Toronto: The charge applied to power exported out of Ontario, which many thought was due for change, may not change much, if at all, in the near future.
The Export Transmission Service (ETS) tariff, currently $1 per MWh, is a rate that is charged when wholesale power traders or generators in Ontario sell power to consumers outside of the province. The charge is collected by the IESO and remitted to transmitters that own the interconnections, who then apply it as an offset to reduce their total revenue requirement.
As part of its 2008 Transmission Application Hydro One said at that time that there was no convincing evidence to change the approved rate of $1.00/MWh. In the settlement agreement for that Application, Hydro One was granted approval to maintain the current charge. However, the IESO was directed by the Ontario Energy Board to conduct research and bring back recommendations on an appropriate level at which to set the rate. After extensive study and preparation, the IESO filed its final report on August 28, recommending no change in the rate. The IESO has been studying this issue since last summer and initiated a stakeholdering exercise on the question in December 2008.
The results of its research, which also examined the likelihood of reciprocal rates being implemented in adjacent jurisdictions, were originally expected in mid-2009, but were delayed until August.
The determination of the ETS rate is somewhat controversial because it could have direct impacts on the bottom lines of several classes of customers. For example a lower export tariff could help ease a surplus generation situation in Ontario and encourage other jurisdictions to reduce their export tariffs, facilitating power flows into the province from neighboring jurisdictions. Conversely, a higher export tariff rate could reduce the amount of power exported, create downward pressure on hourly prices within Ontario, and reduce imports
On August 27, Nicholas Ingman, the IESO’s Manager of Government and Regulatory Affairs, informed stakeholders of the following: “Although the IESO’s quantitative analysis indicates that Option 2 (i.e. a tariff based on average embedded network transmission cost) best satisfies the selection principles of simplicity of implementation, fair and equitable, consistency with rates in neighboring markets and net Ontario Benefit, since undertaking the study, the Ontario market has undergone significant changes, many of which have contributed to increased occurrences of surplus generation conditions.
“We expect these conditions to persist over the next few years. Exports aid in the management of these conditions and we believe that raising the cost to exports may reduce the role of exports in solving the surplus problem and necessitate more costly responses from the IESO. As a result we recommend continuing with the status quo until such time as conditions change or we are able to engage in meaningful discussions with our neighbors regarding the reciprocal elimination of the export tariffs; the option which we believe would be the most beneficial option for efficiency in the region and for the province of Ontario.”
The IESO notes, as part of the background information used in its stakeholder consultation exercise, that “Export Transmission Service Tariff revenues are based on the volume of export transactions from Ontario. The IESO collects these revenues and remits them on a monthly basis to the transmission company whose transmission system is used to facilitate the export.
“As an outcome of Hydro One’s last transmission rate application, parties to the proceeding agreed that the current export transmission service (ETS) rate of $1/MWh be maintained until the 2010 transmission rate setting process. However, as part of the Ontario Energy Board’s decision, the IESO was to undertake a study of the ‘appropriate’ ETS tariff, taking into consideration a minimum of three options identified and discussed as well as engage in negotiations with neighboring jurisdictions towards establishing acceptable reciprocal arrangements with the aim of eliminating the ETS tariff. A fourth option was added to the scope of the review at stakeholder’s further request.”
The four options that were assessed as part of the IESO’s study were as follows:
Option 1: Remain the same at $1/MWh applicable to export transactions (Status Quo).
Option 2: Equivalent Average Network. Under this option, export and wheel through transactions would pay a rate equivalent to Transmission Network Service, but using energy as the charge determinant (i.e. $/MWh).
Option 3: Reciprocal Treatment of Export Transmission Service Charge. This option considers two potential modes of reciprocal treatment, including the mutual elimination of all ETS tariffs between jurisdictions.
Option 4: Unilateral Elimination of the ETS tariff. This option considers two scenarios under which the Ontario ETS tariff could be unilaterally eliminated: 1) unilateral elimination of the tariff in all hours; and 2) unilateral elimination of the tariff only during off-peak hours.
Ontario’s market design generally adheres to the principle that consumers should pay the cost of transmission rates, rather than producers. This is based on the reasoning that consumers have the ability to respond to such price signals and take economic actions that will efficiently influence the capital requirements of the transmission system. The export tariff is the only exception to the “load pays” principle in Ontario, and many generators feel that the current tariff is an inappropriate disincentive on exports.
Most economists and market designers seemed to agree with the principle that “load pays for transmission” and the primary reason that the export tariff was not set at zero in the past is that adjacent jurisdictions had not yet reduced their export tariffs to zero. The $1/MWh rate was proposed as a kind of placeholder at the time of Ontario’s market opening and has not been changed since.
On learning of the IESO’s recommendation, APPrO Executive Director Jake Brooks commended the IESO for “taking a balanced approach,” saying that in his view “continuing with the status quo was the most appropriate decision under the current circumstances.” He noted however that the organization believes that exports during off-peak hours create many benefits and few costs for Ontario and as a result, “We would have preferred to zero out export charges during off-peak periods.” He also observed that Ontario still has some distance to go in terms of reciprocity. There are already charges on exports for certain uplifts that are not charged to exports in other jurisdictions. These include OR, AGC, RMR, certain start-up guarantee programs and possibly others. “It is unfortunate that the IESO does not appear to have included any recognition of this in its discussion,” he said.
Of course the IESO doesn’t set rates, but it is subject to the OEB for review and approval as part of Ontario transmission rate schedules. As of this writing, Hydro One has not yet filed a response to the IESO recommendations. In terms of when the rate change would be implemented, if any change at all is made, there are two possibilities. It could be part of Hydro One’s 2011-2012 Transmission rate application, in which case review would likely take place during 2010. Or it could be part of a special alteration to the 2010 rates. The 2010 rates have already been reviewed and approved, but minor variations are still possible if appropriate review processes can be arranged.
For more information, see www.ieso.ca/imoweb/consult/consult_se78.asp