The proposal finds no precedent in other electricity systems and markets. The proposal is inconsistent with the underlying principles related to marginal cost pricing. The change proposed is arbitrary. The proposal would increase prices more in off-peak than in on-peak hours, exacerbating the already inefficient signals for and creating a further impediment to efficient demand management in Ontario.

While the “total surplus” approach suggests a small social welfare gain resulting from a large change in price, the analysis does not consider whether the price change in a given hour will be more or less efficient as a result of the change. That is, will the HOEP in a given hour be a better or worse proxy for the marginal cost of generation in that hour? As you know, AMPCO has supported the IESO’s initiative to introduce benefit-cost analysis into its review and decision-making. However, the current analysis raises questions as to whether a total surplus or economic welfare approach is consistent with the over-arching legislative objectives of the IESO which include “promoting efficient generation … and demand management” and “protecting the interests of consumers with respect to price…”

The IESO analysis of the effects of OPG’s proposal to withhold coal capacity seems counter-intuitive. The description of this analysis is vague and lacks detail. Circumstances have changed since 2006 (the period of time the IESO uses to simulate the impact of the change). The supply mix projection from the OPA is unreliable.

The analysis of the change on an “as offset” basis is flawed. The Global Adjustment does move inversely to HOEP, but the relationship is neither pure nor linear. The current method for allocating the Global Adjustment is flawed and increasingly inefficient. It is likely to change.

The OPG rebate may also change; while it serves a vital role in mitigating the potential for OPG to abuse its market power and returns excessive rents to customers, the order-in-council sets an expiry date of April 30, 2009. AMPCO supports an extension of the OPG rebate or some variant of it, but we do not count on it.

AMPCO rejects the notion that these surcharges, levies and rebates serve as a hedge. They do not reduce risk to customers. In fact, they bundle the risk and transfer it directly to customers.

Wholesale customers pay the HOEP in a given hour, and receive the GAM and OPG rebate based on their total consumption in the previous month regardless of when the power is consumed. At a minimum, this imposes cash flow risk and increased uncertainty for industrial customers and reduces the purported benefits of any offsets.