Management of Power Purchase Agreements

During 2008–09, the Corporation continued negotiating revisions to non-utility generator contracts so their terms would be consistent with the hybrid electricity market. The hybrid market was created by the Electricity Restructuring Act, 2004, which combined regulated, contract and competitive market pricing.

Efficiencies were achieved in managing the existing power purchase agreements with the non-utility generators in 2008–09. Generator costs dropped by $1.8 million, compared to a $1.7 million drop in 2008, through auxiliary services revenue, incremental power agreements and other transactions that increase or shift the time of electricity generation under the contracts.

Previously, the Corporation purchased power from the non-utility generators under contract terms and sold the power at market prices lower than cost. However, as at January 1, 2005, the Corporation began to receive actual contract prices for power from ratepayers, eliminating losses on power purchase contracts. At that time, the Ministry of Finance estimated that most of the liability would be eliminated over 12 years as existing contracts expire. The liability for power purchase contracts was valued at $2.2 billion as at March 31, 2009, compared to $2.6 billion as at March 31, 2008.

Ontario Hydro Direct Customer Rate

Many of the PPAs employed the Ontario Hydro Direct Customer Rate ("DCR") as the price index.

Separate DCRs were established by the former Ontario Hydro for customers connected at 230 kV, 115 kV and under 115 kV. The Ontario Hydro 230 kV and 115 kV DCRs, from 1988 to market opening on May 1, 2002, appear in the following table.

Since the former Ontario Hydro's DCR ceased to exist on May 1, 2002 upon the commencement of the open market for electricity in Ontario, it was necessary to establish a replacement DCR to continue the administration of the PPAs.

OEFC's Board of Directors approved the proposed replacement for the DCR set out in the Working Paper dated June 24, 2002, for use as the price index in the revision of PPAs. The replacement index is referred to as DCRnew.

Since the Final DCRnew for any year may not be calculated until all of the electricity market data for the year required to calculate the index is available, a Provisional DCRnew is calculated at the beginning of each year, an Interim DCRnew is calculated as of June 30 each year and the Final DCRnew is calculated after the year end when all of the necessary data is available. The calculation of the Provisional DCRnew, Interim DCRnew and Final DCRnew is set out in the Working Paper.

Calculation of DCRnew

Components of TMC

As outlined in the Working Paper, DCRnew is derived from the total market cost ("TMC") of electricity delivered on a 100% load factor firm basis to a wholesale market participant load customer connected at either 230 kV, 115 kV or under 115 kV. At the commencement of the open market TMC was comprised of the following items totalled and averaged over the year:

• Hourly Ontario Energy Price (HOEP)
• Wholesale Market Service Charges, including
• Hourly Uplift Settlement Charges
• Monthly Uplift Charges
• IMO (now the IESO) Administration Charge, and
• Rural and Remote Electricity Rate Protection
• Transmission Service Charges (network , line connection and transformation depending on the voltage level)
• Debt Retirement Charge
• OPG Market Power Mitigation Rebate (MPMR)

Since the commencement of the open market, there have been updates to the components of TMC.

The OPG Market Power Mitigation Rebate (“MPMR”) was applied from May 1, 2002 through to April 30, 2003 and was incorporated into the calculation of TMC. Effective from May 1, 2003, to March 31, 2005 the MPMA rebate was replaced by the more transparent Business Protection Plan Rebate (“BPPR”) after the introduction of Bill 210, the Electricity Pricing, Conservation and Supply Act, 2002.

Under the Electricity Restructuring Act, 2004 (Bill 100), a new rebate mechanism was created commencing January 1, 2005 called the global adjustment. The global adjustment reflects the difference between total payments made to contracted generators (including NUGs and Ontario Power Authority supply procurements), load reduction contracts and regulated OPG generators (prescribed assets) and any offsetting market revenues. In addition, effective April 1, 2005 the transitional OPG Non-Prescribed Assets rebate has been established. This rebate requires OPG to make payments to consumers for revenues in excess of specified amounts earned on its non-prescribed assets for the period beginning April 1^st, 2005 and ending April 30^th, 2009. More detail on these rebates and how they are reflected in the calculation of TMC can be found in the memo entitled TMC Calculation - The Global Adjustment and OPG Non-Prescribed Asset Rebate.

Refinement of Data Source for Wholesale Market Service Charges

There has also been a refinement to the data source for the monthly uplift figure used in the calculation of TMC which has resulted in a small change to the previously published amounts of DCRnew for 2002 and 2003.

From market opening through May 2003, the monthly uplift charge was identified in Section 1.6 of the IESO monthly report only and this figure was used in the calculation of TMC. Subsequent to May 2003, the IESO monthly market summary began to publish a second monthly uplift charge in the summary table entitled “Summary of Wholesale Market Electricity Charges in Ontario’s Competitive Market Place” presently located in Section 8 of the report. IESO representatives have advised that the Section 8 monthly uplift figure includes miscellaneous charges and rebates in addition to those charges included in Section 1.6. Since these miscellaneous charges and rebates apply to directly connected customers, it was decided that the calculation of TMC should be updated to include the Section 8 monthly uplift figure to be consistent with the Working Paper. More detail on the data source change for monthly uplift and the impact on DCRnew (115 kV and 230 kV) for the years 2002 and 2003 can be found in the memo entitled Refinement to 2002 and 2003 DCRnew Calculations.

DCRnew

DCRnew for 115 kV and 230 kV in cents/kWh is as follows:

Further information concerning the calculation of DCRnew is available by contacting investor@OEFC.on.ca