ELECTRICITY DEREGULATION IN ONTARIO

An Explanation of the Language of Energy Contracts

Receiving Gas or Electricity from a Utility
Also known as system or default supply, an LDC contract, or default supply.

If you have not switched your energy supply to a deregulated marketer and are still paying the local regulated utility for gas or electricity, you are on what's known as system gas, or default supply electricity. The utility is by regulation required to simply pass through the cost to you with only their administration costs added. The cost is totally variable since it is based on the short term market rates, or the portfolio of energy supply that the utility has purchased.

The utility must get approval from the regulatory board for rate changes, but they can apply price increases retroactively if they can prove that it cost them unexpectedly more to supply the energy. In addition, if you are on one of these contracts, there may be an annual "settling up" when a balancing is done between what you have paid over the year, and what that energy supply cost the utility. In a market of rising energy prices, this usually means you have to pay extra because the approvals tend to lag the market. In a declining market, it sometimes means a rebate to you.

Variable Rate
This price is set monthly by an ABM based on the price they have to pay in the wholesale market, which is dictated by supply and demand. That price is passed along to the consumer, with admin costs and a profit margin built in. A few marketers offer a rate that is tied to a "Posted Monthly Wholesale Price", such as the Transco Zone 6 midpoint published in Inside FERC's Market Report. Consumers should look at a marketer's track record of beating the utility price before signing this type of contract.

Dicount Rate, or % below Utility Price
If a marketer is offering this type of contract, it is usually a price that is based on the utility regulated price, less a certain amount. For example, it would be stated in the promotional material and the contract as "Always 5% less than the utility". A marketer can do this by buying gas or electricity more cheaply than the utility, or by having substantially lower administrative costs.

Fixed Rate Contract
This is a fixed price for gas or electricity supply for a fixed period of time and gives you the benefit of knowing your energy costs for that period of time. If prices rise above your contract price, you benefit. However, if energy prices fall substantially, your costs will be higher than with a variable rate.

Rate Cap
In this pricing plan, the ABM will supply natural gas or electricity to the customer at the best price it can. However, the ABM guarantees that the rate will not rise above a certain amount, regardless of the current market price. This protects customers from extremely high prices, and allows them to benefit if prices go down.

Best-of-Three
The Best-of-3 concept, currently offered by Ontario Hydro Energy's Onsource, is an attempt to give customers one of the better prices available in the market at the time of electricity market opening in Ontario. Ontario Hydro Energy will compare the rates of three major electricity providers selected by them at the time of market opening, and give the customer the best rate for advertised plans of the same term.

Agency, Billing and Collection -Transportation ("ABC-T")
ABC-T is a relatively new service approved by the OEB and offered by utilities. The utility bills and collects the money for the energy commodity that an ABM has offered to the customers. The utility includes the cost of the energy supplied by the ABM, at the agreed upon price, in the monthly bill that it sends to its customers. Customers who have an ABC-T arrangement, see the name of their ABM and the price of their energy supply (the energy supply charge) on their Utility bills. The Utility collects the money from the customers and remits it to the ABM. The Utility guarantees payment of this money to the ABM, and charges the ABM a fee for the service.

Buy-Sell/Rebate Arrangement
This applies if you have been offered a rebate program by a marketer. This is a rather complicated sales option, but is essentially an offer from an ABM of a rebate on the regulated utility price. It could be a fixed percentage rebate, or the rebate might vary depending on the ABMs success at buying cheaper energy supply.

In detail, it goes something like the following. An ABM purchases directly from a supplier (for example, a gas producer in Alberta, or an electricity generator in Ontario) on behalf of its customer. The ABM then sells back to the Utility at the OEB regulated Ôbuy' rate. The Utility delivers and resells the energy to the customer at the OEB regulated Ôsales' rate. If the ABM has purchased the energy from the supplier at a price below the OEB regulated rate, then the customer could also realize a benefit by getting a share of that savings (depending on their contractual arrangements with the ABM). These benefits will usually be in the form of a cheque sent by the ABM on an annual basis.

'Weather Protection', or Fixed Bill Contracts
The ABM will guarantee that the customer won't pay any more than a fixed dollar amount for their energy for the year. This is based on the customer's usage pattern over the past year and adjustments for weather. This contract type transfers the risk of a long cold winter to the energy marketer. It's a form of insurance for which the customer pays a small premium.

Full Requirements Contract
An electricity supplier agrees to provide all of a company's electricity needs at an agreed price. The supplier does not require that you buy a set amount or buy any electricity on the spot market. This type of contract is common for residential customers but rare for larger customers. Its also known as a "load following" contract.

Fixed Volume Contract
In this type of contract, suppliers pass the volume risk and some spot market exposure to the customer. A customer estimates their monthly consumption based on past years and any expansion plans. The supplier then contracts for that amount on the customer's behalf.

The customer is financially responsible for differences between estimated and actual use bought for them on the spot market by the supplier. This spot market buying and selling happens for each hour by comparing actual consumption with the electricity purchased for that hour.

Structured Block Contract
This involves purchasing a series of blocks of electricity to match -- as closely as possible -- the consumption of a facility.

Electricity trades in blocks of a number of kilowatts for specified periods of time: 7 x 24 - 7 days a week, 24 hours a day, 5 x 16 - 5 days a week, 16 hours a day, 2 x 24, 5 x 8.

These purchased blocks are then stacked to meet the facility's electricity needs.

Single Block Contract
This is a buying strategy more than a type of contract. It involves the purchase of a single block of electricity (see Structured Block above) to cover the period of greatest electricity need, or to cover the period in which electricity is expected to be most expensive.

For more information visit www.energyshop.com. ET