Ontario Industrial Electricity Rate Study prepared for the Canadian Manufacturers & Exporters by London Economics International LLC October 22nd, 20191 London Economics International LLC (“LEI”) was retained by the Canadian Manufacturers & Exporters (“CME”) to conduct an industrial electricity rate study in Ontario. LEI focused on four key areas: a review of the current system in place for industrial rates in Ontario; a comparison of industrial rates in Ontario to a selection of comparator jurisdictions; a qualitative commentary on the options available to make rates more competitive; and a quantification of the economic impact a targeted industrial rate cut would have on the Ontario economy. Based on LEI’s analysis, rates for Class A and Class B customers are higher than the selected group of North American jurisdictions, but Class A customers with best load shifting outcomes face rates that are more competitive with the comparator jurisdictions. For larger Class B customers and those Class A customers that have less ability to shift load but run energy-intensive operations and are trade exposed, the government should consider developing options that address the higher rates they face. A properly designed Industrial Rate Relief Initiative could benefit industrial consumers and have a wider positive indirect and induced impact on the provincial economy. Such programs should be targeted, time-limited, and commitment linked in order to better optimize outcomes. Table of contents LIST OF ACRONYMS ....................................................................................................................... 5 1 INTRODUCTION ...................................................................................................................... 7 1.1 BRIEF DESCRIPTION OF CME .......................................................................................................................... 7 1.2 EXECUTIVE SUMMARY ..................................................................................................................................... 8 2 STATUS QUO FOR INDUSTRIAL CUSTOMERS ...................................................................... 11 2.1 OVERVIEW OF ELECTRICITY BILL COMPONENTS ........................................................................................... 11 2.1.1 Electricity component .......................................................................................................................... 12 2.1.2 Delivery component ............................................................................................................................. 16 2.1.3 Regulatory component ......................................................................................................................... 17 2.2 ESTIMATION OF INDUSTRIAL ELECTRICITY COSTS ........................................................................................ 18 2.2.1 Sample LDC service territories ............................................................................................................ 18 2.2.2 Proxy customer load profiles................................................................................................................ 19 2.3 OBSERVATIONS ............................................................................................................................................. 28 3 ASSESSMENT OF ELECTRICITY RATES IN COMPETITOR JURISDICTIONS ........................... 29 3.1 SELECTION OF JURISDICTIONS....................................................................................................................... 29 3.2 RATE DESIGNS ACROSS REGIONS .................................................................................................................. 31 3.2.1 Alabama: Alabama Power .................................................................................................................... 32 1 Content last modified August 2019, with data gathered between March and June 2019. - 1 - London Economics International LLC 390 Bay Street, Suite 1702 Toronto, ON M5H 2Y2 www.londoneconomics.com 3.2.2 Illinois: ComEd .................................................................................................................................... 33 3.2.3 Indiana: NIPSCO ................................................................................................................................ 34 3.2.4 Michigan: DTE .................................................................................................................................... 34 3.2.5 Rate design observations ...................................................................................................................... 35 3.3 CROSS JURISDICTIONAL BILL COMPARISON .................................................................................................. 36 3.4 OBSERVATIONS ............................................................................................................................................. 38 4 DEVELOPMENT OF OPTIONS TO CHANGE RATES ............................................................... 41 4.1 INDUSTRIAL RATE RELIEF INITIATIVE (“IRRI”) PORTFOLIO ELEMENTS ...................................................... 42 4.1.1 Ending uneconomic spending .............................................................................................................. 42 4.1.2 Shifting responsibility for policy-driven contracts .............................................................................. 43 4.1.3 Competitive investment linked rate buydown (“CILRB”) program .................................................... 45 4.1.4 Monetizing green attributes ................................................................................................................ 47 4.2 IRRI COLLECTIVE IMPACT ............................................................................................................................ 48 5 QUANTIFICATION OF ECONOMIC BENEFITS FROM INDUSTRIAL RATE ADJUSTMENT ...... 50 5.1 OVERVIEW OF INDUSTRIAL CONTRIBUTION TO GDP AND ELECTRICITY CONSUMPTION............................ 50 5.2 OVERVIEW OF IMPLAN ............................................................................................................................... 51 5.3 DATA SOURCES ............................................................................................................................................. 53 5.4 MODEL APPROACH AND ASSUMPTIONS ....................................................................................................... 53 5.5 MODEL RESULTS............................................................................................................................................ 54 6 CONCLUDING REMARKS ...................................................................................................... 55 7 APPENDIX .............................................................................................................................. 56 7.1 RATE SCHEDULES OF COMPARATORS IN THE US ......................................................................................... 56 7.1.1 Alabama Power .................................................................................................................................... 56 7.1.2 ComEd ................................................................................................................................................. 57 7.1.3 NIPSCO .............................................................................................................................................. 58 7.1.4 DTE Electric Company........................................................................................................................ 59 7.2 RESPONSE TO FEEDBACK ............................................................................................................................... 60 7.2.1 ReCharge NY ....................................................................................................................................... 62 7.2.2 Tariff L ................................................................................................................................................. 63 7.3 CASE STUDY OF GERMANY ........................................................................................................................... 70 7.3.1 Brief overview of Germany’s “Energiewende” .................................................................................... 70 7.3.1 Industrial electricity prices in Germany compared to Ontario ........................................................... 72 7.3.2 Rate design in Germany ...................................................................................................................... 74 7.3.3 Observations ........................................................................................................................................ 79 7.4 ABOUT LEI AND ITS ONTARIO EXPERIENCE ................................................................................................. 80 7.5 LIST OF WORKS CONSULTED ......................................................................................................................... 82 List of figures FIGURE 1. SUMMARY OF PROXY CUSTOMER RATES BY JURISDICTION (2018, CENTS PER KWH) ................................... 8 FIGURE 2. HIGH-LEVEL OVERVIEW OF ELECTRICITY BILL COMPONENTS ..................................................................