Energy Savings Suspends Electricity Program
By Canadian Corporate News
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The Action Plan calls for a fixed price for electricity in the Province at $0.043 per kilowatt hour for the next five years. This price is substantially below the current long-term wholesale price for power in the Province, therefore unsubsidized public market participants like Energy Savings will not be able to offer a competitive five year offering to new customers. Based on an analysis of costs of power generation for the Ontario market, Energy Savings management views it as highly unlikely that prices will fall to a point where a profitable free market offering could be made for the foreseeable future.
The Plan (which requires enactment of Legislation) states that all customers who are on existing fixed price contracts (including Energy Savings customers) will see their prices subsidized down to $0.043 per Kwh. The Company has been advised in a Government briefing that its margins will be maintained at the contracted levels and that the customers will be directly subsidized to the extent of any difference.
As of the date of the announcement, Energy Savings had approximately 140,000 residential customer equivalents on its electricity package. Consistent with the Government's proposed treatment of these contracts, the net margin based on established supply contracts is estimated by management to be $9.4 million for the year ended March 31, 2003 (of which $325,000 was realized in the first quarter). Management estimates that margins will be $14 million in the year ending March 31, 2004 based on historically established attrition levels.
While only seven months into the year, the Company had already exceeded its published target of 120,000 electricity customers by year-end. This had been accomplished by focusing its marketing agents on electricity rather than gas aggregation. Given the suspension of electricity marketing, the Company anticipates that aggregation levels in Ontario natural gas will increase substantially for the remainder of the year and during future years. In addition, the Company will accelerate its entry into other profitable Canadian markets and the United States.
None of Energy Savings current $1.15 per unit annual rate of distribution is dependent on margins from electricity. Internal budgets had shown Electricity Marketing consuming more than $20 million in cash over the coming 12 months. To the extent that these funds cannot be profitably deployed on other marketing, they will be paid out to unitholders in higher distributions.
Rebecca MacDonald, CEO of Energy Savings, stated "This decision by the Government is a serious error. The Province has lived in a fool's paradise for eight years where prices have been fixed while the inputs into these prices have risen sharply. The result of this folly was the tens of billions in unsustainable debt at Ontario Hydro. Deregulation was the only route off this treadmill. Anyone who thought prices could be maintained at current levels without bankrupting our grandchildren and their grandchildren was kidding themselves."
"The result is a multi-billion dollar subsidy designed to continue to fool the public for five more years. No responsible servant of the public should threaten our future in this fashion, regardless of the current public concern over volatile prices." Ms. MacDonald added, "The tremendously successful natural gas deregulation in Ontario had similar teething pains. The result has been true competition and lower prices, as seen by the fact that effectively all industrial customers and 50% of residential consumers have switched to private sector alternatives to the regulated price. Longer term, this government will realize (as all Governments do) that allowing the free market to operate benefits all market participants in the long term."
"Energy Savings will continue to grow and prosper. Before there was electricity deregulation, we grew faster than any Income Fund in Canadian history. We will refocus our Ontario marketing on natural gas, a business in which we have seen over 100 per cent compound annual growth in sales. We will also be entering profitable new markets outside Ontario in both gas and electricity."
Energy Savings' business, which is conducted in Ontario, involves the sale of natural gas and electricity to residential, small to mid-size commercial and small industrial customers under long term, irrevocable fixed price contracts. By fixing the price of natural gas or electricity under contracts for a period of three to five years, Energy Savings' customers eliminate or reduce their exposure to changes in the price of these essential commodities. The Company derives gross profit from the difference between the price at which it is able to sell the commodities to its customers and the price at which it purchases the matching volumes from its suppliers.