Global adjustment smokescreen: it works

I’m surprised it took so long for the Ontario government to wave out some kind of “fix” to the Global Adjustment as a solution to high electricity prices. Nobody has any idea what the GA is, let alone what it does, which is why I had expected it to feature much earlier in the government’s defence of the policies that have made electricity expensive in the first place. Mainstream media, especially those friendly to the government, are sure to obligingly take their commentary down the explanatory rabbithole, leaving those who have to pay the high bills and wonder why they are so high no less (and likely more) misled than before.

Since nobody other than a tiny minority of Ontarians knows what the GA actually is, what is it? It is simply a price recovery mechanism. It is the difference between the price the government promised any particular electricity generating company and the “market” price of electricity. Generators get two cheques. The amount on the first one represents their output times the “market” price (which varies by the hour). The amount on the second cheque represents the difference between the “market” rate and the rate the government promised them. The second cheque is the global adjustment.

If the “market” price for a particular hour is say 2 cents per kilowatt-hour, and Generating Company A has been promised 12 cents, then the global adjustment for Generating Company A for that hour is 10 cents. Generating Company B was promised 15 cents, so Generating Company B’s global adjustment is 13 cents. Company C was promised 7 cents, so C’s global adjustment is 5 cents.

The “market” price fluctuates, which means the GA fluctuates. But the prices promised to companies A, B, and C are fixed. It is those fixed prices we all pay. (“Fixed” has several meanings, all of which apply in any explanation of the GA; in this particular instance I mean “stays the same.”)

I put “market” in quotations because there actually is no market. Nobody in Ontario, absolutely nobody, pays the market price that is reported by the IESO. No generator lives off it, and no ratepayer pays it. Every generator lives off the price it has been promised by the government, and all provincial ratepayers pay that price though some pay more than others.

This means the GA is simply a convoluted, and impossible-to-explain, smokescreen that covers up the fact that the government has promised outrageous prices to certain generators. I seriously wonder if the “market” price exists just so we can confuse and cover up things further by slathering yet another layer of obfuscation onto the whole schmozzle with the GA.

So to “fix” the problem of high electricity prices by “fixing” the global adjustment is to either misunderstand the problem or to try to obfuscate people’s understanding of it. The problem is not the 10 cents global adjustment owed to company A from the example above. It is the 12 cents that were promised to that company. Who promised that price, and why did they promise it?

It is as if the province of Ontario were a dysfunctional workplace, where you have a bunch of employees producing identical widgets, but who get wildly different wages for producing them. A poster over the watercooler proclaims that all employees get $5 per widget. But in reality some get $15, some get $100, some get $6.

So over a pay period, employee Joe, who produced say 10 widgets, gets a cheque for $50—he produced 10 widgets, so multiply 10 by $5.

Employee Mary made 100 widgets, so she gets a cheque for $500.

Employee Bob made only 4 widgets, so he gets a cheque for $20.

But the employer has cut separate deals with each one of these employees. This means that each gets a different pay rate than the nominal $5. Bob is the employer’s favourite, so the employer has promised Bob $100 per widget. The widgets Bob produces are identical to the ones Joe and Mary produce so the $100 is for the intrinsic and ethereal “Bob-ness” of the Bob-produced widgets. The employer likes Joe too, so Joe actually gets $15 per widget, in reward for the “Joe-ness” of the Joe-produced widgets.

Mary is a serial high producer, by far the highest, but she is not the employer’s favourite. The employer has grudgingly agreed to pay her $6 per widget.

This means Joe, Mary, and Bob each gets a second cheque, which covers the difference between the original one and the amount they are actually owed. Joe’s nominal paycheque is $50, so his second one is $100 (10 widgets @ $15 per widget, and his first cheque was $50); Bob’s nominal cheque was $20 so his second one is $380 (4 widgets @ $100 per widget, and his first cheque was $20).

If you ask Joe or Bob what they get per widget, if they are honest they will tell you $15 and $100 respectively. If they are smart, they will say something like “well, I get $5 per widget, plus, uh, Global Adjustment, to cover the, uh, special properties of the widgets I produce.” Mary, if she is listening, can be forgiven for suspecting some funny business behind the scenes which results in employees who produce less than she does getting paid more for each widget, even though their widgets are identical to hers.

Out in the marketplace, none of the purchasers of the company’s widgets gives a damn about “Bob-ness” or “Joe-ness.” None of them cares whether Bob or Joe or Mary made the widget. Widgets are a commodity, and one is the same as the next.

You might wonder why the employer bothers to keep up the charade of $5 per widget. No employee actually gets $5. If the employer runs into financial difficulty and has to borrow money to meet payroll, he might tell his creditor he needs to rethink his policy around the second cheques he hands out to his employees. In reality, he needs to rethink the special deals he has cut with Joe and Bob. Fifteen dollars and $100 per widget, when Mary outproduces both for $6? The creditor will demand the obvious: either drop the prices promised to Joe and Bob, or get rid of them. And whatever you do, keep Mary.

This is pretty much an exact analogue to the Ontario electricity situation.

Ontario’s problem with high electricity prices is not the Global Adjustment. It is the high prices the government promised to certain types of generators. These generators are wind and solar. Wind and solar are the government’s favourites. This is why they get rates of 11+ cents and 35+ cents per kilowatt-hour respectively.

To actually address high electricity prices, the government has to at the very least renegotiate (downward) the rates paid to wind and solar. This will effectively put an end to the fake green energy rush in this province. The rush is a rush for free money: profits that are guaranteed to low, unreliable producers by forcing ratepayers to pay them ridiculously high prices. Let the wind and solar “entrepreneurs” find some other sucker.

The chance of this happening is slim. The Global Adjustment smokescreen is a gambit that appears to be working. The mainstream media appears comfortable in trotting out misdirections and obfuscations like this one from CBC:

The global adjustment was added to the electricity price in 2005 to recoup the expected $50 billion dollar costs of refurbishing power plants…

The GA is a smokescreen that works.

In a related article, CBC attempts to explain high prices. At the top of the list of reasons is the oversupply of power. That has it absolutely bass-ackward. The over supply is because of the high price.

Here is realtime energy demand:

Click on “Cost rate”; note the difference between the cost of electricity and that of heat.

The over-supply of Ontario electricity would get smaller if we shrunk the difference between the cost of electricity and the cost of heat. At some point, it would become an under-supply.

The only way to shrink that difference is to get rid of the Bobs and Joes, and get more Marys.