Explaining the Math

Feb 17, 2011  4

Today's question: A recent article in the Whitehorse Star said: "Residential customers in the Yukon are currently paying 12.1 cents per kilowatt hour for the first 1,000 kWh or fewer...As industrial customers, the Minto Mine and the revamped Bellekeno Mine in Keno City are paying 10.5 cents per kilowatt hour...The two mines are paying more per kilowatt hour than it costs to provide them with electricity - approximately nine percent more. Residential customers on the other hand are paying 21 percent less than the true cost."  The math just doesn't make sense to me. Can you explain?

This is a very good question. A lot of people are not aware that it costs more for Yukon Energy to provide service to residential customers than it does for us to provide service to an industrial customer such as a mine. There are a number of reasons for this.

  • Industry typically has a more consistent load (the amount of electricity it needs doesn’t vary from summer to winter) whereas with residential customers their energy demand peaks in the winter, when it costs us the most to produce electricity.
     
  • Residential customers need special distribution services (lower voltage lines and related services necessary to get power to small customers) that industrial customers don’t need. This reduces the cost to industry service relative to residential service.
     
  • Also keep in mind that industrial customers currently must pay 100 percent of the cost up front to be connected to the grid. Since they’ve already paid this cost, it doesn’t show up in their power rate. For residential customers, they only pay a portion of the cost to connect them to the grid (the utility pays the rest). The portion paid by residential customers is taken into account when their rate is set.

The difference in rates and costs between industrial and residential customers is not unusual or unique to Yukon. There are similar situations in other jurisdictions. These differences aren’t new in Yukon either. They go back to when the Faro mine was operating and was an industrial customer.

So the bottom line is that while it costs less to serve mines, they pay the full cost (and then some) of getting power. While it costs more to serve residential customers, they only pay about 80 percent of the true cost.

4 comments

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Comments

by Vic Istchenko

Your explanation of the Whitehorse Star math still does not make sense.
What is the true cost of a kilowatt hour and what is the rate charged residential customers vs the Minto mine. If Tobin’s math is correct, (which may be the faulty premise here) you’ve left me more confused than ever.

02.18.2011

by Yukon Energy

It’s not the Whitehorse Star’s math that’s the problem. Explaining regulatory issues is never as simple and straightforward as one would like. Let me go at it from another angle.

Let’s take the example of a residential customer who uses 1,000 kilowatt hours per month. They would pay an energy charge of 12.1 cents per kilowatt hour each month, which would be $121. They would also pay a customer charge of $14.65. A customer charge covers a portion of the cost of installing and maintaining powerlines and other related equipment. Their total bill for the month would be $135.65, which equates to 13.6 cents per kilowatt hour. However that’s only 77.9 percent of what it costs Yukon Energy to supply that household with power. The true cost would be 17.5 cents per kilowatt hour (13.6 cents divided by 0.779).

Now for the industrial customer. Let’s say a mine uses 2,419,000 kilowatt hours per month (that was the 2009 average). The mine pays 7.81 cents per kilowatt hour in energy charges, or $188,924 a month. They don’t have to pay a customer charge because they’ve already paid up front 100 percent of the cost of hooking up to the grid. However they are required to pay an additional charge of $78,000 a month (it’s referred to as a demand charge). That means their total bill would be $266,924. That equates to 11.6 cents per kilowatt hour. That is 113.7 percent of the true cost of the service. The true cost is 9.7 cents per kilowatt hour (11.3 cents divided by 1.137). 

All this math aside, the point I was attempting to explain is that it costs Yukon Energy less to supply power to mines than it does to residential customers, for the reasons I stated in my original blog entry. I was also trying to explain that residential customers only pay about 80 percent of what it costs us to provide them with power, while mines pay more than 100 of the true cost of providing them with electricity. I hope this helps.

02.18.2011

by Richard Whittaker

Also, how does this compare with the liabilities inherited by a mine going into service, and all the money spent bringing infrastructure to that mine? I still see on my electrical bill a Yukon Energy shortfall rider, which is a legacy of Faro, a notorious stable “Commercial” customer.

02.18.2011

by Yukon Energy

There’s no doubt that when the Faro mine closed, it had consequences for other Yukon electrical customers. I don’t know why the purchase power agreement with the mine was negotiated as it was…that took place before Yukon Energy was even created (it was in Northern Canada Power Commission’s time).

What I can tell you is that things were very different when the Minto mine power purchase agreement was negotiated a few years ago. There were a number of things put in place that would protect other Yukoners from the fallout of a mine closure. They included the following:

1. The Minto mine had to pay 100 percent of the cost of the transmission line that ran from our main transmission grid to the mine property. That means that when the mine closes at some point in the future, ratepayers will not be on the hook for any of that cost.

2. The Minto mine also had to pay $7.2 million towards the building of the Carmacks-Stewart transmission line. This is a line that will be used to provide service to Yukoners long after the Minto mine is gone.

3. There is what is called a ‘Take or Pay’ clause in the agreement with Minto. In the first four years of the agreement, the mine must pay Yukon Energy $12 million, whether they buy power from us that whole time or not. That means if they close early, they still need to pay us that money, in annual payments of $3 million.

Yukon Energy doesn’t want to see another Faro situation any more than you do, which is why on a go-forward basis we will ensure, to the best of our ability, that there are clauses in any power agreements with future mines that protect ratepayers.

02.19.2011