The projections vary widely, but there is general agreement that electricity prices in Ontario are heading north in the next year or two. The next provincial election is two years away and it’s entirely possible that electricity policy will feature prominently.
In fact, the major parties have already staked out their opening positions: The Liberals have a green energy platform, the Conservatives are skeptical that it will cost too much and stray too far from the competitive model, and the NDP want to be greener than the Liberals while also providing rate relief to major industrials. (Apologies to all three parties for the inevitable over-simplifications of summarizing all three platforms in one sentence!)
In this environment it’s easy to see how rate increases could flare up as a public issue. The last time that happened was in 2002 when then-Premier Ernie Eves felt forced to make sudden moves to freeze short-term prices, actions that many feel have been the cause of many problems in the sector ever since. With the Global Adjustment Mechanism (GAM) hitting new highs and expected to rise further, it’s understandable why many in the sector would feel that this would be a good time to think ahead, to plan how to deal with the potential public debate over electricity policy and prices that could occur in the next year or two.
To the credit of the current government and regulators, the system is better prepared to deal with price hikes now than it was seven years ago. Most consumers are on a regulated Rate Protection Plan, which smoothes the impact of any sudden changes in wholesale prices. The supply/demand balance is more favorable (meaning there is relatively more supply), there are a variety of relatively effective warning systems, and a means of shielding low income consumers in particular from sudden price hikes. But in one crucial respect very little has changed: The average consumer is not well-briefed on the energy file, and tends to believe that Ontario’s historically low prices should be the norm going forward. This is a serious weakness, not in the electricity system per se, but in the policy context that helps define the terms of governance that operate over the electricity system.
One of the main reasons that Ontario has a stranded debt that seems to stay around for years at more than $15 billion is because historically there has been a reluctance to let prices rise to reflect the full cost of the commodity and delivering it. The temptation to put off recognition of costs is greatest around election time of course.
Although it’s been said before, and tried before, it’s worth reiterating that a constructive approach to the problem would have three parts:
a) Determining what can be done to ensure that underlying costs are kept to a minimum,
b) Designing and implementing systems to keep costs low
c) Ensuring that the public is engaged in the decisions about what to do and how.
These efforts would likely form the core of any durable solution. Of course deciding how to keep costs down is the key question in the first point above, and it requires grappling with a deeper set of social issues – what kind of cost increases are acceptable in order to meet various public objectives. Many public debates have focused on this, Royal Commissions have studied it, and it’s no less crucial today than previously. However, this is where core principles come into play and where it makes great sense for stakeholders, political parties, regulators and commentators to become engaged: To what extent should electricity policy be used to make Ontario an environmental leader? How far should the province go to make sure power is produced domestically, or in communities near to the consumer? How much should consumers be willing to pay to ensure that affected aboriginal people get a better shake in the future than in the past? Do we want to pay more to have greater reliability? And potentially as a means of gathering together the answers to most of the preceding questions: How should the supply mix be revised?
These are sensitive decisions that any policy maker or regulator would be wise to make only with substantial knowledge about the long term shape of public opinion, and I would argue, only after a public discussion that is likely to help crystallize the thinking of broad segments of the public. Avoiding debate or discussion on delicate topics like these can reduce political risk in the short run, but it’s not really a solution. That’s because every government, every society, is in effect moving forward with a set of decisions on these questions — they are implicit in any government’s electricity policies and programs. Treating the need for debate too lightly is not just undesirable for developing coherent public policy, but it leaves the government of the day exposed to flare-ups on these very questions, on which it would have little consensus built, if prices jump before an election.
For many in the power sector, the holy grail of power markets, which has eluded their grasp for many years, has been to find a politically acceptable means of paying for capacity. The pure real-time energy market sends meaningful signals in many cases, but few markets are able to value capacity properly. The power sector has been riven by debates for years and years over the alternative, not always compatible, methods of reimbursing investors for building new generation capacity. It has compromised, tweaked, restructured and adjusted, but never found what nearly everyone is looking for: a market-sensitive means of compensating investors for capacity that will not cause public anxiety or attract political intervention. In theory market signals should attract investors, but in practice, a heavy reliance on market signals has usually meant consumers were jostled by too many ups-and-down of the market. As a result, capacity signals have often been softened or almost removed from the market.
A market-sensitive means of paying for capacity has effectively stumped regulators, market designers and policy makers around the world as they tried numerous methods of approximating the ideal, or dealt with the various mechanisms already in place designed to simulate capacity payments.
The Harris government proposed the plainest and simplest system of all – let the market decide on what capacity is worth and what to build. But later leaders couldn’t keep their hands off it. The Eves government pulled the plug on the retail market, depriving investors of a key market-based source of financing new capacity. The early years of the McGuinty government proposed a compromise that had markets paying for some of the costs and central procurement covering the rest. Minister Smitherman has moved the agenda forward by producing a system under which consumers as a whole effectively guarantee a major part of new investment in green capacity.
Capacity building can be politically charged, but it shouldn’t be. If the principles for capacity investment can be systematized at the political level, as the supply mix tried to do a few years ago, then the actual investment, construction and compensation processes don’t need to have political risk added to their headaches.
The key issue is whether the public is given a chance to learn the issues, to articulate and decide what it wants from the electricity system. If the public debate over the next couple of years is able to determine this, the election will be fought on meaningful territory. However, if the public mood is essentially “don’t bother me with the details, I want it all,” then the election will be fought on superficial issues and resolve very little. Credit goes to the party or parties able to identify a social consensus that will last. It should not be just do you want green or do you want cheap, but how far should Ontario go in these core directions, given that long term decisions are being made all the time that are costly to reverse later. Anyone who is able to improve the quality of public debate will have a big impact on the quality of public decisions and thereby on the stability of the investment environment.
A key responsibility for government in all of this is to take the initiative in educating the public on electricity issues before any major debate and before any major price increases. According to many consumer advocates, public education in the area was the key factor missing in 2002, and unless something changes it could be the crucial missing ingredient in 2010 and 2011.
Despite many outward appearances, there is an enormous range of agreement, a great deal of opportunity for collaborative policy development that could avert most of the worst possible outcomes of pricing episodes in a pre-election period. If the three major parties could agree to temporarily put aside critiquing each other — necessary as political competition is at most times — and try to devise an approach for managing the pricing issue, some real progress could be made. A sense of direction and a sense of proportion could be attached to questions like how green, how fast, and how much redundancy is really needed.
The political environment is changing. With growing concern over the environment, some people are willing to consider price increases who would never have accepted them before. See “A green future means higher prices, experts tell Empire Club” from the June 2009 IPPSO FACTO.
There will be plenty of opportunity for adversarial debate. However, the consumer and the public will be better served if such debate comes after an informed discussion of principles. Although it will certainly be difficult for political opponents to work together on common principles, the benefits of doing so outweigh the costs. And when the political parties get back to their jousting, there would be more effective positioning and opposition as the differences between the parties’ approaches could focus on the future, which they can do something about, rather than on the past.
There are two major reasons for thinking ahead and trying to develop principles for management of future cost increases. First of all, by the time the news of price increases hits the papers, it’s usually too late to do anything substantial about them, other than temporarily moving a few charges from one account to another. Secondly, if our leaders seek to develop principles to manage future investment, the quality of public debate and the effectiveness of our decision-making systems will be significantly improved as our legislators will be focused less on trading accusations and more on devising workable alternative solutions. That’s not just good energy policy, it’s responsible governance, regardless of which side of the house you’re on.
— Jake Brooks, Editor