Nearly everyone acknowledges that the top challenge for management of the electricity sector going forward is to keep prices as low as possible. Yet it seems that despite best efforts across the board, prices have been stubbornly rising and are showing every sign of rising further. No doubt this is on the minds of Ontario’s newly appointed cabinet as it has been on the minds of many before them. Yet few concrete solutions are apparent. Given that there is a new administration in power in Ontario, and an election campaign expected in the near future, this might be a good time for parties on all sides of the spectrum to re-focus on their plans for power sector policy and prepare to explain to the public what to expect from future governments in terms of energy costs and prices. Much better to prepare their plans now than to craft policy in the heat of an election campaign.
First of all, it would be wise to dispense with the superficial idea that government can simply legislate or direct prices to go down. As long as there are real costs behind a product, those costs must be paid by someone. For example, everyone would like the price of bread to go down, but you can’t simply order stores to drop their prices or farmers to take less for their wheat. Simplistic policies or orders to change prices, if they don’t unfairly penalize certain sectors, only hide or move the costs around so that they are added to the tax base, or to longer term prices. To actually reduce electricity prices you need to find ways to create real savings in the underlying costs of generating, transmitting and distributing the product, and make sure those savings are passed on to consumers.
Over time, two essential processes have been put in place to keep the underlying costs down. Neither of them work perfectly but they do provide a solid foundation. The first is competition in which the actual price of the electricity commodity is determined by hourly offers to buy and sell, and long term supply contracts are awarded based on the results of a competitive RFP. The second is regulation, a judicial-like process of oversight in which officials can peer into the workings of regulated market players and set conditions on their operations and even determine prices in some cases, presumably where the market can’t be relied upon to set prices competitively. Regulators can refuse to grant an operating license if the proposition under review looks like it might impose unreasonable costs on other players.
In Ontario, the two systems, competition and regulation, operate in co-ordination for the most part. There is always room for improvement in both areas, but they basically keep the big players in check and prevent the worst forms of price gouging and so on. Any approach to pricing policy has to start by recognizing the important price control benefits already being provided by the existing institutions.
Aside from fine-tuning these two basic systems for protecting the consumer, what can be done to manage and control electricity prices? Actually quite a bit. There are large chunks of costs that can be driven out of the system by little more than rigorous planning and staying the course. Put very simply, it adds up to this: Changes in direction can be costly and should be assessed very carefully and openly before being enshrined as public policy.
The best example of this is also one of the hottest topics in provincial politics: The decisions to re-locate two gas-fired power plants that had been contracted by the Ontario Power Authority. When the government stepped in and reversed decisions made by its own agencies, it was not just moving power plants. It was casting aside its development and planning systems and throwing into doubt a wide range of understandings that had been carefully cultivated about how the process was supposed to work. Investors may be leery about future assurances from any provincial government if the current one won’t stick to the very plans and systems it has itself put into place. Developers and investors defaulted to their worst case scenario clauses to protect their invested funds. Of course, the government has the right and in fact the duty to act, sometimes swiftly, to change the course of events. But that doesn’t mean it’s wise to do so without carefully considering the costs and the long-term implications.
The time-constrained world of public policy does not allow for the kind of incremental trial-and-error testing that’s possible with retail products. There needs to be a high degree of certainty that there will be net improvement long-term when public policy is changed. Yet change has often been imposed on the energy sector without full consideration of the long-term costs. A key example of this of course was the abrupt shutdown of the retail electricity market in 2002 by then-premier Ernie Eves. More recently there was the establishment of an integrated power planning system followed by the unexplained dropping of the plan and the virtual abandonment of most aspects of the power system planning process. Similarly, the government established independent agencies and relied on their advice, and then gradually began removing the independence of the OPA and to a lesser extent the OEB. There was a major push to install smart meters followed by a period in which smart metering is all but ignored in policy development. The procurement of renewable energy, a widely popular program, is probably the most discontinuous policy area of all. Ontario went from a NUG program in the early 1990s to having modest procurement under Ontario Hydro (RETS) but soon abandoning it. Then the province invested major efforts with international ramifications in a market-based, consumer-driven green energy attributes system related to emission trading. That was allowed to wither a few years later when attention turned to renewable energy RFPs and standard offer programs, which proved successful and reasonably economic. Yet all of that was basically set aside in 2008 in favor of the FIT program – five different approaches to renewable energy procurement in 17 years.
Arguably, a sixth approach to procuring renewables is now at work. In a remarkable act of irony, the FIT program, which held as one of its original core tenets the establishment of long term stable investment conditions, announced a couple of years into its program that it would operate within a system of time-limited windows – making it much like an RFP system without the bidding. Since May 2008 when the RFP system was shut down to make way for the FIT program, the windows for procurement of major renewables have been closed for more time than they have been open.
Cogeneration is an even sadder story where announced programs have taken years to be put in place and directives have gone unfilled for years. There hasn’t been much transparency in the plans for cogen procurement but there is little doubt that the difficulties are in no small way related to one procurement policy change after another, mostly behind closed doors. This meant that the constant policy churn overtook any ability to produce results anywhere near the levels cited in the directives.
An eloquent statement of the issue was made by APPrO President Dave Butters last year in his speech to the Toronto Board of Trade, when he said, “Please, quit fixing us.” In particular, he observed that, “Policy adjustments. Experience-based improvements. Fine-tuning. Corrections. These are all welcome. And necessary. But stem-to-stern reviews. Sweeping overhauls. Game-changing changes. Let’s have less of that. … A climate of perpetual, disruptive change discourages efficient investment decisions. Which renders achievement of our goals harder. Which places greater, not less burden on taxpayers and ratepayers.”
The primary challenge here is that the appropriate responses to unpopular electricity prices cannot be expected to be simple or easily expressed as catchy campaign promises. They are usually found deep inside the workings of intricate systems. This fact presents a significant communications challenge of course, because a carefully-constructed measure isn’t easy to toss around in conversation, or in the media in short sound bites. However the communication challenge isn’t insurmountable: A complicated message can be developed with stakeholders, explained in a blog and the process summarized in a well-crafted sound bite. If governments and parties are prepared to preside over the energy sector in these times of unprecedented costs and highly interconnected systems, then preparing to communicate their approaches is going to require special effort. It can be tiered into two or more levels. For example, the overall explanation to the public can be summarized in clear straightforward language, and the details can be made available in an easily accessible format online.
The cost control problem in the power sector has been politically difficult in Ontario for years largely because the public does not understand the cost issue. As mentioned in my last editorial, the McGuinty government required a fair bit of courage and political capital to explain that the renewal of power infrastructure was going to cost the good citizens of Ontario more than they were used to paying for electricity. A worthy step forward was taken in the direction of better public understanding of electricity costs. However that learning was small in relation to the cost increases that are expected in the years ahead.
To succeed politically and practically with the next round of infrastructure investment, the public needs to be given the information to answer its legitimate questions, and the tools to properly examine the issue. Generally speaking, Ontarians are reasonable people. If they are shown the figures and the full set of options from credible sources, they are likely to accept the reality of rising energy prices and make reasonable choices from the available options.
The methods required to put this kind of advice into action need to reflect our information-inundated tech-savvy age. While in the past a parliamentary cost control officer and a fairness commissioner might have been sufficient for the job, today there is need for greater depth and breadth of information. More effective at assuaging public concerns would be an open database of electricity sector costs complete with analytical tools. (We are talking here about disclosing information that is already public domain, not individual company costs which can be proprietary and confidential for competitive reasons.) Cost assessments could be made by parliamentarians, researchers and the general public on the implications of significant energy policy proposals. Basic options could be costed and presented on the website in spreadsheet form that allow the curious or the competitively minded to test results using their own assumptions. The debate needs to be enriched and the subject matter requires relatively deep information sets to work with. Whatever the future circumstances may be, it is best to know about these costs before making irreversible choices. A better informed public will make better decisions.
Dave Butters concluded by saying, “I advise pragmatism over grand designs. Small steps over great leaps. Let’s rely on practical experience and the pursuit of gradual improvements. That is how we can best realize the goal of building an even stronger, affordable system. One that offers reliability, stability, predictability – for both power producers and the people of Ontario. And it is for that reason that I finish by saying that our fondest wish is that decision-makers will hear us when we say: Please, quit fixing us.”
— Jake Brooks, Editor