In an historic announcement on March 2, the Ontario government confirmed a major change of course in its long-term approach to electricity prices. Titled the “Fair Hydro Plan,” the proposals feature the “largest cut to electricity rates in the history of Ontario” made possible through a series of initiatives in financing, public spending and rate rules. The plan is designed to reduce consumer costs while leaving the structure of the wholesale market and existing generation contracts largely untouched. The most noticeable impact, assuming the Fair Hydro Plan is approved, will be an immediate reduction in current electricity rates, estimated at 17%, followed by increases in future rates as the long-term debt is paid off. The plan requires passage of a new law, and will take several months to implement.
Since the Liberals took power in 2003 under Dalton McGuinty, Ontarians had been paying electricity rates that covered the full financial cost of power, without adding to long-term debt. Completely reversing this policy, the government’s Fair Hydro Plan is proposing to refinance a large portion of electricity sector costs, substantially increasing the level of publicly guaranteed debt and postponing billions of dollars in payments many years into the future.
Ontario Premier Kathleen Wynne explained the reasoning for postponing payment by saying, “We put the $50 billion cost of the rebuild onto the hydro bills of just one generation. It meant high bills because we were all helping to pay down those costs really quickly. Too quickly. You were paying for the sins of the past and subsidizing those who will benefit from these energy assets in the decades ahead. … [W]e’re stretching those costs over a period that is now more in line with the lifespan of the energy assets themselves. That’s helping to significantly lower bills in the short-term. It will cost us all a little more over the long-term. But this is absolutely the fairer way forward.”
Although there’s little doubt that many consumers will welcome the short term rate relief, reaction to the Fair Hydro Plan has been mixed. The opposition parties at Queens Park were critical, as expected, while other commentators raised concerns about the long-term impacts. For example, Peter Reesor, CEO of the Owen Sound & District Chamber of Commerce, said, “The relief will be greatly appreciated but it still doesn't solve the problem in the long run. We're basically passing an even higher debt on this – the cost of hydro – to our children and our grandchildren.”
The Fair Hydro Plan includes the following major components:
• Reduction in the Global Adjustment component of residential electricity bills through long-term debt refinancing as outlined above
• Continuing to exempt electricity from the 8% provincial component of the HST.
• Expanding Rural or Remote Electricity Rate Protection (RRRP) to provide distribution charge relief to additional customers served by LDCs with the highest rates. About 800,000 customers would benefit from the enhanced RRRP program. The cost of this program will be moved from the electricity system to the tax base.
• The Affordability Fund will provide LDCs with money to assist qualifying customers to make efficiency investments. It will target those who do not qualify for low-income conservation programs and who are unable to undertake energy efficiency improvements without financial assistance.
• On-reserve First Nations customers will receive a 100 per cent credit of the delivery line on their monthly electricity bills.
• The expanded Ontario Electricity Support Program (OESP) will provide an additional $180 to $276 per year for households of eligible size and combined income. The cost of this program will also be moved from the electricity system to the tax base.
• Expanding eligibility for the Industrial Conservation Initiative (ICI) program by reducing the threshold from 1 mW to 500 kW and targeting more small manufacturing and industrial consumers.
Although the short term rate relief will likely be the subject of much public debate in the coming year, it is arguable that the long-term impacts are more significant overall. Mark Rodger, Co-Chair of the Electricity Markets Group at BLG, wrote that, "By severing the link between rates and costs with the slack picked up by new debt instruments, the fundamentals of normal public utility regulation may no longer apply." He asked, "[C]ould the OEB's legislated guiding principles be revised to expressly include a new mandatory criterion of only establishing 'just and reasonable intergenerational rates?' "
George Vegh, head of McCarthy Tétrault’s Toronto energy regulation practice, published an editorial March 15 focused on how to “end the cycle of electricity price interventions in Ontario.” He noted that, "The government of the day faces virtually no restrictions on its ability to develop ambitious and costly experiments. The costs of these initiatives are outside of the tax base and are realized years after the plans are launched. So the government is virtually always in the position of developing ambitious plans with costs for which they are unaccountable." He recommended emulating other jurisdictions using "checks and balances provided by independent energy regulatory agencies that are required to approve expenditures of ratepayer money. In these jurisdictions, public utility regulators oversee generation procurements (whether by system operators or utilities). This review requires a demonstration that the procurements are needed and economically rational. Equally important, they are conducted through a transparent and deliberative process that forms a check on the impulsive short-term tendencies of governments."
APPrO President & CEO David Butters said, “We are pleased that today’s announcement preserves the integrity of Ontario’s electricity market and acknowledges that the investments Ontario has made in generation can continue to provide good value to the electricity system well into the future.”
Mr. Rodger had a recommendation for enhancing transparency considering the current circumstances: "Stakeholders would benefit if the Province (or one of its agencies) produced an annual consolidated balance sheet showing the total revenue requirement for the entire Ontario electricity sector. We note that the former Ontario Hydro prepared consolidated balance sheets that were made publically available. Having one consolidated balance sheet would allow the sector and general public to understand the actual financial impacts and track liabilities which would foster greater transparency, an issue that has been an on-going concern for some time."
Legislation enabling the Fair Hydro Plan will need to be passed by the Ontario legislature before the plan can take effect.