CHILD’S PLAY: ONTARIO ENERGY COSTS

Politics in general, and electoral politics in particular, have sadly never been a venue for frank explanations or sensible solutions for important public policy challenges.  The provincial election now underway in Ontario is certainly no exception to that rule, and no issue better captures the exasperating truth of this observation than the issue of electricity costs in Ontario.

That is not to say that the three major parties are ignoring the issue.  The incumbent Liberals have already chopped 8% from the bills paid by ratepayers across the province, with another 17% to follow shortly.  And rural ratepayers are to receive a subsidy to offset their higher power delivery charges that will knock a further 15-25% off their total energy bill.

The poll leading PCs want to up the ante by shaving an even 37% off the bills paid by all Ontarians, and will roll back salaries and severance benefits from the executives of the recently privatized  Hydro One.  The surging NDP has its own comparable offering: 30% off all bills, a further 15% cut for rural customers to offset higher delivery charges, the end of time-of –use rates differentials and a promise to negotiate with the federal government to eliminate the 5% GST from hydro bills, AND the buy-back of the 51% sold off by the province in the privatization of Ontario Hydro.

From the look of these platforms, one would have to conclude that it is pretty easy to cut hydro rates; it looks like a 35% rate reduction is just table stakes for this election.  However, on closer examination, it seems that these rate cuts are only easy because they are not what they claim to be.

Ontario has a problem with its hydro rates because of overcapacity.  Over the last 15 years, high cost electricity has come on line with the execution of contracts negotiated with private generators of solar and wind energy.  At the time that these green energy initiatives were entered into, they were justified in part as part of a plan to decommission carbon-generating gas plants and as part of an industrial strategy to establish Ontario as a leader in the manufacture of panels and turbines required to support green power generation.

Unfortunately, that strategy was flawed on both fronts.  Both at that time and at the present, green energy requires the maintenance of traditional generating capacity equal to peak demand, because there must be light and power when the sun don’t shine and the wind don’t blow.  And both of the traditional generation modes used extensively in Ontario (nukes 61%, hydro 24%) are high fixed, low marginal cost capacity.  So Ontario ended up with its existing full generating capacity that was buttressed by duplicative high cost green energy.

Even that problem was not so bad until the full impact of the 2008 global recession hit.  Economic activity fell precipitously as did the demand for power just as the bulk of these high tariff take-or-pay green energy contracts came on line.  Suddenly Ontario was an exporter of high cost power for which the market would pay only a fraction of the production cost.  Ouch.

So there is the problem.  Let’s look at the solutions that the politicians are offering.  Cuts to the cost of generation can only arise by one or both of two means.  One is entirely cosmetic.  Shifting the cost of power generation from rate payers to tax payers is truly meaningless.  Every ratepayer is also a taxpayer (with the exception of the homeless, who are neither), and given that electricity consumption is reasonably correlated to income, the burden of hydro costs are probably allocated progressively in either a utility or tax bill.  This strategy is nothing more than a shell game, pure and simple.

The other is to shift the cost generationally, incurring long term debt to fund the excess costs of today. If this is to be the strategy, the best and most transparent way to raise that debt is by issuing more government debt, where the creditworthiness of the province’s tax base, howsoever tarnished by excessive borrowing, will still result in lower interest costs than an issuance by the utility itself.  The worst and least transparent way to do it is to set up a special purpose vehicle under Ontario Power Generation to issue the debt, thereby adding even more structuring costs to the already higher issuance costs that OPG itself would attract.  Alas, the Wynne government went with the latter.   As a result, Provincial Auditor Bonnie Lysyk has noted that the rate relief program will incur $4 billion in additional interest costs to create a structure that can only be justified on the tenuous argument that it permits the government to exclude the debt from its own books.  Given the choice between a shell game and kick-the-can, the government chose the latter and then promptly kicked the can under a car.

The only part of this whole thing that has any remotely rational basis is the subsidization of delivery costs for rural users.  One can certainly quibble about the public policy justification for subsidizing more remote Ontario communities, but to the extent that there is a consensus on this policy, it is an effective mechanism to collectivize the cost and spread the pain.

The reality is that Ontario finds itself with electricity rates that are certainly high by Canadian standards, but still modest relative to those of many US jurisdictions.  There is no magic solution to reduce these costs in the short term.  It is time to stop the children’s games and have an adult conversation about how much of the cost can and should be deferred and how to finance that deferral most economically.

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