The perils of a hydro rate freeze for Ontario

Any “relief” the province is considering for ratepayers will come at a cost.

All signs point to some form of a hydro rate freeze in Ontario. For electricity customers, this will come as a welcome relief from soaring hydro bills, but the good news masks another step backwards for the province’s electricity sector. Not only will the politically motivated rate freeze further undermine the independence of the Ontario Energy Board (OEB), it will actually subsidize high-cost utilities. Meanwhile, the rush by Queen’s Park into renewable energy at all costs over the past decade will curb its capacity to freeze rates on the portion of the province’s hydro bills that have increased the most and at the quickest pace.

Some win.

The biggest loser of all of a provincially mandated rate freeze will be the OEB and its ability to perform as a strong and independent regulator.

Queen’s Park will direct its “relief” at monthly delivery charges, according to recent reports. If that’s the case, this move will serve to further undermine the OEB’s clearly legislated mandate, which is to “promote economic efficiency” and a “financially viable electricity”. As an economic regulator, part of the OEB’s job is to test applications from utilities to determine if their proposed rates are good value for ratepayers, and whether they are financially sustainable in the long run, as many utilities are publicly owned.

A rate freeze on delivery charges, however, will push utilities to either defer investments that help to keep the lights on or to issue debt as a way to keep rates artificially low – and that’s no good for ratepayers. Deferring investments increases the risk of blackouts and using debt to ward off rate hikes only moves the cost of delivery onto ratepayers at a later date. Ratepayers saddled with past debt would eventually have to pay it off in the form of higher rates. In both cases, the short-term relief comes at the expense of the long-term health of the province’s electricity grid

Alternatively, if Queen’s Park decides to have the OEB “levelize” delivery charges across Ontario as part of its rate freeze, the move will actually result in higher rates for customers in parts of the province who enjoy well-run utilities. They will pay more so that customers who buy their power from high-cost utilities, like Toronto Hydro and Hydro One, can pay less. This “subsidy” scenario would not only signal a significant move away from economic regulation, but it would also undermine one of the OEB’s key principles. Good management of a utility – and its customers – would essentially be punished by a flat delivery charge.

It would also mark a step backwards for the OEB, which in recent years has increasingly pushed electricity utilities to lower cross subsidies between various groups of customers. Rural customers, for example, pay more in delivery charges than their urban counterparts because the cost to service them is higher. The OEB, rightfully, has encouraged this pricing structure.

The province’s promise of “more relief” also won’t deal with the part of monthly hydro that’s been growing at the fastest pace. The real problem is the “commodity” side of the bill, which is the cost of paying generators – such as nuclear plants, hydro dams, renewables and others – to actually produce power. Over the last decade, it is this portion of the bill that has grown the fastest and, which, at times, can account for more than two-thirds of an average monthly bill. The price for off-peak power, for example, has increased by 155% in the past 10 years, more than eight times the rate of inflation.

The rush into renewable energy at all costs, combined with a fixation on funding conservation programs at a time of declining demand, limits Queen’s Park’s wiggle room to do anything about these costs. In order to attract renewable energy producers to Ontario, the province signed 20-year contracts that guarantee these generators prices well-above market for their power, whether it’s needed or not, and this during a period of surplus.

The primary catalyst in bankrupting the old Ontario Hydro was nuclear power and now it’s renewables. The cost of renewables and provincially mandated conservation programs (during a time of falling demand) has increased from $2.7 billion in 2013 to $4.2 billion in 2016 (the most recent rate) – that’s a 55% increase and around ten times overall inflation over that time. By contrast, the cost of purchasing power from the province’s hydro dams and nuclear reactors increased by one-fifth that amount over the same period. Renewables – and conservation – are the biggest drivers of increased costs and, subsequently, rates.

Any so-called relief the province offers ratepayers will prove to be otherwise down the road and will do little to nothing to reverse the damage of previous policies.

Brady Yauch is an economist and Executive Director of the Consumer Policy Institute (CPI). You can reach Brady by email at: bradyyauch (at) consumerpolicyinstitute.org or by phone at (416) 964-9223 ext 236

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