Hydro rates should not be subsidized. It would be unfair to future generations.

The province’s Financial Accountability Office estimates that Fair Hydro Plan rebates will save ratepayers $18.4 billion over the next decade, but those savings will ultimately cost future ratepayers $39.4 billion.

This article, by Brady Yauch, first appeared in the Toronto Star

Andrew Francis Wallace / Toronto Star File Photo

Soaring electricity rates have become a financial burden to both households and businesses across Ontario. Rather than tackle the root causes of high hydro rates, policies like the recently passed Fair Hydro Plan — which offers residential electricity customers a 25 per cent reduction on their monthly hydro bills — create more problems than they solve.

A low-rate at-any-cost policy like the Fair Hydro Plan kicks the financial burden of today’s hydro rates to future generations, undermines the regulatory system that is supposed to protect consumers from public utility excesses, supports further political intervention and divorces the cost of energy from the price that consumers pay for it. It also undercuts the hundreds of millions of dollars being spent annually on conservation programs. In short, it’s a Band-Aid solution that, rather than helping heal the wounds that have been inflicted on the province’s electricity sector, actually makes the cuts even deeper and the damage more long-lasting.

First, there’s the simple fact that the lowering of today’s rates is a mirage. There is no plan to lower the cost of generating and delivering power in Ontario. Instead, the difference between the cost of generating and delivering power to customers and the 25 per cent reduction being promised to ratepayers is accomplished through issuing debt that future ratepayers will be left to pay off. None of the costs of generating and delivering power have been reduced.

Early estimates from the province’s Financial Accountability Office (FAO) show the Fair Hydro Plan rebates will “save” ratepayers $18.4 billion over the next decade, but those savings will ultimately cost future ratepayers $39.4 billion (the original amount plus $21 billion in interest). If interest rates move higher, as is increasingly looking likely, the costs of the deferral will only grow larger. The full amount of the next decade’s “rebate” and tens of billions in interest costs won’t be fully paid off until the 2040s.

In short, today’s lower rates will cost ratepayers more in the long run and the risk that the cost of the deferral will be larger than is currently anticipated is significant.

Second, the Fair Hydro Plan destroys the credibility and mandate of the “independent” regulator, the Ontario Energy Board (OEB), which, in the wake of the collapse of Ontario Hydro, was tasked with protecting consumers from excesses that resulted in double-digit rate increases. Prior to the Fair Hydro Plan, the OEB ensured that the price consumers paid for electricity was based on the actual cost of generating and delivering that power.

But economic regulation has been thrown out the window, with the OEB now left to rubber-stamp demands from the province to set rates based on an artificial reduction, even though the regulator has in the past often blocked deferral of this kind by the electric utilities it regulates.

Unfortunately, this isn’t the first policy that undermines the independence of the OEB, but rather the culmination of more than a decade of transferring nearly all decision-making in the electricity sector from independent agencies staffed by experts to political staffers at Queen’s Park. The Fair Hydro Plan merely caps off this trend, making it clear to consumers and producers that the price they pay for power is increasingly a political football rather than one based on real-world economics.

Third, artificially lowering rates today undermines the province’s spending of $2.2 billion on conservation programs. Any consumers who have spent either their own money or provincial subsidies on investments needed to reduce their energy consumption (and offset soaring hydro bills) are seeing the savings from those investments being whittled down. Consumers may lose interest looking for ways to more efficiently consume power now that their monthly hydro bill has been reduced by 25 per cent. While the province celebrates the need for conservation in the energy sector, the Fair Hydro Plan rebates offer the strongest incentive to customers not to conserve.

An electricity rate reduction that increases hydro bills for future Ontarians, divorces the price of electricity from the real-world cost of producing and delivering it, and works against the very conservation policies that consumers across the province have been told are good for the environment should hardly be celebrated.

Brady Yauch is the executive director and economist at the Consumer Policy Institute, a division of Energy Probe Research Foundation.

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