Thomas Adams and Michael Hilson
National Post
June 14, 2000

Ontario’s plans to freeze electricity distribution rates could lead to regulatory chaos — nothing new to the province’s electric market reform. But it is not too late for the government to fix the situation.

Instead of depoliticizing Ontario’s electricity sector and protecting the authority and independence of its regulator, the province is going in the opposite direction. The result? The government has disgraced the Ontario Energy Board — once a superb regulator — and replaced it with arbitrary cabinet dictates, creating chaos in the marketplace.

Tomorrow, Toronto Hydro, the largest of the municipally owned distribution utilities, is scheduled to appear before the Ontario Energy Board to ask for a rate increase of 58%, or $128 a year, for the service it provides residential customers. Mississauga wants a 79% increase, or $107 per year, for its residential customers. On average, Ontario’s municipal utilities seek rate hikes that will raise the overall bills that consumers see by 10% to 15% a year from this increase alone.

The response of Jim Wilson, Ontario’s Energy Minister, has been panic. Last week, he issued a directive to the Energy Board opposing the rate increases. Today, he is expected to introduce emergency legislation to enforce rate freezes. If he does, chaos could ensue. Not that chaos is a stranger to the government’s electricity restructuring.

For the last year, Mr. Wilson has been pressing the municipalities to merge their utilities to make them efficient, all the while boasting of rate cuts to come. To encourage the municipalities to merge their utilities, he passed legislation in 1998 that declared Ontario municipalities to be owners of the 250-odd municipal utilities, ordered the utilities to be corporatized and told the Energy Board to regulate them as ordinary commercial utilities. At the same time, by stripping the Energy Board of its independence, the board became subject to political pressure.

The rate increases occurred because the Energy Board accepted the advice of its American experts, who likely had never seen debt-free utilities flush with more than $1-billion in cash. The U.S. experts convinced the board that the utilities’ equity should be transferred to municipalities. Notwithstanding that this equity had all been contributed by electricity ratepayers, the board — lobbied by the municipalities — required them to charge ratepayers again, with interest, for these assets, valued at approximately $6-billion. This decision, made in January of this year, inevitably produces much higher rates. Those higher rates, in turn, inflate the value of the utilities to their owners and potential investors. Utilities and investors have been jumping though the merger hoop, expecting the regulator-approved rate increases. Dozens of deals have been struck, many more are in the works, and untold contractual commitments have been made.

While the Energy Board was determining the rate formula last year, provincial government officials sat quietly. Municipal utilities egged the Energy Board on. Toronto Hydro, using smoke and mirrors, has since been trying to make the elephant-sized rate increases appear small.

Mr. Wilson’s rate freeze — if he can make it stick for any length of time — throws all the financial calculations out the window. Those who risked their cash based on Energy Board-approved rate projections may get singed, even though they followed the government’s dictates to the letter. For example, Hydro Mississauga, Ontario’s second-largest distributor, followed the government’s lead in good faith and refinanced itself but now may get caught offside on the resulting bank covenants. One potential consequence is that the utilities’ assets may be seized.

The Energy Board is now in an awkward position. The municipal utilities’ requests for whopping rate increases appear to generally comply with the Energy Board’s own order. Assigning liability in the event of financial disputes will provide lawyers with a field day.

Within weeks, or perhaps even days, we will get either uncalled for rate increases that will undermine the whole electricity restructuring process, or litigation from investors such as pension funds who had once trusted the process and had responded to Mr. Harris’ efforts to improve Ontario’s investment climate. The reputation of the Ontario Energy Board, which, guided by its questionable interpretation of provincial energy policy, decided to impose the rate increase, may never recover.

It is not too late for the government to remedy the situation. Despite the government’s litany of errors to date, an easy, fair solution to the rate increase problem is readily available. The government should allow the rate increases to go through. But, to leave consumers whole, Mr. Harris should slap a windfall profits tax on municipal governments to recover their excess profits — at least $7-billion province-wide.

Mr. Harris can then use the proceeds of the windfall tax to reduce debt retirement taxes in the electricity bill, a leftover from Ontario Hydro’s debts and stranded nuclear waste liabilities. That would virtually eliminate the province’s own electricity tax on consumers, now called the Debt Retirement Charge, which the government announced late last week. Most consumers would see higher distribution charges but their ultimate bills would be unaffected.