Tories overly optimistic, analysts say

Caroline Mallan
Toronto Star
November 13, 2002

The Ontario government is being overly optimistic about coming up with the money to cushion consumers from high electricity prices, industry analysts say.

The government says a rebate for customers and a four-year price freeze will be paid for from money set aside by publicly owned Ontario Power Generation (OPG) from its wholesale electricity sales.

Premier Ernie Eves insists taxpayers will not be on the hook for the rebate money and price freeze.

But some industry insiders are predicting that higher future rates, increased taxes, increased debt or money taken from other government programs will eventually have to come into play to pay for the billions of dollars that may be needed.

Energy ministry officials seem confident that money being set aside by OPG – a successor company to Ontario Hydro that controls about 70 per cent of the province’s generating capacity – will be enough to cover the rebate scheme.

The rebates will cover the amount paid by consumers over 4.3 cents per kilowatt hour since the market was opened to competition May 1. Eves said the rebates will be at least $75 a household.

By the end of this month, Ontario Power Generation will have set aside $700 million to cover rebates to consumers, states one Ministry of Energy “reality checks” that has been e-mailed to the media.

But Tom Adams of Energy Probe, a consumer and environmental watchdog, does not mince words in his assessment of Eves’ contention that the rebate will be revenue-neutral.

“There is not a shred of truth to that statement,” he said of Eves’ assurances.

Adams said not only will the existing fund likely come up short for the rebates – which he estimates will cost closer to $900 million by the end of this year – it also does not have the money to pay companies that signed up customers with fixed-price contracts for the extra cost they have incurred.

Both Eves and Energy Minister John Baird say they will honour those contracts, most of which offered a fixed price of 5.9 cents per kilowatt hour, even though consumers will pay only 4.3 cents in the end. One industry analyst said the difference owed to those private companies – primarily Direct Energy – could range anywhere from $700 million to $1.1 billion annually.

Jan Carr, managing director of Barker, Dunn and Rossi, an electricity industry consulting firm, said he wouldn’t be surprised if the new price freeze costs taxpayers money – either in the form of increased hydro debt, higher rates in the future or tax dollars out of general revenues.

“You cannot create money out of nothing, if the cost is higher (than 4.3 cents on average), you are going to have to borrow it,” said Carr, estimating the annual cost of the new subsidy plan at between $1.5 and $2 billion.

Critics say that the Tories may have to reduce spending on health care, education or the environment to come up with the money for the rebates.

Carr said while the government may be able to cover the rebate this year, it could have a tougher time in the future because the spot prices for hydro are expected to remain high.

Julie Girvan, an electricity market analyst who advises the Consumers’ Association, said the OPG rebate money was collected assuming lower over-all rates and a plan that would give back customers only a small portion of any unexpected price spikes. It was designed so that OPG would never be asked to pay out more money than it took in.

Essentially, OPG pockets money whenever the energy price is below 4.3 cents and has to pay it out whenever that price is above 4.3 cents.

This article also appeared in the Toronto edition of Metro.


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