Distribution adds the shock to electricity bills in Ontario

Eric Reguly
The Globe and Mail
April 5, 2005

Reading an electricity bill requires the skill of an accountant. In Ontario, there are two commodity charges. There are also regulatory, debt retirement and delivery charges. Sometimes you wonder how small electricity price hikes – Ontario last month approved an increase of about 4.4 per cent – seem to translate into huge bill increases. But it’s confusing and you just pay the damn thing because Desperate Housewives is on.

If you could be bothered to figure it out, you’d be in for a surprise. Electricity is a bargain. If you live in Ontario, what’s killing you is the distribution charge (which is buried in the “delivery” charge on your bill). That’s the amount you pay to the local utility to deliver the juice the last few kilometres into your home. Those prices have been rising at rates that would make your gasoline retailer envious. A report just published by Tom Adams and Alfredo Bertolotti of Energy Probe explains just how thoroughly the government and the regulator botched the distribution charge file.

Energy Probe examined household electricity bills in 10 Ontario urban regions going back to 1998 (more on the significance of that date in a moment). Since then, the total bill in each region has gone up between 27 per cent (Oshawa, at the low end) to 41 per cent (Aurora). That doesn’t mean the electricity prices went up that much. Distribution charges, which account for roughly a quarter of a bill, have been the main driver. They have climbed between 67 per cent (Toronto) and 156 per cent (Aurora, again). Ontario, once known for its low energy prices, is now known for high prices by Canadian standards.

Enersource, the new name for the old Mississauga Hydro, is a middle-of-the-pack example. In 1998, you would have paid $11.15 a month in distribution charges, assuming you were typical user. Now, you’re paying $23.08.

You might feel better if you knew the higher fees were being used to overhaul all the wires and poles and towers that make up your local distribution network. While some work is being done, the truth is most of the increase is simply sucked into city coffers to be spent at council’s whim.

It wasn’t always this way. In 1998, Ontario had 318 local distribution utilities. They essentially operated as co-ops on behalf of customers. The vast majority had little or no debt; some were flush with cash. They paid no dividends and no taxes. They were off the radar screen. The Tories fixed that. They argued the co-op structure was a barrier to efficiency gains. If the utilities were converted into proper companies, they could merge, cut overhead costs and borrow long-term money to finance long-term assets.

The municipalities couldn’t have been happier with the idea.

The utilities came under municipal ownership – gratis – and city councils cleaned out the cash sitting on the utilities’ books, about $1-billion in total. That was the first windfall. The second came when the Ontario Energy Board gave the utilities a regulated rate of return on equity. The figure was 9.88 per cent. Since the utilities’ capital structures were 100 per cent equity, or close to it, the returns were spectacular. As the distribution charges soared, the OEB backed down, but only somewhat. Hasty new legislation allowed the rate increases to be phased in over several years (for almost all the utilities, the last of the big increases came last Friday).

Distribution charges, as a result, have risen far faster than other electricity charges. Ontario, once known for its low energy prices, is now known for high prices by Canadian standards. Too bad there’s virtually nothing that can be done about the fat distribution fees. The municipalities that own the utilities would never want to give up their cash windfall, especially since many of them, such as Toronto, have distressed budgets. Returning the utilities to their former co-op status would be politically and financially messy. At best, the regulators and the politicians will look at the outsized distribution charge increases and prevent them from happening again.

Ontario has been in non-stop electricity upheaval since the late 1990s. Ontario Hydro was split up to form Ontario Power Generation and Hydro One. The electricity market was opened by the Tories, then slammed shut. Hydro One’s privatization was cancelled. OPG ousted its CEO after horrendous cost overruns on its nuclear plant repair jobs. There was a blackout and several near blackouts. Some of the problems could not be avoided. Others could have been, and distribution hikes were one of them. In a world of rising electricity prices, there was no need to add to consumers’ pain by allowing distribution charges to be jacked up so high.

 

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1 Response to Distribution adds the shock to electricity bills in Ontario

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