Tom Adams

January 16, 2002

Energy Probe Ontario Electricity Backgrounder

The Ontario government has issued regulations that will guide the administration of its new electricity tax called the Debt Reduction Charge, regulations that are consistent with its 1997 commitment to ensure fairness to all classes of customers in the recovery of financial liabilities left over by Ontario Hydro. (See O. Reg. 493/01, Ontario Gazette, January 5, 2002.)

The Debt Reduction Charge was first introduced in June 2001 and has been set at 0.7 cents/kilowatt-hour, or about 10% of the cost of electricity. Most of the liabilities that the proceeds of the Debt Reduction Charge will help to pay down relate to historic nuclear costs with a much smaller portion attributable to long-term power purchase contracts at above market prices.

In its 1997 White Paper on electricity reform, the Ontario government promised that any special debt recovery payments would be administered so as to be "clear and fair to all customer classes." The new rules will ensure that large industrial customers capable of generating their own power will not be able to use that capability to escape paying electricity taxes. Instead, all electricity consumption in Ontario will be taxed, irrespective of whether the power is bought through the grid or generated internally.

The only customers excused from paying their share of the Debt Reduction Charge are a secret group of heavy industries who have special rate discounts originally granted by Ontario Hydro and extended for up to four years into the new market. Ontario’s electricity reform legislation passed in 1998 promised to eliminate all special rate discounts upon market opening.

Communities or industries that have historically generated some of their own power, or through alternative purchasing arrangements did not buy electricity from Ontario Hydro, will have their Debt Reduction Charges reduced or eliminated.

In 1995, during the deliberations of the Advisory Committee on Competition in Ontario’s Electricity System, chaired by former federal finance minister Donald Macdonald, the lobby group speaking for heavy industry, called AMPCO, expressed the view that the historic liabilities of Ontario Hydro should be recovered from all consumers fairly, including heavy industry. That commitment would help to create an atmosphere of consensus around the electricity restructuring, a concensus that for the most part held until mid-2000.

Prior to and throughout Ontario’s electricity restructuring process, Energy Probe has recommended that, for efficiency and accountability reasons, the liabilities of the former Ontario Hydro that cannot be recovered through ordinary electricity rates should not be recovered in electricity taxes but instead should be recovered from taxpayers. Ontario Hydro’s borrowing was protected by provincial loan guarantees.