(April 14, 2012) It’s been a flurry of activity around the Ministry of Energy’s offices over the past few days as the Energy Minister, Chris Bentley has announced two initiatives.
The first announcement on April 12th was really more of the same but it was labelled Ontario’s “Clean Energy Economic Development Strategy” and included the appointment of a “Task Force” loaded up with the usual suspects that helped to shape the Green Energy Act and those who continue to benefit from it. The 14 members of this task force will reputedly work at “facilitating collaboration” to identify export markets for Ontario’s clean energy industry. They will lead “cleantech” (what MaRS Discovery District calls it) trade missions” to Asia, the Middle East and the US. The task force will also be responsible for “Delivering on the province’s “Smart Grid Fund” to “spur innovation”. This fund was a $50 million dollar taxpayer fund when set up but it appears the fund has been fully depleted as they no longer accept applications so it remains to be seen what the task force can actually deliver. In the interim IESO has applied for a rate increase to the OEB to fund their $250 million initiative to monitor the information coming from the smart meters. This is the forerunner to IESO’s spending on their smart grid initiatives which they previously said would cost $1.6 billion and additional to those costs are IESO’s wind forecasting expenses which ratepayers are already paying for. We can expect the task force to come back from those foreign trade missions and announce that the benefits of the trade mission will possibly lead to hundreds of million of potential benefits and we can expect that they will continue to push for the addition of more intermittent, unreliable wind and solar power to the Ontario grid.
The second announcement by Minister Bentley came only one day later and in that one it was about launching a panel “to improve efficiencies, including local distribution company (LDC) consolidation.” The rumours about consolidation/privatization had surfaced in the media days before and perhaps had been leaked in order to set the table for what was to follow. The panel is composed of one LDC insider plus Murray Elston, former Minister of Health under David Peterson’s Liberal government and Floyd Laughren, the former Finance Minister under Bob Rae’s NDP government. In those days Mr. Laughren was referred to as “Pink Floyd” by the media. While the announcement indicates the panel will launch a “comprehensive review of the province’s electricity sector” the focus of the press release is all about consolidation of the 80 LDCs and we should expect the panel to focus on that.
Looking at the “year book of distributors” on the OEB website; for the year ended December 31, 2010 (the latest available); indicates Hydro One (including Hydro One Brampton) and Toronto Hydro combined; represented 54.5% of the total LDC equity base, 56.7% of the total net LDC revenue (total revenue less the cost of power) with only 42.5% of the ratepayers. As a result these entities have the highest delivery costs. The OMA (operations, maintenance and administration) of Toronto Hydro and Hydro One collectively represents 57.5% of the total OMA for the 80 LDCs with only 42.5% of the ratepayers as customers. Collectively the OMA for the 80 LDCs was $1,351 million which is where the panel needs to find those efficiencies. Even if they find 20% efficiencies (unlikely), the ratepayers will benefit by $270 million which is equivalent to $2.00 per Megawatt hour or 2/10th of a cent per kWh ($4.80 per month for the average household). Hopefully “Pink Floyd”, former Health Minister, Murray Elston and their fellow panel member will start with Hydro One and Toronto Hydro to find some of those efficiencies, or they will simply be wasting time and tax dollars.
If one looks further at the LDC year book numbers you discern that the collective “Return on Revenue” (RoR) was 15.5% and the “Return on Equity” (RoE) for 2010 was 9.23%. The LDCs also contributed $105 million to the Provincial Treasury in the form of PILT (payments in lieu of taxes) in 2010, but in a budget spending scenario of $126 billion that is more like a “rounding error”.
The “panel “ will undoubtedly look long and hard at the concept of privatization, which would generate one time benefits for the municipalities who currently own 79 of the 80 LDCs (hydro one is owned by the Province) and who would be supporters thereby allowing municipal politicians to (temporarily) avoid municipal tax increases. It is quite likely the willing buyers would be the large public sector pension funds like OMERS, Teachers, etc., who would surely love to acquire a company that delivers a vital commodity in a monopolistic environment and gets a guaranteed RoE blessed by the Ontario Energy Board. The OEB on March 2, 2012 set the RoE at 9.12% effective May 1, 2012. For comparison purposes the US publicly traded electric utilities were recently reported as generating an RoE of 7.10% or 2% less then the taxpayer owned Ontario electricity companies are allowed to generate. The acquisition of the profitable LDCs by the large public sector pension funds would self perpetuate the generous pensions paid to the employees of these LDCs who generally receive indexed pensions and in the case of Hydro One can retire (under the rule of 85) based on their best 3 years of employment earnings.
If the panel look at OPG they will quickly note that the top five senior executives received pay increases totalling $846,000 or 21% (2010 versus 2011 Sunshine list). It is also rumoured that the Power Workers Union just ratified a contract that will give them increases of 2.75% a year for the next three years. The panel might suggest to Minister Bentley that the entities under his watch are simply ignoring the “pay freeze” the Premier imposed on Crown Corporation executives in the spring of 2010 and further are ignoring the “pay freeze” for the public sector workers announced in Minister of Finance, D. Duncan’s recent budget.
In the end it is the ratepayers who will have to pick up the tab no matter how much the “panel” are able to generate in the way of “efficiencies”.