(March 4, 2017) A plan by Ontario’s NDP to fix the province’s hydro crisis will only make matters worse.
Ontario’s NDP recently released a plan to “cut” hydro prices across the province. Unfortunately, the plan introduces more problems to an electricity system already in disarray.
The NDP proposes to “expand the role” the province’s energy regulator, the Ontario Energy Board (OEB), to “more effectively protect customers” and ensure that its guiding principle will be: “Is this the best deal for affordable, reliable, and environmentally responsible power, and is it the best deal for ratepayers?” As part of that plan, the NDP will reserve seats at the regulator for unspecified “ratepayers” and other members with expertise in “consumer advocacy”.
Unfortunately, the NDP’s plan undermines the guiding principles of the OEB, which is to act as an economic regulator, and so will actually shrink the role of the regulator, not expand it. The NDP’s focus on the interest of ratepayers above everything else ignores the other half of the OEB’s mandate, which is to facilitate the “maintenance of a financially viable electricity industry.” Putting the interests of ratepayers above the interests of the energy sector as a whole will create perverse outcomes, such as taxpayer subsidies of the electricity sector.
If, for example, consumer advocate groups argue for lower rates at any cost, they may be acting in the short-term interest of electricity customers, but ultimately damaging the health of the entire sector, which may finance artificially low rates through debt or other financial maneuvers.
If the sector runs into financial trouble – and is publicly owned as the NDP desires –taxpayers will be left to foot the final bill. Under that model, electricity becomes a provincial service, like roads and jails and hospitals.
Rather than limiting the role of politics in the electricity sector, a “consumer-first” regulatory model will enlarge it.
Instead, the NDP should advocate that the OEB hold hearings to review the province’s long-term energy plans, which was one of the key functions laid out for the regulator in wake of the breakup of Ontario Hydro. The province has ignored this principle for more than a decade. If the OEB were to review the long-term energy plans, consumer groups, environmentalists and industry would have the chance to test those plans on environmental and economic grounds.
The very bad
The NDP wants all electricity customers to pay the same delivery charge, even though the cost to serve rural and urban customers is vastly different and varies among the province’s dozens of local utilities.
This proposal creates a number of problems.
First, some urban customers – those who purchase power from Toronto Hydro, for example – pay higher costs than their rural counterparts (the definition of a rural customer is never defined by the NDP). According to data from the OEB, Toronto Hydro is one of the highest cost distributors in Ontario – beat only by a small utility in the north, Algoma Power, which services around 11,000 customers, compared to Toronto Hydro’s 1.1 million
Toronto Hydro customers are not getting a “deal” on their delivery charges – quite the contrary.
Secondly, in the case of Hydro One – the largest distributor in the province – the utility’s urban customers have for years been subsidizing rates for rural customers. The OEB recently directed the utility to mitigate those cross subsidies for economic reasons, meaning the NDP’s proposal would be undermining both the regulator and sound economic regulation.
Thirdly, if the NDP decides to “levelize” delivery charges across Ontario, it will result in higher rates for customers who purchase power from well run utilities in order to subsidize customers of high-cost utilities, like Toronto Hydro and Hydro One. Good management of a utility would be punished by a flat delivery charge.
And finally, there are very strong economic reasons – and the OEB is, ultimately, an economic regulator – for having customers pay the full and transparent cost of delivering power to them. There’s no social equity reason that low-income or middle class households should be subsidizing hydro bills for cottage owners or other high-income households in rural areas.
The very very bad
The NDP wants to return the power sector to complete public control, even though public ownership of the power sector has been a raw deal for ratepayers.
The NDP would start by buying back the 30% of shares of Hydro One and use the utility’s future profits to pick up the tab. The NDP estimates the cost of this policy would be as much as $4.1 billion, but we estimate – based on the current share price of $23.63 – that figure could be as much as $4.63 billion. It appears the NDP has not considered the interest costs that the province will incur after borrowing more than $4 billion to buy back shares.
A publicly owned Hydro One was hardly a good deal for ratepayers. Because the province was its sole shareholder, it often had to pursue costly projects for political reasons, rather than economic ones. The hundreds of millions of dollars spent in recent years to connect renewable generators rather than upgrading its aging assets is the most notable example of this. Those costs were eventually passed on to ratepayers, as the future costs of deferring the necessary costs of upgrading the transmission grid will be.
Hydro One was also a poor performer under sole public ownership.
It was one of the worst performing distributors in North America and blamed its size and terrain as a reason why it couldn’t do much better. Many of its work programs, such as vegetation management, cost more than comparable programs at other utilities in North America. Even among utilities in Ontario, its performance is so poor that it was considered – and still is – an outlier in benchmarking studies.
Nonetheless, its workers have been paid above market wages. According to the most recent evidence, Hydro One workers have been earning more than comparable employees at other companies for nearly a decade – even though the OEB has repeatedly tried to get the company to bring those costs in line with the industry average. The province, as the sole shareholder over most of the time, failed to heed the OEB’s advice.
The NDP also points to British Columbia and Manitoba as good examples of why we should go back to a publicly owned electricity sector.
The NDP should look a little closer.
BC Hydro has pushed billions of dollars of costs into “deferral accounts” and taken on tens of billions of dollars in debt as it pursues controversial megaprojects like the Site C dam (the BC NDP has, in fact, been a very vocal critic of the management of BC Hydro). The rate increases required to cover those costs would result in well above-inflation rates hikes, which would hurt the government politically, so they prevented the energy regulator from implementing them. The low rates enjoyed by BC Hydro customers today are a mirage with unavoidable costs being pushed to the future.
Manitoba Hydro, meanwhile, already has $14 billion in debt and little equity and expects that debt figure to balloon to $25 billion over the next three to four years. In the coming years, it will be almost fully leveraged and will issue debt to service interest payments. While the company expects to increases rates by nearly 4% annually for the next 13 years, its new CEO is warning that even higher rates will likely be needed. The situation is so dire that Manitoba Hydro’s CEO recently warned that it may need an “equity injection” (bailout) from the province’s taxpayers.
And let’s not forget, as the NDP apparently has, that a public Ontario Hydro bankrupted itself.
Brady Yauch is an economist and Executive Director of the Consumer Policy Institute (CPI). You can reach Brady by email at: bradyyauch (at) consumerpolicyinstitute.org or by phone at (416) 964-9223 ext 236