Electricity pricing, fake hearings and public ownership

(December 4, 2017) All political parties in Ontario have pursued electricity policies that are essentially political rather than economic. But how to end the political mess?

By Andrew Roman

All political parties that have been in power in Ontario have pursued electricity policies that are essentially political rather than economic. Some other provincial governments, notably Manitoba and British Columbia, seem to be imitating Ontario’s mismanagement of dangerously costly megaprojects and now in BC, Ontario’s politicizing of prices to consumers. This article focuses on the Ontario experience.

Fake hearings of a powerless regulator

The Ontario Energy Board (OEB) has been empowered to regulate the price consumers pay for electricity in Ontario. It has done this using two universally accepted ratemaking principles. First, consumers should be charged no more and no less than the total cost (of generation, transmission and distribution) of the electricity they use. Second, today’s consumers should be charged for today’s costs, not past costs or future costs. (This second principle is known as “intergenerational equity”.)

Electricity regulators normally make rate-setting decisions through an adversarial public hearing process. The OEB has recently been proposing that it should itself appoint some sort of consumer advocate to represent consumers at its hearings, while precluding the participation of some of the current parties. In substance, the OEB is proposing to replace several of the current consumer advocates with a proxy advocate under its own control, and then acting as if the result of this substitution would be a genuine adversarial proceeding.

The OEB’s regulatory process has been legislated for at least 4 decades. It is supposed to be the normal public hearing process commonly found throughout the US and Canada.  A public hearing process is by definition an adversarial process: an industry participant seeking higher rates and those who would pay those rates seeking to reduce or eliminate the rate request.  An adversarial process requires at least two (and usually more) genuine adversaries.

If the decision-maker itself appoints – and thus can control or influence – one of the key parties, then the adversarial process is no longer open and transparent. It is one where the adjudicator can tell a “party”, behind closed doors, what to advocate or what not to advocate.  If the Board appoints a lawyer as the consumer advocate, the Board would be that lawyer’s client. Such an advocate would actually represent no one, and thus, would have no legitimacy. This whole hearing process could therefore be called a fake hearing. Such hearings are subject to the risk that any affected consumer group denied the right to participate in the public hearing could bring a judicial review application to set aside the process and the resulting decision.

If the OEB wishes to restrict or eliminate representative public participation in public hearings, the more legitimate approach would be to stop holding so-called public hearings altogether. The OEB could then close its doors to the public and issue its decisions from behind closed doors.  There is no room in a democratic society, where government is subject to the rule of law, for a government agency to conduct counterfeit public hearings.

However, the current Ontario government has recently amended its electricity legislation to take away most of the OEB’s ratemaking independence. Therefore, the honest approach for the Ontario Government would be to close the OEB entirely.  If the OEB cannot make rate decisions at arm’s length from government, via a genuine adversarial hearing process, what do we need it for?  It serves no public policy purpose of transparency and accountability. Transfer its key staff into the Ministry and let the decision be seen for what it is increasingly becoming:  a political decision, informed by some modest bureaucratic review. That way the Minister would be clearly responsible for electricity prices and couldn’t blame or hide behind the OEB.

Public ownership and political decisions

By continually and increasingly politicizing electricity supply, generation mix and pricing, the current Ontario government (with no different policy proposals from any opposition parties) has lost its way.  The reason why Ontario’s electricity pricing and grid reliability are falling behind adjacent, competing US jurisdictions is because the competition is making economic decisions through properly functioning adversarial processes while Ontario is making opaque political decisions with obscured accountability.

Unfortunately, all the Ontario political parties have forgotten why it was necessary to have created the OEB in the first place, and, in 2005, to give it increased responsibility for electricity regulation. All of them seem to believe that the right price is the one that will make that party popular in the next election, regardless of economic realities.

A key difference between Ontario and nearby US jurisdictions to which we are losing industry (NY, Michigan, Ohio, Pennsylvania, etc.) as our electricity rates rise to uncompetitive levels is public ownership of the monopolies providing most of our electricity.  As we have moved from largely independent, OEB-regulated electricity pricing to now essentially politically directed, publicly owned monopolies, Ontario’s competitive situation has deteriorated. Eventually this will affect Ontario’s public finances.  The Trump administration’s revisions to NAFTA and its “America first” policy will make Ontario’s competitive situation even worse.

Despite these risks, the Ontario Government (and now also BC’s) is giving electricity users a lower electricity price as a political decision.  How can they practically do this? Governments can legislate a lower price, but they cannot legislate a lower cost of producing it. The costs remain what they are. The political miracle of lower prices is only accomplished by transferring today’s consumer costs to the consumers of tomorrow, at higher future cost than if they were paid today.  In effect, our children – too young to vote – will be forced to pay more for our consumption than we would if we paid for it ourselves.  It may be good politics for the next election, but what do these politicians have against our children?

In the 19th and 20th centuries the theory of public ownership of electric utilities was that if “we” own it we control it.  Public ownership will ensure that electric utilities will pursue the public good instead of private profit.  In the 21st century it is clear that if the government owns it, it is “they”, not “we” who own it.  However, although they own it, they don’t control it; rather, it controls them. Massive, uneconomic megaprojects can waste far more consumer money than the cost of equity of a privately owned utility, resulting in far higher rates. But megaprojects give politicians photo ops at ribbon-cutting ceremonies for new construction.  Politically mandated electricity megaprojects are the opioid crisis of politicians of all political parties.

Massive, uneconomic subsidies for solar and wind power projects can permit a provincial government to boast of making the province “the leader” in green power, even if the leader has no followers. It may not have occurred to anyone that the only reason why we can be the leader is because no one else has been imprudent enough to do anything quite so wasteful.

Private equity investment in electricity assets has an equity cost that is measurable. Public ownership without effective independent regulatory control has a wastage cost that is immeasurable.

Until provincial ownership of electricity generation and transmission in Ontario is ended and independent regulation is re-established, Ontario is destined to have recurring cycles of rapidly escalating electricity prices. These are usually followed by electricity debt crises affecting the Province’s credit rating. Now, privatization is the only way to end the political mess.

Andrew Roman has been an Energy Probe Board member since the organization began. In a legal career spanning more than 40 years, Andrew has advised and represented environmental groups, First Nations, federal, provincial and municipal governments and domestic and international corporations, in every province and territory of Canada. His areas of professional experience include constitutional, administrative/regulatory and environmental law. Andrew has appeared before all levels of court and numerous regulatory tribunals, including the National Energy Board. He has advised federal and provincial environmental assessment panels in cases involving pipelines and other major projects. Andrew has been an adjunct faculty member at four law schools (UVic, UBC, Calgary and Osgoode Hall) and is the author of more than 90 published articles and a book.

This entry was posted in Energy Probe News, Power Generation in Ontario, Reforming Ontario's Local Electrical Distribution Sector, Reforming Ontario's Local Electrical Distribution Sector, Utility Reform and tagged , , , , . Bookmark the permalink.

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