Energy Probe

John Spears
Toronto Star
August 9, 2000

Utilities, activists square off over electricity costs.

Starting today, a procession of lawyers, lobbyists and electric utility managers will troop in and out of a Spartan hearing room in an office tower at Yonge St. and Eglinton Ave.

Their arguments – stretching through next week – will have a direct impact on what Ontario consumers and businesses pay for electricity.

Electricity rates have already provoked some lively spats between municipal politicians such as Mississauga Mayor Hazel McCallion and Energy Minister Jim Wilson.

But the process unwinding before a four-member panel of the Ontario Energy Board (OEB) threatens to be mind-numbing, even to the few who understand it.

“Maybe we should just put Hazel McCallion and Jim Wilson in a boxing ring and let them slug it out,” suggests Michael Janigan of the Public Interest Advocacy Centre. “It would be a lot more entertaining than a week and a half at the OEB.”

The latest tortuous regulatory twist flows from the Ontario government’s decision to throw the electricity market open to competition.

The move – which was supposed to produce lower prices for consumers – instead resulted in many municipal utilities applying for higher rates.

After all, they were told by the province to put themselves on a commercial operational basis. That means they must earn a return for their shareholders, they argue – and they need higher rates to generate the return.

Wilson then issued an order to the board requiring it to give “primacy” to the objective of protecting consumer interests.

Now, the energy board is asking utilities and other interested parties how it should put the minister’s directive into action when considering rate applications.

Energy Board chair Floyd Laughren concedes that the hearing is “very unusual.”

He’s hoping the board can render a decision in a month, although “a month is probably ambitious.”

It’s not just electric utilities that will show up.

The Ontario Coalition Against Poverty, for example, has linked up with the Ontario Council of Senior Citizens Organizations to argue for the interests of “vulnerable consumers.” It says no rates should increase simply because of corporate restructuring imposed on utilities.

A coalition of Ontario’s biggest businesses – from miners to auto makers – argues that steep electricity rate increases will make them less competitive in world markets.

A unit of the $35 billion OMERS pension fund – with 300,000 members who work for municipal bodies – will also be on hand.

It’s unhappy because it has already invested in Mississauga Hydro, and would like a share of more municipal utilities – but expects to earn a fair return. Wilson’s directive might limit the fund’s ability to get a return on its members’ money.

Lawyers are unsheathing their sharpest instruments for splitting the finest legal hairs.

Toronto Hydro will base part of its argument on the difference between giving “primacy” to consumer interests rather than “paramountcy.’

——————————————————————————– Energy Probe complains about a `lack of due process’

——————————————————————————–

It argues that squeezing rates down could mean utilities have less to spend on environmental protection or on preventive maintenance, leading to dirtier or less reliable power. Some participants will argue the hearings are flawed.

Energy Probe complains of a “lack of due process.”

Participants in the hearings won’t be allowed to cross-examine submissions from other participants, the watchdog group says. Evidence may go untested and positions unchallenged. “In light of these procedural deficiencies, Energy Probe is puzzled as to what the board hopes to achieve,” its written brief complains.

If the confusion over immediate rate increases weren’t enough, the hearings are playing out against a background of even more murk.

Legislation has been presented, but not passed, that would “prohibit municipalities from taking windfall profits” from their local utilities, in Wilson’s words.

The proposed legislation isn’t formally part of the energy board hearings – but everyone knows it is there. In fact, one coalition of a dozen utilities argues thatthe bill and Wilson’s directive “appear to compromise the role of the energy board.”

Laughren shrugs off the criticism. The board is still free to make decisions on important matters, and will guard that independence, he said.

“If the directive was to tamper with a decision of the board, then you’d see smoke rising from this place.”

In addition, the opening of the competitive energy market, scheduled for November this year, has been put off until the spring of 2001.

“The whole electricity restructuring is in a profound crisis,” says Tom Adams of Energy Probe. “The path out of the maze is by no means clear.”

Janigan is also pessimistic. The looming rate hikes are the logical result of the way the system was designed in the first place, she says; asking the energy board to intervene now may be futile.

“It’s problematic at this stage to take the tail end of the process and attempt to shake it to get the appropriate result – which for our constituents is attempting to be shielded from large electricity increases.” u

July 27, 2000

Introduction

Energy Probe intervened in the RP-1999-0034 proceeding particularly with respect to the issues now involved in this proceeding. In RP-1999-0034, Energy Probe believes that it took a unique perspective on the issues, being the only party to fundamentally oppose a return to the utility on capital invested by rate payers and the only public interest party to argue that there is no logical distinction between contributed capital and other sources of retained earnings for the purposes of return, in that it has all come from rate payers. Energy Probe’s unique perspective has limited our ability to participate in coalitions for the purposes of our submissions. As the proceeding advances, we will make every effort to coordinate with parties whose views are compatible with our own with a view to economizing the overall costs of the proceeding.

Energy Probe suggests that the process would benefit from a clarification of the Board’s role with regard to distribution rates. Has the government seized authority to determine distribution rates? Is the Board an adjudicator or a proponent or an advisor to the government? What is the role of Board Staff?

As we will discuss later, Energy Probe believes that fixing the problem of the impending local distribution rate shock should have the input of the provincial government. However, we are concerned that Bill 100 creates problems rather than solves problems. We have studies Bill 100 and found it to be so ambiguous that we cannot determine its implications for ratepayers. Under Bill 100, what happens after 2003? Does the legislation apply to privatized utilities? We would urge the government to explain its intentions on the record in this proceeding.

The scope and informal approach to this proceeding as defined by the Board is not sufficient to address the real problems. The disposition of approximately $7 billion in public money, the potential effects on municipal democracy should windfall electricity profits accrue to local governments, the integrity of the regulatory process, and investor confidence in Ontario’s electricity reforms are at stake. Any one of these issue alone should be of sufficient import to warrant mobilization of all the necessary resources for a full inquiry.

Energy Probe is concerned that a lack of due process will undermine the legitimacy of this process, as it did previously with RP-1999-0034. In this case, an issues list was decided with no issues day or, to our knowledge, no other means of consulting with the interested parties. As was the case with RP 1999-0034, there is no applicant. It appears that there will be no proper rules of evidence for submissions. There will not be any cross-examination or other testing of the positions of parties by other parties. In light of these procedural deficiencies, Energy Probe is puzzled as to what the Board hopes to achieve in this proceeding. Parties who duly expect a clear decision on which they can rely will instead get another result untested by the rigour of a formal hearing, with some likelihood of future government interference in any case.

Given the history on this issue and the fact that a multitude of financial decisions have been taken on the basis of the previous Board decision, it is our opinion that the least bad solution for the problems created by the RP 1999-0034 decision requires actions by the provincial government – specifically a windfall profits tax on municipalities, a matter we have advocated publicly⁽¹⁾. Under Energy Probe’s proposal, although the previously approved rate increase would be implemented, the windfall would be taxed back from the municipalities and the proceeds used to offset the Debt Retirement Charge. The net effect on ratepayers of the distribution rate increase would therefore be neutralized. Energy Probe recognizes that its plan would create significant problems for municipalities that have already set lower property tax rates in the anticipation of windfall revenues.

The reason Energy Probe believes that the least bad solution is to leave the rate increase in place is for the protection of investors. Energy Probe believes that in the long run, protection of the rights of investors to receive a reasonable rate of return on prudently invested capital in natural monopoly sectors is a necessary component of consumer protection. (Note that utility shareholders should not have the right to earn a return on capital invested by others, which is what the decision in RP 1999-0034 did.)

On June 22, 2000, the Ontario Energy Board issued a decision in response to application by Toronto Hydro-Electric System Limited for an interim rate order, RP-2000-0021. Energy Probe’s interpretation of the decision is that the Board may consider it appropriate for Toronto Hydro to postpone a rate increase by borrowing additional money to pay for certain restructuring related debt costs incurred under the Board’s direction as expressed in the PBR Rate Handbook decision. This interpretation is based on two elements of the decision:

1. On the grounds that Toronto Hydro can meet certain debt payments from its credit facility with a Canadian chartered bank, the Board found that “no financial distress was demonstrated” and therefore turned down the requested rate increase.

2. The Board stated that “Toronto Hydro was not able to demonstrate its concern that the use of the Bank credit line towards the payment of servicing the debt until final rates are in place would jeopardize its credit ratings.” The decision stated that “there were no specific plans provided for the possible issuance of debt instruments to third parties, only a general concern that unless rates are increased Toronto Hydro would not be able to obtain third party financing to replace bank line borrowings.”

Other utilities, seeing the Board’s decision, may be guided to remove assets from the utility and leverage themselves to the limit in order to demonstrate “financial distress” and thereby gain approval for rate increases.

Energy Probe considers that it would be inappropriate for a utility to borrow money for the purpose of deferring interest costs without a considered plan in place on how those moneys might be repaid. In Energy Probe’s opinion, such a measure would increase ultimate costs for consumers, or risk the capital of creditors, or both. If Toronto Hydro must default on its loan covenants, we consider that the public interest is best served by a default that is smaller rather than larger.

Energy Probe urges Toronto Hydro and other utilities to eschew further borrowing related to debt repayment until the distribution rate rules are settled.

Response to the Issues List

1. The rate impacts resulting from the elements in the determination of a market-adjusted revenue requirement.

Energy Probe’s response: This issue appears to be ambiguous. We are uncertain as to whether we are being asked to comment on rate impacts or the MBRR. As noted above, Energy Probe believes that the purpose of the electricity restructuring is to minimize long term rates for consumers. Our proposed solution – allowing the distribution rate increase and then recovering the windfall to discharge the DRC – is discussed above.

2. The entitlement of utilities to recover deferred return and, if so, methods of recovery.

Energy Probe’s response: We anticipate that some interested parties may advise the Board to stretch out the implementation of the rate increases caused by the PBR Rate Handbook. We believe that if costs are just and reasonable, they should be paid now and not deferred. Energy Probe opposes any measure that would conceal future liabilities from customers. In general, costs should only be deferred if the corresponding benefits occur over a number of years, for example capital spending on assets with long useful lives. Ontario’s electricity restructuring should be guided by the long term interests of consumers, not short term expediency. We particularly oppose deliberate efforts to keep rate payers in the dark. Energy Probe therefore strenuously objects to the application of deferral accounts as outlined in 3.4.2 of the PBR Rate Handbook. Even if a phase-in was proposed without deferral accounts we would be opposed.

3. The entitlement of utilities to recover utility business re-engineering costs and, if so, methods of recovery.

Energy Probe’s response: Our understanding is that business re-engineering cost are costs incurred to delineate core regulated utility services from competitive services to be offered by new utility affiliates. These costs should be borne by the affiliates, which are presumably expecting to make a profit on their re-engineered services. In any event, we would expect that these costs are not material relative to the disposition of $7 billion in ratepayers’ capital.

4. Filing requirements that give indications of how rate impact mitigation might affect service reliability and quality, and what these filings might consist of.

Energy Probe’s response: We interpret this issue to address potential impacts on service quality if utilities encounter financial distress due to an inability to increase rates. We question whether it is possible to meaningfully attribute specific service quality problems to the current environment of regulatory and legal chaos however, we believe it would be in the public interest for the Board to acquire and summarize this information if it could be obtained inexpensively.

We are encouraged by the Board’s interest in transparency and disclosure. The current discussion about municipal rate increases is hampered by the fact that the Board’s filing requirements do not require the utilities to disclose their rate increases on an undiluted basis. As we noted in our final submissions on RP 1999-0034 October 25, 1999, there is no information before the Board that would allow MEU customers to understand the rate impact on them of the proponent’s proposal. Without publication of customer rate impact analysis, there cannot be adequate notice to the affected parties.

Another transparency objective should be to track the financial leakage from the electricity sector. Both the Board, in its Decision on Toronto Hydro interim rates, and the government, with the introduction of Bill100, have expressed their views on the importance of utilities’ capital structures in the determination of rates. Although we disagree with this premise, we do agree that it is important for utilities to disclose all transactions with their owners and affiliates, and the details of all changes to their capital structure. Accordingly, all utilities should be compelled to file details on all financial transactions between utilities and their owners and affiliates since 1998, as well as details on all changes to capital structure. This should include all transactions involving transfers of cash, land and other assets out of the utilities, so that these values are available in the event that policy decisions are taken to recapture them for the electricity sector.

5. The level of the 10% within class rate impact guideline related to rate restructuring included in the Rate Handbook.

Energy Probe’s response: Given the reference to the RP 1999-0034 decision, we have interpreted this issue to refer not to distribution rate impacts but to total electricity bill. (See RP 1999-0034 Decision with Reasons, para. 3.1.23) We take the view that it is inappropriate to analyze distribution rate impacts without reference to the undiluted impact. Specifically, it is necessary to remove the cost of power from the rate analysis to be able to consider the rate changes in isolation. The 10% bill impact guideline would permit larger Distribution rate increases for LDC’s with lower distribution margins, for example due to high contribution-in-aid charges. After the opening of the competitive market for the electricity commodity, power costs, and customer bills, will become more volatile. It is inappropriate, and inconsistent with good rate making principles, to allow higher distribution increases solely because power rates increase.

APPENDIX : Energy Probe’s history on RP-1999-0034

The following is a brief selection of summaries of, and references to, previous submissions of Energy Probe on the PBR Rate Handbook, provided here for the assistance of the Board and the parties :

Motions Day, August 24, 1999

Energy Probe argued for due process for consideration of PBR Rate Handbook. (TR 64-68)

Technical Conference

Energy Probe’s questions focussed on the OEB’s role in determining in the size of the municipal utility windfall. (V. 2 TR 340-347)

Our oral submissions addressed the rate shock problem head on:

With the old Ontario Hydro restructuring, there is a major effort by many people to move heaven and earth to make electricity rates go down, but on the municipal utilities’ side of the ledger, the OEB staff has come forward with a plan that makes the rates go up.

Does this picture seem backward to you? It does to us. (V. 3 TR 612)

Under the proposed scheme, the OEB’sdraft handbook, not the government’s Bill 35, is bestowing a windfall on municipalities by allowing the distribution utilities to double charge for their capital already paid by their consumers.

By allowing a massive leakage from the electricity ratepayers to municipalities, the OEBstaff proposal will raise electricity rates, which in our view contradicts the intention of the White Paper, and we are very concerned will potentially impair public support for electricity reform in Ontario.(TR 615)

Here is the punch line. In Energy Probe’s opinion, it is in the public interest for the stranded benefits within municipal utilities to continue to benefit electricity consumers. All future cost, including the full and fair cost of new capital should be recovered from users. (TR 617)

Submission of Energy Probe, Prefiled Notes for October 5, 1999 Oral Submission

Many representatives of the MEUs have argued in this proceeding that government’s policy is to commercialize the MEUs. Without detracting from this comment but rather to expand on it, Energy Probe suggests that the government’s policy is also to cut electricity rates for consumers. The Minister’s speech in releasing the White Paper referred to one of the goals of the restructuring as leading to electricity rates at “the lowest possible cost”. The third sentence of the White Paper referred to the goal of “lower electricity prices”. The White Paper also noted, “The Government will work with Ontarians to ensure that the electricity industry is restructured in a timely and well-managed way, with the necessary protections for both business and residential customers.” In another expression of concern for the interests of ordinary consumers, the White Paper says (p. 20), “Under the Government’s plan, when consensus on amalgamation among utilities cannot be reached, the Ontario Energy Board would be available, at the request of the utilities, to facilitate the process and ensure that the interests of the consumer are met.” (page 1)

Energy Probe has developed an alternative procedure for setting initial distribution revenue requirements which accomplishes the following objectives :

• Distribution utilities will be on a level playing field.
• Utilities and ratepayers will see normalized rates, including a MBRR.
• To prevent double payment, ratepayers will get itemized reductions to the normalized rate which will decline over time, while allowing utilities a fair return on new investment.
• Ratepayers will be spared shocking increases, but utility investors will earn the MBRR

ENERGY PROBE’S PROPOSED REVENUE REQUIREMENT FORMULA

1. Distribution revenue requirement (before MBRR) per Draft Handbook calc.
2. + Current book depreciation per financial statements.
3. – Additions to fixed assets per financial statements (average of most recent 3 yrs).
4. – Utility net income per financial statements.
5. +/(-) Net interest income (expense) per financial statements.
6. = Adjusted current revenue requirement (before MBRR).
7. + MBRR on rate base including contributed capital.
8. = Normalized Revenue Requirement including MBRR.
9. – Portion of net utility cash and marketable securities, if any.
10. – Depreciation of ratepayer-funded rate base.
11. – MBRR on remaining ratepayer-funded rate base
12. = Opening Revenue Requirement- Distribution

Notes

1. The impact of PILS should be disclosed on customer bills when it becomes payable.
2. Opening rate requirement excludes transition or Z-factor costs.
3. Line 8 figure should be used in applying price cap.
4. Line 9 should only be used if positive.
5. Lines 2 and 3 should include assets financed with contributed capital.
(Page 6)

ENERGY PROBE, Oral Presentation to the Board, October 5, 1999

The real concern that brings us here today is the rate implications, the rate shock, which we anticipate to be approximately a 35 per cent increase in the distribution rates which, as we will argue in our presentation, we think is at least partially and perhaps wholly unnecessary. (TR 295)

If the OEB staff plan is pursued, Energy Probe is concerned that ratepayers will blame their higher rates on unbundling and competition, when the real culprit is the substantial transfer of wealth to municipalities implicit in the Board staff plan. (TR 298)

However, with Ontario’s municipal utility distribution rates the proposed increases are, in our view, counter-intuitive. Distribution utilities are flush with close to a billion dollars in cash and marketable securities. Just think about that for a minute, a billion dollars in cash. Think of any place else in the economy where a billion dollars in cash might exist. That’s more than the liquidity requirements of the federal government I am sure.

The utilities have no debt. Their infrastructures appear to be in reasonable condition for the most part. The fact that they have this huge amount of cash on hand is clear evidence that the historic rate-making practice has been inherently inefficient. We believe that customers have been overcharged historically.

In our oral presentation at the technical conference we noted the inequity of ratepayers being charged again with interest for assets, the cost of which they have already paid. We also set out several possible remedies to this distortion, albeit some within the OEB’s purview and some outside of the OEB’s purview, including a special dividend to ratepayers or having municipal utilities absorb a portion of Ontario Hydro’s debt. (TR 298-299)

So our proposal eliminates the double payment issue and ratepayers get an itemized reduction to their normalized rate, which declines over time. It allows the utilities — and I think this is a key point — it allows the utilities to make a fair rate of return on all new investment when there is — as we normalize and rationalize the electricity sector. They have a normal business structure under normal regulation. We expect them to be partially debt financing, partially equity financing their long-term investments, and that debt and equity becomes the basis for a market-based rate of return.

Finally, the ratepayers, under our proposal, are spared rate shock because what we have done is we have eliminated the double payment and the double counting. (TR 304)

RP 1999-0034 Final Submissions on behalf of Energy Probe, October 25, 1999

Energy Probe opposes the severe but unquantified and apparently unnecessary customer rate impacts inherent in the MBRR element of the Staff’s PBR Handbook. We have attached as an appendix an example of how our proposed formula can cause rates to decrease…It may seem peculiar that Energy Probe is advocating an initial rate decrease in conjunction with the adoption of a market-based rate of return for local electricity utilities, when many other parties accept that at least some initial increase is necessary. The explanation of our position is actually quite simple. (P. 1)

There is no information before the Board that would allow MEU customers to understand the rate impact on them of the proponent’s proposal. Without publication of customer rate impact analysis, there cannot be adequate notice to the affected parties. (P. 3)

The proponent’s proposal, articulated in the PBR Handbook and the Supplement have not been properly considered and cannot be accepted by the Ontario Energy Board. The onus on the proponent was not discharged and no adequate notice to affected parties was provided. (P. 4)

The matter of appropriate LDC distribution tariffs deserves extensive further policy consideration and a full hearing with due process and much more complete information than has so far been made available. There is insufficient evidence on the record to do anything but freeze rates until the Board has before it an appropriate plan that minimizes rates. (P. 4)

IN THE ALTERNATIVE

If the Ontario Energy Board is not an independent adjudicator in the matter of the implementation of MBRR, the Board might issue a decision inviting the government to decide the matter. (P. 4)

If the government wishes to have a complete and legally binding decision by the OEB, the Minister could refer the matter back to the Board for full consideration. Alternatively, the government could decide the matter on whatever basis it finds suitable. (P. 4)

1. “Credibility meltdown”, National Post, June 14/2000, by Thomas Adams and Michael Hilson.

John Spears
The Toronto Star
July 22, 2000

Well, something is going to happen to change the way Ontario residents and businesses buy their electricity.

Only a few nagging issues remain to be resolved – such as how much residents and businesses will pay for electricity, and whether they’ll be better or worse off.

The past month hasn’t made it any easier to figure out.

In short order:

Energy Minister Jim Wilson blasted municipal utilities for trying to hike rates too much. He then introduced Bill 100, to “prohibit municipalities from taking windfall profits” from their local hydros.

Wilson also announced a delay in opening the competitive electricity market – which will allow electricity customers to buy power from any generator or broker that can offer an attractive price. The market had been scheduled to open in November. Wilson said the delay would be up to six months. Shortly afterward, Premier Mike Harris said it could be nine months.

Reacting to Wilson’s statements, the Ontario Energy Board blocked an application for a 6 per cent interim rate increase from Toronto Hydro.

Ontario Power Generation – one of the pieces into which the old Ontario Hydro was split – leased the Bruce nuclear generating station to British Energy PLC for 18 years.

Meanwhile, the Ontario Cabinet has quietly extended special, low electricity rates to a clutch of businesses who had enjoyed special deals with Ontario Hydro. They’ll continue to enjoy lower rates for up to four years. Wilson’s office refuses to release a list of the businesses getting the special break. Pressure for rates to go up, instead of down, is contrary to the promises that a competitive electricity market would benefit consumers.

If Ontario politicians and consumers are bewildered and frustrated they’re not alone: Rates in the U.S. zoomed this week as deregulated utilities charged higher prices in peak demand periods.

Jan Carr has watched the electricity issue for many years. Vice-president of consultants Acres International Ltd., he served on a special committee whose recommendations led to the competitive market we’re moving toward.

Carr said in an interview that the province seems to be losing its focus as it hits the inevitable bumps in the transition from the old monopoly run by Ontario Hydro to the new competitive market.

“That transition could be managed,” Carr said. “We seem to have stopped focusing on managing the transition, and are focusing on eliminating the transition instead.”

Terminology surrounding the new market also is confusing. It’s often referred to as deregulation of the electricity market.

That’s not really the case: All transmission and distribution rates must still be approved by the Ontario Energy Board.

But local utilities are now set up like private corporations, trying to earn a return on their assets. And the old Ontario Hydro has been broken up, with its transmission grid, known as Hydro One, separated from its generating side, called Ontario Power Generation.

“Re-regulation is probably a better word,” said Paul Calder of Canadian Bond Rating Service, which issued an analysis this week.

Some of the political rhetoric has also implied that the market is moving toward privatization of the electricity system.

Certainly, the long-term lease of the Bruce nuclear plant put operation of a major facility in the hands of a private company. But a provincial corporation remains the owner – and will ultimately be responsible for decommissioning and clean-up costs.

Moreover, the biggest buyer of local utilities, which own the wires that carry power to homes and businesses, has been Hydro One – whose sole shareholder is the Ontario government.

In these circumstances, private investors aren’t likely to put money into the electricity sector because they don’t know the rules, said Carr.

For example, Bill 100 seems in its wording to limit the rates of utilities owned by municipalities – but not private companies. But no one is quite sure.

“Clearly if you’re in the private sector and you’re thinking of investing in the industry, you’re sure as hell not going to invest until that little wrinkle is sorted out,” said Carr. “And that won’t happen until the fall.”

A spokesperson for Wilson, who is on vacation, didn’t lay the uncertainty to rest.

No private sector firms control municipal utilities, he noted, which is why the legislation refers to the public sector. But private firms could still face controls.

“If new owners didn’t see the long term benefits of keeping rates reasonable, the minister retains the option of intervening,” he said.

Calder also cites political uncertainty for keeping private buyers out of the market.

“They’re on the sidelines already, and this probably keeps them there even more firmly.”

Calder’s analysis shows a clear winner: Hydro One. It has already snapped up 40, mostly smaller, local utilities and has bids in for another 80.

It has a huge advantage over private investors, Calder said. The province has slapped a 33 per cent transfer tax on any municipal utility sold to a private sector firm or fund. Hydro One is exempt from that tax.

That “effectively renders Hydro One the prime candidate” to buy up local utilities, his report states. But it flags a danger: Given the lack of a real market Hydro One may overpay.

In tandem with Bill 100, Wilson has instructed the energy board to give “primacy” to the interests of customers when it determines rates.

That seems to limit the return that utilities can earn on their assets, Carr pointed out.

“The utility has to borrow money and find equity,” said Carr. “They’re going to be in a very awkward position to do that if they’re not allowed to earn a return on equity.”

Moreover, municipal utilities now in effect have to pay provincial tax on income. Taking on debt cuts their tax exposure, and is a common private sector financing strategy. But Wilson is flaying the local utilities, oddly, for acting like private sector firms. Dale Richmond, who runs the $35 billion Ontario Municipal Employees Retirement System (OMERS) pension fund, is on record saying he knows of utilities that have sought private investment, but failed to attract any because of the uncertainty.

OMERS owns 10 per cent of Mississauga Hydro, but plans to merge the utility with a clutch of other 905 area-code utilities have stalled in the uncertain climate.

Peter Dyne of the Consumers Association of Canada said that preventing utilities from generating a satisfactory return may violate the intent of laws governing corporate behaviour.

It also violates the rules of economic logic, he argued.

Earning a satisfactory rate of return is the incentive for businesses to operate efficiently, he said.

If the utilities are thwarted from earning their targeted rates of return, what incentives do they have to operate at maximum efficiency? he asked.

Tom Adams of Energy Probe argues that encouraging utilities to incorporate and seek a higher rate of return for their municipal shareholder-owners was bound to create pressure for higher rates.

Dyne said that there will be some thorny issues for the regulator to sort out even in defining rates of return.

For example, many municipalities require developers to pay extra so cables can be buried in new subdivisions. That creates a higher asset value for the utility.

Should utilities be allowed to earn a return on those “contributed assets?” Dyne asked. If so, they’ll have to raise rates.

Toronto city councillor Jack Layton, who is vice-chair of Toronto Hydro, is furious with the mixed signals from the province. Toronto Hydro felt the sting of the new policies when the energy board denied its rate increase on the basis of Wilson’s order.

Layton sees a bias toward privatization.

“If we’re a publicly owned business they won’t let us have a return on our investment. Only if we’re a privately owned business,” Layton said in an interview.

“They’re trying to accomplish the privatization that we refused to enact.”

Whether or not privatization is the ultimate agenda is hard to say.

But Carr – who had a hand in shaping the policy – said competition doesn’t have to mean privatization.

“What is needed is competition,” he said. “The fundamental thing is to create choice. When customers have choices and they vote with their pocketbook, then the industry will go in the direction people want it to go.”

If municipally owned utilities can do better than private ones, there’s no reason to intervene, Carr said. Wilson is right to blow the whistle on municipalities that suck dividends out of their electrical utilities to fund recreation programs,he said.

But he said Wilson should stay out of the fray if a city borrows responsibly against its hydro utility to fund capital improvements to other assets, such as roads or transit systems.

“I would prefer the minister tell them what to do with the money, rather than tell them how much money they may have, which is what they are now doing,” said Carr.

Energy Probe has urged competition in the marketplace, but Adams said recent provincial actions are subverting a true market.

By allowing the selected businesses to maintain special preferential rates for the next four years, for example, the province forces Ontario Power Generation Inc. to charge its other customers higher rates to make up the difference.

Wilson’s office notes that Bill 100 is a temporary measure, expiring in 2003.

Adams said that is precisely the problem. Changes are under way – but Bill 100 means their effects won’t be apparent for three years.

“We consider that to be immoral,” he said. “It conceals from consumers the magnitude of the impact they’re going to suffer.”

Adams also rejects the notion that higher electricity bills necessarily lead to conservation.

The current policies are driving up the cost of delivering power – not the cost of the energy itself, Adams said.

The cost of running a wire to a conservation-minded household is the same as running a wire to a household of energy hogs, Adams said. Driving up the cost of energy equally for both households does nothing to reward the household that uses less electricity.

Terence Corcoran
National Post
June 29, 2000

One of the little mysteries of the Canadian Alliance leadership race is the belief that the Harris Tories in Ontario offer a blueprint for national policy and good government. Preston Manning, Tom Long and Stockwell Day genuflect at the mention of Mike Harris and his Common Sense Revolution. As this is written, Harris cabinet ministers, backroom operators and fund-raising wizards are lining up behind the Alliance, the assumption being that Ontario’s Conservatives, along with Ralph Klein’s Alberta Tories, are natural political allies who share objectives and philosophies with the Canadian Alliance.

It may come as a surprise to some, but the Harris revolution, mostly myth right from the beginning, is now down to a few wheezing talking points on the subject of tax cuts. On any other policy issue — health care, education, privatization, municipal affairs — the Harris government has no reform agenda to speak of. The Walkerton water tragedy, while not of its making, has only further paralyzed a government that has no intellectual capital of its own to fall back on.

Nowhere is this core vacancy more obvious than in the turmoil within Ontario’s electric power industry. Originally scheduled to open a pioneering power market next November, complete with competition at the consumer level, the industry is now on the brink of chaos. Over the past couple of weeks, the government has postponed introduction of a widely advertised power trading system for at least six months; issued directives to a regulator reversing its own legislation; tabled new legislation that puts many cities at financial risk; stalled the privatization of parts of the industry; and in the process risked driving private capital out of the market.

Calls are out for the resignation of the province’s energy minister and former health minister, Jim Wilson. The mayor of Toronto’s biggest suburb, Mississauga, accused the minister of bungling and called for his removal. “The new legislation introduced this week clearly indicates that the minister misled the public of Ontario and in fact his own government. This minister has made a mess of Health and now he is making a mess of Energy. Not a very good track record for a government that prides itself on being efficient and organized. This latest action by the minister is a disgrace.”

The mayor of Mississauga, herself a long-time Tory, is prone to flights of hyperbole, but in this case she has her feet on the ground. Under legislation, Ontario cities were given authority to convert local electricity distribution utilities into profit-making corporations. The half-baked plan produced predictable problems, but now — too late — the government is trying to reverse the legislation. Mississauga, Toronto and others face hundreds of millions in losses and other difficulties.

Tom Adams, a veteran Ontario power industry watcher, says Mr. Wilson has undermined the fairness and integrity of the whole system. The province needs a new energy minister — and a premier who will “give the energy portfolio the attention it deserves.”

Whether more attention from a government lacking in reform ideas will solve the problem is debatable. The power mess is the result of a spineless unwillingness to adopt key reforms needed to break up the province’s bankrupt Ontario Hydro power monopoly and create a dynamic, competitive marketplace. Instead, the old monopoly has been carved up into several monopolies — a big power generating company, a big transmission company and a big market operator. At the same time, the $39-billion in debt left behind by the old Ontario Hydro sits unattended.

This is not the handiwork of a government steeped in radical reform and guided by much in the way of economic principle. Not one privatization has taken place. Many deals have been talked about, including the leasing of a nuclear plant to British Energy, but the government now appears to have a moratorium on privatizations, if not an outright fear of them. In a recent speech to industry reps, Mr. Wilson said the financing of the nuclear power deal had been halted because of a “messaging” problem surrounding privatization in the wake of Walkerton.

The reason Walkerton now looms so large within the Harris revolution is that the government has spent all this time in power and never once formulated a meaningful set of principles. Failure to set out privatization objectives and plans has left it at the mercy of critics. When the left pounced on Walkerton as a product of privatization, the Harris revolutionaries could do nothing but run for cover. A cabinet that cannot muster the conviction to privatize liquor sales cannot be expected to defend itself against critics of privatized municipal services.

In short, inside the Harris revolution, the lights are out. Based on its track record, the Alliance hopefuls would do better to look elsewhere for a coherent model of a national revolution from the right.

Thomas Adams and Michael Hilson
National Post
June 14, 2000

Ontario’s plans to freeze electricity distribution rates could lead to regulatory chaos — nothing new to the province’s electric market reform. But it is not too late for the government to fix the situation.

Instead of depoliticizing Ontario’s electricity sector and protecting the authority and independence of its regulator, the province is going in the opposite direction. The result? The government has disgraced the Ontario Energy Board — once a superb regulator — and replaced it with arbitrary cabinet dictates, creating chaos in the marketplace.

Tomorrow, Toronto Hydro, the largest of the municipally owned distribution utilities, is scheduled to appear before the Ontario Energy Board to ask for a rate increase of 58%, or $128 a year, for the service it provides residential customers. Mississauga wants a 79% increase, or $107 per year, for its residential customers. On average, Ontario’s municipal utilities seek rate hikes that will raise the overall bills that consumers see by 10% to 15% a year from this increase alone.

The response of Jim Wilson, Ontario’s Energy Minister, has been panic. Last week, he issued a directive to the Energy Board opposing the rate increases. Today, he is expected to introduce emergency legislation to enforce rate freezes. If he does, chaos could ensue. Not that chaos is a stranger to the government’s electricity restructuring.

For the last year, Mr. Wilson has been pressing the municipalities to merge their utilities to make them efficient, all the while boasting of rate cuts to come. To encourage the municipalities to merge their utilities, he passed legislation in 1998 that declared Ontario municipalities to be owners of the 250-odd municipal utilities, ordered the utilities to be corporatized and told the Energy Board to regulate them as ordinary commercial utilities. At the same time, by stripping the Energy Board of its independence, the board became subject to political pressure.

The rate increases occurred because the Energy Board accepted the advice of its American experts, who likely had never seen debt-free utilities flush with more than $1-billion in cash. The U.S. experts convinced the board that the utilities’ equity should be transferred to municipalities. Notwithstanding that this equity had all been contributed by electricity ratepayers, the board — lobbied by the municipalities — required them to charge ratepayers again, with interest, for these assets, valued at approximately $6-billion. This decision, made in January of this year, inevitably produces much higher rates. Those higher rates, in turn, inflate the value of the utilities to their owners and potential investors. Utilities and investors have been jumping though the merger hoop, expecting the regulator-approved rate increases. Dozens of deals have been struck, many more are in the works, and untold contractual commitments have been made.

While the Energy Board was determining the rate formula last year, provincial government officials sat quietly. Municipal utilities egged the Energy Board on. Toronto Hydro, using smoke and mirrors, has since been trying to make the elephant-sized rate increases appear small.

Mr. Wilson’s rate freeze — if he can make it stick for any length of time — throws all the financial calculations out the window. Those who risked their cash based on Energy Board-approved rate projections may get singed, even though they followed the government’s dictates to the letter. For example, Hydro Mississauga, Ontario’s second-largest distributor, followed the government’s lead in good faith and refinanced itself but now may get caught offside on the resulting bank covenants. One potential consequence is that the utilities’ assets may be seized.

The Energy Board is now in an awkward position. The municipal utilities’ requests for whopping rate increases appear to generally comply with the Energy Board’s own order. Assigning liability in the event of financial disputes will provide lawyers with a field day.

Within weeks, or perhaps even days, we will get either uncalled for rate increases that will undermine the whole electricity restructuring process, or litigation from investors such as pension funds who had once trusted the process and had responded to Mr. Harris’ efforts to improve Ontario’s investment climate. The reputation of the Ontario Energy Board, which, guided by its questionable interpretation of provincial energy policy, decided to impose the rate increase, may never recover.

It is not too late for the government to remedy the situation. Despite the government’s litany of errors to date, an easy, fair solution to the rate increase problem is readily available. The government should allow the rate increases to go through. But, to leave consumers whole, Mr. Harris should slap a windfall profits tax on municipal governments to recover their excess profits — at least $7-billion province-wide.

Mr. Harris can then use the proceeds of the windfall tax to reduce debt retirement taxes in the electricity bill, a leftover from Ontario Hydro’s debts and stranded nuclear waste liabilities. That would virtually eliminate the province’s own electricity tax on consumers, now called the Debt Retirement Charge, which the government announced late last week. Most consumers would see higher distribution charges but their ultimate bills would be unaffected.

John Spears
Toronto Star
June 4, 2000

CONFUSED BY the door-to-door salespeople trying to sign you up to natural gas contracts? Just wait until the electricity peddlers hit the streets.

Starting in November, you will be able to buy your electricity from independent suppliers, just the way you can buy your gas from an independent supplier instead of Enbridge Inc., the former Consumers Gas.

You will pay the supplier for the cost of the actual energy you use. A separate charge will show the cost of delivering the electricity from the generator to your community and then distributing it locally.

That much is clear.

What’s not so clear is how to make an intelligent decision about an electricity supplier, let alone how to tell after the fact whether you chose well or not.

“This damn thing is so complicated it makes your head hurt,” says Tom Adams of Energy Probe, which favours competition in principle but is unhappy with the current situation.

Until the murk clears, beware.

Retailers must abide by a code of conduct drafted with the help of the Ontario Energy Board. But lack of reliable information is a problem at the moment.

Peter Dyne, who has been tracking electricity deregulation for the Consumers’ Association of Canada (Ontario), offers this simple advice. Sign nothing until more is known about the new electricity market. Right now, there are more questions than answers.

It’s tough to compare rates.

You can keep getting your electricity from your local utility, rather than signing a long-term contract with an independent supplier. The difference is that the independent retailer will probably offer a guaranteed rate over a long term. (The independent could also offer energy conservation incentives, or Air Miles.) Your local utility’s rate may vary year to year.

Ideally, you would want to know the difference between today’s price and the long-term price the independent retailer is offering. But the starting price that local utilities can charge – to be known as the “standard supply charge” and regulated by the Ontario Energy Board – isn’t known yet.

Reliable information about the new system is difficult to come by. A call centre operated by the Ontario Energy Marketing Association to answer questions about electricity and gas marketing was shut down this spring. Yet some energy marketers are still giving out pamphlets advising customers to call the association with questions.

The Star tried several other consumer information call lines with varying degrees of success.

Some of the worst information came on a line operated by Ontario’s energy ministry after The Star asked for an explanation of the new electricity system. Part of the exchange went like this:

Call centre: “They’ve decided to open up the market to private retailers. What that means is, private retailers will be purchasing electricity from the government and selling it to the public at various rates.”

The Star: “They’re buying it from the government?”

Call centre: “They are buying from, yes, the Ontario, yeah, the government.”

The Star: “The retailers are buying it from the government? Electricity from the government?”

Call centre: “And they’re selling it to us.”

In fact, retailers will be able to buy electricity from whomever they want. The hope is that more generating companies will spring up. Although the dominant generator in the province will continue to be Ontario Power Generation, the publicly owned generating arm of the former Ontario Hydro, it is not a government department.

The call centre was also unable to tell The Star how much of the electricity bill is made up of the energy cost, which is open to competition, and how much is the delivery charge, which will be the same for everyone.

“I’ve had that question all day today,” said the call centre worker. “However, I have not been given details on the the monetary breakdown. I couldn’t tell you. Neither could I give you details on the rates. I have no idea what the rates are, what they will be.” (It seems the energy part of the bill will make up between 40 per cent and 50 per cent of total, depending on whom you ask.)

The ministry call centre ultimately referred The Star to a call centre operated by the Ontario Energy Board, which had accurate information.

The private companies have trouble telling you about their products.

Direct Energy Marketing Ltd. is already asking customers to sign five-year contracts in a plan called the “Electricity Price Protection Discount Program.” The price will be 5 per cent less than the price of electricity charged by the local utility, guaranteed for five years.

The choice is like choosing a mortgage: You can take a floating rate that will probably cost less in the beginning, or lock in for five years.

Should you want to get out of the contract, it’s expensive, as outlined in some very fine print. The company says the current price of electricity is 6.46 cents a kilowatt hour in Toronto. If you want out after, say, three years, Direct Energy would estimate how much power you would have used for the remainder of your contract and charge you 1.5 cents a kilowatt hour for that electricity. That’s the equivalent of 23 per cent of your bill.

For the average household using 12,000 kilowatt hours a year, that comes to $180 for each year remaining in the contract.

Direct Energy, too, operates a call centre. The operator there initially misinformed The Star about the price of escaping the contract. He said the customer would have to pay the full amount for the electricity remaining on the bill – a condition that applies to commercial, not residential, customers.

A customer who gets into a disagreement with a supplier can call the Ontario Energy Board, which may sort out minor disputes based on misunderstanding. For more serious disputes the board has contracted with a private firm, Consumer Expressions, to run a dispute resolution service.

Until more generators hit the market, the supply of electricity will be dominated by Ontario Power Generation, which produces about 85 per cent of Ontario’s power. If all the retailers buy from one wholesaler and pay exactly the same transmission and distribution charges, it may be hard for them to offer different packages.

Ontario’s new energy rules call for Ontario Power Generation to sell 4,000 megawatts of generating capacity – about 40 per cent – within 42 months of this Nov. 1. Within 10 years, the new company is supposed to supply no more than 35 per cent of electricity, giving retailers lots of room to wheel and deal.

But since no one knows who will buy the generating capacity and on what terms, or what new suppliers will be building generators, it’s tough to predict what will happen to wholesale prices.

Adams at Energy Probe complains that Ontario Power Generation, because it is owned by the province, will be able to borrow more cheaply than rivals can, gaining a built-in advantage. On the distribution side, some local utilities are raising their rates. Toronto Hydro has applied for a rate increase, which will offset savings consumers might get on energy supply.

Toronto Hydro vice-president Blair Peberdy acknowledges the industry has some work to do in getting reliable information to the public, especially with the Nov. 1 competition date approaching.

With so many unknowns, some critics are questioning the whole idea.

“How much effort is it worth going to, when it’s only a few dollars a month difference?” wonders John Todd, an economist and director of the Ontario Energy Marketers Association.

“Nobody’s really asking the question: How much is it costing to make the transition and what’s the benefit?”

Tom Adams
Energy Probe
June 1, 2000

Toronto Hydro is about to impose shocking rate increases on its consumers. Residential consumers using the average amount of electricity for the residential class will see distribution rates rise by 39% initially and 58% once the increase is fully implemented in 2001. Residential consumers who use a small amount of electricity–typical of consumers in bachelor apartments or conservation conscious consumers–will see an increase of 48% initially. Some small businesses will see an initial increase of 868%. Toronto Hydro has posted on its web site a Q&A series providing its explanation of the increases. In this posting, Energy Probe has taken the text of that statement verbatim and commented on it. Energy Probe’s comments, written by Tom Adams, Executive Director, are in bold.

Toronto Hydro-Electric System Limited Rate Proposal:

Questions and Answers for Customers
May 03, 2000

Q:Why does Toronto Hydro-Electric System Limited need a rate increase?

A:The increase is a “one time adjustment”
Wrong. This is not a “one time adjustment” but a stealthy increase in rates over a span of years. Both the Ontario Energy Board (OEB), which is the regulator of the distribution companies, and Toronto Hydro prefer a slow phase-in of the increase to avoid the negative public reaction associated with a rate shock. However, the phase-in does not protect consumers since consumers are forced to be involuntary borrowers from Toronto Hydro, funding the foregone profits in an interest bearing account for later recovery from consumers. You can get more information on this deferred increase and involuntary borrowing mechanism directly from the OEB decision

(www.oeb.gov.on.ca March 15, 2000 – The Board’s Electricity Distribution Rate Handbook, SECTION 5.5.2 Deferred MBRR) that reflects the changes to the marketplace.
Wrong again. The rate increase is due to the OEB’s interpretation of the Ontario government energy policies and bill 35. Relying on the same policies and legislation upon which to base its opinion, Energy Probe considers the increases completely unnecessary. For more information see http://www.energyprobe.org/energyprobe/index.cfm

Municipal utilities have incorporated and must now pay taxes like other corporations in Ontario.
Wrong. The rate increase discussed in this press release has nothing to do with taxes payable to the Ontario government.

We must also provide a financial return to our shareholder, The “shareholder”, meaning the Municipal government, did not invest a dime in Toronto Hydro. Consumers, not the city, invested the funds and consumers should get the financial return from historic investments by consumers. fund capital construction programs in excess of $100 million this year, and invest in new information systems technology that will enable us to operate in the new competitive marketplace.

Q:Why are rates changing now?

A:Under The Energy Competition Act 1998, Toronto Hydro-Electric System Limited is required to apply to the Ontario Energy Board (OEB) for new rates. This year, the application must be received by May 1 for consideration over the following two months.

Q:When will rates go up?

A:Subject to OEB approval, the new rates will go into effect on July 1, 2000.

Q:How much will the rate increase cost the average residential customer?

A:The average residential customer using 1,000 kilowatt-hours of electricity per month will have a rate increase of $7.20 per month.
This represents a 39% increase in the distribution rates. By the time Toronto Hydro has completed the phased increase, distribution rates for the average residence will be 58% higher than now. Toronto Hydro prefers to report its rate increase on a fully diluted basis–for residential customers it claims the increase is only 8.7% initially and 13% when fully implemented. Because distribution costs are only 20% of the current bill, the non-distribution portions of your bill dilute the impact of Toronto Hydro’s huge increases.

Q:How will water heater energy rates be affected?

A:Water heater energy rates will increase the same amount as electricity rates, but because two old water heater rates are being harmonized into one, some customers will pay a little more and some a little less.

Q:Will rates be the same across the amalgamated utility?

A:As of July 1, all residential rates will be the same. All commercial rates will be the same within each of the various commercial rate classes.
Some small business customers in Scarborough will see a distribution rate increase of 868% or about $455.00/month.

Q:When did electricity rates increase last?

A:Our last increase was in 1993. Electricity rates across Toronto have stayed the same or declined since 1994. This increase, our first in seven years, takes rates only two percent higher than they were in 1993.
The main reason why rates in “Toronto” are lower now, before the planned increase, than in 1993 was cost shifting to lower cost regions amalgamated into the megacity. Most customers in York, and Scarborough have already seen huge increases.

Q:Should we expect regular rate increases?

A:The current rate has been designed to cover anticipated costs through 2001, which means that at the present time, we don’t anticipate another rate change until at least 2002. However, there will be changes to the way rates are separated and presented on your bill when the market opens, which is expected to be in November, 2000.

Q:How is the deregulated market expected to affect future rates?

A:We expect electricity prices to come down when the competitive market has been in operation for a while. In the United States, average electricity prices have fallen every year since 1996, when wholesale competition was introduced. What we’re going through this year is the effect of electricity rates having fallen for several years
This statement is incorrect. Rates are rising because the OEB thought the increases were “just and reasonable”. The government imposed rate freeze on Ontario Hydro, initiated in 1993, is completely unrelated to the impending distribution rate increase. combined with some initial start-up costs for the amalgamated Toronto Hydro.

Q:What impact has utility amalgamation had on electricity rates?

A:Amalgamation significantly reduced costs, and therefore pressure on electricity rates. Customers in the amalgamated cities around Toronto got rate increases. It has enabled us to achieve efficiencies that have resulted in cost savings of approximately $60 million since 1998. Although these savings are significant and they can help us mitigate rate increases, they don’t allow us to avoid them altogether.

Q:Has the outstanding debt of the former Ontario Hydro had an impact on rates?

A:The cost of paying Ontario Hydro’s stranded debt has been built into the rate structure for many years now. That situation hasn’t changed at all, so it’s not a major factor in the current rate proposal.
This statement is true but that is the tragedy. The distribution increase, if it funded our historic debts and nuclear waste liabilities, would have been legitimate. Instead, the increase is just providing a new revenue stream to fund government. Since this money is coming to municipalities as a windfall, we are very concerned that municipal government’s will not be accountable for the beneficial use of the funds.

Q:Will the rate increase affect the look of my hydro bill?

A:No it won’t. The bill was recently redesigned as required by the OEB to illustrate the different components of your electricity costs and that won’t change. Because your new bill shows “unbundled” charges, it allows you to make clear comparisons between different retail suppliers who may be seeking your business. The unbundled bill gives you a tool that will help you choose a retailer in the coming deregulated market.

Q:What is unbundling?

A:Toronto Hydro-Electric System Limited presently buys energy and transmission services on behalf of its customers. Up until last year, the charges for these services were bundled together and shown with your energy charge as one single charge. In preparation for deregulation, these charges have now been stated separately on your bill to help you track your usage and make better energy management decisions. That’s why your bill shows separate listings for the energy, distribution, transmission, and customer charges.
The customer charge is also a distribution charge. To find your total distribution cost, that is the total amount of your bill caused by Toronto Hydro, sum the customer charge and the “distribution” charge.

Q:What is an energy charge?

A:The energy charge covers the cost of producing electricity, which can vary on an hourly basis. In an open market, electricity will be treated as a commodity and will be priced on a per kWh basis. This is the portion of your bill that will be subject to competition.

Q:What is a transmission charge?

A:Transmission is the cost of designing, building and maintaining the transmission system that carries electricity from generating stations to municipalities. Because transmission lines are very expensive, it’s most efficient to have one single, regulated provider. For now, that provider is Ontario Hydro Services Company, whose rates are regulated by the Ontario Energy Board.

Q:What is a distribution charge?

A:Distribution refers to the cost of designing, building and maintaining the distribution system, which connects your home or business to the rest of the electricity transmission and generation system. Like transmission lines, distribution wires are also very expensive. Toronto Hydro-Electric System Limited will continue to perform distribution services under regulation of the Ontario Energy Board.

Q:What is a customer charge?

A:The customer charge includes such fixed costs as meter reading and billing which remain constant, no matter how much electricity you use each month. Since these costs don’t vary with usage, the customer charge is a fixed monthly amount. This charge is regulated by the Ontario Energy Board.

Energy Probe’s concluding remarks: Consumers in Toronto have been overcharged for distribution services due to the past inefficiency of Toronto Hydro. Toronto Hydro should be getting more efficient and therefore distribution rates should be going down, not up.

In its application for the rate increase to the OEB, Toronto Hydro (referring to itself here a TH-Electrical System) makes the following statement:

1.4.25 TH-Electric System recognizes that customers may experience come confusion trying to understand the changes to their rates and the resultant impacts to their bills. The Applicant understands the importance of an effective communication plan to explain these changes and notes the OEB’s direction in paragraph 3.2.11 on the Decision requiring “…the utility to inform and explain the rate changes as well as the reasons thereof.”

Energy Probe encourages the reader to consider this statement for themselves.

Ellen Roseman
The Toronto Star
May 29, 2000

LAST FEBRUARY, the Ontario Energy Board gave municipal utilities the go-ahead to raise distribution prices as part of the province’s restructuring of the electricity market.

So, it’s no surprise that utilities are now applying for price increases.

Last week, Toronto Hydro-Electric System Ltd. released details of its plan to increase the average residential customer’s bill by 13 per cent.

To lessen the impact, the municipal utility wants to phase in the increase over two years, starting with an 8.7 per cent increase on July 1.

Toronto Hydro has 650,000 customers and supplies one- quarter of Ontario’s electricity. Toronto Hydro is the largest municipal utility in Canada and supplies power to the economic hub of the country.

For business customers, the average rate increase is 5.3 per cent in the first year. But some will be hit harder as Toronto Hydro harmonizes rates across the six former utilities amalgamated into one.

This is alarming news for Toronto businesses, already reeling from large property tax hikes resulting from changes in the province’s assessment system. Many cannot survive if forced to pay more for electricity, too.

Here’s a guide to Toronto Hydro’s proposed rate increase.

Q What is the distribution price?

A Distribution makes up 10 to 20 per cent of your electricity bill.

Toronto Hydro breaks it out into two components: the distribution charge (which varies with volume) and the customer charge (which is fixed).

On my own Toronto Hydro bill, which covers the two-month period to May 17, the distribution and customer charges add up to $45 of the $224.59 total. That’s exactly 20 per cent.

“In general,” the utility says, “smaller volume consumers in any class will experience the greatest rate increases on a percentage basis as the level of the customer charge is increased.”

Some businesses were never charged a fixed monthly fee (in Scarborough, for example), so their increases will be much higher than average.

Q Why are distribution prices going up July 1, when electricity restructuring begins in November?

A The province gave municipalities the option of operating their utilities on a for-profit basis.

Incorporation was intended to lead to mergers and consolidation. Ontario has 257 municipal utilities, compared with 25 in all the rest of Canada.

Toronto Hydro incorporated itself a year ago and assumed more debt in its capital structure. (Before, the utility operated virtually debt-free.) It now needs more revenue to pay interest on the debt to the city of Toronto.

The utility also wants to earn a commercial rate of return. Last year, Toronto Hydro’s return on equity was 1.28 per cent.

The energy board ruled in February that municipal utilities can earn up to 9.88 per cent.

Toronto Hydro says it can’t wait until November to raise rates. Making things worse, the utility plans to apply the higher price to the entire consumption on bills issued after July 1, even if that consumption occurred before that date. This unfairness is unavoidable, the utility says. Prorating customers’ bills to reflect electricity consumed before and after July 1 is “unjustifiably expensive” and not a viable option.

Q What is the impact of Toronto Hydro’s plan to split the increases over two years?

A While promoted as a benefit, the phase-in will actually cost customers more in the end.

The difference between the phased-in amount and the maximum allowable rate under the energy board’s formula will be recovered, with interest, in later years.

Tom Adams, executive director of Energy Probe, a Toronto advocacy group, says the deferral (with interest) means the public will be borrowing money from Toronto Hydro.

“There’s no indication that the utility intends to disclose to customers how much money they involuntarily borrow,” Adams says.

Q Can the government do anything to stop this rate increase?

A As part of the provincial restructuring plan, the energy board regulates distribution prices charged by municipal electric utilities.

The board gave newly incorporated utilities the freedom to raise rates by adopting a formula allowing them to move to a commercial return.

The only matter in dispute is whether Toronto Hydro is entitled to the maximum return of 9.88 per cent or something smaller. The utility has tried to alleviate that concern by phasing in price increases over two years.

Bottom line: Customers will pay more for electricity in an age of choice, despite Ontario Energy Minister Jim Wilson’s protests that price increases were not inevitable.