Ontario’s Auditor General Snowed Again

In the year 2000, then provincial Auditor General Erik Peters issued his first report on matters related to Ontario’s power system. The former Ontario Hydro had always been exempt from the AG’s oversight. The vast complexity of the financial processes underpinning the power system proved too much for the newly electrified Peters. In a column in the National Post that year, Mike Hilson and I attacked Peters for not correctly adding up the electricity sector’s contribution to the province’s deficit. We alleged that Peters had allowed Mike Harris to inaccurately claim that he had finally achieved a balanced budget. Peters counterattacked with a dismissive letter to the editor. Three years later, now working for the new Ontario government, Peters reversed his position, siding with our original analysis. His reversal is on the record here.

The current Auditor General Jim McCarter was Ontario’s Assistant Provincial Auditor at the time. Having witnessed his boss fan on the shot in 2000, we might have hoped that McCarter would have sharpened his electricity skills.

McCarter issued his annual report today, addressing several subjects of interest to electricity consumers. This essay addresses his chapter on the Ministry of Energy’s renewable energy program. Although the AG’s report identifies billions of dollars of out and out waste, in many key areas the AG got snowed again.

The AG reports at length on how the OPA’s power system planning function was originally designed to be an independent analytical function that has been increasingly afflicted with meddling by the Minister of Energy. However, the AG failed to take note of the key event in this power shift, an investigation of which might well have yielded important insights. The OPA issued its first IPSP for review by the OEB in August of 2007. The OPA was under an explicit license condition from the OEB to produce an updated IPSP by August of 2010. Mysteriously, August 2010 came and went without an updated IPSP materializing. The OPA has still is not produced an updated IPSP. What exactly were the events that resulted in a government agency ignoring a key license condition from its regulator? How much authority does the regulator have when its rules can be ignored without consequences. Notwithstanding these unanswered questions, the AG deserves credit for documenting that “OPA staff acknowledged that the existence of two plans—the Ministry’s and its own—could lead some to conclude that the OPA has only limited authority as an energy planner and that the Ministry’s LTEP is Ontario’s ‘true’ plan for the future.”

A similar gap in the AG’s analysis relates to his failure to recognize, let alone address, the policy switch that now allows renewable energy generators to get paid for deemed, rather than actual generation. When the Ontario wind power industry got going under the Renewable Energy Supply (RES) contracts in the period from 2004-2008, the contracts said that generators only got paid for actual generation. In the event of surplus generation, wind generators could be asked to turn down their output and they would not be entitled to compensation. (Correction: The initial RES contracts had this structure, but subsequent versions included clauses that protected generators from the impacts of market rule changes. Correction added May 16, 2012.) This provision had multiple benefits for consumers. The obvious benefit was that consumers would not be on the hook for excess power from RES producers. More importantly, the strict pay-for-production-only rule created a stabilizing incentive for the wind power industry. Facing the risk that the market for wind power could become flooded, the interests of existing wind generators were aligned with consumer interests to oppose government over-indulgence in wind power. The OPA’s original design for the FIT program maintained this provision. Sometime during the original FIT review process, the OPA received an order to reverse this provision. Now FIT generators would get paid for the generation they could have injected had there been no grid constraints. Ominously, in the AG’s report the OPA indicates that “The OPA and IESO have been actively collaborating on aligning other renewable energy contracts to make operators more responsive to market rules.” Will retroactive changes be introduced in earlier RES contracts to put them also on the absurd deemed generation plan? Was the market operated up until now so that where consumer rights to curtail wind were contractually available, these rights were maximized? How was it that the original FIT design got switched during the public review process so that now FIT generators get paid for deemed, not actual, generation? The AG leaves us in the dark.

Unalert to the mechanisms that make public agencies that are mandated to be independent vulnerable to corrosive influence by government, the AG recommends measures that would actually make the agencies more vulnerable. One recommendation is for greater coordination between the Ministry and the agencies. That is one recommendation that the Ministry is quick to endorse.

In some cases, the AG got sucked in by the marketing spin of the government. For example, the government, often through its puppet agencies, is busy redefining surplus power as an asset to consumers. In response to the AG’s report, the OPA claims, “A reliable and sustainable electricity system will from time to time have surplus power.” The AG swallowed this claim verbatim. “Surplus generating capacity is necessary to meet periods of peak demand, which, in Ontario, occur in the summer. Therefore, to ensure system reliability, all jurisdictions will have surplus power from time to time.” This claim is nonsense. A prudently operated power system maintains reserve capacity. Reserve capacity is not surplus, but a necessary ingredient for reliable supply. Surplus capacity is capacity above reserve requirements. Surplus capacity is sign of planning failure, an unnecessary burden on consumers, not a sign of success.

The government’s electricity policy spin machine is revealed all over the report, sometimes in subtle ways. For example, at one point the AG lists the government’s objectives for the FIT program including reducing the greenhouse gas emissions of Ontario’s power system. The OPA lauds the AG saying, “the OPA is encouraged that the Auditor General recognizes the contribution that renewable energy is making to support the reduction of greenhouse gasses in Ontario’s electricity system.” However, one of the key findings of the AG’s report is that “no independent, objective, expert investigation had been done to examine the potential effects of renewable-energy policies on prices, job creation, and greenhouse gas emissions”. Regrettably, the AG does little to fill the gap on greenhouse gas emission analysis. Ontario ratepayers have the right to expect some credible analysis identifying what emission reduction have been achieved and at what cost but this report leaves the question hanging.

The AG’s report ignored one of the fundamental flaws of the government’s outrageous FIT rip-off – the failure of FIT to target development for where power is needed. As a result, wind and solar developments are going on in a haphazard fashion, thereby increasing transmission costs unnecessarily.

Another consumer rip-off completely ignored in the report is the impact of Global Adjustment reallocation. In all his analysis of future power rates for households, the AG fails to consider the impact of the Global Adjustment reallocation that the government announced in 2010. Global Adjustment reallocation shifts cost for green power initiatives from large industrial users to smaller users. The AG relies on power cost projections issued before the Global Adjustment cost shift was introduced. The OEB estimates that the impact of Global Adjustment cost shifting in 2011, the first year of the program, was over $200 million. As the incentive effects of the mechanism kick in, that figure will multiply.

In some cases, the AG’s report suffers from logical flaws. For example, the report complains, “The absence of caps or limits to the number of contracts signed under Ontario’s FIT program led to the current oversubscription.” The FIT program oversubscription was caused by excessive rates paid to generators, creating the possibility of excess profits. The absence of caps or limits meant only that the resulting total damage to ratepayers was greater than would otherwise have been the case.

The AG properly draws attention to the low value of intermittent generation but places undue confidence on the efforts of the official Ontario to respond to this challenge. For example, the AG expresses confidence in the IESO’s Renewable Integration Project without any recognition of how that project has already unfairly screwed consumers. Here is a further explanation of how the IESO is contradicting its own market design principles to unfairly shift costs from wind power generators to consumers.

Hints of problems not pursued. For example, the report indicates that the Ministry’s internal audit service team is not addressing the government’s renewable energy initiatives, one of the government’s large spending initiatives, albeit mostly off its own income statement. Why does the AG not comment as to the significance of this gap?

Sometimes data is included in the report to support key insights but the analysis stops short. The report includes enough data to show how the move from competitive procurement of wind power to FIT procurement increased the cost to consumers from 9.5 cents/kWh to 13.5 cents/kWh for same product. Little wonder why green lobby groups have been fighting so hard to keep this gravy train rolling.

Many key vulnerabilities of consumers are ignored. For example, there is no recommendation in the report for the Global Adjustment composition to be made  transparent. There is no recommendation for transparency of government communication to independent agencies. There is no demand for quantified tracking of spilled water at hydro-electric stations, dumped steam at Bruce Power, curtailed wind power production, negatively price power, or otherwise squandered power.

The AG’s report addresses the subject of the net value of exports (see figure 11). From 2005 until 2010, consumers lost $1.8 billion. Unfortunately, the report does not address how this figure will grow as the FIT program’s capacity comes into service in large amounts in the next few years.

Notwithstanding the foregoing criticisms, there is much to commend in the AG’s report. Perhaps the AG’s best contribution is where he forced the government to estimate the impact of the extra cost of renewable energy electricity charges on ordinary households. By the government’s own estimate, the cost per household will rise to $31 per month or $372 per year by 2018. Particularly for low-income folks, $372 per year is going to hurt. Unfortunately, no supporting calculations are provided so there is no way to cross check the government’s assertion.

Post Script March 31, 2016: Here is another of my old criticisms, this time from 2003, urging the Auditor General to sharpen its pencils and get to the bottom of the situation at OEFC: https://ep.probeinternational.org/2009/07/07/ontario-grows-debt/

Here Toronto Star article from 2003 addressing the Ontario government’s claim that OEFC’s stranded debt would disappear by 2012.

Here is another useful source for folks tracking the history of Ontario’s shady electricity accounts. http://me.queensu.ca/Courses/MECH430/WK2_GI_electricityDebtDec2003.pdf

4 Comments

  1. When one looks at this section of the AG’s report there are indeed gaps but at least he has highlighted the “top down” management of the Ministry and the lack of cost benefit analysis that has occured on the whole mess including the Samsung contract.

    It would have been better if he included the cost shift from Class A to Class B ratepayers and attached some cost estimates to the cancellation of the Oakville and Mississauga gas plants. You are right on about the lack of a recommendation to complete an unbiased emissions study. The whole objective of the push for wind & solar was to save billions in health costs based on these emissions. The AG report has missed connecting those dots.

    He also doesn’t seem to have considered the cost push, down, to the local distribution companies and what those Liberal policies have done to the distribution costs.

  2. What a farce it is when a former executive with the Canadian Wind Energy Association the wind turbine lobby group and Mike Crawley the former president of the Canadian Liberal Party’s Ontario branch and big pal of Mr McGuinty join forces to get this horror show jump-started with a half millon dollar gift from the Government of Ontario.

    Now they are now threatening communities with law suits, watching people in their wind developments abandon their homes and raking in the rewards of their friend Dalton’s extravagant social experiment.

    Who is running the government of this province?

  3. I find it amazing that the Conservative opposition did not exploit this issue during the last campaign and continue to be unable to skewer the Liberals over this crass mismanagement of our power supply. In addition to the AG report and Tom’s fine comments above,let me provide some additional zingers.

    1. The Samsung contract alone will cost Ontario tax payers $820M per year for over 20 Years in FIT subsidies. A total subsidy of $16 Billion. To Samsung and the Korean Power Authority no less! That’s $2000 per homeowner that can’t be used to buy a flat screen TV or groceries.
    2. Ontario produces 35MT CO2 from its coal plants. (Cw. 750MT/yr for Canada and 7000MT/Yr for ROW) Because windmills and solar cells need back up power, our carbon emission can only be reduced by 50% at best. So maybe we will be able to reduce our CO2 by 20MT. And how much cooler will the planet be as a result? Using the UN’s IPCC own exaggerated estimates, we might cool the planet by 0.001 degree C in 2050 as a result. Can anyone measure that? And this amazing experiment in planetary cooling will cost Ontario taxpayers a mere $2 Billion a year. What a great cost-benefit!
    4 But we will have all these new green jobs! Even the AG admits the predicted 50,000 jobs are a slight of hand and are most unlikely especially on a net basis, given all the industries that will shut down due to high energy prices. So the only long term new green jobs will come because folks will be employed picking up dead birds from the base of windmills and shoveling snow of solar panels. Hewers of snow and pickers of dead birds, welcome, citizens of Ontario, to the Liberal green energy future.

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