Ontario’s “Fair” Hydro Plan Clown Show

The regulatory and financial underpinnings of Ontario’s electricity situation, which governments have vigorously shaken and stirred since 1998, are once again the subject of what might be politely called “transformational change” with the passage of Bill 132, “Fair” Hydro Plan (FHP) Act, 2017.

It pains me to use the adjective “fair” in reference to this legislative vandalism.

This commentary in the journal Energy Regulatory Quarterly provides my more formal analysis of the legislation.

The remainder of this post presents less formal commentary.

To recap, the main impact of the bill will be to create a financial snowplough now pushing a large portion of the ongoing cost of service for small volume customers into the future. The key mechanics of the structure rely on the complete ruination of public utility regulation in the province. As my journal article documents, the FHP wipes out all regulatory authority for rate setting for small volume customers in favour of ministerial fiat. Now, the Minister determines the discount of the end-use rates relative to cost and Ontario Power Generation borrows the difference to make all the contributors to the revenue requirement whole. The current projection is that OPG will accumulate $2.6 billion per year with interest for the next few years. (A much less significant element of the legislation also shifts the costs of subsidy programs aimed at low-income and rural electricity consumers.)

Every commentator that I have seen address the financial basics of the new system has accepted the official gloss on the plan that power costs are being “refinanced” in a way analogous to reamortizing a mortgage. This is a crock. Nothing in the government’s plan changes the costs contributing to the overall system revenue requirement. Rather than reamortizing a mortgage, a more accurate analogy is covering a portion of a household’s month rent with borrowing.

Notice also that 61% of Ontario’s electricity supply last year came from nuclear power plants all approaching their respective best-before dates. While Premier Wynne has described Ontario’s current electricity situation as paying up front for assets that will benefit future generations, what is actually happening is the reverse — current ratepayers are enjoying a lull in costs passed forward by previous generations of ratepayers. If coming nuclear refurbishments don’t go well, Ontario’s current electricity sector revenue requirement will look like the good old days.

The FHP drew the attention of two watchdog officers of the legislature, the Financial Accountability Officer (FAO) and Auditor General (AG). Unsurprisingly, the FAO found that delaying the recovery of costs and incurring the interest expense of that delay results in higher ultimate costs.

The FAO follows the government’s assumption that the barking mad FHP will persist decades into the future, and on that basis calculates tens of billions in incremental interest costs. I don’t expect the FHP junk will last much past the next election.

The Auditor General’s key finding was to rebuke the government’s plan to create a regulatory asset out of thin air to offset the new liability arising from the cost deferral. The outrageous FHP junk makes me more optimistic than ever that eventually the AG will address the bad liabilities called “assets” on the books of OEFC and OPG.

The legislation is a testament to the effectiveness of the banks “assisting” the government in crafting Ontario’s electricity future. On behalf of the banks, the legislation has invented a new type of tradeable financial instrument supported by zero assets except for the firm conviction of government that the future costs will be recovered from consumers (like the Debt Retirement Charge now paid by commercial consumers). To ensure the collection of costs, the legislation and other recent policy measures (like the OEB’s shift to fixed DX charges) are curtailing future options for self-generation by consumers. Here is a little gem in the legislation that represents a win for the banks:

Irrevocability of amount
14 (1) An amount in respect of the clean energy adjustment shown on an invoice issued to a specified consumer under this Act is determinative of the amount of the consumer’s indebtedness resulting from the clean energy adjustment and is irrevocable upon invoicing the consumer and may not be set off or bypassed.

Here is the big score for the banks:

19 (3) Subject to any prescribed limitations, the Financial Services Manager may establish and charge fees in relation to such matters as may be prescribed in accordance with the regulations, which regulations may provide for the ability to recover costs and expenditures and to earn a return.

Folks following Muskrat Madness in Newfoundland & Labrador will notice several similarities with Ontario’s developing electric clown show. NL’s legal prohibition on self-generation, introduced to protect revenues to feed the hungry Muskrat, is more sweeping than Ontario’s current policies (which still includes direct subsidies for by-pass generation on preferred industrial sites). Premier Ball’s recent comments about indexing NL rates to NS rates bear an uncanny resemblance to Ontario’s FHP. One significant difference is that Ontario’s Fair Hydro fiasco probably dies after the next election whereas NL’s hungry Muskrat problem reaches out to 2069. Wynne’s electrified vote buying scheme is a fraud but a time-limited one. Ball’s scheme is a mathematical impossibility.

3 Comments

  1. Who knows what the cost of Newfoundland hydro-power will be when it is delivered to consumers/customers elsewhere in Canada and New England?

  2. I fully concur … I also agree that virtually all journalists have bought into the “refinancing” propaganda rather than borrowing to pay current expenses.

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