Analysis of Ontario’s Upcoming Electricity Cost Reallocation Announcement

Today’s Toronto Star provides an outline from the Ontario government of the upcoming electricity cost reallocation announcement.

With a fixed percentage bill reduction, Premier McGuinty has created a budgetary cancer that will grow rapidly as the Green Energy Act transmission, distribution and renewable energy projects, particularly solar, are brought into service.

Dwight Duncan, in his first term as energy minister, citing the need to fight the government’s deficit, reversed McGuinty’s 2003 campaign promise to maintain the rate freeze established by the previous Conservative Premier, Ernie Eves. Mr. Duncan committed to a set of very firmly expressed and praise-worthy principles:

  • ratepayers, not taxpayers, must pay electricity costs
  • consumers must pay the real costs of electricity
  • Ontario needs a “culture of conservation” policy
  • electricity policy must be depoliticized

On Thursday, Mr. Duncan will disgrace himself on all these basic principles. Dwight Duncan should resign.

Mr. Hudak’s speech to the Ontario Energy Association October 14, 2010, where he discussed candidly the mistake Premier Eves made in November 2002 of freezing electricity rates, has proven to be a strong foundation.

European jurisdictions that have implemented aggressive renewable energy policies tend to impose most of the extraordinary costs on households, not business consumers. The theoretical basis for this allocation of cost responsibilities is often referred to as Ramsay Pricing ““ a strategy that minimizes the overall economic harm of recovering excessive costs from a captive customer base. By pursuing a policy the opposite of Ramsay Pricing, Mr. McGuinty is amplifying the economic harm his careless electricity policies are causing.


  1. Good analysis Tom. Large industrials with average demands over 5 MW will get their January 1 reduction, via a change to the allocation of GA costs. The don’t vote in elections but can vote with their feet. The consumers who will really get squeezed are those consuming above 250,000 kWh/year and with average demands up to 5 MW.


      Bill 4, An Act to amend the Ontario Energy Board Act, 1998 with respect to electricity pricing

      Dwight Duncan:

      We cannot see our energy policies continue to be tossed around like political footballs, as they were under the previous government. I’m sure we all remember, in the summer and fall of 2002, under the lack of leadership of the Tory government, when many consumers, without knowing why, found themselves paying volatile market prices for electricity. Every hour of every day the price changed — sometimes quite dramatically. Working families, small businesses, farmers and individuals on fixed incomes were terrified by the uncertainty this created…

      …Under the proposed legislation, the interim pricing plan will stay in place until an independent regulator, the Ontario Energy Board, develops new mechanisms for setting prices in the future. By so doing, this plan will take the politics and politicians out of electricity pricing and give that responsibility to an independent regulator…

      …By ensuring that the Ontario Energy Board, an independent body, sets future prices, we can be sure that electricity prices in Ontario will be regulated on the basis of what is in the public interest. At the same time, we’re also taking steps to allow the Ontario Energy Board to protect and renew our electricity grid by ensuring reasonable charges for the delivery of electricity…

    • Tuesday 25 November 2003 Ontario Hansard

      Hon Dwight Duncan (Minister of Energy, Government House Leader): On October 30, the Premier asked me to commit to delivering a responsible approach to electricity pricing, one that better reflects the true cost of electricity in Ontario. He asked for a pricing plan and an overall approach to electricity policy that first and foremost would protect Ontario’s consumers by providing them with fair, predictable and stable rates.

      The Premier also wanted a plan that would encourage conservation, promote a cleaner environment and attract new supply. He stressed that a responsible approach to electricity pricing was one of the government’s top priorities, and he gave me 30 days to come up with a plan.

      Under the previous government, we saw energy pricing and energy policy treated as some sort of political football.

      In the summer and fall of 2002, many consumers, without knowing why, found themselves paying volatile market prices for electricity. Every hour of every day the price changed, sometimes dramatically. Working families, small businesses and individuals on fixed incomes were left very uncertain by the tension this created.

      Then, late last year as an election drew closer, the previous government imposed a cap of 4.3 cents per kilowatt hour on the retail price of electricity. The price freeze solved the volatility problem but had the effect of obscuring the true cost of electricity and cutting consumers off from information they needed to make better choices.

      As Premier McGuinty has pointed out, the electricity price freeze is contributing to the $5.6-billion deficit at a rate of hundreds of millions of dollars a year. In fact, since the price cap was put in place a year ago, it has cost all of us — every one of us — over $800 million.

      This policy is simply not sustainable, Mr Speaker, and I remind you it is the taxpayers who will ultimately have to pay that price — the same taxpayers who need to know that their government is investing in schools and universities, that their money is being invested in quality health care, that the air they breathe will be safe, the water they drink will be safe and that they’ll have better communities to live in.

      If we are to provide the people of Ontario with the services they expect and deserve, the 4.3-cent electricity price freeze simply cannot be sustained.

      As we all know, the price freeze provides little, if any, incentive to conserve energy. Today, more than ever, it should be obvious that energy conservation is of paramount importance. It reduces the demands on our electricity system and our reliance on coal-fired generation, and in so doing helps protect our environment.

      On October 2, the people of this province chose change. They chose a government that would be honest, open and transparent in its dealings, a government that would give them the straight goods.

      It’s obvious that we need to move quickly away from the current artificially low fixed price to a more sustainable price that better reflects the true cost of electricity. It is for this reason that moments ago I introduced the Ontario Energy Board Amendment Act for consideration by this assembly.

      Under the proposed legislation, our government would get rid of the artificially low price cap of 4.3 cents. The new plan would introduce a responsible pricing structure that is fair and predictable for consumers, reflects the true cost of electricity, gets rid of a subsidy that is completely unsustainable, and sends a clear and powerful conservation message to the people of Ontario.

      Under the proposed legislation, an interim pricing plan would take effect on April 1, 2004.

      The first 750 kilowatt hours consumed in any month would be priced at 4.7 cents per kilowatt hour. Consumption above that level would be priced at a higher rate of 5.5 cents per kilowatt hour. This would better reflect the true cost of electricity in Ontario.

      Approximately 60% of Ontario homes use less than 1,000 kilowatt hours per month. Conservation measures could help reduce that consumption level. There are many tips available, and later this year we’ll be announcing more conservation initiatives that my parliamentary assistant will look after.

      The government will be taking action to improve its own conservation performance. In the coming weeks, the Chair of Management Board will be announcing a new plan to make a noticeable reduction in the government’s overall energy consumption.

      Since the proposed interim pricing plan would not take effect until April, consumers would have a chance to review their energy use, take conservation measures and, as a result, limit the impact on their electricity bill.

      Under our proposed legislation, the interim pricing plan would stay in place until an independent regulator, the Ontario Energy Board, develops new mechanisms for setting prices in the future. The OEB’s new mechanisms would be in place as soon as possible and no later than May 1, 2005.

      If the interim pricing turns out to be higher than the average market rate, all eligible consumers would receive a credit after the OEB implements its pricing mechanism.

      By ensuring that the OEB, an independent body, sets future prices, we can be sure that electricity prices in Ontario will be regulated on the basis of what is in the best interests of the public.

      At the same time, we’re also taking steps to allow the OEB to protect and renew our electricity grid by ensuring reasonable charges for the delivery of electricity.

      Furthermore, beginning March 1, 2004, local distribution companies would be allowed to recoup some of the costs that the previous government had put on hold. This will ease a tremendous financial burden that these local companies, the vast majority of which are owned by municipalities across Ontario, have had to face.

      To mitigate impacts on consumers, the Ontario Energy Board would be asked to ensure that these recoveries to local distribution companies are spread over four years. We estimate that this would have a modest impact on the final price to consumers.

      As of March 1, 2005, local distribution companies would be allowed to achieve their full commercial return, but only on the condition that they reinvest the equivalent of one year’s worth of these additional monies in conservation and demand management programs. This represents an investment of $225 million, the largest investment in conservation of its kind in the history of Ontario.

      As well, the proposed legislation would restore the normal regulatory regime for transmission rates immediately. We don’t anticipate that this would increase rates.

      This plan would first and foremost protect Ontarians by ensuring a fair and predictable solution to electricity pricing.

      Second, it better reflects the true cost of electricity in Ontario today.

      Third, it would ensure that our government, and Ontario taxpayers, stop subsidizing electricity consumption and jeopardizing our ability to invest in health care and education.

      Fourth, it would send a clear and powerful conservation message to consumers.

      Not only does electricity conservation make sound financial sense; it makes good environmental sense. It reduces our reliance on coal-fired generators, and so helps improve our air quality. Our commitment to phase out coal-fired generation by 2007 remains firm.

      Finally, it would attract new supply by sending a clear signal that Ontario intends to deal with electricity issues in a practical, sensible and transparent way.

      Energy is critical to the safety and comfort of our families and the strength and security of the economy they depend on. It’s simply too important to be continually subjected to political whims and whatever opinion polls show to be popular on any given day.

      We’re giving the people of Ontario the straight goods. We firmly believe that our plan is in the immediate public interest and that it is a major step toward ensuring a safe, reliable and sustainable energy supply for the people of Ontario, for the future of our economy, for jobs in this economy, so we can all grow and prosper together.


      • Wednesday 26 November 2003 Ontario Hansard Volume B

        Dwight Duncan:

        “It would be irresponsible for the province and tax-payers to continue to subsidize electricity consumption, because it jeopardizes our ability to invest in health care and education. This is simply not sustainable, nor is it acceptable. The people of this province deserve better.

  2. If you find yourself in a hole 19.7 feet deep, you stop digging. If you later realize the hole is only 18.7 feet deep, you don’t dig down another foot, you stop where you are. Replace feet with $ billion and this may make more sense.

  3. I would like to know a concise definition of the “real cost” of electricity. Doesn’t such a formulation – “the real cost of electricity” – serve to obscure that the hydro establishment is kleptocratic and self servicing? You’ve mentioned Parker Gallant’s series, where we learn that the median compensation for employees of Hydro One and OPG exceeds 100k$/yr, that they’ve greatly expanded their workforces while the province’s generating capacity has decreased, and that the Hydro commissioners aren’t shy about shelling out millions in bonuses to themselves. Is this all part of the “real cost” of electricity? Seems more like the unreal cost to me.

    I was just waching Dwight Duncan being interviewed by Steve Paikin and while Paikin prodded him on the breaching of the principle of “user pay” there was no challenging of what is getting incorporated into the “real cost” of electricity, namely the featherbedding and kleptocracy detailed by Gallant, but also the hare-brained FIT schemes.

    It seems to me this debate is being framed in such as way as to give a free pass to this pocket-lining in the name of environmental virtue.

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