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The Progressive Economics Forum

Ontario Electricity VII – Committee Testimony

The PC Government in Ontario has introduced Bill 87 which would eliminate the rate-based borrowing to subsidize electricity prices and replace it with Government borrowing.

Last week’s Provincial Budget estimates that the required borrowing to subsidize electricity prices for 2018/19 was $2.8 billion. It is likely to exceed $3 billion in 2019/20.

Ontario is the only jurisdiction in North America where the Government would directly subsidize electricity prices.

Today the Government held Committee hearings on Bill 87 and I was one of 7 individuals/groups that provided our views and were questioned by Committee members.

What follows are my prepared remarks. Readers that have followed my work on the subject will recognize all the main themes.

Opening Remarks by Edgardo Sepulveda to the Standing Committee on General Government on Bill 87. April 15, 2019 – Legislative Assembly of Ontario

Good Afternoon.

Thank you for allowing me to participate in this process.

I am an economist by training and have been a regulatory consultant for more than 20 years, largely in international telecoms, with a recent focus on Ontario’s electricity sector.

My presentation is based on my past research and analysis.  If you wish to refer to it later, I have distributed an article I prepared last year and links to other online research.

I will use my time to focus on three things in relation to Schedule 3 of Bill 87, which replaces off-book borrowing from future rate-bases under the Fair Hydro Plan with public borrowing off the tax-base.

First, how did we get to a situation where we are the only jurisdiction in North America where the Government directly subsidizes electricity prices?

Well, starting in 2005 previous Governments implemented a policy of regulation-exempt, long-term contracts to procure new private sector generation capacity.

The critical design flaw here is that as policy previous Liberal Governments excluded those Contracts from regulatory review and oversight.

And the Contracts policy was often poorly executed. Many Contracts were inflexible and lopsided, with the public bearing most of the risks.

With no oversight, the Ministry often ignored expert advice and the result was excess capacity and an inflated costs.

Which gets us to the Second point – the solutions on offer.

When prices became a political liability, the previous Government chose to borrow via the Fair Hydro Plan, rather than reviewing the Contracts.

But if that was the worst possible solution, the current proposal to continue with Government borrowing is almost as bad.

According to last week’s Budget, the Government will take on about 3 billion dollars of new debt a year to pay inflated prices to power generators and provide subsidies that will benefit high-income families most.

This is not efficient or equitable fiscal policy.

And it does nothing to address the legacy of excess capacity or inflated costs.

So, we come to the Third point – what to do?

The cancellation of pre-construction Contracts last summer was a start, but that accounted for less than 1% of future generation. You can find another percent or so from conservation, distribution and transmission.

But if you want to make a real dent in the annual subsidy or achieve the election promise of a further 12% cut, you have to look at legacy generation Contracts.

Review of these Contracts would not be an easy or fast process and is subject to legal risk – but this Government knows this – last summer it enacted legislation shielding it from additional claims from cancelling the White Pines project.

As a first step, the Government should direct the OEB or a Government Committee or another entity to undertake a comprehensive review of legacy Contracts to evaluate which have provided or will provide fair and reasonable prices and to make recommendations on how to deal with those that have not, including via renegotiation or a new framework.

Last month the Select Committee released a Cabinet memo that showed the previous Government had considered, but rejected renegotiation.

But could another Government, free from association with past policy mistakes, reconsider this option?

If the current Government can establish a Select Committee to look at how the previous Government tried to cover up past policy mistakes, why can’t it also look at how power generators benefited from those mistakes?

But actual face-to-face renegotiation is only practical for a few Contracts and more importantly, lacks transparency.

Better to create a general rules-based approach. Process and time-tested rules are our best guarantee of fair and reasonable rates. It also happens to be our best defense against litigation from unhappy power generators.

My own proposal for such an approach would be to transition those Contracts that have not or will not provide fair and reasonable prices to a new rules-based regime that would reduce prices by applying a regulated rate of return. This is not rocket-science – it is how here in Ontario the OEB sets rates for transmission, distribution and OPG generation and is the standard way that regulators around the world set rates.

Thank you.  Happy to take your questions.

 

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