High-cost power supply is locked-in
On Wednesday, royal assent was received for Bill 2, the plan by the newly elected Ontario government to put a severe dent into the operations of Hydro One, a former Crown corporation taken public less than three years back.
The bill will constrain compensation at the transmission and distribution company and give the provincial government a direct say in the naming of directors. It’s an absolute change (for shareholders and for the government) from what was written down and understood when Hydro One was set free in November 2015.
The politicians are the last group to speak. The newly elected government’s view is different from what bankers, lawyers, investors and analysts are saying. In a general state of confusion about what may come next (particularly so given that Hydro One has made a significant U.S. acquisition which is now pending) all are aghast at the intrusion by a government (that in late 2015 agreed to act as an investor and not a manager) into the internal affairs of a company.
All express the view that the planned changes will do nothing to meet the government’s election commitment to cut electricity prices by 12 per cent. Hydro One is essentially a pass through — buying power at one end and selling it at the other — with limited ability, if any, to influence prices. Three days back we asked the government: How do these changes help Hydro One? We are still waiting for an answer.
We contacted Don Drummond, a former senior economist at the Department of Finance, the former chief economist at TD Bank, and author of The Drummond Report (a deficit-reduction plan requested by the previous government). Part of the plan was a desire for an explanation of partial equilibrium (or the first-round effects that also include cancelling some renewable contracts) vs. general equilibrium effects (which the system reaches over time.)
“The situation begs out an honest explanation that we are going to be paying higher electricity prices for some time,” said Drummond, adding Premier Ford for the time being has an out: it’s a multi-decade mess in the making that won’t be solved quickly.
Meantime, Drummond is not impressed with what has transpired so far.
“The government has managed to confuse everybody,” he said, noting that somehow the government has “tied it in” so that Hydro One was “accountable” for the high electricity prices and by default, if Hydro One “was acting appropriately it would be part of getting hydro prices down.”
Drummond says, “That’s not Hydro One’s role. They are not responsible for the price increases and I don’t know what tools they have to get them down.”
Instead Drummond believes the Ford government will continue with the former government’s policy of “shifting electricity bills onto personal taxes,” now and in the future, a move he says is “unfair because of the absence of a link between usage and payment.”
As well, that move “flies in the face of their plan to lower income taxes,” said Drummond, who prior to the recent election was critical of the plans of all three major parties. None has “a credible plan to tackle Ontario’s fiscal problem,” he wrote.
But shifting the full payment to future generations is not problem-free. “In 10 or 20 years the current ratepayers at that time are probably no keener on paying a higher price than the people today,” said Drummond. “It was a mess before. This seems to be a cloudier situation.”
For Drummond, the real problem is that the province has locked itself, for many years, into “very expensive supply.” And some of that supply (from renewables) comes with a price-indexed feature.
Indeed the combination of “too high” prices (from guaranteeing renewables and from nuclear refurbishment) and conservation efforts (which reduced demand) has resulted in a surplus of expensive electricity, a situation inherited by Ford.
And those high contracted prices make it impossible to bring supply and demand into balance: that general equilibrium outcome would prevail if a market-clearing price was at work.
“Unless you cheat and transfer (the problem) to another source of funding (say personal income taxes) there aren’t many ways out,” noted Drummond.