Response to the Report of the Commission on the Reform of Ontario’s Public Services/the Drummond Report

February 16, 2012

Response to the Report of the Commission on the Reform of Ontario’s Public Services/the Drummond Report

Prepared by Parker Gallant, Vice-president

After reading the following preamble on the electricity sector from the “Executive Summary” of the Drummond report, released February 15, 2012, the gut feeling was that the report wouldn't deliver what we might have hoped for. Here is that section:

“The performance of Ontario’s electricity sector has considerable implications for the province.The government owns Ontario Power Generation (OPG) and Hydro One; its programs include the Ontario Clean Energy Benefit (OCEB); electricity prices influence industrial competitiveness; the feed-in tariff (FIT) policy is designed to attract investment; and electricity policies directly affect the environment. Significant private-sector investment has been driven by Ontario Power Authority (OPA) contracts, necessary because wholesale electricity prices were too low to cover the private generators’ costs. In addition, the government’s job-creation and environmental policy objectives have resulted in the replacement of coal-fired generation with cleaner power sources, domestic-content requirements under the FIT program, and increased conservation efforts. These policies, along with the cost of replacing and maintaining aging infrastructure, have raised electricity rates for consumers.”

While the report sometimes highlights the misguided direction of the “Energy” sector of the current government if clearly fails in many of its recommendations making one conclude that the authors have bought into the McGuinty government’s belief that the renewable energy plan will create jobs and “save” the environment. (Wrong on both counts where wind power is concerned.) Below are the extracts from the “electricity sector” comments and recommendations found in the report followed by the author’s perception and opinion (in this font) on either the observations expressed or the recommendations made.

 “The performance of Ontario’s electricity sector has considerable implications for the province.

The government owns Ontario Power Generation (OPG) and Hydro One; its programs

include the Ontario Clean Energy Benefit (OCEB); electricity prices influence industrial

competitiveness; the feed-in tariff (FIT) policy is designed to attract investment; and electricity

policies directly affect the environment. Significant private-sector investment has been driven

by Ontario Power Authority (OPA) contracts, necessary because wholesale electricity prices

were too low to cover the private generators’ costs.”

Response: As an economist, Mr. Drummond should have recognized that wholesale prices were driven down  by the addition of unneeded and intermittent generation from wind and solar installations, and that the “private-sector investment” was driven by over-market pricing under long-term fixed contracts.

“In addition, the government’s job-creation and environmental policy objectives have resulted in the replacement of coal-fired generation with cleaner power sources, domestic-content requirements under the FIT program, and increased conservation efforts.”

Response: Again, as an economist he should have recognized that coal-fired power generation has not been replaced simply usurped by wind and solar, and the “domestic-content” has not created high-value jobs, only short-term construction jobs. (See the Auditor General’s 2011 Annual Report.) The increased “conservation efforts” have increased electricity costs taking dollars from Ontarian's pockets which would have been better used to create real jobs through the multiplier effect.  He should also have recognized the World Trade Organization challenges due to the “domestic-content requirements.

“These policies, along with the cost of replacing and maintaining aging infrastructure, have raised electricity rates for consumers. There are several areas in which the electricity sector and Ontario’s fiscal position interact.

Direct Program and Tax Expenditures: The OCEB provides a 10 per cent rebate on

electricity bills for residential, farm and small business customers, even though the

government acknowledges that electricity prices will continue to rise. This program distorts the

true cost of electricity and discourages conservation.”

Response: Mr. Drummond has failed to recognize that the OCEB has been principally offset by the collection of the Provincial portion of the HST so the net benefit is 2% not 10% as he suggests.   

“As troubling as this is, the Commission foresees that the scheduled demise of this generous incentive in 2015 will create a large price shock for ratepayers. We worry that an extension of the OCEB would risk Ontario’s ability to return to a balanced budget in 2017–18. Also, removal of the Debt Retirement Charge (DRC) may be delayed until 2018. Ending the DRC and the offsetting OCEB at the same time would provide a ‘soft landing’ for ratepayers, but this would evaporate if such a delay occurred. 

Finally, because the Commission strongly believes the OCEB’s $1.1 billion could be used

more effectively, the OCEB should be eliminated as quickly as possible. All other electricity

subsidies should be reviewed as well.”

Response: The soft landing Drummond claims is not “soft”!  Removing the 0.7 cents per kWh  would reduce the average monthly bill by $5.60 per month (.7 X 800 kWh). Removal of the 10% OCEB would save the Province $1.1 billion and would increase the average bill by $20.00 per month.  An annual increase of approximately $170.00 per annum. 

“Electricity Stranded Debt: When the electricity system was restructured in 1999, only part of

Ontario Hydro’s debt was supported by the assets of its successor companies. The result was

$20.9 billion in stranded debt. The Ontario Electricity Financial Corporation (OEFC) was set up

to manage this debt and certain revenue streams were dedicated to pay it down. Also, the

DRC levied on consumers was part of this solution. The fiscal impact of the OEFC revenue

streams is significant; OEFC revenues, expenses and debt are part of the province’s budget.

The financial performance of OPG and Hydro One matters because their payments in lieu of

taxes and some of their combined net income go to service the OEFC debt. It is imperative

that OPG and Hydro One be run efficiently to maximize their contribution to deal with this

legacy of the old Ontario Hydro.” 

Drummond should have recognized that the Green Energy and Green Economy Act (GEA) undermined the ability of OPG (in particular) to generate revenue and profits which has stretched repayment of the debt out by years!  If he had read the notes in the OEFC annual report he would have noted the following:

“As at April 1, 1999, the present value of future (payment in lieu) PIL of taxes and electricity sector dedicated income was esti­mated at $13.1 billion. Subtracting the $13.1 billion from stranded debt of $20.9 billion resulted in a difference of $7.8 billion, known as residual stranded debt.” Undermining the ability of the public sector companies to generate profits and payments of PIL was a result of both bad government policies and bad management—but Drummond lets the government off the hook.

“Options to Reduce Long-Term Electricity Costs: This report’s principles, set out in

Chapter 3, Our Mandate and Approach, can be transferred to the electricity rate base. In the

face of electricity prices that are projected to rise by 46 per cent between 2010 and 2015, the

province should seek efficiencies in the sector that would help slow electricity rate increases.”

Response: Outside forecasts are higher so Drummond accepts the government projections on this sector—why?  A good economist reviewing this sector should not simply accept what he or she is told!

“At the same time, the Commission recognizes that after so much change since 1999, a period

of normalcy may be helpful. Consequently, the Commission’s recommendations are meant to

balance the need for stability with the need to curb costs. The government should produce a

detailed, 20-year blueprint for the energy sector.”

Response: But not based on the Long Term Energy Plan as he suggests!

“It should also consolidate Ontario’s 80 Local Distribution Companies (LDCs) along regional lines to create economies of scale; this would result in direct savings on the delivery portion of the electricity bill.”

Response: We totally agree, but this was obvious and will require many changes to several acts, as well as buy-in from the municipalities.  Hopefully it doesn't mean Hydro One will run rampant throughout the province scooping up even more LDCs.

“Further, the government should mitigate the impact of the FIT program on electricity prices, first by reducing the initial prices offered in FIT contracts and reducing the tariff over time, and second by making better use of ‘off-ramps’ built into existing contracts. Among other measures, the government should seek administrative efficiencies in various electricity sector agencies and restructure the wholesale electricity market so consumers located closer to generation stations can benefit from lower electricity prices.” 

Response: The FIT (Feed In Tariff) and MicroFIT should be eliminated entirely or power generators should be obligated to deliver power in line with time-of-use (TOU) prices levied on ratepayers!  The OPA should get out of these overpriced FIT contracts if there are indeed “off-ramps” available.  Despite the fact that “distributed power” was supposedly built into Bill 100 the current government has done nothing about it—Mr. Drummond should have called them on that!

“Green energy: The federal government has provided little support for Ontario’s green energy

initiatives, but $1.4 billion in annual subsidies to the oil and gas sectors. Ontario needs fair and

equitable support for its clean energy initiatives.”

Response: There is only one taxpayer! Has Mr. Drummond forgotten that he used to work for the federal government?

“Recommendation 12-10: Eliminate the Ontario Clean Energy Benefit as quickly as possible.”

Response: Ratepayers will be paying 10% more on top of upcoming increases.

“Recommendation 12-11: Review all other energy subsidy programs against measures of

value for money and achievement of specific policy goals.”  

Response: Eliminate them all!

“Recommendation 12-12: Produce an Integrated Power System Plan built on the foundation

of the province’s Long-Term Energy Plan.”

Response: NO!  The LTEP is totally flawed and plans for 8,400 MW of wind power generation which is dumb!

“Recommendation 12-13: Consolidate Ontario’s 80 local distribution companies along

regional lines to create economies of scale.”  

Response: This is a good and obvious recommendation, but will be difficult to execute in a short timeframe!

“Recommendation 12-14: As part of the review of the feed-in tariff (FIT) program, take steps

to mitigate its impact on electricity prices by:

§  Lowering the initial prices offered in the FIT contract and introducing degression rates

o   that reduce the tariff over time to encourage innovation and discourage any reliance on

o   public subsidies; and

§  Making better use of “off-ramps” built into existing contracts.”

Response: Get rid of FIT & MicroFIT and exit existing contracts if possible!

“Recommendation 12-15: Procure larger generation facilities through a request for

proposal process.”

Response: YES--for all power generation over 5 MW!

“Recommendation 12-16: Review the roles of various electricity sector agencies to identify

areas for economies in administration. This could include investigating the potential to

co-ordinate back-office functions.”

Response: YES! But, good luck with the unions on this one!

“Recommendation 12-17: Make wholesale electricity prices inclusive of transmission costs

such as capacity limitations and congestion as part of a comprehensive restructuring of the

wholesale electricity market.”

Response: Inclusive of the Global Adjustment, yes, but inclusive of transmission costs etc., would require too much restructuring.  Split Hydro One into two pieces should have been the recommendation, then sell off the transmission business.

“Recommendation 12-18: Make regulated prices more reflective of wholesale prices by

increasing the on-peak to off-peak price ratio of time-of-use pricing and by making critical peak

pricing available on an opt-in basis.”

Response: The Drummond Commission has mixed up the two!  What he is suggesting would actually drive down what OPG would receive for their regulated hydro and nuclear and drive up the Global Adjustment!

“Recommendation 12-19: Co-ordinate a comprehensive, proactive electricity education

strategy across sector participants that at a minimum covers:

§  Ontario’s electricity resources including nuclear, hydroelectric, thermal and renewable

§  generation;

§  The role and value of electricity import and export markets;

§  Roles and responsibilities of the various entities operating in the electricity sector;

§  The evolving role of the electricity ratepayer in the smart grid paradigm; and

§  Electricity prices — what drives them, how they are communicated and how they are best responded to.”

Response: Huh?  Is this an observation or a recommendation? Sounds like the authors need an education.

“Recommendation 12-20: Strategically promote Ontario’s strengths in the energy sector,

capitalizing on export opportunities for domestic goods and services.” 

Response: We no longer have strengths! Not with the second highest prices in Canada and the highest by next year with the OCEB eliminated!

“Recommendation 20-5: Advocate for federal greenhouse gas mitigation programs to provide

fair and equitable support for Ontario’s clean energy initiatives.” 

Response: We repeat, there is only one taxpayer. Or is he suggesting carbon trading, which Ontario has already signed up for through the Western Climate Initiative?

Conclusion

While the Drummond Commission does a good job at highlighting the bad spending habits of the current government he has treated the electricity sector in a cavalier manner. The report ignored the Energy Ministry's overall impact on the costs to the manufacturing sector and the resulting job losses. Instead of recognizing the effects on the citizens and their abilities to pay electricity price increases that have far outstripped the other profligate spending of this government, he has simply assumed that electricity is a service the Energy Ministry provides similar to the purchase of a lottery ticket from OLG or a bottle of Crown Royal from the LCBO.

Unfortunately, like health care and education, electricity is a basic requirement of all Ontarians, a requirement that is driving many to energy poverty.

Prepared by:

Parker Gallant,

February 15, 2012

Contact us at: windconcerns@gmail.com

http://www.windconcernsontario.ca