Ontario’s new Fair Hydro Plan Act, 2017¹ (“FHP Act”), which received Royal Assent June 1, 2017, upends Ontario Energy Board (OEB) oversight over rates paid by households, small businesses, and farm consumers, restructures the financial architecture of Ontario’s power system, and commingles taxpayer and ratepayer interests more than ever, but leaves question marks about how the massive cost deferral it creates will be recovered.

Ratemaking Reforms

While under Sections 7 and 8 of the new legislation, residential rates for the commodity portion of the bill will still be communicated by the OEB to LDCs, submetering providers, and the public, these same sections of the FHP Act have removed from the OEB any discretion with respect to rates and severed any relationship between costs and rates. Instead, now the overall rate levels paid by households will be whatever the Minister deems to be appropriate (see Annex I).

Section 11 of the legislation extends the Minister’s rate making authority into the indefinite future but provides no clarity as to the process that the Minister will follow in making such determinations (see Annex I).

The FHP Act also replaces the traditional administrative process for ratemaking centered on Board Orders. Instead, pursuant to Section 44 of the FHP Act, LDCs and submetering providers are required to comply with the new FHP rates as a the condition of license.

Nothing in the FHP Act changes the Board’s jurisdiction with respect to distribution and transmission wires rates. However, since the escalation of the overall billing rate to small customers is now fixed at inflation, if distribution and transmission rates rise faster than inflation, the financial effect will be to push more commodity cost into the FHP deferral account than would otherwise be the case. Distribution and transmission rate changes will have no immediate impact on billing rates for small customers, although those wires charges remain a real interest of customers larger than the threshold for FHP rates.

New Financial Architecture

The historical link between costs and rates — a link that had been central to the design of Ontario’s power system continuously since the beginning of Ontario Hydro, and only briefly interrupted during the Ernie Eves rate freeze that applied in 2003 and early 2004 — is gone.

As specified in the FHP Act, final total rates to most household customers are indexed to the total rates that would have been charged by Toronto Hydro on May 1, 2017 had commodity rate adjustments related to the FHP not been made. The overall rate level in the first year of the FHP is determined by the requirement for an initial 25 per cent cut, adjusted in future years with annual inflationary increases.²

Based on analysis from the Ontario legislature’s Financial Accountability Officer (FAO), the scale of the gap between costs and rates, leaving aside rate reductions arising from costs transferred from ratepayers to taxpayer, is the order of $2.6 billion per year for the initial four years of the Plan.³

The gap the FHP creates between costs and rates is being made up with borrowing either by OPG or some other “Financial Services Manager” yet to be named by the government.

Taxpayer Exposure

The FHP marks an unprecedented commingling of taxpayers and ratepayer interests.

The FHP increases payouts under the Ontario Electricity Support Program aimed at low-income consumers and shifts funding responsibility from ratepayers to taxpayers but leaves the OEB in charge of administering this additional electricity-related social program.

The FHP also shifts most funding responsibility for the existing but expanded Rural and Remote Rate Protection program from ratepayers to taxpayers and establishes two new taxpayer-funded programs, a Distribution Rate Protection (DRP) program reducing rates for distribution rate-protected residential consumers and a First Nations On-reserve Delivery Credit which refunds 100 per cent of the delivery charge for on-reserve consumers.

The combined impact of these programs will result in an annual taxpayer cost of $1.8 billion per year according to the FAO.⁴

One upshot is that much of Hydro One’s Ontario distribution income will now flow from taxpayers, rather than ratepayers.

Future Recovery of the Revenue Shortfall

The longer the FHP stays in place, the bigger the financial challenges will be for future ratepayers and taxpayers. When the time comes to clear the massive deferral account created by the FHP, the government of the day will face very limited options.

Recovering costs for the FHP will take place when ratepayers are already burdened by a massive revenue requirement. Taxing electricity to recover the cost would result in a rate shock, risking further consumer bypass from self-generation and demand erosion.

The Act includes measures related to the eventual cost recovery phase of the plan. Two separate clauses of the Act include prohibitions preventing customers from bypassing — avoiding repayment using sources of electricity other than grid supply. While the Act does not specify the customer types to be targeted for cost recovery, one might presume that since only small volume customers benefitted from the FHP, it would be inappropriate to shift the cost recovery onto other classes. Since bypass in today’s environment is normally associated with larger users, it appears that the drafters of the Act may have contemplated either shifting recovery of some deferred costs to larger users or technology changes that might someday make home-supplied power a realistic option and thereby threaten the recovery of deferred costs from small consumers.

The FHP signals a change in policy direction with respect to bypass. Current conservation programs provide cost-shifting and direct subsidy incentives for industrial customers to install behind-the-fence generation. Many policy efforts in recent years have pushed toward distributed generation, including smart meters and smart grid.

Another potential complication for future recovery of deferred costs is that some of the deferred costs appear to have arisen without a sound legal foundation. In the immediate run-up to the new FHP Act regime, the government’s rate initiative directly conflicted with existing laws and regulations⁵ but was implemented by the OEB regardless. Notwithstanding prevailing requirements, the RPP rate for May 2017, recovered less than the full commodity cost of electricity.

In an April 10 letter, the Minister appears to have encouraged the OEB to adjust downward the RPP in anticipation of the FHP Act but did not order the Board to do so:

These proposed details are being set out for the OEB at this time so that they can be considered as inputs into the OEB’s review of the Regulated Price Plan (RPP) prices for May 1, 2017, as the OEB considers appropriate and in keeping with its normal forecasting activities.⁶

In a public statement addressing the OEB’s April 20th announcement of the RPP rate reduction, Energy Minister Glenn Thibeault praised the agency for acting “with the anticipated implementation of our government’s proposed legislation”.⁷

Reg. 206/17 pursuant to the FHP Act contains a provision at Section 16 that seeks to create an opportunity to recover the IESO’s revenue shortfall created by the OEB’s RPP Order for May 1, 2017. The regulation allows the IESO to recover:

Any variance account balances in variance accounts established and maintained under subsection 25.33 (5) of the Electricity Act, 1998 and costs incurred in relation to the balances.⁸

While it appears that no complaints about illegal billing arose specific to the May 2017 charges, an open question remains about the legitimacy of eventual charges required to recover deferral account balances arising from that period although it is possible that retroactivity provisions may be argued.

Conclusion

The Fair Hydro Plan Act arises from a political and policy context of increasing government intervention in the sector and decreasing agency authority. From the perspective of small volume customers, final rates are now determined by the Minister and OEB processes are a sideshow.

Long gone are the days when Ontario’s policy was that consumers must pay what former Energy Minister Dwight Duncan once called the “real price for electricity” based on a transparent breakdown of all component bill charges.

While Ontario Hydro’s insolvency was managed without taxpayer funding, the shift to taxpayer-funded electricity already begun with the Fair Hydro Plan may become a much larger burden on future provincial budgets. Only time will tell, but increased commingling of ratepayer and taxpayer interests might portend more extensive political intervention in Ontario’s power system decision-making than is the case today.

Now, the overall cost of power for households, small businesses, and farms is determined by ministerial fiat without any defined public process and below cost but with the problem of figuring out how the deferred principal and interest costs are to be disposed of left for future determination.

ANNEX I

Here are the sections where the Minister’s new jurisdiction to set the overall billing rate for specified customers is created:

Regulated rate consumers, first adjustments

7 (1)  Despite clause 79.16 (1) (b) of the Ontario Energy Board Act, 1998, the electricity rates payable by regulated rate consumers for the period beginning on July 1, 2017 and ending on April 30, 2018 are the rates determined by the Board under this section and in accordance with the regulations.

Other specified consumers, first adjustments

8 (1) For the period beginning on July 1, 2017 and ending on April 30, 2018, the adjustments made under section 25.33 of the Electricity Act, 1998 shall, with respect to specified consumers who are not regulated rate consumers, be further adjusted by electricity vendors in accordance with the regulations and in accordance with the determinations made by the Board in accordance with the regulations.

Regulations

(2)  The regulations may specify different adjustments, or methods of determining the adjustments, to be made in respect of prescribed classes of specified consumers who are not regulated rate consumers.

Subsequent adjustments

11 (1)  Despite clause 79.16 (1) (b) of the Ontario Energy Board Act, 1998 and subject to subsection (2), the Lieutenant Governor in Council may prescribe methodologies to be applied by the Board after April 30, 2018 for the purpose of determining,

1. electricity rates for regulated rate consumers; or
2. further adjustments to be applied by electricity vendors, in accordance with the regulations and in accordance with the Board’s determinations, to the adjustments made under section 25.33 of the Electricity Act, 1998 in respect of specified consumers who are not regulated rate consumers.

Regulations

(2)  The Lieutenant Governor in Council shall have regard to the following in making the regulations:

1. The purposes of this Act.
2. The clean energy costs borne by specified consumers over time.
3. Such other matters as may be prescribed.

(3)  The regulations may prescribe,

1. different methodologies for different prescribed classes of specified consumers and in respect of different periods of time; and
2. different adjustments to be applied in respect of prescribed classes of specified consumers who are not regulated rate consumers and in respect of different periods of time.

* Mr. Tom Adams is an independent energy and environmental advisor and researcher focused on energy consumer concerns, mostly in Eastern Canada. He has worked for several environmental organizations and served on the Ontario Independent Electricity Market Operator Board of Directors and the Ontario Centre for Excellence for Energy Board of Management. He is a media commentator and guest newspaper columnist. He has published peer-reviewed papers in a range of fields. He has presented expert testimony before many legislative committees and regulatory tribunals in Canada.

1. Fair Hydro Plan Act, 2017, SO 2017, c 16, Schedule 1.
2. Ibid, s 7.
3. Financial Accountability Office of Ontario, Fair Hydro Plan: An Assessment of the Fiscal Impact of the Province’s Fair Hydro Plan (Toronto: FAO, 2017).
4. Ibid.
5. Before the FHP Act, then current law, as reflected in Section 79.16 of the Ontario Energy Board Act, 1998, SO 1998, c 15, Schedule B and O Reg 95/05, and as articulated in the OEB’s Standard Supply Service Code, the OEB’s Regulated Price Plan (RPP) Manual, and the OEB’s Retail Settlement Code all required the OEB to set the commodity portion of household power rates to recover the full cost of electricity through something called the Regulated Price Plan.
6. Letter from Energy Minister Glenn Thibeault to OEB Chair Rosemarie Leclair (10 April, 2017), online: <https://www.oeb.ca/newsroom/2017/fair-hydro-act-2017>.
7. Ontario Ministry of Energy, Press Release, “Statement from the Minister of Energy on the Ontario Energy Board’s New Regulated Price Plan (RPP) Electricity Rate Announcement” (20 April 2017), online: <https://news.ontario.ca/mei/en/2017/04/statement-from-the-minister-of-energy-on-the-ontario-energy-boards-new-regulated-price-plan-rpp-elec.html>.
8. O Reg 206/17, s 16.