Ontario’s “Fair Hydro Plan” comes at a (future) cost

Ontario’s “Fair Hydro Plan” has reduced current electricity bills for Ontario consumers by 25 per cent, effective July 1, 2017. 1  This is being accomplished through a number of measures, including the removal of the provincial portion of HST from electricity bills, shifting the costs of the Ontario Electricity Support Program (OESP) and the Rural or Remote Rate Protection Program (RRRP) to the tax base and what the Government describes as “refinancing a portion of the Global Adjustment (GA)”, to be recovered over a longer term.2  The implementation of the “Fair Hydro Plan” is being done through new legislation (the Fair Hydro Plan Act, 2017)3, supporting Regulations4 and new “rates” approved by the Ontario Energy Board (OEB) which reduce the commodity price paid by Regulated Price Plan (RPP) customers5.  The “Fair Hydro Plan” is not intended to have any impact on payments to generators, distributors and transmitters.

On May 24, 2017, Ontario’s Financial Accountability Office (FAO) published its Assessment of the Fiscal Impact of the Province’s Fair Hydro Plan6.  This Assessment reviews how Ontario’s “Fair Hydro Plan” will impact electricity ratepayers and Provincial finances based on the plan parameters indicated by the Government.  As set out in its media release, the FAO estimates that the “Fair Hydro Plan” will cost the Province $45 billion while providing overall savings to electricity ratepayers of $24 billion.  This results in a net cost to Ontarians of $21 billion.7

The FAO’s Assessment of the “Fair Hydro Plan”8 was prepared in response to a request from a member of the Ontario Legislature.  It reviews the FAO’s estimate of the fiscal impact on the Province and electricity ratepayers over 30 years.

The FAO calculates that under the “Fair Hydro Plan”, ratepayers will save $24 billion versus the status quo over 30 years.  This amount is the difference between savings from removing part of HST and the cost of support programs from electricity bills compared to the costs to ratepayers of refinancing the GA.9  The FAO confirms what is already known, which is that the refinancing of the GA will save money for current ratepayers, but will cost future ratepayers more (because they will have to pay deferred GA costs, along with financing costs).  As noted by the FAO, average electricity bills are projected to decrease by 25 per cent in 2017 and will only increase by inflation until 2021.  However, after that time, electricity bills are projected to increase by an average of 6.8 per cent annually until the end of 2027 and then after 2027, electricity bills are projected to be an average of 4 per cent higher under the “Fair Hydro Plan” than the status quo.  The FAO’s illustration of the drivers of the changes in electricity bills is reproduced in the table below.10


From the Province’s perspective, the FAO concludes that the “Fair Hydro Plan” will cost Ontarians (taxpayers) $45 billion.11  This represents the foregone revenue from removing the provincial portion of HST from electricity bills ($42 billion) and the costs of funding electricity relief programs ($3 billion).  In coming to this conclusion, the FAO notes that while ratepayers will benefit from not paying HST or electricity relief program costs, this does not represent a true savings to Ontarians since tax revenues will be reduced and relief programs will be funded from other tax revenues.

In total, the FAO concludes that the net cost of the “Fair Hydro Plan” is $21 billion, which represents the difference between the ratepayer benefits and the costs to the Province.12

The FAO’s Assessment includes a caution that the costs of the “Fair Hydro Plan” may turn out to be higher than forecast.13  This could happen where interest rates are higher than expected (increasing the GA refinancing costs), or where the Government has to borrow (and incur interest costs) to replace the foregone revenues from removing provincial HST from electricity bills.  Where these things occur, the net costs of the “Fair Hydro Plan” will be higher.

One section of the FAO Assessment addresses the “Fair Hydro Plan’s” potential impact on the provincial debt.14  The FAO Assessment notes that while the plan involves a complicated accounting structure that will increase gross public debt, the Government intends to create a regulatory asset (in expectation of future recoveries from ratepayers) to offset the accumulating borrowing in order to shield the Province’s net debt from an unfavourable impact.  The FAO responds to this aspect of the “Fair Hydro Plan” by indicating, “[d]ue to the nature of the proposed financing transaction, the FAO recommends that Members of Provincial Parliament obtain assurance from the Office of the Auditor General of Ontario that the Province’s proposed accounting treatment for the electricity cost refinancing meets public sector accounting standards and will not impact the Province’s annual surplus / deficit and net debt.”

On the same day that the FAO Assessment was released, Ontario’s Auditor General (Bonnie Lysyk) appeared before the Standing Committee on Justice Policy, which was reviewing the then-proposed Fair Hydro Plan Act, 2017.15  Drawing upon a historical case from 2000 (also in the electricity sector), the Auditor General disagreed with the Government’s plan to convert deferred rate recovery into a regulatory asset.  The Auditor General concluded that, “borrowings are debt; unearned revenue is not an asset today; and when your expenses exceed your revenues, you incur a deficit.”  To date, there has been no substantive reply from the Government to the comments from the Auditor General.

* David Stevens is a partner at Aird & Berlis LLP, and is an editor and contributor for EnergyInsider.ca.

  1. Ontario Government, “Ontario’s Fair Hydro Plan” (2017), online: <https://www.ontario.ca/page/ontarios-fair-hydro-plan>.
  2. Ontario, Ministry of Energy, “Ontario’s Fair Hydro Act, 2017” (11 May 2017), online:  <https://news.ontario.ca/mei/en/2017/05/ontarios-fair-hydro-act-2017.html>.
  3. Ontario Fair Hydro 2017, SO 2017, c 16, Schedule 1.
  4. For example, Fair Adjustment under Part II of the Act, O Reg 195/17.
  5. Ontario Energy Board, News Release, “Electricity prices are dropping again on July 1” ( 22 June 2017), online: <https://www.oeb.ca/sites/default/files/rpp-newsrelease-20170622.pdf> – note that for consumers not subject to the RPP (for example, those with electricity retailer contracts), the impact of the “Fair Hydro Plan” is seen through a reduction to GA charges.
  6. Financial Accountability Office of Ontario, An Assessment of the Fiscal Impact of the Province’s Fair Hydro Plan (Toronto: FAO, 2017), online: <http://www.fao-on.org/web/default/files/publications/Fair%20Hydro/Fair%20Hydro%20Plan.pdf> [“FAO Assessment”].
  7. Financial Accountability Office of Ontario, Media Release, “Fair Hydro Plan Provides Temporary Electricity Bill Relief but Higher Bills by 2028” (24 May 2017), online:  <http://www.fao-on.org/en/Blog/media/Fair_hydro_MR>.
  8. FAO Assessment, supra note 6.
  9. The impact of the “Fair Hydro Plan” on ratepayers is discussed in FAO Assessment, ibid at 3-5.
  10. FAO Assessment, ibid at 4.
  11. The impact of the “Fair Hydro Plan” on the Province’s finances is discussed in FAO Assessment, ibid at 6-7.
  12. FAO Assessment, ibid at 9.
  13. FAO Assessment, ibid at 7.
  14. FAO Assessment, ibid at 8.
  15. Legislative Assembly of Ontario, “Committee Documents: Standing Committee on Justice Policy” (24 May 2017), which includes Ms. Lysyk’s testimony, online: <http://www.ontla.on.ca/web/committee-proceedings/committee_transcripts_details.do?locale=en&Date=2017-05-24&ParlCommID=9000&DocumentID=32287#P400_83203>.

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