On March 2, the Ontario Government announced its latest package of initiatives designed to reduce hydro rates. The key initiative in the package (the re-financing of the Global Adjustment) was widely compared to converting a 20-year home mortgage to a 30-year mortgage and amounted to little more than a cheap accounting trick designed to bribe Ontarians with their own money. The re-financing initiative was the latest in a series of Liberal hydro initiatives that set aside sensible electricity policy and instead, embraced private-sector style financial engineering in order to pursue political – as opposed to policy – objectives.
The purpose of this post is to provide some context and analysis to the March 2 announcement as well as other recent Ontario government initiatives on the hydro file.
To achieve rate reduction, the Ontario government had three broad approaches to energy policy to choose from. It could have:
- Dealt in a targeted way with the affordability challenges of those paying an unacceptably high proportion of their household income on home energy costs. This may very well have involved additional assistance for a good chunk of the ratepayer base but it certainly didn’t need to include an increased hydro subsidy for everyone;
- Dealt with the “structural” inefficiencies that have contributed to spiralling system costs and therefore steadily rising hydro bills; or
- Engaged in a range of complex financial engineering exercises that simply shift current energy costs to future generations of ratepayers and tax payers.
Clearly, a high profile measure such as the re-financing of the Global Adjustment (the key March 2 announcement) falls into the “financial engineering” category.
That said, the government has implemented several low-profile initiatives that deal directly with the real hydro affordability crises facing many Ontarians. Moreover, the government is beginning to explore some market design changes that deal with the “structural” inefficiencies that have driven up the overall costs of the system. Unfortunately, the perceived political need to dramatically reduce all Ontarians’ hydro bills in the short-term has won out. The result is that the more nuanced and targeted initiatives that address the real problems of affordability and unnecessary system costs are taking a back seat to the misguided (but splashier) financial engineering initiatives. Continue reading