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Hydro One Doesn’t Matter

HYDRO ONE DOESN’T MATTER.  WHY ARE POLITICAL PARTIES AND THE MEDIA TRYING TO FIX IT?

Consider a typical family ordering food for delivery to their home. Assume that the restaurant used to charge $40 five years ago but is now charging $80 for the same food. Assume the delivery service used to charge $10, but is now charging $11. Thus, in five years, the total cost of the delivered food has increased from $50 to $91. Would it make sense to blame the delivery service’s $1 fare increase for the entire price increase when the restaurant has doubled its prices? Of course not. Yet that is what the political parties and some media critics have been doing with Hydro One. The only reason I can think of for this mistake is that they are confusing Hydro One with the old Ontario Hydro, which used to generate and deliver electricity but was broken up years ago. 

For a typical Toronto Hydro customer’s 2018 electricity bill of $123 a month, Hydro One would represent no more than 8% of that total bill, around $10.31. Why is everyone obsessed with “fixing” the 8% while ignoring the remaining 92%, which is truly broken?

Like the food delivery service, Hydro One is just a wires delivery system. It doesn’t make the product, which represents the majority of the price we pay. To roughly three quarters of Ontario’s electricity customers Hydro One only provides the high voltage transmission lines between the electricity generators and the local distribution companies (like Toronto Hydro or Ottawa Hydro) that provide the connection to the customers. To the other one quarter of (largely rural) customers, Hydro One provides both transmission and distribution, but still only delivery. 

The NDP have tried to imply that the privatization of Hydro One is responsible for rapidly escalating electricity prices in Ontario. Regardless of who owns the wires, the rates charged by Hydro One are regulated by the Ontario Energy Board. The price of electricity itself is unregulated. In fact, Hydro One price increases since privatization have been very small, in line with what they were prior to privatization. Buying back Hydro One would be costly, but would accomplish nothing to lower electricity rates.  Where is the NDP’s plan for reducing the 92% of electricity costs?

Incidentally, the NDP have also promised to “aggressively renegotiate” very costly power contracts the Province entered into under premiers McGuinty and Wynne. Negotiation can’t work, because anyone who has a contract is under no obligation to accept a less profitable contract.  There are only two ways to get rid of these legally binding contracts: buy them out or legislate to nullify them.  

Buying them out means spending more public money to pay these electricity generators the profit they would have earned if their contracts had been taken to their expiry date. Then electricity consumers would have to pay someone else to generate the electricity that the bought out generators are no longer generating.  Paying twice makes no economic sense.  It is highly unlikely that any government would do that.

Legislation to nullify the contracts and to prohibit any payment for lost profit could be enacted.  But this would result in lawsuits by the contract holders.  Legal opinions are divided on whether such legislation would be upheld or struck down by the courts.  However, most of the over-priced contracts are for solar and wind power, contracts entered into for “green energy”.  This would remove most of Ontario’s renewable generation. It would be a huge political embarrassment to renege on green power contracts encouraged by the McGuinty government as part of making Ontario a leader in renewable sources of electricity.  

The Progressive Conservatives have promised to fire the Hydro One CEO and the entire Board. What would that accomplish when the wires company bears no responsibility for rapidly escalating electricity rates? Undoubtedly, this would cost electricity consumers more money rather than less. The CEO cannot be fired by anyone other than the Hydro One Board because he is not an Ontario Government employee. Theoretically, the government could replace Board members in accordance with its percentage of shareholding (47.4% of the common shares) – which may not be enough to control the Board and fire the CEO. But he has a legally binding contract which includes a generous severance payment upon termination for any reason. He will therefore have to be paid between $6-10 million not to work. His replacement will also want to be paid (probably several million) to run a company of that size (about 6 billion annual revenue). Thus, the total payment for the current CEO and the future CEO will undoubtedly exceed the payment for just the current CEO, and with no material effect on electricity prices.  The political axing of the CEO and Board would make it difficult to attract competent replacements, so board membership would be used as a reward for friends of the party in power.

It is also unclear whether the government could simply fire the Hydro One Board members for political reasons and without cause. The last time a government tried that was in 1996, under former PC Premier Mike Harris. The fired Board members took the government to court and won (Murphy v. Ontario (Attorney General), 1996 CanLII 7968 (ON SC)). They were subsequently paid compensation for the Board fees they would have earned had they not been unlawfully dismissed. This could happen again, which would cost more money than it would save. 

And in any event, these firings would do nothing for 92% of the price of electricity in Ontario.  Where is the PC’s plan for reducing the 92% of electricity costs?

The governing Liberal Party has said very little about electricity prices – understandably, because electricity rates have risen rapidly under their government, and are projected to rise even more rapidly in the future. However, Premier Wynne has correctly pointed out that Hydro One has not increased its rates substantially.

Marcus Gee, an excellent Globe and Mail columnist, recently criticized all three political parties for failing to offer an effective cure for the ills of Hydro One. (Globe and Mail, May 15, 2018, “When it comes to proposed Hydro One solutions, voters must choose between three poor options”). It is concerning that a journalist of his calibre would also focus on a futile debate about “fixing” 8% of the cost. It is time to switch the focus to the 92%.  A lot of the price increase of Ontario’s electricity over the next 30 years has already been baked into the debt repayment schedules set by the current government. Doing something to fix this will not be easy. Indeed, it may be impossible. Electricity prices are escalating to levels that will cause manufacturing plants to close and move elsewhere.  As well, many people with low incomes will be unable to pay their electricity bills and still cover their rent and food expenses. 

Politicians deciding what generation to build, how much to pay for renewables, and how much to charge consumers have brought about the mess we are in.  Politicians make these decisions based on what is politically rational for the next election, not what is economically rational now and for future generations of consumers.   Ontario has to get the politics out of electricity plant construction and pricing.  We need to let markets work to set prices for generation, and let the Ontario Energy Board regulate the monopoly wires part.  Do any of the political parties want to discuss this?

Categories: Uncategorized

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