Canadian Manufacturing

How does the hydro system work in Ontario? The Canadian Press explains

by Michelle McQuigge, The Canadian Press   

Canadian Manufacturing
Regulation Sustainability Energy Infrastructure

Electricity is one of the most contentious issues of the upcoming Ontario election, but the reality is more complicated than political soundbites make it out to be

TORONTO—The price of electricity in Ontario has long been a sore point for many in the province, with the governing Liberals being taken to task for rising hydo rates for years. But how does the system work? And would proposals put forward by the Progressive Conservatives and the New Democrats ahead of next month’s election improve the situation? The Canadian Press tried to tackle those questions.

How did we get to the current state of affairs?

Hydro has figured largely in political discourse for decades.

“In Ontario, electricity is to premiers as the Middle East is to American Presidents,” said Keith Stewart, senior energy strategist for Green Peace Canada. “It’s always somewhere on their desks … and it’s never easy.”


Much of the province’s history with electricity is bound up in a now-defunct entity that came to be known as Ontario Hydro. Stewart said it was responsible for all three components of the province’s electricity system—owning and operating the power producers, transmitting the power, and regulating rates.

Ontario Hydro became the source of political friction starting in roughly the 1970s, culminating in the decision to privatize the corporation in 1999. The government of the time, led by Progressive Conservative Premier Mike Harris, broke Ontario Hydro up into the hodgepodge of entities that make up Ontario’s current system.

Several agencies currently handle tasks previously managed by Ontario Hydro.

Ontario Power Generation (OPG) is the owner and operator of many of Ontario’s power generators, such as nuclear and hydroelectric plants.

Transmission is now primarily handled by Hydro One, which funnels power to a number of local utilities who in turn ensure it reaches customers.

The Independent Electricity System Operator (IESO) co-ordinates Ontario’s electricity needs, balancing the supply of power with demand and directing the flow of electricity from various generation sources across the province’s grid of transmission lines. It also handles long-term planning for the province and is responsible for sourcing long-term contracts with electricity generators, including wind and solar power companies. These contracts can be up to 20 years in length.

The Ontario Energy Board (OEB) regulates the electricity and natural gas sectors, approves and sets delivery rates for power distribution and transmission as well as prices for consumers.

Why have rates gone up?

Hydro rates have more than doubled in the past decade, taking a major toll on Premier Kathleen Wynne’s approval ratings. Analysts say there are several factors behind the increase and argue many of them have benefits that are more evident in the long-term.

Stewart said the previous Tory government capped hydro rates at what he called an unrealistically low number of 3.5 cents per kilowatt hour back in 2000. The Liberals left that rate in place until 2004.

Stewart attributed much of the rate spike to upgrades the province made to its aging infrastructure. This involved refurbishing nuclear plants and building new generating facilities to replace the coal-fired power plants the province phased out as of 2014.

But analysts agree the long-term contracts signed with power producers have also played a key role. Michael Trebilcock, a law professor with the University of Toronto, authored a paper for the C.D. Howe Institute criticizing the rates the province negotiated starting in 2009 when the Green Energy Act took effect.

He said the rates, often locked in for 20 years, were at least twice as high as market rates and in some instances considerably higher. The discrepancy is all the more stark since market rates for wind and solar-powered electricity have tumbled in recent years, he added.

How does Ontario compare to other jurisdictions?

Monthly bills in San Francisco, New York, Boston, Charlottetown, Regina and Halifax in 2017 were higher than bills in Ontario, according to data from the OEB.

Why is hydro so politically charged right now?

Last year the Liberals tried to quell anger over hydro rates by adopting the Fair Hydro Act and slashing prices by 25 per cent.

The plan lowers time-of-use rates by letting customers off the hook for a portion of the global adjustment—a charge consumers pay for above-market rates to power producers—for the next 10 years. In the meantime, producers will continue being paid the same, so Ontario Power Generation has been tapped to oversee the debt used to pay that difference.

Auditor General Bonnie Lysyk has accused the province of underestimating and misrepresenting the financial impact of the plan and shifting the increased cost to a new generation of rate payers.

What about Hydro One privatization?

Hydro One was partially privatized in November 2015, with the government saying it planned to use the sale of shares to fund transit and infrastructure projects. By December 2017, the province had sold off 53 per cent of its stake.

Stewart and Trebilcock say Hydro One has a monopoly on transmission and say the rates it charges are tightly regulated by the OEB.

“Whether it’s owned by the provincial-owned or owned only 40 per cent by the provincial government doesn’t alter the fact that it’s a monopoly, and monopolies have a tendency to charge too much and be slack in holding down costs,” he said. “Maybe that’s happened, but that would happen whether the government owned it or it was privatized.”

Both Trebilcock and Stewart, moreover, agree that allowing Hydro One to function as a monopoly is for the best.

Statistics from the Environmental Commissioner of Ontario suggest privatization has had minimal impact on rates. A recent report found transmission rates, which currently account for seven per cent of overall electricity costs, decreased slightly from 2006 to 2016.

Will any of the political solutions put forward on the campaign trail make any difference?

Experts feel Progressive Conservative Leader Doug Ford and NDP Leader Andrea Horwath are missing the point with their campaign pledges, which have largely centred on Hydro One.

Ford has promised to fire the entire board of the company and railed against high executive salaries. Horwath has pledged to return the company to public ownership. Both have vowed to slash rates—Ford by 12 per cent, Horwath by 30—and both have said they would renegotiate private power contracts where possible.

But Stewart said everyone on the campaign trail is talking about a hydro model that’s increasingly antiquated, saying a centralized approach makes less sense as people adopt more green technology and shift to producing their own power.

“The old public monopoly model of Ontario Hydro is not a good one for this world,” he said. “That isn’t going to get talked about in the election, but I think people within the system know that that’s the big change that’s coming.”


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