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Commentary How Ontario can end the cycle of meddling in electricity markets

Every 10 years or so, the government of Ontario finds it necessary to freeze or cut electricity prices because the costs of an ambitious energy policy prove to be politically unacceptable. This leaves every generation of electricity customers paying for the cost of a failed experiment from a previous generation. We should learn from this experience and implement a governance model for the sector that reviews and mitigates costs before a policy is adopted, not after.

In 1993, the government froze prices because the costs of Ontario Hydro's massive nuclear expansion were leading to double-digit rate increases. In 2002, the government froze prices because the electricity market opening resulted in higher and more volatile prices. In 2017, the government cut prices because of the cost of the green energy and economy ambitions of Dalton McGuinty and George Smitherman. In each case, the underlying cost pressures of the policy were obvious and the resulting escalation of prices was entirely predictable. The consequences of the price interventions were also predictable: future generations were made financially responsible for their parents' policy choices.

Why is Ontario prone to these cycles and what can be done to stop repeating them?

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The best explanation for this is the weakness in the governance structure of our electricity system. The government of the day faces virtually no restrictions on its ability to develop ambitious and costly experiments. The costs of these initiatives are outside of the tax base and are realized years after the plans are launched. So the government is virtually always in the position of developing ambitious plans with costs for which they are unaccountable.

In most North American jurisdictions there are constraints on governments' ability to do this. These constraints are found in the checks and balances provided by independent energy regulatory agencies that are required to approve expenditures of ratepayer money. These agencies take the form of public utility regulators that oversee generation procurements (whether by system operators or utilities). This review typically requires a demonstration that the procurements are needed and economically rational. Equally important, they are conducted through a transparent and deliberative process that forms a check on the impulsive short-term tendencies of governments.

In Ontario, there is no such oversight. While the Auditor-General conducts value-for-money audits years after the commitments are made, there is no prospective review to catch these issues prior to launching into a new round of commitments.

Generation procurements are determined entirely by the government. The system operator – the Independent Electricity System Operator (IESO) – implements government directives. Neither the Ontario Energy Board nor any other independent regulator reviews these procurements. There are no independent criteria, no cost-benefit analysis, no consideration of the need for the procurements, and no review of alternatives. In short, there is virtually no check on the power to procure supply.

The consequence of this is entirely predictable: the government adopts expensive and politically attractive projects. When the costs of those projects start to come in, the government intervenes and passes the costs to future customers. The cycle is then left to start over.

The most recent price cut does nothing to address this structural problem.

Nor is there any reason to expect this will change. To the contrary, in 2016, the government passed Bill 135 to make its agencies even more subordinate to government decision-making. Far from providing checks and balances as they do in other jurisdictions, our energy agencies will be required to satisfy the government that they will, in fact, implement government directions.

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Rather than being a constraint on government discretion as they are in other jurisdictions, our agencies provide the means through which the government exercises its absolute authority over energy procurements.

Without structural changes to Ontario's regulatory governance model, there is no reason to believe that the province's cycle of financially unsustainable energy policy initiatives will end.

George Vegh is head of McCarthy Tétrault's Toronto energy regulation practice and teaches energy regulation at the University of Toronto. He is the former general counsel of the Ontario Energy Board and the author of the C.D. Howe Institute study 'Learning from Mistakes: Improving Governance in the Ontario Electricity Sector.'

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