Ontario’s escalating hydro costs under the Wynne government

Lee Friday – March 17, 2017

A recent opinion poll suggests Kathleen Wynne’s majority Liberal government will suffer a crushing defeat in the 2018 provincial election. Opinions may change, but if the Liberals lose, should we be satisfied that they have been held sufficiently accountable for the significant increase in hydro costs on their watch?

A London Free Press article (February 24, 2017) reports that Ontario Energy Minister Glenn Thibeault admitted

that the government’s green energy policies have contributed to sky-rocketing hydro costs across the province.

The Green Energy Act, introduced in 2009, was intended to expand Ontario’s use of renewable energy like wind, solar and biomass as [a] way to fight climate change. Under the act, the province signed rich fixed term contracts with energy producers. That in turn, drove up costs, Thibeault acknowledged.

“We removed competition within the electricity sector and offered an attractive, standard-offer rate to developers of large, utility-scale wind and solar installations,” Thibeault said. “This made sense at the time, and we drove significant investment in the Province. We now know that competitive tension within and among renewable energy developers could lead to much more attractive pricing. As they say, hindsight is 20-20.”

Let’s review the key points: Climate change – Rich fixed term contracts – Sky-rocketing electricity costs – Competition – Hindsight is 20-20.

CLIMATE  CHANGE

Global warming warriors want us to believe the science is settled, there is no debate, and if we do not act now, the planet is doomed. However, there is a large volume of evidence which says these claims are complete nonsense. The global warming doomsayers are also refuted by more than 30,000 American scientists.

Economist Ryan McMaken writes: “. . . it’s a very bad idea to leave the science of economics and political economy up to climate scientists and their friends in politics who tend to be woefully deficient in their knowledge of how economies work or how scarce goods and amenities can be preserved, obtained, or manufactured.”

Over the years, much damage has been caused by the implementation of government policies based on the recommendations of ‘experts’ in every field, not just climate change. Economist Walter Williams reviews a few erroneous expert predictions. In another article Williams says “Climate change propaganda is simply a ruse for a socialist agenda”, which seems to accurately describe the policies of the Ontario Liberal government (and the federal government). Williams goes on (emphasis added):

In 2010, German economist and Intergovernmental Panel on Climate Change official Ottmar Edenhofer said, “One must say clearly that we redistribute de facto the world’s wealth by climate policy.” The article in which that interview appeared summarized Edenhofer’s views this way: “Climate policy has almost nothing to do anymore with environmental protection. … The next world climate summit in Cancun is actually an economy summit during which the distribution of the world’s resources will be negotiated.”

That is exactly what the Ontario Liberals have done. They arbitrarily increased – substantially – the hydro bills of citizens and businesses, and handed this money over to energy producers. This is a redistribution of resources – a forced transfer of wealth!

RICH  FIXED  TERM  CONTRACTS – and – SKY-ROCKETING  ELECTRICITY  COSTS

The Liberal government signed numerous long term contracts with energy producers at guaranteed prices. These prices tend to be far above the market price. Assume a market price of 2 ½ cents per kWh, which is conservative because for the past couple of years, the price has often been lower. Now look at your hydro bill to see how much you were charged per kWh. Last month, my hydro bill was about double what it would have been at the market price.

A guaranteed price on a long term contract is bad enough, but the government went even further. Some contracts guarantee payment for specified levels of electricity, regardless the level of actual demand. As Global News (July 21, 2016) reported:

when asked not to generate power, electricity producers must still be paid because the Government of Ontario initially agreed to purchase everything the energy producer’s facilities were capable of putting out.

And when too much electricity is generated, it is sold at a loss to the United States, subsidized by Ontario residents:

. . . in 2015 alone, Ontario sold more than 22.6 billion kilowatt hours of electricity – enough to power 2.5 million homes – to places like New York and Michigan at the fair market price of 2.3 cents per kilowatt hour – generating a loss of more than $1.7 billion for Ontario hydro customers.

So while Ontario customers are required to pay for producing green electricity, utility providers in the United States are able to access this same energy source for a fraction of the cost.

In 2015, Ontario Auditor General Bonnie Lysyk said[1] “the excess payments to generators over the market price cost consumers $37 billion during that period (2006 to 2014) and are projected to cost another $133 billion from 2015 to 2032.”

Rich fixed term contracts are the cause. Sky-rocketing electricity costs are the effect.

COMPETITION

Recall the words of Ontario Energy Minister Glenn Thibeault: “We now know that competitive tension within and among renewable energy developers could lead to much more attractive pricing.” Thibeault is right of course, but how is it that they “now know”? The Liberals have not allowed the developers to operate in a genuine free market, so how do they know? Have they studied free market electricity generation in other regions, or other historical periods? Or, have the Liberals suddenly become enlightened because they all enrolled in a basic economics course? Thibeault did not elaborate.

In any event, if Thibeault “now knows” the value of competition, when can we expect the government to legislatively cancel all its electricity contracts[2], repeal its price controls, and allow the free market to satisfy consumer demands with “more attractive pricing?” He didn’t say, and I am unaware of anyone in the mainstream media who challenged him with this question.

HINDSIGHT  IS  20-20

Thibeault followed up his ‘competitive tension’ remark with this: “As they say, hindsight is 20-20.” Both remarks seem disingenuous because he did not say the government would release the industry to the ‘competitive tension’ of the marketplace, thus correcting the mistake which ‘hindsight’ revealed to them.

Over the last ten years, this Liberal boondoggle has taken thousands of dollars out of the pockets of each consumer, and placed this money directly into the pockets of electricity producers. Sadly, there is nothing unusual about this. It reflects the essence of government. It does not matter which party holds power – Liberals, PCs, NDP – they all engage in numerous ‘transfer of wealth’ schemes. Lobbying[3] is the only sector of the economy in which all political parties encourage fierce competition.

Governments always try to propagandize the public into supporting their schemes. In this case, it was, and still is, a dire need to support the production of green energy, no matter the economic consequences – entrepreneurs choosing to base their businesses in jurisdictions with cheaper electricity; exorbitant hydro bills pushing people into poverty, and other people deeper into poverty.

The government never fully explained to the people the extent of the economic hardship which would be inflicted on them. Once again, there is nothing unusual about this. The government always downplays, or denies, the possibility of unpleasant consequences for the schemes they initiate. This works to the benefit of the government, as well as the corporate beneficiaries of the transfer of wealth. The benefits of a policy are typically concentrated within a small group of corporations, while the losses are dispersed among millions of people. Thus, most people are either uninterested, or unable to trace, the gains and losses of a given policy.

It is easy for politicians to give away other peoples’ money, because the loss from a particular policy may be relatively small for each person, and we are usually unaware of the loss. Thousands of policies – various rules, laws, regulations etc. – create thousands of small losses for each of us, yet we remain oblivious. We go about our daily lives, and grumble about our declining standard of living, always unaware of the cause. The total loss absorbed by each person is extremely high. I have written about this here and here.

All of this helps to explain why Thibeault is so flippant with his remarks. He knows the public knows the Liberals screwed up, so he admitted the mistake. However, if this transfer of wealth is intentional, as I believe it to be, it is unlikely a majority of the public perceives it as such. Perhaps then, in his mind, he believes he can help create the illusion of a solution, thus somewhat placating the ignorant masses. Six days after Thibeault’s comments, Premier Kathleen Wynne announced a plan to reduce hydro rates with borrowed money.[4] This money, plus interest, must eventually be repaid. The long-term pain which the loan imposes dwarfs the benefit of a current reduction in hydro rates which the loan facilitates. But perhaps the voters won’t see it this way. All in all, a typical political manoeuvre. Kick the problem down the road a few years in an attempt to relieve the political heat today.

WHAT  IS  THE  SOLUTION ?

The Toronto Sun (January 16, 2016) noted: “Ontario’s hydro system was in need of major repairs when the Liberals won power in 2003. Hydro rates were going up no matter who won that election.”

There is plenty of blame to go around. Yes, the Liberals took a bad problem and made it worse, but none of the political parties have a viable solution. They argue and point fingers at each other. The only thing they agree on is that the free market cannot be trusted – prices would go even higher and we would be subjected to frequent blackouts, they say. However, such assertions lack supporting evidence. The Liberal selloff of Hydro One is often referred to as privatization, which implies a transition to a free market, but this is not true. There is no free market – government ‘electricity’ price controls and other anti-competitive regulations remain in place.

Opponents of the free market often point to California’s disastrous electricity deregulation in the 1990’s. Such critics are either guilty of intentional deception or misinformed about actual events. Adam Summers, policy analyst for the Reason Foundation, wrote in 2005[5]:

Some blame deregulation for the rolling blackouts, soaring spot market prices, and utility bankruptcies that sprang from the energy crisis of 2000 and 2001. But this anger is misplaced. California has never experienced true deregulation. The “deregulation” implemented in 1996 left price controls in place and created “artificial” markets ripe for manipulation and disparities between supply and demand.

By setting price caps below market prices, California limited the profitability of the industry. When wholesale energy costs increased, the price caps prevented energy producers from passing them on to consumers. Wholesale prices rose dramatically for a number of reasons: natural gas prices rose, hot weather in the Southwest increased demand, a relative lack of water in the Northwest minimized the production of hydroelectric energy, and pollution-control permits, which allow industrial companies that produce less pollution than allowed by regulations to sell the difference as “credits” to higher-pollution-producing companies, rose ten-fold, from $4 to $40.

The price caps additionally discouraged potential producers from entering the market and increasing competition, and they discouraged existing producers from investing profits in adding capacity, of which Californians were (and continue to be) in dire need. As a result of the price caps and pressure from politicians and environmentalists, the building of plants and transmission lines slowed dramatically and energy producers were not able to keep up with demand, particularly in the Silicon Valley, where the booming computer and “dot-com” industries led to even sharper increases in electricity demand.

. . . To add insult to injury, when the government stepped in to purchase electricity . . . to try to quell the crisis, not only did it do so at the height of the emergency, when energy prices were highest, it locked in these prices with long-term contracts costing billions of dollars.

Politicians and regulators forced a sham of a “deregulation” scheme upon the energy industry in California, and then blamed the free market when it inevitably failed! The problem was not too much free-market competition; it was too much regulation (despite the “deregulation” doublespeak). The real solution to California’s energy problem is to eliminate price caps and all government regulation, thereby removing barriers to entry, fostering competition, offering consumers maximum choice, and affording providers the greatest incentives to increase capacity and best serve their customers.

In 1986, Howard Baetjer noted:

According to a recent survey, there are 32 communities in the United States that have competing electrical utility companies. Professor Primeaux compared 23 of these communities with others of similar size in the same states served by monopoly electrical utilities. The results are striking. Notwithstanding economy of scale advantages of the monopolies, communities with competing electric companies had average prices for residential sales that were 33 per cent lower. Residents of towns served by two companies, such as Lubbock, Texas, consistently favor the better service resulting from competition. Though state regulatory commissions are usually hostile to competition, “residents who have a choice always vote for competition.”[6]

Make no mistake, consumers benefit from competition, but producers hate it. Thus, the impetus to the corporate/government partnership which outlaws competition.

The solution is genuine competition, not continued monopolization through government!

CONCLUSION

Maybe you believe the dire predictions of the global warming warriors. Maybe you do not. However, what we can say with absolute certainty is that the attempt to address their fears by using the coercive power of government has resulted in unmistakable economic consequences. Energy consumers are paying a steep price, while energy producers are growing wealthy.

What about accountability? If you break your neighbour’s window, accident or not, you pay for the replacement. Whether you paid willingly, or were pressured to pay, the other neighbours are likely to agree this is an appropriate response. You have been held accountable for your actions. You caused the damage, and you paid money to reverse the damage. The compensation comes out of your own pocket.

If the Liberals lose the election next year, there are many who will say they have been held accountable for their green energy mistakes. In fact, this is what we are always told, “If you don’t like the government, then don’t forget to vote, because this is your opportunity to hold the bastards accountable.”

Really? That’s how we define accountability in politics? What about the thousands of dollars lost by each electricity consumer? Who will compensate them? Is our anger diminished simply because we kicked the bums out of office? (What about their replacements – the new group of con artists?) Is it enough to see teary-eyed politicians deliver concession speeches on election night? Do we think a lost election delivers a significant blow to the lives of these losers?

If I walk around the neighbourhood and break all the windows in all the houses, then lose my job, do my neighbours forgive and forget?

The hydro fiasco is the same as all government-wealth-transfer-schemes. All of these schemes rely on a lack of accountability for their development. The perpetrators get to walk away scot-free, whether the scam is discovered or not. No one is required to reverse the damage they caused. And because accountability is non-existent, the damage grows, year after year, decade after decade. The total loss each of us sustains would shock you (I provided a link earlier).

If politicians knew they would be held personally accountable for the damage they inflict – guess what? – they would not inflict any damage!

Over the past couple years, there have been dozens, probably hundreds, of articles written about the Ontario electricity problem. Rapidly increasing hydro bills, and those rich, guaranteed, fixed long term contracts have been frequently mentioned in the same article. With this media coverage, a few people have figured it out – they see energy producers benefitting from the losses they are suffering. Perhaps many more people will make the connection, and realize this is not a mistake, and therefore it is not a one off, as government is simply a conduit for the transfer of wealth to special interest groups, regardless of which party runs the show. Then, there will be reason for hope. But until then, we will always get the government we deserve.

 

[1] Lorrie Goldstein Why Hydro Costs So Much, Dalton McGuinty and Kathleen Wynne blundered into green energy, without doing their homework (Toronto Sun, January 16, 2016)

[2] Lawrence Solomon: Yes, Ontario’s Liberals can cancel their terrible renewable power contracts—and they should do it now (Financial Post, September 15, 2016)

[3] Adrian Morrow, An inside look at cash-for-access Ontario Liberal fundraisers (The Globe and Mail, July 6, 2016)

[4] Ontario hydro cut means billions in interest costs (Toronto Sun, March 2, 2017)

[5] Adam B. Summers, The Myth of Energy Deregulation (Mises Institute, November 7, 2005)

[6] Howard Baetjer, Jr., Deregulate the Utilities (Foundation for Economic Education, September 1, 1986) [sources provided by Baetjer: “Power Stations: Some Like Them Competitive,” Reason. November, 1985, p. 18; Walter Primeaux, “Total Deregulation of Electrical Utilities: A Viable Policy Choice,” Unnatural Monopolies. Robert W. Poole, ed. (Lexington Books, Lexington, Massachusetts, 1985) p. 136; Jan Bellamy, “Two Utilities Are Better Than One,” Reason. October. 1981, p. 28]