Ontario’s powerful sleight of hand

…Put another way, the new power system rewards inefficiency — the bigger the boondoggles, the fatter the government coffers.

by Lawrence Solomon, Financial Post

The Ontario government’s clever Ontario Clean Energy Benefit — a 10% rebate on the rapidly escalating power bills of Ontario voters — is a win-win-win proposition. A win for the Liberal government, which needs to blunt a consumer revolt before next year’s election. A win for the power companies it owns, which now have a go-ahead to continue to escalate their rates. And a win for renewable energy suppliers and their environmental group allies, who had feared the Ontario government would curb the lavish solar and wind contracts that have been clobbering consumers.

The rebate scheme — which is sure to dampen public revulsion at the way the power system is being managed — is especially impressive in how expertly the government has disguised its activities. To read the press reports, the government is deftly rejigging its provincial borrowing and fast-forwarding revenues from a long-term land registry contract to finance the rebate during a five-year transition period to a cleaner energy infrastructure. Sweep aside these sleight-of-hand explanations and the reality is much simpler: The provincial government is in reality providing voters with a five-year break on their HST while rapidly escalating the power prices that all consumers face. Because the province and the municipalities overwhelmingly own the power system, they are making off like bandits as power consumers get squeezed.

Under the old Ontario Hydro monopoly, the provincial power system was run on a non-profit basis. While the absence of a profit motive eliminated an incentive to be efficient, the system did have one virtue — the government couldn’t milk it for revenue. Under the new government-run monopoly system, the power system is run on a for-profit basis, with the profit roughly proportionate to its equity. The more expensive the system, the higher the dividends, fees and taxes that accrue to the government. Put another way, the new power system rewards inefficiency — the bigger the boondoggles, the fatter the government coffers. The new system is already quietly filling those coffers with some $2-billion a year that wasn’t available to them under the old Ontario Hydro system.

The Ontario Clean Energy Benefit is also a lose-lose-lose proposition. Two losers are the opposition NDP and Conservatives, who had called for the Liberals to reverse their position and exempt power sales from the HST. Had the Liberals reversed the HST explicitly, they would have seemed weak and desperate, giving their political opponents a club to beat them with while forever losing a large source of tax revenue. Instead, the Liberals bested their opponents by calling their HST bid, which was worth 8%, and raising it to 10% under a different name. The political opponents came across as pikers and the Liberals as heroes for the day.

Large industrial electricity consumers are also losers. Because these companies don’t vote, the Liberals would have drawn no political benefit in applying Ontario Clean Energy Benefit to them. To the contrary, by collecting the HST from them, the Liberals are obtaining the cash they need to top up the rebate to 10% from 8%. In effect, the Liberal government is merely transferring the HST rebate that the large industrial consumers aren’t getting to the pot of money going to the smaller consumers who can vote — residential consumers, small business owners and farmers.

Of course, under the Ontario scheme, all consumers become losers. Rates, by the government’s own accounting, will be climbing another 46% over the next five years, and then rates will jolt up another 10% as the Ontario Clean Energy Benefit expires. By then, the new power system may also have expired. It took Ontario Hydro, running as a government-owned non-profit, 90 years to go bankrupt. Hydro’s government-owned for-profit successors will be far quicker at reaching bankruptcy.

LawrenceSolomon@nextcity.com———

-Lawrence Solomon is executive director of Energy Probe and the author of The Deniers.

5 thoughts on “Ontario’s powerful sleight of hand

  1. Seems this power situation that Ontario finds itself in is the direct result of the eco-nut thinking that the Province has been subjected to over the past several years.

    Mission accomplished by the eco-nuts. Make electricity so expensive that people can’t afford it. Businesses run out of the Province. Waht a great way it has been to save planet earth.

  2. Psst Dalton…”now you see it, now you don’t” can refer to more than simple games for children…it can also be applied to Provincial Government political parties.

    Take for instance the Ontario Provincial Liberal party: November 20, 2010 – “now you see it”. October 7, 2011 – “now you don’t”.

    Funny how that works isn’t it.

  3. If only this was true…

    If the government coffers (provincial or municipal) benefited from the new electricity market structure in Ontario then what is the reason for the 63 billion (36 already paid, 27 outstanding) stranded hydro debt since 2000?

    What you fail to understand Lawrence is that in a democracy, the government IS the people. In Ontario right now, democracy has failed completely and the people are stuck with an obscene bill. The ONLY beneficiaries are the green energy crooks!

    As for the Liberals besting their opponents with their paltry 10% rebate in the face of 100% past, present and future increases in Hydro rates since 2003, the most recent polling in Ontario would strongly indicate otherwise.

    WE THE PEOPLE, are fooled no longer.

    B.B.W.

  4. Mr. Solomon’s argument hangs largely on the Ontario government profiting from the HST on business but my understanding is that the government gets all that HST back through on input tax credits. Solomon also argues that the Ontario government is profiting from power system. My understanding is that the government is now actually losing substantial amounts annually. Municipalities are benefiting if they own electric distribution utilities but not the province, whose electricity income is all pledged to servicing the old Hydro debt.

  5. Tom:

    I think you mean a business gets the HST back through ITC’s… (Input Tax Credits).

    At least some of the generation companies use water for “fuel” — they don’t generate as much in the way of an ITC as a company that uses gas for fuel. Water over the dam attracts no HST — Gas does… But. even the companies that use gas or coal pay a lot less in the way of HST than they take in. The salaries do not attract HST either.

    I have not looked at the books for a power company — but I will guess that the costs (inputs) — where HST is paid is less than 40% of the revenue.

    In other words if the spend $1000 — probably they paid HST on less than 40% (30%) of the value or $400 X 0.13 == $52 However, when they sold the power they probably used the two times table and sold the power for $2000 — and collected HST of $260. The feds take their $100 — the province gets $160 — they rebated $52 netting $108.

    They also collect income tax, and payroll tax…

    If they rebate 10% of the energy portion of the bill — not the delivery, debt and other charges, they will rebate at most another $100 (of the $2000 billing). That leaves them $8 plus all the other taxes that they normally levy. Now I really don’t know the “manufacturing” vs Sales cost of power, so I just used accepted numbers for a manufacturing operation. A manufacturing operation that does not charge two times cost of production usually goes broke because of the cost of R&D plus new facility development, product service, equipment maintenance etc. However, the power game is more like a service operation — and frankly the margins there are usually greater.

    Anyway that’s how we always did the margins…

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