Issues of Concern to NFA Members:

What Ought to be Done About Hydro?

An Opinion from the Ontario Federation of Agriculture

The electricity market has opened. The sky did not fall in. Lights go on and fridges work. But OFA has some real concerns we would like the government to address.

OFA speaks for 44,000 farmers. Whatever happens in the power market, farmers will be here. We live in commodity markets and have a little knowledge of what works for consumers and producers. It is rare that markets have to be structured to protect sellers. In general, rules should aid consumers, particularly with power, gas or phones. If we have to, farmers can make power and get by. But if customers have to opt out of the market in this way, the market will have failed consumers. OFA believes the following suggestions, if followed, will provide needed comfort and support for consumers, re-new Hydro's positive role in Ontario and pay the debt. Here are OFA's views on how to make this happen:


1 Power Generation and Sales

Power is a commodity and can reasonably be produced and sold by the private sector operating under sound market rules. To ensure competition, a few steps are needed and fairly quickly.

1 sell or lease at least 70% of the capacity of Ontario Power Generation Inc.
2 until that happens OPGI should be subject to the price cap of 3.8 cents per kWh
3 the IMO price rule should be made more consumer friendly. It should use the price bid by each generator, not the highest price taken and then given to all generators.


2 Transmission

Transmission is a 'natural monopoly' and a public utility. It should be owned by Ontario. There is no competition and no benefit from a private monopoly, so the transmission part of Hydro One should not be sold. To get new transmission on a market basis, customers could offer to assist in financing new lines. This approach is similar to that taken for major new distribution lines in the PUC's. It minimizes debt and ensures a market for new facilities.

Low Voltage Transmission (lines under 50 kV) should be treated as the rest of transmission and exporters and generators should pay the same rates for using the lines as everyone else.
Rates for transmission should reflect the fact that rural and small town Ontario were fully serviced from a transmission perspective by 1960 and that the bulk of the high voltage system was built for the cities which have been growing since then.
3 Distribution

OFA recommends the PUC model. (Now called LDC's) PUC's work. What little debt they have is in line with their ability to pay. They have had no failures and they have a great service record. PUC's compete with each other to make their areas better places for business and to live. Hydro One distribution serves rural and small town Ontario, not Toronto, or Kitchener or their like. A decision on Hydro One distribution needs full input from small town and rural Ontario. OFA believes Hydro One's new service and rates will do the following to rural and small town Ontario:

1 take $323 million per year in profit out of the area causing local business to earn less, close or lay people off,
2 reduce maintenance and repairs by about $ 200 million per year. Reliability is essential. In the past three years Hydro One has laid off thousands of line men and service people. Outages are more common and last longer as a result.
3 Hydro One unlike fire, police and ambulance services has almost no shared aid agreements with neighbouring counterparts. Such agreements are essential and would offset any loss of service resulting form manpower cuts.
4 Hydro One proposes new industrial service rates which will 'scare off' industry from rural Ontario causing property taxes to be higher and off farm jobs scarcer
5 adds $ 600 million in new debt from Hydro One's buying PUC's to customer bills
6 ordinary Hydro One customers will see their rates go from 8.2 cents a kWh in May 2001 to about 12 cents for people on reseller contracts once the new Hydro One rates take effect. This compares to 14 cents for power from a farm generator. One more such increase and it will be cheaper for farmers to rely on their generators.

Ontario guaranteed Hydro's debts, but the guarantee was not used. Hydro One is owned by Ontario, but the assets were paid for by customers. The PUC model puts ownership of assets with the people who paid for them. If there are profits, they would be retained locally. Towns and counties in the Hydro One area, should be allowed to buy lines in their area, form and run a PUC and set rates just as cities do. Rural PUC's will ensure good service, reasonable rates, accountability to customers, no new debt for the Province, local retention of profits and competition between PUC's to attract business and keep rates low and service high. It will meet Government's goals and will achieve what customers want.


4 Rates of Return

PUC's and Hydro One may run on a profit or a not for profit basis. Hydro One has opted for 9.88% profits and will take $ 323 million per year out of rural and small town Ontario. If profit is allowed it should not cripple small town Ontario. Until the debt is paid, profits should go against the debt. After the debt is paid profits should be limited to a level that provides low cost finance for growth as is consistent with the PUC model.
5 The Old Hydro Debt

The debt must be paid. The $ 22 billion stranded debt can be pooled with Ontario's other debt. It is all guaranteed by the Province. Whether it is paid from the sales tax, income tax, the tax on power or from Hydro One and OPGI profits and taxes on their profits is irrelevant provided the debt is paid and all residents share equitably in paying the debt. Under the PUC model, counties and towns forming PUC's would accept their share of the debt.

Selling Hydro One now to pay debt reduces funds available in the market to buy generators and delays new competition on the generating side. And if Hydro One is sold the federal government will tax the firm and there will be less tax for Ontario to use against the debt.


6 Maintenance

Hydro One has cut maintenance. Its forestry group has been cut by 60%, but trees under the wires grow as fast as before. Dozens of service depots have been closed. Response time has grown. Inadequate maintenance and delayed upgrading have increased stray voltage problems on livestock farms. OFA believes this is because return neutral lines are increasingly at or beyond capacity so excess return voltages go to ground. The results are lost production and health problems for livestock. PUC's have a great service and maintenance record, because they are close to their customers.


7 Regulatory Concerns

In each hearing in the past three years the OEB has improved the proposals presented to it. But, if in the future, OEB regulation appears to be wanting, the Government as the owner can remedy a problem; provided that a government owns Hydro One. If Hydro One is sold, that chance for a back stop remedy will be gone. PUC's require almost no regulation as they have local accountability and provide the back stop regulation of government ownership.


8 Summary

Apart from protecting the environment, the need for a public role in building or running generation is largely past. OFA encourages a market in the generation of electricity and asks that price setting be made more competitive than the present price rule will allow.

OFA believes transmission should be owned and run by the Province and that new assets should be built with customer participation. This is the PUC model for transmission.


OFA believes every effort should be made to extend the PUC model to distribution for rural and small town Ontario. Hydro One distribution assets and appropriate shares of the Hydro One debt should be sold or even given to municipalities.

OFA believes the PUC's work, that they compete to attract new customers and this combined with local accountability helps them to be efficient. No or low profits (the PUC model) works, though until the old debt is paid higher profits may be needed.

Reliability in Hydro One's service area is at risk because of reduced maintenance. Maintenance must be restored and supplemented with reciprocal aid agreements to better cope with emergencies and the consequences of extreme storms.

The debt must be paid. OFA believes it better to have governments own Hydro One assets to collect the profit and pay the debt. After the debt is paid profits consistent with a low cost way of financing growth are acceptable as these are consistent with the PUC approach.

Hydro has several parts. One approach will not suit each equally. A market for generation with sound price setting makes sense. Transmission operated province wide with effective government ownership and control suits its natural monopoly nature. PUC's competing with each other area by area, with low debt and low profits and helping each other with service and maintenance and in emergencies makes sense and has worked very well for cities. And these approaches provide for paying the debt as well as for customer service. So the PUC model for rural and small town distribution is recommended.

Customers have choices and are guided by prices. The proposed Hydro One prices for service will guide new business away and with another price increase will encourage farmers to rely on their generators. If rural and small town Ontario is to retain and attract customers, especially new business, excellent service and reasonable rates are essential. The growth and future of rural and small town Ontario require that customers be effectively protected from monopoly power whether that be a public or a private monopoly. PUC's do that well and at low cost. Ontario should stick with it and build on it in rural Ontario. It works.

 

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