What the auditor general‘s latest report means for Ontario‘s energy sector

On Wednesday, Dec. 2, Ontario’s auditor general, Bonnie Lysyk, presented her Annual Report to the Legislature, a report containing stinging criticism of the provincial government’s management of its electricity portfolio. Last year, the auditor general focussed upon the many difficulties associated with the implementation of the province’s Smart Metering Initiative. This year’s report is particularly critical of the poor state of Ontario’s electricity planning and procurement processes. As the auditor general bluntly states:  

We found that the planning process had essentially broken down over the past decade, and Ontario’s electricity power system did not have an overall technical plan in place for the past 10 years that was reviewed by the OEB, as required by legislation.  In the absence of a technical plan, the Minister has made a number of decisions about power generation that went against the OPA’s technical advice and did not fully consider the state of the electricity market or the long-term effects. 

Turning her attention to Hydro One, Ms. Lysyk was equally hard-hitting. Hydro One, she said, has a mandate to be a safe, reliable and cost-effective transmitter and distributor of electricity in Ontario and in recent years, the reality is that Hydro One is a company plagued by deteriorating reliability and rising costs. “We noted” she said, “that in the five year period from 2010 to 2014, transmission system outages have been lasting 30% longer and occurring 24% more often….. And in 2014, the Ontario Energy Board ranked Hydro One as the worst of all electricity distributors in Ontario for duration of outages and second-worst for frequency of outages in 2013.”

10 Highlights from the Report

Among the many pointed criticisms levelled by the auditor general were:

1. Electricity consumers in Ontario have been badly served by the current planning and procurement process because there is so little transparency and virtually no independent oversight of major decisions that often impose significant costs upon electricity ratepayers.
2. The consumers’ advocate, the Ontario Energy Board, has seen its role continuously eroded over the past decade, often in ways that conflict with the requirements of the Electricity Restructuring Act, 2004.
3. The increasing use of the ministerial directive has often placed the Minister at odds with his technical experts, and in some cases, like the construction of the Lower Mattagami Hydroelectric Project in northern Ontario, the Minister has ignored warnings of significant cost overruns.
4. The Ontario Government’s Green Energy and Green Economy Act has led to much higher procurement costs than would have been the case had the government followed processes that were well established before 2009. The auditor general states flatly that these additional costs amount to billions of dollars and, when compared to American examples, Ontario’s wind and solar power procurement is well above those norms as well.
5. Ontario now has a significant surplus of power – in 2014 alone, Ontario’s available electricity supply exceeded the peak demand by about 7,500 MW – and this surplus situation is causing costly distortions in the electricity market. For example, between 2009 and 2014, Ontario exported a total of 95.1 million MWh to other jurisdictions. However, as the auditor general notes, “the total cost of producing this power was about $3.1 billion more than the revenue Ontario received for exporting it.”
6. Conservation measures costing billions of dollars make little economic sense in a time of sustained surplus power and, in fact, “actually cost us more”. Furthermore, when one applies a reasonable measure of cost-effectiveness, some of these conservation measures did not pass the test.
7. Repeating a criticism made by her predecessor, Ms. Lysyk drives home the point that there appears to be little or no economic analysis or business case assessment for many of the decisions taken.
8. In recent years, Hydro One has been appearing before the Ontario Energy Board, asking for and receiving rate increases for the replacement of “high-risk assets”  and then spending that money on other assets. As a result, Hydro One has a growing backlog of preventive maintenance orders to be performed on its transmission system and this lack of maintenance has led to equipment failures impairing overall reliability.
9. Hydro One’s vegetation management for its distribution business is well below that of its peer group.  Hydro One operates on a 9.5 year vegetation management cycle while the average such cycle for 14 of Hydro One’s peer utilities is 3.8 years. The net effect of Hydro One’s vegetation management approach is to invite more outages and drive up costs.
10. Hydro One has not adapted its 1.2 million smart meters to assist with the more effective identification and response to power outages.

The Government’s Response

In responding to the report, Ontario’s Energy Minister Bob Chiarelli stated that, “the government does recognize that there has been upward pressure on pricing in Ontario but remember,” said Chiarelli, “before the Global Adjustment¹, the government had trouble persuading private sector-generators to enter the market [because] wholesale prices were not sufficient to attract much-needed investment in Ontario’s electricity sector.”

Chiarelli also made plain the fact that his government was determined to move away from coal-fired electricity plants to cleaner, greener energy for the environmental benefits that such a policy provides.

And as for some of the other criticisms levelled by the auditor general, the Minister defended decisions like the Lower Mattagami Hydroelectric Project and the Thunder Bay Coal-to-Biomass conversion as evidence of his government’s desire to assist the economic growth and diversification of northern Ontario and its aboriginal communities.

The Impact of the Report

While the report’s sharp tone has been fodder for the media and the opposition parties, its long-term impact is difficult to forecast at this point.  While there can be little doubt that the report’s emphasis on rapidly rising electricity costs will attract the attention of consumers, it is unlikely that the Wynne government will be distracted from its policy of transitioning toward a low-carbon economy. In this regard, Ontario will continue to invest in and reaffirm its commitment to the renewables sector. As for Hydro One, its successful November IPO means that the company will be out of the auditor general’s reach moving forward. However, few would deny that, with this report, Ms. Lysyk landed a parting shot.