On May 6, 2020, the Government of Ontario extended an emergency measure capping time-of-use (“TOU”) electricity pricing from its initial end date of May 8, 2020 to May 31, 2020. In addition, on May 1, 2020, the Government of Ontario capped the Global Adjustment charge for Class A and Class B energy customers at $115/MWh, both retroactively for April and for the month of May.
While rate caps have been implemented for both residential and small business customers as well as large industrial clients, the Government of Ontario is taking different approaches regarding the way in which the costs of these programs will be absorbed.
Lower Energy Rates for Consumers
On March 24, 2020, the Government suspended TOU pricing for customers under the Regulated Price Plan – individuals, farms, and small businesses – with a price cap of 10.1ȼ/kWh. The measure was introduced and extended under the Emergency Management and Civil Protection Act (the “Act”) in response to the ongoing COVID-19 outbreak and closures.
The extension introduced on May 6, 2020, two days before the original order was set to expire, will maintain the fixed rate until the end of the month. The government maintains the ability to extend the order under the Act.
Relief on energy prices has also been extended to Class A and Class B customers, the largest industrial consumers in the Province. Class A consumers usually pay a Global Adjustment charge based on their proportion of energy use during the highest hour of the five highest peak days of the previous year. Class B consumers usually pay a Global Adjustment charge on a volumetric basis. For the months of April and May, the Global Adjustment will be fixed at $115/MWh, what was roughly what it was in February, 2020. The Government will be able to extend the order into June, 2020 if warranted.
Differences in Program Funding
The initial 45 days of capped TOU rates was estimated to reduce Government revenues by $162 million. The extension for another 24 days can be anticipated to increase that number by more than half. The Government indicated it would absorb the cost of the program.
For Class A and Class B customers, on the other hand, the Government will pay the cost, estimated at $340 million, but plans to allocate that cost to ratepayers during the 2021 calendar year.
The Bottom Line
As we wrote regarding a recent update from the IESO, the sharp drop in energy consumption in Ontario should cause energy prices to rise as the fixed costs are allocated over a smaller base of consumption. The Government of Ontario has prevented this by capping the prices paid by consumers. The gap between what the energy costs and what consumers are being charged will be paid by the Government.
The total cost of these rate caps are therefore approximately $620 million. This is on top of the budgeted cost of electricity subsidies of $5.4 billion for the 2020 fiscal year.
Looking to the future, the Government plans to recoup the costs for larger consumers from that consumer base; however, as we wrote earlier, the IESO has noted that it can take many years for consumption levels to return to pre-crisis norms. If the economy is still struggling in early 2021, these consumers may not be in a position to absorb hundreds of millions of additional costs. This could result in the need to further defer the energy costs or for new measures to support energy consumers.
More generally, successive governments in Ontario have generally found it easier to defer electricity bills than to control the underlying costs. It may be that more fundamental reform of electricity costs and rates will be necessary. There are many options to choose from and it is likely that the most recent announcements will lead to a start of that conversation, not the end of it.