Three Major Problems with Hydro Solved by Shifting Costs from Bills to Taxes

Marvin JS Ferrer

Electricity bills were expected to play a big role in the upcoming Ontario provincial election in 2018. However, the Ontario government implemented a plan to temporarily absorb some costs and lower bills by 25%. The opposition Progressive Conservatives also propose going further to lower bills a further 12.5 percentage points.

Generating, transmitting, and distributing electricity is expensive, and electricity bills can be a very politically charged issue. Electricity bills can be divided into two parts:

  1. Variable costs of electricity: a total that changes depending on electricity use.[1]
  2. Fixed costs of electricity: a total that does not change depending on electricity use.[2]

The Proposal

Currently, holding everything equal, ratepayers pay the same for fixed costs[3] regardless of income (Figure 1, orange). If government revenue paid for fixed costs instead, it would be taxpayers, not ratepayers, who pay for fixed costs through increased taxes. Generally, taxation is progressive and people pay more if they make more income, and less if they make little income (Figure 1, green).

People with incomes below $X would pay less, while those earning above would pay more. This change could be revenue neutral, such that revenue lost from ratepayers (Figure 1, orange area) is the same as revenue raised from revenue increases (Figure 1, green area).

Government revenue should pay for fixed costs of electricity. It would be fairer and resolve three challenges that contribute to rising electricity bills.

Problem 1: Deciding on the Price of Electricity

Because electricity bills include fixed costs, the government must decide how those costs are distributed, which is a challenge. For example, if a small town in Northern Ontario needs to replace hundreds of kilometers of transmission lines, should local electricity users pay for those costs, or should ratepayers in Toronto contribute? Demand for electricity may also vary in different parts of the province. If Toronto electricity demand rises, should residents of Northern Ontario pay to refurbish nuclear power plants?

Distribution of costs is a difficult political question that governments face. If fixed costs were paid by general government revenue, there would be no need to make decisions about how to distribute fixed costs since they would be distributed according to the tax structure

Problem 2: Exiting the Electricity System (Figure 2)

Electricity infrastructure is expensive, is intended to last for a while, and was built for the benefit of all. Currently, some large consumers of electricity like factories could decide to disconnect from the system and build their own generator instead. However, this results in a smaller pool of ratepayers burdened with upkeep costs and debt load. This phenomenon is shown in Figure 2. This is reminiscent of why the EU demands that Britain make a payment before it leaves the EU.

If fixed costs are paid by government revenue, there would be no stranded debt/liabilities problem. Everyone has to pay taxes.

Problem 3: Energy Conservation

Since electricity bills are the prices faced by consumers for consumption, this is the signal they use to determine how much energy they use. Today, if consumers conserve electricity, their bill will not decrease by the same proportion as their decrease in use because their bill also includes fixed costs.

If fixed costs were paid by government revenue, any reduction in energy use would lead to a proportional reduction in electricity bills. This would encourage consumers to reduce their demand because their bills would be reduced proportional to any reduction in demand.

Table 1: Under this proposal, bills fluctuate as electricity use fluctuates, unlike in the status quo.

Change in Use

Electricity Use Cost

Fixed Cost Bill

Change

Status Quo

50% drop

Before

$50

$50 $100

25% drop

After

$25

$50

$75

After Proposal

50% drop

Before

$50

$0

$50

50% drop

After

$25

$0

$25

Former Energy Minister Weighs In

George Smitherman, a former energy minister with the Ontario government, recently visited the School of Public Policy & Governance, hosted by Spectrum, to showcase LGBTQ+ leadership in public policy.

In an interview, he commented on this proposal. He challenged the idea that the “exit problem” is a problem saying, “many people can go off-grid with little risk, in urban areas especially.”

At first, Smitherman disliked the proposal, saying that it might stifle innovation.  Indeed, the development of cheaper technology shown in Figure 2 is technological innovation at work.

After hearing the rationale (that the tax system is progressive), Smitherman became less opposed, and said “I’ll have to think about it more.”

However, Smitherman noted the political difficulties of shifting costs from ratepayers to taxpayers.

“You’re talking about taking costs that are happily ensconced in a rate base and bringing it into [general revenue], when many people would argue that using the [general revenue] at all for social adjustment to electricity prices is bad economic policy,” Smitherman said.

Regardless, a major benefit of public payment for fixed costs is that no matter the direction long-term electricity policy goes, benefits and risks are shared by taxpayers according to their means, and people who can afford innovation cannot leave behind those who cannot afford innovation.

Payment of fixed electricity costs with government revenue should be considered and studied to make electricity policy fairer.


[1] Generally, this is the amount used in an hour, at the price set by the average cost of generating the last kilowatt for an hour (kWh).  This is tracked by the Independent Electricity Systems Operator as the Hourly Ontario Energy Price (HOEP). It also includes the difference between the HOEP and guaranteed contract prices received by some green energy generators.

[2] Generally, this includes upkeep for transmission (giant towers with wires) and distribution (wires along poles along the street and underground), administration, and electricity cost-related social assistance for lower-income people and rural Ontarians.

[3] “Fixed costs” will mean fixed costs as noted in #2, as well as any difference between the market cost of electricity paid by consumers and the prices received by generators, such as the difference between market prices and the guaranteed prices paid to some green energy producers under the Feed-In Tariff program.

Marvin JS Ferrer previously completed his master’s and doctoral degree in the cell biology of reproduction and fertility at Queen’s University, where he helped many Canadians start new families. His policy interests include science and research policy, industry-government relations, and health policy.  As a politically-minded scientist, he would like to advance the use of the scientific method to improve evidence-based decision making.

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One response to “Three Major Problems with Hydro Solved by Shifting Costs from Bills to Taxes

  1. Pingback: Policy, Tax, and You – Morning Brief, March 6, 2018 | The Public Policy & Governance Review·

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