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Sussex Ontario Election Update – Energy and Environment

Published on
June 11, 2018

The election of a majority Progressive Conservative government marks a watershed moment in the political climate in Ontario. Notwithstanding the twists and turns that resulted in Doug Ford being elected yesterday as the 26th Premier of Ontario (a transition that will become official on June 29th), voters gave the PCs a very clear majority mandate – meaning that the government will have considerable power and runway to bring their vision and promises to reality over the next four years.

Two of the areas that Sussex believes will be critically important for the Ford government – and that were mentioned often during the campaign – relate to energy and environment. To supplement our overarching election update distributed to clients earlier today, please find below our analysis of relevant issues for your review.

Energy-Related Issues

Energy issues one of the very few consistent and constant themes that ran throughout the campaign. Be it assertions of high “hydro prices” harming the pocketbooks of families and businesses,  accusations of mismanagement brought into focus by executive compensation at Hydro One, or promising to reform and expand natural gas access across the province, the PC Leader and now Premier-designate did not shy away from talking about energy. To be fair energy and in particular electricity-related issues have been something that the PCs have tried to focus voter anger on for at least three election campaigns; this time it stuck.

Beyond promises to take action on management at Hydro One, the central energy-related commitment has been to further reduce the Regulated Rate Plan (RPP) for residential and small business customers by another 12% (in addition to the 25% enacted by the Ontario Fair Hydro Plan). This intended rate reduction will be achieved by:

· Rebating the government’s portion of Hydro One’s dividend directly to ratepayers on their electricity bills. This action will purportedly save the average Ontario household $70/year and will “grow over time”.

· Moving conservation funding to the tax base, potentially saving the average Ontario household $43/year.

· Placing an immediate moratorium on any new energy contracts. Information released by the Ontario PC Party states that “rebating the savings back to residential customers will save the average Ontario household $20/year.”

· “Walking away from, or renegotiating, pre-Notice to Proceed contracts, where feasible. When rebated back to residential customers, this will save the average Ontario household $40/year.”

The PCs committed that reductions will begin January 1, 2019. By 2019/2020, the rebates will be a savings of just over $800 million annually: $433 million to move conservation funding to the tax base and approximately $375 million in returned Hydro One dividends. The targeted savings would amount to $173/year for the average household.

This is not the first time a government has used measures between the rate base and the tax base to achieve a balancing of costs in the system. Still, some of these approaches and expectations are interesting. Expectations to grow the Hydro One dividend would likely be based on enhanced performance, or to look at additional means to divert revenue to the rate base. Further, while we anticipate that the PC government will be fully fixated (and rightly so) on affordability and reliability issues in the sector, over time we believe that effort will need to be made to reconcile commitments to a moratorium on contracts and a cancellation of existing contracts while maintaining reliability.

The PCs also announced that they would cancel the Ministry of Infrastructure’s Natural Gas Expansion Program, and rather support projects that enable the expansion of access to more communities by making it easier for private sector investment to take place. Projects announced earlier this year are expected to continue, but their funding arrangements may be altered to conform to the new policy.

There will likely be other policy, planning and program initiatives that will be adjusted and initiated by the incoming government. While the PCs had stated in an earlier platform a commitment to market reform akin to the existing IESO Market Renewal process, we wonder how the Long-Term Energy Plan and the Implementation Plans, which are currently being acted on by the Independent Electricity System Operator and the Ontario Energy Board, may be amended. There are also ongoing reviews of the Conservation First Framework, the OEB Modernization Panel Review, and programs underway that are at varying stages of intake and execution, including the Green Ontario Fund (GreenON) Challenge Fund, the Smart Grid Fund, and the International Energy Demonstration Fund. All of these are funded programs, but that could be affected by shifting priorities and plans of the new government.

Nevertheless, we believe that the incoming government will act in a prudent and focused way, prioritizing measures that will make energy more affordable, make the system more resilient and reliable, recast priorities on affordability and reliability, and look to new and innovative solutions that could accomplish these objectives. These could include new technologies, new ways of doing things, and new means to plan, regulate and execute.

Environment-Related Issues

The PCs have been adamant in their objective to get rid of the cap and trade system in Ontario. Over the campaign, Ford seemed poised to move ahead on this commitment which would entail, giving the one-year notice to the Western Climate Initiative (WCI) to remove Ontario from the joint carbon market with California and Quebec. This move may lead to legal challenges by program participants in all three jurisdictions who have already purchased allowances through the auctions. Through the last 6 auctions, $2.8B in cap and trade revenue has been raised.   

The PCs will also initiate a challenge against the federal government and their consequent move to impose the federal carbon tax backstop.  Federal Environment and Climate Change Minister McKenna has been adamant in her government’s commitment to apply the carbon tax to those provinces that oppose it or refuse to implement their own system; the key example of this is Saskatchewan, which lost potential funding under the Low Carbon Economy Fund because of its refusal to accept a carbon price/sign the Pan Canadian Framework on Climate Change. Alberta’s Jason Kenney, leader of the United Conservative Party, has also committed to end its carbon levy and fight any federal backstop, if elected.

If Ontario refuses to participate and Ottawa has to force the carbon tax (and is successful in upholding any constitutional challenge), Ontario could lose the ability to decide how the revenue is spent. Further, there will need to be consideration given to the fact that Ontario large final emitters in general have not participated in the consultation process with the federal carbon pricing system, which has been taking place over the past 8 months, as they have been ‘covered’ under Ontario’s own system. Ontario emitters have not been given the chance to provide input into how their products/output will be measured, or how it will be benchmarked.

Getting rid of cap and trade in Ontario would also entail repealing virtually the entire Climate Change Mitigation and Low-Carbon Economy Act, as it outlines the cap and trade program, and the statutory criteria for the spending of the cap and trade revenue.  The Act states that all revenue generated from cap and trade must be spent on initiatives that will reduce or lead to the reduction of greenhouse gases.

With that, the future of any programs articulated within the Climate Change Action Plan (CCAP) would be in serious jeopardy, including the programs created under the GreenON, as they are solely funded by cap and trade revenue.  For programs already announced, it remains unclear as to whether those programs will remain in place until completion, or be cancelled, and the associated costs will be managed.

More broadly, the PC have made the following commitments to the environment with a projected combined cost of $500M:

- Preserving waterways and supporting air quality programs;
- Improve enforcement, including hiring more conservation officers and increased policing of major polluters;
- Set up and emission-reduction fund to invest in new technologies in Ontario;
- Commit resources to reduce garbage in neighbourhoods and parks.

Issues of waste, resource recovery, and producer responsibility have not been at the forefront of election pledges from any of the parties making it difficult to speculate how the file will be approached by an incoming administration. 

The PCs were supportive of the Waste-Free Ontario Act through the legislative process and voted in favour of its passage as it aligned with the PC party’s position for a business-friendly climate that reduces regulatory burden and promotes cost-efficiencies.  It is our opinion that the framework for shifting to a producer responsibility regime in Ontario will remain in place, but variation may occur in the specifics of implementation, for example, priority areas, overall timing, and engagement with stakeholders, among other items.

It is anticipated that the new government will look to engage stakeholders and industry regarding the key environmental issues to ensure a prudent path forward. As noted above, the assurance that comes with a majority gives the new government ample time to consider how to proceed on these key policy issues.

Next Steps

As per our earlier note, a transition team has been formed and a Chief of Staff appointed. The new government will officially take over on June 29th, and between now and then a Cabinet will be appointed. It is possible that there could be some amalgamation of the Executive Council and ministries, reducing down the 28 ministerial portfolios. This is still speculative.

Over the summer staff will be appointed to various offices. We anticipate that Deputy Ministers will remain in their portfolios in the near term, although this could change over the course of 2018.

At this point in time we do not know when the Legislature will be recalled, followed by a Speech from the Throne, where the government will lay out its priorities for the session. A fall legislative session is scheduled to commence on September 10th.

Legislative reform – such as amendments to the Energy Statute Law Amendment Act and the Electricity Act, repealing the Green Energy and Economy Act and changes to the Climate Change Mitigation and Low-Carbon Economy Act, will take time and will not be overnight exercises. But the government will need to move quickly in some areas. Sussex will continue to work with the government as transition gets underway in earnest over the next few weeks.

Please feel free to contact Sussex at your convenience if you have any questions or if you would like any additional information.