Reducing Hydro Rates in Ontario: Rebates

As detailed in part two of our series, the government is well on its way to achieving its promised 12% rate reduction by holding bills to inflationary increases only. However, in order to fully complete the promise, the Ontario government will either need to borrow even more money than scheduled or make some bold policy decisions that will lower the cost of electricity and reduce the need to borrow. If the government chooses the latter, they may save money on their fiscal plan but alienate consumers or stakeholders in the process.

In order to understand the pros and cons of such a decision, the government must carefully consider its options. The first place it could start the search is by asking: “Does everyone who qualifies for the electricity rebate need it?”

Explaining the Rebates:

The government will have two main rebates for residential customers. First is the new Ontario Electricity Rebate, which is just a new way to display the existing 25% Fair Hydro Plan rebate. Second, is the government’s electoral promise to rebate Hydro One’s provincial dividend to residential ratepayers. According to Hydro One’s annual financial report the dividend paid to the province in 2017 and 2018 is as follows:

At roughly 5 million residential customers in the province, giving back $275-$300 million annually would average out to just over $4.50 a month per ratepayer. Though helpful, this reduction combined with the policy of holding bills to inflation likely still would not equal the total 12% reduction promised.

If the dividend does not increase dramatically, and no other structural changes are made to Ontario’s electricity system, the government will need to do more to reach the 12% target. By reviewing and eliminating certain classes of customers from receiving these rebates, the government could make its dollars go further.

A narrower group of qualifiers means more money back for those who receive the rebate – getting them to 12% faster. However, it means the government will need to break its promise of universal applicability and explain to certain Ontarians why they no longer qualify for a rebate on a commodity that most would argue is essential. Here’s how the government could do it.

Options for Limiting Future Rebates:

Residential Customers Only:

First, the government could easily limit the new Hydro One rebate in a similar fashion to how it is proposing to limit the new Ontario Electricity Rebate. The Ford government is proposing to remove this rebate for customers who previously qualified but were not actually residential customers. These are customers like hotels and motels, prisons, post-secondary dormitories, and campgrounds.

Given the government has already removed these non-residential customers from existing rebates, it seems logical it could remove these customers from future rebates. This will help any new rebates go further. However, these savings should not be significant as those customers do not make up a large number of the 5 million eligible customers in the province.

Income Testing:

Next, the government could limit the rebates to certain classes of citizens by creating an income test. The lower the income threshold to qualify, the more money the government saves. This logic is already applied to many Ontario programs, including the existing Ontario Electricity Support Program (OESP).

The government would need to publicly make the case that not every Ontarian needs a rebate from their provincial government. Politically, this may be the most passable suggestion, with the Green Party already calling for a similar policy.

Conversely, income-testing would alienate Ontarians who were previously promised relief by this government, including many who may not qualify as low-income but would certainly be part of an important middle-class voting bloc. The temptation may be to only rule out the very wealthy, but that adjustment would be worth more in communications value than in any net program savings. In addition, creating and administering an income test would be administratively difficult without an application process, as local utilities would not have access to household financial information otherwise.

Lastly, the government could choose a halfway point by limiting only the new Hydro One rebate and not the existing Ontario Electricity Rebate. It is a rule in politics that taking something away from people is much harder than not giving it to them in the first place.

A Geographic Rebate:

Third, the government could choose to limit the rebates on a regional or sectoral basis by applying them only to more rural areas of the province. The province already does this through its Rural and Remote Electricity Rate Protection Program (RRRP).

The RRRP is an embedded charge on Ontario electricity bills that is used to rebate customers in areas of the province with a lower population density. The farther apart the homes, the fewer people to spread the costs of poles and wires across. Therefore, the RRRP helps make the cost of distribution fairer for all parts of Ontario.

If the Ford government chose to rebate areas of the province with the highest costs, it would reward their traditional rural base. Rural residents typically have higher electricity rates than apartment and condo dwellers in larger cities since the latter have smaller floorplans and are unlikely to use electric heating.

Marketing such a limitation to the promised rebate would be a challenge, but it is consistent with the more rural base that makes up the traditional Progressive Conservative core. With a government that has been openly looking for ways to demonstrate its concern for places outside the Greater Toronto Area, this idea may be the least likely of the three, but it is not impossible.

Conclusion:

If the government wants to save itself money and still lower electricity bills, it may need to consider limiting electricity rebates to only certain classes of customers. It has a multitude of options available, but each option comes with its own political challenges. Mainly, the challenge of convincing Ontarians that a 12% reduction for some is better than a 12% reduction for all.

Given these challenges, the government will want to consider all of its options before picking a lane. With the upcoming end of the Fair Hydro Plan in 2022, the government does not have a lot of time to do that analysis. And, as seen with the previous administration, the government cannot afford to wait too long.

The StrategyCorp Institute of Public Policy and Economy is producing a series of articles to explore the Ontario government’s options to achieve its stated electricity goals, including the promised 12% electricity savings for residential customers. Stay tuned for part 4 of the StrategyCorp Institute of Public Policy’s series on electricity in Ontario to see more options for potential rate reductions.