February 21, 2012

Drummond report on Ontario public service recommends full cost pricing for municipal water

TORONTO

The Commission on the Reform of Ontario's Public Services today recommended Ontario municipalities charge rate payers the full cost of water and that the province consolidate the 80 local electricity distribution companies along regional lines. It also recommends the province reduce the prices offered to green energy producers under the Feed-in-Tariff program and that it procure larger electrical power generation facilities through a request for proposal (RFP) process.

The much-anticipated report, issued by a commission chaired by former TD economist Don Drummond, includes a chapter on infrastructure, real estate and electricity. The other commissioners were: Dominic Giroux, President and Vice-Chancellor of Laurentian University; Susan Pigott, Vice President, Communications and Community Engagement at the Centre for Addiction and Mental Health (CAMH) in Toronto; and Carol Stephenson, Dean of the Richard Ivey School of Business at Western University in London, and former chief executive officer of telecommunications equipment manufacturer Lucent Technologies Canada.

The commission notes that in municipal water and wastewater services, average capital investment "chronically lags what is actually needed by $1.5 billion per year."

"While a degree of ‘catching up’ has occurred, stable investment over the long term is more efficient and results in greater inter-generational fairness,” the commission noted. “Alternative Financing and Procurement (AFP) could be a useful tool in this regard,” they wrote.

The commission recommends full-cost pricing for water and wastewater services. It noted that the equivalent of about half the $72 billion in assets owned by municipalities will need to be renewed from 2005 through 2019.

Ontario Premier Dalton McGuinty established the commission in March, 2011, to provide independent advice on how to make long-term changes on the way the provincial government delivers services. McGuinty aims to eliminate the deficit by the 2017-18 fiscal year.

"The deficit is expected to be $16 billion this year," Drummond noted in his letter to McGuinty and Finance Minister Dwight Duncan. "By 2017–18, it will almost double — and the debt will climb to more than half of gross domestic product — if the status quo is left in place. Decisive, firm and early action is required to get off this slippery, and ultimately destructive, slope."

Although much of the report is focused on health care and education, Chapter 12 is dedicated to infrastructure, real estate and electricity.

On the electricity distribution system, the commission recommended the province consolidate the 80 local distribution companies (LDCs) "along regional lines to create economies of scale."

"Reducing the $1.35 billion spent on operations, maintenance and administrative costs for Ontario’s LDCs would result in direct savings on the delivery portion of the electricity bill," the commission wrote.

Other recommendations include procuring larger electrical power generation facilities through an RFP process and eliminating the Ontario Clean Energy Benefit (OCEB) “as quickly as possible.”

OCEB, the report notes, is projected to spend $1.1 billion in the 2011-12 fiscal year on rebates for residential, farm and small business utility customers.

"While we understand that the government initiated the OCEB to help with the transition to higher prices associated with the shift to cleaner energy supply, the program distorts true cost of electricity and discourages conservation," the report noted. "In addition, we foresee that the sudden end to such a generous incentive will be difficult if concluded as planned on Dec. 31, 2015, as it will create a considerable price shock to ratepayers."

The report also recommended changes to the Feed-in-Tariff (FIT) program, whereby Ontario Power Authority offers fixed rates for 20 years to companies generating electricity using solar, wind, water, biomass and other renewable sources.

The province could reduce the impact on electricity prices by "lowering the initial prices offered in the FIT contract and introducing degression rates that reduce the tariff over time to encourage innovation and discourage any reliance on public subsidies," the commission recommended.

"Our recommendations are daunting in depth and scope," Drummond wrote in his cover letter. "Indeed, they may seem overwhelming, even to the point that the government may fear that they exceed its political and bureaucratic capacity to carry them out. But there is benefit to moving quickly on many fronts at once. Targeting certain programs or sectors for reform and restraint can generate a sense of unfairness."

DCN DIGITAL MEDIA

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