Prospects Of Negative Governmental Action In Ontario’s Energy Sector

When investments are made in the private sector sophisticated financial models are developed, complete with multiple inputs, all designed to predict a range of best and worst case scenarios. If a significant model input strays beyond its originally anticipated value range for example, if customer demand for a business's products collapses then the financial model for the business may fail. If so, stakeholders in the business will likely face a restructuring of their investments.

The chances of a restructuring are far less likely when government is the main customer of the business, not only because governments are presumed to have deep pockets, but also because, in those businesses where government acts as an intermediary between the business and the ultimate consumers of the business's products, the government's intermediation tends to insulate the business from model failure and its usual consequences. Nevertheless, if model failure is severe and persistent enough, history in Canada suggests that governments may be tempted to impose a restructuring even on these sorts of businesses.

In the years leading up to Ontario's Feed-in-Tariff (FIT) program, it was generally accepted that Ontario was approaching a near-term shortage of electricity as surging demand threatened massive brownouts. Government financial models, no doubt, assumed that the cost of developing renewable energy infrastructure involving long-term power purchases at prices significantly above market could be recouped by steadily increasing electricity rates over time, all without unduly reducing customer demand.1 However, subsequent experience seems to suggest that Ontario's electricity demand may have been more elastic than anticipated, especially as many urban and rural electricity consumers have reacted to increasing prices by switching some of their electricity needs to lower-priced natural gas and propane. Moreover, as price increases in the Province have outpaced those in neighbouring jurisdictions (leaving Ontario's electricity prices 30-60% higher than in those jurisdictions), some large commercial users have reacted by moving their operations out of Ontario, further depressing overall demand.2 In fact, far from remaining steady, electricity demand in the Province is now projected to decline until at least 2021.3

Even as electricity demand has declined, Ontario's generating capacity has increased. Overall generating capacity in Ontario has increased by 13% since 2003, while demand has decreased by 10% since 2005.4 The end result has been a large and continuing surplus of generating capacity, with Ontario's generating capacity expected to exceed forecast (normal weather peak) demand this summer by 25-50%.5 Partly as a consequence, electricity spot prices in the Province have plummeted, sometimes falling to $0.025/kWh.6 Higher-priced, surplus Ontario electricity is sometimes resold to neighbouring jurisdictions at a substantial discount7 and the Global Adjustment amount charged to Ontario consumers has now risen to record levels.8

In summation, some of the model inputs in the Province's original financial models may already have strayed beyond their initially anticipated value ranges, suggesting at least the possibility that model failure has occurred in the sector or that it may be imminent. If so, then recent entrants into Ontario's energy sector, otherwise dependent on the continuance of long-term government purchases, are quite right to be concerned about the possibility of a government-imposed restructuring in their sector.

Unlike private sector restructurings which typically involve a court process, government-imposed restructurings generally take the form of confiscatory legislation or some...