DBRS Comments on Ontario’s Plan to Reduce Electricity Prices

DBRS Limited (DBRS) has today commented on the Province of Ontario’s (Ontario or the Province; rated AA (low) with a Stable trend by DBRS) plan to reduce residential electricity prices by 25%, as announced on March 2, 2017. DBRS views the proposed changes as credit neutral. The Province has the ability to absorb the fiscal impact of the proposed policy changes, while still restoring budgetary balance in 2017–2018. The Province has also indicated that it will seek to recover the debt and financing costs associated with reducing the Global Adjustment (GA) through future electricity rates.

The Province’s plan to reduce residential electricity costs by 25% principally relies on (1) the provision of a rebate of the provincial portion of the harmonized sales tax (HST) for electricity (implemented in January 2017), (2) the enhancement of some targeted electricity cost-support programs and shifting the funding burden of those programs from electricity rates to taxpayers and (3) financing a portion of the GA.

The rebate for an amount equal to the provincial portion of the HST and funding of electricity cost-support programs using general revenue (as opposed to using electricity rates) have direct budgetary impacts for the Province. The Province has the fiscal capacity to absorb the impact of these changes — which will rise to approximately $2.0 billion annually over the next few years — without shifting the timeline to restore balance in 2017–2018. Ontario has indicated that it intends to maintain balanced results thereafter. DBRS will conduct a full review of the Province following the spring budget.

There are few details available about the plan to finance a portion of the GA at this time. The GA is, in substance, the difference between the market rate for electricity and that which is owed to generators based on regulated or contracted rates. The Province will honour existing agreements, leaving generators unaffected, and use debt to spread a portion of the electricity system costs over a longer period time. The Province expects the additional debt and financing costs to be recovered through future electricity rates.

The mechanics of the financing program have yet to be fully developed, although the Province does intend to introduce legislation during the spring sitting with implementation later this summer. DBRS understands that the plan requires $2.5 billion in annual borrowings, on average, over they first ten years to reduce the GA to a level consistent with the policy objective, although the exact amount to be borrowed in any given year and the number of years for which borrowing will be required will depend on prevailing electricity market conditions.

Ontario Power Generation Inc. (rated A (low) with a Stable trend by DBRS) will play a role in managing the financing program, but the exact legal structure for the financing program has yet to be determined. It is not clear who will issue debt, where it will reside or to what extent it may benefit from explicit Provincial support. Provided the debt continues to be fully supported by the electricity rate base, DBRS will treat it as self-supported and exclude it from the calculation of tax-supported debt. DBRS will re-evaluate once more information becomes available.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Canadian Provincial Governments, which can be found on dbrs.com under Methodologies.

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