Ontario Pledges $1.9 Billion to Curb Soaring Power Rates (1)

Mar 02, 2017 12:23 pm ET

(Bloomberg) -- It will cost Ontario C$2.5 billion ($1.9 billion) over three years to cut electricity rates by an additional 17 percent as Premier Kathleen Wynne responds to a backlash over soaring hydro costs in Canada’s biggest province.

Under the power plan unveiled Thursday, Ontario will refinance its capital investments over longer periods to reduce costs in the short term, while providing additional relief to consumers in rural areas and on First Nation reserves. The province says it will still balance its budget in the next fiscal year.

“Thanks to a provincial economy that is leading all of Canada growth, we can make this change and stay on track for a balanced budget next year and the years to follow," Wynne said in a speech presenting the plan. "But it’s going to be a lot harder now and we’ll remain a lot closer to the line."

The price of power in Ontario has been surging after it spent more than C$50 billion to expand and overhaul the electricity system of Canada’s most populous province. The Liberal government has been refurbishing its nuclear power plants, phasing out coal and spending heavily on wind and solar as part of a green power push. A typical residential bill has risen 50 percent since 2010 to C$156 per month, according to Ministry of Energy data, pushing rates for both consumers and businesses to among the five most expensive in North America.

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The increases have contributed to a plunge in Premier Wynne’s approval rating to a record low of 16 percent in December, according to a poll by the Angus Reid Institute. And the controversy has reached Prime Minister Justin Trudeau’s office with one tearful customer imploring him for assistance at a recent town hall, even though power is a provincial jurisdiction.

The reduction comes on top of an 8 percent cut in the provincial sales tax on electricity that went into effect Jan. 1, bringing the total average reduction to 25 percent, starting this summer, according to the statement. Rate increases over the next four years will be capped at the rate of inflation.

About 800,000 rural customers will see an enhanced hydro relief program, while small businesses will benefit from a lower usage threshold in an aid program for manufacturers and industrial consumers, according to the statement.

The change is going to make the province more competitive, said Maria Berlettano, head of Canadian government credit strategy at Canadian Imperial Bank of Commerce in Toronto, adding it was a positive that the province recommitted it’s intention to balance next year’s budget.

For bondholders of Hydro One Ltd., the electricity distributor the government spun out as a public company in 2015 as part of its overhaul, the plan is a sign of more mismanagement and taxpayers will end up paying the bill, said Mark Carpani, a portfolio manager at Ridgewood Capital Asset Management, with C$1.1 billion in assets. His fund doesn’t own Hydro One debt and is “heavily underweight” Ontario bonds for similar reasons, he said.

(Updates with reaction near end.)

--With assistance from Allison McNeely

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