From a fiscal perspective, public infrastructure, in the form of roads, subways or buildings, is a double-edged sword for the province. Built infrastructure depreciates over time, representing an inevitable but predictable draw on the government’s fiscal position. Yet done properly, these assets improve the productivity of a jurisdiction and either create returns elsewhere (through greater tax revenue) or offset future opportunity costs (such as traffic congestion). A study by the Conference Board of Canada suggests that every dollar invested recently in Ontario’s public infrastructure generated $1.11 in economic output.1 As public infrastructure investment affects both sides of the ledger, Ontario must seek to maximize the value returned to the province through its public infrastructure. Effective procurement practices, such as the use of Infrastructure Ontario’s expertise, should be central to the government’s infrastructure plans.
Public infrastructure underpins all types of public services and programs. From complex health procedures to simple transactions such as renewing a driver’s licence or health card, infrastructure is pervasive in Ontario. Leveraged properly, public infrastructure is also a key enabler of economic growth. Public roads and bridges allow goods and services to flow more freely, public schools ensure that generations of Ontarians are highly educated, and public spaces allow citizens to share innovative thoughts, ideas and talents. But public infrastructure is also costly — since 2003, about $62 billion has been spent and $12.8 billion was planned for public infrastructure in the most recent fiscal year.2
Ontario’s fiscal context will complicate matters further. Funding additional infrastructure investments in the years ahead will be more difficult than it is now. Later in the chapter, we recommend that the province begin a civilized dialogue on alternative methods to fund further transportation needs. More can be done in other areas where public funds are spent on infrastructure.
For example, the Long-Term Infrastructure Plan (LTIP) commits to requiring universities, municipalities, social service agencies and other transfer payment partners receiving significant provincial capital funding to publish a detailed asset management plan. While this is laudable, revitalizing Ontario’s public infrastructure will require more robust measures to keep these assets in a state of good repair.
Recommendation 12-1: Place more emphasis on achieving greater value from existing assets in asset management plan reporting requirements than is currently proposed in the Long-Term Infrastructure Plan for certain organizations (e.g., universities, municipalities, etc.).
There are also cases where the fees charged for services provided via publicly owned infrastructure do not fully cover costs. Where discrepancies exist, the gap falls to taxpayers.
A prime example is in municipal water and wastewater services, where average capital investment chronically lags what is actually needed by $1.5 billion per year.3 In these two sectors, where the equivalent of about half of the $72 billion in municipally owned assets used to deliver these services needs renewal over the period from 2005 to 2019, a funding gap of that magnitude poses serious fiscal risks.4 While a degree of “catching up” has occurred, stable investment over the long term is more efficient and results in greater intergenerational fairness;5 Alternative Financing and Procurement (AFP) could be a useful tool in this regard. Moreover, full-cost pricing in water and wastewater services has the added benefit of encouraging conservation — an area in which Canada desperately lags the world’s best.6 The electricity sector already operates on a cost recovery model; so too should water and wastewater services.
Recommendation 12-2: Implement full cost pricing for water and wastewater services.
Finally, specific sectors will need to fully consider their approach to infrastructure investments. As outlined in Chapter 7, Post-Secondary Education, universities and colleges should find ways to optimize the use of existing space before new capital projects are approved. Chapter 5, Health, notes that any marginal operating costs resulting from current infrastructure expansions and costs from future projects must fit within the health sector’s fiscal constraint proposed in this report. And Chapter 6, Elementary and Secondary Education, and Chapter 14, Justice Sector, also have infrastructure-related recommendations.
The Greater Toronto and Hamilton Area (GTHA) is one of the fastest-growing regions in North America. By 2031, it is estimated that the GTHA will grow from over six million to nearly nine million people, the equivalent of moving the population of Greater Montreal into the GTHA.7
A population influx of that magnitude will place stress on public infrastructure, much of which is nearing full capacity. Gridlock on the GTHA’s roads and highways is already problematic. At present, the average Toronto round-trip commute is estimated to be 82 minutes, the longest for any North American city. It is estimated that this congestion costs $6 billion annually in lost productivity. If the population of the GTHA increases to the level expected, within 25 years that cost would rise to $15 billion and the average round-trip commute time would reach a staggering 109 minutes.
Public transit must surely be part of the solution and we recognize that Metrolinx released a 25-year plan in 2008 entitled “The Big Move.” But with an overall capital cost estimate of $50 billion, of which only $11.5 billion has received a funding commitment,8 seeing this plan through to fruition while maintaining existing transportation infrastructure poses a serious financial hurdle to the province. Overcoming this massive funding gap is the elephant in the transit room. With few exceptions, public discourse on the actions needed to meet this challenge — or the consequences of not acting — has simply not materialized with any degree of provincewide prominence.
It would be completely disingenuous to suggest that plucking the low-hanging fruit is sufficient to fix the problem — it is not. However, we must again emphasize that our mandate does not allow us to recommend tax increases. This limitation prevents us from undertaking a more complete review of the means to fund public transit investment over the next generation. Accordingly, we turn our attention to reforms on the expenditure side of the ledger.
The public transit network in the GTHA is provided predominantly by a hodgepodge of municipal operators, complemented by regional services offered by Metrolinx/GO Transit and private intercity transportation. Recent public discussion and study on mass transit have naturally tended towards service levels and quality; little has been done to study the effectiveness of the current structure of transit offerings. Are the roles of the service providers optimally defined? Is there unnecessary duplication or overlap? Are operations sufficiently co-ordinated and integrated? Answers to these questions and others could illuminate opportunities to deliver transit services more efficiently through means such as rationalizing and better co-ordinating routes, services and fares; pursuing additional common procurements; and exploring other measures to reduce overlap and duplication.
The Ontario Northland Transportation Commission (ONTC), which currently offers subsidized transportation services in northern Ontario,9 is different. Studies and reviews conducted over the past several years in Ontario and other provinces illustrate how its services could be provided more effectively and efficiently through targeted private-sector involvement. These steps should be undertaken.
Recommendation 12-3: Where gaps in information and evidence exist, review the roles and operations of public and private mass transit service providers in the Greater Toronto and Hamilton Area and services provided by Ontario Northland Transportation Commission in the north to find efficiencies in those regions’ transportation networks. Act on that evidence to improve the efficiency of those services.
At present, GO Transit does not charge patrons for the use of its parking facilities. While this may seem trivial, the cost of providing parking spaces is considerable. In February 2009, the provincial and federal governments announced a joint contribution of $500 million in funding to GO to support major infrastructure projects, including new parking structures throughout its network.10 If parking is not priced and charged for, it will be overused; this effectively penalizes those who get to a GO station by means other than a personal vehicle. Moreover, the Toronto Transit Commission (TTC) already demonstrated that providing free parking for monthly pass holders is not sustainable.
Recommendation 12-4: Following the precedent set by the Toronto Transit Commission, begin charging for parking at GO Transit parking lots.
Unfortunately, initiatives on this scale are still not significant enough to overcome the problem at hand. Honest discussions between citizens, government and key stakeholders must begin at once on alternative revenue measures that could address a much more significant portion of the gap in funding needed to implement an ambitious transit plan.
The first is to redouble efforts to negotiate with the federal government on developing a national transit strategy. Despite Canada’s enormous geographical size, it is a largely urban nation. Eighty per cent of Canadians live in urban centres, making Canada one of the world’s most urbanized countries. Traffic congestion is a systemic issue from coast to coast, justifying a national approach. Indeed, the federal government is affected by gridlock as much as any province through lost productivity and tax revenue; in 2006, Transport Canada noted that congestion poses a national challenge in terms of its costs in lost time, increased fuel consumption, and increased greenhouse-gas emissions.11 And despite Canada’s urban nature, the Canadian Chamber of Commerce has noted that Canada is the sole member nation of the Organization for Economic Co-operation and Development (OECD) that lacks a national transit strategy.12
Recommendation 12-5: Pursue a national transit strategy with the federal government, other provinces and municipalities.
Federal funding is just one part of the equation — ultimately, Ontario will determine how best to fund its future needs for transportation infrastructure. While general tax revenues will also be a certain source of funds in the foreseeable future, jurisdictions elsewhere are looking at alternatives: congestion charges, comprehensive road tolling, high-occupancy/toll (HOT) lanes, regional gas taxes and parking surcharges. Each produces various incentives that require thoughtful analysis and consideration. However, without clear input from citizens, striking the right balance of these measures will be near impossible.
Recommendation 12-6: Engage citizens in an open, public dialogue on how best to create new revenue sources for future transportation capital needs.
The government of Ontario is the largest owner of realty in the province. This portfolio is a collection of valuable assets, worth an estimated $14 billion including $2 billion for the land alone.13 The province’s real estate holdings include office buildings, jails, courts, hospitals and more. These buildings are an important tool in the provision of services to Ontarians.
For all of its value, the real estate portfolio also poses challenges. Most buildings are old, with the average age being 46. Consequently, buildings are expensive to maintain properly. In 2010–11, the province spent $842 million to operate and maintain those assets. Reductions in maintenance only offset the inevitable expense of upkeep and can lead to more costly problems down the road; this is true even for buildings that are underused, vacant or which the province has no plans to use in the future. Real estate can therefore represent a costly proposition. Practices that maximize the value generated by these assets are therefore needed.
Rational incentives must be put in place to encourage more efficient use of current space. We learned that ministries are charged below market rates for use of government buildings, suggesting that more office space is being used than should be if ministry budgets were forced to consider its full cost.
Recommendation 12-7: Subject ministries to market prices for the use of government real estate.
There are also buildings owned by the Ministry of Infrastructure but managed and used by a second ministry to deliver a program or service — jails and courthouses being prime examples. This has created unnecessary duplication across ministries in administrating payments for accommodation and capital repairs. Such an arrangement also inhibits the government from taking a more integrated approach to rationalize the use of real estate.14
Recommendation 12-8: Consolidate the real estate and accommodation function now resting in line ministries and locate it centrally at the Ministry of Infrastructure.
Together, these recommendations must work towards reducing the government’s realty footprint. In doing so, Ontario will increase its potential to monetize its portfolio of real estate assets — a potential that must be leveraged. While full ownership of properties may be desirable in many circumstances, it should not be the only approach used. Indeed, an array of innovative alternatives could generate further revenue streams if used appropriately, such as arranging sale-leaseback agreements, leveraging air rights, or undertaking land swaps or land asset-based vehicles.
Recommendation 12-9: Develop a strategic plan for the province’s real estate portfolio that adopts market principles for the acquisition, disposition, use and investment in real estate.
The performance of Ontario’s electricity sector has considerable implications for the province. First, there are direct connections between the electricity sector and the province’s fiscal plan through the province’s ownership of Ontario Power Generation (OPG) and Hydro One, and spending on programs like the Ontario Clean Energy Benefit (OCEB). In addition, electricity prices influence regional competitiveness in sectors such as manufacturing and forestry, when energy represents a significant input. Policies such as the feed-in tariff (FIT) for renewable resources are designed to attract domestic and global companies to invest in Ontario and create jobs for Ontarians. Finally, in addition to these economic impacts, policies related to a changing electricity supply mix have direct environmental implications.
Until Mar. 31, 1999, the province’s primary electricity utility was Ontario Hydro, a large, vertically integrated, government-owned electric utility that provided most generation and transmission in the province, and distribution to about a quarter of Ontario customers, primarily in rural Ontario. After significant criticism of Ontario Hydro’s performance for cost overruns and a rapid increase in rates in the early 1990s, the government passed the Energy Competition Act, dividing Ontario Hydro into several companies including Hydro One, OPG, Independent Electricity System Operator (IESO) and Ontario Electricity Financial Corporation (OEFC).
Following the restructuring of Ontario Hydro, there was a plan to introduce a competitive market for the electricity commodity (generation), in part to create an incentive for private-sector investment in electricity infrastructure. However, once the competitive electricity market opened in May 2002, prices were high and volatile during the summer and early fall of 2002. In response to consumer concerns, the government then froze electricity commodity rates for residential, low-volume and other designated consumers. The price freeze was replaced as of Apr. 1, 2004, by a one-year interim pricing plan, until the government put in place a Regulated Price Plan for residential, low-volume and other designated consumers.
Over the last several years, Ontario’s electricity sector has seen significant private-sector investment driven primarily by long-term Ontario Power Authority (OPA) contracts. These procurement contracts, initially required for system reliability, were implemented because the prices in the wholesale electricity market were too low to cover costs for private generators. In addition, policy objectives such as replacing coal-fired generation with cleaner sources such as renewables, domestic content requirements under the FIT program, and increased conservation efforts, reflect the government’s priorities related to job creation and environmental benefits. These policy goals, combined with costs to replace and maintain aging infrastructure, have resulted in higher electricity rates for consumers.
The current commodity market reflects a partially regulated structure in which the Ontario Energy Board (OEB) regulates the rates for OPG-operated nuclear and large hydroelectric generation. The remainder of the market consists of participants that have long-term electricity contracts with entities like the OPA, and other OPG generation that receives market prices. To mitigate price volatility on consumer bills but still recover the true cost of power, the OEB pre-sets electricity prices for residential and small business consumers once every six months. Transmission and distribution rates are also regulated by the OEB.
There are a number of key points of interaction between Ontario’s fiscal position and the electricity sector. We turn our attention first to direct program and tax expenditures related to the electricity sector. We exclude the performance of the provincially owned electricity corporations, as their impact on the fiscal plan is dealt with specifically in Chapter 17, Government Business Enterprises. We then discuss the fiscal implications of managing the former Ontario Hydro’s debts and liabilities. Finally, the inextricable link between electricity prices and economic performance requires us to review possible avenues to reduce long-term costs to electricity consumers. We believe evidence-based policies that drive efficiencies and improve effectiveness would prove beneficial over time.
Tax revenues support a number of direct program expenditures aimed at subsidizing electricity costs. The most significant of these is the OCEB, which provides a 10 per cent rebate on electricity bills for residential, farm and small business customers. Implemented on Jan. 1, 2011, the OCEB is projected to cost $1.1 billion in 2011–12. The government’s stated commitment is to leave it in place for five years. Although the government itself acknowledges in its Long-Term Energy Plan (LTEP) that electricity prices will continue to rise, the Commission believes the OCEB should be reconsidered to reduce its long-term impact on the province’s fiscal position.
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. 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. We are wary of the possibility that the OCEB would remain on the provincial treasury and thus risk Ontario’s ability to return to a balanced budget in 2017–18. This is further complicated by the fact that the OEFC is not guaranteeing that the Debt Retirement Charge (DRC) will be removed in lock-step with the OCEB, suggesting this may not happen until as far out as 2018.15 Any soft landing provided by removing the cost of the DRC simultaneously with the expiry of the OCEB would evaporate if such a delay were to occur.
Finally, the opportunity costs associated with the OCEB are substantial. The Commission strongly believes there are more effective uses for the over $1 billion per year spent on this initiative. The Commission would be satisfied with a gradual phase-out of the OCEB. However, a more aggressive timeline or an immediate cease to the program would be welcomed.
Recommendation 12-10: Eliminate the Ontario Clean Energy Benefit as quickly as possible.
Although the OCEB is the largest electricity rate subsidy in Ontario, it is not the only one. A number of programs target specific customer types (e.g., small or large volume) or certain areas of the province. Each of these initiatives may offer relief to consumers in terms of energy costs (electricity, gas, oil, diesel, etc.), but over time could discourage conservation, leading to higher costs, and should periodically be revisited to ensure they are meeting policy goals and represent value for money.
Recommendation 12-11: Review all other energy subsidy programs against measures of value for money and achievement of specific policy goals.
Overview of Provincial Tax-Based Energy Subsidies
During the restructuring of the electricity system in 1999, only $17.2 billion of the $38.1 billion of debt that had been accrued by Ontario Hydro was deemed to be supported by the value of the assets of its successor companies. This resulted in $20.9 billion of stranded debt. The OEFC was set up as the legal continuance of Ontario Hydro to take on and manage this debt.
The Electricity Act provided for dedicated revenue streams to retire the stranded debt through payments in lieu of taxes (PILs) to the OEFC from OPG, Hydro One and Municipal Electricity Utilities (MEUs). The government also committed to dedicate to OEFC the portion of the cumulative annual combined profits of OPG and Hydro One above the province’s financing costs for these companies. As of Apr. 1, 1999, these revenue streams were estimated to have a value of $13.1 billion. The difference of $7.8 billion was the initially estimated “residual stranded debt,” and the Electricity Act provides for consumers to pay a DRC until residual stranded debt is retired.
The fiscal impact of the OEFC revenue streams is significant as the OEFC is consolidated on a line-by-line basis on the province’s financial statements. All OEFC revenues and expenses, including interest payments, directly affect the province’s deficit/surplus position, and the OEFC’s debt is included on the province’s balance sheet. This further underlines the importance of the financial performance of OPG and Hydro One as their PILs and some part of their combined net income are used to service the OEFC debt. Any PILs paid by MEUs also represent a portion of OEFC revenues. The PILs include amounts equal to federal and provincial corporate income taxes, which are fully used to service the stranded debt.
As the OEFC’s revenue streams directly impact the province’s fiscal plan, it is imperative for the province to ensure that OPG and Hydro One are run efficiently in order to service and retire the debt and liabilities of the old Ontario Hydro.
While the Commission’s mandate is directly linked to Ontario’s fiscal outlook, we feel that the report’s principles as outlined in Chapter 3, Our Mandate and Approach, are transferable to the electricity rate base as well. This is particularly significant in the context of the province’s LTEP that projects electricity prices to increase 46 per cent over the five-year period from 2010 to 2015, prior to the application of the OCEB. There are a number of potentially large opportunities to source efficiencies in the sector and slow down electricity rate increases.
However, the Commission also recognizes the amount of change that has occurred in the sector since Ontario Hydro was broken into its constituent parts in 1999. A degree of normalcy may very well be helpful for the sector to take stock and reflect on the status quo. Consequently, the Commission has a series of recommendations that are meant to balance the need for stability in the sector with the need to curb costs.
Recommendation 12-12: Produce an Integrated Power System Plan (IPSP) built on the foundation of the province’s Long-Term Energy Plan.
The OPA initially filed an application for approval of the original IPSP in 2007 with the OEB, but this process was never completed. An approved IPSP would provide producers, consumers, utilities and other sector participants with a detailed, 20-year blueprint for the electricity sector.
Recommendation 12-13: Consolidate Ontario’s 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 LDCs16 would result in direct savings on the delivery portion of the electricity bill.
Flexibility regarding LDC sector reform could be greatly enhanced through a co-operative federal-provincial tax arrangement that returns to the province any federal corporate taxes paid by newly privatized electricity utilities. This would allow the province to remove the 33 per cent transfer tax on such divestitures currently in place that goes towards stranded debt. It would also help compensate for the future loss of the federal portion of PILs when a publicly owned LDC is sold to the private sector. There is precedent for such co-operation as illustrated by the previous federal Public Utilities Income Tax Transfer Act.
Larger regional entities might allow for economies of scope as well as scale, allowing greater participation in planning, design of conservation programs and expanding responsibilities to deliver other resources such as water.
Recommendation 12-14: As part of the review of the feed-in tariff (FIT) program, take steps to mitigate its impact on electricity prices by:
Recommendation 12-15: Procure larger generation facilities through a request for proposal (RFP) process.
Recommendation 12-16: Review the roles of various electricity sector agencies to identify areas for economies in administration. This could include investigating the potential to co-ordinate back-office functions.
Recommendation 12-17: Make wholesale electricity prices inclusive of transmission costs such as capacity limitations and congestion as part of a comprehensive restructuring of the wholesale electricity market.
Consumers located nearer to generation stations should be able to benefit from lower electricity prices. Sending more efficient price signals to the marketplace should encourage more optimal levels of investment in electricity infrastructure — generation, transmission and distribution.
Recommendation 12-18: Make regulated prices more reflective of wholesale prices by increasing the on-peak to off-peak price ratio of time-of-use pricing and by making critical peak pricing available on an opt-in basis.
Recommendation 12-19: Co-ordinate a comprehensive, proactive electricity education strategy across sector participants that at a minimum covers:
Recommendation 12-20: Strategically promote Ontario’s strengths in the energy sector, capitalizing on export opportunities for domestic goods and services.
1. P. Antunes, K. Beckman and J. Johnson, “The Economic Impact of Public Infrastructure in Ontario,” 2010, Conference Board of Canada.
2. Ontario Ministry of Infrastructure, “Building Together: Jobs and Prosperity for Ontarians,” 2011,
downloaded from http://moi.gov.on.ca/pdf/en/BuildingTogether_En.pdf.
3. Financial Information Return, 2002–2006, Ontario Ministry of Municipal Affairs and Housing and Ontario Ministry of Infrastructure.
4. Water Strategy Expert Panel, “Watertight: The Case for Change in Ontario’s Water and Wastewater Sector,” 2005,
downloaded from http://www.moi.gov.on.ca/pdf/en/Watertight-panel_report_EN.pdf.
5. V. Gill, “Tapped Out: Efficiency Options for Closing the Municipal Infrastructure Gap,” 2011, Conference Board of Canada.
7. Material in this and the following paragraphs is drawn from Metrolinx, “The Big Move: Transforming Transportation in the Greater Toronto and Hamilton Area,” November 2008, downloaded from
8. As noted in “The Big Move,” p. 70, the province has committed $11.5 billion to support Metrolinx’s plan through the province’s MoveOntario 2020 initiative.
9. Rail freight, passenger services (bus and rail), telecommunications and railcar refurbishment.
10. “Prime Minister Harper and Premier McGuinty Announce Major Improvements to GO Transit System,” Feb. 17, 2009, downloaded from http://www.premier.gov.on.ca/news/event.php?ItemID=3325&Lang=EN.
11. Transport Canada — Environmental Affairs, “The Cost of Urban Congestion in Canada,” Mar. 22, 2006, downloaded from http://www.gatewaycouncil.ca/downloads2/Cost_of_Congestion_TC.pdf.
12. Canadian Chamber of Commerce, “Strengthening Canada’s Urban Public Transit System,” downloaded from http://www.chamber.ca/images/uploads/Resolutions/2009/T-Strengthening_Canada.pdf.
13. Information in this chapter has been provided by the Ontario Ministry of Infrastructure unless otherwise cited.
14. For more on justice sector-related buildings, see Chapter 14, Justice Sector.
15. Ontario Electricity Financial Corporation, 2011 Annual Report, p. 2.
16. Calculation based on figures from Ontario Energy Board, 2010 Yearbook of Electricity Distributors, p. 7.
17. For example, Germany’s equivalent tariff program builds in an annual nine per cent reduction in rates paid to solar photovoltaic generators. See W.E. Mabee, J. Mannion and Tom Carpenter, “Comparing the Feed-in Tariff Incentives for Renewable Electricity in Ontario and Germany,” Energy Policy 40 (2011), pp. 480–89.