John Spears
The Toronto Star
July 22, 2000

Well, something is going to happen to change the way Ontario residents and businesses buy their electricity.

Only a few nagging issues remain to be resolved – such as how much residents and businesses will pay for electricity, and whether they’ll be better or worse off.

The past month hasn’t made it any easier to figure out.

In short order:

Energy Minister Jim Wilson blasted municipal utilities for trying to hike rates too much. He then introduced Bill 100, to “prohibit municipalities from taking windfall profits” from their local hydros.

Wilson also announced a delay in opening the competitive electricity market – which will allow electricity customers to buy power from any generator or broker that can offer an attractive price. The market had been scheduled to open in November. Wilson said the delay would be up to six months. Shortly afterward, Premier Mike Harris said it could be nine months.

Reacting to Wilson’s statements, the Ontario Energy Board blocked an application for a 6 per cent interim rate increase from Toronto Hydro.

Ontario Power Generation – one of the pieces into which the old Ontario Hydro was split – leased the Bruce nuclear generating station to British Energy PLC for 18 years.

Meanwhile, the Ontario Cabinet has quietly extended special, low electricity rates to a clutch of businesses who had enjoyed special deals with Ontario Hydro. They’ll continue to enjoy lower rates for up to four years. Wilson’s office refuses to release a list of the businesses getting the special break. Pressure for rates to go up, instead of down, is contrary to the promises that a competitive electricity market would benefit consumers.

If Ontario politicians and consumers are bewildered and frustrated they’re not alone: Rates in the U.S. zoomed this week as deregulated utilities charged higher prices in peak demand periods.

Jan Carr has watched the electricity issue for many years. Vice-president of consultants Acres International Ltd., he served on a special committee whose recommendations led to the competitive market we’re moving toward.

Carr said in an interview that the province seems to be losing its focus as it hits the inevitable bumps in the transition from the old monopoly run by Ontario Hydro to the new competitive market.

“That transition could be managed,” Carr said. “We seem to have stopped focusing on managing the transition, and are focusing on eliminating the transition instead.”

Terminology surrounding the new market also is confusing. It’s often referred to as deregulation of the electricity market.

That’s not really the case: All transmission and distribution rates must still be approved by the Ontario Energy Board.

But local utilities are now set up like private corporations, trying to earn a return on their assets. And the old Ontario Hydro has been broken up, with its transmission grid, known as Hydro One, separated from its generating side, called Ontario Power Generation.

“Re-regulation is probably a better word,” said Paul Calder of Canadian Bond Rating Service, which issued an analysis this week.

Some of the political rhetoric has also implied that the market is moving toward privatization of the electricity system.

Certainly, the long-term lease of the Bruce nuclear plant put operation of a major facility in the hands of a private company. But a provincial corporation remains the owner – and will ultimately be responsible for decommissioning and clean-up costs.

Moreover, the biggest buyer of local utilities, which own the wires that carry power to homes and businesses, has been Hydro One – whose sole shareholder is the Ontario government.

In these circumstances, private investors aren’t likely to put money into the electricity sector because they don’t know the rules, said Carr.

For example, Bill 100 seems in its wording to limit the rates of utilities owned by municipalities – but not private companies. But no one is quite sure.

“Clearly if you’re in the private sector and you’re thinking of investing in the industry, you’re sure as hell not going to invest until that little wrinkle is sorted out,” said Carr. “And that won’t happen until the fall.”

A spokesperson for Wilson, who is on vacation, didn’t lay the uncertainty to rest.

No private sector firms control municipal utilities, he noted, which is why the legislation refers to the public sector. But private firms could still face controls.

“If new owners didn’t see the long term benefits of keeping rates reasonable, the minister retains the option of intervening,” he said.

Calder also cites political uncertainty for keeping private buyers out of the market.

“They’re on the sidelines already, and this probably keeps them there even more firmly.”

Calder’s analysis shows a clear winner: Hydro One. It has already snapped up 40, mostly smaller, local utilities and has bids in for another 80.

It has a huge advantage over private investors, Calder said. The province has slapped a 33 per cent transfer tax on any municipal utility sold to a private sector firm or fund. Hydro One is exempt from that tax.

That “effectively renders Hydro One the prime candidate” to buy up local utilities, his report states. But it flags a danger: Given the lack of a real market Hydro One may overpay.

In tandem with Bill 100, Wilson has instructed the energy board to give “primacy” to the interests of customers when it determines rates.

That seems to limit the return that utilities can earn on their assets, Carr pointed out.

“The utility has to borrow money and find equity,” said Carr. “They’re going to be in a very awkward position to do that if they’re not allowed to earn a return on equity.”

Moreover, municipal utilities now in effect have to pay provincial tax on income. Taking on debt cuts their tax exposure, and is a common private sector financing strategy. But Wilson is flaying the local utilities, oddly, for acting like private sector firms. Dale Richmond, who runs the $35 billion Ontario Municipal Employees Retirement System (OMERS) pension fund, is on record saying he knows of utilities that have sought private investment, but failed to attract any because of the uncertainty.

OMERS owns 10 per cent of Mississauga Hydro, but plans to merge the utility with a clutch of other 905 area-code utilities have stalled in the uncertain climate.

Peter Dyne of the Consumers Association of Canada said that preventing utilities from generating a satisfactory return may violate the intent of laws governing corporate behaviour.

It also violates the rules of economic logic, he argued.

Earning a satisfactory rate of return is the incentive for businesses to operate efficiently, he said.

If the utilities are thwarted from earning their targeted rates of return, what incentives do they have to operate at maximum efficiency? he asked.

Tom Adams of Energy Probe argues that encouraging utilities to incorporate and seek a higher rate of return for their municipal shareholder-owners was bound to create pressure for higher rates.

Dyne said that there will be some thorny issues for the regulator to sort out even in defining rates of return.

For example, many municipalities require developers to pay extra so cables can be buried in new subdivisions. That creates a higher asset value for the utility.

Should utilities be allowed to earn a return on those “contributed assets?” Dyne asked. If so, they’ll have to raise rates.

Toronto city councillor Jack Layton, who is vice-chair of Toronto Hydro, is furious with the mixed signals from the province. Toronto Hydro felt the sting of the new policies when the energy board denied its rate increase on the basis of Wilson’s order.

Layton sees a bias toward privatization.

“If we’re a publicly owned business they won’t let us have a return on our investment. Only if we’re a privately owned business,” Layton said in an interview.

“They’re trying to accomplish the privatization that we refused to enact.”

Whether or not privatization is the ultimate agenda is hard to say.

But Carr – who had a hand in shaping the policy – said competition doesn’t have to mean privatization.

“What is needed is competition,” he said. “The fundamental thing is to create choice. When customers have choices and they vote with their pocketbook, then the industry will go in the direction people want it to go.”

If municipally owned utilities can do better than private ones, there’s no reason to intervene, Carr said. Wilson is right to blow the whistle on municipalities that suck dividends out of their electrical utilities to fund recreation programs,he said.

But he said Wilson should stay out of the fray if a city borrows responsibly against its hydro utility to fund capital improvements to other assets, such as roads or transit systems.

“I would prefer the minister tell them what to do with the money, rather than tell them how much money they may have, which is what they are now doing,” said Carr.

Energy Probe has urged competition in the marketplace, but Adams said recent provincial actions are subverting a true market.

By allowing the selected businesses to maintain special preferential rates for the next four years, for example, the province forces Ontario Power Generation Inc. to charge its other customers higher rates to make up the difference.

Wilson’s office notes that Bill 100 is a temporary measure, expiring in 2003.

Adams said that is precisely the problem. Changes are under way – but Bill 100 means their effects won’t be apparent for three years.

“We consider that to be immoral,” he said. “It conceals from consumers the magnitude of the impact they’re going to suffer.”

Adams also rejects the notion that higher electricity bills necessarily lead to conservation.

The current policies are driving up the cost of delivering power – not the cost of the energy itself, Adams said.

The cost of running a wire to a conservation-minded household is the same as running a wire to a household of energy hogs, Adams said. Driving up the cost of energy equally for both households does nothing to reward the household that uses less electricity.