Higher hydro rates predicted

Martin Mittelstaedt
Globe & Mail
November 14, 2000

Deregulation, debt loads, market forces will see users digging deeper, experts say.

The Ontario electricity market, the biggest in the country, is about to be jolted by higher and more volatile power rates, according to industry experts.

The expected rise, which is difficult to quantify, is a result of the government’s twin program of deregulating the industry and integrating it more closely with the U.S. power market, where rates are under upward pressure due to higher natural gas prices.

“Rates are going to go up. When the public figures out what has been done to them I think they’re going to be very upset,” said Tom Adams, executive director of Energy Probe, an environmental and consumer advocate organization.

The government has also allowed its distribution utility, Hydro One Inc., to go on an unprecedented acquisition spree.

It has quietly spent about $500-million in the past few months to take over about one-third of the province’s local power companies, paying above market prices for some of the assets.

Many industry experts are baffled by the actions of Hydro One, which is one of the successor companies to Ontario Hydro and delivers electricity mainly in rural areas of the province.

Industry experts, such as Mr. Adams, are worried Ontario’s venture into deregulated power could turn into a fiasco of the kind experienced in Alberta and California, where higher prices and supply problems have occurred.

“This electricity restructuring is morphing into an attack on consumers, taxpayers and the environment,” Mr. Adams said.

Until now, Ontario’s $10-billion electricity market has been run as a non-profit, government co-operative, with the province owning most of the generating stations and the transmission grid, while municipalities owned local companies that delivered the electricity to most consumers.

Under the policy changes, these electricity suppliers are being told to operate on commercial terms, make a return on their investments and make payments in lieu of taxes to the province to help retire the debt incurred by the old Ontario Hydro.

Competition in the generation of electricity is also being allowed, while the province’s four million power- ratepayers will be permitted to select the electricity supplier of their choice, starting next year, much like deregulation in the telephone and natural gas industries.

Under the new system, rates will fluctuate on a day-to-day, hour-to-hour basis, according to supply-and-demand.

This is a change from the previous system, where rates were fixed annually based on the cost of supplying electricity.

As an efficiency move, the province has also encouraged the rationalization of local power-distribution companies by granting a tax holiday on mergers between those owned by government entities.

Under the tax break, which ended last week, the number of local distribution companies plunged to 91 from 230.

However, Ontario still has far more than the 25 that exist in the rest of the country.

Distribution costs account for only about 15 per cent of the total price of electricity for taxpayers, so any efficiency savings from the rationalization are expected to be small.

Mr. Adams said the requirement for the sector to earn commercial returns will likely raise overall power rates by about 7.5 per cent over the next three years.

Hydro One purchased 88 of the local distribution companies during the tax holiday, boosting its customer base to 1.2 million a rise of about 25 per cent. Its biggest purchase was a $260-million deal for Brampton Hydro, covering 83,000 customers at a cost of about $3,100 per customer.

Some industry analysts believe Hydro One overpaid by more than 50 per cent on this purchase.

“We would have thought something under $2,000 per customer,” said Tony Jennings, executive director of the Municipal Electric Association an industry trade group. “It is quite interesting that their shareholder is allowing them to do this.”

Bu Hydro One defended the acquisition. Rod Taylor, executive vice-president, said Brampton is in a rapidly growing part of the GTA, and the utility was willing to pay a “strategic premium” to expand into a major urban market.

He said electricity distributors have grossly inefficient ownership structure, compared with other energy sectors, such as natural gas, where there are only two major companies in the province.

 

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