Energy Analects

March 19, 2001

Electricity deregulation may be haunting words to political officials and consumers, but industry insiders see the process as a necessary fact of life that will soon encompass all of North America and the world – and much of the Ontario energy sector wants to join in on it.

Just as the Toronto Board of Trade recently urged, representatives of the businesses, that will be directly involved in providing electricity under the new deregulated structure in Ontario, told the recent Enerdata Ltd. GasFair Power 2001 conference they want a firm date for market opening – sooner rather than later.

“They have to give us a date,” said Arthur Dickenson, president of the Association of Major Power Consumers in Ontario (AMPCO).

He indicated continued delays for market opening could discourage the entrance of new players, with new power projects, from making a move into the Ontario market.

Dickenson also said his association would have preferred an earlier market opening, noting the late October/early November start proposed by the Independent Electricity Market Operator (IMO) and Ontario Energy Board (OEB) is too close to the winter heating season and potentially volatile spot prices.

Jake Brooks, executive director of the Independent Power Producers’ Society of Ontario (IPPSO), and Tom Adams, executive director of Energy Probe, also urged setting of a firm date for a market opening.

“If the provincial government fails to proceed with opening Ontario’s electricity market by November 1, 2001, many investors and their jobs will move to Ontario’s economic competitors,” said Elyse Allan, president and chief executive officer of the Toronto Board of Trade.

“Although the Premier (Mike Harris) and Energy (Science and Technology) Minister (Jim Wilson) have both indicated that market opening will proceed, to date we have not been provided the necessary commitment to succeed,” Allan said.

“A firm opening date is essential for businesses to plan. Without a firm date, current pricing and supply arrangements could be jeopardized and new, innovative and environmentally desirable electricity supply will go elsewhere.”

The Toronto Board of Trade noted Ontario has a comfortable 18% generating reserve, greater power supply flexibility and the potential for new generation – assuming an immediate government commitment to a firm Nov. 1, 2001 market opening date.

“To further delay market opening, would be to risk this advantageous supply/demand balance. It would perpetuate a monopoly that has left Ontarians with $20 billion in stranded debt,” Allan said.

“A November 1 first market opening brings greater consumer choice, reliable electricity supply, environmentally desirable options, competitive pricing, jobs and investment,” said Allan.

“That’s much preferred to the current uncertainty consumers, investors and businesses now face as they plan for the future. To provide certainty in the marketplace, the provincial government must proceed with opening Ontario’s electricity market by Nov. 1, 2001,” Allan said.

The Toronto Board of Trade urged the Ontario government to:
– Set Nov. 1 as the open market date;
– Accelerate decontrol of Ontario Power Generation Inc.’s assets;
– Streamline approvals and recognize the value of environmentally desirable projects; and
– Foster a customer-friendly retail market.

The Toronto Board of Trade pointed out the IMO and OEB have indicated they will be ready for an October/November 2001 opening and it supports a world-class made-in-Ontario open market model.

For their part, the IMO and the OEB – organizers of a joint task force set up to prepare the wholesale and retail electricity market – have been receiving the feedback from industry and are anxious to get the process started under the right circumstances.

“Consultation (with industry as part of the task force) has helped us enormously,” said Floyd Laughren, chairman of the OEB.

Although the OEB is anxious to move towards market opening, it faces other problems.

“When we try to speed up the process, we get accused of not providing due process,” Laughren said.

Once the market opening process begins, the IMO, OEB and industry participants all believe the same thing – there’s no turning back.

Bruce Campbell, vice-president of corporate and legal affairs for the IMO, said all operational systems for the electricity market will be ready by the end of May.

However, task force meetings have determined the preference is for the wholesale and retail markets be opened together in the fall, when they anticipate all potential participants will be ready.

But even before the market opens officially, there will be a “coupled operational dry run” in which all industry and market players will have to participate, said Campbell.

He noted this will be a major structural stage for market opening because once the dry run starts “we will not want to go back.”

The dry run will cover about four weeks and “will lead to market opening and then a stability period,” he said.

Political types, anxious to keep potential voters happy, and consumers, grappling with higher power costs in areas that have already moved ahead with an open market, may feel deregulation is the wrong move, but few in the industry see it that way.

“Deregulation is not something we can go back from,” said David Pope, the president of Dynegy Canada Inc. “It’s apparent there are large benefits to open markets.”

As the newly appointed president for the Canadian division of a major North American energy provider, marketer and distributor, Pope sees the deregulation process as more of an overall trend.

“This is a story of convergence really,” he said, noting the importance natural-gas fired facilities will have on the electricity-generation market.

Despite the existence of some electricity competition, “true open access does not really exist yet,” Pope said, noting power markets will need closely connected wholesale and retail sectors, an easing of environmental restrictions and a mix of contract terms to manage price fluctuations more effectively.

As the Toronto Board of Trade indicated, Ontario Power Generation’s market dominance in Ontario continues to be a serious concern within the industry.

OPG has a government-dictated responsibility to reduce to 35% from 85% its generating capacity in the province within 10 years, but that’s not soon enough for many.

OPG also has a huge debt load, which despite the premier’s recent assertion, has been increasing rather than decreasing, industry representatives noted.

“Ontario’s electricity debt is actually rising,” noted Energy Probe’s Adams. “Electricity debt is not under control, contrary to what Mr. Harris said (at the recent public appearance in Toronto).”

He also said he was worried about full disclosure of OPG activity and what might be contributing to the increasing electricity debt.

Dickenson of AMPCO supported the comments by Adams on the increasing OPG debt and the activities of part of the former Crown corporation. “There’s a lack of transparency about what’s going on,” he said.

Ontario’s political officials continue to emphasize they have a clear understanding of what they want to do in opening the province’s electricity market.

“Ontario is fully committed to opening its electricity market to competition,” Energy Minister Wilson recently told the annual meeting of the Municipal Electrical Association in Ontario.

“The circumstances have to be right for Ontario before the starting pistol sounds,” he said.

Wilson said there are four principles that guide the government’s vision for opening the electricity market and they include: protecting consumers and offering more choice; creating a strong business climate, with a reliable supply of electricity; protecting the environment; and encouraging new ways of doing business and supporting the search for alternative sources of power.

“Protecting consumers is first and foremost,” Wilson said.

“A competitive market will, over the long term, offer the lowest possible costs and lead to better service and value for consumers. That means giving consumers the power to choose their own electricity supplier, with the information they need to make intelligent decisions. It also means protecting them from sharp price increases or interruptions in their power,” he said.

Wilson also said a key condition of the province’s strategy is OPG’s decontrol strategy.

“It’s very key, because we have to make room for new entrants in generation,” he said.

The second principle complements the first, Wilson said, noting the government wants to create a strong business climate for investors and consumers, one that ensures a reliable supply of safe, affordable electricity.

“We won’t open a market, like California and Alberta did, where generation capacity was fully stretched to meet existing demand, let alone provide for future growth,” he said. “Clearly, Ontario’s overall supply/demand fundamentals put us in a much more favourable position than either California or Alberta.”

Wilson would not commit to a market opening date, noting only that “we won’t move forward until the government is satisfied we can bring in a market that consumers will benefit from.”

Wilson said Ontario has been learning from those than have already opened markets to competition.

“We’ve been closely monitoring all jurisdictions which have introduced electricity deregulation, from the success stories to those struggling under tight supply/demand balances,” he said.

And although, California and Alberta have been getting the headlines, Wilson said “that’s unfortunate, because competitive electricity markets have been successful more often than not and yet we don’t seem to hear about the success stories.”

The energy minister indicated Pennsylvania, the United Kingdom and the State of Victoria in Australia are places where consumers have benefited from competition.

Wilson likened Ontario’s situation to that of Pennsylvania, which introduced competition with adequate supply and a low reliance on gas as a fuel source.

However, there was some concern expressed at the Enerdata conference about the lack of documented evidence on the IMO’s study of the supply potential for Ontario.

Energy Probe’s Adams and AMPCO’s Dickenson said they were disturbed by the lack of documented data on supply sources, which could enable independent varification of the IMO study’s assertions.

Pointing out Ontario residents benefited from a seven-year price freeze, which has kept prices artificially low, Energy Minister Wilson said new requirements for protecting the environment have added additional costs to the mix, totalling almost $2 billion over the last decade.

“Additionally, energy prices – including electricity prices – are under upward pressure globally and will likely remain so for the foreseeable future,” Wilson said.

“Ontario cannot isolate itself from these broader global trends,” he said.

“Even Alberta, Canada’s energy producing province, is experiencing these same price pressures. The key for Ontario is to make sure that supply remains safe and reliable, prices remain competitive and consumers get the best deal possible. A competitive market, once we have worked off the excesses of the past, will produce this result,” Wilson said.

All the speakers in one session of the conference referred to the California power crisis and how energy convergence is having an influence on prices.

Perhaps Brian Frank, president of BP Gas & Power Canada, did the best in summing up the situation for California and Alberta pricing woes.

“Electricity is the dog and gas is the tail,” he said, pointing out higher spot gas prices combined with a lack of generating capacity to push up the costs of other commodities.