Regulatory power real issue in electricity deregulation

Eric Reguly
Globe and Mail
February 14, 2002

Evidently looking to add some fizz to her fizzling campaign, Conservative Party leadership candidate Elizabeth Witmer this week promised “an immediate review” of Ontario’s decision to deregulate the electricity market in May. Deregulation is a fuzzy concept that, thanks to California and Enron, has dubious connotations. Too bad the term in this case is a complete misnomer. In fact, regulation, and lots of it, is on the agenda.

When you mention deregulation to the typical Ontario consumer, the reaction typically ranges from skepticism to fear. Deregulation means that the buyers and sellers can negotiate prices (partly true) and that prices will rise (possibly true, although the opposite could happen). It also means that Hydro One, the transmission arm of the old Ontario Hydro, is to be privatized through a monster initial public offering. This, of course, raises visions of price gouging because that’s what private companies naturally attempt to do. A utility owned by the taxpayers, as Hydro One is now, would always have the public interest at heart, or so consumers think.

In reality, the so-called deregulation will come with regulations that will govern almost every aspect of the industry. This, for the most part, would be a welcome change.

First some history. For most of its life, Ontario Hydro (which was split into Hydro One and Ontario Power Generation in the late 1990s) was a law unto itself. The government had no legal right to tell it what prices it could charge even though it was the sole shareholder. The bulk of its capital expenditures were unregulated too. Ontario Hydro took advantage of this by evolving into Canada’s biggest construction company. Generating plants that the province didn’t need were built at damn-the-cost prices. The Darlington nuclear plant, east of Toronto, opened in 1992 a decade late and about $12-billion over its original budget. In the late 1980s, Hydro was planning to construct a dozen new nuclear plants.

The free-wheeling era ended in 1992, when the newly installed NDP government decided to rein Ontario Hydro in. But, as it turned out, making it accountable to cabinet was not ideal. Politicians had the power to tell Ontario Hydro what to spend where, even if the projects made little economic sense. Then the government froze electricity rates, just when all the bills for Darlington and other costly plants were rolling in.

By 1997, Ontario Hydro was effectively bankrupt. Because of Ontario Hydro’s dismal record, the industry will forever be regulated. Ms. Witmer can relax somewhat (more on this in a moment) about potential rip-offs and general scamming because of the presence of two regulatory bodies, the Ontario Energy Board and the Independent Electricity Market Operator (IMO). The former will regulate the rates and returns of the industry’s monopoly companies – Hydro One and the local distributors such as Toronto Hydro, among others. The latter will control the access to the electricity grid.

In effect, the IMO, as it’s known, will act like a stock exchange floor, matching buyers and sellers at the fairest price. Any player that doesn’t abide by the rules will get kicked out.

The presence of the IMO, in particular, should give all electricity consumers confidence that open markets won’t favour any one group of participants. Sadly, this may not be the case because the IMO is not as independent as its name suggests. If there is one area in which Ms. Witner could make political points, it is here. The IMO has 17 board members; at least nine, and possibly 10, represent industry “stakeholders” – the generating and transmission companies, the big industrial users, the local distributors and the like. The others, a minority, are independents; that is, they don’t represent any stakeholder.

Rod Taylor, Hydro One’s strategy chief, is an IMO director. He, of course, will vote in favour of motions that will benefit Hydro One. Barry Chuddy, a senior employee of TransAlta, the Alberta company that is building generation capacity in Ontario, will obviously do the same for his employer.

If there is one way to help ensure that the new electricity market is tamperproof, it is to make the independents a majority on the IMO board.

Over time, they should control it outright, with no political interference from the Ontario cabinet.

Electricity, like water, is an essential service and it’s essential that no one interest group has the power to gang up on another.

 

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