Janet McFarland
Globe and Mail
April 30, 2002

TORONTO — Ontario’s electricity market opens for trading tomorrow morning, but the drama begins today for Dave Goulding, who heads the Independent Electricity Marketing Organization (IMO).

At 7 a.m. EDT, in a control room in Mississauga, the IMO will begin accepting bids and offers to sell and purchase electricity in Ontario’s newly deregulated marketplace.

By tomorrow morning, the data gathered today will provide the basis to conduct the first trades under Ontario’s controversial new power marketing and sales system.

“I think it’s almost inevitable there will be some volatility when the marketplace opens,” Mr. Goulding predicts.

“We’re trading in a product that moves at the speed of light,” Mr. Goulding says. “We’re dispatching [electricity] every five minutes. The demand and the supply change continuously. So inevitably there are always small perturbations in the price from moment to moment in this business.”

Ontario has followed the lead of numerous jurisdictions worldwide by deregulating the generation and sale of electricity. Ontarians are deeply divided over the move, and all eyes will watch the IMO’s trading data to see whether prices will soar under an open-market trading system.

As the man who runs the trading floor, Mr. Goulding is making no promises to consumers about the early days of trading.

“I anticipate it will be a very interesting time, one way or the other,” he says.

Ontario’s electricity deregulation is proceeding despite a court ruling last week that has delayed the province’s plans to sell Hydro One, which operates the province’s major power lines. Opening the market for electricity trading is unrelated to the ownership structure for Hydro One, and has had no impact on the IMO’s preparations.

The IMO, with a staff of 400 and revenue of $370-million in 2001, was one of five independent companies created by the breakup of the old Ontario Hydro in 1999. It has traditionally controlled the movement of electricity across Ontario’s power grid from producers to utilities and other users.

Its new mandate is far broader. The province has appointed the IMO to oversee the wholesale trading of electricity under the new system. It will operate the computer database that links 240 wholesale buyers and sellers of electricity, and will regulate and police the trading system. The IMO’s Web site will allow consumers to track electricity prices throughout each trading day.

That means electricity generators such as Ontario Power Generation and Bruce Power will register offers to sell electricity, and buyers such as local utilities and major industrial consumers will register bids to purchase. The wholesale spot price of electricity will be adjusted every few minutes based on the supply and demand considerations of market players.

This will be a big change for Ontario, where electricity rates have long been regulated by the Ontario Energy Board. Until a rate increase was approved last year, rates were unchanged for nine years after the provincial government imposed a cap following spiralling price increases during the 1980s.

“We’re going to see volatility for the first time,” says Tom Adams of Energy Probe. “For the first time, Ontarians will be subject to floating prices for the commodity, where the price is formed on the basis of supply and demand.”

Virtually everyone has a different prediction about how rates will change in coming months.

Mr. Adams believes the commodity price of electricity will be volatile, but is likely to fall on average, although factors such as an unusually hot summer or equipment problems at power plants could always change things.

He points to recent declines in the wholesale price of electricity in U.S. markets as an indicator of what Ontario may experience.

In the Pennsylvania, New Jersey and Maryland (PJM) interconnection – the largest trading hub in the United States – wholesale prices have been lower than Ontario’s for months. Last Friday, for example, the PJM average price was 2.7 cents per kilowatt-hour (converted to Canadian dollars), compared with a wholesale price of 4.3 cents per kilowatt-hour for retail customers in Ontario. Prices in northern New York state have been lower than Ontario’s for the past couple of months. (A kilowatt-hour represents the energy required to light one 100-watt bulb for an hour. A terawatt-hour is equal to a billion kilowatt-hours.)

Mr. Adams said even higher prices in Ontario would be better than those that have been traditionally kept artificially low. They have contributed to losses at Ontario Hydro and rising debt levels.

“Historically this artificial stability was achieved at a very high cost, but it was a hidden cost. So nobody really appreciated the real costs underneath it.”

Deregulation consultant Jan Carr says greater transparency of costs is one of the underappreciated benefits of an open market.

“Before, there were hidden cost subsidies,” he says. “Sure you were getting cheaper electricity, but at the expense of higher taxes. That should not happen any more.”

Mr. Carr, who works for consulting firm Barker Dunn & Rossi in Toronto, believes consumers – whose bills will reflect monthly average prices – will not see excessive increases, even if there are short periods of peak prices.

That’s because about 30 per cent of Ontario’s customers – residential, commercial and industrial – have signed fixed-price supply contracts, which will have a calming effect on prices. As well, he says Ontario has structured its system to require OPG to sell some generation plants quickly to encourage a competitive environment.

Nonetheless, Mr. Carr believes prices in Ontario must rise gradually because they were too low to cover the costs of the system, contributing to Ontario Hydro’s rapidly rising debt.

Critics of deregulation are convinced Ontarians will face rising prices, pointing to experiences in other jurisdictions such as California and Alberta.

Paul Kahnert, who heads the Ontario Energy Coalition, argues that deregulation has a poor track record worldwide, and says publicly owned power systems have a track record of producing cheaper electricity than privately owned systems. The coalition includes consumers, unions, environmental and social interest groups.

Mr. Kahnert says a private system must build in profits that will come out of consumers’ pockets.

“How are we going to get cheaper hydro rates when you add in profits to generators, profits to distributors, profits to retailers, dividends to investors, and commissions to commodities brokers?” he asks.

Mr. Kahnert will not reveal how his group will continue its battle after the market opens tomorrow, but warns there will be more court action taken against deregulation.

For his part, Mr. Goulding at the IMO believes there will be upward pressure on prices because current rates don’t reflect the true cost of producing the commodity.

But he believes that the old monopoly Ontario Hydro allowed costs to soar out of control. The high debt has left the system in no position to build more generation plants to meet future demand.

“This is a change that’s being made for the long term,” he says.

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The Independent Electricity Marketing Organization (IMO) is one of five companies created by the breakup of Ontario Hydro in 1999.

How Ontario Hydro was broken up:

Ontario Power Generation, producer Hydro One – distributor Ontario Electrical Financial Corp. – holds Ontario Hydro debt

Electrical Safety Authority – IMO The IMO’s mandate is to regulate and police the wholesale trade of electricity in the province. It will monitor interactions between buyers and producers.

Producers will offer their power for sale through the IMO. Buyers will bid to purchase through the IMO trading system.

Ontario electricity stats

Sales breakdown:

Residential 27%

Industrial 34%

Commercial 39%

Annual sales Export to U.S., -12 TWh* Domestic, 140 TWh* (valued at $6.8-billion U.S.)

*TWh = Terawatt hours