Ontario extends power subsidy to larger users

Rajiv Sekhri
Morningstar.ca
March 21, 2003

TORONTO (Reuters): The Ontario’s government broadened the scope of its price cap on electricity use to include some bigger consumers on Friday, but it stopped short of an across-the-board subsidy.

The extension came after months of lobbying by mid-sized and large firms. They did not benefit from a rate freeze of 4.3 Canadian cents a kilowatt hour introduced late last year after Ontario’s messy experiment with deregulating Canada’s biggest power market led to soaring power prices as a provincial election neared.

The Conservative government did not say what it would cost the treasury to extend the cap. It insists that the price cap will eventually be self-financing, although analysts say its cost to Ontario could be C$1.7 billion ($1.1 billion) in the first year alone.

Ontario Energy Minister John Baird said the price cap will be extended to all those using less than 250,000 kilowatt hours of power a year. The cap, introduced in November, has so far applied only to households and to those businesses that use less than 150,000 kilowatt hours of electricity annually.

Baird said large users will remain in the wholesale market and their rebate will be fixed at 50 per cent of the amount by which the average spot price of electricity exceeds 3.8 cents per kilowatt hour.

“You have to give the government credit for preserving the remaining integrity of the market,” said John Brace, president of the Independent Power Producers Society of Ontario.

David McFadden, an energy lawyer with Gowlings in Toronto, said the cap extension is a step in the right direction.

“We’re encouraged that the wholesale market has been left substantially intact,” McFadden said.

The major beneficiaries of the higher cap level are expected to be large retailers and mid-sized farms.

The cost of the cap, the gap between wholesale prices paid to generators and the 4.3 Canadian cents charged to consumers, is being financed from a special fund set up by Ontario Power Generation, the provincially owned power generator.

Some analysts said the government’s announcement has killed any incentive for Ontario Power Generation to sell assets, a key step toward a competitive power market.

Tom Adams, with watchdog group Energy Probe, noted that the government said on Friday that OPG’s rebate to large users will be “fixed”. He pointed out that if Ontario Power Generation were to sell assets, its subsidization costs would not decrease.

“At one time, there was financial incentive for Ontario Power Generation to privatize. Now that has gone. This is a very significant change and the government has struck a blow to the heart of competition,” Adams said.

The freezing of electricity prices has dampened any hopes of private investment in power generation in Ontario.

The average wholesale price has been 5.81 cents per kilowatt hour since May 1, when Ontario’s electricity market opened to competition – about 30 per cent above the cap.

Analysts said the announcement could bring a period of stability in Ontario’s power market, which has been marred by controversy and price volatility.

“A lot of doubt has been removed. Earlier (the market) was in a half-pregnant state,” said Jonathan Dickman-Wilkes, a senior consultant with energy consulting firm Navigant.

($1=$1.48 Canadian)

 

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