Bernard Simon
New York Times
August 22, 2003

With engineers still struggling today to restore full power to industries and households in Ontario, a spirited debate has erupted over the wisdom of recent energy policies in the province, Canada’s most populous.

The province’s premier, Ernie Eves, said today that the state of emergency that had been in effect since the blackout would be lifted this evening and that he expected power supplies to be back to normal by Monday. Since the blackout, the government has urged all power users to cut consumption by 50 percent or face temporary blackouts.

The delay in restoring full power is figuring in the debate over Ontario’s energy policies. In the last week, much of that debate has centered on a four-year price freeze imposed last fall, which, critics say, has led to increased consumption while discouraging new investment in generating and transmission capacity.

“The freeze is great for the consumer, but it’s doing nothing to encourage people to conserve energy,” said Rocco Sebastiano, an energy specialist at Osler Hoskin Harcourt, a Toronto law firm.

Mr. Eves said this week that he might reconsider the freeze. His ruling Progressive Conservative Party is running well behind the Liberals in public opinion polls and political observers expect Mr. Eves to call an election soon, possibly as early as October.

The premier’s second thoughts on electricity pricing are one example of how the blackout has affected debate on power regulation in Ontario, which accounts for about 40 percent of the Canadian economy.

Ontario and several other provinces form an integral part of the North American power grid. The Northeast region of the North American Electric Reliability Council covers New York State and New England, as well as Ontario, Quebec and the Maritime provinces.

But the regulatory system in Canada differs in several important respects from that in the United States. Under the Canadian Constitution, the provinces have jurisdiction over electricity, and each province has its own regulatory framework. In Ontario and Quebec, the provincial government is the sole shareholder in the main generation and transmission utilities. In Toronto and Ottawa, municipal corporations distribute power to homes and businesses.

Thomas Adams, executive director of Energy Probe, a nonprofit research group based in Toronto, said Ontario’s power sector had gone through three phases in the last four years. Before 1999, when it was dominated by Ontario Hydro, a single government-owned utility, “it was central planning with a plan,” Mr. Adams said. With the introduction of deregulation and competition in May 2002, “we were going to use the market mechanism to balance supply and demand.”

Geneviève Lavallée, an analyst at Dominion Bond Rating Service in Toronto, said the government’s backtracking on deregulation meant that “there’s no incentive to invest in transmission.”

At the time of the blackout, rates in the deregulated wholesale market were three times the fixed retail price of 4.3 cents a kilowatt-hour. The difference between wholesale and retail prices is made up by the province in the form of increased debt.

The extent of this subsidy has yet to be disclosed. Though the Ontario Electricity Financial Corporation, which holds the province’s power-related debt, is required by law to publish its accounts within 90 days of the end of its fiscal year, it has yet to produce a report for the most recent period, which ended March 31.

Paul Kahnert, a spokesman for the Ontario Electricity Coalition, a group that favors continued government control of power supplies, agreed that “power at cost” was the likely outcome of the debate. But “it has to be a regulated rate,” Mr. Kahnert said. “We don’t want a rate that’s subject to market manipulation.”

The relationship between Canadian and American utilities and regulators has also come under growing scrutiny since the blackout.

Mr. Adams expressed concern that efforts to change energy policies in the United States might take little account of Canadian interests, especially given the low profile of the Canadian government in electricity issues. “The legislative process in the United States doesn’t leave a lot of room for considerations that extend beyond Congressional districts,” he said. Setting up “an effective international reliability regulator will be a major challenge.”

At the time of the blackout, Ontario was using about 1,700 megawatts of power imported from the United States, out of total consumption of 25,000 megawatts. After reports emerged that the shutdown had its origins in Ohio, Mr. Eves said Ontario should become more self-reliant.

Two of the province’s nuclear power stations are now running well below capacity because of technical and safety concerns. Four units of the Pickering station, east of Toronto, with a combined output of 2,000 megawatts, have been out of service since 1997.

After last year’s backtracking on deregulation, Sithe Energies of New York stopped work on two gas-fired plants near Toronto with a combined capacity of 2,000 megawatts. According to Ms. Lavallée, the government “would have to change the environment here if they want to bring in private investment.”

Some opposition politicians have suggested that Ontario should look more to the neighboring provinces of Quebec and Manitoba than to the United States to plug future supply shortages.

But Mr. Sebastiano, the lawyer, said that Manitoba was too far away from Ontario’s urban centers to make such projects viable, and that it would take some time to expand transmission links from Quebec.