John Spears
Toronto Star
October 19, 2002

Picture yourself in a marketplace where there aren’t enough goods to buy, there’s only one stall selling them, you can’t buy in bulk when prices are low, and you can’t refuse to buy when prices are high.

Now picture yourself as an electricity user in Ontario.

The province’s new competitive electricity market kept the lights on in the province, barely, through a summer of searing heat and record power demand.

But to the surprise of no one, the new market hit some bumps.

Prices soared to previously unheard-of levels during the hottest weather. On four separate occasions, authorities pleaded with customers to cut back on power use.

Ontario paid suppliers outside the province as much as 40 times the average price for emergency power, while domestic generators received much less from their own marketplace.

And although prices followed a roller coaster path through the day – very high late in the afternoon, very low overnight – frustrated householders discovered they had no way of capturing the low prices and avoiding the high ones.

Now, as strains on the system have eased but warnings loom of similar problems next summer, regulators, industry officials and policy makers are sorting through the evidence looking for ways to improve the system.

For some, such as New Democratic Party leader Howard Hampton, the summer’s experience showed the folly of moving to a market system in the first place. He favours a return to a publicly owned power system, tightly regulated by a beefed up, independent-minded Ontario Energy Board.

Others argue the system can work if it’s properly designed.

Jan Carr, an electricity industry consultant, says many of the problems stem from timidity, with a system stuck half way between a genuine market system and the old command-and-control Ontario Hydro system.

"We’ve got half-competition," says Carr. "You can’t have partial competition."

And some big power consumers such as Dofasco Inc. contend that some of the market troubles stem from a design process that listened more to the people who produce power than the people who use it.

"One of our concerns going in was who would look at this from a customer perspective, making sure that customers were at the forefront of decision-making about everything from privatization to how the market works," says Dofasco’s Gord Forstner.

Because there’s no consensus diagnosis, it’s hard to find a consensus solution.

Forstner stresses that solutions aren’t likely to emerge in a hurry – and shouldn’t be forced.

"I’m not sure if we’re in a position yet to be prescriptive. These aren’t simple issues," he warns.

"We want the best market we can have, but there are no silver bullets to make that happen."

Here’s a rundown of some of the diagnoses and treatments – not all of which are compatible with each other – following the long, hot summer.

Supply

Framing the terms of debate is a report from the market surveillance panel, an arm’s-length group established to guide the Independent Electricity Market Operator (IMO), which runs the new marketplace.

The panel contends that the province lacks enough generation. When demand soared to more than 25,000 megawatts this summer, up to 4,000 megawatts had to be imported. While the Bruce and Pickering restarts are supposed to alleviate the squeeze, no one can be certain they’ll be ready.

Not everyone agrees with the committee.

One potential investor – who asked not to be named – said that the shortfalls seem to exist only until the big nuclear plants start up again over the next two years.

But firms that want to build generators are looking at long-term returns. What, he asked, is the incentive to build if the shortage is short-term?

Forstner says competition is a bigger issue than supply.

"We want to have more competition in generation," says Forstner, noting that Ontario Power Generation still dominates the marketplace with about 70 per cent market share.

Dofasco doesn’t pretend to have any magic answers, but Forstner notes that a special committee looking into the province’s electricity system, headed by Donald Macdonald, had suggested splitting what is now Ontario Power Generation into five separate and competing units.

Instead, it remains a single entity, albeit under orders to divest control of significant portions of its assets.

Whether the problem is too much supply or too little, private investors who might provide the competition are sitting on the sidelines.

The market surveillance panel notes that 6,000 megawatts of generating capacity has been pencilled in to come on stream by 2005, in addition to restarting the Bruce A and Pickering A nuclear stations. But less than 20 per cent is now under construction.

Carr, managing director of Barker, Dunn & Rossi, says that one of the keys to enticing new entries to provide both more supply and more competition is a better marketplace.

Along with physical control of generating capacity, Carr notes, OPG holds vast amounts of inside market information unavailable to potential competitors – a huge disincentive to new entrants. There’s no plan in place to de-control that information.

He thinks there should be. When all market players know what’s going on, there’s much less chance for select insiders to play games.

In Alberta, for example, a Web site shows the status of every generator in the province – whether it’s off or on, working at full or half speed. OPG won’t divulge that information about its generators.

Keeping the lid on information also invites abuse when it is in the hands of some market participants but not others, Carr notes. Insider trading, for instance, is a crime of unequal access to information.

But Carr goes further than simply advocating improvements to the existing spot market run by the IMO.

He says what’s needed is an entirely new market in addition to the spot market, which has been very volatile and hasn’t provided good signals about which way prices are heading.

Carr proposes a binding day-ahead market, operated by an independent organization similar to the Toronto Stock Exchange.

A day-ahead market in which buyers and sellers are both bound by their bids and offers would reduce volatility in the daily price, he argues, and it would give better signals to industrial consumers who may want to tailor their activity to conform to power price movements.

Some private generators argue that they need a further incentive to commit the millions needed to build new capacity.

Not all generators are created equal. The big nuclear plants are designed to run 24 hours a day, 7 days a week. But what’s needed to take the edge off the price spikes is "peaking" capacity — generators that can be fired up quickly when demand heats up, and will provide extra supply to keep prices from going through the roof.

The trouble is, these plants may only operate 60 or 70 days a year. Potential investors say few firms will want to build such plants unless new mechanisms are devised to reward them for being on standby.

Demand

For a market to work, consumers have to be able to buy when prices are low and back off when prices rise.

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"We’ve got half-competition. You can’t have partial competition."

Jan Carr

Electricity industry consultant

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"We want the best market we can have, but there are no silver bullets to make that happen."

Gord Forstner of Dofasco

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The market surveillance panel found that the current market doesn’t provide enough consumers with the opportunity to do that.

Nearly all householders who pay market rates pay a monthly average price for their power.

They can run their dryers at night when prices are low, but they’ll still be charged the monthly average price for that power – not the low night-time price that the market generally delivers.

Some businesses, including most large users, have "interval meters" that allow the firms to pay low prices when the price is low, and force them to pay high prices when the price is high.

But even these firms may not be getting information fast enough in real time to take full advantage of price swings.

Tom Adams, executive director of Energy Probe, calls interval meters "the front line of customer protection."

There’s monthly costs involved in running an interval meter that may not make it a practical proposition for most ordinary householders. But he insists there’s huge room for businesses and some householders to tailor their power use to market conditions.

That in turn cuts the demand for expensive generators that stand idle most of the year and are only called on a handful of days a year to meet the market peaks.

And it curbs the extreme price spikes that really hurt consumers who absolutely cannot turn off the power – such as a patient on home dialysis.

Adams points out there’s an up-front cost to installing interval meters, and the Ontario Energy Board hasn’t yet made it clear that utilities can recoup those costs through their rates.

Interval meters may also provide better two-way communication with customers, since some systems connect customers to the utility via phone or the Internet.

This allows other innovative demand management measures. A Florida utility, for instance, pays some customers for permission to install devices in appliances, such as freezers, allowing the utility to switch them off for up to an hour when demand soars.

The system saves power equal to the output of a major generating unit.

Political interference

Dominion Bond Rating Service pointed to meddling as a major drawback this month.

"Political intervention creates significant uncertainty for market participants and reduces the incentive to invest in the Ontario market," the analysis stated.

Political meddling has been rife. Local utilities first felt the sting two years ago when they were set free to earn profits and applied for rate increases to boost their margins.

The province immediately introduced legislation to block the increases, then leaned on the energy board to roll them back.

Dominion cites more recent examples. The province put Hydro One up for sale, then pulled it back and fired its directors. Premier Ernie Eves has intervened in the complicated (and still partly secret) formula for determining what rebate OPG must give its customers.

And in announcing its review of the energy board’s mandate, the province has thrown a wrench into plans to sell a minority stake in Hydro One – which is regulated by the board.

Anyone who favours a competitive market deplores the interference, but it’s hard to find a way to stop it.

"Have an election, I suppose," shrugs Carr.

Imports

Many Ontario consumers were startled to discover that electricity imported into Ontario runs on a separate marketplace. Dominion and other market watchers question whether there’s a reason for this.

They say it provides an incentive for generators to build "peaking" plants – those designed to operate when demand and prices are high – outside Ontario instead of inside, so they can enjoy the high prices.

It may also provide opportunities for manipulating prices. The IMO is probing a number of instances where imports were promised but not delivered, leaving the domestic market suddenly short of power and almost instantly doubling the price.

Since Ontario had to pay up to $2 a kilowatt hour for the imports for brief periods (the average energy price is just over 5 cents), it was good for consumers that the imports weren’t allowed to set the price. But businesses still pay the high import prices sooner or later through "uplift" charges that, at times, have doubled the energy portion of their bill.

The reason for the mismatch is that the two markets operate on different time scales. Imports operate on a North American standard, where bids and offers are taken, and are made binding a day ahead of delivery. The Ontario spot market operates on a much shorter lead time.

Carr’s proposed day-ahead market would line up the time frames and allow imports and domestic power to trade on the same basis.

Regulation

The new electricity market has left the Ontario Energy Board scrambling to meet new responsibilities.

It was unexpectedly ordered to ride herd on retail energy marketers following a stream of public complaints about unscrupulous tactics.

The province says it’s reviewing the OEB’s mandate.

The Ontario Energy Association, representing both electricity and gas industries, has applauded the review of the board.

"It needs more resources for sure," chairman Peter Budd said, arguing it should have a status similar to the Ontario Securities Commission.

That includes freedom to set its own pay scales to attract top talent. Currently the board is bound by Ontario civil service pay scales. It’s one area in which there does seem to be consensus across the spectrum.

Stopping the market

The NDP’s Howard Hampton argues that electricity is too important to be left to the mercy of the market.

Because OPG, Hydro One and most municipal utilities are still in public hands, Hampton says, it’s not too late.

The current market system, Hampton charges, is "wide open to manipulation."

He says any efficiencies gained by privatization are offset many times over by the higher rates that will be needed to pay profits to private generators, transmission firms, local utilities, marketers and retailers.

"When you add in the new profit takers, the new fee takers, the commission takers and the new taxes, electricity is more expensive for the consumer."

Hampton acknowledges that the old monopoly wielding Ontario Hydro became too powerful, but he says it could be held in check by a vigorous, well-funded energy board.