Paul Waldie
Globe and Mail
June 7, 2002

 Six weeks ago, Ontario’s massive electricity restructuring was moving into its final stages without a ripple.

After four years of preparation, the province was just about to open the wholesale market for power. A plan to sell $5-billion worth of shares in Hydro One Inc., the transmission utility, was well under way. And, around 860,000 consumers, or 20 per cent of total households, had signed contracts with private electricity companies.

Things were going so smoothly that Ernie Eves, who replaced Mike Harris as Premier on April 15, gave the restructuring little thought as he campaigned in a byelection.

Everything changed on the morning of Friday, April 19, when Mr. Justice Arthur Gans walked into a downtown Toronto courtroom to issue a ruling on a lawsuit by two unions challenging the Hydro One sale.

Few people, including some of the union’s own lawyers, thought the lawsuit had a chance of succeeding. But Judge Gans ruled the province did not have the legislative authority to sell the utility.

Suddenly, the process that looked so smooth in April stumbled, and some say it may not recover.

The future of Hydro One remains uncertain and Mr. Eves is scrambling to come up with an alternative to the initial public offering. Compounding matters, the company’s board quit this week after the government introduced legislation to fire all directors because of a dispute about executive compensation.

The court ruling has also emboldened opponents of the energy restructuring, who are now vowing to launch additional legal challenges. They got more ammunition yesterday when the provincial auditor questioned terms of a lease the government signed with British Energy PLC for a nuclear station and said consumers could face higher electricity prices because of cost overruns at the Pickering, Ont., nuclear plant.

"We are going to close the market and put it back in the public’s hands," said Paul Kahnert, head of the Ontario Energy Coalition, a group of unions and other associations opposed to the restructuring.

The coalition is planning more lawsuits and encouraging consumers who signed long-term contracts with private suppliers to take them to court.

"The idea that you can add in profit into a non-profit system and have cheaper prices for consumers is wrong," Mr. Kahnert added.

The government is also facing fierce criticism from some members of the financial community who are upset at Mr. Eves’ indecision over the IPO.

"Ernie has got to come to grips with what he is doing," said Bernard Syron, one of the Hydro One directors who resigned.

"I don’t know what has happened to Ernie. He blinked over the IPO. He isn’t half the man as his predecessor was," added Mr. Syron, chairman of Cara Operations Ltd.

This isn’t the first time Ontario’s electricity system has seen turmoil. In fact, the current restructuring was largely born of a crisis five years ago when the old Ontario Hydro announced that its nuclear program, one of the largest in the world, was a mess.

In August, 1997, the utility said it was closing seven of its 19 reactors because they were unsafe and needed $8-billion in repairs. Allan Kupcis, the chief executive officer, resigned and the government was forced to act.

A year later, the province passed legislation to split Ontario Hydro into five entities – Hydro One, the transmission company; Ontario Power Generation (OPG), the power generator; the Independent Electricity Market Operator (IMO), a non-profit division to co-ordinate the open market; Ontario Electricity Financial Corp., which held the utility’s $38-billion debt; and the Electrical Safety Authority.

Hydro One and OPG began operating in April, 1999, and last December the government announced plans for the Hydro One IPO.

After two delays, the IMO opened the province’s power market on May 1, 2002. So far, that market has worked well, expert say. It connects wholesale buyers to sellers and sets a spot price every few minutes. The price set by the market will ultimately be used by power sellers to establish retail prices. Before May 1, the Ontario Energy Board set all power prices.

The average price in May was 2.9 cents per kilowatt-hour, well off the 4.3 cents in place before the open market. However, experts caution that prices will begin to rise once the summer heats up.

"I’m expecting things to go pretty crazy," said Tom Adams of Energy Probe, a Toronto-based environmental group.

"Shortages, price hikes and great difficulty making tough choices. But that’s why we need a market."

He and other experts don’t expect Ontario to face the same kind of problems that plagued California, such as chronic supply shortages and soaring prices. Unlike California, which kept retail prices regulated, Ontario’s retail price will be driven by the wholesale market. Ontario also has access to more generating capacity in the face of supply shortages than California. And, unlike California, Ontario can mandate when generators are allowed to go down for maintenance, so that enough plants are on stream at all times.

"We are not going to have a California here in Ontario," said Michael Morrison, director of the Canadian Energy Solutions group at Fujitsu Consulting in Toronto. "We looked at the market and we learned the lessons well."

But others say Ontario still faces significant problems. For example, despite a drop in the spot price for power, consumers have seen their electricity bills rise because the regulated portion has jumped by more than 10 per cent in recent weeks. That portion represents about half the total bill and it consists of charges for transmission, distribution, debt payments and fees to run the IMO.

The OPG is also far too large, experts say. The power generation company accounts for 85 per cent of the province’s supply and dominates the new open market. The province has ordered OPG to reduce its proportion of total generating capacity to less than 35 per cent within 10 years.

In March, OPG sold four hydroelectric plants to Brascan Corp. for $340-million. The plants represent about 1.5 per cent of total capacity. Last year, OPG finalized a lease for the Bruce nuclear station, which has eight reactors, with British Energy. But the lease is now being questioned by the provincial auditor who says the government earned $200-million less from British Energy last year than in 2000.

Some business groups say OPG is not moving fast enough to sell capacity and that it has a vested interest in keeping the best assets.

"Until we have their breakup, so that we have distinct entities operating in this market, we are not going to get real competition," said Arthur Dickinson, head of the Association of Major Power Consumers in Ontario, which represents 66 large companies.

The government has put a mechanism in place (called the Market Power Mitigation Agreement) to control prices if they get too high, but Mr. Dickinson says that is an insufficient check.

"There is nothing really to prevent OPG from ramping up prices dramatically if they want to," he said, adding that the company can still keep a large share of the increased revenue.

The Hydro One IPO is also unnecessary, says Mark Jaccard, a resource management professor at Simon Fraser University in Burnaby, B.C., and former chairman of the B.C. Utilities Commission.

"I don’t see the point of it ever," Mr. Jaccard said.

He added that while he supports a competitive market for electricity, privatizing the transmission entity doesn’t have to be part of the process. In fact, he said, most countries that have deregulated their power systems have not privatized their transmission companies. New Brunswick recently said it will not privatize its utility and B.C. is expected to make a similar decision.

Other experts worry that Ontario could soon face supply shortages. The reopening of the Pickering nuclear station, closed since 1997, has been delayed again until this winter and the costs of repairing the four reactors has nearly doubled to $2.2-billion. The existing plants are aging and there is little new generation capacity under construction. Hydro One is also behind in developing interconnections with neighbouring markets.

"That all translates into a big hole in the system," said Tom Adams of Energy Probe.

Britain developed a reserve system by paying energy suppliers to keep plants ready if needed. The fee they received was inversely related to the energy surplus. If the surplus narrowed, the fee increased. If it widened, the fee dropped. Mr. Jaccard said Ontario should consider a similar fee.

Jan Carr, an energy consultant with Barker Dunn & Rossi in Toronto, says Ontario’s restructuring has worked well. And he shuddered when asked what would happen if opponents succeeded in undoing the process because of the current trouble over Hydro One.

"You’re talking about unscrambling an egg," he said. "When you start getting down to the cost and disruption that would cause, I would think anyone doing a cost/benefit analysis would say, ‘Why are we doing this?’"

He and other experts say it is unlikely the entire process will be unwound. But given the impact of the April 19 court ruling, Mr. Carr doesn’t rule out anything. "Politics is politics," he said.