Terence Corcoran
National Post
January 28, 2003

As these words are written at around 4:30 p.m. EST yesterday, the wholesale price of electricity in Ontario is about 10 cents per kilowatt hour. That’s the price paid by wholesale power buyers, including local utilities that run municipal electricity distribution companies. When Toronto Hydro, for example, bought power to supply Canada’s largest city through another cold spell yesterday, it paid an average 10.5 cents through the day. Under the miracle of Premier Ernie Eves’ rigged market, residents of Toronto and the rest of the province pay only 4.3 cents.

It’s the kind of upside-down economic structure you’d expect if Jack Layton were running the province: Buy high, sell low. Crazy, but it gets out the vote. It also creates economic chaos. By about 9 p.m. last night, Ontario residents and businesses would have consumed an average of about 23,000 megawatts of power each hour over the previous 14 hours. That power, at 10.5 cents a kw/h, will have cost local utilities and other buyers about $35-million. At least half the power would have been bought by utilities supplying residential consumers at 4.3 cents, or about $14-million. That leaves a giant $10-million hole in the market, for one day only.

At that rate, it doesn’t take long to dig a really deep hole, which is where the Ontario electricity market is heading. Nobody knows yet what the total losses will be, but after all the subsidies and transfers are complete, Ontario taxpayers could be on the hook for hundreds of millions.

By getting the power market backwards, the Eves government has also created a massive disincentive to rational behavior. The Ontario conservation slogan: Screw it. Consumers have no reason to change their electricity consumption patterns. On the contrary, with the price fixed low and temperatures falling, the average household can crank up the heating system, turn on the lights, switch the electric fireplace to high and rev up the home theatre. At 4.3 cents, everybody is cozily oblivious to the fact that the Ontario electricity market is out of whack and running short.

The major concern now is that the province is flirting with the idea of making a bad situation worse. Having frozen the retail price, Ontario Energy Minister John Baird may now be looking at also closing down the wholesale market, the province’s last lifeline to market reality.

The prospect of a freeze in wholesale prices looms in a consultation paper the province circulated last December looking for input from market participants. It asked questions. One question was: "Are the government’s efforts to retain and strengthen the wholesale market the proper approach? What additional efforts should the government undertake to retain and strengthen the wholesale market?"

As Energy Probe‘s Tom Adams put it in his submission, "These Orwellian statements reverse reality. The government has wiped out electricity retailers, who supported the wholesale market through hedging . . . The government has destroyed the independence and authority of the Ontario Energy Board . . . Viewed from a competition perspective, almost every action of the Ontario government since early 2000 has weakened the wholesale market."

Others were less biting, but the theme was the same. The Independent Market Operator, which runs the wholesale market, warned the government against extending the retail freeze to wholesale. Not only would such a freeze wreck price responsiveness, it created risks to the entire system. "Broadening the range of customers to whom fixed pricing is available could put at risk both the reliability of the system and the considerable investment [$1-billion] that has already been made into Ontario’s electricity market reform." It would also "jeopardize the province’s ability to attract new supply and enhance competition."

The IMO says it has already accounted for $445-million in refunds to Ontario consumers via $75 cheques to compensate for the wholesale-retail gap over the past year. More unspecified payments are due. One estimate puts the additional payouts at $200-million; that would bring the total to $645-million. The long-run solution, says the IMO, is to begin planning now to bring retail customers into the market through new metering systems and market pricing.

The IMO gently raises the problem of Ontario Power Generation, the near-monopoly generating giant that controls most of the electricity supply. "The dominant market position of OPG should be addressed," it says.

Some of Ontario’s major corporate power users have a bigger idea. The Association of Major Power Consumers of Ontario (AMPCO) said the .. government-owned corporation should be broken up and privatized. If the Eves government won’t do that, at least it could chop OPG up into five or six subsidiaries that would compete among each other on the market.

The main message from the major briefs was simple: You’ve made a mess of the province’s electricity market, don’t ruin it completely by closing down the wholesale market. It’s the last link to reality.