Eric Reguly
Globe and Mail
May 27, 2003

Scary things are happening in Ontario, and it’s not just the new SARS outbreak. Last week, DaimlerChrysler abandoned plans to build a $1.6-billion pickup truck assembly plant in Windsor. That was the big headline.

There were smaller ones, largely unnoticed. Domtar closed a sawmill in White River, putting almost 200 workers on the dole. In struggling Northern Ontario, that’s close to a catastrophe. Forestry, mining and steel companies are hurting across the province and layoffs are bound to accelerate.

Typically, the explanations for the stalled investments and closings are imprecise. DaimlerChrysler president Dieter Zetsche said simply: "We could not find a business case which would justify the investment into incremental capacity."

Domtar blamed poor markets, an understatement if there ever were one. Import tariffs imposed last year by the United States are killing Canadian lumber exports.

Oddly, two factors that have raised costs substantially in the past year or so – the Canadian dollar and electricity prices – were rarely mentioned as contributing factors behind the stalled investments and the job losses. This will probably change.

Take River Gold Mines, which runs small gold mining operations near Wawa, Ont. The company lost $1.1-million in the first quarter in spite of higher gold prices. The culprit was energy. The company said the "provincial utility deregulation scheme [resulted] in a doubling of electricity costs" that are now "twice those in Quebec."

DaimlerChrysler didn’t mention electricity costs, or the soaring dollar for that matter, when it took a pass on Windsor. Indeed, the budget gnomes at big sophisticated companies would never assume the dollar would be mired forever below 70 cents (U.S.), or that electricity prices could be anything but volatile for some period after the Ontario government (partly) opened the electricity market. But the speed at which both have climbed must have been alarming nonetheless. Electricity probably accounts for 10 per cent of an auto plant’s operating costs.

The dollar, meanwhile, has climbed 15 per cent since the start of the year. It’s hard to believe the twin rises didn’t make DaimlerChrysler’s planners a little skittish.

Electricity prices have climbed because of a shortage of supply, care of several idle generating units at the Pickering and Bruce nuclear plants, severe weather and a fixed rate for retail and small commercial users that discourages conservation.

Energy Probe noted that, under shortage conditions like the one that almost unplugged California, a 1-per-cent change in demand can move the wholesale price by 50 per cent. It expects business and industry electricity bills in Ontario, after rebates, to rise at least $250-million in the year since the fixed price was announced.

The Association of Major Power Consumers in Ontario (AMPCO), whose members include Ford, Dofasco and other monster juice suckers, says the average industrial price, including delivery charges, has gone from $62 a megawatt-hour before the wholesale market opened a year ago to $76 – a 22-per-cent increase. Of course, not all industrial users pay that price. Some have used hedging and variable pricing (such as buying in off-peak hours) to reduce their bills. But companies with inflexible energy demands like the auto makers aren’t getting a break. This helps to explain why they want the fixed price set by the Ernie Eves government in November, $43 a megawatt-hour, extended to them. It’s unlikely to happen.

If the Pickering A units, shut since 1997, are not back on stream this summer, electricity prices are more likely to go up than down. Toss a rising dollar into the equation and all bets are off in terms of layoffs in the auto and resources sector. Both industries suck electricity, have Canadian dollar costs and export the bulk of their product to the United States and other countries. As the Canadian dollar rises, their cost advantage erodes.

If electricity and the dollar had reached their current level over five or six years instead of one, business and industry would have had time to adjust and you wouldn’t hear a word about it. Instead, they face a double-whammy price shock. As the layoffs dribble out, as the industrial investment is put on hold or migrates south, and as some operations, like Domtar’s, shut their doors, the message will get out that something beyond "challenging market conditions" is hurting Ontario.

Premier Eves doesn’t seem to have a clue on how to mitigate the damage to the province’s industrial base, and that’s why he will probably lose the election he seems so hesitant to call. Here’s a suggestion to the Tories: Don’t delay the election. The Ontario economy is going to get worse before it gets better.