Scott Morrison
Financial Times of London
January 6, 2001

It was not long ago that California was held up as a model for electricity deregulation in Canada. Now, the state’s power woes have deepened Canada’s winter chill as the provinces of Alberta and Ontario watch California’s struggle to keep its electricity utilities from bankruptcy.

The two Canadian provinces are in the process of adopting competitive electricity markets. But critics are now questioning the future of deregulation amid growing alarm over Californian power shortages and the poor health of the state’s utilities.

"There’s a concern that maybe we’re headed in the same direction (as California), although the root causes are fundamentally different," says a Canadian consultant who has been closely involved in deregulation.

California’s power generation shortages have combined with sharply rising demand, unfavourable weather and record natural gas prices to create a financial crisis for the state’s utilities, which have been forced to buy power at record prices while being unable to pass on the extra costs to consumers.

Alberta is facing a similar problem, with a dearth of new generation projects and high natural gas prices blamed for virtually trippling wholesale electricity prices. Alberta’s government is partly to blame for this situation, having announced deregulation in 1994 but failing for several years to define how a competitive market would work. That prevented many generators from investing in new capacity.

The crisis prompted Alberta’s government, facing an election in several months, to introduce a rate cap for small retail customers. But businesses not covered by the rate cap will keep taking a hit in the form of higher electricity costs.

Rates are also set to rise in Ontario once the province moves to a competitive model, probably this year.

Ontario’s energy ministry argues the province is free of many of the conditions creating problems in California and Alberta. The government says Ontario has sufficient generation capacity to meet the province’s needs for the next decade. Moreover, Ontario’s generation capacity is much less dependent on natural gas.

In addition, about CDollars 3bn (Pounds 1.4bn) in announced generation projects indicate that investors are confident about Ontario’s deregulation process, a ministry spokesman says. But the Canadian deregulation consultant notes that Ontario’s market rules are not yet clear enough to provide potential investors with the confidence needed to follow through with their plans.

Ontario has already delayed the introduction of a competitive market, initially planned for last November. The government now says its target is "some time in 2001" after the organisations responsible for operating Ontario’s wholesale and retail markets said they needed more time to create the market frameworks.

Tom Adams, director of a watchdog group that supports deregulation, worries that Ontario’s transition has been erratic and he predicts that real competition will be further delayed. And he argues that retail electricity prices will rise by as much as 20 per cent over the next three years unless Ontario’s government moves decisively to set rules that will give investors confidence in the new market structure.

In the meantime, governments in Alberta and Ontario are likely to continue treading softly to avoid the political pitfalls of deregulation.