Matthew McClearn
Canadian Business
March 5, 2001

Enron Canada Corp.’s spartan office in downtown Toronto exudes a certain calm-before-the-storm atmosphere. These days, there are plenty of unused desks, minimalist decor and a doorbell outside its locked doors in place of a full-time receptionist. Yet the office’s 20 employees are far from idle. They’re diligently preparing the company to take part in the biggest electricity bonanza in Canada’s history.

Not well-known in Ontario, Enron Canada is, in fact, a subsidiary of Enron Corp. (NYSE: ENE) of Houston – the largest wholesaler of electricity and natural gas in North America. It is one of dozens of companies cooling their heels, waiting for the Ontario government to open the province’s electricity market to competition. The prize: a piece of the annual $10-billion business that was formerly the fiefdom of the lumbering, monopolistic Ontario Hydro. If and when they get the green light, new entrants will quickly change every conceivable moving part of this most complex machine – the grid that powers nearly every electronic device in the province, from hair dryers to auto assembly lines.

Today, Enron’s Toronto office can only arrange long-term agreements (contingent, of course, on deregulation) and provide advice for its clients. But in Alberta and other deregulated markets, Enron buys power from generators and sells it for a thin margin to its clients, mainly utilities and large industrial customers. Think of it more as a financial institution than a utility. Enron occasionally gets involved in power projects to get more electricity on the grid, but tends to sell those interests so it can focus on trading the power those plants generate. The more trading, the better for Enron. And whereas its traders used to cut deals over the phone, most now buy and sell in much greater volume on the company’s year-old Web-based trading system, EnronOnline – the world’s largest e-commerce site by dollar value.

If its performance in other markets is any indicator, Enron’s anonymity in Ontario will be short-lived. "Enron has been a phenomenally successful company," says Tom Adams, executive director of Toronto-based think tank Energy Probe. "You’d have to be crazy to bet against them." But Enron does have detractors. Consumer groups in California have demonized the company, accusing it of profiteering and market manipulation; it is among a number of energy marketers under investigation by that state’s attorney general. And last year, its Alberta operation was raided by the federal Competition Bureau along with that of Powerex Corp., the marketing arm of BC Hydro. The Bureau alleged that the two companies conspired to raise electricity prices on the provincial power pool, but subsequently cleared Enron of those charges and terminated its case late last year.

Such unfriendly fire can make business difficult – and Adams foresees more trouble brewing for Enron in Ontario. Last year, the Ontario Electricity Financial Corp. (OEFC), the provincial agency responsible for retiring Ontario Hydro’s debt, hired Enron as a contract management agent to administer billions of dollars’ worth of old, ill-conceived and money-losing power supply arrangements between Ontario Hydro and various small generation facilities. Adams says that could pose a conflict of interest for Enron when it eventually tries to sell power on the open market. "They’re potentially trading both sides of the Street here, taking advantage of a highly conflicted situation to make windfall profits," he says. "You can see how it might piss a few people off." Enron, however, says it does not have knowledge of its competitors’ proprietary commercial activities, and is working with the OEFC to avoid conflicts.

"Procedures are being put into place to make sure that doesn’t happen," says company spokesman Eric Thode. Although plenty of companies are sniffing for opportunities after the anticipated deregulation of Ontario’s electricity market, Enron is one of only a handful that have made clear commitments to do business in the province. That’s because many companies fear Ontario Energy Minister Jim Wilson will further delay opening the market or even kibosh deregulation entirely, in the face of problems in California and Alberta. But if Wilson bites the bullet and OKs privatization, new players will crop up in almost all aspects of the industry – including generation, distribution, retailing and energy services.

Ontario Power Generation Inc. (an arm of the former Ontario Hydro) now provides 85% of the province’s power. OPG must divest or lease many of its facilities if the government is to reduce that to its target of 35% within a decade. It is already arranging the lease of two Ontario nuclear reactors near the Bruce Peninsula, northwest of Toronto on Lake Huron, to British Energy PLC. However, new generation companies have less motivation to build plants in Ontario than elsewhere because there isn’t a pressing need to increase capacity. Ontario, unlike California, generates 18% more electricity than it uses every year, according to Ontario’s Independent Electricity Market Operator, which directs the operations of the market.

Deregulation would bring few new entrants among companies that generate Ontario’s power by burning coal and natural gas or splitting atoms. "It isn’t going to be an overnight thing, simply because it takes anywhere between two and 15 years to build a plant," explains Francis Bradley, vice-president of the Canadian Electrical Association. TransAlta Utilities Corp. (TSE: TA), a leading electric energy firm in Alberta, is the first to turn soil in Ontario; last November, it began construction of a $400-million natural gas-fired power project in Sarnia and has already signed supply deals with three large customers.

Keep an eye on so-called green power. When electricity sells at a government-regulated price, companies that peddle higher-cost power generated by windmills, solar panels and other alternative technologies are hard-pressed for business. In a deregulated market, however, customers can choose to pay a premium for cleaner energy. Vision Quest Windelectric Inc. already generates and provides wind-driven power to 3,000 residential customers and a small number of businesses in Alberta, where it is aggressively adding new wind turbines to increase capacity. The company is positioning itself to do the same in Ontario and estimates green power could eventually account for 10% of all electricity consumed in the province. "We probably cost a bit more, but it’s a higher-quality product," says executive director Jason Edworthy. But he adds that the company won’t commit itself in Ontario until deregulation is a sure thing. "It’s too risky," he says. "How can anybody invest in that environment?"

For distribution companies, deregulation could be a nightmare. Most of the province’s approximately 100 distributors are government-owned municipal electricity utilities. Hydro One Inc., formerly the electricity delivery division of Ontario Hydro, has been aggressively bidding for them, as have rival companies. Bradley expects to see further consolidation. "There are pundits in the US who suggest the optimum size of a distribution company is in the millions of customers, not the tens of thousands, to operate in the most efficient manner," he observes. Adams, however, believes that deregulation will not bring enough opportunities to offer new services. "Some of those guys are going to get into trouble, for sure," he predicts. "There are going to be some bankruptcies."

Ontario consumers will see immediate change among the new retailers that will buy power from the provincial pool and sell it to customers. "Retailers are already out there banging on doors, big time," says Floyd Laughren, chair of the Ontario Energy Board. "It includes everybody from affiliates set up by existing utilities like Toronto Hydro and Hydro One to new players like Direct Energy." Calgary’s Direct Energy Marketing Ltd. is a large seller of natural gas to residential and small-business customers in Ontario, Quebec and Manitoba. Other natural gas companies will likely be attracted to deregulated electricity markets, because they already understand energy distribution and because they can differentiate themselves from competitors by offering both electricity and natural gas.

As with any gold rush, initial profits in deregulation will go to those providing the picks and shovels. Tools happen to be the specialty of Asea Brown Boveri Ltd. of Switzerland, one of the world’s largest electrical equipment suppliers and a long-time seller in Ontario. The four varieties of electrical meters it is licensed to sell in Ontario are particularly significant. Most meters currently in use are crude devices with baffling dials, which don’t help users measure and manage their electricity consumption. Improved metering could become a point of differentiation among competing retailers.

We’ll have a better picture of which new companies will operate in Ontario when the industry is confident in a reliable deadline for deregulation. "There’s a certain tentativeness" among new market entrants, Laughren acknowledges, in the wake of the delay in deregulation late last year. But if and when the cogs and wheels start spinning, the big winners will be players who operated effectively in Ontario before deregulation – and companies like Enron that have learned their lessons in other open electricity markets. That should come as a shock to no one.