Paul Vieira
Financial Post
February 15, 2002

The electricity deregulation debacles in California and Alberta should not deter other provinces, such as Ontario, from reforming their power markets, a C.D. Howe study suggests.

If reforms are implemented properly, the benefits are plentiful, writes the study’s author, Mark Jaccard, a professor of environmental management at Simon Fraser University in Burnaby, B.C.

"The difficulties of California . . . and Alberta send a clear warning about the perils of electricity market reform, especially about the assumption that electricity can be treated identically to other commodities," Mr. Jaccard said, describing power as an "unsubstitutable" commodity.

"[But] the risks of the monopoly models are great," he added. "The monopoly model saddles all [taxpayers] with these risks, instead of allowing private investors to play a risk-taking role," noting that Ontario Hydro’s experience with nuclear power is a clear illustration.

But the study’s recommendations to prevent California-type replays drew some criticism. And it also failed to analyze or evaluate how Ontario’s deregulation will proceed.

Ontario will open its $10-billion electricity market to competition on May 1, and critics say electricity rates will skyrocket, much as they did in California and Alberta. Deregulation opponents say price hikes of at least 20% are in the offing, while Mike Harris, the province’s Premier, says he’s "100% certain" rates will go down.

"Although I have not looked at Ontario very carefully, I am concerned that it still might be too market cavalier," Mr. Jaccard said.

And reforms done solely for ideological purposes carry a price, he said in the report. "Blind faith in markets is just as dangerous as blind faith in central planning. Any reform design that seeks benefits from the long-run cost efficiencies of competition must address the special characteristics of electricity."

California experienced blackouts and soaring prices a few years after it experienced deregulation. However, power prices have since fallen to expected levels. Alberta has gone from having one of the lowest electricity rates to one of the highest since it deregulated its market in January, 2000.

With deregulation, Mr. Jaccard said price fluctuations are certain. "Prices are going to go way up, and prices are going to go way down." To avoid this, he said deregulated markets should have the following:

– A reserve capacity market, in which producers are paid to keep little-used plants available to the market to ensure supply in times of high demand. "I would do it, even though I recognize that it carries some costs," he said.

– And the use of financial mechanisms – such as long-term fixed-price contracts – that would see large consumers, such as industrial users, cut back on demand during peak periods.

Neither of the mechanisms will be in place when Ontario opens its market, industry officials say. And the recommendations drew criticism from one industry observer.

"Those are both controversial proposals that have been championed by producer-side interests," said Tom Adams, executive director of Energy Probe, a power industry watchdog. "I remain skeptical that these measures are worth their high costs."

Mr. Adams was particularly critical of the reserve capacity proposal. "It certainly means higher electricity prices at times of low demand."