Sean O’Connor
Canadian Retailer
August 23, 2001

After originally setting the year 2000 as its target, Ontario – Canada’s most power-hungry province – claims it will be ready for an electricity market open to competition, and market prices, by May 2002. What impact will this have on retailers?

Fred Ware sits in his modest office at Zeller’s headquarters in suburban Brampton, Ont., just outside of Toronto. It is one of the hottest days of the year, and one of the smoggiest. Among the pictures and plaques on his wall is a quote from Albert Einstein, framed in black and white, stating, "The best design is the simplest one that works." But right now, he’s summoning a slightly different quote – the Scout motto: "Be prepared."

Ware is discussing an award his company received for reducing greenhouse gas emissions that contribute to the grey haze now hanging over much of Ontario’s Golden Horseshoe. But the context of the conversation is electricity deregulation, a topic as inviting to some as the smoggy sky outside.

"Energy costs are going to go up. There is no way to stop that at this particular time," says the soft-spoken Senior Manager of Engineering for Zellers. "You have to reduce your consumption because the costs are going to go up."

The energy market in North America has seen one of its most cataclysmic periods since the oil crisis of the early 1970s. Early in the year natural gas prices escalated, boosting heating costs across the continent (they have since dropped again). Meanwhile, electricity deregulation in California read like a Hollywood horror story, bringing brownouts, blackouts, and the downfall of once-mighty utilities. Alberta, which entered deregulation at the start of this year, fared somewhat better but still saw prices more than double at their peak.

Now Ontario is lumbering its way towards electricity deregulation. After originally setting the year 2000 as its target, Canada’s most power-hungry province claims it will be ready for an electricity market open to competition – and market prices – by May 2002.

But despite headlines from California and Alberta, deregulation isn’t necessarily all grey and gloom. The effects depend largely on where you live. (Before California and Alberta came deregulation success stories in other U.S. states, in Europe and in Australia. And according to most observers, Ontario should escape the trials and tribulations of California, while Alberta has seen the worst of deregulation’s growing pains.)

Still, retailers have every reason to pay close attention. According to the federal Office of Energy Efficiency, retailers are among the top users of energy in Canada – and most of the energy they use is electricity.

When it comes to deregulation, California did almost everything wrong, with the worst possible timing. It completely ignored Ware’s favourite quote about the best, simplest design and somehow forgot the laws of supply and demand.

According to a CIBC World Market Report on Canadian electricity deregulation, while electricity demand in California has jumped by 50 per cent since 1980, almost no new power generation was added in the past 15 years. That meant a heavy reliance on imports as the state entered deregulation, at a time when jurisdictions selling electricity had their own problems with high demand at home and, in the case of hydro power, record low water levels (for generation).

Adding to its woes, California is largely dependent on gas-fired generation. The huge spike in natural gas prices made a bad situation worse, all leading to skyrocketing electricity bills. To lessen the impact on consumers, the state decided to freeze retail rates, leaving utilities to buy at a high cost, but sell at discount prices. As utilities inevitably began facing bankruptcy, brown outs and black outs became the rule of the day.

Like California, Alberta saw only a minor increase in generating capacity in the 1990s before entering deregulation on January 2001.

It too depends significantly on gas-fired generation, so the province faced the same high import prices created in part by California’s debacle. But the situation isn’t exactly parallel. Unlike California, Alberta refused to cap retail rates. Instead the cash-rich province offered rebates to customers, saving them money while avoiding a crisis among utilities.

CIBC analysts paint a rosier outlook for Alberta as new generation facilities come online. In fact, going into the summer prices dropped substantially (along with a drop in natural gas prices). Ontario differs from Alberta and California in a number of respects. Power generation in Ontario actually exceeds demand, while usage in the province has grown only modestly in recent years.

According to Shane Pospisil, Director of Communications at Ontario’s Ministry of Energy Science and Technology, $3 billion in new, private generation projects have been proposed, while off-line reactors at the Pickering nuclear plant will begin returning to working order by 2002. In addition, only about six per cent of Ontario’s generation is dependent on volatile natural gas, compared to more than 50 per cent in California and 35 per cent in Alberta. And like Alberta, Ontario won’t introduce price caps. To smooth the transition in Ontario, rebates will be provided under a complicated formula whenever market-clearing prices rise above a threshold of 3.8 cents a kilowatt-hour.

Of course, not everyone is so bullish.

Tom Adams, Executive Director at industry watchdog Energy Probe, says significant long-term private investment in generation is far from guaranteed.

Which brings us back to Fred Ware and the Scout motto: "Be prepared."

Conservation is back in a big way, not just for environmental implications but for savings in the face of what some consider inevitably higher prices.

By signing on to a federal conservation program called The Energy Innovators’ Initiative, Zellers has saved more than $1.7 million in energy costs so far this year. In the process, it reduced greenhouse gas emissions by 7,200 tonnes and received the aforementioned government award for its efforts. If electricity costs rise, those savings will look that much better.

"We’re actually implementing strategic ideas right now just to reduce our energy and do as much cost avoidance as we can," says Ware.

The federal program covers up to 25 per cent (to a maximum of $250,000) of the cost of pilot projects in energy conservation – projects that are then duplicated in at least 25 per cent of a retailer’s other locations.

"We’re here to assist people in getting started at becoming more energy efficient," said Ron Mahar, Retail Energy Innovator Officer at Natural Resources Canada’s Office of Energy Efficiency. Though smaller retailers may not fit the program, both Zeller’s Ware and Adams at Energy Probe suggest all retailers should start looking at everything related to energy – from lighting, heating and air conditioning to meters that measure energy usage by the minute instead of by the month – and see where improvements can be made.

A good first step is to get in touch with an energy management consultant. They can help you determine how you use electricity and where you can save.

Another important step is to start looking at purchasing options under deregulation right away. As markets open, customers will have new choices.

Says J.P. Bradette, Director of Sales at OPG Energy Markets, a division within Ontario Power Generation, "you can’t learn enough at this point."

In Ontario, independent retailers have been signing up customers since March 2000. A Globe and Mail report earlier this year showed that in deregulated U.S. states, only 20 per cent of commercial and industrial users of electricity originally signed on with new providers. Most who did, it says, realized savings averaging between 10 and 20 per cent. But not every deal offered is the same – about 10 per cent ended up paying more.

"There are different options for different types of electricity users," says Bradette. "The larger the customer, the greater the need to be informed."

Carolyn Green is a freelance writer and regular contributor to Canadian Retailer.