Tania Henvey
Electricity Today
December 1, 2002

Earlier this year, Ontario opened its electricity market to competition. Consumers could buy their power from municipal utilities or from a retailer licensed by the Ontario Energy Board, a government body that regulates transmission and distribution rates.

The government believed that by creating competition within the marketplace, instead of holding onto their monopoly, opportunities for economic development would occur. This was reflected on October 30, 1998 when the Energy Competition Act (Bill 35) was passed, "to create jobs and protect consumers by promoting low-cost energy through competition and to protect the environment."

Fast forward to May 29, 2002, almost a month after the market had been opened to competition and almost four years after the passing of Bill 35. The Environment and Energy Minister at the time, Chris Stockwell introduced Bill 58 (the sale of Hydro One), trying to ensure that electricity consumers, the environment and hydro transmission corridors would be protected once the company is sold. But, if eliminating "at-cost" electricity and introducing an open market will introduce jobs and cost savings, then why pass a bill to "protect us"?

In May, the average cost of electricity was 3.01 cents per kilowatt hour, according to the Independent Electricity Market Operator in Ontario (IMO). By July, the price had risen to 6.2 cents. August met with charges of 6.97 cents and by September, that rate had climbed to 8.31 cents.

In November, the Ontario government announced that these climbing rates would be capped at 4.3 cents, whether or not a fixed-price agreement had been signed. This rate, which was to begin on December 1, will continue to be capped until 2006. Ontario Premier, Ernie Eves said that he would still honour all fixed-price contracts, most of which are based on a rate of 5.9 cents, even though consumers are paying less. This leaves the government with the bill of the difference between the two rates, which industry analysts believe could reach $1.1 billion a year.

"It is unacceptable that families are being hit with hydro bills they can’t afford, and businesses are facing cost increases significantly larger than they can handle," said Eves after announcing the new rate. "The problem requires immediate action and we are taking it. From now on, the only time your electricity bill will go up is when you use more power."

Those who signed fixed-price contracts with retailers will be fixed to a price of 4.3 cents, regardless of what the original agreement was. In addition, these consumers will receive a rebate, which was previously to be refunded to the retailer. This will not apply to Toronto Hydro customers who were already paying 4.3 cents, because this rate does not warrant a reimbursement.

"Toronto Hydro’s customers are not generally feeling the heat," said Blair Peberdy, vice-president of communications and public affairs at Toronto Hydro. "They are either on fixed-price retail contracts or the 4.3 cent fixed reference price SSS option with a true up."

For residential customers who are unable to pay the bills, such as those on fixed incomes, there is also a program where payments may be deferred until the end of March 2003.

As rates climbed, residential customers were suffering more from the increasing rates than their industrial counterparts.

"The largest percentage increase in any component of electricity bills since the beginning of the market reforms in 1999 has been the approximately 100 per cent increase in the distribution component of bills, a bill component that has little or no impact on industrial power users," said Tom Adams, executive director of Energy Probe. "Large power users have more favourable usage patterns and usually better metering and energy management programs, which has contributed to lower industrial rate impacts than have hit residential consumers."

Homeowners were dealing with the hottest summer in 50 years, and electrical usage increased. August consumption reached an all-time high of 25,414 MW.

"Actual hourly demand exceeded the projected peak 23 times this past summer and six times went over the 25,000 MW hurdle," according to the IMO Web site. This meant that the IMO had to issue a number of power alerts, reduce system voltage and buy emergency power from other sources. At times, they paid nearly $2,000 per MWh, which is 40 times the price paid to in-province generators since the market opened.

This led the IMO to look at "negative reserve weeks" which are times during the year when power will need to be bought from another location. It is believed that from the end of October into early next year, extra power will be needed. In addition, April 2003 is when some plants are scheduled for downtime. And since electricity cannot be produced and held, it must coincide with consumer demand.

"The market system for electricity is inappropriate, because of the nature of electricity," said Edik Zwarenstein, co-ordinator for the Ontario Electricity Coalition (OEC). "Its supply has to be matched to the use at every instant, or the whole system collapses."

So why were rates so high?

"The principal reason why prices have been so high is that domestic supply, particularly when we need it at peak demand periods in the summer and in the winter, is quite tight." said Scan Conway. Ontario Liberal Co-critic of Energy/MPP for Renfrew. "The (government) plan to make some interim relief on the supply side is falling to pieces."

Many critics are now saying that Ontario needs to rethink its electricity market. John Baird, the Minister of Energy, insists the price freeze won’t discourage private firms from investing in Ontario.

"If (new power generator) investors don’t have that sort of price facility or protection, they won’t make long-term investments," said John Wiersma, president and chief executive officer of the Veridian Corporation in Ajax, Ontario. He also noted there won’t be much competition because of the spot-market price.

Higher electricity prices "will not only hurt individual customers but will cause widespread, cost-driven inflation that will damage the provincial economy and drive business and jobs out of the province," according to the OEC Web site.

"Net users of electricity are obviously being hurt, while some suppliers, mainly generators, are benefitting," said Zwarenstein.

Now with the announcement of the capped rates, turmoil has already begun. The Dominion Bond Rating Service has placed eight companies that provide Ontario’s electricity, on a credit watch. This includes Toronto Hydro. Enersource Corporation and Veridian Corporation.

"It looks to me like short-term gain for long-term pain," explains Conway. "There’s no question the government had to do something to relieve consumer pain, but this looks like just a policy made up on the run."

Competition is "supposed" to drive down the price of power but since it wasn’t working, something needed to be done for the consumers of Ontario. When Eves announced a consumer rebate of at least $75 per household, or a total reimbursement bill of about $700 million, many believed it wasn’t the right solution to the problem.

"It looks like it has been just thrown together at the last minute with no real solution to the core problem which has been for years now a problem with supply and generation." said Conway. "The core of the Ontario electricity issue is a serious, and worsening, supply situation."

Critics believe the total bill will cost taxpayers billions of dollars.

"My real concern is how much it is going to cost all of us over the long term," McGuinty said after Eves’ announcement. "We are talking about billions and billions of dollars that are either going to be added to the hydro debt or the provincial debt."

Conway echoed McGuinty’s thoughts.

"Financial details are still a mystery and the people of Ontario, the taxpayers of Ontario, and the electrical ratepayers of Ontario have a right to know: how is this going to be paid for? And when is it supposed to be paid? Mr. Eves gave the provincial credit card quite a workout."

Other sources for energy might be the solution for the future since, accord- ing to GE Power Systems Energy Consulting, over the next 20 years electricity generation is to become, "the largest gas-consuming sector." The Ontario government demonstrated this by announcing there will be even more incentives for those who choose to get their juice from other sources, hoping it will encourage the production of eco-friendly energy such as wind and solar power. The producers with these types of energy will receive tax holidays, among other things.

Only a couple of months prior to this announcement, OPG stated earnings of $215 million in the three months ended September 30. Even with all of its money, the people of Ontario are still on the hook for the $38 billion debt from the former Ontario Hydro, which works out to $3,000 per person.

Industry analysts believe the reason why deregulation failed to work in this province is because the government continues to own Ontario Power Generation (OPG) and Hydro One Inc. Baird has announced he wishes to push through a quick sale of Hydro One, and OPG is still required to reduce its market share to 35 per cent by May 2012.

"To see the overall rate impact of Ontario’s electricity restructuring, compare your bills since (the) market opening (on) May 1, 2002 with (the) rates you paid prior to the restructuring in 1999 or 1998." said Adams.

Over 67 per cent of Ontarians didn’t like the idea of deregulation or the sale of Ontario Hydro, according to the OEC. Consumers had watched as the Alberta government poured $2 billion into rebates because of high prices. In the US, California dealt with rate increases of up to 500 per cent and numerous blackouts. Deregulation in Ontario hasn’t gone the way the Harris government had said it would. Now. no matter how many rebates are returned to those who pay their bills, it still won’t spell relief, or stop the shock electricity is providing in the province. A short-term solution could cost taxpayers even more in the long run when we receive our biggest electricity bill yet.