Doug Saunders
Globe and Mail
November 13, 2002

Ontario’s solution looks a lot like the beginning of California’s problem.

In Ontario this week, Premier Ernie Eves tried to prevent an energy crisis with a rate freeze. Four years ago, California’s energy crisis began with just such a rate freeze, which set off a chain reaction that led to blackouts across the state, bankruptcies of giant utilities and a huge government deficit.

Could the same thing happen north of the border? Some people think so.

"This is California all over again," said economist Tom Adams of Energy Probe, the Toronto-based lobby group that favours deregulation of utilities. "We should be alarmed. The situation Ernie Eves put us into this week will almost certainly lead to blackouts and bankruptcies."

After capping its consumer price rates at a level far above wholesale market prices, California brought competition into its energy market in 1998, as Ontario did this May.

Things began to go awry in California in 2000, when hot weather and a booming economy led demand to outstrip supply, just as wholesale rates rose above the capped levels.

Utility companies began to shut down their generating stations and scrapped projects for new generators, because the below-market rate caps eliminated any incentive to provide more generation.

The state’s utilities were forced to buy electricity from out of state at spot-market rates (they were forbidden from signing long-term contracts with outside generators), but because they were unable to raise consumer prices, they soon faced bankruptcy. This led to even higher prices, because out-of-state utilities didn’t trust the creditworthiness of the California companies. Out-of-state generators (including British Columbia and Alberta utilities) began raising their prices dramatically, selling to California at rates hundreds of times above the usual fees.

And then a heat wave struck in January, just as average wholesale electricity prices had risen to 10 times the price paid a year before.

Observers such as Mr. Adams see striking similarities between the situations. "We’re going into a peak period, as California was. We’ve got prices creeping upward, like California did. We’ve capped rates, even if wholesale prices take off. We don’t have enough supply to meet our needs, and we waste like crazy."

Others say the similarities aren’t so strong. John Chandley, a Massachusetts-based economic consultant who helped design Ontario’s deregulated power system, believes a catastrophe on a California scale is unlikely, although risks are still present.

"I think there are probably lots of differences," he said in an interview yesterday. "California had a mixture of things that went wrong, and those things aren’t all present in Ontario."

Most important, California utilities were forbidden from entering long-term contracts with outside suppliers to buy power at fixed prices during high-demand periods.

"That’s not going to be a problem in Ontario, and that’s going to keep things from leading to bankruptcies, if they manage it right," he said.