Paul Vieira
Financial Post
May 1, 2002

One of the architects behind Pennsylvania’s restructuring of its electricity sector says ratepayers in the state have saved more than US$4-billion over the past five years on hydro bills and become sophisticated power customers – and predicts much the same for Ontario as its $10-billion market opens for competition today.

"Is it a better system now for consumers than it was before? Are consumers better off in a deregulated environment or a regulated price-control environment? I feel pretty strongly that Pennsylvania consumers have a better deal now, and will continue to get a better deal, than under the old regime," said Glen Thomas, chairman of the state’s Public Utilities Commission.

Mr. Thomas, in Toronto today to deliver a speech to a largely Bay Street crowd, offered the following advice for Ontario as it turns a new page in its electricity history. "It’s a never-ending battle. It’s going to require vigilance, patience and practice – but I fully believe that at the end of the day, five years from now, Ontario will be able to say, ‘We’re better off.’"

After years of studies and two aborted attempts, Ontario opens its electricity market to competition today. A number of elements change:

– Households and businesses are free to purchase their power from whomever they choose. They have two options: do nothing and continue to receive their power from their local utility; or sign a long-term, fixed-price contract from one of many retailers scouring the province.

– The price of power will fluctuate and be set in the wholesale market, much like how the cost of bananas or cheese is determined. Experts have said electricity prices should remain stable, in the 4.5¢ to 5.5¢ per kilowatt hour range, until 2007. (A kilowatt hour, KwH, is the equivalent of burning 10 100-watt lightbulbs for an hour.) The price of power in Ontario’s wholesale market is about 4.3¢ per KwH.

– And competition will be allowed on the generation side. Ontario is trying to entice companies to build power plants in order to increase supply and create a competitive pricing environment. Currently, Ontario Power Generation Inc. has an 80% stranglehold on the power-producing market, but that must be reduced to 35% by May 1, 2012.

The Ontario government was also hoping to privatize Hydro One Inc., owner and operator of the province’s transmission grid, but that has been delayed because of a court ruling.

Opponents of deregulation warn of severe rate hikes, as experienced in California and Alberta when they deregulated.

Pennsylvania, however, has been lauded by industry experts as a jurisdiction that did deregulation right. "They are the benchmark," said Tom Adams, executive director of Energy Probe, an industry watchdog.

"It is the most successful, most developed of the electricity restructuring experiences in North America."

Mr. Thomas was the energy advisor to Tom Ridge, the former governor of Pennsylvania, when the state undertook restructuring in 1996. He said estimates suggest Pennsylvanians have saved more than US$4-billion in electricity costs and competition has led to savvier consumers.

"Consumers didn’t used to have a choice. They got a bill and they paid it. The only choice they had was either to turn the lights on or turn them off," he said. "Some of these things are not that easy to explain. The vast majority of people don’t understand how the power gets into your house. Mind you, they didn’t understand how telephone [billing] worked – but they sure know how to save money on phone bills these days."

He said prior to deregulation, utilities that built plants in Pennsylvania recouped construction costs through rate hikes approved by state power authorities.

"Under the new regime, any new generation project is at market risk. If there is any uneconomical generation investment, it’s the investors who lose – it’s not the ratepayers who have to pay," Mr. Thomas said, repeating an argument used by supporters of Ontario’s restructuring efforts. "The fundamental shift of that risk, from the ratepayers on to the marketplace, represents billions of dollars in potential savings for consumers."

He added there has been explosive growth in the area of alternative power – such as solar energy and wind power – which has attracted about 120,000 state households

"People are really choosing to get alternative power. In most times, they are paying a little bit more. The point is, though, is that before 1996, they didn’t have a choice. Now they have that choice they are making it to the benefit of the environment."