James Rusk
The Globe and Mail
November 6, 1997

TORONTO — After almost a century of near-monopoly, Ontario Hydro will be broken up and the electricity market opened to competition, the government will announce this morning.

In a 29-page white paper that Energy Minister Jim Wilson will release at a news conference, the government will outline its plan for an open, competitive wholesale and retail market for electricity in Ontario, starting in 2000.

While the market opening will result in the breakup of a public utility long regarded as a cornerstone of economic development in the province, the white paper "will be looked on as one of the best reforms this government has brought in," said a senior Conservative involved in the document’s development.

Under the plan, Ontario Hydro and the electricity market will go through a two-year transition, at the end of which three new provincially owned utilities will be created, each with a role in a competitive market, sources say.

The new utilities will be:

A generation company that will run Hydro’s generation facilities, including its nuclear, fossil-fuel and hydroelectric plants;

A transmission company that will operate Hydro’s 29,000 kilometres of high-voltage transmission lines and the switching stations that go with them;

A retail company.

The decision was made only recently to form a separate company for Hydro’s retail operation, which sells power directly to about a million farm and residential customers in rural and Northern Ontario. Through most of the planning for the white paper, retail operations were expected to stay with the generation company.

But a source said the government decided that keeping the generation and retail companies in one unit was inconsistent with a basic principle of the new policy: that generating companies should not have privileged access to either transmission facilities or retail customers.

In keeping with this principle, the government has also decided that municipal electrical systems delivering power to residential customers in urban areas will not be allowed to own their own generating facilities, although such facilities can be owned by a municipal government if it so chooses.

The paper will also propose a number of changes, such as removing existing legal barriers to mergers, to make it easier for municipalities to meld utility systems and to take over Hydro’s retail operations in adjacent rural areas. That will allow county-wide or regional utilities to be created.

Access to the transmission system will be controlled by a central market operator, through which buyers and sellers will arrange the delivery of electricity.

The prices of the electricity will not be controlled, but the rates that both the province-wide high-voltage transmission system and the municipal systems charge for their services will be regulated, as they are monopolies.

The split of Hydro and creation of the new system during the next two years will be under the control of an independent transition agency, which will report to the Energy Minister.

Its job will be to ensure that the three new companies are treated equitably when they are set up and that the changes will be completed by the time the new system comes into effect, an exercise that will involve a massive amount of paperwork and legal effort, including breaking Hydro’s system-wide labour contracts into three to apply to each company.

During the transition, the province plans to take a first step toward a fully competitive electricity market by creating an interim pooling arrangement in the wholesale market to allow wholesale buyers to buy electricity and have it transmitted through Ontario Hydro’s system.

Sources also said the paper will have little to say about stranded debt, which is the chief financial issue in breaking up Hydro.

It is estimated that interest on about half of Hydro’s $32-billion debt, which is guaranteed by Ontario taxpayers, could not be supported if the utility had to pay its way in a competitive energy market.

While it is expected that this debt will eventually be retired by a charge on transmission costs paid by all electricity customers in the province, the paper will say only that the Finance Ministry will find ways of managing the stranded debt by the time the competitive market begins.

And although the new system is expected to produce cheaper electricity in Ontario for both industrial and retail customers, the white paper will not make any specific claims about future reductions in rates, sources said.