Dan Westell
Financial Times
July 13, 2000

The Ontario government decision this week to lease some of its troubled nuclear electricity plants to British Energy signals a real beginning to the end of a monopoly that has shackled the province with almost C$21bn ($14.2bn) debt.

But a thick fog on the distribution side of Ontario’s C$9bn electricity market is muffling the glow produced by the progress in reducing the state’s role in generation.

The same government that is celebrating the beginning of real competition in generation has also introduced legislation to curb price increases by municipally-owned distributors. By changing the rules in mid-game, it has thrown the utilities and the investors who were to fund the industry restructuring into disarray, undermined the independent regulator and given the government’s own distributor an advantage.

Bill 100, introduced by the energy minister, Jim Wilson, dismays even those who see competition as the means to rein in the state monopolies. "Ontario is in a good position now to really embarrass itself," said Tom Adams of Energy Probe, an independent watchdog organisation that wants to introduce market forces into the system.

The province’s Conservative government began to deregulate by splitting state-owned Ontario Hydro into two arms, a transmission/distribution company, Hydro One, and a generator, Ontario Power Generation.

It also sought to make municipally owned distributors more efficient by compelling them to merge or restructure as corporations.

As part of the package, almost C$21bn of "stranded" debt was removed from the books of OPG and Hydro One, leaving them with normal levels of utility debt, rather than the unserviceable amounts inherited from Ontario Hydro.

That money, guaranteed by taxpayers, is now being collected from business and individual customers indirectly through a charge on all the companies in the business (the C$625m initial lease payment from British Energy for the Bruce nuclear plants will probably be applied to the stranded debt) and directly through a surcharge on electricity bills.

Many municipal distributors, especially those with a handful of subscribers, opted to be taken over by the government’s Hydro One. It has already bought 45, with 64,500 ratepayers, and has made offers on others.

But the cities that own the big operations, such as Toronto Hydro, opted for incorporation and took out hundreds of millions of dollars, expecting to recover the money through rate increases. Private investors began to move into the municipal sector, basing their return calculations on the rules then in place.

Even though the municipalities were operating within the law passed by the Conservatives, Mr Wilson was outraged. He talked of "value siphoned out of the local electricity system that was paid for over the years by electricity customers", who needed protection from local politicians taking "windfall profits."

In June he introduced Bill 100, entitled "An Act to Promote Efficiency in the Municipal Electricity Sector and to Protect Consumers from Unjustified Rate Increases", and directed the regulator, the Ontario Energy Board, to force municipalities to justify rate applications.

Investors are reassessing their options in the wake of the bill. A planned C$150m debt issue by Hydro Mississauga, the distributor in a booming suburb on Toronto’s western border, is on hold while the utility and its investor, a pension fund, assess the bill.

"Private buyers are going to look at this and wonder where the cash flow is going to come from," an industry insider said. The municipalities believe the minister is reacting to a crisis of his own causing. The restructuring raised costs and, they complain, distribution accounts for only 15 per cent of the costs in the system. Generation, at 70 per cent, represents a better source of cost cutting. The distributors could certainly be more efficient, Mr Adams said, but they were not facing the "financially unsustainable situation" at Ontario Hydro, which was squeezed between the need to service its huge debt and the requirement to hold down rates to prevent industry fleeing the province.

The bill does not apply to Hydro One, giving it the option to buy distributors and then seek rate increases that would be blocked if a municipality wanted the raise. Investors and the industry are lobbying the government to change the bill, which has had a first reading. The house has risen until the fall.

There is hope, said David McFadden, chairman of the Stakeholder Alliance, which represents most parties in the system. "The rules have not been changed. There’s a proposal to change them."