Thomas Adams
National Post
February 21, 1999

Jim Wilson, Ontario’s Energy Minister, is announcing today the ground rules for a new era in electricity, one that will increasingly see free markets replace Ontario Hydro’s monopoly over the province’s electricity system.

The rules are the culmination of a year-long effort by the government-appointed Market Design Committee, on which I sat. They set out the rights and responsibilities of all buyers and sellers in Ontario’s liberalized electricity market, which is about to be established. Starting next year, all customers will be free to shop — or not — for their power. While power prices will constantly be rising and falling, as with any other commodity, barring a major supply disruption — such as new problems at Ontario’s rapidly ageing nuclear stations — everyone’s electricity prices, averaged over a year, will almost certainly fall.

Customer choice and market-based pricing will revolutionize Ontario’s power system. Look for competing suppliers to offer customers one-stop shopping for natural gas and electric service. Or power from environmentally preferred sources. Or locked-in prices for differing terms, the way customers can now choose different mortgage rates.

In the past, whenever Ontario Hydro invested badly or operated inefficiently, it raised its rates or changed its accounting to cover or paper over the shortfall. In the future, inefficient producers will lose customers to efficient ones, and their shareholders will lose stock value.

This new world of electricity will be far from perfect. Over the committee’s objections, the government refused to fully break up the monopoly. Instead, it invited monopoly abuse by giving Ontario Power Generation Inc., the Crown-owned successor taking over Ontario Hydro’s generating stations, control over 80% of the market. As a second-best measure, the committee negotiated a deal that will see Ontario Power Generation cap its revenues from the outset and steadily give up control of most stations over, at most, 10 years.

Other major problems remain as well. Ontario Hydro’s liabilities must be restructured, a process that involves servicing its $30-billion-plus debt and coming to grips with the still-unfunded and growing liabilities for nuclear waste disposal and reactor decommissioning. The Ministry of Environment has yet to deliver on its promise to tighten air pollution controls on the province’s coal-fired stations. The Ontario Energy Board needs to license marketers and carriers of electricity.

One of the most daunting, and perplexing, tasks will involve controlling a newly created Independent Market Operator — an immensely powerful and complex monopolist and regulator charged with reliably and efficiently operating the power system. Although this regulator will set rules for the big players in the power business, representatives of the big players will be sitting on its board. And although it will be responsible to another regulator, the Ontario Energy Board, the Energy Board will be fettered in disciplining the regulator’s owners because, like other Crown agencies, it will have no owners.

Although consumers won’t be forced to change their behaviour, they will benefit from shopping wisely. Under government policy, power prices have been frozen since 1994. But in the future, prices will be subject to market forces, and at times may be volatile. Look for innovations that let customers manage their costs by conserving power when it is most expensive.

The new market participants have their work cut out for them as well. For years Ontario Hydro skimped on maintenance budgets for its high-power, long-distance transmission system, and the successor taking it over will need to beef it up . Strengthening Ontario’s connections with neighbouring utilities — necessary in the short run to allow consumers to tap competing suppliers — will require still more upgrades.

These reforms mark the end of the old Hydro monopoly and the beginning of a new world of competition. Replacing secret decision-making with public regulation over the power system’s remaining monopoly aspects — the Independent Market Operator and the utilities responsible for local distribution and long-distance transmission — will increase transparency and accountability. Having a power system based on decentralized decision-making, where power producers are accountable to their customers and prices reflect value, will prevent future Darlingtons and other boondoggles. High-efficiency power sources with low startup costs — particularly small natural gas-fired stations that produce both heat and power cheaply and cleanly — will grab market share from the polluting nuclear and coal stations so favoured by the old monopoly.

Worldwide, the trend to open electricity markets has benefited consumers and the environment. Ontario’s new rules draw heavily on the best aspects of other competition-oriented jurisdictions. Soon, Ontario may pass on the favour by helping others join the world of competitive energy markets.

Thomas Adams is executive director of Energy Probe, an environmental and economic think tank.