Tom Adams
Speech
October 27, 2000
Eight Lessons for Electricity Liberalization in Atlantic Canada
- Define a public interest mandate for electricity liberalization.
The mandate of Ontario‘s electricity restructuring – to promote jobs and investment – is fundamentally confused. We have too many jobs in the power sector, not too few. We have lots of investment in electricity, although not much of it wise. The confused mandate of the process has made it easily captured by incumbent interest groups and diverted to their purposes. We are watching the commercial Hydro successors, selected major industrial customers, and selected independent power producers capture huge gains at the expense of the legitimacy and integrity of the reform process. You need a better compass to find the true north of the public interest than we have as you negotiate the complex trails of the restructuring. One of the paradoxes of electricity liberalization is that decentralizing power system must to some extent be conducted centrally. A highly successful model used in the State Victoria in Australia to guide what has proven to be one of the most successful electricity liberalizations so far achieved was to set up a special, advisory office responsible to the Ministry of Finance, staffed with recognized experts and mandated to protect the public. In Ontario, we might have achieved something of the kind had we continued the work of the Market Design Committee. Transparency must be a core value of liberalization processes. Virtually all public sector financial data should be released in a timely and complete fashion.
- Aim for a Maritime-wide regional power market rather than province-by-province market.
A significant potential challenge for electricity sector liberalization will be prying the grip of the politicians off the levers of power. Several deficiencies of the Ontario market reform process relate directly to the problem of politicians not wanting to lose their power. Examples include the failure to break up and privatize the commercial Hydro successor companies and the decision to retain directive power over the OEB. The experience in some of the most successful electricity liberalization efforts, particularly mid Atlantic seaboard states (the PJM Interconnection) and Australia, suggests that an interjurisdictional market reduces the grip of politicians.A wider market offers many practical advantages. The costs of establishing the rules and the IT mechanisms for a competitive market are significant so there is an important economy of scale to spread the set up costs. Creating a wider market will improve the ability of the reforms to release efficiencies.
- Quantify your sunk costs once and for all by realizing them.
Without having its electricity liabilities quantified in a hard fashion, Ontario is sliding toward substantially increased liabilities. The best way to avoid this problem is to quantify the liabilities by privatizing them. Privatizing the liabilities may appear costly but the gains in transparency are likely to be highly worthwhile in the long term.
- Think hard about market design and transition/implementation issues.
California separated its power exchange and its system operator, a problem that is now widely thought to have contributed to the current difficulties in that market. PJM initially did not use a system of efficient locational marginal prices for energy on the transmission system. Instead, it used an averaging based pricing simplification. As a direct result, its market had to be suspended in 1997 due to widespread gaming of the system. The market for electricity should closely match the physical reality of that system. Ontario is building its initial market on the basis of the kind of pricing that caused the PJM system to fail in 1997.
- Developing investor confidence is necessary for long term consumer protection.
Problems in California and Alberta with diminished supply reliability and high prices are driven in large measure by the slow pace of investment in new generating stations. Ontario is going there. While investor confidence in Ontario languishes, our power system’s reliability is being undermined and the stage is being set for much higher prices.Investor confidence comes from real competition, real financial accountability, and real independent, arms-length regulation rather than from subsidies and Bandaids
- Don’t forget environmental protection.
Environmental protection is essential to the legitimacy of the liberalization process. If the public gets the sense that the reforms are being carried out at the expense of the environment, public confidence will be undermined. The experience with economically efficient air emission control programs, such as the US sulphur dioxide emission trading regime, proves that major environmental improvements can be made at a very modest cost.
- Get working early on upgrading the metering stock to handle Internet quality data and make commodity electricity prices today start to evolve toward short run marginal cost
High quality, intelligent metering, capable of two-way communication of price and usage data, is a critical piece of the customer protection safety net in a competitive electricity market. Without good metering, customers have little practical opportunity to avoid price spikes by managing their usage of electricity. Without prices that reflect marginal cost, better meters offer little advantage for customers. I suggest that as soon as possible, utilities implement short run marginal cost pricing for commodity electricity and the metering stock be upgraded. Intelligent meters will be most cost effective for larger customers. As the costs of intelligent meters drop, the market penetration can increase.
- Build the knowledge base in Atlantic Canada.
Power system restructuring is a complicated business. Any serious liberalization effort requires expertise in areas such as power system market design, finance, accounting, power system engineering, IT systems development, environmental regulation, interjurisdictional trade law, and administrative law. Although internationally experienced consultants can provide valuable assistance, consultants are both costly and peripatetic. When they leave they take their learning with them. Atlantic Canadians in government, the press, academia, think-tanks, utilities, and industry should be encouraged to study the issues associated with electricity sector liberalization so that your community has a better chance to succeed in this enterprise than appears now to be the case in Ontario.1. Mr. Adams represents the environmental and consumer advocacy organization, Energy Probe, as Executive Director. Energy Probe is a charitable organization that promotes resource conservation, environmental sustainability, democratic decision-making processes, and economic efficiency for Canada‘s energy sectors. He also works for the consulting firm Borealis Energy Research Association. He was appointed by the Ontario Government to the Ontario Market Design Committee, charged with developing the initial rules for Ontario‘s new competition-oriented electricity market. He is now an independent director of Ontario‘s Independent Electricity Market Operator, responsible for managing the integrated operation of Ontario‘s power system at the wholesale level.Energy Probe address: 225 Brunswick Ave. Toronto, Ontario M5S 2M6, ph: 416-964-9223 ext 239, fax: 416-964-8239, URL: www.energyprobe.org, 2. Another overview of Ontario‘s new electricity market can be found at http://www.theimo.com/imoweb/mktOverview/mktOverview.asp. The information on this site mostly aimed at businesses with interests in power generation, marketing, or other services.The Ontario Ministry of Energy Science and Technology offers its own overview of the electricity restructuring at https://ospace.scholarsportal.info/bitstream/1873/4542/1/10280495.pdf. The information provided relates primarily to legal and policy issues. No rate impact analysis of the restructuring is provided on the Ministry’s site. 3. The white paper can be found at .http://www.theimo.com/imoweb/historical_devel/finale.pdf
The following are two links providing analysis about the white paper:http://energy.probeinternational.org/utility-reform/reforming-ontarios-electrical-generation-sector/ontarios-white-paper-learning-austral
4. The MDC reports can be found at http://www.theimo.com/imoweb/historical_devel/Mdc/mdc.asp. 5. Energy Probe’s analysis of Bill 35 can be found at:http://energy.probeinternational.org/utility-reform/reforming-ontarios-electrical-generation-sector/notes-presentation-ontario-standing-c 6. Link: www.ontariopowergeneration.com 7. Link inactive: http://www.gov.on.ca/FIN/english/regbull.htm 8. Link: www.hydroone.com 9. Link: www.theimo.com 10. Link: www.oefc.on.ca 11. Link: www.esainspection.net 12. Recent U.S. reactor sales include Pilgrim for $181 (US)/KW, TMI 1 for $228 (US)/KW, Clinton for $22 (US)/KW, NMP 1 for $117 (US)/KW, NMP 2 for 136 (US)/KW. 13. Most customers in rural areas served by provincially-owned Hydro One will be getting a massive rate increase on market opening, but the reasons are different than those described below. Customers served by privately owned local distribution utilities in Sault St. Marie, Gananoque, and Fort Erie will not see the rate increases described below. 14. Dow Jones Newwire, July 26, 2000, "Power Cos Cautious about Ontario Investing". 15. OEB hearing RP 1999-0017, Transcript p. 648, ll. 18-22. 16. IPPSO/FACTO, October 2000. 17. The Market Design Committee’s case in favour of gross load billing can be viewed at http://www.theimo.com/imoweb/historical_devel/Mdc/Reports/Q4Report.asp under "Principles for Recovering Fixed Transmission Charges for Basic and Export Service" p. 4-9. 18. I expect that at the opening of the market, the rebate will apply to approximately 60% to 70% of your power consumption. Within the succeeding few years, assuming the market becomes more competitive, a declining portion of the commodity cost will be covered by the rebate in the event of high prices. 19. A detailed proposal for such a system was articulated by the Market Design Committee in its third quarterly report.
Energy Probe 