Energy Probe

The Globe and The Mail
January 20, 2001

While electricity deregulation has proved a disaster in California, it has been a shining success in Europe

Beginning in Britain in 1990, the trend spread through Scandinavia and then to other European Union countries such as Germany and Spain, all seeking lower electricity prices in a more competitive environment. Parts of Australia have also deregulated their electricity systems, and prices have fallen as a result.

Of course, there have been many bumps along the way to success, but these experiences stand in stark contrast to California, where prices are soaring and shortages are severe. The state’s major utilities are on the verge of filing for bankruptcy, and blackouts have hit northern California in the past few days.

Yesterday we considered the mistakes made by California, the first U.S. state to adopt full deregulation. Today we’ll look at the success stories that could guide Canadian legislators.

Perhaps the most important success of Britain’s electricity system is the creation of excess supply, which has kept prices from soaring as a result of shortages. This surplus is due in part to overbuilt facilities, a legacy of government ownership. It is also due to the deregulation rules put in place by Margaret Thatcher’s government.

Britain’s pricing mechanism not only pays power suppliers for the short-term cost of supply, but pays them a fee to encourage the development of long-term reserve capacity. Indeed, supply has grown so plentiful that this incentive payment is now going to be dropped supporting the industry adage that deregulation is a 10-year process.

In several U.S. states, the priority has been on building adequate supply before full deregulation. Texas, Pennsylvania and Wisconsin have all encouraged new supply as a first step. Wisconsin has extended its transmission grid to boost import capacity, while Texas has streamlined the approval process, so that it takes just two to three years to build a new generating plant.

Alberta completed deregulation of its electricity sector on Jan. 1, and rates have soared. As in California, Alberta has inadequate supply for the voracious demand, leading to immediate price increases. And, as in California, Alberta has built in no direct incentives for new supply.

Clearly, this track record shows the wisdom of focusing on new supply to ensure a competitive market.

Britain did other things right as well. It did not cap the rates paid by consumers, allowing reasonable returns for generators. California imposed caps that are now bankrupting the two largest utilities. Caps distort market pricing and discourage construction of new plants, because investors don’t know whether they will be able to operate profitably down the road. Appropriately, caps are not planned in Ontario, which is now designing its own electricity deregulation.

In Britain, consumers were encouraged to sign long-term supply contracts to lock in prices, providing more price stability. Few consumers have done that in California, and they have been buffeted by all short-term movements in the price of natural gas.

Hedging has also been a success in Australia, where most electricity purchases are arranged with advanced contracts and utilities have little unprotected risk. California forbade hedging, fearing it would allow the biggest utilities to lock up the cheap electricity and stifle competition. The ban has created huge instability as utilities buy electricity in the daily spot market, and the practice is being abandoned as California learns its lesson.

Experience also shows there need to be careful controls to prevent price manipulation by generators who have held back electricity to create critical demand. Although California tried to guarantee true competition by forcing the two largest generators to sell off their plants and by requiring generators to sell to a centralized computer exchange system, a November report by the Federal Energy Regulatory Commission still found evidence of price manipulation in the market.

Ontario is planning a similar centralized pool sales system, and its design has been one of the issues delaying the announcement of a deregulation date in the province. It’s hard to protest against such a delay if it ensures a better-functioning system.

The point of deregulation is to encourage efficient competition. Australia embraced deregulation because of terrible productivity in its operations. Since then, not only have companies invested in generation and transmission, but efficiency has greatly improved. In the state of Victoria, there are 2,000 employees in the generation business compared with 10,000 employees 10 years ago, and they are producing far more electricity.

In Germany, industrial users saw prices drop by as much as 60 per cent initially. Consumers faced a raft of cut-price deals sooner than even the system designers had hoped. The savings came in part from greater productivity at generating plants, where cost-cutting was severe.

By ensuring adequate supply and protecting against unnatural price manipulation, Ontario and presumably other Canadian provinces can also cut costs and increase productivity. It’s essential to get it right before marching into disaster. But with ample experience to draw from, there is no excuse for getting it wrong.

Richard Brennan
Toronto Star
January 25, 2001

Ontario is delaying its move to a competitive electricity market in the wake of blackouts in California associated with deregulation, Premier Mike Harris says.

“I think there are some steps that we are committed to do to achieve the advantages of competition . . . but our primary concern is for our consumers and industries here in Ontario,” Harris said yesterday.

Both California and Alberta consumers have faced brown- outs and unexpectedly high price hikes since their electricity markets were deregulated.

“There’s no artificial deadline that I can see but we are studying California, we’re looking at Alberta, we’re looking at what the other jurisdictions are doing,” the Premier said.

Critics have said California’s problems stem largely from a botched 1996 deregulation plan – the first in the U.S. – which saw the establishment of two transmission utilities, Southern California Edison and Pacific Gas and Electric, both of which are now claiming bankruptcy.

Harris said California’s rolling blackouts, have been caused, in part, by a power shortage and high natural gas prices – neither of which, he said, will affect Ontario.

“We have a very low dependence on natural gas so far in Ontario although we are looking at it into the future,” Harris said, noting that the Pickering nuclear plant is expected to reopen next year, giving the energy supply a boost.

Energy Minister Jim Wilson said Ontario has delayed the market opening once and is prepared to do it again.

“We’re aiming for later this year but if conditions aren’t right for Ontario we won’t move forward until we’re satisfied we can bring a market in that consumers will benefit from,” Wilson said.

Ontario’s market opening was scheduled for last November. No new date has been set.

The electricity crisis in California is blamed in part on the American Northwest’s limited supplies of hydroelectric power and on deregulation of its electricity industry. Wholesale prices on the open market soared and rate caps imposed under the deregulation plan have prevented utilities from passing on those costs to customers.

“Given that we have the opportunity of learning from California and Alberta, and other jurisdictions, we are going to take our time,” Wilson said, insisting that rate- capping is not being considered for Ontario. “We don’t want to get stuck in a supply crunch like California.”

But critics say the real reason behind the delay is that the Harris government realizes that any hopes of consumers getting a break in a deregulated environment have been dashed.

“I think that Ontarians’ confidence in this plan has to have been shaken quite a bit because of the delays in the implementation here . . . and what we are seeing in California and to a lesser degree in Alberta,” Liberal MPP Gerry Phillips (Scarborough-Agincourt) said.

Tom Adams, of Energy Probe, said the longer the government drags its feet on deregulating the market the greater the chance of power disruptions in Ontario. “The further we delay the opening of the market the more likely power shortages are . . . because we’re not building adequate new generation.”

John Ibbitson
Globe and Mail
January 25, 2001

Even the most inflexible free-market ideologue must feel some compassion for Ontario Premier Mike Harris and his Energy Minister, Jim Wilson.

The Ontario government has spent 5½ years carefully laying the groundwork for an open market in electricity. After numerous delays and course corrections, the province is almost ready for the big bang of deregulation, ready even for the outrage from homeowners when they see their energy bills shoot up.

And then along come the troubles in California, the unpleasantness in Alberta, and everything has to go back on hold.

Which is why the Premier took pains yesterday to emphasize that, while an open market in electricity is coming in Ontario, it might well not come this year.

"There is not an urgency for Ontario," the Premier emphasized. "There is no artificial deadline that I can see."

There used to be a deadline, a quite specific one of Nov. 1, 2000. Then it was moved to sometime this year. And now?

"Don’t expect us to lead into any uncertainty," the Premier warned, in his unique English. "Expect us to logically think through this process and be able to move at the right time."

Blackouts in California and price spikes in Alberta have left the Tories fearful of the political fallout from deregulation. The problem, as they know full well, is that the longer they delay, the worse the impact on the typical homeowner will be.

Electricity is just stuff, the way wheat is stuff, cars are stuff, clothes are stuff. But people think of it as something else, as a basic entitlement, like penicillin. After all, electricity is stuff no one can afford to be without.

All North American jurisdictions are moving or have moved toward deregulation because it makes sense: Publicly owned utilities do the job poorly. (Ontario Hydro managed to bequeath a debt of $20-billion before it was restructured.) All jurisdictions are also trying to protect consumers from increased electricity bills as a result of deregulation. This is impossible.

In Ontario’s case, about half of the typical homeowner’s energy bill is composed of delivery, administration and debt charges. Because the government has subsidized these charges in the past, they will go up under deregulation. One informed guess, from the industry watchdog Energy Probe, predicts an increase to the total energy bill in a typical household of about 7 per cent a year for three years.

The rest of the bill — the cost of the juice — will go up or down, depending on the cost of juice. In theory, deregulation should lower costs, as private investors build plants and compete for our energy dollar.

But new generator construction might not keep up with demand, leading to price increases (Alberta). There might be no new generators — or even financially viable utility companies — at all, if governments cap rates below fair market value (California).

The Ontario plan suffers from a bit of both evils, but not enough to be fatal. The greatest threat is delay. The sooner the province moves to an open market in prices, the sooner private investors will start building plants that ultimately lower the province’s energy costs. The longer the delay, the greater the risk that energy companies will build elsewhere.

One reason that electricity rates in Ontario are bound to go up under deregulation is that they have been frozen since 1993, while the real world has moved on. One way or another, the freeze must be lifted. The alternative — to retain our publicly owned utilities, with rates frozen — will only lead to decaying plants and staggering debt.

Nonetheless, this is politically an impossible time to move ahead with deregulation. Consumer fear is simply too high. But the government must signal its intention to move soon, preferably within the year.

Otherwise the province will not be another Alberta, or even another California.

It will be the worst place of all: Ontario.

Independent Power Producers’ Society of Ontario
Financial/ Technical Bulletin, supplement to IPPSO FACTO
January 31, 2001

"Ontario’s electricity restructuring is degenerating into a liability for consumers, taxpayers and the environment … Restructuring has become a crazy quilt of beneficial and harmful ideas stitched together without an easily discernible pattern … Ordinary consumers in Ontario are going to be paying more for electricity … Many of the problems remain fixable, although in some cases time is running out." These are some of the dramatic charges made in a speech by Energy Probe Executive Director Tom Adams at a conference in Atlantic Canada on Oct. 27, 2000. Entitled "Ontario’s electricity liberalization: from promise to crisis," Adams’ talk made a number of challenging observations and sounded some startling notes.

Most of the basic concepts advanced from the Macdonald Committee up until 1998 were sound, Adams said, but implementation has introduced a number of errors. Among them, Bill 35, proclaimed in October 1998, impaired the independence of the OEB and permitted financial irresponsibility in the successor companies.

Adams addressed his topic under several headings.

Delays in market opening

The first issue Adams attacks is the delay in market opening, for which a date has yet to be announced. His main concern is what he calls the lack of leadership from the energy minister on market opening once it became clear that the original white-paper target opening could not be met for technical reasons.

Part of the problem lies in the renegotiation of the independent contracts. In April of 1999 the government estimated a net present value of the loss on the contracts at $5.2-billion, and still has no plan for dealing with them.

For another thing, the government has yet to decide how it will collect the $8-billion Debt Reduction Charge. This is what remains of the roughly $21-billion stranded debt after some $13-billion is collected from corporate taxes and dividends in the energy industry.

Financial exposure worse under OEFC

"It appears that OEFC is operating its finances in ways similar to the old Ontario Hydro," Adams says. In addition, OEFC was four months late in releasing the financial report for its first fiscal year. Due July 1, the report finally came out at the beginning of November. Based on other reports Energy Probe was able to obtain at the time, Adams concluded "it is clear that OEFC is allowing the public exposure to electricity debt to grow significantly." In an article in the Financial Post on Nov. 17, he went on to say "the new Hydro is running amok, and taxpayers are worse off by more than $1-billion."

Despite government claims that the restructured company would provide "greater accountability to taxpayers and ratepayers," Adams said, the companies are less prudent than the old one. This takes the form of an additional $834-million in taxpayer-backed debt to acquire new assets, Adams said in his FP article, applying the term "curious" to the investments in his speech. These include the restart of Pickering A and the installation of pollution control equipment on its coal plants, the business case for both of which he says is doubtful. Nuclear plants of more recent vintage than Pickering A have been trading for $33 to $347 per installed kilowatt, he notes, while the retubing will cost $500 per installed kilowatt. Likewise, Adams says the cleanup measures will reduce only NOX emissions while increasing emissions of other noxious materials that appear likely to become regulated.

Finally, Adams finds HONI’s purchases of distribution companies doubtful in view of the fact that other parties are retreating from the market, meaning that possibly either it has special knowledge of how policy issues will fall out or a more relaxed approach toward the disposition of funds.

Secret cut-rate deals to large consumers

In his speech Adams referred to secret deals Hydro made, under orders from the Minister of Energy, with some of the largest power consumers for reduced rates, an issue that has recently seen coverage in the major newspapers. Energy Probe believes that the transmission rates, the Debt Reduction Charge, and IMO charges will add up close to the total discounted rate. In effect, the commodity will be supplied to favoured large industrial consumers at a price close to zero or even possibly negative prices. Under the Market Power Mitigation Agreement, Ontario Power Generation is permitted to create artificial scarcity sufficient to increase its average revenue on commodity sales to 3.8 cents/KWh. When commodity power prices close to zero are included in the average revenue calculation, the price for ordinary consumers must rise accordingly, Adams says.

Alternatively, if OPG includes its gross revenues from subsidized sales in the calculation of the Market Power Mitigation Agreement average revenue calculation, the company will see lower net revenues and generate lower profits and dividends. In this event, OPG’s payments to OEFC will be impaired and taxpayers, rather than customers, will cover the cost of the subsidies to big industry.

Adams says the deals will also increase the amplitude of price spikes for smaller consumers who have less interest in responding to price and lack the technical means, such as smart meters, to respond to them. There will also be less incentive to invest in cogeneration in "a climate where heavy industry can solve its energy needs through political processes rather than business effort." He offers the example of TransAlta’s Sarnia cogeneration facility. When the project was originally floated in 1998, there were six customers expected for cogenerated heat and now there are only three.

The Pickering A retubing will be a further disincentive to new investment, with 2000 MW of baseload to enter service over the next few years. Given this consideration, even the recent revisions to water power taxes and the politicized decision to shift transmission costs away from self generators are no more than a band-aid to correct what Adams calls "the now embarrassing lack of private investment."

Local distribution rates up

Adams expects to see distribution rates increase over the next three years by approximately 35% to 100%. "The opportunity existed at the beginning of regulation to move the utilities to a more efficient capital structure, one that allowed the utilities to incur debt," he says. "Rates could have been set to provide for dividends to municipal owners only to the extent that they invested in the system. Instead, the regulator adopted a cost-of-service model that allowed the utilities to earn a ‘market-based rate of return’ on historic ratepayer capital, thereby transferring the net book value of the utilities to the municipal governments. Consumers will effectively pay again for the capital costs of assets paid for previously. "This amounts to a $7-billion windfall to municipal governments, Adams says. He goes on to suggest that the Ministry’s response, Bill 100 (since revoked) seemed to be intended to delay the full effect of the increases until after the next provincial election.

"All semblance of independent regulation of monopoly services has been lost," is Adams’ summary. "Performance Based Ratemaking may reduce distribution rates by a few percentage points over time," Adams says, but its benefits "will never come close to the losses imposed by the double payment problem from applying a market-based rate of return on the capital historically contributed by ratepayers."

Small consumers hurt by net load billing, marketing schemes

In another analytical thrust sure to displease IPPSO members, Adams considers net load billing a political move to shift sunk transmission costs, partly a legacy of past mistakes, from large to small consumers. He sees the rate impact on small consumers as starting small but very likely to grow in future years, and possibly becoming a model for cost shifting of other regulated rates.

Adams says he has studied three power delivery contracts marketers are offering small consumers, and would urge them not to accept any of them. Such contracts typically offer a fixed price for energy extending over several years. Under the contract terms, Adams says, consumers who agree to such a contract are cutting themselves out of any rebates OPG might subsequently offer. "OPG’s rebate program requires the company to rebate customers if the annual weighted average commodity price exceeds 3.8 cents/kilowatt hour," he explains. "The current commodity price, which is not evident on consumer bills, is about 4.5 cents/kilowatt hour. [Because of various factors] I expect that OPG rebates are very likely to arise in the first couple of years of the market’s operation." While hedging against delivered price increases is acceptable, Adams says various aspects of the marketing campaigns are misleading and small customers don’t understand the issue enough to realize it.

Finally, Adams finds that Ontario’s Emission Reduction Credit Trading program as presently designed may well result in increased NOX emissions. He explains: "foregone forecasted emissions are treated as if they are real emission reductions. Credit granted for foregone forecasted emissions can then be used to offset actual emissions. "Here’s how emission reduction credit trading might work: A company might propose to build a facility like a cement plant that is capable of producing a significant amount of emissions. After duly registering its interest in the facility, the company might then cancel the plan for it or reduce its planned size. The reduction in actual emission below the once forecasted level might then be established as an emission reduction credit and the credit sold to OPG. OPG would then have a credit to reduce its registered emission and increase the utilization of its coal-fired units by a corresponding amount."

Recommendations

While the speech was directed at Atlantic Canada, several recommendations apply to Ontario as well:

• quantify the liabilities (sunk costs) by privatizing them. Privatizing the liabilities may appear costly but the gains in transparency are likely to be highly worthwhile in the long term.

   

• use a system of efficient locational marginal prices for energy on the transmission system. The Pennsylvania-New Jersey-Maryland market temporarily collapsed in 1997 because it didn’t do this.

   

• ensure investor confidence

   

• upgrade the metering stock to handle two-way communication of price and usage data.

John Spears
Toronto Star
February 9, 2001

Delaying the opening of Ontario’s competitive electricity market has increased the cost of the new system by $41.8 million, according to estimates by the agency that will run the market.

The new figure pushes the total cost of setting up the market well beyond a quarter of a billion dollars, according to the Independent Electricity Market Operator (IMO).

Altogether, the IMO says the cost of installing the systems needed to track the complex electricity auction in a competitive market will be $285.1 million.

That figure is expected to rise, as further delays are likely before the market opens.

The numbers are contained in the IMO’s business plan, filed with the Ontario Energy Board. The costs don’t include the money utilities and businesses are spending to prepare for the new marketplace.

Under the new system, generating companies will offer electricity at certain prices, which utilities and businesses will bid for – kind of like an electricity stock market.

The IMO must install a system capable of running the auction and settling all the purchases.

Despite the high cost, IMO vice-president Bruce Campbell says the system will pay for itself – if the new marketplace produces the hoped-for efficiencies.

For example, the new market may make the price of off- peak electricity very attractive. If businesses adapt to using more power at night and less during the day, that could eliminate the need to build a new generator costing hundreds of millions.

Ontario’s competitive market was supposed to open last November, but has now been put off until at least May, probably longer. The delay is blamed on a lack of preparation by utilities and market rules that took longer than anticipated to prepare.

The delay means the IMO has had to keep extra staff on standby for months longer, so they’ll be available to troubleshoot when the market opens. It has also increased financing costs.

“Should it be decided for any reason that the market should open later than May, 2001, then extra costs will be incurred,” the business plan warns.

Tom Adams of Energy Probe, an IMO director, says that while some big costs of switching to a competitive market are evident, some of the potential savings are not.

Darlington’s huge costs helped to push Ontario Hydro to virtual bankruptcy. Electricity customers will be paying an extra levy on their bills for years to retire Ontario Hydro’s massive debt.

Adams said that in addition to the IMO, municipal utilities must all spend millions on new market systems as well.

Sheree Bond of the Municipal Electric Association said the association is not opposed to the market delay, even though it means added cost – because of the risk of moving too quickly to a new system.

Lily Nguyen
Globe & Mail
February 14, 2001

With the meltdown of the meltdown of the California electricity sector, "deregulation" has become synonymous with blackouts, shockingly high prices, energy shortages and system failures. Fear and loathing of California-style electricity chaos have prompted one-third of the 24 states contemplating deregulation to either delay or back out of it.

In Canada, the government of Ontario is similarly stalling on deregulation, delaying the liberation of its electricity market from last year to this year to an indeterminate date in the future.

In New Brunswick, Energy Minister Jeannot Volpe won’t even use the word "deregulation" to describe the province’s plans to end the monopoly of its Crown corporation utility, New Brunswick Power Corp. She says it’s just a "new policy."

But in spite of the highly publicized debacle in California, and to some extent Alberta, the deregulation process has been marked with considerable success. For nearly 20 years, power industries around the world, including parts of Europe, South America and Australia, have been liberated. In many cases, it has led to more competition, higher efficiency, lower prices, cleaner and more modern generation, and a lighter regulatory regime.

In North America, it has spread through the northeastern United States, including Pennsylvania, New Jersey and Maryland which form the PIM system as well as New York and New England. Like California, these jurisdictions have introduced competition into wholesale electricity, the side of the market that generates and sells the power to suppliers, but not to end users like households. And so far, their efforts have been met with some success.

In fact, despite the prevailing view, experts say California is not a leader in the deregulation process, or a typical case.

"California is not a front-runner," said Tom Adams, director of Toronto-based Energy Probe, an energy watchdog group. "There have, been some major successes, there have been some big hiccups, but there’s never been a blow-out like California so far."

"California’s situation is pretty much unique," said William Hogan, research director of the Harvard Electricity Policy Group in Cambridge, Mass., which is studying the deregulation and liberalization of electricity markets. Mr. Hogan, a professor of policy and public administration at Harvard University, said nowhere in the world has a deregulating market been hit with a severe supply crunch like California’s, where blackouts have become a fact of life.

So what made the difference? It’s difficult to pinpoint a single formula for success because each country or jurisdiction has a unique starting point for deregulation a different political, economic and environmental climate, as well as a unique electrical industry.

But in light of the California situation, perhaps the most powerful lesson can be gleaned from a 1999 study by the International Energy Agency titled Electricity Market Reform.

Jurisdictions considering deregulation, the study says, must "think hard, but move quickly and vigorously."

The study, which surveyed the restructuring of the electricity industry in countries belonging to the Organization for Economic Co-operation and Development, found that deregulation inevitably brings with it a painful transition period.

Some workers in the industry lose their jobs; industry has to grapple with new rules; system administrators have to learn how to effectively enforce these rules.

The better the market design in the beginning, and the more clearly and consistently it is implemented, the shorter that transition period, and the more quickly the benefits begin to be felt.

That didn’t happen in California, and it also didn’t happen in Alberta, two jurisdictions where deregulation has been accompanied by a supply squeeze and skyrocketing power prices.

"The California experience from day one was to adopt more and more complicated rules, because people were able to take advantage of the mistakes in the rules they had," Mr. Hogan said.

In California, power prices have soared so high that utilities that can’t pass the increase onto their consumers have already threatened bankruptcy and begun to default on payments. California’s two largest utilities owe $12-billion (U.S.) in combined debt, and recently Pacific Gas & Electric Co., the state’s No. 1 utility, said it would be paying suppliers 15 cents on the dollar.

Critics trace the supply shortages in California and Alberta back to poor planning at the outset, and a shifting road map for deregulation that discouraged companies from investing in new generation capacity at a time when the economies of the two jurisdictions were booming and demand mushroomed. California also implemented strict environmental rules that made approval for new power plants difficult to obtain.

Nobody wanted to sink hundreds of millions of dollars into new power capacity when it wasn’t clear how they would make their money back.

"California didn’t have low supply when they went into it, which was 1996," Mr. Hogan said. "The problem was they didn’t have anything much in the pipeline, and things came in very slowly, because people were very uncertain about what’s going to happen.

"Get it right as soon as you can," he said. The PJM system, in Pennsylvania, New Jersey and Maryland, got it right, he added. That’s why deregulation has been relatively painless so far. "The successful jurisdictions are jurisdictions that have regimes that make it a safe, secure environment for new investment," Energy Probe’s Mr. Adams said.

Richard Gilbert, a professor of economics at the University of California at Berkeley who has studied deregulating electricity markets, pointed to Britain as an example of successful deregulation.

When that country deregulated its electricity industry, he said, "prices turned out to be pretty high, and that attracted a fair amount of new suppliers.

"Customers didn’t see a price increase, in fact they saw the price go down a bit. It was a pleasant scenario from a customer’s point of view."

Now that the rules in Alberta are laid out, the deregulation horizon looks clearer, although it may be years before it is reached.

Companies looking to benefit from high power prices are rushing to build new generation capacity. Already, plans for more than 3,000 megawatts, or more than one-third of existing capacity, have been announced over the next five years. Once some of those plants come on stream as early as next year in some cases wholesale prices are expected to come down, as well as prices charged to consumers.

The future of California’s deregulated power industry remains foggy, however.

Mr. Gilbert said there are two big problems with the California system. One is that power rates charged to consumers are fixed. The other is that utilities, which buy power for resale to consumers, aren’t allowed to enter into long-term contracts for their power supply.

Because of the fixed prices, there is no incentive for consumers to cut back on their power use, even though power is in tight supply, Mr. Gilbert explained. The utilities suffer, because they have to scramble to find enough power to meet consumers’ needs. And because they can’t sign long-term contracts guaranteeing any supply, they have to buy it on the market no matter what the cost. That has precipitated their present financial crisis.

In the end, Mr. Hogan said, any system open to competition will be subject to some price spikes and even energy shortages.

"The system works reasonably well without lots of intervention," he said. "Sometimes prices go up for short periods to reflect scarcity and that’s a good thing, not a bad thing. It’s when prices go up all the time like they have in California that you have evidence of something really dysfunctional going on.

"Deregulation? It’s definitely workable, and it definitely offers benefits," he said.

Donald Jones, Tom Adams
Toronto Star
February 19, 2001

The article by John Spears on the cost of the delay in implementing the new hydro market quotes Tom Adams of Energy Probe as saying that under a competitive market the Darlington nuclear generating station would not have been built. But Tom, that’s the problem with the competitive market, we would have gone to the lowest coal provider, coal.

An equivalent sized coal station would now be spewing out millions of tonnes of greenhouse gases a year, together with all the other evils of coal combustion.

Even using our present-day love child, natural-gas fired combination cycle-gas turbine generation, would result in a Darlington-sized plant producing over 12 million tonnes a year of carbon dioxide.

Darlington was over budget for many reasons and is not representative of today’s construction costs but who said solving the greenhouse gas problem was going to be cheap? We have to put our money where our Kyoto mouth is.

Donald Jones
Mississauga

Tom Adams’ Reply:

Donald Jones, who fails to disclose that he is an employee of Atomic Energy of Canada Limited, is correct in saying that, in a competitive electricity market, the Darlington nuclear plant wouldn’t have been built (Letter-Feb 14). But he wrongly assumes that a competitive market would result in more coal — Ontario Hydro’s legacy is our current codependency on coal and nuclear.

In all the jurisdictions in the world switching to competitive markets, coal and nuclear power investment have stalled. High-efficiency natural gas technologies, and sometimes renewable energy, have proven to be the power sources of choice.

Tom Adams
Energy Probe
Toronto

John Spears
Toronto Star
February 27, 2001

A frequent critic of the Ontario government’s energy policies has failed to win reappointment as a director of a key agency set up to run the province’s new electricity market.

Tom Adams, executive director of Energy Probe, has not been reappointed to the board of the Independent Electricity Market Operator (IMO). He was the only one of six directors not reappointed to the IMO when their terms came up for renewal. The IMO has 16 directors in total.

The agency has been set up to run Ontario’s new competitive electricity market, which is not expected to open before the end of the year.

Adams had served on a committee that drew up the basic design for the province’s new electricity market before his appointment to the IMO.

"He helped bridge the gap between that process and the start-up of the IMO, and did that ably,” said Mike Krizanc, a spokesperson for Energy Minister Jim Wilson. “But they’re not positions for life."

He wouldn’t say why the minister dropped Adams, who was replaced by Carol Perry, chief executive of Maxxcap Corporate Finance Inc., a financial services advisory firm.

“It’s sort of like a personnel issue,” Krizanc said. “It’s not something we would discuss in any kind of detail.”

“The sequence was that I wrote to the minister recommending the reappointment of everyone whose term was expiring, including Mr. Adams,” said James Baillie, IMO chair in explaining the process.

“He then said to me: `To help me consider this list I’d like to have a couple of additional people who’d be qualified.’ We gave him a couple of names of people who would be credible. Carol Perry was one of those names, and, in his wisdom, he appointed her instead of Tom.”

It was “essentially a ministerial decision, as it should be because he’s the shareholder,” Baillie said.

Adams supported opening the electricity market to competition. But he criticized Queen’s Park when he thought it had made a wrong move by rolling back rate increases sought by municipal utilities, saying the rollback masked the true impact of the government’s policies. He had also said government actions damaged the Ontario Energy Board’s independence.

Adams said he had wanted to be reappointed. “I took the independence of the IMO very seriously and made comments that in some cases I knew might cause discomfort in some quarters,” Adams said. “But they were comments I think the public deserved to know.

“When I offered my name for reappointment, I knew in some sense it was a test of how far the government was going to allow the IMO to be independent.”

Robert Benzie
National Post
March 1, 2001

Ontario will forge ahead with deregulation of the hydroelectric market despite the threat of higher rates and problems experienced in Alberta and California, Mike Harris, the Premier, said yesterday.

"I’ve always believed monopolies are not in the best interest of taxpayers. They’re expensive and they’re inefficient. I believe in open, competitive markets, because they help keep costs low and they encourage innovation," said Mr. Harris. "We need to apply the same thinking to the electricity sector," he said in a luncheon speech to a business association in a Toronto suburb.

Deregulation has led to California being crippled by rolling blackouts due to power shortages, and in Alberta consumers are being hit by skyrocketing hydro bills. But Mr. Harris said Ontario’s experience will be different.

"Some of you might be wondering why I’m talking about creating a more competitive market for electricity. Reading the papers, you’re left thinking it doesn’t seem to be working well … in California," the Premier said.

"But there are significant differences here in Ontario. California did not have an adequate supply of electricity before it went to an open market," he said.

California relies on natural gas for more than half of its hydro-electric power compared with 4% in Ontario. For that reason, the Golden State has suffered soaring natural gas prices.

"The situation in California is a warning to us all. We will not let [that] happen in Ontario," he said, adding a timetable for the opening up of the market in the province should be revealed within the next few weeks.

In Alberta, where there is also greater reliance on natural gas, the government has issued rebate cheques to ease the burden of higher electricity rates – something Mr. Harris ruled out in Ontario.

"We don’t have the same luxury that Alberta has in rebate cheques," he told reporters.

"What we are looking at is how we can be the most competitive in the long term."

The Premier said electricity prices are going up, whether or not there is privatization.

"The key is how can we make sure they go up by the least amount required," he said.

Since first being elected in 1995, the Conservatives have been promoting the privatization of government services. But other than selling the Highway 407 toll route north of Toronto for $3-billion and allowing a greater role for the private sector in the jail system, little has been done. To date, the Premier has rejected privatizing the Liquor Control Board of Ontario, one of the largest state alcohol monopolies in the world, or selling off TVOntario, the province’s educational television network.

"Our vision for Ontario’s electricity sector is based on four guiding principles: Protecting consumers and giving them more choice; ensuring a strong business climate with a reliable supply; protecting the environment, and encouraging new ways of doing business and new sources of power, " Mr. Harris said.

But critics say Mr. Harris’s erratic approach to hydro deregulation, delayed for months as the Ministry of Energy continues to study the issue, has discouraged interest from the private sector.

"Ontario’s current round of electricity restructuring is heading for the rocks. Electricity prices are going to rise. Electricity debt is rising. Power system reliability is becoming less secure. Private-sector investment is being scared out of the province," said Tom Adams, executive director of the lobby group Energy Probe.

Gerry Phillips, a Liberal MPP, also expressed concern at the vagueness of the scheme.

"This whole thing is quite troubling. He was supposed to unveil this thing last year. He got everybody down to look at it [at a press conference] and then decided not to unveil it," said Mr. Phillips.

"Even today, there was nothing. It was just: ‘Stay tuned, I’ll tell you more in the future,’ " he said.

"I think people have a right to be extremely worried. There’s enormous uncertainty. It’s clear that they’ve miscalculated the risks in this."

Matthew McClearn
Canadian Business
March 5, 2001

Enron Canada Corp.’s spartan office in downtown Toronto exudes a certain calm-before-the-storm atmosphere. These days, there are plenty of unused desks, minimalist decor and a doorbell outside its locked doors in place of a full-time receptionist. Yet the office’s 20 employees are far from idle. They’re diligently preparing the company to take part in the biggest electricity bonanza in Canada’s history.

Not well-known in Ontario, Enron Canada is, in fact, a subsidiary of Enron Corp. (NYSE: ENE) of Houston – the largest wholesaler of electricity and natural gas in North America. It is one of dozens of companies cooling their heels, waiting for the Ontario government to open the province’s electricity market to competition. The prize: a piece of the annual $10-billion business that was formerly the fiefdom of the lumbering, monopolistic Ontario Hydro. If and when they get the green light, new entrants will quickly change every conceivable moving part of this most complex machine – the grid that powers nearly every electronic device in the province, from hair dryers to auto assembly lines.

Today, Enron’s Toronto office can only arrange long-term agreements (contingent, of course, on deregulation) and provide advice for its clients. But in Alberta and other deregulated markets, Enron buys power from generators and sells it for a thin margin to its clients, mainly utilities and large industrial customers. Think of it more as a financial institution than a utility. Enron occasionally gets involved in power projects to get more electricity on the grid, but tends to sell those interests so it can focus on trading the power those plants generate. The more trading, the better for Enron. And whereas its traders used to cut deals over the phone, most now buy and sell in much greater volume on the company’s year-old Web-based trading system, EnronOnline – the world’s largest e-commerce site by dollar value.

If its performance in other markets is any indicator, Enron’s anonymity in Ontario will be short-lived. "Enron has been a phenomenally successful company," says Tom Adams, executive director of Toronto-based think tank Energy Probe. "You’d have to be crazy to bet against them." But Enron does have detractors. Consumer groups in California have demonized the company, accusing it of profiteering and market manipulation; it is among a number of energy marketers under investigation by that state’s attorney general. And last year, its Alberta operation was raided by the federal Competition Bureau along with that of Powerex Corp., the marketing arm of BC Hydro. The Bureau alleged that the two companies conspired to raise electricity prices on the provincial power pool, but subsequently cleared Enron of those charges and terminated its case late last year.

Such unfriendly fire can make business difficult – and Adams foresees more trouble brewing for Enron in Ontario. Last year, the Ontario Electricity Financial Corp. (OEFC), the provincial agency responsible for retiring Ontario Hydro’s debt, hired Enron as a contract management agent to administer billions of dollars’ worth of old, ill-conceived and money-losing power supply arrangements between Ontario Hydro and various small generation facilities. Adams says that could pose a conflict of interest for Enron when it eventually tries to sell power on the open market. "They’re potentially trading both sides of the Street here, taking advantage of a highly conflicted situation to make windfall profits," he says. "You can see how it might piss a few people off." Enron, however, says it does not have knowledge of its competitors’ proprietary commercial activities, and is working with the OEFC to avoid conflicts.

"Procedures are being put into place to make sure that doesn’t happen," says company spokesman Eric Thode. Although plenty of companies are sniffing for opportunities after the anticipated deregulation of Ontario’s electricity market, Enron is one of only a handful that have made clear commitments to do business in the province. That’s because many companies fear Ontario Energy Minister Jim Wilson will further delay opening the market or even kibosh deregulation entirely, in the face of problems in California and Alberta. But if Wilson bites the bullet and OKs privatization, new players will crop up in almost all aspects of the industry – including generation, distribution, retailing and energy services.

Ontario Power Generation Inc. (an arm of the former Ontario Hydro) now provides 85% of the province’s power. OPG must divest or lease many of its facilities if the government is to reduce that to its target of 35% within a decade. It is already arranging the lease of two Ontario nuclear reactors near the Bruce Peninsula, northwest of Toronto on Lake Huron, to British Energy PLC. However, new generation companies have less motivation to build plants in Ontario than elsewhere because there isn’t a pressing need to increase capacity. Ontario, unlike California, generates 18% more electricity than it uses every year, according to Ontario’s Independent Electricity Market Operator, which directs the operations of the market.

Deregulation would bring few new entrants among companies that generate Ontario’s power by burning coal and natural gas or splitting atoms. "It isn’t going to be an overnight thing, simply because it takes anywhere between two and 15 years to build a plant," explains Francis Bradley, vice-president of the Canadian Electrical Association. TransAlta Utilities Corp. (TSE: TA), a leading electric energy firm in Alberta, is the first to turn soil in Ontario; last November, it began construction of a $400-million natural gas-fired power project in Sarnia and has already signed supply deals with three large customers.

Keep an eye on so-called green power. When electricity sells at a government-regulated price, companies that peddle higher-cost power generated by windmills, solar panels and other alternative technologies are hard-pressed for business. In a deregulated market, however, customers can choose to pay a premium for cleaner energy. Vision Quest Windelectric Inc. already generates and provides wind-driven power to 3,000 residential customers and a small number of businesses in Alberta, where it is aggressively adding new wind turbines to increase capacity. The company is positioning itself to do the same in Ontario and estimates green power could eventually account for 10% of all electricity consumed in the province. "We probably cost a bit more, but it’s a higher-quality product," says executive director Jason Edworthy. But he adds that the company won’t commit itself in Ontario until deregulation is a sure thing. "It’s too risky," he says. "How can anybody invest in that environment?"

For distribution companies, deregulation could be a nightmare. Most of the province’s approximately 100 distributors are government-owned municipal electricity utilities. Hydro One Inc., formerly the electricity delivery division of Ontario Hydro, has been aggressively bidding for them, as have rival companies. Bradley expects to see further consolidation. "There are pundits in the US who suggest the optimum size of a distribution company is in the millions of customers, not the tens of thousands, to operate in the most efficient manner," he observes. Adams, however, believes that deregulation will not bring enough opportunities to offer new services. "Some of those guys are going to get into trouble, for sure," he predicts. "There are going to be some bankruptcies."

Ontario consumers will see immediate change among the new retailers that will buy power from the provincial pool and sell it to customers. "Retailers are already out there banging on doors, big time," says Floyd Laughren, chair of the Ontario Energy Board. "It includes everybody from affiliates set up by existing utilities like Toronto Hydro and Hydro One to new players like Direct Energy." Calgary’s Direct Energy Marketing Ltd. is a large seller of natural gas to residential and small-business customers in Ontario, Quebec and Manitoba. Other natural gas companies will likely be attracted to deregulated electricity markets, because they already understand energy distribution and because they can differentiate themselves from competitors by offering both electricity and natural gas.

As with any gold rush, initial profits in deregulation will go to those providing the picks and shovels. Tools happen to be the specialty of Asea Brown Boveri Ltd. of Switzerland, one of the world’s largest electrical equipment suppliers and a long-time seller in Ontario. The four varieties of electrical meters it is licensed to sell in Ontario are particularly significant. Most meters currently in use are crude devices with baffling dials, which don’t help users measure and manage their electricity consumption. Improved metering could become a point of differentiation among competing retailers.

We’ll have a better picture of which new companies will operate in Ontario when the industry is confident in a reliable deadline for deregulation. "There’s a certain tentativeness" among new market entrants, Laughren acknowledges, in the wake of the delay in deregulation late last year. But if and when the cogs and wheels start spinning, the big winners will be players who operated effectively in Ontario before deregulation – and companies like Enron that have learned their lessons in other open electricity markets. That should come as a shock to no one.