Energy Probe

Andy Holloway
Canadian Business
March 5, 2005

There are bound to be glitches when trying to deregulate a $10-billion industry that is technically complex, riddled with $21 billion of stranded debt and inherently tied to the general public’s way of life. But in light of California’s recent blackouts and Alberta’s own electricity woes, the delay in Ontario’s three-year-old plan to open up both the generation and retail sides of its public energy utility couldn’t have come at a worse time. In late January, both Premier Mike Harris and Energy Minister Jim Wilson publicly indicated that privatization of the province’s hydro industry, originally scheduled to be completed last November, is on hold until provincial regulatory bodies come through with final recommendations.

The systems and logistical framework for creating a competitive market are not ready, says Shane Pospisil, a spokesman for the province’s Ministry of Energy, Science and Technology. And the deregulation delay has nothing to do with the problems in other jurisdictions, he claims. Ontario’s Independent Electricity Market Operator (IMO), which will manage operations of the wholesale electricity market, is still doing testing; the Ontario Energy Board (OEB) is still registering retailers and looking at rate applications; and technicians are still looking for bugs in the computer network that will support those trading systems. "It’s not so much a physical date," Pospisil says, "as it is a series of conditions that have to be met for us to make the transition and make sure it’s a smooth transition." Most of the legwork is already done.

As a result of Bill 35, the Energy Competition Act of 1998 that deregulated the industry similar to the way the telephone and natural gas industries were before it, the erstwhile Ontario Hydro was broken into five successors – two commercial companies and three regulatory bodies. The province maintains it’s fully committed to privatization and that the background issues, which are causing such havoc in Alberta and California, simply do not exist in Ontario.

The province’s hydro industry currently has a supply reserve cushion, and it is increasing ties to utilities in surrounding regions, boosting the flow of electricity from Quebec and Michigan by approximately 40%. Already, 17 interconnections exist with utilities in Quebec, Manitoba, New York and Minnesota. And Ontario’s generation mix of hydro, nuclear and fossil fuels means it’s not as exposed to natural gas price fluctuations as Alberta and California are. The mix is closer to the widely touted deregulation success story of Pennsylvania, which opened up its wholesale market in 1993, followed by retail competition in 1996.

But the lingering perception that Ontario is waffling on privatization could create an economic climate of indecision and reluctance similar to that which is partly responsible for supply problems in Alberta and California, says Tom Adams, executive director of the Toronto-based [Energy Probe].

"The Ontario situation is a madcap amalgam of beneficial and detrimental processes and ideas all running simultaneously," says Adams. "Nobody promised a rose garden on this thing, so we do have a very complicated situation." He adds that the government’s inability to set a new market date doesn’t entice other companies to invest in the energy sector. The uncertainty the government has created favors the two commercial Ontario Hydro spinoffs, Ontario Power Generation Inc. (OPG) and Hydro One Inc., now operating as near-monopolies.

The Harris government counters that some $3 billion in new projects is on the books, generating almost 3,000 megawatts of power – enough to meet the needs of a city the size of Toronto. Calgary-based TransAlta Corp. in November broke ground on its $400-million plan to build a 650-megawatt natural gas-fired cogeneration plant in Sarnia, Ont., and to operate existing utility plants to serve Bayer Inc., Dow Chemical Canada Inc. and NOVA Chemicals (Canada) Ltd. New York City-based Sithe Energies Inc. is planning to build two 800-megawatt combined-cycle electric generation facilities in Brampton, Ont., and nearby Mississauga. And Ontario Power Generation is planning to restart the Pickering A nuclear plant, closed since 1997.

On the distribution side, Hydro One, which took over Ontario’s electricity delivery assets as well as call management, customer information and billing duties, has been a player in the bidding for municipal electricity utilities (MEUs). But it’s not the only bidder. Indeed, while Hydro One has spent more than $250 million to acquire 88 MEUs (87 of which are in rural areas or which already feed off its distribution system), it has been successful only in about 55% of its bids acknowledges president and CEO Eleanor Clitheroe.

The only party clearly hurt by the delay in privatization is the unregulated retail industry, where companies signing up customers won’t be able to offer their services until the market officially opens. Still, 42 licences have been issued by the OEB, including one to Ontario Hydro Energy.

In the coming competitive electricity market, Hydro One is likely to be the most visible, both because its six subsidiaries touch so many aspects of the industry and because of its expansionist ambitions. With a commercial mandate and a board of directors comprising private industry veterans from the likes of Gulf Canada Resources Ltd., General Electric Canada Inc. and Cara Operations Ltd., there is speculation that Hydro One is eyeing a future IPO or private sale. Last May it floated a $1-billion initial public debt offering underwritten by a syndicate co-led by Scotia Capital Inc. and BMO Nesbitt Burns Inc. – the first fulfillment of commitments Hydro One made to refinance its portion of the old debt that it was handed by the Ontario Electricity Finance Corp., one of the subsidiaries that arose from the restructuring of Ontario Hydro.

In the nine months ended Sept. 30, 2000, Hydro One reported net income of $345 million, 8% higher than in the same period a year earlier, even though revenue declined 5% to $2.2 billion due to a cool summer. Clitheroe insists privatization isn’t a current goal for the utility. "We’re focused on moving the company from the old Ontario Hydro culture, which was a monopoly culture and a monopoly system, to a commercial operation focused on benefit to the customer and providing shareholder value," she says, sounding like a true private capitalist.

Those growth plans include not only acquiring MEUs, but also expanding into other areas. Hydro One and TransÉnergie have filed to build an electrical transmission cable under Lake Erie. Its Hydro One Telecom subsidiary, which operates one of the largest fibre optic networks in the province, can now lease excess capacity to other providers. Hydro One Networks maintains approximately 30,000 kilometres of transmission lines and 113,000 kilometres of distribution lines, supplying electricity to almost one million retail customers, more than 100 direct industrial customers and more than 200 municipal utilities operators. That network accounts for roughly 90% of the transmission system in Ontario, so the majority of Hydro One’s distribution competitors will be using it on a fee-for-service delivery basis.

Hydro One Networks owns about 30% of the province’s distribution business. Ontario Hydro Energy, yet another subsidiary, operates the retail brokerage that will allow it to sell to end-user customers in an unregulated environment. As a holding company, Hydro One is required by law to maintain its various businesses as subsidiaries – they can’t share customer lists or use revenue from one subsidiary to fund activities in another. Clitheroe likens it to selling tomatoes: "We don’t grow the tomatoes, but we do truck the tomatoes and our retailer sells the tomatoes. But the trucking of the tomatoes and the selling of the tomatoes have to be strictly separated."

When everyone else will be able to sell tomatoes is up in the air. Pospisil says companies in the generation business are looking for a window of opportunity to open in the next 12 to 18 months, but the earliest that deregulation will be completed is likely this fall or next spring, when there is less stress on the hydro market. And while critics maintain a new deadline is necessary, there are reasons to be optimistic.

Ontario won’t fall into the same traps other jurisdictions have. Energy Probe’s Adams says the province has some well-formed institutions, solid legislation and a reasonably high level of commitment by market participants. But aside from perceived government indecision, the negatives include rising debt on the part of the two key players (OPG Hydro One) and some retreat from the principles that guided the transition – including extending subsidies to large industrial energy consumers for another four years. "That’s an example of a big step backward, sending powerful signal out there that this was not going to be a transition guided by principles of fairness," Adams says. "Some people are going to be treated favorably at the expense of others."

One thing is certain: there is no going back. As if to bring home that point, the Royal Ontario Museum in downtown Toronto is currently featuring an exhibit called "Power for the People: Electricity Transforms Ontario." It includes a retrospective on Ontario Hydro, and a look ahead to the future of a competitive electricity market. The show is presented by (you guessed it) Hydro One.

David McArthur
Natural Gas Market Report
March 19, 2001

In another development related to the opening of the new Ontario power market, the Ontario government recently dumped an outspoken, reform-minded critic of the province’s electricity system from the board of directors of the IMO.

Tom Adams, the Executive Director of Energy Probe, an environment and public interest group based in Toronto, was the only one of several IMO board members not reappointed in February by Jim Wilson, the Ontario minister of energy. James Baillie, the IMO chair, had approved Adams’ reappointment.

Before his IMO appointment, Adams was a member of the Market Design Committee, which had laid the ground rules for the new power system. Adams sees his lack of reappointment as a test of how far the government is going to allow the IMO to be independent.

“I took the independence of the IMO very seriously and recognized that some of my comments could make it difficult for the government to reappoint me,” he told NGMR. He noted that recent actions of the Ontario Government have reduced the independence of the IMO and the OEB.

Concerns are also being expressed that delays in opening Ontario’s competitive power market could cause electricity shortages, as in California.

Robert McLeese, President of the Independent Power Producers’ Society of Ontario, and others, have urged that Ontario not further imperil investment in new power projects with further delays and regulatory uncertainty.

Ontario’s recent electricity demand growth requires substantial new generation capacity each year, equivalent to a large, new generating station, which would likely be fuelled by natural gas.

Ontario headed in wrong direction?

These developments all relate to fundamental problems in the new Ontario market structure, which as planned, promises to be an unwieldy command and control form of regulation, designed primarily to pay down Ontario Hydro’s stranded debt, while allowing the corporate offspring of Ontario Hydro to be free to exploit their monopolies while slowly moving towards competition (NGMR, March 5).

Ontario’s new market structure has been greatly hampered since Ontario Hydro’s generation division was never broken up and sold off, as in other jurisdictions, which recognized that that was the only way to allow actual competition.

Rather than allowing immediate and efficient competition and customer choice, and deregulation, the new Ontario structure actually shares many similarities to the problem-plagued California market structure.

The very features which the regulators of the ungainly Ontario market structure hope to use to cope with and mitigate the market power of OPGI, and to pay down Ontario Hydro’s legacy of stranded debt, appear to be greatly contributing to the complexity of the new Ontario market, and the difficulty and slowness by market participants in preparing for market opening.

Thus, Ontario’s market system may be obsolete and prone to problems at birth, by being based on early British-inspired electricity market systems, which have had a tendency towards market abuse, high prices, and inefficiency. The world’s most advanced and most enlightened power market is scheduled to open shortly in Britain. The revolutionary New Electricity Trading Arrangements (NETA) has been given the go-ahead to commence March 27.

The system will use multiple power exchanges, and treat electricity as a commodity in fast-paced bilateral or multilateral buying and selling of power. It will dispense entirely with the questionable practice of awarding the highest, or marginal cost, to all power suppliers in power auctions, as in Ontario, California and elsewhere.

NETA was designed to lower costs, increase trading efficiency, and prevent market abuse. Ontario could do well by carefully studying NETA’s design, rationale and performance, and adopting a NETA-like system right from the start in its new power market.

Thomas Walkom
The Star
March 31, 2001

SAN DIEGO – As Ontarians prepare for the brave new world of the competitive electricity market, they might reflect on the fate of Arthur Edelman.

Edelman is a 75-year-old retired carpenter, a big, plainspoken man. On his right arm is a tattoo, a memento from his wartime service in the U.S. Navy.

Edelman also has a bad heart. To walk even a few paces in his tiny, two-room apartment is an effort. To get around his seniors’ complex, he uses a battery-powered, motorized scooter.

Every evening, he plugs in his scooter to recharge the batteries. Until last summer, that presented no problem.

But in June, Edelman and 3 million other San Diegans became the first North Americans in decades to experience the full fury of a deregulated electricity market.

As Californians turned on their air conditioners, electricity rates charged by San Diego Gas and Electric, the local private utility, began to climb. By August, Edelman’s monthly power bill had tripled to $125 (U.S.)

Even after an alarmed state legislature acted to temporarily reregulate San Diego’s rates (albeit at higher levels than had prevailed before the summer) he was still scrambling.

Living on a pension of only $1,040 a month, he had no choice.

“I keep the lights off; I try not to run any appliances,” he says.

Nonetheless, he hasn’t been able to pay his full electricity bill for almost a year. He is hundreds of dollars in arrears. Recently, he was warned that his power will be cut off if he doesn’t pay up.

What will he do if he can no longer power his scooter? “What can I do?’ he shrugs. “I can’t walk. I need it to do everything.”

Told that Ontario is preparing to enter the world of deregulated and privatized electricity, Edelman just shakes his head.

“Oh boy,” he says. “You guys are in for a glaring shock.”

Premier Mike Harris insists that the worst aspects of the California deregulation nightmare – such as the rolling blackouts that periodically sweep the state – won’t happen here.

But even he now acknowledges that electricity rates will jump when Ontario finally opens up its power system to competition later this year.

“I have no doubt that prices will be going up,” he told a business group earlier this month.

(In fact, as The Star revealed this week, even before deregulation begins, the price of basic power is set to rise by 8 per cent.)

Rising power rates weren’t part of the government’s story three years ago when it decided to break up Ontario Hydro, privatize parts of it, and replace the decades-old system of electricity regulation with one based on competition and market pricing.

Then, the Premier said he was “quite confident” his government’s moves would lead to lower electricity prices for all. Energy Minister Jim Wilson was even bolder.

“Competition is our best guarantee for the lowest possible prices in Ontario,” he said, after introducing his Electricity Competition Bill in the Legislature.

At the time, few seemed to doubt him. The major interest groups, the so-called stakeholders, were in agreement.

Big industrial users figured they could get cheaper rates. Private energy firms hoped to gobble up some of Hydro’s lucrative generating plants.

Smaller municipalities looked to make a cash windfall by selling off their utilities. Larger municipalities, like Toronto, hoped their wholly owned electrical utilities would become profitable cash cows.

To many environmentalists, deregulation would encourage so-called green power, such as solar or wind generation. Anti-nuclear groups, including Toronto-based Energy Probe, assumed that privatization would kill Ontario’s three big atomic generating plants.

Hydro’s top managers figured privatization was their chance to make it in the big leagues, with hefty private-sector salaries to match.

Even Ontario Hydro’s main union, the Powerworkers, came on side after the utility promised that workers wouldn’t lose their jobs under the government’s scheme.

In 1999, as Hydro was split up in preparation for what the government called “market opening,” togetherness was the order of the day.

Powerworkers president John Murphy was hired by Ontario Power Generation, one of Hydro’s successor firms, as an executive vice-president. Energy Probe chief Tom Adams was appointed to the board of the Independent Market Operator, another Hydro successor firm.

(Adams, who in recent months has become openly skeptical about the government’s market-opening scheme, was not reappointed this year).

Even the opposition parties weren’t overly perturbed. During the 1999 election campaign, the issue of privatizing and deregulating electricity almost never came up.

To most Ontarians, it just didn’t seem that important.

In fact, the decision to take apart Hydro is probably the most far-reaching economic move the Harris government has yet made, one that overturns almost a century of industrial policy in the province.

Since 1906, public power has been the cornerstone of the provincial economy.

Created largely at the behest of manufacturers who wanted cheap power, Ontario Hydro – particularly under its first chairman, Adam Beck – literally electrified the province.

Cheap electricity drove the manufacturing industries of the south as well as the mines and pulp mills of the north. By the 1950s, the words Ontario and Hydro were synonymous.

Hydro’s secret, the utility insisted, was that it provided power at cost. The private monopolies it replaced had charged whatever the market could bear. But Hydro based its rates on the real cost of producing electricity.

As long as those costs were steady or falling, Hydro was golden. But when the construction of pricey nuclear plants sent costs spiralling upward, the crown utility began to lose political support.

Wilson’s Electricity Competition Act was the result, striking right at the heart of the way power is produced and sold in this province.

First, it removes Hydro’s effective monopoly. Once “market opening” occurs (that date, twice postponed, is now expected for the fall), other private firms will be allowed to compete in the generation and sale of electricity. In fact, Hydro is required to divest two-thirds of its generating capacity within 10 years.

More important, the price that consumers pay for power after market opening will no longer be based on the real cost of producing that power.

Instead, price will be determined by supply and demand.

If consumer demands for electricity are high, those selling power will make superprofits.

Conversely, if consumer demands are low, sellers could find themselves bankrupt.

Economic theory predicts that in the long run these ups and downs should even out – that price spikes, for instance, will encourage new generating plants to come on line, which will automatically bring rates back down.

But as California has demonstrated, in the world of electricity, economic theory does not always work.

It’s easy to mock California’s experiment with electricity deregulation.

The original scheme was rammed through the legislature by Steve Peace, a Democratic state senator best known for his role as co-star in the 1978 horror film Attack of the Killer Tomatoes.

Deregulation has become such a disaster that the state is on near-constant blackout alert. Last night, California was yet again put on notice to expect rolling blackouts as energy reserves dropped perilously low. Two of California’s three big private utilities are on the verge of bankruptcy; the California Power Exchange, the jewel in the crown of the deregulated system, has closed its doors.

Lights have already been doused on the expressways. Starting this month, businesses which keep their outdoor lights blazing all night will face hefty fines.

The very state government that decided to get out of the electricity business is now back in it with a vengeance – buying power, reregulating rates and, if negotiations with the private utilities succeed, taking over three-quarters of California’s transmission and distribution system.

The cost to electricity users and taxpayers from this fiasco is estimated at $17 billion and climbing.

“We will not let a California happen in Ontario,” Harris vowed earlier this year.

Yet just 10 months ago, this same California was a model for deregulation, one lauded across the continent.

Alberta based its fledgling system of electricity deregulation on California. In Ontario, Wilson singled out California as an example for all.

California’s experience, he told reporters in 1998, showed definitively that a free market in electricity would lead to lower rates.

Until 1998, California, like most U.S. states, had provided power through a system of regulated utilities, each acting as the sole provider of electricity to a defined area.

While some were municipally owned, three-quarters of the state’s power was provided by a trio of private firms, Pacific Gas and Electric in the north, Southern California Edison in the centre, San Diego Gas and Electric in the south.

In all cases, rates, profits and expansion plans were subject to regulation by government agencies.

But in the mid-’90s, California decided to turn all of that on its head. Competition had already been introduced to air travel, telephones and natural gas.

Why not electricity? Surely, supporters of deregulation argued, electricity was a commodity like any other.

As well, there were more practical reasons. California’s electricity prices were high compared to elsewhere in the U.S. Partly, this was because consumers were still paying for high-priced nuclear plants built by the state’s utilities.

Partly it was because the utilities were required, as a conservation measure, to buy a portion of their power from higher-priced alternative generators that did not use fossil fuels.

As in Ontario, those lobbying hardest for an end to regulation were the large manufacturers who used the most power – particularly cement makers. Bypassing the big utilities, these firms figured, could substantially cut their power costs.

The U.S. federal government’s 1992 decision to open up the wholesale, interstate electricity market to competition put the game in motion. In 1996, the state’s then Republican administration decided to finish the job.

Platoons of economists trooped to the state capital in Sacramento to advise on setting up a competitive market. Behind the scenes, bagmen and lobbyists greased the wheels.

The final bill, passed unanimously by the California legislature in 1996, was not only a tribute to theoretical economics. It was also the result of intense bargaining between the utilities, large manufacturers, environmental and consumer groups.

And it was remarkably similar to the scheme the Ontario government plans for this province.

At the centre is a commodity exchange for electricity. The hourly spot price set by this exchange acts as the fulcrum for the entire system.

Ontario’s proposed version of this exchange is the Independent Market Operator, a crown corporation charged with operating both the physical system and the financial trading floor.

California split those functions between two bodies. The Independent System Operator runs the physical system, making sure power goes where it is supposed to go. The California Power Exchange – until it was unceremoniously shut down last month – acted as the trading floor.

There are other differences. For instance, California initially discouraged long-term contracts, a characteristic which ultimately proved costly to the state. Ontario says it won’t do that.

But in the end, both schemes were driven by the same philosophy. Generators would compete with each other to sell electricity into the market. Utilities and other retailers would compete to buy.

These retailers, in turn, would compete with one another for the attention of final consumers who would be able to choose from a wide array of electricity providers.

Competition would rule; prices would reflect supply and demand.

To appease California’s utilities, $28 billion of their debts – most of which were incurred from building nuclear plants – were billed directly to consumers as so-called stranded costs. These were to be paid off over time through a hidden charge on electricity bills.

To appease consumer groups, rates were frozen for up to four years, after which the private utilities could charge whatever the market would bear.

But if a utility paid off its stranded costs before 2002 – as San Diego Gas and Electric did – it could start charging the full market rate early.

That was the little wrinkle that sent Arthur Edelman’s rates soaring last summer.

These days, critics say the state’s decision to freeze rates caused all of California’s subsequent problems. If the utilities had been allowed to pass on costs to consumers, the argument goes, they wouldn’t be facing bankruptcy. If they weren’t facing bankruptcy, they could pay their bills. If they paid their bills, the generators would supply them with more power and the state wouldn’t have to endure blackouts.

But in 1996, the rate structure demanded by the state appeared more than generous to the utilities. True, legislators had insisted on an additional 10 per cent rate cut for residential consumers. But it was largely phony, financed by yet another hidden charge on consumer power bills.

“The 10 per cent cut was fictitious,” says Laura Krannawitter, an adviser to one of the Republican members of the state’s Public Utilities Commission. “It was a way to sell deregulation to a skeptical public.”

The fiction worked. The California public bought deregulation, voting down a last-ditch plebiscite aimed at derailing it.

Initially, the big utilities prospered. According to an audit done for the Public Utilities Commission, Pacific Gas and Electric made so much money in the first years of deregulation that it was able to pay at least $4 billion to its parent holding company. That enabled the parent to indulge in generous dividend payouts and foreign acquisitions.

At the behest of the state and at considerable profit to themselves, the private utilities also sold off about half of their generating capacity to other firms.

Later this would be seen to have been a critical mistake. California’s utilities are now in the unenviable position of having to buy power at 30 cents a kilowatt hour from plants they once owned, so they can sell at the government-mandated rate of about 7 cents a kilowatt hour to consumers.

But when the market opened in 1998, neither the utilities nor the state worried about this. California’s plan, like Ontario’s, was contingent on forcing the generating industry to open up to new players. The more players competing, the more prices would fall. That was the theory.

Only two imperfections marred this otherwise faultless leap into market-based electricity. First, retail competition never materialized. Some businesses found alternate suppliers. Some consumers dedicated to environmental goals bought power – at higher prices – from so-called green generators.

But 98 per cent of California’s customers, both residential and business, stayed with their existing utilities.

Partly this was because retail competitors found California a hard slog. The four-year rate cap was high enough to give the incumbent utilities a good profit but low enough to discourage competitors.

According to one estimate from the American Public Power Association, the cost of persuading just one customer to switch to a new supplier can be as high as $600.

What’s more, consumers weren’t interested in switching. Why should they? Rates were stable; the lights worked. Who wants to spend all their time comparing kilowatt-hour prices just to save a few cents a month?

The second flaw would turn out to be more serious. The state’s economy was booming. Electricity use, thanks to the rapid expansion of the Silicon Valley high-tech industry, was skyrocketing.

Big energy firms from outside the state had gobbled up existing utilities, often paying premiums of two or three times book value for the privilege.

But they weren’t lining up to build new plants. In fact, as they waited patiently for prices to rise, the private generators had every incentive not to add to capacity.

The reason, as University of California economist Severin Borenstein has pointed out, is that the economics of electricity are ruthless. If demand skyrockets and supplies are limited, those who control those supplies can make a killing.

Which is exactly what happened. According to figures assembled by the state’s Electricity Oversight Board, generating firms saw their profits rise last year by anywhere from 47 per cent to an astounding 1,800 per cent.

This week, the California Independent System Operator reported that generating firms have overcharged Californians by a whopping $5.5 billion (U.S.) during the last 10 months.

Nora Whitcotton sits in the gloom of her tiny two-room apartment in El Cajon, just outside of San Diego. “Is it all right if I don’t turn on the light,” she asks her visitor. “I try to save on the electricity bill however I can.”

Whitcotton illustrates what an economist would call the inelastic nature of demand for electricity. She is 63, suffers from a host of lung diseases and lives on a social security cheque of $732 a month.

For Whitcotton, sitting in the gloom and hooked up to her oxygen machine, electricity is a matter of life and death. If the price of power goes up, she can’t just turn off her electrically-operated machine – not if she wants to keep breathing.

“Without it, I wouldn’t survive,” she says.

Ever since she described her situation to a local public interest group, Whitcotton has been inundated with media.

“Nightline (an ABC television news show) came to interview me,” she says. “Goodness, there were so many of them; they had to move all of my furniture out so they could fit in.”

Today, it’s The Star. A few weeks ago, it was a Japanese newspaper. “I did turn down CNN though,” she says. “I wouldn’t let them come.”

With all of her media guests, Whitcotton is thorough and polite. She has two years’ worth of electricity bills at hand to prove that she’s not exaggerating when she says her rates tripled last summer. For someone who lives on $732 a month, an increase of $129 on her power bill – like the one she experienced last August – is sobering.

But isn’t she all right now? Didn’t the new rate cap the state imposed on San Diego Gas and Electric solve her problem?

Not exactly, replies Whitcotton. And she directs the reporter’s attention to her latest bill. There she has been charged $95 for electricity priced at market rates. Thanks to the rate cap, she only has to pay $46 of that immediately. But the remaining $49 hasn’t been forgiven. It is being charged to her as a debt which she will have to begin repaying in two years.

Like the 10 per cent rate cut the California legislature enacted in 1996, Whitcotton’s new rate cap is essentially fictitious.

Still, she is asked, isn’t there an upside? According to the theory of electricity deregulation, consumers like Whitcotton are supposed to alter their behaviour when rates rise. That’s the whole point.

Ontario’s Market Design Committee, the government-appointed body charged with establishing the rules for electricity deregulation in this province, put the theory quite succinctly in its final report.

Rising electricity rates, the report noted, give consumers “a reason to think about conservation and a benchmark against which they can judge some of the supply options that competitive retailers in their area may offer.”

So why didn’t Whitcotton think about conservation? She laughs. “I pay $135 a month for medical bills. My rent is $192. That leaves about $400 for food, utilities and everything else. . . .

“At $400 a month, I don’t eat out. I don’t go to the movies. I eat a lot of potatoes and use powdered milk. Life is pretty simple. In the summer it gets hot in here, but I try not to turn on the air conditioner. I keep the lights off as much as possible. This (she pats her oxygen machine) uses 500 watts of power.

“I don’t understand what else I’m supposed to do.”

And what about taking advantage of the “supply options that some of the competitive retailers in (her) area may offer?” She laughs again.

“There aren’t any.”

Thomas Walkom
The Star
April 1, 2001

CALGARY – When Alberta first announced it would open up its electricity system to the free market, Harry Irving was thrilled.

Irving’s family-owned Foothills Steel Foundry makes steel castings for the gravel crushing industry. Under the province’s decades-old regulatory system, the Calgary manufacturer paid between $15,000 and $20,000 a month for power. Competition in the electricity industry, he figured, would surely lower his costs.

“I’d be the first one to say deregulation should work,” Irving says.

Now, huddled over his computer screen in the early morning gloom, he is decidedly less enthusiastic.

Since Jan. 1, when Premier Ralph Klein’s Tory government officially threw open the province to free-market electricity, Foothills’ power rates have quadrupled. Irving has laid off half of his production workers and put the rest on a four-day week.

To take advantage of cheaper night rates, he and his entire staff now work the graveyard shift. They go to work at 11 p.m.; they clock out sometime after 7 a.m.

“It’s a different world,” he says. “I call it the dark ages.”

Most nights, he spends glued to a computer watching the price of electricity dip and surge at the whims of the market. So volatile is this price that it can triple within the space of a few minutes.

If it does jump dramatically, Irving has less than an hour to shut his entire plant down or face ruinous losses.

One night, the price suddenly leapt wildly. “I sent everyone home, but even then we didn’t get off fast enough.”

Harry Irving’s story is repeated throughout Alberta. In Lethbridge, John Davies, vice-president of Lethbridge Iron Works Co. Ltd., tells of leaving his computer screen briefly one night to take a quick shower. When he returned, the price had doubled.

“The regulatory system wasn’t perfect,” Davies tells a reporter. “But it sure looks good compared to what we’ve got today.”

Unlike Ontario, Alberta has always had a mixed, public-private electricity system.

Three large firms – two private, one a municipal utility owned by the City of Edmonton – dominated the generating field, each operating as a regulated, local monopoly.

As in Ontario, the regulated price charged to consumers was based on the actual cost of producing, transmitting and distributing power.

And, as in Ontario, the regulatory system worked. Alberta’s electricity prices were among the lowest on the continent.

In fact, Alberta even had one leg up on Ontario. Having never invested in nuclear plants, its generators were not burdened with the billions in debt that Ontario Hydro has incurred.

In hindsight, says Dan Macnamara, the old regulatory regime was nirvana.

Macnamara looks ever so slightly rueful when he says this. He is executive director of the Industrial Consumers and Cogenerators Association of Alberta, a big-business lobby that was the prime mover behind electricity deregulation.

“It proves what they always say,” he says over lunch. “You should be careful what you wish for.”

In the mid-’90s, Alberta big business was wishing for a free market in electricity.

New technology had made it easier to build smaller generating turbines. Petrochemical, forestry and big manufacturing firms found they could generate power cheaply themselves.

These firms didn’t just want to supply their own electricity through this so-called cogeneration process. They wanted to be able to sell any excess to someone else.

By 1995, the industrial consumers association – made up of 30 giant firms which use half of Alberta’s electricity and represent some of most powerful economic interests in the province – was pushing the Klein government hard to deregulate.

“We didn’t like the regulatory environment,” says Macnamara. “We thought it gave too much to the generators.”

At the same time, other forces were at play. Southern Albertan businesses resented a government policy requiring electricity to be sold at the same price throughout the province. Power was cheaper to produce in the south. Businesses in Calgary and Lethbridge didn’t see why they should subsidize their competitors in Edmonton.

As for the private utilities, they saw the writing on the wall. Deregulation seemed inevitable. Even British Columbia’s New Democratic Party government was talking of going to a competitive electricity market.

“We didn’t think regulation was going to last forever,” explains Dick Way, vice-president for TransAlta Utilities Corp. which, under regulation, had been one of the province’s big three generating firms.

“It was a matter of helping it to end in away that was not damaging to us.”

In 1995, the government announced it would take the plunge. Business and consumers would be given six years to prepare for the new world of electricity competition. D-Day would be Jan 1, 2001.

Now, six years later, many of the same business interests that first promoted electricity deregulation say it has been a disaster.

“The current mess just isn’t sustainable,” sighs Macnamara, digging into his pizza. He says two of his association’s members (he won’t say which) have quietly shifted production out of Alberta.

In Taber near Lethbridge, the Lamb Weston french-fry plant has put a $50 million expansion plan on hold, citing high electricity prices.

“Look,” Macnamara says, putting down his fork. “My members will be all right. They’ve got ways to protect themselves. What the government doesn’t realize though is that in the end, the people who really will be screwed are the small residential, industrial and commercial customers. . . .

“If you’re not going to get to a competitive environment, it is absolutely insane to deregulate. People forget why we regulated in the first place.”

But isn’t it just that Alberta screwed up its move to the free market? Can’t a deregulated electricity system be designed which will produce competition and lower prices?.

Macnamara ponders the question. “I’m not aware of any electricity market in the world that’s working,” he says finally.

In theory, Alberta’s deregulation scheme plan should have worked. It resembles the one Ontario plans to introduce later this year. In fact, on paper it looks better.

As in Ontario, the hallmarks of Alberta’s market opening were competition and choice. Ontario’s scheme requires Ontario Hydro to sell or lease two-thirds of its generating capacity within 10 years. Alberta’s plan required the three big generators to sell off, not their plants, but the output from those plants – for periods ranging up to 20 years.

The idea was that those who bought this output would compete with one another to produce a low basic electricity price.

Middlemen would then buy this electricity and compete with one another to provide final consumers, residential and business, with the cheapest possible power.

As in Ontario, consumers would be able to sign long-term, fixed-rate contracts for their power. Those who didn’t would, as in Ontario, pay the spot market price.

This spot price would be not be set by government regulators but by the impersonal forces of supply and demand operating through the Alberta Power Pool (the equivalent of California’s now-disbanded Power Exchange and Ontario’s Independent Market Operator).

Those who controlled the output from generating plants would offer electricity to the pool, indicating how much they were willing to sell and at what price. Utilities and other large consumers seeking to buy electricity would make bids, indicating how much power they wanted and how much they were willing to pay.

When bids and offers were matched up, the theory went, a single price would emerge – one satisfactory to both sellers and buyers. This was the spot price, the key to the whole system. Even those selling power through long-term contracts would take their cue from the spot market

There was, however, one big difference between Alberta’s scheme and Ontario’s. In Alberta, residential and small business rates were to remain capped for up to five years after the market opened to competition. In Ontario, there are to be no formal caps on prices.

To market purists, Klein’s decision to cap electricity rates for the majority of the population represented a loss of nerve.

In the end, though, it probably saved him from a humiliating political defeat.

By Jan. 1, as Alberta formally opened up its electricity system to market forces, almost nothing had worked out as planned.

Under regulation, three firms dominated the province’s supply of power. Under deregulation, the number had barely nudged up – to five.

These five, including the municipal utilities of Calgary and Edmonton, bought most of their power through a government-run auction last August, paying about four cents a kilowatt-hour.

Now they are selling this same electricity through the power pool at anywhere from eight to 25 cents a kilowatt-hour.

Similarly, Alberta’s promised retail competition has not materialized. Edmonton Power, now called EPCOR, controls the northern half of the province, Calgary’s public utility, ENMAX Corp., controls the south.

Like Toronto Hydro, both EPCOR and ENMAX are municipally-owned. Like Toronto Hydro, both have taken their provincial government’s advice to heart.

In the world of electricity deregulation, they are as hard-nosed, secretive and profit-driven as their private-sector counterparts.

Last December, as Harry Irving prepared to meet the Jan. 1 deadline for market opening, he was desperate. Since 1996, the power pool had been listing a kind of shadow price for electricity – the price consumers would have to pay if there were no regulation.

By December that shadow price was high and rising. Even the government was forced to admit that power prices would skyrocket once the market regime was instituted.

The utilities feared they would be caught in a California-style squeeze, forced to buy high but required – because of the residential rate caps – to sell low. To appease the utilities, Klein increased the regulated rate cap for residential and small business consumers. Their electricity prices would now almost double.

But to appease voters on the eve of a provincial election, he also announced $2.3 billion in temporary subsidies to these same residential and small business consumers.

The result: most voters will not see their electricity bills rise significantly until the end of this year.

Thanks to the subsidies, Klein easily weathered the election. Most voters were like the Premier himself who, in the final days of the campaign, acknowledged that he didn’t “know a damned thing about generating electricity.”

All that most Albertans knew was that, in the end, their rates were stable.

“I don’t really know if (deregulation) is a good idea,” Calgarian Peter Tworow told a reporter who knocked on his door during the campaign. “It probably is. I mean government shouldn’t really be involved in the free market, should it?”

Among residential consumers, Tworow’s comment was typical.

However, medium-sized businesses like Harry Irving’s Foothills were not as sanguine. Their electricity rates were not protected by either caps or subsidies.

Under regulation, Irving had been paying ENMAX 5.6 cents a kilowatt-hour for power. In late fall, the Calgary utility offered him a one-year contract, at more than triple the old price. EPCOR, the only other major retailer in Alberta refused to offer him anything.

Suddenly, in early December, ENMAX pulled its offer from the table. It was no longer interested in across-the-board, long-term contracts.

“Our (long-term) offerings are now limited,” Kevin Willerton, ENMAX’ director of market development, explained later to The Star. “We now only offer these contracts to certain customers.”

Irving stills buys his power from ENMAX. But the price he pays is set by the power pool spot market and is well above 18 cents.

Bill Pastoor, whose Big M factory in Lethbridge makes plastic bags for supermarkets, is in a similar situation.

“When the government first announced electricity deregulation, I never thought about it, . . .” he says.

“I thought it would be like when they deregulated the telephone, with Telus, Sprint and AT&T falling all over each other to get our business.”

Instead, he was faced with only one electricity supplier: ENMAX. The company offered Pastoor a one-year contract at roughly triple what he was paying. EPCOR offered nothing.

In December, ENMAX abruptly pulled its offer from the table. Like Harry Irving in Calgary, Pastoor is now at the mercy of the spot market.

Pastoor says he competes with manufacturers from British Columbia and Manitoba, where – thanks to regulation – power prices are still cheap. He has already lost two plastic bag contracts and fears he will lose more.

Would he like to go back to the old regulated system?

“You bet,” he says.

Supporters of market opening argue that Alberta – like California – simply blew it.

Both these jurisdictions, free market supporters say, didn’t have sufficient reserves of generating capacity when they deregulated.

The fact that prices went through the roof, they argue, reflected shortages and the high cost – particularly with natural gas prices up – of producing power.

“The conditions in Ontario, including the way the market is being set up, are quite different from California and Alberta,” Dave Goulding, president of Ontario’s Independent Market Operator, told the Toronto Board of Trade recently.

“(In Ontario) I expect to see far more stability in prices.”

In particular, Goulding noted that Ontario has plenty of excess generating supply.

However, so did Alberta and California when they first embarked on the road to deregulation. California had access to about 30 per cent more electricity than it used. Alberta had a 35 per cent cushion.

Ontario’s power reserves, according to Pat McNeil, a vice-president of Ontario Power Generation (one of Ontario Hydro’s successor companies and the main generator in the province) are now only about 15 per cent.

But even that figure is optimistic, says Tom Adams, head of the public interest group Energy Probe and until recently one of the directors of the Independent Market Operator.

“No one can say with any kind of certainty that something like Alberta won’t happen here,” Adams says.

There is one glaring similarity between the two provinces. Like Ontario today, Alberta before deregulation had some of the lowest electricity generating prices in North America, roughly four cents a kilowatt hour.

The market price in Alberta now is between double and six times that.

Severin Borenstein is director of the University of California’s Energy Institute. Like many economists, he is sympathetic to the idea of deregulation. His scholarly articles on the subject have been published by the Washington-based Cato Institute, a rightish organization devoted to market principles.

But Borenstein says he is less confident about deregulating electricity. The problem with electricity, he says, is that it isn’t a commodity like any other.

Unlike grain, it cannot be easily stored. Moreover, demand and supply must always be in exact equilibrium. Send too much power down the lines and everything may blow out. Send too little and the system may collapse.

Equally troubling, Borenstein notes in his paper “The Trouble with Electricity Markets,” is that electricity has unusual economic characteristics. Both supply and demand are inflexible. An economist would call them inelastic.

What this means is simple: No matter how much the price of electricity goes up, neither the quantity demanded nor the quantity supplied varies much.

Demand is inelastic because, to most people, electricity is a necessity. Even if the price of power rises, most Torontonians will still have to run their furnace motors in winter.

Supply is relatively inelastic because it takes years to build a new generating plant.

The result is that electricity markets are more vulnerable than most to manipulation by suppliers. Economists call it exercising market power. In the industry, it’s called gaming.

According to experts, gaming is a characteristic of every deregulated electricity market. Any generators that don’t game, write Borenstein and fellow University of California academic James Bushnell, are doing so “out of the goodness of their hearts and against the interest of their shareholders.”

In California, the Independent System Operator, the government-appointed body charged with overseeing the electrical system, concluded last week that gaming has cost the state a stunning $5.5-billion (U.S.) over the past 10 months.

That figure, the report says, represents the excess profits generators who have been able to manipulate the electricity market have extracted from consumers and utilities.

In Alberta, the government’s former market surveillance administrator, Howard Ward, suggested that the same kind of manipulation may have occurred there.

“The circumstances or level of market maturity may be such that the essential elements for workable competition are not there,” Ward wrote last October.

(Tom Cumming, Alberta’s current market surveillance administrator, says he is working on rules to curb the improper use of gaming, if it indeed exists).

While some, including Klein, have argued that high electricity prices in California and Alberta are solely attributable to rising natural gas prices, evidence shows otherwise.

In California, a government report issued last August pointed out that natural gas prices did rise 200 per cent in the first few months of last year. But over the same period, electricity prices jumped 700 per cent.

Alberta’s Ward made much the same point in October. “The fundamentals (rising gas prices) do not of themselves explain the price levels experienced,” he wrote.

Indeed, according to the Industrial Association of Southern Alberta, so weak is the correlation between natural gas and electricity prices that, at times, they move in different directions: power prices can rise even as gas prices decline.

If gaming is endemic to deregulated electricity markets, can it be controlled by encouraging more competition? Not necessarily, says economist Borenstein. He says gaming happens even when deregulated electricity markets aren’t dominated by a handful of players.

Nor is collusion required. All that’s needed is for one significant generator to suddenly shut down one turbine – allegedly for unscheduled repairs.

If the market is already tight, as it is in California and Alberta – and as it may be in Ontario – this reduction in supply can send prices shooting up astronomically.

The gaming generator will then be able to make super profits on the units it has left in service, so much so that the extra money it makes will more than compensate for any revenue it has lost by shutting down the one turbine.

Best of all, it is virtually impossible to catch gaming. Who can question a generator that says it has to shut down for maintenance?.

And even if gaming is detected, it isn’t illegal. In a free market, no one is compelled to sell electricity. If a seller can make more by creating artificial shortages, what’s wrong with that? It’s free enterprise.

“Businesses are going to do what businesses are going to do,” sighs Dan Macnamara of Alberta’s industrial power consumers association.

There is one area, though, where the competitive market works exactly as predicted.

Under most regulated systems, including those of Alberta, Ontario and California, electricity costs were based on the average cost of production.

If Ontario Hydro used a mix of low-cost hydro plants, medium-cost nuclear plants and high-cost natural gas plants to generate power, the price the regulator would allow it to charge consumers would be based on an average of all three.

Under a competitive market model, however, price is set by the so-called marginal cost – the cost of producing the last unit of power brought on line.

In the world of theoretical economics, this would make no difference. Average and marginal costs are equal. But, as Borenstein points out, in the real world of electricity, this equivalence rarely holds. Marginal cost – and hence the price charged – can be either higher or lower than average cost.

When this price is below average cost, Borenstein says, the utilities will complain, threaten bankruptcy and demand to be bailed out by government.

But when it is above, the utilities will reap super profits.

Even without gaming, this is what is happening in Alberta. Utilities are producing the vast bulk of their power in low-cost hydro and coal-fired plants.

But they are able to sell all of this cheap power at the price determined by the province’s small number of high-cost natural gas plants.

Why? Because those are the rules of the marketplace. That’s the way it works

Thomas Walkom
The Star
April 2, 2002

MEDICINE HAT, Alta. – To the casual observer, this small Prairie city doesn’t seem much like Los Angeles.

The houses are modest, the glitter definitely limited. Downtown at Top Pizza Family Restaurant, the lunch-time crowd is watching curling on television. No one is dressed in all-black.

But in one key way, Medicine Hat is L.A. When everyone else was hopping aboard the electricity privatization bandwagon, this city – like Los Angeles – refused to take part.

Instead, both held on to their publicly owned generating plants and continued to provide power at cost.

The result: amid the turmoil of electricity deregulation in Alberta and California, Los Angeles and Medicine Hat are islands of stability.

Rates in the city of Los Angeles are about a quarter of the California market price. While San Francisco and neighbouring cities in Los Angeles County, such as Beverly Hills, have suffered blackouts, L.A. proper has endured none.

So, too, in Medicine Hat. Large industries pay about a fifth of what their counterparts are charged elsewhere in Alberta.

Residential rates are about half of what they are in Calgary just 300 kilometres away (although the provincial government has narrowed the gap by paying massive subsidies to Calgarians and other Albertans affected by deregulation).

From his office overlooking the icy South Saskatchewan River, Medicine Hat Mayor Ted Grimm explains why his city declined to take part in Alberta’s free-market experiment.

“This a conservative city,” says Grimm. “But it’s a small c-conservative city. We’re not just ideological. We’re pragmatic.

“Our thinking was: If it works, let’s keep doing it. Let’s not just switch just because there’s a new fad.”

Now, like Los Angeles, Medicine Hat is sitting pretty.

Both are making money (neither city will admit exactly how much) from selling their excess power at market rates to neighbouring cities.

“It all looks great, and it is at the moment,” says Grimm. “But we don’t brag about it. As I say, every dog has its day.”

In Los Angeles, Department of Water and Power spokesperson Darlene Battle is equally cautious, saying only that her city is making “hundreds of millions” from selling its surplus electricity to the rest of California.

“We don’t like to publicize it too much,” she says.

Jeff Jodoin, a regulatory analyst with the Alberta Consumers Coalition, has a theory to explain Medicine Hat and Los Angeles.

“The real winners from deregulation are the places that stayed regulated,” he tells a reporter.

In a curious way, his analysis explains not only Medicine Hat and Los Angeles but deregulation’s success stories – Pennsylvania and Britain.

But first, the renegade cities.

When, in the mid-’90s, Alberta and California embarked on their crusade to bring the benefits of the free market to electricity, each faced a complex domestic situation.

In California, roughly one quarter of the state’s power was provided by municipally owned utilities. Most didn’t have their own generating plants. Rather, they bought power, at regulated rates, from private generators.

The city of Los Angeles was the most visible exception. Since 1917, the city – which occupies only a portion of the sprawling megalopolis known as Los Angeles County – has not only distributed but generated its own electricity.

Over time, Los Angeles acquired plants across the southwest, including one in Utah and a share of the Palo Verde nuclear plant in Arizona.

But by the mid-’90s, explains Randy Hough of the city’s Department of Water and Power, Los Angeles – like almost everywhere else in North America – had figured that deregulation was the wave of the future.

In 1996, the city’s residential power prices were 20 per cent lower than those in the rest of the state. But to pay for this, its industrial rates were higher. Los Angeles was sure it would be left out as the efficiencies of the private market worked their magic on the rest of California.

“We thought we’d be caught in a death spiral,” says spokeswoman Battle. “Our debts were high, which meant we couldn’t cut rates. Industrial customers would flee our high rates. That would mean that those who were left would have to pay higher rates to cover the debt, and on and on.”

The city’s game plan, says Hough, was to take a few years to reduce its debt, trim costs and then join deregulation in 2002.

“No one is saying that now,” says Battle, grinning.

Now, it is those private utilities which gambled on the competitive market that are in the death spiral, forced to buy power at exorbitant market prices and sell it at low, government-regulated rates.

The state is spending billions to subsidize consumers and plans to spend billions more to bail out these private utilities. But Los Angeles is doing what it always did: generating power and selling it to the city’s 3.9 million citizens at cost.

In Alberta, both Edmonton and Medicine Hat owned generating plants. Premier Ralph Klein’s government wasn’t about to let Edmonton opt out of market-opening. The city is one of the biggest electricity generators in the province. If it stayed out of the market, there could be no market.

By contrast, Medicine Hat’s utility was small, serving only the city. It could be excluded from deregulation without jeopardizing the entire scheme.

As well, public power was part of the city’s tradition. Granted its own natural gas fields in the late 19th century, Medicine Hat has been using that gas to generate electricity since 1904 – before Alberta became a province.

Still, public ownership was not without controversy.

“It costs money to buy a gas field or rebuild a generator and people never like that,” Grimm says. “A lot were enamoured by deregulation – some for ideological reasons, some because they thought it would be cheaper.”

When Klein announced his province was moving to a deregulated electricity market, other municipalities eagerly embraced the idea.

But Ted Grimm – and Medicine Hat – held firm.

“We have a history of self-sufficiency,” Grimm says. “We know what local control means.”

Whenever the topic of electricity deregulation arises, supporters like to bring up Pennsylvania.

Ontario Energy Minister Jim Wilson has pointed to Pennsylvania’s competitive electricity system as a model for this province. (His other example, an unfortunate one in hindsight, was California.)

“Good competition will bring us the best guarantee of low prices,” Wilson said in 1998.

But Pennsylvania is not Ontario.

As Eric Montarti, a pro-market policy analyst with Pittsburgh’s Allegheny Institute points out, Pennsylvania is a state in decline. Its steel-based economy is fraying, its population stagnant.

Those who remain in Pennsylvania tend to be old. The young, Montarti says, are getting out.

“Obviously, there’s no Silicon Valley like California’s,” he says.

As well, Pennsylvania has an excess of power. Ontario doesn’t.

But the key difference between Pennsylvania and Ontario is that Pennsylvania never really adopted the kind of free-market model Ontario is planning.

It just said it did.

Before 1996, electricity rates charged by Pennsylvania’s eight private utilities – the so-called incumbents – were set by regulation.

Now, under what the state calls “electric choice,” they still are.

The 90 per cent of Pennsylvanians who stayed with the incumbents will be protected from rate increases by the state’s Public Utility Commission until at least 2004. In some areas, regulation will last until 2010.

Ontario, by contrast, plans to eliminate rate regulation for all consumers as soon as it opens the electricity market (originally scheduled for last fall but now postponed indefinitely).

While Ontarians may receive some temporary cushioning from rate increases thanks to government rebates, the plan is to have consumers pay prices that more accurately reflect those set by the spot market.

If the spot market price of electricity jumps, as it almost certainly will once Ontario dives into deregulation, consumers will pay more.

None of this occurred in Pennsylvania. In fact, electricity prices fell after 1996, mainly due regulations. For example, PECO Energy Co., the Philadelphia incumbent, was ordered by regulators to give consumers a temporary 8 per cent rate cut.

Pennsylvania did, however, allow other utilities to compete with the incumbents. In some parts of the state, it made sure the regulated retail rate was set high enough that these new retailers would be able to make money. The state could do this, says the Public Utility Commission’s Kevin Cadden, because the wholesale price of electricity at the time was well below the regulated retail price.

In Philadelphia, a new retailer could buy power cheap on the wholesale market, undercut PECO’s regulated price and still turn a profit.

Elsewhere in the state though, where there was less difference between the wholesale price of power and the regulated rate, little or no competition evolved. And in still others, competing retailers went out of business as the wholesale price of electricity began to move up again.

In the end, about 568,000 customers – or about 10 per cent of the total – switched from incumbent utilities to another retailer. This was enough to let state governor Tom Ridge declare Electric Choice an unqualified success.

“We have plenty of juice, we’re plugged in, consumers have greater choice,” Ridge crowed.

The governor says the average 3 per cent decline in electricity bills resulting from deregulation has saved his state’s consumers $3 billion. What he doesn’t say is that the vast bulk of these savings are not the result of deregulation but of regulation – the mandatory rate cuts ordered by the state’s Public Utility Commission.

“No one was worse off and some people were better off,” says Irwin (Sonny) Popowski, the state government’s Consumer Advocate. “So in that sense it (deregulation) was a success.”

Still, Popowski concedes that the same savings may have resulted if the state had simply kept its regulated rates lower.

As for the Public Utility Commission’s Cadden, he insists that Pennsylvania’s market opening was always about more than mere money. “This was about opening up to competition not just slashing rates. It was about choice.”

Pennsylvanians now have the option of buying more expensive “green power” from environmentally sound generators, he points out. And, he says, a small number (he doesn’t know how many) do.

In 1990, Britain, under former Conservative prime minister Margaret Thatcher, was one of the first countries to privatize its state-owned electricity industry.

The first years under privatization were difficult and marked by controversy. Not until 1998, under a Labour government, was the market finally opened to residential consumers.

Now, the British system is considered a success. Price are down and consumers are happy.

However, a closer look suggests that here too, all is not quite as it seems. In a 1997 article done for the Washington-based, pro-market Cato Institute, economist John Kwoka wrote that there was “less to the (price) declines than met the eye.”

First, the government had artificially boosted rates in the last year of the old regulatory regime. After market opening, rates fell back to their old levels and the government declared a political success.

(Interestingly, the Ontario government seems to have borrowed a leaf from Thatcher’s playbook as it prepares to open the market. Late last week, it announced it was boosting the regulated wholesale price of electricity by 18 per cent, from 4 to 4.7 cents a kilowatt-hour. Ontario residents will pay an extra 8 per cent for electricity starting June 1.)

Second, Kwoka notes, the 1990s were a time of falling coal and gas prices across Europe. What that means, he writes, is that British electricity prices would have fallen anyway, even under regulation.

By one calculation, Britain’s electricity prices, adjusted for fuel costs, actually rose during the first years of deregulation.

In part, as economist Catherine Wolfram writes in the American Economic Review, this is because Britain’s market opening had a perverse result. Those private firms which dominated the new market were able to manipulate it. In the parlance of the trade, they were gaming – adjusting their output to keep prices artificially high.

Wolfram calculates that gaming kept British electricity prices about 20 to 25 per cent higher under deregulation than they should have been.

But perhaps the most telling detail of the British story is that, for residential consumers, regulation is still front and centre.

When the government opened up the residential consumer market to competition 2* years ago, it carefully kept a price cap in place. Then, to give consumers a break, it cut that regulated price cap by about 8 per cent.

What that meant was that the 75 per cent of British householders who stayed with their incumbent utilities got an 8 per cent rate cut – not because of deregulation but because of regulation.

The remaining 25 per cent who did switch to alternate suppliers did get, on average, a bigger rate cut – about 15 per cent.

But as a recent report from Britain’s National Audit Office points out, most of those benefits went to high-income earners. Poor and rural families found, in some cases, that their electricity rates had gone up.

“The U.K. is the success story” of market opening, says Tom Adams of Toronto’s Energy Probe, a public interest group which has long supported bringing the discipline of free markets to the electricity business.

“But even there, the benefits have been really modest.”

So. What will happen when Ontario makes its move into the world of free-market electricity?

Certainly, rates will continue to go up. The government has admitted as much. Premier Mike Harris has vowed that this province will be able to avoid the pitfalls experienced by California and Alberta.

But Adams, who until recently was a director of the Independent Market Operator (the body charged with running Ontario’s competitive market), is far less optimistic. “Right now, we’re headed toward higher prices and less reliability,” he says.

While still a believer in liberalized electricity markets, Adams says the experiences of California and Alberta have forced him to re-evaluate the wisdom of plunging along that path.

“A success in electricity restructuring can give you modest gains. A screw-up can take you back to the dark ages . . . It’s not rational to do this (move to a competitive market) unless you’re relatively sure of a big gain.”

He is not alone in rethinking deregulation. In Alberta, Dan Macnamara, the head of the big-business lobby group that actively promoted electricity deregulation, now says it was a terrible mistake.

His advice to Ontario: “If you’re not sure you can connect all the dots, don’t rush into it. Don’t rush into something you can’t sustain.

“When the politicians say `We’re just going to plow on,’ my advice is don’t do it. If you go ahead and it doesn’t work, it’s too late. By then, some people have money in their pockets. Once you’ve created winners and losers, you can’t undo what you’ve done.”

But perhaps California provides the a final irony. North America’s pathbreaker in the world of competitive electricity markets now thinks public ownership looks good.

Partly to bail out its bankrupt utilities, but partly to regain control of its chaotic electricity system, Governor Gray Davis now wants to take over the state’s privately owned transmission grid. And some of the same legislators and officials who sent their state on the road to free-market electricity are now pushing for publicly owned generation as well, using the same arguments Adam Beck – the father of Ontario Hydro – made in in this province 95 years ago.

“There’s been a lot of glorification of private markets the last few decades,” state treasurer Phil Angelides told the Los Angeles Times recently. “We should never fool ourselves into thinking they’re perfect devices . . . “There’s a set of goods we long ago decided we needed in society, things we needed to do in the public interest because you couldn’t depend on the private sector . . . transportation, housing, health care.

“Electricity is a vital commodity.”

If the state’s nascent public-power movement succeeds, Angelides says, “we’ll be out there creating new power and selling it at cost.”

Tom Adams
The Toronto Star
April 3, 2001

Note: The Toronto Star did not run this letter, written by Energy Probe’s Tom Adams, despite receiving it on the same day as the final installment of its Walkom three-part energy series.

Dear Letters Editor:

Your "Electric Shock" series which ran from Mar. 30 to April 2, claims that the "real winners" at running power systems are government-owned and not competitive. In making that argument, you are ignoring the monumental environmental and economic problems created by government-owned systems like the former Ontario Hydro. The history of Ontario Hydro shows how "power at cost" can lead to long-term hits on taxpayers and the environment. Ontario Hydro racked up $31 billion in taxpayer-guaranteed debt, off-book financial obligations officially estimated at $5 billion, and a legacy of nuclear waste.

Your author, Thomas Walkom, claims that consumers don’t respond to electricity price changes. Yet his own series disproves that claim. He repeatedly cites anecdotes of consumers very much responding to price, such as two Alberta smokestack industries switching production to night shifts.

Both Alberta and California confirm the lesson in his anecdotes — consumers do conserve in response to price increases. In the event of real supply crunches, a market-based power system can use price as an extra tool to protect supply. California’s regulated system did not use price, with disastrous results.

Walkom inaccurately reported the system for electricity pricing in Ontario’s new electricity market, and my concerns about coming rate increases, which primarily relate to the regulated components of consumers’ bills — government action, far from protecting consumers, has allowed increases of up to 88%.

Getting government out of the power business and forcing producers to compete can work for consumers and the environment. On top of the 29% decline in residential electricity cost, the U.K.’s electricity restructuring, whose power system once looked a lot like Ontario Hydro, has demonstrated huge environmental gains following privatization and competition. Acid gas emissions, the number of nuclear plants in service, and greenhouse gases have all been slashed, mostly due to surging gas-fired generation and conservation. Renewable energy has increased by a factor of almost three.

Tom Adams
Executive Director, Energy Probe

Editor’s note: Renewable energy in the U.K. in 1990: 1.1 million tonnes of oil equivalent. In 1999, the amount of renewable energy was 2.9 (mtoe).

Stephen Ewart and Chris Varcoe
Calgary Herald
April 9, 2001

PM faces challenge of charting new strategy for 21st century

In the corridors of power in Ottawa and Washington, the e-word is back.

In an era of pump-price angst, unprecedented home heating bills and an electricity crisis in California, energy has returned as a key political issue in the White House and on Parliament Hill.

As Prime Minister Jean Chretien addresses a luncheon of oil executives in the Palliser Hotel today, the eyes of the entire sector will be on the former energy minister as his government grapples with a new energy policy for the 21st century.

“I’ll be interested in hearing what he has to say about the energy sector,” says Dick Auchinleck, chief executive of Gulf Canada Resources, one of Canada’s biggest petroleum producers.

“When the politicians have been involved in the energy business, our experience out here in Alberta certainly has been less than positive.”

Energy matters have seldom held as much sway in Ottawa as they do right now, and when they have, Chretien has been right in the thick of it. Few politicians have played as big a role in federal energy policy over the past three decades.

Chretien was a keen supporter of Arctic oil and gas development when he was minister of Indian Affairs and Northern Development during the 1973 Arab oil embargo. In 2001, Arctic gas development is back on the front burner inside the industry.

As energy minister in the 1980s, Chretien watched as Petro-Canada expanded its foothold in the oil business; today, experts are waiting for Ottawa to unload its last stake in the former Crown corporation.

Chretien also oversaw the reviled National Energy Program when he took on the energy portfolio. Much of the sector is fearful that a Son of the NEP will emerge as Ottawa struggles to live up to its Kyoto accord commitments to curb greenhouse gas emissions.

But, like it or not, energy is back in vogue in Ottawa.

Against a backdrop of high commodity prices, Kyoto and U.S. President George W. Bush calling for a continental energy pact, Chretien has struck a high-powered cabinet committee to deal with “all things energy,” says one government source.

The committee includes Finance Minister Paul Martin, Natural Resources Minister Ralph Goodale, Pierre Pettigrew from International Trade, Brian Tobin from Industry and others.

The power brokers in cabinet prove that the issue is back on the government’s agenda.

“You have these crises squeezing voters,” said analyst Brian Prokop of Calgary energy investment firm Peters & Co.

“As soon as energy becomes a voter issue, it’s a policy issue.”

Energy has also been a major topic of discussion in recent talks between Chretien and Bush, as well at meetings between members of their cabinets. Canada’s petroleum producers have also been asked for their input on U.S. energy policy.

In an interview with the Herald, Goodale was adamant that discussions on a continental energy plan do not mean that Washington will dictate policy to Ottawa. He said access to the

U.S. market is the key issue for Canada

Canada already supplies more than $50 billion a year in oil, natural gas and electricity to U.S. consumers.

“The objective from our point of view is finding the means to make it grow,” Goodale said. “There is great potential for that.”

Government sources said Chretien’s speech today includes a commitment to securing markets for oil and gas, a pledge of no new taxes on the energy industry and a reminder it’s been more than 20 years since Ottawa’s ill-fated incursion into the oilpatch through the NEP.

There are still a lot of skeptics, even outside corporate Calgary.

“He’s got a lot of baggage on this . . . on energy subjects, Chretien suffers a big credibility gap,” said Tom Adams of Toronto-based environmental group Energy Probe.

Yet, much of the current debate about energy has been driven by the new U.S. president.

In addition to abandoning support for the Kyoto treaty, Bush wants Mexico and Canada to help the U.S. overcome an addiction to overseas oil.

Vice-President Dick Cheney — who, like Bush, is a former oilman – – has been given the job of developing the plan.

U.S. administration watchers such as Prof. Charles Doran of the School of Advanced International Studies at Johns Hopkins University said the industry should have little fear of a heavy-handed approach by the Bush team.

“This group of people in the White House is fully aware of the power of the market forces and is not trying to set aside the market forces,” said Doran, an expert in U.S.-Canadian relations, NAFTA and energy policy.

“They have deep confidence in what the market can do.”

North of the border, Canadian policy is also crucial to Bush.

For example, the president said he will look to the Canadian North for new gas supplies if drilling is denied in the environmentally sensitive Arctic National Wildlife Refuge.

Chretien has also encouraged the Americans to look at Alberta’s massive oilsands resources to help resolve their deepening energy shortage.

For Canadian energy executives, the biggest issue may lie in the ground — the decision on whether a pipeline to bring natural gas from the Arctic travels through Alaska or down the Mackenzie Valley in the Northwest Territories.

But for Chretien, the times are a changin’.

Unlike his days as Canada’s energy minister, direct government intervention in the oil and gas sector does not seem to be in the cards.

There have been calls for Ottawa to use America’s appetite for Canadian gas as a bargaining chip to win concessions in areas such as pipelines, Kyoto or the lumber dispute.

But Goodale said Ottawa will not be heavy-handed with the Americans in talks over energy and other trade issues.

Such talk is music to the the ears of Canada’s energy executives.

“You want to leave the business to the businessmen, generally speaking,” said Auchinleck.

“Going on past history, our preference would be to leave us to do what we do best — continue the growth and development of our business without any help.”

Stephen Ewart and Chris Varcoe
Calgary Herald
April 9, 2001

PM faces challenge of charting new strategy for 21st century

In the corridors of power in Ottawa and Washington, the e-word is back.

In an era of pump-price angst, unprecedented home heating bills and an electricity crisis in California, energy has returned as a key political issue in the White House and on Parliament Hill.

As Prime Minister Jean Chretien addresses a luncheon of oil executives in the Palliser Hotel today, the eyes of the entire sector will be on the former energy minister as his government grapples with a new energy policy for the 21st century.

“I’ll be interested in hearing what he has to say about the energy sector,” says Dick Auchinleck, chief executive of Gulf Canada Resources, one of Canada’s biggest petroleum producers.

“When the politicians have been involved in the energy business, our experience out here in Alberta certainly has been less than positive.”

Energy matters have seldom held as much sway in Ottawa as they do right now, and when they have, Chretien has been right in the thick of it. Few politicians have played as big a role in federal energy policy over the past three decades.

Chretien was a keen supporter of Arctic oil and gas development when he was minister of Indian Affairs and Northern Development during the 1973 Arab oil embargo. In 2001, Arctic gas development is back on the front burner inside the industry.

As energy minister in the 1980s, Chretien watched as Petro-Canada expanded its foothold in the oil business; today, experts are waiting for Ottawa to unload its last stake in the former Crown corporation.

Chretien also oversaw the reviled National Energy Program when he took on the energy portfolio. Much of the sector is fearful that a Son of the NEP will emerge as Ottawa struggles to live up to its Kyoto accord commitments to curb greenhouse gas emissions.

But, like it or not, energy is back in vogue in Ottawa.

Against a backdrop of high commodity prices, Kyoto and U.S. President George W. Bush calling for a continental energy pact, Chretien has struck a high-powered cabinet committee to deal with “all things energy,” says one government source.

The committee includes Finance Minister Paul Martin, Natural Resources Minister Ralph Goodale, Pierre Pettigrew from International Trade, Brian Tobin from Industry and others.

The power brokers in cabinet prove that the issue is back on the government’s agenda.

“You have these crises squeezing voters,” said analyst Brian Prokop of Calgary energy investment firm Peters & Co.

“As soon as energy becomes a voter issue, it’s a policy issue.”

Energy has also been a major topic of discussion in recent talks between Chretien and Bush, as well at meetings between members of their cabinets. Canada’s petroleum producers have also been asked for their input on U.S. energy policy.

In an interview with the Herald, Goodale was adamant that discussions on a continental energy plan do not mean that Washington will dictate policy to Ottawa. He said access to the

U.S. market is the key issue for Canada

Canada already supplies more than $50 billion a year in oil, natural gas and electricity to U.S. consumers.

“The objective from our point of view is finding the means to make it grow,” Goodale said. “There is great potential for that.”

Government sources said Chretien’s speech today includes a commitment to securing markets for oil and gas, a pledge of no new taxes on the energy industry and a reminder it’s been more than 20 years since Ottawa’s ill-fated incursion into the oilpatch through the NEP.

There are still a lot of skeptics, even outside corporate Calgary.

“He’s got a lot of baggage on this . . . on energy subjects, Chretien suffers a big credibility gap,” said Tom Adams of Toronto-based environmental group Energy Probe.

Yet, much of the current debate about energy has been driven by the new U.S. president.

In addition to abandoning support for the Kyoto treaty, Bush wants Mexico and Canada to help the U.S. overcome an addiction to overseas oil.

Vice-President Dick Cheney — who, like Bush, is a former oilman – – has been given the job of developing the plan.

U.S. administration watchers such as Prof. Charles Doran of the School of Advanced International Studies at Johns Hopkins University said the industry should have little fear of a heavy-handed approach by the Bush team.

“This group of people in the White House is fully aware of the power of the market forces and is not trying to set aside the market forces,” said Doran, an expert in U.S.-Canadian relations, NAFTA and energy policy.

“They have deep confidence in what the market can do.”

North of the border, Canadian policy is also crucial to Bush.

For example, the president said he will look to the Canadian North for new gas supplies if drilling is denied in the environmentally sensitive Arctic National Wildlife Refuge.

Chretien has also encouraged the Americans to look at Alberta’s massive oilsands resources to help resolve their deepening energy shortage.

For Canadian energy executives, the biggest issue may lie in the ground — the decision on whether a pipeline to bring natural gas from the Arctic travels through Alaska or down the Mackenzie Valley in the Northwest Territories.

But for Chretien, the times are a changin’.

Unlike his days as Canada’s energy minister, direct government intervention in the oil and gas sector does not seem to be in the cards.

There have been calls for Ottawa to use America’s appetite for Canadian gas as a bargaining chip to win concessions in areas such as pipelines, Kyoto or the lumber dispute.

But Goodale said Ottawa will not be heavy-handed with the Americans in talks over energy and other trade issues.

Such talk is music to the the ears of Canada’s energy executives.

“You want to leave the business to the businessmen, generally speaking,” said Auchinleck.

“Going on past history, our preference would be to leave us to do what we do best — continue the growth and development of our business without any help.”

Tom Adams
Energy Probe
April 10, 2001

Nuclear power is back. Mike Harris has played into the hands of the pro-nuclear lobby by stopping the emergence of a competitive market. As Harris told reporters on the day the government announced it was delaying competition indefinitely, he is resurrecting the Pickering nuclear reactors to keep the lights on in the province. Without competition, the nuclear industry is back in the driver’s seat.

The nuclear lobby knows it cannot compete against green technologies like high-efficiency cogeneration. Whenever monopolies are broken up and the best technology allowed to win, green technologies have always come out the overwhelming victor. Not once, anywhere in the world, has a company -public or private -built a nuclear power plant over a green technology in an open marketplace. And for good reason. A nuclear plant costs about 10 times as much to build as a cogeneration plant of equal size, and three times as much as its energy equivalent in windmills. In fact, according to the Wall Street Journal, windmills have become economically viable, able to compete without the need for government subsidies.

Ontario Hydro’s old guard and other nuclear proponents spooked the Harris government into believing that Ontario could face California-style blackouts if Ontario opened the door to competition. Competition is risky, nuclear proponents claim, while nuclear plants are safe. The truth is just the opposite: Because Ontario is not moving to competition quickly, we are vulnerable to blackouts as never before.

When companies offering cleaner power realized the Harris government could not be trusted to let them compete on a level playing field, most began to abandon their plans to build new plants. About 85% of the independent power producers cleaner facilities a total of six Pickering-sized reactors worth of power have been derailed, shelved or cancelled. Only one cogeneration plant is being built and even this was scaled back after Harris gave three of its potential customers -corporate giants Amoco, Sunoco, and Imperial a sweetheart deal to keep them in the monopoly fold. Had the government not blocked an open marketplace, enough new green power plants would have been built to give Ontario a large energy surplus.

Instead, we are flirting with disaster. Our nuclear reactors are unreliable they are often and unpredictably down for repairs. Twice in the last two years, parts of Ontario suffered brownouts a fact the government doesn’t publicize.

The reconstruction of nuclear plants is also unreliable. In 1998, the government predicted that we’d have a Pickering reactor ready for reuse by the summer of 2000. It’s still undergoing repairs. Now the government predicts this reactor will be ready in 2002. The last time Hydro refurbished Pickering reactors in 1983 the job ended up taking more than five years. The last time Hydro built a new nuclear plant the Darlington complex the project came in 10 years late.

As independent investors flee the province, only the government is left to build the plants we need. But the old guard in Ontario still runs the show and is almost all pro-nuclear. That’s why the Ontario government continues to spend billions trying to bring back old nuclear plants when green technology costs less and is faster to build.

Mike Harris thinks he has no alternative but to throw in our lot with the nuclear industry but he’s wrong. If he truly believes in competition, he can break up the power monopoly that still grips this province and let the best technology win.

As the attached editorial from the Globe and Mail.  notes, there is a right way and a wrong way to bring competition to the electricity business. When it’s been done the right way as in Australia, the United Kingdom and parts of the U.S. both consumers and the environment have benefited. And the lights have stayed on.

Thanks in good part to our efforts since the California crisis began, this message is starting to be understood in Ontario. Many in government, industry and the media now realize that going back to a reliance on nuclear power represents the biggest threat to Ontario’s energy future.he next few months will be critical in determining where Ontario goes. Will it be to an insecure future dominated by nuclear power? Or to a future of clean, green technology? With your generous help, now, at this critical time in our province’s history, we will redouble our efforts for a safe energy future.

Tom Adams
Eye magazine
April 12, 2001

Letters to the Editor

Judging from his track record of extending secret subsidies to industrial power guzzlers, using Cabinet orders to undermine the independence of our energy regulator, and exempting Crown-owned electricity corporations from Ontario’s Freedom of Information Act, Mike Harris is intent on keeping the public in the dark about key aspects of his electricity restructuring.

However, faults in Ontario’s ill-implemented electricity restructuring do not prove that a return to the old Hydro would solve the problems the old Hydro created, including lack of transparency, or that competition and privatization necessarily decrease public access to information.

Public ownership does not equal public disclosure. For example, in 1993 the NDP began a trend of exempting the old Hydro from rate reviews by the Ontario Energy Board, a move designed to keep industrial rate subsidies secret. Thorough disclosure in the days of the old Hydro was rare and often required heroic effort by journalists or environmental groups.

Experience elsewhere proves that markets can lead to more transparency. For all its warts, Alberta’s electricity restructuring has vastly increased public access to electricity sector information. Water privatization in the U.K. has also contributed to great improvements in disclosure. David Kinnersley, a former senior British civil servant, in his book Coming Clean: The Politics of Water and the Environment, points out that from 1951-1985 "Whitehall insisted that details of authorized effluent discharges made by businesses and local councils should be concealed from public knowledge" whereas today, "this concealment is ended; the details are in the open on public registers that anyone can study."

Tom Adams
Executive Director, Energy Probe