Energy Probe

Editorial
Toronto Star
April 30, 2002

April 30, 2002 — Tomorrow, Ontario takes a leap into the unknown with the opening of the electricity market to competition.

Well, almost unknown. There is one certainty: Prices will rise. Depending on which report you read, the increase could be anywhere from 10 to 40 per cent.

Under market opening, consumers can sign a contract for fixed-price power with one of the new electricity retailers, or continue buying it from their current local utility — in this city, that’s Toronto Hydro. That means paying whatever the price is on the fluctuating spot market.

Ontarians were never asked whether they wanted to go down the path of restructuring the old Ontario Hydro, of which market opening is only one step. They were never given a direct vote on the issue.

The final insult was the Ontario government’s shoddy mishandling of the opening of the market. The Tories let loose door-to-door retailers, some of them ruthless, on a public that was never given proper, timely information that would have allowed them to make informed decisions before signing hydro contracts.

The advocacy group Energy Probe predicts customers of local utilities will be paying 20 per cent more under the new open market, while those who have signed fixed-price contracts will pay 30 to 35 per cent more since many contracts were signed at rates higher than those now expected.

The Tory government was aware that market opening carried price-hike risks. As Thomas Walkom reports today, confidential government documents from as late as last June noted the possibility that electricity rates would skyrocket under market-opening. The documents also refer to plans the government was developing to increase subsidies to consumers in that event.

However bad price increases are in the short term, there is a threat they could become much higher in the long term. Ontario Power Generation, one of the arms of the former Ontario Hydro which now owns 70 per cent of the province’s power generating capability, must pay rebates to electricity users if the average price of electricity climbs above 3.8 cents per kilowatt.

But the rebates will be phased out as OPG sells off generating capacity. When the rebate goes, so will the brakes that prevent prices from rising, particularly as the new private companies sell electricity to the U.S. market where prices are higher.

Not only are Ontarians faced with price hikes, they’re also facing a risk of power shortages. Energy Probe says the province may not have the supplies it had projected for this year and possibly 2003, a situation that could lead to brownouts.

Ontario consumers are getting an unbelievably raw deal. They are being asked to trade in their publicly owned power system that has served Ontario well for nearly a century, providing reliable and affordable electricity. In return, they are being offered huge risks, based on little more than a Tory government’s blind faith in the free market.

The Star is strongly opposed to the selling of public assets for the benefit of special interests.

It will fall on the province’s next government to reverse the situation, at what will be a high cost to taxpayers.

Paul Vieira
Financial Post
May 1, 2002

One of the architects behind Pennsylvania’s restructuring of its electricity sector says ratepayers in the state have saved more than US$4-billion over the past five years on hydro bills and become sophisticated power customers – and predicts much the same for Ontario as its $10-billion market opens for competition today.

"Is it a better system now for consumers than it was before? Are consumers better off in a deregulated environment or a regulated price-control environment? I feel pretty strongly that Pennsylvania consumers have a better deal now, and will continue to get a better deal, than under the old regime," said Glen Thomas, chairman of the state’s Public Utilities Commission.

Mr. Thomas, in Toronto today to deliver a speech to a largely Bay Street crowd, offered the following advice for Ontario as it turns a new page in its electricity history. "It’s a never-ending battle. It’s going to require vigilance, patience and practice – but I fully believe that at the end of the day, five years from now, Ontario will be able to say, ‘We’re better off.’"

After years of studies and two aborted attempts, Ontario opens its electricity market to competition today. A number of elements change:

– Households and businesses are free to purchase their power from whomever they choose. They have two options: do nothing and continue to receive their power from their local utility; or sign a long-term, fixed-price contract from one of many retailers scouring the province.

– The price of power will fluctuate and be set in the wholesale market, much like how the cost of bananas or cheese is determined. Experts have said electricity prices should remain stable, in the 4.5¢ to 5.5¢ per kilowatt hour range, until 2007. (A kilowatt hour, KwH, is the equivalent of burning 10 100-watt lightbulbs for an hour.) The price of power in Ontario’s wholesale market is about 4.3¢ per KwH.

– And competition will be allowed on the generation side. Ontario is trying to entice companies to build power plants in order to increase supply and create a competitive pricing environment. Currently, Ontario Power Generation Inc. has an 80% stranglehold on the power-producing market, but that must be reduced to 35% by May 1, 2012.

The Ontario government was also hoping to privatize Hydro One Inc., owner and operator of the province’s transmission grid, but that has been delayed because of a court ruling.

Opponents of deregulation warn of severe rate hikes, as experienced in California and Alberta when they deregulated.

Pennsylvania, however, has been lauded by industry experts as a jurisdiction that did deregulation right. "They are the benchmark," said Tom Adams, executive director of Energy Probe, an industry watchdog.

"It is the most successful, most developed of the electricity restructuring experiences in North America."

Mr. Thomas was the energy advisor to Tom Ridge, the former governor of Pennsylvania, when the state undertook restructuring in 1996. He said estimates suggest Pennsylvanians have saved more than US$4-billion in electricity costs and competition has led to savvier consumers.

"Consumers didn’t used to have a choice. They got a bill and they paid it. The only choice they had was either to turn the lights on or turn them off," he said. "Some of these things are not that easy to explain. The vast majority of people don’t understand how the power gets into your house. Mind you, they didn’t understand how telephone [billing] worked – but they sure know how to save money on phone bills these days."

He said prior to deregulation, utilities that built plants in Pennsylvania recouped construction costs through rate hikes approved by state power authorities.

"Under the new regime, any new generation project is at market risk. If there is any uneconomical generation investment, it’s the investors who lose – it’s not the ratepayers who have to pay," Mr. Thomas said, repeating an argument used by supporters of Ontario’s restructuring efforts. "The fundamental shift of that risk, from the ratepayers on to the marketplace, represents billions of dollars in potential savings for consumers."

He added there has been explosive growth in the area of alternative power – such as solar energy and wind power – which has attracted about 120,000 state households

"People are really choosing to get alternative power. In most times, they are paying a little bit more. The point is, though, is that before 1996, they didn’t have a choice. Now they have that choice they are making it to the benefit of the environment."

Paul Vieira – with files from Robert Benzie
National Post
May 1, 2002

Chris Stockwell, Ontario’s Energy Minister, has further complicated the Hydro One Inc. privatization saga by saying the government is toying with turning the electricity transmitter into an income trust.

"We’re going to look into it," Mr. Stockwell said yesterday. "I don’t claim to be an expert on this, but it seems to accomplish both our goals: it gets us the capital dollars and it puts it in the private sector with shareholders … which will make it a more efficient operation."

One Bay Street insider disagreed. "This is a truly stupid idea," the source said, saying income trusts are beginning to lose their lustre and would tie the utility’s hands by distributing its cashflow to unitholders, instead of spending it on much-needed infrastructure maintenance and transmission links with U.S. states.

Industry observers were also miffed, saying it demonstrates a lack of leadership. "For the Minister to fasten on to this idea, without any analysis or consultation, just shows that this government is winging it," said Tom Adams, executive director of Energy Probe, a hydro industry watchdog. "It suggests they don’t have a game plan."

Mr. Stockwell’s remarks are the latest development in Ontario’s plan to privatize Hydro One through an initial public offering. An Ontario Superior Court put the IPO – which financiers have said could raise up to $5.5-billion – on hold last month after ruling that the provincial government lacked the legal authority under the Electricity Act to sell the company.

Just last week, the Premier, Ernie Eves, said the government would appeal the ruling and amend the law to give it the right to sell the utility. Mr. Eves also said it would hold public hearings to discuss the sale – but yesterday, during the first session in London, Ont., Mr. Stockwell adjourned the proceedings following disruptions from privatization opponents.

Myriad businesses, from fast-food operations to energy producers to coal miners, have reorganized recently into income trusts. Instead of ploughing most of their cash flow back into operations, income trusts use most of it to pay unitholders regular distributions. Retail investors have flocked to trust units because the relatively stable businesses have provided a much higher yield than most bonds, given low interest rate levels.

The income trust idea was floated by Cal Stiller, the chief executive of Canadian Medical Discoveries. In a letter to Mr. Stockwell, he said an income trust "meets the objectives of many Ontarians and most thoughtful critics. Given the strength and consistency of the cash flow generated by Hydro One … I suggest that the government might look carefully at this kind of structure."

One financier with knowledge of income trusts said the vehicles are suitable for low-growth businesses that have a steady income stream and predictable capital spending patterns. However, it may not work for companies whose spending patterns fluctuate or for companies seeking growth.

In the prospectus filed in connection with Hydro One’s IPO, the Toronto utility said it would need to set aside significant amounts of cash for capital spending because the old Ontario Hydro failed to invest in needed repairs to the transmission grid. Moreover, the prospectus said Hydro One wanted to embark on an aggressive growth strategy, namely acquiring transmission assets in the United States.

Units in an income trust would still be sold through an offering. But the Bay Street insider said it would raise less money than selling Hydro One stock through an IPO.

Moreover, the insider said Mr. Stockwell’s comments undermine all the work done to date by the underwriting syndicate employed to sell Hydro One shares.

"It’s the last thing you ever, ever, ever do – is speculate about a different structure than the one under consideration. This is an inane, unsophisticated and damaging thing to do."

Lawrence Solomon
Toronto Life
May 1, 2002

"Nothing is too big for us. Nothing is too expensive to imagine." So argued Ontario Hydro’s megalomaniac founder, Adam Beck, before 700 municipal delegates in 1914. Originally set up as a transmitter, not a generator, Hydro was supposed to own the power lines while the energy would be supplied by municipalities or private companies, like those already operating at Niagara Falls. But Beck – the fellow whose bronzed form sternly surveys University and Queen – fantasized about creating a single combine that would also build dams, run railways, operate gas and water utilities and control telephone and telegraph companies.

Even if the 700 delegates doubted Beck, he convinced the province to back him partway there, and he and his successors proceeded to build the continent’s largest power company. Hydro dynamited or dismantled some 500 diminutive dams too troublesome to maintain from afar. Later, when it ran out of big rivers to dam, it switched to building coal and nuclear plants. Unlike other Crown corporations, Hydro didn’t have a regulatory board second-guessing its decisions, nor did it have inquisitive shareholders like a private sector company. Thus insulated, Hydro grew unchecked into one of the dirtiest, least efficient utilities on the continent.

Enter Mike Harris on a pro-privatization platform. To succeed, he only had to follow the lead of his fellow Tories across the pond. After the 1989 breakup and privatization of the U.K. monopoly, the new competitors swifty replaced outdated coal, oil and nuclear plants with natural gas generators and some high-tech windmills. Residential rates for relatively clean, private energy decreased by a third.

Inexplicably, Harris et al. ignored the key aspects of the British model. In post-May 1 Ontario, the "market" will be dominated by one inadequately regulated, government-owned company. Rates will rise, and – at least for the forseeable future – we’ll grow more reliant on costly, polluting coal and nuclear power. Tomorrow looks a lot like yesterday.

Richard Brennan and John Spears
Toronto Star
May 1, 2002

In a surprise move yesterday, Energy Minister Chris Stockwell (pictured) said the Ontario government might simply lease the Hydro One transmission utility instead of selling it outright.

His comment came less than a week after Premier Ernie Eves vowed to push ahead with the sale of the utility for $5.5 billion and a day before Ontario’s electricity market opened up for competition.

Earlier yesterday, Stockwell stormed out of a heated public hearing in London, Ont., on the Hydro One privatization plan, abruptly ending the session after just 20 minutes.

Stockwell later told reporters at Queen’s Park that Dr. Calvin Stiller, a London, Ont., heart surgeon who is also involved in investments, proposed the leasing option.

"It runs like a private company with shareholders, but at the end of the 25 years or … however long the term, the ownership and the operation of the Hydro reverts back to public ownership," he said.

"We are actually considering this … as an alternative view … on first blush … it seems to accomplish both our goals. It gets us the capital dollars, it puts it in the private sector with shareholders … but at the end of the term, it reverts back to government."

This is a complete departure from the path mapped out last week by Eves, who said the government plans to introduce legislation this spring allowing it to sell off Hydro One.

The leasing idea was introduced as Ontario’s electricity market prepared to open for competition. Starting at 1 a.m. today, the price of electricity is to be determined by bids and offers of competing buyers and sellers, rather than the current regulated price.

Liberal Leader Dalton McGuinty said Stockwell’s words give the electricity issue a bizarre twist.

"If it weren’t for the fact that we are talking about the single most valuable public asset, this would be laughable," he said. "It’s policy on the fly. They are still making it up as they go."

McGuinty said he considered Stockwell’s musings nothing more than a diversionary tactic.

"At the end of the day they have received some very clear marching orders from Bay Street, and those orders are quite simply sell off Hydro One by means of an initial public offering (IPO) … everything else is window dressing," he said.

New Democratic Party Leader Howard Hampton said this kind of policy on the fly "just tells how completely incompetent this is and how risky it is for the economy of Ontario and the people of Ontario.

"This government obviously doesn’t have a clue," Hampton said.

In London, the hastily-organized public consultation on the Hydro One sale got off to a rocky start when Stockwell heard only one deputation, by Duncan Hawthorne, chief executive of Bruce Power.

Stockwell was questioning Hawthorne when one of about 60 people in the audience tried to interrupt. Stockwell told him he couldn’t speak, which provoked boos and interjections from other spectators. Stockwell warned he wouldn’t tolerate interruptions.

"If you’re going to shout down the deputants, you know what? We’ll just pack it up," Stockwell said. At that, some audience members began chanting: "Pack it up, pack it up," and Stockwell promptly walked out.

The energy minister said afterward public access to future hearings slated through May 7 may be restricted.

"That’s an awful shame," he said. "You can’t do it this way. You can’t operate this way."

Tom Christensen of London, who had come with several friends, said he chanted out of frustration.

"They’re not listening to the people, they’re just ramming it down our throats," said Christensen, who was incensed that Stockwell had tried to silence the questioner so brusquely.

"The guy stood up to say something, and he wouldn’t acknowledge him. He said we’re here to listen to the people, and he wouldn’t acknowledge him."

The walkout stranded an annoyed Tom Adams of Energy Probe, who had been scheduled to give the second deputation.

"So this is what mob rule looks like," Adams said.

Lynn Girty of the Ontario Federation of Agriculture was also stranded, but said the whole consultation process is flawed.

"This was hastily called. I expect the government probably expected some of this," Girty said. "It’s a very, very emotional issue. It hasn’t ever been debated. It hasn’t been brought to a vote. No government ever had the mandate to do this.

"The public is obviously concerned and upset. The process has been badly handled from Day One."

Girty echoed the criticism of many others that there was hardly any notice of the hearings.

"We didn’t know anything about it until yesterday … That’s not a good way to handle a consultation."

Stockwell said the opponents of privatization are hypocritical.

"All along, they’re saying we need public consultations," he said. "But the first meaningful opportunity to hear from the public, they shut it down."

Stockwell added that he will shut down the hearings scheduled for today in Thunder Bay and Sudbury if people opposed to the privatization plan start heckling him.

Stockwell, who in opposition was the most vociferous of the Tory hecklers, said he won’t abide people who disrupt his cross-province public consultations.

Opposition critics said Stockwell’s show of temper best illustrates the government’s unwillingness to listen to anyone who disagrees with the Tories.

"The government is treating these (hearings) simply as a chance to get its own propaganda message out and as soon as someone asks a question or tries to raise a different point of view, Mr. Stockwell shuts everything down," Hampton said.

Liberal critic MPP Michael Bryant (St. Paul’s) said the Tories’ "bogus" public forum on electricity reform is going from bad to worse.

"Tory arrogance and a contempt for the people of Ontario apparently has no limit," Bryant said. "The energy emperor, Chris Stockwell, won’t hear from Ontarians and shuts down dissenting opinion."

Eric Reguly
Globe and Mail
May 2, 2002

Imagine this: A CEO announces that his company will join the stock market. The machinery – the underwriting syndicate, retail sales strategy, legal work – is put in place to ensure the deal is completed. Then, months later, the CEO’s second-in-command comes along and says, hold it everyone, we may not do this after all. Is this any way to run a company?

This is precisely the scenario that’s playing out with the privatization of Hydro One,the Ontario government-owned electricity transmission company. Late last year, then-premier Mike Harris announced that Hydro One would join the stock market in a $5-billion initial public offering. His successor, Ernie Eves, said he’s committed to the same sale. Then, two days ago, Chris Stockwell, the greenhorn Energy Minister, said essentially the opposite: Hydro One may, in fact, be kept in government hands. His new idea is to turn the company into something akin to an income trust. "It would mean that rather than actually selling the asset, you would sell the future profits of the asset but retain Hydro One in the public ownership," he said.

Today, in spite of what looks to be bumbling on his part, Mr. Stockwell still has his job.

What is even more extraordinary is that Mr. Stockwell appears to be inventing industrial policy on the fly. And just about anyone’s policy will do. As far as we can tell, at a public hearing into the privatization in London, Ont., on Tuesday that descended into chaos, an investor mentioned the non-sale option to the minister. All of a sudden, the IPO was in doubt and Mr. Stockwell was babbling about the income trust scenario.

No wonder Howard Hampton, the Ontario NDP Leader, has been able to inflict such damage on Mr. Stockwell and the rest of the Tories on the most important privatization in the government’s history. It was Mr. Hampton who stacked the London hearings with anti-IPO hecklers. The flustered minister couldn’t take the heat and bolted for the door. No one, including Energy Probe, one of the few voices of reason on the merits of privatizing the electricity sector, got a chance to make submissions that would have shed light on the issue.

The Tories’ mistake was not sticking to its convictions about the sale’s economic and industrial sense. Now, having been exposed as non-believers by the Opposition, the Hydro One privatization is in limbo. Mr. Hampton smells blood and is attacking the sale on all fronts. Cleverly, he has managed to link the IPO with yesterday’s opening of Ontario’s electricity market. The two are not related, but Mr. Hampton is making sure they are one and the same in the minds of frightened consumers.

Opening the electricity market to competition, he has said, could double electricity prices. Hydro One is half of the electricity market; therefore, its sale is evil too. The message he is trying to deliver is that, in the hands of greedy shareholders, Hydro One will make price gouging a way of life. Keep it in government hands and the public good will be protected.

It’s amazing how fast the Hydro One sale hit the skids. Only two weeks ago, it was proceeding apace. The underwriting syndicate had been formed, the prospectus was out and complicated issues, such as the instalment purchase plan for Ontario residents (who, as taxpayers, own Hydro One), had been sorted out. Only one hurdle of any size – the prospectus’s approval by the U.S. Securities and Exchange Commission – had to be overcome.

The first blow came when a judge ruled that the 1998 overhaul of the Ontario Electricity Act did not specifically state that Hydro One could be sold. Curiously, the Tories didn’t come out swinging the moment the ruling came down. It took them several days to announce that they would appeal the ruling and rewrite the legislation to allow the sale to proceed. The delay was enough to convince the Opposition that the Tories, under Mr. Eves, were losing the faith. Their first victory was hijacking the public hearings in London and exposing Mr. Stockwell as someone who could be easily scared.

If the Tories want to save the IPO – and it’s not 100 per cent certain that they do – they will have to move with alacrity to defend its merits. Privatizing Hydro One, the wires business of the disastrous old Ontario Hydro, is all about converting a flabby, inefficient operation into a market player with some bracing entrepreneurial flair and discipline. Under government ownership, the company did little to upgrade and reinforce its network or build links to allow the easy export and import of electricity. It went on a dubious acquisition spree that saw it buy dozens of local distribution networks.

As a stock market company, Hydro One would be free to expand its network, install efficient, computerized switching technology, and buy assets in the U.S. Northeast in an effort to create an integrated, transborder network. Installing more capacity would attract new generation capacity; new generating companies won’t come now because they’re not assured of getting their electricity to market. As more plants are built, electricity prices will come down.

What’s more important, a disastrous strategic decision would penalize shareholders, not the taxpayers of Ontario. With a privatized Hydro One, followed by a privatized Ontario Power Generation (the other half of the old Ontario Hydro), the province has a fighting chance to create a regional electricity hub, with all its jobs and value-building potential.

Mr. Stockwell’s income trust idea would accomplish none of the above. Income trusts pay out almost all their free cash flow to investors, leaving little for capital expenditures. If the Tories want to save the IPO, they will have to explain why they wanted the deal in the first place. What made sense a few months ago still makes sense now.

Paul Vieira
National Post
May 2, 2002

Photo: Glen Lowson, National Post
Mario Churland, senior exchange co-ordinator, at work yesterday on the electricity trading floor at the Independent Electricity Market Operator in Mississauga, Ont., where they buy and sell power to Ontario residents.

Ontario’s $10-billion electricity market opened yesterday with power prices well below average levels and industry observers impressed with first-day results.

"It is off to a very good start," said Tom Adams, executive director of Energy Probe, an industry watchdog. "It’s a bit of a surprise for [opponents of electricity reforms], who said prices would double or triple. But it’s in line with neighbouring U.S. markets prices – where they are and where they have been."

Prior to yesterday, the benchmark price for the Ontario power market was 4.3¢ a kilowatt hour (KwH). As soon as the market opened, the first quoted price was 2.54¢ KwH. The price later climbed to the 3¢ KwH range where it remained for most of the day – although it was expected to hit 4¢ KwH in early evening hours. (A kilowatt hour is the equivalent of burning 10 100-watt lightbulbs for an hour.)

But ratepayers shouldn’t expect prices to remain at that level.

Mr. Adams said prices will "bounce around," as they have in other deregulated wholesale markets such as New York and Pennsylvania. Prices there have climbed as high as 20¢ KwH and dropped near zero.

"There will be some volatility, but that won’t necessarily be a bad thing," Mr. Adams said, noting that electricity prices have been kept artificially low for some time (the Ontario government has frozen hydro rates since 1994).

That is one of the big reasons there is a massive debt – about $38-billion – left over from the old Ontario Hydro monopoly.

"What we need is efficient prices," Mr. Adams said. "If there’s high demand, prices should be high. If there’s too much supply, prices should be low."

For example, prices in the summer may skyrocket as many homeowners and offices choose to crank up their air conditioners to combat the steamy weather.

In Ontario’s open power market, the price of electricity will float and be set by on the wholesale market, much like the cost of bananas, cheese and other commodities is determined.

In the wholesale market, run by the Independent Electricity Market Operator, or the IMO, generators and other suppliers compete to supply the electricity needs of Ontario consumers. Up to 10 IMO traders, in a complex in Mississauga, Ont., will accept offers from suppliers and calculate a spot market price every five minutes by balancing the supply of electricity with demand at that particular time.

The players bidding for and supplying power in Ontario include, at this moment: 93 local utilities, which distribute power to cities and towns; 89 industrial companies, such as steelmakers and miners; 19 power producing companies, of which Ontario Power Generation Inc. is the dominant firm; 34 wholesale buyers and sellers, which include retailers and other traders; and four transmitters, of which Hydro One Inc. is clearly the largest.

Experts have forecast that electricity prices in Ontario should remain stable over the next five years, ranging on average in the 4.5¢ to 5.5¢ KwH range.

In the open market, households can obtain power at the market price through their local utility or sign a long-term deal that locks them in at a fixed rate.

The going rate for power in these contracts is around 5.5¢ to 5.7¢ KwH and roughly one-third of Ontarians have signed such deals.

Meanwhile, Chris Stockwell, Ontario’s Energy Minister, told a Bay Street breakfast crowd that Ontarians will reap the benefits of a restructured electricity market.

"I’m convinced a competitive market will be successful," he said. "Prices over time will be considerably lower than they would have been under the old monopoly-based system."

Citing a government-issued report, he said the province’s ratepayers would be paying $3-billion to $6-billion more over the next 10 years for power had the government not introduced its reforms for the sector.

But Howard Hampton, leader of the Ontario New Democratic Party, said households and manufacturers will end up with much higher hydro rates as a result of opening the market. "No matter where you go in North America, public power costs less."

Industry experts, such as Mr. Adams, have said electricity bills will go up next year, by about 20%, largely because of pre-approved increases in transmission and distribution fees. This forecast does not take into account what might happen to the price of power.

Globe and Mail
Globe and Mail
May 2, 2002

Ontario’s electricity market opened for trading without a hitch yesterday, and the new spot price of electricity stayed within the anticipated range for an average spring day.

Some critics of the Ontario government’s deregulation plan had predicted immediate and drastic price spikes, and were proved wrong. But experts warned yesterday that no simple lessons about deregulation can be extracted from one calm day of trading.

"You can’t draw a conclusion from it; you need some history," said Michael Morrison, director of the Canadian Energy Solutions group at Fujitsu Consulting in Toronto.

Mr. Morrison said the reasonable trading price yesterday should allay the most extreme fears of soaring prices. But he said that it will take months and years of data to determine whether prices are rising or falling under a deregulated system.

Until yesterday, Ontario consumers had paid a regulated and fixed commodity price of 4.3 cents per kilowatt-hour for their electricity. (A kilowatt-hour is the amount of electricity needed to power a 100-watt light bulb for 10 hours.)

Under the new system, electricity prices are set every five minutes based on bidding in a open trading system, changing as demand fluctuates. Prices are typically low in overnight hours and rise during the day, then fall off again later each evening.

Trading opened yesterday at 1:01 a.m. EDT with an initial commodity price of 2.54 cents per kilowatt-hour, then rose through the day to 3 cents at 9 a. m., 2.98 cents at noon, 3.04 cents at 3 p.m., and 3.07 cents at 5 p.m.

The old rate of 4.3 cents was set by the Ontario Energy Board (OEB), so did not reflect an actual market trading price. It was also a long-term price, so is not directly comparable to yesterday’s trading price. That’s because electricity prices are expected to be lower on a spring day when neither heating nor air conditioning demands are high.

"This is a shoulder season," said Kevin Dove, spokesman for the Independent Electricity Market Operator (IMO). "Generally, demand is not high in the spring and the fall, so it is a lower demand season, and therefore pressure on prices should be less."

Dave Goulding, chief executive officer of the IMO, was pleased that the market began operating yesterday without any glitches. The IMO was created from the breakup of the old Ontario Hydro, and is responsible for operating and regulating the new trading system.

"I had every confidence that it would work," Mr. Goulding said early yesterday morning.

He attributed the flawless start to the months of preparation that the IMO had performed, including a trial run for the past month.

Blair Peberdy, spokesman for Toronto Hydro, said the launch was smooth for his utility, which is one of the 239 participants in the new computerized trading system.

He said the bigger technical challenge has been transforming the utility’s billing system to handle the one-third of its customers who have signed fixed-price supply contracts with electricity retailers.

Customers with fixed-price contracts will not be affected by the fluctuating trading price of electricity. And those who have opted to stay with the standard service provided by Toronto Hydro will not immediately see the impact of market prices, Mr. Peberdy said.

That’s because Toronto Hydro will initially calculate bills based on the old 4.3 cents/kwh price, and will adjust bills a number of months from now to reflect the actual average market price. He said the adjustment may be done sooner if the market price varies greatly from 4.3 cents.

"If it’s way off, we may do it earlier so the customer isn’t looking at a big refund or a big catch-up bill," he said. "We’re waiting for the OEB to advise us as to when that [adjustment] should take place, and I believe they’re waiting to see just how the market price moves."

Tom Adams, executive director of Energy Probe in Toronto, said one of the first lessons of yesterday’s trading is that prices seem to move in "lock step" with nearby U.S. markets. He said it is an indication of smooth trading across Ontario’s borders.

"It’s a good thing, not a bad thing, that we’re exchanging with our neighbouring utilities," he said.

Mr. Adams said consumers should not expect electricity prices to remain as stable as yesterday. During peak demand in the summer, prices can soar. On one large U.S. electricity trading hub, prices peaked at 91 cents per kilowatt-hour last Aug. 8, he said.

Consumers will not see those brief peaks on their bills, which will reflect average prices over the billing period.

Consumers can follow the market price of electricity on the IMO’s Web site at http://www.theimo.com, under "Today’s Market."

Andrew Willis and Paul Waldie
Toronto Star
May 2, 2002

Ontario Premier Ernie Eves, under pressure to alter the controversial Hydro One initial public offering, is already working with Bay Street on a possible alternative that could result in an income trust.

Comments by Ontario Energy Minister Chris Stockwell, who raised the possibility Tuesday of revising the Hydro One plan, were dismissed in some quarters. But sources said yesterday Mr. Eves is seriously considering scrapping the IPO and opting instead for an income trust model.

Indeed, Ontario provincial government officials have been working for days on an alternative, the sources said.

"The Premier wants to show a different approach, to show that he’s listening, then acting on what he hears," said a financier working with Mr. Eves.

"Here, there’s now heightened public sensitivity to the possibility of rate increases, to the ownership of Hydro One and to the issue of funding the company in the future."

"An income trust could be a really good structure, and [provincial Energy Minister] Chris Stockwell really likes the idea," the source said.

Under an income trust, the government would continue to own Hydro One but would sell units to investors who would receive a portion of the company’s cash flow. The units would trade on the Toronto Stock Exchange. The trust would likely have a defined lifetime of between 25 and 40 years, after which the cash would flow to the government.

The idea has been under consideration for several days and was first raised in a recent letter to Mr. Stockwell from Calvin Stiller, head of Canadian Medical Discoveries Fund Inc., who is a director of several real estate investment trusts.

Mr. Stiller is also chairman of the Ontario Research and Development Fund, which the province created in 1997 to invest $500-million in research projects.

Mr. Eves himself yesterday said he would rethink the future of Hydro One.

"I’m not doing this [selling Hydro One] so some guy on Bay Street can get a bonus before he goes on summer vacation," he told reporters.

Mr. Eves has been under pressure to revise the Hydro One privatization ever since an Ontario court ruled last month that the government did not have the authority to sell the utility. Shares in Hydro One were expected to go on sale in June in the largest initial public offering in Canadian history.

The government is appealing the ruling and plans to change the privatization legislation.

Last week, Mr. Eves said he was committed to the Hydro privatization and promised to hold public hearings on the issue. Those hearings began Tuesday in London, Ont., but Mr. Stockwell cancelled the meeting before it began when the crowd became unruly.

Mr. Stiller was supposed to discuss the income trust idea at the hearing.

Dozens of companies have created income trusts or investment trusts, including TrizecHahn Corp., which is about to reorganize itself into two investment trust. BCE Inc. also spun out a $385-million trust that contains stakes in Bell Canada’s local phone networks.

Government advisers are working from the notion that Hydro One might generate $500-million to $600-million annually.

If the income trust was structured to offer investors a 7.5- to 10-per-cent annual yield, a financier working on the concept projects raising $6-billion or more through an income trust offering. The Hydro One IPO was expected to raise between $5-billion and $5.5-billion.

Sources familiar with the project said an income trust would also impose financial discipline on Hydro One’s management.

Tom Adams of Energy Probe, an environmental group that supports Hydro One’s privatization, says the income trust idea hasn’t been thoroughly discussed.

Robert Benzie and Paul Vieira – with files from Tony Seskus
National Post
May 3, 2002

TORONTO – The largest privatization in Canadian history is in jeopardy after Ernie Eves, the Ontario Premier, said yesterday the $5.5-billion sale of Hydro One is "off the table for [the] immediate time being."

Signalling a major policy shift from his predecessor, Mike Harris, who announced the selloff of the transmission grid in December, Mr. Eves said he will await the outcome of public and legislative hearings before determining how to proceed, emphasizing that privatizing the utility is now just one of several options.

"I’m not doing this so some guy on Bay Street can get a bonus before he goes on summer vacation. I’m doing this to protect future generations of Ontarians for many, many decades to come. It’s an important matter and we will take time and we will do it right," said Mr. Eves, who during his sojourn from politics worked as a Bay Street executive.

Asked whether the initial public offering, by far Canada’s biggest ever, is dead, he replied: "I wouldn’t say it’s dead. It’s one of the … options [for Hydro One]. Is it dead for going out the door on May 6? Absolutely. We’re going to take the necessary time to make the appropriate decision."

He said that if privatization "is the vehicle we should be choosing, then that will be that. I wouldn’t say it [the IPO] is off the table. It’s off the table for this immediate time being."

The goal, Mr. Eves said, is to provide a "private-sector-disciplined" power grid that will protect consumers from high prices, be competitive internationally and not amass a huge debt like the old Ontario Hydro did.

The comments sent shock waves through the financial community, with one analyst calling the Tories’ turnabouts "bizarre."

Mr. Eves’s latest remarks came one day after Chris Stockwell, the Minister of Environment and Energy, proposed turning Hydro One into an income-trust and six days after the Premier expressed support for privatization.

"This is just getting more and more bizarre," said one analyst, who did not want to be named.

"Why create more uncertainty? Why would anyone come into Ontario and buy distributors or build power stations when they see all this political interference and waffling? Business doesn’t like uncertainty, and if the Ontario government keeps changing the rules, investors are not going to stick their neck out," he said.

The uncertainty surrounding Hydro One has prompted one leading utility executive to back off from investing in Ontario.

Steve Snyder, chief executive of Alberta’s TransAlta Corp., said at the company’s annual meeting that it has no plans to expand its presence in Ontario’s deregulated electricity market until the Hydro One issue is resolved.

"Right now, we are more wait and see," said Mr. Snyder, whose company has three plants in Ontario and a $500-million station under construction near Sarnia. "We want to see how … this Hydro One plays out, not so much who owns it, but how much impact it will have on transmission rates and transmission rules. Then, I think we’ll reassess."

Mr. Eves’s announcement on Hydro One came on the same day the province’s $10-billion electricity market officially opened its borders to competition. Under the new regime, homeowners and businesses can purchase their power from whomever they choose and the price of electricity will be set in the open market.

Confusion over the status of the Hydro One sale overshadowed the market opening.

Tom Adams, executive director of Energy Probe and a proponent of privatization and deregulation, said Mr. Eves’s fledgling administration is doing little to allay fears about the changes to the electricity sector.

"The downside is that the public and investors don’t know what’s going on. The government doesn’t know what’s going on. People don’t know how to plan or what to do. It just creates a high degree of confusion and lack of confidence in the government," Mr. Adams said.

Dalton McGuinty, the Ontario Liberal leader, said he was astonished by Mr. Eves’s "bungling" of such an important issue.

"[The Premier has been] flipping and flopping like a freshly landed fish on a hot July day on a Nipissing dock," said Mr. McGuinty, who favours market competition, but not the sale of Hydro One.

"In short order, we’ve gone from a full-fledged commitment to privatization to yesterday a consideration of a long-term lease and today apparently to the point where Ernie is saying everything is on the table," he said.

"To think that this is part of some cunning political strategy would be to flatter Mr. Eves and this government. The fact of the matter is they don’t have a plan, they don’t know what they are doing and they are in panic mode," he said.

Howard Hampton, leader of Ontario’s New Democratic Party, said he was unimpressed by Mr. Stockwell’s musings about an income trust, an idea first presented to the government by a private investor on Tuesday.

"Let’s cut through the charade: This government is going to privatize Hydro One. The Minister was trying to create a bit of diversion yesterday and he got caught promoting a stupid idea," Mr. Hampton said.