Energy Probe

Paul Vieira
National Post
October 10, 2002

A major credit rating agency says it may have to downgrade the power utilities doing business in Ontario unless the Conservative government refrains from intervening in the electricity sector and flaws in the market are fixed.

The statement from Dominion Bond Rating Service Ltd. is the latest blow to Ontario’s $10-billion power market – this one two days after the province launched a review of the Ontario Energy Board, the agency that regulates the market, and an independent panel warned of a "serious shortage" of electricity that could lead to California-style rolling blackouts next summer.

Any move by DBRS will hit consumers, because a downgrade increases the utilities’ cost of raising cash – and those increased costs will be passed on to consumers through higher rates. Consumers are already reeling after receiving their recent hydro bills, which have doubled or tripled from the last statement.

"It’s unavoidable. That’s the consequences," said Tom Adams, executive director of Energy Probe, an industry watchdog.

In its statement, DBRS said political interference in the power market has come with a price.

"The combination of political intervention in the Ontario electricity market since the spring of 2002, certain market design flaws and various regulatory issues has created disincentives to investing in the Ontario market. If political intervention continues either directly or through the OEB, such that the financial position of those companies whose operations are concentrated in Ontario is materially affected, rating downgrades could be warranted."

The rating agency added that political interference creates uncertainty about the market, and "reduces the incentive to invest in Ontario, which could exacerbate the tight demand-supply conditions over the medium term.

"Any situation that causes electricity prices to remain high could result in further government intervention at the expense of electric utilities," the agency said.

Mr. Adams said the DBRS statement highlights the flaws in the government’s electricity policy.

"This is a perverse situation because [Premier] Ernie Eves is taking these panic measures to try and protect consumers. But his approach is like throwing a boomerang – it is coming back to harm consumers."

John Baird, Ontario’s Energy Minister, played down the DBRS statement. "I think we’d all like to see a greater degree of certainty [about the market] and that’s something I’m working on."

Companies affected include Crown-owned giants Ontario Power Generation Inc. and Hydro One Inc., and a number of local utilities that distribute electricity throughout the province. "These distributors are already stressed to meet capital and cash flow requirements," Mr. Adams said. "This news from DBRS will make a bad situation worse."

Since last spring, when Ontario’s market was opened to competition, the government has "intervened frequently" in an effort to protect consumers, DBRS said. The moves include: a decision to kill the privatization of Hydro One, the transmitter; the review of the OEB; and statements from Mr. Eves indicating OPG will have to pay out rebates promised to consumers even if the Crown utility’s revenue drops through the sale of assets – a requirement under the market regulations.

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Andrew Callus
Planet Ark/Reuters News Service
November 4, 2002

LONDON — The U.K. government was considering this week whether to extend its emergency loan to stricken nuclear firm British Energy for a second time as a four-week countdown began to deciding the company’s future.

A 650 million-pound ($1.02 billion) state-bailout loan to the producer of a fifth of Britain’s power is due to expire on November 29.

Privatised British Energy cannot make money at current electricity prices, which have dropped below its cost of production after market reforms exposed industry overcapacity.

Other British power generators are in financial trouble too, but ministers happy to let market forces do their work elsewhere have acknowledged that they cannot walk away from British Energy for reasons of safety and security of supply.

Forcing the firm into administration and potential insolvency by withdrawing support at the end of this month will not make the problem go away. Analysts said it could prove even costlier in the long run because the state’s own loss-making nuclear fuels arm BNFL depends on British Energy.

But propping it up indefinitely with taxpayers’ money is not an easy option either. EU rules against state subsidy are getting stricter and other power producers would have a case for subsidy as well. Meanwhile environmentalists and supporters of renewable energy who want to phase out nuclear power are planning court action against the current loan.

"They (the government) just don’t want this thing on their balance sheet," said a senior industry executive involved in wide-ranging talks about the future of the UK’s power industry.

"Next year’s energy policy review is the key to resolving this whole thing. A debt rollover until the government is clear about where this (policy) is going is where I think things are heading."

A source close to the government said a decision on whether to roll over the loan – extended and increased once already in September – would be taken "very close indeed to November 29".

Ministerial minds have not been made up, he said. "But if there is an extension on November 29 the decision will have been taken that British Energy should survive."

Capacity payments

According to the industry source, one likely change to energy legislation next year that could alleviate British Energy’s difficulties is a return to "capacity payments" – where wholesale power prices include a fee paid to generators for making capacity available.

Capacity payments were abolished with the reforms that introduced New Electricity Arrangements (NETA) last year.

Although regulator Ofgem and many customers are happy with the 40 percent slide in wholesale prices since 1998, generating firms say a power market needs spare capacity, and that there is no longer any incentive to own capacity that is not in use.

They say the situation could end in a capacity shortage. Capacity payment would apply to all types of power producer, so discrimination in favour of nuclear energy would not be an issue.

Another key element to the British Energy puzzle is the future of BNFL, whose contract to recycle fuel costs British Energy 300 million pounds ($469 million) a year.

One neat way to cut the cost of that contract might involve BNFL, which has its own privatisation plans, taking an equity stake in British Energy, possibly swapped for easier contract terms.

Sources have said this is also among the ideas on the table in ongoing talks between industry and government.

Industry sources said Chancellor of the Exchequer Gordon Brown, who runs the nation’s finances, will have the final say on November 29 even though the Department of Trade and Industry (DTI) is officially in charge.

The DTI said talks were continuing, and the Treasury said British Energy was a matter for the DTI.

Adria Vasil
NOW magazine
November 7, 2002

Anxiety over ongoing expansion efforts at the Bruce nuclear facility is running high. Locals were thrown another curve this week when Energy Minister John Baird suggested that troubled reactors at the facility could be pressed into action to help fill any energy gaps facing the province in the future. Baird tossed out the Bruce option as it became apparent Monday that four reactors at Ontario Power Generation’s Pickering plant, which generates most of the province’s electricity, will not be up and running for months to come – if ever.

The prospect of hurrying the Bruce facility’s notoriously problematic reactors back into service, several of which have been out of commission since 98, has locals and anti-nuke activists worried about the environmental fallout. But Bruce Power (BP), the private company now running the generating station, is getting ready to spark up two of the Bruce A reactors.

Residents have little trust in the old reactors, which have been plagued by technical problems and poor performance. They worry that the reopening will mean even higher levels of the radioactive toxin tritium in their drinking water.

The local Inverhuron Ratepayers Association has documented several "emergency" releases of tritium directly into Lake Huron because of mechanical breakdowns and mishaps over the years. Though considered by some to be a relatively benign radionuclide, tritium has been linked to leukemia and Down’s syndrome.

Even BP admits that tritium levels will lilely rise. The company, however, denies that the carcinogen has ever reached harmful levels.

BP spokesperson Steve Cannon says, "Bruce Power only undertook the restart program for Bruce A following the most comprehensive assessment of CANDU reactors ever done."

Locals say BP is downplaying the dangers. Normand de la Chevrotiere, a spokesperson for Inverhuron residents, was dismayed to discover that Health Canada’s guideline for the maximum level of tritium in drinking water is 10 times higher than that established more than 30 years ago in the U.S.

"It prompts the question," says de la Chevrotiere, "why are allowable Canadian levels still so much higher than those in the U.S.?"

Norm Rubin of nuke watchdog Energy Probe says the looser standards were put in place to accommodate the fact that the technology used in CANDU reactors produces more tritium.

"Unfortunately, the polluters are powerful enough to make it work that way," says Rubin.

According to the UN Safety Committee on the Effects of Atomic Radiation, Canada’s much-vaunted CANDUs actually release up to 20 times more tritium into the environment on a regular basis than comparable U.S. reactors. And with childhood rates of leukemia in the Bruce region 40 times the provincial average, locals are eyeing the toxin as a serious suspect.

But Health Canada spokesperson Andrew Swift says, "Our limit is one-twentieth of what it is possible to be naturally exposed to."

That BP’s parent, British Energy, is on the financial rocks, is heightening concerns about safety.

"Would a private firm be tempted to cut corners if it were in economic difficulty? Yes, perhaps," offers Michel Cleroux, a spokesperson for the Canadian Nuclear Safety Commission (CNSC). "However, if ever we saw that a firm was in economic difficulty . . . we would ensure that none of that would occur."

But Bruce, the notoriously leaky home to all the low- and medium-level waste from 20 of Canada’s 22 reactors (nuclear waste is also stored aboveground near the reactors), has already been leaching exceedingly high levels of carcinogenic tritium into nearby groundwater. So much so that the CNSC decided to increase official maximums for the toxin by 500 per cent in order to renew the facility’s operating licence in 2000.

Relying on Bruce to pick up the electricity slack may not be in the Tories’ best interest, given the potential eco fallout. But the howls of disgruntled consumers about energy costs may preclude a change of heart.

Richard Mackie
Globe and Mail
November 7, 2002

Premier Ernie Eves is expected to announce tomorrow a package to protect Ontario consumers from soaring electricity prices in response to the unprecedented political pressure his government is feeling on the issue.

The Premier told the legislature yesterday that the government also will protect people who risk having their power cut off because they cannot afford to pay the increases in their bills.

The package to help consumers will include rebates to cover some of the steep increases in electricity prices since the market was opened to competition on May 1.

The government also is looking at placing a cap on electricity prices and at ways to encourage private companies to build new generating plants.

The prospect of increasing rebates and capping on electricity prices was strongly criticized yesterday by experts in the industry.

"Ultimately it all comes back to taxpayers" to subsidize rebates, Tom Adams of the watchdog agency Energy Probe said.

"A rate freeze would increase the risk of blackouts this winter," he warned, and would discourage investment in new generating plants.

Since May 1, the basic wholesale price for electricity has averaged 5.17 cents a kilowatt-hour, according to the Independent Electricity Market Operator, which is responsible for ensuring the province has enough power to meet demands. When the market was being set up, the price was supposed to average 4.3 cents.

At times the prices have hit six cents and seven cents, and even exceeded eight cents.

As bills have risen sharply, members of the legislature have been swamped by complaints that even Progressive Conservatives admit exceed anything they have experienced in the past.

Enterprise Minister Jim Flaherty said yesterday that when he talked with voters in his riding of Whitby-Ajax, he was inundated by demands that the government do something.

"It’s a genuine concern, particularly by small businesses and individuals in their homes. So we have to address it," he said.

Even without government action, consumers are in line to receive rebates averaging $52 a household as of Oct. 31, according to Mr. Adams.

But government sources acknowledge this would be inadequate to calm the wrath of the four million consumers who pay electricity bills in the province, especially from a Premier who used his last budget as finance minister to send out tax-rebate cheques of $200 to every taxpayer.

The rebate program will be enriched by drawing more money from Ontario Power Generation or from the general revenues of the province.

Mr. Adams complained that in either case taxpayers would end up paying more in taxes, either to top up revenues or to cover the increased debt at the Ontario Electricity Financing Corp., which is responsible for debt run up at the old Ontario Hydro.

A similar complaint came from John Wilson, formerly on the board of directors at Hydro One. "The big problem with paying out rebates to everyone is that those rebates are not really rebates. They’re taking our own money and paying us with it. So we’re not really gaining. It just looks like something is happening."

The idea of freezing the rates people have to pay for electricity also drew negative comments.

Keith Stewart of the Ontario Electricity Coalition said that taxpayers, again, would eventually have to cover any difference between the capped rate and the price paid to generating companies supplying the electricity.

"If you are capping how much people pay on their bills, but not how much the private producers are getting, there is a difference there that has to come from somewhere. . . . If that is coming from the public purse, as it probably would, then what we are doing is we’re essentially giving a massive subsidy to private producers out of tax dollars."

Mr. Adams said a rate freeze increases the risk of blackouts because higher prices force consumers to cut back on their use of electricity, curbing demand.

Richard Brennan
Toronto Star
November 12, 2002

Ontario Hydro consumers will get about $700 million in rebates from the provincial government to offset electricity costs that soared over the summer.

Premier Ernie Eves yesterday announced a nine-point plan that calls for rebates for consumers of $75 before the end of the year and more as a credit on their hydro bills next year, and a rate freeze that will last until 2006.

A protester dubbed "Hydrozilla" parades outside a Mississauga residence where Premier Ernie Eves announced yesterday rates will be capped and rebates will be issued. Credit: Frank Gunn, Toronto Star

"There are a lot of things you can do without," Eves said, "but electricity isn’t one of them."

Eves said "it is unacceptable that families are being hit with hydro bills they can’t afford, and businesses are facing cost increases significantly larger than they can handle. The problem requires immediate action and we are taking it. From now on, the only time your electricity bill will go up is when you use more power."

Eves said the money will come from a Consumer Price Protection Fund, money set aside by the government-owned Ontario Power Generation (OPG) and Hydro One for rebate purposes.

"At the end of this month that fund will be well in excess of $700 million," the Premier said.

Critics say the real cost will be billions of dollars.

And Arthur Dickinson, president of the Association of Major Power Consumers in Ontario, said the rate freeze means the future supply of electricity in Ontario is now in jeopardy.

Dickinson warned the price cap will deter new suppliers from setting up shop and could lead to power shortages given the ongoing delays in restarting nuclear reactors in Pickering and Kincardine.

Under the plan, which must be approved by the Legislature, the rate will be fixed at 4.3 cents a kilowatt hour effective Dec. 1 – about half what it was in September – and consumers would be repaid "every penny" of the difference retroactive to May 1 when the market was opened up to competition.

The government’s plan also calls for an investigation into delays in getting the four nuclear reactors at the Pickering A generating station back on line and changes of the board of directors at OPG, the government-owned producer that still controls 70 per cent of the electricity produced in the province.

Tom Adams, of Energy Probe, an industry watchdog, said the government’s meddling in the market will drive away potential investors.

"Ontario electricity supply is in a lot of danger . . . the likelihood of blackouts this winter went way up.

"Ontario does not have enough power supply," Adams told reporters.

Eves picked a sprawling neighourhood in west Mississauga to make his announcement, where owners with pools and air conditioning saw sharp increases.

Eves actually looked at a hydro bill for Mississauga couple Keshab Hardatt and his wife Meena whose home he used for his press conference, and with a pen explained that they would see a retroactive rebate of about $150.

Premier Ernie Eves visits the home of Meena Hardatt and her husband Keshab in Mississauga yesterday afternoon to announce that Ontario’s hydroelectricity rates will be capped and rebates paid. Eves calculates how much the Hardatts will save on their bill. Opposition critics say he’s refusing to admit privatizing hydro won’t work. Credit: Tony Bock, Toronto Star

Today Energy Minister John Baird is to make an announcement today about the issue of the supply of energy. Tomorrow Baird and MPP Steve Gilchrist will launch initiatives to encourage conservation, clean electricity and alternative energy.

Liberal Leader Dalton McGuinty said the true cost of the rebates could be much higher than Eves suggested.

"My real concern is how much is it going to cost all of us over the long term.

"We are talking about billions and billions of dollars that are either going to be added to the hydro debt or to the provincial debt," McGuinty said.

NDP leader Howard Hampton said "to engage in this kind of cover-up we estimate will cost a half a billion dollars a year, which means the government will be using tax dollars to hide the cost of privatized, deregulated electricity from consumers."

Under the plan, consumers will pay a fixed rate of 4.3 cents a kilowatt hour but producers will still charge the fluctuating market rate, leaving the province to make up the difference.

"The market will continue to operate in terms of those who generate power . . . the difference is the consumer won’t see that fluctuation," Eves said.

Customers of Toronto Hydro, who have been paying 4.3 cents, won’t be faced with additional costs they had expected to pay.

People who signed contracts with electricity retailers will also pay 4.3 cents with the province subsidizing these companies for the difference.

Eves said consumers will be reimbursed even if they signed contracts that say the retailer gets any rebate.

The combination of a hot summer and insufficient power produced in Ontario forced the province to import expensive electricity to meet the growing need, which sent rates soaring.

Other highlights of the plan include:

• The charge for delivering the power to people’s homes and business would be capped at current levels;

• An independent review of how other charges on electricity bills are calculated to ensure they are reasonable, including the fixed monthly charge and create standard province-wide electricity bills that are easier to understand;

• Demand Ottawa stop charging the GST on electricity bills;

• A plan to ensure a long-term electricity supply at reasonable costs;

• Incentives for conservation, clean energy and alternative fuels, including tax incentives and tax holidays.

Richard Mackie – With a report from Canadian Press
Globe and Mail
November 12, 2002

Ontario electricity consumers will get their power at the frozen rate of 4.3 cents a kilowatt hour, and can look for rebates of up to $100 on average under a major policy reversal announced yesterday by Premier Ernie Eves.

The new scheme could end up costing billions of dollars, critics warned. However, Mr. Eves insisted the costs will be minimal.

After 6½ months of staunchly defending the attempt to deregulate the industry, Mr. Eves said his government will bow to public opinion and end the experiment of allowing competition to set the price of electricity.

His decision came after a public outcry threatened to destroy his government.

"It is unacceptable that families are being hit with hydro bills they can’t afford and businesses are facing cost increases significantly larger than they can handle," said Mr. Eves during a heavily choreographed announcement at a private home in Mississauga.

"From now on the only time your electricity bill will go up is when you use more power."

Mr. Eves set out a plan to freeze the basic electricity rate at 4.3 cents, and repay consumers and small businesses for the excesses they have paid since May 1.

The price freeze is effective Dec. 1 and is to last until 2006.

Critics warned that ending deregulation eventually will cost taxpayers billions of dollars and increase the probability of brownouts and blackouts.

"The risk of blackouts was serious before today. After today there is a very high likelihood," said Tom Adams of the electricity watchdog agency Energy Probe.

The rate of 4.3 cents a kilowatt hour was the price at which electricity charges were frozen in 1994 by the New Democratic Party government. They remained at that level until May 1.

Mr. Eves said there will be no cost to consumers or taxpayers to put the price freeze and rebates in place, because Ontario Power Generation, the government’s electricity-generation company, makes money on generating power in the range of two cents to three cents a kilowatt hour from water and nuclear sources.

This profit can cover the cost of paying for power generated at a cost of five cents, six cents or seven cents, he said.

However, critics warned that 4.3 cents is far below the cost of producing and importing much of the electricity used in Ontario.

Since the market was opened, the wholesale price for electricity, adjusted to take into account the times of heavy use, has been about 5.6 cents, and it spiked several times. In the first week in September, the price averaged 10.9 cents a kilowatt hour.

Mr. Eves’s announcement echoes Alberta’s experience two years ago, when soaring electricity prices in a deregulated market forced political action.

Premier Ralph Klein provided rebates totalling $300 to every taxpayer, along with other benefits to quell a public outcry against the problems in the industry.

In California, a shortage of electricity pushed up prices to the point where the state had to reregulate its deregulated market.

Stakeholders in the electricity industry, who received a special briefing on the policy reversal from the Premier’s office, said later that they could not obtain answers to their questions on where the money will come from to pay for the price freeze and the rebates. Nor could they obtain answers about how the government will encourage new investment in electricity-generation plants needed in Ontario.

Judith Andrew, Ontario vice-president of the Canadian Federation of Independent Business, said: "There was discussion today about how [the new system] was supposed to be self-financing. But the real question is how that will happen. . . . We had a long period of price freezes . . . and that’s when the debt was built up." When Ontario Hydro was broken up four years ago, it had a debt of $38-billion.

Len Crispino, president of the Ontario Chamber of Commerce, said: "We did not get adequate answers to our questions today with respect to who pays for this. It’s supposed to be revenue neutral, but we have our doubts."

Energy Minister John Baird is to hold news conferences today and tomorrow to elaborate on Mr. Eves’s announcement, while the Premier takes what his office described as "private time with his family." The legislature is not sitting this week.

About one million of the four million consumers in the province who have contracted to buy electricity at fixed rates, usually 5.5 cents or more, will pay the 4.3-cent rate and be entitled to rebates similar to those that will go to those without fixed-price contracts.

The first instalments of the rebates, set at $75, will be sent before the end of the year, Mr. Eves said.

The balance of the rebates will be applied to future bills. Most of the money will come from Ontario Power Generation, which has a $700-million rebate fund.

The changes announced by Mr. Eves put an end to the attempt to establish private companies to sell power to homes and small businesses on fixed-price contracts, Mr. Adams said. He predicted that it will cost the government up to $1.5-billion to buy out companies in the business of selling electricity on a retail basis through fixed-price contracts.

Mr. Eves had other announcements, including plans to look at other charges on electricity bills to see whether they should stay. An easy-to-read bill is to be designed.

Further, the government will make changes at Ontario Power Generation to make it more concerned with the interests of consumers. And the government will set up an investigation into why the four nuclear generators at the Pickering A station are out of service more than five years after they were shut down for repairs.

John Heinzl
Globe and Mail
November 13, 2002

When Ernie Eves dropped in for a choreographed, election-style visit with a Mississauga family to announce a freeze on electricity prices, the goal was to portray the Ontario Premier as a politician with a common touch.

Instead, the episode may one day serve as the basis for a public relations textbook titled 101 Ways to Ruin a Press Conference. The ham-fisted effort has left reporters angry and PR experts scratching their heads.

First, there was the ill-chosen venue.

If Mr. Eves’ handlers were trying to depict him as a man of the people, why did they choose a 3,500-square-foot suburban home with a 50-inch Sony television and a fridge with an ice maker? This family doesn’t need lower hydro prices. It needs its own generator.

Surely, there are thousands of Ontario families who would have made a more convincing case for a hydro rate freeze.

Poor optics weren’t the only reason observers criticized the location. As expansive as the Hardatt’s home is, it wasn’t big enough to accommodate the crush of media that converged on the upscale Mississauga neighbourhood to cover the government’s stunning policy reversal, reporters said.

"It was a real disaster from a PR standpoint," said John McGrath, a CBC Radio reporter and president of the Press Gallery at Queen’s Park.

"There were certain things done that were appalling for a government news conference."

Some cameras could not even get inside the Hardatt’s home, because it was already bursting with reporters, he said. Some news organizations ended up sharing footage. That sort of thing shouldn’t happen at such an important announcement, he said.

Because of the crowds, Mr. Eves’ handlers even tried to deny entry to Tom Adams, executive director of Energy Probe, an industry watchdog, Mr. McGrath said.

Mr. Adams was eventually allowed in after Mississauga Mayor Hazel McCallion entered with no resistance, Mr. McGrath said. Reporters are so furious about the venue that yesterday Mr. McGrath was weighing whether to write a formal letter of complaint to the Premier’s office.

"It was like trying to have a picnic in the middle of Verdun," he said. "I’ve never heard the gallery so angry."

Barry Wilson, senior media adviser to Mr. Eves, put a different spin on the events. The news conference did not cause any undue inconvenience for reporters, he said, and only one expressed his disappointment at not being able to ask a question.

"All the cameras made it into" the house, he said, adding that "it is fully within our authority to choose what venue we would like to make these announcements in."

Meena Hardatt, whose home was the scene of Monday’s debacle, said in an interview that she has no political connections to the Progressive Conservative Party and doesn’t even remember how, or if, she voted in the last election.

Someone just called her family out of the blue last Friday – a friend had provided their name – and asked if they would mind having the Premier and a bunch of reporters in her kitchen. Sure, they said.

Not that Ms. Hardatt was complaining. Having the press conference in her house was a great idea, she said. Mr. Eves "showed me how [the rate freeze] related to me and how it affected me and how I would benefit. He got out his message and put my mind at ease and a whole lot of other people."

Patrick Gossage, a long-time Liberal PR strategist, said Mr. Eves’ people picked the wrong venue to make such an important announcement. They should have held it in a large room equipped for press conferences.

By holding it in a private home, there were too many distractions, he said. The goal may have been to provide fodder for the cameras, but the strategy backfired, he said.

Doug Saunders
Globe and Mail
November 13, 2002

Ontario’s solution looks a lot like the beginning of California’s problem.

In Ontario this week, Premier Ernie Eves tried to prevent an energy crisis with a rate freeze. Four years ago, California’s energy crisis began with just such a rate freeze, which set off a chain reaction that led to blackouts across the state, bankruptcies of giant utilities and a huge government deficit.

Could the same thing happen north of the border? Some people think so.

"This is California all over again," said economist Tom Adams of Energy Probe, the Toronto-based lobby group that favours deregulation of utilities. "We should be alarmed. The situation Ernie Eves put us into this week will almost certainly lead to blackouts and bankruptcies."

After capping its consumer price rates at a level far above wholesale market prices, California brought competition into its energy market in 1998, as Ontario did this May.

Things began to go awry in California in 2000, when hot weather and a booming economy led demand to outstrip supply, just as wholesale rates rose above the capped levels.

Utility companies began to shut down their generating stations and scrapped projects for new generators, because the below-market rate caps eliminated any incentive to provide more generation.

The state’s utilities were forced to buy electricity from out of state at spot-market rates (they were forbidden from signing long-term contracts with outside generators), but because they were unable to raise consumer prices, they soon faced bankruptcy. This led to even higher prices, because out-of-state utilities didn’t trust the creditworthiness of the California companies. Out-of-state generators (including British Columbia and Alberta utilities) began raising their prices dramatically, selling to California at rates hundreds of times above the usual fees.

And then a heat wave struck in January, just as average wholesale electricity prices had risen to 10 times the price paid a year before.

Observers such as Mr. Adams see striking similarities between the situations. "We’re going into a peak period, as California was. We’ve got prices creeping upward, like California did. We’ve capped rates, even if wholesale prices take off. We don’t have enough supply to meet our needs, and we waste like crazy."

Others say the similarities aren’t so strong. John Chandley, a Massachusetts-based economic consultant who helped design Ontario’s deregulated power system, believes a catastrophe on a California scale is unlikely, although risks are still present.

"I think there are probably lots of differences," he said in an interview yesterday. "California had a mixture of things that went wrong, and those things aren’t all present in Ontario."

Most important, California utilities were forbidden from entering long-term contracts with outside suppliers to buy power at fixed prices during high-demand periods.

"That’s not going to be a problem in Ontario, and that’s going to keep things from leading to bankruptcies, if they manage it right," he said.

Bernard Simon
New York Times
November 13, 2002

Across much of North America this fall, electricity bills are being held in check by a slack economy and intense competition among producers. But not in Ontario, where politicians are scrambling to quell a public outcry over soaring power prices.

Six months after deregulating its power market in hopes of promoting competition and encouraging investment in new capacity, the government of Ontario, Canada’s most populous and industrialized province, backtracked late Monday and said it would freeze retail electricity rates for the next four years.

Households and small businesses will be given rebates averaging about 75 Canadian dollars ($47.79) to compensate for the surge in electricity bills since the start of deregulation in May, the government said. It also froze the fees local distribution companies charge customers for delivering power from producers to them, reversing an earlier decision to allow them to rise gradually.

"We have to smooth out the bumps along the road to a competitive market," John Baird, the province’s energy minister, explained.

Critics said they saw in the decision the seeds of a crisis like California’s in 2001. A price freeze, they said, would significantly increase the risk of blackouts in coming months, and threaten the financial stability of some utilities.

"The retreat is so dramatic," said Tom Adams, executive director of Energy Probe, a Toronto research and consulting firm. "It would be positively hazardous for anyone to lay down their cash here in any form of long-term investment."

With the ruling Progressive Conservative party trailing in public opinion polls, Mr. Adams said, the government’s action looked like a political ploy. An election is expected to be called here within 18 months.

Electric bills have become a major issue for many businesses, from hotel operators to mushroom growers. The situation is "a mess," said Gregory Gray, operations manager at Money’s Mushrooms near Campbellville, west of Toronto.

Mr. Gray’s company produces 22 million pounds of mushrooms a year, using large amounts of electricity for climate control in its greenhouses. He said the power bill in August was 40 percent higher than the year before, and the September bill will probably be more than double.

High demand in an unusually warm summer was partly to blame for big power bills, analysts said. But the volatile prices and the deepening financial problems experienced by many North American utilities since the collapse of Enron have also exposed flaws in the government’s blueprint for the power sector.

"It is important to recognize that the world in which we operate is much different than the world in which the Ontario market was created," said Duane Cramer, vice president of Sithe Energies, a New York-based power producer, at a conference here last month. Sithe is a unit of Vivendi Universal.

Sithe recently shelved plans to build two power stations on the outskirts of Toronto. "We’ve spent much of the past year spinning our wheels, and we’ve run out of rationales to continue spending money," Mr. Cramer said.

According to Rocco Sebastiano, a lawyer at Osler Hoskin & Harcourt who specializes in energy matters, "there isn’t the appetite in the marketplace to make significant investments in energy these days."

Despite deregulation, Ontario’s power market is still dominated by two government-owned companies. One, Ontario Power Generation, was created to take over the power plants owned by the old provincial monopoly, Ontario Hydro, when the monopoly was broken up in 1999; the other, Hydro One, was created at the same time to take over Ontario Hydro’s transmission network.

Hydro One was supposed to be floated in an initial public offering, but unions and advocacy groups heatedly opposed the sale, and Ernie Eves, the provincial premier, called it off shortly after taking office. Instead, the government is trying to find a buyer for a stake of up to 49 percent in Hydro One.

To increase competition, the government ordered Ontario Power Generation to give up control over at least 4,000 megawatts of generating capacity over the next three years, about one-sixth of its total capacity. By 2012, Ontario Power is meant to control no more than 35 percent of the province’s electricity supply; it now has more than 75 percent.

But the government recently forced Ontario Power to cancel a proposed sale of two coal-fired power plants because the buyers would not promise to convert them to run on natural gas or another energy source cleaner than coal.

The power picture has not been helped by delays in getting a nuclear plant at Pickering, east of Toronto, running again. The plant, which can produce 2,060 megawatts of power in all, has been closed since 1997 because of safety concerns.

The first of the four generating units was to be restarted before deregulation began, but Ontario Power now says it will not come online until next spring. In the meantime, Ontario has had to buy power from neighboring provinces and from the United States at greater cost.

Refurbishing the Pickering plant has also eroded Ontario Power’s profits, with much of the rising cost, now estimated at about 2.3 billion Canadian dollars ($1.47 billion), charged off as operating expenses.

The nuclear plant at Pickering, the first of four generating units, will not come online until spring.

As a result, the company made no contribution last year toward paying down the 20.1 billion Canadian dollars in "stranded debt" that the province assumed from Ontario Hydro to make its two successor companies more attractive to outside investors. According to Mr. Sebastiano, Ontario Power "hasn’t moved to market-driven forces – they’re still in a monopoly position."

At the time of deregulation, the government said rising prices would curtail demand and be self-correcting. Mr. Baird said today that he now expected demand to be held in check by conservation. To set an example, the government said it would use only half the usual number of Christmas lights to decorate the giant tree at the provincial legislature.

Paul Waldie
Globe and Mail
November 14, 2002

The Ontario government will have to raise taxes or cut spending by more than $800-million to pay for its planned rebate to power customers, a new analysis shows.

Premier Ernie Eves has said the government’s plan to freeze power prices to 2006 and rebate consumers retroactively will be covered from money set aside by Ontario Power Generation in a consumer-protection fund. He has insisted that taxpayers will not be on the hook for the rebate.

However, Bruce Sharp, a senior consultant at Aegent Energy Advisors Inc., which provides research to big energy buyers, says the OPG money won’t be nearly enough.

In a report to be released later this week, Mr. Sharp estimates the rebate will cost the government $1.88-billion by April 30, 2003, the first anniversary of deregulation.

However, OPG will have set aside just $1.05-billion in that period. That leaves an $830-million shortfall.

"Something has got to give," Mr. Sharp said in an interview. "These guys have gone and done exactly the wrong thing."

Mr. Sharp’s calculations are based on market prices and demand figures since the energy market was deregulated on May 1. His estimate of the total rebate includes reimbursements to consumers who bought power under contracts from energy retailers, such as Direct Energy Marketing Ltd. About one million of Ontario’s 4.4 million energy customers signed contracts with retailers.

A spokesman for Energy Minister John Baird was unavailable. This week, Mr. Eves said OPG will have $700-million in the protection fund set up for rebates as of the end of the month and that money will pay for the rebate. OPG officials would not comment on Wednesday.

According to Mr. Sharp’s research, most Ontarians will actually be worse off under the government’s program. If Mr. Eves had done nothing, most residents would have received $231-million of the $1.05-billion set aside by OPG (the remainder would go to energy retailers and businesses).

Under Mr. Eves’s plan, those residents will receive $380-million of the $1.88-billion total (the remainder will go to customers with contracts, retailers and businesses). However, they will also bear most of the cost of the $830-million shortfall through higher taxes or spending cuts. If the shortfall is made up through higher taxes, residents will pay $435-million in new taxes.

In short, Mr. Sharp estimates most Ontarians will end up paying $55-million more in new taxes than they received in rebates.

"It could get worse," he said, noting that the cost of the rebate program is expected to rise along with power prices.

Mr. Eves has frozen power prices at 4.3 cents per kilowatt per hour. Since market deregulation, the price has averaged 5.14 cents. Some analysts expect wholesale prices to reach nearly 6 cents by 2006 even with the addition of two nuclear-power plants that are expected to come back into service next year.

Tom Adams of Energy Probe said Mr. Eves’s plan will financially cripple OPG.

"The government has created so many new liabilities for OPG that OPG will not be solvent on its own. It will need continuing cash injections from taxpayers in order to continue to operate," he said Wednesday.

On Wednesday, Standard & Poor’s rating service placed OPG and all municipal-government-owned utilities on credit watch with negative implications. The agency said that given the government’s price freeze, it is unlikely the utilities will be able to reach the financial results needed to meet current ratings. On Tuesday, Dominion Bond Rating Service Ltd. announced it is reviewing its ratings for OPG and several other power companies for possible downgrade.

With a report from Eric Reguly