Energy Probe

John Spears
Toronto Star
April 12, 2000

Energy board told phase-in hides effects of hikes.

Regulators shouldn’t cushion consumers from electricity rate increases triggered by Ontario’s new market-driven electricity system, says Energy Probe.

Tom Adams, executive director of the non-profit environment advocate, told the Ontario Energy Board yesterday that his group opposes phasing in new, higher electricity rates proposed by local utilities.

Phasing in higher rates, or deferring them for several years, isn’t a measure to protect consumers from “rate shock,” Adams argued.

Instead, it’s a way for the people who designed the new system to conceal the effects of their actions.

Adams argued that part of the rate increase sought by local utilities is unjustified. But he said if they’re going to charge unreasonable rates, the public should know.

“If you’re going to scam people, you’ve got to show them, clear and simple,” he said. “At least tell the customers what you’re doing.”

The energy board is holding hearings to consider a directive from Energy Minister Jim Wilson, in which he told the board to give priority to the interests of consumers when setting rates.

Wilson’s Conservative government promised that rates would fall as they threw open Ontario’s electricity market to competition.

But electric generation is still dominated by Ontario Power Generation, one of the units of the former Ontario Hydro, so its rates haven’t fallen.

Meanwhile, local utilities have been restructured on the province’s orders.

For the first time they must pay dividends to their municipal government shareholders, plus provincial taxes.

Because of the new costs, many local utilities say they’ll have to raise distribution rates.

Adams was challenged by Sheila Halladay, one of the four-member panel considering how to apply Wilson’s directive.

Halladay asked Adams why consumers would not be able to understand what was going on if the energy board and their local utilities clearly told them that higher rates would be phased in over, say, three years.

Her own parents are seniors on fixed income, Halladay said. She would have trouble explaining to them why they should pay higher rates right away when the payments could be deferred, she said.

“They would not say that I was acting in the public interest,” she told Adams.

Meanwhile, Oakville Mayor Ann Mulvale and Toronto Councillor Jack Layton complained that municipal utilities are paying more for electricity than Hydro One, the corporation that runs Ontario’s main transmission grid but has been buying up local utilities.

Hydro One spokesperson Terry Young said the comparison isn’t exact.

Hydro One is liable for tax payments that are not yet applied to the municipal utilities, he said, and that’s part of the reason Hydro One is charged less for power.

The Toronto Star
February 3, 2000

Urban homeowners can expect an average hike of about 6 per cent in electricity costs this fall.

The Ontario Energy Board has given the go-ahead to Ontario’s 255 municipal utilities to boost rates for industrial and residential customers Nov. 1.

The increases come despite repeated promises by Energy Minister Jim Wilson that deregulation of the electricity industry – both at the generation and delivery ends – would result in lower costs to consumers.

Wilson wasn’t available for comment yesterday.

The increase will be as low as 3 per cent for high-use customers and 10 per cent for low-use customers. There are a total of about 4 million electricity customers in the province.

Each utility will still have to appear before the energy board by May 1 to get its individual rate increases approved.

Toronto Hydro has not yet established a rate, a spokesperson said.

Energy Probe, an activist organization devoted to energy issues, has estimated the average residential bill could jump by $100 a year.

Meanwhile, about 1 million rural customers served by the Ontario Hydro Services Company – one of the five units created when Ontario Hydro was broken up on April 1 – are not affected by the energy board decision.

Municipal utilities are busy incorporating and looking to make a profit for their cash-starved municipal owners. Some municipalities, however, including Toronto, are talking about selling off theirs to private operators.

Critics say the rate increases will be a nightmare for Wilson because he promised that deregulation was the road to lower energy costs.

Michael Krizanc, a spokesperson for Wilson, said electricity is expected to cost less in the long run, not right away. He also said the municipal utilities will raise prices at their peril.

“They will be answerable to their ratepayers if they do that . . . every other place where they have done this (deregulation) rates have come down,” he said.

Liberal energy critic MPP Sean Conway (Renfrew-Nipissing-Pembroke) said a legislative committee looking into power deregulation was told 18 months ago rates would go up.

“Sad to say I’m not surprised because some very thoughtful witnesses warned the legislative committee that in the short and intermediate term . . . consumers can expect electricity rates to go up and quite dramatically,” Conway said.

Tom Adams, executive director of Energy Probe, said the hike is “totally unnecessary.”

“The distribution rate being charged now is more than enough to meet the cost of the distribution system,” Adams said. “Whether these utilities remain in public hands or whether they are privatized, rates should be going down.”

The Municipal Electric Association said its members warned from the outset that rates were bound to go up because of deregulation costs and the need to generate a profit.

“Certainly in the short term one cannot expect that rates will go down,” said Bob Kanduth, a spokesperson for the association.

Kanduth said the utilities are expecting consumer outrage mainly because Wilson was telling anyone who would listen the cost of electricity was going to go down.

Ken MacDonald, of Hydro Mississauga, said the cost of power in Mississauga is expected to go up by at least 5 per cent, in part because the city is expecting a “a reasonable return on what they own, which we have not formally done before.”

Krizanc, of Wilson’s office, said the increase approved by the energy board will be offset slightly by the fact Ontario Power Generation has been told to limit what it charges for the next 40 months as it gradually loosens its virtual monopoly on power generation.

Meanwhile, New Democratic Party MPP Marilyn Churley said municipalities will use their utilities as a backdoor to raise money without actually raising property taxes.

“It is a devious way to get taxes with blessing of the Harris government,” Churley said, adding she blames the government for raising consumer expectations.

Thomas Adams
National Post
January 28, 2000

Ontario’s electricity restructuring, which could and should be delivering a cheaper, more accountable electricity system, is morphing into a nightmare attack on small ratepayers and taxpayers.

Last week, the provincial government’s Ontario Energy Board announced that municipal utilities such as Toronto Hydro will be allowed to raise distribution rates by about 50% after Ontario’s so-called electricity market opens this November. Because the rate hike doesn’t apply to the electricity that Ontario residences and businesses consume — only to charges for delivering power along the municipalities’ power lines — the power bills that ultimately arrive in the mail will show only a 6% rise on average. Big businesses will see relatively small hikes, about 3%, while homeowners and small businesses will take the biggest hit, at least 10% — which will often mean $100 per year or more.

The rate hike will give the cities, who own the utilities, a windfall worth as much as $10-billion — roughly $1,000 for every man, woman and child. Yet Ontario’s municipal politicians, instead of offering to return the windfall to citizens in the form of a dividend or property tax cuts, are instead claiming they are hard-pressed to hold the line on taxes, and are warning of possible tax hikes.

Ontario’s new electricity system — which Premier Mike Harris decided should stay monopolized for another four to 10 years — is saddled with $22-billion in net liabilities, most of it nuclear-related. Taxpayers will ultimately be forced to pick up much of this. In explaining why his government has decided to maintain a monopoly in power generation, Mr. Harris points to the need to pay down that debt.

If Mr. Harris wasn’t giving that $10-billion to the cities, he could have used it to clean up almost half the remaining Hydro liability. That would have permitted the government to create a fully competitive, fully accountable power system that would have lowered, instead of raised, power rates. Instead, Mr. Harris has made the power sector a cash cow for the municipalities. Using the new Tory rules, last week Mississauga mayor Hazel McCallion — while blaming coming rate hikes on the Tories — announced she had taken assets and $200-million in cash out of Hydro Mississauga. Earlier, Toronto mayor Mel Lastman took $130-million in cash and real estate from Toronto Hydro. Other municipalities across the province are lining up at the trough.

The electricity ratepayer, meanwhile, is left in the dark by a muddled regulatory system working to hide the effect of its actions through accounting tricks and bewildering rules. To obscure the extent of consumer gouging, the Energy Board has told utilities to transfer part of the 50% rate hike — with interest — to bills that will be borne by customers several years down the road. In effect, while the municipalities will average a 50% increase in the rates they begin collecting in November, consumers will first pay less than 50%, and later more, before rates level off at the regulator-approved 50% hike.

The distribution rate hike is only the beginning of the ordinary ratepayer’s woes. Thanks to an October Energy Board decision, passive residential customers and other small users will be scammed through the way they are billed for electricity. Under the Energy Board’s scheme, all small customers will be allowed to buy power either at a regulated average price or at a free-market price. In winter and summer, when heating and air-conditioning demands raise the free-market price of power, the regulated price will generally be cheaper. Motivated customers will buy power on the competitive market in spring, switch to the regulated power in summer, go back to the competitive market in fall and then switch back to regulated prices in winter. Residential customers jumping back and forth each season can save perhaps $100 per year, and perhaps twice as much if they are heavy users of electric heat and air conditioning. These savings will primarily be recovered by adding a hidden surcharge to the bills of the passive, non-jumping customers.

With power rates varying wildly from house to house; with power-supplying companies seeing large influxes and exoduses of customers each season; and with surcharges hitting customers each year, the electricity marketplace will be in chaos. Once it dawns on the public that these machinations have been brought to them courtesy of their government regulator — who is presumably there to protect them — the outcry will be loud and long, and heads may roll. Anticipating this outcome, many municipal utilities, as well as a lobby group called the Vulnerable Energy Consumers Coalition, want to force consumers to take their power from a monopoly provider assigned to them by the regulator. This is deregulation?

The degeneration of the electricity marketplace is caused partly by Mr. Harris’ failure to quickly break up the old Hydro monopoly, and partly by his transformation of the Energy Board — once an independent, quasi-judicial agency — into a servile branch of government. New legislation passed by his government removed the due process provisions that once protected the public and bound the regulator. As a result, the government bureaucrats at the Energy Board became free to force consumers to take a $10-billion hit, and free to transfer that $10-billion to the municipal governments, without calling sworn evidence, and without subjecting that evidence to cross-examination by parties that might have different ideas about the disposition of those funds. The Energy Board deliberated largely behind closed doors, using rules that were made up on the fly, before arriving at its decisions.

Presiding over this brave new era is Energy Board Chairman Floyd Laughren, Mr. Harris’ hand-picked-choice to protect consumers and taxpayers in implementing his restructuring of Ontario’s electricity system. Mr. Laughren — the former NDP finance minister — doubtless agrees with his board’s finding that this rate hit was “just and reasonable.” But he’s not necessarily proud.

To deflect responsibility for its decision, the board is already telling the municipalities that, although they may raise rates by 50%, they should exercise restraint. The municipalities, knowing the public will blame them for the inflated bills that will start being mailed in November, have already begun to blame the province, saying the rate hikes stem from privatization and deregulation. And the provincial government will return fire by blaming the mayors for not controlling their utilities.

While there’s more than enough blame to go around, the buck must ultimately stop with Mr. Harris, who — despite numerous examples of successful restructurings in other jurisdictions — is botching the all-important task of modernizing one of the continent’s largest power systems. Even before the Energy Board’s rate hit, he had piled billions in hidden taxes onto ratepayers, partly to pay down Ontario Hydro’s historic liabilities and partly to prop up the accounts of the government’s reincarnation of the old Ontario Hydro power-producing monopoly, Ontario Power Generation Inc.

Mr. Harris has clear choices. He can try to spin his way out of the problem by blaming the mayors. He can throw more money at the Hydro system — which still accounts for 30% of the province’s entire debt. Or he can do what he should have done all along: He can bring in true competition in the electricity generation business by immediately breaking up and privatizing the generating monopoly, and curb monopoly excesses in the electricity distribution business by giving back to the Energy Board the integrity and rigor required for honest regulation.

Tom Adams is executive director of Energy Probe, a Toronto-based watchdog organization.

Edward Alden
Financial Times
December 8, 1999

Canada has lessons for countries whose electricity sectors have long been dominated by government-owned monopolies. Its experience illustrates both the limitations and the opportunities created by deregulation and opening up the market.

Three provinces – Quebec, Alberta and British Columbia – are open to wholesale competition. They established transmission tariffs that grant all power generators similar costs for delivering electricity to customers. Alberta has also opened its market for retail sales, while Ontario plans to open wholesale and retail markets next year.

Despite these moves, genuine competition in Canada’s electricity markets remains unlikely. Power generation is still dominated by a handful of government-owned monopolies. They are eager to exploit new market opportunities in the U.S. but loathe to encourage competition domestically.

Most provincial governments have embraced the theory that competitive electricity markets should reduce prices for consumers. But none has devised an effective strategy for replacing regulated monopoly utilities with unregulated free market competition.

It is likely to result in rising prices – in a country where cheap electricity has long been a significant competitive advantage for large industrial companies.

Tom Adams, executive director of Energy Probe, a leading non-governmental organisation, says “there’s a very substantial risk that regulatory decisions and market power problems will conspire to increase energy prices, which would undermine the fundamental legitimacy of the reform effort”.

The reasons for Canada’s half-hearted attempt to reform its electricity sector vary from region to region, because control over power markets falls within provincial jurisdiction.

Generally, most provincial governments have sought to preserve large utilities that can be competitive on a North American scale while protecting their domestic markets.

British Columbia Hydro and Hydro-Québec, the government-owned utilities in Canada’s second and third largest provinces, have done the most to take advantage of deregulation in the U.S. Under US Federal Energy Regulatory Commission(FERC) rules, the utilities would have been barred from delivering power directly to U.S. customers unless Canadian transmission lines were opened on a non-discriminatory basis to US competitors.

Both provinces have done so, but so far the effects have been decidedly one way. As low-cost hydro-electric producers in relatively small markets, the utilities are unlikely to face any significant U.S. competition.

Both have captured opportunities created by U.S. deregulation, which has generally brought energy prices down but produced price spikes that can be exploited by nimble utilities.

Over the past year, BC Hydro’s revenue from electricity trading almost doubled, from C$398 million in 1998 to C$739 million in 1999, with 95 per cent coming from the western U.S. market. The utility uses its large reservoir system to take advantage of price fluctuations in the U.S. It buys energy for current use when market prices are low, and releases water to generate additional electricity when prices are high.

Hydro-Québec similarly plans to become a much more active participant in the U.S. With several of its long-term contracts to supply power to the New England states expiring soon, the utility anticipates much greater use of short-term arbitrage transactions, says Thierry Vandal, vice-president of planning.

Neither utility expects any significant domestic competition in the near-term despite their aggressive moves into the U.S. market. Hydro-Québec controls more than 95 per cent of its domestic market, while only a handful of BC Hydro’s 1.5m customers buy directly from U.S. producers.

Ontario, Canada’s largest province, will open both its wholesale and retail power markets in November, 2000. Despite pressure from industrial users to break up and privatise Ontario Hydro, one of North America’s five largest utilities, plans call for the company to remain substantially intact under government ownership.

Generation and transmission were separated earlier this year, but the generating arm – now known as Ontario Power Generation (OPG) – still supplies more than 85 per cent of the market.

Ontario faces significant problems because of a C$38 billion debt created largely from ill-advised investments in nuclear power generation. Only 12 of the utility’s 20 nuclear reactors are currently operating, producing about 45 per cent of domestic electricity requirements. The utility hopes to sell at least some of its nuclear assets to private buyers, but provincial taxpayers will still be left with a stranded debt of about C$8 billion.

Unlike British Columbia and Quebec, which have made only token efforts to open their monopoly utilities to further competition, Ontario’s deregulation law requires OPG to reduce its share of the market to 35 per cent over the next decade.

That should create new opportunities for foreign generators, though sceptics question whether the utility’s monopoly power will genuinely be weakened. The legislation does not explicitly require OPG to sell those assets, only to transfer effective control to other entities. In the transition period, all generators in Ontario face a rate cap of 3.8 cents a kilowatt hour, which will likely discourage new competitors from expanding generation capacity in the province.

Patrick McNeil, vice-president corporate development, says that OPG plans to apply to FERC next year to sell power directly in the U.S. to take advantage of U.S. price fluctuations.

The cautious approach to market opening in most Canadian provinces may be due in part to the experience of Alberta. Long the country’s strongest proponent of free market policies, its government deregulated its energy market in 1995, setting up an independent power pool to serve as a kind of central market. Potential competitors and the three dominating privately-owned utilities have not invested in new capacity, due to uncertainties about the deregulation process.

The result has been significant power shortages and price spikes, driving Alberta electricity costs above those in the rest of the country despite an abundance of cheap natural gas.

Tom Adams says the fundamental problem is that Canada’s provinces have been unwilling to break up monopoly providers. “If you’re going to do away with regulation, you’ve got to have competitive conditions,” he says. “You can’t deregulate monopolies.”