O Canada: Singing the blues north of the border

By Pam Boschee

Mention Bill 210 to electricity market participants in Ontario, and you’ll surely elicit a look of exasperation accompanied with a comment along the lines of, “This can’t go on for long.”

Our northern neighbors are now singing their own version of the “deregulation blues.” Just as in most blues songs, theirs contains elements of “something went wrong ” and “somebody’s going broke.”

Electricity regulatory authority currently falls under the jurisdiction of the provinces with the majority of generation, transmission and distribution provided by a few dominant utilities. Although Alberta and Ontario have made efforts to deregulate, price volatility soon created problems for those provinces. Quebec and British Columbia do allow third party access to their grids, but continue to maintain utility monopolies.

The Ontario market officially became deregulated in May 2002. In just a few short months, something went wrong.

In November, Ontario Premier Eves announced the Ontario government’s plan to freeze residential and small commercial customers’ rates at 4.3 cents per kWh until 2006. Bill 210 was passed in December, leaving many in Ontario’s energy industry perplexed and disappointed.

There is also widespread concern among Ontario’s taxpayers. Unlike the retail price caps in California where the electric utilities had to eat the difference between the wholesale purchase prices and the retail rates, the province of Ontario is covering the difference.

The government has acknowledged that it will need to borrow funds to support its promise of 4.3 cent rates, and that there is no guarantee it will be able to repay the borrowed money out of savings from lower-cost energy in the future. (Sounds like a situation that could lead into the stanza about going broke.)

I learned firsthand about the Ontario situation last month when I had the opportunity to travel to Toronto and visit with many of the market participants. Representatives from Ontario’s Independent Market Operator, Ontario Power Generation (OPG), HydroOne, Toronto Hydro, the Independent Power Producers’ Society of Ontario (IPPSO), the Canadian Nuclear Association, the Electricity Distributors Association and the Electro-Federation Canada all mentioned Bill 210.

The rate freeze is an especially interesting turn of events since as recently as September 2002, Ontario’s newly appointed energy minister, the Hon. John Baird, stressed the importance of debt retirement. He also emphasized the importance of attracting investment capital for Ontario’s energy sector.

The rate freeze has many Ontario citizens concerned about the potential of escalating long-term provincial debt. The IPPSO is also concerned about the timing of this rate freeze. Ontario needs new capacity; however, the present economic situation may not be attractive to developers.

The government has said that it would take steps to encourage new supply, including pushing OPG to build new plants. However, because the government owns OPG, many are concerned that OPG will actually increase its market power, which is the opposite result of what restructuring was intended to achieve–reducing the market power of the dominant generator, OPG. (Another stanza about something going wrong.)

I found myself having several “California flashbacks” as my hosts explained the progression of events. Several of them mentioned California and a need to explore “lessons learned.”

Ontario isn’t the only province with the deregulation blues. Out west, Albertans are demanding consumer natural gas rebates. Something went wrong in their view, and they’re the ones going broke.

The provincial government opened its spring legislative session last month amid a growing clamor for consumer gas rebates, an outcry based on perceptions that Albertans are paying as much as or more than outsiders for a resource that resides under their feet.

The price for gas rose to $7.19 per gigajoule (GJ) in February–$3.66 more than the rate one year ago.

Albertans point to provincial legislation enacted in 2001, which the government said would insulate customers from sharp price changes. The Natural Gas Price Protection Act called for the province to issue rebates when the price goes above $5.50 per GJ.

However, it seems that–in the small print–the triggering price is defined as an “annual average,” meaning low prices through the summer could prevent the rebates from becoming effective.

The qualification has angered many customers, who point to Alberta Premier Klein’s comments two years ago, comparing the law to a household “thermostat” that kicks in whenever the temperature sinks to a certain level.

The National Post reported that the Opposition Liberal party leader, Ken Nicol, said, “They’re weaseling out of it, and that’s not acceptable.” He pointed out that the province was far quicker to step in shortly before the 2001 election, when it spent nearly $4 billion on rebates and other forms of assistance to offset high energy costs.

Murray Smith, Alberta’s energy minister, contends that through much of 2002, Albertans enjoyed some of the lowest gas prices in Canada.

Just as in the states, electricity and energy markets are different from province to province in Canada. Perceptions and incentives vary as well. Until the models that work best evolve, “somebody done me wrong” will be heard across the U.S. and Canada.

The good news is that in many of the wailing blues songs, the final outcome often unexpectedly turns around to some much improved situation.

So, let’s endure the wailing verses for now, with the knowledge that good times are around the corner (maybe).

Pam Boschee, Managing Editor

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