Costly first summer of deregulation

Canadian Press - October 3, 2002
by Steve Erwin

It was a hot, expensive summer in Ontario for residents and companies alike. While millions of consumers were hit by "power shock" when they opened their latest electricity bills, the first few months of the province's deregulated hydro market have also hurt companies that use large amounts of power to make cars, trucks, steel and metals.

Steelmaker Dofasco Inc. - the province's largest industrial user of electricity - expects to pay an additional $50 million this year in power costs at its Hamilton operations, 40 to 50 per cent higher than in 2000, the baseline year it's using for comparisons.

A sizzling summer pushed air conditioner use to record levels in Ontario, leading to rising power prices, calls for conservation and warnings of electricity shortages.

For many companies, uncertainty about supply and prices left them unable to shift production schedules to non-peak periods to take advantage of cheaper rates.

"It couldn't be done," says Dofasco spokesman Gord Forstner. "We didn't know where the market was, and therefore it was impossible for us to tailor our operations to save money."

Forstner said the company is always looking to make its operations energy-efficient.

"But our ability to turn operations on and off with changes in electricity rates, even if we wanted to do it, was non-existent."

The rising costs weren't a surprise to Dofasco (TSX:DFS) and other companies that want a market that's open to competition.

"People haven't been happy about the bills, but then that's the nature of a free market and a restructured market, which we've all supported," said Arthur Dickinson, president of the Association of Major Power Consumers in Ontario, whose 65 industrial members paid about $1 billion a year for electricity before deregulation took effect May 1.

What worries Dickinson's members is how long it will take for "meaningful" competition to arrive, to increase power supply and prevent the kinds of shortages that led to price spikes this summer.

"Our supply situation in Ontario was very tight at a time when we were setting all-time records for demand," Dickinson said.

While new power plants are proposed for southern Ontario, it could be up to two years before they begin commercial production, adding to the provincial power grid.

Supply was also hurt this summer by problems at Ontario's nuclear power system, by far the largest in Canada. One of the reactors at the Bruce Nuclear Station on Lake Huron was out of service for the entire summer, forcing the province to import more expensive electricity from neighbouring provinces to meet demand.

There have also been lengthy delays by Ontario Power Generation getting a nuclear plant restarted at Pickering, east of Toronto. The station built by the old Ontario Hydro in the 1960s has been idle for five years because of financial, safety and environmental issues and isn't expected to restart for another few months.

The power supply won't improve much in the immediate future.

An 18-month outlook issued by the Independent Electricity Market Operator, a nonprofit agency that runs Ontario's wholesale electricity system, says the province's energy reserves are "highly dependent on the return to service" at Pickering and Bruce.

It warns that more delays "could lead to extensive reliance on imports, as was the case during the summer of 2002."

Delays that put energy supply at risk - causing temporary blackouts - could prove costly for huge manufacturers, like the major automakers that assemble cars and trucks in the province.

"Even if there is a very small interruption of supply, not much more than a fraction of a second, their line stops because the computers go out of sync," Dickinson said. "They lose 45 minutes of production just from that. They don't want to put their line down. They can't speed it up to make up for production."

Such a scenario doesn't appear to be a major concern for General Motors of Canada, the biggest automaker in the country. GM generates some of its own power through generators at its massive Oshawa, Ontario, complex.

"We do everything that we can to reduce our energy costs anyway," said GM Canada spokesman Richard James, though energy costs account for only about one per cent of vehicle manufacturing expenses.

"When we look at the totality of our costs, the energy cost is relatively small," he said. "There are other areas we need to focus our attention on."

Some big companies took steps to curb high energy costs before the summer heat wave. Nickel producer Falconbridge Ltd., for example, shut down its big Sudbury smelter from June 18 to Aug. 8 for maintenance.

"We usually take a summer maintenance shutdown, but also at other times of the year. What we did was combine everything into the summer months," said Falconbridge spokeswoman Caroline Casselman. "We knew that the prices would be higher. We kind of shifted around our production schedule."

Ontario Power Generation, which has an almost 70 per cent share of the generating market, is required by law to reduce its share to 35 per cent within 10 years.

Dickinson said that isn't fast enough.

"The trouble is that without real competition, there aren't many people who are able to provide you with contracts for supply," he said. "Without that, you don't have an ability to develop a contract that suits your needs. The more players in the market, clearly the better off you are.

"One assumes that over time these things will be corrected. The question is, when?"

While Alberta private companies such as TransAlta Corp. (TSX:TA) and Atco Ltd. are spending hundreds of millions of dollars to build natural gas-fired power plants in southwestern Ontario cities of Sarnia and Windsor, Ontario Power Generation is selling assets to reduce its dominance of the Ontario market.

Other alternative sources of energy from wind and solar power are being considered.

OPG spokesman John Earl said the provincial corporation sold four hydroelectric stations on the Mississagi River, east of Sault Ste. Marie, in May. The buyer was an income fund 50 per cent owned by Brascan Power Corp. (TSX:BNN.A), one of Canada's biggest private power producers.

Four provincial properties on the block are the coal-fired Lakeview station in Mississauga; the Lennox station near Kingston; the Atikokan generating plant in northwestern Ontario; and a Thunder Bay operation.

"We have had expressions of interest in all four of them," Earl says. "None of the expressions of interest are anywhere close to where we will have an agreement.

"We've said all along we want best value for OPG . . . and best value for consumers. We're not going to move a decontrol opportunity forward until we have the right deal."

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