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Ontarians face price shocks on hydro bills & Energy Probe

Globe and Mail - February 9, 2002
By Janet McFarland

Ontario Premier Mike Harris told a Toronto press conference in December that he is "100 per cent convinced" that electricity deregulation will bring lower prices for Ontarians.

Perhaps one day, but it's not going to happen soon. And Mr. Harris surely knows it.

The reason is not so much that open market competition will drive prices higher; electricity rates in spot markets have been falling because of the economic slowdown and the reduced demand from manufacturers. Prices in U.S. border states have dropped in recent months to levels below the wholesale price in Ontario. And Ontario has a healthy excess of electricity supply. That means the province will avoid a California-style crisis, where soaring demand and inadequate supply pushed prices through the roof.

The real reason prices will rise as the market opens this spring is that other costs are scheduled to increase, and because the underlying structure of deregulation brings new costs. Last year, 24 large municipal utilities filed applications for higher rates, and the Ontario Energy Board has ordered them to be phased in over three years. The utilities say they must earn market rates of return and make new "payments in lieu of taxes" under the province's new system.

These sorts of rising regulated costs will be difficult to offset by deregulation in the generation part of the industry, even if the spot market price of electricity falls.

Supporters of deregulation argue that the current rate increases would have happened anyway after years of price caps. But critics, including a coalition of Ontario's biggest manufacturers, say some of the coming rate increases stem directly from the new market structure. They point to the pressures to earn profits, the need for private companies to pay taxes and the legacy of a huge debt as factors in boosting prices.

Tom Adams, executive director of Toronto's Energy Probe, is one of the critics.

Mr. Adams spent a decade urging the Ontario government to privatize the province's electricity market as a way to bring more financial discipline to the former Ontario Hydro, and to reduce taxpayers' exposure to poor business decisions and soaring debts. When Ontario decided to go ahead with the plan, Mr. Adams sat on the market design committee and initially was a board member of the IMO, the new body that will run the wholesale energy market. But with the market about to open in less than three months, he has become disillusioned.

He estimates consumers will see higher rates this year -- 20 per cent higher this spring alone. He says that, while some of the price increase would have been unavoidable even without deregulation, some portion of it could have been averted.

In particular, he opposes the decision that changed the ownership structure of municipal utility companies. No longer quasi-co-operatives owned by consumers, their ownership was legally transferred to municipalities to prepare for deregulation. The idea was that once the ownership was clear, municipalities could decide whether to sell the utilities.

Mr. Adams says the new ownership structure has allowed cities such as Toronto to extract huge dividends from utilities -- $140-million a year, for example, from Toronto Hydro. He believes this ownership change will cost consumers $700-million to $1-billion a year as a result. "This is the largest financial mistake in the electricity restructuring," he says. He then corrects himself: He believes it's the second largest mistake, after the decision to restart the Pickering A nuclear reactors.

Meanwhile, electricity prices will particularly rise for the million or so Ontarians who have signed long-term electricity supply contracts from marketing companies. Those companies have blitzed the province with door-to-door sales campaigns. The contracts commit consumers to paying rates that are higher than current market prices, and Mr. Adams says those consumers may see price increases of up to 40 per cent this spring. That's twice as much as the rest of us will face.

Despite his criticism of the process, Mr. Adams is not calling for the province to abandon deregulation. He says the process has gone too far to turn back, and there is no better alternative on the table to adopt. Instead, he is urging a number of reforms to reduce the damage.

For example, he says there should be a moratorium on selling long-term supply contracts until retail consumers begin receiving their new bills. Starting this spring, bills in Ontario will be itemized so that customers know how much they're really paying for their core electricity. Only then can they really assess the deals they're being offered by the private retailers.

But even if tinkering is done now, higher bills are almost certain this year. The best that can be hoped for is that the impact will be relatively short-term, and that rates will fall as the initial costs are absorbed and competition grows. Consumers will not be satisfied that Mr. Harris has created a free-market model if there's nothing in it for them.

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