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How did we get into this mess?

After a decade of mismanaging the electricity sector, Ontario now finds itself scrambling to buy power amid rising costs

Toronto Star - September 17, 2003
Opinion by Ron Bartholowmew and Tom Campbell

First of three parts. For part two visit How Serious is this Mess? and part three Giving power to the people

Ontario has an electricity crisis — shortages, reliability problems, and potential loss of affordable rates. Government initiatives to restructure Ontario Hydro, deregulate the electricity market, and sell off the assets of Ontario Power Generation and Hydro One have proven to be unworkable and unpopular.

After a decade of mismanaging the electricity sector, Ontario now finds itself scrambling to buy expensive electricity from neighbouring utilities, facing uncertain and rising fuel costs, and having no clear assignment of responsibility for a strategic plan to resolve these issues.

How did we get into this mess? How serious is the mess we are in? How can we get out of this mess? We'll attempt to provide some answers over the next three days.

The Ontario electorate chose public power in 1906, and for the first 85 years of Ontario Hydro's existence, it served the province's needs, developing into a world-class utility.

As economic hydraulic sites became scarce, Hydro switched to imported U.S. coal, and, when coal availability, cost and pollution became issues, pioneered the development of a Canadian nuclear industry.

Our rates were not as low as Quebec's and Manitoba's (blessed with abundant hydraulic power), but a fraction of those of neighbouring U.S. states.

Hydro had a manageable debt and a very good bond rating. Some concerns about nuclear plant performance were being addressed and the 1990-92 recession saw a temporary electricity surplus. However, the outlook was generally positive.

The decade of the 1990s and the years of this new century have seen a series of unfortunate policy decisions that have turned Ontario's electricity sector into a "basket case."

Today, seven of 20 nuclear reactors are shut down, necessitating burning more expensive and dirty coal to keep the lights on. Total electricity debt has risen by billions of dollars with little to show except a few windmills and a botched rehabilitation project at Pickering.

The surplus of generating capacity has turned into a shortfall. Ratepayers angry about high and fluctuating electricity prices caused the government to "re-regulate" the market.

Nobody is taking responsibility for long-range strategic planning. For our future electricity generation we are becoming dangerously dependent on natural gas (without knowing its future source or cost). For the first time ever, taxpayers may subsidize ratepayers.

This adds up to an unqualified failure.

No single policy triggered the decline in Hydro's fortunes. However, one critical factor was a decline in nuclear plant performance in the 1990s, caused mainly by the loss of hundreds of qualified nuclear operating, maintenance, and technical support staff, who took the early retirement packages during a downsizing initiative gone awry. This action nearly brought the nuclear program to a complete shutdown.

When it became clear that the nuclear program had been crippled, Hydro senior management appeared to misread the situation.

Nuclear management was blamed; competent station managers fired; U.S. experts brought in (who, to nobody's surprise, discovered manpower resources were critically low); eight reactors shut down to focus scarce resources on the remaining 12; nuclear operating budgets significantly increased; and massive hiring and training of new staff and contractors began.

Meanwhile, revenues were constrained by an unrealistic government-directed rate freeze, fuel costs continued to rise, liabilities were rising in a period of little capital construction, and, by 1997, accumulated deficits reached a peak of $4.5 billion.

The prospect of bailing out of this daunting situation (by selling assets to someone else to manage and trusting the forces of the market to plan the future) must have looked good. And, unhappily for Ontario at that time, most of the government's advisers were effectively saying, "That's the way to go."

During the late '90s, deregulation became trendy. In Britain, the 1989 Electricity Act called for deregulation of the electricity market. Starting from a position of unrealistically high rates, and with the good fortune to exploit North Sea gas about the same time, there were early reports of success with their open market.

In the U.S., the deregulation "movement" started in 1992, ostensibly aimed at wresting control from individual state regulatory bodies (whose rate decisions had upset both utility investors and ratepayers).

Deregulation was also strongly promoted, for reasons of self-interest, by many utility executives, investors, energy brokers, financial institutions and politicians. Spurred by high — but misplaced — hopes for the California experiment, a wave of electricity deregulation initiatives began in many states.

In Canada, two provinces took the deregulation plunge: Alberta in 1996 followed by Ontario in 1998 (with its market opening four years later).

The Ontario decision was apparently based on:

  • Optimistic reports of successes in other jurisdictions.

  • A public inquiry (seemingly greatly influenced by Enron's testimony).

  • Assurances of a few close advisers, apparently wanting Ontario to become a big North American energy player.

  • Encouragement of industrial customers (expecting to "cherry-pick" the market for bargains at the expense of less sophisticated residential consumers).

  • Endorsement of the local financial community, which had a keen interest in privatization fees.

  • A fundamental political belief that the private sector is always superior to the public sector.

So we got into this mess because the Ontario electrical sector had struggled in the past decade — to the point where change to something different appealed to the government. The world trend toward deregulation coincided with that desire, and there were plenty of proponents. The critics who warned that Ontario was embarked upon a very dangerous path were ignored.

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