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Soaring hydro rates force firms to reconsider expansion plans

Globe and Mail - July 25, 2005
by Karen Howlett

Ontario's high electricity prices are forcing many industrial users to consider scaling back their operations in the province or to have second thoughts about expanding here.

"Ontario is not competitive with other jurisdictions, and we're getting worse," said Mike Kuriychuk, chairman of the Association of Major Power Consumers in Ontario.

The heat wave afflicting much of Ontario this summer has sent energy costs soaring in the province. The province has paid 8.2 cents a kilowatt-hour on average to buy power on the open market so far this month, well above the 5-to-5.8 cents charged to households and small businesses.

If costs continue to exceed revenue, consumers won't face higher bills until next April, when new rates come into effect. But industrial users, many of whom buy much of their power in the spot market, are already feeling the pain. Their electricity costs have risen by about 30 per cent since 2000.

With electricity in short supply, prices are widely expected to continue rising. The risk Ontario is facing is that high power prices could drive investment out of the province.

Ontario Energy Minister Dwight Duncan said electricity users in the province had been paying artificially low prices for years. "We were living in a dream world for a long time, and that's one of the reasons we're in the predicament today," he said.

This summer's sweltering heat has forced the province to meet surging demand with expensive import, creating concern among industrial users that their ability to operate here is being compromised by unreliable power supplies.

"In these kind of conditions, we're on the edge all the time," said Lauri Gregg, director of energy management at Falconbridge Ltd. "We've got serious problems."

Mr. Gregg said a significant increase in electricity prices could threaten the viability of some of the company's operations in Ontario. The giant nickel and zinc producer is the second-largest user of electricity in Ontario after steel maker Dofasco Inc.

"Let's just say that investments in Ontario are much more difficult to justify because of the cost of electricity," he said.

Commodity companies cannot simply pass on added production costs to customers because prices for their products are set on international markets.

Calgary energy company Nexen Inc. shut down a small plant near Windsor last month, saying high electricity prices made operating it too costly. Others are threatening to follow.

Gerdau Ameristeel Corp. warned the government last year that it could move production from its plants in Whitby and Cambridge to other more economical locations in North America if electricity prices continue to rise.

The province's forest products sector is reeling from falling commodity prices and rising costs, including electricity and the strength of the Canadian dollar against its U.S. counterpart, which hurts export profits.

A dozen pulp and paper mills in Northern Ontario are at risk of closing, said Jamie Lim, president and chief executive officer of the Ontario Forest Industries Association. These mills have 7,500 employees, just under 9 per cent of the sector's total work force.

Ms. Lim said some pulp and paper companies are paying up to 50 per cent more in energy costs in Ontario than their rivals in the southern United States, making it difficult to compete.

"Ontario is one of the highest-cost jurisdictions to be operating in the world," she said.

Norm Bush, vice-president of Weyerhauser Corp.'s Ontario operations, said electricity costs have increased 35 per cent since 2002 at the company's pulp mill in Dryden. Weyerhauser's energy costs are higher in Ontario than in any of its other North American operations.

"We have trouble justifying to our head office why we should continue operating this mill," he said.

Bowater Inc. closed its giant paper mill in Thunder Bay for 18 days this month as the company seeks to cut its costs.

Industrial users are not expecting relief any time soon from high electricity prices.

Mr. Kuriychuk said the government should reassess its ambitious time frame for phasing out the province's aging coal-fired generating plants, which supply about 25 per cent of Ontario's generating capacity.

The government plans to close the plants by 2009 and replace them with new gas-fired plants and a variety of demand-reduction and renewable-energy projects.

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