Monday, November 18, 2002

Power deregulation ghosts haunt Ontario California, Enron turned the tide Paul Vieira Financial Post Monday, November 18, 2002 Ernie Eves, the Ontario Premier, last week announced a cap on the price consumers will have to pay for power until at least 2006. With voters hopping mad over a 25% surge in their hydro bills, Ernie Eves, the Ontario Premier, turned his back only six months into the province's restructuring of its $10-billion power market. In fact, Mr. Eves is not the first politician to back out, as electricity reform, or deregulation, has become a hot potato governments are scared to touch. During the past year, 23 U.S. states that studied deregulation or were ready to open their borders to competition have either delayed the process or dropped plans altogether, according to a recent UBS Warburg report. Other countries, particularly in Latin America, are also getting cold feet. "The biggest problem is that there's a lot of fear out there. Nobody wants to end up like California," says Glen Thomas, chairman of Pennsylvania's Public Utilities Commission and one of the architects of that state's restructured power market. Even though electricity reform has proven to be a success in places like Pennsylvania, the U.S. northeast and England, everybody remembers the horror of California -- the soaring rates, the rolling blackouts and the bankrupt utilities. Add in fears of Enron-type energy traders manipulating the market and it's no surprise deregulation is hitting a dead end. "California and Enron were pretty seminal in terms of changing the tide," says Jan Carr, managing director of the Toronto offices of Barker Dunn & Rossi, an energy consultancy. Proponents of electricity reform say if done properly, consumers will get more choice and lower prices, just as they did when governments broke up monopolies in the airline, railway, telephone and natural gas sectors. Deregulation was partly fuelled by a lack of willingness among governments to take on the risk of building generation megaprojects to meet consumer demand. When governments have taken that risk in the past, the results have sometimes been costly. For example, the nuclear expansion undertaken by the old Ontario Hydro monopoly is the key reason why Ontarians are stuck with a $38-billion electricity debt, which they are paying off through a special charge on their hydro bills. Moreover, ageing infrastructure, in both the generation or transmission fields, is in need of either repair or upgrades, at a big cost to the state. The U.K. was the first country to embrace deregulation. Under Margaret Thatcher, the former Conservative prime minister, the government broke up the state power monopoly and privatized its successor companies. Smaller generating companies built plants and competition flourished. The result: a 30% drop in electricity prices in real terms during the 1990s. U.S. state governments followed, with Pennsylvania cited as the model market. But then, along came California. A number of factors -- growing power demand, fuelled by the dot-com craze in Silicon Valley; limited supply; a hot summer and cooler-than-normal winter; rising natural gas prices; capped retail prices; market manipulation on the part of some traders; and a ban on building nuclear plants -- led to the crisis in 2000 that haunts deregulation advocates across the continent. David Austin, a Vancouver energy lawyer, says skepticism around deregulation in Canada is also based on a misguided perception that cheap power, especially from hydroelectric sources, is a birthright. "Restructuring is about making sure that electricity is going to go up no more than it has to," he says. "But until people stop living in hydro la-la land, they will not understand what restructuring is all about." Alberta was the first Canadian province to open its electricity borders in 2000 -- and like Ontario, saw the market price for electricity initially soar, from about 5¢ a kilowatt hour (kWh) to about 20¢ kWh. The rise was sparked by high natural gas prices, and merchants who bid up the price to buy Alberta energy and sell it to power-starved California. The government intervened by issuing rebates to households and making minor regulatory changes. Prices have since dropped and the government hopes new generation projects will further drive prices down. While Alberta tinkered, Ontario pulled the plug. Mr. Eves announced last week the province will cap the price consumers pay for power at 4.3¢ kWh until at least 2006, and issue rebates to customers retroactive to May 1. As a result, the government will step in and bear the risk should the market price exceed 4.3¢. Industry players and analysts say the move will cost Ontario taxpayers billions and drive away private-sector investors that were looking to build or acquire energy assets in the province. "What has happened in Ontario is classic Canadiana -- it's the car stuck in the snow, and it goes forward, it goes backward, but it just ends up digging a deeper hole," Mr. Austin says. "The reality is that supply is not keeping up with demand." Lack of supply was one of many flaws in the Ontario scheme. The province opened its market to competition last May 1, even though private-sector companies had yet to add new power to the grid and Crown-owned Ontario Power Generation Inc. failed to get its troubled Pickering A nuclear station back in operation, despite many promises. Moreover, power producers stayed away from Ontario for a number of reasons: the government delayed opening the market twice, in 2000 and 2001, which planted seeds of doubt as to whether the province was serious about deregulation; the dominant market player, OPG, is government-owned, creating an unlevel playing field; and investors faced uncertainty over whether mothballed nuclear units at Pickering and Bruce would come on-stream and flood the market with cheap electricity. "You don't want to go into a restructuring short of supply," Pennsylvania's Mr. Thomas says. "That was another mistake of California. So if you had problems with plants that you expected to be online but were in fact offline, that is huge." As for other Canadian provinces, New Brunswick and British Columbia are most advanced with plans to restructure, Mr. Carr says. "I think the mistake that has happened [in Ontario] is that they have been too timid in their restructuring program," he says. "You need one thing or another -- you either need a vertically integrated, tightly regulated monopoly system, or you need a very competitive, very open market-driven system. But we were sort of dithering around with something that was trying to be halfway between the two. And that does not work." pvieira@nationalpost.com © Copyright 2002 National Post