Features:

You are here: Home > Features > Electrical Deregulation in Canada

Electricity Deregulation in Ontario

In 1998, the government announced the energy market would be open to competition in 2000. Since that time there have been several setbacks. As a result, it is too soon to determine whether Ontario will successfully make the transition to a fully competitive electricity market.

Background

Deregulating the Ontario electrical energy industry was a key part of former Premier Mike Harris’ “Common Sense Revolution.” Several conditions made Ontario seem like a good candidate for electrical deregulation:

• Unlike Alberta, where several privately owned companies dominated the system, a Crown corporation, Ontario Hydro, ran Ontario’s electrical energy industry. This made it easier to split up the bundled system into several components.
• As a Crown corporation, Ontario Hydro operated at arm’s length from the government, and had incurred a large outstanding debt from running its nuclear power plants. The government believed this was caused mainly by mismanagement. The government wanted a system where Ontario Hydro was not regulating itself.
• The government believed deregulation would encourage competition and bring in new, more efficient electricity generators.
• The government believed deregulation would encourage investment in environmentally friendly types of energy, such as wind power.
• Ontario had excess capacity and no problem meeting energy demands in the province.
• Unlike Alberta and California, Ontario did not rely on natural gas – which can have widely fluctuating prices – for power. Only three percent of Ontario’s power is generated through natural gas technology.
• The government had a philosophical commitment to privatization, and believed that increased competition in the market would eventually result in lower energy rates.

Deregulation: Phase I

In April 1998, Ontario passed the Energy Competition Act, with a commitment to opening wholesale and retail markets together in 2000. Under the terms of the Act, Ontario Hydro was split into several companies. Generation was handled by Ontario Power Generation (Genco), while Hydro One handled transmission and distribution. The Independent Electricity Market Operator was given responsibility both for organizing the spot market where electricity would be traded, and for ensuring open access to the transmission system. Finally, the Ontario Electricity Financial Corporation was given responsibility for handling the large debt incurred by Ontario Hydro.

To pursue its goal of privatization and help pay off the debt, the government planned to sell off Hydro One shares to private investors. Eventually, it planned to sell off other portions of the Crown corporation as well.

To reduce the potential market power of Genco under deregulation and encourage competition, Market Power Mitigation Agreements required Genco to reduce its generation to no more than 35 percent of provincial capacity within ten years, and established the conditions under which Genco could lease out its power.

Although Ontario planned to implement both wholesale and retail access, the legislation made it clear that reducing the rates customers paid for electricity wasn’t a major goal, at least in the short-term. First, stranded costs and other debts owed by Ontario Hydro would be paid partially through a debt retirement charge added to consumer’s electricity bills. In addition, the government ruled out setting a cap on the retail price of electricity.

Deregulation: What Happened?

By 2000, it became clear there were several problems with the government’s plan for deregulation:

• The government reversed a previous decision and announced that, after deregulation, Ontario Hydro would continue supplying electricity to certain industrial customers at a cheaper rate. Through a complicated mechanism, ordinary consumers paid for the discount.
• Ontario Hydro’s controversial decision to restart the Pickering A nuclear station discouraged new investment, especially since the costs were passed on to the public. Smaller start-ups, such as coal-fired plants, felt they couldn’t compete.
• Continued uncertainty over how the retail market would operate also discouraged new investment.

Faced with these problems, the government pushed back the date for deregulation until May 2002. In the meantime, concern over the possibility of lost jobs and rising electricity rates for consumers led to mounting opposition from both unions and end-users. Finally, two unions launched a court challenge over the government’s plan to privatize Ontario Hydro. In the aftermath, the government was forced to abandon or at least postpone this part of its plan. Nonetheless, the markets were open to wholesale and retail access on May 2002.

Almost immediately electricity prices rose, due to a shortage of supply caused by lack of new generation. In December 2002, Premier Eves was forced to backtrack even further on deregulation and implement a price cap on electricity rates. Critics argue that these are exactly the conditions that produced the California energy crisis in 2001, when the wholesale price of electricity skyrocketed and the utilities were unable to collect the money from end-use consumers. Others feel the system will work once the government is able to follow through on its plan to privatize Ontario Hydro.

Next>>
Electricity Deregulation in California:
From Excess Capacity to Rolling Blackouts