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Electric Deregulation

Update August 2000 New Developments in Electricity Regulation in the UK
Update July 2000 Bills Before the House: BILL 100 Ontario Energy Board Amendment Act 2000

In November 1997, the Honourable Jim Wilson, Minister of Energy, Science and Technology, released the white paper Directions for Change: Charting a Course for Competitive Electricity and Jobs in Ontario. There is considerable interest in this development and the consequences are likely to be far-reaching. For these reasons, presented below are:
  • 1) The major points contained in the white paper;
  • 2) A sample report on the release of the white paper from Bloomberg L.P.;
  • 3) The Ontario Hydro response to the report;
  • 4) The response from employees;
  • 5) A brief list of some newspaper reactions to the report;
  • 6) A bibliography of books relating to electric utilities and a short bibliography on the history of the industry in Canada.
  • 7) Elsewhere in the world, the process of deregulating the electric power industry is well advanced and considerable information is available on the WWW; some useful web sites are also provided.The White Paper (http://www.est.gov.on.ca/)
THE WHITE PAPER PROPOSES THE FOLLOWING 9-POINT PLAN
  • Create a competitive market in the year 2000 for both wholesale and retail customers
  • Separate monopoly operations from competitive businesses throughout the electricity sector
  • Establish an Independent Market Operator (IMO) and provided for an interim supply market for replacement power starting in 1998
  • Redesign the Ontario Energy Board and provided it with an expanded mandate to protect electricity consumers and other stakeholders
  • Provide for the introduction of new mechanisms to ensure environmental protection
  • Encourage reform to achieve cost savings in the local distribution sector, including incentives to consolidate some of the existing 306 municipal utilities
  • Establish a level playing field on taxes and regulations in the electricity market
  • Restructure Ontario Hydro into new companies with clear business mandates and,
  • Introduce measures to put the electricity companies on a sound economic and financial footing.
THE MARKETPLACE FOR ELECTRICITY

White Paper Highlights:

  • Competition would begin for all customers in the year 2000.
  • The monopoly and competitive parts of the electricity industry would be separated in a way that is fair to all participants.
  • An Independent Market Operator (IMO) will be established as a new Crown corporation and would run an electricity exchange in which power is dispatched on a least cost basis.
ENVIRONMENTAL PROTECTION IN THE ELECTRICITY SECTOR

White Paper Highlights:

  • The move to a competitive electricity marketplace would offer access to suppliers utilizing more efficient, and environmentally benign generation technologies.
  • Existing emissions standards for Ontario Hydro generation will remain in place and will be strictly enforced by the Ministry of Environment.
ELECTRICITY GENERATION AND TRANSMISSION

White Paper Highlights:

  • Ontario Hydro would be restructured into three separate corporations, the Ontario Electric Generation Corporation (OEGC), the Ontario Electric Services Corporation (OESC), and the Independent Market Operator (IMO). OEGC would compete with other generators inside and outside Ontario to supply electricity.
  • Transmission will continue to be priced at uniform prices for all customer classes.
  • All generators, including those outside Ontario, would be able to participate in the market by offering supply.
COST OF ELECTRICITY

White Paper Highlights:

  • A competitive market, with fair rules and vigilant regulation, would ensure that electricity prices are as low as they can be, and would be an important factor in Ontario's competitiveness and ability to create jobs. Prices would reflect conditions of demand, as well as the costs of production, and would be driven to the lowest possible level as customers exercise their new freedom to shop for the cheapest available power.
  • A competitive market would help put greater price and cost discipline on electricity providers, encouraging savings, new ideas, technological innovations and adoption of best practice techniques of management.
  • The prices for transmission and local distribution, as distinct from the price of electricity itself, would be regulated to ensure that these components of the total price are as low as possible.
  • The protection that rural customers presently have from excessively high rates would be continued.
ELECTRICITY FACTS
  • The total electricity bill for the province is almost $10 billion a year.
  • For households, Ontario's electricity rates are the third highest in Canada and average almost $1,000 a year.
  • Electricity costs for some industries account for more than five per cent of all their total spending and amount to tens of millions of dollars each year.
  • Ontario Hydro's debt exceeds $30 billion and well over a third of its total revenues goes to debt payments.
  • Ontario Hydro has 963,000 retail customers and 103 direct industrial customers.
  • Ontario Hydro has almost 21,000 employees.
  • Ontario Hydro was created in 1906 and today sells wholesale electric power to 306 municipal utilities which in turn distribute power to customers in their service areas.
  • Ontario Hydro owns 29.000 km of transmission lines an 104,000 km of distribution lines
  • Primary sources of power for Ontario Hydro are as follows: nuclear 54%, hydraulic 26%, fossil 13%. The remaining 7% is purchased under contract with independent power producers.
STRANDED DEBT

White Paper Highlights:

The Government has outlined a six-point plan for restoring financial soundness at Ontario Hydro and the new companies that would be formed from the existing Hydro businesses' assets, including the recovery of potentially stranded debt. Any debt that Ontario Hydro could not service as a commercial entity in a competitive market is said to be 'stranded'.

  • Tough efficiency targets would be set by the Government as shareholder to keep costs as low as possible.
  • Hydro's commercial successor companies would be encouraged to form joint ventures in order to achieve cost efficiencies and increase value.
  • All payments in lieu of corporate income and capital taxes made by the new companies and local distribution utilities would go to paying down any stranded debt.
  • Ontario's debt guarantee on new debt would be phased out by the year 2000.
  • If necessary, a transition charge would be established to deal with stranded debt if it is not eliminated by other means.
  • In order to establish a capital structure consistent with private sector companies, the Government would enter into a debt for equity swap with the new successor companies. The Province would receive dividends in line with private sector norms.
Prior to introducing legislation, the province will seek advice on the options for recovering potentially stranded debt and on the principles that should be applied in choosing a course of action.

Ontario Hydro's Monopoly to End in 2000, Markets to be Opened

Source: Bloomberg (November 6, 1997)

Ontario Hydro's 90 year monopoly over the province's electricity market will end in 200, opening up a C$10-billion (US$7.1 billion) market to competition from U.S. and other utilities, the provincial government said.

The announcement follows wide criticism in August by a government-appointed U.S. nuclear expert who revealed managerial abuse and inefficiencies at the utility. Hydro subsequently closed two of its nuclear-generating stations and shut down seven nuclear reactors at an estimated cost of C$8 billion over the next four years.

With the U.S. rapidly deregulating its electricity markets, the Ontario government said it, too, will open its market to free movement and delivery of electrical power. Ontario borders on half of the U.S. states actively embarking on deregulation and U.S. utilities will have access to Hydro's customers.

"Under this proposal, Ontario Hydro would no longer have a monopoly on the electricity system from generation to transmission price-setting in the province," said Energy Minister Jim Wilson.

The government said it will divide Ontario Hydro into three provincially owned utilities, including Ontario Electric Services Corp., which will run Hydro's 29,000 kilometeres (18,023 miles) of high-voltage transmission lines and its switching stations. A second unit, Ontario Electric Generation Corp., will own Hydro's nuclear, fossil-fuel and hydroelectic plants, while an Independent Market Operator (IMO), a non-profit government corporation will run an electricity exchange to match buyers and sellers and ensure delivery.

Customers would be able to choose among suppliers and have their electricity delivered over Hydro's transmission lines in the same way that telephone lines and gas pipelines are common carriers for different suppliers.

Ontario Hydro currently generates more than 90 percent of the province's power and sets the wholesale price of electricity.

"Hydro's business performance has faltered so significantly over the past decade, that power costs have increased by 30 percent in the early 1990's and that Hydro's debt exceeds C$30 billion," Wilson said in a 35 page document detailing the government's plans. "Ontario's household electricity rates are the third highest among Canada's (10) provinces."

The government said the combined revenue of the three new entitles might not be enough to meet Hydro's current debt-service obligations, which are guaranteed by the provincial government.

Ontario Hydro's customers include 306 municipal electric utilities serving more than 2.9 million customers and one million farm and residential customers in rural and northern Ontario.

Ontario Hydro Responds to Government White Paper

Source: Ontario Hydro web site

The following is a statement by Ontario Hydro Chairman, C.E.O. and President William Farlinger


"Today is an important day for Ontario's power sector,for Ontario Hydro, and for electricity customers across the province."

The provincial governments' white appear ends in the year 2000 the monopoly on generation in Ontario, and on retail supply. This means customer choice for all. Ontario Hydro enthusiastically endorses this policy direction.

Competition will mean that planning decisions in our industry will be made in the context of open market forces. That will mean competitive prices. Competition will bring a whole new range of products, services and suppliers, and a new era of innovation based on customer needs.

Ontario Hydro supports most of the key aspects of the government's white paper: the creation of a new independent system and market operator; the creation of a new regulatory structure, keeping our generation together; and setting up the industry on a commercial basis.

We recognize that the white paper results from a broad consultative process by the government, and the views of many stakeholders are represented in the decision. We argued that it was not necessary to break apart transmission and distribution wires from our generation to create a fair marketplace. We said the new independent system and market operator would ensure there was no self dealing, and that most other jurisdictions in North America saw that as an adequate solution. However, the government has listened to other stakeholders' positions on this matter, and has decided to split Ontario Hydro in two. On behalf of the people at Hydro, I commit that we will work hard to make this transition to two new companies a success.

Despite its current nuclear difficulties, Ontario Hydro has had a long history -- almost a century -- of dedicated service to the province. Compared to other utilities with similar generation mixes, our energy prices are low. We have one of the most reliable wires networks in the world.

Whether as the one company we have been in the past century, or as the two we will be in the future, the people at Ontario Hydro look forward to competing and winning the new competitive marketplace, to earning the business of power consumers in the province every day."

The Response of Hydro Employees

Source: Canada News Wire (November 6, 1997)

"Disastrously shortsighted" was the reaction of one organization to the long-awaited government White Paper on Ontario Hydro's future.

Responding to recommendations to end Ontario Hydro's monopoly by breaking up the utility, John Wilson, President of the organization representing Ontario Hydro's 5500 engineers, scientists and other professionals said: "Dismembering Ontario Hydro to introduce competition is exactly the wrong thing to do."

"The day of the monopoly is dead. The electricity market no longer stops at Ontario's borders and we face a juggernaut of out-of-province energy giants when the open market hits. Our major competitors, megacompanies like Enron out of the U.S., and Hydro Quebec, are staying intact, expanding and swallowing everything in their path."

"With Ontario Hydro lying in pieces, billions of dollars will flow out of Ontario into the pockets of our competition and very little will trickle in to the province."

The big losers if Ontario Hydro is broken up will be "the little guy - home owners, remote customers, and small businesses" who will bear the brunt of rising rates, worsening government deficits and severe job loss. A study conducted by the Institute of Policy Analysis shows that if Ontario ends up importing even 20% of its electricity, the economic consequences will be catastrophic.

To compete successfully in the North American energy market, Ontario Hydro must remain intact and be given time to return its nuclear program to excellence before the government lets the wolves in at Ontario's door.

A recent Environics poll shows two out of three Ontarians want to keep Ontario Hydro integrated so that it can compete effectively with out-of-province suppliers. Eight out of ten Ontarians also want to rehabilitate and restore Ontario Hydro's nuclear units before opening up the province's electricity market to out-of-province competition.

"Breaking up Hydro may please Hydro's detractors in the short term. But as a long-term strategy, it's a one-way road to economic ruin," said Wilson.

Sample Newspaper Reaction

editorial: "Ontario Plugs in to Power Competition", The Financial Post, Nov. 8, 1997, p.24.

"Ontario Turns on Power Market", The Financial Post, Nov. 7, 1997, p.3

"Ontario a Magnet for Power Firms", The Financial Post, Nov.8, 1997, p3.

"Healthy Dose of Competition the Right Prescription for Hydro", The Financial Post, Nov.11, 1997, p.25.

Selected Books on Electric Utilities and Related Issues

Bary, Constantine W.
Operational Economics of Electric Utilities
HD9685.A2B3 1963

Baumol, William J.
Transmission Pricing and Stranded Costs in the Electric Power Industry
DBWSTK HD9685.A2B33 1995

Brennan, Timothy, et al.
A Shock to the System: Restructuring America's Electricity Industry.
DBWSTK HD9685.U5S45.

Costello, Kennith W.
Overview of Issues Relating to the Retail Wheeling of Electricity
HD9685.U62C67 1994

Christensen, Peter C.
Retail Wheeling: A Guide for End-Users
HD9685.A2C48 1995

Czamanski, Daniel Z.
Privatization and Restructuring of Electricty Provision
DBWSTK HD9685.A2C95 1999

Flanagan, Jana Ricketts (ed.)
Vision 2001: Energy and Environmental Engineering
TAYSTK TJ163.2.V57 1996

Flavin, Christopher
Powering the Future: Blueprint for a Sustainable Electricity Industry
DBWSTK HD9685.A2F43

Flowers, Edward B.
U.S. Utility Mergers and the Restructuring of the New Global Power Industry
HD9865.U5CF59 1998

Gilbert, Richard J. and Edward P. Kahn
International Comparisons of Electricity Regulation
DBWSTK HD9685.A2I567 1996

Hines, Mary Alice
The Development and Finance of Global Private Power
DBWSTK HD9685.A2H52 1997

Jackson, Marilyn (ed.)
Innovative Energy and Environmental Applications
TAYSTK TJ163.4.U6I54

Marsh, W.D.
Economics of Electric Utility Power Generation
DBWSTK HD9685.A2M29

Ministry of Environment and Energy
A Framework for Competition : The Report of the Advisory Committee on Competition in Ontario's Electricity System to the Ontario Minister of Environment and Energy

Moses, James
Electric Utility Restructuring Strategies: Diversification, Downsizing, Outsourcing and Re-engineering [sic] in Preparation for a New Era
HD9685.U52M66 1995

Moses, James
Free Markets Emerge in the Electric Power Industry: Bottom Line Consequences for American Corporations, Utilities and Their Investors, Government Agencies, Universities and Other Consumers and Producers of Electricity
HD9685.U52M662 1995

Murphy, Frederic H.
Economic Behavior of Electric Utilities
DBWSTK HD9685.A2M87 1983

Murray, Barrie
Electricity Markets: Investment, Performance and Analysis
HD9685.G7M87 1998

National Energy Review Board
Inter-Utility Trade Review - Transmission Access and Wheeling
DBWGOV CA1 MT76 92I57

OECD
Competition and New Technology in the Electric Power Sector
DBWGOV ZZ EC200 96C55

PennWell Power Group
Electric Power Industry Outlook and Atlas: 1997 to 2001
HD9685.A2E46 1996

Pollitt, Michael G.
Ownership and Performance in Electric Utilities: the International Evidence on Privatization and Efficiency
DBWSTK HD9685.A2P65 1995

Studebaker, John M.
Electricity Purchasing Handbook
HD9685.A2S767

Tessmer, Raymond G. et al.
Cogeneration and Wheeling of Electric Power
TAYSTK TK3101.C64 1995

Warkentin, Denise
Energy Marketing Handbook
HD9685.U5W37 1996

Selected Books on the History of the Electricity Sector in Canada

The most recent Canadian study is Delusions of Power: Vanity, Folly and the Uncertain Future of Canada's Hydro Giants, by Wayne Skene.
HD9685.C32S53

Armstrong, Christopher and H.V. Nelles.
Monopoly's Moment: The Organization and Regulation of Canadian Utilities.
Weldon 28day HD2768.C37A75 1986

Denison, Merrill
The Peoples Power: The history of Ontario Hydro.
Weldon 28day & Taylor 28day HD9685.C3056

Fleming, Keith R.
Power at Cost: Ontario Hydro and Rural Electrification.
Weldon 2hr loan, & 28day & Business HD9685.C40538 1992

Freeman, Neil B.
The Politics of Power: Ontario Hydro and Its Government.
Weldon 28day HD9685.C340576 1996

Hughes, Thomas P.
Networks of Power: Electrification in Western Society.
Weldon 28day TK1005.H83 1983

McCutcheon, Sean.
Electric Rivers: The Story of The James Bay Project.
Weldon 28day E99.C88M38 1991

McKay, Paul.
Electric Empire: The Inside Story of Ontario Hydro.
Weldon 28day & Business 28day HD9539.U7R65 1990

Munson, Richard.
The Power Makers: The Inside Story of America's Biggest Business... And Its Struggle to Control Tomorrow's Electricity.
HD9685.U5M86 1985

Negru, John.
The Electric Century: An Illustrated History of Electricity In Canada.
Taylor 28day HD9685.C2N44 1990

Nelles, H.V.
The Politics Of Development: Forest, Mines, & Hydro Electric Power in Ontario.
Weldon 2hr (5 copies)& Business 28day HC117.O6N44b

Plewman, W.R.
Adam Beck and the Ontario Hydro.
Weldon 28day (2 copies) HD9685.C3O884

Waldram, James.
As Long As The Rivers Run: Hydro Electric Development and Native Communities in Western Canada.
Weldon 28day E78.P7W34 1988

Selected Web Sites

Bills Before the House: BILL 100 Ontario Energy Board Amendment Act 2000

See "The Electric Power Industry Today" at the site of the Edison Electric Institute which also provides many good links.
http://www.eei.org


See the Harvard Electricity Policy Group site for documents and useful links.

http://www.ksg.harvard.edu/hepg

/The Canadian Electricity Association provides a useful document on "Restructuring the Electric Industry" which includes provincial updates.

See:http://www.canelect.cahttp://www.opg.com/indexserver/asp_indexserver.asp
An essay by John Moorhouse - "Competitive Markets For Electricity Generation", The Cato Journal, Vol.14, No.3 - is found at: http://www.cato.org/pubs/journal/cj14n3-3.html"

Stranded Costs: A Bigger Rip-Off Than the S&Ls" at http://www.me3.org/projects/dereg/stranded.html

http://www.est.gov.on.ca/index.cfm?fuseaction=english.electricity

Links to certain items on the topics relating to electricity and deregulation have been provided below.

The Cato Institute: "High Voltage Swindle: Why Electricity Restructuring Could Electrocute Ratepayers".

The Cato Institute:

http://www.cato.org/pubs/pas/pa-301es.html