SHOCK TREATMENT

CFI chose to reduce energy consumption by creating many sources of natural light, such as windows and skylights throughout our building. Layered and independently switched lighting, and timers throughout our building control over how many lights are on at any one time.

by JOHN GRAY
Commentator, Canadian Business
Monday, December 9, 2002

Somebody’s going to pay for Ontario’s electricity cock-up. Say what you will about the Mike Harris Common Sense Revolution, but at least the actions of the Ontario government seemed to, well, make sense. That can’t be said about the latest manoeuvring of current premier Ernie Eves and his attempts to deregulate/ re-regulate Ontario’s electricity market. Less than six months after the market was opened for competition, the province has effectively pulled the plug on its attempt to modernize the way it delivers power to consumers and to deal with the shocking $38-billion (and growing) debt rung up by Ontario Hydro, the former public utility. After a summer that saw hydro bills go through the roof, Eves finally caved to political pressure, announced a rebate on electricity and froze rates at 4.3¢ per kilowatt-hour for the next four years.

It was a stunning reversal. And it effectively short-circuited Ontario hydro deregulation and undid years of reform. Private participation, competition, sound public policy and profits earmarked to pay down the stranded debt of Ontario’s utility and to encourage much-needed investment in the province’s energy grid were effectively swept away in a matter of hours. The province now has the worst of both worlds: an inefficient energy market with prices frozen at an artificially low rate, and dozens of private energy retailers and about a million consumers who signed contracts left hanging by the massive policy flip-flop.

In a move that would make the CFO of Enron proud, the provincial government has decided to move those costs off the utility bills and bury them. Annoyed consumers (or should we say “voters,” since Eves must call an election sometime in the next 18 months) will now get a $75 rebate timed to arrive right before Christmas. And it’s not just consumers who will get a rebate; dozens of private energy retailers, who have spent the last year convincing clients of the wisdom of signing long-term contracts to lower their energy bills, will also get rebates. But that’s cold comfort for companies that are now hamstrung in their efforts to sign on any new customers.

One such operation, Toronto-based Ontario Energy Savings Corp., spent much of the day following the Eves announcement preparing to halt its electricity retail operations, according to Rebecca MacDonald, president and CEO of the Energy Savings Income Fund (TSX: SIF), which controls the energy retailer. “We have 140,000 customers that we will continue to serve, but I am not going to waste my time or my money trying to get new customers,” she says. MacDonald and her clients may be compensated for the losses they will incur for power purchases above the frozen rate, but there will be no compensation for the $200 million in market capitalization shaved from her company in the hours following the premier’s announcement, she says. “This isn’t how we are supposed to act in Ontario,” MacDonald complains. “This is how they act in China.”

It doesn’t seem too much to ask for the government to pick a single energy strategy. Either control the market and run it efficiently without a debt, or deregulate it and let it work as it should. Analysts are already warning that Ontario’s vacillation is going to cost consumers dearly. The rebates will create a shortfall of hundreds of millions of dollars in the first year alone. And worse, the rate freeze could produce the kind of rolling blackouts California saw last year when it bungled its own energy-market deregulation.

As anyone who has studied Economics 101 would know, the only way to drive energy prices down is to create an energy surplus, by either convincing people to use less or by building more capacity. Now, with prices frozen and the private companies running for the hills, neither of those solutions is likely. One way or another, Ontario consumers will be paying higher energy prices-either on their utility bills or through their taxes.

And don’t look for relief from the private sector. The Eves power debacle has made Ontario more radioactive than the core of the misfiring Bruce nuclear power plant when it comes to attracting desperately needed private power investment. “Ontario has lost out on a historic opportunity,” says Kevin Andrews, president and CEO of Toronto-based Corpfinance International Ltd., which arranges financing for capital-intensive power plants. Interest rates are at a 40-year low, making costly facilities cheaper to build. And while Ontario has some prime locations for potential plants, few companies are going to want to do business in a province that has demonstrated a willingness to back out of its long-term commitments. “It takes 20 to 25 years to pay off the loans for these projects,” says Andrews. “So you have to convince these companies that the market is going to be stable for that period of time.”

That may be asking a little much from a government that apparently can’t see beyond the next election. Maybe Ernie Eves should remember the old saying about standing in the middle of the road: you are going to get hit by traffic going both ways.