News

The recent continent-wide heat wave stretched Ontario's electricity system to record high production levels of more than 26,000 megawatts - enough to light one Christmas tree lamp for every human being on the planet. It triggered requests for customers to cut back on avoidable use and raised concerns about service reliability and future prices

Today, the price Ontarians pay on their electricity bills reflects the full cost of providing supply. This has not always been the case. The disconnect between cost and price for most of the last century resulted in Ontario Hydro amassing a debt of over $25-billion - that's $2,000 for every man, woman and child in Ontario. Currently, a typical residential customer pays an additional $7.50-a-month toward this debt and all the taxes and profits of the Ontario Hydro successor companies - Ontario Power Generation and Hydro One - as well as all the taxes paid by Ontario's more than 90 local electric distribution utilities, are dedicated to paying it off.

Price subsidies were eliminated in Ontario with the introduction of a competitive market for electricity in April, 2002. Just six months later, subsidies to Ontario residents were reintroduced when prices were frozen so far below the real cost that a further $1-billion per year was added to the outstanding debt. The price freeze resulted from concerns that retail consumers were being exposed to the full volatility of wholesale market prices. Cost-based pricing was reinstated this past April but, this time, volatility was reduced by basing retail prices on the average wholesale market costs over a 12-month period.

While it's true that consumers will not see last month's high wholesale costs until next April, they will not see the much lower wholesale costs of this past April, May and June until next year too. All these costs will be averaged (present retail prices are based on a forecast that averaged the expected highs and lows into a blended price).

One problem with any averaging process is that consumers see the same price each month. They are unaware that the electricity they use in July has a bigger effect on next year's rates than their use in April, for example. In other jurisdictions, higher prices in periods of high demand have encouraged reduced use and, ultimately, lower prices for everybody. Long averaging periods do reduce volatility, but they also create bigger discrepancies between real cost and actual price on any particular day, week or month.

Choosing the averaging period is therefore a matter of balance. In natural gas, a three-month period has long served customers well and, starting next April, a six-month period will be used for electricity. Electricity costs are dictated by competitive market forces.

The competitive market introduced in April, 2002 restructured Ontario Hydro and removed the long-range planning role that it used to have. Now, the Ontario Power Authority (OPA), which is responsible for averaging costs, is preparing a 20-year plan that will identify the new generation and transmission facilities required as the economy grows and existing facilities reach the end of their useful lives.

This 20-year plan will build on a renewed commitment to conservation and demand management that is being spearheaded by the new Conservation Bureau that is also a function of the OPA. The province's commitment to conservation will be underpinned by the installation of "smart meters" at every customer location over the next five years. The plan also will incorporate small-scale and community-level generating facilities as well as traditional-sized generating facilities.

Public consultation phases of the planning processes are slated to begin in September and move through various steps into early next year.

In the interim, the OPA is moving ahead with projects that have already been identified as necessary. Contracts have been signed for the construction of 300 megawatts of small scale generation based on renewable energy sources including wind, landfill gas and water power. In addition, some 2,000 megawatts of natural gas fired generation has been contracted for construction. Negotiations are under way that will result in increased production from 1,200 megawatts of existing generation and bidding has begun for 1,000 megawatts of renewable sourced generation, and will be initiated this fall on a further 2,500 megawatts of generation, conservation and demand management projects. Together these projects represent commitments of up to $6-billion in new investment. A similar amount is also being invested to the refurbishment and restart of nuclear generating units idled before the ends of their useful lives by Ontario Hydro.

Most of these projects are being privately financed and market priced. This approach frees up Ontario's public financial resources for other government priorities such as health care and education. It also transfers risks from the public to investors - avoiding a repeat of Ontario Hydro's massive debt build-up.

Planning and construction takes time. People have come to expect electricity to be there when they want it at a low price. It's time to realize that it can only be there tomorrow, if we act wisely today and are willing to pay what it really costs.

Jan Carr is CEO of the Ontario Power Authority and former vice-chair of the Ontario Energy Board. David McFadden is chair of the National Energy and Infrastructure Industry Group, Gowling Lafleur Henderson, and chair of the Stakeholders' Alliance for Electricity Competition and Customer Choice.