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What we need is to decide whether the pricing system for industrial consumers makes sense going forward. (Fred Lum/The Globe and Mail)
What we need is to decide whether the pricing system for industrial consumers makes sense going forward. (Fred Lum/The Globe and Mail)

ADAM WHITE

Ontario’s surging electricity prices endanger domestic manufacturing Add to ...

Adam White is the President of the Association of Major Power Consumers in Ontario

Mexico and other competing jurisdictions stand to capitalize from the monstrous megawatt rates Ontario imposes on manufacturers.

As an advocate for some of Ontario’s largest manufacturers, we fear the province’s long-term electricity plan is placing too high a financial burden on industry.

Our manufacturers are currently paying excessively high electricity rates for power the system doesn’t need; this surplus energy is then sold to our competitors in neighbouring jurisdictions (Quebec, New York, Michigan, Illinois) for a heavily discounted price. The math just doesn’t make sense.

Some of the big industries – pulp and paper mills, steel smelters and the like – have been able to control costs to a certain extent by shutting down production during the electricity system’s peak hours. But the majority of industrial customers have no options, no choice of electricity supplier and no ability to control their utility costs.

Energy is a significant cost for these companies. In their highly competitive environments, these firms cannot afford to raise prices to cover higher electricity costs. They operate with very tight margins. The effect of flat prices for their goods, and sharply rising energy costs, is grim. Profit disappears.

This trend results in two outcomes. They can close, further opening the door to suppliers south of the border. Or they can move to the United States or Mexico.

If this happens, the tug of suppliers moving south might prove irresistible to the large auto makers, who will find Canada a less and less attractive place for reinvestment or new investment. When they go, so go the customers for Ontario’s steel industry, and so on. It is a grim scenario, but a plausible one.

What we do need is to decide whether this pricing system makes sense going forward.

Electricity costs in Ontario are unlikely to ease. The province’s long-term energy plan calls for massive investment to prolong the lives of the Bruce and Darlington nuclear stations, starting in 2016, and lasting for 15 years. The cost, in multiple billions, will be borne by Ontario electricity customers.

The price for this regulated and contracted power is often higher than the wholesale market price. The generators must be paid, but the market is not producing adequate revenue to cover the payments.

To raise the needed revenue, Ontario has devised a mechanism called the “global adjustment,” a surcharge to the market price. For homeowners, it is invisibly blended into their rates. But businesses see it as a charge on their energy bill. It is visible, if not transparent. Not only does this added-on “adjustment” often more than half the energy bill, the amount is projected to rise and keep rising.

There were reasons why the system evolved in this way, and now is not the time to debate whether that evolution was wise or foolish. It is what we have.

In 2010, when industrial customers in Ontario were paying an average of 8.5 cents a kilowatt hour for electricity, the government created a rate class for large power users that rewards them when they reduce demand during peak system hours. This policy has proved highly effective in significantly driving down peak demand – avoiding the need for polluting and expensive fossil fuel generation, and reducing overall energy costs for all customers.

The “Class A” average rate for these large users, which includes commercial and institutional energy consumers as well as industry, has risen to 9.7 cents a kilowatt hour in five years, an increase of 14 per cent. But for “Class B” industry, such as auto-parts companies, sawmills and wood-product manufacturers, the rate has increased to 12.1 cents a kilowatt hour – an increase of 42 per cent.

The drop in the value of the Canadian dollar is providing some relief to Canadian manufacturers. But exchange rates can be volatile. And a low dollar doesn’t excuse the need for viable economic policy for industry and the electricity sector.

In the face of this uncertainty, we have the ability to exert significant control over domestic electricity pricing. It is time to ask: Is our current track the right one? Or is it putting our industrial sector at greater risk?

Our public policy-makers too often focus on the needs of energy producers in devising energy policy. But most Canadians, and Canadian businesses, are energy customers. As policy-makers in Ontario and elsewhere turn their attention to the energy sector, we need to make sure that they keep the interests of Canadians in mind.

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