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Bottom line? Price of power is bound to rise?

By Murray Campbell, Globe and Mail
November 1, 2003

The Ontario government will use a range of varied-price mechanisms to encourage conservation and to ease the blow to consumers when it raises the price cap on electricity.

The Liberals are desperate to end what Premier Dalton McGuinty called the "completely unsustainable" fixed price of 4.3 cents a kilowatt-hour that was introduced a year ago, because it's creating a mountain of debt. They also need to reduce demand to have any hope of creating the price stability that's needed in order to fix Ontario's chronic energy shortage.

Energy Minister Dwight Duncan is expected to announce on Monday the framework for the new pricing regime he proposes to introduce in a month. So far, he is promising only "a regulated fixed rate . . . stable over time," but energy-industry observers and Liberal sources are pointing the way to the scheme likely to be adopted.

Predicting quite where the Liberals will land is a little dicey because the party has been all over the place on the electricity issue. At this point, however, it is expected that the government will keep in place the wholesale electricity market that was set up last year when the Progressive Conservatives flirted with complete deregulation. It will attempt to avoid the sensational price volatility that smashed the Tory plan by acting as a "default" to protect consumers from any unusual price swings.

So, what would the price be? Well, the average price since the wholesale market opened in May, 2002, has been about 5.8 cents a kilowatt-hour. This is why the former Conservative government spent about $700-million subsidizing the bills of the 53 per cent of the electricity market eligible for the price cap.

But this 5.8 cents does not reflect the cost of imported power, and industry speculation is that the real cost of electricity consumed in Ontario in recent months is about 6.8 cents a kwh. Pegging the price at that level would mean consumers would be paying nearly 60 per cent more for the hydro. That doesn't mean, however, that bills would go up by that amount; the commodity price represents only about 45 per cent of the bottom line in the utility bill.

The government will also give consumers a chance to reduce their bills. Initially, this means average users (about 1,100 kwh a month or less) will pay a base price with a premium attached to demand above that level. Power used during the peak demand periods in winter and summer is expected to cost more, to encourage conservation.

In the longer term, the installation of new meters will allow customers to reduce their costs, for example, by running dishwashers at off-peak hours. Measures will also be introduced to allow homeowners and, more crucially, industrial users to retrofit so energy is consumed more efficiently.

The natural-gas industry provides the handiest model for how electricity prices will be regulated. Gas is bought and sold on a North American wholesale market and can be subject to daily fluctuations. The Ontario Energy Board approves the rates charged by the gas utilities and also authorizes new pipeline construction. Every three months, the board reviews the price, and it has the power to correct earlier miscalculations.

The government believes a similar regulatory system would provide the price stability that the Conservative deregulation experiment notably lacked. It couldn't be completely parallel, however. There are only two major utilities in the natural-gas industry, while there are 90 players in the electricity industry. And while gas can be stored for periods of peak demand, electricity is consumed the instant it is produced.

It's possible, however, that a combination of a deregulated market dealing in long-term, fixed-price contracts combined with a realistic price cap could provide the sort of stability that would attract private investors to pony up the millions of dollars needed to build generation plants to ease Ontario's periodic electricity shortages.

But no fix is possible unless prices go up. Get used to it.