By David Morris

Input Costs
Electricity Deregulation Could Be A Shock

People who use significant amounts of electricity could get a shock from their electricity bills in the near future, according to Graham Henderson, Director of Business Development and Market Strategy for Ontario Hydro Energy Inc. Mr. Henderson told those in attendance at OCPA’s Annual Convention that major changes are coming as the Ontario government is about to deregulate the electricity market in Ontario. The date for deregulation has not been announced, but when it does occur, the days of simply buying electricity from Ontario Hydro or a local utility without a second thought (other than that it costs a lot) will be gone. In the future, electricity users will have to decide whom to buy electricity from and at what terms - decisions that could have a major impact on the size of their electricity bills.

In the past, Ontario Hydro had a near monopoly on all aspects of the electricity business in Ontario. The power was generated in Hydro’s plants; it was transmitted through their lines; and for farmers and other rural customers, it was sold through Hydro’s marketing division. All aspects were regulated by the Ontario Energy Board (OEB) and there was just one price line on the bill. In the near future, the industry will be ‘unbundled’. Electricity generation, delivery and retailing will all become separate businesses. Generation and retailing will be deregulated and open for competition. Electricity delivery will remain a regulated service industry. On your electricity bill, there will be separate lines listing charges for electricity, delivery, administration and payment of the debt left outstanding from Ontario Hydro.

The generation business will be open to any company willing to make the investment and able to meet the technical and safety requirements. Generating companies will be able to sell their electricity at whatever price the market will bear. Mr. Henderson expects that the price of electricity in Ontario will increase following deregulation, in part because the price of electricity will be heavily influenced by the price of natural gas. Almost all new generating stations will be powered by gas and they will have a choice of using the gas they own to generate electricity or of selling it to another user of gas. Mr. Henderson noted, however, that the biggest effect on electricity bills could well come as a result of more volatile prices after deregulation.

After deregulation, electricity will become a commodity, traded on an open market, like corn or soybeans. Because electricity can’t be stored, the price at any given time (known as the spot price) will be based on the supply and demand picture at the moment the power is being used. The spot price will vary hourly, 24 hours a day, 365 days a year. That may not sound all that bad except for the fact that Ontario will become part of the same market as the eastern seaboard of the United States. Thus, our price will be influenced by factors that have nothing directly to do with Ontario, such as the weather in New York city. If, for example, a big power station in Labrador goes off-line when New York is experiencing a heat wave, the price could skyrocket temporarily. But people who happen to use a lot of power during a month when the price is high, will probably want to be sitting down when they open their electricity bills.

If you do not make other arrangements, the utility company from whom you are receiving power now will continue to be your supplier. Utilities will be required to deliver electricity at cost, without marking it up, except for administrative costs. If your farm is equipped with an interval meter (one that records power consumption on an hourly basis), your bill will be calculated from your electricity usage and the spot prices at the time you were using it. Otherwise, your bill will be based on a weighted average price for the load (usage) profile for the entire utility. Either way, you will become vulnerable to the continual changes in the price of electricity. Judging from the experiences of areas that have been deregulated, the price is expected to be very volatile. During 1999, the price for electricity on the spot market in the U.S. ranged from 4 cents to $1.00 per kilowatt-hour. Most utilities will offer equal-billing plans, but there will be year-end adjustments as well so that the full cost of the electricity is covered.

You can protect yourself from this volatility by contracting to purchase electricity at a fixed price from one of the electricity retail companies approved by the OEB. These companies will purchase electricity in bulk from the generating companies and resell it to end users. Signing a contract with a retailer will remove the uncertainty about what you are going to pay, but will likely result in a higher price overall than if you were to take your chances on the spot market.

Mr Henderson concluded by listing several questions that all users of electricity should ask themselves as they determine if it will be advantageous to contract with a retailer or even to generate their own electricity:

• What proportion of your operating costs does electricity represent?

• How much will you be affected by a price increase?

• How much will you be affected by price volatility? (Can your cash flow cope with large variations in the size of your electricity bill?)

• How does your load profile compare with that of the utility company as a whole? (Do you tend to use a lot of power at times when the general demand for power is likely to be high?)

• What premium are you willing to pay for a contract protecting you against price volatility?

Additional information about deregulation of the electricity market in Ontario can be obtained from your power company or from the following websites:

1. The Ministry of Energy, Science and Technology:

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