Exploring the elusive hydro question.

Recent announcements by the provincial government on the fate of the coal-fired electricity-generating plants in Atikokan come on the heels of major layoffs taking place in the forestry industry, adding to an already precarious economic situation in northwestern Ontario. While there are many reasons for the decline in an industry that provides over 40 per cent of the jobs in this region, one that has been cited over and over is the increasing cost of energy. In fact, hydro costs in this region are now some of the highest in North America. In this article, I will attempt to put into perspective what is now becoming a Hydro Saga for the Northwest.

Ontario Hydro was built on the concept of providing power at cost to the people and industries of this province. This combination has fuelled the engine of the Ontario economy for over a century, helping make it the most prosperous province in the country. Environmental concerns, inflationary pressures, government changes and a host of other factors prompted a re-evaluation and a policy change. Ontario Hydro was split into separate business units and eventually started moving towards privatization.

The deregulation of the electricity market was part and parcel of the previous provincial government's plan to privatize what once was a monopoly. This change was not only driven by the government's philosophical bent towards privatization, but also by the thinking that permeates large sector industries and that has led to deregulation in the whole field of energy (oil and gas industries).

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This thinking is based on the premise that competition and market forces alone will maintain a balance between supply and demand and produce efficiencies sufficient to provide a reasonable rate of return to investors while maintaining competitive rates to consumers and industry. While this ideology sounds great in theory, the reality is quite different. To dispel the notion of a well-balanced free energy market environment, it is sufficient to point out to the sky-rocketing cost of natural gas and gasoline all over North America. And that's not to mention the price fixing fiasco in the hydro market in California just a few years ago that almost bankrupted one of the richest American states.

The former provincial government found out the hard way that such a move was full of dangers for both the consumer and the economy (not to mention their own political future), and froze the rates once prices went through the roof right after deregulation was implemented. The new provincial government seems to have learned only part of the lesson, and in its eagerness to appeal to the environmentalist-minded voters last month announced that it is moving ahead with the shut down of the coal-fired generating plants by 2007.

As a budget co-ordinator for Ontario Hydro-Northwestern Ontario Region from 1987 to 1995, I watched a sequence of provincial governments (Liberal, NDP, Conservative, and now Liberal again) take this crown corporation from its stated objective of delivering power at cost to an instrument of social policy, to full deregulation, and now to a mix of private-public utilities. Each new vision supposedly implemented to correct the flows of the previous one. The most recent based on the premise that a mix of regulated and free-market prices will provide the best protection for the consumer.

So what does this mean for the average consumer and business who wants nothing more than a stable and fair pricing structure? According to a market surveillance report by the Independent Electricity Market Operators (IMO), Ontario's electricity system is facing insufficient capacity and ability to supply power at a time of growing demand. If this situation is not corrected quickly, "Ontario could be facing even more serious reliability problems in the near future, leading to the possibility of supply interruptions and continued upward pressure on prices during period of peak demand." In fact, this summer industrial and commercial users in northwestern Ontario have been paying exorbitant prices (at imported costs) due to extremely high peak demand down east, while this region has been producing more power than it needs. And they want to shut down fossil fuel generation that provides 26 per cent of the total supply in Ontario? What will that do to prices in the future?

While the debate on whether Hydro One should remain completely in public hands or move towards privatization will continue, the mix of supply and demand as well as other global changes will be shaping electricity and energy markets for years to come. The way this province and region respond to such events will also have serious implications for our economic wellbeing. In the next article I will highlight the proposed changes and its implications for northwestern Ontario.

Frank Pullia is a Certified Management Accountant (CMA), Principal of Pullia Accounting & Consulting and a former city councillor. He can be reached at 767-6579 or via e-mail at [e-mail]