| Province's Power Exchange is a wolf in sheep's clothing By
The government's proposal to open Ontario's electricity market to
competition and consumer choice won't result in the lowest possible
The public's concern about high electricity prices is justified,
because a government-owned offspring of Ontario Hydro will continue
to ``operate' ' the market regardless of who participates. The
Harris government is letting technology junkies from Hydro, who
brought us the $26 billion nuclear fiasco, actually design and
``operate'' their latest expensive technology fad, called the Power
Similar market-opening attempts elsewhere in the world failed to
lower electricity prices. Repeatedly the electric utility managers
who controlled the old system use their knowledge and vast resources
to get control of the new system. Accordingly, Ontario Hydro's
current Central Market Operator will become the government's
proposed Independent Market Operator with little change in
management, staff or operation. It will operate the Power Exchange,
which is a market for moment-to-moment electricity at prices that
Under the government's market opening plan, electricity consumers
and electricity generators are supposed to be free to deal with one
another regardless of location and regardless of who owns the wires
carrying the electricity. As in a stock market, bulk buying and
selling would normally be done either through the Power Exchange or
over the counter. Since consumers prefer a price that doesn't
fluctuate, the Power Exchange would normally be used just for
last-minute purchase and sale of power not already contracted for
under long-term fixed- price contracts outside the exchange.
However, the government plan would force as much as possible of the
bulk buying and selling of electricity through the Power Exchange,
which is but the reincarnation of Ontario Hydro.
This is bad news for consumers because central power exchanges
are notorious for upward manipulation of the electricity price by
generators who ``set'' the exchange price. On power exchanges,
buyers have no buying power: They buy the power from the exchange,
not from individual generators. Annual Power Exchange volume could
be as high as $4 billion and screw-ups could be worth hundreds of
millions a year. Long-term, over-the-counter or bilateral contracts
for electricity from generators outside the exchange support the
building of new plants and the market for green power. Too much
trading on the power exchange will mean eventual shortages both of
generating plants and of transmission lines, and thus even higher
prices. This has been demonstrated time and again, in England,
Alberta, New Zealand and the midlantic U.S. states. Add to that
lower environmental quality.
The government will force the Power Exchange on consumers in
three ways. First, it will require that all electricity through
congested transmission lines be bought and sold over the Power
Exchange. No one may have a contractual or property right to
priority dispatch of specific electricity, say green power, through
a congested transmission line.
Second, the province's 270 municipal utilities (MEUs) will be
required to buy on the Power Exchange the ``default'' supply of
electricity for the vast majority of households and commercial
establishments that don't initially elect to buy power from an
``aggregator.'' (An aggregator supplies many small consumers with
power it purchases in bulk for them at a long-term fixed price.)
MEUs want, instead, to be allowed to band together to buy this
default power directly from generators at a fixed price. That would
offset the market power of the 80 per cent of generation still to be
owned and operated by the provincial government.
Third, all consumers will pay for a convoluted province-wide
billing system to support a scheme of purely financial contracts
designed to fix the price of electricity that the MEU would always
supply from the fluctuating-price Power Exchange. Financial
contracts are riskier and more expensive than long-term contracts
for physical power. By making all consumers pay for this financial
infrastructure, the government will discourage the building of the
metering infrastructure that aggregators or the MEUs need in order
to sell to consumers physical power that they buy outside of the
Power Exchange. Meanwhile, the government will pay for the metering
infrastructure for large industrial consumers, which will take all
the best, lowest, fixed-price deals possible on the physical
long-term market. Big dogs will eat first.
A legislated rate freeze and environmental requirement is not the
way to assure Ontarians the low price and environmental benefits of
an electricity market. It's the government's proposed market
mechanism that's at fault.
The Power Exchange is a wolf in sheep's clothing.
The Power Exchange is Ontario Hydro all over again: purveyor of
high prices and environmental danger.
Robert Blohm is an investment banker operating in
Toronto and New York. He was an adviser to Donald Macdonald's
Advisory Committee on Competition in Ontario's Electricity System.
Robert Blohm, Province's Power Exchange is a
wolf in sheep's clothing. , The Toronto Star, 08-24-1998.