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Province's Power Exchange is a wolf in sheep's clothing
Date: 08-24-1998; Publication: The Toronto Star; Author: Robert Blohm

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The Toronto Star Province's Power Exchange is a wolf in sheep's clothing By Robert Blohm

The government's proposal to open Ontario's electricity market to competition and consumer choice won't result in the lowest possible electricity prices.

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 Exchange.

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 continuously fluctuate.

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.

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