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Date: Thu, 15 Nov 2001 09:20:04 -0800 (PST)
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Subject:      Ontario Treads Cautiously Along Its Toilsome Path Toward
             Deregulation
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November 15, 2001=20



Ontario Treads Cautiously Along Its Toilsome Path Toward Deregulation



By Will McNamara
Director, Electric Industry Analysis






[News item from Reuters] Ontario, Canada's plan to open its electricity mar=
ket to competition could happen earlier than the May 2002 target date, but =
the earlier timing is contingent upon the completion of a key report, a spo=
kesperson for the province's energy minister said earlier this week. "It's =
opening. We're just waiting to set a date and full steam ahead," said Chris=
tine Smith, a spokeswoman for the Ministry of Energy, Science and Technolog=
y. Ontario's government will make the decision regarding the start date for=
 competition once the readiness report, which documents the preparedness of=
 all the agencies involved in the privatization process, is completed and r=
eviewed by both Energy Minister Jim Wilson and Premier Mike Harris.=20

Analysis: The fact that the start of electric competition in Ontario, Canad=
a's most populous province, may actually be on the near horizon is a major =
development, considering that deregulation in the region has been in the wo=
rks-and has encountered several delays-since 1998. Shaken by the fiasco of =
direct access in California, along with the sudden price spikes that occurr=
ed in Alberta (Canada's only fully opened market), officials in Ontario hav=
e been rather reticent to proceed with dismantling the monopoly system in t=
his region. However, it now appears that Ontario is finally moving forward =
with its deregulation plan, despite concerns from some of the major players=
 in Canada that officials in the region have orchestrated what may become a=
nother troubled experiment in electric deregulation.=20

Before discussing the current deregulation plans in Ontario, it is necessar=
y to establish some key points about Canada as a whole, the province of Ont=
ario in particular and trends within the energy market of the Great White N=
orth. From a national perspective, electric deregulation in Canada is occur=
ring on a province-by-province basis (much like the United States is deregu=
lating its market on a state-by-state basis). At this point, only Alberta h=
as deregulated its electric market, which occurred in January 2001. Beyond =
Ontario, none of the other Canadian provinces (British Columbia, Manitoba, =
New Brunswick, Newfoundland, Nova Scotia, Prince Edward Island, Quebec, Sas=
katchewan, or Yukon) have taken any definitive steps toward deregulating th=
eir electric markets and instead are approaching deregulation from a "wait-=
and-see" perspective. Part of this reticence toward deregulation among othe=
r Canadian provinces besides Alberta and Ontario relates to the generally l=
ow energy prices across Canada and the fact that the regions within the nat=
ion are vast and rather isolated from each other (thus making the issue of =
transmission interconnection a challenge). Ontario is an exception to this =
general rule, as the province has experienced relatively high prices and is=
 interconnected with other provinces and the United States.=20

As noted, Ontario is the most populous Canadian province, the home to 11 mi=
llion people with an average power usage of 155 terrawatt hours a year, and=
 representing a $10-billion electric market. The three main utilities in On=
tario are Ontario Power Generation, the former Crown-owned utility that was=
 formed by the replacement of Ontario Hydro Services Company with separate =
commercial companies in April 1999 and currently controls a total generatin=
g capacity of approximately 25,800 MW; Ottawa Hydro, which is owned by the =
city of Ottawa; and Toronto Hydro, which was created as a result of the con=
vergence between six utility companies serving Toronto. Toronto Hydro consi=
sts of a transmission and distribution unit and an energy services company,=
 but owns no generation of its own. Of the three, Ontario Power Generation =
has the market share in the province, reportedly serving about 85 percent o=
f Ontario's power market.=20

Deregulation of Ontario's natural-gas market took place in the late 1980s. =
Following plans that had been in the works since at least 1998, electric de=
regulation in Ontario was originally scheduled to begin in November 2000, a=
lthough it was postponed another 18 months due to concerns from officials a=
fter witnessing the well-documented problems in California. Energy Minister=
 Jim Wilson reportedly was also concerned about Alberta's experience with e=
lectric deregulation. Competition in Alberta's wholesale and retail power m=
arket began on Jan. 1, 2001, a time at which wholesale prices for natural g=
as were staggeringly high. High demand and short supply in Alberta caused r=
ates in the province to immediately double upon the onset of deregulation, =
a development that has naturally given great pause to other Canadian govern=
ments. Natural-gas and electricity prices in Alberta have since fallen dram=
atically, as elsewhere in North America, but not before the Alberta governm=
ent was forced to give hefty rebates to customers to compensate for the sha=
rp increases.=20

Under Ontario's evolving deregulation plan, retail markets will remain unde=
r the oversight of the Ontario Energy Board, the provincial power regulator=
, and are scheduled to open at the same time as wholesale markets. Under th=
e retail system, customers will have the option of arranging their electric=
ity purchases directly from suppliers at fixed-price contracts, or having e=
nergy purchased for them by distribution companies, agents, brokers, or mar=
keters at fluctuating prices. Most reports indicate that Ontario is well po=
sitioned to open its market to competition, at least from a supply perspect=
ive; in fact, Ontario government officials have claimed that the province h=
as adequate power supply, fueled mostly by hydro and nuclear energy, along =
with planned investments in new generation. However, other observers have c=
laimed that the delay in the start date for competition in Ontario is servi=
ng as a deterrent for new generation investments in the region. Reports fro=
m earlier in 2001 indicated that Ontario will need an additional 1,000 MW o=
f generation in addition to its existing capacity of 26,000 MW to meet dema=
nd, and only one 450-MW plant had been officially announced.=20

In addition, despite the assurances from the government, some companies hav=
e claimed that the deregulation policy outlined by the Ontario Energy Board=
 is fundamentally uncompetitive. For instance, one company that appears to =
have very little interest in the new opportunities in Ontario is Calgary-ba=
sed TransCanada Pipelines Ltd., Canada's largest natural-gas pipeline compa=
ny and a huge player in the country's regulated marketplace. One of the key=
 criticisms that TransCanada officials have raised is that the Ontario gove=
rnment is implementing a policy in which the bulk of Ontario's high-quality=
 generating assets will remain controlled by Ontario Power Generation, leav=
ing only undesirable plants on the auction block. In other words, even in a=
 deregulated market, Ontario Power Generation may continue to hold the mark=
et share of generation in Ontario. TransCanada claims that this approach wi=
ll diminish investment interest in Ontario and do little to entice new gene=
rating companies from entering the province. TransCanada, which has previou=
sly made acquisitions of natural-gas fired plants in Alberta and the northe=
astern United States, does not think that the province will offer a very co=
mpetitive market and appears to have little interest in moving into the Ont=
ario electric market. Note that in mid-October, Mirant Corp. (NYSE: MIR) an=
nounced that it had entered into an agreement to purchase the majority of t=
he gas marketing business of TransCanada, making it the largest natural-gas=
 marketer in Canada and the largest natural-gas exporter to the United Stat=
es.=20

Under the Ontario Energy Board's deregulation plan, Ontario Power Generatio=
n must sell or lease 4,000 MW of its non-nuclear power within 42 months of =
the opening of the Ontario market. Currently, Ontario Power Generation owns=
 9,700 MW of fossil-fuel capacity; 8,728 MW of nuclear power; and 7,309 MW =
of hydroelectric power. Obviously, the governmental mandate regarding the d=
ivestiture leaves the bulk of the province's generating capacity under the =
control of Ontario Power Generation, which is a major point of contention f=
or potential competitors.=20

It is important to note that the office of Ontario Energy Minister Jim Wils=
on does not share TransCanada's perspective. In fact, a spokesperson for th=
e office said generation assets such as the Mississagi hydroelectric system=
 and the gas-fired Lennox plant in southwestern Ontario, both of which Onta=
rio Power Generation will be divesting, represent very valuable assets that=
 should be a desirable way for companies such as TransCanada to enter the d=
eregulated market. Also note that TransCanada has expressed concerns only a=
bout opportunities in Ontario's electric market, and the company already ha=
s rather extensive gas-pipeline investments in the province. Nevertheless, =
enabling the opportunity for new companies to gain generating assets curren=
tly owned by Ontario Power Generation is a key factor to the success of Ont=
ario's deregulated market.=20

Moreover, Ontario inches ever closer to a competitive electric market, but =
a good number of concerns about the province's plan for deregulation remain=
 unresolved. There is great anticipation for the report that is expected sh=
ortly from the Ontario Energy Board, which may specifically address the div=
estiture policy for Ontario Power Generation that has troubled companies su=
ch as TransCanada. Certainly, there is great hope that no further delays of=
 the deregulation start date in Ontario, and that province officials either=
 maintain or accelerate the May 2002 start. Just as Canadian officials have=
 closely watched the move toward deregulation in the United States, U.S. co=
mpanies continue to monitor Canada's slow, province-by-province progression=
 toward competition. As noted, Mirant Corp. already has gained a market edg=
e in the natural-gas sector of Canada by acquiring the assets of TransCanad=
a. Duke Energy, Calpine Corp. and Devon Energy have also penetrated the Can=
adian natural-gas market with pending acquisitions of Westcoast Energy, Enc=
al Energy and Anderson Exploration, respectively. The next horizon for the =
Canadian energy market is electric deregulation, and industry eyes remain o=
n Ontario as the only Canadian province that is following Alberta into elec=
tric competition.=20


An archive list of previous IssueAlert articles is available at
www.scientech.com <http://secure.scientech.com/issuealert/>=20


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