Ontario Hydro and the Ontario Electricity Industry

We still get calls asking if we are Ontario Hydro, or if we buy our power from Hydro One, or if we generate our own power or have power purchase contracts.  This confusion is understandable.  For new residents or visitors from elsewhere, the structure of the electricity industry in Ontario is unusual and different.  And for longer-term residents of Ontario who do not care about the intricacies of electricity in Ontario but just want the power on and a reasonable bill, which is likely the vast majority, keeping track of the changes is often beyond their level of interest.

But as you are reading this, now is the time to be enlightened.

Prior to the passage of the Electricity Act, 1998 the electricity industry in Ontario consisted of Ontario Hydro and over 300 local distributors (LDCs).  Ontario Hydro generated most of the electricity, transmitted it around the province, managed the grid, regulated the LDCs, distributed power to most rural areas and generally managed the industry for the Province.  The LDCs distributed electricity to urban areas and were Public Utility Commissions designed to deliver power at cost.

With the Electricity Act, 1998, Ontario Hydro was broken up into five entities.

1. Ontario Power Generation (OPG) took over all the generating activities of Ontario Hydro.
2. Hydro One took over all the transmission and rural distribution activities of Ontario Hydro.
3. The Independent Electricity System Operator (IESO) took over the grid management functions of Ontario Hydro.  It was also responsible for the newly created electricity market.
4. The Ontario Energy Board (OEB), which had previously just managed the gas industry, took on an expanded regulator role for electricity.
5. The Electrical Safety Authority (ESA) was created to regulate from a safety perspective.

There were a number of reasons why Ontario Hydro was broken up.  In the eyes of many it had become bloated; a government agency with no cost controls and no cost/benefit perspective in its operations.  It was felt that its size hindered competition and, with the cost of electricity rising, competition was viewed as a means to try control these rising costs; primarily in the cost of generating electricity. Having competition was also needed if there was to be a true market which was one of the objectives. It was also felt that with its legacy generation it stymied innovation and prevented the creation of local solutions to local energy problems.  With competition and innovation local business champions could emerge fostering growth and jobs.  Finally, it was hoped breaking Ontario Hydro up would make the industry less political.

The resulting industry structure is unusual in a number of respects:

• The industry has the structure of a market-driven economy but all the major pieces are still largely owned and operated by the Government.  There is private sector involvement but it is integrated in, and largely subservient to, the Government entities.  Most other electricity sectors are either dominated by private sector companies or have the single Ontario Hydro style entity.

• The LDCs are highly confined in their operations.  The high number of LDCs in Ontario is not necessarily unusual; there are around 2,000 in the USA.  However, LDCs elsewhere typically have the right to enter into their own power purchase agreements.  Many LDCs elsewhere will sole source their electricity as that makes financial sense but they still have the option to do otherwise.  Ontario LDCs must purchase all their power through the IESO.

• The market price is largely meaningless though there is still a market.  Almost all generation is on a fixed price contract or has a price negotiated with the Government (directly or through the OEB).  The market price therefore has no meaning to these suppliers.  This can be seen with the Global Adjustment (largely the difference between the set prices and the market price) which has been 90% of the cost of electricity in some months.

In my opinion, some critical mistakes were made with the Electricity Act, 1998 and these mistakes are still affecting us today.  I should note that while this is being presented with hindsight, these mistakes were noted at that time.

• A fixed price was not created for residential and small commercial customers.  This was corrected in a few years with the RPP (Regulated Price Plan) rates but by then the damage had been done.  Most customers want stability with their utility bills and the lack of a fixed price created considerable uncertainty.  The Ontario Hydro break-up was also done at a time of rising rates so customers associated the rate increases with changes.  Unfortunately, as part of fixing this error, the Government took its first steps in backing away from a true electricity market; and this market has never recovered.

• Ontario Power Generation should have been broken up more.  OPG still generates around 50% of Ontario’s electricity which makes it the dominant generator by far.  This prevents competition and gives the Government a crutch they can turn to whenever they want an easy solution.  I am not necessarily arguing for further privatization but the nuclear and hydro arms of OPG could have been separate companies.  OPG should also not have been allowed to purchase a number of fossil fuel plants recently as this reduced competition.  Most of OPGs generation has a set price so, like Ontario Hydro, OPG gets paid on a cost-plus basis rather than a market price.

• Hydro One should have been split between its transmission and distribution rates.  These are two very different businesses and have been separated in some other jurisdictions.  The performances of these two businesses under Hydro One have also been very different with distribution rates rising much more than transmission rates.  I would also argue that Hydro One distribution could have been effectively broken up into a number of smaller distribution companies.  As it was, its larger size allowed Hydro One to purchase too many of the smaller LDCs with no discernable rates benefit from savings and a rates issue from some of the purchases the OEB is still trying to solve.

• There is no true force to counteract the regulators.  Regulators exist to regulate so, if left unchecked, will create more and more regulation.  As almost all the major participants in the Ontario industry are also part of the Government in one form or other there is no independent body that can speak with authority against any regulatory over-reach.  Jurisdictions with large business interests or a single integrated provider have these authoritative counterweights.

There are those that argue that we should put it all back together again as a 21^st century Ontario Hydro.  I am not in favour of this but I can understand the frustration with the existing structure.  My personal preference would be to go back to the original intentions of the Electricity Act, 1998 with a market driven generation sector and with the mistakes noted above corrected.  However, I realize neither the political will nor the public demand exists for this right now.