The Municipal Electric Association Answers Some Questions About Industry Restructuring in Ontario

As the date for market opening draws closer, both large and small power consumers in Ontario are paying closer attention to the changes to the province's electricity system. In the February 2000 issue of their newsletter 'Circuit Breaker', the Municipal Electric Association published the following Q & A offering answers to some commonly asked questions. Some of this information may not be new; however, to those who have not been closely following the restructuring in our industry, the answers bear repeating. For more information on this subject, you can visit the MEA website at www.mea.on.ca.

Q: Why is the electricity industry in Ontario changing?

A: In October 1998, the Ontario government passed legislation -- the Energy Competition Act, 1998 -- to restructure the province's electricity industry. The changes to the electricity industry include:


Q: How will the new electricity system work?

A: Ontario is going from a monopoly-based electricity system to a competitive electricity market, in which electricity can be produced and supplied by any number of companies and sold by a variety of licensed retailers. Starting in March 2000, companies that have been licensed by the Ontario Energy Board will be able to contract with customers to sell electricity when the market opens in November 2000. Customers will continue to be served by their current electricity supplier (their local utility) unless they choose to change to another competing electricity retailer.

Local distribution companies (the local utility) will distribute all of the electricity in their service area. The local distribution company will also be required to sell electricity to customers within their service area, if those customers so wish. The electricity sold by the local distribution company will be sold at rates based on the electricity spot market prices and approved by the Ontario Energy Board.

Q: How will the changes affect municipal electric utilities (MEUs)?

A: For almost a century, Ontario's MEUs have been not-for-profit, publicly owned entities overseen by utility commissions made up of locally elected or appointed officials. MEUs have been responsible for maintaining local electricity distribution systems (i.e. the poles and wires), supplying electricity and offering related services to customers within their service territories.

MEUs were required to buy their electricity from the former Ontario Hydro, and customers were required to buy their electricity from MEUs. These former monopolies will end when the competitive electricity market opens in November 2000.

The Energy Competition Act, 1998 requires all municipalities to incorporate their MEUs as companies under the Ontario Business Corporations Act by November 7, 2000. Once incorporated, the new local distribution companies (LDCs) will operate on a commercial basis, with the option of earning a profit.
The new LDCs will still be responsible for maintaining the local distribution network that delivers electricity to customers. They will also continue to supply electricity to customers who choose not to sign a contract with an electricity retailer, or if the customer's chosen supplier defaults.

The initial owner and sole shareholder of the LDC will be the municipality. The municipality can choose to form one or more affiliated companies to competitively sell (or retail) electricity and energy products and services, or it can decide to sell off all or part of its ownership in the company.

Municipalities can also choose to acquire or merge with other utilities, or pursue joint ventures and leasing options.

Q: How will the changes affect electricity customers?

A: Customers will face the same types of choices as they have with gas and telephone companies. They will be able to buy electricity from a choice of electricity retailers (i.e. suppliers) and they will be able to select from a variety of service packages.

Q: What if customers don't want to switch suppliers?

A: The current provider, likely the local municipal utility, will continue to supply customers with power if they don't want to switch to another supplier.

Q: What will happen to electricity rates?

A: Even Ontario's Ministry of Energy, Science and Technology has acknowledged that there will be short-term cost pressures associated with moving to a competitive electricity market. It's been known since the introduction of the Energy Competition Act, 1998 that distribution costs would increase. These increases, however, were to be offset by reductions in costs in other parts of the system, especially from competition in generation.

There are new taxes on the distribution system that will increase distribution costs. While these taxes are to be used to pay off Ontario Hydro's debt, they do, nevertheless, still represent new costs to utilities. In addition, MEUs must incur new costs related to:
The Energy Competition Act, 1998 clearly contemplated such a return on equity. In fact, the Act gives the Minister of Finance the authority to calculate the taxes on a different basis if the utility tries to operate on a not-for-profit basis.

MEUs must be incorporated under the Ontario Business Corporations Act by November 7, 2000. Case law suggests that the directors of business corporations have a responsibility to enhance shareholder value. It will be difficult to hold down electricity rates in the short term in the face of these new costs. The hope is that rates will come down in the long term.

Q: Can municipal electric utilities absorb any potential increases in rates by using their accumulated assets?

A: In theory, utilities could borrow against these assets to artificially subsidize the rates, but this is not in keeping with the market-based competitive system set up by the Energy Competition Act, 1998.

Q: Can municipal electric utilities hold down any potential increase in rates by cost cutting?

A: The cost of running the local municipal electric utility is, on average, about 15 per cent of a customer's total electricity bill. About half of these costs are fixed. Although MEUs are continually looking to squeeze further cost savings out of their distribution systems to reduce rates to customers, the reality is that there is much more potential for cost savings in the generation of electricity, which will account for roughly half of a customer's total electricity bill. In other jurisdictions, the expectation has been that most savings would come from competition in generation.

Q: Should customers sign up with an electricity retailer now or wait until the competitive market opens in November, 2000?

A: Although electricity retailers will be starting to sign up customers in March, 2000, there is no deadline for making a decision on who your electricity supplier will be when the competitive market opens. Customers can take their time to shop around and compare offers before making any decision to switch suppliers.

Q: When will local utilities be able to tell customers what price they will be charging for electricity?

A: The specific rates that will be charged to customers have not yet been determined. They will be known closer to market opening, in November 2000. ET