It's a question that our organization, AMPCO, is now asking its members. And we're dedicating a lot of time and energy to finding the answers.
Our organization represents the largest industrial consumers of electricity in Ontario. Our members spent more than one billion dollars on electricity in 1997. That's more than 16 per cent of Ontario Hydro's primary energy sales in Ontario.
With 66 members operating in more than 100 locations across the province, we are a very diverse organization. You will find a wide range of resource, manufacturing and processing industries under the AMPCO banner.
We are major employers, as well as major power consumers. AMPCO companies provide direct employment for some 100 thousand people and indirect employment for another 300 thousand. We are also major contributors to Ontario's economy, with estimated sales of more than $60 billion a year in 1995.
Despite our diversity, AMPCO members have very important things in common:
As a result, we have a vested interest in the restructuring that is going on in Ontario today.
To this end, we at AMPCO have played a major role in helping the Ontario government come to terms with the idea of a competitive market and developing the current plans for creating that market.
We helped create a broad coalition, the Stakeholder's Alliance, to support lobbying and public education efforts. In fact, it was the S.A.C. that put this issue on the government's agenda.
We developed and presented detailed proposals for market design and operation, based on studies of competitive market operations around the world.
And, we have acted as a major conduit between industry and government . . . giving the private sector a forum for involvement, a source for information and a powerful voice for change.
AMPCO's strength is that we really do our homework before making some very specific recommendations to the government.
And when you compare the AMPCO list of proposals with the recommendations developed in the government's White Paper, you'll see how close we came to getting what we wished for . . .
We recommended that Ontario Hydro's retail units be amalgamated with the Municipal Electric Utilities, and the White Paper does support that concept.
We suggested that a separate company was needed to operate the monopoly functions of transmission and distribution, and that's just what the White Paper said.
However, we thought, based on international experiences and studies of the market place, that generation should be broken up in at least five companies. This recommendation does not appear in the White Paper or Bill 35.
I'll return to this point in a moment, but let's first celebrate what the government has done to this point and recognize how well it has responded to the needs of consumers, including the large industrial users we represent. Our members will be able to negotiate with different suppliers to achieve the best prices possible, just as they do with other operational input expenses.
This is the empowering freedom of competition!! This is what we wanted and all consumers in Ontario will have this same opportunity.
However, as I mentioned a minute ago, AMPCO is concerned that the White Paper and Bill 35 fail to adequately address the issue of market power and do not include a provision for the break-up or divestiture in the area of power generation.
This, in our view, is the one area where the White Paper fell short of a practical design for a truly open market. Instead of true competition in this area, we will have one enormous generating company - Genco that could manipulate prices, and act as a barrier to new market entrants and investment in the electricity sector.
It will own more than 90 per cent of the province's generation capacity. It will supply more than 80 per cent of the province's demand. It will be the next best thing to a monopoly, and we strongly believe that the government has left the door open to serious market power problems down the road.
This is not just our opinion. The government's own Market Design Committee came to the same conclusion after months of intensive study, including an international conference in May 1998 that drew experts from around the world. At this conference a clear consensus was reached that divestiture was the only sensible way to prevent a dominant player from using its market power to raise prices or reduce competition.
To quote from the MDC's second interim report, "If left to operate without constraints, Genco would have an intolerable degree of market power."
Again, to quote from the MDC report, "Both in principle and in practice, an electricity sector with multiple generators having reasonable market share requires the least amount of regulatory intervention in the market, and provides market participants with the greatest degree of certainty that the market is truly competitive."
Unfortunately, that option has been ruled out, so the Committee has done its best to find alternatives, including the likely use of vesting contracts on most of Genco's baseload generating capacity.
It may well be that Ontario will follow in the footsteps of many other jurisdictions and learn only from experience that divestiture is the path to follow.
The experiences of other jurisdictions which have gone before us show that the best way to avoid serious market power problems is by careful market design. The United Kingdom did it poorly and has paid the price. The State of Victoria in Australia did it well and has reaped the benefits. And the State of California is forcing its three biggest utilities to divest their generation assets to avoid market power problems.
Instead of removing this potential landmine, the government is proposing an exaggerated role for the regulator of the new market place, the Ontario Energy Board.
We have several concerns with this, including the fact that the Board may be asked to do a job that falls under federal competition policy and is beyond provincial jurisdiction. We're also concerned about how much of a role stakeholders will be allowed in the redesign of the OEB for its new responsibilities. After all, a market place must be able to have complete faith in the fairness and efficiency of any regulatory body.
There is one last point of concern from our perspective - the issue of stranded debt.
Depending on whom you listen to, the debts left behind by a re-organized Ontario Hydro are either a monstrous millstone around the taxpayers' necks, a huge impediment to more competitive prices, or no problem at all.
We think the truth lies somewhere in the middle, and that the government will have to manage this issue carefully to avoid saddling energy consumers or the general public with excessive costs. So far, Queen's Park has been moving VERY cautiously towards defining how much residual stranded debt exists and how it will raise the money to service those debts, never mind pay them off.
It's one of the many issues AMPCO is not only monitoring closely, but also involved in addressing by working with the province through various committees.
Our real work is just beginning. We are moving from the lobbying phase, where our main focus was on pushing for competition, to the transition phase, with a new emphasis on designing the market place and determining how competition will work.
We're already dealing with the detailed design of the market structure, the evolution of the electricity industry as it adjusts to that market, and the gaps in the energy bill that created the market.
In other words, the ship has finally left the harbour. Now, we've got to sail it!
So, we must continue to be heavily involved in helping guide the government's decisions on these issues. There are two AMPCO representatives on the Market Design Committee, and representatives on each of the MDC's technical sub-panels. As well, our former Chair is serving on the Energy Minister's own Electricity Transition Committee.
The other half of our work is directed towards our own membership, towards helping prepare them to face this new market paradigm and towards helping prepare them to participate fully in its creation.
We're only a couple of years away from the biggest change in the electricity sector since they put the first generator under Niagara Falls.
We are moving from a highly regulated, stable environment with predictable prices and physical transactions . . . to a competitive market characterized by volatile prices and financial transactions.
Success, indeed survival, in this new world will require us to change our paradigm of energy procurement. Buying electricity will no longer mean just signing the invoice. It will mean managing the procurement of electricity as a commodity in a competitive market place.
In other words, it's time to sit down and take a detailed, honest look at your organization's energy requirements, and your ability and willingness to risk some stability of supply for a chance of lower prices.
Let me warn you now, this is not as easy as it sounds.
We must start to prepare yesterday. We can't be like those companies who didn't worry too much about the effects of the year 2000 on their computer systems. Only now are they looking at what needs to be done, and finding the job much larger than they thought. Only now are they trying to find the experts and develop the systems they'll need, and finding that the best people have already been snatched up.
Managing your risks in the new market place will require change and review from the top down. Your senior management will need to understand that this is a whole new ball game , and that they must set some clear limits and goals for their risk levels and they must learn to employ Risk Management Techniques. Someone at the management level has to take charge of this major change.
You will need new policies, new business processes, new systems and trained people to operate them.
I'm not an expert, but I can tell you that there are many ways for an organization to reduce its risks in the new market place, ranging from physical bilateral contracts to financial hedging instruments, all with ups and downs and risks of their own.
You'll need someone to trade in the spot market on your behalf, to analyse the trends and predict your future position, to keep track of what you've bought and what you should buy, and what you should sell as well as settle your contracts at the right time.
There are many questions you will need to answer, such as:
I hope you are beginning to see how much more the new market place will demand from you. It will present challenges but it will also bring opportunities for obtaining lower prices and better service.
There is no reason to enter this new era with an attitude of fear. After all, there will be many safe, secure options for buying long-term energy supplies.
Just remember that, if your competitors are willing to invest in the expertise and take a bit more risk, they may be able to get their electricity cheaper . . . reducing their bottom line and improving their competitive positions.
From now on, electricity procurement will be like all other manageable input expenses in a competitive business world. Those who learn, change and work hardest to optimize in the new environment will get the edge.
As the year 2000 approaches, we all have the chance and the choice to get ready for the shifting tide . . .
We can get involved, now, in the ongoing process of the developing market place we'll all have to live with in less than two years. We can start, now, to develop a realistic risk management strategy for our companies and organizations . . .Or, we can wait for the tidal wave of change to overwhelm our ability to adapt.
We at AMPCO are preparing ourselves by learning about competitive markets and Financial Risk Manage-ment. We are preparing our companies by reviewing corporate policy, business processes, IT infrastructure, and employee skill sets. We are meeting with potential new market entrants.
And we started yesterday !!
This article is taken from a presentation made by Mr. Gregg at the Canadian Electricity Forum's Electricity Deregulation in Ontario Forum in September 1998. ET