Hydro Industry on Credit Watch

The move came after Premier Ernie Eves' dramatic announcement of rebates and price caps for hydro consumers.

The government will introduce a variety of tax breaks, and push Ontario Power Generation to form public-private partnerships to bring badly needed new generators on stream in the province, Energy Minister John Baird said.

But the response from the financial world was swift and negative to the province's moves to restructure the power industry.

An influential credit rating house — which advises investors about the risks of lending to corporations — threatened to cut the rating of virtually every major player in Ontario's electricity sector.

Dominion Bond Rating Service said the province's plans "could have significant negative implications" for the provincially owned Hydro One and Ontario Power Generation (OPG).

Included in the assessment are major municipal utilities such as Toronto Hydro, Enersource Corp. — 90 per cent owned by Mississauga, and parent of Enersource Hydro Mississauga — and Veridian Corp., owned by municipalities in the eastern part of Greater Toronto.

DBRS placed eight companies under "negative watch."

The credit rating house said these companies have been financially weakened by the new rules announced.

That's because they won't be able to raise rates as they had anticipated.

When ratings are cut, or even threatened, lenders become more reluctant to advance loans to the affected companies, and may charge higher rates on any loans they do make.

Premier Ernie Eves froze electricity prices for consumers, but said the "wholesale market" in which generators sell large amounts of power to big buyers at market prices would continue.

But the DBRS analysis said there's already been so much political interference in the province that a price freeze could well extend to the wholesale market. That would discourage investors from sinking money into new generators, which can cost hundreds of millions of dollars.

That wasn't the message Baird was trying to deliver.

As the waters of Niagara Falls cascaded behind him, Baird said Ontario Power Generation — now on "negative watch" — will push ahead with a new tunnel that will channel more Niagara River water to existing generators, and may construct another power plant at the Falls.

He said the province will look for private investors to share the cost of up to $700 million. "It could be 100 per cent privately financed," he said, although he didn't name any investors waiting in the wings.

Baird said many of the details, which are supposed to favour alternative and renewable resources, remain to be settled.

And in the material accompanying the announcement, Baird's office continues to maintain that the province's current supply of electricity is sufficient to meet near-term needs.

That contradicts a report by a panel of the Independent Electricity Market Operator (IMO) that stressed Ontario has a "serious shortage of generating capacity to meet Ontario's growing demand" and that could lead to "serious reliability problems" next summer.

Private sector observers said Baird's measures are unlikely to promote much competition in an Ontario market still dominated by the provincially owned Ontario Power Generation.

Baird said the government will introduce new tax breaks to encourage private sector investment.

They include:

- A corporate income tax holiday for income derived from the sale of energy from alternative sources;

- Electricity generators will get a sales tax exemption on production equipment and machinery;

- A 100 per cent write-off for the cost of assets used to generate electricity from alternative and renewable energy sources;

- OPG will be directed to accelerate its assessment of a 500-megawatt project in the Toronto portlands at the site of the old Hearn generating station.

Baird insisted the electricity price freeze won't discourage private firms from investing in Ontario because the wholesale market for power remains open, giving generators the opportunity to cash in when prices rise.

Opposition politicians were scornful of Baird's plans.

"They're making it up as they're going along," said Liberal critic Michael Bryant.

Marilyn Churley of the New Democrats was also dismissive.

"We see the private generators fleeing right now. The government's still trying to hang on to this poor deregulation and privatization beast. ... It isn't working," she said.

Charlie Macaluso, chief executive of the Electricity Distributors Association, said the local utilities are collectively on the hook for close to $500 million in new obligations because of the deregulated market, and now aren't sure how, or if, they'll be allowed to raise the money to pay them.

Rob McLeese, past president of the Independent Power Producers' Society of Ontario, said Baird's plans include "some good first steps."

"There are all kinds of things about saving taxes for renewable and alternative energy projects, but there's no way for these projects to know that they're going to receive adequate economic revenue to make them economically viable," he said.

David McFadden, a lawyer specializing in electricity, said Baird's announcements fail to address one central issue.

"One of the issues that remains front and centre is a lack of competition in the marketplace," he said.

OPG controls about 70 per cent of the marketplace.

"It will be a while before the kind of generation of these tax incentives will assist and the other incentives will have much affect."

Arthur Dickinson of the Association of Major Power Consumers of Ontario agreed.

"If I'm a generator looking at investing, why would I risk investing in a province which changes the rules regularly?"