Producer Warns of California Death Spiral

Increased government involvement — especially in the form of caps on electricity prices — will only further confuse investors weighing whether to build new power plants needed to increase supply and, eventually, to sustainable and hopefully lower rates, says Stan Marshall, CEO of Newfoundland-based Fortis Inc.

"I've seen situations where governments have subsidized rates substantially. That really is a recipe for disaster," Marshall said an interview today from Fort Erie, where Fortis's Canadian Niagara Power subsidiary provides electricity from a generating station on the Niagara River.

"The signals (for investors) become confused and you get into a spiral — it's the California death spiral," he added, referring to the crisis that caused rolling blackouts in the biggest U.S. state last year.

Ontario's energy market has been thrown into turmoil — with soaring prices and looming shortages — only a few months after the system was deregulated May 1. Supply has been cut because of troubles at some of Ontario's nuclear plants, while demand has risen sharply because of an unsually hot summer.

Political and consumer pressure is intensifying on the Ontario government, which had banked on new private power production to help ease the supply crunch Ontario faces.

But aside from a gas-fired plant being built in Sarnia, Ont., by Alberta power producer TransAlta Corp., and another station planned for Windsor by Calgary's Atco Power and its Ontario partner, there are few new projects being planned. And even if they launched a new project today, it could take up to two years to order machinery and get all the necessary regulatory and environmental approvals to get the plants online.

Marshall — who runs power companies in Newfoundland, Prinice Edward Island and the central American country of Belize — acknowledges that mounting political pressure will force the Ontario government to offer rebates to consumers — who also happen to be voters.

"You might be able to do something in the short term, but you're better off doing it very selectively for those having financial hardship," he said.

But too much interference makes the market too difficult for private power companies to predict and leave them uncertain whether they'd get a big enough return on the hundreds of millions of dollars needed to build new plants, Marshall said. And caps, he said, result in consumers using more electricity because it appears cheaper than it actually is, while no new power sources are built.

"Do not distort the whole system to deal with the hardships of a few."

TransAlta is reluctant to invest further until it sees more clarity in the Ontario market. In particular, the Calgary company wants to know when the Pickering A nuclear reactors — run by Crown-owned Ontario Power Generation, the province's dominant energy provider — will come back online and how that will impact power prices.

"It's uncertain when the reactors will be restarted, making supply forecasts difficult to project," says Dick Way, TransAlta's vice-president of regulatory affairs. "As a supplier, you look at what competition you'll be facing and what the supply situation is in a market.

"The amount of nuclear that's offline that could come online is very substantial."

Mass confusion would also result if the Ontario Tory government caters to calls from critics of deregulation that the province should abandon or modify its overall strategy.

"The worst fear any of us would have about investing here is that no sooner do we break ground on construction, then the whole deregulation process is abandoned," TransCanada Pipelines CEO Hal Kvisle said in a visit to Toronto.

Others are more optimistic. Atco Power says it has been conservative in its approach to investing in Ontario, but sees lucrative opportunities in plants that can export electricity to the U.S. markets.

"The advantage I think that Ontario has over Alberta is that you have such a large market right next door in the United States," Atco Group CEO Nancy Southern said in Calgary on Thursday. "Alberta is a bit of an island unto itself. And the transportation route to get oversupply to new markets is very restricted. In Ontario, that's not the case.

"So even if you get a situation of oversupply, in an early deregulated market, you have a lot of opportunities to export your product to various markets on the eastern seaboard of the United States."

Marshall said the government can't now "unbake" its energy market cake by moving away from deregulation, and must realize that while it makes sense theoretically, there's no guarantee an open market will mean lower rates for consumers. The best it can hope for, he said, is reduced volatility.

"It's the volatility that causes the problem," he said, adding consumers eventually adjust to rates they include in monthly budgets. "You want to turn your switch and the power comes on and when you pay your bill at the end of the month, there's no substantial surprises."

The province has some options to alleviate short-term pain, he said, including working with current utilities to defer maintenance shutdowns, or adding lines to the government-owned transmission grid to tap into other markets. It may even have to launch its own new power plant projects.

"You're almost forced to deal with the players already on the ground," he said. "They're the ones who can help in the short term."