Extending Subsidies May Cost Ontario Extra

The first year of subsidizing electricity prices in Ontario could cost the most populous province in Canada about an extra CAN$1 billion if it extends subsidies to big power users, a study showed.

Ontario capped electricity prices at 4.3 Canadian cents a kilowatt hour for consumers and small business after its experiment with a competitive power market led to soaring prices.

Bruce Sharp, a senior consultant at Aegent Energy Advisors in Toronto, said that if the provincial government extends subsidies to all customers its bill will be CAN$2.65 billion (US$1.8 billion) for the first year, about CAN$983 million more than if prices for only low-volume customers are subsidized.

Electricity rates were frozen Dec. 1, 2002, in Ontario until May 2006, during which time the government will make up the difference between the capped price and the market rate charged by power generators. Customers also received rebates for higher prices they paid between May and November of 2002, before the rate cap went into effect.

Ontario Energy Minister John Baird is expected to announce whether the province will include all customers in its plan to keep down electricity prices.

Dan Miles, a spokesman for Baird, declined to comment on Sharp's analysis. But Miles said Ontario has been behind by about CAN$10 million a month for the first nine months of the plan.

"We may be a little behind in the short term; but in the long term we believe the plan is designed for 41 months and the plan will pay for itself," Miles told Reuters.

He said that about 3,000 megawatts of new generation expected to come on line in Ontario before the summer will help ease supply shortages and lower prices.

Aegent's Sharp said that if all customers were included for the rate subsidy the additional cost will leave the provincial government "saddled with a huge amount of price risk, and worst of all, deal Ontario's wholesale electricity market a final, crushing blow."

Miles said the government's has spent about CAN$640 million up to now to help consumers with their electricity bills. In the same time Ontario Power Generation, the provincially owned electricity generator, has set aside about CAN$1.1 billion in a fund designed to help consumers with their electricity bills if prices rose due to deregulation.