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Why Ontario needs a competitive market.
Fortnightly Magazine - May 2004

leave OPG unchanged, except for subjecting its rates to cost-plus-rate-of-return regulation by the Ontario Energy Board (OEB).

Curiously, after noting that OPG and its predecessor have a history of being subjected to political interference, the review committee made no substantive suggestions on how such interference can be prevented if OPG continues to be owned 100 percent by the provincial government. The recommendations specifically leave open the possibility for OPG to construct new capacity in the province. Given the potential for a provincially owned OPG to inappropriately apply a cost of capital substantially lower than private-sector actors when considering new projects, this proposal could have a chilling effect on planned private-sector investment.

Ontario appears to be headed toward a market structure in which OPG continues its dominance and procurement ultimately resembles a single-buyer model, with heavy reliance on long-term purchase power agreements. Since such an approach is likely to deaden incentives for efficiency, both in operations and in capital allocation, it is worthwhile to consider some alternatives.

We believe that the following steps would result in a vibrant and sustainable Ontario power sector, while respecting the apparent desires of Ontarians for coal plant retirements and continued public ownership:

  • Break OPG into at least two companies, each with a mixture of baseload and peaking capacity;
  • Enter into a long-term lease for the Pickering nuclear facility while continuing recovery of the second mothballed unit, with the counterparty responsible for determining whether and when to restart the remaining two mothballed units;
  • Create vesting contracts between the OPG successor firms and entities responsible for default supply, apportioned proportionally by load and structured to gradually reduce contracted volumes over a 10-year period;
  • Sell up to 49 percent of each OPG successor company to Ontario individual and institutional investors to increase transparency, oversight, and financial discipline, while enabling the province to redeploy funds;
  • Make the Ontario Independent Market Operator (IMO) responsible for determining resource adequacy and for contracting for new capacity to meet projected shortfalls, but under a system whereby bidders would be paid only a capacity payment; bidders would be expected essentially to bid the amount needed in addition to revenues from wholesale market or bilateral contract sales to meet return-on-investment criteria;
  • Direct the OEB to revise generation licenses associated with coal-fired power stations such that the licenses expire over a period from 2007 to 2015; to further underscore the government's commitment to shut down the plants, any resource adequacy contracts issued by the IMO would commit the government to pay specified liquidated damages to the contract holder for each month any coal station operated beyond the expiration date set in the revised OEB license;
  • Implement a process whereby default supply is procured through an annual full-requirements auction process, where the amount offered would be the residual needs over and above the vesting contracts with OPG successor entities; and
  • Allow those customers wishing to enter into bilateral contracts with retailers or marketers to do so, provided they make their desires known prior to the default supply auctions and that their new contracts do not become effective before the