Powering Ontario
THE LASTING LEGACY OF MIKE HARRIS’ ENERGY DEREGULATION
In a new book, Will Stewart looks back at the innovative electricity-market reforms that took place under Ontario’s former Progressive Conservative government.
When Mike Harris came to office in 1995, he inherited an electricity system that was far over capacity, mired in public debt and facing the challenge of retrofitting Ontario’s nuclear reactor fleet, which had still not been paid for despite generating electricity for decades.
To help provide practical answers to the question of “What now?” the new government looked to former federal Liberal energy (and finance) minister Donald Macdonald to provide a road map. Macdonald was tasked with considering these structural and financial challenges. In May 1996, “A Framework for Competition” was presented. It laid out the challenges with the current structure, discussed why it no longer worked and set out a vision for increasing competition across generation, transmission and even local distribution of electricity. The headlines, of course, largely focused on the “breakup” of Ontario Hydro. With rates now “frozen,” the new government set about reorganizing the sector — a realignment that remains largely unchanged to this day.
A TOP-TO-BOTTOM RENEWAL
The framework called for the creation of new entities to promote competition. The generation assets were to be moved to what we now know as Ontario Power Generation. Long-distance transmission, and a considerable number of smaller distribution systems, were to be housed in Hydro One. Rates and regulations and policies were to be assigned to the Ontario Energy Board. The Macdonald framework also called for the sell-off of non-nuclear assets. Further, while municipalities would remain the focus for distribution assets through local distribution companies (LDCS), they too were encouraged to amalgamate or consolidate for efficiency and better service.
Harris moved forward, adopting the recommendations of the committee. Yet these reforms were not simply a reassignment of responsibilities: Ontario Hydro had grown to become one of the largest electrical utilities in North America. Simply breaking up a utility of this size, powering the country’s largest economy, with shared “interties” with Ontario’s provincial neighbours as well as many American states, was a massive task. Hydro not only had nuclear, gas, coal and water generating stations, but it also was one of the world’s leading transmitters across massive distances. Simply separating the Crown corporation into two commercially driven entities would have been enough for most governments. But half-measures were not the modus operandi of the Harris PCS, as they pushed to reach a desired end state in just a few short years.
THE CURTAIN RISES
With the stage set, the wholesale and retail markets were opened to competition at midnight on May 1, 2002. One of Harris’ first acts was to cap the price on electricity at 4.3 cents per kilowatt hour, after rates had been raised consistently under the NDP from 1990 to 1995.
While this move was welcomed, setting the price at that rate — which many considered too low — would ultimately end up costing the Harris government dearly. If that “frozen” price from 1995 had not stayed fixed until market opening and had better reflected the true costs over those seven years, perhaps the change in prices after opening to competition might not have caused such significant backlash.
At first, the move to a market price was either welcomed or simply unnoticed by ratepayers. The date of market opening had been deliberately set in the spring, when the demand for electricity drops as furnaces are turned off and the days become longer, but before air conditioners and pool pumps had been activated for the season. With lower demand, the market should respond with lower spot market prices. And it did, at first. In the first month of this new approach, the price did in fact fall: the average spot market price of wholesale power in May 2002 was 3.01 cents per kwh, considerably lower than Harris’ frozen price of 4.3 cents per kwh, which many critics saw as too low to recover costs. In short, the wholesale market was working.
THE RETAIL MARKET: A MISSTEP
But at the same time as Harris opened the wholesale market, he also allowed the retail market to open. Ultimately, this would be seen as perhaps the gravest misstep. That second component is made up of “end use” customers. In most cases, the municipally owned electricity companies, or LDCS, would pass the spot market price onto customers, meaning that each month, homeowners would see a different average spot market price on their bills, which would then be used to calculate the price charged for what they consumed. After all, the LDCS were, and are, municipally owned, regulated monopolies with capped rates of return, and had no ability, or desire, to take on commodity price risk. While the market opening was a success from a market function point of view, and initially resulted in lower prices, celebrations of the success were short-lived. By the second month, prices had begun to rise. But even then, there was no immediate outcry, as it was commonplace in the LDC billing cycles at the time to only have a bill every two months. So, consumption, at whatever the floating commodity price, did not come through to the customer as a bill to be paid for up to two months. But as spring turned into summer, the problem of a lack of supply for electricity began to surface.
There was an added challenge: 2002 ended up being the hottest summer in Ontario in 50 years. This meant that in addition to the price of power going up considerably in the early months after market opening, the added air conditioning load meant that bills jumped again over the months that followed.
Opposition parties saw blood in the water, despite increased demand in a hot summer, decreased supply due to Pickering A mismanagement and a firstin-a-lifetime spot market price of power being passed through to customers being the true culprits. But by the time the summer bills ended up in the mailboxes of residential customers in the fall of 2002, the electorate had had enough of the experiment. The opposition was successful in making the pricing of electricity entirely a political decision.
A DECISIVE WIN FOR ‘P3’
The Liberals also took aim at a public-private partnership (P3), which the government had created for Bruce Power, the nuclear power plant on Lake Huron. (Yet once in power, the Liberals saw the benefits of the arrangement and, instead of cancelling the deal, in fact continued to renew and promote what has become known as one of the most successful public-private partnerships in the country, if not beyond. The Bruce Power P3 deal has now celebrated 30 years, and the nuclear plant has gone through countless renovations and retrofits — fully funded by the private sector.)
So as we look back on the Harris era, we certainly see his lasting legacy in the market-driven system we have in Ontario today: We have multiple new generating plants built without taxpayer dollars. We have one of the most successful public-private partnerships ever, operating a major nuclear plant. We have successful conservation programs that reward private-sector companies for encouraging less consumption. We have a series of integrated entities to ensure the effective management of the electricity system, and we have rid our province of coal-generated electricity, making our grid one of the cleanest in the world.
A LASTING LEGACY
And, in perhaps the biggest success of all, we saw the Liberal government that succeeded Harris’ revolutionaries continue down the same path and even go one step further, pushing Hydro One into a privately held, for-profit, publicly traded organization.
It all stands as the most compelling proof you can find of the enduring nature of Mike Harris’ electricity legacy.
WE HAVE MULTIPLE NEW GENERATING PLANTS BUILT WITHOUT TAXPAYER DOLLARS.
Adapted from The Harris Legacy: Reflections on a Transformational Premier (Sutherland House, 2023), which features a series of essays by leading policy experts in a range of fields central to the Harris government’s agenda. It is a must-read for scholars and policy wonks alike, and is available for $36.99 at theharrislegacy.ca. Will Stewart is a senior adviser in public affairs and former chief of staff to Ontario’s minister of energy.