Presentation to the Standing Committee on Resources Developmenton Bill 35 – Energy Competition Act, 1998

Speaking Notes of the Public Interest Advocacy Centre(PIAC)

Introduction

First of all, I would like to extend our thanks to the Committee for giving us an opportunity to address the Committee on our concerns associated with Bill 35 – the Energy Competition Act.

The Public Interest Advocacy Centre (PIAC) is a non-profit organization that provides legal and research services on behalf of consumer interests, and, in particular, vulnerable consumer interests concerning the provision of important public services. Since the inception of the Centre in 1976, the regulation of public utilities, such as telecommunications and energy, has been an important focus of the Centre’s work .

PIAC has been a frequent intervenor, generally on behalf of low income customers, in proceedings before the Ontario Energy Board, both with respect to rates and policies for natural gas local distribution companies and in the former periodic reviews of different aspects of the Ontario Hydro operation. We participated fully in the OEB proceedings that produced the report recommending the legislative changes in the gas industry which has provided a policy basis for the portions of this Bill dealing with the natural gas industry. PIAC has also published extensive reports in utility fields and frequently provides policy reports to the federal department of Industry on consumer related concerns. We have appended a partial list of publications to this document.

By way of general comment upon Bill 35, we would state that the Government appears to be proceeding in a prudent fashion, given the relatively large stakes involved in the management of the transition to a more competitve energy industry in Ontario. Getting from where we were, to where we will end up, is by no means a straightforward proposition.The management of the change will play a key role in the economic future of all stakeholders . As we will discuss later in this submission, it is vitally important that the superintending authority possess the ability to fashion effective consumer protection and market failure remedies when the need arises. In energy, we do not have the luxury to wait for long term market correction based on economic theory in the event that serious impairment arises to threaten energy access and affordability.

It should also be recognised that this Bill deals with two industries, gas and electricity, with wholly different historical profiles in terms of meaningful regulation, public accountabilty and effectiveness. The natural gas industry has carried out its monopoly operations pursuant to real scrutiny by an informed and effective regulator, the OEB, with authority to review performance and compliance. Ontario Hydro, on the other hand , has not had a similar experience and its lack of meaningful accountability has given rise to many of the problems that beset it today. Public satisfaction with the historical performance of the natural gas industry is relatively high: there is little clamour for change among natural gas residential consumers. In electricity, on the other hand, there has been a demonstrable need for change that is apparent to all informed stakeholders.

However, little can be gained at this juncture by a recitation of the past sins of Ontario Hydro. When discussing the treatment of utilities, it is always a risky proposition to quote from former British Prime Minister Margaret Thatcher. However, I believe that her statement ” if we spend our present, debating the past, we will find that we have forfeited our future ” has particular resonance with many of the tasks concerning the management of the electricity industry that are before us in this Bill. We cannot make the monkey of stranded costs disappear from the backs of the Ontario Hydro customer. We can only ensure that there is a equitable treatment of these costs so that : (1) the burden of the costs are fairly allocated and (2) no market participant is able to avoid contribution by opting out.

We have organised our comments upon this Bill under the general headings of Benefits, Consumer Protection and Unknowns. The limitations of time prevent a lengthier discussion of many of the points raised in each of the above noted categories, but I trust that other presenters may be addressing them.

Benefits

We see potential benefits accruing to all consumers from the following features or effects of Bill 35:

1. The separation of the Ontario Hydro’s generation assets and the restructuring of the transmission and distribution system should encourage better accountability of individual system components and reduce cross-subsidies among system components. As well, the elimination of vertical integration should help attenuate market power.
2. The introduction of competition into the electricity sector, given adequate supervision to maintain service and quality standards, should serve to introduce new efficiencies into the generation and distribution system that should help to reduce operating costs.
3. In the natural gas sector, the removal of regulatory barriers to gas sales may enable the expansion of competitive delivery of other components of the current system delivered in a monopoly mode. Once again, this increases the possibilities for elimination of cross-subsidies and inefficiencies currently costed to gas delivery.
4. The provisions requiring licensing of gas marketers, with proper enforcement, should address the ongoing problem of consumer deception or improper conduct in the solicitation and delivery of commodity to customers.
5. The monopoly components of the Ontario Hydro’s transmission system will finally be subject to cost of service regulation, and ongoing scrutiny will take place to ensure conformance with OEB directives.

Protections

1. Proper enforcement of the licensing provisions links a code of conduct for marketers and retailers with their ability to stay in business. This provides a powerful incentive to avoid customer abusive behavior.
2. Contracts entered into with an unlicensed marketer cannot be enforced against the user, diminishing the prospect of hit and run sales by rogue operators with an eventual assignment of contracts to an established player.
3. The OEB must approve the distribution rates to be charged by the successor corporations to the MEUs. In addition, the distributor has an obligation to supply customers in the distribution area providing security of access for consumers.
4. Any transfer of over 20% of the assets of a distribution system is subject to OEB approval, presumably to protect customers in the serving area from improvident transactions.
5. The new distribution corporations set up by the municipal utility must separate monopoly and competitive businesses. This provides some insurance against cross-subsidization..

Unknowns

1. The successful fostering of competition will result in loss of market share by the Genco. Such market share loss may impact on the payments to be made to the Financial Corporation for the retirement of debt. In turn, this may increase the size of the stream of revenue required from all market participants through the levy to recover for stranded debt. This makes it, of course, difficult to capture competition benefits for consumers achieved in the electricity generation sector.
2. Will municipal taxpayers be subject to greater risks by the activities of the municipal commodity corporations? There will be differing levels of expertise and buying power in the new commodity acquisition corporations owned by the MEUs. If a new corporation is not able to outbuy the market or even acquire competitively priced electricity, the separation from the local transmission business may buffer customers but not local taxpayers from losses by the municipally owned commodity business that might be incurred. As well, there may have to be a workably competitive market in place for retail, in order for the end-use customers to be protected in this circumstance.
3. Will there be other competitive sources of power generation to produce a workably competitive market, or are we simply fostering a competitive resale market?
4. We are creating a retail market for commodities that the ordinary citizen has little experience in buying. The initial experience with door to door natural gas sales has been a cautionary tale . Healthy competition depends on the communication of straightforward unbiased information to establish a market of informed consumers, to mandate transparency in the details of the retail transaction, and to ensure swift and effective enforcement of rules of marketplace conduct. Will there be adequate resources provided for these tasks and how will they be provided? Consumer and competitive concerns militate for strong provisions incorporated into the licensing regime to ensure customer mobility, ease of comparison with rival services, as well as confidence in the ability of the licensed marketers to deliver their product. There must be pro-active oversight with the resources to ensure that the job gets done.
5. The necessity to put in place transmission rates for January 1999 should not prevent a cost of service review of the monopoly elements of Ontario Hydro , particularly before any performance based regulation is put in place.Will current management be successful again in evading regulatory scrutiny because of time constraints.
6. There are differences in the licensing regime set up for electricity and that set up for gas. What will be the effect of such differences upon the retailing of the energy commodity, for example ?

Conclusions

In this decade, PIAC has been actively engaged with the regulatory and governmental process that has attempted to establish the framework for competition in telecommunications in Canada. The telecommunications experience with competition to date is, in some ways, instructive to the current task in energy, and, in other respects, not particularly helpful.

In telecommunications, it was necessary to re-price network access to facilitate competitive entry into long distance markets. This meant an two to three fold increase in basic rates (despite the initial CRTC finding that such increases were not inevitable). Similar to the energy market, the revenues from long distance service were disproportionately produced from the high volume users. (One third of all Bell Canada accounts in 1994 produced two thirds of the long distance revenue). The CRTC generally left it to market forces both to establish an informed consumer market as well as police the many resellers that sprung up to sell long distance offerings to compete with the former incumbent monopolist. In the result, the higher volume user was largely the market target for discounts. Consumers were bombarded with a confusing array of advertising and some customers were slammed onto services they had not authorized. By the beginning of 1998, most telephone customers were paying higher total telephone bills.

There also continues to exist indicia of the former monopoly in the market power exercised by the incumbent local telephone companies. Up to this year, for example, Bell Canada was able to retain close to a 90% share in the residential long distance market despite the fact that its RealPlus savings plan had call amount minimums that exceeded the monthly long distance bills of a majority of its residential customers. This meant that most customers were not receiving any benefits from competition.

This year, there are finally discounts for ordinary callers available with Bell and there appears to be an expanded interest in low volume customers by most long distance players. The lion’s share of competition benefits still remain with the high volume user.

However, this pattern should not be repeated in energy. Simply put, energy customers in Ontario will not countenance a doubling or tripling of their energy rates and wait six years for some real benefits no matter what the advertising program that accompanies the changes. As well, there will be much less tolerance for unscrupulous operators in the energy field as the consequences of misconduct in false representations, slamming, and inability to deliver are more serious. As one commentator has stated, ” You can’t have a busy signal when you turn on the light switch”.

The telecommunications industry has been saved from widespread public outcry from market misconduct, in part, by the fact that the players are absorbing the transactional costs of customer transfer themselves to encourage customer mobility. Because of the arbitrage nature of competitive commodity offerings in the energy field, long term locked-in energy contracts with customers are the desirable norm for marketers. This makes it difficult to effect market corrections without regulatory intervention, both to police misconduct and secondly to ensure workable competition in an informed consumer market.

Similar to telecommunications, there will likely be attempts to wring concessions for high volume users with accompanying threats to exit the system, if rates are not designed to recover more costs from smaller users. As well, competition theorists are likely to be frustrated by the maddening tendency on the part of private market participants to maximize the bottom line, in the form of cream skimming , service reductions, and mergers and acquisitions, rather than financing competitive entry as they are supposed to be doing.

In our view, Bill 35 seems to have a framework of remedies in place to address th above noted problems.This returns to the central theme of our presentation. The evolution of a genuinely competitive market for energy will initially require more regulatory vigilance not less. (In the case of Ontario Hydro, we are starting close to regulatory ground zero)The statutory provisions of this Bill creating the licensing regime and establishing effective OEB superintendence over the process are vital to the successful smooth transition to competition as well as the operation of the industry to the benefit of the entire public interest.