Ontario Premier Ernie Eves last week put the brakes on the province’s newborn competitive power market and proposed a rate fixing plan some critics said was eerily similar to what happened in California, trigging blackouts and utility bankruptcies.

“It is unacceptable that families are being hit with hydro bills they can’t afford, and businesses are facing cost increases significantly larger than they can handle,” said Eves. “The problem requires immediate action and we are taking it. From now on, the only time your electricity bill will go up is when you use more power.”

Eves, who is facing an election next year, proposed sweeping new legislation that would fix retail rates for the next six years at C4.3 cents/kWh (at least 1.6 cents/kWh lower than the current cheapest long-term retail offerings) and require refunds above that amount retroactive back to May. The province is setting aside C$700 million to cover its share of the refunds.

On Tuesday, Ontario Energy Minister John Baird unleashed the second wave of restructuring, adding huge tax breaks for renewable and alternative energy resources.

“While the province has a sufficient supply of electricity to meet current demand, we need more generation to keep prices at reasonable levels and to meet the long-term needs of families, businesses and farmers across Ontario,” Baird said.

His plan, which must first be approved by the legislature, includes the following:

Meanwhile, power generators and retail energy marketers were reeling from the premier’s assessment of the competitive market, which was born only a few months ago.

“We’re committed to Ontario; we’re committed to the market, and we’re committed to deregulation. However, what the government has effectively done in the last 48 hours, I believe, is not good for consumers and not good for ratepayers,” said Paul Massara, president of Direct Energy Canada, the largest retail marketer in the province. “At the end of the day what they’ve done will stifle competition, will stifle innovation and will stall investment in badly needed generation. If you cap the price, that will have to be paid for somehow. There’s no such thing as a free meal here. Effectively Ontario consumers will end up having higher rates and higher taxes to fund the debt [the government plans to use] for cross-subsidization.”

First Source, a jointly owned partnership between Enersource Corp. and Veridian Corp., said that it is a “strong and viable company” and that it is committed to serving its customers with the highest level of service and access to information that is available to the company. “All contracts signed with First Source will be honored.”

Electricity distributors also criticized the new plan. “The premier’s comments are inaccurate and without basis,” said Charlie Macaluso, CEO of the Electricity Distributors Association. EDA said the distribution portion of customers’ bills has not increased since May. “In fact LDCs are absorbing huge costs, yet to be recovered, in the order of hundreds of millions of dollars, in seeking to mitigate the impact on customers.”

Independent power producers were in disbelief. “The market is not perfect but its defects are more like birthing pains rather than signs of any fundamental issue with the design,” said John Brace, president of the Independent Power Producers’ Society of Ontario. “Much greater problems could result from political interference in the market design or pricing system at this time.”

Massara said the need to subsidize new renewable power generation “just shows that people who are looking to buy generation and build generation aren’t interested in a market where prices aren’t set to reflect the true market economy.”

He added that the government’s conclusion that the market didn’t work because prices were higher last summer is simply wrong. “The reality is this market is barely six months old and prices have risen because we had the hottest summer in 50 years. [Higher prices were] a signal that the market should have been sending to [generation] investors. I think retail competition was working. I think the wholesale markets were working. Unfortunately for whatever reason the government has pulled the plug on it.”

However, he said Direct Energy would continue supplying its existing 550,000 electricity customers. “They won’t be disadvantaged by this. They will get the same 4.3 cents/kWh rate that everyone else is getting.” However, their children will be paying for today’s lower rates through higher rates and taxes tomorrow, he said.

California just completed a sale of $11.3 billion in long-term bonds to finance its own energy crisis. Ontario is laying aside about C$700 million to cover some of the refunds and the artificially fixed rates going forward. “That will be way insufficient,” said Massara. “Therefore you are going to see a heavy debt burden. We’ll be back to the bad old days of $38 billion of Ontario debt when the government tried to do this last time.”

Nevertheless, Massara said he believes the Ontario government will pass this legislation. “They are in a strong position here. They have a majority, and therefore will pass it, I think, unfortunately.”

The rapidly changing landscape in Ontario’s power market also caused some consternation among U.S.-based power marketers. The National Energy Marketers Association (NEM) on Friday told Eves that it is “deeply concerned about significant impacts” on North American energy markets stemming from his plan.

“While obviously well intentioned, our experience in California leads us to believe that capping energy prices, particularly for extended periods of time, creates enormous economic dislocations and undermines our mutual goals of conservation, load shifting and adequate supplies,” wrote NEM president Craig Goodman in a letter to Eves. “Additionally, our experience has shown that such measures also hurt taxpayers and small consumers over the long-term.”

On a related front, Toronto-based Dominion Bond Rating Service Ltd. (DBRS) on Thursday confirmed its short-term and long-term ratings on the province of Ontario “despite the fact that the province will have to absorb the costs involved with freezing the price of electricity in Ontario at C4.3 cents until at least 2006.”

The credit rating agency said that its decision was primarily motivated by the fact that over 70% of the power generated in Ontario is produced by Ontario Power Generation (OPG), which is owned by the province. As result, a “considerable portion” of the compensation paid under the plan will ultimately be returned to the province through OPG’s earnings, providing the province with a hedge against much of the potential cost of the price freeze.

“Although there remains an element of uncertainty as to the total amount of subsidies to be distributed under the plan, DBRS expects the net impact of this initiative on the province’s fiscal balance to be manageable,” the ratings agency went on to say.

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