More Electrical Summer Fun for Ontario
A NETWIT special report
As Ontario poises on the brink of a summer of rolling brownouts and blackouts and high electricity prices, this is a good point at which to remind Ontarians not to listen to the blandishments of the Ontario government and its official mouthpieces. Rest assured that this dim future is, indeed, courtesy of electricity restructuring.
There are two reasons why the flirtation with brownouts and blackouts are the responsibility of the restructurers. First, it was the restructurers that closed down the Pickering A and Bruce A nuclear plants in order to create the crisis necessary to begin the whole misadventure. These closures were completely unjustified and have probably already contributed to unnecessary deaths due to increased air pollution from the coal plants that have made up the lost power.
Take a look at then-Minister Wilson's Press Release from Spring 2001 that announced a May 2002 "market opening". The Release laid out four "conditions" for market opening to occur, among them:
"Creating a strong business climate with a reliable supply of electricity. Ontario already has sufficient supply to meet current needs. Announcing a firm market opening deadline provides greater certainty to potential new investors who have already announced $3 billion in new generation projects, representing over 3000 MW of new capacity. In addition, Ontario Power Generation (OPG) plans to return Pickering A to service beginning early in 2002, which will add another 2000 MW over the next two to three years, enough power to meet the electricity needs of a city the size of two million people.." (emphasis and parentheses added)
One of the reasons we thought the market would not open was that we knew there was no chance Pickering A would be back on-line by May 2002 . It's not clear if it will be available by May 2003! We are still mystified by the Ontario government's decision to open the market anyhow.
Without that 2,000 MW Ontario is at the mercy of the weather. If the weather remains hot it is a virtual statistical certainty that there will be some combination of transmission and generation outages that will cause brownouts and/or blackouts in July and August. It's not just the increased load. Circuits overheat, equipment malfunctions more in the heat, and water levels for hydraulic generation draw down. We assume it was a mixture of ignorance, arrogance, ideological bravado and the need to provide "cover" for the ill-fated privatization of Hydro One that motivated the opening of the market despite these problems.
The second reason that the current situation is due to restructuring stems from the nature of the new auction process that is run by the Independent Market Operator (IMO). While OPG controls the market and has every incentive to keep the lid on a potential crisis, when there is so little reserve capacity it is possible for the few smaller players to "game" the market. Now, it's true that any such gaming will enrich OPG far more than the actual gamers, but the temptation is there because of the tremendous profits that can be made from just a few hours at or close to the "maximum market clearing price" of $2,000/MWh.
An example may help. In a little-publicized deal just before market opening OPG sold its four hydraulic plants on the Mississagi river, with a combined capacity of about 350 MW, to a subsidiary of Brascan. To take the most extreme case, if Brascan were to withhold the roughly 50 MW of the George Rayner plant at the hours of peak load this could drive the price to $2000. Brascan's remaining capacity would then earn $2,000 X 300 = $.6M for every hour that this occurred. Ten hours would cop them a cool $6M. Of course it would land OPG about $42 M per hour (yes, that's 42 million dollars per hour) and Bruce Power would do nicely, too (about $4.5M per hour). What is difficult to tell is whether the US brokers that have joined in the Ontario market are going to try out some of the routines that Enron made infamous in California. In early July the IMO was importing as much as 2400MW. Limitations on the Quebec and Manitoba connections leaves Ontario vulnerable to gaming by US brokers during peak load hours.
Even if Ontario miraculously avoids brownouts and blackouts it will still endure much higher prices than would have been the case than without a "market". Ironically, the "market" is supposed to increase price transparency but because of the Byzantine nature of the new system, residential consumers will not see the impacts for many months. Our last piece explained some of this. However, the increases are substantial and the reasons for the higher prices contain a much larger lesson about the nature of advanced capitalist society. The restructuring makes it very clear what is going on.
At bottom, the ideological economic justification for capitalism rests on two foundations. First, that capitalism embodies a "free market" and a free market is able to align the money cost of economic output with the "true" resource cost. Second, that capitalism is more productive. Analyzing the second claim would take us too far afield, but to the extent that it is dependent on the first claim it is also undermined by the points raised in the following discussion. Clearly, if the first claim is wildly inaccurate (which we believe is the case) at the very least it would be difficult or perhaps impossible to establish productivity claims also.
To address the first claim we need to describe a core notion in economics, that of a resource or "opportunity" cost. This a rarity, one of a handful of useful economic concepts. The idea is simple. The value of a resource is given by the value of its alternative uses. George W's labour is worth $4 per hour because if Acme didn't pay him that he could get $3.99 from Macdonalds. In a competitive market each resource is bid down to its resource opportunity cost and the prices of the products that are made from these resources are likewise the "marginal" costs of making the last unit for sale in each case. This is efficient in the sense that if, all other conditions unchanged, Acme paid its workers $4.10 then they would have to increase the price of their product, which would not be sellable at that price since, by definition in a competitive market, everyone would know it was overpriced. Acme would have to lower its price and its wages if it wanted to stay in business.
This is all well and good, if you can buy the thirty or forty assumptions required for a truly competitive market to exist. The truly amazing leap of faith is the belief that money prices can approximate these abstract price ratios among each good and all other goods and each product and all other products. What capitalists actually do is try to engineer situations in which the money price of their products bear no relationship to costs of production. This is most easy to do in financial markets. The opportunities are ultimately limited by the relationship of financial instruments (securities) to productive assets.
Turning now to electricity, what Enron wanted, and what its fellow lobbyists still want, is to create "markets" for electricity where the price for each hour has nothing do to do with the costs of production. You can see this quite clearly by going on the IMO website and looking at the prices1. Most of the time the price is close to the production costs, as it was under Ontario Hydro, but sometimes the disparity is enormous. The highest cost generator on the Ontario system has a cost of about 8.5 cents, yet you'll see prices as high as 70 cents. Where do these come from?
These are cases in which the offers of price speculators had to be taken. In a fantastic twist of economic logic, these are now justified as "opportunity costs", meaning that now there is an auction mechanism that lets you get whatever you want up to $2,000, your "opportunity" is the ability to sell at these stratospheric prices. For example, a hydraulic plant may now be said to have an "opportunity cost" of in excess of more than100 times its production costs because it could store the water to produce power at a time when that price would be available!
So there are real costs to restructuring. Under the old despised Ontario Hydro generators were paid their actual costs of production, now OPG is paid its actual costs of production except for those hours in which the price speculators get whatever the market can bear.
Entering the Summer the opportunities for price speculation greatly increase. Ontario's historic high peak was a shade over 25 gigawatts (GW). Current loads in early July have been nudging this level. Total capacity is just below 28GW but the actual margin is much thinner. Ontario is interconnected to the entire North American East and interconnection rules require it to keep about 1GW on "operating reserve" at all times to cover the loss of its largest unit – at Darlington. The IMO can dip into this for about ten minutes otherwise, if it cannot get power from elsewhere, it has to look at "load shedding" which, in very hot weather, is very likely. The loss of any capacity for any reason at this point means brownouts or blackouts. The more hot days, the more this becomes a certainty.
The alert reader will have noted a truly frightening prospect. If OPG were already privatized there would be nothing to stop it making almost unlimited amounts of money. This, we assure you, has not escaped the attention of either its senior management or the Bay Street, Wall Street, Houston and California financial districts. But that's another story.
1. If asterisks appear in either IMO graph, the graph has been truncated. Click the "full size" box to see the complete graph. BackMore Electrical Summer Fun for Ontario © NETWIT, 2002
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