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Ontario’s electricity market is worth $10 billion with around 4.1 million consumers Market Structure Prior to Deregulation
In the past the Ontario electricity industry was regulated by government and run through a crown corporation known as Ontario Hydro. Ontario Hydro produced almost all of the power for the province, which was then purchased by the local municipal utilities and distributed to the customers. However in some of the communities private companies also existed. Ontario had below average prices of electricity in the 1980s which went to the third highest in Canada around early 1990s. Over the years by the late 1990s, this regulated structure and monopoly led to the accumulation of approximately $38 billion of debt. Why Deregulation in Ontario
Due to the accumulation of this debt to the tune of $ 38 billion, this old monopoly of Ontario Hydro was said to be inefficient, out of date and too expensive. So the Ontario government initiated deregulation of the electricity industry, meaning that electricity supply in Ontario will no longer be a monopoly. The new open market structure allowed private companies to sell electricity directly to consumers and providing consumers the option to choose the supplier instead of having only one supplier in a given community In 1998, Bill 35, the Energy Competetion Act, was passed to deregulate the electricity market in Ontario by May 1, 2002. Through this act, the electricity market was to be deregulated by May 1, 2002, after a lengthy and politicized negotiation process with the expectation that supply capacity would exceed electricity demand enough to keep prices low. This Act was also supposed to create new jobs and protect consumers by promoting low cost energy through competition, and to protect the environment also. It was emphasised that some of the debt of old Ontario Hydro will be paid off by the new utilities, but was also estimated that it will not be possible to pay all of this. So it was stressed that a part of the debt will be paid off by the electricity consumers. Pre deregulation price of electricity commodity was 4.3 cents/kWh New market Structure:
The former Ontario Hydro was broken into two main commercial companies as: Ontario Power Generation (OPG) and Hydro One. Presently OPG generates about 75% of the electricity in the province but in the new market, the generation of electricity will be a competitive activity and OPG is required to allow competitors to have access to the Ontario market by reducing its control over power generation. Hydro One transmits power and also distributes power to many rural and remote communities. Power generated will be sold at competitive prices in the new market and the Independent Market Operator (IMO), a not-for-profit organization formed in 1998 as part of the restructuring of Ontario's electricity power industry will operate this wholesale electricity market. While operating and regulating the wholesale market it has to ensure that the new market is fair, reliable, effective, and delivers the benefits of a competitive wholesale market to the province. On the Distribution and Retail side, the consumers have two options. Either they can have the power supply from the old supplier like the local utility at the market rates, or they can have agreements with one out of the several retail licensed companies. The consumers also have the option either to sign a fixed rate contract for one, three or five years or to pay at the prevailing market rates. Expected Derivatives of Deregulation
Ontario Electricity Restructuring Act was passed with a clear aim of following major objectives:

• Better Customer services by ensuring a safe and reliable electricity supply
• Low supply rates resulting from a competitive electricity market
• Creating more jobs
• Increasing opportunities for investment with technological improvements and innovations and ensuring environmental protection
• Providing more choice to the customers to buy different types of electricity, from green power (generated from renewable sources) and also from the supplier of their choice

With these objectives in mind, the Ontario Electricity market was deregulated and started operating with effect from May 1, 2002 What went wrong
Since the opening of Ontario’s new deregulated market in May 2002, several problems arose against the expectations as below: High Rising prices of electricity: In the first six months i.e. by October 2002, the Electricity prices went high with the unusually hot weather in the summer and tight supplies as is clear from the Market data report for the month of October 2002 of IMO:

It shows clearly that the weekly average price of electricity went as high as more than 9 Cents per KWh ( i.e. per unit of electricity) and the cumulative price was more than 5 Cents up to the month of October, so higher than the pre-deregulation price of 4.3 Cents per KWh. Supply Shortages:
On several occasions in this period, the Independent Market Operator (IMO) issued Power Warnings due to high electricity demand, combined with short generation and transmission system limitations. Consumers and industries were asked to immediately reduce their electricity consumption. This supply shortage and corresponding price increases in Ontario put a question mark on the credibility of the provincial government that had claimed that such a shortage would not happen and that customers would receive cheaper electricity in the deregulated market. So there were a lot of complaints by almost all categories of electricity consumers. Re-regulation:
Backout by Ontario Government
After a lot of hue and cry by the electricity consumers, in November 2002 the Ontario Government rolled back and announced retail price freeze at 4.3 cents/kWh to the consumers retroactive to May 1. A series of subsequent amended regulations to this Bill further clarified that price of electricity is to be capped at 4.3 cents per kilowatt-hour to be paid by residential customers, small businesses, farmers and some other designated customers. This rate will remain frozen until 2006. It was felt as reversing the path from a deregulated electricity market towards a regulated market and this further switch over called as Re-regulation Effects of Re-Regulation:
This freezing of electricity price as announced by the government was considered just as the end of market deregulation in Ontario. However the Government denied that deregulation was dead, saying the actual price of power at wholesale level will still fluctuate according to supply and demand. The only change was that consumers would be protected from those fluctuations. But it seems to be a wrong approach to the supply shortage and consumer protection. The reasons being that the regulated prices, whether retail or wholesale, always distort the markets where competitive prices are possible. This can further lead to shortages of supply, inadequate investment, over-consumption, and other problems due to unattractive market. It also looks like just a panicked return to Re-regulation as it was too early to get the impacts of the deregulation in just six months. It is well known that a market transition always gives an unstable and fluctuating market in the beginning and it takes time to get the market settle down and provide the desired results. It has a short term and long term impacts on many issues as below: Energy Conservation:
In the deregulated market, market-based prices provide consumers with the appropriate information, incentives and to take initiatives to conserve energy. But the price caps discourage these initiatives. Normally it is felt that electricity rate increases always encourage people to find ways to conserve energy. This is very clear from the sentiments of the woman from whose home Premier of Ontario announced the retreat from market pricing for electricity in November 2002. She told the media “We can put up the (Christmas) lights and I can entertain and put on some music and the kids can play video games and we won’t have to worry about the bill,”. This is the best example and a warning that the rate freeze can encourage people to use power carelessly. And it proves that market prices force consumers to make decisions about consumption. Untying consumption from prices directly affects the energy conservation and energy efficiency plans. Environmental Concerns:
Price caps are also considered unfriendly to environments. When prices are freezed, there is no encouragement to conserve electricity. In case of supply shortage, Ontario will have to buy more expensive electricity largely from coal fired plants in the United States. It will lead to increase in greenhouse gas emissions. New generation:
In Ontario, electricity generation is a big issue because the province needs enough generating capacity to meet its normal fast-growing demand and seasonal peak demand. Due to initial rising prices the existing producers earn more money from it and it is an incentive for them to see profit opportunities in future investments and to find out new technologies and innovative projects to enable them earn the means to pay for their investments. But price caps short-circuit this investment incentive which ultimately lead to worsen supply shortages. Though the Ontario Government announced some tax breaks to attract new investors in power generation. But only tax breaks don’t increase production market. The only way to ensure more electricity generation is an attractive market and the market price for the electricity to be produced. Investors can be motivated to enter this field when there is a reasonable rate of return for their investments. This was also one of the main objective behind deregulation in the first instance. Even The Premier of Ontario in the recent past admitted that attracting new generating business is a big challenge
It has been felt that the enthusiasm of private sector to make investments in the power generation field has been down after the announcement of the Government about the price freeze in November. It may be due to loss of confidence in the Government policies especially about backtracking from full deregulation or due to unattractive electricity market now. Supply Shortages:
In case of supply shortage or increase in its demand, Ontario has to import power from outside sources which has been done so many times before. The situation may arise that those suppliers are not willing to sell to Ontario because they have more attractive offers elsewhere and Ontario’s market is not much attractive due the price caps, then the supply shortage in Ontario will deepen further. Economy and Tax Structure:
As per the announcement by the Government in November, 2002 the price is capped on retail side in the new market, but the price at wholesale level i.e. the price that producers are paid still fluctuates according to supply and demand. Ultimately this difference between the wholesale price and retail price is to be covered by taxpayers and consumers of Ontario. It was already feared that this price freeze and rebates would cost us around $600 to $ 700 million. And it happened -just take the example of the month of January:
In January, due to cold weather, electricity consumption in Ontario went to a record high. Ontario businesses and residences consumed around 14.5 million megawatt hours of electricity. According to the Independent Market Operator (IMO) the market price of power in January averaged 6.2 cents per KWh. That means the province has to make-up the difference of 1.9 cents per KWh for general consumers and small businesses who are paying only 4.3 cents per KWh. And that cost difference came to $135 million. For the month of December this cost already had been about $110 million. And In addition to this there is already a burden of $335 million on the province due to $75 refund cheques to compensate the consumers for the months of May to November. The total cost to taxpayers of financing the price freeze for the 13 months since it came into effect now stands at $600 million. The average cumulative weighted price for the whole year is slightly more than 6 cents per kilowatt hour as is clear from the data of IMO:

Since the cost of subsidizing consumers stands around $600 million and it is rising, there are not enough funds to cover this consumer subsidy. So the deficits are financed by the Ontario Electricity Finance Corp. (OEFC), the provincial body set up to administer the debt left over by the former Ontario Hydro. As consumers are billed for 4.3 cents per kilowatt hour, but the IMO has to pay generators the full market price. So the IMO submits a bill to the OEFC for the difference between 4.3 cents and the market price. This is ultimately to be a burden on the Tax payers and the Economy of Ontario.

Real Time Prices
Demand Side Management:
In the deregulated market the prices change at different times as per the available supply and the consumer’s demand. The Independent Market Operator (IMO) that set the hourly price for electricity has a Web site that displays prices and demand for electricity in real time and anybody can log on and watch these prices at different times every day. On the demand side- the climate, economic activities and life-styles are the major factors affecting the demand and the prices. On very hot days, due to air conditioners load, Ontario has to buy power at very expensive spot market rates from the open market and so the prices would go high. Similar is the condition in too cold weather due to more heat required. This strong correlation between extreme temperatures (both high and low) and demand, results in increase in prices or we can say a variability and volatility in the prices. It is this increase in gap between the supply and demand which makes the situation worse. On the supply side - Ontario has not this much reserve capacity to meet with these seasonal peak load demands. The reason being that Ontario has less installed generation capacity as per peak demands and even the existing generators have to be taken off-line for routine maintenance or for forced maintenance. So keeping in view these both demand side and supply side problems, the best, cheaper and environmental friendly option available to minimize this gap between supply and demand is Demand Side Management. It is this Market Based Price and Spot Price especially at peak hours which may lead to Load Response Programs and many other innovative programs which can curtail this high rising price. We have numerous examples before us about so many utilities and the consumers who have earned much through these programs. Even this is leading to further new technologies, innovative products and projects along with the creation of new jobs. And these were also the major objectives of deregulation. Conclusion
What should have been done:
While implementing deregulation, the electricity consumers should have been warned about the initial price increase due to market transition and to wait till the market gets settled. Consumers should have been made conscious regarding Demand Based Prices, the Spot Price market structure and that in this type of structure the markets prices go up and down with demand. This would have made people to understand and implement Demand Side Management techniques and thus control Peak Load high prices. Further, instead of freezing the price at 4.3 cents per KWh and accumulating a burden of $ 600 million by this time due to subsidies and rebates, some investments should have been made towards new innovations and technologies for Demand Side Management, Energy Conservation and Efficiency and New Generation of Electricity. This would have lead to a new technologically advance, with more job opportunities, more environmental friendly, and an economically strong province. Thus achieving almost all the objectives of deregulation.