Ontario Electricity Prices and Industrial Competiveness

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					   Ontario Electricity Rates and
   Industrial Competitiveness




               Presented to

Association of Major Power Consumers
               of Ontario



            March 24, 2006




          Navigant Consulting Ltd.

        2 Bloor Street West, Suite 2005
         Toronto, Ontario M4W 3E2
                (416) 927-1641

        www.navigantconsulting.com
T ABLE OF C ONTENTS
INTRODUCTION ....................................................................................................................1
  Major Findings............................................................................................................................................. 1

ELECTRICITY INTENSITY ......................................................................................................3
  Introduction ................................................................................................................................................. 3
  Industries and Data Analyzed .................................................................................................................. 3
  Electricity Intensity Comparisons............................................................................................................. 4
  Findings ........................................................................................................................................................ 4

INDUSTRIAL ELECTRICITY PRICE COMPARISONS ..............................................................8
  Data Sources and Price Definitions .......................................................................................................... 8
  Overall Average Price Comparisons ...................................................................................................... 10
  Price Comparisons for Specific Industries............................................................................................. 13
  Findings ...................................................................................................................................................... 17

COMPARISON OF PRICES PAID ............................................................................................18
NEXT STEPS...........................................................................................................................21
CONCLUSIONS ......................................................................................................................22
APPENDIX A: US CENSUS REGIONS & DIVISIONS MAP ...................................................23




Ontario Electricity Rates and Industrial Competitiveness                                                                                            Page ii
L IST OF F IGURES
Figure 1: Electricity Intensity: Pulp and Paper Manufacturing............................................................... 5
Figure 2: Electricity Intensity: Petroleum Refining ................................................................................... 6
Figure 3: Electricity Intensity: Chemical Manufacturing ......................................................................... 6
Figure 4: Electricity Intensity: Iron and Steel Manufacturing.................................................................. 7
Figure 5: Electricity Intensity: Cement Manufacturing ............................................................................ 7
Figure 7: Industrial Rates Comparison- Ontario versus Canadian Jurisdictions................................. 11
Figure 6: Industrial Rates Comparison- Ontario versus US Jurisdictions ........................................... 13
Figure 8: Iron and Steel Manufacturing- Price Comparison by State................................................... 14
Figure 9: Petroleum Refining- Price Comparison by State and Province ............................................. 15
Figure 10: Pulp and Paper - Price Comparison by State and Province ................................................. 15
Figure 11: Chemical Manufacturing- Price comparison by state and province ................................... 16
Figure 12: Cement Manufacturing- Price comparison by state .............................................................. 17
Figure 13: Comparison of Prices Paid in 2003........................................................................................... 19
Figure 14: Comparison of Prices Paid in 2004........................................................................................... 20




Ontario Electricity Rates and Industrial Competitiveness                                                                   Page iii
L IST OF T ABLES
Table 1: Ontario Price Derivation ................................................................................................................ 9
Table 2: Electricity Price Growth Rates, US and Ontario ........................................................................ 12




Ontario Electricity Rates and Industrial Competitiveness                                                                            Page iv
I NTRODUCTION

Navigant Consulting Ltd. (Navigant Consulting) was retained by the Association of Major Power
Consumers in Ontario (AMPCO) to research and compare current and historical electricity prices in
Ontario and other North American jurisdictions. The objectives of this study are to provide an
objective and independent analysis of how industrial electricity prices in Ontario compare to those
in other jurisdictions in which AMPCO members and their competitors operate as a basis to
compare the impacts of electricity policy on the economic competitiveness of major power
consumers in Ontario.

For this research, Navigant Consulting has consulted AMPCO members and used available
aggregate data from statistical agencies (Statistics Canada and the U.S. Bureau of the Census) and
energy agencies in the United States and Canada and from other sources, as described below.

This report contains six chapters. The first is this introduction. The next reviews relative electricity
intensity (i.e., the percent of total input costs represented by electricity)1 in the United States, Ontario
and other Canadian provinces for selected industries. The third chapter uses publicly available data
to compare average electricity prices for industrial customers in Ontario, other Canadian provinces
and the United States as a whole and in selected states and provinces where AMPCO members and
their competitors have operations. The fourth chapter uses information gathered from AMPCO
members and from utilities in the United States to compare the prices industrial customers actually
pay in these jurisdictions. The fifth chapter discusses possible next steps for a further report, and the
last chapter briefly summarizes the main conclusions.

The findings we have made are based on the available data. We have used completely comparable
data to the extent possible. In some cases, data limitations necessitate comparing average industrial
electricity prices in Ontario, other Canadian provinces and prices for specific industries in the
United States. Where that is the case, the findings report on patterns, rather than on direct
comparisons for each industry.

Major Findings
Up to and throughout the 1990s, average industrial electricity prices in Ontario were lower than in
competing jurisdictions in the United States. These rates reflected Ontario’s low-cost indigenous
resources and a policy of cost-based pricing. The opening of the Darlington nuclear plant and the


1   Note: this comparison relies on total factor input data which considers electricity costs as a proportion of total fixed and
     variable production costs. Another approach would to be consider electricity costs as a proportion of variable or
     marginal costs.

Ontario Electricity Rates and Industrial Competitiveness                                                          Page 1
inclusion of its cost in the rate base put some upward pressure on Ontario electricity rates in the
early 1990s, but the relative position was largely maintained. After the opening of the Ontario
electricity market in 2002, however, prices paid by Ontario electricity consumers rose significantly
relative to those in the United States, even after accounting for rebates and the phase-out of
preferential rates for individual customers. With the greater than 15% increase in 2005, delivered
industrial electricity prices in Ontario have increased over 60% since 2001. Forward electricity prices
for Ontario suggest that price levels will rise further in 2006.

Ontario industrial electricity prices rose above those in industrial states that compete with Ontario,
like Ohio and Illinois, where before they had been lower.2 In part, this increase was due to higher
prices in Ontario; in part, it was due to the increase in the value of the Canadian dollar.

The Canadian dollar’s rise also affected these industries’ competitiveness directly. The higher dollar
raised input costs in Ontario relative to those of competitors in the United States, raising prices on
Canadian products. For those products priced on world markets in US dollars, the value of the
product in Canadian dollars declined.

Relative to other Canadian provinces, Ontario has historically had somewhat higher industrial
electricity prices than those in Quebec, Manitoba and British Columbia. The price increases of the
last five years have significantly widened the gap, and also put New Brunswick’s prices below those
in Ontario. The rise in the value of the Canadian dollar did not affect the relative ranking of
electricity prices in Canada.

These price increases are likely to result in greater declines in economic output in Ontario than in
competing jurisdictions. Large electricity-intensive industries in Ontario tend to have a higher ratio
of electricity costs to total costs than do similar industries in the United States, which may be a result
of the earlier pattern of lower prices in Ontario.

The relative price increase in Ontario accelerated in 2004 and 2005.




2   Given the lags in reporting electricity prices in other jurisdictions a comparison between delivered electricity prices in
    Ontario and those in other jurisdictions for 2005, when industrial electricity prices have increased dramatically, cannot
    be made.

Ontario Electricity Rates and Industrial Competitiveness                                                        Page 2
E LECTRICITY I NTENSITY

Introduction
For most manufacturing industries, electricity represents a relatively small fraction of total costs,
often under 2%.

For some industries, however, electricity is a very important component of total cost. For these
more electricity-intensive industries, electricity costs can factor more importantly into locational and
production decisions. Producers generally will seek to locate in areas where their total costs,
including capital, labour, energy, and transportation, are minimized. The greater the relative
importance of electricity in the total, the more likely it is that a decision could be influenced by
electricity costs.

Industries and Data Analyzed
The industries chosen for this study include:

       •   Forest products, including pulp and paper

       •   Steel manufacture

       •   Petroleum refining

       •   Chemical manufacturing

       •   cement manufacturing.

Difficulty of finding data, either for Ontario or for comparable industries in the United States, has
limited the number of industries which can be analyzed fully. We have full analysis for the pulp
and paper, steel manufacture, petroleum refining, and chemical manufacturing industries. We
sought data from smelting and refining and for automobile manufacturing. However, we have data
relating only to Ontario for smelting and refining and data related only to the United States for
automobile manufacturing, so we cannot make comparisons for those industries.

We gathered data on electricity prices, usage and activity in these industries in the United States and
Ontario. 3 For the United States, the electricity data for the industries analyzed are available only as


3   There is a break in the industry definitions in 1997 in both the United States and Canada. Prior to that year, each used
     their own Standard Industrial Classification Code. After 1997, both switched to the North American Industrial

Ontario Electricity Rates and Industrial Competitiveness                                                      Page 3
aggregates for four geographic regions: Northeast, Midwest, South and West.4 The comparisons are
for the years 1991, 1994, 1998 and 2002, for which comparable data are available. The competitive
electricity market in Ontario opened in 2002. As the analysis in Chapter 3 shows, electricity prices
have increased significantly since market opening in Ontario. Rates have increased further in 2005,
with indications that these rates may be higher yet in 2006.

Electricity Intensity Comparisons
This section reports on comparative electricity intensities for selected industries in the United States
and Ontario. We gathered data on electricity usage and activity in these industries in the United
States and Ontario. For the United States, the data relate to the averages for four geographic
regions: Northeast, Midwest, South and West. 5 Data from the statistical agencies are available for
individual industries only for these aggregate regions. The comparisons are for the years 1991, 1994,
1998 and 2002. The results are shown in Figures 1 to 5. The data shown there are electricity
expenditures as a percentage of the value of total shipments in the industry. They therefore
represent electricity expenditures relative to total costs plus total profit margins. They measure the
cost intensity of electricity usage.

Findings
The data show some clear patterns. First, the more energy-intensive industries in Ontario have a
higher level of electricity cost intensity than do similar industries in the United States. Ontario
producers appear to be using more electricity-intensive production techniques. Because electricity
prices in Ontario have historically been lower than those in the United States, Ontario producers
would rationally have responded by choosing more electricity-intensive production technologies.
This causes these industries to be more susceptible to increases in electricity prices.

Second, for most industries in both countries, electricity cost has generally been falling as a fraction
of total costs over the period of the study. The overall trend is partly related to the fact that, for most
of this period, electricity prices were falling relative to other prices. Since demand for electricity is
not highly responsive to price, a decrease in price will reduce the total amount spent on it. The
increase in intensity may also be related to technical change in the industries, as increased efficiency
in the production equipment can lead to lower relative electricity costs. As prices rise, total
electricity costs will also rise, given that electricity usage is not highly responsive to price.



   Classification code (NAIC). Comparisons of results before and after that point are therefore more indicative than
   precise. After that point, the US and Canadian data are more comparable, due to the harmonization of industry
   definitions.
4 A map showing these regions is in Appendix A.

5 A map of these regions is attached as Appendix A




Ontario Electricity Rates and Industrial Competitiveness                                               Page 4
An exception to the pattern of falling electricity cost intensities is the increase in electricity cost
intensity in some Ontario industries in 2002. This may be due, as will be discussed in the next
section, to the upward effect on prices of the opening of the competitive electricity market in Ontario
in that year.

Another pattern is that the more electricity cost intensive of these industries – pulp and paper, iron
and steel, and cement manufacture – have greater differences between the US and Canadian
intensities than do the less electricity cost intensive industries. This would be expected where lower
electricity costs in Ontario over time led to a choice of more electricity-intensive processes.

Figure 1: Electricity Intensity: Pulp and Paper Manufacturing

                                                                    6%
                       Electricity cost to value of shipments (%)




                                                                    4%




                                                                    2%




                                                                    0%
                                                                         1991                   1994                  1998                2002

                                                                                                         Year

                                                                                Ontario   US - South   US - Midwest     US - Northeast   US - West



Data Source: Natural Resources Canada, Office of Energy Efficiency; Statistics Canada, and Energy Information Administration -
Manufacturing Energy Consumption Survey (MECS)




Ontario Electricity Rates and Industrial Competitiveness                                                                                             Page 5
Figure 2: Electricity Intensity: Petroleum Refining

                                                                                 3%



                      Electricity cost to value of shipments (%)



                                                                                 2%




                                                                                 1%




                                                                                 0%
                                                                                      1991                   1994                   1998                 2002

                                                                                                                       Year

                                                                                             Ontario   US - South    US - Midwest     US - Northeast    US - West



Data Source: Natural Resources Canada, Office of Energy Efficiency; Statistics Canada, and Energy Information Administration -
Manufacturing Energy Consumption Survey (MECS)


Figure 3: Electricity Intensity: Chemical Manufacturing

                                                                                 2%
                                    Electricity cost to value of shipments (%)




                                                                                 1%




                                                                                 0%
                                                                                      1991                    1994                  1998                  2002

                                                                                                                        Year

                                                                                             Ontario   US - South    US - Midwest      US - Northeast   US - West



Data Source: Natural Resources Canada, Office of Energy Efficiency; Statistics Canada, and Energy Information Administration -
Manufacturing Energy Consumption Survey (MECS)



Ontario Electricity Rates and Industrial Competitiveness                                                                                                            Page 6
Figure 4: Electricity Intensity: Iron and Steel Manufacturing

                                                                    6%



                     Electricity cost to value of shipments (%)



                                                                    4%




                                                                    2%




                                                                    0%
                                                                          1991                      1998                          2002

                                                                                                    Year

                                                                          Ontario    US - South   US - Midwest   US - Northeast     US - West



Data Source: Natural Resources Canada, Office of Energy Efficiency; Statistics Canada, and Energy Information Administration -
Manufacturing Energy Consumption Survey (MECS)


Figure 5: Electricity Intensity: Cement Manufacturing

                                                                    20%
                       Electricity cost to value of shipments (%)




                                                                    15%




                                                                    10%




                                                                    5%




                                                                    0%
                                                                          1991                       1998                         2002

                                                                                                     Year

                                                                           Ontario   US - South   US - Midwest   US - Northeast     US - West



Data Source: Natural Resources Canada, Office of Energy Efficiency; Statistics Canada, and Energy Information Administration -
Manufacturing Energy Consumption Survey (MECS)



Ontario Electricity Rates and Industrial Competitiveness                                                                                        Page 7
I NDUSTRIAL E LECTRICITY P RICE C OMPARISONS

This section compares publicly available data on industrial electricity prices in the United States,
other Canadian provinces and Ontario. In jurisdictions where industrial customers can choose
alternative suppliers, as they can in most of North America, the customers do not necessarily pay
the regulated prices. US statistical agencies gather data on delivered prices, which are compared
here to delivered prices in Canada.

Data Sources and Price Definitions
The intention is to compare delivered electricity prices for large industrial customers in Ontario,
other Canadian provinces and the United States, using publicly available data. Comparisons using
data collected from AMPCO memers are presented in a later chapter.

In Ontario, under the electricity supply structure as it existed before 2002, Ontario Hydro directly
served about 100 of the largest industrial customers in the province, those that had direct
connections to the transmission system. The rate for such customers was called the Direct Customer
Rate (DCR), and it was a delivered price that included both the supply of electricity and the cost of
transmission. Historical data on the DCR are available from the Ontario Electricity Financial
Corporation.

After 2002, these large industrial customers were required to participate in the competitive
wholesale market, purchasing power from the wholesale market pool through the Independent
Market Operator (now the Independent Electricity System Operator – IESO). Some industrial
customers who paid preferential rates under provisions of the Power Corporation Act continued to
pay preferred rates on a declining portion of their consumption through Transitional Rate Orders,
which are to be phased out over a four year period (the last step in the transition to 100 percent
elimination is set to take place in the spring of 2006). In addition, all Ontario electricity customers
received rebates under the provisions of the Market Power Mitigation Agreement (MPMA), which
was put in place in 2002 as a temporary measure to mitigate OPG’s market power while OPG
reduced its market power by decontrolling first its price-setting assets and then other assets. The
MPMA rebate was renamed the Business Protection Plan Rebate in 2002 and was subsequently
replaced in the spring of 2004 by a combination of regulated prices and revenue limits. The impact
of these rebates was to reduce effective electricity prices below the average of wholesale market
prices.




Ontario Electricity Rates and Industrial Competitiveness                                   Page 8
Table 1 below shows the derivation of the Ontario price after the opening of the IESO-controlled
market6. The basis for the price is the average Hourly Ontario Electricity Price, plus applicable
charges and less applicable rebates. This price and the history of the DCR are used as the average
Ontario electricity price in the comparisons that follow. For the sake of comparison, these prices for
Ontario therefore do not include any distribution charges, although many large industrial,
institutional and commercial customers (and of course, all residential customers) pay distribution
charges in addition to the costs discussed below.

No publicly available data identify prices paid by firms in individual industries.

Table 1: Ontario Price Derivation

          ¢/kWh (Cdn Dollars)                     2001        2002        2003        2004        2005
    DCR                                            5.39       5.83 1         -           -          -


    HOEP                                             -        5.54 2       5.67        5.19       7.19


    Wholesale market service charges                 -        0.72 2       0.48        0.51       0.63


    Wholesale transmission charges                   -        0.86 2       0.84        0.93       0.81


    Debt retirement charge                           -         0.70        0.70        0.70       0.70


    Rebates 3                                        -         1.20        0.82        0.33       1.23 5

    Average delivered price for
                                                   5.39       6.38 4       6.87        7.00       8.11
    transmission customer

1 The DCR was in effect for the first 4 months of 2002 before the wholesale market came into operation.
2 The wholesale market data for 2002 is averaged from May 2002 onwards which is when the wholesale market came into operation. The
transmission charge is an approximate since data on transmission charge is not available for first three months of market operation.
3 The rebates include the MPMA (1.2 c/kWh) for 2002-2003 which was replaced by BPPR (0.63 c/kWh) for 2003-2004. The IESO's market

year is from May 1st to April 30th.
4 The average delivered price for 2002 is calculated using a one-third weight for the DCR rate and a two-third weight on the Wholesale

price.
5 The rebates for 2005 include The Global Adjustment (average from Jan. - Dec. 2005) and the OPG Non-Prescribed Assets Rebate

(estimated rebate rate for the period April 1, 2005 – December 31, 2005)




6   The average price shown for 2002 is just for the last eight months of the year, after the opening of the competitive
    wholesale electricity market. The 2002 price used in the charts is the weighted average of this price and the price for the
    first four months.

Ontario Electricity Rates and Industrial Competitiveness                                                                 Page 9
Canadian data were obtained from several sources. Rates of industrial price increase for the 1990s
came from the NRCan/CEA publication Electric Power in Canada, the last issue of which provided
data up to 1999. That publication also provided some price level data for 2000.7 Industrial electricity
price data for 2001-2005 for all provinces except Alberta came from Manitoba Hydro’s annual
survey of industrial rates. Alberta data came from the Alberta Electricity System Operator (AESO).8
Data from these sources were adjusted to make the series compatible.

Ontario prices as detailed Table 1 are only for the largest industrial customers, those directly
connected to the transmission system. The data from the sources listed above are prices for
industrial customers taking service from a distribution utility. The prices were adjusted to make
them comparable to Ontario prices. Because of the necessity of these adjustments, the industrial
price series for Ontario and the other Canadian provinces may not be precisely identical, but the
data do allow comparison of the relative patterns of price changes.

Data for the United States come primarily from the Energy Information Administration (EIA) of the
Department of Energy and from the Bureau of the Census.

The EIA data give average prices paid, by industry, for firms located in the four geographic regions.
These data are used for the comparisons of prices for individual industries. Because of the lack of
individual industry data in Ontario, the comparisons in all cases are between prices paid by firms in
these industries in the United States and the average price for all large industrial customers in
Ontario.

The average price levels analyzed here can mask differences for particular firms and for particular
sub-groupings within these industries. The prices some industrial customers actually pay are
determined by their time of use and by their specific contractual arrangements.

Overall Average Price Comparisons
The overall price comparisons include average prices for Ontario against other Canadian provinces
and Ontario prices against US prices.

Figure 6 below compares industrial electricity prices in Ontario and those in British Columbia,
Alberta, Manitoba, Quebec and New Brunswick. It shows that industrial electricity prices in Ontario
have historically been higher than those in most other Canadian provinces. British Columbia,



7   Canadian Electricity Association, Natural Resources Canada, Electric Power in Canada 1998-99
8   The data for Alberta from Electricity Power in Canada and Manitoba Hydro were too incompatible to use, since they
     covered different entities. Alberta data shown therefore start in 2000, with the opening of the Alberta competitive
     market, for which data are readily available from the AESO.

Ontario Electricity Rates and Industrial Competitiveness                                                 Page 10
Manitoba and Quebec have relied on hydraulic resources for lower electricity prices. Prices in
Alberta were quite high in the first years of its market, but have since fallen significantly as the
market matured and new supply became available. Alberta has abundant resources of domestic
coal which can be exploited at low transportation cost. Only New Brunswick has a resource mix like
Ontario’s, with nuclear, coal and hydraulic resources, and only New Brunswick has historically had
higher industrial electricity prices than Ontario.

The recent increase in prices in Ontario widened the price differential significantly, and also brought
Ontario industrial electricity prices above those in New Brunswick and Alberta.

Figure 6: Industrial Rates Comparison- Ontario versus Canadian Jurisdictions


                                                          16.00
                                                                     Ontario
                                                                     New Brunswick
                                                                     Quebec
                                                          14.00
                                                                     British Columbia
                                                                     Manitoba
  Average Industrial Electricity Price (CAD cents /kWh)




                                                          12.00      Alberta




                                                          10.00



                                                           8.00



                                                           6.00



                                                           4.00



                                                           2.00



                                                           0.00
                                                              1990   1991      1992   1993   1994   1995   1996   1997   1998   1999   2000   2001   2002   2003   2004   2005

                                                                                                                     Year




Data Source: IESO, OEFC, Electric Power in Canada 1998-99, Comparison of Electric Bills Survey- Manitoba Hydro, AESO, NCI
Analysis


To make comparisons between average prices paid for electricity by industrial customers in the
United States and Ontario requires that one currency (Canadian or US dollars) be converted to the
other by the exchange rate. The comparative prices are therefore the result of two factors, the own-
currency price and the exchange rate.

To look at how prices changed in their own currencies, Table 2 below has the growth rates of broad
average industrial prices in their own currencies, averaged over three historical five-year periods.




Ontario Electricity Rates and Industrial Competitiveness                                                                                                                         Page 11
Table 2: Electricity Price Growth Rates, US and Ontario


                     US Industrial Electricity Price Ontario Industrial Electricity Price
       Period
                            ($US) AAGR                          ($C) AAGR
      1990-1995                    0.33%                                6.18%
      1996-2000                    0.09%                                0.00%
      2001-2005                    1.06%                                12.59%

Ontario electricity prices rose in the early 1990s as the Darlington Nuclear Generating Station was
brought into service while demand growth was slower than forecast. In the late 1990s, the Ontario
Hydro price was frozen. The five years from 2001-05 show the effect of the opening of the
competitive market and tight electricity supply conditions. In the United States, electricity prices
remained relatively flat in the 1990s, with fuel prices low and not increasing. The five years after
2001 show some price escalation as fuel prices have climbed.

These patterns can also be seen in the comparisons converted to the same currency. Figure 7 below
shows an aggregate comparison of average industrial electricity price in all of the United States and
that in each of the four geographic regions against the average electricity price in Ontario for the
years 1990 to 2004.9 The Ontario price rose relative to those in the United States in the early 1990s,
flattened out during the rest of the 1990s, and rose rapidly after 2002.

Despite these periods of relative price increase, the average Ontario industrial electricity price
remained below all the regional US averages over the entire period from 1990 to 2003.

The Ontario electricity market was opened to competition in May 2002. Table 1 above shows the
calculation of the Ontario electricity price used in Figure 7. The figure indicates that average
industrial electricity prices in Ontario rose sharply relative to those in the United States from that
year on. The average Ontario industrial electricity price in Canadian dollar terms rose after 2001; in
Canadian dollar terms, the Ontario electricity price rose steadily relative to prices in the United
States from 2002 to 2005.

The result of these relative price changes is that, after 2001, the Ontario industrial electricity price
rapidly closed the gap between it and the US price and surpassed the average US price in 2004.

A similar pattern is evident when comparing the Ontario industrial price with those of the four US
regions. Prior to the opening up of the Ontario electricity market in 2002, the Ontario industrial
price was lower than that of all four regions. Since 2002, Ontario’s industrial electricity price has



9   For the comparisons, all prices are reported in Canadian dollars.

Ontario Electricity Rates and Industrial Competitiveness                                    Page 12
become higher than those of the Northeast, Midwest, and Southern regions, but not the Western
region.

Figure 7: Industrial Rates Comparison- Ontario versus US Jurisdictions


                                           14



                                           12
   Electricity price (CAD cents per kWh)




                                           10



                                            8



                                            6



                                            4


                                                                        Northeast                                          Midwest
                                            2
                                                                        South                                              West
                                                                        US Industrial Electricity Price                    Ontario Industrial Electricity Price

                                            0
                                            1990   1991   1992   1993    1994     1995    1996     1997      1998   1999   2000   2001     2002    2003    2004   2005

                                                                                                          Year




Data Source: IESO, OEFC, and Energy Information Administration - Manufacturing Energy Consumption Survey (MECS), Short term
Energy Outlook


Price Comparisons for Specific Industries
For comparisons that are more relevant to individual industries, Figure 8 to Figure 12 below show
industrial electricity prices in US states and Canadian provinces which have high levels of activity in
the selected industries, and therefore represent the prices likely to be paid by AMPCO competitors.

These figures provide some useful direct comparisons for states and provinces of particular interest.
They generally show the same pattern as the regional data in Figure 7, but with more detail. The
most dramatic of these charts is Figure 8 for the iron and steel industry. Ontario starts the period
with the lowest industrial electricity prices of the competing jurisdictions, and ends the period with
the highest prices. Prices dropped dramatically in Pennsylvania after 2002, making it no longer the
highest-priced among these markets for industrial electricity.




Ontario Electricity Rates and Industrial Competitiveness                                                                                                                 Page 13
Though not so dramatic as for iron and steel, the other figures all show Ontario starting out as the
lowest or next to lowest industrial electricity price jurisdiction with its prices passing at least some
competitors during the period.

Figure 8: Iron and Steel Manufacturing- Price Comparison by State


                                   10.00


                                    9.00


                                    8.00
   Electricity Price (CAD c/kWh)




                                    7.00


                                    6.00


                                    5.00


                                    4.00


                                    3.00


                                    2.00
                                                                                                           OH           PA      AL           ON       IN
                                    1.00


                                    0.00
                                           1990   1991   1992   1993   1994   1995   1996   1997   1998   1999   2000   2001   2002   2003   2004   2005

                                                                                               Year




Data Source: IESO, OEFC, and Energy Information Administration – State Energy Data




Ontario Electricity Rates and Industrial Competitiveness                                                                                                   Page 14
Figure 9: Petroleum Refining- Price Comparison by State and Province


                                   18.00


                                   16.00


                                   14.00
   Electricity Price (CAD c/kWh)




                                   12.00


                                   10.00


                                    8.00


                                    6.00


                                    4.00

                                                                                            ON          OH         TX           CA        NJ          AB
                                    2.00


                                    0.00
                                           1990   1991   1992   1993   1994   1995   1996   1997    1998   1999   2000   2001   2002   2003    2004   2005

                                                                                                 Year




Data Source: IESO, OEFC, and Energy Information Administration – State Energy Data, Electric Power in Canada 1998-99, NCI Analysis,
Comparison of Electric Bills Survey- Manitoba Hydro, AESO


Figure 10: Pulp and Paper - Price Comparison by State and Province


                                   12.00




                                   10.00
   Electricity Price (CAD c/kWh)




                                    8.00




                                    6.00




                                    4.00




                                    2.00
                                                                WA            NY             GA              ON          NB            BC             QC


                                    0.00
                                           1990   1991   1992   1993   1994   1995   1996   1997    1998   1999   2000   2001   2002   2003    2004   2005

                                                                                                 Year




Ontario Electricity Rates and Industrial Competitiveness                                                                                                     Page 15
Data Source: IESO, OEFC, and Energy Information Administration – State Energy Data, Electric Power in Canada 1998-99, Comparison
of Electric Bills Survey- Manitoba Hydro, NCI Analysis


Figure 11: Chemical Manufacturing- Price comparison by state and province


                                   16.00


                                   14.00


                                   12.00
   Electricity Price (CAD c/kWh)




                                   10.00


                                    8.00


                                    6.00


                                    4.00


                                    2.00
                                                                                            OH            SC        TX          NJ       ON          AB


                                    0.00
                                           1990   1991   1992   1993   1994   1995   1996   1997   1998    1999   2000   2001   2002   2003   2004   2005

                                                                                               Year




Data Source: IESO, OEFC, and Energy Information Administration – State Energy Data, Electric Power in Canada 1998-99, Comparison
of Electric Bills Survey- Manitoba Hydro, AESO, NCI Analysis




Ontario Electricity Rates and Industrial Competitiveness                                                                                                    Page 16
Figure 12: Cement Manufacturing- Price comparison by state


                                   14.00



                                   12.00



                                   10.00
   Electricity Price (CAD c/kWh)




                                    8.00



                                    6.00



                                    4.00



                                    2.00                                                                    ON           AR            OR           CT



                                    0.00
                                           1990   1991   1992   1993   1994   1995   1996   1997   1998   1999   2000   2001   2002   2003   2004   2005

                                                                                               Year




Data Source: IESO, OEFC, and Energy Information Administration – State Energy Data


Findings
Ontario has experienced a serious erosion of its competitive price advantage in industrial electricity
over the last five years, to the extent that in many cases, especially in states where Ontario’s
industrial competitors operate, it has become a price disadvantage. The data clearly show industrial
electricity prices in Ontario climbing rapidly after 2002 relative to those in the United States and
relative to Canadian provinces for all provinces, states and regions, including those with high levels
of activity in industries competing with AMPCO members. The data indicate that Ontario’s
industrial electricity price advantage, maintained throughout the 1990s in comparison to many of
these states, had mostly disappeared by 2005. The price disadvantage relative to Canadian
provinces increased markedly during that time.

Looking at the regional data, the Midwest and South regions are home to many of Ontario’s
industrial competitors in North America. Data for 2004 and 2005 show a widening disadvantage
relative to these regions, as both Ontario electricity prices and the value of the Canadian dollar have
continued to climb. Given the relatively high electricity intensity of these industries, this loss of
competitive advantage can have a more serious impact on their overall competitiveness.




Ontario Electricity Rates and Industrial Competitiveness                                                                                                   Page 17
C OMPARISON OF P RICES P AID

Some AMPCO members have operations in many jurisdictions in North America. For these
jurisdictions, the members often have data on the prices actually paid for electricity in each
jurisdiction where they operate, including Ontario. These data are confidential to each AMPCO
member. They provide a more direct comparison of industrial electricity rates than those using
publicly available data because they are the prices these industrial electricity customers actually pay
in these jurisdictions. They represent the result of both the price or rate structure and the net effect
of the efforts customers make to control their electricity expenditures, such as timing their usage and
hedging prices through contracts.

Figure 13 and Figure 14 compare these actual payment data for the two years 2003 and 2004.10 The
data in the figures are the prices in each jurisdiction, indexed to the price in Ontario.11 The figures
include those jurisdictions in the United States and Canada for which AMPCO members provided
data for both years.

These comparisons do not show any dramatic change in these two years. The difference between
Ontario and the most expensive jurisdiction, New Jersey, does narrow from over 30% to about 10%,
but only Illinois shifts from being more expensive than Ontario to being less expensive.

However, the picture these figures give is consistent with the other information in this report: the
electricity prices industrial customers pay are higher in Ontario than in virtually all the jurisdictions
where competitors of AMPCO members operate. In many of these jurisdictions, the price
differential is quite large. Over two-thirds of the jurisdictions plotted enjoy an industrial electricity
price advantage of 25% or more compared to Ontario. These unfavourable differences have
widened in the more recent years.




10   The last year for which AMPCO members provided sufficient data is 2004.
11   First, all the prices were converted to a common currency, Canadian dollars. For most of the jurisdictions shown, price
     data were available from more than one AMPCO member. These prices were simply averaged to arrive at the indexed
     price.

Ontario Electricity Rates and Industrial Competitiveness                                                     Page 18
                                                                                                    Electricity prices (Index: Ontario=100%)
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Page 19
                                                                                              Relative Electricity prices (Index: Ontario=100%)
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                                                                                                                                                                Figure 14: Comparison of Prices Paid in 2004




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Ontario Electricity Rates and Industrial Competitiveness
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Page 20
N EXT S TEPS

This report relied heavily on publicly available data, which are not always directly comparable
across the jurisdictions. The report also did not attempt to analyze the consequences of the changing
electricity price differentials that it found. Future studies could benefit from more comprehensive
use of data from industry participants and analysis of the impacts on Ontario producers.

Future reports could therefore

    •   Gather more information on prices actually paid in competing jurisdictions

    •   Analyze the conditions of the electricity markets in competing jurisdictions and their
        impact on the prices industrial electricity customers pay
            o   Liquidity of the markets
            o   Ability of market participants to hedge price exposure
            o   Ability of market participants to control electricity costs through controlling use
            o   Price patterns in the markets
    •   Include participation of more industry organizations, especially those representing major
        power consumers, such as forest industries
            o   Use this participation to help gather more information on actual costs for industrial
                electricity.
    •   Analyze the impacts of the price changes on the competitiveness of Ontario industries
            o   Gather actual data from industry participants on the relative cost impacts of
                electricity prices
            o   Gather information on the actual impacts on industrial operations in Ontario of the
                relative electricity price changes.


The future reports would be more focused on using relevant data collected from industry
participants, as opposed to continued reliance on publicly available data sources. The report would
have to be careful in its use of these data to ensure that data confidentiality is not breached.




Ontario Electricity Rates and Industrial Competitiveness                                   Page 21
C ONCLUSIONS

Ontario has experienced a serious erosion of its competitive price advantage in industrial electricity
over the last five years, to the extent that in many cases, especially relative to states where Ontario’s
industrial competitors operate, it has become a price disadvantage.

Despite some increases in the early part of the 1990s, average industrial electricity prices remained
below those in the United States, and somewhat above those in Canadian jurisdictions, throughout
the decade. However, they rose dramatically after the opening of the competitive Ontario electricity
market in 2002. Over the five years from 2001 to 2005, industrial electricity prices in Ontario rose
rapidly.

This rapid price rise significantly widened the gap between industrial electricity prices in Ontario
and those in other Canadian provinces. From 2000 to 2005, the ratio of industrial electricity price in
Ontario to that in Manitoba and Quebec widened from about one and one-third to about one and
one-half.

To compare Ontario prices to those in the United States, they must be stated in the same currency.
The increase in value of the Canadian dollar since the start of the decade12 also affected the relative
cost of electricity in Ontario. The increase in the value of the Canadian dollar simply adds to the
relative electricity price disadvantage for industries in Ontario.

These conclusions can readily be seen in the publicly available data and are corroborated by data
available from some AMPCO members showing how much they actually pay for electricity in the
various jurisdictions in which they operate. Of the 18 jurisdictions for which data were available,
AMPCO members consistently paid higher electricity prices in only one of them, New Jersey. The
data also indicate that the gap between the industrial electricity price in Ontario and in other
jurisdictions is growing, putting Ontario producers at an increasing disadvantage.

This report concluded with some suggestions for further study.




12   The average value of the Canadian dollar appreciated by almost 30% from 2001 to 2005.

Ontario Electricity Rates and Industrial Competitiveness                                     Page 22
A PPENDIX A: US C ENSUS R EGIONS & D IVISIONS M AP




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