International Swaps

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July 11, 2001
International Swaps Derivatives
Association Transforming the Derivatives
Business The Emerging Ontario Electricity Market
Meg Timberg Solicitor
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Emerging Electricity Market

• Historically, Ontario Hydro was an integrated
  utility, generating and transmitting electricity.
  Electricity was sold at regulated rates
• no electricity derivatives market existed in
  Ontario.

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Emerging Electricity Market

• In 1998, the Province created the Market Design
  Committee (oversees design, creates rules etc.
  for the New Ontario Market) and the market
  restructuring legislation, the Energy Competition
  Act, 1998 was enacted
• Ontario embarked on the course of deregulating
  the electricity sector and creating a New Market
  for electricity.

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Emerging Electricity Market

• April 1, 1999, business of Ontario Hydro
  transferred to separate entities
• Ontario Power Generation Inc. (generation
  business)
• Hydro One Inc. (transmission, rural distribution
  and retail energy services businesses)
• Independent Electricity Market Operator (IMO)
  (centralized independent electricity system
  coordinator and independent market operator)

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Emerging Electricity Market

• Electrical Safety Authority (electrical equipment
  and electrical wiring installation inspection
  functions)
• Ontario Electricity Financial Corporation
  (OEFC) (manages retirement of Ontario Hydros
  outstanding debt and other obligations for
  non-utility generator contracts)

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Current Status

• Market Rules are being developed.
• Market testing is in process.
• OPG continues to sell electricity at regulated
  rates.
• Market Participants are developing strategies,
  products etc. for New Market.

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Date of Market Opening

• Province has indicated Open Access should be
  achieved by May 1, 2002 subject to four
  conditions being met
• protecting consumers and offering more choice
• creating a strong business climate with a
  reliable supply of electricity
• protecting our environment and
• encouraging new ways of doing business and
  supporting the search for alternative sources of
  power.

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Market Power Mitigation

• OPGs generating license has two market power
  mitigation provisions, intended to help create
  framework for a competitive marketplace.
• 1. Rebate Mechanism (hedges against price
  increases)
• majority of OPGs expected Ontario energy sales
  will be subject to an average annual price
  threshold of 3.8 cents per kWh
• OPG rebates any excess earned to Ontario energy
  consumers via the IMO (creates automatic hedge
  for Ontario consumers).

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Market Power Mitigation

• 2. OPG relinquishing effective control of
  generating capacity (thereby creating competition
  in generation of electricity)
• First target decontrol at least 4,000 MW of
  fossil generating capacity (1,000 MW of which can
  be substituted with hydroelectric generating
  capacity) within 42 months after Open Access.
• Second target reduce effective control over
  electricity supply options to 35 or less of
  total electricity supply options in Ontario
  within 10 years of Open Access.

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New Market - Establishes a Floating Price for
Electricity

• Generators may submit to the IMO offers to sell
  electricity and consumers (i.e. load) may bid
  to purchase electricity from the IMO.
• Generators and load who do not submit an offer or
  bid will be non-dispatchable (i.e. will
  automatically sell or purchase at floating
  price).
• Price will be established and electricity will be
  dispatched based on offers and bids received by
  IMO to sell (and purchase) energy and operating
  reserve.

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New Market Lends Itself to Price Management

• Generally speaking, generators will receive the
  IMO 5-minute price and load will pay the IMO
  hourly market clearing price
• price paid/received will be a floating price, not
  the amount offered/bid
• creates incentive for generators and load to
  enter into OTC derivative contracts to fix the
  price of electricity.
• An energy forward market will not be established
  as of Open Access, but may be introduced at a
  later date.

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Retail Consumers

• Can either fix price of electricity by
  contracting with a competitive retailer, or
  purchase energy from current distributor
  (standard supply service or SSS).
• Generally, distributors of SSS will charge
  customers with demand greater than 50 kW the
  hourly spot price directly, while consumers with
  less demand will be charged a fixed annual rate
  based on a forecast spot price, subject to
  adjustment at the end of each year against the
  actual spot price.

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Status of Emerging OTC Derivatives Market

• Various market participants are developing
  products to meet customers price management needs
  following Open Access.
• Products and opportunities will develop over time
  as market develops.