Continuing high world oil prices and uncertain electricity prices in Ontario have the province's $5-billion mining industry worried.

"Ontario is already one of the highest-cost energy jurisdictions," says Chris Hodgson, president of the Ontario Mining Association.

"Where is it going to end is a big question. We need some predictability on long-term electricity pricing," he says. "It can't just be left open-ended."

After labour, energy is the second-highest cost driver for a mining operation, Hodgson says.

Ontario manufacturing plants already face significantly higher electricity costs than their neighbouring counterparts. Plants in Manitoba and Quebec have electricity costs 50 per cent less and 20 per cent less, respectively, according to the Association of Major Power Consumers of Ontario.

Hodgson, who was a cabinet minister in the previous Progressive Conservative government, says the price of electricity and reliability of energy supply for industry are major issues the Ontario government needs to address.

"Metal prices are high now. But this is a cyclical industry and we need to know where the price of electricity is going before investing in expanding existing mines or building new mines," he says. "Uncertainty with electricity prices can affect those decisions. We're not just talking about jobs today, but future jobs."

Ontario's mining companies are among the province's largest consumers of electrical power. Since 2004, all users of power pay the market price. Previously, industrial users were subsidized through specialized rates.

In April, the Ontario Energy Board announced a 12-per-cent increase in electricity prices for industrial customers. The prices remain in effect for one year.

"The 12-per-cent announcement avoided a crisis. We'd heard of price increases between 30 to 50 per cent," Hodgson says.

He says more pricing uncertainty was created when the government recently announced it would postpone for two years the planned shutdown of the Nanticoke coal-fired power station. The 3,938-megawatt station, Ontario's largest coal-fired plant, generates more than half the province's coal-fired capacity.

The government still plans to shut down the province's three other coal-fired plants in 2007.

"We know what is happening in 2005. But what will happen in 2006, 2007, 2008 and 2009? How much is the electricity price going up?" Hodgson says.

The Ontario Power Authority, set up last year to manage provincial energy supply, is expected to release further details on the province's electricity supply reliability and coal-replacement strategy this fall.

Hodgson says the mining association expects to complete its analysis of the effects of the rising price of electricity on Ontario mining companies in the next few months and meet with the government in the fall.

Laura Blondeau, adviser to Minister of Northern Development and Mines Rick Bartolucci, says the provincial government remains committed to ensuring that the costs of Ontario industries do not get out of line with key competing jurisdictions.

"Our government remains focused on working to rebuild the energy sector in Ontario," she says.

Blondeau acknowledges the mining association's concerns about the future stability and viability of Ontario's mining sector, but says it is the strongest it has been in more than 25 years. "Our government has identified the issues and is working diligently to help ensure the long-term success of the industry."

Earlier this month, the Independent Electricity System Operator (IESO) said new power supplies, transmission facilities and conservation initiatives are needed to deal with aging generating facilities and projected growth in demand over the next 10 years. The IESO is responsible for managing the reliability of the electricity system.

The IESO says progress has been made since its last report in March 2004. Since then, gas-fired generation totalling 650 megawatts has been installed, a decision has been made to restart a 515-megawatt unit at the Pickering nuclear plant, and arrangements have been made for 2,200 megawatts of new supply and almost 400 megawatts of renewable energy.

Unless conservation measures take hold, the IESO estimates electricity consumption is expected to grow at an average annual rate of 0.9 per cent.

The uncertainty also concerns Lauri Gregg, director of energy management at Falconbridge Ltd., as the company has been known since June 30 as a result of the merger of Falconbridge and Noranda Inc.

"Any costs associated with energy can't be passed through to the consumer," Gregg says.

"We're price takers. Anyone who competes in a global marketplace has to take the global price," Gregg adds. Because the London Metals Exchange sets prices through contracts for all world metal producers, energy costs come right off the bottom line.

Falconbridge mining operations spend more than $100 million annually on energy in Ontario, mainly on electricity.

The Ontario mining industry spends about the same amount on electricity and natural gas - $330 million - as it does on exploration and development - $314 million, according to the Ontario Ministry of Energy and the Ontario Mining Association.

To protect northern Ontario industries - including mining companies - from the rising electricity prices, Ontario NDP Leader Howard Hampton has called for the provincial government to implement regional electricity pricing.

The difference in electricity prices between jurisdictions in North America creates problems for Falconbridge, Gregg says. The company's main competitor has energy costs in hydro-powered Manitoba of $25 to $30 a megawatt-hour, compared to $60 per megawatt-hour in Ontario. In Missouri, where the company operates an aluminum plant, electricity rates are in the range of $45 US a megawatt-hour.

"The only way to compete is to become more efficient and control energy use," Gregg says. Falconbridge has invested millions of dollars in the past decade to reduce energy use in its manufacturing processes.

Gregg says the company believes the current system should be redesigned to allow companies to sell power under a system known as demand response. "We would turn down some of our processes and sell the power to the independent operator if we received the market clearing price. (We) would become a virtual operator."

- With files from The Canadian Press

(Charles Wyatt can be reached at wyatt@businessedge.ca)