The laws of economics suggest that when supply goes up, prices fall.

Not so in Ontario's increasingly twisted electricity market.

Here, heavily discounted surplus power is routinely sold to neighbouring utilities in Quebec and various U.S. states, while customers at home face a steady diet of higher rates.

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Ontario had net exports of more than 1,000 megawatts of electricity last year, or enough to power a million homes. Occasionally, Ontario Power Authority even pays Hydro-Québec to take electricity off its hands – power the Quebec utility can then resell in New England at a profit.

Al Yousef, process improvement manager at plastic packaging maker Par-Pak Ltd. of Brampton, Ont., is appalled by this bitter irony.

The company pays 12 to 14 cents per kilowatt hour for electricity at its three Toronto-area plants – four or five times the price charged to Ontario's neighbours in the wholesale market.

Mr. Yousef wonders whether Ontario really wants a manufacturing industry. Par-Pak, which has 500 Ontario employees, could save millions of dollars a year by moving to Buffalo, which is dangling cheap power and tax breaks to attract Ontario manufacturers.

"It's not fair for us as a manufacturer … [to be] paying for the mistakes done by the province," Mr. Yousef said. "We are a Canadian company, but how much can we take?"

Thanks to a dysfunctional market, Ontario has become an island of high-priced electricity in a North American sea of surpluses and falling rates.

Higher electricity rates is one of a growing list of good reasons not to make things in Canada. Already reeling from the high dollar and a host of competitive disadvantages, expensive power risks forcing more businesses out of the province altogether – to Quebec, or more likely, to the United States.

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The problem goes way beyond the $1-billion squandered on two cancelled gas-fired power plants.

The culprit for Ontario's pricey electricity is the so-called "global adjustment," which is added to customer bills, but not the export price. The surcharge is a catch-all that pays for a decade or more of botched deregulation, bloated guaranteed-fixed-price energy purchase contracts and costly efforts to promote wind and solar, while shuttering coal plants.

Energy traders eagerly exploit this price gap. Meanwhile, independent power suppliers, including wind farms and the privately owned Bruce Power, a nuclear power plant near Kincardine, Ont., are often paid for electricity they don't ever produce – a concept referred to as "deemed generation."

"Ontario is probably the worst electricity market in the world," said Pierre-Olivier Pineau, an associate professor and electricity market expert at the University of Montreal's HEC business school.

Ontario's prices are now dangerously out of whack with key neighbouring jurisdictions, who are using cheap natural gas to produce power. The average price paid by large industrial power users in Toronto is nearly 11 cents per kilowatt hour, according to Hydro-Québec's 2013 survey. That compares with 4.8 cents in Montreal, 5.45 cents in Chicago and 8.12 cents in Detroit.

The Toronto-Montreal price gap has widened to 123 per cent, up from 79 per cent in 2009. Four years ago, power was cheaper in Toronto than Chicago. Now the reverse is true.

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There is a better way, argued Tim Clutterbuck, president of stainless steel maker ASW Steel Inc. of Welland, Ont. Instead of selling cheap surplus power to neighbouring utilities, Ontario should be using discounted electricity as an economic development tool – a model used in Quebec, New York and elsewhere.

"That might be a better argument than trying to cover the real cost of power," he explained.

ASW Steel, like other manufacturers, is doing whatever it can to stay competitive, including holding down labour costs and contracting out certain activities. "Power has to come along for that ride," he said.

The competitive pressures on Ontario are mounting. Quebec, which already has some of the cheapest power rates in North America, says it will now offer special discounts as part of a $2-billion effort to revive its moribund economy. Key to the new pitch: Power at 4.6 cents per kilowatt hour for large power users, or half of the going rate in Ontario.

In a rational system – a country with an integrated national electricity market – one province wouldn't be poaching customers from another.

But don't blame Quebec. This is a made-in-Ontario mess.