Presentation to the Standing Committee on Finance and Economic Affairs

Lawrence Solomon

February 11, 1992

Pre-Budget Consultation Hearings

I am grateful for the opportunity to take part in the Committee’s pre-budget consultation hearings, because this next budget is sure to be one of the most widely watched events in Ontario history.  This province, as all parties will acknowledge, is in economic difficulty, and no easy answers appear to be in the offing. I am coming here with some easy answers.  I do not claim to have all the answers, but in one dominant area I do claim to have some easy answers. My answers will help protect social programs while furthering economic needs. My answers will raise government tax revenues while lowering the deficit. They are sure to instill business confidence and promote domestic and foreign investment. They are so compelling that they have become commonplace around the world, in developed countries and underdeveloped ones, by socialist governments and by capitalist ones, by progressive-minded, pragmatic governments of all political stripes.

I have brought several Energy Probe studies with me, which you should have before you. I ask you to turn to the thickest one, the one entitled. The Worldwide Trend to Electricity Sector Privatizations As you’ll see, these privatizations are occurring, in varying degrees, almost everywhere. I have brought a map to show you the change over time: (display map now)  In some cases, privatizations occurred because of ideology. That certainly was a dominant factor in the case of Great Britain, under Maggie Thatcher. But in other cases, socialist parties, such as the Spanish Workers Party, or the Australian or New Zealand Labour parties, were the agents of change.

In the U.S., President Jimmy Carter, a Democrat, was the progressive. Electricity sector privatizations have one thing in common – they make sense, regardless of your political orientation.  They’re happening around the world for the same reason it should happen here. Governments need money for social programs; governments need money to reduce deficits or pay down their debt; governments want to restore their credit rating; governments want to promote liquidity in equity markets; governments want to greatly expand and democratize the ownership of equity, to broader segments of the public.

There are two other reasons electricity sector privatization should be happening here: it would help protect the Ontario environment, and it would lower the cost of power, which would promote jobs.

To give you an idea of what has been happening with Ontario electricity rates, I’d like you torefer to another study before you, entitled .Cross Border Electricity Rates: Ontario’s Loss of Competitiveness I would like to ask you to turn to the first graph, which compares Toronto electricity rates to the U.S. average.

Until 1978, the U.S. and Ontario had very similar electricity structures, both being monopolized sectors. Some parts of the U.S. – those with abundant hydroelectricity – had lower cost electricity than Ontario, but most U.S. utilities charged more for their power than did Ontario Hydro, because most did not have significant water resources. Overall the U.S. charged much more for power than did Ontario Hydro.

In 1978, the U.S. federal government, under the Carter administration, passed anti-monopoly legislation that affected all 50 U.S. states. The monopoly utilities challenged this legislation in the courts, and eventually lost when in the mid-1980s the U.S. Supreme Court ruled that the federal anti-monopoly legislation was constitutional. As a result, the utilities were forced to allow competition.

The graph we’re looking at shows the result. With competition now allowed, vast amounts of cheap and clean power began to flood the U.S. market. Coal and nuclear power expansion from the utilities were stopped dead in their tracks. Replacing these expensive and environmentally damaging technologies were safer and more economic technologies: renewable technologies such as windmills, but most of all, high efficiency gas technologies.The economy was ahead and the environment was ahead.  Now let’s look at the graph to see what happened in Ontario over that same period, during which Ontario Hydro’s monopoly powers remained in tact. As you can see, Hydro’s rates increased dramatically. They will need to continue their dramatic increase if the utility is to avoid taxpayer bailouts. If Hydro rates are capped, as the energy minister said he might do, the result can only be more debt or a rapid decline of the electricity system’s reliability, or both.

Capping rates is not a responsible alternative, but doing what governments everywhere are doing – privatizing some of the electricity sector – would be highly responsible, and simultaneously solve numerous problems.

I propose that Ontario Hydro, at least for the foreseeable future, maintain ownership of its very valuable transmission system, which is a natural monopoly, and maintain the debt incurred to build the transmission system. I’d like Hydro to continue to manage the grid. No change there. I also propose that the nuclear division of Ontario Hydro be segregated into a subsidiary called Ontario Nuclear, which would continue to be owned by Ontario Hydro.

The debt incurred to build the nuclear plants would remain associated with the nuclear plants. The nuclear plants would be operated by the very same personnel that run them today. Again, no real change here.

The change comes with Hydro’s non-nuclear plants, which I propose be sold off to companies in the private sector. The plants could be organized into several electricity generating companies and sold through a public offering, as the Nova Scotia government is doing with its privatization of Nova Scotia Power, and as many other governments around the world have done. These plants would be sold with their associated debt, and would fetch for Ontario taxpayers something in the area of $15 to $20 billion. The $15 billion need not come in all at once either – many governments are selling off their utilities in several tranches, and even then on the installment plan.

For example, in the UK only 60% of the government’s stake was sold, and then it was payable in two installments, over the course of two years. Spreading out the revenues is desirable because it doesn’t overload the equity markets, and so keeps the value of the government’s asset high, while producing a continuing revenue stream for the government.

The revenue stream doesn’t end, even after all the installments are paid, because the new, private sector companies have become taxpaying members of society. If just the non-nuclear stations were in the private sector, annual provincial income tax could come to $500 million per year, quite apart from the economic growth, and increased tax revenues, that would flow from lower electricity rates. If all electricity was subject to the same taxes as any other business or another commodity, billions in additional revenues would come in to the provincial purse.  Those revenues could be used to lower taxes for the rest of society, creating a more level playing field. They could be used to lower the deficit or the debt, reducing future interest payments. They could be used to finance our social safety net. Or they could be used for all three.

How you choose to allocate those funds among those purposes is an area for legitimate disagreement, and I would be disappointed if the members around this room did not disagree strongly about what this province’s spending priorities should be. But whether you choose to privatize some of the Hydro system, to give yourself the freedom to choose among those options, should not be a matter of serious controversy for most fair-minded people in this room. Privatizing Hydro helps socialists be socialists and helps capitalists be capitalists. Be yourselves, honourable members, and privatize Ontario Hydro.

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