Presentation to the Municipal Electric Association Summer Conference 1992

Lawrence Solomon
Energy Probe
March 18, 1992

Plenary Session #1 V.V.! Public Power in the 1990s

Thank you. You can’t know how heartening it is for me to see the MEA holding this conference, with privatization issues. so prominent. Just one year ago, most people considered many of the issues at this conference to be all-but-irrelevant to Ontario In fact, when the Environ mental Assessment Board examining Ontario Hydro’s 25-Year-Plan decided to hear evidence from Energy Probe about privatizations occurring around the world, the MEA objected, and even went to Court to try to stop the Board from hearing our views.

The Court decided that the Boardcould. hear about privatizations, and we will be presenting our case for a competitive restructuring of Hydro this fall or next spring. And today, I can give you a sense of where we’ll be coming from.

Those of you who know of my books on Ontario Hydro know the respect that I hold for the municipal utilities. The municipalities, as you know, gave birth to Ontario Hydro, in a system that brilliantly combined public and private power.

Somehow you foresaw, back at the turn of the century, the great wisdom in a public grid to carry power from Niagara Falls. That power, lest we forget, was private power. Ontario Hydro was set up not to generate power, but to bring the benefits of private power from Niagara Falls to the dozen or so municipalities which founded it.

The grid was a natural monopoly – your forefathers knew that – and put it into public hands which were then best suited to running a monopoly. But generation was naturally competitive, and so your forefathers’ generation left in private hands, where competition could be employed to keep costs down. Later, of course, Ontario Hydro changed.

It began to acquire generating sites, then used its political muscle to rob municipalities of autonomy. Some of you will remember the great struggles between Ontario and the municipal utilities. The municipalities better than others foresaw that turning Ontario Hydro into a crown corporation would make the utility even less accountable. You resisted that in 1973, but lost, to the province’s grief.

We’re here this weekend to discuss the directions for public power in the 1990s. I’m here to tell you that there is a worldwide trend underway. It’s occurring in capitalist countries and in socialist countries. It’s occurring in western countries, in third world countries, in the countries of the former eastern bloc. And I’m proud to say that this trend is taking the world toward the very system that your forefathers established at the turn of the century. We are going back to a competitive electrricity system. Different countries are pursuing competition in different ways, but almost all employ the princi.ples established by your forefathers – a decentralized system in which a monopoly grid conveys private power. (display map now)

The great experiment with monopoly generation is coming to a close. Some still cling to it, but it is becoming harder and harder to justify monopoly utilities in the modern world. Most governments are realizing that we live in a highly interde.pendent world, and that the electricity sector is too important to leave behind. The restructurings we’re seeing around the world are occurring for many, many reasons. In some cases, these competitive restructurings are occur.

ring 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 restructurings have one thing in common – they make sense, regardless of your political orientation.

They’re happening around the world for the same reason that Ontario Hydro will need to be restructured. 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 a competitive restructuring will be happening here: it will help protect the Ontario environment, and it will lower the cost of power, which will promote jobs. To give you an idea of what has been happening with Ontario electricity rates, I’d like you to look at the overhead slide, which comes from a study entitledCross Border Electricity Rates: Ontario’s Loss of Competitiveness The graph you see 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. In1985, U.S. rates were almost twice as high. 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 intact. As you can see, Hydro’s rates increased dramatically. In 1993 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 – restructuring 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 billion. The $15 billion need not come in all at once – 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 several hundred 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.

Because privatization means a win for the economy, a win for consumers, a win for the environment, because it solves so many problems, it has been steadily winning over more and more members of society.The Financial Post was the first major newspaper to endorse our privatization proposal, in 1989. This year The Globe and Mail, in a brilliant series of editorials, as emerged as a major proponent of privatizing Hydro.

The Provincial Progressive Conservative Party – in power at the turn of the century when Hydro was created – has always defended it. Now it wants see privatization. They’re not alone. Many in the Liveral Party, and even in the NDP are of like mind.

The major power consuming industries used to be staunch Hydro supporters. Now they’re openly starting to question public power. Many in the financial industry are absolutely convinced of the merits of privatizing Hydro – some more convinced than I am that it will happen soon. In fact, one senior member of the investment community who also advises this government, told me just last week that he expects that in the next provincial election campaign all three parties will be campaigning on a platform of privatizing Hydro.Far-fetched? Perhaps.

But in the context of the worldwide trend to electricity sector privatizations, and in the context of what’s been happening in Ontario – with electricity rates and with the provincial debt – perhaps keeping Hydro as a public power monopoly is what’s truly far-fetched.

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