CD Howe Institute Roundtable discussion

Lawrence Solomon

September 12, 1994

Thank you for inviting me to this Roundtable discussion, and for giving me the opportunity to discuss why Ontario Hydro should be broken up and privatized to create a competitive electricity sector. Over the years, the case for privatization has been growing steadily.  Today, I believe the case is compelling, so compelling that electricity privatizations 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 a map to show you the change over time: (display map now) In some cases, electricity 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 electricity privatization should happen here. Governments need money to reduce deficits or pay down their debt; governments want money for social programs; 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 to refer to the 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.

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. Rates will need to continue their dramatic increase if the utility is to avoid taxpayer bailouts. If Hydro rates are capped, as the government is attempting to 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 financial problems. Privatization would also eliminate many environmental concerns.

Nuclear power, for example, cannot survive in a competitive system, and would phase itself out. As Mrs. Thatcher found out, nuclear power cannot even be privatized in a competitive system, despite her best efforts. The private sector wouldn’t take the reactors, even for free. To sweeten her offer, Mrs. Thatcher offered the private sector a $5 billion fund for unexpected contingencies, and a continuation of the nuclear industry’s exemption from liability in the event of an accident.

The private sector needed more – at least $20 billion to cover its risks, more than the government could afford. In the end, the private sector simply refused to take ownership of nuclear plants. The UK proved that the marketplace is a powerful environmental ally on other counts as well. Not only did the UK privatization rule out nuclear expansion, it also ruled out coal expansion.  In fact, overnight, 75% of all electricity growth was eliminated, as the private sector realized it could run the existing plants far more efficiently than the public sector had. And that was only DAY ONE of privatization. Soon, the private companies realized that the entire system was so overbuilt that they could prematurely retire existing coal plants.

First a few hundred megawatts were retired, then a few thousand, the amount now slated for premature retirement exceeds 16,000 MW – not just existing coal but also existing oil and nuclear plants. 16,000 MW represents the equivalent of about 30 Pickering-sized nuclear plants. That’s only half the story. While the marketplace is busy retiring these outdated technologies, it is also busy building modern new facilities. The UK’s electricity sector, despite the recession, is in the midst of the biggest building boom since the days of OPEC.  Instead of the polluting coal and nuclear plants the previous monopoly favoured, the UK marketplace is building high efficiency gas generating plants and some renewables – exactly what the marketplace in the US has decided is most economic.  In Ontario, as in the US and the UK, the monopoly chose coal and nuclear. Break up the monopoly and let a competitive system decide, and we’ll find that here, too, high efficiency gas and renewables will dominate new supply, coming in at about half the price.

Much of the new power will be cogenerated by steel mills, pulp and paper companies, and other industries able to produce electricity as a by-product of their existing operations.  Much of the new power will come from dedicated high-efficiency gas-fired electricity plants. Much of it will be provided by farmers, from small hydro plants on their property, from agricultural wastes, and from windmills located on windy knolls that were previously thought worthless. But before investors can confidently invest their money in the electricity sector, they will require secure access.

Just a few months ago, private companies lost tens of millions of dollars in sunk cash when Hydro decided that allowing them to proceed with their building plans would be injurious to Hydro’s bottom line. The Hydro monopoly needs to be broken up.  Here’s how the breakup could occur. 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 ownership change comes with Hydro’s non-nuclear plants, which I propose be sold off to companies in the private sector.  The power plants could be organized into several competing power 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 often attractive to governments 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 would 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. Preserving the Hydro monopoly requires more government-guaranteed debt, lower economic growth, higher electricity rates, and more pollution. For these reasons, the status quo is untenable, and Hydro’s days as a generating utility are numbered.

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