Urban Renaissance Institute

Lawrence Solomon
National Post
August 21, 2003

Fifty million North Americans suffered inconvenience and expense in the Great Blackout of 2003. Not one will receive any compensation.

Millions of companies also suffered inconvenience and expense, and lost business that they will never make up. Amid the ruins, however, lie a lucky handful of companies who will have their losses covered. The lucky are among the electricity monopolies that brought us the Great Blackout of 2003.

Under the system of regulation that dominates North America’s electricity monopolies, customers and taxpayers are almost always at risk, and power companies are almost always saved harmless. The imbalance is even more extreme in central Canada, where deregulation was stopped, where no privatizations have occurred, and where the old monopolies remain largely intact and as unaccountable as ever. To add insult to the injury that Ontarians have just suffered, rates will soon go up, or taxes will increase, to compensate the power companies for their lost business, and the ordeal that they’ve gone through.

In a normal industry, subject to the discipline of a competitive market, heads would roll after a fiasco of such epic proportions. Don’t expect anyone to lose his job at Hydro One – a company that shares responsibility for maintaining reliability on Ontario’s grid. It treats the grid’s failure as someone else’s problem, and happily stands by as politicians on both sides of the border discuss the intricacies of how best to run the electricity business. It also gets grim satisfaction as Ontario Premier Ernie Eves places most blame on distant jurisdictions. (The only ones in Ontario subject to an Eves tongue-lashing are members of the general public. If more blackouts come, he has told Ontarians, it will be because Ontarians aren’t conserving enough.)

A regulatory system that gives a pass to those who cause the damage, and a finger to those who suffer, is worse than no regulatory system at all.

A business whose performance depends on customers conserving – i.e., avoiding – its product is an aberration. Yet in the upside-down world of electricity monopolies, these are accepted as normal, as are the inevitable consequences – frequent minor power failures and infrequent massive ones.

Power customers need strong and independent regulation, a practical impossibility in Ontario where the government effectively owns both the industry and the regulator. Government regulators can be effective – in Ontario, regulators such as the Ontario Energy Board have had a history of being superbly effective – but only when they haven’t been asked to regulate their own masters. I know of no government regulator anywhere in the world that has ever been an effective regulator of a government-owned industry.

To see what independent electricity regulators can do, we need look at the United Kingdom, the only country to privatize and break up a major power monopoly into its many component businesses and then regulate those components – such as the distribution of electricity – that did not lend themselves to competition.

In the U.K., customers are no longer powerless. If the distribution company doesn’t perform, the customer’s inconvenience is the utility shareholder’s pain. You are a residential customer in London with a problem, and you ask the company to make a service call. It doesn’t come at the agreed upon time. You receive £20 in compensation. Or you are a small business and request a quote for upgraded service. The quote arrives late. You receive £40. Or you and your business suffer an extended power interruption, of the duration Ontario and the United States just experienced. You receive £75 and your business £125, or roughly $440 to ease your discomfort.

Except that the company almost never needs to make payments – and has never needed to compensate large numbers of people – because it has invested what was necessary to deliver the service it guarantees its customers. The London utility meets 99.9% of its targets for unexpected interruptions and it meets virtually 100% of its targets in replying to customers or correcting routine service problems. The standards of service that it must meet, meanwhile, get steadily ratcheted tighter with each passing year.

Since the U.K. power system was privatized and regulated, the time that customers have been without power has dropped by almost two-thirds, thanks to more than £30-billion invested in the U.K. grid. Neither are the British exhorted to conserve to forestall a grid collapse: The U.K. is awash in electricity following an unprecedented building boom in clean power plants. Neither did customers’ or taxpayers’ pocketbooks suffer as the privatized power companies upgraded their capabilities: Rates have dropped markedly, for residential and business customers alike.

Fifty-million-odd people in the U.K. now enjoy power from the world’s most modern, most reliable, most efficient, least monopolized and least politicized electricity sector in the world. Fifty-million-odd North Americans, meanwhile, are now recovering from everything that the U.K. system is not.

Lawrence Solomon is executive director of Urban Renaissance Institute, a division of Energy Probe Research Foundation. LawrenceSolomon@nextcity.com.

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Holding power companies to account and compensating consumers

Readers respond

Re: Power To Consumers, Not Monopolies, Lawrence Solomon, Aug. 21.
Thank goodness for Mr. Solomon’s forthright and accurate description of the pitiful behaviour of Ontario’s power generating system, and the politicians who oversee it. One does not need to be an expert to understand that Ontario Hydro’s main objective became doing what is in the best interest of its unionized employees and the state’s bureaucratic elite a long time ago.

Ontario’s management of its nuclear generating facilities has been nothing short of criminal, given the phenomenal amounts of taxpayers’ money that has been poured into these old plants.

But if you listen to people like Ernie Eves and Mel Lastman, it is we the consumers who are the problem. We “waste” power, and if we don’t stop our selfish ways, we are going to cause rolling blackouts. This absolute nonsense has been echoed by countless environmentalist extremists who get daily airtime on the CBC and other outlets.

I’ve even heard people on some of the major radio stations say that we should stop using household appliances altogether, and turn back the clock 50 years or so. This is nothing short of deliberate deception, an attempt to conceal the colossal failures found in the Hydro state monopoly. This power shortage is 100% their fault, pure and simple.

Howard Hampton, who leads Ontario’s NDP, made the ridiculous statement that this nightmare proves that Hydro is “too important” to be put in the hands of the private sector that he hates so much. Let’s hope he does not feel that way about our food supply.

Frank Gray, Unionville, Ont.

Lawrence Solomon
National Post
August 16, 2003

The food in your freezer has spoiled. The clocks in your home need to be reset. Your schedule has been thrown out the window.

Shouldn’t someone – apart from you – have to pay for the disruption that power shortages cause in your life? Wouldn’t power companies smarten up if they were actually held to account for the disruptions they foist on customers and if they didn’t operate in a 100%-monopoly system, in which their customers aren’t free to take their business elsewhere if they choose?

In the United Kingdom, power companies are held to account in just these ways. Customers are free to choose among many suppliers. They are compensated for their inconvenience. And a revolution in reliability has occurred.

When the United Kingdom privatized its power system in 1990, it injected accountability into what had been a decrepit state-owned monopoly system. The number of power cuts per 100 customers has declined precipitously, by a whopping 31%. The average duration of those power cuts has also fallen, by 64%. Customers have not only been spared from cost and inconvenience from disruptions that did not occur, they have received millions of pounds in compensation for the fewer disruptions that did.

Ontario’s government-owned monopoly system of today resembles the cumbersome U.K. utility that existed prior to privatization. The Ontario monopoly mostly produces unreliable electricity from outdated and failing coal and nuclear plants. And it has starved the power grid network of needed investments in order to prop up its money-losing nuclear plants, making the delivery of power unreliable as well.

When the weather behaves, and its luck holds out, power gets to customers. In the past few years, the system has become so unstable due to lack of investment in both generating stations and in the grid, that Ontario’s power authorities have resorted to pleading with customers to cut back or face brownouts and blackouts. This week, the lack of investment caught up with Ontario and cost Ontarians big-time.

Once, the U.K., too, suffered from lack of investment. Then, after privatization, when the one big cumbersome monopoly was broken up into about 20 nimble companies, competition soon transformed the industry. The polluting coal and nuclear plants were rapidly replaced by a new generation of high-efficiency natural gas-fired systems. And more than £30-billion was invested in the transmission systems to make sure the clean power could get to customers. Despite the mammoth private-sector investments, costs plummeted, benefitting residential and industrial customers alike. It was the most rapid transformation of a power system in the history of the world and it occurred almost invisibly, without any California-style power fiascos. Because it was also the first major privatization, it occurred without benefit of any precedents to guide the way.

In reforming its power system, the U.K. recognized that the electricity system is a hybrid: The generating plants are naturally competitive and can operate on a free-market basis with relatively little regulation; the transmission lines, in contrast, are naturally monopolistic and require a good deal of regulation to keep them honest. Intelligent regulation – much of it oriented to improving customer service – became a hallmark of the U.K. reforms.

Under the U.K. system, electricity suppliers must guarantee their customers standards in 11 different areas – everything from responding to customer telephone calls on a timely basis to keeping appointments to restoring power after disruptions. In their first year under the regulator’s gun, power companies made 13,000 payments to consumers in compensation for poor service. That number dropped to a mere 2,251 within five years. The customers don’t get rich from the compensation – some infractions fetch only a few pounds and a seriously affected customer can usually claim only £50 from a major interruption (18 hours without power). But the compensation is enough to keep companies on their toes and striving to develop ever-more reliable systems.

The U.K. regulatory system continually tightens its expectations of companies. It sets targets for different companies to meet and, as companies get better, the regulator sets the standards tighter. But the system also adjusts with feedback from customers as to their preferences. In the past, a standard for interruption of service has been one minute without power, a hardship that most residential customers found trivial. Even a three-minute interruption to a residential customer, the regulator discovered, costs the typical domestic customer only four pence. A three-hour interruption, in contrast, costs the typical customer £4 – with interruptions of this scale, meal arrangements may need to be changed. Customers also reported they were particularly perturbed by repeated interruptions, even if each is relatively short, leading the U.K. regulators to develop compensation schemes of £50 for customers who experience more than three interruptions of three minutes or more in a year.

Is a three-minute interruption an appropriate standard? Should companies be allowed to keep customers dangling on the telephone line for more than 15 seconds? These are the controversies that now beset the United Kingdom’s privatized power system.

Were we only so lucky.

Lawrence Solomon is executive director of Urban Renaissance Institute, a division of Energy Probe Research Foundation.; LawrenceSolomon@nextcity.com