The Future of Electricity

Tom Adams

February 6, 2002

  Presentation for the St. Lawrence Forum
St. Lawrence Centre for the Arts
Tuesday, February 26, 2002

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Origin of Ontario’s electricity reforms

“Ontario Hydro is a corporation in crisis,” Maurice Strong, Chairman, March, 1993.

“Ontario Hydro was controlled by a kind of a nuclear cult,” William Farlinger, Chairman, August, 1997.

Nuclear crisis leads to Ontario Hydro’s 1997 financial collapse

Ontario Hydro, in a confidential briefing to the Ontario Legislature Select Committee, October 28, 1997, revealed that it could not comply with its statutory financial obligations, effectively declaring the public sector equivalent of bankruptcy.

Structural flaws created conditions for Ontario Hydro’s failure

· Political control and the absence of liability eliminated accountability and efficiency;
· Centrally planned investments ignored risk;
· Starting in 1994, politically-determined rates contributed to financial instability.

Ontario Hydro’s structural flaws understood in 1916

“Public Ownership and the Hydro-Electric Commission,” by James Mavor (University of Toronto professor), the Financial Post of Canada, August 5, 1916, anticipated that Ontario Hydro would fail due to:
· “the tendency to minimize the risk and to underestimate the amount of capital necessarily involved”;
· “the tendency to overman the enterprise”;
· “the tendency to fix the price arbitrarily.”

Ontario’s electricity reforms – Criteria for Success

1. Lowest sustainable rates (artificially “stable” rates increase cost and impair reliability);
2. Eliminate taxpayer liabilities – Hydro bonds, nuclear waste and power contracts;
3. Reduce environmental harm;
4. Maintain system reliability.

The Good News

· Legislative foundation mostly sound;
· Progress toward a smart wholesale electricity market;
· Consumer protection and competition promotion through the Market Power Mitigation Agreement (MPMA);
· Two of three new regulators protecting the public interest working well – the Independent Market Operator and the Electrical Safety Authority – and the OEB is improving;
· Modest (but insufficient) environmental gains – nuclear waste funding and reduced smog;
· Some significant reliability gains from efficient prices and stronger transmission.

The Bad News

· Rising publicly-backed electricity debt – largest contributor is the restart of Pickering A;
· Continued special discounts for preferred industries;
· Impairment of independent regulatory bodies mandated to protect the public interest;
· Some unjustified increases in regulated distribution component of electricity prices;
· Inhospitable climate for private electricity investment;
· Regulator-created customer confusion creating opportunities for marketing scams.

(Each of the above resulted from government failing to deliver on its original promises.)

The U.K.’s 1989 electricity reforms benefit the public interest

“Electricity deregulation and privatization have been bad news for consumers everywhere they have been implemented,” said John Wilson – February 19, 2002, press release;
· Deep cuts in coal and oil use, acid gas emissions, and greenhouse gas emissions;
· Nuclear expansion stalled and existing nuclear capacity is contracting;
· Electricity prices for households down 32 percent;
· Increased electricity system efficiency, staffing down about 50 percent;
· Stopped cutting off power to the poor.

Comparing U.S. and Ontario electricity prices

“We’re going into a new market, a U.S. market where prices are much higher.” OEC, Feb. 6.
· Wholesale prices, not retail, in neighboring areas are relevant to future Ontario prices;
· New York wholesale prices averaged 2.8 ¢(US)/KWh in Q4, equal to Ontario;
· Pennsylannia/Maryland/New Jersey wholesale prices averaged about 2.6 ¢(US)/KWh in Q4, eight percent less than Ontario.

What needs to happen now?

· Open the market on time – delaying would increase the total cost of electricity, injure taxpayers, and could ultimately reduce reliability, just as it did in California and Alberta;
· Privatize government’s industrial activities;
· Strengthen regulatory independence;
· Bring emission rules up to the level required by international agreement;
· Freeze marketing until bills unbundled, enforce rules on marketers, test legality of some contracts, but no cancellation of legal contracts as Mr. Hampton called for on Feb. 6.


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