National Post June 8/2006
Century of mayhem by Tom Adams
Yesterday marked the 100th anniversary of the proclamation of the legislation creating the Ontario Hydro-Electric Power Commission. With this proclamation, Ontario Hydro’s career of state-sponsored theft, perennial profligacy, phony accounting and conflicted regulation officially commenced.
At the beginning of the 20th century, electricity cost more than 20 times the current price, removing inflation. Adam Beck, Ontario Hydro’s founder, championed a popular solution – public power. Beck’s public power movement drove the provincial government to renege on contracts under which private power suppliers had purchased access to Niagara River water flows. The public power movement also negated legislation protecting privately funded electricity suppliers from take-over by suppliers backed by government loan guarantees. Beck’s intention was to bankrupt the private producers, then obtain their assets without having to pay for them. To ensure success, Beck empowered Ontario Hydro with regulatory authority to set electricity prices.
Beck’s plan worked. Investors were destroyed. The benefit of their assets, scooped by Ontario Hydro and allies such as Toronto Hydro, allowed the public power system to drop rates and expand rapidly.
By the 1930s, Ontario Hydro had exhausted its right of free access to all of the waterfalls owned by the provincial government that were attractive for development. The provincial government and Ontario Hydro decided the solution lay in another scheme to expropriate without compensation. This time the victims were aboriginal people in northern Ontario. Ontario Hydro seized waterfalls and surrounding areas on treaty lands, often without prior notice to the inhabitants. Dams, roads, power lines and transformer stations were constructed on aboriginal land. Villages were bulldozed, religious sites dynamited and graves flooded. Aboriginal people watched as the bones of their ancestors washed up on the shores of the new artificial lakes. Language barriers and the indifference of white society meant the harm Ontario Hydro caused was barely recorded and rarely noticed. Boosted by the fresh confiscated assets, rates dropped again and Ontario Hydro kept growing.
Rates kept dropping until the 1960s and then remained static until the 1970s. Then nuclear power operations began, along with a relentless climb in prices. Ontario Hydro needed new schemes to delay rate increases. For the first dozen years of the nuclear program, Ontario Hydro declined to recognize any liabilities for nuclear waste disposal and nuclear decommissioning – effectively imposing a portion of the 1970s power bill on future consumers and taxpayers.
In 1983, beset by a nuclear accident at Pickering and massive cost overruns at all of its ongoing nuclear construction projects, Ontario Hydro came up with yet another cost-hiding scheme. Notwithstanding new information learned from the accident showing premature reactor ageing, Ontario Hydro extended the depreciation period for its nuclear reactors from 30 years to 40 years. For the 15 years until Ontario Hydro became insolvent, fantasy-based depreciation policies allowed the utility to pile on more debt. When finally forced to admit its insolvency in 1998, Ontario Hydro transferred $22-billion in debt to the provincial government, in part because the Ontario government admitted that reactors become worthless in less than 30 years.
Huge cost overruns plagued Ontario Hydro’s major power projects from the beginning, not just its well-known nuclear cost overruns. Adam Beck’s Niagara project, completed in 1922, suffered so large a cost overrun that it nearly brought down the government. Ontario Hydro’s Atikokan coal-fired generating station, completed in 1985, was one of the most expensive coal plants ever built, anywhere in the world.
Ontario Hydro’s collapse due to self-inflicted wounds was forecast more than 80 years in advance. Between July and December of 1916, the illustrious University of Toronto political economy professor James Mavor wrote a series of 16 columns in the Financial Post condemning the monopoly’s formation.
Mavor, one of the leading reformers of the day, railed against Ontario Hydro’s confiscation of private property. He argued that competition among the private generators would reduce the cost of power while maintaining the fees and taxes that government then received from the private enterprises. Foreshadowing Ontario Hydro’s later tendency toward megaprojects, he warned, "Nothing is more usual in public enterprises of this kind than to disregard the element of risk."
Warning of the incentives against keeping proper accounts, Mavor anticipated a tendency that reached its fullest form only during the nuclear age. "Even when they do nominally set aside depreciation and reserve funds, they frequently, as in the case of the Hydro-Electric, employ these funds for the extension of the system or otherwise, instead of using them as such funds ought invariably to be used."
Mavor argued, "In Ontario . . . there is little need for governmental attempts at industrial monopoly." He urged the public to look beyond "rhetorical exaggeration and appeals to prejudice." He concluded his series of columns with the warning that "the community of Ontario as a whole will suffer for years from the effects of the foolish optimism of the promoters of the movement for public power."
In 1998, Ontario Hydro’s torch was passed to its legal successors, Ontario Electricity Financial Corporation (OEFC) and Ontario Power Generation (OPG). Since it was created, OEFC has been committing future electricity ratepayers and taxpayers to new expensive long-term power purchase contracts and new stranded debts.
Notwithstanding the Harris government’s multi-billion-dollar bailout in 1998, OPG still can’t pay its bills. In 2004, Ontario Premier Dalton McGuinty created yet another Beck-inspired power agency, the Ontario Power Authority, with an updated populist mandate – conservation subsidies and rate stabilization – on top of the old populist central planning role. Meanwhile, the Ontario Energy Board, historically a strong independent agency, has been afflicted with conflicts, as the government transfers responsibility to the regulator for setting prices paid to government-owned power agencies.
One hundred years later, Adam Beck’s legacy still darkens Ontario’s power future.