Tom Adams
Financial Post
March 25, 2004

Governments that privatize electricity generators provide their citizens with cheaper, dependable power. Why is Ontario heading into darkness?

With bankruptcies and blackouts on Ontario’s electricity horizon, the Ontario government is poised to shelve plans to create a competitive market. Instead, it will remain with the monopoly system that has brought Ontarians some of the highest costs on the continent. To boot, it is likely to soon become one of the continent’s most unreliable power systems.

The government is doing so driven by fear of repeating a California-style fiasco. It doesn’t realize that California’s trouble occurred because that state failed to implement a market-based system, and that, almost without exception, consumers have benefitted whenever power systems were privatized and deregulated.

The U.K. privatized its power system in 1990 in what was then, and remains today, the largest power privatization in history. The typical domestic electricity customer in the U.K. now pays £115 per year less for power – from £365 in 1990 to £250 in 2002 – a decline of 32%, and that’s after accounting for inflation. The U.K. story is even better for consumers who decided to shop around to obtain the best price for power – different power companies suit different customers, depending on how much power the consumers use, and when they use it. Since competition came to the domestic market, the typical electricity shopper saves about £32 on their annual bill, on top of the £115 per year that they save without bothering to shop.

In the United States, most of the country is awash in cheap electricity, after deregulations unleashed a building boom in power plants. The single most successful U.S. power market is known in electricity business circles as PJM, short for the interconnected Pennsylvania, New Jersey and Maryland system. Here, competition especially delivers cheap power during peak periods. From 2001 to 2002, peak prices dropped by more than 50%, from $307 for the highest priced 100 summer hours to $138 during 2002. The price then dropped another 40%, to $97, during the last summer. The reason? Plentiful private investment in new generation – something Ontarians lack – kept peak prices low. Prices should continue to drop because last October a nuclear utility serving Pennsylvania consumers finally eliminated the last of its stranded costs – most of them related to ill-advised investments in nuclear reactors and contracts for independent power – that were entered into during the system’s previous monopoly period.

In Australia, power markets proved a great winner, too. After the state of Victoria privatized, power rates dropped and investments soared. Privatization fever then struck other Australian states in the populated south and east coast. The investment boom in South Australia led to a 30% increase in generating capacity between 2000 and 2002 alone.

But privatization is fragile, not because of the nature of electricity markets but because of the nature of politicians. After labour unions struck the power system in the State of Victoria during the hot summer months in 2000, the government panicked and froze power rates. The system soon developed serious shortages. Rotating power cuts became common. Its interference wrecked the market. With rates frozen and the government unreliable, investors lost confidence and fled to neighbouring states. Neighbouring South Australia, although it was also affected by the strike, and although it also experienced a hot summer, fared better. Its government didn’t lose its nerve, and it resisted the temptation to intervene. Although prices temporarily peaked, investment flowed in and South Australians are now reaping the benefits of low prices.

Even where rates rise, as happened in Alberta following price hikes in natural gas, the benefits of markets are clear. Alberta’s government started introducing competition in the mid 1990s because the former regulated system was not modernizing and meeting the needs of a rapidly expanding economy. From 1998 to 2003, the electricity efficiency of the economy, based on the amount of power sold through the electricity market, increased by almost 9%. In 2002, demand was 16% higher and natural gas prices were 40% higher than in 1999. Yet power prices increased by an average of only 2.8% in 2002 compared to 1999. Between 2001 and 2003, the energy efficiency of power generation in Alberta improved by over 40%. Competition worked as expected, creating downward pressure on prices due to rising investment in new, more efficient supply.

Consumers aren’t the only beneficiaries of privatization. Taxpayers win big, too, even when prices plunge for consumers as in the U.K. The proceeds from the U.K. privatization amounted to £21-billion. In addition to that one-time benefit, taxpayers are now rewarded annually, with the now-private companies having become among the country’s largest corporate taxpayers. Following privatization, the government has received £8-billion from the corporate taxes paid by the electricity companies. As with other competitive jurisdictions, the U.K. is awash in power.

In Ontario, in contrast, the average bill has risen dramatically since 1990. Power supplies have become insecure, the more so given the province’s increasing reliance on nuclear power, and Ontarians face rotating blackouts whenever the summer gets too hot or the winter too cold. Public power gives its advocates a warm, fuzzy feeling. For everyone else, it raises the spectre of freezing in the dark.

References:

UK household electricity prices

PJM peaking prices:
www.pennfuture.org, "E3", Vol. 5, No. 25 – 2003: The Year in Review

Alberta’s efficiency increases:
For 9%, the calculation is based on AEUB and StatsCan data; for the 1999-2002 wholesale price comparison see www.ippsa.com/Restruct_Paper.pdf; the 40% 2001-2002 fuel efficiency gain is based on comments of Martin Merritt, Market Surveillance Administrator, presentation to IPPSA 2004 annual conference

UK taxpayer gain due to liberalization

Australian power investment patterns:
International Energy Agency book, Power generation investment in electricity markets by Peter Fraser, (Paris: 2003)