Tom Adams
National Post
August 16, 2003

Ontario NDP leader Howard Hampton might be forgiven for failing to grasp the scope of Ontario Hydro’s woes. But not for ignoring his party’s role in them.

Creating a sustainable, efficient power system is a challenge. As Thursday’s blackout starkly shows, Ontario has failed to meet that challenge. One reason for the province’s decades of failure is widespread ignorance of the history of the power industry in Ontario, an ignorance perfected by Ontario’s NDP leader Howard Hampton in his recent book, Public Power: The Fight for Publicly Owned Electricity.

In describing the early history of the Ontario Hydro-Electric Commission of Ontario, Hampton follows closely the official version published by Ontario Hydro. Sir Adam Beck is the main character, energetically synthesizing political and electrical power. From 1903 until his death in 1925, Beck built and deployed a political movement of municipal and industrial leaders to back his ambition for an expansionist industrial monopoly, free from competition or effective external oversight.

Hampton lionizes Beck, but Hampton’s prescription for Ontario’s electricity future would, paradoxically, have horrified him. In Hampton’s vision, an elected politician controls the power system. Beck recognized that politicians are not elected for their administrative competence and are prone to promoting inefficient pet projects designed to achieve political objectives. He said, on his deathbed, "I had hoped to live to forge a band of iron around the Hydro to prevent its destruction by the politicians."

Hampton’s retelling is a victor’s history. Beck’s opponents are caricatured two-dimensionally as greedy capitalists. As in Ontario Hydro’s vanity history, Hampton ignores Beck’s greatest intellectual challenger.

During the First World War and through the 1920s, James Mavor, Canada’s first academic economist and a University of Toronto political economy professor, decried the creation of Beck’s monopoly in the Financial Post and elsewhere. As Mavor explained, Ontario Hydro’s early success came from the confiscation of property from private companies then trying to establish electricity utilities and competitive generators. Mavor argued that competition between the private generators would reduce the cost of power while maintaining the fees and taxes government at that time received from the private enterprises.

Mavor catalogued the flaws that would eventually kill Hydro. Presaging Ontario Hydro’s failure to set aside funds for nuclear waste disposal and decommissioning, Mavor warned of the incentives against keeping proper accounts. "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 accurately warned that taxpayers would eventually be held to account for the excesses of public power.

Mavor’s prescience demonstrates that Ontario Hydro’s later insolvency was not an accident, but resulted from fundamental flaws. Mavor’s warned, "Nothing is more usual in public enterprises of this kind than to disregard the element of risk." He also warned about, "the tendency to fix the price arbitrarily at such a rate as to induce the public to believe that the service is being rendered cheaply, rather than a rate determined by the technical conditions of the enterprise." Ontario’s experiences with nuclear power and long-term power purchase contracts demonstrate how right Mavor was about investment risk. Ontario’s history of electricity rate freezes – an NDP innovation now adopted by the Ontario Tories – confirms Mavor’s insight on the tendency for underpricing.

Hampton’s arguments betray an ignorance of economics, as seen in his account of the United Kingdom’s experience with privatization. To his credit, he acknowledges that U.K. electricity prices declined after privatization and the introduction of competition. But Hampton decries the investments the privatized companies made in foreign countries, to which they were able to transfer their great success. The basis for his complaint? Hampton claims the investments were made on the backs of U.K. customers, notwithstanding their lower rates and improved service.

Hampton theorizes that a private transmission utility would always have an incentive to skimp on maintenance, whereas a public transmission utility would always make more sound long-term investments. Unlike the experience in the U.K., where reliability in various industries soared after privatization, Ontario’s experience with utility systems of all kinds reveals the opposite pattern. Ontario’s privately owned but publicly regulated natural-gas utilities have exceptional transmission and distribution assets. On the other hand, Ontario’s publicly owned sewage and water utilities provide an example of mismanaged, underpriced publicly controlled utility service. So, too, with the publicly owned power grid. For example, a significant portion of the Crown-owned Hydro One’s transmission system, particularly around Hamilton and regions of northern Ontario, was built before 1940 and struggles in primitive condition. This neglect over many decades – Ontario Hydro starved its transmission system of needed investments to finance nuclear generators – has long presented a key reliability risk and may be a contributing factor in the recent power disruptions. Private investors tend to protect their assets, whereas politicians tend to protect their short-term popularity.

Hampton also theorizes that increased private ownership would make the power system resistant to technological and environmental advancement. The facts demonstrate otherwise. The most rapid technological redirection and environmental improvements ever achieved by a modern society’s power system were achieved in the U.K. after privatization and the introduction of competition in 1989.

The governance and business problems that led to Ontario Hydro’s self-declared financial insolvency in October, 1997, do not figure in Mr. Hampton’s retelling of the utility’s modern history. Hampton believes Ontario Hydro was regulated, although it was in fact the only Canadian utility with legal self-regulating powers. The only "political oversight" that ever had any effect came from sporadic interventions – such as rate freezes from panicky politicians.

Hampton maintains the claim that Ontario enjoyed "power at cost." Yet Ontario Hydro became insolvent because its debts were understated, because the funds collected to pay for nuclear waste were squandered and because its assets were overvalued. Although the utility had never declared an operating loss, although it was shielded from taxes and real interest costs by subsidies, upon Hydro’s dissolution in 1999 it was revealed to be bankrupt. The officially estimated net loss on all of its investments was $19.4-billion.

Many Ontarians and almost all Ontario politicians failed to grasp the scope of Ontario Hydro’s financial collapse, so Mr. Hampton might also be forgiven for not getting it. The systematic amnesia that afflicts Mr. Hampton’s retelling of his own party’s role in causing the collapse is less forgivable.

The NDP was largely responsible for Ontario Hydro’s decision to sell power below cost. For example, in 1976, former NDP leader Donald

C. Macdonald chaired a legislative committee that ordered Ontario Hydro to roll back its proposed rate increase by a drastic 8%. This turning point in Ontario Hydro’s history led to an explosion of debt and a lasting politicization of ratemaking.

Hampton blames all of Ontario Hydro’s nuclear mistakes on the Conservatives and Liberals. The truth lies elsewhere. In 1985, the Liberals and NDP – both of whom had promised to cancel the Darlington nuclear megaproject – formed a minority government. Through creative accounting, Ontario Hydro duped them into believing Darlington was 70% complete (rather than the actual figure of about 25%). If Hampton’s theory that public ownership equals public control were sound, the massively unpopular Darlington project would not have been completed.

Under NDP leadership from 1990 to 1995, Mr. Hampton claims Ontario Hydro "was working." The book highlights the NDP’s record of cutting Ontario Hydro’s operating budget by $600-million, claiming the NDP turned around Ontario Hydro’s finances and operations. In fact, those cuts occurred while compromising safety. Two years after the NDP’s electoral defeat, Ontario Hydro revealed that, partly because of many years of underfunding, a third of its remaining nuclear reactors had to be closed. One of the stations to close, Pickering A, had failed to upgrade safety systems despite being repeatedly directed to do so by the federal nuclear safety regulator. Hampton acknowledges no relationship between the NDP cutbacks and the safety and operational problems that finally felled Ontario Hydro.

After Hydro disclosed its nuclear problems in 1997, Hampton’s own caucus colleagues viewed the utility without his nostalgic, rose-coloured glasses. In a minority report to a legislative committee studying the nuclear problems, the NDP members responded to the Tory’s newly released plan to dismantle Ontario Hydro, stating "We support changes to the way Ontario’s electricity market is structured."

Ontario’s power system faces colossal challenges if it is to become an efficient and reliable jurisdiction for power production. As Hydro’s true history shows, public ownership is antithetical to both.

Tom Adams, a former director of the Ontario government’s Independent Market Operator, is executive director of Energy Probe, a Toronto-based think tank. E-mail: TomAdams@nextcity.com.