October 5, 1992

  By Lawrence Solomon
Borealis Energy Research Association
on behalf of Energy Probe

Testimony filed at the Ontario Hydro Demand/
Supply Plan Environmental Assessment hearings

Q. Mr. Solomon, public power has a long history in Ontario, and a reputation for having served Ontario well. Hydro is credited with having developed the province’s industrial capacity through prudent electricity expansion and low rates. What led to the phenomenon known as Ontario Hydro?

A. The dominant factor driving the public power movement was high electricity rates. Without high rates, Ontario manufacturers and the Ontario public would not have clamored for a public power alternative to the existing system, and politicians wouldn’t have taken the extraordinary steps required to establish the Hydro-Electric Power Commission of Ontario.

Q. Please describe the essential characteristics of the power system as it existed in Ontario in the period preceding Hydro’s creation, and describe why this system was responsible for high electricity rates.

A. Prior to the advent of Ontario Hydro, municipalities were generally served by local steam plants, which relied on expensive coal. Toronto and Hamilton, to supplement their own steam plants, were also being serviced by privately generated Niagara Falls power. This private power was delivered via privately owned transmission lines to the privately owned electricity utilities in those municipalities.

Three private companies generated power on the Canadian side of the Falls: foreign-owned Canadian Niagara Power Company, which exported all of its power to the U.S., foreign-owned Ontario Power Company, which exported most of its power to the U.S., and Canadian-owned Electrical Development Company, which primarily served the Toronto market. The Electrical Development Company transmitted its Niagara Falls power to Toronto through its own transmission system, where it was sold to Toronto Electric at the high price of $35/HP under a 30-year contract. This price, however, was not sufficient to guarantee EDC’s profitability: the company had difficulty raising capital because investors – fearing unfair competition from the provincial and municipal government – refused to wholly subscribe to the EDC bonds floated to finance the works. EDC was thus forced to borrow on the expensive, short-term market – a circumstance from which it never recovered.

Toronto Electric, owned by an investor group substantially the same as EDC’s, was profitable in the early years of its franchise by virtue of the monopoly franchise it had earlier purchased from the city. Until 1911, Toronto Electric was able to charge 8 cents a kilowatt-hour, which provided shareholders with a handsome return on their capital. After 1911, Toronto Hydro, a municipally owned utility, began delivering Niagara Falls power to Torontonians via Ontario Hydro’s transmission system. Rates then dropped to 4 cents a kilowatt-hour, below Toronto Electric’s cost.

Although Torontonians had been paying high rates until 1911, the blame cannot be placed entirely in the hands of the private capitalists: being an investor in Ontario at the turn of the century was fraught with risks, including the considerable risk that government would not honour its commitments.

The Electrical Development Company’s difficulties are a case in point. Investors who shied away from EDC bonds were astute to do so. EDC, in purchasing a franchise to generate power at Niagara Falls from the provincial government, had obtained the following contractual commitment in the form of a clause in the original franchise:

The Commissioners will not themselves engage in making use of the water to generate electric, pneumatic, or other power except for purposes of the Park, provided that in case the said Commissioners … at any time may have granted to any other person or corporation license to use the waters of the said Niagara or Welland Rivers, and by means of failure of such person … to carry on the works so licensed, the … Commissioners find it necessary to forfeit said license and to take over said works, this clause shall not prohibit said Commissioners from operating such works for the generation and transmission, sale or lease of electricity or power.

As some investors anticipated, the government later voided this clause, to further Ontario Hydro’s requirements, and in so doing effectively bankrupted EDC.

Similarly, under the Conmee clause added to the Ontario Municipal Act in 1899, municipalities could not establish themselves in various utility businesses, electricity among them, without first purchasing competing private companies at a market price, to be determined by arbitration. Conmee was designed to prevent municipalities from either directly or indirectly expropriating utility capital.

With this protection, Toronto Electric and the Electrical Development Company undertook the major financial commitment required to bring power from Niagara Falls to Toronto. Toronto Electric began to use Niagara Falls power in 1906 to supplement power from its existing steam electric plants, making it the largest Ontario consumer to tap Niagara power. To the dismay of Toronto Electric investors, the Conmee clause was later declared not to apply to municipalities obtaining power from the Commission. This freed the city of Toronto from the obligation to protect the private capital that Toronto Electric had invested to service the city. The City of Toronto soon arranged to buy power from the Hydro Commission, and built its own distribution system in competition with Toronto Electric.

The insecurity of capital, and the absence of strong property rights as existed in the United States, drove up the cost of doing business in Ontario. Although asked by the EDC for government backing, the provincial government at that time was unwilling to guarantee EDC’s bonds.

In this business environment, public power enterprises had clear advantages. Ontario Hydro did not suffer these private sector privations: Hydro faced no threat of expropriation, and not only had access to government guarantees, but was also spared the obligation to pay taxes. The tax relief included the burden of federal taxes, since the federal government did not have the power to tax provincially owned power companies.

Q. In 1911, competition from a government-owned utility drove down prices. Were any efforts made to engender competition earlier, to avoid monopoly profits in the hands of the capitalists?

A. Until the turn of the century, the city of Toronto maintained a policy of promoting competition in the provision of energy services. To provide competition in lighting between electricity and gas, the city denied Consumer’s Gas Company of Toronto the right to string electric distribution wires when the gas company tried to enter the electric lighting field in 1889. Also in 1889, the city signed 30-year contracts with Toronto Incandescent Electric Light Company and with Toronto Electric, an arc lighting company, giving each franchises and promising to issue no others; should the two companies merge, however, the contracts provided for the voiding of both franchises to allow the city to reinstate competition. Torontonians thus had access to three competing forms of illumination.

The parties to these contracts had not anticipated the effect of technological change on their contracts. When arc lighting did not find a sufficient market, Toronto Electric attempted to enter the incandescent light market, competing directly with Toronto Incandescent Electric Light Company. When the market was too small to sustain them both, the two companies were forced, in 1896, into an amalgamation. To avoid annulling the 1889 franchise agreements, however, the two companies decided to maintain a separate legal status – a structure eventually challenged by the city but upheld by the courts in 1905. A half-dozen years through the 30-year franchise, the city’s fear of monopoly had materialized, half-way through and the courts ruled that the contracts of 1889 should not be voided.

Through this elimination of competition in Toronto’s electricity business, the public hardened in its view that private capitalists could circumvent the public good. At the same time, corruption involving public officials and private companies, Toronto Electric among them, also came to light. The public also hardened in its view that contracts – as so much else in that day – could be influenced by corruption, and developed the view that mere contracts, the courts, or regulation, were not up to the task of protecting the public.

Q. In entering the electricity business, the governments decided to create competing entities – Ontario Hydro at the provincial level and Toronto Hydro at the municipal – rather than taking over the existing concerns. What were the governments’ reasons for establishing parallel operations, with all the duplication that implied? Did the municipal and provincial governments have the opportunity to acquire the private power companies, rather than setting up their public competitors?

A. Yes, on several occasions. The Conmee amendment to the Municipal Act in 1899 envisaged municipalities providing electrical service following purchase at fair market value of the private utility’s franchise and other assets. Expropriation was also considered at the provincial level. In 1902, Liberal Premier Ross, and in 1905 Conservative Premier Whitney, expressed concern at the expense of acquiring the province’s electrical facilities – then estimated at up to $25 million.

Interest also came from the private companies, as occurred in 1907, when Toronto Electric offered itself for sale. In 1911, Toronto Electric was again put up for sale but amalgamated into the Toronto Street Railway group when the city wouldn’t meet its offer. In 1913, the mayor of Toronto agreed to buy the assets of Toronto Electric at appraised value but city council rejected the terms at the urging of Hydro’s Chairman, Adam Beck; although there was little dispute over the asset value, the city did not want to assume the company’s expensive power contract with EDC. In addition, and over the objections of even Toronto Hydro commissioners, Ontario Hydro was driving rates below cost, lowering the value of the Toronto Electric franchise and giving the Toronto city council an incentive to postpone any purchase (Hydro had regulatory power over rates under the Hydro-Electric Power Commission Act). In the end, the owners of the private system stopped maintaining their system, let their assets run down, and bled the company of cash prior to the expiration of its franchise.

The governments’ ultimate objective was not ownership of the electricity system, but the lowering of rates. Expropriation or purchase at market value would have done little to lower rates, since the cost of the acquisition would need to be recovered. To reduce the acquisition cost, and to make feasible municipal acquisitions of electrical utilities and hence electricity from the newly created Ontario Hydro, the government set about removing various impediments, particularly the contractual obligations made to the private sector by the state.

Q. Low rates, then, were a dominant factor spurring the public power movement at the turn of the century. And at that time competition was not considered a feasible method of controlling rates. Does the continuing desire for low rates continue to justify public power today?

A. No, just the opposite. Unlike the situation at the turn of the last century, when low rates were associated with public power, today low rates are associated with competition and private power regimes. In both the U.S. and the U.K., real rates have been dropping dramatically since deregulation and competition were introduced, accompanied by an increase in the private sector’s market share. Ontario Hydro, meanwhile, has become one of Canada’s highest cost producers of power, and may soon be one of North America’s highest cost producers.

Apart from the empiric evidence from other jurisdictions, several changes in Canada indicate that cost advantages once enjoyed by public power utilities no longer apply. The federal government no longer taxes private utilities, to level the playing field in the power sector. (Editor’s note: this tax equalization for private power was withdrawn in 1995.) Ontario’s large economy, and the interconnected grid linking our municipalities, allows competition at the generation level. Economies of scale were long ago met.

Q. Apart from promising low consumer rates, at the turn of the century Ontario Hydro also promised economic development. Please describe the promise of industrialization, and the rationale it provided for public power.

A. During the Industrial Revolution and its dependence on steam power, Canada had lagged behind the coal-based economies of the U,S. and Great Britain. But with the advent of hydroelectricity, or "white coal" as it was called, it appeared that Canada’s fortunes could be reversed. A common sentiment of the day was expressed to the Royal Society of Canada by the prominent engineer, T.C. Keefer, just before the turn of the century:

"Heretofore we have cut our spruce into deals and exported it to Europe, and more recently into pulp wood and exported that to the United States; but manufactured by our water power into paper, the raw material would yield this country ten times the value it is now exported for."

Keefer saw a Second Industrial Revolution based on "white coal" that would develop Canada into an industrial power, enabling us to throw off our slavish roles as "hewers of wood" for the Americans. The popular mind conjured up similar visions. The Toronto News predicted that hydroelectricity would turn Ontario into the "Pennsylvania of Canada and build up a flourishing industrial community where good wages and profitable investments would be the general order." Many others expressed similar sentiments. Hydro was the instrument through which Ontario would prosper: The belief that hydroelectricity could fuel Ontario’s progress, and promote our sovereignty, gave the public power movement a missionary zeal.

Q. Quite apart from the merits of this original rationale for public power, does this original rationale for public power – that Ontario needs public power to further the process of industrialization – remain today?

A. No. There is no evidence that a publicly owned electricity body is required to further develop Ontario. The evidence, in fact, is now to the contrary: to the extent that power is needed in a modern, industrial society, those power needs can be met from the private sector. The electricity generating sectors of the U.S., the U.K., Germany, Japan, and most of the world’s other industrial nations are overwhelmingly under private sector ownership. Most countries with public ownership of electricity sectors are in the process of converting ownership to the private sector. The path to economic development for most advanced countries has become characterized by competition, decentralization, and a decreased public ownership role.

Q. You have described two major rationales for the creation of public power in Ontario at the turn of the century. Were other factors important to the creation of public power?

A. Yes, several other rationales existed, although none to compare in importance with the desire for lower rates or the desire for economic development. For the sake of completeness, I will list the others, and provide some explanatory comments.

Security of supply was an important issue, particularly following a bitter coal strike in Pennsylvania that cut Ontario off from all coal shipments prior to the winter of 1902. With southern Ontario’s forests already depleted, the "Great Coal Famine," as it was called, threatened householders and industry alike, as many mills closed down rather than pay the escalating costs of coal – the price tripled from a pre-strike $3.50 per ton to a high of $10 for a boatload of Welsh coal. Some Torontonians also would have recalled the conduct of privately-owned Toronto Consumers Gas in the early 1800’s, when the utility high-handedly cut the city off during negotiations, thereby threatening the public safety.

Rural electrification, which required subsidies that private industry would not agree to, was another factor pushing many to the public power camp. Similarly small-town Ontario manufacturers, fearing that Toronto, because of its size would gain access to low-cost hydro power while they remained reliant on higher cost steam generated power, saw public power as a means of widely distributing the provinces’ hydraulic resources. Toronto manufacturers, meanwhile, distrusted regulation and feared that a monopoly could result under private ownership. They thus sought public power to deliver them from the monopolists’ embrace.

Q. Security of supply continues to be a concern for Ontarians. Does this concern still justify public power?

A. No. Ontarians no longer depend unduly on foreign fuel supplies. In any event, Ontario relies on a diversified mix of fuels available through numerous suppliers, and under a competitive electricity system, this diversification would only increase. In addition, the existence of an integrated grid – which did not exist at the time of Hydro’s creation – provides a great deal of comfort in this regard.

Q. What about rural electrification? Does it justify the continuance of public power?

A. No. Ontario’s rural communities are, with insignificant exceptions, entirely electrified.

Q. What about the fear of small-town manufacturers that Toronto would have access to Niagara power while they were confined to more expensive generation?

A. With a modern, integrated grid, prices would be roughly equal everywhere in Ontario.

Q. And what about Toronto’s fear that a monopoly would result under private ownership?

A. In the last 100 years, the world – and Ontario – have learned a great deal about effective regulation over monopoly enterprises. One need look no further than the Ontario Energy Board, which is an effective regulator over the private gas monopolies. Not only do Ontarians not complain about the level of gas rates, but the gas sector is entirely non-controversial. No controversial DSP hearings, no need for Standing Committee hearings, Select Committee hearings, Royal Commission upon Royal Commission.