(November 5, 2015) The sale of Hydro One offers a number of potential benefits to both ratepayers and the province.
This article originally appeared in the Financial Post
Although the left and right alike lambaste Ontario’s sale of Hydro One, they neglect the logic in the deal.
The Ontario government’s sale of Hydro One has been criticized by all sides. Newly elected PC leader Patrick Brown called it a “fire sale,” while NDP leader Andrea Horwath claimed it was “irresponsible.” The initial report from the Financial Accountability Office (FAO) – essentially Ontario’s version of the federal Parliamentary Budget Office – argued that the sale would push the province deeper into debt.
But none of these critics highlight the many potential benefits to both ratepayers and the province in selling off Hydro One.
Hydro One remains one of the worst performing electricity distributors in North America. It repeatedly shrugs off that criticism, arguing that it’s an exception to the rule and can’t be compared to other utilities because of its size and difficult terrain. It also spends more to achieve those poor results, as highlighted by a comparison of its vegetation management costs to its peers undertaken a couple of years back, where Hydro One had some of the highest costs across North America.
Even among electricity distributors in Ontario, the company underperforms. In a recent study on its productivity among the 70-plus distributors in the province, Hydro One performed so poorly that it was considered an outlier (along with Toronto Hydro and another small utility).
A new, private owner would look at ways to increase the productivity of Hydro One, something that the government has failed to do adequately while it was the sole owner of the company, since the break-up of Ontario Hydro. If productivity does increase, the company and its investors would still earn their regulated rate of return but at less cost – and lower rates for ratepayers.
Even though the Hydro One is well behind in terms of productivity, its workers are paid more handsomely, according to the company’s own data, showing its wages are 10 per cent above its peers. Again, a private company would try and bring that in line with the industry average. Although the unions will likely fight such a move, they are now a major shareholder in the private company and so have their own incentive to try and make it more productive and leaner. Again, this could mean lower rates for ratepayers.
While the FAO warns that the province will suffer from “foregone income” once it’s no longer the sole owner of Hydro One, the province could also see the value of its remaining 40 per cent stake increase if a private company was able to improve operations and profitability. The value of the province’s stake, then, increases without it having to do anything.
Furthermore, the FAO has assumed that there will be no “increases in profitability” at Hydro One under new ownership, as though no private owners could ever do better than the government’s abysmal record. Any initiatives that lead to an increase in profitability at the company will accrue to the province as well as its new investors. Additionally, the risk that the utility sector – already undergoing major changes due to the threat of home generation and battery storage – isn’t as profitable in future is now less of a concern and will borne largely by private investors, rather than taxpayers.
A private company will be more likely to deal with Hydro One’s massive pension liabilities and push its employees to either contribute more to their defined benefit plans or move to define contribution schemes that are prominent in the private sector, where the risk/reward is better shared between the company and employees. This would benefit ratepayers, as it limits the amount of pension costs passed onto ratepayers.
From a regulatory standpoint, the mandate of the province’s energy regulator – the Ontario Energy Board (OEB) – to protect ratepayers will be made clearer, as its boss (the province) is now no longer the sole owner of Hydro One. By reducing this major conflict of interest, the OEB will be better positioned to and ensure Hydro One operates like a private company in a competitive environment.
Over the last 15 years, while ratepayers have been dutifully paying the debt retirement charge and the province was supposed to be using profits from Hydro One to pay down the near $30 billion of debt inherited from Ontario Hydro, the electricity sector is nearly as leveraged now as it was then. The company set up to control Ontario Hydro’s debt – the Ontario Electricity Finance Corporation (OEFC) – currently has $26 billion in debt and another $3.8 billion in IOUs from the province – or nearly the same amount as it had in 1999.
This debt is an inherited problem – the result of previous government ownership. Likewise, many of the other problems in the electricity sector stem from government-mandated policies. These include: the rollout of smart meters without OEB oversight, handing out generous renewable energy contracts without regulatory oversight, a recent move by the province to ensure that the construction of transmission lines won’t be blocked by OEB oversight and never-ending conservation programs paid for by ratepayers. These are all problems caused by government policy, not privatization.
Contrary to much of the headlines, the sale of Hydro One could have major benefits for ratepayers and taxpayers alike. Given the government’s performance over the last 15 years, it calls for hopeful optimism, rather than knee-jerk nay-saying.
Brady Yauch is an economist and Executive Director of the Consumer Policy Institute (CPI), a division of Energy Probe Research Foundation. You can reach Brady by email at: bradyyauch (at) consumerpolicyinstitute.org or by phone at (416) 964-9223 ext 236
(November 5, 2015) Tom Adams responds to Brady Yauch:
Hydro One: Privatized, but not so good for ratepayers
The Ontario government’s $1.66-billion sale of 13.6 per cent of its electricity distribution monopoly, Ontario Hydro, has gathered comments from all sides. Most of the commentary has been negative. An exception was an op-ed on this page from Brady Yauch, of the Consumers Policy Institute. Yauch said he supports the sale, based in part on his view that “the mandate of the (Ontario Energy Board) to protect ratepayers will be made clearer.” He also stated that “the OEB will be better positioned to ensure that Hydro One operates like a private company in a competitive environment.”
Privatizing government-owned power businesses, if it can lessen political influence over the province’s ongoing electricity crisis, has the potential to benefit ratepayers. However, rather than pursuing a real privatization, the Liberal government is in fact turning Hydro One into a perverse public-private partnership where shareholders gain the upper hand at the expense of ratepayers.
Central to the government’s plans to jack up Hydro One’s value are new regulatory rules. Ratepayers lose at every turn.
Bill 112 has currently passed second reading. Its provisions that would:
- eliminate OEB review of government-approved transmission projects,
- allow government to eliminate consumer groups from participating in OEB processes in favour of a government-appointed consumer advocate
- would reverse prohibitions that until now have prohibited comingling of regulated and unregulated businesses.
Direct government control over future transmission megaprojects would replace public reviews that are designed to ensure that proposed projects are likely to produce net benefits. The government-appointed consumer advocate in Newfoundland & Labrador recently demonstrated the weakness of such a system when that office became part of the official fan club for a massive green energy project in Labrador, Muskrat Falls, that will jack up rates at least 50 per cent.
Under the new regime, the Ontario government is overturning regulations that prohibit commingling of regulated and unregulated businesses. These rules arose from about a decade of difficult regulatory experience trying protect ratepayers from revenues going to the shareholder’s unregulated account while costs were recovered from captive consumers.
What regulatory protections will be left will now be administered under the shadow of questionable appointments. In the immediate run-up to the sale of Hydro One, the government appointed a senior Hydro One executive — a person who was directly responsible for Hydro One’s rate applications — to the OEB. This appointment follows in the footsteps of several recent executive moves back and forth between the regulator and senior executive positions in the regulated electricity distribution sector.
With the sale of Hydro One pending, the government made no effort to correct violations of key governance requirements of the existing OEB Act. Since July 2010, the Ontario Energy Board has violated three sections that are at the heart of its governance rules. These say: the OEB must have two vice chairs, that these vice chairs must sit on a management committee with the chair to direct the board’s internal affairs, and that the OEB must have a chief operating officer. The 2014 Memorandum of Understanding between the OEB and the government and also the OEB’s Bylaw #1 both explicitly require this structure. How can the public interest be protected when the regulator flouts the law?
Bill 112 and conflicted appointments are not the only signal that the government intends to tilt the playing field against consumers. Bill 135 was introduced this week in the Legislature. It says that the government will be able to procure and pay for transmission just like it can do for generation, apparently bypassing rate regulation altogether.
Tom Adams is a Toronto-based energy consultant.
(November 13, 2015) Brady Yauch replies:
Hydro One privatization strengthens regulation, benefits ratepayers
Public ownership has ill-served Ontarians; privatization could stem the damage
In a recent article, Tom Adams argued that ratepayers “lose at every turn” with the privatization of Hydro One. Maybe we should look at how ratepayers in Ontario have been winning under public ownership.
Electricity rates have increased dramatically over the last decade. Since 2006, the price of off-peak, mid-peak and peak power charged to ratepayers has increased by 144%, 80% and 67%, respectively. Last month, it was announced that the peak rate of power jumped by 25% over the same time last year. Those soaring rates haven’t prevented Hydro One from asking for record amounts of money to sustain its operations. Hydro One recently applied to the OEB to spend $1.6 billion on distribution, on average, annually over the next five years. Because the government owns Hydro One along with other parts of the power system, it is an open secret that it meddles in the regulatory process, forcing the Ontario Energy Board to do its bidding at the expense of ratepayers. In contrast, the OEB has been a fine regulator over the natural gas utilities, which are privately owned.
Hydro One pays its workers wages that are 10 percent above other comparable utilities – costs that are passed onto ratepayers – plus an unusually high percentage of its employees’ pensions. A recent report on pensions in the publicly owned electricity sector called them “generous, expensive and inflexible” and “far from sustainable.”
Hydro One has also steadfastly refused to agree to penalties for its poor performance. In fact, it wanted the OEB to exempt it from having to contact customers of missed appointments 100 per cent of the time, arguing it should be lowered to 90 per cent.
Adams would have been more accurate to say ratepayers “lose at every turn” with public ownership.
Contrast Hydro One’s cost and service performance to private electric utilities in both the UK and Australia, where distributors are both fined for poor performance and forced to give rebates to their customers when they fail to keep the lights on or to repair a blackout in a reasonable amount of time. Rates in the UK fell by around 30% in the decade following privatization, while in Australia rates increased at a slower rate in states that privatized their electricity systems than those under public ownership.
Privatizing Hydro One will push the company to improve its productivity, to better align its wage structure with the industry average and to lower its operating costs while maintaining or improving reliability and customer service. Public ownership has failed ratepayers on all of these issues.
Adams points to proposed new legislation and other measures that will further undermine the OEB’s independence. Contrary to his argument, this diminution of the OEB has little or nothing to do with Hydro One’s privatization – these moves have long been in the works, with Hydro One under public ownership. Privatization hasn’t undermined the regulatory system, the government has. It sidelined the OEB whenever the province didn’t want the economics of its policies scrutinized. This became clear years ago when the OEB was bypassed in both the $2 billion-and-counting rollout of smart metres and the ongoing handout of renewable energy contracts that have cost ratepayers billions.
Privatization provides ratepayers and opposition parties with a much needed opportunity to push back against ill-advised policies and uphold the integrity of the OEB. Under government ownership, that opportunity never existed.
The lesson for governments is that when you own an electric utility it also owns you.
It is not clear why the taxpayers of the province have to be in the wires business.
Given what you say about the wage levels at Hydro One, I wonder whether the Provincial Government is paying its union’s negotiating costs as it has done with the teachers’ unions.
The elephant in the room is Wind and Solar. They are not reducing C02, Ontario’s own Professional Engineers are telling us this.
Reference: “Ontario’s Electricity Dilemma – Achieving Low Emissions at Reasonable Electricity Rates.” Ontario Society of Professional Engineers (OSPE), April 2015.
www DOT ospe DOT on DOT ca/resource/resmgr/DOC_advocacy/2015_Presentation_Elec_Dilem.pdf
Page 15 of 23.
“Why Will Emissions Double as We Add Wind and Solar Plants ?”
– Wind and Solar require flexible backup generation.
– Nuclear is too inflexible to backup renewables without expensive engineering changes to the reactors.
– Flexible electric storage is too expensive at the moment.
– Consequently natural gas provides the backup for wind and solar in North America.
– When you add wind and solar you are actually forced to reduce nuclear generation to make room for more natural gas generation to provide flexible backup.
– Ontario currently produces electricity at less than 40 grams of CO2 emissions/kWh.
– Wind and solar with natural gas backup produces electricity at about 200 grams of CO 2 emissions/kWh. Therefore adding wind and solar to Ontario’s grid drives CO2 emissions higher. From 2016 to 2032 as Ontario phases out nuclear capacity to make room for wind and solar, CO2 emissions will double (2013 LTEP data).
– In Ontario, with limited economic hydro and expensive storage, it is mathematically impossible to achieve low CO2 emissions at reasonable electricity prices without nuclear generation.