Lawrence Solomon
Financial Post
July 11, 2009
A study on the potential risks of Compressed Natural Gas vehicles.
Lawrence Solomon
Financial Post
July 11, 2009
Billionaire energy tycoon T. Boone Pickens has a two-step plan to cash in on climate change. Today: Step one
A fool with a plan can outsmart a genius with no plan,” says T. Boone Pickens, the billionaire energy tycoon. Pickens has a plan but he’s no fool. And those he seeks to outsmart — government officials — are no geniuses. The consequences for the rest of us can be profound, especially when the plan at issue is a colossus of epic proportions.
The Pickens Plan, touted him to save the United States from calamity, has two wildly ambitious steps. Step one: The United States should construct a mammoth north-south electricity transmission corridor
from Texas through the Great Plains states to Canada. Windmills in Texas and throughout the corridor would then generate electricity, displacing the natural gas now used to generate electricity. Step two: The United States and Canada should run trucks and automobiles on the natural gas that has been saved, displacing gasoline.
Pickens’ two-step has great appeal to those on the left side of the political spectrum because, as he argues, his plan would slash greenhouse-gas emissions. And it has great appeal to those on the right because, as he also argues, his plan will reduce America’s dependence on oil imported from enemy countries. The other great appeal in the Pickens Plan, rarely mentioned, is to Pickens personally.
Among other wind schemes, Pickens planned a 400,000-acre wind farm in the Texas Panhandle, the world’s largest by far. And Pickens, long one of America’s major natural-gas developers, has now made one of the biggest bets of his career on his Clean Energy Fuels Corporation, which builds natural-gas fuelling stations for vehicles.
Men without imagination consider the Pickens Plan to be wildly implausible. For starters, what are the odds of converting cars to natural gas cars when gasoline dominates and electric vehicles are in fashion? With the exception of Honda and its Civic GX, no major automaker manufactures a natural-gas car, and even if some did, these cars couldn’t get refuelled — vanishingly few gas stations offer fill-ups of natural gas. There are also performance reasons to shy away from natural-gas vehicles — they require larger gas tanks, robbing cars of half their trunk space; even with a larger tank, they require fill-ups almost twice as often; and they can explode. Little wonder that fewer than one-tenth of 1% of the 250 million vehicles on the road run on natural gas.
Pickens does not lack for imagination. He imagined that natural-gas vehicles at half the cost of the $25,000 Honda Civic GX would spark demand. To turn fantasy to reality, Pickens approached those ablest to get the job done — not the top designers and engineers at Honda and other manufacturers but the top U.S. lawmakers. This week Senate Majority Leader Harry Reid of Nevada, Senator Robert Menendez of New Jersey, Orrin Hatch of Utah, joined by Pickens himself, announced legislation to lower the cost of driving a natural gas vehicle.
The legislation would cover up to $12,500 for passenger cars and light trucks and $64,000 for heavier vehicles. Even better, this bill doesn’t stop at halving the cost of buying a natural gas vehicle. It also lowers the cost of buying natural gas for vehicular use. And it expands and extends tax incentives for the installation of Pickens-style refuelling stations — builders of natural-gas refuelling stations will be able to receive up to $100,000 per station.
All this and more — coupled with similar legislation recently introduced in the House of Representatives — is a great improvement on previous subsidies that the U.S. government passed in 2005 to help secure Pickens’ vision of a sound energy policy for America.
Pickens personifies the never-say-die American entrepreneurial genius in working the political system. Just months earlier, in November 2008, Pickens and his Clean Energy Fuels Corporation had suffered a disappointing setback when California voters rejected Proposition 10, a referendum that his firm helped write, and then backed through a multi-million dollar campaign contribution. Had it succeeded, Prop 10 would have provided close to $10-billion in alternative-energy rebates and incentives, almost all of it to the exclusive benefit of Pickens’ company. No quitter, Pickens immediately turned his lobbying talents to the U.S. Congress. “If you’re on the right side of the issue, just keep driving until you hear glass breaking. Don’t quit,” he likes to say
Step two in Pickens plan — creating the infrastructure for natural-gas vehicles — now seems well in hand. Step one — his bid to make the wind blow for him — is next on his agenda. Count on him to again work the system and to employ once more a principle that has stood him in good stead over one of the most storied careers in U.S. corporate history: “Make sure as many people as possible have a stake in the game.”
By enabling Republican and Democratic lawmakers in their energy independence and global warming causes, he gives them a stake in a game he has every intention of winning.
Financial Post
Lawrence Solomon is executive director of Energy Probe and Urban Renaissance Institute and author of The Deniers: The world-renowned scientists who stood up against global warming hysteria, political persecution, and fraud.
Norman Rubin
Energy Probe
I want to tell you about some very alarming documents — internal memos that the nuclear industry, its regulator and its government sponsors were sure you’d never get to see. They show a hidden side of the industry that will sadden and frighten anyone who cares about public health, safety and the environment.
These startling documents were surrendered by the industry through the court system in our 10-year-long legal battle to strike down the Nuclear Liability Act — the federal law that protects the people who cause a nuclear accident, while leaving accident victims without any legal right to full compensation. Now that we’ve concluded our case, and conceded that the Canadian courts won’t declare this act unconstitutional until a nuclear catastrophe occurs, we are free to share some of these secret documents with you. Here are the facts they prove:
FACT: When reactor operators discover that their reactors aren’t as safe as they’re supposed to be, they do everything in their power to avoid actually making them safer! In private memos, they admit that improving reactor safety is their "last resort" and not their first priority, as they so frequently claim in public.
One long internal memo lists the steps that Ontario Hydro’s safety analysts use to avoid actually making the reactors any safer: "Our first approach to resolving these issues is, generally, to refine the analysis by reducing conservatism [i.e., reducing safety margins] and by developing and applying more detailed, sophisticated analysis methods. Design and operational procedure changes are, generally, considered as the means of last resort to resolving unacceptable results."
This memo — by a safety analyst — includes tables showing literally dozens of instances where new information revealed safety problems, but clever analysis was applied instead of safety upgrades. "Resolution of many of these problematic issues could have resulted in design changes, tighter operational limits or modified trip setpoints [all of which would have improved safety]. In reality, the majority of these problems were resolved through additional, more extensive analysis."
According to the same memo, Ontario Hydro’s elaborate safety analysis has convinced staff of the AECB [Canada’s nuclear regulator] that it is "acceptably safe" for a reactor’s nuclear fuel to boil completely dry in some loss-of-coolant accidents. (It is impossible to have a "meltdown" if the fuel is kept wet.) By doing so, Hydro has "thus far, avoided the necessity for design changes and deratings." Of course, those design changes and deratings would have made the reactors safer. Unfortunately, allowing the nuclear fuel to boil dry will not.
FACT: The industry frequently tells the public and the regulator that they always err on the safe side when doing reactor safety analysis — in the technical lingo, they claim that their analysis is extremely "conservative," and that they leave large "margins" to account for uncertainties and errors. The secret documents show it isn’t so.
According to one secret document, "analysts and those close to nuclear safety know margins are very tight: that’s why a lot more analysis has to be done." Another says "There appears to be a prevalent attitude amongst some people not directly involved in safety analysis that the analysts generally apply great ‘globs’ of conservative assumptions in their analysis, but are reluctant to sharpen pencils when necessary. Generally this is not the case."
FACT: In 1993, Ontario Hydro asked its nuclear safety analysts how a serious safety problem ("fuel string relocation" during a pipe-break accident) could have been overlooked for decades, "even though the effect is a basic characteristic of the design." The answer was more than Hydro bargained for.
The root cause, according to the analysts, was cost cutting and management pressure — both of which continue today. "You don’t get rewarded for finding problems," one said. "Right now, a questioning attitude is penalized," another wrote. "All sorts of potential safety problems are being shelved . . . As people change jobs and schedule pressures remain, . . . most of these will be forgotten." One comment referred to a "time bomb somewhere waiting to explode." Moreover, the analysts discovered that the basic design flaw was identified in the 1960s but the knowledge "appears to have been lost within Ontario Hydro."
FACT: When Energy Probe presented the staff of the Atomic Energy Control Board with evidence of excess childhood leukemia around Canada’s nuclear reactors, AECB staff reacted promptly and urgently — but in defense of their own past decisions, not in defense of the children. Their plan backfired.
In September 1991, I discovered that an excess of childhood leukemia around the Pickering and Bruce stations, originally revealed in an AECB-sponsored study, was large enough to be considered "statistically significant." AECB had earlier announced publicly that the excess "could be due to chance." Before releasing my analysis to the press, I faxed a copy to John Waddington, Director of Analysis and Assessment at the AECB.
What the secret documents show is that the AECB went into action as if Canada had suffered a nuclear emergency: (1) A meeting of six senior AECB staff was called "early in the morning to inform them of Norman Rubin’s report and his intent to publish his comments on the leukaemia studies in newspapers." (2) The review group met again the following morning. While a quick internal review had convinced AECB staff that I had "used improper statistical techniques" and "misinterpreted" the leukemia data, "it is decided that two outside experts be consulted to add more credibility to the conclusions of our internal review." (3) The following day, the group met through electronic mail, and agreed to wait for "the reviews from the university professors." The head of AECB’s public relations department thought "a write-up about this matter in the next issue of the Reporter [AECB’s newsletter] might be appropriate."
But while the Globe and Mail soon covered the story ("Researchers at war over child deaths," September 9, 1991), the AECB Reporter never did, because both university professors criticized the AECB’s report, one of them concluding that my statistical analysis and conclusion were correct, and that AECB’s conclusion resulted from using an inappropriate statistical test. Nonetheless, AECB’s Waddington still sent me a letter stating "that there is no need to change our conclusions with regard to . . . childhood leukaemia."
FACT: Nuclear plant operators have access to their regulators that the public, and groups like Energy Probe, only dream of having.
We now have hard evidence, from many documents, of private staff-to-staff meetings between AECB staff and nuclear utility staff, and of AECB staff sending drafts of forthcoming public policy documents to nuclear utility staff for review, long before a later version was circulated to us for "public" review. In some cases, AECB staff even sent the utility staff drafts of their reports to the AECB’s own board of directors!
It seems that one reason our written submissions on the AECB’s public "Consultative Documents" don’t result in any changes in policy is that the real consultation has taken place months or years earlier — between the AECB staff and nuclear utility staff — and it is already reflected in the first document we get to see. Since the trial ended, we’ve already encountered one case of this procedure, and have formally objected to AECB, which has promised us that we will be included in their future discussions on that issue.
I hope you agree with me that these secret documents provide clear evidence that reactor operators must be held financially liable for the full consequences of their actions, that the public must constantly question and prod the operators and their regulators, and that this technology must be phased out as soon as possible, in favor of more efficient, more sustainable and safer alternatives.
To help achieve these goals, we will be making extensive use of such secret documents and others in the coming months: First, I’ll present them to a federal Parliamentary Committee that is considering giving the AECB sole jurisdiction over the environmental impact of Canada’s nuclear plants, instead of Environment Canada. The documents show that AECB does not deserve that responsibility. Next, we will send them to the Ontario Solicitor General’s Office, which is finally considering updating Ontario’s Nuclear Emergency Plan in response to post-Chernobyl recommendations from ten years ago. And finally, we’ll regularly distribute selections of these disturbing documents to highlight the never-ending supply of these reprehensible dangers to Canadian society. We’ll be sending wake-up calls to politicians, and the press once a week, every week, like clockwork, via e-mail. If you have access to e-mail and you’d like to receive them, too, please let me know on the enclosed response coupon.
Sincerely yours,
Norman Rubin
Director of Nuclear Research
Thomas Adams
During Quebec’s brutal January ice storm, the residents of Kingsey Falls and four neighbouring municipalities suffered only relatively minor power disruptions. Except for two days without power at the start of the storm, the townsfolk remained lit and the main local employer, a forest products company, remained in operation. Kingsey Falls was an island of security and normality in an ocean of cold darkness because of cogeneration, a decentralized technology environmentalists have long promoted. During the crisis, the company’s natural gas-fired power station delivered electricity directly to the local communities while keeping the industry supplied with electricity and heat.
If Canada’s electricity systems had developed competitively instead of being distorted by unaccountable monopolies, they would have been more resilient, and this January’s ice storm would have caused a small fraction of the destruction. To prevent more man-made calamities in future, we need to break up the large centralized monopolies that make us so vulnerable to the elements. Next time, calamity might hit B.C. or Manitoba, whose power systems are just as vulnerable as those that collapsed in the east.
Everywhere in the world where monopolies are broken up, environmentally preferable technologies such as natural gas cogeneration replace nuclear, coal, and monster dams. Once Canadian jurisdictions allow competition, small power plants will spring up in shopping centres, factories, hospitals, apartment buildings, and office complexes. So too will new hydro-electric power at hundreds of small sites, and wind power, which has been largely ignored to date. Instead of a landscape dominated by remote megaprojects supplying distant communities via very few, very fragile transmission corridors, power plants will exist throughout our communities. Both their diversity and their proximity to users will improve resilience.
As if to prove that this economically and environmentally preferable option will never occur as long as the monopolies are in charge, Hydro Québec is responding to the horrific blackout by further centralizing its system, with new transmission corridors carrying more power from more remote generating stations.
Energy Probe’s fight with our power monopolies on reliability, environmental protection, and cost is starting to yield successes:
LI>Competitive pressures are playing a key role in forcing nuclear reactors to be shut down in Ontario.
If you support our efforts promoting environmentally responsible, reliable, and decentralized power systems, please send us a generous, tax-deductible donation. With your help, we’ll bring about a sustainable energy future.
Sincerely,
Thomas Adams
Executive Director
Thomas Adams
Energy Probe
If you’re a multinational, take heart: Mike Harris’s Hydro can cut a sweetheart deal for you. Suncor, Nova Chemicals, and Polysar are just some of the beneficiaries of the Hydro monopoly’s boast of being "responsive" to its customers. Who will pay for these breaks for big business? Why, the little guys residential and small business consumers.
If you’re a residential customer, there’s only one way to lower your Hydro bills leave. Manitoba to the west charges residential customers about a third less than Ontario. So does Quebec to the east, and many, many U.S. jurisdictions to the south. Thanks to decades of mismanagement, in fact, Ontarians now pay among the highest power rates on the continent.
Big business has more good news coming, too. Soon the Ontario system could be opened up to real competition, and they’ll be able to buy power at the real, uninflated rate. But residential customers are out of luck: Farlinger, Ontario Hydro’s new chairman, wants to direct the windfall that will come from competition to big business, and away from you, until the year 2010!
This may sound like "common sense" to Mike Harris, but to most Ontarians including those who elected the new government expecting Harris to put an end to the Hydro monopoly it makes no sense at all. And there’s no reason we should take it.
Ten years ago, when the natural gas system was deregulated, Energy Probe fought for the right of residential customers to benefit from competition in the natural gas business. We won that battle to the benefit of small gas consumers rates have dropped 25% after inflation and now we must fight and win the battle to give small power customers full rights to an open electricity marketplace.
Please join the battle with a tax-deductible, charitable donation. Reform of Hydro is now imminent, and we must ensure that the changes work to the benefit of all Ontarians, and not just a privileged few.
Thomas Adams
Director, Utility Reform
Thomas Adams
Energy Probe
Changes to our giant power monopolies are sweeping most of the country, offering potential environmental improvements and lower rates for consumers. Damaging megaprojects could be scrapped in favour of smaller-scale power that meets local needs. Canadians may look forward, for the first time, to the choice of supporting renewable energy sources over coal and nuclear plants. Electricity customers in Calgary already have the option of buying wind power due to the advent of competition in Alberta.
But good results are not assured. Done badly, we could see increased pollution, blackouts, new threats to aboriginal communities, and new liabilities for taxpayers. Ontario Hydro is already increasing production from its highly polluting coal-fired stations. Consumers in Alberta and Ontario have experienced brownouts or blackouts. Hydro Québec’s new electricity transmission tariff, officially billed as a step toward an open, competition-oriented power system, is in fact a major subsidy to the latest hydro-electric megaproject planned for aboriginal land in Labrador by the Quebec and Newfoundland governments. In New Brunswick, NB Power has already stuck taxpayers with $450 million in liabilities for its nuclear mistakes while continuing to spend more on its faltering nuclear program.
Energy Probe is blowing the whistle on these backward steps — in the press and on the Internet, in academic circles, and before legislatures in several jurisdictions.
But we’re doing more than just criticizing. We are also working hard on constructive projects to ensure that electricity reforms result in energy that’s more sustainable. In Ontario, we are campaigning to put customers in charge, with rules that require full disclosure by power distributors about the source of power they sell and the pollution that results. We are campaigning for tougher air pollution controls on fossil-fueled power stations, tighter regulation of the operation of power dams so that river ecosystems are less disrupted, the orderly phaseout of nuclear power in Ontario, New Brunswick, and Quebec, and secure funding of nuclear waste liabilities by waste producers. We are making the case across the country for thorough, independent, and public regulation of monopolies in the electricity sector. We are also keeping a watchful eye on utilities to ensure that they don’t overlook the Year 2000 computer glitch in the midst of all the other changes now underway.
To continue our work, we need your help. Last year we received less than 1/10 of 1% of our financial support from corporations and no financial support from governments. That tells you something about who we’re fighting for. If you believe that Canada needs a strong advocate for a more sustainable electricity future, please send us a charitable donation today, and we’ll put it to the all-important task of ensuring a safe and sustainable energy future for all Canadians.
Yours Truly,
Thomas Adams
Executive Director
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.
Deirdre McMurdy
Maclean’s
March 26, 1993
The two buildings are only 12 blocks apart. But in every other respect, the modernistic headquarters of Ontario Hydro and the cluttered brick house of Energy Probe in Toronto are light years apart. Since several environmentalists formed the aggressive lobby group in 1974, it has waged war against Canada’s largest electric power utility and its operations. Although the group has most frequently focused on Hydro’s extensive nuclear power program, it has also attacked its monolithic structure and its bureaucratic corporate culture. For their part, senior utility executives have tended to dismiss the Energy Probe workers as misguided zealots. But early this week, that adversarial relationship was due to take a sudden turn: Maurice Strong invited himself to a meeting at Energy Probe and was set to become the first Ontario Hydro chairman to visit the group’s offices. Said Norman Rubin, director of nuclear research at Energy Probe: “This is the first time that they have ventured onto our turf. It’s a real departure.”
The initiation of any dialogue between Ontario Hydro’s management and its most vociferous critics is the latest sign that the troubled utility is in the throes of a profound transition. Just four days before his meeting with Energy Probe officials, Strong announced that Ontario Hydro was following the example of hundreds of recession-battered private-sector companies by restructuring into three smaller, semi-autonomous units and eliminating 4,500 employees–including eight of the utility’s 14 vice-presidents. He even invoked the ultimate “New Economy” notion of spreading decision-making responsibility throughout the ranks.
At the same time, Strong said that the debt-encumbered utility will take a $1.3-billion “hit” this year to write off restructuring and other operating charges, including the $150 million penalty for cancelling a $13.5-billion supply contract with Manitoba Hydro. Speaking at a Toronto news conference, Strong noted that “to surmount the present crisis afflicting the organization,” flexible, responsive business units had to be created. He added: “You can’t have an efficient system that isn’t broken down into manageable units.”
However radical was Strong’s rhetoric, especially for the head of a moribund Crown corporation, the success of his bold strategy remains largely beyond his control. The utility is not only saddled with $34 billion in debt, but its future has been permanently linked to a costly and increasingly unreliable nuclear power program. The protracted construction of the $14-billion Darlington nuclear station east of Toronto and the maintenance problems at the 26-year-old Bruce nuclear facility on the shore of Lake Huron, have largely contributed to the utility’s financial burden.
Now, as the financially troubled provincial government looks for ways to separate itself from that debt, which it has guaranteed, the option of privatization is under increasing debate. But the immeasurable environmental risk and the rigorous federal licensing requirements attached to nuclear facilities ensure that those capital-intensive units cannot be easily transferred to any other owner. Said David Brown, an economist with the Toronto-based C. D. Howe Institute: “Nuclear assets are uninsurable. No private market could–or would–handle the inherent risk.”
While Strong has made it clear that Ontario Hydro must reorganize to address such short-term problems as increasingly uncompetitive rates and corrosive interest charges, the ensuing process will inevitably fuel the discussion of privatization. The division of the utility into three separate units (international and new technology, generation and distribution, and conservation and service), each with responsibility for individual profit targets, is one of the first measures required to transform Hydro’s capital structure. With the distinct operating units in place, it will finally be possible to monitor specific operations as in a private-sector company. As part of that exercise, Ontario Hydro also will revalue its assets to determine what they are currently worth.
Although Strong has initiated an internal Hydro review of the privatization issue, last week he remained reticent about that prospect. “Privatization is part of the public dialogue and it is not decided by me,” he said. But he added, “We expect that dialogue to continue.” For the Ontario government, which this week was scheduled to sit down with public-sector unions in an attempt to contain a deficit that could soar as high as $17 billion this year, the option of limiting its responsibility for Hydro must be compelling. Because Hydro is a Crown corporation, the province is directly responsible for its entire debt.
According to Yves Lemay, assistant vice-president at Moody’s Investor Service, a New York City-based credit rating agency, even if Hydro goes private, Ontario will still be liable for all debts incurred while it was a Crown corporation. Of even greater significance, however, is that credit agencies include Hydro’s debts in the overall Ontario debt because the province is Hydro’s guarantor. That liability is now of special concern because Ontario’s debt crisis already is jeopardizing the province’s fragile credit rating.
To separate itself from a similar utility debt problem, the government of Nova Scotia successfully privatized its power utility with the issue of 85 million shares at $10 each last August. But equity underwriters involved in that transaction emphasize that the case of Nova Scotia Power is radically different from Ontario Hydro. Although Nova Scotia Power Corp. also had a relatively high debt load, it had a strong political directive to keep its rates low through efficient operation. As well, Nova Scotia Power had already issued savings bonds directly to the public rather than just to international capital markets, as Ontario Hydro has done.
But by far the most critical distinction between the two utilities is nuclear. Nova Scotia has no nuclear power facilities–a fact that makes it attractive to potential investors. Even Strong acknowledged last week that as debt is allocated against assets in Hydro’s restructuring, the nuclear power unit could end up shouldering much of the burden. In Britain, the Conservative government of Margaret Thatcher set about privatizing its electric power system in 1988 in a bid to introduce free-market competition to the sector. Ultimately, however, the government discovered that there was no market for the nuclear assets and, as a result, had to separate them out and retain responsibility for them.
If the Ontario government does opt to privatize Hydro, it could sell shares, as Nova Scotia did, or it could sell assets outright. But, as Maurice Strong and Energy Probe’s Norman Rubin are clearly aware, it is unlikely to be able to sell the nuclear assets that have contributed so much to the overall problem.
Andrew Coyne
The Globe and Mail
November 1, 1994
The citizens of Ontario have grown used to puzzling advertisements from the state electrical monopoly, Ontario Hydro. In the recent past, the utility’s taste has run to pictures of small children holding giant models of the Earth, with accompanying text that calls to mind early experiments in writing poetry by computer: "Walk far from cynics and whiners, they don’t believe, they never have. Uphold those who care, who share." "Hold out the hand to those who yearn and work to build. Welcome those who have the fire." Yes, but how do I get the lights back on?
Lest these opaque bits of sentiment lead the unsuspecting to think well of the corporation, Ontario Hydro’s workers have periodically taken out ads of their own, roundly denouncing the utility and its chairman, Maurice Strong.
But for veteran puzzle enthusiasts, Ontario Hydro’s latest ad is the most challenging yet. Pictured are the utility’s president and chief executive officer, Allan Kupcis (Mr. Strong having semi-retired to a role approximating that of Deng Xiapping in China), and John Murphy, president of the Power Workers’ Union. The two have joined hands to brag that Ontario Hydro is "holding the line" on the rates it will charge municipal utilities and rural customers in 1995, the second straight year they have been frozen.
Indeed, the ad says, industrial customers will see their rates fall slightly, "the first time that has happened in almost 30 years." It closes with two of those non-sentences advertising copywriters favour: "Keeping your power costs down. Ontario Hydro and the Power Workers’ Union."
Keeping your power costs level, maybe. But down? What the ad doesn’t say is that in the four years before rates were frozen, Ontario Hydro’s rates jumped by an average of almost 40 per cent, more than four times as fast as inflation. Average revenue from primary power customers rose from 4.7 cents per kilowatt-hour in 1989 to 6.5 cents in 1993. Having launched rates from the merely alpine to the stratospheric, Ontario Hydro now proposes to keep them there. This is not most people’s definition of "down."
Yet, as everyone in Ontario knows, the utility has also been through a major restructuring in the past two years, including the reduction of its regular work force from about 29,000 to its present 22,500. Mind you, the workers didn’t go cheaply: The cost of the buyouts and early retirement packages needed to persuade 5,000 of them to leave last year ran to $624-million, not counting relocation charges, or about $124,000 each. But still, as the ad notes, operating costs have been reduced by 25 per cent. So we are left to wonder: How come the corporation is still charging the same rates as it did two years ago, with only three-quarters of the staff? Freeze, shmeeze: Why can’t it cut rates?
One reason is that Ontario Hydro’s sales have been in decline since 1989 — largely because of the increase in rates. At larger volumes, the corporation spreads its heavy fixed costs over more customers. But with dwindling demand, average costs rise.
Two, other costs have risen — notably the cost of interest on Ontario Hydro’s $34-billion long-term debt. In Hydro’s accounting system, interest on debt incurred to finance capital investment is built into rates only when the projects are put into use. That meant taking a big whack in the past year, when the last two units in the long-delayed Darlington nuclear plant (total cost: $14-billion) finally went into service. There is a certain pathos in seeing Hydro’s workers lose their jobs to pay for Darlington, says analyst Tom Adams of Energy Probe, since they were among the project’s biggest backers. But that was in the days when costs could always be loaded onto consumers.
In fact, high as they are, Ontario Hydro’s rates may still not reflect its true costs. The corporation still does not pay anything like the real economic price of the water it uses in its hydro-electric plants. Nor is the 50-basis-point fee it pays the province to guarantee its debt more than a token of the benefit it receives, given that the corporation is arguably insolvent. Indeed, the $3.6-billion "restructuring charge" Ontario Hydro took on its books last year leaves it with a debt-to-equity ratio of more than 10:1, even on Ontario Hydro’s numbers. Some of that charge was to write off costs that would otherwise have later passed through into rates. So the freeze of which the corporation is so proud may be at the expense of a further weakening of its financial position.
On the other hand, Hydro also wants to keep rates high in order to finance more of its capital investment out of cash flow, and less from borrowing. The advertisement notes that the corporation has reduced planned capital expenditures by $24-billion over the next 10 years: "aggressive numbers, to be sure."
Aggressive, and misleading. It is true that Ontario Hydro has scaled back its ambitious expansion plans, from $40-billion down to $16-billion. But a critic might ask why, given the present overcapacity, Hydro should be building any new plant, let alone spending almost $2-billion a year. It may be that more capacity will be needed in the future, but Ontario Hydro’s spending plans presume it will be the one to fill it. Given its price and cost performance, that may no longer be a safe assumption.
Andrew Coyne is a writer with The Globe and Mail.
Thomas Adams
Energy Probe
November 29, 1995
Paper for
The Institute of Electrical & Electronic Engineers (IEEE)
Power Engineering Society (Toronto section)
Future of The Electric Power Industry In Ontario
November 29-30, 1995
Royal York Hotel, Toronto
Transforming Ontario’s power system so it can sustainably lower rates and improve efficiency will require new methods of ensuring responsible behaviour. The province’s 89-year experiment using public ownership and self-regulation by the power industry to effect control has produced unacceptable results–high rates, bulging public liabilities, and failed investments. Self-regulation must be replaced by independent regulation. However, for independent regulation to be fully effective, Ontario will have to embrace electricity sector competition and sweeping privatization to eliminate the pervasive conflicts of interest.(1)
Public ownership was once an accepted method of effecting control over key business enterprises in Canada. For example, until the creation of the Canadian Radio and Television Commission in 1968, the CBC regulated the broadcast industry in Canada. Confidence in government ownership as a means of protecting the public interest grew out of a culture of paternalism in public life that was left over from our history as a colony of England. Fortunately, small "r" republican notions of "checks and balances," previously considered to be suspiciously American, are taking root here. The ongoing global revolution which is converting monopolies and public ownership to competition and private ownership is coming to Canada, albeit a good deal later than elsewhere. Paradoxically, one of the leaders Canadians should now be avidly studying is our former colonial master, the U.K.
The U.K. has not only dismantled state ownership and monopolies in many key industries, but also has boldly established strong and effective regulation, often in innovative forms. In the electricity industry, power rates for all consumers have dropped since privatization. Homeowners now enjoy 10% lower rates relative to inflation. The biggest winners have been medium-size institutional and business users whose rates have dropped by 15%.(2) Profits for most new electricity companies are robust, despite falling rates, revealing just how much consumers had been overcharged under the old system. Productivity has jumped, with the amount of power produced per employee almost doubling since privatization. Not only are customers seeing their electricity rates go down, but service has improved as well. Utilities that miss appointments, for example, pay the inconvenienced customer £20 (about $43). Disconnections for non-payment are down by 98.7% in the new profit-oriented system as a result of a variety of new payment options for customers behind in their payments. Reliability has been maintained, partly because the generation reserve capacity is large and growing.
Regulation has played a key role in the U.K.’s success in decreasing power rates, in increasing efficiency, and in improving the quality of service. The new regulatory system limits the rates utilities charge instead of the profits shareholders earn, giving utilities a powerful, profit-based incentive to cut costs. In order to prevent cost cutting from reducing the quality of service, the regulator tracks quantitative measurements of service quality, and imposes rules entitling individual consumers to recover financial penalties from utilities that fail to perform. The U.K. experience shows that privatization and regulation are not the strange bedfellows some may believe them to be. In fact, the surest way to get strong regulation is through privatization.
Privatization solves the fundamental conflict of interest that exists when government is both owner and regulator. Remove that conflict of interest, by separating government from industry, and the regulator gains freedom to do the job he should be doing: guard the public welfare.
The regulatory status quo in Ontario’s power sector suffers many conflicts of interest. Ontario Hydro’s most glaring conflict of interest is its regulatory control over municipal utilities, which buy and distribute 70% of Ontario Hydro’s output. Under Ontario Hydro’s mandating legislation, the Power Corporation Act, the rates charged by a municipal utility "are subject at all times to the approval and control" of Ontario Hydro’s board. Further, Ontario Hydro has the power to order a rate change "when in its opinion it is in the interests of the municipal corporations." Municipal utilities are regulated in secret and without right of appeal beyond Ontario Hydro’s own Board of Directors.
We do argue (for electricity and gas) that the environmental externalities which remain, after weeding out those externalities caused by allocative inefficiency, ought to be dealt with in regulatory fora outside rate regulation. Energy Probe’s argument that rate regulators are poorly placed to be environmental regulators is not an argument for weak environmental regulation. For example, Energy Probe is Canada’s leading advocate of stricter environmental and safety regulation for nuclear power.
Canada’s vast water resources are a case in point. Although laws are on the books governing our water and sewage utilities, the laws are systematically ignored. In British Columbia, for example, where fishermen two years ago took Vancouver to court to force it to obey the law, the provincial government, as is its right, took over this private prosecution "in the public interest." It then dropped it, allowing the dumping to continue. Regulation of water resources in other provinces is no less delinquent. Municipal water utilities routinely pollute in violation of the law, but provincial governments, which are responsible for the municipalities and for upholding the law, don’t say boo. And how could they, when they don’t prosecute their own equally culpable sewage plants? Provinces have another conflict of interest, too: Because they often fund improvements to sewage systems, court orders to clean up municipal plants can boomerang on them. Better by far to lie low, they reason, and ignore the problem. The result–visible degradation of public resources such as beaches, leading to a brisk coast-to-coast business in "No Swimming" signs each summer.–>
The Ontario Energy Board (OEB), in its latest report on Hydro rates, challenged this conflict of interest. The OEB found that the present arrangements are "increasingly anachronistic" and "designed to ensure that MEUs (municipal electric utilities) operate fairly within a monopoly electrical system, based on postage stamp rates." The report stated, "The Board does see a degree of conflict in the Hydro-MEU regulatory relationship."(3)
London Hydro, one of the most forward thinking utilities within the "Hydro family," has supported the OEB’s recommendation, officially condemning regulation by Ontario Hydro. London Hydro’s Strategic Plan (1996-2000), approved by its board on October 3, 1995 proclaims that "It is time to remove any regulatory authority by Ontario Hydro over MEU’s; a more open regulatory system under the Ontario Energy Board should be implemented."
Another profound existing conflict is Ontario Hydro’s effective regulation of its current or would-be competitors. Ontario Hydro regulates barriers to entry through its control over technical standards for grid connection, back-up power availability, transmission services availability, and rate discounts designed to thwart self-generation, fuel switching, or supplier switching. Without eliminating Ontario Hydro’s control over each of these areas, we will fail to achieve what should be one of our ultimate goals in electricity reform–a fully open, competitive commodity market for power.
Another conflict of interest exists in Ontario Hydro’s regulation of water flows in rivers and hydroelectric operations. Ontario Hydro, after it complies with its site licences and water power lease agreements, is effectively the regulator of water flows on Ontario’s developed watersheds. Ontario Hydro is the decision maker of our waterways, trading off the interests of hydroelectric production priorities against the interests of upstream and downstream water users. Such decisions require irreducibly complex trade-offs between competing interests–one of which is Ontario Hydro itself. Ontario Hydro has taken on the role of water regulator by default. We need a new regulatory paradigm for water control that provides all affected parties, whether power producers, riparians, or environmental authorities, with power to influence decisions in an accountable and independent process.
Yet another conflict of interest is Ontario Hydro’s regulatory authority over the installation standards and inspection of electrical equipment safety. Although this conflicted regulatory authority has not been implicated in anti-competitive actions to date, Ontario Hydro’s authority in this area must give some independently minded municipal utilities and potential industrial self-generators pause. Installation codes for electricity should be developed as they are for gas, under the responsibility of the provincial Ministry of Commercial and Consumer Relations. With an appropriate liability regime for inspection services, Ontario Hydro’s electrical inspections function could even be privatized.
Without privatization, regulation of publicly owned enterprises is burdened by conflicts at every turn. The OEB has never had binding authority over Ontario Hydro rates. Instead, it is empowered only to offer advice to government upon review of next year’s rates. The OEB has never had the right to regulate or even to comprehensively review capital programs. Often the OEB’s recommendations are ignored. Under the previous government, the OEB’s power was curbed even further. In 1993, the government shielded Ontario Hydro entirely from public accountability by exempting it from having to present its industrial rate discrimination plans to the OEB. In 1994 and 1995, respective Ministers specifically prevented the OEB from examining in any respect the most pressing and important issue in the electricity sector–privatization.
The OEB’s weak oversight of Ontario Hydro contrasts sharply with Ontario’s experience with regulation of the privately owned natural gas distribution industry. The OEB was the first regulatory authority in North America to allow competition in commodity gas sales to the whole market. Competition has been a massive and under-recognized success. It has saved Ontarians billions of dollars. For example, residential customers of Consumers Gas have seen their rates drop by 36% since 1984 after adjusted for inflation. While Ontario Hydro selectively ignores, and sometimes explicitly refuses to follow,(4) the OEB’s findings, Ontario’s private gas utilities are highly responsive to them. In the gas sector, the OEB has the power and inclination to pursue its own initiatives, an example being the current generic review of system expansion policies. Unlike the annual electricity rate review, the OEB is under no artificial time constraints when examining gas issues. In gas, the combination of a competitive commodity market, private ownership of transmission and distribution, and effective public regulation has served the Ontario public exceedingly well.
When we are designing a new electricity system for Ontario, we need to be mindful of the words of Clint Eastwood (who is not often recognized for his contribution to regulatory theory.) Eastwood said, "A good man knows his limits," a philosophy that can be usefully applied here too. We have to recognize the limitations of monopoly regulation.
Regulation on its own can never force monopolies to innovate. The electricity sector today is like the telephone sector before deregulation when the only phone option available was basic black. Around the world, innovation has been suppressed by the electricity monopolies. The monopolies have failed to develop and adopt distributed generation and storage options, failed to exploit cogeneration opportunities, and failed to optimize electricity service provision by converging it with provision of other goods and services. Successful innovation is elicited from private initiative, whether from competition between private interests or from the profit motive in an incentive regulation scheme.
Regulation is a necessary accompaniment to privatization and competition, but it is not a substitute. Regulation without competition and private ownership is a very weak instrument for protecting consumers from the inefficiency of state-owned monopolies. Price cap incentive schemes, often applied to nonprofit Crown utilities to encourage efficiency gains, also perversely encourage creative bookkeeping. New Brunswick (N.B.) Power is under a price cap scheme. Rather than expensing outage costs like replacement power costs, interest costs, and depreciation charges of plants under planned and forced outages, N.B. Power capitalizes these costs as construction-work-in-progress. Current electricity ratepayers are not exposed to the full outage costs, since the costs are added to the utility’s debt. Future electricity ratepayers or taxpayers in New Brunswick will eventually have to pay for spending that was effectively concealed from current ratepayers. Furthermore, without shareholders to share the burden of imprudent capital and labour decisions (either by statute through regulation or by the harsh decisions of the market), regulators have little power beyond moral suasion and public embarrassment to discipline management and protect consumers.
Even where there is a genuine desire to reform, as was the case with Ontario Hydro under Maurice Strong during the past three years, many fundamental issues cannot be managed through internal reforms designed to make the utility more closely resemble a normal corporation. Ontario Hydro created generation business units and developed an internal power market through transfer pricing. Yet, incentives for good performance remain extremely limited, as do methods for balancing risks and benefits. The utility remains accountable only to cabinet ministers rather than accountable to customers, suppliers, and competitors. As long as government remains an owner, it will continue to be a conflicted regulator.
The U.K. reforms were driven by the recognition that competition, where it can flourish, is a far more potent cost-cutter and innovation stimulator than the toughest and wisest regulator. In the U.K., National Grid is a leader in twinning power transmission with fibre optic data capability. The labour intensity of the electricity business is down by half–far more than Maurice Strong’s reduction of one third, commendable though it was.
When we move to a competitive market, limiting market power in generation will be essential to ensure that competition serves the public interest. With real competition in generation, electricity regulators will have the benefits that gas regulators now enjoy in Ontario. Gas commodity competition has strengthened regulation by substituting market pricing for complex and questionable administered pricing. The job of regulators has been simplified and streamlined, allowing them to focus more attention on controlling and improving the natural monopoly aspects of the industry.
The most important method of limiting market power is to break up control of the existing generating assets. The worst mistake made in the U.K. power privatization was the decision to apportion the generation assets of the former state-owned monopoly to only three competing generating companies. There has been some evidence of market manipulation by the three largest producers. Fortunately, the market power of this triopoly is rapidly eroding. In the past five years, suppliers outside the big three have more than tripled their market share to 19%.(5) In Ontario, competition should be kick-started by breaking the existing generating assets into several separate companies. In addition, transmission, distribution, and dispatch functions should be structurally separated and privatized.
Once sufficient diversity of ownership is created, transmission providers, distributors and dispatch providers must be regulated to ensure non-discriminatory access to power producers. Power producers outside Ontario, self-generators, and distribution utilities with generation facilities all need access equal to that offered to the new owners of Ontario Hydro’s stations.
While monopolies should be regulated, competition should be unregulated. An old, now discredited model of quasi competition–one of the first competition-oriented concepts to penetrate the bunker of the monopoly electricity business–provided regulated competition in power procurement. The U.S. 1978 Public Utilities Regulatory Policy Act (PURPA) was based on that model. Under competitive procurement, utilities have entered into longterm contracts with non-utility generators at fixed prices based on "avoided costs." The contracts themselves often provided the shadow equity for these projects, which were often very highly leveraged. "Avoided costs" have generally proved to be significantly above market price. Because of the long-term nature of these power purchase contracts, consumers have generally been major losers. Here, Ontario Hydro followed a similar model for the years 1989-1992. The market value of Ontario Hydro’s present non-utility generation portfolio is a liability which may be as large as $2 billion. The whole fiasco in the U.S. and Canada could have been avoided by empowering consumers to procure power on their own behalf.
Energy regulators in Ontario need to been given more concrete direction from the legislature. The purposes set out for the OEB in its mandating legislation are too vague. Regarding gas, the Ontario Energy Board Act directs the OEB only to "[fix] just and reasonable rates." For electricity, the OEB is directed only to hold a public hearing and report their findings to the minister. By comparison, the statutory duties of U.K. regulators of telecoms, gas, and electricity are expressly to protect consumers and to promote competition. Giving such a mandate to energy regulators in Ontario would significantly strengthen and focus the regulatory process.
Beyond dispersing the existing assets widely and eliminating artificial barriers to market entry, government should not attempt to artificially restrain the forms of commercial structure that may develop. Recent U.K. experience shows how the legal right of companies to engage in mergers and acquisitions can bolster the regulator’s hand and create a bonanza for consumers. In a hostile takeover attempt of Northern Electric, a distribution utility, by Trafalgar House last December, Northern attempted to stave off the attack by offering to boost shareholders’ profits through cost-cutting measures which the management had previously implied could not be done. The U.K. Office of Electricity Regulation, tipped off to the savings that management was hoarding, immediately cut the maximum price that the country’s distribution utilities can charge by between 11% and 17%. In April, the regulator followed up with another bonanza for consumers–additional delivery rate cuts of 10% to 13% and a four-year schedule of rate cuts at the rate of inflation minus 3% per year.
If artificial barriers to entry are removed and competition is left wide open following the breakup of Ontario Hydro’s assets, it is unlikely that damaging consolidation will reemerge. The gas industry, over the past ten years, has proved that, where it exists, competition increases diversity. If collusion occurs between electricity businesses, consumers can be protected by application of Canada’s Competition Act. Some consolidation is now happening in the U.K. to take advantage of the unfortunate fact that residential consumers remain the captives of regional distribution monopolies until 1998. A made-in-Ontario solution to this problem would be to follow our success in implementing gas commodity competition in 1985 where all consumers, regardless of size, were liberated right from the beginning. If the functions of transmission, distribution, dispatch, and generation become intermingled through ownership, regulatory measures may be necessary to prevent abuse of affiliate transactions between regulated and unregulated portions of the industry like those now in place for gas.
Ontarians should be mindful of two pieces of advice when creating a tough, effective regulatory regime for a reconstructed electricity industry. Over two hundred years ago, Adam Smith, commenting on guilds, an early form of monopoly, noted: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."(6) More recently, Margaret Thatcher has observed, "Privatization itself does not solve every problem; though . . . it certainly exposed hidden problems which could thus be tackled. Monopolies or quasi-monopolies which are transferred to the private sector need careful regulation to ensure against abuses of market power, whether at the expense of competitors (if there are such) or of customers."(7)
1. This paper does not address the reinforcement of environmental and public health regulation that we believe should also accompany reform of Ontario Hydro.
2. Arthur Cooke (U.K. Office of Electricity Regulation), "Environmental and Consumer Protection in the Privatized UK Electricity Supply," in Europaeische Elecktrizitaetswirtschaft: 26/27 September 1995. On November 29, Gordon Homer reported to the IEEE conference, based on data from the U.K. Office of Electricity Regulation, that as of that week residential rates were down by 10.7% and medium industrial rates were down by 17%. Ontario Hydro’s Power Workers Union has taken out full page newspaper ads in recent weeks claiming that privatization has caused rates to be 20% higher than they would have been without privatization. The claim is based on a 1992 study by George Yarrow, which compared rates in 1992 with extravagant rate claims by the now disgraced Central Electricity Generating Board, made at a time it was trying to fight off privatization.
3. Ontario Energy Board, H.R. 23 Report of the Board, 31 August 1995, pp. 142-3.
4. Recent examples of OEB recommendations Ontario Hydro has specifically refused to comply with include recommendations 3.8 and 3.9 of HR 22 regarding heavy water production costs and accounting. The refusal is registered in a letter from Allan Kupcis of Ontario Hydro to the Brenda Elliott, Minister of Environment and Energy, November 9, 1995. In addition, Ontario Hydro’s response to the HR 22 recommendations was filed ten weeks after the date the OEB ordered it due.
5. S. C. Littlechild (U.K. Director General of Electricity Supply), "Privatization and Regulation of the U.K. Electricity Industry," Mont Pelerin Society Regional Meeting, Cape Town, South Africa, 10-13 September 1995.
6. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, (1776; reprint, New York: Collier, 1905), Book 4 207 (page citation is to the reprint edition).
7. Margaret Thatcher, The Downing Street Years, (New York: Harper Collins, 1993), 677.
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