Toronto Hydro provides local distribution of electricity to consumers in Toronto. It is owned free of debt by the city, its cost of about $1.7 billion having been paid for by the people of Toronto over the years through their electricity bills.
The recently enacted Bill 35 converts Toronto Hydro from a consumers’ cooperative administered by the city to an ordinary business enterprise that the city can continue owning or sell. This study compares the costs and benefits of these two alternatives. It concludes that continued city ownership of Toronto Hydro compares very favourably with its privatization.
City ownership can be expected to provide very low rates to consumers for the distribution of electricity and a generous low-risk rate of return to the city on its investment in Toronto Hydro. Its cost per kWh of power distributed is less than one-half the median cost for publicly owned distribution utilities in the U.S., and the latter’s cost compares favourably with U.S. investor-owned utilities.
If Toronto Hydro were privatized, the city could invest the funds obtained from the sale in a portfolio of securities. Under unrealistically optimistic assumptions, this would result in the same electricity rates to consumers and on average the city might earn the same return on the portfolio as it earns on ownership of Toronto Hydro. However, the return on that portfolio of securities would be far riskier than the return on ownership of Toronto Hydro.
In fact, the rates charged for distribution in general, and to residential and other small consumers in particular, would prove to be far higher under private than under public ownership for a number of reasons.
First, rates will be set by the Ontario Energy Board, and we can be sure that a private Toronto Hydro will be far more energetic, use considerably more expensive resources and be much more successful in getting higher rates from the Ontario Energy Board than a city-owned Toronto Hydro. The overriding objective of private owners is profit maximization, whereas the city sees that higher profits result in higher electric rates and it is more concerned with performance than profits.
Second, rate design involves setting different rates for the demand for and use of electricity among different classes of customers. The evidence from the U.S. is that by comparison with public ownership, private ownership results in higher rates for small users and lower rates for large users.
Third, privatization is quite likely to result in Toronto Hydro becoming a small subsidiary of a large, probably foreign, conglomerate. Through transfer pricing, that is the pricing of services that the parent company would provide to Toronto Hydro, and the energy sold to it, the costs and rates charged by Toronto Hydro could, in turn, be inflated. The ability of the Ontario Energy Board to detect and eliminate the abuse of transfer pricing would be very limited in the current political and institutional environment, particularly if the conglomerate were owned abroad.
Fourth, retail competition has been decreed by the provincial government in the pricing of electricity to consumers. Complicated metering arrangements, licensing of marketers and the other institutional and technical arrangements needed to establish retail competition for residential and small business users will involve costs and confusion with no apparent benefits. City ownership is likely to add less to the cost and confusion than a privatized Toronto Hydro, anxious to profit from the introduction of new and varied pricing packages.
Whether public or private ownership is a better vehicle for minimizing labour and other production costs and for the introduction of desirable improvements in technology without endangering the quality of service, is a matter on which there has been some debate. Experience in the U.S., where municipally-owned retail distribution is widespread and has a long history, suggests that municipal ownership compares favourably with private ownership. The data reveal that municipal ownership results in lower consumer rates than private ownership.