Among the claims advanced in favour of privatization is that competition and the profit motive lead to reduced costs and technological innovations, both of which benefit the consumer. Nonetheless, this is not true for electric power in the U.S., where a large fraction of the local distribution of electric power is by cooperatives and by municipally-owned companies like Toronto Hydro. It has been found there that costs and rates for residential and small business users are in fact higher for investor-owned utilities. See American Public Power Association, Straight Answers to More False Charges Against Public Power, 1999, p. 6, where data compiled by the U.S. Department of Energy are presented. In 1997, average revenue per kWh was 6.8¢ and 8.9¢ for publicly-owned and investor-owned utilities respectively.(16)
Deregulation and competition in the telecommunication industry may have contributed to introducing the new products made possible by the technological revolution taking place in that industry. However, notwithstanding the cost reductions made possible by the new technologies, the price charged for local telephone service has skyrocketed over the last ten years.(17) We see there that private ownership and the weakening of regulation resulted in a sharp rise in price for a basic local service where the demand is insensitive to the price.
What is the situation in the distribution of electric power? It is a natural monopoly and no one is suggesting that it be deregulated. The technology in the industry is quite stable, and there is no evidence that privatization would lead to radical cost saving innovations. Instead, it is quite likely that as in telecommunications, the profit motive under privatization would lead to much higher rates for residential and other small consumers for whom the demand is very insensitive to price.
The only significant technological innovation in the electric power industry with which I am familiar is the combined cycle gas fired (CCGF) electric power plant. Here, capital costs per unit of capacity are comparatively low, and they do not rise sharply as the size of plant is reduced. The impact of this development on generation for urban areas is unclear. Assuming that it will be economical for many large urban users to turn to this source of power, two questions must be answered. Would a privatized Toronto Hydro be in a better position to introduce this new source of power than a city-owned Toronto Hydro?(18) Second, this source of power, like others, would not be regulated, and how would the benefits be distributed among the privatized utility, the large consumers and the people of Toronto? Until we have more information on the consequences for large urban areas of this relatively new means of power generation, it should have little or no impact on the choice between public and private ownership of Toronto Hydro.
The former practice of setting prices for Toronto Hydro by Ontario Hydro and the prohibition on paying dividends to its owner resulted in the excessive accumulation of cash and what some would call an excessively high level of service. In any event, the consolidation of the six member companies of Toronto Hydro into one company has made it possible to reduce employment by 22%. I presume that this leaves Toronto Hydro with the staff needed to provide Toronto with the safe, reliable service it requires. Whether staff can be reduced further without putting at risk the reliability of service, and whether a privatized Toronto Hydro would be able to do it better is a subject on which I have no professional expertise.
A privatized Toronto Hydro might cut costs by reducing the full-time staff to a bare minimum and rely on contract workers for maintenance, installations and emergency repairs. Whether the dollar savings is worth the impairment of service is open to question. Even more questionable is the extent to which the savings would be passed on to consumers, as will be seen now. I also doubt that the city wants to lead the way in converting decent jobs into insecure, low-wage contract employment.
Notes
- In a comprehensive analysis of the reasons why public power is cheaper than power from investor-owned utilities, John E. Kwoka, Professor of Economics at George Washington University and the leading figure in analyses of electric power costs, found that the difference is not fully explained by advantages such as lower tax rates and greater access to cheap government-owned hydroelectric power. Municipally owned distribution companies were found to be more efficient than privately owned companies. See John E. Kwoka, Public Versus Private Ownership of Electric Utilities: A Comparison of Price Performance, American Public Power Association, January 1995.
- Between 1980 and 1989, the monthly charge for an individual telephone subscriber in the Toronto area rose from $9.90 to $12.60, only 27.2 per cent. This was a period during which the inflation rate was relatively high and the benefits of technological progress were comparatively modest, but telephone rates were subject to regulatory control. Since 1989, the bare bones local service rate has climbed to $22.05, a rise of 75 per cent. This has been a period of very low inflation, revolutionary progress in telecommunication and the reliance on competition to control rates. The latter has not been very effective.
- Toronto Hydro has joined with Toromont Energy, a subsidiary of Caterpillar, which is an established producer of CCGF power plants to offer such plants to users in Toronto.