SUMMARY
This submission is presented by the Ontario Division of the Canadian Union of Public Employees representing more than 165,000 CUPE members of which 20,000 are electric power utility workers. The purpose of this hearing is to examine proposals to restructure the electric power industry in Ontario. Our submission focuses on the three major areas of privatization, competition and deregulation.
CUPE Ontario opposes privatizing any segment of the Ontario electric power industry. Our submission argues that electricity rates are cheaper under public ownership; publicly-owned utilities are more accountable to consumers than privately-owned utilities that must answer to shareholders; public health and safety concerns with nuclear energy generation can be better addressed under public ownership than private ownership; and investment in renewable energy technologies is less likely under private ownership, where the primary concern is maintaining low short-term prices.
CUPE Ontario is opposed to the introduction of competition in the Ontario electric power market because we believe that the purported benefits of competition do not justify the risks and problems that it may bring. These risks include opening our market to both foreign competition and foreign ownership under terms of the North American Free Trade Agreement and which may also expose Ontario power consumers to possible future power shortages if we become dependent on American sources for supply; the public may be left with billions of dollars of stranded nuclear generating assets if competition in generation is permitted; the electric utility industry may abandon valuable social planning tools in integrated resource planning and demand/supply management if competition is introduced; and many more jobs in the electric power sector may be lost through downsizing and restructuring.
Rather than imposing competition on Ontario consumers, we propose that the municipal electric utilities create a comprehensive energy efficiency upgrade programme that will generate new public sector jobs.
CUPE Ontario opposes deregulation of the Ontario electric power industry because experience with deregulation in the airline, gas and telecommunications industries in Canada and the water and electricity industries in the United Kingdom, indicates that benefits to small consumers may not appear for many years, and may never appear at all.
The uncertainties associated with restructuring the electric power industry far outweigh the purported benefits to be gained. For these reasons, CUPE Ontario submits that the present industry structure should be maintained.
INTRODUCTION
The following brief is submitted by CUPE Ontario on behalf of more than 165,000 CUPE members of which 20,000 are electric power utility workers. CUPE Local 1000 (the Power Workers’ Union) has already submitted a separate brief.
Section 1
CUPE Electric Power Workers
CUPE public utility workers and Ontario Hydro workers provide a vital service in communities across Ontario. Our members work to generate, maintain and deliver every aspect of this service to municipalities, business, rural communities and individual homes. CUPE members provide valuable customer services, read hydro meters, operate the stations that generate electricity and maintain the powerlines which provide electricity.
Ontario Hydro
The present hearings are being conducted in a political climate characterized by the belief that both real and perceived problems in Ontario’s electric power industry can be solved by the rapid introduction of partial or total competition and privatization.
The present hearings are influenced by a wider political struggle over the degree of government involvement in the Ontario economy. It must be recognized that the push to restructure the electric power industry is based on a strongly biased pro-market ideology, not simply an attempt to make the industry operate more efficiently.
The provincial government of Mike Harris is under heavy pressure from large, multi-national industrial corporations to reduce their electric rates and from finance capitalists on Bay Street to sell Ontario Hydro to private interests.
A wide range of options are being advanced for the future structure of the industry. They vary in terms of the degree of private vs. public ownership, the degree of competition to be introduced, and the type of regulatory structure that should oversee the industry.
CUPE Ontario believes that in order to better clarify and respond to the issues arising from the various proposals for restructuring Ontario Hydro and the electric power industry it is instructive to review the rationale for the original creation of Ontario Hydro and the history of its performance.
In 1906, the Ontario government created the Ontario Hydro Electric Commission. Its original purpose was to build and operate a provincial transmission grid that would deliver power from privately-owned hydroelectric generators on the Niagara River to various municipally-owned distribution systems in Southwestern Ontario. Over the next 20 years, Ontario Hydro constructed a province-wide transmission grid, progressively acquired most of the privately-owned generating facilities and built new generating facilities of its own.
In the years leading up to the creation of the Ontario Hydro Electric Commission, the public expressed a number of concerns with privately-owned electric companies. There were allegations of abuses by private monopolies in both power generation and local distribution; foreign ownership of major generating facilities and the exportation of power by these facilities to U.S. consumers was criticized; concerns were voiced that electric generating resources (especially hydroelectricity) were community resources (“people’s power) that the public should not have to pay a rate of return on to private owners; and that a public power industry was a key ingredient in a long-term industrial development strategy for Ontario based on low-cost and widely available electricity. We believe that these concerns still hold true today and must be addressed in the context of present proposals to restructure the Ontario electric power industry.
Ontario Hydro strengths to maintain and build on
In its mission statement, Ontario Hydro defines its goals as being “To make Ontario Hydro a leader in energy efficiency and sustainable development, and to provide its customers with safe and reliable energy services at competitive prices” (Ontario Hydro, 1994 Annual Report). We support these objectives and submit that the many proposals for change in the Ontario electric power industry should be evaluated in the context of whether they assist or hinder the electric power industry in meeting these objectives.
Under public ownership, Ontario Hydro has build an unrivalled electricity transmission network that has delivered reliable and quality service while maintaining a reasonable degree of rate equity (i.e. postage stamp rates) between different classes of customers and regions throughout Ontario. Notwithstanding the short-term rate increase aberration of the early 1990s, over a period of several decades, Ontario Hydro has provided Ontario residential, commercial and industrial customers with a stable rate structure that compares favourably with most North American and European electric utilities. Over many decades, Ontario Hydro has proven itself to be one of the most cost-efficient electric power produces in North America.
Ontario Hydro has been and still is a good public investment. Hydro’s own studies, which have been confirmed by independent sources, indicate that Ontario Hydro is back on firm financial ground, to such a degree that by its own estimates it can retire 45 percent of its debt over the next 8 years without raising rates.
Public ownership of the electric power industry in Ontario has been a key to Ontario’s industrial development. By maintaining stable, low rates, Ontario Hydro has made a major contribution to attracting energy-intensive industry to locate in our province. In the context of the current debate over the future structure for the electric power industry in Ontario, it is vital that the historic achievements of Ontario Hydro be recognized and maintained.
The guidelines distributed for this hearing identify a host of issues associated with restructuring the electric power industry in Ontario. CUPE Ontario is focusing our submission on specific aspects of the major issues of privatization, competition/restructuring and regulation.
MAJOR ISSUES
Section 2.1
The three major issues that the committee is addressing are privatization, competition and regulation in Ontario’s electric power industry. We believe that these issues should be examined in terms of three questions. First, should any or all of the assets of Ontario Hydro and the municipal electric utilities (MEU’s) be sold to the private sector? Second, should competition play any role in the future electric power industry? Third, does experience with deregulation in other sectors in Canada and abroad suggest that Ontario consumers will benefit from deregulation of the electric power industry?
Privatization
Before any decision to privatize either Ontario Hydro or the MEU’s is taken, a number of important questions must be addressed. First, what impact will any form of asset privatization have on electricity rates paid by consumers in Ontario? Second, is the loss of public accountability that will accompany privatization, in the best interest of the Ontario consumer? Third, can a privatized electric industry serve public policy initiatives such as promoting sustainable development and energy efficiency?
Electricity Rates
One of the major arguments being advanced by privatization proponents is that privatizing Ontario Hydro will result in lower electricity rates for consumers. This is a major plank in the proposal from the Association of Major Power Consumers in Ontario (AMPCO). The implication is that privately-owned utilities are inherently more efficient than publicly-owned utilities and that lower electricity rates will follow automatically from privatization. This claim is supported by statements to the effect that public utilities are bureaucratic, bloated with unnecessary staff, inherently inefficient and debt-ridden. However, these accusations are not supported by empirical evidence. What has happened to electric rates in other countries both after privatization has occurred and in countries with a large proportion of privately-generated power?
U.S. Experience
In the United States, approximately 75 percent of electricity is generated by privately-owned utilities. Contrary to popular belief, publicly-owned electric utilities in the U.S. charge less for electricity than privately-owned utilities. In a 1993 critique of empirical studies comparing public vs private ownership of electric utilities in the U.S., John Kwoka (5,1993) found strong evidence that publicly-owned electric utilities had lower overall prices and less markup than privately-owned utilities. Furthermore, he found that residential and commercial consumers appeared to be the major beneficiaries of public ownership, with industrial consumers paying higher prices under public ownership. While these studies are not conclusive regarding the superiority of either form of ownership, it is clear that the claims of significant efficiency gains from privatization are exaggerated and unsupported by empirical studies.
U.K. Experience
A review of the literature suggests that there is no broad agreement as to whether electricity prices have actually dropped significantly, slightly, or even increased slightly since privatization began. Nevertheless, George Yarrow, of the Regulatory Policy Institute calculated that in 1991, the price of electricity for residential customers was 25% higher than what might have been expected if privatization had not taken place (Woolf,58, 1994). What this means is that had the service been left in public hands, the prices were about to fall dramatically - but after privatization the new owners decided to keep prices close to what they were. In the process, they puffed up their profit margins and executive pay scales.
Furthermore, the industry regulator, whose job it is to oversee the restructured electric power industry and who is responsible for setting rate caps, had to intervene twice in the past 18 months to impose price cuts because the publicity fallout from windfall profits and bloated executive pay packages became too much to ignore.
What can we learn from electric power privatization in the U.K? Have electricity rates dropped dramatically since the CEGB was privatized in 1990? No! But executive and managerial salaries have skyrocketed and profits for the new, privately-owned utilities have been scandalous (estimates of more than 100%). Privatization advocates love to point to the U.K. as a privatization success story that we should copy in Ontario. We don’t think so. The real picture tells a different story.
What Can Ontario Consumers Expect?
Despite unsupported claims that consumers will benefit from privatization through lower electric rates, we think it is instructive to look at what two people with detailed knowledge of the electric industry have to say about future pricing after privatization occurs. In a recent exchange with reporters at a news conference, Allan Kupcis, President of Ontario Hydro, could not predict whether electricity prices would rise or fall under Hydro’s plan for privatization. “I don’t know, honestly. Nobody can model a marketplace.” (The Globe & Mail, 1, Jan. 27, 1996) Exactly! A rare, but honest answer.
Myron Gordon, Professor of Finance Emeritus at the University of Toronto, and a noted industry analyst, concluded in a recent study that the cost of financing Ontario Hydro’s generating plants under private ownership would either require increasing the rate charged to Ontario consumers by about one billion dollars per year, or transferring close to $10 billion of Ontario Hydro debt to the province (Gordon, 4,1995).
The evidence indicates that we face higher electricity rates if Ontario Hydro is privatized.
Public Accountability
Will privatization of Ontario Hydro and/or amalgamation/privatization of the MEU’s compromise public accountability in the electric power industry? Under the existing vertically-integrated structure, both Ontario Hydro and the MEU’s are ultimately accountable to some external authority. One can argue as to the degree of effective political control that has been exercised over Ontario Hydro in the past but, ultimately, it must answer to the provincial government of the day, while the MEU’s are responsible to their local constituency through elected PUC officials.
If plans to privatize any segment of the electric power industry are implemented, this clear demarcation of accountability may be blurred significantly. The result will be a situation of divided loyalties between accountability to private shareholders vs accountability to the broader public. In may instances, private and public interests may not be identical. Under private ownership, utilities will be accountable to their shareholders first. This loss of accountability is unacceptable.
We want to further focus the Committee’s attention on two areas: 1. How can the public be assured that they are paying a fair price for their power? and 2. Who will be responsible for defining and enforcing environmental and human safety standards? In particular, can public safety with regard to nuclear generating stations be ensured if they are privatized?
Regulatory Controls
Neo-conservative economic theory suggests that in a perfectly competitive marketplace regulation of price and/or profit is unnecessary because competitive market forces guarantee the lowest rate, i.e., price of commodity. However, examples such as service charges in the banking industry and the cost of healthcare in the United States suggest that even in supposedly competitive industries competition is no guarantee of low price.
In the current context of the proposed restructuring of Ontario’s electric power industry, we believe that Ontario consumers must be protected from possible price gouging directed at residential and commercial consumers as a means to offset price reductions demanded by Ontario’s major power consumers, represented by AMPCO. This requires an effective and independent regulatory agency. We submit that the Ontario Energy Board could fulfil this task if its mandate is rewritten.
Defining/Enforcing Environmental and Human Safety Standards
Another reason Ontario Hydro should not be privatized is because of the issue of responsibility for defining and enforcing environmental and human safety standards. This is a crucial issue in regard to public safety if Hydro’s nuclear generating stations are sold to private interests. Nuclear generating stations require safety monitoring far in excess of any other method of producing electricity. Despite recent problems with some aspects of the operations of Hydro’s nuclear plants, we believe that they have been adequately monitored by both internal employees and external agencies such as AECB.
There are two aspects to nuclear safety: protection of the workers in the nuclear plants and protection of the public from both radioactive emissions and protection from the threat of a serious accident at any of the nuclear generating stations. All of these concerns require that nuclear generating stations be monitored constantly to ensure that safety standards are being followed and that both workers and the public are protected to the highest possible degree. There is no room to compromise on safety issues. For these reasons we maintain that an effective, independent regulatory agency is necessary to ensure that proper safety monitoring is carried out in nuclear facilities.
We submit that it is totally unacceptable to consider privatizing Hydro’s nuclear plants and putting the health and safety of Ontario residents at the mercy of private owners whose prime concern is to generate profit. Real experience demonstrates that we need publicly run utilities to maintain high safety standards.
Cutting corners to increase profits is a cornerstone of business. We submit that this philosophy has no place with regard to nuclear generating plants. Safety concerns cannot be overlooked, sidestepped or downplayed. Protection of workers and the public must take precedence over profit-making. It is ludicrous to expect the public to believe that their health and safety interests will be adequately protected if Ontario Hydro’s nuclear generating plants are put in private hands. Common sense argues otherwise!
Sustainable Development and Energy Efficiency
It is crucial that the impact of privatization on sustainable development and energy efficiency be examined closely. Fossil fuels will not last forever and nobody is predicting that any new nuclear stations will be built in the foreseeable future. Any truly sustainable energy policy must be based on renewable energy. If we are to move smoothly to a world in which renewable energy is our primary energy source, we must make major investments in new renewable energy technologies.
Since the CEGB was privatized in the U.K., there has been little investment in renewable energy technologies on the part of the privately-owned utilities. The U.S. experience with privately-owned utilities is much the same. The major concern of private utilities is keeping the short-term price down. As long as price is the prime determinant, they have very little incentive to invest in future sustainable technologies.
In order to ensure that Ontario residents have an adequate supply of clean energy to meet our needs in the future, we must invest in the development of sustainable, renewable energy resources, while at the same time investing in energy efficiency measures that both improve productivity and extend the life of existing energy supplies.
We believe that the MEU’s are well placed to initiate a province-wide programme to improve Ontario’s energy efficiency. In Toronto, “Greensavers”, in cooperation with Toronto Hydro, has established a programme to conduct energy audits in Toronto homes to determine where energy savings can be made. In conjunction with the audit programme, low-cost renovation loans are offered to finance the required upgrades. This programme demonstrates the kind of activity we believe should be expanded across the province. Several other municipalities are involved in similar projects.
There is a large market for energy efficiency investments in each of the residential, commercial and industrial sectors. Major savings in both energy bills and energy consumption are possible by upgrades such as fluorescent lighting, heating and cooling systems and electric motors, in addition to the savings that can be captured through actions such as upgrading housing insulation.
We believe that this is the type of programme that can best be implemented under public ownership. Several studies have demonstrated the tremendous potential for job creation in this field. We argue that public sector workers can perform these tasks more efficiently, more effectively and for a cheaper cost to the public. Ontario MEU’s should lead the way in developing new programmes to improve Ontario’s energy efficiency and at the same time play a leadership role in job creation.
Conclusion
We oppose privatizing any part of Ontario Hydro or the MEU’s. If privatization of either of these institutions goes ahead, we believe that the average consumer in Ontario will suffer as rates in the residential and commercial sector will undoubtedly rise, while large industrial consumers (primarily multi-national corporations) will benefit from lower rates. The evidence indicates that electric power is cheaper under public ownership than under private ownership and furthermore, that public ownership is a constraining factor on managerial pay scales.
Privatizing any or all of Ontario’s electric power industry will limit the extend to which Ontario Hydro and the MEU’s are accountable to the public. After privatization, to whom will private companies owe their primary allegiance? The public or their own shareholders? We think the answer is obvious.
CUPE Ontario believes that the ability to effectively regulate electric power utilities is a vital aspect of public accountability. Furthermore, we maintain that regulating the electric power industry is both easier and more effective if the industry remains under public ownership. Experience with other industries demonstrates that the private sector does not take adequate precautions to prevent the emission of pollutants to the environment. In an industry that is as dangerous to both worker and public health as the nuclear industry, private ownership is an unwarranted health and safety risk.
In other countries investment in renewable, clean energy has declined significantly after public-owned utilities have been privatized. This compromises our ability to provide for our future energy needs. It is clear that public ownership of the electric power industry is necessary if future investments are to be made in renewable energy technologies.
Finally, we believe that there is a significant opportunity to create public sector employment in the provision of energy efficiency programmes. These programmes are necessary both to create employment and to make our economy more efficient.
Section 2.2
Competition and Restructuring
Many of the submissions before you, argue that the key to a more efficient electric power industry lies in the introduction of competition. The major debate is between proponents of wide-open competition in everything from electricity generation to local distribution and those who support a more narrow form of competition, such as in generation or distribution only.
We believe that it would be a mistake to apply the neo-conservative idealogy in vogue today to change the current structure of the Ontario electric power industry, i.e., that market forces like competition are necessary to improve our ability to compete on a world scale. There are several significant risks and problems associated with introducing competition into the electricity sector. We will restrict our comments to five issues:
- risks related to the North American Free Trade Agreement (NAFTA);
- stranded assets in generation;
- environmental concerns;
- local distribution;
- impacts on employment in the electric power industry.
NAFTA
The proposals to introduce competition into the Ontario electric power industry raise a number of concerns with regard to provisions of NAFTA. These include foreign competition in the supply of electricity to Ontario consumers, the question of supply security and foreign ownership of generating assets, and the question of foreign control of one of our essential services.
Article 301 of NAFTA has serious implications for both competition in and privatization of the electric industry in Ontario. Article 301 of NAFTA requires that equal treatment be given to potential competitors of other GATT/WTO members if Canadian companies are allowed to compete for market share. As long as the present monopoly conditions in the electric industry persist, would-be foreign competitors are treated in an equal manner with would-be domestic competitors, i.e., they are both prevented from competing in the market for electricity generation and/or distribution. However, if the present structure is changed to permit domestic competition in the industry, NAFTA requires that foreign competitors be given equal access to our market.
If foreign (i.e., U.S.) competitors are permitted to enter the market to sell electricity to Ontario consumers, our future supply of electricity may be compromised. Placing Ontario consumers in a situation where we are dependent on foreign sources for a perhaps significant portion of our electricity needs to open us to the uncertainties of the political climate south of the Canada/U.S. border. In times of fuel shortages in the United States, there may be no guarantee that existing export agreements with Ontario would be honoured. We believe that this is an unwarranted risk to impose on Ontario electricity consumers and one that most Ontario consumers would reject if given the choice.
NAFTA’s impact on privatization is similar to that of competition. As long as the current conditions exist, i.e., Ontario Hydro and the MEU’s remain publicly-owned utilities, would-be foreign investors are treated on a par with would-be domestic investors, i.e., they are both excluded from purchasing part or all of Ontario Hydro. However, in the event of a sale of part or all of Ontario Hydro or the MEU’s, Article 1102 of NAFTA, regarding National Treatment standards for investment, would come into effect. Article 1102 requires that investors of other NAFTA parties be given equal rights to invest as domestic investors. This opens the market in Ontario’s electric industry to foreign investors. Under this clause, no limits may be placed on the proportion of Ontario’s electric power assets that may be sold to foreign interests.
Fears of American capital investing in Ontario’s electric power industry are not idle speculation. This is exactly what is currently happening in the U.K. In 1995, the Southern Company of Atlanta, one of the largest utilities in the U.S., purchased South Western Electricity P.L.C., a major regional power-distribution company in the U.K. Central and South West Corporation of Dallas recently bought Seeboard P.L.C., another power supplier, and Houston Industries and Pacific Gas and Electric are exploring a possible purchase of one of the companies that has not yet been taken over. Large American utilities are looking for investment opportunities. Ontario is a prime target once privatization of public assets begins.
It is argued by some proponents of privatization (AMPCO, for instance) that many of our vital resources such as minerals and forest products are already owned by foreign interests and that electric power should not be treated any differently. However, we believe that electric power is an essential service that should and must be treated differently. It is totally unacceptable that a service as vital as electricity to the everyday welfare of Ontario consumers be opened to foreign ownership.
Stranded Assets
The prospect of future competition in the Ontario electric power industry immediately raised the question of what becomes of generating assets worth literally billions of dollars that become “stranded”, if consumers are able to switch to privatized supply sources.
There is a serious risk that the introduction of competition will result in a repeat of British experience, characterized as the “dash-for-gas”. With the widespread development of combined cycle gas turbine (CCGT’s), generating stations, new gas-fired generating stations can now be built in a fraction of the time and for a fraction of the cost of Hydro’s most recent generating station at Darlington. The concern is that consumers will switch to gas-fired generating stations, stranding our historic investment in Hydro’s existing nuclear generating stations. Furthermore, as former Hydro Chairman, Maurice Strong notes, this problem could be compounded if Ontario becomes open to competition from U.S. utilities dumping their surplus power at just above their marginal cost of production but still lower than Hydro’s average production cost (Strong, 15, 1995).
There is no simple way to avoid the real costs associated with competition and stranded assets. A number of proposals have been advanced to absorb the cost of stranded assets but the overriding bottom line is that someone has to pay, most likely either Ontario taxpayers through higher taxes or Ontario electricity consumers through higher electricity rates.
We submit that it is unacceptable to force the people of Ontario to assume, in any way, shape or form, the costs of stranded assets that may result from the introduction of competition into the electric power industry. We strongly believe that if the Ontario consumer is made aware of the economic consequences that may result from competition and stranded assets, Ontario consumers will overwhelmingly reject this option.
We believe that the people of Ontario should make the final decision on this question. The present government was not given a mandate in last year’s election to foist electricity competition on us at any cost. We think it is against the public interest.
Environmental Concerns
The introduction of competition also affects environmental and economic sustainability. Over the past two decades, the concepts of integrated resource planning (IRP) and demand/supply management (DSM) have played an important role in determining how we allocate resources in the electricity sector to best match supply and demand. Until recently, it has been accepted wisdom that it is in our best interest to carefully plan how our resources can be best utilized. IRP and DSM are essential components of planning to ensure that society’s resources are optimally utilized.
Competition was introduced into the electric power industries in both the U.K. and Norway in the early 1990’s. Let’s look at the impact competition has had on IRP and DSM in the U.K. and Norway in the past five years.
Competition in the U.K.
Since competition was introduced in the U.K. electric industry, there has been a marked decline in investment in DSM programmes. Why? Because the focus of utilities is now on short-term pricing policies, rather than long-term planning.
One recent study concluded that the Regional Electricity Companies (REC’s) could have saved 10-15 billion pounds sterling over ten years if they had invested in aggressive DSM programmes (Woolf, 59,1994). However, there was little interest because it could have meant price increases in the short-term. Retail competition is a further obstacle to investment in DSM programmes. Customers (especially large customers) can simply switch to a lower-priced power supplier. To date, experience with electricity competition in the U.K. indicates that a competitive market in electric power presents a serious obstacle in investment in DSM programmes.
Competition in Norway
A situation similar to the U.K. has developed in Norway since competition was introduced in 1990. IRP was quickly abandoned after it proved to be incompatible with a competitive retail market. DSM programmes have been fighting an uphill battle in a competitive environment characterized by a surplus of underpriced electricity.
In Norway, DSM investment decisions are now made on the basis of market prices which do not adequately reflect the long-term social costs of developing new generation resources. The result has been a drastic decline in investment in DSM programmes. In an recent article looking at the results of competition in Norway, Dan York (53,1994) concluded that “reliance on the market may not be sufficient to develop optimal levels of DSM from a societal perspective”.
We maintain that integrated resource planning and demand/supply management programmes are an important social planning tool that should not be sacrificed on the alter of competition.
The Impacts of Competition/Restructuring on Employment
CUPE Ontario public utility workers are very suspicious of the potential impact of restructuring in the electric industry. Our suspicions have increased as Ontario Hydro has eliminated more than 6,000 CUPE Local 1000 members since 1992. Now there are proposals on the table from various industry sectors that large “savings” can be attained by amalgamating the more than 300 municipal electric utilities into a small number of regional units.
It is clear to us that when the word “savings” is used in this context, the end result is that more of our members are slated for elimination from the workforce. The layoff of workers does not just affect the immediate employees. It also affects the communities that they live in. Ontario’s unemployment rate is already unacceptably high. We think it is unconscionable that proposals are being put on the table that will sacrifice yet more working people in the pursuit of unknown rewards based simply on the belief that competitive markets function better, in spite of any empirical evidence to support the claim. There needs to be serious discussions that take into account all impacts of restructuring on the public workers and consumers.
Every cut in government spending is offset by a) what the government loses interms of lost tax revenue and having to pay more for income support, and b) its impact on the rest of economy, for example, on private sector grocery stores, car dealerships, landlords, etc., who, in turn, also pay less for taxes, and also may cut back on their own spending.
A pre-condition for any restructuring must be the involvement of our members and their elected local leadership. CUPE Ontario utility workers possess an intimate understanding of their jobs and the industry they work in. They are in the best position to recommend how a service can be upgraded and improved, without major job losses. Ontario Hydro and the MEU’s will be wasting a great pool of knowledge and creativity if our members are shunted to the side of this process. The human resources that Hydro and the MEU’s possess are their great strength. This strength must not be wasted! Our members must be involved in the important choices that both a healthy electric power industry and their jobs depend on. The public will not be disappointed. Nothing less is acceptable.
Local Distribution
A number of proposals argue that Ontario’s electric distribution sector can become more efficient if retail competition is permitted. In order to become more efficient, the argument goes, either some form of amalgamation of Ontario’s MEU’s is necessary or the MEU’s should be privatized outright. There are essentially three models to achieve this. Ontario Hydro proposes that the MEU’s be amalgamated with Hydro; others such as AMPCO call for “rationalizing” the distribution sector by amalgamating the current MEU’s into approximately 20 large regional distribution companies; and finally, Energy Probe argues that the key to “kick-starting” competition is the total privatization of the distribution network.
One of the major strengths of the present distribution structure of the MEU’s is the degree of local control that consumers exercise over their own MEU through direct election of their Public Utility Commissioners. This control will be lost if amalgamation is imposed. Consumers will no longer have effective input into decisions that affect them on a daily basis.
Ontario MEU’s have proven themselves to be both accountable and responsive to their communities. This contrasts with the reputation that Ontario Hydro has acquired of being distant and unresponsive to the needs of its customers. If the MEU’s are amalgamated into a handful of giant regional utilities, this valuable community responsiveness will be lost.
The argument that retail consumers will quickly reap large savings by virtue of being able to choose their own electricity supplier is not supported by similar experience in the gas industry. Any cost savings will, in all likelihood, got to large industrial consumers that can contract for large electrical supply. The reality is that residential and commercial customers will not benefit from retail competition in the foreseeable future.
The other important factor to consider when looking at cost is the degree to which efficiency can actually be increased through amalgamation. Despite claims that major gains in efficiency can be attained through amalgamation widespread agreement on this issue does not exist. A number of studies have produced conflicting conclusions. We caution against making changes in an environment of such uncertainty.
We foresee legal battles if Ontario Hydro’s proposal that the MEU’s be amalgamated with Ontario Hydro because the MEU’s have never relinquished their claim to ownership of Ontario Hydro, based in part on the investment they have made in Ontario’s electric power sector and the volume of electric power that they have purchased from Ontario Hydro. The MEU’s claim that their equity interest in Ontario Hydro was publically acknowledged up until the time Hydro became a crown corporation. They point to Premier Frost, who said in 1959, “…Hydro is not owned by the Government. Hydro emanated from, and is still basically an emanation of, a partnership of municipalities. To put it in understandable terms, municipalities are the shareholders in the system.” To them, Ontario Hydro’s amalgamation proposal looks like a cynical attempt to grab the valuable assets of the MEU’s.
Conclusion
We oppose competition in the electric power industry because of several unwarranted risks and problems. Under the terms of NAFTA, if we open our electric power industry to competition from Ontario suppliers, we must also permit competition from other NAFTA members, i.e., the U.S. This is unacceptable from a position of supply security. We do not believe that the risk of supply interruptions in times of energy shortages in the U.S. is acceptable to the Ontario public.
We oppose competition because it may create billions of dollars worth of stranded assets in our nuclear facilities, assets for which the people of Ontario will ultimately pay in one form or another. This is socially unacceptable and inefficient. Let the people decide if they want to risk stranded assets as a result of competition.
We support the concept and practice of integrated resource planning and demand/supply management as important socio-economic planning tools. Experience in other countries shows that these tools will not survive in a competitive market place. We argue that the benefits of IRP and DSM outweigh any alleged benefits that may follow the introduction of competition.
We oppose retail competition because any cost savings that result will not be evenly distributed. Large industrial consumers will reap most of the rewards while it may be years before residential and commercial consumers will see any benefits. Competition/amalgamation will also reduce local control and accountability in the electric distribution sector. Furthermore, it has not been adequately demonstrated that efficiency gains will automatically follow from amalgamation of MEU’s. This is still speculative.
Finally, we oppose competition in the electric power industry because we believe that the workers in the industry will be the ultimate losers in any competitive scheme that is adopted. Rather than downsizing and further industry layoffs, we propose a major job creation programme based on energy efficiency investments, owned and operated by the MEU’s.
Section 2.3
Deregulation
Proponents of deregulation share the fundamental philosophical premise that free markets are the best means of allocating resources to their most efficient use and, left alone, also work in the public interest. The philosophy is that competition will discipline producers to become more efficient, thereby lowering costs which can be passed on to the consumer via lower prices. But does this theory stand up to an objective analysis of recent history?
In the past decade in Canada, deregulation has hit the airline, gas and telecommunications industries. Although these industries vary in certain respects, there are enough similarities between them to allow us to draw certain conclusions. Deregulation has also been applied increasingly on an international scale. In the U.K., both the electric power and water supply industries have been deregulated. Let’s look at the results of deregulation in the respective industries, domestically and internationally.
The Canadian Airline Industry
Airline deregulation in Canada began with the removal of key regulatory controls in 1984 and culminated in 1987. It was based on a number of assumptions; first, the airline industry is a structurally competitive industry and deregulation would not result in increased concentration or destructive competition. The second assumption was that the airline industry is a perfectly contestable market. Therefore, new entrants (or the threat of entry) would restrain existing airlines’ market power. The third assumption was that there are not economies of scale. Size does not confer an advantage on carriers. The final assumption was that there would be no predatory conduct and strategic entry deterrence practices.
Based on these assumptions, it was predicted that airline deregulation in Canada would mean more competition as a result of an increased number of airlines; lower airfares as a result of improved industry efficiency; more frequent service with more choice for consumers and increased employment in the industry. These expectations have not come true. To the contrary, the reality is that in each case virtually the opposite has occurred to that predicted.
Canada’s scheduled airline industry has become a highly concentrated duopoly with little effective competition and overcapacity. By assimilating second level carriers into tightly-controlled feeder networks, Air Canada and Canadian Airlines control over 95 percent of the Canadian domestic market. Furthermore, they lost $2 billion between 1989 and 1993 and are debt-ridden as a result of “competitive” practices designed to put each other out of business.
Despite sharply rising average fares which have not benefited consumers, the industry was unprofitable in four of the last six years. Air travel has become less convenient for passengers and there have been declines in service to some regional centres. Finally, some 16,000 jobs have been lost at Level One and Two Canadian carriers in the five years between 1989 and 1994, including 10,600 jobs at Air Canada and Canadian Airlines.
Neither Canadian consumers nor airline industry employees have benefitted from airline deregulation. Clearly, the corporations under deregulation are unable to manage air transportation in the interests of the Canadian people.
The Canadian Gas Industry
In 1985 the production of natural gas was deregulated and competition introduced. This led to the development of a new industry in which companies facilitate the direct purchase of natural gas by end users. Natural gas has not been treated as an essential service like electricity and no attempt has been made to guarantee universal service. In both, the electricity and natural gas industries, transportation and distribution continue to be natural monopolies (i.e., the “pipes” business in natural gas and the “wires” business in electricity). However, unlike electricity, there are a variety of energy options available.
The potential benefits of competition in the natural gas industry have not been equally distributed to all consumers. Initial export licensing policies of the Alberta government restricted sales of Alberta gas to local distribution companies and large volume customer. This created a two-tiered market in which large industrial customers were able to purchase gas in a competitive market while supply arrangements for remaining customers remained unchanged. Direct marketing firms focused their attention and sales efforts on the large industrial consumers. In recent years they have supplied virtually 100 percent of this sector through direct purchase agreements.
The costs associated with marketing programs to residential consumers were considered too high when compared to the large profits to be made in the industrial sector. It is only in the past few years that direct marketing firms have turned their attention to smaller customers. Eventually, after almost 10 years, competition has forced down the price that all consumers pay for gas but large customers have received much greater savings than small customers. Competition has finally benefitted average consumers but it has taken nearly a decade to achieve widespread benefits.
The Canadian Telecommunications Industry
The Canadian telecommunications industry has been involved in an ongoing period of increasing competition and deregulation, particularly since 1992 when competition was permitted by the CRTC for long distance voice services. The situation in the telecommunications industry closely parallels recent developments in the electric power industry in that in both industries technological advances have made it possible for new competitors to underprice the embedded costs of the established major utilities.
Initially, there was a mad scramble amongst several companies to break into Bell Canada’s long distance market. Over the new few years, the industry suffered a shake-down with the disappearance of some companies, and major downsizing by Unitel, originally Bell’s largest competitor. Significant long distance rate reductions were given to consumers. However, this led to pressure to rebalance the rates between local and long distance charges, with local rates rising to offset reductions in long distance rates.
This rebalancing has been to the benefit of heavy long distance users with light users seeing their monthly bills increase. Overall, rate rebalancing has meant higher telephone bills for the majority of customers. The telephone companies are now trying to rebalance rates between business and residential customers and between customers in large urban centres and rural customers. Again, the benefits from rebalancing will go in business customers in urban areas with residential customers in urban centres and rural customers suffering higher rates.
Although competition has been introduced into the telecommunications industry in recent years, it is uncertain how the market will develop from here. Presently, the market is still dominated by one player in local services and a small number in long distance services. The potential for the long distance market to evolve into a tight oligopoly exits.
Given examples of how competition operates in other industries, such as banking services, it is debatable how long real competition in long distance pricing will continue before the major players quietly move to a more uniform price structure. Based on our observations of other supposedly competitive industries we believe that this is a likely scenario.
Deregulation in the United Kingdom
Privatization and competition were key cornerstones of government policy during Maggie Thatcher’s tenure as Prime Minister of the U.K. The state-owned monopolies in the electric power and water industries were divided and sold to private investors and new regulatory structures created to oversee the industries. However, public dissatisfaction with utility deregulation has been increasing because of large increases in company profits, dividends and executive pay scales.
In the water industry, household bills have increased an average of more than five percent above the inflation rate every year since privatization. People in England and Wales who used to pay $150 per year for water today pay $250, $400 and even $800. In 1994, two million families couldn’t keep up; last year, 1,000 families were having their water cut off every month. During this same period, the market value of the privately-owned water companies rose by 5.5 billion pounds sterling (-$11bn Canadian) and shareholders received more than 2 billion pounds sterling in dividends.
The use of incentive regulation has permitted water companies to increase their profits substantially. Finally in 1995 adverse publicity and widespread public dissatisfaction forced some of the water companies to offer rebates to customers. While shareholders are reaping massive dividends, the industry is being criticized for lack of investment in infrastructure repairs and improvements and failing to address the issue of continuing water shortages.
The results of changes to the British electric industry are similar to what has taken place in the water sector. Although reports vary as to the real impact on prices in the industry it is clear that prices have not fallen dramatically. The one thing that is perfectly clear to the public is that profit margins and executive pay scales have skyrocketed. One credible British study reported that real (inflation-adjusted) prices fell less than 2 percent from 1990 to 1994, but profits soared 108 percent in the same period (International Herald Tribune, May 16, 1995).
One final point about British experience with deregulation concerns the massive reduction in employment that has accompanied the introduction of competition and privatization. In the overall electric industry employment dropped by 27,000 workers between 1990 and 1993. Over the same period 12,600 jobs were eliminated from the generating sector alone.
Conclusion
Based on the results of the past 10 years, deregulation of the electric power industry is not likely to provide any significant short-term benefits for the Ontario consumer.
Deregulation in the airline industry has been a disaster from any point of view: fares have increased, service has deteriorated, ownership has become extremely concentrated, the airlines have suffered enormous financial losses and industry workers have suffered massive job losses.
Deregulation of the gas industry has not been as negative as the situation in the airline industry. However, it has taken almost 10 years for the price reductions to filter down to the level of the average residential gas consumer. Industrial consumers benefitted much earlier.
Deregulation in the telecommunications industry is still in its formative period. Changes are still being implemented in the area of rate balancing. Initial long distance service savings are now being balanced by higher local service charges. Since real competition requires that several competing interests exist, it remains to be seen whether competition will survive or whether ownership concentration will lead to the creation of an oligopolistic market.
In the U.K., deregulation in the water industry has been followed by steep price increases, large shareholder dividends and declining investment in infrastructure. In the electric power industry, private utility profits and managerial salaries have escalated to a shocking level, forcing the industry regulator to intervene and decree price reductions.
The experience with deregulation in other Canadian industries and the U.K. leaves no doubt that it is an illusion to believe that Ontario consumers will receive any significant short-term benefits by deregulating the electric power industry.
SUMMARY OF CONCLUSIONS
CUPE Ontario opposes the privatization of any of Ontario’s publicly-owned electric power industry. The arguments against privatization are varied and persuasive:
- Electric rates are cheaper under public ownership
- Under public ownership, Ontario Hydro and the MEU’s are more accountable to the public than privately-owned utilities. Both must answer to a public authority. A privately-owned utility ultimately answers to its shareholders.
- Public health and safety may be compromised by the pursuit of higher profits if Ontario Hydro’s nuclear generating stations are privatized.
- Privately-owned electric utilities are less inclined to invest in renewable energy technologies.
CUPE Ontario is opposed to the introduction of competition in the Ontario electric power market because we believe that the purported benefits of competition do not justify the following risks and problems that it may bring.
Under provisions of the North American Free Trade Agreement, American electric utilities must be given equal access to Ontario’s electric power market if it is opened to competition from Canadian generators. We believe that this may create an unacceptable situation of dependence on insecure foreign electricity supply.
The public, either as taxpayers or electricity consumers, may be stuck with billions of dollars of debt from stranded generating assets.
Integrated resource planning and demand/supply management are incompatible with competition in the electric power industry. We believe these are important social planning tools that should not be abandoned.
Real efficiency gains from amalgamating the MEU’s have not been demonstrated. Any cost savings will go to large industrial consumers, rather than residential and commercial consumers. Amalgamating the MEU’s will diminish public accountability and the ability to respond to local concerns.
The ultimate losers in any move to competition will be the workers in the electric power industry. We suggest that, instead of competition, the MEU’s develop a comprehensive energy efficiency programme that will create public sector jobs and contribute to a more efficient provincial economy.
The ultimate losers in any move to competition will be the workers in the electric power industry. We suggest that, instead of competition, the MEU develop a comprehensive energy efficiency programme that will create public sector jobs and contribute to a more efficient provincial economy.
CUPE Ontario opposes deregulation of the Ontario electric power industry because experience with deregulation in other industries indicates that any benefits to the small consumer may never appear at all.
Deregulation in the water and electricity industries in the United Kingdom has been plagued with price increases to the consumer, in conjunction with inflated pay scales for management of the newly-privatized industries, as well as exorbitant increases in profits to the privately-owned companies.
Privatization, competition and deregulation of the Ontario electric power industry are not in the best interests of the Ontario public. Large multi-national corporations and Bay Street finance capitalists stand to gain the most from any electric power industry restructuring. On behalf of CUPE Ontario, we submit that the present electric power industry structure be maintained.
Reference List
Gordon, Myron (1995). “Statement On The Comparative Gains and Loses To The People Of Ontario From Privatizing The Generating Plant Of Ontario Hydro.” Paper presented to Board of Directors of Ontario Hydro at the request of the Power Workers’ Union, August.
Mittelstaedt, Martin (1996). “Ontario Hydro Seeks to Open Market.” The Globe and Mail, January 27, pp.1
Unattributed (1995). International Herald Tribune, May 16.
Wool, Tim (1994). “Retail Competition in the Electricity Industry: Lessons from the United Kingdom.” The Electricity Journal, June, pp 56-63.
York, Dan (1994). “Competitive Electricity Markets in Practice: Experience from Norway.” The Electricity Journal, June, pp. 48-55.