On May 1, 2002, Adam Beck met Adam Smith, and it’s bound to get ugly. That’s when the Ontario government unleashed its electricity deregulation plans, setting the founder of the province’s public electrical utility on a collision course with the father of the so-called free market.
Ontario’s plans impose wrenching change, ending a 95-year span of reliable public power provided at cost and replacing it with a host of suppliers and middlemen each fixed on maximizing profits.
The move has prompted public outrage across the province. Many predict electricity deregulation and privatization will lead to a doubling of rates, more air pollution and a less reliable supply while threatening Ontario’s economy and sovereignty under the North American Free Trade Agreement (NAFTA).
The stage was set with the 1998 Energy Competition Act, which broke publicly-owned Ontario Hydro into five separate corporations. While the Conservative government’s plans were then put on hold several times, including during the blackouts of California’s deregulation crisis and price shocks in Alberta, deregulation and open markets are now set to lurch ahead in defiance of evidence and experience from around the globe.
Ontario Hydro was split into separate provincially-owned corporations for generation (Ontario Power Generation) and transmission (Hydro One) as the first step in the selloff. The restructuring also hived off Hydro’s debt into a separate corporation, forcing the public to pick up the tab for assets the private sector is about to make a mint on.
The Ontario Electricity Financial Corporation took on $21 billion in “stranded debt” that makes the rest of the Hydro package more appealing to investors. The government will hit electricity consumers with part of the debt repayment, imposing a mortgage on property the public no longer owns. The Tory debt repayment scheme also counts on profits from ownership of Ontario Power Generation and Hydro One, as well as new tax revenues from electricity corporations. The provincial auditor has warned that if deregulation doesn’t work out, taxpayers will find themselves even further on the hook.
Hydro One was created amid repeated pledges that the grid would remain public, and that the government had no intention to privatize it. The grid has served Ontario well, including during the 1998 ice storm. Yet in December 2001, just before recessing the legislature, the government went back on its word and announced the sale of Hydro One.
But the Ontario government’s privatization plans were dealt a serious blow in a mid-April court ruling that the government lacked the power to sell off Hydro One. CUPE and the Communications, Energy and Paperworkers’ Union argued the province does not have the power to relinquish public control of Hydro One by selling its shares to investors. The unions also called on the Ontario Energy Board to hold public hearings to judge whether selling Hydro One will undermine security of supply, environmental protection and consumer interests.
The court ruling derailed the government’s fast track plan for Hydro One, an initial public offering estimated at up to $5.5 billion, making it the largest privatization — and hottest fire sale — in Canadian history. The selloff was slated to go ahead without any public hearings or the debate and passage of legislation authorizing the sale, preventing much-needed democratic discussion of a move that will have far-reaching impacts.
Transmission rates would likely rise to cover shareholder profits and taxes the public corporation didn’t have to pay. The initial public offering was posted on the internet with little fanfare, and even less public debate, just before midnight on a long weekend. While the preliminary prospectus limits any single shareholder to a 15 per cent interest in the company, no restrictions were otherwise placed on the right of investors, including foreign investors, to buy shares in the transmission utility.
Ontario Power Generation also has an axe hanging over its head, under orders to reduce its market share from 85 per cent to less than 65 per cent by 2004 and to just 35 per cent by 2010. The forced selloff — a move that backfired badly in California — opens the door to foreign multinationals such as British Energy. BE has signed a lease of the Bruce nuclear plant many call a “sweetheart deal”.
As with Hydro’s stranded debt, the government retains much of the risk, including the full cost of safely closing the eight reactors leased to British Energy. The corporation has the right to walk away from the lease any time after 2006 if it isn’t making enough money, despite the lease’s 2018 initial end date. The lease sets out rent payments that are a fraction of the profits the corporation is expected to reap. The provincial auditor is now conducting a value for money audit of the lease.
“At every turn, the government has privatized the profit and kept public the risks,” says Paul Kahnert, who’s worked 23 years at Toronto Hydro. Kahnert, a member of CUPE 1, has crisscrossed the province campaigning for the Ontario Electricity Coalition. Public meetings in churches and community centres crackle with anger at the underhanded way the deal’s been done, and the coming fallout. Municipal governments have added their voices, passing resolutions calling on the government to cancel its deregulation and privatization plans.
The lack of public input into the government’s plans for deregulation and privatization is a sign of things to come. Community oversight will be permanently limited by Freedom of Information laws that don’t extend to the new corporations, leaving the public in the dark about key environmental and economic concerns.
Selling the province’s common wealth
Public utility experts Myron Gordon and John Wilson say the Energy Competition Act “replicates California’s mistakes” by forcing the generation sell-off while legislating price caps, a move that drove California utilities into bankruptcy as they sold electricity below its cost while paying skyrocketing prices to buy it.
“Billions of dollars in provincial assets are literally being given away,” according to Gordon, who has done extensive economic analysis of the Hydro selloff for the Ontario Electricity Coalition and the Canadian Centre for Policy Alternatives (CCPA).
His calculations found Ontario Hydro’s generation assets have been massively undervalued, just in time for a selloff. The government’s $8.5 billion price tag falls far short of Gordon’s $40.7 billion value estimate. Hydro One’s estimated worth is at least $10 billion, and its 2001 cash flow was $950 million.
While the assets have been underpriced, the result of their sale will inevitably be price hikes. Ontario’s generating rates, the bulk of an electricity bill, will rise to meet the higher prices of neighbouring American states as the Energy Competition Act teams up with NAFTA to integrate the Ontario and American markets. “[I]ntegration will force Ontarians to bid against wealthy, electricity-hungry Americans to buy their own Ontario-produced electricity,” warn Gordon and Wilson, adding Michigan’s electricity prices are 50 per cent higher than Ontario rates, and New York’s are four times higher.
NAFTA locks in higher prices, according to the Ontario Electricity Coalition. “NAFTA mandates that we move to high US rates and not use our electricity system to benefit Ontarians. The Ontario government would not be able to maintain a low rate for Ontarians and sell at a higher rate to Americans as it does now.” Opening up markets to the south will also shift Hydro One’s focus to increasing transmission capacity to the south. “[T]he price Ontarians pay for their electricity will rise correspondingly,” according to Gordon.
Low-priced cash cow
For-profit generating plants will work the unregulated market to its limits. Prices will rise in Ontario and corporations will increase their production in order to reap profits from the States. Much of this increased production will belch pollution into an already smog-choked corridor, with costly environmental consequences.
Increased energy costs will shock public institutions already under tight budget constraints. For example, the Toronto District School Board spent almost $30 million on electricity in 2000-2001, about 12 per cent of its total operating costs. The board has introduced energy savings plans to try and offset rising utility costs, but has still been forced to cut deeply into its caretaking budget. The results are obvious in and around the schools, with a desperate shortage of caretaking staff to do preventative maintenance and ensure schools are clean and safe. Municipalities and other public institutions such as hospitals and arenas will face similar problems.
Price increases will also hike the cost of doing business in Ontario — a key source of business outrage in Alberta after the market opened there. While some on Bay Street are eager to rake in the commissions from putting Hydro One on the block, other corporate leaders are publicly questioning the wisdom of the province’s strategy.
“So few people are going to benefit. So why are they doing this? The answer lies in Enron,” says Kahnert. “Enron invented deregulation in North America. Are we witnessing an Enron made in Canada, where we’ll pay the price of a huge scam when the house of cards folds?”The Tory plan has also drawn fire from the London-based World Energy Council. The Britain-based organization’s secretary general has said he’s not convinced electricity deregulation needs to be combined with privatization of publicly-owned electrical utilities. Even the conservative C.D. Howe Institute is skeptical, saying “Ontario is caught in the midst of dramatic reforms, unsure whether its current path will also lead to a crisis” like those in California and Alberta.
Supporters of public power such as Kahnert aren’t interested in a return to the old days of Ontario Hydro. Instead, they have a vision of a new, sustainable public power system. “We don’t need overbuilt projects and centralized generators. What needs to happen for the environment is many smaller, widely-spaced generators that concentrate on reducing environmental harm, starting with natural gas and moving to other sources,” he says.
As stories emerge of major problems with the clipboard brigades peddling electricity contracts door-to-door, Kahnert worries that remaining industry checks will be toothless at best — and that a wild new frontier has opened up. “There’s no regulation of generation. There are no price caps and the sky’s the limit. “