A fourth way in which privatization would raise the cost and price of electric distribution has already been legislated by the province, and it is supposed to go into effect by the end of the year 2000. It is called retail competition. Every consumer of electricity, large or small, we are told, will be free to buy electricity from any number of competing suppliers. The consumer will pay Toronto Hydro a regulated price for its monopoly service, the local delivery of electricity. Consumers will also choose between paying a generator or a marketer of their choice a “negotiated” price for the electricity purchased or acquiring it from Toronto Hydro at its average wholesale cost to Toronto Hydro.
Retail competition has worked reasonably well for large industrial users in the natural gas industry. In that industry, there are many large and small gas producers in the West, and these producers and large industrial users in Ontario find it attractive to buy and sell directly with each other. They use Trans-Canada and local distributors only to carry the gas. Residential and other small consumers are free to buy gas from a gas marketer, but they rely primarily on local distribution companies, paying them their average wholesale cost of gas. There is no evidence that the freedom to buy from a marketer of their choice has benefited small consumers in the gas industry, and the institutional arrangements needed to protect consumers from irresponsible marketers may well make the costs greater than the benefits that “freedom of choice” provide.
In the electric power industry, the conditions are even less favourable for retail competition. For a long time, one or a few generators will be the source of at least 90% of the supply. Independent marketers will have to be licensed and supervised. Meter reading and billing will be complex and expensive with multiple suppliers and multiple ways of pricing electricity. All of these costs will ultimately fall on the small consumer, and it is not clear how choice will benefit the consumer. These observations apply only to residential and small business users. Toronto Hydro should and is offering new methods of buying electricity to large users.
In this connection, we should take note of Paul L. Joskow, Professor of Economics at MIT and universally recognized as the leading figure in developing the theory and guiding the practice of restructuring the electric power industry in the U.S. In an article with the clear title, “Why do we need electricity retailers? or Can you get it cheaper wholesale”(21) he wrote:
The rhetoric about “customer choice” and “retail competition” as it applies to residential and small commercial customers has borne little relationship to the observable value added that ESPs [Electricity Service Providers] are bringing to these customers. The physical attributes of electricity production, distribution and metering provide a simple and inexpensive method to bring a significant fraction of the benefits of electricity competition to all customers by giving them direct access to the wholesale market. The maxim “I can get it cheaper for you wholesale” can be applied directly to electricity. At the same time, these same physical attributes make it very challenging for retailers to provide significant value added to residential and small commercial customers compared to the value they receive by getting simple cheap direct access to the wholesale market. (p. 56)
What follows from this conclusion is that Toronto Hydro and other municipal utilities should proceed very conservatively in incurring the costs involved in making it easy for marketers to compete. Doing so is most unlikely to benefit small consumers, while the considerable costs involved in creating these markets will fall on the people of Toronto as customers and/or owners of Toronto Hydro.
Notes