Time To Sell

Commentary, Energy, Frontier Centre, Uncategorized

Officials at Manitoba Hydro must be licking their chops as the chaotic state of affairs at its sister utility in Ontario unfolds. Indeed, misfortune is often the birthplace of opportunity. But let’s not repeat our neighbour’s mistakes.

The problems forcing Ontario Hydro to mothball 25% of its capacity were identified in a harshly critical report a few weeks ago. Seven out of nineteen nuclear generating plants will close, but the action has little to do with defective technology. The real sinker turned out to be mismanagement, or more correctly, monopoly management.

Ontario consumers now pay higher power rates than most other North Americans. When service providers can dictate that buyers must purchase from a single seller, themselves, they lose normal incentives to be efficient and turn out expensive products. Without competition, utilities passed their inefficiencies on to consumers in the form of higher prices. The protected market gave managers (and politicians) a holiday from accountability for unwise decisions.

This framework produced a monster in Ontario. Surrounded by ample, inexpensive alternatives like waterpower and coal, Ontario Hydro went nuclear, producing 60% of its power from atomic plants. It also produced at least $16 billion in unrecoverable debt.

Many electric utilities now regret they went nuclear. Defenders of atomic power point the finger at environmentalists because costs escalated enormously as public fears about safety spread. However, if the electricity industry had operated in a competitive environment, many nuclear plants might never have been built. Their monopoly status allowed utilities to build mega-sized power plants, theoretically capturing something economists call "economies of scale" and, in turn, lower power costs. But today electricity can be generated more cheaply using small-scale options like natural gas turbines and co-generation facilities at industrial plants.

Hence, Ontario ratepayers are now stuck financing big debts accumulated to pay for the more costly nuclear generation facilities. These big fixed expenses are called "stranded costs". Similarly, investments in other huge scale power plants on the prairies, all made during the "economies of scale" era, have left our traditional monopoly utilities saddled with debt. These sheltered behemoths once dismissed these debts as "rate-supported". In other words, a captive market would pay them off. At the same time, they used regulation and political clout to discourage the advancing wave of cheaper, small-scale power sources.

The wave cannot be contained any more, at least where electricity is concerned. Deregulation, an enormous success in Britain, is now spreading through North America. A recent study out of Clemson University predicts that the new competitive playing field will eventually push rates down by 43% in the U.S. In five major industries that experienced deregulation since 1977-trucking, railroads, natural gas, long-distance phone service and airlines-average prices dropped between 4 and 15% within two years, and between 25 and 50% within ten years.

The benefits of these falling prices will be fantastic, for industrial plants, the commercial sector, hospitals, schools, and homes. The new framework will permit "wheeling", where other power producers can use existing lines to sell electricity to individual customers on the open market. New technology can produce power at half the rate now paid to Ontario Hydro.

At Manitoba Hydro, the buzz is now about recommissioning the mothballed Conawapa Dam project to take advantage of Ontario’s problems. The idea may be terrific, but it’ll take seven years to build. In the modern economy that’s a long time. Debt and interest payments have taught us that piling up government scrip is poor public policy.

Why not convert Manitoba Hydro into a private company, where it can find expansion capital in stock markets to finance its invasion of the Ontario market? That takes the public off the hook, and restores accountability to the business.

By all means, let’s take advantage of Ontario’s misfortunes. And to avoid their repetition here, let a new, privatized Manitoba Hydro take the risk as it expands aggressively in the new competitive era.