A Failing Grade For Centra Gas

Commentary, Energy, Frontier Centre, Manitoba, Uncategorized

We live in a world where governments are fleeing public ownership of commercial utilities. Rapid technological change is destroying their ability to regulate and control these industries. The cutthroat competition that precipitated the government’s sale of MTS in the telecommunications business is coming to the power business.

For consumers of electricity and natural gas, the benefits will be falling prices and better services. But the volatile environment caused by the hurly-burly of competition will make things risky for producers of power. The value of energy assets will likely fall as prices decline.

Against this backdrop, in early March, the Filmon government committed half a billion dollars of taxpayer money to buy up troubled Centra Gas, a privately owned but publicly regulated natural gas distribution company. Enough, in other words, to completely pay for the needed upgrading of the highly successful Winnipeg floodway.

Using arguments from the now discredited Leonoid Brezhnev School of Public Policy, it systematically shredded its earlier case for shifting ownership of MTS to the stock market. The most embarrassing arguments advanced lie at the heart of Manitoba’s relative decline over the past decades.

The first is that natural gas will be cheaper because under public ownership Centra Gas won’t have to pay dividends to shareholders or income taxes. Using this logic, the government should own the entire economy and we would have lower prices all around — pure nonsense, of course. Taking over Centra Gas simply shrinks the tax base of the corporate sector. Crown corporations are partial tax freeloaders. When they don’t pull their weight, the rest of the economy pays higher than necessary sales and income taxes.

Not paying dividends just means the government is ignoring the cost of capital. As everyone knows, if a family borrows money for a mortgage it pays a cost called interest charges. We could all have lower mortgage costs too, if the government decided to absorb the cost of interest. But again, we would simply pay for "free" or "cheaper" mortgages with higher taxes elsewhere.

The lower costs supposedly produced by government ownership are really just invisible transfers from the unsuspecting taxpayer. But politicians have fallen for this "we can save money" fallacy for decades to expand public ownership of the economy. And, as most studies show, governments are ill-positioned to efficiently operate complicated organizations. We end up with a larger low performance government sector combined with a smaller tax base and, in Manitoba’s case, another reason why we have a place that grows slowly with a little over a million people instead of a place that grows quickly with 3 million people.

The troubling thing about the Centra Gas buyout is that the invisible transfer game will raise costs all around and reduce consumer welfare. The cost of servicing the extra debt and the hidden tax and capital subsidies will far exceed any savings from amalgamating meter reading and bill payments. The risk of volatile energy markets will now be transferred onto the general taxpayer instead of a small group of shareholders.

In addition, the government has a clear conflict of interest when it owns both the gas and electric company and the regulator that is supposed to watch them. Political interference will emasculate the regulator’s influence. And — you heard it here first – Winnipeg energy consumers and large industrial users will likely pay for this big time when the government expands gas service into uneconomic rural areas, subsidized with higher than necessary prices.

The Filmon Government has fumbled the "big picture" ball miserably with its poorly thought out and unnecessary half-billion dollar expansion of a subsidized energy monopoly.