Electricity Deregulation Opportunities

Commentary, Energy, Frontier Centre, Uncategorized

In 1997, the Manitoba Hydro Act restructured the crown corporation to comply with American law, which requires power exporters to the U.S. market to open up their wholesale market to other suppliers. But our ample supply and low cost structure, protected from swings in fossil fuel prices, means we don’t need to buy power at all. We already export about a quarter of the electricity we generate. We’re sitting pretty in a seller’s market. Or so it seems.

From another angle, the glass looks half empty, not half full. As the information economy expands, demand for more electricity is growing even faster. It’s been claimed that one palm pilot hooked to the web uses as much juice as a refrigerator. That’s probably an exaggeration, but the growing networks of server farms are huge power hogs. California’s Silicon Valley increased its power consumption by 12% just last year.

Manitoba Hydro can’t take full advantage of the continental jump in demand and prices. Locked in an insular mindset by a legal requirement to sell its power to Manitobans at cost, the utility has only modest plans to expand production. Our hydro-electric potential lies dormant, its access to capital for new construction smothered by the dead hand of government ownership. Instead of waking this sleeping giant, the Doer government is cutting off 10% of its already anemic profit to equalize electricity rates throughout the province, penalizing city dwellers for the benefit of rural consumers.

Our low prices reflect the relative efficiency of water power, but in some ways they’re a sham. Kept down by cheaper rates for government debt, Hydro prices are also subsidized by an exemption from income taxes. Albertans pay lower tax rates partly because their utilities are not exempt. Transalta, that province’s largest private power company paid almost $200 million in income taxes in 1999. Manitoba Hydro paid nothing. Second, the returns on government assets are always dismally low, which means that their citizen owners forego the opportunity of realizing a higher return by investing it elsewhere. The privatization and deregulation of Manitoba Hydro would simultaneously expand the taxbase while ending the consumer subsidies that encourage people to waste power. The proceeds could be used to cancel the provincial debt and free up half a billion a year for a massive permanent income tax cut.

In the long run, consumers may pay more for electricity, but hardly the 30% estimated by Manitoba Hydro. The trade-off, desperately needed in an increasingly uncompetitive province, would be dramatically lower tax rates and the economic benefits from headquartering the talent and brains needed to expand an outward looking power colossus across the mid-western U.S.

Disaster reports from California and Alberta have overshadowed the many successes of electricity deregulation. Consider the experience of PMJ Interconnect, the largest power grid in North America, which services the mid-Atlantic states. Following deregulation, competition increased and prices fell, with Pennsylvania consumers saving $3 billion in three years. Britain, Norway and Australia privatized and deregulated the industry with few glitches and consumer prices have steadily declined.

From 1990 to 1998 prices fell in Britain between 23% and 32%, with medium-sized businesses — the ones with the least political clout under the old regime — benefiting more than large industrial plants and home consumers. Generators sign futures contracts that stabilize price swings. Supply is way up, as are improvements in productivity and service. Complaints are down by 60%. If your home loses power for more than 24 hours, your supplier has to pay you £50. Therefore the lights don’t go out very much.

“Don’t Restructure Electricity; Deregulate”, an article in the winter edition of the Cato Journal, explains that what happened in North America wasn’t real deregulation. Richard L. Gordon, a professor of mineral economics, describes it instead as regulator-imposed restructuring, often done in a clumsy manner. It’s just a new form of market control, with economic effects just as bad or worse than the old. He concludes that to capture the benefits of an open market, you have to stop diddling and drop the “public utility” regime altogether.

Gordon’s analysis explains what happened in California, where prices were de-controlled on the wholesale level but capped at the retail level. A protracted approval process and a highly organized environmental lobby stymied new plant construction while demand grew by 25% in eight years. A dunce could have predicted that the price controls would create shortages, especially under these conditions. It was no coincidence that the lights stayed on only in San Diego, the only city to free up retail prices.

A similar dynamic precipitated Alberta’s problems, where booming growth has generated lots of extra demand. Supply, however, was constricted by uncertainty and a lack of external transmission grids. The government failed to define the terms of deregulation in time to make new generation prudent, so market prices jumped as they should when demand exceeds supply. Ralph Klein’s government had the wealth to cushion the mistake with a hastily slapped together energy rebate program. In the end, the market has responded to high prices by spurring plans for enough new electric generation to power the whole of Calgary.

These isolated travails of badly done deregulation have Manitoba’s legions of market skeptics clucking with unusual self-assurance. They’re dusting off central planning schemes long consigned to the historical ash heap. One ancient pearl, from the more obscure corners of the academy, for example, proposes a Manitoba Energy Bureau with extraordinary powers to regulate. It would tax energy companies another $23 million — an impost sure to be passed on in higher prices — while hiring hundreds of bureaucrats to spend the money on the poor and gimmicks like windmills. Sounds like another bad rerun of that 70s show.

Deregulation toward competitive markets always leads to lower prices and more secure supplies in the long term. In the telecom and transport industries, it brought sharply lower prices for consumers. The same will happen in the energy sector when we let it.