Benefits of Hydro break-up not yet clear

Toronto Star - June 11, 1998
By Ian Urquhart — Queen's Park Bureau

The break-up of Ontario Hydro has been presented to us as both inevitable and beneficial.

The preamble to the Energy Competition Act introduced by the provincial government this week states that it is "an act to create jobs and protect consumers by promoting low-cost energy through competition, to protect the evironment, to provide for pensions."

Who could argue with that?

As it turns out, almost nobody. The measure was supported, in principle, by the opposition parties, the power workers' union, environmental groups, major power users, rival producers, and so on.

But if it sounds too good to be true, it usually is.

Yes, Hydro's break-up has long been advocated by a wide range of experts as a solution to the utility's woes, which are the result of both ill-advised investments and bad management.

Ontario Hydro's prices are now the third highest in Canada, which puts industries in this province at a disadvantage. It is generally believed that this problem will be solved by breaking up Hydro and ending its monopoly, thereby subjecting electricity to the discipline of the market.

But will it be beneficial to everyone?

Premier Mike Harris said this week that he is "quite confident" the move will lead to lower prices for all. Energy Minister Jim Wilson went one better and said he is "very confident."

I'm not. Nor is Bill Farlinger, chairman of Hydro and confidant of Harris. He called it "a leap of faith."

Oh, the major power users, like General Motors and Stelco, will certainly pay less for power under the new arrangement. They have the clout to bargain down prices.

But the householder is a different matter. Indeed, there is good reason to believe residential Hydro rates will actually go up, not down.

First of all, someone has to pay for the lower rates for big business. That is what happened when telephones were deregulated. Businesses benefited from lower long-distance rates, but local residential rates went up to compensate.

Secondly, new costs are being built into the system. Hydro, as a crown corporation, doesn't have to pay taxes and borrows money at low interest because its loans are guaranteed by the government.

The new generating company to be spun off from Hydro, while it will still be government-owned, will be treated as a commerical corporation and pay taxes and higher interest rates.

Also, any reduction in the direct charge to consumers for power may be more than offset by indirect taxes to pay for Hydro's "stranded debt" which the government will take over.

Yet to be determined are the amount of the stranded debt (it could be $30 billion, if Farlinger has his way) and the method of taxation to pay for it. But one way or the other, the cost will eventually be passed on to the consumer.

Will these costs be offset by the efficiencies of the marketplace? Maybe, maybe not.

The impact on the consumer is not the only unknown in this week's announcement. Also to be determined is who ends up owning and running the electricity system.

The government has made it clear that the spun-off Hydro generating company will remain government-owned only in the immediate future. Beyond that, it is not saying.

And with the ending of Hydro's monopoly, private-sector firms are now free to enter the generating business alongside the government-owned company. As well, the municipally owned utilities, which distribute Hydro's power, are to be "commercialized."

"Let me tell you, they are absolutely salivating down on Bay Street," says Liberal energy critic Sean Conway. "A greater business and investment opportunity has not been presented to this province in a long time."

Conway's concern is that lobbying and backroom dealing will lead to decisions that are not always in the public interest.

And, finally, this week's announcement paves the way toward the continentalization of the electricity market. Farlinger declared this week that Hydro now sees its market as stretching from Illinois to New York and as far south as Kentucky.

Watch for the new spin-off generating company to acquire American assets to give it a foothold in that market. Jobs may flow south with the capital.

So, yes, the break-up of Hydro was probably inevitable. But the benefits arising from it are far from clear. It will take vigilance from the press and public and politicians in the coming months and years to ensure that it is not just a boondoggle for big business.

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