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Privatizing electricity makes no sense

Toronto Star - January 30, 2001
by Thomas Walkom

Refresh my memory. Why exactly has the Ontario government committed itself to privatizing electricity?

Consumers in other jurisdictions that have tried this have suffered one of two fates. Either their electricity rates have gone through the roof, as in Alberta, or they have been forced to endure blackouts, as in California.

In fact, every privatization scheme since former British prime minister Margaret Thatcher pioneered the concept in 1989 has been fraught with problems.

As analyst Andrew Holmes noted in an exhaustive 1992 Financial Times Management study, Thatcher's privatization replaced a low-cost public monopoly that worked, with an unwieldy, uncompetitive private system that raised prices and reduced service.

"The whole business of a competitive market (in electricity) is, in short, a facade," Holmes wrote. "If it is not an entire failure, electricity privatization is a long way from its original goals and with no obvious prospect of achieving them."

Holmes' paper is a case study of how ideology is translated into action. The Thatcherites began from the unexamined premise that private trumps public. They ignored the evidence. They also ignored the fact that electricity is, in Holmes' words, a "difficult commodity," one that - unlike, say, grain - cannot be easily stored.

What he meant is this: An economy requires not only enough generating capacity to meet average needs, it requires more - for the times those needs suddenly spike upward.

When the demand for grain briefly exceeds supply, people can eat potatoes. But when the demand for electricity briefly exceeds supply, how do you run your word processor? On natural gas?

Yet, in spite of its dubious results, Thatcher's electricity privatization has become the model for right-of-centre governments.

The model has two parts. First, split up and sell all or most of the public generating plants. Second, create an artificial market where, theoretically, buyers and sellers can deal.

In Ontario's case, the sell-off is being done by Ontario Power Generation, one of five public successor companies to Ontario Hydro. The artificial market is to be controlled by the Independent Market Operator, another Hydro successor.

But if Ontario's experience is anything like Britain's, most power won't go through this artificial spot market. The risk of price fluctuations is too great. Most will be sold in the form of long-term contracts.

And the key here is that those contracts can be signed with any power user in North America.

Right now, Ontarians have first call on any electric power produced in the province. Only that which is left over may be sold elsewhere.

But when so-called market opening arrives in Ontario (and the date of that event has become increasingly uncertain) all of this will change. Then, any generator may sell all or part of its output to anyone it can reach.

For example, the entire output of OPG's Bruce nuclear plant on Lake Huron currently goes to Ontario customers. But OPG is in the midst of leasing Bruce to a private firm controlled by British Energy.

Once Bruce is in private hands, and once the market opens, all of that power - about 20 per cent of the province's electricity - may be sold to the highest bidder.

Currently, the highest bidders are in the U.S. Residential consumers in Detroit, for example, pay about 14 cents a kilowatt-hour for their power. In Ontario, the price is about 8 cents. If you were a private operator, which market would you sell to?

Pat McNeil, a vice-president of OPG, argues that this doesn't mean electricity rates in Ontario will rise permanently. The U.S. price, he points out, may come down as more generators are built there.

In any case, for some 42 months after market opening, OPG will be required to pay rebates to Ontario customers if it lets the price of the power it generates exceed 3.8 cents a kilowatt-hour.

That won't stop a privately-operated Bruce from selling to Detroit. It will mean, for 42 months at least, that power that remains in Ontario probably won't cost much more than it does now.

But OPG is under instructions from the Harris Tories to unload two-thirds of its generating capacity as quickly as it can. That's why it is so eager to lease the Bruce nuclear plant. To meet government targets, it will have to get rid of either Pickering or Darlington, too.

So, after 42 months what happens? If power-starved utilities in the U.S. have found new sources, maybe nothing. If not, expect the price of electricity here to take off.

Why is the Harris government doing this? Why is it replacing a system that provides cheap, reliable power with one destined to produce, at best, higher prices and, at worst, blackouts? Reckless stupidity seems too simple an explanation. Surely there must be some other reason.

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