A blank cheque for waste

In early 2000, we noted that smelters in western North America that generated their own electricity were making more money from selling power than they were from selling metal.

Looks like they may get another chance, selling power to the province of Ontario. Facing public ire over a drastic increase in the cost of electricity since the province’s market was deregulated in May, the government of Premier Ernie Eves has announced a plan to freeze rates and rebate the price increase to consumers.

Under the plan, residential and small-business power-buyers get a fixed rate of 4.3 per kWh, no matter what. That includes anyone that signed a fixed-rate contract with an electricity supplier. But guess what? The gravy train stops at this station too: power consumers will get a rebate effectively capping their cost at 4.3 per kWh retroactive to the beginning of May.

The freeze remains in place until 2006 at the earliest. Best of all, you needn’t even worry about paying your electric bill; nobody will have his power cut off for non-payment until the end of March.

Dominion Bond Rating Service, the country’s largest independent credit rating agency, has placed the credit ratings of Ontario Hydro’s two successor companies — Ontario Power Generation, the power producer, and Hydro One, the transmission utility — on a watch with those dread “negative implications.” They had enjoyed an A rating, even after the comic-opera “privatization” of Ontario Hydro under the Harris government. (The publicly owned Ontario Hydro had shared the province’s rating, currently AA. But then, all that meant was that the taxpayers of Ontario could be counted on to take the hit for any default.)

The rating service also placed a review on large poser sellers and distributors: Borealis Infrastructure Trust, controlled by the Ontario Municipal Employees Retirement System; Veridian Corporation, a consortium of electrical utilities from the Lake Ontario shore; Electricity Distributors Finance Corporation, a similar company formed by utilities in the suburbs north of Toronto; and the municipally owned electrical utilities of Ottawa, Toronto and Mississauga.

DBRS quite rightly has identified some serious problems with the price freeze. First — and possibly the least likely — the government may actually realize it is subsidizing people’s electricity habit. Faced with mounting bills for this gesture, it may decide to intervene in the wholesale energy market as well.

Second, the electricity suppliers — who are mainly the old provincial and municipal electrical utilities, rebadged — lose their raison d’etre when everyone has a capped rate. They will inevitably have to be wound down. In the meantime, Ontario taxpayers will cover any operating loss.

Third, there will be plenty of power-consumers wise enough to realize that for the next four months they can’t have their power cut off for non-payment. Local power utilities have to keep the juice flowing, whether they are being paid for it or not. Even if the government hasn’t thought about this, DBRS warns of something it gently terms “a substantial buildup of receivables” leading to “significant liquidity problems.”

Moreover, Ontario has walked straight into the California problem, the same measure that destroyed that state’s ability to keep electrical power flowing. Consumers no longer have any incentive to conserve power, because the province is picking up the tab. The government’s decision to turn off the lights on the Queen’s Park Christmas tree an hour early this year will have precious little impact if the great bulk of power users are not receiving the market’s signal that electricity is now a scarce resource.

And at the same time, the government is effectively mothballing the Ontario Hydro privatization. Hydro was supposed to be sold off, with the proceeds applied to its monstrous long-term debt, and the taxpayers were expected to clear up the remaining debt over time; they had, after all, benefited from cheap power for years.

Now the old scene is to be replayed, but without a middleman. Ontario taxpayers will now subsidize their own, and their neighbours’, power consumption, rather than paying for what they use. Subsidies for consuming a scarce resource make it economically rational to be profligate.

While it may suit the public to think someone else is paying for all this, the bill will come, either in the short term as higher taxes or in the long term as increased provincial debt. The skeleton of Hydro privatization may have gone back into the closet, but it will rattle around in there until one day it falls out again.

At the centre of the issue is the need to send price signals from the market to producers and consumers. The Eves government either does not realize that markets set prices, or has chosen to ignore that truth for electoral expediency.

Economically illiterate, or just too craven to tell voters the truth? Hey, we’re talking about the Ontario Conservatives: is there any reason they couldn’t be both?