On one hand, it's ironic that California, which has spawned so much high-tech innovation and so much of the New Economy culture, has been hit by old-fashioned electric power blackouts in recent weeks.
On the other hand, its' frightening. Because the push for power market deregulation, which has wrought so much havoc in California, is under way in Canada. And some experts, including Tom Adams, head of Toronto-based industry watchdog Energy Probe, claim that many of the problems encountered in California could be easily replicated here— with drastic results.
The principal parallel between what Adams calls the California “power belly flop” and the Canadian situation is politics. In California, political pressure led the state government to impose caps on rates, at a time when the cost of fuel for power generation was on the rise. As a result, power companies have been forced to sell electricity at prices lower than the cost of production. At the same time as the price caps have deterred new entrants into the market, they have given consumers no incentive to curb their demand. And the resulting gap between supply and demand has forced existing players into the electricity spot market, buying from the likes of B.C. Hydro, as prices have soared.
California may have blown its bid to deregulate electricity, but that doesn’t mean it’s a bad idea
Hydro, as prices In Ontario and Alberta, the two jurisdictions in Canada that have advanced the furthest with plans for electric power deregulation, politics is already causing an equally dangerous warp in the process. According to David Drinkwalter, a former executive at Ontario Hydro who is now a consultant with Resource Associates Canada Inc. of London, Ont.: “Governments need to knuckle down and display real intestinal fortitude in their commitment to deregulation.” But so far, that hasn’t been apparent in either province.
In Ontario, after considerable study, rhetoric and legislative change, Premier Mike Harris has been waffling and apparently moving away from deregulation, in part because of the negative publicity surrounding developments in Alberta and California. In the wake of a delay last year, the premier last week said that even though the target was to deregulate by the end of2001, he is in no hurry to push ahead with market reform.
But that’s just the sort of message that exacerbates problems in the provinces already-weakened power market. Adams notes that despite its significant industrial base, Ontario’s power supply system is “not in good shape”: it is too dependent on troubled and costly coal and nuclear assets. Given that scenario, prolonged uncertainty about the provincial government’s timetable is discouraging investment at a time when, he says, “we desperately need to attract capital to get on track for the future.”
In Alberta, the government’s attempts to “manage” the transition to an open market have stumbled badly, as prices have soared and industries have become increasingly reliant on temporary subsidies. Again, a large part of the problem is that the political commitment and rules for deregulation have not been clarified. That impedes new capital investment in the electricity market at a time when a roaring economy has ignited record demand.
Energy Probe’s Adams notes that Britain’s deregulation of the power sector has worked well—it is generally held up as the most successful international model—because of strong curbs on government involvement in the process. For example, he says, a strong, independent regulator was established and empowered early on, keeping government at arm’s length and attracting private capital to the sector. There, prices have fallen.
The painful and disruptive North American experience increasingly raises the question of whether some key elements of social and economic infrastructure should be exempt from the relentless push to privatize and deregulate. The telecommunications and airline businesses, after all, are markedly different from essential services like water, health care or electric power. And deregulation has, in many cases, become an ideologically trendy policy for governments seeking to cut costs and hive off responsibility and risk.
Still, when it comes to making the case for power market reform, Ontario Hydro stands as a compelling argument in favour. In 1998, the bloated utility essentially collapsed under the weight of its $31-billion debt, most of which was guaranteed by provincial taxpayers. But for years it expanded, unchecked, as cost overruns on such ill-fated projects as the Darlington nuclear plant were passed on to retail consumers, and industrial rate subsidies were given to business. Although those subsidies are slated to be phased out after four years of deregulation, they were originally intended to deter major power users from building their own, lower-cost generating plants and competing with the government-controlled system.
While it’s both easy and legitimate to be distracted by the recent chaos in California and Alberta, it remains important not to lose sight of the fact that in both cases, politics—not true, open-market deregulation—have caused the problems. Furthermore, existing government monopolies on generation and distribution have become entirely unsustainable. To adapt Lord Acton: all power tends to corrupt, but electrical power corrupts absolutely.
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