The old model broke; it's not coming back

By David Butters

The following editorial appeared in the Toronto Globe and Mail on July 25, partly in response to an editorial by Rod Anderson and others which appeared on July 20.

Reinvesting in energy infrastructure in Ontario is the single most important public policy challenge facing us today. The province does not have enough low-cost electricity to meet its future needs, but arguments in favour of returning to the good old days of complete public ownership of power generation are not the answer.

In fact, we're in this fix largely because the old Ontario Hydro model (the so-called "public power" system) was irreversibly broken. Both the current Liberal government and the previous Conservative ones came to understand this simple truth.

The public power model is based on a simple argument: Government can build power projects cheaper than anybody else because (a) it has lower interest costs than the private sector, and (b) because the government doesn't aim to make any profit and therefore can offer power at cost - which has to be cheaper than a profit-driven, private-sector company. Advocates of this model conclude that the government should build, finance and operate all of the power facilities in Ontario. Cheap power will ensue, they say, which will be good for small, medium and large consumers. But if that's true for power projects, why isn't it true for groceries? Food is a more essential commodity than electricity. Why is nobody advocating such a position for our farms?

The answer is that the model doesn't work. Those who have had to suffer through managed economies know this only too well.

That model left Ontario on the short side of power supply in the face of inexorable demand increases. And it's clear that rates under the old model didn't reflect the true cost of power either - that's why we've been left with $20-billion in stranded debt (you'll find a surcharge for this on your hydro bill). This should be sufficient warning about the folly of a return to past practices.

Everyone should be familiar with the supply challenge Ontario faces. Appeals for conservation during the current hot spell underscore this fact. Factoring in the growth of our economy, the province will need to refurbish, rebuild or replace 25,000 megawatts of generating capacity over the next 20 years costing anywhere from $25-billion to $40-billion, depending on what generation resources we choose to build, and when.

This is a huge amount of money to ask taxpayers to ante up when we are struggling with a large deficit and debt load in Ontario, and under enormous pressure to invest billions of dollars in health care, education and other critical infrastructure. So where will this money come from. The obvious answer is that the private sector has to play a large role. It has the resources and the know-how to do the job to complement public investment.

But there is no silver bullet that will solve all of Ontario's energy challenges. Mobilizing the very large amounts of capital required to ensure Ontario's energy future will require policy coherence, regulatory co-ordination and efficiency, and an attractive fiscal regime. It will also mean we must move to a situation where prices reflect the true cost of power - clearly the government will have to balance this with the need for fair and competitive electricity costs to support the sustainability of our economy. It will be no mean feat to balance a huge array of competing priorities and interests, and to ensure we're getting it right.

Still, if our policy and regulatory processes are clear, efficient and effective, these and many other attractive features will ensure we are a destination of choice for energy investment.

An article on last Wednesday's op-ed page in The Globe and Mail made a case for returning to public power. Among other things, its authors argued that private-sector generation tends to concentrate on fast-payback, gas-fired generation of electricity. But nobody is arguing that all new generation should be gas - or even if it should be all built by the private sector.

In Ontario, we've got private-sector organizations building renewable generation such as wind and water power and refurbishing laid-up nuclear plants in co-operation with the government through the Ontario Power Authority.

We have both private-sector and public-sector entities (such as the Greater Toronto Airport Authority) building new gas-fired generation. And we have publicly owned entities such as Ontario Power Generation and Hydro One investing in other important projects. This is a balanced approach that makes sense given the enormity of the power challenge.

What is common to all of these initiatives is that they are working on the basis of sound business disciplines - something that was often missing in the good old days.

There's no question the Ontario Hydro model once served Ontario's needs well, but we've changed, and we'll continue to change. We need new ways of thinking that are far more agile and flexible than the old ways if we are to move forward and succeed in an increasingly competitive world where we have to balance economic and environmental sustainability.

Ontario needs a sustainable electricity solution based primarily on market forces and private-sector participation that results in an adequate, affordable, safe and reliable supply. That's the nub of this debate. Let's get on with it - the stakes are too high if we don't.

David Butters is the president of the Association of Power Producers of Ontario, representing Ontario's publicly and privately owned electricity generators.

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Last update: August 3, 2005 URL:http://www.appro.org/whats_new.html