The Charade Continues
Ontario Liberals Fumble the Electricity Football
A NETWIT special report
"…the ideas of economists, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from intellectual influences, are usually the slaves of some defunct economist." - J M Keynes, The General Theory of Employment, Interest, and Money, Ch 24Anyone doubting the applicability of Keynes' oft-quoted words would be well advised to consider the continuing debacle of Ontario's electricity system. The new hapless Liberal government of Dalton McGuinty has already signalled it hasn't any more of a clue about what the root of Ontario's problems is than the venal Harris-Eves Tories. The problem is the belief that an electricity market exists in Ontario and that it just needs some fixing up and all will be well.There is no market. There can be no market.
As long as the belief persists, Ontario will stumble from mess to mess.
We have written at some length on the fundamental mistake underlying all of the electricity system restructuring that has been going on all over the world since the late 1980s. As we have previously explained here, bulk grid electricity is a public good, not a private good.
However, we recognize that the words of NETWIT are a mere fart into the gale of advice that flows from the lips of economics professors, protecting their careers, and consultants and merchant bankers, protecting their bank accounts and reputations. Yet it is still shocking to see how the belief in "the market" is so powerful that it leads to the blatant idiocy of the latest Liberal announcement.
Barely a month ago the Liberals capped the "non-regulated" electrical energy costs to homeowners and small businesses ("low volume") and various "designated" users, such as hospitals, schools, etc., at prices above the previous cap imposed by the Eve-ils of 4.3 cents per kWh. The new cap has two stages; 4.7 cents for the first 750 kWh per month and 5.5 cents thereafter. Now they say that Ontario Power Generation (OPG) is running out of money. So, when they imposed the caps did no-one realize that they also capped OPG's revenues?
Let's walk through the situation slowly, to appreciate the farce in full.
OPG controls 100% of the price-setting peak and intermediate plants and generates about 80% of Ontario's power. It controls the price and therefore its own revenues. For reasons best known to the now-departed executives OPG elected to set prices at about 25% higher than costs for the first 18 months of the "market". This created a huge money laundering exercise as most of this excess got recycled back to users under two rebate schemes (one called the Market Power Mitigation rebate - hint, hint!).
As explained elsewhere, the price cap of 4.3 cents was an enormous subsidy, more enormous than most people think because it has to be compared against the load-weighted price for the applicable consumers, not the average revenues received by generators.
We can't calculate exactly what the new price cap corresponds to in terms of average generator revenue because we don't know the size of the relevant load classes (the residential, small business and designated), but it must be around 5 cents. Either Double-D (energy minister Dwight Duncan and his evil twin, Duncan Dwight) expects OPG to "arrange" an average price of 5 cents/kWh or he thinks this is a good "forecast" of the "market price" and has in mind some kind of clawback from OPG if the price ends up higher. This fixes OPGs revenues at about $6 billion. Apparently, now, this will drive them into the hole.
Why did the Double-D choose those particular numbers? Here are the possibilities.
We plump for number 4. Ontario electricity experts have consistently failed to understand that total payments to generators equals total payment from consumers. Double-D and his boss, the McGuinty, are no more immune from the naïve faith in "the market" than the Tories before them. This does not mean we won't see some future boondoggle. We almost certainly will. We just don't think it's the result of deliberate strategy.
- Not for the first time, the Ontario energy bureaucrats couldn't get their sums right.
- This is the Liberals version of create-a-crisis, i.e. they knew the caps would plunge OPG into financial crisis, which they will use to advance some as-yet unrevealed boondoggle.
- Double-D and his advisers are so bamboozled by the electrocrats and their own preconceptions that they think there is a market, despite OPG's obvious dominance.
- A mixture of (1) and (3).
Clearly, this is a fake "crisis". All OPG has to do to increase its revenues is to increase the price, which it has the power to do. But this would mean acknowledging that there is no "market". So, instead, we get hand-wringing and a new role for John Manley, as he figures out how to "do a Chrétien" on Paul Martin. It would also trigger the need for a clawback from OPG to meet the needs of the price cap, which would render (more) obvious the fake nature of OPG's financial situation.
Unbedazzled by market ideology, the obvious solution (to the problems of prices and OPG's finances) would be to return to a system whereby OPG is paid for its costs of production and consumers are charged their load-weighted costs. But then we wouldn't have the magic of the "market" would we?
The Charade Continues © Coolth, 2003
Posted December 18, 2003
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