When Thieves Fall Out:
Electricity Restructuring Follies
a special report by NETWIT
(NETWork Interested In Telling-it-like-it-is)Editor's note, November 11, 2002: While some of this article's short range predictions did not come true, the soundness of its general analysis has now been acknowledged by the premier of Ontario. We warned him.
First published in December 2001.
NETWIT has been neglecting Ontario for some while and we feel guilty. Telling-it-like-it-is is a demanding profession. There is so much bovine excreta in post industrial, post modern, post rationalist, post empiricist, post theological society. Odd as it may seem, giving the straight story is as rare in the back rooms as in the public sphere, as rare in private corporations as public bureaucracy. We live in times when unclothed emperors stalk the halls sartorially oblivious, as their brown-tongued aspirants assiduously gag any that may be inclined to comment on so much human flesh on display. Our days are crowded, our services often unappreciated. Yet, press on we must.
It is not without some glee that we note reports that the wheels are falling off the Ontario electricity restructuring tumbril. The Glib & Stale has run stories on the emergence of an option, championed by the Royal Bank, to turn Hydro One, the successor company to Ontario Hydro's transmission, distribution and retail operations, into a not-for-profit corporation, rather than a privatized corporation, through an Initial Purchase Offer (IPO) for shares, which was the plan of the Hydro One apparatchiks (the prospect of earning stipends similar to those enjoyed by their counterparts in the UK, we are sure, has not played and will not play any part in guiding their actions).
What is the significance of this story?
NIH readers may recall an earlier piece (soon to be posted again on this site) in which we described the main pieces of the cabal that came together to ruin Ontario's electricity system: the major electricity consuming industries (AMPCO), Bay Street, and, the Hydro brass. They convinced an ideological government that an unstoppable wave of electricity restructuring, featuring the creation of "competitive markets" was sweeping the developed world and that Ontario better start swimming or it would sink like a stone. This was a tissue of lies, deceptions and half-truths, but the Harris government wanted to hear it and no one in the senior ranks of the public bureaucracy was willing to provide a dispassionate analysis (a recent Freedom of Information request revealed that the Ministry of Energy conducted no studies into the likely price impacts of restructuring!). A faked nuclear crisis was then initiated and used as a pretext to introduce the sweeping changes.
The times they have a-changed, again. The main driver of the restructuring always was AMPCO, whose members were not satisfied with the fourth cheapest power in the world (behind Sweden, New Zealand and Quebec). Hell is a world where you get what you want; so goes the memorable Sid Herpes song. To their horror, AMPCO members have discovered that a restructured market is likely to increase their power costs by up to 100%. They persuaded the government in 1999 to continue for a while their sweetheart deals, known as "load retention rates," but this is a stop-gap measure.
The load retention deals are confidential but NETWIT estimates they are about $30-35/MWh, all-in, compared to $73/MWh, the average for all Ontario at the time of the restructuring. In the brave new world of restructured electricity, electricity costs are to be "unbundled", so figuring out the relevant comparison takes some patience. NETWIT reckons AMPCO members will face about $20/MWh before they take a single kWh of power: $7 for the "Debt Reduction Charge" (DRC), to recover the supposed "stranded debt" of Hydro; $8 for Hydro One's transmission and $5 for the new Independent Market Operator (IMO). What has really put the wind up AMPCO has been the discovery that Ontario Power Generation (OPG), the successor to the generation division of Hydro, wants in excess of $50/MWh for a riskless (i.e. covering all of the hours of each year for the term of the contract) long term contract for power. Under the proposal revealed by the Grope & Flail the DRC may be reduced by about $2/MWh, which would help, but NETWIT suspects that what AMPCO really wants is to set in place contracts with the new Hydro One that give them a "bundled" rate comparable to the old load retention rates.
Bay Street, too, has fractured. The brokers were hoping for a share of the commissions on the largest share offering in Canadian history for the privatization of Hydro One, and the subsequent good offices of their customers when the shares appreciated in value, as happened in the UK. Given the new weakness in equity markets, the bond traders have come forward to press their case: instead of an equity offering, all of the assets of Hydro One will be financed by bonds that will be used to pay down the "stranded debt". The commissions on bonds are less but for the bank to get in line first, just as lucrative.
The Hydro brass is now relatively powerless. Their power derived from the ability of the old integrated company to generate political headaches. Hydro One now has no cards to play that will not reflect badly on its executives: blackouts or PCB spills will be their fault. OPG is not likely to be privatized and their "insurrection of the nuclear priesthood" card has already been played.
The Ontario government, too, is undergoing change. Harris is now a lame duck. None of the leadership hopefuls or their backers will allow decisions to be made that will hobble their Premiership. Everyone has a veto on anything that may be unpopular, which even the Tories now realize is the case for the electricity restructuring policy. The front runner, fiscal butcher, dandy and piss-artist Ernie Eves, was never, we hear, a fan of the electricity restructuring package but went along with the wishes of his golfing buddies, Farlinger (ex CEO of Hydro and the champion of restructuring) and Harris. All of the hopefuls will be pressured by the local distribution companies (LDCs), disproportionately in Tory-held ridings, who were never "on board" and are increasingly aware of both the costs of restructuring and the ridiculousness of the crazed Energy Minister Wilson's spring target for opening a market for retail electricity. Finally, the events of 9/11 have had their impact. Only a fully brainwashed neocon is sanguine about leaving the security of the electricity system to private corporations.
Opposing the new proposal are the remnants of the original coalition: the Hydro One executives, desperate to retain their shot at the massive payday that would follow an IPO; those still pushing for the opening of the market, i.e. the erstwhile electricity retailers, led by Direct Energy, a subsidiary of the UK's Centrica; the Bay Street equity brokers; the various software developers and system vendors that are relying on the opening of the market; and most of the lapdog print media. Some of the larger LDCs, notably Toronto and Mississauga seem to have embraced the concept of a "market" but there is nothing intrinsically in the interests of their owners (the municipalities) in going ahead, while no politician enjoys explaining price increases to constituents.
While the new proposal does not necessarily put the kibosh on the opening of a market, these groups are right to fear this as a consequence. It would not be illogical to fold the IMO back into the reconstituted Hydro One in order to better disguise the sweetheart deals with AMPCO (OPG would have to be forced to accept low-price contracts to guarantee the low prices to AMPCO; these could be characterized as "vesting' or "must run" contracts with IMO/Hydro One). Moreover, the current separation of grid operations (IMO) from asset management (Hydro One) is not sensible in the long run (the nearest analogy would be if a major manufacturer, say General Motors, had a separate company carry out its plant management functions). Even if this does not happen, the way is left clear to open up a partial "market" in which only the larger LDCs and a few "wholesale" power brokers play, which is a far cry from the wild-eyed vision of "full retail competition" that is embodied in the Harris government's legislation.
There is delicious irony in seeing AMPCO try to squirm away from the DRC. This arises from the fictional "stranded debt" which was of their creation. In the mythology of the market the cost of generation was supposed to fall from about $42/MWh in 1996 to about $30 on market opening (originally set to be January, 2000). This would have meant that the debt used to finance Hydro's generators at $42/MWh could not be paid and would be "stranded". This was estimated at $21B and would have to be recovered by various means, including the DRC. It is now all too clear that prices will not decline. In fact, they are likely to rise. Unfortunately, this omelette cannot be unscrambled. In the restructuring OPG was given a debt burden supposedly reflective of its reduced ability to service – $8.5 billion. We now have the worst of all possible outcomes. OPG can charge whatever the market will bear, up to the (higher) prices in New York, Michigan, Pennsylvania, Ohio, etc. and Ontarians still have to pay the $7/MWh DRC!
Why, then, did AMPCO push for this?
While AMPCO might have had reasonable expectations that a market would reward consumers that use relatively more power in the cheaper off-peak hours, in the end, though, we are left with a triumph of ideology over business sense. In a famous quote, John Maynard Keynes talked of how supposedly hard-headed businessmen are "slaves to the ideas of some defunct economist". However, AMPCO has now woken up and no-one should underestimate its ability to wheedle concessions from the Ontario government, of any stripe. Its members are all of the major resource industry and manufacturing players, and layoffs in Tory ridings will not go down well in the run-up to an election. For once, their fears of substantial increases in costs, in a time of recession, are well-founded. NETWIT will watch with continued wry amusement but we believe that the smart money is on the creation of "Ontario Electric Red Cross", a name we suggest respectfully in honour of one of our favourite not-for-profit organizations.
When Thieves Fall Out: Electricity Restructuring Follies © NETWIT, 2001
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