20 June 2011

Making the Most of Our Energy Resources (Part I – Electricity Reform)

In slightly more than a decade, fundamentally bad policy decisions by Liberal and Conservative administrations have turned the provincial government’s electricity corporation into an unregulated, unaccountable monster.

Such is the power of this hydra corporation as we enter the second decade of the new millennium that it can corrupt the public body  - the board of commissioners of public utilities - that is supposed to control the corporation in the public interest and turn it, instead, into nothing more than a tool of the corporation’s Muskrat Falls venture, all with the enthusiastic support of the provincial government.

The result of all this is that the people of the province will not be getting the most of their own resources.  Rather, they will pay dearly to supply discounted energy to other people.

No single act created the beast.

No single act will bring it under control.

But there is no question that the province’s electricity industry must be radically over-hauled.  If we allow the industry to continue on its current disastrous course, what should be a very rosy future for the people of Newfoundland and Labrador  may well turn out to be as bleak as the bleakest time in the province’s history during the 20th century.

In reforming the electricity industry in the province, we must keep an eye on our basic principles.
  1. The entrepreneurial private sector must be the main engine of growth in a globally competitive economy.
  2. The provincial government must regulate the industry to support economically and environmentally sustainable development.
  3. At the same time, the provincial government must ensure that the people of the province – the resource owners – get their fair return at the lowest possible level of risk.
With those three elements in mind, let us now turn to some specific actions.

Privatize


While there may have been an argument in favour of nationalising the provincial electricity companies 40 years ago, those rationales have long since vanished.  Even some of the politicians who created the hydro corporation in the mid-1970s now think it was a bad idea. And if privatizing a Crown hydro corporation is a good policy for a former Parti Quebecois activist, the idea is well worth considering in this province.

Privatizing the provincial government’s energy corporation remains the best way to reform the provincial electricity industry almost two decades after a provincial government first pursued the idea.  Turning the corporation over to the private sector would net the provincial government significant cash while at the same time removing a huge debt from public shoulders. 

In the past 20 years public attitudes have changed.  A renewed sense of confidence in the public would support the creation – in effect – of several new corporations doing business within the province and expanding outside its borders.

The provincial government will need a plan on how to privatise the electricity corporations. They could entirely in the private sector from the start.  The provincial government could sell shares or accept offers – as Danny Williams was ready to do – for any or all of the company and its assets. 

Alternately, the provincial government could create Norwegian-style hybrid companies that are jointly own by the state and private share-holders. The public interest in hybrids would be managed through a parliamentary oversight committee similar to the type used in Norway and elsewhere to remove Crown corporations from decisions that may be based on too many partisan considerations.

In either approach, the new companies must be incorporated under the Corporations Act* and subject to exactly the same laws and taxes as all other companies in the province.

Embrace Competition


No matter what route the provincial government choses to take on privatization, it must sell off the generation assets seized from private sector companies in the 2008 expropriation legislation. This will be an important first step in smashing the dangerous monopoly created under the 2007 energy plan.  It will also send a powerful message to investors that the provincial government will not tolerate such grotesque abuses of power.

Reform would also mean replacing the provincial energy corporation’s  tangled mass of interlocking directorates and companies with clearly defined companies that look after electricity transmission (TransCo) and generation (GenCo).  GenCo could be also subdivided into the island generation assets and those in Labrador.

Churchill Falls (Labrador) Corporation should remain a separate company and possibly would be retained as a Crown corporation as proposed in 1994. The provincial government should move quickly to repeal legislation that supports the Lower Churchill Corporation, including the 1978 development corporation act.

In the future any Lower Churchill development should be undertaken by the private sector, based on sound financial plans.

For TransCo, the provincial government will also have to set an open access transmission tariff or give the public utilities direction to do so. OATT allows open access to transmission facilities. It is part of the competitive system fostered by American regulatory changes in the early 1990s. This is an important part of connecting the province into the North American electricity market system fairly and equitably.

Protect the Public


The 1994 version of the Electrical Power Control Act created a role for the public utilities board in managing the electricity industry in the province.  The provincial government should repeal a series of exemptions granted in late 2000 that effectively stripped the PUB of its power to ensure that the people of the province benefit from the electricity they need at the lowest possible cost, as mandated by the EPCA, 1994.

As part of the reform, the PUB leadership must be removed from the realm of political pork and patronage.  New commissioners should be appointed from the winners of an international competition.  Funding for an expanded commission that we will need to carry out the PUB’s new role should come from a combination of public funds and levies on the regulated industries.

The PUB’s first task will be assessing the province’s energy needs for the future.  This will determine what, if any new power sources might be needed.  The PUB can then re-allocate existing generation to meet the forecast need or call for new projects.

Set the Taxes and the Policies


In the new world, the provincial government will have a new role.  At first, politicians and bureaucrats will have to get used to a new role instead of involved in all sorts of high-powered negotiations for which they have usually turned out to be uncomfortably unsuited.

The provincial government will have to set broad electricity policy to deal with environmental issues:  how much of the province’s domestic supply should be from renewable sources?  Should the province allow natural gas generation?  What about nuclear power?

The provincial government will also have to set taxes and other charges that generators, transmitters and domestic retailers will have to pay to the people of the province in exchange for developing electricity resources. This could turn out to be an interesting new source of provincial government cash. There’s another post coming on that aspect.

The government would also have to set the broad rules that the public utilities board would follow when setting retail prices within the province.

Taken altogether, these reforms to the provincial electricity industry would:
  • Reduce the public debt load.
  • Produce an initial pot of cash for the provincial government from sales.  This would be followed by new annual revenue from taxes and other charges that the provincial government currently doesn’t collect.
  • Promote sustainable development of new energy sources at the lowest cost for domestic consumers.
  • Create a stable environment in which entrepreneurs can attract investment in order to develop the province’s full energy potential.
- srbp -
* Corrected from Companies Act

4 comments:

Brad Cabana said...

Ed, there is no money in power generation, other than the already capyured resource of the Upper Churchill.Name one power generation company that makes money soley on generating power? Fortis understands this. Only 1% of their revenue comes from generation.The key in the power business, like the oil business, is distribution.What private company wpould want to buy fiancial loss? Only a company like Hydro Quebec that could absorb the losses due to its massive volume could even look at this.Even they have to look at life after the Upper Churchill in 2041, and the massive loss to overall profitability that will create. Is it not trading one monopoly for another?

Edward Hollett said...

Bring on the bogeymen! At least, a discussion of the province's electricity industry is starting in a predictable place.

The system of private companies I am describing is exactly the opposite of the situation you describe and the one we currently suffer under.

Even if, by some set of circumstances we allowed one private sector company - like Fortis - to own everything in the province, you still would not have a situation where the energy utility controlled the government and via the government controlled its own regulator.

If as a matter of policy you set up the companies and kept them separate and allowed competition, I think you'd find this would be a much less attractive a place for HQ to do business that either NB or NS with its closed monopolies. Like tends to deal with like, after all.

Bear in mind that if the goal is to ensure that we have the cheapest possible energy, that it is developed in a sustainable way and so forth (the objectives I set out) it doesn't make any difference if the company is based here or comes from Djibouti?

In other words, set the policy objectives and then let someone meet them. Anything after that is usually bullshit

Part of the reason we have the current mess is because of successive governments who have claimed they were doing everything with electricity except the simple job of delivering a service to consumers cheaply and efficiently.

They have used all manner of excuses and distractions to cover their actions, the most common one being the HQ bogeyman you just trotted out. He loved it and people ate it up unquestioningly even though his contentions were - at the time he made them - fairly obviously a load of crap.

But if anyone out there is a Danny lover or feels we need more Dannyism, then let me just remind them that the basis of my policy is the same as his: sell it if we get a decent offer. I actually go a bit beyond that but there is really nothing in the fundamental bit about privatization that Danny didn't endorse in April 2008.

With respect to HQ, surely you know he spent five years try to sell them an ownership stake in the Lower Churchill. Heck Ed Martin is still at it. That should make it pretty clear that the HQ bogeyman is just a political prop people use to distract the punters.

Name me one private sector company that is its business to lose money. If Fortis wasn't making money from generation it would not be in the generation business in the first place.

You might make a case for integration. Fair enough. Just bear in mind that in the oil business, the goal of integrated companies is to make money at all phases.

For all that, though, there are companies that do nothing but exploration, others that do production, and others that do refining and still more who do retail distribution.

Brad Cabana said...

I didn't mean to make HQ the bogey man. My most recent blog states it like it is - it's just business, and they are taking advantage of a business opportunity that fits into their strategic vision. My point was that we put ourselves in the vulnerable position. My other point was when it comes to profitablity in the power sector I can only find it in distributors.Their may be some that do generate and distribute within a closed, monolistic sector - like Sask Power in Saskatchewan that just keep upping rates to make profit.I can't think of a place in Canada that has any real competition in the electicity market.

Edward Hollett said...

Fair enough, Brad but the HQ spectre or any other variation on the bogeyman theme winds up in the same place:

How exactly is having a regulated marketplace that allows competition a case where "we" become vulnerable to anything? What exactly are "we" going to be vulnerable to?

Opening up the local market to private initiative would allow for further development of small hydro and wind as well as conservation. All of these have been held up for the past decade simply because they undermined Nalcor's desire to proceed with an incredibly expensive megaproject.

An innovative environment - as opposed to the current monopoly - would also allow for the development of alternatives (all of which have been identified in the Muskrat hearings and rejected out of hand by Nalcor) that work for consumers and not for the monopoly.

I am not sure why you find the idea such a problem. As for generation being unprofitable, I am still waiting for you to explain why any companies are involved in it if the generation is so unprofitable. Even in this province, two private sector generators worked until 2008 when they were swept out of existence by the monopoly.