As sure as day follows night, the blackout that swept across most of the eastern United States and Ontario has already sparked cries of outrage and a chorus of I-told-you-so's from critics of deregulation. See what happens when you privatize electricity? No one spends money to upgrade the system because they are driven by the profit motive and a desire to boost their stock. That makes a compelling argument -- provided you don't know anything about the energy industry.
The anti-deregulation spin doesn't really fly when it comes to assigning blame for Ontario's role in the blackout, of course, since the power business here is still effectively government regulated -- the result of a colossal failure of nerve on the part of Premier Ernie Eves, who backed off on the proposed privatization of Hydro One, the transmission arm of the former Ontario Hydro.
The premier and his party have done their best to sidestep any political fallout from the power outage, arguing that the blackout was a U.S. problem that Ontario wound up on the receiving end of, through no fault of its own. "This had nothing to do with Ontario's electricity supply," Mr. Eves said in a statement after the outage. "At the time this occurred, we actually had enough domestic supply available." That may be true, but it also misses the central point.
Ontario's problem -- the thing that made it more vulnerable to a cascading failure, and has also hampered the recovery -- has little to do with the supply of electricity, but a lot to do with electricity distribution. Coincidentally enough, that is one problem that Hydro One's privatization was supposed to alleviate. Cancelling that may not have caused the blackout, but it sure hasn't helped.
One of the main things Hydro One planned to do with the money raised by its public share offering -- more than $5-billion -- was to upgrade the grid system in the province, something that hasn't been done in decades, despite the implacable growth in demand for electric power. The utility was also supposed to spend that money upgrading the "inter-ties" that connect Ontario to neighbouring power markets such as Manitoba, New York and Quebec.
Had it been able to do this, Ontario might have been able to weather the cascade of rogue power that shut down the province's electrical system. Mr. Eves is right in the sense that a lack of supply was not the problem -- the real problem was too much supply, too quickly, to the point where the grid had to shut down to protect itself. But one of the main reasons for that shutdown is that there was no slack in the system, no room to soak up that over-supply.
In addition to this, the ill-considered rate cap that Mr. Eves and his government imposed after cancelling Hydro One's offering has added to the grid's capacity problems, since it effectively discourages power conservation. Why should you turn off your lights or your air conditioning if Mr. Eves has capped your power bill? The premier is just the latest culprit in this -- power prices were kept artificially low by Ontario Hydro long before Mr. Eves came along.
The province also clearly needs more generating capacity, and yet companies are unwilling to invest because the premier has backtracked on privatization. Meanwhile, Ontario Power Generation, the generating arm of the former Ontario Hydro, has sold off only a small part of its capacity and still controls a majority of the market. Since OPG's nuclear plants are over-budget and behind schedule, the province has been buying power from New York State, rather than selling its surplus power to others as it used to do in the past.
In other words, Ontario needs more privatization rather than less. And what about the United States? The anti-deregulation lobby is just as strong there, and fingers are busy pointing at privatized power producers, who have allegedly avoided spending money on transmission to focus on Enron-style forays into the deregulated world of power generation and trading. The blame is misplaced here as well, however, and the solution is not re-regulation but more privatization.
One of the main reasons why power companies have not spent the $50-billion (U.S.) or so it would take to upgrade the U.S. power grid is that state and federal authorities made it uneconomic to do so, by keeping the transmission business heavily regulated while deregulating the generation side. A recent proposal would remove state controls and make the transmission business a more open market between states, regulated by the Federal Energy Regulatory Commission (FERC), but this is being opposed by the states.
For those who are eager to paint government ownership as a solution to all the electricity market's problems, meanwhile, it's worth remembering that Ontario's grid has been starved of investment for decades, since long before Ontario Hydro was broken in two. For the most part, it was starved so that Hydro could spend billions on an ill-fated nuclear power program -- the same power plants that Ontarians have spent billions trying to fix over the past few years.
In a sense, the biggest problem for both Ontario's power industry and its U.S. counterpart is that they are stuck in a kind of limbo between government ownership and privatization -- they are neither fish nor fowl. Unfortunately, this makes it easier for those involved to avoid blame, since the fingers extend in all directions.
E-mail Mathew Ingram at mingram@globeandmail.ca
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