Seamanship Quotation

“In political activity, then, men sail a boundless and bottomless sea; there is neither harbour for shelter nor floor for anchorage, neither starting-place nor appointed destination.”
— from Michael Oakeshott's
Political Education” (1951)

Thursday, May 24, 2012

Follow up: debate on Hudak’s disruptive idea

A shrewd senior public administrator (not too revealing, I hope) gave me this explanation of why it’s so hard to have a productive discussion about change in electricity ownership in Ontario: “The experts who dare to talk about it are either mad or bought.”

On a grander scale, Fredrick Hayek anticipated this problem in “The Road to Serfdom.” Even in free societies, he warned, modern government could become too big for a vital democracy to function, that eventually there wouldn’t be enough informed people who’d feel truly free to speak their minds. Those who think there’s a better way of doing things would run the risk of looking a little mad.

In Ontario, over 80% of the electricity industry—an industry that effectively serves 100% of the province's households and competitive businesses—is entirely owned by the government. So, it’s tricky to propose changes that would significantly limit the power of that government and threaten those who most benefit from how that power is exercised.

The industry is supported by thousands articulate professionals and pensioners who owe their good fortunes to the status quo. They can fine-tune incremental change brilliantly. They know the immediate past inside out. Overwhelmingly, however, they’ll marshal their expertise and mountains of data to keep the future under control.

I say this simply to note—and admire the fact—that Hudak is playing with fire.

Hudak isn’t a mad idealist. His proposal to stage the sale of transmission and generation assets, while promising to subsidize industrial customers, is compromised and somewhat contradictory. He is not proposing to reduce government’s role as a regulator or, as a last resort, as a procurer of additional power. Clearly, he doesn’t want to scare Ontarians; he’d rather win votes than design a perfect policy paradigm. However, his privatization plan will be challenged by professionals, as well as demonized by his adversaries.  

Two concerns have already been raised.

Jim MacDougall commented on my last post:

“The point missing from the media coverage is that the goal of infusing private capital in this government owned electricity sector is a hope (founded?) that government will keep its paws off. That message needs to get out otherwise electricity privatization could be Hudak's "private school funding" downfall in the next election.”

Martin Regg Hohn of The Toronto Star worries about cash flows:

‘The new private shareholders would demand more profits as a return on their investment (pushing for higher electricity rates, which Hudak has pledged to forestall). Private ownership would also reduce the money turned over yearly to the provincial treasury in the form of profits and payments in lieu of taxes (the utilities would ultimately lose their tax-exempt status).”

McDougall raises a key test: Will private sector operators have to pay a higher risk premium than government operators when financing new electricity investments?

There are at least two ways to respond in Hudak’s favor. Electrifying Ontario no longer needs the government’s credit rating or subsidies; it’s a mature industry. Further, the electricity investor has no valid reason to believe that investing in electricity in Ontario would be any more dangerous than investing other forms of energy or other essential services.

The Ontario Energy Board has provided comprehensive economic regulation of Ontario’s private natural gas business, another essential service. In setting consumer rates and in overseeing changes in the ownership of natural gas distributors, the Board has earned the trust of domestic and global capital markets. Regulated private utilities are a safe haven for investors everywhere.

The Ontario government and aspiring premiers, unfortunately, cannot credibly promise to keep their paws off any essential service, gas, electricity, nursing homes, and fresh milk, for that matter. However, as with other North American governments, Ontario has a sturdy record of respecting property and investor rights—while playing politics.

Regg Holn’s concern sounds like bookkeeping and, as such, will be used by many technicians who want to perpetuate government ownership.

Hudak needn’t be intimidated by numbers. If owning the business was more profitable to the treasurer of the province and its open economy, today the treasurer wouldn’t be holding $billions of stranded debt, accumulated by its public electricity assets. Logically, it would be championing permanent public ownership of other big industries—say, our troubled auto industry.

It’s inescapable. Ultimately, a profitable private Ontario electricity industry would have to pay taxes to Ottawa, not just pseudo taxes to the Ontario Government. However, there is ample historical evidence in Ontario and, for instance, in booming Alberta, to demonstrate that well-run competitive businesses paying something to Ottawa is much better than captive bureaucracies promising to give all of next years “surplus” to the provincial government.

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