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Electricity privatization and restructuring in Ontario and abroad

Dec 17, 2015

Stephen Littlechild

Stephen Littlechild, former regulator of the U.K. electricity industry

As the Ontario government moves forward with partially privatizing Hydro One, it’s important to also look back at how privatization of electricity sectors has worked elsewhere.

That’s why the Ivey Energy Policy and Management Centre hosted two panel sessions in Toronto on November 30 called Electricity Privatization and Restructuring in Ontario and Abroad. The events featured Stephen Littlechild, former regulator of the U.K. electricity industry, sharing lessons from the U.K., one of the first major economies to restructure in 1990. 

“If we look back globally, since 1990 more than 60 countries have undertaken privatization and restructuring reforms of their electricity sectors, each with their own flavour,” said Associate Professor Guy Holburn, Director of the Ivey Energy Policy and Management Centre and Suncor Chair in Energy Policy. “Now in 2015, with the benefit of 25 years of experience, we can look to these other jurisdictions and ask what has worked well, what hasn’t worked so well, and are there any general lessons that we can learn from this experience?”

Privatization pays off in the U.K.

Littlechild, who is now a Fellow in Privatization, Regulation, and Competition at the University of Cambridge, outlined the potential benefits of privatization. Littlechild also created the well-known RPI-X model of price regulation that has been adopted by many jurisdictions.

He outlined how the U.K. was motivated to divide its public utilities monopoly into multiple entities to encourage competition and to better address customers’ needs. The move paid off with improved efficiencies, lower prices, greater reliability, and benefits to both customers and shareholders.

“Privatization is a unique one-off opportunity to restructure an industry because you can do it when it’s in government ownership. It’s much more difficult to do when it’s in private ownership,” he said. “We need a form of industry and a form of regulation that is much more responsive to change and much more susceptible to innovation. We have to accept that political concerns are going to impact on this, but my argument is they do less damage if you have a privatized industry.”

How does Ontario compare?

Although Littlechild acknowledged Hydro One’s partial privatization as a step forward, he encouraged Ontario to go all the way with privatization. Under current plans, the Ontario government will hold on to 40 per cent of Hydro One shares.

“I know in Ontario, you have the question: Can we have the best of both worlds by having partial private ownership? It seems to me that introducing an element of private ownership brings greater innovation and independence, but you always have this worry that the government is going to step in to the disadvantage of investors,” he said. “In the U.K. at least, the argument was go all the way and do it as soon as possible.”

The events also included insights from Canadian electricity sector experts. A morning event, co-hosted with the Council for Clean & Reliable Electricity, included a panel session with Jan Carr, former Chief Executive Officer of the Ontario Power Authority and former Vice Chair of the Ontario Energy Board; and David Hay, former CEO of New Brunswick Power Corporation and former Vice Chairman of CIBC World Markets Inc. An evening Ivey Idea Forum included Dwight Duncan, former Minister of Energy and Deputy Premier of Ontario, and John McManus, Senior Advisor at Borealis Infrastructure, as panellists.

Here are some of their insights:

Jan Carr – The journey has just begun

Carr noted that once you start to privatize, there is much more to think about, such as whether you need a regulator to regulate prices and/or how to encourage competition. He discussed his experience with two projects, the Fort McMurray West Transmission Line and the Maritime Link Transmission Line, and the processes involving both competitive services and regulation.

“Privatization is just a beginning, not an end,” he said.

David Hay – We need to measure our progress

Hay stressed that cost savings achieved by the private sector through efficiencies should outweigh the costs of new capital being brought into the system.

“The elixir we are all seeking is the lowest possible cost of electricity consistent with safety, reliability, and the concerns that we have for the environment,” he said. “This is a measuring stick, at least as far as electricity is concerned, for every action that we take modifying the system.”

Dwight Duncan – We need to invest the proceeds elsewhere

Duncan suggested that taking proceeds from the Hydro One sale and re-investing them in other areas, such as public transit, might improve productivity in Canada.

“We have billions and billions of dollars tied up in these assets and the question isn’t whether or not they are paying a dividend now, the question is should they be paying a higher dividend?,” he said. “It is in the best interest of Ontario to look at hydro assets to see if we can better maximize the tremendous amount of money ratepayers and taxpayers have tied up in the assets and try to rationalize through a market mechanism the generation, transmission, and distribution of our assets.”