The private sector, we are always told, produces low costs and efficiencies.
In many cases, this handy bromide is true. But as two recent bombshell reports point out, it does not hold in the world of electricity generation.
Both the Ontario Energy Board (OEB) and the province’s auditor-general have produced damning indictments of the Liberal government’s hydro privatization strategy.
They have found that it’s just too easy for the private generating companies to abuse their market power – or, as the OEB likes to call it, “game” the system.
As my colleague Rob Ferguson reported this week, an OEB report estimates that over several years, just one private generator, the Japanese-owned Goreway Station Partnership in Brampton, collected $120 million from the province that it didn’t deserve.
Goreway denies that it deliberately did anything wrong.
A day later, auditor general Bonnie Lysyk released another report that calculated gaming by private generators cost the province $300 million over nine years.
In both cases, electricity ratepayers ultimately footed the bill.
The problem of gaming is endemic to privatized electricity markets.
All electric generation, whether public or private, faces the task of matching supply to ever-changing demand. That requires some generators to be on standby in case there is a sudden spike in the need for electricity. And keeping generators on standby costs money.
If generation is public, as it was when the former Crown corporation known as Ontario Hydro held a near monopoly, the utility can simply be ordered to keep some capacity on standby. There will be a cost. But ordinarily, a public utility has no incentive to exaggerate this cost.
A private generator does, particularly if it is being reimbursed for its start-up and standby expenses.
It is here that the abuse of market power can occur.
In Ontario’s case, the reimbursements for standby power are handled by an arm of government called the Independent Electricity System Operator. The IESO covers the costs incurred when a private generator agrees to start up its turbines and put them on standby.
The easiest way to game that system is to claim costs that are not legitimate. In the case of Goreway, the OEB said the utility included in its list of start-up costs expenses that it would have incurred anyway, including landscaping, tool boxes and ear muffs.
In one case, according to the OEB, Goreway included as part of its start-up costs fuel for a steam-fired cogenerator that used no fuel.
In another, it said, the Brampton utility claimed start-up costs for a turbine that, while offline, was otherwise fully functioning and did not need to be started up.
In her report, Lysyk said unnamed private generators claimed scuba gear and carpet cleaning as start-up costs eligible for reimbursement.
The private generators are not solely to blame for this. As good profit-maximizers, they devote time and attention to making money any legal way they can – including gaming the system.
The OEB report noted tartly that they are often helped in this by government rules that invite abuse.
In one instance, according to the report, a Goreway senior executive sent an ecstatic memo to staff following a new rule change on eligible standby costs.
“Put a bow on it,” he wrote. “Christmas came early.”
Certainly, the penalties are not onerous for private generators that break the rules.
Lysyk calculates that while nine generators claimed $260 million worth of ineligible expenses between 2006 and 2015, only $168 million of that has been recovered by government.
She says the government still pays $30 million more per year than it needs to in order to keep generators on standby.
In Goreway’s case, the private utility ended up – after repaying $100 million of the $120 million it had made from gaming the system plus a $10 million fine – with a $10-million profit.
That’s private power in a nutshell. It’s a great deal for the private power owners. For the rest of us: Not so much.
Thomas Walkom is a national affairs writer.