Montreal, December 9, 2007 • No 245

  

LE MARCHษ LIBRE

 

Pierre Desrochers is Assistant Professor of geography at the University of Toronto Mississauga.
 
 

DEREGULATION AND THE FUTURE OF ELECTRIC POWER*
 

by Pierre Desrochers

 

          Most Canadians, but especially those living in the hydro-based jurisdictions of Quebec, Manitoba and British Columbia and who enjoy some of the lowest average prices for residential customers in the world, tend to take an affordable and reliable electricity supply for granted.

 

          Despite this, pressure for regulatory reform (i.e., moving from an electricity sector characterized by integrated monopolies to a market structure made up of competing generation, transmission and distribution companies) and more realistic (i.e., higher) tariffs have been mounting in Canada for years. Such pressure, in some cases, has resulted in action.
 

          In Alberta, electricity restructuring began in 1996 as a result of anticipated rapid growth in energy consumption and the need to replace an aging power generation infrastructure. In Ontario, a half-hearted attempt at deregulation was launched in 1998 because of the dismal fiscal and operational performance of Ontario Hydro's nuclear strategy. British Columbia, New Brunswick and Quebec now allow wholesale access and limited retail access to electricity, while Saskatchewan and Manitoba allow wholesale access. Interestingly, prominent Quebec citizens (collectively known as "lucides" or the clear-eyed), led by former Premier Lucien Bouchard, have recently urged a massive hike in electricity rates in order to address the provincial public finance crisis.

          Despite the increasing role played by the private sector (including investor-owned utilities and non-utility generators) and municipal utilities, however, it is fair to say that the visible hands of provincial Crown Corporations and (most importantly) elected politicians still largely dominate the Canadian electricity picture and that prices paid by residential and industrial consumers rarely reflect true market conditions.


Electric Choices: Deregulation and the Future of Electric Power edited by Andrew N. Kleit, Rowman & Littlefield Publishers Inc., in cooperation with The Independent Institute, Lanham and Oakland, 2007, x + 242 pp.

          If one nonetheless accepts the premise that the current underlying conditions of many Canadian provincial electricity systems are untenable in the long run, then one is left with what are basically two options. The first is to leave provincial systems as they have essentially been and stop whatever liberalization efforts might have been undertaken in recent years. This, of course, either implies significant rate increases or cross-subsidies from other sectors of the economy (or a combination of both), which will in turn negatively affect the economic competitiveness of these jurisdictions. The second is to learn from others' successes and failures in the restructuring and deregulation of their electricity sectors.
 

"If a century ago electricity generation was a natural monopoly dominated by economies of scale and scope, in recent decades technological and entrepreneurial innovations have paved the way for the removal of barriers to entry and deregulation."


          Supporters of the latter approach will find much food for thought in Electric Choices, a collection of jargon-free essays edited by Pennsylvania State University economist Andrew Kleit. As can be expected from a book published by the Independent Institute, a free-market Californian think tank, the various authors do not ask whether the electricity sector should be deregulated, but rather how it should be.

          In essence, the basic premise of all chapters – one that is shared by electricity market reformers the world over – is that if a century ago electricity generation was a natural monopoly dominated by economies of scale and scope, in recent decades technological and entrepreneurial innovations, coupled in many places with massive cost overruns on nuclear power plant construction, have paved the way for the removal of barriers to entry and deregulation. In this context, decentralized market mechanisms should be allowed to play a greater role in the electricity sector at the expense of government agencies and vertically integrated firms.

          Readers willing to entertain this premise and to learn about various aspects of electricity deregulation policies will gain much from the essays penned by fifteen respected energy analysts (including Nobel economics laureate Vernon Smith).

          The topics covered range from more applied deregulation case studies and the roles of retail pricing and distributed energy sources in electricity restructuring to more theoretical chapters on the contribution of experimental and transaction cost economics in making electricity deregulation a reality.

          In short, the authors argue that not all electricity restructuring experiences were the same (if California was a disaster, Pennsylvania proved that it could work); that deregulation can deliver lower prices, a better use of scarce resources and increased consumer choice; that a working price system will send the right signals to both consumers and investors; and that blackouts will be a thing of the past in freer markets. Perhaps of greater interest for Canadians will be Terry Daniel, Joseph Doucet and Andr้ Plourde's discussion of the Alberta case.

          The fact that most of the essays are written in plain English doesn't mean, however, that the book is easy reading. These are contributions penned by and for serious students of energy markets. As the editor points out, electricity markets are extremely complicated, and the book's content reflects this reality.

 

* This article was first published as "Review of Electric Choices. Deregulation and the Future of Electric Power by Andrew N. Kleit (ed.)" Rowman & Littlefield Publishers, Inc and Independent Institute, 2007, Canadian Geographer, vol. 51, no. 4 (Winter 2007), pp. 501-502.