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from the July 10, 1996 edition

Ontario May Sell a Portion Of Its Huge Electrical Utility

TORONTO—

Ask the average American to name the largest electric utility in North America and few would come up with the name Ontario Hydro. Yet it produces 34,000 megawatts of electricity, about one-third more than the Tennessee Valley Authority, the largest power company in the United States.

Now Ontario's Conservative government seems certain to break up Ontario Hydro, selling off huge parts of it. The reason: The monopoly created to produce low-cost electricity for industry and consumers has not been doing its job.

"When you have a big dominating monopoly as we have had here in Ontario, it's not going to be working hard to bring prices down. People who have to compete are going to bring them down," says Donald Macdonald, who wrote a government-sponsored report on the utility's future.

Although Canada has the second-lowest electricity rates in the world, after South Africa, Ontario's rates are the second-highest in Canada - and almost twice average rates in neighboring Manitoba.

Ontario Hydro generates power at 69 hydroelectric stations, five nuclear plants, and six fossil-fuel plants. The utility, wholly owned by the Ontario government, started in 1906, mainly to provide low-cost power to Toronto industries from a big hydroelectric plant on the Canadian side of Niagara Falls. While Niagara produces as much electricity as a large nuclear power station, more than 60 percent of Ontario Hydro's electricity comes from nuclear power, using Canadian-designed nuclear reactors.

The cost of building these nuclear reactors has produced Ontario Hydro's other superlative: its debt. It owes $33 billion (Canadian; US$24 billion). The cost of servicing that debt has been rising electricity rates for industry and the 12 million people of Ontario, Canada's most populous province.

The government report suggests selling almost all the 69 hydroelectric sites and the fossil-fuel plants. It would not include Niagara Falls. The reason, Mr. Macdonald says, is "just plain politics." He didn't want to give privatization opponents a symbol for their cause. The nuclear plants would also stay in government hands. They might be a tough sell because of their high debt and safety concerns, Macdonald says.

The report is being taken seriously because Macdonald, a former federal energy minister once touted as a possible prime minister of Canada, has a solid track record. His revolutionary report on Canada's economy in the early 1980s led to the 1988 Free Trade Agreement between Canada and the United States.

Labor unions and Canadian economic nationalists didn't like the free-trade deal, and they don't like the privatization of Ontario Hydro either.

"It would be a financial disaster for the people of Ontario," says Myron Gordon, a finance expert at the University of Toronto's School of Management. "It would increase electricity rates by more than $1 billion a year." He says the only alternative is for taxpayers to pay off Ontario Hydro's debt through higher taxes.

The Power Workers Union says it believes in competition among large utilities, but that Ontario Hydro should not be split or privatized. Worker pay currently averages more than $63,000 (US$46,000) a year at Ontario Hydro. "Public utilities are no less efficiently run than those that are privately owned," says the union, citing comparative studies done in the US. "If anything, the evidence shows that public utilities are somewhat more efficient in the longer term."

Not so, says Energy Probe, an environmental group funded by nonindustry donations. "We think Ontario Hydro needs to be broken up and redesigned to foster competition," says Tom Adams, the group's director of utility research. "Giving customers choice will mean lower prices and environmental benefits."

Taking away Ontario Hydro's monopoly will allow more-flexible power generation, Mr. Adams says. As an example, he points to the Toronto District Heating system, which supplies heat - but not power - to office towers in Toronto's financial district.

"Toronto District Heating should be generating electricity with natural gas and using the waste heat to service its customers," says Adams. He is critical of the centralized system of generating electricity, especially from nuclear reactors. "Ontario Hydro captures 30 percent of the energy of its fuel. The rest goes into the Great Lakes. Cogeneration [as in plants that produce both heat for industrial use and electricity] is doubly efficient and halves the emissions."

James Laxer, a professor of political science at York University in Toronto, wants a vote on the sale. He writes: "Ontario Hydro has provided residential users, farmers, and industry with reliable, cheap electricity. Nobody in the world has done a better job."