By AJ Goulding, President, London Economics
The commentators raise interesting points regarding the current status of regulation in the electricity sector in Ontario. From the points raised, it appears that there is not a consensus regarding the role of regulation, and in particular the idea that a regulator should be independent, both from the industry that it regulates and from the government that appoints it. Glenn Zacher observes that “a clear understanding of where political decision-making ends and where regulatory review starts is essential both to fulfilling government policy and providing independent and effective regulation.” However, George Vegh’s assertion that “governments should not be shy to be direct and blunt in their political expectations of regulators. This will make it more likely that these expectations will be achieved” in fact suggests that some may question the idea of independent regulation at all.
Regardless of whether a competition-driven or “provincial champion” approach is taken in the electricity sector, lack of independent regulation is potentially dangerous. Regulation and competition are often falsely thought of as opposites, when in fact a sound regulatory structure facilitates competition by providing a rules-based foundation for market interactions. What is perhaps less well understood, however, is how important independent regulation is in a state-led model of development. The assumption that state-owned (whether Crown or OBCA) companies will act in the public good simply by dint of their ownership structure needs to be carefully examined. In the absence of competition, pressure from shareholders, and regulatory reviews, how do we know that the state-owned utility is operating efficiently? Without independent regulation, how do we prevent the utility from becoming the captive of ministerial or managerial pet projects, perhaps disguised as “industrial policy?”
Roles and responsibilities of the various actors in the Ontario power sector with regards to regulation need to be better delineated. Regulators provide transparency, a means to examine whether rates incorporate incentives and appropriate costs for natural monopoly and government sanctioned monopoly segments of the electricity sector, and an alternative complaints mechanism for consumers. Whereas ministries may formulate and attempt to implement policy, an independent regulator acts in a quasi-judicial fashion to assure that implementation is rules based. The regulator serves as a check against precipitate action on the part of either the government or regulated utilities. While both affected parties may chafe at that check, it is not clear that quick action is always the best action in an industry in which billions of dollars of investment can be rolled into a customer’s bill without the customer being able to avoid those costs by switching to another supplier.
In the absence of independent regulation, Ontario risks through the use of ministerial directives and potentially inadequate oversight of provincially owned entities repeating the mistakes of the past, such as the cost overruns at Darlington for which Ontario ratepayers continue to be responsible. George Vegh notes that “although economic efficiency is not irrelevant to energy regulation, I think it is now finding it difficult to compete with other considerations, such as industrial policy and environmental policy.” This is consistent with Glenn Zacher’s comment that “public policy goals have recently re-emerged as the primary driver of electricity sector development, signaling a potential swing back towards a public good model.”
I would argue, however, that industrial policy is in fact irrelevant to energy regulation, and that separate agencies already exist to deal with environmental policy. Even accepting these two policy objectives as a given, economic efficiency matters. A more productive economy provides sustainable growth over the long run, and thus more job creation; making sure prices are structured in a fashion that allows customers to associate their consumption decisions with what they pay leads to environmental benefits, particularly when emissions impacts are included.
George Vegh points out that “…the government has not transferred independent decision making authority to the agencies.” He also argues that “…the discretionary regulation contemplated by Bill 35 is not inherently better than the nationalization approach that existed prior to that time…” Yet one element that I believe is inherently better than the previous “nationalization” approach is in fact the potential for independent regulation of the provincially-owned entities.
Providing for OEB review of Hydro One, and of the prescribed assets of OPG, benefits both taxpayers and ratepayers because it provides a systematic review framework which is challenging for either the Ministry of Finance or the incarnation du jour of the Ministry of Energy to provide. Both Ministries have significant overarching policy responsibilities to attend to; by contrast, the OEB already has the infrastructure to review regulated monopolies. Ministries risk not only being subject to the political whims of the moment, but also enthusiasms of the management of the companies which they oversee. OEB has the potential to objectively review proposed activities, particularly those which would become part of the Global Adjustment, that Ministries may not have the process, resources, or will to examine critically.
Over the long run, creating truly independent agencies with clear mandates benefits Ontario, whether a state-driven or competitive model is espoused. Independent agencies help to assure a thoughtful approach to electricity sector decisions, and are just as critical when state-owned companies are involved as when for-profit companies lead. What the government loses in speed of implementation may be more than regained in terms of effectiveness.