Government-owned utilities have a costly, longstanding habit they can’t seem to kick: megaprojects.
This article first appeared in the Financial Post.
Government-owned power utilities across Canada have a costly, longstanding habit they can’t seem to kick: megaprojects.
In B.C., Manitoba, Ontario and Newfoundland and Labrador, public utilities are constructing megaprojects — typically defined as infrastructure projects costing more than $1 billion — that will cost electricity customers, at current estimates, $43 billion. The final cost to electricity customers, already expected to result in double- or triple-digit rate increases, will be a great deal higher once these megaprojects start generating power, given the track record of megaprojects of consistently coming in over budget and behind schedule. Two of the four megaprojects, already deep into construction, have experienced cost overruns of more than 100 per cent and are years behind schedule.
But it’s not just the sticker shock that should worry ratepayers — and the taxpayers that will be asked to bail out publicly owned utilities should their megaprojects bankrupt them. The integrity of the regulatory system established to protect customers from this type of reckless behaviour is another casualty. All along the way, the regulators that were explicitly put in place decades ago to protect ratepayers from uneconomic white elephants have been routinely ignored, undermined and, in one case, publicly disparaged.
In Manitoba, the $8.7-billion Keeyask dam being built by government-owned Manitoba Hydro is nearly triple the early cost estimates. Now, nearly a decade after the project was first proposed, Manitoba Hydro execs have finally come clean to customers on the magnitude of rate increases required to pay for the dam and other capital projects — nearly eight per cent annually over the next five years. Unfortunately for ratepayers, that admission came after the project hit an apparent “point of no return.”
In Newfoundland and Labrador, the $12.7-billion Muskrat Falls hydroelectric megaproject is now more than double the original price and its power may not be needed for more than a decade, if at all. The province’s regulator, required by law to review major capital projects to ensure they pass an economic smell test, was initially blocked from doing so by government decree. Only after a public outcry did the province allow a very limited review. The regulator called that limited review “torturous,” said it wasn’t afforded the necessary time or resources to do a proper review and, ultimately, failed to support the project. The province’s politicians responded to that criticism by calling the regulator’s work a waste of time and money.
The regulator’s concerns weren’t unfounded — the new CEO of the province’s public utility now calls the project a “boondoggle.” Electricity rates are expected to more than double over current levels when the dam starts producing power.
In B.C. the province initially blocked its regulator from reviewing the $8.8-billion Site C hydroelectric project to determine if it offered good value for money. Worse, knowing the dam would require outsized rate increases that would be politically unpalatable, the province introduced legislation that simply overruled the regulator and mandated how much it could raise rates each year. The difference between the public utility’s high costs and the low rates it was allowed to charge customers have been shunted into what are known as regulatory accounts and will be collected from future customers. Today’s low rates are simply a mirage. The province’s auditor general took the government to task for this use of accounting tricks, only to be ignored.
And in Ontario, Queen’s Park has routinely ignored — then dismantled — the regulatory system put in place to protect the public from nuclear megaprojects gone awry. Rather than ensure the $12.8-billion refurbishment of the Darlington station was subject to a public cost-benefit analysis, as was intended under the regulatory framework following the collapse of Ontario Hydro, the project was pushed through by the power of legislation and blocked from a public review by the province’s regulator.
Already facing a public backlash from rising electricity rates, the province also used the legislature to prevent its regulator from passing on the full cost of refurbishing the nuclear plant and, instead, artificially lowered rates in the near-term by kicking those costs to future ratepayers — a maneuver it calls “rate smoothing.”
The common theme among all of these megaprojects is that none of the public utilities pushing them face any discipline through competition and market forces. Private companies that lack access to government guarantees or generous subsidies avoid mega-dams and nuclear projects. And unlike government utilities, their shareholders can’t use legislatures to thwart the regulatory hurdles that would ordinarily stop wildly uneconomic projects.
Public utilities and their political masters, in contrast, ultimately have no need to fuss with regulators. When the cost estimates, schedules and need for megaprojects become fantasies, politicians simply shut the regulators down and rely on taxpayers to bail them out of their poor decisions.
Brady Yauch is an economist and Executive Director of the Consumer Policy Institute. email@example.com.
Read Consumer Policy Institute’s recent report “How Megaprojects Bankrupt Power Utilities and Leave Regulators in the Dark.”