From public good to private exploitation: Gats and the restructuring of Canadian electrical utilities.

AuthorCohen, Marjore Griffin
  1. INTRODUCTION (*)

    When George W. Bush announced the U.S. would pursue a North American Energy Framework, his idea was greeted with enthusiasm by the Canadian government and energy-exporting provinces. The public outcry that could have been expected a decade earlier has failed to materialize thus far, probably because of a general sense that a continental energy policy is on a steamroll that is not going to be stopped. As one commentator put it, "there isn't a lot left to negotiate when it comes to CanadaUS energy relations." (1) His take is that the FTA and NAFTA have pretty much sewn up Canada's energy integration with the U.S., and since these agreements came into effect from Sable Island off the coast of Nova Scotia to the Beaufort Sea a web of pipelines is carrying oil and gas south of the border. (2) In some respects this sense that the setting for a common continental energy policy is already in place is correct.

    The combination of the deregulation of the oil and gas industries in the late 1980s that accompanied the Western Accord, privatization of production in provinces where it was still in the public sector, and the signing of the continental trade agreements radically changed the energy regulatory regime in Canada. (3) These changes accelerated production for exports so that Canada now sells abroad about 59 percent of its natural gas and 30 percent of its oil supply, proportions that are likely to continue to increase since recent price hikes for energy in the U.S. have further stimulated exploration and plans for new pipeline connections. (4) Almost all of Canada's oil and gas exports are to the U.S., with gas accounting for 94 percent of all U.S. natural gas imports and 15 percent of its total market. Canadian exports of crude oil are 14 percent of U.S. imports and account for 8 percent of the total U.S. market. The integration of the U.S. and Canadian oil and gas distribution has had the effect of creating a common energy market for these forms of energy and there is almost nothing except the re-regulation of the entire industry that will halt the convergence of domestic and export pricing. Mexico, unlike Canada, would experience enormous changes in its oil and gas industries through a U.S.-led continental energy deal. Mexico has an exemption in NAFTA for most activities relating to exploration, refining, storage, transmission and distribution of crude oil, natural gas, and basic petrochemicals, so any policy that affects this exemption would bring about a diminution of state powers over oil and gas. (5)

    Despite the highly integrated nature of the Canadian and the U.S. oil and gas industries, Canada would not come out of this unscathed, mainly because of changes that a U.S.-inspired energy policy would bring to the electricity industry. Electricity is one part of the energy sector where the U.S. still does not have common pricing and unrestricted access to investment, resources and sales within Canadian markets. While some provinces have deregulated electrical generation to encourage private production of electricity, most of the value of Canadian electricity remains in publicly-owned and regulated institutions. Of the five main electricity-exporting provinces, only one, Ontario, has a plan for complete deregulation and open market access. The other four electricity-exporting provinces, B.C., Quebec, Manitoba and New Brunswick, rely primarily on publicly-owned institutions for generation, transmission and distribution of electricity.

    The public provision of electricity in Canada is in a precarious position because of a number of forces that are driving the deregulation of the industry; forces that relate to both domestic and international pressures. Both domestic and international private-power marketers and suppliers want access to government-controlled markets. (6) They usually justify deregulation ideologically by the claim that private producers operating through the market are inherently superior to government-provided services, and that the introduction of competition in electricity markets would reduce prices. Another force for deregulation relates to the drive for exports in many provinces, a process that brings the regulated market in conflict with the deregulated system in the U.S. (7) In exporting provinces the requirements of access to U.S. markets bring these jurisdictions under the aegis of the Federal Energy Regulatory Commission (FERC), the U.S. regulatory body. (8) This in turn requires allowing specific kinds of access to private producers and traders to the infrastructure of the electricity system in Canada in order to ensure reciprocal access to markets. (9) As the high prices of electricity in the U.S. make production for export increasingly attractive, more demands will be made on Canadian suppliers to conform to U.S. requirements.

    The intent of this study is to examine the initiatives on energy at the WTO that are occurring through the new round of negotiations on the General Agreement on Trade in Services (GATS). These initiatives coincide with the U.S. drive for an integrated continental energy policy. The proposals for the comprehensive inclusion of energy in the GATS would cement the deregulation process and, hence, the move toward privatization of the provision of electrical energy in Canada. Should they succeed, the U.S. proposals for the GATS would privilege private-energy producers and result in radical changes to the electrical energy industry in Canada. Countries that currently have public control of the oil and gas industries could be seriously affected by GATS measures on energy, and it is likely that the GATS could further restrict Canadian access to its own oil and gas resources. The focus for this study, however, will be on electricity because that is the major energy utility that is still controlled by governments in Ca nada and is the most threatened by the possibility of GATS coverage.

  2. ELECTRICITY DEREGULATION

    1. Changes in the Industry

      In most countries the electrical industry is a very big public business that has the potential to provide the private sector with huge profits. Revenues, world-wide, from generation and distribution of electricity are estimated to be over $1 trillion a year, or roughly more than double the revenue generated by the international auto industry. Until fairly recently it was widely accepted that the electrical industry was best served by large-scale monopoly production. Until the 1990s most countries in the world, with the exception of the United States and Japan, relied on vertically integrated, state-owned utilities for electricity. (10) In Canada the capital costs involved in providing electricity were larger than private corporations wanted to risk, so the establishment of the modern electrical system was accomplished through the public sector with considerable encouragement from private industry. (11) The primary mandate of these government utilities is to provide electricity to people and industry within a provincial boundary, and their operations are characterized by long-term planning for adequate supply, equitable distribution, and low and stable prices. Exports, while often important for provincial revenue, were usually limited to the sale of surplus electricity through long-term contracts with guaranteed pricing. (12)

      The move toward privatization resulting from the competitive pressures of globalization came slower to the electrical industry than to other utilities in the public sector. The landmark case in the deregulation of utilities in North America was the U.S. court decision in 1984 ordering AT&T to open the U.S. telephone system to competition. Since then the U.S. has introduced legislation to deregulate the telecommunications industry, the gas industry and the electricity industry. In 1992 the Energy Policy Act opened ownership of electrical generation and access to transmission systems. This provided competition at the wholesale level. At the retail level, by 2003 the "Comprehensive Electricity Competition Act" will allow all customers to choose their electricity supplier. (13) Similar changes in electrical utilities have occurred in other countries such as Argentina, Australia, Chile, Norway, Sweden, the United Kingdom and New Zealand. (14) The deregulation of utilities in the U.S. affected Canada, and now both the telecommunications and gas industries are competitive and largely deregulated.

      The electrical industry was relatively insulated from deregulation pressures because the technological advantages of large-scale generation, transmission and distribution created natural monopolies and this, coupled with the history of public development of the infrastructure, kept the industry firmly under government regulatory control. (15) The huge capital costs for reservoirs, generation facilities and transmission and distribution lines brought governments into the industry in the first place. As well, the physical constraints of transmission and distribution meant that the most efficient relationship between high-voltage transmission and low-voltage distribution demands an exclusive line, or network of lines, both to reduce costs and to minimize losses of electricity. Both the cost of establishing the infrastructure and the technical requirements of transmission and distribution kept the industry either under government ownership or government regulated, mainly to protect the consumer from monopoly pow er but also to ensure long-term planning for sufficient supply and equitable distribution.

      Most analysis of deregulation in recent years points to the significance of new technologies of electricity generation as the primary force for change, mainly because they have made investor-owned, relatively small-scale electrical generation more viable. (16) In some instances it is true that the economies of scale that have historically dominated the industry have been undercut by the use of new...

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