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The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.

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Private Risk-Capital Could Lower Electricity Costs for Consumers

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...provinces can shift the risk of mistaken demand forecasts and overinvestment from ratepayers to private investors.

June 27, 2017 – Consumers would likely enjoy lower power bills if provincial governments welcomed more private investment in electricity utilities, according to a new report from the C.D. Howe Institute. In “Adding More Juice: How Private Investors can Improve the Performance of Provincial Power Assets,” author Steven Robins shows how provinces can shift the risk of mistaken demand forecasts and overinvestment from ratepayers to private investors, causing overall electricity prices for consumers to fall.

Electricity utilities represent significant assets for provincial governments. The author focuses on Ontario, British Columbia, and Quebec and estimates that they currently have $31-$45 billion in equity invested in their utilities. These provinces charge consumers both the cost of producing power and the cost of investing capital in power generation and transmission assets.

Robins states, “Continued ownership is not necessary to achieve government objectives such as affordable prices for consumers – strong regulators that protect consumers from abuse of monopoly power are sufficient.”

The author lays out an electricity model that would attract private capital and improve outcomes for ratepayers:

  1. Pricing needs to be established at a level that allows investors to earn market risk-adjusted returns on the capital they invest.
  2. To enforce an appropriate pricing balance between consumers and investors, regulators would need to be strengthened, and made completely independent from political interference.
  3. A market for generation assets would need to be designed that can be competitive.
  4. Provinces need to explore breaking up the generation assets of these companies into individual companies.

BC, Ontario and Quebec have models where the consumer largely pays the full cost of investment in the electricity system, meeting the first test. In other provinces with provincially owned utilities, namely New Brunswick, Manitoba, Newfoundland, and Saskatchewan as well as Ontario Power Generation, consumers do not pay the full cost of capital. As a result, attracting private investment would be undesirable without significant changes to each utility’s economic model.

Overall, the report concludes that, “by involving private risk capital, provinces can transfer demand risk to private investors. If the market is better able to manage this demand risk than central government decisions – a view we take in most other sectors of the economy – then overall electricity prices for consumers would fall.”

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The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.

For more information contact: Steven Robins, Joint MBA and Master in Public Policy Recipient from Harvard University; or Ben Dachis, Associate Director of Research, C.D. Howe Institute: 416-865-1904 or email: rivory@cdhowe.org  

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