Saturday, December 11, 2010

Lawrence Solomon: How to renege on egregious green contracts

Risk-free contracts pay up to 20 times market value

One century ago, amid public outrage at the high electricity rates that came of the long-term franchise contracts that Ontario municipal governments had signed with private utilities, the municipalities reneged on the bargains they had struck. To help the municipalities stab their private-sector partners in the back, the province even went so far as to write new legislation negating previous legislation enacted specifically to ensure that franchise agreements could not be cancelled without compensation.

Fast forward to today and many of the same elements are in place. Once again in Ontario, long-term electricity contracts between the government and private-sector players are at play. Once again, public outrage is mounting at the utility rates that they face.

But there are differences between then and now, differences that make last century’s outrages pale to insignificance. The profits made by the utilities of yore, while often healthy, were hardly outrageous given the large capital risks the developers took on — many developers in fact went bankrupt. The contracts then were limited in number, typically one per municipality. And no one argued that the public had no need for the power plants that the companies were providing — the electricity was, in fact, so highly valued by the public that governments tried to expand service through public ownership, thinking that eliminating private profits would lower costs and make power more affordable.

Today, the Ontario government has been signing contracts that force consumers to pay developers absurdly high prices — as much as 20 times the market value of electricity — making electricity far less affordable. The contracts are virtually risk-free — the province guarantees that Ontario consumers will pay the sky-high rates even when the power produced is surplus to their needs, such as in the middle of the night or other periods of low demand. In fact, to deal with the growing amount of surplus wind and solar power that the developers are producing for non-existent Ontario customers, the province is giving away the power to the Americans or actually forcing Ontarians to pay Americans to take the power off our hands.

Wind and solar power megaprojects also have negative value in another respect — because the wind doesn’t always blow and the sun doesn’t always shine, the government must build and man expensive backup generating plants to have at the ready at all times. More negatives: The massive new transmission corridors required to bring power from industrial wind and solar farms to market and the industrial wind farms themselves, with their towering presence and relentless enervating noise, generally make for poor neighbours, leading to public protests by those who fear for their property values or for their health. To suppress local opposition, the Ontario government has passed legislation limiting the traditional rights of communities to have a say in developments that affect them.

Little wonder that, in Ontario as elsewhere, opposition has mobilized to counter the renewables megaprojects. Yet despite opposition based on high rates and interference with traditional ways of life, the Ontario government is feverishly entering in to ever more contracts. Because foreign multinationals and Canadian subsidiaries of U.S. real estate operations are grabbing an outsized share of these lavish contracts, because the terms of the contracts are kept secretive from the Canadian public, and because the contracts can be quickly flipped and reflipped for quick profits at Ontario ratepayer expense, the outrage will only grow.

To pay for the province’s many mistakes, past and present — these include an earlier round of reckless contracts from the 1980s and cost overruns on nuclear reactors, as well as the failed conservation programs and renewables contracts of today that are coming on stream — the government levies a hidden charge that it embeds in power bills. This hidden portion of power costs — in Orwellian fashion, the government calls its boondoggles the “Provincial Benefit” — already represents more than half of the costs of power generation that consumers now pay.
With the new slew of power contracts, the “Provincial Benefit” will rapidly climb further. Together with the other wild excesses driven by the renewables contracts — not least the energy welfare payments to the growing number of Ontarians entering fuel poverty — the Ontario ratepayer and taxpayer will soon reach a breaking point. After the next election, expected in a year, a new government of whatever stripe will need to renege on its deals with the renewables developers. It will have several options.

New legislation to undo the old — as happened last century — would have popular support. Even the threat to tear up the contracts would be enough to force the developers to agree to concessions.

Or, the government could simply impose a windfall profits tax to claw back egregious gains — the U.K.’s Labour government in 1997 levied such a tax retroactively on 33 utilities it deemed to have been underpriced when privatized in the 1980s. Municipal governments could also exact local justice by enacting a punitive property tax rate specific to wind and solar farms — Ontario municipalities have targeted particular industries in the past.

Environmental levies could also come into play. Earlier this year, in a judgement that was accepted by all, a court fined Syncrude $3-million for the death of 1,600 ducks that were inadvertently killed in its tar sands tailings ponds, or $1,875 per bird. The court-set Syncrude standard, if applied to wind turbines — a.k.a. Bird Cuisinarts — would threaten many wind farms. Or, by applying the Precautionary Principle, wind turbines could be shut down until the low-frequency sound they emit can be proven safe for humans.

Which option the future government chooses will depend on politics —weighing the wrath of voters from doing nothing against the wrath of future lenders and investors, who might then shun the province. And it will depend on the province’s books — how many pennies on the dollar it can afford to pay to the developers to retire the current contracts and move to a sustainable power system.

Whatever option the government chooses, a public debate would inevitably ensue, doing some good in another way. The debate would raise questions about the proper role of government in the development of an economy.

Financial Post LawrenceSolomon@nextcity.comLawrence Solomon is executive director of Energy Probe and the author of The Deniers.

Next week: The Doctrine of Odious Contracts

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