September 6, 2005
Living in Interesting Energy Times
“May you live in interesting times,” goes the slightly ominous Chinese proverb. It certainly applies to Manitoba’s schizoid energy policy. World demand for energy is high and supplies are tight. High prices for oil and energy substitutes like electricity have consumers predictably grumbling. Places that supply the stuff are cashing in. Except Manitoba.
We can thank our orthodox, low-growth model of high taxes and regulation, high subsidies, wide government ownership and a subset policy relic that blocks the energy bonanza from igniting our economy. It’s called “power at cost,” and it means we sell our valuable hydro resource far below its true market value.
Behind the idea that we benefit from artificially cheap power lies the theory that Manitoba can enrich itself through a flood of investment and jobs by companies attracted to that advantage. Let’s have a reality check. It never happened. Manitoba has the lowest level of private investment in western Canada due to its high taxes, which ironically are partly caused by the “power at cost” ideology.
The policy backfired in two ways. Holding electricity prices down means we forgo substantial, continuing revenue which would allow the lower taxes needed to jumpstart investment. Imagine if Alberta sold its $65 a barrel oil for $10 and raised all sorts of taxes to make up the difference. Second, low prices encourage high consumption, unsurprisingly putting Manitobans among the highest per capita power users in the world. This is especially ludicrous when politicians are pursuing all sorts of green policy gimmickry to discourage energy use and encourage environmentally friendly energy like wind power and solar. Hydro's knock-down electricity prices means they are uncompetitive from the start (and require even more subsidies to offset artificially low prices).
Can we put a dollar figure on the losses from our “power at cost” thinking?
Tom Adams of Energy Probe, a Toronto-based energy think tank, calculates that Manitoba squanders between $840 million and $1.2 billion a year in revenue because we underprice electricity. He arrived at the lower estimate by taking Manitoba Hydro’s industrial rate for large customers of 3.087 cents per kilowatt hour and deducting operating costs for transmission and other overheads of 1.4 cents, to end up with a commodity cost of 1.7 cents. This year’s price in Ontario averaged 6.1 cents per kwh, or net 4.4 cents more than Manitoba’s price. Multiplying this huge gap by Manitoba Hydro’s annual sales inside the province of 19 terawatt hours produces the “missing profits” figure of $840 million.
The larger estimate comes from applying the price Ontario paid last year for renewable energy under long-term contracts—7.9 cents per kilowatt hour—to the same multiplier. Adams notes that hydro-electric power from Manitoba should capture a higher value due to its reliability compared to Ontario’s renewable generators, which mostly rely on wind power. That reliability offsets the disadvantage of Manitoba’s distance from the key southern Ontario market.
Other subsidies complicate the mix but, to keep it simple, it can reasonably be estimated that the opportunity cost of this policy is about a billion dollars a year, a huge figure in relation to Manitoba’s $7.7 billion provincial budget. To map out the impacts, the Frontier Centre has created an interactive calculator, a “connect the dots” exercise which illustrates how the phantom billion could be deployed on a mix of spending and tax reductions, no matter what your policy disposition.
Mindful of Manitoba’s pitifully uncompetitive tax environment, one could eliminate the most damaging impediments to jobs and investment including the payroll tax ($294 million), capital tax ($168 million) and corporate tax ($366 million) and still have room to more than double grants to municipalities ($154 million) or increase road spending ($120 million) by 143%. Alternatively, one might eliminate the school portion of property tax ($575 million) and cut income taxes by 23% ($430 million). These types of dramatic reductions would, of course, ignite Manitoba’s economy, suck in capital and jobs and raise property values and wealth levels. And create a huge permanent boost in tax revenue from higher growth levels.
If you were less sophisticated about creating a dynamic economy, the NDP’s particular intellectual challenge, you might keep taxes uncompetitively high. Take the extra billion and simply increase spending on health by 30%, on education by 84%, on universities by 180% or on family services and housing by 103%. That wouldn’t confer the benefits of tax reductions, but the point is that there is tremendous scope to adjust taxes down and or spending up by ditching the “power at cost” ideology.
All of this would, of course, create a huge green impact as consumers conserved energy and invested in energy-saving technologies in response to higher electricity prices. The corresponding reductions in consumption would be exported at market prices. Transitional programs would cushion adjustments. Pulling it off would require strong leadership from a political class that lacks vision. An all-party consensus on a modernized, more productive policy would help and, given the enormous reward, should be possible.
The world’s energy producers are feasting at a banquet, while Manitoba lives off crumbs from the table. Let’s price our power at market levels and join the party.
The Frontier Centre for Public Policy
is an independent public policy think tank whose mission is "to broaden the debate on our future through public policy research and education and to explore positive changes within our public institutions that support economic growth and opportunity."