Montreal, January 15, 2005 • No 150




Harry Valentine is a free-marketeer living in Eastern Ontario.




by Harry Valentine


          Over the past several decades, many free-market economists have illustrated that over the long term, government economic regulation invariably fails. An example of this involves the impending layoff of almost 45% of the workforce at one of the largest and highest-paying employers of blue collar labour at Cornwall, Ontario. Between the late 1980's and early 1990's, the management of that industry (a paper mill) proposed to install a steam turbine on their premises, to generate electric power and provide steam for both themselves and a neighbouring industry that also paid premium blue collar wages. Wood by-product from the paper-making process that can burn cleanly with low emissions when gasifier combustion technology is used, was available as fuel to fire the boiler. This fuel is now classified as being environmentally neutral under the Kyoto Accord.


          Nevertheless, Ontario's electric power regulatory tribunal vetoed the proposal to generate electric power at the paper mill. Such tribunals exist solely to protect the commercial interests of politically favoured players from legitimate competition. During the late 1980's and early 1990's, the provincially owned power utility and the municipally owned power utility were the only players in a position to have opposed the paper mill's steam turbine. Today, the long-term effect of the power regulator's veto threatens to reduce the paper mill's workforce, if not even shut the facility within the next two years.

          A steam turbine generating electricity at the paper mill would have lowered the paper mill's plus the neighbouring industry's overall energy/operating costs, while providing low-cost winter heating and summer cooling to a variety of other businesses. A portion of the locally generated electric power could have been allocated to the local electric power distributor that purchases power from Quebec. During winter, a portion of the steam turbine's exhaust could have been diverted into a district heating system, to provide low-cost winter heating to several nearby large buildings. During summer, a portion of the exhaust steam could have been diverted into a water-based vacuum-refrigeration system. It could have cooled water to below 10°C and supplied up to 25,000,000 BTUs per hour of low-cost air-conditioning to the same nearby large buildings via the pipes of the winter district heating system.

          A steam turbine generating electricity at the paper mill could have benefited Cornwall's economy by lowering energy costs for two major industries as well as for several other businesses and enterprises, indirectly making them all more competitive. By preventing the paper mill from selling electricity generated on their premises to a local market, the Ontario government regulatory tribunal indirectly reduced the competitiveness of the paper mill, the neighbouring industry and several other Cornwall businesses. It did so by having indirectly compelled them to incur higher energy/operating costs. Since that decision was handed down, the paper mill's neighbouring industry cut back operations and laid off staff. Now the paper mill itself has announced its intention to do likewise.

Erratic future

          With the exception of the paper mill that purchases electric power from Ontario Hydro, the rest of Cornwall and a portion of its surrounding area is supplied with electric power from Quebec. Due to climate change, hydroelectric power generation in Quebec may become erratic in the future (see "Climate Change Requires Power Deregulation in Quebec," le QL, no 149) and cause power shortages and/or power price increases. While Cornwall's power distributor may seek an alternate source of lower cost power, the choices may be limited. Ontario Hydro presently operates near the limit of its electric generating capacity, 50% of which is due for retirement within the next 15 years. The Ontario government's insistence on either owning or controlling any electric power generated for sale in that province will likely result in a shortage of electric power.

"Elected officials, who have the power to shut down the tribunals also, invariably end up being "captured" by Keynesian or neo-Keynesian economic advisors who act to protect their own interests and scope of influence."

          The economic events that have unfolded at Cornwall could be repeated in other parts of Ontario as well as Quebec. While Ontario Hydro stands to lose its only customer inside Cornwall, other local businesses that depended on the paper mill for their existence, could also close their doors. Such closures would not only reduce the local power distributor's commercial customer base, they would also reduce the municipality's business and commercial property tax base.

Creating opportunities abroad

          While a decision from the power regulatory tribunal may do economic harm to a town like Cornwall, decisions made by officials in other government departments could potentially force the closure of the paper mill and create new economic opportunities abroad. It may be possible to open paper mills in North Africa, where boilers and steam accumulators could operate from concentrated sub-tropical solar energy (accumulators provide steam overnight). An abundance of vegetation grows under the Mediterranean Sea and is available for harvest and suitable for conversion into paper. Solar-heated boilers and accumulators could also operate in tropical Brazil, where paper companies from Canada could manage private forests in the Amazon jungle and tap into the abundance of hydro electric power that will become available from the Amazon river.

          Elected officials who take issue with the behaviour of marketing tribunals often elicit the complaint of "interfering or compromising the neutrality of the tribunal". Since their inception, market regulatory tribunals have invariably ended up being "captured" by the businesses they regulate, to protect their commercial interests from legitimate competition. Former University of Chicago professor George Stigler (1982 Economics Nobel Laureate) illustrated how economic regulation consistently failed to achieve its originally intended objectives. In short, the so-called neutrality and impartiality of market tribunals is mere illusion.

          Elected officials, who have the power to shut down the tribunals also, invariably end up being "captured" by Keynesian or neo-Keynesian economic advisors who act to protect their own interests and scope of influence. They are often connected to regulated businesses, whose commercial interests are assured of continued protection. In the Cornwall example, a publicly owned utility may have been protected from competition by a tribunal that stopped an industry from generating its own electric power. Except that by doing so, it has practically killed the goose that has been laying the golden eggs for the utility's accounts receivable department. This is but one example among several thousand of the negative long-term effects of economic regulation.