Wednesday 12 August 1998
Energy Competition Act, 1998, Bill 35, Mr Wilson /
Loi de 1998 sur la concurrence dans le secteur de l'énergie,
projet de loi 35, M. Wilson
CanEnerco and Ontario Petroleum Institute
Mr Philip Walsh
Mr Fred Brown
Mr Mark Rodger
Thunder Bay Chamber of Commerce
Mr Harold Wilson
Ms Rebecca Johnson
Valerie Falls Limited Partnership
Mr David Boileau
Mr Bud Carruthers
Northwest Energy Association
Mr Larry Hebert
Mr Doug McCaig
Thunder Bay Hydro
Mr Paul Kennedy
Mr Larry Hebert
Mr John Boulter
Ontario Mining Association
Mr Peter McBride
Mr Henry Smith
Aird and Berlis
Mr Bob Doumani
STANDING COMMITTEE ON RESOURCES DEVELOPMENT
Chair / Présidente
Mrs Brenda Elliott (Guelph PC)
Vice-Chair / Vice-Président
Mr Peter L. Preston (Brant-Haldimand PC)
Mr David Christopherson (Hamilton Centre / -Centre ND)
Mr Ted Chudleigh (Halton North / -Nord PC)
Mr Sean G. Conway (Renfrew North / -Nord L)
Mrs Brenda Elliott (Guelph PC)
Mr Doug Galt (Northumberland PC)
Mr John Hastings (Etobicoke-Rexdale PC)
Mr Pat Hoy (Essex-Kent L)
Mr Bart Maves (Niagara Falls PC)
Mr Peter L. Preston (Brant-Haldimand PC)
Substitutions / Membres remplaçants
Mr John R. Baird (Nepean PC)
Mr Steve Gilchrist (Scarborough East / -Est PC)
Mr Michael Gravelle (Port Arthur L)
Mrs Helen Johns (Huron PC)
Mr Wayne Lessard (Windsor-Riverside ND)
Clerk / Greffière
Ms Donna Bryce
Staff / Personnel
Ms Anne Marzalik, research officer, Legislative Research Service
The committee met at 0907 in the Airlane Hotel, Thunder Bay.
ENERGY COMPETITION ACT, 1998 LOI DE 1998 SUR LA CONCURRENCE DANS LE SECTEUR DE L'ÉNERGIE
Consideration of Bill 35, An Act to create jobs and protect consumers by promoting low-cost energy through competition, to protect the environment, to provide for pensions and to make related amendments to certain Acts / Projet de loi 35, Loi visant à créer des emplois et à protéger les consommateurs en favorisant le bas prix de l'énergie au moyen de la concurrence, protégeant l'environnement, traitant de pensions et apportant des modifications connexes à certaines lois.
The Chair (Mrs Brenda Elliott): Good morning, everyone. The standing committee on resources development is called to order for the purpose of hearing presentations on Bill 35.
Our first presenters this morning are scheduled to be the Coalition of Eastern Natural Gas Aggregators and Sellers. Are those people present? No.
CANENERCO ONTARIO PETROLEUM INSTITUTE
The Chair: Next up is CanEnerco. Are they present? Would you like to come forward then and we'll await the presenters that are listed at 9 o'clock. Colleagues, we'll be moving to the organization at the 9:30 slot. I'm assuming you're Mr Walsh.
Mr Philip Walsh: I am.
The Chair: Welcome. Please make yourself comfortable.
Mr Walsh: I happen to know Alistair quite well, so I may give him a hard time about being late.
Mr Doug Galt (Northumberland): We will too.
The Chair: Please introduce yourself and your title for the Hansard record. You have 30 minutes in which to make a presentation.
Just before we start, I would just like to say on behalf of all the members of committee that we're delighted to be here in Thunder Bay this morning. It's an interesting bill and we're very lucky to have the opportunity to travel across the province and always enjoy coming to this great city. We're delighted to be here and we're pleased to welcome you as our first presenter this morning.
Mr Walsh: Thanks very much. I was slated to go first. It was advised yesterday that the 9:30 had cancelled, so they put me back to 9:30, but I'm glad to be back to my 9 o'clock slot.
My name is Philip Walsh. I'm vice-president of gas supply, storage and marketing for CanEnerco Ltd. I'd like to begin this morning by thanking the committee for allowing me the opportunity to provide some comments regarding the proposed legislation.
I'm here to represent CanEnerco Ltd and the Ontario Petroleum Institute Inc. By way of introduction, CanEnerco is an Ontario-based oil and gas producer with its head office in London, Ontario. We've energy services and marketing subsidiaries located in Cambridge, gas supply and storage operations based in Dresden, Ontario, and a gas supply office in Calgary.
The Ontario Petroleum Institute, of which CanEnerco is a sponsoring member, is a non-profit organization representing the interests of individuals and corporations active in the oil and gas industry here in Ontario. Its members include producers, utilities, gas storage companies, services and law and accounting firms.
I recognize that the bulk of these proceedings will centre around the electricity issue, but I'm here to remind the committee that a portion of the proposed legislation deals with changes to the OEB act that governs, in part, the activities of the Ontario natural gas industry, particularly as it relates to a gas producer's ability to market and store its natural gas.
My presentation is comprised of two parts. The first part deals with the process of deregulation of the Ontario natural gas industry and our industry's general support of the proposed legislation, and the latter part focuses on what we see as deficiencies in the current draft, including the treatment of gas storage. We will be providing a written submission that expands upon my discussion this morning, and it is our hope that given the tremendous amount of input that you will receive, this committee will carefully consider some of the recommendations contained within that submission.
Now I'd like to lead into our comments regarding our support of the proposed legislation by providing excerpts from a paper that I gave at an LDC restructuring, retail access and competition conference held in Houston in late May. At this conference, the Ontario experience was being touted as a template for the successful deregulation of the natural gas industry. The title of my paper, however, was, Deregulation of the Natural Gas Industry in Ontario or it took less time to put a man on the moon!
When Kennedy proclaimed that the US would have a man on the moon before the end of the decade, he and his administration laid the groundwork for the allocation of the appropriate resources and commitment. More importantly, however, they were able to achieve buy-in of that vision by all the key parties involved in the project. Before the decade was out a man had indeed walked on the surface of the moon and Kennedy's vision was attained.
As we know, gas deregulation in Canada, and Ontario in particular, has taken what appears to be a relatively long period of time. As we jokingly refer to it, in the days of the dark empire the natural gas customer was left with little choice but to rely on the local distribution company to acquire and deliver the gas to them at a cost determined by the LDC but regulated by the Ontario Energy Board.
At about the same time as Sir Adam Beck, a fellow Londoner, was setting up the provincial monopoly for electricity, the Ontario natural gas industry began with the discovery, in the early 1900s, of significant volumes of natural gas by various producers operating in a competitive marketplace. The development of a market in urban areas adjacent to this production resulted in the creation of a number of gas companies to distribute the gas. The indigenous production provided all aspects of the gas supply service, including load balancing, backstopping and distribution.
In time, these companies grew, they were merged, they were taken over until today we currently have two major gas utilities and a smattering of smaller municipal and regional distributors.
The growth in natural gas demand eventually exceeded supply from local Ontario production and a pipeline connected to the US supply in the late 1940s allowed for the delivery of additional volumes to the Ontario marketplace. Eventually, in the late 1950s, the completion of the TransCanada pipeline allowed for western Canadian gas supply to the province of Ontario.
Regulation was put in place that required continuous service to natural gas customers in the province. The LDCs were responsible for arranging for supply, transportation, load balancing, distribution etc. By 1985, more than 90% of the LDC supply was from western Canada.
Supplementing the needs of the LDC was again the local gas production, but to a minor extent, and the LDCs gas storage facilities. It's important to note that there is insufficient pipeline capacity to provide winter gas supply to this province and that is why underground gas storage is so crucial to the natural gas marketplace. Every gas storage pool in Ontario was at one time a gas-producing reservoir, and very few of these storage pools were discovered as a result of the LDCs' unilateral exploration efforts. In fact, most of these pools were discovered by Ontario producers. Until recently, the regulation of the gas industry in Ontario meant that the producer could not take advantage of its ownership of a potential storage pool other than to sell it to one of the province's LDCs.
CanEnerco has recently completed the first non-utility storage pool in the province, which we use to maximize the value of our own gas supply. Unfortunately, we must still pay, though, to have that gas transported out of the province before we can sell that gas.
It was apparent that government policy was antiquated as it related to the needs of the customers and the industry as a whole. An example of that is the use of the Langford report, a policy paper on the natural gas industry from the 1960s which even up to today is still supported by one of the LDCs. Just to show how antiquated it is, I quote, "The consumption of gas fluctuates hourly as all the housewives of the province turn on the gas to cook meals."
So it was time for a change. What we've seen is a 13-year odyssey that has provided the following major events.
The 1985 Halloween agreement, so named because it was signed on October 31, was an agreement between the federal Canadian government and the producing provinces of western Canada. But interestingly, it did not include the major natural-gas-consuming provinces of eastern Canada. Without the buy-in of the governments of those consuming provinces, the benefits for the customer within those provinces were muted by provincial regulations limiting the access of the customer to supply within the province.
The signatories of the Halloween agreement presented their vision of a new natural gas industry which would allow customers better access to supply and, conversely, suppliers better access to the marketplace. It was determined that the customer would be ensured reasonable prices and supply through the creation of a competitive market for natural gas.
The problem with this accord was that there was not a complete buy-in of all the key parties in the process, so the ability to attain this vision was hampered from the beginning. However, the Halloween agreement became the first piece of the puzzle to be solved, and certain large customers and suppliers in Ontario began to take advantage of it.
In 1987 the Ontario Energy Board rendered a decision to allow for the creation of the direct purchase of natural gas by the Ontario customer. The ability to aggregate customers and to make arrangements with the LDC to utilize new and existing transportation services resulted in the birth of the direct-purchase industry and its members, whom we affectionately call agents, brokers and marketers, or ABMs.
The ABMs aggressively pursued the large end-use customers, obviously because it took less work and provided for greater volumes and margins, and soon there was a plethora of market players arranging for the supply of natural gas from western Canada on behalf of their customers.
In turn, the utilities, with their long-term transportation arrangements on TransCanada, allocated the capacity to the customers and their ABMs to move the gas east. All services within the province, however, remained the sole responsibility of the LDC. Aside from the delivery function, services such as load balancing, backstopping and downstream transmission remained in the domain of the LDC.
In the mid-1990s, the local producers' supply contracts with the LDC, which were indexed to the weighted average cost of gas of the utility, expired. Although the existing regulations required that the Ontario producer move the gas outside of the province before selling it to a non-LDC, it was still financially beneficial to do so. As a result, the majority of local production is sold outside of the province at prices indexed to Nymex.
The competition among ABMs resulted in lower margins to be made among larger-volume customers and therefore we saw an expansion of marketing efforts into other rate classes such as commercial, light industrial and residential.
The success that the ABMs were achieving in converting customers to direct purchase, combined with the potential to generate revenues from other natural gas services, provided the incentive to encourage the Ontario Energy Board to further deregulate the natural gas industry in this province. Customer groups were also interested in seeing the opening of a competitive marketplace for services other than the natural gas commodity.
In 1996 the Ontario Energy Board mandated the industry to develop a report to the board. This report was to be the Ten Year Market Review that was released in 1997. The review group was comprised of ABMs, producers, LDCs and public interest groups. The purpose of the review was to make recommendations that would allow for the creation of a liquid and competitive natural gas commodity market in Ontario.
The review process took approximately 10 months and resulted in a recommendation to the board to proceed with a hearing to resolve those issues -- and there were many -- where consensus was unattainable. Also, recommendations concerning required legislative changes for natural gas title transfers were also made.
Unfortunately, the review was inconclusive due to a lack of attribution and specific recommendations. Many participants in the process were quite vocal about various issues. Positions on these issues were as would be expected, with distinct polarization between the LDCs and the ABMs. The public interest group positions were paradoxical, with their desire to ensure security of supply on one hand while acknowledging a desire to allow a competitive marketplace to lower natural gas supply costs.
As you are aware, the review resulted in a legislative impediment hearing which resulted in a recommendation from the board.
Some of the key recommendations that the Ontario producing community supports include the need to change the definition of a "distributor" to emphasize an obligation to deliver as opposed to supply. This allowed for the creation of the definition of a "gas supplier" with certain obligations to supply. Amendments to related acts were also recommended in order to allow for consistency, differentiating a distributor from a supplier.
CanEnerco and the Ontario Petroleum Institute believe the best recommendations were those providing the board with the authority to order either the removal from regulation, or redefinition of, current LDC gas transportation, storage and distribution functions and services, as well as the ability to supervise the structuring of utility services and rates so as to separate load balancing, backstopping and supplier-of-last-resort service requirements from a regulated gas supply option.
These are important recommendations because they allow the regulator to have the legal right to make the ultimate decisions related to the deregulation process. Essentially, it empowers the board to undertake a true leadership role. The board would also establish and enforce rules governing gas suppliers' access and interconnection to the monopoly assets and services of the LDCs that would remain regulated. The board would be able to enforce the LDC code of conduct, which includes the manner by which the LDC deals with an unregulated affiliate, and the board would be able to choose the most appropriate and cost-effective means of regulating monopoly services.
The legislation would also be amended to ensure that the board would have the authority to order the LDC to provide, or cease to provide, a service so as to enable a regulated service to be maintained by the LDC until a competitive gas market has grown to the point that the regulated service option is no longer in the public interest.
Other changes recommended and supported by our industry included providing for the board's authority to forbear, to implement performance-based regulation and to exercise rule-making and the authority to inquire into and advise the government on matters related to the governance of the natural gas delivery system and market. These powers and responsibilities would also be related to natural gas storage operations in the province.
Our industry would like to summarize how we think storage should be treated. This pertains back to some of the concerns we have regarding the lack of legislation empowering the board to deal with the storage issue.
As you are aware, storage involves the use of the physical storage of natural gas as it pertains to providing total natural gas supply service in the future. If we are to allow customers the choice in determining who supplies them with their natural gas needs, and storage provides the supplier of choice with a more cost-competitive product, then the opportunity to lease or develop storage to help meet those needs must be available.
Where are we? Storage in Ontario has, up until now, been the exclusive domain of the utilities due in part to a combination of historical development and regulatory limitations. Presently there are 22 active storage pools in the province with approximately 210 billion cubic feet of maximum working capacity. When you look at the Ontario natural gas production to date, we've produced in excess of 1.1 trillion cubic feet, which represents approximately five times the reservoir capacity of existing storage operations in the province. The Ontario producers are confident that other storage reservoirs can be developed.
Currently this storage is under a combination of long- and short-term contracts. The Ontario Energy Board regulates rates for storage. The short-term contracts, which are less than a year, are typically bid when a utility posts availability. The bidders are ranked in preference by customer classification. In essence, the in-franchise customer has first right, followed by an ex-franchise Ontario customer, then it's ex-franchise Canada and finally, if one were to exist, ex-franchise United States.
Longer-term customers are presently in a queuing process, although that queuing process has most recently been set down by the Ontario Energy Board. Rates for new storage are on a rolled-in basis to the utilities' existing system, thus allowing for lower rates resulting from the historical rolled-in rate method.
As a result of deregulation, however, in other jurisdictions in North America, the open-season mechanism has been created to dictate rates for new storage services, thus providing a free market to determine the value of those services in those particular areas of the continental natural gas market.
The existing Ontario Energy Board Act contains sections that are outdated in regard to the treatment of storage and rates. It is not that the act does not deal with the issue, it is the lack of specifics and the problems associated with interpretation that limit the ability to use the act in reference to the use of storage as it relates to the unbundling of services.
When the onus was on the utilities for security of supply, it was imperative that they develop an integrated natural gas delivery system involving their own facilities and/or long-term arrangements with third parties, for example, TransCanada PipeLines. Storage provided the utilities with the ability to level the summer supply with the winter demand, allowing for a combination of savings from improved transmission load factors, insurance to supply during interruptions, and peak day supply demands. Their cost allocation process was developed as a result to allocate the cost of all services: purchase and production of natural gas, and storage, transmission and distribution to the appropriate customer class. These rates were subject to the approval of the Ontario Energy Board.
With the advent of deregulation in North America, where do we want to go with storage? The unbundling of services as a result of deregulation across North America puts competitive pressures on the market, allowing customers cost-effective options for their natural gas supply needs. As a result, the creation of market centres or hubs has evolved in order to better establish physical and economical matching of buyers and sellers of natural gas. These hubs, usually an area of numerous supply sources or market users, enhance efficiencies and lower costs. Those jurisdictions where market centres can develop require unbundled rates that allow for such things as flexible receipt and delivery points, rate zones defined by the market centre and mileage-based rates within a market centre itself.
If Ontario customers are to receive the ability to benefit from the same types of arrangements, then Ontario must become a market centre, taking advantage of growing pipeline options and enhanced by increased storage capability. This would allow for the increased flexibility on behalf of the customer and the ideal services they may require to lower their cost of natural gas.
How do we get there? When the Federal Energy Regulatory Commission in the United States, which is known as FERC, instituted their order 636 it included language "for the encouragement of the development of market centres or hubs." FERC felt that to encourage market centre development, the prohibition of rate designs and tariffs was required. Since storage is a key aspect of market centre development, then this statement applies to the use of storage in a natural gas supply strategy.
If unbundled services such as storage are to be accessible by the Ontario natural gas customer, then the act must be unbundled by the OEB. The act must provide clear language that allows for development of storage outside of a rate base when it is being developed in the context of a market centre or hub.
The existing definition of a "storage company" must exclude those companies owning and operating storage for their own account. Storage can be used by a company for its own natural gas supply strategy, as is the case with CanEnerco, without the need for establishing recovery of costs from a captive customer base. If the customer is allowed the ability to choose its supply options, then the supplier of choice must absorb completely the risks associated with the development of storage if it plays a role in their natural gas supply service.
That said, I'd like to touch on some of the deficiencies, as we see it, with the current draft of the legislation. First, the proposed changes to the Ontario Energy Board Act do not sufficiently allow for the creation of a competitive market for storage and load-balancing services. I refer in particular to the proposed sections 35 and 41 of the revised Ontario Energy Board Act. As I mentioned earlier, we will provide specific change recommendations and reasons in our written submission, which I believe is due August 20.
Although some sections, such as the proposed section 28, point towards empowerment of the board to determine if a competitive marketplace allows for refraining from certain sections of the act, those previously mentioned sections, 35 and 41, may continue to tie the hands of the OEB as they're currently written.
Our industry sees the deregulated energy marketplace no differently than a football game. The consumers of Ontario are the fans. The market participants are the players. The rules of the game are the regulations. As long as all the players know the rules, the game will remain competitive and will benefit the fans. However, as in the game of football, the referee -- in our case the Ontario Energy Board -- must be given the total authority to ensure that the game remains competitive.
Ontario gas producers can, as their predecessors did back in the early days of the natural gas industry, provide competitive gas supply, load-balancing, backstopping and, potentially, distribution services. Unfortunately, there are currently no rules allowing us to do so within the province of Ontario. That is why we strongly support those aspects of the proposed legislation that create those rules. What we need is the appropriate referee.
As I indicated earlier, change requires true leadership. The province of Ontario must develop legislation that gives the Ontario Energy Board the opportunity to provide that leadership. This is not re-regulation, as some parties are emphasizing, but rather an empowering of the Ontario Energy Board that our industry believes will show, as Kennedy did with the space program, the leadership required to see the creation of a truly competitive energy industry in Ontario, and in doing so, present a working model for other jurisdictions in North America and elsewhere. Thank you very much.
The Chair: Thank you. We have time essentially for one question and one answer from each caucus. We'll begin with the NDP caucus.
Mr Wayne Lessard (Windsor-Riverside): Thank you very much for your historical perspective on the development of the natural gas marketing business. I'm from the southwestern Ontario area where Union Gas has been dominant for quite some time and I think we do have storage facilities in the Windsor area. I had no idea about the rules with respect to those storage facilities.
You're right that the focus on much of the debate in the hearings has been on the electricity marketing side. I'd like to ask you whether you have any concerns about gas and electricity marketing coming under the legislation and under the purview of the Ontario Energy Board and being included together in the bill, because there are some very inherent differences between gas and electricity, one being that you can't store electricity, but you can store gas. I just wanted to know what your views on that were.
Mr Walsh: We see convergence of both electricity and natural gas. Obviously, there's going to be some tremendous potential for the production of power by means of burning natural gas as a fuel. Therefore, if I had to comment in general, I would say that the legislation should combine both, recognizing however that there are certain operational differences, as you've just indicated, in each industry.
What's important is that we have to deal with natural gas and electricity as energy. Just as we're proposing that there are some things that need to be altered in the current draft of the legislation as it relates to the empowerment of the board, in certain sections under the act pertaining to that, it's important as well that the Ontario Energy Board also is provided the mandate to be the "referee" for the electricity industry as well.
The Chair: To the government caucus.
Mrs Helen Johns (Huron): Thank you very much for your presentation. It was very interesting. I look forward to receiving documentation from you. I would like to state just off the top that sections 36 through 40 are status quo sections taken out of the previous act. In effect, you're asking us to change something that has been in existence for a period of time. We would like to hear from you on that. If you could give us some documentation on that to allow us to have a look at it, we would appreciate it.
Given that you're going to send me that, and these are status quo from previous times, I'd like to ask you, as a result of the deregulation in the gas, because we're looking at those, electricity and gas, kind of simultaneously here, do you see that with the changes you're asking for in the gas we'll be able to create jobs and investment in Ontario?
Mr Walsh: It's my feeling that any time you open up a business or an industry to competition, it brings new market entrants. When you have new market entrants, it means you have to create jobs in order for those companies to participate in that industry. Very simply put, I believe there will be a creation of jobs and additional investment in the province.
The Ontario natural gas production business and oil production business is not large relative to a number of other industries. As you are all aware, we don't see the same type of support either from the government as it relates to our business. But we would like to point out that we have a fundamental knowledge of the business here in Ontario, the oil and gas industry. From the natural gas perspective, we see an opportunity for that basis of knowledge to be used to expand upon the creation of cogeneration projects, additional gas storage facilities for the purposes of providing backstopping, and load-balancing services for those businesses. Again, in a nutshell, yes, I do see expansion of jobs and additional investment in the province.
The Chair: To the official opposition.
Mr Sean G. Conway (Renfrew North): Thank you very much. Following on Ms Johns's last question, thinking about consumers in this part of the province, and thinking about the answer to Ms Johns, what are the particular benefits that are going to accrue to consumers in Marathon and White River and Emo and Stratton and Red Lake and Nipigon and Thunder Bay and Fort Frances?
Mr Walsh: It's interesting because that's something that came up during the course of the 10-year market review when I was part of the upstream transportation and downstream transportation and storage component subcommittee of that 10-year market review. That was probably the single most concerning point, the fact that the existing natural gas infrastructure in northern Ontario is so limited to the extent that storage in southwestern Ontario really has no impact on the gas customer in northern Ontario.
Mr Conway: And the answer to the concern?
Mr Walsh: The answer to the concern is that, until the marketplace in northern Ontario is sufficiently large enough to warrant the investment of capital to develop facilities that might allow for load-balancing or any type of service that can lower costs, you just won't see the benefit of that to the customer in northern Ontario. It's just a matter of location. It's something, unfortunately, that we have to live with.
The Chair: On that note, on behalf of each of the members of the committee, we thank you for coming before us this morning with your presentation and your new ideas. We thank you also for being able to present a little bit early.
Mr Walsh: Thank you very much. I wish you the best of luck.
The Chair: Thanks. We look forward to your presentation in writing.
The Chair: Northland Power, please come forward. While these presenters are making themselves comfortable, on behalf of the committee may I welcome one of the local members in this area, Mr Gravelle.
Mr Michael Gravelle (Port Arthur): I'd like to welcome everybody here to Thunder Bay and northwestern Ontario. It should be an interesting day. It's good to have you here.
The Chair: Our pleasure.
Mr. Conway: Madam Chair, just on a technical point: We're in a difficult situation because a lot of these presentations are just excellent and just one question after a 25-minute presentation is -- I just wonder, can we ask presenters, if there is half an hour, can we split the time? It's almost an insult to the debate to get a presentation like the last one and just have to let it go -- just an agreement maybe that if we've got half an hour for presentation, I don't know whether it's possible, but to say 15 or 20 minutes for the presentation and allow for some questions because it seems to me there's a lot of very good work here and I would just like to have an opportunity to hear the committee have a little bit of additional cross-examination. If it's not possible --
Mrs Johns: Can I just ask, are you suggesting that people who have their presentations prepared now would have to shorten them because --
Mr Conway: Not necessarily shorten it, but it just seems to me, for example, that the last presentation was very interesting and just to get it and then to get one quick question --
Mrs Johns: It was very interesting.
Mr John R. Baird (Nepean): Maybe the Chair could remind people at the beginning to --
The Chair: Yes, I will do that, as Chair. The last presenter was exactly in the 30-minute time period and every presenter before us does know.
Mr Conway: That's not my concern. I have no problem. If people want to come and just talk at us for 30 minutes, that's fine, but these committees generally work best when there's an ability to talk back and forth. So my preference would be if there's a 30-minute presentation, I hope we could, if possible -- it may not be in some circumstances -- have the presenters take maybe 50% to 60% of that block of time and leave at least 30% of the time for questions if that's possible.
The Chair: We'll try to do that.
Welcome, gentlemen. As you can see, we are concerned that we have enough time to be able to ask you questions. You have 30 minutes for your presentation time but it is at your discretion as to how you wish to use that time. Before you begin, please introduce yourselves for the Hansard record.
Mr Fred Brown: Thank you, Madam Chair. My name is Fred Brown. I'm executive vice-president and chief operating officer of Northland Power. With me is Mark Rodger, our counsel from Borden and Elliot.
Let me begin by saying we have a presentation here which we've given out hard copies of. I will attempt to allow enough time for questions at the end. So, Mark, if I run a little past the halfway point give me a nudge here and I'll speed it up.
I'd like to begin by first telling you a little bit about Northland Power and then make some general comments about the legislation. I would like to emphasize we are a strong supporter of the direction the government is proceeding in, and my comments, as they relate specifically to the legislation, are intended to be constructive and are by and large tuning or request for clarification, and in one or two cases, areas where we think something could be added to the benefit of the overall goals of investment and the creation of jobs and a vital competitive environment in the province.
Let me begin by telling you briefly who Northland Power is. We are an Ontario-based company. We began in 1987. Our roots are in cogeneration and the consulting business, but we've been exclusively focused on independent power and cogeneration since that time. We have developed from a banking perspective four projects in Ontario. We are today the largest independent power company in Ontario. We are privately owned and we have raised over $900 million of investment in that period, invested here in the province.
We are a full complement of skills and services within this sector. We develop, we design, we construct, we finance and we operate. Our projects today are all owned by either the institutional investors or by the public and we are the managers of those projects.
We have an operation in Calgary which acquires our fuel and provides services for not only our own projects but other companies as well. But we are an international player. We have a project of which we are 51% owner in Kiev, Ukraine, today, which is under repowering and redevelopment. We're expanding that project and going forward there. There are over 300,000 heat customers in there, which is equivalent to a total output of about 600 megawatts, 300 of it being power.
As I said, we are a strong supporter of the legislation as it's put forward, the goals and objectives that have been articulated, the opportunity for all customers of power in the province to have free choice. We particularly are pleased with the non-discriminatory access to the transmission facilities and the direction that the IMO is taking. We're also delighted with the timetable that's been put forward and compliment the government on the aggressive schedule they've been pursuing and continue to pursue with a view to full competition by 2000.
There has been a dramatic change in not only our attitude and approach to the Ontario market but I think by all participants in the industry. It really has been revitalized.
I'd like to emphasize today that we are investing substantial sums of monies, in the millions of dollars, in the development of projects in the province on the anticipation that it will be an open and fair competitive marketplace.
We see our customers in this new marketplace at this point in time as being, obviously, the large industrials but also municipal utilities and the two new companies that will be formed as the restructuring unfolds. We view partnerships with Genco and the service company and the wires company, also institutional and commercial customers and agents, brokers and the marketers. At this point, we're not visualizing initially a direct involvement in the retail market.
Of the projects that we have under development in the province today -- there are several -- a short list that we deem as very real possibilities represents in excess of $700 million of investment opportunity.
The key factor that I'd like to focus on as we go into this discussion is that it's not just investment but it's also the need to be able to raise the financing as part of that investment that is important, that has to be considered thoroughly in the legislation.
The requirements for that investment and the financing aspect of it: In our view, we need to be providing a real market; the Market Design Committee calls it a robust market, but fundamentally something analogous to the stock market, where there are a number of buyers and sellers and there are not just a few with the consequences that you have volatilities that are unrealistic and you can't determine what the real market prices are.
We need to have fair market rules, a level playing field and a licensing structure that is manageable. At this point in time with the legislation, it appears that Northland would be required to enter into five or more separate licences. We think there needs to be some simplification of that so that we could have one licence that would consolidate all this, simplifying the administration and the bureaucratic costs associated with that.
We are going to need a reasonable level of residual stranded debt. I know that's a very complex subject, but we have some comments on that that we'd like to make.
A very key point is that in order to raise the financing for these projects and these investments, we need a predictable competitive transition charge. We can deal with what the worst case is in financing, but if we don't know what the worst case is, we cannot raise the financing. If there's a simple, single message we'd like you to take from this discussion it would be that. It can't be open-ended, something that's variable, or we will not be able to raise the financing associated with these projects, which you understand is substantial.
Finally, we're comfortable with the objectives and goals. We need an implementation schedule leading to this market that we can be raising money against and have confidence that it will happen.
I'd like to now move to stranded debt. On the subject of stranded debt, it's very simple. If it's too high, in our view, there will not be a competitive marketplace. Whatever the structure is, it has to be such that there are no unfair competitive advantages realized by any of the participants, and in particular Genco.
We view the legislation at the moment to be a little vague on how the Minister of Finance will make the decisions on this level. We would like clarification and in particular we'd like to ensure that's it's an open and public process with stakeholder review. We would like to ensure that the capital structures and the dividends and capital payments that are made are directed to repay the residual debt first. While I believe that's the intention, it's not explicit in the proposed legislation.
Moving to the CTC, or the reasonable competitive transmission charge, we all know that's intended to pay down the residual stranded debt and again we'd like to recommended that it be explicitly stated that it's to be used only for that purpose. We believe this is intended but we'd like to have it explicitly stated that there will be no double charges on the same kilowatt. It could be interpreted that all players pay, that is, the producer and the purchaser, and the result is that there could be a double charge.
I have two additional points to make. I think the details are not included in the legislation but I think you would all acknowledge that these are appropriate. Any out-of-province generator that's competing in the market should pay this charge, whatever it is. That's not in the legislation at the moment. In addition, any Ontario-based company that is going to produce power for export, in order to be competitive in the export market, should not pay this charge on the export sales. Otherwise it would not make sense for an Ontario company to develop a project in Ontario. We have one very large project that's very close to announcement, where a large portion of the power we expect to produce on it will be for export. We would not want to be paying that charge on an export or we would be non-competitive and the project wouldn't go forward.
Finally, the point I made before: This charge needs to be predictable, such that it will not go beyond a certain level. It can certainly come down but not go beyond a defined period either. As we put forward our financing proposals to the institutions and the banks, we need to have a fence around it. Whatever that number is, we'll deal with it in the final analysis, but it can't be an open-ended number.
We'd like to make a couple of other points. Under the provisions of section 28, the default supply obligations that suggest that the MEUs will be providing power in the absence of a decision, there's a great deal of discussion, I understand, with the Market Design Committee on this point. Initially intended just to be a backstop, there are some concerns that it may in fact preclude players like ourselves from going after many customers during this period. That's not the intent of the language as it is there now but that's a point that needs to be kept in mind so that all players can compete in this market eventually.
Finally, we would like to raise a point concerning the issue of non-utility generator contracts. Section 25 relates to supply contracts. It suggests that all contracts will be cancelled. I don't think that's intended to include the NUG contracts. We would like to have it explicitly stated that it's not intended to extend to the NUG contracts. A point I'd like to make under the market dominance of Ontario Hydro relates to these NUG contracts and I'll bring that up in a moment.
The next point is the market power of the Genco organization, which will be somewhere in the order of 90% plus in the marketplace initially. It's very difficult to imagine a full competitive market under those conditions. We know and believe that this was probably the beginning and that through time this will change.
As the Market Design Committee is looking at vesting, asset swaps and licensing options, we'd like to make a point about the vesting contracts. We think you need to be cognizant of the risks in those vesting contracts. If the prices are set too low, there will be a higher residual debt and it will set an expectation in the marketplace that may be unrealistic. If the quantities are set too high, you will limit the competition. So it's a very delicate balancing act.
Another point is, as we're beginning into the competitive market, it's going to be important initially, before a full real market is established, that there be backup power provisions available. In all probability it will be Genco that will provide that backup power. We wouldn't want them with their market dominance to be able to charge unreasonable rates for that backup power, which would preclude any project going forward. It needs to be a fair and reasonable rate that's charged. Once the market matures, I think that need will go away.
To capsulize, Northland is very much interested in and heavily committed to the success of this legislation and we are today investing. We are looking at our business partners and our potential customers and trying to represent their needs that will support the investments that have to be made, most of which I've made the comment on already. They're looking for a definite timetable for implementation, the ability to contract bilateral contracts, which is now included. As I mentioned earlier, we're very positive and thankful that that's included. They're looking for competitive pricing, a minimal and predictable competition transition charge and early definition of the tariffs for distribution and transmission and the associated services, so that decisions can be made and financing proposals can be formulated.
All in all, I have to say we're enthusiastic. We're optimistic and counting and betting on the government getting it right, leading to the investment and jobs that we're all looking for. Thank you.
The Chair: Thank you very much. We have five minutes for questioning from each caucus. We'll begin with the government caucus.
Mr John Hastings (Etobicoke-Rexdale): Thank you, Mr Brown. I'd like to go right to the last page of your presentation and ask you, or perhaps your counsel, your concern over the continued tax exemption by the local utilities in terms of competition at the retail level as envisaged in the Market Design Committee report. How would you deal with that item: remove the exemption, limit to the two years or one year or create some kind of a tax treatment that would require this government to have to go to the feds, I suppose, to get changes under the Income Tax Act of Canada?
Mr Brown: I'm going to pass the question to our counsel, but before I do that, let me apologize for not raising that point in the presentation. In the interests of time we decided to submit it but not raise it. The reason we've tabled it, for the benefit of the people in the audience here, is that one of the options open to a company such as ours is to make investments in the municipal utilities. We would like to have that option open, and on the level playing field theme we just didn't want to have other sides of the restructuring having a competitive advantage of no tax provisions and us having the tax implications of it. In terms of specific solutions, I'm going to turn to our counsel to give whatever recommendations he can.
Mr Mark Rodger: I think there are two issues that you've identified which are discrete. The first is the issue you refer to on the last page of our submission, and that's section 88 of the Electricity Act. That appears to be contrary to the level playing field concept that was articulated in both the white paper and the various announcements leading up to Bill 35.
Under section 88, if a municipal electric utility transfers assets to either Genco or Servco, the act provides that that transfer will be done on a tax-free basis; but if the same MEU transferred the same property to Northland Power, the MEU would pay tax on that. That seems to be the disadvantage. There's an incentive for MEUs to transfer assets to Genco and Servco, and that raises a series of other questions. For example, in what circumstances would we want Genco to get bigger? There's already a huge market power concern. That really is the level playing field that doesn't seem to be apparent.
The second issue is around the default supply. There are really two concerns there. First, it's unclear how the concept of default supply customers is going to be defined. Who are that group of people? If it turns out that current MEU customers will automatically be transferred into this default supply category, then that's an unlevel playing field because with all the history with the MEUs it might be very difficult for Northland to try and break into that market.
Then there's the second question about what will be the price of power that that default supply customer class pays. I think our theme there is that if that's the way the legislation will be interpreted, the price should be set by market forces and not a regulated price in order for Northland Power to make a bid to supply part of that default supply load.
Mr Hastings: If you had some changes along your lines of thinking then, how would this improve the investment and jobs picture overall at the retail level?
Mr Rodger: On the first issue, if the tax advantages to Genco and Servco are eliminated, then companies like Northland will have an incentive right away to start chatting with municipal electric utilities about transfers of assets. Right now, there really isn't much of an incentive if there's a disadvantage against them. Second, with the default supply, it opens up a whole new range of discussions with municipal electric utilities about how that supply will be provided.
Mr Brown: For example, we have had discussions with one municipal utility involving what could be a very substantial investment related to a site and it would require a joint venture arrangement. The tax implications of that we haven't thought through, but we'd want to have an ability to pursue that with them.
Mr Baird: Just a brief comment on page 5 of your presentation. Your point with respect to getting the residual stranded debt right is very well taken. I know Mr Lessard mentioned this a number of times yesterday and the government has retained a number of experts in this field: Goldman Sachs, CIBC, Wood Gundy and Midland Walwyn.
I was particularly struck, though, with number 4 on this chart with respect to the provisions for Genco's and Servco's dividends. When these experts in the financing restructuring come to what they think will be some good advice with respect to how the two new companies are capitalized, there will obviously be a debt-equity swap, and I suspect strongly that the residual debt would be paid off long before any of the debt from the debt-equity swap would be paid off and that any dividends would go to the Ontario Hydro Financial Corp potentially with respect to paying off the debt in that debt-equity swap. But your points are well taken and certainly worth reflecting on.
Mr Rodger: I think the fundamental theme is that until the residual stranded debt is paid off, then all revenues that flow from Genco or Servco should be paid for that purpose and not held in a separate fund by the government.
Mr Baird: What about paying off the debt, though, from the debt-equity swap?
Mr Rodger: Until we know those valuations, you're right, there may not be a residual stranded debt. But what we're saying is that if there is, then any revenue in the act that's referred to is the dedicated revenue stream, or if it's Ministry of Finance, all those payments should be going to pay the stranded debt so it's paid off as soon as possible.
The Chair: To the official opposition.
Mr Conway: Thank you, gentlemen. A very good brief and I particularly appreciate, as Joe Clark would say, "the specificity of your concerns and remediation."
Just following up on some earlier questions, I think you're absolutely right on things like market power and the levels of residual stranded debt. My sense is that a lot of players on all sides of this, big government, big business, big law firms, big accounting firms, I suspect that when they sit around a table, they're all going to agree that because there are no easy choices and there are some very hard choices to be made, there's going to be a real tendency to take a lot of this and to look to that broad rate base as a very dear friend in helping resolve some of these issues.
With that in mind, I come back to what is my primary question. I'm an electricity consumer in the city of Thunder Bay, in the town of Fort Frances, in the village of Emo. I want you to tell me, Mr Brown, thinking about Northland Power under what I believe is in Bill 35 a good potential policy framework, how are you over the next three to five years going to deliver a real, measurable electricity benefit to me, the residential, farm or industrial consumer of electricity in northwestern Ontario?
Mr Brown: Let me respond to that question by talking about what I know. What I know is --
Mr Conway: My question is specific. I'm a consumer and I want somebody to give me a more specific idea of a measurable benefit that I'm going to receive from Northland Power or people like Northland Power over the next five years.
Mr Brown: In northwestern Ontario?
Mr Conway: In northwestern Ontario.
Mr Brown: OK. One of our strengths is that we have a proven track record in the pulp and paper industry. Northwestern Ontario has a large base of pulp and paper. One of our projects that we're looking very closely at is, we've been working with one pulp and paper company who has a major problem with his current power costs, particularly as it compares to his competition outside the province. We've looked at various scenarios where we would build a plant and sell power back to him or provide back to him or he would become an equity player in that plant. We've looked at scenarios of exporting power that --
Mr Conway: I'm a residential customer in Nipigon.
Mr Brown: You included industrials in your question.
Mr Conway: I know. I appreciate that and I think those are helpful answers. I'm a residential electricity consumer in Barwick, Stratton, Nipigon or White River.
Mr Brown: Let me just conclude on my point. The proposal that we put forward has allowed this particular pulp and paper company to conclude that he can now, by being an equity player, bring his cost of power competitive with their best plan, which is in Quebec.
Mr Conway: I appreciate that and I accept that.
Mr Brown: So the vitality of the community will be substantially --
Mr Conway: But for residential consumers?
Mr Brown: As I said at the beginning, we're not in the residential market.
Mr Rodger: But I think what can be said, if you look at other jurisdictions around the world, what residential customers do see and have seen is lower prices in other jurisdictions. They've certainly seen efficiencies of their service go through the roof and costs go down. The MEUs that serve those residential customers have a whole range of options open to them under this act that they never had before, including privatization of those MEU facilities or leasing out those assets, and I think we have to remember that under the current regime those residential customers are saddled with $30 billion of debt. So the track record is pretty good for the new efficiencies, technologies and opportunities for new approaches which are not available under the current regime.
Mr Conway: My final question, Mr Rodger. I appreciate what you've said. Just again with a view to a residential consumer in small-city, small-town northern Ontario -- take your pick, Emo, Stratton, Red Lake -- out of that general statement that you've just made, what would be the non-Ontario example, specific model that you would hold up as something that people in small-town northern Ontario would look to?
Mr Rodger: I would certainly look at the state of Victoria in Australia, which also has smaller and rural residential customers, and look at the UK experience and the impact of residential rates on various residential classes in that country.
The Chair: To the third party.
Mr Lessard: I appreciate that Northland Power isn't in the retail business of electricity sales to residential consumers, but to follow up on Mr Conway's question and your response to look to Victoria in Australia and to the UK example to illustrate the benefits that can go to residential customers, they're very different markets in my view. It's very heavily populated in the UK compared to northern Ontario.
My interest is in ensuring that consumers throughout Ontario are going to benefit from the anticipated lower rates that the Minister of Energy continues to tout as the benefits that can be derived from Bill 35. Although you're not directly involved in the retail market, it would appear to me that the only way, or one of the ways, for consumers to benefit is if you may have excess power that could be sold or you were developing the infrastructure in northern Ontario so consumers can benefit up here.
But the concern I have is that when people look at the Ontario market where consumers may benefit, they see the large southwestern Ontario area that can be serviced easily. It's close to the United States, the infrastructure is there to transfer power in there and consumers may benefit from lower prices, but how are consumers in northern Ontario going to benefit from Bill 35?
Mr Brown: Our plants are all in northeastern Ontario. We have one project today that has excess power. The current contract with Ontario Hydro prevents us from selling that excess power into the local market. We have in our brief here recommendations that would allow us to sell that power into the marketplace as opposed to through Ontario Hydro. We think that would help mitigate some of the market power Ontario Hydro has. We think that would be delivered at a lower cost today into northern Ontario than the existing structure.
We would encourage that the existing non-utility generators be able to invest in additional extensions to their plant and sell that into the marketplace as opposed to through Ontario Hydro. We have an expansion plan that we would like to go forward in another plant that would allow that and it would be green power using wood waste as a renewable energy force and would be a local generation of power to the local market.
Mr Lessard: I wanted to talk to you as well about stranded debt. I appreciate your concerns with respect to the minister's discretion in determining stranded debt and the residual stranded debt as well. There are a number of unanswered questions in Bill 35 that cause me concern. I think there are just too many unanswered questions, and what the amount of the stranded debt is is the major one. You have identified that if the stranded debt is estimated to be too low, there won't be competition --
Mr Brown: It's too high.
Mr Lessard: Too high. Right, too high.
Mr Brown: The result gives Genco a unfair competitive advantage. It's been written and published that one cent of price on a kilowatt would translate into a swing up or down of $10 billion on the debt. So people can mis-estimate what the market prices are likely to be and result in huge swings in that stranded debt --
Mr Lessard: My question is, what happens if --
The Chair: I'm going to have to interject. I apologize. That's our time. If we get behind, it plays havoc with the rest of our day.
Gentlemen, on behalf of the members of the committee I thank you for coming before us this morning, for bringing your ideas and for making this presentation to us about the bill. Your advice is appreciated.
Mr Brown: Thank you. We're going to listen to the various participants in the hearings and we may well be submitting a written submission at the end, by August 20. Thank you.
The Chair: I'm now calling upon representatives of the Thunder Bay Chamber of Commerce, please.
Mrs Johns: Madam Chair, while they're coming up, can I just put a point of clarification on the record. They asked about avoiding double charges and clause 80(1)(k) will eliminate the ability for us to do double charging. Just so you have that, 80(1)(k).
The Chair: All right. We don't have representatives from the Thunder Bay Chamber of Commerce. Is there anyone here from the 11 o'clock slot, Valerie Falls Power, or anyone else presenting? We are in a break position then, so we'll take a short recess and we'll return at 10:30.
The committee recessed from 1011 to 1033.
THUNDER BAY CHAMBER OF COMMERCE
The Chair: We'll return to order for the presenters for the remainder of the morning. We'll begin with Thunder Bay Chamber of Commerce. Welcome. Please make yourselves comfortable and when you begin, please introduce yourselves for the Hansard record.
Mr Harold Wilson: Good morning. Ladies and gentlemen, my name is Harold Wilson, chair of the board of the Thunder Bay Chamber of Commerce. With me to make this presentation to the legislative standing committee is the chamber president and CAO, Rebecca Johnson.
Thank you for providing the Thunder Bay Chamber of Commerce the opportunity to address you today on the Energy Competition Act and how it will impact businesses in northwestern Ontario and, in particular, Thunder Bay.
The Thunder Bay Chamber of Commerce has a membership of 975 member firms and over 1,300 voting representatives. Our membership is mainly comprised of small businesses, 76% of 15 or fewer employees. The total membership is representative of all business sectors in Thunder Bay and northwestern Ontario.
Our board of directors and our economic action committee solicited input from a variety of members to incorporate into our presentation to you this morning. Following our presentation, both Rebecca and I will answer questions, but we are not prepared to address specific technical questions.
The Ontario government has taken a very important step in the deregulation of the electricity market in Ontario. The Thunder Bay business community welcomes the changes and looks forward to having more purchase alternatives available that would help to make Ontario business strong and competitive. Businesses in Thunder Bay also look forward to the many opportunities that will become available to develop new products and services in the deregulated marketplace.
Bill 35, the Energy Competition Act, may be the single most important piece of legislation in support of job creation and investment produced in the provincial House in the last decade. The following are some specific comments with respect to Bill 35.
The Thunder Bay Chamber of Commerce endorses the Ontario Chamber of Commerce white paper: Direction for Change: Charting a Course for Competitive Electricity and Jobs in Ontario. We are aware that the OCC will be making a presentation to the standing committee and thus will not repeat the recommendations contained in the white paper.
Subsections 79(4) and 79(5) of the Electricity Act, 1998, make provision that every generator and consumer respectively pay a competition transition charge. At present the amount of this charge and its duration are not specified. The business community would like to see a ceiling, or maximum rate, applied to this possible charge in order to limit the price risk that could otherwise result. Placing a ceiling on this cost item would reduce investment uncertainty on the part of generators as well as consumers and help to assure employment growth in the province.
Subsection 108(1) of the Electricity Act, 1998, makes provision for the transfer of assets, liabilities, rights, obligations and so forth of the present Ontario Hydro to the Generation Corp, Services Corp or various other parties. The business community urges the full disclosure of the valuation methods used during these transfers to guard against the possibility of an unfair market advantage accruing to the Ontario Hydro successor companies that could interfere with the growth of a competitive market in generation.
In the absence of immediate divestiture of Ontario Hydro's generation assets, the issue of market power becomes a concern. It is difficult to envision a truly competitive market with one large incumbent controlling the bulk of market supply. Hence the business community would urge the government to work diligently towards the eventual establishment of a generation marketplace where no one entity would own or control more than 30% of the market. We believe issues of market dominance need to be addressed in the legislation, not left to the Ontario Energy Board processes. Transition mechanisms need to be established to limit returns on generating assets until such time as the market becomes demonstrably competitive.
We question who will control the new Hydro. It is important that the standing committee, when establishing their new boards within a municipality and if owned by said municipality, does not permit them to establish rates that could be higher than necessary. The excessive profits generated would then in turn be used as a revenue source for the municipality. In Thunder Bay at present, the telephone department, municipally owned, provides revenue to the municipality that is used to subsidize other programs, such as social programs etc. As a result, business in Thunder Bay may be paying higher than necessary rates for telephone and yellow page advertising.
Currently, under the Power Corporation Act, Thunder Bay Hydro cannot provide revenue to the city and thus they keep their rates under control to cover actual operating and capital costs. In fact, Thunder Bay Hydro has worked extremely hard to reduce the hydro rates, which business acknowledges and appreciates.
Profits realized by the Hydro board need to be, and should be, used to support hydro initiatives that will reduce hydro rates.
The Thunder Bay Chamber of Commerce often serves as a better business bureau, responding to questions asked by the general public on any and all issues. We have been receiving several calls related to gas brokers. The questions arise around contracts to obtain lower rates.
Bill 35 has not been passed. This leaves those businesses that are calling themselves gas brokers in a position of actually breaking the law. Many businesses, particularly small businesses, do not have the knowledge of what is happening in the marketplace and, on occasion, are signing contracts. This vulnerability leaves businesses in a position where they have signed on with someone who may not get a licence when they are issued. The government should either ask brokers to stop or do some type of public campaign to advise businesses and others of this situation.
Another area that business has a concern about is the possibility of skyrocketing electricity bills with this deregulation. The chamber is aware that Ontario is one of the highest-cost jurisdictions in North America for power. The legislation, at a minimum, must ensure that rates do not increase and, in turn, provide lower and fairer rates for power.
In conclusion, we provide you with the former statements and recommendations that we ask you to carefully examine as you conclude your hearings across the province.
Once again we thank you for providing the time on your agenda to address the hearings and to bring you these comments from the business community in Thunder Bay and northwestern Ontario.
The Chair: Thank you. We have about six minutes for each caucus and we'll begin with the Liberal caucus.
Mr Conway: Thank you, Mr Wilson and Ms Johnson, for a very helpful brief. A couple of questions, starting towards the end: You make a very good point that I think all of the committee would agree with, about the confusion around various marketing tactics that are being employed before this bill becomes law. I live in the Ottawa area. I didn't bring it with me, but there was quite a prominent article in one of our national capital dailies the other day about a similar kind of difficulty and the consumer confusion that's been created thereby.
Just speaking for your members, what do you think the energy board, the energy department or the government needs to do to strike the proper balance between on the one hand allowing those people to do their business, but on the other hand not taking undue advantage of consumers, both small business and residential? What would work on the ground to deal with the problem?
Mr Wilson: On area, first of all, until the legislation passes, there isn't that support there in the first place. That's what has to take place.
The other one, and it keeps coming back down to it and you've mentioned it, is the newspaper article. We had one prominently in our newspaper as well. It's just to try to get the public aware of this, to do some education of businesses. We can do that through the chamber, but not all businesses are chamber members, the general public who can be preyed upon by people who are just trying to offer something that they cannot deliver on.
As far as the balance goes, once the legislation is in place and there are proper licences for them, I think that will solve part of it, but again there's the diligence that you have to do. There are a number of companies offering telephone rates, gas rates, the types of things that they expect can kind of lure people into some false ideas about what kind of rates they can achieve, what kind of savings. I think it's important that until that takes place, we just make sure that if they're not licensed, stop them.
Mr Conway: A second question then or general question. I would argue that Adam Beck was probably the most powerful, the most successful and I want to say the most -- well, he certainly was the most powerful and most successful business lobbyist in the history of 20th century Ontario. Beck's concern as a small business person at the turn of the century was that in an unregulated market, and particularly with what he saw happening in places like Toronto where some not very savoury capitalists had got their hands on this thing called electricity, small business in the hinterland -- cigar box makers in London, harness shop operators in Preston -- would just get screwed. Pardon the language. Beck began a great campaign to try to put some fairness into the marketplace. His great campaign began and succeeded beyond probably his wildest imagining. That's history.
We're going into a new world now. When I look at the map of Ontario and I look at the metropolitan community that is Thunder Bay, I see a city of 125,000 serving a vast hinterland in northwestern Ontario. I say to myself, I can imagine the market working around Thunder Bay because I've got the population to support it. There are economies of scale. What I want to know is, how are we going to make this market work in the hinterland, on which you depend?
I don't want to sound like a broken record, and I support the need for change and competition and better regulation. I want to know and I want somebody to tell me, how are we going to make this market work to the advantage of small businesses and residential and farm customers in that litany of communities that I will continue to rhyme off as long as I'm here? I've been to Emo and Stratton and White River, as have a number of other people here, and I find that a lot of these people are sceptical -- they've heard this song before -- and that the benefits are not going to be evenly distributed. They probably believe that the big players are going to win, in that they will probably get quicker, lower rates, and less of the multi-billion dollar debt to pay off, and that the broad base of regular customers, and in that I'd include a lot of small business, somehow are not going to see the benefits as quickly or as materially. How do we make that market work, particularly in and for the great region of which Thunder Bay is the centre?
Mr Wilson: I think one of the things the minds that are taking a look at how this is going to work with breaking it up -- you have the generation side which is one aspect of distribution. The lines are already in place, so I don't think we're talking of wholesale change when this happens. At the same time, northwestern Ontario generates an awful lot of power as well, so there might be some opportunities.
I think the regulations have to be in place to make sure that the smaller communities do not do poorly at the expense of the larger ones. I think that would be acknowledged. I would expect that's one thing the committee will be hearing, is hearing here and will hear until the end of these hearings.
Ms Rebecca Johnson: I would just like to add one thing, if you don't mind. The fact is that within northwestern Ontario we have some excellent networks, and I don't know that the government really uses those to the best of their advantage, whether it's the Northwestern Ontario Associated Chambers of Commerce or the northern networks. I think those organizations can provide information that goes out in a very broad-based way, to get the information out; an education process, which is your former question. Even secondly on this question is the education process.
Generally, I think that businesses know there is something happening with electricity. They don't know specifics. They don't really care. All they want to do is have cheaper electricity. That's what it boils down to. So how do we educate them to know that?
The concern now with the gas brokers going out, we're really very concerned about that happening. As we've identified in our presentation, the calls that are coming into our office -- with unlicensed people out there doing and promoting it, small businesses, unfortunately, because of the lack of education, really sign up and then they're losers in the end. We have to do something to make sure that doesn't occur.
Mr Gravelle: You made reference to the concerns about the increase in cost of electricity. You say it should, at a very minimum, make some commitment to low-cost energy. There is nothing in this legislation that makes a commitment to that. Do you feel there should be something written in this legislation that commits to low-cost energy?
Ms Johnson: Certainly that's part of our message to you this morning. We feel very strongly that we have to have it, whether it's in the legislation or whether its in the regulations. That's what business requests.
Mr Wilson: At the very least that that be a goal or a principle that all this is leading to.
Mr Lessard: Thank you very much for your presentation. In effect, this has been a principle that has been espoused by the Minister of Energy in his introduction of this bill and the lead-up to it was the promise of lower rates for consumers. In my opinion, that has really enabled the gas brokers and the electricity brokers to go out and do the business that they have been doing up until now, because the government has been telling people that this legislation is going to lead to lower rates and there's going to be the ability for consumers to purchase and make arrangements to get the supply of their electricity and gas from whomever they may choose.
My concern and the concern of my NDP caucus members is that in this great new reality in the electricity market, small residential consumers are really not going to be in a very equal bargaining position with people who are going to be selling electricity and gas to them. That is a major concern that we have. They really are not going to be on an equal footing.
What we've been saying, and we've been trying to raise public awareness on this issue right now, is that if there are electricity brokers who come to your house and promise lower rates or promise to supply electricity at some point in the future, you don't sign anything right now. We've been trying to get that message out.
One of the provisions that we'll be asking to be put in this legislation as well is that any contracts that are signed between now and the time that there is competition in the electricity market are voidable, so that people can get out of those contracts.
You raised the concern about skyrocketing hydro bills. We share that concern, and also the interest that Bill 35 results in lower and fairer rates for all consumers, especially small residential consumers. I wonder what causes you concern about the possibility of skyrocketing hydro rates. Where does that concern originate?
Mr Wilson: I can maybe answer the last one first. We always have a concern with things skyrocketing. That's the bottom line. When everything changes, one of the concerns is, what will be the effect on business, from the taxation point of view, from different things, hydro rates, water rates? It's something that we're just diligent about and with any change we want to make sure that that is going to be met, at the same time as, provincially, we have an organization, the Ontario Chamber of Commerce, that we know will be working dutifully after this as well to ensure that business is recognized as having some concerns while this is enacted.
You talked about residences not having an opportunity. Quite frankly, I think that they do and that's the elected members, should those rates start to go up. I think no matter what the political stripe, if hydro rates do start to go up significantly, all MPPs will be getting a lot of calls, so I think that's a check that's in there at that time.
You mentioned voidable contracts. I think we were talking about brokers who are not legitimate. They can put anything in there and since they're not legitimate, they probably don't intend to deliver or they haven't researched enough that they can deliver. No matter what's in the contracts, we're just saying people should wait until the regulations are in place to regulate the brokers before going ahead, not just the fine-tuning of a contract.
Mr Lessard: There will be a time, after the legislation has passed and licences are issued, before there is open competition, that there will be legitimate licensees out there selling as well, so the voidable contracts suggestion comes into that area as well.
You mentioned as well that there should be a limitation of 30% of market suppliers for any one particular supplier. Where is it that you come up with that number? Is your reason for suggesting that in the interests of hydro consumers, and how will they benefit?
Mr Wilson: Where that figure came from, we talked about the small businesses that we serve. Some 56% of our members are small businesses. At the same time, we also serve the large business community and a lot of our larger companies have stated that one of their concerns is there's a lack of real competition. It did not serve anyone. It's a number that they said should be worked towards. Again, there's nothing really magical about that, but it just ensures that there is that competition available.
One other tie-in that has come up is that I don't want to lose sight on the generation side. We have a lot of small communities working with larger companies in their own communities that can do something in terms of generating hydro. That's where we can see some real benefits to our smaller communities, to communities in northern Ontario. There might be jobs, employment and investment on the generation side, and that in turn can ultimately reduce the amount that they would have to go to a single monopoly. That's where there's some great potential. We talked about the amount of investment in jobs that might result from this legislation, and that's a main area.
The Chair: To the government caucus, please.
Mrs Johns: Thank you very much for your presentation. It was very interesting. I'd like to just comment on Adam Beck for a second. I think Adam Beck, in his monopoly situation in the 1900s, is far different from what we deal with today. I personally can only imagine Adam Beck rolling over in his grave if he knew that 40 cents out of every bill was going to pay off the inefficiencies of Ontario Hydro over the last 40 years. I think it's time to look at a different system and move forward, as we say. We'll come out of the 1900s and come into the 21st century.
Mr Conway: You may want to read the book, Helen.
The Chair: Order.
Mrs Johns: Order. We'll start to banter back and forth and it will be an unproductive day.
With respect to the marketers, we are concerned as a government about the marketers. We of course are saying that the Ontario Energy Board will regulate this, and anyone who enters into a contract prior to the time that a marketer is licensed, the contract will be null and void. We are looking for ways to inform the public, and I have to say I've spent a great deal of time on this issue and I've thought a lot about this. We've talked to the MEUs and we've said, "Nobody reads your statement." When you get your statement in the mail, how often do you read the little blurbs that are associated with it? Some of us do; some of us don't. That's one way to get to the people. Another way is to do seminars, but of course if we do seminars, not a lot of people know they need to come to a seminar to hear about it, because they don't know what we're talking about.
So we are looking for ways to help inform, and we are very committed to doing this. From that standpoint, we are looking for input about what you could offer us and how you could help us move that agenda forward. It's a very important part of this bill, and I think all parties agree with that. I don't know if you have any suggestions about what you perceive we should do, but I take them from anybody in the crowd in writing, or from yourself today, of course.
Mr Wilson: I always have suggestions. One of the things we enjoy in Thunder Bay is some good partnerships. There are ways that our members, the chamber of commerce, can be informed about this. We also enjoy an association with labour, with the social planning council, with different organizations, with the city of Thunder Bay as well, by getting together and being able to do some kind of promotion at that time.
It's my experience, though, that you can talk about one of these things every month, you can have monthly meetings about it, monthly newsletters, but in between that, somebody is going to be called and somebody will have forgotten the information, missed it or, as I say, if something sounds just too darned good to be true, they might sign on. So the question that the contract will be made null and void by the energy board, that's fine unless somebody has already paid out some money. You can never totally cause that not to happen, but it is incumbent while this process is taking place to know that they're out there. There are always scam artists in every way, and especially while this is going on, I think some of that extra effort should be taken until Bill 35 passes.
Ms Johnson: Could I just add to that? If government provided chambers of commerce in Ontario two or three statements -- because we get calls to our office on a regular basis, and it's people who are very vulnerable, as well as businesses that are vulnerable. What occurs is that we sit down as staff to figure out how we're going to respond to these questions, because we can't in any way detract from a business being in business. But if we were able to say to our staff that the law is not in place, the bill has not been passed etc and this is what the staff should be saying, which is legal, then we can at least inform a lot of people. That happens on a regular basis.
The other thing is that if you provided for us some information, we would be most pleased to distribute that in whatever manner. That goes out to 100,000-some-odd businesses in this province.
Mr Wilson: We are also tied into the chambers of commerce throughout the northwest. As I said, there is no Better Business Bureau here, so by us being able to do that, sending it out to our other chambers, it gives them some ammunition too when they're getting calls.
Mrs Johns: In your presentation you raise the issue of excess profits by the municipal electric utilities. I know you're not reading-the-act-at-bedtime sort of people --
Mr Wilson: That's my wish.
Mrs Johns: -- but under subsection 77(2) we have the ability at this point, through the Ontario Energy Board, to regulate the municipal electric utilities and their wire prices and those kinds of things. So we will be able to stop them from a gouge of the public, if they deem that's the way they want to do it. That's where we will have the control to do this, in this enabling legislation, just for your interest.
I think my colleague Mr Hastings --
Mr Wilson: He's leaving the building.
Mrs Johns: From that standpoint, I will ask my next question, which is about pricing. Do you believe that if we get efficiencies with Ontario Hydro and we move to go into a market and ask for competitive pricing with different companies like Northland, with other groups of companies, that because that's about 80% of the price of electricity, we'll be able to get a lower price and that will be passed on to the consumers?
Mr Wilson: Do we believe that will happen?
Mrs Johns: Yes.
Mr Wilson: We believe that will be the intent. We hope it's going to happen; we just suggest diligence at all times, especially when you're going out into the marketplace with that. As you have stated, though, with 40% going towards debt, that's going to be an issue. If one area is doing part of the generation, where is that going to sit? Those items have to be paid for somewhere along the line. You might be able to handle it in one area. Broadly, are you going to be able to cover those costs and be able to do it competitively so that once the person on the street or the person with the business gets their bill, they do see that they are getting the savings?
Mrs Johns: Let me be very clear on that issue, because you've raised a very fundamental issue. The ratepayers in Ontario are paying for that debt now; they will be paying for that debt later. It's 40% of their bill right now; it will be that afterwards. There is no new debt as a result of us moving forward with this deregulation. We are not looking to add new debt to Hydro. But the province and the taxpayers have guaranteed that debt in the past and they will have to pay for that debt because they have guaranteed it. But there is no new debt that's going to come as a result of Bill 35.
Mr Wilson: One of the questions I have is, will some of that debt be retired as well? There might be a component in the billing to help retire some of that debt at the beginning. Savings might actually be realized in the longer term, as that starts to be repaid. So it would be nice if it was 40% now and you could stand here in 10 years and tell us it's 30%.
Mrs Johns: That's an excellent question and that's exactly what we're trying to do. We're trying to move that the dividends come back, and the tax payments, into the debt so that it reduces very quickly and the taxpayers and the ratepayers start to pay less and less on their bill. That too will bring savings to the ratepayer. That's another way we hope to obtain savings, by getting that debt down quickly and that 40% going back to the ratepayers of the province of Ontario. Thank you for bringing that up.
The Chair: On that note, it's my pleasure to thank you for coming. On behalf of all the committee members, we appreciate your input this morning. We'll carefully consider that as we review the bill changes.
VALERIE FALLS LIMITED PARTNERSHIP
The Chair: We now call upon representatives from Valerie Falls Power. Good morning and welcome. Please make yourselves comfortable.
Mr David Boileau: Good morning, ladies and gentlemen. My name is David Boileau. I'm the president of Seine River Power Inc. My company, with 35%, and Great Lakes Power, at 65%, together own the Valerie Falls hydroelectric project. I'm actively involved in hydro industry issues and provide valuation and investment advice on existing and new hydroelectric projects in Ontario and other parts of Canada. With me today is Bud Carruthers, a vice-president of Valerie Falls.
On behalf of Valerie Falls, I would like to thank you for the opportunity to make this presentation to you today.
Valerie Falls Limited Partnership developed and operates a 10-megawatt hydroelectric generating station on the Seine River, three miles north of Atikokan in northwestern Ontario. The Seine River flows west into Rainy Lake and Lake of the Woods, forming part of the Winnipeg River drainage basin.
The Valerie Falls generating station, completed at a cost of $23 million, started producing power in October 1994 and was officially commissioned in June 1995. The power plant, built on a man-made diversion of the Seine River, contains two five-megawatt turbine generators. All power produced by the station is contracted for sale to Ontario Hydro under a long-term sales agreement which expires in 2044. This agreement has a fixed rate schedule and term, with the only variable being an annual adjustment for inflation. There is no -- and I repeat, no -- provision in the contract for a flow-through to Ontario Hydro of any new government-imposed taxes.
The Valerie Falls generating station is a typical hydroelectric non-utility generator, or NUG as they are referred to in the industry. This power station was developed under special rules and incentives designed to encourage alternative energy sources. These projects promoted the goals of the Ontario energy security policy, which was introduced in the early 1980s by the provincial government. The objective of the policy was to increase the energy contribution by provincial indigenous energy resources from the 1978 level of 22% to a level of 35% by 1995. To this end, the Ministry of Energy, Ontario Hydro and the Ministry of Natural Resources worked co-operatively to release water power sites and develop power purchase policies which would encourage private investment in new energy generation. A direct consequence of this policy was the subsequent private development of approximately 150 megawatts of new hydroelectric capacity in northern Ontario, representing $350 million in capital investment and creating an average of 500 full-time jobs per year for the past nine years.
Hydroelectric developments require a very large upfront capital investment. The construction phase is high-risk due to the vagaries of nature, such as flood and difficult civil works sites. The payback period is typically at least 20 to 25 years, and with the drought we're experiencing this year, maybe it's 30 years.
Long-term stable power sales contracts and consistent and predictable government tax policies are required to encourage experienced private investment in this industry. Therefore, it is logical that as a partner in the Valerie Falls project, my company has several serious concerns about the impact of Bill 35 on our business, particularly with respect to the imposition of competition transition charges or other stranded debt charges at the generator level. In our case, without a legislative exemption, a stranded debt charge levied at the generator level, as is currently provided in Bill 35, would have to be absorbed by Valerie Falls Limited Partnership. This would have a devastating financial impact on the project.
The situation at Valerie Falls is mirrored across the province. Virtually all NUGs which have contracts with Ontario Hydro would be financially impaired by a stranded debt charge at the generator level. I therefore urge the committee to recommend to the minister that the final legislation contain provisions to ensure that NUG investments are not devalued due to stranded debt recovery.
On a second point, I would also like to emphasize that the inequitable method of municipal assessment for hydroelectric projects very nearly caused the cancellation of the Valerie Falls project. I ask the committee to help correct this inequity by recommending to the minister that companion Assessment Act legislation be introduced at the same time as Bill 35 in order to level the playing field and tax generating facilities in a similar fashion consistent with the practice in adjoining provinces and states. Without a change in assessment policy, Ontario will lag behind in new hydro investment, and the economic and environmental benefits of this wonderful power source will be lost.
In addition to the Assessment Act, there are a number of other crown statutes and policies which affect our industry. These include various Ministry of Natural Resources and Ministry of Finance policies related to water power development and water power royalties. Some of these policies and statutes will need to be re-examined, revised and/or rescinded if the intent of Bill 35 is to provide a level playing field for various sources and types of energy.
As a private investor in the hydro industry, I welcome many of the changes proposed by Bill 35. There is a real need for changing how electricity is regulated and sold in this province. I look forward to opportunities which should attend open access. However, I strongly object to a stranded debt charge on our sales to Ontario Hydro as this would adversely affect the economic value of our operation. I also encourage the committee to examine existing statutes and regulations of the ministries of natural resources, finance, environment and municipal affairs to ensure that hydro projects operating under Bill 35 are not disadvantaged by rules not addressed directly by Bill 35.
Thank you once again for the opportunity to appear before you today. Bud and I would be pleased to respond to questions from the committee.
The Chair: Thank you very much. We have six minutes for each caucus for questions and we'll begin with the third party.
Mr Lessard: Thank you for your presentation. You've raised at least one issue that was raised earlier today which, at least on my own behalf, I wasn't familiar with until it was raised, and that is the taxation of generation facilities here in Ontario vis-à-vis generation facilities outside the province and how special charges may be applied.
This was a government that got elected promising people a 30% tax cut, and people are seeing now what the cost of that tax cut is and how it's going to be paid for. People are seeing increased user fees and special charges, and this was a government that during the campaign said that user fees are taxes. I would argue that the special charges you're talking about to cover stranded debt and residual stranded debt are taxes as well.
My question is, how many other non-utility generators are there that may be experiencing the possibility of this unfair charge?
Mr Boileau: I'll be fairly general in my response on that because I'm not sure exactly what the number is. I believe -- Bud, you can correct me -- there are about 2,000 megawatts of non-utility generation in the province. I would think that probably half of that is under contract directly with Ontario Hydro and would suffer a full loss of value for whatever that stranded debt charge would be, because there is no provision for passing that charge through to Ontario Hydro if it's charged at the generator level.
In addition to that -- and I'm not here to defend that industry -- what I would call the industrial NUGs, companies like Abitibi or Inco who produce power themselves at their own hydroelectric facilities or other generating facilities and transfer it either directly or through Ontario Hydro's lines to their operations -- paper mills, mines and smelting operations -- also would suffer that direct loss of whatever that stranded debt charge is.
Bud, did you have something to add to that?
Mr Bud Carruthers: The Independent Power Producers' Society of Ontario, IPPSO, will be making a presentation, I'm sure, to this committee and they could give you the exact number of independent producers.
Mr Lessard: What will be the fate of non-utility generators like Valerie Falls if this change doesn't come about?
Mr Boileau: It would be very, very serious in that the average price of electricity sold by NUGs to Ontario Hydro, or the valuation, might vary between four and six cents. We're not exactly sure what the stranded debt charge would be, but if it was one cent, for instance, it would represent one fifth of the value of the project. I don't know very many projects that have those kinds of margins. Anything that's operating with a 15% margin or return is going to be in very serious difficulty, whether they are financed or whether they are purchased outright. Does that answer that question?
Mr Lessard: I'm wondering what the serious difficulty may lead to. Would it be possible that it would become bankrupt or go out of business or be insolvent?
Mr Boileau: There are two possibilities. Yes, that would be a possibility in the event that the project couldn't sustain it and make its financing requirements. The other possibility is that it basically shuts down any opportunities that are available for development in terms of charging it at that point, because it would add that much more cost to the generator.
Mr Lessard: One of the advantages being touted by the government in Bill 35 is the job creation aspects of it. From what you're saying, there is a possibility of jobs being eliminated, and in fact, if Ontario generators have to pay this special charge and American generators don't have to pay it, we have the possibility of actually having jobs created outside the country and power being transferred into Ontario, which would be a real anomaly.
Mr Boileau: Our point is that if it's charged at the generator level there is great danger of that circumstance.
Mr Lessard: The last point I want to make is with respect to your suggestion that we amend the Assessment Act. If you've been following the debates in the Legislature you know we've been through that about four times now. I don't look forward to amendments to the Assessment Act for a fifth time. However, we do take your suggestion under advisement. Thanks.
Mr Baird: Thank you very much for your presentation. We appreciate your submission and we'll certainly take the time to reflect on it. You've raised some excellent points.
I particularly am struck by the comments you made with respect to the debt and any charge to pay that off, because obviously that's something that is of concern to all of us.
When I got my Nepean Hydro bill -- that's in Nepean, an Ottawa suburb -- they had a little graph which explained that Nepean Hydro was only responsible for 10 cents of every dollar that I paid for my Hydro bill and that the transmission and generation were 70 cents and 20 cents, that the other 90 cents was basically going to Ontario Hydro.
The $30-billion-plus debt has been rung up over the last 30 or 40 years by all parties while they were in government. To be candid, someone wasn't watching the store: $30 billion in debt. Today almost 40%, 42%, 44%, when you look at principal and interest, of our dollars are going to pay for that debt. So the store wasn't being watched appropriately by all three parties, to be fair. I wasn't around during that time, but that's a real problem. Obviously we can't make that go away. That has to be dealt with.
There are a number of options, but basically the consumers are going to continue to pay because at the end of the day obviously they're the ones who pay that through the payments and other charges, who would, if necessary, continue to pay approximately 40%, 44% of their hydro dollar towards paying that debt. We can't make it go away. As shareholders in the province, each of us is responsible. As shareholders of the corporation, each of is technically responsible, so we pay it today.
To be candid, I was very shocked to learn that it was that high. I knew Hydro had a $30-billion debt, but I never would have equated it with upwards of 40%, 44% of the dollar. So your comments are well taken with respect to putting any sort of special charge, if it was required, on generation.
I guess when you look at a regime, at how the government deals with this large debt, you've got to look at -- for example, someone could be a self-generator. Would they fall under the auspices of being a consumer? How do you ensure there are not loopholes in the legislation so that everyone takes their part of the debt that's been built up over the last 30 and 40 years?
Your comments are well taken and certainly worth reflecting on, but I can tell you that all of us are very, very sensitive. That's why it's, in my judgment, clearly not any sort of new tax because it just basically reflects the existing tax regime that we already pay for today in our bills. It's not maybe levied out that way, but it's obviously a real concern that we begin to clean up that mess. All I could think of was, what shape the Ontario economy would be in if we didn't have that 40%, 44% debt charge on all of our bills.
I want to thank you for your presentation. It certainly merits some consideration and we'll reflect on your thoughts.
Mr Boileau: Just to clarify that point again, we recognize that there is going to be some recovery of debt. Somebody's going to pay for it. Obviously, the consumer is. Our problem is that all of the kilowatts that are sold in the province are assigned a value of a half a cent or a cent to retire the debt, or whatever the figure might be. Ontario Hydro can pass that on to the end user. We, as a generator, have no opportunity to do that, so if the tax is put on at the generation level, then we are caught and trapped in between and we would be absorbing that ourselves and we just simply couldn't afford it.
Mr Baird: I don't think there is any intention for it to be doubled, but you just want to make sure that, for example, the self-generator who might be self-generating for their own particular enterprise isn't lost.
Mr Boileau: I think there is a provision in the bill for either attaching the stranded debt charge at the end use or at the generation end. Our hope is that our point is taken that if it's applied at the generator end, then it's discriminatory and seriously devalues our investment.
Mr Baird: Obviously that's one of the things. We want to make sure we assign the appropriate debt to both Genco and Servco and then to see what the scope of any residual debt would be. To make sure, the government had a process and has brought in a number of financial advisers -- Goldman Sachs, CIBC, Wood Gundy and Midland Walwyn, some experts in this field.
The concern has been raised to make sure that we get it right, because it's going to be very, very important to make sure that is right and that we take the time to get it right, to ensure that it's the appropriate valuation so that it minimizes any potential they charge, which may or may not be there.
My point that I want to leave with you is that we're already paying today as customers, although we may not recognize it, the interest and the principal on the $30-billion-plus debt. I think many people -- certainly I was surprised to learn that as a consumer, that it's just built right into our bill. So for a consumer that charge or part of their bill isn't new. It's just taking an identical form, and this would be after, with the other payments each month.
Mr Galt: Thank you for your presentation. As we move to near the end of the presentation you're talking about other ministry statutes and regulations and having a concern about the environment. We had a protest yesterday out on the front lawn with Greenpeace. I think they were there to raise funds. I don't know if they're really concerned about the regulations, because everything they've mentioned we have concerns about and are empathetic to their concerns, no question.
This legislation we're proposing is enabling legislation to change regulations under the Environmental Protection Act and via that, through the OEBA, to producers of energy outside of Ontario.
I am just wondering about some of your thoughts since smog is not the problem here that it is in downtown Toronto, unless maybe of course you have a big forest fire nearby. If the regulations are the same for importers of power as they are for the producers of power here in Ontario, is that going to affect you? I am just looking for some of your feelings in connection with this enabling legislation.
Mr Boileau: I think that when I referred to other statutes and regulations I mentioned the Ministry of the Environment one because there are obviously green power issues associated with Hydro that would probably take more time than we have today to get into.
There were other ministry regulations and statutes that we were concerned about. One of them in particular might be the Public Utilities Act or the Municipal Franchises Act. We would expect that a companion bill would be passed to amend or rescind some of the aspects of those because, as a private generator, we are not allowed to construct a facility in a municipality without the approval of the council of that municipality.
We would expect that under an open-access market, all of the legislation that is on the books today would be examined to see if it truly promotes open access. If there's something in conflict with that, then it should be revisited.
With regard to the Ministry of the Environment issues, again I'm a great champion of hydroelectric power. I think it's not going to replace all of our needs. It doesn't have the capacity in Ontario. We don't have enough high waterfalls or big enough rivers to do it. But certainly there is an opportunity for another thousand megawatts at least in northwestern Ontario or northeastern Ontario. That's big investment, it's big jobs and it's something that made the north. I think we want to make sure that when we design the rules for open access we don't unnecessarily discriminate against Hydro, which has been the case in our province.
You mentioned Sir Adam Beck, Mr Conway. I'm a great admirer of him. He built the industrial strength of this province primarily on hydroelectricity. Up until the time our needs grew beyond hydroelectric, it was a very proud enterprise. We still believe today that hydroelectric projects, given an even and level playing field, can compete very successfully in Ontario and in all markets, including American and adjoining province markets. But we have to have the tools to do it. That's why we're here today, to make sure that we don't end up with a stranded debt charge at the generator level, because it will be very detrimental to hydro development, and that other aspects of legislation that currently exist are revised to reflect that view.
Mr Conway: I appreciate the presentation. Not that I want to restimulate the debate about Mr Beck, but Mr Baird made a very interesting point about the situation in which we now find ourselves. I think that as a relatively young person he has a very valid right to make that point because there is pot of debt.
One of the problems I guess I've had with this Hydro debate -- I've been around it personally for a number of years and I've made some effort to study it since the Beck era -- is that if you could just get the religion out of the debate, if you could just get the theology out of the debate, because much of what's given us the big mountain of debt was never supposed to happen. I was there. I was told.
Mr Baird: The storekeeper.
Mr Conway: I just say that because now we're at another turning point. Listen, I think there is strong bipartisan support from this committee for a new direction. But I'm telling you, I am skeptical because there is such overwhelming theological belief that certain things must axiomatically happen. I sure as hell hope they do. But I was told that 30 years ago. I sat on a select committee last year on Ontario Hydro Nuclear and I wanted to have a court martial, because 30 years ago the theologians told me it couldn't happen.
One of the reasons why I'm interested in Adam Beck is, to be fair to Ontario Hydro, they ended up with a bag full of utilities they never wanted. Some of them were in northern Ontario and some of them gave us the biggest political scandals we ever had because the market behaved in a way it wasn't supposed to behave and because the commodity is electricity. Because Ontario and Canada are big and empty and cold, electricity is about the most political commodity you could imagine.
So I agree with Mr Baird. I want a new direction. I want reduction in bills and a reduction in debt burden and I want there to be joy and peace and equity in the land.
Having said that, I want to come to your brief. Let's talk about assessment. Could you just quickly and briefly explain the arcane world of property assessment as it relates to private hydroelectric power projects in this province and what we need to do to inject more fairness into the playing field?
Mr Boileau: Sean, it's an interesting point and one we raised because we feel it's very important. Just a very brief background to assessment in Ontario: There are two methods of assessment for hydroelectric projects and for other energy projects, basically. One is under the Assessment Act, which falls under the Ministry of Finance. The second method is under the Power Corporation Act, in grants in lieu of taxes, which is available for Ontario Hydro and municipal utilities.
The structure under the Power Corporation Act assigns a specific value in dollars per cubic metre for inside space of a powerhouse and that's the rate that is paid to the municipality by Ontario Hydro. Private developers are subject to assessment under the Assessment Act and the structures of the facility are assessed.
The effect of the two different assessment methods is that a typical hydroelectric project that is owned by a private company will pay 3,000% more in property taxes than the same facility would pay if owned by Ontario Hydro. In other words, if a project was a 50-megawatt project, a private company would pay 3,000% more in taxes to the municipality than would Ontario Hydro if they owned it.
Mr Conway: Will that change under the provisions of this bill? There is a reassessment provision around hydro works.
Mr Boileau: I don't know. I haven't seen that information, so I can't answer that.
There's another problem with the whole assessment system in that kilowatts are taxed differently between hydro kilowatts and thermal kilowatts. Generally, there is about a 2,000% difference. So if you own a hydro project, you're paying 2,000% more than if you owned the same size of thermal project. By "thermal," I mean coal- or gas-fired. This is a real serious problem in terms of developing new projects because there's some discrimination in the energy.
What's happening in other jurisdictions, in states and provinces, is that they're looking at a specific rate per dollar sold of electricity, which seems to make more sense and is more rational and even and levels out the playing field between different sources of electricity.
Mr Conway: Perhaps we might ask these deputants, Madam Chair, to supply some paper to the committee on some of those assessment inequities and what they have meant to people like yourselves, just so that, as we get into the later stages of this, we might turn our minds to it. Could we ask you to do that, just to maybe expand a bit on your actual experience with the previous assessment regime? This is all about levelling the playing field. I don't profess to understand the intricacies, but I'd like to see perhaps a greater elaboration of the actual experiences that you've had and how they have led to disincentives.
Mr Boileau: We in the hydro industry have seen assessment difficulties in terms of assessment costs on a project amounting to --
Mr Conway: Sorry, I didn't mean it as a new question. I just mean it as something you could perhaps supply the committee with.
Mr Boileau: Certainly.
The Chair: On that note, then, you have an invitation for further input; I hope you'll take it. On behalf of the members of the committee, we thank you for coming before us today with your experiences and your advice.
Mrs Johns: Chair, I'd like to explain where I think Bill 35 may help them. It's in subsection 86(1), where you see payment in lieu being increased for Genco, Servco and municipal electric utilities to bring them into a level playing field. I'm not sure it meets their needs but I wanted to outline that that is the section. I'd like that group to have a look at that before they send in their documents.
Mr Conway: I agree with Helen on this. I think that is the area. Hopefully it is the remedy, but this is a very complicated business. I don't profess to understand it. I'd like them to, if they could, submit some evaluation as to whether that section helps solve their problems.
Mrs Johns: That's why I wanted to bring this section forward, so they would put that into the report.
The Chair: And it's 86(1). Maybe we'll have staff speak to them privately.
Mrs Johns: Valerie Falls Power, could you look at 86(1) in the bill as you're looking at the documentation that Mr Conway asked you to send in and see if that alleviates some of the problems you have?
NORTHWEST ENERGY ASSOCIATION
The Chair: Now calling upon representatives of the Northwest Energy Association.
Mr Larry Hebert: Madam Chair, we'll pass out two maps. I don't pretend in our group to represent First Nations groups but we've shown the First Nations in those communities only as those apply to the province then. Maybe we need a geography lesson. Maybe we're truly in southwestern Ontario when you look at the map.
The Chair: As we look at these maps, then, we'll try to examine them and listen to your presentation as well. Before you begin, you're very welcome to be before our committee.
Mr Doug McCaig: Thank you very much. You had the heavyweights yesterday. Today you have the exciting ones here.
Anyway, good morning. My name is Doug McCaig and I'm the chairperson of the board for the Northwest Energy Association. With me, of course, is Larry Hebert, the general manager of Thunder Bay Hydro and one of the many volunteer staff at the Northwest Energy Association. We obviously have no permanent staff.
During the late 1980s, Ontario Hydro realized some problems and we in district 3, which we represent through MEA, started looking at the implications for our customers. We sent a resolution to our parent body, the Municipal Electric Association, calling for a rationalzation of the municipal utilities in this province. Faced with what we perceived as an impending dilemma, a conclusion was reached. We had two options: a co-operative or a single utility. The ensuing argument nearly destroyed the whole district and its unity.
Our focus the pursued the concept of a co-operative. The Macdonald commission complimented our presentation as the best they'd seen for its foresight, innovation and, of course, originality. The rest of our history is captured in the executive summary, which is at your disposal, which is part of our written presentation, by the way.
We represent 11 municipal utilities in our district of northwestern Ontario and all are members by choice, all are endorsed by their major shareholder or stakeholder, the respective municipal governments. We look forward to expanding our customer base to other electrical users in this province and there are meetings in progress to do just that.
Our objectives are outlined in our attachment. The structure of our board represents each and every community in our area. Northwest Energy Association is a fully endorsed, non-profit corporation that is implementing what is being advocated by the government of the day and driven by competition, which is the key word.
With that, I turn the presentation over to Larry Hebert.
Mr Hebert: Thanks again to the committee for allowing us to be here.
The Ontario government is taking a very aggressive approach to open competition by opening wholesale and retail competition on the same date. Other jurisdictions have not had success in retail compared to wholesale implementation. Even FERC is questioning the wisdom of totally open markets when you have the risk of severe volatility in rates that you did this summer on the spot market for electricity. We all know also how long it took to rebuild the system after the ice storm of 1998. What if there is no power to sell or, even worse, power but no system to distribute it because wrong decisions were made?
Electricity is a necessity in this day and age. If you don't agree, don't phone next time your power goes off. We were without power in northwestern Ontario for up to three hours in some locales in late June of this year, 3:30 to 6:30 in the morning, and many people didn't notice it. Was is it a technical/storm-related issue, or were we sacrificed to make a sale on the very lucrative spot-price electricity market? We'll never know.
Despite these risks associated with the open, free and competitive market, we welcome the opportunity to participate in it. We are a group from northwestern Ontario working on behalf of northwestern Ontarians for the benefit of northwestern Ontario. With our proximity to the cheapest power in North America, we are on the verge of a business and commercial boom if we do our job correctly and the Legislature allows truly open markets.
The electricity market is extremely complicated when it is opened and unbundled, so one of the first jobs for any of us is consumer education. We have to ensure customers understand what is happening, why it's happening, how it's happening and how it benefits them. That is a role for the government, the OEB and the various players in the market. We don't want a repeat of the snake oil salesman scenarios that came with a highly unregulated and unlicensed gas market when it opened.
The Manitoba connection: At one point in another galaxy, Ontario Hydro was going to import power from Manitoba -- 1989. We all remember the 25-year plan. Why? Power was available, it was hydroelectric power and it was low-cost. The contract got cancelled and, as far as we know, there's still a lawsuit outstanding. But the two main criteria still exist: availability and low cost.
In the spirit of the government's legislation, we have talked to Manitoba Hydro about a contract to buy power and services. They see opportunities here as well. Through further public and private partnerships we'd hoped to move about 1,500 megawatts of power into our area and beyond. It would come down the Highway 17 corridor -- and Ontario Hydro has done most of the preliminary work on a route selection for that -- and a second corridor would be down Highway 11. Both would come into Thunder Bay and move along the 17 corridor to eventually get to Great Lakes Power, which we've also talked to. A new line could possibly be built into the Minnesota market along the western shore of Lake Superior. No line exists there currently.
An investment banker from the US, two major Canadian banks, a major Canadian credit union and some of the direct customers of Ontario Hydro have indicated a major interest in this line, and varying degrees of interest, from "No thanks" to "Yes, we'll help," to pay for it directly. Two firms have talked to us with an interest in bringing three new manufacturing plants to our area. One 300-megawatt plant in Thunder Bay, one 130-megawatt plant in Thunder Bay and one 300-megawatt plant in the region are some of the reasons for the Manitoba deal. The US dollar currently and the transportation corridors in our area are other attractions that make it attractive to them. We've also been told some of the mines that closed during the recession may reopen.
Assuming we meet environmental approval, we seek your support in allowing the Manitoba connection to take place. Why? First, it creates construction jobs for the line to be built. Second, it creates construction jobs for the new plants that would be built. Third, it creates permanent jobs in the industries that are secondary to the three main plants. Finally, it creates good-paying, permanent jobs in the private sectors in those plants.
Manitoba Hydro has their own agenda which dovetails with ours. Public and private partnerships equal new jobs, a winner for everyone. If we can get a better deal from Ontario Hydro, we're ready to talk to them now, and we'd enjoy doing that as well.
The Manitoba connection, part II, and the reason I passed the maps around: The second reason for another Manitoba connection is to get more of the remote native communities off expensive diesel fuel and on to the grid. That lessens the cost since about 26 remote communities could be put on the grid. In this case the grid could be a ring bus, fed from two different sources, and as funds become available more extensions could be made to it. We have talked to the federal government, which has a vested interest in seeing this happen since they subsidize the very expensive diesel power in these remote sites.
The grid also allows native groups to develop small hydraulic sites as businesses and sell on to the grid. We would commit to a price for such production. If that helps solve other native issues that we all know exist, then that's a real bonus.
Again, a potentially successful native partnership would be a great one: First Nations, Manitoba Hydro, the NEA and the federal government.
For cogen developers, while we are not prepared to guarantee the rates Ontario Hydro was forced to pay for energy, the Thunder Bay Hydro model, which was developed by Bill Butuk, one of our engineers in the past, pays developers of cogen for both demand and energy and could be a workable solution to the dilemma about contract cancellations.
The white paper allowed for pilot projects. We are currently talking to Genco about a pilot deal until competition opens to see what a contract would look like. We are also looking at both a real aggregated contract for power which would save NEA members almost $300,000 a year until competition opens, and we are working with Genco and a consultant on what an ideal contract would look like in the new millennium. We have also offered Ontario Hydro Retail in the area an opportunity to join us as a partner in the pilot project so that everyone in the region is treated the same, and we are also talking to them about a buy, sell or merge deal for the long run.
We have met with the Ontario Energy Board, the Ministry of Energy and the local MPPs have been kept abreast of our plans. All feel we are proceeding as was intended by the government's plans. Most are surprised at how far we have come.
I'll turn things back to Doug to conclude.
Mr McCaig: The government has said it wants MEUs to amalgamate and assimilate. We are doing just that and have been doing so for several years. I would like to point out to you that it was this district that initiated the initial study of the electricity sector through the MEA's institutional options and one of our members was chairman of that group when it started. We want to take an evolutionary, not a revolutionary, approach to things. We don't propose to have a slash-and-burn policy because it would be against our concept of creating jobs, as Larry has pointed out.
The government has said it wants private and public sector partnerships. We are working diligently on those: first nations, existing firms in the area, new potential firms and government bodies. It wants utilities to privatize as OBC companies. The NEA is a non-profit corporation now and one step away from the OBCA requirement.
The government has said it wants to create jobs and we haven't experienced the growth they have in southern Ontario. We are very adamant in our approach to creating jobs in northwestern Ontario to satisfy our regional differences, and this is something you have to be very much aware of.
The opportunity in electricity may be the catalyst and example for other sectors of our region to follow. As I said, our district started the institutional option. We are well on the way to fulfilling whatever the government has requested of the utilities on an amalgamation and assimilation basis. I suppose you ask the question, What are you looking for?" We are looking for you to let us be the pilot project to go ahead with the plan that the government is advocating. We're well on the way. We're further ahead than anyone else, and have been doing such for a long time.
The Chair: You have left us six minutes for each caucus. We'll begin with the government caucus.
Mr Steve Gilchrist (Scarborough East): Thank you both for your presentation. I think it's well known around this table and certainly among the government members that you've been one of the most progressive, if not the most progressive, districts in the MEA and you're to be congratulated for taking the proactive stand you have in terms of finding lower-cost alternatives for your customers.
In point of fact, the Manitoba example you raised is precisely what we would expect to happen after 2000, once the current Hydro is forced into a truly competitive arena.
You raise a couple of questions in your presentation here and I'd invite further comment from you. You talk about price volatility and the need to perhaps provide some sort of transition or extra protection while at the same time balancing the need to go to a competitive marketplace. In Alberta, where they only went to deregulation of the wholesale end of the business, there have been no great savings that wound up in the hands of the customers. Where there have been the greatest savings are in jurisdictions where both wholesale and retail were totally thrown open to competition very early on.
Have you any examples or specific suggestions on the kinds of mechanisms you think might still allow the protection against the price spikes you talk about, while still embracing the concept of full competition?
Mr McCaig: I'll start it off and then I'll it pass it off to Larry. What we're looking at was recently on the spot market in the United States during the heat wave. The normal cost of electricity is about $35 a megawatt hour. During the spot market crisis a few weeks ago, the price of electricity went from $35 to $7,000 a megawatt hour. Several corporations that were brokers went under because of what happened, brokerage firms that were worth $150 million each. They didn't have deep enough pockets. This is the kind of volatility we're referring to. The spot market price is very volatile and a lot of things can happen.
Somewhere along the line there has to be a built-in regulation that protects perhaps not the large industries but the individual residential customers. There has to be a cap for the default customers, those who go to the utility and don't really want to have anybody else supplying them electricity. I think that has to be invoked and I'm not sure if it says it in the white paper. I'm sure it's being looked at. But these are some of the things, with the volatility.
Further to that example, I told you we indicated in our proposal that we're ready to go to the private sector. I know that one of the paper mills in this industry took such significant jumps in the spot market price that they would have lost $1 million a day had a deal not been struck.
Mr Gilchrist: Let me explore that further then because in almost any other commodity we can think of, it isn't necessarily a smooth cost to the supplier. When you pick up the phone and make a long-distance call, it doesn't cost Bell exactly the same to route you to Vancouver as it does to Ottawa, but many of the marketers out there now have a plan that's a flat rate. You pay six cents a minute or 10 cents a minute, no matter where you go. Obviously they've looked at the averages and they've looked at seasonal factors -- although there's not much in telecom, although more wires would fall down in the winter -- and they've developed a profit model for them that allows them to assimilate those peaks and valleys.
Why, as we look down the road, wouldn't the energy industry adopt a similar philosophy? Yes, you bite the bullet maybe that one time every 50 years where there's a major drought, but the other times you've built in a little extra margin to compensate for that.
Mr McCaig: Just a couple of things. We have to be very careful when we throw around these terms, major drought and ice storms that hit us once a millennium. It seems we've been hit two or three times this year with these things that happen only once in a while, so we have to be very careful with that.
I think you have to look to FERC in the United States. They are really looking closely at their deregulation policy right now because of what happened in the electricity market. We have to be very careful that we don't try to reinvent the wheel. We can learn by their mistakes and we can also learn by the British mistakes, what happened when they went into the operations at their end. That's what I'm saying. Let's get some regulations that protect the little guy. That's very important.
Mr Gilchrist: One of those regulations: Might it be that the bidding you do to attract a customer should have a set price over a fixed term so that the customer could plan? Again, if in fact you as a supplier have miscalculated, well, that's the risk of being in business, but someone else will certainly fill your shoes if you've made a bad business decision. Would that be an appropriate regulation that we perhaps should have some sort of a contractual obligation that gives a customer a fixed term and a fixed price?
Mr Hebert: That's certainly one possibility. The other option is it's open, it's risky, that's what business is all about, and we just take those risks and have to deal with them as they come. I just talked about it in the paper as a caution, not necessarily something we have to regulate, but that's one way of doing it.
Mr McCaig: What we have to remember is that we're not deregulating, we're re-regulating this whole thing.
Mr Gilchrist: Hopefully with fewer than is the case right now.
The Chair: Thank you. To the official opposition.
Mr Conway: That's a very good point, Doug. It is essentially a re-regulation, although with very different kinds of instruments. It's so good, it's so sweet and attractive, who in their right mind could not run out and embrace this?
Mr Hebert: Thank you.
Mr Conway: I just want to start by saying --
Mr McCaig: Don't give him a straight line. Please don't give him a straight line.
Mr Conway: I have in my hot little hand Ron Osborne's testimony to the committee yesterday, and it seems that master of the telecommunications world, now CEO of Hydro, sounds like he has a different plan. Yesterday I was certainly struck by the clarity and the power of his presentation around their plans to grow the services company, Servco, the retail company. So let me ask you, what would it take from Servco to make this happen? Presumably there are substantial Servco assets that are at the core of the debate.
Mr McCaig: To make what happen?
Mr Conway: To make the regional co-operative electricity distribution system for northwestern Ontario work as proposed here, complete with the Manitoba interconnect.
Mr McCaig: I think one of the more interesting things that could happen is the partnering with the customers and Ontario Hydro with the utilities. We can all retain our own identity as municipal utilities or NEA, whatever, and we purchase power based on the economies of scale.
Mr Conway: But the more hands in this soup, as some of my friends opposite would I think rightly observe, the more diluted are the efficiencies likely to be. But let me come back to my first question. I like this. I think most of us would like this. It would seem to make a lot of sense, so good that there must be all kinds of problems with it.
Doug, you and I were around for the Bill 185 business, which was a local rationalization that was intended -- everybody was onside. We passed the bill to great Te Deums of praise and everybody went and misbehaved. That was just local franchise markets. We couldn't make that happen, and everybody said they were onside five years ago, after 10 years of debate. So my question is, what is the current attitude of Servco to this kind of proposal, and specific to that, what are their assets? What assets have they got in this mix -- I can imagine several -- that you would have to bring on stream to make the thing work with some degree of efficiency? Because again I say to you, if I'm a customer up on that line, all I want is reliable energy and I want to see a benefit.
Mr Hebert: The easiest answer is they don't have to do anything except let us do it. Technically we don't need any of their assets if we're actually going to construct a new grid.
Mr Conway: All right.
Mr Hebert: If we want to be totally fair in the region, they have roughly 40,000 retail customers in this area. If they wanted to sell for a reasonable price, like $1 or $2, we'd be more than willing to buy so that we'd have a contiguous region. We represent 11 municipalities now, but there are other municipalities out there that are direct customers of Ontario Hydro.
Mr Conway: But let me ask you, in talking to others of your colleagues, we have talked generally about efficiencies on the distribution side and I think the committee has agreed that there are some real possibilities there. Surely one of the real issues is going to be how we make that happen, how we create a market in the legislative environment for that to occur sensibly. How do we make people sell or lease at a reasonable price the kind of assets that would be necessary to get the synergy, to get the right mix within a given community or region?
Mr McCaig: Under the present circumstances, it's a symbiotic relationship, as you pointed out, but for all of us to survive in the north, I think you have to appreciate the regional differences and what goes on. If you are looking at what makes it happen, first of all, it has to be sold to the municipal governments, who are the real stakeholders in the utilities, and that has been done, and we have to give them reason and services to promote that we can protect the people in the north --
Mr Conway: I need to change the behaviour. If I learned anything in the Bill 185 debate, it was people told me what I wanted to hear and they all said, "Yes, ready, I agree," and then they went out and the behaviours didn't change. The behaviours in fact frustrated the very thing that people said they wanted to have happen. That was a minor piece. Now we're into a much bigger, more promising proposition. I hear you today and I heard Osborne yesterday and I'm thinking they say they're ready for a marriage, but I think I need a very bloody-minded counsellor to get them up the aisle, to keep them together.
Mr McCaig: With all due respect, Sean, but I think what is happening is that we have already illustrated by the course of action we have taken previously that we are doing that and getting the necessary attitude and doing the necessary education which the government has said is necessary and that the utility people have to be educated. We're already doing that and we have a great deal of concern for our rural, for our natives and for the large businesses in this area, meaning the paper mills and this sort of thing. They are crucial to our economy. As I said earlier -- we're not trying to walk around with halos or anything like that -- we have done it for nothing. We are unpaid.
Mr Hebert: Isn't the Reverend Floyd supposed to be the hanging parson who can handle that marriage?
The Chair: Third party.
Mr Lessard: I want to thank you very much for your presentation. One of the things that caught my attention, of course, was what happened on the spot market for electricity during the summertime when we saw this incredible heat wave in the southwestern United States. We know the problems that are inherent with the system. Even if you have excess power, how are you going to get it someplace else and deliver it to that market? So the infrastructure that needs to be in place is something I want to get back to.
You also mentioned that there was a time when you were without power in this area and that you don't know whether you were sacrificed to make a sale to a more lucrative market. You may never know, but I would suggest that's something we need to do know. Consumers should be aware of what may happen. We heard Mr Osborne yesterday talking about his vision in a competitive market and he sees Ontario Hydro moving into the United States. They want to be able to compete in Michigan, Ohio, Kentucky and places like that. When I consider Ontario Hydro looking for expansion of markets in the United States, I look at northern Ontario and say that if it weren't for people like you in this new, competitive marketplace, who is going to be making the investments to develop the infrastructure to ensure that you have the power here to see the development that takes place in the future? I don't know who that may be in that competitive environment.
That's one of the concerns I have. If Ontario Hydro is looking to the south and other markets, are they going to be load-shedding? Are they going to be getting rid of services of infrastructure here in northern Ontario or other parts of Ontario that are going to leave customers and development at risk, basically, in the future?
Mr McCaig: I can say unequivocally no, for the very simple reason that there is a great deal of hydraulic generation that Ontario Hydro at this time owns in the north and that has to be taken note of. When Larry talks about the Manitoba connection, I think you have to look at it on the basis that Ontario Hydro is very interested in selling into the eastern United States in particular because the market is there, but at the same time, opening up the Manitoba development, it leaves us access to very cheap power. Mind you, going the other way with the power it doesn't open up for Ontario Hydro a whole lot as it does eastern Canada. So you can see what's happening there on a businesslike basis.
But I have to say that Mr Osborne has been very good to us so far in the north in making sure that people are negotiating and are talking to us, and things have been happening in a very positive manner. I will say that unequivocally and I hope you hear it loud and clear because he has been very good with us. There's no doubt about it.
Mr Hebert: Your point is well taken. It's the reason our group was formed to begin with. We had concerns, exactly what you said: Who's going to care about us in this new, wide-open market because we're a very small part of the load of Ontario.
Mr Lessard: We know that consumers may have the ability to negotiate the supply of power. Then I have concerns about their ability to negotiate with power retailers on an equal footing. I have concerns about the peaks and valleys that may come in the price of electricity and consumers' ability to negotiate in basically a futures commodity type of market that they have absolutely no understanding of.
I certainly don't have any understanding of it although I consume products like coffee that are subject to volatility on the futures market. If the price of coffee goes way up I don't have to drink as much coffee, but with electricity that's something that's beyond my control. For businesses as well you need the power or you go out of business.
To compare it to the Telecom market, there may be that smoothing that is available. But here I agree that we need to be very cautious because it is a new reality for us. We need to look at these other jurisdictions for some of the experiences we have because we don't have that track record right now as to how you try to come up with a smooth price of power when we don't know how these peaks and valleys are going to be dealt with and how extreme they are.
Mr McCaig: I'd like to address that question. We've already got the jump on that, Wayne, for the simple reason that the key to this whole thing is going to be power procurement. We are already in the process of educating a couple of our people, who are employees, in the art of power procurement. I'm not saying that we can throw somebody into the independent marketing office, but we will have somebody knowledgeable, to know how to select the right places to buy. That's a service that Northwest Energy as a group can provide for everybody in this district or in this end of the province, because we've already started that process of education.
The next thing in that process that has to take place, and it will be coming through Northwest Energy and to the end users, is going to be if they decide to select from somebody else, a broker or whatever, we will identify the snake oil salesman, as the government has already done with their 1-800 number if somebody is coming down the road selling you smoke in a box. We are already doing that sort of thing. It's in process. It's our responsibility to educate the people to that.
I will say this also: Having sat on the retail study committee for the MEA, which was chaired by Tom Wells, when we went around this province, I don't think there's a real danger. If we supply that necessary service to our users, they won't abandon us as a utility. That was in the cards and that has been said many times and I've seen many studies that have given us direction.
The Chair: On that note, on behalf of all the members of the committee, I thank you for coming before us with news of your exciting initiatives and appreciate your input on this.
Mrs Johns: Madam Chair, just before lunch I have a question of the legislative research group. Mr Lessard has made this comment a number of times about the spikes in the market on those two days. It's my contention that those spikes represented a very small volume level, and what happened was that a broker went short and got caught with his pants down and got his just reward.
I would like to see how much volume traded at the high spikes on those two days so I'd like you to get that for us, please.
Mr Conway: If I could, just speaking to that point, I think that is very useful information to have. My memory is that sometimes, just two or three weeks ago, there was quite a lot of commentary in the financial press. I remember a utility in Cincinnati leading a charge to Washington saying, "It's terrible what's happened to us." I think there were one or two articles in the Wall Street Journal about it.
It would be something that I think would be useful for the committee to have, just to see what the nature of the difficulty was, because there certainly seems to have been some.
Mr Baird: Is it possible to see if there were any articles?
Mr Conway: I've actually got a couple from Reuters.
Mrs Johns: We'll be hearing from Nymex on this issue too, but I'd like to have the numbers associated with that.
The Chair: We are going to adjourn for lunch then. The legislative staff has your instructions. There are places reserved for us in the restaurant here. It's a buffet lunch, so we can get through quickly and we'll reconvene here at 1:30.
The committee recessed from 1202 to 1336.
THUNDER BAY HYDRO
The Acting Chair (Mr Doug Galt): We'll reconvene the resources development committee. Despite a request by the opposition for a motion to adjourn, we'll continue. The first delegation is from Thunder Bay Hydro, and I believe it's Larry Hebert and Paul Kennedy, commissioner. You have 30 minutes for presentation and question-and-answer period to use as you see fit.
Mr Paul Kennedy: We'd like to thank you very much for the opportunity to appear. Before we start taking up your time with the presentation, we'd like to tell you a little bit about Thunder Bay Hydro. We have 48,000 customers in the area. We're one of the second-largest geographic utilities in the province. We have a large rural constituency. We're the 10th- or 12th-largest utility overall in the province. We are measured third in reliability of all the large utilities across the province. We spend a lot of time being a good utility and that's why we think we can be here and take up some of your time.
Our commission is very supportive of the move to open markets. We have been one of the leaders in the development of the Northwest Energy Association, which you heard from this morning. We think they're going to do a lot of good things and we're going to continue to support them.
Three issues are paramount for our utility. They are the stranded debt issue, the potential loss of local control and the development of real competition. Many other issues are of concern but they are being dealt with by the MEA, which is our representative at the Ontario level, and by other utilities.
With regard to the stranded debt, no other jurisdiction in the world, and we're sure you'll hear this elsewhere, that has moved to open competition has had to deal with a stranded debt of the size of Ontario Hydro's. Their chairperson has suggested a $10-billion to $30-billion stranded debt that should be written off into a financial holding company. Some have suggested the amount should be the $30 billion. We're not sure that's the way to go. There are some points to consider around this issue.
When establishing the level of the stranded debt, which we all understand has to be ascertained, we should consider the following:
The amount of debt left after subtracting or establish the stranded debt cannot be so crippling as to make Genco or the new Ontario Hydro uncompetitive.
The stranded debt write-off cannot be so great as to reward Ontario Hydro and its successor companies for mismanagement and poor planning over a number of years. Where has the revenue gone that was supposed to be paying down this debt over the last few years? Ten billion dollars should be in the nuclear decommissioning fund. There's zero there now. Ontario Hydro estimates they still need $15 billion in this account to deal with decommissioning.
The stranded debt amount must be established at a level to encourage positive, businesslike decision-making at the new Ontario Hydro companies, up to five companies. They have to start listening to their customers and responding to market forces, not living in a land of forgiveness, where they don't have the debt that they created to deal with and bring them competitive discipline.
We'd like to ask how a stranded debt amount can be assigned across all of Ontario Hydro's assets when the bulk of it has been developed through the debacle that became the construction of the Darlington nuclear station. A lot of that debt in an ordinary business world would attach to the asset where it was created.
The stranded debt recovery should be done through the transmission system so that all users pay a common charge at a common point. The recovery should not be done through a tax or levy on gross revenue for utilities.
First, if you want to be fair, it should be transparent and a charge on transmission does that. If you try to attach it as a levy to gross revenue, then you are not allowing municipal utilities to truly act as corporations established under the Ontario Business Corporations Act, because normally businesses are not taxed on their gross revenue.
There should and must be a sunset clause on any levy associated with the stranded debt because once it's paid down, there's no reason for the levy to exist any more other than as a permanent tax with another clever name hung on it.
We'd like to talk to you briefly about the potential loss of local control of distribution utilities. Local control is a concern for the Thunder Bay Hydro commission. We spoke to you in the introduction about the time that this utility has spent being efficient, being productive and servicing their customers well. We think that control at the local level is the best way to ensure that that continues.
The Ontario Energy Board is going to have the right to regulate and license and basically assign franchises in this new era of competition. The municipality did that previously. Is the relationship between the municipal council and the new Ontario Business Corporations Act utility going to be an arm's-length one? Will there be protection built into the regulations to protect utility revenue beyond any local fees and grants in lieu that the bill requires? Are our hydro rates only going to pay for hydro distribution and not become another way of disguising taxation for a municipality? This is a concern at this time. Currently, electricity revenue cannot be used to subsidize city services. We would like to see it ensured in this legislation that it can't change from that because it's not that way now.
What restrictions, if any, are placed on council in appointing the board members to the new Ontario Business Corporations Act distribution companies at the local level? Local accountability will be very important. Local accountability has been what has made Thunder Bay Hydro a responsive competitive entity.
There are examples now of problems with decentralization of accountability and we have somewhat facetiously written down a 1-888-NO-RESPONSE call centre number that a lot of Ontario Hydro's rural customers are having a lot of trouble with at this point in time.
Mr Conway: That's nasty.
Mr Kennedy: That's his work, not mine.
We'd like to talk to you about real competition because we think that the act has to strive to create real competition across the province.
How is the government going to ensure true competition when Ontario Hydro will still control a huge percentage of the generating capacity, Ontario Hydro's successor? How are private firms in existence going to be competitive when their long-term contracts are going to be terminated and/or their role in the energy market in Ontario has not contributed to the Ontario debt?
The expectation is that bills are going to go down. Realistically, how will this happen in the short run? If Ontario Hydro or its successor in generation can't be made more competitive and new charges are put on transmission to recover the stranded debt which is being transferred to a holding company, how is the consumer going to see a saving? We are building up a lot of expectations here about lower rates in the future but we're not building the framework quite right to deliver that.
The initial efforts of the government to rein in control of Hydro in a very complex and challenging environment are to be applauded, but we think perhaps we're seeking the savings at the wrong end of the vertical integration spectrum, the distribution end. We think we have to find more savings at the generation end. This is basically an area where the real competition should be seen and isn't being introduced.
Instead of working on the problem of efficiency in generation, the government is providing a format for Ontario Hydro to become one of the largest vertically and horizontally integrated energy companies in the world and all of this has been merely an academic exercise to camouflage that plan. Is this what the government intends?
True competition should benefit the majority of customers in the province, whether large industrial or small residential. If Bill 35 can do that, then the end result may justify the means.
That's our presentation in a nutshell. We think the legislation has to work a little bit harder at creating real competition at the generation level.
We hear folks were intrigued this morning with the fact that we may get some competition in this area using the NEA perhaps to play off Manitoba against what's left of Ontario Hydro's generating capacity. We are geographically fortunate to be able to do that. There may be some areas in southern Ontario where geographically they're just across the border from the States and can do that. But overall in the province we're probably not creating a competitive enough environment.
We think local control is important and we think you'll hear that a lot of places. We hope you take it to heart in your recommendations. We think that the debt that should be left to Ontario Hydro's successors should be fair and should challenge them, as debt does any corporation, to be more efficient in everything it does from this point forward. That's our presentation.
The Acting Chair: Thank you very much for the presentation. We have approximately five minutes left for questions and statements from each of the caucuses. If I remember correctly, it was the third party that started last time, and we will start with the government caucus this time, split between Mr Baird and Mr Gilchrist.
Mr Baird: I want to thank you for your presentation. We appreciate hearing the views of local hydro utilities. I think among the general public, probably more than any public service, there's a tremendous amount of public regard and respect for the service they've gotten from local Hydro utilities, so we appreciate getting your thoughts.
You've spoken in your presentation a lot about debt, stranded debt and residual debt and assigning that debt, and I can certainly appreciate why because I think we're all concerned about that. I have a number of comments and I ask for your thoughts on those. We're certainly concerned. We've heard a lot about the stranded debt in our deliberations. Like my colleagues, I try to look at these things like a consumer. Right now we're spending about 40, 44 cents on every hydro dollar towards paying off that debt. You might like to think of how much lower your rates would be for your customers and my constituents and all of us if we didn't have to pay that. But obviously, in any equation that has to be done. I agree with some of the points you've left us to consider to ensure that the debt left with the successor Ontario Hydro companies, whether it's Genco or Servco, is enough so that it won't be crippling and will let them be competitive. At the same time, it's a delicate balance.
We've got a team that's been brought in from the private sector. It was an open process. Goldman Sachs, Midland Walwyn and CIBC Wood Gundy are working very hard to try to see where you can assign that debt to each of Genco, Servco and the Financial Corp to ensure we get it right. We'd all like that today, but we want to make sure we take the time to get it right. I take it from your presentation that will be an important point to consider.
In terms of the tax revenue, we want to have a level playing field. If the only team on the field was left without having to pay taxes, it would still be just a one-team league. That's why it's important that we get it right.
I particularly like point 3 in your points to consider, on page 2, that we want to ensure we're "not living in a whimsical never-never land." It's a point well taken.
You made a number of points I would just comment on, to ensure that any potential CTC goes exclusively to the electricity sector and the stranded debt within it. That's a point very well taken that I'll certainly take back. It very much is the intention and one with which I don't have a problem and would agree. As well, the tax revenue from the existing taxes should be assigned to that debt as well.
The power of Ontario Hydro in generation -- this comes to another point you made with respect to Genco. Some think even with subjecting them to a competitive tax structure in terms of the equivalent in the private sector, Genco would still have too much control and power in the market. Have you any suggestions or ideas for us on ways you would alleviate that in terms of the power Genco would have in generation? Some estimates have said it could be a 40% reduction over time in terms of their loss of market share. Is that still enough? What is your experience?
Mr Larry Hebert: It's really selfish from a northern Ontario standpoint. We could say, "Shut down the nuclears," because they don't affect us very much, but certainly they affect a number of you, so we won't say that.
Mr Baird: Bruce is in Helen's riding.
Mrs Johns: Thank you very much for that.
Mr Hebert: Only for a short time, Helen. They can turn it back on anyway.
It's a difficult decision, what to do with Genco. We realize that's something you as members of the Legislature have to deal with. It depends on the philosophy. We talk about it in here, and it was commented on yesterday, that certainly the powers that be in Ontario Hydro, Mr Farlinger and Mr Osborne, make it pretty plain they want Ontario Hydro to become a large, vertically and horizontally integrated company. If you're going to support that, you don't want to break up Genco any more than it is. In fact, you probably want to give them even more power. If that's been the object of this whole exercise, it's been a nice academic exercise but it really hasn't got at the true problems of what's happened in this province.
On the other hand, if you want to sell off the generation, I guess that's partially what you can do. It was suggested in Macdonald to sell of river systems and I'm not sure that's a good idea. In this area there's only thermal and hydraulic to look at. You could put it up and test what would sell in the open market. That's one way of deciding what to do. I guess you'd have to do that on a staged basis, because you don't want to sell it all at once, I don't think.
Mr Kennedy: And you'd have to do it on a basis where you asked for people in the business community, for example, to come to you with a proposal on the various packages of assets. You can't let anybody come in and cherry-pick the good ones. If you're going to test the market, you've got to say, "Yes, but you've got to take one of those and one of those and one of those." You don't get to just take all the good ones and say the heck with everybody else. So there probably is a way to use the market to at least test various theories. There's no reason to just assume that Genco has to stay with every generating asset in the province.
Mr Baird: We don't want a fire sale.
The Acting Chair: We're well over the five minutes. Sorry, Mr Gilchrist. We'll move on to the official opposition.
Mr Conway: It was a very good exchange and I think, Mr Baird and Mr Kennedy, you've come to a central point. We all want the benefits of competition. Competition on the big part of the bill, the generation bill, which is 70% of the bill, is what has to deliver the benefits we all want. I think we're all agreed on that. The problem we have is that we've got a policy that says we can't do some of the things that we are told by experts, including the Market Design Committee and the Macdonald committee, are necessary to get at that.
I come back to this same line of questioning. I want competition. I don't want a fire sale of public assets either. But Macdonald said you had to unbundle. You didn't have to sell them off, necessarily, but you have to break them up into competing units. You might have to take on some private equity in some fashion. Maurice Strong said that. This is a very tripartisan bunch of advice we've got here. We've got a real mess. Helen and I, some of us, sat through that hearing last year for three months. I don't want to sell off the patrimony of this province. Public power has brought us a lot of benefit. But Ontario Hydro undressed itself in front of the whole province this very day last year. I don't want now to feed any more of their imperial powers, on the basis of their recent experience.
My question to you would be, can you imagine, either one of you, an unbundling of the Hydro assets that would on the one hand reduce the market power of Genco, create competition to a greater extent and not sacrifice valuable public assts to some kind of fire sale? Is it possible to meet those two or three objectives?
Mr Kennedy: I think everyone's agreed that a fire sale is not possible, because that leaves the people --
Mr Conway: It's not desirable.
Mr Kennedy: It leaves the people of Ontario eating a pretty big chunk of debt too, so it's probably really not possible politically either. I guess anything's possible. You've got to find a way to create an environment that shows that the debt can be transferred to a holding company or whatever and through the judicious use of transmission charges can be retired. You've got to attach proper levels of debt to the assets.
I think the best way then is to go to the private sector and say, "Look, we're not going to give anybody all the nuclears or all the hydraulics or all the thermals, but you can partner up, you can take one of each in franchises or concessions, perhaps in different areas." You can go to the private sector a lot more and work with them on what might work, because that's where you're going to find a lot of good ideas, not necessarily from people sitting at this table and coming to your hearings. If this is going to work, it's private sector people and private sector smarts that will make it shine.
Mr Conway: In northern Ontario, Larry, maybe you can tell us, what is your load here in the city of Thunder Bay?
Mr Hebert: On average about 170 megawatts.
Mr Conway: What's the source of the electricity for that load?
Mr Hebert: In the area, Ontario Hydro and cogens have a total maximum capacity of, I think it's 1,410 megawatts, and the maximum load ever in the area was about 1,127 megawatts; that was back in the late 1980s.
Mr Conway: Looking at the region of Thunder Bay and west, the NEA region, I suppose I'd call it, regional load and regional generation would give you what kind of excess or supply, as it is now, with very conservative assumptions on the generation side?
Mr Hebert: On the generation side there's always stuff down for servicing etc. With everything running at a reasonable level of water in holding ponds etc -- because it's been a tough year for rainfall in the area -- there would be enough to supply the area. We'd probably be talking about loads, on average, anywhere from maybe 700 to 900 megawatts.
Mr Conway: A final question on the tax: The bill contemplates a range of six charges, the last one of which, in fairness to the finance people, the competition transition charges, are likely the least attractive option, according to their paper. Which of the other five charges would you least like to pay? You've looked at the bill. I'm looking at the other five. You're obviously going to pay some of them and not others. You don't like the charge on your gross revenues, obviously.
Mr Hebert: Right.
Mr Conway: But you do accept that there is going to have to be a reasonably fair tax regime.
Mr Hebert: Just not on gross revenue. Regular businesses don't pay it on gross revenue.
The Acting Chair: We'll have to move on to the third party.
Mr Lessard: Mr Kennedy, I don't think you should discount the value of your advice at all, because one of the things I've been finding through these hearings so far is that this is an incredibly complex area and that there is no monopoly on solutions as to what it is we can do to try and address the problems we all recognize with Ontario Hydro.
I really am interested in the benefits of competition as well. I'd like to see rates go down. I'm attracted to that suggestion by the minister, that we're all going to benefit from lower rates as a result of Bill 35. But one thing we've heard is that it isn't going to happen with the set-up we have, if the supply all comes from one place. I don't want to see the privatization of Ontario Hydro. When we're talking about many of the generating facilities, we're talking about public resources that we have a public interest in maintaining as well. I'd like to see some suggestions, if you have any to offer, that may lead to more competition in the generating sector, but still enable a predominant public investment or co-operative investment or an investment by utilities, something like that rather than strictly the privatization of Ontario Hydro. That may be where we're leading.
In the final submission you make, you ask, if this is the government's plan, to make Ontario Hydro an even larger vertically and horizontally integrated company, why don't they just say that? I wonder that myself. Why do you think they may be doing this? What's your theory?
Mr Kennedy: I'm uncertain of the answer why that would be. Obviously, the corporation is close to the government. The corporation has had numerous opportunities to try to steer the government towards various solutions, but the solutions that the corporation seems to be pushing are solutions that don't really diminish their market power that much, don't really diminish their size or cause an increase in their efficiency. Basically, the main thing just seems to be to get the debt monkey off their back and on to everyone else's.
I can't answer why the legislation seems to go that way and not go far enough in terms of creating competition, but I could say if I was Ontario Hydro and I was an entity looking to sustain myself, that's what I'd be doing. I think they've done a pretty good job of it and it's up to your committee as you go around to see this and listen to what people are telling you and come out of it saying, "No, we've got to do a little bit more."
Mr Lessard: I thought we were going to hear an explanation from Mr Baird, but he didn't get a chance to include it in his remarks.
Mr Hebert: I think Ontario Hydro is in a dilemma, obviously, as is the government on this. Perhaps the two things they want to do are banging against each other. They want to compete in the US. I think that was said yesterday to the committee. Maybe we need, whatever it's called, Ontario Hydro International, for a working phrase, that is a large, fully integrated utility, vertically and horizontally. Then there's a domestic, if we can call it that, Ontario Hydro, that is broken up more. It's not easy to divide those up either, but maybe that's really, in the long run, what we're looking at: domestically a very competitive market, but when Hydro is international in terms of the US it is this huge utility it seems to want to be now with Mr Osborne and Mr Farlinger indicating that. Certainly in the last little while it seems to be where they've been heading in any comments they've made.
The Acting Chair: Thank you very much for your presentation. We appreciate your candid response to the questions and wish you a good day.
We'll now call on the next delegation, Environment North, the presenter, John Boulter. Is he present?
The Chair: Good afternoon and welcome. Please introduce yourself and your title for the Hansard record.
Mr John Boulter: Good afternoon. My name is John Boulter. I am an executive member of Environment North, which is a local environmental group, a small but active Thunder Bay environmental group. Welcome, to the members of the committee, the honourable members who have seen fit to come to Thunder Bay to listen to this. I apologize in advance that my presentation will be much different than the ones you've heard and it won't be too welcome to some ears because my organization and myself are more conservation-minded and futuristic-minded and perhaps not so much involved with profit and development.
Bill 35, which seems to be mainly involved with the financial and operational reorganization of Ontario Hydro, has in our opinion some serious shortcomings for the future of the people of Ontario.
I don't have to tell you that Ontario Hydro is facing some horrendous problems: how to meet the energy needs of Canada's most populous and industrialized province, yet an energy-poor province. We have no important coal, petroleum or gas resources of our own. Unlike northern Quebec, which is mountainous and capable of producing hydraulic electricity, most of Ontario is relatively flat, even the north, and has limited potential for future major hydroelectric projects.
Our enthusiastic commitment to nuclear generation has left Hydro with a legacy of debt, operating problems, safety concerns and disposal nightmares. Hydro-Québec by contrast, based on hydroelectric development, has been described as one of the most profitable enterprises in Canada in terms of operating efficiency and profit. It is inevitable that the government seek to reorganize Ontario Hydro with emphasis on opening up opportunities for competing agencies to supply a portion of our energy needs, yet I strongly urge the government in the interests of younger and future citizens to place a great deal more thought and emphasis on the present conservation of electricity.
No one, except perhaps a few scientists and intellectuals, seems to have the slightest idea of the chain of interrelated events and perhaps disasters that will befall industrialized societies when conventional energy resources begin to run out in the 21st century. During the past couple of centuries we have gone from a simple society where people were rather independent and self-sufficient to our present mega-urban way of life in which people are no longer self-sustaining but are totally dependent on artificial means of staying alive. We totally depend on other agencies to grow and bring us our food, our water and our basic needs, and to keep us warm. Many of us can't even get to the front door of our residences without power to bring us there, and if that isn't a sobering thought, I don't know what would be.
Future generations will condemn us of the 20th century in harsh and bitter terms for our self-indulgence and greed, our self-centredness, our short-sightedness and even downright stupidity. Yet we go on increasing the population of a bitterly cold country, encouraging immigration, developing farmland and open spaces into freeways, subdivisions, warehouses, fast-food joints and parking lots, of which we already have far too many.
I realize this all goes far beyond the scope of Bill 35, but it is very definitely related. As a people, as a province, as a country and as a world community, we need to change from a profit, greed and development mentality to a conservation and sustenance mentality, and Canada should be taking a leading role in this initiative.
A few years ago and for a short time Ontario Hydro changed its "Live better electrically" message to one of conservation and some people actually listened to that. They were asking consumers to be less wasteful and to reduce use of hydro at peak hours. That campaign was relatively ineffective, I think, and relatively short-lived. Although a few people did try to comply, I'm sorry, but most people are generally too uncaring and too self-indulgent to even think about changing their wasteful ways.
I suggest that enormous amounts of electricity could be saved, that is, not generated at all, if people, businesses and industry could be persuaded to do things like shutting down unused equipment, operating air conditioners at a lower level or not at all, setting thermostats lower, not plugging in the car at work or school on warm winter days just because it's free, and so on and so on.
Industry, and that's largely employees of industry, could likewise save even greater amounts of electricity by shutting down equipment that's not in use and by eliminating wasteful practices, and so could construction and design save enormous amounts of energy and electricity if buildings and industries and cities were designed in a conservation mode rather than a wasteful mode.
In my opinion, to me it's quite clear that our economy over the last 100 years or 200 years, especially during the 20th century, has thrived because we were blessed with unlimited natural resources, a rapidly expanding population and cheap and plentiful supplies of energy. All of these things are running out, except the growing population.
I suggest the public needs to be educated on the need to save as well as how to save. For instance, in my family, in my own house, we've reduced our electrical consumption for a three-bedroom home to an average of 560 kilowatt hours per month over the past year, yet we still live very well -- no Jacuzzi, though, and no air conditioning. If a million households in the province could do as well or better, that is, reduce their consumption by 5,000 kilowatt hours per year each, could that not shut down one nuclear plant or save the construction of a couple of coal-powered stations with the resultant emissions?
I'm suggesting that Hydro must tell and educate people how to save. Shutting off a few lights or avoiding a Christmas tree is not very effective. It is the heating and cooling equipment and electric motors that gobble large amounts of electricity. Construction and retrofitting standards need to be changed. Things like water pre-heaters, shorter runs of plumbing and pipe insulation, proper ventilation and refrigeration equipment, more efficient supermarket coolers, lower water temperatures, all of these and countless more could make an enormous difference.
Only a minority of people will voluntarily comply with such programs. The majority will only respond to much tougher measures, that is, higher rates, especially if hydro rates went up at higher levels of consumption and not the reverse, as at present, where the more you use the cheaper it gets. Higher rates would also be effective if part of the increased revenue was set aside for developing alternative energy sources, either public or as low-cost loans or grants to private developers. Extra funds, as has been mentioned here, are also needed for safe and permanent storage of nuclear waste.
Most people will complain bitterly about any suggestion of higher rates, and I don't want to get my windows broken or my tires slashed for saying so, but electricity in fact is cheap, very cheap; it's a bargain. If anyone doesn't agree with that, try offering them double their electrical bill back to do without it.
Ridiculously low energy costs, for example, the price of gasoline in the United States, contribute greatly to our mentality of waste. In Italy, by contrast, gasoline costs the equivalent of C$1.60 per litre. The Italians are much more frugal than we are and yet their economy plods along just the same. You don't need a PhD in economics to know that raising energy costs will have serious effects on the economy, on jobs, on corporate profits, on dividends to shareholders and so on, and thereby lies the responsibility of senior federal governments to use pressure and persuasion to get other countries worldwide, especially major industrial nations, to do the same so as to equalize the economic effect of conservation.
With modern and future technology, we can in fact learn to get along with much less. Solar power and 12 volts, for example, can easily be adapted to domestic lighting applications, and higher electrical costs, higher electricity charges will help finance research and development in these renewable areas.
Why should conservation be written into the act and not just left for regulation or policy? Because if it is made into law, it cannot be left to the whims of whatever political group or temporary interest comes along at a particular time; it is permanent public policy.
I'd like to touch just briefly on emissions as well. Ontario Hydro's increased use of coal to compensate for unreliable nuclear generation has contributed, in my opinion, to 1998 being the smoggiest summer on record in southern Ontario and has increased emissions of the climate-warming greenhouse gases, carbon dioxide and so on, contrary to the 1997 international Kyoto agreement.
Also, caps are urgently needed on all fossil fuel emissions, by Hydro, by industry and by other entities, and they should be applied to all electrical generating plants. These caps should be applied to sources of imported electricity as well.
That concludes my presentation. If you have any questions or comments, I'd be glad to do my best.
The Chair: Thank you very much. We have five minutes for questions from each caucus. We'll begin with the official opposition.
Mr Conway: Mr Boulter, thank you for your presentation. It is very stimulative. You make very strong arguments, some of which I would accept and some of which I disagree with. Let me start with some disagreement.
Where I live in the Ottawa Valley, I live a stone's throw from the Ottawa River and I represent a county with several large hydroelectric dams, some of which are more than 70 years old. I kind of resent the suggestion that people make that those power-producing hydroelectric dams are without environmental consequences when they do have them. I can tell you, every spring I get a flood of phone calls from people who are very annoyed at the owner and operators of hydroelectric installations. That's not to say that we shouldn't have them, but they are not without their problems. I like the fact that they are perpetual. I like the fact that they produce very attractively priced power. I think it is the cheapest power in our system. Help me, somebody, it's a cent and something. But I'm sorry, these things are not innocent and benign. I often fantasize and think, could we build any one of them in my county today? We probably could, but boy, it would be a fight. It would be one hell of a big fight.
You see the difficulty I have in this debate is the religion. The nuclear stuff, boy, it's hard to defend it these days. I don't have any coal, but I can imagine being pretty excited if I had some because I don't like the smog either. I just want to know in a modern economy with apparently -- maybe 25,000 megs is too much. I accept, I completely agree with what you say about conservation, but how do we find the balance? What should I do about those people who phone me with those nasty, nasty complaints about hydroelectric consequences in the spring from an environmental point of view? Let me start with that question.
Mr Boulter: I can't tell you what you should tell those people.
Mr Conway: God, I want you to tell me -- anything. Help me.
Mr Boulter: That's why you're an elected member and I'm not.
Mr Conway: Oh, no, no. Because you made a very strong speech here and I like a lot of it, but I need some help. I've got somebody who's bloody well got a flooded basement and a flooded front room and they think -- sometimes with pretty good evidence -- that it's a hydro dam that's done it to them. So help me with that complaint.
Mr Boulter: Those people, I suggest, are strongly represented in the environmental movement because for many of my fellow environmentalists the word "hydro dam" is a curse word to them. They hate the thought. But I'm suggesting that hydraulic power is one of the least evils that we're facing and certainly nowhere close to, as you mention, nuclear and it doesn't produce the problems that a coal plant does.
Some of your constituents might say, "Instead of damming up the river, let's have a natural gas plant because natural gas doesn't produce any emissions or any problems and it's nice and clean." I'm sorry, but natural gas does produce an enormous amount of emissions. My house furnace in the middle of winter produces up to 20 litres of water in a day and that water yesterday was oxygen or atmosphere.
Mr Conway: Just let me take you up on a supplementary on that as my last question because, you know, two or three generations ago we would have been here saying and expecting that all of the load in Ontario would be produced by hydroelectric means. A generation ago, we would have been here saying, "We're going to produce some of it by hydro but more of it by nuclear."
Today, the operating assumption of most utilities that I find in the eastern half of North America, probably across the continent, is we're going to meet most of the new load requirement with gas-fired electric. That seems to be not just the operating assumption but the explicit statement of most utilities. I want you to tell me from an environmental point of view what we need to concern ourselves about that as hundreds of millions of consumers east of the Red and Mississippi rivers all do the same thing at the same time.
Mr Boulter: I would suggest that you find out how much natural gas there is because I don't know.
Mr Conway: Lots, apparently.
Mr Boulter: So the producers tell us, but I'm not sure if they're necessarily telling us the truth. When it runs out, the bad news will come very quickly.
Mr Conway: What are the environmental consequences?
Mr Boulter: Environment includes the fact that in January it's going to be minus 30 degrees out. We're tropical animals and we need to stay warm and stay alive. What I'm saying is, during the next century things are not going to be terribly rosy. Things are going to go from bad to worse, unfortunately.
Mr Conway: Thank you.
Mr Boulter: What is now a Third World country will be perhaps as well off or better off than we are 100 years from now.
Mr Lessard: I think you've really identified an important issue in Bill 35. From my perspective in reading the bill, the policy that's outlined in here really just encourages consumption because what it does is open up the market to competition and that means that other people than Ontario Hydro are going to be able to supply the Ontario marketplace and the encouragement will be to maximize profits and therefore sell as much electricity as you possibly can to the market. There really doesn't seem to be any initiative built into this bill whatsoever for conservation measures.
One would have hoped that in the past Ontario Hydro would have taken more initiative with respect to conservation, because the reality is that we wouldn't build any more nuclear power plants in Ontario and we probably would have a difficult time damming rivers for the reasons of environmental concerns and also aboriginal issues where the land that would be taken as a result of damming rivers may interfere with land claims. That really leaves us with natural gas and coal. In my area -- I'm from the Windsor area -- we're faced with the very real concerns about smog from the Ohio Valley. We see the coal-fired plants looking to Ontario as an opportunity to export their power and we end up with the bad air in southwestern Ontario, so that's a very real concern I have.
I agree with you that we need to have some conservation initiatives in this bill to avoid the prospect in my area of having cheap, dirty, coal-fired power come from the Ohio Valley into our area. We may end up with lower electricity prices, but the consequence of increased emissions is something I don't really want to have to deal with.
Mr Boulter: You can turn on the lights but you can't breathe the air.
Mr Lessard: That's the choice. In your submission you've indicated that those choices are difficult ones, and I wonder if you have some suggestions to offer as to the way we can put those conservation initiatives in this bill.
Mr Boulter: How to put those initiatives into the bill is very difficult to outline in a short time. The bill should have to make a very strong statement about conservation without getting into the nitty-gritty of how it can be done or what can be done, because there are many ways we can save electricity and avoid generating electricity by getting people in industry and business and government to consume less, and by going more to what we call green power, to alternative sources of energy.
I recall seeing a hillside in the south of Spain that was covered with windmills and they were all producing current. I don't know how much, but there was a whole chain of them, a mountain range covered with windmills. I was very impressed and I believe the same thing happens in windy areas in southern California. Ontario Hydro is doing something along those lines up in the northern communities and that's wonderful. I really applaud those sorts of things.
Mr Lessard: You've mentioned a couple of ways. One is to increase the price of energy and therefore use the market mechanism to establish those conservation programs or reduce the consumption. But I agree with you that there need to be some regulatory initiatives to do these things.
Mr Boulter: It has to done on a worldwide basis, and especially trying to involve the United States, the Americans, because obviously if they continue their wasteful ways and insist on using lots of energy at low prices, using ours, it doesn't matter what the rest of the world does. Then we won't even be able to compete with them in any way.
Mr Lessard: One of the arguments we get from this government is that a lot of those regulations are just red tape. It was the NDP government that required more insulation in basements, for example, and that was a regulation that this current government got rid of because it increased the cost of houses. But those are trade-offs and I think we need to have those regulations to make homes, for example, more energy-efficient. I hope that if there are some other suggestions with respect to mechanisms we can put in the bill to increase conservation, you'll provide those at a later date.
Mr Galt: Thank you for your presentation, a very practical presentation, one that it's very obvious you're genuinely concerned about, the environment. I would just like to make a couple of comments as it relates to this particular bill.
This bill, as it relates to environment, is enabling legislation so that regulations can be written to address the concerns you have expressed. We are concerned essentially with those concerns that you have expressed in your presentation.
You should be aware that at present there is really no easy way for any producer of green power to get it on the grid, so with this bill that will be possible. At present it's very easy -- there are really no regulations -- on the importation of dirty power. Right now it's the cheapest power that can be purchased into Ontario, so we're in a present position of almost the encouragement of dirty power to come into this province, such as the Ohio Valley that's been referred to many times.
It's interesting that Mr Conway makes reference to what's normally considered as green power, Hydro-produced electricity and some of the problems there. You alluded to being in Spain and seeing the beautiful hillside of windmills. I can imagine what would happen in this country with a beautiful hillside of windmills. We'd have protest rallies galore over the cutting down of trees or taking over farmland for those windmills or for a bunch of solar panels. There is always a drawback to whichever one you come at. I'm not being critical of them, but there are some problems with the various solutions we have. Granted, I still agree with you that it is green power.
Competition, along with this bill providing choice, is really the catalyst to give people that opportunity to purchase green power. I think it's interesting, a quote from a man who presented yesterday, Kevin Jardine from Greenpeace, and he was stating the significant chunk of the public that wants to buy green power. I don't think there is any question; there is a significant number of people out there who really do want to buy green power.
I would think that with these things in mind you'd be quite happy with this bill, that it's come quite a way. Maybe it hasn't come as far as you would like, but I'm also rather surprised to have an environmentalist present to us about non-renewable energy such as gas. I would have thought an environmentalist would have been opposed to using non-renewable energy in the production of electricity. I know you're referring to it being very clean in emissions, and I fully agree with you that it's an awful lot better than dirty oil.
Coming around to a question, what in your opinion is the most important measure we can take to ensure environmental protection in this whole electricity restructuring?
Mr Boulter: Excuse me, perhaps you misunderstood me. I didn't say that I approve of natural gas being used for generation of electricity. I was alluding to Mr Conway's constituents.
Mr Galt: I interpreted you being very enthusiastic about it.
Mr Boulter: No, I was not enthusiastic. I said, "Ask your constituents what they do when the gas runs out." I'm sorry, what was the additional question you asked?
Mr Galt: It relates to what area you think is most important in the electricity restructuring to be protecting the environment. Should we be going abroad? We're already looking at regulations with the Environmental Protection Act so that will extend to those people who want to import power into Ontario. What kinds of things do you think should be most important? Setting standards, environmental performance standards on those particular producers outside the province? Looking into emissions reduction trading where you ratchet down the emissions being allowed? What kinds of things should we be looking at? Would you be part of this program, because we're now into consultation and very anxious to have people such as you involved?
Mr Boulter: Do we agree then that we will be importing power? I know that at peak times we import power even here from Manitoba.
Mr Galt: We already do that. This is a competition act, opening it up.
Mr Boulter: I would be very concerned about the sources of that power, yes, how cleanly it's being generated. But I still think that conservation right here in Ontario is the key element, if you could get everyone to conserve, to reduce their Hydro consumption by a third or a quarter, especially at peak hours. Even when Hydro was having this campaign, you still had the kids come home from school and turn on three different televisions in the house and three different video games while mother has the oven and the cookstove going and someone else is having a shower. As I understand it, this is what is killing Hydro's capabilities; it's the peaks, putting out that power at those peak demand times.
In spite of my pessimism, people do listen. People will pay attention. Sometimes it takes a while. With some of them, it doesn't sink in right away, but many people will listen and will cooperate.
Mr Galt: We're going to have to relate that as that switch goes on, four more shovels of coal goes into the --
Mr Boulter: Perhaps you could even put an addition to their Hydro metre so that a beeper goes off if they go beyond a certain point or something squealing like a pig or something so that the neighbours all know those people are power hogs or something.
The Chair: Innovative thoughts that you're presenting there. Thank you very much for coming before the committee with your ideas today. Your input is very much appreciated. I know if you have further thoughts, we'd be happy to receive those as well.
Mrs Johns: Madam Chair, on a point of clarification: The gentleman suggested we should have a purpose clause that talks about energy efficiency. In schedule B, paragraph 6 of section 1 is the purpose clause, the broad objectives that talk about energy efficiency within this bill.
The Chair: Thank you.
ONTARIO MINING ASSOCIATION
The Chair: We would next like to hear from representatives of the Ontario Mining Association. Good afternoon and welcome to the committee. We are pleased that you're able to join us this afternoon.
Mr Peter McBride: My name is Peter McBride. I'm with the Ontario Mining Association. Joining me today is Henry Smith, who is the plant superintendent of the Williams mine at Hemlo, near Marathon. Depending on whose scale you use, we can still call it the largest gold mine in the country.
It's nice to come to northwestern Ontario, especially to see Ms Johns, who has one of the biggest mines in southern Ontario.
Mrs Johns: Thank you very much.
Mr Conway: Working in the salt mines.
Mr McBride: I don't want to get into politics.
From where we're coming from, we certainly support the government's intent to create a marketplace for electricity. It's an important step for the future development of this province and the way we need to go.
Just by way of background before getting into specifics, the Ontario Mining Association was founded in 1920. It's one of the oldest industrial associations in this province. We currently have 47 members, representing about 98% of mineral production in Ontario. For economic importance -- that's why it's always nice to come north from Toronto -- the industry supports approximately 50 communities and on an annual basis provides $6.6 billion in income, over 100,000 jobs directly and indirectly and, very important for the people at Queen's Park, provides at least $1.5 billion in taxes annually.
The economics of commodity production, which gets us into electricity very quickly, is supply and demand, among other things. This industry is highly cyclical. Right now it's in a down cycle. Without singing the blues, from a year ago you're looking at nickel prices that are 30% lower, gold prices 14% lower, copper prices 32% lower and zinc prices 20% lower. What this means for electricity when it increasingly becomes a commodity too, I think it's going to go through those vicissitudes of going up and down, and depending whether you're a consumer or a producer of that commodity, your financial fortunes are going to change quite drastically from year to year.
Those low metal prices in Canada's resource-based economy, by the way, are certainly one of the contributors to our sliding dollar at the moment.
Electricity, for the importance of mining operations, is about 10% to 15% of operating costs. Why we feel this bill is very important is that it offers companies, mineral producers, the opportunity to manage a very high cost of their operation. Until this bill comes into place, it's take it or leave it from Ontario Hydro and we've been doing more taking than leaving.
The importance of electricity when we say 10% to 15% of costs: The industry spends about $300 million a year on electricity collectively, which is approximately 3% of Ontario Hydro's total revenue. The competition -- I hate to keep harping on how bad Ontario Hydro is, but if we were operating in Quebec or British Columbia, that electricity bill would be about $100 million less, and if we were next door in Manitoba it would be about $120 million less. That's how far the competitiveness of Ontario Hydro has slipped, particularly since 1990.
While the gentleman before was concerned about conservation, which we all respect, and I think energy efficiency, I can assure you that the economics of electricity costs are already in the mind of any mineral producer in this province. Particularly since the early 1980s, when low commodity prices forced this industry to wake up a great deal, energy efficiency has been foremost in the minds of miners and has been improving regularly. Going back to the mid-1990s, even when Ontario Hydro was on its demand-management phase, there was one study that showed that mining contributed 14% of all energy conservation in the province in 1995.
While we're concerned about electricity, I just wanted to mention one thing. I haven't heard anybody before talk about natural gas, other than as a source to produce electricity. I think the aspect that would allow large industrial customers to resell natural gas they buy is one of those things that's most welcome for the flexibility it provides and the ability to manage a large input cost.
While supportive of the bill, like many who've come before I have concerns about market power, stranded debt, resources for the Ontario Energy Board, licensing and the level playing field. Whatever percentage one wants to use, there is certainly going to have to be some mitigation of the generating capacity of the new Genco, the successor company.
Perhaps of specific concern, to use an example on the level playing field concept, is the tax situation where if a municipal utility transfers any of its assets to Genco or Servco, there's no tax liability. If those same assets are transferred to anybody else, there is a tax liability. I'd like to use that as example of something that goes counter to the intent of a level playing field and open market.
I think we're all concerned about the debt. I think there are people at Ontario Hydro who wouldn't be happy until the stranded debt is larger than the actual debt. But if we're going to a marketplace, I think there's a valid argument to let the marketplace decide if there is a stranded debt, and if there is one, how much it will be, before any charge is slapped on consumers or transmitters of electricity.
The only thing we'd like to say is that if it does come to the point of a stranded debt, ensure that it is based on economic efficiency and that ratepayers, retail and wholesale, are protected. Again, transparency has to be the biggest thing.
Currently, I don't think we as payers of Ontario Hydro's debt understand how that money is calculated, collected or how it goes to repay the debt. If it comes to the time that this debt is going to be reduced, everybody, whether they're living in an apartment or are a homeowner or a major industrial customer, has to know how that money is collected and is being used to reduce the debt. We're -- I hate to use the pun -- in the dark about it right now.
The burden, too, of stranded debt has to be minimized, if there is going to be one. We'd like to see some provisions strengthened that Genco and Servco have to stand up and be counted and to pay up to reduce the debt. If they are selling electricity to Americans or other markets and generating profits, we need to see some of that go to reducing the debt, not putting it on the backs of ratepayers.
I find myself in the reluctant situation of saying that maybe government activity should be expanded, which goes against a lot of what we say. The Ontario Energy Board under this legislation is being given a great deal of new responsibilities and duties, and it's really important for what's being expected of the OEB to help make this new marketplace work that it has the resources on hand. With all due respect, the former Treasurer of Ontario and member for Nickel Belt, that fine mining riding, is a good person to be in there, but I hope the resources are there to make sure he can do the job.
On the question of licensing to streamline the system, the legislation requires all participants in the market to get licences. Many industrial customers, particularly miners who might be generators of power, distributors of power, buyers or wholesalers -- currently, the way the legislation is read, we understand it would require multiple licences. I think one licence could be used to cover market participants in that way.
One other area that is important to mention is that through this consultation process -- Ontario tends to be a province where things happen in an evolutionary sense. Whether it's the Macdonald committee or the white paper or, as Mr Conway alluded to, the nuclear affairs committee last year, there has been a lot of consultation and communication as we move towards a competitive market, and I salute the efforts that go in that direction.
To sum up, as big consumers of power, obviously we'd like a fair marketplace. There are concerns about Genco wielding too much market power and the debt we all need to deal with. I think the OEB is crucial to the future of making this marketplace work. We'd like consolidated licences.
I can assure members of this committee that, as an industry, we know a lot of homework has to be done and we all need to gain experience in this electricity market game and we're busy trying to do our best to help make this market work.
My colleague Mr Smith and I would be pleased to try to answer any questions from the committee.
The Chair: Thank you very much. We have five minutes for each caucus for questions. We'll begin with Mr Lessard from the NDP.
Mr Lessard: I'm pleased to hear that you have such confidence in the abilities of the former member for Nickel Belt, Mr Laughren, my former colleague. I have great expectations of him as well.
One of the things that caught my attention in your presentation is with respect to the stranded debt. We've heard a lot of different estimates of what the stranded debt will be. I know my friend Mr Baird will say we've got this army of experts to help us figure out what it's going to be or what it should be. However, we heard earlier -- I don't know if you were here -- from Thunder Bay Hydro. Their opinion is that this stranded debt is only going to be determined by some arbitrary means. Ultimately, it's going to be a political decision. It's going to be made by the Minister of Finance and that's what it's going to come down to. That's the reality. Of course my concern is whether the guess is wrong and what the motivation is to have that number either too high or too low. One of the other theories we've heard today is that perhaps one of the reasons to guess wrong is to make Ontario Hydro even bigger. I don't know if you have any opinion about that.
You say the marketplace should determine the amount of the stranded debt and you acknowledge that it's a simplistic suggestion. It sounds kind of frightening to me that the marketplace would decide that without knowing more of the details of how that might happen. Could you elaborate on that?
Mr McBride: Sure. I think there are two ways you can go. First of all, if a stranded debt is estimated, I can guarantee you, unless you're going to win Lotto 6/49, that the number is going to be wrong.
The people who are going to be the predominant determinators of where that stranded debt would start will be the bond raters in New York, which is where the financial consultants are trying to determine the value of Debtco -- I call it Debtco -- and Servco.
Mr Conway: I like it.
Mr McBride: A slip of the tongue.
I think there is a danger of having, as we all fear, people outside our control, the same as a municipal electric authority fearing loss of local control. I don't like the idea of maybe some people in New York helping determine a number, like what kind of credit rating a Genco would have, that then backs out to determine some artificial number for a stranded debt.
Although it may be simplistic, if you want to produce gold in the world market, the price will be set for that commodity and supply and demand will determine it. Instead of a predetermining that there is a stranded debt and it's going to be $1 billion or $15 billion or, as Mr Farlinger would say, $30 billion, let the market determine it. If Ontario Hydro has done a good job of serving this province, as they maintain, then stranded debt in fact, if there is one, may be very low. Don't put a charge on consumers by picking a number through some financial process. If we're going to have faith in the marketplace, let's let the market give us a sense of what it is.
Mr Lessard: I'm not sure if you answered my question about how the market would determine that amount. One of my fears is that the way that's determined is to have the assets of Ontario Hydro determined in the marketplace by being actually sold out there. That's one way to determine it, and I hope that's not what you're advocating.
Mr McBride: Certainly not, Wayne. We're advocating competition, not privatization. I'm not sure privatization is a solution at all. If Genco can make money, then what is the stranded debt if it can reduce it? If Servco can make money and pay the debt down, then what is stranded? I think that's how you have to let the market determine it.
Mr Lessard: The other issue we have to deal with is that we'd like consumers to be protected, we'd like to see consumers get the benefit of lower rates if they are out there. But if consumers are protected, that leaves taxpayers with this debt, whatever it is, that also might be out there. The choice is between who benefits and who pays, ultimately. I don't want to see residential consumers as the ones who end up footing the bill and large consumers figuring out some way to avoid it.
Mr McBride: That's fair. It's ratepayers. If there is a stranded debt, we would be supportive of the transmission charge. That seems to be the fairest. It should be on ratepayers, not taxpayers.
Mr Baird: I just echo my agreement that the market determining it would not be a bad idea. You did say in your comments that if Ontario Hydro has done such a great job, then of course they'll be able to do that. I think we all agree that there have been some problems at Ontario Hydro over the last five, 10, 20 or 30 years that led to that $30-billion debt in the first place, so it's unlikely. We don't know. We have a financial team in place to advise the government with respect to how much debt the new Servco and Genco can hold. In the end, it's probably not unlike what you suggested. Whether it's the bond raters in New York or Dominion Bond Rating Service here, they will determine, is it viable? Can they get a BBB credit rating or an A credit rating to allow them to operate in a commercial environment?
You also said in your last exchange not to put a charge on consumers or customers. Today we've got that 44 cents out of our hydro dollar; we've got that charge in our bill. Nepean Hydro -- that's on my bill every month. If it's a $100 bill, I'm paying $44 on debt. After Bill 35, I would likely continue to pay that. It would obviously decline over time, when you look at both the interest and payments on the principal. Obviously, getting that reduced would be a good thing and stopping it from taking over the rest of the pie --
Mr McBride: Is that your local utility that's provided that information?
Mr Baird: No, this was one we calculated. I have my local utility's here, which shows me that 90 cents goes to Ontario Hydro for generation and transmission and then today approximately 40% to 44% is going to pay for principal and interest. Basically, with Genco and Servco some of the debt will be assigned to them and then they'll look at how much stranded debt there is and there'd be a debt-for-equity swap with the province that the dividends would seek to pay off. We got into this hole over 30 or 40 years, and I think it's been particularly bad over the last five or 10 years, and that has to be dealt with.
I wanted to raise one more point on your presentation. You mentioned, could all the money go towards paying off the stranded debt? Section 80 and a potential amendment to section 79 allow the regulatory powers to do just that. I guess what you're saying is that you want to wear a belt and suspenders to be doubly protected, which we'll take back to discussions with my colleague.
Mr Gilchrist: Thank you both. I appreciate your comments. I'm intrigued, Mr Smith, given that your mine is the largest gold mine in Canada. Correct me if I'm wrong, but since 1989 you've decreased your operating costs while increasing your output by about, what, 20%, 25%, to 6,500 tons a day?
Mr Henry Smith: On a tons basis, yes, but on an ounces basis, we've gone the other way.
Mr Gilchrist: As you're getting more and more marginal.
Mr Smith: Yes.
Mr Gilchrist: To some extent, that's quite analogous to the situation we find here with Ontario Hydro. You and many other people have commented that they have a concern about Genco operating with the apparent market power it has today. Again, I would ask you a question, as miners. When someone finds another opportunity for a salt mine, are they deterred by Sifto's size? Is somebody deterred by William's size, Teck Corp's size? Or if you believe that the existing players in the marketplace are making a good return and you can compete at or below their cost and make a return that's acceptable to you, if there are no other legislative barriers to your entry, why would we be concerned about how Genco starts out? If they're not doing the job properly, the best possible job of delivering the lowest possible costs for consumers, why won't somebody else get into that market just as they would get into your market?
Mr Smith: We kind of expect that they will at some time in the future, that there will be other generators come in. I guess in the short term, when the power market opens, that's the only generator that's going to be available to us, as a large consumer, generally.
Mr Gilchrist: As the flip side on that coin, let me ask you both, as businessmen who obviously are dealing in pretty high dollar amounts, when's the best time, if in fact there are any benefits to bringing in other equity partners, to bring in new partners or actually sell off or swap certain of Genco's assets? On day one, or once you have determined their true value and their highest and best use? Do you do the fire sale right now or do we let them go into the marketplace? If they improve, great. No one else will come in and they will be returning a profit to the shareholders, namely, the taxpayers. If they don't, why would that still not be the most appropriate course because in a competitive environment we'll get a fair dollar if they have to swap or sell any of their assets in the future.
Mr Smith: Genco assets could be broken into competing groups within their own organization as opposed to having one province-wide unit.
Mr Gilchrist: It's an intriguing thought but I have to wonder what that buys us because you would then have to put in some kind of subsidy knowing that the coal plants are more expensive to operate and will yield a far smaller return than the hydroelectric, and the nuclear is somewhere in the middle. You will severely discount the returns on the one hand, instead of taking the same blending under one umbrella.
I fail to see how that helps us. In fact, under the same umbrella, is there not a greater incentive for Genco, as it faces new competition, to shed the most expensive, to shut down the most expensive plants? Whereas, if I were to sell you all of our coal plants today, you've now got a vested interest in continuing to crank out NOx and SOx and continuing to be in effect a negative in our economy.
The Chair: Can I interrupt? We're going to move on to --
Mr Gilchrist: I didn't get a yes or a no.
Mr McBride: I'll talk to you later. I wouldn't sell it now.
Mr Gilchrist: You wouldn't sell it now?
Mr McBride: No.
Mr Conway: I'd just like to pursue this because I see this as a central issue. We've got troubles; nobody's denying that. We're being told particularly by people like the Macdonald committee and most recently the Market Design Committee that the single biggest hope you've got for downward pressure on rates is stimulating competition on the generation side. That is the single biggest area for opportunity to force rates down. But those self-same panels are saying the single biggest impediment to that is too much market power in the hands of any one player; in this case, obviously it's Hydro.
It is not an easily resolved issue. The Macdonald advisory panel said we should unbundle under the umbrella, first, of the public utility into smaller competing units. I don't profess to know how you do that specifically but that was their recommendation, to try to do in a way what they've apparently done in Victoria in Australia. As I understand the Market Design Committee's analysis of the state of Victoria, then you've got at least the competition from within that family of generators.
But isn't our problem, though, the nuclear stuff? That's our real problem as we look over the next five to 10 years. Peter, you make the point about letting the market decide. I understand there's a real appeal, except this is essentially a nuclear company, the modern Ontario Hydro. Particularly its underperforming assets and its debt load attach to that, with all, by the way, the political problems that attach to it as well. So how, I ask you, is a market, whether it's in Toronto or in New York or in Frankfurt or in Tokyo, going to assess the true value of a large, troubled, high-debt, underperforming nuclear power utility?
Mr McBride: I'll stay away from that.
Mr Conway: I don't blame you for staying away from it.
Mr McBride: First of all, even if the market doesn't change, you're looking at $10 billion up for grabs with this market in Ontario. That's Ontario Hydro's revenue.
Mr Conway: I'm talking about the valuations now.
Mr McBride: You've got to let those assets that generate electricity try to perform and sell their product in the market where they're going to have equal access to a transmission system.
Mr Conway: But surely, as we go into this market, we've got to have some idea of what Genco and Servco are worth. I guess I'm trying to get around my head, how is the market going to assess the value and the assets that attach to the nuclear power division?
In fairness to Bill Farlinger, when he made that speech in mid-June, where his idea of a stranded debt was substantially higher than others, I suspect what the chairman was saying out loud was, "By the way, we have done some costing about the downstream costs associated with the whole nuclear decommissioning thing and they're probably a lot higher than we want to suppose." I don't mean to speak for him but I've heard that from others. What do we do with that? How do we evaluate that sensibly?
Mr McBride: Unfortunately, I think we're going to go back to the bond raters in New York and it's going to be a political decision. It's going to be what credit rating do you want Genco and Servco to have.
Mr Conway: But surely they're going to say: "Yes, this is a dog's breakfast. Let the politicians decide. That's just so fraught with trouble and environmental hazards and all kinds of whatever."
Look at what we got from Ontario Hydro last year. Have you read this? If I was an ordinary citizen and I read the 1997 Ontario Hydro financial report, I'd be terrified to think of what somebody would do in New York. I'd understand what they might do in New York, but my expectation is when they look at that nuclear power division of Ontario Hydro, they're going to say: "That's one for the politicians. We're not going to take that."
Mr McBride: I think, Mr Conway, the flip side is that while we can speak negatively of that, there are others like British Energy and PECO. Ontario Hydro currently is not talking to anybody about long-term leases or deals like that, but there are companies out there that are willing to, through signing long-term leases, put a value on some of Genco's assets. Maybe it's a two birds with one stone kind of thing. It helps you evaluate those assets. It also helps get other competition into the marketplace without Genco on a long-term basis selling off its assets at fire sale prices or otherwise.
There are some people out there who may look at the Bruce plant and say --
Mr Conway: I accept that.
Mr McBride: There are ways around that.
The Chair: On that note, thank you, gentlemen, for coming before the committee this afternoon. We appreciate your advice and we'll consider your suggestions carefully.
Mr McBride: Thank you very much. It's a pleasure. Good luck with your deliberations. A very important job.
The Chair: Calling the representatives from Aird and Berlis, please.
Mrs Johns: Chair, can I just give another point of clarification? In two presentations we've had today they've talked about having to get separate licences and how that will be quite a barrier. Subsection 59(1) gives the Ontario Energy Board the ability to grant one or more licences to an individual, so I think we have handled that in the legislation. If you could read that and if it's still a problem to you, we'd like to hear from you. But 59(1), we heard on that issue twice today. Thank you for raising it.
AIRD AND BERLIS
The Chair: Good afternoon. Welcome. Please introduce yourselves for the Hansard record.
Mr Bob Doumani: My name is Bob Doumani. I'm a partner in Aird and Berlis. I'm a member of the energy group and the municipal group. I've been practising municipal law for about 24 years, but in the last four years I've been engaged in the expansion of municipal electric utilities into the Ontario Hydro retail division service area. I was lead counsel in a case about which you may hear something next week, Lincoln Hydro against the Power Workers' Union. I've distributed a submission to you, which the clerk was kind enough to hand out. I propose not to read it, but just walk you through it.
On page 1 I've listed those clients for whom we currently act, and all of them are engaged at one stage or another in an attempt to expand the area of local retail service and bring it under the umbrella of the local municipal utility. They do, in my view, represent a reasonable cross-section of the electrical restructuring activity at the municipal level prior to the introduction of Bill 35.
I've divided my submission into three areas: one, the treatment of boundary expansions under the Power Corporation Amendment Act of 1994, which I'll call Bill 185 for ease of reference; two, attempts at utility amalgamations; and three, some comment, if we have time, about ancillary services, which the new municipal electric company permitted by section 130 of Bill 35 can undertake. I will concentrate on the first part, boundary expansions, because there are, in my view, significant transition problems in this bill about which I want to talk to you.
Bill 185, the amendment to the Power Corporation Act, was enacted after a study, a review, after extensive consultation with stakeholders, and negotiations, and, as I understand it, all-party approval. It permitted municipal corporations to enact bylaws expanding the area in which their utility provided retail service into the area in which Ontario Hydro retail provided service, thereby allowing the municipality to take over control and management of the distribution of assets. The purpose of that, as I apprehend it, was to provide a degree of local control and accountability in the delivery of electricity at retail.
Bill 35 produces an arbitrary cut-off date of June 9. If the municipality passed a bylaw permitting expansion before June 9, that bylaw is void unless they've also entered into a transfer agreement, that is to say an agreement providing for the transfer of assets, the control and management of assets from Ontario Hydro to the utility. If, on the other hand, the municipality passed an expansion bylaw on or after June 9, its bylaw is void.
The commissions which we represent fall into three categories. Category 1 are those who passed bylaws before June 9 but have not yet entered into transfer agreements. Category 2 are those commissions who in good faith were planning, studying and working on an expansion but didn't pass the bylaw before the arbitrary date. The third group are those who were creating a municipal electric utility but had not got distribution assets into it yet.
Let me deal with the first group and tell you what happened. A number of municipalities, including Lincoln Hydro, were off the mark fairly quickly, as early as late December 1994 or early 1995, to pass expansion bylaws. All those bylaws were appealed by the Power Workers' Union and some of its members. They were being appealed by the Power Workers' Union and a list of its members, and that appeal was taken to the Ontario Municipal Board.
In order, I thought, to expedite matters, I brought a motion to have the appeals dismissed as having nothing to do with the issues raised by Bill 185, and the board agreed. But in agreeing, the board treated the Lincoln case as a test case and stacked up all the other appeals behind it. So Lincoln and some 11 or 12 municipalities were then locked in combat, as it were, with the Power Workers' Union.
The union appealed to the Divisional Court, where the board was unanimously upheld. The union appealed to the Court of Appeal, where the board was unanimously upheld. The unions sought leave to the Supreme Court.
Mr Doumani: Yes, you've got it. You've done that, have you?
On April 30, leave was refused. So there Lincoln stood, ready to go forward.
Subsequent to that, through the offices of the Municipal Electric Association, an understanding was worked out with the Power Workers' Union whereby it agreed to withdraw its appeals from the other bylaws and try to get its members to withdraw. It has withdrawn those other appeals, but its members haven't. The significance of that is that no expansion bylaw comes into force until the board's process is over. So we're off to the board on August 24 to see if the board can do something about that for us. But if a member of the Power Workers' Union wants to continue to fight, we could be in this same dance for quite some time.
Against that we find Bill 35. Bill 35 says if you don't have a transfer agreement before the Power Corporation Act, as amended, is repealed, even though you passed your bylaw before June 9 and even though you were stuck fighting with the Power Workers at the Ontario Municipal Board, your bylaw is void; it's gone. So four years of work, for many of those municipalities, is tossed out the window. I don't think that's right and I don't think it's fair.
The problems which are being caused by that provision are these -- I'm on page 4 of the submission now. There may not be sufficient time to negotiate a transfer agreement if I have to get into this dance on 11 or 12 other appeals at the board and through the courts. Secondly, the bill deprived municipalities of a significant right that they had under the Power Corporation Act, as amended. Bill 185 said, "You, municipality, could expand with or without an agreement with Ontario Hydro." Bill 35 now puts a gun to the municipalities' head and says, "You've got to have an agreement. If you don't have an agreement by the cut-off date," which is the proclamation of Bill 35, "your bylaw is void." That, as you could well imagine, gives Ontario Hydro, one of whose solicitors is here, with whom I've been dealing, a significant bargaining advantage. I'll tell her that right in front of this committee.
Mr Conway: Point her out.
Mr Doumani: No, I won't. I respect her too much. But she's over there.
It permits them to extract commercially unrealistic terms. Let me give you a couple of examples. We're talking about an asset transfer of control and management here in the order of magnitude of $6 million to $8 million -- not small potatoes. You would think as a matter of commercial realism you would obtain what the lawyers call a representation and warranty, a promise or an undertaking that the assets that you're getting might actually be in good working order. Hydro says no. And you might expect to say to Hydro, "If you've got any environmental problems lurking there under one of your transformer stations, maybe, and if they arose before you transfer control of the assets, that's your problem, isn't it?" Hydro says no. That's the type of situation this bill has put municipalities in, and I think just simply stating it shows it's not fair.
Thirdly, since, as I understand it from the bill, the Ontario Hydro retail division will find its way into Servco, there's not a lot of interest, I would suggest, in Ontario Hydro to transfer portions of Servco's assets and customers, and the control and management of them, to a municipal entity. I'm not blaming them -- it's common sense -- but you can see that they are not a very willing participant in the process. So why not insist on commercially unrealistic terms and hope the clock runs out and the bylaw is voided?
I attach it perhaps for a little levity, but in that regard Hydro is dragging its feet, to be blunt. There is a letter, as the last item in my submission, in one of the expansion municipalities that I invite you to look at. We've been discussing what the transfer date is going to be. What date does control in management occur? Curiously, and I'll come back to it, it has to be after January 1, 1999, even though we're sitting here in August 1998. As I say, I'll come back to that, but the excuses are becoming quite interesting, including the one I have attached about vacations. Everybody is too busy going on vacation to get to work on transferring, except, of course, the solicitor with whom I'm dealing.
There you are. If you're on page 5, here is what we're recommending on behalf of our municipalities and municipal electric clients. We're facing an uncertain negotiating deadline, because you know in this bill you can proclaim various sections at various times, but the clock is running. We've got one party to the negotiations who has an unfair negotiating advantage because the bill has put a gun to our heads, and we have a possibility of continuing expansion processes being precluded. What we're recommending is this: Look, extend the time limit for entering into the transfer agreement until the later of -- which is a good lawyer's term -- either we get through all these appeals or two years from proclamation. Why did I pick two years from proclamation? That's the time limit in which we have to set up the municipal corporation under sections 130 and 131.
Secondly, and I'll deal with this now, conclusively deem -- another lawyer's term, but that means "for sure" -- all the provisions of Bill 185 dealing with transfers apply. The bill currently says all the provisions of Bill 185 continue for the completion of a transfer. I hesitate to say this in a public committee, but I will: A little degree of paranoia in a lawyer is not a bad thing. When I have Hydro stalling me past January 1, 1999, as to the effective transfer of the assets, I wonder if there's a hole in the provision. If there is a hole in the provision, I don't want to worry about it; I want to block it.
The problem is this: What if I sign the transfer agreement today, with all the terms I don't like, but the transfer doesn't occur until January 5, 1999? Is that completion or does completion simply mean all the documents necessary to give effect to the transfer? I don't know the answer to that. I know that on the ones I'm working on, it's going to be a long time to get the actual documents of transfer, the little bits of paper that say you have title to this and title to that. I could have a transfer today, but I don't get the paperwork done for three or four months. Is that what completion means? We don't need that problem on a $4-million to $8-million deal, so clean that up. That's all we're asking.
Finally, because of the negotiating leverage that this bill has given, we're recommending that a form of interest arbitration be available. That's not unique. Bill 185 provided for arbitration over the transfer price in respect of the control and management of the assets. It's not a big leap to provide for a form of arbitration over the commercial terms. I don't care what the price is if the commercial terms are not realistic.
That's our first group of municipalities.
Our second group -- now I'm on page 6 -- was in process when Bill 35 came along but had not passed an expansion bylaw prior to June 9. I've given on pages 6 and 7 the example of the town of Huntsville. It's typical of what Bill 185 was trying to accomplish. The District Municipality of Muskoka Act restricted the Huntsville Hydro Electric Commission to the core of Huntsville. Then, as Huntsville grew out, under the district act you either had to take in the whole of Huntsville or not; you couldn't go partial. Bill 185 fixed that.
Once Bill 185 was enacted, Bracebridge, Huntsville and Gravenhurst got busy doing studies to see if it made sense. Gravenhurst and Bracebridge were first off the mark to pass their bylaws, and guess what? The Power Workers' Union and several of its members appealed them. So Huntsville said: "Lincoln Hydro is a test case. Let's see what happens." On April 30, 1998, we won. Huntsville then starts the process to get its bylaw in place, and boom, along comes Bill 35 and cuts them off at the pass, as it were. That's contrary to what I thought the Macdonald commission report and the white paper said in terms of encouraging utility expansions. Huntsville had no idea that June 9 was going to be picked. It doesn't seem right and it doesn't seem fair that Gravenhurst and Bracebridge within the same district, for example, can enjoy the benefits of an expanded utility, including local accountability, and Huntsville can't. In effect, the Power Workers' Union, having been beaten unanimously at every judicial level in this province, now wins in Huntsville because it has delayed it.
That is the issue there. The recommendation is very simple. We have said that you should grandparent municipalities in that situation. Either just do it or, if you have some concerns about process, you could put a provision in that says a municipality that has completed a study, enacted a resolution or expressed some other clear intention of municipal intent to expand is grandparented, and if there is an issue it can go to the OEB for determination. That's the second group.
The third group is on page 8. Those are municipalities -- and I've put two down, Oro-Medonte and Moore; I think you are going to be hearing from Moore on August 20 in more detail -- that had just established municipal electric utilities and were trying to negotiate agreements for the transfer of control and management with Ontario Hydro when Bill 35 was introduced. As I read the provisions which I've set out on page 8 of the submission, particularly the ones in sections 130 to 132, if you have a municipal public utility or hydroelectric commission but it's not distributing because it doesn't have assets to distribute, you're not in the game. You can't then access the creation of the municipal corporation. Without the assets, these municipalities are dead. We are having inordinate difficulty in Moore with Ontario Hydro striking a deal over the assets. Again, it's a timing thing. Why give up part of your retail division if you know that if you wait long enough this bill will cut off those who were bona fide in the process of trying to do it before the bill was ever introduced?
Again, very simply, we have two recommendations: First, give them two years -- and I told you why the two years were picked -- to begin distributing electricity or obtain the assets, and that's again coincidental with the two-year requirement on the municipal corporation; and give them access to the Bill 185 process in terms of the transfer of control and management and any employees who that bill may permit to be taken over as well.
Finally, related to that, it was the recommendation of the Macdonald commission report that you try to create shoulder-to-shoulder municipal electric utilities, try to amalgamate them. I don't want to sit here and be all doom and gloom. Bill 35 has a nice provision. The ability of more than one municipality to own shares in that municipal corporation permitted under section 130 or 131 of the bill is an outstanding way to produce the type of amalgamations that the Macdonald commission recommended. But the problem is that if you're not contiguous to each other, if Ontario Hydro is between you so that you are -- to use a term that's probably been overused here -- stranded from your brother and sister municipalities, what's the point?
There are a couple of municipalities, Moore township being one, who were in the process of trying to get themselves into a position to amalgamate and actually have a private bill before this Legislature, Bill Pr8, to create the West Lambton Electric Commission, consisting of Sarnia, Petrolia, Point Edward and, it was hoped, Moore. But if Moore doesn't have the distribution assets, Moore is not in the game, yet Moore was trying everything it could and was working hard and had spent significant dollars for a municipality that size to get the distribution assets, and it will be frustrated by this bill.
The rest of my submissions are on ancillary activities; you can read them for yourselves. I hope I've a little bit of time for questions.
The Chair: Yes, not a lot of time but a little bit of time, I think about two minutes for each caucus. We begin with the government caucus.
Mr Lessard: Madam Chair, I'm prepared to give up my time, but I'd like to give the parliamentary assistant an opportunity to give some explanation of why June 9 was the date that was picked. If that's not available, we could --
Mrs Johns: It was the date of the first reading of Bill 35.
Mr Lessard: There must be more reason than that.
Mrs Johns: That's exactly what it is, the date of the first reading of Bill 35.
The Chair: Let's use our time constructively, then. Go ahead, Helen.
Mrs Johns: I'm just a dumb little bookkeeper from Huron county and that was a pretty slick presentation for me.
Mr Doumani: And if I believe that --
Mrs Johns: I just want to ask you a few questions about this. It's my understanding that Bill 185 allows municipal electric utilities to take the assets from Ontario Hydro at book value. Is that correct?
Mr Doumani: No. Both "take" and "book value" are wrong. Obtaining control and management --
Mrs Johns: Purchase.
Mr Doumani: No, not purchase. Obtaining control and management or acquiring control and management for the residual debt.
Mrs Johns: For the residual debt? Oh, that's even worse.
Mr Doumani: From your perspective.
Mrs Johns: From that standpoint, there's an asset at Ontario Hydro that's worth 50 billion bucks and the residual value on that asset is five billion bucks and you think the MEUs should be able to take it for that five billion bucks as opposed to the 50 billion bucks which is the cost the taxpayers of Ontario paid for that asset?
Mr Doumani: Yes, including the ratepayers within the area to be serviced by the MEU. I hold to the view that those assets are held in trust for those ratepayers.
Mrs Johns: So what you're saying to me is that if a private individual company came in -- we're trying to level the playing field in Bill 35 -- what would happen is that they would pay the 50 billion bucks, the MEU would pay the five billion bucks and you think that we, as the people protecting the taxpayers of Ontario, should let it be sold at this fire sale for five billion bucks?
Mr Doumani: It's not a fire sale. It's not a --
Mrs Johns: The residual value.
Mr Doumani: Let me finish my answer. It's not a fire sale. It's not a private corporation, it's a municipal corporation, and since your government has finished downloading a pile of costs on municipalities and reducing grants, it would be kind of nice to have an Ontario Business Corporations Act corporation which can be both in the distribution business and, through a subsidiary, in other businesses. It might a source of revenue. We are taking in a debt which the Legislature in 1994, with all-party approval, thought was a good idea, and I don't see any circumstances or any rationale why that's not a good idea right now.
Mrs Johns: Given that the government believes there should be a level playing field and that competition is the key to bringing this level playing field, how would you say that's a level playing field when a municipal electric utility can get it for five billion bucks and the private sector guy is going to pay 50 billion bucks?
Mr Doumani: How do you say it's a level playing field to allow Ontario Hydro retail division to continue to exist to service a very large number of ratepayers with no local accountability, no local input? I don't see that as a level playing field either, and I don't see the private sector bellying up to the bar to create a distribution system.
Mrs Johns: I would say that we're seeing the presentation from Encore coming through loud and clear.
Mr Conway: I'm going to follow up. The parliamentary secretary does a very good job, but I think we have a problem here, Helen, quite frankly, because it is a distribution system. We all want this to happen. I think we've had this discussion. If this committee has heard one thing, it is that surely there are gains, in some ways probably the easiest of the restructuring, that should occur at the distribution end. I think we would really want to see, more than theoretically -- but this west Lambton business certainly sounds like something we were anticipating with Bill 185. You weren't there. I was. That was certainly my view.
I know the rationalization that should occur in Renfrew county would have some similar ingredients. I would want fewer players rationalized across a sensible region. You're right about a level playing field, but I would expect here that you're going to have two competing public entities fighting for the distribution asset. If I'm a ratepayer, if I'm a taxpayer in west Lambton or in Renfrew, I pay my rates, I pay provincial taxes, but I also pay for my municipal tax. I would assume that the real competition is going to be between two parts of the public sector, and I want rationalization. I don't expect that there are going to be any private players moving in, but maybe we'll talk about that.
I guess what I'm saying is that if we don't fix this problem, if this doesn't get fixed, we are not going to get what we want except with this proviso. When I think back to the provision yesterday, you know, we will get an Ontario Hydro retail. That's what we will get. We will inadvertently, from the point of view of the committee, allow a situation to occur where there is real rationalization, but in the end it's going to be Ontario Hydro retail, because you can't make the other business happen. Would I be --
Mr Doumani: Yes, that's the problem. Especially in the more rural areas or areas where there is a little bit of an urban core and a rural area around it, the market control will be Ontario Hydro retail or Servco, when it's rolled into Servco. I don't know what's right about that.
Mr Conway: I was maybe being a little bit bold yesterday, but in my area, and that's very similar to this situation, they are so ticked off at the service problems of Ontario Hydro that they like Bill 35. One of the things they want in Bill 35 is hopefully a kind of west Lambton operation that they have got some reasonable control over. If this thing turns out --
The Chair: We have a guest. Questions are to be directed to the Chair or to the guest. We're going to wrap up, though.
Mr Doumani: Mr Conway, I'll take it as a question and address that. It's one thing to have to go to some big service centre or downtown Toronto; it's another to walk into the plaza where your local municipal electric utility is when you have a problem, and that's what Bill 185 was about.
Mr Conway: My concern -- just a final point -- is that you're telling us in this that there is, buried in this bill, a mechanism that, as far as you read the situation, effectively frustrates and perhaps more the rationalization of distribution units at the local or regional level.
Mr Doumani: And now intentionally so, it seems.
The Chair: Colleagues, we must wrap up. On behalf of all the members of the committee, I thank you for coming before us today with your brief and your view on this piece of legislation. It's much appreciated and I know we'll consider it carefully.
Colleagues, we have a plane to catch. It leaves at 4:40. The taxis will be waiting for us at the front door. We begin tomorrow morning at 9:30 in Sudbury. We are adjourned for today.
The committee adjourned at 1530.