Thursday 13 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
Sudbury and District Chamber of Commerce
Mr Gerald Foley
Mr Harvey Prudhomme
Canadian Niagara Power
Mr Mardon Erbland
North Bay Hydro
Mr David Wills
Mr Geoffrey Laplante
Ms Brennain Lloyd
Great Lakes Power
Mr Ed Kress
Mr Harry Goldgut
Mr Michael McEwen
Mr William Bradley
Wahnapitae First Nation
Ms Carolyn Pettifer
Mr Dwayne Nachkewe
Chief Ted Roque
Sault Ste Marie Public Utilities Commission
Mr Ken Wallenius
Mr John LeMay
Municipal Electric Association, district 9
Ms Susan Cochrane
Mr Henri Robillard
Toronto Futures Exchange
Mr David Rudd
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 Ted Arnott (Wellington PC)
Mr John R. Baird (Nepean PC)
Mr Steve Gilchrist (Scarborough East / -Est PC)
Mrs Helen Johns (Huron PC)
Mr Wayne Lessard (Windsor-Riverside ND)
Mr Gerry Phillips (Scarborough-Agincourt L)
Also taking part / Autres participants et participantes
Mr W. Leo Jordan (Lanark-Renfrew PC)
Ms Shelley Martel (Sudbury East / -Est ND)
Clerk / Greffière
Ms Donna Bryce
Staff / Personnel
Ms Anne Marzalik, research officer,
Legislative Research Service
The committee met at 0930 in the Four Points Sheraton Hotel, Sudbury.
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.
SUDBURY AND DISTRICT CHAMBER OF COMMERCE
The Vice-Chair (Mr Peter L. Preston): Good morning, ladies and gentlemen. We have a tight agenda today. I call on Gerald Foley, Sudbury and District Chamber of Commerce. Mr Foley, you have one half-hour in which to make your presentation. I hope that you would leave some time during that half-hour for questions at the end. For the purposes of Hansard, would you identify yourselves prior to your presentation.
Mr Gerald Foley: My name is Gerald Foley. I am president of the Sudbury and District Chamber of Commerce. With me today is Robert Skelly of the SRDC. I'd like to thank you for the opportunity to make a presentation today. It wouldn't harm my feelings at all if we could do this in 10 minutes instead of 30 minutes and start off ahead of schedule as opposed to running late, so we'll endeavour to do that for you.
I'm here today representing the roughly 1,000 members of the Sudbury and District Chamber of Commerce. The Sudbury and District Chamber of Commerce has the honour of being one of the largest and most vibrant chambers in the north. We represent a group that ranges from multinationals that are here today and on the agenda to individual people trying to make a living selling something or doing some form of service. Over 70% of our members have fewer than 10 employees, and it's particularly that group that we are going to try and speak on behalf of.
The one thing we figured out when we got into this is that the titans are going to take care of themselves quite well. Ontario Hydro and the large buyers of electricity are going to ensure that they have invested a great amount of effort and energy in knowing what the heck this is all about, how it's going to impact them and how to take care of themselves. The small business person, by a very weird reality of life, has neither the time, energy nor expertise to truly delve into these issues and take care of them.
Quite frankly, when I was handed this issue to deal with, in spite of having some great resources available to me, people who are going to be making presentations here today on their own behalf, I came to realize very quickly that the breadth and scope of this change is beyond what I would call us mere mortals, who are not immersed in the energy issue. Trying to figure out what wheeling rate was and finding out what stranded debt was, and a whole host of new terms, was quite frankly an interesting challenge.
In spite of having already told you that we don't really have a lot of expertise in this area, there are some things we would like you to think about and deal with as you go through this process. One is that we recognize that this is possibly one of the largest fundamental restructuring changes undertaken by the government in its current mandate. We fully endorse the privatization of Ontario Hydro, so at a basic level we very much endorse this bill.
Given the reality that we as small business people don't have the time, energy or expertise to make sure that our interests are taken care of, and given that small business is the economic driver of this economy and the backbone of this province, we think it's very important that the message that comes out of here is that those people who do have the time, who are vested with the knowledge, the ability and the accountability to make decisions, do so in a manner that clearly keeps the interests of small businesses and small manufacturers in the forefront. As I said earlier, the titans of the game are going to do a very good job of taking care of themselves. I don't think Ontario Hydro is prepared to come out of this a loser. I don't think GM or Ford or Falconbridge or Inco, any large players, are going to sit by passively, so there's a reality here that I think you have to take back.
What a small business person needs is dependable service at a reduced cost. We all know that Ontario Hydro rates -- I heard the presentation or the report from the mining association yesterday -- are uncompetitive. If they're uncompetitive for a large supplier, you can be very sure that they are uncompetitive for a small bakery or for a small place grinding stone, making monuments. We want to make sure that the group drafting the bills and developing the regulations never loses sight of taking care of the small business person. I wonder how many pounds of paper -- I know with my little brief there were 25 copies asked for, and if every person who is making a brief brings 25 copies, we're going to have some healthy paper industries.
In spite of all that and in spite of all of the economic analyses and in spite of all of the very learned people who will no doubt give you lots of opinions on what to do, we know there are going to be points in time when the person trying to craft the regulation or figure out how to say what they want to say in the act is going to run into a grey area where there is no clearly defined answer, and at that point -- if we had it, we'd blazon it on the wall where they're working -- we want them to ask themselves, "Now that I'm at a crossroads or at a grey area, which approach will best stimulate private business, will generate better service and reduce the cost of this product?" If they figure that out and they follow that lead, then they won't go very far wrong in the development of this act. That's the philosophy we want you to adopt.
We'll try to talk a little bit about some specific issues out of the myriad that I'm sure have to be dealt with to give you our opinions. You may in the end ask me questions about something which I have been told is good for me and I don't really understand, and if the person who told me is in the crowd, I'll ask them to answer the question for you.
One thing is timing. We believe very much that everything should be done to move this bill through by January 1, 2000. That's not saying we don't understand the magnitude of the issue, but when you put something this large into flux, ambiguity sets in. People start to defer investments, people start to wonder what it's going to look like when it's over, and they start to hesitate. We think the sooner the better. Maybe not everybody is going to be ready on January 1, 2000, but it's a fact of life as human beings that if you made it January 1, 2002, the same people probably wouldn't be ready by then either.
Stranded debt: I'll tell you that as an individual when I heard about this I shook my head. I'm sorry, I don't have a lot of time for people who have $16 billion in assets and I'm told they're likely to have $45 billion in debt when this is all done. Whether that's a magnitude larger than what it really is going to be, who knows? But I do know one thing: Their ability to incur more debt should stop yesterday. They haven't proven to have a great track record, because if I was giving someone $1 to invest on my behalf and they came back and said, "You owe me $2 more," I wouldn't keep them as an investment banker very long. I think the privatization of Ontario Hydro is about -- whatever that number is -- $30 billion too late. I think you know that I have an opinion on that issue.
Fairness: We're worried that in a battle of titans, where lots of expertise is thrown at it, it's the small producer, the small person, the ratepayer, the taxpayer, who ends up getting it in the end here, so please, when you're structuring this thing, let's make sure that it's perceived as fair for all participants.
There's one thing that we did have a discussion about. In this changeover from what we've grown up with, everyone in this room and Ontario has grown up with, to a new world there are going to be some areas in this province that do very well by the change, particularly areas that have gencos -- I think that is the term that's used -- and we feel that it is not inappropriate to say that those areas that end up with a very definable benefit should either be required to share that benefit with all of us who have helped set it up or incur a proportionally greater piece of the liability.
In other words, if we want this thing to come out fair, there can't be very clearly perceived winners. That doesn't mean everybody ends up being a loser. I'm asking you to accept that paradox. But there are some large cogen stations in this that derive a great deal of economic benefit for that area and there are areas in this province that have no perceived benefits out of this. Let's make sure that someone doesn't come up with a wonderful straight-line analysis and we all get treated "fairly" by paying the same thing and yet some people get a benefit.
I'm on page 4, for those who are trying to follow this presentation.
Level playing field: I think here what we're really talking about is a level playing field with groups such as the natural gas industry. I probably should read this because this isn't one of my strong points.
We have to ensure that there's an effective process in place to encourage the municipal electrical utilities and Ontario Hydro retail to merge local assets and ensure local control of distribution systems. We would endorse retaining the processes set forth in Bill 185. I'm told that they are quite capable of doing what needs to be done. However, there are probably ways to enhance it, and those should be looked at, to ensure that it in fact would facilitate the transition to municipal electrical utilities even faster. Having never seen Bill 185, please ask me for no details on it, but I'm told by the people who would be impacted by it that they see it as a fair and appropriate methodology.
Explicit business lines: This is something, depending on whether you want to be in the business or are in the business and want to stay in the business -- we had people from all spectrums trying to give us advice on this. After they gave us their advice they sort of did like people do: They said, "There's our opinion; you figure out where you should sit as the chamber of commerce," and we did. We come back to the question I suggested to you earlier: Does it drive private business?
We think there's a very realistic possibility, and I'm told there are horror stories that in fact it is occurring, where the regulated utility can use its strength, the fact that it is regulated and has a given rate it can charge, to unfairly compete with the small business person trying to do electrical services business. That should not be allowed and it's got to very transparently not be allowed. There should be no sharing of resources. They shouldn't be able to share the same buildings so that the regulated business is absorbing the costs so that now their overhead costs, trying to bid on a power line contract, are a lot less than the guy who has to own his own building, run his own trucks, can't share a foreman, those sorts of things.
We think it's important to recognize that the act and the regulations have to be explicit as opposed to implicit. There is, I understand, a sense that if the small business person is able to indicate where they're being harmed, it should be looked at. Let's remember the story of the titans. Someone who can put $60 million on their first draft to this committee has got a whole lot more clout than a person who says to a volunteer like myself: "We know we should be commenting on this. How much time can you dedicate to it?" That's the reality. Someone who has five employees is not going to be able to take on a monopoly, albeit a smaller, regulated group than currently exists. So try to ensure that the regulations are very explicit that they can't use their resources to compete where private business can compete.
We endorse the concept of local ownership for the wire distribution companies. However, that's tempered by the belief that the entities must end up being of a decent size, scope and breadth to be credible players in the game. We don't envision every little community --I think there are something like 300 MEUs now. Some people have suggested to me the right number is 10 to 15. To be honest, I couldn't tell you whether it should be 200, 150 or 15. What we're saying is that there should be some sense that the people who are taking care of me are within a reasonable local region to where I am and that it's not a 1-800 phone number, unless the call centre happens to be here in Sudbury. We would gladly take on that business.
Sale of assets: I have no doubt that when it's all said and done this will end up being very contentious. We believe the rules need to ensure that Ontario Hydro divests of its assets in a reasonable, fair, costly manner. I'm sure everyone will agree with that and no one will know how to define that. I'm not going to give you the answers because I don't know.
However, we do know that a simple way to frustrate this process is for Ontario Hydro to say, "We need to make a whole bunch of money so that we don't look like total idiots with a $30-billion leftover debt, so we'll crank the price up, and since people want to get into this business, they'll pay $5,000 for something that the market rate should be $1,500 for." I don't think you can leave that to the market per se to decide, because one of the players in that market, the seller, has huge clout and the other people will be gambling that they can make this go. I think the rules have to set that out very clearly.
It's like the fear that we stated in here. One way to frustrate the whole process is for Ontario Hydro to set an artificially high rate that no one can buy into and then say, "We tried to divest but obviously nobody wants to be in this business." You have to ensure that happens. As a person who then ultimately is going to have to pay for whatever that sale price is somewhere in the system, I don't want it to be something that I've already paid for being bought and paid for again.
I'd like to thank you for allowing us these few moments to give you that input. I think it stayed at a very high level. I'm sure there are other people who are going to wade into the details, and quite frankly I pity you for that, but that's why you guys get the big bucks, I guess. But our fear is that we've got to make sure, and the only message we're really here to bring you today, is that the people making the decisions in the grey area ask themselves that question: Will this decision, this regulation, this process stimulate private business, ensure dependable service and reduce the cost of the product? That's what small businesses are interested in.
You wouldn't have had time if every member of our chamber had decided to come and give you that message. You wouldn't have had time to hear 800 people do that. So I'm here on behalf of 800, and no doubt 180,000 small business people, or however many there are in the province, all have the same concern. I don't know what you're doing to me and I'm not sure how it's all going to work out, but I need to make sure that business is involved, service is dependable and the costs are reduced. How you do that in this scope of change, we wish you the best of luck. As I said, if you could make a poster and stick that on every piece of paper, then you're going in the right direction.
The Vice-Chair: Thank you, sir. We have three minutes per caucus. We will be doing it on a rotational basis. We'll start with the Liberals.
Mr Gerry Phillips (Scarborough-Agincourt): Thank you, Mr Foley, and I appreciate the chamber's presentation. My background is business. I used to have three businesses and 300 employees or so. Let me just say that I also agree with the comment you made that the titans will look after themselves. There's no doubt that there's going to be hundreds of millions of dollars made on this bill and the big will handle themselves. Our caucus's concern is small business and the consumer, the average home consumer.
The problem we run into is that, frankly, we're going to have to deal with this bill before we're able to get answers to many of the questions you raised. The Minister of Energy said the other day that they won't have the stranded debt for us before we approve the bill, and he said it's really not that important anyway that we know that. For us it's fundamental, because if the stranded debt is loaded in a certain way it will benefit big business and penalize small business. Hydro has said that they are going to keep all of their generating assets and sell heavily into the US to pick up the 40% share of the Ontario market that they're going to lose. If that doesn't happen, guess who picks up that cost. It's small business and the consumer.
My message to you really is that we're going to have to sign this bill, the Legislature will deal with it, before we have some of those fundamental questions answered. Do you think we should be holding off on final approval of the bill until we get the answers to the questions that you've raised in your document here?
Mr Foley: Quite frankly, no, I don't think you should, and for a couple of reasons. But I'd like to make a comment on a comment you made and the minister has made. Although we didn't write it into our brief, it would be fair to say that we believe fundamentally that on the cogeneration side, if you're going to have an active marketplace, Ontario Hydro should not end up with any more than, say, 30% of the cogeneration business. You have to stimulate business, it has to be a competitive market, and if there's only one supplier of reason in the area, that's not competitive business.
Why would I say not to hold off on the bill? Because quite frankly, whether it's $20 billion or $40 billion, it's a hell of a lot of money. We all know that, and the detail of that is irrelevant. But as a small business person, you know as well as I do that if you hesitate, if you delay, there will always be a reason to do that. This is an issue where ambiguity is going to hurt more than help. We know the direction we have to go in and that has to be endorsed. I think some of the detail stuff can be debated adequately in the Legislature.
Mr Phillips: Keep going.
Mr Foley: I don't know about this all of a sudden.
I think it's important that we stop doing what we've always done in the past, and that's what this bill is all about. We won't know all the answers; 10 years from now we won't know all the answers. But I know as a consumer that we went through a whole lot of this -- I heard Bell make all these arguments before they allowed a lot of things to occur in the phone industry that couldn't possibly have happened before. Yet I know that every time I turn around now, a number of years later, my rate is going down, and that makes me pretty excited. I think you have set up the system to do that and then monitor it over a decade, not over a month, not over a year, not over two years.
Mr Wayne Lessard (Windsor-Riverside): One of the things that we heard from Mr Osborne from Ontario Hydro the other day was he was likening what this process was about with what happened with the telecommunications industry. What we saw, even though long-distance rates have gone down, is that local service rates have gone up, so that the benefits of deregulation in the telecommunications business, which Mr Osborne is likening this to, haven't gone to many small residential consumers who are only using local service.
I agree with you that the titans will take care of themselves, and I understand your concern about small business consumers. My concern is with residential consumers. I don't see the protections with respect to rates in this bill for small residential consumers. I would say to you that that protection against increased rates isn't there for small business people either, and you have every reason to be concerned about that.
You said that you fully endorse privatization of Ontario Hydro. I don't support that view, however, and the NDP doesn't support that either. The minister has said to us, "This isn't about privatization." I don't know whether you have expressed those views to the minister, but he says that's not what this is about; it's about something else. We're trying to figure out what it is. Maybe you could tell us what you think this is all about.
Mr Foley: No, I'm not going to go there. What's that saying? "Talk to the hand here," or whatever it is. I don't know.
What I know is that it's got to be structured, from my chair, in a manner that creates competition. The Ontario Hydro rates are not competitive on a world basis, and that's reality. If they're not competitive, that means that as residential people we're already paying a higher rate than we should have to pay and than other people are paying. A continuation of the status quo doesn't mean I'm getting a deal. It may mean I'm comfortable because I can see it and feel it and touch it, but it's not the best deal I know that's potentially out there.
I think this is about the potential. In my mind, it's about structuring it so that the potential can come to fruition and not be frustrated by just changing the deck chairs on the Titanic.
Mr Ted Arnott (Wellington): Mr Foley, thank you very much for your presentation. I thought it was excellent. You've done a good job of representing the viewpoints of your membership.
In talking to small business people across the province, what I hear most consistently with regard to this bill is the expectation that rates will go down, lower than they would have been otherwise without the bill. I think most small business people feel that when the monopoly is ended and competition enters into the marketplace for electricity, there will be tangible benefits.
I would ask you this question: For the small business people in your riding, how big an impact do Hydro rates have on future investment decisions, and will this bill more likely lead them to feel more confident about the future and invest more, creating the new jobs that we need in the Sudbury area?
Mr Foley: Most small business people I know are undying optimists. I say there are three realities: There is never enough time to do what needs to done; you probably have everything you've got on the line, including probably money from your mom and dad, and you don't have a margin for error; and you have to exploit every opportunity for success, at which point rule number one usually kicks in.
I think that most business people who have energy as a major component of their costs -- and if you're running a bakery, guess what? That's a major component of your costs. We know that you can get the best butter tarts in Canada here by one of our local businesses. If you could reduce their costs, I suspect they would find a way to convert that into increased opportunity for themselves.
At a large level, huge investments -- and I'm thinking of someone who decides to open up a smelter -- they look around the world at energy rates and they decide where that is. So if you want to bring in the big players, you have to be able to have a rate -- they consume so much that a small difference matters.
To the small person, I'm more worried that they're scraping by. A decrease in rate increases their margin of success, and that's important. Like I said, there's a crazy gene that goes in most businessmen's heads. They'll take that opportunity and they'll run with it and we'll never be able to figure out what they did or whether that was the scintillating change. But they will look at the end of the day and say, "I've got more money to invest and I'm going to do it." I believe that. Most people will take that extra step if they can find a way to reduce their costs.
The Vice-Chair: Our time is exactly up. I thank you very much for your presentation.
The Vice-Chair: I would like to now call upon Mr Harvey Prudhomme of Sudbury Hydro. Welcome. You have half an hour to make your presentation. I would hope you would leave some time for questions at the end.
Mr Harvey Prudhomme: I certainly will. I've got copies of my presentation.
The Vice-Chair: You may wish to pass them around, or the clerk will get them and pass them around. For the purposes of Hansard, if you would identify yourself prior to your presentation, I would appreciate that.
Mr Prudhomme: Good morning. My name is Harvey Prudhomme. I am the general manager of Sudbury Hydro.
I would like to focus today on four areas of concern, notwithstanding the other issues, including the stranded debt, Ontario Hydro's competitive monopoly, future customer reliability and service. These are issues that are being addressed by other presenters, including North Bay Hydro, Sault Ste Marie PUC, to my understanding, and district 9 and some of the private sector presenters who are here.
The areas I wish to focus on are section 72 of the Ontario Energy Board Act, 1998; section 131 of the Electricity Act, 1998; the formation of the board of directors; and the development/contribution capital issue. We would like to focus on those four issues.
First I wish to give an overview of Sudbury Hydro to give you some concept of where we're coming from. We are a community-owned, community-operated and community-minded utility, a heritage that began over 100 years ago when the fledgling community of Sudbury became the first community in Ontario to own and operate its own electrical generation station. While the demand for electricity has increased from the original 75,000 watts available to 200 million watts, the drive to keep customers at the leading edge of innovation has remained with the Sudbury Hydro-Electric Commission.
Today, Sudbury Hydro services the needs of 40,000 customers within the city of Sudbury and serves as a utility contractor for parts of Nickel Centre, including the townsites of Falconbridge and Coniston. From the original steam-powered plant, we have moved to 25 modern substations controlled by the latest in computerized equipment. This system supplies reliable electricity to residential and commercial customers, ensuring that the community has the electrical infrastructure to grow and prosper.
Sudbury Hydro continues to meet the challenges of customer service by developing new ventures to promote new and secure economic development for the community it serves. Most recently, we expanded our own communications network to provide a state-of-the-art broadband fibre optic telecommunications system for the area. This system provides for the telecommunication needs of existing institutional and commercial customers and paves the way for a host of new high-technology businesses within the Sudbury region. We are also actively participating in development of a community district energy system supplying cold and hot water with an electrical generation portion. These initiatives are with private and public sector alliances and partnerships.
"Community-owned and -operated," and "community-minded" are not just buzzwords at Sudbury Hydro. They guide all of our business decisions. This commitment to our heritage and future, combined with local control, will ensure that the needs and concerns of the community guide us.
We are debt-free and have not raised rates or user fees since 1993, unlike Ontario Hydro, Bell Canada, cable TV and the gas companies. We intend to serve the community as a distribution company and offer competitive products and services in all forms of energy and communications.
I will now address our concerns with the legislation.
Section 72 of the Ontario Energy Board Act, 1998, has limiting powers for newly created municipal distribution companies. Such limitations are not contained in the legislation for the Services Corp, nor of the gas and telecommunications companies. This utility and others have installed broadband, high-speed fibre optic systems for our own use, including our SCADA system, which is our automatic remote control system, automated meter reading, and as mentioned, for community-wide use. We are also a partner in a district heating and cooling system currently under financial and engineering review.
These two ventures, combined with the ability to market other forms of energy, including gas and value-added products, will provide synergies that will maximize our revenue, minimize our costs, assist in economic development and enhance customer value. These benefits must not be jeopardized in the future by having our competitors use this section of the act to challenge our position before the Ontario Energy Board, forcing Sudbury Hydro to incur excessive litigation costs. We ask for a level playing field. Let our customers determine the marketplace, not a few words in an act which are not required under this section.
I'd like to focus also on section 131 of the Electricity Act, 1998. This section of the act limits the ability of existing municipalities without hydroelectric commissions to establish new distribution corporations after the act receives royal assent. Northern Ontario has several municipalities, including five within the region of Sudbury, the Tri-towns, Timmins, Elliot Lake and Kirkland Lake, that for various reasons have not previously formed utilities. Municipalities in northern Ontario currently with utilities will continue to have all of the advantages that a distribution company can bring, including local jobs, dividends, new services and assistance with economic development. Municipalities that continue to be served by Servco will only have the 1-800-GOOD LUCK number in Toronto.
Mr Prudhomme: No, we have a much better number in Sudbury. At least we'd answer the phone.
A number of municipalities and MEUs along the Highway 17 corridor between Sturgeon Falls and Espanola have begun formal discussions on the creation of an alliance. The Rainbow Country Alliance group's aims and objectives are to retain local northern Ontario control of the distribution assets and partner in competitive services. This group encompasses a 100-mile length with an approximate base of 100,000 customers, if we count the current Ontario Hydro customers in that area. A similar distance in southern Ontario, ie, Hamilton to Claringview, would have an approximate two- to three-million customer base in that 100-mile zone. That gives you a concept of the distance and the difference that you must look at when you examine the northern Ontario areas.
The rationalization of the northern distribution assets among five centres in alliances such as the Rainbow Country group would give all northerners a share of the rewards in ownership of their distribution systems. These rewards include local control of decisions affecting levels of service, costs, system reliability and economic development, and, most importantly, retaining the jobs in the north as well.
Local utilities have worked very diligently to ensure effective, reliable service for our customers. This is reflected in a recent survey where 93% of Ontarians trust their local utility, whereas Union Gas was at 60% and Centra Gas was somewhat less with 35%. These are very recent survey results.
We strongly urge the legislation to give these northern municipalities the right to form either their own distribution companies or partner with an existing MEU, such as the Rainbow Country Alliance, in order to maintain local control and jobs. The north has too often and too long been left as the poor stepchild of the province by large corporations such as Bell Canada, Ontario Hydro, Union Gas etc, which have centralized their services in the south.
Further, Servco's assets should be given to the municipalities at existing debt owing, after the stranded cost has been removed, since those customers have already paid for the assets and should not be charged twice at some unknown market value. In addition, municipalities should have franchise rights over distribution companies including any remaining Servco systems similar to their franchise rights over gas distribution companies.
Acceptance of the position put forth would speed up rationalization of the distribution system and the cost reductions that can be achieved, a saving which will be passed on to the customer.
On the issue of the formation of the board of directors, I'd like to make a few comments. Upon the formation of the newly created distribution companies, the act gives city council the right, as shareholders, to appoint the board of directors. Currently serving commissioners, whether elected or appointed, have a great deal of experience which should not be lost in a transition period.
While we support the continuation of elected commissioners, it is strongly suggested that formation of new boards include existing commissioners, at least until their current elected term expires.
On the issue of contributed capital, Bill 35 is silent on the authority of new distributors to impose charges for the provision of plant required to serve new growth. Many MEUs adopted the principle that new growth should pay for itself. We are concerned that by not being addressed in Bill 35, such charges are at best in jeopardy. We urge the government to include in this act the continuance of the current provisions or similar mechanisms to fund capital work to serve new growth.
In closing, we agree with many significant aspects of the legislation including the OEB control process, structuring under the Business Corporations Act and the concept of competition generally. We anxiously anticipate the challenges and rewards of the new marketplace; however, we urge you to exercise caution in your deliberations for the protection of the customer.
We thank you for your attention and good luck in your deliberations.
The Vice-Chair: Thank you very much, Mr Prudhomme. The caucuses have six minutes apiece, beginning with the NDP, Ms Martel.
Ms Shelley Martel (Sudbury East): Thank you, Harvey, for coming here today. Let me focus for a second on the concern you raised with respect to section 131, which is the section that limits the ability of the existing municipalities to establish new distribution corporations. Why do you think the government has that section in this act?
Mr Prudhomme: We can't guess where the government is coming from, but it's our feeling that this government has decided that Servco will retain all of its assets and not allow these municipalities to even have the option of buying those assets. As you're aware, many municipalities in the north -- I can't speak for Valley East but they're here today. They have attempted to go through the formation of a utility now for several years, off and on. They have been blocked. We saw the Lincoln county situation down in Lincoln where they spent three years, finally before the Supreme Court, trying to establish a utility within their municipal boundaries at several thousands of dollars in cost both to the MEA and Lincoln itself.
We don't believe that Ontario Hydro Servco should exist in northern Ontario. We believe it should be turned over to the northerners and not run out of Toronto.
Ms Martel: Part of the concern, although you didn't raise it, which we have has to do with the stranded debt, what exactly the level will be by the end of the day, because regardless of what happens around restructuring, that is an issue that has to be dealt with. The minister has repeatedly said that through this process and through the reorganization, residential users, particularly of hydro, would not experience a rate increase. In fact, he anticipates there will be a rate decrease.
This is a concern to us because we're not sure it's true, but if one wants to believe the minister, then one would think the minister would be quite happy to actually put that guarantee in the legislation, state quite categorically in law that as a result of this reorganization residential users will not be forced to pick up the tab and that rates will be frozen and they will not go up.
We fully intend to move that clause when we start the clause-by-clause, but what would your reaction to that be, given the number of customers you serve?
Mr Prudhomme: It's very difficult to give a guarantee that rates will not go up. You also have to look at the fact that if we don't go through this process, rates will go up under the current system. The only reason, at least officially, that Ontario Hydro has not raised rates in the last four years has been that the government has said it can't.
I don't think the residential customer is in danger of any large increase coming out of this process. I think there are opportunities. Rates eventually could go down, but it's going to take some time, three to five years.
Ms Martel: Let me back up. You're saying quite clearly that you don't think residential customers would face a rate increase. I assume that Inco will come today and say very clearly that they certainly can't afford any kind of increase. But at the end of the day someone has to deal with the stranded debt. The level of that remains to be seen, but it's probably in the order of $30 billion plus.
How realistically are we going to deal with that? Who will pick it up? Our friends from the chamber just came -- you sat through their presentation -- and said they shouldn't be struck with this either, shouldn't be hit with this bill. Who then deals with it? It is going to be a significant cost that someone has to assume.
Mr Prudhomme: I assume that the stranded debt is going to be picked up by all consumers in this province. It should be equally shared among the residential and among the Incos and the Falconbridges of the world. Perhaps they should pay a bigger chunk because of course they use a much bigger chunk of electricity.
The issue is that we have a debt, we've got to pay it and somehow it's got to be worked into the rates. It's currently in the rate base now to a certain extent, but I'm sure there's a large percentage which may not be in the rate base. Somewhere down the road rates may increase overall across this province in the short term to get that debt down. If we truly allow competition on the generation side, which we're not doing with this legislation at this time, rates may go down, but not as long as Genco continues to have 93% of the market.
Mrs Helen Johns (Huron): I just have two quick questions. I want to share my time with my colleague.
First of all, would you agree that approximately 40% of the bill we pay now goes to pay off interest and debt for Ontario Hydro?
Mr Prudhomme: I could never understand Ontario Hydro's accounting system, so I couldn't answer that.
Mrs Johns: We have this chart that shows that 40% of every bill in the province is going to interest and debt charges. Of course, after the time they come in, that 40% will continue to go. So we are paying for the stranded debt now and we will be paying for the stranded debt later. There is no increase in debt happening as a result of Bill 35. We are paying for the stranded debt as we speak.
I need a short answer because I don't want to cut into Mr Gilchrist's time. I was interested in the fact that you enter into different businesses than the typical business of an MEU and I want to congratulate you for that. That's very exciting.
What we were concerned about when we were developing the legislation was that we didn't want MEUs going into high-risk businesses that may in effect take some of the money that should be coming back to the ratepayers or give them increased rates. You would understand our concern to care for the ratepayers and the taxpayers of Ontario.
How would you suggest we put that into legislation so that we minimize hare-brained schemes, yet let municipal electric utilities go into issues that may help us in the future?
Mr Lessard: No pun intended.
Mr Prudhomme: No pun intended.
Mrs Johns: I'm not known for my good wording.
Mr Prudhomme: Local municipalities are accountable to the electorate in their areas and so are local hydro commissions. I guess you'd have to leave it up to the judgment of the commissions and the judgment of the councils and the judgment of the people in that area whether or not they support utilities moving into ventures such as telecommunications or district energy. You have to make sure that the people you hire are wise enough not to get into hare-brained schemes. But we shouldn't need Toronto and the legislation to tell us, "You can't do these things," when our competitors can do them.
Mr Steve Gilchrist (Scarborough East): Thank you very much for your presentation this morning. Before I launch into a couple of questions, I think I really should put on the record, and maybe invite your comment, that Ms Martel has raised the spectre that there is some uncertainty whether or not rates may go down. Interestingly enough, after two full days of hearings, neither of the two opposition parties has come up with a single example anywhere in the world of any jurisdiction that went into deregulation that didn't have a rate decrease.
But right here in Ontario, we have groups such as Carl Block, co-chair of the Sarnia Lambton Chamber of Commerce. For Sarnia, it really becomes a competitiveness issue. Deregulation of the electricity system will end up in lower costs, for not only the homeowners but for the industries in Sarnia, because electricity is a very important component of cost. One of your colleagues, Jim Collins, chairman of Port Hope Hydro, said just two months ago, "We're pleased, because we're going to be able to lower the cost of power to our customers, no question." Are they incorrect in their assumptions?
Mr Prudhomme: I don't think anybody's incorrect in their assumptions. I guess reality will tell us where it's going in the next three to five years. I didn't say the rates would not go down eventually. I think there's a lot of opportunity for load shifting for some of our institutional customers, where they can save dollars on the power cost.
But again I go right back to the generation. We've had several generating companies talk to us about building generation. They're all very concerned about investing dollars in this province as long as Ontario Hydro has its huge 93% monopoly, which is not being broken up. You may not be aware of it, but FERC in the US has just turned down Ontario Hydro for further sales in the US in an open competitive marketplace, because the Ontario market is not competitive at this time.
Mr Gilchrist: Precisely, because we don't allow equivalent access for American companies. I'm sure you're well versed in what's happening in the United States. As companies down there have merged to create giants larger than Ontario Hydro -- at one time Hydro was the largest generating utility in North America. We're not any longer. Isn't it somewhat ironic that in going to a competitive marketplace we will allow access for Americans as they will allow access for Ontario Hydro, yet we've heard a consistent message from MEUs that they think Hydro should be broken up at a faster rate? It seems to me, and I invite your response to this, that the less competitive Ontario Hydro is as a continental player, the greater the chance you would have American companies able to lever their size and come in and underprice Ontario Hydro. Does it not make sense for homegrown consumers and taxpayers to start out the process, at least, with one very strong player in the game so that we can keep as much of that market share and hopefully grow into the States?
Mr Prudhomme: If you want to put something in the legislation that might help lower rates, why don't you tell Ontario Hydro that within three years they must give up 40% of the marketplace? You will then encourage new generation in this province. Let Ontario Hydro take the risk. If they want to invest and sell power in the States, then go and take the risk down there on their own, but don't do it at the expense of the consumer in Ontario.
Mr Sean G. Conway (Renfrew North): I want to ask a couple of questions. I believe personally that down the road, because of new technology, new opportunities and new synergies, we will bring rates down, given what we know today. That's my belief. My concern quite frankly is how we get through the next three to five to seven years, because the real problem as I see it is how we manage this multi-billion dollar debt that has been built up over the years, largely because the nuclear power division has not performed as advertised. That's the problem I see.
Ontario Hydro just a few months ago produced a report that said the Ontario Hydro board of directors used its rate-setting authority to exclude from the rates a number of costs they felt were unrecoverable. They did so on the basis that there was a rate freeze. That meant that for this past year the corporation took a $6.5-billion writedown. That's not money that's gone away. We've got a rate freeze, but all we've done is, in the case of the year 1997, parked $6.5 billion worth of debt obligation to be paid at a future date by someone else. I accept my share of that responsibility.
I want to be clear that my colleagues and I believe there is some light down the road, but it's just how we reasonably and fairly pay off this debt, how we sensibly get into a competitive marketplace and deliver benefits that I believe are there, for all classes of Hydro customers in all parts of the province.
Let me ask you this very simple question, Harvey. Thinking over the next five years, because you know this business from an operational point of view much better than I, what is it going to take for you as a utility manager to deliver? What policy changes will this committee and this government and this Legislature have to give you as a utility manager to deliver hydro rate benefits to a 70-year-old widow living in an apartment in downtown Sudbury or a 40-year-old part-time farmer who lives out in the valley or down in Hanmer who is a customer of yours, let us say, even if they aren't now?
Mr Prudhomme: I think because of technology you've got to give us some economy of scale. This is why we have formed this alliance. On the distribution side, we know that an economy of scale even over a 100,000-customer base will start to return lower costs to the customer.
Mr Sean G. Conway (Renfrew North): So you need a larger area in which to do business?
Mr Prudhomme: A larger distribution system, because our technology costs are so high that we want to spread it out among more customers in order to lower the cost.
Mr Conway: So the point around section 131 is a real concern. That has to be dealt with.
Mr Prudhomme: It's a real concern for us. You've got to give us the opportunity to make sure that the electricity generation market is wide open and we can get out there and get the best price for our customer.
The other concern we've got is on the metering side.
Mr Conway: But 70% of this bill is generation. If I'm that senior citizen in downtown Sudbury or I am the farmer out in the valley -- and I haven't been to the Harvard business school, but I'm thinking that if I'm going to get a benefit, you've got to deal with 70% of that bill. If 70% of that bill is generation, surely that's got to be the area where we've got to do something.
Mr Prudhomme: You want to focus on generation. We're heading now in a direction where we're actually putting in some small generation, for example, our district heating system. We know we can get ourselves off the spot market for three or five or 10 megs of power. We know what the spot market cost is. If we can avoid some of the spot market problems, we know we can eventually lower the total cost to the consumer in the Sudbury district.
Mr Conway: What is the single biggest impediment, then, with that residential consumer in Nickel Belt or Sudbury, what is the single biggest problem you would worry about over the next five years as preventing you from delivering a rate benefit to the residential or farm customer in Sudbury and district?
Mr Prudhomme: Getting very competitive generation from more than one supplier.
Mr Conway: So we've got to deal with the market power of Genco if we're going to, over the next little while, deliver the rate benefit to the regular customer.
Mr Prudhomme: That's right.
The Vice-Chair: Thank you very much for your presentation.
CANADIAN NIAGARA POWER
The Vice-Chair: I'd like to move on now to Mr Erbland of the Canadian Niagara Power Co. For the purposes of Hansard, would you please identify yourself prior to your presentation.
Mr Mardon Erbland: My name is Mardon Erbland. I'm president and chief executive officer of Canadian Niagara Power Co Ltd. Our company is also known as CNP. I'd like to thank the committee for the opportunity of a personal appearance. Canadian Niagara Power intends to provide a detailed written submission to the committee prior to your August 20 deadline, but in this morning's oral presentation I'll be directing my remarks to issues of special importance for CNP while leaving some of the more detailed and specific issues for the written brief.
CNP occupies a unique position in the Ontario electric business. We are one of the few investor-owned electric utilities in the province, with roots that go back over 100 years. CNP was incorporated in 1892, and in 1995 an act of the Ontario Legislature, that is, the Canadian Niagara Power Company Limited Act of 1995, continued our company as a body corporate, with share capital governed by the Ontario Business Corporations Act.
We operate under a franchise agreement from the town of Fort Erie and are the sole electric distributor within the town, providing electric service to over 14,000 customers. CNP wholesales electricity to Cornwall Electric, and we have sold into the Ontario interim market. We have also signed enabling agreements with a number of US utilities. Despite this array of wholesale power marketing expertise, CNP has never bought electricity from Ontario Hydro. As a consequence, we have never been subject to Ontario Hydro regulation.
CNP built, and still operates, the Rankine generating station, a 93-megawatt plant that was the first generating station on the Canadian side of the Niagara River at Niagara Falls. This plant was completed in 1905 and CNP's delivery of electricity to the Fort Erie area commenced in 1907.
We are one of the few fully integrated electric utilities in Ontario, with operations that span all segments of the industry, including generation, transmission, distribution and commodity sales. We operate 32 kilometres of high-voltage transmission lines and approximately 900 kilometres of distribution lines supplying six substations. We are owned 50% by Niagara Mohawk and 50% by Fortis Inc, a Newfoundland-based company. We operate as an autonomous OBCA company with our own board of directors.
I hope this brief bit of corporate history conveys to the committee a sense of the uniqueness that is Canadian Niagara Power. While we accept that our vertical integration will come to an end under Bill 35, I believe that many of the objectives of Bill 35 are already embodied in the operations of Canadian Niagara Power.
With this as a backdrop, I turn to some specific concerns and recommendations. As I proceed, I'd ask you to bear in mind that it is our uniqueness that gives rise to these concerns, and we therefore believe that the majority of our recommendations can be accommodated with relatively minor changes to the current bill. We also believe that few of these changes would have implications beyond CNP.
As a matter of principle, Canadian Niagara Power fully supports the government's commitment to creating a competitive electricity system in Ontario. We share the government's belief that customer choice through free and open competition will benefit the economy. We also believe as a matter of principle that the legislation and subsequent regulations which create this environment must be drafted to provide equal opportunity for all participants. Those of us who are already competitive companies under the Ontario Business Corporations Act must not be disadvantaged, even if inadvertently, by the provisions of the act and the subsequent regulations.
I have five areas of comment with respect to Bill 35 in its present form. These are the contract cancellation provisions, the competition transition charges to be imposed on generators and consumers, the transfer tax provisions, the transition provisions for initial licensing and the treatment of CNP's transmission lines. I'll elaborate on each in the order mentioned.
CNP is concerned with the contract cancellation provisions because of the negative effect that subsection 25(3) would have upon long-standing contractual arrangements between CNP and Ontario Hydro for the efficient use of water on the Niagara River. To understand this issue, I ask the committee's indulgence with a brief bit of history.
Ontario Hydro's Sir Adam Beck plant at Queenston enjoys significant efficiency advantages over CNP's Rankine generating station. This is because the Beck plant is located farther from the Falls and therefore has a larger hydraulic head. The Beck plant is able to generate substantially more energy from the same quantity of water than the Rankine plant.
In 1954, under an oral agreement, CNP began to allow Hydro to utilize our water entitlement to generate electricity. In exchange, a portion of that electricity was delivered back to CNP for distribution to our customers. This water exchange arrangement was formalized in a 1971 agreement that complemented a pre-existing power exchange agreement that had been entered into in 1962. These long-standing arrangements have allowed both companies to benefit, but perhaps even more importantly, they have ensured that the available water from the Niagara River is used in the most efficient and effective way possible.
It is our belief that this long-standing arrangement between CNP and Ontario Hydro should continue and that the associated agreements should be exempt from the cancellation provisions of subsection 25(3). To provide clarity, we argue that Bill 35 should incorporate an additional schedule of existing contracts that are to be exempt from the cancellation provisions of the act and that the two agreements just mentioned should be included in this schedule.
On a related note, CNP understands that the existing contracts with Ontario Hydro will be transferred to its successor companies. We support the transfer of these contracts to Genco and we believe that by doing so we will continue to ensure that the water on the Niagara River is utilized in the most efficient way possible.
Our second concern is with the competition transition charge for generators described in schedule A, subsection 79(4). Under the provisions of this subsection, every generator is to pay a charge to the Financial Corp in respect of electricity generated by it in Ontario. CNP's Rankine generating station has been producing electricity since 1905 and in no way has contributed to the creation of Ontario Hydro's stranded debt. In fact, the existence of the Rankine plant and the associated water exchange and power exchange agreements has, in its own small way, helped to keep Ontario Hydro's stranded debt lower than it would otherwise have been.
As a consequence, we believe that electricity produced from the water entitlement associated with CNP's Rankine generating plant should be exempt from this charge. Although section 80 provides for regulations exempting persons, or classes of persons, from the generation charge, as a matter of certainty, CNP would prefer that Rankine generation be given this exemption, which would reflect the plant's history, through a schedule appended to the act at the time it is passed.
Schedule A, subsection 79(5), provides for a similar charge to be paid by every consumer in the province. CNP believes that the residents of Fort Erie and a certain number of other municipalities in Ontario that have never been serviced from Ontario Hydro should be exempt from this charge. Since CNP has never purchased electricity from Ontario Hydro, our requirements for power, and the requirements of our customers, did not give rise to any of Ontario Hydro's stranded debt. As a consequence, we believe that our Fort Erie customers should be exempt from this charge and that this exemption should be provided in the form of a schedule to the act.
Our third concern is with the transfer tax described in schedule A, section 88. We view this tax as the equivalent of a capital gains tax for MEUs. Our concern is that the bill in its present form provides a two-year exemption period during which MEUs can sell to, or consolidate with, other MEUs without paying the tax. A similar exemption is not provided for sales to taxable corporations such as CNP. The result is to disadvantage taxable corporations such as ourselves and weaken our ability to participate in the consolidation of the Ontario electricity industry through the purchase of municipal electric utility assets from willing sellers.
CNP supports the government's objectives of consolidating our industry and we are eager to participate in this consolidation through investment. We believe that the transfer tax provisions of the existing bill must be changed to allow taxpaying and non-taxpaying utilities to participate in this consolidation on a fair and equal basis. To do this, we believe that the two-year transfer tax exemption period for non-taxpaying entities should be removed.
Our fourth area of interest is the transition provisions for initial licensing. As already mentioned, CNP is a vertically integrated utility with operations that span all sectors of our business: generation, transmission, distribution and commodity sales. It is therefore important to us that an effective mechanism be provided for initial licensing that covers the full scope of our present activities. To do otherwise would create havoc on day one.
In our reading of the bill we see evidence that the act recognizes this problem as related to the operations of existing municipal electric utilities. We are less certain that the bill contemplates the scope of CNP's current activities. We ask simply that provisions be included in the act to allow for an orderly transition period associated with all of the initial licenses that will be required given the scope of our current activities.
My fifth and final area of concern is the issue of transmission lines owned by taxable OBCA companies such as CNP. As a matter of principle, we support the concept of open and equal access embodied in the IMO. We agree that CNP-owned transmission lines must be made accessible to others on that basis. Of course, the reciprocal of that commitment is that we expect similar access and that we expect fair compensation will be paid to us for the use of our lines, consistent with other lines in the IMO-controlled grid. Furthermore, CNP is in the process of building a new 115-kV supply line to improve system reliability to our customers in Fort Erie. This line is not scheduled for completion until year-end, and we seek assurances that the wording of Bill 35 will not inadvertently disadvantage this line compared to lines that are already in service.
Before concluding, I'll offer brief comments on the issues of market dominance and sizing the stranded debt. There is probably little need for me to repeat the generalities of market dominance concerns. Much has been said, and will be said, about this message by others. Instead, I'd like to make the point that Canadian Niagara Power is prepared to invest in Ontario. We are already in the hydroelectric generation business and we would like to increase our investment in this area. To do this, we require opportunities to either acquire existing plants or to secure the water rights that would allow us to build new plants.
Canadian Niagara Power and other private investors are ready and waiting to make these investments, thereby reducing the need for Ontario Hydro's successor company, Genco, to raise new capital. I urge the government to pursue a course that will increase opportunities for private investment in the electricity business in our province and reduce the need for Ontario Hydro's successor companies to raise further capital.
On the issue of sizing the stranded debt, I echo what many others have said: If the size of the stranded debt is set too high, the base price of electricity -- that is, the price without the stranded debt surcharge -- produced by Genco will become artificially low and the very competition that is the heart of Bill 35 will never develop. It is imperative that the right number be chosen for the stranded debt.
In conclusion, I would like to once again thank the committee for this opportunity to appear before you personally. As I said in my opening, I believe that Canadian Niagara Power's circumstances are unique in the Ontario electricity industry and that we already embody many of the objectives that Bill 35 seeks to accomplish. Our written submission will reiterate the points that I have made here and provide additional detail. I ask simply that in your deliberations you recognize the special circumstances surrounding Canadian Niagara Power, and that Bill 35 and the resulting regulations accommodate our company's unique circumstances in a fair and equitable manner.
Thank you. I'd be delighted to answer any questions.
Mrs Johns: Thank you very much for your presentation today. I want to say that we recognize that we have a number of companies that are unique and that offer different services. We certainly do have to accommodate some of your requests and we will be looking at them.
I want to explore the CTC with you. It would seem to me that in the future you would want to be expanding your business's service, since you talked a little bit about looking at different MEUs and the opportunities to do that. If we were to exempt someone like yourself from the CTC and then you took on new customers that had in effect had the benefits of the hydro and had incurred the benefits of the stranded debt, how would you advise me to deal with that situation, since your argument basically comes down to, "My customers presently didn't have any benefit from the stranded debt, so they shouldn't pay," but obviously the ones you take on will? Will that not be just what I would call an accounting nightmare?
Mr Erbland: No, I don't think it would be. As the distribution licences are issued for the Fort Erie area, for example, the consumer charge could clearly be defined in the Fort Erie area. We've been serving that area since 1907, so I don't think there would be an administrative difficulty associated with that. Again, I think it would be very easy to account for the fact that electricity generated from the water entitlement associated with the Rankine plan could be exempt, and I think the accounting could be handled well.
As a matter of fact, if Rankine were not exempted on the generation side there could be some administrative difficulties and questions about when generation is considered generated. If we trade water and Ontario Hydro generates, if that charge applies, where does it apply? Who pays it? I don't think the administrative problems would be difficult.
Mrs Johns: We have rules in there to stop people from being hit twice, both at the generation and the consumer side, so I'm not so worried about that. I'll quote the section of that later on.
For example, let's say I'm in Fort Erie and I'm employed in a business that uses electricity that's generated by Ontario Hydro in Niagara Falls, so I've had the benefit of being employed and having opportunities as a result of Ontario Hydro's bringing electricity to Niagara Falls. But because their residence was in Fort Erie, you believe those people shouldn't pay for some of the debt that was incurred for all of Ontario? You believe that wouldn't be a responsibility of the people who have had opportunities because of electrification in other areas of the province?
Mr Erbland: Ontario Hydro did not bring electricity to Niagara Falls; Canadian Niagara Power did. We had the first plant there. The electricity from our plant is what supplied power to Fort Erie. That's my whole point. The unique circumstances surrounding the fact that Canadian Niagara Power brought that generating plant to the falls and subsequently delivered that power to Fort Erie are what gives rise to my point. I agree with you. If Ontario Hydro had been the ones to bring that and if the people of Fort Erie had benefited from Ontario Hydro investment, then I wouldn't be here arguing for the exemption.
Mrs Johns: What if a new company comes into Ontario from the States? They obviously haven't had the benefit of Ontario Hydro's costs. Should their customers pay for the stranded debt?
Mr Erbland: I fail to see how a new company coming in from the US would bring customers with it. The customers are already in Ontario. What would happen is the company would come into Ontario but the customers would be here. So from a consumer charge standpoint, I think the customers who are here now in Ontario would be the base that would be used to decide who pays the CTC and who doesn't.
Mrs Johns: I hope your understanding from my discussion so far is that this is a very difficult issue. I think that even though a specific area may not have had the benefit in their homes, they may have had benefit that has incurred some of the debt of Ontario Hydro in other areas. It's certainly an area worth reflecting on, I appreciate that, but it's going to be very difficult for us to decide that people in Fort Erie have had no benefit from Ontario Hydro over the years even though you have been their residential person. What I'm learning from this is that we have to be very careful about the CTC and make sure it's fair and equitable. I take that point. We certainly will be looking at you for other unique opportunities.
Mr Conway: I want to join the committee in thanking you for a very interesting and very specific set of recommendations. I certainly appreciated what you had to say.
As Ms Johns rightly observed, your presentation ought to remind us all how complicated and idiosyncratic this business is. You are a trustee for an outfit that met Adam Beck at high noon 90 years ago on that Niagara Escarpment, and unfortunately, from your point of view, you got cut off at the Queenston pass, but you were there at the beginning.
I have two questions, although I do really think your five points are very interesting and we are going to want to look at those with some greater specific interest down the road.
Stranded debt: I think everyone agrees. What I'd like from you, sir, is what would you advise the committee, given the absolute centrality and importance of that decision -- how much stranded debt will there be, how will it get apportioned -- what mechanism would you recommend that the government or the Legislature employ to ensure that there is the greatest transparency and the greatest fairness in arriving at that decision?
Mr Erbland: From day one I would have recommended an auction of all the assets. I think the best way to price the stranded debt is to let the market do that. I would have put all the generation assets up for auction and seen what the market bid. We're beyond that now, so what I would say at this point is that in sizing the stranded debt I'd be very careful that there be none of it attributed to anything other than the nuclear. If there is stranded debt associated with Hydro plants or distribution lines, I think there ought to be a look taken at optioning those assets.
CNP would be willing to bid on all those assets. We would love to bid on either generation or poles and wires from Ontario Hydro. If there is a claim of stranded cost associated with the Hydro assets or the poles and wires, let's revisit whether we could option those.
On the nuclear side, I think we've beyond that. Frankly, I am at a loss and it's not something that I'm close to on how that stranded debt would be sized for the nuclear business. I know it's very important that it be sized right. As I said in my presentation, if it's made too big the price will be too low and there will be no competition as is the heart of the bill.
Mr Conway: I really appreciate this, but again, it's this nuclear problem. I don't doubt that the auction value of the hydroelectric system or the poles and wires or the fossil system would be quite attractive. But what do we do with this nuclear component, which is the single largest component in terms of generating capacity, debt and difficulty in this gargantuan public enterprise that is Ontario Hydro? What do we do with that?
Mr Erbland: I wish I had an answer.
Mr Conway: I need an answer.
Mr Erbland: All I can caution you on the nuclear side is that the number has to be right. And at auction, even though --
Mr Conway: What would you pay for it?
Mr Erbland: Nuclear, I don't think we'd pay too much.
Mr Conway: But you see my problem. That's exactly what I would expect the auction to tell me. Then how do I protect this 70-year-old widow in Sudbury, because my worry is -- anyway, thank you, sir.
Ms Martel: Thank you for your presentation and for talking to the committee about the unique situation.
I just want to follow up from where my colleague from the Liberal Party was going with respect to the stranded debt, because you certainly made clear to all of us the importance of getting the right number, for all kinds of reasons which flow from that. My understanding of the process that's now underway to get to that number, whatever it may be, involves some work that's going on by the Minister of Finance and I assume just a whole cadre of consultants, brokers and everyone else who's in on it to try to arrive at that.
I guess I am worried about two things: What is the mechanism for the public, outside of all of those people, to have some input into that process? And do I feel confident at the end of the day that it's transparent enough and independent enough that at least we'll be able to say, "The public had some input, we felt the process was transparent and if we got the wrong number, at least we all got there together, and we're wrong"? I worry about the process that's underway right now, which is very much a government-initiated process with what I understand is no kind of public input at all.
Do you think there's a better way, outside of the auction, which is, as you pointed out, an interesting way to do it, some better way that would be more transparent, that would allow the public to have their say, that would then give us all the confidence that we arrived at this together?
Mr Erbland: I may sound repetitive, but I really don't think there is a better way to quantify stranded debt than a public auction. The market decides the value of the stranded debt. I just urge the committee to be very careful that the only assets giving rise to the stranded debt are the nuclear. To the extent that there is stranded debt associated with Hydro plants or lines, I think there ought to be a revisitation of whether the auction arrangements would be the right mechanism to quantify that debt. On the nuclear point, I'm lost for suggestions, other than to say it's important.
The Vice-Chair: Thank you, sir.
Mr Erbland: Thank you very much for the opportunity.
NORTH BAY HYDRO
The Vice-Chair: I would like at this time to call upon Mr Wills and Mr Vezina of North Bay Hydro.
Mrs Johns: Mr Chair, just as a qualification as these people are coming up, the subsection in the act that ensures that there's no double charge is clause 80(1)(k).
The Vice-Chair: Everybody interested get that? Thank you very much.
Welcome, sir. For the purposes of Hansard, would you please identify yourself prior to your presentation.
Mr David Wills: Mr Chair and members of the resources development committee, good morning. My name is David Wills. I am the general manager of North Bay Hydro. I am here today to speak on behalf of the electricity customers of North Bay, the premier municipal electrical utility in the province of Ontario. With me are the chair of the commission, Mr Vezina, and two of our commissioners, Mickey Beattie and Frank O'Hagan.
I would like to acknowledge first of all the presentations from other municipal utilities in northeastern Ontario and from MEA district 9. We're also aware that the MEA and other utilities in the province will be making presentations. I'll try not to duplicate those comments, which means I will not comment specifically on some issues such as market power of Genco, taxation and local control. Rather, I will focus on a few customer-related topics that are of particular interest to us.
North Bay Hydro believes that, generally speaking, the legislation appears to be carefully and competently crafted, although obviously the full implications of the legislation will not be known until we have seen the regulations and the recommendations of the Market Design Committee.
There are provisions in the bill that we have recommended for years. For example, some of the regulation of Ontario Hydro and the transfer of regulation of municipal utilities are some things we've recommended.
While I'm sure the committee would not consider it a waste of time to sit and listen to praise of the legislation, I am going to disappoint you and move on to a few areas of concern in the interests of brevity.
We have some concerns about the assumption that these changes are customer-driven. It has been said that they were customer-driven. To the extent that they were initiated by Ontario Hydro's wholesale MEU and direct customers, this may be partly true. But neither MEUs nor over 99% of the customers in the province asked for the changes at the retail level that are being contemplated.
Customers are only now becoming vaguely aware of the fact that changes are on the horizon. They're unsure why they are necessary and have little idea what they might be. They groan at the suggestion that the process might parallel gas and unless, like long-distance telephone, there are significant reductions in the price of electricity, these changes will not be welcome.
I've been told that since gas was deregulated my commodity price is less than it was in 1985. That may be true, but what I pay per cubic meter of gas delivered has gone up because of higher customer, delivery and transportation charges. So if the commodity price of electricity goes down, but the delivered price stays the same because of stranded debt charges, transmission, distribution and customer charges, the process of change will have been a waste.
As an industry we can make and deliver any changes the government desires, but our job will be enhanced if those changes are meaningful and deliver real benefits for all of our customers. So much faith has been put into the conceptual benefits of a competitive marketplace that we hope the realities will not come as a disappointment.
We make the recommendation that -- we understand this legislation is described as enabling -- we'd like to see the government maintain some control over the restructuring process and ensure that the levers of change are not activated unless there is reasonable certainty that there will be substantive customer benefits.
We have a real concern about the Ontario Hydro market dominance of retail distribution. Lots has been said about Genco. At the time the white paper was released, industry insiders suspected Ontario Hydro contamination of the process. There were key phrases and language that seemed in all probability could only have originated with Ontario Hydro. I list three of those statements that are contained in the white paper.
On page 5, it says, "Some of them" -- the people of Ontario -- "question why Ontario needs more than 300 local distribution utilities." On page 9, it says, "And it" -- Ontario -- "has one of the more fragmented distribution systems with over 300 local distribution utilities." And just in case readers had missed the point, on page 12: "Ontario has more than 300 local distribution utilities. Experiences elsewhere suggest that significant economies could be achieved...." These are a reprise of the comments made by Hydro management in its submission to the Macdonald committee, Competition, Convergence and Customer Choice, the so-called 4Cs.
There is no question that the number of MEUs in the province is an anachronism, but municipal utilities are not the cause of high electricity rates. These are a direct result of Ontario Hydro's non-competitive generation, in turn a result of an unregulated monopoly, poor management and particularly its grossly high debt.
However, most municipal utilities agree with the white paper that there could be fewer municipal utilities and it is likely the realities of the new marketplace will lead naturally to such an evolution. The Macdonald committee recommendations were for shoulder-to-shoulder utilities based on expanded municipal utilities and that Ontario Hydro should exit the retail business.
The white paper proposes rationalization, the legislation enables rationalization, but the expected form of rationalization is left unclear. This ambiguity or omission in direction is of particular concern because of the creation of Servco, which does not separate Ontario Hydro's transmission and distribution functions.
Clearly, this has the potential to enable Hydro's vision, on record in the 4Cs, of a vertically integrated utility where it has a monopoly on generation, transmission and retail distribution and can, in its own words, "recover most if not all, fixed capacity costs from captive, full-requirement customers." Ontario Hydro has made it clear that it believes competition in electricity is in northeastern US markets, not in Ontario. So roughly translated, what this statement really means is that Ontario Hydro can compete in the export market as long as the working stiffs back home can be suckered into paying the bills. This concern was flagged by the OEB in its response to Ontario Hydro's 1996 submission. This is not an original observation; the OEB has exactly the same observation.
Ontario Hydro's new president, Ron Osborne, has recently reiterated this vision, saying he wants Servco, as opposed to MEUs, to be the major player in retail rationalization. Mr Osborne further expresses the view that competition is an event to be won, not an ongoing process that will benefit customers.
We have some real concerns about those kinds of cynical views by what will be major participants in the industry and we think the committee needs to listen carefully to stakeholder concerns and scour the legislation for sections and language that will perpetuate the province's problems with Ontario Hydro rather than correct them. We have some real concerns that Ontario Hydro is being treated like a three-time bankrupt and then they've been asked to come up with a financial plan to repay their creditors.
The geography of northeastern Ontario is vast. With the distances between municipal utilities, rationalization cannot be considered without addressing Ontario Hydro's retail customers. As we've said, North Bay Hydro, the MEA and the utilities of northeastern Ontario have supported rationalization of utilities, but we fundamentally object to rationalization by Servco.
We believe the legislation is problematic because by not separating transmission and distribution it enables Servco to use accounting practices that will purport to show Servco's distribution costs lower than so-called performance-based benchmarks. We're concerned that Servco will leverage such practices to take over supposedly less efficient municipal utilities. Ontario Hydro's past practice says it will then strip jobs from northeastern Ontario and reduce levels of service, both of which are unacceptable to northern communities.
We caution the government against implementing legislation that leaves a one-million customer province-wide retail distribution utility in place with legislative tools and financial and resource muscle to dominate the retail sector in the same manner that it dominates generation. The white paper made much of the principle of a level playing field, but if the teams on the field are grossly mismatched, it really doesn't matter what angle the playing field is.
Our recommendation is that the legislation should address specific mechanisms to permit rationalization of the retail distribution system through the expansion of municipal utilities into shoulder-to-shoulder utilities, especially in northern Ontario.
I have an orphan recommendation here, but it's been referred to earlier, and that's that the legislation should address the transfer price of assets and cap them at the depreciated value, less equity, to enable rationalization. That's been referred to already because of the problem that you're not going to get rationalization if Hydro simply says, "This asset is worth $5,000 a customer and if you're not going to pay $5,000 a customer, then this is not a commercially viable agreement and we're not prepared to go ahead with it." That can stall rationalization right there.
The timing of restructuring: The other area of concern is the proposed timing of the changes. Many, if not most, of the proposed activities are untried and unproven anywhere in the world. The scope is vast, and if the changes are made without adequate testing, training and customer awareness, there will be chaos and it will be customers and retail utility staff who will bear the brunt.
Recently the government has experienced the problems of transitional change with the Ontario Works program. Technical glitches and duplicate administrative requirements have bogged down the new system, making it more difficult than ever to manage the welfare system.
Some quotes from Social Services Minister Janet Ecker seem appropriate and worthy of the committee's attention. She said, "Anyone who thought this process was short and sweet doesn't know much about the welfare system in Ontario." Further, she said: "Anybody who ever phased in new computer technology quite understands that again it is not something you do overnight, nor should you. And if you try, it won't work."
Another example of change that didn't work out as planned was when Ontario Hydro changed its customer information system and billing software and introduced a new bill format; a large job but not an unknown or unpredictable project, with the opportunity for parallel testing to ensure a smooth transition and, relative to the changes that are being proposed for the entire electrical industry, a very modest undertaking. The result was a disaster. The bills were unintelligible and, worse, they were wrong. The number of calls to Ontario Hydro's call centre went into the stratosphere. Ontario Hydro had to take out newspaper advertising to apologize for the mess and customer inconvenience.
Consider for a moment a minor list of what municipal utilities need to do to accommodate the legislation: setting up OBCA corporations; determining strategic directions for participation in wires and competitive activities; splitting the existing municipal utility with associated accounting and labour relations considerations; determining power procurement requirements and putting out RFPs; unbundling costs and designing and implementing new rate structures; updating and/or acquiring new software to handle the customer information and billing system changes; establishing load profiles for customer groups for costing and for customers who do not select interval metering; adopting metering standards and communications protocols for interval meters; applying for and obtaining licences for all business activities that are to be undertaken; liaising with the OEB on default supplier rates; and, if we are to consider rationalization, any time and resources that would be required to actually rationalize or merge two or more utilities; and last but by no means least, we would also have the business of running our distribution utilities, which is presently a relatively full-time activity.
Our recommendation is that fixed dates or timelines in the legislation be modified to permit flexibility based on experience and needs.
My last point is, will North Bay Hydro's customers benefit from this legislation? We've got 23,000 customers in North Bay; 20,000 of those customers are residential, 3,000 are non-residential, general service, commercial-industrial customers; 2,700 of the 3,000 are small loads, less than 50 kilowatts. So perhaps for a few of the 300 larger customers over 50 kilowatts there may be some opportunities for lower-cost electricity because of their load profiles or because they can shift load.
For the vast majority of the customers that we supply, the electricity commodity represents probably 30% to 40% or less of their bill. They can't shift their usage significantly and will finish up looking for electricity at the same time as everybody else, between the peak periods of 7 in the morning and 11 at night. So we're wary about the opportunities for smaller residential and non-residential customers to realize any benefit from a competitive marketplace in Ontario, given their inability to shift load and the legacies that will dictate the market conditions.
North Bay Hydro's electricity customers are small by provincial comparisons. While the individual loads of small customers are not significant, as an aggregate the small consumer is one of the largest customer classes in the province and must not be forgotten. On their behalf we emphasize that smaller customers deserve specific consideration in this process of change. This consideration should be demonstrated in prudent design, planning, testing, customer awareness and then competent implementation of the changes over a period of time that respects their complexity and extent.
In conclusion, I'd like to thank the committee for the time you've taken to come out and travel the province during a month when a lot of your peers and colleagues are taking a well-earned rest. We appreciate the chance to have a say in a process that will result in significant changes into the way electricity is bought and sold and delivered to the province's citizens. I hope we've been able to contribute some insight into your hearings from a grassroots perspective of the living, breathing ordinary folk who make up the vast majority of the province's customer base.
Mr Phillips: A very thoughtful presentation and you have your finger on the major concern we have, and that is that when the dust all clears the big guy in this thing will do all right. It is the residential consumer and the small business -- we were struck by the fact that when Ontario Hydro presented to us they had not one single recommendation on how to improve the bill. They obviously, I gather, think the bill is perfect.
My concern, by the way, is the one that you've identified, and that is that Hydro is saying they are going to sell a lot of their power into the US. That's how they'll keep their plants running. They'll lose 40% of the Ontario market and sell into the US. But at what price? If to sell in the US they've got to cut the price, the remaining consumer ends up paying that cost.
We've been told, however, that it is imperative that Ontario Hydro stay large in order to compete down the road and that's the reason they will keep, I gather, 100% of their generating businesses and a huge part of their distribution businesses. Do you have any advice for us on how important that is that Ontario Hydro stay very large in order to compete down the road, or is that something that we should pay less attention to and more attention to what's going to happen to the residential consumer?
Mr Wills: I have no idea why we would take advice from Ontario Hydro on anything.
Mr Conway: I'd like to follow up because I think the surprise for me in the first few days of these hearings is not that Genco is as large as it is -- that's sort of been out there for a while -- but I am really troubled by the vigour of the testimony of Mr Osborne this week. When I look at his presentation and particularly the plan for Servco, the big surprise to me thus far is that Osborne's stated ambition is to aggressively grow the retail company. What I take that to mean is that we are, in the view of Hydro, going to get a substantial rationalization on the retail side but it's not going to be with the consolidation of MEUs in many cases, it's simply going to be a much more aggressive, larger Ontario Hydro retail. Do you share that concern and do you see that as a real problem in terms of delivering the benefits that we all want?
Mr Wills: Absolutely.
Mr Conway: Could you amplify your concern there a bit?
Interjection: Don't take yes for an answer.
Mr Conway: All right. You see, the point you make here around recent experiences is a very good one. Bob Mason's in the back of the room. Bob ran the Ontario Hydro operation in Cobden 10, 15 years ago. It was run well back then. The problem we've got now is we've got this centralized 1-800-GET-LOST business in Markham and it is driving my constituents up the wall. The terror we have is that a bigger, stronger Servco is going to lead to more, not less, of that kind of misery. Is that the view in North Bay?
Mr Wills: Of course it is. We had the irony of retail customers trying to call into the call centre. They couldn't get through to the call centre, so they called the Premier's office. The Premier's office couldn't get through, so they called us and said, "How do we get hold of Ontario Hydro?"
Mr Conway: Thank you. I'll leave it there.
Mr Wills: We have their customers who will call us and we will intervene on their behalf to try and get a hold of Ontario Hydro. That kind of service or so-called service really is a trend, that non-service trend, and we object to it.
Mr Lessard: Thank you for your presentation. As we've been going through these hearings, it seems clear that people are becoming more and more wary that the prices for electricity are actually going to go down as a result of Bill 35, despite the minister's expressed point of view that that is the objective that's trying to be achieved here. We're asking that he put that in the bill, that residential consumers especially are going to see their rates at least be frozen or go down and not go up, as you've expressed the fear that they may do.
I know that Mr Gilchrist will say that because we can't prove that the prices have gone up in other jurisdictions as a result of competition entering the marketplace, we're out to lunch. I kind of think about the theme of the X-Files, that the truth is out there. Just because we can't prove that rates will go up doesn't mean that it couldn't possibly happen. As you have indicated, the proposed activities are untried and unproven anywhere in the world and each market is unique. My fear is that there are some people who may benefit from this legislation but that there will be hundreds of thousands of others, if not millions, especially residential consumers, who won't. I don't know if I have a question there, but if you have any comments, feel free to --
Mr Wills: The only comment I have is that we talk about how this has always worked in other jurisdictions. Maybe that's true. There aren't that many jurisdictions that have gone down this road; certainly there are some. I don't know if there are any other jurisdictions like Ontario. When you go into a process like this with a $32-billion debt, it's been observed that that debt has to be paid. If you go in with an open process, you've asked the question, "How do we get that debt right?" That's one of the major questions that is so important as to where that debt is set and what the level is. It will control the amount of new generation that you're going to get. The only hope for competitive electricity prices is competitive generation.
The whole thing balances on that stranded debt number. In other jurisdictions, if you didn't have the stranded debt, then presumably you can go into a process like this and you've got aging and older plants and companies and maybe investor-owned utilities and maybe the shareholders take a bath as competition comes in. But in Ontario, you've got the stranded debt. You have to look after that debt.
Ms Martel: I want to go back to one of your recommendations, which is that the legislation should address some specific mechanisms to permit rationalization, and you talked about the problem particularly in northern Ontario. Can you give us some examples, some ideas that you would have that should be incorporated to deal with that very legitimate concern?
Mr Wills: Obviously in northern Ontario you've got vast distances between utilities. I think as I said in the presentation, if you don't look at the retail customers, there's no point even considering rationalization in northern Ontario. It's not going to happen. You almost have to make a policy decision on how you're going to rationalize. You almost have to give some direction as to how that's going to happen, because if you just leave it open and hanging out there, then to me it's problematic whether it will happen or not. Does it have to be a voluntary process or is it going to be driven by Servco? It's just left hanging out there as an open question.
I think the Macdonald committee recommendations were good. I thought those were excellent. It talked about you show the utilities based on geographical or political boundaries. I think you can set the boundaries. It talked about share capital depending on the equity. I think that process could have worked well. I support the proposals in the Macdonald committee recommendations.
Ms Martel: I just want to go back to the comments you pointed out about Markham. Markham represents not only a real service problem for folks, but it represents, at least for those of us in northern Ontario, real job loss as well. Your community lost, other communities in other parts of my riding lost quite significantly by that centralization. I would suspect that part of your concern has not only to do with that service but what it means for northern Ontario if Ontario Hydro continues to operate in the way it has, in that predatory fashion.
Mr Gilchrist: Thank you very much, Mr Wills, for coming before us here today. I guess we see a pattern emerging here from the MEUs. I'm struck by the contradiction. You are vexed and perplexed at the ongoing size of Genco, so you believe it's quite appropriate to have competition among, effectively, your suppliers, but you don't seem to share the same zeal to have competition for your customers.
I have a summary of a number of different studies that have been done, including for the MEA, for your association, a study prepared by Adonis Yatchew in 1996, a study by Hydro and the MEA, a joint study into retail electricity service in Ontario, interim report 1994, another study based on the results in New Zealand, the New Zealand Ministry of Commerce, and a study by the Ministry of Finance.
The amalgam of all that is that the expected potential savings by rationalizing the MEUs and providing a more competitive framework for the customers so that they're not tied over a long term to their existing one supplier is $212 million. Would that, in and of itself, not be a significant savings for the ratepayers in Ontario?
Mr Wills: Yes, it would.
Mr Gilchrist: Thank you. When I read your report -- and I appreciate the fact that you've been very candid in here -- your exact words are, "the number of MEUs in Ontario is an anachronism." It's a historical aberration that we have 275 MEUs in Ontario. That's almost 20 times the total number of utilities in all the rest of Canada. What do you see as a problem, in this bill, for the MEUs to themselves immediately embrace the idea of competing with Hydro on a more level playing field by moving quickly to amalgamate or integrate their services and compete with them on a more equal footing?
You have 2.7 million customers among yourselves. Hydro has a million. So one supplier is dealing with a million customers; each of you, on average, is dealing with 10,000. I made the point on Monday that that's barely enough customers to justify a decent hardware store, hardly a complete electrical utility. So why are the MEA and the MEUs not suggesting among themselves that the best defence is a good offence here?
Mr Wills: One of the things you've got to realize is that the average doesn't tell the whole story. You've got close to 300 utilities, but the largest 40 to 50 utilities in the province serve 85% of the customers, so that the majority of the utilities are very small. The distribution of electricity is something that by its nature takes place where the customer is. That's what the distribution business is. That's what we do. There are probably 800 Shoppers Drug Marts in the province as well, because when you go to a drugstore, it's a distribution function.
I'm not making my point well, but you're saying, why don't we get together to compete with Hydro --
Mr Gilchrist: Excuse me, but contrast that with the fact that Hydro is capable of distributing in the most remote parts of Ontario, from one end of our province to another. So obviously you can distribute on a greater scale. And you're right. If I wanted to go further down the road, if you take Toronto Hydro out, which in and of itself would be the fourth largest utility in North America, never mind Ontario, the numbers that are left after that, for the other 274, dwindle into almost insignificance.
I really am perplexed at why the MEUs --and I'll give credit. Your northwestern district has already come together and said, "You know, what we'd like to do is buy Hydro's 40,000 retail customers, and we're prepared to pay a market rate." When they're done, they've got a surplus of generation over consumption. They would be selling power from their hydraulic plants to other parts of Ontario. Why wouldn't all of northeastern Ontario, for example, immediately embrace a similar objective?
Mr Wills: Northeastern Ontario looked at that and we drew the conclusion that it was futile to be approaching Hydro. Hydro has no interest in giving up its retail business.
The other thing about the retail business is that I collect $1 from my customer. I cut a cheque for 85 cents and give it to Ontario Hydro. I keep 15 cents. I operate a distribution business. Now, I could take the position that I'm not really in the $1 business; I'm in the 15-cent business, and the 85-cent business belongs to somebody else.
I think the other point I made is that we need to see where the regulations and the Market Design Committee come down on some of these issues, because I may not be in the power procurement business after the Market Design Committee is finished with its recommendations. Once you've got the default supplier and you've got a competitive market, there may not be room for a municipal utility energy supplier. We may be a wires company. I could set up a rate structure where I collect a monthly charge and a charge for using the wires and I can basically replicate the 15 cents that I collect today, and my customer can buy energy anywhere. I think it's a myth that municipal utilities are seen as electricity companies in some ways. I think that decision has to be made in the future. I know a lot of utilities are very aggressively looking at being competitive, but that decision is still somewhere down the road as to whether the opportunity is there to do that.
Mr Gilchrist: We hope they all embrace that idea. Thank you.
The Vice-Chair: Thank you very much, Mr Wills, for coming here today.
The Vice-Chair: I call on our next presenter, Mr Geoffrey Laplante.
Mr Geoffrey Laplante: My name is Geoff Laplante. Before I begin, I see a lot of tired faces and probably some anxious ones. I know it's getting close to lunch. If you want to take a few short minutes to visit the facilities or get some water, please feel free to do so. I don't expect to be very long.
Mr Gilchrist: We have great capacity and great interest.
Mr Lessard: Are you looking at anybody in particular?
Mr Laplante: No. Go ahead. If somebody's got to get something to refresh themselves, please feel free to do so, and I can wait till the room clears out and calms down again.
Good morning, members of the committee. This morning I want to start with basically identifying who I am and what I'm doing here, and make it clear that I'm not representing any particular group. I have no authority to speak on behalf of any aboriginal or first nation groups here in Ontario.
I'm a lawyer by trade. My employer is Digline pipeline and stringing. We're located on the Nipissing First Nation near North Bay. We're primarily an oil and gas contractor. When I saw the advertisement in the local paper that Bill 35 was making the rounds, if you will, I thought it incumbent upon me to at least propose a few revisions to the bill and draw the committee's attention at a minimum to some issues which I think should be part of this government's mandate.
As a lawyer, I understand the concept of fiduciary responsibilities between governments. I understand the unique relationship first nations across Canada have with the federal government. I also understand the special relationship that aboriginal groups, ie, non-first-nation entities such as Metis nations here in Ontario, have with the province and with the federal government.
Leaving aside all the legal arguments and quagmires they inevitably will bring up, in this bill, upon my reading of it, and it's quite voluminous -- the Electricity Act, the Ontario Energy Board Act and related statutes -- the preambles indicate that it's "An Act to create jobs...." That is in fact the very first line and the first four words: Bill 35, An Act to create jobs. Throughout the act I can see the framework being established for energy competition and distribution of energy and whatnot, and it's implicit that there would be jobs created in that.
There are appointments indicated throughout this bill to be made by the minister for boards of directors and directorships, CEOs and whatnot, to the IMO. My concern is that there isn't a clear enough mandate to indicate whether this government has a commitment to providing procurement opportunities for aboriginal people or ensuring that their issues are going to be represented at this level. Sure, the Ontario government has ONAS, the Ontario Native Affairs Secretariat, sure, they have the Ontario land claims commission, sure, they have the Chiefs of Ontario in terms of political bodies they can speak to with respect to issues. But having somebody involved in these committees and having somebody involved as a director of these organizations on a day-to-day basis, in my respectful submission and opinion, would be probably a much better way to ensure that aboriginal concerns and voices are heard.
I'm not sure who all you people are. I see your name tags. I haven't met any of you before. I recognize some of the names. Somebody brought up a point earlier that you're capable of delivering power from one end of the province to the other. Typically, the other end, the north end -- or, if you look at it the other way, the other end is the south end -- is usually marked by huge economic disparity and disadvantage. If those people wanted to come to this committee and bring forward similar issues, many of them couldn't afford it. Many of them don't have the privilege and the luxury of the background that I've been able to enjoy, and people around this table as well. To expect these people to get their concerns into the IMO's hands is unrealistic at best. It's just not going to happen, and if it does, it's going to be second-, third- or fourth-hand information. I just think that before this bill is proclaimed, there should be some concerted effort put into inclusion of or a specific reference to aboriginal positions or aboriginal people being represented. I'm going to draw from specific instances for reference's sake.
Prior to doing that, though, just as some background information, the federal government has a procurement strategy for aboriginal people when it comes to government-based contracts. There's a set-aside of government contracts for aboriginal people. That serves to highlight my point, that the federal government is serious about its commitment to aboriginal people and assisting them in assisting themselves. They're taking steps to ensure that these people across Canada have an opportunity to break into the market. They've aside a block of contracts for these people.
Obviously this act isn't going to be able to do that, and I'm not here asking the Ontario government to do that. That sure is one of my greatest wishes, for that to happen, but this isn't the time or the place. But the analogy can be drawn that aboriginal people or first nations people across this country do enjoy special positions within our society and that governments such as the Ontario government should take some responsibility whether they have to or not. Put that aside. They should take the initiative in some way, shape or form and do something concrete so it's not left to chance. Don't just say: "Don't worry, Mr Laplante. The minister will make sure that we'll try and get as many aboriginal representations as possible." I say it's time that you put the money where the mouth is, as they say, and ensure that those positions are going to be filled by aboriginal people. Put some directorships aside; find a framework to make it work.
I'm not a legislator. I don't know now to make those things work, but you people have the resources to do it. I'd be happy to provide any instruction I can, but I would think that you're probably better equipped to find and devise strategies to ensure that can happen. So long as you understand the message, that's my point.
I don't know if you have a copy of the act in front of you, but if I can turn to subsection 6(2) of the first act; I guess it's the Electricity Act. Page 7 is the page number that I have. This was downloaded from the Internet, I believe. One of the secretaries at the office got it for me, so I don't know if it corresponds to your numbers, but section 6 of the act indicates the composition of the board. I'm just going to read, for those of you who may not have a copy of it:
"The board of directors shall be composed of,
"(a) the chief executive officer of the IMO; and
"(b) at least 10 and not more than 20 other directors appointed by the minister in accordance with the regulations."
That may be an opportunity to include reference to an aboriginal appointment or opportunity for networking with an aboriginal-based commissioner of some sort to address these types of issues and to ensure that they in fact are brought to the table.
I'm not familiar with every plant location for energy generation in this province, but I would suspect that a great number of them exist by virtue of traditional lands being flooded and reserve lands being expropriated. I know that's the case in a first nation just outside of Sudbury. I believe it's the Wahnapitae First Nation and Ontario Hydro is still paying some form of a royalty or compensation for it.
There are effects to aboriginal lands and I think it's an issue that can't just be left to chance any more, because if you leave it to chance, chances are it won't happen. I believe that's the reason the federal government has this procurement strategy for aboriginal contractors.
This may be a minor issue in respect to this -- I'm not sure if it's covered somewhere else -- but section 78 of the act refers to tax exemption. This is really a longly worded section. It has, gosh, 16 or 17 different subsections and throughout all those subsections it indicates that "the Financial Corporation shall pay in each year" any taxes that are payable "to any municipality in which are situated generating station buildings or transformer station buildings" etc.
I don't know if this is covered in another act or not, but one of the concerns I have is that if this act comes into force, and if there are payments owing to a first nation community, is the government going to be able to hide behind that crafted wording to prevent them from paying any first nation that's due money under this tax payment scheme, or is that in fact covered under some sort of analogous act where a municipality is defined to be a first nation?
It's just something that I would bring up for the committee to consider in their review of this bill. They may want to include specific reference to "or first nation/aboriginal community" as is appropriate.
Third, the act itself, just in a general sense, mentions the OBCA as being the governing statute or framework within which any suppliers must adhere in order to become a supplier under this act.
The concern I have is that that may not be totally fair, because aboriginal or first nations people across this country may choose to retain their special relationship, the fiduciary relationship they have with the federal government. They may choose to adopt the CBCA, the Canada Business Corporations Act, versus the OBCA. There are some strategic reasons why they would want to do that, primarily because of the relationship the feds have with the first nations people and the invocation of bylaws and such. It brings it into a different realm and it brings their concerns to a different court of competent jurisdiction should they have problems with any of the framework. I just suggest that to you, again.
I don't know if it's something that was deliberately done or if it was an oversight. If it was an oversight, please revisit it and find a way to make it work.
These are concerns that I think first nations people -- again, I'm not speaking on their behalf -- aboriginal people across Canada may have. For those who aren't able to come, I would simply raise those issues. Again, I want to make it clear that I'm not speaking on their behalf because I have no authority to do so.
I'll see if I can get a specific reference for you down the road, but there is a reference to inspectors being able to go on land and do their thing under this act. I'm wondering if there cannot be some sort of revisitation of the appointment of inspectors or the guarantees that aboriginal people will be consulted for prospective talent from their respective communities for people who may be eligible to be an inspector. In other words, if you're just going to go out and have a bunch of inspectors, why not try and implement some sort of proactive policy to give these people an opportunity that otherwise they may not have? Build something into this framework that ensures that they're going to get consideration for inspector jobs, especially if the inspectors are being appointed by the board of directors, none of whom, under the current framework, may be aboriginal people or all of whom may be aboriginal people. Who knows?
But if there are no aboriginal people on the board of directors and they are the people calling the shots as to who gets hired on as an inspector, chances are that the inspectors wouldn't be coming from the aboriginal talent pool. Chances are there aren't many qualified aboriginal inspectors, but if there aren't, get the message out to these communities that you're looking for some aboriginal inspectors to do this type of work, let them know what kind of qualifications they need to have, and I'm sure you would find some qualified people within a matter of months or years. It's been my experience, in any event, in dealing with aboriginal communities and first nation communities across the country, that they're very resourceful people. If they don't have the capacity, they can find it in short order.
I've got my road maps earmarked with subsection 77(3) of the Ontario Energy Board Act. It refers to the rates: "The board may make orders approving or fixing just and reasonable rates for the transmitting or distributing of electricity and for the retailing of electricity in order to meet a distributor's obligations under section 28 of the Electricity Act."
I didn't understand whether or not this would be binding on a provider that resides, for instance, in a first nation. Can you enforce these types of rate schedules? Would they be exempt if they're under the CBCA? Just questions, again, I put to the committee for their consideration. It seems to be more of an issue of conflict of laws than anything else, which one would take priority. I don't want to comment on it; I just encourage you to revisit it.
The aboriginal inspectors reference would be section 104 of the same act: "One or more inspectors may be appointed under the Public Service Act for the purposes of this part." That's the section that deals with inspectors under the act.
There was one section that I had difficulty reading. I don't mean to be a person who corrects mistakes or grammatical errors, but it just didn't make sense to me. It was section 50. It reads:
"Grounds for refusal.
"An applicant for a licence under this part is entitled to a licence or renewal of a licence unless...." I can't follow that. I think what the section is trying to say is that "an applicant for a licence under this part is not entitled to a licence or renewal of a licence in the event that..." and then list all the criteria. I think that may need to be reworded because it doesn't flow the way I can read it.
Other than that, those are my basic submissions. I'm not sure if there are questions or comments.
The Vice-Chair: We have about four minutes apiece, beginning with Ms Martel.
Ms Martel: First, Mr Laplante, I would like to thank you for bringing the perspective that you do here today. I appreciate that you're not representing any particular first nations concern. I haven't been travelling with the committee, but I understand there has not been representation of a first nations interest to date. I suspect that if you have a good look through the legislation, the legislation is silent on the issues that you've brought forward, but some of the important issues will be brought forward today by Wahnapitae. I don't want to speak for them, but I suspect they will talk about their concern about who they negotiate with in 1999 when they have to deal with the renegotiation of the compensation package they have been receiving from Hydro. I suspect other first nations, if they were to attend, would want to know who they might negotiate with to actually get compensation, or deal with on a first-time basis, not even for a renewal as is the case with Wahnapitae.
I think the government will have to go back and look at these issues because I suspect that outside of Wahnapitae First Nation there are a number of others, particularly on the James Bay coast, who have been trying to get some negotiations going with Hydro because of flooding of traditional lands. How that process continues under a revised Hydro structure needs to be addressed, so I thank you for your perspective and the one that we're going to hear this afternoon.
Perhaps, though, for the benefit of the committee, you could expand a little bit more for all of us on first nations views of CBCA versus what is outlined in OBCA so that we clearly understand what that mechanism is and what the historical relationship is and how we might continue to allow that relationship to continue even under this act.
Mr Laplante: First of all, I'm not a first nations citizen. I am an aboriginal person of this country; I'm registered with the Metis Nation of Ontario. I do have a great deal of experience with first nations as a result of my former private practice. One of the issues that I dealt with -- and I think, Ms Martel, it's a good point that you bring up, that it needs to be clarified -- is that I can't speak in terms of what occurred in this particular instance but I can give you some general indications of where the disparity sometimes arises.
If a first nation or an aboriginal community enacts certain articles of incorporation under the Ontario Business Corporations Act and it makes regulations and bylaws thereunder, it almost prevents them from turning around to the federal government and asking the federal government to ensure that their fiduciary obligations are met. The protection mechanisms for first nations in imposing the OBCA on them aren't as great as when they have the opportunity to have the CBCA behind them. In other words, the CBCA may afford them more protection, especially when dealing with the provincial government, because if they're acting under the OBCA, the federal government's fiduciary obligations can't be as easily latched on to in legal arguments.
I'm sure you have an army of lawyers at your disposal. If you revisit your army of lawyers, they can probably explain it in more concrete terms than I can. I just know the experience that my clients had and it would have been in their better interest to have incorporated under the CBCA had they had the opportunity to do so.
Mr Gilchrist: Thank you, Mr Laplante. I appreciate your bringing your perspective, which we had touched on yesterday in Thunder Bay, but you've certainly explored it in far greater depth and I appreciate your doing that for us here.
Let me just say as an opening comment that clearly our intent in Bill 35 is to benefit all consumers and offer opportunities for any individual, any group, any company to participate in a way that they see fit by opening up generation and ultimately the distribution end to competition. We do see tremendous opportunities.
I should highlight for you something we heard yesterday from the Northwest Energy Association, a group of all of the MEUs in northwestern Ontario. They said one of the things that they've been actively working towards is a connection routed through Manitoba, just because the geography would work out that way for one end of the wires, that would take a total of 26 of the remote first nations that currently are served by diesel fuel -- very expensive diesel fuel, I should note -- and put them on a grid. More important than just the fact that that would lower their costs, it offers the native bands the opportunity to develop a series of small hydraulic projects themselves and to go from being net payers for energy to net recipients.
I know it wasn't your intent, but I'm always struck when people come before us and say, as you did here, that first nations are very resourceful. There's always a "but": But we've got to give them an extra handout; we've got to continue to prop them up through other artificial means. I would ask you, would this not be the best possible means of supporting those 26 remote communities? Giving them automatically the right to develop their own indigenous sources of energy, large enough that they would be net exporters of power, working in partnership with experienced electrical generators, the MEUs out there right now, who, remember, are non-profit and so they themselves would not be exploitative in that sense but would provide the expertise and would be able to form the terminus for either end of this grid, is that not the best possible solution for those people instead of some artificial government subsidy or offset?
Mr Laplante: I hear your point. It's like, if you want to enjoy a level playing field, then let's play level. But your argument really is, give them the motor vehicle but no fuel. It doesn't go very far. Yes, a car is great. I'd love to have a Ferrari, but if I don't have gas for it, I'm out of luck, or if I have diesel fuel for my Ferrari --
Mr Gilchrist: Where do you see the missing gas in this equation? The expertise is provided in a partnership with MEUs. They would be the generators. They would get the immediate benefit. They no longer have to buy the expensive diesel fuel, which is flown in, or trucked in if they're lucky, if they're not as remote, and have a surplus that they can immediately be selling back into the grid.
Mr Laplante: You're presupposing a supplier's going to be fair to these people, and that's not legislated. You may not be able to legislate fairness, you may only be able to legislate parameters of equality. But face reality. There are very few, if any, people from first nations or aboriginal communities who are involved in this type of business. They just don't have the current capacity, and if you want to make sure they have the capacity, you have to legislate opportunities for them. That's my point. I'm not saying give them a leg up, do an extra favour for aboriginal people. No. Make sure that they're represented, make sure that they have a voice.
Mr Gilchrist: That's a good point.
The Vice-Chair: Mr Phillips.
Mr Gilchrist: Can I just very quickly, because he's in the room here today, say that we have someone on the Market Design Committee, which is giving an awful lot of the input on this, who does represent five of the first nations bands: Attawapiskat, Fort Albany, New Post, Moosonee, Moose Cree and Kashechewan.
Mr Laplante: Great. There are over 100 in Ontario.
Mr Gilchrist: But I want you to know that while it's not very large, you have representation there.
Mr Phillips: I appreciate your taking time to be here. I'm not one who feels that we have gone out of our way to artificially prop up the first nations in Ontario. Certainly in the last three years I don't think anyone would accuse the Ontario government of going out of their way to artificially prop up the first nations.
I appreciate your raising several issues here. You're suggesting to us that it's possible that inadvertently the bill may contravene some other existing statutes. I think you mentioned the tax exemption issue, the businesses that may want to incorporate federally rather than provincially, if I've read you properly. Have you any recommendation for how we might proceed on that? You've raised the issues. I gather you're looking for the government to take into account your concern and provide our committee with some assurance that the bill doesn't do what you are concerned it might do. Would that be helpful to you, that we get the government to provide this committee with some assurance that at least your concerns in those two areas are not based on fact?
Mr Laplante: Yes, I think that would be a great starting point. I'm suggesting that you may want to make sure. If you don't have a clear directive on it, I'd suggest you get one.
I'm not retained by anyone. I'm speaking squarely from my own knowledge. As a resident of the province of Ontario, I want to make sure that this is done the right way and that's why I raised the issues. I don't want to come back and find out down the road that, yes, we've got a problem here.
Mr Phillips: Perhaps, Mr Chair, later on there may be things that we can ask the staff to provide us, and certainly those would be a couple of things that I would find useful to make sure that we aren't, as I say, inadvertently contradicting some laws.
Mr Conway: One of the opportunities in the new marketplace, as I understand the potential in Ontario, is greater water power, particularly in areas where first nations have a very real interest and involvement. Do you care to comment on opportunities you know about in terms of first nations communities in mid-northern and northern Ontario for greater water power development that might produce opportunities, not just for first nations but for other consumers?
Mr Laplante: I know that there are some first nations communities that have a number of innovative ideas -- not necessarily the communities themselves but people within those communities -- for alternative sources of fuel.
Mr Conway: Any specific examples?
Mr Laplante: None that I can draw out right now, but with time I'm sure I could draw some up. You see, there are other sections of these acts that impact on contractors. The Oil and Gas Act in particular is the one that came to mind. I think what you're going to find is that as more aboriginal communities get wind of these opportunities, they're going to start developing their own infrastructure and they're going to start developing their own resources. But I can tell you, and Ms Martel touched on this, that the James Bay or Hudson Bay coastal communities, for instance, are probably best positioned because they're at the mouth or the headwaters of a number of great rivers. There are also some communities north of the Thunder Bay area that would be in good shape.
I travelled to these communities, by the way, when I was a summer student with the crown attorney's office up there a few years ago. It's a real shock. When people say that Indian reserves here in Canada are really a Fourth World population, it's a very accurate statement. They just don't have the same opportunities we do. I would encourage this committee to perhaps send out some feelers to these communities and ask them for some input, because it's a great question. I just don't have the specific answers for you, Mr Conway.
The Vice-Chair: Mr Laplante, thank you very much. You didn't have a handout, did you?
Mr Laplante: What do you mean "a handout?"
The Vice-Chair: I would suggest you get your suggestions together and send them to the committee.
Mr Laplante: No. All I had was the Internet stuff.
The Vice-Chair: I thank you very much for your time.
Mrs Johns: Just a point of clarification for the committee and for Mr Laplante: Section 78 of the bill, the tax exemption section that Mr Laplante talked about, is a status quo section. It's section 52 out of the Power Corporation Act, so it's in existence at the present time. Subsection 104(1), which is the inspector section, is also status quo out of the Ontario Energy Board Act. Just for your information when you're submitting documentation, you can tell us if that's working now and if that's OK or if we need to make changes in a section that has been in existence for, I think, 80 years.
Mr Laplante: Thank you, Ms Johns. Thank you for your time, and good luck.
The Vice-Chair: Thank you very much. At this time we're going to break for lunch. We will be resuming at 1:30 o'clock sharp.
The committee recessed from 1153 to 1330.
The Vice-Chair: This afternoon we're going to give each presenter 45 minutes American time. As you know, that works out to 30 minutes Canadian.
I'd like to call on Northwatch. Is Brennain Lloyd, from Northwatch, present? Ms Lloyd, you have half an hour. I hope that at the end you leave some time for questions. For the purposes of Hansard, please identify yourself prior to giving your presentation. Go ahead. You don't have to lean forward; they'll pick it up.
Ms Brennain Lloyd: I always lean forward. Good afternoon, committee members. I'm Brennain Lloyd, from Northwatch. We're a coalition of environmental and social justice organizations in northeastern Ontario. We were created in 1988 to provide a regional voice from the northeast on a range of concerns related to environmental, social and community concerns. We've continued to work to fill that mandate through these last 10 years and in fact are having our anniversary this year.
Northwatch and Northwatch's work would be familiar to many members of the standing committee, both through our work in the northeast and in provincial discussions as they relate to the northeast, but also through our appearance before previous standing committees. Bill 118 of the previous government and Bill 76 of this government perhaps are the ones of most particular relevance to today's discussion. As you will recall, Bill 118 under the previous government was the bill to amend the Power Corporation Act and Bill 76 was the bill to replace the Environmental Assessment Act.
I'm not meaning to suggest that it's a frequent or everyday occurrence for us to be appearing before a standing committee; in fact, it's not that frequent an occurrence for standing committees to come to the northeast or to northern Ontario. We want to express our appreciation to the committee for making these trips. Northern Ontario is 85% of the land base of this province, so having two hearings in that region, in Thunder Bay and Sudbury, is both appreciated and appropriate as a minimum.
I wish to cover three areas in my presentation today. One is to provide an overview very briefly of Northwatch's perspective and experiences and expectations as they relate to today's discussion and to Bill 35. I would like to set out a short list of seven elements which we think must be found in this bill, in this set of amendments to an act or acts, to achieve what is necessary in terms of restructuring the electricity sector to serve the public interest and the people of Ontario, which we assume is an interest that we all share. Certainly for Northwatch, chief among those concerns which we consider to be in the public interest are environmental standards and ecological protection. Thirdly, I'd like to do a very brief run-through of the bill to identify some specific areas for amendment or attention on your part and on our part as we continue through this discussion with you over the next several weeks.
Northwatch, as I said, was created a decade ago, in 1988. What motivated the coalition's formation in northeastern Ontario was that there were a number of regional concerns or developments or proposals which were greater and grander than member groups or individual members felt they could deal with at a local level. They affected us regionally and warranted a regional response. Chief among them, there was a class environmental assessment of timber management; there was also a hearing on nuclear fuel waste; and shortly after our formation there was the release by Ontario Hydro of its 25-year demand-supply plan.
Within that 25-year scheme put out by Ontario Hydro, northern Ontario was going to be impacted heavily. In a number of areas the project proposals included 1,800 kilometres of high-voltage transmission corridors, the potential for a nuclear reactor on the north shore, a number of hydroelectric developments, Patten Post just on the north shore of Lake Huron, on Lake Nipigon the Little Jackfish project and a number of hydroelectric developments in the Moose River basin. In addition to that, there were some other projects underway by Ontario Hydro, the northeastern Ontario transmission reinforcement project being one.
We were caught, in northern Ontario. We were facing a multitude of project proposals, generation developments, transmission developments. We were dealing with them on the ground, specific projects. We were dealing with them at the provincial level within the demand-supply plan. They were overlapping; they were interfacing; they were interfering; they were undermining. The story you heard in one room was not the story you heard in another room. We believed this to be very much the product of an unregulated electricity sector and an unregulated electricity utility in Ontario. From that day in 1989, I believe it was December 13, we have had a concerted and continued interest in seeing the regulation of the electricity sector, the electricity utilities in this province. That interest stays with us today and it brings us into this room with you this afternoon. That's part of our perspective and part of our experience.
Our other experiences include efforts on our part to participate in provincial assessment processes and the demand-supply plan, which, as I'm sure you all know, came to a grinding although welcome halt when Ontario Hydro withdrew its request for approval. We've also participated in Ontario Energy Board rate reviews, which was the only vehicle we found available to have public access, public input into the attempt to regulate Ontario Hydro. Those are our experiences.
Some of those projects I mentioned that were proposed back in 1989 are gone but not forgotten, and perhaps not truly gone: the Patten Post rears its head from time to time. These are projects which we consider to be inappropriate and inconsistent with the needs and the best interests of this region.
During our work on the demand-supply plan, we developed a definition or a design for sustainable development, particularly in the context of development in energy use for northeastern Ontario. It was based on a number of premises. It had three basic, fundamental criteria. One is ecological integrity or ecological security, community stability and environmental sustainability. It also had a number of indicators -- community control, a small scale, local generation, local demand-supply planning -- and was geared towards the needs of this region.
While northeastern Ontario is certainly unique in many respects, every region in this province is unique, and perhaps if people in other regions organized you would hear similar stories or similar expressions from them. We really think that kind of regional demand-supply planning is absolutely essential. That's part of our experience. That's what brings us into this room today.
I want to set out those seven elements or seven criteria or components that we think are absolutely essential to this bill if it's to achieve what's necessary in terms of restructuring and regulating the Ontario electricity or energy sector. We really think that the point of restructuring needs to be regulation. The point of changing the status quo is to restructure to that end, to that end of regulation, and creating an electricity scene or system which is accountable, which is sustainable, which is environmentally responsible and which is socially and economically responsible to the people of Ontario, to the human communities of Ontario, but also to the natural communities of Ontario.
I'm going to just run through those seven components. The first is clearly regulation. Regulation has two tracks or two phases. One is those tools which regulate access to the electricity system. We've identified just a short list of those tools, and I think there are four very important tools for regulating access to the grid. This has to be at the very heart of your considerations and discussions as you consider the bills as drafted.
The first tool is that there has to be a content requirement for renewable energy and there has to be a schedule for bringing that content requirement up, for ratcheting up the percentages. I suggest that we start with something in the neighbourhood of 25% and ratchet it up at 5% increments over, say, every two years until we reach at least a very minimum of 50% renewable content.
There are very different ways you can do this. It depends how you want to count the hydraulic. If you want to count Ontario Hydro's current hydraulic capacity, your number would be 25%. If you wanted to set that current hydraulic capacity, which is of a different nature than most of the new renewables will be because it is larger in scale, your number might not be 25%; you might start down around 10%. But the principle is the same: You start with a percentage required component. It's like Canadian content in radio 15 years ago, and we've seen the music industry not only survive but thrive because of that. Perhaps even more important is that we see the renewable energy industry survive and thrive. I think having content requirements is the first step towards that.
The second tool is having high efficiency standards for any new fossil generation that comes into the grid. Access to the grid is determined through a number of tests, and one of those tests is that any new fossil has to meet a high efficiency standard.
The third is that there has to be a carbon tax, or you could call it a dirty power tax, for existing fossil capacity.
The fourth is that there are incentives for energy services; for example, reduced fees for access to the grid for those utilities, those generators, which conduct themselves not just as producers or generators of electricity, but as energy service companies which provide a host of services that allow the consumer or the customer to have no net increase in their bill because they've reduced their use. I think we can all expect and we should all expect that there will be increases in electricity rates -- our rates, I think, are inappropriately low -- so let's expect that, but let's look at keeping the emphasis on the customer's bill. The way to keep the customer's bill low is to give them energy services instead of electricity supply.
Those are the four tools -- not the only ones, but the four key tools -- for regulating access to the grid.
The second aspect of regulation is providing a regulatory process which is open and accountable and accessible. We all expect that function to be met by the Ontario Energy Board, but I think we need to see some real definition given to the role of the energy board more than we see in the Ontario Energy Board Act, as seen in schedule 2. We need to see more definition to the kind of notice given to the public, to the kind of access provided to the public, particularly from northern Ontario, where we're heavily impacted by differences in rates and by generation and future potential generation schemes. We're heavily affected by these projects, very directly affected, but it's very difficult for us to access the regulatory process if it's in an office tower at Yonge and Eglinton and we have only very standard or minimal notice to participate in that process. We, as an organization with some history, have difficulty accessing those processes, and I think other organizations -- ratepayers' groups, citizens' groups -- would face even greater barriers at this point in time.
That's the first component: regulation.
The second, and this is closely related, is full-cost accounting. This perhaps is another part of those same tools for regulating access. I think there has to be full-cost accounting implemented in full, and that means that we have to know the full and long-term costs of electricity sources -- of energy sources. Although I'm speaking mostly in terms if electricity, it's not out of indifference to the gas sector or that part of the energy sector. It's simply because we have, by our history, focused more on electricity. But we have to have full-cost accounting. We have to know the cost in the long term and the full term and in the environmental context and in the community context.
The third is a greater emphasis on energy services. That was mentioned in our comments on tools for regulating access, but there has to be a much greater emphasis on energy services, through the municipal utilities, through the provincial structuring and so on.
The fourth is that there needs to be a mechanism for regional demand-supply planning. We shouldn't be looking at the province as a single entity in terms of how we do energy planning and electricity delivery. We should be looking at it regionally and we should be looking for a no-net export or import on a regional basis.
Fifth, we need to have improved environmental assessment. That certainly applies to new generation and it absolutely applies to water power generation. We have a very weak regime for assessing water power projects in this province. It's not caught under the Environmental Assessment Act unless it's designated by the minister specifically, and that has proven difficult to achieve. There was some years ago a brief discussion, supported by the water power association, to have a class environmental assessment on water power. That went nowhere. At present the regulatory or the assessment regime is the water power assessment process managed by the Ministry of Natural Resources, and it has not been effective, it has not been able to do the job that's needed. We need to have an assessment process for generation which is much expanded from what we see at present.
Sixth, we have to see a nuclear strategy. Within this I would include both a strategy to retire the debt, to manage the waste and decommissioning, and to phase out the reactors. If we are really going into a regime where decisions are made based on fiscal accountability and/or environmental responsibility, that will happen itself, but I think there has to be some intentionality about it. If a restructured or reorganized energy or electricity sector is to operate effectively, that has to be done with a great deal of thought at the outset.
Seventh, there have to be environmental standards, performance standards built in to all the licensing and all the decisions to give access to the grid. There are performance standards mentioned in the bill, but I think that needs to be supplemented. It needs to be clearly spelled out that those are performance standards which relate to environmental performance and that there are strict codes of environmental performance and environmental standards which have to be met.
Those are our seven items which we consider to be essential. I think it would behoove this committee and all legislators to take those seven tests and view the four pieces of legislation here, particularly the Electricity Act and the Ontario Energy Board, through those lenses, through the lenses of those seven tests.
The third item I wanted to cover, and I will do it very briefly to allow some time for discussion with the committee, is to touch on a few areas within the bill that particularly need some attention. There are too many of them to give adequate discussion, but I'll try and identify a few of the key ones.
The very first, at the front end of schedule A, the Electricity Act, within the purposes section, and this is a problem we see again in the Ontario Energy Board Act, we get down to 1(g) before we see any recognition of or referral to our environmental responsibilities. In (g) we hear that a purpose is "to facilitate energy efficiency and the use of cleaner, more environmentally benign" -- I don't know what energy sources are environmentally benign -- "energy sources in a manner consistent with the policies of the government of Ontario." That's perhaps fine as a (g), but what I think we need to see in an (a) is a very clear statement of the environmental standards that need to be met and a commitment by this government, a commitment by the resulting entities that are going to be active in the electricity sector, to energy and environmental responsibility.
I brought along one of the documents put out by Ontario Hydro just this year. It states on the cover, "Ontario Hydro's mission is to be a leader in energy efficiency and sustainable development and to provide its customers with safe and reliable energy services at competitive prices." I've not been a real booster of Ontario Hydro over the last decade. Perhaps that's why I'm alarmed to see that Ontario Hydro's document looks better than the purposes set out in this act. At minimum, surely we could meet Ontario Hydro's commitment to sustainability and environmental responsibility. So the first point is that the purposes of the act have to be improved and they have to state a clear commitment to sustainability and environmental responsibility and place an environmental imperative in the act at its front end.
I think there needs to be a distinction made between generation facilities at commercial and household levels. In the renewable energy sector there is a lot of generation and an increasing amount of generation being done in the household sector, but in a few places in the bill there are points where the lack of distinction between commercial generation and household generation could be problematic, in the definitions of both the Electricity Act and the Ontario Energy Board Act in particular.
Referring back to the point I made about access to a process, in section 30 of the Electricity Act we have a discussion of the IMO. It's noted that, "The IMO shall publish the market rules in accordance with the market rules and shall make the market rules available for public inspection during normal business hours at the offices of the IMO." I draw this to your attention not because I think every resident of northern Ontario is going to have a burning desire to read those market rules but because I think it's an example of the kind of exclusion and lack of access that we see repeatedly, and that's one example of it in this bill. It's simply not acceptable to say that you can go and inspect it in an office tower in Toronto. That doesn't serve any purpose for most of the residents of northern Ontario.
There are also some difficulties with the time lines we see within the IMO in publishing the market rules, just having market rules published 22 days in advance and then you have 21 days to file an application. That to me just seems impractical and something that will lead to more confusion and less certainty or clarity of the process.
Within the section on emergency plans, section 37, it's certainly positive that there is emergency planning included in the act, but it requires a lot more definition. There should also be included in here decommissioning and closure plans for all generation and transmission facilities, particularly for generation facilities. That's absolutely got to happen for the nuclear facilities, but for the other facilities as well, and this is perhaps a reasonable section to include it in.
We have in here a note. In section 79 there's some discussion of dealing with the stranded debt. It says that generators will pay the charge for the stranded debt, paying off the stranded assets or debt for mostly the nuclear facilities. Charging the generators for that is perhaps not the best way to go, particularly if that's going to build in a penalty against new generators which are going to be providing the grid and the people of Ontario with more environmentally responsible forms of electricity. It just doesn't make sense and it isn't fair to charge them with the nuclear debt. I think the nuclear debt has to be left with Ontario Hydro specifically or its successor, Genco, and/or charged as a surcharge on a kilowatt rate basis to all consumers of electricity. It doesn't make sense in our view to charge it out to producers who are perhaps going to be using renewable and much less damaging sources of electricity.
When we come to the Ontario Energy Board Act, schedule B, we would make the same comments where environment is last again. It comes under section 1, paragraph 6, of "General" and I would just make the same comments as we made at the opening of our discussions, of our walk-through of the bill.
In general on the Ontario Energy Board and from the electricity sector, there are a few things that are absent that should be built in. Cogeneration is absent. There should be some incentive, some reference to cogeneration to facilitate its having a place in the grid. That is less likely to happen without specific reference or some specific incentive.
Just in a general way, we have to acknowledge that we're not starting from a blank slate. We have a capacity which is badly skewed towards fossil and nukes, and while the nukes might phase themselves out, we need to again look for some incentives to make sure that the renewables, which have been badly served by the last 40 years of Ontario Hydro's operations, are given a better place.
Perhaps a purpose that should be built into the Ontario Energy Board Act is to provide energy services at the lowest cost to the ratepayers and society as a whole. Building that purpose into the Ontario Energy Board Act -- and there is not a purposes section at the beginning of the Ontario Energy Board Act -- would give the board some better direction and better clarification of its role and the emphasis it should place.
I'll leave it at that simply for the sake of saving at least a few moments.
The Vice-Chair: You have two minutes left. You might as well use it speaking because there's not enough time for questions.
Ms Lloyd: OK, very good. Within the Ontario Energy Board, again I would say that there should be notice requirements set out clearly for the board's proceedings.
Under licence application -- this is discussed in section 65 -- I think the environmental implications and the review process should meet the same requirements and should be roughly equivalent to the environmental assessment process. It should look at need, rationale, alternatives to generation projects.
Thank you. I apologize for going over time. I think that when you build four bills into one act, maybe you need more than half an hour.
The Vice-Chair: Yours was a very good presentation. You had a lot of stuff to cover. Thank you very much.
I'd like to call upon Great Lakes Power Inc, please.
Mrs Johns: Mr Chair, just as a clarification as we're changing people here, in section 79, because this is enabling legislation, what we have is options in (4) and (5) which would allow either for the surcharge on generation or CTC. I just wanted to draw that to the attention of the woman who just spoke. So it's (4) or (5) in section 79, because it's enabling legislation.
Mr Lessard: It doesn't say "or."
Mrs Johns: I know, but we had to list all of our options that we were able to take, so we listed the options. It doesn't mean we will be taking both. We could and I take your correction on that.
GREAT LAKES POWER
The Vice-Chair: Great Lakes Power has half an hour. For the purposes of Hansard, would you please identify yourself and your associates.
Mr Ed Kress: Good afternoon, ladies and gentlemen. My name is Ed Kress. I'm the president and CEO of Great Lakes Power Inc. Mike McEwen is our VP of operations. Harry Goldgut is our vice-president of planning.
On behalf of Great Lakes Power, I'd like to thank you for the opportunity of making this presentation to you today.
Great Lakes is the largest independent power producer and distributor in Ontario. Its principal operations are headquartered in Sault Ste Marie and encompass 12 hydroelectric plants on four river systems in the Algoma district of northern Ontario. They have a generating capacity of 312 megawatts. We also own 1,450 miles of transmission and distribution lines. Great Lakes has supplied electric power to the people of northern Ontario for over 80 years through this fully integrated electricity generation, transmission and distribution system.
Great Lakes also operates and has ownership interests in the Lake Superior Power and Valerie Falls Power projects in northern Ontario, Pontiac Power in Quebec and Louisiana Hydro-Electric Power in the southern United States. These operations include four hydroelectric generating stations and one natural-gas-fired cogeneration plant. The combined generating capacity of Great Lakes's power plants is just over 650 megawatts.
Our principal shareholder is EdperBrascan Corp, which has a long history in the electric power business and whose affiliates are among the major power consumers in this province. The group employs over 50,000 people worldwide, two thirds of whom work in Canada. It has chosen to headquarter its operations in Ontario and is committed to being globally competitive. Competitive power costs are an important element in achieving this objective.
We understand the reasons for changing how electricity is regulated and sold, and support the move to greater competition in this industry. It is happening in other jurisdictions in North America and it is integral to safeguarding Ontario's competitive position in the global economy. However, we feel that it is essential that these changes proceed fairly and that they not penalize those who have long-standing investments in the industry and who have provided reliable, competitively priced power to their customers.
Although there are a number of issues concerning the electricity industry restructuring, my presentation today will deal with our views on the proposed provisions of Bill 35 dealing with charges that may be levied in order to service and retire a portion of Ontario Hydro's debt. This is a major issue for Great Lakes and its 43,000 customers in Sault Ste Marie and the Algoma district.
Our position on this issue is based on the unique status of Great Lakes Power. I will demonstrate this uniqueness of Great Lakes regarding its history, customers, employees, community relationships and performance.
The development of hydroelectric power in Sault Ste Marie dates back to the late 1800s. It formed the base of an industrial complex built there by Francis Clergue and it has powered the development of the mines, mills and towns throughout the district of Algoma.
In a referendum held in Sault Ste Marie in January 1928, residents and industrial customers decided that Great Lakes Power would be its principal electricity supplier rather than the provincially owned Hydro-Electric Power Commission, which of course was the predecessor of Ontario Hydro. Unique in the province of Ontario, Great Lakes continues to provide competitively priced power to the city of Sault Ste Marie and the surrounding region under the terms of its franchise.
As occurred in 1928, Great Lakes has once again reached a crossroads, as the government of Ontario moves to make another important change in the provincial electricity markets.
Great Lakes currently sells power directly to industrial, commercial and rural customers in its service area and indirectly to residential customers in the city of Sault Ste Marie via the city's public utility commission. Algoma Steel, St Marys Paper, GP Flakeboard and North Superior Forest Products are our four largest industrial customers. Our operations in northern Ontario generate approximately 75% of our power requirements from our own hydroelectric stations and we purchase the balance that we require from Ontario Hydro.
For many years, we have managed to keep our rates 12% to 17% below those charged elsewhere in the province and neighbouring states, in effect maintaining a separate power market from the rest of Ontario. This represents savings of approximately $250 million for our customers over the past 20 years, through good times and bad. We stood by two of our major industrial customers in the early 1990s when they encountered significant financial challenges. We continued to provide them with electric power in order to assist them through their respective restructurings, knowing that we would incur significant losses. This was a case where good business sense and good community sense converged. The way we approached these situations demonstrates the special and unique relationships we have with our customers.
As you can see, we have shared a close interest with our customers in providing them with competitively priced power. We have increased our power rates only once during the past six years.
During the past 20 years, we have invested over $350 million in upgrading and expanding our generating and transmission facilities in northern Ontario. Our investments in these projects have resulted in new jobs, economic spinoffs and other benefits in the communities we serve in northern Ontario.
We have also devoted a great deal of attention to achieving productivity improvements and high levels of reliability. We are recognized internationally as a leader in safe work management and consistently rank in the top 10% of North American utilities. Our safety record is five times better than the Canadian average. Productivity is two to three times better than most other Canadian utilities based on kilowatt hours produced per employee. We are leaders in risk-based preventive maintenance, which has enabled us to achieve unit availability of 99% versus 92% for the average Canadian electric utility.
Our work management programs incorporate best practices from our other businesses and today we are leaders, particularly in the distribution business, resulting in a much higher level of productivity among our linemen. We are proud of our accomplishments. Our people were highly commended for their commitment and outstanding performance in helping to restore power to several Quebec communities following the devastating ice storm in January of this year.
Since the 1928 referendum, Great Lakes Power has operated outside the Ontario Hydro market and supplied its customers with electricity at rates below comparable rates charged by Ontario Hydro.
The uniqueness of our status goes beyond our performance. It relates fundamentally to our customers having opted out of the Ontario Hydro market and reaffirming their separateness from it over the years, most recently in extending our franchise to the year 2008.
Our operations have always been distinct from Ontario Hydro. It has made its own investment and management decisions and we have made ours. Since 1928 we have made our own way, often through difficult and challenging times. In so doing, we knew that if we had overruns or incurred extra costs, we were on our own. It was clear to us that the province's other electricity generators and their industrial, farm and residential customers would not pay for our debts.
Yet Bill 35 envisions the possibility that Great Lakes Power and our customers could be compelled to help pay for part of Ontario Hydro's debt, specifically the investments and extra costs incurred by Ontario Hydro and financed by debt which will not be serviceable by the new generating, transmission and services companies to be created by the proposed legislation.
Great Lakes Power and its customers were not party to Ontario Hydro's investment and management decisions. Accordingly, we believe it would be unfair for us and our customers to bear any responsibility for repaying debt incurred by Hydro in deciding how it would operate.
As you know, subsections 79(4) and (5) of the proposed Electricity Act, 1998, give the government broad powers to impose a competition transition charge on generators and consumers of electricity in Ontario to service and pay down a portion of Ontario Hydro's debt. Section 80 provides, among other things, that the Lieutenant Governor in Council may make a variety of different regulations, including exempting persons or classes of persons from subsections 79(4) and (5). It is clear, therefore, that the drafters of the proposed legislation foresaw the very real possibility and the need for there to be exemptions from these charges for persons and classes of persons such as Great Lakes and its customers.
In the absence of specific language to the contrary in the legislation, our view is that Great Lakes and its customers could be subject to the stranded debt charges. Therefore, we respectfully request, given our unique history and the quality, reliability and long-standing service provided to our customers in this province, that Bill 35 be amended to specifically exclude Great Lakes and its customers from the competition transition charges contemplated by section 79 or any other stranded debt charges. In the alternative, the committee should, at a minimum, recommend a regulation pursuant to 80(1)(k) that Great Lakes and its customers be exempt from these charges. To impose such charges on Great Lakes or its customers would significantly diminish the value of the enterprise and relationships we have diligently built with our customers over the past 80 years.
While we do not know the quantum of the proposed competition transition charge, an earlier estimate by Dominion Bond Rating Service in a report dated April 29, 1998, indicated that a charge of 1.6 cents per kilowatt hour could be required. The imposition of such a charge on Great Lakes Power's system could result in a loss of approximately $350 million in value, equivalent to our investment over the previous 20 years. Being an investor-owned enterprise operating in Ontario, we submit that we should be entitled to the protection of long-standing ownership rights.
Furthermore, the levying of the competition transition charge on Great Lakes and our customers could unfairly increase their costs of operation. This would be contrary to the spirit of Bill 35 and the need to encourage investment in this industry in order to increase efficiencies to enable power rates to become competitive. The objective should be to reward success and avoid penalizing those who apply the best work practices and technologies to achieve lower costs.
We have attempted in Appendix A of this presentation to suggest proposed language to deal with the exemption. However, we would welcome the opportunity to participate in the process of drafting acceptable amending language.
We believe that if the electricity industry restructuring initiatives are implemented fairly over time, the result should be more jobs for more people as industrial growth is facilitated and new, more productive investments are made in the electric power industry.
We commend all those striving to find the right answers in deregulating the electric power industry in Ontario. We recognize that there is no simple model to guarantee success. However, we draw great comfort from the consultative processes put in place and the credentials of the people who have given a considerable amount of their time to achieve the desired objectives. We are confident that with your input they will succeed, but in the process it is essential not to discourage those who have operated diligently in the industry without subsidy or government support. Given the fair treatment we are seeking, Great Lakes is confident that it will increase its investment to secure long-term, competitively priced power for industry and the residents of Ontario.
Thank you once again for the opportunity to appear before you today. The three of us are now prepared to take your questions.
The Vice-Chair: Thank you, Mr Kress. We have four minutes apiece, and we'll start with the rotation finished from this morning, starting with Mr Baird and Mrs Johns.
Mr John R. Baird (Nepean): I'll go quickly because I know my colleague Mrs Johns has a question as well. I think you make a good argument that you haven't participated in the debt, so why should you have to pay it? But in your own presentation you say you've received 25% of your hydro from Ontario Hydro. Would you not be responsible for at least that?
Mr Kress: I think our position is that we only got intertied with Ontario Hydro in 1960 and that as a proportion of the overall market we're approximately 1% of terawatt-hour sales in the province, so we're a very small factor.
As I said in my words, we didn't expect anybody to help us if we made mistakes on our investment decisions. I guess the other thing is, if Ontario Hydro or its successor company exports to the United States or Quebec or wherever, do we expect those people to pay the CTC charge?
Mr Baird: I guess the concern I would have is, if you make one exception, what would I say to the new manufacturing plant coming into my constituency in Nepean which is going to wholly export all of its products when they arrive and say: "We're just setting up shop here in Ontario. We didn't participate in any of this debt"? Should we make an exception for them? Does that not get into a really slippery slope?
I'm a young person. I didn't vote for any of these governments who allowed Hydro to go into debt. Should I get an exemption too?
Mr Kress: As I said, it is indeed a complicated issue. I think we're saying that on new generation we're prepared. We'll have our heads up so that if there's a CTC charge we're prepared to bear that on generation from new plants. But to go backwards is almost like an expropriation.
Mr Baird: As Mr Conway says, help me. What do I say to that new manufacturing facility in Nepean which says: "John, I want the same deal that Great Lakes Power has. They weren't responsible. Why should I be?"
Mr Kress: Because you're brand new and Great Lakes has been here for 80 years. We preceded Hydro. We built the plants before Hydro came on the scene.
Mrs Johns: Obviously, we're going to have to consider this. This is a pretty big issue and we want to have a chat about that.
I want to have you answer two questions at the same time. First of all, who supplies the default power if something happens?
I'm going to formulate my second question also. You've charged less per kilowatt hour or whatever it might be than Ontario Hydro does at this particular point. One would assume that's because of efficiencies you've brought in or something that you do substantially different from Ontario Hydro.
Given that Hydro is entering this new and competitive market, could you see Ontario Hydro being able to reduce its prices to get to a level where they may be able to be as competitive as you and therefore be able to pass those savings on to the consumer?
Mr Kress: If I can deal with the second one first, and Mike may elaborate on this, what we have done in our own system is we have applied technology; we have applied work management systems. We get a great deal of co-operation from our union members and we have a great relationship with the union. That has allowed us to keep our costs under control.
I think that in certain instances that would work for Hydro. What I would suggest is that part of the benefit of that could be used to relieve the stranded debt problem.
Mr Conway: I've got two questions just to follow up, and I think Mr Baird and Mrs Johns strike at perhaps a bit of the soft underbelly of what is a very compelling argument, because there's an equity issue here. I understand entirely. And you remind us, as did CNP this morning, that the Ontario Hydro monopoly is not exclusive. There are pockets. There are duchies in Algoma and Fort Erie, and there was a for a while even in my part of the world. I guess there still is around Cornwall, sort of.
But what about the fact that you tell us that since 1960 there has been an interconnect and that at least for the last 38 years, some portion, maybe 25% of your power, give or take a bit, has come in from the big Ontario grid? If that didn't exist, then I think you'd have us in a very, very tight corner, but I think that if in the last 38 years 25% of your power, give or take, has come from the Ontario Hydro grid, it seems to me that exposes you to some residual obligation there.
Mr Kress: The contract expert is Harry. He's a lawyer.
Mr Conway: I've got a question for Harry in a minute, a different question, and I've only got four minutes.
Mr Kress: All right, Harry, be brief.
Mr Harry Goldgut: To try to respond, when the interconnection was made with Ontario Hydro in 1960, I think you have to look at it in a commercial sense. We had two similar businesses, one with power to sell and one with an interest in buying that power, Great Lakes being the latter, of course. That commercial arrangement has worked very well for both parties over the years. Since the time of that interconnect, Great Lakes has indeed expanded its generating capacity in its service area by building four plants to reduce purchases.
But I think you have to look at it again commercially, as opposed to coming back to Mrs Johns's comment on default supply, where two interconnected utilities in a similar fashion to Hydro-Québec being connected with Ontario Hydro or Michigan and what have you are doing business with each other under commercially acceptable arrangements, to some extent.
Mr Conway: All right, Harry. We'll obviously have to look at it. You make a compelling argument, but it seems to me that we're going to have to be very careful about the equity of the retirement of this debt obligation.
Now, Harry, since this bill was introduced a couple of months ago and since the Legislature broke in late June, you and your colleagues on the Market Design Committee gave us a very good read in the second report of the MDC, tabled on June 30. I was very impressed by this report and I'm very troubled, quite frankly, by the pungency and the clarity of your position around market power.
Do I read this report correctly when I conclude that it appears to be the view of the MDC that we have not helped the process of competition by excluding divestiture beyond the Genco we're left with as a result of the white paper proposal? Would that be a fair conclusion?
Mr Goldgut: I'm going to respond very briefly, and hopefully not to disappoint you, by suggesting that the question may be better put to the chair of the Market Design Committee when they make their presentation, only because I'm not equipped to deal with that question.
Mr Conway: I thought Ron Irwin was the only diplomat to be coming out of northern Ontario, but I see he's got a brother.
The Vice-Chair: We move to the next caucus. Mr Lessard.
Mr Lessard: Of course, the issue of charges that may be imposed on generators or on consumers for the stranded debt is dependent upon what the amount of that stranded debt may be. We've had suggestions -- I heard from a lawyer yesterday in Thunder Bay that maybe there isn't any stranded debt to some estimates that go up to as much as $30 billion or more.
I am interested in your opinion as to whether you think there is any stranded debt; second, if you do, who do you think is in the best position to determine what it is?
Mr Kress: Let me answer that. We are obviously waiting for the department of finance and the professional experts to come out with their initial determinations of those figures, and we will react to that. Certainly, earlier this year -- and this is based on a very limited knowledge of costs of nuclear recovery and decommissioning. But just based on a general sense of what is the basic marginal cost of new generation today, all in, with a proper return on equity -- that figure is based on gas-fired, combined-cycle generation -- it's about five cents a kilowatt hour. That is what should drive what the price of power is in this province.
I think at our annual meeting earlier this year I had expressed some doubt that there was any stranded debt, but I said that was based on a limited knowledge of all the facts, and let's let the experts come out with their calculations.
Mr Lessard: I guess if we assume that there is some stranded debt, my next concern is, how are we going to pay for it? We've heard from yourself and from someone this morning as well saying, "We're in a unique situation so we should get an exemption." I'm wondering now how many people, how many corporations, might be in a situation like yourself, who say they're unique and might be asking for an exemption. Do we have any idea?
Mr Kress: Ignoring all the NUG contracts, which are almost a separate issue, I think the independent power producers would be 2% of all the terawatt hour sales in the province, so not big.
Mr Goldgut: And you may find that there are different shades of uniqueness.
Ms Martel: I'm sure we will.
The Vice-Chair: You have one minute.
Mr Michael McEwen: Around reliability, that issue, we have a win-win, which is a nice contract to have, with Ontario Hydro that provides for us to keep a very reliable transmission system that can back up Ontario Hydro's east-west tie, as well as Ontario Hydro providing for features that we enjoy as well. It is really a commercial contract that has two players in it that both have reliability contributions to improve the reliability in the Algoma district as a sum, basically.
The Vice-Chair: Thank you very much, gentlemen.
The Vice-Chair: I would like to call on William Bradley as the next presentation. You have 30 minutes, and I hope there's time at the end for questions.
Mr William Bradley: Actually, I would like to be reminded at 10 to --
The Vice-Chair: After you've spoken for 20 minutes, I'll give you the signal.
Mr Bradley: Exactly.
The Vice-Chair: OK. You asked, you get it.
Mr Bradley: My name is William P. Bradley and I've been an environmental writer for about 20 years, mostly covering environmental technology and renewables. I am a member of Northwatch and associated with the Canadian Uranium Alliance.
Basically, I'm not going to be talking about uranium, because that's not my field. Philip, if he was here, would be speaking to that. My interest is on the renewables side. In fact, 20 years ago, in 1978, I participated in the hearings concerning the Eldorado nuclear refinery here in Sudbury as a member of the Sudbury Association for the Environment. At those hearings, my role was strictly in speaking to the aspect of renewables.
I haven't had a lot of notice with respect to making a presentation and I apologize for not having a printed transcript, but I do have a number of items that I wouldn't mind discussing with you. My focus today is not necessarily on discussing various policy options but sensing what I do on a day-to-day basis, and that is my role in writing about environmental technology in society as a whole for various media organizations, to give you a sense of what is going on in the minds of certain members of the media and society as a whole.
I would like to read from a couple of scripts I aired for a very prominent public broadcaster this spring. I did a series on environmental technology. The first one, which is probably one of the most unusual energy technologies of them all, is actually on wind energy. Just to read from that script, the host asked me:
"Bill, conventional energy sources may have their problems. In the preamble, I noted that energy has been in the news a lot this year with ice storms, there's been conflicts with the Labrador Innu arising out of the new Churchill Falls project, and public concern has certainly derailed the option of burying nuclear waste in northern Ontario. Mainstream energy sources are showing vulnerabilities. But what are the alternatives?"
That's what I was addressing in that radio clip.
My comeback is: "I feel, through my investigation -- and I used the Internet and Web sites as much as I could -- basically, they've come a long way.
"First, let's consider renewable energy technologies such as wind as part of the environmental technology sector as a whole. Currently, 123,000 Canadians work in this new growth sector. According to the Canadian Environmental Industry Association, these businesses generated annual sales of $16 billion last year, 2.2% of Canada's GDP."
My comeback is: "I know. I've been following the environmental technology sector for 10 years, but to be honest, like most people, I was quite skeptical about wind energy making much contribution either to the energy grid or the economy."
The host asked me, "What changed your opinion?"
"Four events. First, last summer I surfed the Internet and punched 'wind' into my browser and came up with the American Wind Energy Association. They follow the global wind energy technology sector. Their report of the amount of electricity today generated by wind alone stunned me. We're talking about 8,000 megawatts, a megawatt being one million watts, which equals twice the amount of electricity to be generated by the proposed Churchill Falls II project in Labrador. And remember, Churchill Falls II will be the biggest new hydroelectric project in North America."
The announcer asked, "Where is wind energy developing?"
My answer: "Germany leads, with 2,000 megawatts installed today. But even more startling is the economic impact that wind energy is having on national economies. Take Denmark, for instance, a country of five million people. Denmark manufactures 75% of the world's wind turbines; 8,600 Danes are employed in this sector. In fact, wind energy manufacturing is their second leading export, after agriculture.
"Now, the reason they are jumping on wind is that wind energy is growing eight times as fast as conventional energy sources -- 24% per year versus 3% or less for conventional energy sources, according to Washington's World Watch Institute."
"What else have you found out, Bill?" asked my host. "What's happening here in Canada and North America?"
Then I get into a discussion of one company, Advanced Thermodynamics in Sault Ste Marie.
"They have a joint project with the Batchawana First Nations band, and when I talked to the individual involved, he was discussing a contract they had in southwest Alberta about installing Canada's largest wind turbine, a one-megawatt tower."
I actually have a photo of the kind of technology we're beginning to talk about here. That's a 600-kilowatt turbine, which is now standing and generating electricity in southwest Alberta.
Then that was followed up by the particular media organization I was working for. They invited that particular company into their studio in Sault Ste Marie. He announced on air that in fact they had a contract with the Peigan Indian reserve in southwest Alberta to build 100 towers in southwest Alberta.
That's just a few extracts about wind. The most interesting aspect about that first item was that we got a great deal of public response after that item. We got seven people calling in, faxing, e-mailing for more information, because I always add a resource list. For instance, they ran a psychologist for six months and he only got six responses in all.
Then I went on to some other environmental technologies. I went on to solar, for instance. When I do an item I try and look at the global situation as well as the local. I hooked bases through the Internet with Dr Andrew Blakers, an Australian from the Australian National University. He's working now to cut by 50% the cost of silicon cells through a new manufacturing process which is coming out of the lab and should be commercialized within three years.
My host asked me: "What else is going on? These guys are just coming out of the lab. Are we here yet in terms of solar energy being practical?"
"Actually, I'd say there are other factors to consider. First, large-scale and widespread commercialization must occur, and government must take the lead in breaking down policy barriers to solar energy. Third, the public has to show consumer demand. Now, there has been movement on these fronts globally and locally. For example, last year the Greek government and Enron, the world's second-largest solar cell manufacturer, announced the construction of Earth's largest solar power station -- 50 megawatts -- on the island of Crete. By the year 2003 the station will provide electricity for 100,000 residents, one eighth of the population of Crete."
I talked about the US. "President Clinton has announced the million solar rooftops program. By 2010 approximately 70,000 jobs could be created in solarizing one million US buildings. Already plans have been announced to install 500,000 systems via nine utilities, states and non-governmental organizations."
My announcer asked why.
"Basically, export potential -- Enron is a US company -- jobs and the economic savings in reducing their energy reliance on foreign energy suppliers such as Canada."
"What is our government doing?"
"Basically they're still in the demonstration stage, but some provincial utilities in Alberta and Quebec have been reported to" -- again, I mentioned the wind farms in Alberta and there's another major one in Quebec.
My view is that what's happening through this series is that the public has shown a great deal of interest in renewable energy technology. There is the private sector involved. Just through a perusal of the various phone books in northeastern Ontario, there are four renewable energy retailers in Sudbury, there are renewable energy retailers in North Bay, in Timmins, in Sault Ste Marie right on the ground now. People are buying the systems. Business is booming.
I think that what you have to look at is some of the recommendations and policy recommendations by organizations such as IPPSO, the Independent Power Producers' Society of Ontario. There are some similar recommendations made by the uranium council as well, basically talking about having a minimum content for the generation of electricity by renewables, allowing consumers to have the ability to choose, making sure they have the ability to assess where that energy they are purchasing is coming through in terms of labelling. These organizations mention many examples and many states in the United States.
I am a freelance writer. I'm following up on that story. My producers, my editors and whatever media think this is a growing story. They're interested in it because they think the public is interested. Sooner or later other people in the media are going to start asking you questions about why you're not pursuing a more aggressive stance towards this industrial sector, which obviously generates jobs, helps to diversify our local and regional economies and even has export potential.
That's all I have to say. Just a word of advice: Pay attention to this sector or watch out for the microphones.
The Vice-Chair: Fine. You've surprised me. We have about six minutes apiece, beginning with Mr Phillips.
Mr Phillips: The bill we're dealing with, Bill 35, does get into this issue of renewable power. Have you had an opportunity to look at the bill in terms of whether in your opinion it is going to be supportive of building the industry?
Mr Bradley: Because of a lack of notice, I haven't been able to take much of a look at it. I was putting together a radio show which aired at noon today. My advice is perhaps to pay attention to those individuals. I think you should not just look at IPPSO and the other organizations, but also make sure you're touching base with the renewable energy industries associations such as Canwea, the Canadian Wind Energy Association, such as the Solar Energy Society of Canada, which is based in Montreal. These people have Web sites. I'm not sure if they're part of the proceedings, but I do hope their people are able to give that industry perspective, because it's the industry that has the numbers on the potential in terms of job creation, what specifically they need to break down the barriers.
All I'm saying is that as a freelance person in the media I think there's a story right here and that's why I'm covering it, and I'm getting support from the mainstream media as a whole.
Mr Phillips: Well, you'll be able to cover yourself today.
One of the provisions in the bill I believe will encourage one's electrical bill to indicate the source of the energy. In other words, if I as a consumer would like to be using solar energy, I would be aware of that. I'd also be aware of the cost of that. In other words, I'm prepared to pay X cents more or X dollars more.
In your experience, is the public prepared to support the environment by perhaps paying some kind of premium for their power?
Mr Bradley: Actually, that has been the case in the United States in some states. If you went to the DOE Web site or got your researchers to, they've done surveys in Texas and other jurisdictions where people have been prepared to pay a premium.
The other aspect which people are concerned about, and they tell this to me, is that they would like to install renewable energy technology but they'd like to sell it back into the system to get a payback. It's called net metering. I'm sure IPPSO would be able to make a better presentation on that. That's just out there, in talking to the members of the public at large. On my lake -- I'm in an off-the-grid situation -- out of 23 buildings there are already five solarized. We have systems ranging from $100. My system is $300; it's a used system. It goes from $1,500 to $3,500 to $5,000. People are prepared to pay, and they're not just running on solar; they also have it in conjunction with propane appliances as well. They're prepared to pay, but it would be nice, if they are hooked into the grid, if they get a net metering situation where they can get a payback. It should help offset that barrier of renewables, for instance, the higher capital cost. In my case, I got set up for $300 with used equipment, but not everyone has the connections to find out who's got used equipment. So some people are concerned about that.
Mr Phillips: With your knowledge of the technology, what is the premium that one may be looking at to --
Mr Bradley: In the United States, in the material I looked at, they're looking at 10% to 15%.
Mr Phillips: That's 10% to 15% over the --
Mr Bradley: That's right. If you gave me the time to come back to you with some of the detailed information, I could come back to you in a week or so.
Mr Lessard: Feel free to take the time to provide us with further information, because you can do that in writing for the next week or so at least.
I've had an opportunity to go to California and tour the wind farms they have set up near Palm Springs, and it's quite impressive. People who ran that said to me that in the new deregulated California market, they think wind-generated power is almost competitive; you do have to pay a premium if you want to get your power from the wind farm.
Part of the reason they were able to make it close to being competitive is because when the wind farm got set up after the Arab oil embargo, a lot of people jumped into the market and they've lost all their investment because the market went bust after that. A lot of that hardware has been paid for, and that's why it is more economic. We're not going to go down that road here in Ontario, and ultimately I think it's going to be an industry that develops based on economics or some incentives or regulation being provided by the government.
The government says this legislation actually gives people a choice as to where they want to buy power. If they want to buy renewable energy or green energy, now it gives them that choice. You've said that some people are going to be prepared to pay a premium for that. That may be the case, but I believe there needs to be more than just that faith that some members of the public may be prepared to pay more for renewable or green energy and there need to be some incentives or regulation. I wanted to hear your views about that.
Mr Bradley: Certainly some of these organizations mention that there could be a need for more funding, more R&D. This is the private sector we're talking about, you know, and there's all kinds of government support for private sector companies in whatever industry we're talking about. The industry is at a fairly immature stage of development. That doesn't mean it's not generating electricity into the grid today or providing electricity on people's rooftops today, but it is an immature industry and could use some specific financial incentives. Also, the government could generate more information, support.
Mr Lessard: One of the things we've had suggested to us is that the marketers of electricity should have a certain percentage of renewable or green power as part of the energy they have to supply. It would be a regulated --
Mr Bradley: That's called a renewable portfolio standard, which I did mention and which is popular I believe in the United States and which IPPSO and the uranium council have mentioned in their Web site materials.
Mr Lessard: Are you supportive of that approach?
Mr Bradley: Yes, I think there should be a minimum. That's a way to help support the industry. But I believe you have to investigate it thoroughly in terms of where it's been utilized in jurisdictions before. The advantage sometimes of coming in a little later in the game is that you get to see what mistakes they've made or you can fine-tune the situation.
Mr Lessard: One of the things you'd mentioned as well is the net metering -- is that what you call it? -- an opportunity for people who are generating their own power either by solar or by wind to sell back to the energy supplier as one incentive of doing that. Do you think that's something we should put in the bill, those sorts of incentive mechanisms?
Mr Bradley: I think you should pay attention to that discussion as it's being enunciated, because that's what people are telling me. In my area, it's kind of a high-income area, and many people are well educated and are concerned about the environment and are interested in environmental technology. They see it on their TVs and have thought about implementing it, but they would like to see some sort of payback, which is what net metering is all about. For a more technical discussion, you have to talk to IPPSO and the other organizations.
Mr Lessard: I'd like to get into the technical aspects, but we're in the policy-making aspect. We want to try and encourage people to do this.
Mr Bradley: Exactly. Well, the technical aspects in terms of policy formation.
Mr Galt: Congratulations on your enthusiasm for renewable energy, particularly wind and solar power. For the legislation that we're bringing in the regulations are not written as yet, but we described it as enabling legislation to write the regulations addressing some of the concerns you have. I'd like to bring to your attention the present status, where there's really no way to get green energy -- you're referring to wind power, solar power -- on to that grid unless it's a demonstration project by Ontario Hydro. The other awkward position we find ourselves currently in is that if Ontario Hydro is short of power, there's no limit on where they can go out and buy it, so they can go to the Ohio Valley, for example, where there are some pretty dirty coal plants, and import so-called dirty power from the US. Would you agree that moving ahead to Bill 35, which we're working on, is better than the status quo?
Mr Bradley: Some organizations are talking about having fossil fuel caps, since we all acknowledge that the burning of fossil fuels generates pollution and can affect global warming. Again, the public is getting quite concerned about ice storms, heat waves etc. These organizations are making that point, so that's one way of limiting Ontario Hydro's ability to generate more than it should from fossil fuels.
Mr Galt: It's interesting to note the record of Ontario Hydro. Of all the plants in the northeast, the organizations that produce hydro, many of them much smaller than Ontario Hydro come in second in total emissions of SO2, CO2 and the nitrous oxides. From the total emissions going out, they're in quite a good position.
Just looking at some of the environmental regulations, we're looking at everything from citing environmental performance standards of those who import or want to import into Ontario to emissions reduction trading, requiring revealing the emissions that come from each of these plants. It would be right on your electricity bill so you as a customer would be quite aware. But none of these have been written. They're certainly not etched in stone, and that's part of the reason to leave it in regulation, so that it can be moved a little more easily in the future. Would you be interested in being part and parcel of that consultation and contributing to it?
Mr Bradley: Certainly. Just one last little bone of contention: There is a new 85-kilowatt tower at the town of Spanish, which I visited. Although it can generate 85 kilowatts, it's only allowed, under current regulations, to generate 50. It's owned by the town of Spanish and it's actually quite aesthetic-looking, in fact stunning, because it's quite large. It should almost be considered a tourist attraction. I don't know why they don't have a sign. That's a little bone of contention I have. IPPSO has made that point a number of times.
Mr Galt: You commented earlier that you felt people would buy green power if they were aware of the standards and had that kind of choice. If they can get that in this -- and this is certainly our intention -- do you see this as an opportunity for new investment and jobs here in Ontario?
Mr Bradley: That's why I mentioned in my script the jobs; 8,600 jobs in Denmark out of the wind energy sector. It's a way of diversifying the economy, putting jobs in various parts of the province. We just had a presentation from a private sector company.
Mr Galt: Not to discourage you, but there are some drawbacks to wind and solar power. They use acres of either forest land or agricultural land; they have problems should there be an ice storm, if lightning strikes, if the wind doesn't blow, if the sun doesn't shine and so on.
I'm curious about your grouping of green power. Some of the hydraulic plants do block up water and have ice problems. Do you classify that as green power in your grouping?
Mr Bradley: In my perusal of what many analysts and groups are saying, it depends on how large the site is. It's probably site-specific. You'd have to do a mini environmental assessment on each project.
Mr Galt: So you don't give blanket green power to the hydraulic plants that do not create any emissions?
Mr Bradley: There's a big difference between James Bay and something much smaller. You can get right down to micro-hydro, which is probably the most efficient if you have the stream flow.
Mr Galt: The nuclear plants give off no emissions to speak of. How would you classify those? Would you consider those as green power?
Mr Bradley: If Philip was here, he would point out the connections that we don't always look at, in terms of the costs of decommissioning, the environmental costs in mining and transporting the material.
Mr Galt: You made an excellent point earlier on setting aside and looking at decommissioning costs. This has been quite a struggle for Ontario Hydro, to identify what those real costs are, but they indicate that $2.8 billion has been collected for decommissioning purposes. Their explanation is that it has been reinvested back into the organization. I'm hearing from you then that you're looking at nuclear very positively.
Mr Bradley: I never have looked at nuclear in a very positive way, because I've always been interested in the alternatives. I was always quite concerned about Ontario Hydro's debt and the percentage of that which was generated by having a larger nuclear capacity than we should have. Earlier down the road, if we had gotten more into energy efficiency and promoted renewables, perhaps we could be leading Germany or the Danes.
Mr Galt: There's no question that this bill will certainly be promoting that, particularly as the regs are written. It depends how effectively those regs are written. If you were to leave me your card, I'd certainly make sure the Ministry of Environment people get it and follow it up with you.
The Vice-Chair: Thank you, Mr Bradley. I think you've gotten the interest of a number of people. If you're going to send a report to Dr Galt, I'd like to get a copy of it too. We would see that it's shared with the committee.
At this time I'd like to call upon the Wahnapitae First Nation, Carolyn Pettifer and Peter Recollet.
Mrs Johns: A point of clarification, just before they come up: We were asked about access. That's section 25 of the act, so Mr Penna, as he's preparing that brief, should look at section 25 of schedule A. Section 87 is the regulations that allow for environmental issues in schedule B. I just wanted him to know those.
WAHNAPITAE FIRST NATION
The Vice-Chair: Good afternoon. Please identify yourselves for the sake of Hansard, to begin with.
Ms Carolyn Pettifer: I'm Carolyn Pettifer of Wahnapitae First Nation, a part of the Anishnabek Nation.
Mr Dwayne Nachkewe: Bonjour. I'm Dwayne Nachkewe. I work for the Union of Ontario Indians. We're an affiliate with Wahnapitae First Nation.
Carolyn has asked me to begin, to give, if you will, a national perspective on behalf of the Anishnabek Nation, on the changes taking place within Ontario Hydro. I should mention that the Union of Ontario Indians represents 43 Ojibway, Pottawatomi and Odawa first nations surrounding the Great Lakes of Ontario, stretching from roughly Sarnia up to Thunder Bay.
The relationship between Ontario Hydro and Ontario's first nations was born by accident, a necessity based upon circumstance. Many of the generating stations in northern Ontario are situated on or very near traditional territories.
The aboriginal perspective on the changes to Ontario Hydro outlines three key areas and describes historical grievances which have shaped the opinions for change tomorrow.
The planning, development and operation of generating stations in Ontario has occurred with little or no regard to first nation peoples or the impact on first nation territories.
The impacts on our people have been twofold: as a people expected to bear the environmental costs associated with hydro development and as a people who have been traditionally excluded from deriving any degree of economic benefit from these very same projects.
Projects such as the White Dog generating station and the Caribou Falls generating station contributed in the most negative way possible. Combined, these projects flooded a total of 1,100 acres of the One Man Lake First Nation. The flooding forced the relocation of an entire community. Perhaps even more tragic was the flooding of the community cemetery, which caused exposure of family gravesites and resulted in coffins floating to the surface and washing up on the newly created shoreline. Finally, the effects of artificially fluctuating water levels led to the destruction of the annual wild rice harvest, costing the community $200,000 to $300,000 per year in lost rice sales, one of the few industries in remote northern Ontario for first nations.
Construction of a hydro station on the Nipigon River in the mid-1920s contributed to the first changes in water flows experienced by the Red Rock First Nation. These changes were magnified substantially by the construction of a much larger facility at Virgin Falls at the outlet of Lake Nipigon several years later. Combined with the replacement of the Virgin Falls generating station with the much larger Pine Portage generating station in 1950, this provided Hydro with a much greater capacity to fluctuate flows and alter water levels in the Nipigon River.
Flooding of reserve lands and the erosion of shorelines and the community cemetery led directly to a loss of livelihood and reduced ability to utilize the community land base in the manner to which the people of Sandpoint First Nation were accustomed. Sandpoint First Nation was abandoned quietly in the mid-1940s, making compensation for this particular case difficult as many of the community members have taken residence in communities throughout northern Ontario. Compounding this problem further was the seizing of the community's land base by the province and its eventual conversion to a provincial park in l950.
Overcoming the experience and history of the Ontario Hydro and first nations relationship is critical if the corporation is to secure the support of first nation communities while restructuring. To this end, Ontario Hydro has at its disposal alternatives to take meaningful and long-lasting mitigative measures to ensure that first nations derive a share of the economic benefit from the continued operation of these facilities on their traditional lands.
The liability incurred from Ontario Hydro operations must reside with the crown. Where communities have levelled claims against specific operating stations, ownership of these stations should reside with the crown until such claims are settled.
The first nations' key interest is the securing of the first right of refusal to purchase facilities located on traditional land use areas. Communities for the first time would be integral participants in the power generation industry, benefiting economically and having a vested interest in what has traditionally been viewed by communities as a competitive interest for this particular resource.
Ontario should develop as part of its criteria a means to weigh the involvement and support of aboriginal communities for these proposals. By encouraging joint venture partnerships, Ontario Hydro ensures the coexistence of privately owned stations in the north with aboriginal communities.
The commitment to purchase power from existing stations must be maintained, otherwise any discussion related to the privatization of Ontario Hydro and the divestiture of its assets is pointless.
Transmission: The incidence of Ontario Hydro's transmission and distribution lines and their location on first nation lands forming the basis for conflict between the two occurs far more frequently than most would recognize. In many cases, Ontario Hydro remains satisfied that their legal status on first nation territory is unquestionable.
Staggered by the number of grievances first nations were attempting to address through the impact assessment phase and worried that the completion of the assessment would be stalled while dealing with these grievances, Ontario Hydro agreed to establish a past grievance process that would take historical claims against the utility outside the environmental process. What they found during the implementation of the past grievance phase gave them cause to question for the fist time the legitimacy of their occupation of first nation territory.
In most instances the conflict between Ontario Hydro and first nations is based primarily in the self-serving and disparaging attitudes Ontario Hydro adopted with aboriginal communities in the 1950s. Further aggravating first nation governments is the refusal of Ontario Hydro to acknowledge their past practices as profoundly unfair. They remain satisfied that they obeyed the laws of the day despite how such practices are regarded today.
Ontario Hydro and first nations must jointly develop a right-of-way access plan. This plan would provide terms of reference for continued tenureship of first nations' territory and provide a means to resolve existing tenureship and land use issues.
Ontario Hydro must commit to the non-use of herbicides designed to suppress plant growth on first nations' territory. As an alternative, Ontario Hydro should examine the viability of undertaking these activities using manual tending.
Ontario Hydro must continue to study the linkages between high-voltage transmission lines and the occurrence of cancer for people living near those lines.
Operations: In addition to the organizational and structural problems facing the utility and first nations, a relationship between the degree of service provided to communities and the development of their respective economies has become apparent. In remote and off-grid communities, the absence of Ontario Hydro services has become apparent.
From a daily operational perspective, Ontario Hydro has made ridiculous demands on the aboriginal communities it serves. It has held hostage a community's membership while attempting to extort a ransom for unpaid accounts from the first nations themselves. The situation works thus: In a number of instances, individuals from a wide range of communities have defaulted on their individual hydro accounts. Ontario Hydro in turn has pursued the first nation for payment of the individual's account, oftentimes refusing service to new residents until the first nation has paid the previous account. Furthermore, Ontario Hydro has demanded substantial deposits from new account holders if service is being requested on reserve.
Ontario Hydro must ensure a basic principle and right for the provision of electricity to every household and business in Ontario confirmed by a restructured utility. Proposed municipal electrical utilities, especially those based in regions such as northern Ontario, must continue to distribute electricity with an obligation to serve, making it mandatory to provide service irrespective of community location, remoteness or other factors municipal electrical utilities might regard as unprofitable.
In addition, municipal electrical utilities as an alternative to Ontario Hydro must abandon the policy of holding first nation communities responsible for individual accounts. This policy is not found anywhere else in Ontario and should not be implemented against first nations because of their susceptibility to these practices.
With that, I'll turn it over to Carolyn, who will provide a perspective from Wahnapitae.
Ms Pettifer: I'd like to introduce our chief, Ted Roque, from Wahnapitae.
I brought a visual so that you can see where our reserve is located. Sudbury is down here. Lake Wahnapitae is this. It's 11 miles by nine miles this way. The reserve is right here, two miles by two miles. It's a very small reserve.
We've had hydro in there just in the last five years, but we're at limited capacity of 30 hookups. That's just 30 homes. There's no more capacity for businesses and for new residents who are in the process of building homes. We also don't have any Bell Telephone lines into the reserve. We have very limited infrastructure, being located as close as we are to the city of Sudbury. It's only 60 kilometres north.
This whole area, if you look at the activities around the lake, there's a lot of mining happening, a lot of resources being taken out of the area. We're in the process right now of negotiating with the province an interim measures process that takes in 10 townships in and around the area.
When the reserve was surveyed as part of the Robinson-Huron Treaty of 1850, the survey was incorrect. The reserve should in fact be at least 16 times the size it is. When the Indians signed the treaty, there's the north Wahnapitae River that goes up to the hunting area, up in this area, and in the summer months our people would go down the south Wahnapitae River to Lake Huron to do their fishing. It was a traditional travelling area for our people.
When we signed the treaty in 1850, there was a problem in terms of the notion of measure that was understood by the Indians and what was written in the treaty. That's why the survey was wrong. The reserve itself was not surveyed for 30 years after the signing of that treaty, and when the surveyors came in to survey the reserve, they went in on their own without consulting with our first nations people as to the location of the reserve and the size of the reserve. We are in the process right now of a claim to reclarify our boundaries, so that's why we're entering into an interim process in terms of this whole area until our settlement is concluded.
On the south Wahnapitae River, going down here, Ontario Hydro built a dam in the 1930s. Actually, some other utility company built the dam prior to that and Ontario Hydro took it over in the 1930s. But what has happened because of the building of that dam is this whole orange area in here, a large area of erosion. The shoreline was eroded quite a way back in front of the reserve and in this area. This here is a provincial park in this area. This part was deregulated for the purposes of mineral exploration last year, and this area up here was included as part of the provincial park.
When this area was flooded, a lot of our burial grounds located in this area were washed into the lake. From the 1930s, I believe, you can even see articles in the Sudbury Star where there were skeletons found in the lake. We're very concerned about the impact of Ontario Hydro on our traditional territory and our whole reserve area. Whatever the bill does in terms of breaking up Ontario Hydro, we're very concerned about who is going to take accountability and responsibility for the past damages that were done in our area. The river that goes up north, the inlet used to be right down in this corner. Now it's way back in here and the whole area is flooded.
I guess that's about it. We will be meeting with Ontario Hydro for the first time to look at what kinds of arrangements we can make in terms of the compensation for lost lands and flooding. Back 20 years ago, we did enter into a lease arrangement for a small part of the eroded area. It didn't cover the whole area that was flooded. They only took into consideration 100 feet of waterfront at that time. Those kinds of things need to be reopened and renegotiated with Ontario Hydro.
Chief Ted Roque: I just wanted to mention too, because of the lack of hydro within our community and the members who are living there now, some of them lived there this winter without hydro, just living with generators, and we need to negotiate with Hydro. A cost of possibly $1 million is what we're looking at to bring in hydro; that's what we had been quoted at one time. I know we are currently waiting for a new price to come in, but even with that, the safety there without the phones or the hydro is a real concern for the membership -- as well as infrastructure, economic development. We have missed out on a few opportunities to date for getting into manufacturing with co-ventureships with other businesses. We have been approached, but we don't have the infrastructure there. We want to be able to function on our own, but we need these infrastructures there to do this, the phone lines and the hydro. That's one of the other reasons we're here too, to make you aware that we want the infrastructure within our community, to move on and to grow.
The Acting Chair (Mr Doug Galt): Anything else that anyone wanted to present on? OK, thank you very much. We have approximately four minutes for each caucus to ask questions.
Ms Martel: Thank you very much to all of you for coming. The agreement ends -- I think in 1999 you have to start renegotiating with Hydro with respect to not only the 100 feet but any additional claim you want to make. At this point has there been any kind of discussion whatsoever with Hydro as to who will assume some responsibility, who you will be negotiating with? Will there actually be a branch still in place to do that with? Have you had any connection to Hydro at all at this point?
Ms Pettifer: No. Our first meeting with them will be next week, and it's just an initial meeting to make them aware that we want to enter into a negotiation process with them.
Ms Martel: I'm not sure, Dwayne, if you might be the better one, or Carolyn. How many other first nations might be in this situation, either having some form of compensation from Hydro now or having a claim before Hydro for past damages incurred on traditional land? Any idea?
Mr Nachkewe: There are about 134 first nations in Ontario, about 100 in northern Ontario. I would say virtually every one of them would have a past, present or future claim. Most of these generating stations happened in territories immediately adjacent to or in the traditional hunting or fishing territories of first nations. That's a guess. I couldn't give you a specific number, but within our organization we have roughly 30 communities that are north of Lake Nipissing and the French River, and virtually all of them have had Hydro claims.
Ms Martel: When you talked about the past grievance process that Hydro has put in place, that would be where first nations -- I don't want to use the word "applied" -- were actually starting to make Hydro aware of the fact that they intended to put in a claim?
Mr Nachkewe: Yes. Some of our communities have had successful negotiations with Hydro, and I think they found that Hydro's attitude has come a long way in dealing with the communities. That being said, there are a number outstanding.
Ms Martel: How many first nations within the area dealt with by the Union of Ontario Indians might not have hydro now?
Mr Nachkewe: Wahnapitae -- we have two that I know of right now. Our communities are fortunate because most of them are located along the TransCanada Highway. At the same time, I don't think any of you would characterize Wahnapitae as a remote community; 40 minutes north of Sudbury doesn't seem very remote to me. It's mostly the communities north of these treaty areas, like Nishnawbe-Aski Nation and Grand Council Treaty 3 in the west, that would be more adversely affected.
There is a more pressing issue too, and it's going to require some co-operation from both levels of government, federal and provincial, and that's the fact that the Indian Affairs budget is frozen, and they pay the cost for this hydro. If hydro costs increase significantly, it's going to cut into other much-needed parts of band budgets.
Ms Martel: So that we're clear about where you're coming from, there's certainly an issue about extension of hydro services, and I recognize that for NAN and Treaty 3 that would be a much more pressing issue, just given the locations of the first nations. Many of them just fly in. People would say it might be difficult to get to Wahnapitae, but in terms of some of the others that we're talking about, they're so remote that that's a real problem. But really your concern is that with respect to Bill 35 -- we all know there are going to be some enormous changes with Hydro and we're not clear about what the structure might be in terms of what Hydro will look like at the end. You want to be very sure that someone at Hydro or the crown will continue to deal with legitimate grievances and continue to ensure that compensation is paid where it is due?
Mr Nachkewe: I think that's fair. We are also concerned with the fact that these changes coming down are going to have direct impacts on our communities and negotiations within our communities, and chiefs and community members have not been at all satisfied with the level of consultation on the change.
Mrs Johns: Thank you very much for your presentation. I wanted to tell you I was informed a great deal by it.
Ms Martel and I had a discussion prior to your arrival just about what was happening here. She was quite concerned that Bill 35 would in some way affect what little, it would appear after your presentation, you have now. We've tried to work out a couple of things. I then took the opportunity to call Ontario Hydro up to talk to me because we have of course a team of Ontario Hydro experts who seem to be following us around the countryside.
I wanted to confirm with you, if you can confirm, what they're saying. They're saying that there's a new realm of openness with the reserves and that they're trying to deal with them. In fact, they're telling me that this weekend Ron Osborne is visiting -- I'm going to get this name really mixed up; I'm sorry -- Ginoogaming First Nation in northwestern Ontario and celebrating with the first nations the signing of a treaty with respect to some of the issues you raised today.
Do you believe that to be true or do you have any comments on that? Basically, I think what they're trying to prove is that they're starting to try and deal with these grievances and they're trying to put this under their belt and work forward to get some of this stuff settled. Do you notice any of that kind of openness and movement forward to try and do something about these long-standing agreements?
Ms Pettifer: Is there anybody here from Ontario Hydro?
Mrs Johns: Oh tons, tons.
Ms Pettifer: We're meeting with them next week, so -- our agreement was negotiated 20 years ago and it is up next year. It was a small lease agreement. They haven't approached our reserve since that time. We did the first call to them, not only because we were concerned about the new agreement but because we're concerned about the past grievances. I understand that corporate policy to deal with aboriginal people came about quite a number of years ago, and there has been, to our knowledge, no undertaking on the part of Ontario Hydro to look at our grievances. We are talking about a lot of flooded areas as well as lost cemeteries and graveyards.
Mrs Johns: Let me ask you how the meeting next week came about, then.
Ms Pettifer: It was at our invitation to --
Mrs Johns: To Hydro to come in to speak. OK.
I just want to confirm things. Ontario Hydro says there are negotiations on a number of historic grievances. They're saying there are between eight and 12, and that there are maybe 30 communities that have approached Ontario Hydro to talk about problems or issues. Dwayne -- I'm sorry I don't know your last name -- I think I heard you say 100. Have I got incorrect information or is that just a lot? Is 30 correct?
Mr Nachkewe: I probably can't give you a really accurate number but what I was referring to is that communities that have been affected by hydro generation probably number 100. Like I said, virtually every first nation in northern Ontario has a generating station within their traditional area. That doesn't mean they're actively involved in processes, but I know of a number that have settled with Hydro, a number that have grievances outstanding. As to your question about whether Hydro has a new openness, I think there is, but the onus is still squarely placed on the shoulders of the first nations. If they're not motivated to address the claim situation, if they don't have the capacity to address it, they have to wait.
Mrs Johns: We certainly aren't trying to eliminate something in the act that exists now. If you see any of those kinds of issues -- I know it's hard to read these bills -- we'd certainly be happy to hear from you again.
Mr Phillips: Thank you, Chief and the rest, for being here. For advice to us on Bill 35, you indicated at the outset some suggestions for ensuring that the liability rests with the crown. I think that was one of your recommendations. Have you had a chance to review Bill 35 and do you see in the bill any risks that Hydro or entities you hold accountable -- that you may not be able to hold them accountable if this bill is passed?
Mr Nachkewe: I thank Carolyn for getting me a copy of the bill on Monday this week. I called for it last week and it would have taken Publications Ontario probably three or four days to get it to me.
Our communities aren't even aware that the standing committee is moving around. I wasn't aware until Carolyn called me last week, and she wasn't aware until her MPP told her about it. So I can't really fairly and honestly answer that question.
Mr Phillips: Let me just say that it would be helpful for the committee, once you've had an opportunity to review the bill, if you think that there's some risk that by passing the bill previous obligations will not be as accountable as they should have been, that you let us know that as quickly as possible.
Mr Nachkewe: I understand we have until August 20 to get further submissions in and then after that the door's closed. Is that right?
Mr Phillips: I don't think we've determined when the amendments have to be in yet, if I'm not mistaken. Have we?
Mrs Johns: We go to clause-by-clause September 28, but we have to have amendments in prior to that, but we would like to have it as soon as possible so we can work on it.
Mr Phillips: That's the next step for us, I think. We've heard today about what may be some significant liabilities on behalf of Ontario Hydro with your nation.
Have you had a chance to discuss whether the bill will be helpful to improving service of the community, Chief? We've heard conflicting evidence on it. I think you've got a very legitimate major concern about services to your people. Have you had a chance to discuss with Hydro or with the local municipal electrical systems whether the bill will be helpful or harmful in terms of improving service to your community?
Chief Roque: I haven't had a chance to talk to anyone about that yet because we've just learned recently ourselves. I guess the concern is because we're dealing with Hydro too and with opening our renegotiations. We've worked with them in the past, but right now it's our traditional lands, our burial grounds. Our concern right now is that we want them to be aware that these are still negotiable before this bill is passed or whatever.
Mr Phillips: I don't know of anybody, at least from our party and I think probably from all parties, who would not support changing the bill if it allowed legitimate obligations not to be met because this bill changes the legal entity. I would ask you to take a good look at it and give us your advice as soon as you possibly can.
The Acting Chair: Thank you very much. We appreciate your presentation. Getting into the north we get very different information than we do in presentations in Toronto. Thank you very much for coming out, even though you just found out about it very recently.
Mr Lessard: I notice that the parliamentary assistant just stepped out. We wanted to ask a question of clarification that she may be able to cover now or --
The Acting Chair: She's coming back. I'll call on the Sault Ste Marie Public Utilities Commission to come forward while you're getting that clarification.
Ms Martel: To the parliamentary assistant, it might be helpful if the committee could get some clarification about whether the issue that this first nation and others would raise around liability is something that the ministry wants to consider under section 108, which deals with the transition section. It certainly talks about liability and the ability of assets and liabilities to be transferred to any number of agencies.
The issue for us would be, does liability include present grievances and ones that have yet to be dealt with? There may be a simple way, if we could get some guarantee that that's what liability includes for the purposes of this act, that you could easily resolve some of the first nations concerns about what will happen under this process.
Mrs Johns: We will put something in writing to you, but I would like to say first off that all assets and liabilities have to be moved to one of Genco, Servco or the Financial Corp and we are very specific about what can be moved to Financial Corp in the act. It would appear, from my reading of the act, and I will get you a legal opinion, that all assets and liabilities have to move to Genco, Servco or IMO, of course -- I suppose there are a few assets but not very many -- so the liabilities would have to follow and go to one of those places. There is no place in the act that imagines an asset or a liability staying nowhere, if you will. That would mean that all of them should be moved, but I will get you something in writing that gives you a better feel than that.
Mr Lessard: The question is whether the situation that has been raised, a grievance with respect to potential claims for flooding of land, is included in the liabilities.
Mrs Johns: When I talked about liabilities I meant contingent liabilities also.
SAULT STE MARIE PUBLIC UTILITIES COMMISSION
The Vice-Chair: Mr Wallenius? You have half an hour. Identify yourself for Hansard, please, before you begin.
Mr Ken Wallenius: My name Ken Wallenius and I am the general manager of the Sault Ste Marie Public Utilities Commission. I would like to thank the committee for giving the commission this opportunity to speak to you regarding Bill 35, the Energy Competition Act.
The public utilities commission wishes to address the following issues which result from Bill 35 and which impact on our operation. These issues are as follows: (1) the renewal of electrical supply contracts; (2) the Ontario Hydro stranded debt; (3) a board of directors versus elected commissioners; (4) distribution above 50 kV; and (5) electric and water utility combined function.
General overview: Sault Ste Marie is a northern Ontario community with a population of approximately 81,000 people. The Sault Ste Marie Public Utilities Commission is responsible for electric and water supply to the citizens of this city. The electric utility services 31,785 customers while the water utility services 24,922 customers. The commission operates each utility with the revenue received from metered electricity and water consumption. The rates charged for these essential services are among the lowest in the province.
The public utilities commission was established by city council in 1917. It is currently made up of six elected commissioners, one from each ward in the city, and one councillor to represent the mayor. Commissioners are responsible for representing not only the voters in their respective wards but also the best interests of all utility customers throughout the city. Commissioners are committed to supplying customers with low-cost electricity and water, high-quality product and superior customer service.
The commission purchases electricity from Great Lakes Power, a privately owned company with hydroelectric generating stations located throughout the Algoma district. Great Lakes Power has provided the public utilities commission and its customers with reliable electrical supply and service over the last 70 years and at rates that are 15% to 20% below rates charged by Ontario Hydro to other comparable municipal utilities. Commission demands have been met by Great Lakes Power through its continued development of environmentally responsible hydroelectric facilities. Great Lakes Power has been good for our community and we would look forward to their continued support in providing our customers with low-cost, reliable electrical supply.
Renewal of electrical supply contracts: The original contract for supply of electricity to the PUC by Great Lakes Power dates back to 1928 and has been amended and renewed over the years to provide our customers with low-cost electrical supply. The current contract expires on December 31, 1998, and is under review for renewal. Our customers would recognize advantage in extending the terms and conditions of the present agreement for at least a five-year period. The proposed legislation indicates that existing contracts between utilities and their supplier may be terminated or transferred to the new companies established under the Business Corporations Act. The commission requests that the committee recognize the agreements that we have in place with Great Lakes Power and ensure that they continue to the benefit of our electricity customers. Great Lakes Power is prepared to continue their offer of low prices and it is the commission's desire to enter a longer-term contract with GLP that would benefit our customers.
Ontario Hydro stranded debt: The stranded debt issue refers to investments made by Ontario Hydro and financed by debt which will not be serviceable by the new generating, transmission and services companies to be created by Bill 35. Since the Sault Ste Marie Public Utilities Commission is not and has never been a customer of Ontario Hydro, we think the Public Utilities Commission should not be obligated to pay any portion of the stranded debt.
Our unique status goes beyond not being an Ontario Hydro customer. For most of this century, our energy needs have been met by a privately owned utility that has met the needs of its customers by building generating capacity and financing these investments through the rates it charges. Accordingly, we believe that the Sault Ste Marie PUC should not bear any responsibility for repaying debt incurred by Hydro in deciding how it would meet its customers' needs.
Board of directors versus elected commissioners: The proposed act identifies the municipality as the owner of the electric utility and requires the establishment of the utility as a company under the OBCA with the municipality as a 100% shareholder. The company will be governed by a board of directors elected by the shareholder, which in this case is the municipality.
The new board of directors must be accountable to the electricity customer and must be responsive to customer concerns. There is a need for customers to have a significant voice in matters that affect an essential service for them, provision of electricity. To ensure this voice, electricity customers must be given the opportunity to elect members to the board who will represent customers' interests. Currently, customers have strong representation through their elected commissioners and the new governance should ensure that this representation continues.
Distribution above 50 kV: The PUC takes power from Great Lakes Power at 115,000 volts to supply two transformer stations which are owned and operated by the Sault Ste Marie PUC. Power is transformed from the 115,000 kV to 33,000 kV at the transformer stations and distributed to various distribution substations within the system, where it is stepped down to the 12,470 distribution voltage.
The proposed legislation identifies 50,000 volts as the division between distribution and transmission. Under this criterion, our 115 kV system would be classed as transmission facilities. However, our 115 kV lines are radial supplies with the sole purpose of supplying the Sault Ste Marie utility. There is no transmission of electricity over these lines to supply other than the Sault Ste Marie PUC customers. The higher voltage allows a more efficient operation of the distribution system and improves service to our customers. Accordingly, it is our position that the 115,000-volt power lines be recognized as part of the distribution system and be factored in appropriately in any future cost analysis.
Electric and water utility combined function: The proposed legislation supports the formation of a new electric company that can form affiliated companies or in other ways associate with other businesses. Under our present structure in Sault Ste Marie, electric and water utilities operate as a combined utility to the benefit of our customers. Significant cost-efficiencies are realized with the shared utilization of staff and resource facilities. It is important for the new legislation not only to accept what has proven to be a successful operating structure, but also to encourage the sharing of resources to improve efficiencies. In the final analysis, it is the customer who benefits in receiving the essential services of electricity and water in a most cost-efficient manner. Customers receive high-quality and reliable electricity and water supply now and can rightfully expect this to continue under the new legislation.
In closing, I would urge the committee to recognize the successes that are evident in the electric utility industry today and ensure that they are carried forward as the new industry develops. Elected commissioners give customers a significant voice in electricity matters that concern them directly. Dedicated, trained staff must be given time to adapt to the new environment so they can continue to provide superior customer service. We must continue to maintain and upgrade the electrical supply systems to provide reliable and environmentally friendly electrical energy to customers. In the final analysis, the new industry must add value for the customer and ensure reliable, low-cost electricity to meet customer needs.
The Vice-Chair: Thank you. We have six minutes apiece, beginning with Messrs Baird and Gilchrist.
Mr Baird: Thank you very much for your presentation. I think the local power utilities have certainly served their customers well. If you serve the folks in Ste Sault Marie as well as the folks in Nepean serve my constituents, they've been well served.
I think you make some excellent points, as did your supplier, Great Lakes Power. It's certainly something for all of us to reflect on and to consider. Let me just commit to it. I know I and probably all of our colleagues will take the time to reflect on it and to give it some thought and not perhaps go with our first gut instinct.
I think, more than anything, the way you've operated and Great Lakes Power in its presentation earlier probably make the case for breaking up the monopoly of Ontario Hydro better than any policy person or politician at Queen's Park ever could, because you obviously, both as a utility and as a private operator, have shown that it can work outside of Ontario Hydro.
I do have a concern and it's a very tough one. When you make exceptions for some, you open the floodgates. You probably were here earlier when we heard from Great Lakes Power. We learned from their presentation that since 1960 upwards of 25% of the power has come from Ontario Hydro. Does that not merit some sense of the liability?
Mr Wallenius: I think the Great Lakes Power representatives did respond to that. But as far as the exceptions go, you say it opens the floodgates. Is it still not important, though, to understand what these exceptions are and address them? There could be some very legitimate issues that are coming up and it may be some of them are more legitimate than others. We really do believe that we have a legitimate issue, that if it is one of the exceptions, I think it's worth the consideration that you've indicated you're going to give it.
Mr Baird: That's a fair point. I don't know what I would say, for example, to my constituents in Nepean. In Bells Corners, which is a community of about 12,000 people where I live and grew up, we've been trying to tap the methane coming from the Ottawa-Carleton dump, which could actually supply the hydro needs of the 12,000 folks who live in Bells Corners and would be demonstrably better for the environment because it's going out in the atmosphere. We've been fighting for that for years and Ontario Hydro won't let us. So because Ontario Hydro lets some people out of the grid and not others, do we get a break too? We wanted out and we've been fighting to get out; they just won't let us out.
Mr Wallenius: That's what you should be arguing then.
Mr Baird: That's what we're arguing here with this bill, I guess.
Mr Wallenius: Very good.
Mr Baird: I just want to say there are some fair points and we'll certainly reflect on it.
Mr Gilchrist: Thank you for your presentation. You raise a couple of issues. Let me very quickly deal with a minor point here. Great Lakes Power in their presentation said that the community had reaffirmed their separateness over the years, most recently by extending the franchise till 2008. You mention in yours that it's up for renewal and you're looking for an extra five years. Who's got their facts straight on this?
Mr Wallenius: What we're negotiating right now is just a power supply contract to the utility. They've mentioned the franchise. I would leave that for Great Lakes to identify what the franchise is to 2008.
Mr Gilchrist: So we're talking two different contracts. Fine.
It's always interesting. Every presentation has a different wrinkle. You've raised the issue of the distribution over 50 kV and that's the first time anyone has done that.
However, you do raise another issue of board of directors versus elected commissioners. There's absolutely nothing to prevent Sault Ste Marie from having any kind of a public input process. Perhaps much like Alberta has done with their request for senators being elected from Alberta, the fact that the federal government isn't required to do that doesn't mean they wouldn't respect that that's the way Alberta puts a name forward. I would submit to you there is nothing in this bill that would prevent Sault Ste Marie from finding a different way of coming up with the six names to become the board of directors, and if they want to continue to do that by election, I'm not aware of anything that would bar this.
The final point I would ask your comment on is the electric and water utility combined function. As you're undoubtedly aware, in the bill there's nothing that prevents you from continuing to do two or more functions. All we suggest is that the accounting must be done in a very transparent way so that people can see the true cost of the electric service and the true cost of the other service. You obviously can fairly attribute even administrative expenses. Do you have a problem with that?
Mr Wallenius: Separating the costs? No, there's no problem with the separation.
Mr Gilchrist: So as long as this bill, as it does, allows you to take on other convergent technologies, any other task that you think you can compete with in the private sector, you have no problem with the bill saying that, knowing that all we're asking you to do is just fairly distribute the costs.
Mr Wallenius: I think I've noted that. It is there in the legislation and we accept that. That's good.
Mr Gilchrist: OK. I just wanted to be clear on that.
Mr Conway: Mr Gilchrist has anticipated the two areas I wanted to --
Mr Gilchrist: Mind-reading is just another skill.
Mr Conway: I think you make a very good point, Mr Gilchrist, and I just want to come back to it very quickly. Just explain if you would, Mr Wallenius, to the committee, as you understand the provisions of Bill 35, what are the governance changes that are effectively going to be imposed on you that would be different than the ones you've had over the years in setting up the commission that runs your PUC?
Mr Wallenius: As I understand it, the municipality, being the 100% shareholder, will be electing the board of directors, so it will be up to the municipality. However, they won't be representatives elected by the people. Somehow a board of directors is going to be established in some way. I think I'm being told here that there are many different ways of establishing that board so it's possible then to ensure in some way -- and I don't know all the procedures that could be used, but there must be some process by which the people could elect some representation to the board so that the board is close to the people rather than being remote. That's my understanding of how it's set up.
Mr Conway: You raised a point and we'll probably want to look at it a little more carefully. But just like Mr Gilchrist, my impression is that it is a slight change but it shouldn't affect the ability of the shareholder, the municipality, to decide what that board's going to look like.
Mr Wallenius: It's a case of just wanting that assurance, because our concern is that the customers will be able to have representation on the new board. I think there's some thought that boards of directors can tend to be very remote from the population in general; they may not be representative. I think just an assurance that somehow this board is going to have elected representation.
Mr Conway: The second issue is the issue of convergence. You've got a municipal utility that runs two operations, an electric and a water utility. I guess that was going to be my question. Does the bill impose effectively the construction of any firewalls that you don't already have in place?
Mr Wallenius: No, and it's again more of an assurance that we're understanding it correctly. The combination of having the electric and the water and possibly entering into other businesses is the expectation that's coming.
Mr Conway: You see the subtext here, and it's not just a subtext. Listen, I've been around the business long enough to know that humankind can sometimes sin. I think of Kingston and St Catharines. They come to mind. Over the last 10 or 15 years I remember stories in the St Catharines Standard, and the Kingston Whig-Standard had some rich detail about the behaviour of a utilities commission going off to some exotic place and doing things. The worry is, quite frankly, that there's perhaps the opportunity for boondoggle. The provincial Legislature never engages in that, but we have to watch you people. We have to be very vigilant that people like the Sault Ste Marie Public Utilities Commission behave themselves and don't use the convergence that this new world order is going to provide to --
Mr Baird: That's a road I wouldn't go down.
Mr Conway: Well, on Monday we're going to be in Ottawa. We're going to hear from Cornwall. In Cornwall we've got convergence now of a different kind. We're going to have a private operator, Consumers' Gas, that's going to have a gas franchise and the electric franchise. I expect more of that's going to happen. There's certainly going to be pressure for that. You've answered the question, that there is no great burden being imposed on you to separate out the two parts of the utility business that you've long operated.
Mr Wallenius: They're separated now, but it's a case of ensuring that two of them can't operate together. If you want to call it convergence or whatever, then it's to try and ensure that they can. That's economic for the customer.
Mr Lessard: I come from the Windsor area and we have a utilities commission that supplies electric power services to households as well. We'll be hearing from them next week in Sarnia. You're satisfied that you'll be able to continue, once incorporated, not only to provide electricity but to provide water to consumers in Sault Ste Marie as well after this legislation is passed?
Mr Wallenius: That would be my understanding of it, but I think it's a case of, is that the intention of the legislation too? I'm looking for feedback from the people involved that that is the intention and the interpretation of the legislation, that that will be allowed.
Mr Lessard: One of the concerns that I've heard expressed is that although there may be an ability, as you understand, to offer electricity and water services together, there are some who are concerned that Servco, the Ontario Hydro competitors, may be able to offer additional services that you may not be able to offer. Is that your understanding of the legislation as well?
Mr Wallenius: I think based on what I have read on that that there could be limitations. I think this is an MEA presentation, that there are limitations on what the new company could provide, and I would be at a disadvantage if there are limitations put on the new company.
Mr Lessard: Are there some disadvantages for your municipality to provide water services through a corporation incorporated under the Ontario Business Corporations Act as opposed to under, I guess it would be, the Public Utilities Act?
Mr Wallenius: Disadvantages in doing that?
Mr Lessard: Advantages or disadvantages. They're going to be changing possibly the taxation structure.
Mr Wallenius: These are issues that I think we're just coming up to. I don't think I fully understand all of the impact at this particular stage, so I would hope at this point, with the combination of the two, that we could still provide a competitive service.
Mr Lessard: Do you have any kind of sewer surcharge on your billing as well?
Mr Wallenius: We have the sewer surcharge that we collect for the city, yes.
Mr Lessard: You collect that for the city. That's similar to the Windsor area as well. Do you feel that you'd be able to continue to do that, or is it still premature to have an answer to that question?
Mr Wallenius: I don't know if we could or not. We do it now. Someone would still have to do it, and I believe it's sort of an economic procedure at this particular point. It's good for us to do it. Why not continue to do it?
The Vice-Chair: Thank you very much, sir.
Mrs Johns: On a point of clarification, Chair: In section 83 of the act we talk about the distribution above 50 kV, so I think you might want to look at that. It's section 83 (a) and (b) -- I haven't got my glasses on here -- and it talks about the feasibility of going beyond the 50,000 that you've been talking about.
The Vice-Chair: I'd like to call upon John LeMay and Ron Aelick from Inco Ltd. You have 30 minutes. I hope that you'll have time left over at the end for questions. You may start whenever you'd like.
Mr John LeMay: My name is John LeMay, project manager for energy conservation for Inco's Ontario division. Unfortunately, Mr Aelick, because of his schedule, isn't able to be here with us today. I'll be about 10 or 12 minutes with the presentation and then questions. I'd like to thank the committee for the opportunity to appear before them.
Inco is a member of the Association of Major Power Consumers in Ontario, the Ontario Mining Association, and, through those organizations, the Stakeholders' Alliance for Electricity Competition and Customer Choice. We support the position of those organizations. We're also a member of the Industrial Gas Users Association and support their position.
Inco is one of the world's leading producers of nickel and an important producer of copper, precious metals and cobalt. In Ontario we have operations here in Sudbury and in Port Colborne. In Sudbury there are 10 producing mines, a concentrator, a smelter, nickel and copper refineries, a sulphuric acid plant and a sulphur dioxide liquefaction plant. In Port Colborne there's a cobalt refinery. Our Ontario operations produce about 220 million pounds of nickel annually and a similar amount of copper. We also produce significant quantities of cobalt, sulphuric acid, gold, silver, and platinum group metals.
We function in a very competitive international market. Some 95% of our nickel and half of our copper production is exported. All the products we produce are commodities that have their prices set on world markets. Our prices for our products are considerably less today than they were a year ago. Since we can't control our prices, we have to control our costs, and electricity is one of those important costs.
In our Sudbury operations, Inco has the most modern nickel and copper smelter in the world. It also has an efficient nickel refinery that produces specialty products such as nickel powders and nickel foam. The copper refinery, while older, has recently been updated and modernized. All these facilities are capable of processing ores from around the world. For example, nickel matte from other locations has been processed. Automobile catalytic converters are processed to recover platinum group metals. Copper concentrate from other companies has been smelted and refined. Copper has been refined for others, as have gold and silver.
These are all things that add value to the provincial economy. They are, however, dependent on competitively priced energy. The smelting and refining operations are much more energy-intensive than the mining operations and account for more than 40% of electricity use and most of our natural gas use.
The Ontario division is a substantial user of energy, accounting for almost 1% of the electricity and natural gas used in the province. Natural gas is used for process and metallurgical applications, mine air heating and building heating. Electricity is used for everything from mine pumping, ventilation and hoisting to electrolytic refining and oxygen production, and we use oxygen in our high-temperature metallurgical applications.
In 1998, the division expects to spend more than $110 million for energy: $75 million for electric power purchased from Ontario Hydro, $30 million for natural gas, and the remainder for oil and other fuels. I'll note that the CBC quoted the Ontario Mining Association as saying we spent $30 million as an association; it's $300 million. I don't know if that number was right or not when Mr McBride appeared before the committee.
In addition to the power purchased from Ontario Hydro, Inco owns and operates its own generating plants and an extensive power system consisting of 200 miles of transmission line and more than 60 high-voltage substations. This system is used to distribute power to the various mines and plants in the Sudbury area. Normally, Inco generates about 20% of its power requirements. This amount fluctuates a little bit from year to year because hydraulic generation is dependent on precipitation.
The generating plants are located on the Spanish and Vermillion rivers, 30 miles west of Copper Cliff. The Spanish River watershed extends more than 100 miles north to Biscotasing. There are 12 dams that are used to control levels on nine lakes according to a water management plan that was developed in conjunction with lake users and the Ministry of Natural Resources.
Inco's generating plants predate the formation of Ontario Hydro. The first plant went into operation in 1904. For many years, Inco was the only electricity supply to several of the towns in the area. As a result, Inco also developed an extensive electrical distribution system in the Sudbury region. This system is used to supply power to Ontario Hydro in Walden and Sudbury Hydro in Copper Cliff. The Inco power system is capable of operating completely separate from Ontario Hydro. This has happened in the past when there has been a total power failure in the supply from Ontario Hydro.
The Sudbury operations have used natural gas since the trans-Canada pipeline was installed in the mid-1950s. Inco was one of the companies that signed a 25-year contract allowing the TCPL pipeline to be built.
Inco and its Ontario operations have had a long history of commitment to energy efficiency. Inco's Ontario division is the world's most energy-efficient nickel producer. Over the years, management initiatives have generated significant cost savings, improved productivity, and produced a positive environmental impact. The Ontario operations of Inco have improved energy performance by more than 35% since 1980 through a combination of operational and process changes. Between 1992 and 1997, energy efficiency has been improved by 13.8%.
For Inco to remain competitive and continue to make a significant economic contribution to Ontario, competitive energy costs are essential.
Ontario Hydro has made some changes that have allowed the Ontario division to reduce its electric power costs somewhat. However, this does not begin to compensate for previous increases. In the four years from 1990 to 1993, rates increased by 42%. In 1994, there was no change, and in 1995 a 0.7% rate reduction.
Since that time, there has been no change in average rates, although Ontario Hydro has done a number of things that have increased costs for many companies. In 1995, Ontario Hydro introduced a rate called real-time pricing. The Ontario division used this rate to, at that time, reduce our purchase costs by about 6%. But even with this reduction, their rates are a liability, and the way they apply their rates, our rates are actually going to go up this year and they'll go up again next year. So the slight reduction we got is very rapidly being eroded.
In Inco's operations in both Thompson, Manitoba, and in Indonesia, electric power is considerably less expensive than in Ontario. In Thompson, electric power is supplied by Manitoba Hydro and rates are about 40% lower than in Ontario. In Indonesia, all power requirements are supplied from company-owned generation. Most of this is hydro generation.
As with any mining company, we have no control over the end price of our products. Increased costs cannot be passed on to our customers. In fact, for the Ontario division to remain competitive, it's necessary to reduce costs, and that includes electricity and natural gas costs.
Inco is a member of the Association of Major Power Consumers in Ontario, the Industrial Gas Users Association and the Ontario Mining Association and supports their positions. I'm not going to go through the details of the proposals, because they are all appearing before the committee. I'd rather focus on a couple of issues that are of particular concern to Inco.
Licensing: Under the requirements of the act, Inco could be required to apply for more than one licence. It would streamline the process if multiple licence requirements could be obtained through one application. Licences should not be required for an industrial generator that uses power solely for their own requirements. Licensing should not be required for an industrial company to sell gas that is in excess of its requirements, provided such gas is not sold to an end-use residential or small-volume commercial customer.
I'd like to talk about natural gas for a minute. From listening in the audience, it almost sounds like people have lost sight that this is an energy act, and there are a number of provisions that are very important regarding natural gas.
Inco believes the provisions of the act respecting natural gas will provide the competitive environment we need.
To provide a reliable, economical gas supply to Inco's facilities, it is necessary to have both adequate transportation on TransCanada PipeLines and sufficient storage to go with this transportation. Inco has this assurance for 1999. However, beyond that time Union Gas is proposing to reduce the storage allocations.
Inco considers it necessary that the Ontario Energy Board regulate the disposition of the transportation that the local distribution companies hold on TransCanada PipeLines and the storage that is mainly located in the Union franchise in southern Ontario. A local distribution company should not be allowed to allocate either transportation or storage capacity directly to one of its affiliates. Any such disposition, other than a temporary assignment to an end-use customer, should be regulated by the Ontario Energy Board.
Electricity: On the competitive transition charge, the act provides for the government of Ontario exempting certain market participants from the obligation to pay any competitive transition charge that might be imposed in the future. Inco submits that since many of its electrical facilities predate the formation of Ontario Hydro and since its generation has not in any way contributed to any potential stranded debt, Inco's existing generating facilities be exempt from the CTC.
Mr Baird: There seems to be a pattern.
Mr LeMay: Yes, there's a pattern. You're in the north, although the member from Thunder Bay might disagree with that. I say that having been born in Port Arthur.
In conclusion, we support the intent of the Energy Competition Act to create a competitive energy environment in the province. We recommend streamlined licensing requirements, Ontario Energy Board regulation of the disposition of storage and transportation by local distribution companies, and that existing generation that hasn't contributed to the debt be exempt from the competitive transition charge. On that I'd like to clarify that I mean just the portion of our load that's our generation, not what we buy from Hydro. What we buy from Hydro should be treated the same as for anybody else.
The Vice-Chair: Thank you, sir. We have exactly six minutes apiece, beginning with Messrs Phillips and Conway, in that order.
Mr Phillips: I want to take advantage of your being here to get your advice on how you think this thing will unfold over the next few years, because the legislation will pass in a couple of months but in many respects I think we're flying a bit blind on what it will really mean.
The rates have been held down. One way Ontario Hydro has done it is to write off a lot of costs. A lot of interest costs, tree-trimming costs and things like that were written off against debt so that they could keep the rates in 1998 and 1999 frozen.
What is Inco's expectation about what will drive the reduction in costs? Ontario Hydro will keep all of its existing generating plants and will lose about 40% of the market to new generating plants. Hydro is now saying they'll sell that excess power into the US. What, in your opinion, is going to drive down the cost to Inco of power?
Mr LeMay: I think getting into a competitive environment will do it. It's the same thing that right now is driving us to do everything we can to reduce our costs. We're doing it because if we don't do it, our competitors are going to get our business. In Ontario Hydro's case the same thing is going to happen. If they get into a competitive environment, they're going to reduce their costs. I think anybody familiar with the utility can find all sorts of areas where costs can be cut if they get in a competitive environment.
Mr Phillips: Is Inco's expectation that there will be significant new generation plants come on stream?
Mr LeMay: I think there will be -- this is a personal expectation -- but I think it will take time. I think we're going to go through the same sort of thing we did with natural gas deregulation, and that was 10 or 12 years ago. With this act we're just really finishing gas deregulation. It's taken a long time for prices to come down. They didn't come down all at once and we went through a whole series of changes. I think the total changes from this act will probably take five to 10 years too.
Mr Phillips: Is it the right decision to not permit the sell-off of the Ontario Hydro generating plants?
Mr LeMay: I don't think whether you privatize them or don't privatize them is the issue, really. I think the issue is whether or not you get a competitive environment. The Tennessee Valley Authority is similar to Hydro, and when they didn't have any competitive environment, they were the same. It doesn't matter whether it's public or private. There are a lot of American companies that are private and that don't have competition that aren't very good examples of how to run a utility business either. You need to get the competitive environment.
Mr Conway: Just a couple of quick questions. Just for your information, the brief presented yesterday to the committee in Thunder Bay by the Ontario Mining Association did on page 3 talk about "a collective electricity bill for the mining industry in Ontario at about $300 million annually." That was the material.
John, just in layperson's language, do you want to decode that business on the bottom of page 7 under "Natural Gas," your recommendation that the OEB "regulate the disposition of the transportation"?
Mr LeMay: To get gas to Ontario you have to get it over the Nova system and then transport it over the TransCanada PipeLines system. All the gas that is transported in that system, somebody holds the transportation in their name. In the case of ourselves, Union holds the transportation in their name. They also hold the storage. That transportation has a value to it, so the utilities really want to grab as much for themselves as they can grab. The act certainly provides for it. We feel that it needs to be regulated, or at least not let them grab it without our having a say in it.
Mr Conway: So it's really a regulatory matter that the OEB should be --
Mr LeMay: Yes, a regulatory matter that should be there.
Ms Martel: Thank you for coming today. You will know that you are now the third organization today that has come to talk to us about why there should be some form of an exemption. The committee takes that issue seriously because we recognize that there are significant costs involved. I guess on the other hand we're wondering how many other organizations might be able to come forward and make a similar case, either to be wholly excluded or to have part of their operations excluded, given their relationship with Hydro, and who will be left then paying what. Obviously what will be paid is still at issue as the Ministry of Finance deals with trying to make some calculations about stranded debt.
To read where you're coming from with respect to what you purchase from Hydro and what you own yourself, you'd probably be looking at about 80% of your needs coming from Hydro, and that would be the portion where you would expect the debt, whatever it is, to be applied.
Mr LeMay: Yes, that's right. I think that in the case of ourselves or Great Lakes Power, we invested the money in the generation. Hydro and the provincial taxpayers didn't invest any. As a result, any debt that Hydro has built up, we haven't contributed to that part. The 80% we buy from Hydro, if there is any stranded debt, then that 80% should carry whatever the fair portion is. I think the same thing in the case of Sault Ste Marie. Whatever they get from Great Lakes shouldn't; whatever they buy from Hydro should. I think a very clear distinction can be made between the two.
Ms Martel: You mentioned in your brief that you're expecting a rate increase next year and this. Do you have an idea what the percentage is, or have you just been told that by Hydro?
Mr LeMay: No, it's the way their rates work. Their real-time pricing rate is a very complicated one. I don't know the exact percentage, but I'd guess in the order of 1% or 1.5%.
Ms Martel: That would be for this year?
Mr LeMay: Yes.
Mr Gilchrist: Thank you, Mr LeMay. We appreciate your coming forward. You know, I'd be remiss in not starting off by saying we've always had a practice of recognizing past MPPs when they come here. Given that he's an Inco employee, it's probably appropriate to start the protocol of introducing Mr Gerry Courtemanche, a future MPP who I'm sure will be joining us in a couple of weeks.
But seriously, on your presentation, I appreciate your supportive comments. I think as one of the largest, if not the largest, purchasers of hydro in Ontario, obviously your perspective is one that is very relevant to the bill and we appreciate your pointing out that this is a bill that covers not only electricity but natural gas.
You've raised three points and I am pleased to say that on two of the three we can set your mind at ease already. In clause 56(c), in connection with your licensing questions, there will be no requirement at all for a company like yours, as long as you're simply producing natural gas or electricity, as the case may be -- but in this case, natural gas -- that is for your own purposes or sold to anyone but a small consumer or a small business. So unless Inco anticipates going down the street and selling natural gas to individual homes, that's not something you will have to get a licence for.
Mr LeMay: Thank you. From our reading of the act, it wasn't totally clear.
Mr Gilchrist: That's one of the other benefits of committee hearings; hopefully the information flows two ways. Similarly, on your question on natural gas transportation and the allocations, it is probably not necessary and in fact the bill did not contemplate having the OEB involved because that's actually a federal responsibility. The National Energy Board is charged with doing exactly what you're asking for here, maintaining that.
Mr LeMay: That is one of those things where if you say the National Energy Board is charged with it, we'll fall through the cracks because the National Energy Board has no jurisdiction over the LDCs, the local distribution companies, in Ontario. They're governed by the Ontario Energy Board.
Mr Gilchrist: That's interesting because that's not the viewpoint of --
Mr LeMay: That's why we brought it up, because it's a very important point.
Mr Gilchrist: I appreciate that. If you've had any correspondence to that end, we'd be most grateful to receive that, because it's certainly our understanding that this does fall under the NEB's jurisdiction. If there is a crack somewhere that something's slipping through, it's a perfect opportunity for us to paper that over.
Mr LeMay: We have discussed this with the Ministry of Energy staff in the past.
Mr Gilchrist: We'll take it up again.
The final point: As you've heard, there certainly is in the bill the ability to apply the CTC to generation, but I think we've heard raised now, not just by three presenters here today but by others, that there may be a need to recognize the fact that there are some privately owned generation facilities and perhaps that will presuppose where the charge goes.
But in connection with that you make two points: that you're spending $75 million this year on electricity and that in Manitoba your operations in Thompson are paying 40% less. Isn't it intriguing that is precisely the percentage of the average Hydro bill, which is going to retire the debt? Would you take it as an article of faith that whatever label we put on it, whether we call it CTCs affecting stranded debt, or whether we just call it your existing Hydro bill, that all of us have, rightly or wrongly, this obligation? Would you be comforted if, no matter what label is put to that, the amount that Inco pays in the future is not higher than that, and we hope lower, but recognize that you are paying $30 million a year right now towards retiring the debt?
Mr LeMay: Yes, we recognize that. That's why I said I wasn't sure there would be any stranded debt when we get into the competitive market because I think rates can go down somewhat and the debt still be paid off.
Mr Gilchrist: We certainly share that expectation or we wouldn't be going through this exercise. That's been the experience in every other jurisdiction around the world that has tried it, and particularly those where they moved quickly on wholesale and retail at both ends of the spectrum to encourage competition.
Do you have any thoughts on the positions taken by the MEUs that we should have competition at the supplier level but not at the customer level? Who's going to capture any potential increased profits if that is the case?
Mr LeMay: Usually you have the middleman. In the gas business initially it was the brokers in the middle who captured the excess profit. Again, that's a personal opinion.
Mr Gilchrist: I think it's more than a personal opinion that you have. I think if you look at the Alberta example, where they deregulated wholesale but not retail, that is exactly what happened. The middleman makes more money and the consumers don't see it.
Hopefully, as one of our biggest consumers, you will benefit by opening up both ends of the spectrum as quickly as possible. Thank you again for bringing that perspective to us here today.
The Vice-Chair: Thank you very much for your presentation, Mr LeMay.
Mr LeMay: Thank you for the opportunity to appear.
MUNICIPAL ELECTRIC ASSOCIATION, DISTRICT 9.
The Vice-Chair: I would now like to call on Susan Cochrane and David Wills of the Municipal Electric Association, district 9. For the benefit of Hansard, would you please identify yourselves prior to your presentation.
Ms Susan Cochrane: Good afternoon. My name is Susan Cochrane. I am the chair of the Municipal Electric Association's district 9. With me today is Henri Robillard, who is representing one of our member utilities, Capreol Hydro.
I am here today representing the municipal electric utilities of northeastern Ontario. They are located in the communities of Cache Bay, Chapleau, Capreol, Espanola, Cochrane, Iroquois Falls, Hearst, Larder Lake, Kapuskasing, Massey, Latchford, Nickel Centre, McGarry, Sault Ste Marie, North Bay, Sturgeon Falls, South River, Thessalon, Sudbury and Webbwood.
As the map attached to our written submission shows, northeastern Ontario is geographically huge. The distance between our utilities averages over 50 kilometres. We also vary considerably in size, from the cities of North Bay, Sudbury and Sault Ste Marie with populations between 60,000 and 120,000, to the villages of Latchford and South River with 1,500 people. We vary not only in size but in the range of services we provide our communities to meet their needs.
We appreciate the opportunity to comment today on the Energy Competition Act. We recall that the process of change began back in 1992 regarding an appropriate institution structure for the electricity industry. Several years of substantial rate increases had resulted in electricity prices losing competitive advantage in Ontario, a legacy of the massive debt burdens of Ontario Hydro and its poor management practices. The government of the day appointed a new chair for Ontario Hydro at that time, which resulted in massive corporate restructuring and downsizing. More important for electricity customers, including MEUs, was the five-year freeze on electricity rates. The current government continues the commitment to increasing industry competitiveness, which we all hope will result in lower consumer costs, lower costs for us all.
Our district is pleased that the legislation requires that Ontario Hydro and successor companies be regulated to ensure accountability. District 9's MEUs also applaud the common sense move to having MEUs regulated by an impartial third party, the Ontario Energy Board. We can only hope that the successor companies of Ontario Hydro respect and adhere to the OEB rules and regulations.
But the legislation contains many other changes and provisions, originating from the Macdonald commission and the white paper, about which we are not so sure. We take this opportunity to remind your committee that the legislation, market design and regulations must address the fundamental problems noted earlier -- ie, the debt mainly -- and not, to paraphrase, "fix what ain't broke."
We believe Bill 35 should concentrate more on addressing the market power issues of Genco and that greater separation of Servco's transmission and distribution is required.
On the distribution side, which is where MEUs fit, the legislation, in accordance with the white paper, makes a number of changes. The transformation of MEUs to OBCA corporations affords municipalities, through their utility corporations, the flexibility to provide utility services to their communities that meet the service needs of that community. Unfortunately, many northern communities will see no change in their ability to enhance services as a result of this legislation. Municipalities currently directly served by Ontario Hydro which have had services or service levels reduced, local jobs lost and services centralized elsewhere in the province will be unable to form OBCA corporations to own their distribution systems. We request that the legislation allow municipalities currently served by Ontario Hydro to purchase the assets at the debt value currently owed.
The current accountability, through elected commissioners, is a feature preferred by this district. In lieu of that, we propose that the legislation be enhanced to require that a certain number of board members represent the ratepayers. Also, the expertise of those now serving on MEU commissions should not be lost in this process. The initial board of the new corporations should, for an interim period, include current commissioners.
The legislation says the municipality will be the shareholder of the OBCA companies. We believe electrical ratepayers are the owners of MEUs and that the role of the municipality is that of a trustee. We would therefore have preferred language in the legislation specifically addressing the rights of electricity ratepayers. However, we believe the legislation does contain adequate checks and balances to protect ratepayers, namely, through compulsory OEB reviews of share sales and controls on the percentage shares hold by one owner
Both the white paper and the legislation contain aggressive schedules to implement changes. Given time, we are confident that the combination of legislation, regulation and market design requirements can be implemented. The operative word is "time." We believe the legislation should contain more flexibility on the timing, that absolute dates should be replaced by dates set in the regulations. We believe the current time frame is simply too short. Problems in other jurisdictions show caution may be the more prudent route. We would prefer that changes be done right rather than quickly. It is the consumer who will suffer and bear the costs where there is a lack of due diligence and adequate planning.
This government's current agenda for the electrical industry calls for restructuring virtually every function and business relationship. Meanwhile, we must also focus on year 2000 readiness and compliance. Utilities of all sizes will be hard-pressed to address year 2000 issues diligently, even without the added complications of adjusting for industry restructuring.
We support the requirements in the legislation that retailers, brokers and marketers be licensed. The government has obviously learned from the disastrous natural gas experience. We recommend that the government further require, either through legislation or regulation, a comprehensive consumer education campaign prior to the introduction of retail access. We further recommend that electrical supply contracts or agreements with retailers, brokers or marketers being signed today in anticipation of a competitive marketplace be declared null and void. This will offer some protection to consumers from disreputable marketers who make misleading statements and promises.
That concludes my comments today. Again, we thank you for this opportunity to provide input to the legislative process of improving the electricity industry in Ontario. We urge our elected representatives to remember that the final, best test of the legislation's effectiveness is in its ability to improve the services and service levels for all its constituents.
The Vice-Chair: Thank you very much. We have seven minutes, beginning with the third party.
Mr Lessard: You mention an issue that I think we have heard addressed on previous occasions, and that is with respect to municipalities currently being served by Ontario Hydro. You also mention the loss of local jobs as a result of that and an inability to form corporations to distribute electricity in those areas that Ontario Hydro serves. Can you elaborate a little bit on what you see the barriers being and what in the legislation we might be able to amend to address that?
Ms Cochrane: Our reading of the legislation as it is right now is that no new utilities can be formed to distribute power. That is the basis of our recommendation that there be some mechanism in the legislation to allow for that, because a lot of northern Ontario obviously is serviced by Ontario Hydro and there have certainly been decreases in the levels of service they're receiving, but they have no other recourse under the legislation right now.
Mr Lessard: Can you think of any reason that the legislation may be set up this way? Why is it that they would restrict the ability to establish new municipal electric utilities?
Ms Cochrane: I have no idea why it was set up that way. Sorry.
Mr Henri Robillard: Capreol is a small utility about 20 kilometres north of Sudbury. We presently are partnering with Sudbury in the telecommunications end of it, in a business. We're scheduled to start construction in September. Valley East is a municipality that is serviced by Ontario Hydro. It's between Sudbury and Capreol. Valley East looks at Capreol with envy because we have a municipal utility. They would like to have their utility expand to provide these services. What we're providing for Capreol will not come to Valley East until into the future. They wouldn't come to Capreol either, because we're that much farther out. It's the same with municipalities that are located -- Marathon. If they were allowed to set up utilities to provide telecommunications services -- which the legislation is going to do for us. It's allowing us to expand into these markets, but not in Valley East, so we would like that aspect of the legislation changed.
Mr Lessard: I agree with you that the current time frame is short and that we must exercise caution when we're going through this exercise and be prudent. You refer, in giving that advice to us, to problems in other jurisdictions. I wonder if you could be more specific and elaborate on problems that you may be aware of in other jurisdictions that cause you to say that.
Ms Cochrane: What I was thinking of in that comment was mainly of California, I guess, which has just tried to roll out retail access. From what I've read, it's a lot more difficult and complicated than they envisioned, I think, when they said, "January 1 everybody can decide whom they get their electricity from." That was the jurisdiction I had in mind.
Mr Lessard: I've been finding, in my exposure to these committee hearings, that it's a fairly complicated issue to deal with as well. At the end of the day, notwithstanding that complication, the government continues to assure us that rates will go down for all consumers. I don't know whether that has happened in California or not, but they say to us that's the assurance. We're asking them to put that assurance in the legislation. Do you think that would be a good idea?
Ms Cochrane: I think this whole exercise is a leap of faith for all of us. I'm certainly not trying to say we shouldn't do it. We applaud the government for introducing this legislation and certainly introducing competition, which is the main thing that will drive lower rates, if we can get more competition on the generation side, because that is the bulk of where the cost comes from. I think the whole process is good. It's just a matter of for some utilities and for some businesses the time line is a bit tight, not for all.
Mr Gilchrist: I appreciate your bringing your perspective to us here today. I guess there are a number of different points that you touch upon in your presentation. The most compelling one, though, is that the overall tone from the MEA and the MEUs seems to be that it's appropriate to call for a faster breakup of Hydro to increase competition for your suppliers, but to go slower to bring competition to your customers. I think that's a contradiction we're having a tough time wrestling with.
I'm intrigued as I look at the numbers in your own report here. We have 20 MEUs in your district here. The total population is well under the population of the old city of Scarborough. Scarborough, of course, is now part of the city of Toronto, with 2.4 million people. You would think that even before this further integration, the MEUs would be able to come before us and say, "Hydro, with all of its costs, having to get to the most remote parts of Ontario, because nobody wanted those really distant retail customers, should have the highest possible costs."
But when you look at the chart that Mr Baird keeps showing, Toronto, for both retail and commercial customers -- let me give you a couple of quick examples. If you're buying 50,000 kilowatt hours per month and you're a commercial customer in Toronto, you pay $2,789. If you buy the same thing from Hydro, it's $2,315. Similarly, $92.30 is the average residential bill for 1,000 kilowatt hours a month. It's $85.50 for Hydro, almost 10% less.
We certainly are not unsympathetic to your perspective that greater competition in suppliers might be a worthy goal, but we think it has been accomplished already by simply allowing access to anyone who wants in there.
On the flip side, though, if we were to follow your suggestion and delay the implementation of greater competition, greater access for other companies to come in and bid against the PUCs, clearly we wouldn't achieve that.
Let me just give you a couple of quotes and I'll invite your comments in response.
"Each day that we delay opening the electricity marketplace to competition robs consumers and businesses of $200 million." That came from Tim Burns, the chairman of a large consumer choice group in the United States. Divide that by 10, and $20 million a day would be analogous here in Ontario.
We also have, I think even more compelling, a compendium of all the reports that have been done for the MEAs themselves and Ontario Hydro.
I mentioned it earlier today, but just to be fair let me draw it to your attention again: A study prepared by Adonis Yatchew for the MEA in 1996 indicated that they believed there would be savings. Another study for Ontario and the MEA, a joint study into retail electricity service in Ontario in 1994, also concluded there would be savings.
The bottom line is that all the reports, if you put them all together, show a saving of $212 million if we move quickly to consumer and supplier competition. Is $212 million not a worthy goal for opening up quickly the marketplace for customers?
Ms Cochrane: Where do I start?
Mr Gilchrist: Start with the end first, perhaps. Is a $212-million saving for consumers something that --
Ms Cochrane: Nobody here is arguing against reducing costs. That is the bottom line for all of us. But I think you have to recognize that the bulk of the cost of electricity is on the generation side. It's not in the distribution. The MEUs feel that we give our customers good service. They like us. When you say that for the population of northern Ontario we have 20 MEUs --
Mr Gilchrist: No, in your district, northeastern.
Ms Cochrane: In northeastern, sorry, they were chosen locally. The local people chose to have that structure. Some of them chose not to. Timmins does not have a local utility. It was a decision made by the people.
Mr Gilchrist: Let me just touch on Timmins quickly. Another one of your points is that there's disappointment that this bill would turn off the ability for municipalities that never made that local choice. They've had 93 years to do it. Now that they see an opportunity to get in under the wire and get something at book value instead of market value, all of a sudden there's this confusion or consternation. Would you not agree with me that every time Hydro sells an asset for less than market value, you're going to increase the stranded debt?
Ms Cochrane: I don't think anybody was saying that if a new area, say Valley East, wanted to form their own utility -- would they not be expected to purchase those with the part of the debt that would be --
Mr Gilchrist: No, I guess I'm asking you now, because the bill anticipates that Hydro will swap, sell, partner, do something with many of its assets, why we would not want to recognize what those assets are really worth, not the artificial price that's carried on the books. Every one of us who's been in business knows that over the years with depreciation there is a book value. That has not necessarily any point of reference with its real value, its ability to produce money. So why would we want to let any municipality or anyone else buy something for a penny less than its true value and thereby increase the debt?
Ms Cochrane: I think they would. They would pay whatever the reasonable cost is for that asset.
Mr Gilchrist: I appreciate your candour, because that hasn't been the position taken by the MEA in other presentations, but I would applaud you for recognizing that. When we come back to the number, what should that number be? If I were the northeast group, your district here, or the northwest group, which has only 40,000 Hydro customers in all of northwestern Ontario -- if Hydro says, "I want X dollars to buy it," for you to buy it from them, I'd turn around and say: "Fine. Then obviously it's appropriate that you'd sell me yours for the same dollars."
Wouldn't that be the litmus test on whether it's a fair price? If you believe that integrating all 20 of your MEUs would provide greater economies of scale, greater competition to Hydro, would you not be well advised to pay those dollars, merge your MEAs and go ahead against Hydro head to head?
The Vice-Chair: Thank you, Mr Gilchrist.
Mr Gilchrist: Couldn't we just get them to say yes or no?
The Vice-Chair: Thank you, Mr Gilchrist. Mr Phillips. If he chooses to answer the question in his next -- it's up to him.
Mr Robillard: The only concern we have is that the ratepayers of the Ontario Hydro utilities have paid higher rates for ever and ever. They've retired a great portion of the debt. Now they are going to buy this system. They've retired a lot of this and now they're going to buy it for more than it's worth to them. You buy that car, pay for it for five years, it's worth $5,000 and now he wants to sell it to me for $10,000. Why should I pay $10,000?
Mr Robillard: That's right.
Mr Gilchrist: So it should be your choice.
Mr Robillard: The people of the municipality should have the choice of buying it at book value.
Mr Gilchrist: I'd like --
The Vice-Chair: Mr Gilchrist, I've allowed the question to be answered. That's sufficient. Mr Phillips.
Mr Phillips: We hear enough from Mr Gilchrist daily, so I'd like to give the witnesses a chance to talk.
Your concern on the generation side: I just want to get some feeling from you of your concern about the legislation on the Genco side. You're suggesting here that we should be putting more focus in the bill on making some changes in the generation side. Any advice for us on that?
Mr Robillard: It seems to me that we want more openness as far as Genco goes. In Capreol we have two generators that we're in talks with. There's one in Sudbury, it's a district heating plant. These are the things that are going to provide lower rates for us. We'll have the choice to buy -- we have a hydroelectric generator proposing to build a plant. We have cogen proposing to go in Capreol. They're going to provide us the choice. We can buy from them or we can buy from Ontario Hydro as long as we have that choice in the legislation.
Mr Phillips: Your feeling is that the legislation doesn't provide the flexibility that you want?
Mr Robillard: Ontario Hydro is big. We see these rates, $85.50, their chrome-plated rate, and it's provided to municipalities that were interested in buying the system, so they came up with this rate so that now it's not feasible. They forget to tell the rest of the municipalities that they're paying more. They are the big boys on the block, they do what they want and we're asking for them to have less power.
Mr Phillips: This is an observation on my part: One of my problems is the way Hydro reports its numbers. I have difficulty in understanding Hydro's numbers. In the 1997 annual report, I see they wrote off $340 million of tree trimming and interest costs that were going to be incurred in 1998-99 against 1997 costs. It's just that the comparison that one of the Conservative members made on rates -- it's very difficult now, with the way Hydro is reporting its numbers, to draw comparisons of their costs versus your costs. But my colleague here --
Mr Conway: I just have a question about the whole debate about the value of the asset, the book value or some other kind of value. I'm concerned about that, but I'm also concerned about a story that I heard from one of my colleagues here in northern Ontario. Mr Brown, the member for Algoma-Manitoulin, was quite upset about problems involving Ontario Hydro recently. He was saying that it was reported to him by authoritative sources very close to Ontario Hydro that a complete outage, that I think shut off the power for most of Manitoulin, was caused by some crossbar just rotting and falling down at a very inappropriate and inopportune time that took the whole system down. To the best of your knowledge, what kind of shape is the distribution system that Ontario Hydro retail has in this part of midnorthern Ontario like?
Mr Robillard: The distribution system has been let go. Our feeling is that it has been to the benefit of making them look better. I was in Killarney last weekend when this happened. We were out of power for twelve and a half hours.
Mr Conway: What? Twelve and a half hours?
Mr Robillard: Maybe it should have been out twelve and a half hours. Maybe that was a very remote location; I don't know. I don't know where it was. From what I've seen and the experience I have in valleys where the distribution system is not --
Mr Conway: But what kind of an investment is it going to take, from whatever owner, to bring it up to some kind of more acceptable standard? Presumably that's going to cost money. I'm a ratepayer and I expect that I'll have to have that taken out of my hide in rates.
Mr Robillard: The problem is -- I don't really know what the investment is -- once the legislation is passed, if Ontario Hydro, Servco, becomes the utility, who cares what happens?
Mr Conway: I care.
Mr Robillard: That's right. So do I. But who's going to change it? You're not going to get it back to us, to the municipal utilities, to local control.
Mr Conway: But your assessment is that much of the grid is in bad shape in this part of midnorthern Ontario?
Mr Robillard: It certainly needs work.
The Vice-Chair: Thank you very much for your presentation. We have a point of clarification, I believe.
Mrs Johns: You certainly do. I just wanted to clarify, as a result of my experience in accounting, that when an event happens, you usually accrue the cost associated with that event in the period where the event happened, so it would not be unusual to accrue the costs associated with the ice storm in the year that the ice storm happened. I would be happy to get an accounting opinion on that, if Mr Phillips feels that's an improper accounting process.
Mr Phillips: I would appreciate your getting that. Perhaps you will file that with the committee, then?
Mrs Johns: Yes. That would be great.
Mr Phillips: The increased frequency of tree trimming in the distribution system; interest costs --
Mrs Johns: Related to the ice storm.
Mr Phillips: -- the replacement energy. I will look forward to that.
The Vice-Chair: I would like to call at this time the Toronto Stock Exchange, David Rudd. I don't believe he's here yet. The 15-minute cushion I've been working at building up all day has just been shot down. We'll wait until 5 o'clock. At 5:01 we will adjourn if we don't have a presenter.
The committee recessed from 1644 to 1658.
TORONTO FUTURES EXCHANGE
The Acting Chair (Mr Doug Galt): We'll reconvene the committee. It's almost 5 o'clock. The Chair will be back in just a few minutes.
I call the delegation representing the Toronto Stock Exchange. Please come forward and take a seat. Greetings.
Mr David Rudd: My name is David Rudd. I'm a member of the board of governors of the Toronto Futures Exchange and senior vice-president of Refco Futures (Canada). I'm here on behalf of the Toronto Futures Exchange to talk about their interest in establishing an electricity futures contract in Toronto.
I want to talk very briefly about the issue, first, of fiduciary and agency trading. Futures, as you may know, are an agency type of transaction where every broker acts in a very fiduciary area, a very fiduciary responsibility. They have a legal obligation to their client to do the best they can for them. I've got to contrast that with essentially principal trading where in a sense the relationship between the customer and the person who's transacting is essentially adversarial. The futures contract and the futures exchange and futures regulation are very adamant about this fiduciary, legal responsibility between broker and customer.
All the futures transactions, as you probably know, take place in a very public forum and where there is a continuous public bid and offer. There is some comfort by clients and by people who use the futures exchange that they're obviously getting the prevailing market rate to hedge their energy risk.
I have a couple of points I want to make, if I can sort of leave you with some bullet points. We do have a written presentation, but I'll digress a little bit. The first one is that I believe in the next three or four years electricity futures will be by far the largest and most active commodity futures contract in the world. After the cost of money, the next thing corporations spend most of their income on is the cost of energy. Although some of that cost will go to things like gas and oil, there's no doubt that the cost of electricity is a huge component of the Ontario economy.
One thing we want to pay attention to is the fact, for those of you who don't know, that the primary role of futures themselves, when all is said and done, is to provide stability in prices, whether it be electricity prices or anything else. It's the preferred vehicle that knowledgeable hedgers use both to determine the price in the marketplace and to lock in and hedge commodity prices or electricity prices.
We're very interested in the fact that there is a tremendous growth and interest in electricity futures. We believe, as I said, that in the next three or four years it'll be a very dominant part of our futures industry. Futures, if many of you don't know, have a credit quality that's much different than is normally perceived. Typically, futures are thought of in terms of people going bust and making millions every day. They may or may not make money, but the dynamics are that the futures contract and the futures exchanges have a credit quality that is just as high as sovereign debt. In recorded history, in the last 80 years in North America, there has never been a default on a futures exchange.
I think that's very significant, particularly when we look at what's going on recently in the United States electricity markets, in those just developing electricity markets, where we're already running into significant credit defaults.
The fact is that it is rated highly and there are structures in place to ensure that there can't be defaults or if the customer does default the broker is then liable, so the broker obviously does everything the broker can to ensure that the customer meets his obligations. But those issues really mean that the ratings agencies give futures a very high rating.
One of the unique things about futures is that they are accessible to all who wish to participate. It's not a closed shop. All one has to do is have an interest and have essentially a performance bond in place and they can participate. If they wish, they can also actually participate right down to the point of view of taking power or delivering power or delivering wheat or taking wheat, but to participate in the price action you don't have to be part of an inside club. The fact that futures can open themselves up to all participants to my mind means you get an obviously very transparent process, but you get a very dynamic-type price, because everybody who has an opinion can participate. One of the issues in some over-the-counter markets is that that's really great, I mean it's a nice price, but nobody actually can participate. There's a club of eight, 10 or 12 people and that's the group.
In Ontario we need to ensure that the price of power is discovered in this public marketplace and discovered in a fashion that all people at the end of the day can say: "Yes, that's where the price was. I had an opportunity. If I thought it was too high, I had an opportunity to sell it. If I thought it was too low, I had an opportunity to buy it." So everybody is quite comfortable with the fact that it's the price. From a futures perspective, we can also say -- there's a little phrase -- we like to discover price in the marketplace rather than in the boardroom of the dominant market player.
In summary, this market transparency that I think is crucial to coming up with an exact price or the true price, the superior credit that futures have by virtue of some of the mechanics that are in place, and a public, unbiased price where all can participate to my mind make futures an ideal vehicle to hedge and price risk. We are certainly going to need a vehicle whereby corporates and users can take longer-term decisions and hedge price risk out into the future. I don't know much about public policy, but it seems to me that if you've got superior credit, transparent price and a level playing field where all can participate, I think that lines up with public policy very clearly.
The other issue we're interested in is that all the futures exchanges, whether it be NYMEX or exchanges in Europe, are looking to add more in electricity contracts. We have an exchange in Minneapolis that is about to list an electricity futures contract for power in the Minnesota area. I expect that before this market is mature we may have as many as 10 different futures contracts around America, and several of them will be on borders of Canadian provinces.
The fact that these products will be there and price, transfer and risk vehicles will be available at the doorsteps of provinces means, I think, that there is a real danger that we won't have a made-in-Ontario price and we may not benefit from the deregulation and all the effort and agony that everybody is going through to try and get a competitive market here. I really believe that this made-in-Ontario price can be of real benefit to Ontario. If we are building a better mousetrap here, we can benefit from that liquidity. We can benefit from what the futures market can bring. Let us bring as many players to the table as possible in an open, public and transparent process.
The other thing that's kind of interesting is that in a futures contract, as you know, since it's so open, prices get transmitted around the world immediately to traders in all corners of the globe and they all can participate. You don't have to be technically a buyer or seller of physical power to have an opinion on price. The one thing about futures, as I said, is that it broadcasts this information around the world. I think it can also, from a public policy viewpoint, say Ontario is open for business. If you have an opinion on price and you want to hedge your power, if you're in Munich and you want to hedge Ontario power, here is the vehicle to do it. You don't have to be in the club.
As you may know, some time ago, the Toronto Futures Exchange sent a letter to the Market Design Committee expressing interest in pursuing and looking more closely at the concept of an electricity futures market. That happened in March, and obviously the Market Design Committee was looking at other things at the time. We have since had another conversation with them. In the meantime, a loose coalition was formed of some users, some financial interests, some non-Canadian generators; Ontario is probably the largest energy consumer. This coalition met a few times and there was unanimity in that coalition that futures would be a fantastic thing for Ontario to have, that a viable, public, transparent electricity futures contract would be a good thing. We eventually ended up calling the association the Ontario Electricity Futures Coalition, and the object of that group is really to educate, as it were, and promote the concept of electricity futures in Ontario.
They were supported in this by the IMO. Some representatives of the IMO have participated in a couple of meetings, because I think they realize quite clearly that one needs to have an instrument that is both sound from a credit viewpoint and can provide some forward price stability for those customers that want a hedge in the open marketplace. We've had some discussions about different vehicles and different possibilities, and if a futures contract were to come about, what are some of the attributes of that contract.
It's our sense that in a traditional market you typically have a futures trading pit where you have, if you can imagine, 20 people or 500 people selling to each other. I have a picture of one of those pits in this little brochure, near the back. It's our view that that's a very inflexible type of approach to trade futures. Most futures exchanges are moving to an electronic mechanism where all customers have keyboards essentially, see where all the bids and offers are and trade very actively. All the exchanges are going that way. It's interesting that the Toronto Futures Exchange is quite far along that electronic road. To us, it's the ideal platform to deliver pricing both to customers and traders and to allow them to participate.
We have an interest, if this were to come about, in working somehow with the IMO to deliver as much information -- I say "information" as opposed to "data" -- on price, on bid, on offer, on size to the customer, whether it be a user, a producer or whoever, so they can make an informed decision.
In this little package I have here, there are a few pages that discuss -- essentially it's some old slides. By the way, thank you very much for inviting us here. We didn't really get a chance to put together too much, but it basically talks about the futures exchange from the point of view that it really steps in the middle. Bilateral contracts between two individuals meant both had to assume some credit risk. Now those two individuals don't have to assume that risk with each other; the exchange takes it on. The exchange essentially guarantees the performance of both parties.
At the end -- I guess it would be a few pages along -- we show a couple of examples of how we would see a futures contract working, how it would be designed and how it really could benefit the user much more than many futures contracts do now. In my opinion -- and I've been in this business about 20 years, hedging with Canadian corporations and global investors -- the major financial institutions use futures because they appreciate the credit issues and the price discovery issues, but to my mind the smaller corporations don't use them primarily because they don't understand them and they find the pricing, for whatever reason, difficult to comprehend.
I think it's vital for a successful contract in Ontario that it be very closely linked to the cash market. Using an electronic trading platform, we're really able to provide a fascinating look for users and producers so they can easily see what their exposure is and easily see how to hedge their risk.
If one were to say that futures are a good thing, I would certainly agree. The problem we see at the moment is that no one is going to launch a contract, obviously, where we have a dominant market player. The UK, for instance, has been deregulating electricity for almost eight years and they still don't have a futures contract. And you know what? They're not going to have one. It's only because no one would be foolish enough to advocate a futures contract where there are one or two generators that essentially can act somewhat in concert and they both have the same sort of load profile.
I suspect, if it's done correctly, that it's possible to have a futures contract in Ontario even though one might on paper have a dominant market player, if the Market Design Committee and the various groups do their bit to ensure that there's some of that power generation that's at market risk, as it were. We don't really feel there has to be a wholesale dismantling of the current generation arrangements as long as the dominant power can somehow be mitigated, or at least part of it can.
That's about all I really have to say. I didn't want to run you through the slides, necessarily, but they're background material. At the back there is an article we wrote for Canadian Investment Review. This is more for laymen in the investment business who really hadn't looked at electricity, just laying out some of the issues with respect to electricity trading. It's amazing how quickly there is interest developing in trading in price-risk management.
Our interest, if we can get more direct and move to the legislative issue, is to have some wording in Bill 35 that would encourage the establishment of an electricity futures contract in Ontario for the benefit of Ontarians, and to formalize the procedure for the IMO to investigate the use of futures for price-risk management for the benefit of Ontario citizens and corporations.
That's basically it. I want to thank you for your time. I'm sorry I was held up, but they were actually blasting on Highway 64 and our cab was held up for about half an hour. I thought no one would be here, so it's fascinating.
Mrs Johns: Thank you very much for your presentation. It was interesting although probably somewhat above our heads.
Mr Conway: Speak for yourself.
Mrs Johns: I read your article a number of months ago when it appeared in a magazine. I want to ask you a couple of questions about this. First of all, we've heard a lot of discussion during our time on committee, mostly from municipal electric utilities, saying that price volatility is going to be an issue that's going to affect the retail consumer. They're concerned for the retail consumer, as we all are. By going into the futures market, will we be able to control some of the volatility that they say we're going to experience in the electricity market?
Mr Rudd: Futures provide price stability, there's no doubt about that. It's been proven. What it does is it allows everybody who has an interest in the price to participate. If we can go back to the electricity example of this summer in the United States, power really spiked, as you all know, in the US because of a credit default. People said, "Jeepers, if I'd known the price was there, I would have sold some." Well, the answer is, "You didn't; it was a private deal." The price ran up so quickly, no one could respond. People always knew after the fact. It was, "Hey, Dave, did you know two days ago that power got up to $7,000 a megawatt?" That's too late. That's old news.
What a futures market would do is bring price movement to everybody who has an interest in selling into that marketplace, for instance. There are many people who, with prices at $150 a megawatt, would shut down their plant, sell the power back, give everybody a cash bonus and they'd take the summer off. That's what you need. You need as public an information forum as possible. Any vehicle that can provide that, to my mind, is just going to be a tremendous benefit to reducing volatility.
Of course, what futures also bring is the fact that there's a vehicle whereby people can hedge their price risk. You won't get these panicky buyers in the spot market because they will have hedged.
Mrs Johns: You talked about an over-the-counter market versus the Toronto Stock Exchange. For many of us who deal in the stock market, we've dealt in over-the-counters such as NASDAQ or, worse yet maybe, some other ones, versus the Toronto Stock Exchange. What would be the advantage to us deciding on a market such as the Toronto Stock Exchange versus one of the central clearing mechanisms that might not be an exchange?
Mr Rudd: It is definitely different than a stock exchange. The Toronto Futures Exchange is owned by the Toronto Stock Exchange but it definitely operates under a different set of rules.
What would be the difference in an over-the-counter market? Public, regulated certainly, a high credit quality. This is one of the issues that's confounding everybody at the moment: Who is going to be responsible if something happens? In the futures exchange, each dealer guarantees each other dealer. If the Toronto Futures Exchange has members like, say, Dominion Securities and the Royal Bank or Joe Blow, they all have to guarantee each other in the marketplace. In essence, I think the credit quality is a huge issue. That's really what happened in the United States. The funny thing about credit quality is that you don't need it until you can't get it. So we have to make sure that we don't denigrate this whole issue of credit, because it's what causes every blow-up. We really have to have vehicles in place.
What vehicle is in place? To my mind there is only one, and that's where every party will guarantee these transactions, and futures are one. It's linked up that way and it's been successful for so long because they put that structure in place that everybody had to have common rules. What often happens in the over-the-counter market is that people start to degrade their credit quality to get the business. I might go to you if I'm a client and you'd say, "I don't like your credit, Dave Inc." I'll go to the next one and the next one, and someone will say, "OK, I'll take it."
Mr Conway: Thank you very much, Mr Rudd. I really appreciate the verve with which you have made this presentation, given the stresses under which you had to get here. I must tell you, I feel like I've just followed the Roman Curia down a fascinating Byzantine walk through Aquinian theology.
The Vice-Chair: Pardon me?
Mr Conway: It is. The only thing I know about futures -- I saw a movie once about pork belly futures where some innocent fellow came to an unhappy end. I think it was a movie.
Interjection: A pig.
Mr Conway: A pig. But it's a wonderful world in which we live and you really seem to know this stuff. I take it that what you were saying is that the absence of a futures market for electricity exacerbated that problem in the United States last month. Is that basically your take on what happened in the US, where the spot price went berserk? Had there been a futures market for electricity, might that have been less problematic?
Mr Rudd: It certainly wouldn't have made it any worse. I don't want to go --
Mr Conway: Would it have made it any better?
Mr Rudd: Probably.
Mr Conway: The second and final question: I'm struck by what you said about Britain. We have a report from the Market Design Committee and they tell us that in Britain the regulator -- not just the regulator, but the regulator apparently retained some analyst to look at the behaviour of National Power and PowerGen, and seven years after the deregulation began, according to the Market Design Committee report of last month, the firm of Brealey and Lapuerta "found evidence of persistent market manipulation" by the two big players, and you basically confirmed that.
Mr Rudd: I don't have personal evidence but I have anecdotal evidence from people at the scene, absolutely.
Mr Conway: We're going to begin the competitive market in Ontario with Genco having at least as much market power as National Power and PowerGen had in the period of time. So what I don't understand is, you wouldn't recommend an electricity futures market for Britain because of the market dominance of those two players, but you would recommend one for Ontario. It seems to me as a layperson that that doesn't quite stand up, but I'm sure it does.
Mr Rudd: One of the unique things about Britain and the reason there really has been no development in the derivative market -- if I can call it that, but the forwards market -- is that one can't sell back into the system in the same way that we would hope that one could in Canada. One can't sell power back to the system at a market price. For instance, I gather that if you are a broker or a trader or a generator, you can't sell into the system. There are only two bidders in this bid system, and the two bidders to supply power are National Power and PowerGen. Why can't there be 50 other people that can supply power, can bid in or can sell physical power? That's one of the issues. It's really a one-way street in England. Essentially, since they both know their own load curves, basically, and the nuclear side from British Energy has a completely different load curve, there's no mystery to it.
Even though there are two players there, Ontario probably has -- with what little we have of, say, Canadian Niagara Mohawk and a few others and a couple of the NUGs, we probably have more market risk or more dynamic trading, in many respects almost, already. But clearly, in the design of any contract, it's got to be very important for people to be able to sell back into the system. That's very important.
Mr Lessard: You're right, this is a very fascinating area. I come from Windsor, the home of the Windsor casino. I don't go there because I'm not much of a gambler. But consider that we accept your ideas and it's a couple of years from now and my wife and I are looking at the electricity bill and we think, "Gee, we might be able to get a better deal on our own." Is this an opportunity for us to try to get lower rates at our own household, to become involved in the futures electricity market?
Mr Rudd: I really don't think so. It's not the kind of issue that would really be a consumer-oriented product. At the same time, the dynamics of futures are that they provide a vehicle by which, if you have an opinion on electricity and you meet certain credit qualifications, you can participate to some extent in its price movement, as futures have always been for a hundred years.
Mr Lessard: So for residential consumers, if there's a benefit to be derived, it's going to be indirect at best.
Mr Rudd: It would certainly be indirect. I would think you'd have to be one pretty nimble and creditworthy residential consumer with a lot of load to actually get in there.
One thing that's important to futures and how this committee and the legislation will come to a determination that they've got a successful competitive marketplace is very simple: When you and I drive down the road and we see the price of gas at 55 cents, that's a good deal; 60 cents, maybe not so; 65, don't want it. We make decisions every day about price. As a matter of fact, if you really sit back and think about it, that's all we do all day long, value our time and our effort: this computer versus that computer; that rug versus this rug etc. We have an innate ability to assess what's a good deal. We can't do that in electricity. Maybe you folks can here. I can't tell people what I'm paying per kilowatt-hour. I don't know how to access a better deal; I don't know how to get a worse deal. Some of the very large corporations are able to maybe do some browbeating and get a better deal.
The next time you're at a backyard barbecue and your two neighbours say, "Wayne, I got 6.7 cents," and another one says, "Yeah, but I got 6.65," you'll know you've got a successful contract, because you have a lot of bidders, a lot of sellers and you've got a real market.
Mr Lessard: You're talking about what is essentially a new industry and you're anticipating it to be a large industry. To sustain that industry, there's going to be a cost associated with it as well. Although it may be one mechanism to determine the market price of hydro, there is a cost associated with determining that price through this system.
Mr Rudd: Can you expand on that? What is the cost -- I'm not quite sure.
Mr Lessard: What's the cost of establishing the futures trading market? There must be some --
Mr Rudd: It's really minimal. It's an electronic trading platform. It's a few hundred computers. If I can give you an example from the Montreal futures exchange, which has a very viable futures contract, on a daily basis Montreal trades about -- yesterday they traded about $60 billion worth of three-month money. The Montreal exchange has in total about 150 employees between the exchange and the various members. They provide a tremendous service for price discovery on interest rates in Canada, and a lot of that discovery and a lot of the effort they undertake is on behalf of non-Canadian investors. So relative to the amount that's traded, it's not even noticeable, it really isn't.
Don't forget, all they're taking out is a commission, and the commission on futures is very low. Very few people are offering any special deals, because we're all going to the same place; we're all going to the marketplace. So it doesn't take very long until commissions, if they're high, begin to collapse, because everybody's offering the same product. You're offering a product that is a high credit rating, where price is in the public realm, so what can I add over and above the next eight people? We have to compete on price.
The Vice-Chair: Thank you very much. You've elicited a great amount of interest and intrigue.
Mr Conway: I bet this guy came first in his class, too.
Mr Rudd: No.
Mr Conway: It was very good.
The Vice-Chair: If he didn't, he probably bet about whether he was going to get an 80 or a 70.
These meetings are adjourned until tomorrow morning at 9 o'clock in room 151. That's Friday the 14th.
The committee adjourned at 1730.