Friday 14 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
Canadian Association of Energy Service Companies
Mr Alan Levy
Enron Capital and Trade Resources Canada Corp
Mr Richard Shapiro
Ontario Natural Gas Association
Mr Paul Pinnington
Mr Bernie Jones
Mr Rudy Riedl
Mr Brian Cappe
Mr Fred Hassan
Stakeholders' Alliance for Electricity Competition and Customer Choice
Mr Dave McFadden
Green Energy Coalition
Ms Christine Elwell
Mr Greg Allen
Mr Ken Ogilvie
Mr Peter Love
Mr Joe Castrilli
Mr Andrew Frame
CUPE Local 1
Mr Bruno Silano
Consumers' Association of Canada
Dr Peter Dyne
Mr Robert Warren
Toronto Hydro-Electric Commission
Mr Mark Anshan
Society of Ontario Hydro Professional and Administrative Employees
Mr John Wilson
Ms Leslie Forge
Ms Shirley Roburn
Mr Scott Moore
Bennett, Jones, Verchere
Mr Peter Budd
STANDING COMMITTEE ON RESOURCES DEVELOPMENT
Chair / Présidente
Mrs Brenda Elliott (Guelph PC)
Vice-Chair / Vice-Président
Mr Peter L. Preston (Brant-Haldimand PC)
Mr David Christopherson (Hamilton Centre / -Centre ND)
Mr Ted Chudleigh (Halton North / -Nord PC)
Mr Sean G. Conway (Renfrew North / -Nord L)
Mrs Brenda Elliott (Guelph PC)
Mr Doug Galt (Northumberland PC)
Mr John Hastings (Etobicoke-Rexdale PC)
Mr Pat Hoy (Essex-Kent L)
Mr Bart Maves (Niagara Falls PC)
Mr Peter L. Preston (Brant-Haldimand PC)
Substitutions / Membres remplaçants
Mr John R. Baird (Nepean PC)
Mr Steve Gilchrist (Scarborough East / -Est PC)
Mrs Helen Johns (Huron PC)
Mr Gerry Phillips (Scarborough-Agincourt L)
Mr Wayne Lessard (Windsor-Riverside ND)
Clerk / Greffière
Ms Donna Bryce
Staff / Personnel
Mr Lewis Yeager, research officer, Legislative Research Service
The committee met at 0900 in room 151.
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.
CANADIAN ASSOCIATION OF ENERGY SERVICE COMPANIES
The Chair (Mrs Brenda Elliott): Good morning, everyone. I call to order the standing committee on resources development for the purposes of hearing presentations on Bill 35.
Our first presenters this morning back in Toronto are from the Canadian Association of Energy Service Companies, Mr Levy. Will you please come forward. Good morning and welcome. Make yourself comfortable. If you'd like to formally introduce yourself for the Hansard record, you have 30 minutes for presentation time. You may use all of that time for presentation, but we always prefer if you leave some time for questions. Please begin.
Mr Alan Levy: My name is Alan Levy. I'm president of the Canadian Association of Energy Service Companies. What I propose to do, unless the Chair feels otherwise, is briefly go through an executive summary, which I believe you should all have a copy of in front of you, and then perhaps just walk you quickly through the body of our presentation and leave enough time, as you suggested, for questions.
The Canadian Association of Energy Service Companies, or CAESCO, represents a broad cross-section of businesses and organizations whose mission is energy efficiency. We have over 100 members, and 13 of our members are what we call energy service companies -- I'll explain that in a moment -- and we've been around for 10 years.
Energy service companies are somewhat unique in the energy efficiency business in that they guarantee their savings performance, they arrange all the financing, all the engineering, all the construction to complete an energy efficiency project and get paid out of the savings. No savings, they don't get any money.
In Canada we are regarded as the world leaders in the ESCO business. Member companies are responsible for investments of over $1 billion to date since we've been in business, since about the early 1980s. As I've mentioned here, we believe, the federal government believes and other governments believe that we do play and will continue to play a prominent role in Canada's Kyoto targets and, indeed, as discovered in preparation for this presentation, the Ontario government's targets for energy efficiency cost savings.
In general we support Bill 35, but we do respectfully offer some caution on the impact of the bill and the changes that will occur on energy efficiency. In particular, while none of us, I understand, quite knows now how the stranded debt will play its way into the marketplace, we urge the government to be cautious, when that decision is being discussed, in making sure there is no discrimination against energy efficiency.
We also are concerned with the issue of the market power of the Ontario Hydro companies and some of the larger distribution companies as they move into competitive markets. We welcome them in those competitive markets, but let's make it competition and not, as we use the phrase, the elephant rolling over and crushing the smaller private sector companies.
We also raise the issue, which is a very strong issue in the United States and elsewhere where deregulation has occurred, of cross-subsidization between regulated and non-regulated utility affiliates. The California Public Utility Commission estimates that cross-subsidization is approaching over $100 million a year at present in that state alone, and they estimate $2 billion a year in the United States. What I'm talking about there is sharing of customer data between regulated and non-regulated companies, transfer of employees and employee benefits, using the financial capacity of the regulated affiliate to secure better financing terms for the non-regulated affiliate, shared logos and trademarks, bill inserts and preferential referrals.
The last thing I want to mention in terms of the issues is the distribution utilities. We haven't seen any discussion in Bill 35, or indeed at the Market Design Committee, about what services of the distribution companies, other than purely managing the wires, will be open to competition and contested. For example, there are certain services they provide in maintaining and servicing transformers. Some of that work is presently contracted out to the private sector, some is carried out internally within the regulated distribution utilities. We think there needs to be a discussion, in terms of what's the best value to the customer, of what stays in the regulated utility and what should be taken outside.
Like the Market Design Committee, we are not in favour of a non-bypassable systems benefit charge to fund DSM, ie, demand-side management, or energy efficiency.
We are concerned that the issues I've raised probably can't be dealt with promptly and effectively through a process such as interventions at an Ontario Energy Board hearing. It may be a case of too little too late. If you look at the bill, one of its major principles is to facilitate energy efficiency. The government is asking the OEB to act as a body to make sure that the government's policies in energy efficiency are enacted. We suspect that energy efficiency over time will move from the regulated utilities into the non-regulated, and therefore that could weaken the intent of the bill, for the government to use the OEB as an instrument for energy efficiency.
We have a proposal, which is that a stakeholder group with profile and authority, made up of private and public sector bodies working closely as an advisory group to the government -- perhaps like the Market Design Committee has done; I've just watched at a distance, but it seems to have done an effective job -- be a real-time monitor for the issues I've outlined to you today and advise the government of where there should be policy changes, where the OEB should act to correct market distortions. All this is related to energy efficiency. We believe, if you agree, that this should be formalized in Bill 35.
That's an overview. If you wish, I can quickly go through the points that I've raised in the body of the text, and I will just emphasize those which are most important.
Point 1: I want to make it clear that we represent a broad cross-section of businesses, governments and utilities involved in energy efficiency.
Point 3: Note that our intervention relates to something right at the start of the act, and that is, it says in clause 1(g) that a purpose of the act is "to facilitate energy efficiency and the use of cleaner, more environmentally benign energy sources in a manner consistent with the policies of the government of Ontario," and that's about it. Not a great deal is said after that about energy efficiency. Two key points there: What are the current policies of the government, and the next point is, is the OEB going to be an effective vehicle to facilitate energy efficiency?
Energy efficiency is important for this bill but it's important for Ontario, it's important for Canada and it's important for the world, because every world leader who speaks about Kyoto and global emissions talks about energy efficiency in buildings as, if you like, a no-brainer solution as a contribution to emission reductions. Energy efficiency creates jobs, makes businesses and organizations more competitive. I haven't heard one voice anywhere saying it isn't a good thing to do, so we're talking about an issue here of paramount social and economic importance to this country as well as to this province.
I have to say that our organization has enjoyed an excellent relationship with both the gas and electric utility companies. I mention that because I think that gives me confidence that we can work in a stakeholder group and effectively move forward.
I also wish to make the committee aware, in point 8 on page 3, that we have a robust energy efficiency industry here in Ontario and in Canada. Some of the largest energy efficiency projects in the world take place quite close to where we're sitting now. The city of Toronto has a very ambitious program called the better buildings program. The Toronto District School Board has embarked upon one of the largest energy efficiency projects in the world in the school buildings.
I move now to point 10 on page 4, and that is the recommendations of the Market Design Committee, because I think they impact your deliberations.
There were two recommendations concerning energy efficiency: 5.4 was a recommendation for demand-side bidding. Without going into the technicalities of that, that is a loaded phrase, "demand-side bidding," in our industry. I think what the Market Design Committee meant was enabling energy users to aggregate their demand and therefore sell to the utilities their ability to reduce their demand and therefore keep the cost of electricity down. We explain in the text there the other meaning of demand-side bidding, and we think there should be clarification of that.
The second recommendation we agree with in part. We agree with the Market Design Committee that there not be a non-bypassable systems benefits charge to fund an energy efficiency or demand-side management investment program, which somebody, presumably some government or quasi-government body, would then distribute into the marketplace. What the Market Design Committee does recommend is additional funds for the Ministry of Energy, Science and Technology, with particular emphasis on information and education. We urge caution with that. We think that's a good idea if those funds are used in close collaboration with the private sector.
In the past, government programs relating to energy efficiency have often been inconsistent and ephemeral, particularly when they get involved in a transaction that relates to an end user using less energy efficiency, either by virtue of financing or -- in other words, the government arranges a fund to help project financing or contributes an incentive fund for an energy investment study. I think they are well-meaning but, in our opinion, over the last 15 years, money not well spent.
I turn now to point 11 on page 4. The government has a 1998-99 business plan relating to energy efficiency. We believe all the recommendations that we make are entirely consistent and congruent with those policies and plans. Indeed, the government has put in their targets saving $230 million by the year 2000, and we believe our members alone will contribute 25% of that. So our recommendations in here, we believe, are consistent with the key parts of the government's existing policy, particularly partnerships with energy stakeholders.
Finally, I'll say something which may surprise you, but we don't want financial incentives in the marketplace. We've experienced them before. They distort the marketplace. They create fly-by-night companies that come in when the incentives are there and then disappear when they are removed. We argue strongly against financial incentives to bribe customers into energy efficiency. We believe there are economic investments to be made and we have to create a business climate where the marketplace can be allowed to function.
The Chair: Thank you. We have five minutes remaining for questioning from each caucus.
Mr Sean G. Conway (Renfrew North): Thank you, Mr Levy. Alan, I'd just like to put your very helpful testimony to a level of an average residential or small business customer. I think I understand a good bit of what you're telling us here in general terms. Explain to me how this policy has to work to deliver measurable retail benefits to a residential electricity customer living in North York or anywhere else, particularly from the point of view of the energy services sector that you know so well.
Mr Levy: When you refer to policy --
Mr Conway: You make a number of suggestions here that I think I understand in general terms. Your last point is very well taken, about laying off the financial incentives because you'll distort the marketplace. I just want you maybe to help me and the committee with a couple of specific examples of how this policy, if it works properly -- I understand clearly when you say, for example: "Stay away from the financial incentives. That will distort the marketplace."
Let me maybe help you a bit by saying that Hydro has told the committee this week that they plan to aggressively grow the retail company. I think that's a problem. I think it's a problem because in the past, with the very best of intentions and with strong support from government -- of more than one kind, I might add -- Hydro has, because it was so large and so cumbersome, in my view, tried with the best of intentions to get into this business with not very good results.
Let's take Servco, as you understand it. Is it going to be a problem if the retail company of Ontario Hydro grows aggressively, or am I wrong in that suspicion?
Mr Levy: I think there are two questions there. First, what does all this do for the residential customer and the small business owner? The second one is related to the potential market power of Ontario Hydro retail.
Let me answer the first one. I would say our industry in particular, the energy service industry, has been somewhat successful with the residential customer in multi-unit family dwellings -- not terribly successful, but somewhat.
You see, we're most successful and there are instances around the world where success in energy efficiency comes where you aggregate smaller customers, just as you've seen happen with the gas industry, where people can get homeowners to aggregate together and then serve them with cheaper gas. We have to do that on the energy efficiency, energy services side. An example of where that has begun to work well has been the city of Toronto Better Buildings Partnership, where they bring together the utility companies -- I think in this case it was Consumers' Gas -- the government and the private sector, and say, "How can we reach the citizens of Toronto?"
The reason I say aggregation is so important is, you can imagine the overhead cost of a company marketing to lots of individuals. It's horrific. We know that in this new marketplace, new world, the utility companies will be, in a deregulated mode, addressing the needs of the individual consumer. They're going to put market resources to that. They have a big customer retention issue. So I think if you combine the resources of the utilities that have no choice but to try and retain individual small customers, they are in a sense already doing the aggregation for us.
Mr Conway: Let me just ask this. If aggregation of a cluster of small customers is really important, what are the impediments in the marketplace that you see to that happening? Or are there any?
Mr Levy: I don't think there are, in the sense of anything legal or regulatory. I just think it's a marketing issue, and when we get the right constituents together I believe that will happen. It has happened in the United States on occasion in the last 10 years. There are instances of where this has happened.
Mr Conway: If you're happy, I'm happy, because this is exciting. I want benefits for the average residential customer, and that's what we're promising. That's what we want to deliver. You know this business better than I. You made a point that in your business you go out and guarantee the results, and if you don't produce the results, tough luck for company A or company B.
I want to also ask you about that stranded debt. We've been told that we probably aren't going to see any of the concrete data around stranded debt for weeks, perhaps months, to come. How important is an understanding of the stranded debt, its amount and its distribution to delivering downstream benefits to the average hydro customer?
Mr Levy: I think it could be very important. In our business, one thing that makes customers act against energy efficiency, as I know from the situation in Australia, is uncertainty in what the future cost is, whether it be fuel or electricity. You can get a market neurosis with short-term energy costs, so people just look out for the best short-term price in electricity or gas and put aside what we would consider economic investments, two- or three-year payback, in energy efficiency.
With respect to your question, to the extent that the uncertainty about stranded debt creates uncertainty in the marketplace for consumers and end-users to make financial and economic decisions, it is of concern to us.
Mr Wayne Lessard (Windsor-Riverside): I certainly appreciate your presentation, Mr Levy. It really identifies what I think is a shortfall in Bill 35, and that is more attention to the details of energy conservation.
You've identified in the purposes clause of the bill and posed a question: What are the policies of the government of Ontario with respect to the environment and energy efficiency? We've had a report from the Environmental Commissioner recently that has been very critical of the policies of the current government with respect to the environment. So I share your question about what the policies of this government are when it comes to the environment and how they're going to be implemented to try and make improvements through Bill 35. That's why I think we need some tougher language in the bill to ensure that we do see environmental improvement and energy efficiency as a result of Bill 35.
You mentioned as well that your energy-efficient programs have been very successful here in Ontario, and I think there's a good reason for that. One is because of your expertise and the other is that we're really recognized as energy wasters among the world and it's relatively easy to find savings. But there must be some way to encourage people to do that, I think.
I'm surprised, as you've mentioned in your remarks that we would be, that you wouldn't think financial incentives or disincentives would be a good idea. I would think that if price, for example, were to go up for electricity, people would be more inclined to try and implement energy efficiency and conservation measures. I'm curious. Other than the fact that you say that government incentives might encourage fly-by-night companies to come in, why wouldn't you think that other types of financial incentives would work to encourage energy efficiency?
Mr Levy: I just relate to our experience over the last 15 years. Financial incentives, usually from government, don't last. They're meant as a stimulus to make something happen, to encourage a market transformation. In general, financial incentives, in our opinion, have not worked well because they've not been well thought out as to the long-term ramifications -- in other words, will they sustain a market transformation? -- and in our view are unnecessary.
We're out there in the marketplace. We don't see as a major barrier to energy efficiency a financial grant from any government or quasi-government body. There are issues in the marketplace, market barriers that exist, which we believe can be overcome by collaboration, particularly in this new environment, with utilities, government bodies and private sector stakeholder partners.
Mr Doug Galt (Northumberland): Thank you, Mr Levy, for your very informative presentation. I'm particularly intrigued with your last request in item 12(ii), where you're asking to "Avoid financial incentives and disincentives for energy efficiency." It's a rather unique request coming to government to ask for no financial assistance. I think I can assure you that this government will pay the strictest attention to that particular request, as original as it is.
As you are aware, this is enabling legislation as it relates to energy efficiency, as it relates to environmental control and activities. Most of this will be written into regulation. I notice you're concerned about discrimination against energy efficiency. I suggest that competition being brought in with this bill and consumer choice would be the catalyst to ensure that energy efficiency will occur.
Do you see anything in the legislation that would block or inhibit regulations being written so that it would encourage, promote, pressure energy efficiency to occur?
Mr Levy: No, I don't see anything written in there that would act against it, nor do I see anything written there pro energy efficiency. Your remarks that you are surprised and gratified that we don't want incentives -- remember, we don't want any disincentives either.
Mr Galt: Certainly.
Mr Levy: That may be more tricky for you. All we ask you is that as you go through this very difficult, complex process, someone raise the flag periodically and say, "What is this going to do for energy efficiency?" I'm sure it won't be by design that you would harm energy efficiency, but it could be a consequence of something inadvertently happening. For example, to take Mr Conway's point of where the stranded debt falls, I don't know yet and we can just hypothesize, but it could happen that it skews rate structures or in some way would act against what we call comprehensive measures.
To understand this, we have a philosophy about energy efficiency. That is, when you address a building such as this, you do it in a comprehensive fashion. You don't just change the lights; you look at the heating, the cooling, the humidification. If you don't do that, you create air quality problems and all the rest of it. So it's not a semantic point, this comprehensive approach. It's very important. Someone around the table has to raise the flag and say, "Hey, what's this going to do for energy efficiency?" It's up there as a principle.
Mr Galt: It's always difficult, when you're writing legislation, how much you put into legislation, which is very cumbersome to change down the road, and how much you put into regulation, which is much easier to change down the road. In this case we can upgrade this as technology changes, so there are some advantages there.
Madam Chair, I defer to Ms Johns.
Mrs Helen Johns (Huron): Thank you for being here. I just wanted to ask you a question after I emphasize this: This government is placing a great deal of importance on the broad objectives and the purpose clauses in these. We certainly have every intention of following through on these broad objectives to ensure that we meet the parameters that the bill sets. As you may be aware from past litigation that has happened with the government, these purpose clauses become very important in the future, so to put energy efficiency in one of our purpose clauses really does say that we are interested and we are concerned.
I have a quote from the Canadian Energy Research Institute. This morning I'm going to have to put my glasses on to read it.
"Rather than adopting a piecemeal approach to the issues of environment and energy efficiency, a comprehensive program should be established to deal with the role of environmental programs in the new marketplace. Regulators can determine if there is a need to foster DSM, renewable energy or R&D after the market has been given a chance to operate."
Do you believe we need to see how the market is going to operate before we can move forward with determining the regulations for energy efficiency and those kinds of things, and do you believe it is best imposed in regulations as opposed to in the legislation?
Mr Levy: There are two points we've made. One is, who knows how long it's going to take the market to unfold? So what we're proposing is to create some stakeholder alliance that's reporting to you and that is monitoring the marketplace as it unfolds. It may be an error to say, "Let's wait and see, and then maybe in two or three years we'll fix whatever problems occur." We think you can do it on a real-time basis with the stakeholders involved. That is one difference.
The Chair: On that note I must interrupt. Our time has expired. We thank you very much for coming before the committee with your advice and your expertise. We will take your considerations to heart.
ENRON CAPITAL AND TRADE RESOURCES CANADA CORP
The Chair: I now call upon representatives from Enron Capital and Trade Resources Canada Corp. Good morning and welcome. Please make yourself comfortable. Are you Mr Shapiro?
Mr Richard Shapiro: I am.
The Chair: It's nice to have you here. Please introduce yourself and your title in full for the Hansard record.
Mr Shapiro: I will do that. My name is Richard Shapiro. I am vice-president of state government affairs for Enron Corp.
Enron Corp is a global, diversified energy company that includes among its corporate family ECT Canada, Enron Capital and Trade Resources Canada. Enron Capital and Trade Resources Canada is, among other things, a leading wholesale natural gas provider in Canada. It employs over 75 people here in this country and has over $2 billion in annual revenues. Enron is also a company that is very proud of its environmental businesses and environmental track record. We are the leading producer of wind energy in the world. Through a joint venture, we are the second-largest manufacturer of solar panels and have been recognized by the White House recently for our environmental stewardship record.
We as a company, I think very importantly to this subject, have supported the competitive restructuring of the energy industry and liberalization of energy markets around the world. We believe that our customers and our competitors' customers have benefited significantly from our efforts.
We are here today to support the government's initiative in the introduction of the bill. We believe that the competitive restructuring of this industry is a process, not an event. Minister Wilson used very much the same terms in his remarks I think this past Tuesday with respect to this being a process, not an event. The government is to be commended for the significant achievement of beginning the process. The government and others, including the stakeholders' alliance, are also to be commended for creating a consensus among the stakeholders as you undertake this very important and commendable process.
My purpose here today is not only to state support for the government's initiative and to commend you for your achievement, but also to provide a perspective on the restructuring process in the United States on a few key issues in the brief time that we have.
We've provided a submission that I'm not going to necessarily follow in order. I will refer from time to time to some of the maps and other pages that are contained therein. Here are the issues I'm going to touch on very briefly and try to leave some time for questions: Why did we undertake this process of competitive restructuring of the energy industry in the US? I'm going to talk a little bit about this past summer's experience in the midwestern electric markets; talk about what's going on in the industry, both the electric and gas industries in the US, in terms of consolidation, merger and acquisition activity, as well as specialization within the various segments of the industry; and then talk for a few moments about consumer protections in a competitive electric market.
In many of the presentations that I've done recently, I've started out a little bit by taking us back to why we began this process in the United States and I think why you're undertaking this process here in Ontario. Very briefly, I think there's a fundamental belief in both of our countries that markets create a level of efficiency and a level of creativity that are not replicated elsewhere. We have experience in both countries as well from other industries, other network industries like natural gas and telecommunications, going through market liberalization and competitive restructuring that have produced significant benefits for all segments of the consumer population, from residential on up to large industrial.
Probably the most powerful, the most important reason for undertaking this process is the proper placement of risk. We have in both countries an issue called stranded cost, stranded debt. If you go back to the genesis of that problem and that issue, it's the result of placing the risk, the burden of investment decisions that were made primarily in generation on the backs of consumers. So when a bad decision, with 20-20 hindsight, was made in building a certain type of facility or there were certain cost overruns in building a certain type of generation facility, consumers bore that burden in both countries.
In the future, as we competitively restructure this industry, the key reason, I believe, for undertaking this process is to place that risk, place that burden on those who can best bear it, and that is the marketplace. These reasons, we believe, in the US are just as powerful as they were five, six, seven years ago when our US Congress first undertook the process of enacting the Energy Policy Act of 1992. We need no new generation of stranded costs in either country.
I often use an example of automobiles. You could talk about widgets, you could talk about anything else and apply it to this industry. If the marketplace for a widget or a car is $2 per unit and somebody builds a plant in the marketplace that produces a widget for $3, they don't recover the cost of their investment in the marketplace. Their shareholders, their investors are the ones who bear the burden of that bad decision they might have made. Obviously, what has taken place in this industry in both countries has been quite different in the bad decisions, in hindsight, that have been made with respect to certain generation construction decisions having improperly been borne by consumers.
I'm going to talk a little bit about the Midwest experience. I'm sure many of you have read about and are quite familiar with the price fights that occurred for a very brief time back in July. First I'll tell you a little bit about why it happened in terms of some of the physical characteristics that contributed to the event. There was a period of extremely hot weather in the Midwest. There were some weather-related transmission outages. There were generation facility shutdowns that were not planned. You had the default of an undercapitalized marketer and also the default of an electric municipal system in the Midwest. You had transmission constraints, some of which were real and, as I'll talk about in a few moments, some of which may not have been entirely real.
Fundamentally, you also had a failure of price signals to filter through to industrial customers so they could modify their usage behaviour in response to the conditions that were occurring in the Midwest, something that would very likely occur in a marketplace where customers would be getting the appropriate price signals from their suppliers. What you ended up with was a market where buyers would pay anything for power.
A couple of other contributing factors: You have not had, in the Midwestern United States, significant generation construction probably for about five years. The most fundamental reason is that the Midwest has stalled as of recently in undertaking the retail restructuring of the electric industry, so you have a significant amount of regulatory uncertainty. You have investor-owned utilities that are unwilling to go out and make generation construction investments because they don't have an assurance of recovery any longer through the regulatory process and they don't know what kind of market structure will be in place on the horizon. You don't have private investors like our company willing to come into that marketplace and make generation construction decisions, again because of the regulatory uncertainty and the uncertainty of what the future statutory construct will look like.
One other thing that happened in the Midwest, as you have here in Ontario -- you have vertically integrated companies that own generation as well as transmission. There's some evidence, and growing evidence, that certain companies did not behave economically rationally with respect to use of optimizing their transmission systems to benefit their own generation. As a result, you might not have had as much power moving to load centres as would have been the case had companies been behaving more rationally, were they not vertically integrated.
Some of the lessons learned from the Midwest I think are quite important. We believe the primary lesson is that we need to create competitive markets as soon as possible. We have evidence in the United States, in certain regions such as New England and California that have undertaken the process of competitively restructuring the industry, that private investment is very willing to come in and build generation. In New England, a system that has a peak load of 21,000 megawatts, there are currently pending before the New England independent transmission system operator requests for studies for 29,000 megawatts of generation. It's everyone's expectation that at the end of the day about 5,000 to 6,000 megawatts of generation will get built out of the studies that are pending. In California you currently have about 7,000 megawatts of generation in the process of being permitted enough power to light the city of LA that are going through that process. Once you provide the regulatory certainty, people will come and they will build and they will invest.
The other lesson is that competition does not degrade reliability. In fact, quite to the contrary, it enhances reliability. One thing to remember about the Midwest experience this summer is that the lights stayed on. You can contrast that to a recent experience in Chicago, in 1995 -- very hot weather, generation facilities down, transmission constraints -- where the lights went out. As many of you may recall, people died in the city of Chicago because the utilities could not access additional supplies. The bottom line is that the market worked. It kept the lights on, albeit at a high price for a very short period of time.
I think the lesson for us in the US is that we need to finish the job of competitive restructuring. We need to put in place certainty with respect to what the retail marketplace in the Midwest will look like so that companies will begin to come in and make the necessary investments in the electric infrastructure.
One other issue I'd like to talk about a little bit here today is the consolidation and specialization that are going on in our industry. I think there's a map in the submission that we provided you that shows a significant level of merger and acquisition activity and also a significant level of divestiture activity with respect to generation facilities.
We've seen, in many of the regions that have undergone restructuring, the decision to have the vertically integrated companies divest themselves of their generation facilities. We've seen significant premiums paid for those assets and obviously we've seen mitigation of market power through the sale of those assets as well.
We've recently also had a transaction signed that would for the first time divest a company of its nuclear facility, and that is, General Public Utilities out of Pennsylvania has entered into a contract with AmerGen, which is a joint venture between British Energy and PECO Energy out of Philadelphia to sell the Three Mile Island nuclear unit that is currently operating.
The bottom line out of all this merger and acquisition and divestiture activity is that we're seeing increasing specialization among the segments of the electric industry in the US. You're seeing companies begin to specialize in distribution. You're seeing companies like Entergy, which is out of the southern United States, begin to talk about wanting to be a transco or transmission company across various regions of the country. You have companies like PECO Energy and Entergy again that are very interested in acquiring nuclear facilities, that believe they've operated their own nuclear facilities at a very high standard and expect to do so with other facilities that they begin to acquire. You also are seeing companies specializing in the construction and purchasing of fossil facilities.
I believe that this specialization which is occurring in the American electric utility industry will result in more efficiency. You're going to have companies within each segment of the industry that develop more scale and scope, that perform with a higher degree of excellence in their operations within each segment that will result in a more efficient industry in every respect and in every segment.
The last issue I'd like to touch on is consumer protection. As we undertake the competitive restructuring of the electric industry here in Ontario and in the United States, clearly one of the issues that has been at the forefront is how do we build in sufficient consumer protections to make sure that consumers are benefited and are protected from less than credible providers in the marketplace.
I can briefly touch upon our own experience in Portland, Oregon. Some of you may be aware that Enron Corp owns Portland General Electric, which is an investor-owned utility, a vertically integrated utility, in the northwest. I guess about a year ago we submitted to the Oregon Public Utilities Commission a comprehensive plan for the competitive restructuring of our company service area. In that we put forward a very comprehensive consumer bill of rights, which is contained in this submission that I've provided you here today. I'm not going to walk through that, I think it's self-explanatory, but I think it evidences our company's understanding and recognition of the need for consumer protections in a competitive marketplace. There's every reason why, with sufficient consumer protections, the marketplace can work for all consumers.
In conclusion I'd like to commend you again for beginning this very important process. This is a correct and necessary step. We believe, as evidenced by what has happened in the Midwest in the United States this summer, that time is of the essence. We believe this initiative will help sustain and enhance continued economic growth here in Ontario. We, as a company, look forward to being an active participant in this province's electric industry.
The Chair: We have five minutes for questions from each caucus and we'll begin with the NDP caucus.
Mr Lessard: I want to talk to you about stranded debt. In Bill 35, there's the intention expressed by the government that it's going to create a competitive environment. I'm not so sure it does that, but it's an elaborate mechanism to get the stranded debt monkey off the government's back and try and get it on to someone else's back. A lot of people out there are saying, "I don't want it and I shouldn't have it," and as an investor in generating facilities you probably say that generators shouldn't have it placed on their backs. But I don't want to see residential consumers the ones who are going to be bearing the brunt of these bad investment decisions that had been made in the past. I agree with you that in future, bad mistakes for generating should be placed on the backs of investors and shareholders. That makes sense to me.
But for right now, I wonder whether a company like Enron would be more interested in investing in new generating facilities here in Ontario or in buying existing Ontario Hydro facilities. I'm sure that you've given some thought to that, as to whether there'd be more focus, more interest in buying existing generating facilities in Ontario than in constructing new ones.
Mr Shapiro: I think you've asked a number of questions and I'll try to touch on all of them.
In terms of stranded cost, stranded debt, the first thing I think we all need to remember is that those costs are already in the rates that consumers are paying. This is true in the US and it's true here in Ontario. It's not as if we're imposing a new tax, a new burden on consumers. It's already there in their rates.
One of the things we have tried to do in this process in the United States, I think as you have done here in Ontario, is find ways to mitigate that number, to reduce that number from where it currently stands today. There are various ways to do that. We'll be participating in the process and suggesting some of the ways that mitigation can be enhanced.
We have consistently, with respect to stranded costs and stranded debt, advocated a non-discriminatory access charge of sorts so that all consumers are equitably exposed to the historical costs. Obviously, if we could wave a magic wand and make those costs, which are billions of dollars, go away both in the US and here in Ontario, we as a company would love to have that happen. But I think the bargain that has been getting struck in the restructuring of this industry in both countries is that we're going to have to deal in an equitable manner with the costs that have been left by some of the bad decisions that have been made in both countries and deal with those in an equitable manner.
With respect to a preference for buying existing generation or building new generation, I think we haven't made any decisions in that regard. I'm not sure with the current approach that we're going to have an opportunity to buy, in the near term, existing facilities, although there might be opportunities to lease existing facilities, buy output from existing facilities. We as a company will look very carefully at those options as well as considering very carefully the opportunity to build new generation.
We have just, for example, recently announced the construction of a 500-megawatt facility in Pittsburg, California, which is in the San Francisco Bay area. We're very interested in finding opportunities to build new generation where those opportunities lie.
Mr Lessard: Do you think you would be serving the Ontario market from United States generation facilities?
The Chair: I'm sorry. I'm going to have to interrupt. We have to move to the next caucus.
Mr John R. Baird (Nepean): I want to thank you for your presentation. It has been a very different perspective. We've heard a little bit about some of the issues you have raised, but it has been particularly useful, so I want to thank you.
I didn't want to have to do this, and I have a lot of respect for my friend the member for Riverside, but he has forced me to bring out my chart again.
He said he doesn't want to see residential consumers bear the brunt for the stranded debt. We know residential consumers are bearing the brunt now, and business consumers, with 40% to 44% going on interest, and they are going to continue to bear the brunt under the new regime until the stranded debt is paid off -- with no new debt, not $1 of new debt on this as a result of this bill -- because successive governments did not watch the shop, particularly over the last 10 years, but all three parties can bear some responsibility. Someone wasn't watching the shop, and Ontario Hydro kept borrowing billions and billions of dollars. The member for Windsor-Riverside wants to see this rest on the backs of the shareholders. The people of Ontario are the shareholders, and regrettably, for some time to come, we're going to be bearing the brunt.
I like charts, so I particularly liked your chart, which I have gone through. It has given me some new things to hold up.
I want to discuss price volatility, because we're all concerned about price volatility for customers. With this bill we wanted to help people, help people get jobs and help people in their own lives. Can you tell us from your experience with respect to this issue, based on that experience, what you expect to happen? We've seen here some terrific results over two years, five years and 10 years, in trucking, railroad, airlines, long distance, telecom and natural gas. Can you give us your best advice on what you think is going to happen to prices in Ontario over the two- to 10-year period after this bill?
Mr Shapiro: I think that clearly in the short run the amounts of the savings will be smaller, because we're going to have to deal with the generation of historical above-market costs and debt that you illustrated in your first chart. Clearly the opportunities for savings will be fewer in the short term, but we believe that for some of the reasons I have talked about in terms of some of the industry phenomena that we're seeing in the US also occurring here to various degrees, you're going to see efficiencies driven in virtually every segment of the industry as we render it more competitive.
I can't sit here and tell you, as I think is evidenced by that chart, that savings within 10 years will reach the 30% to 40% level in the electric utility industry, but I think the savings will be significant. I think we have always underestimated the creativity of the marketplace in its ability to deliver services at less cost and in more creative ways, so I'm confident that savings will increase over time. Particularly as we move out beyond the burden of our historical mistakes in both countries, the savings will grow significantly.
For example, in California we're in the midst of a transition period where the stranded cost, stranded debt, is being paid off. That transition period is due to end no later than March 31, 2002. Consumers today are seeing savings somewhere in the range of 3% to 10%. Some of it has been mandated by statute, some of it is being achieved in the marketplace, particularly by larger consumers. If you look at the amount of the stranded costs that are embedded in customers' rates today, and we expect those to fall off in the next three or four years, you're likely to see reductions in costs of 25% to 30% in California from where rates were pre-restructuring.
Mr Baird: That takes us to the thought that rates are going to be stable well into the next decade, and we're having a five-year price freeze. If no action was taken, could rates conceivably go up?
Mr Shapiro: I can't sit here and tell you that there won't be some modest increase in gas costs that obviously will translate into slightly higher electric generation costs in both of our countries, but if you look at the level of stranded cost, stranded debt, and you see those costs over a period of time beginning to go away, it's hard to conceive of any increases in electric generation costs even coming close to matching the decline that we'll see once the stranded cost, stranded debt, begin to fall off.
Again, this is sort of the creativity, the ingenuity of the marketplace. I think the marketplace has always to some degree defied reality in its ability to deliver generation for less and less over time. We're building gas-fired generation plants today in both countries at prices and with efficiency levels that were unheard of 10, 15, 20 years ago. I see no reason why that technological innovation won't continue and in fact get accelerated as we open up the marketplace to more competition.
The Chair: We move to Mr Conway from the official opposition.
Mr Conway: I want to ask a couple of questions. I share with you the expectation that particularly because we've got apparently an endless supply of very cheaply priced natural gas, and we now have the electricity-making technology to convert that endlessly available, endlessly cheap natural gas into electricity, that downstream we should be able to provide some pretty attractive electricity rates to our customers, assuming that we're right, that natural gas is endlessly available and relatively cheap, because that seems to be where everybody is going. The unstated assumption is that most of the new electricity is going to be gas-fired.
But my concern is in the short term here in Ontario. We have a situation that seems to be problematic in this respect, if we're thinking about competition, because our old utility, Ontario Hydro, is going to be broken up but broken up very, very minimally. We're going to have a very large generator called Genco and we're apparently going to have a very large and aggressive retail company, so it doesn't appear that we are going to, in the early days at least, get very much divestiture, very much disaggregation on the generation side -- this, by the way, at the time when we've got this stranded debt to worry about.
My friends in the government are quick to raise their charts and talk about how it's all in the rates now. The problem is, in the last 18 months, this gigantic public utility that is Ontario Hydro has written off $8.2 billion in losses that aren't in the rates, that are parked on the sidings, to be decided. That's my concern. My particular concern is that the residential electricity customer in the short and near term -- by that I mean three to five years -- does not get stuck with a disproportionate share of writing down this multi-billion dollar debt, particularly the billions of dollars of debt not yet in the rates. I cite the fact that in the last 18 months, $8.2 billion has been written off and it's nowhere in anybody's rate.
What advice do you have to this committee about the apparent contradiction, that we have a policy that I think rightly intends in the direction of competition on the one hand, and on the other hand we don't appear to have very much disaggregation planned in the early days of this new policy on either generation or retail in this province?
Mr Shapiro: A couple of comments, first on your natural gas comments. When I first came into this industry some 13 or 14 years ago, I was always hearing about this gas bubble, and that gas bubble, 13 or 14 years later in a competitive natural gas industry, still exists. The marketplace has responded time and time again when there are the proper price signals in the marketplace to find new supplies of natural gas. Everything that I see, every projection that our company and other independent third-party studies have made, I think holds that same degree of confidence well out into the future with respect to natural gas supplies.
I guess I go back to my initial statement that this is a process, not an event. If I were able to come into Ontario and have the ability to create the industry, a competitive market structure as I think it ought to be created, it wouldn't look exactly like this bill, but I think that beginning the process is a significant achievement for this province. We, as a company that is not known for infinite patience in terms of wanting to transform regulated industries into competitive markets, would like to have this done in a flash cut. The reality is that there are many stakeholders, many interests in this process that appropriately have a voice. We end up taking smaller steps at the beginning than we would like but I have infinite confidence in the marketplace, and once you begin to unleash the forces of the marketplace, as I believe this bill does, good things will come.
Mr Conway: Mr Shapiro, speaking about the patience of Enron, I noticed in the United States press here a few weeks ago something about Enron getting a bit impatient and withdrawing from part of the deregulated electricity market in California. Could you just explain a bit of the recent California experience that Enron has had?
Mr Shapiro: You're not the first person to ask that question. The question is, why did we decide for the time being to suspend our efforts in the residential marketplace in California? I've always thought the better question is, why were we ever there in the first place?
Mr Conway: My question is, why did you leave?
Mr Shapiro: But I think you have to ask why we were ever there in the first place and you have to look at the statute in California. You can talk to one of your colleagues in California, Senator Steve Peace, who was one of the architects of the bill in California, and he will tell you that he did not and the builders of that legislation did not intend for there to be competition for residential customers during the transition. The way they constructed the stranded cost charge clearly created no ability for us to come in and provide sufficient value for customers to want to switch. We learned a very tough lesson, trying to be a first mover in a marketplace, that policy-makers really didn't intend for there to be competition. We made the decision, for the time being, to pull back because we just didn't see the response in the marketplace.
Mr Conway: That is a helpful answer, for which I thank you.
The Chair: On that note, I must close. Mr Shapiro, on behalf of all the members of the committee I thank you for taking the time to come before us this morning and to share your advice.
ONTARIO NATURAL GAS ASSOCIATION
The Chair: I'd like to now call upon representatives of the Ontario Natural Gas Association. Good morning, welcome to the committee.
Mr Paul Pinnington: Good morning, Madam Chair. My name is Paul Pinnington. My colleagues and I are here today on behalf of the members of the Ontario Natural Gas Association, ONGA, to present our views on the Energy Competition Act.
With me this morning are Fred Hassan, on my immediate right, who is director of strategic planning and a member of the market design committee. On my immediate left is Rudy Riedl, who is the president of Consumers' Gas and a member of the minister's transition team. On my far left is Bernie Jones, the president of Blue Apple Consulting and a consultant to ONGA. On my far right is Brian Cappe, the president of EnerShare and a member of ONGA's board of directors.
The Ontario Natural Gas Association, ONGA, is an organization of more than 330 corporations and individual members who make up Ontario's multi-billion dollar natural gas industry. We represent transmission, storage and distribution companies, producers, marketers and brokers, equipment manufacturers and suppliers, professional organizations, contractors and individuals. We are involved in providing natural gas to Ontario's homes and businesses, offering a wide range of cost-effective and environmentally responsible goods and services. Our members are also increasingly involved in the electricity business. This creates a need for a high level of congruence between the two sectors in terms of marketplace and regulation.
I will now ask Bernie Jones to present a summary of ONGA's views with respect to Bill 35. Our comments have been tabled in a written submission which is in some detail. I believe that submission has been distributed to the members of this panel.
Mr Bernie Jones: Madam Chair, committee members, our submission is clear: The Ontario Natural Gas Association supports Bill 35. This legislation provides a framework for change, but it cannot describe in great detail how the new electricity marketplace will actually function. So while we commend the government for its work to date, much work remains. Many important elements are left to the regulations, as you know.
Our support for this bill is based on our industry's positive experience with more than a decade of competition and less regulation. As you know, deregulation in our industry began in 1985 with the freeing of the price of the natural gas commodity. In 1986 the direct purchase option was introduced, allowing customers to buy their gas supply from someone other than their local gas utility. Since then deregulation has moved forward, increasing the competition for the consumer's energy dollar.
By most measures, deregulation of the natural gas market has been an unqualified success. The price of the natural gas commodity has not risen in real terms over the last decade, and more and more people are choosing the direct purchase option. Today, 50% of natural gas customers buy their gas supply through a broker or marketer. That's quite a transition.
That isn't to say there haven't been problems along the way. Like you, we have been concerned that the business practices of a small minority of brokers may have caused damage to the development of a vibrant, competitive market, not to mention our customers' goodwill towards our industry. We believe that some of these problems stem from legislative obstacles that make it difficult for the customer to compare prices. Our inability to transfer title of natural gas within this province has resulted in complex billing structures which customers find confusing, utilities find cumbersome and brokers find frustrating. Bill 35 would eliminate this legislative impediment and allow existing and new players to developer closer relationships with their customers.
The problem of confusing billing structures was exacerbated by the fact that often there just wasn't enough information available to customers to explain the radical changes that were taking place in our industry. I think all of us in this room at the present time have experienced some of that. As a result, our members launched a number of public awareness campaigns to generate a greater understanding of how individuals can benefit from the choices available to them. Additional education will be required to ensure that customers understand the further unbundling of gas utilities about to take place and the coming changes in the electricity industry. The best way to achieve this customer understanding may well be through utility bill inserts with the nominal associated costs recovered in rates.
Many of our members are also keen participants in the Ontario Energy Marketers Association, or OEMA, which was established to respond to customer concerns and create a code of conduct and a customer bill of rights. We are enthusiastic about the licensing provisions in Bill 35, and believe that OEMA will be an effective partner as we together strengthen customer protection. You may be aware that the OEB is already engaged in consultations on licensing with stakeholders.
As existing energy service providers broaden their services, new players enter the marketplace and utilities unbundle their retail services from their distribution operations, homeowners will find that they will have a whole new range of home comfort options at better prices. That's our experience.
Natural gas, as you know, is an environmentally preferred energy source for power generation. It results in lower emissions and efficient utilization of energy. Gas distribution companies are exploring opportunities in electricity distribution, and many retailers are enthusiastic about the opportunity to offer their customers both electricity and natural gas services. As such, natural gas and electricity companies are both collaborating with each other and also competing with each other. Thus, as Bill 35 proposes, it makes sense to put both the natural gas and the electricity monopolies under the same regulatory authority, namely the Ontario Energy Board.
It also makes sense to create an even playing field for the competitive businesses of these two vitally important energy industries, whether the companies are publicly or privately owned.
You may gather that we are pleased with the way this legislation has come together. The government has taken a consultative approach, seeking input from all stakeholders along the way. ONGA has been directly involved, as you've learned, in the Market Design Committee, the minister's electricity transition team and the Stakeholders' Alliance for Electricity Competition and Customer Choice, and we believe that this process has served the industry, the government and most important, the consumer, well.
Our key concern, folks, is about what happens after this legislation passes into law. Bill 35 calls for sweeping changes in the energy industry. It sets out in very broad strokes what the new market should look like and gives a rough idea of how it will work. However, as I mentioned earlier, much of the detail will be left to the regulations and we believe that this stage of the process should also be a collaborative process. All stakeholders should have the opportunity to provide input and to stay informed on developments as this legislation is implemented. From our point of view, consultation would help us all ensure that regulation is streamlined and congruent for both the electricity and natural gas sectors.
Our submission makes proposals for further consultations which we believe will help ensure the success of electricity competition. We have suggested that an OEB- or government-led forum be created to scope out areas where regulation is necessary, where regulation is not necessary and where there could be self-regulation. We need to clarify the rules so as to avoid overregulation and regulatory confusion which would impair the market and would also involve added costs for government and market players.
Another area where the consultative process would be extremely useful is in the development of a fully competitive retail market for electricity. The Market Design Committee does and should play an advisory role in the design of the retail options.
It's our position that retail prices should be determined between knowledgeable and informed consumers and retailers, that consumers should have a choice between fixed-price and variable-price options based on factors such as volume, timing of use, price offer, location and the nature of service, and that the local distribution utilities should offer a standard service until sufficient market competition is in place. We believe that these kinds of issues must be discussed and evaluated through the consultative process.
Beyond the need for continued consultation, there are a number of other recommendations we have put forward in our submission for your consideration, all of which will contribute to more effective competition and greater customer choice and protection. We believe that the independent market operator who will oversee the wholesale market should begin to function as soon as possible. It is vital that it begin to prepare the market rules and put in place bidding and other systems to ensure that the transition to competition in electricity is as smooth as possible.
As the Market Design Committee has already noted, we like many stakeholders are concerned about the possible abuse of market power by the proposed Ontario Electricity Generation Corp. The legislation should allow the revisiting of this issue and keep the door open to possible privatization or separation of Genco's generation capacity. We propose that the Ontario Energy Board be empowered to make recommendations on the best course of action.
We are pleased that the policy intent of this legislation is to establish an equivalent and unbiased taxation level playing field between privately and publicly held utilities. For example, in cases where a municipal electricity utility is sold, all buyers would be subject to transfer tax. Our submission outlines our concern, however, regarding the two-year exemption granted to the future generation and service arms of Ontario Hydro for the payment of this tax. Such preferential treatment would give Ontario Hydro undue market advantage and be contrary to the spirit of an open, competitive marketplace.
We also support the continuation of rural rate assistance, but to avoid complicated and burdensome administration it's our feeling that it should be turned into a straight government-funded subsidy.
Finally, we propose the creation of a single window for environmental approvals, preferably through the OEB, where the approvals will be subject to rigorous evaluation and public consultation. We would also welcome the inclusion of incentives such as emissions trading and tax deferrals to increase the economic advantages and environmentally responsible operations.
If there is one thing on which stakeholders agree, it is that the status quo is no longer an acceptable option. Energy users, both large and small, should be able to choose their energy service supplier and take advantage of competitive prices and options.
Energy providers want to spread their wings. The global marketplace applies to the energy industry as well. With deregulation sweeping the continent and the rest of the world, our energy service companies want to compete to provide the most innovative and cost-effective services available and to create jobs here in Ontario. Our challenge, then, is to create an energy industry that follows through on its promise of low-cost energy choices. We need a marketplace where consumers are well-informed and to help feed the competitive spirit, where regulation assures consumer protection and fosters innovation and where environmental protection is primary and itself becomes a competitive force.
As far as the Ontario natural gas industry is concerned, this legislation couldn't have come a moment too soon. It is in the right direction, it is timely and it has broad stakeholder support. We look forward to participating in the public debate as we go forward together and would now be happy to answer any of your questions. Thank you.
The Chair: Thank you very much. We have five minutes for each caucus. We begin with the government caucus.
Mrs Johns: Am I the only one who wants to ask questions?
The Chair: So far.
Mrs Johns: Thank you very much. I appreciate your time this morning. You made a good presentation to us.
I'm not sure if you touched on it this morning, but I have heard some comments, I suppose because Rudy sits on one of the same committees as I do, about your support for the payments in lieu of income tax for all companies, for the level playing field.
I'm concerned. We've heard a lot of talk and I want to confirm or have you discuss for us today whether you think that will be beneficial or non-beneficial to the consumers in the long run or if that will affect the consumers and how that will affect the marketplace.
Mr Rudy Riedl: It is our belief that those payments in lieu of taxes be put in place because electric distributors will be put on the same footing as other utilities, and making the conditions of conducting business the same for both privately and publicly owned entities would certainly ensure that there is a good degree of competition in the marketplace, that no avenues would be closed to public-private partnerships and that the market discipline would be imposed on all participants. For those reasons we would support that those payments in lieu of taxes be put in place.
Mrs Johns: I haven't thought about the answer, so it's always dangerous to ask this question, but Mr Conway has been probing for a long time the dominance that Servco might have as opposed to what Genco might have. It would seem to me that because some of you people work as distributors and transmitters, you might have a comment on the Servco business and the dominance. Do you have a comment on that? Do you think it's too dominant or do you think it is something we need to be concerned about? If you're prepared to share that you might enter into the marketing competition of Servco, I'd love to hear that too.
Mr Riedl: I think all potential competitors should be given an equal opportunity to enter the marketplace. There is always the danger, if you have a dominant player in the marketplace and the conditions are such that the barriers to entry are too high, that true competition would not evolve. That is one of the concerns about the market power of the successor companies of Ontario Hydro, especially due to the proposal that for a period of time the transfer tax when MEUs are consolidated and/or taken over by Servco, there would be a window, a holiday, on that tax for Servco. I think that would create an unacceptable barrier to entry of other participants. I think there is always a concern of too much vertical integration. I think that if Servco had a dominant position, it would be to the detriment of the marketplace.
Mrs Johns: Of course, there will be municipal electric utilities in there too with a larger range of customers.
One of the things I am struck with in the gas industry is that the people out there, maybe in a lot of cases, have not had enough information to make good consumer choices. Today in your presentation you talked about informing the consumers. You would have a lot of experience in this now after being at this for a while and you've done some things well and some things horribly. I guess from that standpoint, could you tell us, if you were going to enter into some kind of a customer program informing consumers, exactly what you would recommend that we would do.
Mr Brian Cappe: I would hope that there would be put in place over the next period of time for a number of years, in fact starting as soon as possible, proper information going from the MEUs and from Ontario Hydro to the end users fairly explaining the changes that are going to be occurring. We have to be conscious that any proponent of information -- and it has to go out to everybody all the time. The information that goes out has to be explained to the consumer, the changes of what is going to be, the differences of the gas experience and the electricity experience and in particular the concept of licensing. One thing we have to recognize, very important in communication, is the fact that everybody will be licensed and bonded to market the commodity. Under this basis we're going to have a proper playing field.
I think the communication has to go out slowly, continuously building on the fact that 2000 is coming and everybody will have choice and everybody should have fair and proper choice. I think it should be subsidized through the rate base and it should be on a continuous program with a group of stakeholders coordinating the information that goes out.
The Chair: Thank you. To the official opposition.
Mr Conway: I think Ms Johns makes a good point about consumer education. It is going to be central to getting good information in the hands of end users. That's one of the reasons why I am really frustrated about the situation I find myself in, because at the general level there is no more important piece of information that I as a consumer and legislator need to have than what is this stranded debt, how big is it, how many billions of dollars is it, and of equal importance, how does it get apportioned across the category of ratepayers and with what impact does that land on rates? I'm being asked to sign on to something here as a consumer, legislator, without having that information. I tell you I hope we get it. I'm very anxious to get it because it's billions of dollars that will have an impact on rates, which is really what I care about. I hope and expect that competition down the road is going to give me a benefit, but boy, I'm from Missouri, and since Ontario Hydro is involved in this, I want some details; I want some numbers.
I never thought when this process began that we were going to end up with the kind of Servco that Ron Osborne has in mind. I thought what we would get at the distribution end, where I think we all agree there have to be rationalizations -- there will be fewer distributors doing more interesting things, but I never thought in my wildest dreams that the rationalization was going to occur to the benefit of Ontario Hydro retail. I thought what we would get, particularly in southern Ontario, was fewer numbers of larger distributors, some of which, like in Cornwall, are going to be private. But I heard in this building three days ago that we're going to have an aggressive, expanding Ontario Hydro retail company and I am concerned that that's going to cause a problem in trying to get some of the efficiencies at the distribution end that we all want. Am I wrong in that worry?
Mr Riedl: There are two questions here. One is about how to explain the stranded debt, and perhaps Mr Hassan could answer that, and I will handle the other one that you asked.
Mr Fred Hassan: I'll just relate it quite quickly to the natural gas experience. We had what could have been called a stranded debt under top gas, and the top gas was dealt with very effectively by the gas industry. Generally consumers need not know what was included in the actual burner tip price because of the way it was handled. There was a fairly substantial amount of money owed. As a result of the federal-provincial agreements on natural gas pricing there was an agreement that there would be a top gas charge. Old gas, I believe the number 20 cents a gJ was the amount that was paid for purchases under those contracts. New gas that flowed was phased in over a three-year period at nine, eight and seven cents. That was included in the wholesale price and flowed through the utility's weighted average cost of gas to the consumer. Net of all those stranded debt charges were all of the efficiencies that I think you heard about this morning. There have been efficiencies at the distribution level on the gas side, there have been efficiencies on the Trans-Canada system, and I think, as indicated by Mr Jones and in the charts by Enron, you will see that on a real-cost basis prices have been relatively flat and on a deflated basis they've declined quite substantially.
Mr Conway: My concern for the residential electricity customer is simply this, particularly over the next two to five years: I think after about a five-year period we end up as a province with more attractive options with more beneficial results for all classes of customers. My worry, to be perfectly frank, is that in the transitional period, from the year 1999 through to about 2003, the residential electricity customer in Ontario is going to get stuck with carrying or paying down a disproportionately large share of whatever that multi-billion dollar stranded debt is.
I have a responsibility as a trustee, surely, for the general public interest to make every reasonable effort to ensure that the millions of residential electricity customers do not get nailed with, hosed for, burdened with a disproportionate share of a multi-billion dollar stranded debt that I am prepared to bet big customers, big, well-resourced industrial and business customers, are going to be able to find ways to offload on to others, most especially the millions of residential customers. That's surely got to be a concern. You're all taxpayers. What should we be doing about that?
Mr Hassan: I think the recommendations that the government has put forward in terms of managing the stranded debt are the appropriate mechanisms.
Mr Conway: But the Market Design Committee, of which some of you are members, tells us that the single biggest thing we need to do is further disaggregate and force a divestiture on Ontario Hydro, without which divestiture we're not going to get those benefits that the millions of residential electricity customers must have if their rates are coming down.
The Chair: We're going to have to move on. We'll go to the NDP caucus.
Mr Lessard: One of the things the government members like to say is that this is enabling legislation and that all the details aren't included in it. As you've correctly pointed out in your news release, the devil is in the details. We as legislators are expected to take a leap of faith here in approving this legislation and taking the government's word that there are going to be benefits for residential consumers as far as rates at some point in the future. But I know for myself and my other NDP colleagues, we remain somewhat skeptical about those assurances.
I wonder whether you think it's imperative that we know some of those details before this legislation is passed, one of them being the stranded debt and the other is the content of the legislation. What is the process going to be here? Do you think that we need those regulations before this legislation is passed?
Mr Riedl: I think these are very critical points in going forward. However, we know one thing: The present system does not work. This is a step in the direction of creating a new system. I think it would be overly ambitious to anticipate that the enabling legislation would incorporate all the regulations, all the workings of the marketplace in the legislation. I think the route to go is to have the enabling legislation, which would be strategically, directionally correct, and then proceed with public consultation in developing regulations with all stakeholders and have the Ontario Energy Board, which is an independent body, review the public interest and be helpful in the stewardship of developing those regulations. I think that would be a workable. Quite frankly, we don't have all the answers now. Many of those answers will only emerge after we have had some experience with the marketplace, but we are quite confident that it could be done. It worked in our industry, to the tremendous benefit of our customers.
Mr Lessard: I appreciate your suggestion that we exercise caution as we go down this road. I appreciate your suggestion as well to give the Ontario Energy Board some powers in making recommendations and having some overseeing ability with respect to developing regulations.
One of the other things I heard you talk about was that the Ontario Energy Board had some role to play in recommendations with respect to privatization of Hydro assets. Was I correct when I heard that?
Mr Riedl: Yes, that was part of our submission.
Mr Lessard: What is the reason for making that recommendation?
Mr Riedl: The reason is related to my earlier comment that one cannot foresee the future with perfect clarity at any given time. If the enabling legislation takes the first steps, which would not necessarily mean divestiture or privatization but provide a framework under which it could happen under certain circumstances, then the government of the day could rely on the Ontario Energy Board, which is an expert board, to review the public interest issues associated with potential divestiture and privatization and then make recommendations to the government of the day which then could be considered. We see that as a process, rather than prejudging the events into the future.
The Chair: On behalf of the members of the committee, we thank you for coming forward this morning with your advice from the experiences you've learned in your industry. It's very much appreciated.
STAKEHOLDERS' ALLIANCE FOR ELECTRICITY COMPETITION AND CUSTOMER CHOICE
The Chair: I'd like to now call upon representatives of the Green Energy Coalition. Oh sorry, my apologies. I am in error. I'm calling the wrong group. I should be calling the Stakeholders' Alliance for Electricity Competition and Customer Choice. Good morning, gentlemen. Welcome to the committee. I apologize for giving you that little shock there at the beginning. Please begin by introducing yourselves and your positions for the Hansard record.
Mr Dave McFadden: Good morning. My name is Dave McFadden. I'm chair of the Stakeholders' Alliance for Electricity Competition and Customer Choice. I'm joined here at the table by representatives of three of our member organizations. Ian Cunningham is vice-president and director of policy of the Ontario Chamber of Commerce. The Ontario chamber is one of the founding members of SAECCC. Rod Seiling is president of the Ontario Hotel and Motel Association. Keith Matthews is the general manager of Brampton Hydro. Both Keith and Rod are members of our executive committee.
I'm very pleased to have the opportunity to be here to speak to you today about Bill 35, the Energy Competition Act. The Stakeholders' Alliance congratulates Energy, Science and Technology Minister Jim Wilson and the government for introducing this legislation on schedule, in accordance with the timetable laid out last November in the government's white paper. Once approved, the legislation will result in the creation of a competitive electricity market by the year 2000 -- a historic moment and one that will lead to a more positive environment for employment and investment growth in Ontario, as well as improved global competitiveness for Ontario's businesses.
We are pleased that the Legislature moved so expeditiously to give Bill 35 second reading, so that public input could be secured by this committee during the summer adjournment.
At the outset, I would like to comment on the spirit of openness and co-operation which has characterized the process involved with the development of this legislation. We have been very pleased with the co-operative and accessible approach taken by the Minister of Energy, Science and Technology and the staff of both his ministry and the Ministry of Finance. The government has always been prepared to listen to the concerns of the stakeholder community.
We have also very much appreciated the open and positive relationship the Stakeholders' Alliance has had with Mr Conway, Mr Kwinter and other members of the Liberal caucus.
Prior to his appointment as chair of the Ontario Energy Board, we were pleased with Floyd Laughren's progressive approach in dealing with the issues faced by Ontario Hydro, and we very much enjoy working with him in his new position, which is intimately involved in protecting the consumer interest and ensuring the develop-ment of a competitive electricity market in Ontario.
I'd like to take this opportunity to say a few words about the Stakeholders' Alliance. As some of you will know, the Stakeholders' Alliance was founded in October 1996. The alliance is a broad coalition of Ontario Hydro's consumers, representing virtually every sector of our province's economy. Our support base includes the automobile, steel, chemical, forest, mining, equipment and hotel/motel industries, the Municipal Electric Association and a large number of electrical utilities, the Canadian Federation of Independent Business, the Ontario Chamber of Commerce, the Association of Major Power Consumers in Ontario, the Ontario Natural Gas Association and the Independent Power Producers' Society of Ontario.
The Stakeholders' Alliance is the broadest coalition ever assembled in Canada to advocate electricity industry reform. A complete list of the members of the alliance is at the back of the copies of my remarks that I think all of you have now.
In 1996, the founding members of the Stakeholders' Alliance were concerned that the momentum for constructive change created by the Macdonald committee could be lost and that Ontario would fall even further behind in the rapid shift to competitive markets throughout North America. It was clear that the electricity industry in Ontario had to change and that the status quo was unacceptable.
The founders of the Stakeholders' Alliance were particularly concerned that Ontario Hydro would implement its own vision of a competitive system, which would entail a continuation of its effective monopoly over generation and transmission in Ontario together with an increasing presence in retail electricity markets.
The Stakeholders' Alliance believed that the recommendations of the Macdonald committee report, A Framework for Competition, provided a reasonable blueprint for an orderly transition to a competitive market. The Macdonald report provided choice for all customers where practical, ensured that the Ontario Hydro debt and other potential stranded costs would not become a burden on the public purse and respected local concerns.
The goal of the Stakeholders' Alliance has been to drive the focus of the Ontario electricity system from the needs of a large monopoly to the needs of the consumer. This can be most effectively achieved in a competitive, consumer-oriented market.
The alliance believes that the focus in restructuring must be on creating competition and consumer choice in generation and distribution, not on privatization. We believe that the right form or forms of ownership will evolve over time once the competitive structure is in place. Our view was that ownership changes should be done only when they are in the best interests of the stakeholders of the system, namely, consumers.
We would expect that the Ontario electricity system will evolve and restructure as the competitive market takes shape into the next century. With the proposed restructuring, Ontario should again be a place where competitive electricity prices boost economic growth and create jobs.
The Stakeholders' Alliance developed a three-point plan that reflected the philosophy and consensus of our members. These points were: (1) Separate the transmission system, including an independent system operator, from Ontario Hydro's generation assets and establish it under its own governance; (2) set a time frame and establish consistent criteria and requirements for municipal utilities and Ontario Hydro retail, established as a utility under its own governance, to work out the restructuring of local distribution through regional studies; and finally (3) to establish a transition agency independent of Ontario Hydro with the mandate and authority to effect the changes needed to introduce a competitive market. We argued that these points were fundamental in any move towards competition. The government's white paper in November 1997 met the alliance's fundamental requirements.
How does Bill 35 compare to the alliance's three primary objectives? First, Bill 35 has separated transmission from generation and created an Independent Market Operator, as recommended. Second, the bill has set out a timetable and framework for restructuring the retail distribution sector and municipal utilities, as recommended. Third, the government decided not to create an independent transition agency to introduce a competitive market. However, the Minister of Energy, Science and Technology has structured two entities which provide direct stakeholder involvement in the transition process.
The Electricity Transition Committee, chaired by Mr Wilson and co-chaired by Arthur Kroeger and myself, provides direct, ongoing input to the minister and government officials from senior executives from a broad cross-section of stakeholder organizations. The Market Design Committee, chaired by Professor Ron Daniels, brings together a very knowledgeable group of people with wide experience in the electricity industry to assist in the development of market rules for the newly structured electricity market. The stakeholder organizations have been pleased with the level of input they have had through both of these committees, as well as through numerous meetings with government officials in recent months.
Bill 35 puts in place the essential building blocks for the development of a competitive electricity market. Individual member organizations of the alliance have made or will make submissions to the committee dealing with concerns about various aspects of the bill. We have encouraged this, so that members of the committee are aware of the full range of views of the various consumer groupings throughout the province.
Ontario needs a competitive electricity market. We support the Energy Competition Act and urge members of this committee to ensure that the bill is enacted with any appropriate amendments at the earliest possible date.
The Chair: Thank you very much. We have about six minutes for questioning from each caucus. We'll begin with the Liberal caucus.
Mr Gerry Phillips (Scarborough-Agincourt): I want to focus on the generation side for a minute and then my colleague Mr Conway has a question. An essential element of this bill is the retention by Ontario Hydro of essentially all of the generating capacity. We're told one of the reasons for that is the need for a major Ontario player in the generation side to compete internationally and certainly North American. There's some substantial risk in that, in that the book value of those is around $26 billion. There's a substantial amount of the stranded debt that I suspect they'll pick up. I gather that as new private sector generation comes on board, Ontario Hydro's share of the market declines and I think perhaps puts at risk some of that investment. You people are experts in this. Are you supportive of the model that we see before us of Ontario Hydro retaining 100% of the generation or should we consider some modification on that?
Mr McFadden: As I've indicated, we support the proposal put out in the legislation to leave generation as one unit. It's safe to say, and you've already heard it from different individual members of our organization, that a majority of the Stakeholders' Alliance probably would be in favour of some further restructuring. However, we think that the current proposal that's named in the legislation is the right move now. We can live with that. We think the approach taken in the legislation in terms of creating an Independent Market Operator which will ensure guaranteed access to the system is a good move to protect consumer interest. The separation of transmission from generation was absolutely essential and was a sine qua non to any reform.
What we think should be done at this point in time is: Let's get going. Let's see how the market develops here. Let's see how things work with the revamped and repowered Ontario Energy Board that would be there to protect the consumer interest.
If it should happen in the years to come that, for example, we're not getting a competitive market or that consumers are not getting the benefit of competitive power prices, then the government of the day at that time should take steps to maybe look at some further restructuring. But at this point we think it's a reasonable proposal. It should be enacted and then let's work and see how it actually turns out in practice for the consumers of Ontario.
Mr Conway: Thank you very much. It's good to see you folks. A very good brief, although I would, and for no other reason than to protect the sainted memory of Adam Beck, tell you that on page 3 you say, "Stakeholders' Alliance is the broadest coalition ever assembled in Canada to advocate for electricity industry reform." Compared to the Beck crowd, David, you're still a pretty minor league group of players, important, however, and I think offering very good advice.
The problem I've got is essentially the problem that my colleague Mr Phillips mentioned. All of us want competition -- I think that is clear -- and the government enjoys a broad base of tripartisan support for the goal of competition and the benefits we expect that competition to bring. But what are we to do when we see the government's own special advisory committee saying that the single biggest and most important thing we need to do as a Legislature and as a government to reform this sector, to get the benefits of electricity is to unbundle, to disaggregate, to pull apart, at least into separate, competing generating units, what is now to be Genco?
I'm really concerned because we're dealing with Hydro. It's Ontario Hydro. I've been down this road, you've been down this road before. I have this terrible feeling that while Hydro has the government and all of the rest of us singing out of this hymn book about the pleasures and the opportunities of competition, they're sitting behind the curtain just chuckling all the way, saying: "Boy, we've got them saying one thing while we do the same old thing. Keep the power in our hands," literally.
I just ask you again, is there not a fundamental contradiction between wanting the benefits of competition, on the one hand, and ignoring advice that says you're not going to get the benefits of that competition in generation without further unbundling, disaggregating, breaking up Ontario Hydro generation -- without maybe changing the ownership -- into at least five or six competitive generation units?
Mr McFadden: Mr Conway, your point's well taken. I don't know of anybody who's more of a student of the history of Ontario Hydro. Mr Beck might have got upset about some of this, I don't know.
Mr Conway: But you're so much more polite and so much less ruthless than Mr Beck. That's why it's a pleasure to have you here.
Mr McFadden: I don't intend to run Ontario Hydro.
Mr Conway: That's what Mr Beck always said. He was just about public power and God's work.
Mr McFadden: The Market Design Committee is wrestling with this. We've spent time with the Market Design Committee and I think our feeling right now is that the Market Design Committee had set out in its second interim report an approach to develop what effectively would be a rules-based competitive market structure. We're not going to, in effect, have Genco broken up so you have competition from producing units.
What is happening is that we're going to create a regulatory framework and rules to get us there. Obviously, it means fairly difficult negotiations right now between Genco and the government of how they're going to have vesting contracts and all these other things that are going to have be in place. What we're hoping, obviously, is that with the rules that are put in place and with the protections with the Independent Market Operator and the protections in place with the Ontario Energy Board, legitimate other competitors will build up in Ontario to compete with the generating company or imports will come in from other jurisdictions, be it from Quebec or from the United States, again to create competition.
As I mentioned in answer to Mr Phillips' question, I think this may have to be revisited, as I think anything else in this act will need to be revisited in the years ahead. This is a first crack, and if you look at what's happened everywhere in the world, you put in place a market and you always have to be constantly looking at it because things go wrong that you don't anticipate, new market conditions develop, things don't turn out the way you want. I think there's going to be a need for a constant review of this legislation and how it's developing to ensure that we have a competitive electricity market and to ensure that the consumers benefit from it.
I don't think there's a total answer. I think the Market Design Committee has come up with a scheme to try to deal with this, to mitigate the power of Genco. If it turns out that that's not adequate, I would hope that the government of the day at some future time would deal with that appropriately. I can tell you the consumer groups are going to be there and they're going to be talking about it and they're going to be lobbying, as I'm sure the members of the Legislature will be too.
Ms Marilyn Churley (Riverdale): Thank you very much for coming to present to us this morning and for your compliments to our past colleague, Floyd Laughren. He is indeed a pleasure to work with and, unless his views have changed, has never been supportive of privatization of Hydro.
I note that on page 4 you mention and you talked about the need down the road for perhaps more structuring. You say specifically that at this time you believe it must be on competition and consumer choice in generation and distribution, not on privatization. But you go on to say, "Our view was that ownership changes should be done only when they are in the best interests of the stakeholders, the customers." You said, in answer to Mr Conway and Mr Phillips, about the need in the future for restructuring, which I would agree with. We are going on a huge leap of faith here. I expect you would agree with that comment.
I would like to follow up on your views on privatization. Would you believe in selling off Niagara Falls at some point down the road? Do you think we should be very clear that we don't want to be going in that privatization direction at this point and not leave that door open? Who should decide these things?
Mr McFadden: I assume when you refer to Niagara Falls, you're talking about the power plant and not the --
Ms Churley: No, I'm talking about the water, the falls.
Mr McFadden: We could sell it to Disney. They could set up a Disneyland over there.
Ms Churley: Not the casino, though. We'll leave that out of it.
Mr McFadden: What will undoubtedly happen is that the market will develop and some of these decisions will become more logical and clearer as we move along the road. The government's white paper talked, for example, about partnerships. I know that PWU has talked about partnerships in relation to Bruce, for example. The Market Design Committee has talked about leasing generation.
One of the things we should probably do is keep an open mind on how best to do this. The objective here is not structure and the philosophy of structure. Our objective here is to develop something that works for the consumer benefit and works for the benefit of the people of the province. Certainly we're not advocating getting out of regulation and ensuring that's done.
Our feeling is that, in effect, over the next five, 10, 15 years you're going to see restructuring. Whether you wind up with increased level of private investment in power, who knows? Whether it's in the form of partnerships, whether it's in the form of leasing, who knows? You may have a mixture of public-private. Some may be publicly owned corporations competing with privately owned. I don't know how it will go.
You can look at, for example, the airline industry, where we had a public entity, Air Canada, and a private entity, Canadian. Eventually, they both became private. Petro-Canada followed a similar kind of route. It was publicly owned and gradually became privately owned. If you look at those examples, Air Canada continues to provide an excellent service for Canadians and so does Petro-Canada. They're both Canadian entries on the world market. I think we're going to have to see how the market develops. It may be a long time before we see the results of all this.
Ms Churley: I don't think Mr Beck would enjoy having his great creation compared to an airline. Come on.
Mr McFadden: I think Air Canada is a very good airline to fly on to make it to Thunder Bay.
Mr Lessard: You say that this is a process that needs to be continually reviewed. One of the things that I'm not sure we can review or change is the amount of the stranded debt. It's very important, whatever that number is, that it be determined, that it be fixed and that it can't be changed at some point in the future, because of the uncertainty that would cause in the market. Have you given any thought to what would happen in the future if we guess wrong as to the amount of the stranded debt? If it's too high or if it's too low, what do you see as the ramifications of that?
Mr McFadden: I guess there are two things. You touched on a very, very vital issue: what's happening to stranded debt and the effect it'll have on pricing. First of all, I have been to I don't know how many different seminars and speeches and briefings on stranded debt. I assume members of this committee have been to similar things. Your mind boggles when you listen to all the financial wizards and financial advisers who are involved with this. The province is very well served by the people in the Ministry of Finance. I think they're really trying to wrestle with this thing to try to come up with a proper answer.
That, to some extent, may evolve with time as well, in this sense: that we may find that as things evolve, you may not have as much stranded debt as you thought, because some companies could perform better. As well, one of the things we are concerned about is how you approach stranded debt. There was a proposal around a while ago, and it's mentioned in fact in the discussion paper, that some people had proposed a rapid paydown of the debt. If we get involved in some sort of accelerated payment plan, just as you would if you had a mortgage on your home, you would find the prices go up. The position of Stakeholders' Alliance is that there's no reason for any increases in power prices resulting from stranded debt. It's a question of over what period of time you pay this debt off.
As far as I know, we're not in default of anything. There's no pressure from the market to suddenly pay all this off in this next two or three years. If we just pay off the debt in the ordinary course, there should be no reason for it to impact on prices. We already have heard that 40-some-odd per cent of our current hydro bills are made up of debt payments, payment on account of interest or principal. There's no reason for that to go up. The debt's there and it'll be paid off. There should be no additional debt come to light. Presumably, if we handle it right and pay it off over a period of time and we don't get into any kind of an accelerated payment program, I can't see why there'd be any increase in prices.
I can tell you one thing. The Stakeholders' Alliance position would be this: If they were to bring in some sort of accelerated debt payment program and they'd cause an increase in consumer prices, I think the support for that proposal would be very slim. We're interested to hear what's going to happen. We're very optimistic, though, that in terms of prices the stranded debt should have little or no effect on prices. We're hoping that it will basically be a wash from the current situation.
Mr Steve Gilchrist (Scarborough East): Thank you, Mr McFadden, and your colleagues for coming before us here today. I'd like to touch on two points, if I could, arising, in one case, briefly in your presentation; the other a bit more extensively, but I'd like to explore it a little further.
As you're aware, one of the government's intentions in bringing forward this piece of legislation was another stimulus to jobs and investment in Ontario. I know SAECCC had a number of things to say on that subject before. We were up in Sudbury yesterday. The Ontario Mining Association said in their brief that this bill is an initiative which can help mineral producers in this province become more competitive in the international marketplace. So it's not just domestic benefits but the ability for our companies to lever lower costs into something far greater reaching. I wonder if you would expand on SAECCC's position vis-à-vis the job creation opportunities attendant to this bill.
Mr McFadden: The fact is that if you look at our membership base, you will see that it's all the major power consumers: the automotive industry, the steel industry, the mining industry, the forest products industry, and you take from that the tens of thousands of Ontarians who work in those industries. Every one of those industry groupings is worried about power prices in Ontario. From the mid-1980s to 1995, power prices jumped 60% in Ontario. That is putting all those industries at risk in terms of competition.
Every major power consumer is urging the government, either individually or through the alliance, to get on with this. Let's get a competitive electricity market going, because we're facing -- all you have to do is read what's been happening the last few months in terms of the Asian crisis and everything else. There are very severe pressures coming on Ontario and increasing on many of these industries that are sensitive to energy prices. We're very, very concerned that we move as rapidly as possible to competitive electricity prices, and we think it's going to be important, as a result of that, for the government to constantly be reviewing this to ensure that we achieve that. After all, in many ways the power system is a trusteeship for the people. It's very important that our electricity system doesn't become a drag on the job creators in our society, and that's what it's become over the last number of years.
Mr Gilchrist: I appreciate that. The other point I'd like to have you touch on is that Ms Churley mentioned that following through on this bill would take a leap of faith. I would suggest it's more of a leap to catch up with everyone else.
We love charts. I'm glad Enron has left us with a couple more today. Here's a map of the United States. You may be able to see it from there. A grand total of one of the 50 states has not done what we're proposing to do in this bill, and many Canadians provinces have as well.
I know that on SAECCC there are a number of MEUs, municipal electric utilities. We had an interesting admission yesterday, also in Sudbury, from one of the more outspoken MEUs, North Bay Hydro. Their general manager admitted, "There's no question that the number of MEUs in this province is an anachronism." When we're talking about competition and we're talking about addressing the concerns that the Liberals keep bringing up about Hydro's power when it evolves into Genco, have you taken a position on whether the consolidation of MEUs would provide for greater competition among domestic suppliers and the ability to lever purchases from new co-gen plants and that sort of thing? Is that an important part of this equation?
Mr McFadden: As you know, in our three-point plan we did urge the municipal utilities to be permitted to consolidate, to rearrange their boundaries and so on. I can tell you that the MEA and the municipal utilities I've met are all anxious to get on with a sensible restructuring. Everybody realizes that there are some major economies that can take place if that happens.
Our feeling about this is that this legislation permits that to happen. It permits the municipal utilities to incorporate under the Business Corporations Act, which will then bring into it a real drive and an approach to efficiencies that will be desirable. It will also facilitate amalgamations. The people I meet from the municipal electric sector -- many of the general managers and presidents are very progressive people and are looking at ways to restructure to the benefit of their consumer. Before, it was very difficult. This legislation will facilitate that.
Mr Gilchrist: As a final point, then, just looking at the ability to amalgamate, this is perhaps more of an accounting question than anything else. There is a bit of a dispute going on about the fair price that should be charged. As in any other business transaction, would it be appropriate for Hydro to be selling off its assets at market value, at the price the assets are worth in a fair market? Alternatively, do you depreciate that, knowing it would increase the stranded debt? The MEUs are taking the position that depreciated book value should be the price they get to buy it at. They are the instant beneficiaries of that difference in price. But, in fairness, we had the MEA District 9 representative yesterday say that she personally believed that market value is fair because it would pay down the debt more appropriately.
Mr McFadden: Our alliance hasn't really studied how you're going to value municipal utilities. This surely is an issue that the municipal governments are going to have to make a decision on, presumably. The legislation confirms and probably clears up a point on that issue, but the municipalities are going to have to decide what they want to value these assets at. If they are prepared to accept the idea that a very key asset of the municipality is worth book value --
Mr Gilchrist: I was thinking more of Ontario Hydro's assets, if they are sold to --
Mr McFadden: Ontario Hydro's assets. That's another issue. If I misunderstood -- there were many questions you raised. My view, as a taxpayer and a citizen, is that if Ontario Hydro were up for sale, or Genco or Servco, it should be sold at fair market value and the market will decide that at an appropriate time.
If you look at the valuations worldwide, where various countries have made available for investment their power sector, the amount of money that has come into the government has been huge. In fact, it's often been in excess of what they anticipated. I have no reason to believe, if you were to do that here, that that wouldn't happen, but obviously you would not sell Genco or Servco at less than its market value; I think the taxpayer would have a legitimate complaint. But I assume that's a moot point, since that's not happening.
The Chair: On that note we must end this section. Gentlemen, on behalf of the members of this committee, we thank you for coming before us this morning. We appreciate your ideas and your suggestions.
GREEN ENERGY COALITION
The Chair: Now calling representatives of Green Energy Coalition, please. Good morning and welcome. Please make yourselves comfortable. As I'm sure you know, you have 30 minutes for presentation time. Please begin by introducing yourselves for Hansard.
Ms Christine Elwell: Good morning. Thank you very much. My name is Christine Elwell and this is my colleague Greg Allen. We're here this morning to file a submission on behalf of the Green Energy Coalition. We thank the committee very much for this opportunity to address you on the urgent matters before you today.
We have a few extra copies of our brief if needed. In addition to our brief, we've also filed a number of other documents. We've filed a technical report by the Sierra Club on environmental aspects of the Ontario Energy Competition Act, which reviews in more detail and gives more background on the particulars. We've also filed a renewable energies cost and capacity fact sheet. They're our best numbers, based on government statistics, on what the costs are, and the members can judge for themselves how affordable and competitive they are. Finally, we've also filed a copy of an overhead called Environmental Portfolio Disclosure: Consumer and Air Quality Protection in Deregulated Electricity Markets.
I would take instructions from you, Madam Chair. We do have available the slide presentation. It's basically an indication of what US producers are going to offer in the competitive market for green energy. I think it would be very insightful for the committee to see what the competition is up to. It's a very short presentation. We can judge at the end, depending on our time, if there's time to actually show it. We need a minute or two to set up. Otherwise, we have made a photocopy available for you in your package.
As you're thinking about the environmental aspects of the Energy Competition Act, we'd like to remind members of their duty and the province's duty to avoid the 1,800 premature deaths every year of our citizens related to air pollution. In your considerations, you also have a duty to avoid harm to our neighbours such as Quebec, and our unnecessary demands for their land and water resources and flooding of their terrestrial space. In addition, we have concerns about air quality of our neighbours to the south, for example, Vermont and Massachusetts, that are directly downwind of our electricity sources. Indeed, the duty you have today is a global one. Your duty needs to take into account avoiding harm with respect to global warming and whether this legislation helps or hinders efforts to mitigate climate change.
So there was the big picture, but indeed we have a number of specific recommendations we'd like to make to improve the bill.
I would like to speak to the issue of environmental and consumer disclosure, and my colleague Greg Allen will speak to the issue of stranded debt and renewable standard portfolio. In summary, we would suggest that the committee recommend amendments in two main areas.
The first main point is to capture the many laudable promises of environmental protection that this government has set out in this bill. Our concern is to ground those promises in the legislation itself. Our recommendations for a green energy strategy in Ontario would include a system benefits charge for energy efficiency and conservation. We would suggest that this modest charge could be levied by the independent market operator for transmission grid access, in section 17 of the act; in the OEB's powers to levy a fee in relationship to distribution, in section 76; as well as approval of rates, in section 77.
Moreover, we would recommend that any adjustments made to support these absolutely necessary public programs ought to be adjusted in any competition transition charge that may be necessary for stranded debt payment, anything that might favour green power producers and consumers, any cost flow recovery from renewable portfolio standard or other public energy conservation programs at the municipal level. But to be able to get the bureaucracy to recognize these initiatives, I entreat you that it needs to be in the act, whether by modifying the fee-levying power in terms of charges, rates or fees, but also with respect to licensing. This is the second main area.
To ensure a 10% renewable standard portfolio, essential emission and environmental performance requirements, as well as consumer disclosure, we would recommend that section 69 of the Ontario Energy Board Act be amended so it would roll in, would recognize, would incorporate by reference those environmental measures as a condition of OEB licensing; and furthermore, that that licensing be able to be enforced the same way as any other breaches of the Electricity Act or the OEB Act, and that's by suspension, revocation. To say, yes we have environmental measures but we have no enforcement measures is frankly just dropping the ball.
Finally, we would recommend in particular that section 87, which outlines and enables the Ministry of the Environment to establish a number of regulations concerning emission and environmental performance requirements, also be incorporated by reference in OEB licensing in section 69.
With that very broad sweep, I'd like to turn to my colleague Greg Allen, who will address stranded debt and renewable standard portfolio.
Mr Greg Allen: Hello. I'll begin by just giving a brief background. I have been 25 years at the issue of moving Ontario and indeed all our energy sectors towards a sustainable energy future. I have been active as an engineer in the promotion and development of renewable energy technologies and energy efficiency for that time period. Over those 25 years, the waves of hope and disappointment have washed over me and colleagues repeatedly from government to government.
Underlying those periods of what appeared to be breakthroughs in government policy and direction has been the dominance of Ontario Hydro policy that overrides those interests expressed by the population. We, as a result, have incurred this enormous debt, we have been subject to the poisoning of our air with the coal emissions, we have been saddled with a large inventory of radioactive waste for ourselves and children to contend with, and we have been snubbed repeatedly for daring to make a critique of that strategy.
I believe that the premise of this legislation, to renew the electrical sector in Ontario through competition, is absolutely compromised if the way we go about determining the stranded debt calculation makes an implicit assumption that the massive investment necessary to rehabilitate the nuclear reactors is within that calculation. If we do that, then it is business as usual at Ontario Hydro, where policy is directed by administration there and not by the province.
The nuclear assets optimization plan is a $22-billion investment by the crown corporation, which will still bear impact on the taxpayers and ratepayers of the province. In fact, the creation of a situation where we can continue to incur those debts isn't a matter of levelling the playing field but of levelling the other players on the field.
The way I perceive it is akin to that we've bought a lemon and the dealership that gave it to us has had our credit card. We keep being told that just one more overhaul will solve the problem and we will have many kilometres to go on this one, and bitter experience has proven otherwise. It's time for the people who should be in control, ie, the government of this province, to pull the plug on this money pit.
The irony of the Ontario situation is that restructuring has been driven by the crisis of electricity costs and the non-performance of nuclear reactors worldwide. It has driven the US initiatives. If it becomes the instrument by which Ontario Hydro/Genco has another opportunity to make one more massive investment in that direction, I'm afraid that the prospects of a successful reduction of costs as a result of a competitive marketplace will have been vanquished.
The issue of not only allocation of stranded debt but the decommissioning costs and the addressing of the high-level waste problem should be accrued by the generators, ie, Genco. As we continue to operate the nuclear reactors, we are accruing on a continuous basis more waste and more cost in terms of its disposal. Those should be explicitly accounted in the decisions on when to pull the plug.
Others, including Karl Wahl, the general manager of Mississauga Hydro, have noted that the nuclear reactivation will put a wet blanket on the prospect of investors getting interested in producing the more efficient and less costly generation opportunities.
To that end, there are two recommendations in our report: that the successor Ontario Hydro generator service as much of the stranded and incurred debt as possible in order to avoid unfair competition with new generators, in particular green power producers; and secondly, that a public fund be established by Ontario Hydro, as part of its assumption of the stranded debt, to ensure that Ontario's nuclear power plants are properly decommissioned and insured against risk, so that incorrect nuclear energy prices can no longer unfairly compete with more economic and environmentally friendly sources.
The second item I would like to address is one that is being widely advocated -- in fact, I recently heard that Ontario Hydro may be a proponent of such -- and that is the renewable portfolio standard, which is commonplace in the jurisdictions in the US and not yet embodied in the act. I urge that it be taken into consideration and a form included, with some articulation, in the act.
The reasons for having a renewable portfolio standard are many. We have the fundamental issue of how we are going to move, over the next generation, our energy usages to ones that are sustainable and that reverse the pattern of ever-increasing contaminant loading on the environment. As such, we need to have a public policy that advocates green power in the province. Secondly, we need to recognize that other countries are enjoying a very prosperous renewable energy industry. I'll cite Denmark, for example, that has been early on in wind power generation. It is now their second-largest exporting industry. We will fall behind in Ontario in the competitive market for green power if we do not have in place similar regulations to those south of the border.
We also need to recognize that the placing of all one's eggs in one basket, the pattern of the past, has got us into a lot of hot water. We can quite surely revisit that if we have a predominant dependency on single fossil fuels, such as conversion over to natural gas sources and the price instability that we can imagine occurring. A diversity of generation in the province makes the system more robust and hedges against future cost increases.
There are other motivating factors, but I would just like to indicate that renewables are presently capable of competing in many sectors. The application of some of these technologies is already in place, such as the capture of methane off of landfill sites to cogenerate power and heat. Wind technology is closing. In fact, a project I'm personally involved with in the city of Toronto is to establish a net billing program: collective ownership of a wind generation facility for approximately 300 households. We can open the floodgates to innovative means of financing from the citizenry and the private sector for these green power options at competitive rates if there are not access limitations.
I will close on that. I'm sure that there are many questions that I might be able to respond to.
The Chair: Thank you. That leaves us three minutes for questioning from each caucus.
Ms Elwell: If there's no time for the overhead could I just make reference to two pages of this material?
The Chair: It's your choice. If you wish to do the overhead or you want to refer to the material, that's fine.
Ms Elwell: I'll just flag the pages in particular, because I'm very interested in taking your questions and wouldn't want to use your valuable time unwisely. Let me just indicate that all the necessary requirements for a sustainable energy strategy sort of come together under the environmental and consumer disclosure head. Why I say that is because it brings together our needs for energy efficiency, renewables, disclosure and serious emission caps kind of within one mechanism, so it's worth spending some time on it.
The last sheet gives you a checklist of the basic outline of true environmental disclosure for electricity. The absolutely essential thing there is that not only are the emissions indicated according to a benchmark on what the standard is, but also the relative fuel mix. In other words, it would not be appropriate for a marketer to come in and say, "I market green power," if that's 1% of their portfolio and meanwhile, 99% of their portfolio is dirty coal or something. The information to the consumer needs to be about the entire portfolio of the supplier, and this is outlined quite well in this document.
The other page I would flag for members' attention is page 8. This is the electricity emissions benchmark portfolio disclosure. You'll notice it outlines the fuel mix that's being provided to consumers, but it also, and this is very important, outlines the air emissions in terms of a benchmark so that I, as a consumer, can say, "I'll buy from company A because their NOx emissions are low," or "I'll buy from company B because it has a lot of solar power." We really need that comparative shopping potential and I would entreat you to look at it very carefully.
With that, Madam Chair, I'll turn it over to any questions members may have.
The Chair: There's time for one brief question and answer from each caucus. We'll begin with the NDP caucus.
Ms Churley: We only have one minute now. I agree that the mistakes made in the past are what got us into what I call heavy water today. Now is the opportunity to build that bridge, and it's going to take some time.
The environmental externalities of burning dirty coal and the billions and billions of dollars that we've put into nuclear power means that at the end of the day we subsidize those particular sources of power. In the past and, believe me, in government, it was frustrating, because of the debt, not having that bridge. That's why, ultimately, I'd like to support this bill.
My question is this: If some of the recommendations you made today aren't put in the bill so that renewable energy will come on stream, unless these things are put in the bill so it's very clear, are you afraid that because of competition you're not going to be able to get in the door even now and that we'll end up continuing on and on with coal and nuclear?
Mr Allen: Yes. I have to say it's with a sinking heart that I perceive, with the rush to put this bill through in the absence of having these safeguards in place, that we will end up making the commitments identical to the commitments we've made in previous years, without any significant change to that arrangement. Simply passing it over to another crown corporation that will make its financial decision somewhat independently of government will, I believe, result in the absence of competitive opportunity. If you invest in a nuclear reactor, those funds are sunk and you must run that equipment, so whatever the price is, it will be undercut by the generator.
Mr Galt: Thank you for the presentation. I've glanced over your recommendations and I can assure you that the government is empathetic to most, if not all, of the points you're making. As I'm sure you're aware, there's extensive consultation going on. I hope you will be, or are, part of those consultations.
I'm interested in your comments about pulling the plug on Ontario Hydro. There might be a lot of people empathetic to that kind of thinking. At the same time, you also talked about the overhaul or fixing up and not believing the direction. I would suggest that what this bill is doing is really redesigning a new model and heading in a very new direction.
The concern you mentioned earlier in connection with systems charges to increase the use of green energy: Yes, a suggestion that should be considered. I bring to your attention that our first presenter this morning, from the Canadian Association of Energy Service Companies, concerned about energy efficiency, was pleading with us not to bring in any financial incentives one way or another. We're bringing in consumer choice, and I think you're on record as saying you support the government's idea of emission disclosure, emission caps, emission reduction trading, performance standards provision, all things which should encourage green energy and green power production.
I'm curious about what you group as green energy. There are difficulties with even wind power and solar power; they take up acreage of forest or agricultural land. We heard the other day that hydraulic generators create some problems too. Do you consider hydraulic generation as green power?
Ms Elwell: Yes, small scale. Thank you for that question. May I suggest to the committee that this issue of what is green power is really holding up a lot of our progress here unnecessarily. I think you should just decide it. Just go ahead and define it. Everyone will live with it. But not knowing is not good for investors, not good for anyone. Ontario has a comparative advantage in green power and hydro power, if we define it, say, as something more than a 20% run of river. In other words, do something different than the eco logo recommendation. I would entreat the Market Design Committee to come up with and negotiate something. At this point, it's just silliness that we haven't been able to agree. We're not stuck to any one position.
May I also address your other question about energy service companies? It's kind of like an end-of-pipe solution. If we can avoid unnecessary expansions at the front end -- yes, energy service companies have their role to play, but the generators need to be onside and provided with some sort of incentive. The market's there to provide their shareholders with profits, and that's based on selling the most amount of energy at the highest possible cost. That's what markets are supposed to do. Therefore, it won't address the public interest needs of making sure energy efficiency is practised, making sure there's some conservation.
But the generators need to be onside and provided with some sort of incentive, because the market's there to provide their shareholders with profits and that's based on selling the most amount of energy at the highest possible cost. That's what markets are supposed to do. Therefore, it won't address the public interest needs of making sure energy efficiency is practised, making sure there's some conservation.
I give you the analogy of land development. When a government makes a land deal, they'll often set aside 5% or 10% of the space for public community centres, schools, whatever. We're asking for that same public space for a renewable standard portfolio to ensure that the uncompetitive pricing signals in the market are compensated for by a public investment in renewables and energy efficiency.
Mr Allen: If I could add, system benefits charges are not to interfere with the markets where ESCOs can actually perform, but rather to examine strategically where markets are dysfunctional, such as the split incentives of landlord and tenants, such as market transformation. I give an example in the gas sector where take-up of high-efficiency gas was not happening for historical reasons and because the technology wasn't readily available to the dealers etc. So a short three-year downcharge on the high-efficiency technology transformed the marketplace and it was totally lifted after that point and forever remains a beneficial move by the community.
Mr Phillips: Time only permits one question so I'll focus a little bit on the stranded debt issue, because your recommendation, as I interpret it, is that there will be debt assigned to the generating company and then there will be a portion of the stranded debt assigned to the generating company, Genco. Your recommendation is that as much as possible be assigned to Genco.
My question is, if that were to happen across the board, even some of what you would regard or I would regard as the green generating capacity of Hydro would be unfairly burdened and would make them in some respect non-competitive with other sources that will come down the road. By the way, as an aside, previous presenters have said that Hydro is generating enough to pay off the debt right now. I just remind us that in the last two years they couldn't pay off the debt and they've had to put in $8 billion worth of write-offs, some in interest costs, some to buy future power, just to keep from raising the rates. But my question is, if we take recommendation 6 of yours, is there not the possibility that we penalize Hydro's ability to compete even on its green generation?
Mr Allen: Of course there is a contradiction when you have a crown corporation where the determination of what is competitive for the utility is based on debt allocation and also in terms of the competition transition charges that may be imposed. You're kind of rigging the playing field so that Genco can actually be a competitive entity in it, and I understand the reasons for doing that. It's as much political that we're not selling off the assets as from any arguable benefit to the community.
The essence of the issue is in the determination of what is a stranded debt in this case. If it assumes that it is necessary to make those investments of, as I mentioned, the $22-billion overhaul of the nuclear equipment, then there is no market determination of whether that was a good or bad choice. It is a determination that's made by the finance department in this government as to whether those investments are going to be available for Genco to make. We are just deferring that very hard question as to when to pull the plug.
Ms Elwell: Madam Chair, may I just also indicate recommendation 5 might address the member's concern about flow-through with rates and adjustments to take into account monies paid for renewable energy efficiency programs.
Finally, on the concern about the selling of assets, I would flag Sierra Club's last recommendation 8. We've made a recommendation on how to safeguard public natural resources. While the bill may allow for the actual facility or building to be sold off, I would entreat the committee to think very hard about whether you really want to sell Niagara Falls, the actual resource, the water itself.
The Chair: I'm going to have to interrupt. We have to leave time for the next presenter. I thank you on behalf of all the members of the committee for coming before us today. We appreciate your advice.
The Chair: I'm now calling upon representatives of Pollution Probe, please. Welcome. Before you begin, please introduce yourselves and your positions for the Hansard record.
Mr Ken Ogilvie: My name is Ken Ogilvie and I'm the executive director of Pollution Probe. I have with me here today our technical and policy adviser, Peter Love of Lourie Love Environmental Management Associates, and Joe Castrilli, our legal adviser on issues related to restructuring and the Energy Competition Act.
Our position is that we are in support of three of the measures in the act. We do have comments and concerns to express. In short, we will be arguing, as other groups have done, for inclusion of a system benefits fund and a renewable portfolio standard in the act, or alternatively, but not in preference, within the Ontario Energy Board's mandate. What we'd like to do is to give you our reasoning behind this and to table our research on this subject and answer any questions you may have. I intend to take no more than 15 minutes, hopefully less, to present, and I may cut that even shorter depending on whether I think I'm adding value to the discussion.
I want to start by giving a bit of background on Pollution Probe to explain who we are and what we are. I think many people know, but I think that's important. Then I'd like to define the problem based on some of the research that we've done that we see with some of the existing electricity generation in Canada and the United States. Then I'd like to turn to what we think are some of the policy options and why we support some and we'd like to see others included, and then make just a few concluding remarks.
Pollution Probe, as many of you know, was created in 1969, so we have close to a 30-year history in developing environmental policy and supporting environmental policy development in Ontario and in Canada. We're a national organization with headquarters in Toronto and very recently have opened an Ottawa office to deal more directly with national policy.
We are one of the largest donor-based environmental groups in the country with approximately 10,000 active donors. Our approach has evolved over time, I think, from the early days of pure advocacy to today we have a commitment to using sound science and reliable information. We focus on positive outcomes and we focus on building partnerships with government, industry and other stakeholders. We believe that's an effective way to help shape public policy and we're quite committed to that.
I would mention that I will table a single copy of information reports, but we do have 25 copies of our more substantive materials that we'd like to put in front of you. I will table an annual review for those of you who may be interested in the scope of what we do.
Work that we've done related to electricity restructuring started with a very careful look at the problem related to coal-fired electric stations. In January of this year we published a report that was led by Peter Love on emissions from 312 operating plants from the United States Great Lake states, the Ohio Valley, through to the east coast of Canada and the northeast United States. I brought one copy of this because it has been previously distributed, but we can certainly make others available.
The results of that are quite stunning. We did look at five emissions of concern. That's sulphur dioxide, nitrogen oxide, particulate matter, carbon dioxide and mercury from these plants. We looked at scenarios out to the year 2010, assuming, I think reasonably, that the US Clean Air Act amendments, as currently stated, will be implemented and that existing promises and commitments will be met.
We looked at the results of applying available control technologies to reduce pollution from those plants. This is important because this is really the major source of emissions of concern. There are other issues related to electricity production, but those five pollutants are huge issues. What we found, of course, is that current levels of these pollutants do threaten the environment and human health, but also that more than 90% of each of these five pollutants are generated in the US Great Lakes states and Ohio Valley states.
How much of that transfers to Canada is a matter of modelling and other studies that are available, but a large amount of this pollution comes to Canada and we bear the brunt of that. We are also significant generators in our own right and have no cause to point too hard at the United States for some of its failures, but we do have a lead in some areas and I'd like to address that.
We also found that existing technology can take the levels of most of these pollutants down by 50% or more. This is best available control technology as specified in some of the US Clean Air Act amendments, with the exception of carbon dioxide, a greenhouse gas, which really does require a shift in energy mix to achieve that goal.
The average emission rates of Ontario Hydro's coal-fired plants are considerably less than the average of similar plants in the United States, although the United States will catch up to Ontario when the Clean Air Act amendments are fully implemented. But we do have a lead. We have invested. We've put the money up already and we should find a way to get the benefits of our investment in cleaner technology.
We went on from there because we believe that the problem is quite clearly defined by ourselves and others and we do need a solution to this. We went on from there to look at policy measures, policy options that could be used to deal with the problem in a competitive energy market. Peter identified 22 policy measures that we looked at and we looked at who was implementing each of those and what they meant, and they're in a report that we've produced and are releasing today for the first time that has the analysis in it of those measures. Twenty-five copies have been made available.
This report was done for the purpose of selecting seven measures based on criteria that we applied to say these might be of great interest to the province of Ontario. We did at an early date, in March of this year, send a letter to the Honourable Jim Wilson, of which we've given 25 copies, outlining those measures.
Three of those measures have been included in Bill 35 and we support their inclusion. I do have some comments to make on them, but we support their inclusion, and that is emission caps and tradable permits, emission rate standards and mandatory disclosure. I think others have supported those too. There are details to be worked out; we would prefer to see some straightening out of some of the language and some clarifications, and we would really have preferred to have had more time to deal with what the regulations around those measures might look like before the bill is finalized.
For example, I make note of clause 176.1(a) on emissions trading, in which the purposes of emissions trading are, in our view, inaccurately stated. Emissions trading is a means to achieving an end, which is cost-effective reduction of pollution and meeting environmental target standards. It's not intended to maintain or improve existing standards, as noted, or to protect the environment per se. It's a market mechanism, it's a tool to be applied. The targets and standards should be set outside of the process of emissions trading independently and should apply to the electricity sector, regardless of whether or not emissions trading is used. A more complete understanding of this tool can be obtained.
Again, we have just received yesterday the results of a conference that Pollution Probe and the Conference Board of Canada put on last year -- we have the proceedings -- in which we invited up the best American experts on this issue that we could find and had a really, I think, excellent conference. We captured the essence of what has gone on in the United States and in Canada. It's in these proceedings and I will table one copy of this. Again, we can make further ones available.
We have some concerns about the way in which the existing measures are stated but we support the inclusion of these measures in the act. We need to have the authority to use these measures if they make sense, but we need to work out whether in fact they make sense and they're in the public interest.
One of the policy measures we identified in the letter we don't support. We looked at emission caps and voluntary agreements and in a competitive market, it just doesn't work. It's very difficult. We've outlined our reasons for that in our study.
Another of the measures, which is energy efficiency codes and standards, is already captured in other legislation. We support those measures and would like to see further development of those measures.
That leaves us with the two I mentioned at the start of my talk, which is a system benefits fund and the renewable portfolio standard. I'd like to talk a bit about the logic we see behind including those in the bill. I do have Peter Love and Joe Castrilli with more expertise on the legal and technical aspects of these measures, and we can answer questions later.
I think everybody knows what a system benefits fund does, so I don't think I should talk about that other than to say that more than 10 US states have enacted or are proposing to enact a system benefits fund and that this measure is the most common mechanism used to fund energy efficiency internationally. President Clinton has announced support for a $3 billion per year fund as part of his comprehensive electricity competition plan and we've included a copy of that plan in our study.
Seven states have either passed or are proposing to pass a renewable portfolio standard. Again, President Clinton's plan proposes a standard of 5.5% nationally by the year 2010, excluding hydroelectric sources.
We note that two of the three policy measures that are in the bill -- emission caps and trading, and emission rate standards -- tend to result in emission control retrofits and fuel switching but are not that effective in controlling greenhouse gas emissions, CO2 emissions, since they do not reduce the utilization of fossil fuel plants.
Mandatory disclosure is a relatively new policy measure which we totally support, but the effects of that in terms of consumer choice are not that clear. We would like to have that in, but we see it as necessary but not sufficient to move towards greener power.
The system benefits fund and the renewable portfolio standard are, in our mind, the most effective policy measures that we could apply to reduce fossil fuel plant utilization, and that's what gets us to reducing all of the five and many more pollutants that we've mentioned, including CO2. As simple a fund mechanism as a 1% wires charge could generate savings, according to our estimates, of five terawatt hours per year after 10 years. Energy efficiency programs in New York state have found quantifiable benefits for energy efficiency measures of three times cost. We think that the public benefit is clearly there and the private sector won't provide that without some incentive. As I've stated, if these measures aren't part of Bill 35, we'd like to see some way of having them applied more directly through the Ontario Energy Board.
We have conducted a legal analysis of these measures, of the system benefits fund and the renewable portfolio standards, as well as mandatory disclosure. Joe Castrilli has just submitted his first draft of that report and we will table one copy and, again, can make more available if you'd like. Joe has looked at the Canadian constitutional and federal and provincial legislative authorities to apply these measures. We've made some headway there. Due to time and budget limitations, we couldn't get any further before this date, but we're going to continue on and finalize that study.
Peter Love is conducting a study right now of the cost of upgrading Ontario Hydro's coal-fired plants to US new source performance standard equivalent, a best available control technology. We expect that to show that we have a significantly lower cost than the US faces in doing similar upgrades, especially if new and existing plants are included in US policy. So we advocate, both in Canada and the US, the achievement of these standards or equivalent and are prepared to look at the application of cost-effective measures like emissions trading as ways to achieve them at least cost.
We will have the study on the cost side, I hope, within about a month or so. It's dependent on receiving some data from Canada and the United States. But I think that the point we're trying to make is that we're in a very good position to be a leader in North America on delivering cleaner energy at competitive prices. That assumes energy imports from the United States are required to meet similarly stringent environmental criteria as our own, and we need to have the legal mechanisms and policy measures to do that.
My conclusion then is that Ontario, as we all know, has the highest smog levels in Canada. We have now again, with a growing economy, growing greenhouse gas emissions, and we have serious acid rain and mercury contamination problems, among other electricity-related issues. All of these five pollutants are emitted in large quantities by coal-fired electric plants and, in particular, transboundary pollution is a huge source of our problem, especially from the older plants that are grandfathered under the Clean Air Act amendments in the United States. But with Bill 35, Ontario does have an unparalleled opportunity to reduce pollution by these substances.
Ontario will not achieve the goals of the provincial and national smog plans without a major shift in the way electrical energy is generated. Moreover, Canada's Kyoto target for reducing greenhouse gas emissions by 6% in the period 2008 to 2012 will not be met if the use of fossil fuels continues to expand as current forecasts predict.
Therefore, today Pollution Probe urges the government of Ontario to be a leader in providing cleaner, competitively priced energy to the people of Ontario. Including provisions for a system benefits fund and a renewable portfolio standard in Bill 35 will give us the tools we need to ensure a comprehensive approach to giving the people of Ontario cleaner air and to supporting our commitment to the international greenhouse gas target set in Kyoto. Thank you very much.
The Chair: Thank you. We have four minutes for questioning from each caucus, beginning with the government caucus.
Mr Galt: Thank you, Mr Ogilvie, for the excellent presentation. I certainly compliment you and organization, a very credible organization concerned about pollution, particularly air pollution, in our many chats over the past three years or so.
You made comments about some of the -- I think the term was "stunning information" you gleaned from some 312 fossil fuel plants in the US. It's interesting when we look at Ontario Hydro with all of the electrical organizations in the northeast that we come in -- I said "we" -- that Ontario Hydro comes in second, with total releases of SO2, CO2 and the oxides of nitrogen. I think that gives some of the reasons why Genco, with its three methods of producing electricity -- it's wise to hold them together so that the fossil fuel plants are only used for peak periods and the base load comes from other sources of electricity with much lower emissions.
As you're quite aware, this is enabling legislation. Do you see anything in the bill as it's presently written that would block or inhibit any of the kinds of things that you would like to have happen environmentally in the future?
Mr Ogilvie: If I could, I'd just like to ask Peter Love to address the question of the synergy between the five measures, the three that are in the bill and the two that we're proposing, because I think it's important from a long-term market point of view and other issues like greenhouse gases, that these measures work together. I think that's our main messages, that these are complementary, not contradictory, and that the three measures are not complete. Peter, would you like to speak briefly to that?
Mr Peter Love: Yes. As Ken said, we started with 22 measures and we focused them down to seven, which are the ones that we communicated to the Honourable Minister Wilson. We didn't select one that was the best. We didn't try to do that. We didn't try to rate them. What we concluded really was that they work together and they complement each other. I guess a concern of ours is that the bill really focuses on the end-of-pipe solutions. It's talking about caps, it's talking about performance standards, it's talking about disclosure. These are all things that have happened once the coal has been burned, and there's going to be a role for that. Probe is fully in support of those measures and that's clear from our work.
But one of the implications of spending the money, and it's large amounts of money, on emission control technologies is once that money's been spent, that utility, that owner, public or private, is motivated to run those plants for as long and as often and as for many hours as they possibly can in order to recover those high capital costs that they have incurred.
You're continuing to use coal as a base. One of our real concerns is that right now coal, you're right, is used as a peaking fuel in Ontario. However, if Hydro or another private operator were to spend millions of dollars, tens of millions, hundreds of millions of dollars on improving the emission controls at an older plant, that would no longer be used as a peaking station. It's very possible that would be looked at as more of a base station and then we'd have C02 emissions actually going up because that station would be used much more.
This is why we really are very much in favour of a combined approach that looks at and encourages -- and there's wording certainly in the objectives of the OEB that they want to encourage energy conservation, they want to encourage renewable energy technologies. It's not in Bill 35 itself, and at this point in the OEB Act it's very vague as to what would be included. We would like to see more consideration being given to that.
It's not just an end-of-pipe solution we're looking for. Just as we did with waste and with garbage 25 years ago, let's look at how we can reduce the amount before we begin to recycle it. Let's look at how we can reduce the amount of electricity that we're actually using or the amount of coal that we're burning and then let's clean up what we have actually had to burn as best we can.
Mr Galt: I think you'd be pleased to realize that the Lennox generating station is in the process of or maybe it has completed now a conversion of two of its generators to gas from oil. I believe the Nanticoke plant is putting cleaners on their stacks. They're moving in that particular direction.
Mr Ogilvie: Yes.
Mr Galt: Just quickly, just one last question --
The Chair: Doug, sorry. I'm sorry, there isn't time.
Mr Galt: Oh, dear. Thank you, Madam Chair.
The Chair: Moving to the official opposition, Mr Conway.
Mr Conway: Just a couple of questions. What would a renewable energy portfolio look like in Ontario in the next 10 years? I think you make a very attractive and powerful argument. I'm trying to imagine myself as a retail customer and that sounds like a good idea. I'm trying to think, what would it look like? What would be in that portfolio for Ontario in the next 10 years, realistically?
Mr Ogilvie: I'd like Peter to answer that again. I agree of course with what I think the Sierra Club has said, which is that wind, solar, small-scale biomass and hydro are definitely candidates for that, but I'm not sure technically -- Peter, if you want to address that.
Mr Conway: That's a pretty good answer, by the way, Ken.
Mr Love: I think that was a very good answer. We're talking about what tend to be smaller technologies. They're not huge plants. They're not 1,000 megawatts here and even 500 megawatts there necessarily. We're talking about smaller plants. They tend to be referred to as what's called distributed generation. They tend to be plants that are located closer to where people are. One of the real advantages of that is you have less susceptibility to power interruptions as was experienced in Quebec and eastern Ontario, where you had some lines go out around generating stations and around homes. The whole thing fell through, so that it caused major problems.
This idea of a distributed generation, there are lots of technologies. Some are not competitive now, but will be. We need to be keeping a watching brief on those as they develop. Certainly there are some in the Toronto area right now. The recovery of methane gas from landfill sites is already a very competitive one and that's something that five years ago people thought was both technically unfeasible and probably expensive. That is a renewable technology that we have seen over the last five years come to the fore as being economically viable.
That's what it would look like. I think consumers are looking for it, would be interested in it. The bill certainly includes a disclaimer requirement and I think consumers are going to be interested in seeing that.
Mr Ogilvie: If I could add just briefly to that, we're doing a great deal of work on emissions trading at Pollution Probe, including participating in the national discussions on an international trading program. There will be, if things evolve as current policy is going, an economic value to some of these other technologies. There will be emission credits generated if these systems come into place, so there will be additional benefits financially.
Mr Conway: The Market Design Committee in its report last month said, and I quote from the report, "An emissions trading system should be implemented when the competitive electricity market opens here in Ontario in the year 2000." Do you expect that we are going to be able to have, on the basis of what you now know, that emissions trading system and the related regulations in place when the door opens to the competitive marketplace 18 months hence?
Mr Ogilvie: I'd like to answer briefly to that and then ask if Joe wanted to say a few words, because Joe has done a great deal of work on the legal dimensions of emissions trading.
What you'll find in the proceedings of the conference that we did -- and we've got another report on this coming out in about two months' time or less. We're not as prepared as the United States, because of their legal regime, to implement emissions trading broadly. Our electricity sector perhaps is much closer. We do have pilot studies under way in Canada, but there are some fundamentals that have to be put in place to run emissions trading systems that take care of the public interest, capture the benefits and create a broad enough market.
Mr Conway: Are we going to be ready?
Mr Ogilvie: I doubt it personally, but perhaps Joe, if you'd like to --
The Chair: I'm sorry to interrupt, but I think we have to allow time for the third party to ask a question.
Mr Lessard: I'm very interested in hearing the additional response, so I'm going to ask that you answer the question.
Ms Churley: But hurry, because we have another one.
Mr Joe Castrilli: The short answer to your question is that there are really two types of emissions trading programs extant in North America. There is what is known as an emissions cap and allowance trading, which is basically what the US Clean Air Act employs under title 4. There is also a second system known as "emissions reduction credits," which is what title 1 of that act uses. They are fundamentally different.
As you know, with title 4, you essentially set a global aggregate annual tonnage cap on emissions for sulphur dioxide and then allowances are made available -- they are essentially permits -- and collectively all utilities in the United States cannot exceed the global aggregate.
The second type of regime, emissions reduction credits, does not set any caps for any substances that are a source of trading. Frankly, although that legislation requires that reductions of emissions must be a part of the emissions reduction credit program, it would be very difficult to translate that concept to Ontario law because of the nature of the regulations we currently have in place.
However, I think it would be much easier for Ontario to go the route of an emissions cap and an allowance trading program, because right now, under the Ontario Hydro regulation, you already have an emissions cap in place. That's also true for the other three emitters of sulphur dioxide in this province. Nova Scotia has an emissions cap and allowance trading requirement for its one utility. I think that approach is eminently capable of being employed in Ontario within reasonable period of time, perhaps even as soon as the year 2000. But if you attempt to use the existing regulation 346, which are point-of-impingement regulations, you will not get anywhere with respect to emissions trading and environmental improvement.
Mr Lessard: One of the things the government likes to say is that if you make green power available to consumers, they will choose it and it doesn't matter how much higher the price may be or what the premium may be. I think there are some real severe limits to what consumers will purchase. Do you feel that market for green power will develop without the renewable portfolio standard being included in Bill 35?
Mr Ogilvie: Do you want to answer that? You touched on it in your work.
Mr Castrilli: If I can just briefly respond to that, I noted in the Macdonald committee report of 1995 that there were really two contradictory tendencies set out in that report. The first one was what you just stated, that increased competition would lead to increased green electricity. The second tendency and approach of that committee, however, was to state that they had concerns about the extent to which that would occur without the influence of regulatory controls.
I think as you move forward in the policy material that was developed subsequent to the Macdonald committee, there's been, if I can put it this way, an accentuation of the notion that competition all by itself will lead to green electricity and a de-accentuation, if that's a word, on the notion of whether regulatory controls are necessary. I think the Macdonald committee had it exactly right: We've got to do both. I don't see both right now necessarily in Bill 35.
The Chair: On that note, our time has expired. As you can see from the co-operative way we were handling our questions here, this committee is truly interested in finding the best solution to changing the electricity industry that we have in the province, and we thank you for coming forward with your suggestions today.
Mr Phillips: Chair, before we break, I was pleased yesterday when the government said it would supply some information on Hydro accounting. I want to be sure that they're providing the information that I requested yesterday. I'm very interested in the $6.5-billion Hydro write-downs in 1997, including --
The Chair: Just a moment, please, so we can hear.
Mr Phillips: I mentioned yesterday the tree-trimming, the interest costs, the replacement energy, I think $800 million in interest write-offs. I think the government indicated yesterday that they all followed proper accounting procedures. I just wanted that to be included.
Mrs Johns: What I promised yesterday was that I would prove that the costs that were incurred as a result of the ice storm should be properly included -- even if they hadn't been incurred, they should be accrued -- and that I could get an accounting opinion on that to you. I think you should get that information. If the member would like to ask another question about that, he should ask legislative research to get that.
Mr Phillips: Okay, that's good. Then why don't I ask legislative research to provide that.
The Chair: Fair enough. You might want to talk further on details.
Mr Phillips: Okay, good.
The Chair: Colleagues, we're going to stand recessed and we'll reconvene this afternoon at 1:30 in this room.
The committee recessed from 1206 to 1332.
The Chair: Good afternoon, everyone. Our first presenter this afternoon is Andrew Frame. Welcome, sir. We are pleased to have you with us this afternoon. If you would like to introduce yourself formally, you have 30 minutes for presentation time.
Mr Andrew Frame: Good afternoon, ladies and gentlemen. I want to thank the committee for the opportunity to appear before you today.
You have a one-page handout regarding my qualifications and my background and education and the things I have done in the electrical power business. You may note that I am not part of a group, a company, an association or anything else like that. If I am a part of a group, I am part of that 3.5 million who are customers of Ontario Hydro and I am here really hoping to make some comment on this legislation. I don't claim to speak on behalf of customers, but I am a customer and I am looking at it from a customer's point of view.
Bill 35 is a historic change in the way electrical power is handled in Ontario. The electrical power industry changes dramatically with this bill. It has all-party support. This is rather unique. Not very often does a major piece of legislation come in with all-party support, but this one has it.
My presentation to you today is from the aspect of my career working with the government in the Ministry of Energy as senior adviser on hydro utilities for a period of 17 years. I worked for 15 ministers over 17 years and I worked with all parties in their stints in government.
During those years, they all had problems with Hydro. Various things happened, but Hydro was continually in the news. There were problems of various sorts, some minor, some major.
Someone once said to me that Hydro was like an elephant. An elephant is going through the jungle and there is a man up on top of the elephant and you say that the man is in control of the elephant. You tell him to start and he starts, you tell him to stop and he stops, turn right, turn left and he does what you tell him. But you're never really sure. If the elephant decides to lie down and roll over top of you, you're dead.
That's really the kind of problem that governments have had with Hydro. They weren't really sure what Hydro was going to do next and what kinds of troubles it was going to cause and if it was going to bring down a government.
Hydro has, under present legislation, a lot of powers. Determining the cost of electricity in Ontario: I guess maybe the best-known one, or maybe you're not too familiar with it, is section 92 where it talks about selling electricity to municipalities. The cost will be the cost determined by it, "it" meaning Hydro. So I guess the elephant is called "it." They could determine whatever was going to be in the cost base -- no arguments, no appeals. This was the cost, this is what you had to buy it for, for resale to municipalities. That caused all kinds of problems in the rates and other things, but cost determined by "it."
What has happened is that the existing legislation is not enough to control Hydro. There are many problems and the government of the day has come to the conclusion that it can't be fixed with minor adjustments, that what you have to do is make a major change, a new approach, new legislation. The government has chosen to set it in a framework of competition in the electrical industry.
But Bill 35 is not just about competition. There are many, many more things involved. The legislation introduces many new factors into the electrical power industry. Competition is getting the big play. The finance paper put out recently said that competition will ensure that you have the lowest possible rates. I don't think they can ensure that at all. You've been careful not to say that you're going to have lower rates. Earlier this week, both the minister and the president of Hydro were very careful to say you're not going to have lower rates.
The minister, when he introduced the legislation, talked about the old vision, the Adam Beck vision. He said the Adam Beck vision has come to an end. The Adam Beck vision of Hydro in Ontario was one of public ownership, no profits and no taxes. Things were done for the benefit of the customer. Now this new vision that you've got before you is quite different. It brings in competition, it brings in investment by private investors -- and there won't be any investment unless you hare assured of a profit -- and it brings in a lot of taxes.
You don't mention taxes in press releases. You call that a level playing field. All the time we hear government referring to the level playing field, but it's really a euphemism for the many areas in which this legislation introduces taxes into the hydro system or into the electrical power system when they weren't there before.
I think the policy of the government in the legislation is making some bold assumptions. The assumption is that the industry, with the competition, in generation in particular, maybe in distribution, will bring about such lower costs -- you'll have people working smarter or more efficiently or doing something magical or maybe getting better interest rates, Lord only knows -- that somehow all this will offset what has to contribute to the higher costs, the profits that will be expected by the people who invest in the industry, and the taxes which the government is going to extract from the industry.
It has been said that you can be assured of lower rates and one of your colleagues has said, "That's a leap of faith," and I certainly agree. I don't see those lower rates at all.
In the Power Corporation Act, you have 28 places where order-in-council approval is needed. This is approval by the Lieutenant Governor in Council; ie, approval by the cabinet. What is not in that act is approval of rates. There's no way that Hydro requires an order in council or any other approval. Hydro sets its own rates and these are reflected through to the customers.
The new act brings in regulations allowing you to set a lot of regulations. Several of them will be for rates. So you say: "Okay, the problem is solved; we're going to regulate the rates and the customers will be happy. Great stuff. Problem solved." But I'm not quite sure if that's the case or not, because first of all I haven't seen the regulations and neither have you.
In the situation in California a couple of years ago when they were introducing the legislation, the first tabling of the regulations, there were 1,000 pages of regulations. I'm not sure what the regulations in Ontario are going to look like. If there are 1,000 pages, how many of you are going to read them? But the Ontario Energy Board will advise the cabinet, the cabinet will pass the regulations and you're going to have regulations. But no longer will you have, as in the present act, the powers to review legislation that will be looking at some of the key things which happen in the electrical power industry: Hydro buying and selling land, building generating stations, transmission lines, selling power, buying in power and many other things which were part of an order-in-council approval. These are all gone.
The assumption here is that the government-appointed board of directors -- the government's the shareholder; the shareholder will appoint the board of directors -- in their wisdom will control all these things and make all the right decisions and do all the right things to bring about a good situation: lower rates, better hydro system, better electric power system we're going to call it now. The legislation gives both the Minister of Energy, Science and Technology and, particularly, the Minister of Finance wide powers to do things without going through cabinet: "The minister may do this; the minister may do that."
The minister can also make rules. In several places, it refers to rules. Rules don't have to be approved by anybody. They don't even have to be gazetted. Regulations do. They go through the cabinet and have to be gazetted. But rules are made and they're just the rules. You'll find out later when somebody tells you what the rule is. There are wide powers in the act for the government.
As members of the Legislature, you have to be concerned about what influence you're going to have, about who's going to answer for all the things that can go wrong. The public, the customers, are going to want to know who's doing what and why these changes are coming about, particularly when they're adverse. If there's a power shortage or power interruptions, if there are massive rate increases, who answers? The public is going to expect their elected representatives, the members of the Legislature, to provide the answers and to be able to question what's going on.
But you can say: "Oh, but don't worry about it. Competition is going to bring around a good situation and control everything. We're going to have lower prices." Okay. How about the oil industry? Lots of competition in the oil industry. How are you doing on controlling the gasoline prices at the pump? The provincial and federal government have both been frustrated for many years trying to get a handle on gasoline prices. Lots of competition and the prices do what they want and you can't do a darn thing about it. As a guy who has to fill up my tank, it drives me crazy.
My brief to you today is to say that the legislation is incomplete. The public, the customers, expect some control by their elected representatives. You have a responsibility. I am suggesting that you need a standing committee on electric power as part of this act to look after the interests of the public and the customers, a standing committee to review the reports that go to the ministry from the four different groups and comment on those reports and act on a continuing basis on all other matters on electric power in Ontario.
Why a separate standing committee? First of all, the electric power service in Ontario is vital. It's one of the most important services we have in the province. The tolerance for being without electricity is about 15 minutes. If the power went off in this room right now, we would shut down and go home. It's a vital service. The second reason is that this legislation makes major changes in the way the electrical power industry is handled. It makes major changes in municipal hydro utilities, the way they're going to act. There has to be an overview, somebody that you can appeal to. Third is that you're going to have a lot of regulations. I don't know how many, when they're going to come, what they're going to look like, how many pages, what they're going to cover. I'm not sure what the rate legislation's going to say and what the basis of rate regulation will be. Will it be return on investment? Will it be something else? We'll have to wait until the OEB tells us.
There are things you cannot control which are going to affect rates: interest rates, inflation. The US dollar has an effect on hydro costs. You can't control those things, but you're hoping to control the other things. It's not sufficient to put your faith in the control of competition. You have to have some additional control and a review process. A public review is necessary. If you don't get some review in this legislation, so that somebody's responsible to look after and be continually on top of what's going to happen, you may find you've got four new elephants out of control. You need a review process. My brief to you is that you should recommend the establishment of a standing committee on electric power as part of the Ontario legislative review.
Thank you for listening. I'd be pleased to answer any questions you may have on my presentation or any other aspects of the legislation that I may be able to answer.
The Chair: Thank you very much. We have five minutes for questioning from each caucus. We'll begin with the official opposition.
Mr Conway: Well, a man with a view. Should it concern this committee that we are well into our deliberation without any specific understanding as to the nature and extent of the stranded debt and how that stranded debt will be disposed of across the various rate categories?
Mr Frame: It certaily should, because the key to what's going to happen in the electrical power business and what kind of rates you get and what kind of competition you're going to get is a decision that the minister is going to make regarding the transfer of assets. Genco and Servco are going to want to transfer as much as possible of their debt out of their system into the Financial Corp and let it be paid off through special payments and taxes. If they only hang on to a little bit, they're in a very competitive position.
But the government, on the other side, is going to want to have as little debt in the Ontario Hydro Financial Corp as possible so it gets paid off early, because once it gets paid off, the revenues that are in some parts of the legislation become a revenue stream into the general funds of the province. That decision is going to be made sometime down the line by the -- I think the legislation gives the power to Minister of Finance to make that decision, how those assets are going to be transferred. You should be very concerned about it. It's the key to the whole future operation of the industry.
Mr Conway: And understanding the nature, the extent and the disposition of that stranded debt would, in your opinion, have a material impact on our understanding of rates and what might happen, at least in the intermediate term, to rates across various categories.
Mr Frame: I'd say it's going to be the key factor, but there are also many other factors regarding future rates. The way the Ontario Energy Board writes the regulations, which will have to be approved by the legislation committee of cabinet, what they put in those regulations, how extensive they are, how well they're enforced and all kinds of other things, that's going to be the other key factor on what kinds of rates or costs the electrical power customers of Ontario are going to have to pay.
Mr Conway: I should just add to that. The representatives of the Ministry of Finance told this committee a few days ago that it was premature to be looking at issues of stranded debt. My great fear is that we're not going to get any of the hard data on stranded debt until after the bill is written and done with.
Mr Frame: I agree completely. It's a fear that you should all have. It will be too late when all these things are written into regulations, are being passed and are put into operation.
Mr Conway: Final question: Should the purpose clause of Bill 35 incorporate some reasonable commitment to the lowest possible electricity rates to various customer classes in the province? You point out that section 92 of the old Power Corporation Act has language around the old-time religion: power at cost. I'm happy to see the Globe and Mail here. Nothing excites my friends at the Globe and Mail more than commodity-at-cost issues. What about the purpose clause in Bill 35? It's silent on the question of lowest possible rates. Should the bill incorporate some language?
Mr Frame: It's silent for a very good reason, because they have no concrete way of knowing what those future costs are going to be and what those other factors are going to involve. They don't want to be held to the fire later on when rates are sky-high.
Mr Conway: But surely this is going to bring the rates down. I say that facetiously.
Mr Frame: Let me throw in something here --
Mr Conway: Well, as you answer that question, because my time is going to run out very quickly, the other side of that question is that we're only here today because we were here a year ago. A year ago this week the old electricity order in this province was shown to be rather delinquent in the delivery of promises made over many years. So the status quo is not an option, clearly.
Mr Frame: I mentioned section 92 of the Power Corporation Act, which says costs determined by it. A few years ago, maybe it's six, one of the governments of the day decided that conservation and green energy and all kinds of things were good things, and Hydro went into an announced program of investing $6 billion over 10 years for all these good things, all this great stuff, except that Hydro's financial data, its balance sheets, were showing they couldn't afford it.
I think Bill Walker from the Toronto Star interviewed the chairman of Ontario Hydro and I guess it came out that, yes, there were going to have to be some rate increases, and it came out to 13% and 14% each year for the next three years. Mr Walker wrote a story and somehow the headline of the story was "Hydro Rates to Increase 44% over Next Three Years." The chairman didn't say 44%; Mr Walker or somebody did some compounding. That story was the turnaround point where people realized that Hydro was out of control; you couldn't tolerate 44% and something had to be done. Hydro was doing what they wanted and this had to come to an end.
Now what you may be doing is giving the government the power to do what they want, without any control. My brief to you today is that you need a control mechanism built into this legislation so that you as the members of the Legislature can get up and hoot and holler and question when things aren't being done properly to protect the customer.
Mr Lessard: I want to thank you very much for your presentation, Mr Frame. I hope the government members are listening carefully. I wish there were a few more of them here to listen, because when I look at your credentials, I can see that they're impeccable. You have a long history and a depth of understanding of the electricity industry that very few of us could ever come close to.
One of the recommendations you've made very strongly for this standing committee on electricity issues -- and we in the opposition, the NDP, may recommend an amendment to the legislation to that effect, but you know what happens to recommendations for amendments by opposition parties. They oftentimes get defeated by the government majority. That is one of the questions I have for you in recommending this sort of approach: If a standing committee is dominated by government members, how does a standing committee have any more impact on what is going on in the electricity industry than the minister may have? Ultimately, the standing committee is going to be controlled by the government.
Mr Frame: I think you have the ability through hearings you may have and reports you may issue to bring it to the attention of the public and hope that the media will assist you in bringing it to the attention of the public when things go wrong. Things will go wrong. You aren't going to have a smooth ride on this thing. You'll have the ability to make recommendations for changes in the legislation. I agree with you that the minority parties will have a difficult time, but through the media, through the pressures you can bring, through the reports and recommendations you can make, you may bring the government around to your way of thinking. Of course, it all makes good points come the following election. It can be a major point on an election platform.
Mr Lessard: One of the things we've been recommending is that if the government is so convinced that rates are going to go down, they should put that guarantee in the legislation, but I don't think we're going to see that either.
I think it's imperative that we know what the amount of the stranded debt is and that we also know what the regulations are going to entail before we pass this legislation. If the stranded debt number is wrong, I'd like to know your sense of what the impact of that is going to be: too high or too low? What do you think will happen?
Mr Frame: I don't know, the government doesn't know, Ontario Hydro doesn't know. In a recent annual report, the notes to the financial statement -- you've all got a copy of the financial statement and maybe you read some of it, but you have to get into the notes to the financial pages, the financial notes. I think it's note 1, 1A and note 6, where they talk about stranded debt, which is related to stranded assets. They've set aside $6.5 billion, but those notes clearly explain that they're not sure what the stranded debt is going to be because they're really not sure what the future of some assets is. The note admits it. You've got to look carefully in the small print of the financial notes to the balance sheet of the annual report to find this, but it's there. What I'm really saying is, it's a big unknown. The government certainly isn't going to make a commitment to lower rates because it's a big, big unknown.
Mrs Johns: Thank you for the presentation. I've seen you in a number of committees over my last three years in energy. I thought first of all you were at the Ministry of Energy over those 17 years, but you've been in the private sector. Is that correct?
Mr Frame: For the last six years. I've been doing a little consulting and some writing.
Mrs Johns: Over the last 17 years that you've been working, or maybe 20 years, let's say, how many standing and select committees do you think there have been in this place on Ontario Hydro?
Mr Frame: To my knowledge, there has not been a standing committee on electric power. There have been several special committees. The first special committee I was on, the committee convened for the building and leasing of the new Hydro building, back around 1976. They go on from select committees to --
Mrs Johns: I think we'll just agree that there have been a lot. Let's not go through them.
Mr Conway: We don't want to go there, Helen.
Mrs Johns: We don't want to go there.
Mr Frame: A lot of them, yes.
Mrs Johns: I think you would agree with me that there has been substantial work done on committees and through the government on Ontario Hydro. Myself, I have been on two committees on Hydro now since I've been here in my short period. I think if we ask Mr Conway, he could tell us of many more.
Mr Frame: I agree.
Mrs Johns: We've had committees of some sort on Hydro, and would you agree with me today that Hydro has a substantial number of problems?
Mr Frame: The existing Hydro, yes.
Mrs Johns: We have gone through all these committees and it hasn't seemed to do anything to clean up Ontario Hydro, so I guess my comment would be that maybe we should try and do something a little different than we've done in the past to be able to make Hydro move forward.
The question I want to ask you today is about the debt. You have very strong feelings, it appears to me, about the cost of power in the future, and we've had people here talking about the cost of power. We're getting different visions from everybody. We of course had Enron here this morning, who presented this chart and it talked about prices in the gas, long distance, telecom, airlines, trucking and railroad, where as a result of introducing competition into all of those systems there has been a substantial reduction in prices over two years, five years and 10 years. In fact, I think today even the opposition suggested that over the medium and long term, they felt there were going to be some substantial reductions in pricing. I could start to quote lots of people here; I've got enough quotes here to read to you for my whole four minutes. But I would like to know, since you're paying 40 cents on every $1 of your hydro bill now, as you're a consumer, for debt and interest payments, and that debt and interest payment is going to be in existence afterwards and we're not adding any debt to Ontario Hydro as a result of Bill 35, how do you think the payments you're paying for hydro are going to go up?
Mr Frame: First of all, I think you cannot be sure what your generating costs are going to be. You think they're going to come from lower-cost sources and that the people you get this generation from will operate with more efficiency or at lower cost, and you're assuming that those low-cost generation costs will offset the higher -- they have to have a profit -- will offset the other things which are going to happen in the act: special payments and taxes.
Mrs Johns: Let's just talk about that. We have other power corporations that have come in in the last two or three days. We had a number of them. We had GLP up in Sudbury yesterday, which does produce power at a lower price than Ontario Hydro, so we have specific examples in Ontario right now where generation costs are lower than the costs that Ontario Hydro is producing it for.
Mr Frame: Yes, for a very good reason. Great Lakes Power up in Sault Ste Marie are about 360 megawatts and they are all hydroelectric generation -- very low-cost. They don't have the generation mix of nuclear hydroelectric and coal and oil, and that's why they've got lower costs up there. That's the main reason and that's 90% of the reason they have lower costs.
The Chair: Sorry. We have to stay on schedule because we have other presenters to come forward. Mr Frame, on behalf of all the members of the committee, I thank you for coming forward with the wisdom of your experience and we will consider your suggestions carefully.
CUPE LOCAL 1
The Chair: I now call on representatives from the Canadian Union of Public Employees Local 1. Good afternoon and welcome.
Mr Bruno Silano: My name is Bruno Silano and I'm the president of CUPE Local 1. To my immediate right is Brother Paul Kahnert, an overhead line foreperson in our overhead construction department; to my immediate left is Sister Pauline Niles, the local's WCB representative; and to my far left is Brother Brian Peterson, overhead construction department, Etobicoke district. I trust that everyone has a copy of our brief.
First allow me to say a few words about CUPE Local 1 and who we are. Our employer is the new Toronto Hydro. The workers at Toronto Hydro have been unionized dating back to around 1913. Local 1 presently represents over 1,600 women and men in trades, technical and clerical positions. Our unionized workforce is highly trained, skilled and qualified. CUPE Local 1 and Toronto Hydro have spent an enormous amount of time, energy and resources with the members of our union to bring them to their present level. Our workforce is involved in every aspect of the operation of the utility, from the lines, poles and transformers you see on the street to the cables and transformers underground, from the planning and design of the distribution system to the members who send out bills and answer customer inquiries.
What is a municipal utility? A municipal utility, specifically Toronto Hydro, is presently wholly owned by the public. The new Toronto Hydro comprises the six former municipal utilities which existed in Metro Toronto before Bill 103.
A municipal utility such as Toronto Hydro purchases electrical power directly from Ontario Hydro wholesale and then marks up the price and resells electricity to the residents and businesses of the new city of Toronto. Toronto Hydro receives no taxpayer money whatsoever. We sell power at cost to the residents and businesses. The markup is enough to finance Toronto Hydro's entire operation. Toronto Hydro is a revenue generator for the city of Toronto. The utility makes payments to the city of Toronto in lieu of taxes. The public owns the electrical infrastructure. The public, through payment of their electrical bills, has paid for the highly skilled workforce that is now in place at Toronto Hydro. The public owns the fleet vehicles. The new mega-utility has gross revenues of $2 billion a year. Of that figure, approximately 80% goes to pay Ontario Hydro for power. The remainder forms the basis for Toronto Hydro's operating and capital expenditure budgets. The utility is self-sufficient.
In the beginning, electricity was developed to serve the citizenry. It is now a necessity. Just ask people from eastern Ontario and Quebec. Electricity is a vital service. It is just as important as water and air. People take electricity for granted, that is, until you no longer have it. That's when our members tell us you see residents come screaming into the streets demanding that power be restored as quickly as possible. In essence the city of Toronto, like all cities and towns, depends on electricity.
Our union is fundamentally opposed to this piece of legislation. CUPE Local 1 is very concerned with the government's policy on electrical deregulation. Why are we in Ontario proposing to deregulate the electricity industry? There are no public protests on the lawns here at Queen's Park, where the citizens of this great province are demanding lower electricity prices. So what's the rush for this rapid and radical deregulation? What's the panic all about to break up public electric monopolies?
Under the guise of economic restructuring of the electricity sector, this government is heading down a road which will lead the province to ruin. There is no hard evidence anywhere that deregulation will necessarily lead to lower rates, but what evidence there is out there shows quite clearly the opposite: that deregulation has been a great success only for large industrial and commercial users of electricity, their executives and shareholders, who have benefited tremendously from deregulation.
Deregulation for the sake of deregulation or because it's what they're doing south of the border is not reason enough to introduce it here in Ontario. This government, we believe, is interested in deregulation because their short-term objective is to reduce or not be on the hook for Ontario Hydro's debt by selling their interests to the private sector.
Investment firms and dealers, self-interested elite and American power companies have indicated that they will scoop up anything for sale at Ontario Hydro. These so-called stakeholders are lobbying for the breakup of the electricity utility sector as they stand to make enormous profits from the demise of municipal utilities and Ontario Hydro. The pressure to run the electrical system for profit will lead to cuts in health and safety, training, maintenance programs, wages and benefits. These, however, are deemed efficiencies in the brave new world of the competitive marketplace.
I would now like to draw the committee's attention to a few examples of deregulation in other sectors, first the telecommunications sector. On Tuesday of this week this committee heard from the president and CEO of Ontario Hydro and the former head of Bell Canada, Mr Ron Osborne. In his deputation to you he stated, "The overall effect of telecom deregulation and competition on employment has been positive." No facts, no figures, no evidence, just a blanket statement.
I can tell you for sure that when long-distance rates were deregulated by the CRTC in 1992, Bell Canada eliminated over l0,000 jobs. Then it rehired some of these workers, placed them in a company called Entourage and paid these workers on average $6 an hour less and with about half the benefits of their Bell counterparts for doing the exact same work.
Before long-distance deregulation was introduced, basic phone service in Toronto was at $13.70 a month, in 1994. It now averages $24.50 a month and by the year 2002 it will average $27.25 a month, almost a 100% increase in less than four years. Clearly, telephone companies are gouging residential and small business customers to make up for lost revenues in the long-distance market. Competition was supposed to benefit all customers, but all we have seen in the telephone sector is higher local rates and increased telephone company profits, reduced employee wages and benefits and more telecommunication mergers benefiting underwriting companies and lawyers. Ma Bell, however, argues that local rate hikes are necessary to pay for innovation.
As recently as just last year, the CRTC allowed for competition on local phone rates to take effect on January 1 of this year. On the mere threat of local competition being introduced, Bell cut an additional 2,000 jobs in order to compete. If this is positive, as Mr Osborne put it, I would hate to see negative.
Deregulation of long-distance rates has meant no saving to the average person and small business. In fact, if you make relatively few long distance calls, you're a big loser, as any saving may have been more than offset by increases in local rates.
The people of our society that have benefited the most from telecom deregulation are the large institutions, such as banks and brokerage houses, that are making thousands of dollars worth of long-distance telephone calls every day. They are the big winners.
Next I would like to briefly discuss the airline sector. Deregulation has taken a terrible toll in air transportation in Canada. Deregulation of the airline sector has been a failure. After over a decade of aviation deregulation, the airline industry in Canada is highly concentrated, there is overcapacity and sharply rising average fares which are obviously not benefiting consumers. Air travel has become less convenient to passengers and there has been a reduction in service to some regional centres.
The problems facing the airline industry are directly related to a free and open competitive market. The absence of any effective regulatory levers has left the federal government powerless to intervene and to try to achieve a fair balance between market forces and the protection of the public interest. Safety has decreased as accidents and near misses are on the rise because competition is so stiff that budgets for training and safety have decreased.
Airline deregulation and privatization have meant layoffs -- over 10,000 jobs have been eliminated between 1989 and 1994 -- more job insecurity, poorer working conditions, wage freezes and cuts and a climate of fear in the workplace. In 1996, Canadian Airlines was on the verge of collapse. It was at collective bargaining that it demanded wage and benefit concessions from workers in CUPE, the Canadian Auto Workers union and the International Association of Machinists for the airline to stay afloat.
Neither Canadian consumers nor airline industry employees have benefited from airline deregulation.
Next is the electricity sector. In the late 1980s, British Prime Minister Margaret Thatcher launched a massive campaign to dismantle and privatize what had been a huge publicly owned utility infrastructure in England. The government sold off the bulk of its electrical system in 1990. The reality is that the privatization of electricity has resulted in thousands of layoffs, prices being kept artificially high and soaring salaries for the new class of utility tycoons that the privatization binge created. Executive pay rates skyrocketed and owners of shares in the utilities made handsome profits instead of using these moneys to reduce rates for the vast majority of customers. Economist George Yarrow of the Regulatory Policy Institute calculated that in 1991 the price of electricity was 25% higher than could be expected if privatization had not taken place.
In the electrical industry, productivity improvements have come about through layoffs, not changes in operating methods. Employment in the industry fell from 143,000 jobs at privatization to 116,000 jobs in 1993. The generating companies halved jobs from 24,500 to 11,900 over the same period -- the International Herald Tribune, May 16, 1995.
Finally, perhaps the most overlooked benefit of public utility ownership was also lost in Britain and that is the ability to generate significant revenues for a struggling public treasury. A British member of Parliament published a report in The Guardian on September 26, 1995, which included the following revealing figures. Under public ownership, the treasury received almost £6 billion, roughly C$12.5 billion, in revenues. Compare this £6 billion with the £3.1 million paid in through taxation under private ownership.
This revenue shortfall had to be made up by the government in other ways, whether through higher taxes or, more likely, cutting even more services altogether. If valuable public assets are to be privatized, the benefits that had been shared by all consumers and taxpayers will instead be transferred to corporate executives and shareholders. As you can imagine, revenue from utilities sent to investors as dividends would have a very different effect on the local economy than continuing to use those same revenues, say, for social services, affordable recreation, snow removal and, yes, perhaps even property tax cuts.
Background: Ontario Hydro has been at the heart of this province's economy since its inception back in 1906. It has assets of over $43 billion. In 1994 and 1995 it made a net profit of nearly $600 million in each year. Quite clearly it is a valuable asset that serves all the citizens of this province.
All of Ontario Hydro's infrastructure system was built and paid for by Ontario taxpayers. Even though it is not being run properly by management, it is still turning a profit and able to meet the payments on its debt. Ontario Hydro and the municipal utilities are an enormous asset to the citizenry of this province. We have all been investing in municipal utilities and Ontario Hydro for decades. Ontario Hydro and municipal utilities are quite clearly a prize which this government intends to destroy and eventually sell off to the highest bidder. This is going against Ontario Hydro's mandate to provide cheap electricity to all customers and not to make a profit for private shareholders.
Rates: Ontario Hydro and municipal utilities have very cheap electricity rates compared to the United States. As well, Ontarians, including large commercial and industrial users of electricity, enjoy some of the lowest electricity rates in the world. The vast majority of US power companies are privately owned, yet in North America public power is on average 33% cheaper than private power. Just ask anyone living in New York or Los Angeles. They envy our electricity rates.
The government is proposing to unleash deregulation and competition on this province with no certainty of what the outcome will be on residential and small business electricity rates. The consumer is having to play the role of guinea pig. The relationship that the residents and businesses of this province have enjoyed for over 90 years is coming to an end. This free market experiment is extremely risky to the public in this province. All we are told is to believe in the discipline of the marketplace. The government and other so-called stakeholders want to convince the public that the marketplace should be the sole arbitrator or referee in control of price, service and customer choice. That simply is not good enough. Rates have been on the decline in Ontario predominantly for large users of electricity.
The rate schedule that has been historically in place throughout Ontario has been such that the residential and small business sectors have been interfinanced by the large commercial and industrial users of electricity. The latter sector is no longer interested in this arrangement and wants to opt out. This is the real reason why AMPCO, for example, is in favour of deregulation. But by doing this, these large customers are abandoning their civic responsibilities to the cities, towns and communities in which they operate. It will mean a huge cost shift from the large industrial and commercial users of electricity on to residential and small businesses. We are at serious risk of throwing out the good with the bad. Cheap public power gave Ontario a competitive advantage.
Nothing is as important to a modern society as electricity. It provides us with light, heat and a high standard of living. Electricity is ubiquitous. It is omnipresent. Electricity in fact plays a huge social role in our society. We cannot simply leave electricity to the marketplace. Electricity should not be treated as a commodity. Where an electricity market has been created in other jurisdictions, we are seeing that it is far more volatile than, say, natural gas or the petroleum market.
For example, in Alberta in June of this year, there was a shortage of electricity in the Alberta power pool. This resulted in the spot price of electricity spiking as high as $1,000 a megawatt per hour. Just two years ago, before deregulation, the price of electricity was very stable at only $15 a megawatt-hour.
About the bill: This bill is vacuous. There is not a lot of detail and, as usual, all the detail will be in the regulations. This legislation with lead to the dismemberment of municipal utilities and Ontario Hydro alike, and then ultimately to privatization. We at Local 1 firmly believe that the true thrust of this legislation is to lay the groundwork to eventually privatize Ontario Hydro and the municipal utilities. This legislation is very careful not to mention the P word, because it recognizes that the majority of residences in the province of Ontario are against the selling off of Ontario Hydro and their municipal utilities.
You are not fooling anyone. By forcing the incorporation of Genco and Servco at Ontario Hydro and doing the same for the MEU's wires and competitive businesses, it is clear that privatization is headed our way. In fact, the legislation states that only the initial shares shall be held by the transferor municipal commission. What about subsequent shares?
Stranded debt: I will admit that Ontario Hydro is a bit of a modern-day financial Frankenstein. However, this legislation conveniently has created a financial holding company that is responsible for any debt. This is a publicly held crown company. How convenient. This bill proposes to saddle the public with this multi-billion dollar debt, but Servco and Genco, which can earn money, are non-crown corporations. These corporations that may earn money in the future have to hand over any monies to their eventual shareholders and executives.
Jobs: Deregulation, competition and eventual privatization will lead to huge job loss in the public sector. Cutting the public sector not only erodes valuable public services that are key to economic stability, but the cuts also eliminate an important source of decent jobs. The public sector has been an important provider of good jobs in recent decades, offering decent wages and benefits and stable employment. By comparison, small and medium-size businesses, where most of the job growth might take place under deregulation, generally offer lower wages and benefits. Private companies, part-timers and contractors will not have the skill, knowledge and experience to keep the hydro system safe and reliable. These types of jobs will not bring stability to our economy. Competition at Toronto Hydro has already been used to justify two downsizings, resulting in over 800 jobs being eliminated -- 800 skilled jobs for our young people, gone forever.
Conclusion: On his deathbed in 1925, Sir Adam Beck, the founder of Ontario Hydro, said, "I had hoped to live to forge a band of iron around the Hydro to prevent its destruction by politicians." Then he delivered a warning: "Watch what they do when I'm gone." How prophetic.
Now, 73 years later, this government is poised to do just that -- destroy Ontario Hydro and the province's municipal utilities with this legislation. There is nothing in this bill for the public or workers. The bill does not ensure that any savings must go back to the consumer or be reinvested in workers. The public sector must receive renewed investment. The public creates the infrastructure on which our economy runs.
We ask that the government rethink its position on deregulating the electrical industry. Our union is not afraid of change, but we must be cautious because once we have started down this path, it is very difficult to turn back. Deregulation, competition and ultimately privatization are not in the best interests of the Ontario public. Residential and small business customers stand to lose the most, along with utility workers across the province. On behalf of the organized workers at Toronto Hydro, we submit that the existing public ownership structure be maintained.
We must remember one very important point of history here. Ontario Hydro was created by a referendum, where the citizenry of this province overwhelmingly voted to create a provincial, non-profit, publicly accountable utility. We request that before the municipal utilities or Ontario Hydro are broken up that another referendum and debate be held on this issue. The people of Ontario voted to create Ontario Hydro, and it must be the people of Ontario that decide to break up Ontario Hydro. To do otherwise flies in the face of this government's pre-election position that they were in favour of referendums, as they were trying to portray themselves as a populist government. To my recollection, the only referendum since the Tories have come to power was whether or not to build a casino in Niagara Falls. Surely, the future of Ontario Hydro deserves the same consideration as a casino, does it not?
However, if the public decides to proceed with this legislation, then we would respectfully submit the following changes:
Regulation is needed that ensures the highest environmental standards, fair electricity rates, reliability, safety, public access and workers' rights. There must be specific residential and small business customer protection described in the regulations.
Successor rights and pension rights must be enshrined in the regulations also. No trickery. Our collective agreements must go along with the successor companies. We urge you in the strongest possible terms that these must be put into the regulations.
There must be strict environmental protection. The bill should discourage dirty electricity production with a surcharge.
Consumers must oversee the electricity marketplace with the power to effect change. Thus, we recommend that market watchdog groups have designated seats on the board of directors for citizens and labour representatives from the utility sector in this province.
The bill must have a mechanism for ratepayers to have access to policy or decision-making at the highest levels of this marketplace.
Finally, the bill should explicitly state that its goal is not to privatize the municipal utilities' or Ontario Hydro's successor companies and that these companies clearly continue to remain in the public interest and accountable to their city or town councils and provincial governments respectively.
Thank you for your time this afternoon. I hope our concerns and comments are considered by this committee. I'd be pleased to take any questions.
The Chair: We have a brief time remaining for questions, colleagues. I would suggest probably time for only one question from each caucus. We'll begin with the NDP caucus.
Mr Lessard: I think you really hit the nail on the head with your brief. The government doesn't say that Bill 35 is headed towards the privatization of Ontario Hydro, but we share your suspicion that that is where it's headed and that although they're being very careful to stay away from saying that's the agenda -- in fact they say privatization isn't part of their agenda -- you can be sure that there's not going to be a referendum on this issue and that it is going to be an issue during the next campaign, because we feel if the current government gets re-elected, then that is going to lead to the privatization of Ontario Hydro. I want to thank you very much for your presentation here today.
Mr Gilchrist: Thank you, Mr Silano. I appreciate your taking the time to prepare your thoughts. You'll forgive me if I disagree with much of what's in there. If Mr Lessard wants to go into the next campaign with one of his major platforms as increasing debt for taxpayers and higher electricity costs, we'll be happy to take him on in that forum.
You bring up so many points, and we've only got a minute or so, but I just have to suggest to you that talking about employment at Bell Canada doesn't come close to talking about the telecommunications industry. There are thousands of new jobs at Sprint, AT&T and Call-Net. In fact, Sprint is about to build the biggest building in the history of Toronto on the Markham-Scarborough boundary.
You're right: There are increased costs for home service. At the same time, there have been massive new investments, as you would well know, in fibre optic technologies so we can handle the demand for fax and Internet and all the other new services that consumers are demanding. You couldn't do that over the old wires, and somebody has to pay for that.
You talk about Hydro being competitive. They have the third-highest rates in all of Canada. If it's so efficient, why are seven other provinces doing better than we are? While we're on the subject of cost, why is Toronto Hydro at $92.50 for the average homeowner taking 1,000 kilowatt-hours when Hydro's at $85.50? So much for efficiencies from size.
We don't have time to go through all your points. I'm going to leave you with one very simple question. I appreciate your perspective, but perhaps you could answer us why the Power Workers' Union is not only in favour of this bill but is interested in participating as a partner in buying or sharing some of those assets if privatization ever did take place, which isn't even contemplated in this bill.
Mr Silano: The only comment I would have in regard to your comment would be, first, with regard to the telecommunications sector and some of these new jobs that are coming up, true, there is some job creation. Has it offset some of the cuts? I'm not sure. What I am fairly certain of is that any of the jobs that have been created by Sprint, by MCI and what have you that have moved up into Canada to compete in the long-distance market, most of the jobs are in marketing and in the call centres.
I don't know if any of you have been to a call centre recently, but labour is referring to them as the sweatshops of the 1990s. You're strapped in with the headset, you're working on what's called the dialler system; it automatically dials out and automatically takes incoming calls. Every second you spend on this system can be scrutinized by any supervisor. They can tap into your call to listen to what you're doing, and I'm quite certain that they're not as high-paying as some of the Bell positions that we may have lost.
Mr Gilchrist: I suspect the Chair is going to cut us off in a sec, so can you come to the question of the Power Workers' Union and their support?
Mr Silano: Yes, with regard to the Power Workers' Union and the fact that they are "in favour of this legislation," the Power Workers as a provincial union have workers throughout the province and I think they have some concerns obviously with what may take place in the nuclear industry. I don't want to speak specifically of exactly why they are in favour, but I know they are somewhat in favour at least that the bill show signs of taking successor rights with the new Servco and Genco which will be created at Ontario Hydro. I know they are glad to see that at least in the bill there is some reference made to pension portability and what have you. But, again, we need to see that in the regulations and that was part of our recommendations. I think John Murphy is speaking sometime next week to the committee and he will elaborate further.
Mr Conway: Thank you, presenters. Just one question: One of the areas where I would expect as a consumer to hopefully see some benefit is on the distribution side, and forgetting entirely the participation of the private sector. I look at the distribution of electricity in the province and I personally remember a day four years ago when I signed on with a lot of other people to Bill 185, which was supposed to rationalize the distribution or create an environment where there could be some sensible rationalization of distribution as between two different parts of public power. It didn't happen; in fact what did happen was a nasty little bit of border war and litigation. The private sector had nothing to do with that.
I'm a consumer and I'm looking at that and saying, "Why didn't that happen?" because my intuition tells me that surely it would have been possible in places like Lincoln and many others in southern Ontario to reasonably and sensibly, between two parts of the public sector, rationalize this in a way that a lot of people thought possible. It didn't happen. What do you have to say to me as a consumer who's interested in efficiency and not hostile to public power but feels a bit betrayed by what didn't happen four years ago?
Mr Silano: I'll try to answer that question with the specific incident that you raised, that being Lincoln Hydro. I think there could have been something worked out there but I believe the MEA took a position that if Lincoln county decided to expand its boundaries into Ontario Hydro territory, Ontario Hydro and the Power Workers' Union had no successor rights and there should be no unionized workforce in place there. That was, from my limited understanding of the situation, what caused the PWU to enter into litigation, and I believe it's still one of the test cases that are out there. Again, I'm not from the Power Workers' Union and --
Mr Conway: I think I saw some of the same problem in the eastern Ontario ice storm of recent fame as well.
The Chair: I'm going to have to interrupt. Sorry, but we have to keep on track so that we don't get into difficulties at the end of the day. Thank you for coming before the committee today with your advice and your perspective on Bill 35. We appreciate it.
CONSUMERS' ASSOCIATION OF CANADA
The Chair: We are now calling representatives from the Consumers' Association of Canada, please. Welcome. Please make yourself comfortable. Before you begin, please introduce yourself and your colleague for the Hansard record and begin any time.
Dr Peter Dyne: I am Peter Dyne, chair of the energy network of the Consumers' Association of Canada, and I am assisted here by our lawyer, Robert Warren.
The presentation I am going to make is a condensation, to some extent, of the material which has just been handed to you. If you want all the details, look at them afterwards.
The Consumers' Association of Canada, which we call CAC, is a volunteer organization engaged in a wide range of activities, with the objective of protecting the interests of consumers. CAC has had an extensive involvement in the restructuring of the energy markets in Ontario.
In this submission, CAC will concentrate on the principal criteria which should be used to assess the effectiveness of the legislation in protecting the interests of residential consumers. These criteria are:
(1) whether the electricity market is truly competitive;
(2) whether the Ontario Energy Board has powers which are sufficiently broad and flexible to protect the interests of residential consumers; and
(3) whether the legislation ensures consumer involvement in the development of the regulations of the restructured energy sector.
Some background information on our constituency: Residential consumers consume approximately 70% of the electric power in Ontario. We are the major power consumers. AMPCO has got it all wrong. Collectively, residential consumers will pay the lion's share of the cost of Ontario Hydro's stranded debt and its stranded assets. Electricity is to residential consumers an essential commodity. They cannot live without it. They must be assured the safe, reliable delivery of electricity at a reasonable cost. Individually, residential consumers have virtually no bargaining power. That is in stark contrast to the major industrial consumers of electricity and the entities who would supply electricity in the restructured market. While residential consumers have a stake in the electricity market restructuring, they do not have the resources to influence how it is restructured.
CAC recognizes that the status quo is not acceptable. Ontario Hydro has operated as an unregulated monopoly. It has accumulated a staggering debt. It has paid insufficient attention to the safe operation of its nuclear plant. Significant changes in US legislation expose Ontario Hydro to competition. Drastic reforms of the electricity sector are required. CAC acknowledges that the direction of the government's proposed changes towards greater competition is both necessary and, if properly enacted, in the long-term best interests of residential consumers.
At the same time, however, residential consumers enjoy, under the existing system, the safe and reliable delivery of electric power at reasonable prices. The problems of Ontario Hydro seem, to the residential consumer, remote, and the need for drastic change has to be explained. More importantly, the government must be forthright in telling consumers that there is no assurance that the drastic change will result in reductions in their rates, particularly when the elimination of stranded debt and the cost of stranded assets are factored in.
There is, understandably, a focus on whether the restructuring of the electricity market will result in a reduction in the prices which residential consumers pay for electricity. Unfortunately, this focus on prices disguises the real issues. CAC has seen no credible evidence that prices for electricity are likely to decline in the near term as a result of the restructuring of the electricity sector. They will almost certainly not decline when the costs of stranded debt and stranded assets are factored in. There must, therefore, be a reasonable assurance that prices will decline in the longer term. In the short term, the important considerations are whether, in the new market, the interests of residential consumers are adequately protected.
As I have noted, CAC has been extensively involved in the restructuring of the energy market, both for natural gas and electricity. It has attempted to represent the interests of residential consumers in these complex issues. It requires considerable expertise to participate in a meaningful way and to have a realistic chance of affecting the shape and content of the changes in the energy market.
CAC is realistic about its ability, as a volunteer organization, to have a significant impact on these changes. The details of the restructured energy sector, and in particular the electricity sector, are yet to be worked out. Those details will largely determine the impact of the restructuring on the residential consumers. The devil is in the details. This committee must understand that the process of working out those details can and will be captured by those with an economic stake in the restructured energy market. Those entities do not have the interests of residential consumers at heart. The inevitable result, I'm afraid, is that there will be more devil in the details than residential consumers would like.
CAC strongly cautions this committee, therefore, to be vigilant in ensuring that the legislation protects the interests of residential consumers, also allowing the full participation of consumer interests in working out the details.
To comment now on the Electricity Act: There are two key elements to the introduction of competition into the Ontario electricity market at the generation level. They are the separation of transmission and generation components, giving competitors access to the transmission system, and the establishment of the Hydro successor companies on a commercial basis to provide a level playing field between them and their competitors.
CAC submits that the structure created by the Electricity Act does not go far enough to ensure that there will be competition in the generation level. There are several reasons. While legislation permits competition, it does not establish a competitive market. The successor generating company will have a dominant market position, controlling about 90% of the generating capacity in Ontario.
There are two alternatives to addressing this problem. The first would be to break up Ontario Hydro's generating assets. The government has decided not to pursue that approach. The second alternative would be the adoption of market power mitigation measures as part of the initial market design. CAC understands that the Market Design Committee is currently considering a range of mitigation measures, to be adopted ex ante, to ensure competition in generation.
Experience in other jurisdictions has demonstrated that unless the market power issue is addressed up front, we will simply not have a competitive market. The legislation should enable the government to impose ex ante measures to mitigate the market power of the successor generating companies. The measures must be in place before proclamation.
On the financial structure: The government will be the sole shareholder of the successor generating and transmission companies. The government has made clear in its white paper that it expects its electricity companies to earn a normal rate of return and to make dividend payments. It has made it clear that it will exercise its control in its role as owner and shareholder and will focus on bottom line financial results. Incidentally, the requirement that the Generation Corp and the Services Corp will earn a normal rate of return and to make dividend payments to the shareholder is not explicitly stated in the act and should be explicitly stated in part IV of the act.
The establishment of a level competitive playing field also requires that the new corporations have debt/equity structures comparable to their competitors in the private sector.
To the extent that the legislation cannot ensure a fully competitive market at the generation level, it must provide mechanisms by which adjustments to the market can be effected. Section 27 of the Ontario Energy Board Act permits the minister to issue to the board binding directives to address the abuse of market power in the electricity sector. While such a corrective power is necessary, it should not, in CAC's view, be exercised by the minister. The government, as the sole shareholder of the successor company, has a conflict of interest in issuing directives to address the abuse or possible abuse of market power. CAC recommends that section 27 of the OEB Act be amended to give the board the power to issue such directives.
The treatment of Ontario Hydro's enormous stranded debt arguably overrides, at least in the short term, all the other issues in the restructuring of the electricity sector. The government must be candid about its proposals to deal with the stranded debt. Residential consumers must be told how they are going to pay for it. CAC recommends that any special charges used to reduce the stranded debt be explicitly identified on each bill which the residential consumer pays.
CAC believes the success of the restructuring of the electricity sector, and certainly the success of competition at the retail level, will depend in large part on the ability of the municipal electric utilities to make a transition to a competitive market. The provisions of the Electricity Act dealing with municipal electric utilities are, in their simplicity, quite stark. These provisions mask, however, a reality that for many utilities will be daunting. They will face an array of conflicting pressures. CAC believes the importance of the role of the municipal electric utilities requires the Legislature to be satisfied that the MEUs can deal with the competing pressures they will have to face in the restructured market.
To turn to the Ontario Energy Board Act, the OEB Act makes the powers of the board broader and more flexible. The powers granted to the board are critical to the protection of the interests of residential consumers, and therefore to the success of the restructuring. CAC supports the reforms in the OEB Act. The CAC urges this committee to resist any suggestion that the powers of the board are either too broad or too intrusive.
The CAC's observations on the OEB Act are directed to areas where the powers given to the board need to be clarified or expanded.
Sections 1 and 2 of the act contain the statements of the objectives of the board. This statement of objectives is important. The CAC's concern is that the board may not have been granted sufficient powers to meet those objectives.
To illustrate, the board is given the power to facilitate competition. The board does not, however, have the power to create competition. It does not, for instance, have the power to require divestiture of the generating assets of the successor to Ontario Hydro.
One of the board's objectives is to protect the interests of consumers with respect to prices. It is unclear, however, what powers the board has to do that.
The committee should be satisfied that each of the board's objectives can be linked to a specific power that is broad enough and flexible enough to allow the board to meet those objectives. How the board will carry out the powers will have a major influence on the success of the restructuring contemplated in this legislation. More importantly, from the perspective of residential consumers, it is how the board will carry out its broadened powers that will determine whether the interests of residential consumers will be adequately protected.
I stressed earlier the importance of ensuring that the interests of residential consumers are represented in the processes by which the details of the restructured energy sector are developed. That observation is particularly true of the activities of the board. Unfortunately, however, the legislation does not provide an adequate mechanism for ensuring that participation.
Section 29 of the act grants the board power to award costs to any participant in a proceeding, a power which the board has in the existing legislation. The board has in the past quite narrowly interpreted that power, limiting itself to awarding costs only in formal hearings. It is clear, however, that the board will be undertaking a number of informal, non-hearing processes to develop, for example, a generic set of conditions that will apply to licensing of energy brokers. The board has already issued an invitation to interested parties to make submissions to it on the conditions that should be attached to those licenses.
The board's interpretation of existing powers to award costs would mean that, for example, stakeholders representing the interests of residential consumers would receive no costs of participation in the informal process and so would not be able to participate effectively. By contrast, interests with a financial stake in the outcome of restructuring would be able to participate fully.
What is required, in CAC's view, is an amendment to the legislation to make the board's power to award costs both broader and more flexible. Section 29 of the act should be amended to broaden the meaning of the word "proceeding" to include any process, whether formal or informal, by which the board carries out the obligations assigned to it under the Electricity Act and the Ontario Energy Board Act.
CAC welcomes those provisions of the OEB Act giving the board licensing authority with respect to gas and electricity brokers. The unscrupulous marketing activities of a few gas brokers have undermined the confidence of the consumer in the retail natural gas market. These problems underline the dangers of precipitate deregulation of a market without extensive consumer protection and information activities being in place well before the introduction of competition. They underscore the importance of effective regulatory supervision.
In conclusion, when the Electricity Act and the OEB Act are proclaimed, consumers will face a strange new world. Electricity will be priced and sold on an entirely new basis. Rates as consumers now know them will no longer exist. Electricity prices may change hourly as gasoline prices change daily. Consumers may pay the hourly price or some average price to be determined after the fact. This is a necessary consequence of a competitive electricity market. An enormous public information exercise will be required to explain and justify this revolution.
I will conclude by acknowledging that the Electricity Act and the OEB Act contain important and in many cases long-overdue reforms. They are an important first step. However, whether the legislation results in a restructured energy market which enhances and protects the interests of residential consumers will depend on whether a truly competitive marketplace is created, on the board having sufficient power to protect the interests of residential consumers, and on the ability of residential consumers to participate effectively in the development of the details of the new market.
Thank you very much.
The Chair: Thank you. We have three minutes for questions and answers for each caucus. We'll begin with the government caucus.
Mr Gilchrist: Thank you for coming before us today to make a presentation. I appreciate that you have offered a scenario here that includes your own admission that it takes people with great experience and expertise to perhaps come up with the most informed vision of where we're going to be as a result of passing this bill.
You made an allusion early on in your comments about the lack of involvement of consumers, and specifically CAC. I don't think that was your intention, because obviously our making every accommodation possible to have representation by the CAC on the MDC --
Dr Dyne: Excuse me. What did I say that --
Mr Gilchrist: "Consumers don't have a voice in the process."
Mr Robert Warren: I don't think that is what Dr Dyne said.
Mr Gilchrist: I just wanted to make sure that everyone in the room was clear that the CAC has had an active involvement. You picked the person. We made sure they were on the MDC.
But let me just go on to my points, if I may, and invite your response. You comment about rates and the fact that there is no evidence -- I think your exact words are that you've "seen no credible evidence" allowing you to conclude that prices for electricity are likely to decline as a result of restructuring.
So you haven't seen reports from the United States Department of Energy, for example, saying that as a result of the fact that every US state except South Dakota is doing or has done what we are intending to do, consumers -- not businesses -- will see an average reduction in the national price of energy of 12%, a savings of $30 billion a year. I guess you didn't see that report.
You must not have heard Enron's submission where they talked about their expectation, but further showed -- we love to have charts and graphs -- that every industry that was formally regulated has seen price reductions of anywhere from 13% to 50%, whether it's trucking, railroads, airlines, long distance telecom or natural gas.
Dr Dyne: Can I comment on that?
Mr Gilchrist: Let me just finish my submission. You say furthermore that the rates will be subject to great volatility.
Interjection: I'd like to hear his comment.
Mr Gilchrist: So you obviously haven't heard the submission from the Toronto Futures Exchange, which talks about how selling commodity futures will guarantee that you won't see the volatility of the spot market.
I am left with a very simple question, I guess. You say you haven't seen any evidence for the positive things. Can you table with us evidence that somehow your worst-case scenario is going to come to pass?
Dr Dyne: First of all, the comparison of electricity to transportation and to telecommunications is irrelevant. It's hocus-pocus. The question is what will actually happen in Ontario. And the question about the reduction in rates in other jurisdictions is very much jurisdiction-dependent.
For example, people will say that rates have gone down in the UK. In fact, rates were legislated as being constant and would increase by the consumer price index for five years so that they went up exactly as the consumer price index.
I'm aware of the sort of comments that you say people claim. I'm very suspicious of all those. You have to look very much at the fine print and what in fact was the financial status of the organization which was being deregulated.
Mr Warren: I'm not sure, frankly, how the member would have reacted to a brief that was hostile to what the government initiated.
Mr Conway: Stick around.
Mr Warren: I do think it's fair to observe, though, that a close reading of what Dr Dyne has written is that the CAC doesn't believe that rates will decline in the short term, and in the long term there is reasonable evidence to believe that they will decline.
The Chair: To the official opposition.
Mr Conway: Gentlemen, I want to come back to a central point that you make in your presentation; namely, that the broad base of residential consumers have a very real interest, obviously -- they are the largest single rate category -- but their interest is so diffused as to be less powerful than others with a much more focused interest.
You would think normally that the protection of the broad base of interest, the residential interest, would be in government, and I think to some reasonable extent it will be, except there is this problem in Bill 35 that the government has a real interest, a real commercial interest, not only as the principal shareholder in the early going at least of Genco, but also the exchequer, because some of the special payments, once the stranded debt is retired, continue under the provisions of the bill, as written, to the credit of Her Majesty's provincial treasury.
Dr Dyne: Correct.
Mr Conway: My question is, what measures should this committee consider to mitigate the conflict of interest in which government finds itself in the implementation of this policy?
Dr Dyne: The suggestion I made was that the government's participation as the owner and shareholder should be at arm's length from the government and essentially that the regulatory activities of the board should be again somehow or other at arm's length from the government. That's the only solution I can offer. It's a very real problem.
Mr Conway: I can see how that would be helpful on some of the issues around part of the problem, but on the financial side -- for example, how you would define the stranded debt, how you would apportion the stranded debt, how you would select from the basket of instruments, and when you decide the stranded debt is no longer there -- obviously you have a very real interest for government because once all of that is decided, I, the referee, start to recoup what are going to be hundreds of millions of dollars, presumably. What mechanism would you recommend to deal with the problems around the financial conflict of interest in which government will find itself?
Dr Dyne: This is in part a response to Mr Gilchrist, because --
Mr Conway: Don't point at him. It will only inflame him.
Mr Gilchrist: Only the Liberals are capable of that.
Dr Dyne: I'm sorry; it's rude.
The requirement that the successor companies pay taxes and pay a dividend is a necessary requirement to make it a level playing field. So those are increases in cost, and I suspect they are are large increases in cost, which have to be paid. I understand the government is going to use those revenues to pay down the stranded debt. After that, yes, the government is going to be making half a billion to a billion dollars a year out of Ontario Hydro. More power to them. That's what we are stuck with.
Mr Conway: On stranded debt, how important is it from the residential consumer's point of view that this committee get some greater detail around the size, the extent and the disposition of the stranded debt before we conclude the proceedings in disposing of Bill 35?
Dr Dyne: The simple answer is that we are just wasting our time discussing the details of this legislation until the finance department comes clean with what the cost of the stranded debt is.
Mr Lessard: I hope we're not wasting our time this afternoon, because I'm very interested in the submissions that you've made, as far too often we don't hear from representatives of consumers. For most residential consumers, the details in Bill 35 are just overwhelmingly complex. What their final objective is and what they really want to see is reliability of supply at the lowest price. My colleague Mr Gilchrist can come up with all the charts and graphs he wants and say: "Consumer rates are going to go down. Trust us." I'm more inclined to rely on the view of the consumers' association, who say, "There's no assurance that rates are going to go down." I want to ask you whether you feel that it is imperative for us to have the regulations, the framework, as to how the price is ultimately going to be determined before we pass Bill 25.
Dr Dyne: With respect, if you have a competitive electricity market, the price cannot be regulated. Tough. The government essentially has no power to regulate. If it did, there would not be a competitive market.
Mr Lessard: The Market Design Committee, in its report, says they're going to have some mechanisms to regulate. This isn't deregulation, this is re-regulation. This is regulation in a different form, I guess.
Dr Dyne: Excuse me. There are a vast number of regulations which have to be put in place, but a simple regulation of the price of electricity, that regulation, that it shall be 5.6 cents per kilowatt hour, cannot happen.
Mr Lessard: Why not?
Dr Dyne: Because we have a competitive market, and the price is determined by competition between the generators. That's what is supposed to happen.
Mr Lessard: Do you think it will?
Dr Dyne: Do I think -- excuse me? The legislation and the plan for a market pool make it quite clear that the price of electricity is going to be determined by competitive bids from generators, and those cannot be regulated.
The Chair: On that note, as Chair of the committee, I thank you for coming before us this afternoon with your perspective on this bill. Your ideas will be considered. Thank you.
TORONTO HYDRO-ELECTRIC COMMISSION
The Chair: I now call representatives from Toronto Hydro. Good afternoon and welcome. Please make yourselves comfortable. As I'm sure you already know, you have 30 minutes for presentation time. I hope you'll leave time for questions at the end. Before you begin, please introduce yourselves for the Hansard record.
Mr Mark Anshan: Thank you, Madam Chair and members of the committee. My name is Mark Anshan and I'm chair of the Toronto Hydro-Electric Commission. With me today, I'm pleased to introduce John Alati, a member of our commission; Blair Peberdy, vice-president of communications and corporate planning; and Hilda Mackow, our senior vice-president for customer and energy services. Thank you for providing Toronto Hydro with this opportunity to address your committee.
The Toronto Hydro-Electric Commission is a municipal electricity distribution utility serving approximately 650,000 customers in the city of Toronto. As you well know, in January this year the utilities of the former cities of North York, York, Scarborough, Etobicoke and Toronto and the borough of East York were amalgamated under Bill 103, the City of Toronto Act. This amalgamation created the fourth-largest electricity utility in Canada and the second-largest municipal distribution utility in North America. The new Toronto Hydro now distributes approximately 25% of the electricity in Ontario, has annual revenues of approximately $2 billion, has a peak load in excess of 4,500 megawatts and employs 1,900 people in a variety of professions and trades.
Toronto Hydro is unique in many ways. Not only are we one of the largest electricity industry stakeholders by far, but our roots go back to the earliest days of public power in Ontario. The original Toronto Hydro was formed in 1911 and all the Metro-area utilities have been successful examples of the benefits of public power. We have contributed to the economic and social growth of Metropolitan Toronto and the province. We have provided safe, reliable and low-cost power to our customers for many years.
It is important to note that in the midst of these discussions about industry reform, we are dealing with the amalgamation of six utilities with different distribution systems and cultures.
Toronto Hydro's cost structure, measured in gross margin, is now at 15%, which compares with other MEUs across Ontario, even those utilities that are a fraction of our size and do not serve such a dense urban area as the city of Toronto. Simply stated, gross margin represents our overhead costs. Other municipal utilities don't have to cope with the traffic congestion downtown and the heavily treed, narrow residential streets that our utility faces. The cost of operating in a dense urban area is higher than in suburban municipalities. Development charges were also not available to the former Toronto Hydro.
We have already saved more than $30 million through amalgamation by reducing staff levels by approximately 20%, or 500 employees. Further significant savings will be achieved over the next few years as we rationalize our operations and sell surplus properties and assets. This is good news for Toronto electricity consumers. But we believe that the real benefits should come when we have competitive supply choices. After all, more than 80% of our costs are driven by wholesale power prices. We believe that our purchasing strength will enable us to negotiate cheaper wholesale power prices and to develop environmentally friendly, competitive cogeneration options.
The changes taking place at Toronto Hydro are immediate and profound and they touch every employee. We are successfully accomplishing the consolidation while maintaining seamless, high-quality service to the public. The challenges in achieving this are considerable, but we are well positioned to participate successfully in the new electricity market, including retailing, wholesaling and related energy businesses.
The delivery of safe and reliable electricity to Canada's largest urban, cultural and business centre is foremost in our minds. None of the other municipal utilities or industry stakeholders are facing the tremendous challenges that Toronto Hydro is addressing. The realignment of our operations and the introduction of advanced information systems technology are keys to the success of industry restructuring. These are important facts that should be recognized by your committee and the government as you move ahead. Toronto Hydro is a key participant in Ontario's energy industry. The success of industry reform may well depend upon our ability to implement the changes you legislate in a manner that does not impact in a negative way on our customers in the city of Toronto.
The principles of Bill 35 and the regulations and market rules that will be developed to foster competition should, if carefully crafted, result in more choices and lower rates for customers. However, change must be introduced carefully and phased in at an ambitious but measured pace. Toronto Hydro must be able to implement the changes that are introduced without compromising the integrity of our distribution system or the service we provide to our customers. To this end, we offer the following comments and recommendations to assist you in your deliberations.
First of all, we recommend that the local distribution companies be allowed to compete for their customers on an equal basis with retail suppliers.
Secondly, we recommend that local distribution companies be taxed on the same basis as other companies operating under the Ontario Business Corporations Act, based on annual income rather than gross revenues.
Third, we recommend that green energy options, including emissions cap and trade provisions and the requirement for generators to provide a percentage of renewable energy as part of new generation proposals be introduced under Bill 35 to support the reduction of C02 toxins and other greenhouse gas emissions.
Finally, we recommend that industry reform be introduced at an ambitious but measured pace that will enable industries to provide seamless service to customers at competitive costs.
We believe that the economic interests of our customers will best be served by the introduction of wholesale and retail markets. The creation of a truly competitive wholesale market must be the premise upon which a retail market evolves. Consumers should have retail options, and this should lower rates.
We support the provision in Bill 35 that municipal utilities must incorporate under the Ontario Business Corporations Act. This will provide a greater ability to offer our customers more services and to enter into partnerships to provide consumers with a wider range of products and increased convenience. For example, Toronto Hydro has successfully developed a fibre optic cable network in our underground cable ducts downtown and across parts of Metropolitan Toronto that connects our control centres and substations. This network has increased the reliability of electricity supply to our customers and it has enabled us to lease excess fibre optic capacity to public and private organizations in Toronto. All parties are benefiting from this innovative use of our distribution system.
OBCA incorporation will enable us to maximize our engineering and technological capabilities to the advantage of our shareholder and customers. The former Toronto Hydro first requested commercial status back in 1995 when we addressed the Macdonald committee. We are pleased our model has now been adopted in Bill 35.
The success of the new competitive market will rest upon the ability of the government to create a truly competitive market for participants. We believe that Toronto Hydro should be allowed to compete. We are confident in our ability to do so. Toronto Hydro will be one of the few Ontario-based, Canadian utilities that will have the critical mass and cost-efficient resources to compete in the new market. We believe that it is important to the credibility and success of the market that incumbent utilities be allowed to compete for customers but that they do so on an equal basis with new entrants. We do not believe that the public interest will be served by restricting incumbent utilities from competing for their customers. This would limit the options available to consumers and dampen competition.
In a truly competitive market, all players are subject to the same rules and regulations. The rules of Ontario's new electricity marketplace should not be created in such a way that they favour private sector firms to the detriment of government-owned electric utilities such as Ontario -- er, Toronto Hydro. I suppose Ontario Hydro as well. We have expressed this concern to the Market Design Committee and we are working with them to ensure that the new rules are truly competitive for all utilities.
Section 87 of Bill 35, if passed in its current form, will require municipal utilities to pay taxes that are based on their annual adjusted gross revenues. On the other hand, private corporations are taxed on their levels of annual income. This provision of Bill 35 is anti-competitive for the industry because there is a disparity between taxes based on gross revenue and those based on income. Taxes based on gross revenue and the transfer taxes contemplated in Bill 35 will result in increased electricity rates to consumers. Fairness in the market will be achieved if all competitors are taxed equally. We recommend that Bill 35 be amended to ensure that all competitors pay taxes on the same basis.
This summer a large part of Ontario faced air quality advisories and smog alerts during heat waves. In the midst of a smog alert in July, Toronto Hydro adopted aggressive C02 reduction initiatives to reduce air pollution by offering our customers green energy choices. Based on our customer research, we know that there is a market for green energy and we intend to play a leadership role in offering this option to our customers. There are a number of renewable energy sources, cogeneration and energy-efficient opportunities that Toronto Hydro makes available. These local generation projects will continue to contribute to our ability to offer environmentally superior supply options to our customers while meeting our ambitious C02 reduction goals. We are leaders among municipal utilities in our environmental management programs.
However, in order for us to continue to do this on a competitive basis, all energy suppliers should be held to the same strict environmental standards. The committee may wish to consider including such a provision in the act. To this end, we support the introduction of cap and trade emissions standards to ensure that industries will reduce their emissions. It is hoped that the full life-cycle cost of the generation source will be factored into the emission trading formulas, because generation has an impact on society that reaches far beyond the environment.
We are also seeking clear direction as to what constitutes green or renewable energy and what will be the requirements of individual distributors to provide renewable energy to their customers. We would like to see each generator selling into the pool blend a percentage of renewable energy into each proposal for the development of new generation. This should be a licensing requirement.
Toronto Hydro believes that we can achieve customer choice and the diversity of electricity supply within the timelines set by the government. It is essential that the restructuring be phased in at a pace that will enable the utilities to adjust their systems and procedures so that the transition to the new marketplace is seamless to customers.
The intent of Bill 35 is to provide choice and the benefits of competition to Ontario's electricity consumers. Our customers will determine whether the restructuring has been successful. They will make this decision based on the logic and clarity of the changes that are implemented and whether or not these changes have resulted in lower energy prices and increased choice and convenience.
Local distribution utilities have a positive, long-standing relationship with the public based on stability, reliability and accountability. We bring a high degree of public trust and expertise to the market that has been developed over many years. Of all the stakeholders in this multibillion-dollar industry, the municipal utilities like Toronto Hydro are best able to lead consumers into the new marketplace and help them take advantage of the benefits that competition will provide.
To achieve this, reforms should be implemented at a steady but measured pace that will enable us to address the complex information systems and metering issues that are an inherent part of large, modern, urban distribution utilities. Competition and choice can be introduced quickly without dismantling the core business systems and customer interfaces that enable us to operate our utility, and we look forward to assisting the government in achieving these goals in the months ahead.
Toronto welcomes the opportunity to compete in this exciting new market.
The Chair: You've left five minutes for questions from each caucus. We'll begin with the official opposition.
Mr Phillips: Thank you very much for your presentation. I want to focus first on the taxation issue, just to make sure I have it right, and see if we can't resolve it.
As I understand your recommendation, as the bill is currently written -- let's take Toronto Hydro -- you will be required to pay the Ministry of Finance annually a tax that will be determined as a percentage of your gross revenue. That's a new tax that you currently don't pay and that will be a tax paid by the shareholders of your company, namely, the residents of Toronto. The reason for that tax, I gather, is so that private sector companies that may be competing, that are paying a corporate income tax, will not be disadvantaged. The problem with that is that your shareholders have already paid over decades for your assets, they've invested in those assets, and now, as I understand what you say, the city of Toronto taxpayers will have a new tax to pay, namely, this gross revenue tax. You're suggesting that it should be simply a tax on gross profits, the same as it would be for a private sector company. Am I interpreting that correctly?
Mr Anshan: That's right. We're not saying that taxes shouldn't be levied on all players in the industry but that they ought to be levied on the same basis.
Mr Phillips: Why do you think the bill is written in the way it's written here instead of the way you would like to see it written?
Mr Anshan: I can't answer that. I think you'd have to ask the minister. Maybe it was an oversight. Perhaps it was just a flaw in the drafting, but it's something that we think should be given careful consideration.
Mr Phillips: Or is it the expectation that traditionally you would not be looking to make a gross profit at Toronto Hydro?
Mr Anshan: No. We anticipate, on the competitive side of our business, that we would be earning revenues for our shareholder, which would be the city of Toronto.
Mr Phillips: I appreciate your raising this with us. I think it's an important issue and maybe the government will be able to clarify it.
One issue you didn't touch on in your brief is one we've had a lot of comments on here, and that is the plan in the bill for Genco, the generating company -- essentially, Ontario Hydro will retain all of its generating capacity rather than there being some break-up of that generating capacity. Is Toronto -- and there are many who have come before us -- concerned that that will mean there isn't competition for people like yourselves to purchase electricity? Has Toronto Hydro had an opportunity to review that and do you have a position on that?
Mr Anshan: We haven't taken a formal position on that, Mr Phillips, but we have been considering that. As I've indicated, we think the introduction of a retail market is premised on having a robust wholesale competitive market as well. That may well mean looking carefully again at what's happening with the Genco situation, but we haven't taken a formal position on that. Clearly, as the one player so far in Ontario that accounts for 25% of the power, we think we're going to have significant purchasing power, if you will, in the market and that we will have some influence ultimately on wholesale power prices.
Mr Phillips: Right. In terms of timing, I think most people want to get on with change. There's an appetite by virtually everyone to get on to modernizing our energy sector, our power sector. You're indicating some concerns in here about the pace of change. There's always a balance, because if you allow an unlimited amount of time for change, change probably never takes place. Are there specifics where you think the timetable is going to be impossible to meet, that we really need to re-examine the bill in that area?
Mr Anshan: I wouldn't say it's impossible to meet. We're trying to raise a flag of caution with respect to the technological changes that need to be brought into place. One of the special interests we have, from the Toronto Hydro perspective, is the fact that in addition to dealing with the introduction of the competitive marketplace we're also dealing with amalgamating six companies, six former utilities, into one, and we need some time and ability to integrate the systems we've inherited from the six into one, particularly in the high-tech areas, computer areas and customer information. We think it's possible to do within the time frame, but we raise it as a note, and it's probably worth some discussion between us and others who are managing this process.
Mr Lessard: You've mentioned in your brief some proposals in dealing with green and renewable energy. The government likes to remind presenters that there's a market out there for green and renewable power and that if you provide it people will buy it and they'll pay extra for it. It's sort of a variation of the "Build it and they will come" scenario. I think there are some financial disincentives there for persons to make those choices and that there needs to be something in the act or in the regulations to encourage the provision of green and renewable energy alternatives. If that's not done, that segment of the market won't expand and any jobs that may be related to the growth of that market won't be there either.
Do you feel that that's something which, if Toronto Hydro offers it as a service, people will buy it no matter what the price? Or is that something you think needs to be a required percentage of your mix of services?
Mr Anshan: As I indicated, we do favour that, we are marketing that, but there's a price point for everything in terms of consumer choice. Not every consumer is going to buy it at whatever price you sell it. There is a price point. We want to be competitive with respect to that product mix. If the government as a matter of policy wants to encourage green power in this province, our recommendation is that there be a level playing field between all suppliers of energy and that in their portfolio mix there ought to be a requirement for a certain percentage of that to include green power.
Mr Lessard: You're asking for some direction about what constitutes green power. I'm asking whether you can undertake to provide us some direction as to what you may consider green power as well. That's not something that's defined as yet and I'd like to see how you may define it.
Mr Anshan: I'm certainly happy to undertake to do that and to provide the committee with something in writing on that subsequent to today's hearing.
Mr Lessard: Great. Yesterday we heard from someone who was suggesting that there needed to be a commodities futures market for electricity contracts. I asked him if that was something that I as a residential consumer may be interested in taking advantage of so that I could get lower rates as a result, and he said probably not. But I suspect that Toronto Hydro may be big enough that that's the sort of market they could get into, electricity futures contracts. Is that something you've looked at, an area where you would see yourself participating, and do you think that it's got some benefit?
Mr Anshan: We are looking at it. We're looking at the whole question related to power procurement, of how we will enter the market to buy and purchase our power requirements for our customers. It may be of benefit, depending again on how it's managed and whether or not one has the expertise and abilities and skill sets to manage that process. Some people have gotten quite hurt in these kinds of markets in other jurisdictions. We don't intend to do that. We're going to enter it carefully and methodically but we're certainly looking at it.
Mr Gilchrist: Thank you, Mr Anshan and colleagues. It's good to see you again. I must say I'm somewhat intrigued by the slightly different position you've taken from many of the other MEUs that have come before us. I think you've taken a more balanced approach, particularly in connection with the response you just gave to our opposition colleagues about the need to break up Genco and whether or not that is necessary to see a competitive market ensue.
I'll just deal with a couple of the things you've raised here. Let's talk about the tax issue. Would you agree with me that right now all of the taxpayers in Ontario, having guaranteed Hydro's debt, are on the hook for the debt that is on Hydro's books?
Mr Anshan: Unfortunately.
Mr Gilchrist: "Unfortunately" is exactly the way to phrase it. Moving forward from here, knowing that the debt won't increase but it still has to be paid off --
Mr Anshan: A portion of it.
Mr Gilchrist: Ultimately we would like all of it to be paid off. It's somewhat irrelevant, if it's all embodied in that total cost that the customer is paying right now, how you split up the pie. Would you agree with me that whether you arbitrarily say it's a Hydro penny or a Toronto Hydro penny, if Toronto Hydro pays it, the Ontario Hydro or Genco price is reduced by a corresponding amount? If you're still able to deliver to the customer for exactly the same price, it's really quite irrelevant where in the equation the tax is generated?
Mr Anshan: I would agree with you, provided that the other wholesale suppliers who are competing with Ontario Hydro are paying the same rates on the same basis.
Mr Gilchrist: We would agree with you on that. If there were a circumstance where any supplier were to create a non-profit situation that would otherwise not entitle the government to make any taxation demands upon them, under the normal circumstances under the Business Corporations Act we would lose our ability to take funds and funnel them in through the account to pay off the debt from that particular company.
Mr Anshan: They'd also be out of business, probably.
Mr Gilchrist: No, they could run as a non-profit. If they balanced it exactly so that --
Mr Anshan: We don't expect to be running as a non-profit, though.
Mr Gilchrist: No, but you would agree with me if someone did that --
Mr Anshan: I suppose. Theoretically, yes.
Mr Gilchrist: If I were to say to you that first off the bill considers it a "might," not necessarily the case that there would be the tax on gross revenues, and that every penny that went from that tax paid down part of the debt so that Genco's cost to you would be reduced by an equivalent amount, you would still be able to deliver, net to the customer, electricity at the same price.
Mr Anshan: I'm not sure. But if you can structure it in such a way that we can remain competitive with other energy suppliers who are going to enter the city of Toronto market, then we won't have a problem with that.
Mr Gilchrist: That's certainly our goal.
Mr Anshan: I'm just raising it as a flag to you because our reading of it is that it may not work out that way and we're just wanting this committee to be aware of that.
Mr Gilchrist: That's the benefit of these hearings and we've certainly heard a wide variety of submissions from companies which have taken very different perspectives.
You're much bigger than not only any other MEU but almost all the other MEUs put together. We've had interesting discussions about the need for them to develop economies of scale. What would your position be in terms of whether or not somebody with 800 customers or 1,200 customers is going to be able to compete with any kind of competition, whether it's with Servco or with a private company? Is that a realistic expectation or should they be moving to do what you've now done, maybe not by choice, but what has taken place in Toronto?
Mr Anshan: Excuse me, Mr Gilchrist, I think it was your government that did that.
Mr Gilchrist: That's right, my minister.
Mr Anshan: In any event, I understand your question. I would answer that theoretically it would be very difficult for a utility with 800 customers to be able to compete effectively with a utility our size. Having said that, I remember recently reading in some of the literature that there are utilities that could be considered to be virtual utilities, where all you have essentially is a small group of managers who basically manage outsourcing contracts and manage utility. I'm not going to engage in what I think are the more political discussions of what goes on in rural Ontario in terms of the rationalization of utilities. I think I'll leave that to the MEA and others to debate with you.
Mr Gilchrist: Fair enough.
Mr Anshan: But clearly as a matter of theory I think you're right.
Mr Gilchrist: Thank you. As a final point to you, and this isn't quite so theoretical: If you were buying or selling to anyone, would you expect your assets to be sold at your book value or at their fair market value? If you sold them at anything less than fair market value, have you in effect increased your debt if you were in an existing debt situation?
Mr Anshan: I think that's a difficult question to answer.
Mr Gilchrist: No, this is a real-world question. If you wanted to buy Pickering Hydro, just as a for instance, would you expect to pay the value of their generating stations, their wires and the value of what their retail customers are worth, or would you expect to get some kind of a deal at the expense of Pickering taxpayers?
Mr Anshan: No, I think it would be more what the amortized price would be of those assets at the time you went to buy them. If the book value has been properly calculated, then that might be --
Mr Gilchrist: You know that the book value -- you take straight depreciation on certain assets that may or may not strictly conform with the life cycle or whether or not they've been well maintained or poorly maintained. You would do an appraisal of those assets and you would come back and say to Pickering, "We believe the value of what you've got less the liabilities is X," would you not?
Mr Anshan: Yes.
Mr Gilchrist: You don't really care what they're carrying on their books. You would say, "What it's worth to us, knowing that we could make X million dollars more in revenue, is Y dollars for the assets." Would that be fair?
Mr Anshan: I suppose that people buying those kinds of assets will look at it and make the kinds of judgments you make, and then the market will determine, if there's more than one buyer, what the price should be, just as you buy any other kind of asset.
The Chair: Thank you very much for coming before the committee this afternoon. We appreciate hearing your advice on this bill.
SOCIETY OF ONTARIO HYDRO PROFESSIONAL AND ADMINISTRATIVE EMPLOYEES
The Chair: Calling representatives from the Society of Ontario Hydro Professional and Administrative Employees, please. Good afternoon and welcome.
Mr John Wilson: My name is John Wilson and I'm the president of the society.
Ms Leslie Forge: Leslie Forge, vice-president of the society.
Mr Wilson: We're here on behalf of the 5,500 professionals at Ontario Hydro. We appreciate this opportunity to appear before you.
Our members are responsible for ensuring and helping with the smooth and successful transition to competition, and our members' interests are aligned with those of ratepayers, because if Ontario succeeds, our members will succeed.
I won't take you through every word in the little blue book that I just passed out. I'll try to do a précis of some of those highlights and you can decide where you want to go into more detail. Over the next few minutes I'd like to look at two areas. The first is the changing marketplace and the second one I'd like to address is some workforce transition issues.
In the changing marketplace I'd like to look at market size, Ontario Hydro's successor companies, how the playing field should be levelled and two other concerns: privatization and incentive regulation. We'd like to look at whether Ontario is going to get its fair share of the electricity market; the parts of Bill 35 that disadvantage Ontario Hydro's successor companies in relation to out-of-province suppliers; focusing too narrowly on the Ontario market in relation to the broader North American market; and some amendments to level the playing field and allow an opportunity for the province of Ontario to succeed.
We'd like to look at the competition, how they're preparing to compete and then look at how Ontario is preparing to compete. We'd like to see Ontario Hydro's successor companies and note how they and the competition should be treated so that they play under the same rules.
Finally, looking at workplace transition issues, we'd like to look at two areas: transfer orders that move people from Ontario Hydro to a successor company, and pension provisions of Bill 35 as they apply to the existing Ontario Hydro pension plan and its successor plans.
In addition to that, we'll note some recent society-commissioned polling results done by Environics that support the recommendations we'll make. Over the past little while, Environics results show that the people of Ontario say that electrical industry restructuring must ensure the delivery of safe, reliable and low-cost electricity to Ontarians; protect the financial position of Ontarians and provide a fair return on their investment in Ontario Hydro; position Ontario to compete successfully in the North American and global marketplace; protect Ontario's generation assets against foreign control; enhance Ontario's overall competitive position; and finally, promote energy efficiency, sustainable development and protect the environment.
First, let's have a look at the changing marketplace. I'd like to say at the outset that we understand that the monopolies in the generation and retail wing of utilities are no longer viable and that no one is for the status quo. Competition is on our doorstep. When we take a look at the market that's happening, that's coming here, I'd like to make one statement, and that is that the market is North American and that this market is changing at lightning speed. Very soon Ontario will find itself with massive foreign companies hungry to expand their already large market shares. The real question here is, will Ontario Hydro's successor companies be large enough and strong enough to compete with these people and win? Some of the representatives of those companies will be appearing or have appeared before you.
Critics of Bill 35's decision to keep Ontario Hydro's generation assets in a single company contend that these assets need to be broken up to mitigate Ontario Hydro's successors' market power. This argument falsely assumes that the electricity market is limited to Ontario. The market is North American. In northeastern North America, Ontario Hydro has a market share of less than 15%, hardly enough power to manipulate it. The northeastern and Midwestern markets will become even more tightly intertwined. We all noticed that during the big spike that happened just several weeks ago.
Our share will drop. For instance, one of our competitors, Hydro-Québec, is now spending $13 billion to increase generation and transmission to permit massive exports into Ontario and the United States.
In Ontario today we have a $10-billion electricity market annually, with spinoff benefits for the province. These spinoff benefits will multiply as electricity, telecommunications, gas and information technologies converge. If we aren't able to compete in this market, we will be importing products and exporting jobs.
Size matters in the larger market. It gives an edge to competitors. It gives them economies of scale, it gives them deep pockets to have diversified investments and it lets them strategically coordinate their assets. All across North America, industry executives confirm this conclusion. We've had the 1998 Electric Industry Outlook by the Washington International Energy Group. Some 82% of all the executives surveyed said there would be less than 100 North American generating companies in 10 years, 45% said there would be less than 50, and many said there will only be 10 to 15 large generating companies left when the dust settles.
We can see that happening. There have been over $3 billion of mergers in the energy business in North America in the last two years alone. Let's look at some of them. Hydro-Québec has purchased Noverco, the parent company of Gaz Métropolitain, and now controls almost all of the gas distribution in the province of Quebec. Duke Power has merged with PanEnergy; American Electric Power with Central and South West. The trend is clear: The competitors are getting larger and they're getting more diversified.
We should have a look at what Quebec Premier Lucien Bouchard said when Hydro-Québec acquired Gaz Métropolitain: "Concentration of supply, distribution and transportation of energy into the hands of large consortiums is a worldwide trend, and Hydro-Québec has to keep up with the competition." Let us hope Ontario can keep up with the competition.
Bill 35 does not require consideration of the broader North American and global context when market power issues are addressed. There is a danger that the Ontario market will be viewed in isolation. We recommend that Bill 35 be amended to require consideration of the North American and global energy markets when addressing market power.
Let's look at what's happening with generation in Ontario. Alone among all the major players in North America, the big ones, Ontario has decided to break up its electricity company into smaller, independent pieces. The fact is that even before Bill 35, there was a tidal wave of mergers and acquisitions, and Ontario Hydro was swept out of first place as the largest utility in North America, down the list. Bill 35 will move Ontario Hydro's successors considerably further down the list.
Bill 35 has a provision to keep all of Ontario's generation assets together. We believe this is Ontario's only chance to achieve competitive success, but we believe these provisions have to be strengthened. We believe that a forced licensing agreement or asset swaps will adversely affect Ontario's competitiveness. Leasing the operation of generating plants is divestiture by the back door. Leased assets are not commonly controlled and directed. Asset swaps involving actually transferring ownership and control to different jurisdictions will be equally harmful.
The fact is that Ontarians strongly oppose foreign control of their generation plants that would likely result from an asset swap. When questioned in the latest Environics poll, 68% of Ontarians disagreed with the idea of asset swaps and 84% wanted Ontario's electricity supply to be protected from foreign ownership and control.
The society would say it's time to stop thinking small and start thinking big in the global arena. The people of Ontario have invested a lot of money into our electrical system over a 90-year-plus period and they need a fair return on their assets. We recommend that Bill 35's provisions for keeping Ontario's generation assets together be strengthened.
One of the most important measures we can take to pay down outstanding debt, protect our investment and prepare for competition is to rehabilitate the laid-up reactors at Bruce and Pickering and return them to service at world-class levels as soon as possible. Hydro's rehabilitation will provide Ontario with a major advantage over foreign competitors. Nuclear reactors are costly to build and very inexpensive to operate, especially when compared to fossil fuel, the main energy source for our American competition. It's largely because of Ontario's large nuclear capacity that Resources Data International determined that of the 32 utilities in northeast North America, Ontario Hydro is the lowest-cost generator at the margin.
The returns we will get back will also be environmental if we rehab those reactors, because this will radically reduce greenhouse gas emissions. That will line us up with what's happening with Bill Clinton in the United States. Energy swapping is enabled by Bill 35 and it will help us meet our commitment in Kyoto to reduce those emissions. The society recommends that Bill 35 be amended to permit the Generation Corp to rehabilitate, own and operate the laid-up Bruce and Pickering nuclear stations.
Now let's look at a level playing field. Whether Ontario succeeds or not will depend on the kinds of rules it imposes on the people who come from here and play here. Genco and Servco represent Ontario's best chance for success in the North American market. If they do not succeed, Ontario will not succeed.
We're concerned about two major issues. They are stranded debt and reciprocity. If Genco and Servco do not have a sustainable financial footing, they will fail if they have too high a debt burden. They will also fail if they are prevented from selling into markets outside Ontario while competitors from these markets are allowed to sell here.
Bill 35 gives no discretion on how much debt is transferred to Genco and Servco. There is too much at stake to allow decisions affecting Ontario's economic future to be made without any direction. In the most recent Environics poll, 81% of Ontarians said it was important that Ontario Hydro's successor companies be put on a financial footing that would enable them to compete with suppliers from the United States and Quebec. We recommend Bill 35 be amended to direct that the amount of stranded debt transferred to Genco and Servco is such that it places them initially on a sound financial footing.
Equally important is reciprocity. Quebec has opened up its wholesale market but it has not opened up its retail market. Michigan will not allow retail access until the year 2002. If Hydro-Québec and Detroit Edison are not required to open up their markets to Ontario suppliers, these utilities will use their captive retail base to sell surplus into the Ontario market at salvage prices. This will have a devastating effect on Genco's competitive position because it is a certainty that Genco will lose share in Ontario. We recommend that Bill 35 be amended to provide that out-of-province electricity suppliers not be allowed to sell into the Ontario market before Ontario suppliers are allowed to sell into their markets.
We have two other concerns: privatization and incentive regulation.
Ontarians have consistently said they oppose the privatization of Ontario Hydro. As currently written, Bill 35 allows privatization to occur without the approval of the Legislature. Initially the government will hold all the shares, but there's no guarantee that this will stay the case. It's also possible, under the existing provisions of the bill, that Servco and Genco could decide to sell off their assets in whole or in part to private investors without legislative consent. We recommend that Bill 35 be amended to prohibit selling all or part of Genco or Servco without legislative approval.
On incentive regulation, just a word of caution. We do not oppose incentive regulation but we would like it to be such that it looks at the long term as well as the short term. We recommend that Bill 35 encourage an efficient and effective electrical system that does not undermine safety and reliability or harm the environment in the short and the long run, to provide guidelines to the OEB on incentive regulation.
We looked at the changing marketplace, we looked at market size, we looked at the competition, we looked at Hydro's successor companies, and size does matter there. We looked at levelling the playing field, we looked at the amount of debt that should be placed on Genco and Servco, and at reciprocity, privatization and incentive regulation.
Now we'd like to just take a moment and look at some workplace transition issues. There are two of them. The first one is transferring people from Hydro to its successor companies, and the second one is the Hydro pension plan and its successors.
Bill 35 transfers employees from Ontario Hydro to its successors. It's a very powerful, broad discretionary power that exists despite any general or specific act or rule of law. The society believes there should be a requirement to consult with employee representatives before transfer orders affecting those people, to make the transition smooth and to achieve the lowest costs. We recommend that Bill 35 be amended to require consultation with the bargaining representatives before making transfer orders affecting employees of Ontario Hydro.
The last thing I'd like to look at is the Ontario Hydro pension plan and its successor plans. We met with Ministry of Finance representatives so we could understand Bill 35, and we reviewed the legislation in light of these discussions.
We'd like to focus our discussion. Basically we have three principles that we have used to help us arrive at some results. The first principle is that we would like to have the bill provide a level playing field for all the employers and employees in Ontario, to ensure that pension plans under the Energy Competition Act are consistent with pension plans under the Pension Benefits Act, and to ensure that Ontario Hydro's successor company employees are not disadvantaged with respect to other employees in Ontario.
Second, we would like to ensure that the successor companies are not competitively disadvantaged relative to other companies and that they're permitted to negotiate mutually beneficial agreements with their employee representatives in the same manner as those other companies.
Third, we would like to treat all the stakeholders in the pension plan fairly and equitably and protect the interests of the ratepayers during Hydro's transition to those successor companies.
We use those three principles to have a look at how plans are governed, how surplus is used, reciprocal access between plans, participation in plans and how broad in should be.
First, governance: We don't believe Bill 35 should mandate a governance structure which prohibits joint trusteeship of plans because this disadvantages the employees and the employer. Specifically, it should be possible to negotiate joint trusteeship etc. We believe that Bill 35 should be amended to permit the Financial Corp, Ontario Hydro's successor, or its immediate and future successors to enter into agreements with the bargaining agents to provide for joint management of the plans, to share the entitlements of surplus and the liability of deficits, to resolve any disputes with methods other than moving before the courts and to negotiate with the employer and the bargaining agent regarding changes in benefits or rate of contribution of the pension fund.
Second, in addition to governance, looking at surplus, as a result of contributions by both Ontario Hydro and its employees, the Ontario Hydro pension plan has a substantial surplus today. The society recognizes the reasoning behind Bill 35 permitting contribution holidays to employers. If these holidays are used to reduce operating costs, this will benefit the ratepayers of the province.
We believe employee contribution holidays can also be used to benefit ratepayers. We believe that the legislation should encourage employee contribution holidays and the reinvestment of moneys that employees contribute to the pension plan for uses that advance the interests of the employees and the public and ratepayers. Such uses could include provisions permitting an employee contribution holiday with a requirement that employees contribute towards labour venture capital funds etc to allow that investment to go into the electrical industry in Ontario. This is the kind of thing that can be done without requiring changes to the Pension Benefits Act or the Income Tax Act. That would be our recommendation on use of surplus.
We also believe that there needs to be reciprocity between the pension plans so that employees are not trapped and labour mobility is not reduced in moving about the province so that you can get skilled labour to employers that need that labour. We would recommend that a standard form reciprocal agreement be entered into by the successors of Hydro that allows employees to move between the plans.
Lastly, levelling the playing field, we don't believe that the bill should be inconsistent with the Pension Benefits Act. We believe that the legislation should not preclude multi-employer plans etc. Whatever can be negotiated under the Pension Benefits Act between employers and employees should be allowed under Bill 35.
Those are the general concepts of the society's recommendations. I would like to thank you for providing us with this opportunity. I will try to answer your questions. If I'm not able to, I will obtain the answers for you.
The Chair: Thank you. You have left us three minutes for each caucus. We begin with the NDP caucus.
Mr Lessard: Thank you very much for what is a very detailed and extensive brief. I wanted to tell you how much I share your concerns about foreign ownership and control of power-producing assets here in Ontario. I think that's probably the direction the government is heading towards, the privatization of Ontario Hydro, and that's something I am concerned about. I appreciate your suggestion to try and put things into the legislation to prevent that from happening, but just because we put things in the legislation, it doesn't make them so, and that's especially true with respect to the stranded debt.
You've suggested that the amount of the stranded debt should be such that it places Genco and Servco on sound financial footing. I don't know if that provides us with much more clarification than we have now, because just by saying it's so doesn't mean that's what is going to happen. It's really the market that will determine whether the amount that's picked for the stranded debt is right or it isn't. I wonder whether the reason you're suggesting that go in the legislation is because you have some concern that the Minister of Finance may come up with the wrong number. If that's the case, do you have some suggestions as to how we might arrive at the right number for the stranded debt so that there is a sound financial footing for Genco and Servco?
Mr Wilson: I don't have suggestions on how to arrive at the right number, but there are many people lobbying that all or most of the debt be left with Servco and Genco and that the province wait and see what happens, to see how they fare in the market. What we would like to happen is that the playing field be levelled and that Servco and Genco have the same debt-equity ratio and the same kind of resiliency that their competitors have, and that that be done initially so that when the fight takes place for market share, Ontario fares as well as it can fare and that the province doesn't end up digging itself out of a hole and not being able to pay off its debt and that market share goes to foreign competition and out-of-province competition.
We're saying that it's important that we not look at, as others have suggested, allowing the debt to be left mainly with Servco and Genco. These are people who are looking mainly at, as I said, the Ontario market and not the bigger global market. We can talk with you about how to do that, but we believe it would be a good thing to provide that kind of direction to the minister in the bill so that the minister can get input from us and from other people as to what a sound financial footing is and will not be dealing with people who are requesting that the two major successor companies carry a larger burden of the debt and wait and see what happens.
Mrs Johns: Thank you very much for joining us today. You've certainly given us a very important perspective with respect to the whole hearings and so I wanted to just talk about that for a second. I guess in most cases if we have heard any comment on the specific issue of market power within the bill, we've heard some concerns that Hydro may be getting too much market power. From that situation we haven't had anyone talk as much about how important it is to compete in the northeast corner of North America, as opposed to just in Ontario. From that standpoint, since you're really the only person who has raised this issue, I want to give you more of an opportunity to talk about that, because that's important for us to understand. As legislators, we're on a difficult balance. Do we keep the market power right for Ontario or for North America? If you could talk to that issue for a few minutes, I would appreciate it.
Mr Wilson: I think you've pointed to the answer, and that is, what is the market? What does Ontario expect to do and where does it expect to compete? I would say that the market begins in northeastern North America and then it moves across North America and it probably moves outside of North America. If we're to look about us in Toronto and look at the people who are building offices here, who expect to come here and who expect to complete, and we can name them -- American Electric Power, British Energy etc -- we know that the competition knows where the market is. If Ontario is opening up its borders, and that is what it's doing, and it's increasing the inter-ties between Ontario and the United States and Quebec, then we have a choice as to which way the electricity flows: either the product comes in and the jobs go out or the electricity goes out and the jobs come in. What happens inside Ontario definitely has to be considered, but the make-it-or-break-it for the province will be, when we run up against the big American juggernauts of Duke Energy and American Electric Power and Enron, whether we win or whether we lose.
I would say that the critical thing for Ontario is to look at the big market and that's why we made the recommendation that when you look at market power, look big and make sure that you're not just advantaging this province against the major competitors that we'll face.
Mrs Johns: For the society of Ontario Hydro professionals, which is a professional union or a professional group of people, do you believe that jobs will be created as a result of this bill and investments will come in? Do you have any indication about where you think pricing will go as a result of this?
Mr Wilson: I don't know where pricing will go, but I can tell you about what will happen if the electricity goes out. The Institute for Policy Analysis at the University of Toronto did a study about what would happen to the province's economy if 20% of the electricity came into Ontario as an import. It means that jobs will be lost. It means that government deficits will rise. It means that total output across all sectors of the province will fall. So if it doesn't happen that we either hold or gain market share, the people who I represent will have a big problem and Ontario will have a big problem, which is why I say our interests are aligned. I would hope they're aligned for everybody in the province, all of the utilities.
Mrs Johns: And Bill 35 will give you some of this ability to move forward and to capture those markets, with some small changes that you've recommended?
Mr Wilson: Right. We think the provisions should be strengthened in terms of allowing the successor companies to rehab those reactors and not to be forced to enter into leasing and swapping agreements, to allow it to compete head-to-head on the same footing with the same tools that its competitors will have.
Mr Phillips: I appreciate the presentation. Unfortunately, there's so much here and so little time. In the last part of your presentation, the transition issues are absolutely crucial to your members, obviously, and I wish there were more time to debate them. I hope they can be accommodated in some form or other.
I want to just follow up on one of the fundamental issues of this bill and that is your support of Ontario Hydro retaining essentially 100% of the generating capacity. I'm just curious about that, in that I do understand that the purpose of the bill is to see a lot more generating capacity come on stream in Ontario. There are a lot of investors right now waiting for the bill to pass so they can build generating plants, new technology and new generating plants that will be, I gather, extremely efficient and will take substantial share away from the existing generating plants. In fact, the minister said the other day that it's his expectation that -- right now Hydro has 90%; that will drop to 60% in these generating plants.
I do understand the need to have at least one major player here in Ontario that can compete with the northeast, but whether it is in Ontario Hydro's best interest to retain 100% of those plants is, in my mind at least, an open question. Are they the right ones to own? Would some of them be better off in other hands than Ontario Hydro? If you're going to be this northeast North American giant, have you got the right mix here? Because once this bill passes, that will be your generating capacity. Are you saddling the future of Ontario Hydro with the wrong generating capacity?
Believe me, the day the bill passes, the value of these generating plants drops. As soon as the bill's passed, in my opinion, the value begins to drop because other ones are going to build new generating capacity and you'll be competing for a smaller market. I'm just curious about the professional advice you would give us of whether now Ontario Hydro, an operating, competing company, Genco -- if you were a shareholder in Genco, which I guess we all will be, is this the right package of generating plants that you want to compete down the road?
Mr Wilson: I guess the answer to that question is how it should be done. Should everyone have the same rules? Should Duke Energy have the people in North Carolina taking it apart or removing part of it? Should Ontario Hydro be forced to lease or forced to get into a swap? What we're asking for is that Ontario Hydro be allowed to play by the same rules that other people play by. Actually, I should not say Ontario Hydro, forget Ontario Hydro, but Genco; you said it correctly. Should Genco, our big player, be allowed to play by the same rules that Duke Energy plays by?
Several things: Number one, what will happen to Ontario Hydro's generating assets when the bill passes? There are a large number of people with a lot of money in Ontario right now who are trying to buy bits and pieces of Ontario Hydro, some very large bits and pieces. I think the market will determine what Ontario Hydro's generating assets are worth. With Ontario Hydro's rehab of its reactors successfully, they will be worth more than anybody else in terms of that next kilowatt of electricity in this part of the continent. Those are what the studies have looked at.
Ontario Hydro is in a good spot, so what we're asking for is, allow Genco to play the game, allow Servco to play the game, and don't saddle those people with rules and regulations that will hurt Ontario when they have to come head-to-head with Duke Energy. I'm sure Duke Energy is wondering if they have the right mix of this or that, and if they don't, they'll make those corrections. All we're saying initially is, allow the successor companies to get in there and play the game and don't, in terms of market power inside the province, cut out this amount of generation or that amount. Let the utility deal in a competitive fashion with its competitors.
The Chair: I'm sorry, time has expired. I apologize, but we must move on. Thank you very much for coming before the committee today.
The Chair: Now calling representatives from Greenest City. Good afternoon and welcome.
Ms Shirley Roburn: My name is Shirley Roburn and this is Scott Moore. Originally, David Kraft was scheduled to speak but he wasn't able to make it, so we will.
Chernobyl happened at the end of April. My friends in Poland and the Ukraine and Romania were 10 to 13 years old at the time. When I worked in Europe, sometimes slips of their memory would come out from those days. They would talk about their fear of eating vegetables that grew too close to the earth or the secretive distribution of iodine pills that was deployed days too late to have much effect. But the story that I remember most was the story that my friend Suzanna told me.
Chernobyl happened at the end of April, which is right before the May Day holiday. May Day is a workers' holiday and in the Soviet Union and Eastern Bloc states it was a very important time for public display. The people would go on parades. The children would march first, with banners and music, and they would be followed by the workers, while the party officials sat and watched from the balconies.
In 1986, during the crumbling years of the Soviet Union, the May Day parades went ahead as usual and I will always remember Suzanna telling me about this eerie event on the first real day of spring: the children in their uniforms and shorts waving red flags, playing trombones and brassy instruments as their thin feet kicked up radioactive dust.
I know that seems like a strange place to begin a discussion about energy policy, but I think it's important to remember that energy policy is about more than just consumer protection. Energy policy is very important. While we take it for granted in our everyday life -- everybody uses and depends upon energy -- it's important for our safety and security, for our health and quality of life and for the stewardship of our land and resources for future generations. At Greenest City we're deeply concerned about all of this.
I'd like to begin by thanking you for taking the time to hear our voices. Scott and I will be speaking on behalf of Greenest City. I work at Greenest City and I'm also a student. Scott is a business person, who also coordinates our No Energy to Waste program, which is a program whereby retailers work to increase their energy efficiency and reduce their energy costs.
Greenest City works on the community level to help people reduce greenhouse gas emissions. I think what we can bring to this committee is a discussion of how energy policy affects us on a community level, so I'm going to begin by discussing some of the issues that I think affect regular people living in Toronto and the surrounding area because of our energy use, and Scott will go on to address specific measures that could be in place in the bill to protect people as consumers and as citizens.
Thankfully, there have been no Chernobyls here. Partially, maybe this is due a bit to luck, but it's also due to the fact that we have had regulations that protect us. With the recent incidences of smog in Toronto, it's really brought home to me how important strong regulation is. If somebody had told me 10 years ago that I would wear a gas mask to bike through my city or that I'd be afraid to go outside in the hottest part of the day or that swimming in the lake next to where I live would make me sick, I would have had a hard time believing it. I don't want to be extremist, but I find it weird that we have accepted a lot of these things as totally normal. For me, whenever I bike through the city in a gas mask, it creates a science fiction quality to my life.
The radio announces that there's going to be hot, sunny weather and that will bring smog today. It's declared as if this were a normal consequence, as if a bright, sunny day in the Sahara Desert would equally bring smog. But it's not. It's a clear result of our policy choices. It's because the restructuring of energy policy in the United States has led to more burning of dirty coal. It's because we have six million car trips in southern Ontario and have had difficulty putting in place better regulations to govern their emissions. It's also because Ontario Hydro's own plans predicted that from 1996 to 1998 there'd be a 70% increase in fossil fuel emissions. In the absence of effective regulation, many people have suffered.
In France, when there are smog days, half the cars are taken off the road and other measures are put in place to reduce energy use. But the values driving us are different here. On smog days, we don't see people walk, cycle or take transit. People turn on their cars. They use air conditioners. For several days each summer, because it's inconceivable to us to limit the freedom of the car, we limit the freedom of our citizens. Children, the elderly and people with respiratory ailments are told not to go outside, to be under house arrest or risk possible death or severe respiratory damage. How did this become acceptable to us? What could be more basic than our right to breath?
I find our inability to deal with smog disturbing on two levels. One is just because I am a lover of beauty. On an aesthetic level, it's sad to me that the sweetest days of summer have now become a soup of dirty air and that for many children living in the urban area today, that's all they're going to know. However, it scares me even more because in an energy-intensive society I feel we're losing touch in a very basic way with an understanding of what is required for us to survive. We're witnessing a mentality where people really think that we can put suntan lotion on our children and that this will offer some kind of protection, while UV radiation damages crops, destroys the phytoplankton in the sea and the last salmon runs in BC die off in the warm, sickly water.
I'm very concerned that the absence of good regulation on smog and greenhouse gases will have really damaging effects on our future. Part of the work that I've been doing for Greenest City has been looking at sustainable farming. When I went to interview farmers, because I was interested I also asked them about the greenhouse effect.
I have one friend who is a farmer, named Jean Roussel, who works in the Mont-Saint-Grégoire area of Quebec, where he's been farming for 30 years. During the last ice storm, his family was without power for a month. He survived because people from Montreal came every day and drove cords of wood up and his family lived by a wood stove. So I asked him if he thought the greenhouse effect was happening, and he said: «Depuis quatre ou cinq ans, le soleil frappe avec plus de force. La terre, ça devient comme de la pierre, du ciment», which roughly means: "Yes, for the last four or five years, the sun has been striking with more force. The earth is turning to cement and to rock." I sat there with him and I looked out over his fields and I could see the worry he felt about how he was going to adapt to a changing climate.
It made me think about why we don't feel this worry. I think it's because in an energy-intensive society, we're not so close to those effects. Our food is trucked in from thousands of kilometres away. Many of us don't even know what the plants we're eating look like, what part of the plant a fruit or a root came from, let alone being aware of how we would need to act to grow our own gardens. I'm worried because I don't think we're truly aware of the consequences of what it might mean to live in a greenhouse. There isn't really any doubt among the leading scientists of the world that the greenhouse effect has started, that the world will warm up three to five degrees Celsius over the next 100 years. Already one in eight vascular plants is threatened. Already 95,000 lakes in northern Ontario will find the life in them extinguished if present policies continue. Thinking about that and looking out over the crops, I wondered what the future would look like, how we felt we were going to be able to handle it.
I guess that brings me back to Chernobyl and the issue of regulation. Chernobyl was a different situation, but while it's terrifying, I can see very easily how it happened that people sent their children and the workers of their country out into a parade in radioactive dust. The leaders at that time were faced with the crumbling Communist infrastructure that they knew would have tremendous difficulty in changing. They felt a need to prop up some institutions that were at the core of their society. Maybe at some level they understood that letting the parade go ahead was dangerous, but I don't think they really believed that it could have harmful long-term effects.
I think it's time that we raise our own red mayday flag and really think again about energy policy, because there is a cloud on our horizon. It was unleashed some time ago. All we can possibly do now is minimize its consequences. But there's a wind stirring and there's not much time. When it does come, change will affect generations following after us and there won't be much we can do to take it back. We maybe don't have the structures in place that we need right now. People are expecting tradition to follow down the same roads we've always been following, but that cloud is dangerous. Maybe people don't know, but you're our leaders and you do.
I hope that when you look at this bill you will think not just of the need for cheap energy and of the needs of the people of Ontario as consumers, but that you'll also consider that life is precious and that the trust we put in you as our representatives is what's going to take us into the future. In that light, Scott is going to mention some recommendations that we think could be in the bill and go a long way to reducing greenhouse gases and dangerous environmental futures.
Mr Scott Moore: Greenest City as a group focuses on climate change and reducing climate change within the city of Toronto. We also like to do our small, community-level programs in very localized and ethnic areas. So the recommendations I have to the committee with regard to Bill 35 involve reducing air pollution, as well as helping to promote community awareness, energy reduction, energy efficiency and local energy generation.
With regard to means by which Bill 35 could actively reduce air pollution, we have three recommendations, much in line with other environmental organizations that have come forward and spoken at the same committee. The first would be emission caps which would be applied to the three major air pollutants -- sulphur dioxides, nitrogen oxides and carbon dioxides -- which are responsible for acid rain, ground-level ozone, smog and climate change.
I'll just reiterate some of the caps that have been put forth already: One is 43,750 tonnes for sulphur dioxide emissions from all electricity generated in Ontario as well as for all electricity generated for sale in Ontario; 6,000 tonnes for nitrogen oxide emissions, again from all electricity that's generated within Ontario and for all electricity that's generated for sale in Ontario; and 23.3 million tonnes of carbon dioxide emissions, again applied to all electricity generated within Ontario and all electricity generated for sale in Ontario.
We also believe that a percentage of all electricity generated for sale in Ontario should be generated by sustainable and renewable sources. By this we mean things like solar voltaics, wind generation and biomass generation. Those are the three major ones. This would have a double effect. It would help reduce the air pollution, but it would also help promote the green power industry and help it gain a foothold within the market here in Ontario.
Also, we believe there should be full disclosure of the sources of electricity on all consumer bills. This would give consumers the opportunity and the choice to purchase green power over "dirty power" in an open and free electricity market.
The reason we believe these things need to be written into Bill 35 is that we feel something has to be done immediately, before dangerous and irreversible precedents are set, before it becomes too late to try and roll back the clock against the large-scale generators out there that are polluting the environment.
The second area I would like to discuss in terms of our recommendations on Bill 35 is that of promoting community awareness, energy reduction, energy efficiency and local energy or electricity generation. I find it's often the case when there are large-scale provincial or federal regulations of this nature that they tend to focus on large-scale things like nuclear-powered generating plants and large coal generating plants, but often, as I'm beginning to learn, there are solutions in small-scale community initiatives.
The Greenest City sponsors and is actively involved in community-level programs that not only reduce greenhouse gas emissions but raise awareness around related environmental and health issues. We feel that Bill 35 has an opportunity to promote community awareness, energy reduction, energy efficiency and local energy generation. The principal means by which Bill 35 could accomplish this is through something called a systems benefit charge, which would be a small charge applied to the fee for the delivery of electricity that would amass itself into a fund which could then be allocated through grants and loans throughout the province, sponsoring programs designed to reduce energy use, to create energy efficiency where possible, to help small business and small energy producers get a foothold in the market, and in general raise community awareness, to help people make the bridge between things they do at their thermostat or with their light switches and the environmental damage that potentially can cause.
As an example, the Greenest City has a program, along with another group in the city, the backyard shade tree program. What that does is that we basically subsidize the planting of trees in people's backyards, front yards, multi-housing units etc. It's a very simple act that provides people with aesthetic pleasure as well as a connection to the earth by planting a tree. When that tree grows up and reaches maturity, it can often shade a house and provide it with a windbreak during the winter. As a result, cooling and heating costs are reduced. It's a very simple act and it doesn't cost a lot of money, but the reward over the lifespan of the tree is great.
In a similar fashion, the program I'm closely associated with, the No Energy to Waste campaign, is generating energy efficiency in the retail sector by promoting energy-efficient lighting and more energy-efficient practices, as an introduction to the program and then, through that, reaching the consumer base of those businesses involved, those retailers involved, and promoting energy efficiency and atmosphere-friendly behaviour. Again, through energy reductions and energy efficiency, a lot can be done. I believe that a kilowatt that's not spent or not used is a kilowatt that doesn't need to be generated, which could save millions of dollars in terms of building power plants but also is a dollar for the environment.
Lastly, some of these monies could be provided to smaller or local generators of electricity, pioneers really, working with solar photovoltaics, wind generation, small-scale hydroelectric and biomass. Already here in Toronto there is something brewing on the horizon, the Toronto Renewable Energy Co-op, which is planning to build a wind generator here in the city, and it is selling off shares as a co-operative. With the opening up of the market, I think there is a real chance for smaller-scale people to penetrate into that market, especially if there is full disclosure on the bills and especially if consumers are allowed to make the choice. As someone who is a part of the fledgling green economy here in Toronto, I firmly believe that given the awareness and the choice, the consumer will make the decision that's best for the environment.
There's a real future here in this area of expertise and technology. We should not let the opportunity pass us by here in Canada. A great example of that is telecommunications now being sold overseas in places like India for millions and millions of dollars, providing thousands of jobs here in Canada as well as millions of dollars in taxes.
I guess basically to sum up, we hope that the committee will see fit to write into Bill 35 some measures which will hopefully reduce air pollutants, not just in Toronto but throughout Ontario and for our neighbours who will be affected by it as well, to the south, east and west, and also give businesses and small-scale community organizations the chance to grow and develop within the larger umbrella of a deregulated electricity market.
Unless you have anything to add, Shirley --
Ms Roburn: No. We wanted to leave some time for questions.
Mr Moore: Thank you very much.
The Chair: Colleagues, our time for questioning is very brief. I think there's time for one question and answer for each caucus.
Mr Galt: Thank you for a very effective and thoughtful presentation. I too am concerned about the environment, particularly when I have a daughter with asthma who happens to live in Toronto, so it rings home very, very close.
I'm not familiar with your organization, Greenest City. How long have you been active and involved with the environmental movement?
Mr Moore: We have been in existence for about three years. We came about after the demise of the green communities program under the former provincial NDP government. The east Toronto green community, the north Toronto green community and the west Toronto green community got together and applied for funding from the Toronto Atmospheric Fund. Currently we get funding from TAF, Action 21 and a whole host of others.
Mr Galt: There'll be extensive consultation. We'd very much like you people to be part of those discussions. If you'll leave me your card before you leave, the ministry will get in touch with you for the consultations on the development of regulations. All the concerns you've expressed will be considered in those regulations.
Mr Phillips: There are two approaches to this. One is that money is raised and then available to organizations like yours. There's a school of thought that says it's very difficult for governments to pick the right ones. The other approach is to find a way that successful projects are encouraged through regulations or through legislation. In other words, rather than fund projects, a climate is created where successful ones are able to operate. I interpreted from your recommendation that you were suggesting we try and make funds available as opposed to the other way. Have you considered the other approach? If you have, do you have any suggestions for us there?
Mr Moore: Any time you've got a large number of community groups and a small number of dollars, it's almost an open market in itself and there's a lot of competition to win those dollars. In general, you find that the programs with the best ideas and the most developed plans of action are the ones that initially win the funding and those that are successful and have a future continue to win the funding. That's why we need large accumulations of capital that can then be allocated, just the interest alone, to groups within Ontario to help us to keep doing the work we do. With Bill 35 there's an excellent opportunity to instill that in the framework by taking a small tax, a surcharge, from people's bill and taking that money and allocating it in that manner. Hopefully, that answers your question.
Mr Lessard: I'm pleased to see that there seems to be such a strong consensus of opinion on environmental initiatives that should be placed in Bill 35 with respect to emission caps, the required percentage of energy generated by renewable or sustainable sources and also the sustainable development funding technique as well. The other area you mentioned that I'm not so clear on is conservation measures. I'm wondering whether you think that the approach with respect to conservation should be based on financial incentives, or should it be based on price? The bill really encourages increased sales for people who generate power in Ontario. It doesn't really encourage conservation, especially if the price goes down, as the government says; that would encourage consumption.
Mr Moore: That's the whole dichotomy in itself. You're opening up the market in the hopes that the price will drop. You would expect that when the price drops, demand will increase, just by nature of people being flippant or what have you.
Probably most of the major energy efficiency initiatives that were launched in North America arose out of the energy crisis in the 1970s. People drove less, people purchased energy-efficient lighting etc. My mother is a classic example who refused to turn the heat up above 68 in the house and who issued stern warnings every time lights weren't turned off.
The principal way by which you're going to reach people and teach them about reduction and reducing their energy use is by forcing them, through awareness, to consider the implications; in other words, to make a bridge between using lots of electricity and causing acid rain, which will kill 95,000 lakes in the years to come; or connecting turning their air conditioning up on a really hot day to the fact that the coal plant here in the city has to increase its capacity, which causes more smog, which makes it hotter.
If there is an opportunity and a way that Bill 35 can promote awareness of that nature, then I really believe, in an open market where prices will drop, that's one of the few ways you can reduce use.
Ms Roburn: May I just add something?
The Chair: Very briefly; our time is over.
Ms Roburn: One thing is to consider a lot of the externalized costs. Part of the point is that coal has some very expensive consequences, which include $5.6 billion in health care costs over the long term. As far as regulation goes, in the long term a goal would be to change the taxation system and to allocate the true costs of different energies to their production. But unfortunately, I don't have enough knowledge to comment on that in great detail.
The Chair: Thank you for coming before the committee today and sharing your knowledge that you have gleaned in your experiences. We appreciate you taking the time to do so.
BENNETT, JONES, VERCHERE
The Chair: Our final presenter this afternoon is Mr Budd, from Bennett, Jones, Verchere. Good afternoon and welcome.
Mr Peter Budd: Thank you, and it's nice to see you again, Ms Elliott.
The Chair: And you as well. I'm sure you know the routine: 30 minutes for presentation time and we hope you'll leave time for questions. If you want to introduce yourself formally, that would be appreciated.
Mr Budd: For the record, my name is Peter Brian Budd. I'm a partner at the law firm of Bennett, Jones, Verchere. Thank you very much for having us here today. It's a real opportunity for a practising lawyer to appear before a committee such as this and to offer comments to you on Bill 35. I recognize of course that it's very late in the day and in fact in the week. Last may well be least, but I'll do my best to be brief.
I have been engaged in the practice of law for some 10 years as a specialist in the energy area, from a policy, regulatory and commercial perspective. I was fortunate to have articled at the Ontario Energy Board so I have some intimate understanding of how it works. I have also worked at TransCanada Pipelines and therefore I have been active in the natural gas deregulation process for some 12 years. I'm a sitting member of the Market Design Committee.
Just a brief blurb on our firm. We are an energy law firm consisting of some 200 lawyers across Canada. We specialize in all aspects of Canadian and international energy projects. We act for a variety of energy clients: gas and electric utilities; agents, brokers and marketers -- you've probably heard the term ABMs here -- who will be active in the electricity market; as well as gas producers, pipelines, generators, you name it. If they pay the bill, we'll act for them.
We've recently even been assisting the Alberta government on their new energy legislation there. We've been active in the Hibernia and Sable Island development. So we have some significant interest in Canada in seeing our energy laws work well, and we're grateful for the efforts the Legislature has put forward on this one.
That has taught us, then -- we've learned a number of valuable lessons from the natural gas deregulation process across the entire country. We've been active in British Columbia, Alberta, Manitoba, Ontario and Quebec and seen how that's unfolding.
In Ontario, you may recall that former Ontario Minister of Energy Vince Kerrio embraced that deregulation and competitive process in order to bring those substantial benefits to Ontarians through competitively priced natural gas and related services. We've certainly seen that happen. It was the right move, with the right results. Gas prices fell substantially right after the regulations were taken off on pricing. While they've bounced back and forth, we certainly have a commodity market now in the natural gas field in which all customers can participate.
We can't and we will not know all the answers at the outset of this electricity overhaul, but it is an understandable and acceptable result that we don't know them all right now. We didn't know them in gas either. Experience tells us that there will be plenty of opportunity later on, as we go step by step, to get it right and fix any of the unforeseen issues. That's natural; it's normal. If the industry is telling you it can live with the legislation, it's telling you that, that "We'll fix the problems as we go along."
There is certainly no case that I can see to delay or halt any kind of passage of this legislation. To the contrary: We really do need to stay the course on this. From a practitioner's perspective, let me tell you that the draft legislation is an excellent starting point. When I first looked over the legislation, I felt relief that finally we were on the right track. Not only were we cleaning up all the problems of the past, but effectively we would be able to move forward and for some number of years, because the tools were there to do so. I believe the outcome will be very positive for all Ontarians, as our businesses and institutions become more efficient consumers in the energy industry. Therefore, the timing of the legislation is appropriate, particularly as we see electricity and natural gas converge.
There are some areas where the legislation could be enhanced to clarify competitive and commercial conditions, and I'll allude to a few in a moment, but let me make no mistake in being clear on this point: If this type of legislation had been in place many years ago, if there had been a regulator supervising the monopoly activities in the electricity industry -- because of course we have had that with gas -- at a minimum it's my submission that there probably wouldn't have been the Ontario Hydro debt problems we now face. That in itself, let me urge you, is a good and sufficient reason for us to engage in this expeditious overhaul of the industry. The public deserves accountability through an independent regulator, and the legislation allows for precisely that necessary oversight.
By now, the travelling committee, probably tired at the end of the week, has heard about the myriad benefits embedded in the legislation. As I say, I was very excited to read this because we're really moving forward. You've got:
Competition driving market-based pricing, and that's going to deliver the right result. Count on it
New customer choices in the retail and the wholesale markets, which will open simultaneously. Let me say there's no other jurisdiction in the world that's had the courage, the stamina and the foresight to open both of those markets at the same time, I am advised.
Licensing protection. We'll get that right; we've learned that from the natural gas world.
New flexibility, which is tremendous for the board in setting market rates.
Dispute resolution techniques.
A provincially organized and operated grid. That is of course referring to the independent market operator that the MDC recommended, and of course it's in the legislation.
And controls on abuse of market power.
I could go on, but it's just so comprehensive. It's absolutely the right recipe. It's modern legislation which is certainly designed to remain flexible and work for years into the future, and I really look forward to seeing the underlying regulations as they are promulgated.
But the committee has also heard concerns, some of which are legitimate. Yesterday in Sudbury I heard some of the concerns such as: "We don't know the outcome, or until we do let's not move ahead, let's study it longer." With respect to those views, as a practitioner I don't think we have that luxury.
The experience on the gas side is that the benefits of a competitive commodity market and related services market will not be concentrated solely to the benefit of certain types of customers, like the larger ones. You may have heard that argument. Rest assured, from those of us who waded through the experience on the gas side, that didn't happen. All customers will ultimately benefit from open market forces driving down commodity prices and services to what we call in the industry their lowest practical cost. That will happen. The proof, in my submission, is that there's going to be, right off the bat, hopefully, an active spot market which is accessible to customers directly or indirectly through suppliers and/or through their municipal electric utilities' power portfolio. Under the regime proposed by the legislation and supervised by the Ontario Energy Board, the IMO, the government and all customers will have the opportunity to benefit from the market-based prices.
I'd like to turn to the Ontario Energy Board as regulator. You know well, and it's my view, having reviewed the legislation, that it confers enhanced jurisdiction on the board to ensure that the public interest in Ontario's energy markets is not only preserved and enhanced but substantially improved in the way that the board has handled the natural gas regulation of monopoly activities in the past. The legislation has given the board additional tools to protect the public, with such things as licences and remedies, investigations, inspections, approvals -- new tools which were not there even before.
Another strong feature of the legislation -- I think this is a really positive one -- is the express ability in the wording of the act for the Ministry of Energy, Science and Technology to send matters to the board for their review and effectively to dialogue with the board in an appropriate legal way at any time. That's important, because that's a fundamental thing in law that we haven't really put into words before, that it is appropriate that a board take policy guidance from the government. That's there now in explicit and fair terms.
I want to just jump on to gas in a more detailed way. Some of us who have been very active in the industry have forever, since we've started working, been trying to get the burner tip sales issue resolved. I don't know if you know what that is, but effectively the previous legislation under which the marketplace in the gas world has been operating didn't allow for buyers and sellers, industrial customers, to trade volumes and deal with one another. It precluded it. You had to take an artificial transaction and bounce it off a meter point on to the TransCanada Pipelines system -- and you had to pay for that -- to get around that problem. This legislation removes that problem. I think you're going to have a lot of happy customers and agents, brokers and marketers because they'll be able to transact in Ontario. I think you heard yesterday the made-in-Ontario price arrangement. That's what you've done with the gas legislation. May I say as a practitioner, you should all be commended in moving that forward.
On the gas storage issue: This is one that I think maybe we could tweak a little bit to help that industry along. I assure you, my experience is that energy sources are converging, and it will be important to recognize this through making the market more customer- and supplier-friendly. It's easy to do. For example, suppliers will increasingly be selling more than one energy type. Customers using gas to make electricity and steam may purposely interrupt their own gas -- they've got their contractual arrangements arranged that way -- and burn oil or propane when the gas market prices are high. So they can sell their own volume, say, into the market. The result is, when you've got all sorts of industry players able to do this, in Ontario we're going to have a much more efficient energy industry. That's very much to the benefit of customers. This legislation supports that.
One possible enhancement in the legislation I'll leave for your consideration -- on the weekend, of course. That's that it might be helpful to have an explicit recognition that the gas storage services become more unregulated so that it becomes a more competitively priced service offering. Currently, to offer a storage service you have to go to the board even for the pricing. To me, that doesn't seem necessary and reasonable. I urge you to go back and think about that. It'll certainly allow other storage development to occur in the province. It'll stimulate that kind of development. There are a lot of small pools out there that would benefit from having development, but if they can't go into the market and set their own costs in a flexible way, they're not necessarily able to recover the necessary funding from the market to be able to do that. It's another example of letting that market work.
On the issue of diversification and utility sharing of services, I would note that Bill 35 seems to limit the activities in which MEUs may engage, unlike the natural gas corporate affiliates. I think that restriction might be clarified -- you could even just do it through regulation -- so that MEUs understand what activities their affiliates may engage in and to what extent they should be allowed to enter into other types of energy sales and services businesses. It's not a difficult point, but just one that might be helpful to them.
To the extent that regulatory control over the sharing of services between utilities and their affiliates is necessary, and I think it is, the Ontario Energy Board should have the jurisdiction through this legislation to control those relationships through the licensing regime and also through conditions and terms on board orders. The legislation allows for that, which I think is a good thing. I also believe there's provision for some form of code of conduct in this area.
Stranded debt: Just briefly, this is an issue which I think is among the two top issues we've got to get right. I know there's a lot going on on that front, but on the legislation itself, the legislation does allow for a collection methodology and flexibility of setting and resetting the level of debt collection, the terms, the payers and that type of thing. In my respectful view, based on some fundamental regulatory principles of cost causation -- the Bonbright book is one of them you might want to look at behind the scenes, and there are many others. There is a fundamental principle in cost causation that those who cause the cost should pay and those who don't shouldn't. I know you heard lots yesterday, in fact I think I was there when you had all three exceptions in a row come before you, but it's a fundamental regulatory principle and you may want to look at it.
On the market power abuse and mitigation matter, I put this as another of the top issues in the electricity world which must be addressed in order to ensure that a competitive market develops in electricity. I'm satisfied that the legislation takes a very good start at this point. I would note that while it seems to take a stab at controlling the abuse of market power, if the abuse occurs, with a minor amendment to the wording of the act, which we'll be happy to provide to the committee if you'd like, the regulatory body, like the OEB, would be able to act in advance of there being an abuse problem or a potential abuse problem. Therefore, we think there should be some minor amendment put forward in terms of handling mitigation measures, because that's not clear in the current wording -- just a suggestion for you.
On the environment, I was pleased to see that the legislation addresses that circumstance wisely. It puts it right up front, in the objectives section, for gas and for electricity. That's a very effective way to do it, because it's referring to the ongoing policies of the Ontario government in this area. Certainly, these policies are going to change. In my experience, the Ontario Energy Board has dealt with these issues through demand-side management and welcomes environmental groups in hearings before it who have an interest. I think the legislation allows for that to continue and it will be enhanced.
Finally, if I could turn to first nations, some of you may know that our firm is acting for a major first nations group which intends to connect to the Ontario Hydro grid in three remote communities. They are called Five Nations Energy Inc. They are putting this project together along the western shore of James Bay. Because we have some direct experience in this area, and I heard some comments yesterday, I thought I might help with this point.
Presentations and representations were made yesterday concerning some possible deficiencies in the bill respecting opportunities for first nations to benefit from the new regime. I've had a chance to speak with some of my partners about that to get their views. Our view is that the act should work very well for them as well. In our view, to the extent that certain of the northern first nations are already connected to the grid -- for example, around Moosonee, Moose Cree -- they stand to benefit just as much as everybody else, because they are rural retail customers as they stand now.
To the extent that you have these remote communities that are, as Mr Gilchrist said yesterday, on diesel generation -- they are not connected to the grid -- in my view they are a special circumstance. I believe the white paper referred to their continuity of treatment. The board will undoubtedly have to look at that in the deregulated market. In some form, the subsidy from what we call up there the standard A rates that the institutions pay will have to be considered and continued in Servco's first rate application, as long as they remain Ontario Hydro Servco customers. That's likely, so that what we call in the regulatory world "rate shock" is avoided. I expect that will be a normal type of treatment. We see no problem on that one.
To the extent that the bill does not stand in the way of connections by these remote communities to the grid -- in other words, they are finally tied in -- one submission for you is that the committee should ensure that the regulations which will be promulgated promote, rather than discourage, connections to the grid where from an economic, long-term perspective such connections make sense. So this is in the world of what we call system expansions that the energy board may have to deal with.
In any event, what we hope does not happen is that these types of connections are discouraged because in effect the remotes are difficult communities. For those who have been up there when the power goes out at minus 10 it can be quite an experience, and that's in October.
We are hopeful that the board will have due regard for all the special circumstances regarding these particular types of remote connections, and in this way the OEB would receive some positive government policy guidance that it can point to or rely upon when it's making its decisions and otherwise not disincent -- which isn't a word, by the way, in spell-check -- otherwise appropriate system expansions.
Thank you very much for the opportunity to appear -- I hope I've come under my limit -- and for your patience in being here so late in the week.
The Chair: Thank you very much. Yes, it is late in the week, but these presentations are interesting to all of us, yours as well as the ones we heard at the beginning of the week.
We have time for questions from each of the caucuses, a brief question and answer though, just under three minutes. We'll begin with the Liberal caucus.
Mr Phillips: Obviously you know this stuff well. With the limited time, I want to start on the stranded debt. Just trying to -- I hope I get a chance for two questions -- understand your recommendation here, are you suggesting that since Ontario Hydro really was the cause of the stranded debt Genco and Servco should be assuming a significant portion of the stranded debt?
Mr Budd: I'd like to say a couple of things, if I can, Mr Phillips, on that. First of all, I understand that finance is looking at that closely. It's in their bailiwick to actually determine the amount. To the extent that the cost causation principles are followed, and I recommend that they are, then I submit that's probably where the majority of the debt ought to lie. But we have to bear in mind the definition of stranded debt, which is, as I recall it, that debt which cannot be recovered by those entities in a competitive market, and trust the finance department to come up with the advice that they get and to provide that to us.
In terms of the methodology for collecting it -- and I'm not speaking as an MDC member here, I want to be clear on that -- it's my view that that is a matter which ought to be left to those who are in the business of setting rates and designing the marketplace. It's a very difficult issue as to how it's collected, but one concern I have is that it be collected from people as a fixed fee which is transparent, that people can understand it or see it and have it explained to them and not be buried, and not be a cents-per-kilowatt-hour charge. I don't think that's appropriate. As a person interested in rates, my preference that it be a fixed fee on a monthly basis for the customers, whoever is going to pay it.
Mr Phillips: One of the things I find in this whole process is that the major interests have got their voices heard. It's the consumer I'm continually worrying about. Are you acting for one of the companies that are coming forward to propose a generation plant as well?
Mr Budd: A generation plant?
Mr Phillips: Yes.
Mr Budd: I am involved in the TransAlta file in some capacity.
Mr Phillips: Because the more debt we load on to Hydro, the less competitive -- one of my concerns is that the taxpayer in the end has a huge asset here that they are responsible for and if we make Genco uncompetitive, or at least less competitive, then that asset value drops substantially. My concern with your recommendation here is that those who caused the debt pick up the debt. Some of those decisions were made in the past, and as we look forward to trying to have a competitive Genco, if we load in too much -- your plan will do it very well, but Genco is going to have a problem, I think.
Mr Budd: Yes. I'm not speaking here on behalf of TransAlta; I want to be clear on that. The principle I'm putting forward is just a fundamental rate-making principle. We need to be cautious about how we are collecting it. Certainly if all of that debt were loaded on Genco, which I do not recommend, the entity would likely become commercially unviable, and that's not in the interests of the citizens of the province.
Mr Lessard: Mr Phillips kind of took my question away because that was really the focus of my interest as well, that those who caused the costs should pay. I'm thinking, is that Ontario Hydro? Ontario Hydro can only pass that on to consumers. Or is it the government that permitted Ontario Hydro to get into that position in the first place? The government can only get that from taxpayers. I think of that Pogo cartoon: "I have seen the enemy and it is us." One way or the other, somebody's going to end up paying the bill and it's going to be either consumers or taxpayers. My concern is that it's not residential consumers who pay an inordinate share of that stranded debt.
Mr Budd: I understand that.
Mr Lessard: I guess by saying what you have, you support that there should be exemptions. Some groups or some organizations or sectors shouldn't have to pay, they should be exempt. I don't want to see a situation where that list of exemptions gets bigger and bigger and the people who have no choice end up with a bigger part of the bill.
Mr Budd: If I can respond to that, I think you probably heard your list of exemptions, practically, yesterday and you're not going to hear a very large list. I say that because the number of those privately owned utilities in the province is small. You do not have a significant problem on that, in my view, and I'm sure your staff can help you with understanding that.
But I would liken it to this -- and I'm not here to speak on their behalf. As a regulatory lawyer, I would say that their investors and their shareholders, ratepayers, have had their own stakeholder arrangements which have, to a large part, I gather more or less, depending on which one you're talking about, been stand-alone. They haven't necessarily been a part of that problem or, to whatever extent they have been, they're prepared to admit that. Where they haven't mean, that means they've managed their investments well. They've paid for those investments and they've paid for them presumably along the way.
Unfortunately, Hydro's rates, if you look back at some of the early OEB recommendations in their reports -- bear in mind they're not decisions, they're just recommendations to government -- Hydro's rates probably should have been higher for some time, some time ago. That's why you've got the stranded debt. You had a lot of expenses being incurred which weren't being charged through and therefore you have what we call in the regulatory world an intergenerational problem. Now a lot of people have gone who incurred the use of that power and didn't pay the full cost of it, and that's of course how we get there.
It's a difficult challenge at the best of times, but one thing is sure: The parties that were not using those facilities at all weren't involved in that. I suppose if there's one place government could go ahead and say, "We're going to spread out the costs," it is at the government level. It's a social policy decision, but it wouldn't be, in my submission, necessarily an appropriate regulatory position to take.
Mr Gilchrist: Thank you, Mr Budd. Good to see you again. Given your range of expertise in both electricity and gas, I think perhaps you're in a unique position to give us some guidance because we certainly have not heard much on the subject of consumer protection from energy marketers. I guess my first question would be, what should the consumer protection requirements be for the marketer licences for gas and electricity? Should they be the same or should they be different?
Mr Budd: I think that, generally speaking, they can be the same, very similar for gas and electricity. I don't see that at the small or what we call low-volume residential level there needs to be any difference. If somebody can point one out to me, I'd be happy to consider it. What you're dealing with is the potential for customers at the low-volume, small residential level to be vulnerable because they lack information and may be uninformed. I think they will get up to speed. I've seen it start to happen in the gas business and I believe it will happen in the electricity business. It will be necessary to put proper notice out in customers' bills and to bring customers along, and I see some municipal electric utilities, like in the Orangeville area, doing that already.
Mr Gilchrist: You've been involved in setting market rules. I'd be interested in knowing -- we've heard some parties advocating that there should be price caps put right in the legislation. Do you have any comments on that?
Mr Budd: Yes, I have a view on that. I would vigorously urge you not to do that.
Mr Gilchrist: Why do you say that?
Mr Budd: That is because in order for the commodity market to find an equilibrium, you have to let there be spikes and valleys at different times of the day, seasonality and through the year. When you have that happen and with the remarkable number of market rules that we are creating at the MDC, you'll have a very viable signal in the commodity market sent out so that if there are difficulties with too much generation here or there, or a lot of consumption here but not enough transmission wires to get to that location, those pricing differences are going to start to show up.
If you cap those, if you put lids on them, floors on them or whatever you're talking about them like that, you're going to distort those signals and they will become very false signals very quickly and you will not be able to bring jobs and investment into the province in that way. You must let the commodity markets function as they will. They'll serve you well when the supply and demand get into equilibrium.
We probably have a small oversupply right now, so that's a good way to start out. When shortages start to be on the horizon, the Market Design Committee has written in its second-quarter report, public report, that there will be a regime in place to be able to identify that on the horizon and to deal with it early so we don't suffer the same problems that have occurred in Alberta.
The Chair: We thank you for coming before us. It's late in the afternoon for you as well, but I can assure you that we are very appreciative of your advice and of your expertise.
Mr Budd: Thank you, Ms Elliott, and good luck to you all.
The Chair: Colleagues, we will adjourn and reconvene starting early on Monday morning, at 8:30, in Ottawa. See you then. We're now adjourned.
The committee adjourned at 1707.