Monday 17 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
Regional Municipality of Ottawa-Carleton
Mr Peter Hume
Mr Paul Hughes
Dr Bryne Purchase
Industrial Gas Users Association
Mr Peter Fournier
Mr Alisdair Stark
Public Interest Advocacy Centre
Mr Michael Janigan
Mr Carl Kropp
Municipal Electric Utilities of Renfrew County
Mr Ron Lowe
Mr Murray Moore
Mr Tom Freemark
Mr Rick Farrell
Sierra Club of Canada
Mr John Bennett
Atomic Energy Control Board
Dr Agnes Bishop
Consumers Gas Energy Inc; Cornwall Electric
Mr Perry Stover
Mr Robert Winn
Kanata Hydro-Electric Commission
Mr Rick Shields
Mr Guy Cluff
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 Alex Cullen (Ottawa West / -Ouest L)
Mr Steve Gilchrist (Scarborough East / -Est PC)
Mrs Helen Johns (Huron PC)
Mr Wayne Lessard (Windsor-Riverside ND)
Also taking part / Autres participants et participantes
Mr Jean-Marc Lalonde (Prescott and Russell / Prescott et Russell L)
Clerk pro tem / Greffier par intérim
Mr Tom Prins
Staff / Personnel
Ms Anne Marzalik, research officer, Legislative Research Service
The committee met at 0830 in the Delta Hotel, Ottawa.
ENERGY COMPETITION ACT, 1998 LOI DE 1998 SUR LA CONCURRENCE DANS LE SECTEUR DE L'ÉNERGIE
Consideration of Bill 35, An Act to create jobs and protect consumers by promoting low-cost energy through competition, to protect the environment, to provide for pensions and to make related amendments to certain Acts / Projet de loi 35, Loi visant à créer des emplois et à protéger les consommateurs en favorisant le bas prix de l'énergie au moyen de la concurrence, protégeant l'environnement, traitant de pensions et apportant des modifications connexes à certaines lois.
The Chair (Mrs Brenda Elliott): Good morning, everyone. The standing committee on resources development is called to order for the purpose of conducting hearings on Bill 35. We are very pleased to be in Ottawa this morning. This is the beginning of our second week of hearings. I am delighted to see that we have three Ottawa area MPPs, Mr Baird, Mr Cullen and Mr Conway. I think we're looking forward to a week of interesting submissions.
REGIONAL MUNICIPALITY OF OTTAWA-CARLETON
The Chair: We'll begin this morning with guests representing the regional municipality of Ottawa-Carleton. Welcome, gentlemen. Before you begin your presentation, please introduce yourselves for the Hansard record. You have 30 minutes, and we hope that you'll leave some time for questions.
Mr Peter Hume: We intend to do that, Madam Chair. My name is Peter Hume, and I am a regional councillor with the municipality of Ottawa-Carleton. On my left is Paul Hughes from the region's legal department, and on my right is Dave McCartney, the manager of environmental projects. We are very pleased to be before the committee to talk about Bill 35.
Over the past two years, the region has been actively examining ways of improving governance and service delivery in Ottawa-Carleton. Most recently we have been investigating a unified city concept, and we are going out to the public to seek their consultation on that option. Part of that uni-city model that we're looking at is the creation of one hydro commission for the entire unified city. The region is concerned that this bill should permit and promote efficiencies of scale in the delivery of electric services. Ottawa-Carleton is concerned that, in light of the current political climate at the municipal level, this bill places inherent restrictions on the ability to ensure delivery of municipal electric services on the most efficient and cost-effective basis.
We are a large consumer of electricity, spending over $7 million in 1997 for such matters as the operation of waste water treatment processes, water purification, traffic signals and buildings. We also, though, are very innovative in that we generate power through cogeneration at our sewage treatment centre where methane gas is generated in the sewage digestion process. We are also aggressively pursuing the establishment of a landfill gas generation project.
What is most significant from the region's perspective is the possible creation of a region-wide hydroelectric utility either as part of a unified city or within the current two-tier municipal governance structure. There are currently six different agencies delivering power in Ottawa-Carleton. The region is not asking that the legislation create region- or county-wide electric utilities. We're just concerned that undue restrictions not be placed on this possibility as potentially the most efficient means of distributing power in this area and that a region-wide utility be promoted if shown to be the most efficient way of delivering services. Ottawa-Carleton is also wishing to ensure that the municipal electric utilities are granted the authority to compete fairly with private retailers for hydro sales and be able to provide services to the consumers in the most efficient and cost-effective ways.
We have several areas of concern, the first being the amalgamation and restructuring of municipal electrical utilities. The Macdonald commission report and the white paper Direction for Change have recognized that there is a need for some consolidation of the number of municipal electric utilities currently operating within Ontario. However, these documents and Bill 35 do not provide any mechanism to require that the consolidation of these utilities take place. At best, the Ontario Energy Board can exercise its authority under section 82 of the Ontario Energy Board Act, 1998, to set standards, targets and criteria for evaluating the performance of municipal electric utilities as part of the licensing process.
While the Macdonald commission report and Bill 35 contemplate that competitive forces will push municipal utilities to amalgamate and consolidate in order to maximize efficiencies, this position does not take into account the realities of the political climate of proposed municipal restructuring. Local municipalities will naturally be unwilling to amalgamate electric utilities if to do so sends a signal that one component of the municipal service is better administered or delivered on a basis other than that of the local community. This may occur despite the fact that the new responsibilities for electrical demand forecasting and expert purchasing of electricity on the volatile commodities market may create greater demands than can be met by a small local utility. The existing political climate may therefore delay or thwart the amalgamation or consolidation of municipal electric utilities on the most efficient basis.
Sections 130 to 132 of the Electricity Act, 1998, provide a mechanism for incorporating current municipal utilities into business corporations owned by local municipalities. What is not clear from the legislation is whether a municipality not currently involved in electricity distribution, either on its own or through the agency of a commission, may create a business corporation to sell and distribute power. Of a more central concern to the region of Ottawa-Carleton, the legislation does not provide any mechanism by which a regional government may establish a corporation to distribute power on a region-wide basis. At a recent conference organized by Insight Information Inc on the role of municipal electrical utilities, Neill Winger, a senior consultant with Acres International Ltd, presented a paper which stated, "Most preliminary studies illustrate that the greatest savings, and thus the potential for lowering rates, can best be achieved by pursuing a single fully amalgamated county-wide utility option."
Mr Winger also cited studies from amalgamations in Durham region, Grey county, Simcoe county and Huron and Perth counties. In fact, the study in Durham region commissioned by the local utility estimated that the savings to ratepayers would be in the amount of about $5 million, which is quite a significant savings.
It may be argued that amalgamation of a number of local distributing corporations could help to create the operating efficiencies in serving a broader area. However, the shares of the amalgamated utilities would be held by a number of different municipalities, thereby creating the potential for conflict as to the future courses of action in a rapidly evolving electricity market. If one local municipality purchased the assets or shares of adjoining utilities, the residents of those adjoining areas could see the distribution wires and electrical services in their areas controlled by another municipality which does not necessarily represent their interests. On the other hand, if the assets and shares of the utility were held on a region-wide basis, the interests of residents served could ultimately be represented through their representatives on the regional council.
Bill 35 may also place severe restrictions on the ability of a municipal utility to expand services into areas served by Ontario Hydro retail and on the ability to provide electrical services on a more efficient region-wide basis. Section 83 of the Power Corporation Act currently provides a mechanism by which municipal electric utilities may expand their services into areas served by Ontario Hydro retail by purchasing Ontario Hydro retail assets at net book value. Under this bill, the Ontario Electric Services Corp will not be required to sell its distribution assets, even if it can be shown that the expansion of an adjoining municipal utility will provide the most efficient way to distribute hydro.
We have a solution, however. We are recommending that the bill be amended to permit the Ontario Energy Board, of its own motion or at the request of a municipality or local distribution utility, to review distribution electricity services within a geographic area designated by the board and to order the transfer of shares to one or more municipalities on such terms and conditions as the board may prescribe. The legislation should also be amended to permit regional municipalities to create business corporations undertaking electricity distribution and which corporation may be the recipient of share transfers ordered by the board. Furthermore, the bill should be amended to preserve the right of municipal electric utilities to purchase the assets of Servco in a distribution area at their net book value.
The second area of concern for the region is the ability of the municipal electric utilities to compete for customers. Bill 35 carefully eliminates virtually all potential advantages that municipal electrical utilities may have over private sector retailers in competing for customers. While the municipal utilities may have the advantage of initially holding all the customers as the default supplier, this may prove more of a burden than a benefit. Municipal utilities will be forced to serve customers who are the least attractive to private retailers because they are the most expensive customers to supply. Private retailers will cherry-pick the best customers, offering discounted rates which cannot be matched by municipal utilities without creating separate competitive affiliates. Any affiliate may be regarded as a branch of the most expensive default supplier.
The Ontario Energy Board will be involved in setting rates for the default supplier. The Market Design Committee has suggested in its second interim report that the default supplier should only be able to purchase, supply and sell electricity on the basis of spot prices. In this way customers will bear the full risk of any volatility in electricity markets. This limitation seems unduly restrictive. It is becoming recognized that the most responsible way to purchase electricity for resale is by way of a portfolio of purchases undertaken at various stages prior to the actual delivery of power. This helps to provide price stability. It is also probable that over the long term power generators will offer discounts for those purchasing power in advance and thereby ensuring a market for their supply. To restrict default suppliers to the spot market will further exacerbate the gap in electricity rates between private retailers and default suppliers.
We are proposing that the bill be amended to include a power to establish a mechanism set by regulation and similar to the Facility Association for automobile insurers whereby retail suppliers should share the burden assumed by default suppliers serving the most expensive customers who do not reside or operate in rural or remote areas. Furthermore, the bill should ensure that default suppliers are not limited to the spot market for electricity supply. Restrictions may be imposed on the extent of advanced purchasing of hydro to ensure that undue risks are not assumed by the default supplier.
Our next area of concern is rural and remote area assistance. The legislation does not seem to guarantee rate assistance to those moving to rural or remote areas and does not seem to guarantee levels of assistance.
Ottawa-Carleton, therefore, submits that the bill should be amended to provide rural and remote area assistance to all residents of these areas as well as a mechanism for ensuring that levels of assistance are maintained at current ratios by reference to default supply rates in other areas of the province.
Our last area of concern is sharing of services with municipalities. We always try to ensure that we enter into cost-savings agreements wherever possible. In fact, the region has entered into agreements with the city of Ottawa for things like road maintenance and other areas where there would be a synergy.
In our minds, there would appear to be a significant potential cost saving in the sharing of services between municipalities and municipal electric utilities. Such areas as fleet management and maintenance, equipment supply and purchasing, meter reading, invoicing and collection can potentially be shared on an equitable basis.
Section 72 of the Ontario Energy Board Act may impose restrictions on the sharing of services. Municipal electric utilities are limited to electricity-related activities and activities that enhance their ability to undertake these activities. The Ontario Energy Board is in a position to enforce these restrictions through its powers of licence suspension and revocation. Decisions of the board in the natural gas retailing field suggest that the board will restrictively interpret the scope of the permitted activities of a municipal electric utility. This presumably will limit the risk of municipal cross-subsidization of electricity and avoid the need to monitor for any possible cross-subsidization. Meanwhile, significant cost savings will be lost which would otherwise have been passed on to customers and taxpayers.
We are proposing that the legislation be amended to permit expressly the sharing of services with municipalities while permitting the Ontario Energy Board to ensure that the municipal utilities are not being unfairly cross-subsidized. The board could hold a generic hearing to establish guidelines for the sharing of services so as to ensure that cross-subsidization does not occur.
Ottawa-Carleton recognizes that many factors are operating to necessitate the introduction of competition to the electricity sector. Nevertheless, competition must be introduced on a fair basis as between municipal utilities and private retailers. The legislation must also provide a mechanism by which power may be distributed in a geographic area in the most efficient way possible in the new competitive environment. In so doing, some protection must be preserved for rural and remote area customers. Changes are needed to Bill 35 if these goals are to be achieved. Thank you very much, Madam Chair. That is our submission.
The Chair: Thank you. You've given us five minutes for questions from each caucus. We'll begin with Mr Lessard from the NDP.
Mr Wayne Lessard (Windsor-Riverside): Thank you very much for your presentation. I come from the Windsor area in southwestern Ontario. We don't have regional government there so I'm not really all that familiar with some of the intricacies of how regional government operates.
Mr John R. Baird (Nepean): Wow.
Mr Lessard: From Mr Baird's remark, maybe he's thinking that regional government should be imposed on our area. I'm not really sure.
Mr Baird: No, no.
Mr Lessard: You've mentioned some of what you perceive to be undue restrictions on the regional government or a body incorporated by a regional government to provide electricity services in the region. Currently, as I understand it, you have a number of utilities that provide services within the region and one of the restrictions you see is the amalgamation of those services. Are there any areas where Ontario Hydro provides services as well and, if so, can you elaborate on what you see as these undue restrictions and what the conflicts are?
Mr Hume: First of all, the answer to your question is that there are six existing hydro utilities in Ottawa-Carleton: Ottawa Hydro, which serves Ottawa, Vanier and Rockcliffe Park; Nepean Hydro, which serves Nepean; Gloucester Hydro; Kanata Hydro; Goulbourn Hydro, which serves the village of Richmond only; and the Ontario Hydro retail area, which serves Cumberland, Goulbourn, Osgoode, Rideau and West Carleton.
I think from our perspective there are two areas of concern. Given the healthy competitiveness between the upper and lower tier here in Ottawa-Carleton, we believe that unless there is a mechanism where we can place an appropriate business case before an independent tribunal, we will not be able to see any restructuring of those six municipal utilities. We feel there is a need to have that because other studies done -- and I cited the region of Durham -- show that the creation of a region-wide or county-wide utility will save the ratepayers in those areas a significant amount of money. What regional governments are all about is delivering services in the most cost-effective, efficient way. That's our main area of concern with the existing utilities.
The other one that we mentioned was the ability to purchase the assets in the Ontario Hydro retail area. What we want to be able to do is to move into those areas on a region-wide basis and buy the assets that exist at their net book value. Right now, as we understand it, the Ontario Electric Services Corp will not be required to sell its assets, even if it can be shown that joining, say, one region-wide utility would be the most efficient way to deliver services to those ratepayers.
Mr Lessard: How do you think that problem is going to be resolved? We've heard this raised on a number of occasions before, and if you don't think you'll be able to purchase Ontario Hydro's assets in those areas that are currently served, then you wouldn't be able to serve the whole area. Is it possible that you see that Ontario Hydro retail may be trying to service that area that's currently served by the utilities? We've heard from Mr Osborne from Ontario Hydro that they intend to aggressively pursue and expand into the retail sector, and perhaps one of the sectors they're looking at is Ottawa-Carleton.
Mr Paul Hughes: In fact that is the main concern. Obviously, Ontario Hydro retail becoming Servco could decide that they're simply not going to sell any of the distribution assets within the area currently served by Ontario Hydro retail even if that were shown to be the most efficient way to deliver power within those areas, for example, moving to a region-wide utility.
I might also mention specifically in relation to the legislation, sections 130 to 132 of the Electricity Act appear to contemplate the rollover of the current utilities into a local distribution company. What is not clear from the legislation is whether somebody, a municipality, for example, who is not involved in electricity distribution could create a distribution company.
Mr Lessard: I'd like to hear from the parliamentary assistant on that issue and also for clarification as to whether regional governments can establish corporations for the distribution of power as well.
Mr Baird: Thank you very much for your most interesting presentation. I wanted to ask a few questions from page 3 of your submission. You recommend that the Ontario Energy Board be given authority to basically impose solutions from Toronto here in Ottawa-Carleton. If there are big cost savings, why wouldn't it be voluntary? Wouldn't the local municipalities and the ratepayers just run to a solution that meant lower hydroelectric rates?
Mr Hume: Of course, the environment that we have here in Ottawa-Carleton is such that, regardless of the cost savings, regardless of whether we can demonstrate -- and we have on a number of other services -- that there are significant cost savings, municipal entities have not embraced any sort of restructuring initiatives. For instance, we operate a number of trunk sewers and the sewage treatment plant, but discussion of assumption of local sewers has met with significant resistance, regardless of the fact that we can reduce their rates by, on average, 20%.
What we have found and what has been demonstrated here in Ottawa-Carleton is that anything that erodes the current lower-tier entity will be met with heavy, if not permanent, resistance to any sort of change. So what we are looking for is not an imposed solution from Toronto. What we're looking for is an independent body which we can present a business case to, that can evaluate that business case in an independent way and render a decision.
What we're proposing is not unlike what the regional section of the Association of Municipalities of Ontario proposed in its submission on the new Municipal Act where it asked for, and that's all regional governments across Ontario asked for, an independent panel to be struck. Namely, we asked that the OMB be vested with the power to hear submissions on municipal restructuring in regions, just because there is such an almost fanatical resistance to an establishment of efficient, effective service distribution.
Mr Baird: But back to Hydro, do you get calls from your constituents, saying, "Would you please amalgamate Hydro?" How many calls would you have gotten in the last -- you've been a councillor now for -- is this your third term?
Mr Hume: I don't think we get a lot of calls for-
Mr Baird: Have you had any?
Mr Hume: No. I would say you're probably right, we don't have any. But my job is not only to respond to my constituents but to research and review the operations of municipal government, to deliver to them the most efficient, effective service.
What we're telling you is that we've looked across the province of Ontario and we've seen studies done in other regions that demonstrate that there is a significant amount of cost savings to be passed on to the ratepayers by amalgamating municipal utilities.
Mr Baird: But you say you're not aware of any. I haven't heard any calls or any complaints about -- for example, in my case, Nepean Hydro, there's a very high level of satisfaction. In our community we elect them; I know in the city of Ottawa they are appointed. But I've never heard anyone say: "Listen, this is a problem. Would you please act on it?" Never, not one call, not one letter, not one fax, not one person at the door.
Mr Hume: Regional government prides itself on being proactive in bringing the maximum amount of savings to the ratepayer. We believe in this case that the establishment of a region-wide utility, as demonstrated by studies that have been done across the province of Ontario, will save ratepayers $5 million. I can tell you, I know that ratepayers want to save money. We've seen that.
Mr Baird: OK. If this type of proposal were adopted and there were liabilities in some hydro -- for example, let's say the city of Ottawa had some infrastructure liabilities or some debt. I know Nepean Hydro's long-term debt levels used to be well over $6 million. They're now down to about half a million last year, so they may be already gone this year.
But if in the city of Ottawa there is a significant amount of debt vis-à-vis the age of their hydro substations, which I think are on average 35 years old whereas in Nepean they're seven, who would pick up that liability? Would that be borne by Ottawa ratepayers today?
Mr Hume: It may surprise you, Mr Baird, that if I understand what Ottawa Hydro will be presenting to you in the next little while, Ottawa Hydro is debt-free, so it's significantly different from Nepean.
Mr Baird: But on infrastructure debt.
Mr Hughes: My understanding is Ottawa Hydro is debt-free. In terms of how any amalgamation and restructuring could occur, presumably the Ontario Energy Board could address that as part of its order on the transfer of assets, while ensuring that the existing areas are required to pick up the outstanding liabilities.
Mr Baird: Could I tell people that the position of the regional government in Ottawa-Carleton was that if there is a liability, it should be borne by the pre-existing ratepayers?
Mr Hume: I think what you can tell people about what the region of Ottawa-Carleton would do in that case is that we would do our best to protect ratepayers and to provide them with electricity at the lowest possible cost. It is not our goal to make someone else bear some other costs.
The Chair: I'm going to interrupt, I'm sorry. Moving to the official opposition, Mr Conway.
Mr Sean G. Conway (Renfrew North): Gentlemen, I very much appreciated your presentation. I found it specific and helpful. I must say, I feel almost embarrassed about interrupting the previous dialogue because it's a very good dialogue to hear Alta Vista meet Nepean.
Someone once said, "All politics is local." I must say I'm very impressed, particularly with my colleague from Nepean, to know that localism is alive and well, notwithstanding ideological imperatives, which would suggest on the face of it, Mr Hume, that if there were ever a place to rationalize the municipal electricity distribution system, it would be here in the national capital.
I want to ask you a two-part question because I think from the point of view of the customer, the customer of electricity, which is vital commodity, would expect and would want as efficient and as reliable and as attractively priced a commodity as is possible. My sense is that is what most people, whether they live in Alta Vista or Nepean or Vanier or Bell's Corners, would want.
People in the national capital and eastern Ontario lived through a very memorable experience this past winter. I am up in the valley and I was on the edge of the ice storm, but I was very impressed by the work that the regional municipality did, and the municipal utilities in the area. My impression was that through the ice storm, local authorities performed much better than Ontario Hydro, for whatever reason. I want to ask you a specific question: What would be the advice that you and your colleagues would offer this committee as we contemplate the changes under Bill 35, based on your learned and lived experience through the ice storm?
Were there problems with Ontario Hydro's retail services? What did you feel those problems were, from your own experience and that of your compatriots in the region? If there were problems beyond what would be reasonable given the severity of the storm, would it give you any comfort to know that the stated testimony of the president and chief executive officer of Ontario Hydro to this committee last week was that Servco plans an aggressive expansion in the distribution business in southern Ontario? By Servco, I mean the retail division of Ontario Hydro as it will be restructured.
Mr Hume: Based on our experience, and if you would talk to some of my colleagues in the rural areas, Betty Hill and others, they were not happy with the service that they received from Ontario Hydro. I, on the other hand, was served by Ottawa Hydro and I was served very well. I had power long before my rural counterparts. So I would say that Ontario Hydro was not responsive, or not responsive enough, to the crisis. In fact, it was quite some time before a representative of Ontario Hydro was joining our twice-daily briefings on the state of the emergency.
Mr Conway: Was that not in fact a real problem, that for people in Ottawa and Nepean and Gloucester, the power centres, the decision-makers, were here and were, on the spot, exercising hourly judgment, whereas it took days to get people in Toronto at Ontario Hydro headquarters seized of the severity of the problem, that they were from away and it was very seriously reflected in the delayed decision-making?
Mr Hume: You're exactly correct in that and that's one of the reasons why we are here today telling you that we feel that this Bill 35 places severe restrictions on the municipal ability to expand into areas served by the Ontario Hydro retail area. That's why we want these portions of the bill to be changed, because we believe that we will be able to serve those areas now served by Ontario Hydro in a more cost-effective, efficient manner, but also in a manner that will be more responsive to their individual needs and concerns.
The Chair: Thank you very much. The committee appreciates your taking time to come before us and starting off our week with your advice.
Mrs Helen Johns (Huron): On a point of clarification, Madam Chair: In response to Mr Lessard's comments, subsections 130(2) and (3) allow ownership to happen, and you can take shares from, for example, Nepean. You could form a new company and each of those surrounding areas would have a share in the new corporation. So it could be done.
What this bill does not take into effect is that it has to be done. We want amalgamations but we have not used any kind of a stick approach to this. We believe that economies of scale will push it.
In addition, subsection 78(5) of the Ontario Energy Board Act allows for the expansion of rural and remote assistance, which is another section they talked about in their presentation.
The Chair: Now calling Bryne Purchase, please. Good morning. Welcome to the committee. As I'm sure you've been briefed, you have 30 minutes for presentation time and we hope that you'll leave time for questions as well.
Mr Conway: Madam Chair, my schedule shows an hour.
The Chair: Mine does, too. I stand corrected. I apologize. Yes, you do have an hour.
Dr Bryne Purchase: I have an hour to speak, Madam Chair?
The Chair: The rule says that the presenter may use the time any way you wish, but we always hope that you'll leave time for questions.
Dr Purchase: I will endeavour to leave a great deal of time because I'm sure that you have a way of getting at what I think that's probably better than my prepared presentation.
It's an honour to speak before this committee. I believe strongly in an informed and effective Legislature. The work of this committee is a very important part of that exercise, so again, it is a great pleasure for me to appear here.
Ontario Hydro is an old and venerable institution. It has served Ontario well, but clearly the consensus is that the time has arrived for dramatic change. I believe that Bill 35 is an effective platform for launching these historic changes.
As you know, I was engaged by the Ministry of Finance to carry out a public consultation with selected stakeholders on the matter of Ontario Hydro's potentially stranded debt. I thought it would be useful today to provide you with some of my own thoughts on the process that I was so fortunate to be involved with.
Before I do, let me thank the people I was involved with. It was an extremely educational process. I learned a great deal and I would like to particularly take the time to thank the stakeholder groups that I was involved with. This was a really interesting process. The ministry officials from finance and from energy, science and technology and the officials from Ontario Hydro, as well as other people I met, the Market Design Committee officials, the Ontario Energy Board officials, I'd like to thank them all for their professionalism, for their candour and for their willingness to spend long hours to explain quite complicated matters to me in some detail. Having done that, perhaps I can turn to my presentation, which I hope will be short and to the point.
First of all, let me point out that the things that struck me first were the paradoxes of the stranded debt. When I use the term "stranded debt," I'm referring here primarily to what the legislation refers to as residual stranded debt, which is the debt that cannot be covered by revenues from the new companies as a result of the introduction of competition. The other stranding, if you like, due to commercialization is an issue that I think is less significant, less important to the province.
There are some important policy issues associated, of course, with commercialization related to taxation and to a commercial rate of return and to the selection of a capital structure for the new companies, but those are issues that I think are all of secondary importance to the primary one of the impact of competition on Ontario Hydro's stranded debt.
To return to my main point, the paradoxes of the stranded debt are that a successful competition policy means more stranded debt. The more terrible the old Ontario Hydro was as a monopoly, even if a regulated monopoly in terms of its inefficiencies, the more competition we have in the new marketplace, the more stranded debt we'll have. It is indeed a paradox that, in your success in the introduction of competition, you arrive at something which we refer to as stranded debt.
The second thing, of course, about stranded debt is that it is a sunk cost. That is, it is not a cost which is something that's new that we have yet to encounter. We are already liable for this cost. It's cost which has been incurred on behalf of the ratepayers, customers, in Ontario and will have to be paid, regardless of the performance of the new companies.
While I say it's a sunk cost, it matters what we do, and one of the things that I want to stress for the committee is the importance of an effective governance structure for the successor companies. These are important assets and it is extremely critical to the economic performance of this sector of the economy that we get the maximum out of those assets. That will in large measure be a function of the governance structure of the new companies.
My second major point deals with the question of how much stranded debt. My first take on this, and it's a position which I have maintained throughout this exercise -- although I have heard many experts on the subject and many people who are much more knowledgeable than I on Ontario's electricity sector wrestle with the question of how much stranded debt, my underlying feeling about this is that it is a virtual impossibility to get a correct forecast. In other words, I was impressed from the beginning about the hubris of thinking that we will be able to forecast in detail the value of each of these assets out into the future over a very long period of time. That's not to say I don't think we have to do that or to undertake that technical exercise, but I do think that we have to acknowledge that it is unlikely that we will be correct in that exercise. Therefore, the appropriate position to take is that we must set ourselves up so that we can cope with the uncertainty, we can cope with the fact that we may well be wrong.
Indeed, there are ways of doing that. I accept that we have to fix the capital structures of the new companies. Therefore, we have to value the assets and implicitly, therefore, value the stranded debt. At the same time, however, we can make the competitive transition charge adjustable, based on experience, and indeed the legislation provides for that possibility so that if we miscalculate the stranded debt, we can, ex post, adjust the stranded debt charge. At the same time, we have to make sure that we have appropriate performance incentives in place for the new companies to ensure that they have every incentive to perform well in their new environment and to minimize the amount of stranded debt.
The last question I want to deal with is the question of who should pay. The underlying philosophy of stranded debt recovery, as I understand it, is that certain investments have been made on behalf of the customers of Ontario Hydro and that these investments were made in good faith and in full understanding of the needs of both the present and future customers. These investments were made under a particular regime of a regulated monopoly. We have now chosen to change the regulatory environment such that under the new environment with the introduction of competition, it may no longer be possible to recover the full value of the original investments. Therefore, it is incumbent upon us to allow the owners, in this case the taxpayers of Ontario, to recover the value of these investments that they undertook in good faith. This is something that customers, for the most part, I've found, were perfectly willing to consider.
There are two issues in the recovery of the stranded debt. One is a question of fairness and the other is a question of economic efficiency. Incidentally, I've found that fairness and economic efficiency, while they are sometimes at odds, in this case very often led to the same answer.
On the matter of fairness, I've found a substantial consensus around the view that you should pay according to your contribution to the problem, and on the matter of efficiency, that we should make the charge non-bypassable. That of course would also make it fair in the sense that no particular customer could, through changes in their consumption behaviour, avoid paying their share of the cost which they had contributed to.
To wrap that point up then, fairness and efficiency means that you pay according to your contribution to the problem, and that would imply, in my view, that there may well be some exemptions from where you were not previously a customer of Ontario Hydro. Secondly, it would not be possible to bypass the charge. Bill 35 makes provision for, effectively, a non-bypassable charge, so I think, in principle, the power is given to the government to make this charge both fair and efficient.
That concludes my formal remarks. I would be very happy to take questions at length now.
The Chair: Thank you very much. We have 15 minutes for questioning from each caucus. We'll begin with the government caucus.
Mr Lessard: Madam Chair, I wonder if I could make a suggestion that perhaps you rotate at five-minute blocks, if that's acceptable, because things might arise as a result of questions from other people.
The Chair: Sure, if everyone is agreeable.
Mr Conway: Or split it -- well, whatever is easier.
The Chair: Okay, seven, seven, seven.
Mr Conway: Something like that.
The Chair: Okay, that's what we'll do then, seven, seven, seven. Dr Galt, you're on.
Mr Doug Galt (Northumberland): A two-part question, it relates to management change that may be required at Ontario Hydro. We've heard over and over again that the major problem of this monopoly has related to management. We've heard it from the Power Workers, we've heard it from the society, we've heard it from the general public, and Ontario Hydro in general. My personal observation on the Hydro select committee, particularly when touring Pickering, is that I couldn't believe how many people, so-called workers, were there to watch us go through the plant. It really struck me that these people must have a job, and it wasn't to come out and watch us go through the particular plant. The evolution of this organization as a monopoly is typical of a monopoly, as I understand it.
My two-part question is: With a stranded debt, is this going to be based on it operating in the future as a monopoly or as a competitive company? If it's a competitive company, then what changes are going to be required in Ontario Hydro to become competitive? Did they not keep up with all the corporate changes in the late 1980s, the way they sort of flat-lined administration? Are those the kind of things they will have to do to compete in the future? So how is the stranded debt going to be calculated, monopoly versus competitive company, and what are they going to do with the organization to be truly competitive?
Mr Purchase: On the first question, of course, the stranded debt arises to the degree, as I indicated in my remarks, that competition is successful in driving down costs and prices. The more stranded debt we have, the more really effective our competition is and the more successful in the long run our policy is. If, on the other hand, that does not happen, that is to say we have a very small stranded debt, we either had a very efficient monopoly or we have a very ineffectual competition. Either might be possible.
In most cases, if the studies -- I've had opportunity in my career to look at a lot of these studies. Invariably, the introduction of competition, sometimes in the context of privatization but not always, to monopoly public services has resulted in dramatic productivity improvements. The consensus of academic opinion, supported by empirical fact, would suggest that we would have very substantial improvements in productivity as a result of an effective competition.
On the question of what changes are required by the management of Ontario Hydro, that's an important issue. I can't pretend to have studied that in detail. I want to emphasize that next to the introduction of competition itself I regard the governance structure and the relationship of the government as owner to the management of Ontario Hydro as the single most important economic issue on the table.
Obviously what we have to do is put in place a tough regime that makes sure that management functions. I think benchmarking performance on the cost side is appropriate. I think costs and outputs need to have detailed performance benchmarks. We have to make sure there's no upside for the management if prices turn out to be higher than forecast. I don't think they should get particular benefit from that. It's things like this that I would do.
Mr John Hastings (Etobicoke-Rexdale): I'm somewhat mystified by your enjoining fairness and economic efficiency together when you deal with the allocation of the stranded debt. Since we already have a monopoly in Ontario Hydro and you have the retail players and the local utilities, are you telling me then that in the allocation of the stranded debt it will be allocated on the basis of which of the local utilities throughout the province can show, through whatever list of indicators, that they will have less stranded debt, say, in Sarnia versus Ottawa, or vice versa? How are you going to actually allocate the stranded debt to the MEUs, since they're the major retail players in the field and you haven't got the new ones in the field yet in terms of the stranded debt, yet at the same time be fair to all the participants in that exercise?
Dr Purchase: These are issues that are yet to be determined, so I can't presume to know for sure how this will take place. The stranded debt is allocated in effect through the levying of the competitive transition charge which is provided for in the legislation. That charge may be based, for example, on current consumption. To the degree that current consumption reflects previous consumption, you will pay according to what your previous contribution to the stranded debt was. So you will only pay according to what you consumed. As I say, to the degree that your current consumption reflects your historical consumption, presumably you will pay according to what you contributed to the stranded debt problem.
Remember that there is a problem because we built facilities to serve you which are in principle no longer economic in the new environment. We're not asking you to pay a dollar more or a dollar less than what you would have had to pay if we had continued with the current monopoly regime.
Mr Hastings: So it's not going to be economic efficiency so much as it's going to be consumption by the various players at the retail level.
Dr Purchase: Yes, consumption will determine --
Mr Hastings: The larger the consumer, the larger the allocation of the stranded debt.
Dr Purchase: Yes. Economic efficiency refers only to the fact that we don't want -- we think of the stranded debt as in principle a lump of money which has to be recovered which is already owing. It's not something we can avoid paying; we have to pay it. We're just trying to find an efficient way as well as a fair way to allocate it among people in Ontario. Economic efficiency in the very strictest sense would say that we should try to find a way which doesn't alter their behaviour in any way, that they don't try to bypass by changing their consumption patterns or switching to another fuel or self-generating or whatever other options they may have. In principle, with the downside being you have to make this practical, we would simply try in the design of this tax to avoid changing your behaviour in any way in response to this act, that's all.
Mr Conway: Dr Purchase, delighted to see you. You are a critical witness, because yours is one of the central questions. I want to pursue some of the earlier points as specifically as I can, and I want to do so from the point of view of a residential electricity customer, whether in the city of Ottawa, in the town of Carleton Place or in the rural areas of Renfrew county that my friend the warden is here from Cobden to represent with me today.
I'm a residential hydro customer. In my own case, I do believe that competition in generation is the single most significant policy change that will give me down the road the benefit in rates that I hope for out of policy. I've got to tell you, my concern is that if I don't get competition in generation as a centrepiece of this change, I'm not likely going to get much, if any, benefit on my rates which, together with reliability and environmental concerns, are my primary issues here.
Thinking about rates, I've also got to think about the stranded debt. I'm not a professor of economics or fiscal policy, but I've got to believe that a corporation that's got a $32-billion debt, some of which is going to be stranded -- "some of which" means several billions of dollars are going to be stranded -- is in the short term not going to be good news for my residential or farm electricity bill.
To the best of your knowledge, using reasonable assumptions, what would you tell me this morning, as someone who has looked at this, is your best guess as to the order of magnitude that this stranded debt is likely going to be as we begin the process of a new electricity policy? You've heard the range. Some people say it might be very little; some people say it's going to be $10 billion; other people say it could be as high as $30 billion. In your considered opinion, what number would you estimate is the likely number?
Dr Purchase: It's good to see you again, Mr Conway. Mr Conway and I go back a long way. I remember briefing him, in another life, on lots of other issues.
Mr Conway: You were very, very helpful then, as I know you will be this morning. What's that number, Dr Purchase, in your considered opinion?
Dr Purchase: I honestly do not know that number. My concern, and the thing I tried to convey to the members of this committee and that I certainly have tried to convey to anyone who would listen to me in the ministry and anywhere else, is that we have to design a process which will allow us to deal with whatever that number turns out to be, based on actual experience. The reason is that there are very significant risks involved with getting that number wrong. There is a tendency to believe that these assets are worthless and that we are going to have a huge stranded debt. I personally don't believe that.
Mr Conway: This is getting helpful. So it's not huge. Then does that mean it's more likely going to be in the order of $5 billion to $10 billion, as opposed to $25 billion to $30 billion?
Dr Purchase: First of all, on the matter --
Mr Conway: Well, if it's not huge, Bryne --
Dr Purchase: Fair enough. What I'm saying is that I think that the range is a lot bigger than what we are sometimes led to believe, that we tend to hear extraordinarily large numbers which imply incidentally that those nuclear assets are not going to come back and be the productive assets that technologically we know that they can be, that it's just a management problem. I think management problems can be fixed.
Mr Conway: Bryne, Mackenzie King lived at Kingsmere, not at Carleton Place. You need to help me because I'm serious. I know it's not easy, but I'm the customer. I'm one of those millions of residential and farm customers. I know there are problems. I know there probably aren't any easy answers. But people are talking to me about benefits. I expect the big boys, the big industrial consumers are going to be able to get a break because they'll have a focus and resources that I'm not going to have. How can I begin, as a member of this committee, to discuss this without some idea of how big a number that might be?
The second part of it is, the bill contemplates a menu of six categories of charges to help write it down. We know from Steve Dorey's comments last week, and I understand this, that finance clearly does not want to have to apply the wires charge if at all possible. It's pretty clear from Mr Dorey's testimony that the so-called competition transition charge is the last of the options they want to apply. We've got the special hydro tax on the MEUs' gross revenues; we've got the provincial government's collection of new federal taxes on players in the game; and three or four others. I need to know, how big is it going to be? Then what menu, what order and what mix of these several charges is going to be applied to me, the residential and farm customer? Because I'm from Missouri, I have taken leaps of faith before and I've landed with a very big bruise on my head.
Dr Purchase: My answer to that is I believe the legislation provides the maximum amount of security, if you like, for the customer. We can honestly say that you will only pay according to the amount of actual stranded debt. You will not be stuck with some economist's prediction of X billions of dollars and you will pay that regardless of the future price of electricity.
Remember the problem here is -- and here I'm talking about economic stranding or what they call residual stranded debt -- if you say that the residual stranded debt is, I don't know, $5 billion, let's say, and that's based on a particular price forecast which is a low-price scenario going forward and in fact prices turn out to be higher than what you forecast that stranded debt on, if you then say, "We're going to collect that $5 billion no matter what," you're going to drive prices up inadvertently. What I'm saying is you have in place a mechanism which can at least assure customers that you will not do that.
Mr Conway: I understand that. But remember, according to Mr Dorey -- I'm no expert, but he certainly sounds pretty compelling on the subject -- the first calculation that has to be made is, how much of the existing debt can the successor hydro companies, Genco and Servco, take? What can they take? Then whatever is left over is, in a sense, the stranded debt. You have gone out of your way today in a way that is very helpful to warn this committee that governance is key. We'll come back to that on the second round.
But I'm the residential hydro customer. I'm worried about the interest. I'm worried that the interest of Genco is not going to be my interest because their interest is going to be to shuck as much of this as possible and to be lean and to get to Kentucky. I'm also worried about the government -- not just necessarily this government, any government -- because my provincial government is not without an interest. The Minister of Finance is a critical umpire in this game. But he/she is an umpire with a very substantial benefit because some of these new hydro taxes, once the stranded debt is paid off, are going to come into the provincial treasury.
Again, I'm looking at my situation. I can't find out what stranded debt is but I know it's going to be in the billions. I know that Genco's going to be working overtime to dump as much of it off their back as they can. I know that my government is going to be in a very significant situation of benefit as they come to critical choices. Because, for example, the call as to when the stranded debt is relieved is not without benefit to the Ontario government, the very people making the call. So who's looking after my interest as a residential or farm customer to make sure that I don't get stuck with a disproportionate amount of this apparently unknowable, multi-billion-dollar stranded debt that apparently is not going to affect my hydro rates in the next two, three or four years?
Dr Purchase: Well, sir, my attempt to answer that -- and many of the points you make, I agree with; I don't see how anyone could not -- is that the solution is not to have a specific number, if you like; not that you won't, you'll get that. My understanding is you'll get that this fall when they value these assets at least initially for the purpose of commercialization of these companies. But the protection to the people of Ontario, other than in the work of the Legislature and this committee, and to the taxpayers of Ontario, really lies in the quality of the institutional structure that you set around this, which is embedded in the legislation and which you set around the future operations of this company and of the financial holding company.
Mr Lessard: Dr Purchase, you've survived well the first round of cross-examination by Mr Conway and I can understand your reluctance to divulge to us some number that represents your best guess for stranded debt. However, eventually that number will be determined and it will at best be a guess, as you've indicated to us this morning, and not only that, but that is a decision that's going to be a political decision. It's one that's going to be based on various information provided by fiscal planners and people with knowledge of assessment and financial backing. But ultimately it's the government that's going to make the call as to what the amount of the stranded debt actually is.
You've told us this morning that it's a virtual impossibility to get that number right, which means that the number's going to be wrong, and I want to ask you what you think the implications of getting the amount of the stranded debt wrong are. If it's too high or if it's too low, tell us what you think those scenarios are three to five years out.
Dr Purchase: Yes, I think it is. I mean, I was a forecaster for many years and I think once we actually hit it bang on. I'm not sure exactly why that was but, as you can imagine, as sophisticated as this work is -- and it is sophisticated and the government has hired extremely capable people to help it do this. They did not hire me for that purpose; I wish sometimes they had. There are highly technical and highly expert people, many of whom I'm sure will address this committee, at work on these important subjects.
My own personal view on this is that, while I believe that work is absolutely essential, as I said, to actually establishing the commercial value for these companies, we have to deal with the fact that we have uncertainty. I said that there were consequences, and you've asked me the question, what are the implications?
Let's begin with an overestimate of the stranded debt, which means you've underestimated the value of the assets, right? If you've underestimated the value of the assets or overestimated the stranded debt, one possibility is that if you did not make the stranded debt charge adjustable but made it a fixed amount -- an overestimate of the stranded debt implies that, let's say, prices turn out to be higher than what your forecast was, so there wouldn't be as much stranded debt -- you have higher prices. But if you say, "We're going to collect that overestimated stranded debt regardless," in other words, if you treat it as a fixed amount you're going to collect no matter what the future brings, then you're going to drive prices up because you're going to make consumers effectively pay twice in that instance. You have to have, in my view, the flexibility in the legislation, and I believe it's there, to adjust if you've made a mistake on the overestimate.
The other thing is if you overestimate the stranded debt or underestimate the value of the assets, you've really potentially left some money on the table as far as the management is concerned. The management would obviously like to get assets that are undervalued and then presumably perform extraordinarily well when it turns out that this undervaluation is demonstrated by the marketplace. Now you have to remove the incentive for that. Again, this comes back to the question of the governance structure that you have in place for these institutions. If you have underestimated --
Mr Lessard: Have we removed this incentive in this legislation?
Dr Purchase: I think the legislation provides you with the opportunity to do that. I can't say that it does it, but it certainly provides it. The legislation, as I understand it, is really a platform that does provide for ample opportunity to do many things. The real issue will be an ongoing monitoring of how well this is done.
Mr Lessard: I'm sorry I interrupted you.
Dr Purchase: I think if you overestimate the stranded debt, you undervalue the assets, and the converse to that is if you overvalue the assets and underestimate the stranded debt. In that case, what's happened is that then you leave the taxpayer or the owner at risk. Then we have to pay through another mechanism. If prices turn out to be way lower than what we otherwise thought or Ontario Hydro loses way more market share than we thought, we're only going to collect a fixed amount of stranded debt and that amount now turns out to be too small, then the taxpayer has simply lost value and we have to find the money someplace else.
Mr Lessard: And that would fall on the shoulders of taxpayers?
Dr Purchase: Presumably. The consolidated revenue fund would have to be tapped for the difference. This is money owing by the Ontario taxpayer, because all this is guaranteed debt. It's not so we can somehow deke out and make somebody else pay. We do finally pay. It's just an issue of whether the payer happens to be a ratepayer or the taxpayer. There are some differences.
The other issue is how effectively we can make these assets in the future, because if we can make them hum again, if you'll forgive the pun, then obviously we'll lower the real economic cost to the province.
Mr Lessard: I guess my concern is that part of this government's agenda, I think, is towards the privatization of Ontario Hydro and I don't want to see incentives in this legislation such that there is the real possibility that Ontario Hydro may not be successful in the competitive market in the future and therefore be forced to sell its assets to private investors at fire sale prices to try and recover not that original investment but at least as much as we can to recover the stranded debt before they collapse ultimately, if you think that is a possibility.
Dr Purchase: I don't necessarily share your view on privatization, but I do share your view that it would be a shame if we sell these assets and somehow have tricked ourselves into believing that they're not worth very much when in fact they are.
Mr Lessard: That leads me into the governance issue. You believe, and I think appropriately so, that the governance is very critical here, because we don't that fire sale to happen. Do you believe there should be more government control or intervention or less government control to deal with that?
Dr Purchase: I don't think it's a question of more or less in this case where the government will be the owner of the assets, and it's then a question of the nature of the governance structure that's put in place as owner vis-à-vis its managers to extract the maximum value and to provide the proper incentives for its managers and other employees in Ontario Hydro to utilize these assets to their maximum effectiveness.
Mr Lessard: As a legislator, I guess I'm faced with this choice of how it is that we ensure that after going through this whole exercise we don't end up with something that looks exactly like Ontario Hydro in the future that therefore possibly commits the same errors that got us into this situation in the first place.
Dr Purchase: I think you have definitely identified an important issue.
Mrs Johns: Thank you very much, Dr Purchase. I'm just going to ask you a couple of short questions. Should this legislation entrench in it something with respect to lower pricing? Should there be a statement in here that prices must be lower than they are now, for example?
Dr Purchase: My answer to that is no. We have now embarked on a new course, if you like. We are opening up the market. We're no longer going to have a regulated monopoly that we can order to do whatever we wish it to do, insulated from all other markets. We are now going to be fully integrated into, or least progressively integrated into, a North American market through inter-ties and through the entry of new companies into Ontario in the production of electrical energy.
Once you do that, once you have started down that course, there are great benefits, as we know. Competition, when you have it, is an effective device for lowering costs and lowering prices and improving productivity, but it's also true that you can no longer then simply control the price. It would be a mistake for the government to guarantee customers a future price. If it turned out that they were correct, it would simply be lucky. We can't control the price of oil or natural gas, which are the competing energies, and in fact are also used in the production of electricity, certainly natural gas and coal. These prices can go as their markets will take them, so we couldn't control prices, no, and we shouldn't.
Mrs Johns: My last question, just because I want to give Mr Gilchrist some time: It's been the contention of Mr Conway and of a number of people who have come before us that they need to know the stranded debt number before we enter into this bill. It's been my contention along the line, and I think the government's contention, that there are mitigating circumstances within this bill that will allow us to alter specific things if we get the dollar value wrong for the stranded debt, for example, CTC charges and other things outlined. Can you explain what you see as the mitigating controls and how they would kick in, given that we get the stranded debt number incorrect one way or the other?
Dr Purchase: I think you've identified it. The CTC, as I read the legislation, can be changed by the minister and adjusted ex post according to actual experience in the marketplace. That, to me, is the single most important design feature to alleviate people's concerns about our ability to forecast accurately the stranded debt. That, I think, is effectively the thing that I would point to in answer to your question.
Mr Steve Gilchrist (Scarborough East): Thank you, Dr Purchase. I guess there's certainly a lot that has arisen from the comments you've made, but I'd like to come back to one point. You said that it would be almost impossible to set an exact price and Mr Conway took you down the road. He's just that residential consumer in Cobden and he's concerned about his price.
Let me posit a scenario to you. He stays an Ontario Hydro customer. If this is done accurately, the debt that is considered book debt will continue to be paid by Ontario Hydro as part of its charge to you, that customer, and the other debt, presumably divided pro rata per kilowatt hour, would continue to be paid by Hydro as a fee to the Ontario government in some form. So for that residential customer, if there was no new competition and you stayed an Ontario Hydro customer, would your price of electricity, barring any other changes by the local utility, stay the same?
Dr Purchase: First of all, there are some institutional arrangements that are slightly different than what you've outlined there. But if we go forward, for example, and the wholesale price of electricity falls but we're adding on top the CTC and it's not a fixed amount, we're just simply picking up the cost which is stranded by virtue of the lower price, then I don't see why the price would change in the future until such time as the stranded debt is discharged.
Mr Gilchrist: It has to be said, of course, that simply the passage of this bill does not change the fact that 40% of what you and I are paying for our electricity to Ontario Hydro is existing debt service. You would agree with me on that.
Dr Purchase: Oh, yes.
Mr Gilchrist: Perhaps a more compelling area to look at would be the fact that Hydro charges the same price to every MEU, correct, give or take? It's a tough question to pose perhaps to the MEUs. Maybe you'd give a less biased answer.
If you take 90% of what's charged by -- let's use Nepean as an example, and the chart Mr Baird is kind enough to bring along to every meeting, where $78.55 is the price for 1,000 kilowatt hours, actually less a 5% rebate last year. That leaves you with 6.71 cents per kilowatt hour that they pay to Ontario Hydro. If that's what Nepean paid to Hydro, presumably that's what all MEUs paid to Hydro. But isn't it intriguing that the difference between that and the actual consumer rate for a rural Hydro customer is 1.83 cents, and in Toronto it's 2.84 cents. So the total operational overhead in Nepean is 73 cents. It's two and a half times as much for a Hydro customer and four times as much for a Toronto customer.
Is it more likely that that's where future savings are going to come from and that's where the consumer should be looking to find new efficiencies?
Dr Purchase: I've read the studies which suggest that there are very substantial efficiencies available to us in distribution. Absolutely.
Mr Conway: At the outset, I want to just let the committee and the assembly know that I've known Bryne Purchase a long time and he is a very bright, competent, knowledgeable person who has served --
Mrs Johns: That's why the government hired him.
Mr Conway: I was delighted that the government chose to bring Dr Purchase on board. It's because I know of his ability and his past that I want to be as aggressive with him today as possible. I suspect Bryne Purchase could tell us what he knows about his experiences with Ontario Hydro over 25 years of public service. It would make for quite an interesting book.
Mr Baird: This is quite an interesting question.
Mr Conway: I will also say Mr Gilchrist is right: There are savings to be made on the distribution end, which is 15% of the total cost. Notwithstanding the evident tensions between Alta Vista and Nepean, some of those things are going to have to happen, and they're not going to be easy, all politics being local, I say to my friend from Nepean and Alta Vista and anyplace else. But let's not forget the fact that distribution is 15% of the total bill. Everybody who has looked at this, Bryne, has said it's the generation side, 70% of the bill, where you've got to get the big savings to produce the discounts that we all want.
I favour competition. I think everybody on this committee realizes that the monopoly, particularly the post-Second World War monopoly, is over and it can't be continued. My great fear is that for whatever inadvertent or other reason there's a lot of Hydro's monopoly still sitting underneath Bill 35. Are you concerned, knowing what the Macdonald committee told us two and a half years ago -- and they couldn't have been clearer. The advisory committee on electricity reform had as its centrepiece a substantial disaggregation, breakup, divestiture, call it what you want, of the massive power of Ontario Hydro's monopoly.
The government in its white paper last year specifically ruled out divestiture beyond the Genco that we got, the Genco that's going to have 85% to 90% of market power when this new world order of competition begins within 12 to 18 months. Is that not a problem, Dr Purchase, to getting the competitive juice that we all want to drive prices down for everyone?
Dr Purchase: I have to first of all say that there is the Market Design Committee which is looking at this issue. The government didn't invite me to spend my time thinking about competition. The Market Design Committee, as you know, is peopled by individuals of incredible talent who are no doubt able to discern anything that I could do.
Mr Conway: The Market Design Committee, a copy of whose second report I have in my hot little hands, is blunt in reinforcing the message that the Macdonald committee made two and a half years ago. They're not only blunt in warning of the problems of too much market power. They also, in their report on page 16, the report of just last month, warn us that if you're not going to have a breakup of Ontario Hydro beyond the Genco and you're going to then rely on what they clearly feel are second-best measures, one of which is the so-called vested contracts, and let me quote:
"The temptation may be great to use vesting contracts as a non-transparent mechanism to recover stranded costs by imposing contracts with inflated prices on distribution companies and their customers. This is likely to seriously distort the operation of the competitive market and can only achieve its objective if retail customers are made captives of the retail companies for some period of time and prevented from exercising the ability to choose other lower-cost suppliers. Without a captive customer base, retail companies holding contracts with the contract price set above the market price would face a high risk of bankruptcy."
And we're talking about vested contracts as a likely alternative.
Again, back to my residential and farm customers. We're not getting a dissaggregation; we're not getting a further breakup of Ontario Hydro. That is clearly going to lead to the possibility of anti-competitive practices by Genco in the early days. We are almost certainly going to get vesting contracts, which are, according to the Market Design Committee, a real Trojan Horse to dump a disproportionate amount of whatever stranded debt there is on the backs of the millions of residential and farm customers. I want those people to get the equity that you advertise. I think you're absolutely right. How do we protect them?
Dr Purchase: Let me say here that I am talking now not about the work I did for the government of Ontario but just simply as a private citizen observing what's happening. I haven't read that particular report in detail, having been on holiday.
Vested contracts I think are still a live option, not vested contracts to recover stranded debt but vested contracts to remove the incentive of Ontario Hydro to gain the market in some way. As I say, without having read that particular page that you read from, I just make that observation. I don't think vested contracts should be ruled out as a way to mitigate the incentive for Ontario Hydro, but certainly vesting above the market or something like that is not a way to recover stranded debt. We have the mechanism to recover stranded debt.
Mr Conway: The concern I have is that there's a basket of choices there. There are five or six or seven instruments. All I want to know as a residential or farm customer is that the instruments chosen and the mix of those instruments is fair to everybody.
A question on governance, because my time is running out.
The Chair: Yes, your time is running out.
Mr Conway: I want to ask you this question. On governance, I think you make a very good point. I am terrified as a residential customer right now that I've got a situation where at Genco I've got the chairman of Ontario Hydro, Bill Farlinger, a bright guy by all accounts, who at one and the same time is the chairman of Ontario Hydro and has just taken an appointment to the board of Newcourt Credit. Newcourt Credit has made no bones about what it's into: It's into the business of getting more active play in the energy business.
I'm saying, again as a residential customer, whose interests is Bill Farlinger serving? What kind of governance mechanism is there to protect me against Farlinger on the one hand running Ontario Hydro and on the other hand serving on a private corporation that has stated its desire to get more aggressive in the electricity business? Is that not a governance concern?
Dr Purchase: I think this probably could be put under that heading. I don't want to comment extensively on it.
The Chair: Mr Lessard.
Mr Lessard: Getting back to the stranded debt and the possibility that that is misjudged, the other option to recover what you've referred to as residual stranded debt is through the competition transition charge. I'm wondering whether by doing that and making this number adjustable, that introduces some uncertainty into the market, and if there is that uncertainty, then how is it that consumers, especially residential consumers, will be expected to benefit from lower rates in the near term and in the longer term?
Dr Purchase: I acknowledge that it does introduce some uncertainty to have an adjustable charge. One would select a particular number for the value of the companies and there would be certainty provided there. In other words, they're not going to continuously change the capital structure of the companies. They're basically out of the loop once that valuation has been determined and implicitly a stranded number has been determined for them.
But in terms of payment of the debt that's now held by the financial holding company, that would be flexible. That does introduce for consumers some uncertainty, but what I would suggest to you is that the uncertainty for customers is one which they benefit from. In other words, unless they were convinced that we would underestimate the value of the stranded debt, it's better for them to put up with the uncertainty, if you like. It's better for them to have the cushion debt. If we've overestimated the stranded debt, we'll reduce the charge rather than trust us to simply have underestimated the stranded debt, in which case they would conceivably get away without having to pay something that they would have otherwise paid.
Mr Lessard: The minister has been consistent in his suggestion that hydro rates are going to go down as a result of this bill, and we've said that we want that commitment put in the legislation. You've explained that you don't think that's a good idea. But let me ask you, after looking at this, whether you feel that rates for residential hydro consumers will go down in the short term, the first three years, and in the long term after that.
Dr Purchase: I have every reason to expect, and this is again just my reading of the situation, that wholesale rates will definitely go down. I think Ontario Hydro, even if it has a dominant market position, will actually act like a competitive market player for reasons that I believe it may fear being broken up and so on and so forth if it doesn't. So there are some disciplines that act on Ontario Hydro other than just the pressure of potential entry of other competitors.
I anticipate that Ontario Hydro might well, as I say, act competitively, and in the short run we'll see short-run marginal cost pricing in an industry that would look like it has excess capacity, which could drive wholesale prices down quite far. For the retail customer, though, then you'd have the stranded debt phenomenon, so we have to add back in. My feeling is that there should be no reason for that to spike up, though, beyond what they would have otherwise paid.
Mr Lessard: You said that the CTC should be non-bypassable. I think that's a good idea. The legislation provides an option to put it on consumers and on generators. The government says it won't go on both. However, it doesn't say that it should be placed on generators from outside the province. It sort of raises the fear to me that there's the possibility that we're actually encouraging generators to produce outside Ontario, hopefully not with dirty coal, and miss having to pay that competition transition charge. Do you think it should cover generators outside Ontario?
Dr Purchase: I don't believe the province has the legal authority to tax a generator outside the province, but it certainly can tax -- or charge, if you like, a CTC -- any consumption in the province. In other words, wherever it came from, if it was imported from another jurisdiction, it would be picked up by a consumption charge. There's not a concern there. We will be able to get imports and there will be no distortion so that somehow a customer would find it to their benefit to buy from an importer rather than from a domestic utility.
The Chair: On that note, Dr Purchase, thank you very much for coming before the committee this morning. I know there were a number who were anxious to hear what you had to say and we're very pleased you took the time to join us.
INDUSTRIAL GAS USERS ASSOCIATION
The Chair: I now call the Industrial Gas Users Association, please. Good morning and welcome to the committee.
Mr Peter Fournier: My name is Peter Fournier. I am the executive director of the Industrial Gas Users Association. With me is the chairman of IGUA, Mr Alisdair Stark, who has kindly flown up this morning from Sarnia. It was only later, after we agreed to this meeting, that we found out you're going to be in Sarnia tomorrow. So I got the benefit of staying home.
We appreciate very much the opportunity to speak to this committee. IGUA has been active in the government and the OEB's review of the last several years to deregulate the gas market.
The Industrial Gas Users Association is an organization of some 50 companies. We're large users of natural gas and have members with plants in Manitoba, Ontario and Quebec. Forty of our members have plants in Ontario, many with multiple plants. In total, our members consume in Ontario about 115 billion cubic feet of gas a year, which is about 27% of Ontario's industrial market.
IGUA members are mainly involved in the mining, metals refining, chemical, and pulp and paper sectors of industry. Through our current membership drive we're hoping to pick up some of the car companies, some of the Ontario steel plants and some of the refineries.
Principal plant locations of our members are in northern Ontario, and I understand you spoke with some of our members last week in Sudbury. Another concentration is in the southwest corner, down around Sarnia, the chemical area, but we also have members both in the Toronto-Hamilton and eastern Ontario areas.
IGUA's role is to represent its members' interests in proceedings before the Ontario Energy Board, the Régie de l'énergie in Quebec, and before the National Energy Board. Our objective is to obtain for our members flexible access to transportation, fair and reasonable transportation rates, to allow our members to manage their own gas supplies in the most efficient manner possible.
We're a major supporter of the initiative of the government of Ontario and the Ministry of Energy to deregulate the Ontario natural gas marketplace and to foster the restructuring of the gas distribution sector.
In that regard, we believe quite strongly that we're at a very important crossroads in Ontario's energy policies. The restructuring of the providers of natural gas and electricity supplies is causing a fundamental change in how the province's energy market is being served now and in the future.
As large users of natural gas and as important participants in Ontario's economy, IGUA's members are vitally interested in how the restructuring policies are being formulated and implemented. We strongly support the passage of Bill 35 in respect to the provisions of the act relating to the sale, distribution, regulation and consumption of natural gas in Ontario. The reasons for that support are set out in our submission, which I believe you now have copies of. I would note that we take no position on matters in Bill 35 with respect to the regulation of electricity.
I would like to just note that in particular we support the proposed amendment to the Municipal Franchises Act, which is found at schedule D, section 21 of Bill 35, which among other things removes the current prohibition for the selling of gas in Ontario by parties other than the local distribution companies.
IGUA supports the proposed amendments to the Ontario Energy Board Act, and in particular we note that we agree with the provisions of parts I, II, III and IV of that act, and sections 41, 43, 46 and 47, which address some of the areas we've expressed concerns about in detail in our submission.
Finally, we recommend that section 3 and section 113 of the Ontario Energy Board Act be reviewed with the objective of perhaps amending it to more clearly define who is a gas distributor to whom part VIII is intended to apply, part VIII being the powers to allocate gas.
With that, I'll turn to Alisdair, who will give you some background and further detail on our industrial interests.
Mr Alisdair Stark: Good morning. As Peter said, my name is Alisdair Stark. I'm currently the chairman of the Industrial Gas Users Association. My real day-to-day job is purchasing manager of Bayer in Sarnia. We have a large synthetic rubber facility in Sarnia and that's what I do when I'm not flying up to Ottawa.
As Peter mentioned, IGUA has been a very active participant in the OEB's 10-year market review proceedings. We have made submissions to ministry staff recommending certain matters that should be addressed in this legislative process. We've been a member of the OEB natural gas market design task force and currently still are a member.
I would like to take a few minutes of your time to talk to you about some of the issues that are specific to IGUA's industrial members and how Bill 35 addresses these issues.
First off as an issue is the right to resell gas. To maximize our opportunity to manage our natural gas purchases and consumption, industrial gas users must be able to resell, in Ontario as well as outside the province, gas which is in excess to our requirements. Therefore IGUA supports the proposed amendment to the Municipal Franchises Act found at schedule D, section 21 of Bill 35, which removes the current prohibition of selling of gas in Ontario by parties other than the LDCs, the local distribution companies.
The next few issues regard areas that the Ontario Energy Board will need to help out.
The control of upstream transportation: The ability to purchase their gas supplies directly with Alberta suppliers has been important for the economic viability of Ontario's industries over the past 13 years, allowing them to access lower-cost gas supplies than what they would have had to pay if they had had to purchase LDC system gas. As the LDCs move towards vacating the merchant function, that ability to purchase natural gas directly from western Canadian suppliers and transport it to Ontario will not only be standard procedure for industrials but will also be how all of the Ontario market will be served by the aggregators and marketers who are replacing the LDCs in the commercial and residential sectors.
As the LDCs abandon the merchant function, it is probable that they will also cease to offer to transport gas for others under buy/sell and T services. Those who take over responsibility for supplying the Ontario market will want to gain access to the transportation capacity on the TransCanada PipeLines system. This capacity is now held by Union Gas Ltd and the Consumers' Gas Co Ltd. It will bring Canadian gas to Ontario to meet the utilities' own sales and to transport gas for others under buy/sell and T service arrangements.
However, the total TransCanada capacity held by the utilities is less than 100% of their total market peak-day requirements because they've used storage, US-sourced gas supplies and local Ontario gas production to supplement western Canadian supplies. In short, the LDCs do not hold sufficient capacity on TransCanada to provide space to all who will want access to it.
In IGUA's view, as other shippers take over the responsibility to supply the Ontario natural gas market, there must be a process in place to ensure that there will be an orderly assignment of recontracting of utility-held capacity. Specifically with regard to IGUA's members, industrial gas users need to be assured of access to their fair share of utility capacity currently used to service industrial bundled delivery services contracts. IGUA believes that the Ontario Energy Board should exercise oversight of this reallocation of LDC-held TCPL capacity.
Another issue is the access to storage. IGUA believes that in time the operation of Ontario's natural gas storage facilities can be fully deregulated, that market forces will provide for the appropriate allocation and pricing of storage services. However, in the transition period IGUA believes that it is desirable for the OEB to continue to exercise regulatory oversight of the use of and prices charged for Ontario's storage facilities. This will ensure that all sectors of the Ontario gas market which rely on storage to meet seasonal and peak-day requirements have full and fair access to the LDC-controlled storage caverns.
Another issue which we want to talk about is the licensing of marketers. As previously noted, IGUA has sought to have the prohibition on direct sales in Ontario lifted in order that industrial end-users may resell their excess gas supplies. At the same time, notwithstanding the prohibition on gas sales by parties other than the LDCs, it is a fact that for several years various agents, brokers and marketers -- we refer to them as ABMs -- have been active in Ontario selling gas to the end-users in the residential and commercial markets.
IGUA has been aware of the public discussions of the need to protect the public from certain less than scrupulous practices by some marketers and has noted the suggestions that some form of licensing regime be established to permit the licensing authority to disenfranchise marketers who do not meet practice standards. IGUA has sought to have industrial end-users who periodically seek to resell excess gas supplies excluded from any requirement to be licensed, provided that they did not sell their excess gas to residential or commercial consumers. Industrial gas users who seek to resell excess gas supplies would do so only to other industrials or sell into the wholesale market. They would not sell to residential or small commercial customers. Licensing of industrial gas users would be, in IGUA's submission, unnecessary for the protection of the low-volume consumer and would be an administrative burden on industrials.
IGUA believes that the proposed amendments to the Ontario Energy Board Act provide the OEB with the powers to deal appropriately with the matters I've just discussed.
Therefore, IGUA supports the proposed amendments to the Ontario Energy Board Act. IGUA notes and agrees with the provisions of parts I, II, III and IV, and in particular with the provisions of sections 41, 43, 46 and 47.
The last issue I'd like to talk to you about is the proposed powers for gas priorities and allocation. IGUA believes that this part of the act is intended to apply only to distributors of gas; that is, to regulated public utilities who carry on the business of delivering natural gas to consumers, and in that regard suggests that the definition of "gas distributor" contained in section 3 and that of "distributor" contained in section 113 be amended to remove any ambiguity, to ensure that parties such as industrial buyers of gas are not swept up into being made subject to the provisions of part VIII.
Therefore, IGUA recommends that sections 3 and 113 of the Ontario Energy Board Act be amended to more clearly define the "gas distributor" and "distributor" to whom part VIII is intended to apply.
We're almost there.
In closing, IGUA's support for the legislative change package is directly linked the desire of its members to be able to acquire and manage gas supplies in the most flexible, cost-efficient manner possible. The existence today of impediments to the open buying and selling of direct purchase gas supplies frustrates that desire. IGUA understands that the legislative changes embodied in Bill 35, insofar as they relate to natural gas, will address the concerns that we have described in our submission.
IGUA wishes to thank the standing committee on resources development for this opportunity to submit comments on Bill 35.
The Chair: Thank you very much. We have four minutes for questions from each caucus. We begin with the Liberal caucus.
Mr Alex Cullen (Ottawa West): The first question I have: Is Ontario Hydro a member of your association? It's a big natural gas consumer.
Mr Fournier: No.
Mr Cullen: Secondly, you were very silent at the start by saying you have no position on electrical regulation. But I would think that the natural gas system that we have, with lots of private competition, would be used as a model. How come you're not advancing it?
Mr Fournier: There's a separate organization I'm sure you're aware of, and had a submission from, the Association of Major Power Consumers in Ontario, AMPCO. Many of our members are members of AMPCO. We have a very defined, clear, narrow scope of responsibility and we're just sticking to gas.
Mr Cullen: Thank you for your input.
Mr Lessard: I take it from your submission that you are in agreement that there needs to be regulation and licensing requirements for marketers, at least for residential consumers, of not only gas but electricity as well, and that those licensing requirements be included in the legislation. Am I correct in that?
Mr Fournier: Correct.
Mr Lessard: The concern you've expressed is that you shouldn't have to get a licence in order to be able to resell natural gas. I'm wondering what sort of restrictions you might want to put on that sort of an exemption, because we wouldn't want to permit you to get into the gas marketing business to smaller industrial users, I guess, and those smaller industrial users may not feel as though they're being fairly dealt with. They may be subject to the same concerns currently that small residential consumers have about door-to-door gas marketers.
Mr Fournier: I think the language in section 46 of the proposed Ontario Energy Board Act covers that concern. It limits the definition of a gas marketer as a person who is a seller to a low-volume customer. If indeed Bayer or any of our members wanted to turn around and make a sale to a residential customer, then yes, they should be subject to licensing to protect that residential small-volume customer.
We don't make that kind of sale. We'll sell to another factory down the road or to a marketer, if we have some excess gas. But if, by remote chance, one of our companies wanted to get into that retail end of it, then yes, they should be subject to the same code of licensing that any other seller into the residential market is subject to.
Mr Lessard: So your question is, what is a low-volume purchaser?
Mr Fournier: I think that's adequately defined in here and we're quite satisfied with that definition and then with the exclusion of the large-volume industrial seller from the provisions of licensing.
Mr Lessard: Do any of your members have their own storage facilities?
Mr Fournier: Some of them contract with storage. They don't hold their own storage, they contract now with Union or with Consumers' Gas. The two major storage areas, I'm sure you're aware, are at Don, owned by Union Gas, and Tecumseh, owned by Consumers' Gas.
Mr Lessard: Are your members interested in having their own storage facilities, or is it important to ensure that access to storage facilities and the ownership are kept separate from large consumers?
Mr Fournier: The concern is to have access to storage, to manage your gas consumption, and it's always been that way. This is a service currently provided by the utilities, and as they back out of the merchant function, who will pick up this ball and carry it? To manage your gas supplies, there are days during the year when you have peak demand, say 100 units. Most of the year you might only need on an average day 80 units and you wouldn't contract for 100 units year-round because you're paying for 20 units for say 300 days of the year that you don't need that 20 units; you only need the 80 as a base core. One way to meet those days when you need an extra 20 units is to put some gas into storage and then draw it out on those days when you need it. That's easily done down in southwestern Ontario where they're close to the storage facilities but very, very difficult in northern Ontario, difficult here in eastern Ontario, because you then get into transportation and delivery problems.
Mr Hastings: Thank you, gentlemen, for coming in and appearing before the committee. While it's not explicitly stated in your submission, I'd be very interested in knowing, since we're all talking about the benefits of significant change coming out of the Energy Competition Act and since I see you're trying to go after new membership, grow new membership in the automotive parts and other areas of the economy, have you folks ever had any general or specific discussions regarding job retention/job creation in the respective member companies you have in your organization?
I can see with respect to the pulp and paper sector that it would be primarily a job retention exercise since there is significant consolidation going on in that industry. Could you give us some realistic assessment or conservative estimates as to the number of jobs that could be created or retained in the particular sectors of the companies you have in your organization, either company-specific without naming it or by sector?
Mr Stark: I don't believe that we have any numbers. What we're pushing for here is the continuing deregulation of natural gas as a commodity. The main deregulation occurred in the mid-1980s and we see the need to continue that and change the last few remaining issues that need to be changed.
I can make a comment from Bayer's point of view, and that is that we have just recently completed one but are in the process of completing a second new plant in Sarnia. So we're adding two new production facilities. I mentioned earlier that our plant was primarily synthetic rubber. Bayer is bringing two unique processes to Sarnia to produce tungsten, tungsten carbide and nickel hydroxide, and one of the major reasons that Bayer AG in Germany decided to locate in Sarnia was the energy costs that we were able to maintain in Sarnia compared with other Bayer facilities throughout the world. So in order to compete worldwide, we need the ability to maintain and lower those energy costs and we see that the continued deregulation of natural gas will be able to do that for us.
Mr Hastings: How many jobs will be created with the new facility, Mr Stark? Do you have any idea at this point?
Mr Stark: I'm not sure of the number.
Mrs Johns: You talked a little bit about section 8 and, as I understand section 8 in the act, it's identical to the current wording in the Ontario Energy Board Act and it's never been invoked because it's there in case there's a gas shortage and there needs to be some assistance to the consumer. What exactly would you like to see as changes in that section? You have trouble with the definition of "distributor" in that section, I think is what you've said.
Mr Fournier: That's correct. It's part VIII of schedule B that I was referring to, and the definition of "distributor" in section 113 reads, "a person who supplies gas to a consumer." If I'm selling gas to an industrial, he is a consumer. I would prefer to see a closer alignment to the same kind of definition you have used to define who a marketer is, and that's a very low-volume consumer or whatever. In theory here, Ontario Hydro is a consumer or a very large cogen plant is a consumer, as is a large factory. Our concern is that there is not use of this part of the act to confiscate or take gas for which an industry has legitimately bought the contract to run its business and to give it to somebody else.
Mrs Johns: But if there's a gas shortage, which is the only time this section would be proclaimed, would it not be fair to say that both industrial and residential consumers would deserve the protection because it's obviously a very unusual time, and that we in fact are just protecting all the people by the way part VIII is worded?
Mr Fournier: If there was an emergency of such magnitude that you had to start cutting into firm industrial purchases, we're in a pretty major problem. Most or a great deal of industrial gas is purchased as interruptible, and that would automatically, if there were a shortage, be interrupted in any event.
Mrs Johns: So if it's interruptible in any event, what's the concern? If we could interrupt it anyway and we're trying to protect those industrial and retail customers, I guess I would like you to consider that and maybe come back to us with some wording you would like to see that may meet your needs.
Mr Fournier: I'd be pleased to do that.
The Chair: That concludes our time. Thank you very much for coming before the committee this morning. We appreciate your giving us your advice on this section.
PUBLIC INTEREST ADVOCACY CENTRE
The Chair: We're now calling on representatives from the Public Interest Advocacy Centre, please. Good morning and welcome to the committee. Please make yourself comfortable.
Mr Michael Janigan: Thank you very much. My name is Michael Janigan. I am the executive director of an organization known as the Public Interest Advocacy Centre. The Public Interest Advocacy Centre is based in Ottawa and I'm very appreciative of the opportunity to address the committee today in Ottawa. It is a non-profit organization that provides legal and research services on behalf of consumer interests and, in particular, vulnerable consumer interests concerning the provision of important public services.
Since the inception of the centre in 1976, the regulation of public utilities such as telecommunications and energy has been an important focus of the centre's work. PIAC has been a frequent intervenor, generally on behalf of low-income customers, in proceedings before the Ontario Energy Board, both with respect to rates and policies for natural gas local distribution companies and in the former periodic reviews of different aspects of the Ontario Hydro operation. We participated fully in the OEB proceedings that produced the report recommending the legislative changes in the gas industry that has provided the policy basis for the portions of this bill that deal with the natural gas industry.
PIAC has also published extensive reports in utility fields and frequently provides policy reports to the federal Department of Industry on consumer-related concerns. We have appended as the last page of our speaking notes a partial list of some of the utility publications to this document.
By way of general comment upon Bill 35, we would state that the government appears to be proceeding in a prudent fashion, given the relatively large stakes involved in the management of the transition to a more competitive energy industry. Getting from where we were to where we will end up is by no means a straightforward proposition. The management of the change will play a key role in the economic future of all stakeholders. As we will discuss later in this submission, it is vitally important that the superintending authority possess the ability to fashion effective consumer protection and market failure remedies when the need arises.
In energy, we do not have the luxury to wait for long-term market correction based on economic theory in the event that serious impairment arises to threaten energy access and affordability. It should also be recognized that this bill deals with two industries, gas and electricity, with wholly different historical profiles in terms of meaningful regulation, public accountability and effectiveness.
The natural gas industry has carried out its monopoly operations pursuant to real scrutiny by an informed and effective regulator, the OEB, with authority to review performance and compliance. Ontario Hydro, on the other hand, has not had a similar experience, and its lack of meaningful accountability has given rise to many of the problems that beset it today. Public satisfaction with the historical performance of the natural gas industry is relatively high. There is little clamour for change among natural gas residential consumers. In electricity, on the other hand, there has been a demonstrable need for change that is apparent to all informed stakeholders.
However, little can be gained at this juncture by a recitation of the past sins of Ontario Hydro. When discussing the treatment of utilities, it is always a risky proposition to quote from former British Prime Minister Margaret Thatcher. However, I believe that her statement, "If we spend our present debating the past, we will find that we have forfeited our future," has particular resonance with many of the tasks concerning the management of the electrical industry that is before us in this bill.
We cannot make the monkey of stranded cost disappear from the backs of the Ontario Hydro customer. We can only ensure that there is equitable treatment of these costs so that the burden of these costs are fairly allocated and no market participant is able to avoid contribution by opting out.
We have organized our comments on this bill under the general headings of "Benefits," "Protections" and "Unknowns." The limitations of time prevent a lengthier discussion of many of the points raised in each of the above-noted categories, but I trust that other presenters may be addressing them.
Benefits: We see potential benefits accruing to all consumers from the following features or effects of Bill 35.
(1) The separation of Ontario Hydro's generation assets and the restructuring of the transmission and distribution system should encourage better accountability of individual system components and reduce cross-subsidies among system components. As well, the elimination of vertical integration should help attenuate market power.
(2) The introduction of competition into the electricity sector, given adequate supervision to maintain service and quality standards, should serve to introduce new efficiencies into the generation and distribution system that should help to reduce operating costs.
(3) In the natural gas sector, the removal of regulatory barriers to gas sales may enable the expansion of competitive delivery of other components of the current system delivered in a monopoly mode. Once again, this increases possibilities for the elimination of cross-subsidies and inefficiencies currently costed to gas delivery.
(4) The provisions requiring licensing of gas marketers, with proper enforcement, should address the ongoing problem of consumer deception or improper conduct in the solicitation and delivery of commodity to customers.
(5) The monopoly components of Ontario Hydro's transmission system will finally be subject to cost-of-service regulation and ongoing scrutiny will take place to ensure conformance with OEB directives.
(1) Proper enforcement of the licensing provisions links a code of conduct for marketers and retailers with their ability to stay in business. This provides a powerful incentive to avoid customer-abusive behaviour.
(2) Contracts entered into with an unlicensed marketer cannot be enforced against the user, diminishing the prospect of hit-and-run sales by rogue operators with an eventual assignment of contracts to an established player.
(3) The OEB must approve the distribution rates to be charged by the successor corporations to the MEUs. In addition, the distributor has an obligation to supply customers in the distribution area, providing security of access for consumers.
(4) Any transfer of over 20% of the assets of a distribution system is subject to OEB approval, presumably to protect customers in the serving area from improvident transactions.
(5) The new distribution corporations set up by the municipal utility must separate monopoly and competitive businesses. This provides some insurance against cross-subsidization.
There are a number of unknowns:
(1) The successful fostering of competition will result in the loss of market share by the generation company, Genco. Such market share loss may impact on the payments to be made to the Financial Corp for the retirement of the debt. In turn, this may increase the size of the stream of revenue required from all market participants through the levy to recover for stranded debt. This makes it, of course, difficult to capture competition benefits for consumers achieved in the electricity generation sector.
(2) Will municipal taxpayers be subject to greater risks by the activities of the municipal commodity corporations? There will be differing levels of expertise and buying power in the new commodity acquisition corporations owned by the MEUs. If a new corporation is not able to outbuy the market or even acquire competitively priced electricity, the separation from the local transmission business may buffer customers but not local taxpayers from losses by the municipally owned commodity business that might be incurred. As well, there may have to be a workably competitive market in place for retail in order for the end-use customers to be protected in this circumstance.
(3) Will there be other competitive sources of power generation to produce a workably competitive market, or are we simply fostering a competitive resale market?
(4) We are creating a retail market for commodities that the ordinary citizen has little experience in buying. The initial experience with door-to-door natural gas sales has been a cautionary tale. Healthy competition depends on the communication of straightforward, unbiased information to establish a market of informed consumers, to mandate transparency in the details of the retail transaction and to ensure swift and effective enforcement of rules of marketplace conduct. Will there be adequate resources provided for these tasks, and how will they be provided? Consumer and competitive concerns militate for strong provisions incorporated into the licensing regime to ensure customer mobility and ease of comparison with rival services as well as confidence in the ability of the licensed marketers to deliver their product. There must be proactive oversight with the resources to ensure that the job gets done.
(5) The necessity to put in place transmission rates for January 1999 should not prevent a cost-of-service review of the monopoly elements of Ontario Hydro, particularly before any performance-based regulation is put in place. Will current management be successful again in evading regulatory scrutiny because of time constraints?
(6) There are differences in the licensing system set up for electricity and that set up for gas. What will be the effect of such differences upon the retailing of the energy commodity, for example?
By way of conclusion, I want to touch to some extent upon the experience the organization has had in competition and telecommunications. We've been actively engaged in the regulatory and governmental process in this decade that has attempted to establish the framework for competition in telecommunications in Canada. The telecommunications experience with competition to date is in some ways instructive to the current task in energy and in other respects is not particularly helpful.
In telecommunications it was necessary to reprice network access to facilitate competitive entry into long-distance markets. This meant a two-fold to three-fold increase in basic rates, despite the initial CRTC finding in the 1992 seminal competition proceeding that such increases were not inevitable. Similar to the energy market, the revenues from long-distance service were disproportionately produced from the high-volume users. One third of all Bell Canada accounts in 1994 produced two thirds of the long-distance revenue. The CRTC generally left it to market forces both to establish an informed consumer market and to police the many resellers that sprang up to sell long distance offerings to compete with the former incumbent monopolist.
As a result, the higher-volume user was largely the market target for discounts. Consumers were bombarded with a confusing array of advertising and some customers were slammed on to services they had not authorized. By the beginning of 1998, most telephone customers were paying higher total telephone bills despite the industry hoopla.
There also continue to exist indicia of the former monopoly in the form of market power exercised by the incumbent local telephone companies. Up to this year, for example, Bell Canada was able to retain close to a 90% share in the residential long-distance market, despite the fact that its RealPlus savings plan had call amount minimums that exceeded the monthly long-distance bills of a majority of its residential customers. This meant that most customers were not receiving any benefits from competition. This year there finally appeared discounts for ordinary callers available with Bell, and there appears to be an expanded interest in low-volume customers by most long-distance players. The lion's share of competition benefits, however, still remain with the high-volume user.
However, this pattern should not be repeated in energy. Simply put, energy customers in Ontario will not countenance a doubling or tripling of their energy rates and wait six years for some real benefits to appear, no matter what advertising program accompanies the changes. As well, there will be much less tolerance for unscrupulous operators in the energy field as the consequences of misconduct in false representations, slamming and inability to deliver are more serious. As one commentator has stated, "You can't have a busy signal when you turn on the light switch."
The telecommunications industry has been saved from widespread public outcry about market misconduct in part by the fact that the players themselves are absorbing the transactional costs of customer transfer. This is to encourage customer mobility. Because of the arbitrage nature of competitive commodity offerings in the energy field, long-term locked-in energy contracts with customers are the desirable norm for marketers. This makes it difficult to effect market corrections without regulatory intervention, both to police misconduct and to ensure workable competition in an informed consumer market.
Similar to telecommunications, there will likely be attempts to wring concessions for high-volume users, with accompanying threats to exit the system if the rates are not designed to recover more costs from smaller users. As well, competition theorists are likely to be frustrated by the maddening tendency on the part of private market participants to maximize the bottom line, in the form of cream skimming, service reductions and mergers and acquisitions, rather than financing competitive entry, as they are supposed to be doing.
A good example of this has arisen in the United States under the new Telecommunications Act of 1996. The expectation of the legislators in passing that act was that what we would see is the competitive entry by different telecommunications players in each other's business. Unfortunately, when they examined this situation, they noted that it's probably better to acquire another player than it is to go out and compete with them. Hence we have AT&T acquiring TCI cable rather than competing as a cable provider in its own right.
This is simply the private market responding to what is the most sensible for their shareholders, but in terms of what may be the most sensible for all telecommunications users you may need to revisit that idea that full competition is going to provide consumer protection, particularly in the cable field now, where rates have increased at four times the rate of inflation and we're still waiting for competitive entry from the telephone companies in any sort of realistic way.
In our view, Bill 35 seems to have a framework of remedies in place to address the above-noted problems. This returns to the central theme of our presentation. The evolution of a genuinely competitive market for energy will initially require more regulatory vigilance, not less. In the case of Ontario Hydro, we are starting close to regulatory ground zero. The statutory provisions of this bill create the licensing regime and establish effective OEB superintendence over the process, and these are vital to the smooth transition to competition as well as the operation of the industry to the benefit of the entire public interest.
Finally, just briefly in closing, I have had the opportunity of speaking with my colleague Bob Warren from the Consumers' Association of Canada, and I would echo his views with respect to section 29 and the potential expansions of the cost awards proceedings to include not simply the formal proceedings but also the processes by which the Ontario Energy Board and the industry examine the different issues that come before it.
Our experience in telecommunications has been that frequently the meetings that have been held between the different stakeholders and consumers on different issues associated with particular local competition have been best served in an informal procedure, in workshops and discussion groups that have been ongoing over a period of time. Certainly it would be our view that that should be encouraged rather than discouraged and, accordingly, the amendment could add the possibility of full participation by public interest groups in any process that is short of a formal proceeding.
I'd be happy to entertain any questions.
The Chair: Thank you very much. We have four minutes for each caucus for questioning, beginning with the NDP caucus.
Mr Lessard: Thank you very much for your presentation, Mr Janigan. I appreciate the work that your organization has done, especially with respect to telecommunications and the transference of that knowledge and experience into the new energy market. I have the benefit of benefiting from the wisdom of one of your board members, Howard Pawley, in Windsor on a regular basis, so that gives me a good idea of the quality of the people you have in your organization.
One of the most troubling aspects of Bill 35 to me is the risk that residential consumers may be exposed to. Although the government likes to tout the benefits of competition in the electricity market, and of course they give us this assurance that price is going to go down, my overwhelming fear is that there are some people for whom that will be true but that residential customers may be faced with increasing electricity rates.
You have given a good example of that; in fact, Mr Osborne from Ontario Hydro used the telecommunications example in his submission to us as to the benefits competition brings for consumers. But you have told us very clearly here that, by and large, residential consumers didn't benefit through lower rates from the deregulation of the telecommunications business. However, you don't really make any suggestions for changes to the legislation here. You say you're hopeful that the mechanisms exist in this legislation to try and avoid that, but I want to make sure that there are some teeth in this legislation to make sure that all consumers benefit from lower electricity rates that this government is promising.
Mr Janigan: I think it will be difficult, at least in the short term, to deliver on any particular promise of cheaper rates, but I think we have to look at the process as an evolutionary one where we're starting with a completely unsatisfactory example of public accountability in Ontario Hydro and attempting to move to something that may provide benefits in the long term, introduce efficiencies and possibly protect consumers.
I look at the provisions in the new act that enable the OEB to scrutinize the rates that are offered by MEUs to, to some extent, force amalgamations, to increase the buying power in the commodity corporations and to generally superintend the process as being sufficiently protective, at least at first blush, of the interests of low-income consumers. I think it's essential that the regulatory scrutiny is there to make sure that there is no ability in behind-the-scenes arrangements for large-volume consumers to wring out concessions that do not pass under regulatory scrutiny and do not meet the standard cost allocation tests, and I think that's our principal concern in the process.
I think you are right. There is no guarantee at the end of the day that there will be cheaper electricity for consumers, at least in the short term. I think it's a question of attempting to design a system that takes advantage of some of the benefits of competition, in particular the breaking up of the vertical integration of Ontario Hydro, which we think is a favourable element, and as well to ensure that there is a strong regulatory authority to police that transition.
I would add that in terms of telecommunications I don't think I would go as far as to say that there are no benefits that have accrued to consumers through competition. I would say that the benefits have been unequally distributed, and some of that failure is in part attributable to the fact that there has not been more aggressive regulatory intervention in the form of a balloting procedure that might have assisted the establishment of a more knowledgeable consumer market and prevented the ability of the former monopolist to exercise market power.
Mrs Johns: Thank you very much for your presentation. I certainly appreciated the format and some of the strong comments you have given us on the successes of the bill.
I'm interested in your unknowns. In section 2 you are talking about the municipal commodity corporations. It's certainly a concern to us that we get the best deal we can for the ratepayers in the province. This bill is primarily about trying to protect the consumer, and at the same time flow through advantages to the consumer that could come by this marketplace. You talk about the municipal electric utility or the board that would run this not necessarily having the expertise to be able to deliver the product, ie, purchase of economies of scale, that kind of thing. As a consumer I don't have to stay with that municipal electric utility if they can't provide those services to me. I can stay with them because they're the default supplier if I so wish, if I don't want to make informed decisions or move forward, but I can also move. Does that not protect the consumer? I guess that's what I'm interested in delving into with you in this time.
Mr Janigan: Yes, and as I indicated, consumers might be buffered. In the event that there is a workably competitive retail market, they can move elsewhere. The problem exists, of course, of the Orange county syndrome, where your municipal corporation has gone off and speculated in highly risky derivatives and thought, "We're going to go out and outbuy the market." The market was smarter than they were, and they're stuck with rather substantial losses. So the citizen of that municipality as a consumer may be protected by the retail market, but as a taxpayer he may be saddled with some additional burden somewhere along the line.
Mrs Johns: That's a good point. So should we put in under the Ontario Energy Board Act that there should be some restrictions on what kind of activities the municipality can enter into?
Mr Janigan: I think it would be difficult. Some of this will be captured in the ability of the OEB to superintend with a view to in effect forcing amalgamations among the smaller players to ensure that there is sufficient expertise and buying power so that the circumstance doesn't exist. But it is an additional risk. I can't fashion off the top of my head a statutory remedy that will be in keeping with the spirit of the act at the same time as providing some protection to municipal taxpayers.
Mrs Johns: What I think I heard you say there was that in the licensing agreement we should make sure that each of the groups that applies for a licence has expertise, but that's basically as far as you think we should go in the legislation?
Mr Janigan: I think there will be some questions, for example, if Ailsa Craig, with 68 customers, comes forward and says they want to have a commodity company to buy electricity. In that circumstance, I think it's quite clear that they won't be allowed to do it.
The problem exists in the smaller and middle-level municipalities where there may have been some expertise in the past, but the risk of exposure, given the size of the municipality, may be great. I don't know. Off the top of my head, I can't suggest a statutory remedy in that circumstance, but I think it's something that should be examined.
Mr Cullen: I want to continue walking down this road because you've made it very clear in your presentation that we're starting close to regulatory ground zero. The parliamentary assistant has said, "Can't we rely on the operation of the market?" and you're saying, "Not quite." We seem to have touched on hearings dealing with licensing. The other question is we have two models to look at. We're evolving. In terms of regulation, we've seen what's happened to natural gas and we've seen what's happened to telephone. Are you suggesting perhaps local rate hearings? Are there other mechanisms consumers can use to protect themselves in the situation of deregulation in electricity here?
Mr Janigan: Certainly the monopoly elements of Ontario Hydro will be subject to real regulation for the first time. That's principally where we believe there will be accountability and some savings wrung from the system if they go through with a genuine cost-of-service process before the Ontario Energy Board.
Mr Cullen: Who's going to ensure that happens? Do we rely on individual customers? Do we rely on the government? Do we rely on hearings where various parties, such as yourself, present themselves? What's the mechanism to ensure that happens?
Mr Janigan: The OEB will police those monopoly elements of the system the same way they police the LDCs, for example, where they tell them, "Look, you have to come in now for a rates application this year," or "We want to hear this." I think it will be done in that same fashion. What disturbs us is we hear some rumblings in the background from Ontario Hydro: "January 1999 is coming up. Let's put some rates in place. Oh, by the way, can we also have performance-based regulations so that we don't really ever have to have genuine cost-of-service scrutiny over these elements?" We're very concerned that there finally be some effective review of Ontario Hydro.
Mr Cullen: And at the local scene?
Mr Janigan: It's also envisioned that the transmission rates the new successor corporations to the MEUs will charge will be scrutinized. I'm not quite certain of the fashion in which that is done.
Mr Cullen: Are you looking at a model like the CRTC where consumer groups would come forward and say: "We challenge these assumptions on the transmission rates. We challenge the assumptions on the contribution to our stranded debt that is now affecting these costing calculations?"
Mr Janigan: The OEB's own rules of practices and procedures will be sufficient to ensure this occurs, that they're given the regulatory authority over that.
The Chair: On behalf of all the members of the committee, I thank you for coming before us this morning with your perspective. We appreciate your advice.
Mrs Johns: Point of clarification, Madam Chair: With respect to Mr Cullen's question, section 75 of the Ontario Energy Board Act gives the ability to the Ontario Energy Board to be able to grant a licence or to refuse a licence given some of the constraints you were talking about.
The Chair: We call now representatives of Ottawa Hydro, please. Good morning. Glad you're able to join us. Please make yourselves comfortable.
Mr Carl Kropp: My name is Carl Kropp. Before I introduce myself, I want to introduce the chair of Ottawa Hydro, Dyan Cross. In respect to Carl Kropp, who is he? You've got copies of my CV that have been provided to the clerk. I'd like to emphasize two points in that CV. One is that I'm the general manager and chief engineer of Ottawa Hydro. I've held that position now for 14 years. Second, as you can probably tell from the colour of my hair, or the lack thereof, I've been in the utility business for some 40 years.
I reviewed the submissions made to this committee last week. I'm pleased to discover that our submission is going to be a little bit different from what you've heard. Only the first page is really devoted to the philosophical issues. You heard a lot about that last week. I'm sure you'll find that a bit of a relief. The remainder deals with operational concerns, which in my view are not getting adequate coverage in front of this committee. I think there are some operational concerns in here that you ought to be thinking about, so I'm pleased to be able to bring some of these to your attention.
Finally, I intend to finish with a very important point, which will bring together a philosophical concern, as well as an operational concern. Against that background, I proceed with the Ottawa Hydro paper.
Ottawa Hydro was founded in 1915 and presently has some 140,000 customers, which makes us the third-largest utility in the province. We are proud to be recognized as a benchmark utility. Details about Ottawa Hydro are provided in appendix A. This presentation has been reviewed by the commission and has their support.
Ottawa Hydro applauds the government's intention to introduce competition and choice into the electricity utility business in Ontario. Accordingly, we appreciate this opportunity to appear before the standing committee on resources development to publicly express this support. We have some concerns with the enabling legislation, Bill 35, the Energy Competition Act, 1998. Hopefully, by bringing these concerns to your attention we will help you to improve the quality of Bill 35.
First, three important issues of a general nature: We are concerned that the purpose of achieving low-cost and reliable electrical energy is not entrenched in the legislation along with the seven other purposes stated in section 1. I believe this is a most important aspect in respect to the customer and ought to be included as the eighth purpose, but ought to be included in the first position because it respects the customers' interests and wishes.
Second, we are concerned that by maintaining one large, market-dominating generator the potential for low rates may not be realized.
Third, we are concerned that by not creating separate transmission and distribution companies, favouritism and cross-subsidization may result.
These are some of the issues which we understand will be further developed in the submission of the Municipal Electric Association and we state them here simply to indicate our support.
Based on my 35 years of experience with Ottawa Hydro, I wish to focus on some special operational concerns inherent in Bill 35. I'll start with the Electricity Act, 1998, and I will read the section and subsection number with the marginal comments in respect of what it relates to and then I'll give you our view.
Subsection 25(4), "Previous contracts with municipal corporation": Included in appendix B are copies of our "Application and Contract for Electrical Service" and "Water Heater Rental Agreement." You will note that the conditions generally relate to the wires or hardware part of the business. These conditions must survive the transition to the new order, otherwise there will be chaos. A similar situation exists in respect to two wheeling contracts over our wires. In other words, there are contracts and there are contracts.
The legislation, or possibly the regulations, must provide for the continuation of the wires and/or hardware requirements of the municipal electric utility through the transition phase. During the subsequent phase, the Ontario Energy Board may wish to specify standard terms and conditions, or at least general guidelines, within which the wires company of the municipal electric utility must operate in fulfilling its obligation to connect every customer.
Subsections 27(a) and 27(b), "Distributor's obligation to connect": Where no line exists, it seems clear that the municipal electric utility may collect a contribution for the extension of a line to the property, possibly subject to guidelines of the Ontario Energy Board. However, Ottawa Hydro, like many other utilities, operates two primary voltages. The lower voltage supplies smaller loads and the higher voltage the larger loads. Should a building require the higher voltage and only the lower voltage be present, it is suggested that the extension of the higher voltage line be treated in the same way as the case where no line exists. In other words, the use of the word "line" in the legislation is really not very specific in terms of what goes on in our industry and I think you might want to have a look at that particular usage, because it could lead to some confusion.
In the existing order, such line extension charges could be recovered, in part at least, through development charges should the municipality and the municipal electric utility wish. In the new order, there is no longer an opportunity to recover these costs through development charges. Thus new line extension charges and the extension of the required voltage ought to be put on the same footing.
Subsection 27(b): As presently worded, an occupant may insist on a connection notwithstanding any objections of the owner. As such, the possibility for conflict is obvious, as is the likelihood of court action. It is suggested that the consent of the owner be made a necessary condition for the connection.
Next are sections 28 and 29, which deal with "Distributor's obligation to sell electricity" and "Termination of service."
Section 27, which we just dealt with, requires the municipal electric utility to connect and section 28 requires the municipal electric utility to sell, albeit in the roll of default supplier. Section 29 permits disconnection in the case of non-payment. This is really not unlike the present system except that the municipal electric utility is now the default supplier. But there is nothing in the legislation that allows the municipal electric utility to establish the credit worthiness of the customer as presently exists in section 30, tax-rolling, and section 49, security deposit, of the Public Utilities Act.
About half of Ottawa Hydro's 140,000 customers own their property and the other half are tenants, so we're in a good position to comment on this particular aspect of security.
In respect to credit worthiness, I believe the following is instructive. In the past year 410 accounts of property owners were tax-rolled because of non-payment, in the amount of $122,000. As such, eventual payment is generally assured.
The case of tenants is a little more troublesome. Bad debts for non-payment of electricity accounts in our service territory were escalating out of control. Late in 1996 the commission instituted a deposit policy for customers who do not establish their credit worthiness. It was seen as unfair that those customers who faithfully paid their electricity account were financing customers who did not pay.
The results of this deposit policy are rather dramatic and are depicted on the graph in front of you, which shows a steady increase in the amount of dollars sent for collection, culminating in 1996 at about $900,000. You'll see that in 1998, after just over a year of deposit policies, that amount has fallen by some 50%, to maybe $500,000. So there has been a dramatic decrease in terms of capturing delinquent accounts.
There is still a concern here, as 20% of that money that is sent for collection is ever recovered; the other 80% is not. So it's important to be able to establish the credit worthiness of a customer.
In summary, in addition to the obligation then to connect and to be a default supplier and the right to disconnect, the legislation must continue to allow the municipal electric utility to tax-roll and to collect security deposits from customers who do not establish their credit worthiness. Recommendation 4-8 in the second interim report of the Market Design Committee also recognizes and speaks to this particular problem.
Finally, in subsection 29(2), reasonable notice is stated and I suggest that any time you talk about reasonable notice, it has to be defined; otherwise it will be defined by the courts at an unnecessary expense. I suggest that be given some definition.
Subsection 30(2) is examples of market rules. I think there are some interesting observations here. This section empowers the Independent Market Operator to deal with system emergencies. It does not cover emergencies which may occur at the local level. For example, a local distribution substation transformer failure may limit the amount of power available. Normally, such situations would be dealt with under the authority of the Public Utilities Act, section 20, which deals with the allocation and distribution of available power. That section has always allowed us, for example, to go into rotational load-shedding in the event that there is not enough electricity to go around for whatever the reason might be.
But schedule D of Bill 35 removes electrical power and energy from the domain of the Public Utilities Act, so one is led to conclude that the Public Utilities Act is really no longer applicable. Curiously, schedule D of Bill 35 goes on to revise section 20 of the Public Utilities Act to substitute Ontario Hydro by its successors, the Ontario Electricity Generation Corp and the Ontario Electric Services Corp.
I say this begs the question, does the Public Utilities Act continue to apply or does it not? If it doesn't, why are you bothering to revise it? If it does apply, then the municipal utility can only allocate the distribution of power available from the Ontario Hydro successor companies. But with the advent of retail competition, the distribution wires will carry the electricity of other suppliers. No authority is given to allocate this electricity.
In conclusion, in an emergency, the municipal utility must be clearly given the authority to allocate the distribution of available power, regardless of who supplies it.
Also, as appendix D goes on to include other revisions of the Public Utilities Act, it seems advisable to simply remove these sections from the Public Utilities Act as it no longer applies to electrical power and energy. But again, does it or doesn't it? There seems to be a question.
Next is section 44, "Affixing signs": Back in 1993 the Supreme Court of Canada took a decision in respect of affixing signs to hydro poles. It is known as Peterborough v Ramsden. The court found that the particular citizen had the right to affix signs to hydro poles but that the municipality could set some conditions on the fixing of those signs, such as the size of the sign and the length of the sign that could be there.
The act here imposes a $200 penalty for anybody who affixes a sign to a hydro pole. I suggest you might want to have your legislators check into the impact of the Supreme Court of Canada decision on that particular clause because I think it's probably not legal.
Subsection 79(4), "Competition transition charge: generators." Existing municipal-owned generation has never been a part of the stranded debt issue and ought in my view therefore to be excluded from any charge payable to the Financial Corp.
The next section, 145, on transfer bylaw and other matters: This section implies that there is no limit on what municipal councils may specify. Surely the articles of incorporation under the Business Corporations Act, the transfer bylaw as otherwise specified under Bill 35 and any shareholders' agreement are adequate instruments. Accordingly this section, I believe, ought to be removed. It is redundant.
Next we turn to the Ontario Energy Board Act, 1998, and I start off with subsection 69(10). In any given area, there ought to be only one distributor that should be licensed. I believe this is the intent of the legislation but it's not said. As presently worded, there is really no indication of exclusivity and I suspect the board, if they wanted to, could create two licensees. You could have a pole line on both sides of the street, which we used to have in Ottawa, by the way, up until 1950, when Ottawa Hydro bought out Ottawa Light, Heat and Power. I think there ought to be an exclusive licence given in any area and the board ought to be adequately directed by the legislation.
"Municipally owned distributors": I'm talking about subsection 72(1). The language in paragraphs 3, 4 and 5 is rather vague but seems to imply that we really can only be involved in the electricity business. In any case, a narrow interpretation could be very limiting. A broad interpretation could be more permissive. As such, conflict is inevitable. I suggest that more precise language implying the broad interpretation is suggested. I'm going to comment a little further on that in my closing remarks.
We have to construct an electricity line. That's subsection 91(1). The language is so inclusive that even minor work will require leave from the board. The volume of the paperwork and the obvious delays will be unbearable for the customer and the utility. Possibly in the regulations, as a minimum, a threshold value should be set for board approval.
In my previous life, before coming to Ottawa Hydro, I worked in Quebec where there was a regulated electricity system prior to Hydro-Quebec and we dealt with a board that you had to submit your various works to. I really would suggest that some care is required. Unless you exclude a certain number of all these minor things that a utility does on a daily basis, you're going to bog down the whole system with paperwork and you're going to drive the customer crazy waiting for approvals to come from the board. Some care is required here and minimum values have to be set below which you can operate.
Now a final concern: I really didn't know whether to put this at the beginning to emphasize its importance or leave it till the end to emphasize its importance. I chose to leave it till the end, but it is an extremely important issue, one that I feel very strongly about and that I hope the committee will deliberate on.
Section 72 of the Ontario Energy Board Act, 1998, clearly limits the municipal utility to the electricity business. But to best serve the needs of the customer, municipal councils ought to be permitted in a straightforward manner to establish a municipal energy utility selling electricity, natural gas, hot and chilled water and so forth. Such a utility would be able to offer energy solutions to the customer from an unbiased position. No such restrictions apply to possible competition, so we automatically have an unlevel playing field here.
Concerning the Consumers' Gas purchase of Cornwall Electric, Mr Perry Stover, director of utility ventures for Consumers' Gas, stated, "We're looking at opportunities for synergy between gas and electricity."
Perhaps more significantly, a western Canadian municipal utility -- I underline the word "municipal" utility here -- is partnering with a local institution to install cogeneration and sell electricity and thermal energy. This legislation purports to want to create jobs. It may create jobs in that respect, but the profits are going to flow outside Ontario unless we do something about that.
A number of opportunities for us in Ottawa to partner in the energy business have been put on hold because of the limitations of the existing legislation, and Bill 35 does little to improve that situation. It is not at all clear why a council would have to sell off more than 50% of the electricity business to get out from under some of the restrictions of Bill 35. So not only is the playing field warped, but unnecessary requirements are imposed on municipal councils.
An energy utility is the way of the future, there's no question about that in my mind, and Bill 35 must be revised to make this option available to Ontario municipal utilities.
That concludes the paper. I thank you for your attention. We would be pleased to take any questions you might have.
The Chair: Thank you very much. We have four minutes for each caucus, beginning with the government caucus.
Mr Gilchrist: Thank you, Mr Kropp. I appreciate your submissions. In fact, let me say, while many of your points are somewhat technical or involve legalese, you prove the merits of having committee hearings because I think you've brought more different issues to our attention in one brief than perhaps entire days' worth of submissions that we've had so far.
I would like to touch on a couple of your broad concerns that you glossed over at the outset, because I think staff will certainly take all of your other submissions. You've raised some very valid points, but I think we've got a philosophical issue we have to deal with.
One that is most disconcerting is the issue of the pricing of assets and the potential sale back and forth between Genco or a utility. I would like to explore it very briefly if we can here today. If you had $10,000 in debt to a bank and you only had one asset, a car that you thought was worth $5,000, would you agree with me that if you sold that car, you would have $5,000 worth of stranded debt?
Mr Kropp: I would probably think so, yes.
Mr Gilchrist: If you sold the car for less than what you thought it was worth, your stranded debt would increase. Correct? On the other hand, if, when you put a want ad, you had five or six people clamouring for it, you might be very pleasantly surprised and get $6,000 or $7,000. Your stranded debt is less.
When you buy and sell assets, as the local utility, do you do that on the basis of the fair market or would you expect either your supplier or purchaser, depending on the direction, to take a bath just because of accounting?
Mr Kropp: I don't think it's as simple as buying and selling a car.
Mr Gilchrist: Why isn't it? Why wouldn't a generating station be worth whatever a generating station generates as income, the value that would have, no different than any other business asset you and I might buy?
Mr Kropp: If I were selling Ottawa Hydro assets to a third party, I would go at market value, but I'm cautious here of a situation where you want to buy Ontario Hydro rural assets, where the customer has already paid for them, in part.
Mr Gilchrist: How is that different than if you sell a generator that you've paid for with Ottawa?
Mr Kropp: Because the benefits of that will flow to Ottawa Hydro, won't they?
Mr Gilchrist: Why would the same argument not apply to Ontario Hydro shareholders, the taxpayers of Ontario?
Mr Kropp: Because the Ontario Hydro rural customer has already paid down some of the costs associated with that distribution line.
Mr Gilchrist: So has Ottawa Hydro. You tell me you're debt-free, so every asset you own has been paid down by your shareholders, namely, your ratepayers.
Mr Kropp: That's right.
Mr Gilchrist: Why is that any different, philosophically, from the treatment that Ontario Hydro's assets should receive? I think we have an incredible contradiction here.
Utilities are telling us that just because of some artificial book entry, they deserve to get a deal. But on the flip side, you've just testified here that if you were to turn around and resell those assets the next day, you'd expect to get market value. How do I reconcile that?
Mr Kropp: I'm not asking for a deal.
Mr Gilchrist: That's what book value is. It's an artificial book entry based on depreciation rates that may or may not have anything to do with the real marketplace. Why wouldn't you expect to pay, MEUs in general, what an asset is worth?
Mr Kropp: If that's what the market has to be, that's what the market has to be, but recognize that there's a windfall profit going to somebody then.
Mr Gilchrist: Ah, but the profit in this case goes against that 40% of the hydro bill that's going to pay debt. No one has suggested that if Hydro was to sell all of its assets it would come out of this with a profit. It would have less of a stranded debt. But again, the same people that you're serving every day, the taxpayers in this part of Ontario, would have that tradeoff. They would still save money.
Mr Kropp: I agree. It's a possibility for a windfall profit. For example, if you buy the rural system and you pay market value, there is money beyond what the customer has already paid. OK? So where's the windfall profit go? It's going to go to pay down the stranded debt. I think that's a political decision. Do you want to saddle the people in the rural community with, having paid off part of the system, now you get a market value thing and you use that to pay down some of the stranded debt? I don't know. If both systems work, it's not a business decision, it's a political decision.
Mr Gilchrist: You'd agree with me on the flip side, the stranded debt would be a bill on all taxpayers?
The Chair: Sorry, we must move on to the official opposition.
Mr Kropp: It's a political decision, I think, really.
Mr Conway: Thank you, Mr Kropp. I really appreciate, as do I think all committee members, the very specific and detailed, almost line-by-line analysis of the problem areas and the strengths of the bill.
Just to pick up on the last exchange, one of the concerns I have is that in the last 15, 18 months, because of the political decision around a rate freeze for the five-year period between 1995 and 2000 -- and who could be opposed to that? -- the board of directors of Ontario has parked over $8 billion worth of losses, only a very small portion of which is now reflected in our rates.
So the people who are going to be running Genco -- because, you know, it's been broadly advertised in this committee, people are waving around bills and saying all of this debt is reflected in your current rate. It isn't. One of the reasons it isn't is that the board of directors of Ontario Hydro in the last 18 months has taken two writedowns totalling over $8.2 billion. The vast majority of that debt, as I understand it, is parked on a siding, to be determined. So that's a determination that I, as a residential customer, would really like to know more about.
My question to you is two-fold. One, you're the third largest municipal utility in the province but you also have a very substantial internal generation capacity. I think you say in your brief 12,000 --
Mr Kropp: Twelve megs.
Mr Conway: I've been hearing from some others that there is some concern about the impacts of the policy as a whole on municipal utilities that own and operate their own generation. You cite 79(4), the requirement that until the stranded debt is paid off, you're going to have to make a charge on the basis of that generation to help with that obligation. Is that the only area where the policy affects your generation capacity? If it isn't, could you add others, and if it is the only area, just help me understand again why you should be exempt, because we heard some of this in northern Ontario last week.
Mr Kropp: I believe that the existing generation is grandfathered. The last point I make actually talks as well to how I think the ability of the municipal utility to expand its area of influence into being an energy company would have impact on the area of generation. For example, we may want to get into thermal energy distribution. The obvious way to do that, the economical way, is cogeneration, which means we would have to bring more cogeneration into the system.
Specifically to your question why we ought not to pay a transition charge on existing generation, no money has ever been borrowed against the existing generation by Ontario Hydro. It's not really part of the problem, never has been. We didn't put it in to displace Ontario Hydro generation. In fact, this generation predates the formation of Ontario Hydro. It dates from 1899 and 1901, so it's really never been part of the problem.
Mr Conway: A second question has to do with Servco. I want you to just forget for a moment your involvement with Ontario Hydro because your resumé is pretty impressive. You've been around this business a long time, one of the few people probably to present to us who's been around long enough to work for private power in the pre-Hydro-Quebec days, if my memory about Gatineau Power in the late 1950s is correct.
Mr Kropp: That's right.
Mr Conway: Looking at southern Ontario, one of the areas where I would have expected and I still do expect a very substantial rationalization on the distribution side is southern Ontario. I would have thought prior to Mr Osborne's testimony last week that what we would get in the main would be substantially enlarged MEUs in southern Ontario. I'm not at all sure that's the plan of Servco after Mr Osborne's quite dramatic testimony about eat or be eaten. He intends to go to the lunch table and not be eaten.
What is your considered opinion after 35 years of experience in this business? What should the design of the distribution system look like in southern Ontario, taking into account that there's a lot of moose pasture between Bell's Corners and Kaladar, for example?
Mr Kropp: I'd love to have lunch with Osborne and see who comes out paying the bill. I want to point out that Ottawa Hydro has a very low gross margin, slightly less than 9%, one of the lowest in the province. I challenge Ontario Hydro or Osborne to compete with us any particular time.
Specifically referring to southern Ontario, I think some amalgamation of utilities makes sense.
Mr Conway: And aggressive expansion of Ontario Hydro retail in southern Ontario?
Mr Kropp: No. I would hope that the utilities would amalgamate and get together and displace Ontario Hydro retail. Bill 35 does not make that as easy as one might think. There's a Catch-22 in Bill 35. I might just outline that to you.
Bill 35 makes it much easier for the municipal utility to be privatized and that could bring some of them together. Let's suppose you have three utilities roughly the same size that want to come together in the consolidation proposal of Bill 35. Say one of them wants to privatize and two do not. If they come together as one utility, the one will only have a third of the voting power and would lose its position. The flip side of that is also the case.
Unless the utilities have a like mind, they may want not to come together, so I think you have to have a look at that particular aspect of the bill. It won't necessarily promote utilities to come together. It will promote utilities that have a like mind to come together, the like mind being whether they want to be a public utility or a private utility.
Mr Lessard: Thank you very much for your presentation. I want to give the parliamentary assistant an opportunity to answer your question about whether the Public Utilities Act applies or not. I hope that she takes that opportunity.
The benefits that the government holds up from Bill 35 are two: the possibility of reduced rates and the creation of jobs. If I heard you right, in your presentation you mention the concern that job creation may take place someplace other than in Ontario. Was I right when I heard that?
Mr Kropp: No. I said that job creation, for example, would take place in Ontario but the profits may go outside the province unless you allow municipal utilities to compete on a real level playing field with our competition and not limit us only to electricity. Allow us to go into the thermal energy business and whatever our councils might decide they want us to go into.
Mr Lessard: Would you be able to continue your water heater rental business under this act, do you think?
Mr Kropp: I would suspect so. Yes, I would say so. The deliberations of the Market Design Committee make it quite unclear where that business may end up, but I believe it will end up with one of the successors to Ottawa Hydro.
Mr Lessard: You mentioned other areas of energy that you'd like to get into as well, and you mentioned the possibility of amalgamations between various utilities. What would happen in the event that between those utilities that may decide they want to amalgamate and they do have a like mind, there is some area that's currently served by Ontario Hydro? What happens if Ontario Hydro is in the middle?
Mr Kropp: I believe they would want to acquire the assets of Ontario Hydro, and depending on how that solution was taken, the discussion I just had with Mr Gilchrist, that would have to be bought either at market value or at book value. Again, I think that's a political decision on which way you want to go on that.
The Chair: Thank you very much for coming before the committee. As was stated, you do have some unique ideas that I'm sure our committee will carefully consider in this bill.
Mrs Johns: Madam Chair, I have two points of clarification. The public utilities have two years to transform to the Ontario Business Corporations Act, and in those two years the Public Utilities Act applies as it is now. After that time they come under the new legislation.
The second thing is that the Public Utilities Act makes it easier to amalgamate than privatize. The reason I say that is because of the transfer tax that's imposed. In the bill, if they sell more than 20% there's a transfer tax on it, so it makes it difficult to privatize or not as lucrative to privatize.
MUNICIPAL ELECTRIC UTILITIES OF RENFREW COUNTY
The Chair: I now call upon representatives of the Ottawa Valley Power Corp study committee. Good morning and welcome to the committee.
Mr Ron Lowe: Madam Chairperson, members of the standing committee on resources development, my name is Ron Lowe. The gentlemen who are with me today are from utilities that are within Renfrew county: from Arnprior, Rick Farrell; from Pembroke, Murray Moore; from Renfrew, Tom Freemark. These gentlemen will answer any questions that you may have after our presentation.
When you were talking about meat and eating people up here, I got kind of nervous because I'm such a small person. I hope you leave me enough that I can get out of here.
My goal in these few minutes today is to share with you the concerns we face in rural Renfrew county. Let me take you away from those worries of Bay Street and big industry and along the back roads to a farm in Horton township or into a home in the village of Calabogie. What will Bill 35 mean to the people we serve in Renfrew county?
As I said, I represent nine municipal electric utilities in our county, and together over the past few months we have prepared a plan for amalgamation. Our goal is to find the best possible means to serve our customers, the people who have owned our utilities ever since they began. As local utilities, we've always been directly responsible to our customers. They vote for our commissions and we have to put their interests and protection above all else.
Let me present you a graphic symbol of the changes we are afraid our customers could face if they were to lose that local, responsive service we've developed over the years. I think you're all probably aware of it or have seen it in the paper. It has a story it tells by itself: "If you've been getting a busy signal...we're sorry."
Let me ask you: If you were standing in the dark in a cold house on a winter's night and your power had been out for over an hour, would you be satisfied with this response?
Accountability: That's what it's all about. We're providing a service that's essential. We need a reliable supply of electricity for big business, for an average family, and for a dairy farmer living on the fourth line of Bromley township back home in Renfrew county.
The legislation you're reviewing needs to protect the locally developed, regionally based service groups providing electricity throughout Ontario. If the ice storm of last February taught us anything, it's that we have to be available and ready to serve our customers and communicate with them not just in a time of crisis, but all the time.
Another major concern for us is cost. We've worked hard through the years to be responsible service providers. We've kept our debts to a minimum and our customer's cost as low as possible. There are parts of Bill 35 that could destroy all that hard work and send electrical bills in rural Ontario through the roof.
Let me give you an example. Let's suppose that the customers in the town of Petawawa want to leave Ontario Hydro and join our amalgamated utilities of Renfrew county. As paying customers, they've already made a huge investment in the infrastructure that delivers their power. It would be unfair to expect them to abandon that investment and begin all over again. It is crucial that this legislation be clear: Assets, whether they're owned by Ontario Hydro or another supplier, must remain with the customer when there is a transfer to a new utility.
I've already mentioned the responsible management of debt that goes hand in hand with the locally owned, accountable municipal utility. It is with great fear that we face a future saddled with huge debts accumulated by Ontario Hydro over the years. Again, we must protect the interest of the customer. A fair system of recovery must be developed that will not leave the doors open for a tax grab that protects big business at the expense of the individual homeowners and farmers who live in our part of the province.
At this point I will go to some of the highlighted areas that we have in our written presentation to you.
Page 2: We strongly feel that the new local utilities should operate independently of municipal governments. We believe the proposed legislation could be unnecessarily restrictive in terms of development and rationalization of a distribution system of shoulder-to-shoulder utilities.
Page 3: We have a number of concerns regarding the management of Ontario Hydro's current debt load. The structuring of Ontario Hydro's debt is not sufficiently addressed in the proposed legislation.
Bill 35 assigns authority to the provincial finance minister for determining the stranded debt. We agree with the MEA position that the level of Ontario Hydro's unassigned debt should be determined by the Ontario Energy Board. Further, we must stress that all charges dedicated to stranded debt recovery should be eliminated once full recovery is achieved.
Page 4: The existing municipal generating facilities should not be subject to the competition transition charge. We propose that the assets of the existing municipal electric generation facilities be transferred to a new corporation.
Ownership of meters and the responsibilities for billing, metering and the customer database have not been addressed in Bill 35.
Ontario Hydro generation facilities should be further separated into provincial public corporations with stakeholder representation, including local utilities, on the boards of directors.
We must emphasize the need to separate Ontario Electric Services Corp further.
Page 5: Section 28 of the Electricity Act states that a distributor has the obligation to sell electricity as a supplier of last resort, meaning that the distributor must provide electricity for consumers not purchasing power from any other retailer. This section of the legislation also creates an obligation for the distributor to provide electricity for customers who have purchased power from other retailers in the event that the retailer is unable for any reason to sell electricity to that customer. Given the nature of demand and supply, this power may have to be purchased by the distributor at a premium rate. This will be an unfair burden to the innocent customers caught in a situation beyond their control and outside our ability to maximize their savings. We believe it is the local retail affiliate that should have the responsibility of suppliers of last resort.
Page 6: Section 91 of the Ontario Energy Board Act states: "No person shall construct, expand or reinforce an electricity transmission line or an electricity distribution line or make an interconnection without first obtaining from the board an order granting leave" to do so. This section needs clarification, as there are a number of questions raised by the current wording. Approval should not be required for an extension of a street or subdivision in a utility service area. We believe municipal electric utilities will require an exemption to this regulation in order to carry on with routine business in a cost-effective manner.
We face some rather unique challenges in Renfrew county. With large tracts of crown land, you can travel through miles of forest between settlements and even between individual properties. As suppliers of electricity, we need a broad customer base to allow us to service the more costly remote areas of our county. We need a level playing field in order to survive in a world of competition. We recognize that our world is changing and we are ready to do business in a new competitive market, but I am here today to remind you that there are very different and very real challenges when it comes to servicing rural Ontario.
Please, as you review the legislation and make recommendations on the new structure for electrical generation and services in Ontario, keep these basic questions in mind: Will it cost less? Will it benefit the consumer? Or will it cost more? Will it bankrupt the consumer? That's our bottom line as we continue to work on behalf of the residential, agricultural and business customers of Renfrew county.
Our detailed concerns and recommendations are outlined in the written brief we've submitted to your committee. My goal today was to give you our rural perspective on the future as it could appear under Bill 35.
Before I go, I'll make one last proposal. The members of our committee convey their thanks for this opportunity to have input. We will finish by offering our further participation as Ontario's new electrical system develops. We would be happy to volunteer for any pilot projects or other opportunities to be full partners in this process.
The Chair: We have five minutes for questions and answers for each caucus. We'll begin with the Liberal caucus.
Mr Conway: Thank you, gentlemen. I have to be careful here lest I be seen to be engaging in what Pierre Genest used to call a sweetheart cross-examination.
Mr Conway: Well, don't assume it, because I've got a couple of questions here.
Clearly there is a problem in our part of the world about the deterioration in service from Ontario Hydro. You've all been around this business longer than I have. Would it be a fair characterization to say, Ron and colleagues, that in the last five to 10 years there has been a steady decline in the capacity of the regional and district offices of Ontario Hydro to respond to the service needs of people in and around the areas you people serve?
Mr Lowe: I would have to say that in some cases there has been a great deterioration. I guess the biggest one is the example we have shown you here today.
Mr Conway: How angry are people you hear about in the Pembroke-Renfrew-Arnprior areas about the kind of service responses they're getting? I've offered some advice to the committee, but I want a candid assessment. It's an open question to anyone on the panel.
Mr Lowe: At one time it was nice to be able to walk out and say you were associated with Hydro. Now when you walk into the farming community you're a little more careful of what you say. I'll leave it at that.
Mr Conway: I take it that one of the issues -- and we've talked about this before -- is that there is a very real, ongoing problem with this centralized communications network that the provincial utility has established. Is that a fair assessment, Mr Moore?
Mr Murray Moore: I'm glad you looked at me. In our office we have about two to three calls a week, and that's minimum; that's without a problem.
Mr Conway: And your office is?
Mr Moore: Pembroke. People are just absolutely beyond themselves in trying to get through to Ontario Hydro's one-call centre. It's just not working, and it's a good example of what happens when you turn around and you lose local accountability. You hit on that before, when they closed the local offices and went to a central location for billing etc. I'm sorry. It's just not acceptable to the rural customers and they're really having a very hard time accepting that.
Mr Conway: Let me ask another question. I think it's fair to say that in the committee there's a sense that there are going to have to be rationalizations at the distribution end, and you people have obviously worked out the beginnings of an arrangement for the rural, small-town, small-city Ottawa Valley.
But let me ask you this. Surely if you look at the area we come from, there are two realities. There's what I call the Highway 17 reality, running 160 kilometres from the town of Arnprior to beyond the town of Deep River, along which about 60% or 70% of the population in your communities is concentrated. But then there's that vast interior of what we used to call in geography the Frontenac axis, that great swath of east-central Ontario that goes from Eganville across to Lakefield, from Kaladar up to the southern boundary of Algonquin Park, a hell of a lot of territory, much of which is owned by Her Majesty, and the population scattered lightly through all of it.
Do you really want to take a good chunk of that on as part of your regional utility and, if so, how do you propose to manage what might look to some like high costs and maybe not a great revenue stream?
Mr Tom Freemark: That's mine? In our proposal here we have nine utilities looking together, and how we came together was that we were going to keep local offices. Having come from industry, there's a cost involved with that. Because of our local accountability and the idea that the customer owns us, we feel that these costs should be in the system, that we'll have to bear these costs.
Mr Conway: They are commercially bearable in the model that you're looking at?
Mr Freemark: Yes, our original study to the white paper. In defence, we haven't taken now whatever the costs are to get the rural assets. We have no idea, we have nothing to bear that on, but the principle here is that people do not want to phone Markham. They don't want to get a busy signal. They want to be able to talk. People can talk to any of the managers; any of our customers can talk to us directly. We don't have somebody in between putting them away, and we think it's important because electricity is such an important commodity to people in Renfrew county.
Are we crazy? No. We're Renfrew county; we'll look after Renfrew county. We'll take it on. If we're given the right economic situation here, we'll take it on, and that's what we're asking for consideration.
Mr Lessard: Electricity isn't vital just in Renfrew county; it's vital to the very economy of Ontario. It's one of those essential services that I can hardly imagine living without these days, although I know that people at one time were able to.
I wanted to start where you ended up, and that was, will the changes that are contemplated in Bill 35 cost less and will they benefit the consumer? I think you probably have some opinion about that, and I'm interested in knowing what it is.
Mr Lowe: I believe that, yes, it will benefit the consumer provided that the legislation as it comes down is designed in a way that is fair to the consumer. If the assets travel with the customer, then I think that, yes, it is feasible. If you expect us to pay twice for those assets, then no, definitely it will not work. But if the assets travel with the consumer, then yes, I believe it will be profitable for us.
Mr Lessard: I guess, following up on that, there needs to be a level playing field as well. You've made some suggestions in this legislation about things that need to be changed in order for that to take place, and one of them was to ensure that this provision about the contracts between Ontario Hydro and MEUs before the legislation are null and void and that that provision should be extended to other contracts as well. You've mentioned a number of them in here. I would like to have you elaborate on that and the impact of either having contracts that you've signed not become null and void or for that provision to not apply equally to other types of contracts.
Mr Rick Farrell: We are concerned with the speculators and brokers who are signing up some of our customers there now. We should all start off at the same spot and that people are committed. It might be putting some of our customers at a disadvantage if they're signed up with a marketer now.
Mr Gilchrist: You two have raised a number of concerns, some of them unique. I would just like to deal with a couple, if I can.
One of the first ones you talked about was the need for flexibility in how you select your board members. I just want to assure you that there would be no problem, if you choose to have an election, to then provide council with the names to submit for board representation. That would be an acceptable means of doing so. There is certainly no restriction on how you go about deriving the slate of directors.
Perhaps less supportive comments on your suggestions on section 86(4) about the need to eliminate the charges in that section at such time as the stranded debt is repaid, because if you look at the start of that section, that deals with municipal and school taxes.
You ended your presentation by saying you're very concerned that there be a level playing field. Is it your submission here today that in that level playing field, a private company that comes in would have to pay property taxes but the new corporation set up to replace the utility shouldn't? Is that level?
You get the tough ones, eh?
Mr Moore: They give me the tough ones.
I think I could refer to something which Ottawa mentioned this morning, and that is that you don't need two wires companies in the same locality. We are out here to give the customer of Ontario the lowest possible cost, and we see a lot of things in this legislation which are going to increase the cost of electricity to the customer and camouflage possibly tax revenue underneath nothing else but electricity rates.
Mr Gilchrist: Right now, 40% of what you pay Hydro -- you, not the customer -- is servicing of debt, and that doesn't change. The passing of this bill doesn't change the fact that you and I and everybody else in Ontario owes those billions of dollars because we've guaranteed Ontario Hydro's debt. So no matter how you slice that pie, the debt is still there, but it doesn't get any bigger. I'm always intrigued that people think somehow cutting that pie into a different shape raises the price. Perhaps if after today if you could supply a mathematical example, I'd be intrigued to see it, because so far, after six days of hearings, not one person has been able to posit a scenario where that would be the case.
My question concerns property taxes in general, because that's what that section is. Don't restrict your answer or your thoughts, please, to wires, because you have a lot of other things. If I build a cogeneration plant with a step transformer and service a couple of industrial customers, I'm going to be paying property taxes on all those assets. Why shouldn't the new corporation --
Mr Moore: As the municipal utilities do now. We pay grants in lieu.
Mr Gilchrist: And that's what this section says. Right now everything you pay is going to go to service the debt. After the debt is paid off, you're going to continue to pay it to the municipality, not the government of Ontario. So why are you raising that as a concern in your brief? Do you not believe that what you're doing today should continue on after the stranded debt is paid off?
Mr Freemark: Maybe I need a clarification. Wasn't it the difference that carries on? Maybe I've got it wrong. I know we have payments in lieu of. Was it the difference that carries on afterwards?
Mr Gilchrist: That's right.
Mr Freemark: Why does the difference carry on? Why can't we stay the way we are now, presuming we're paying proper --
Mr Gilchrist: Because, quite frankly, it's providing that level playing field that you suggested earlier. An outside entrant is going to be paying a certain cost, and this bill anticipates that everyone who is in that business, in any aspect of distribution, would be required to pay the municipality after the stranded debt is retired, so I think it's quite fair to anticipate that. I think wearing your current municipal hats, or the relationship you have, it's somewhat intriguing that you wouldn't see that the same taxpayers/ratepayers are going to be, to some extent, not inconvenienced at all. It may go from one pocket to another, but it stays in that same local community.
Mr Farrell: I guess from the point of view of a small utility, although we're all in favour of good deals for the customer, some of us run very close to the bone in small utilities, and any incremental cost will have to be reflected in short-term rate increases if we can't come up with any other efficiencies.
Mr Gilchrist: Again, I'd just like to remind you that it's not incremental. You're paying the stranded debt.
Mr Farrell: That's right.
Mr Gilchrist: So that's a cost that's there today. When that cost is replaced by property taxes, let's call it, in the future, it's not incremental. It's exactly the same amount of money. Quite frankly, the municipalities at that point would have the choice, if they want, to lower the property tax rate with the flexibility we've given you with the recent changes to the property tax legislation. If the municipality wants to then cut the price it charges all utilities, it can do that in the future to reflect that increased revenue. So I think that one is perhaps not a particularly legitimate concern, but I certainly appreciate the others you've raised, and we'll take them back to staff for further consideration.
Mr Lowe: Are you saying that once the taxes have been completed and the municipality takes over, we are going to be -- that in an amalgamation of municipalities, the ones that are in those utilities are going to be helping support the ones that are not in utilities that are coming into the amalgamation process? What I'm saying is, if you have four municipalities that are joining -- you have two municipalities that have utilities; you have two municipalities that are under Ontario Hydro. Once this is completed, the ratepayers of the existing utilities are then going to be paying -- one's going to have a benefit over the other, are they not?
Mr Gilchrist: No, because in theory everybody's getting electricity from somebody, and if you lower the cost to whoever their provider is, whether it's Servco or your local utility, obviously a lower cost can translate into a lower cost to the customer.
The Chair: Excuse me. I'm sorry. This is a conversation that I think should go on, but not at this particular point in time because I'm very cognizant of the fact that we have to be back and in committee here at 1 o'clock.
On that note, I'm going to thank you very much for coming before us today. You raise some interesting questions that I know our committee members are going to be carefully considering. Thank you very much.
Colleagues, we will recess to reconvene here at 1 o'clock.
The committee recessed from 1159 to 1302.
The Chair: Good afternoon, colleagues. Before we begin with our first presenter I would like to welcome Mr Lalonde, who is joining us for a brief time this afternoon. We're very glad you were able to come in.
Mrs Johns: Madam Chair, on a point of clarification: In one of the presentations this morning, they suggested as an MEU they were going to have to obtain the power or else they would have to make decisions about how they turned on and off power in specific places. I'd like to suggest that under subsection 4(1), clauses (c) and (d), the IMO's responsibility is to make sure that the power supply is guaranteed.
The Chair: Do you know which group that was?
Mrs Johns: The last one, Ottawa Valley.
The Chair: Thank you for that.
SIERRA CLUB OF CANADA
The Chair: Now I'd like to call the representative from the Sierra Club of Canada, the national office, please.
Good afternoon and welcome. If you would just begin by introducing yourselves, as I think you're about to do, and your position if you wish. You have 30 minutes for presentation time.
Mr John Bennett: Good afternoon, Madam Chair and members of the committee. My name is John Bennett. I'm the director of atmosphere and energy for the Sierra Club of Canada. My associate today is Paul Gregory. He's the youth climate change campaigner for the Sierra Club of Canada. He is part of our ongoing commitment to the training of our youth for the future.
The title of our presentation today is Making the Energy Competition Act Work for Our Health, Our Environment and Our Economy. The Sierra Club of Canada sees the changes you're contemplating as a real opportunity to take Ontario from the hard path of pollution and nuclear waste to the soft path of renewable energies, conservation and efficiency and to do it through competition that's fair and just.
My resumé is not included in the presentation, but just to put it in context, 20 years ago I was involved with the Ontario Non-Nuclear Network as the Greenpeace Canada nuclear campaigner, at which time I participated in the Porter hearings on electrical generation. In the 1980s and early 1990s, I was Greenpeace Canada's climate change campaigner and energy campaigner, and until 1995 I was the project coordinator for Belleville Green Check, which was a green community initiative of the Ontario government. I also spent about 18 years working as a reporter, 10 of them in Dr Galt's riding in Northumberland county.
Mr Galt: We won't hold that against you.
Mr Bennett: I don't hold it against you either. I got to know Howard Sheppard a lot better than I did you, because I was gone by the time you came along.
The first point I would like to make is that during the last 20 years of my involvement in energy and electricity matters in Ontario, what we have seen is successive Ontario governments from all three parties that listened for their advice on electrical generation and energy, from Ontario Hydro, from the Ministry of Energy and from the industry consultants. For us they're all part of the same group, and I think they have been giving you bad advice all those 20 years.
It was 20 years ago that I gave my first public presentation on electricity in Ontario, and it was to the public library in Burlington, Ontario. I was doing a flip chart on the Darlington power plant, and when I got to the page which said, "Ontario Hydro estimates the cost of Darlington will be $3.6 billion, but we think it will be $5.6 billion," two Ontario Hydro employees who had come to monitor my presentation -- they came to all of them, by the way -- leaped to their feet and said: "You're a liar. You're misleading these people." I think it's quite evident who was wrong and who was right about what nuclear power costs Ontario. We're faced with a mess. You have an opportunity to clear up the mess, and we'd like to give you some general guidance on how to do it and protect our environment and our health at the same time.
To do that, we'd like you to take a holistic approach. We have a mess with Ontario Hydro that needs to be fixed, but we have a lot of other messes that need to be fixed and we can fix them at the same time. The list of those includes climate change, and this is the major concern of my career at this point in time, but it should be yours as well considering what happened to this city and the rest of this part of the province and a great deal of Quebec in January. The ice storm that happened is the kind of event that you can expect to happen more and more often in Ontario and across the world if we don't do something to reduce our CO2 emissions. That cost $1 billion, just a 35th of Ontario Hydro's debt, but it could happen over and over again, so when you're thinking about to change how we sell and produce electricity in Ontario, think about how we can prevent those things from happening in the future. There's also a real health cost. I have included an appendix in the presentation on what those health costs might be in the future as the climate changes, as new diseases emerge in Ontario that haven't been here before.
Third, the federal government and the provinces are now involved in an elongated negotiation process which may end up in new laws and regulations that may impact the electricity market in Ontario. This is the time to anticipate those changes and put them in as part of the Energy Competition Act now.
The second area is air pollution. I know you have already been told this a number of times, but 1,800 people in Ontario die premature deaths every year from air pollution, hundreds of thousands become sick, tens of thousands are sent to the hospital, and the OMA estimates it costs us, you and me, between $400 million and $1.5 billion. We should be dealing with that problem as well.
The third problem is nuclear power. Nuclear power likes to maintain that it's a nice, clean, safe form of energy, but we all know that it's not, and even when it's running safely, our power plants are releasing tritium constantly. It's going into the environment. That's a cost and a problem that we have to face. We have to face what we're going to do with those plants when we finally decommission them. What are we going to do with all that high-level radioactive waste that's going to be dangerous and threatening to us for 200,000 years? We should be looking at an opportunity to get away from that kind of power generation system in the future. I'll make a recommendation about how to do that in a moment.
The next point I want to raise is how we price the electricity in the future. Do we price the electricity just at the operating cost of a coal plant? Or do we say: "We know there are a lot of associated costs that go on with the production of electricity. All those costs should be involved"? Today, coal-fired power plants are allowed to use our lungs as a waste dump. I don't remember them ever offering to pay me for that or hold an environmental assessment on my lungs or anyone else's lungs in order to operate and burn coal. The cost to Ontario, as I said earlier, is close to $1 billion a year. That cost should be reflected in the price. If it's not, then the coal-burning providers are going to be subsidized in a hidden and sneaky way; some would say even worse than sneaky. That price should be involved.
With nuclear power plants, all the costs incurred in building those plants, in rebuilding those plants, in fixing those plants and in burning coal when they were shut down should be attributed to those plants and the price of electricity coming from those plants should be attributed completely. There are other items as well. Those power plants don't pay the same cost of insurance that a private producer would pay. The federal government guarantees their insurance. All the costs of producing power from a nuclear power plant should be included.
When you look at renewables coming on stream in the future, they're going to have to pay their entire costs. They won't have those negative downstream costs but their price may come in a little bit higher. It will appear to be more to consumers when in fact it won't be, because consumers will be picking up the bills from other pockets.
The next point is to talk about security of supply. Today we have a small number but some of the largest power plants in the world. Just imagine what happens when a pinprick is found in a pipe at Pickering. We lose 2,000 megawatts and suddenly we have to fire up a coal-fired plant in order to replace that power. If there's a major weather event we could lose the main delivery line, say, from Bruce. If the ice storm had happened a few hundred kilometres to the west, we could have lost the main delivery line from the Bruce. That could have isolated not only the towns that were down from the power source but we wouldn't have been able to get the power out of the plant. That could affect us.
Second, when you have large plants, you have large, dependent workforces in particular areas. If we were to move to renewables, those plants could be spread across the province into 20 and 30 and 40 job markets so that we'd have a more diffuse market in terms of where it was coming from and be more secure. In the long run, we'd be better off to have more small plants that would be secure in supply.
As my final point I'd like to mention that we need full disclosure. Every person has a right to know what damage they're doing to the environment when they turn on their lights. We know that with that information, there will be some parts of the population that will use that information and act. We don't think it will significantly affect the sales of electricity but, in the short term, it's a good way to get started in making sure that we have an informed public.
That brings me to the recommendations that are contained in the report:
(1) That the Ontario Energy Board be instructed through legislation to promote the development of non-polluting, environmentally benign technologies as well as aggressive conservation and energy efficiency measures by requiring electricity suppliers to provide gradually increasing percentages of electricity from renewable sources and to maintain aggressive demand management programs;
(2) That all health, environmental, property damage, insurance, current debt and other real costs associated with power production must be incorporated in the price to the consumer;
(3) That the Ontario Energy Board should be instructed through legislation to move Ontario's electricity supply system from fossil fuels and nuclear energy to sustainable, renewable supplies of sources located throughout the province;
(4) Suppliers must be required by law to list the generation sources and a description of the impact of emissions and other potential environmental implications on monthly bills -- for example, their carbon dioxide, nitrous oxide, VOCs, sulphur dioxide, tritium and waste products, including nuclear waste generated.
That concludes the presentation part. I'll be glad to answer questions.
The Chair: Thank you very much. We have four minutes for each caucus for questioning beginning with the NDP.
Mr Lessard: Thank you very much for your presentation, in which you pose the question, is this like the long jump or the 100-metre dash? You say that it's more like the long jump. We as legislators think that it's more like a giant leap of faith that we're being asked to take, even more than a long jump. When the government says to us that we're going to have lower rates and we're going to have a cleaner environment as a result of Bill 35, I'm somewhat skeptical that that will be the result.
One of the things that concerns me is that although it's a stated objective that we improve energy efficiency, really in Bill 35 there is more of an incentive, in a competitive environment, for people to come into Ontario to sell more power. There really isn't much of an incentive to become more energy-efficient. If you let the market make those determinations, energy efficiency will only be achieved if the price rises, but the government says they want the price to go down. My question is, how is it that we ensure that we achieve the savings and improve the environment through energy efficiency measures and make sure that gets put in the bill? What do we need to put in here to ensure that we're conserving energy and not encouraging more consumption?
Mr Bennett: I'm not going to comment about exactly where to put it in, but I think that in the licensing process, if the Ontario Energy Board has instructions to take us from one kind of energy system to another through a gradual process, then it can grant licence to those companies that are going to meet their requirement and it can require them to make the changes similar to the changes they've forced Ontario Hydro to do on rates in the past and how they've done with the gas companies in forcing them to invest in demand-side management.
The Ontario Energy Board has to have the authority to do that. It has to be in the legislation so it's clear that this is what they're supposed to do.
Mr Lessard: Do you think it'll happen without it being in the legislation?
Mr Bennett: No, it won't. It'll be another hollow promise.
Mr Galt: Thank you, Mr Bennett, for your very thoughtful presentation. A common theme is evolving from the various environmental presentations. Just maybe a couple of words on our present status, which is such that it's almost impossible, if not impossible, to get green power onto the grid unless it's a demonstration project by Ontario Hydro. At the same time, we're presently in the position whereby there's no limit on what Ontario Hydro can import into Ontario. It can be very dirty power from some of the dirtiest stations in the Ohio Valley.
I think you would agree that at least moving ahead, we're going in a more environmentally friendly direction than the present. This legislation is enabling legislation to develop the regulations that are necessary, that are needed to protect our environment. Do you see anything in that legislation that would impede the kinds of changes you would like to see?
Mr Bennett: As long as the environmental protections aren't part of the act per se, then I don't see anything that's going to take us from one kind of a system to another one. What I see is a set of rules that'll keep us in the same situation we're in now unless the rules are put clearly in legislation from the start that this is the goal.
I don't believe that the goal should be entirely limited to, "Let's create competition in the electricity market." I think the goal should be, "Let's make our electricity market be environmentally friendly and positive to our economy at the same time." If you take those three goals and put them in the preamble and then give the Ontario Energy Board the authority to act, they can take us to where we want to go, which is to a non-polluting electrical system.
Mr Galt: Basically that is in the preamble of the bill. I'd have to dig out the exact section for you. But we are into consultations at the Ministry of the Environment and will be into very extensive consultations, along with putting the final regulations on the EBR, as you're quite aware. I take it for granted that you are involved in the consultations or will be.
Mr Bennett: One of my associates is. Her report was that when she raised the question of carbon dioxide, she was told, "Thank you very much but that's not part of the discussion." If we're not going to be discussing carbon dioxide in terms of power generation, we're not really talking about the environment.
Mr Galt: Ontario Hydro already has a commitment to the 1990 levels by the year 2000 and a 10% reduction by, I believe, 2005. I may be out just a little bit on the last figure, but certainly there is a commitment for a 10% reduction in the very near future. So there is quite a commitment already in place on the greenhouse gases.
Mr Bennett: Just to make a point that we made in the presentation, Ontario Hydro may well be committed to that, but if a pipe bursts at Bruce or Darlington or Pickering in the next year and a half, they won't make it because they'll have to turn on coal in order to supply the electricity. We're too dependent on too few large-scale sources.
Mr Galt: I'm interested in what you consider as renewable energy, of course wind and solar and probably biomass. When it comes to hydraulic plants to produce electricity, do you consider those as renewable or as green power?
Mr Bennett: It depends on what state they are in now and what would have to be done to bring them up. There are certainly many versions of hydraulic power that could be developed in Ontario without disturbing the environment. Each one would have to be individually examined, but in terms of renovating existing small scale and that sort of thing, a run of the river, those are the kinds of systems we look at. There are no more James Bays left in Ontario, there are no more big sources, and we wouldn't support them either.
Mr Galt: How much power do you think could be created by renewable energy as a total package for Ontario as it sits now? What percentage would be reasonable to produce -- you've mentioned the ice storm. What happens to wind power when the ice storm comes on the windmill? What happens when the sun goes out when the solar panels are out there?
Mr Bennett: I've seen several scenarios over the last 20 years that could bring us to the point where it could be our sole source of power, but it's not something that's going to happen today or tomorrow. I think that's an unfair question. What I'm asking you to do is just establish the rules that will get us there. If the rules are there, we'll develop enough supply to meet the needs, but we need the rules and we also need aggressive conservation measures.
Mr Galt: Just for clarification, can I go back to a comment you made?
The Chair: Very briefly.
Mr Galt: Did you say all the power could come from wind and solar, that kind of renewable energy?
Mr Bennett: Ultimately that's what we'd like to see.
Mr Cullen: I'd like to thank you for your presentation to this committee. The work of the Sierra Club has I think been very important in raising public consciousness about environmental problems. Certainly my colleague Jean-Marc Lalonde from Prescott and Russell and myself here in Ottawa are very well aware of the impact on the environment from the recent ice storm and the contribution of global warming towards that.
I just want to pick up on one of the comments here, that the underlying thrust of the government's bill is to improve Ontario's cost-competitiveness. The notion is that Ontario's cost advantage of power and electricity has been eroded and therefore we need to restructure how we distribute this power source so that we can reduce our costs and compete elsewhere. But I see from your presentation here that we haven't fully comprehended all the costs to producing power. You're suggesting that these things ought to be factored in, such as what we do in dealing for example with cancer. I can very well remember that the federal government and I believe the provincial government, in deciding to ban smoking in the workplace, did it not only because of work health but they also did it because it reduced their cleaning costs etc. There were a number of factors. But you think we're not covering all the factors of the cost of production of power here in Ontario.
Mr Bennett: We never have. We've always allowed large industrial sources and Ontario Hydro to use the air as a waste dump. We haven't charged a fee for that and we're paying the price.
Mr Cullen: So you think as part of the licensing process each applicant, depending on the nature of the power source they're bringing forward, should provide the equivalent of some surety against claims for damage because of the kind of power they're producing; a bond, so to speak.
Mr Bennett: I think they should actually be contributing towards the health costs of Ontario in cash, and the cash should be collected from the customer because they're deriving the benefit of the electricity. We should pay for the whole cost. We shouldn't hide the cost of anything.
Mr Cullen: I just want to pick up on the point Dr Galt was talking about in terms of Ontario Hydro's commitment to reduce hydrocarbons, for example, in the atmosphere, the 10% target. I see that you're looking at a role for the Ontario Energy Board to set conditions in their licensing. Are you suggesting, because we're all talking about a level playing field here, that the commitment that's being asked for by Ontario Hydro should be asked of every participant that provides electricity in Ontario? This is to reduce emissions, to reduce the negative impact on the environment, to set standards, whether you're a producer -- obviously some areas would benefit over others, but that's because of producing cleaner energy. Those who use coal would have to reduce their emissions, those who would use nuclear power -- I'm thinking of, say, a company coming from New York or a company coming from Ohio that wants to sell electricity here in Ontario -- have to have that reduction in emissions as part of the licence application.
Mr Bennett: I think we'd find that if the American government, once it comes on stream with Kyoto, had a power plant in Ohio selling electricity into Canada, we'd be claiming that those emissions to generate that electricity are actually Canadian emissions. Even though they originate in the United States, if they're supplying energy to Canada, then they're our emissions and we'd have to put them into our calculations to reach our Kyoto goal. So yes, you would have to take all those things into account. When you start calculating all the complexities of nuclear power and coal, you conclude that wouldn't it just be better if you didn't make emissions when you produced electricity or if you didn't make radioactive waste, because it's a better system. That's why we're arguing fundamentally to use this as an opportunity to take us off the hard path of pollution and on to the soft path of renewables.
The Chair: On that note, we thank you very much for coming before our committee today. We appreciate your thoughts on this very important legislation.
Mrs Johns: Madam Chair, these sections in the act that Dr Galt was talking about with respect to the purpose clause and energy are subclauses 1(d) and (g) in the Electricity Act, and section 1, paragraphs 4 and 6 in the Ontario Energy Board Act.
ATOMIC ENERGY CONTROL BOARD
The Chair: I am now calling on representatives from the Atomic Energy Control Board. Good afternoon and welcome to the committee.
Dr Agnes Bishop: I'm Agnes Bishop, president of the Atomic Energy Control Board. To my far right is Mrs Audrey Nowack, senior legal counsel for the Atomic Energy Control Board; to my immediate right is Mike Taylor, who is the director of the power reactor evaluation directorate; and to my left is Pierre Marchildon, who is the director general of the secretariat of the board.
Good afternoon and thank you for inviting the Atomic Energy Control Board to participate in your hearings on Bill 35. As president of the Atomic Energy Control Board, I appreciate this opportunity to express our views on the government of Ontario's plans to introduce competition into electricity markets and to restructure Ontario Hydro.
The AECB's purpose in appearing before you today is not to either oppose or endorse the move to a competitive electricity market and the restructuring of Ontario Hydro that would be implemented through the Energy Competition Act. Our objectives are to ensure that the concerns of the AECB as they relate to the operation of nuclear facilities are well understood and to suggest points of clarification in two clauses of the bill. It might be useful for me to put my remarks in perspective by briefly explaining the role of the AECB.
As you are aware, the AECB has no role in establishing energy or economic policy in Ontario, and we fully recognize the provincial government's authority over energy markets. However, the federal government has primary responsibility for nuclear matters. Therefore, when electricity is being generated by a nuclear reactor, as is the case in Ontario, New Brunswick and Quebec, the AECB has regulatory control over the safe operation of those facilities.
The AECB was established in 1946 under the authority of the Atomic Energy Control Act. Our role is to regulate the nuclear industry in Canada in such a manner that the development and use of nuclear energy do not pose an unreasonable risk to health, safety, the environment and national security. As you may know, Parliament passed the Nuclear Safety and Control Act, NSCA, in March 1997, to provide Canadians with a more modern and effective regulatory framework for the nuclear industry. Under this act, the AECB will become the Canadian Nuclear Safety Commission, a name that will better reflect our mandate and modern role. Among other things, the new act enables the commission to require financial guarantees as a condition of receiving a licence. This is an important issue that I will return to later. The new act is expected to come into force in early 1999 after the necessary regulations are finalized.
The AECB is an independent federal agency that reports to Parliament through the Minister of Natural Resources, Canada. To achieve our mandate, the AECB administers a comprehensive regulatory and licensing system. In many areas we have a "joint regulatory process" to see that the concerns and responsibilities of federal and provincial government departments in such areas as health, the environment, transport and labour are taken into account in our regulatory process.
Turning to the issue at hand, the AECB is interested in the deregulation of Ontario's electricity market and the restructuring of Ontario Hydro for three reasons. First, it is important to all Canadians that the proposed changes do not compromise the safe operation of nuclear stations. Second, we must be assured that adequate financial guarantees are available to cover the costs of decommissioning Ontario Hydro's nuclear facilities and managing radioactive wastes. Third, we must be satisfied that the organization named in an AECB licence is in fact competent and in control of the day-to-day operation of the licensed facility.
Let me expand briefly on each of these three points. From a safety perspective, it is important that structural changes in Ontario's electricity sector take into account the specific needs of nuclear power stations. Our two main concerns with the Ontario government's initiative are the control of the power grid and the financial pressures that are likely to result from the move to a competitive market. Both factors are important to the safe operation of nuclear reactors, and the impact that restructuring might have on these matters must be properly assessed and understood.
The overall control of the power grid has safety implications for nuclear stations in two ways. First, the safety case for Ontario Hydro's nuclear power stations assumes a certain level of reliability with respect to the grid. From an operational point of view, we would therefore expect power manoeuvres on the grid to be governed by rules that will ensure that the probability of power interruptions to nuclear stations is no greater than at the present time.
Second, I would like to point out that Canada's nuclear plants were designed to supply baseload electricity. They are not well suited to constant changes in requested output. The AECB would therefore also expect that nuclear stations not be required to change their power output frequently just because cheaper power can be purchased from elsewhere as market conditions fluctuate. At a minimum, the safety implications of operating in such a manner would have to be properly assessed and found acceptable before changes in operating mode could be authorized.
Let me now explain our interest in the financial pressures that may result from the move to a competitive market. As the business environment changes, care must be taken to ensure that when making decisions related to safe operation, nuclear operators are not unduly influenced by the pressure to compete against other energy producers or to make short-term economic gains at the expense of longer-term safety objectives. In a market-driven environment, plant maintenance, staff training and the size and qualifications of the workforce are examples of areas where issues of cost may impact on nuclear safety. Having adequate funding does not, of course, guarantee that nuclear plants will be maintained and operated safely in the long term, as can be seen by Hydro's current problems. It needs to be complemented by good management. But it is equally clear that adequate funding is necessary. With respect to this, the AECB would expect that the move to a competitive market would not jeopardize the implementation of Ontario Hydro's nuclear recovery plan. An important element in judging the success of that plan will be the sustainability of the collective measures put in place.
Our second area of concern relates to the financial implications of the proposed restructuring on long-term nuclear safety.
It is the federal government's policy that the producers and owners of radioactive wastes are responsible for the safe management of those wastes. This means that those utilities having nuclear power facilities are responsible for the costs of decommissioning their nuclear stations and management of their spent fuel. The federal policy will be implemented by requiring nuclear utilities to provide financial guarantees as a condition of receiving a licence from the Canadian Nuclear Safety Commission.
The prospect of a new electricity regime in Ontario raises some obvious and important questions about financial liability related to nuclear generating stations. I recognize that the Energy Competition Act includes provisions regarding the division of assets and liabilities between the proposed competitive electricity generating company and the proposed Financial Corp. The AECB has no position on the division of Hydro's assets and liabilities or on the associated issue of dealing with stranded debt. But I want to make the AECB's position clear: Adequate and appropriate financial guarantees must be assured under the new regime. Without an appropriate financial guarantee, the commission is unlikely to issue an operating licence under our new act. Clearly, the AECB will need to understand the respective roles of the commercial electricity companies that will be created by Bill 35 and the provincial government in assuming this liability.
For the committee's information, the AECB is developing a policy on financial guarantees for decommissioning activities and a guide for licensees, both of which will be available to licensees when the new act comes into force next year. These documents will clearly specify which licensees will be required to supply financial guarantees, what types of guarantees will be acceptable and how the amount of financial guarantees will be calculated. With respect to the types of guarantees, it is quite likely that there will be different types of mechanisms that will satisfy our requirements. Such mechanisms might range from protected cash funds to binding commitments by government.
The rationale for the third issue I mentioned, the need to ensure that the named licensee is in control of day-to-day operations of an AECB-licensed facility, is self-evident. If the owner and operator of a nuclear power station are not the same entity, the AECB must be assured that the operator, that is the licensed party, has adequate managerial control of the facility to ensure its safe operation. In other words, the operator must be making the day-to-day decisions about the facility and must be clearly accountable for all facets of its operation.
It is important for everyone involved in the restructuring to understand that AECB licences cannot be transferred by the licensee, nor can reactors be operated without a licence. New operators will need to go through a formal licence application process, which could place some constraints on the timing of Ontario's plans to deregulate electricity markets and restructure Hydro.
I want to emphasize that these issues are real concerns of the AECB which could have an impact on our ability to permit the operation of nuclear power stations by any new competitive electricity-generating companies. Before the AECB or the new commission could permit such operation, it would have to be satisfied that there is no undue hazard posed by the rules surrounding the operation of the grid, as they would impact on the operations of nuclear plants, or by the relationship between the owners and operators of nuclear plants. The nuclear regulator would also have to be assured that the new operator is competent and that appropriate financial guarantees are established. It may not be possible to permit operation of nuclear power stations until these issues are clearly addressed.
This committee may want to take these issues into consideration when preparing the timetable for implementing the legislation we are discussing today. I am pleased to inform you that my staff are collaborating with the staff of various involved provincial ministries to promote resolution of the issues. Staff will also be meeting with the Market Design Committee in the very near future to ensure that that group is aware of our interests and concerns in this important matter.
Those are the broad areas of concern the AECB has with Ontario's electricity restructuring initiative. However, we also have a couple of specific concerns with Bill 35 that I would like to raise with the committee. We believe these issues can be easily addressed through simple amendments that will not significantly alter the scope or intent of the proposed legislation.
First, I would like to bring your attention to section 37 of the Electricity Act, 1998, which deals with emergency planning. We believe the current wording of this section could lead to confusion on an issue where clarity is absolutely essential. Section 37 proposes to obligate the Ontario Ministry of Energy, Science and Technology to require the Independent Market Operator and the operators of nuclear power stations to prepare and file emergency plans with the minister and to authorize the minister to direct implementation of an emergency plan.
First, I should point out that regulatory authority over on-site emergency preparedness at nuclear facilities is exercised by the AECB as the federal nuclear regulator. The AECB requires licensees to prepare on-site emergency plans, which the AECB approves as a condition of the licence. We recommend that section 37 be revised to acknowledge federal regulatory jurisdiction for on-site emergency preparedness planning.
Of course we recognize that off-site emergency preparedness planning is an area where the provinces exercise authority, and when considering a licence to operate a nuclear plant, the AECB accepts the off-site emergency plan approved by the responsible provincial ministry. Currently, the Ontario Solicitor General is responsible for off-site emergency planning. The AECB has a good working relationship with the Ontario Solicitor General and we have been working with his office to harmonize our respective roles in emergency planning. We will extend that to the Ministry of Energy, Science and Technology should it become involved as a result of the legislation under consideration today.
The AECB is also concerned with clause 105(1)(a) of the Electricity Act, 1998, which would give the proposed Electrical Safety Authority the power to make regulations for electrical equipment and systems in Ontario. The broad wording of this clause could be construed as implying provincial jurisdiction over the design, construction and operation of nuclear reactors. Although we have been assured by provincial officials that this is not the intended meaning of clause 105(1)(a), we recommend that the section be clarified to avoid confusion or the perception of overlap and duplication.
Let me close by reiterating that the AECB neither opposes nor endorses the restructuring of the Ontario electricity market and the restructuring of Ontario Hydro that will be implemented through Bill 35. Our objective is solely to ensure that the rules of operation in the new environment, as they relate to nuclear facilities, are well understood from the outset. We believe Bill 35 needs to clearly distinguish between nuclear and non-nuclear activities where appropriate, and to acknowledge the federal role in the nuclear area. This can be achieved by a few minor wording changes in the sections to which I referred earlier.
Ladies and gentlemen, thank you for your time and attention. I or my colleagues would be pleased to answer any questions you may have at this time.
The Chair: We have three minutes for questioning from each caucus. We'll begin with the government caucus.
Mrs Johns: Let me start, and hopefully some of my colleagues have some questions.
I'm struck by the wording, "deregulation of Ontario's electricity market." It would appear to many who have come before us that there are substantially more regulations involved in this than there have been in the past. In fact, the government believes that we're just introducing competition into the marketplace. I'd like to understand why you think this is deregulating the market.
Dr Bishop: When I give a reference to a deregulated market, I am talking about a competitive market.
Mrs Johns: So to you competition and deregulation are the same thing?
Dr Bishop: In terms of the commercial aspects only. I'm not talking about safety regulation.
Mrs Johns: Let me just say for the record that we believe we've added more regulations, we've given the Ontario Energy Board more power to control, and we think that's a step in the right direction. So I would disagree with that, but I certainly will try to consider what you're saying in the future.
Dr Bishop: I wonder if I could just repeat that when we are using the word "regulation," we are not talking about safety regulatory aspects. So I would not argue with you in terms of regulatory controls you're putting in.
Mrs Johns: I'm fighting internally here, and I think people who were on the select committee would feel the same degree in their minds. I listened to this, and as we went through the select committee we heard what you said and then we saw what happened at the nuclear plant with the Atomic Energy Board. You've taken a very powerful stand here about us trying to move to a competitive marketplace, which we think will be better for the people of Ontario. You say you're going to be tight on the licensing, you're going to be concerned about the financial aspects. I think in the financial liability section you talk about implementing financial guarantees.
My question, which I know is not nice of me to ask, is, why is all this happening so damned late? They've been in process for 40 years here and nobody has taken these on. The government of Ontario decides it's going to move forward and all of a sudden there are all these things that you're deciding to implement. I guess my question is the same as it was at the select committee. I wish some of these things had been in effect when I was a child and we would have a better nuclear industry now, rather than jumping on to the bandwagon much later.
Dr Bishop: There are two issues there. Number one, the new act was under preparation long before Ontario Hydro was considering its new restructuring. So the new act and the powers within that new act are not related to the step which the province of Ontario is taking over Ontario Hydro. I do not believe the two are related if you look at the time frame in terms of of the new act for the Atomic Energy Control Board.
I can't answer, obviously, why certain things were not done 50 years ago or 40 years ago. I would only say to you what is occurring now and that the NSCA, the new act, is not related to the Ontario Hydro situation. But it does makes changes in terms of how the AECB or the new commission is going to have to carry out its regulatory activity, including the requirement for fiscal assurance, for decommissioning, and for waste management control.
Mr Conway: Dr Bishop and colleagues, we are pleased to have you here today.
This is, as Mrs Johns has indicated, very strong testimony. It reminds me, and I hope it reminds the entire committee, that the bulk of Ontario Hydro is the nuclear power division, in terms of its output, its assets, its liabilities, and most of its problems apparently -- not all of them, but a goodly number of them.
I think what I hear you saying, Dr Bishop, is that there are some issues here that are going to be central to how that new policy framework around commercialization is going to affect the area of this business that you regulate; namely, the whole nuclear power division. What would you estimate, at the current levels of your understanding, the downstream costs of waste management and decommissioning with the existing Ontario Hydro nuclear power division to be?
Dr Bishop: I knew that question would probably be asked, and I'm hesitating to give even a ballpark figure. There are a couple of reasons for that.
At the moment, the federal government's response to the Seaborn committee in regards to management versus disposal has not yet been put before us, and there is a different cost factor in there. So I'm not prepared to give a cost factor per reactor or per station in terms of how many millions that --
Mr Conway: I understand that, but then to go the next step, I hear you very clearly on page 3 of this brief. You're basically telling the committee of the Legislature and the people of Ontario that you're not going to allow a situation to develop where Ontario Hydro decides to lease or swap some or all of its nuclear assets to an actual operator -- it might be Duke Power, it might be the Acme Power Corp, it might be CanGen; it could be any number of possibilities -- without there being met some very clear financial and other requirements. Is that not correct?
Dr Bishop: That's absolutely correct, because you now have new operators. The new operators must apply for a new licence. It may not be very difficult to obtain the new licence or it could be very complicated, depending upon the application of the new applicant.
Secondly, whether it was the old Ontario Hydro or the new one under the new act coming up, the same financial guarantees would have to be put in place.
Mr Conway: Given the number of flags that you have introduced here this afternoon, the number of very important questions that you have raised, is it likely that there could be significant change in the nuclear power division of Ontario Hydro over the next 12 to 24 months?
Dr Bishop: This will depend entirely on what the new company presents to us as their new means of operating. I don't know yet. The AECB has not received that. I don't know whether there are going to be insignificant changes or major changes.
Mr Conway: But surely if I'm a potential partner -- and on the select committee of which Mrs Johns and I were a part, and Mrs Johns is absolutely right, what we saw a year ago was not a very pleasant picture. The committee agreed in the main that we would be anxious to look at some kind of partnering to see if we couldn't clean up at least the management of that deeply troubled Ontario Hydro division.
I guess the question I have is, have you seen anything, say in Britain, about behavioural changes there that would give us some idea of how quickly we might move forward in Ontario with perhaps new operators?
Dr Bishop: I think certainly there have been stations in parts of Britain that have changed from a crown corporation to some private corporation. British Energy, as an example, are doing that. Stations have in some cases improved. In other cases, the total amount of improvement that the regulator would like to see has not occurred.
So there are situations that could improve the present management, and we have accepted the nuclear asset optimization plan that the present management has put into place as a solid, integrated plan. What we are waiting to see is that they can carry out that plan, implement it and sustain it. We would want to make absolutely certain -- in fact, it is an area of some concern to us. If those new implementation plans for the improvement should be in any way put behind schedule because of these new plans for Ontario Hydro, I believe that Ontario Hydro would be in very deep trouble.
Mr Lessard: Thank you very much for your presentation. I was struck by the statement made on page 3, and I'll quote: "Without an appropriate financial guarantee, the commission is unlikely to issue an operating licence under our new act." That's pretty strong stuff.
As part of the financial guarantee that you're expecting is an amount sufficient to cover the cost of waste disposal and decommissioning of nuclear power plants. The most recent estimate I have is that that is $18.7 billion, and that is a figure that is currently under review. I would assume you have some role to play in the evaluation or assessment of that figure and that it's quite possible that the estimate is going to go up. Until we know what that final figure is, we don't know what the liabilities are that are going to be transferred from Ontario Hydro to the new company and we don't know what the financial picture is for the stranded debt.
Dr Bishop: That's correct. As I said, the AECB is not interested in the stranded debt. We are interested in having enough money to ensure that we are not left with orphan stations, orphan nuclear facilities, where there is not appropriate funding for decommissioning and where there is not appropriate funding for long-term waste management.
On day one when our new act comes into being, we have the power to do that, to require the financial guarantees. But it must be done in a sensible and responsible way, and there may be some time before we have to in fact act on that, because our licences, as you know, are every two years. In utilities that have been granted a licence under the old act, it will not be until they are due for a new licence that we will be putting the new act requirements into place for that licence.
I know of very few countries that do not require financial guarantees for decommissioning. I do not know of any situations where countries would leave a utility or a nuclear facility of the degree we are talking about without being able to guarantee to the public that there will be sufficient funds available. How that is worked out will depend on what the relationships are between the new company with its operator and whether there are relationships with the provincial government.
Mr Lessard: Just to follow up on that, when you're talking about the new company, I'm trying to clarify whether you consider the transfer of assets and liabilities from Ontario Hydro to the new generating company to be a transfer that requires your approval in order to effect.
Dr Bishop: What we are requiring is that the new operator must apply for an operating licence.
Mr Lessard: Is that the company we're calling Genco here?
Dr Bishop: That is the company you're calling Genco.
Mr Lessard: OK. Thanks.
Mr Conway: Ask not for whom the bell tolls.
The Chair: Thank you very much for coming before the committee today with your information. We will take this into consideration as we move forward on this bill.
Colleagues, the presenters for the next time slot, AGRA, are unable to be with us this afternoon. We have their brief; it has been distributed to you for your review. If we can find time for them to make a presentation further on in the week, then we will do so.
CONSUMERS GAS ENERGY INC CORNWALL ELECTRIC
The Chair: The good news is that we have Cornwall Electric ready to make their presentation now, if they would come forward. Good afternoon. Thank you very much for coming before us.
Mr Perry Stover: Thank you very much, Madam Chair and members of the standing committee. My name is Perry Stover. I am here today on behalf of Consumers Gas Energy Inc and Cornwall Electric. With me today is Robert Winn. Robert is a general manager of Cornwall Electric, and he'll be talking specifically to some issues that Cornwall would like to raise with the committee.
We welcome the opportunity to participate in today's proceedings and, like other delegations you've already heard, we are pleased to offer our comments and our suggestions with respect to Bill 35.
I think it's in order to give a brief background of Consumers Gas Energy Inc. For the sake of brevity, I'll refer to it as CGEI. CGEI is a wholly owned subsidiary of IPL Energy, a Canadian company. CGEI owns and manages a group of energy utility and energy services companies that include Consumers' Gas Co, Consumersfirst, Consumers Gas Utilities and, recently, Cornwall Electric.
CGEI commends the initiative taken by the government to introduce this package of reform to bring competition to Ontario's electric industry. We believe competition will promote energy efficiency gains, create jobs, and improve customer choice in both energy commodity and energy services.
We applaud Bill 35's practical approach to societal concerns such as customer protection and protection of the environment. The bill also provides for industry transitional rules while at the same time establishing municipal authority over publicly owned electric distribution utilities and permitting private ownership should this be desired by the municipality.
The city of Cornwall, in recognition of market uncertainties and financial risk in a deregulated electricity marketplace, chose to exit the electric distribution business by selling the local utility to CGEI. In so doing, the city assured employment for Cornwall Electric staff, guaranteed three years of rates, established a rate-incentive mechanism to keep future delivery rates low, and received a cash payment that wipes out the city's debt and, with the surplus, establishes a local improvement fund that will stabilize property tax for years to come.
All this was made possible in advance of Bill 35 because Cornwall Electric was never part of Ontario Hydro's power grid and, as such, was exempt from the Power Corporation Act. The unique status of Cornwall Electric is significant and is relevant to our submission in respect of Bill 35. To give you Cornwall Electric's submissions I'll turn it over to Robert Winn.
Mr Robert Winn: Good afternoon. Cornwall Electric's history has made us an anomaly within the province, and with the risk of going on too long, I will give you a short rundown of Cornwall Electric's history. We were founded in 1887 when Canada was merely 20 years old and fully 19 years before the setting up of Ontario Hydro. In 1902 control of the company passed to Sun Life Assurance Co where it remained for 75 years. During that period we ran the freight railway system -- electric of course -- for local mills and factories, we ran the electric streetcars and trolley buses and later diesel buses. We even ran St Lawrence amusement park at the site of the present St Lawrence College in Cornwall, and oh yes, we ran the electric utility.
By 1977, when the city bought our shares, we were focused solely on the electric utility. In 1987, our 100th birthday, our special centennial project was to acquire St Lawrence Power from Niagara Mohawk. St Lawrence Power served the western part of the city of Cornwall and also the Mohawk territory of Akwesasne -- at least the part in Ontario. In 1994 we again led the way by creating Cornwall District Heating, a cogeneration project using natural-gas-fired piston engines to generate about 4% of our electricity requirement and capture the waste heat and pipe it as hot water to heat 15 institutional buildings within the city. Most recently, two weeks ago, we had a new owner, Consumers Gas Energy Inc, with the sale of the shares of our company.
Electrically, we're not part of Ontario. We're actually part of New York state. New York state is 30 degrees out of phase with Ontario Hydro's system, so we need to have expensive phase shifters to connect on to the Ontario Hydro grid. We are fed by lines owned by Cedar Rapids Transmission Co, which are possibly the oldest operating 115,000-volt lines in North America. Cedar's lines were built by Alcoa in 1915 to deliver power from Quebec to Alcoa's smelter in Massena, New York. It's a line of approximately 60 kilometres, 40 of which are in Ontario. Hydro-Quebec, for its part, bought the Cedar's transmission lines in 1985.
Notwithstanding Ontario Hydro's massive impact on the Seaway construction 40 years ago, Cornwall, the Seaway city, has never bought any power from Ontario Hydro. Why is this? Because we could always do better elsewhere. It was purely a commercial decision. Customers in Cornwall pay less for their electricity than most other customers elsewhere in Ontario.
That brings us up to date to where we are today. Now I'd like to discuss what we like about Bill 35, because we are here really in support of it, and then discuss a few topics of concern to us.
The first issue we like about what we see in Bill 35 is competition. We've been buying power competitively for many, many years and I'm here to tell you that competition's good. An organized market with defined access to the grid is even better -- better than what we've had heretofore.
The second thing we like is the stated intention to level the playing field. Remember, we've been a very tiny player in a market dominated by very large players. Here we concur with the Municipal Electric Association and others that the intention to level the playing field must be backed up by necessary regulation in order for it to happen.
Another aspect we like is the creation of an independent Electrical Safety Authority. This is part VIII of the act. This is not a high-profile part of the act by any means, but one that's very necessary for the safety of all Ontarians. We like the licensing of marketers and making them subject to the consumer protection laws. In our view, this can't happen quickly enough. We already have many complaints from our customers about bad business practices from some of the marketers.
We like schedule C, which is the tiniest little part of the bill. It expands the definition of "participating employer" in the Ontario municipal employees retirement system, OMERS. This goes a long way to removing the anxiety of employees in the municipal hydro sector. Generally, these are long-service workers who tend to stay in the industry for their entire careers.
Finally, we have to like the governance of municipal utilities. Cornwall Electric in many ways is the prototype for what you've got in the act. We're incorporated under the Ontario Business Corporations Act, the city was the sole shareholder that operated it as a stand-alone, dedicated-purpose entity, and in the last year, a year-long review of its ownership and sale of the utility to Consumers Gas Energy we think makes us a prototype again.
I'd now like to address some specific concerns for Cornwall Electric. Those concerns are the timing of the effective date of schedule C -- I'll explain that in greater detail -- the issue of the stranded debt of Ontario Hydro, Ontario Energy Board regulation and the fate of existing power contracts.
Under existing legislation, our employees cannot remain in OMERS. Schedule C expands the definition so that we will be able to rejoin OMERS at some point to be defined later, but what happens to our employees' pension for the few intervening months? We're working closely with the Ministry of Municipal Affairs and Housing and the Ministry of Energy to seek an amendment to allow Cornwall Electric employees to remain in OMERS without a gap and we ask that you look favourably on this amendment.
Concerning Ontario Hydro's debt, as Hydro did not construct assets to serve Cornwall, none of their debt was incurred to serve our customers. It would be wrong, in our view, to force Cornwall's customers to pay for a system that can serve only other parts of the province. It would be akin to asking Ontario Hydro's customers to pay extra to retire the debt of BC Hydro.
Concerning the Ontario Energy Board, Cornwall Electric now has an agreement with the city of Cornwall setting out guaranteed rates for the next three years, followed by incentive gains sharing between the customers and the company for more than 30 years after that. We think that this local solution will work well for the benefit of all customers and we ask you to allow it to work by giving it precedence over Ontario Energy Board regulation.
Finally, concerning existing power contracts, we have contracts with power suppliers in New York state and in the province of Quebec stretching out all the way to the year 2020. Recently, we've signed sales contracts with the city and with other customers to ensure that we have a need for all this purchased power. Our worst case would be if our sales contracts were wiped out by section 25 of the bill, leaving us with contracted supply but no sales, and so we ask that this matter be addressed.
In conclusion, I want to thank you again for this opportunity to present our support for Bill 35. We have a written submission, which I believe you have now for your consideration, and we would be pleased to answer your questions.
The Chair: Thank you very much. We have five minutes per caucus for questions. We begin with the official opposition, Mr Conway.
Mr Conway: Thank you very much, gentlemen. You have a very interesting story to tell and you've told it very well. My friend from Etobicoke I think was suggesting that maybe my friends in the upper Ottawa Valley should make a similar kind of arrangement. We had one actually well before there was an Ontario Hydro. Back in the late days of the previous century the privately incorporated Pembroke Electric Light Co developed electricity in the province of Quebec and delivered same across the river to the people of my city. We've had a very interesting and a rather similar experience that I won't bore you with. So I thank the presenters.
A couple of obvious questions. One of the benefits that is expected, and it would certainly be expected on my part as a consumer, is the possibilities that convergence provides in this brave new world into which we are moving. My first reaction when I heard the Cornwall deal was that's got to be convergence. We've got a well-established private gas company, gas distributor, buying the electrical utility. Surely there are opportunities of convergence to the benefit and credit of the consuming public in and around the city of Cornwall. Would that be part of your expectation as well?
Mr Stover: Yes, Mr Conway, that is part of the expectation. An example of convergence I can give you is that we intend to converge energy-efficiency programs so that the customer can make one call to Cornwall Electric and get advice and equipment to conserve both electricity and natural gas. We feel we can deliver that sort of service more efficiently as a joint effort than as an individual effort. Another example is something as basic as meter reading. One meter reader can read both meters at the same address. Another example is joint billing. Another example is locating facilities, whether they're hydro facilities located for construction purposes or for gas purposes. The same technician or engineer can provide that same service. Those are the sorts of things that we visualize, as the future unfolds, as examples of convergence.
Mr Conway: I appreciate that. You've been very helpful with specific examples. I personally believe those opportunities will deliver not only rate benefits, hopefully, to me, but also expand the range of service because I expect you'll be buying a cable company one of these days soon, if you haven't already done so, because it's going to be one wire presumably coming into my house and one pipeline. I say that seriously.
The problem on the other side is the danger. There's been some discussion here about putting a fire wall between MEUs so they don't cross-subsidize. We had the people from Sault Ste Marie the other day. Was it Sault Ste Marie where their utility delivers two services? I think there is certainly a concern in part of this debate that public utilities not use their captive markets to cross-subsidize. What protections am I going to have as a consumer in Cornwall who kind of likes the idea of convergence that Consumers' Gas isn't going to find some clever way to what I'd call manipulate the market?
Mr Stover: In Cornwall we believe that will be easy to explain because in Cornwall the gas company is owned by Westcoast Energy, Union Gas, not Consumers' Gas. It is a different company, so we can't cross-subsidize Westcoast Energy. However, in areas that we currently have within the gas industry where there might be this concern of cross-subsidization, each year we go through public hearings conducted by the Ontario Energy Board, and these activities and these actions have to be explained very thoroughly. As you're probably aware, there's a very active intervenor group at the energy board.
Mr Conway: So the energy board will be the protection?
Mr Stover: Yes.
Mr Conway: Mr Winn, a question to you: What is the interconnect capacity between Cornwall Electric and Ontario Hydro retail in your part of southeastern Ontario?
Mr Winn: There is one interconnect line that got used for the very first time in January this year.
Mr Conway: That was going to be my question. Has there been any set of circumstances in the long and storied history of Ontario Hydro where Cornwall Electric, for whatever domestic reason, required the backup, directly or indirectly, of Ontario Hydro? I ask the question because, Ms Johns, we've talked earlier about people who for lots of very interesting reasons want to exempt themselves as independent duchies from any of the special charges to write down that massive Ontario Hydro debt.
Mr Winn: The link between Ontario Hydro's St Lawrence transformer station and Cornwall Electric's Rosemount substation is one link that can feed only one part of the city.
Mr Conway: So for the last 75 years Cornwall Electric has never ever had to think or act on the basis that they needed Ontario Hydro as a potential default provider.
Mr Winn: Once, approximately 10 years ago, when it looked like the market for power was such that we wouldn't be able to buy competitive power, we approached Ontario Hydro to see if they would be willing to sell to us and at that time we were refused power on the basis that we were not a municipal utility in their eyes.
Mr Conway: Do you see any opportunity --
The Chair: I'm sorry, I must interrupt. Mr Lessard.
Mr Lessard: Do you think you may be able to expand the area where you provide service from the existing boundaries?
Mr Winn: I think in all practical terms there's a limit to that in that from a societal point of view we don't want to see competing sets of wires down the same road. If we can provide better service and can make an arrangement with the existing wires owners, then there might be an opportunity to expand, but that requires a business arrangement with the existing owners.
Mr Lessard: That's not something you've considered in the future, then? You haven't investigated that possibility seriously?
Mr Winn: Not in a serious way.
Mr Lessard: One of the issues we're having to tackle as a committee is the ability of Ontario Hydro to purchase municipal electric utilities and the possibility of municipal electric utilities expanding into areas that are currently serviced by Ontario Hydro. You've mentioned your criticism of what you perceive to be an unlevel playing field. I wonder if you have any theory why Bill 35 sets up this unlevel playing field for those situations.
Mr Winn: I'm not suggesting that Bill 35 sets up a non-level playing field. I think it's a question of the regulations needed to make the playing field level not being contained in the legislation as it's written right now. Regulations are to follow, I believe.
Mr Lessard: In your brief you said you object to what you refer to as a tax holiday. That's what I was asking with respect to.
Mr Winn: There, the essence of paying off Ontario Hydro's debt by using grants in lieu of income taxes and taxes on capital makes a lot of sense. It creates a level playing field between utilities regardless of their structure and ownership. The concern on our part is that if that has a sunset that's fixed in time or fixed once the debt's gone, then suddenly there is going to be a tipping of that balance again. I don't think that serves the customer well, to have all of a sudden one class of utilities that has a leg up over all the others.
Mr Gilchrist: I appreciate your presentation, Mr Stover and Mr Winn. You raise three issues. In one case, we've certainly heard from two other entities which are in a similar situation and I think there's tremendous sympathy to the issue of the contracts you've signed. I don't want to say to a hundred percentile, but I'd be very surprised if we don't wind up being sympathetic to the clarifications you've requested there.
Similarly, the suggestion about the OMERS effective date. I certainly would like to know from staff or legal counsel why we couldn't do that. You've certainly raised an issue no one had before.
On the third issue, I guess I should half tongue in cheek suggest that the sitting member in Cornwall has on a number of occasions, including when he was part of the government, had a choice to not guarantee that stranded debt, which is now going to have to be covered in some other way than off the backs of the taxpayers in Ontario, and he chose not to follow a different course.
The question I would like to put to you, because I think this is quite intriguing, is we now finally have someone at the municipal level who can talk in concrete terms, not some philosophical discussion, about how you buy and sell assets. I don't know if you were privy to the conversation we had before lunch today with some of the other representatives from MEUs. My recollection is you paid $68 million for the assets you bought; 22,500 customers, I think I heard you say.
Mr Stover: That's correct.
Mr Gilchrist: So $3,000 per household. What was the book value that Cornwall was carrying that for?
Mr Stover: The book value was about $40 million and the book value included the cogeneration plant, CDH, that Robert mentioned.
Mr Gilchrist: Was that part of --
Mr Stover: That was part of the $68 million, yes.
Mr Gilchrist: So they got a 75% premium over book value.
Mr Stover: They got a premium over book value, yes.
Mr Gilchrist: That's interesting, that that is the percentage, because it just so happens that when we were in Sudbury last week, the MEUs up there were suggesting that Hydro was terribly unfair to ask for a certain amount of money per household if they wanted to buy some of Hydro's more distant customers. In fact they suggested that they should only have to pay $1,400 in one case and $1,750 was the other suggestion; in one case, half of what you had to pay. There would appear to be a contradiction, would you agree?
Mr Stover: Not understanding the reference you made --
Mr Gilchrist: When MEUs buy from Hydro they should have to buy at book.
Mr Stover: -- but I can say that from our perspective the premium was paid for strategic reasons. As the future unfolds and more assets are available, whether they are electricity or water, we believe that premium will decrease. The strategic interest now is our interest in the electricity business as it is deregulated, it's the learning experience we hope to gain from Cornwall Electric and we're positioning ourselves for the future. We felt that was worth a premium.
Mr Gilchrist: When there's only one game in town, that normally winds up being the case. You would agree with me it was a seller's market.
Mr Stover: At that time, yes.
Mr Gilchrist: To some extent, if in fact there still is only one supplier in each area, it's still an industry that probably will never see the sort of totally open competition that you might enjoy in, say, the hardware field or the sale of cars.
Interjection: Canadian Tire.
Mr Gilchrist: Canadian Tire's products, yes, just to give a specific. You will always find that the seller has an advantage; namely, if you don't use his or her wires, you don't get into the game. Would that be correct?
Mr Stover: Can I give you just a slight deviation of that?
Mr Gilchrist: Sure.
Mr Stover: Theoretically, if all 275 MEUs were on the market at the same time, then it would be a buyer's market.
Mr Gilchrist: I will grant you that, yes, because there's only a limited capacity of other private companies that want to enter. But if I owned another MEU right now and I was the first one out of the gates --
Mr Stover: You would get a premium.
Mr Gilchrist: -- I'd get a premium today. Would you agree with me that if at the same time those MEUs that are talking to Consumers' Gas, and there are MEUs talking to Consumers' Gas and to other companies, it's a contradiction if they turn around to Ontario Hydro and say, "I know that when I buy your assets for book value, I'm going to get market value because that's what Consumers' Gas will pay me"? You will pay what those assets will generate as an income-generating business, correct?
Mr Stover: That's correct.
Mr Gilchrist: The artificial depreciated value on the books has no relevance to what Consumers' Gas would consider the value of an asset.
Mr Stover: That's correct.
Mr Gilchrist: Thank you. If the MEUs had come to us and said, "You let us buy Hydro's customers at book value and we guarantee that we'll sell to any private company at book value," I don't think we'd have a problem here, but it's fairly obvious that there's going to be a windfall.
Let me ask you very quickly the final consequence of that. If Hydro does not recover the best possible value for its assets, every dollar less than that increases the stranded debt, does it not?
Mr Stover: It does, yes.
Mr Gilchrist: So any kind of deal or any kind of artificial accounting savings that was used to artifice a lower price to an MEU would in fact wind up on the backs of all the other taxpayers in Ontario and, ironically, even the customers in that locale, because there would have to be a greater stranded debt charge, correct?
Mr Stover: In your example, yes.
The Chair: On that note, all of the committee members are grateful for you taking the time to come before us this afternoon with your interesting story, as Mr Conway said, and your advice.
KANATA HYDRO-ELECTRIC COMMISSION
The Chair: I would now like to call upon representatives from Kanata Hydro, please. Before you begin, I would like to thank you for being able to make your presentation early today because of one group that wasn't able to make it. That makes our job easier and we thank you for that.
Mr Rick Shields: Madam Chair and members of the resources development committee, good afternoon. My name is Rick Shields and I'm here as vice-chair of the Kanata Hydro-Electric Commission. Our chair, Christopher Lever, extends his regrets that he cannot be here personally to deliver our message. Joining me is Guy Cluff, the general manager of Kanata Hydro.
Kanata Hydro serves a population base of over 51,000 people in the city of Kanata. In addition to over 17,000 homes, we supply electricity to a broad range of commercial and industrial customers in Canada's Silicon Valley North.
Kanata Hydro supports the government's objectives to make Ontario's electricity industry more competitive and thereby foster the creation of jobs and investment in the province. We have, however, some serious concerns about how Bill 35 attempts to achieve those objectives.
As a municipally owned public utility, Kanata Hydro continues to be committed to providing its customers with the electricity they need in a reliable, safe and cost-effective manner. It is within this value system that we offer the following comments on policy issues related to Bill 35.
We have grouped the first broad area of concern for Kanata Hydro under the title "Benefits for all Customers."
Kanata Hydro embraces the government's intention to move to a competitive marketplace, provided that such a marketplace will provide a net benefit to our customers. Deregulation in other jurisdictions has not always provided benefits to all consumers. Kanata Hydro believes that the move to competition should not benefit some at the undue expense of others.
While the government has made numerous statements regarding the goal of the act and how it is intended to provide low-cost electricity to consumers, the act is not entirely explicit in making such a commitment. We do not propose that the act mandate a rate reduction, but we would like to see the principle of low-cost electricity entrenched in the purpose section of both the Electricity Act and the Ontario Energy Board Act, 1998.
As enabling legislation, Bill 35 contains little detail, yet encompasses complex issues. To protect the interests of consumers and to facilitate the interpretation of the act by regulators and the courts, the act should include a commitment to the principle of low-cost electricity through a competitive system, in the view of Kanata Hydro.
Our commission is also concerned about the amount of market power that will continue to reside with Genco following deregulation. Under Bill 35, Genco will own more than 90% of the province's generation capacity and will supply more than 80% of the province's demand. Currently, generation accounts for about 70% of a consumer's electricity bill. Clearly, generation represents the largest opportunity to reduce electricity costs through competition.
Ontario's interconnections with neighbouring provinces and the United States are limited to approximately 15% of Ontario's electricity needs. The expansion of these ties would be limited in potential and lengthy to construct. For some considerable time into the future, therefore, Genco will have a near-monopoly hold on generation in the province.
In the second interim report of the Market Design Committee, the MDC states:
"We concluded early in our mandate that the decision to leave Ontario Hydro's generation assets within a single corporate entity with no constraints would be a serious impediment to developing a fair, efficient and competitive electricity generation market in Ontario, and that such a decision would likely result in market participants and other investors refusing to risk their capital and efforts in this market."
While the Market Design Committee has been considering methods of mitigating Genco's market power, these methods and measures are only second-best solutions. Take, for example, the MDC's consideration of vesting some of Genco's generation capacity. Fixing the price on a significant amount of Genco's generation may actually serve to remove a large portion of generation from the competitive wholesale market.
We have serious concerns that Genco will dominate the marketplace and therefore limit the benefits of competition to consumers. Genco could potentially use its market power to raise prices to consumers and/or to operate in ways that could prevent competitors from entering the generation market. This would not only reduce the benefits to consumers from industry restructuring but would also place at risk new investment and job creation in the industry.
Other jurisdictions have recognized this potential barrier to competition and have unbundled generation into multiple stand-alone businesses. We strongly support that this approach also be taken in Ontario. To avoid the situation where these businesses reassemble themselves after deregulation, the legislation could restrict subsequent mergers of separated generators.
Kanata Hydro also is concerned about the restrictions that would be placed on municipally owned local distribution companies, or LDCs. The act would place restrictions on the types of business activities that LDCs and their affiliates could engage in while 50% or more municipally owned. Private sector competitors and both Servco and Genco will not be similarly restricted.
The government has expressed their objective to create a level playing field between municipally owned and private sector businesses in the competitive marketplace. The restrictions in Bill 35 could be construed as being contrary to this objective. The private sector competitor will be able to offer value-added services that the municipally owned LDC will not. This would seriously restrict the ability of the LDC to compete and may even affect its viability.
The local distribution company is a valuable asset of a municipality. The act should allow local decisions to be made on how that value can be managed and developed to the best benefit of the shareholders. Local markets, expertise and skills will influence business decisions and the desire of the LDC to pursue them.
We feel that the act should remove all restrictions on local utilities and leave these decisions with the shareholders who have the ability to make informed business decisions about the appropriateness of the LDC's business activities.
Kanata Hydro is also concerned about the stranded debt recovery charge. Special payments are imposed by Bill 35 to recover Ontario Hydro's stranded debt. Bill 35 leaves open the prospect of the continuation of these charges once the stranded debt has been paid. While we support such a charge as legitimate for the purpose of recovering the debt, we would consider the continuation of it beyond debt retirement as inappropriate. Special payments directed at recovering the stranded debt should be eliminated once the debt is retired.
Similarly, Kanata has concerns about the adjusted gross revenue special payments that are proposed in the legislation. Bill 35 would require LDCs to annually pay a special payment or tax on their adjusted gross revenue. Again, this appears to be somewhat inconsistent with the government's objective to create a level playing field since private sector competitors will not be subject to charges or taxation in this form.
Since municipally owned distribution companies will be incorporated under the Ontario Business Corporations Act, we should be subject to the same tax or tax-equivalent calculation as any other OBCA corporation.
Based upon the principle that equity equals equality, the adjusted gross revenue special payment should be eliminated in the interests of creating a level playing field or amended accordingly.
With regard to Servco's transmission and distribution activities, Kanata Hydro notes that Bill 35 establishes Servco as the owner and operator of both the former Ontario Hydro transmission and retail distribution systems. Recognizing that transmission is a natural monopoly and that retail distribution will participate in the competitive marketplace, the two functions of Servco should be clearly separated into two distinct entities. This will avoid the potential for cross-subsidization.
With regard to the transition to competition, Kanata Hydro firmly believes that caution needs to be exercised as Ontario's electricity system moves to a competitive market. Care needs to be taken to get it right the first time. The Market Design Committee has already identified a number of technical and operational items, such as standard data exchange formats and load profile billing, that will require resources and time to address.
Many references have been made to deregulation in California and the United Kingdom, but in both jurisdictions the deregulated marketplace was implemented over a longer time frame than the 18 months proposed in Bill 35. Most other jurisdictions have introduced competition in the generation sector before addressing the retail sector. In doing so, they recognized that the greatest opportunity to produce savings rests in the generation sector, which represents 70% of the electricity dollar. They also recognized the regulatory, technical and consumer education challenges associated with opening the retail market to competition.
We believe that it may be unrealistic to expect the transition to full wholesale and retail competition in the time proposed, especially if the objective is to have it done right. Bill 35 should require that retail access pilot projects be conducted to ensure the markets and the associated systems are ready before full-scale access is permitted.
With respect to consumer education, Kanata Hydro has concluded that Ontario electricity consumers need to understand the changes coming to their electricity system and the effect it will have on them as customers. Kanata Hydro believes the government should conduct a public information program to inform consumers about deregulation and what it will mean to them.
With regard to unlicensed energy brokers who have entered the marketplace of late, our commission continues to hear complaints from customers about energy brokers knocking on doors and trying to sign them up to future electricity supply contracts. Customers are unclear as to who these brokers are and what is happening with deregulation.
In addition to the previously noted consumer education program, Kanata Hydro thinks it may be advisable that the act make provision to invalidate any supply contracts signed by customers prior to a licence being issued by the Ontario Energy Board or a comparable mechanism to ensure that consumers are protected in this transitional period.
In conclusion, Kanata Hydro supports the government's objectives to make Ontario's electricity industry more competitive and thereby foster the creation of jobs and investment in the province. As we have attempted to outline today, however, we have some serious concerns about how Bill 35 attempts to achieve those objectives.
Thank you for the opportunity to speak to the committee today. We would be pleased to address your questions.
The Chair: Thank you very much. We have five minutes for questions from each caucus. We'll begin with the NDP caucus.
Mr Lessard: This morning one of the first presenters we had was from the regional municipality of Ottawa-Carleton. They were talking to us about their desire to establish an entity that provides electricity service for the whole region. Have you been involved in those discussions at all?
Mr Shields: I can say that Kanata Hydro and the city of Kanata have recently convened a working group to examine the issues that will relate to the changes that are coming both with respect to Bill 35 and potentially with amalgamation initiatives so that the utility is well positioned to make appropriate decisions that are to the benefit of its ratepayers on a going-forward basis as this legislative process continues. The working group will be meeting during the next several months, and I would expect that is one of the issues they will be closely examining.
Mr Lessard: Are the provisions of Bill 35 going to be of assistance or do you think they may be a hindrance?
Mr Shields: As the working group has not undertaken its work, it may be premature to comment on that aspect of the bill.
Mr Lessard: One of the areas we've heard several times with respect to is the ability of local distribution companies to engage in types of services other than electricity services unless they're 50% divested from the municipality. Do you have any theory as to why there is that provision in the bill, the restriction that you can't be involved in providing any other services?
Mr Shields: You're asking me to speculate on the intention of the drafters?
Mr Lessard: Yes.
Mr Shields: I'm not sure I can add a lot of value on that particular point. It may be rooted to a certain extent in the traditional approach to municipal activities in the business sector and the desire to separate government and private enterprise. As to whether it's appropriate in the context of this particular legislation, which creates a municipally owned corporation and makes provision for it to engage in certain forms of competitive activity, whether it's necessary to hamper that move to a competitive footing to put restrictions on that activity, I entertain some considerable concern and I think that reflects the commission's feelings as well. I think there is a general uncertainty as to why that has been added to the legislation. We certainly are looking for answers in that area as well.
Mr Lessard: So am I. I share your concerns, your feeling that we may be moving ahead too fast. I also agree strongly with you that the move to competition shouldn't benefit some at the undue expense of others. I sincerely hope that's the way it turns out.
Mr Gilchrist: You raised a concern about cross-subsidization. That's certainly something that throughout the bill we've made every effort to try to prevent, to make sure there's clear accounting. I would draw your attention to two sections: subsection 47(4) of the Electricity Act, and 69(2)(f). Both cases require that the transmission company, Servco, would have to maintain separate accounting, so there would not be an opportunity for them to artificially reduce the rates of the retail customers by propping up a higher transmission charge. If they did it, it would be obvious what they had done. So the accountability is there.
I'm not going to belabour the point about market value sales with another MEU, but you certainly touched on a couple of other points that I think have been peripheral to a lot of the concerns brought forward by MEUs all across the province.
Let me just explore from your perspective -- Mr Lessard alluded to the first or second presentation we had this morning and the sense in the minds of some municipal governments and, quite frankly, some MEUs that they will have to find some way of combining to more capably compete with Hydro on a level playing field even when it comes to buying energy and turning around to resupply their customers. Has Kanata Hydro done any kind of analysis of what is the minimum size an MEU should be before it has any chance of going out there and being able to provide the best quality of service at the lowest price for its customers?
Mr Guy Cluff: Some of that work is still being done. If we look back on the current situation we are in now, there seem to be a number of studies around the world addressing the issues of economies of scale obtained in utilities. Keeping in mind that that is exclusive of operating in a competitive environment, so one has to take that analysis for what it's worth, those studies seem to indicate that utilities achieve economies of scale fairly early on in life by standards quite small -- 4,000, 5,000, 6,000 customers and up. There's some indication that when you get large at the other end you may actually have some loss of economies of scale.
What's more important in the utility business seems to be economies of density issues. It's a matter of what kinds of revenues you are getting for the investment you've got in plant, in essence. When you take that analysis and how much of that is attributable directly to a competitive environment, that is one we're trying to study. I don't know of anybody who has done that analysis. We'd be pleased if someone has any information and would let us know. But I haven't found that directly.
Mr Gilchrist: We've seen from a variety of sources, including one of your neighbours, Nepean Hydro, in the chart they send out to their ratepayers, a wealth of information. John has been showing it in every hearing. It's quite intriguing when you look at the fact that Toronto is way up there, $92.50 per thousand kilowatt hours, and you folks down here in the Ottawa area are all in the $70 range. It varies by a couple of dollars but there's quite a differential. You'd agree with me that all of you are buying your power from Ontario Hydro at exactly the same price.
Mr Cluff: It depends on the supply voltage that we're buying it from, but given that we buy it at the same supply voltage, we're paying the same rate.
Mr Gilchrist: Forgive me, yes. When you compare apples with apples in the voltage, you're paying the same price. So it has to follow, then, that the difference between that and the retail price to the customer is the markup of the utility exclusively. You make no other payments to anybody. You buy your energy from Hydro; you sell it to your customers. The difference is the markup. I'm not saying profit.
Mr Cluff: Yes, the additional cost to cover whatever it is locally is added either in value or in contribution to net income. For example, I believe the Toronto situation is reflective of different levels of service.
Mr Gilchrist: It's also reflective of $50-million new offices built and the fact that all of them are still continuing to invest in new computer systems. You would think one of them would now become the billing expert. But the reality is that if other MEUs -- and I think the MEUs in Ottawa have a right to be proud of the rates you've set here in Ottawa, an 8.6% markup.
Mr Cullen: Debt-free.
Mr Gilchrist: Debt-free, that's correct. I think you have a right to be proud of that.
Should the ratepayers elsewhere in Ontario, just by following benchmarks, never mind any further benefits from competition -- by having this information out there and far more public now, should we see some significant savings in the parts of the province where the MEUs have not been as frugal or as efficient as they have been in the Ottawa area? And if not, why not?
Mr Cluff: Obviously, I'm not intimately familiar with the financial situation in other areas of the province. I think traditionally utilities have, as we have within the Ottawa area, for example, used competition within ourselves. While we're not competing in the same service territory, we're certainly competing against each other from a community level to leverage our costs down, and at the same time co-operating on what areas seem to make sense, if there are advantages to us collectively in getting together for various issues.
For example, and this isn't exclusive of the utilities, our utility co-ops with the regional municipality on all sorts of purchases, everything from tires to paper, because it makes economic sense to do so. I know other utilities in some areas have formed their own co-ops and have gone out and done significant works as far as affecting cost savings as well.
Mr Gilchrist: Let me just say as a Toronto ratepayer, along with 2.4 million other people, I just wish some of your competitive zeal had been felt within that municipality. Perhaps you could second some of your officials down to show them how it's done.
Those are all my questions. Thank you both.
Mr Hastings: My question, gentleman, relates to the transition period that you focus on. In other deputants' submissions, they have pointed out that if you don't have a fairly exact parallel of competition at both the wholesale and retail levels, you're obviously going to end up not having the significant benefit of lower electrical prices. All we have to do is look at California and, more so, closer to home, Alberta.
What I'd like to know is, in your submission, how long do you consider it to be an orderly transition before you would have real competition at the retail level? If you want to sort of hold off on that for, it would strike me as being probably five years, when would we ever get, in your estimation, to retail competition if it's not to be followed almost in parallel, in sync, with competition at the wholesale level? How many years do you expect --
Mr Cluff: I don't think we're talking anything, in our minds, like five years. I think we are talking like a year, something to prove the process on the retail side, as we suggested, to put a pilot project in a number of areas together -- we had the group I guess from Pembroke offer to do that for us this morning -- but simply to test the technologies as well as the markets. There seem to be an awful lot of technical issues wrapped around the retail side of competition, and quite frankly I don't think all of us have answers to those yet.
For example, the Market Design Committee has already addressed the issue of, how are you going to build this? Unless you force everyone to go to interval meters, we're going to do this on load profiles, particularly in the residential sector. The software has to be created to do that. The data standards have to be developed to allow the interchange of data between all the players -- the retailers, the LDCs, the IMO, the Gencos -- to be able to monitor all of this stuff. I don't know if anybody has been involved in developing standards, but they usually don't happen over a weekend.
Mr Hastings: Generally, though, when you say one year for a pilot project in software development, it usually ends up being two and three and four in any sector of the economy. If it's that complicated in terms of the technical capacity to get competitive at the retail level respecting metering and the lower voltages versus the higher, it would seem to me you'd have to take much more than one year.
Mr Cluff: That's a possibility.
Mr Hastings: Yes, and that's my problem with your orderly transition.
Mr Cluff: My indication of the year was not to infer that we want to delay this thing in perpetuity. As we mentioned in our presentation, we support the concept. It's going to be very difficult to go back, though, if you make a mistake.
The Chair: To the official opposition.
Mr Conway: Thank you very much, gentlemen. I appreciate your attendance today.
I'd just like either one of you to tell me a little more about Kanata Hydro, 17,000 homes. What percentage, roughly, of your total load is a residential load, high chart?
Mr Cluff: Revenue-wise, it's about 48% residential and 52% commercial-industrial.
Mr Conway: Do you serve all of the electricity consumers in the city of Kanata?
Mr Cluff: The full geographic boundary.
Mr Conway: I take it that in the contiguous municipalities of West Carleton, Rideau and Osgoode, that's Ontario Hydro retail?
Mr Cluff: Correct, yes. Our neighbours, Goulbourn Hydro, look after the village of Richmond, and the rest of the township is Ontario Hydro.
Mr Conway: You raised, Mr Cluff, a very good point. You used a phrase I have not heard in these debates to date. We talk a lot about economies of scale, but the other concept is the economies of density. I'd like to explore that a little bit with you, because I think there is a general consensus that there should be a rationalization at the distribution end in some way that makes sense.
One of the problems I see in southeastern Ontario is, how do you organize this -- I think of your area as a good one, because once I get out of Kanata, I start to get into lots of geography, a declining number of actual customers. How do we deal with the problem of the economies of density, particularly in the areas outside the immediate confines of urban and suburban Ottawa-Carleton or Kingston or Brockville or Cornwall or Pembroke, and make sense of it?
My worry now is that Ontario Hydro has decided: "There's going to be rationalization, all right. We're going to do it." I don't know that that's everybody's -- certainly I don't think that is what my constituents are hoping for out of this. They probably would like Kanata Hydro or Renfrew Hydro, some sense of local ownership and local accountability. But there are problems. One of the major problems is this economy of density. Everybody is going to want Kanata; everybody is going to want Arnprior. Lots of people aren't going to want the rest of the stuff in between because it's high-cost, low-revenue.
How do we get, let's say in this part of southeastern Ontario, a sensible, reasonable, affordable rationalization at the distribution end and deal with this problem of the economies of density?
Mr Cluff: That certainly is a delicate issue, and I think that probably leads back to the history of the municipal utilities in the first place. That was a socially significant, desirable reaction to have electrification of the entire province, and the municipal utilities undertook that, creating Ontario Hydro out of that process to handle the intermediate areas. I guess now we're stuck with, how do you bring it back the other way?
Mr Conway: But people like Mrs Johns and myself and Dr Galt, three here, represent a lot of people who are living in the countryside. They feel a right to reliable, reasonably priced electricity. I can pick as I want on Ontario Hydro, and I've done my share of it; they've got a million customers, a lot of whom other people don't want.
The problem with markets -- the other day up in northern Ontario I didn't get a chance to say it. I forget who it was who came to us -- it was one of the MEUs, I think -- and said, "That rural rate assistance program should be paid for directly by a provincial government subsidy." That's unvarnished code for, "We recognize that there are substantial parts of this market that don't work, so you politicians write a subsidy for it; market if we like it, subsidy if we can't make it work."
As we found out in the ice storm, there are lots of people in this part of the province who are out in the hinterland. The Ottawa Citizen had an editorial here a few months ago that basically said, "Maybe we shouldn't have a reasonably uniform pricing policy." That will be big news to the people in rural Ontario. I need some help, because there is a real constraint called economies of density. How do we reasonably deal with this?
Mr Cluff: I don't know if I've got the answer for you. I'm also one who lives in the rural area and am subject to the same uncertainty of where my supplier is going to be down the road. I really, honestly don't know. That's a question that needs some debate. Whether that's something that society still needs to provide for, whether there is something that --
Mr Conway: Could you people take over, for example, West Carleton, Goulbourn and Rideau? Would it make any sense to imagine an expanded utility on the southwestern perimeter of suburban Ottawa-Carleton? Is it possible to imagine a scheme where you could have a rationalized utility offering good service at affordable prices?
Mr Cluff: Yes, I think there are opportunities to do that provided that you could maintain some rate differential.
Mr Conway: Of what order of magnitude would that differential have to be?
Mr Cluff: I can't tell you. I haven't looked at the numbers.
Mr Conway: Guess: 10%, 20%, 30%?
Mr Cluff: It's a difficult guess. Having worked for your previous speaker's Cornwall Electric, where they in essence do have that -- they have a zone system because they look after a whole and part of another township. It was costed as a separate cost centre and therefore you can do the asset calculation and see what kind of rate of return you need and you can do those kinds of things.
Mr Conway: Do you know what their differential was within the Cornwall area zones? I'm just trying to get my --
Mr Cluff: I can't remember what it was.
Mr Conway: Was it 50%, was it 5%?
Mr Cluff: No, it was something less than 25%. I don't know.
Mr Conway: All right.
The Chair: Perhaps that's homework to do in a conversation.
Gentlemen, thank you. I apologize for those noises that were in the background beyond our control, but it gives you a sense of what question period must be like in the House at any rate.
Mr Conway: There's only one question period today, and it's in a federal court in Washington.
The Chair: Perhaps we'll be taking note later.
Gentlemen, thank you for bringing your best advice to our committee today. We appreciate it.
Mrs Johns: Just on a point of clarification, Madam Chair: I'm not sure I'm going to be answering Mr Lessard's question, but what we were trying to do with the legislation was, we were trying to work with the Ministry of Municipal Affairs on this 50% number that he brought up a few minutes ago. What I want everyone to understand, even with that 50% number in there, is that there are still licence qualifications that would say they cannot cross-subsidize, whether they be public or private. They still would be under the control of the Ontario Energy Board. So that is there, although we chose 50% as a benchmark for the selling, as you have indicated before. If you have other questions about it, we'd be happy to try and get you the answers.
The Chair: All right, colleagues, that's our final presenter for today. We have not made taxi arrangements to the airport. We're going to assume that we will get together in twos and threes and go together if we have phone calls and so on to make in the next little bit.
We will reconvene tomorrow morning at 9 o'clock in Sarnia. We are adjourned.
The committee adjourned at 1504.