Thursday 20 August 1998
Energy Competition Act, 1998, Bill 35, Mr Wilson /
Loi de 1998 sur la concurrence dans le secteur de l'énergie,
projet de loi 35, M. Wilson
Canadian Energy Efficiency Alliance
Mr Bruce Lourie
Power Workers' Union
Mr John Murphy
Ontario Energy Board
Mr Floyd Laughren
Mr Steve McCann
Mr George Dominy
Association of Major Power Consumers in Ontario
Mr Lauri Gregg
Mr Arthur Dickinson
Association of Municipalities of Ontario
Mr Michael Power
Ms Joan King
Canadian Federation of Independent Business
Ms Judith Andrew
Independent Power Producers' Society of Ontario
Mr Al Barnstable
Mr Tom Brett
Ontario Clean Air Alliance
Mr Jack Gibbons
American Electric Power Resources Canada
Mr Tom Drolet
Mr Pat Hemlepp
CanaGen Energy Inc
Dr Robin Jeffrey
Market Design Committee
Mr Ron Daniels
Mr Don Dewees
Mr Michael Trebilcock
Mr John Grant
Lincoln, Pelham and West Lincoln Hydro Electric Commissions
Mr Philip Andrewes
Mr John Alton
STANDING COMMITTEE ON RESOURCES DEVELOPMENT
Chair / Présidente
Mrs Brenda Elliott (Guelph PC)
Vice-Chair / Vice-Président
Mr Peter L. Preston (Brant-Haldimand PC)
Mr David Christopherson (Hamilton Centre / -Centre ND)
Mr Ted Chudleigh (Halton North / -Nord PC)
Mr Sean G. Conway (Renfrew North / -Nord L)
Mrs Brenda Elliott (Guelph PC)
Mr Doug Galt (Northumberland PC)
Mr John Hastings (Etobicoke-Rexdale PC)
Mr Pat Hoy (Essex-Kent L)
Mr Bart Maves (Niagara Falls PC)
Mr Peter L. Preston (Brant-Haldimand PC)
Substitutions / Membres remplaçants
Mr John R. Baird (Nepean PC)
Mr Steve Gilchrist (Scarborough East / -Est PC)
Mrs Helen Johns (Huron PC)
Mr Monte Kwinter (Wilson Heights L)
Mr Wayne Lessard (Windsor-Riverside ND)
Also taking part / Autres participants et participantes
Ms Marilyn Churley (Riverdale ND)
Clerk / Greffière
Ms Donna Bryce
Staff / Personnel
Ms Anne Marzalik, research officer, Legislative Research Service
The committee met at 0900 in room 151.
ENERGY COMPETITION ACT, 1998 LOI DE 1998 SUR LA CONCURRENCE DANS LE SECTEUR DE L'ÉNERGIE
Consideration of Bill 35, An Act to create jobs and protect consumers by promoting low-cost energy through competition, to protect the environment, to provide for pensions and to make related amendments to certain Acts / Projet de loi 35, Loi visant à créer des emplois et à protéger les consommateurs en favorisant le bas prix de l'énergie au moyen de la concurrence, protégeant l'environnement, traitant de pensions et apportant des modifications connexes à certaines lois.
CANADIAN ENERGY EFFICIENCY ALLIANCE
The Chair (Mrs Brenda Elliott): Good morning, everyone. The standing committee on resources developing is called to order. We are once again considering presentations on Bill 35.
We call now on our first presenters, representatives from the Canadian Energy Efficiency Alliance. Good morning. Welcome to the committee. Please make yourself comfortable. You have 30 minutes for presentation time. We hope you'll leave some time at the end of that for questions. Begin, please, by introducing yourself for the Hansard record.
Mr Bruce Lourie: Good morning and thank you for providing me with the opportunity to speak with the committee today. My name is Bruce Lourie. I am going to describe myself with a brief biography, but I'm speaking today as the executive director of the Canadian Energy Efficiency Alliance. I hope the committee will find my comments to be helpful as you consider how the important matters before you affect the life of Ontarians: the quality of our air and water and the competitiveness of our economy.
I wanted to provide a brief personal background so you can have a context for my remarks. I own and run a small consulting business in Ontario which specializes in energy and environmental issues. I have worked independently for nearly 10 years. I now, through that organization, run a number of different organizations and programs and employ half a dozen staff. I think I therefore have some understanding of small business issues in Ontario.
I've been involved to a significant extent in the issues of environmental protection and energy efficiency in a competitive electricity market. I have organized and run workshops on this subject. I've consulted to government, utilities and non-government organizations. I am a member of the advisory board of the US Clean Air Task Force -- I'm the only Canadian on that group -- and I was very pleased to be appointed by the Honourable Jim Wilson to the Electricity Transition Committee and have been participating in all of those meetings. I am also a member of the federal Office of Energy Efficiency's national advisory council on energy efficiency, and I act as a director on the boards of several organizations in Canada and the US. But I am speaking today, officially, as the executive director of the Canadian Energy Efficiency Alliance.
The alliance is a three-year-old non-profit organization created to promote energy efficiency and ensure a competitive economy, and to protect the environment. We have a very active membership. It has grown from nine founding members to over 30 members that represent the full spectrum of energy stakeholders in the province. I know our membership has been well represented before the committee. Our membership includes Ontario Hydro, Union Gas, Consumers Gas, the Municipal Electric Association, the Independent Power Producers' Society of Ontario, the Canadian Association of Energy Service Companies, Pollution Probe, the Sierra Club, the Consumers' Association of Canada, Owens-Corning, Canada Trust, and many other companies and organizations in Ontario and in fact across the country. These organizations have come together with one common interest, and that is the pursuit of energy efficiency. Many, like Ontario Hydro, have been very supportive of our organization from the beginning.
I plan to keep my comments simple and hopefully to the point. In fact, I have only one recommendation I would like this committee to consider, and it's something that isn't considered in Bill 35. I'll mention it now and then explain it more fully through my comments. I thought as well that it's good to keep in mind that this recommendation was developed by the diverse membership of the Energy Efficiency Alliance and ratified at a board meeting of our alliance. It was also recommended by the Ontario Medical Association in their recent report, the Health Effects of Air Pollution in Ontario. It is supported by environmental organizations throughout the province. It is included in the restructuring of virtually every other electricity market around the world, and it is included in Clinton's national electricity competition plan. Yet it has been rejected by Ontario's Market Design Committee, and I will tell you why in a moment.
The recommendation is this: that a fund be created to invest in cost-effective energy efficiency projects. It's really quite simple. The precise details on how this fund would be generated, how it would be managed and exactly what would be funded have not been discussed at great length, although I will be providing some ideas in a few moments. What we're really looking for is an indication of some support from the government that the idea is sound and supportable. It is clear to us that the idea is sound. The real question is whether the government will recognize that there are well-known barriers to cost-effective energy efficiency that will not be overcome, in fact will be exacerbated, by a competitive market and that relatively small investments up front can reap major benefits for Ontario businesses and Ontario residences.
I am talking about investments in what is called market transformation. Unlike demand-side management programs of the past, which offered subsidies for product purchases and generally left a bad taste in everyone's mouth, market transformation investments are made strategically and targeted to overcome known barriers to efficiency, allowing the marketplace to operate more effectively in achieving the desired gains in efficiency.
There are many examples of barriers to cost-effective efficiency, and I will provide one quick one now. It is called a split incentive. In a large commercial building development, the developer's goal is to build a building as inexpensively as possible, ie, to minimize the capital costs. This means that higher levels of insulation, more expensive energy-efficient windows and lighting and a more efficient heating-cooling and ventilation system will not likely be installed. All the operating and energy costs are passed on to the tenants. This includes more for electricity and more for gas. At the end of the day, the overall cost to society is much greater, even excluding the environmental costs; because the developer has no incentive to reduce his operating costs, they are all passed on.
Another complication in this example is that financial institutions frequently have no means for evaluating the advantages of a more efficient building in terms of leaseability, tenant comfort, tenant retention etc. All they see are upfront costs requiring short-term paybacks. A fund could provide the necessary capital or loan guarantees to support a more efficient building. This could operate as a revolving loan fund, with loans paid back with interest. That's just one example of the many kinds of barriers to cost-effective efficiency that exist in a marketplace.
I hope I leave this committee with a clear understanding that the goals of the Energy Efficiency Alliance and our recommendation are consistent with the direction the government is heading in and the primary purpose as stated in the title of Bill 35. We support electricity competition. We want to see lower energy bills in Ontario. We want to see more investment in the Ontario economy. We want cleaner air and water. We want to see more jobs. We support investments in science and technology. These are precisely the reasons we think a fund to support energy efficiency is needed. I would like to touch briefly on a number of these goals.
First, it is interesting to note in section 1 of the bill under "purposes" that nowhere is lower-cost energy mentioned. The big assumption is that competition will result in lower prices. As I stated in my presentation before the select committee on nuclear energy, the average Ontarian would be happy to have lower energy bills, but most probably would not notice a fluctuation of 10% in either direction and likely not mind a small increase in rates if it meant protecting the environment and supporting domestic industries.
Note that the concepts of lower energy bills and cheaper electricity are very different. You can improve efficiency and lower your bills without changing the electricity rate. It is likely easier and more cost-effective to lower energy bills by achieving higher levels of energy efficiency than by restructuring the industry, but I know that's obviously not the case. But we must keep in mind the primary and really sole driver behind electricity competition in Ontario, and that's large industry. When I hear the government saying that what customers in Ontario want is cheaper electricity, I can probably name the 40 customers the government is referring to; the other 11 million don't seem to really count.
The outcome of a successful competitive market in Ontario is to have greater investments in Ontario industry, leading to job creation. In the Ministry of Energy, Science and Technology 1998-99 business plan, the minister notes that two out of every three new jobs in Ontario were created in knowledge- and technology-based industries. One such industry where Ontarians have played an international leadership role is energy efficiency, particularly building efficiency. I think the point the minister was getting at in that comment is that it's small and medium-sized high-technology businesses where we're seeing growth in jobs and investment. I think that's an important consideration.
The business plan also recognizes the importance of energy efficiency and the linkage to economic development, increased jobs and investment. It also commits the ministry to invest in science and technology, leveraged by the private sector. This is precisely the model we are recommending for the energy efficiency fund. Better yet, there is an easy way to encourage private sector leveraged support, remove the need for government and provide a taxpayer-free mechanism for creating the fund. I will explain how it could work in one moment.
I want to refer to one other report, the Second Interim Report of the Market Design Committee, specifically section 5.3, where energy efficiency is discussed. As you know, the government created the Market Design Committee to provide advice on developing the market rules and governance structures for a competitive market in Ontario. It is clear from the composition of the committee that their strengths and motivations are related to electricity supply and free market competition, not efficiency. It is even clearer reading the report, and having attended some of their subcommittee meetings, that energy efficiency was not an issue well considered by the committee. They recommend that the government continue to encourage energy efficiency through the distribution of information and to pursue energy efficiency programs using public monies.
It seems odd that a group charged with the job of creating the rules for a competitive market free from government interference would recommend that the government continue to manage and deliver programs using taxpayer dollars when a clear, well-established alternative exists, particularly when this alternative will provide greater benefits to the public and small business and appears to be more consistent with the business plan of the ministry.
Perhaps the Market Design Committee recommendation should have been simply to have the government identify an appropriate organization with sufficient expertise and industry representation to advise the government on the best approach for facilitating energy efficiency in a competitive market. I am certain the conclusion would have been very different.
Getting back to the recommendation that a fund be created to facilitate energy efficiency, the term often used for an energy efficiency fund is a "system benefits fund," and this is derived from the notion that there are benefits to an integrated electricity system that will be lost in a competitive market. Ontario appears to be heading on a course to be one of the only restructured electricity jurisdictions worldwide with no plan or funding mechanism in place to support energy efficiency in a competitive market.
A system benefits fund is typically created through a charge on electricity, typically 1% to 3% of the price. I know there is considerable sensitivity around the notion of another charge on electricity, given the anticipated debt charge. This does not seem to be a valid reason for not considering a positive charge -- not to be confused with electrons -- as long as it is applied fairly and takes into consideration principles around fuel neutrality. In fact, I am certain electricity consumers in Ontario -- again the 11 million, not necessarily the 40 -- would be much more willing to pay for energy efficiency to reduce their bills as opposed to paying old debts on malfunctioning nuclear power plants. In fact, you could probably create a single bundled energy charge and drop the much larger debt component when the debt is paid off but continue the energy efficiency charge. This would seem to me to be much more politically attractive. This is also a neat mechanism which eliminates the need for direct taxpayer monies.
A fund could also be created by the government out of general revenues. The advantage of any fund over the status quo is that the fund would operate either independently or at arm's length from the government. An independent fund could also be established as a foundation, similar to the foundations being created by the Ministry of the Environment or the Ministry of Natural Resources, both of which I've been involved in to some extent. A foundation structure could then facilitate leveraged funding from the private sector, resulting in more effective, coordinated funding.
The recommendation of the Market Design Committee to have the government continue to manage programs directly is probably the last choice of the energy efficiency sector. There are few, if any, examples in Canada of successful energy efficiency funds run by governments at any level, although I would like to note that there are some successful programs.
The key to a successful approach for overcoming the barriers to energy efficiency is to have the energy efficiency sector stakeholders working together. The recommendation is therefore that the fund be managed by a non-profit multi-stakeholder agency, not government. The agency would be self-funded through the fund or services provided and report to the Ontario Energy Board periodically.
In terms of the fund amount, if, for example, we assumed that the fund were equal to 1% of Ontario Hydro's revenues -- in the US there are examples where they're looking at 3% of utility revenues to create funds -- the annual fund would be nearly $85 million. This is a very modest amount compared to the billions of dollars in the nuclear recovery program, the billions of dollars Ontario Hydro planned to spend on demand-side management, or even the hundreds of millions of dollars the Ministry of Energy, Science and Technology plans to spend on R&D over the next few years. There seems to be no connection between the ministry's science and technology mandate targets and energy targets. Perhaps the ministry ought to make the linkage and dedicate the $85 million out of the science and technology budget to a fund, if a system benefits charge is not implemented.
In terms of comparative government spending of tax dollars, it is difficult to avoid comment on the massive expenditures on nuclear plant recovery. We know that billions have been spent and billions more are planned, yet we are uncertain when the billions will stop flowing. Moreover, it amazes me that the very same companies and business associations who insisted that Ontario Hydro make huge, ill-advised investments in nuclear energy are now successfully lobbying the government to stick the taxpayers with this debt, while at the same time opposing negligible charges to improve efficiency and the environment for all Ontarians. Something seems to be wrong with this picture.
In terms of disbursement, funds would be invested in energy efficiency and conservation initiatives based on a set of criteria developed by an independent board overseeing the fund. The criteria would be reviewed by the Ontario Energy Board periodically and be consistent with the policies of the government. Funds could be disbursed to sectors according to contributions made by the sector through a charge, or other criteria if public monies are used.
Again, to conclude, the recommendation is that the government create a fund to facilitate overcoming the barriers to cost-effective energy efficiency and that this fund be managed by an independent multi-stakeholder organization.
I would be happy to take questions. Thank you.
The Chair: Thank you very much. We have three minutes, probably time for one question and answer from each caucus. We'll begin with Ms Churley from the NDP caucus.
Ms Marilyn Churley (Riverdale): Thank you very much. In my view, I believe you gave one of the most important presentations to date, although I admit I haven't been to all the hearings, only those in Toronto. It is very important and, unfortunately, it hasn't been focused on enough. There has been some talk of renewable energy and some mention of energy efficiency. It's been a long-time interest of mine. When I was on city council, I started the first energy efficiency office, which, as you know, has now led to a major atmospheric fund and all kinds of activities. It's really incredible, with a small investment and real political dedication, how far that's come.
I'm wondering if you can tell me the difference between what that atmospheric fund is doing and what you're suggesting here, and other examples of where this is working. You mentioned that there are some. I believe we really need to push this concept. The more information we have and the more ideas of how to make it work would be helpful.
Mr Lourie: I was actually one of the early board members of the Toronto atmospheric fund and I'm quite familiar with how it works. It would be similar in terms of the kinds of projects that would be funded. The one distinction I would make is that a fund, to be really successful, be more removed from government influence and that it be truly at arm's length to government and that it be the people in the industry making the decisions as opposed to, in the case of the atmospheric fund, where it's primarily the politicians who make the decisions. But it is a good example of a fund that has been set up to do these kinds of activities. The amount of money given out is quite modest. It's used largely, as you may know, to fund municipal projects like the city lighting project and those kinds of things, which are important. But it is a kind of model we could look at.
I didn't want to go into a lot of detail in my discussion of how it's being developed in other jurisdictions. In many cases, the restructuring is just in the process of unfolding around the world. I have provided, for example, to the Market Design Committee detailed information on these kinds of programs which do exist. They're structured somewhat differently. For example, in Norway and Sweden I believe the government has set up regional agencies that are essentially regional energy efficiency offices. In the United Kingdom a fund was set up based on a charge. In California they've created a fund I believe based on 3%, so it's collecting several hundred million dollars to fund both renewable energy development and energy efficiency projects. So there are examples we can look at.
Ms Churley: Great. Thank you.
The Chair: From the government, Dr Galt.
Mr Doug Galt (Northumberland): The percentage you're referring to would be on the customer's bill? It would appear on the bill? It would be however it could be worked in.
Mr Lourie: That's correct, yes.
Mr Galt: You may have explained, but I seem to have missed it. You mentioned that the Market Design Committee did not support it and that you were going to explain that, and I never did pick up that explanation of why they're not in support of it. I just don't understand why they're not supporting it when you're so enthused about it.
Mr Lourie: I guess my simple explanation, which may have been lost in there, was that the composition of the committee is represented by individuals and organizations that either want to supply electricity at the lowest cost possible or essentially purchase electricity at the lowest cost possible. They're motivated by pure market forces, and in my view either don't recognize or appreciate the difficulties of funding even cost-effective energy efficiency in a competitive marketplace. There are well-known barriers that prevent it from happening, and the composition of the committee isn't such that they delved into that issue.
Mr Galt: In other words, just plain money. They just don't want to spend that extra 1%.
You used the example of a building and the developer. I didn't follow through on how money might be collected there to encourage that developer to put in the more efficient windows etc. Would you see the whole construction industry be charged the 1%, or were you using that as an example where this 1% on electricity would be used to encourage the developer rather than being used purely for research purposes?
Mr Lourie: Right. That's an example where you could, for example, provide an additional loan guarantee that a bank might not be willing to carry for the upfront additional costs that could be paid off over time through the energy savings. It does happen to some extent now; it's called energy performance contracting. But there are still many examples where companies either won't be loaned that additional amount or they're just not interested in putting that additional amount into the building up front.
Mr Sean G. Conway (Renfrew North): Mr Lourie, good to see you again. I want to agree with Ms Churley: It is a very good brief and you have been extremely helpful in fleshing out the particulars of an idea that has been mentioned by other presenters over the last number of days.
By the way, before I begin a question, I particularly liked the bottom of the second paragraph on page 6. Having been around here for as long as I have, I certainly agree that there is a certain paradox and irony in the fact that those who insisted that Hydro make the big investments are now very reluctant to see a systems development charge, apparently.
Two questions: One, if you were to look across the restructured electricity world, which jurisdiction would you cite as having developed the most efficient, cost-effective systems development fund? Where would we go to see a very good model of what we would want to emulate?
Mr Lourie: It's early days. In New England they've done some good work, in Massachusetts and in New York, and the California example would be good to look at in terms of the kinds of activities they plan to fund and its structure. My understanding is that in California things are very heavily regulated still in terms of how things are being done. There's a lot of bureaucracy around it.
Mr Conway: I appreciate that, and I very much like your idea. Philosophically, I find it extremely attractive. What I would be concerned about is boondoggle, that it's just another well-intentioned scheme -- and I agree with you; I would like government as removed from it as possible, because no matter how good the intentions of government, it seems to me we're just too big and too awkward and sometimes not as well motivated for long-term results as we should be. On behalf of those 11 million customers who I suspect would like this, would certainly like the results of this, how do you protect me against boondoggle, a good idea gone amok?
Ms Churley: Like nuclear power.
Mr Conway: I'm thinking about some of the energy efficiency schemes that were well intentioned but just didn't quite deliver.
Mr Lourie: I would like to think that the primary way of doing that is by having an independent board that would be well represented by all the stakeholders who have an interest in seeing effective energy efficiency go forward, not by having direct political influence on it but by having as well a mechanism whereby you would be reporting to the Ontario Energy Board on a fairly regular basis.
Mr Conway: You make that point in your brief and I'll have to accept it. The caution I have, though, quite frankly, is that the farther down this road I go I keep looking for the independent person, the virtuous, disinterested, dispassionate individual. Boy, present company excepted, they're getting very hard to find, because the real and potential conflicts of interest around this energy deregulation or re-regulation become more manifest with every passing hour. I hope we can find enough independent people to do what you want done.
Mr Lourie: The Energy Efficiency Alliance is a good start.
The Chair: On that note, it is a good start to our day. Thank you very much for coming before us. It's an excellent brief, I think all my colleagues will agree, and one that we will give serious consideration to.
POWER WORKERS' UNION
The Chair: Now calling representatives from the Power Workers' Union, please. Good morning.
The Chair: As you can see, the committee is really excited that you're here before us now. Welcome. As you know, you have 30 minutes for presentation time. Please begin by introducing yourself formally for the Hansard record.
Mr John Murphy: My name is John Murphy. I'm the president of the Power Workers' Union. We represent about 15,000 members in Ontario. The vast majority of those work at Ontario Hydro. We represent about 70% of Ontario Hydro's workforce. The remainder work in a number of municipal utilities as well as some in Atomic Energy of Canada and some telephone companies as well.
We appreciate the opportunity this morning to share our views with the committee, and what I'm going to do is try to limit my presentation by focusing on the summary of recommendations that we have.
The PWU supports the general intent and direction of the legislation but feels it can be improved in a number of ways that advance its intent more effectively. The complete discussion of recommendations is tabled in our presentation.
We're going to, in our presentation today, cover six categories, those categories being successor rights and employee representation, pensions, electrical inspection, regulatory authority, consumer equity, and energy efficiency. We have nine recommendations associated with those six categories.
Beginning with successor rights and employee representation, the bill is silent on the mechanisms by which the existing union representation will be continued, either in Ontario Hydro's successor companies or in municipal electrical utilities, nor does it provide a process for resolving restructuring transactions, such as mergers and acquisitions, which involve more than one union. The PWU recommends that the process set out in Bill 136, the Public Sector Labour Relations Transition Act, 1997, as it has already been approved for similar situations by government, labour and employers, be the process applied here also. Accordingly, the following new section should be added to the Electricity Competition Act. This is our first recommendation:
"Notwithstanding any other provision of this act, the Public Sector Labour Relations Transition Act, 1997, shall apply to all transactions carried out pursuant to this act and shall continue to apply, notwithstanding any of its provisions, until such time as a regulation is made terminating its applicability."
The bill protects, among other things, contracts of employment when employees are transferred to new entities as a result of restructuring. For purposes of clarity the PWU recommends specifically mentioning collective agreements as similarly protected. Our second recommendation is to amend the noted sections of the act and add the words "or collective agreement" after the word "insurance" and before the comma at the end of each provision, to include collective agreements.
The bill permits the government to exempt by regulation the applicability of any other statute to Ontario Hydro and municipal utility transfers. To ensure labour stability, labour relations statutes should be exempted from this power, we believe. That comes to our next recommendation, which is to amend sections 124 and 146 and add the words "not relating to labour relations" after the word "provisions" in each of the two sections. That covers the first category we would like to provide our feedback on.
The second category deals with the issues of pension rights. The bill provides that municipal utility employees' participation in OMERS may continue when the utility becomes an Ontario business corporation, which it must do within two years under the bill. However, participating in OMERS is at the election of the new corporation. The same scheme applies to these corporations, if any, when they are subsequently privatized. The new employers could withdraw from OMERS without even consulting the affected employees. The PWU believes that, at a minimum, employer-employee consultation on this issue should be required. This can be achieved by regulation and should be added to the list of areas in which the Lieutenant Governor in Council can make regulations under the act. Our recommendation is to amend the identified section of the Electricity Act requiring employer-employee consultations with respect to continuing membership in the Ontario Municipal Employees' Retirement System in relation to any transaction under this act.
Again under the heading of pensions, there is a number of sections in the bill relating to the fate of the Ontario Hydro employees' pension fund. Inexplicably, the bill establishes a unique pension regime for Ontario Hydro employees, one that is specifically exempted from parts of the Pension Benefits Act. This new regime will likely have the effect of taking away very significant pension rights long enjoyed by Ontario Hydro employees and, at the same time, deprive them of rights enjoyed by other employees in Ontario under the Pension Benefits Act.
For a full discussion, we have identified it in our brief, but it may be worthwhile just highlighting some of what we see as inequities that would be created for Ontario Hydro employees covered by the Ontario Hydro pension plan versus everybody else in Ontario who would be governed by the Pension Benefits Act. Consistent with the direction of this legislation to create a level playing field, we think it's important that Hydro successors do not have an advantage in this respect over some of their competitors and that there's a sense of fairness at the same time for employees who will work for Ontario Hydro's successor companies.
As an example, the legislation contemplates having unique legislation governing the Hydro successor pension fund. It would specify that the financial corporation pension fund is not a multi-employer pension plan for purposes of the Pension Benefits Act, when clearly it is a multi-employer. We're creating a number of different employers. It is a multi-employer pension plan.
Another example is that the legislation specifies that the employer is the administrator of the plan. It specifies that the employer, in its sole discretion, may take contribution holidays and it specifies that the costs of administering the pension fund are payable out of the fund. We believe it's not only unnecessary to enshrine such provisions in legislation; it's also undesirable from a public policy perspective. Generally, such provisions appear only in the terms of the pension plan documents and can therefore be changed or negotiated as circumstances warrant. We believe having that sort of flexibility is important, especially given the magnitude of the change we're likely to go through in the next number of years with the introduction of competition.
That brings us to our recommendation with respect to the Ontario Hydro pension plan. We have identified various sections of the act that we suggest should be deleted to essentially have the effect of bringing the Ontario Hydro successor pension plan in line with every other pension plan under the Pension Benefits Act. We're not asking for any advantage over anybody else. We're simply saying that the same rules should apply.
The third category we'd like to cover is electrical inspection. The bill transfers authority for electrical inspection in the province from Ontario Hydro to a new Electrical Safety Authority. The structure of the ESA is not specified. The PWU endorses the recommendation of the working group on electrical inspection and safety in Ontario in this regard, provided that affected employees are treated in the same way as all other Ontario Hydro employees. We therefore recommend that the Electricity Act be amended by adding a new part after part II that creates the Electrical Safety Authority as a stand-alone, not-for-profit corporation having the rights, powers and privileges of a natural person and not being a crown agent. The definition of "Electrical Safety Authority" in section 2 of the act should be amended to read "means the corporation designated as the Electrical Safety Authority" in the appropriate part of the act; also, ensure in whatever the appropriate part of the act is that the employees transferred from Ontario Hydro to the ESA are covered by exactly the same transition provisions that apply to all other Ontario Hydro employees; in other words, that there isn't a disruption to their employment provisions as they transfer to this new entity.
The fourth category we'd like to provide comments on deals with the regulatory authority. The bill gives the government very broad regulatory powers to give it sufficient flexibility to respond to the needs and expectations of the new electricity marketplace and its stakeholders. But this power should not be exercised without a reasonable degree of consultation with those who will be affected by new regulations. The Minister's Electricity Transition Committee, which is representative of all stakeholder groups, is the ideal forum, in our view, for ensuring that appropriate consultation has taken place.
The bill appears to allow for any further regulations made pursuant to part IX to prevail over any inconsistent provisions of the Electricity Act or any other provincial statute. It does not seem fair to the marketplace, which is responding to the vision contained in the white paper and Bill 35, to allow regulations that are inconsistent with that vision. We therefore recommend that the bill be amended to specifically provide that the proposed regulations must be received and reviewed by the Electricity Transition Committee prior to receiving final approval by the Lieutenant Governor in Council. We think there is a lot of value to that because of the broad stakeholder group that's represented on that electricity transition committee. We also believe that this recommendation can have a sort of sunset clause, that it can in fact be eliminated after the initial marketplace structures and rules have been implemented, such as on December 31, 2000.
The next area we would like to cover deals with consumer equity. We feel very, very strongly that this is a critical ingredient to help make this legislation work for a number of reasons, not the least of which is the whole issue of public confidence and public understanding of what's being attempted to be achieved through this legislation. We think this is a critical area to be addressed.
Recent experience from California, the first large US state to completely open up its electricity market, suggests that residential and other small consumers are not benefiting from competition proportionately as much as large customers. This may have implications for Ontario, especially in low population density areas of the province.
Our recommendation has two parts to it. The first is that in its further refinement of this bill and in the development of regulations in the future, the government should carefully consider how applicable the California experience may be to Ontario and take appropriate steps to mitigate its imbalance in the benefits of competition from happening here. In this regard, special attention should be given to the net impact of competition on electricity rates in agricultural and northern regions of the province which are especially vulnerable to being "orphaned" in an otherwise active marketplace that is focused only on urban and large commercial and industrial customers.
While the PWU fully expects the introduction of competition to eventually drive down rates through improved efficiencies, there is a need to address the concerns of consumers whose rates could be adversely affected over the transition phase, and we think it's important to specify that our primary concern is over the transition phase. The government should ensure that it has the power, either through existing general powers or through specific amendments to Bill 35, to mitigate rate increases to customers through the introduction of a rate cap. The assurance that rates will not exceed current levels will provide customers with the confidence required to improve the overall acceptability of the introduction of a competitive electricity market in Ontario.
I just want to add to that recommendation. Specifically, we're attempting to address the issue of public confidence in terms of, "What is going to happen to my rates?" That is the basic question that needs to be addressed to restore public confidence. "Are my rates going to go up or go down?" This is an attempt to say that the government clearly has a broad public policy issue of ensuring -- in fact, the whole purpose of making these changes and introducing this act is to make electricity more cost-effective in Ontario. But the government also would be saying, if this recommendation were adopted, that it will be watching, and in the event that this does not happen for whatever reason, that there's a safeguard in place in terms of the government being able to intervene to address the issue of rates.
We're not talking about controlling or putting a cap on the cost of a megawatt of electricity, because that varies from minute to minute or from hour to hour in a competitive marketplace. What we are talking about is trends, annual trends if you like, the end rate cost of electricity that's being looked at. We really feel strongly that a recommendation of this or a variation of it would go a long way to addressing that issue of consumer confidence around this bill.
Our last recommendation deals with the issue of energy efficiency and it's pretty consistent with the recommendation that was made by the speaker prior to me, Bruce.
Energy efficiency: While renewable energy technologies should be supported, it will take many years to displace a significant amount of non-renewable generation. In the meantime, a major energy efficiency program in the province would be the easiest, fastest and most effective way to protect the environment and reduce Ontario's aggregate energy bill. It would also create thousands of high-value jobs. Restructuring provides us with the opportunity to establish a funding mechanism for this objective.
This is our final recommendation: that we allocate a small wires charge to an energy efficiency fund for the creation of an energy efficiency industry in Ontario. While this charge would be small and the overall dollars would be relatively small associated with creating the fund, with the potential benefits from such a fund, as you heard from the previous speaker, the potential benefits of reducing up to $1 billion of the energy bill in Ontario and the spinoff effect that would have on the economy as a whole in Ontario, we think it would be really worthwhile looking at in terms of this recommendation.
Thank you for the opportunity. I'll be glad to answer any questions you may have.
The Chair: Thank you very much. We have four minutes for each caucus. We'll begin with the government caucus.
Mr Steve Gilchrist (Scarborough East): Thank you, Mr Murphy. It's good to see you again. I really think it's important to put on the record, and I say this I'm sure on behalf of all of my colleagues, that we genuinely appreciate the perspective that you personally and your union have taken in the dialogues that have taken place so far. I know you're continuing to be actively involved in the minister's transition committee and I appreciate that.
Again here today in your comments you've taken a more societal view and a less myopic view. Not to drive a wedge in any way in the union movement, but yesterday when Mr Ryan tried to suggest that he spoke for more electrical utility workers than you do, I felt constrained to correct that impression. I really do appreciate the fact that throughout all of this you've made not only the comments you've made here today -- by the way, just as an aside, there are a couple of things in your presentation that perhaps I could just make very brief comments to. In the case of electrical inspections, right now the legislation would provide for the option that you're putting forward there as is, but in every case we'll certainly undertake to take your suggestions back and get a very good explanation from the bureaucrats of why they can't be accommodated or, preferably, hopefully they will.
What I'd like to explore with you is something that wasn't in your presentation, that throughout this process you've also expressed a willingness to be an active player in the actual management and operation of these plants. Coming from a background where the Canadian Tire stores have a profit-sharing plan that makes their employees very much co-owners of the business, I would be hypocritical in not suggesting that is a laudable goal, and, even further, your comments about private participation as well.
I wonder if you'd just care to discuss the opportunities that you see existing in the next few years for greater involvement of your members, and the best possible job security, becoming part owners, and of the private sector as well.
Mr Murphy: I'd be happy to. In terms of just the overall approach we've been taking as a union, we feel very strongly that for the 15,000 people we represent who have worked directly in this industry that's being significantly transformed, it's really important to take a pragmatic approach to looking at the issues, to not just be critical of changes that are coming up but to try to be part of the change, part of the solution and try to address it, because ultimately they're the ones who are going to have to live with the results of this new, transformed electricity industry that we're heading into. That's why we've been spending a lot of research and a lot of time looking at the issues and hopefully we've been effective in trying to influence some of the changes.
In terms of the opportunity for participation, we're absolutely convinced that one of the key ingredients for an effective organization, either in the public sector or the private sector, is the opportunity for people to have a sense of ownership of the company they work for. Having a sense of ownership we think involves things like being able to share in the rewards of a company as well.
One of our objectives as a union is not only to try to get more say in the running of a business, because that's also important, we think the knowledge base that workers have in any industry is very valuable in making it effective as an organization, not only having more say but also having people have an actual stake in that business as if it were their own business. If people came to work with the sort of sense that, "Look, this company is more efficient and more effective; I'm going to do better out of it as well," we think there's a lot of value to that. Certainly our approach as a union will continue to be, even more aggressively as we move into a competitive marketplace, to explore ways through collective bargaining of creating more of those opportunities where people will have a stake, ownership and get rewards associated with the returns on the industry that they're a part of.
Mr Gilchrist: I appreciate those comments.
Mr John R. Baird (Nepean): Could I have Mr Conway's time?
The Chair: He promised he'd be back. To the NDP caucus.
Mr Wayne Lessard (Windsor-Riverside): Thank you very much for your presentation, Mr Murphy. I wonder, if none of the suggestions and none of the recommendations you've made are taken into consideration, whether you still support Bill 35 in the end?
Mr Murphy: The answer to that question is that we do support the legislation, we do support the direction that's been taken. In terms of the recommendations not being taken into consideration, it would depend on to what degree they were not taken into consideration. I'm not trying to avoid the question, but as an example on the issue of how successor rights were going to be dealt with, the bill contemplates a smooth transition for employees. So, consistent with that smooth transition for employees, we're simply saying that there are some things that may inadvertently need to be fine-tuned to allow that smooth transition. If these recommendations not being implemented meant that the interpretation was going to be that there would be a disruptive transition for employees, then obviously that would cause us to have to reconsider our support for the bill.
Mr Lessard: One of the recommendations you made is the Ontario energy efficiency fund, which is one that I think has a lot of merit. We've heard similar suggestions from a number of people. One of my concerns about Bill 35 is that it talks about introducing competition into the Ontario market. To me that translates into more generators from either inside Ontario or from outside of Ontario producing more power to sell into Ontario, and theoretically that is power that would be produced by people who weren't members of your union. This bill really provides encouragement for more energy to be sold in Ontario by a number of different people. It doesn't encourage conservation because they want more power to sell to more consumers. By promoting more energy efficiency, how do you see that that is going to benefit your membership in the long run?
Mr Murphy: In a number of ways. We believe that it's difficult to continue to look at Ontario from an electrical perspective as if there's a wall around the province. We think that the whole trend across North America is moving more towards a North American marketplace, competition in a North American marketplace, and that's the inevitable direction in which we're heading.
We think, given the fact that the members we represent are highly motivated, are highly productive, that we have cost advantages that are significant in Ontario relative to a lot of our neighbouring US utilities, that opening up competition will open up new opportunities for Ontario generators to compete in that market, to sell power into that market. We're not concerned with competition from that perspective. Will there be some dislocations? Absolutely. Will those dislocations be offset by new opportunities, new markets that we gain? We believe the answer to that is yes.
In terms of the energy efficiency fund, the reason why we suggested that is because -- you're correct -- in a competitive marketplace people are going to want to sell as much power as they can. That's why we've suggested that to address the issue of energy efficiency, there needs to be a separate charge, a separate fund and a separate focus group that are going to be mandated with the task of trying to help industries and consumers become more energy-efficient.
Mr Conway: John and colleagues, good to see you. I must say, John, there is a charming Celtic calmness to your presentation today, a protest movement becalmed.
Mr Baird: Like Mr Gilchrist's questions.
Mr Conway: I'm sorry I was out. It's a very good presentation. I'm particularly attracted to your recommendations around consumer equity and energy efficiency.
But let me come to a specific point that underlies a lot of what we're about, that yes, competition should deliver some benefits; yes, a more rigorous and transparent regulation of this electricity business is a good thing, both of which I support and I think there's broad support in the committee and in the country. But in the short term perhaps the single biggest challenge we face as a community in Ontario is what to do with the massive and underperforming assets at Ontario Hydro Nuclear. Can you update the committee from your point of view as to what is the progress or ongoing lack of progress with the implementation of the nuclear asset optimization plan? Quite frankly, if we don't get better performance or better answers around Ontario Hydro Nuclear's troubled situation, many of the benefits of competition are certainly going to be delayed, particularly for the 11 million residential and farm customers across the province.
Mr Murphy: In terms of the nuclear asset optimization plan, and the short time available to comment on it, I think I'll try and summarize it like this, Sean, by saying, are we better today than where we were before the nuclear asset optimization plan was started? Absolutely yes. Have we made progress? Yes.
Mr Conway: Can you be specific as to how and where?
Mr Murphy: I can in a second, Sean, but just to keep with the question, are we as far ahead as what the plan envisioned? No. Are there areas where we're behind? Yes. That's in terms of where the nuclear asset optimization plan is.
The one thing that's absolutely clear, I believe, in terms of the members I represent, is that heading into the competitive marketplace that we're heading into, apart from the huge impact on the province as a whole, everybody understands that nuclear recovery is an absolute must. But to be fair, I think that recovering Ontario Hydro nuclear reactors -- it took a long time for them to get into the problems they're into and there aren't any snap, magical, easy, quick-fix solutions to it. I think it's very complex. It's been off to a rocky start in some respects but I do think the plan is working, I think it's coming together and I think it will be successful.
Mr Conway: My final question then is simply this: Everyone who has looked at this policy, and particularly the Macdonald committee, the advisory committee appointed by the Ontario government which reported two and a half years ago on the structure of electricity competition in the province, and more recently another special committee, the Market Design Committee -- both of those special government advisory committees have told the people of Ontario that to get the benefits of competition there must be a further breakup of Ontario Hydro's massive generating capacity beyond what this bill contemplates. With that in mind, with that very specific advice in mind, can you comment on how, if we are to have a further unbundling of Ontario Hydro's generating assets, we deal with the Ontario Hydro nuclear generating assets which are, as you know, at least 60% of the generating assets of Ontario Hydro?
Mr Murphy: Personally, Sean, I don't support a further unbundling of the generating assets, not because of any impacts on our members or disruption or anything but just simply because of the fact that if you look at what's happening in the world around us, in the private sector out there, in the banking communities and in every other industry, the common driver is that if you're going to be in a competitive marketplace, size is important. Organizations are coming together, they're merging so they can get the efficiencies of mergers, and at the same time we're looking at Ontario.
Again it's the concept of, do you look at Ontario as a wall around it in terms of the electricity market or do you look at it in terms of the North American marketplace? We look at it from the perspective of being a North American marketplace and we say that if you're going to be effective in the North American marketplace, you'd better be big enough to compete. Everybody understands that. Most of the residential customers out there understand it. They understand why Wal-Mart is successful, why Home Depot is successful. Size is important if you're going to be a player in a competitive marketplace.
I don't support further disaggregation of the generating assets. In fact I'd go even further. I'd suggest that it would be in Canada's long-term interests -- it may not be politically expedient to do it -- to look at further associations, stronger ties between Ontario Hydro's successor generating companies, Manitoba Hydro and Hydro-Québec. If you really wanted to look in terms of being effective in the North American marketplace, that's the direction I would be moving in rather than becoming smaller. We'll get eaten up by the competition if we break up our generation further.
Mr Baird: I wonder if I could ask just a quick point of clarification, Madam Chair, and maybe it could be just for the committee's deliberations: On recommendation 4.1.1, if it would be possible to get a definition of the word "consultation," that might assist us in our deliberations
Then second, on 22.214.171.124, these are important issues with respect to pension rights that I can appreciate are important to people's economic security. If there could be some more specificity on the basis for the changes and the background of those parts, I would welcome it.
Mr Murphy: Sure. As to the question on consultation around changes to the OMERS pension plan, the reason we've used the word "consultation" was to cover the variety of circumstances we find ourselves in. In a unionized environment, consultation we would envision as being two-party negotiations, that the new successor employers and union would sit down and negotiate whatever changes they wanted, the same as they do on the other provisions of the collective agreements.
Where there isn't a specified provision in a collective agreement, because a lot of municipal utilities, in particular some of the smaller municipal utilities, would not have specified the OMERS pension plan in their collective agreements because they just would have gone on the assumption in the past that you're automatically going to be part of the OMERS pension plan, in those cases what we would suggest is some sort of provision that would say that when the collective agreement expires, there would be protection to allow continuation in the OMERS pension plan till the collective agreement expires, so that both the union and company can decide whether or not they want to negotiate a continuation in the plan.
In the non-unionized environments -- and that's why we have the word "consultation" in there, to cover the full gamut -- we would suggest whatever the normal consultation process is within the non-unionized environment, that should take place as to whether or not continuation in the OMERS plan would continue.
Mr Baird: I appreciate it. Thank you.
The Chair: Thank you for coming before us, gentlemen. What happens in this transition and all these changes will clearly affect a number of your members very directly and we thank you for your best advice in this matter.
Mrs Helen Johns (Huron): Madam Chair, as a point of clarification on Mr Lessard's question, I think he needs to recognize that subsection 87(1) in the Ontario Energy Board Act is there to enhance environmental standards and allow for more customer options. I just wanted to draw that to his attention for Hansard.
Ms Churley: I think he knows that.
ONTARIO ENERGY BOARD
The Chair: Representatives from the Ontario Energy Board, please. Good morning, everyone.
Mr Conway: Oh, surely the chairman hasn't brought slides.
The Chair: Most of us are looking forward to your presentation.
Mr Conway: You can tell who has been a cabinet minister around here.
The Chair: As you're getting settled, I'm sure you know the ropes and that you have an hour for presentation time. Before you begin, please be sure to introduce everyone for the Hansard record.
Mr Floyd Laughren: It's good to be back here, so far, and mingle with some old friends. With me this morning are George Dominy, the vice-chair of the board, and Steve McCann, who's the board solicitor. Both have a great deal of knowledge of the bill and of the workings of the boards.
I was also pleased to note in the room this morning the presence of my predecessor at the board, Marie Rounding, who served as a sterling chair of the board for over six years. If your questions get really ugly, I may ask her to give me a hand up here.
We have a number of slides that I'd like to speak to, which go through some of the activities of the board and some of our concerns and challenges as well. I'll make sure that there's time left for questions.
Mr Conway: Yes, that would be rather sporting.
Mr Laughren: I wouldn't want to see Mr Conway not have a chance to express himself.
Mrs Johns: That would be a first.
Mr Laughren: The role of the board is going to change very dramatically because traditionally the board has been an independent regulatory agency, established under the Ontario Energy Board Act. The board regulated the monopoly sale, distribution, transmission and storage of natural gas and did it through quasi-judicial hearings with a lot of attention to due process. That has been the traditional role of the board.
They also reviewed, upon request, Ontario Hydro's bulk rate proposals when requested to do so, as I say, and then would make a recommendation to the minister. That didn't mean that the board had the authority to alter those rates but it could make a recommendation to the minister.
It was driven by the public hearing process, very transparent and a lot of opportunity for people to have input into it if they wished, and then decisions were brought down with reasons. It was quite a formal process in which the board has been engaged and, quite frankly, still is doing with our natural gas hearings as we speak.
The reason for that was to provide as much public interest as possible and, at the same time, have it transparent for people who would be affected by rates. The existing resources at the board now would allow us to continue to do that. That simply wouldn't be a problem, but as the changes come about, we know that what's there now isn't going to do it.
The new role as envisaged in this bill, and I'll be very careful not to be contemptuous of the Legislature in anticipating the passage of this bill --
Mr Conway: Surely governments are so flexible.
Mr Laughren: Yes -- but as this bill is written, it really expands enormously our responsibilities and our mandate, both for gas and for electricity. I'd like to speak for a moment on the natural gas side because I think sometimes we get caught up in all the changes around electricity and forget that natural gas is an important part of what's regulated in this province on the energy side.
One of our responsibilities is to try and bring greater regulatory consistency between these two sources of energy, gas and electricity, and to establish rule-making authority so that there is consistency. For example, it's not inconceivable to think that in the future people will buy energy as opposed to having a mindset that they're either into gas or electricity. They'll be buying energy, so we need to have consistency in treatment. Whether it's the marketers who sell electricity or sell gas, we want to make sure they're treated as consistently as possible whether it's expanding a gas line or a transmission line. We want to bring consistency to the whole process so people understand that.
The same with rule-making authority, which could establish, for example, codes of conduct for affiliate businesses, whether in the electricity field or in the natural gas field, so that investors, for example, understand that very clearly.
To bring more flexibility in establishing rates, right now rates are established through this quasi-judicial rate-setting process of very complex hearings by the board. It's very time-consuming and complex. This bill encourages us to have more flexibility, and I'll talk about it in a moment because there's a new process -- well, new to me anyway -- called performance-based regulation that's going to allow us to be a lot more flexible in doing this.
We're also going to need to be able to set conditions of service because if we just allow price to drive it, then you could have a situation where price would be low, but it would be low because of poor service and we don't want to be encouraging that, so that's going to be part of our mandate as well.
We are going to license agents, brokers and marketers in electricity and in gas. People around this table more than most know the problems with marketing of natural gas and potentially electricity. I know I've had letters from some of you on that and I'm sure your constituency offices as well because, right now, we have no jurisdiction over that. If they break the law, they're subject to the penalties that way, but right now, the board certainly has no jurisdiction over the marketers and their practices.
I want to ensure that there's a rational system expansion. For example, if right now a gas line is to be expanded, they need permission from the board. The same will apply with electricity, because you don't want a utility expanding at enormous cost when it doesn't make sense. I think they call it in the trade gold-plating a system. Then all the ratepayers pick up the tab for that. So it has to be rational expansion, and not just expansion to make a bigger empire.
Mr Conway: Keep Ontario Hydro out of this for the moment.
Mr Laughren: I wanted to talk about electricity licensing. That's going to be a very important part of the changes that are going to occur. There is a two-stage approach, because we're doing interim licences. We're working on that now. We've sent out a consultation paper and we're really trying to get a handle on that. It's something we've never done before; this is completely new for us.
We're doing interim licences now, which we hope to have done late this year or early next year. When those licences are granted to all the players out there, they will be viewed as interim licences and as an application for a permanent licence when the market opens up to free competition in the year 2000. Our goal is to get those licences in place and consider them an application for the permanent licence.
We'll be licensing the IMOs, the independent market operators that are in the bill. We'll be licensing generation, Genco. We'll be licensing the transmission and the distribution. On the distribution end, there are 270 some municipal electrical utilities, so you can see that there is a lot of work to be done so we can handle that and digest it. We'll be licensing the retailing or the selling of electricity. We'll licensing the wholesale buyers too. We'll arrange contracts presumably and so forth.
We're going to set up what's called performance-based regulation for the monopoly part. You can have abuse of market power not just at the generation end of the spectrum, but also in the distribution and transmission end. So we'll be setting up performance-based regulation for that, and I will speak in a moment about performance-based regulation.
We are also charged with maintaining rural and remote rate assistance, to make sure that that remains in place. We don't set the rules on that. The Ministry of Energy, Science and Technology will set the rules. Then we'll be responsible presumably for making sure that rural rate assistance remains in place and that all ratepayers help pay for rural rate assistance as they do now.
We will monitor and advise on market power of the various components of the system, whether it's generation, transmission or distribution.
In the electricity licensing, our objective is, first of all, that participants won't be able to function without a licence. That's the rule. They will have to have a licence if they're going to be out there operating. Also, a licence will empower us to ensure that the players comply with the terms of the licence. We have to have that to make sure there is compliance and also so that there's an obligation -- presumably this will be part of the licences, although they're not developed yet -- to comply with any industry standards or codes. That could be codes on health and safety or weights and measures, things like that, so that there's an industry standard or code and people can't get around it. The licences would make sure of that.
Also of course, there's an obligation to provide access and service to customers. We can't have people not being serviced just because there's a competitive market out there. We have to make sure that that's in place. This is a bit in-house, but the whole administration process of licensing is an enormous challenge for us at the board. That has to be set in place, and that's a major task for us. I know it's not your concern at this point, but it's something we have to work very hard at.
When it comes to the board's role on rates and their facilities, we are shifting from a very prescriptive regulatory process to a much more flexible one. We at the same time have to make sure we have transparency and public participation in it. That's not an easy task. It would be pretty simple just to make decisions at the board, but that would be unacceptable, particularly when people are used to a very transparent process there and a lot of due process in place. We're going to have to make sure that we continue to have public participation. We've done a lot of it already on the natural gas side and are starting to do it on the electricity side through consulting all the stakeholders out there.
We are going to approve or fix just and reasonable rates for electricity transmission and distribution utilities. You can imagine that that is in itself a task, to set those rates. The board has never done that before. Also, we will utilize flexibility in approving any system expansion in electricity.
I want to say a word about -- I keep using the term "performance-based regulation." What we really mean is that rather than setting rates based on costs to the utilities and so forth, we'll say to the utilities, "You can have some flexibility, but you must achieve certain performance levels and standards, and if you do that, OK, you're fine," and the board will monitor that. It's incentive-based so that they have incentives to provide quality service and reasonable prices as well.
It will mean fewer hearings, no question about that. Can you imagine us holding hearings on 270-some municipal electric utility licences? I know we couldn't handle it. It will be more flexible for written hearings, oral hearings, tried hearings and so forth. We will try and make it as transparent as we can and then monitor their performance. That in itself again is going to be a major task for the board to try and monitor those. Once the expectations have been set up, we have to monitor them to make sure they're achieving them.
All the municipal electric utilities are going to be licensed. In order to be licensed they will, as a condition of the licence, have to determine what their business activities are and tell us. They'll have to determine what their geographic service area is. They'll have to prepare a cost-of-service study. Their rates then will have to be approved by the Ontario Energy Board. They must separate their monopoly services from their competitive service, in other words, the wires from other aspects of their business, so we know there's not a cross-subsidy from the monopoly to the competitive side. We have to be sure of that.
The board will have authority to examine and comment on and change amalgamations, mergers and acquisitions. That will be part of the process. If a couple of the utilities, or three or four or five, merged, for example, they would require a new licence as a result because they would be a new creature and would have to get their licence from the board. We will also have to make sure there's non-discriminatory access to the wires because that's part of the new world.
I want to say a word about market power. The board has some authority in this regard. We can review potential or perceived abuses of market power in a number of ways. One is that the minister can request the board to investigate abuses of market power at different levels, whether it's generation or transmission or distribution. As you may know, the IMO has what's called a technical panel, and they will be watching for potential abuse of market power. We can act on a report from them as well, or if the board itself saw that there was a problem, could comment on it as well. We license the generators and the others so that we can alter licences according to behaviour as well, and that is part of our responsibility.
We must implement government directives concerning the market rules and licence conditions to mitigate market power concerns, and that's part of our job. We can impose conditions onto the licences. We cannot require divestiture on the Genco side. That's forbidden in the bill. I think it's section 69. That cannot be a condition of the licence.
There are some key challenges for us.
First, we must establish relationships with new market participants, because the board has never had to deal directly with all those municipal electric utilities. That's going to be a challenge for us, to develop a working relationship with them, the same with the gas marketers, the electricity marketers, all those participants. That's a challenge for us to develop that.
Second, and this is an important challenge as well, we have to manage all this change and the growth in the board with an aggressive implementation timeline, much more aggressive than any other jurisdiction we know. We're being asked to do this very quickly. For example, the licensing of everyone: We want to get the gas marketing licences done this calendar year. We have to draft licences for next year, the first quarter, we hope. An appeal process has to be set up, because people can appeal decisions of the board and so they should be able to do. We have to develop rule-making powers. We have to develop the rates for Servco. They're going to need to know their rates for rating purposes by the bond rating agencies, those wonderful folks, as I recall, and the rates for Genco as well.
We are going to need the necessary resources to do that. We've already had approval from Management Board for a major injection of money and people for the board, but that takes time to get through the process to get people hired, and they don't always hit the ground running either. That's a struggle for us, but we do have money in the board budget for outsourcing for expertise too, because those people just don't materialize instantly just because you have the money to hire them.
There are also a lot of internal tasks that I won't bore you with but that we're working hard on at the board. I already mentioned that we've done a lot of consultation with the gas industry already and now there's a paper out on electricity licensing as well. That's due back by the middle of September from the stakeholders out there. All the municipal electric utilities are themselves engaging in a process of consulting district by district, as they call it, and we are taking part in that. Mike McLeod, who's in our strategic services division, who's here at the slides, takes part in that, as well as others. We are taking part in that to make sure we're consulting there too.
We've got to develop new rules and guidelines and processes and make all of it work, including monitoring. That's going to be a big task for us, monitoring all of this once it's done, and at the same time ensuring efficiency and effectiveness and ensuring symmetry between natural gas and electricity so that there's a level playing field, and also that there's regulatory certainty. I think that's important for people who have never before invested in energy in Ontario. I'm thinking of generating or retailing or wholesaling, whatever. There needs to be certainty so they know what to expect when they come here, when they develop something here in the province, that there's going to be certainty there so they know what they're doing and what to expect.
Those are most of the challenges we face. There may be some concern about whether we can do all this in the time we have. We think we can do it but it really is a challenge for us. I wouldn't give you any other impression. We have a good staff at the board and we're working very hard, and we have had co-operation on getting new resources and so forth from Management Board. So we think we can do it. We are going to work very hard at it and make sure we accomplish our objectives.
Thank you, Madam Chair.
The Chair: Thank you very much. We have 10 minutes for questions from each caucus. We'll begin with the official opposition.
Mr Conway: Thank you very much, Madam Chair, and thank you, Mr Laughren and colleagues. It was a very helpful presentation. Let me get to my questions.
Mr Chairman, you have said in your presentation that as a result of Bill 35, the roles and responsibilities of the Ontario Energy Board, to use your phrase, "expand enormously." I think that's obvious. My question, and you touched on it briefly, is what kind of additional resources, financial and otherwise, do you particularly expect you will require over the next three to 24 months to bring about an orderly transition from the monopoly market to the competitive electricity market?
Mr Laughren: That's exactly what we're struggling with, and it's an appropriate question. The Management Board submission that we had approved very recently gives us 18 new people we can hire who will help us. A lot of this is in the licensing area, which is so totally new to us. We need more space, and we're getting that, in the same building, as it turns out, which is helpful. That is in this fiscal year. You said up to 24 months, and we think we'll need more people after that. Quite frankly, that's all we can digest at this point, that number of people. The other thing we'll need is money, because I believe we'll need to do a lot of outsourcing to get expert help, people who've worked on these kind of exercises in other jurisdictions who can help us with developing licensing and monitoring and so forth. Those are the kinds of things.
Mr Conway: I appreciate that. Let me, in the limited time we have this morning, cut to, for me, one of the essential questions. As a member of the Legislature and as a member of the Ontario public, one of the aspects of Bill 35 that I really like is a much more transparent, rigorous and meaningful regulation of the energy sector, not just gas, but electricity, for the first time.
I've been thinking about the broad base of residential and farm customers that you, more than anyone, are going to have to protect through a lot of shark-infested waters. It is no secret that this is a multi-billion-dollar business. The electricity business alone in Ontario is a $10-billion business.
If I look at the literature in the United States and in Great Britain, one thing is clear. This kind of policy, particularly with the disposition of public assets or the allowing of private interests into a vast marketplace like electricity has had the capacity and continues to have the capacity to make millionaires overnight, to make fortunes over weekends. The literature is very rich on that subject, and not just in the United States but in the United Kingdom as well.
As an average Ontario citizen, taxpayer and electricity customer, you, Mr Laughren, and your colleagues are a very important part of my protection. The bill sets out a number of opportunities you have to rigorously regulate and protect the public interest. I think that's a good thing, but there are problems.
One of the problems I struggle with is evident conflicts of interest. The government of Ontario -- and I don't mean this as a partisan criticism; you and I have been in government. But I look at the sections of the bill that touch on the Ontario Energy Board. I look at sections 26 and 27 of the Ontario Energy Board Act, 1988, and I see that the provincial government of Ontario has given itself a clear directive power around a whole range of important policy questions. Why would that be important? It might be important because, among other things, the successor companies to Ontario Hydro -- Genco and Servco -- have one shareholder, and that shareholder is the government. The government, therefore, is in a clear conflict of interest, because it's got a pecuniary financial interest in the health and wellbeing and the commercialization of Genco and Servco.
Then I go back to the Electricity Act and I look at subsections 87(1) and (2). Before that, actually, the whole subject area about special charges to write down the residual stranded debt, the multi-billion dollar stranded debt -- what do I see there? You're a former Minister of Finance. It's clear under this legislation that the Minister of Finance is going to make a critical call around how much residual stranded debt will be dumped on the backs of the broad base of electrical consumers. He'll do that only after he accepts a valuation of companies in which he is the principal shareholder -- another conflict.
Then we come back to not only the call about the residual stranded debt, which he alone makes; he alone also makes the call as to when it is paid off, and when it is paid off, under sections 85, 86 and 87 of this bill he, the Minister of Finance, begins to receive new electricity taxes that are going to provide to the government of Ontario, once the stranded debt is paid off, I presume hundreds of millions of dollars of annual revenue, about which anyone who has ever been or ever would hope to be a Minister of Finance would understandably salivate.
I only cite these as examples of conflicts of interest that are real and material. I come to this with 23 years of experience in and around the government and the Legislature, so any instinct for Pollyanna I ever had is long gone.
What, Mr Laughren, are you and your colleagues at the Ontario Energy Board going to do to protect the 11 million electricity consumers from the exercise of these conflicts of interest in a way that might be very injurious to rates, particularly rates paid by the millions of residential and farm customers?
Mr Laughren: There are some things we have jurisdiction over and others we don't. When it comes to the whole issue, for example, of market power we have some jurisdiction, we have some say in that.
We do not have a say over the stranded debt and how it is allocated. That is not within our mandate, so we can't do anything about that. Once that has been set up, we can monitor what goes on after that, but we cannot do anything about the rate the stranded debt is set at or how it's allocated, in other words, among Genco or consumers or transmission. We just don't have the authority to do that.
All we can do is make sure -- I think the board has done a good job on natural gas. I really believe that, and I believed that before I went to the board, that they did a good job in that regard. The board has a long history of looking out for the public interest in that regard. There is no reason not to; that's our mandate. I think that when it comes to electricity, that will apply. The board will be diligent.
Mr Conway: Within the powers granted to the board, I accept that. My concern is that there are very important exceptions to the board powers. Tom Adams is here today. Tom and the group were with us yesterday. They expressed a concern around section 26 of your act, the Ontario Energy Board Act.
Again my concern is, who is looking out for the interests of the average residential and farm customer, particularly since there are such enormously powerful commercial interests at stake?
Bryne Purchase, whom you know, came to this committee in Ottawa earlier in this week and he said to the committee -- and quite frankly, I thought it was very important and somewhat surprising testimony -- that one of the most important obligations we had in looking at this legislation, and that the government and the Legislature had generally, was making sure there was very strong governance of the successor companies, Genco and Servco. I suspect the reason he said that -- and he was very guarded because he's a very diplomatic fellow. But Bryne knows what you will know: that the opportunities for people running Genco to make private fortunes at the expense of the Ontario taxpayer and the Ontario electricity ratepayer are significant. If you look at Britain and the United States, it is clear how those fortunes get made.
I want to know what protections the board feels it can exercise on, for example, the governance of the successor Ontario companies. Have you got a strategy to ensure that the small, tightly knit boards that are going to run Genco and Servco, multi-million dollar assets in their control that they can do a variety of things with, will not do it in a way that is going to injure and impair important public investments and enrich private citizens to the tune of millions of dollars at the expense of Ontario taxpayers and Ontario electricity consumers?
Mr Laughren: The board does license them and part of the conditions of licensing will be rates. We will monitor that. At the end of the day, we will try very hard to make sure that there are not abuses on rates. If I follow your argument, you're implying that there will be abuses through pricing, and part of our job is to make sure that those don't occur.
Mr Conway: One of my concerns comes back to the question about how you establish the value of, say, Genco and Servco. We've got Midland Walwyn and Goldman Sachs and a variety of good people who lie awake at night worried, their primary concern about protecting the public interest. We all know that. Goldman Sachs doesn't rest without understanding the public interest in all its dimensions. But a critical decision is going to be made around how much of the debt Genco and Servco can make.
You don't have to be Albert Einstein to figure out how important a calculation that is to the opportunities for Genco, on the one hand, in a commercial market, and also how much of this multi-billion-dollar debt is dumped on the back at the first instance, because we get one call at this presumably. There is going to be valuation day, and then these two new horses, paid for by the Ontario government and the Ontario taxpayer over the decades, are going to be allowed to roam in new pastures, and some of those pastures, by Mr Farlinger's own admission, are going to be in Kentucky and Tennessee and Ohio.
I guess that's the question: What does the board have by way of regulatory authority to oversee the behaviour of Genco and Servco in the United States? Another concern I would have is that the successor companies, going around with very substantial public investments, will make every effort to give benefits to themselves and their new American customers, leaving behind a stable full of manure to be picked up by the Ontario taxpayer or Ontario electricity ratepayer.
Mr Laughren: I'll try to respond to that very evocative statement without --
Mr Conway: But Bill Farlinger has said, for example, that they're not going to divest Genco, which is a major problem. But the way they're going to deal with it is that they're going south. They're going to take 40% of their business -- I think the average Ontario citizen is going to look at that and say, "I bet the strategy here is that they want to take their new assets, debt-free, into the United States, provide a benefit to American customers and leave a pile of debt behind for ratepayers in Shining Tree and the Ottawa Valley and everyone else to pick up and pay for."
The Chair: While you're considering your answer, I'm going to let Mr Lessard start, and you can incorporate that.
Mr Lessard: I'm going to use the beginning of my time to give you an opportunity to respond.
Mr Laughren: I wanted to let Mr McCann try it.
Mr Steve McCann: I don't think I can deal with all those issues, but drawing an analogy with the way the board has regulated the natural gas industry in the past, as I think everybody knows, the natural gas industry is somewhat different in its character from the emerging electricity industry.
Mr Conway: I agree.
Mr McCann: It's under private ownership, not public ownership, and is characterized by large distribution companies rather than the large number of electricity distribution companies of various sizes that will emerge. But the point I wanted to make about it is that in fixing just and reasonable rates, which is the test the legislation imposes on the board, the board looks at the costs of the company it's regulating. Those costs include everything from executive compensation to construction of facilities and so forth.
Of course, in doing that the board has to exercise judgment. Regulators are often accused of micromanaging companies, and we don't want to do that. We don't want to get into the day-to-day management decisions because that's a very inefficient way of regulation. But issues such as compensation and so forth can come before the regulator and sometimes do and are issues that can be considered in fixing just and reasonable rates.
As Mr Laughren has indicated, the regulatory methodology is going to be somewhat different in the future, but that's not to say that there can't be scrutiny of these matters. Certainly one of the things that the board feels is very important in the legislation is the fact that all these new companies that are distributing electricity, transmitting, generating, will be companies formed under the Ontario Business Corporations Act. I think the expectation is that they will operate as business corporations and the standard that should be applied to them by the regulator is the same or similar to business corporations. Therefore, at least some of the issues you're raising are proper subjects for the regulator to consider in dealing with the cost and rates that are proposed to be charged by the companies involved.
Mr Lessard: Thank you very much for your presentation. Mr Laughren, I want to start out by clarifying the record. When you said you were pleased to see some old friends here at the committee, you were referring to Mr Conway primarily, who's celebrating his 23rd anniversary in the Legislature this week, by the way.
Mr Laughren: Congratulations.
Mr Lessard: One of the single most important factors in determining whether Bill 35 is going provide any benefit to residential consumers in the province of Ontario is the determination of the amount of the stranded debt. One of the things we've been encouraged to do as legislators is to make sure that process is as transparent as possible. The way the legislation stands now is that the Minister of Finance is going to be the person who determines that number. We've been told an army of consultants is assisting him in making that determination, but we've been told by Bryne Purchase, who did some work on how that amount was going to be determined, that no matter what number you pick, it's going to be wrong. The ramifications of that number being wrong are substantial, because it's going to determine whether we really have a competitive marketplace in Ontario and whether we have a possibility of lower prices or not.
Mr Conway asked you what responsibility or impact you may have on determining what the stranded debt is. I take it from your answer that the way the legislation stands right now, you have no influence on how the stranded debt is determined. Am I right?
Mr Laughren: That's correct, but just a word of caution in that regard. If we did have authority or jurisdiction over the stranded debt, and I don't mean this as a flippant answer, I suspect we'd end up having to hire a lot of expertise, and many of them probably would be the same expertise that the Ministry of Finance has hired, to get advice on this. The board does not have in residence expertise in this regard at all, so we would have to go outside to get help to deal with this issue. We just don't have that kind of expertise. We've been a natural gas regulator all these years. We would have to get help, and quite frankly, I suspect we'd end up getting the same kind of advice that the Ministry of Finance will get. At the end of the day, it's their responsibility to take or not take that advice and allocate the stranded debt as they see fit. But you're right, we don't have any authority in that regard. We've got no jurisdiction.
Mr Lessard: One of the things we'll be suggesting in the amendments we've proposed is to give the Ontario Energy Board some responsibility in determining what the stranded debt may be --
Mrs Johns: Even though you don't want it.
Mr Laughren: We appreciate your confidence in us.
Mr Lessard: -- not to make that determination but at least to give some transparency to the process, so those who are going to be impacted can at least have the comfort that they've had an opportunity to participate in the determination of that amount, because it is so critical.
It's also been suggested that perhaps the energy board have some ability to oversee the asset valuation, because the asset valuations of the assets of Ontario Hydro -- the infrastructure, the power-generating facilities, the transmission facilities and things like that -- are going to be critical in determining the amount of the stranded debt as well.
Also, it's been suggested that there may be different rate classes, different types of customers who may be paying the stranded debt at different rates. The other concern is that large consumers of electricity may be able to make good deals and escape paying their fair share of the stranded debt and residential consumers are going to get stuck paying the biggest bills. We don't want to see that happen, and I think there should be some ability for the energy board or some other regulatory body to ensure that doesn't take place.
This may be a legal question, and it's with respect to clause 126(1)(h) under the new Ontario Energy Board Act. It's with respect to the Lieutenant Governor in Council being able to make regulations. We all understand "Lieutenant Governor in Council" means the cabinet of whatever government may be in place at that particular time. Clause (h) says they may pass regulations "delegating all or part of the powers of the director under part IV or V" to a self-regulatory organization. Part IV and part V refer to the regulation of gas and electricity. I would like to know what your interpretation of that regulation-making power is.
Mr Laughren: That's a good question. That refers to the marketers of gas and electricity, right, those sections? We are charged with licensing those marketers. There's something in the language of the trade called forbearance, which means the board can forbear and allow someone else to do it, or at least not do it ourselves. One of the areas the industry would like to see us forbear on -- I don't think immediately, but eventually -- is the running of the marketing aspect of it. In other words, the industry would set up a self-regulating or self-managing organization that would police their own members in terms of marketing practices and rules and behaviour. We at the board agree with that.
At the beginning, we're going to set up the rules with the licences and make sure there's proper conduct. We can monitor that and withhold licences and cancel licences. That's in our authority. But at some point it seems to me that the regulator should not have to do that, that the industry should be doing that, policing themselves on the behaviour of their members. That's what that is getting at. I believe the act says we can recommend to the minister, "Now it's time for us to get out of this or to forbear in this regard and let this self-managed organization look after their problems."
Mr Lessard: The concern I have is that that doesn't happen too soon because of the problems that we've seen in the gas marketing business up until now.
Mr Laughren: I understand that.
Mrs Johns: Good morning, Mr Laughren. We appreciate your being here. I'm going to try not to make any comments about our select committee. As we talked about Mr Conway making 23 years in the Legislature, I'd have to say that some of us should have to consider our employment choices along the way.
Mr Conway: In this line of work, fortunately, there's a broad base of the public that helps the cause.
Mr Laughren: But you realize that Mr Conway always had school to fall back on.
Mr Baird: What's wrong with that?
Mr Laughren: Not a thing.
Mrs Johns: I just wanted to raise a couple of issues that we kind of went by with Mr Conway pretty quickly, because we have some media here, I guess. You did get Management Board approval for the recommendations, the proposals you have, so you're happy with that process that's gone on at this point.
Mr Laughren: Yes. We couldn't survive without it.
Mrs Johns: I would assume so.
Bryne Purchase, when he talked to us -- it's funny. We're all going to have to read Hansard, because we all got something different out of his speech, obviously, so I think it's important to go back and have another look at it. But what I got out of Bryne Purchase's statements was that he was talking about having to find efficiencies within Ontario Hydro. I know you would see that as an important aspect, after being on the select committee with me, that there could be some management and employee changes there that would lead to a reduction in costs. Those costs presumably would be found in the generation, in the new Genco, and those cost savings could be passed on to the consumers.
The question I wanted to ask you was, right now I think the Ontario Energy Board has no ability to ascertain the rates that Ontario Hydro charges. You can recommend; you can do things that you wish. In the future that will be substantially different and you'll be more of a monitor on Ontario Hydro's rates. Is that true, and can you explain why you think that's a good or a bad thing?
Mr Laughren: I think it's a good thing because right now all we can do is recommend to the minister that we think these rates should or should not be increased. In the future when we grant a licence to -- I'm not sure which part of Ontario Hydro you're referring to or if you're referring to all parts. For example, we grant a licence to Servco, which is the big wires, if I can put it that way. We analyze their costs. They have to bring in their costs to us, and we analyze what those costs are, that they're all legitimate and they are not subsidizing some other part of their operation and so forth. The same applies at the distribution level, the small wires, and to the generation of electricity.
It's going to be a much more intensive look at Hydro on a regular basis as they apply for their licences, the various components of the new Hydro. The board is very good at analyzing legitimate costs, because there's always that debate in the national gas utilities about whether that really should be borne by the ratepayers or whether that cost should be borne by the shareholders, the difference. The board, I think, has real expertise in that regard and will be able to monitor that very closely.
Mrs Johns: That's good, because consumers should feel some protection as we try and get efficiencies wrung out of the old Ontario Hydro, so I think that's important.
Unlike your previous colleague Mr Lessard, I would say that you have lots of experience in dealing with large debt as the Minister of Finance.
Mrs Johns: I couldn't resist. I'm sorry.
Mr Conway: Does Steve Gilchrist have a sister?
Mrs Johns: The only point I wanted to make --
Mr Laughren: I knew I should have talked longer.
Mrs Johns: -- is that you feel that by the Ontario Energy Board reviewing the stranded debt calculations, that's a duplication of process and you would provide no new expertise to the situation.
Mr Laughren: At this point, I don't think it would make sense for us to go back and also review the stranded debt. I'm quite serious when I say we'd have to go out of house to accomplish that. It could have been set up that way originally, that we would be responsible for establishing the stranded debt and allocating it and so forth; that would be a different matter. Then we would have started from square one and done it.
Quite frankly, I don't think there would be time now to do it either. That's a tough process, the stranded debt one. Just ask them at finance. That's a very tough process, and so it would really use up a lot of time, and we're going to need to know that stranded debt cost in order for us to do rate-setting for Servco and for Genco. They are going to want to know their rates in order to get assessed by the rating agencies and so forth. So that would slow down the process at this point, in my opinion.
Mrs Johns: Yesterday we had Tom Adams here. From my perspective of being in government and energy for the last couple of years, he's helped me out substantially on a number of issues, as I'm sure he did you when you were here. He made some comments yesterday about the policy directives that the government would give to the board and how he felt that would make the process less open or that it would make it difficult or compromise the board.
I'm wondering if you can talk to that issue. I've given him some sections in the intent and asked him to come back to us. I'm wondering if you could comment on what you think about the policy directives.
Mr Laughren: I can give you an instinctive reaction. First of all, because of this whole new world we're facing, the board will need some certainty in our role and policy directives, quite frankly, aid in that regard. Once those policy directives are given and we engage in our activities as directed, then if there was any further involvement or interference -- I don't want to use the word "interference" -- then that would be inappropriate.
Mr Dominy would certainly know better than I, but I don't think there has ever been any history of interference by any government in the independence of the Ontario Energy Board. I'd be very surprised if any government would do that. That would be inappropriate, but that's separate from policy directives that establish the role of the board and our mandate and so forth. We need that in order to make sure there is clarity in what we're doing and that the players out there understand it too.
I don't know whether you want to add anything to that, George.
Mr George Dominy: The only thing I would say is that I'm not aware of any direct interference, if that's the word you're thinking of, but any regulatory agency, when it is making decisions, clearly has to be cognizant of what the policy framework within which it's operating is. I think, as Mr Laughren has said, if they stated and provided clarity as to what that policy framework is, that is helpful to a board because then they know the bounds in which they are regulating.
Mrs Johns: Maybe I can add another question to that and you can help me with --
The Chair: I don't think we've got time.
Mrs Johns: I'm running out of time? Then I've got to change my whole philosophy here.
One of the things I've heard during this whole process which I've been particularly upset by is the energy marketers that are now going out and signing contracts with people. We have in the act said along the line that the MEUs and Ontario Hydro could not do that, that they would be null and void as a result of this bill coming into effect. I'm thinking right now that we should make an amendment that might allow us to take the energy marketers in there too so that any contract they sign now will be null and void until such date as the Ontario Energy Board allows the market to proceed, or something like that. Have you got a comment on that?
Mr Laughren: As a matter of fact, if somebody had asked me if I thought there should be any amendments to the bill, that's one I would have said. I would have said yes, that because of the potential problems with marketers there needs to be something in place. Right now we have no jurisdiction and they've got signed contracts, some of them. They assure me they are not doing it any more, but I suspect there are some already out there.
One way of resolving it would be an amendment that says -- and Mr McCann is much more expert than I am on this -- that when this bill comes into place, any existing contracts, such as you're referring to, would have to abide by the new rules that we establish on licensing of marketers. Do you follow me? If they are consistent with the new rules of the licences, then fine; those contracts can be deemed to be appropriate, and there is nothing wrong with them. But if not, then they are null and void and they must apply for a new licence -- something like that.
Do you want to add anything to that?
Mr McCann: I think there are a number of options that could be pursued to achieve that. That's one of them, and certainly we would be discussing and have been discussing these types of amendments with the ministry. I think it is important to recognize that particularly in the electricity sector, public awareness of what they may be purchasing in these contracts is not very great at the moment, so there is a case to be made for some fairly strong consumer protection measure of that nature to be included in the bill.
Mrs Johns: Could you send over something, Floyd, you would feel comfortable with?
The Chair: We have to break off --
Mrs Johns: I'm just wondering if they could write something that they feel comfortable with and give it to the committee so we could have a look at it.
The Chair: That's a good suggestion. I think all the committee members would appreciate that.
Mr Laughren: OK.
The Chair: Thank you for taking the time to come before us. This is a very important part of this restructuring initiative. You're missed in the Legislature, Mr Laughren, but I know that you're once again part of public service to the people of Ontario, and we wish you well in this new endeavour.
Mr Laughren: Thank you, Madam Chair. If I could just say one closing word: Because of all these changes, if members do have any questions or advice, do not hesitate to give us a call, because that helps us too. Thank you very much. Good seeing you all.
The Chair: Thanks again.
Mr Conway: You're looking dangerously well.
ASSOCIATION OF MAJOR POWER CONSUMERS IN ONTARIO
The Chair: Calling now representatives of the Association of Major Power Consumers in Ontario. Good morning, gentlemen, and welcome to our committee. As I'm sure you know, you have 30 minutes' presentation time, and committee members always like it when they have time for questions.
Mr Lauri Gregg: Thank you, Madam Chair. My name is Lauri Gregg. I'm the chairman of AMPCO and also the energy manager of Falconbridge Ltd. With me today I have two colleagues: Arthur Dickinson, who is the president of AMPCO, and Mark Rodger, who is our legal counsel.
Thank you for the opportunity to present AMPCO's views regarding the Energy Competition Act, 1998. I will not go into the detail of our submission at this time but will quickly summarize it so that we can move on to questions.
Let me first describe AMPCO. The Association of Major Power Consumers in Ontario represents the interests of industrial companies that depend on electricity as a key source of energy for manufacturing or processing. AMPCO advocates, and has for some time, competitive electricity rates, and promotes the concept of a reliable, environmentally sound supply of electricity. We have 65 members who spend in excess of $1 billion a year on electricity in this province, which represents about 16% of Ontario Hydro's domestic sales. Falconbridge, my employer, expends more than $100 million a year on electricity. We're Ontario Hydro's largest direct customer. I'm quite willing during the question period to put on the Falconbridge hat and respond to questions if the committee so wishes.
Because electricity is our major source of energy, AMPCO members have a vested interest in ensuring that the restructuring process leads to a competitive marketplace for electricity. The purpose of the new legislation is to establish a competitive electricity market which will bring economic benefits to Ontario by reducing rates and stimulating new investment and jobs. Certainly we, as large industrial users, have advocated this restructuring for some time to allow us to compete more effectively in the global economy in which we operate. For this reason, AMPCO strongly endorses the government's decision to restructure the Ontario electricity sector and strongly endorses this legislation as a major step in the evolution of the sector.
While Bill 35 takes the first important steps towards the creation of a competitive electricity market, it raises some concerns in the minds of AMPCO members which we have addressed in our recommendations in our submission and we'll discuss here today.
The focus of this legislation is to improve the electricity sector for Ontario consumers by creating a real market, but it fails to deal adequately with our first area of concern, which is the problem of Genco's market power. The bill hobbles the market and limits customer choice by creating a single Genco which can act as a major barrier to new market entrants.
As we mention in our submission, at a conference convened by the MDC in May, a group of international experts involved in restructuring in the UK, Australia, New Zealand, Argentina and Norway all confirmed that the preferred solution to mitigating market power is to break up Genco into competing entities. Other approaches, such as using a regulating agency, as proposed in this legislation, were referred to as second-best solutions.
Additionally, the recent decision by Ontario Hydro to delay the resumption of discussions with potential private sector partners such as CanaGen sends a signal to potential new investors in generation in the province that new market entrants are less important than recreating a large Genco.
It is in the interest of the people of Ontario to encourage investment in the electricity sector. Such partnerships as the one with CanaGen could go a long way to diminish the market power that Genco will clearly have. They would also protect the interest of electricity consumers, who would benefit from an influx of capital to help offset Ontario Hydro's debt and some proven management expertise which the nuclear division appears to need.
For this reason, AMPCO has included as its first recommendation the need for the government to conduct a review of its policy on divestiture of Genco assets over the next three years.
AMPCO has also recommended that Genco and Servco should not be given the tax advantage that the bill allows over private sector participants who might wish to purchase municipal utility assets. Genco and Servco already have excessive market power and they should not be given additional incentive to expand further.
Our next area of recommendation states that stakeholders should have the choice to pursue non-IMO-administered markets; that is, supply and service transactions falling outside the scope of the proposed act and IMO markets. This will allow AMPCO members and others the opportunity to explore the complete range of financial and physical options available to them and to be innovative in terms of electricity supply and transmission.
Moving on to the area of telecommunications property interests, we have made a recommendation to improve the clarity and understanding of the act. As presently worded, there is some ambiguity related to the definitions of "easement" and "telecommunications service" which need to be resolved.
Turning now to IMO operations, AMPCO has recommended that in preparation for the new marketplace it will be important for the operation of the IMO to be benchmarked against the best practices of other established IMOs by the OEB. This benchmarking will enable the board to ensure that the IMO operates as efficiently as possible.
AMPCO has also made five recommendations regarding licensing procedures. In particular, we recommend that the OEB should be directed to the issue of a wholesale market participant licence which would consolidate the possible requirement to obtain multiple licences by large users. We have done this with the intent of streamlining the licensing process for the OEB. Using this approach, the process will be easier to manage, because wholesale market participants will indeed have multiple roles. At the very least, we will be both buyers and sellers of electricity. The intent of the recommendation is to diminish the administrative burden caused by the proposed act, which is in line with the recommendation of the Red Tape Commission.
The next area of recommendation relates to regulatory exemptions from licensing, non-discriminatory access to transmission, and the competition transition charge on generation where these assets have existed solely for the members' own use. Again, AMPCO has attempted to simplify the licensing requirements where industrial, municipal or institutional generation was in operation prior to the commencement of Bill 35 or where transmission systems have been used primarily to supply the owners' or group of consumers' own consumption.
While AMPCO recognizes that the recommendation regarding exemption from the competition transition charge for loads supplied by stakeholders for their own consumption may be controversial, it has been included because there is a principle of equity and fairness which should be applied to those who have invested in such facilities in the past. We have outlined several benefits which apply in these circumstances in our submission.
Reform of the Ontario Energy Board is also a key element in the structuring of an efficient marketplace. The new responsibilities of the board will have a substantial impact on the operation of the competitive electricity and gas markets. Since this will involve breaking new ground, it is important that stakeholders have an opportunity to be involved in the redesign of the OEB processes and guidelines. Included in our recommendation is a range of issues where we believe stakeholders can provide valuable input.
Last but not least is the question of managing any residual stranded debt. In our submission we have highlighted certain principles and guidelines which should be incorporated into any residual stranded debt recovery mechanism. However, while the proposed legislation goes some way in dealing with this problem, it has excluded any reference to dividend and other payments by Genco and Servco to the holder of their equity, the province of Ontario. We believe this is an oversight which can be easily remedied by incorporating the amendment included in our last recommendation, which indicates that any potential dividend or equity payments will be included in the stream of payments retiring the residual stranded debt.
Thank you for your attention. Madam Chair, we're open for questions.
The Chair: Thank you very much. We have five minutes for questions from each caucus and we'll begin with the NDP caucus.
Mr Lessard: I'd just like to ask that you expand upon the final remark you made about the dividends and other payments with respect to going towards the residual stranded debt. I'm not sure I understand that completely.
Mr Gregg: It's not specified in the act that these payments, potential payments, dividend payments or capital payments or retained earning payments, would go towards the stranded debt. Our position is that all cash flow net operating costs should go to retire the debt.
Mr Galt: Thank you for the very detailed presentation and package that you've brought before us.
I understand that many members of your organization serve on the Market Design Committee. Is that true? Are you aware of your membership on that particular committee?
Mr Gregg: We have two participants on the Market Design committee.
Mr Galt: Only two. How large is the Market Design Committee?
Mr Gregg: Sixteen people.
Mr Galt: We've been told by other groups that it's because of the influence of your representatives that there's been no recommendation coming forward that there should be a system benefits charge. Do you believe that's true?
Mr Gregg: I'll ask Arthur to comment on that.
Mr Arthur Dickinson: I'm not sure it is true. I wasn't privy to the discussions at that time so I can't answer that. It sounds like we have enormous influence, if that's the case. But my experience of the discussions at the MDC, and there have been occasions when they will allow observers in, is that it's a very effective and useful process to get agreement across a large group of stakeholders, so I'd be surprised if we had undue influence.
Mr Galt: Do you have any idea or any feelings why the Market Design Committee didn't come forward with a system benefits charge for energy efficiency or environmental protection?
Mr Gregg: I can't comment on that. I have no idea.
Mr Galt: Moving on to some other areas, do you see this competition in the marketplace for electricity as helping the economy of Ontario?
Mr Gregg: We certainly do. With the establishment of an effective competitive electricity marketplace, we will certainly be able to develop rates which potentially will be lower and this will stimulate investment in the economy and certainly help companies such as Falconbridge invest in their existing operations in the province.
Mr Galt: Do you see improvement in job creation and that kind of thing as a result of this lower energy attracting more industry in? Do you see any indication of that happening so far?
Mr Gregg: So far, no, simply because we have not established a competitive market yet. This competitive market for electricity is critical, recognizing that electricity rates have risen 30% to 40% during this decade.
I was looking at a document that we have just the other day that shows that in 1989 we were paying 3.9 cents for electricity; today we're paying 5.4 cents. For us that means $40 million a year. Were we paying 1990 rates, we would have $40 million more to invest in what we need to invest in our operations here in Ontario.
Mr Galt: If I can just circle back for a moment to the first question, would your organization be opposed to this system benefits charge, such as 1%, to put into a fund that would look after energy efficiency that would help with environmental protection?
Mr Dickinson: We have a problem with any additional charge on electricity. Industries suffer from having uncompetitive rates here in Ontario so we naturally are not supportive of extra charges. One per cent doesn't sound like very much, but 1% on electricity charges to an industrial customer, to my members, is $10 million a year extra. There has to be a better way to do it than to impose a charge.
Members of AMPCO have driven for energy efficiency for a long time because of the existing electricity rates. Some of the best energy efficiency measures have been undertaken by AMPCO members, so I'm not sure that will necessarily lead to anything better, but it will lead to a problem with rates if it's applied.
Mr Baird: Just as a comment rather than a question, I want to echo your comment that consumers shouldn't have to bear any additional charge to what they're paying now. That's why they're paying 40 cents or 44 cents on the dollar to service that Ontario Hydro debt, including principal. Then afterwards, through interest and principal dividends, retained earnings and payments in lieu and other payments, they'll continue to have to pay off that debt. Someone has to pay off the debt that's been amassed over the years and that's certainly something that is very important. I just wanted to echo that I share the concern that there shouldn't be any additional charges, that the customers should just have to pay the existing charges to service and retire the pre-existing debt.
Mr Conway: I'm always appreciative of my colleague from Nepean. He holds that chart up and he's right to do so. There is a substantial burden of debt. I always like to point out, though, that in the last 18 months, under the new scheme of things, our friends at the Ontario Hydro board, ably led by Bill Farlinger, have parked $8.2 billion or $8.3 billion worth of writedowns. I don't believe that the bulk of that multi-billion-dollar writedown is yet reflected in rates. If it's fully reflected in those Nepean rates, then that's news to me.
But we have this spectacle --I don't want rate increases any more than you do, but we've had a government that's said, "There shall be no rate increases in a five-year period from 1995 to 2000," and three cheers for that. So what have we got? We've got Mr Farlinger and the board sitting there saying, "Because of this political decision, we will use our rate-setting powers to set aside those costs which we cannot therefore recover in rates." What has that meant? It has meant $8.3 billion worth of set-aside. If I'm wrong, I want to have somebody tell me how that $8.5 billion worth of writedown is reflected in my rate today.
Mrs Johns: That's the NAOP costs and some of those costs are for purchasing power --
Mr Conway: That's right. I agree, some of those costs, but who couldn't freeze rates, who couldn't be competitive if you could simply say, "These costs I can't recover so I'll park them"?
That gets me to the question I want to talk to you about and that is the whole question of divestiture. I have supported the policy because I believed it to be a policy that was going to genuinely move towards competition, and particularly in generation where 70% of the input costs are to be found in the electricity business, in the main. If you're not going to make competition work on generation, you're not going to get the lion's share of whatever benefits are to be had in the whole exercise.
The government, for reasons that I'm beginning to understand, has decided there can be no meaningful breakup of Ontario Hydro's generation. I believe they're going that because they've got a very serious problem with Ontario Hydro Nuclear. They're not admitting it, but we've got a situation --
Mr Baird: We have admitted it.
Mr Conway: Well, the point I'm making is that fundamental to the competitive policy we all endorse is a breakup of Genco. We're not going to get that. Without that the consumers, large and small, but particularly small, cannot reasonably expect to get meaningful gains on their rates. You've said so and I think you're right. You've not only said so, everybody who has looked at this has said so.
How does this committee deal with a transparent contradiction? The government says it wants competition, and that's widely endorsed. But the single biggest driver in the competitive marketplace for competition is the unbundling of Ontario Hydro's massive generating capacity, and that's not going to happen. What would you say to your neighbour in Oakville or in Etobicoke or in Ottawa who as a residential customer is expecting to get benefits but is not going to get an unbundling, a further breakup of Ontario Hydro generation? You wouldn't have to be Albert Einstein to figure out that there's something wrong with that picture. So what would you say to a person who asked you, as a knowledgeable business person, "How am I going to get benefits on my residential and farm electricity rate over the next few months, over the next few years, if you don't deal with the 70% of input cost, namely generation?"
Mr Gregg: I think it's important to realize, with the creation or the reformation of the electricity sector, that this is a journey. We're at the first part of the journey and that's why we've recommended that the possibility or the mitigating measure of divesting Genco not be overlooked and be considered in the future. We're at the early stage and right now we're beginning the transition into a competitive marketplace.
Mr Conway: But your brief makes a very powerful argument and, again, there's a growing part of me that thinks that these people at Ontario Hydro are going to make the great train robbers look like pikers. In an exercise that was supposed to be about breakup and about competition, what have we got, according to your own brief? We're going to have a very powerful consolidated Genco, the successor to Ontario Hydro generation. It's going to be strong and powerful without a lot of encumbering debt and we're going to have an even stronger Ontario Hydro retail company. You've pointed out in your brief that it's strengthened in a number of very specific ways that are unfair and do not speak to a level playing field.
So we've had a journey that was to start out with the objective of getting competition and breakup, particularly of the gargantuan monopoly that was Ontario Hydro, and what I'm beginning to see, thanks to evidence like the evidence you've tendered today, is a situation where for at least the next few years we're going to have a big, strong Ontario Hydro generation capacity and a big, strong Ontario Hydro retail company with a lot of debt dumped on the back of a lot of unsuspecting customers. My question is --
Mr Conway: Well, unsuspecting in that there's four or five or six --
Mrs Johns: You're paying for it now.
Mr Conway: Well, yes, you're paying for it now, but you're going to be paying for it in a very different and unfair way, potentially. Why would the customer be anything but skeptical and cynical in the light of what has brought us to this point, particularly when it deals with Ontario Hydro? So has Hydro not pulled off a major coup here? The very things that were supposed to put constraints around them, that were supposed to put competitive pressures both on Genco and the services company appear in first instance not to be there.
Mr Gregg: I think we can take heart in the fact that we recognize this.
Mr Conway: I take heart, yes, and what should we do about it?
Mr Gregg: There's more and more evidence every day that the only way we can mitigate market power is to divest the generation companies in the future. The only way you can create a competitive electricity price is to have actual competition.
Mr Conway: But look at the services company. Arthur, look at services. They're strengthened in a way that we couldn't have imagined five years ago. We're going to get rationalization at the distribution end, but in the name of Ontario Hydro. Was that ever intended in any of your deliberations? The answer is no.
The Chair: Gentlemen, on that note, we thank you very much for coming before the committee. If memory serves me correctly, you were one of the first groups that came to see me when I was the minister to alert us that it was time for change. I'm glad to see you're still at it. Thanks for coming.
ASSOCIATION OF MUNICIPALITIES OF ONTARIO
The Chair: Now calling representatives from the Association of Municipalities of Ontario. Good morning. Welcome to the committee. As I'm sure you know, you have 30 minutes of presentation time. Please begin by introducing yourselves for the Hansard record.
Mr Michael Power: Madam Chair and members of the standing committee, I'd like to thank you on behalf of the Association of Municipalities of Ontario for the opportunity to appear before you today to present issues on restructuring Ontario's electricity industry, issues that are critical to municipal government.
My name is Michael Power. I am the president of the Association of Municipalities of Ontario and mayor of the town of Geraldton in the great northwest. With me today are Joan King, vice-president of the Association of Municipalities of Ontario, a councillor from the great city of Toronto and the acting chair of the AMO task force on electricity restructuring; as well, Paul Hughes, solicitor, region of Ottawa-Carleton, and a member of AMO's task force on electricity restructuring. As you can see, Sean, we are all-inclusive within AMO.
Mr Conway: Haven't heard about Greenstone yet.
Mr Power: AMO's presentation today will examine the implications and the concerns that municipal governments have with the proposed changes to electricity generation and sale.
The province has outlined an ambitious blueprint for restructuring the electricity industry. The government's main objective, to "support investment and jobs through the lowest possible electricity prices and the best possible electricity service" is one that, if executed properly, will benefit Ontario and its municipalities and those who live and work in our communities. AMO recognizes that change in and for the electric industry is inevitable and it is necessary if Ontario is to compete in the next century.
It is important to emphasize that our comments today are intended to ensure that municipalities are at the forefront of any and all decisions made regarding the restructuring of Ontario's electricity industry. After all, more than $5 billion in municipal assets are involved, and, like municipal utility agencies, we are concerned about the interests of those living and working in our communities.
In all our presentations to the government on legislative and regulatory change, AMO has consistently maintained that municipal governments must be given the tools and the accompanying flexibility to make local decisions regarding governance structures and service delivery. This flexibility is crucial and central to the successful transfer of any role or service responsibility and in the restructuring of essential services such as electricity supply and distribution.
One of AMO's key principles in examining this legislation was that the best interests of consumers must guide any reform of Ontario's electricity system. Structural changes to the electricity sector should result in low-cost energy for consumers. It should not jeopardize the availability of electricity to the customer, nor should it negatively impact the environment, public health or the economic strength of municipalities.
The province has confirmed what municipal governments have consistently maintained: that the municipality owns the assets of local electric utilities. As the owners of electricity distribution assets in the magnitude of $5 billion, municipalities play a critical role as the guardians of public endowment and are greatly concerned about their potential role in retiring Ontario Hydro's stranded debt.
AMO is pleased to join Minister Wilson's transition committee and we welcome the opportunity to participate in these discussions. We remain firm in our commitment to have meaningful input into all areas of this restructuring exercise, at every step in its development.
As primary stakeholders in electricity restructuring and as the owners of the assets of municipal electric utilities, municipal governments share the province's desire to emerge from this exercise with a more competitive, efficient electricity system in Ontario. However, while we may share this goal, municipalities also have some concerns with the way the legislation is currently drafted.
AMO's task force on electricity restructuring has reviewed the bill and, through input from AMO members, has identified some areas of key concern as well as some recommendations we feel will improve this legislation.
Earlier this year, the government established the 12-member Market Design Committee to provide a formal mechanism for the electricity industry and customer representatives to collectively advise on the rules and structures for the new electricity market, including the terms of access for generators located outside Ontario. The committee is also charged with advising the government on the governance and operation of the proposed Independent Market Operator. The establishment of the Independent Market Operator and the Market Design Committee and the new Ontario Energy Board are important to ensure that fair rules of competition and consumer protection are established. AMO supports the renewed mandate of the Ontario Energy Board and the establishment of the Independent Market Operator as the government agencies with the responsibility to regulate the new marketplace.
Decisions respecting local services' structure and governance are most appropriately made by locally elected municipal councils who are ultimately accountable to their property taxpayers. We believe, however, that the province should retain its central control of setting policies and standards of delivery, regardless of who delivers the service, and retain control over the transmission grid.
We are encouraged that the province has appointed a municipal representative to join the Minister's Electricity Transition Committee in its early stages. Given the multiple roles of municipal corporations as large consumers of electricity, agents of delivery and, in some cases, soon-to-be producers of electricity, this inclusiveness must be extended to the Market Design Committee and any other ministerial advisory forum as well.
While some municipalities continue to look to municipal electric utilities to deliver only hydro services, others have moved to or are exploring amalgamating their electricity and water services. This has made the delivery of both these services more efficient, saving dollars for property taxpayers.
There are significant potential cost savings to be gained through economies of scale for municipal electrical utilities in both distribution and retail. This includes the joint provision of service with other municipalities' municipal electric utilities or by combining electricity-related services with other municipal services. Examples of economies of scale include joint fleet management and maintenance, equipment and supply purchasing, meter reading, invoicing and collection. However, section 72 of the Ontario Energy Board Act places limits on the business activities of municipal electric utilities, which are majority-owned by municipalities.
We put it to you, members of the committee, that the bill needs to be amended so that such efficiencies, which are utilized by private corporations in all aspects of business, can be authorized for municipal electrical utilities. Such cost-sharing benefits get passed on to the electricity consumer and to the property taxpayer.
Similarly, municipalities should be given the flexibility to determine how services are delivered in their jurisdictions, that is, to be able to determine if they wish to franchise distribution to municipal electric utilities, amalgamate the service or parts of the service with another municipal department, or provide a franchise to an alternative service delivery provider.
In addition, municipalities without current hydroelectrical systems must not be prevented from establishing new hydro service corporations. While the legislation currently prevents this, we understand that this oversight will be corrected, and we are looking forward to this amendment.
On the issue of introducing competition in supply of power, AMO believes municipalities should have the authority to capitalize on their own power producing potentials and be enabled to generate electricity through cogeneration and other means, including energy from waste. Moreover, municipalities should be able to use these sources of energy for their own corporate uses or to sell on the open market. This would be an innovative method of cutting costs and providing appropriate new revenue sources for municipalities. Obviously, the decision to undertake such ventures will be made by locally elected municipal councils based on local needs and local circumstances.
AMO believes that the legislation should not provide barriers or limits on service restructuring. Any restructuring needs to be a locally driven process. Locally driven restructuring processes will look to the interests of efficiency and customer service.
AMO is concerned about the potential of greater pollution resulting from the increased use of less expensive, fossil-fuel-based energy produced in the United States. As such, AMO supports the bill's intent to empower the Ontario Energy Board to ensure environmental standards compliance through licensing, emissions trading, emissions caps, emissions performance standards and pollution disclosure requirements.
AMO is concerned that the government's priorities of retiring the massive stranded debt of Ontario Hydro will to some extent be accomplished at the expense of municipalities, especially those with large generation facilities. AMO is concerned that the provisions set out in the legislation violate the principle that municipal property taxes are to be raised for municipalities and applied for municipal purposes. They also violate the concept that Hydro's debt should be paid by hydro charges so that those who have benefited from hydro services pay the debt related to providing those services.
As the committee has already heard, the private sector is planning on building new electrical generating facilities and they will be required to pay full property taxes. We seriously question why Genco is to be treated differently.
AMO recommends that a one-time opportunity be provided to municipalities to sell their interest in a municipal electrical utility without incurring a transfer tax based on the fair market value of the utility being transferred. This would allow a municipality to transfer an existing utility to a new operator without having to factor in the amount of the transfer tax in the sale price. Otherwise, this may result in higher electricity costs to municipal consumers, as this extra cost is reflected in the higher consumer rates charged by the new operator.
Municipal electric utilities and Servco have been established as default suppliers of electricity. While this may provide an initial advantage to the supplier in securing and retaining customers, it is likely that other potential advantages, such as tax exemptions, exclusive access to customer consumption information etc, will be eliminated or restricted, thereby creating a significant disadvantage for municipal electric utilities in trying to compete with private suppliers not subject to the same restrictions.
Both of these suppliers must serve customers who are the least attractive to private suppliers. These customers are not necessarily just rural and remote customers, but they may also include customers who have high electricity consumption during peak demand periods. It would appear that it is not possible for municipal electric utilities to favour the most attractive customers through the use of special rates.
The Market Design Committee's report number 2 suggests that municipal electric utilities and Servco may only purchase electricity on the spot market and should not enjoy the benefits of portfolio purchasing through future price contracts as a means of hedging against electricity price variations. This places them at a disadvantage in terms of retaining customers in the event of a sudden substantial increase in electricity prices on the spot market. The Market Design Committee also suggests smoothed rates, limiting the ability to provide seasonal discounts.
Further, pressures exist for municipal electric utilities to provide electricity rebates to the most expensive customers in order to retain business operations within a particular locality. Private retailers, on the other hand, can selectively choose to provide service to the best customers while not having to compensate municipal electric utilities for having to service the least attractive customers. This places municipal electric utilities at substantial competitive disadvantage and results in increased costs.
AMO recommends that utility rate regulations include an amount charged to all customers to compensate municipal electric utilities for their obligation to be the default supplier to the most expensive customers. This would be similar to the Facility Association risk-sharing pool under the Compulsory Automobile Insurance Act, section 7, which funds liability for uninsured drivers from charges levied against all insured drivers.
AMO is encouraged by the province's commitment to continue the rural and remote assistance to customers who may not be able to take advantage of a restructured competitive marketplace. In that regard, AMO expects to continue to be consulted in the development of related regulations. The residents of dense, large urban markets and those closest to sources of power will be able to take advantage of greater choice and cheaper rates, similar to the current shopping choice for long-distance telephone carriers. However, not all Ontario residents may benefit from wide-open competition. Therefore, AMO is very pleased to see the province's commitment to continue providing rate assistance to rural and remote regions of our great province.
Currently, municipal electric utilities can expand operations into areas serviced by Ontario Hydro Retail by purchasing the distribution assets at net book value. This legislation repeals this section and provides no obligation on the part of Servco to sell distribution assets. Servco may then exercise market power by refusing to sell, effectively forcing local utilities to continue on a confined and inefficient basis, and ultimately take over local distribution assets at a reduced share value.
We believe the legislation should include an obligation by Servco to sell distribution assets to municipal electric utilities where it is shown to the Ontario Energy Board that an area of expansion can be served efficiently by the municipal electric utilities at no higher cost to existing municipal electric utilities' consumers. The purchase price is capable of being set by the Ontario Energy Board at least at fair market value, if not at net book value.
Many of the details related to the implementation of Bill 35 will be outlined in future regulations. Given the wide-ranging implications of the impending regulations, AMO, as a key stakeholder in restructuring the electricity sector, urges the province to get early input from municipalities prior to the drafting or finalization of regulations. AMO is ready to bring municipal expertise to this activity. Furthermore, AMO recommends that the province empower the Market Design Committee to circulate draft regulations and for broad public consultation prior to promulgation. It is of vital importance that the development of subsequent regulations does not undermine the flexibility and latitude of the bill.
Electricity restructuring in Ontario is recognized as offering significant potential benefits to Ontario municipalities by supporting investment and creating jobs in our communities. To this end, AMO believes that the best interests of customers must guide the restructuring process. This translates into a reliable and efficient source of energy provided to all consumers at low cost, without adverse impacts on availability of supply or detrimental environmental effects.
While the need for greater competition is recognized, the government must monitor and evaluate the process, tools and rules for getting there, and be prepared to make adjustments.
Municipalities are seeking the flexibility and the authority to rearrange their electricity utility functions according to the criteria of consumer protection, cost-effectiveness and efficiency. As directly elected and accountable decision-makers, municipal councils must have the authority to determine how to deliver the best possible service at the lowest costs to their residents and property tax payers.
Moreover, the legislation must include a rational method of taxation so that the retirement of Ontario Hydro's stranded debt is not done at the expense of legitimate sources of future municipal revenues.
Electricity restructuring is a complex matter. AMO and the Municipal Electric Association will be working together to ensure that municipal officials are well informed of the transition decisions that will be required of them.
We, members of the committee, are committed to work with the government to ensure a smooth, practical and fair transition to a new era of power supply.
The Chair: Thank you very much. We have slightly over two minutes for questions from each caucus. We begin with the government caucus.
Mr Baird: Thank you very much for your presentation. I think you skipped page 7 when you were reading, so I'll just refer to it. It's with respect to property taxes. We know we have to have a level playing field, otherwise there would only be one team on the field, so Genco and the MEUs would be required to pay property tax. You make two statements, that any increase in the property tax as a result of that should go to municipalities and not to pay off the stranded debt that folks are currently paying for today. How could it be in the best interest of consumers to see an increase in their electrical rates because their mayor and city council is getting a big windfall of new tax revenue to find new ways to spend? How would that be in the best interest of consumers?
Ms Joan King: One of the concerns we have as municipal overseers is that the only source of revenue we have is property tax. When that new generating company comes into my town, they're going to have to pay full property tax, as I understand it. But for the Genco ones, any increase due to changes in assessment or any increases on the property tax through the grants in lieu won't come to the municipalities, but with the new generator it will come to municipalities. We see that as not fair to begin with, but also that property tax or grants in lieu of property tax truly should come to municipalities.
Mr Baird: Sure, but as a consumer, when I get my bill and it has gone up because my municipality is taking additional tax revenue, how is that in the best interest of the consumer to see local governments and municipalities get more tax revenue and then consumers have their electric bill go up a commensurate amount?
The municipalities would still get every single dollar they're currently getting now but just going to a level playing field. The private sector is going to have to pay taxes, so those MEUs are going to pay taxes at a commensurate amount. There would not be the erosion of one single dollar in revenue, it would just be the difference between what they're paying now and a market tax rate.
Ms King: Can I remind you of the Toronto problem, for example? When for 40 years you don't recognize in assessment changes in property values, then you get into these situations 40 years from now where the municipality is stuck with a property owner who hasn't been paying their full share of property tax. At least, they've been paying it, but it hasn't been coming to the municipality. That's the issue for us.
Mr Baird: But it wouldn't change by one dollar. If I'm an MEU paying $100 in tax and to go to a market tax rate, it would go up to $200, what we're saying is that $100, rather than go to the municipality to funnel into new spending, it would go to pay off that stranded debt that customers are currently paying. Otherwise, they're going to have to pay that debt off and they're going to have to increase people's --
Ms King: Yes, so you're paying it from property tax, and that is our issue.
Mr Baird: But they'd have to raise consumers' hydro rates so that the municipalities could get a windfall of new money.
Mr Power: Why wouldn't you treat everybody on the same level playing field? That's what we're saying, Mr Baird. Joan has pointed out very clearly that you must treat everybody equally, so if the new private company is going to come in and is going to pay taxes at fair market value based on the assessment, why wouldn't the existing ones as well?
Mr Baird: But they are.
Mr Power: That's like turning around and saying to a municipality that because you've got a new company in your municipality that has increased the assessment and therefore there's a little bit of new revenue, that should go to pay down the province's debt, which you incurred. Hydro incurred their debt. They need to pay it down. We're saying keep it as a level playing field.
Ms King: When our property taxes go up 10 years from now, it would be because we have service costs. What you're saying is, yes, but for that particular company, any of those increases for the service the municipality is providing goes to pay off the debt rather than --
Mr Baird: But on page 8 you say that this could "result in a higher electricity cost to municipal consumers" and you highlight that as a concern. I just think it would be wrong to give a new stream of revenue to the municipalities and then, on the very same day, have hydro customers' hydro bills go up to pay that commensurate amount.
The Chair: Mr Conway?
Mr Conway: I fear my bad habits are spreading. For that I accept total responsibility.
Mr Baird: The liability on that basis is considerable.
Mr Conway: I appreciate the presentation. Really, I have just one question for you, Michael. Thinking about the average residential customer up in your part of the world, in places like Geraldton and Nakina and Longlac, what are they expecting, particularly those people in small-town, rural and northern Ontario, from this policy? Do you sense that they're even aware that major change is under way? At one level -- and your brief on page 10 makes the point, at least indirectly -- their exposure is very high, because in a market-driven world I don't imagine there's going to be a lot of interest in being active in the very vast regions from which you come. What is the general state of understanding and expectation of the people you represent municipally up in the northwest in communities like Geraldton and area?
Mr Power: Probably, Mr Conway, similar to the expectations of the citizens of Renfrew county, that when they flick on the light switch electricity will flow and the light will go on, that when you turn on your heat your home will be heated, you'll have hot water, all those things. That's why we were very clear in saying that we were quite pleased that as part of the statements the government has made they are guaranteeing that rate assistance for remote and rural Ontario will remain in place. That is very crucial. We're always very happy to hear that commitment being underscored at every possible opportunity.
Mr Conway: At the end of his long and distinguished public career, Mr Leo Bernier, well known to you and myself, Mr Power, styled himself as no longer a politician but a statesman. With your answer, you've graduated to the Leo Bernier school of statesmen, and I thank you for the answer.
Mr Lessard: The big incentive, the carrot that's being dangled in front of everybody, is this promise of lower electricity rates. The minister is consistent in his assurances that rates are going to go down, yet many people have come before this committee in the last week and a half to say that they can't really say that at least in the short term there'll be any decreases in rates. We know that the vast majority of consumers in Ontario are served by municipal electric corporations, over 10 million residential and small business consumers. You've mentioned in your brief some of the challenges you're going to face in trying to deliver lower electricity rates, and you mentioned the increased risk of purchasing power on the spot market as one of those factors. You also mention being a default supplier to the most expensive customers as well. Finally, you raise the possibility of increased efficiencies that may be achieved through expanding your service area. There seem to be some roadblocks that have been set up in that regard. Given all those factors, do you have any expectation that rates for residential consumers in the municipalities you represent are going to go down, either in the short term or in the long term?
Ms King: One of our concerns is that some of the large users might get a very good deal with the private sector somewhere and that the municipal electric utility might be the one that is having to serve the harder-to-serve or the small users, and that is a concern. What we're saying very clearly is that we need those tools. We have to be able to share. A perfect example: Should we be sending out our water meter reader on week 1 and then our hydro meter reader on week 2? That wouldn't make any sense. We should be able to use one meter reader and share that service and share the cost. We want to make sure that those abilities to make it efficient for municipalities and their electric utilities to function -- that we have those tools.
We do have some concerns. We want to see it work. We know that those large companies, the big users, are part of our municipality too and that they bring us good value. We want to have the cake and eat it too. That's what we're saying. We want to make sure that this works properly.
Mr Lessard: Without those changes, do you expect to see lower rates for residential consumers? That's my question.
Ms King: If the municipal electric utility can't work competitively, no, you won't see it. We really need to see those changes.
The Chair: On that note, on behalf of the members of the committee we thank you for coming before us with your suggestions and we appreciate your input.
Colleagues, that's our final presentation this morning. We'll reconvene this afternoon at 1 o'clock.
The committee recessed from 1200 to 1300.
CANADIAN FEDERATION OF INDEPENDENT BUSINESS
The Chair: Good afternoon, colleagues. Our first presenters this afternoon are from the Canadian Federation of Independent Business. Welcome, Judith. I'm sure you know you have 30 minutes for presentation time, and colleagues are very pleased if you leave time for questions.
Ms Judith Andrew: Madam Chairman and members of the committee, I'm Judith Andrew, executive director of provincial policy with the Canadian Federation of Independent Business. I am very pleased to be afforded this opportunity on behalf of CFIB's 40,000 small and medium-sized business members in Ontario. We appreciate the opportunity to present the perspective of small business on Bill 35, the Energy Competition Act.
We're aware that the committee has received many presentations from organizations directly involved in the industry, and we note that CFIB represents some firms in that category, for example, utility contracting, but the vast majority of our members would have an interest in this legislation as business customers who represent an important customer segment to be considered, along with large business users and residential consumers.
In your kits you will find a document called the Small Business Primer, and in there you will see that the small business sector is the predominant form of business organization in the province. About three quarters of all businesses in Ontario have fewer than five employees. Small firms account for over half of total private sector employment in Ontario. There are over 300,000 firms currently doing business here, as well as in excess of half a million self-employed individuals doing business on their own account. As a major force in economic growth and job creation in the province, the small business sector must be explicitly considered in this key reform of our electricity industry.
Until the early 1990s, CFIB as an organization had the luxury of ignoring Hydro as an issue since "power at cost" had served small business reasonably well and other issues tended to predominate on our agenda. The extreme economic difficulties of the recession during the early part of the decade, exacerbated by the attention-getting electricity rate increases over 1991 through 1993, put Hydro on our radar screen and directly on to CFIB's member surveys.
In mid-1993 our Ontario provincial survey found that the heavy rate increases had had a bottom-line impact on smaller firms, with about a quarter of the nearly 5,000 respondents indicating a major impact on their firms, one half marking moderate impact and the remainder noting minor impact. Indeed, it is clear that some small firms are reasonably heavy users of electricity and can't be discounted in the sense that they are equivalent to individual residential consumers.
Over the years, we've done various benchmarking on satisfaction with Hydro rates, and the most recent one dates from January 1997. Certainly Ontario Hydro's so-called average rate freeze has not garnered the electrical utility industry accolades from the small business sector. I would direct your attention to the colour charts in the side pocket of your kit. This is from CFIB's Our Members' Opinions data, which is a census that we administer in person at the member's place of business, right at their business premise. These January 1997 data found only 20% of respondents rating their electrical utility as good, while 38% marked fair, and 34% didn't equivocate on rating their electrical utility as poor. In fact, Ontario's small firms gave their electrical utility poorer marks than did smaller firms, on average, in the rest of Canada.
Our members also rated value-for-money on their electrical utility in Ontario worse overall -- and this is the combined good and fair ratings -- than on their gas-oil utility, on their local telephone, on their long-distance telephone. In fact, their utility rated even worse than Canada Post. Clearly, the status quo is not an option.
CFIB's support for introducing a competitive marketplace in electricity draws from our mandate 182 in 1996, in which 69% of respondents voted in favour of the Ontario government ending Ontario Hydro's monopoly control over electricity generation and transmission and introducing competition among power generators. The full question is appended at the back of the brief as appendix B.
This question was based on the June 1996 report of the Macdonald committee, the Advisory Committee on Competition in Ontario's Electricity System, and it did contemplate the separation of Ontario Hydro's nuclear, hydroelectric and fossil fuel facilities into separate commercial businesses. The question preamble also indicated that nuclear and Niagara Falls generating facilities would remain under public ownership while the rest would be sold.
Certainly our members, as independents, have a strong appreciation for the benefits of free enterprise. They understand all too well the problems associated with little or no competition, having experienced those in other spheres such as banking and workplace disability insurance. Smaller players are always more vulnerable where power is concentrated in the hands of the very few. It is not a leap of faith, therefore, for smaller businesses to support the development of a competitive market in electricity.
Small firms in Ontario expect to benefit from a competitive electricity market, with greater choice, lower prices and a safe and reliable power supply. Many of them may also see business opportunities in connection with the $10-billion consumer electricity market. A competitive market which delivers on these anticipated benefits will boost the economy by encouraging job growth and investment by small business job creators. Bill 35 sets out the framework to allow these benefits to be realized through the separation of generation from transmission and transmission grid access managed by a truly independent market operator, as well as competition at the retail level.
The CFIB has appreciated the many opportunities afforded to us by the government through the Minister of Energy and staff from the Ministry of Energy, as well as the Ministry of Finance, to consult on the key issues associated with the reform. We have also met on this issue with members of the opposition, as well as with key players such as the chairman of the Ontario Energy Board. As always, our survey results are shared widely with policy-makers.
As a member of the steering committee of the Stakeholders' Alliance for Electricity Competition and Customer Choice, we have been working closely with our larger business counterparts, as well as the municipal electric utilities, to advance the electricity industry restructuring to everyone's benefit. On behalf of small firms, we flag the following issues for your attention:
On market power, CFIB members support the establishment of a truly competitive market. Because Genco, Ontario Hydro's generation successor company, will hold 90% of the generating capacity, potential abuse of its dominant position is a serious concern. With divestiture ruled out in the short term, we understand that the Market Design Committee is working with Ontario Hydro on a number of market power mitigation measures. These, together with the roles of the Independent Electricity Market Operator and the OEB in promoting competition in the best interests of customers, are expected to guard against Ontario Hydro gaming the market.
We also appreciate Minister Wilson's undertaking that this government will not permit Genco to abuse its market position. Our view is that this area must be monitored very closely and corrective action must be taken as needed, depending on the developments. We join with the stakeholders' alliance in believing that the right form or forms of ownership must and will evolve to serve the interests of electricity customers.
On the issue of stranded debt, Ontario Hydro's $31 billion of debt is a major millstone around ratepayers' necks, with the cost of servicing and retiring that debt absorbing approximately 40% of customers' electricity bills. Estimates of the amount of Hydro's debt and other liabilities that can't be supported by the new successor companies vary between $10 billion and $30 billion, with the actual number being very sensitive to changes in the price of electricity. Since it is impossible to predict future electricity prices accurately, we are convinced that a transparent, flexible approach is necessary to deal with any residual stranded debt.
We are currently polling our members on the alternative of having taxpayers pay for the residual stranded debt and the results from this question will be available roughly late September or October. The full question is attached to the brief. Should the competition transition charge allowed under section 79 of the legislation be necessary, it must be applied even-handedly, in a way that does not discriminate against small and medium-sized businesses.
On the unfair competition issue, CFIB supports the level playing field measures contained in sections 83 through 86, which require the Ontario Hydro successor companies to make payments in lieu of the various taxes. Similarly, the section 87 measure instituting an adjusted gross revenue tax on municipal electric utilities is supportable for putting market participants on an equal basis. When the stranded debt is defrayed, CFIB holds that the value of these revenue streams must be channelled into tax reductions for Ontarians.
It is very important that municipal utilities are prevented from subsidizing the competitive services side of the business from the monopoly wires side of the business. This is an area that must be monitored and regulated very closely to ensure there is no intermingling of resources or other subtle advantages or cross-subsidies given to the municipal competitor.
We have already heard from CFIB members in the utility services field who are extremely nervous about municipal utilities gearing up to compete on an unfair basis. Tough questions are being asked of us about the transfer of municipal utility assets under section 133 and subsequent. CFIB members in this business want assurance that their municipally owned competitors will not, in effect, be gifted with free assets by the municipality.
Also in this area we're presenting a position that's diametrically opposed to what you heard earlier from the Association of Municipalities of Ontario. We also are concerned about the proposed Ontario Energy Board Act section 72, which outlines the scope of activity for municipal distributors. As we understand it, there is very little constraint in this section, as almost anything can be tangentially linked to enhancing the retailing or distribution of electricity or the use of assets more effectively. The issue of unfair competition by government and its agencies is a huge and growing problem as entrepreneurial types within the public sector see opportunities to launch commercial businesses from their taxpayer-subsidized base. CFIB urges the committee to carefully review and address this issue.
In terms of the regulatory regime, based on our own experience with the Ontario Energy Board , CFIB is concerned that this quasi-judicial tribunal is inaccessible to average Ontarians. This issue takes on even greater importance considering that Bill 35 accords the OEB with substantially increased powers and responsibilities which will affect many smaller players and have a substantial impact on consumers. The regime of cost awards at the OEB has resulted in a very time-consuming and costly hearings process around which some representatives have built entire consulting and legal practices. The issue of accessibility of the OEB to Ontarians should be addressed in the context of implementing the competitive market.
I was pleased to hear this morning the chairman of the OEB, Mr Laughren, indicate that they are intending to shift to a more flexible process. We will want to pay close attention to how that is developed.
We would like to leave with the committee today a principle to guide the restructuring: that Bill 35 and its regulations, associated structures, policies and procedures must have a customer focus. While the various players that come before you will wish arrangements to suit themselves, the objective here is to serve the needs of customers, with all consumers, large and small, sharing in the benefits.
In conclusion, we would say that the Ontario government has set out a carefully considered framework for developing a competitive market in electricity, which we trust will proceed on schedule so that its benefits will be enjoyed at the earliest possible date. We do not underestimate the issues and challenges associated with creating a robust, vibrant electricity market, and we appreciate your serious consideration of the small business concerns in this endeavour. We are heartened by the goodwill shown to date by all participants, and we anticipate that the open policy development process will continue as we move towards the competitive market in 2000. We appreciate this opportunity and would like to answer your questions.
The Chair: Thank you very much. We begin with the Liberal caucus.
Mr Conway: Thank you very much, Ms Andrew, for a very helpful and specific presentation. The point you make at the bottom of page 3 and the top of page 4 about unfair competition is an understandable one. You focus your concerns around the opportunities that will be afforded municipal utilities to potentially cross-subsidize in ways that will be clever and intricate and perhaps hard for the human eye to capture. You have said nothing about the opportunities for Servco. One of the interesting points that a number of presenters have made in the past eight days is the fact that the legislation effectively empowers Servco to do some things that will clearly consolidate its power. Do you have any concerns in that connection?
Ms Andrew: Yes. In fact, I was not explicit here, but on what we're saying about a level playing field and those concerns, ditto for Servco.
Mr Conway: I appreciate that. My second question has to do with the stranded debt issue. You're currently polling your members, you said on page 3, about the possibility of having taxpayers pay for the residual stranded debt. Do you want to just elaborate on that point?
Ms Andrew: You'll see the vote question appended right there at the back of the submission. Essentially, there are arguments for doing that, one of the arguments being that past Ontario governments have of course guaranteed all of Ontario Hydro's debt, perhaps in connection with things that weren't exactly prudent investments. Mistakes were made.
Mr Conway: Big mistakes were made, absolutely.
Ms Andrew: One could argue, perhaps, that government, on behalf of all taxpayers, should perhaps be participating in this. This would be especially an important issue if, for example, there was the threat of hydro prices rising in connection with any kind of competition, a transition charge. That would be a very unfortunate outcome if, after all this, hydro prices were to rise for the small consumer.
Mr Conway: There is some prospect in the minds of some that in the short term prices may not go down for a goodly number of customers. My belief is that for big customers the prices will probably be going down quickly, simply because they'll have opportunities to do things that small business and individual customers will not have. In fact, we know that over the last two, three or four years big business has been able to negotiate with Hydro.
Ms Andrew: Which our members disagreed with. There's another vote there.
Mr Conway: That's right. It was simply because of their power in the marketplace. I understand that. I don't want to be naive. But my concern is that there be equity in terms of disposing of the multi-billion-dollar debt, whatever it is. To be fair to the Ministry of Finance, and I always want to be fair to the Ministry of Finance, they have said the CTC, the competition transition charge, is the last resort. I believe them when they say that, because there are some problems with that. But there are four or five or six other instruments in the basket of charges. The ones I would be most concerned about, as a residential customer or as a small business person, would be the ones that I think are going to be relied on, one of which is going to be taking a slice out of the gross revenues of municipal utilities. That's the big one; that's the one that has the big yield. It's being done in part to level the playing field, and I understand that, but after the stranded debt is paid off, that continues, under the terms of this act, to the credit of Her Majesty's provincial treasury.
Have you got any views on the mix of the other charges? Setting aside the competition transition charge, accepting that that is the last resort, there are five other charges that the legislation proposes. Have you any specific advice, thinking about your members, as to how those instruments might be selected and imposed?
Ms Andrew: As I understand it, the plan is to apply those other charges essentially in lieu of taxes, because those entities are not taxable in the normal way for corporate, property and other taxes. The intention is to channel that revenue stream to the financial corporation towards the debt. Is your question about what happens after that happens?
Mr Conway: I just want to make sure that there's equity. You're right in the main about what you say about how they're to apply, except as I read the language -- and we had some testimony this morning that I will certainly want to investigate further. For example, there's a special payments category for Servco and Genco that will contemplate dividends, presumably, and other things; we're not exactly sure, because it's to be determined in regulations. I'm a small business person in North York, and I just want to be sure that I am paying my fair share of this multi-billion dollar debt, no less but no more.
Ms Andrew: I agree with you. We would argue that dividends and such should also apply to any debt. Once the debt is dealt with, it should be channelled back into tax reductions for taxpayers.
Mr Lessard: Thank you very much for your presentation. You've mentioned some mistakes made by Ontario Hydro in the past. One of the biggest was Darlington, the nuclear facility. That's a big part of where the stranded debt is going to come from. But in agreeing with you that we need competition in the hydro market, what we don't want to see is that Ontario Hydro just changes their name, the way in which they hold assets, and we tell them, "Go forth into the future, but don't make those same mistakes that you made in the past." We need some mechanisms to ensure that doesn't happen. I'm not so sure that strictly market forces will do that.
I share your interest in ensuring that all consumers benefit from lower rates, if in fact that's what happens, because I think this is an area where residential consumers share the interests of small business people. We're all going to be exposed to those same market forces and having to negotiate the best deal we can.
This morning we heard from the Association of Major Power Consumers in Ontario. One of the things they suggested was that they be permitted to have choice beyond the IMO-administered markets. Just to translate that for you, that means to opt out of the market and make their own deals for the supply of power. That would mean that somebody else would end up paying the bills and they would get the benefit by being able to negotiate their own contracts. If they were able to do that or come up with some other ingenious means of trying to avoid paying their share of the stranded debt, that means somebody else is going to get stuck with it. You've given us an estimate of the stranded debt of between $10 billion and $30 billion. I guess you're being more forthcoming with us than many other people we've asked to guess what the amount of the stranded debt would be. I would like to know whether you have some specific suggestions as to how we ensure that all consumers, residential and small business people, pay their fair share while we ensure that other large consumers aren't going to be able to avoid paying their fair share of the stranded debt.
Ms Andrew: On that issue, and by extension from our member votes which are in the brief, we would argue that there should be strong anti-avoidance rules so that nobody can wiggle out from paying their share. As you know, the smallest, most vulnerable consumer is residential and typically the very small business and it would be inappropriate to saddle those people with stranded debt charges if some other categories were somehow exempt. So we would argue that there should be anti-avoidance rules to make sure that everyone pays appropriately.
Mr Lessard: Have you canvassed your members at all with respect to environmental issues, their concern or their interest in ensuring that environmental issues are addressed as a result of Bill 35?
Ms Andrew: We haven't canvassed our members specifically on Bill 35 environment-related issues, but we know from previous environmental surveys we've done that our members have very much the same concerns as the general public and they are most interested in ensuring that the environment is protected in the course of any endeavours, including the electricity market.
Mr Lessard: Do you feel that we need to put some strong measures for environmental protection in the bill? Do you think we need to strengthen what's in Bill 35 in that regard?
Ms Andrew: I haven't studied those in detail, but I have read that there are strong measures there. I would be happy to consider that and respond later.
Mr Lessard: Thanks.
Mrs Johns: I appreciate your presentation. I just have a couple of quick questions before Mr Baird. On this chart that you gave us with the heading How do you Rate the Following Organization from a Value-for-Money Perspective? -- I know you went directly to the members, so when they were answering that question about their electric utility, can you tell us if they were thinking more about Ontario Hydro or the MEU that they get service from? What did people think of when you asked them "electric utility"?
Ms Andrew: I imagine it was a mix of both, because not that many people understand the previous structure or what's upcoming. I would argue that a lot of the poor rating had to do with the high rates they're paying and especially their recollection of the big increases in the early 1990s. So they would be rating both Hydro and their utility in that answer.
Mrs Johns: I was just wondering, because over the course of the eight days we've heard a lot of talk about how we should be able to get the generation costs down, which we should be able to, of course, because there's 80% of the dollars of your base payments, but this side has argued that there should be lots of savings to be found on the municipal electric utility side too. I'm just wondering if people out there were recognizing those differences.
Ms Andrew: I expect there is and that makes the fear of cross-subsidy and so forth all the more of concern, because unless that's carefully monitored the municipal utility will start to engage in all sorts of businesses and do it with taxpayer-subsidized assets.
Mrs Johns: That's a big issue for us. You believe that if we open the playing field for municipal electric utilities to enter, what will happen is that the municipal taxpayers will end up subsidizing that, or the ratepayers, and you're opposed to that.
Ms Andrew: That's right.
Mr Baird: Thank you very much for your presentation. I have just one comment to make at the outset. Whenever the CFIB comes before the committee I am always convinced you are representing your members because you've always explicitly asked their opinion on the public policy issue of the day before you come to us. So I certainly appreciate the time and effort you've put into your presentation, including discussing with your members.
I wanted to follow up on the comment of Ms Johns's with respect to the local MEUs and their costs. Do you think it's a safe bet to say, first on the Genco side, on generation, that with competition we're likely to see generation costs fall over time?
Ms Andrew: Absolutely, and from what I'm told that's where the bulk of the savings will be. But certainly on the MEU side there must be some. They have those territorial monopolies.
Mr Baird: Yes, that was my next question: Do you get any differentiation on your survey in terms of geography from various centres? I look at the little flyer I got with my own hydro bill in Nepean, where they compare commercial electric bills. Based on 100 kilowatts, 30,000 kilowatts a month, last year in Toronto you'd have paid $2,789 but in Nepean you'd have paid only $2,100. That says to me, when you look at the base, that 90 cents on every dollar in Nepean goes to Ontario Hydro generation, so they're spending about 8.9% on the local MEU delivery, whereas in some other parts of the province it could be well over 20%. Do you get more complaints in certain parts of the province, say, here in the city of Toronto, where costs are so demonstrably higher than they are in other areas?
Ms Andrew: I think there was some variation. To be honest, I didn't look at it again before coming here, but we can actually tabulate our data by MPP code, by postal code, whatever geographical area we need. So if you're vitally interested in that we could do that for you.
Mr Baird: Maybe not by riding but just by geography, because I think we've spent a lot of time looking at efficiencies from generation. But there also seem to be substantial efficiencies in some parts of the province on distribution at the consumer level, and that's obviously the area closest to residential and small business owners, when you see such a huge amount of difference from one local authority to another.
Ms Andrew: When these data were made available, the Municipal Electric Association was very interested, and I'm sure the opportunities for utilities to benchmark against each other and figure out why one is doing way better than the other are there. I think that's a very good exercise because they haven't faced any competition and there really hasn't been any pressure to do the best they can do.
Mr Baird: That's where benchmarking is important.
The Chair: That's our time, sorry.
Thank you very much for coming before us with your advice and for participating. It's much appreciated.
Ms Andrew: Thank you for the opportunity.
INDEPENDENT POWER PRODUCERS' SOCIETY OF ONTARIO
The Chair: I now call upon representatives of the Independent Power Producers' Society of Ontario. Good afternoon. Welcome to the committee.
Mr Al Barnstable: My name is Al Barnstable. I'm president of the Independent Power Producers' Society of Ontario. To my left is Thomas Brett, who is a director of IPPSO and who has retained the firm of Johnston and Buchan to prepare our brief which we submit to this hearing today. We'll try and keep our verbal part down to 10 minutes approximately so there's plenty of time for questions.
As a matter of background, IPPSO has roughly 500 members in Ontario and we represent the private power producers in this province and the related supply and service industries to the private power sector. Our members have approximately 120 projects in Ontario that are in service and these supply roughly 10% of the province's electricity, two thirds of that through wholesale contracts directly with Ontario Hydro.
Our members essentially represent the sector in the province that is prepared to invest and be competitors at the generation level and this is a key part of the restructuring. We firmly believe that because most of the costs of electricity supply are at the generation level, without further investment in this area there won't be substantial competition in this province and the effect it could have on prices and investment etc may not be realized for many years.
IPPSO in general is very supportive of the provincial government in its efforts to restructure and bring about competition in the electricity sector in Ontario. We are an active participant stakeholder in the overall restructuring process. We have members on both the Market Design Committee and the Electricity Transition Committee. We very much favour the timetable that has been set by the government to start a competition in the year 2000, and in general we are very impressed with the legislation as it has been drafted and is the purview of this committee.
We do, however, have a number of recommendations that we are tabling today, and I wanted to give you a strong sense that our recommendations are directed mainly at ensuring that there is competition at the generation level for the reasons that I outlined. Unless we see fair and workable provisions in the act to ensure that there is real competition in generation, we don't see that there will be the benefits that are being put forward for restructuring the electricity sector at this time.
We are very concerned, as we've heard other people put before this hearing, and I think some of your questions are in the same framework -- our concern with the overall restructuring process is that if it doesn't go a bit further than is currently drafted in the legislation, we could very well end up with little more than a financial restructuring of Ontario Hydro. The monopoly may disappear on paper, but in fact it could very well still be there in that there won't be competition because there isn't a fair set of rules in the legislation that governs the competition provisions of the act.
We're making recommendations today in a number of areas, but there are three main areas that we're putting our emphasis on:
(1) The need for further reform in the market at the outset to lessen the power dominance of the successor generation company.
(2) We're recommending that there be further structural reform in terms of setting up at least four successor generation companies as opposed to a single successor generation company for Ontario Hydro. We think this structural reform is necessary, and contractual licensing and rule-making reform will not go far enough to mitigate the market dominance of a single generator.
(3) We're also recommending further powers for the Ontario Energy Board so that it can intervene under its own initiative on matters concerning market power.
We are addressing some issues in the legislation concerning stranded debt. We recognize the need for stranded debt determination and recovery of stranded debt. We have been very active in providing input on this particular issue and we're coming from the basis that we want to see fairness and equity in both the determination and recovery of stranded debt. You'll see in our recommendations that we have concerns that this whole exercise is a little bit too close to the government. It's not quite as open as it should be. We're recommending that before the numbers are set and cast in stone, perhaps there needs to be an Ontario Energy Board review of the determination and setting of these numbers.
The third area in which we're making recommendations concerns green power and environmental aspects of restructuring. We feel this is an area that is lagging some of the other reforms and needs more attention. This attention can come through further provisions in the legislation but also in the overall restructuring exercise. We feel there is no better opportunity for the province to make initiatives in this area, and if those initiatives are taken, our members will stand behind green power initiatives and are prepared to invest in this sector of the generation business. We have for many years and we are strongly positioned to make significant investment in this area, but we need to see that there are some additional market-based and some other incentives as we're recommending to stimulate this investment.
I'll close my remarks and turn it over to Tom Brett, who can address in a little more detail some of the things we're recommending here today.
Mr Tom Brett: Thank you very much. Mr Barnstable addressed three fundamental points. I want to touch on three other points that you'll find in our brief.
The first is that the act does not at the moment deal explicitly with the existing contracts between Ontario Hydro and the independent generators. We think it should. Those are long-term, legally binding contracts much akin to a Hydro debt. The act should explicitly deal with them. We believe that these contracts should stay with the financial corporation. They should not be transferred to Genco in particular or to any other third party. We think, as Mr Probyn and others have told you, that as a matter of clarification section 25(3) of the act should be amended to make it clear that those contracts aren't inadvertently terminated by the provisions of that section, which talk about termination of pre-existing Hydro contracts with municipalities.
The second point is that we think the act is a good skeleton which provides a framework for change, but much of the meat is left to regulation. This is not unique to this act by any means, but as a result of that it's very important that there be a good public consultative process for those regulations before they're made final, because a lot is done by regulation in this act: everything from transition charge to categories of contracts which will be protected, to the amounts of these special payments which will flow towards reducing the residual stranded debt and the like. We think there needs to be a strong consultative process and we also think that should apply, as Mr Barnstable said, to those key determinations of the debt, the amounts of special payments and the proposed transition charge.
He mentioned the importance of giving the Ontario Energy Board the right on their own account to inquire into market power considerations. The act has some regulatory oversight of market power but it limits the power of the board to do this on its own initiative. It requires that the board act in response to a directive from the minister or to a report from the independent market operator.
Next, I suppose under the rubric of level playing field, we think that, as set out in the white paper, the transmission company should not be in the business of acquiring any generation. We don't think there's justification for that with or without OEB approval.
Second, we think that the municipal wires business and the municipal competitive business should be separate corporately. We don't think accounting separation is sufficient. Accounting separation makes it difficult for the regulator to see whether cross-subsidy is going on. It's much better, in our view, to have corporate separation between those two things, and I think the white paper did call for corporate separation between the wires company at the municipal level and the competitive businesses of the distributor.
Finally, we have some concerns about the distributors being able to acquire generation. We think the existing generation that they have now should be grandfathered, but as a general rule distributors should not be in the business of owning generation and acquiring generation, at least not in their own service areas.
Thank you. Those are our initial comments.
The Chair: Thank you very much. We have five minutes for questions from each caucus and we begin with the NDP caucus.
Ms Churley: Thank you for your presentation. I want to follow up on page 12 of your brief where you talk about the lack of mention of existing IPP contracts with Ontario Hydro. I'm wondering if you can expand on the implications of that, if you've had dialogue with the government about what happens to your contracts once this bill is passed and the implications for you if those contracts are not renewed through the government. What happens to the power that you're generating now if you don't have some kind of an agreement on that?
Mr Brett: We haven't had extensive discussions with the government at this stage because this process is getting underway. We would anticipate that in any and all events these contracts would be honoured. We think it's appropriate, though, to incorporate this into the legislation. It isn't simply a question of honouring the contracts, it's also a question of who the contract is with. I think under the original scheme it was with Ontario Hydro, which is a crown corporation bearing a government guarantee. We'd like to see, I think as Mr Probyn told you, that same credit be in place.
Mr Barnstable: I think it's important that these contracts be recognized for what they are. Over the last year or so they got a bit of bad press, mainly Ontario Hydro using them as a smokescreen to cover their own inadequacies. These contracts were struck at about the time the Darlington generating station was being brought into service. The basis of comparison of those contracts really should be power from Darlington. By and large, these contracts on average produced power at about half the price at Darlington, so we see they're a good deal for the province. They've done what was intended when Hydro entered into these contracts with the sanction of the cabinet. If it hadn't been for these contracts, we probably would have had brownouts this summer. I think Mr Osborne said 7% of his power comes as a result of these contracts. It would have been a tough summer without them.
Mr Lessard: I wanted to ask you about renewable energy portfolio standards and the impact that your members may be able to provide to improving environmental quality in Ontario. We've heard this from a number of presenters. I'm hoping that it's having some impact on the government, because I'm concerned that if we don't have some requirement that there are renewable energy portfolio standards, we're not likely to get much increase in renewable energy in Ontario. I just wondered what your views were on that.
Mr Barnstable: That's the basic reason why we have it in our recommendations. This whole environmental area is a bit of a concern to us, because as we watch the market design process and as the act comes together, the environmental initiatives tend to get shuffled off to the Minister of the Environment and we're not sure that they're going to be up to speed and be able to do things in a timely manner.
We're basically recommending, in addition to emission trading, that we have a renewable energy portfolio. It doesn't need to be a large set of numbers; 1% of the electricity demand in the province would probably represent something close to 1,000 megawatts of additional renewable resources in the province. You can do a lot with a little bit of the market. If you do have that portfolio, you also set up another market mechanism: trading credits for green power. The way we're phrasing it is a "renewable portfolio." Retailers would be required to have a certain per cent of renewable energy in their whole portfolio. Those that had more of that could trade surplus to others that had less, so you could get a very fluid market here.
What we're really after is, if there are some initiatives to get this started, that our members will make investments and they'll be within the competitive market, this very small competitive market for renewables. The very best renewable projects will come forward because they'll have to compete with each other. We think it's an excellent time to do that. We realize it's a bit of a set-aside of the market, but the green advantages and the advantages to the environment are worth setting aside a small portion of the market to stimulate that particular sector.
Mr Lessard: I agree, and they'll create jobs as well.
Mrs Johns: I agree with that too, and I think that's why we've set up the regulations in 87, to allow the opportunity for consumers to have choice for the first time in Ontario, and I think that's record-breaking for us.
From the standpoint of market power, I'd just like to talk about the ability for new generators to come in. I'm not sure if I heard you incorrectly, but what I infer from what you've said is that with the bill the way it is now, new market generators wouldn't come into the market.
Right here on my desk today I have a press release from Northland Power, which of course is one of your members, which says that they're entering into a new cogeneration project. They're saying: "The viability of this project is directly related to the provincial government's initiative to create an open electricity market in Ontario. An open electricity market would permit direct sales from the facility to customers located in Ontario and/or other interconnect markets such as the northern United States."
Yesterday or the day before when I was in Sarnia there was another independent news release out where they were looking at entering into a large contract in Sarnia, and of course we had TransAlta at the beginning of the month talking about that.
I'm deeply concerned that the impression is left that the new generators won't come in with this legislation the way it is, because obviously they are coming into the marketplace, obviously they think it's a good opportunity. With new generation all we can have, of course, is prices going down for the consumers in Ontario, and that's good news. Would you like to comment on that?
Mr Barnstable: The first thing you should know is that Northland Power is a member of IPPSO, and I think that's what you're alluding to. They were also party to the putting together of our presentation, our recommendations today.
I can't speak for individual generators and their business initiatives. Part of business is positioning yourself in the marketplace. I can tell you, though, that if we don't see further reform -- I do consulting in the private power business and I have clients who are some of the larger private power companies in North America. They're somewhat shy of this market. They are very concerned about the dominant position that the successor company to Ontario Hydro will have.
It's an obvious thing. There will be some investment. By and large, there will be bilateral contracts. The benefits won't flow down to the small ratepayers. They'll tend to stay up with the larger customers. If you want real reform and you want real competition and you want real prices, advantages in sifting down to the smallest buyer in the marketplace, you've got to have the very best structural type of competition. We don't have it in this act. We think this one simple change will go a tremendous distance to making that structural change and to really opening the doors to fair competition in this province.
Mrs Johns: Let me just say before I move on to my next question that in the TransAlta deal they are going to sell some power into the retail market and that does bring benefits to the consumers. In that particular case there is a retail component to it.
IPPSO has had someone on the Market Design Committee all the way through and has had I think a fair amount of input in the whole discussion, especially around the second paper, where they say basically that there could be mitigating factors put on market dominance to allow the market to work fairly and competitively.
It's my understanding that everybody who was on the Market Design Committee agreed with that. Did you people put a different report out, or do you not agree that the mitigating control set up by this second report would curtail predatory pricing and market dominance?
Mr Barnstable: We agreed with some of them, particularly the longer-term initiatives. Where we're concerned is that when the market opens, there is going to be a dominant player there, that you can't really mitigate through rules, licensing or contractual measures. The only way to do it is structurally.
The advice that was given to the Market Design Committee by various experts was that you need structural reform here. I can't speak for specific recommendations of the Market Design Committee. We only have one member on there. As you know, it's by --
Mrs Johns: Consensus.
Mr Barnstable: Progressive consensus I guess you could call it.
Our members are telling us that if they are going to become a presence in this competitive marketplace, it's going to be very tough. If you have one generator who dominates the market, no matter how you try to cover it over with contractual measures, you're going to bury the regulator with some of these mitigation measures. The poor regulator isn't going to be able to address this stuff because of all the different needs. It's better to get it structurally and that's what we're recommending.
Mr Brett: As you know, the Market Design Committee themselves expressed some concern about the fact that they were dealing with an incomplete deck, as it were, to begin with because the option of separating the company into several was not really on the table for them. I think they did the best they could in the circumstances and, as our brief says, we support a number of the things they've done. We just don't think it goes far enough.
Mrs Johns: The Market Design Committee is going to speak to us this afternoon and we'll hear what they say with respect to that, so that's fine. Thank you.
Mr Conway: Gentlemen, I will try not to gild the lily here, but this exchange with Mrs Johns is I think a central one. I have read the Market Design Committee report. I don't profess to understand it in a way that you might, but as a generalist I am able to read the direction, and it couldn't be clearer, particularly if you read it in conjunction with the Macdonald report. I'm a layperson and I've read Macdonald and I've read the Market Design Committee, and they both seem absolutely clear on the centrepiece of the reform you must have to deliver the benefits we all want, namely, lower rates for all classes of customers.
The Market Design Committee and the Macdonald committee both agree that there must be structural reform at the generation level, and obviously you agree with that. The bill, by the way, does not do that. Bill 35 and the policy that attaches to it, particularly the white paper -- the white paper said there could not be divestiture beyond the Genco that is proposed in this policy. The Genco that we've got under this policy will begin with about an 85% to 90% market power from day one of this new electricity order 12 or 18 months from now. I think that's a real problem if we want the competitive benefits we all say we want.
You mentioned in your brief that there should be a disaggregation, an unbundling of Genco into at least four smaller units. Would you clarify that, just explain a bit what those four units might look like and particularly how you would deal with the fundamental difficulty I see, which is the massive power problem that is Ontario Hydro Nuclear?
Mr Barnstable: Yes. First of all, let me back you up a little bit here. We're not in any way recommending divestiture. We're simply saying four publicly held generation companies as opposed to one public generation company.
Mr Conway: I think the Market Design Committee actually used the word "divestiture." I understand what you're saying.
Mr Barnstable: As far as how you would divvy up this generation into four companies, we were very conscious when we made this recommendation that part of the driving force behind the whole nuclear recovery exercise is to consolidate and bring commonality to the operations and maintenance in the nuclear plants.
We are of the view that commonality could be applied even if different nuclear plants were inside of different companies. It's the control of the company and the control of the pricing into the market that we're interested in. There could be a common nuclear operator service provider that could look after those kinds of facilities irrespective of what company they're in.
Where it becomes a challenge, and I don't think it's by any means a difficult challenge but it needs further thought, and we've urged the Market Design Committee to stick their nose in there and look at it: The segregation needs to be quite skilfully done at the fossil plant level because those are the plants that are going to be the price-setting plants in the open market. We want to see those plants competing against each other because it's the price-setting plants that will bring the dynamics to the market. We don't believe that the nuclear plants will be the price-setting plants. They won't be far behind it but they'll be coming to the market at a lower-bid price.
Mr Conway: I appreciate that. The other point I want to underscore and just observe, and maybe a quick question: You point out in your brief, and I like the phrase you use, that Bill 35 is, I think you called it, a "legal skeleton," and it is. It is, as the ministry officials would want me to say, an enabling piece of legislation. It is the Delphic oracle. It can mean everything or it can mean nothing. It can mean whatever Her Majesty's government decides it to mean.
I look at the sweeping executive authority contained in the bill. When the bill was first introduced I made a quick list of the powers the cabinet has under regulation. By regulation the cabinet can appoint the board of directors for the IMO, for Genco, for Servco. By regulation the cabinet can prevent the ending of Ontario Hydro's monopoly supply contracts. By regulation the cabinet will determine the objectives of the financial corporation. By regulation the cabinet will decide how, when and how much consumers and generators will pay in the various stranded debt charges. By regulation the cabinet will issue regulations binding policy directives to the energy board on a range of electricity matters. By regulation the Minister of Finance will appoint the board of directors at the Financial Corp, including the chair and vice-chair. By regulation the cabinet will declare any financial corporation bylaw to be void unless approved by the finance minister. By regulation the Minister of Finance will issue binding directives to the financial corporation. By regulation the Minister of Finance will define the size of the stranded debt that Ontario Hydro will leave behind. By regulation the Ontario Minister of Finance will decide when the stranded debt is deemed to have been retired. By regulation the Minister of Finance will determine the amount of payments Genco, Servco and the municipal electric utilities must make to the financial services corporation. That's just my short list. It is sweeping executive power.
I like your recommendation that there should be some oversight of how those regulations are written and applied for, among other reasons, in many of these critical questions. The Ontario government and the Ontario Minister of Finance have clear conflicts of interest, which I'm sure, like Solomon, they will exercise in the public interest, but you might just want to have some independent regulation or independent oversight to ensure that Solomon behaves as he should behave.
Mr Barnstable: That's basically why we're recommending this oversight on the regulations. I can see why it's of more concern to a legislator than it is to a business person, because we're encouraging the government to move quickly and we very much support the progress that's been made to date. We don't have a lot of trouble with the way the legislation has been worded. The fact is, a lot of the meat has to come in regulations. That suits us fine. They're making good progress, but we want to be party to putting together the rest of this act.
Mr Conway: We all want a break in our rates. We all want lower electricity rates.
The Chair: Gentlemen, thank you very much. It's time to wrap up. We thank you for bringing your views before the committee and appreciate your advice.
Mrs Johns: Madam Chair, just a point of clarification on the way they suggested the breakup would happen, where fossil fuel would be divided through -- the government, when they thought about that, would have some concerns, of course, because fossil fuel right now is used primarily for peaking hours and if you had corporations in there that were competing against each other that had to run their fossil fuel on a more consistent basis, we would have to be concerned about the pollution aspects of that also.
ONTARIO CLEAN AIR ALLIANCE
The Chair: Calling now representatives from the Ontario Clean Air Alliance. Good afternoon. Welcome to the committee.
Mr Jack Gibbons: Thank you, Madam Chair. I'm Jack Gibbons, and with me is my colleague Sara Bjorkquist. We'd like to thank the committee very much for giving us this opportunity to speak to you this afternoon on behalf of the Ontario Clean Air Alliance.
The Ontario Clean Air Alliance is a 45-member organization and our 45 members represent over three million people in this province. The objective of the Ontario Clean Air Alliance is very simple: We want to ensure that electricity deregulation leads to cleaner air, not increased air pollution.
This afternoon I would like to briefly address you on three topics: (1) why deregulation could lead to increased air pollution; (2) how we can ensure that electricity competition will lead to cleaner air; and (3) the alliance's recommendations.
At present, Ontario Hydro is subject to emissions caps for its emissions of greenhouse gases, sulphur dioxide emissions and nitrogen oxide emissions. This means that there are legally binding limits on the amount of those gases that Ontario Hydro can emit into the atmosphere. However, the status quo emissions quotas or caps on Ontario Hydro will not be sufficient to protect public health and the environment in a deregulated electricity marketplace, for three reasons.
First, Ontario Hydro's emission limits will not apply to its new domestic and US competitors. Therefore, without effective new environmental regulations, electricity emissions will rise when competition begins in the year 2000.
Second, there are no caps on the 35 air-toxic emissions associated with coal-fired electricity generation. These toxic emissions include mercury, which is a very potent nerve toxin, and they also include six known cancer-causing agents, that is, arsenic, beryllium, cadmium, chromium, lead and nickel.
Finally, Ontario Hydro's status quo emission caps are too high. They're too high in terms of protecting public health and the environment. For example, according to the acidifying emissions task group our sulphur dioxide emissions should be reduced by a further 75%. I'd like to note for the committee that that acidifying emissions task group included representatives from Inco, from Shell Canada and from the Canadian Electricity Association. Also, as you know, the Ontario Medical Association has called for a further 85% reduction in Ontario Hydro's nitrogen oxide emissions.
In its white paper, the government of Ontario promised the people of Ontario that when implementing a competitive electricity market it would ensure that our environmental performance is maintained and improved. To improve our environmental performance we must ensure that our electricity-related emissions go down when competition starts in the year 2000. In order to ensure that, it's absolutely essential that the government of Ontario impose legally binding emissions caps which apply to all players in the marketplace, domestic and foreign, which will ensure that all the emissions associated with electricity generation go down when competition starts.
We are very pleased to note that the Market Design Committee, which was appointed by Energy Minister Wilson to give him advice on the creation of a competitive electricity market and the protection of the environment, has recommended that starting in the year 2000 there should be emissions caps on all the emissions associated with electricity generation. So the Market Design Committee has called for emissions caps, the same thing that we're calling for.
Unfortunately, in our opinion, the government has not yet accepted the Market Design Committee's recommendations with respect to environmental protection in two important aspects. First, the government of Ontario has not yet committed to establishing emissions caps which will reduce our total electricity-related emissions when competition commences. Second, the government of Ontario, in their consultations with stakeholders about new environmental regulations, so far have only consulted stakeholders on emissions regulations for two of the 38 air pollutants associated with electricity generation. It appears the government is in the process of developing new environmental regulations for only two pollutants, that is, sulphur dioxide and nitrogen oxide, and therefore it appears that the government is not planning to put in place environmental regulations which will ensure that our greenhouse gas and our air-toxic emissions decline, or are even held constant, when competition begins.
This, in our submission, is a very serious omission. It's inconsistent with the Market Design Committee's recommendations to the government that caps be established for all emissions, not just two but all 38, and it's also inconsistent, in our opinion, with the government's commitment and promise to the people of Ontario that when implementing competition it would protect the environment and ensure that we get an environmental and public health improvement.
Finally, our recommendations: At the moment, under the Environmental Protection Act, the government of Ontario has the ability to cap the emissions of domestic electricity generators. If the Energy Competition Act is approved, the government will also have the authority to cap the emissions associated with electricity imports from the United States, so that is a big step forward. Therefore, the Clean Air Alliance recommends that the provisions of the Energy Competition Act, which would allow the government of Ontario to cap the emissions associated with US electricity imports, be approved.
Second, we recommend that the Ministry of Environment issue a discussion paper analyzing the benefits and costs of various levels of emissions reductions of all the pollutants associated with electricity consumption. Then after the discussion paper is issued, we recommend that the Ministry of Environment consult with the people of Ontario about the appropriate level of emissions reductions for those pollutants.
Finally, we recommend that the government of Ontario establish emissions caps for greenhouse gas emissions, sulphur dioxide, nitrogen oxide and the 35 air-toxics which will ensure that those emissions decline when competition is established. If the government does that, then we can enjoy the economic benefits of competition and customer choice and we can also have a cleaner and healthier environment for our families.
The Chair: Thank you very much. Lots of time for questions, about six minute per caucus, and we begin with the government caucus.
Mr Galt: Thank you for a very detailed and interesting presentation. It's neat to see how many people and organizations you represent. It certainly gives it some credibility. We had an interesting presentation yesterday from the Ontario Medical Association detailing how some of these pollutants do affect, biologically and pathologically, bronchials and lungs.
As you're probably aware, at present it's next to impossible, if not impossible, to get green power on to the grid, other than demonstration projects that Ontario Hydro may wish to operate. At the same time, they are wide open to import whatever kind of power they want, whether it be dirty power from Ohio or wherever. That's our present status, so I think you would have to agree that any move in the direction that we're going with competition is going to be at least environmentally a step in the right direction.
Mr Gibbons: Sir, if I can just stop you there, I certainly understand what you're saying. With a competitive electricity market, green power will now be able to be sold in Ontario, and that, I personally believe, is a very positive development. But that, in and of itself, will not lead to a net reduction in pollution.
While certain people will now have the opportunity to pay a premium price for green power and that's positive -- it's customer choice and that will help the environment for environmentally responsible citizens who are willing to do that -- at the same time, without new emissions caps, Ontario's companies, Ontario's large municipal electric utilities, will go to the Ohio Valley, they'll buy very cheap but dirty coal-fired electricity, and the net impact will be a rise in emissions.
We're only going to build so many wind turbines on the city of Toronto lakefront. They'll have a positive impact, but they can easily be swamped by the negative impact of increased purchases from the Ohio Valley of coal-fired electricity.
Mr Galt: This particular bill, as it relates to environment, is enabling legislation. In other words, regulations can be written, and we're very open to the suggestions that you've have made here today, certainly very specific on things like caps for SO2 and NO2. We're certainly into consultations and look forward to your input and assistance with that.
Having read the bill, do you see anywhere in this bill that there is anything that would stop or interfere with the objectives that you're putting forward?
Mr Gibbons: No, sir. We like the bill. We agree with you, it's enabling legislation, and the key thing is that the government move forward after the bill is approved with the appropriate regulations. This is a positive step forward, but it is essential that it be combined with the proper environmental regulations. Then, we believe, we can have the benefits of competition and also the benefits of cleaner air. The bill provides the potential for great things to happen in Ontario, but we need the proper regulations.
Mr Galt: With the enabling legislation, it doesn't lock us in down the road. We can keep ratcheting it down to protect the environment as we go, as you're quite aware. There are some advantages in leaving it as enabling, a little bit open so that we can do that with the legislation in the future.
The medical association and yourselves are talking in the neighbourhood of a 75% further reduction of SO2 and NO2. Do you have any feeling, if we were to do that with the present Ontario Hydro operation, what that would do to rates?
Mr Gibbons: That's a very good question and I'm glad you asked it. Our members have simply said that emissions should go down when competition starts. We haven't said by how much, whether it's 75% or 1%. The key question is, we know from a health point of view we need very large emission reductions, and that's what the Ontario Medical Association spoke to you about.
There is obviously also the question of economics: How much is it going to cost? We're in the process of sponsoring a technical study which is going to look at the cost of getting various levels of emissions reductions by building new natural gas turbines to replace the output of Ontario Hydro's coal-fired stations. We're hoping that we'll have the results of that study by the middle of October and then we can share it with the government and the people of Ontario, and we'll be able to talk dollars, about how much it would cost in terms of bill impacts for various levels of emissions reductions.
Mr Galt: We certainly look forward to that information. As you're probably aware, the Lennox station, two of those four generators are either now or will be very shortly converted to gas, and we can certainly clean up on some of the other coal-fired plants that are presently going on. So Ontario Hydro -- a little bit of support, a little defence -- they're coming quite a way. They are also part of the Countdown Acid Rain program. They've reduced their SO2, the acid rain, considerably; it has been voluntary on NO2, a grand total on the max of some 215,000 tonnes. So they have come in the right direction. I guess that's the good news. The bad news is there is still a long way to go environmentally.
Mr Gibbons: Absolutely, I agree with you 100%.
Mr Conway: Thank you, the Clean Air Alliance. It's good to have your presentation. A couple of questions present themselves.
Just forgetting for the moment the move to competition, I want to talk a little bit about the nuclear recovery program, because when we were chatting -- I think in this very room a year ago, Jack; I think you presented at that time -- one of the concerns that I believe you and others had was that in the next couple of years, as we take 4,000-plus megawatts of nuclear power out of production, we have to replace that. Given the transmission constraints and other constraints, it is likely that there will be a reliance by Ontario Hydro, not on just more domestically produced coal-fired electricity but almost certainly a greater reliance on American, Ohio Valley coal-fired electricity. One just imagines the province of Ontario kind of going coughing, spitting and gagging into the first few years of deregulation and nuclear power recovery. I'm not so sure that we didn't see a little bit of that this summer.
What can you tell us about the nuclear recovery program, from your point of view, a year after we discussed it, particularly in terms of the increased reliance on coal-fired electricity?
Mr Gibbons: Certainly the fact that the nuclear plants are down means increased emissions. It's my best understanding, though, that Ontario Hydro is still planning to comply with all its emissions caps for greenhouse gases and sulphur dioxides and nitrogen oxides. So they are still complying with the caps and it's good those caps are there. Clearly, that's the reason why caps should continue, for all the players.
In the long run, we've got to get off coal, clearly. If we're going to get substantial emission reductions, we have to get off coal. Personally, I believe the cheapest way to achieve significant emission reductions is by substituting natural gas for the coal-fired output.
Mr Conway: You're absolutely right. I think that is a given. The assumption is that a centrepiece of the new generation world is going to be combined-cycle, gas-fired and electric, absolutely. But we've got to get from here to there, and in the short term we've got the nuclear recovery program, which had as its backup the importation of coal-fired electricity from the Ohio Valley. You're not aware that we've had to draw on very much of that in the last few months?
Mr Gibbons: I'm not aware of the numbers.
Mr Conway: The second question, that's related, is, how do we effectively regulate the transboundary issues? I don't know the regulatory environment as well as you, obviously, in the environmental area, but one of the concerns that I have is, can we actually write legislation -- emission caps and trading systems -- that will be effective in the sense that we make decisions in Ontario but the problem may be in Ohio or Michigan or New York?
Mr Gibbons: Yes, we believe you can. What we're calling for is emissions caps for all of Ontario's electricity, both produced in Ontario and imported and consumed in Ontario. We're saying that anyone who wants to sell in Ontario must come in within that emissions cap. For example, everyone who sells in Ontario would have to have an emissions quota, and therefore people who want to bring in power from the US would have to ensure that the emissions associated with those electricity imports don't exceed their quota, which is part of the overall Ontario quota.
Mr Conway: The Market Design Committee, in its second report, on page 5-4 says, "Emissions monitoring and enforcement are key factors to the success of an emissions trading system." They go on in other places to talk about the importance of monitoring and enforcement. Do we have in Ontario today the capacity to monitor and enforce to the level required to make these systems actually work?
Mr Gibbons: If we don't exactly have the capacity right now, we can certainly create it with relatively few bodies. For example, the American generators have to provide all kinds of details to American regulators, and that information can be publicly available. The government of Ontario can obtain it. The Independent Market Operator, which will be dispatching power in Ontario, including imports from the United States -- they are very sophisticated people. They are well aware of where the power is coming from. They could easily gather the data and find out, when they're importing X kilowatt hours of coal-fired electricity, what the incremental emissions of sulphur dioxide or whatever are. So, yes, we can gather the data. I'm not sure we have civil servants at the moment who are on top of that, but a relatively small staff of sophisticated people could get on top of that issue very easily.
Mr Conway: I appreciate that. A final question, I suppose, would be that the basic policy we have in front of us turns on the notion that it's going to be a market-driven dynamic. The OMA and others, certainly the Market Design Committee -- I won't read the language, but there is clearly a difficulty with pure market forces when it comes to the environment, in terms of the selection of sources of generation. How do you properly price the downstream social and health consequences that the OMA was very explicit about last night? Any suggestions beyond what you've said in terms of ensuring that the market disciplines recognize particularly these health issues that have in the past not been very well understood or valued in the marketplace?
Mr Gibbons: We believe that the market alone, without proper environmental regulations, will not protect the environment, but we believe there is a simple solution. It's emissions caps for all the pollutants that harm human health. The government establishes those caps, then you will harness market forces with your competitive market to ensure those emissions reductions are met at the lowest possible cost.
Ms Churley: Thank you very much for your presentation. You have echoed what others have said. I'm hoping the government members hear that, because it seems they want to hang their hat on consumer choice and labelling, consumer information, and limited emissions caps. In the limited hearings I've attended -- I've only attended the ones in Toronto -- we're hearing over and over again that that doesn't go far enough.
I want to ask you a larger question, and I'll start by saying this. Back in 1957, Leslie Frost started environmental protection in a big way in Ontario when he created the Ontario Water Resources Commission. Since that time, every government -- Tory, Liberal and NDP -- has moved forward on environmental protection in varying degrees over the years. Since this government came into power we have seen repeatedly a downward trend, that is, deregulation and cuts, the cutting of people who are out there to enforce and monitor by about a third and incredible cuts to resources over all. This trend has got to stop. You congratulated the government, and I do too, on at least this skeleton of the bill before us. But we know it's the regulations and what happens after this bill is passed that's going to make all the difference.
I don't trust this government and this Ministry of the Environment, given their track record, to bring in the kinds of remedies, the kinds of regulations, the kinds of laws that are needed, despite the lovely title of the bill. It reminds me of the title of many other bills. I want your comments on that. Given the state of the environmental protection we've seen to date, do you trust this government to proceed and bring in the measures we need? Do you have a fear that we're going to end up in a situation where our environment, with the changes in our electricity production, is actually going to be worse?
Mr Gibbons: The government has repeatedly said in their white paper that they want to bring in competition in a way that will protect the environment, and we certainly hope the government will do that. As we've said, this is enabling legislation, and we'll learn whether they will when we see the regulations. Our 45 members sincerely hope the government will do what they promise. If they do what they promise, we can have a very significant benefit for public health and the environment. It's good public policy, it'll be good for the people of Ontario, so I hope the government will do it
Mr Lessard: What we've heard over and over again from this government is that to reduce emissions and improve the environment, you give that responsibility to consumers. If you give consumers the choice, they'll choose green power and renewable energy, and that will improve the environment. You responded to that question earlier by saying that you don't think that goes far enough, and I agree.
Other suggestions we've heard, in addition to emissions caps, are the renewable portfolio standard and systems benefit charges. I wondered what your opinions were with respect to those.
Mr Gibbons: Our alliance is simply calling for emissions caps, because if you put in strict emissions caps, you can protect the environment. Strictly speaking, that's all you need to do if your goal is to reduce the air emissions. The simple mandate of the Ontario Clean Air Alliance is to reduce air emissions. But if you also bring in a renewable portfolio standard or a systems benefit charge for energy efficiency programs, those are complementary to a cap. They'll help the cap be achieved. Those are complementary options.
The Chair: Thank you very much. That's our time. You stated your case very clearly, and I know the committee members are appreciative of your views.
Mr Galt: Madam Chair, just a little clarification for the committee. This government has done more for the environment in the last three years than the previous two governments did in their 10 years. Ms Churley keeps talking a good story, but that's all their governments did about the environment, was talk a good story. They did very little to improve the environment.
The Chair: That's not a point of order.
Ms Churley: You're very funny, Doug.
Mr Galt: They talk it but they sure as heck don't walk it.
AMERICAN ELECTRIC POWER RESOURCES CANADA
The Chair: Let me call representatives from American Electric Power Resources Canada. Good afternoon and welcome to the committee. Please make yourselves comfortable. You have 30 minutes for your presentation time. As you begin, please introduce yourselves for the Hansard record.
Mr Tom Drolet: My name is Tom Drolet. I'm the managing director of AEP Resources Canada. With me are Nabila Yousef, who is the general manager of AEP Resources Canada, and Pat Hemlepp, the manager of corporate and public relations from Columbus, Ohio, our head office.
The Chair: Welcome.
Mr Drolet: Well, thanks for having us. I look forward to this opportunity to read into the record some abbreviated version, as best an Irish-French Canadian can stick to the story line, of the paper. I'll also take some liberties as I go through to editorialize, in order to maximize question time.
Today I'm going to touch on four topics: the development of competition, specifically here in Ontario; transmission to and from Ontario; new generation potential in Ontario; and the environment is fourth.
A little bit more on Nabila. She had a 22-year career with Ontario Hydro in the electrical industry, in both the nuke areas, where she got up to be director of Pickering engineering construction, and also on the retail distribution side. Pat Hemlepp has been with AEP for a number of years and before that was a reporter, and is clearly able to speak on a number of issues, including the environment. As for myself, I made my 26-year career with Ontario Hydro my life. I enjoyed that time there, after a military college start in flying. They ended up using me around the system in Hydro, all the way from the nuclear stations to fossil to hydraulic, in R&D programs and so forth. The combination I'm trying to set is that we feel we have some perspective, even though we represent an American utility, on the local environment and all its considerations.
Based on that experience and that of my company, AEP, the Energy Competition Act is not only setting the correct course for Ontario but, more importantly, because of the schedule you have set for yourselves, this legislation vaults you into the lead among many jurisdictions throughout North America in terms of getting on with competition choice and so forth. We compliment you on that very advanced schedule. Perhaps only California and certain areas of the northeast of the US, both high-cost jurisdictions, are ahead of you on that schedule.
Just a small bit on AEP. They are, by any measure, a large electrical utility, one of the largest in the world. They also own foreign holdings in the UK, a large distribution company called Yorkshire Electricity. They're building a power plant in China right now. They have 20% of a hydraulic company in Australia.
AEP Resources, here in Canada, what are we about? We're here to look for and are considering a variety of power project opportunities right across the land. We serve, by the way, a total of 7 million residents in our core area just south of the Great Lakes and slightly to the West: Indiana, Kentucky, Michigan and so forth. We have 21 major generating stations, 125,000 miles of transmission lines and so on. I won't go into our recent merger announcement with Central Southwest, except to say that Ron Osborne of Ontario Hydro the other day did a great job of giving us three or four paragraphs of his speech, so I'm sure you're well informed about that particular merger.
We're here for the long term, and we're here to support the government in the generic area of the legislation you're bringing in now. We'll persist, not only in Ontario but in Alberta and in other provinces, to look for opportunities, in the true belief that deregulation is fostering that type of behaviour. We want to act that out, not just here in Canada but elsewhere in the world.
Bill 35 is in essence a made-in-Ontario solution for a made-in-Ontario set of conditions. I think you've done a good job of customizing the local circumstance into the local legislation. Not all ideas in what we call deregulation -- incorrectly, I would add; I'll go on to say in a moment -- fit the bill here in Ontario. Our electricity industry is going through what everybody does call popularly deregulation. What a misnomer. It ain't. It isn't. Not so. In fact, what we're really talking about is a shift from a monopoly geographic environment into a competition-everywhere type of environment. So it sure isn't deregulation versus regulation. It's monopoly versus competition. I hope that gradually we all start to talk and think like that, because certainly we, the participants in the industry, think like that.
Our continued economic success in Ontario depends upon Ontario's access to competitive power prices. Ontario is now part of an integrated NAFTA North America. As such, the economic zone, if I can use that, called Ontario, just like the economic zone called the US Midwest, is fighting economic wars and needs the infrastructure to carry on and develop that. Recently, our governor of Ohio was up here and noted in the last five years alone 60% explosive growth in trade between those two jurisdictions.
The first topic I'd like to address specifically, as it pertains to the bill, is transmission integration. Is Ontario's transmission system adequate to deal with the future competitive environment you are trying to create? With the growth of the economies in central Canada and the US Midwest, we can expect -- but we can't measure it yet, of course -- a growth in the demand for electricity, not only in our home service jurisdiction but here in Ontario. This fact demands that we put in place the systems that allow the transfer of power to allow those things to happen.
The Ontario electric power system is relatively isolated -- relatively islanded, as some would say -- when it come to many connections with surrounding jurisdictions. Just as an example, but only to show you the other end of it, our home service jurisdiction -- in Ohio, Virginia, Indiana and so forth -- is interconnected with 29 other utility jurisdictions and 120 connections. Here in Ontario we have somewhere between six and eight, depending on whether you have directed or dedicated lines or actual interconnections into the US, Quebec and Manitoba and so forth. One hundred and twenty versus six is a pretty big difference for a jurisdiction.
We know that the development and operation of high-voltage transmission systems is a complex matter requiring careful study and planning. That said, we are encouraging you, the government, as you bring forward this legislation, to look for further scheduled and planned ways of integrating the grid of Ontario with surrounding jurisdictions. I might add, as the Market Design Committee is looking at and has looked at, that internally in Ontario there are lots of choke points, so there's some work required there. That's all in the name of trying to foster competition in your home jurisdiction, which is what you're after in this legislation.
Remember that it's a two-way street too. It's not just self-serving on parties like ourselves to want more access to this market, but it will also allow Ontario Hydro/Genco here to get lines out. As Mr Osborne said, they'd like to be able to compete outside. Well, let's have the pathways, the highways to allow them to do that. We're asking for more attention, if you will, clauses in the legislation which look for those planned and scheduled activities.
Mature competitive market systems are by nature more in balance when it comes to supply and demand than are monopoly systems. Supply failures can be made up from surrounding jurisdictions. Also, causes of nature, be they ice storms, heat waves or collapsed lines, all can be corrected the more interconnected your system is. Again, this is a relatively islanded system up here.
Finally, I'm going to turn my attention to the remaining two quick issues.
Fostering competition in generation in the near term: With Genco providing the vast majority of generation in Ontario, at least initially, and with limited interconnections with surrounding jurisdictions, the government should consider strengthening those areas of Bill 35 which foster new merchant generation and/or industrial-hosted merchant generation.
With the possibility of a competitive transition charge on transmission or generation to take care of the stranded debt of Ontario Hydro, the returns from an investment of pure merchant or industrial-hosted merchant plant is of course likely to be smaller the higher the stranded debt is. You could say that the stranded debt is actually a great big barrier which we competitors have to jump over. The bigger the debt, the higher the bar. To foster competition and to push the electricity generation sector towards a greater number of players, the government of Ontario should allow, in the legislation, for special projects based on building and serving customers, with the new investment in plant and jobs that folks like ourselves would like to bring to the province, of course with all due compliance for Ontario environmental standards.
The environment: Following the Clean Air Alliance, I know it's on our minds. With a lot of the references to the Ohio Valley, part of which we occupy from our home service jurisdiction, it behoves us to remind us all that we all share the environment. We all have a common environment, and the air is the biggest single carrier of that commonality. The case for a common set of environmental standards, state-wise, federal-wise, the US and Canada, is absolutely overwhelming, and the sooner that commonality, driven by governments, is put in place, we think the sooner the workable framework for the way in which we can work in a competitive integrated environment will be set.
As long as we have the carping between jurisdictions, the nuances of numbers here versus the numbers there, unless the standards are put in place to mitigate that sort of argument -- and remember that the whole course of the exercise is to look at public health and its amelioration. Enough said on it.
All generators of electricity in Ontario and the US must meet existing environmental standards. We do, and I know that Ontario Hydro and the IPPSO companies all do here. In the United States, those standards must be met by electricity generators and industries, and they have become more and more stringent over the last 20 years.
Electricity deregulation is a very complex issue, as you have discovered; so is environmental regulation very complex. These issues will require substantial time and effort to formulate meaningful and appropriate regulations.
We want to end just by saying that we're thankful for the opportunity to chat to you, and we're open to anything that's on your mind.
The Chair: Thank you very much. Five minutes for questions from each caucus, beginning with the NDP.
Mr Lessard: Thank you very much. I take it that you are one of those who's ready, willing and able and looking for the opportunity not only to produce power in Ontario but to produce power to be exported into Ontario from the United States, or perhaps even establishing or buying generating facilities here in Ontario. Given that, I'd like to talk to you about environmental standards and ask you about the mix of the types of generation facilities that you have currently in your asset base.
Mr Drolet: I'll ask Pat Hemlepp to help me too, but let me try to get it right, Pat.
We've got today, give or take, 24,000 megawatts, about what Ontario Hydro has available to it today with some of the nukes being shut down. We're, give or take, the same size. Last year we both produced, give or take, 135 terawatt-hours of actual power.
However, with the merger with Central South West, we're getting another 16,000, for a total of about 39,000 or 40,000, somewhere in there. The percentage split today, forgetting Central South West, is about --
Mr Pat Hemlepp: It's 88% coal-fired, approximately 10% nuclear, and the other 2% is a combination of hydraulic and pump-storage hydraulic.
Mr Drolet: On the Central South West side -- let's assume for this discussion that it will close in about a year's time, we hope -- of that 16,000, they have about 9,000 gas, so we're well into gas with that, and about 6,000 or 7,000, whatever the remainder is, on coal-fired. It's a predominantly fossil-fired generation base we have.
To comment further on your point, yes, we look at it as a two-way street. We're looking for not only importing power from the United States from our existing facilities, whatever they may end up being as time changes, but given the fact that our system is pretty much in balance now, we don't have spare generation. There was a point earlier about whether we imported a lot of power during this latest heat wave. Gad, we were in virtual crisis in our home service jurisdiction about supply, so the answer was no, we didn't import anything into the province at that time. But we're looking for the two-way flow. If we buy generation here, we're looking to serve interconnected markets, wherever they are, south of the border, north of the border, west, east, you name it.
Mr Lessard: I'm from the Windsor area right across the river from Detroit, and our concern is with a lot of transboundary air emissions. If coal-fired power plants are supplying power to Ontario, we're the ones who are going to end up with dirty air.
You were here, I believe, to hear the submission from the Clean Air Alliance earlier, who suggested that there should be emission caps that conform with the caps we have for energy produced in Ontario now and to extend those caps to cover the sources of energy so we have the same caps no matter where the energy is produced. Is that something you think you'd be able to comply with?
Mr Drolet: The point is, of course, we will comply with whatever regulations and standards are put in place. We are, by definition, going to do the right thing, the thing that's demanded of us. That said, it seems to us -- and our ideas are still forming in this whole debate -- that the concept of having a cap on one geographical jurisdiction like Ontario and then the dichotomy of that with an open free market, but putting all the generators that feed this geographic area under that cap, doesn't seem to compute. The way forward surely should be what I tried to say in the remarks, and that is some commonality of environmental standards wherever the home generating jurisdiction is. The sooner all federal, provincial and state agencies get to that point, the sooner a free market in the trade of electricity can occur without this sort of debate.
If you put in place a cap over Ontario for all generators, wherever the power comes from, be it Duke Energy down in the southeast of the US or wherever it comes from in Michigan or Wisconsin or Manitoba, I'm not sure how all that is going to work. How are you going to audit? How are you going to mandate the performance of those facilities in those jurisdictions?
Mr Lessard: You raise some interesting concerns. You can understand my concern. We've had friendly relations with the United States for a long time, but we've always had our differences as well. Although I'd like to be optimistic that we can have those uniform caps or environmental standards and we're on our way to making sure that we're doing what we can to improve the environment and not see it deteriorate, there's a lot of negotiation that needs to take place in doing that and there are always bumps in the road.
Mr Hemlepp: One thing AEP has been a strong advocate of is subregional modelling for emissions. It's something that came out at the ozone transport assessment group process that was completed about this time last year. Let's say subregions are having impacts on air quality in different cities; it's taking steps to put the necessary controls on those sources to correct the local problem. That's something that we and other utilities have been pushing for. Now the governors of the states in the Midwest have been pushing for the same thing with the US EPA. The best way to solve local air quality issues is to take care of the local sources of the emission.
What came out of the ozone transport assessment group is that the majority of the impact of nitrogen oxide emissions from coal-fired power plants and other sources takes place within a radius of approximately 60 to 80 miles from that source. It dissipates quickly after that. For instance, emissions from Midwest sources have approximately a four-parts-per-billion impact on air quality in the northeast US. That's out of 140 or 150 parts per billion we're talking about. Our plants, for instance, would likely have more of an impact on the Pittsburgh area than they would on Philadelphia or Newark, New Jersey. That's the reason we've been pushing for the subregional modelling to take care of those local emissions.
Mr Lessard: I'm in Windsor, and I want to know how we're going to influence decisions in Detroit.
Mr Galt: Thank you for an interesting presentation and putting it in a very easy-to-understand way. I'm concerned with your company and your presentation. I have some charts. Usually it's Mr Baird showing charts. This one relates pounds of emission to megawatts of production of the 17 companies that produce electricity in the Midwest and in the northeast. In all three, Ontario comes in in second place. Your company sits somewhere around 13th to 15th. When it comes to NOx, Ontario Hydro is 0.8 pounds per megawatt; you come in at 15th position, at 7.5 pounds per megawatt. In SO2, Ontario Hydro comes in at approximately -- because I just have a graph here -- two pounds per megawatt; you're coming in just slightly under 15 pounds per megawatt. When it comes to C02, Ontario Hydro is coming in at approximately 250 pounds per megawatt; you're coming in at slightly under 2,000 pounds per megawatt.
Yes, Ontario wants to open up for competition so we can sell power to the US as well as US competitors here or cogenerators here in Ontario, but our intent is that there will be a cap on these three items for the province of Ontario, for production in Ontario as well as the power coming into Ontario. I'm suggesting to you that you've got a big challenge if you want to sell to anyone in Ontario. How are you going to go about that?
Mr Drolet: For the record, our intent is to build in this jurisdiction and invest dollars in this jurisdiction and create jobs in this jurisdiction and elsewhere in Canada. That said, I'd like to try to get us on to a discussion of apples for apples rather than beef jerky for corncobs.
We have an awful lot of coal-fired generation. Of our 135 terawatt-hours last year, as Pat reminded me, 88% of that is coal-fired. Here in Ontario, about one seventh of the generation, even though the overall is the same, comes from coal; I think it's about one seventh or one sixth, something like that.
Mr Galt: You're in the ballpark.
Mr Drolet: The point I'm making is that we are the largest coal-fired generating utility in North America and, yes, therefore we produce the most SO2, NOx and so forth. But on a per-megawatt basis, that is, apples and apples, it's our information that we are similarly in the same ballparks with SO2 and NOx as almost all other coal-fired jurisdictions; in fact, we're a little bit better. We're some of the most efficient plants in terms of the burn rate and so forth, the amount of coal required to create a megawatt, of almost any of the coal plants in North America.
Mr Galt: If I can just clarify here, you're talking coal plant compared to coal plant, not total generation.
Mr Drolet: That's right.
Mr Galt: No question. What I was quoting you was total production per company.
Mr Drolet: That's right. In this particular jurisdiction, Ontario Hydro, when it comes to emissions of CO2, SOx and NOx, is in fact fortunate, from that point of view, not to have a lot of coal-fired plants operating at high capacity factors. But let's be fair. They've also got a bunch of nuclear plants, and they have different types of emissions and different types of concerns.
From a public health and therefore an environmental standards point of view, we should try to categorize things and deal with them on a like basis. That's my comment.
The Chair: There's time for a brief question and answer from Mrs Johns.
Mrs Johns: I appreciate your being here. Your submission talks a lot about your being interested in opportunities that may arise both from the generation perspective and the transmission perspective. We all have talked about and heard -- and yesterday we were at the IMO, so we saw -- that there is a whole bunch of problems with the interconnect and being able to get power from different areas. I understand that that's quite an expensive business. If the situation was right, would you be interested in providing interconnect or allowing us to share power with other utilities across northeast North America?
Mr Drolet: Oh, 100%. That's the shortest answer I've given today. Why? First of all, because we think, as is Ontario Hydro/Servco good at it, we have more miles or kilometres of high-voltage transmission lines than anybody in North America, including Hydro-Québec, which often claims that.
More to the point, how can you create a free market, if I can use the trucking example, without enough roads? How could we have all that transport without enough wires to put it on? I have said in my submission that I think Ontario should look actively at a scheduled planned increase in that. We'd be happy to help in that cause, as I think anybody participating in the market should be wanting to help in that cause.
The Chair: Thanks very much. On behalf of all the members of the committee, we appreciate your coming up and making your presentation to us today.
CANAGEN ENERGY INC
The Chair: Good afternoon. Welcome to the committee. We're pleased you're able to join us this afternoon. Make yourself comfortable. As I'm sure you are aware, you have 30 minutes for presentation time. The committee always prefers that there is time for questions at the end and, as you begin, please introduce yourself for the Hansard record.
Dr Robin Jeffrey: Good afternoon. My name is Robin Jeffrey. I am deputy chairman of British Energy plc, the UK's largest electricity generator. I am also chairman of CanaGen Energy Inc, a 50-50 joint venture between PECO Energy Co and British Energy.
With me here today are two members of the CanaGen team, David Gilchrist, who is the finance director of British Energy in North America, and Susan Brissette, who is head of communications here.
Further information on CanaGen, a company headquartered in Toronto, is given in the brochure, which looks like that, that is attached to your pack. Because there may be some useful lessons for Ontario, this afternoon I would like to draw to your attention three aspects of what has been happening in the UK electricity industry which may be of relevance to your deliberations on Bill 35.
To set the scene, the process of change started in the UK in 1990. In essence, the then government monopoly electricity company, CEGB, was split into four entirely independent entities. These were a fossil Genco known as National Power, a second fossil Genco known as PowerGen, a nuclear Genco known as Nuclear Electric and a transmission company known as NGC, the National Grid Co. At the same time, the 12 government-owned distribution and supply boards were turned into 12 independent free-standing companies, and for the first time each of these was granted the powers to own and operate their generation plant.
Revolutionary as this seemed then, over the past eight years there has been an enormous development in ownership and structure of these various organizations and today the picture is as illustrated in figure 1, which is the second-last page in your pack.
I'd like to give you a flavour of these changes.
National Power has been transformed from a UK-only company into one of the world's leading independent power producers with a third of its 24,000 megawatts of plant capacity being overseas. It is listed on both the London and the New York stock exchanges.
PowerGen has also successfully expanded internationally and now has a global investment portfolio of some 5,500 megawatts of plant with a further 2,200 megawatts of plant under development.
British Energy was created in 1996 through a merger of Nuclear Electric and its Scottish equivalent, Scottish Nuclear, with the new company becoming the first purely nuclear generator to enter the private sector. Subject to due diligence, a PECO/British Energy joint venture is currently finalizing the acquisition of the operational nuclear plant at Three Mile Island and is in discussion with a number of other US nuclear plant owners.
The UK transmission company, NGC plc, which was originally owned by the 12 distribution and supply companies, has been successfully floated on the London Stock Exchange and has become a significant global transmission company.
A new concept of company has been created termed the "multi-utility" which, in the case of Scottish Power, is not only an electricity utility but is also into gas, water and telecoms. The idea of a multi-utility is likely to become the next international best-seller, following upon the UK export success of privatization, "Buy all your utility services from us...only one meter reading...and a tempting discount off your total bill."
Independent generators, unknown in the UK before 1990, now have a significant market presence.
Finally, as you will see from that chart, the Americans have arrived in force and bought up many of the UK regional supply companies although, fascinatingly, over the past few weeks two of the US utilities have announced their plans to sell off their regional companies.
That outlines the change that has taken place in the UK over the past eight years, and now what I would like to do is to stand back and look at that UK electricity scene from quite a different perspective. What has all of this corporate upheaval meant from the customer's perspective?
The change has been quite breathtaking: Electricity prices to end customers, whether industrial or domestic, have been reduced by some 15% to 20% in real terms; the quality of supply to customers has been improved substantially; and the safety and environmental performance of the industry has been significantly enhanced. And if that was not enough, the process has benefited the UK taxpayer to the tune of around C$100 billion.
Noting that the UK electricity industry is about twice the size of the Ontario industry, what might all of this mean to Ontario and to Bill 35?
The first issue I should like to address is the phrase "low-cost energy through competition," which appears on the front page of the bill. This seems to me to be the heart of the matter. Low-cost energy is important to everyone; it benefits the private ratepayer, it benefits commerce and it benefits industry. It makes business more competitive and attracts inward investment. Bill 35 rightly identifies that low-cost energy results from competition, that competition is the driver for change.
Today in the UK there are upward of 20 significant generators. Having competition in this way not only puts a downward pressure on prices but it also means 20 different management styles, different approaches to labour agreements, some companies who believe in dash for gas, and at least one company which can see the true light, that nuclear is green, clean and environmentally friendly.
Competition means innovation and a diversity of solutions.
Eight years after its creation, there are many critics of the UK market system, but it has clearly met with a degree of success since electricity prices to end customers have fallen by the 15% to 20% in real terms I quoted earlier.
From the standpoint of one of these generators, British Energy, I know what we have had to do to respond to these competitive forces: output up by over 60%; unit operating costs decreased by almost 40%; and despite wholesale prices falling year on year, turning a loss-making company into a strongly profitable one. That sort of corporate achievement doesn't just happen; it is the result of overhauling our entire corporate culture, learning how to work together as teams, how to communicate effectively, and especially how to reward and motivate our staff.
The latter is particularly important and indeed is perhaps the most important single issue which has been the secret of our success: 98% of all of our staff are shareholders. We have a profit-sharing scheme known as gainshare, where for every $3 added to the bottom line over and above the corporate plan $2 goes to the company and $1 to the staff. This has turned an us-and-them culture into an our-company culture.
The second issue I want to pick up from the front page of Bill 35 is the phrase "protect consumers." This means to me the quality of the service received by end customers.
Many critics of the UK market restructuring argued that moving ownership from the government-owned sector to the private sector would mean that customer interests would be sacrificed for company profits. Nothing could have been further from the truth.
I make no apology for showing you today figure 2, which I also gave to the select committee last October.
The spider's web demonstrates how the 12 regulatory quality-of-supply indicators have changed over the years 1992 to 1997. Outer means bad and inner means good. What hits you straightaway is that all the indicators show strong improvement. This transformation was a direct consequence of meaningful competition and customer choice.
But above and beyond that, there was the open accountability to the shareholder. For you see the sort of information shown in figure 2 is published in the UK, company by company, and is widely commented on in the media. Shareholders know if the company they own a piece of is performing well or badly, and no chairman will tolerate going to an annual general meeting and being grilled by shareholders on why their company is delivering poor service.
The same peer pressure has also been successful in improving safety and environmental performance. What competitive pressure has taught us is to examine every process. If it doesn't add value, cut it out; if the process is essential, examine it and simplify it. Simpler means less costly, simpler means people understand the process better, and better means safer.
The third area I would like to touch upon is the considerable array of vesting contracts which were created in the UK back in 1990: for example, contracts to protect the coal industry which only phased out earlier this year and arrangements to buffer the nuclear industry which were cancelled only in 1996 when British Energy transferred from being government-owned into the private sector.
Running in parallel with these arrangements was the progressive introduction of true market freedom. Eight years ago only the very large customers could shop around to buy competitively; then in 1994, there was a step change when just about everyone other than the domestic customer could, and later on this year the door will really only start to open on true retail competition for everyone.
The UK was blazing the way with this process and time was certainly needed. In retrospect, it would probably have been better to have worked to a more aggressive time scale, for people will always find compelling reasons to stick with the status quo. History proves that processes don't get any easier by postponing the day of decision.
To conclude, I would like to pull together the themes I have been addressing.
The UK is some eight years down the path that Ontario is about to embark upon through Bill 35. Despite the passage of time, the rate of change within the UK electricity industry is, if anything, accelerating rather than slowing down.
Within the UK, competition has increased and this has had many consequences. It has brought down electricity prices to end customers and improved the quality of service. Because of increasing competition in home markets, it has caused companies to seek to expand globally. It has brought new thinking and international best practice into what formerly was a somewhat old fashioned and traditional industry.
As I said, Bill 35 is clearly an important step. I compliment the government and this Legislature for your boldness. Your deliberations will be followed with great interest.
I also hope that the bill will provide the platform for major inward investment into Ontario so that companies such as CanaGen can bring to the province their experience in providing low-cost energy through competition, their expertise in safety and their belief in achieving through people.
I thank you for the opportunity to speak to you today and, with my colleagues, will be pleased to answer any questions you may wish to ask.
The Chair: Thank you very much. We have five minutes for each caucus. We begin with the Liberal caucus.
Mr Conway: Mr Jeffrey, it's a pleasure to hear your mellifluous tones again. I think you're getting better. God, you were good last year. I think you're even better this year. I was thinking about Lord Beaverbrook for some reason, I don't know why. Don't forget that he got his start in the energy business, sort of.
Page 1 of the brief: The process of changing Britain began in 1990 when the government-owned monopoly was broken into four separate and, I take it, competing, generators along the lines of your description.
Dr Jeffrey: Correct.
Mr Conway: That unbundling occurred within the first year of the policy having been announced. Is that generally correct?
Dr Jeffrey: Yes. There were three competing generators and also the transmission company, but you're correct.
Mr Conway: How important was it for the process that the unbundling at the generation level occurred as quickly as it did after the launch of the new policy?
Dr Jeffrey: I think it set these three companies on their toes. I think it was very important.
Mr Conway: I ask that for the obvious reason, that in our proposal here we are moving in a slightly different way. We are going into a competitive marketplace, but our CEGB is going to be kept together for the foreseeable future. Do you see that as an impediment to the competitive juices that the market would otherwise produce?
Dr Jeffrey: I think that is something for the Legislature to ponder over. Each country must find its own way and its own solution. I was very careful in my remarks to say I just wanted to comment about the UK industry and the way in which competition in the UK had been a driver to price reductions.
Mr Conway: A very judicious answer, and I appreciate it and I understand it. The accompanying document, CanaGen, A British Energy and PECO Energy Team, includes remarks that you made apparently at the conference in Banff earlier this year, May 5. Let me just read from the first page of that document:
"CanaGen is a collaboration between British Energy, which is based in the UK, and PECO Energy of Philadelphia to develop a public-private partnership encompassing Ontario Hydro's nuclear reactors at Bruce, Pickering and Darlington."
How's it going? As we say on public radio, "for the record."
Dr Jeffrey: I think you know the answer to that question. For the record, I think it would be appropriate for me to quote Ontario Hydro in an interview Ron Osborne had with the Financial Post. He said:
"Hydro is still interested in partnerships. We totally subscribe to the desirability of having such partnerships and we intend to seek out such partnerships. This is a suspension, not a cancellation."
I and my colleagues place a lot of weight on these words.
Mr Conway: I am impressed with the felicity and care that you read Mr Osborne's words. I would, in my last question, like to hear from you, sir, as to how you would characterize the negotiations and the prospects for a public-private partnership in the near and intermediate term.
Dr Jeffrey: CanaGen believes that a public-private partnership is a win-win situation for the province's taxpayers and ratepayers and can add value to the shareholders of British Energy. We regard this as a very important proposal. As a company, we've made a very substantial investment in Toronto; our North America office is here in Toronto. Toronto is an excellent city in which to do business south of the border as well as north of the border. I think we wouldn't be here today if we didn't believe in the future of this proposal.
Mr Conway: As they say on Perry Mason, your witness.
Mr Lessard: Thank you, counsellor.
You've obviously expressed some interest in the nuclear assets of Ontario Hydro. Quite frankly, that causes me some concern, and this is concern that I'm sure you dealt with in the United Kingdom as well. I have some concerns about the privatization or the sale of Ontario Hydro's public assets, whatever they may be, but especially the nuclear power plants. I guess one of the concerns is the regulation of those nuclear power plants. This is an issue that you've dealt with in the United Kingdom, and I would like to know how you dealt with the argument about the regulation as you moved from public to private in the nuclear power business.
Dr Jeffrey: Do you mean there the nuclear regulation or the economic regulation?
Mr Lessard: Nuclear regulation.
Dr Jeffrey: Drawing on our UK experience, and the same applies to the experience of PECO with respect to the Nuclear Regulatory Commission in the United States, I think the first point is that you have to deal with a regulator in a very serious and a very professional way. You have to be very open and honest with a regulator. You have to set out clear plans, and I think for the regulator to have respect for the company, you have to demonstrate an ability to deliver these plans, to perform in accordance with regulations, whether it's nuclear safety or whether it's environmental.
There is the issue I referred to both at Banff and in my remarks a few moments ago about "address every process." If things don't add value -- because things which don't add value create complexity -- eliminate them, find simpler, better ways of doing things. I think that approach has been understood by the nuclear installations inspectors in the UK.
Mr Lessard: If you're a corporate investor with a nuclear power plant and you're not complying with the regulations, then your stock price will go down.
Dr Jeffrey: It's as simple as that.
Mr Lessard: My concern is, how do the shareholders find out whether there's something that's going wrong? I wasn't on the select committee last year but I know that the members of that committee had an opportunity to look into some very serious concerns and problems at Ontario Hydro about the operation of its nuclear generating facilities.
I ask myself, how did this happen? Was it possibly that the regulators weren't doing their job? We've heard some concerns from the government members about the atomic energy regulatory commission here in Canada not perhaps being as diligent as they should be. If that's the case, and they're the same regulators if you were a private sector owner of a nuclear power plant, how do we make sure that citizens in Ontario don't have any fears about nuclear energy? I think the nuclear strategy was misguided here in Ontario, but we have them; we still have to deal with them. The possibility of them being in the private sector is something that concerns me, and I don't think I'm alone.
Dr Jeffrey: I think, drawing from the UK experience, there was a lot of concern in 1990. The intention had originally been to transfer nuclear to the private sector. The UK government withdrew from that. Between 1990 and 1996, the UK nuclear industry demonstrated its capabilities, its competence, improved its process, and in 1996 the UK government took the decision that nuclear could and should be privatized.
That decision was taken in conjunction with the regulatory authorities. The regulatory authorities looked at all of the arrangements, and I think, perhaps blowing my trumpet, we've come through with flying colours since then. The performance of the industry in the private sector has gone from strength to strength for the very reason that you said: There's now a further imperative for having a track record of excellence. Anything other than that would damage our share value.
What CanaGen has suggested may be of interest here in Ontario. It's not a privatization; it is a public-private partnership, which is quite a different animal.
Mr Lessard: You said in the United Kingdom the government received $100 billion in proceeds. I wonder who got the best deal.
The Chair: Thank you. We have to move on.
Mrs Johns: I guess there's always an advantage to coming on the first day of a committee hearing and on the last day. I'm hopeful that I can somewhat take my lesson from Ken Starr and ask you some questions about a few things that I've learned and try and get some reinforcement from you on whether they're right or wrong.
Mr Conway: Don't go there.
Mrs Johns: I guess the question I want to ask you is, we've heard a lot over the last two weeks about legislating prices, talking about how we could work forward to say something in the legislation that might talk about price reduction. So we would come through in the legislation and say that there must be a price reduction that is passed on to the consumer.
Can you tell me the impact of putting that into the legislation on competition, especially given the experience you've had in the UK?
Dr Jeffrey: I'll pass by your remark about Mr Starr, unless of course you're a grand jury instead of a legislative committee.
I think it wouldn't be right for me to comment on what would be the effect of putting something like that within the act. I think the best method of dealing with prices, in order to deliver reduced prices, is to set up arrangements which introduce effective competition.
If a number were to be put into the legislation, I would suggest it would be a number that people would find comfort with and they would tend to live close to that number, whereas if you introduce effective competition, then one group competing against another would powerfully drive down prices. I think it would be a mistake to put in a number which would cause people to focus high, rather than saying, "Get your sleeves rolled up, and if you don't deliver a better service and a cheaper service, someone else will."
Mr Gilchrist: Thank you, Mr Jeffrey. I appreciate your comments, particularly the perspective you bring. Perhaps I should compliment you on your hiring practices as well. It's always nice to see some distant relative who made good, particularly from the old country.
I must compliment you on the production of this speech. I don't think I've ever seen a speech reproduced in such a format. I just hope Ontario Hydro doesn't get any ideas on how to spend money, because I'd remind them that you're a profitable company; you can afford to do that.
Seriously, though, in your speech you gave in Banff, you note that the cost of producing a kilowatt hour of electricity has been reduced by 35%. That's an extraordinary percentage for something that I'm sure a lot of people take as a given, that the price is the price and there are somehow great constraints on it or else we would have found those savings to date.
We've heard a number of presentations over these eight days of hearings from groups who have suggested that it's appropriate to open up competition at the supplier level but it's somehow terribly rushed and terribly inappropriate to do the same thing for consumers. I wonder if you could expand a little further based on your perspective, the real-life experience you have lived and worked, on what the pitfalls would be, or conversely the positives, of ensuring that you open up all aspects of the marketplace to competition early on in this process.
Dr Jeffrey: I've worked both in a state-owned monopoly and also in private sector generation companies, in different firms, and I think the very straightforward answer to your question is that it's very comfortable to work in a monopoly, whether it is state-owned or not.
The thing that competition does is it compels you to think very hard and work very hard. It compels you to look for innovative solutions, for better solutions. It makes you think about the end customer in quite a different way, where the customer is king. It's not, "The monopoly will look after you." It's "The customer is king," and if we don't provide you the service that you want, then someone else will. So my answer to your question is competition, whether it's in generation or whether it's in retail, throughout the line where it make sense to do so.
Mr Gilchrist: If you didn't open it up to competition all the way through, would there be a natural tendency for the wholesalers to keep more of those savings to themselves rather than passing them on?
Dr Jeffrey: I think it's straightforward from my answer that competition causes everyone to look for innovation. It's not just cheaper methods of doing things, because that's only a very small part of the argument; it's to find better methods of doing things, providing a more comprehensive service, providing the service which the customer wants. I think competition is good for customers.
Mr Gilchrist: We agree. Thank you, Mr Jeffrey.
The Chair: Thank you very much for taking the time to come before us this afternoon. We are about to embark on an interesting adventure here in Ontario and we appreciate your advice on this task. Thank you again.
Dr Jeffrey: Thank you for listening to me.
MARKET DESIGN COMMITTEE
The Chair: Now calling upon representatives from the Market Design Committee, in particular Ron Daniels. Good afternoon and welcome to the committee. We're very pleased to have you. We've hardly had a presentation since we started that hasn't referred to the Market Design Committee's work at least several times, so we've been anxiously awaiting your presence this afternoon. You have an hour for presentation time. Before you begin, please introduce yourselves for the Hansard record, and we hope you'll leave time for questions.
Mr Ron Daniels: Madam Chair, I'm Ron Daniels, chair of the Market Design Committee. On my right is Professor Michael Trebilcock, who is director of research for the Market Design Committee. I'm hopefully going to be accompanied by my two vice-chairs from the Market Design Committee, Don Dewees and John Grant, who should be here momentarily.
I have a formal presentation. Hopefully it won't run on too long, and we look forward to answering any questions you might have in relation to our presentation.
First, Madam Chair, I want to thank you and the committee for this opportunity to provide the Market Design Committee's comments on Bill 35, the Electricity Competition Act. As I mentioned before, I am accompanied by several of my colleagues. I hope that when all of them get here they will be able to assist you in any questions you might have in relation to our mandate.
The executive of the Market Design Committee brings a wide range of different talents to it. Michael is a law and economics specialist, an expert in competition policy. Don Dewees is also a professor of economics and has a background in economics, law and engineering, and is an expert in environmental policy. John Grant is a former and very distinguished chief economist with Wood Gundy and is a seasoned veteran of debates over electricity restructuring, having served as a member of the Macdonald committee. In tandem, I couldn't imagine a more dedicated and able group of colleagues to work with in discharging our mandate, and I want to take this opportunity to acknowledge the very significant contributions each has made to our deliberations.
I also want to take this opportunity to acknowledge the central role and contributions of the 14 stakeholder representatives who have served on the MDC and whose dedicated and constructive participation has been absolutely essential in meeting the timelines specified in our mandate. I believe the province owes each of them a very large debt of gratitude for their energy, expertise and judgment.
In making this presentation today on behalf of the Market Design Committee, I would like to focus my remarks on four key areas. First, I would like to register the MDC's clear and unequivocal support for Bill 35. Second -- John Grant is now joining us -- I would like to describe the mandate for the MDC and the process we have used in discharging that mandate. Third, I would like to address the key design features of the market we are charged with designing. Finally, I would like to conclude my remarks by focusing on one of the more controversial matters within the mandate of the MDC: the existence of market power at both the wholesale and retail levels of the market, and the measures we have proposed to mitigate market power so that the public interest in a robust and competitive electricity market can be realized.
I offer these comments to clarify the MDC's view on these key issues and to assist you, as legislators, in coming to a determination on how effectively they are addressed by Bill 35.
As I indicated a moment ago, the first point I want to make today is that the Market Design Committee supports Bill 35 both generally in terms of its overall intent and direction and specifically in terms of its proposed content, legal definitions and language.
It is our view that Bill 35 reflects the vision and directions outlined last fall in the government's white paper on electricity restructuring. We also believe that the bill, if approved by the Legislature, will facilitate the creation of a competitive electricity marketplace in Ontario in several key ways: by ending Ontario Hydro's traditional monopoly on generation and opening up the field to other competitors; by creating an Independent Market Operator to ensure that the new, competitive electricity market functions effectively and that electricity customers throughout the province continue to receive high-quality service; by permitting the development of important environmental safeguards to ensure that electricity competition enhances the overall quality of life for the province of Ontario; by clearly separating the competitive and regulated parts of the electricity business both in the wholesale and retail sectors; and finally by strengthening the regulatory powers of the Ontario Energy Board to ensure that effective competition will indeed take place and that the benefits of competition flow to all power consumers, large and small.
MDC members support these broad policy goals and believe that Bill 35 will enable Ontario to achieve them. On this basis, we would respectfully recommend that this committee endorse the bill so that it can eventually be adopted as law by the provincial Legislature.
Let me now turn to the mandate of the MDC and the deliberative process we have used in discharging that mandate. As you are aware, the mandate of the MDC is to provide the best possible advice to the minister on the design of the new electricity market for Ontario. In providing this advice, we have been guided by several key design criteria: efficiency, fairness, reliability, transparency, robustness and enforceability. We have invoked these criteria frequently to determine whether our recommendations would advance the broader public interest in industry restructuring.
The committee's advice to the government is embodied in two interim reports that were submitted to the minister earlier this year. Our third report is due at the end of September, and we will conclude our deliberations by the end of the calendar year with a final report.
One of the clearly unique features of our mandate was the minister's decision to charge a committee consisting of 14 different stakeholders with the task of designing the new market. I must confess that at the time I was asked to serve as chair of the MDC, I was more than a little apprehensive about the task of having to chair a group of 14 stakeholders, each of whom, I expected, would have a fairly clear sense of their sponsoring institution's private interests, but with little real appreciation of, or commitment to, the public weal.
I, along with my fellow members of the NDC's executive, feared that most of our time would be invested in managing discordant stakeholders. Nevertheless, one of the unexpected pleasures of this brief has been the interactions that I and other members of the executive have had with our members.
The truth is that our deliberations have time and time again been characterized by the capacity of the private interests represented around the table to coalesce around some broader vision of the public good. More than that, through direct incorporation of stakeholder perspectives and interests on the MDC, we have been able to merge, I believe, principle with politics. In other words, while there has been a healthy give and take among members of the MDC, our politics have been disciplined by a firm sense of principle and by the experience of what has and what has not worked in other jurisdictions.
Welcome, Dr Dewees.
Mr Don Dewees: Thank you.
Mr Daniels: Yet we have not confined our deliberations solely to members of the MDC. Through timely dissemination of background memoranda, working papers and draft proposals on our Web site, we have sought to share our provisional views on the design of the market with the public at large. Indeed, as of last night, the MDC's Web site had 29,643 hits. This interest has been reflected in our receipt of a significant number of letters, comments and formal submissions from non-represented stakeholders, which have been circulated to every member of the MDC and have clearly shaped our deliberation. As well, we held an international conference in the spring to which we invited more than 150 individuals to attend.
Thus, although our timelines have, to say the least, been tight, we have done our best to ensure that our deliberations have been open and transparent to the public and that our consultations have been informed by the public's reactions to our work in progress. Given this process, what has the committee recommended?
In our first report we focused on the establishment of the Independent Market Operator. Under the model we proposed and the government endorsed, the IMO will be responsible for managing the secure operation of the integrated power system, for determining system capabilities and operating rules, and managing real-time dispatch within these capabilities. The span of the IMO's responsibilities is based on the need to ensure that an independent and credible agency is charged with the task of operating the market in a way that ensures that generators and various downstream retailers operate on a level playing field with one another, no matter what their size or economic interest.
The IMO is to be governed by a hybrid board structure composed of stakeholders and independent interests. Our recommendation for a hybrid board structure was based on our desire to marry the benefits of expertise with the benefits of independence. While other jurisdictions have opted exclusively for one type of representation over another, we believe that the public interest is best served by fusing these perspectives on the IMO board. We have, however, been cognizant of the limitations of the hybrid board structure and propose various voting rules that confer significant power on independent directors over certain fundamental matters.
Turning to the design of the wholesale market, the MDC has proposed the creation of a market in which market participants will enjoy considerable flexibility in their commercial activities. For instance, the MDC endorsed the right of market participants to enter into financial and physical contracts for the delivery of electricity. Although these transactions share many similarities with one another, there are fundamental differences in the form of settlement entailed by each and the tracking that is required by the IMO. During our deliberations, we were informed that certain interests within the province require physical bilaterals and the committee has supported the extension of this option, provided that the market rules ensure comparable treatment, system pricing and cost-sharing between physical and financial transactions.
The committee has also endorsed the need for a staged introduction of congestion pricing into the market. The committee was of the view that some form of congestion pricing is necessary to support accurate and reliable investment in enhancements to both transmission and generation capacity. These price signals ensure that generators and loads will observe the impact of their decisions to provide or to take electricity at locations that suffer from transmission constraints. In the absence of such locational price signals, the fear is that a prospective generator will not be able to identify those locations where the need for investment in new generation is greatest and may, as a consequence, devote scarce investment funds to locations where generation is already constrained off the system because of transmission limitations.
The MDC believes that the benefits to the province of a well-designed congestion pricing system are substantial. However, as indicated in our second report, we recognize that the implementation of such a system is complex and we have therefore recommended that for the first 18 months of the market's operation, the IMO calculate and publish, at least monthly, hourly nodal prices and that by the beginning of the 19th month of market operation some form of congestion prices be used for settlements for generators and wholesale market buyers.
In terms of the retail market, the committee has proposed the adoption of a quick-start regime that will allow the province to realize the government's commitment to full retail competition in the year 2000. This commitment reflects the government's determination to ensure that every consumer in the province is able to realize the benefits of wholesale competition at the time of market opening. These benefits include lower prices, greater choice and innovations in products and services.
It may be worth noting, however, that although other jurisdictions have set ambitious targets for implementing retail competition, some have been forced to delay or change their start dates because of the technical complexities involved in implementing this goal. It may also be worth pointing out that Ontario's target for implementing retail access is among the most demanding of any jurisdiction that has undertaken electricity restructuring.
After much study and careful deliberation, the MDC concluded that a cost-effective, quick-start version of retail competition for all customers can be achieved in the year 2000. Briefly, our plan would require the distribution companies to pass a customer's bill on to a competitive retailer, when requested by the consumer, and to compute the bill using the hourly spot market price. This pass-through mechanism enables the customer to enter into financial contracts with retailers indexed against the wholesale price.
Of course, many residential customers will initially choose to stay with their current electricity supplier, in which case they will receive a standard service offer. Our second report recommended that the standard offer be a smoothed spot price. We are now contemplating other options for default supply, including a fixed price.
We also believe that by requiring all electricity retailers to be licensed by the OEB, consumers will be protected from unscrupulous and misleading retailers and the kind of questionable business practices we have occasionally seen in other deregulated sectors.
Another critical focus of our work has been on the impact of the market opening on environmental concerns. In chapter five of the MDC's second-quarter report, we address the white paper's direction to ensure that environmental protection goes hand in hand with the adoption of a competitive electricity market.
One concern that has arisen in relation to the prospect of competition in electricity, for example, is that downward pressure on prices could encourage some generators to cut corners, particularly with respect to meeting environmental obligations. Another concern is that with the emerging continental market for electricity, Ontario consumers might choose to purchase power from out-of-province suppliers whose facilities might be required to comply with lower environmental standards than those in Ontario.
To ensure that electricity competition protects Ontario's environment, and therefore the quality of life enjoyed by all Ontarians, the MDC has made a number of recommendations, including the adoption of an emissions cap and trade program to prevent air pollution emissions from increasing beyond levels that would have occurred without restructuring; green power marketing program to allow electricity consumers to express their preferences for environmentally friendly forms of power generation; and a generation labelling program to inform all consumers about the energy source and pollution emissions associated with the electricity they purchase.
These would all be market-based programs and we believe they would enhance the overall environmental quality in Ontario. We believe these recommendations reflect government directions outlined in the white paper and its concern to ensure socially desirable outcomes engendered by the move to competition.
Having identified our key market design recommendations, I would now like to focus on the problem of market power, both at the wholesale and retail segments of the industry, and the efforts we have made to ensure that the market that is being designed for Ontario will be competitive and efficient, two goals that were given pride of place in the government's white paper.
Market power, as you know, arises when one company or even a few large companies dominate the market. If and when these dominant companies decide to take advantage of their dominant position, they may try to drive up prices beyond competitive levels. They also may engage in unfair practices calculated to force some companies out of business and/or to prevent others from getting into it.
Last week I understand that this committee heard a presentation from Ontario Hydro's president and chief executive officer, Mr Osborne, who confirmed that at the onset of Ontario's competitive electricity system Genco will have an 86% share of the province's generation capacity. As he has pointed out, this has led to a great deal of discussion about whether there can be true competition in the presence of such a dominant supplier. The question, of course, is, how can we have a truly competitive market in Ontario when one generator owns such a large percentage of the productive capacity?
In other jurisdictions the answer to this question has often been to break up the existing monopoly through divestiture, normally by dividing the monopoly into several smaller companies, selling them off and forcing them to compete. However, the government's white paper stated very clearly that this approach is not an option for Ontario Hydro. Although there have been times when we were tempted to debate this option, we have respected our mandate and have focused on the development of non-divestiture mechanisms that will mitigate Genco's market power.
The MDC has studied the market power problem in considerable detail over the past few months and our second-quarter report makes specific recommendations to the government on how to curb Genco's market power in the short term while reducing it over time. We believe that an effective package of market power mitigation measures must accomplish three things: First, the measures must control Genco's ability to exercise market power as long as the company remains Ontario's dominant power generator; second, the measures must encourage the development of competitive alternatives so that over time Genco's dominant position in the market will be reduced; and third, the measures must provide some incentive or inducement for Genco itself to work towards reducing its dominance of the market.
In addressing the market power issue, members of the MDC were firmly of the view that proactive rather than reactive measures should be the preferred option. That is, instead of relying principally on reactive instruments such as regulatory interventions by the OEB, we believe that relatively clear rules of the road should be put in place that would anticipate and effectively respond to the reality of Genco's market power at the time of the market opening so that investors would have confidence in the marketplace as soon as possible. This is particularly important given the long lead times for investors to realize returns on investments in new generating capacity. But, of course, certainty of rules is also of value to Genco in its future decision-making, given its new commercial orientation.
In thinking about the precise mitigation measures that should be deployed, we have focused considerable attention on the vesting contract. Such contracts have been used successfully in a number of other jurisdictions to achieve market power mitigation. Essentially, under such a contract the price of some significant portion of an incumbent's capacity is vested or locked in at pre-specified prices and quantities that attempt to replicate outcomes which would be achieved in a competitive marketplace. The benefits of these contracts are clear:
First, it would ensure that Genco would not be able to reduce its base load capacity so as to induce supra-competitive prices.
Second, it would reduce the incentive for Genco to manipulate prices on the non-vested portion of its portfolio, again through the withdrawal of capacity, because Genco would not be able to recover any monopoly rents on the vested portion of its portfolio.
Third, the creation of a vesting regime would impart price stability to those participants anxious to secure a fixed price for future delivery of electricity.
Fourth, the vesting contract would provide strong incentives for Genco to reduce its operating costs because it would still reap the benefit of any cost savings that are achieved from the contracted price.
In addition to vesting a significant portion of Genco's capacity, the MDC has recommended decontrol measures -- and this is our term -- of Genco's marginal or price-setting plants. Whereas the vesting contract removes the incentive for Genco to exercise its market power, decontrol deprives Genco of the ability to do so. Decontrol measures take a number of different forms. We have cited several examples: long-term leases, asset swaps, auctioned capacity or bidding rights and outright sales of plant. If adopted successfully, decontrol measures increase the likelihood that competitive market forces will drive system prices, thereby providing accurate investment signals to prospective entrants.
In tandem, the MDC believes that this regime offers the best prospect of providing meaningful constraints on market power given the white paper's proposed structure for Genco. I should emphasize that our recommendation on this issue, like the vast majority of decisions we have made, received the support of every member of the committee.
However, as I indicated earlier, concern over market power is not confined solely to the wholesale market. If left unchecked, the LDCs' monopoly over the wires business also poses significant market power risks. Both the MDC and the government have been cognizant of the retail market power problem and have addressed this issue in several ways:
First, by insisting that local distribution companies provide retail customers with the wholesale spot price pass-through. This option limits the extent to which downstream customers can be obliged to pay inappropriately high prices for energy.
Second, by subjecting the natural monopoly components of the electricity system, transmission and distribution, to incentive-based regulation by the OEB.
Third, by attempting to confine the LDCs to providing only those services which use true natural monopoly functions. This means, for instance, that functions such as management of the financial risks of spot price volatility, demand-side management services and metering services can all be remitted to the competitive marketplace.
Fourth and finally, by ensuring that the LDCs do not enjoy an advantage in the competitive segments of the industry, the MDC's recommendations will limit the scope for abuse of market power in the retail market.
As with our other recommendations to mitigate market power at the wholesale level, we believe that the rules for retail competition should be established before the introduction of competition to ensure that the regime is as clear and as stable as possible from the start so as to minimize regulatory costs and confusion.
Because our proposed approach to retail competition gives consumers the greatest possible flexibility and choices, we believe that retail consumers and the informed purchasing decisions they will make will play an important role in the evolution of a more competitive and dynamic electricity market. In a relatively short time, for example, we would expect Ontario's retail electricity sector to offer consumers a range of price and service options that is similar to those offered in other industries and services, for instance, the long-distance market.
Let me conclude by thanking your committee for the opportunity to address you today. I will summarize very briefly the main points that I have made here.
First, the Market Design Committee supports the general provisions of Bill 35 and believes its adoption into provincial law is in the broad public interest.
Second, the MDC believes that Bill 35 reflects government policy directions enunciated in last year's white paper and also reflects the best possible advice that we have been able to provide on how those directions can be best pursued.
In terms of the MDC's recommendations on market design, on the need to protect the environment, on measures to curb and reduce market power at the wholesale and retail levels, we believe the adoption of Bill 35 will enable the government to create an electricity market that delivers major benefits to power consumers, including lower prices, greater choice and innovations in both products and services.
As we understand it, in all these ways the proposed legislation will advance the ultimate goal of this committee and of these hearings, namely, to protect the economic and social interests of electricity consumers in Ontario.
Thank you. I and the other members of the executive, who are now all in attendance, welcome your questions.
The Chair: Thank you very much. You have left us with 10 minutes of time for questions from each caucus. We begin with the NDP caucus.
Mr Lessard: Thank you very much for your presentation. I was wondering what is going to be in the third report of the committee that's supposed to be coming out in September.
Mr Daniels: What you'll find is not nearly the same type of report that we've furnished in the past. Right now we are into technical implementation issues, and that means the kind of report that we will furnish will really just report our progress on the various market rules that we're developing on the bylaws for the IMO, just report on a range of different activities that we're currently undertaking.
But in terms of the high-level design principles we believe are necessary to implement the new electricity market, we believe most of that advice has been furnished in the first two reports. There will be some additional high-level design material that we will provide on aspects of transmission and distribution and we would expect that we will have further work that we'll wish to provide on mitigation of market power at the wholesale level. We might do some further work on the retail side. But ignoring those matters, I don't expect there will be a lot of other high-level design issues that we'll be looking at, and the focus will be on reporting our progress on the development.
Mr Lessard: Are any of the issues that you expect to be dealing with environmental issues, suggestions with respect to any of the regulations we may be looking at to implement some of these suggestions you've made with respect to protection of the environment?
Mr Dewees: If I might answer that, the second-quarter report identified one area in which we were doing further consideration. We looked at renewable portfolio standard as an additional measure for environmental protection. We are going to continue that discussion in the third quarter and we may well have further advice with respect to that matter in the third-quarter report.
On most of the matters, however, we made our recommendations in the second-quarter report and directed them to the Ministry of the Environment or to the Ministry of Energy, Science and Technology, and we don't expect to have more to say on those matters.
Mr Lessard: I guess this is more of a comment than a question, but after we've gone through eight days of hearings and we've had an opportunity to hear from you and read your report with respect to environmental issues, we've had a number of suggestions from people about ways in which we can ensure that the quality of the environment is enhanced as a result of Bill 35. One was the renewable energy portfolio standard, and there was system benefits charges as well. However, we haven't heard from the Minister of the Environment on any of those issues or what they expect to do to address them. It's unfortunate that we haven't heard it from anybody from the ministry, because that's where you say that you've provided your suggestions.
Time and again we've heard that the initiatives that you've suggested, the cap and trade program and others, aren't going to be sufficient to improve environmental quality through this bill. We heard just today from the Canadian Energy Efficiency Alliance, from the Ontario Clean Air Alliance, from the Sierra Club, from Greenpeace, and yesterday we heard from the Ontario Medical Association, that the only way to ensure that we improve the quality of the environment is through a renewable energy portfolio standard or some other method.
In the comments that have been made today, it says that you believe the recommendations you've made so far would enhance the overall environmental quality in Ontario. I'd like to know how it's going to do that. How do you make this statement?
Mr Dewees: I think there are a couple of responses to that. First, for me and I think for many on the committee, the air pollution emissions cap and trade recommendation is a central recommendation for protecting the environment. To the extent that when we talk about environmental concerns we're talking about air pollution, the cap and trade mechanism would provide a limit on the total air pollution emissions that can be discharged in Ontario.
We don't say in our report exactly what that limit should be. We said that the limit should be set so that it does not allow more emissions under a competitive market than would have occurred otherwise. But it is at the discretion of the government to set that limit, and the limit can be set at a level that will ensure no environmental degradation; it can be set at a level that ensures environmental improvement.
Over the years the history of environmental regulation has been one of setting emission standards or air quality standards and over time reducing those allowable emissions. If that is done within a cap and trade program, that can ensure that the air pollution emissions associated with electricity generation decline over time. It seems to me that if air pollution is the central concern, this is the mechanism that gets right to the heart of the concern. That's why I think that our recommendation is indeed very protective of the environment.
Mr Lessard: You made a comment that caught my attention, and that was the caps on emissions for generators in Ontario. There has been some suggestion that the regulation-making ability in this legislation would actually be able to cap emissions for generators from outside of Ontario which are supplying power to Ontario. We heard from somebody from AEP Resources, a large power-generating corporation in the United States which has a number of coal-generated plants, who took issue with the ability of Ontario to enforce emission standards on generators outside the province of Ontario. You're saying that these caps are for generators in Ontario. Is that the idea?
Mr Dewees: I was a little too modest in what I said a moment ago. Our recommendation actually said, first, that emissions should be capped for generation in Ontario, and second, that regulations should be developed to ensure that generation of electricity, if it's imported into Ontario, does not increase emissions beyond those which would occur if the electricity were generated within the province.
You've raised an important question, which is exactly how that would be done. We haven't solved that legal problem. That raises a number of problems in trade in international law which we simply don't have either the competence or the time to resolve, but our recommendation was that the government look towards mechanisms that would do exactly that. I don't believe that the situation with competition would be any worse than the situation we're in today. I believe that if we had a cap-and-trade program, it might be possible -- we're not certain about this -- to require that those who import power into the province participate in that program so that the cap that's set is one that applies to all generators of electricity that's sold in Ontario.
Having said that, we didn't work out the legalities of that mechanism and that remains to be seen -- you're right, there is an implementation problem -- whether the government of Ontario has the legal capability, or the extent to which it can legally control sources in other jurisdictions, but I believe we will discover that that capability is significant and we've recommended that the government exercise it.
Mr Lessard: I guess that's part of my concern. Until I get that satisfaction, I'm not sure that it's going to work, and if it doesn't work, we're left really with market-based mechanisms that the government keeps telling us are the way to provide customer choice. Customers will choose to purchase renewable energy or green energy sources. I'm not sure that is going to work completely because I'm sure that in looking at this issue, you must have had to look at some statistics to determine how much more people are going to pay for renewable energy and what impact those market-based mechanisms may have on improvement of environmental quality. Were those some of things you looked at?
Mr Dewees: They are two separate issues. Once again, I think the cap and trade provides a powerful limit on emissions within Ontario, and with respect to power imports I think it provides in fact a better mechanism in dealing with imports than we have today. The green power marketing is another means of encouraging generation with environmentally friendly resources and we looked at that. I think that will be beneficial as well but I see the cap and trade as the first and primary protection of air quality in Ontario.
Mr Lessard: My question is, what if it doesn't work?
Mr Dewees: With respect to generation in the province, it has to work unless the Ministry of the Environment doesn't enforce it. If they put it in place -- we have regulations today. If the regulations are enforced, they work. We have no reason to believe that the government's enthusiasm for enforcement is going to change. So just from looking at the regulatory regime, cap and trade will do at least as well as what we have now.
You're asking how much it can extend outside the province. That's a good question, but given the size of our inter-ties, there's a limit to how much can come in in any event. Ontario Hydro can import power today. There's not, to my knowledge, an environmental limit on its imports, so I don't see the advent of competition creating any new environmental problem that does not exist at the present time so long as cap and trade is in place to limit these emissions here.
Mr Lessard: I hope you're right for the sake of the people I represent in the Windsor area who have to deal with transboundary air quality problems from Detroit, Michigan, and from the Ohio Valley as well. We deal with the impact of coal-fired generation in the United States and anything that would control those emissions would be an improvement to the environment in the area I represent.
Mr Dewees: I agree. In Toronto we breathe air that blows in from the US Midwest as well and we share those concerns. In the year 2000, sulphur dioxide emissions from all US coal-fired power plants are going to be subject to the US cap-and-trade scheme and so there will be an absolute limit on the amount of discharge within the United States. That would be nicely matched if we had a similar program in place on this side of the border.
Mr Lessard: Will those caps include emissions other than sulphur and nitrogen oxide?
Mr Dewees: SOx and Nox.
Mr Lessard: Will it include mercury, lead and PCBs, for example?
Mr Dewees: No. None of that is covered under that program.
Mr Galt: Thanks for the presentation. My apologies for being pulled out. I hate to bring this to your attention, but this morning your organization was being criticized by the Canadian Energy Efficiency Alliance. They were making reference to system benefits charges as it relates to energy efficiency and possibly also to environmental protection. I'll just read a couple of their sentences as they make reference to your second interim report:
"It is clear from the composition of the committee that their strengths and motivations are related to electricity supply and free market competition, not efficiency. It is even clearer reading the report...that energy efficiency was not an issue well considered by the committee." Would you like to comment on that and the relation to system benefits charges?
Mr Dewees: I have to disagree with the characterization that you've presented to us. We did consider energy efficiency. We discussed it at some length and we discussed the system benefits charge at some length. We believe that the recommendations we have made will promote energy efficiency in the first place by establishing a spot market with hourly prices that we provide to customers who have interval meters, that is, a meter that can display the price every half-hour or every hour. The market will give those customers the maximum information about their energy consumption and the price that consumption imposes at every hour of the day, and that provides incentives for the consumers to conserve electricity. The higher the price, the greater the incentive. We think that having an efficient, competitive spot market is one mechanism to encourage energy efficiency.
By recommending cap and trade, we have implicitly increased the cost of using methods of generation that discharge air pollution, because that pollution will have to be controlled consistent with the cap and trade and that in itself will provide incentives for consumers to conserve electricity. We believe that retail competition and competition in metering will encourage energy service providers to work with customers to identify their consumption patterns, the cost of those consumption patterns, through more sophisticated metering and means of conserving energy. We think that the competitive market we're creating is going to be a better market in which energy service companies can work with customers to implement energy efficiency programs. I think we're improving the market for energy efficiency.
Mrs Johns: I want to direct my first question to Dr Daniels. We've heard a lot over the last two weeks about market power and those kinds of issues. As you're well aware, and I think everyone around the table is, the government is really concerned that we're introducing a competitive marketplace. I was wondering if you could give us some level of confidence that those market power mitigation measures that you introduced in your second paper will lead to an increase in competition and will make the market a competitive market which will bring in new generation, new transmission and new opportunities, of course, for the people who pay the electricity bills in Ontario.
Mr Daniels: I'm going to take a start at this question and ask Michael Trebilcock, who's been working very closely on this matter, to also chime in.
I think there's no question that there are significant challenges posed by the structure that we at least start off with, given that, as I mentioned in my formal remarks, Genco will have a significant share of the market in generation. As I also mentioned, there have been other ways of dealing with that market power problem in other jurisdictions. Divestiture is one option, but there have been other options that have been utilized.
We have worked quite vigorously on this matter and have sought international counsel as to how we best deal with the market power issue, recognizing that it's very important that there be some credible constraints on Genco at the time of the market opening, that they won't exercise market power or we won't see that investment. It seems to be clear within the white paper that we have to achieve that result. The question is, how do we do that short of the divestiture option?
I think this vesting contract on the bulk of Genco's electricity that it will supply, which will essentially limit the amount of profit that Genco can realize on the electricity it supplies, coupled with the various decontrol measures that we recommend for the marginal or price-setting units, constitutes a very credible market power mitigation regime. It's something that we're trying now in a very dedicated way, with representatives from Ontario Hydro, to work out, the subtleties of the regulatory regime, but we have every reason to expect that the regime will in fact work. Vesting contracts have been used to mitigate market power in other jurisdictions and so we remain optimistic that they will work here. Again, by transferring control over the marginal units to competitors, we believe that's a very credible way of making the market more competitive at a fairly early stage.
Mr Michael Trebilcock: The question you pose raises a good many complexities for us once we take out the easy solution, which is to break up Genco into five or six competing generating facilities, which we accept is an option that isn't presently on the table. So short of that straightforward option, we're forced to consider a number of more complex options.
Essentially with market power problems, with a firm here with 90% market share, there are really only two ways one can go: change the structure of the market or constrain behaviour, adopt structural responses or behavioural responses. Structural responses have in part been ruled out. That would be changing the structure of the market by creating more generators.
What the vesting contract does is it attempts to change behaviour, that is to say a financial arrangement which says, "If you, Genco, try and push up the market price, beyond some level you cannot capture profits from that strategy and indeed these profits will be transferred," in our thinking maybe to Holdco, the provincial holding company, by way of reducing stranding costs. This would be designed to remove incentives to monopolize the price by removing the profits from so doing.
The other measures the chair has mentioned, that is, measures on the margin with the marginal plants, typically fossil and some peaking hydro plants -- these are the plants that would be the last in in any given unit of time, particularly at peak times, and will therefore set the system marginal price, a price, it bears emphasizing, that every generator during that time period gets. Perhaps this is insufficiently appreciated. You're bidding at 5 o'clock at night, generators bid in until enough capacity is bid in to satisfy demand and the last plant you need to satisfy demand sets the price not only for itself but for all the other lower-cost plants backed up behind it. So it's a particular concern of ours as to who controls these marginal plants, because if you add in both the lower-cost plants backed up behind them and the marginal plants, there's obviously enormous incentive to push up the price that you bid the marginal plants in in order to capture returns not only on the marginal plants but also on all the lower-cost plants backed up behind them.
So we are particularly concerned about Genco's control not only of the base load plants but the marginal price-setting plants, and there we think we have to be somewhat more aggressive in our recommendations and indeed propose some quasi-structural measures that would break up operating or price-setting control over those plants through long-term leases, asset swaps, sales, auction bidding entitlements, something that ensures that Genco cannot control the price-setting behaviour in this market.
Mrs Johns: My last question is about low-cost energy. In the title of this bill we talk about low-cost energy. I just wanted to know what opportunities you see in the bill or have recommended in the market design that don't have severe price volatility, that we could manage price volatility.
Mr Dewees: I think there are several aspects of our market design that will help to control price volatility. We know people are worried about this because of some experiences that have occurred in the United States -- in the Midwest, in California -- during earlier parts of this summer.
It bears remembering that the conditions, at least in the US Midwest that gave rise to some very high prices, are very different from the conditions we have here. They do not have a competitive market with price disclosure, a spot price and the sort of bidding mechanism that we have here. Those high prices in the United States were a result of bilateral exchanges among utility companies which are still vertically integrated. So it's really not a comparable situation at all.
We are looking at a market in which the spot price will be visible to all players at all times. There would be a day-ahead market so you can anticipate what the price will be. We will be looking at demand-side bidding in which large consumers who saw a high price coming because of weather forecasts and other forecasts for the next day could say: "Hey, if it gets above $100 a megawatt hour, cut me off. I'd rather do without." That will by itself help to reduce the price volatility.
In terms of the default supply that we've recommended for consumers, we've suggested a smooth spot price which would be averaged over a period of a year. You can absorb an awful lot of volatility by averaging over a long period of time. So we think we have a market design that will avoid the problems we've seen elsewhere.
One advantage of our not being the very first in the world or in North America to design a competitive market is that we can learn from those who have gone before us and hopefully provide a design with a better performance than they've experienced.
Mr Conway: Thank you, gentlemen, for a stimulating presentation. We are met on this battlefield because we all apparently believe in the benefits of competition and what that's going to deliver in terms of better electricity rates for all classes of electricity consumers in Ontario. That is the policy framework that brings us together, all of us, and I think it is widely shared. That's my perspective.
I want to start with you, John Grant, because you've been sitting there very benignly. You put your name to a report two and a half years ago that said, and let me quote directly:
"Separating Ontario Hydro's generating assets to create distinct competing entities is an essential step in opening up the electricity supply market. Indeed, without taking this step, the full benefits of competition will not be realized."
Later, on page 57 -- that previous quote was on page 56 -- you and your colleagues at the Macdonald committee went on to say, "The separation of Ontario Hydro's generation assets into a number of distinct competing generating entities is necessary both to give customers choice among suppliers and to promote competition in electricity supply."
That report is of course replete with even more delicious examples of the first-order importance of unbundling Ontario Hydro's generation monopoly. That was John Grant in the Macdonald committee.
You've all penned your names to an even more interesting report, which I received five weeks ago and which I appreciated and read with some care, generalist though I am. Let me read from page 2-3 of the second interim report of the Market Design Committee. Quoting you, gentlemen -- and you're the experts, you're the wise men from afar. We are mere legislators.
Mr Dewees: It's not that far.
Mr Conway: Well, it may not be that far. Trudeau and company didn't have to go very far from Montreal to Ottawa, but they made the trip nonetheless to advise the nation. You're advising us on matters that are enormously complicated and, like wise men, you've got a right to give us the benefit of your considered opinion.
So what do you say in page 2-3? "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. The effects of an unfettered Ontario Hydro acting in a nominally competitive market would be to send inappropriate price signals to investors and market participants, attenuate market discipline on costs, and offer fewer choices for consumers -- outcomes that are inconsistent with the government's policy objectives for electricity industry restructuring."
Those are, from wise men, fairly direct words.John Grant, since you have signed on to both of these reports, I want you to tell me and the millions of Ontario electricity consumers how they are being well-served and how their rates are going to come down as a result of Bill 35 and the attendant policy, which clearly does not contemplate in the first instance that which you in two different reports said was essential, the sine qua non without which we would not get the one thing we all want, which is moderated and hopefully reduced electricity prices, not just for the big boys and girls in industry and commerce, but for the plain folks in Willowdale, Wyoming or Wanapitei. So will you help me with that?
Mr John Grant: Well, Mr Conway, we confront each other with equal benignity,I think. I'm glad you raise the topic of the Macdonald committee's report because I think that was a signal report. I'm very proud to have served on that committee and I still believe that their recommendations provided the government with the right kind of initiative and momentum to put us where we are today.
That said, I'm also very proud to be serving on this committee, which, as our chair has said, is a remarkable example of pulling people from very diverse industry backgrounds and interests together and finding common purpose with them and between them and among them.
Mr Conway: Agreed on both points.
Mr Grant: On the issue of market power, as our chair has said and as Professor Trebilcock has said, certainly the members of the executive of the MDC have made no bones about the desirability in some ideal world of having divestiture. In many jurisdictions it's been almost the natural option to pursue, but that wasn't open to us under the white paper. Given that, and our mandate to follow the dictates of the white paper and try to make them work effectively, we do think that we have found -- we are in the processing of finding, I should say, because we're still working with Ontario Hydro and with the government to work out the details of the contracts and proposals that the dean and Professor Trebilcock have discussed to make effective mitigation a reality.
Mr Conway: All right, I appreciate that, John.
Let me ask Professor Trebilcock. Let me make it easy. I am a residential electricity consumer living in Willowdale and I don't understand any of the particulars of this. I trust smart people like you to advise good government and a better Legislature to do the right thing. Now, what I want to know is very simple: Under the existing framework, as you understand it and could imagine it being applied -- I'm that consumer up in Willowdale; my current electricity bill provided to me by my utility is $1,000, 1,000 1998 dollars for the sake of this argument -- when and by how much will my bill go down?
Mr Trebilcock: That's a very good question and I wish I could answer it.
Mr Conway: It's important, because you're the experts and --
Mr Gilchrist: Why?
Mr Conway: The member says, "Why?" Because this is being offered up as a policy that is going to deliver, to read that which is not in the purpose section of the bill but the bill is entitled, "An Act to create jobs and protect consumers by promoting low-cost energy through competition." I can read, so this is all about providing low-cost energy.
I'm back to my point, Professor Trebilcock. You're the expert. It's 1998. My residential bill is $1,000. We have this framework. You know it better than I. When and by how much will my bill go down from the existing $1,000, assuming constant dollars, and assuming the same level of consumption?
Mr Trebilcock: I can't give you a number on that and I think it's unrealistic for anyone, not just me, to pretend that they can offer a number. The first point is, the stranding costs have to be recovered. These are costs that have been incurred from prior investments that are no longer used and useful for the duration of the period required to recover these costs or these prior investments. This constitutes a drag, so to speak, on electricity prices.
Mr Conway: Is it possible that the stranded debt and its disposition could in fact in the near term push prices up a bit?
Mr Trebilcock: I hope they would not go up, if that's the question.
Mr Conway: Is it possible that they could go up as a result of the stranded debt recovery?
Mr Daniels: I think it's important to emphasize we're paying for the stranded debt now.
Mr Trebilcock: We're paying for it now.
Mr Daniels: It's just embedded in the price. It's not being broken out.
Mr Conway: My problem is that I've got an Ontario Hydro report that just parked $8 billion worth of writedown. That's not in my current bill.
The Acting Chair (Mr Doug Galt): Thank you, Dr Daniels and company for coming before us. This indeed is a very complex issue, as we've just found out here.
Mr Conway: I'm beginning to think I should go to church and not go to committee, because this is all about prayer and faith. I'm in the wrong place.
Mr Gilchrist: We've been saying that all along.
The Acting Chair: We wish you luck in working towards your final report. Thank you for coming before us.
LINCOLN, PELHAM AND WEST LINCOLN HYDRO ELECTRIC COMMISSIONS
The Acting Chair: We now call our last, but not least, delegation. They might be interested to know that they are the 91st delegation to come before this committee over the eight days that we have been sitting. It's Lincoln Hydro, Mr John Alton, if you'll join us at the table.
Mr Conway: The honourable minister returns. He looks more ministerial, more senatorial than when I saw him last.
Mr Philip Andrewes: Especially when you're the 91st delegation.
The Acting Chair: You know what kind of a mood we're in, eh?
Mr Alton, if you don't mind introducing yourself for the purpose of Hansard, and your guest also.
Mr John Alton: We appreciate that, and what I'd like to do, Mr Chair, is introduce our chair of the Lincoln Hydro Electric Commission. We've prepared a presentation and he'll introduce me, which is only proper, seeing as I work for him.
Mr Andrewes: Thank you, Mr Chairman, members of the committee. My name is Philip Andrewes and I indeed have the privilege of chairing the Lincoln Hydro Electric Commission.
I did once have the privilege of sitting on this committee, Mr Chairman. I occasionally occupied your position and chaired it briefly for a few months with an aspiring young member by the name of Harris, who may be familiar to you.
Mr Conway: They were both good chairmen.
Mr Andrewes: Thank you, Mr Conway.
Mr Chairman, members of the resource development committee, thank you for the opportunity to address you on the proposed electricity restructuring legislation, Bill 35.
As I mentioned before, my name is Philip Andrewes, the chair of the Lincoln Hydro Electric Commission. With me today is the general manager and secretary, John Alton. Also with us, as you can see by the cover page, are Brian Walker -- these are members seated behind me -- the chair of the Pelham Hydro Electric Commission, and the secretary of the Pelham Hydro Electric Commission, Mr William Gee. West Lincoln Hydro Electric Commissioner, Willis Copeland, and the general manager of the West Lincoln commission, Dennis Percy, are also in attendance.
All three commissions have received and approved the submission which we are presenting today.
As a matter of background, the town of Lincoln passed bylaw 94-206 on December 29, 1994, as authorized by the Power Corporation Amendment Act, 1994, known as Bill 185. The bylaw directed the Lincoln Hydro Electric Commission to expand its service territory from the former village of Beamsville to the entire town of Lincoln.
The Power Workers' Union subsequently appealed the bylaw to the municipal board, the Divisional Court and the Court of Appeal. All appeals were unanimously dismissed. On April 30, 1998, the Supreme Court of Canada denied the Power Workers' Union request for leave to appeal the decision of the Court of Appeal. The expansion of the service territory took effect in the town of Lincoln on July 1, 1998.
The township of West Lincoln passed their expansion bylaw 95-76 on November 6, 1995, directing West Lincoln Hydro Electric Commission to serve their entire municipality, and the bylaw was also appealed by the Power Workers' Union to the Ontario Municipal Board.
The PWU has agreed to withdraw its appeal in accordance with an agreement between the Municipal Electric Association, the Power Workers' Union and certain municipal utilities. The West Lincoln Hydro Electric Commission has agreed to be bound by the decision of the Ontario Labour Relations Board in a successor rights application that the Power Workers' Union has filed with the Ontario Labour Relations Board against Lincoln Hydro. West Lincoln Hydro has already established with Ontario Hydro that their service territory expansion will take place on June 1, 1999.
Given the ongoing litigation, Pelham Hydro Electric Commission was hesitant to present service boundary expansion to its own council. However, with a newly appointed commission in December 1997, the Pelham Hydro Electric Commission decided the time was right to consider the municipal benefits of serving the entire municipality.
The town of Pelham gave notice on May 20, 1998, to hold a public meeting pursuant to section 83.2 of Bill 185 concerning the extension of the hydro service territory. On June 22, 1998 the town of Pelham passed bylaw 2013, directing the Pelham Hydro Electric Commission to serve their entire municipality. Pelham Hydro has also become a signatory to the MEA-PWU agreement, agreeing to be bound by the Labour Relations Board decision on successor rights.
All three of the mentioned municipal councils and their respective commissions have fulfilled their obligations under the current legislative framework, albeit all are at different levels of completion. The councils have exercised their legislative right to direct their local commissions to assume control and management of the rural distribution systems within their entire municipalities, including the assumption of the residual debt associated with the electrical plant.
Bill 185 was drafted based on a 1990 working group report to the ministers of energy and municipal affairs. The bill was supported by all major stakeholders and all three legislative parties when it was passed in 1994. The bill simply was to remedy the problem of freezing hydro service territories at the time the regional acts were introduced in the late 1960s and early 1970s.
The provisions in Bill 185 solved an earlier legislative constraint in the case of these three municipalities represented before you and, in our opinion, complement the intent of the proposed Energy Competition Act, Bill 35, to encourage economies of scale by establishing shoulder-to-shoulder utilities in the western Niagara region.
Expansions: schedule D, other amendments and repeals.
Section 28 should be revised to ensure that all of the applicable sections of Bill 185 are grandfathered or carried through to fruition for all three municipalities. Surely the date of the first reading of June 9, 1998 in paragraph (2)1 was arbitrary at best, as the Legislature was unaware of the desires of the town of Pelham to exercise its right to assume control and management of the municipal distribution system and the work already undertaken by the council and its commission.
The mandatory requirements in paragraph (2)2 for utilities to enter into a transfer agreement with Ontario Hydro, a professed competitor, are unfair and biased. In our opinion, Ontario Hydro should not be entrusted with protecting the interests of municipal hydro ratepayers when their corporate strategy is growth, not municipalization.
Lincoln Hydro's experience with obtaining a transfer agreement when there was no legislative requirement to do so has already shown how unreasonable it is to deal with Ontario Hydro. That transfer agreement puts all the liabilities on to Lincoln Hydro and allows Ontario Hydro to put all the bad debt -- or accounts in arrears after 60 days -- on to Lincoln Hydro, with no incentive for Ontario Hydro to collect.
The new West Lincoln Hydro transfer agreement puts even the costs of Ontario Hydro doing the final meter readings on to West Lincoln. In Lincoln, as of August 14, 1998, not all accounts have been final billed and, of the approximate 5,000 accounts, more than 500 have already proven to be grossly inaccurate. The provision of a mandatory transfer agreement should be removed so the municipal utilities have the opportunity to negotiate fair and reasonable terms with Ontario Hydro. The need to keep Ontario Hydro honest and accountable cannot be overstated.
Finally, the boundary adjustment or financial assistance which was guaranteed and relied on by all Bill 185 expanding utilities should continue over the complete five-year cycle. The financial assistance was negotiated by the affected stakeholders, and it was recognized there was a transitional need and that overall the rural rate subsidy throughout the province would be reduced. Paragraph (2)4 should be expanded to include that the company responsible for collecting and distributing the rural rate assistance also be responsible for administering the financial assistance for all Bill 185 qualifying municipal utilities.
Rationalizations, amalgamations and mergers: schedule B, the Ontario Energy Board Act, 1998.
Section 84(1) should be flexible enough to allow the three municipal distributors to obtain the appropriate licences to amalgamate their distribution systems and should be explicit to allow for two or more corporations to amalgamate.
As an example, the three municipal utilities represented here -- Lincoln, Pelham and West Lincoln -- collectively have about 19,000 customers, share similar customer demographics and geographical size, and are contiguous. If the scheme of the proposed bill is to encourage economics of scale, it should be clear that it is permissive.
Ownership: schedule A of the Electricity Act, 1998.
Hydro ratepayers in the entire province of Ontario have already paid for the costs associated with delivering electricity and as such are the rightful owners. Local utilities should be owned by electricity customers, and be independent of local government and governed by a newly created customer, the elected board of directors. Local utilities should establish separate subsidiaries for their competitive and wires company businesses. The non-competitive businesses should operate on a non-profit basis, with rates regulated by local boards of directors within OEB guidelines.
Local wires companies should continue to pay grants in lieu of taxes to local governments but should not be required to pay any new charges or taxes.
No transfer of funds should be allowed from wires companies to competitive businesses; rather surplus revenues and deficits should remain with customer-owners.
Market dominance: As long as one company has control over 90% of the available generation in the Ontario market -- I'm disappointed Mr Conway isn't here to hear this -- there will be limited competition and potential market abuse. The market surveillance panels and the OEB cannot possibly affect the benefits of real competition in generation. The Market Design Committee's recommendations on the ability of the OEB to make recommendations on divestitures does not go far enough.
Seventy per cent of the costs of electricity are in generation, and through all the legislative changes being proposed in the industry it is almost incomprehensible why Ontario Hydro successor generating company Genco is staying intact.
The greatest opportunity for competition and real savings for all electricity ratepayers in the province of Ontario must be in the area of the highest costs, that is, generation. Introducing competition in retail distribution, which represents approximately 15% of the costs, pales in comparison to the benefits which could be derived from competition in generation. At the very least the bill should ensure that the status of Genco be reviewed annually and the legislation should make further unbundling of Genco easily accomplished.
Thank you, Mr Chairman and members of the committee.
The Acting Chair: Thank you very much for the presentation. We have approximately five minutes for each caucus. We'll begin with the government caucus.
Mr Gilchrist: Thank you, Mr Andrewes and Mr Alton. We appreciate your coming before us.
Again, to some extent a common theme we've heard from a number of MEUs. In fact, we were fortunate to hear from Pelham yesterday, as you're probably aware, on their particular circumstances. You raise some similar issues in your brief. It drives the Hydro folks crazy when I say this, but let me deal with your ownership one.
As I read the bill, and no one has contradicted me, at the end of the day, how a municipality derives the names that it then appoints does not in any way prevent them from taking names that have been selected by election, much as the Prime Minister is not in any way required to take a name that Alberta presents as a senator. If Alberta chooses to derive as the only name they will forward something produced as a result of an election there, there's nothing that would prevent you doing that. However, as you are aware, most MEUs have appointed directors at present so it's more in keeping with that norm that the bill has moved forward.
I would like to explore as a general theme we've heard from all the MEUs -- and you've brought it forward here again too -- sort of a related point: Competition is good when it affects your suppliers but not good when it affects your retail customers. The breakup of Genco is not accompanied by a similarly eager anticipation by the MEUs that there be any kind of competition downstream. That goes hand in hand with the pricing issues.
We have heard from Pelham and others that they believe it's quite appropriate for Ontario Hydro to isolate even more debt into what could only be called stranded debt by selling assets for less than their market value and instead selling them for some artificially reduced price called book value.
In fairness to the presentation from Pelham yesterday, the gentleman was the general manager and not the chair and said he couldn't speak for the commission itself. You're in a bit different situation, so let me ask you the same question I asked him. Are you prepared to state on the record that if Hydro is required to sell at book value, or any other artificially reduced price, your commission today or any time in the future should be similarly constrained that you could never sell those assets again for anything more than book value and, if not, why not?
Mr Andrewes: First of all, Mr Gilchrist, I feel very strongly that the manner in which municipal utilities acquire assets from Ontario Hydro, that is, at book value, reflects the fact that the ratepayers within that municipality have invested substantially in those assets over the years and have paid for them. The residual debt is the remainder of their payment and when they assume the assets, they assume that residual debt, and I think that's a reasonable position.
Mr Gilchrist: But help me out here. You say that the residents in that area are Hydro customers paying Hydro a bill which is not differentiated that says, "Here is my $40 this month and that goes just for the wire and that one pole out on my property and my odds, one-in-ten-thousand chance, that I'll need a lineman this month."
It obviously gets thrown into the same pot of money that all Hydro revenues get thrown into and Hydro then pulls from that pot to pay for all sorts of things, from nuclear plants to ice storm problems to 40% debt service. Why could any customer anywhere suggest that their bill can be disaggregated and applied to that one transformer, the step transformer, or the pole out in front of their house?
Mr Andrewes: But we're not suggesting that at all. What we're suggesting is that the assets, when they were purchased, were entered into a ledger and that the assets are written down on an annual basis like any business person would do, and the people who have paid the cost of writing down those assets are the ratepayers.
Mr Gilchrist: But that's all Ontario Hydro customers.
Mr Andrewes: That's correct. But within our jurisdiction we are prepared to take responsibility for the written-down value of those assets which we, as Hydro customers over the years, have paid for.
Mr Gilchrist: I don't fault you for taking that perspective. If I were a buyer I would as well. But help me out here. Again, you've just said, it's a book entry. It's something done, as all businesses do. In private companies, you do it to offset income, to make allowances for future replacements.
But there's no exact science there. If a willing buyer and a willing seller then buy a car dealership, a hardware store, whatever it is, the fact that I've written down my shelves to $1 each, if the willing buyer says, "You know, if I buy those shelves it will allow me to make an income that suggests that I could pay up to $2 a shelf," that becomes the price that asset is worth.
If we can't approach it this way, let me ask you in the reverse.
The Acting Chair: We are going to have to move on to the third party and you may respond during the third party's turn.
Mr Alton: Can I just answer that?
Mr Gilchrist: Oh, they're desperate to respond.
Mr Alton: Can I just answer very quickly?
Ms Churley: We'll give him enough time.
Mr Alton: I'd like to start in 1906.
Mr Gilchrist: We'll use Mr Conway's time.
Mr Alton: OK. I'll try to do this as quickly as I can. In 1906, in the Power Corporation Act, when Ontario Hydro was first formed, there was this concept of power at cost. Ever since that time, everybody built into the rate of power that no matter where you bought it in the province of Ontario, it represented all of the cost, so everybody participated in paying for the costs. So it doesn't really equate to the shelf theory, in the sense that you've been paying for it ever since it was built. When they extended the line in Atikokan, or if they extended a line in Pelham or in Tintern, everybody paid for it.
In 1921, the government introduces the rural electrification act in Ontario. In 1958, the government forgives all of those particular charges. The grant in aid is forgiven; the grant in aid is not transferred from Ontario Hydro over to expanding utilities and never has been. Everybody has always paid power at cost. Now what you're suggesting is that no longer flies. What we're saying is that it has always been that way and, in our minds, there is no substantiated reason why on June 9, 1998, it all changed.
Mr Gilchrist: I'm just suggesting we don't want to leave more stranded debt than we have to.
The Acting Chair: Thank you. We're moving to the third party officially, Mr Lessard, and then we'll come back to the official opposition.
Mr Lessard: I guess there is very good reason that everything changed on June 9. When I asked that question, the parliamentary assistant said, "Well, that's the date that the legislation got introduced." Of course, that's the reason everything changed.
You can tell from Mr Gilchrist's line of questioning how sympathetic the government is to your concerns. I am not entirely optimistic that you're going to see much change as a result of your presentation here today. We've heard this a number of times and you're the last person we're going to hear this from and this is the last time we're going to hear from Mr Gilchrist on this issue.
Mr Gilchrist: Oh, we have five days of clause-by-clause.
Mr Lessard: And we can be thankful for that. But if your concern isn't addressed, what is the impact? What is going to be the outcome in your area?
Mr Alton: It's not just our area. I see it as a tremendous grab in the sense that the people of the province of Ontario have always paid their rates based on power at cost. We all own it. It doesn't matter whether it's a transmission line or it's a piece of Niagara Falls. We've all owned it, we've all paid for it, we've always shared in those costs. Now all of a sudden, there is some line of demarcation; somebody decided to draw the line in the sand. All of a sudden, it's market value. I do not think it's appropriate that the government, whether at the provincial level or at the municipal level, should take the grab, because it's the ratepayers in Ontario who have always paid the finances.
I am happy that the bill was introduced on June 9 because we've seen the ability or the inability -- how Ontario Hydro has been able to put it into financially dire straits. Now they did do that on our behalf. How deep they've got in is another question, but I think that we needed to stop the bleeding. It is the people of Ontario who own the hydro system. Right now, to say magically on June 9 it's all going to change and it's all going to go over to the provincial government or to the municipal governments, I can't understand the logic. I haven't seen anything here that would tell me any good reason why it should happen.
Mr Lessard: My question is, if our concerns aren't addressed, what is going to happen in your area?
Mr Alton: The rates will go up.
Mr Lessard: And who is going to end up providing the service? Is it going to be you? Is it going to be Ontario Hydro? Who is going to be in business in the end? As Mr Osborne indicated to us when he came before us, Ontario Hydro is going to aggressively pursue the retail marketing of electricity. In other questioning, it has been put in even cruder terms than that; it's either eat or be eaten.
Mr Alton: As long as the government leaves the transmission and distribution sectors together, they will cross-subsidize that as much as they can. Everybody will pay the extra on the transmission side so that they will cross-subsidize the distribution side and it will be the loss leader. All we need to do is look at the history of Ontario Hydro since their inception to know whether it's true or not. I kind of agree with Mr Conway's comment earlier. You feel like being in church.
Mr Lessard: So you don't think that rates are going to go down for your consumers?
Mr Alton: Not at all. I think rates are going up, there's no question.
Mr Conway: Mr Andrewes and Mr Alton, it's good to see you. I appreciate the detail of the Bill 185 story because I have said on other occasions I have felt rather disappointed that we weren't able to, for whatever reason, make what seemed like a good idea at the time work more quickly and more expeditiously, and you've done a thorough job of explaining that.
In the very little time left -- and maybe I'll direct this to John Alton -- as much as anyone, I have really been focusing on the whole business about market power and Genco and all of that, but as these hearings come to a conclusion, I think in some ways the equally big story is what's happening at Servco. We haven't paid as much attention as we probably should, because I think Servco is going to be a real story. The whole argument here is level playing fields and letting competitive pressures work.
Your story today -- we had Moore township a couple of days ago in Sarnia, we've had a number of other submissions which seem, on the basis of their evidence, to make plain that what we are doing with this bill and the attendant policy is in fact to strengthen Ontario Hydro's retail capacity in the new marketplace. That's certainly an impression I get from your brief.
Mr Alton: It's correct then. You've got the right impression.
Mr Conway: Surely that's not what anybody out there in Lincoln country or in Renfrew county or in Sault Ste Marie was expecting out of this policy.
Mr Alton: No. I think they missed the target big time. The target's quite easy. There's a big, shiny building over here on the corner and for some magic reason, it was missed. All of the competition that has been introduced through Bill 35 is at the retail level, leaving Ontario Hydro totally out of the picture. Servco hasn't got the same rules and conditions placed on it as the MEUs do that we now have to comply with under the Ontario Business Corporations Act. Servco is going to be able to do whatever they want.
Mr Conway: You may have said this when I was out, and I apologize if it's repetitive, but I'd like clarification. I presume that your view is that, as a minimum, there should be a firewall of separation between the transmission and distribution aspects of Servco, and that's not there.
Mr Alton: Yes, if you're going to do it correctly, if you're going to go through the entire exercise.
Mr Conway: As a minimum, that has to happen.
Mr Alton: Yes, as a minimum, you have to do that.
Mr Conway: To put this at the highest possible level, I was saying the other day that Maurice Strong, among others at Ontario Hydro in the last number of years, as their debt-equity ratio worsened, looked covetously, these people running Ontario Hydro, at what Macdonald told us two years ago was over $5 billion worth of unfettered assets in the distribution and transmission facilities of the MEUs.
If we've got a bill, Bill 35, that is going to set up the possibility, create an unlevel playing field to the advantage of Servco, which after this competitive marketplace becomes effective is a commercial company with only one shareholder, the Ontario government, if Servco is going to be given an unfair advantage to put its big snout into the $5 billion worth of some part of the multi-billion dollar asset base of the MEUs and then take that out into the commercial market, that's the business I'd want to be in. That's the one where there have got to be huge opportunities for profit and gain. Would you not agree?
Mr Alton: Definitely. I think Ontario Hydro is very happy with the bill. I would think they'd have to be elated with it.
Mr Conway: I simply make the point that this bill is supposed to be about a level playing field. I think it is now agreed that, where Ontario Hydro is concerned, at Servco it is manifestly not a level playing field.
Mrs Johns: That's not agreed.
Mr Conway: Listen, John Alton has been in this business a lot longer than I have. He's telling me that, as he reads the bill, it is an unlevel playing field. You're not alone. I thought the Moore township story was a painful story about how it could be to the considerable advantage of Ontario Hydro, because the legislation and the rules are very much in their favour, including such things as timing.
Mr Alton: Definitely. The advantage is squarely in Ontario Hydro's corner. No question.
Mr Conway: Anything else beyond the clear separation of Servco into two distinct entities? What other measures would you recommend?
Mr Alton: I found it very interesting that the panel that was here just before us, the Market Design Committee, was talking about competition and how you can mitigate it. They admit the fact that there are limited transmission facilities to introduce any more competition in here; that as long as Ontario Hydro/Genco stays together, 70% of the cost is out there, and the price is going up.
The Acting Chair: Thank you very much, Mr Alton and Mr Andrewes, for your presentation. We appreciate your coming before us.
Mrs Johns: On a point of clarification, Mr Chair: I'd just like to ask Philip if he'd like to tell us any stories about Jim Rusk in his school days.
The Acting Chair: Maybe that can be after hours, out in the hall.
Mr Conway: Might I suggest my incredulity that they could have been in the same class.
Mr Andrewes: Indeed we were.
The Acting Chair: We've received some 91 delegations, we've received a very large number of written presentations and the committee has moved along very well over the last eight days. I believe you have a motion, Mr Lessard.
Mr Lessard: I move that the resources development committee extend an invitation to the Minister of the Environment to attend at the next meeting of the committee for one hour to make a presentation and respond to questions with respect to Bill 35.
The Acting Chair: From my understanding, the way it was originally set up that motion would be out of order for the eight days that were laid out for hearings. They might have been able to shuffle a bit if that motion had come forward earlier, and it's laid out when we come back for clause-by-clause. I rule the motion out of order.
Mr Conway: Then that probably anticipates --
Mr Conway: I've got another point. Trust me, I'm not going to be difficult.
My colleague Phillips and I have indicated earlier in these proceedings that we certainly wanted some opportunity to have the current chair of Ontario Hydro, Mr Farlinger, appear before these proceedings. He wasn't able to be here on day one, for reasons that were understandable; his schedule did not permit it. But I would certainly like to find a way to have Mr Farlinger come and speak to us about some issues I think are very important that only he could speak to. Is there any agreement to consider that possibility?
The Acting Chair: In both cases I think the ideas are excellent. It's unfortunate they hadn't come to us two or three days ago or last week, when we might have worked it into the schedule.
Mr Conway: In fairness, it was last week that Mr Phillips indicated his interest in having Mr Farlinger. I suppose we could have been obdurate and said, "Well, no, the invitation was extended." He's a busy man. I have no problem with his being unable to accommodate one of the days. But if we are going to, as a self-respecting Legislature, allow important public executives to tell us that their schedule was such that they couldn't fit their time into the one opportunity that was available and therefore they can avoid any appearance before the committee --
The Acting Chair: The problem I'm having with this isn't to do with who does or doesn't appear; it's to do with what was passed in the Legislature and the number of days there. If you want to take it back to the House leaders to debate and arrange something else --
Mr Conway: I'm happy to do that, because I can't imagine that we would want to conclude these hearings without the chairman of Ontario Hydro coming to give his views on matters that are very material to his current mandate and his future plans.
The Acting Chair: My understanding is that for this committee to change the rules that have been laid out for us by the House would be very much out of order. But if you want to have the House leaders renegotiate and bring it forward, I understand that's possible.
Mrs Johns: I would just like to add that at the subcommittee it was agreed that Ontario Hydro representatives would appear before the committee, not that Mr Farlinger would. So he didn't deliberately decide that he wasn't going to show; that was a result of the subcommittee decision and not Mr Farlinger himself.
The Acting Chair: I think we should move on.
Mr Conway: World Wrestling Federation. There's nothing I like more than a transparently supine Legislature that lies down and allows itself to be tickled silly by its overly aggressive executive branch.
The Acting Chair: Order.
Mr Lessard: I understand the constraints that have been placed upon us by the resolution that was passed. We've reached the end of our opportunity to have delegations come before us. We've heard from a number of those very important concerns with respect to the environment, and I thought it would be appropriate to invite the Minister of the Environment to respond to some of those. I think we can do anything, on consent.
The Acting Chair: Not after it has been through the Legislature.
Mr Lessard: Then we can't take it to the House leaders. Is that what you're suggesting?
The Acting Chair: That's what I'm suggesting.
Mr Lessard: If you say it's not in order, we won't be able to.
Mr Baird: You need unanimous consent of the House to allow it.
Mr Lessard: Maybe we could check the consensus of the people here as to whether that's something we can bring to the House leaders.
The Acting Chair: In all fairness, I think the questions on environment were very capably answered by the parliamentary assistant.
Ms Churley: The usual line: "We've done more for the environment in three years than any government."
The Acting Chair: As humble as I am, I'm sure there was no bias by the parliamentary assistant.
If we could move on to the last item, that's the date for amendment. It has been suggested that amendments from each caucus, if Mr Conway is still listening, would be in by September 21. Would that be in order?
Mr Lessard: Do we have some estimation as to when we may be reconvening the committee?
The Acting Chair: September 28 at 1530 hours, according to the direction from the Legislature. That would be exactly a week later. There are five days set aside for clause-by-clause. So the 21st sounds in order? Agreed. Thank you.
We stand adjourned, then, until September 28 at 1530 hours. Thank you very much and have a safe trip home.
The committee adjourned at 1705.