Tuesday 4 November 1997
Mr Pat McNeil
Mr Rick Machon
Ms Malen Ng
Ms Eleanor Clitheroe
Township of Bruce
Mr Dick Joyce
Ernst and Young
Mr Brian Caine
Mr Ken Hartwick
SELECT COMMITTEE ON ONTARIO HYDRO NUCLEAR AFFAIRS
Chair / Président
Mr Derwyn Shea (High Park-Swansea PC)
Vice-Chair / Vice-Président
Mr Monte Kwinter (Wilson Heights L)
Mr Sean Conway (Renfrew North / -Nord L)
Mrs Barbara Fisher (Bruce PC)
Mr Doug Galt (Northumberland PC)
Mrs Helen Johns (Huron PC)
Mr Monte Kwinter (Wilson Heights L)
Mr Floyd Laughren (Nickel Belt ND)
Mr John R. O'Toole (Durham East / -Est PC)
Mr Derwyn Shea (High Park-Swansea PC)
Clerk / Greffière
Ms Donna Bryce
Staff / Personnel
Ms Anne Marzalik, research officer, Legislative Research Service
Mr Richard Campbell, consultant
Mr Robert Power, legal counsel
The Chair (Mr Derwyn Shea): The select committee will resume its business for the day. You may recall that we're picking up on deputations that were started last week, and it is a continuation of the briefing by Ontario Hydro. When we last left off, Mr Patrick McNeil was making presentations on the Genco implications of the NAOP recommendations. You were continuing, so I have allowed up to 30 minutes more for your testimony. Then we'll proceed to Ms Ng, who was waiting anxiously to start into the financial implications.
I'll begin with you, Mr McNeil, if you'd be good enough -- the light is on and it's your spot -- to identify once again for Hansard all your colleagues at the desk. Although they're all well known to us, that would be helpful before you begin.
Mr Pat McNeil: My name is Pat McNeil. I'm vice-president of corporate planning at Ontario Hydro. With me today are Rick Machon, the chief nuclear operating officer; Malen Ng, vice-president of corporate finance; and Eleanor Clitheroe, executive vice-president and chief financial officer.
At the last session I had concluded my remarks and we had gone through one round of questions, and I believe there was the desire to continue.
The Chair: There's nothing further you want to add this morning?
Mr McNeil: No, sir.
The Chair: Then I'm pleased to take us directly into the questioning, and that will be Mrs Fisher.
Mrs Barbara Fisher (Bruce): Good morning, and welcome again to these proceedings. I would like to pick up where I left off the last time. It has to do with a couple of issues. Mr Chair, do we have 10 minutes?
The Chair: Ten minutes per caucus.
Mrs Fisher: To one of the questions I ended on, your answer was a shrug of the shoulders, and I don't really know what that meant. The question was this: I went through the scenario of replacement fuel costs of $2.1 billion and I went through a proposition where the Bruce units might be retubed in a different way and the boiler tube problem might be taken care of. You mentioned that you would then have the issue of some replacement fuel costs anyway. Now that we've had almost a week since we saw each other, have you been able to rework your numbers to figure out that there might be another option that could be available to the community for consideration?
Mr McNeil: We're continuing to explore the other options. With respect to my remarks for the replacement energy costs, I believe my comments were restricted to the comment that you could invest some of the replacement fuel cost money. I think the question I was asked was in the context of using the fuel replacement money, and my response was that while the work was being done on the Bruce A units to return to service, there would still be the replacement fuel cost to come down.
Mrs Fisher: I think we agreed with that. If all seven units were shut down -- it's not just Bruce that I'm worried about, I'm worried about Pickering as well, and I'm worried about the ability to purchase electricity at a more expensive price than what Hydro can produce it for, I'm told. If you make the assumption that all seven go down, an argument would be made that replacement fuel costs would be there.
But what if we make the assumption that they don't, and that we continue to operate a few while we refurbish a few and enter into that blend of discussion, private equity? I'm not hearing anybody fight the issue, right from the Power Workers' Union, who have been before us before, to the community we visited since we saw you last, to yourselves. I haven't heard anybody argue with regard to the private-public partnering issue with regard to the economics of retubing.
Again I ask you: Since last week, have you been able to go back and put another formula together or put another perspective to the issue as it relates to Bruce?
Mr McNeil: Ms Fisher, based on the information I've seen to date, the scenario of shutting down the seven units was based on the availability of resources to operate those units effectively and return the B units and the Darlington units to an area of operational effectiveness if other resources became available to supplement them. That's one of the options we will continue to consider.
Mrs Fisher: That's excellent to hear, because I think that's something we need to look at, but we need to look at it sooner rather than later. As it stands right now, things are happening as we speak. Things are being shut down in more of a permanent state than a lay-up mode. Right now the NAOP report recommends that we look at 1999 or 2000. Quite frankly, that's in all likelihood too late.
I'm asking for a commitment on behalf of this committee, number one, which has heard the same testimony from all proponents, but especially from the community I represent -- I'm asking for a commitment to look at it sooner rather than later, and that means don't put them into a permanent dry lay-up stage at the end of March. I know there's some work that needs to be done.
I want to add one thing. At the Canadian Nuclear Association conference, British Energy made a presentation, and they made it here as well. It was obvious from each of those forums that there are workers out there, and that means there are probably management staff too. Mr Andognini has made it very clear that until we get the management culture repaired and refocused and enhanced in terms of numbers, it will cause us problems in terms of lay-up.
However, I would expect that if you know you have 200 laid-off British nuclear workers who were good enough to help us out bringing up the Douglas Point Candu system originally, there probably is some available management staff. In their presentation to this committee they made a commitment to look worldwide at helping others in the recovery plans of nuclear industry. I challenge you, please, to find out what is available there on our behalf.
I want to go on to another point before I lose this opportunity. It's the second issue that we unfortunately got cut off on last time. In this community that I represent, there are three issues right now that Ontario Hydro impacts, although they really only own two of them; they think they own the third. In a very critical way, from my perspective, they've been an interfering body, not a complementary body, to the Bruce Energy Centre since 1987.
Last week presentations were made at the public forum. I asked you here last week whether you saw any progress being made in the negotiations to replace Hydro's responsibility for the steam issue. Obviously, that could possibly, through cogeneration, tie into allowing that community to have something of its own for a change that produces lower-cost electricity. In the updates from the major proponents of the Bruce Energy Centre at the public hearings last week, I asked you the question, were you working with them? You said you were working cooperatively with them. At the hearings I asked them the same question, and the answer was, "If that's cooperation, I don't know what it means." Could you tell me what that means?
Mr McNeil: No, I can't. I wasn't aware of the testimony from the other people who testified before you. I can assure you that we are working as cooperatively as possible with the proponents and the people who are on the Bruce Energy Centre to resolve this. As I mentioned, Ontario Hydro is seeking a win-win solution for everybody and to encourage the ongoing viability of that area. Ontario Hydro's obligation to supply steam is a very serious one which we are undertaking to meet in a reasonable-cost fashion.
Mrs Fisher: We've known that for a long time, but we also know that right now, while all of Bruce A is down, you're subsidizing the steam performance or the steam provision to the tune of a million dollars a month. There has been, at your request, I understand -- I'm at liberty to talk about this; I asked before I did this. From all proponents, there were two proposals put forward to you with a closure date of October 6. You put out terms of reference to make those happen. They proposed in good faith. They're now told you're going back inside, reworking it and doing it again. Can you explain to me why you would do that? I don't call that working in good faith with anybody.
Mr McNeil: Your understanding of the process is different from mine. We have been working with the people on the Bruce Energy site to bring forward proposals from all the proponents rather than from one or two; and to ensure that all the people on the Bruce Energy site, given our contractual obligation to supply steam to the individuals there, concur with the direction we're going in.
Mrs Fisher: I'll correct you on that: They do not, and it was very clear at the public hearings that they do not. But you're right; all were given the opportunity. The closure date was October 6. You were then in receipt of two proposals. You've now decided to go back inside again and try to do it the Hydro way. I challenge you to let the community have a forward foot on this one and let them be the provider to Ontario Hydro for its minimal needs in terms of the residual of what would be needed from the Bruce Energy Centre. We have to cut the interference by Ontario Hydro to that centre for it to proceed.
Quite frankly, Ontario Hydro has been in our way since 1987, when it made a commitment to provide low-cost energy, including electricity, to that site. It took till 1992 to negotiate a steam rate, and still has done nothing better than 7.2 cents a kilowatt-hour for industrial uses, all the time hiding behind the past Power Corporation Act. I ask you to please work today and tomorrow, not a month out and not two years out, on resolving this issue and get out of the way. Cooperatively come with them -- I understand the need to do that because you have contractual, legal obligations -- but give the community a chance to have ownership of this for a change. I ask you, can you please consider doing that?
Mr McNeil: We have entered a process which should give all the proponents at Bruce Energy Centre, including anybody in the community who wishes, an opportunity to bring forward proposals that would allow us meet our contractual obligations.
Mrs Fisher: The closure date on that was October 6. You have two before you to consider now. You invited all participants who came up, those who wanted to be there. Consider those. That was your obligation under the terms of reference.
Mr McNeil: Yes, and we've considered the proposals we've received and we expect additional proposals to come in.
Mrs Fisher: You don't close something and then reopen it at your convenience.
The Chair: Thank you, Ms Fisher. Mr Conway?
Mr Sean G. Conway (Renfrew North): Mr McNeil, in one of these myriad documents there is reference to commercial opportunities at Sir Adam Beck. Do you want to speak to that point? What potential is there at Beck? How much megawattage are we talking about? What are the time lines for bringing that on stream, and are there any constraints with respect to doing so in the next three to five years? I'm looking at some of your documents; there's an Everest of paper around here, so I'd excuse you if you couldn't find it either.
Mr McNeil: I can find it, sir; I'm just trying to find the level of detail you've requested. On Sir Adam Beck 3 there are, as we refer to the commercial opportunities, two additional development opportunities at Sir Adam Beck. One would result in an additional provision of 50 megawatts of peak load meeting capability to the grid. The other one, which we call the full development side, would result in about 600 megawatts.
There are two issues related to Sir Adam Beck 3. Sir Adam Beck 3 really is an opportunity for the future rather than an opportunity during the interim, while we replace the lost energy. The lead time for the partial development -- that's the 50-megawatt development -- is approximately seven years from the time it started, and for the full development it's approximately nine years. The cost associated with the energy that would be expected after those developments for the partial development is in the order of about three cents and for the fuller development is about five and a half cents. Given the three-cent full development cost of the energy, given a suitable time frame and a capacity need, Sir Adam Beck 3 poses a realistic option for meeting future energy needs.
Mr Conway: I want you to back up and repeat that slowly and clearly. I haven't heard very much about Beck 3. It's been on the books as a potential for several years now, and you tell me that fully developed it would be 500, 600 megawatts and it --
Mr McNeil: The additional capacity, sir, yes.
Mr Conway: Just give me a Dick and Jane. I want to be clear. Sir Adam Beck commercial opportunities: What are they? At what cost? At what price? With what constraints? And why haven't we heard more about this in the last little while? Those are my questions.
Mr McNeil: I'm not sure why you haven't heard more about this in the testimony of the witnesses before you. The Sir Adam Beck 3 remains a development opportunity for the province. In terms of this partial development, again, a partial development with a lead time of about seven years is about 50 megawatts. It's fairly good-priced energy. The difficulty is the lead time. The difficulty also is, when is additional capacity needed and over what time frame?
Mr Conway: You're mixing me up. I'm getting annoyed because you're talking about something that's going to give me 50 megawatts and something else that's going to give me 500 or 600 megawatts. Do you want to separate those clearly? I'm not making the distinction that you are.
Mr McNeil: One is a larger development than any other; one is more capital-intensive than the other.
Mr Conway: Which is which?
Mr McNeil: The partial development is a smaller development, with a shorter lead time and with a lower price.
Mr Conway: That's the 50-megawatt piece of Beck 3.
Mr McNeil: Right.
Mr Conway: So the small piece is 50 megs at five to seven years?
Mr McNeil: The lead time is seven years now.
Mr Conway: At what price?
Mr McNeil: It would come out roughly in the order of three cents.
Mr Conway: The big piece is 500 megs?
Mr McNeil: About 600 megawatts.
Mr Conway: About 600 megs. How much lead time?
Mr McNeil: About nine years.
Mr Conway: At what price?
Mr McNeil: In the order of five and a half cents.
Mr Conway: Why is the bigger piece giving us electricity that would cost nearly twice what it would cost from the smaller piece?
Mr McNeil: It's a fuller development and gets you more capacity, but the amount of river flow and the amount of water available limits the amount of energy you'd actually get out of it.
Mr Conway: Are there any constraints on our use of the water that might be required to do the big piece or the small piece?
Mr McNeil: As you know, we share the water that goes down over the Niagara. We have sufficient water rights that would allow us to produce about two terawatt-hours a year out of the fuller development.
Mr Conway: Again you've lost me here.
Mr McNeil: We share the Niagara River between the United States and Canada. We retain sufficient water rights per se to allow us to generate about an additional two terawatt-hours of power through Sir Adam Beck 3.
Mr Conway: Are there any of those rights that lapse within the next three to five years?
Mr McNeil: I can't speak authoritatively in that area. I don't believe so, sir, but I can't speak with authority on that.
Mr Conway: We've got a recovery plan that has a very controversial substitute power. We're going to be putting all manner of crap into the air that's giving pause to a lot of the environmental community in Ontario and has the attention of the Republican governor of New York. I would have thought we would hear more about Beck 3. Beck 3 has been on the books as a possibility for a long time. Are you telling me it is basically both the time it will take to bring into production and the price that make it unattractive?
Mr McNeil: For the partial development it's primarily the time; for the fuller development it's the price and the time.
You made some comment, sir, with respect to our emissions. Our emissions are going up substantially while we're awaiting the recovery of the nuclear side. As the nuclear units recover, the fossil emissions will decrease in the province.
Mr Conway: But you seem to be taking a very rigorous approach to the price on the hydro-electric side and putting a great deal of faith in the price of the nuclear option downstream. If we've learned anything over the last 10 or 15 years, Ontario Hydro Corp's estimated costs of nuclear have been among the most reliable of anything. I just get the feeling that you're applying a much more rigorous, sceptical attitude towards Beck 3 than you are to some of this nuclear recovery.
Mr McNeil: I wouldn't say we're sceptical of Beck 3 at all. It's a matter of when you commit to spend the funds.
Mr Conway: If you've got 600 megawatts at Beck 3 -- I don't get the sense that Beck 3 occupied very much of anybody's attention at head office over the last little while as people have run madly about in all directions to try to fill this gap of several hundreds or thousands of megawatts that will be created because the A plants are coming down for a period of at least four to five years.
Mr McNeil: As it stands now, the nominal plan is to return the Pickering A units starting in the year 2000, so it's not quite four to five years. Again, the reason Sir Adam Beck 3 -- particularly the fuller development. The fuller development has a higher cost. It wouldn't be as economic as the more partial development, and the reason the more partial development wasn't considered at this time is because of the time frame in which it would show up. We are highly regarding the Beck 3 in terms of future supply options should Pickering A or load or anything else change our underlying assumption.
Mr Conway: But as Ernst and Young has pointed out, there are a lot of assumptions in this recovery plan that give people pause. One of the concerns I have, quite frankly, is that I don't know that your fossil plants are going to be able to take the stress of the additional capacity and expectation that has been assigned to them. You seem to feel that's not a problem, that you're going to get all the capacity, all the production out of Nanticoke, Lambton and the other fossil plants that this plan calls for.
Mr McNeil: Yes, sir, I do.
Mr Conway: What gives you that level of comfort?
Mr McNeil: Experience, sir, and past experience with the fossil fleet in particular. As I testified last week, the fossil fleet is operating in the upper quartile of the neighbouring utilities, and the fossil fleet also has the experience at operating at the 34- and 35-terawatt-hour level in the late 1980s and early 1990s.
Mr Conway: But you're taking the fossil plants out of the minor leagues and making them the big league carrier for the next few years.
Mr McNeil: I wouldn't want to relegate the fossil plants to the minor league, sir. I would say we're increasing the energy production by a factor of two.
Mr Conway: Yes. You're increasing the energy capacity by a very considerable amount.
Mr McNeil: Which puts them in an annual operating capacity, if I recall correctly, of about a 35% capacity factor over that period of time, compared to the fossil fleets in the rest of the industrialized world, particularly in the United States, where we'd be purchasing from, of average fleet operating factors of 65% to 70%.
Mr Conway: But when you cranked up the nuclear plants over the last few years and you got some good production and some good capacity, after a very short period of time they were blowing gaskets all over the place, and then we end up with the IIPA telling us that there were all kinds of difficulties because of the additional stress. Now we're being told, "We're going to transfer a lot of this burden to these fossil horses and they'll just charge off like the Carlsberg team of Clydesdales and there will be no problem." I hope you're right, but I'll tell you, past performance in some other aspects of Ontario Hydro's operation don't give me a great deal of comfort.
Mr McNeil: Sir, I'd also like to advise you, as I think I may have mentioned last week, and I apologize if I didn't, that we also have contingency plans in place to ensure that the energy needs of the province are able to be met.
Mr Floyd Laughren (Nickel Belt): Welcome back to the committee, Mr McNeil. I've been somewhat taken aback as these hearings have gone on by the sense of animosity towards Hydro. Ms Fisher expressed it in a very tame way. When we were up in Bruce county, I was surprised at the feelings in the community towards Hydro -- not towards the local plant. Their expression was "the 19th floor." Deputant after deputant was very angry at Hydro. As director of corporate planning, I think your title is, how did that happen? How did you lose all your friends? I don't mean personally, of course.
Mr McNeil: Maybe I have lost some of my friends too. But I can't go that far back in history, and I'm not aware of the testimony you received at the Bruce. I was appointed to corporate planning in September of this year. Prior to that, my exposure to decisions at the 19th floor and the process -- I couldn't speak to it. And again I can't speak to the testimony. All I can say is that I have not seen evidence in my tenure of a disdain or a lack of cooperation or a lack of willingness on the part of the so-called 19th floor. Some of us aren't on that floor.
Mr Laughren: But you're striving.
Mr McNeil: Not necessarily.
Mr Laughren: I'll give you an example. The folks who were very concerned about the Bruce Energy Centre said they had lots of cooperation from the local folks up there, but as soon as they got to Toronto they hit a brick wall. One example they used, and Ms Fisher knows much more about it than I, was the fact that you charged them rural rates even though you're next door. They couldn't break through to Hydro to get them to understand the importance of the difference between rural rates and the other rates that would have been significantly less.
Mr McNeil: I think we understand the difference between rural rates and the rates they were looking for in terms of what the price is. The question that comes in is our ability to deliver those to them. I believe the Bruce Energy Centre and the community would have to form a utility to get access to do that and I believe they would have to go through the township to form that utility. As far as I understand, and I'm not an expert in this area so we'd have to get this confirmed later on, I don't believe six or seven individuals or corporate entities could form a utility.
Mr Laughren: To those folks that's a bureaucratic answer that doesn't deal with the reality of their problem, that's all.
Mr McNeil: Sir, that answer is found in the Power Corporation Act, which gives rise to Ontario Hydro.
Mr Laughren: Let me move on to another area that surprised me. There are, it seems to me, an increasing number of people who say that instead of the recovery plan as approved by the Hydro board on August 12 this year, what you should do is get into the real world -- these are other people's words, of course -- and admit that when you do the dry lay-up of Bruce A, it's not going to open again. Therefore, if you want to have contracts that are of a reasonable price that people can bid on, you've got to give them a contract for security of tenure of 10 years or more. Do you have evidence that you can do a dry lay-up of a plant like Bruce A for three years or more and then reopen it? What makes you think you can do that?
Mr McNeil: The concept of whether you do a wet lay-up or a dry lay-up is an item that I believe Rick has talked to previously in his testimony. Would you like to add a more technical side, Rick?
Mr Rick Machon: Fundamentally, the reason for going into a dry lay-up, ie, removing the fuel and going into dry lay-up, is to allow us easier access to get into retubing, to get the pressure tube issue behind us.
Mr Laughren: I understand, but I don't want a technical explanation. What I want to know is, what evidence do you have that if you do that dry lay-up you'll reopen that plant? People told us there's never been a case of a dry lay-up for that length of time and then having the reactors reopened.
Mr Machon: I can give you some personal experience in that area. As I mentioned, I came from the Brown's Ferry plant, TVA, that was shut down in the 1984-85 time frame. Unit 2 restarted in 1992 and unit 3 restarted in 1995; I think it was 1995. Both plants were in a laid-up condition during that time frame. Both plants were defuelled. Different technology, obviously, vertical versus horizontal fuelling, but they were both defuelled. They were laid up. Most of the systems were dry, air blown through them, dessicant to remove moisture at the time to avoid corrosion problems. Those shared systems that were needed for -- I want to say earth, wind and fire -- electricity, air and water that were required were kept in chemistry and kept in spec. The units came back and they're both operating at very high-capacity factors at this point in time.
Mr Laughren: It's a comparison you can make?
Mr Machon: Yes, to taking care of the equipment, taking care of the systems. The big difference between the Pickering lay-up and the Bruce lay-up is the fact that we're going to defuel Bruce. We're going to leave Pickering fuelled so it will move right into its startup in, normally, the 1999-2000 time frame. Don't forget, again, they were going to be down the majority of next year anyhow from a generation standpoint. That's just to allow us rapid access to get into the pressure tube replacement. We can do some mock-ups and work in advance, those sorts of things, and get ready. It can be done.
Mr Laughren: If and when Bruce A is started up again, what would be your best estimate of its projected life at that point?
Mr McNeil: Depending on the amount of work that is done to return the Bruce A units to service, and it depends on whether you do the boilers and the pressure tubes at the same time -- there are some options; we're still evaluating how you would package that kind of work -- anywhere between the end of its depreciation life, which I believe would be about 10 to 12 years, but if you did a more complete job, and we are still in the process of identifying what that is, you may be able to get another 10 years beyond that out of it. Again, the options analysis we've done on Bruce A has been very preliminary and we've really focused our attention to the option of getting it to the end of its depreciation life, which is roughly 10 years of work.
Mr Laughren: From the time it reopens?
Mr McNeil: From the time it reopens, right.
Mr Machon: One of the advantages we have by not having a 40-year operating licence, ie, going back periodically for licences, is that there is no term to that licence other than to keep justifying moving forward. In the States, to go beyond 40 years you have to go through a whole relicensing process. They call it plant life extension. As you know, a lot of plants are replacing steam generators or boilers in the States and going through some major equipment upgrades. When they get to the end of the 40 years, you have to go through a rigorous regulatory process. It can take five to 10 years to get yourself through the process, to get beyond 40 years. We have this every two years or nine months, depending on what it is, a process that allows us to go through. So the justification can be built as you're going for those units.
Mr Laughren: When Bruce A is laid up, do you then immediately start on the work on Bruce A? You do the Bs first, right?
Mr McNeil: Yes, we'd return the Bs to an operational acceptance level.
Mr Laughren: Yes, to more efficient levels of operation. Let's just stick with Bruce for a moment. At what point then do you start the work on Bruce A?
Mr Machon: I believe it starts to kick in in some significance -- remember that cash flow diagram we had? You'll see that start to rise above base. I think it's about the year 2000-01 you'll start to see an increase as we start the preparation for the work. Coming into 1998, the activities will be -- you're obviously keeping it operating through April 1 normally. Then it will be focused on defueling, getting the systems in a laid-up condition, getting the humidified air etc in it over the remainder of the year, springing some of the resource free, holding it in a laid-up condition until I believe about the year 2000. If you notice when that starts to increase, that --
Mr Laughren: The reason I ask that question is, I'm wondering at what point in that whole process you make your very tough decision on the future of Bruce A; very tough for that community, I must say, as well as for Hydro.
Mr McNeil: Looking towards the Bruce A decision, I would expect the Bruce A decision would be brought forward in the later part of 1999 versus the early part of the next year after that.
The Chair: Mr McNeil, a couple of questions for you. I'm going to go back to Beck 3 that Mr Conway was questioning on. What is the total cost of Beck 3?
Mr McNeil: We have an estimate of about $630 million for the partial development, and for the complete development, which is the 600 megawatts I referred to, the fuller development, it's about $1.6 billion.
The Chair: Has the environmental assessment all been completed?
Mr McNeil: The majority of it has, yes.
The Chair: You did indicate that the larger capacity, the full capacity is a nine-year lead time.
Mr McNeil: Yes.
The Chair: And it would bring in at 5.5 cents per kilowatt.
Mr McNeil: About five and a half cents on average for all the energy.
The Chair: That means you would be able to provide this committee with all the details and background on Beck 3?
Mr McNeil: Yes, sir, what we have today.
The Chair: Thank you, if you'll provide that for the members of the committee, please.
Mr McNeil: Yes, sir.
The Chair: There was a member of the committee who was asking about the possibility of an RFP for Bruce. I don't want to presume her questioning, but it was on the lines of whether Ontario Hydro would be interested and/or willing in terms of opening up an RFP to see if anyone would be interested in operating one or more of the units at Bruce. Do you recall the question that was put to you? I think it was by Ms Fisher.
Mrs Fisher: Yes, it was. It was to refurbish and operate, not just operate.
The Chair: All right, to refurbish and operate. That's obviously not something you can answer immediately, but is that an issue that you would be able to take back and lay a response before this committee within the next several days?
Mr McNeil: I believe I could try to get a response. I can't guarantee what the response would be like. I would have to go back and start looking at what the legal issues are and what the licensing issues are with respect to the operation of that plant.
The Chair: I think that's reasonable. If you can at least provide to this committee what the response would be and what the caveats would be, the committee will then deal with the caveats.
Mr McNeil: Yes, sir, we could do that.
The Chair: It would be helpful if you could.
Mr McNeil: Given the time available, if we were to have a response during this week, it would have to be a very preliminary response.
The Chair: I think the member would find that acceptable at least as a starting point. Then the committee will take it unto itself and begin to peel the onion back in its own inimitable fashion.
Mr Conway: Mr Chairman, just a question for you and for staff while Mr McNeil is here. One of the questions that presents itself to me is Hydro's expected price for power of all kinds over the period 1997 to, say, 2007 or whatever, just on the basis of current expectations and current assumptions. For example, to be told that the price of power at Beck 3 is five and a half cents for the full, larger project is an interesting statistic. I guess maybe this is a question for staff: Are we confident at this point that we have out of Hydro all that we need in terms of the other prices quoted, the assumptions underlying prices, so that we've got a good context as to what the pricing assumptions and the price delivered to Hydro of alternate power would be over the period of the next five to 10 years?
Mr Robert Power: I hate to say this, but the short answer is that Mr Campbell has responsibility for that issue and he's out of the room at the moment. From my perspective, no, we haven't got that stuff completely yet.
Mr Conway: It's interesting to be told it's five and a half cents, but I'd want to know in what context that figure sits. What are the expected prices of the power delivered from the returned nuclear plants? What are the prices being quoted downstream for gas-fired electric power?
The Chair: That's a reasonable request. We've been working in that direction, to piece together that jigsaw puzzle over the last several weeks. I'll take it upon myself to work with research, with staff and with all of our deputants to see if we can start piecing this together.
Mr Conway: I'm sure Mr McNeil has a substantial amount of data that he will be happy and willing even to share with us.
The Chair: I think it could be here shortly.
One final question: I want to make sure I was clear for Beck 3, or for Beck at least. Your evidence was that there was at least an additional two terawatts in the river.
Mr McNeil: Yes, sir.
The Chair: And we're looking, at least in the shortfall, for 4,000 megawatts.
Mr McNeil: During the interim period of time that the Pickering A and Bruce A plants are shut down. Again, Sir Adam Beck would not be delivered within that time frame. Sir Adam Beck is one of those options we would look at to compare the business case for reinvestment in Pickering A or reinvestment in Bruce A.
The Chair: We're looking forward to receiving that information from you. I thank you now, Mr McNeil. If you'll just relax for a moment, it's time to turn the spotlight over to Ms Malen Ng. Once you've made your presentation, Ms Ng, would you be good enough then to know that we will also open up the questioning with Ms Clitheroe here. I think it would be appropriate that you both join in the responses. In fact, I think it would likely be appropriate, since we're dealing with the financial implications and all of the issues, that all of the deputants be available for questioning as we move into this round as well. If you'll make the presentation, I appreciate that.
Ms Malen Ng: Good morning. My name is Malen Ng, as Pat has indicated, and I am the vice-president of corporate finance in Ontario Hydro. I have been in this position for about a year and I report to Eleanor Clitheroe, the chief financial officer.
My involvement in this particular process is to support the CFO in providing a corporate consolidated view of all the NAOP-related impacts and reviewing the overall impact on Hydro's finances.
I believe you all received last week a copy of the presentation that I'm going to use. The information contained there is actually very similar to that which was presented to the board of directors in their August 12 meeting. The numbers, the themes and the issues are essentially the same. One difference, though, is that in the August presentation we provided the impacts of three scenarios relating to the return to service of the A units, given that the decisions were yet to be made. For a better focus in this presentation, I have narrowed the numbers down to the scenario whereby Pickering A and Bruce A would be returning to service. I believe you have the presentation that actually extends the graphs to make it three bars instead of one bar in terms of the results.
Turning to the presentation, page 2 of the material you have contains an outline of what I propose to cover. Last week, Rick Machon talked about the nuclear asset optimization plan, Pat McNeil talked about the power systems implications and they both discussed the cost components that are related to those actions.
What I wanted to provide today is the corporate consolidated view of all the impacts, starting with the basis for the corporate financial implications and then talking about the sum of all the impacts that you have seen; the financial outlook that incorporates all the incremental impacts; the risks surrounding that outlook and the issues associated with it; and last but not least, given the significance and magnitude of the dollars, discuss a bit some of the ongoing reviews that will be there to flesh out the plans and to review the costs.
First, the basis for the financial implications: The 1997--99 business plan was used as the basis to identify the incremental impacts. The 1997--99 business plan was a plan that was prepared late last year and approved by our board in January of this year. We had then extended the three-year plan to the year 2001 to allow for a five-year picture. Then we layer in the impact of the NAOP, plus the Genco actions.
Very quickly, in terms of some of the assumptions underlying that plan, specifically noteworthy is that, for example, we have assumed no growth in revenue over this period, which essentially means no sales growth and no price increases. The no sales growth is a conservative planning assumption, as our most likely forecast calls for about a 1% growth annually over that period, but for financial prudence, we have basically assumed that there is no revenue growth. One thing I should note is that this year's business plan is being prepared right now and obviously these assumptions would be updated during that process.
I want to introduce the financial review by looking at some of the overall impacts. The information here is shown in terms of total impact over the 1997--2001 period. The numbers you're looking at there, which are increments over the business plan for the five-year period, have shown the impact based on both Pickering A and Bruce A returning to service after their lay-up, and the second scenario essentially assumes that Bruce A and Pickering A would not return to service after the lay-up.
Going down the line, we've shown you the impact in terms of higher OM&A, the impact of the replacement energy costs which Pat has talked about and the interest costs as a result of not being able to pay down the debt as originally expected. Those are primarily the ones that are causing the operating impact on net income to the tune of about $5.3 billion under the first scenario and $4.2 billion under the second scenario.
On top of that, there are also write-offs that must be considered. If it's decided that Bruce A and Pickering A are not to come back into service, then there needs to be a write-off pertaining to the remaining book value of the A units. There also has to be a write-off pertaining to the construction projects that are currently in place, also related to staff costs and some other provisions. In the case whereby Bruce A and Pickering A will be returning to service, the only write-off that would be needed is the write-off of the construction projects at the Bruce A stations, because the number of years between the lay-up and the return to service would be long enough that the value of those construction projects would be questionable.
When you add up the total impact on net income, which is sort of a measure of an operating statement impact, it's about $5.5 billion for the first scenario and $7.6 billion for the second scenario, which is the bound of the $5 billion to $8 billion that had been referred to previously.
On top of that, what I've shown on the bottom line is what we call capital expenditures. As a result of the incremental work in the nuclear, fossil and transmission areas, some increase in capital expenditures would be expected, to the tune of about $1 billion, over the five-year period. I should note that the impact on net income from these capital expenditures has already been embedded in the above numbers, so it's probably not appropriate to add the two.
This is sort of a high-level summary of all the numbers. What I'd like to do now is actually go through each of the components and show you what some of the components are.
First, look at the total operating cost increases. Notice that the biggest component in terms of the increase over the previous plan for each year is primarily in replacement energy cost, which is the number that Pat has been talking about. On the bottom bar there is the OM&A cost, made up of both nuclear and fossil, and on the top, the other, primarily the interest as a result of the increased expenditures.
In terms of the replacement energy cost, this chart here shows you the makeup of the higher fuel cost as a result of the higher fossil generation and the component as a result of the loss in secondary sales profit because of the curtailing of the secondary sales as a result of lower nuclear production.
One thing you should note as you go through the years 2000 and 2001 is that there is a decrease in the replacement energy cost as the Pickering A units are expected to return to service in this scenario.
In terms of OM&A costs, primarily nuclear, related to the work that Pat and Rick talked about at the last meeting, also, in terms of fossil, these are the incremental fossil costs, about $75 million a year, in relationship to the higher fossil generation and to improve fossil reliability.
From other cost increases, again three components there: The biggest component is the interest and depreciation that I talked about earlier on. The increase in interest is because of the increased cash expenditures that will be needed to fund the NAOP-related actions. As a result, we will not be paying down our debt, and as such, interest costs will be higher.
Another component is heavy water revenue. Here, what we have assumed is that as a result of the shutdown of the Bruce heavy water plant, there is a potential loss in the heavy water revenue associated with the AECL contract. This is a conservative planning assumption and current discussions are still going on with AECL pertaining to that contract. There is another piece related to some changes in provision levels. Those are the impacts on current operations.
Now look at the capital increases. A large part of the capital increases over this period, a total of about $1 billion over the five-year period, is related to nuclear. Again, I think Rick has talked about some of the work that's necessitated through NAOP. Then Genco, those are the costs associated with some of -- the air emission strategy, some of the Lennox conversion to gas. Then we also have a piece associated with transmission expenditures, and that's a piece that's needed to increase the transmission capacity to carry additional generation from other sites as a result of the loss of nuclear generation.
This looked at all the incremental impacts. It's just a very quick walk-through in terms of consolidating the stuff that you had seen from the last two presentations.
Now, looking at the impact on the current financial outlook, incorporating all these incremental expenditures, this is the net income that was previously projected in the business planning process, and as a result of all the incremental expenditures we just talked about, we're going to find net income coming down significantly lower than previously planned. As a matter of fact, assuming that rates are being held constant, the company will be in a net loss position for the next few years, and also net income will be below the SDR level. I will come back to this SDR level later. This SDR level is an amount that the board is obliged under the PCA to ensure it's collecting in rates. We'll come back and deal with that issue.
With the net loss, we're expecting that there will be a draw-down in our equity or our retained earnings over the years, whereas in the business plan we were expecting that the net income each year would be added to our total equity amount with an increase. Here we're basically looking at a completely different trend.
Another element is the debt outstanding. Over the last few years -- if you notice the curves here -- Hydro has been paying off its debt, specifically from 1993 to 1996, with pay-down of close to about $4 billion worth of debt. This is made possible because our revenues include a charge for depreciation for our facilities that are currently in service, and that depreciation in the net income that we get is significantly higher than the amount of capital expenditures that have been needed over the last few years. What that means is that there is a lot of internally generated cash flows available to pay down our debt.
In the previous plan we were actually projecting that the debt would continue to decline, to the tune of about $7 billion to $8 billion, from 1997 to 2001. With the increased cash requirements from NAOP and a lot of the generation-related actions, that means essentially debt will remain quite constant. Instead of declining by about $7 billion to $8 billion, we are looking at debt declining by about $1 billion to $1.5 billion over this period. Having said that, though, it also means that all the incremental cash flows from NAOP and the replacement energy costs can be accommodated within the internally generated funds.
A quick look in terms of the increased cash requirements as a result of NAOP; again, you have looked at some of these components before. The largest component is the replacement energy cost and there is the OM&A cost as well as the capital cost. "Other" is primarily the interest charges as the debt increases from what it would otherwise have been.
In summary, when you look at this outlook, it's definitely a much more deteriorated outlook compared to what previously was expected and the outlook is subject to a number of risks, as are any other forecasts: some external risks pertaining to the sales forecasts, the revenue forecasts. Given the high level of our debt, we're very vulnerable to changes in financing rates, interest and foreign exchange rates. As a result of a high fossil generation, we're also very sensitive to fossil fuel prices. Some of the internal risks are, for example, nuclear performance and costs en route to nuclear plan recovery and also the cost of other operating facilities. At this point in time a review is being conducted on all the other operating facilities, be they hydro-electric, fossil, transmission or distribution. The review is intended to be completed -- I think one part of it, which is the physical condition, is intended to be completed by the end of the year, and the other one, which is the management processes, early next year.
Given the outlook, coming back to look at the SDR issue, under the PCA the Hydro board is obliged to set rates that are sufficient to recover costs, and "costs" is defined in the Power Corporation Act including a component for statutory debt retirement. It's a prescribed formula which calculates an annual amount that has to be recovered in rates by the Hydro board. Also included in "costs" is a discretionary amount which the board can set aside for reserve as part of a net income as well.
If you look at the financial outlook again, with the net income forecasts or the net loss forecasts for the next few years, there is a bit of a question in terms of how the board would be able to meet its fiduciary responsibility in terms of the SDR.
The board operates, under a normal situation, in a rate-regulated environment. The board, under this kind of situation, would be considering a rate increase. Given the government policy of a rate freeze until the end of the decade, there are three additional options available to the board in terms of meeting the SDR. In the absence of a rate increase, the board can choose to exclude NAOP-related costs from rates each year to achieve the SDR, and the second and third options are for the board to apply a rate ruling which then accounts for the costs differently in terms of either bringing them forward into 1997 or deferring and amortizing them.
One thing I should note is that none of these three options changes the actual cash flows to the company. It's basically choosing the way the costs are being accounted for or reported for rate-setting purposes.
In the first option, this is the net loss that will be reported each year. After exclusion of the NAOP-related costs, this will be the net income that can be used for rate-setting purposes, allowing the board to actually be able to achieve SDR on a legal basis.
The second option is a rate ruling. A rate ruling is really an accounting treatment available only to rate-regulated monopolies whereby the board of directors can choose to include costs in rates in a different period than the costs would normally be accounted for under generally accepted accounting principles. So in this case what it would mean is that the board would charge to 1997 all the incremental costs associated with NAOP in 1997, hence excluding them from the subsequent years and allowing the net income to meet the SDR level. One thing it does is turn the retained earnings into a negative amount starting in 1997, and our understanding is that legally the board is not constrained with respect to negative retained earnings.
The third option is again applying the rate ruling, in this case to defer and amortize the costs each year over the future period. In this chart we have used a 40-year period, which enables the net income in each year because of the deferral of costs to meet the SDR level in subsequent years. Obviously, one issue here is that with imminent industry restructuring and introduction of competition, to have a regulatory asset over a 40-year period is questionable.
In the end, there are these options that have been available and the board would need to exercise its judgement in terms of considering all the tradeoffs in terms of what is the appropriate course of action.
We've talked about the SDR issue, which is relevant under the current monopoly regime and under the current PCA. Another dimension to look at is really the issue of stranded debt. Stranded debt is really costs which are not recoverable or debt that cannot be serviced under market prices when there is a transition from the monopoly regime to a competitive market. There is definitely a very high degree of uncertainty surrounding any estimate of stranded cost simply because it's so much dependent on market prices, and market prices are so much dependent on a myriad of factors, be it the industry structure, be it the market, be it the timing, be it the amount of capacity surplus that's expected, be it fuel prices. IIPA have identified that significantly greater expenditures would be needed to address the nuclear issue and the significantly greater expenditures would potentially increase stranding. On the other hand, though, there is that improved long-term expected nuclear performance which provides some mitigation to the level of stranding that will be there as a result of the market opening up.
Last, but not least, I want to quickly cover off some of the ongoing review processes in place, given the significance and magnitude and the impact of the NAOP and the related actions. One of the starting bases is the independent financial review that has been done by our external and internal auditors. The auditors reported their recommendations to our board of directors in September, and you have all got a copy of that.
A number of actions are currently ongoing and initiated to address these actions. Some have been completed, such as the documentation of the range of options, and some are still ongoing. Also, internally, there's a lot of work ongoing at this juncture to further flesh out the costs and the plans as part of the business planning process which will be brought forward to the board in December for approval in January 1998.
The monitoring and reporting processes are currently being established as well. That would include a process to control the ongoing release of funds, subject to business pace, as well as regular reporting of status and monitoring of status in order to make sure NAOP stays on track.
This concludes my presentation. Eleanor and I would be happy to answer any questions.
The Chair: Anything else to add to this, Ms Clitheroe, before we begin the round of questions?
Ms Eleanor Clitheroe: No. I'll just take any questions the committee might have.
The Chair: We will begin the questioning with Mr Conway.
Mr Conway: Let me begin with you, Ms Clitheroe. What is the operating assumption at corporate head office these days? Do you or do you not believe that you have an obligation to meet your statutory debt retirement obligations?
Ms Clitheroe: As Ms Ng pointed out in her presentation, there is an obligation to meet the SDR requirements of the Power Corporation Act. The methodology in which those SDR requirements can be met is under consideration by the board, and that decision hasn't been taken yet.
Mr Conway: But it is clear the assumption is that you have an obligation to meet the statutory debt retirement obligations as set out in the Power Corporation Act?
Ms Clitheroe: It's the operating assumption that the provisions of the Power Corporation Act govern the corporation and that the board is obliged to --
Mr Conway: No, listen. I'm getting very testy here because this is a remarkable presentation at one level. It's more theological than anything else. I want to get down to basics. The basic view of corporate head office is that the Power Corporation Act obligates you to meet on an annual basis a statutory debt retirement obligation, yes or no?
Ms Clitheroe: Yes, the obligation is to meet the Power Corporation Act requirements around the SDR. The methodology that the board is going to adopt to meet those requirements has not yet been established.
Mr Conway: But the methodology surely cannot subvert the first principle, which is that there is a statutory debt retirement obligation as set out in the act that must be met.
Ms Clitheroe: The methodology is not to subvert the Power Corporation Act; the methodology is to implement the requirements of the Power Corporation Act.
Mr Conway: That's helpful.
This is an open question and I don't really care who answers it. I would certainly like to have staff weigh in, because I'm no expert in this. The way I read the data, particularly from page 15 on, the financial outlook risks, if I look at your chart on page 17, the financial outlook, that and subsequent charts, Ms Ng, through the years 1998, 1999, 2000 and 2001, Ontario Hydro will be reporting negative income.
Ms Ng: It will be reporting negative net income if the board does not choose to adopt alternatives 2 and 3. If they choose to adopt alternatives 2 and 3, by virtue of bringing the cost forward to 1997 or deferring it to future periods, they will be reporting a positive net income.
Mr Conway: I think somebody over the way said that's just a shell game. This is where I'd be happy to have counsel or someone weigh in, because I just feel like I'm being had here. This is just not very satisfactory. You give me the impression that you're bankrupt. This basically makes me believe that Ontario Hydro over the next few years is bankrupt. You've got more debt than you've got income and you've got no ability, without the most bizarre financial chicanery, to meet your statutory debt retirement obligations. You're bankrupt, you can't service your debt, you're going to be hit with industry restructuring and you're hoping, according to this, that options 2 or 3 are going to allow you -- I don't quite frankly understand how they're going to work. Maybe you could help me with that.
You've got three options, and I notice you begin the options by saying, "In the absence of a rate increase...." Well, the government has said there's going to be no rate increase, so let's get that off the table. Your three options are: You're going to exclude this multibillion-dollar recovery plan from the picture -- that in itself is positively breathtaking, but that's apparently what option 1 is; option 2 is to apply the rate ruling to accrue the NAOP-related costs in 1997; option 3 is to somehow string it all out over a 30- or 40-year period. Is that what you're telling me in option 3?
Ms Ng: Option 3 is a deferral and amortization over a 40-year period.
Mr Conway: An awful lot of corporations would love to have that as an option they could put on the table under these conditions.
Ms Ng: I think I did mention that the rate ruling is only an option that's available to regulated monopolies, and I did raise the issue of the questionable period of amortization given the imminent industry restructuring.
Mr Conway: Explain option 2 to me again, "Apply the rate ruling to accrue the NAOP-related costs in 1997." Explain that in layperson's terms.
Ms Ng: It's basically saying that there are incremental costs from NAOP that have been identified for the subsequent years. The board, under a rate ruling, can choose to accrue those costs and provide for them in 1997. So it's basically taking these incremental costs and recognizing them in 1997.
Mr Conway: If I look at these charts, pardon me, I just look at this and say: "You're broke. You're bankrupt." You don't have enough incoming revenue to meet your expenses, including your statutory debt retirement obligation, and you're not easily going to have that over the next three or four years.
Ms Ng: I think if you look at the operating statement, yes, without any rate rulings, there is going to be a net loss over the next few years. Equity remains positive during that period. The other thing is that in terms of cash flows, in terms of the cash flows to service business requirements as well as the debt obligations, there are sufficient cash flows generated when we go through the debt outstanding chart, when we go through the internally generated cash flows.
Mr Conway: But that's only with the depreciation allowances that you talked about earlier.
Ms Ng: But the fact of the matter is that there are sufficient cash flows and there is positive equity. I agree absolutely with you: This is not a very favourable set of financials at all.
Mr Conway: I'm trying to imagine even your equity situation, because we're heading into a competitive market in the next six to 18 months and I've got to believe that once we get into that, the equity situation of Ontario Hydro is going to be affected to some degree. Would that be a reasonable assumption?
Ms Ng: Yes. I think all the numbers that you've seen are prepared under the current regime and under the PCA. Pretty clearly, with the imminent industry restructuring, the whole issue about stranded debt and financial restructuring has got to be part and parcel of the whole discussion.
Mr Monte Kwinter (Wilson Heights): I just want to pick up on Mr Conway's comments. One of the problems I have is that Ontario Hydro is using an assumption that may not be accurate. You're saying all of these assumptions are based on a regulated monopoly. If with, let's say, the white paper, or whatever happens, we're into a new regime, none of these assumptions apply. Notwithstanding that, you are making commitments based on the old assumptions when we are on the threshold of new assumptions.
It would seem to me that something doesn't ring true here. We have been told that all of the nuclear reactors are safe, we have been told anecdotally that even at Bruce and Pickering we could still go on for a number of years without any significant problems, and somehow there is this rush to judgement. There is this rush to commit to this particular program when all of these things are happening or are going to be imminently happening.
Why was there this great rush and why would the board of Ontario Hydro not get all of the information you've identified as the risk factors before they make their decision? What you have said, I assume, in your presentation to the board, is, "Here are some of the things that are at risk and they're very significant." If any one or more of them should happen, what you have described as a very bad situation would be catastrophic, yet the board has said, "Well, we will approve it; we will monitor as we go along," but they're making their decision on assumptions that any reasonable person would look at and say are not likely to be. Do you have any reaction to that?
Ms Clitheroe: Perhaps I can answer, Mr Kwinter. With respect to the regulated monopoly assumption, it is correct that the board must, while the Power Corporation Act is in existence, operate as a regulated monopoly. We are, as are other industry participants, expecting some form of industry restructuring through the white paper or others. We note that the white paper is in fact referenced in your own terms of reference for the committee, so we do expect to see some sort of industry restructuring. But until that industry restructuring takes place and the new rules are outlined, the new assumptions, if you will, are incorporated into legislation which would govern Ontario Hydro, the board can only operate under the assumptions that it currently has or under the rules that it currently has under the Power Corporation Act.
It does raise difficulties for the board in reviewing material, in making decisions around a time when it becomes evident that there's going to be substantial change, but it doesn't obviate its requirements to operate under that piece of legislation and operate as a regulated monopoly until it can do otherwise.
With respect to your comment about the rush to commit to judgement, I'm assuming what you mean there is the rush to take a planning decision to bring the nuclear reactors up to world-class standards. Am I correct in assuming that's what you meant by that comment? Yes.
The board had been reviewing material starting in 1996 with respect to the performance of the nuclear reactors and had begun a program, for which it had taken a provision the prior year, to bring those nuclear reactors up to standard. As it reviewed the program through the fall of last year it became apparent that the pace at which the issues around the reactors were being corrected was not fast enough to satisfy itself that the turnaround of the nuclear recovery was going to take place as it had expected.
Because of that, the board began its search for what turned out to be Mr Andognini and his team. Mr Andognini began in January 1997; most of the team I think was in place by February and March. Mr Andognini began to make reports to the board beginning at the front end of 1997, obviously, originally quite preliminary reports as he began to do the IIPA and to uncover material, and perhaps more in depth to the nuclear committee of the board, but certainly a monthly report to the board on his findings. Each month's findings built on the previous month's findings, so the board was not unfamiliar with Mr Andognini's view of the extent of the nuclear problems he was uncovering.
What had not been discussed in Mr Andognini's report, because he had not yet formulated a plan, was Mr Andognini's proposal for how to address those problems and how to recover the 19 nuclear units. He had been investigating both the technical and the management and other issues, some of which, by the time his report was prepared in July and was presented to the board in August, he had reported on to the board; some of which he had reported on that he had not been able to completely uncover all of the issues associated with them; some of the problems he'd merely identified that there may be something further to look at, so that he identified there was further work to be done.
When the board received Mr Andognini's report in August, the August 12 board meeting, they weren't coming at it from the point of view of saying this is something that he had sprung on them, that they had not been aware of. In fact, the reason they brought in the team was because they had been aware of the issues and had been wanting the team to get to the extent and magnitude of the issues and hear his proposal for turning those issues around.
The report went to the board to advise the board of Mr Andognini's findings and the proposal he had for recovery, during which meeting, you're quite correct in saying, not only did Mr Andognini and his team and the generation group present the issues around the recovery, but we also presented very similar information to what you have just seen with respect to the potential financial impacts of the recovery, with the commentary that there were risks around that as well as that there was a lot more work to be done to dig into the financial issues raised in particular by this report.
The board at that time decided that for planning purposes we should proceed on the basis, as we moved into the 1998-2000 planning period, that Mr Andognini's report would be adopted and that we should be planning around doing the work around coming back with the further analysis around that plan. So for purposes of our going forward as management, we were to plan to implement that, to bring that forward in the 1998 business plan.
The comment that you make around the rush to commit I think doesn't put in full context the amount of time the board had spent leading up to that date and the amount of time it expected to be spending post-August 12 in reviewing and implementing the proposed nuclear plan.
The Chair: That wasn't a particularly helpful answer for me, Mr Kwinter, but it may be for you. I want to move on to Mr Laughren.
Mr Laughren: As someone who has been a strong proponent of public power at cost as long as I can remember, I'm troubled by what I see unfolding before us. Believe me, I don't get any satisfaction out of it.
Am I right in saying that if you exclude the NAOP costs from the numbers, if you will, that's almost like building a new plant and not allowing the cost of that new plant to be brought into the rates until it starts feeding into the system, the way Darlington was built and not charged into the rates until it started supplying power? Is that an analogy that's appropriate?
Ms Clitheroe: One of the options that Ms Ng had in her presentation was the accrue and amortize. That would be similar, I guess, in terms of the capitalization and amortization. In the case of the plant, of course, you don't begin the amortization until you actually bring the plant into service.
Mr Laughren: So there is a similarity there. It's pushing what you have to do now off into the future in terms of it being reflected in the rates, is it not?
Ms Clitheroe: Yes, that's correct.
Mr Laughren: In a sense, it's buying time because of a government directive that there be no rate increases, because it seems to me that as financial persons, if you had your druthers, you would reflect the NAOP costs in the rates as those NAOP costs are incurred. Is that correct?
Ms Clitheroe: As a financial person, I'm always interested to see a more attractive balance sheet and income statement than what is portrayed here in this material. On the other hand, as a financial persons, I also have to take into account the circumstances in which such a rate increase might take place. So the financial statements are only one aspect of what would precipitate a rate increase.
Mr Laughren: Do you think that what you're contemplating doing in order to meet the requirements of the Power Corporation Act vis-à-vis the statutory debt requirement -- and this is a tough question for you perhaps, but do you think that the options you're considering in that regard are in keeping with the spirit and intent of the Power Corporation Act concerning the debt?
Ms Clitheroe: Yes, I do. The Power Corporation Act has to be taken in its entirety, and the powers of the board in terms of its ability to accrue and amortize or to take a rate ruling are all part of what was anticipated in managing the financial condition of the company. So I do. Clearly there are several alternatives that the board has to face and weigh all the factors in making that particular decision.
In the light of the government policy on no rate increase, in the light of the fact that there is a monopoly in place and that the rate guarantee of the government is in place, I think all of those options are available to the board.
Mr Laughren: I guess this isn't the first time we disagree on a financial matter. It seems to me that this really does subvert the spirit and intent of the Power Corporation Act vis-à-vis debt retirement. When I think about that, I remember thinking about it in another light as well, that this really does violate it, but that's my opinion on it.
Could I ask you about the options that are now before us and you, basically because of the decisions you've already made as a board. Please permit me to be hypothetical for a moment. If the Hydro board had decided not to proceed with the nuclear recovery plan, the set of numbers that Ms Ng showed us this morning, with the permanent loss of revenue from Bruce A and Pickering A -- let me use both of them for the moment -- the set of numbers that we've been debating here this morning would be substantially different, would they not?
Ms Clitheroe: I guess that is a subject of debate. The original business plan had the original recovery program built into it, with the provision that had been taken in 1996. The expectations were that the recovery program was going to be effective and that you would get the production levels out of the nuclear plants that the plan incorporated. Given that the board and management felt that the recovery program was not effective, it is highly unlikely that had we continued to proceed, we'd actually get the production out of the nuclear plants. Had we not adopted the plan, would things have unfolded as we expected under the business plan? I expect not. We perhaps would not have been in a position to plan for them not unfolding that way had we not recognized it, but I would think it is unlikely that they would have proceeded on the original plan.
Mr Laughren: The point I'm trying to get at, and I hope it's not too circuitous, is that I wonder if the board had many options. If it was going to come to a point of actually being able to, in whatever fashion, meet its obligations under the Power Corporation Act vis-à-vis debt retirement, if you had put numbers up there on that screen that showed you with a substantial drop in revenue because of competition coming in and the energy not being generated by Ontario Hydro but by gas-fired turbines etc plugging into the grid, if that had been the case, I wonder how much worse those numbers would have been that we'd be debating this morning, because it seems to me that you desperately need those revenues that are on those slides. I think among us there's a lot of scepticism that even if you proceed with this recovery plan, you're not going to get those revenues. If you had not proceeded with this plan, the revenues would have been even less, so I am really sceptical about the assumptions built into your revenues on these slides.
Ms Clitheroe: Your scepticism is driven off of the notion that the industry will open up, that there will be competitive forces and that Hydro's generation would not be attractive in that market.
Mr Laughren: That's right.
Ms Clitheroe: The business plan that we had put forward, the one that you're seeing as the baseline in those slides, when we put that forward to the board, we indicated that we were not taking into account a loss of the monopoly in that plan. We recognized that there was a potential loss of the monopoly if the government took action to change the policy around industry, but we did not build into the plan a loss of revenue as a result of loss of the monopoly.
Leaving aside NAOP, if we were to lose the monopoly, we had discussed internally that we felt we would lose some of our higher-cost generation in competition with generation being brought in from other provinces or from the United States. That primarily would have been probably our fossil plants, which would not have been as competitive in some circumstances; less likely that it would have been a hydro-electric or nuclear on the margin, ie, running the operating costs of running the plant.
We had a concern around that drop in revenue, and that was as a result of losing the monopoly, if that were to occur. That was part of what was driving the restructuring from 1993 onward, to try to put the company into a more competitive mindset and into a more competitive cost structure with a view to thinking that it would eventually occur, that as the North American industry restructured, so would ours in Ontario.
Mr John O'Toole (Durham East): Thank you very much for appearing before us before; there were a number of good questions. You mentioned, Ms Clitheroe, as a professional accountant or as an expert in that area, you'd like to see a little more black ink. Do you support the NAOP plan?
Ms Clitheroe: From the point of view of bringing the nuclear units into a higher productivity, I certainly support the nuclear plan. As it stands, the production from the nuclear reactors on the margin is the cheapest electricity that can be generated in Ontario, and the more production we can get out of those existing plants the more favourable our income statement is going to be.
Mr O'Toole: Just on that, on a very simple level, what is the cost of nuclear power? I'm somewhat confused with respect to full-cost accounting. You say that's your qualifications. Are the accounting costs real, all on the table, and what is the cost per kilowatt? We can clearly say three and five cents for other forms of power. What is nuclear?
Ms Clitheroe: If I can just differentiate what you had said there in terms of full-cost accounting and marginal accounting, which I had been referring to in my previous --
Mr O'Toole: All the private companies are full-cost accounting. Your competition is using real accounting methodology as opposed to "throw it in the debt basket."
Ms Clitheroe: As do we. The issue would be, given that we have plant built and our competition has plant built, whose production would be the cheapest. So if you think of the existing plant as already built and sunk costs, how much does it cost you to run that plant would be the way people would make a decision about what power was cheapest. If we could run our nuclear plants on the margin at two cents and somebody could only run theirs at three cents, we would run ours and take the additional income that would bring us. A different decision would be taken if you were building new plant, and that's where your comment about full-cost accounting would be.
Mr O'Toole: I have some problems. If you look through your statements here, statement 19 tells you that you're overbuilt, your assets are basically -- you've got to write off about $15 billion to be equal. So you've got a lot of baggage in the rates that doesn't show in the rates. I don't believe the two or three cents; I think it's more like six cents in nuclear. If you had to really be competitive, you wouldn't be competitive. I'm referring to the Ernst and Young report as well. They question very seriously some of the underlying assumptions. You're aware of that. I'm sure you've read it in detail, in probably more detail than we have.
One of the factors that I question is the aging factor. All this stuff is predicated on a 40-year lifespan. What, in your view or your expertise, is the anticipated plan for writing off these assets, and are they real? What's the number? It sounds to me like they're only going to be half the life.
Ms Clitheroe: The question is, what is our plan for writing off the assets?
Mr O'Toole: What is the life of a nuclear plant?
Ms Clitheroe: The current assumption on the life of the nuclear plants continues to be 40 years. Some of those are obviously into their life and so don't have an additional 40-year life.
Mr O'Toole: It sounds like two of them are done and they're not 40 years.
Ms Clitheroe: Two of them are the ones that are in question. When Ms Ng put up the slide that indicated the two options, Pickering A and Bruce A units' return, she noted that there would be some construction work in progress that would have to be written off, in and around the $300-million mark, as a result of the lay-up time frame. But with respect to Pickering A and Bruce A not being brought back, if they are not brought back, then the write-off of those units would be the noted figure there of $3.4 billion.
Mr O'Toole: Even the $3.4 billion isn't full either because really you have to greenfield that site. The decommissioning costs, I think the assumptions there are seriously suspect. I'm not an expert, but there have been people here who suggest that maybe those have been also numbers -- how much debt will be outstanding when the nuclear reactors have completed their useful life? In other words, you've paid for a plant -- probably the case could be made you overpaid -- you've used the wrong calculations for depreciation and there's going to be an amount of the debt left at the time of its useful ability to generate revenue. How much debt is going to be left when Bruce A and Pickering A are terminated?
Ms Clitheroe: The remaining book cost of those plants combined is the $3.4 billion that I've just referenced you to.
Mr O'Toole: We'll take that as weighted. Just in the purely financial realm, not to be too harsh but very specifically with the showing of negative retained earnings and a questionable debt-equity ratio, all the underlying fundamentals aren't there, period. If you were trading on the market, you'd have a lot of trouble. Are there any control mechanisms in place to require Ontario Hydro to get provincial government approvals at certain phases of financial -- or bonds? Are there formal processes where the province actually has the ability to say yes or no?
Ms Clitheroe: Yes. All of the debt of Ontario Hydro is government-guaranteed and that guarantee stretches back a long way; I think it probably has always been in place. So at the time that bond issues are raised, the government must approve those bond issues by providing the guarantee.
Mr O'Toole: Without the government's guarantee, would you be able to float your bonds? If the government wasn't fundamentally underwriting your debt, would you be a viable entity? Is it not, first, the government's inability to really bring to bear its concerns and yet it's the government's ability to underwrite all this debt that keeps you solvent? Isn't there a problem there?
I'm not trying to be hard-nosed here. I just think that we represent basically the people of Ontario. They're saying that it's $30 billion now in debt. This plan will put them $40 billion in debt. The plants will be finished; by the time you get those plans all implemented, you'll be closing half your assets. The others will also be aging. We're going to end up with $50 billion and be right back here in another decade saying: "What's happened? It's now $64 billion." That's the direction that all of the underlying things tell me. I think you would have to deal with this more seriously if in fact the government wasn't there underwriting and the people of Ontario assuming this debt. I want you to answer it in this respect: How and who in an unregulated market should be paying that money back? Who should be paying it back to whoever we owe it to?
Ms Clitheroe: You've asked a number of questions there.
Mr O'Toole: Yes. There are two main ones, though.
Ms Clitheroe: Could we float our debt without the government guarantee? Of course we don't know that because we have never attempted to do that. However, we have been advised in the past that we could. Whether that is accurate or not, I don't know, and we certainly haven't pursued it because it hasn't been an option that's on the table.
With respect to the question of solvency, I'd like to come back to that because the cash-flow chart that Ms Ng put up indicates that we have sufficient cash to pay the debt and to pay the bills, so there isn't a cash solvency issue. I'm not denying that the financial statements are unattractive, but there isn't a solvency issue.
With respect to the issue of the debt and the expectation of where the debt would go to, the expectation that we had under the base plan that was outlined to you this morning was that we would be able to bring the debt down by $6 billion to $7 billion over the next number of years. The expectation now is that we'll be unable to do that, but that we'll be diverting that cash that was to pay off that debt for the NAOP. It is not expected that we would be bringing the cash requirements up over that level at this time.
With respect to your last question, in an unregulated market who should be paying for the debt, I guess there are a couple of answers. In the event that none of the assets were stranded assets, the debt would be paid off in the normal course through the energy prices, as it is today. In the event that there were assets that were stranded under the new rules that the government would put out, then there are a variety of mechanisms that different jurisdictions have used. They range from transition charge to transmission charges, debt equity swaps. There's a range of ways that it has been done, and that would be a government policy issue which I'm not qualified to comment on.
Mr Conway: Ms Ng, I want to go back to your paper, Corporate Financial Implications and Issues. On page 4, 1997--99 business plan assumptions, the first line of that, the Canadian dollar relative to the US dollar, 1997, your planning assumption for 1997 is the Canadian dollar will be 74.1 against the American dollar.
Ms Ng: That's correct.
Mr Conway: It's November 4, 1997. I went out yesterday to look at buying some American money and I'll tell you it wasn't being quoted as 74.1. In fact, it was down around 71 something.
Ms Ng: Yes. I mentioned to you that this is the business plan that was developed last year and we're using this to identify the incremental impact of NAOP. Essentially the new business plan is being prepared right now and --
Mr Conway: But my point is, this is what we've got in front of us and I look at that and say, and you heard Mr O'Toole and others here say, we don't have a great deal of confidence in the planning assumptions at Ontario Hydro. We're not alone. Ernst and Young has tabled a report in which they raise many serious questions about the assumptions, financial and otherwise. I see on the first page of your document assumptions around the Canadian dollar and they don't look anywhere near reality. They're not real for 1997. How you get to 1999 with the Canadian dollar estimated to be 77.8 cents relative to the American dollar seems to be extremely optimistic.
Ms Ng: At the time when the forecast was put together late last year, the process we had was to look at all the major forecasters. We consulted with DRI, who actually provide us with all the economics forecasts. It's something that we buy rather than make ourselves.
Mr Conway: But you would agree that this does not appear to be a very realistic assumption for 1997?
Ms Ng: The only thing I can say is that this forecast was already lower than any other forecasts that were on the table last year from all the other forecasters.
Mr Conway: I accept that, but the reality for 1997 seems to be markedly different. I'm now looking at a recovery plan that makes a whole series of very dubious assumptions and we're right at the margin. We're at the margin everywhere. So I wonder what the implications of, for example, something as basic as your Canadian dollar assumption mean for this plan.
Ms Ng: The only thing I can say is that we're probably as wrong as others, probably less wrong than all the others.
Mr Conway: But not very many of the others are faced with the financial crises that Ontario Hydro appears to face.
Ms Ng: The other thing I should let you know too is, we actually made a prudent adjustment to the forecast that we got from DRI and we also built in a $100-million contingency in 1997, $200 million in 1998, and in 1999 we built in $300 million. So from a planning perspective, I try to use the best information that's available at the time.
Mr Conway: That may be very well and good, but all I know is that we've got what we've got in front of us. That's the first thing that jumped out at me when you started through your slides and I thought, "Where are those assumptions coming from?" You tell me you bought them from DRI. That's well and good, but they don't appear to be very realistic for 1997.
Ms Ng: We not only buy it; we also have an economic advisory group that includes a number of major forecasters from investment houses and banks. We take their number and make sure that we pick something that's absolutely more conservative than any of the ones that are on the table.
Mr Conway: I guess it would give me more comfort if I saw a 1997 and 1998 number that was a lot closer to reality than the numbers presented to me here today.
Ms Ng: I'm not sure that maybe we can further increase the prudence by, instead of adjusting it down -- like this year we have gotten a the new DRI forecast and we have lowered it by two cents in order to build in that prudence. You have to rely on the best information and the best expertise at the time.
Mr Conway: I want to come back to a couple of other questions around assumptions. First of all, how much of the current Ontario Hydro debt attaches to the nuclear assets?
Ms Ng: We don't actually allocate the debt by units per se in terms of --
Mr Conway: Give me an approximate figure then.
Ms Ng: I think if you're looking at the book value of nuclear, it's somewhere over $20 billion. I would suspect that if you want to do some kind of an allocation, that may be an approximate sense.
Mr Conway: So approximately two thirds of Ontario Hydro's existing debt attaches to nuclear assets. I just want to get a ballpark number.
Ms Ng: Like I said, we don't allocate it, but I can tell you the book value of the nuclear, and if you can associate the debt and equity to it, that may be something like what you've just said.
Mr Conway: I'd like a written response to the committee as best you can give it on that question: How much of Ontario Hydro's existing debt attaches to nuclear assets?
Ms Ng, one of the questions I have again -- you know, it is absolutely clear to anyone that we're on the brink of major change in the electricity sector. What I want to know is, has anybody in your office run a model of what the competitive environment is going to mean for Ontario Hydro's financial situation? Has that modelling been done?
Ms Ng: We have definitely looked at some of the hypothetical scenarios, and that formed the basis of the disclosure we had in the 1996 annual report whereby we talked about the introduction of competition and some of the potential implications. Basically, whatever internal analysis that was done formed the basis of the information that's in there. I think Mr O'Toole just now was talking about note 19 and that's essentially what I'm referring to.
Mr Conway: I look at the Ernst and Young report and there's a whole series of questions around not only what is but what's about to happen. I find it incomprehensible that the staff would give to the board for August 12 a multibillion-dollar recovery plan that doesn't appear on the face of it, and I suspect there was a lot more going on at that board meeting than we'll ever know, but there does not appear to be a great deal of workup about the implications of a competitive market, particularly around a lot of the costing and other assumptions that went into the so-called nuclear recovery plan.
Ms Ng: As Ms Clitheroe has just indicated, until the government puts forward its policy decisions in terms of what would happen in terms of the industry restructuring, the board is operating under their obligation under the current PCA and the current regulatory regime, and that's essentially what the information is based on.
Mr Conway: That's unbelievable. You're committing the taxpayers of Ontario, the ratepayers of Ontario Hydro, to a 10-year multibillion-dollar recovery plan, the out years of which I think are 2007, 2008, if you look at the potential pullback of the Bruce plant. We know, all of us, that before the decade ends, we're going to be in a very different kind of electricity market. It just doesn't seem possible to me that people who have your kind of credentials and your kind of experience would give to the board submissions that didn't in a very real and meaningful way take that into account, because I've got to believe that competitive marketplace is going to produce a totally different kind of analysis of many of your assumptions.
Ms Ng: As I said, that analysis was the basis for note 19, but for the purposes of this under the board's current obligations, I'm not sure whether Hydro can design its own different obligations without the government providing that context.
Mr Conway: Ms Clitheroe, are you a voting member of the Hydro board?
Ms Clitheroe: Yes, I am.
Mr Conway: Did you vote on August 12 for this so-called recovery plan?
Ms Clitheroe: Yes, I did.
Mr Conway: You did and you were comfortable enough with the financial data at that time to endorse this plan?
Ms Clitheroe: I was comfortable to endorse the plan from planning purposes, as is indicated in the resolution that was passed by the board. In the last two paragraphs of the board resolution you'll note that there was a direction to bring back additional financial material and analysis and to bring back information on the Bruce A and Pickering A, and with those two paragraphs I was comfortable.
Mr Conway: Staff can help me. When did Hydro release its second-quarter report?
Mr Richard Campbell: September.
Mr Conway: In September. The second-quarter report, which presumably is your handiwork, Ms Clitheroe, went out to the markets with some very interesting information. Your second-quarter 1997 report suggests that beyond all of this, there could be asset write-offs of an additional $2 billion, that there were other reviews taking place of the non-nuclear facilities, to which Ms Ng made some reference earlier, and that these charges and changes could produce a significant deterioration from the previously planned financial performance over the 1998-2001 period. I'm just quoting from the second-quarter report of Ontario Hydro.
How is it that somebody in your position can be associated with this when not only are people like Ernst and Young saying there are all kinds of unanswered questions, all kinds of questionable assumptions in the NAOP, but your own second-quarter report indicates that the NAOP is only part of the story? If you weren't bankrupt or nearly bankrupt at the NAOP stage, if I read your second-quarter 1997 report, I've got to believe you're surely insolvent at that point, and all of this on the verge of a government paper that we hear the other day may in fact start the disaggregation of Ontario Hydro. If I'm an Ontario Hydro bondholder living in Bond Head, Ontario, I must be wondering: "What do I own? What are Ms Clitheroe and her friends setting me up for?"
Ms Clitheroe: Is that the question?
Mr Conway: The question is, I want to know more about --
Mr Conway: I wish I could be more pointed, but I'm telling you, the information is --
The Chair: I think your question was very clear, Mr Conway.
Mr Conway: Your comfort level as the senior financial officer at this corporation, not only at August 12, where you get after just a few days a recovery plan that commits the taxpayer and the ratepayer to billions of dollars of additional unplanned-for expenses and, not only that, you're in the process of preparing a second-quarter report to the market which arrives late August, early September saying: "And that's not all. We've got more write-offs that we intend to make and the situation may be worse even."
Ms Clitheroe: The second-quarter report was published at the same time as the NAOP was announced, so that material was in the public sector at the same time. In the interviews that I had, particularly with the press or with the investors, that second-quarter report was discussed along with the implications of the NAOP. The issue of disclosure, I think, was covered and handled, and the contents of the second-quarter report were known to the board at the same time.
Mr Conway: But is the real issue, Ms Clitheroe, because the taxpayers guarantee this debt, there really isn't anybody over there at Ontario Hydro worried too much at the end of the day, because at the end of the day the bills come over here? They're guaranteed by Her Majesty.
Ms Clitheroe: I think it is inaccurate to say that there is no one at Ontario Hydro worrying about the financial conditions. Certainly the board does, I do and the management does worry about the financial condition of Ontario Hydro.
With respect to the comment about insolvency, I guess I need to repeat that again. The projections that we have in front of us are not dealing with an issue for Ontario Hydro to have sufficient cash to meet its obligations. The chart that is in front of you indicates that we had planned to pay off debt, but that the cash that was there is to be diverted to pay for --
Mr Conway: But the chart I have in front of me tells me that through 1999-2000 you are insolvent and the only way you're going to keep your head above water is to use measures that no other corporation in the country would be able to use.
The Chair: Thank you, Mr Conway. We'll go to Mr Laughren.
Mr Laughren: Would you like to use some of my time to respond to that?
The Chair: No, I'll take it off the next time around.
Mr Laughren: Are you going to respond to that?
Ms Clitheroe: Could you repeat the portion?
Mr Laughren: Do you want to respond to that now? I don't mind if you do.
Ms Clitheroe: Okay. The issue of the ability of the company to meet its obligations and have sufficient cash to meet its obligations is one issue, and that issue, what you're seeing from the financial material in front of you, is that there is sufficient cash to meet obligations. The other issue which we're confronting as a corporation and which you have in the material in front of you is the accounting treatment on the balance sheet in terms of the write-offs issue, if taking write-offs will then result in impairing the retained earnings, ie, going "negative" or, over a period of time if it's done year over year, that they would be reduced. But that does not result in an insolvent situation; it results in the accounting costs of a NAOP program drawn from the equity of the corporation. That is not a cash situation; that is an accounting treatment. The cash itself remains and the cash outlay is sufficient to meet the obligations of the company in the plan you see in front of you.
Mr Laughren: Thank you. I wanted to return to the decision the board made on the recovery plan. We were told that the whole issue of the recovery plan was put on the agenda as an information item when it was sent out to the board members. Then when the board members got to the meeting, lo and behold, it was a decision item, which is an enormous difference, it seems to me. Who would make the decision that that item would be changed from an information item to a decision item?
Ms Clitheroe: The change would be made by the board in discussion, and that is in fact what did happen. The presentation of materials was made by the nuclear group and I made the presentation with respect to the potential financial impacts. The discussion centred around not only the financial impacts but the technical issues that are raised by the report, the safety and licensing concerns, the risks associated with carrying on the way we were with allowing further deterioration to go on and so on. With that range of factors in place, the board decided that given the information in front of them, it was not prudent to simply receive the information and have it come back for further analysis, but that they wished to advise management that the situation was serious enough that management should take the plan as their planning document but come back with detailed information on the financials, particularly on the Bruce A and Pickering A issues.
Mr Laughren: Oh. Perhaps I'm alone on the committee in this regard, but I'm surprised at that response. It was my understanding that the board members were surprised when they got to the meeting to find out that was not an information item but indeed a decision-making item. I'm wrong on that?
Ms Clitheroe: It was an information item on the board agenda. There's always a cover sheet, if you will, on top of submissions, and the cover sheet on the submission was an advice to the board. During the course of discussion at the board meeting, the board decided that they would prefer to move it beyond an advice item to a decision-making item for planning purposes.
Mr Laughren: Oh. So that decision was made at the board meeting, not prior to it?
Ms Clitheroe: That's correct.
Mr Laughren: Oh, I see. Leading up to that meeting, as someone who had to make the financial presentation to the board, you must have been very much involved with the options laid out in the recovery plan. Is that right?
Ms Clitheroe: No, not in the technical options. The financial information was obtained from the operating groups. We consolidated it and then translated that into, what would that mean from a corporate impact? The material we would receive from the two operating groups would deal specifically with their own fuel costs and so on. Our job was to translate it into the type of material you see here, which gives you the impact on the income statement, the cash analysis and that sort of thing. The direction we had coming out of the board was to take the information we had incorporated and then go back with Ernst and Young, with corporate finance and with the operating groups and fill out more detailed information, investigate the risks further and bring that type of information back to the board, not only on a monthly basis but to deal with it as we brought forward the 1998 plan, which would be their formal approval for the plan for the subsequent year.
Mr Laughren: As the chief financial honcho, if you will, at Hydro, to what extent did you feel obligated to say: "That's fine, this is all a nuclear recovery plan. There's got to be other options that we have to look at as well"? To what extent did you do that and run those numbers?
Ms Clitheroe: We hadn't run options. The numbers we had run were the numbers which reflected the implications of the specific proposal that Mr Andognini put forward.
Mr Laughren: I understand.
Ms Clitheroe: We did indicate that they were potential impacts and needed further investigation. We did indicate that other alternatives should be looked at, that we needed further analysis on the Bruce A-Pickering A situation, that we had to delve into the substance of these numbers to be able to give them a more accurate picture in subsequent months.
Mr Laughren: But the all-nuclear option, basically.
Ms Clitheroe: The nuclear option as opposed to?
Mr Laughren: As opposed to non-nuclear options; for example, shutting down the two A plants and moving into a whole new era of generation at Hydro.
Ms Clitheroe: We had not done that analysis but we expected that we would be doing that analysis leading up the business plan for 1998.
Mrs Helen Johns (Huron): I want to ask a couple of quick questions. Ms Ng, can you tell me what reserves Hydro has on their books that are allocated to nuclear asset renewal or tied to doing some work on the nuclear assets?
Ms Ng: You are talking about the capital expenditures as planned for nuclear?
Mrs Johns: And that you have a reserve for on the books.
Ms Ng: A reserve for on the books? Are you talking about the $400 million that was accrued in 1996 --
Mrs Johns: I'm just asking to get it on the record. You tell me what reserves you have that are tied to assets and I will --
Ms Ng: I assume that you are talking about the $400 million that had been accrued at the end of 1996 for nuclear recovery, which I think at this point in time would have to be considered together with the new NAOP plan.
Mrs Johns: When you are doing your accounting I assume you would be looking at what needs to be done in the future and putting reserves aside. Was there any discussion about this reserve previously and why the number would be so small when all of a sudden within five or six months you're asking us for eight billion bucks?
Ms Ng: On a normal accounting basis, the costs would either be expensed to operations or be capital, which would mean coming into service and the costs charged then. A reserve and an accrual needs an application of the board's rate ruling, which is essentially what was done with the $400 million. I think the $400 million was done at the end of last year as a result of the 1996 business plan, in which the nuclear management at the time identified the amount of expenditures that would be needed in order to bring the nuclear to a performance level. That was the amount the board had decided would be set aside and accrued using the rate ruling.
Mrs Johns: Because you have a lot of accounting knowledge, can you tell me if you would invest in a company that has $600 million in retained earnings and $34 billion in debt.
Ms Ng: I don't have any money to invest, so --
Mrs Johns: Oh, I would think you must at Ontario Hydro.
Ms Ng: Whether I would invest or not, I would have to look at a number of the factors, be it whether there is a regulated revenue stream and whether there is a government guarantee on the debt in terms of the bonds. There are a number of things that probably would be looked at.
Mrs Johns: That's exactly what I would be looking at too. I would only be looking at that government guarantee. If there was one, I would be investing, and if there wasn't one, I wouldn't be investing. I think that proves the point.
I just want to ask Ms Clitheroe a couple of questions. I want to understand why you got Ernst and Young involved and why this report came out on September 7.
Ms Clitheroe: Following the board meeting of August 12, we were asked by the board -- and we would have done it in the normal course anyway -- to bring back additional financial analysis. Because of the magnitude of the program that was being undertaken, I believed it would be prudent to bring in a third party to look with us at the implications, the risks, cost factors and that sort of thing, to identify for us areas where we should focus additional attention. They did that and then we were able to take their results and look at where we should be focusing additional attention.
Mrs Johns: Okay. Basically, it comes out of the board meeting that you have to get additional information. I wrote to Carl Andognini a couple of weeks ago and I asked him: "You say you have no financial prowess, Mr Andognini; you say you have no fossil fuel experience. Someone must have helped you in that area." He said to me in his response that, sure, corporate finance had been working with him. There had been people assigned to him. I wanted names but he didn't give me names. I would assume that since you are the head here, you probably know who was involved in this all the way along. You were getting direction about the NAOP process. I would assume that on August 12 or 13, this wasn't news to you specifically. Is that correct?
Ms Clitheroe: Yes. When Mr Andognini came in January, he asked for a small team to work with him. We provided him with a small team of a few people, one of whom is now his vice-president of finance in his operations unit. He used the small team from January to March, I believe, or April, and then appointed his own person to continue on from May to July. Currently the person is still in place.
We worked with Mr Andognini to help him understand the accounting in his unit, to get access to the information as a new individual coming in, to understand the information. So we worked along with him. We were familiar with, as it unfolded, the extent of the issues that he was addressing in his plan. Where we were not involved was in the technical side, the technical recovery side --
Mrs Johns: Of course not. It's not your side. I understand that.
Ms Clitheroe: -- and we were not involved in the proposal on how he felt that the recovery should take place, ie, were there sufficient resources to do X, Y or Z?
Mrs Johns: Were you at the management team meeting in Orangeville where they discussed the NAOP and put dollars to it and brought all this information together? I think it happened much earlier than August.
Ms Clitheroe: No, I was not.
Mrs Johns: Was anybody from your staff there?
Ms Clitheroe: I don't believe there were, just Mr Chopra, who is currently his vice-president of finance.
Mrs Johns: Okay. Did Mr Chopra work for you at that point?
Ms Clitheroe: Late July? No. At that point, Mr Chopra would be working for Mr Andognini.
Mrs Johns: Excuse me about this, but how do you know about this NAOP policy if you weren't at that meeting, you have nobody working for you who's tied to it? It just comes to you with a premonition?
Ms Clitheroe: No. Mr Chopra would work with our group in providing the information that we would then consolidate.
Mrs Johns: There was a flow from Mr Chopra to you, so you were kept informed the whole time along about the NAOP process and what they were doing.
Ms Clitheroe: About the specific financial issues.
Mrs Johns: Exactly. I'm only talking about financial issues. I assume that you don't know anything about how to run a nuclear reactor. I assume that. From that standpoint you understand all this information all the way along from the financial perspective, because they start to build this information as they're going along through the process because Mr Chopra is there from very early on in the process. You don't think to bring somebody else in all the way along the process? You get this approved by the board first and then you say, "Oh, by the way, maybe we should get some third-person advice on this."
Ms Clitheroe: Typically, the type of financial prudence review that we had done by Ernst and Young would be done in a private sector setting. It would be done at the point that a utility was going forward to have its costs incorporated into its rate base. Typically, these costs would be reviewed in this manner, after the fact, after the plants were built. There would then be an intensive prudence review at that stage. Although we had not done it before, what we decided to do under these circumstances of such a large program was to take that concept of doing that type of prudence review that is typically done much later on in the process and accelerate it and do it at the front end of the process so that we would have that additional information up front.
Mrs Johns: What disturbs me about that is -- as a board member too, and as chief financial officers -- you're there to give the board direction and advice on what is a good and prudent method. They depend on you for advice. Board members are there to take information from the senior management, to process that information and to come back with good solutions. I think the board members, especially Bullock who was here, believe that they get good information from the managers. I don't think that we're to believe they're getting good information from the managers.
For example, in the Ernst and Young study, how can management or the board make a decision when there is $158 million that was incorrectly put through the books by the corporate finance presentation as a result of insufficient communication between departments? Do you feel in any way liable for that?
Ms Clitheroe: The decision that the board took on August 12 was not a financial decision. They explicitly indicated that they did not take the financial decision, that they wanted additional financial material brought to them. They did not make any financial releases and neither were financial releases requested.
When we, as corporate finance, with the operating teams, brought the information forward, there was not a request for financial approvals. In fact, we indicated that we thought there was insufficient information to make decisions on financial approvals and financial releases and that further information had to be brought back. The decision that was taken was made on the basis of the technical information that was brought forward by Mr Andognini and his team on the condition of the plans --
Mrs Johns: I disagree with that.
Ms Clitheroe: -- for planning purposes.
Mrs Johns: You mean they didn't consider the $8 billion? If it was $60 billion, they would have said, "Sure, go ahead," or if it was $8 billion or $2 billion? The dollars never came into effect at that meeting? I don't think so.
Ms Clitheroe: No. We made a presentation giving them the range of what we thought it was going to cost to implement the specific proposal that was in front of them. We also gave them an indication of the range if the Bruce A and Pickering A plants did not come back. But that was really a range provided to them to give them an indication of the magnitude of the program in front of them. It wasn't a request for release of funds and it wasn't expected to be an approval of the financial plan. The approval of the financial plan for the program is yet to be done and is intended to be done through the business planning process for 1998.
Mrs Johns: Just two quick questions: I'll answer the first one for you because the answers get long. I assume you believe that if you have a debt, personally, it affects your cash flow. You pay some money towards that each month and it would reduce your cash flow. When you give us this long, drawn-out explanation about cash flow and liquidity versus the insolvency of Ontario Hydro, you conveniently forget that you have decided, over the next four years, not to pay back any of the loan and that if you actually paid back some of that loan, the cash flow would be in a non-positive position. Would you agree with that?
Ms Clitheroe: If I understand the question, it is, if we attempted to pay down the amount of debt that we had originally planned --
Mrs Johns: That you're required to.
Ms Clitheroe: -- and pay for the nuclear decision that we wouldn't have sufficient funds? That's correct.
Mrs Johns: That is correct. When you say to us, as you so nicely answered to both Mr Conway and Mr Laughren, that you're solvent from a cash flow perspective, you're solvent from a cash flow perspective because you're going to go in violation of the Power Corporation Act and not pay off the SDR.
Ms Clitheroe: No, that's inaccurate. The cash comes from, obviously, the revenues we generate, so the cash position is a different number than the number that you look at when you look at the revenue in and the costs out, because of, as Mr Kwinter indicated, the depreciation. The depreciation is a non-cash charge. When you include the non-cash charge and the excess cash flow, that gives you the total sum of cash that is available to pay off the obligations of the company.
When I'm talking about cash flow, that's what I'm referring to. When I'm talking about the income statement and the losses that would be generated through the income statement, that is a combination of expenses which are cash charges and expenses which are non-cash charges, such as depreciation.
Mrs Johns: Okay, let's just look at your cash flow statement for last year. I'm only doing it off the top of my head, but you have a negative cash flow and that's as a result of a $1,656-million depreciation number. I don't know if you're working in millions; I assume you are. So in effect you have positive cash flow of about $900 million, whatever number we're working with; 900 on that sheet. What you have here are net income losses that are going from 300 to 500. If the same was true of last year that is true this year you'd be very close to not having enough cash flow.
Ms Clitheroe: Do you have the number of the free cash flow?
Ms Ng: Yes. I think in the original business plan, for example, the free cash flows over a five-year period are $7.7 billion, and that's made up primarily of depreciation, which like you said is ranging about $1.6 billion to $1.7 billion a year. Then you multiply it by five. That's almost $8.5 billion. Then you have some net income and then you have the capital, and that was giving you the free cash flow.
When you look at the picture, for example, that we've just shown, you still would have the sort of $8-billion to $8.5-billion worth of cash flow from depreciation, but you're going to have some net losses. So instead of having a net income you have some net losses and you're having some increased capital expenditures as a result of the requirements. When you take a net of that it's more like $1.5 billion over a five-year period, rather than the original --
Mrs Johns: It's a positive cash flow.
Ms Ng: It's a positive cash flow over the five years.
Mrs Johns: So over five years that's $300 million, which is basically what I said.
Ms Ng: Yes, accumulated it's about $1.5 billion.
Mrs Johns: Well, $300 million on a corporation of that size is just nothing.
Mr Conway: Ms Clitheroe, I want to go back to the notes from the Hydro board meeting of August 12. This is an executive summary of the board meeting around the nuclear optimization plan.
Item number 4 -- and I'm reading now directly from the Hydro board minute:
"An analysis of the preliminary financial implications of the" recovery plan and related initiatives "indicates a significant deterioration in financial performance" of the company "from currently planned levels." Then it goes on to talk about cash flows will be "reduced by about $6.3 billion over the" period 1998 to 2001, I believe it is. "While these results represent a significant deterioration from previously planned financial performance, the preliminary nature of the numbers employed make premature any judgements regarding the permanent impairment of the corporation's financial viability."
That was August 12. It's now November 4. We've had an intervening 11 weeks. What can you tell us about the intervening three months' worth of time and effort? Does the database make the situation look better or worse from your point of view?
Ms Clitheroe: The situation hasn't changed much in terms of the financial information we have obtained from the nuclear group. The extent of the cost is determined by how much nuclear production we're going to have. The more nuclear production, the lower the cost of the whole program; the less nuclear production, the higher the cost of the fossil fuel, the coal and so on. At the moment we have not been given any indication at corporate finance that the original estimate of nuclear production and therefore the alternative purchases that have to be made to supplement that loss have changed. So while our cash flows, as we've investigated them, have had some variations as we've done more detailed work, the general parameters haven't changed significantly.
Mr Conway: On that, the Ernst and Young report, which you received on 7 September, raises a very real concern about one of these very points. They raise a yellow flag of concern around the planning assumptions the nuclear power division is using. I'm reading now from page 19 of the Ernst and Young report. They wonder whether the operating capacity of the existing Ontario Hydro nuclear plants, which has been averaged at 67%, is going to actually meet the target of 86%. Does anybody in finance share Ernst and Young's concern that that's a very ambitious, aggressive target that the folks over at Ontario Hydro Nuclear are using as an operating assumption for the NAOP?
Ms Clitheroe: The way we would handle that in corporate finance would be to indicate the risk we would see to the financial statement of not having the nuclear production at the planned levels. We would rely on the technical expertise of the nuclear folks to do the original plan. Then we would put a risk factor around, saying, "Well, if they only made it to 80% or 75% or whatever, here would be the magnitude of the impact." If the magnitude of the impact were such that we thought we should take a provision, then we would be recommending that to the board. As Ms Ng indicated earlier, in subsequent years we have taken provisions based on risk impacts of $100 million. In the current plan there were escalating impacts because of the uncertainties you've identified.
Mr Conway: But you've never been in this corner before. You are in a very tight corner here. You're taking seven of these reactors down; the other 12, you're hoping, are going to operate at 86%. I hope you're right.
Mr Machon: I think we need some clarification on that point. The 86%, as I tried to explain yesterday, is an operating capacity factor, how you operate between outages. That is, you can't relate that to, you know, we've had 80%, 82%, as I related the other day, but they're apples and oranges.
Mr Conway: I'm now looking at it from a financial point of view. I accept your point, sir. All I'm saying is that the financial people are looking at this and saying the operating capacity that's built in to the recovery plan on the nuclear side is substantially higher than the record of the recent past.
Mr Machon: No, and that's the point I was trying to bring out. If you look at the average of the units that are going to be operating, the four-year average I gave, the B units have operated in the high 70s and the low 80s. We have assumed no better than that moving forward in the beginning years. In fact I believe you'd find, if you did the aggregate over the time on a rolling average, that they're in the 76, increasing over time.
Mr Conway: I'm reading from the Ernst and Young report. I'll let those people speak to that point, but I hear what you're saying. I guess my point is that from a financial point of view you're in a real squeeze here because you're getting very close to margins. There are all kinds of assumptions here, not just on the nuclear side but on the availability and the price of the replacement power. One of the big assumptions beyond the year 2000 has to be that if there is going to be increased competition, you've got to believe that's going to put really significant downward pressure on your rates, and what does that mean in terms of your intermediate revenue line? I presume you've looked at that. Ms Ng?
Ms Ng: In terms of the market?
Mr Conway: Well, if we get an open market --
Mr McNeil: Mr Conway, could I talk to that for a second, if I might, about the open market, which seems to be the basis of your question?
Mr Conway: It's a pretty basic assumption around this table. Before we come to that, though, I want to go back to Ms Clitheroe about another issue.
You've been a former Deputy Minister of Finance, and by all accounts a very rigorous and purposeful public servant. One of the questions I have for you, Ms Clitheroe, as a voting member of the Hydro board, who's been a former Deputy Minister of Finance, who knows something about the sensitivity over at the executive department of government around Hydro matters, particularly unplanned, unexpected, multibillion-dollar expenditures: The minister's letter, Mr Sterling's letter, I think dated August 11, we hear, arrived at the board. This is the letter from the minister, the shareholder, asking the Hydro board to make sure they canvass all opportunities, all options, which I would take, and I've got to believe you, Ms Clitheroe, would take very seriously, both because of its relative rarity and the nature of the content. It apparently was circulated late in the day after much of the discussion, I gather, and the decision had in fact been taken. Is that your understanding?
Ms Clitheroe: The letter was circulated towards the end of the board meeting. I can't remember the precise timing, but I think the general tenor of your comment is correct.
Mr Conway: Were you aware of the minister's letter before you went to the board meeting that day, on August 12?
Ms Clitheroe: I had not seen a copy of the letter before the board meeting.
Mr Conway: Were you aware of the letter? Were you aware of the minister's interest in and concern about the board canvassing all options?
Ms Clitheroe: I was aware of the minister's interest, but not through a letter process, through the regular officials process.
Mr Conway: Had you had any discussions with Ms Stevens and/or Mr Horswill about the minister's concern about what was at hand over the nuclear recovery plan?
Ms Clitheroe: I certainly didn't with Ms Stevens.
Mr Conway: Think carefully, Ms Clitheroe. You're a former Deputy Minister of Finance.
Ms Clitheroe: I'm trying to remember if I did with Mr Horswill pre or post and I honestly can't remember that.
Mr Conway: Did you have any discussion with anybody at the Ministry of Finance about these issues?
Ms Clitheroe: About the financial issues?
Mr Conway: Yes.
Ms Clitheroe: Yes, I certainly had discussions with Ministry of Finance officials.
Mr Conway: Which officials?
Ms Clitheroe: I spoke with Mr Gourley, the Deputy Minister of Finance, and I'm trying to recollect if I spoke with any other officials.
Mr Conway: That would be good enough for me. When did you and Mr Gourley discuss these issues prior to the August 12 board meeting?
Ms Clitheroe: I don't remember the exact date, but I had alerted Mr Gourley in June that I believed there were going to be substantial costs associated with the nuclear recovery program, in the multibillion-dollar range, and that we would have to discuss them once they became more available and once Mr Andognini's report was available.
Mr Conway: That's very helpful. With that as background, were you not as an officer of the Hydro corporation and as a member of the Hydro board a bit concerned about the manner in which Minister Sterling's letter was transmitted to the board, after the discussion and after the decision had been taken?
Ms Clitheroe: As I say, I can't remember if it was after the decision had been taken, but no, I wasn't, because the content of the letter had in fact been reflected in the request of the board to bring back further information, so I didn't see an inconsistency between the letter and the actions the board was taking.
Mr Laughren: I'm puzzled about what I would call a deferment of costs, if those are the right words, of the recovery plan. If you're going to meet your obligations under the statutory debt retirement part of the Power Corporation Act, it means putting off the cost of that recovery plan until a later date, right?
Ms Clitheroe: Yes, essentially that's correct.
Mr Laughren: Have you figured out what that means in terms of rates and when they would kick in?
Ms Clitheroe: Our expectation is that it does not imply a rate increase but that it implies rates would remain at current levels or around current levels out into the future. We had not gone beyond seven to 10 years in terms of our analysis.
Mr Laughren: I'm a little puzzled because it seems to me that cost, somewhere between $5 billion to $8 billion -- it's fine to say capitalize it, if you will, the way you do a construction project, but when that construction project is completed, like Darlington, and starts getting reflected in the rates, it very much gets reflected in the rates. It's very real. What I don't understand is where this $5 billion to $8 billion, when the rubber hits the road, as it were, in terms of the rates -- I still don't understand that. It must at some point get reflected in the rates.
Ms Clitheroe: I think the chart Ms Ng put up with respect to the capitalization and amortization --
Mr Laughren: Which?
Ms Clitheroe: Was it the second chart?
Mr Laughren: "Defer and Amortize NAOP Costs"?
Ms Ng: Yes, page 21.
Ms Clitheroe: The one that writes off the cost over a 40-year period. That gives you some indication of how you would spread those costs out over the life of the plant.
Mr Laughren: So it would be spread so thinly for so long that there'd be no increase in rates?
Ms Clitheroe: That's right.
Mr Laughren: Magic. Well, almost. I find that puzzling because at some point other things will happen in the corporation as well, right? Other things will happen such as retubing and refurbishing, write-downs, whatever. I just find it hard to imagine this happening without the chickens coming home to roost. I know what you're saying but are the numbers so -- $5 billion to $8 billion is a big number. When Darlington hit at a cost of $14 billion -- for argument's sake let's say it's twice what the recovery plan is -- when that hit the rates, rates went up 10% a year for three years.
I don't want to be overly simplistic and attach everything to Darlington because there were higher interest rates then and so forth, but at the same time that had a very substantial impact on the rates and here we are dealing with a number that's admittedly only half as big, but even half is big when you're talking about these numbers. I'm still wrestling with that in my mind, as to how that can just not be reflected in the rates. I know you're saying it's because of the length of time.
Ms Clitheroe: That is one of the options the board has in front of it. As Ms Ng indicated, there are other options, which would be to simply put those costs directly against the equity of the company.
Mr Laughren: You now have these three options in front of you. The Hydro board must make a determination on these three options; right? You haven't decided which one yet, have you?
Ms Clitheroe: That's correct.
Mr Laughren: Do you have a time frame in which you want to make that decision? How is that going to get resolved?
Ms Clitheroe: We would expect to go back to the board in December or January with respect to this issue. We haven't set a date certain as we're still investigating all the issues surrounding the costs. We need to get to the point that we have confidence in the 1998 business plan numbers, which not only include the NAOP but all the other divisions in the company, which we normally do through -- the normal schedule would be that we would take preliminary information to the board over the fall indicating what we think the magnitude of what we're looking at is, which is essentially what we did with respect to the nuclear program in August. I presented some issues with respect to the business plan, planning assumptions, to the board in September. The normal pace would be that we would bring back a preliminary business plan in December, and at the end of January we would present a final business plan for 1998 out three years, with a budget for 1998 that would be specific budget releases; no releases beyond that one-year time horizon.
Mr Laughren: Would you expect the Ontario Energy Board to show an interest in this?
Ms Clitheroe: In the business plan?
Mr Laughren: In particular the deferment.
Ms Clitheroe: Usually the Ontario Energy Board is interested if -- not only interested. They must see us if we're proposing a rate increase, or within the overall level of rates, changes to any specific rates. Where we have had the discussion with them has been in that context. If my memory serves me correctly, in 1993, when we did a write-off at that time against equity, there was some interest by the Ontario Energy Board in the process we used in that year.
Mr Laughren: What I'm puzzling about is to what extent the Ontario Energy Board will say, "Wait a minute now, you're not proposing a rate increase for this year or the next year, but you're doing a deferment of costs which otherwise would be reflected in rate increases." To what extent they would automatically show an interest in that, you don't know. I know you're not speaking for them.
Ms Clitheroe: I don't know that and I don't believe the energy board takes an interest until they get a referral from the ministry to precipitate their interest.
Mr Laughren: A final question has to do with the story that surfaced last week about there being a potential rate increase proposal by the Hydro board. Did you follow that? Do you remember that story?
Ms Clitheroe: Yes, I do.
Mr Laughren: Where did that come from, do you know?
Ms Clitheroe: I'm not sure where it came from. What I think it came from was a letter from the chairman of Ontario Hydro to the minister which indicated that rate issues would be discussed at the board, but I am not certain of that.
Mrs Fisher: I have some questions for each of you, almost. I would like to start with Mr McNeil. My understanding is there are still negotiations under way for -- I think it's improper to call it special deals, but let's call it different rates of electrical generation purchase, as we speak. You continue to negotiate with business, I assume. Let me put it this way: I hear a rumour that Shell was able to obtain a different than a regular rate, a load retention rate contract in the past while. Is that true?
Mr McNeil: Shell has been able to retain a load retention rate. Those negotiations were initiated, I believe, about two and a half years ago and they concluded, I believe it was, last month.
Mrs Fisher: Up in the Bruce last week we had the opportunity to have the three major proponents of the Bruce Energy Centre, those same ones who put an offer to you a short while ago. We had them at the table and one of them, who is doing business in the Chatham area right now, noted that there was a requirement for his company to sign 44 contracts, of which 40 had been signed in the past two years. He is ready to commission his plant. Guess whose the four outstanding are?
Mr McNeil: I can't guess. Could you enlighten me?
Mrs Fisher: Can't guess? Ontario Hydro.
Mr McNeil: I believe it's Chatham Hydro. They're not a customer of ours. I think the service contract is with Chatham.
Mrs Fisher: I think there's an interlinkage. Hydro is Hydro and Hydro is Hydro, and if they had support, they might be able to get done.
Mr McNeil: Most MEUs don't care to be classed with us right now.
Mrs Fisher: I understand that. The issue with regard to rates: You mentioned earlier, and I just want to take one more second on this because I have a couple of other questions to others, that one of the ways in which somebody could derive one of those on a different basis would be through a public utility commission, which in the normal way of doing business historically, in the silo mentality, would be only with a municipality. Has Hydro ever opened its mind to thinking that maybe somebody else could do it on a utility basis and help others?
Mr McNeil: I'm not so sure it's Ontario Hydro opening its mind as what Ontario Hydro feasibly can do under the Power Corporation Act at this time.
Mrs Fisher: That's a good point, so I'll ask you this. Everybody continues to hide behind that Power Corporation Act. You're a senior VP over there, I think.
Mr McNeil: I'm a vice-president, yes.
Mrs Fisher: Ms Clitheroe assists you as well. What recommendations have you made to the government, given that you know this tool isn't working for you? And it's not working in the best interests of the population of Ontario. What definitive recommendations have you made to the Minister of Energy in the past two years, because you've identified that it's a barrier for doing business in Ontario? What written information have you given to the minister that it's not working?
Ms Clitheroe: The barrier that you're referring to being the Power Corporation Act?
Mrs Fisher: Every time I hear an answer, it's, "The Power Corporation Act doesn't allow it," and yet you're running this corporation on behalf of Ontario, supposedly in its best interest. If you're a VP over there -- finance, otherwise -- what recommendations have you made to the minister that in fact this thing is flawed and is acting as a barrier for progress in Ontario?
Ms Clitheroe: Management submitted a paper to the Macdonald commission with the --
Mrs Fisher: I said to the minister.
Ms Clitheroe: We also submitted it to the minister. We submitted a paper with our recommendations about what the management of Ontario Hydro recommendations with respect to the industry restructuring would be, and included in that are the issues around the Power Corporation Act.
Mrs Fisher: Specifically you identified exactly what recommendations you would make to a minister who brings it to government for change to the Power Corporation Act. Specifically you talked about those very dirty barriers that are causing us problems being able to do business in Ontario?
Ms Clitheroe: We raised what we thought would be a competitive marketplace industry structure which would allow Ontario Hydro to do business in a more commercial manner.
Mrs Fisher: Ms Clitheroe, you're VP finance. I'm asking you, stop skirting the issue. I'm kind of like Mr Conway a little bit, getting frustrated. I asked you a very specific question and I want a specific answer, please. What specific issues regarding finance and your responsibilities did you either recommend personally or through your chair or through the board for changes to the finance part of the Power Corporation Act that is causing barriers in Ontario?
Ms Clitheroe: With respect to finance, we recommended that the company be put on a commercial footing. That would involve all of the issues that would be around a commercial capital structure and so on.
Mrs Fisher: Mr Chair, I would ask that we get a copy of that recommendation, please, because maybe it will fit. I don't know.
To go on, I would like to ask Ms Clitheroe a question. Last week I asked it of somebody else but you weren't here that day and I understand why and that's fair; you weren't asked to be. I know in the last six months there have been numerous contracts of electricity that were negotiated during the course of the time the Andognini report was being prepared and during the time we knew there was going to be a shortage of power in Ontario, not an abundance.
Most indications, publicly anyway, were that if in fact something happened to the magnitude that's been recommended, we may be buying power as opposed to selling it. Yet my understanding is that in the last eight months, during the course of the time the senior management of Ontario Hydro, as you indicated earlier, starting June of last year and working all the way through to the last year we've passed, there was some indication there wouldn't be enough power.
I ask this question one more time. Would you agree that there is a net penalty difference because of the fact those contracts were signed and now had to be cancelled, zero impact to the residents of Ontario?
Mr McNeil: Excuse me. Are you referring to the interconnected market contracts?
Mrs Fisher: Yes, I am.
Mr McNeil: Could I just repeat, since I gave the answer last time?
Mrs Fisher: Actually I wanted it from Ms Clitheroe.
Mr McNeil: Certainly.
Ms Clitheroe: Yes, okay. I was just confirming with Mr McNeil because he has the most up-to-date information, but my understanding is that there was no financial impact of the contracts that had been entered into and getting out of those contracts.
Mrs Fisher: Zero?
Ms Clitheroe: That's my understanding.
Mrs Fisher: Okay. Ms Clitheroe, I was listening very carefully when Mr Laughren was asking you a few questions, and Mr Conway as well. I just have to reconfirm what I heard before I ask the question. Did you in fact say the financial plan to the NAOP has yet to be approved? The plan has been approved but not the financial substantiation to it?
Ms Clitheroe: That's correct.
Mrs Fisher: I know I heard you say that more nuclear production lowers the cost and lower nuclear production increases the cost.
Ms Clitheroe: That's correct.
Mrs Fisher: That's right too. I would ask you how, then, number one, you could recommend to the board of directors -- I heard you voted for the proposal. How could you do that as a finance head of Ontario Hydro when you didn't have the information to back your academic knowledge of the plan? How could you agree to approve a plan when you yourself, if I recall reading the minutes of the board meeting, which I did, questioned that? How then would you have voted for that?
Ms Clitheroe: The planning decision that was taken was based on the advice given by the experts in the nuclear field as to how much production we could be expecting. Certainly, if the nuclear division can produce more from the nuclear reactors, that would be a tremendous help to the financial position, but with respect to the approval of the proposed nuclear recovery program, what was being approved was the method in which the experts -- Mr Andognini and his team -- were proposing to get the reactors up to a level of higher production. In that event, relying on the experts in the nuclear field, I can support the recommendation.
With respect to the financial impacts, we indicated that we had to come back and give further details with respect to the financial plan and that we were not asking for releases of dollars for the full plan until we were able to assess that more determinatively.
Mrs Fisher: As financial adviser to the corporate body that was trying to make a decision that day, when you look back today, do you think it makes any sense whatsoever that you wouldn't have strenuously objected and said, "You're going at this the wrong way," that there was in fact a two-stage proposal that needed to be decided upon or needed to be presented for decision-making? One would have been the NAOP, the technical recovery plan, which I have yet to hear anybody disagree with -- not one party. But I hear numerous people saying: "Hang on. There's no substantiation to be ensured that it is $5 billion to $8.5 billion, or maybe it's $11 billion or maybe it's $15 billion." Do we know?
As vice-president of finance or whatever you are at Ontario Hydro, why would you not have strenuously argued that it was in the wrong context of doing good business on behalf of the consumers of Ontario to vote that day? Why would you not have done that?
Ms Clitheroe: What was approved that day was the approval of the plan of recovery; it was not an approval of the financial spending.
Mrs Fisher: I won't say any more. I think you get the point and you keep skirting it with some other answer.
Mr Kwinter: I just want to pick up on that. Ms Clitheroe, I have a copy of the minutes of the August 12 meeting and I want to read from it. It says:
"Corporate Financial Implications and Issues: Using overheads, the executive vice-president, corporate business development and chief financial officer, Ms Eleanor R. Clitheroe, apprised board members of potential corporate financial implications and issues with respect to the NAOS and of corresponding Ontario Hydro Generation Co actions. Ms Clitheroe's presentation included the context for the potential financial implications, scenarios, net income, charging NAOS to 1997 operations and its impact on retained earnings, equity and potential write-offs, fuel cost sensitivity, OM&A and capital increases versus the business plan, production changes, debt outstanding, debt increase (NAOS versus the business plan), SDR requirements...."
It seems to me they had been given a pretty extensive overview of the financial implications. But having said all that, one of the board members, Mr Bullock, "expressed the opinion that...he is concerned that the board has not had sufficient information and opportunity to exercise the due diligence required for approving the NAOS decisions...," and you agreed.
What we have is, on the one hand, you've presented all of the financial implications, and quite detailed according to the minute, according to your presentation, and on the other hand, you have raised questions, and Mr Bullock has raised questions about the due diligence that was done. Yet notwithstanding that, it was approved.
Before you answer, and I'd also like to ask Ms Ng: Did you, as a professional, have any concerns about the due diligence that was done before this decision was taken?
Ms Clitheroe: Would you like me to respond to that?
Mr Kwinter: Yes.
Ms Clitheroe: During the course of the discussion at the board meeting, which I indicated to you and apologized perhaps at some length earlier in answer to your question, there was a discussion about, rather than receiving as an advice, approving the plan. I believe you have a copy of the board resolution that what be approved was the first part of the board resolution without the subsequent two paragraphs on the board resolution. The discussion that occurred here, that you're flagging up, was to say that we could not approve the financial implications or the financial releases for the plan but that we could only approve the plan for planning purposes. So the subsequent two paragraphs were adopted. The discussion you're seeing here was satisfied by the inclusion of the last two paragraphs in the resolution that you see in front of you.
Mr Kwinter: Ms Clitheroe, you indicated to my colleague Mr Conway that you had kept Mr Gourley apprised of the fact that there was a rather substantial expenditure contemplation coming up. Was the Ministry of Finance aware that on August 12, this thing was being changed from an information item to a decision item and that the board was in fact going to commit -- and I know you say they didn't commit, but I can tell you that the planning stage is well under way and they did commit. If you read the minutes, they committed to this program. Was the Ministry of Finance aware that that was going to take place on August 12?
Ms Clitheroe: Not to my knowledge. I don't believe anyone at the board was aware prior to the discussion that there would be a recommendation coming like that.
Mr Conway: Just against that backdrop, then, as a former Deputy Minister of Finance, you are smart enough to start the process in June of saying to Mike Gourley over at finance: "There are things happening at Hydro. We've got some problems. This Andognini gang are working on a recovery plan." I take it that you very wisely put the deputy at finance on some notice that something was up. That would be a fair assumption?
Ms Clitheroe: Yes.
Mr Conway: You are a former Deputy Minister of Finance. You know all about Hydro and this guarantee and all of that. So you put the people at finance, you put the deputy, on notice some time in June that something's coming.
One of the things that occurs is that the minister writes a letter, and this is where I have a real problem, Eleanor, because everything I know about you is that you're a very thorough professional. You're at the Hydro board. You're the chief financial officer. You're a voting officer of this corporation. You're a former deputy of finance. There is a letter from the Minister of Energy saying, "I want the board to look at all of the options." You've now just told my friend Kwinter that nobody at finance knew the decision was going to be taken on that day, the 12th, that I can understand. Nobody on the board apparently knew.
You get into that board meeting and it moves from an information item to a decision. You make a decision. When you saw that letter from Norm Sterling, a two-page letter saying, "Folks, I want all of the options canvassed," I've got to believe that you were very nervous and concerned about not only the speed of the decision-making process on August 12, but that nobody had bothered to tell finance and the Minister of Energy what was happening that day.
Ms Clitheroe: The at that time acting but now Deputy Minister of Energy was at that board meeting, so I felt the concerns of the minister or the concerns of the Ministry of Energy would be dealt with by the deputy.
Mr Conway: We're going to be talking to that person, but can you tell the committee what your recollection is of the participation of Ms Stevens and/or Mr Horswill at that decisive meeting of August 12?
Ms Clitheroe: Ms Stevens was not at the meeting.
Mr Conway: Mr Horswill was there.
Ms Clitheroe: Mr Horswill I believe was acting deputy at that time.
Mr Conway: That's correct.
Ms Clitheroe: He certainly alerted the board to government concerns with respect to exploring all options. I believe that was prior to the distribution of the minister's letter, in my recollection, but I'm not 100% sure.
Mr Conway: Again, you're heading down this road very quickly to approving in principle this multibillion-dollar recovery plan, some of the financial aspects of which you yourself, according to the documents, have very legitimate concerns about. You must have been sitting there, surely, saying, "Gourley and that gang at finance are really going to be concerned." Did you think that?
Ms Clitheroe: I believed that their concerns would be covered off by the subsequent two paragraphs that were added on to the initial resolution, which indicated that the financial analysis would be thoroughly reviewed and brought back, and that no funding decisions were taken at that meeting.
Mr Conway: Ms Clitheroe, what I want to know is, around August 10, 11, 12, did you have any discussions with Minister Sterling and/or any of his staff about his concerns as indicated in that letter?
Ms Clitheroe: I don't believe I did. It's possible I spoke with Mr Horswill, but I don't recollect that.
Mr Conway: So you had no discussions with Minister Sterling or any of his senior political and/or departmental staff?
Ms Clitheroe: Sorry, yes, I did have a discussion with Mr Horswill. I'm recollecting that now. The board meeting was on a Monday or Tuesday?
Mr Conway: It was August 12.
Ms Clitheroe: I had a meeting with Mr Horswill and some others, not the minister, on the Friday.
Mr Conway: Was there anything beyond what you just said about Mr Horswill raising those concerns? What did you and Mr Horswill talk about on the Friday before the August 12 board meeting?
Ms Clitheroe: I was accompanied by Mr Andognini. The discussion really centred around Mr Andognini's explanation of what the proposed plan looked liked, and then my discussion was around what the potential financial implications could look like. There were questions of a nature of, "What about the write-offs?" and would they be necessary. They were more clarification-type questions.
Mr Conway: The interesting thing is that if you met on the Friday -- and we should get somebody to check the calendar. If the meeting was on the Monday of the 12th, the minister wrote a letter dated August 11. After your meeting with Horswill, the acting deputy, the minister writes the letter, which tells me that whatever happened at that meeting between yourself and Horswill gave the minister enough concern to have him write a two-page letter.
When somebody whispers in my ear -- I won't repeat that, but --
The Chair: Thank you, Mr Conway.
Mr Conway: I'd like an answer to that.
The Chair: Just complete that off.
Mr Conway: We now know that the acting Deputy Minister of Energy met with Ms Clitheroe two or three days, if it was the Friday -- has anybody got a calendar?
The Chair: The 11th was a Monday.
Mr Conway: The board met on the Tuesday. You met on the previous Friday, which was the 8th or 9th. So we have the acting Deputy Minister of Energy meeting with the vice-president of finance, Ontario Hydro, on the 9th. Then we get a letter two days later from the minister, quite a clear letter, to the chairman of Ontario Hydro where he sets out the concerns and the expectations of the government, which is entirely understandable. And then this letter arrives at a board, but really only after the board has made some decisions in principle about some issues that obviously Minister Sterling and Mr Horswill had some concerns about, some of which were given to you at that meeting on August 8 or 9.
I just can't imagine how you could sit in that meeting, Eleanor, again as a former Deputy Minister of Finance, knowing what the Deputy Minister of Energy must have told you that Friday, knowing -- the minister's letter comes after that meeting. You go to a meeting where an information item becomes a decision item, a decision item that has multibillion-dollars' worth of unplanned-for expenditures. It just seems incredible.
We have the chairman now telling us that -- I forget the phrase he used yesterday, but he tells the Globe and Mail yesterday that "The reality is they," the Hydro board, "flogged the hell out of this thing." Well, it doesn't seem to me that they did.
The Chair: Okay, can we pause for the answer. Any response?
Ms Clitheroe: At the meeting which included the acting deputy, he listened, he was briefed. The content of the letter was not communicated to me at that meeting. The letter arrived obviously some time the following week. It was presented to the board meeting. The board meeting's resolution with the request that financial analysis come back and that the analysis of Bruce A and Pickering A come back, at least in my view, satisfied me that the minister's concerns raised in his letter were being met, and I would assume they met Mr Horswill's concerns, as he was there during that process and did not see fit to need to add anything in addition to the resolution to address the minister's concerns.
The Chair: We are in the final round, so I will use my Manitoba watch and go slightly past the 12 o'clock hour.
Mr Laughren: I guess if I were writing this out as a script, I would have had the chief financial officer of Hydro go to that meeting on the 9th, I believe it was, the Friday, and if not blatantly then quietly offer encouragement for such a letter to be written to the chairman of the board to ask the board to consider all options, because I think if I were the chief financial officer of Hydro, I would want that to happen.
I then, of course, following the script, would have been disappointed when that letter was not dealt with prior to the decision being made by the Hydro board. I think that's the real sad aspect of this whole story of the 12th: that the minister's letter was dealt with after the important decisions were made concerning the nuclear recovery program. That's where I feel that matters weren't dealt with in an appropriate way, to use my words carefully, because I think to be fair to everybody concerned, that letter should have been right up front before any discussion of Mr Andognini's plan was laid before the board.
I guess my question to you then is, did you feel any sense of disappointment, to use a gentle word, that that letter didn't appear and get circulated until after the important decision had been made on the recovery plan?
Ms Clitheroe: Any concerns that I had during the board meeting, which I obviously expressed and which are reflected in the minutes, around requiring further due diligence around the financial statements, the financial impact, were alleviated by the couple of paragraphs that I've referred to. I did not feel that either the Ministry of Finance or the Ministry of Energy, which was represented at that meeting, would be concerned with the outcome, given the way the resolution was finally adopted by the board.
Mr Laughren: But, you see, you knew a lot more about everything than the other board members, it seems to me. You've got these poor folks from across the province coming in to serve on the board and they don't have the information you do about Mr Andognini's plan, about the cost of the options, about the problems with the statutory debt retirement. On all of those things you have a lot more information than they do. Perhaps you were comfortable with the letter not being circulated until the decisions were made, but if I were another board member, I'd be mad as hell about that letter not being circulated until after I'd been asked to make a decision. I would be really angry if I were a board member.
I don't know if they were, but I'd feel like I'd been had by somebody, and basically by the chairman for not circulating that letter, because the letter went to him. He chose -- I can come to no other conclusion -- not to circulate that letter until after the decision had been made. That really bothers me.
Ms Clitheroe: If I could pick up on two points that you've made, one is that the material provided to the board members at that meeting, both prior to and subsequent to that meeting, has been very fulsome. I take your point about people who are on boards having to absorb a lot of material quickly about an entity that they're not spending their working days at. On the other hand, they did have many months of reporting by Mr Andognini and they certainly had several discussions on prior occasions around these same types of issues, not necessarily with respect to the NAOP, in terms of how the financial issues work --
Mr Laughren: But they didn't know about the letter.
Ms Clitheroe: -- in the Power Corporation Act. So with respect to full disclosure to the board, I certainly believe there was full disclosure to the board of all of the issues.
With respect to the functioning of the board and the input from the Ministry of Energy, I believe the government added the deputy minister to the board for the very purpose of keeping the board apprised of the minister's wishes. The deputy minister was there, and so in that event I'm comfortable that the deputy had the opportunity to make known all of the concerns and issues that the energy minister had.
Mr Laughren: But did the deputy in effect bring to the board the contents or the concerns expressed in the minister's letter?
Ms Clitheroe: I believe he did, but I understand that you are going to be seeing the deputy and perhaps it would be better directed towards him.
Mr Laughren: I'll tell you, I would be very unhappy with my chairman if I were a board member trying to do the best job I could under very difficult circumstances. I have some sympathy for board members who are making decisions of enormous import and don't have full disclosure. That's the only word that I can thing of, that there was not full disclosure to the board members at that meeting, because that letter was not circulated. I think that's serious.
Ms Clitheroe: Just to correct the impression here, the letter was circulated --
Mr Laughren: After the decision was made.
Ms Clitheroe: Again, I believe you'll have the opportunity to ask him about this directly, but I believe the chairman felt that the spirit of the letter and the request of the letter were being accurately reflected by the board and would have raised the issue had it been going the other way. When the letter was circulated, people examined the letter and felt the discussion and the resolution were consistent with the letter as circulated.
Mr Laughren: All I know is that if I were a board member, I don't think I would be any more if I were treated that way by the chair.
I wanted to return to the letter written to Mr Wilson, the new Minister of Energy, Science and Technology, and now the chief shareholder in Ontario Hydro, dated October 15 of this year, in which the chair, Mr Farlinger, talks about pricing options. The first part of the paragraph implies that it's really just special aspects of pricing that might need to be looked at. This is how I would interpret it, anyway.
"The board was advised that changes were necessary to the pricing options in order for Ontario Hydro to help mitigate the adverse economic impacts on direct customers and the Ontario economy of recent increases in system marginal costs. As well, the chairman and chief executive officer...was authorized to apply to the" cabinet "...for a regulation exempting Ontario Hydro from submitting a proposal to the Minister of Environment and Energy for review of these changes by the Ontario Energy Board."
What I'm trying to get at here is to what extent were those just basically housekeeping changes in prices, or was that referring to a general increase in rates by Ontario Hydro?
Ms Clitheroe: It was not referring to a general increase in rates.
Mr Laughren: What specifically was it referring to then? Help me out as a layperson on this. I'm just a country boy from the north.
Mr McNeil: We have a variety of rate classes and rate structures that apply to differentiated classes of customers. Several of our direct industrial customers have access to what is known as the surplus power rate. It was a rate that was established when Ontario Hydro had a surplus of capacity, which it currently doesn't. Those rates are beneficial to retaining customers inside the province and to the economy of Ontario. With the absence of access to surplus power, those people are being exposed to a much higher rate of power.
One of the items we've gone through to help alleviate some of the concerns our industrial customers have with respect to price is to allow them to have what we call basically a pass-through rate, which is, if they so desire, we'll purchase power for ourselves on the interconnected market, but they'll be willing to pay a price that's higher than what they get it in Ontario for but lower than what a full built-in rate is. It is really an option rate. They don't get it firm. They take it when they want it. We have basically approached the government to get leave to do that. It had been done on an experimental basis this year, and several of our large and direct customers wanted to carry it on for next year.
Mr Laughren: The last sentence in that paragraph says, "The board of directors determined that a decision regarding the necessity for a rate increase in 1998 will be considered at the next meeting of the board." That was referring to that option, not --
Mr McNeil: No, sir. Maybe Eleanor would like to talk to that.
Ms Clitheroe: What Pat was talking about was the special situation, which was the front end of what you've just read out of the letter. The last line that you just read out of the letter was referring to what we would normally do in the fall, is examine whether a rate increase was to be requested or not, and that would be the case whether we were thinking of decreasing rates, no change in rates or increasing rates. So the rate issue --
The Chair: Thanks, Mr Laughren. Mr Galt.
Mr Doug Galt (Northumberland): Good morning. The whole area of finance, maybe just in a little more global sense, I would like to review and go over. We've heard from the Ontario Energy Board and they're saying that yes, they review the rates of some but not all. For example, the rural customers; they are not required under the PCA to look at that. Then they give recommendations to Ontario Hydro, which doesn't have to necessarily follow those recommendations. We then hear from the AECB and they're saying, "Oh no, we don't have anything to do with the finances. We just license and look after safety," and there's some question there at times.
We're kind of left with the poor taxpayer out there, the Ontario resident getting stuck. Who's really responsible for the finances? Where does the buck really stop? This is a monopoly; they can do whatever they want. Where does the buck stop?
Ms Clitheroe: The responsibility for rate-setting is with the Ontario Hydro board, and debt is issued on the recommendation of the board and with the government concurrence, with the government guarantee. Those are the two places, either on the revenue side or on the borrowing or financing the plan's side, that the authorities are, either with the Ministry of Finance or with the Ontario Hydro board.
Mr Galt: I understand that you've just thrown up your hands and said Ontario Hydro doesn't have any responsibility?
Ms Clitheroe: No, no.
Mr Galt: That's what it sounded like.
Ms Clitheroe: I'm saying that the Ontario Hydro board has the responsibility for setting the rates and approving the business plans. They also recommend the borrowing program for the year, and that borrowing program must be concurred in by the Ministry of Finance for the government guarantee to be issued to it.
Mr Galt: I hear from the people of Ontario it's totally out of control and has been for a very, very long time. In 1985 we had some of the cheapest industrial electricity in North America and now it's extremely expensive, I am told, in relative terms. We hear some other figures coming in, but that's not what I'm hearing from industry out there. The people of Ontario feel that it really has been rolling out of control from back in the mid-1980s.
With your experience as Deputy Minister of Finance and now in this role at Ontario Hydro, to protect the people of Ontario and to give them the kind of confidence that they deserve, what kind of changes would you recommend be made to the Power Corporation Act? Surely to goodness there must be something that we need to do to protect the people of Ontario.
Ms Clitheroe: First of all, I do have some ideas around what changes could be made to the Power Corporation Act, which I'll comment on.
With respect to the first comment, however, about protecting the people or protecting the taxpayers from Ontario Hydro as a result of the restrictions under the Power Corporation Act, the Power Corporation Act empowers the board to take certain actions and the stewardship of the company is entrusted to the Hydro board in conjunction with the Ministry of Finance and the Ministry of Energy. I think the people are well served by what has been a very successful Ontario Hydro over the last 90 years.
With respect to the company being out of control, I'm not sure exactly what you're referring to in terms of "out of control."
Mr Galt: That was a very common reference in the early 1990s as the rates were going up.
Ms Clitheroe: If I understand your comment, it's around rates. Our rates have indeed gone up over the last number of years, and that was why in 1993 Ontario Hydro began the cost program, the reformation, commercial orientation -- all of those programs that were put in place to --
Mr Galt: You did adjust your rural rates. Approximately a year ago we got beat up as MPPs very badly over those adjustments. There was absolutely no warning to us; it was just adjusted and away you went.
Ms Clitheroe: With respect to the overall rate structure, that rate structure we are operating within the rate freeze. Within the rate structure, we have been applying the Power Corporation Act requirements. I'm not familiar with the issue you're raising with respect to lack of notice in terms of potential rate increases.
Mr Galt: I'm referring to the increase in service charge to rural customers and the drop in the kilowatt-hour. So the place that had the small barn with maybe only a few lightbulbs in it, all of a sudden their rates went up maybe three times what it had been, their total cost per quarter. It was quite a jar to an awful lot of farmers in rural Ontario.
How would you change the PCA? We never got around to it.
Ms Clitheroe: With respect to the second half of your question, as I indicated to Mrs Fisher, the management had made a proposal with respect to the Power Corporation Act to put the company on essentially a commercial footing and to open up the industry to a competitive marketplace. That would necessitate some fundamental changes in the structure of the Power Corporation Act. It would remove the obligation to serve from one entity and distribute that to anybody who wished to supply power in the province. It would remove the monopoly from the company and force it to compete with other potential suppliers, either from the States or those who would build in Ontario, and put the company into a commercial footing where it would have to borrow without the government guarantee, that sort of extension of the commercial aspect of a capital structure and normal financing program of the company.
We felt that was consistent with the way we saw North America moving and that would both allow the company and other competitors to operate in a North American marketplace and would provide complete due diligence to the people of Ontario and provide them with reliable, safe and cost-effective power.
Mr Galt: It's interesting that you would recommend changes to the PCA to bring in competition, become more commercial. At the same time, Ms Ng earlier said that in the recommendations that she brought forward, none of this was considered. The Macdonald report sitting out there was recommending competition. We know there's a white paper coming very shortly, but yet no consideration was given to this when the finances were brought in for the August 12 board meeting.
Ms Clitheroe: The dilemma is for a management operating when they believe there are going to be changes to fill all the obligations of the current legislation and try to anticipate what is going to happen in the future. The Macdonald report is just about two years old now. We have had to fulfil all the Power Corporation Act obligations in that time frame. We will have to do that until and if legislation is changed.
Mr Galt: I'd have to correct you on your time frame; it's about a year and six months.
Ms Clitheroe: A year and a half.
Mr Galt: It came out in June 1996.
Ms Clitheroe: So we have to fulfil our obligations under the Power Corporation Act as well as try to anticipate what government policy will be, what the marketplace will look like and adjust internally. To that end, we've set up business units; we've attempted, through internal transfer pricing mechanisms, to instil some competitive behaviour in the people at Hydro; we have changed some of the ways in which we analyse business decisions; we have a better handle on what our rate structure looks like vis-à-vis others -- and as much as we can do internally to restructure along commercial mode without actually being able to give up the power-at-cost obligation to serve requirements that are on the company under the Power Corporation Act.
Mr Galt: I think I heard you earlier say in some of your testimony that the board does worry about the financial solvency of Ontario Hydro, and that's certainly good news to me and good news to the taxpayers of this province. But reflecting back on what's been going on from the development at Darlington to the change in rates and some of the other faux pas that have been happening over the last 12, 15 years, it's certainly pretty upsetting what has been going on. It's good news to hear you say that. When did the board start really seriously looking at the financial solvency of the operation of Ontario Hydro?
Ms Clitheroe: I've been at the company for four years. So for the time that I have been there, the financial condition of the company, the potential for the marketplace opening up and decreased revenue or loss of market share, the issue of would some of the assets that we currently have be useful in a competitive marketplace, have been topics for discussion since I've been at the company in any event. I suspect it predated that as well, but it certainly has been the case for the time I've been there.
The Chair: Ms Clitheroe, that completes this round of questioning, but just a couple of questions to wrap it up for the morning. One of the options sees Ontario Hydro taking a $4-billion write-off in 1997. Am I correct with that?
Ms Clitheroe: Yes, that's correct.
The Chair: When would the board typically make this decision?
Ms Clitheroe: The necessity to make the decision would arise when they had finally made the decision as to what the financial plan would look like. For example, if a decision had been taken with respect to a specific asset in February of a year, then they would be obliged to deal with that at that time and write it off in the calendar year.
With respect to these specific write-offs, once they take the decision as to how they are going to handle the costs of the program and whether or not any of the plant and equipment has to be written off, then they would be obliged to put that accounting treatment decision into the financial statements. That could happen this year. It may not. It could happen the following year. It depends completely on when management recommends and the board approves any particular decision.
The Chair: So it may happen before January?
Ms Clitheroe: Yes, it could happen before January for the 1997 and then be reflected in the 1997 statements, the current year statements.
The Chair: If this committee wishes to make recommendations to the government on the appropriateness of the options, would you be able to give this committee any undertaking that the board might be prepared to withhold a decision on those write-offs until this committee has made its decision?
Ms Clitheroe: I can't personally give the undertaking.
The Chair: No, of course. I understand that.
Ms Clitheroe: But I can certainly go back to the corporation and pass the committee's wishes on to it.
The Chair: There is a question to ask you about the assets. The equity that I see is something in the order of about $49 billion. Would I be about right in the figures that I saw? Is it approximately that?
Mr Campbell: It's $39 billion.
Ms Clitheroe: The book value of the assets is just around $40 billion.
The Chair: About $40 billion. Is that based upon market value? What's the value? How do you arrive at that magic number?
Ms Clitheroe: It's not based on market value.
The Chair: Is that a value that's in the eye of the beholder?
Ms Clitheroe: No, it's book value. For example, what did the piece of equipment cost? If it was to take it down to a very small level, what did a typewriter cost? It would be $10 and it would go on at $10.
The Chair: Okay. So in some cases, using the example you've given me, saying the typewriter will survive two years while a nuclear reactor will survive 40 years --
Ms Clitheroe: Right.
The Chair: That's the nature of the subjectivity.
Ms Clitheroe: That's right. In accounting treatment, some of those items would simply be expense, like pencils and papers and so on. At a certain level they are put on the books, capital, and then they are depreciated over a period of time.
The Chair: Those figures, in your opinion, with your significant experience, are pretty reasonable?
Ms Clitheroe: They're certainly correct from an accounting point of view. Whether you could fetch that --
The Chair: No, but I chose a different word.
Ms Clitheroe: Yes. Whether you could fetch those sort of dollars if you tried to sell a particular asset in the marketplace is a completely different question. That would be putting a market test to what the asset value is, and that is not what is reflected on the books.
The Chair: The final question goes back just again to stir at the issue raised by all of the caucuses and that deals with the timing of the introduction of the letter of the minister at the August 12 board meeting. Would it be unfair of me or fair of me to suggest that the chairman of the board had possession of the letter at the beginning or during the meeting?
Ms Clitheroe: I honestly can't speak to that.
The Chair: I see. All right. Thank you very much. If there are no other questions, I'll deal with that in another setting. Thank you so much and -- oh, I do have a couple of questions from staff. If you'd please just stay on for a moment.
Mr Campbell: Ms Clitheroe, just to follow up your last answer to Mr Laughren, the minister's letter says -- this is the October letter to Mr Wilson saying, "The board determined that a decision regarding the necessity for a rate increase in 1998 will be considered at the" November 10 meeting. That's next week. You'd said that's typically the type of thing you would do at this time of the year. But the corporation is a little bit out of sync though, isn't it? Typically at this time of the year or early in the new year the corporation would be considering a rate increase for 1999. Isn't that correct?
Ms Clitheroe: Yes, that is correct.
Mr Campbell: So if the board decided in November that a rate increase was required, then presumably the same exemption that is talked about earlier in the letter with respect to industrial rates would have to be requested as well as an exemption from the Ontario Energy Board Act so that rates could take effect in January 1998.
Ms Clitheroe: I guess there would be a couple of options. One would be to make a special request to accelerate the process. One would be to carry on through the normal process, but that would impact the size of the rate increase that would be required if that were the case.
Mr Campbell: Okay. With respect to the extraordinary measures that the board is considering, the acceleration of NAOP, costs in the 1997 or the exclusion to achieve SDR, those options assume that a rate increase is not necessary. Could you give the committee a sense, if the corporation and the board of directors were to consider a rate increase and not pursue these other options, what the magnitude of the rate increase might be?
Ms Clitheroe: Obviously that would depend at what point the rate increase were introduced, if it were January 1 or June 1 or whatever, and how quickly you wanted to raise rates over what time frame. We raised them over two years?
Ms Ng: Yes. I think technically, if you just do a technical calculation in terms of just meeting the SDR and looking at the shortfall in the net income that needs to be included in revenue requirement, and assuming that you can increase it, I think it's probably going to be somewhere in around a 11% rate level if you can do it on a full-year basis. But again all those things are a bit of a technical calculation based on full year and based on SDR and so on and so forth.
Mr Campbell: Just so I understand, 11% say for 1998? Is that what you're saying?
Ms Ng: Yes, I think it's around that.
Mr Campbell: Would there be consideration there for 1999 as well?
Ms Ng: I think again using the same technical calculation of SDR, the rate level would be somewhere around that same level over the years if you do a technical calculation.
Mr Campbell: I wonder, Mr Chairman, if you agree, if Hydro could be requested to file the November board documents with the committee some time after the board meeting next week.
The Chair: That's a fair request.
Ms Clitheroe: Certainly.
The Chair: Thank you to all witnesses. I appreciate your attending upon the committee today. Ms Clitheroe, in particular if you could hold yourself available for another appearance before the committee, we'd appreciate that. It's only a matter of working out our scheduling now, but we'll give you fair notice now that there will be a recall. Other members obviously may be called again back to the committee as we continue the hearings. I appreciate your presence today and your cooperation. Thank you very much. You are excused.
Members of the committee, we have now arrived at that time when we will adjourn. We will return at 1400 hours.
The committee recessed from 1222 to 1403.
TOWNSHIP OF BRUCE
The Chair: The committee will be in order, please. We will begin the afternoon session. The first witness is Dick Joyce, emergency preparedness coordinator, township of Bruce. Please come forward and take the witness stand.
Mr Dick Joyce: Okay. I'm not sure of the process.
The Chair: Just sit down and relax. If you would like a cup of coffee, we will get one for you.
Mr Joyce: No, thanks. I'm coffeed out for today.
The Chair: Then please make your presentation, and later we'll have questioning by members of the caucuses.
Mr Joyce: My name is Dick Joyce. I'm the emergency planning coordinator for the municipalities around the Bruce nuclear power development. I'd like to do a couple of things today: describe my role, and what our emergency preparedness program consists of up at the Bruce. By way of introduction of myself, I think you should all be aware of the fact that I am a former employee of Ontario Hydro. I was one of the people who received a pension in 1993, just so you understand where I'm coming from and you can take that into account, however you see fit.
I understand that you folks are aware of the responsibilities of Ontario Hydro and the province and the municipalities for offsite emergency planning in a nuclear emergency. The province has overall responsibility and control of the offsite public safety program, Ontario Hydro is responsible for the program within their site fence, and the municipalities are responsible for implementing directives which are given to us by the province. That's kind of the way the roles and responsibilities work out.
Our municipal emergency preparedness program consists of six elements. First of all, we are responsible for developing a strategy for dealing with a nuclear incident in our municipalities. We are responsible for developing plans and procedures for meeting that strategy. We are responsible for emergency facilities -- in our case there are five facilities within our municipality -- and the equipment that supports those facilities. We are responsible for the training, drill and exercise program. We are responsible for the public education program. We also have an infrastructure around our emergency planning process, just things like the meetings we have to have with people, pagers and phones and developing, photocopies and all those things you have to support a program.
Ontario Hydro supports us within our municipality to the tune of $60,000 per year to meet those responsibilities. Our staff consists at this point of one part-time person, myself; one temporary full-time person; and an administrative support person as well, who is also part-time. That's our municipal emergency preparedness program, six elements.
Next, to tell you where I'm coming from, I'd like to tell you about our expectations of Ontario Hydro.
First of all, as a minimum, we expect Ontario Hydro to provide staff for our offsite emergency preparedness centres in the event of an emergency. These are what we call monitoring and decontamination units, which are established to support the municipality. We expect these staff should be highly skilled, knowledgeable and trained in both radiation protection and emergency preparedness. That's our first expectation.
Our second expectation is that Ontario Hydro should have a site non-nuclear emergency plan and integrate this emergency plan with our own municipal emergency plan. It's particularly important in the Bruce because of Ontario Hydro's large presence in our area. They are in fact another municipality, as I look at it, within our local municipalities, and we expect them to be part and parcel of our municipal emergency preparedness program in a non-nuclear sense.
Third, we expect Ontario Hydro to provide leadership and proactive support for the offsite nuclear emergency preparedness program. We expect them to be out there looking and to support us if they see things that, from their perspective, need improvement or support, things that need doing. We expect them to provide some leadership by example and support us in our program.
Fourth, we expect Ontario Hydro to provide a technical resource to us in the area of radiation protection and in the area of emergency preparedness, giving us best practices from all over the world from their expertise. They've got a lot of very skilled and knowledgeable people, and we expect to be able to tap into that resource, often in an informal way.
Lastly, we expect Ontario Hydro to fund the offsite nuclear emergency preparedness program. I mentioned the six elements a little while ago. We expect Ontario Hydro to provide support in the form of dollars for that program.
That is the formal part of my presentation, folks. I have a couple of points I would like to make at the end, but if you like, I'll reserve that, if you'd allow me five minutes at the end.
The Chair: Thank you very much for your presentation. We'll begin the questioning with Mr Laughren.
Mr Laughren: Welcome to the committee. You were quite expansive in outlining what your expectations are of Hydro. Do they meet them?
Mr Joyce: This is one of those, "Yes they do, no they don't" situations. In some areas they do a good job in meeting those expectations; in other areas, improvement is required.
Mr Laughren: Where do they do a good job?
Mr Joyce: At the moment, they're doing a good job in conducting drills and exercises for those components of the program that they are responsible for; in other words, the monitoring and decontamination units. They have an aggressive drill and exercise program and they're meeting their commitments in that area.
Mr Laughren: Where are they not meeting your expectations?
Mr Joyce: In a couple of areas. We would hope there can be some improvements made. We have noticed, particularly over the last few years, that some of the knowledge and skill base is perhaps not as good as it might have been in years past. We noticed -- I shouldn't say "we." It is my personal opinion that there is not a succession planning process, that people are not necessarily being selected for some of these offsite jobs on the basis of their aptitude and skills and ability, but perhaps they happen to be available for that particular position, and there they are.
Mr Laughren: I have no idea what the answer to this is, but do you have any idea what the biggest fear or danger in Bruce county is regarding the nuclear plant?
Mr Joyce: From the standpoint of the residents?
Mr Laughren: Yes.
Mr Joyce: Until the announcements on the heavy water plant were made, definitely the toxic gas emergency was the large concern. Once again, I can only give you opinion, but I don't see a large nuclear fear in the Bruce area from, say, Southampton in the north to probably somewhere below Kincardine. In areas outside that area within Bruce county, yes there is some concern about the nuclear program. We have some people who are active, to whom I am actually going to talk tomorrow night at one of their meetings, who are very concerned about the nuclear option in that area.
Mr Laughren: In my community, we have a very large operation called Inco, and a couple of years ago -- over a year, anyway -- there was a massive leak of toxic gas. Inco just settled out of court for $10 million, because a number of people went to hospital and so forth. People don't normally think of a mining operation as being dangerous in that sense to the local community, but it can be. Has there ever been a leak of any kind at the Bruce operations that would lead people to be concerned?
Mr Joyce: Once again I've got to give you opinion on this. There has never been a leak wherein we've had to activate our nuclear emergency plan. There have been some leaks that have been of significant concern to both the regulatory authorities and to the public; in fact, not so very long ago, in 1995, we had one that got a lot of press. But we have never had to activate the nuclear emergency plan in our area. We have never had a leak that has met the criteria for activating the plan.
Mr Laughren: Who approves your emergency plan?
Mr Joyce: Our plan is based on and must be approved by the provincial Ministry of the Solicitor General, Emergency Measures Ontario; at least my municipal plan has to be approved by them. In fact, we were just going through that this morning.
Mr Laughren: And you update that from time to time?
Mr Joyce: Yes. Ideally, we would like to update it once every year. We don't meet that. Probably once every two or three years is about the best we can manage.
Mr Laughren: So when a heavy water plant goes down, you are able to take away some aspects of the emergency plan, are you?
Mr Joyce: Exactly right. We have two plans. One is what we call a basic emergency plan, which covers a toxic gas release, tornado, fire, flood and all the rest of those things; and we have a nuclear emergency plan. With the changes being made now, I'm integrating those all together, taking the toxic gas emergency plan out and sticking together the other two. So yes, there will be a significant thing that has changed.
Mrs Fisher: Good afternoon, Mr Joyce. It looks like maybe you were having a little more fun than we were in the Bruce last week, so it's nice to have you here in Toronto. The committee had the opportunity to hear a little bit about the plan and how it might work, but throughout the course of the hearings we have had some indication from authorities, if you will: the Ministry of Environment, which, although they don't approve it, certainly need to be a part of some of the undertakings; the Ministry of the Solicitor General, which of course does approve it in the end and must be part of the proceedings; the AECB etc.
In the past there has been a question, in my mind anyway, about the structure of forming one, who should be involved and to what degree they continually communicate once it's approved. In the area, we have noticed in the past that the medical health unit, for example, was maybe caught by surprise by not knowing something or was a little unhappy with some of the proceedings. Would you agree that there could be a better way of not only making the plan and getting it through the approval process, but then carrying it on on a more consecutive basis, if you will, as opposed to hitting it once in a while and hoping it works if it is ever called upon?
Mr Joyce: Yes, there can always be a better way. Actually, I think you're aware of the revisions being made to the provincial nuclear emergency plan which are going to help some of those things. There is a process in place to keep this plan under constant revision. The problem until just recently, within the last couple of years, has been that there just hasn't been the staff, both in EMO and within the municipality, to carry out what we need to do. We're starting to get a little better now and we do have a formal process to keep the plan under review, and a committee and all the rest of those things. It is putting pen to paper that is the problem right now. Provided that funding keeps on improving and all of those things, we should be in a much better position in a couple of years from now. That's my guess.
Mrs Fisher: Last week, the reeve of the host municipality, Mr Ribey, made a comment that struck me, that I hadn't thought of in the past, and it's very significant, I think. His request was, how would we consider the continuity in the event of an election year, for example? I guess that question hadn't been raised so blatantly before. Maybe it was so obvious, staring us in the face, that we did nothing about it. But having heard that question and recognizing that the municipal head right now is designated as the host respondent to an issue, is it time to reconsider that and think that maybe there should be somebody else? That's not in disrespect to anybody there; that's not what I'm getting at. But the continuity during an election year is at risk. The continuity after an election, because of a new council, which isn't well versed and prepared to take on that leadership, is at risk. Have there ever been recommendations as to what alternative body or what alternative proponent in the community might be the right party?
Mr Joyce: It is particularly important to us right now because of restructuring. We are going to have a new council in a couple of weeks and we are going to have a new council a year from now. In fact, we've anticipated that. What we are doing under Project Upgrade is to put a lot of the more operational responsibilities on staff -- that would be me -- so that we are responsible for the operational things and there is some continuity there. The elected municipal officials are then in a decision-making process. I am also developing a transition plan to get the new people up and running. Actually, two days after the election we are going to gather them all together and say, "Here's the scoop."
Mrs Fisher: But in the bigger discussion, has there ever been a suggestion that it shouldn't be an elected official?
Mr Joyce: No.
Mrs Fisher: Again, not in any disrespect to anybody who has had that ball to hold in the past, but it makes a lot of sense to me that if there is ever a period of time, even a minute, where there is lack of continuity or lack of knowledge because they haven't been in position long enough to train, something is at risk.
Mr Joyce: Two things on that. First of all, there has never been, to my knowledge, a consideration of a non-elected official. In fact, the Emergency Plans Act is very clear that it be an elected official who is responsible. This would be more of a concern in a non-nuclear emergency, like a tornado and so on, because in a nuclear emergency, clearly the direction for the emergency is through the province, through Emergency Measures Ontario. There is staff; there is continuity; orders and directives are given; and it's up to us to implement those orders -- not so much of a problem. What is more of a problem is the other areas.
Mrs Fisher: Right. The hydrogen sulphide risks of the past, or whatever.
Mr Joyce: That's right. If a tornado hits us on November 14 with a brand-new council, with a plan that's covered with dust, that's a problem, yes.
Mr Kwinter: Mr Joyce, I'm not quite clear exactly about the organization. Whom do you report to? Who is your reporting body?
Mr Joyce: I report to the head of council for Bruce township, the reeve of Bruce township.
Mr Kwinter: Does all your funding come from Ontario Hydro?
Mr Joyce: Yes.
Mr Kwinter: I assume that $60,000 is used almost exclusively for salaries?
Mr Joyce: I'll have to qualify that. Of that $60,000, $20,000 is for administrative costs, things like paper and photocopies and phones and all the rest of those things.
There is another component of funding which we are able to enjoy, at least up to the moment, and that is JEPP funding, joint emergency preparedness program funding. This is a federal government grant which is sort of an ad hoc grant that you may or may not get. Right now, half of our full-time emergency planner is being funded through a JEPP grant, roughly 50%.
Mr Kwinter: Does Ontario Hydro have a counterpart for you on their site?
Mr Joyce: Yes, there are a number of counterparts for me within the Ontario Hydro organization both onsite and within their corporate office. I deal basically, within Ontario Hydro, with three or four people on a regular basis.
Mr Kwinter: Does the Solicitor General's department have someone as well?
Mr Joyce: Yes.
Mr Kwinter: What I'm trying to find out is, let's say there is an occurrence at Bruce. What is the chain? What happens? They obviously have people onsite who would respond immediately. Do they just call you to let you know about it, or do they call you if it's onsite?
Mr Joyce: Really briefly, the chain of events goes like this:
A problem occurs at the site. They categorize it; it meets a certain category. They have certain things to do based on that category. The first thing they do is call the province. The second thing they do is call the municipality. Then we go to our procedures and the province then takes over all control of the emergency response. They consult their plan and will direct us to implement certain protective measures. It might be to close the schools, it might be to set up road blocks, it might be to evacuate people and so on.
The province calls the shots offsite. The municipality implements those actions. Ontario Hydro focuses on their own within-the-fence situation. Does that answer your question?
Mr Kwinter: Which is exactly what I'm trying to get at. We heard from the people in Pickering, we heard from the Ontario fire marshal that he does not have any jurisdiction inside the Hydro facilities.
Mr Joyce: That's true.
Mr Kwinter: That's the same situation you have at Bruce?
Mr Joyce: Yes, that's true.
Mr Kwinter: So they really have control of that.
Mr Joyce: They are in total control within their fence, yes.
Mr Kwinter: And you coordinate what happens outside the fence?
Mr Joyce: Exactly. Including support to them if they need it, if they request support from us. Mass fatality, for example, we have to coordinate ambulances, hospitals and so on at their request.
Mr Kwinter: Have you ever been called upon to do anything for them?
Mr Joyce: Not from a big scale. We've had offsite ambulances go onsite every once in a while to help them out, yes, but not on a regular basis. They are sort of self-contained, if you like.
Mr Kwinter: What happens to your position during this election period? Do you sort of serve at the pleasure of council or is this something where you have a contract regardless of who the political masters are?
Mr Joyce: I have a contract, yes, regardless of who the political masters are. So I am continuous through these changes.
Mr Kwinter: I'm also not clear. Is this a part-time position or a full-time position?
Mr Joyce: Part-time for me, on a contract basis. I'm not an employee of the municipality. I'm a contract employee.
Mr Kwinter: But it's not a full-time. What happens if part of the time that you're not on duty something happens?
Mr Joyce: Normally I wear a pager. If I'm within a three-hour response of the station, I wear a pager. If I happen to be in Florida, as I just got back from, then our chief administrative officer wears the pager. I pretty well let them know where I am all the time. That's basically it.
The Chair: Mr Joyce, thank you very much. It was that easy and it was that helpful.
Mr Joyce: Good. I hope it was.
The Chair: We thank you very much for appearing before the committee. If we have any other questions, I know you'll hear from us and we know we'll have a speedy response.
Mr Joyce: Yes. I just had two points I'd like to make.
The Chair: Absolutely. That's why I want you to summarize. Go ahead.
Mr Joyce: One is regarding the IIPA study. I've read it over, particularly the part that involves my speciality, which is radiation protection and also emergency preparedness. I'd just like to make a comment on the IIPA, that in my own opinion, it generally hits the mark as far as what things need to get addressed.
The how part would be something that might be a little bit different. There are many ways to address a problem, many ways to skin a cat, if you like. I guess there is one guy, a very wise man who used to say, "You never ask a barber if you need a haircut." I see a little bit of that in the IIPA report. I see certain statements in there that identify problems which are really identifying the solution as opposed to the problem. That's the first thing.
The second thing is, I'll use another colloquialism, if you like. In anything like this, a big change like this, you've got to be careful that you don't throw out the baby with the bath water. I'd like to say that there are people in Ontario Hydro -- and I'm not saying this just myself -- who are expert in my particular area of expertise. I've been involved with the Russian nuclear power program over the last little while. I've had people come over and visit Ontario Hydro stations and they have been very impressed with the quality of the people who work there.
So in all these changes that are being made, I would strongly urge people to make sure that you don't destroy some very venerable and very effective situations and customs and culture that are existing there today.
The Chair: Thank you very much. I appreciate your evidence and we thank you for being with us.
As we prepare to go to the next round, I might just mention to members of the committee, if you will make sure that all cell phones are turned off, please. It is distracting to hear the phones ring and I would hope that each caucus lead would ensure there's some discipline within the caucus and full support.
The Chair: Mr Laughren, speak to yourself and get that organized, so let's make sure we get that all organized, shall we?
Mr Conway: If you keep this up, you're going to join your friend Mel Lastman on the mat.
The Chair: We will have a talk about that one, won't we?
ERNST AND YOUNG
The Chair: Let's move into the next round, Ernst and Young. Brian Caine, senior partner, please come forward. If you'll make your presentation, whatever time that takes, then we will proceed with questioning by caucus in rotation. The questioning will begin with the government caucus this time.
Mr Brian Caine: Good afternoon, Mr Chairman and the members of the committee. My name is Brian Caine and I am the senior advisory partner from Ernst and Young assigned to Ontario Hydro. Beside me is Ken Hartwick, who is the audit partner on the Ontario Hydro engagement. Ken was also the lead partner on the Ernst and Young report on the assessment of the financial estimates for the NAOP, which I believe has been provided to the committee.
First, I'd like to provide a little background and context to the report. Ernst and Young is a professional services organization, providing services in Canada and around the world. The firm has operated in Canada for 130 years and has been the auditor of Ontario Hydro for 90 years.
Mr Conway: Did you say 90?
Mr Caine: Ninety years. We've been privileged to serve as auditors for many governments.
Mr Conway: You've got some explaining to do, then.
The Chair: Those asides come out of your time, Mr Conway. Please carry on.
Mr Caine: At 90 years, it sizes it out of my time, I should assert.
As you're aware, Ontario Hydro's board of directors asked us to conduct an independent assessment of the financial support for the NAOP as part of its August 12 decision. The project team that did that work consisted of professionals from our firm along with support from Ontario Hydro's internal audit group under our direction.
I'll now turn to Ken, who took the lead role in preparation of the report, to outline the timing and the recommendations, the chronology.
Mr Ken Hartwick: Good afternoon. The mandate of the independent assessment report was to determine the quality, sufficiency and extent of financial analysis supporting the nuclear asset optimization plan based on the technical data that was provided as part of the IIPA report.
Our field work commenced on August 27 with a review of documentation, interviews and collection of the supporting evidence. A presentation of our findings was made to the audit finance committee of the board of directors of Ontario Hydro on September 7. In accordance with our normal procedure, the findings of the assessment were reviewed with Ontario Hydro management to confirm the factual accuracy of the evidence that supports our findings. As a follow-up to this presentation and at the request of the board, we provided our detailed report dated September 7, which you have, and a letter dated October 20 commenting on the status of our findings.
The report issued a series of findings on the financial estimates associated with the NAOP, and based on those findings, Ernst and Young offered seven major recommendations which have been summarized in the report. Very briefly, the seven recommendations were the range of options that Ontario Hydro considered in response to the IIPA report that should be documented such as cost implications and risk factors:
Corporate finance should determine the financial impact of each option.
A more rigorous financial analysis should be prepared for supply options should Pickering A not return to service at the scheduled time.
Implications of key NAOP assumptions must be assessed and substantiated before commitment of significant funds.
The risk associated with each option should be assessed and documented along with the cost implications and contingency plans.
Hydro should establish clear accountability for the integration and assessment of the NAOP options and financial analysis with authority to direct the analysis prepared by Ontario Hydro nuclear generation and other relevant business units.
Finally, a performance monitoring process should be developed to support the tracking of costs to the benefits achieved.
Our recommendations highlighted that additional analysis was required as it relates to the financial aspects of the nuclear asset optimization plan.
In response to the report, it is our understanding that the Ontario Hydro board has instructed management to undertake a series of actions to address the recommendations, including the commitment to complete the necessary financial analysis as part of the business case preparation for the release of funding for the NAOP projects.
Mr Caine: At this point we're happy to entertain any questions you might have.
The Chair: Thank you very much, Mr Caine. If it would be agreeable to the members of the various caucuses, Mr Power asked if he could ask a few preliminary questions to lay the ground. It strikes me as a reasonable request, if that's agreeable to all members. Yes? That's concurred with. Mr Power?
Mr Power: A few background questions, if I may. Who instructed you from Ontario Hydro?
Mr Caine: The instructions were received from and pursuant to a requirement from the board of directors to have further due diligence on the financial numbers. The communication we had was with Ms Eleanor Clitheroe, who is the chief financial officer of the corporation. A copy of the terms of reference was filed with the board of directors and is included in the report.
Mr Power: Did you have ongoing communications with Ms Clitheroe as you carried out your work?
Mr Caine: In the course of our work, we had communication with a number of senior members of management of Ontario Hydro. I'll ask Ken to give a more detailed answer to that question.
Mr Hartwick: Yes, we did. It's fairly ongoing, in the preliminary collection of information and data phase that we were going through, to ensure that we had the supporting documentation as well as then venting our findings and the evidence that supported those findings through the various individuals within the management team.
Mr Power: Did you communicate to them your concerns as they arose or did you wait until the report was filed at the end?
Mr Hartwick: We began the review around August 27, and through the first week of collection of information, we went to an audit finance committee on September 7 and had discussions prior to that, so probably the Thursday or Friday before -- I think the audit committee meeting was on a Sunday -- to review the findings and what we were going to present as our findings to that audit finance committee.
Mr Power: Was that just an oral briefing or was there written documentation provided as well?
Mr Hartwick: For the audit finance committee?
Mr Power: Yes.
Mr Hartwick: A presentation was prepared and provided to the audit finance committee, which is reflected in the detailed document submitted to this committee.
Mr Power: Did Ontario Hydro receive a draft report from Ernst and Young at any time? Did they provide any comments back on that to you?
Mr Hartwick: Yes, they did. We provided this report that was filed with the committee, dated September 7. It was provided in draft to various people at Ontario Hydro to provide comments, to look for clarification on factual accuracy around the evidence and the evidence that supported our findings, and those comments were taken from Ontario Hydro.
Mr Power: Were there any comments or instructions to you which limited your scope or affected the tone or tenor of what you wrote in the final report?
Mr Hartwick: No, there was not.
Mr Power: Was there adequate time allowed for you to carry out your retainer? Were you satisfied with the amount of time you had?
Mr Hartwick: Yes, we were. We are satisfied with the report that was prepared and submitted.
Mr Power: Are there any major issues, from your financial expertise point of view, that you found as a result of your investigation that might have been outside of the scope of your retainer and therefore have not been reported on?
Mr Hartwick: I don't believe so.
Mr Power: Does your retainer continue at all with respect to the outstanding items you have outlined in your report?
Mr Caine: Might I address that as well? We are the auditors of Ontario Hydro, so of course the detailed financial plans, once decisions are made with respect to plants and other commitments, liabilities, would form part of the evidence we would look at in terms of determining our opinion on the fairness of the presentations of the financial statements for this year, which are closed off at the end of December.
Mr Power: In the interim, though, do you have any ongoing role regarding follow-up for the issues that are outstanding as identified in the report?
Mr Hartwick: We issued a letter on October 20, which I believe has been filed here, which gave a summary of the status report of management's progress on our recommendations, and we have no further role beyond that.
Mr Power: I want to be certain we're on the same wavelength here. You're doing no further investigation of the documentation. You filed your report, you've done a little bit of follow-up with that letter, and you have no further role until the year-end audit time.
Mr Hartwick: That is correct.
Mr Power: A difficult question, I think, but there's a concern raised that it might be too late for Ontario Hydro to respond to a number of the questions raised in your report because they're about to commit to the closure of Pickering, Bruce following shortly. Can you tell us what confidence you have that the type of satisfaction you expected can be met before December 1, let's say, or will Hydro be able to meet those questions before December 1 or year-end?
Mr Caine: Perhaps I could deal with the overall context of your question and then pass it to Ken to talk about specifics. In terms of the request that we received to do this review, it isn't uncommon for a client who is examining a major investment or looking at some major event or change in direction to ask their auditors to go in and take a look at the support for financial information. Once they've made that direction, it is an intensive process as you make significant changes in direction. That's the kind of context within which we conducted this examination and prepared these detailed reviews against the criteria that we stipulated in our report.
Mr Hartwick: I believe we have referred in the report as far as addressing the issues that are raised here are concerned. Some of them are very significant and will require some time. Whether they impact the December 1 time line, that's probably a question that management would be in a position to address.
Mr Power: To rephrase the question: Do you know for certain whether these issues can be satisfied to the level of satisfaction you've raised by December 1? Has somebody told you they will meet all of the issues raised in your report by December 1, for example?
Mr Caine: We understand that all of the issues that have been raised in the reports are being addressed by management. We've seen some evidence, as indicated in our letter, that for example documentation of the options and so on has been already provided. But we have no ongoing role with respect to determining the status of them at December 1. Our last review was at October --
Mr Power: Right. I guess the short answer is, you don't know. I guess you're going to find out at the year-end audit period, right? At the year-end audit period, if they haven't addressed these types of questions and they've proceeded with their course of action, what do you foresee writing at that time?
Mr Caine: We would expect to see a complete set of evidence as to what business plans have been prepared, that these matters would be addressed in those business plans as part of the evidence for assessing the valuation of the assets and the quantification of the liabilities as at December year-end, and also the delineation of any uncertainties that should be made known to the financial public and to the Legislature.
Mr Power: Moving that hypothetical one step forward, what if they haven't satisfied those criteria? What's the remedy? I guess you just write a report that outlines those concerns and do nothing further.
Mr Caine: We are required to prepare a report as to whether or not these financial statements state fairly the financial situation of Ontario Hydro. We would include our comments should we not be satisfied with the evidence we see in that report.
Mr Power: In expressing your opinion, if I understand your point correctly, you're dependent upon other expert advice with respect to, for example, reliability of the nuclear assets' costing and a variety of other matters. Have you retained or found that type of expertise to assist you with providing your year-end audit review?
Mr Caine: We have a general professional requirement that we follow with respect to the reliance on technical expertise. Generally it doesn't necessarily involve employing our own separate experts. It could, but it has not up to this point required that. We follow those based on professional standards.
Mr Power: In light of what you've seen now, and given the time frame you have before you, do you think it's reasonable that you would require that sort of outside expertise to assist you? Or is the firm of Ernst and Young confident they have the capability to write the audit report as matters presently stand?
Mr Caine: We look at that as we go forward. We haven't finalized our decision on the evidence that we're going to be requiring. Perhaps I'd ask Ken to comment. He's been dealing with this in a little more detail.
Mr Hartwick: That's correct. As we move forward through the year-end and through to issuing our audit opinion and report, again, that's an assessment we'll make as to whether we're satisfied with the information that's provided by management on management's financial statements, which will allow us to report, or whether we do require independent technical experts in the nuclear area or any other area through the corporation. Those are decisions we will make as we go through the audit process, but ones which we have not made as of today.
Mr Power: If I understand correctly, that's after the books close. End of December, mid-January you'd start your audit process, roughly?
Mr Hartwick: The audit process for companies such as Ontario Hydro is more frequent than that. It does go throughout the year. We'll have people in at various points through the year doing certain elements of the work. It's not as if we start the process in January or February, once the books have been closed off; there are certain elements that are done prior to that.
Mr Power: I just need to get a better sense of the timing here. Given that you have an ongoing audit process of some nature, given that you have to express an opinion within a couple of months, at some point you must make a decision whether Ontario Hydro has addressed the issues raised in your report satisfactorily and whether you require outside assistance to evaluate and express your opinion at the end of the year. That's got to be fairly soon. I'm just wondering if you can provide some guidance to the committee. Is that a month off, two months off, three months off?
Mr Caine: I just wanted to broaden the question, if I might, just a bit and then bring it right back down. In a general sense, we would look at all the evidence, including the AECB licensing of these facilities and other evidence that would provide us assurance that these are operating in accordance with the requirements that have been laid down in law and regulation. We are auditors after all and not technical experts in the nuclear field. That's the kind of evidence that we normally look to. Where we can't be satisfied with that kind of evidence is when we usually would want to consider other kinds of avenues for assuring ourselves that these assets are appropriately stated on financial statements.
That kind of decision-making, in this particular case, would be as they move forward, prepare detailed plans, have their discussions with the regulators. We have other avenues of evidence that we believe we can rely upon at this point. But we don't close down any options until we finalize our audit opinion, which is generally in late February, early March -- something like that timetable -- if it goes by historical standards.
Mr Power: Again, my question: If you're closing down by the end of February, there must be some point in time you have to make these decisions regarding the evidence and the need for expertise. Is it a last moment sort of thing? You must have some sense of this.
Mr Caine: Absolutely. We review the plans on a regular basis throughout the audit. We meet with the audit committee to finalize our audit plan and then have a second meeting with them generally in mid-audit. We would make that decision then, because you have to arrange for the right kind of people, if that was necessary.
Mr Power: Is your firm providing accounting advice regarding the three different financing options that have been presented from Ontario Hydro?
Mr Hartwick: I'm not sure the financing options that were --
Mr Power: Other than increasing the rates, we had a presentation regarding -- there was an overhead you may or may not have seen that says, "In the absence of a rate increase, three additional options can be potentially considered by the Hydro board, to meet the SDR requirements prescribed by the PCA." Does that ring a bell with you?
Mr Hartwick: Yes, it does.
Mr Power: There are three issues they had provided to us. I'm just curious whether you're providing advice to Ontario Hydro or whether you'd be independently assessing whether or not they'll be meeting those statutory financing requirements.
Mr Hartwick: We provide advice as to the accounting treatment and disclosure of the financial statements associated with whatever type of option or whatever type of transaction might be involved. That is something that we have ongoing discussions with them on as to the correct accounting treatment for those options, rather than the options themselves. It's really the presentation and accounting for the options that management would be considering.
Mr Power: We've had evidence before this committee that Ontario Hydro cannot proceed as it intends to, that it will be in violation of the Power Corporation Act provisions regarding how it intends to finance the NAOP. Have you formulated any opinion regarding whether or not they are in compliance with the Power Corporation Act for this?
Mr Caine: Perhaps I'll start. It does seem like a tag team, but we do work on this on a consultative basis. We are aware of the provisions of the Power Corporation Act and the requirements for SDR. It's part of our review and it's part of assessing the financial statements and whether they comply with all the necessary requirements. We do that as part of our audit. They've consulted with us on accounting implications that are part of that consideration. That's our role. I don't know if there's anything you wanted to add.
Mr Hartwick: I think that's correct; it's around the role of accounting and presentation of considerations related to the SDR.
Mr Power: What I'm asking is whether you have formed an opinion on whether the financing options under the Power Corporation Act that Hydro has presented before the committee, and obviously to its board and to yourselves, are acceptable within the parameters of the Power Corporation Act.
Mr Caine: The specific opinion as to whether or not it's within the requirements of the Power Corporation Act is something I believe Ontario Hydro has sought legal counsel on. We also have access to the legal opinions they obtain and can obtain evidence with respect to it on that basis. It is a legal matter; it has accounting implications. We certainly have been advised on that aspect.
Mr Power: Might I interpret that to be that this is best left in the hands of the lawyers? Is that what that means?
Mr Caine: Many things are best left in the hands of the lawyers.
Mr Power: I just have one or two brief questions left. Are you satisfied that those options then fall within the generally accepted accounting principles for a regulated public utility of this nature?
Mr Caine: Again, there is a set of generally accepted accounting principles, which includes how to handle situations where there are rate regulation processes, and that's part of our advisory thing that it does. The specific signoff on that has not happened yet.
Mr Hartwick: I was just going to comment on the options being considered and the use of that rate regulatory framework. Those are discussions which are ongoing and will be addressed as part of the management set of financial statements, and our opinion that gets attached to them, so we have not concluded our deliberations on the acceptance of the options.
Mr Power: I have some familiarity with the GAAP requirements. It's clear from your report you were not satisfied at the time, and I can understand why from the way you've laid it out. I guess there's a question: At what point will you be satisfied in your mind that the GAP has been met for a publicly regulated utility? I take it that's an issue that will be dealt with just at the year-end audit.
Mr Caine: Absolutely. We do that as part of our financial audit and completing our review once they've completed their suggestions of what the accounting should be.
Mr Power: Mr Chairman, I have no more questions.
The Chair: Then we'll take it to the caucuses. We'll begin with Mr Galt.
Mr Galt: Good afternoon. I was just curious: If you turn to page 6, I notice it says you started on August 27 and substantially completed by September 5. Is that accurate?
Mr Hartwick: That is correct.
Mr Galt: You worked quickly.
Mr Hartwick: Yes, we did.
Mr Galt: We've been hearing a lot of evidence here about various figures. The figures seem to be all over the place. As a member of this committee, I'm finding it rather confusing to see just how scattered these figures are, and I'm beginning to wonder just where some of them are at. Certainly, you as auditors reviewed it. I've looked at some of your report. Of course, you never expect to find compliments in this kind of report. Usually, it's finding the problems rather than the good things.
If we look at this recovery plan, the NAOP, a big concern is whether financially and economically it's truly viable. You people have been thoroughly through this and I'm looking now for more of a personal opinion than a critique that was carried out in here. Do you see this as viable, and if so, why and how, or if not, why?
Mr Caine: In the terms of our engagement, we were engaged to look at the financial support for the NAOP and specifically did not look at the technical side of the options, as it's not in our area of expertise. In terms of viability, that is really a technical question, if I understand your question correctly. We assessed the financial support, the due diligence for that estimate, and came up with these conclusions. As you say, they didn't expect nor did we expect these to be complimentary. These are areas that need to be addressed.
Mr Galt: We've heard already from the AECB and the OEB and a whole bunch of others on the safety aspect of it, and there's been quite convincing evidence that, provided operated at reduced efficiency, these units are safe. We're now looking at a new direction, and most of it relates to the finance and efficiency of it, so due diligence and all the rest -- I'm back to your opinion on this.
Mr Caine: I think it's laid out in the report. The conclusions we came to were, as outlined there, that certain areas needed to be addressed for us or the board of directors to have sufficient assurance to go on and commit the funds and to exercise their role. That's what they asked us to do; that's what we found.
Mr Galt: I think I'm hearing from you then that if management addresses these, it is not as serious as it might appear on the surface. If addressed, everything should be in order.
Mr Caine: In terms of financial support for this, this is a comprehensive list of the things that needed to be dealt with in our professional opinion, yes.
Mr Galt: Of course, in a recovery plan you're looking for some sort of flexibility so they can move and it isn't all nailed down, and my understanding from the August 12 board meeting is it was approved in principle. Do you see this kind of required or needed flexibility built into this particular recovery plan?
Mr Caine: I'd like to ask Ken to address that, because that's a very specific question that was addressed in some detail here.
Mr Hartwick: We raised in the report several major assumptions that were made around the NAOP, and if those can't be achieved, what is the contingency plan and the need to have laid that contingency plan out? That is one of the requirements that we were looking for going forward: setting out the alternative paths that might be taken if some of the NAOP objectives can't be met. We would expect to see that as they move through the development of the NAOP.
Mr Galt: With each move there would be new directions and new flexibility that could be looked at, at those respective times.
Mr Hartwick: Presuming things don't go exactly in accordance with where the NAOP direction is meant to go.
Mr Galt: There's no question that as you move down the road you find new roadblocks, new problems and issues. This has been brought forward by a new team of experts that has been brought in to look at this whole area. There's a fair amount of confidence being developed from the nuclear aspect and the technical direction we're being given. Do you have the kind of confidence, going over this, that we should have as we look at this recovery plan, when you look at the team?
Mr Caine: In terms of the review, of course, we did not assess the technical merits of the propositions. However, we had open and full access to the team. They were very liberal and free with their time, if I might say that, and they gave us all the explanations we required. We weren't hampered in any way in doing our examination.
Mr Hartwick: I'd just reinforce that again. Our expectation in doing the assessment really was around the availability of the nuclear team and others in other business units to provide the documentation evidence to review our findings with, and all that was done in a very professional manner by the nuclear team.
Mr Galt: So rating this with other organizations that you've reviewed in the past, from what I'm hearing from you, on a score of zero to 10, they rate pretty high on openness and providing information.
Mr Caine: They were certainly willing to work through the Labour Day weekend.
Mr Galt: Obviously, from those dates, the 27th to the 5th, they must have been.
Mr Caine: They matched our timetable and they did not complain, so it was quite professional.
Mr Galt: I'm getting the feeling from you, from this recovery team, the recovery plan, that you're reasonably confident, outside of the technical aspect, the financial aspect, that it should fly and do the Ontario government and Ontario ratepayers justice.
Mr Caine: I'd have to refer back to our mandate. We assess the financial support and not the technical. This is a very extensive technical proposition that of course will be reviewed with the AECB and others. We didn't try to come to a final conclusion as that. Some 80% of this is technical and 20% is, say, financial.
Mr Galt: Since the IIPA report refers almost 80% of the problem as related to management of the past, and in the recovery plan very little relates to management, do you have any concerns there, that most of it relates to recovery of plants and laying-up and that sort of thing, rather than the management issue?
Mr Hartwick: The fact that most of our report refers -- sorry. If I could perhaps ask for clarification.
Mr Galt: In the IIPA report, they refer to something like 80% of the problem as related to management problems of the past rather than equipment failures; in other words, poor preventive maintenance, that sort of thing. But in the NAOP report, very little is referred to about training of people and changing that management style. Do you have any concerns about that kind of thing in the recovery plan?
Mr Hartwick: With what we were asked to look at, I'd speculate that's probably a better question to be directed towards the nuclear team itself, as far as the mix of the management.
Mr Galt: That's outside of your area.
Mr Hartwick: It is. We were looking very much at the financial components and costs associated with the plan that was put forward, and the buildup and support for those costs.
Mr Kwinter: Mr Caine, we had Ms Ng in here earlier today and she went through her presentation. Everything she said was virtually conditional on the fact that this was a regulated monopoly, and as a result it has certain, I guess, accounting leeways that a regular company would not have. She made comments to that effect. Is that your understanding?
Mr Caine: Ontario Hydro is a rate-regulated monopoly, and the accounting practices and policies follow that environment under the PCA. That's correct.
Mr Kwinter: The reason I ask is, I took a look at your company's statement with the auditor's report, and for someone who is not familiar with that aspect, that there are different criteria that are used for a regulated monopoly, they would not gather that from your reporting letter, that these are consistent with practices used in a regulated monopoly; someone might look at it and think that these are the generally accepted principles of any company. Is that a fair comment?
Mr Caine: Generally accepted accounting standards in Canada require that you provide that kind of report and include the comments about the accounting practices and the relationship to the environment in a note to the financial statements. In Canadian GAAP that's required. That is how all such statements must be made in Canada, and that's the jurisdiction under which we issue this report. In note 1, you'll see all of that fully laid out, and because of that, the auditor's report refers to generally accepted accounting principles in Canada.
Mr Kwinter: The other aspect of your report: Is it influenced by the fact that you don't have to present the same kind of detail and the same kind of information that a normal investor would look for because of the fact that the debt of the utility is guaranteed by the province of Ontario? So it's really relatively immaterial as to what the numbers state and, as has been stated earlier today, in normal practices Ontario Hydro could almost be considered bankrupt.
Mr Caine: Just on the general, the principles we follow in terms of generally accepted auditing standards are the ones we apply as part of our professional training. The reporting requirements are set by the SEC and other reporting requirements that require a certain amount of disclosure. So the disclosure in these financial statements is assessed against generally accepted standards, not specific ones that are crafted separately for Ontario Hydro; they're against generally accepted standards. I hope I've answered your question.
Mr Kwinter: I want to get back to the actual report that was made at the board meeting on August 12. In your experience, if a client was going to ask for a commitment from their board for an expenditure of approximately $8 billion, and given the fact that you were sort of engaged after the fact, when this decision was really taken -- there's been some discussion as to whether or not that decision was a decision in principle, but in my reading of the minutes, they agreed to go ahead and did it. Would it be normal practice for that kind of decision to be presented to you before they make the decision, so the things that you did after they made the decision could be considered by the board members and you could point out some of the shortcomings in what they've done?
Mr Caine: Every case is somewhat unique for all of our clients. But it certainly isn't uncommon for a board to make a decision to, say, invest in a massive change in a subsidiary or move or divest or whatever, and to ask their auditors to review the financial information once they've made a decision to go in a particular direction. It's often time-limited. The opportunity or something comes up and they need to make that decision, so often they'll ask the auditors or the chief financial officer to do due diligence on that and make their decision subject to that due diligence.
If you're asking the general business practice, it's not uncommon. It happens in a number of our larger clients. It happens in a number of our entrepreneurial clients as well.
Mr Kwinter: In your opinion, and as the auditor and financial adviser -- I assume outside financial adviser -- to Ontario Hydro, did you think this was a time-sensitive issue, that it had to be decided on that particular day?
Mr Caine: We are the auditors of Ontario Hydro. Again, I have to repeat, it's not uncommon for us to be asked to come in and take a look at the financial support for decisions after a general direction has been set. That's not uncommon, so I didn't find it unusual. Ken, I don't know if there were further discussions when we made --
Mr Hartwick: As far as the timing of us being asked to begin our due diligence process on the financial information, again, I think we have a wide variety of paths that clients follow, and this was one of them that certainly some of our clients have done.
Mr Laughren: Welcome to the committee, gentlemen. How long was Mr Farlinger gone from Ernst and Young? He was chair of Ernst and Young?
Mr Caine: Bill Farlinger was the chairman and CEO of Ernst and Young Canada until the middle of 1993. I'm not sure which month, but somewhere in the middle of 1993.
Mr Laughren: Were Ernst and Young the auditors while he was chair?
Mr Caine: Yes.
Mr Laughren: Were you then not at all surprised to get the request to do this work?
Mr Caine: To do which work?
Mr Laughren: The analysis of the recovery plan.
Mr Caine: As I said in the opening comments, we've been the auditors for a long time. In any case, where we are the auditors of a corporation, it's not uncommon for them to ask us to take a look at significant investment decisions that they are looking at from a financial perspective. They usually make the decision that they want to move in a certain area and they ask us to take a look at the background.
Mr Laughren: It shows you how naïve I am. I'm just a country boy from the north, you understand. I'm surprised at the cosy relationship with the auditor, who I've always thought of being off to the side and steely-eyed, as opposed to someone who gets in there and rolls up their sleeves and gets involved in a project like this. You're telling me that's quite normal.
Mr Caine: Two parts -- perhaps the general question. The independence and objectivity of Ernst and Young is a very treasured asset and it is a major element of what we offer as auditors. It's required to be examined from a stringent point of view from professional standards and from standards set down by reporting agencies such as the SEC. We're fully independent and impartial with respect to Ontario Hydro and any client.
Mr Laughren: I'm not questioning your ethics, but I'm wondering, would there be eyebrows raised at the fact that when Bill Farlinger goes from Ernst and Young to Hydro, Ernst and Young remains the auditors for Hydro?
Mr Caine: The process for selecting auditors is the standard process. The review goes to the independent audit and finance committee of the board of directors, chaired by Don Fullerton in this case; each year a different committee. There has also been a process of tendering the audit over roughly every five years or so. So the process is pretty much the standard process. Other than that, it is fairly normal for auditors to be asked to examine additional information on behalf of their clients.
Mr Laughren: So you, Mr Caine, would be the one who would have agreed to do this analysis. Is that correct?
Mr Caine: We have a consultation process to accept any engagement. We followed that process, reviewed it, in this case with our internal review processes which are set down by our company policies, because it's a fairly substantial and important project, as are all of them.
Mr Laughren: And an important client.
Mr Caine: And an important client. So we followed that due diligence process internally.
Mr Laughren: Since in a sense -- and I'm not an accountant. I'm not even an actuary.
Mr Laughren: An actuary is an accountant without a sense of humour.
Because you have, in a sense, a stake in the wellbeing of Ontario Hydro as their auditors -- that may be a strange way of putting it, but in a sense you've got to pass judgement on Ontario Hydro at the end of the day as their auditors. I don't think that's an unfair statement. I'm wondering, when you were asked to assess the recovery plan, to what extent you said: "Wait a minute now. We're not just doing some consulting here. We're the auditors and we want to know if this is the best of all possible solutions for what's going on at Hydro." To what extent did you ask for, or was it even hinted, that you could look beyond the recovery plan as it was presented to the board and then to you?
Mr Caine: The terms of reference specified that we were to look at the financial support, not the technical side of it. To really assess the best possible solution, that would have to encompass both a technical and a financial aspect, so that was outside the scope of this review.
Mr Laughren: I guess I find strange that given who you are, as Ernst and Young, somebody wouldn't be saying: "How do we know this is what's best for Hydro? How do we know these are the right financial arrangements?" The financial implications are enormous. I know you're used to dealing with the big boys up there, but $8 billion is big no matter who you are. I would think $5 billion to $8 billion is big and not something you regard as small potatoes, given the significance of your client, of course.
If I was running a company like Hydro, I would expect my auditors and consultants to take a pretty tough view of what I was doing. I would want that. I'm wondering to what extent you felt that you were quite happy with the proposals Hydro had brought forward and that all you would do is analyse them in that fairly narrow framework, as opposed to saying, "How do we know there isn't a better way?"
Mr Caine: I think the role that we play as auditors in general is an important role. I guess I can be forgiven for saying that. The role that we played in this was an important role as well: to identify a need for better financial analysis, better information that was required in our field of expertise, in our area of what we do, what we know how to do quite well. So I found it not uncommon and I felt quite comfortable that we could and should do this work. That's my response.
Mr Laughren: Could you tell us which of the alternatives or options that Hydro brought forward you would recommend? I don't think you answered that question for us. Counsel was making reference to it, the three options of dealing with the expenses. Do you have that?
Mr Caine: No. I'm sorry, I don't.
For the record, I've just been handed a document dated today. Page 18 of the document submitted by Ontario Hydro identifies three options: exclude NAOP costs, apply a rate ruling to accrue the costs, and apply a rate ruling to defer and amortize NAOP costs.
Mr Laughren: Had you analysed --
Mr Caine: I had not seen that document, but I have heard about those general options that are being reviewed.
The Chair: Mr O'Toole.
Mr Conway: That's an important question. I'd like to hear an answer from somebody.
The Chair: I thought we had a response. Go ahead.
Mr Hartwick: Which one of these do we prefer? Is that the question?
Mr Laughren: Exactly. Get to the heart of it.
Mr Hartwick: Going back to the role of the auditors relative to the role of management, it's management's responsibility to determine the presentation within the financial statements and the accounting treatment. It's our role to audit those and assess them and determine that they meet generally accepted accounting principles and are appropriate within the context of Ontario Hydro.
Mr Laughren: So as long as all three, you don't give a hoot.
Mr Hartwick: I believe that management is in the process of looking at the options, and we'll be commenting on them in due course.
Mr Conway: You should keep that document, because I'm going to come back to it.
Mr Caine: Okay. We'll give it back.
Mr O'Toole: The questions I'll be raising will come from your report of September 7, as well as the 1996 annual report.
More or less to start off, I would make a statement saying something like, to me, if there were any implications of a relationship between Ernst and Young and the current board of Ontario Hydro, despite your 90-year relationship, professional as you've defined it, certainly this report would not show any cosiness, as Mr Laughren said. In my view, your report is rather critical. I'm going to read to you several things to substantiate my observation. In your executive summary:
"Evidence supporting the examination of a comprehensive range of options...was not available. Potential options were not documented....
"Substantiation of key financial and planning assumptions...were not sufficiently documented....
"Corporate and Genco's response to the NAOP option requires a more rigorous financial analysis of supply options....
"Consistency in assumptions used in options analysis" -- there were inconsistent assumptions used throughout NAOP, operational analysis.
Every one of the summary statements is critical. It is elusive inasmuch as it says, "We're not thorough, we're not rigorous, we're not developed technically." I concur that you must be at arm's length, certainly, because you did offer some critical views. Would you support my understanding of that?
Mr Caine: Perhaps I could just come back to the general. We are independent and objective with respective to Ontario Hydro and any audit client. I think people expect directness and straight talk from their auditors. They want to know what should be dealt with. They have limited time, so they want to deal with those things. Audit reports don't tend to be filled with all the things that go well, because people will tend to ignore that. We follow the process of saying, "Here are the things that have to be improved."
Mr O'Toole: I guess it's the thoroughness of their own data that you as well have commented on in here that weren't fully developed.
Mr Caine: We commented on the completeness of the documentation of the data and its availability to support not only the board of directors' requirements but also other management teams' requirements. Ken, I don't know if there were other points.
Mr Hartwick: Just to add to that, again it's a reflection of areas where additional documentation or support or evidence was required in order for the financial analysis to be seen as complete and sufficient.
Mr O'Toole: I look to the history, and in that respect I'll be referring to the most recent annual report. You did refer to it both in the audit report, the signature copy, as well as the footnotes referred to in the financial statement. Even there, there's a fair amount of elusiveness, I would say. If it wasn't for a deep-pocketed government, they'd be in serious trouble. There's no relationship to debt-equity or to real value of assets as opposed to the on-book value.
I would refer you to a couple of things, first to footnote number 1, which deals with depreciation. Do you comment in any sense -- professionally, actuarially or otherwise -- with respect to the 40-year life expectancy issue? That's been brought before us, as the aging factor is -- you said you weren't technical but you are the auditor and this is one of the comments in the annual statement.
Mr Hartwick: Perhaps I could address that. When we go through and assess the accounting policies which management and the corporation are following and the appropriateness of those policies, we look for evidence in support around the policies on the depreciation, the 40-year lifespan for the nuclear stations. There's a process within Hydro which examines that both from a technical as well as an accounting basis and we certainly have access to that information, particularly the accounting practices, and compare those to industry practices or what other utilities are following in North America. I think we come away satisfied that these policies reflect industry standards and are appropriate for this specific client: Ontario Hydro.
Mr O'Toole: Technically, they've been questioned by some of the presenters before us. If I could just go on, there are a couple of others. Number 6 was the corporate write-off one. In fact, I'm intrigued by the very language of it. It's sort of like a motherhood statement, in a way. "Hydro has embarked on the program to ensure that adequate nuclear recovery plan expenditures are made in future years to allow for the achievement of its nuclear excellence strategy." That's the strategy we're coming out of.
We're coming into one, and I think they're already using the words here -- "The costs of the program which are planned to be incurred over the period 1997-2001 have been charged in 1996." We wrote off $2.5 billion in 1996 as part of a nuclear recovery strategy. That's what has already happened. Here we are in 1997, and I expect the annual report to say there's a nuclear recovery strategy -- you might call it In Search of Excellence, or something, good title -- and it might be $8 billion.
One of the presentations this morning, by Ms Clitheroe, clearly showed a few options, one of which was to declare the cost of the recovery in year one so it didn't show up in the shortage of cash flow every other year, and it just technically moved into the books as debt. Could you comment to me on those what you call normal accounting practices with respect to the management and write-off of some $7 billion over the last four or five years kind of at the whim of the board, technically?
Mr Caine: Again a general comment and then specific to Ontario Hydro. In any audit situation you look at the intended use of the asset, the evidence that supports that use -- a capital asset, for example, a plant that is built and is expected to be used for a certain purpose -- and then for reasons that are outside the powers of the organization or decisions they make with respect to their direction, they say they're not going to use that plant any more or they're not going to use it for the intended purpose. Then you'd assess the values that are left in that plant when it's not being used and so on. Those are the kinds of things you see here. For example, heavy water is an example of assets that depend on a certain use. Once they're not to be used for that, a generally accepted accounting principle says, what are you going to do with that kind of asset? Sell it? If you're going to sell it, how much is it worth, and if that is less than the amount that's on the books, it must be written off under generally accepted accounting principles. Those are the kinds of things we do as auditors. We look at changed business circumstances, changed external environmental issues that reflect on the values on the balance sheet, and we have discussions with management and they write off things that don't retain value because of those changed circumstances.
Mr O'Toole: This recovery plan of $8 billion that they're going to footnote next year is going to show a fair amount that really isn't capital. It's the cost of replacement energy. There are some other factors -- very little capital in there. There's maybe only $1 billion to $2 billion in capital in the whole plant. The rest is operation and maintenance factors, which are really labour costs. They're operational costs. How is that going to be somehow discharged as a footnote, and take a huge loss in 1997 to make the other years look streamlined, in some kind of recovery mode? Are those generally accepted accounting practices?
Mr Hartwick: I could perhaps start on that. Again, I think we were having discussions around the appropriate accounting treatment, presentation of those costs, as well as other areas within the corporation. Whether they are treated within the body of the financial statements -- the income statement balance sheet -- or presented through the note disclosure, those are discussions which are continuing. We do not present our opinion on the treatment of them until we report on the financial statements.
Mr O'Toole: I've got one question left. Statement 19 on the stranded debt, that's going to come up regularly. The difference between going to a competitive marketplace and Hydro's current financial dilemma -- by the way, every statement I've read shows some question between $10 billion and $15 billion that just isn't there. I had one of the previous chairs of the board say to us that they were pouring money out like it was coming out of the end of a fire hose, you couldn't drink it fast enough, into Darlington. That's what it appears to me they're doing here. They've got to compress time for the recovery. My question to you is, where should the $15 billion, when this is all a competitive framework, be put? There's no value there for that. It's just book money.
Mr Caine: The question around stranded assets and stranded debt bears on the structure of the industry, the regulatory framework that is established and other issues that are within the power of government. They also have to do with the competitive price of electricity, something that's a marketplace reality.
With that as a background, it really has yet to be determined what those rules will be. Until those rules are clearer, it isn't clear what to do with this whole stranded debt, industry changes and asset impairment matter. That's why it's here and not accounted for in the financial statements. If we knew what the rules were, the financial management of Ontario Hydro and ourselves would require that it be accounted for in these financial statements, as opposed to just disclosed in a --
The Chair: Thank you, Mr O'Toole.
Mr Conway: Gentlemen, if nothing else, you look like the alpha and omega of probity and rectitude. This is altogether too quiet and calm in here, given the issues that are at stake, as far as I'm concerned. So let me begin. You've been the auditors of this corporation for 90 years. I heard you say that earlier.
Mr Caine: Ernst and Young has, yes.
Mr Conway: Right. What is the current debt-equity ratio of Ontario Hydro, as best you understand it?
Mr Caine: The current debt-equity ratio, as presented in the last financial statements we opined on, which are the financial statements for the end of December 1996 -- I have to do a quick calculation here. It may be probity but --
Mr Conway: I have it in front of me and it looks like --
Mr Caine: It's 90% debt.
Mr Conway: It looks higher to me than that, actually.
Mr Caine: Ninety-two, okay.
Mr Conway: We've got a debt-equity ratio now at Ontario Hydro of about 93%, 94% debt to equity. This is before the multibillion-dollar nuclear optimization plan, correct?
Mr Caine: Correct.
Mr Conway: How does that debt-equity ratio compare with other utilities with which you have some experience?
Mr Caine: Where the utility is a private sector utility, tax paying, for example, in the US or where it has to compete for funds on a basis as a per share --
Mr Conway: Let me cut to the quick here because we've got limited time. Are there very many utilities of which you have knowledge that have a debt-equity ratio as bad as or worse than this at Ontario Hydro, or is this common in this category of utility?
Mr Caine: In public sector utilities owned by government, a higher debt-equity ratio -- that is to say higher being more debt to equity -- is more common.
Mr Conway: I didn't understand that. Say that again. I'm looking at data that tell me that now, before we proceed with this multibillion-dollar recovery plan, Ontario Hydro has a debt-equity situation where they've got about 95 cents' worth of debt against every dollar's worth of equity. That's before we proceed with the multibillion-dollar recovery plan. Is that typical of the debt-equity situation of other regulated utilities? Yes or no.
Mr Caine: It's difficult to compare. It is higher than a share capital utility and what the recommended debt-equity ratios are -- say, Standard and Poor's -- for those kinds of utilities, but it is what it is for a rate-regulated utility that is dependent entirely on debt financing.
Mr Conway: If you look at the document Mr Laughren gave you, which is the Corporate Financial Implications and Issues, Tuesday October 28, 1997, from Ontario Hydro, on page 17 on their financial outlook, as I read this document, Hydro is planning on at least three years -- 1998-99 and 2000-01 -- of negative income. If that's correct, if the debt-equity ratio now is 93 cents' worth of debt against every dollar's worth of equity and we're planning three or four years of negative income, negative retained earnings, would it not be reasonable to conclude that this corporation is now, or will soon be, bankrupt by any kind of conventional standard?
Mr Caine: In response to that, in the notes to the financial statements, note 19 to the audited financial statements at December 31, 1996, it states that Hydro has recognized that its existing debt load is too great and that it is overleveraged to compete in a future restructured marketplace.
Mr Conway: No, you're skating away from me here and I want to come back just to the numbers. Your audited report tells me in 1996 the debt ratio at Ontario Hydro, as I read it, is roughly 94 cents' worth of debt for every dollar's worth of equity. By the way, as my colleague Kwinter observes, the debt is real. The equity, particularly as we move into a competitive electricity world, is perhaps a lot less firm. Be that as it may, the debt-equity ratio is roughly 93, 94 cents' worth of debt for every dollar's worth of equity. That's before we embark on a multibillion-dollar recovery plan, the assumptions of which you rightly point out in your report are in some key areas questionable and dubious. But we've got that debt-equity ratio. We're going into a five-year recovery plan of billions of dollars of unplanned expenditure and, Hydro tells us, according to this document, at least three or four years of negative income.
Given the debt-equity ratio going in, surely a reasonable person would conclude that three or four years of negative income, negative retained earnings, and the advent of competition, which is certainly going to have an impact on rates, revenues and the equity -- how is this corporation not now or not soon to be bankrupt or insolvent by any conventional standard?
Mr Caine: As part of our role as auditors in this 1997 year, we're going to be looking at the proposed solutions and also their effect on debt servicing capability of the corporation, and no doubt the other rate rating agencies will be looking to the same kind of evidence. We take all that into account as part of our role as auditing these financial statements.
Mr Conway: What other rate rating agencies get at Ontario Hydro if they're not going before the energy board with a rate increase?
Mr Caine: Standard and Poor's and other --
Mr Conway: All right, sorry.
Mr Caine: They look at the debt and they look at the debt servicing capabilities and the projections and the cash flow and they assess that, and so do we, in assessing whether or not those liabilities are covered.
Mr Conway: Let me ask you the same question in a different way. Would a reasonable Ontario Hydro ratepayer and citizen, looking at your audited statement for 1996 and this financial outlook, which Hydro itself brought to this committee last week, be right in concluding that by about the year 2001 there may be more debt than equity in this corporation?
Mr Caine: I think that was one of the reasons Hydro management and we --
Mr Conway: My question is simple, Mr Caine: Would it be reasonable for a person looking at your audited statement and this financial outlook from Ontario Hydro to conclude that by about the year 2000 this corporation would be bankrupt, using the calculation that if you've got more debt than equity --
Mr Hartwick: I think a person could look at these and determine that you have more debt than equity. The question of the ability to service that debt is, again, highly dependent on the monopoly status of Ontario Hydro.
Mr Conway: Which we know is going to change. We know that for sure. You're the auditors of Ontario Hydro. You know that the buzz over there for the last year and a half, while this white paper goes through one of the world's most spectacular gestations and deliveries, has been that the monopoly status is going to end. You can't be the auditors of Ontario Hydro for 90 years and be there for the last 90 weeks and not know that.
Mr Caine: I think the role of auditors is to make sure that proper accounting happens and that disclosure of uncertainties like this is fully made in these financial statements. When we talked about the industry changes, the asset impairment, those issues in these financial statements went out to the investing public in the bonds and put them on notice: "What are the uncertainties?" It's disclosed here. No doubt fuller and better disclosure can be made as these things become more clear.
Mr Conway: All right, but I want to come back to --
The Chair: Thank you, Mr Conway.
Mr Conway: We've got to come back to this.
Mr Laughren: We know there's been a directive to Hydro that they must not increase their rates. That's what they've been told: "You must not increase your rates." I think it's to the end of this decade, isn't it? I'm wondering what the role of the auditor is when you hear something like that. You know how difficult Hydro's position is. I think it's fair to say it's difficult. If you don't want to go beyond that as auditors because you're on their payroll, I understand that, but I think you would have to agree that their situation is difficult. I'm wondering what your views are on this rate freeze with Hydro and, if they were given the latitude to increase rates, what that would do to their financial picture and whether you'd sleep a little easier if that were to happen.
Mr Caine: We, as auditors, don't have a specific role with respect to rate increases. We do have a role with respect to the financial statements and assets, which is one of the pieces of information the board of directors used in setting those rates. In terms of whether they can recover the rates that they increase is a factor that we would have to look at, not only from the point of view of the ability to raise those rates under government direction should it come to that, but also whether increasing the mill rate would add to revenue or create a situation where you have dropped in volume. There are other impacts of passing on rate increases that we'd have to look at in terms of assessing the asset valuations.
Mr Laughren: I appreciate that. I don't think I insult anybody in the committee if I say it consists of laypeople when it comes to --
Mr Conway: Hear, hear.
Mr Laughren: -- except the Chairman --
Mr Conway: And the highly paid staff.
Mr Laughren: Yes. But among us lay folk there is a real scepticism about the recovery plan, and I think it's a genuine scepticism. I don't think it's on party lines. I think it's just from having seen what we've seen and heard what we've heard that we're sceptical about it. Yet we don't have the expertise among ourselves. We can go out and get some, and that's what my question is. If this committee remains as sceptical as I think it is now about the recovery plan, what advice would you give us in order that we can come to a conclusion that may or may not sit well with you or with Hydro, but that would perhaps give us some assurances that the right decisions, these very important decisions, are being made?
Mr Caine: I've had the privilege of looking through some of the transcripts of your hearings, and I think they're quite thorough and so is the process you're following. I haven't been involved in this process in this jurisdiction before, but it seems like a fairly thorough looking into the plans and examining the independent experts who have been hired by Ontario Hydro to come up with the technical plan and to receive their commentary. Other than that, I hadn't thought to any additional steps you'd want to take. We were asked to look at, of course, the financial stuff and I think that is a wise move and one that identified a number of things that needed to be dealt with as part of the normal due diligence that a board of directors and a senior management team take when you're faced with such a massive and major decision.
Mr Laughren: Do you appreciate the fact that we're sceptical and do you --
Mr Caine: Yes.
Mr Laughren: This is going to be probably an impossible question for you, but if you could step outside of your auditor's skin, would you share some of that scepticism?
Mr Caine: As auditors, one of our natural traits is to be somewhat sceptical, so I think it's a good attribute to have as an auditor, and one you'd expect in doing our work, which focuses on financial areas. We applied that due diligence, that due scepticism, that independence in identifying the areas that we thought needed to be addressed and which the board and management agree must be addressed before they commit the funds.
Mr Laughren: You're comfortable enough with the recovery plan, not just today but in the years beyond 2000? You're comfortable with the fact that that will allow Hydro, even given the fact that there's competition coming into the system, we all know that, which will mean that the rate issue is going to be very tough for Hydro to deal with? Who knows whether the revenues will stay up as high, as competition starts eating into their traditional sources of revenue? You are comfortable that the way it's being laid out now will get Hydro through this very difficult time?
Mr Caine: Again, we're doing a process. We are responsible for a process, one critical aspect of that. We are satisfied that we have had all the explanations, all of the information and open dialogue from that team. That gave us, in our sceptical frame of mind, a confidence about the completeness of that examination process. As to the rest of it, it is a technical plan, a technical question, technical issues, and also issues that would be affected by the form and nature of the industry and its regulatory framework.
Mr Laughren: If I could pick up on what Mr Conway was getting to, you would have an obligation as an auditor, would you not, to warn Hydro that the direction they're going, even though today that plan may be digestible, given what's potentially down the road -- and I talk about competition and rates and revenues and so forth. You would have an obligation, would you not, to say to Hydro: "Look, you can do this by deferring the costs of the recovery plan or by loading it all into 1997 and so forth. There are ways you can get around a number of your problems, including the statutory debt retirement issue. But at the end of the piece, in the year 2001, 2002, 2003, 2004, 2005, whatever, we feel obligated as your auditors to warn you that you're heading for trouble"? Do you have an obligation like that?
Mr Caine: We have a responsibility to look at all of the evidence, including the matters that you've just discussed in terms of the future competitiveness, where prices are going and so on, looking back at the valuations of the assets on the financial statements, the impacts of those, and to advise the people to whom we report, the board of directors, what the future --
Mr Laughren: But you haven't done that, right? You haven't felt the need to do that.
Mr Caine: We have completed our review for December 1996, which included write-offs which I think totalled in the order of $2.8 billion, as well as disclosure of the significant uncertainties facing this organization. In our view, that is full, fair and complete disclosure and is in accordance with generally accepted accounting principles and with the requirement for disclosure of these major matters of uncertainty.
Mrs Johns: Good afternoon. I just want to preface my remarks by saying that all of my colleagues here are trying to protect the assets of Ontario Hydro. We realize that they have been eroded, if you will, over the last 15 to 20 years and we're just looking for ways that we can move forward to correct this problem. I'd like to ask you some short questions about as audit time has rolled around over the last 10 years. First of all, Mr Caine, can you tell me how long you've been senior partner at Ontario Hydro?
Mr Caine: I've been a partner -- I hate that word "senior" -- with the firm for 17 years.
Mrs Johns: No, but I mean on Ontario Hydro.
Mr Caine: I've been working on Ontario Hydro -- I was the audit partner from 1987 to 1994 and I've done various and sundry other assignments around the utility industry, including Ontario Hydro, for some 20 years.
Mrs Johns: Suffice it to say that you've been around for a long time while this kind of evolution in Ontario Hydro has been going on. When you're getting ready to sign this financial statement and you've got to put your name on it here and sign "Ernst and Young," you must talk about going concern, the qualification. It strikes some of us that maybe there should have been a qualification about going concern. You must think about that. What's happened that hasn't put that qualification in the audit opinion?
Mr Caine: The generally accepted auditing standards require that you look at the issue of whether the financial statements of any organization should continue to be placed on a going concern basis, which these are. As covered by the Power Corporation Act and as we saw the evidence, with the write-offs of course that were required in December 1996, these statements are prepared in accordance with generally accepted accounting principles, including the requirement to be on a going concern basis, which they are.
Mrs Johns: I'm just going to bluntly ask you this question then. Is it a going concern because the province guarantees the debt? Is that the only reason it's a going concern? Because in my mind, if you saw a company with this kind of debt, I think the projection for next year is $600 million in income and $34 billion in debt, that's not a going concern.
Mr Caine: A going concern review in a general sense is you would look at the ability to raise revenues, the projected levels of costs and the ability to service debt based on cash flow. All of those have been taken into account in our decision with respect to the December financial statements and will be taken into account when we sign off as auditors for the December 1997 --
Mrs Johns: Let me ask you this, Mr Caine. If I gave you this financial statement and said, "Here, this is yours," do you think you could get a loan from a bank or do you think that you'd be a going concern?
The Chair: I want to hear the answer.
Mr Caine: That is a great answer. Can I take that answer?
Mrs Johns: No, Mr Caine, I'd like to hear your own. He was the one who gave us a lot of the debt in the province.
Mr Caine: And some good answers. That was a good one.
In terms of this, the question is a matter of fact. There are debt rating agencies that look at this and ensure that they will continue to advance funds to this organization. When any debt instrument is issued, we meet with them and with the bond issuers and they have full access to us. We give them all the information that we have as auditors and so does management. That's the process answer to your question. The fact is that debt is being issued on these and other debt instrument documents with full disclosure of all these uncertainties.
Mrs Johns: Well, I'm happy that I'm sending you the cheque tomorrow on the debt. Let me see. Ken, I want to talk to you. I'm sorry. I don't know your last name, sir.
Mr Hartwick: Hartwick.
Mrs Johns: You suggested that you reviewed the Atomic Energy Control Board decisions to ascertain exactly whether the plants were going concerns, whether the 40 years was a fair life to it. I think the atomic energy board has been fairly negative. I've read the atomic energy reports -- Mr Conway and I have read them I think -- for the last 10 to 15 years and they're pretty disastrous. How do they give you any sense of confidence?
Mr Hartwick: Perhaps just to clarify on the 40-year lifespan of the plant, there is a process within Ontario Hydro that reviews the appropriateness of that lifespan and that's benchmarked externally as far as what other nuclear companies are doing.
With reference to the AECB, the information that we look for from them is really just a licensing status of the various stations or individual units, so that as we are set to report on a set of financial statements, we understand the status of the units, the status of the licensing requirements, risks to those licensing issues. Those can be reflected in either disclosure within the accounts that are reported, if the risks are there -- so it's really at that level as opposed to doing detailed examinations of all the very detailed findings that an agency such as the AECB would be providing to the management team.
Mrs Johns: I'm surprised you look as young as you do when Pickering got the six-month licence and you were able to keep the grey out as a result of that.
I want to talk about the NAOP this afternoon. I was amazed when Ms Clitheroe was here, and maybe I wasn't very nice this morning, when she suggested that financial decisions weren't really part of the NAOP board decision, that she thought that they would make the decision today -- well, on August 13 -- and later they'd get the financial information to the board. I think that states it fairly, although I'd love to be able to quote her directly.
I don't know if you're in the consulting side or the auditing side of the firm, but in your history of dealing with businesses as they make decisions about their future, is it that they don't consider the financial implications of their decisions until a later date when they're making some substantial decisions like this?
Mr Caine: I can answer that in a general sense, and I've been both on the consulting side of the business and on the auditing side of the business. Generally, all aspects of a decision need to be brought to bear to ensure that you're making a complete decision and one that's in the best interests of the organization.
With respect to this particular decision, a direction was set, based on my understanding of the advice of decisions that we were provided with, and we were asked to assess the financial information that was part of that decision. There was financial information. We were asked to look beneath that and look at the support and the components of it. My understanding was that there was financial information that was part of the advice to the board, because that was indeed what we started with to frame our examination. We looked at that and studied the support, the rationale and then went in beneath that to the modelling and the rest of the stuff that you'd expect us to look at.
Mrs Johns: On page 35 of your report -- it's called Sustaining Base Budget -- you talk about the potential cost implications of some of their significant planning assumptions. We talk about $60 million understated, $25 million overstated. We have some where we can't qualify them because there's no sensitivity analysis done yet. These numbers to the layperson in Ontario are pretty big dollars. This is a fair chunk of change here that they have underestimated and overestimated. Somewhere else I find that you say that because the different departments didn't consult with one another during that time frame, there was $158 million not recorded correctly. These kinds of overages and underages, are they typical of what you'd expect to see from a firm that pays thousands of dollars for excellent accounting service, not from their auditor but from their internal staff?
Mr Caine: Again that's general and I'm going to ask Ken to comment on specific -- I don't know how the time is. In a general sense, when we get asked to do due diligence assignments, we expect to find things that need to be directed. Often decisions are made with respect to direction. The people know what they're supposed to do, but they don't write it down to the extent that we think is important and so the kinds of general observations of, "We need better information on this, better information on that," that's not untypical. The specifics about this one, Ken, perhaps you can comment on that.
Mr Hartwick: Perhaps I'll comment on the one part in relation to different departments and some of the inconsistency in assumptions. Again, I think there are many groups within Hydro that were involved in the decision: Genco, corporate finance, the nuclear team. Again, we saw the inconsistency in assumptions and some of the financial information being used, and you would expect that to a certain degree. What we're looking for, and I have asked in our recommendations, is that those inconsistencies be addressed and quantified and assessed as part of the financial information that will form sort of the final business cases as they proceed towards committing funding.
Mrs Johns: Let me ask you this question, and I just need a yes or no. If you were a board of directors and you received the information that you got from senior management that you have done the analysis on right now and you had considered all the options and you had gone through a lot of process that day to come up with listening to all the information and making a decision on it, would you say that the senior management team had done enough analysis before they presented it to the board and was there enough due diligence done by senior management to be able to let the board make the appropriate decisions?
Mr Caine: I guess the question was phrased, "If we were on the board and received this, what would we do?" The question is, the board received this and directed management to address each and every one of these findings. They asked for this additional information as to the support at the time they reviewed the material. I can only speculate that they were --
Mrs Johns: Can I just clarify? I have no problem with what --
The Chair: Very quickly, Ms Johns.
Mrs Johns: -- the board did. I have a lot of problems with the second-class approach that management took in this. Do you think this is a second-class approach or do you think that it was good enough to take it to the board?
Mr Caine: The review we did was of the support of the material. We identified a number of areas where action needed to be taken to quantify what was in people's minds. It was quite clear that they had thought about a number of these things, had not spent the time to write them down and needed to do that in order to allow the management team to work as an integrated and cohesive whole. I should go on to say that the report is aimed at meeting the board of directors' requirement for further due diligence, but is also aimed at management, saying, "Here are the areas, which is a comprehensive list of all the things we would expect to be done over this period of time." It's been reviewed with management and I think it's correct they've substantially agreed with all of the areas that needed to be addressed.
The Chair: Mr Conway.
Mr Conway: I want to come back, gentlemen, to the basic question. If I look at the financial charts that Hydro presented to this committee recently and if I look at a year like 1998, where they are potentially looking at negative income of something in the neighbourhood of 300 million bucks, and I'm looking now at page 17, are they insolvent? Is Ontario Hydro insolvent under those conditions? Yes or no.
Mr Caine: The question of insolvency relates to the ability to cover debt service costs in a cash sense. This information is not enough for me to answer your question.
Mr Conway: All right. But they've got three choices, and that's on page 18. I'm happy to have anybody else join in here because I think this is an absolutely critical question. Remember why we're here: Hydro has embarked on a multibillion-dollar recovery plan because of troubles identified in the Andognini report. That's the first point.
The second point is, the government of Ontario has said there will be no rate increase through to the end of this decade.
The third point is, the government of Ontario has clearly indicated that there will be a competitive market by the year 2000. Those are, I think, very clear factors in this situation.
With that as backdrop, let's then look at this situation, because this all hinges for us, for me particularly, on the integrity and the viability and the advisability of this particular plan.
You're here to talk about the financial aspects of it, so let me ask you then, we have on page 18 of that document three options. The first option, option number 1, it's wonderful. It's like a piece of magic. Exclude the multibillion-dollar nuclear asset optimization costs. Just take them off the book. Secondly, it's to take a big write-down in 1997, as I read that. Correct me if I'm wrong.
Now if you take a write-down in 1997 -- I'm going back to the 1996 report and I look at that debt-equity ratio -- and, gentlemen, you've got to be the people to tell me; you've been the auditors for 90 years. If I look at the 1992-96 slide -- well, it's not quite a slide because our debt-equity was an 84% ratio in 1992, then to 92%, then to 90%, then to 88%, then to 93%. I'm assuming the reason it's getting worse is because of the write-downs, in part. Am I correct?
Mr Caine: Yes.
Mr Conway: The write-downs are a significant part of that deterioration. If we take a massive write-down in 1997, I've got to believe that debt-equity ratio worsens appreciably. Is that correct?
Mr Caine: If a write-down is taken, the debt-equity ratio would worsen.
Mr Conway: That's the second option.
The Chair: Four billion dollars.
Mr Conway: It's about a $4-billion write-down. Under those conditions, I can't imagine that there's anything left of the equity.
The third option is to amortize over a longer period of time, which I think Hydro told us they didn't particularly want to do, for a variety of reasons, not the least of which is the competitive market that's coming. So I come back then to, these are Hydro numbers. The first one, unless there's some kind of benediction from government that allows that, I don't know how that can be done. The third one we're told is not very attractive, so the one that I guess we might be left with is the second one. We have a big write-down in 1997.
My question then remains, we're going to have a multibillion-dollar expenditure that was not planned. We are not going to have an increase in revenues. There are no rate increases going to be allowed, we are told. How is this company not insolvent?
Mr Caine: The options you're referring to on page 18 are the options under the Power Corporation Act for the board of directors to meet their requirements under SDR. That's my understanding of them. In the absence of a rate increase -- that's what you're referring to -- these would accrue costs but would not have an effect on the cash flow per se. These options themselves wouldn't necessarily change the cash flow up or down. As I understand this page, these are how the board of directors would achieve its requirements under the Power Corporation Act to meet the technical SDR requirements. That's what this is all about. That's my understanding of this page.
Mr Conway: I'm just the layperson and I'm looking at this. We've been asked for our opinion on this plan and I'm looking at this and they're in a tough bind. They're in a real box here. There are no easy answers to this.
But let me come back to your report, because I was sceptical about Ernst and Young, good people that you are. Bill Farlinger had an association with you and I thought, "What are we going to get from Ernst and Young?" By the way, were you briefed by Hydro before you came here today?
Mr Caine: We've met with Hydro to receive the transcripts for earlier presentations, and just before we came over here, we asked a member of Hydro management, Malen Ng, to tell us what areas we might want to be prepared to discuss. That's one of the things --
Mr Conway: The answer is yes, you were briefed by Ontario Hydro.
Mr Caine: Oh, yes.
Mr Conway: Let me ask you this. In the absence of Hydro issuing new debt, does Ontario Hydro, in your estimation, have enough cash flow to service its current obligations?
Mr Caine: As part of our review for this 1997 audit we will be looking at its ability to service its debt. That's correct.
Mr Conway: But again -- God, Mackenzie King had sons. I think I'm looking at them. What do you have to tell me more specifically? In the absence of issuing new debt, does Ontario Hydro, in your considered opinion -- you've spent two weeks over there looking at this situation. You've been talking to them back and forth. In the absence of issuing new debt, do they have enough cash flow to service their obligations in this fiscal calendar year?
Mr Hartwick: The report we did and the assessment of the financial costs associated with NAOP dealt with the costs and expenditures that were anticipated under the plan. It was not a review of the cash flow requirements required to support the plan.
Mr Conway: But, gentlemen, I just have the 1996 report. It doesn't look very good and that's the reason we ask the question. The 1997 numbers have got to be worse.
Mr Caine: As part of being involved in issuing debt instruments, we allow our name to be associated with those debt instruments. I'm just going to ask Ken, when was the last time we were involved with that?
Mr Hartwick: The spring.
Mr Caine: So in the spring issuance, one of the things that the debt reviewers look at is debt service cost. At that time it was still well in control, and so far, with the rollover of debt, my assumption, not having completed the audit and not having been involved in a debt instrument release since spring --
Mr Conway: But the rollover is -- this is back to Helen Johns's point earlier. What you're telling me is that they've got to be able to roll over that debt. I take it that in 1996, if they had not been able to issue new debt instruments, they would not have been able to meet their obligations, correct?
Mr Caine: Every corporation must maintain its debt --
Mr Conway: This is a different corporation.
Mr Caine: -- and this corporation as well.
Mr Conway: But in 1996, yes or no, would Hydro have been able to meet its obligations without issuing new debt, in fiscal 1996?
Mr Caine: Issuing new debt, rolling over old debt, they actually reduced their debt load in 1996 and have a plan to reduce their total debt size over a period of time. So that's what they did, but they did roll over debt in 1996.
Mr Conway: But if they didn't issue new debt -- you see what I'm trying to get at here. The thing is that the government guarantee is what makes this such an unusual bird. One of the concerns that I think many on the committee have is that there is a kind of lassitude, a kind of almost indifference about certain normal business practices because there's always good old Mike Gourley and Ernie Eves over there, and they just get the bill, you know.
Mr Caine: Just to refer to the financial statements for 1996, the principal outstanding in 1995 was $31.4 billion and the principal outstanding in 1996, at the end of the year, was $30 billion, so $1.4 billion had been reduced. There was, as part of that, a process of rolling over debt to improve their interest rate coverage. I could come back and talk about it or we could have some more information on that and the exact amounts they did.
Mr Conway: In fiscal 1996, how did they reduce that debt?
Mr Caine: Because their cash flow was so large, it was sufficient to take that cash and reduce the debt.
Mr Conway: What was the reason for their cash flow being so strong?
Mr Caine: Putting it simply, their cash income was higher than their cash outflow.
Mr Conway: I understand that. Projecting ahead, again our interest here is, what is the impact of the so-called nuclear recovery plan on that kind of flexibility?
Mr Caine: Exactly, and so the key thing that we look to is the cash-flow projection. At the end of the day, cutting through it all, it's cash in and cash out, projected forward, and what evidence and assumptions are they; that's what we look at, and that's what happened here.
Mr Conway: I read your report. Nothing is surely going to affect cash flow more than a competitive marketplace. We're only two years away, I would think, at most and Hydro is going to face some very real pressure on the cash side because there is going to be, I suspect, a marked increase in competition that is going to certainly not increase, for the short term, their cash-flow situation. It has got to be putting real stress on that. There is no reference to the competitive world that is clearly coming in any of the work you did in late August or early September. Was that a conscious decision on your part?
Mr Caine: As a general, overall comment, there is an increasing level of competition in the electric and gas power industry. It's worldwide. It is certainly extensive in the North American context. That business fact is there. On the question about the structure of the industry, suffice it to say there will be few more interested readers of the white paper than we as the auditors of Ontario Hydro in terms of what the impact of that is on the cash flow for this organization.
Mr Conway: But we had the Hydro people here this morning. I think it was Ms Ng, very much at the end of the morning, responding to Rick Campbell, our consultant. She said -- and correct me, Rick, if I'm wrong -- that we would have to increase our revenue line by about 11% to absorb these NAOP costs, these nuclear recovery costs. Now, that's not going to happen. The government has said, "We're not going to allow you to increase rates." They can't increase their rates for at least two years. At the end of two years, we are going to be into a competitive market. That's got to have downward pressure on the cash-flow situation at Ontario Hydro, all of which is background for this plan that the board has endorsed.
I look at your report and I must say I thought your report was quite telling. I agree with Mr O'Toole. I am very concerned by a number of the observations you have made about labour issues, flexibility and adjustment there, about the capacity factors. I think I know what the senior folks at Hydro are saying, but basically, their recovery plan is built on capacity factors above recent performance. That's fair enough. Productivity gains elsewhere you raised some concerns about. I tell you, I hope they're right but I don't have very much confidence at all that, given the very limited manoeuvrability here, this is going to work the way it's expected to, and your report adds to my discomfort.
Mr Laughren: I wanted to return to the potential options for the statutory debt reduction scenario. The first one, and I need help understanding this, says you simply remove the recovery plan costs each year. It says to exclude the costs from the rates each year. It doesn't say that you exclude them from the balance sheet or the profit-and-loss statement, right?
Mr Caine: That is correct. Those costs are there. The decision of the board of directors is whether to pass those costs on to the ratepayers or to absorb them in the financial statements of Ontario Hydro without that pass-through.
Mr Laughren: Which would give you one of the reasons you'd have a negative net income, right?
Mr Caine: Correct.
Mr Laughren: The second one is where you throw all the costs into 1997, basically -- a layman's way of saying that -- and take the big hit in 1997.
Mr Hartwick: That's correct. You accrue all the costs, charge them in 1997 and effectively exclude them from the rate base again.
Mr Laughren: If you did that, that in itself would have an impact on the debt-equity ratio, right?
Mr Hartwick: Correct.
Mr Laughren: If then, in two or three years from now -- it's already there, you can't go back and undo that -- the decision is made by Hydro to write down Bruce A and/or Pickering A, what would then happen to the debt-equity ratio?
Mr Caine: If the decision had been made not to restart those stations and to take them out of service, they'd be written off, and unless there was some unforeseen revenue or other matter, that would reduce the --
Mr Laughren: Or accounting magic.
Mr Caine: Well, there is no accounting magic. There are accounting rules.
Mr Laughren: It's called double entry for a reason, you know. Anyway, I am really concerned with this, because at what point does debt exceed equity? It would at that point, wouldn't it?
Mr Caine: Correct, if they took a substantial write-off in excess of the retained earnings balance, which was about $2.5 billion at the end of last year.
Mr Hartwick: If I could add to that, under the second option, where they are accruing and charging all the costs in 1997, the one piece which would be of interest is what that does to the net income going forward in subsequent years, if you're bringing all those costs back. So the question as to whether or not you get negative retained earnings from charging them all in one year and then subsequently having one of the units taken out of service and writing it off --
Mr Laughren: Or two.
Mr Hartwick: Yes, or two, or whatever -- is really then dependent on what your net income numbers are and what other factors come into your net income, which is going to drive your retained earnings. So there are some pieces that would need to be looked at which have implications depending on which of the options you follow.
Mr Laughren: What do accountants or even auditors say about institutions that have a debt that's greater than their equity?
Mr Hartwick: If an organization is set up, as this is, under a regulated monopoly, and if they are able to maintain payment of their debts and foresee an increase in income in the future, that is accounted for under our view that they can go on on a going-concern basis. If our conclusion was opposite to that, we would not believe that they could on on a going-concern basis. It all depends on the evidence we see to support that.
Mr Laughren: That would go back to Mr Conway's concerns. If at that point the write-downs occurred with the nuclear units, you'd already had the accrual of the recovery plan in 1997, you had competition coming into the system, you'd have pressure on the rates probably because of that -- you can see why we're concerned about the future of this very important utility. I really worry about that because I'm one who thinks we should try to keep public power at cost. But I'm really worried about what's happening down the road and I don't think that's a crazy scenario; I think it's a possible scenario.
Mr Caine: As auditors we're very cognizant of the impacts of those in the industry, and the electricity industry, I will reaffirm, have knowledge, and that was part of the reasons for the fairly substantial write-offs that took place at the end of 1996. Of course, we're keeping on looking at that aspect for 1997 with the same point of view and the same scepticism, the same rigour.
Mrs Fisher: Good late afternoon. I'd like to start with the report. It was raised last week at the first financial presentation we had with some of the participants who returned here today. In your own report that I'm referring to right now, with some type of analysis of the NAOP report and the financial implications resulting therefrom -- I won't read into the record today as I tried to do in very speedy time last week, but time and time again, even just reading the executive summary, there are seven or eight bullets that are very significant in terms of, quite frankly, negative comments related to what you had seen on a very first-brush run. Then, of course, once you get into the report, more and more questions get asked.
I didn't know until today that you were in fact the auditing company for Ontario Hydro for 90 years; I thought it was nine when you were saying that. I thought, "Well, that's reasonable." But can you imagine what it would be like if one single government was in place for 90 years, how that would affect the province?
Mr Laughren: Forty-two years was bad enough.
Mrs Fisher: We liked it, but we're cleaning up now.
Mr Caine: I can assure you that one single audit partner was not in charge of that assignment.
Mrs Fisher: He'd be rather aged, wouldn't he, or she?
Mr Caine: He'd be rather aged and perhaps out of date on accounting principles.
Mrs Fisher: Anyway, I just thought I'd mention it. It's a very long time.
Mr Caine: It's pretty common for audit firms to retain a long relationship with their audit clients. The process in public sector corporations is to go through a periodic tender to make sure that's still in the best interests of the organization. That has happened twice and both times we were pleased that the audit committee chose to retain us.
Mrs Fisher: I guess the interesting part of that is, if I recall, Ontario Hydro was formally formed in 1906, and 1997 almost makes you there forever in terms of the history of Ontario Hydro. It's not a negative comment, it's just an observation.
Having said that, however, your September 7 document and then your follow-up letter of October 20 outline some of the major points you made in your report and address somewhat your continuing concerns with regard to outstanding issues from that report.
I've been in both positions. I've been an executive director of a small finance corporation. I've also been on boards of directors. I rely on my staff to provide me with information that I can make good, sound decisions on. They're the ones who are paid and, in essence -- I remember my days as a board member. I wasn't paid; it was a volunteer performance. But I counted on my staff to make good, solid recommendations based on all known fact.
My question to you is this: If you were the senior staff member at the board of directors on August 12, specifically relating to the finance side of it -- because we had three of them here this morning. There were four but the fourth was not involved in the finance side of it nearly as closely as the others, nor responsible for it. If you were the senior staff making a recommendation to Ontario Hydro that day, would you have recommended that they adopt that plan, based on the fact that there were really two parts to it -- three? There was the IIPA report, there was the NAOP report, but there needed to be some substantiation financially to support a sound decision.
Does it make sense? Would you have recommended to the board of directors, knowing what you knew, given that you didn't know everything -- from your report you certainly highlight many areas where there was inadequate information -- to the board to accept it and go forward that day?
Mr Caine: As I said before, it is not uncommon in business practice to ask auditors to take a look at the financial support for a major investment decision, especially when this --
Mrs Fisher: Sir, can I interrupt you? I don't want to use all my time, quite frankly. I just want you to answer the question. If you were the senior management staff advising the board of directors that day, and including having a vote at that table, would you have recommended adoption of the NAOP report and be moving forward almost the day after on some of the action plans?
Mr Caine: With respect to our role as auditors, I'm not in a position to make that comment. We looked at the financial aspects of this, did a professional piece of work on that and provided that report, so I am not in a position to really speculate on what I would have done had I been a board member and had all of the other information that a board member receives, one of which is the package they received that they gave to us, but also all of the information that they provided on a regular basis from Carl Andognini and the IIPA team. We were invited into parts of board meetings where that happened, so it was certainly a flow of information all the way through there. That wasn't clear. There was a lot of information outside this, but we weren't privy to all of that information. I'm not trying to avoid it; I just can't answer the question.
Mrs Fisher: Okay. Let me ask it another way then. If I were the board member that day and I decided I wanted more information, and I knew you were our auditing firm for 90 years, if we had asked you to come to the board that day, given the information that was before us, and I was a board member, just a simple, old, little, plain board member, asking you, "Sir, Mr Auditor, the one we pay annually to give us advice, would you please advise me as to whether or not I should be in a position today to move forward, based on the financial information I have to support the NAOP report," what would you have said?
Mr Caine: I think we have to answer with reference to our report, based on that the decision asked for additional information. I can only presume that was because they were not comfortable or they hadn't the information they wanted. They asked us to provide that additional analysis and assessment, and we did that. That's a very normal business practice.
Mrs Fisher: I guess I'll ask you this then. Your letter is dated October 20 to the executive vice-president, chief development officer and chief financial officer, Ms Clitheroe, who was here this morning. In that letter it continues to outline some inadequacies. It does talk about some progress in the concerns that were raised in your review of the report after it was adopted by the board.
My question to you is, would you, if you were that person -- I'm not asking you to be the auditor. Take off your auditor's hat. We have many people come before us right now in these hearings who are giving us advice. Some of them aren't even paid to do it. So now you're a paid adviser and I'm asking you, as a paid adviser, would you not -- let me ask you this, as the auditor to the corporation. This is your role. Why didn't the last line read, "And we may suggest you hang on for a second until we discover in fact what the true costs might be if all options are presented"?
Mr Caine: There are three or four things there. I'm going to ask Ken to address the October 20 thing and I'll reserve our normal due diligence on accepting engagements.
Mr Hartwick: With reference to the letter, this was something that was requested and it's normal for a follow-up to the report that we did. You point out that there are still areas which have not been fully addressed. Some have been, such as the basis for recommendation of options, and that's a document which I believe the committee has been given. But there are additional areas that need to be addressed: improvement in the financial analysis; the labour issue remains as a big one that needs to be addressed. So they're there. What we've looked for is the commitment from the board and management that these issues will be addressed. We've been satisfied that we've received that commitment.
Mrs Fisher: As you are their paid adviser, and you know that they're making decisions and you know that they're taking action today as we speak with regard to the implementation of that plan, does it not worry you that perhaps they're maybe not moving ahead, not necessarily in the right direction but maybe in the wrong order?
Mr Caine: I think we were asked on October 20 to talk about the status at that point. We have not been asked to assess it at its current state, so we would be giving an incomplete answer if we were to answer you as of November 4.
Mrs Fisher: That's fair. Okay. I want to move on to another issue because we're getting nowhere here.
I do want to address one comment, by the way. As of the midpoint of last week --
Mr Conway: That means, by the way, you're winning.
Mr Laughren: I think you'll be retained.
Mrs Fisher: That's a good possibility.
Just as a comment, the labour issues have come up about three times this afternoon since being here and we've had very strong indications of some very supportive moves forward in terms of their assistance in dealing with this problem. I just hope they're heard.
I want to get on with the issue of public corporations. Of course, with no disclosure of other clients, I would ask you this question: Have you ever been involved, as auditors, in a corporation -- it doesn't have to be huge, just any corporation -- that's gone from a public status to a public-private partnership status?
Mr Caine: Have we ever been involved in a privatization of a public --
Mrs Fisher: Hang on now. I didn't say "privatization"; I said "public-private partnership." I wouldn't call that privatization. There's another step before you get to privatization, if it was to be considered.
Mr Caine: Okay. I probably didn't hear it correctly.
Mrs Fisher: What I'm saying is, have you ever dealt with a public company which has moved into a public-private partnership in terms of equity injection, shared ownership, shared operation and responsibility -- shared anything?
Mr Caine: Ernst and Young no doubt has. I've had a lot of experience with a variety of situations; nothing that fits exactly into that definition personally.
Mr Hartwick: I just echo the same comment.
Mrs Fisher: Have you been exposed to the British model that was presented to this committee?
Mr Caine: I have not been provided with that document. I'm generally aware of what happened in Britain in terms of the changes in their industry, and Australia and New Zealand and a number of other jurisdictions, but just general --
Mrs Fisher: As somebody a little bit entwined right now, but in I guess respect of the fact that you're going to be there, perhaps if this model was asked to be reviewed as the auditor to the corporation, in looking at it from the outside, is it something that maybe -- everybody else is talking here about long-term debt and debt-equity ratio and the ability to survive and the ability to go on etc and the true values. Knowing that perhaps we're out of money, when we say, "cash in, cash out," I would wonder if you would agree that without the money it's probably not there anyway in terms of the corporation.
Mr Caine: The cash flow, as demonstrated by these 1996 financial statements, is there and it's being used to reduce debt by $1.4 billion in that year and by an additional amount this year, but I don't have the exact amount handy. I can get it, but there is a substantial reduction in debt because the cash flow is there.
Mr Conway: Gentlemen, what do you understand the statutory debt retirement obligations under the Power Corporation Act to be over at Ontario Hydro?
Mr Caine: In a general sense, the --
Mr Conway: In a specific auditor accounting sense.
Mr Caine: The Power Corporation Act requires a calculated provision under the terms of the act to set up what I think is called a sinking fund. Maybe I'll turn it over to the fellow who really knows the answer. Go ahead, Ken.
Mr Hartwick: I think it's within the rate recovery process that there's an allowance for the collection of funds that can deal with the debt retirement over the term of the debt that's in place at Ontario Hydro, in simple form.
Mr Conway: From an accounting and auditing point of view, and having been there for 90 years, are you aware of any provision that would excuse Ontario Hydro as a corporation from meeting those SDR obligations on an annual basis? They are statutory, as I understand them.
Mr Caine: They're statutory. We're not aware of any provisions that excuse them from that. The matter is a legal matter, of course, and I understand that --
Mr Conway: But it's also surely an accounting matter.
Mr Caine: Based on the legal interpretation of the requirements of that act.
Mr Conway: Over your 90 years, are you aware of any time or provision under which Ontario Hydro was excused from that?
Mr Caine: No. As I said, I'm not aware of any forgiveness of that provision.
Mr Conway: Thank you for that.
I want to come back to one of the aspects of your report done in late August and early September. I want to focus on this whole labour issue, because at the heart of the Andognini recommendation for this recovery plan was the observation that they just didn't feel they had the people to keep 12 reactors up to a good level of operating standard. I look at your report and you certainly raise a number of concerns about the assumptions around labour generally. Do you want to just elaborate on those concerns?
Mr Hartwick: Sure. With respect to the labour and the importance of it to the nuclear asset plan, there are core assumptions around, as you mentioned, to wet-lay and dry-lay some of the units, to the ability to move those people to the other 12 units to deploy there -- so just the moving of people. I think also the nuclear team had certain areas where they had particular skill shortages that needed to be addressed either through retraining or getting other people.
All of those issues around the ability to move, to retrain, to redefine work areas or work packages for the employee group, are all very complex in the context of Ontario Hydro. The point we raised in the report was really around that being a critical assumption, the ability to resolve those labour issues to the point where the NAOP could actually be implemented, and that being one of the key elements to actually implementing it.
Mr Conway: On page 14 of your report, under the subtitle "Resolution of Labour Issues," you point out that under the nuclear assessment group's preliminary analysis approximately 850 employees could be required to move to fill a corresponding shortfall at Pickering in 1998. You go on elsewhere in this report basically to say that a lot of the assumptions have not been tested or not been detailed to any great extent, including these assumptions around personnel. That's correct?
Mr Hartwick: In the report what we've raised is the fact that a number of these assumptions are very critical to the success of the plan. Certainly in our conversations and around the roughly 850 people in the movement, those are issues which have been identified, and were identified, by the nuclear team. What we're saying is that those need to be addressed as to how they fit into the ability to execute the plan.
Mr Conway: The more I think about this and I look at your analysis -- and yours is a financial analysis -- I sit and I think I reflect maybe some of the concerns that people like Mrs Fisher have raised as well. You tell us, and Hydro now tells us pretty bleakly, that they are facing some pretty tough financial challenges, particularly over the short and intermediate term. To be fair, let's just accept that. Then I say to myself that we know from the federal regulator that none of these reactors -- even though they may be cited as minimally acceptable and in the view of the federal regulator they can continue to operate. In fact, in some cases they're getting better. The performance is getting better, I think I can fairly say.
So I say to myself, given the financial pressures and the situations we were talking about earlier: that they may be getting to a point where there's no equity left; they're not going to be able to increase rates, in fact they may be under real pressures in the other direction because of the competitive market; they've got personnel problems, they don't have the right mix of people, and they've got to get a better culture -- I accept all that, but again, thinking financially, I say to myself, wouldn't a more prudent policy and recovery be to say, "Let's not lay up seven; let's lay up four, five, but let's keep two or three of these assets in production, producing revenue," avoiding some of the headaches that are there, not just financial but environmental? Yes, there's probably going to be some difficulty getting the skill mix right, but you tell me that the NAOP is not going to be without that problem as it is.
From a financial point of view, as someone who thinks the way I just did out loud, maybe an alternative course here might be not to lay up seven reactors but rather four or five, and keep two or three of these reactors that are scheduled for lay-up in production for a year or two, assuming there's no problem around safety; we've had some testimony from the federal regulator. But from a financial point of view, keeping two or three of those seven in production for another 18 to 24 months, if it's possible under the federal regulatory agency, as it appears to be, would that not be a sensible thing to do from a financial point of view?
Mr Caine: The general response is that in our report we identify that the options should be better documented. There were six options that were reviewed and documented -- I believe that has been provided to the committee -- which included these options of doing different numbers and what the positives and negatives were in terms of capability of achieving that and so on. Ken, you looked at that.
Mr Conway: I remember the options, and correct me if I'm wrong here, but I thought the option basically was they did an analysis of trying to keep the 19 and they said the chances of doing that were I think nil. So it was either 19 or 12, but I don't remember there being a middle option of, say, 14 or 15. The reason I mention that today is thinking financially. With your testimony this afternoon and some of what we got this morning, I just see this corporation right at the cliff on the financial ground. We're asked to look at this recovery plan. Surely there may be a more prudent middle course, if only for even a couple of years, because a lot is going to happen between now and the year 2000. I'm thinking financially about rate freezes and the competitive market and SDRs and debt-equity ratios.
Mr Hartwick: Perhaps to react, I think within the six options that were presented there were some variations, almost by four-unit pack of the facilities. In looking at it, I'm not sure whether you can look at it from a purely financial perspective. We were asked to look at the financial analysis that was done in the supporting documentation. Other issues such as the ability of the appropriate number, of the right skill of people to do multiple or keep some units running and others down, the issues around having different standards between units, those are all technical issues, in our view, which would need to be better addressed probably by Carl and his team.
Mr Conway: But committee counsel reminds me that on page 11 of your report, it says: "NPAG" -- that's the nuclear power assessment group -- "presented two options to the board on August 12," that is, recover all 19 units or lay up seven and work on 12. I guess what I'm asking you is, in any of your work, did you see, or in the absence of seeing it, is it foolhardy for this committee to think about maybe a third option that says there's a middle ground, someplace between 12 and 19, thinking financially, assuming the safety issues are manageable?
Mr Hartwick: One of our recommendations dealing with that specific issue was that there be a documentation of the options that were considered; not just the two, but other options that were considered as part of the NPAG assessment. That was done and presented to the September 26 audit finance committee. I think the document has been provided here, which is the basis for the recommendations providing for the nuclear asset plan, and that set out six options which then dealt with keeping Pickering A going and not Bruce. So it dealt with some variations.
Mr Conway: But as committee counsel tells me, it's after-the-fact documentation. The decision was made on August 12. I'm trying to get my head around financial issues. You're not here to talk about the technical and safety issues, I understand that, but there are huge financial obligations here. We have some responsibility to the taxpayers of Ontario and the ratepayers of Ontario Hydro to get as good a level of comfort -- I'm telling you, I want you guys to tell me more directly than you're telling me this afternoon, is it prudent for this committee to think about a third way, something between 12 and 19, so the kind of nightmare that I see coming financially in six to 24 months is reduced to some reasonable extent?
I come back to my question: Did you ever find, or is it prudent for us to go looking for, an option that says, "We accept that you can't keep the 19 going, but 12 is too far the other way," that a prudent financial and safety and operational course might be to look at keeping 14 or 15 of these reactors operational, at least until the year 1999 or 2000, so we can get a better picture of other things and so we can give ourselves a little bit of financial room in which to manoeuvre?
Mr Caine: At the time of our review, we did find that other options had been considered but simply not documented and provided to the board at the time of the August 12 board presentation. Those other options, the six options, were then documented and presented by September 19. That was the documents' date. It was quite clear in our examination that they had been examined and had been examined in some depth.
The Chair: Thank you, Mr Conway. If it's absolutely critical --
Mr Conway: Have you done any analysis of that kind of middle course that I've talked about or are you aware that anybody has done that analysis of that middle course, someplace between 12 and 19 reactors? Are you satisfied that it's been done or are you aware that it's been done?
The Chair: That's the question.
Mr Hartwick: Perhaps again I'll refer back to the documentation that was prepared by the NPAG team and presented to the September 26 audit committee, which set out six options. That is one of the recommendations of our report, that the options that were considered be appropriately documented and assessed, including not only the cost but also the practicalities through safety and --
Mr Conway: You're not satisfied at this point that that work has been done --
The Chair: Thank you, Mr Conway. Counsel will have a chance to ask that in a couple of minutes. Mr Laughren.
Mr Laughren: I'll pass.
The Chair: That will complete the questioning. Mr Power, do you want to ask some more questions? That will save you having to go through -- Mr Conway is right here.
Mr Power: I might as well follow up on Mr Conway's question. The question is relatively simple: Are you satisfied, for example, that the option of maintaining 17 units has been fully evaluated and considered through all the various risk scenarios? Are you satisfied that option has been properly evaluated and documented to your satisfaction and is appropriately discarded?
Mr Caine: We did not conduct that examination. Our review was of the financial support for the technical options that were considered feasible and viable by the NPAG team, and that's what our report covered.
Mr Power: So you're telling me that the examination of these other alternatives to ensure whether or not they are satisfactory in their own right, or the decision to discard them, is beyond the scope of your retainer?
Mr Caine: A technical evaluation is beyond the scope of our evaluation, yes.
Mr Power: So you can't express any opinion to the committee here as to whether or not it might be prudent to evaluate operating 17 or 16 units? Is that what you're telling me?
Mr Caine: We cannot express that opinion at this point.
Mr Power: Would you be expressing that opinion as part of your audit at the year-end?
Mr Caine: We would express an opinion on the financial statements of Ontario Hydro as to whether they fairly present the financial picture based on the decisions that are taken by the duly constituted board and management of that organization. The responsibility of an auditor isn't necessarily to say, "Maybe you could do this or that or the other thing." We look at what you did do, what you have done and how much it's worth.
Mr Power: Yes, I understand. In other words, you won't ever express an opinion on whether 16 or 17 units should be run. That's Ontario Hydro's decision, that's beyond the scope of what you'd be doing. Right? You will simply accept the final decision.
Mr Caine: It is at its heart a technical and financial question.
Mr Power: Okay, and it's beyond your scope.
Mr Caine: Yes.
Mr Power: A couple of other questions, if I may. Just following up on some of the questions about the consolidated statement of changes and the cash position, I must admit I was confused and I may have missed this. On page 46, as I see it there, the cash from the operating activities is $2.228 billion. If I understand correctly the investment activities, down below there is a negative $735 million, which gives me roughly cash available for financing activities of $1.493 billion. Does that make sense to you, gentlemen?
Mr Caine: Maybe I'll ask Ken to take it through. It isn't that simple.
Mr Power: As you can tell, we've sort of grappled around here and I'm trying to -- as a layperson it is --
Mr Caine: What this tells you is that in general terms they're getting a lot of cash out of their operating activities and they're using it to retire debt. That's what it tells you, in the order of $2.2 billion. They had other things they had to use the cash for, but they used that cash effectively to retire debt.
Mr Power: I'll just see if I can understand this. What is, then, the cash available for financing activities excluding going to the bond market, your revenues from your customer base?
Mr Caine: We'd have to provide that separate calculation. This is net of a bunch of things.
Mr Power: If you could provide that separate calculation, then if you could add to that what the long-term debt due in 1996 is -- I understand from note 9 that it's $2.704 billion. If you could show me the difference between what that income was versus the debt due, I think that was the question that was trying to be brought out earlier.
Mr Hartwick: That was just basically for clarification or reconciliation of the note 9 change in debt number through to the cash that was generated through the operations of the entity and the reconciliation back through to the cash flow statement.
Mr Power: Let me rephrase it as I understand it. People are trying to understand what Ontario Hydro's cash flow is. As you've very ably pointed out, that's the key issue here.
Mr Caine: It is.
Mr Power: What the cash flow in the example year 1996 would have been, when you reduce what your investment activities would be, it leaves you with a net cash flow position to do with what you want.
Mr Hartwick: We term that the free cash flow that's available to retire debt, invest.
Mr Power: That makes sense. Okay, I'm with you there. Then the question is, once you have that free cash flow, what was the planned long-term debt due in 1996? As I understand it from note 9, from my notes here, it's $2.7 billion. What I seem to come up with is a significant difference between the cash flow and the long-term debt due planned in 1996. Is that a fair statement?
Mr Caine: Yes, that is a fair statement. What this and every other corporation this size does is use treasury operations to balance its flow of cash needs against available cash saying, "That's what's callable in the year." Because it tends to be higher-interest-rate debt and we have a low-interest-rate phenomenon, it's very much in their interest to roll that over and reduce the overall net interest rate applied to this debt position. That's what they do.
Mr Power: That sort of makes sense. If I understand you correctly, by saying you use your treasury capabilities, basically you roll over debt.
Mr Caine: Right.
Mr Power: In this case, if there's a deficiency between the free operating cash and long-term debt due, you've really got to make it up on the bond market somehow.
Mr Caine: Yes, you roll it over in the bond market. If you look on page 54, you'll see that the weighted average interest rate of the debt has come down by 0.4% over that period. It doesn't sound like much but it's huge in terms of its implications for the cost flow of this organization, every point of per cent.
Mr Power: That makes sense to me. Then if I understand it correctly, you've got less free cash available than you have the ability to pay off your planned long-term debt due in the example year 1996 we have right now.
Mr Caine: Yes.
Mr Power: Now I roll forward in time to the NAOP and the implications of that. Is it fair to assume that your free operating cash position's going to get worse, for lack of a better expression, in future years with the costs to be incurred with the NAOP?
Mr Hartwick: With all things being equal as far as your basic operating expenses and other things that would consume cash, sure, if you're going to layer on an additional set of expenditures, that's going to impact your free cash flow to retire debt.
Mr Power: Which would suggest to me that in the next couple of years, based upon what we know of Hydro, my free operating cash is going to remain around here, but my debt load's going to continually increase. I think some of the flowcharts have shown us that.
Mr Caine: If your free cash flow stays at a level of, say, $1.5 billion, just for the sake of argument out of here, and the amount that you need to finance the plan is $1.5 billion times however many years, then what that would mean in a general sense, as one of your options, is to cease the paydown of debt and continue with the rolling over of debt to reduce the interest rate coverage, assuming we stay in this interest rate environment we have, this favourable environment we have right now, to reduce the overall costs of the organization.
Mr Power: I think I've satisfied some of the confusion that went around that. I'll take you up on your offer, though, if you can just elaborate that in writing so we can circulate it around. You can tell there are some questions about that.
Mr Hartwick: Yes. That certainly is an analysis that the finance group at Hydro I'm sure has. Depending on your preference, we can either have them provide it to you or we can.
Mr Power: I'd prefer it out of your company's letterhead, if you don't mind.
Mr Conway: I second that motion.
Mr Power: An unrelated area but another area of confusion in my mind: Generally speaking, what does "retained earnings" mean? There's some confusion around that and I'd appreciate what advice you can give me on that.
Mr Caine: That's a good question. Some people ask why retained earnings isn't equal to cash. It is the net equity position. In this case there are no external shareholders other than the shareholdings or ownership position by the government of Ontario.
Mr Conway: We've noted that.
Mr O'Toole: There are no shares.
Mr Caine: Yes, there are no shares. Retained earnings is the residual between assets and debt and other liabilities. That's the simplest way to explain it.
Mr Power: That's sort of simplistically how I understand it. I'm just pleased to know I'm on course.
Mr Caine: That's about right.
Mr Power: I'm getting comments over here that when you get accountants and lawyers agreeing, we should all be nervous. But putting that aside, would you agree with me that as a general principle retained earnings is a positive matter, it's a positive on the books?
Mr Caine: Retained earnings, being the residual value of the asset versus the debt, if it is a positive amount, is looked upon in a positive way in terms of flexibility for the future, an additional indication of flexibility for the future.
Mr Power: Is it acceptable to have a negative retained earnings balance?
Mr Caine: It happens. Boards of directors looking at that situation would want to know how it turns to a positive.
Mr Power: Is it an issue of considerable concern for a corporation if it has a negative retained earnings balance?
Mr Caine: It is certainly not a matter of rejoicing.
Mr Power: You're being far too nice about this. Let's face it, it's a serious issue, isn't it?
Mr Caine: We have clients that have negative retained earnings situations and they've managed out of that. I might refer to one other client that Ken and I share, and that is Algoma Corp. It had a negative retained earnings situation and they seem to have dealt with it. But it certainly is a matter to be looked at.
Mr Power: That's the exception to the rule, though, isn't it? In your experience you've mentioned one.
Mr Caine: I can't comment in terms of the rule, other than the idea of having negative retained earnings is something that you'd look at with concern and something that you want to turn around. We would, as auditors, expect that that plan would be there to turn that situation around.
Mr Power: It's a fairly rare experience, though, for you. It is for everybody else I've talked to in your profession. I can tell you, we've talked to a lot of people and they all come back with the same consistent statement, so unless you have a unique perspective on this, which I'm more than willing to listen to, you're alone.
Mr Caine: The general rule is you look for a positive equity position in most of the companies that we audit, which are private sector companies. That is my principal background and that of Ernst and Young, so that's the common situation. The common, accepted business practice is to move towards a positive retained earnings position.
Mr Power: In the example you gave, I don't think it's unfair to characterize it as somewhat akin to an insolvency situation. I can't recall the facts off the top, but it was a company that was in very difficult financial circumstances at the time. Correct?
Mr Caine: In terms of the comments, we look at the ability of the organization to continue as a going concern and at its ability to service its debt, at the free cash flow, and a series of other indications in the context of that corporation. It really isn't a one-size-fits-all audit, even though we use the same processes and techniques. It really does have to take into account the unique circumstances of every situation, which we do in this case and --
Mr Power: You've ducked me nicely on this, but maybe I can just bring you back. From what I'm hearing, the free cash flow is limited, the debt will increase with the NAOP quite significantly, and I think we're all in concurrence that a negative retained earnings balance is generally an unacceptable state of affairs. In your language, if I may paraphrase, you'd want to see that turned around. How fast would you want to see that turned around?
Mr Caine: The corporations we are involved in look to see the equity position in a positive sense. For example, if you're in a biotech or a big investment situation, you could see negative retained earnings but you'd have a significant equity position in there to support the investments. So coming back to it, yes, we would look to see the equity of the organization appropriate to its mandate, the environment it sits in, whether it's competitive and how it's expected to get its money.
Mr Power: Can you give some guidance to the committee as to, in the particular circumstances of Ontario Hydro, given your 90-year experience, given the work that you just did, when we should reasonably expect there's to be turnaround on Ontario Hydro books if they're going to have indeed a negative retained earnings balance?
Mr Caine: There are three elements to the answer. First is the business environment within which this organization will have to operate, and that includes its structure, its regulatory environment and so on. Second is the competitive environment it's expected to operate within: What is the rate for the power and how can it be assured of achieving its costs? The third are the structures and the agreements that it arrives at in carrying out its mandate and the way it's managed.
Mr Power: My last question is, if the white paper came out tomorrow, that might fundamentally affect your view of how soon you'd want that paid off, wouldn't it?
Mr Caine: As I said before, there will be few more interested readers of that document than Ernst and Young.
The Chair: Mr Caine, will the NAOP add anything to Hydro's equity?
Mr Caine: The NAOP, as it's currently provided, involves a substantial expenditure of funds once these are approved by the board of directors. There a bottom-up process that's under way right now, so that's the process that's under way. Once that happens, we'd be able to give you the information, the specific amounts.
The Chair: I'm sitting here a little bemused. Your answers have left me in a quandary about what happened on August 12. Help me piece together what has happened in terms of your testimony. On the one hand you've indicated that there's a technical issue and you're not expressing any competency in terms of the technical choices. Mr Conway has spent some time talking about several options that were put before the board and wondering out loud whether one should be looking at perhaps 14, 15 or 16 reactors as opposed to more or less. So the technical side is left questionable. Then I have your response to indicate that in the areas of the financial viability of the plan, or whatever is happening, there are still ongoing discussions, there are still continuing reviews. Upon what basis has any decision been made?
Mr Caine: The question as I understand it is around the day of August 12, as to what substantiation or information was there for the board to make that decision.
The Chair: You can start with that.
Mr Caine: We have been provided with a package that was provided to the board at that point, as the basis for our review. There was also a fair amount of other information provided to that board leading up to that. We know bits and pieces of the information that was provided.
The Chair: Are you comfortable that at that point the board was in possession of sufficient information in terms of finances upon which to make a decision?
Mr Caine: I'll have to come back to the board's decision, which required that an assessment of those finances be done and that we did. Our report clearly outlines a number of areas where improvements were needed in the substantiation of the documentation.
The Chair: So the board was not fully in possession of all the information it needed to make a definitive decision.
Mr Caine: They decided to ask for due diligence and that's what led to us being asked to take on this engagement.
The Chair: So the board did not have sufficient information to satisfy it at that point to make a definitive decision. Would that be true or not?
Mr Caine: I cannot answer the question as it's stated.
The Chair: Then let me withdraw that question and put it to you another way. How do you react to the comments made by Ms Clitheroe that are in the minutes of the board, the concerns expressed?
Mr Caine: We've had a number of discussions with Ms Clitheroe over the course of doing our examination for the preparation of this report, so we were able to find out from her what her concerns were and we were able to use that as part of the evidence that came in to the basis for our findings.
The Chair: Were they reasonably minor concerns?
Mr Caine: I guess I'd have to ask Ken to comment on that.
Mr Hartwick: Coming back to the board decision itself, which requested that an additional financial review or assessment be done of the financial elements of the nuclear asset plan, certainly some of those were driven by the discussion at the board that they required that additional due diligence. It's something that we view as being common in the other companies we deal with, that on a major investment decision, additional due diligence would be done in the area of financial information.
The Chair: So financially it would be fair to say to the layman that what I see here is a picture of a board that's saying, "Looks like everything is okay, but let's take one more look at it." Is that what you're painting for me?
Mr Hartwick: I think what the board --
The Chair: Is that what you're painting for me as the auditor? Would that be fair?
Mr Hartwick: What the board decision reflected was the board proceeding for approval of the plan, subject to the review of the financial information. We weren't there for the discussion, but it will reflect that they wanted the financial information examined and then subsequently asked us to do that.
The Chair: Mr Hartwick, if you were sitting there, would you have said, "I have enough. That sounds pretty good to me"?
Mr Hartwick: I wasn't sitting at the board, so it's a question that I don't think we're in a position to answer. We'd certainly react more to what the board instructed us to do.
The Chair: Would you have advised the board to make that decision?
Mr Caine: Again, they asked us for our advice with respect to the financial support. As outlined in our report, we've advised them, Ontario Hydro's board and management, to get additional information before commitment of the funds. That's what's in the report. That's what our advice is. It's not whether it would have been; it is that advice.
The Chair: I should not be concerned, then. As I take a look at the testimony, it seems as though the question raised by Mr Conway of whether you do 12 or 14 or whatever is a technical thing that no one seems to really know an awful lot about, but that's okay. The financial thing is: "Well, it looks to be okay, but let's proceed. We'll do some more studies and we'll have ongoing conversations." In the meantime, the recovery plan seems to be unfolding, does it not?
Mr Caine: The recovery plan, as I understand the board of directors' direction, has been approved in terms of its direction and the strategic and tactical direction of which units and what they expect to happen. What they asked for in addition to that was due diligence, of which this is part.
The Chair: In your opinion, is the plan currently being implemented in any part?
Mr Caine: From what we've seen, the plan of NAOP is under way.
The Chair: A final question in that regard is, would you think Ernst and Young would consider a going concern note to be issued in regard to the 1997 financial statements?
Mr Caine: We're required under professional standards to examine the evidence that would substantiate maintaining a going concern basis for any set of financial statements, and certainly anything where there are significant uncertainties as outlined in note 19 to these financial statements, that's expected and that's what we'll do.
The Chair: Would your outward countenance change if tomorrow morning the government were to withdraw its guarantee?
Mr Caine: I would certainly be interested in that decision, were it to be made.
The Chair: Would that get your attention, as an auditor?
Mr Caine: It certainly would get our attention.
The Chair: And what does that mean?
Mr Caine: We would like to look at the impact of that with respect to the ability to continue to roll debt, the ability to retain a debt rating. The key thing is, what is the debt rating? Those are done by -- you talked about "cold, hard." That's a cold, hard review.
Mr Conway: Cold heart?
Mr Caine: Cold, hard.
The Chair: It's a theological term.
Mr Conway: Among other things.
Mr Caine: It's beyond accounting.
The Chair: The final question for you is, in your opinion, because you may not be able to speak to it technically, is the recovery plan financially sound?
Mr Caine: We did not examine the financial soundness of the recovery plan. We did identify a number of pieces of information that will be required in order to be able to estimate what the full cost of that plan would be. Once that information is in, we'd be in a position to know. We expect a lot of further evidence to be available to us, as the auditors, by the time we close off these accounts.
The Chair: Mr Caine, I thank you very much for your attendance upon the committee, and Mr Hartwick for your evidence. I hope that you'd be available to the committee if there's further questioning that may flow from this.
Mr Conway: Mr Chairman, can you make sure that these gentlemen's superiors get a copy of this videotape of their performance? Because I'll tell you, if Elvis Stojko is this good at Nagano, we're going to win a gold medal. You guys are good.
The Chair: We'll have that passed along without prejudice to the committee.
We thank you very much. You are excused from the stand for now.
For the members of the committee, before we close off, I might remind you that tomorrow morning at 8:30 we will leave here for the Pickering station. Then, in the afternoon, the public hearings will be held at 2:30 pm at St George's Anglican Church, at 51 Centre Street South in Oshawa. There are something in the order of 14 to 20 deputants so far on the list. Some are clustered together, to be of assistance to them and to us.
Mr Conway: We don't need robes for the church?
The Chair: I do but you don't. As long as you know how to light candles, we'll be all set. Other than that, I think we are all set.
For those who are watching television, may I remind them that we now leave the airwaves for about a week and a half. We will be returning the week of the 17th. I know the number of viewers of this committee is growing by leaps and bounds every day. We will return that week. I'm told by Donna that we have to share that week with another committee. Unless we can find the pictures of the last party, we'll have to defer to them and just come back and forth every other day, but we will return that week.
Rob, there's one other item you have to raise before we go?
Mr Power: Mrs Johns has a question.
Mrs Johns: I have two points of order. I assume Hydro is in the crowd -- if not, they're watching on the TV -- so maybe they can get this information for us.
Mr Conway: Hydro usually is the crowd.
Mrs Johns: Hydro usually is the crowd, so Hydro, are you writing this down?
We received this from Ontario Hydro yesterday -- it's dated November 3, addressed to Donna Bryce, and it is with respect to five details that I believe Ms Fisher and I asked for. In number one, they gave us a long sheet that talks about the phased recovery, the NAOP-based case or 12-plus units.
Under the heavy water plant layup and infrastructure, I'm interested in why $9 million is being expended on that from 2000 through to 2009, if we are actually laying that up, closing it up and all those things.
The second thing is in the fourth section about the decommissioning report on page 8. It talks about used fuel disposal and the unit cost of disposal. It's $140 per kgu. I'm not exactly sure what that terminology is, but that is substantially less than America, where it's $330, or $1,540 in Finland, $750 in Sweden. I'd like to know why the difference in that dollar value. Is it because we're on a Candu reactor, or is there some other reason for that to be the cost? It seems way out of whack. If I could have that information when we return, I'd appreciate it.
The Chair: Ms Johns, that is not a point of order, but it is a reasonable request and we will indeed on your behalf make that request to Ontario Hydro. Hopefully we'll have it by noonhour tomorrow.
Is there any other business?
Mr Power: Just to let you know that we have received and Donna will circulate in a moment the summary report of AECB staff to the board. This is not the full report that's following next week that is some several inches thick. For the purposes of the next two days, it's not site-specific, but there are a couple of pages in there worth reviewing. In essence, AECB concludes with Ontario Hydro's IIPA findings. Like I say, from my brief review it doesn't add too much more. If you have a chance, I'd review it in the next two days, but the next two days are, as we discussed, site-specific. Those are my only comments, Mr Chair.
The Chair: Thank you very much, Rob. To remind us, tomorrow we adjourn to Pickering and then on Thursday this committee will travel to Darlington for its site visit as well. Tomorrow afternoon we will hear deputations that will take us up to the early to mid-evening.
Any other business for the committee? If not, this committee will stand adjourned until 8:30 tomorrow morning.
The committee adjourned at 1718.