Wednesday 19 November 1997
Advisory Committee on Competition in Ontario's Electricity System
Mr Donald S. Macdonald
Dr John Grant
Dr Jan Carr
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 on Ontario Hydro nuclear affairs is in session. When I left off yesterday so we could adjourn for the division in the House, there was a motion before us placed by the government caucus.
Mr Doug Galt (Northumberland): On further reflection, we will withdraw that motion.
The Chair: Is that agreeable? All in favour? Opposed? Carried.
We will proceed to the business of the committee. We are moving towards our deadline, as you know. December 1 is looming and the committee is of a single mind that we will hit that objective. Today we have a very distinguished deputation. Just before we get to that, I ask members to note the submission on your desk now from the Ontario Natural Gas Association. The very quick review I've been able to give it indicates that it is of signal importance to us all. Please read that. That will be considered by our staff for its writing of the report.
ADVISORY COMMITTEE ON COMPETITION IN ONTARIO'S ELECTRICITY SYSTEM
The Chair: Now I welcome Donald Macdonald to the select committee. We appreciate very much your presence and agreeing to provide testimony to the committee.
For the purpose of Hansard, Mr Macdonald, though you're extremely well known, would you please identify yourself and your distinguished colleagues at the witness table with you. Then we're in your hands to make whatever opening statements you'd care to make.
Mr Donald S. Macdonald: First, we'd like to thank the Chair and members of the committee for the opportunity to appear. I'm the Honourable Donald Macdonald, the chairman of the advisory committee which reported in June 1996. On my immediate right is Dr John Grant, who was a member of the committee and who is an economist by profession. On John's right is Dr Jan Carr, who is an engineer by profession and is associated with Acres International, the Toronto engineering firm. We represent the three different vocations and will be happy to respond in that way.
I've left for committee members a précis of some of the thoughts we have at this particular point, but of course we'd be glad to go further into other questions if you feel it might be of assistance to the committee.
Obviously, in the aftermath of the white paper, much has been said on the public record that we would have said anyway. As you know, the white paper accepted the principal recommendation of the advisory committee that the virtual monopoly which Ontario Hydro has enjoyed for many years should be brought to an end, and that Hydro will continue but would compete on even terms with the province's electricity market.
The white paper introduced a new element. First, the government set itself what we regard as a tough matrix, to have change effective some time during the year 2000, and not only would it do as we had proposed -- restructure the wholesale market for electricity within the province and therefore make some structural changes in the generation -- but also it would undergo the restructuring of the retail market at the same time. We think it will involve some major changes. It's going to make the Legislature's job very busy with the changes to the Power Corporation Act, and a lot of administrative changes will have to be made.
One of the concerns that the advisory committee had when we were doing our work was the recognition of the fact that in Ontario, Ontario Hydro is, and would be after our recommendations, in control of more than 50%, in fact close to 80%, of the generation within the province. To talk about competition on one hand and then have a single party in control of so much generation, we were very concerned with the risk of non-competitive activity, of the dominant player in effect dominating the market.
One of our proposals of course was that some of the Hydro assets -- not all of them, but some of the Hydro assets -- would be privatized so as to have some independent players out there able to compete into the newly established market. Even then, we recognized that there would be competition policy problems.
In a sense, the problem remains with the white paper proposals. Hydro generation, in a standalone generating corporation, is going to be very large, very dominant in the market. One of the concerns we would have is that there be a structure there which would have the responsibility to superintend that market, the way it operates, and, if there is unfair competition arising just from sheer size, to take a role in that regard.
The white paper sees to the enhancement of the role of the Ontario Energy Board, making it a full-scale regulatory agency, and would endow the Ontario Energy Board with some of the same responsibilities that the competition tribunals under the responsibility of the government of Canada have in this regard.
It's been a long time since I've examined that particular question, but looking back to the Canadian breweries case, I'd agree with the judgement there that a provincial crown corporation is beyond the effective control of the federal competition policy bureau. That being the case, it's going to be important that the OEB exercise a very strong jurisdiction there, to make sure the value that the government, and I'm sure the House, will set on competitive behaviour is recognized. Keeping under public scrutiny the competitive behaviour of one of the generating companies is one of the concerns we wanted to communicate to you.
On the question of privatization, as I said a moment ago, our concern when talking about privatization was to try and create competition. In that sense, we weren't privatizing it for its own sake. There are two obvious advantages apart from competition. Of course, Hydro would get some of the money back in order to pay for its operations, but the government is not proposing to do this, and I think I speak for the three of us and for the committee in saying we acknowledge that it's not essential for this purpose. The essential thing is creating a new structure of a market which will make competition possible. In five or seven or 10 years' time, when there has been an operation of the new system, the Legislature of the day can take a look at that and decide what they want to do about it.
We refer to the spectre that was present at the announcement of the white paper the other day, and that is of course the raison d'être for this committee's hearings, namely, the difficult circumstances of Ontario Hydro's financing. Particularly after the announcement of the financial difficulties of Hydro's nuclear division, the minister was candid in acknowledging that there were no easy or immediate solutions for dealing with the heavy load of debt which Ontario Hydro bears and that managing the problem will be a major concern.
We articulated a formula, and Dr Grant is particularly qualified to speak to this, whereby over a period of time the then-existing stranded debt could be managed by the corporation as it appeared to be at that time. Those facts of course have been changed again. John, you may want to comment on that particular aspect of it.
In summary, we welcome the release of the government's plan. We think it's an essential first step. We have spoken in support of it and are happy to do that today.
I now defer to my colleagues if they would like to touch on points of special interest to them.
Dr John Grant: I don't want to add a great deal to what Don has said at this point. You probably have questions you want to pose to us. But I would want to point out that now we're looking at weaker nuclear assets than the committee anticipated, the generation corporation that will succeed to the ownership of all these generation assets will be a much smaller company. And even with the stronger balance sheet that will be provided for it by the government's decisions, ex the government guarantee on debt, it will presumably have less capacity to refurbish the nuclear assets. It will have to go out on its own recognizance and raise any moneys that will be required to do that.
I'm not sure that all of us in the province have yet got our minds around the implication of a $6-billion to $10-billion corporation trying to refurbish $6-billion-plus of nuclear assets of uncertain futurity, as opposed to a nominally $32-billion corporation with a government guarantee doing that. It's not just a question of handling the handed-off stranded debt, which the government has many options for doing, but rather looking at the nuclear assets in the context of a struggling, competitive Genco, albeit with a large share of the market going in, in a totally new situation.
Dr Jan Carr: I'd just emphasize one point that I think is probably important to your considerations, that is, that the structure that has been recommended in the white paper spends a lot of attention on the implications, providing some discipline to long-range planning, to capital planning, to capital spending and so on. Too often, I think, restructuring focuses on a rather short-term goal of driving rates down tomorrow sort of thing.
I think the structure that has been in place, in particular the moving to wholesale and retail competition to happen on day one, so to speak, is very supportive of that approach. It's probably the main advantage that comes out of putting a competitive market in place. Sensible capital spending today does influence tomorrow's rates, and that is exactly what the structure proposed has as its strength.
The Chair: Thank you very much. We will proceed with the questioning by caucus. We'll start off with the five-minute rounds so we can give everybody a chance to get into the first round. We'll begin today with the government caucus.
Mr Galt: Good afternoon. You people did a lot of investigating and looking into Ontario Hydro, I expect, in general. We had quite a surprise back in the middle of August with this announcement about the nuclear problem, at least it was a surprise to a lot of Ontarians. We knew about your report. Did you get any feeling that the nuclear reactors or generators were in as much trouble as was announced in the middle of August?
Mr Macdonald: I can speak only for myself in the sense that I was professionally in no way involved with Hydro. I was astonished when the announcement was made in August about the shortfall of Ontario Hydro Nuclear. May I say it was a deep disappointment. Twenty-two years ago, as Minister of Energy, Mines and Resources, I attended the opening of the first Pickering plant. I've been proud of the system, and of course as the federal minister responsible for the AECL, was a great advocate of it. I was stunned, frankly, when the announcement was made of the proposed shutdown. I knew they'd had troubles at Bruce, I knew they'd had interim troubles at Pickering, but I had no expectation -- Jan, you were of course closer to the field than I was.
Dr Carr: Well, I don't think sufficiently closer to have any improvement on that perspective. I do notice and did notice at the time, and of course it's well established, that the problems are problems of management. It's important, and in our committee's consideration we did look to the nuclear plants as being a very important asset of the province, as physical assets. In spite of the difficulties, it is encouraging to see that the assets themselves are not at issue here; it is the way the assets have been managed.
Mr Galt: Did you people get to tour these plants during your review, during your study? Were you in and out?
Mr Macdonald: We actually did not. In our own defence, could I say that the life of the committee was five months, which included Christmas 1995 and New Year's, so we really didn't get going until January 1996 and it was a short period of time. I of course had been in a number of the plants before, but no, not currently; the committee did not visit them.
Mr Galt: Why I asked was that I was just wondering if you might have got a tour similar to ours. Things looked pretty good where we got toured through. Maybe the areas we should have seen were the areas we weren't being toured into. But we've seen pictures from the AECB, some pretty disastrous-looking pictures of a year or so ago as to what was going on in Pickering A in particular, and they sort of suggested that maybe this was going on in many other areas. Some of the horror stories I've heard about Darlington during the construction period there, how the stuff was being carried away faster than they could bring it in in the supplies building, everything from horse trailers to fish huts and so on -- I just wondered what kind of things you were seeing.
It's interesting that you were as surprised as the rest of the people in Ontario, because there were a lot of earmarks there that things were in trouble. Hindsight is great, but looking back you can see that there were earmarks that things were going awry.
Mr Macdonald: My perspective -- I didn't regard the Candu system as trouble-free. The experience we'd had, for example, with the metallurgy of some of the equipment there just confirmed for me that we were in the first generation of a particular technology with a long life, and as time went on difficulties were bound to show up, and they did. But I was unprepared for the extent of the shutdown that occurred. The last I remembered was 22 years before, and it looked a lot better then -- but maybe so did I at that time.
Mr Galt: But maybe you've had better maintenance than the Candus had.
Mr Macdonald: I'm not sure about that either.
Mr Monte Kwinter (Wilson Heights): Mr Macdonald, the whole thrust of your report was dealing with competition. There was some confusion in the minds of some people. They felt that competition and privatization were the same thing, but you were talking competition, not necessarily privatization.
Mr Macdonald: Yes.
Mr Kwinter: This morning I heard a radio report, and unfortunately I haven't been able to find any text or any reporting on it, by the president of TransCanada PipeLines saying that as a result of the white paper's proposal that generation should remain with Hydro, with that 80% domination of the market they would not be able to compete -- I'm paraphrasing -- almost to the point where they wouldn't even try; that unless that generation capacity was broken up so there wouldn't be dominance in that sector, it's going to be a real deterrent to competition. Do you have any thoughts on that?
Mr Macdonald: The first thought I have is that I'm a director of TransCanada PipeLines and I'm a little surprised to hear that. The president didn't talk to me about that. I would be surprised if it would be possible, for example, for home heating purposes if electricity, even under the best regime by Hydro, could be made competitive with natural gas. Let me say, Mr Kwinter, that I know all about this. I'm a customer of Ontario Hydro Retail in Uxbridge township, and it's very, very expensive to be dependent for home heating on baseboard heaters with electricity. I can't imagine that TransCanada is going to have a competitive problem. You've tweaked my interest and I'm going to ask him what he had in mind.
Mr Kwinter: Again, I just heard this on the radio. When I got to the office, I started looking through the clippings, and I was through the Financial Post and the Globe, thinking that somewhere there would be some basis for this report. It wasn't something he said. It was a business report about what he said. I was just curious to find out whether or not you had any information on that and whether that was a concern for you.
Mr Macdonald: That's counterintuitive to me. I don't think that's a problem.
Dr Grant: I think it's important for the new market design committee and ultimately for the system operator to have sufficient transparency in the operations of the system that if there is any undue exercise of market power by the new Genco, it will become quite clear to everyone in the game and that the OEB and the ISO will have the requisite regulatory intervention powers, as necessary, to put that down.
My sense, when we were looking at the numbers as to how costly it would be to generate incremental kilowatts, was that there would be plenty of scope for merchant providers, if you will, within and without the province to come in and quite effectively compete in the new market. How much of the total power taken by Ontarians they could supply in the early years is an issue, but I for one had no thought that they couldn't be quite effective at the margin and would just be dogs barking at the big elephant.
Mr Kwinter: Dr Grant, I follow up on a comment you made about your concerns about the nuclear facility being downsized to a $6-billion to $8-billion -- I'm sure not the nuclear facility, the generation --
Dr Grant: Genco as a whole.
Mr Kwinter: Yes, Genco as a whole being downsized to a $6-billion to $8-billion corporation with a potential liability of another $6 billion to refurbish the nuclear. We had John Ahearne here -- he's a past chairman of the US Nuclear Regulatory Commission -- saying that in his experience every generation company that's publicly owned has divided off their nuclear facility from their fossil or hydro-electric facility, that it was always a stand-alone situation.
If that were to happen, that would just compound your concern, I would assume, because there's going to be some sort of cross-fertilization between the revenues from the hydro-electric and the fossil to help create the kind of capital that's needed to refurbish the nuclear, particularly when it's in a down state. Do you have concerns about that?
Dr Grant: I think if you have different kinds of power to offer to the market, you can use the strengths of one to balance the weaknesses of the other and vice versa, so that you are a stronger company financially and in other respects. When you have a mixed operation, in terms of the ability to raise funds, though I'm not sure how it would play out, I think it would depend very much on the market's assessment at the time of the viability of each of the plants in the kind of market they're intending to serve.
It's probably too early to make any kind of meaningful comment on the likely success of such a company and whether it would be a greater success to start off having broken it down one stage lower. I think the government may have to revisit that issue before this is over, but at the moment to hold Genco together while we're at this early stage isn't necessarily the wrong decision to make.
Mr Floyd Laughren (Nickel Belt): Welcome to the committee. The white paper recommends that the provincial guarantee of Hydro's debt be phased out by the year 2000 as part of the level playing field scenario. I can't help but wonder what will happen in the year 2000. I appreciate the fact that the existing debt remains guaranteed. I understand that. But in the new world when Hydro decides they need some big bucks for their nuclear operations or whatever, what's going to be the reaction of the market to that when they go out there to borrow money? I don't know whether Mr Grant would be the best one to answer that.
Dr Grant: You have an operating company that has a revenue stream and you have any number of new competitors out of province and in. You have the likelihood, I imagine, that substantial new transmission facilities will be bruited and possibly under construction coming, for example, from Quebec, from Manitoba, whatever. It's going to be an uncertain life for any company in the electricity business and, however big it is, it's going to have some pretty flinty-eyed financiers to face.
That being said, starting off with what I imagine will be the preponderance of the usefulness of the Ontario Hydro nameplate, they will certainly have substantial strengths going in. So we're not looking in any way at a hopeless situation to get that financed. However, you wouldn't be looking at the Ontario credit rating, that's for sure, however strong the balance sheet might be given to start off.
Mr Laughren: I certainly learned a lot from the flinty-eyed financiers. I was wondering, though, about the nuclear units, that's what bothers me the most, that are so incredibly expensive if something goes wrong. It costs as much to fix them as it does to build a new other kind of unit, I would think, or maybe more.
That is what's got me worried about this new world. All the projections about the life of the nuclear plants have been wrong as far as I can tell and the projections on the costs have been wrong. You've underestimated those, whether you're talking about the building of Darlington or the retubing of one of the stations or whatever. I don't know how, if you separate and make Hydro too small as a base -- I think there's a separate financial holding company; nevertheless the debt must be related to those assets somewhere in Hydro.
Dr Grant: May I just answer?
Mr Laughren: Yes.
Dr Grant: I think myself that moving to this new market-driven structure is the appropriate way to get the decision-making made sensibly in the context of a truly competitive environment. If those nuclear plants can be justified in that context, then let's go ahead and have a refurbishment. If, on the other hand, it appears that Ontario's marginal power needs can be supplied by a whole different set of technologies, then that would be the right decision to make. I think removing the public monopoly from the playing field is exactly the right move in the way of setting directions for those new investments.
Mr Laughren: That I can understand, and I don't have a big problem with bringing competition into the system. What gives me the willies is that we're already faced with Bruce A being shut down and probably not reopened, we're faced with the possibility of the same thing with Pickering A and then you start thinking ahead of Bruce B, Pickering B and Darlington. I don't want to give a scary scenario here, but at the same time I worry about a diminishing base of the crown corporation that has to achieve revenues to pay not only for the debt that's there now -- others will help, I assume -- but also of any new ventures, any new attempts for the crown to continue to generate electricity. I don't know how you deal with that. I don't know how you anticipate that.
Dr Grant: Just to add another aspect to that, if we're looking at plants that now have much shorter anticipated lives, then we'll have to revisit the whole issue of how to account for decommissioning and whether you want instead of a notional fund, for example, an actual cash outlay which would create a sinking fund on which that company would earn interest, of course, but it wouldn't be at the marginal rate of return of its operations.
Those issues certainly have to be raised. One would hope that the province would in some sense stand ultimately behind the credibility of the nuclear assets under the worst circumstances.
Mr Macdonald: I've nothing to add to that. I'm sure the province ultimately will be there and we of course propose to -- stranded asset charge -- try and discharge this, but the weight that the stranded asset will have to bear is much greater and probably it'll last a lot longer than we thought it was going to.
Mr John O'Toole (Durham East): Thank you very much for your esteemed presence here. I, as did many members here, read with interest your report, A Framework for Competition, and felt with that announcement there was a vacuum until the white paper arrived. Is it your sense that it was the response document, or is it just too naïve of me to put that question to you? Everyone was kind of waiting for that other shoe to drop.
Mr Macdonald: Do you mean the white paper as a response to --
Mr O'Toole: Yes.
Mr Macdonald: I certainly saw it that way. Indeed it dealt with a lot of the issues, generally speaking agreeing with us, but in a couple of cases not. But it was a response document.
Mr O'Toole: Perhaps you could describe your terms of reference briefly going into that study, that rather comprehensive view of stability of supply of affordable, sustainable electricity into the future. Did you feel any conclusions before you started the study that you finally have to bite into this big nugget, the Ontario Hydro monopoly? Is that what you felt going into that?
Mr Macdonald: The word "competition" figured in the title and it was prominent in our terms of reference. I have to tell you that the terms of reference went on for a full page and you could get almost anything you wanted out of there. But in the overall North American and world environments we felt what we were really being asked was to try and construct a competitive framework in which what had hitherto been a monopoly could be operated and how you'd get from A to B. The predominating theme would be that yes, we're going to competition, and then what remains is how you get there.
Mr O'Toole: That's right. So it was a bit of an anomaly in terms of how the generation side, distribution and the whole retail-wholesale side pretty much dominated just how you deal with the pieces.
I'm just going to move back for a second. I appreciate your remarks there. This committee's terms are quite specific, addressed in response, as you well know, to the Andognini report. We have the IIPA report and the nuclear asset optimization plan, that safety is first and the cost factors.
In some respects I'm sure, when I look at the safety and your shock -- certainly the government and these members here need to address that -- the AECB, a federal regulatory body, has the powers there. We heard yesterday from the American counterpart that there was some inability to take the next step and exercise that mandate.
With your experience and background at the federal level, do you feel that the mandate of AECB needs to be clarified with respect to who has the operation key, if you will, to actually shut them down? There have been warnings, six months, nine months, over the bow. They've been an integral part of the reviews, both the peer reviews and all the ongoing daily reviews, but there's been this lack of ability to translate that observation into an action. What advice could you bring to the committee's attention in dealing with the federal regulatory body?
Mr Macdonald: I have to tell you that the federal regulatory body is a lot more independent than it was 22 years ago. At that time, some of the directors of Atomic Energy of Canada were also on the Atomic Energy Control Board. My successor, the Honourable Alastair Gillespie, was effective in making this distribution so as to make it an independent body.
I just have to say that I think the federal regulator would be presented with a problem particularly where nuclear got to be 61% of the province's generation. If it was really bad, could you really say, "Close them all down"?
Mr O'Toole: That's a very fair question.
Mr Macdonald: There's a little unreality if you try to apply that in practice.
Mr O'Toole: That's the problem we currently keep hearing. It was never stated as obviously as you've stated it, but the choices are being dark and cold, so they really aren't viable choices.
In your research into the financial assets, liabilities and other issues facing Ontario Hydro's board of directors, did you perchance refer to their annual reports, and were you satisfied? We've met with the vice-president, Ms Clitheroe. To my satisfaction as a taxpayer in Ontario, I'm not convinced that due diligence was in place. They do in footnotes -- the auditor sort of signs this stuff; I'd refer you to footnote 19 -- very clearly state that they have a significant portion to the stranded debt. They say in footnote 19 that there's some $15 billion that they really can't work out. It's eventually going to fall.
Mr Grant, you would probably as the economist like to say -- in your research, A Framework for Competition, you must have wrestled with this bullet. Who gets the ball? The people of Ontario are expecting this committee to address that. Now we're asked to say, "Is this board that's come up with the NAOP plan the proper board to say: 'Oh, it'll be fine. Just give us another $10 billion'?" I feel very unstable, insecure in anything I've heard from their senior officers to support one more loan at the roulette wheel from a financial perspective. If you look at the debt-equity ratio, the underlying fundamentals, Mr Grant, I've had my chance to core dump my feelings on it. I'm not looking for endorsement. You're more qualified to analyse the documents than I am.
Dr Grant: On the basis of the projections we were provided from Ontario Hydro and then work done for the committee by a consultant, we independently came up with the idea that the current debt load of Ontario Hydro would be untenable in the new competitive environment even if they had the same percentage of the Ontario load they currently have or that they were currently expecting, even without, as Don says, any recognition on our part that those nuclear assets might be impaired, simply because the price at which they could sell the power would be substantially lower in the competitive market than what they were currently getting for it.
The number we came up with in terms of the stranded debt was not as big as $16 billion, but it was in that ball park. Now I would have to think that with the potential impairment of the nuclear assets, if that turns out to be a major factor in operations, you'd be looking at even more stranding. I think Hydro's statement in its most recent report was very close to our own in terms of the number they come up with, but I think if we came up with a number today, it would be an even larger one.
Mr Sean G. Conway (Renfrew North): Thank you, gentlemen. Mr O'Toole has anticipated very directly my line of questioning, so let me begin.
Just a few days ago we had testimony from the senior brass at Ontario Hydro, and by a few days ago I mean 10 days ago, where I think I fairly summarized their current financial situation as essentially the following: Their debt-equity ratio, charitably put, is about 94 cents, 95 cents of debt for every $1 of equity. They are operating on a plan where they expect to have negative income for the next three or four years. They are on the verge of competition and they're faced with an unexpected multibillion-dollar nuclear recovery plan. I think that's a fair representation of what we were told just a few days ago.
We were told furthermore that their recovery plan -- their official line is that their recovery plan was calculated on the basis of the monopoly status continuing over a five-year period. One has to believe that privately that's not the case, but that's what they advanced at the committee.
I'd like then to ask you very directly: One of the things the committee is going to have to recommend upon very shortly is, what do we suggest or recommend in the near term about this $5-billion to $8-billion nuclear recovery plan? Given your experience on the advisory committee, what you know about the white paper that was announced, and you're all citizens and taxpayers of Ontario, what would you specifically advise this committee to think about and perhaps recommend with respect to endorsing, amending, otherwise commenting upon this multibillion-dollar nuclear recovery plan?
Mr Macdonald: Perhaps I could ask Dr Grant to respond to that one. But can I make a procedural point at the start? I was surprised that the Hydro board, I think it was August 16, announced as a fait accompli this very substantial plan.
I can say that if I were a director of Ontario Hydro, I would be looking to the shareholder to get some direction: "We've got a major problem here. How do you want to us to handle it? What are your priorities?"
The minister, with the Lieutenant Governor in Council, and of course ultimately seeking the support of the Legislature, has a provision under section 10 of the Power Corporation Act where the government can issue policy directives to Ontario Hydro as to what the shareholders' expectation is in this regard. If I were one of the private citizens on the board, I would look to the government to say: "All right. How do you want us to run this thing and what are your objectives so that we can have some indications?"
You had the feeling that they were presented with a very difficult report and without a clear indication as to what the ultimate expectation of the shareholder was.
I suggest that you might want to recommend that the use of that power might be suggested. Having said that, on the substance of your question Dr Grant perhaps can help.
Dr Grant: As I understand it, Hydro has felt bound to continue its planning under the assumption that the Power Corporation Act would continue in force, which we all know it won't.
Going along with Don's view, which I share, if the government were to direct them to assume the environment of the white paper from 2000 onward and construct scenario planning in that light and then revisit the issue of how much to spend and in what form, of course Hydro would be entitled to come back to the government and say, "You'll have to tell us more about what kinds of financial resources we'll be given, and what kind of balance sheet can we assume to start with?"
It would not be in any way an easy exercise for either party. We're dealing here with huge imponderables compared to any time in Ontario's past. The prudent planner, I guess, under those circumstances says: "Don't make big commitments. Think out the implications of making commitments, but don't necessarily go ahead and borrow $5 billion and spend it without having scoped further over time."
I suppose my inclination would be not to demand either of Hydro or of the government to try to settle things in, for example, early 1998 once and for all. Even there, we may want to temporize with the problem, understand it better and understand in particular better what will be the new competitive reality and who will be the other players who will emerge on the scene to share in supplying power to Ontario.
Dr Carr: I just have one comment pertinent to your first question and in part to Mr O'Toole. There is provision in the white paper for this interim market, 1998 to the year 2000, and I wonder what part that will be playing in the decision-making of Ontario Hydro with regard to exactly this issue. I would have thought a big part, frankly.
The Chair: Thank you, Mr Conway.
Mr Laughren: I don't want to embroil you folks in the politics of this place or of Hydro, but you weren't at all involved in the drafting of the white paper, were you?
Mr Macdonald: Not at all.
Dr Grant: Not at all.
Mr Laughren: On the three days or so before the decision was made by the Hydro board there was a letter that went from the Minister of Environment, Mr Sterling, which almost said what Mr Macdonald just said: "Be careful. Assess all the options before you do anything hasty." That letter went to them on the Friday and I believe the board meeting was on the following Tuesday. But the letter was never presented to the board until after they had made their decision, even though they had the letter.
I don't want to speak for everybody on the committee, but that has given some of us some real concern about the decision-making process that was engaged in at Hydro. We're really struggling here -- I think it's fair to say that we're struggling on a non-partisan basis -- with where we go from here. What do we say to Hydro? They claim that they have to do these things, and very quickly. For example, Bruce A is scheduled to be shut down --
Mrs Helen Johns (Huron): The end of March.
Mr Laughren: -- at the end of March. That's very fast. It implies also an endorsement of huge spending as soon as you start that process, because the new fuel is over $2 billion of the total cost.
I have the feeling I'm making a speech here. That's not what I intended to do.
Given the very tight time frame in which we're operating, I'm wondering whether you have a sense of advice to this committee on what we can do to make sure Hydro is operating -- and I'll be a little bit mean here -- not in its own interests but in the interests of all the taxpayers of the province. Can you give us any advice, or is it too broad a question?
Mr Macdonald: What I was saying previously, when I referred to section 10, is I think the shareholder, the government, is going to have to lay on hands and make some of these blockbuster decisions for itself and for the province and then communicate them to the Hydro management and board.
From what I've heard, it sounds like a Hobson's choice that the board was faced with. Hobson, you will remember, was a stable-keeper who said, "You can have any horse you want in the stable as long as you take that one right there." That seems to me the kind of appalling choice they had back in August. I think it's just going to have to go back. To govern is to choose, and they're going to have to make some choices on this one.
As John has said, it's not going to be easy to make choices, because they're dealing with a moving field, but quite clearly, if there is going to be some substantial exposure of the credit of the province, then it has to be made at the executive level; it can't be left to the board.
Dr Carr: But I do think there are some immediate tests available. They don't take a long time to implement as tests. They are provided for in the white paper, which is this interim market. Ontario Hydro has gone out with requests for proposals for makeup power -- I forget the exact terminology. The same thing could be done for capacity, which basically is offsetting the need to refurbish a nuclear plant as opposed to building a new one, as you suggested. That can be tested against the market and it does not take a long time to do that.
Mr Laughren: But you're going to get short-term contract proposals, which will be very expensive, as opposed to longer-term. If you knew ahead of time, if you knew from the day you request the proposals that these could be long-term contracts, you'd get a different set of proposals coming back to you, wouldn't you?
Dr Carr: Oh, yes, but you're talking about a staged thing here anyway, so you're talking about the most immediate decisions, being March. Let's look at that one first. You've still got the longer ones. You're not committing to a complete comprehensive plan of action; you're just committing to a plan with respect to that one expenditure, the most immediate one.
The Chair: Thank you, Mr Laughren.
Dr Grant: Just one more comment, if I may. There's a great temptation in cases like this to look to the protection of the sunk cost and to say, "We have here a big corporation which is the taxpayers' darling," or has been, and fail to think primarily from the point of view of the ultimate future consumer of electricity whose interests, in my judgement and I think the committee's, come first. Even though you might want, for instance, to pour money at Ontario Hydro Genco to give us the strongest possible balance sheet with which to face the vicissitudes, that might not be the right line to take in providing to other potential competitors the level playing field that would give Ontario ultimately the most competitive cost for power.
Mrs Barbara Fisher (Bruce): I was one of those very young employees at the time that you, Mr Macdonald, opened Pickering. So we seem to be seeing each other through history on a number of occasions.
I have a number of questions. I don't even know where to start. I've waited a long time for this day. I don't know how long we've been at this process, maybe seven weeks, but it feels like seven years some days.
I'll start by coming back to the financial picture issue. I'm a little bit discouraged to be hearing a trend change in our thinking, in our presentations at the table, on the acceptance that, "Well, somebody said that Bruce A is gone, so Bruce A is gone." I tend to be of a different opinion, yes, somewhat because I represent the community, to be very honest about it, but certainly in the bigger picture of Ontario Hydro, which I have viewed with extreme interest for 27 years now.
Let's talk a little bit about other means of financing. I know the corrective picture for Ontario Hydro, the Bruce site, is $2.4 billion, the remaining outstanding funds to totally refurbish and operate four units. I know the replacement fuel cost alone, in the $5-billion to $8.5-billion investment, is $2.1 billion. It is not making too much sense to me -- I respect what you said, Mr Grant -- to put at risk the asset value, in the short term maybe and probably forever if we take that jump.
I would ask you this: We did have a presentation with regard to other forms of financial input to this mess, and one was the privatization of the British system. We seem to have a reasonable approach being made by the workers of Ontario Hydro in wanting to open the door to some consideration for private equity in a public-private proposal. Would you think that might not be a good thing for Ontario Hydro to decide to study, to investigate and to economically test before they go ahead with the closure of any units at the end of March? If you were a member of the board of directors, is that not something you would be interested in having before you before a final decision was made?
Mr Macdonald: It certainly would be attractive if it was possible. I'd have to say that, as you know, the advisory committee recommended against privatizing the nuclear system. Certainly, the way my mind ran was along these lines: As I said before, it's in the first generation. One doesn't know if it's going to really last the 40 years that it has nameplate capacity. Second, every gram of spent fuel is still inside those reactors and we haven't yet developed a national policy to deal with that. Thirdly, there is always the problem of the catastrophic risk of something going wrong. It's less likely with regard to a Candu than any other, but one has to bear that in mind.
The question is, if you were a private person coming in, wouldn't you discount the price at which you're requiring this substantially, and shouldn't the government say: "Listen, if that's all we're going to get for it, and ultimately if one of these events occurs we're going to be left holding the whole thing, we shouldn't sell it in the first place"? That's the hesitation I would have about a private owner coming in.
Mrs Fisher: Quite frankly, I fully support your comments, because I do not at all support the privatization of nuclear in Ontario. I never have and I don't imagine I ever will. There would have to be a very convincing factor that changes my mind.
However, I hesitate to think that private equity into it at this stage of the game, in joint ownership with the public-owned corporation asset, would be a wrong thing to be thinking about. These gas companies or alternate fuel companies, the alternate generation facilities that are being talked about, made it pretty clear to us in their presentations to this committee that they really didn't have an interest in short-term.
The makeup power -- I agree those aren't maybe the right words, but the makeup power proposal that's out there right now isn't really whetting too many appetites because of the short-term connection to it, yet we have a very short-term three-month decision to be made. Maybe we're fooling ourselves a little bit to be throwing all our eggs in the other basket. Maybe we should learn from the past mistake and not have them all in one basket but protect the asset value.
One last question. Under the IIPA report, Mr Andognini identifies a human resource problem and poor decision-making of management in the past for the demise of the nuclear situation today. Do you believe that other workers from the British restructured program who are now unemployed but able to run a nuclear site -- or possibly even the first choice would be the laid-off workers who maybe shouldn't have been laid off to start with, and then the British workers or American workers -- could work hand in hand with the full nuclear recovery plan of Mr Andognini to keep the units alive that apparently still have a seven- to eight-year safety life left in them before retubing?
Mr Macdonald: It seems to me that to the extent that Andognini said he felt there weren't adequate management skills there to run it -- and I think we should look for assistance in that regard anywhere --
Mrs Fisher: We should or we should not?
Mr Macdonald: We should. Probably the first step is to find the most capable and toughest executive we can find to put on top of the whole thing and endow that person with the responsibility of making it work and recruiting the help wherever he can get it.
On the final point you made, it's true there are some outstanding Canadians who in effect bought themselves out of Hydro in the past. Let's not be obscured by that contract. If we can bring them back and put them to work in the system they know best, then we should do that.
Mr Conway: I come back, gentlemen, to the here and now, because this committee and the government and the people are faced with some very immediate pressure. I think we'd all agree with you that Hydro finds itself in a very difficult situation, and I don't want to deny that, but we have a plan that's been announced. It commits the utility, which has a guarantee provided by the provincial government, to a $5-billion to $8-billion recovery plan. The plan is beginning to roll out, and some of it we've already talked about.
This is going to be occurring over the next few weeks and months. World leaders are going to meet in Kyoto to worry about greenhouse gases, sabres are rattling in the Middle East, and we're looking at a nuclear recovery plan here in Ontario as we embark on a major policy change in terms of the electricity sector.
I was going to point out that today's Ottawa Citizen has a very interesting editorial called "Stranded Taxpayers." It's a very good headline. If you were a taxpayer in this committee for the last five or six weeks, I think you'd get a very uneasy feeling about what you were going to be set up for.
Also, if you were a taxpayer in this committee, the one thing you'd probably conclude, if you were a general citizen, is that any reactor that's going to be shut down for more than a few months in this environment is probably not coming back. I think that would be a very fair conclusion on the basis of a lot of the testimony we've been hearing.
I want to come back to the short-term squeeze. What do we do about a plan that was taken, as you said, Mr Macdonald, on one day in mid-August, a Hobson's choice, that's going to lay up seven reactors, that's going to commit us to multibillion-dollar purchases, direct or indirect, of some pretty controversial power? What do we do about that?
My concern, quite frankly, thinking about the stranded taxpayer, is that the combination of these current factors just has the potential to really hose the taxpayer. With a lot of good intentions -- some corporate, some public, some private, some personal -- the taxpayer could really get hosed in this.
I want you to help me with, for example, the lay-up of one third of that nuclear power capacity, all of which we're told can operate safely in the short term. One of the obvious things to me is, why wouldn't we look at saying on a short-term basis -- all right, Hydro tells us they can't manage the whole 19. I believe that. They probably can't manage the whole 19. I'm not convinced that they can't manage 14 or 15.
Part of me wants to say, with a tough mandate from the AECB, giving these reactors no more than a six-month recurring licence, let us, in the taxpayers' interests, if we can, keep 13, 14, maybe 15 of these 19 reactors operating for at least the next two or three years, assuming it can be safely done under the aegis of the AECB. When we decide to close these reactors down, to be fair not just to the utility but to the private market out there, they're gone. When they're down, they're gone and they're not coming back.
My second question in this connection is, surely the private market is going to be affected by the lay-up of seven reactors which most people will probably think aren't coming back, but surely the fact that they're laid up with some proviso that they might come back is going to introduce some real uncertainty into that marketplace. Tell me if I'm completely off the beam here.
Mr Macdonald: I'm sure that's right. I defer to Jan Carr, who knows the electricity market well. I guess I'd say, and here I'm an old House leader talking now, rather than your feeling that you have to determine once and for all by December 1, one of your recommendations to the government should be that the committee be reconstituted, either in this form or in another form -- which in due course will receive the Power Corporation Act, I presume, when it's brought forward -- to continue to wrestle with this issue. As John Grant has just said, I don't think you should feel compelled, nor should the government feel compelled, to solve all the questions to the year 2025 at this particular point. The facts are going to change.
Mr Conway: But my immediate concern, Donald, is the seven reactors, because I believe if we shut them down, they're not coming back.
Mr Macdonald: My guess is that they probably are not, but I'd have to defer to Andognini and what he had to say on that, and you're more familiar with that than I. Jan or John, do you --
Dr Carr: I keep harping on it, but the market test is there in the interim market. I'm not sure it's an all-or-nothing thing. Your earlier question concerning the involvement of alternative capital things is certainly there. As I read the white paper and government policy, there is nothing preventing the British nuclear operators from submitting perhaps an unsolicited proposal to Ontario Hydro to come in and assist them with keeping reactors on line rather than laying them up.
Mr Conway: But my concern, quite frankly, is that by the time this or any government gets around to deciding some of the questions in the white paper, to get the legislation in place, the utility may have decided a number of questions, effectively.
Again, I come back to these reactors, because they are a substantial problem. If I'm thinking about stranded debt, stranded assets, stranded taxpayers, boy, I've got to be concerned that if they're down, then a very important -- and it may be that the AECB is also going to say they can't run safely. I'm not convinced of that. The AECB has told us that they can operate safely. Hydro has made a strong point that they don't feel they have the manpower. But I have to think that because they've got a provincial guarantee for what they're doing they're not going to be particularly concerned about financial considerations, because at the end of the day they know they can pass that bill back to the Minister of Finance for Ontario.
Dr Carr: Then the real issue there is, is the new spending to bring these reactors back subject to the provincial guarantee or not? That, to me, is not clear from reading the white paper.
Dr Grant: I think we've said already that this is a bad time to be making large, irrevocable decisions. We don't know the technology, among the three of us -- Jan knows it. But I would certainly feel uneasy if the taxpayers were being committed to huge decisions which in the light of future evolution might look to have been the wrong decision.
Mr Conway: One of the interesting things in recent days is, I've been struck by the fact that the chairperson of Ontario Hydro -- undoubtedly with his view about the corporate agenda of Hydro as his primary concern, and that's not unreasonable -- has made it clear that he's concerned about some of the decisions made in the white paper.
He's made it clear that he doesn't agree with a couple of important decisions that underlie the white paper. That gives me some concern, not that he's not acting in the best interests of the corporation, but that since the shareholder has a real interest -- as Mr Laughren I think pointed out in his questioning, it struck a lot of us in this committee, particularly those of us who have had some cabinet experience, that a minister's letter of the kind Mr Sterling wrote on August 11 would have gone to the corporation, and the board didn't really look at that letter until after they made a decision in principle that committed them to this multibillion-dollar recovery plan.
That's the background. Now we know the government has decided -- a white paper, a lot of ingredients of which I think all of us like, but we now know that the president of Hydro does not agree with some of the key issues. I'm very concerned that in this intervening period, and it's going to be more than a few weeks and months, some other decisions will be taken by the utility for which there will not be good oversight and for which there will be substantial consequences downstream to the provincial taxpayer.
I guess what I come back to is I'd like to be in some kind of a position to recommend something specific about maybe putting some reasonable brakes on that without wanting to be mischievous or irresponsible.
Mr Macdonald: I think the legal instrument is there to do it and I think the government has got a tough decision to make as to, as shareholder, what it calls for in the short run.
Mr Conway: Is there a concern --
The Chair: Thank you, Mr Conway. Mr Laughren.
Mr Laughren: There are a couple of things I want to get at. One is this whole idea that Mr Conway is getting at, I think, and that is government actually moving in and saying, to use my words, no one else's: "Hold the phone. We know what you want to do. We've seen your recovery plan, but now you've seen our white paper. We think there's a new world on the horizon out there and we want you to either go back to the drawing board with the new plan or tell us that that's our responsibility." Would you have any trouble with that kind of recommendation?
Mr Macdonald: I liked the first part of it. If I recall, Hydro spokesmen have said in these hearings and outside, "We're waiting for the white paper." They've got it now. They know what the future's going to be, and I think it would be very fair for the shareholders to say: "All right, we've sketched out the future. We can't indicate all the possibilities of it now within that future. How would you propose to address the question now?" The implication being of course that, "Unless you really work at it, then we'll work out a recovery plan and we'll direct you to do that." I don't think that will be necessary with the people involved, but I think it is, as you suggest, fair to go back to them and say: "This is going to be the new environment now. Faced with the problem we share, how would you resolve it?"
Mr Laughren: Thank you. Because the committee members have made a determination -- among ourselves -- that we're going to complete our work in another week or so, by December 1 anyway, we will not get into the white paper. We may comment on it and so forth, but we're not going to analyse the white paper. We didn't get it until it was released and we've already done most of our work.
One of you, I think it was Mr Macdonald, made the comment that perhaps the committee could be given a second mandate in the new year to proceed further. I don't have any problem with that idea, but my problem is -- maybe I'm unduly worried about the time frame here, and I'll tell you what I'm worried about -- I'm worried about Hydro moving forward and saying: "We served notice what we were going to do. We did that through our recovery plan. We have heard only from the select committee, which doesn't have the authority to tell Hydro what to do. We report to the Legislature as a whole. We don't even report to the Ministry of Energy." That's my concern about the time. You seem to think or seem to imply, "Don't worry about the time." But I sure do and I wonder if you could comment on that?
Mr Macdonald: I guess maybe in what you said you've just written one of the recommendations, namely recommending to the government that they should be prepared to exercise their directive power and say: "We've got a new environment here now. Come back and tell us how you'd do it."
Dr Grant: Just again though to reiterate that the government can't simply go with what's in the white paper and say, "Come with a plan," because any responsible financial planner in Hydro would need to know things like, "How much can we borrow and will we have to borrow on our own recognizance?" Presumably yes, but how much equity will the government be prepared to put in? Those are questions which in effect represent a give and take between the shareholder and the corporation.
Mr Laughren: Why would they have to put equity in?
Dr Grant: Because Mr Conway just said that 97% debt doesn't sound very good etc.
Mr Laughren: Oh, I see.
Dr Grant: It's not a question of the government saying, "Come back with a plan and we'll vet it." It's more a question, "We'll get into working out a new and more appropriate plan given the atmosphere that we're setting up with the white paper."
Mrs Johns: I want to start by talking about the white paper. As I read through your report again last night -- I skimmed through your report because I've only had last night again to look at it -- there were a lot of similarities between your report and the white paper. I suppose you think it must have been a pretty substantial base to the white paper. You're obviously pleased about that, Mr Grant. I guess I want to ask you, were you surprised by the acceptance of the white paper when it was announced last week or the week before? Were you surprised that there was so much apparent acceptance throughout the industry and in Hydro and other areas for most of the issues?
Dr Carr: I can speak to that and say absolutely not. The industry has been waiting very anxiously for the white paper and has been, from my discussions, very much coming around to consensus on the recommendations of the Framework for Competition report; therefore, I would have expected the similarity would have been received very favourably, as it was.
Mrs Johns: One of the things that I'm most concerned about, and it hasn't been raised today, is that the committee has been startled, I think would be the best word, by the lack of controls that Ontario Hydro has had over the last 10 or 15 years. I think we assumed that the Atomic Energy Board and the Ontario Energy Board wielded a little more power over them and we have seen years and years of unfulfilled deficiencies, if you will.
Yesterday the gentleman was here from the American regulatory body and he suggested that we needed to impose teeth, if you will, with the Ontario Energy Board and he suggested that we needed the following teeth: that the Ontario Energy Board needed the ability to shut down a plant if they felt there were substantial deficits, that they should have some venue to be able to criticize both the private and the public firm publicly, and to fine it. Have you got any other recommendations about what teeth you think the Ontario Energy Board should have if we were to give it more strength?
Dr Carr: The Ontario Energy Board as envisioned in the white paper I think is a very good model. It basically has veto power over the policies, decisions and actions of a number of entities, not just Ontario Hydro or the generators but also the operation of the independent market, and in fact particularly the operation of the independent market. I think ultimately it is the final court of approval on the way the industry shall be working. I'm not sure whether that constitutes teeth. To me, it sounds pretty vicious.
Mrs Johns: Do you agree with the other things that he suggested? For example, do you think they should have a right to state publicly criticism about any public or private firm? Do you think they should have the ability to levy fines?
Dr Carr: I really haven't given that much thought. I would observe that the American regulatory environment is entirely different from the Canadian regulatory environment and therefore some of those measures may not necessarily be appropriate in Canada, let alone in Ontario.
Dr Grant: If we go back to the issue that was raised before about how realistic it is for AECB to issue a stop production order when you're relying on that power for so much of Ontario's energy, if the newly constituted board were to have teeth that would bite but wouldn't hurt the consumer, you'd have had to already set up sufficient alternative sources of supply. That stricture would be perceived as one that they could undertake without putting the consumers at risk.
Mr Macdonald: I guess I'd have to say that in the national gas business, both in terms of long-distance transmission and local distribution, there are tribunals in existence which are effective. They don't have to levy a fine or put somebody in jail in order to get their recommendations covered. So I don't think that's been found to be necessary. If you've got that mandate in the market, then the market players will respect it.
Mrs Johns: I differ from my colleagues in one issue that they've been talking about, and I think I've been consistent throughout this. My major concern, and I think everybody's here to start off with, is that we're very concerned about safety in this industry, and I think you state that very clearly in your documentation too.
My concern is if we start to micromanage what Hydro thinks is an acceptable solution -- they have come up with lots of plans over the last 20 years on how they're going to fix all these deficiencies and yet as they come through the process, they never seem to be able to put the nails in the coffin or close the deal or get the thing done.
Everybody's got great ideas over at Hydro it seems, but they can't seem to get this done. They once again have a plan and of course we're all concerned about if they can get this done. But on the other side I have some concerns about micromanaging the issue, just in case they can get it done. I'd like to set some benchmarks to ensure that they do work through that process, but I think for once here they have a lot of public scrutiny, they have a lot of reason to make this work because of the competitive market.
Honourable Mr Macdonald, you've been around Hydro for a long time through your history in politics. Can you talk to me about the micromanagement of this system or their inability to do things in the past and maybe our concerns in the future, or is that too provincial and not federal enough?
Mr Macdonald: I must say that I can't really do that. I read with interest Dr Kupcis's testimony to this committee. Dr Kupcis was very helpful to us and I've got great respect for him. He did refer to the psychological element -- the Greek word is "hubris" -- that they'd had such success that they didn't listen to anybody else or, as a matter of fact, pay very much attention to what they were doing. That is a problem with any management.
I don't think we would want a regulator to get in there to micromanage it. Ultimately, you've got to set some fairly broad targets that you expect from an industry, and if they're not getting it, then you act against them in the broader sense but not on questions of detail, even with regard to a particular reactor.
Mrs Johns: I think almost every board member who has come in has said that this is a flexible plan, that they are going to consider the government's white paper, they're going to look at the changing marketplace and with that they are going to make decisions along the line -- in fact they believe they left us with a flexible enough plan, that they considered what the minister had said in his letter of August 11.
From an engineering perspective, Mr Carr, have you considered the NAOP and have you considered the opportunities to change that where something becomes irreversible along the line? Have you thought about that at all?
Dr Carr: No, I haven't. I haven't looked at it in any detail. Back to your comment about micromanage, I would forbear from making any comment of a micromanagement nature on that plan. But I do think that there are some obvious generic issues in any planning exercise of this sort, and they have been raised already this evening. There are some big decisions which become irreversible, but there are some other decisions which can be staged and leave open a number of options beyond them.
I would be focusing on the first action in the plan. Let's forget the end of the plan for the time being. Let's look at the first action on the plan and see to what extent that absolutely has to be made and everything else hinges on it, and what the options are for it in terms of buying more flexibility for the next action on the plan and so on. By the time you've got down into the plan a little way, you perhaps find that you are not constrained to the point that you presently feel you are, standing at the starting line.
Again, these are just very generic comments about planning. They're not intended to be either a critique or endorsement of the particular plan that's been put forward. I'm not dismayed by the timing, frankly. I think there are some things that can be done.
Mr Kwinter: I just want to follow up what we've just been discussing. The perception I get from listening to Mr Macdonald and Dr Grant is that at the present time -- and also from the chairman, Bill Farlinger -- there really is a Hobson's choice. There's just too much dependence on nuclear. We've got too much money invested in it. Whatever the solution is, nuclear is going to be a major part of that solution.
Having said that, I queried a couple of the members of the board about when the minister sent his letter and said, "I want you to consider all options." I asked them if that meant all options or all options presented by the Andognini team where there were six options. They said they were only addressing the options that were presented to them on the nuclear recovery. So that leads me to the problem, are we in fact dealing with a done deal?
My question to you is this: Do you think in order to open up the potential for options that it might be feasible, taking from the white paper the suggestion that we have an independent market operator, and there is an entity like that at Hydro right now that operates, to pull them out right away and get them out there really plumbing the market so that you know in what kind of situation you can be and make decisions based on actual information as to what's available, what are the implications for the environment, cost, transmission, all of those things, and that would in fact give us a very, very essential tool in which to make additional decisions?
Mr Macdonald: It's going to take a little time to set up. As you know, the structure already exists within Hydro and so it's not as though you had to recruit and invent it. It can be just moved over and under a different form of public ownership. There's going to be a little running-up time to find out how you run the physics of the system independent of the generator, which have always been close to the generator in the past, work out how a market operates in Ontario. There's going to be a little running-up time on that one, so it's going to be difficult to do anything immediately.
I think that if the chairman of Hydro said to me, "Listen, you were talking about bringing in, for example, other sources of supply. It's unlikely you can do that in the two years that remain anyway," I'd agree with him. But I think they should work with all deliberate speed to try and get the new structure in place so that the market opportunities can come in and so that the people who are prepared to risk some money will know that they can come forward and they've got a new system in place and they can come up with some options.
I think that's what Mr Carr's approach advantage is. As time goes on and you're going to come into a competitive market, some players may appear that you hadn't thought were out there. There may be a lot more players out there who are prepared to offer alternatives to refurbishing, some at least in the nuclear plants.
Dr Carr: Could I just make a comment on that too? I do believe that the white paper has almost done what you've suggested or at least it has the framework there to allow that to happen almost as you suggested. The only difference is that this is the interim market yet again. The arbiter, if you will, or the purchaser in the interim market is within Ontario Hydro and not a separate entity, whereas in the fully competitive open system, obviously it is a totally separate entity. The reason for the separateness ultimately is that you've got multiple purchasers and multiple sellers, but in the interim you've only got one purchaser and you're dealing with multiple sellers. Frankly, the complexity in moving to the longer-range one in a very short time frame is quite substantial.
I think the proposal made in the white paper is very good structurally. I think it gets as much going competitively as you possibly can, as soon as you can.
The concept that the single purchaser should not be Ontario Hydro but should be an external agency, which I think is the point you're making, would not be a steep climb from the position taken in the white paper. That's an organizational thing, not a technical thing. That would be feasible. You'd have to look at that in terms of whether it offers greater confidence to people selling into the market, that the single purchaser is truly independent of Ontario Hydro as opposed to being Ontario Hydro itself.
Mr Laughren: I wanted to ask you about the stranded debt. The white paper left me unsatisfied. That's not a new phenomenon in my life. I couldn't get my mind around what they would do about electricity that came in from Quebec or the States, for example, or what you do about self-generation if Chrysler set up its own generating station, or Inco or whatever. How would you come out with a fair balancing of stranded debt charges here so that some people weren't getting away with not having to pay their share while others paid too much?
Dr Grant: Our proposal, as you know, suggested that the stranded debt should be estimated and then, in the context of a level playing field and the use of payments in lieu of taxes and so on all being funnelled to retire outstanding Hydro debt, there would still be some left over that had to be basically amortized. We suggested doing that over a seven-year period, but that would depend on the reality of the time.
We still believe that the principle there, which was to share those costs equally across all Ontario consumers of power, wherever they bought their power in Ontario, is the proper way to go. Once the government has decided what the break is between taxpayer support of that debt and electricity ratepayer support, we're on record as saying that all electricity consumers, whether they are generating a good deal of their power themselves or whether they are buying from the grid, should be required to pay that down.
Mr Laughren: To pay into that fund.
Mr Macdonald: Including of course power that came from outside the province; it would have to bear part of the freight too.
Mr Laughren: The people who pay a charge in lieu of taxes, doesn't the municipality get some of that? I should know that.
Mr Macdonald: You're talking about a different question, I think, the taxation question as opposed to the stranded debt charge.
Mr Laughren: No. I thought there was a link here between the grants in lieu of and the stranded debt charge.
Dr Carr: The province perhaps contemplated intercepting the grants in lieu and applying them to paying down the debt.
Mr Laughren: Exactly. The government would dedicate all the new payments in lieu of taxes to paying down stranded Ontario Hydro debt.
Dr Grant: Which would reduce the other charges they would have to levy, then.
Mr Laughren: Right. So where would the municipalities stand?
Mr Macdonald: I think it's fair to say that the Municipal Electric Association isn't delighted with that suggestion, but it's not an unreasonable one.
Dr Carr: It is a status quo suggestion, financially. It doesn't rock the boat.
The Chair: Mr O'Toole. May I suggest this is the last round now?
Mr O'Toole: Yes. I'm going to share a brief comment and then ask a brief question or ask an opinion.
The Chair: That's all still within the same time frame.
Mr O'Toole: Yes. We've used most of it now.
The Chair: Then I've done my job.
Mr O'Toole: The reference you made philosophically to Hobson's choice twigged an interesting little story in my mind. I remember the Hobson axiom of equality. I put it to you that it's an interesting little challenge, because it says, and I'm going by memory, that seeing something wrong for a long period of time gives it the appearance of being right. I put it to you that the Ontario Hydro example is a clear example of, "Well, what else can you do?" It's my observation of another application of Hobson's principle, if you will. That's for the record, primarily to contribute like Mr Conway's often eloquent remarks. I'm learning as I go.
Mr Conway: Flattery will get you everywhere.
Mr O'Toole: We've heard from many of the alternate suppliers or potential suppliers that the combined-cycle gas generation is really, if you're looking at a purely economic model -- no choice. In your framework for competition reference, would you have come to that conclusion?
Mr Macdonald: Yes. The economics of the system have been well proven. One of the best pieces of evidence that it's a good and competitive system was the enthusiasm of Hydro to cut off any further plants of this kind, because they were too competitive with the existing supply.
Mr O'Toole: You're on the board of directors of TransCanada PipeLines, as you said in your earlier comments. What is the future market or the life supply-side for natural gas? I've heard 500 years.
Mr Macdonald: I'm not sure. I wouldn't say that for the western Canadian sedimentary basin. I think by the middle of the next century the western Canadian basin will be like the western Ontario basin is now; the gas will have substantially been produced. But it will still be a very important basin because of the oil-sands. Assuming that hydrocarbons are still being used, it will still be important for that reason, but the gas has a finite life.
Mrs Fisher: I'd just add to that a little bit, because I'm on the gas line, if you will.
Mr Macdonald: I wish I was.
Mrs Fisher: I'm actually trying to get out of it. I find it interesting that that lifeline is about the life of a nuclear site if it was properly maintained and with a renewable resource.
For a long time, I have understood the value of nuclear energy and the non-polluting environmental aspects of that type of electricity generation; it's one of the major reasons, by the way, why I support it so strongly. When is the right time for Canada to get its act together and impose the same type of expense, if you will, to offset the decommissioning and long-term, high-level waste storage costs and equate that and make a playing field that's a little bit fairer, anyway, in terms of a carbon tax? I hear them continue to go on and on, from 1987, at minimum, on. We have our Prime Minister going to a conference.
Mr Macdonald: I won't comment on the carbon tax. When should we have been setting funds aside to provide for decommissioning? I think the right time to do that was 1975. I went to cabinet, to Treasury Board, with a proposal for atomic energy in Canada to embark on a program in that regard, and my colleagues didn't go for it. Their myopia in that regard has been shared by Canadians ever since. It's something we should have done a long time ago, and we still haven't come to terms with it.
Mrs Fisher: Should we be doing it with a carbon tax now too, though, to level the playing field? If we're going to compare our sources of competition, then there has to be a level playing field. Without the carbon tax or some other type of imposition as to the other major alternate producer, how can you call it level? How can you even make an economic decision?
Mr Macdonald: I would hate to be the federal politicians who have to go to the other parts of the country that don't have nuclear power and say, "We're imposing a carbon tax in order to pay for Ontario."
Mrs Fisher: Why?
Mr Macdonald: I wouldn't be prepared to take that grief.
Mrs Fisher: But if we consider Ontario Hydro to be an economic engine for Ontario, just like oil is for Alberta, why not?
Mr Macdonald: Well, you can put additional tax on at the pump and at the gas pipe, but a carbon tax is talked of primarily at the producing end, and I don't think that one would be a starter.
Mrs Fisher: But does it not have the advantage, on a competitive basis, of being able to use a transmission corridor that has been paid for by another generation industry? Where has it ever paid its way in that?
Mr Macdonald: I'm sorry?
Mrs Fisher: When you get into the transmission system side of it and you don't pay any surcharge for not having paid for the construction of that as an industry, where do you get the level playing field in competition of pricing then?
Mr Macdonald: Do you mean as between natural gas and electricity?
Mrs Fisher: Well, in the distribution. If you gas-fire and you burn and you transmit over the transmission corridor that Ontario Hydro has as part of its debt on the books to date, at what stage in the game does the gas industry pick up their share of that outstanding debt to the Hydro books to level the playing field, either through a carbon tax or a surcharge for a new type of user?
Mr Macdonald: It's at this point I defer to the best economist I know.
Dr Grant: With all respect, we are dealing with two different problems. In the case of the decommissioning charges, we're really trying to establish, through accounting procedures, the appropriate level of income to take from that resource. In the case of carbon taxes, we've got a global issue of environmental sustainability. All hydrocarbon producers ultimately would have to be faced with whatever regulatory structures, but it's not a question of their accounting for their own operations, whereas in the case of decommissioning costs, it is a question of appropriately accounting for costs which ultimately they should bear, having been the producers.
Mr Conway: I just have two questions, both for Mr Macdonald. But before I begin I've got to say that the part of that answer about "Their myopia has been shared by many Canadians since" is probably the most clever answer provided in this committee. I can imagine how that committee with Mr Macdonald and Mr McKeough operated for those many weeks and months. It must have been a very entertaining and interesting place to have been.
Donald, I've got two questions to conclude with. The first question is on the competitive marketplace. One of the assumptions that has been widely advertised and embraced by many is that we're going to move into electricity reform, we're certainly going to be looking at places like Ontario, we're going to break down big, state-owned enterprises, big public monopolies, and we're going to have a much more dynamic market, a much more competitive market, with real and measurable advantages to consumers of all kinds, because it's not going to be monopolistic. That is a very compelling advertisement to people in the 1990s.
When I look at the United Kingdom, when I look at parts of the United States, it's not always evident to me that we're going to get all of those advantages. In fact, some people would look at the United Kingdom and parts of the United States and say, "Are we on the verge of or do we risk simply trading a big, clumsy, state-owned monopoly for one or two aggressive, private sector, privately owned monopolies or near-monopolies?" What would you say?
Mr Macdonald: It's a reasonable expectation that a lot of players will come into the market to acquire the commodity in one way or another and to sell it in competition with each other. That has emerged in the natural gas markets, and I can't think of any reason in principle why it shouldn't emerge with electricity as well.
Mr Conway: But the Major government in Britain just a year and a half ago had to intervene in fairly short order by cabinet directive to stop consolidations in the utility business that were certainly not being advertised as either likely or desirable.
Mr Macdonald: I would agree with that. There would have to be scrutiny. Again, this would be a role for the Ontario Energy Board, to make certain, for example, that a generator didn't get control of the distributor; in other words, to exercise competitive surveillance in that regard.
My recollection from the testimony we heard with regard to the United Kingdom example, and I was actually in Britain for part of the time it was occurring, is that when the systems were sold to the private sector they were underpriced and the purchasers picked up a windfall there. Naturally the customers felt they should have gotten some of the windfall; other taxpayers felt they should have got that. I think they would say on the whole that now electricity is coming at lower rates than it did before, with the old coal-fired system, and they are relatively satisfied with that.
I don't think the system in the United States is as far ahead as so many commentators say it is, but I think there is that prospect as well of having much cheaper power.
Mr Conway: My final question concerns something really basic. The poor staff on this committee have heard me rant and rail about this. I read your report, I read the white paper, I read financial press, and one of the things that strikes me is that, particularly in the Canadian context, there is a discussion now about energy, about electricity, that's just wonderfully antiseptic, as though it's a commodity comme les autres, there's really no difference. In fact, I must say the Black press in the national capital in the last couple of days is full of all of this stuff. Andrew Coyne is telling us today it's really no different than anything else.
I may be just old-fashioned or just highly idiosyncratic, but it seems to me that electricity specifically and energy generally is about as politically sensitive a commodity in a country and a province this big as I can imagine. When I think a little bit about the recent past and look at the future -- as I mentioned earlier, we've got Kyoto coming up. That's going to be very significant around greenhouse gases. Every day you read about the Middle East, and that's not just about some peoples that don't get along. We westerners have a vital energy interest in that part of the world. I read all these reports. The politicians are never going to be faced with some of the political dimensions of electricity and energy.
As a former Minister of Finance and a former Minister of Energy, particularly thinking about the Canadian context, how energy, for example, speaks to one of the most divisive cleavages in our political culture, regionalism -- I've talked to you about hydro-electric plants in my part of the world. Do you know they are anchored in Quebec? If you want to sell the Ottawa River power plants, somebody better be talking to somebody in Quebec City, because the Quebec issue is going to be part of that commercial transaction. Let me put the question. Do you have anything to say to the committee about some of the traditional and ongoing political sensitivities that attach to the energy and the electricity question and how we might think about that in terms of this brave new world that's about to dawn upon us?
Mr Macdonald: I accept your characterization that it is a commodity different from others. It's different, for example, than telephone services. Life is dependent, in our climate, on the availability of energy: oil, natural gas, propane, electricity. For that reason, this remains a sector where there is an element of regulation still by government, where there isn't for so many other commodities. It is vital to the community, and therefore there does have to be public surveillance on it, where there is not public surveillance on a lot of other commodities.
Mr Conway: As a practical matter -- and I'll end with this. As I was saying to Floyd here a few moments ago, I can imagine a situation where the Acme Power Co is providing electricity to the city of Thunder Bay and something just goes wrong with the Acme Power Co -- trouble in the bond market, whatever -- and there are some transmission difficulties. Theoretically you might be able to get replacement power there. I just worry that some politician someplace -- it would probably be the first minister; it might be the Minister of Finance; it will certainly be the local member. It will happen on a January afternoon when the announcement is made that Acme Power is just not going to be able to do its duty. All of the arguments are well put about the marketplace and the regulator, but the reality is, on a cold winter day something goes awry. I'm just very anxious to get as much comfort as I can that no politician will ever be confronted with these kinds of nasty little political problems that sometimes pop up.
Mr Macdonald: If there's an effective market working, then from a supply standpoint, the failure of Acme Power, while regrettable for its shareholders, will not be fatal to the customers. In terms of distribution, obviously there is an important concern to make sure that the gas pipe doesn't blow up or the transmission line doesn't blow down. That's why there's greater surveillance in that area. But in terms of the actual supply of the commodity, to borrow a phrase from another context, we're asking for a leap of faith that indeed a market can develop here for this commodity as it has for natural gas, and in the long run we won't get the enormous cost overruns that we've had under the previous form of organizing the industry.
Mr Laughren: I'm a little bit better prepared to accept this leap of faith than I was the last one.
Mr Macdonald: I'm not surprised to hear you say that.
Mr Laughren: You'd be disappointed if I didn't. I just have one question, and it has to do with a new Ontario Energy Board, call it whatever we will, and to what extent it needs interventionist powers because of the new regime with the private sector and importers and what have you. Where would you draw the line on that? I was trying to picture the energy board. Most people now feel that the Ontario Energy Board doesn't have enough power. I think most people feel that, that it doesn't have the teeth it needs to have. I don't know how much power you give it. We've got the AECB on the safety side. What would you give the Ontario Energy Board to do under the new regime?
Mr Macdonald: The first important area is where you have the so-called natural monopoly, as the economists say, of the local distribution lines or the long-distance transmission line. It's a monopoly because nobody is going to build two or three other lines down the same street. It's there, so the board will have to regulate the costs of that so that the de facto monopolist doesn't take advantage of that. That's the first area.
The second area is the one I referred to in the early part of my remarks, and that is to say that where you have one very big player out there who's capable of gaming the market, of influencing the market, then the board is going to have to play some of the same functions as the competition policy bureau does in Ottawa to make sure that scale is not being unfairly used. That's something that wouldn't arise if you had an evenly balanced market with a lot of competitors the same size, but it does arise in this particular case.
I'd have to defer to Dr Carr, because there may be other technical reasons why the board from time to time will want to come in. For example, the white paper talks about the board having an oversight on what the independent market operator does.
Dr Carr: I'm not sure exactly, but the broad principle requires that the Ontario Energy Board be vested with ensuring that there is a market where a market is supposed to be, and where there isn't a market, that things are behaving in the public interest, very broadly speaking. The monopoly, one, is there.
The natural gas industry is already very much in the mode that we're talking about the electricity industry being in, with regard to the Acme Gas Co failing to supply on January afternoons. Those issues have been dealt with. I would anticipate a symmetry there between the regulatory powers the OEB has on the gas side and those that it should have on the electricity side.
Mr Laughren: You wouldn't intervene, would you -- or would you? I don't mean to put it in that way. If you had a co-gen plant here, a nuclear plant here, a fossil plant here and a gasoline plant there, would there be any need for the Ontario Energy Board to step in with regard to prices or would you let that co-gen plant, obviously much more efficient, sell electricity at their rate?
Dr Carr: The short answer is that you'd let the market sort that out. There might be some extenuating circumstances, probably mostly relating to when you've got artefacts from the past. In other words, we're coming from a centrally planned model, where things were put in locations for central planning reasons, and now you're moving to a more diverse situation, and so you will have some anomalies over a period, possibly decades.
Mr Laughren: Could I ask one final question, Mr Chair?
The Chair: Dr Grant wants to make a response as well.
Mr Laughren: Okay.
Dr Grant: Just quickly, in the regime we've all been used to, there's an obligation to serve. With the particular form of regulation of Ontario Hydro, we've got used to what we consider gold-plated service levels. In the new regime, someone will have to decide how much transmission to provide and how much generation is sufficient to meet the reserve requirements from day to day, and individual producers will not take that responsibility on themselves.
I think the market design committee of the new, independent system operator will have to think long and hard about how to set those new rules, the ISO, and then the OEB will have to have some kind of watching brief which it shares with the ISO as to what levels of reserve capacity for both generation and transmission will be the levels that Ontario consumers should feel they can count on.
Mr Laughren: Would you see it as beyond the mandate of the OEB to intervene, for example, if they shut down Bruce A and/or B, because of what it does to that community? This is broadening the debate a bit here, but that really would have a massive economic impact on that community. Would you go so far as to say to someone bidding, "Look, we need electricity. We want you to bid, but somebody is going to have to go to Bruce"? The transmission facilities are there, obviously. Somebody is going to have to go there. If they want to get in on this, they're going to have to be responsible partially for the economic viability of Bruce county.
Dr Carr: My general reaction to that is, that's not the mandate of the OEB. But my guess is that the skilled workforce there, the energy delivery infrastructure there and all sorts of other things would act very much in favour of indeed a replacement facility being located there.
Mr Laughren: But basically that's leaving it to the market.
Dr Carr: Leaving it to the market.
The Chair: Mr Macdonald, in response to a question near the beginning of the testimony, you ruminated about how well you had worn. Did you wear as well as the reactors or not? At least from this Chair's point of view, you have worn exceedingly well.
Mr Macdonald: Thank you very much.
The Chair: One might only wish our reactors had worn as well. We thank you very much for your testimony and for attending upon this committee. For the small part I might add, on behalf of this committee I want to thank you for the contributions you've made on this important issue. We thank Dr Grant and Dr Carr for attending with you today and for their testimony. If we have further information that we require, I know you'll respond very quickly to our requests.
Mr Macdonald: Absolutely. Thank you for the opportunity to appear and talk about it.
The Chair: It's our great pleasure. You're excused. We thank you very much.
For members of the committee, may I quickly remind you that we will be leaving here shortly for a division of the House, I think, so we'll be watching for that.
In terms of the agenda for tomorrow, may I make sure that you're up to speed. At 10 am, or 1000 hours, we will meet with the Ministry of Finance. The afternoon session will begin with the McGill University presentation, which will be followed by the Ministry of Environment and Energy. That will be here in the afternoon.
For Monday, we conclude witnesses, and that will include Ms Clitheroe, Mr Farlinger and the consortium. That will conclude the witnesses for the committee on Monday, and we will proceed then with completing the writing of the report.
The committee should feel some degree of pride that it is able to meet the deadline given to it by the Parliament, and we should be able to report out on that date. Mr Vice.
Mr Kwinter: I just want a clarification. On Thursday afternoon, when we have the Ministry of Environment, does that mean we are not having a representative from the federal Ministry of the Environment?
The Chair: I don't think we've been able to get anybody yet from it.
Mr O'Toole: I appreciate, respectfully, that the Vice-Chair would be recognized before I, even though I had been recognized.
Mr Conway: Seniority.
Mr O'Toole: It's seniority, and I appreciate that. My point is, for the record, I'm rather disappointed, and this is extremely sincere, that we have not visited Darlington. I would direct the Chair to make sure that happens, at the convenience of the committee.
The Chair: May I point out to you, Mr O'Toole, we are going there next Thursday morning.
Mr O'Toole: Good. For the record, you've clarified that.
The Chair: I only assume that something happened between yesterday and today and you forgot.
Mr O'Toole: You presume the worst. Is the glass half full or half empty?
The Chair: We will nevertheless be there. The lead of the government caucus has been at great pains to ensure that we are there, and out of great courtesy, we should be there. It will be our pleasure to be there, as many of this committee as can be there.
Is there any other business? If not, this committee will stand adjourned until 1000 hours tomorrow morning.
The committee adjourned at 1737.