Thursday 20 November 1997
Ministry of Finance
Mr Mike Gourley
Mr Steve Dorey
Mr Tony Salerno
Dr Nigel Roulet
Ministry of the Environment
Ms Ivy Wile
Mr Chuck Pautler
Mr Doug Harper
Mr Bob Shaw
Dr Walter Chan
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)
Also taking part / Autres participants et participantes
Ms Marilyn Churley (Riverdale ND)
Clerk Pro Tem/ Greffier par intérim
Mr Todd Decker
Staff / Personnel
Ms Anne Marzalik and Mr Lewis Yeager, research officers, Legislative Research Service
Mr Richard Campbell, consultant
Mr Adam Chamberlain and Mr Robert Power, legal counsel
The Chair (Mr Derwyn Shea): The standing committee will come to order, please. We are just a few minutes delayed but have been asked to proceed, and we will do so in order to keep the affairs of this committee on schedule and conduct our business in a timely fashion so we can report out to the Parliament, as we are instructed to do by December 1.
You will see that Donna has changed her apparel, and she has renamed herself Todd, so don't be surprised if her voice has deepened over the next few minutes. Welcome, Todd. Nice to have you at the committee.
MINISTRY OF FINANCE
The Chair: Our business for this morning involves the Ministry of Finance, and I'm pleased to have Mike Gourley, the deputy minister, and other members of the ministry with him. As we have done and will continue to do today, presentation followed by caucuses asking questions in rotation. For information, we will begin the questioning this morning with the official opposition. Mr Gourley, if you'd be good enough for the purposes of Hansard to introduce yourself and those at the witness table, we'll proceed. Welcome to the committee.
Mr Mike Gourley: My name is Mike Gourley. I'm the Deputy Minister of Finance for Ontario. With me today I have Steve Dorey, who is the assistant deputy minister of finance responsible for the office of economic policy. Mr Tony Salerno is also an assistant deputy minister with the Ministry of Finance and the chief executive officer and vice-chair of the Ontario Financing Authority.
As you indicated, I have a brief presentation. There are a number of slides; I believe everyone has a copy of them. I would like to begin by illustrating the relationship between the Ministry of Finance and Ontario Hydro. What we have illustrated on the first slide is that essentially there are two very formal aspects to the relationship, one defined in the Power Corporation Act, having to do with Hydro's borrowing authority, the approval process for that borrowing authority and financial reporting and public accounts of Ontario. Of course, the Ministry of Finance plays a key role as an adviser to government in respect of such matters as the transition to competition, the nuclear asset optimization plan and competition, the provincial guarantee of Hydro's debt, the relationship between NAOP and the debt retirement and the issue of stranded debt.
The presentation today is intended to address issues that were raised in brief conversation with committee staff about the nuclear asset optimization plan and the directions set out in Direction for Change, the government's white paper.
On slide 2, under the Power Corporation Act, clearly Hydro requires the approval of cabinet to use the province's debt guarantee, and it requires approval to borrow in fact. That borrowing authority is provided in the form of an order in council. The specific details, if I could put it that way, of the financing require further approval through the Ontario Financing Authority, which is part of the Ministry of Finance and is an agency which I chair. The technical details of the actual borrowing program are subject to, if you like, a technical approval.
The borrowing approval process is an annual strategy. It is submitted by the management to the Hydro board for approval. Subsequently that plan is reviewed by the Ontario Financing Authority, and any comments on it are provided to the board prior to their approval. The approval of the specific issues of debt is undertaken by the Hydro audit and the finance committee, and of course, as I indicated earlier, Hydro itself consults with the Ontario Financing Authority staff as to timing of those issues, the market and the terms of those financing arrangements.
In terms of financial reporting -- and I'm reviewing, obviously, some matters that the committee has already covered, but I think it's useful to establish the context and the role the Ministry of Finance plays -- Hydro presents its financial statements in its own annual report. That report is prepared by management and approved by the board of directors. These financial statements are reproduced as part of volume 2 in Ontario's public accounts.
Page 5 reflects specifically note 7 of the financial statements of the public accounts of Ontario. As at March 31 of this year, they indicated, as has been the practice over several years, Hydro's results are not consolidated as part of the province's results; it's a self-sustaining, separate corporation. However, the public accounts do provide the actual details of Hydro's results for the year. As at that date, the outstanding debt issue for Hydro, and guaranteed by the province, was $32.1 billion. The concerns Hydro has had with respect to its monopoly status and future competition, particularly in respect of stranded debt and future risks in respect of a guarantee, are all noted in those notes. Hydro itself pays to Ontario $162 million in the form of a debt guarantee fee, and that was for last year, and water rental fees of $118 million.
I mentioned that the Ministry of Finance has a policy and advisory role. Obviously, the ministry provides advice to the Minister of Finance in his role as minister and provides advice as cabinet deals with matters such as approvals of new generation projects, approvals of fuel or other Ontario Hydro contracts, any issues related to electricity rates and the design of those electricity rates and any regulatory policies Hydro is involved in.
There is another series of matters which, as we indicate here, affect Hydro indirectly, such as international trade, a general competition policy, environmental policy, taxation and others, all of which we would provide advice to the Minister of Finance on in carrying out our role.
Page 7 indicates that the Direction for Change outlines concerns that Hydro will take some advantage in the interim period, as it were, to secure advantages over that period. I think the market design committee, the redesigned Ontario Energy Board and a number of other initiatives included in that paper will ensure there is very close scrutiny of all activities in this so-called transition period between now and the time full competition arises. The phasing out of the debt guarantee is indicated, and it will be phased out only if there is a substantiated business case to support new investment. There will be, of course, the interim power pool, which will make the supply and costs of electricity transparent to customers, and I think that will help as well, providing a context for those investments.
In respect to the nuclear asset optimization plan and the competitive environment, I think it's fair to say that Hydro formulated its program knowing that competition was coming but without having the precise details of the restructuring that were proposed in the white paper. It was clear that this plan would need financing and that specific approval for the debt guarantee will be required, as I indicated earlier and as indicated in the white paper, in the form of a substantiated business case. I mentioned the power pool. As I say, I think the nuclear asset optimization plan was prepared on a so-called status quo basis, recognizing that competition was on the horizon.
As part of the implications for debt retirement, the nuclear asset optimization plan clearly changed a plan that included a $6-billion retirement of debt over the next three years. It clearly changed the performance estimates, reducing the future cash flows that were anticipated as part of an ongoing nuclear production program, as it were. Clearly, with the funding of NAOP, there will be no debt retirement over this period. Successful implementation of that plan will have to produce significant cash flows to retire debt in the medium to long term. The rating agencies, in the questions and discussions we've had, have clearly indicated that Direction for Change and their review of the nuclear asset optimization plan were sufficient to confirm the credit rating of the province and Ontario Hydro in terms of both short-term and long-term paper.
Page 10 alludes to the provincial guarantee, that the debt guarantee will remain in place for existing debt -- that's an important message to existing bond holders; the debt guarantee will be phased out on this substantiated business case basis by the year 2000; the financing will be subject to a market test; and obviously the government will have to make that decision in the interim period as to whether or not to provide the guarantee.
Stranded debt, on page 11, clearly is the debt that the commercialized successors of Ontario Hydro might not be able to service in a competitive market. There are several variables, as the committee has heard, that determine the level of so-called stranded debt, including future competitive electricity prices, the demand for electricity, and the cost performance of the industry.
The paper Direction for Change sets out a plan for dealing with the stranded debt and for putting the electricity industry and the companies in it on a sound financial footing. I note specifically, in respect to stranded debt, that Dr Bryne Purchase has been engaged to lead consultations on stranded debt and options for structuring a transition charge for the newly restructured industry.
Many of the issues in the comments I've made today have been shared with rating agencies, with investors in conference calls, as you might expect, existing investors wanting to know what is happening to the industry, and in face-to-face meetings that have been held and will be held, because we're in the middle of that process now, in major financial centres. We're undertaking those meetings and those reviews in concert with Ontario Hydro staff, so it is Ministry of Finance and Ontario Hydro staff who are present at those meetings and available to answer any of those questions. As I say, many of those issues I've addressed today have been asked by others. Generally speaking, in all the discussions, the reaction to the white paper, Direction for Change, has been positive.
I look forward to answering the committee's questions today, with my colleagues.
The Chair: Thank you very much, Mr Gourley. We will begin the questioning again by caucus, and we will begin with Mr Conway; five minutes per caucus.
Mr Sean G. Conway (Renfrew North): Thank you, gentlemen, for appearing today. Mr Gourley, good to see you. As I expected, you look robust. You sound fulsome and very much in charge, as we know all deputy ministers of finance are around the nation these days.
I want, Michael, to ask some questions of you particularly about the chronology from, say, June to August 1997, because my particular concern in the first round is going to be the development of the so-called nuclear asset optimization plan and the involvement of the department of finance in that plan. Can you tell the committee, Mr Deputy, at what point this year you were notified by anyone over at the Hydro head office that the Andognini process was likely going to lead to what we now know to be the recovery plan for an ailing nuclear power division?
Mr Gourley: One of the points I made in my remarks was about what I'll call the formal relationship between finance and Hydro. We have, I believe, a good working relationship with Hydro, which is necessary in order to carry out the obligations under the formal relationship. I think it's fair to say that Hydro indicated it was having a review, the nature of which was obviously subject to some discussion, but it was having a review early in the spring. What the results, what the conclusions of that would be at that point were simply characterized as significant.
Mr Conway: When did you personally hear that there could be significant cost implications of the nuclear recovery plan?
Mr Gourley: Eleanor Clitheroe gave me a call in June or so and indicated that the report was being prepared and it could have significant implications.
Mr Conway: So you heard from Ms Clitheroe some time in June that there could be significant cost implications of the so-called recovery plan. Can you tell the committee what you did, as the person who has something to do with the debt guarantee, following that news in June?
Mr Gourley: To be quite frank, I think that was very consistent with the fact that the government itself had indicated concern about Ontario Hydro and that Hydro had indicated in the springtime that it was conducting a review. For me, at that point I was simply alerted to the fact that a report would be coming. I expressed interest in it; I asked if we could have a copy of whatever results as soon as they were available. There were some parts of our conversation -- I'm talking about the conversation with Ms Clitheroe -- at this point which simply indicated that one of the issues was the overall rating of Ontario Hydro nuclear plants, their performance rating, which was going to be realistically assessed as part of this process and would likely result in a significant statement, a negative statement, if you like, about their condition, whereas most people might have thought they were in reasonable condition.
Mr Conway: Did you as Deputy Minister of Finance attend at any meeting with Ms Clitheroe and any of her senior Hydro colleagues, including the chairman, between that period of time just indicated, in June, when you became aware of the significant potential of cost implications out of the recovery plan and the announcement of the recovery plan on August 13, 1997?
Mr Gourley: Yes. In the week before the announcement, I did attend a meeting, at which --
Mr Conway: Who was at that meeting, to the best of your recollection?
Mr Gourley: To my recollection, not present for the entire meeting but for part of the meeting, Mr Farlinger, Ms Clitheroe, Mr Andognini, myself, Ms Burak as secretary of the cabinet, and there may have been one or two other individuals.
Mr Conway: That's a pretty good list. That's about who I'd expect to be there. Can you tell us what concerns you brought to that meeting? Did you ask for that meeting? Was that a meeting at your call?
Mr Gourley: As I indicated, this was part of our working relationship at that point. Eleanor had called me and indicated that the report was available. I said: "Great. We would like to specifically talk about it. Let's get together and discuss it."
Mr Conway: Were you made aware at that meeting that it was likely that within a few days the Hydro board would approve in principle the so-called NAOP?
Mr Gourley: At that meeting, the basic premise was that it would be presented to the board. What the board would do had not been decided at that point in time, what form of resolution it would take, but clearly the board would be presented with --
Mr Conway: At that meeting on August 8 or whenever it was -- I think it was August 8 -- did you as the Deputy Minister of Finance understand that the NAOP would involve a cost of something between $5 billion and $8 billion?
Mr Gourley: Yes, I did.
Mr Floyd Laughren (Nickel Belt): Welcome to the committee, gentlemen. The week before the board meeting, which was on Tuesday, August 12, the Minister of Environment, Mr Sterling, sent a letter to --
Mr Conway: The Minister of Energy.
Mr Laughren: The Minister of Energy and Environment at that time, correct. He obviously had been briefed on what was coming down. He sent a letter to Mr Farlinger in which he said that he assumed the board would examine all options before deciding on what they would do. Those are my words, but that's basically what he said to them. Then at the board meeting, that letter was not given to the board members until after they'd made their decision on the recovery plan, which seems strange to some of us. I won't ask you to comment on the strangeness of that, but that did seem strange to some of us. I'm wondering whether or not you were aware of that request that other options be examined before approving the recovery plan.
Mr Gourley: I understood that the minister was sending a letter to the chair of Ontario Hydro, and the issue of alternatives was one that I was familiar with.
Mr Laughren: So you were aware that they were expected to examine other alternatives.
Mr Gourley: I can't say that I saw the letter before it went or any of that with precision. I understood that the issue of alternatives was going to be placed before the board, as it were, before the chair.
Mr Laughren: Were you surprised that events unfolded the way they did?
Mr Gourley: I wasn't present at the board meeting. I expected the board to have a presentation. My understanding was that it took several hours to present and there was a broad discussion on it. That's the nature of a board.
Mr Laughren: Given what you know about the recovery plan and its costs and, as a matter of fact, your responsibility in this regard it seems to me, do you think that Hydro is going down the right road?
Mr Gourley: Clearly, the chair of Hydro has said that he believes that the plan that's been approved is one that is flexible and that can accommodate consideration of other alternatives. Clearly the intent of the minister's letter and our interest as the Ministry of Finance was that alternatives be explored in the depth necessary to satisfy the government that the plan that was being proposed was robust, rigorous and sufficient to meet the needs of a substantiated business case, as it were, that we've indicated in the white paper as the appropriate test for any program, including this particular one.
Mr Laughren: I'm a little unsure of what you're saying here. What I'm trying to understand is whether or not you think that recovery plan is an appropriate plan for Hydro, given its costs.
Mr Gourley: In my view, given the performance of Hydro up to this point in time, the plan is absolutely necessary to deal with the declining performance. If you simply look at the rated performance and the production of the nuclear plants, the extension of that progression, the deterioration is a problem. Some plan had to be produced and this plan, based on the expert advice of the team that Hydro has assembled, is designed to deal with that.
Mr Laughren: But does it not bother you that the only plan that Hydro looked at was the nuclear plan, even though they'd been asked by a senior government minister to examine other options?
Mr Gourley: My understanding, and from the discussion and from the comments that were made by members of the board here, was that the board is in fact examining and will be examining other alternatives, other variations on the theme. Mr Farlinger has clearly indicated, as far as I understand, in public statements that other alternatives will be examined, but this is the direction which it intends to take. It intends to focus management resources on 12 of the plants and carry them out.
My view is that a plan is necessary. I don't think that I'm technically qualified to judge whether 12, 14 or whatever number of plants should continue to operate or whether seven or five or four should be laid up. But an action plan is definitely necessary and I think this one is being subject to both this committee's deliberations and the deliberations of the board itself.
Mrs Helen Johns (Huron): I'm just interested in a couple of pages in your presentation. If I could direct you back to page 7, I'd like to talk about the transition to competition. One of the things we're most concerned about in this committee is the accountability of Hydro in the transition period. We're concerned that maybe enough scrutiny won't go into this plan over the next three or four years until the competitive market steps into place.
I'm a little surprised by what I think you're saying on page 7. What I read you're saying is that there are going to be controls there that will add accountability to Hydro making these grave financial decisions over the next three or four years. You believe those to be in place and to be able to monitor Ontario Hydro. Can you just talk to that issue?
Mr Gourley: Yes. First of all, I think that the environment for any investment that Hydro's going to make has changed as a result of this committee's deliberations, as a result of, if I could call it, the surprising nature of the problem as identified in the report that preceded the development of the nuclear asset optimization plan.
The government is not going to be able, to use, if I could call it this way, the past practice in considering Hydro's investment plan because there will be a number of interested groups looking at those investments, and I'll pick one in particular. Anyone's who's going to be competing in the future with Ontario Hydro is going to want to know that any investments that are being made are being made in an appropriate manner, subject to a substantiated business case, the expression that was used in the white paper.
Basically, those people who are going to be competing with Hydro want to know that Hydro is not going to be gaining any advantage in the two-year period through its access to a provincial debt guarantee. I believe that the rules of the game will change. The level of public debate will change and I think that will change. I've used competitors as perhaps a new discipline on the horizon.
I think the board itself, as a result of this committee's deliberations, as a result of the knowledge that it will be facing a competitive environment, will be examining those decisions much differently than they would have under an assumed continuation of the monopoly environment. I believe that the next two years will see major changes in the way that business cases for investments are evaluated.
The Ernst and Young report provided a whole series of tests that it felt should be applied to these investments. The combination of those three things, in addition to this committee's deliberations, I think will provide the people of Ontario, the ratepayers with some comfort perhaps that there is a more rigorous process and there will be a more rigorous process of accountability for those investments.
Mrs Johns: The reason I wanted to have you here is because of my financial concerns about the stranded debt, or the stranded role the taxpayers may have to pay, I suppose would be a better way of putting that. I'm concerned about two things with that. First of all, Ontario Hydro has decided they're not going to make any contributions to the debt over the next three or four years. I'm concerned how that will affect our ability to pay off the debt and what the credit rating agencies will think about that and that kind of thing.
Mr Laughren and I are pretty concerned about when we allow competitors to come into the marketplace. You have a specific company that may produce its own generation powers, so it won't on be any transmission line. How are we going to get them to pay for the stranded debt so that they don't walk away from the problem where they've had electricity for the last 40 or 50 years and now all of a sudden they have this. They're making their own and they don't care that Hydro has $32 billion in debt that's really the taxpayers' debt. Can you address that and make me more comfortable with the stranded debt issue?
Mr Gourley: I'm going to ask Steve Dorey to speak to the issue, but I think a couple of things should be considered in the context of his comments. One is that we've asked Dr Bryne Purchase to look into the design of this stranded debt to ensure that we have a stranded debt charge at the appropriate amount and structured in such as to avoid the very point you're making so that people will not be able to escape their obligations.
Mr Steve Dorey: With respect to your first question of Ontario Hydro not contributing to debt reduction over the next three or four years, the measures that have removed that $6 billion of debt reduction that had been planned are measures that are potentially substantial reinvestments in the industry, and they will generate cash flow out through the medium term which will be used to retire debt. It's a delay, but those are reinvestments.
With respect to self-generation and how that might be handled, as the deputy said, we're going to take, with Dr Purchase leading the way, a very good look at the variety of mechanisms one might employ to recover stranded debt from power consumers, and that's certainly one of the issues we'll have to look at. There are some mechanisms one could imagine, exit fees and so on, that one could apply to people who leave the system and self-generate, which could ensure that they pay their share.
Mrs Johns: Could I just ask you one more question?
The Chair: Very briefly, Mrs Johns.
Mrs Johns: I know you're a guru on this white paper and you've looked at it for a long time, Steve, so I think I have the right man here when I ask this question.
Mr Conway: When you start talking about Floyd and Helen, that's one thing, but now Steve and Helen --
Mrs Johns: Pretty scary, isn't it?
Mr Conway: I'm getting worried about the impartiality of this process.
Mrs Johns: I'm going to miss my question because he's chatting.
Mr Conway: I'm observing, because it's worried me.
Mrs Johns: I don't necessarily buy, and I need you to convince me, that the rate of return that people will get from this NAOP investment will be paid off in any reasonable time that the bond raters and the credit raters will accept. What makes you think that the rate of return from a maybe $5-billion investment would come soon enough that it's worth letting the debt retirement be eliminated for two or three years or more?
Mr Dorey: We don't know precisely. The white paper is designed to subject a lot of the decisions that are going to have to be made over the next two or three years to a market test, through the interim power pool, which will look at other sources of potential power. Through the removal of the debt guarantee, which can take place as soon as legislation is passed and the corporations are corporatized, they will have to go and borrow in the market without a debt guarantee to undertake some of those big expenditures. If the market doesn't believe those are viable investments, they simply won't be able to do that.
Mr Conway: I want to come back to the deputy. I'm getting increasingly concerned, Michael, because I know something about your professional competence, which is properly highly regarded, and I know something about the institutional culture at the Ministry of Finance. I've got to tell you, I, like many people, am incredulous that somebody as beleaguered as Ontario Hydro, whose debt guarantor you are on our behalf, could come to you in the summer of 1997, when we know -- they tell us -- they have virtually no retained earnings, they're nearly insolvent, they are on the cusp of dramatic change in terms of electricity reform, they're not going to be able to meet the $6 billion worth of debt retirement over the period planned for and they are about to embark on a recovery plan that may cost as little as $5 billion and as much as $8 billion, and nobody at finance said, as the former Minister Of Finance for Canada said here last night: "Just hold the phone. This is a very big obligation that the Hydro board is undertaking."
The impression many of us get is that there still is not a great concern over at the 19th floor of Hydro because there is this provincial debt guarantee. So my question is this: Have you got yet at finance any idea, for example, of what the NAOP will mean to increased publicly sponsored debt if these seven reactors that are going to be laid up as part of the NAOP -- and now the chairman himself says what an awful lot of other people have told this committee, that if they're laid up for any period of time, they're not coming back.
Have you got any calculations, for example, as to what the additional cost to the Ontario taxpayer would be in terms of seven reactors that are laid up not to come back? What's that going to mean in terms of added obligation to the Ontario taxpayer? We've guaranteed that debt. Has any calculation been done on that?
Mr Gourley: On the issue of those seven plants, particularly on the issue of their not coming back, I think there are two specific issues: One is, shall I say, the write-off of the investment that is there, and perhaps as important if not more important, the issue of decommissioning. If they're not coming back, the whole issue of decommissioning comes into play. My understanding is that the committee has heard about the issue of decommissioning and has heard information about the calculation that I know Mr Andognini --
Mr Conway: I'm not interested in decommissioning. I want a specific answer: Are there any calculations done at finance? You tell us in your presentation that the outstanding debt was $32.1 billion. I'm looking at NAOP in the short term. That's all I want to talk about, quite frankly, with you this morning. You're the guarantors of this debt. It's $32 billion before we start into NAOP. The chairman is now telling us that it's probable that reactors that are laid up aren't going to come back. NAOP intends to lay up seven reactors. If those reactors don't come back, what does that do to the provincially sponsored indebtedness of Ontario Hydro, a corporation in the here and now that is very nearly insolvent?
Mr Gourley: We did look at that issue, but to be frank, if you're going to do a set of calculations assuming that those plants are not going to come back, you cannot ignore decommissioning costs. I understand that you don't wish to discuss it today, but you simply cannot ignore it. It is a significant part of the cost.
Mr Conway: It will only make my case stronger, so go ahead. But I want to know, inside my five minutes -- I don't want to find out three months from now, Michael, what I suspect to be told, that, "Yes, the costs were higher, the revenues lower, the exposure greater, and we just can't find anybody anywhere to exact any accountability from." You're the debt guarantor. You're a pretty important person in all of this.
Mr Gourley: What we have to be able to establish is, what will be the implications of the writing off of these investments? If they're not coming back on stream, how are they going to be treated from an accounting point of view? There have been calculations done. I don't have them with me today, but I'm happy to provide the committee with the calculations. I believe they will reflect the calculations that Hydro presented to you, because we don't have any better details --
Mr Conway: But the Hydro financial people came here and told us 10 days ago something that I did not expect to be told, and they were supported by their auditors, which I suppose we shouldn't be surprised at. We were told, and I'm sure you've seen this, that this company now is very nearly insolvent. We are told they've got virtually no retained earnings. They plan on three or four years of negative income. They're going to lay up seven reactors that they probably aren't going to bring back. If everything goes well, they might be able to buy the replacement power at $2 billion or $3 billion -- if everything goes well. Of course they're going to be heading into a very competitive market in two years' time. And by the way, the Hydro finance people, supported by Ernst and Young, said officially -- you've got to believe there's another story, but their official line to this committee is that all these calculations were done on the basis of the monopoly status continuing over this next five-years.
I've got to believe that when people like you at finance hear that, you must go through the roof. If it's bad before competition, this becomes very nearly cataclysmic about the year 2002. If this competitive world takes root and the downward pressure on revenues is there, a company that's almost insolvent in 1997 is going to be in very real difficulty, I would think, by 2001. I guess my question is, what about the stranded taxpayer?
Mr Gourley: The issue of how much is the stranded debt -- because ultimately that's where you're going. I think I understand the question.
Mr Conway: Yes, and this plan intends to impose potentially billions of additional stranded debt on that poor taxpayer.
Mr Gourley: Hydro itself, in its own reports, had an estimate of stranded debt that was in the order of $15 billion or $16 billion, as I recall the number, and what we said in our presentation is that the amount of that stranded debt and the calculation of that is very important. If those plants don't come back on stream, the stranded debt will be larger. The stranded debt is of course the amount of debt that Hydro has acquired, for whatever reason, for whatever purpose, including everything up to March 31 and between now and the time competition comes in, that cannot be supported by those commercial successors.
The amount of that stranded debt is a key issue, and it will be determined by whether or not those plants come back on stream, it will be determined by future competitive electricity prices. I understand, for example, that to calculate a stranded debt, you have to make certain assumptions about what prices are going to be for electricity in the future.
Mr Conway: But Hydro has come to this committee to tell us that they have developed a recovery plan in the spring/summer of 1997, projecting into the future by five years, that assumes the status quo. Does that give you, ought that to give this committee any comfort?
Mr Gourley: To some extent. I didn't anticipate your question, but I certainly believe Hydro's own documents say competition is coming. Their annual report says that; the footnotes to the province's financial statements say that competition is coming.
The report itself, NAOP, may have been produced with some underlying assumptions, but I can't and don't believe that anybody at Hydro -- and this may be challenging as a notion -- said, "We don't think the government is going to adopt a position of competition for the electricity industry," when in fact it had a commission which recommended that and subsequently when it released a paper --
Mr Conway: I don't disagree with you, but I'm telling you what we heard here from Ms Clitheroe and her colleague just 10 days ago. There was some incredulity on my part and I think on the part of others, because they told this committee and they produced documentation -- I'm quite aware of the annual report. I read it, like you, and I think there's a lot of sense to that. That's why I'm absolutely stunned to be told by the vice-president of finance of Ontario Hydro and its auditors that this plan -- here's the document. This is what they brought for the committee. They said, "Our operating assumption for this plan, for these numbers" -- and these numbers are the numbers that tell us three, four or five years of negative income, of virtually no retained earnings. This is before we start to spend money on replacement power, before we start to think about what we do with these laid-up reactors, before we start into those decommissioning costs.
I'm not an economist, but I'll tell you, I can't believe that -- finance wouldn't let the most junior ministry of government walk into the Frost Building and try to pull this off. I can't believe you people are not taking a more active and more vigorous oversight responsibility, if for no other reason than as the public's debt guarantor, in pulling the reins on this operation. They're in a tough spot, but I'm very worried that they're going to be sending -- because you've got the guarantee, and by the time you figure it all out they'll have added another $1 billion, $2 billion or $3 billion to it and you'll have to pay it because the costs have been incurred.
The Chair: Just before I go on to Mr Laughren, Mr Gourley, in your response to Mr Conway you did indicate that in the ministry you do have what otherwise might be referred to as financial modelling for lay-ups and decommissioning costs and other kinds of options. Would you --
Mr Gourley: What I was responding to was Mr Conway's request for whether or not we had any calculation as to the implications of not bringing those units back on. I will provide that to the committee.
The Chair: Do you take issue with the way I phrase it in terms of lay-up cost and/or decommissioning costs?
Mr Gourley: No.
The Chair: All right. Could you table that this afternoon with the committee? You obviously have them on hand.
Mr Gourley: As soon as I can, I will do that.
The Chair: If you would, please, this afternoon.
Mr Laughren: Mr Gourley, I'm very much a linear thinker, so help me out here. The debt at Hydro now is $32 billion.
Mr Gourley: Right.
Mr Laughren: It's not going to pay down any of that debt in the next three years at least -- I don't know how they can say just three years, but anyway three years. At the end of three years, what will that debt be?
Mr Gourley: The answer is it depends on the level of investment that's undertaken under NAOP, but to comment, the reason it was three years is that was the plan that had been put in place. There was nothing special about not paying down debt in three years. It's just that there had been a publicly announced program to actually pay down $6 billion in debt over three years. So there's nothing special about terminating -- if the planning horizon had been longer than that, it would have been --
Mr Laughren: We know it will be.
Mr Gourley: The debt retirement program that had been announced is no longer in effect and is impacted by NAOP.
Mr Laughren: Let me cut to the chase then. What I'm trying to find out is, how high is that debt going to go before it's being paid down again? Assuming that even if you picked $5 billion as the recovery plan number -- although I've never seen Hydro come in under cost, but anyway, if it's $5 billion -- what's the debt going to climb to before it starts declimbing?
Mr Gourley: The difficulty I have on this issue is that the $5 billion as proposed under NAOP was to be funded from internal sources. Clearly, those sources would have been part of the previous debt retirement program. So in essence, the $6 billion that's not going to be paid down is going to be funded from internal sources. I thought the first part of your question was, "How big is it going to go?" and I say it depends. You've given the example of $5 billion. The $5 billion could be supported from internal sources, at which point further consideration of paying down debt is possible.
Mr Laughren: But the interest on that debt is ticking too, right?
Mr Gourley: Oh yes, absolutely.
Mr Laughren: So it's going to go --
Mr Gourley: It would all be part of their debt. Then once the competitive environment arises, the issue of stranded debt becomes that debt which cannot be supported, so it will be part of that whole equation, as it were.
Mr Laughren: Are you of the view that whatever the stranded debt is, it must be paid for by electrical users specifically, or producers, at the end of the day, the hydro ratepayers, as opposed to being on the tax base?
Mr Gourley: The white paper suggests, if you like, all of the above. It does say there is a possibility of the taxpayers assuming that. In the ordering of them, if one could read into the ordering of the possible bearers of that responsibility, the ratepayers are first and taxpayers are last. Again, it depends on the amount of debt.
Mr Laughren: I'm aware of what the white paper says. I'm asking you, though. Where do you think that stranded debt should go? How should it be done?
Mr Gourley: I think stranded debt should be paid first by ratepayers. That's a responsibility. Otherwise we've incurred all of this. Really, there was a subsidy that should have been charged to taxpayers; it should have been reflected in deficits and all that in the past, and that's not the case. If the taxpayer were to be responsible for this, I think we would be treating Hydro differently than we are today. Our assumption today in going forward is that Hydro will remain independent, self-sustaining and that successors will be as well.
Mr Laughren: So if a large corporation such as General Motors or Falconbridge were to generate its own electricity completely on site, would you agree that there should be a charge on them at that point if there's a stranded debt charge?
Mr Gourley: I think it's fair to say that the generating capacity, the debt that's been incurred for transmission and all the activities of Ontario Hydro are the responsibility of all participants, and if one participant decides, whether it be a large corporation, a municipality, a university, whatever, they should bear the responsibility for the debt which has been incurred to date, but obviously no responsibility for future.
The form of that charge, the nature of it -- Mr Dorey indicated an exit fee concept, which is not unknown, or some other form of dealing with that issue is going to have to be considered by Dr Purchase and then recommended to the government.
Mr John O'Toole (Durham East): I think the inquisition is basically chasing down the stranded debt issue. It's very important because the taxpayers of Ontario, as Mr Conway has stated, are really the shareholders. With that, you've clearly said to us this morning that the higher rates you would anticipate to deal with this debt will be reflected in the customer's bill, ultimately.
Mr Gourley: Right. Could I just respond to the higher rates? The stranded debt charge could be funded within the current rate. There's no implicit increase in rates that is necessary. It depends on the amount of the current rates that you dedicate for paying down stranded debt. If you have a large amount over a long period, you could obviously accommodate a large stranded debt. So the form of that stranded --
Mr O'Toole: In my unsophisticated mind I ultimately see all the revenue coming from the user. There's no equity floating here that's going to defer or spread some of this cost. I don't care how you spin the conversation; technically, all revenue comes from me and you.
Mr Gourley: Right, as ratepayers.
Mr O'Toole: So however you depreciate or amortize or capitalize, I'm going to pay. Yet everything I read about competition and all that is flavoured very nicely with the expectation of the British experience, that the spreading and competitiveness will drive rates down. It's all through the documents, very acceptable language, actually -- extremely unbelievable, technically -- no, it really is. I just don't see it. Eventually, it's a shell game. We've got this $13 billion here. It's in this report, at footnote 19. They admit clearly with all assumptions, still having a monopoly, they just can't deal with this problem here. Read footnote 19, a very troublesome note. They're saying, "We just cannot deal with it."
Not only that, the scenario's technically a lot worse than that. It's saying, "Oh, gee." If I look to the history, they have written off, from 1993 to 1997, some $7 billion. I read the financial statements, and all the time it shows some ability to write off some of the liability or the debt -- kind of a fragmented approach to revenue and expenditures. Really, even now they've revised that. With this plan they're saying they're going to revise the 1997 forecast of writing off $700 million; they're going to write off another $2 billion, which takes the write-off.
The write-off means that the book value is really overestimated. That calculation occurred a number of years ago, and I put to you -- you're the expert. The original plan with the nuclear sites was basically a 25-year operation. Then they went to a 40-year operation. All that did was just take a second mortgage out. With the stroke of a pen, they just reamortized the whole deal over 40 years instead of 25 years. Now it really isn't even going to be 40 years, but it still shows on the books, nicely technically calculated with the strategic debt retirement, as one fortieth. Do you understand what I mean? Mr Conway is much more able to articulate my concern. To save my five minutes, am I oversimplifying this or am I somehow not assessing this situation very accurately?
Mr Gourley: I'll deal with your characterization of the write-offs. I think it's fair to say that in the first write-off you referred to it was argued, based on information at that point in time, that that was essentially the only write-off, that was a clean-up. There were some other business risks that would have to be evaluated in the future, but that would essentially be the largest single write-off and would have to be dealt with in the future. Subsequent events and decisions showed that not to be accurate, not to be correct at any rate, and additional write-offs were required and are required.
To be frank, the government's Direction for Change paper simply said: "This continued approach to writing off some here and some there has to be subject to greater discipline than it has been in the past. That will take the form of proper accounting and proper accountability, which can only come in a competitive environment."
You referred to an accounting practice of changing the useful life expectancy of these assets where it's clear that in other jurisdictions, from a financial point of view, there have been amortizations of the expense over periods much less than 25 years, because that's the real and realistic financial approach to it. Physically, they could still last 40 years, but I think it's a matter of viewing these assets in the future in their financial context in a competitive environment, how long that life will be. So there may be changes yet to come that reflect that.
Mr O'Toole: Very good. I have very few minutes and I just want to look at the Power Corporation Act. It permits a full cost recovery in the rates, including the SDR. I'm not sure if we have a full cost accounting model, technically. That's really where I'm coming from. But I think it's almost a conundrum, because on one hand you have a political atmosphere that says, "Thou shalt freeze rates," which really means -- we know the revenue stream's kind of fixed, dependent, of course, on the demand side, so you really have this restraint here.
What it actually does is drive the costs and absorb them internally -- ie, restructure, in the business jargon -- in the organization. In a private sector organization, they do all the things they have to do to be competitive. In a publicly funded one, they just say, "Of course we will." They respect the rate freeze, march along and just keep handing you the bills -- handing us the bills, technically; thank you for managing them.
Are they able, in their organization, to really drive -- Maurice Strong tried it. There will be those who argue Maurice Strong dismantled the organization's effectiveness by reducing 10,000 employees --
The Chair: Just ask your question, please, Mr O'Toole.
Mr O'Toole: My question to you is, is the organization able to drive down internally some of the recovery costs through increased efficiency, plant performance? What assurances do I have that those performance rates will meet what they say, 86% capacity?
Mr Gourley: There are two comments. First of all, I think you're right to focus on the issue of cost. What assurance do you have that the cost can be found? Certainly, there are studies that show that whether it be through benchmarking or comparing with private sector companies, there are cost savings that can be achieved. How those are achieved and whether they're going to be achieved properly is obviously the challenge that faces Ontario Hydro management and its board to supervise that sorting out of the cost, that reduction in the cost, but as long as the price freeze is in effect, the costs essentially are the main focus of attention, as they should be.
Future electricity demand, as you mentioned, is absolutely key as well, as are future electricity prices beyond that, because Hydro will have to deal with costs, anticipating a competitive environment. It won't be sufficient just to deal with costs in the transition period; it will have to set up its cost structure to deal with the future competitive environment.
All the other environments, including the British experience, I'll say after the decisions were made, had events change the context in which those companies had to operate. I don't expect that Ontario will be any different, but I think Hydro is going to have to show that its plans are robust to accommodate future differences, more aggressive competition, more fluctuation in the price of electricity, the price of competitive products, and they're going to have to demonstrate that they can get the cost structure down to be competitive. Otherwise they are not going to be able to compete.
Mr Monte Kwinter (Wilson Heights): Mr Gourley, I'd like to get back to the responsibility of your ministry and its relationship to Hydro and the oversight provisions you have. You talked about this meeting that you had on, I think it was August 8, where you got an overview of the fact that there were some significant developments taking place and some significant obligations that were going to have to be undertaken for the rehabilitation of the nuclear facility.
We certainly had Ms Clitheroe and Ms Ng here saying that all their calculations, notwithstanding that everybody knew that competition was on the horizon, were based on a monopoly, regulated utility. My concern is this: My colleague Mr Conway has said that the corporation is virtually insolvent. If they were a private company, if they had to go into the market to raise this $5 billion to $8 billion, they wouldn't be able to do it. Not only wouldn't they be able to do it, they wouldn't be able to sell the bonds they have now. Is that a fair evaluation?
Mr Gourley: On their own, without the provincial guarantee?
Mr Kwinter: On their own.
Mr Gourley: I think the market would certainly make a very sharp statement to them about the business plan and would be looking for where they're going to be five years from now. They would be looking for, "How are you going to get the costs down?" They would be asking all the questions that Hydro's going to have ask itself in terms of getting ready for competition. The market would ask those questions bluntly, and if the answers weren't forthcoming they would have difficulty borrowing or they would have to pay a much higher price for the borrowing than they are currently paying.
Mr Kwinter: That is in a regulated monopoly, but the key to their ability to sustain themselves is your guarantee. We saw the Standard and Poor's reaction even after the white paper. They as much as said: "As long as the province is on the hook, we have no problem. We would have some very serious concerns if the province was not guaranteeing that debt."
The question is this. We have the board considering this NAOP plan, which was supposed to go to the board as an information item only. You had met with some of the key players -- Mr Andognini, Mr Farlinger -- and they apprised you of the direction they were going in. But to this day -- we've had Mr Andognini say that he's still plumbing the depths of the problem, he doesn't know the costs. We asked him, "What is the cost of the layup and what is the cost of decommissioning?" He'll give us US experience; he doesn't know the Canadian experience. We're talking significant amounts of money.
What troubles me is, how could the Ministry of Finance, as the guarantor, be so casual about what they're doing in saying, "We've been apprised of what they're doing and that's fine," without taking a very detailed look, looking at the options and deciding that since we are going to eventually be on the hook for this money, we need some better answers?
Mr Gourley: I can only give you my assurance that there's nothing casual about our attitude towards this situation. The Ministry of Finance has not been casual at all. It's indicated that we are interested in having assurance that the alternatives to a particular direction are fully and adequately considered. I believe the Ministry of Finance and everyone, including Hydro itself, would have preferred, I'll call it a timing, different than the one in which we were alerted to the possibility of this report and then provided with the details immediately prior to a board meeting, at which time there was very little time to go through the normal analysis and review that we might do.
Certainly, our expectation is that Hydro will at the end of the day be shown to have considered all the alternatives, as it said in its board meeting. I take the board minutes to be a serious commitment to reviewing those alternatives. It's my view that the Ministry of Finance has carried out its responsibilities: in the first instance assuring itself that there is nothing in this plan that we believe will jeopardize the existing guarantees, assuring itself that any future plan is going to be subject to, as I said in my opening comments, a much more rigorous examination than has been the case in the past. That's not anything other than the statement that the context has changed. There's going to be competition, so $1 billion or $2 billion or $5 billion invested in this plan is going to have to meet different tests than $5 billion had it been spent a few years ago.
The issue of our oversight of it: I believe we are carrying out our oversight responsibilities appropriately and with due diligence. I leave it to the committee to pass judgement on it.
Mr Kwinter: Mr Gourley, when I questioned members of the board and I asked them about the letter they had received from the minister -- and we've already heard from Mr Laughren that the letter was there but they didn't really know about it until after they had made their decision. When the minister called for the board to examine all options, the members of the board who appeared before this committee told us their interpretation of that was to examine all the options presented in the recovery plan, which were all nuclear, every one of them. There were six options, and the recommendation that was given to the board by Mr Andognini was either item 5 or item 6. They felt that the only options they were considering were the nuclear options.
The title of the presentation wasn't an energy optimization plan; it was a nuclear asset optimization plan: How do we optimize the nuclear asset? That's all they were considering.
What I don't understand is how you say now that they have the ability to take a look at all these other options when they're going to start laying up these reactors, some of them, in March. They're already down the road, they're going that route. Everything that has been said by the chairman, who said there really isn't another option when you consider that we have 60-plus per cent of our energy requirements coming out of the nuclear facility -- we've got to go that route. This is really, "How do we maximize that particular facility?" without looking at the myriad other options available. With all due respect, you keep saying, "No, no, they have the ability to look at these options." I don't see that happening. They're going down that road.
Mr Gourley: In respect of their examination of the options, it's my understanding that the committee is going to have Mr Farlinger here before it again, and you'll have to speak with him about the extent. But my understanding is that they will in fact be looking at variations on laying up reactors, that the alternative of running some of the reactors longer and therefore not having to buy as much alternative fuel is part of the options they are considering. Those are reasonable options, and potentially -- if they are successful, although it depends on the practicality of those solutions -- they could dramatically affect the cost of the nuclear asset optimization plan. If you are able to continue to operate or delay the layup of certain plants at Bruce or Pickering for a longer period of time, that would dramatically affect the cost of alternative fuel.
Mr Conway: Well, well, well. That's very interesting testimony, that.
Mr Laughren: I'm somewhat surprised at the testimony from this flinty-eyed deputy that --
Mr Gourley: I must remember to get more sleep.
Mr Laughren: I'll tell you why. You indicated when you were talking abut Hydro that Hydro would have difficulty selling its bonds if it were not for the provincial guarantee, that if they were just out there on the market there would be very, very tough questions asked about the future and so forth.
Mr Gourley: Absolutely.
Mr Laughren: In fact you are the person who takes the place of those people who would buy the bonds, it seems to me, you're the one who's on the line, so I would just assume that you would ask the same questions that those tough-minded people who buy the bonds would ask.
Mr Gourley: Right.
Mr Laughren: But I don't get the sense that you've done that.
Mr Gourley: Despite my flinty-eyed look, I can assure you that the questions we ask are tough and are intended to say: "Look, if you think these questions are tough, wait till you get to Bay Street or Wall Street. You are going to get really tough questions. These investors are not interested in what you're doing tomorrow. They want to know where their investment is going to be for the life of the investment we are asking them to make." It's not sufficient for us to say, "We have a plan that's going to take us through the next three years." It needs to say, "How am I going to be assured that my investment is good for the next 30 years?" in the case of 30-year issues.
To have a situation in which Hydro attempts to borrow in an environment of uncertainty is to suggest that the answers aren't going to be sufficient and will only be sufficient when we set up these companies, have the structures in place and Hydro has been demonstrated to have been put on a sound financial footing and will then, on its own, sink or swim in the market, based on those tough questions they will have to field directly.
I believe they are well aware of those. I think they will find that they echo the questions we're asking, and I believe we are carrying out our responsibility.
Mr Laughren: I guess what surprises me is that last night -- I doubt you've had an opportunity to read the transcripts of last night's testimony from Mr Macdonald, Donald S. Macdonald, who knows a bit about this industry and about financing problems and so forth. Mr Macdonald -- and correct me if I'm characterizing his comments in the wrong way -- was, in my mind, quite clear. He said: "Hold it. Don't let them do it. Don't let Hydro do what they've said they're going to do. You need time to sort this out."
Of course Hydro is going to bring forth a nuclear optimization plan. Of course they are. Isn't that the culture of an institution like Hydro? I think it is. Here we have you saying, "That's okay. We'll guarantee your debt. Go ahead. Restructure yourselves on the nuclear model. Don't worry about the other stuff" -- because that's what they're doing -- and then we get Mr Macdonald coming in, who stands back from the fray and doesn't have your responsibility of guaranteeing the debt, and he's saying, "Holy smokes, don't let them do this." I would have thought that that's what you'd do. I'm really surprised that you're letting Hydro do what they say they want to do, without buying time, without seriously considering other options. You can say they're considering other options, but that's not what's in the recovery plan. Other options are not in that recovery plan; it's the nuclear recovery plan.
I wish you could explain to me how it is or why it is that you've bought into this nuclear recovery plan.
Mr Gourley: A couple of comments: First of all, I think it's in everyone's interests, whether it be taxpayers or ratepayers in Ontario, that Hydro take responsibility for ensuring that the $32 billion in debt that has been accumulated is appropriately managed and that actions are taken to protect the assets that have been acquired as a result of accumulating that debt.
I think everyone would want to say: "Please ensure that my existing investment is protected. Let me know that my existing investment is protected. Second, in respect of my future investment, please assure me that you are making the right future investment and please assure me that you've subjected that future investment to tests that will leave me feeling good about the long-term prospects of my organization."
The Ministry of Finance continues and is obligated to approve the borrowing plans of Ontario Hydro. We will continue to do that, and we will exercise our authority and play the role, if you like, as you described it, of investors, subjecting their proposals and their proposed programs to the appropriate tests.
Mrs Barbara Fisher (Bruce): Good morning. I'm going to make a couple of brief statements and then I have about four questions, so we're going to have to move along, because I have five minutes.
I will start with the issue that over the last couple of weeks we've talked about the bigger picture, and that of course focuses on the white paper and how that affects the long-term future of Ontario Hydro. However, we're faced with the dilemma right now of not being able to think as freely in that macro world as we'd like to and talk about micromanagement. Some people would really get upset at us having an opinion with regard to micro-micromanagement, but some of us have to because we're in a macro problem because of poor micromanagement in the past. I don't understand anyone who thinks that a $5-billion to $8.5-billion tag, if that's the real dollar value, is not micro or macro. I take a responsibility for that, and I take it very seriously.
Having said that, I want to ask a question of Steve Dorey, and it's going to be a fast one. You mentioned that this $5 billion to $8.5 billion is an investment in our future. As our chief economist -- I'm trying to understand -- when you put $2 billion, which equates to almost a third of that investment, into replacement fuel, which protects nothing but totally expends something, protects nothing in terms of the asset we're already in debt for and trying to pay for, how can you say that's a protection or an investment in our future when it's really just a throwaway?
Mr Dorey: I guess there are two points there. One is the issue of the micromanagement and how these decisions get made and whether they're good investments. That's precisely why the white paper direction is to say: "Let's subject these investments to a market test. Let's have these successor companies go out there and borrow without a guarantee and see whether the market believes these are good investments."
With respect to the $2 billion for replacement fuel and how you should see that as an investment, well, if that replacement fuel leads to moving resources to the remaining 12 reactors and raising their capacity from 60% to 65% to 86%, it may well be a good investment. But really what we want to do is to make sure the market makes those judgements rather than bureaucrats, because we've been making those judgements for a number of years and the market will do a better job.
Mrs Fisher: I hear you. My disagreement would be that if you invest that dollar in protecting the assets you already have -- whether we like nuclear energy or not is at this stage of the game irrelevant. To me, the bottom line is that all you're doing is putting off the inevitable problem anyway. We are delaying facing the problem.
I want to ask Mr Gourley a couple of questions here. Again, this is going to be considered micro but it does relate to four of the seven units we're talking about. In 1996 there was a recycle analysis report done for Bruce A, and finally we're having the opportunity on Monday to look at this. We should have had it two months ago. To me, it should have been one of the options on the table from day one. There was a recycle analysis report done and the consortium is addressing the committee on Monday. Are you aware of that other nuclear recovery as it relates to four of the units at Bruce?
Mr Gourley: Not that specific alternative, but in my comments earlier I made the point that the timing of the layup and the extent to which existing operations could be continued as an alternative to purchasing alternative fuel is an option which I believe Hydro is considering and will have to consider before coming to any final investment decisions on NAOP. I think they've clearly got a direction, but how that plan is actually implemented is very critical to the cost of the plan itself.
This issue of whether or not the Bruce plants, or Pickering for that matter, could continue to operate safely and adequately as an alternative to making that investment in alternative fuel is one I think that is --
Mrs Fisher: Mr Farlinger mentioned that he would revisit it, and I respect that. Let me ask you this: If we had two years for that to happen before we go ahead and spend the majority of the $5 billion to $8 billion, I'd have a higher comfort level. We have three months. I'm talking about my community right now. We have three months. We don't have a year. We don't have two years. In fact we know in my community that that's where the negative impact is going to be felt in full. We're not hearing a lot from Pickering except for a referendum saying they have other concerns.
In my community we have an issue where we have 1,700 people being displaced, which from an economist's point of view, representing good guidance to the Minister of Finance and to the province, should have been taken into consideration before we allowed a larger part of that $5 billion to be expended.
Mr Conway: Mr Gourley, I want to come back to your exchange with Mr Laughren, where I think you were much more helpful than imagined, unlike my friend Kwinter. I want to come back to that in a moment, because one thing is starting to become a bit clear to me, and that is, the difference between some of you people and maybe some people here and out in the community is that NAOP for you people is a bit like the Delphic oracle. It can mean a lot of things. I'm beginning to think there are people in government and in Hydro who think NAOP might very well be several things rolled into an ongoing parade, and I hope you're right.
I don't agree with my friend Kwinter's assessment. I happen to know -- I think the word was "casual" and I noticed you stiffened. I'm not surprised you stiffened at that word because my information is exactly what I would expect: that the finance folks have been anything but casual, that you are understandably concerned about what's been going on.
If you look at this picture, and this is a picture we got from Hydro's finance people. This is what they are projecting. This is a nightmare before competition and before decommissioning. If you factor in competition and you factor in decommissioning and laying up permanently those seven reactors, let me tell you, if I'm the Deputy Minister of Finance, I've got gas in amounts that would make TransAlta proud. I'm not trying to be funny, because this is about a real impact for taxpayers.
The concern I've got as competition dawns now is that the interests of Ontario Hydro and the Ontario taxpayer are really going to start to diverge. The interests of Hydro and the taxpayer, as we get to competition, are really going to start to diverge. If I'm running Hydro, as John O'Toole said, referencing footnote number 19, it's the stranded debt. I want to get into this competitive market. I want to be competitive. I have got to shuck as much of this debt as I can. As the Ottawa Citizen yesterday rightly observed, make no mistake about it, it's going to be a stranded taxpayer. We can all dress it up in whatever way we want, but you know better than most that at the end of the day a chunk of this -- how big is yet to be determined -- is going to end up with the taxpayer.
With that as backdrop, as you understand it, is NAOP sufficiently flexible in the minds of senior people at the department of finance as to contemplate, for example, significant adjustments in the number of nuclear reactors that get laid up in the next three months to three years?
Mr Gourley: Yes.
Mr Conway: Very helpful. It seems to me if I were at finance and I was looking at this and I knew that the regulator said to me, "These are safe reactors" -- yes, Andognini tells us there's a real problem with personnel. He's the expert; I'm not. If I'm at Hydro, anticipating competition, I'm going to be concerned about other things, but if I'm at the Ministry of Finance, holding the debt guarantee, the first thing that's got to be striking me is, if we've got certain of these reactors that are apparently approved by the regulator as being safe and they can continue to operate for some months or maybe even a year or two beyond the so-called March 1998 deadline, then why wouldn't we do that?
It is a Hobson's choice, to use Donald Macdonald's phrase of last night, but I'll tell you, given this is a nearly insolvent company with $32 billion worth of debt, that's an option that's at least got to be looked at.
I take it that finance has been discussing with senior brass at Hydro the efficacy and the possibility of adjusting some of those schedules to allow, if safety permits it and manpower can be found, the adjustment of some of those schedules for perhaps some of those seven reactors to be laid up.
Mr Gourley: This issue has been raised with Hydro. At least I believe the case is that they are going to examine -- whether it's specific scheduling or not, I must obviously point out that clearly we're not capable technically of making a judgement as to whether or not one plant can be laid up later than another. Our perspective would be, provided it can be done safely and reliably, that is an alternative that is very attractive and should be given whatever rigorous examination, because it will save money on the $2 billion that will have to be invested in alternative fuel. But at the end of the day, we in finance have to rely on the judgement of the board and management at Ontario Hydro that it can be done.
If it can't practically be done, I, as the Deputy Minister of Finance, might wish a lot of things, but I cannot wish away the operability of that suggestion. It may be a very interesting theoretical plan.
Mr Conway: Let's cut to the quick on that. I accept what you're saying, but you're the banker. Let's be clear. You're not just some kind of viewer in the good seats; you are the banker. You're the mortgagor for an outfit that, through many governments, has not had a particularly good record of keeping to their fiscal promises, and you guarantee their debt. These birds have come forward in the summer of 1997 and told you, the banker, that there's a big mess at their principal generating division. You know what they know, namely, that there's going to be a big change in the electricity market in the next two or three years. These people now, with their record, want you to stand idly by and basically accept whatever bills are forthcoming by way of guarantees in the next two, three or four years, and going into this they've got a balance sheet that looks like that.
My question is, since August 12 have you undertaken, as the representative of the public of Ontario, any specific oversight measures on Hydro with respect to this NAOP plan; what it's specifically going to mean and what it's specifically going to obligate the taxpayer to pick up? Have there been any measures taken by way of specific, additional oversight imposed by you as the Deputy Minister of Finance on these characters over at Hydro as they proceed down the path of NAOP, having particular regard to the fact that you're going to get some additional hundreds of millions, probably billions of dollars worth of spending or debt that you're going to have to guarantee in our collective public interest?
Mr Gourley: We have had meetings with Hydro and have had communications and discussions about this issue, but essentially our effort has been to deal with key and critical issues such as -- and I'll start with decommissioning because that happens to be one which I think is a very important one, and as the committee knows, that issue is being reviewed and analysed by Hydro.
The initial IIPA report had in it a reference to a safety report that was going to elaborate additional safety issues that have to be accommodated. So there are, if you like, additional potential investment issues. There are issues on the horizon that we in finance need to know about, because when we go with Ontario Hydro personnel to the investment community and say, "This is a plan; it will work, and it's based on a full and adequate disclosure," we have to know that's the case.
Again, to be frank, the fact that Ontario Hydro has undertaken this -- and I believe in the way they have done it, it's been more open and helpful in terms of exposing the issues it has to deal with, making it a more realistic environment in which to examine these issues. I think that has been good. I think it's been good discipline. I think it's been helpful. In spite of all the concerns that individuals may have with it, I think this process is very helpful and very beneficial to the taxpayer of Ontario.
I just want to quote from a letter, which I'll provide to the committee, that I wrote to Ms Clitheroe in my capacity as Deputy Minister of Finance.
Mr Conway: On what date?
Mr Gourley: This was October 28. Subsequent to the presentation to the board, we had had meetings with Hydro staff, one particular meeting I recall, on the issue of alternatives and on the issue of decommissioning costs, because that was one that was not identified. I'll just quote one paragraph. It says:
"While I can appreciate the board of directors' need to plan for the future, I think that the board should defer a decision on rate increase proposals" -- which this was in the context of -- "until such time as:
"It has clarified its policy with respect to the nature and extent of NAOP and non-nuclear safety-related activities;
"It has complete and accurate information on the future costs associated with these activities and the impact on the net income of the organization; and,
"It has reviewed all available alternatives for reducing costs within the corporation."
This was prior to the release of the white paper, but it's that sort of exchange that I think demonstrates, at least in my own view, that we are meeting, we are exchanging views. We are working cooperatively on the one hand and vigorously and diligently on the other with Ontario Hydro to ensure that taxpayers' interests and the economic interest of the province are being addressed.
Mr Laughren: Ms Clitheroe is a person of much integrity, in my view. When she came before the committee and we asked her about the statutory debt retirement issue, her responses had committee members scratching their heads, I think it's safe to say, without speaking for others.
Mr Conway: There was a pretty colourful legal opinion to go with it.
Mr Laughren: Yes. I'm wondering, since you're the guarantor of their debt, whether or not you have played a role in figuring out how to meet the statutory debt requirement without paying down the debt.
Mr Gourley: The discussions to date have not dealt specifically with this issue. We know that Hydro has been examining it, and the question has not yet been answered as to how they mean to do it. We don't have all of the information we need in order to see the exact impact.
Unfortunately at this point in time, I can't provide you with any better answer other than certainly I'm aware of the issue and we are going to have to deal with it, but we have not in finance modelled a situation which purports to say, "This is how it can be done." We are discussing with Hydro how they propose to do it and then we'll examine that once they do it. We have to retain the right to be able to examine their proposed approach and pass judgement on it. If it's appropriate, then obviously we would endorse it and proceed, but until that specific proposal comes forward, we won't be able to comment really.
Mr Laughren: If I hear you correctly, and don't let me ever put words in your mouth, you're saying that you will vet their statutory debt retirement plan -- some would say scheme -- before passing approval on it, and that at the end of the day you do have that clout over Hydro.
Mr Gourley: The government certainly does, in respect of the Power Corporation Act, have a very clear authority and obligation to approve their borrowing and financing plans. They will have to be going to market and in that process will have to demonstrate that they have a sound financial plan with which we agree. So our clout, as it were, is very clear and unambiguous. We will ensure that we undertake that review so that we can satisfy ourselves in the first instance, obviously, in the role that we play, but satisfy the external investment community as well.
Mr Laughren: I have to tell you, I was really taken aback by Hydro's plans on the statutory debt retirement. I found it really weird, so I'd be very interested in your providing to this committee, if you can, your opinion. They have plans on the statutory debt retirement, there's no question about that. Whether or not they've told you I don't know, but they have plans, and I, and I suspect the committee, would appreciate your views on that.
Mr Conway: The deal is to tell finance after the fact. They'll find out, but when they get it done.
The Chair: Mr Galt.
Mr Laughren: Could I have an answer to that question, Mr Chair?
The Chair: You may indeed. I'll pause. Mr Galt, just hold. There was so much side action over there, it was hard to hear if it had been answered or not.
Mr Gourley: What I indicated was that once we get a specific plan, we will be evaluating that specific plan. There are a number of alternatives that Hydro has looked at and Ms Clitheroe covered those with you. I think we would reserve our judgement until we see a specific plan and then indicate whether or not it meets the test we would apply to it.
Mr Doug Galt (Northumberland): As I sit here and listen to the testimony this morning, I can't help but see the very awkward position we're in. It's going to be very awkward to come up with some good decisions in the right direction. I think maybe we're very, very fortunate that we had somebody like Mr Farlinger, probably in concert was Mr Kupcis, who said, "Enough's enough," and called in the experts to review the problem that we're having with these nuclear plants, and brought this whole thing to a head. Dear knows where it would have gone had that not happened; similarly with the Macdonald commission report on Ontario Hydro in general. That's the message I'm getting here.
We've talked an awful lot this morning about the total debt, $32.1 billion. We've talked about struggling with a stranded debt and who's going to get hung with that -- and it sounds like the ratepayers will -- the cost of NAOP being laid on us and then the statutory debt retirement being put on hold and the question about whether that's right or wrong. I guess the people out there whom I'm really concerned about and what they're telling us -- you alluded to it in your conclusions and I'd like you to expand more on it -- relates to the rating agencies. They're really the ones who control the strings, so to speak. I'd just like you to talk a bit for a few minutes about their casual comments, official comments as they relate to the nuclear asset optimization plan that's out there.
Mr Gourley: The rating agencies confirmed all of the ratings they had in place prior to the release of the white paper and prior to the release of the nuclear asset optimization plan.
Subsequent to the release of the nuclear asset optimization plan, there were a number of questions asked and basically the rating agencies all said, "Look, we don't feel comfortable rating either Hydro's credit or Ontario's credit until we see what the future structure of the industry is going to be." You may well say that's an obvious statement, but they clearly said at that time, "We await with interest the white paper."
When the Direction for Change paper did come out, we spent time with them briefing them, holding detailed discussions in concert with Hydro staff. I think it's fair to say that we, through Mr Salerno's offices, are in more frequent contact with rating agencies than others. So we led those discussions and led those reviews and undertook to provide the rating agencies with answers to the questions they asked us.
That ended up essentially in a situation where they said, "Fine, we understand the structure in the future, we understand competition to an agency," and there were four agencies. They indicated basically they're not going to make any comment at this point in time about how future debt that is not guaranteed by the province might be rated. We simply said: "Look, this debt is going to be subject to a market test, so in that respect, we are concerned on the one hand but not concerned about its impact on the province's credit rating because it will not be on the province's credit that this money will be borrowed."
The agencies basically, after affirming our ratings, then outlined their understandings of the new structure of the industry. They feel that the detail in the white paper was sufficient to allow them to continue to rate our bonds. They had alternatives, and those alternatives you would be familiar with, which could have included saying, "We don't have enough information and we're going to consider some form of notice that we're going to look more thoroughly into this." They did not do that. They confirmed our ratings for both short-term and long-term paper, so at least as far as I was concerned, I think we met their test for disclosure, and the questions they asked were all answered.
Mr Galt: Are they doing any kind of market analysis in this direction? If so, would it available to us? Or are they just sitting back waiting to watch the rest of this unfold. The question was relating to, are they doing a market analysis about this whole thing?
Mr Gourley: They are very familiar with the electricity industry. In fact, they have some comfort in knowing that the experience with restructuring in the industry in the US has been generally successful and they've been following that closely, so this is not really new for them. The scale is obviously different, because Ontario Hydro is such a large corporation, but the fact that it's being restructured, the fact that we're now applying competition to the industry is actually more reassuring than the current environment simply because of the external tests that will be applied by the market.
Mr Galt: So there's that comfort zone, a comfort feeling there that I'm picking up from you, that the rating agencies have with the direction in which we're going.
Mr Gourley: Right. They want more details. They would like to know specifically how the stranded debt charge will work, Mr Laughren's questions earlier: "What happens when somebody leaves? Will it be legislated? How much will it be? How long will it last? What's your phase-in? What is an exit fee if you have it? What power do you have to recover it?"
All those details, which we will have to provide eventually, are questions that they want answers to, but which are not necessary for them to say: "Fine. You've clearly said that to the extent there is stranded debt, there will be a stranded charge and we have several options for dealing with them." That's very important for the rating agencies to hear.
I shouldn't speak on behalf of the government, but in the paper we indicate, "The government is prepared to consider the following list of options." The options are clear and they are not without difficulties for the government, but it's indicated it's willing to consider those options, including absorbing, taking on a portion of the debt should that be necessary. So all of those options provide assurance to the rating agencies that we have examined the situation thoroughly and that we're prepared to deal with the consequences of the plan and of the restructuring.
The Chair: Very, very quickly.
Mr Galt: Just a quick question on the bonds. It is Ontario Hydro that sells the bonds or the province of Ontario that sells the bonds? I know the province underwrites them and guarantees them. Who actually sells them?
Mr Tony Salerno: All but about $3 billion is issued by Hydro with provincial guarantee. There is about $3.1 billion to $3.2 billion that was issued by the province with then a back-to-back issue with Hydro.
The Chair: Mr Gourley, in response to a question put to you by Mr Laughren and an intervention, I think, from Mr Conway, maybe I could just ask you to elaborate a little bit more. Have you received from Ontario Hydro detailed monthly cash-flow projections for the next two years?
Mr Gourley: Detailed monthly cash-flow projections? No.
The Chair: Are they to be obtained?
Mr Gourley: I don't have them.
The Chair: You have no intention to have them?
Mr Gourley: No.
The Chair: When you receive information from Hydro, when you receive its numbers, particularly around NAOP, for example, do you run independent models and tests of those assumptions or do you take Hydro's assumptions and figures as given to you?
Mr Gourley: We take the data and then examine all of the alternatives and see how sensitive they are to the assumptions that have been made. If there are assumptions that have been made and those are reasonable in our view as a projection for future price or a projection for future inflation rates or economic environment demand for electricity and all of that sort of thing, those are parts of our normal questioning of proposals. But it's always in the context of, shall I say, a proposed borrowing plan that Hydro would present to us.
The Chair: Have you found the assumptions to be reasonable?
Mr Gourley: Yes. Generally speaking, there are some details -- and now I'm moving down to the actual borrowing programs -- of timing of access to market on which Mr Salerno and his staff at the Ontario Financing Authority would deal with Ontario Hydro specifically. They may have a preference for accessing the market on a particular day or a particular week, and we may indicate that because we are going to the market, we prefer them not to do that or that we don't judge the conditions to be appropriate and would prefer that they not enter the market at that time.
The Chair: Assuming the spending for NAOP commences now, will it have the benefit of government guarantee?
Mr Gourley: All of the spending under NAOP will have to be judged to the extent that it's going to have to be externally financed. As I indicated earlier, at least $5 billion of it, I believe, can be financed from internal sources, but that doesn't mean Hydro won't have to be borrowing. They will have to renew maturing debt since they're not going to be paying down the debt and they will have to be borrowing for other specific purposes, and they will share that plan with us. We don't have their plan for next year, but we're aware of their plans over the next few months.
The Chair: In your opinion, if the NAOP spending were implemented at this moment, and some may suggest it has been, is it possible to stop that spending?
Mr Gourley: My understanding is that the board has absolute control over that spending and that its approval is required before any spending commitments are made.
The Chair: And who has control of the board?
Mr Gourley: The board has control of the board.
The Chair: What specific directives or requests --
Mr Gourley: Excuse me, I should say that with respect to the decision I was talking about, the spending, clearly the board has control of the board. To the extent that any spending decisions require borrowing authority, the Ontario government is responsible and the Ministry of Finance is responsible for approving that borrowing plan.
The Chair: That was not an unimportant addendum. Have there been any specific directives or requests given by finance to Hydro to ensure that all alternatives have been looked at and properly evaluated?
Mr Gourley: The one letter I quoted from on October 28 I think was very specific and clear on that issue. It's not in the form of a directive; it's in the form of a letter from me to the chief financial officer of Ontario Hydro.
The Chair: That is the only directive or guidance that has been given, and that has been subsequent to August 12?
Mr Gourley: Well, the letter from the Minister of Environment and Energy was obviously a clear direction.
The Chair: A very clear directive. Can I just finalize a question in that regard? When you got up on the morning of August 12, did you go to that meeting?
Mr Gourley: No.
The Chair: You were not at that meeting. You were not present. All right. You were aware that meeting was to be held?
Mr Gourley: Yes.
The Chair: When you got up on the morning of August 12 -- and I assume it was a bright, sunny day -- did you have an expectation, as you tied your tie and prepared for the day's events, that a decision of the magnitude of the NAOP plan would have been approved that day?
Mr Gourley: On that day?
The Chair: On that day.
Mr Gourley: My impression was that the board would be considering the NAOP report and proposal. I use that word advisedly because I have been a member of a board for four years, and the board, at its meetings, is free to take whatever action it wishes to take, and that's the discretion of the board.
The Chair: I understand your answer, because we've all served on boards, and so I respect your respect of boards' authorities. I think that's laudable. Having said that, would you on that morning have expected the board to have taken a signal decision of this sort, at that meeting? Did it not strike you as out of the ordinary when you heard the decision had been taken? Was it seen as a very ordinary course of events or was it something that struck you as slightly extraordinary?
Mr Gourley: First of all, it was a major change for the corporation -- this whole report, the assessment of the report, the implications, investment -- a major change before the board. It had to deal with the issue. Going to my own reaction to it: When I saw that the minutes basically said, "This is the direction in which we are proceeding and we are going to examine alternatives," because that is an extension of the minutes, I felt the decision was clear, that they were going to make a planning decision and, to use Mr Conway's characterization of it, that the plan would be modified or adjusted, depending on the examination of alternatives and costs and details and the implications of the plan.
The Chair: At that point you thought it was just a normal unfolding of the world's events.
Mr Gourley: It was a normal approach to a major issue, as it were --
The Chair: A purely regular step.
Mr Gourley: I wouldn't characterize it as normal and regular, you know, "We have this following report." It was a major initiative that was before them and they had to show --
The Chair: So it wasn't a normal, regular step.
Mrs Johns: We've been hearing about it for months and months.
The Chair: That's the point I'm raising. There has been some unfolding, is what you are saying, and this seems to be a --
Mr Gourley: They had had reports. They had had the nuclear review committee. The issue had been raised. I made a comment earlier about the fact that the ratings for Ontario Hydro's generating plants had, in a sense, heretofore been not quite secret, but near secret; that it wasn't a matter of public knowledge that these plants were at one time, and I'll say always, among the top 10 in the world, and suddenly, somehow, they appear to have been changed in their nature or their rating has been changed so that they're very near the bottom of the rating scale.
I wouldn't regard that as a normal event. My point is that this whole process has led to an opening up of that, which I believe is very healthy and very good for the taxpayers, the ratepayers and the people of Ontario. I think it's a good development that this issue is out in the way it is and in the detail in which it's being raised.
The Chair: It's a helpful place then to conclude the evidence for this morning, and I do appreciate your testimony.
Mr Conway: You should have a screening of the film The Madness of George III.
The Chair: Are you feeling your gout this morning?
Mr Conway: The deputy's last response, which is an interesting one, I think is sort of --
The Chair: Mr Gourley, I thank you very much for having attended upon the committee and for your testimony. It has been very helpful, and for those who are with us, thank you very much. The committee will now stand adjourned until 3:30 this afternoon. You'll note that we have the appropriate deputations, including the Ministry of the Environment.
The committee recessed from 1154 to 1551.
The Chair: The committee will please be in order. We have two witnesses this afternoon before the select committee. Our first witness is Dr Nigel Roulet. We're pleased to have you with us today. The technique will be one of simply opening matters up for you to make a presentation, and then we'll go by caucus for questioning. For the purposes of Hansard, if you would simply be good enough to identify yourself, then let's begin.
Dr Nigel Roulet: My name is Nigel Roulet. I'm a professor at McGill University and director of the Centre for Climate and Global Change Research at McGill. On very short notice, because I was supposed to be here in Toronto giving another presentation, I was asked to delineate some of the broader issues that might be related to fossil fuel emissions and some energy decisions you have before you. To comment on those emissions and their impact on the decisions that need to be made and to examine the increases in CO2 that might occur because of switching energy sources requires first to understand a bit about the central issues in the climate change debate.
There are three questions I think you have to satisfy yourself with. The first question is whether the climate is in fact changing. The evidence that has been obtained so far is that the temperature has increased over the last 100 years approximately half a degree to one degree C. This is an unprecedented rate of increase in temperature, based on evidence looking at ice core records and various things like this.
The second question you have to address once you've established it's an unusual temperature increase is, what is the potential cause of that temperature increase? There are two lines of evidence I think we need to look at to examine this. The first suggestion would be greenhouse gases. There is irrefutable evidence that has been collected since 1958 on the rate of increase of greenhouse gases in the atmosphere. Why I say this is irrefutable is because it's simply a measurement. It's done at about 14 stations around the world and there's no question that CO2, methane and nitrous oxide are increasing.
To put that in context, the current concentration of CO2 in the atmosphere is 372 parts per million. From the ice core records, that concentration has not been observed in the last quarter of a million years. The highest concentration over that period of time was 280 parts per million. So we definitely have larger CO2 concentrations. The same numbers are true for methane, which has approximately doubled, and also nitrous oxide. There is strong statistical evidence to suggest that those increases in greenhouse gases are correlated with increases in temperature, but that does not necessarily mean a cause and effect.
There are two pieces of research that have come to the forefront recently, since 1993: One is work done by a scientist named David Thomson at AT&T Bell Laboratories in Murray Hill, New Jersey. He is a signal analyst. He has looked at the relationship between the increasing carbon dioxide, methane and nitrous oxide in the atmosphere and the other natural factors that affect climate, analysed them statistically in relationship to various different properties and has come up with the number that approximately 70% of the explanation for the temperature increase over the last 100 years lies in the increase in greenhouse gases.
The second situation that has arisen in the last two years that has given more credence to evidence for global warming due to greenhouse gases has been in the changes in the models that are used by scientists to examine climate change. These models are called GCMs, or general circulation models. Up until two years ago, those models had a very difficult time predicting the observed temperature changes over the last 100 years. The models predicted too great a temperature change based on the greenhouse gases that were emitted over that period of time. However, it has also been realized that at the same time we're emitting greenhouse gases, we're also emitting other gases that counteract greenhouse gases. One of the gases, for example, is sulphate. Once those gases were incorporated into the models, we saw a tremendous improvement in the predictability of the models, and now we can actually reconstruct the temperature changes over the past 100 years very well with these changes in the models. That provides additional support to greenhouse gases having an impact on temperature.
Looking at this evidence, if you arrive at the conclusion that at least we've had a temperature change and it's probably greenhouse gases that are doing it, then we need to look at the sources of CO2 that exist in the current global carbon cycle. There's absolutely no question that there is an imbalance in the global carbon cycle at the present time. That is because of the burning of fossil fuels, and the production of cement is putting carbon into the atmosphere at a rate of approximately -- and these units are very large -- 5.5 gigatonnes of carbon per year. We know that approximately one third to one half of that is going into increasing concentrations in the atmosphere. The other half to two thirds is going back into the oceans and back into the landscape.
That number of 5.5 gigatonnes of carbon on a global basis is derived from fossil fuels. That is the number you would need to use to compare, on an international scale, what the impact of increased emissions would be from, let's say, Ontario Hydro if they were to embark on this strategy, and there are some numbers on the national scale that we would need to look at. I got these numbers to work with from Ontario Hydro just yesterday, and I got the last set of numbers from the Atmospheric Environment Service at 10 o'clock this morning to look at.
In a 1997 document, Ontario Hydro reported that their 1990 baseline emissions, the emissions that all their activities add to the atmosphere in carbon dioxide, was 26 teragrams. Teragram is written "Tg," and a teragram is 10 to the 12 grams. In 1996, they reported a number that was much lower than that, 18.6 teragrams of CO2. Their projection for the year 2000 is that this number, with their changes, would go to 30 teragrams of CO2. That's an increase of approximately 11 teragrams of CO2, or about a 40% increase.
To put that in context, on the Canadian scene, in 1992 the estimate, based on the state of environment reporting, was that Canada was emitting approximately 468 megatonnes of CO2 a year. I use that number because that's what the federal government reports, and you can get lost in the units very quickly on this. A megatonne is actually equal to a teragram, so the two numbers are the same.
If you take the 1990 baseline number that Ontario Hydro reports and you want to compare it with the Canadian total for the national picture, you would take the number of 26 teragrams and put it over 468. That would tell you that Ontario Hydro is responsible for about 6% of the national emissions of fossil fuels.
If you did the calculation for the 1996 baseline number of 18.6 teragrams -- and the number for 1995 that I got from the Atmospheric Environment Service this morning is that Canada is emitting in the fossil fuel sector 499.6 -- we call that 500 -- teragrams of CO2. That means that Ontario Hydro in 1996 is responsible for 4% of the national emissions of CO2.
If we project to the year 2000 using the number of 30 teragrams as Ontario Hydro's number, because obviously we don't know what the rate of CO2 emissions would be on the national scene at that time in the future, if you look at the difference of Canada from 1992 to 1995, there was an increase of approximately 10 teragrams of CO2 per year on the national scene. What I've done is just prorate that forward to come up with the number that Canada probably would be emitting in the year 2000 -- 550 teragrams. I've put Ontario Hydro's estimate of 30 teragrams over top of that, and that means Ontario Hydro would be emitting approximately 6% of the national emissions in fossil fuels. They would return to the 6% emission level that they had in 1990 as a proportion of the national emissions. I should point out, though, that there is an absolute increase in CO2 emissions that Ontario Hydro is reporting of approximately four teragrams over its 1990 base level.
You can do those calculations. Just to put them into context, of the total fossil fuel emissions in Canada, approximately 22% of it is derived from power plants. If you then go through and do the analysis again, it means that Ontario Hydro would account in 1990 for approximately 25% of the fossil fuel emissions from power plants. In 1996 that number would have dropped to 18%, and using their 2000 projections, it would rise up to about 29% of the national emissions.
Mr Galt: Could I get some clarification on weight? You've moved back and forth from carbon to carbon dioxide. Are you talking about the carbon from the carbon dioxide or the total weight of the carbon dioxide?
Dr Roulet: I should make that perfectly clear. That was not clear to me until I actually got a response from Ontario Hydro today. All their numbers are reported in grams of CO2; not grams of carbon that's in the CO2, but grams of CO2. The numbers that I'm giving you, if you take those and multiply them by 12 over 44, because the carbon atom weighs 12 grams of the carbon molecule, which is 44 grams, that's how you would translate it into carbon.
Mr Galt: Weight.
Dr Roulet: Yes, carbon weight. The multiple is I think 3.7 -- no, 0.27 is the multiplier that you would use. I'm reporting the numbers all in mass of CO2.
Mr Galt: Even though you're saying carbon, you're talking about CO2 totals.
Dr Roulet: Yes. I apologize for that.
Mr Galt: That's okay. I just wasn't sure. I thought that's what was going on but I wasn't absolutely sure.
Dr Roulet: The problem is that Ontario Hydro works in CO2 and the federal government works in CO2 mass. But those are about the only two agencies that do that. Most of us in the climate change world actually work in the carbons, though. My apology.
Mr Galt: Thanks very much.
Dr Roulet: What that means is that in fact there would be an increase in CO2 emissions and it would have a slight impact on the national scene in terms of the total emissions from Canada.
You can go through and do the very same calculations to do what the impact of that change would be on global emissions. The number I gave you for fossil fuel emissions globally -- I am moving into carbon units now because those are the numbers that are reported -- of 5.5 gigatonnes of carbon emitted by fossil fuel and cement production, if you went through and redid the calculations, Ontario Hydro is responsible for a minuscule amount of CO2 on the global scene, and it works out to approximately 0.1% of global emissions. In fact, if you round to the nearest significant digit any policy that Ontario Hydro does, because the numbers are so large globally, it has no effect on the overall global numbers.
In terms of greenhouse gas emissions, the other issue that I was asked to comment on is, how would this fare with Canada's commitments for greenhouse gas abatement? That's also a bit of a hypothetical question because we really don't know at the present time what Canada is going to agree to at Kyoto. But if we take the press information that came out of the meeting in Regina a week ago, there does seem to be some indication that the consensus would be to try and obtain 1990 levels of emissions by the year 2010. Canada had agreed at Rio to 1990 emissions by the year 2000, but the indication from the Regina meeting is that this may go to the default of 2010, which I believe is what the Americans are also arguing for.
By the year 2000, Ontario Hydro, using its own numbers, would be above its 1990 level of emissions. To get back to their 1990 level of emissions they would have to find some way of reducing four teragrams of CO2 emissions over the decade between the year 2000 to 2010. That's on the assumption -- obviously I've done the calculations -- that they would maintain their fossil fuel program that they have said would be in place. The numbers they've given me are from 1997 to the year 2000. That would mean they would be approximately 10% over their target level for 1990.
The Chair: Thank you very much, Dr Roulet. I appreciate that very much. One point: It would be helpful I think, and our legislative researcher nudged me in this regard, if we could have some of your deputation in writing. Some of those figures would be very helpful. While Dr Galt may have had trouble struggling with some of the balances there, you made it clear to others of us so succinctly. I tease him when I say that. It would be helpful to actually see this in writing, if you wouldn't mind.
Dr Roulet: I'd be very happy to produce a hard copy for you.
The Chair: Thank you. I appreciate Dr Galt raising that question for us and clarifying it. We will proceed with questioning by caucus in rotation, five minutes per caucus.
Mr Laughren: I think I enjoyed your presentation. Have you read Ontario Hydro's nuclear recovery program?
Dr Roulet: No, I have not. The material I have read is the material that Ontario Hydro sent me on the document that they prepared for the voluntary challenge program for meeting greenhouse gas emission targets. I have not read the document you're referring to.
Mr Laughren: They claimed in an appearance before the committee that they could achieve their voluntary emissions agreement with the Ministry of Environment. I believe that's what they told us. Are you familiar with that agreement? Is that what you were referring to?
Dr Roulet: The voluntary registry program is actually within NR Can, the federal government --
Mr Laughren: With what?
Dr Roulet: Natural Resources Canada are the people who run that program.
Mr Laughren: I see. I think I heard you say towards the end of your remarks that there would be 10% -- am I mixing up different agreements here?
Dr Roulet: No.
Mr Laughren: -- 10% above that voluntary agreement with the federal government.
Dr Roulet: No. The voluntary agreement is that they would be emitting at their 1990 levels. That's the target they're supposed to hit. That number was 26 teragrams of CO2, which is what they were emitting in 1990. The 2000 number that they provided for me was 30 teragrams, which is four teragrams above that.
Mr Laughren: That's your 40%. They go from the goal of 26, in the year 2000, to 30.
Dr Roulet: Four teragrams over 26 is the amount they are above their target.
Mr Laughren: So am I right, then, that when Ontario Hydro told us they could meet that -- you're saying they can't, that they'll be above it?
Dr Roulet: The number they provided for me was a number they would reach in the year 2000.
Mr Laughren: Under their present plan.
Dr Roulet: Yes. That's the estimate they gave me.
Mr Laughren: With their recovery plan, with the starting up of the fossil stations.
Dr Roulet: Yes.
Mr Laughren: Maybe the folks can help me here, but it seems to me they were quite specific that they could come pretty close to the levels they had predicted, but they would be able to achieve them. Total acid gas, 215 all the way through -- well, 160 is the other one. The limit is 215, right? I'm sorry, I'm not reading this correctly, because I was sure they said they could meet it; you're saying they can't. That's really what I'm trying to get at.
Dr Roulet: What I'm saying is the numbers they project for the year 1997 to the year 2000 is what they gave me. It says it will increase to a maximum level of approximately 30 teragrams per year. It says: "Beyond the year 2000, the forecast level of greenhouse gas emissions from Ontario Hydro and the future electricity sector will depend upon the return of nuclear units to service and the evolution of a competitive supply-side marketplace." That's for their post-2000 projections that they are making. On the bar graph they provided for me, they have also suggested a corporate strategy for management of greenhouse gas emissions. What they are talking about is to stabilize net greenhouse gas emissions at 1990 levels by the year 2000 and to further reduce them by 10% by the year 2005. If they did it by 2005, they would be back to their 1990 level.
Mr Laughren: To 26.
Dr Roulet: They'd be back to 26. If they reduced by 10% of their 2000 level, they would be back down by the year 2005.
The question that comes in, in interpreting this, is whether you set the year 2000 as the target date for meeting your emission or whether you set the year 2010 to meet your target.
Mr Laughren: But Hydro already had a target and an agreement for the year 2000 -- am I right? -- that they would be back to 26 by the year 2000. That was their agreement with the federal government, wasn't it? Am I getting something mixed up here? Because that's what I understood you to say.
Dr Roulet: What I'm saying is that Canada has agreed to try and return itself to the numbers for 1990.
Mr Laughren: I understand that.
Dr Roulet: As part of the voluntary registry program, people are asking the corporations to return to their 1990 levels.
Mr Laughren: Let me try one last time to nail this down. Ontario Hydro -- we're just talking about Ontario Hydro now -- was at 26 teragrams in 1990. They had a voluntary agreement with the federal government, the Department of Natural Resources, to be back to that number by the year 2000. Is that correct?
Dr Roulet: I don't have that voluntary agreement in front of me. What I do have is the letter they wrote to the Ontario Ministry of Energy, which I think updates their voluntary registered action plan. I don't have the actual plan in front of me; what I've got is the update to that. To answer your question, I can't say whether that's what they agreed to, no.
Mr Laughren: I wonder if we could get that clarified from Hydro, to what extent they were correct when they said they would continue to meet their voluntary agreement with the federal government and to what extent they cannot, because I'm hearing different messages.
The Chair: We'll certainly ask.
Mr Galt: Thanks for your presentation. I'd like to try and get sorted out in my mind a little bit -- in firing up the fossil fuel plants, they'll be using gas, oil and coal. I'm certainly led to believe by all kinds of information on gas that it's supposed to be an awful lot cleaner. When it comes to the release of CO2 per calorie or joule or whatever, how much cleaner is it in greenhouse gases versus coal and oil? Sulphur is another thing; I'm zeroing in more on the CO2 problem.
Dr Roulet: You'd actually have to ask a combustion engineer for those specific numbers. There's absolutely no question, though, that on a unit of energy produced, natural gas is cleaner than oil and oil is cleaner than coal.
Mr Galt: As it relates to CO2.
Dr Roulet: Yes, as it relates to CO2.
Mr Galt: I'm just trying to get a feeling here. Is it significantly better, or is it marginally? Do you have any feelings that way? Other than that they say it's cleaner, I've never got a feeling. Is it marked?
Dr Roulet: I don't know the numbers on that, so I don't know whether or not I would argue it's significantly cleaner.
Mr Galt: It might be beneficial for us to find out, because we might want to recommend that more of the burners be converted to gas than allowed to stay with coal, as one of the recommendations.
Dr Roulet: Definitely, that would be a good recommendation.
Mr Galt: The other question I'd like to try to sort out here -- we've tried once or twice before -- has to do with total cost to society of whatever the pollutants happen to be. It varies tremendously. We look at the nuclear plant and we talk about decommissioning and the storage of the spent fuel in whatever manner, and that still hasn't really been sorted out yet, but we're saying all those costs have to go to those nuclear plants. Then we have the fossil fuel plants that create a greenhouse gas effect from the CO2, and that has a cost to society.
How do you relate that cost to society with the fossil fuel plants versus that of the nuclear plants, to put them both on a level playing field environmentally? Is there any formula out there, any assumptions that can be made? Is there any way? I'm thinking also of the competitive market from the white paper.
Dr Roulet: I think you've actually hit the crux of the problem. I'm not an economist.
Mr Conway: He's a geographer. Mike Harris might like that.
Dr Roulet: There have been some extensive studies done on the estimated costs of reducing greenhouse gas emissions in terms of the gross domestic product and things like this, and there have also been quite a few studies done -- and a number of them were done for the intergovernmental panel on climate change, from the United Nations environmental program and the World Meteorological Organization -- on the costs of the believed impacts from climate change. Those costs range considerably; it depends on the assumptions that are made.
The suggestions are that the cost of climate change, with the doubling of CO2, can range anywhere from 0% to 3% of gross domestic product. The estimated cost of reducing greenhouse gas emissions, the upper limit that I've heard is approximately 3% of gross domestic product. There is no one formula that people use; in fact, there are many different formulas that are used and all the intangibles that go into those types of things. If you want a more precise answer, it would be prudent to refer to an economist who does this work.
Mr Galt: Thank you very much. I think maybe we should try to get the information on CO2 releases from gas versus coal versus oil if at all possible. That would be helpful in our recommendations down the road, Mr Chair.
The Chair: We'll certainly make sure we do that.
Mr Conway: Thank you, Dr Roulet. Mr Galt raises some very good and central questions. I want to come back to those in a moment, but broadly speaking this committee has a responsibility to make some comment and recommendation around, among other things, the efficacy of this so-called nuclear recovery plan. Basically what the recovery plan turns on is that the utility has decided it's got some real trouble on the nuclear generating side, so they intend to take and lay up for some time seven reactors that give a total of about 4,000 megawatts and to replace those 4,000 megawatts with a combination of increased production from their own fossil, gas-fired and presumably some hydroelectric --
Mrs Johns: Purchases from other sources.
Mr Conway: -- and purchases from outside of the jurisdiction.
When that announcement was made, national networks showed people troubled reactors on the one hand and then the next thing people living across the country would see were these fossil plants spewing all kinds of guck into the stultifying humidity of a central Canadian summer.
One of the questions I think we have to satisfy -- we're just generalists; I'm certainly a generalist -- and one of the reasons we're pleased to have you here is to give us some advice around the public concern that will be out there that at least in the short term there are going to be, if this plan is implemented and the mix of it, as Mr Galt made plain, is not yet determined -- how much gas-fired versus coal-fired we just don't know.
On the basis of the numbers you cited in response to Mr Laughren's question, I conclude that Hydro will over the next three years, from 1997 to the year 2000, lose any of the advantages they've gained over the last five or six years in reducing their percentages -- they were at 6%, they came down to 4%, they're back up at 6% -- that they will still be, as a percentage, using your extrapolation, at 6%, which is where they were five, six, seven years ago, but that they're still broadly speaking going to be within tolerable or agreed-to limits. Is that a fair conclusion on what you've told Mr Laughren?
Dr Roulet: Can you define for me what you mean by "tolerable"?
Mr Conway: By that I mean the agreements that Hydro has voluntarily acceded to, particularly on CO2.
Dr Roulet: Given the numbers they have given me, I think they will be close to their targets plus this 10% factor. One would attempt to argue with them or encourage them to try and do whatever they can do in terms of efficiency or a mix of fuel or various other things to reduce that.
Mr Conway: In response to Mr Galt's observations, that would mean from your point of view telling the utility, in terms of substitute power, to put as much reliance on additional hydraulic, additional gas-fired, and stay away from coal of any kind to the greatest extent possible, right?
Dr Roulet: Yes, and from a greenhouse gas perspective that includes purchases of energy from those sources also.
Mrs Johns: Ohio Valley.
Mr Conway: Ms Johns rightly observes that probably means staying away from buying the so-called controversial, dirty, coal-fired electricity out of the Ohio Valley.
Dr Roulet: From a climate perspective, I would argue that's not a wise thing to do.
Mr Conway: Are there other issues? Your expertise is in the area of climate issues. We had representation some weeks ago now from a group called the Ontario Clean Air Alliance, Jack Gibbons. You may know Jack. He appeared before us back on October 20, now a month ago. His presentation touched on greenhouse gas emissions but he went on to talk about carcinogens and sulphur dioxide emissions. Have you any expertise or any commentary on any of those collateral issues?
Dr Roulet: No. I've done no work in, for example, the oxidants, in sulphur or in nitrogen, so I don't know the numbers --
Mr Conway: That's fine. Back to the CO2 emissions, which are the key concern in the greenhouse gas question. One of the difficulties I think in trying to assess the plan that we have to pass some judgement on is the mix of those ingredients. There is a lot of uncertainty. The exigency of the moment may in fact force the utility to do some things they don't want to do, but Ontario is a big, empty, cold place in the middle of winter. Heat must be there and the lights have to be on.
From your cursory look at these data, if there was some unexpected development, on the basis of what you've seen, could that profile of Hydro's picture, particularly between 1997 and 2000, stray into quite unattractive zones? You've crunched the numbers and you've said, in response to Mr Laughren, 4% to 6%. Mind you, there was a substantial increase as you get towards 2000 over where we were in, say, 1994, looking just at Ontario's domestic situation, pulling away from the national profile.
What I'm trying to get at here is if you got some major surprises, for example, if you couldn't get as much natural-gas-fired substitute power as you wanted, and if you didn't get the performance out of some of your cleaner alternatives in the province, and you had to buy more of that dirty coal-fired electricity out of, say, Ohio in the short term, could that really skew some of those numbers?
Dr Roulet: What that would do is increase CO2 emissions. By what percentage would depend on whatever mix you've got to do. But I think at that point in time you're on a margin, so it would be a small increase over the large increase already.
The other thing that should be pointed out is Ontario Hydro, in terms of its emissions, in terms of unit power production, the obligations for reducing CO2 emissions, the 1990 number is an important number to look at. The fact that they reduced emissions significantly into 1996 is probably a result of some of the practices they have had in the sense that they have had large investment, from a greenhouse gas perspective, in relatively clean energy sources. That's not an endorsement for doing the alternative way they have produced energy, but from a greenhouse gas perspective that is a much better avenue to go.
Mr Laughren: This committee is to complete its report in the next 10 days and make some recommendations on Hydro's stated intentions. We are going to, I assume, be wrestling with this whole issue of alternative fuels. I assume that someone like you would be happy if we recommended that all substitute fuel be turbine natural gas fuel as opposed to coal or anything else?
Dr Roulet: I suggest the route to go from the greenhouse gas perspective is to try and maximize your yield of energy with the minimal amount of emissions possible. That would mean, when you talk to your fuel engineers, get the best blend of fuel that you can get to do that.
Mr Laughren: Wouldn't that be the natural gas?
Dr Roulet: As I've said, I think you need to get someone who is an expert in that area.
Mr Conway: Or nuclear.
Mr Laughren: Yes, I suppose the other is nuclear. You don't have the emissions there, do you?
Dr Roulet: No, the emissions from nuclear power facilities of greenhouse gas are very low.
Mr Laughren: You're being very cautious about making any suggestions for us here as to what we should be doing when we make our recommendations.
Mr Conway: He's not even an economist.
Mr Laughren: They don't hesitate to make recommendations. What I want to know is, when you make recommendations like that, do you have a sense of the market out there at all, or is that not something that's in your bailiwick?
Dr Roulet: No. There are certainly market implications in any decision that's made on what you do with fossil fuels. There's absolutely no question about that. But what I am is a climatologist who is saying that what you should try and do is minimize your greenhouse gas emissions.
Mr Laughren: But you know that we have to wrestle not just with emissions; we have to wrestle with supply.
Dr Roulet: That's why you're there and I'm here.
Mr Laughren: You're here to give us advice.
Dr Roulet: My advice for you is to produce your energy in the cleanest possible way you can for greenhouse gas emissions.
Mrs Johns: I have one question and then I'll pass my time over. I followed your numbers this time around. I learned that in Ontario, until we had this potential problem at Ontario Hydro, we were working at reducing our teragram limits, emissions. I want to know why Canada is increasing them. Is not the whole country working towards this? How is it that we're going down percentagewise and Canada as a whole is going up? What is it that Canada isn't able to reduce their emissions -- that might be global. Is that global or was that Canada you gave me, 468?
Dr Roulet: That's Canada.
Mrs Johns: Why have they been going up and Ontario Hydro has been able to get theirs down?
Dr Roulet: As I said earlier today, economic productivity is very closely tied to emissions of fossil fuels, for example, and as the economy picks up, there are more fossil fuels emitted as a result of increased production and those types of things. From a greenhouse gas perspective, the recession was actually a fairly good thing because it actually reduced emissions.
Mrs Johns: Oh great. You and Floyd should be at the same place.
Dr Roulet: There's no question that fossil fuel emissions are tied to economic production.
Mrs Johns: I guess my argument here, and it's not an argument to you, but my argument is that I believe -- because you come from Quebec, you may not believe the same thing as I do -- that Ontario is the engine of Canada and if Ontario can manage to do this because we have most of the manufacturing and most the productivity and it's all generated basically by Ontario Hydro and their ability to give us power, then it seems strange to me that we can do that and Canada can't. From that standpoint, I guess that argument doesn't really help us in this kind of discussion today so I'll just let that go and I'll let Barb speak to her question.
Mrs Fisher: It's sort of on the same line, actually, and more concerned about the assumption of 550 megatonnes that you talk about by the year 2000. We went 468, 499.6 and 550 and I think you were doing that incrementally on the basis of 10-megatonne-per-year increases.
Dr Roulet: The number 599 was the 1995 number.
Mrs Fisher: It's 499.
Dr Roulet: Yes, 499.
Mrs Fisher: You're speculating 550 for 2000. My problem with that is if we take a look in the bigger picture, the global, and let's talk North America right now, and if we were to concede that in fact perhaps the US might be ahead of us in terms of its clean air legislative imposition, which it is, then I would suggest that maybe, if Canada is anywhere near getting its act together, which it's slow in doing, it won't be 550, and therefore Ontario Hydro won't equate to its worst-case scenario of 1990 if we allow this to go forward. I would speculate that you're going to see in the range of 10. Let's assume for a second we hold our ground.
Dr Roulet: Ten what?
Mrs Fisher: Ten per cent of national emission of CO2. If we impose the program that --
Dr Roulet: It wouldn't be 10% if you put 30 over 500.
Mrs Fisher: Right. It's worse. Okay. The point I'm making is that it's hypothetical, I agree, and I understand that you had to come from somewhere in term of forecasting, but if the national government does what it said it was going to do, and if Kyoto does anything in terms of reaffirming that 2010 isn't the window and that instead it is closer to 2000, and if it can be shown that Canada is not pulling its weight compared to its American neighbour, we could be in a worse situation, number one, in Canada, but even worse because of Ontario Hydro. My question to you then is, to get back to this emission issue and given your profession, would that not be a better argument for nuclear rehabilitation as opposed to coal, to some type of conversion out there about 2000, if I recall the plan, to gas?
Dr Roulet: It's a better argument as far as the CO2 emissions are concerned; you're correct on that.
Mrs Fisher: On that basis -- I've asked this question of a number of people who have come before us; I'm not trying to be imposing on you -- then what would you suggest? If people continue to do this, should there be a penalty paid? If we look at the balance of choice between nuclear or fossil-burning fuels, should there not be a penalty for those who continue to fossil-burn when we know in the end that we have to penalize, for decommissioning and long-term high-level waste storage, the nuclear industry? If we're going to make things competitive, even if we're worried about economics only and how we can finance this problem, would you argue in favour of nuclear production or fossil-fuel-burn production?
Dr Roulet: What vehicle is used to reduce greenhouse gas emissions -- you're talking about penalties and things like this. A whole series of options is available that could be used for that, and I think a lot of people are discussing those. It actually seems to be the major political debate in Canada today, over making commitments, and I think the pros and cons of each of those have to be weighed. That's a public policy decision, not a climatological decision.
Mrs Fisher: Take the dollars out of it --
The Chair: Thank you very much, Mrs Fisher.
Mrs Fisher: Can I just finish that one last point?
The Chair: We really have gone well beyond your time, Mrs. Fisher, but if you ask very quickly and very precisely, I'll certainly let you ask the question.
Mrs Fisher: It'll be very quick. Taking the dollars out of it and not influencing the political decision, with your background and your profession, what would you recommend to this committee if it only had to worry about the environment?
Dr Roulet: I would have to be competent to assess the environmental implications in the nuclear power versus those in the greenhouse gas question, which I'm not competent to do.
Mr Kwinter: Dr Roulet, I'm going to play devil's advocate. I've been listening to you and I'm curious about one of your statistics. You gave us the statistics from 1990, 1992 and then what the projections are for the year 2000. What was happening is that the total emissions were gradually going up, but Hydro was targeting 6%, then it went down to 4%, and expects that by the year 2000 it's going to have 6% of the total Canadian emissions. Is that right?
Dr Roulet: Yes.
Mr Kwinter: Then you went on to say that the total Canadian emissions, compared to the global emissions, were sort of statistically unreportable. It was like 0.1%.
Dr Roulet: No, no. I said that Ontario Hydro's numbers, if you take that number of 26 teragrams or 30 teragrams, whichever number you use, relative to the total global emissions for fossil fuel combustion in cement, it's a very small number. It's around the 0.1% level.
Mr Kwinter: Oh, I'm sorry. So that wasn't Canadian; that was Ontario.
Dr Roulet: The Canadian numbers are certainly not insignificant in terms of the absolute numbers, and on a per capita basis they are very significant.
Mr Kwinter: But Ontario Hydro's numbers are not?
Dr Roulet: Ontario Hydro is one contributor to that national number. In terms of the total overall emissions, Ontario's emissions, depending on what year you're using in doing your comparison, are somewhere between 4% and 6%.
Mr Kwinter: That's what I don't understand. What I'm trying to get at is, you're saying that that 4% to 6% is the percentage of Canadian emissions?
Dr Roulet: Of Canadian emissions of CO2. Yes, right.
Mr Kwinter: Okay, and what I'm saying is that Ontario Hydro's total emissions globally are 0.1%.
Dr Roulet: Yes.
Mr Kwinter: The reason I'm asking is that we are taking a look at what the alternative fuel sources are going to do to greenhouses gases, what they're going to do to Hydro's decision, and yet you are saying it's such a minute number. Is that a concern?
Dr Roulet: Yes. The thing is that the global emissions of CO2 are made up of millions of minute numbers. There's no single smoking gun in this issue. The problem is that it is made up of millions of relatively small sources that, when you add them together nationally, make up pretty significant numbers. What is going to be required is to reduce the emissions from all those sources. A solution is not going to be to find one or two of them to remove; you need to reduce all of them.
Mr Conway: And on that, let me just be clear. If you look at the sources of energy generation that we've traditionally relied on, we range from hydroelectric over here to nuclear over here with gas-fired and coal-fired thermal plants in the middle. Those are the four traditional sources of electrical generation in Ontario. I want to be clear. Thinking about greenhouse gas emissions, they range from bad -- the worst is coal. The best would be what, hydroelectric?
Dr Roulet: There is some evidence for hydroelectric and in fact this is some research that we've done ourselves --
Mr Conway: We don't have much time. I don't want to take all of Mr Kwinter's time. I've got four sources of generation. You told us we have to make the choices. I'm ready to make some choices. You're a professional when it comes to climatology. We've got four of these choices. With a view to greenhouse gas concerns, rank in order of best to worst those four sources. If they are the obvious ones, I think I've got them: hydroelectric, gas-fired electric, coal-fired electric and nuclear. Best to worse with a view to greenhouse gas.
Dr Roulet: I think it would go nuclear, hydro, gas, coal.
Mr Conway: That's clear in my mind. Thank you.
The Chair: Mr Laughren, you began the cycle. We'll go around with one question each because the deputatants are not yet here. Okay, one round and one question each as we go around. Mr Laughren.
Mr Laughren: I'm trying to think of how --
The Chair: I'm not forcing you into that.
Mr Laughren: No, I'm trying to think of how to work four questions into one. Where does Ontario Hydro rank as a producer of greenhouse gases?
Dr Roulet: I don't know. I don't have the numbers for the other -- presuming you're asking me to compare against other utilities. Is that what you are asking me to do?
Mr Laughren: Yes.
Dr Roulet: I don't have the numbers on the other utilities to be able to do that.
Mr Laughren: Do you know where they stand in a rank of Ontario, not with other utilities, obviously, but other sources of greenhouse gases? They'd be number one, wouldn't they?
Dr Roulet: I don't know that. I would assume that they're very high but I don't know that.
The Chair: Thank you, Mr Laughren. Mr Galt.
Mr Galt: Oh, are you still going around?
The Chair: One question.
Mr Galt: Hydro is talking about some emissions trading. Of course, in emissions trading you're always ratcheting down. What are your views on some of the emissions trading and what's being done there with new equipment and moving in that direction? Do you have any thoughts when it comes to CO2 production? Is there a lot of advantage in working on emissions trading? First, "emissions trading" sounds kind of dirty, but it's one way of ratcheting things down. Do you have any thoughts on that, with greenhouse gases, particularly as it relates to Ontario Hydro?
Dr Roulet: No. In the information I have seen presented on that, there are economic advantages and disadvantages to it. But I don't know the specifics on that.
The Chair: Mr Kwinter, final question.
Mr Kwinter: In your statistics, what you're really showing is that the pie keeps getting bigger, but notwithstanding that, Ontario Hydro has got 6% of it, then it went to 4%, and it's now targeting for 6%. What are your feelings about, rather than using a percentage of the total pie, basing targets on actual emissions, so that regardless of whether the pie gets bigger, if you maintain, you'll get a smaller percentage?
Dr Roulet: That's the point I made right at the very beginning, that the percentages are not good numbers to use. The number you want to compare Ontario Hydro's number to is the 1990 number. That's the number you want to compare it with. You want to look at that 26 teragrams of CO2, and if Canada agreed to the 2000 or 2010 target date for returning to 1990 emissions, and let's say everybody was requested to return to those levels, then that's 26 teragrams of CO2 that Ontario should be aiming for.
The Chair: Dr Roulet, thank you. Just before you complete your evidence, may I ask you to comment. There's been a series of television ads that I have watched, emanating from the US, that have bemused me, to say the least. You twigged my recollection of that with your comments that there is no smoking gun, there is in fact just a series of points of origin, small in number, that have added up to a considerable impact upon the climate. Can you comment on those ads?
Can you also comment in terms of this nation's inability to meet the real agreement and how we may find a way to restate our position in any less than an embarrassing way at Kyoto and what it means in terms of those ads, where it seems as though there are some very strong lobbyists at work trying to deflect the American, in that instance, reductions according to the real agreements and what that means for us and how we, if we exclude certain groups, are able to still make significant reductions? Is that based upon First and Third World economies? Can you make some brief comments in that regard.
Dr Roulet: The issue you have raised is actually the major problem. You've actually hit on a number of the major problems going into Kyoto. There are certainly efforts in certain public relations sectors trying to not get the US and Canada, for example, to commit to certain reduction levels at Kyoto because it will have an economic implication on those areas of the economy.
You've also hit on the single most important issue in the Kyoto discussion: what will happen in the developed countries versus what is happening in the developing countries. If you look at the proportion of emissions that come from developed countries and the proportion of population in developed countries and then you reverse that and look at the emissions that come from developing countries, and assume that those individuals in the developing countries have every aspiration to reach the economic wellbeing that we have attained in the western countries, and you consider that the far greater percentage of the population is in developing countries and you look at the record of emissions that developed countries had while they were developing, because in fact we have now reduced our emissions in per-unit economic output quite considerably since about the 1980s, that is the major issue: What happens with the developing countries?
The United States is arguing that developing countries should have the same standards applied to them as has happened in developed countries, but the developing countries are arguing that it's going to have a severe impact on their economic development. The European countries are suggesting a two-tiered type of system, with some technological transfer that could happen from developed countries to developing countries.
If I had the answer to that question, I would probably be at Kyoto answering it. You've hit the central political issue in this.
As far as the advertising campaigns are going, there is a concerted effort to try to confuse the debate, an attempt to not have any solid decisions made.
The Chair: Thank you very much, Dr Roulet. We appreciate your appearing before the select committee today and the presentation of your evidence. I also appreciate your agreement to provide some of the information to us in writing. That will be of assistance to our legislative research. It has been the only sidebar of evidence provided. That's very important to us in this very tight focus, and so we appreciate your presentation. I hope we can get to you for further information if it should be necessary as we complete our studies.
We thank you so very much for being with the select committee. You're excused.
MINISTRY OF THE ENVIRONMENT
The Chair: Members of the committee, we are prepared to welcome members of the Ministry of the Environment to the witness table, if they are now ready for presentation. I have no idea who all is at the witness table right now, but for the purposes of Hansard if we could begin with each identifying themselves and their position and so forth, we'll then be in the hands of the witnesses to make their presentations. At the conclusion of the presentation, we will then go into questioning in sequence by caucus, so if we could begin.
Ms Ivy Wile: Good afternoon. My name is Ivy Wile. I'm acting assistant deputy minister of the science and standards division of the Ministry of the Environment.
Mr Chuck Pautler: My name is Chuck Pautler. I'm the acting director of the program development branch, Ministry of the Environment.
Mr Doug Harper: Doug Harper, manager, biomonitoring section, Ministry of the Environment.
Mr Bob Shaw: I'm Bob Shaw. I'm the assistant director of central region of the Ministry of the Environment.
The Chair: Thank you. We are in your hands if you'd be prepared to make opening comments.
Ms Wile: Thank you, members of the committee, for allowing us this opportunity to meet with you and present our information. In addition to the people who are sitting at the table with me, there are a number of staff experts in the background. We might call upon them to answer some of the questions. They'll introduce themselves at that time.
Our job at the ministry is to ensure that effective environmental laws, regulations and standards are established and enforced across the province. The minister has stressed on a number of occasions his expectation that Hydro will continue to meet these environmental requirements.
The ministry has had an opportunity to review the preliminary information provided by Ontario Hydro dealing with the potential environmental effects of the nuclear asset optimization plan. We look forward to reviewing the specific details of Hydro's plans as they come forward to ensure all environmental controls are in place and environmental protection is maintained.
To hopefully assist the committee in its deliberations, I'd like to start today by providing an overview of our regulatory framework and the protection measures that are available under the various pieces of legislation. We'd then like to move on to specifically those rules that apply to Ontario Hydro and finally end up with a brief assessment, a very preliminary assessment, of the implications of any emission increases. This is hopefully going to provide a context for explaining how the ministry interacts with Hydro to ensure that emissions and discharges do not exceed our regulatory limits.
With regard to our regulatory framework, Ontario Hydro is subject to the same regulatory requirements as every other industry in the province. The primary regulatory environmental legislation includes the Environmental Protection Act, the Ontario Water Resources Act and the Environmental Assessment Act.
The Environmental Protection Act imposes requirements to obtain approval for emissions to the atmosphere and for the establishment and operation of waste disposal sites. The Ontario Water Resources Act imposes similar requirements for treatment and discharge of sewage and other effluents.
Under these pieces of legislation, the ministry controls emissions to the natural environment through certificates of approval. Environmental quality standards form the basis for issuing or granting these approvals. The ministry has approximately 900 standards for the various media and approximately 350 of these are for air. Any changes to the limits imposed by a certificate of approval require ministry review and the issuance of a new approval.
In 1996, the ministry posted an aggressive three-year plan for updating and developing new environmental standards. With a major focus on air, the plan identifies more than 70 air standards for development. To date, we've tabled 14 proposed air standards with stakeholders for preliminary discussion, and many of the specific contaminants are relevant to fossil-fuelled generating stations. We have an additional 19 standards under development.
In addition to the above, both the Ontario Water Resources Act and the Environmental Protection Act provide a director in the ministry with authority to issue orders to companies to take corrective action in case of non-compliance or where a serious environmental problem has been identified. These orders are legally binding.
Any company or person, including Ontario Hydro, can be prosecuted for failure to comply with either the general provisions of our environmental legislation or with specific requirements imposed on them by means of regulations, certificates of approval or director's orders.
For any increase to emissions to the environment over and above existing allowable limits, the company or person must first seek approval from the ministry.
Referring now to Ontario Hydro's specific requirements, some of the previous presentations to your committee had raised concerns regarding possible increases in emissions of certain toxics, such as arsenic, cadmium, chromium and lead. We'd like to point out that the ministry has regulatory standards for all of these substances, which Ontario Hydro is required to meet.
The air standard for lead was reassessed in 1994 and is one of the most stringent in the world. Under the three-year plan, as I mentioned earlier, the ministry has proposed new standards for cadmium, arsenic and chromium. These proposed standards are under discussion with stakeholders.
Concerns have also been raised by previous presenters about the potential increase in particulate matter. The current regulatory standard of 100 milligrams per metre cubed is based on total suspended particulate; that includes larger as well as smaller particulates. The ministry recently announced an interim ambient air standard for PM10, smaller particulates of 50 micrograms per metre cubed for a 24-hour average, in recognition of the serious health effects that these microparticulates can cause.
The interim air quality criterion for the PM10 will be considered when we are reviewing Ontario Hydro's applications for certificates of approval to expand generating capacity at individual stations.
The ministry also has an air standard for mercury, which Hydro currently meets. Nevertheless, the ministry is concerned about the impact of mercury, since it's a globally recognized priority pollutant. The development of Canada-wide standards for mercury has been identified as a priority by the Canadian Council of Ministers of the Environment under the effort to harmonize activities between federal and provincial governments.
The ministry has also committed to developing an action plan for mercury in our 1997-98 business plan. Under the plan, the ministry intends to work with all mercury sources in the province, including Ontario Hydro, to develop strategies to reduce mercury emissions.
The ministry's acid rain regulations, Ontario regulation 355/90, prescribe an overall emissions cap for Ontario Hydro whereby the total annual sulphur dioxide emissions cannot exceed 175,000 tonnes and total annual sulphur dioxide and nitric oxide emissions cannot exceed 215,000 tonnes. The overall provincial cap of 885,000 tonnes for sulphur dioxide was set to achieve a 60% reduction in sulphur dioxide emissions in Ontario from the four largest emitters, one of which is Ontario Hydro, and other smaller sources.
Under this requirement, Ontario Hydro must report on their emissions quarterly to the ministry and maintain continuous emissions monitoring systems for both sulphur dioxide and NOx at all fossil-fuelled generating stations. The regulation also requires an annual review of monitoring systems or audit conducted by an external auditor and report submitted to the ministry.
Under the clean water regulations, or MISA, these regulations define effluent and toxicity limits for nine industrial sectors, including electric power generation. The electric power generation regulation became law on April 13, 1995. It applies to 12 generating stations and associated facilities. The regulations set limits for conventional pollutants such as solids, oil and grease and, in the case of electric power generation, for heavy metals such as zinc and aluminum. Under MISA, industries, including Ontario Hydro, are required to monitor and report on their effluent quality.
Under the Environmental Assessment Act, the establishment of new Ontario Hydro facilities requires review and approval before proceeding. The operation of existing Ontario Hydro nuclear and fossil-fired generating stations is covered by provincial exemptions. These exemptions were generally granted because at the time of the act's proclamation in 1976 these facilities were either constructed or well advanced in the planning. Any changes in the operations, such as laying up and restarting, would be covered by these existing exemptions.
Nuclear facilities are currently regulated by the federal Atomic Energy Control Board. Any requirement for permits or licences from the Atomic Energy Control Board would trigger the Canadian Environmental Assessment Act at the federal level. If the Canadian Environmental Assessment Act were triggered, there would be opportunities for Ontario to participate in any federal review. Private undertakings are not subject to the Environmental Assessment Act unless designated by the minister and cabinet.
With regard to voluntary commitments in our battle with smog, Ontario Hydro made a number of commitments. In 1991, they made a voluntary commitment to limit their nitric oxide emissions to 38 kilotonnes per year, beginning in the year 2000. NOx is a smog precursor. I should also mention that over 50% of Ontario's smog problem does originate in the United States.
Hydro's latest NOx emission projections are for 45 kilotonnes in 1998, 44 kilotonnes in 1999 and 41 kilotonnes in 2000, with the emissions below the cap in 2001.
With respect to greenhouse gas emissions, Ontario Hydro has made a commitment at the national level to stabilize emissions at 1990 levels by the year 2000. A further reduction of 10% below 1990 levels will be achieved by 2005.
Although Ontario Hydro has not committed to any further nitric oxide reductions beyond the year 2000, the ministry expects Ontario Hydro to commit to further reductions in order to meet the NOx reduction targets under our smog plan. Any new power-generating sources will have to meet stringent requirements.
Currently, Ontario Hydro emissions are below their voluntary commitment of 38 kilotonnes of nitric oxide. The increase in fossil fuel use will increase the emissions of nitric oxide by 10 kilotonnes over the years 1998-99.
To put some context around these issues, we have done a preliminary analysis. By way of introduction, Ontario launched the Countdown Acid Rain program in 1985 to reduce, as I mentioned earlier, SO2 emissions by 60%, based on 1980 base levels, by 1994. Concurrently, the US commitment is for a 40% reduction from 1990 levels by the year 2010. Ontario's 1996 emissions represent an actual 70% reduction from the 1980 base, or 10% over our actual established limits. In 1996, Ontario Hydro accounted for 12.7% of Ontario's SO2 emissions or 85 kilotonnes.
While still meeting their regulated limits, Ontario's projected SO2 emissions will be 170 kilotonnes in 1998, 171 kilotonnes in 1999 and 174 kilotonnes in 2000. This increase in sulphur dioxide emissions will potentially increase deposition of sulphate by 0.5% to 1% in central Ontario, places such as Muskoka.
Ontario as a whole is responsible for about 30% of Canada's total greenhouse gas emissions. Ontario Hydro accounted for 12% of those emissions in 1995, or 3.6% of total Canadian emissions.
Ontario's total greenhouse emissions in 2000 were predicted in the 1997 federal forecast to be 5% below 1990 levels. The same forecast predicted Canadian emissions will be about 8% over 1990 levels in the year 2000. However, this forecast had unrealistically low projections of electrical growth in Ontario and requirements for fossil fuel generation.
As part of a national effort on climate change, the ministry has indicated to Ontario Hydro that we expect it to meet its voluntary commitments to stabilize emissions at 1990 levels by the year 2000 and reduce them to 10% below 1990 levels by the year 2005.
With regard to NOx, Hydro's voluntary commitment will likely be exceeded by three to four kilotonnes in 2000 but should be met in the year 2001.
Mr Conway: Just a moment. The witness seems to be reading from a text, and there's good data presentation there. If possible, sharing that text with the committee is going to make some of the questioning a lot easier. I'm quite impressed by the data that's being cited. I notice a number of the presenters have copies of the text. Just as a matter of comfort.
The Chair: I think that's a reasonable request. If there is a document you might share with us, I can have the clerk run it off for all members, to facilitate questioning.
Ms Wile: I must apologize, though; some of it is slightly scribbled out. It was prepared in a very short time frame.
Mr Conway: That's fine. I understand. It's the data.
The Chair: That's fine. Please carry on. It's an exhaustive and detailed presentation. We'll make sure we get a copy of it as soon as we can after your presentation. Please continue.
Ms Wile: Our best estimate in terms of mercury is that over 70% of the airborne mercury in Ontario comes from transboundary sources. That's just to put Hydro's in perspective. Our own releases, Ontario's releases, of mercury to air are estimated to be from 2.5 to 4 tonnes per year, and current emissions from Ontario Hydro are estimated at about 400 kilograms per year, or approximately 16% of the total.
In closing, the government's recently released white paper on electricity restructuring proposes that a move to a competitive electricity marketplace in the year 2000 would offer access to suppliers using more efficient and environmentally friendly generation technology. When the time comes, the ministry will look at all the environmental initiatives and make sure they're flexible enough to enhance competition and at the same time protect the environment.
The Chair: Thank you very much. On behalf of the committee, we appreciate the presentation. We did in fact accelerate the timing of presentation here before the committee, and I know it wasn't easy for you to get it prepared in time. The committee appreciates the effort you've made to be ready to make the presentation. I'll look forward to receiving the written documentation. We'll begin some questioning, if we can, for a while. Let me begin with the government caucus.
Mr Galt: Thank you for the presentation. The sheet I have here is from Ontario Hydro, and their forecast emissions were the same as you gave us a little earlier. As I look at this and go across, I see the regulatory limit, 215, and I see 215 coming across here in the total of SO2 and NOx, sitting right on the line. My concern is, what happens when they go over? They're not giving us any margin, even 1%; they're right to the line. What is going to happen when they go over, and how closely will they be monitored?
Ms Wile: Because the 215 is a regulatory limit, if they exceed that limit we can prosecute or enter into compliance discussions to make sure they meet the limit. But that is a regulatory limit, and we are entitled to proceed with prosecutorial action.
Mr Galt: I'm sure this committee would be interested in knowing what that penalty would be. Would it be a little slap on the wrist or would it be quite significant? Would they lock up the president? What kind of nasties would we do to them?
Mr Conway: Put Farlinger in a cage.
Mr Galt: The question is, what are the penalties? I'm being quite serious.
Mr Shaw: The corporate penalty is $50,000 on a first offence. That's the maximum penalty on a first offence with the type of material we are talking about.
Mr Galt: Minimum?
Mr Shaw: That's the maximum.
Mr Galt: And the minimum?
Mr Shaw: There is no minimum.
Mr Galt: There is no minimum. It needs upgrading, doesn't it, as we're thinking down the road? There's a proposal for emissions trading. I was questioning our previous delegate earlier on this particular one. What are the feelings of the ministry about emissions trading? Yes, we do ratchet it down, but it kind of has a nasty sound to it on the surface. Tell us your feelings about emissions trading. Is this good, bad or indifferent?
Mr Harper: When Ontario Hydro made their proposal in 1991 to cap their NOx emissions by the year 2000 at 38 kilotonnes, in the letter to Minister Grier they outlined a number of ways they wanted to get there, a number of tools, many of them fairly standard: low-NOx burners etc. They did point out, however, in the letter that one of the things they wanted to explore were, as they called them at the time, economic instruments, but by definition or by implication that meant emissions trading at that time.
For the last couple of years, Ontario Hydro and a group of companies have been operating a pilot project, with the ministry sitting at the table observing the goings-on and the outcomes. This pilot project is called the pilot emission reduction trading program and it's basically just what it says: It's a pilot program to look at emissions trading, to look at the feasibility within the Ontario regulatory context. Does it have a future within that context, and if so, what sort of rules should be written?
When that group has finished their work, they are expected to make, and they have mandated themselves to make, some recommendations to the government which are for the government to take under advisement and use as you see fit.
Ms Wile: I just add that any emissions trading efforts that are in place now would not apply to regulatory limits; they apply to the voluntary commitments that have been made.
Mr Harper: Solely to the 38-kilotonne voluntary NOx limit.
Mr Galt: To that aspect.
Mr Harper: That was their proposal at the time.
Mr Galt: The other area that we need clarification on is that we've had, as you're probably aware, a vote out in Pickering on an environmental assessment for starting the reactors up a second time. How does the Environmental Assessment Act apply to that? Is this necessary? Is this something that's a good idea or whatever?
Mr Pautler: The changes in the operations, such as the laying up or the restarting of a facility such as the Pickering facility, would currently be covered by the existing exemption orders that were prepared in the mid-1970s. So a new environmental assessment would not be required per se under the provincial legislation.
Mr Galt: You're saying there was no environmental assessment carried out in 1977.
Mr Pautler: Pickering was built at the time.
Mr Galt: So it was exempt. It was already there.
Mr Pautler: It's operation and maintenance and those kinds of activities were covered by that exemption order.
Mr Galt: What about Bruce? Did it go through an EA at that time?
Mr Pautler: No, it was built as well at the time.
Mr Galt: It was in place at that time.
Mr Pautler: That's right. The only facility that was not built that was exempted at that time was Darlington.
Mr Galt: And it received an exemption?
Mr Pautler: It received an exemption order and it proceeded to be constructed pursuant to the numerous terms and conditions that were attached to that exemption order.
Mr Galt: Did this get changed regularly each time they hesitated in the construction?
Mr Pautler: No.
Mr Galt: Was that part of the cost problem there or was it just a constant exemption?
Mr Pautler: There was one exemption, I believe, for Darlington itself and it didn't hold up the project at all per se.
Mr Galt: So the regulatory changes they talk about were more from the AECB, I expect.
Mr Pautler: Yes.
Mr Kwinter: I just want to follow up on what Dr Galt was asking you. As you know, there was a question on the ballot for the people in Pickering calling for application of the Environmental Assessment Act before any of the laid-up reactors are brought back in. You say they don't require that. How would they go about doing that if that was something they wanted to have done?
Mr Pautler: First of all, the question of the reactors being restarted is really covered by the rules and regulations of the Atomic Energy Control Board. Ontario Hydro would have to follow those requirements and the rules and procedures that are laid out by the board in restarting a reactor. The Ontario Environmental Assessment Act, due to constitutional reasons, does not apply to the restarting of the reactor itself.
At this point in time, we would expect no other changes to the facility: the buildings, the transformer stations, the egress from the site, the effluents to discharges etc. So there are no other changes at this point that we're aware of to the facility that would require environmental assessment approval or EPA approval. Now, if there were changes to effluent, Ontario Hydro would have to certainly comply with the clean water regulations or the MISA regulations which prescribe a limit to what they can discharge to Lake Ontario.
Mr Kwinter: Effectively what you're saying is that, notwithstanding that there was overwhelming support for that, there is no provision or no need for it because it's either covered by the existing facility or it falls under the Atomic Energy Control Board's jurisdiction.
Mr Pautler: Under the current legislation and regulations, with the way they're written, that's correct, sir.
Mr Kwinter: I just want to get your reaction. You were saying that, with the white paper, there will be more efficient energy sources available and that should cut down on the emissions. We had Dr Roulet saying to us just before you appeared that if there was a hierarchy of emissions, he would say nuclear was the cleanest, hydro was second, oil was third and coal is the worst. In any kind of replacement energy, nuclear would not be an option, I don't think. There might be some, but certainly the whole issue that we're trying to address is that the nuclear capability is going to be reduced, either permanently or over a short time or medium-term, and it's going to be replaced with other energy sources.
It would seem to me that no matter what happened, those emissions would go up, as opposed to what I understood you to say, that it might be more efficient because the market is opening up. The market is opening up, but from what we've heard, it will primarily be gas, and we've already heard that gas has greater emissions than nuclear. Do you have a response to that?
Mr Pautler: In response to the question, Mr Kwinter, we believe that in the competitive marketplace for electrical power generation, the market would respond with more environmentally friendly fuels, if there were some, on the fossil side. For example, the gas-fired stations would probably come forward as opposed to coal-fired stations, and gas, in the large scheme of things, in comparison to coal, would be the more environmentally friendly option.
Mr Kwinter: The point I'm trying to get confirmation on is, once you eliminate nuclear, you may get a far more environmentally friendly decision on the three remaining, but regardless of which of those three you take, it will still not be as environmentally friendly as the nuclear. Is that a fair assumption?
Mr Pautler: In general, we'd say yes to that.
Mr Harper: You're quite right. The emissions must go up, and indeed Hydro acknowledges that in these numbers that Dr Galt referenced, where you see 40s instead of in the 30s. Those numbers indeed will go up in the short term unless that nuclear comes on in a timely fashion. Essentially their numbers support what you're saying.
Ms Marilyn Churley (Riverdale): Thank you very much for coming today. I'm sorry, I came in late to relieve my friend Mr Laughren who had to fly back home.
I was just taking a quick look through your presentation and caught up a little bit. This table of numbers -- as I understand it, there is no regulatory limit for Nox. It's a voluntary number, the 38. Right? So according to this chart, you will meet the regulatory limit on SO2. -- you're a bit below it, whoever is answering this; Nox, you will be somewhat over the voluntary commitment, and acid rain, SO2, is going to be right on the money according to this. My question would be, was all this analysis done internally by Hydro or were there independent analyses done as well?
Mr Harper: We believe it's entirely Hydro's. They've shared previous iterations of this with us, but we believe it's entirely Hydro.
Ms Churley: How believable are these numbers? I must say they fairly well meet targets, except for the one that's somewhat above the voluntary commitment. Given the fossil fuel plants you have to fire up again, especially if they were done internally, how believable do you think they are? Are you confident that these numbers can be reached? I suppose attached to that is, is this a worst-case /best-case scenario?
Mr Harper: I think your last sentence is really --
Ms Churley: You like that better than "How believable are these numbers?"
Mr Harper: As you can understand, they could put any number on the paper here, and any number is subject to the weather. If you have a particularly hot summer and air-conditioning demand, or a particularly cold winter and heating demand, it can throw these numbers out. I don't know whether they are offering us mean or max. I suspect they're offering us something in the middle. If they got particularly lucky, I suspect they could come in under those numbers. I might look to Walter.
Ms Churley: Is there somebody here who actually knows a little? Mr Chair, could I beg your indulgence? Perhaps if there is someone here who is a bit more knowledgeable about it, that would be helpful.
The Vice-Chair (Mr Monte Kwinter): Could you change so we can get this recorded on Hansard and just identify yourself, please.
Dr Walter Chan: My name is Walter Chan and I am the acting assistant director with the standards development branch of the Ministry of the Environment. The numbers projected by Hydro are based on the projected median load growth.
Ms Churley: Median low growth?
Dr Chan: Median load. It could be higher or it could be lower, but this is the best estimate they have.
Ms Churley: How long were these numbers being worked on? When did you start gathering this information and doing the analysis?
Dr Chan: We saw some numbers after they announced the plan initially. The numbers have been slightly modified, but they were very, very similar.
Ms Churley: In other words, this can be taken, to the best of your knowledge, as a sort of average? They could go up, they could go down, depending on weather and various other components. They're not totally reliable but we can take them as an average.
Dr Chan: They're projecting the median situation.
Ms Churley: How concerned are you in that case about the Nox in particular, where even the median here is somewhat above the voluntary, particularly given the climate today in this area, if I may make a pun here?
Dr Chan: I think it would carry the same certainty as the SO2 numbers. They are based on what they project in terms of the technology they would use or demand management processes to project those numbers.
Ms Churley: I personally think it would be useful, frankly, to also have some independent analysis done, along with Hydro. Given the issues we're facing today around climate change -- acid rain, for instance, is very worrisome, in that, as we know now, although the targets were met during the acid rain agreement, the terms were met, the levels were met, it didn't work for other reasons. There's going to be pressure on governments, quite rightly, to start a program again and lower those numbers.
Dr Chan: There is a ministry control order on Hydro which requires them to report to us audited emissions so we'll be able to follow through to see whether they are on track or not.
Ms Churley: What's the plan if they are not?
Dr Chan: It goes back to the earlier comment that they are governed by what is required by the Environmental Protection Act. There are penalties that could be imposed on Hydro.
The Vice-Chair: Thank you, Mr Chan. Ms Wile, I assume you want to reseat yourself. Mr O'Toole.
Mr O'Toole: Thank you very much, Mr Chair. I'm glad you're still in the chair. You may not have been as easily recognized.
Thank you very much for your presentation. There has been extensive questioning, but Ms Churley should know that we did have some significant discussions about who should be attesting to these numbers. Ms Churley has been rigorously and, I might suggest, rather forcefully questioning these numbers. We had suggested that we should have Ontario Hydro, Mr McNeil, here to say, "Work these numbers." It's unfortunate that Mr Laughren wasn't here, because in our first position, Mr Galt argued that we're talking to the wrong ones.
I'm reassured, though, that you have said, if I understood your presentation -- thank you for the copy. I guess I have a question: Who monitors? Who actually does the physical smokestack or whatever is going on here? Who is the person with the stopwatch?
Mr Harper: The actual in-stack monitoring, the so-called continuous emission monitors that are used for the NOx, for instance, are operated by Hydro.
Mr O'Toole: And you check them once in a while to see if they're working or whatever.
Mr Harper: They are audited.
Mr O'Toole: They're audited by you.
Mr Harper: By a third party.
Mr O'Toole: Oh, you have a contract that does that for you.
Mr Harper: Yes.
Mr O'Toole: Very good. So we have an involvement in making sure that the instruments being used are effective. There is some kind of reporting mechanism, I would think. They send you a Monday morning briefing or something.
Mr Harper: Which is what Dr Chan referred to.
Mr O'Toole: Good. Who was monitoring when they were doing the Pickering effluent, the copper and that? I live there, I'm from Durham, and that's why they don't trust anybody. Honest to God, they don't. That's why they had the referendum. I live there, and those are constituents whom I'm representing. Hello there. I'm doing my job.
They had a referendum and you have told me that it was for naught. That's what you told me this morning. I'll be answering the phone tomorrow afternoon and telling them, "Don't bother, because it's not required." There's no EA required, right?
Mr Pautler: That's correct.
Mr O'Toole: Who was monitoring when they had this copper and stuff going out into the lake, four million tonnes or whatever it was? Who had the stopwatch then? The third party did, is that it?
Mr Shaw: In its certificates of approval for its facilities, such as Pickering, Hydro has requirements imposed on it for various types of monitoring. The certificate of approval for Pickering does not have a monitoring requirement imposed on it for copper or zinc.
Mr O'Toole: That answers that question pretty clearly. Thank you very much for that forthright answer. That's important, but I guess really the thing I am in all seriousness trying to accomplish is this: When we visited the site and the community -- and Mr Conway and all the members were aware that there was a high level; Mayor Arthurs appeared before the committee quite adamant, and many members of the monitoring groups -- it was a case of trust that was missing really. What can we as a government say in this report to ensure that the shutdown, the phasing up -- is there anything more we should be recommending to enhance that communication and awareness?
I hear things of stuff buried on the site. I hear all these things that are rather troublesome in what should be an open process. Is there any substance to these claims?
Mr Shaw: I think it is fair to say that we were somewhat troubled by some of the reports that were coming out, and as a result of those concerns, two director's orders were issued on Ontario Hydro. One of those director's orders is focused specifically on the issue of the heavy metal discharges from the cooling water streams, from the plants that still use brass condensers, as well as looking at the environmental implications of those discharges into Lake Ontario from the Pickering station.
The second order -- I have been quoted as saying it before and I'll use it again -- requires Hydro to come clean and tell us if there are any other skeletons in their closet that they haven't told us about yet.
Mr O'Toole: You've put on the record precisely what the community suspected. When I asked, facetiously of course, who had the stopwatch or the monitor or whatever it's called, I was really being rather trivial about it, but I'm actually quite serious. I want to know, and the whole community wants to know, what the processes are, what the accountability is, what the responsibilities are and what role you have ensuring that you don't find out in the Toronto Star. Do you know what I mean? That's really what we're here about. That's public safety. That's a primary task of this committee. I believe, because of the culture that has been mentioned, that needs to be firmed up and there needs to be some reporting relationship to a third party, be it you or someone else.
I want to get a little less intense here for a moment, just to ease off on a lighter note.
The Chair: And you have one moment.
Mr O'Toole: Maybe I'll just sing a song.
What I really want to get to is, in this report I believe that Hydro is acting responsibly in their recovery plan. I think that all lights are shining on them. What is your comment with respect to the efforts they are making, the fuel choices, the alternative choices? For instance, at the high-load level, they may need to burn coal. As politicians, we're all going to hear about that. Do you think their suggestion of the low-sulphur coal is the kind of action that would allow me to be assured that they are making every effort to make sure we have clean air in this province?
Ms Wile: I think the shift to low-sulphur coal is very critical to capping effluent emissions.
Mr O'Toole: Is it more expensive or less expensive?
Ms Wile: It tends to be more expensive.
Mr O'Toole: How much? Twice as much?
Ms Wile: We're not really certain.
Mr O'Toole: But it is more.
Ms Wile: We don't have that kind of economic analysis. I guess it depends on the particular source. I know Hydro has some of their own mining operations south of the border. We're not clear what the costs would be to them. We depend on them for that kind of information.
Mr O'Toole: Thank you very much. I appreciate that.
Mr Kwinter: Mr Shaw, I assume you're the one I should be asking this to. Have there ever been any penalties levied against any of the nuclear facilities of Ontario Hydro?
Mr Shaw: I have to say I don't know.
Ms Wile: We can certainly undertake to check and report back, but we'd have to go back through any cases, unless our legal people here might know. No, not off the tops of their heads.
Mr Conway: I just assume that since none of us can remember, it's probably not likely, but we'd certainly appreciate --
Ms Wile: Perhaps not recently.
Mr Conway: I want to look at the material, Ms Wile, which is very helpful. I really do appreciate your providing it, because the data are quite clear. On page 1 of your notes you make the point that the Ministry of the Environment presumably has had an opportunity to review preliminary information provided by Ontario Hydro dealing with the potential environmental impacts of the NAOP. Can you just elaborate a little bit as to what you have seen at this point in time? What kind of preliminary data have you seen? Pretty well what the committee has seen? Have you seen anything beyond that?
Ms Wile: We have had a presentation from Hydro. It was quite some time ago, I believe in the summer, so maybe their plans weren't as fully completed. Since then, off and on, staff have been in contact to obtain updates on information. I think Mr Harper perhaps has the most comprehensive information. Doug, could you handle that?
Mr Harper: They have shared earlier iterations of this with us over time, and we have seen the numbers change, as Dr Chan pointed out; not dramatically, but they have changed. They have also shared with us some of the things they have planned to do, and I think they have probably outlined them to the committee, such as the low-NOx burners, the move at Lennox and what not. That sort of information has been shared with us more or less since the beginning of August. I would assume that was approximately the time.
Mr Conway: Ontario Hydro has something in excess of 12,000 megawatts of installed fossil capacity. The NAOP anticipates over the next short period of time, to one degree or another but to a significantly enhanced degree relative to the pre-1997 period, to really crank that up to help fill the short-term gap.
People like the Ontario Clean Air Alliance were in here reminding the committee that one of the really unfortunate discharges of coal-fired plants is mercury. I notice in your submission you make the point that in your 1997 Ministry of the Environment business plan you are going to develop a mercury control program. Should we be concerned? The Ontario Clean Air Alliance left me rather worried about things like mercury, the substantial increase in mercury that would be generated if their preliminary assessment of the NAOP was to be credited. I can give you the testimony, but I don't want to waste valuable time. Does the Ontario Clean Air Alliance have a point? Should we be concerned about the substantial increase of mercury that might be generated as a result of increased reliance in the short term on these fossil plants?
Ms Wile: In general I'd like to say that yes, we should be concerned. There's just a growing concern globally over mercury. We have to look at all sources. Any increases obviously aren't desirable. Some of them may be unavoidable. I believe some of the shifts to something like gas instead of coal would reduce or mitigate some of the mercury emissions. We're concerned enough that we have moved aggressively on looking at all the sources. We're working with our federal colleagues because mercury has become very much a national issue.
We've got some actions that have already taken place on a number of sources. A big problem for us continues to be transboundary mercury because probably somewhere in the realm of over 70% comes from across the border. Not only do we have to deal with local sources, including the Hydro increase, we have to very aggressively pursue action south of the border as we do on a number of fronts: smog, acid rain.
Mr Conway: Just reading from that testimony of the Clean Air Alliance, because we haven't heard a great deal on the environmental front, that's why we really appreciate -- I know I do -- your willingness to come here on short notice to give us this excellent testimony today. On page 7 of Mr Gibbons's testimony given here on October 20 under the category "carcinogens," "Five of the toxic substances emitted by Ontario Hydro's coal-fired generating stations, arsenic, beryllium, cadmium, chromium and lead are designated as carcinogenic by the US Occupational Safety and Health Administration." There are currently no caps on Ontario Hydro's total emissions of these carcinogenic substances. They go on to say, "Ontario Hydro's proposed nuclear" optimization plan "will increase the emissions of these carcinogens by approximately 50% to 60%."
If I were a citizen of Ontario and I read that, assuming that it's credible -- these are credible people, I believe -- that would really catch my attention. What response would you have, as the Ministry of the Environment, to public concern in those areas? Do we not have any caps? If we're going into much more fossil-fired electricity in the short term, and I think we are, whether of our own or stuff we buy south of the border, that apparently is going to be a byproduct.
Ms Wile: Let me just give a preamble and then I'll ask Mr Harper to finish off. First of all, our approach to regulating some of these substances is through standards. Standards are set on a risk base. This is common among other jurisdictions. You look at whether it's a carcinogen or not. There are different models for developing those risk-based numbers. What we have in place are standards for all those compounds. We're now in the process of updating them to make sure that information is current. There are different classifications for carcinogens. There's a listing by EPA that identifies some of them. Some of them are possible, some of them are probable. There's a whole scale of how much certainty is associated with their carcinogenic ability.
When we set these standards and they are placed in regulation, that obliges every industry to meet those standards. That's how we regulate the discharges of these carcinogens.
Mr Conway: You expect to have a more detailed program around things like mercury and some of these others.
Ms Wile: For selected contaminants that require special action, we actually do more than perhaps just set regulatory limits, standards or incorporate these provisions into certificates of approval. We actually developed a separate plan of action for things such as smog or acid rain. Now we're moving on mercury. For other substances we continue to have our normal regulatory limits and regulatory tools in place which are updated on a regular basis to ensure that they're current with current scientific knowledge. I don't know if Mr Harper wants to add anything.
Mr Harper: I was going to try to add some context or maybe some scale in answer to your question. I'm going to pick on mercury because it's the one Mr Gibbons usually cites first and it's the one that most people pick out of that list. You could call it fortunate if you wish, but we are able to estimate how much mercury comes out of a stack, because the mercury comes from the coal, and that mercury is lost virtually in its entirety up the stack, very little of it left in the ash. Even if you estimate 100%, you then know you should have a very good estimate of what's actually being emitted, unlike NOX, where it's dependent on temperature, which can go up and down. It's harder to characterize.
We have a good idea of what's coming out of the stack. We are able to mathematically model it where necessary. But in the case of the ministry, we have been able to go beyond that and have been party to the development of quite a sensitive mercury analyser which is portable. We have taken it and we have done some monitoring in the Nanticoke stack: tracked the plume and followed the plume around and done some monitoring. The levels we measure are extremely low. Even if they increase under the scenarios that are presented to us here, we are still looking at very, very low numbers.
Ms Churley: To follow up on that, you dispute Mr Gibbons's numbers. I know you haven't seen the report, but they were just read out.
Mr Harper: No, I don't dispute his numbers. In fact, he gets his numbers from Ontario Hydro and we have the same numbers from Ontario Hydro. I don't dispute the tonnage. What happens is that the concentration in air, the exposure to you or me if we were living in that region, is still very low. However, don't let me sound like I'm trivializing it. The comments Ms Wile made with respect to the focus we want to give mercury -- because of its known toxic effects, we're more than willing and quite prepared to continue to seek further reductions from Hydro.
Ms Churley: Do you know what the allowable limits are on mercury emissions in the United States?
Mr Harper: No. We could get it, but offhand I can't cite it.
Ms Churley: I was just wondering because, as everybody is saying, it's one of the toxins that is most talked about these days. I don't know if there's some kind of zero tolerance like there is for dioxins now or what. But if you don't know, that's okay with me. I'm just wondering if people are there to protect the environment.
I suppose this might be somewhat hypothetical, and you're not necessarily paid to do this, but given that you are there to protect the environment, you have seen the option which came forward from Hydro, can you see that there might be other options available to the committee to recommend to Hydro that would have less damaging effects on the environment? I've put you on the spot a bit here, but using fossil fuel energy we all know is not a good way to go.
Ms Wile: There are a number of items that we would encourage them to pursue: energy conservation measures within what's feasible; we would be looking at low-sulphur coal, hopefully gas -- we're probably not experts in that area; better insulation of pollution control technology, scrubbers and whatever is possible. We're not perhaps the right experts to have all the answers to those questions.
Ms Churley: I didn't expect so, but I'm glad you mentioned things like energy conservation and efficiency and renewable sources, cogen, all of that. In my view, this is an opportunity to really speed up. Would you agree with that?
Ms Wile: Yes.
Ms Churley: I know you're not experts, but as protectors of the environment you would recommend to the committee that it be looked at and that this be an opportunity to speed up the process and government getting involved in these programs?
Ms Wile: We would certainly encourage any measures that benefit the environment. We'd be happy to hear --
Ms Churley: Thank you. A slightly different track here, and again you can't give me any confidential information; I realize that. But the minister is going to be coming forward some time I guess in the near future with the regulatory changes. As you know, a paper was released on that some time last year. We hear that it's going to be soon. We don't know for sure, but obviously there are going to be changes to some emission guidelines. I suppose some are going to be strengthened and some weakened. But you don't think it will have any impact on what we're talking about here? As far as you know, there will be nothing within those regulatory changes.
Ms Wile: We don't anticipate any changes that would loosen the limits on Hydro.
Ms Churley: What I am also getting at is that they could be toughened in some areas, which could possibly affect your plans or the numbers here and the implications.
Mr Pautler: I don't think there are any regulations that were contemplated in that earlier paper, Ms Churley, that would impact this particular plan, either make it more stringent or in any way lessen the degree of environmental protection.
The Chair: As well, just before you go, perhaps I might ask you a question concerning your relationship to the Atomic Energy Control Board; in specifics, your relationship to Ontario Hydro nuclear facilities and AECB. For example, under the Environmental Assessment Act, do you have the right to shut down a unit? Do you have a right to step in and control the operation of a facility, or do you have the responsibility to report to the AECB?
We've heard the modesty of the financial part that Dr Galt, I think, focused on. Are you able to give any other kinds of information about your regulatory authority to control under the Environmental Assessment Act?
Mr Shaw: If I could take the liberty of expanding that beyond the Environmental Assessment Act, and I will just use the province's environmental legislation period, the answer is that all matters relating to the operation of the nuclear facility that deal with the matter of any type of radioactive material, its usage etc are solely under the control of the AECB and none of the provincial legislation allows it to step in and shut down a nuclear reactor, as you have suggested, or anything like that.
Mr Pautler: If I could add to that, in our presentation we outlined that if the Canadian Environmental Assessment act were triggered by the proposed changes contained in this plan, we have agreements with Environment Canada to participate in the decision-making processes that would be triggered under the Canadian Environmental Assessment Act where the nuclear regulatory decisions could be made. So we can participate in that way in those kinds of decisions.
The Chair: But other than that, you are mute.
Mr Pautler: That's correct.
The Chair: Thank you very much for making your presentation today. I again wish to express my appreciation to your minister and to you for being here on short notice and for making this presentation as detailed and as exhaustive as you have been able to do. Thank you very much for your presentation and attending upon the committee. You are excused.
May I remind members of the committee who had circulated to your desk in the House the committee meeting notice for next week. I will just remind you that on Monday we are meeting at 3:30 pm, or 1530 if you choose metric. We will hear from Ms Clitheroe and then we will hear from Mr Farlinger. At 7 pm the meeting is likely to be closed as we begin the report writing. That will depend on how the afternoon unfolds. But clearly I'm conscious of the time frame the committee is running.
We will proceed then into Tuesday at 3:30, closed, to continue report writing.
Wednesday, 3:30, closed session to continue the report writing.
Thursday morning, I will remind you if you have your document, there was a slight error there, as Mr O'Toole has graciously invited us and reminded us, and we would not hesitate to accept that invitation and it would be inappropriate not to accept it. We will in fact be adjourning to Darlington in the morning.
In the afternoon we will meet in closed session to bring the report writing hopefully to a close, or very shortly to a close, and that will bring the week to an end.
Mr Kwinter: Mr Chairman, you have alleviated my concerns because I got the notice in the House and I noticed that Darlington had not been included. You have now corrected it. That was what I was going to raise.
The Chair: Then, sir, I am doing my duty and you, as a diligent vice-chairman, have kept me on track and I appreciate that.
The Chair: That's what happens with wealthy men. They let no small matter escape their attention, so I appreciate that. Thank you. Any other business?
Mr Kwinter: I leave no turn unstoned.
Mr Galt: I wasn't in the House and I didn't get a yellow copy. I just heard you say it was in closed session at 7. Somebody of the three delegations must be missing.
The Chair: The consortium, Dr Galt, was not able to be here on Monday and we have asked the consortium to provide us written documentation.
That now allows us to truncate the witness -- we complete witnesses on Monday and then this committee will go into its report writing.
Mr Conway: Before we take our leave, I really appreciate the speed with which Mr Gourley has supplied us with a copy of his October 28 letter. But I've got to tell you -- am I the only one? -- I read this letter, and I certainly am very appreciative of getting it, but the letter conveys a different tone than I got earlier from today's --
Mr O'Toole: It's a very firm memo.
Mr Conway: It's a much appreciated letter. Am I the only one who reads it that way?
The Chair: I have a sense that we will be returning to that next week as we consider our report. Is there any other business before the committee?
Mr Galt: Yes. A nice young man met me, when I left at noon, about working out a market in connection with rating agencies. Apparently Dominion Bond Rating Service has worked out a scenario for various nuclear plants. I'm wondering if we could obtain that from the agency. He was going to phone me this afternoon. I did not get a phone call --
The Chair: We'll make an inquiry. I'll ask the staff if they'll pursue that over the next --
Mr Galt: If we could get that from the rating agency, it would be very helpful.
The Chair: I'll ask the staff if they'll try to find that for us. Lewis, if you could at least investigate and ask --
Mr Galt: The Dominion bond company.
The Chair: I heard you, Dominion bond. We'll follow it up, Dr Galt.
Any other business before the committee? If not, the committee will stand adjourned until 3:30 pm imperial or 1530 metric on Monday, November 24.
The committee adjourned at 1758.