Wednesday 1 October 1997

Ministry of Environment and Energy

Ms Peter Fraser, senior adviser, electricity policy branch

Ms Cynthia Brandon, counsel, legal services branch


Chair / Président

Mr Derwyn Shea (High Park-Swansea PC)

Vice-Chair / Vice-Président

Mr Monte Kwinter (Wilson Heights L)

Mr Sean Conway (Renfrew North / -Nord L)

Mrs Barbara Fisher (Bruce PC)

Mr Doug Galt (Northumberland PC)

Mrs Helen Johns (Huron PC)

Mr Monte Kwinter (Wilson Heights L)

Mr Floyd Laughren (Nickel Belt ND)

Mr John R. O'Toole (Durham East / -Est PC)

Mr Derwyn Shea (High Park-Swansea PC)

Clerk / Greffière

Ms Donna Bryce

Staff / Personnel

Mr Lewis Yeager, research officer, Legislative Research Service

Ms Anne Marzalik, research officer, Legislative Research Service

Mr Adam Chamberlain, committee legal counsel

Mr Robert Power, committee legal counsel

Mr Richard Campbell, consultant

The committee met at 1620 in committee room 228, following a closed session.

The Chair (Mr Derwyn Shea): The committee is now in public session. I'll report out from the in camera meeting a decision by the committee. We have discussed terms of reference for both the consultants and our legal advisers, and it has been agreed by the committee that they leave the matter of finalizing the terms of reference and the rates to the Chair. That will be embraced in the budget that is finally presented to the committee for approval.


The Chair: We had agreed that the remainder of the time today, until 5 o'clock, would be spent discussing the Macdonald report. To that end, I'd ask the staff to come forward and continue with that briefing.

Mr Peter Fraser: My name is Peter Fraser. I'm the senior adviser on electricity restructuring, in the policy division of the ministry. This is my colleague Cynthia Brandon, who is a lawyer in our legal services branch.

As you said, Mr Chairman, I'm here to talk about the report of the Advisory Committee on Competition in Ontario's Electricity System. I understand that a copy of the report, A Framework for Competition, has been made available to you. In the time today, I'd just like to go over terms of reference the government set up for the report and also summarize highlights of that report. Of course I'd be available for questions at any point during my presentation or after, whatever you prefer.

To start by just going over those terms of reference, which are included in your copies of the report, the committee was chaired by the Honourable Donald S. Macdonald, set up in November 1995. It had terms of reference, which are in appendix A, I believe. I'll just go over the highlights of those terms of reference.

The first point was to examine economic, technological and public policy trends facing Ontario Hydro and the provincial electricity system and the existing barriers to change. I have a point of clarification as to what those were about.

"Economic" was referring particularly to the need for competitive electricity rates.

"Technological" was referring first and foremost to the amazing amount of technological change that has been occurring in the electricity generation sector, making possible more economic and smaller-scale electricity generation, particularly fuelled by natural gas, than had been available a few years before.

On the third, public policy trends, I'd just point out that a number of jurisdictions around the world have been restructuring their electricity systems. The UK is the most often cited example, but also Scandinavia, Norway, Sweden, Finland, Australia -- all six Australian states -- are now in the process of restructuring their systems; New Zealand; a number of countries in eastern Europe as well; and the European Union will be opening up their system to competition beginning in 1999. That will give you a sense of the kinds of changes that are going on around the world.

The second main point was to make recommendations on structural legislation and potentially ownership reforms required to ensure that Ontario Hydro and the provincial electricity system are poised to meet the competitive challenges of the 21st century. That was very much in light of those trends going on. In coming up with those recommendations, the committee was asked to investigate and assess options for enhancing competition in the electricity system in the following areas: first of all, to look for structural change options, including what's called the unbundling of Ontario Hydro, or separating its generation business from its transmission business and distribution business and energy services businesses; introducing competition in electricity supply; enhancing efficiency in the distribution sector; the appropriate regulatory framework to encourage a competitive electricity market; to look at the relative benefits and consequences of options for introducing private equity as a means of enhancing competition, including the sale of Ontario Hydro's non-essential business operations or its generating assets.

The committee, in assessing models for reform, was asked to look at potential impacts with respect to rates and how they affected all customer classes, or rate equity; increasing economic efficiency; impacts on power system reliability and the obligation to serve; economic competitiveness and regional economic impacts; the implications for public finance, including public sector debt and provincial and municipal government revenues; first nations and aboriginal issues; electricity trade and energy security; the arrangements for nuclear power -- which was a pretty open-ended look at anything from the structure of the nuclear division to decommissioning and fuel waste disposal; local accountability; sustainable development. They had to consult broadly through public forums and written submissions and deliver the final report to the minister by April 30.

To quickly go through the process they actually went through, in December they released a working paper for discussion and invited comments and submissions. They received over 200 submissions from stakeholders -- about half were made by municipal utilities -- on those issues. They held six public meetings in Guelph, Toronto, Peterborough, Sudbury, Thunder Bay and London to solicit public comment. They also met with a number of interested parties privately, and they commissioned consultants to assist the committee on a number of issues. Those reports are available to this committee if they are interested. The committee submitted its report in early May 1996, and the report, A Framework for Competition, was released in June.

If I could just give you some of the highlights or key design features of the committee's proposal to introduce competition in Ontario's electricity system: proposing to move away from a public monopoly system to one based on competition, one where publicly owned generators are acting as commercial companies competing under the same terms in terms of selling electricity, in terms of raising capital to build new plants or paying taxes as private companies; Ontario Hydro Retail and municipal utilities would be reorganized and merged to create approximately 50 county or regional distribution companies; there would be a competitive electricity market at the wholesale level and a publicly owned electricity exchange to manage the financial trading of electricity; municipal utilities, customers, agents, brokers, marketers would be able to buy power from generators, either inside or outside the province, or from the spot market established by the exchange; there would be open access to the transmission system; there would be a separate, regulated monopoly, with a postage-stamp rate for all customers, meaning that the rate for customers would not vary and would be the same regardless of location within the province; there would be a publicly owned system operator to ensure that the system continued to operate reliably. Those were the structural changes.

They also recommended a number of changes to the regulation of the electricity system. Currently, as you know, Ontario Hydro's board of directors has a responsibility to set wholesale electricity rates and also to approve the rates of municipal utilities. Under this system, the Ontario Energy Board would become an electricity regulator, with a comprehensive mandate to regulate the rates of the transmission and distribution monopolies. They would have an interim responsibility to regulate the price of generation until that market became competitive. They would have to regulate the independent system operator to make sure it was doing its business efficiently. Finally, it would have oversight of the rules for the competitive wholesale market to make sure they were truly fair to all market participants.

They would also have a role in commenting on the competitive structure of the generation business, whether one company had too much influence over prices in that market; and they would complement the role the federal competition bureau plays under the Competition Act in that respect. The regulator would also have the responsibility for approving special changes, including subsidies to rural areas, through charges on the transmission system or using other mechanisms.


Finally, in the area of ownership, the committee did recommend divesting some major assets after the market and the independent regulator were established. Also, they made it very clear that regardless of public or private ownership, there should be a commercial level playing field for access, for dividends that a publicly owned company would pay, the taxes they would pay; and the regulation that would fall under would be the same as a privately owned firm.

The final part of the report was a proposal on how to phase in competition. The committee recognized that competition could not come all at once but recommended a staged phasing. The first phase they call vertical unbundling. They meant that they would separate Ontario Hydro's generation and transmission business into separate companies and divest Ontario Hydro International.

In the second phase, once the legislation had been passed, they would establish commercial public generating companies, establish a level playing field between public and private companies. They would create a financial holding company called the Ontario Hydro Acceptance Corp for the excess debt that those commercial companies could not carry in a competitive market. They would establish an independent electricity exchange, also the legal framework for the new regulator, and they would also reorganize the municipal utilities, Ontario Hydro Retail, into the 50 county or regional distributors.

After that had been done, in their third phase they would begin the wholesale market. They would begin access. Municipal utilities would be able to chose the supplier of electricity, and the large electricity customers of Ontario Hydro and the municipal utilities would also be able to chose. The regulator would have oversight over the market rules. Once that is up and running, they suggested that divestiture of major assets of Hydro should occur.

Finally, they suggested in the long run all customers should have choice.

They did not set out an explicit time frame for those steps but they implied that the wholesale market could be started as soon as 1999.

That's my presentation on this report. I'd be happy to take any questions anyone may have.

The Chair: All right. Who wants to start off?

Mr Adam Chamberlain: I just have a few simple questions, I believe. The first one would be, what authority does the Ministry of Environment and Energy have to regulate Ontario Hydro?

Ms Cynthia Brandon: Could you be a little more specific when you say "regulate" Ontario Hydro?

Mr Chamberlain: Simply put, does the ministry itself regulate Ontario Hydro?

Ms Brandon: So you're not asking with reference to whatever Macdonald was proposing?

Mr Chamberlain: No.

Ms Brandon: As the ministry addressed yesterday, with respect to the overall structure of Ontario Hydro and the government and the Power Corporation Act, Ontario Hydro's board of directors is appointed by the Lieutenant Governor in Council.

Mr Doug Galt (Northumberland): Mr Chair, I think this is out of order. This was discussed very thoroughly yesterday.

The Chair: Mr Galt, it was an area that the committee had asked.

Mr Galt: It was walked through quite carefully by staff yesterday.

The Chair: You weren't here, but there was a question raised in the closed session just before we began today asking that we get something on the record. We did go through it. All the committee members wanted to have this on the record, the question and the answer; that's all.

Mr Chamberlain: I'm asking a very simple question that I think has a very simple answer. I understand your points about the appointment of board members. The question is, though, is there regulatory power in the Ministry of Environment and Energy over Ontario Hydro, aside from what you've already discussed?

Ms Brandon: Aside from what was discussed yesterday, no; I believe we touched on it. There are all the activities that were outlined yesterday that require approval by the Lieutenant Governor in Council. We also touched upon the fact that the electricity rates set by Hydro are not regulated but are determined by Hydro. I guess it depends on what you mean by "regulate." If you mean regulate like the OEB regulates gas, the answer is no, the government doesn't play a role that way. If you mean regulate as in, are there controls over Ontario Hydro, then I would say yes, and that was what I think we outlined yesterday. I guess it depends on what you mean by "regulate."

Mr Chamberlain: I think what I mean by "regulate" is more what you're talking about with respect to OEB and gas.

Ms Brandon: Okay. There is not a relationship between the government and Ontario Hydro, I would say, that is comparable to the relationship between the OEB and the gas industry.

Mr Chamberlain: Are there are any other provincial authorities in Ontario with that regulatory authority over Ontario Hydro?

Ms Brandon: The AECB has authority.

Mr Chamberlain: That's a federal body.

Ms Brandon: Oh, provincial. I'm sorry. I should have been clear, actually. There is the Environmental Protection Act, of course. There is a number of different pieces of legislation that Ontario Hydro would comply with in its activities, under which it would seek approvals, so it would be regulated in that sense, as is any other corporation in the province.

Mr Chamberlain: But in terms of specific regulatory authority, that which I was describing with respect to the Ministry of Environment and Energy, I suppose your answer is the same as it was for the Ministry of Environment and Energy. Simply put, if the Ministry of Environment and Energy does not have the power to regulate Ontario Hydro, do any other provincial authorities have that regulatory power?

Ms Brandon: Regulate which activities of Ontario Hydro?

Mr Chamberlain: I mean it in terms of the way in which I just described the Ontario Energy Board dealing with gas, for instance.

Ms Brandon: To the extent that the Ontario Energy Board regulates the gas industry with respect to licensing, with respect to approvals to build transmission, yes, there the Ontario government needs to give LGIC approval for Hydro to undertake building and acquiring lands and things like that, so there's a little bit of comparability there. But I think you're going to rates. I'm guessing here, but if that is what you're going to, I would agree there is no provincial agency that plays that comparable role.

Mrs Barbara Fisher (Bruce): I guess this is a follow-up on a question I started yesterday and was having difficulties getting a clear answer on, and I still am not very clear. I don't mean to be rude by saying that, but I will ask it again.

What I and I think others are trying to establish is, what is the role between the Ministry of Energy and Ontario Hydro? Where does the decision-making capacity begin and end? If the Ministry of Energy, through the minister's office, delivers on policy change to Ontario Hydro and to the electricity provision in the province of Ontario, who makes that decision? Clearly, what I think we want to ask is, does the Ministry of Energy have any jurisdiction over the decision-making capacity of the board of directors of Ontario Hydro? When a government decides it wants to have a change in policy as it relates to energy policy for the province that day and thereafter, how does it get into Ontario Hydro to convey that policy direction change, and does it have any legal authority to do so? That's what I was after yesterday, and I think we're back there.

Ms Brandon: If it's okay with the committee, Peter, as a member of the electricity policy branch, will address the question, and if I can supplement at all, I will.

Mr Fraser: I wasn't here yesterday but I'll just give an example, one I was involved with, which is the current government's five-year freeze on electricity rates. That was a cabinet decision, and that was formally conveyed to the Ontario Hydro board by means of a letter from the minister to the chair of Ontario Hydro. A letter from the minister to the chair of Ontario Hydro does not have statutory authority. The rate-setting power is under the Ontario Hydro board of directors, but they do take due regard of government policy in that way, as Cynthia can no doubt elaborate. The government does have a more formal statutory power, called a policy directive, under section 10 of the Power Corporation Act. It did not use that power to do that.


The Chair: Let me remind the committee that we did say we would begin by getting something on the record, but we are here for briefings on the Macdonald report, so I'd like us to get our questioning focused around the Macdonald report.

Mr Floyd Laughren (Nickel Belt): I think this is interesting. I do think it needs to be out there that Hydro basically sets its rates, the Ontario Energy Board says aye or nay and recommends a different rate, and then the Hydro board statutorily, I believe, can ignore or not the Ontario Energy Board's recommendations. I appreciated your comments about the letter to Hydro from cabinet, probably the Premier. I'm not sure who it would come from. I can remember this happening too in government.

We shouldn't kid ourselves. The entire Hydro board is appointed by Lieutenant Governor in Council, right? I think every single one of them is. So any Hydro board that ignored a directive of the government -- it would be a very strange scenario. I suppose it could happen, but I don't know how long they'd be there. I appreciated the directness of the answer.

I don't know what control anybody has over Ontario Hydro. I don't know. Maybe AECB does, in terms of safety and so forth. I don't know who has any other kind of control over Hydro. What am I missing? Other than AECB, which is a federal agency, does anybody in the province have any statutory control over Ontario Hydro?

Ms Brandon: As I've earlier noted, there are, for example, Ontario Hydro's requirements to comply with the Environmental Protection Act. That's all control over their activities. But in terms of control of activities that I believe you're referring to, control would be through the order-in-council process. If it's a matter that requires order-in-council approval, that matter has to be brought before cabinet and cabinet may approve or not approve the proposed activity.

The Chair: I don't want to belabour it. I think, frankly, the committee has had enough time on this one. It's on the record. I think we've dealt with it. There will be other places in the hearings to visit this again. We've now had an opportunity to hear from both sides of the committee. I would like us to turn our attention to questioning on the presentation made on Macdonald.

Mr Sean G. Conway (Renfrew North): It has been a while since I've read the Macdonald report, but I was refreshing myself in preparation for today. The question I have for you may be a little unfair to ask you, but I would like to, since you are senior policy adviser on these matters.

The Macdonald report and much of the literature around the electricity today focuses almost entirely on "the market" and on this commodity that is important. I think we all accept that. When I look at the Macdonald report it talks about a variety of options.

One of the things that really strikes me is that there seems to be little or no consideration, in Macdonald and much of the rest of this debate, quite frankly, about what once was a very, very major part of the policy debate in this province and country, namely, the strategic importance of electricity. I want you to comment on this with particular reference to Macdonald, as you understand it.

We live next door to the only superpower left. One of the things that always strikes me about the American political debate is the overwhelming, almost obsessive, interest in oil. Oil is a commodity that has a hell of a lot more to do with than just energy. If you read the front page of today's New York Times, for example, are they upset about what the French are doing in the Middle East. Why? Because the Middle East is so fundamentally important to that oil patch.

I come back to Macdonald. I keep reading this stuff. There is no strategic importance, apparently, left to electricity. We are big piece of real estate that is very cold for six months of the year. I wondered if you agree with me that there didn't seem to be much in the Macdonald report about what I will call the strategic importance, to past governments and business and labour leaderships in this province and country, about electricity and what it means in a country this big, this empty and this cold for four or five or six months of the year. Has that ingredient just dropped out of the equation entirely?

Mr Fraser: In the context of the Macdonald report, I don't recall reading anything that was put quite that way. They certainly were concerned about security of supply and also continuation of a reliable supply. On the evidence of electricity markets that have opened elsewhere, there has been both a surge in the development of new generating stations and day-to-day reliability has been maintained or in some cases improved.

In terms of the issue of electricity as a long-term strategic asset, I would agree with you on the Macdonald report, that that's much more on the issue of competitive price rather than a competitive asset.

Mr Conway: Would I be right in stating that historically in the province of Ontario politicians and community leaders have generally looked at electricity, particularly the electricity commodity, as being important not just for its economic ingredient but also for some of the attendant political and social factors? For example, if you don't have electricity in Nickel Belt in the middle of winter, it's rather different from not having electricity in the Mississippi delta in the middle of winter.

Mr Fraser: No. In that case, it's not having it in the middle of summer there, where their electricity load peaks.

Mr Conway: But you could survive in the delta in the summer without electricity.

Mr Fraser: A lot of people die in summer heat waves.

Mr Conway: Actually, they died in Chicago.

Mr Fraser: That's right. But I take your point about the security of supply. There is an underlying assumption that a market will encourage other people to invest in the electricity business. As I said earlier, the limited experience in other jurisdictions to date does indicate that people are willing to come in and build new plants because they see an opportunity to generate electricity more cheaply.

Mr Conway: Macdonald talks about privatization of a lot of the assets. As I recall, he talks about privatizing most of the hydro-electric assets save and except Niagara Falls. One of the questions that struck me in this report is that one of the most interesting and difficult issues facing previous legislatures and governments in this province was developing the interprovincial power in my part of eastern Ontario along the Ottawa River, and certainly the international power along the St Lawrence. I read Macdonald and I don't get the sense that -- it's just not an issue any more.

I just wondered whether I was the only one who thought, for example, living on the Quebec border as I do, that the Ottawa River plants -- one of the anchors is Ontario and the other anchor is in Quebec. I thought to myself, any disposition of the hydro-electric assets on the Ottawa River I presume would attract the interest of Quebec City. I have a feeling that the government of Quebec would have a real interest in the disposition of those assets. In fact, I have a feeling that a lot of the people I represent, in their more private moments, might be a little interested and concerned about the disposition of those assets, one half of which is anchored in the province of Quebec. Am I just some kind of oddball Cassandra who thinks these thoughts and no one else imagines them?

Mr Laughren: That's true, but it hasn't anything to do with the question.

The Chair: Hansard will strike that comment.

Mr Conway: Those assets didn't develop easily or overnight, I guess is what I'm saying.

Mr Fraser: As you say, when there is an asset straddling a border, that's something that has to be recognized in terms of any possible changes in its ownership, regardless of who owns it today.

Mr Conway: Would you share any concern I might have about the fact that in Macdonald there is no evident concern that that might even be an issue?

Mr Fraser: I don't know. You would really have to ask Mr Macdonald about that.


Mr Laughren: One of the things that puzzled me about Macdonald -- and maybe I missed something in his pitch -- when he suggested separating out the nuclear units and operating individually, almost competitively, separate from the fossils and from hydraulics and so forth, was that I always thought one of the good things about Hydro was the blended price. It's a lot more expensive to produce nuclear than hydraulic, obviously. How in the world would you do that? How would it work if you didn't have that blended price? If you didn't, if you said, "Oh, I can still have a blended price," then what's the sense of doing the separation?

Mr Fraser: In principle, what you'd find is that you have hydro-electric assets which produce power very cheaply right now and the nuclear ones are very expensive. The expectation of the advisory committee was that prices would drop below the level at which the nuclear plants are producing power today; the price on the market would be lower than today. Even though you had your hydro-electric assets making money, basically your nuclear plants would not, but the price to the customer would actually be lower than what they would be paying today, as low or lower.

Mr Laughren: But where would the supply come from? Wouldn't the nuclear plants still be operating?

Mr Fraser: In the report they recognize -- the problem with the nuclear plants, in their analysis, was mainly that they cost too much to build and they were carrying more debt than they could sustain in a competitive market. That's why they had this stranded assets chart.

Mr Laughren: Oh, I see. If they got rid of the debt, they could compete.

Mr Fraser: If they got rid of the debt, they could compete in that market at that price. I think they used a generation price of three cents a kilowatt-hour.

Mr Monte Kwinter (Wilson Heights): Mr Fraser, I wonder if you could give me your interpretation. The main purpose of the Macdonald report really was to take a look at the competitive aspects of Ontario Hydro. Some people equate that with privatization, but that isn't necessarily so. Their mandate was to look at the competitive aspects of Hydro.

My interpretation of "competitive" is that if equal to or lower than the cheapest hydro available, you're competitive; if you're more, you're not competitive. Where I have a problem with the Macdonald report, and I'm having difficulty getting around it, is that they say:

"An important step is to identify and remove the legislative and other barriers so that all participants, public or private, face the same external costs and operate under the same set of rules. Ontario Hydro's preferential access to capital markets by virtue of the provincial debt guarantee and its tax-exempt or tax-reduction privileges compared with privately owned utilities are major obstacles to achieving a level playing field in the electricity industry in Ontario."

They're saying: "Ontario Hydro is far more competitive than we are because they have all these advantages. The have the government guaranteeing its debt. They don't pay tax. They have all these things. We want that removed so that we have a level playing field." A level playing field isn't necessarily a competitive field, it's just level; everybody rises to whatever the true cost is. Yet we're talking about competitiveness. I don't quite understand how that equates.

My colleague was talking about how energy and electricity are very important competitive components when attracting industry, and Macdonald talks about it often. Yet the recommendation is that these things should be removed so that it will find its own level, which invariably, if he's critical of the fact that Ontario Hydro has all these benefits, should raise the price of electricity. Do you have any comments on that?

Mr Fraser: I think what the committee assumed was that making the power market open to, say, surplus supplies, initially from other jurisdictions, from the US or from Quebec or Manitoba, would all help depress the price. Even though publicly owned generating companies would now face these additional burdens, they would be more than offset by the influx of this cheaper generation, so that would force them to lower their prices to below today's levels. That's how they came up with their forecast of three cents.

There is market trading going on right now in the US, in the region just west to us. It's a relatively small market, but the prices there are, in Canadian cents, in the two-and-a-half-to-three-cent range. So it doesn't seem to be that unreasonable to assume.

Mr Conway: But that's the Ohio coal market too, right?

Mr Fraser: Right.

The Chair: There are no other questions? Thank you very much, Mr Fraser. Thank you very much, Ms Brandon. We appreciate your appearing before the committee.

Before the committee goes, Mr Galt has asked that the committee go in camera for a moment. I'd ask committee members to please stand by. The others may leave the room. In the meantime, formally the committee will be adjourned until Monday at 3:30 pm. We will begin then the deputation from Ontario Hydro.

The committee continued in closed session at 1656.