ENERGY COMPETITION ACT, 1998 LOI DE 1998 SUR LA CONCURRENCE DANS LE SECTEUR DE L'ÉNERGIE
PELHAM HYDRO-ELECTRIC COMMISSION
ONTARIO HYDRO CENTRAL MARKET OPERATIONS
CANADIAN UNION OF PUBLIC EMPLOYEES, ONTARIO DIVISION
CONTENTS
Wednesday 19 August 1998
Energy Competition Act, 1998, Bill 35, Mr Wilson /
Loi de 1998 sur la concurrence dans le secteur de l'énergie,
projet de loi 35, M. Wilson
City of Mississauga
Mr Dave O'Brien
Pelham Hydro-Electric Commission
Mr Brian Walker
Hydro Mississauga
Mr Karl Wahl
Ontario Hydro Central Market Operations
Mr David Goulding
Mr E.W. Browne
New York Mercantile Exchange
Ms Deniese Palmer-Huggins
Energy Probe
Mr Tom Adams
Mr Mark Mattson
Mr Norman Rubin
Citizens for Renewable Energy
Mr Siegfried Kleinau
Canadian Union of Public Employees, Ontario Division
Mr Sid Ryan
Ontario Medical Association
Dr John Gray
Dr Ted Boadway
STANDING COMMITTEE ON RESOURCES DEVELOPMENT
Chair / Présidente
Mrs Brenda Elliott (Guelph PC)
Vice-Chair / Vice-Président
Mr Peter L. Preston (Brant-Haldimand PC)
Mr David Christopherson (Hamilton Centre / -Centre ND)
Mr Ted Chudleigh (Halton North / -Nord PC)
Mr Sean G. Conway (Renfrew North / -Nord L)
Mrs Brenda Elliott (Guelph PC)
Mr Doug Galt (Northumberland PC)
Mr John Hastings (Etobicoke-Rexdale PC)
Mr Pat Hoy (Essex-Kent L)
Mr Bart Maves (Niagara Falls PC)
Mr Peter L. Preston (Brant-Haldimand PC)
Substitutions / Membres remplaçants
Mr John R. Baird (Nepean PC)
Mr Steve Gilchrist (Scarborough East / -Est PC)
Mrs Helen Johns (Huron PC)
Mr Monte Kwinter (Wilson Heights L)
Mr Wayne Lessard (Windsor-Riverside ND)
Clerk pro tem / Greffier par intérim
Mr Tom Prins
Staff / Personnel
Mr Lewis Yeager, research officer, Legislative Research Service
The committee met at 1301 in the Novotel Hotel, Mississauga.
ENERGY COMPETITION ACT, 1998 LOI DE 1998 SUR LA CONCURRENCE DANS LE SECTEUR DE L'ÉNERGIE
Consideration of Bill 35, An Act to create jobs and protect consumers by promoting low-cost energy through competition, to protect the environment, to provide for pensions and to make related amendments to certain Acts / Projet de loi 35, Loi visant à créer des emplois et à protéger les consommateurs en favorisant le bas prix de l'énergie au moyen de la concurrence, protégeant l'environnement, traitant de pensions et apportant des modifications connexes à certaines lois.
CITY OF MISSISSAUGA
The Chair (Mrs Brenda Elliott): Good afternoon, everyone. The standing committee on resources development is called to order for the purposes of receiving submissions on Bill 35. Our first presenters this afternoon are representatives from the city of Mississauga. Welcome to the committee. As you begin, please introduce yourself. You have 30 minutes for presentation time. Committee members are always happy when they have time for questions.
Mr Dave O'Brien: Thank you very much, Madam Chair. My name is Dave O'Brien and I'm the city manager of the city of Mississauga. Let me first apologize for the fact that Hazel's not here. Steve, she sends her best.
Mr Steve Gilchrist (Scarborough East): I'm not laughing.
Mr O'Brien: Hazel's out of town, unfortunately, and would have very much liked to be here and asked that I fill in for her.
We've handed out a submission that I think all the members have. I don't propose to read it. I'm going to touch on a few points and try and entertain questions, which I think might be a little more pertinent.
The three points Mississauga would like to touch on are, first, the concerns we have with the legislation with respect to the potential of depleting the value of our asset; second, whether the legislation will potentially reduce our revenue or obligate us to make payments from which we are presently exempt; third, that the impact of the proposed changes are not really understood by the public, by the consumers. I'd like to take perhaps 10 or 15 minutes and touch on each of those, and then we can have some questions.
Having said that as an introduction, I'd like to say up front that we generally support the changes that are proposed in the legislation, particularly that the interests of the consumer will be respected. That's a theme that seems to run through the legislation and we hope that is in fact the case when all is said and done. We in Mississauga, as I'm sure my friends from Hydro Mississauga will tell you when we speak, have the lowest rates of any hydro utility in this province and we use our hydro company and those subsequent rates to ensure that we can attract and maintain industries and manufacturing establishments in our community.
The first thing I'd like to touch on is hydro as an asset. You will have probably heard from many speakers to date and will hear in the future in your submissions that there is a general concern about the stranded debt and how it is to be dealt with. We are very concerned that the stranded debt be transparent and as easily understood as possible as it's being allocated across the province.
We feel that the OEB should have a role in ensuring the fairness of the allocation of the debt. Hydro Mississauga works on a very low margin, and debt transfer is going to have a significant impact on the consumer and on our ability to compete in the future. That's the first point with respect to the asset and the impact of the legislation on the asset from a debt point of view.
The second thing we're concerned about with respect to our asset is that the legislation seems to imply that the competition will have access to our consumer base. We feel this is wrong, and we feel it's wrong because it will allow the competition to pick off the best high-use customers, leaving the local utilities with the customers that are less profitable, if you want. One of the ways we keep our rates low in Hydro Mississauga is that we, as I believe most utilities do, pool the good ones and the bad ones. That allows us to keep the market fairly flat. If you allow the good ones to be picked off, inevitably the rates will increase.
We also have a process in many utilities in Ontario, in their relationship with the municipality, where there is a cross-subsidization of our businesses, not that we give each other money, but that we operate by sharing overhead duties. For instance, it's not uncommon for a common accounting system to be in place, a common human resources system, a common IT system. You'll find that in many utilities, particularly in the smaller communities across Ontario.
If the legislation does not allow this to continue or it allows it to continue in one sector which could be a competitor and not in the present circumstances, we feel that would be a detriment to Hydro Mississauga's ability to operate in the fashion that it has and also for the customers, who are inevitably taxpayers, to continue to enjoy the low rates we've put forward.
The second point I'd like to address is the financial issues. The approach that's being proposed to debt retirement will undoubtedly, unless it's managed properly, have an impact on the rates. The proposed legislation has to be very careful in allocating the stranded debt across the various utilities in the province. There is no doubt that the debt has to be retired, that's not an argument, and there's no doubt that the proposed way of doing it is probably as good a method as you're going to get. The problem is that defining and allocating that debt, first to the two operating arms of the newly created hydro companies, has got to be such that a fair amount of that debt is placed there and it's not passed back on to the local utilities which in turn are going to have to pass it back on to the consumer, or whatever becomes of the local utilities, whether they're sold or not.
We are concerned, and you will hear this from AMO tomorrow, that one of the options to retire the debt is to grab any increases in payments in lieu of taxes and allocate them towards the repayment of the debt. We feel that payments in lieu of taxes from Ontario Hydro and the utilities is one of the few ways that municipalities have access to tax revenue in areas where we can't tax, and to skim off -- and I use that not in a derogatory way -- the additional revenue we think is incorrect.
We have a concern about the proposed legislation and the implications of a transfer tax if the utility is sold after the two-year window. In some cases it may take longer than two years to determine whether the asset will be sold, if in fact it is sold, once it is created as a corporation under the business corporations legislation. If there are additional transfer taxes required at the point of sale, it is our feeling that those will come back inevitably to be added to the overall rate to ensure that whoever purchases the company, or whatever business arrangement is made, can recover those costs.
We believe that there should be a one-time, forever exemption from transfer tax or any other additional taxes that are required, that the municipality would have to pay as it disposes of all or part of the asset. In subsequent purchases and sales, whatever happens with the balance of the asset, if the municipality only sells part of it, or if the new owner later on sells the company to another company, then of course those taxes can apply.
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The third point I'd like to make is that we are not convinced -- and I don't know quite frankly how you're going to do this, but I think the committee should spend some time discussing this prior to introducing the final amendments to the legislation in the fall. This change that is being proposed, albeit good from a business point of view -- we support that and I think you'll find many people do -- is a change to a very fundamental service that the public in this province has grown accustomed to. Hydro is something like water. It's the kind of thing that people hold near and dear to them. It's the kind of service they expect often to be provided by their public sector municipality or offshoot of the municipality. When you start releasing these kinds of very important, very dear services into the realm of the private sector, for whatever reason, be it competition or for monetary gain, you have to, we believe, be very careful in ensuring that the public understands what's going on and why it's going on.
If you put it in perspective, there is a very good possibility that when all is said and done, when the local municipal utilities have been created into businesses and purchases start taking place, be they complete purchase of the asset or partial purchase of the asset, it would not surprise me to have a number of large US firms involved in those purchases. You have to think of the situation that might ensue when you have a local utility that for 100-plus years has been owned by the local municipality, ie, the local taxpayers, now suddenly owned by an American corporation and the implications of that.
I don't mean to say that American corporations are bad. They are very well run businesses in many cases. But just think of the implications of that, think of the sense that would create in the eyes of the public. We feel it's very important that the committee and the government pay very close attention to how these assets are going to be put into play, so to speak.
We think that perhaps the energy board may be an agency that could be used to have a great deal of influence on the way this thing unfolds. We feel it takes it away from government per se and puts it in the hands of a more independent agency.
Finally, before I stop, we feel it is important that the regulations, when they are being developed, be done in concert and in full consultation with the Market Design Committee. The Market Design Committee is the representative of just about every interest group possible with respect to the energy sector. We feel it's important that the regulations -- which after all, when all is said and done, will be the piece of legislation that really makes this thing work or not.
When I was involved with the discussions with the Urban Development Institute and the government on the changes to the Development Charges Act a few months ago, Mr Leach allowed the industry, the Urban Development Institute and a number of representatives from the municipal sector -- I happened to be one of them, fortunately -- to sit down and work out with the ministry staff the actual regulations that ultimately were put in place. Although we had our moments, we feel that in the end we got a piece of regulation that we were all able to work with. If we had concerns about it, we were able to voice them to each other in the privacy of a meeting, as opposed to an Ontario Municipal Board hearing or other such public agency. So there is some benefit to be gained, we feel, in allowing the ultimate users of the industry or players in the industry, if you want, and we think they're represented by the Market Design Committee, to have some input into the development of the regulations.
With that, I'll stop and open it up for questions.
The Chair: Thank you very much. Five minutes for each caucus for questions; we begin with the government caucus.
Mr Gilchrist: I'd be happy to start. Thank you, Dave. Good to see you again. Even without Hazel, as usual you did a fine job of presenting the case for Mississauga. I think it is appropriate that we are holding one of our days of hearings here. You do have the lowest rates in the province. I think that's something that hopefully the other MEUs will give some consideration to at the same time they're considering the impact of Bill 35: precisely why there is such a huge variance of Hydro rates when you hit Etobicoke Creek.
You raised a couple of concerns. Let's flesh them out, if we can, a little bit more. First off, I think we can assure you that the process for determining the stranded debt will be very transparent. It will be easily confirmed. I don't think there is any sense that this is going to be something done in secrecy. Obviously, there will be a mathematical calculation that will support whatever number is selected. I hope that not just the OEB but anyone else involved would offer their thoughts if they think there have been any missteps along that way. We're getting that counsel right now. We've had a number of groups that have given us some suggestions on how to determine it and I'm sure the Minister of Finance has taken that into account.
You raise the point about taxation and PILs in particular. I tried to read your entire brief and listen to you at the same time, but I don't see it in here. You are aware that it's only the increase in generating and wires; that you still have complete ability to tax any administrative building or office building as you would tax any other office building. There is no deviation there from your standard practices. You're still getting the $86.11 per square metre that has already been the accepted norm for a number of years. I don't know if Mississauga has taken exception to that at any point, but few, if any, have. That seemed to be seen as a fair amount to date.
I want to give you this assurance and then I'd like your response whether you still have concerns. Whether that or any of the other five or six taxation options are used, individually or jointly, to pay down the stranded debt, every dollar that is collected in that case -- let's say that is one that's chosen -- would go towards paying down the stranded debt, would therefore offset the cost of electricity supplied by Hydro, would therefore come back to presumably benefit your consumers by having lower rates. Currently 40% of every dollar you're paying goes towards that debt servicing of Hydro. If we take a chunk of that off and pay for it some other way, and there cannot and will not be an increase in costs attributable to that, would you still have the same reservations? Or is it simply that you want confirmation that that sort of accounting does guarantee that if the PILs go up, the cost of Hydro goes down?
Mr O'Brien: Mr Gilchrist, the assurance we're looking for is probably twofold, that as you mentioned one would offset the other. But there continues to be a concern in the municipal sector, and you will hear it from most municipalities that will make a presentation to this committee, that the payments in lieu of taxes, whether they are the base -- and I agree with you and I accept and understand that the base PILs being received by municipalities now for Ontario Hydro and the local utilities will continue. We hope that is in fact the case. I have to accept that it is. We would stress the point: Please make sure that you ensure it's the case.
Beyond that, the additional PILs are something -- municipalities are concerned that the government has come to the PIL table or the PIL payment as a source of revenue to retire Ontario Hydro debt. Municipalities' sources of revenue these days are so tightly constrained that if there was an opportunity to get more PILs out of a new business, it would be to our advantage. We are concerned that they are being taken away and used to retire debt. I accept the fact and know clearly that every time I pay a Hydro bill at my house a portion of that is paying off Ontario Hydro debt. Definitely, we know that. But given the fact that our sources of revenue in the municipal sector are so confined, today more than ever, we do not accept the fact that the additional PILs should be used to pay off debt.
Unfortunately, I can't give you another source to do that, because your next logical question would say, "Where would you get the money from?" I can't answer that. But I challenge the committee and the government to look around and see if there's another way, because I really think it's difficult for the municipal sector to have to give up those PILs. I hope I didn't steal your question.
Mrs Helen Johns (Huron): No. Thank you for that answer. We appreciate that. All of the choices are always difficult when you have $30 billion in debt and you're looking for some way to pay it off, there is no question about that.
You're the first presenter who has been in to see us who has talked about the two-year window. Many private sector businesses of course have come in and said: "This is not a level playing field. Come on. For two years they can transfer these assets and pay no tax, whereas if we have to buy them we have to pay tax." We're hearing the other side of the argument today, and I suppose if you were on the private sector side, you probably be arguing the other side, or I would like to believe you would be.
How can we maintain a level playing field if we do what you ask and say, "Hydro Mississauga, you can sell these assets out 10, 12, 15 years"? How does that level playing field, which is very important to attract business into this marketplace -- how do they even think about coming in then?
Mr O'Brien: I think that the assets of the hydro utilities in this province, which are assets of the municipalities because we own them, are such that the private sector agencies that are wanting to come in and purchase these assets are going to be more than willing, more than eager to pay what it takes because I think they see a huge market downstream.
From our point of view, one of the things we have to try and maintain when we create our private hydro companies, as municipalities, is our client base. We have to be absolutely certain that we don't do anything to throw off the very sensitive balance that we've created with respect to our base.
With respect to Hydro Mississauga, our margins are very narrow. We don't make a lot of money and put it in our pocket. We put it back into our business. As you start throwing more costs at trying to -- not even trying to. We have to create this new business come January. As you load it more and more with costs, the potential to lose that very delicate balance is created. We are very concerned about that.
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Mrs Johns: Wouldn't that probably be a windfall, as opposed to a cost?
Mr O'Brien: Listen, the municipalities will make money out of these sales, there's no question about it. But we will not be able to make those decisions lightly. The decision to sell your hydro utility, once it's created into a business, is probably the single most important business decision a municipality will ever make.
In the case of Hydro Mississauga, our asset is worth in excess of half a billion dollars. That's an awful lot of money. We don't make many half-billion dollar decisions in our lives as municipalities. You can't make those decisions on a purely business sense. You have to make them in the context of how that decision affects your constituents, the taxpayers.
Our taxpayers in Mississauga have become very accustomed to a rate that's very low. Our businesses have become accustomed to a rate that's very low. We attract businesses to our community because we keep our rates in pretty good shape. When you start fooling around with that, you open it up for all kinds of things -- criticism from the public with respect to your selling an asset that's very near and dear to their heart, potentially increased rates to the residents, potentially increased rates to the businesses and potentially putting yourself in a less competitive position in the marketplace to bring business to your community. So all of those things come into the decision. If it was a straight business --
The Chair: I'm sorry, I'm going to have to interrupt because we should move to Mr Conway.
Mr Sean G. Conway (Renfrew North): Thank you very much, Mr O'Brien. I appreciate your very helpful testimony today.
I want to touch on two areas, the second first: consumer education. You make a very strong argument that for the broad base of the public out there, they're not yet very aware what changes are around the corner and how they might affect the individual customer here in Mississauga or anywhere else in the province. Do you want to just expand on that point? What kind of public education or consumer education programs might in your considered opinion work, and who should undertake those?
Mr O'Brien: I think the best way to undertake that public education is to use the local MEUs to do that, and not burden them with the responsibility per se, but they have the best access to the marketplace through their billing process, other than perhaps sending out a water bill. There's a potential to penetrate the household with information.
I think more importantly than that, the government should look to a means whereby they can use -- if you look, Mr Conway, at what has gone on with respect to the changes that we as municipalities have undergone in the last year, there has not been a lot of information that's gotten out to the public. Certainly the government has not put a lot of information out as an entity. Municipalities have scrambled and tried very hard to do so because it was left to them by default. I don't think that's what should happen here. I think if the government is initiating the change, the government should use its various mechanisms to do it. It has access to all the media. What's wrong with coming to a city council meeting and explaining it? What's wrong with going into communities throughout Ontario and having open houses with respect to the whole change process?
It's better to do it up front and to spend the time and effort than to have what we have now in Ontario with respect to assessment.
Mr Conway: Thank you. My second question and really my primary concern, then, your brief at the top of page 3 says:
"We don't suggest that there is anything wrong with the Minister of Finance" for Ontario "calculating the amount of the stranded debt, as is presently proposed by the legislation. However, the process must ensure that there is a mechanism in place that would afford an opportunity for interested parties to review this calculation."
As you indicated in your exchange with Mrs Johns and Mr Gilchrist, and I think we all recognize, there is very likely going to be a stranded debt. It is expected to be a multi-billion dollar stranded debt. I think the concern we all have is that there be transparency and fairness across all rate categories in the disposition of whatever that stranded debt is. By the way, I think you were talking about a half-billion dollar consideration that your municiality would have to make.
This is big business and we've got big debts but there are huge opportunities. We are going to create some exciting opportunity with this legislation, the principles of which I support. But we are going to more quickly than any other initiative I can think of create millionaires in this province. There is an opportunity here for gain that is very substantial.
One of the obligations I feel as a public trustee is that on the one hand we not dampen realistic opportunities for enterprise, but on the other hand I'm not very anxious to see windfalls accruing to others than those who might -- I'm just concerned that we don't expedite the making of millionaires by other than honest means, if I can put it that way.
This is code, quite frankly, for stranded debt, because there are some of these calculations that are absolutely critical. If you look at the Ministry of Finance paper on how this is going to be done, it begins with valuing the current assets that will be Genco and Servco. That's an absolutely critical calculation.
To its credit, the government has gone out and retained the services of Wood Gundy and Midland Walwyn and a variety of other experts to help in that valuation. But I certainly want to see more than I've seen to date as to how that process works because that's the first critical step. That valuation must be made. An assignment of a commercially bearable amount of debt must be made to Genco and Servco. Whatever is left over is going to be stranded debt, some of which will be residual stranded debt.
I guess my question to you is, thinking about Missisauga's broad base of residential electricity customers, what specific protections would you like to see that are not now in place, beyond the ones you've recommended, to make sure that the hundreds of thousands of residents in Mississauga don't get stuck in a situation where they carry a disproportionate share of that stranded debt and maybe are paying it in not particularly attractive or equitable ways?
Mr O'Brien: I think that's a good question and it gets at one of the very strong concerns that the city has. You made a very good point with respect to evaluating the two companies and starting off at the point of trying to assign debt to the point where they don't become uncompetitive.
The problem that we have with the stranded debt right now is we don't know what it is. Nobody can put a finger on it. Until such time as the nuclear costs are calculated, which will form probably a substantial part of that stranded debt that's being speculated right now at $30 billion or $40 billion and perhaps more, I'm not sure we should be moving too quickly with respect to the assignment of the stranded debt until it's all there. That's part of the problem that we see, that it's not there yet. To try and move this thing to January really quickly, I'm not sure we should be pushing it in that vein. We should maybe sit back and say, "Let's really get all this debt."
That's one of the ways to ensure that you assign the stranded debt on day one on a proper, fair, all-in kind of basis and you don't come back two years later and say, "By the way, there's a little extra here that we've got to add on the pot."
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Mr Conway: On page 3 of the brief, as I indicated, you argue that there be a mechanism in place to afford an opportunity for interested parties to review the calculations made by the Minister of Finance. As you will know from reading the bill, sections 79 and 81 -- and those are two specific locations; I think there's at least one other where the bill contemplates -- and I'll use the language: "The determination of the Minister of Finance that the residual stranded debt has been retired is final and conclusive and shall not be stayed, varied or set aside by any court."
It's pretty clear that the Minister of Finance is going to have a very critical role here and as a politician, at one level, I don't object to that either, except I'm troubled in this particular case because the Minister of Finance is an umpire with an interest, because some of these determintions that he or she alone will make, once made, trigger benefits to the public treasury, of which the Minister of Finance is in charge.
A favourite and obvious example is that there's no doubt that this policy contemplates that, once in place, the Ontario government is going to, in the interest of a level playing field for taxation, take in perpetuity an annual slice of the multi-billion dollar rate base of the MEUs. In the first instance, that slice of the adjusted gross revenues will go to pay down the stranded debt. That I understand. But after that's done, at a time to be decided by the Minister of Finance alone, once that determination's made and the stranded debt is gone, that stream of money goes forever forward into the coffers of the Ontario government.
Mr O'Brien: You know, in 1949, I think it was, the federal government introduced something called the income tax and it's still there. It was put in place to pay for the war and we're still paying it.
Mr Conway: Is there a specific mechanism that you would recommend to keep the umpire honest to the interests of the electrical consumers?
Mr O'Brien: I would give the Ontario Energy Board the powers to intercede and to guarantee fairness and equity in that allocation.
Mr Wayne Lessard (Windsor-Riverside): I appreciate your suggestions with respect to exercising caution, as far as going into this without knowing what the stranded debt amount actually is. We've been told quite candidly by an expert, Dr Bryne Purchase, who was working on how the stranded debt should be calculated, that it doesn't matter what number you pick, it's going to be wrong.
We heard from the nuclear regulatory commission as well, who were quite concerned about the costs that need to be attributed to decommissioning of the nuclear power plants and disposal of nuclear waste. Although there is an estimate in the billions of dollars with respect to that, we don't know how accurate that amount is. There's no doubt that that will represent part of the stranded debt as well. I agree with you that before we know those amounts, determining what the stranded debt is and going ahead with this process is probably premature.
I think you probably answered this question about the Ontario Energy Board's involvement in the process of determining the stranded debt, but my question is, do you think that should be done by public hearings? Should the stakeholders actually have an opportunity to make representations before the Ontario Energy Board as to whether there's an amount that's been picked, what people think that amount is, how it was come to?
Mr O'Brien: Yes, I do.
Mr Lessard: You talked about the level playing field between what municipalities may be able to offer by way of services and what your competitors may be able to offer by way of services. This is a point that we've heard on a number of occasions. You mentioned in your brief about how some gas brokers have been offering free gasoline in order to attract customers for gas services. You'll be interested to note that one of the presenters yesterday in Sarnia was Sunoco, who made it very clear to us that they expect to get into the electricity marketing business as well. So they may be offering free gas to sell electricity also.
Is there any reason that you can see a justification for a competitor like that being able to offer those sorts of services when the municipal corporation may have some impediment to being able to compete on the same basis?
Mr O'Brien: I think you've hit on one of our key points and that is: Make the playing field level. Don't allow one part of the industry to have an advantage over the other. We don't, in the municipal sector. We don't generate power and we don't have the ability to go out and offer all kinds of incentives. My personal belief on this is that the residential user of electricity will have a hard time moving away from their MEU. There's sort of an affinity that's been established over the years. It's like I wouldn't want to buy my water from anybody other than my municipality. I don't want to get my hydro from anybody other than my MEU, but that's me as a homeowner, parent, a long-time user of electricity in a home.
The businesses approach it in a very different way. It's the bottom line: "How cheap can I buy my hydro, period. I don't care where I get it from." When you start plucking those things out of the system and saying, "Take them off and give them to a competitor," perhaps an American, then you suddenly disrupt the balance of rates that are being set across the board because you've pulled some really big stuff out of the game. That's what I'm afraid of. That's where, if the playing field isn't level, you add to that potential.
Mr Lessard: I have some concerns about privatization that you've kind of touched on in your submission as well. You've mentioned the half-billion dollar asset that the city of Mississauga is going to have. There are going to be some pressures to say, "This is some money that we can pick up here," and there will be some temptations that will be presented before council at some point in time.
Mr Conway: Hazel will stare them down.
The Chair: I'm going to have to interrupt. I'm sorry, our time's expired, Mr Lessard.
Thank you very much, Mr O'Brien, for coming before us as our first presenter this afternoon. I know we're going to have a number of interesting presentations here and we're glad you started us off.
Mrs Johns: Point of clarification, Madam Chair: In section 88, which is the repeal section on the two years, the intent of the government was to encourage amalgamations of municipal electric utilities. I just wanted to bring that intention forward.
PELHAM HYDRO-ELECTRIC COMMISSION
The Chair: Now calling representatives from Pelham Hydro-Electric Commission, the town of Pelham, please. Welcome.
Mr Brian Walker: Good afternoon, Madam Chair. Thank you very much for the opportunity to represent the Pelham Hydro-Electric Commission, and also the town of Pelham, at these hearings of the standing committee on resources development. My presentation today will be very brief because it's going to deal with one specific issue.
The Pelham Hydro-Electric Commission services 1,228 customers in the part of the town of Pelham which was formerly the village of Fonthill. The location is right in the heart of the Niagara Peninsula. Since the formation of the town in 1970 under the Regional Municipality of Niagara Act, the commission, in conjunction with the town, has examined several times the feasibility of the expansion of the service area to include part or all of the areas within the municipal boundaries.
In 1995, the commission purchased data from Ontario Hydro which dealt with a partial expansion and which indicated that such an expansion was feasible. Because of the continuing litigation proceedings faced by our neighbouring utility in Lincoln, a decision was made to delay application for an expansion.
In December 1997, at the first meeting of the new commission, a decision was made to begin the proceedings necessary under the Power Corporation Act to expand the service area to include the whole of the municipal boundaries of the town of Pelham. This expansion will service approximately 4,500 additional customers. I am not going to go through the details of the proceedings but I have included them as an appendix to my written submission. I'd like to stress that our commission has acted in good faith throughout these proceedings to expedite the matter.
On May 20, 1998, the town of Pelham published a notice in the local newspaper advertising a public meeting to be held on June 10, 1998. Because our courier service in Toronto did not meet its time commitment of personal delivery of the notice to the secretary of Ontario Hydro, the town had to publish a notice on May 27, rescheduling the public meeting to June 17, 1998.
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Since no objections were expressed at the public meeting, council decided to place the expansion bylaw on the agenda of the June 22, 1998, meeting. At that meeting the bylaw was given three readings and passed. During the subsequent appeal period, no objection was filed by either Ontario Hydro or the Power Workers' Union.
Expansion of our service area is in accordance with the Macdonald commission's recommendation for the creation of shoulder-to-shoulder utilities. It would allow us to pursue mergers, amalgamations and sharing or purchasing of services from neighbouring utilities in Lincoln, West Lincoln, Thorold and Welland. We recognize that the status quo will not be a viable option for us under the Energy Competition Act.
This is where our problem occurs. Schedule D of the newly introduced Energy Competition Act, subsection 28(2), states:
"Bylaws passed by a municipal corporation under Section 83.2 of the Power Corporation Act on or after the day the Energy Competition Act, 1998 receives first reading in the assembly are deemed to be void as of the day Section 83.2 of the Power Corporation Act is repealed."
It is our contention that this section, if passed, would be punitive in our situation. We proceeded in good faith under the appropriate act and the town of Pelham passed a bylaw which is in the best interests of its ratepayers and of the hydroelectric customers of the whole town. The repeal provisions of Bill 35 would prevent the expansion of the Pelham hydro service area. Customers in the expanded area have responded enthusiastically to the proposed expansion and certainly do not want to see it stopped by the provincial government.
We would therefore request that the expansion of the Pelham hydro service area be allowed to proceed to completion under the Power Corporation Act and that the repeal provisions of the Energy Competition Act not apply in regard to the town of Pelham bylaw 2013 (1998).
I thank you for your consideration of this brief and would welcome any questions you may have.
The Chair: Thank you very much. We have seven minutes for questions from each caucus, beginning with the Liberal caucus.
Mr Conway: Thank you, Mr Walker. Does my memory serve me correctly? Were you around for the 185 business four years ago?
Mr Walker: Yes, I was.
Mr Conway: Lincoln is, of course, where it came a cropper, as we say. It didn't quite work out as advertised. I take it that when your group at Pelham met after the election in 1997, I guess it was, that first meeting of newly appointed commissioners, you anticipated that you would ultimately see a region-wide distribution system municipally owned and controlled in the entire Lincoln area.
Mr Walker: We saw that there would be mergers or amalgamations, not necessarily region-wide, but that there could be three or four utilities over the next year or two.
Mr Conway: But you will agree that Macdonald, in his recommendation two and a half years ago, indicated that given the burdens that the new marketplace was going to impose on LDCs, there was going to be some requirement that we probably look at county-wide, region-wide and city-wide, but particularly county- or region- or district-wide utilities. Certainly people were aware of that.
Mr Walker: That is correct, yes. The problem that we have is that we're like the hole in the middle of a doughnut in that the service area is only the former village of Fonthill, so we're surrounded on all sides by Ontario Hydro.
Mr Conway: That was going to be my next question. Can you just tell the committee whether, for example, Effingham would be part of your service area or would it be part of Pelham Hydro?
Mr Walker: No, that would be Ontario Hydro.
Mr Conway: So there's a lot of Ontario Hydro Retail all through your --
Mr Walker: Yes, all of the subdivisions which have occurred in the town of Pelham since 1974 are under Ontario Hydro areas.
Mr Conway: We've heard this point at least two or three times in the last week, and I can't remember who or where, but the relief to the point you make in the second paragraph of page 2 would be what, the specific relief? It's subsection 28(2) of schedule D that is the problem, because the bill was introduced on June 9 and your first meeting was not scheduled, or your bylaw -- well, it's irrelevant. The bill was introduced before you got to it. What is the relief required? Strike that section? Amend that section?
Mr Walker: We would like to be able to proceed under the act under which the proceedings began in December, because we were 90% complete when Bill 35 was given first reading.
Mr Conway: Can you tell me, at least, because I was there for the 185 debate -- and I must say I've been personally annoyed, to use a very neutral phrase, at what has not happened in three or four years on the part of all kinds of players who beat their little breasts and said, "Of course all goodness will follow," and it hasn't. I'm a bit skeptical because we were all onside and nothing much seemed to happen except a lot of very active court activity and litigation. From where you sit, what was the problem down there in Lincoln to frustrate the unanimity of purpose underlining Bill 185, which had as its basic commitment the rationalizing of franchise areas between MEUs and other players?
Mr Walker: The problem in our area was resistance by Ontario Hydro to allow Lincoln Hydro to expand its municipal boundaries. Then of course subsequently there were the objections filed by the Power Workers' Union.
You must understand that our commission only has two employees. That's why I came here myself today; we didn't want to close the office. We looked at it at the time and we were aware of the kind of legal bills that were facing Lincoln Hydro, so we said, "We'll just wait until there's some progress towards resolution of that conflict," and obviously it became evident that there was going to be a resolution in the spring.
Mr Conway: The way this debate is unfolding, it seems to me that in an area like Lincoln we're going to get rationalization all right, but it's going to be a large LDC that is essentially Ontario Hydro Retail, because we had a number of submissions that make me believe that there are a number of instruments that militate against anything else happening, including subsection 28(2), to which you make reference on page 2. Do you think that's just an unfounded instinct on my part or do you see anything currently in the behaviour of Ontario Hydro Retail that would make you conclude that they're anxious to expand and consolidate their retail function, particularly in an area like Lincoln county, or what used to be Lincoln county, by consolidating and eating up, to use a phrase that's been used before, local smaller MEUs?
Mr Walker: Effective July 1 past, Lincoln Hydro expanded its boundaries. Effective next June, West Lincoln will expand its boundaries. The only areas that will be left in the regional municipality of Niagara that are serviced by Ontario Hydro will be part of Pelham and the rural township of Wainfleet. They will be the only ones left. Dunnville, Nanticoke, Haldimand are all going to municipal utilities. There may be further consolidation after that. One of the things we're worried about now is that the closest centre for Ontario Hydro to service customers in the town of Pelham will probably be Simcoe.
Mr Conway: But the expectation of most in the committee, I think, is that in an area like old Lincoln county you're going to have fewer LDCs. You're going to have to have a rationalization. I think we all understand that. Macdonald was very clear as to why that should happen, because of the new obligations of the new marketplace. I'm trying to imagine what you've got down there and it doesn't strike me that it's going to be impossible for Ontario Hydro Retail to pick you off one at a time, saying: "Dunnville is too small, West Lincoln is too small and Lincoln is too small, and we can effectively frustrate their coming together. There's only one other possibility: We buy them out, play the Bell Canada role."
Mr Walker: That is a possibility. I think in terms of what Pelham Hydro would like to do, expanding our boundaries would allow us to then proceed to the next stage which would be either mergers or amalgamations. We've had talks with Lincoln and West Lincoln Hydro going back for a number of years. In fact, one of them was with Ms Elliott back in 1995. We've also been exploring very actively service sharing with Thorold Hydro. We recognize that we're not going to survive as a utility of 1,228 customers. We're going to be into a much larger scenario.
Mr Conway: Thank you very much, Mr Walker. I very much appreciate your testimony.
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Mr Lessard: I guess you answered my first question with that last answer, because I wanted to ask you a little bit about the economies of scale. That's probably the single most important factor for wanting to expand your service boundaries, I would take it, in that the introduction of subsection 28(2) in schedule D is really going to frustrate those efforts and any benefits that you may be able to achieve. Did you have any indication whatsoever that this section was going to be included in the bill?
Mr Walker: No, I did not.
Mr Lessard: I suppose you would take it as odd, considering how far down the road you had gone through this process, followed all the steps that you were supposed to, that you wouldn't even get any notification, any hint whatsoever that this might be a possibility.
Mr Walker: It has been frustrating because we are so close to the realization of the project that with two weeks' difference --
Mr Lessard: I suppose the arguments about the economies of scale would be the same for Ontario Hydro as well. If they were only able to service this small number of customers you're talking about, they would have to service them from a distance as well, if that were the only area they were serving.
We've heard as well during our committee hearings some frustration with dealing with Ontario Hydro, especially the billing changes and the 1-800 number that was to be called for people to have the new billing changes explained. Have you heard any of those complaints about Ontario Hydro's service in your area?
Mr Walker: Our staff receive many calls because people sometimes aren't aware of whether they're Ontario Hydro or Pelham Hydro customers, even though it indicates on their bill where their money is going to be sent. We have a lot of calls. Our director of operations for the town of Pelham approached me last week and said one of the people who had called in had a tree limb on the service line going into the house. They called Ontario Hydro and Ontario Hydro said: "Sorry, we no longer have a forestry crew in this area. Call the town of Pelham." It is very frustrating and I think a lot of people are getting to the point where they're calling Mr Sheehan, the member for Lincoln, to express their frustration.
Mr Lessard: That sounds like a good suggestion.
Have you had any discussions with Ontario Hydro about the price of the assets for the expanded service area, if in fact you were ever able to get through this process?
Mr Walker: I attended a meeting at the MEA in late July and Mr Vipin Suri from Ontario Hydro was present. He stated at that time that they were willing to enter into transfer agreements with the 20 utilities which had passed the bylaw. So I wrote him a letter when I got back to our office and asked him if he'd also send us a copy of the transfer agreement. That was about three weeks ago and I haven't heard from him yet.
Mr Lessard: Even if you were able to get some relief from this section and be able to proceed along the course that you wanted to, you'd still have to negotiate with Ontario Hydro with respect to the price.
Mr Walker: Yes.
Mr Lessard: We've also heard concerns from people about the frustration in those negotiations about the price of the assets. I know Mr Gilchrist has had many discussions with presenters about what the value of those assets should be. Is that something you have given any consideration to, if you were able to continue and be able to acquire those assets?
Mr Walker: The study that was done by our consultant indicated a price that would be approximately $7 million, based on the computer models they used etc. It showed that was a feasible amount for us to pay in order to make this a viable utility.
Personally, I have some difficulty even with residual value because in our town we have a lot of new subdivisions that have expanded a great deal in the last 25 years. In all of those subdivisions the hydro plant was paid for by the developer and ultimately the lot owner and then turned over to Ontario Hydro. So now we're going to have to buy back plant that was already paid for.
People in the rural area who are third or fourth generation on those farms think they've probably paid for the line down their road as well.
Mr Conway: They have.
Mr Lessard: They have paid for that and it would be unfair, I would think, if they were to insist on that price. They may be able to frustrate your intentions even if you were to get the relief you've asked for from here, from this section. If you don't get that relief, if this section isn't repealed or amended to grandfather your particular situation, what do you see ultimately as the result in Pelham and the surrounding area?
Mr Walker: I've heard a phrase used about commercial or market value. I've never seen a definition of how that is derived, but in our neighbouring utility of Lincoln, which has a residual value of about between $8 million and $9 million, the figure that was bandied about as the commercial and market value was $26 million. That would make the expansion unfeasible. The debt load would be too high for the number of customers in the utility.
Mr Lessard: Maybe I'll give Mr Gilchrist an opportunity to further debate this asset valuation.
Mr Gilchrist: Very kind of you. Thank you, Mr Walker, for coming before us. We've certainly heard from quite a number of MEUs on both matters, both the one to which Mr Lessard has alluded and the issue of the cut-off date of June 9.
This isn't a cross-examination, but there was sort of a set-up question given from our colleagues opposite: Did you know this section of the bill was in there? I guess I could similarly ask you, how many copies of bills in the past did the Liberals or NDP share with you before bills were tabled in the Legislature? Would the answer be none?
Mr Conway: I can think of a few.
Mr Gilchrist: No, shared with Mr Walker. The question was to Mr Walker. How many governments have shared copies of bills?
Mr Walker; I've only been the chair for this past year, Mr Gilchrist.
Mr Gilchrist: Fair enough, OK. But take it as a given that for some fairly obvious reasons, while governments talk about the direction they're heading in, you don't normally print the bill somewhere before you table it. It would be incredibly disrespectful to the opposition; I'm sure we'd hear about it.
But more to the point, is it fair to say that Pelham knew the direction the government was heading in and that you have been well aware of the various white papers and the various commissions that have been heading down this road?
Mr Walker: Yes, especially with the Macdonald commission, Mr Gilchrist.
Mr Gilchrist: OK. Not a lot turns on that, but would you agree with us as well that, leaving aside the specifics of this clause, when the government makes a change in direction, whether it's something that affects insurance companies or retail companies, whatever it is, it is not unusual and it is not inappropriate to fix a date so that there is no last-minute profiteering, recognizing that there's a time period between when a bill is introduced and when it gets passed? It wouldn't be inappropriate for a government to sort of set a line in the sand and say, "What people were doing in good faith before we told about our change in direction is one thing." What they've done since the bill's introduced, I think they take great risk if they --
Mr Walker: Yes, I would think that any utility that commenced the process after June 9 is in a different situation than we were.
Mr Gilchrist: Let's come to that point, because in your presentation you talk about -- I think you said you had gone through this process three times since 1970. What was different this time?
Mr Walker: One of the things that made it more attractive at this time, as compared to previous studies that we had done, was the cost of borrowing. The previous studies we had seen were looking at borrowing money at 12% and 13% and this study indicates a borrowing rate of between 6% and 7%. That is just enough in the size of our utility, Mr Gilchrist, to make it financially viable.
Mr Gilchrist: Fair enough, and that's certainly a compelling reasons for businesses all across Ontario to have made the expansions they have in the last few years.
If Hydro were to sell you an asset, whatever that asset is, if it got $10,000, it can put all that money against the debt. If it sells it for $5,000, obviously there's $5,000 more in stranded debt at the end of the day. Would you agree with that?
Mr Walker: Correct.
Mr Gilchrist: So to a very great extent you can appreciate that our dilemma here is that we are all the taxpayers, and yes, with over 99% of the province wired, we're all ratepayers to some extent; it's a question of which pocket do we put funds into. One of the reasons that June 9 was chosen is that Hydro's direction from the previous government to sell things at book does not necessarily reflect the income-generating value of that asset. If you were going out and buying any other asset, you would expect to pay the going rate, you would expect to pay what everyone else in the market pays, would you not? If it was for a car or a truck, that sort of thing, that sort of asset?
Mr Walker: Yes.
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Mr Gilchrist: The dilemma is not so much the Pelham case; Pelham by itself would not change the math significantly. But looking at all the MEUs that have in some cases started the process beforehand, and in some cases not started the process beforehand, or started it about that same week, if you add all of those up and, quite frankly, if you make an exception for them, where do you then draw the next line? Obviously we are talking, in aggregate, an awful lot of dollars, and the difference between the book value and the market value of those assets would ensure that all of us as taxpayers wind up keeping more stranded debt than paying for that some other way.
You heard the presentation from Mississauga beforehand and their concern about stranded debt. Would you agree with me that if deals were cut to lower the selling price of assets, the MEUs, who continue to purchase their power from Hydro, or wherever, would pay a stranded debt charge to compensate for that?
Mr Walker: Yes.
Mr Gilchrist: So your customers, ironically, might not benefit at all by getting the deal that -- again, taking Pelham and extrapolating that to all the MEUs that are making this application, in aggregate, if they get a break on one hand, they're going to wind up paying more for the actual cost of the hydro you buy from Ontario Hydro. Is that not true?
Mr Walker: In our case, substantially so, yes.
Mr Gilchrist: I think that really becomes the nub of the problem here. In your presentation, and I really don't think you meant to leave this impression, the section you quoted would "prevent" the expansion of Pelham Hydro. I think you mean it would prevent it at book value acquisition price, because there is nothing in this bill that prevents you from going to Ontario Hydro and offering to sit down and negotiate a purchase price. It would allow you to go shoulder to shoulder with the other four utilities you quote.
Mr Walker: Except that if I tell my ratepayers, "Your kilowatt hour is no longer 8.9 cents, but it's going to be 11 cents," they're not going to be too impressed.
Mr Gilchrist: But you're assuming a certain price is the result of those negotiations. Are you aware that the OEB is prepared and has the powers to be an arbitrator?
Mr Walker: I am.
Mr Gilchrist: OK, because we've seen recently the sale in Cornwall of the PUC down there. It was bought by Consumers' Gas, and the purchase price was less than $3,000 per household.
We heard some numbers from the Sudbury and other northern PUCs that suggested that Hydro was somehow expecting to get $5,000 per household. I would submit to you that the most up-to-date example is a price far less than that, and I think the OEB would take direction from facts rather than from speculation. If that was the ballpark, roughly the $2,000 to $3,000 range, which is the difference between what the MEUs would like to pay and what Cornwall got for theirs, that's not all that great a differential, wouldn't you agree? Certainly, it would be something worthy of at least entering into negotiations, because you might wind up seeing it a lot closer to $2,000 than to $3,000.
Would you necessarily stop the process or would you agree with me in at least pursuing it to the OEB if all else fails?
Mr Walker: You would have to look at the numbers. The numbers are based on about $1,650 per household. That's what you'd have to do. Before you'd ever get a price from Ontario Hydro, you'd have to use a computer-based figure, and $1,650 was used in our case.
Mr Gilchrist: All right. Would you agree with me as well that in all of this process we share the goal of finding those consolidations and amalgamations so that the MEUs can compete on a more level playing field with Hydro and anyone else that comes into the market in the future? You made the concession that $1,200 isn't good enough. I'm not asking you to pick a number that is the appropriate number, but in general terms would you agree with the general manager of North Bay, who said that the number of MEUs is an anachronism and that we need amalgamations?
Mr Walker: I agree with that.
Mr Gilchrist: OK, because -- here's the zinger -- looking at the Cornwall example, is Pelham prepared to sell its assets at any time in the future on the same basis that you are offering to buy them from Hydro? If you buy them at book value, are you prepared -- leave any market differential on the backs of all Ontario taxpayers -- to be bound the same way if you were to sell your assets to Lincoln, if they wound up being the dominant partner and instead of a merger it became an acquisition?
Mr Walker: I can't answer on behalf of the commission, Mr Gilchrist. We haven't discussed that matter.
Mr Gilchrist: Will you agree with me that that would be the only fair way to do it? Or is the result that a windfall would occur for the folks in Pelham that quite frankly has been paid for by the taxpayers from all across Ontario, namely, for the Ontario Hydro assets?
Mr Walker: I don't think the residual value of $7 million is a windfall, based on the circumstances within our municipality. When you have a substantial number in an expanded area having already been paid for by the developer and, subsequently, the lot owner and then just turn it over to Ontario Hydro, I think $7 million is quite a generous figure.
Mr Gilchrist: But that presupposes that once money goes into Hydro, it goes into a little bucket that specifically pays for that pole or that wire. You and I are all paying 40 cents on every dollar just towards the debt service for past mistakes, and all the funds they get, as all the funds you get, are aggregated. It goes into one bank account and when a customer pays you their monthly bill, that doesn't specifically go to cover their wire, their pole. You'd agree with me on that?
Mr Walker: Definitely.
Mr Gilchrist: It covers the cost of the general manager and a whole bunch of other things.
The Chair: Time to wrap up.
Mr Gilchrist: OK, very quickly. So Hydro, having received X number of dollars, I accept may or may not correlate to certain expenditures, but there is no tracking that way, and you'd agree with me that we all have an obligation to retire that Hydro debt and if we don't do it one way, we're going to do it another.
Mr Walker: Right.
Mr Gilchrist: I would hope, worst-case scenario, if this does have to go to the OEB, that as long as you're able to tell the folks in your town that every dollar that goes to retiring more of the stranded debt lowers the cost of the hydro you buy, may actually not change the price equation at all.
Mr Walker: They've all been privy to the figures that were done by the consultants and that's why so few people showed up at the public meeting and none of them objected. We're looking at a situation where the house taxes in our town are up $250. If we can save the people $100 on their energy bill, they'd appreciate it.
Mr Gilchrist: Perhaps just as a final point if I could just ask the question, because he said he couldn't bind the commission --
The Chair: Five, four, three --
Mr Gilchrist: Perhaps you could get back to us and ask the commission the question that I posed to you and send their response back to us, because I think that would be very enlightening to us.
The Chair: Mr Walker, thank you very much for coming before the committee with the story of your particular utility. We'll take this under serious consideration.
HYDRO MISSISSAUGA
The Chair: Now calling upon representatives of Hydro Mississauga, please. Good afternoon, Mr Wahl, and welcome.
Mr Karl Wahl: Thank you, Madam Chair. My name is Karl Wahl. I'm the general manager of Hydro Mississauga.
Bill 35 is, overall, an excellent move forward for Ontario, balancing the need to protect Ontario's investment in Ontario Hydro while seeking to provide the best mix of price and service to customers. However, Bill 35, as drafted, appears in some sections to be inconsistent with the principles of fair competition and of assuring customers stable or decreasing prices. Further focus upon these principles, combined with flexibility regarding the implementation of retail competition, will achieve these important policy objectives.
By way of background, Hydro Mississauga is the second-largest distribution and retail electric utility in Ontario. We have the lowest rates of the major GTA utilities, and of each dollar paid by the customer for electricity, only 7.5 cents go to Hydro Mississauga and the rest goes to our supplier, Ontario Hydro. We have a margin close to the lowest in the province. We have equity of $428 million with no debt, and we have a world-class, highly reliable system.
We believe Hydro Mississauga is the most effective and efficient distribution and retail utility in the province. The distribution operation, our Wiresco business, will continue to operate well as a regulated monopoly. Our retail business operation, our Servco, is ready to compete if the competition will be fair.
Hydro Mississauga believes that there are two major aspects of the proposed legislation that require further thought and refinement in order to ensure both lower rates and well-served customers. These two major aspects include, first, ensuring fair competition between all competitors in the retail services at both the provincial and local levels, while preserving the value of the MEU; and, second, considering how competition in generation may affect the retail market.
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Bill 35 will require the segregation of MEU retail activities into a new competitive company. This company must compete against established, out-of-jurisdiction competitors who are already moving into Ontario. The objective of these competitors is clear: to capture all of the retail business and potential profit associated with retail activities in a competitive marketplace.
Failure to provide the new MEU Servco a reasonable opportunity to organize a client base and consolidate its operations will create a weak operation. In contrast, these retail competitors will enjoy major competitive advantages as we move towards the year 2000. First, they will have developed expertise from other jurisdictions proceeding now with wholesale and retail competition. Second, unconstrained by present laws that restrict MEUs to geographic service areas, or historical boundaries, if you will, they will have been marketing across Ontario and elsewhere. Third, they will cherry-pick prime customers leading up to the year 2000, thereby focusing resources and improving competitive position.
These competitors also enjoy other advantages. Relative to MEU retail companies, competitors are very large, offer a variety of services, and are well financed.
If Bill 35 permits a competitive imbalance, large predators, mostly American, will absorb the Ontario retail market. The financial markets will recognize this likelihood, thus constraining financing opportunities for MEU Servcos. The established public interest in MEU Servcos will diminish as the operations struggle to establish the client base and revenue stream necessary to compete.
We have all recognized the importance of the public investment in Ontario Hydro and enabling the successors of that corporation a fair chance to compete. The same importance attaches to the public investment in MEUs, including MEU retail activities.
Hydro Mississauga agrees that MEUs should consolidate -- we've been a proponent of that for a long time -- to continue to achieve greater efficiencies and serve customers well, both in distribution and retail activities. We believe, however, the public investment in Servcos should not be lightly discarded. As presently drafted, Bill 35 runs the risk of losing all of the Ontario public investment in MEU Servcos, thereby enabling out-of-province competitors to take advantage of this important area of business.
We have a number of specific recommendations that we believe will help to achieve fair competition in retail services. In each case I will describe the issue and then summarize with our specific recommendation.
Our first point relates to preserving the MEU Servco value. Bill 35 contemplates that Wiresco and Servco services will be segregated and contracts between MEUs and customers will be terminated. Subsection 28(l) of the Electricity Act contemplates that the Wiresco will act as the default service provider, whereby customers who do not sign up with other retailers will default to Wiresco. Wiresco will be obligated to provide this service.
Unlike the Wiresco operation, there is no clear mechanism to enable the new Servco to quickly establish a client base and an associated revenue stream. The second report of the Market Design Committee suggests that Wiresco be prohibited from assisting Servco in any transfer of clients or even preferential recommendations. If this proposal is followed and Servco does not receive the initial transfer of customers in year 2000-01, Servco will not have any significant resources from which to build a new customer base. As a result, there is no business certainty upon which to borrow, grow or compete.
The MDC is debating whether customer contracts should be transferred to Servco on the first day of competition. There is a recognition that without such a transfer Servco will be at a serious competitive disadvantage. The end result is that without a clear transfer of customers to Servco on the first day of open retail competition, any value associated with the retail element of an MEU will be significantly diminished and in fact might be lost. MEU value, jobs, in-Ontario investment, taxes and future debt reduction payments through transfer taxes will be lost or diminished unnecessarily.
If Servco is provided with this initial customer base, there is a question as to whether customers will receive the best mix of price and service. Hydro Mississauga is confident that competition will swiftly eliminate unreasonable prices or poor service.
Our recommendation is that section 28(1) of the Electricity Act should be amended so that contracts with existing MEU customers should be initially assigned to MEU competitive affiliates. After the initial transfer, the Wiresco may still act as the default supplier. Where an MEU does not form a competitive affiliate, the MEU should be able to assign its retail contracts to another MEU competitive affiliate for value.
Our next issue is enabling MEU Servcos to compete. Section 72 of the Ontario Energy Board Act, the OEBA, significantly constrains the types of for-profit businesses that an affiliate of the distribution company can engage in. Business activities of an affiliate may be owning or operating authorized generation facilities, retailing electricity, activities to assist in the retailing of electricity, activities to assist in the distribution of electricity or activities primarily for the purpose of more effectively using the assets of the distributor's distribution system. The private sector competitors have no such constraints.
Section 72's apparent concern to protect Wiresco from high-risk activities is adequately addressed through a separate incorporation, limited liability and sections such as OEBA 69(2)(f), which enables the Ontario Energy Board to prohibit cross-subsidization and risk spreading.
Our recommendation to this is that section 72 of the OEBA, which places constraints on competitive affiliates, is anti-competitive and unnecessary. This section should be abandoned or deleted as it applies to a competitive affiliate.
Our next point is to ask for limits to Ontario Hydro Servco's unfair advantages. The new Ontario Hydro Servco will have in excess of a million customers. Based upon experience in other jurisdictions, a million customers is the approximate critical point or critical mass to achieve significant cost-efficiencies. Ontario Hydro Servco has also had the historical opportunity to develop the necessary large-scale infrastructure from which to compete throughout the province.
Toronto Hydro with 650,000 customers and Hydro Mississauga with 150,000 customers are the next-largest retailers in the province. It will be extremely difficult for retailers to compete against the new Ontario Hydro Servco given its dominant position in the marketplace. MEU retailers have been constrained by law to developing limited infrastructure which meets local needs only.
Section 47 of the Electricity Act contemplates that Ontario Hydro Servco can, through its subsidiaries, include both retail and wires. Similarly, there is no requirement that Ontario Hydro Servco's transmission and distribution functions be placed in separate subsidiaries, and that's an important point. There is no separation between transmission and distribution as proposed by the act. This is inconsistent with the expectation that MEUs will completely segregate these functions. Transparency is thereby lost.
The Municipal Electric Association, recognizing the dominant position of Ontario Hydro Servco, has recommended that the Ontario Hydro Servco should have a mandate to entirely divest itself of its business through rationalizations with local utilities by November 6, 2002.
Our recommendation is that Ontario Hydro Servco should be completely segregated into three separate organizations, based upon the distinct operations of retail, transmission and distribution. Objective and transparent firewalls should be immediately and now established and publicly reviewed by the OEB in 1999, before competition begins. There should be a yearly OEB review of the effectiveness of the firewalls until such time as the OEB determines that no further review is required.
Next, we believe that private sector contracts should be placed on a level playing field. Energy brokers are already enticing customers with various contracts, including retail services in the year 2000. A variety of questionable practices and promises have also been reported.
It is not in the customer's interest to permit brokers to offer binding contracts for services until the legislation and market rules are known and in force. This also provides a competitive advantage which is unfair to MEUs, whose contracts will be terminated in the year 2000 under section 25 of the Electricity Act.
Our recommendation is that section 25 of the Electricity Act, which terminates contracts between MEUs and customers, should be amended to terminate all wholesale and retail contracts in the year 2000, including contracts with energy brokers and other energy service suppliers.
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We have three recommendations that relate to eliminating unfair tax penalties.
The first concerns transfer taxes. The proposed transfer tax contained in section 88 of the Electricity Act is detrimental. The two-year window before this tax takes effect promotes a premature sell-off of assets. A good portion of the value in the utility will be lost to the transfer tax once it is implemented. This will likely result in higher electricity prices as a means of recovering the lost value. Mr O'Brien spoke to that earlier. It is only natural that a seller or buyer of a utility will seek to pass on to the customers of the utility any exceptional costs.
Our recommendation is to eliminate undue time constraints on potential MEU divestitures. Section 88 of the Electricity Act, transfer taxes, should be eliminated. Intermunicipality transfers and one-time disposition of the MEU assets to the private sector should be exempt from this tax.
Next is the proposed property taxes. Property taxes are not a fair or logical source of funding for stranded debt. Property taxes create a provincial-municipal jurisdictional problem. Such taxes require the splitting of proceeds between two parties, one of which is being told what they will get and the other setting the rate and keeping the difference. Municipalities will be affected to greater or lesser degrees through sheer luck as this situation is wholly dependent on where Ontario Hydro facilities are located.
Our recommendation is that, given their unique jurisdictional nature, property taxes paid by any entity should not be used as a vehicle for servicing or reducing stranded debt.
The third issue is that of corporate taxes. Payments in lieu of corporate taxes, section 87 of the EA, meet the government's goal of levelling the playing field on taxation. This tax will be in line with taxes paid by private enterprises and will carry on indefinitely. This tax will be calculated as a percentage of gross revenue which should make it easy to administer and build into the rate-setting process. Hydro Mississauga supports this approach to taxation. We do think there should be a sunset clause, though, and cease the taxation once the stranded debt is paid off.
The primary issue with this tax is that it will create an immediate increase in electricity rates that can only be offset by a corresponding decrease in the cost of generation. The province should have evidence of decreasing generation costs before implementing new taxes.
Our recommendation is that corporate taxes as contemplated in section 87 of the EA should not be imposed until there has been a demonstrated decrease in the cost of generation. This is a critical point, in my opinion. There's a big assumption that the cost of generation is going to come down and that therefore we'll be able to pay these taxes, but we have no evidence that's actually going to happen. The legislation should provide express power to the minister to defer retail competition until generation savings have been established.
Another key concern to Hydro Mississauga is the management of the impact of Ontario Hydro nuclear operations on debt allocation and new investments. Generation is the major cause of Ontario Hydro's existing debt. Until the nuclear asset optimization plan, NAOP, is completed, there is no ability to assess nuclear performance. NAOP has fallen behind schedule by approximately eight to ten months by some estimates.
It will still be a few more years before the results of this asset optimization plan can be assessed. Until nuclear performance can be assessed with confidence it is impossible to attribute debt. Thus any attribution of debt in the interim is an educated guess at best. If you attribute too little debt to Ontario Hydro Genco, it will control the generation market for years, and if you attribute too much debt, Genco cannot survive. Either scenario will force the government to intervene in the marketplace to shift more debt to or from Genco.
Some gas-based generation will be in the range of four to six cents per kilowatt hour and other generation will cost more. It is clear that nuclear power, if NAOP is successful, will dominate and perhaps undermine the entire generation marketplace until and unless debt is fairly allocated to Genco in such a way as to level this major competitive advantage. The problem, though, is that while Ontario Hydro Nuclear is confident in its expectations for nuclear performance, no one truly knows how the nuclear units will perform, given the historical lack of reliability.
Until these variables are known, significant investment in Ontario in the generation sector cannot be undertaken. The marketplace needs finality once the debt is attributed. Market players and customers should not assume any risk for an error in debt allocation or Genco's ability to effectively manage nuclear performance.
Our recommendation is that legislation mechanisms should be implemented through Bill 35, which addresses Ontario Hydro debt imbalance scenarios. Marketplace participants and customers should not be at any risk for the implications of any future debt reallocation or adjustment.
Our final recommendation relates to the impact of generation on electricity prices. Generation is the primary component of electricity prices. It is critical to ensure efficiencies in this area.
There is a risk that if competitive market-based pricing in generation is not functioning well, the new taxes and other burdens contemplated in Bill 35 will only result in an increased price to the customer, because overall efficiencies have yet to be achieved. The efficiencies that can be achieved at the MEU Wiresco or Servco level are very small in comparison to generation. Such efficiencies will not always offset new costs for taxes, the increased regulatory burden and related matters. For example, of each dollar paid by Mississauga customers for electricity, only 7.5 cents go to Hydro Mississauga. Realistic reductions in this cost are highly limited and pale in comparison to the cost reductions which can be achieved at the generation and transmission level.
Our recommendation is that a flexible approach to restructuring the marketplace should be incorporated to reduce the risk of increased prices to customers. We're afraid that the prices are going to go up. New costs such as taxes should not be assigned to the retail sector until such time as generation efficiency and related price reduction is clearly established. Legislative mechanisms should be implemented to enable the minister or the OEB to make this determination in the year 2000.
In conclusion, open competition in electricity services will be good for Ontario. The inefficiencies of the existing generation, transmission and distribution systems will, over time, be reduced or eliminated. We will all benefit.
In the move to competition, the province should recognize that the ability to achieve efficiencies in generation and the proper assignment of debt to generation are the two most important and unknown variables. Success in transmission and distribution services and retail competition cannot offset major errors or mistakes in generation or debt assignment. I'll stop with that, Madam Chair.
The Chair: Thank you. We have three minutes for questions from each caucus, and we begin with the government caucus.
Mrs Johns: I want to follow two trains of thought, so I'm going to have to be really quick on the first one. It seems to me that both you and the city manager have talked about an apprehension about competition in Hydro Mississauga or your ability to compete as other private sector people come in. It seems to me, knowing you, that your Hydro Mississauga has good management, it has efficiencies that are incredible and it's pretty visionary in some of the things I have seen from you. If anyone is poised to compete in this new market, it would be Hydro Mississauga. I guess from my standpoint, when I go out and talk to people all across the country, if there are going to be 30, 40, 50 municipal electric utilities left, I always say that Hydro Mississauga is going to be there. Do you believe that also?
Mr Wahl: I sure do.
Mrs Johns: So you're getting ready to eat as opposed to being eaten?
Mr Wahl: Correct.
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Mr Gilchrist: Thank you, Mr Wahl. I appreciate your presentation today and your help to the government by the MDC in all this. It's very important to us.
I would like to address very quickly, because we only have a second here, you're concerned about generation and state, "Until these variables are known, significant investment in Ontario in the generation sector cannot be undertaken." We were just in Sarnia yesterday and heard about two projects already announced, $500 million yielding 620 megawatts. The head of the chamber of commerce told us there are other projects that are on the drawing boards totalling over $1 billion in Sarnia alone, and the minister is confident we're going to see, in the relatively short term, $10 billion to $11 billion worth of new investment, so I think your concerns might be unfounded there.
But let me ask you a very pointed question. What's the magic at Etobicoke Creek that you can deliver electricity for 7.5 cents markup but it takes Toronto almost 25 cents? What's more expensive about delivering electricity in Etobicoke than it is here in Mississauga?
Mr Wahl: Some of it might be that the age of our system is a little younger and is not as congested, but overall I would say when we have looked at some of those situations, I think it's just a good management team and a good attitude of trying hard to be the best we can.
Mr Gilchrist: It's my understanding you have incentives for your staff and in fact you're expanding on those?
Mr Wahl: How did you find out? I just announced it this morning. I had two town halls with my people to announce that we are introducing an incentive program -- we think that's the next level of incentive for our people -- where we will pay from 2.5% up to 10% of their base annual wages for savings, productivity improvements, reliability, increase in safety and increased customer service. Those are the fundamentals of our incentive plan, and we're quite excited about that. We think it's a first in the industry actually.
Mr Gilchrist: As a Toronto ratepayer, I'm looking forward to Toronto stealing your good ideas and lowering that price by that 18%.
Mr Wahl: In our Servco, Mr Gilchrist, we'll have those things for sale.
Mr Gilchrist: Excellent. Sign me up.
Mr Conway: Mr Wahl, thank you for a very helpful and specific presentation. You are well known in this industry as a very successful and creative manager. From my point of view, the policy that we're here to debate today in two of its fundamentals is absolutely right: competition in generation and a more transparent and rigorous regulation of the entire electricity marketplace. I think those are two objectives that are right and proper.
Of course a broad base of the public, to the extent they're paying any attention at all, would reasonably conclude that we're doing this to escape from some of the unintended burdens of past electricity policy and also to deliver lower rates. My own belief is that down the road, with new technology and new attitudes, we can do that. My concern, quite frankly, is the near-to-intermediate period.
I say that because of something that you also raised in your brief, and it concerns me more and more every day; that is, how do we manage the residual nuclear problems? I couldn't agree more wholeheartedly that to get the benefits we really need around competition, it has got to happen primarily in generation. Down the road I think it will happen. It can happen tomorrow, as we heard yesterday in Sarnia, if we allow people like TransAlta or Hydro Mississauga to come in and do what they could do under the new technological order, but the problem remains that underneath this waterline is a massive iceberg of residual nuclear difficulty.
You have been very strong on pages 9 and 10, indicating from your point of view, for example, "Until nuclear performance can be assessed with confidence, it is impossible to attribute debt." I think you're absolutely right. Can you perhaps amplify? What are you hearing about NAOP and what do you think exists by way of reasonable market tests for the Ontario Hydro nuclear assets, whatever they may turn out to be?
Mr Wahl: My concern really is going back to what Mr Gilchrist said about the cost of generation. Currently we buy power at six cents and combined gas cycle is at around four cents or perhaps less, and the nuclear is coming in -- a quote from Mr Farlinger -- I said two cents and he corrected me and said it's 2.5 cents.
What I keep hearing from Ontario Hydro and what we don't know is the economics of that statement. Is that the incremental cost of nuclear, or is that the all-in cost of nuclear, in other words, the cost of the capital infrastructure? That uncertainty is one of the things that's undermining the market right now for the investments that Mr Gilchrist was talking about that are being made in Sarnia. We're looking at some investment in Mississauga right now, but our investment is undercut by just what is nuclear going to come in at? What price is it going to come in at for sure? Again, the allocation of debt, depending on how the government does that, is extremely critical. That will affect future investment in generation in the province.
Mr Conway: We had a financial report from Ontario Hydro this past year which set aside $6.35 billion worth of unsupportable obligations, most of which had to do with the underperforming nuclear power division. I don't think the bulk of those costs are anywhere in rates today.
Mr Lessard: I share your concern that the price of electricity may not in fact go down. Really, there's every reason to expect that it may go up, at least in the short term. Other than the minister's optimistic assurances that prices are going to go down, we really haven't heard that from any of the presenters before this committee. The government isn't about to put any guarantees in the legislation that prices are going to go down either.
One of the things you have spoken about in your presentation flows from Mr Conway's questions about the stranded debt and the amount to be attributed to decommissioning and disposal of nuclear waste. You've made a recommendation here that there should be mechanisms in Bill 35 that address Hydro's debt imbalance scenarios. You make that suggestion in anticipation that the amount for stranded debt is either going to be estimated prematurely or too high or too low. I'm not sure exactly what it is you mean by that recommendation. I wonder if you can expand on that for me.
Mr Wahl: I'm not sure I understand your question.
Mr Lessard: You make a recommendation that there should be some mechanisms in Bill 35 that address the issue of the stranded debt amount being wrong. I don't know what you're suggesting there.
Mr Wahl: The mystery that surrounds Bryne Purchase's report. It's very difficult to understand just what is there and how big is the beast that we're trying to tie down and get under some kind of control. There needs to be a very transparent and open process that we are made aware of, that we're satisfied that what is being done is proper. There needs to be more debate on it than there has been up to this point.
The Chair: Mr Wahl, thank you very much for bringing the perspective of your utility before us. We appreciate your advice.
Mrs Johns: I have a point of clarification. On page 7 in Mr Wahl's presentation, paragraph 3, on section 47, the first line says, "Servco can, through its subsidiaries, include both retail and wires." In subsection 47(4) it's transmission and distribution, not retail, OK?
When it talks about the MEUs being treated differently -- that's in the Electricity Act, for Mr Power -- in the last line of that, section 70 under the Ontario Business Corporations Act allows the distributor to be a distributor and a transmitter also. So it treats it the same way.
Subsection 69(2) makes sure you have to keep segregated accounting.
Those sections are important. It's not worded very well in the presentation, so I just wanted to clarify that.
Mr Conway: I want to know what Mr Power is doing here --
Mrs Johns: Just good looks, I guess.
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ONTARIO HYDRO CENTRAL MARKET OPERATIONS
The Chair: I now call upon representatives of Ontario Hydro Central Market Operations. Gentlemen, thank you for coming. Long time no see. We're looking forward to your formal presentation. Please begin by introducing yourselves for the Hansard record.
Mr David Goulding: Good afternoon. Thank you for inviting Central Market Operations to participate in these hearings on Bill 35, the Energy Competition Act.
First of all, it was a pleasure showing you our Clarkson facilities this morning and explaining how the integrated bulk electricity power system works in Ontario. I hope you found the visit and the information we provided useful.
My name is David Goulding. I'm the senior vice-president of Central Market Operations. Joining me today are Derek Cowbourne, our chief operations officer, and Paul Murphy, vice-president of market effectiveness and evolution.
Central Market Operations, CMO, today is playing two roles. First, as Ontario's electricity system operator it manages the operation of the integrated power system to ensure the reliable supply of electricity for Ontario. Second, Central Market Operations is evolving, hand in hand with government policy and the work of the Market Design Committee, to become the Independent Electricity Market Operator, IMO, as we move towards a competitive industry structure.
Because electricity can't be stored, it must be manufactured and distributed instantaneously to meet customer demand. The challenge is to match the amount of generation with customer requirements at all times, while protecting against events that could cause the lights to go out.
This process consists of two parts. The generation and transmission of bulk electricity to supply points is one, including the direct receipt of that electricity by consumers or by distributors such as municipal electric utilities. This process is the management of the operation of the integrated power system. The integrated power system is the interaction between generation, transmission and bulk consumption. Second is the distribution of electricity from bulk supply points down to the fuse box. Last winter's infamous ice storm presents an illustration of these two processes. The successful operation of the integrated power system ensured that electricity was available at all bulk supply points across Ontario. This made it possible for local distributors to deliver power to consumers as soon as they were able to repair their local infrastructure from the damaging effects of the ice storm.
CMO manages the operation of Ontario's integrated power system. Today we coordinate the interaction between generation, transmission, neighbouring jurisdictions and bulk consumption for the benefit of retailing utilities, directly supplied customers and generation companies in Ontario and to keep the lights on.
CMO's responsibilities include a broad range of activities, from operations planning, electricity system security assessment and scheduling all the way to real-time coordination of the power system.
The nerve centre for the operation of the integrated power system is our system control centre in Clarkson, about 30 kilometres west of Toronto. Our employees in the system control room are on the job 24 hours a day, seven days a week, monitoring and directing the generation and delivery of electricity throughout the province.
Our staff ensure the continuous supply of electricity and the price-based priority selection of electricity generators. Where there is a conflict, maintaining a continuous supply of power takes precedence over the price of electricity generation.
Through careful planning and minute-to-minute management, control centre staff ensure that operating reliability standards and limits are respected throughout the integrated power system to avoid power interruptions and to protect expensive equipment. They make sure that voltage levels are adequate and correct and that loadings on transmission lines and output from generators are within system reliability limits.
In addition to managing the operation of Ontario's integrated power system, CMO operates an internal market for electricity and bills wholesale and large direct customers, and settles accounts with electricity producers.
Electricity does not recognize international boundaries. Events affecting the reliable delivery of power in one jurisdiction instantaneously affect the reliable delivery of power in other jurisdictions. Electricity produced in one location can flow through multiple jurisdictions to its end point, influencing other parties' transactions and use of transmission along the way.
The North American Electric Reliability Council is establishing a system of mandatory reliability standards, including an organization of shoulder-to-shoulder security coordinators. The responsibilities of these security organizations will include the coordination and implementation of interjurisdictional reliability standards.
Independent system operators, also known as ISOs, are also being established to provide open access to the transmission systems across the United States. These ISOs will also ensure the reliability of the integrated power system. The IMO will be both the ISO, or the independent system operator, and the security coordinator for Ontario.
These reliability standards will get embodied in the market rules and regulations currently being developed by the Market Design Committee.
The international characteristics of electricity make the growing introduction of competitive wholesale electricity trading in the United States an irresistible force for Ontario. Electricity moves north to south and south to north regardless of the nature of how the electricity is being traded. Ontario must begin the process of putting in place the long-term price signals competitive markets provide so that our electricity system remains competitive with similar trends already initiated by our trading competitors in the United States.
As today's independent market operator, the CMO is already strongly impacted in its day-to-day operation by changes in the United States. Without the introduction of comparable institutions of competition in Ontario, our job will continue to get proportionately more difficult. Ontario cannot remain isolated in the new world of competitive electricity markets.
Jurisdictions throughout North America and around the world have recognized the need for a strong, independent system and market operator to provide the reliable foundation for a successful competitive electricity market. Everybody is interested in competitive electricity prices, but the lights have to stay on.
The process of managing the operation of the integrated power system to keep the lights on carries over into the new industry. A reliable power system is the very foundation upon which to build a competitive market.
In addition, as outlined in the white paper and now in Bill 35, there are six basic operations at the core of a competitive electricity market: (1) collecting the offers of competing suppliers and the bids of purchasers; (2) dispatching supplies to meet requirements based on least-price bids and bilateral contracts; (3) settling financial trades between buyers and sellers; (4) forecasting electricity supply requirements; (5) encouraging investment as necessary and advising government if additional steps are needed to ensure an adequate and reliable supply of electricity in the province; and (6) acting as an impartial manager of the electricity system, helping to ensure that competition develops quickly and without abuse of market power.
For the competitive market to work, these operations must be conducted transparently by an independent agency, such as the Independent Market Operator, that has no links to any market participant.
Jurisdictions that have introduced competitive electricity markets in an organized and planned way have found that system reliability has improved. But this doesn't happen naturally. Reliability standards must be built into the new market. Bulk electricity reliability has been maintained or improved in areas where the authority of the ISO or IMO was recognized as part of legislation and market rules. Distribution interruptions and service has improved in jurisdictions where competition and choice have been allowed to flourish.
Adequacy of supply requires that the market rules and instruments underlying the legislation be carefully designed to provide the right competitive signals and motivators.
The nature of electricity places reasonable, manageable but unfortunately sometimes intrusive constraints on the free operation of the commodity electricity market. Electricity is not an ordinary commodity. For this reason, as outlined in the government's white paper, a key feature of the market is a strong IMO whose principal task is to facilitate a competitive market. The promotion of a competitive market requires conformity with pre-established criteria ensuring reliability and a set of clear market rules to guide the activities of market participants. The province has issued a well-formulated white paper policy for introduction of competition. It drew heavily on the successes of other jurisdictions.
The province has put in place a well-qualified Market Design Committee to advise it on the design of the new market. That Market Design Committee is drawing heavily on the experiences of other jurisdictions. The draft legislation before the House and this committee closely follows the advice of the Market Design Committee.
Bill 35 has been designed to be enabling legislation rather than prescriptive legislation. The market rules and regulations underlying that legislation will provide the details. Other jurisdictions teach us that it is important to have a flexible process to develop the detailed market rules and regulations. This will allow adjustments to be made as the electricity markets mature.
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The industry regulator is the Ontario Energy Board. The Independent Market Operator is an independent body to oversee the operation of the competitive segment of the industry and its evolution. It operates within policy laid out by government and under the forbearance of the Ontario Energy Board. There is a natural partnership between the IMO and the OEB to work together to achieve Ontario's policy objectives for the industry and avoid costly duplication. This partnership is key, because the nature of electricity, the operation of the integrated power system and the operation of the wholesale market necessitates a technical and minute-by-minute working relationship between the interactions of the monopoly and the competitive sectors of the industry.
In conclusion, the legislation enables a successful new electricity supply industry for Ontario. Central Market Operations is working with government and market participants to ensure the design of market rules and regulations will promote a reliable and competitive industry structure.
Thank you for your time and attention. We would be pleased to answer any questions.
The Chair: Thank you. There are six minutes for questions from each caucus. Mr Lessard, can we begin with you, please.
Mr Lessard: I don't have any questions.
The Chair: Thank you. Mr Baird, please.
Mr John R. Baird (Nepean): Thank you very much for coming before us today. I think your presentation is certainly one of the most interesting we've heard, and in many respects you could argue that it's the most important in terms of the issues you've raised. We've all discussed the role and the importance of the consumer benefiting. We've had a lot of discussion about price. We've had a lot of discussion about stranded debt and about a whole host of academic issues. But the bottom line, as you've defined it in a number of places in your presentation, is that everyone is interested in competitive electricity prices but the lights have to stay on. You discussed system reliability having improved in other jurisdictions and then finally, under 4(b) in your presentation, tension between commerce and reliability.
I come from eastern Ontario, where we've just been through the ice storm, which was obviously a significant experience, not just for those in the hydroelectric field but indeed for all the residents, particularly in the rural areas, and for the agricultural industry, particularly dairy operators.
I wonder if you might explain to me, in your own opinion, how you see an IMO working and operating in terms of maintaining system reliability in the event of a natural disaster like that.
Mr Goulding: There are a number of areas in which we would operate. First of all, I should explain that the IMO as such will be managing and operating the wholesale market and the high-voltage integrated power system rather than the distribution network down at the customer end. However, in order for any customers to receive supply, it's important to ensure that you have a secure integrated system network.
The IMO, first of all, will be working within and applying and helping to amend and modify all of the rules that are necessary in order to have participants take part in the marketplace, to ensure that people who connect to the marketplace meet certain criteria, to ensure that we have the appropriate limits in the marketplace. This is necessary on an ongoing basis, because this is a dynamic relationship.
But furthermore, in terms of, first of all, general contingency planning, we look at a wide range of possible contingency situations that may arise and put in place a number of plans that we can implement for a number of different types of scenarios: the loss of a large generating station, a tornado that might rip through parts of the province, even to some extent an ice storm.
The point is that you can't always predict exactly when any of these events are going to happen. So we have these as plans, if you like, that can be adopted at the time of the event. However, what you inevitably find is that with the best advance planning, some circumstances will be somewhat different at the time. So we make sure that our staff are well qualified. First of all, the people we have on shift are capable and authorized to make rapid decisions in order to maintain the integrity of the system or to maintain the extent of default or to put the system back together again. Similarly, we have backup staff available who will look at the circumstances and be immediately involved in identifying new system configurations, new limits that need to be applied.
Similarly, we have agreements with our neighbouring utilities regarding the support they will give us in those circumstances. Those are well defined and will be activated immediately. We have agreements with the generators, the transmission people and others throughout the province, including customers who we can rotate in the load share if necessary in order to maintain the main system, to keep most of the customers in supply.
The bottom line is there are many plans available, there are many ways in which we are ready to operate in those circumstances. That's one of the reasons why during the ice storm, for example, the integrated system itself was always operated within limits and was always in compliance and was sitting there waiting so that as soon as the distribution network was brought back, the supply was available.
Mr Baird: On page 5 of your presentation you talk about how in other jurisdictions where electricity competition has been introduced in an organized and planned way, system reliability has improved. Obviously the ice storm of this past winter was an anomaly and certainly the storm of the century for Canada. Are there any other jurisdictions where they've had a significant natural disaster where there's a competitive environment? Has there been anything written on that that you're aware of?
Mr Goulding: I'm not aware of anything similar to the ice storm, but in most jurisdictions, those that are currently competitive or otherwise, there are frequently a number of events that take place which require rapid restoration and pre-preparation.
What I think we're seeing in general terms is that where there's a competitive market and where customers and others have a choice of who their supplier is going to be in future, then there's an additional incentive for those suppliers in two respects. One is to be prepared to respond very rapidly in order to put those customers back on supply; and second, which is related to the first one, what we're actually finding now --if you look to the UK, you see a lot of examples -- are contracts and agreements that are actually being put in place, some of them directed in fact by the regulator in the UK saying, "Connection times should be thus-and-so, and if not, there's a penalty," or "Restoration time should be thus-and-so or there'll be a penalty."
In the competitive marketplace, not only does the customer have more choice of the supplier, but partly due to the regulator and partly due to the utilities themselves, they're looking at stretching themselves, stretching their competitive element to offer better service than the person next to them. Generally we find that the regulator says, "These are certain standards," but the attempt is to better those standards, to be number one.
Mr Baird: Throughout these hearings from time to time we've had various groups come forward and discuss renewable energy suppliers, consumers having choice in terms of green power. In an advanced bidding market system, how do you see those renewable energy suppliers, whose supply may be intermittent and less predictable than the traditional approach we've used in nuclear or fossil fuels?
Mr Goulding: Again, it depends on how the market rules are evolved. They certainly could be evolved in such a way, for example, that such intermittent suppliers could be recognized to be effectively only bidding into the system, if you like, during and whenever their generation is available. They could be doing that into a spot market. Whether that spot market is the same transparent spot market or whether there's some additional incentive, that's going to depend on the rules that get developed.
They could also have specific contracts with customers. As and when their generation is up and running, when the wind is blowing, for example, this customer might say, "We'll pay an additional premium and we'll take that amount of energy." So while that particular power doesn't get delivered directly to that customer, nevertheless that customer is paying to have a reduction in emissions and increased use of green power.
Mr Baird: So the system could accommodate that type of consumer choice.
Mr Goulding: The system can accommodate that kind of consumer choice, yes.
The Chair: Thank you very much. I just want to say again on behalf of the committee for the record that we very much appreciated the hospitality you extended to us this morning. Although the questions were brief this afternoon, there were a lot of questions that you answered for us this morning and we very much appreciated your taking the time to do that.
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E.W. BROWNE
The Chair: Now calling representatives from the United Church, sip and serve committee. Welcome to the committee. Please begin by introducing yourself for the Hansard record.
Mr E.W. Browne: E.W. Browne is the name, 601 Bob-O-Link Road, Mississauga. I'm a member of the United Church but I'm not speaking on behalf of the United Church. We didn't have a referendum on this or anything like that. I belong to a sip and serve committee there. We don't drink a lot of liquor; we do things. OK? I'm here. Thank you.
It's a very democratic situation. It's very essential that this is done this way, the input.
For the financial protection of Ontario payers, why Ontario Hydro should not be privatized: Ontario Hydro is making a profit each year and this money is used to pay off the Hydro debt. For example, between the years 1996 and 1997, they paid down $1.849 billion in that one year. In my submission, if you go back to the third-last page, you'll see from the 1997 annual report, the third line down, how Hydro has paid down the debt since 1993, right up to 1997, each year. Last year they paid $1.849 billion off the debt. Over 16 years, it would reduce its debt to zero. We're dealing in futures; that's approximately. I underline that.
I would like to read a paragraph from an article written on "Ontario's Options for Ontario Hydro" by Professor Myron Gordon, faculty of management, University of Toronto. The introduction to Professor Myron Gordon is on the front page. He graduated from Harvard and is a professor at the University of Toronto. The introduction is in French, so I'm not going to do that.
"An attempt is being made to convince the people of Ontario that deregulation and privatization of Ontario Hydro (OH) is the best way to ensure cheap, reliable power for the province. This distracts attention from two fundamental realities. First, the privatization of OH and its breakup into a number of independent corporations would substantially increase the cost of electric power. Second, 60% of OH's capacity is nuclear, and its privatization has not been proposed. Premature retirement of a significant fraction of OH's nuclear generating capacity, due to management failure at the corporate and provincial level, is possible. It would have catastrophic consequences for the province. Specifically, premature retirement could result in the transfer to the province of as much as $15 billion in OH's debt that it would have otherwise serviced and retired through operating revenues. It could also force OH to turn to natural gas as a primary source of fuel for electric power. The cost of gas generation is already much higher than the cost of continued nuclear generation, and could be expected to rise even more in the future."
This article was written in April 1997 by Professor Myron Gordon. The whole thing is included in here. He deals with several different factors in that article. He deals with the effect of the free trade agreement. He does not touch on the energy agreement we have, the North American energy agreement, but that would come into effect.
The effect of the free trade agreement is being experienced right now with Ethyl Corp suing the federal government for $700 million because the federal government wants to eliminate the use of additives. Seven hundred million dollars was what Ethyl sued the federal government for. The federal government, a few weeks ago, settled out of court, paid the expenses -- $20 million -- to Ethyl Corp. We cannot take this additive out of the gasoline, yet California and many other states do not use that. This was free trade exerting itself and it's an example of ethics in business.
If we take a look at the financial summary page, you'll see, in the top right hand corner, debt outstanding and how it's been reduced since 1993. You can see that those graphs could be projected and it would eliminate itself in approximately 16 years. This year we're spending more money on upgrading the efficiency of the nuclear plants, which is going to impact on the debt this year, but as this is to improve the efficiency of the generators -- it wasn't a safety problem, it was an efficiency problem -- it should contribute to reducing our debt, this work they're doing on them now.
The second last sheet in my presentation, "Nuclear Technology has Admirers," Gordon A. Robb was the author of this, and it was in the Financial Post July 3, 1998. He points out -- I underlined a few points there -- British Energy wants to buy into Ontario Hydro's nuclear program because of its quality, because it's a very good system. Candu was developed by Ontario Hydro and the Atomic Energy Commission of Ontario.
PECO (Philadelphia Electric) wants it because the Candu is a very safe reactor. I've seen charts showing how they're used all over the world, many places, and Ontario is the only place on this chart that shows them all being overhauled. It was in Maclean's about a year ago. It points out that a rupture of a pressure tube in a Candu reactor isn't a catastrophic problem like in some other places.
A very pressing problem is the supply of natural gas to cogenerating plants. I noticed the TransCanada PipeLines stock was pretty sad this year. They cancelled a big pipeline in the last few weeks because they haven't got the gas to fill the line. They have to look ahead before they put in a big line.
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On the last page, reliability of power supply: Ontario Hydro supplies all the power to Hydro Mississauga and on the last sheet we see where multi-million dollar rebuilding programs and targeted preventive maintenance improve the quality and give it world-class reliability in the supply of power. Power outages in Mississauga in the last year were down to 32 minutes per year; the year before it was 115. If you talk to somebody who lives in Quebec, you'll find they appreciate the reliability of our systems.
An example of how Hydro works here: They are replacing some of these big towers with new, modern, one-piece monolithic towers which don't suffer under the ice storm situation we had last year. North of the Queensway, they've doubled up the towers along there in the last few years. The new towers are south of the Queen E between, the Lakeshore and the Queen E in Clarkson.
This last summer, the summer of 1998, we had a lot of problems in the United States, on the eastern seaboard. In fact three years ago, Chicago and New York Edison were cited by the American government for failing to supply adequate power to certain areas of their two cities, resulting in 700 people dying in the summer three years ago for lack of power in certain areas. In the summer of 1998, both Chicago and New York had major brownouts and blackouts in certain areas of their cities and the eastern seaboard suffered a shortage of power.
If I can buy power from anybody, they can sell power to anybody. In all of the states bordering Ontario, the average rate of power is higher than our average rate of power. So I'm going to have to pay more for power if I want to buy it from an individual company because they can ship it to the States because of the free market. They can't stop them from shipping it there. As to the free trade deal and the North American energy deal, you have to look at that very closely and see how we're protected against that.
Professor Myron Gordon's article should really be studied because in 1997 he digested the problem very thoroughly and deals with a lot of these factors very well, and the annual reports of Hydro are very good. Any questions?
The Chair: Yes, we have five minutes of questions from each caucus. We'll begin with Mr Lessard.
Mr Lessard: Thank you very much for your presentation, Mr Browne. I appreciate your taking the time to come and address our committee because far too often during our deliberations we hear from people who represent large organizations or incorporated interests or people who feel as though they're going to benefit from Bill 35. It's unfortunate that we don't hear more from residential consumers, which I'm assuming you are.
Mr Browne: That's right.
Mr Lessard: Those are the people for whom I'm concerned about the impact of Bill 35. Those are the people we as legislators need to be looking out for.
You've included a resumé for Myron Gordon, the person who wrote this article. You've told us that although you belong to the United Church, you're not here speaking on their behalf, but can you tell us a little bit about your own background and how it is that you became interested in Ontario Hydro issues?
Mr Browne: I have no more financial interest than you do or anybody else, peanuts. But you have to look ahead. When I was a little kid, people in Toronto did their cooking on gas stoves that were supplied by manufactured gas. Houses were heated by coal. I've been around a bit. After the Second World War, people switched to oil and then finally gas arrived here. The oil went out and gas took over.
I'm in the stock market. Enerflex: You should have had your money in that. The stock was really beautiful. About six weeks ago, I dumped it because it started going down. What does Enerflex do? It makes gas pumps. It takes a little bit of gas and runs it through a jet engine which pumps the gas. So Enerflex isn't pumping gas and TransCanada PipeLines is not going on with its new pipeline and our gas situation is going to get a little tighter. The price of natural gas is going up. So on the market you might buy stock in natural gas companies.
Did I answer your question?
Mr Lessard: Do you think Hydro rates are going to go down for people like yourself as a result of the government's initiative?
Mr Browne: No.
Mr Lessard: Do you have any suggestions for us as legislators to try and ensure that residential consumers like yourself do see lower rates in the future?
Mr Browne: All right. I can see that we can get rid of this debt in 16 years by carrying on right now the present situation. Don't give me this baloney about stranded debt. It's just debt. Don't put any icing on it. It's just debt the people of Ontario are responsible for. It can be taken care of by the earnings of Ontario Hydro easily in 16 years. That's a major factor in the cost of operation. If you get your annual reports, and I've got 1995, 1996, 1997, and analyze them, you'll see that we can take care of that debt hands down.
Read this article from Myron Gordon. I was instrumental in getting him to speak to the University of Toronto in 1995 on this very subject. He used this article for the main thrust of his speech in 1995.
Mr Lessard: Do you believe it's the government's agenda to privatize Ontario Hydro?
Mr Browne: This is the beginning stage of it. This is the first act of the whole deal.
Mr Lessard: Why do you think they would be doing that?
Mr Browne: If you have companies that are interested in making a big wad and influencing people, sure.
Mr Doug Galt (Northumberland): Thank you, Mr Browne, for the interesting presentation and bringing forward the paper that you have.
I'm intrigued with your organization, sip and serve. I can say with great assurance you're the first one to present from the sip and serve committee to the standing committee.
Just to follow up on Mr Lessard, certainly the bill we have before us has to do with competition, not to do with privatization. I know the thought is in your mind down the road, but that's certainly not the thinking of the government at the time.
The other thing I want to comment on is you made reference to deregulation. Yes, when you go into competition a lot of people think of it as deregulation. In this case, it's actually going to add an awful lot of regulations to the books to be able to look at competition outside of Canada and the US. For example, environmental regulations will have to be very extensive.
Just a short reference on my feeling on reliability of supply, most of the problems have related to the transmission wires in the past and that will still be controlled by a company such as Servco, some such name as that, which will be a crown corporation that will be run by what is essentially now Ontario Hydro, and that's where you have the ice storm, wind storms etc that blow these lines down.
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We have received an awful lot of support from several groups for the general direction we're going in, including the opposition -- I know they don't agree with every detail -- the Power Workers, even Ontario Hydro. They basically agree with this direction.
I think it's interesting looking at Professor Gordon's opinion as an economist. I think you can get an opinion from as many economists as you interview. They all have a different opinion. There is even the odd economist who doesn't quite agree with the direction of our government, but they're very few and far between.
What I'm hearing you say is that you agree with the status quo of the electricity supply in the province of Ontario.
Mr Browne: It's not perfect management -- we never find that in any organization -- but it's status quo is pretty good. If we get down the deficit, and they are getting down the deficit -- our energy is delivered to us cheaper than any other area except Quebec, which I suppose is lower than here, and Manitoba, because they're 100% hydro, whereas we only have 25% hydro.
Mr Galt: In seven other provinces it's cheaper than here in Ontario, and for the Ford Motor Co, they're down to 13th where they produce cars that are most expensive. In 1985 it was the cheapest here in Ontario.
I want to pass on to another member so I will quickly ask you: In a lot of what we're hearing about the past problems in management with Ontario Hydro, it's an accountability problem. We believe that competition will bring in that kind of accountability. If we don't bring in competition to bring accountability to the management of Ontario Hydro, what would you suggest we should bring in?
Mr Browne: Governments have auditor generals and give them a great budget and they look at and they come out with any horror stories. Don't give me the story that a limited company that's in business is a success. The field is full of limited companies that are just dragging their something around. They're not doing much. They're existing. Just because it's a limited company, that isn't a definition of successful management. It's a success, it's running, but it's not doing great. Ford, Chrysler, General Motors, all sorts of companies, have had horror stories in their day. So Hydro has had a horror story. They've over-expanded themselves. They built too many reactors, maybe. But they were going by the free trade deal that was supposed to make a great big surge of industry in Canada. Well, it did in raw materials but not manufacturing, so the consumption of Hydro went down.
These nuclear reactors take a long time to build. The first ones took a long time because it was a new industry, a new design. It was very expensive. If you read this small article here, it refers to our nuclear system becoming a good system, you see. It's being overhauled now and the Americans, Philadelphia Electric, and British Energy, are looking at it. They'd like to get control of it because it's good technology. That's this little article here.
Mr Conway: Mr Browne, the sip and serve: I thought it was the All-England Lawn Tennis Group, but you're just here speaking for the people and that, as Mr Lessard and others have observed, is a very good thing.
Interruption.
Have we got a kasbah out in the hall or what kind of bazaar is going on there? Perhaps we should invite everybody in.
The people are expecting that some of the problems we've got are going to be dealt with and the benefits that change is going to bring will be generally beneficial for all classes of ratepayer.
Let me be a bit provocative because I could argue, and I will argue, that the original plan for public power in the province did not contemplate the vertically integrated monopoly we've had in this province, particularly in the post-Second-World-War era. The big fight in the beginning was to see that these pirates, and I won't mention them by name but they are well known if you know anything about the literature -- one of them owned Casa Loma, or built Casa Loma, I don't know that he ever actually owned it -- not seize control of this vital commodity. The way that the Legislature in the beginning thought this could be managed was by making sure that the transmission of electricity was in public hands. For a long period of time it was contemplated, and it was the reality, that generation would be a mix of primarily private and some public power. Beck built his commission, a public commission, to quite frankly be beyond public control and he succeeded throughout the ages. The success of that unaccountable public enterprise that became Ontario Hydro has brought us to some of the difficulty we've got today.
I have disagreed with Professor Gordon, who is a very fine fellow, but the difficulty is that since his April 1997 paper we've had some subsequent analysis of the single biggest aspect of Ontario Hydro, which is the nuclear division. Things are not very happy. I can't believe anything out of Ontario Hydro these days about the financial affairs of Ontario Hydro, not because I want to be skeptical, but why would I?
You've got the 1997 financial report. Phillips made off with my copy yesterday. In that report the board of directors blithely says that using the rate-setting powers vested in the board they are setting aside, for the financial year 1997, $6.35 billion of unrecoverable cost. What the hell do I make of some $6.5 billion worth of writedown? Where is that in the rate? What is the true cost of a technology that I have believed in and still believe in?
I think the nuclear option is still a good option, but I say that very reluctantly now on the basis of our congenital incapacity to run these plants, apparently, with any degree of efficacy. I'm interested quite frankly in British Energy, or anybody else who can come into this province and inject into Ontario Hydro Nuclear some kind of management expertise that will produce better results. Let me tell you that what I saw, with Mrs Johns and others in this Legislature last year, at this very time or a little later perhaps, as to the ongoing difficulties at Ontario Hydro Nuclear gives me a great deal of concern about, not only the cost of the power but the reliability of the system, and perhaps even the safety of Ontario residents.
I'm sorry to have to say that because I bought the line 25 years ago. Boy, I was here when the prophets came. It was going to be almost perfection. Two and a half decades later, the people who promised the moon have delivered me a thin slice of very rancid cheese. What do I do about that? I like public power, but most of our public power in recent times has come out of a very troubled Ontario Hydro nuclear power division.
I keep asking witnesses, so let me ask the sip and serve committee, what do I do with an apparently congenitally malfunctioning management at the biggest single part of Ontario Hydro's generating capacity, not just today or yesterday but apparently over the last 15 or 20 years? Sorry to have gone on, sir.
Mr Browne: No problem. Look, it's 1993 to 1997. It is making a profit.
Mr Conway: The numbers are bogus.
Mr Browne: I don't give a damn how much they owe. I wouldn't mind owing that, as long as I can service the debt. If someone tells me I owe $1 billion, to hell with it. If I can service the debt and show a profit, that's what we're talking about.
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Mr Conway: But who couldn't service the debt if every year --
Mr Browne: I've got the floor, come on. I've got the floor.
The Chair: But we are almost out of time, Mr Browne, please.
Mr Browne: I've got to leave? All right.
We've paid down the debt. Since 1993 we have been paying down the debt, that's the important thing, and in 16 years or less. We are supplying electricity for less money than any other neighbouring jurisdiction except Quebec, which gets it all with water, and Manitoba, which gets it all with water. BC has cheaper power probably, you see, and Alberta has, but Saskatchewan, PEI -- OK? We're getting it for less, and that's important. Don't worry about the management. The management is in good hands. We've got this guy, he's a CA, he ran Ernst and Young or one of the other big --
Mrs Johns: A good guy, Farlinger.
Mr Browne: A good guy. You know him. He's a smart guy, and he must have a lot of faith in it because he has committed $5 billion to upgrade the reactors. If he doesn't know where he's going to get the $5 billion he has no business doing it, but he's a smart guy. He knows he's going to get it back. Relax. He's spending $5 billion to upgrade those reactors, and he's not going to do it unless he knows where he's going to get the money, and he knows where he's going to get the money.
In this enclosure, the Candu reactors -- Philadelphia Electric and British Energy want to get hold of it. The Candu reactor is a great success in many places around the world. Maclean's had an article in their magazine last year that showed a map with all these different reactors around the world, Candu reactors, and none was being refurbished. They all must be running like clocks.
The Chair: We have to wind up.
Mr Browne: I'd better shut up. Thank you very much.
The Chair: I didn't mean to end it that abruptly. Mr Browne, we thank you for coming before the committee. It's a new perspective that we haven't heard a lot of, but we appreciate your taking the time to come before us.
Mr John Hastings (Etobicoke-Rexdale): Mr Browne, I think you should apply for some jobs at an Ontario nuclear facility.
Mr Browne: I make more money than when I worked. No kidding.
NEW YORK MERCANTILE EXCHANGE
The Acting Chair (Mr Doug Galt): We now call the next delegation, the New York Mercantile Exchange, Deniese Palmer-Huggins, director. Please come forward. Thank you very much for joining us today.
Ms Deniese Palmer-Huggins: Thank you for inviting me here. I'm afraid I'm not going to be as entertaining as the last person -- a little bit more dry material.
First of all, I'd like to introduce myself. I'm Deniese Palmer-Huggins. I'm the director of the Houston office of the New York Mercantile Exchange. I tell most people that that makes me an oxymoron.
I was asked here today basically from an information standpoint. First of all, I'd like to point out that the New York Mercantile Exchange and I do not take a position on the bill. We are here purely from an information standpoint, to impart to you how our risk management works, how the exchange works, who we are, where we came from. I'd like to just set the stage with that.
I'd also like to clarify that the topic of risk management is a very complex one and a very lengthy one and in 15 to 30 minutes today I am not going to cover all the bases. I am not going to be able to explain it in its entirety and you're not going to be able to walk away being experts. I just have to set the stage and tell you that this is not a topic that is easily discussed in this amount of time. But I'll do my best to try and give you as much information as possible. I will be happy to answer questions and I can also tell you that there are a number of forums in which you can send delegates or other members to educate themselves further. One of the things we spend a lot of our time doing is trying to educate the populace about who we are and how we function.
With that, I'd like to set the stage and tell you where we came from. The New York Mercantile Exchange is 126 years old. I think most people don't realize that most commodity exchanges are over 100 years old. For example, the ones in Chicago are about 150 years old and the Kansas City Board of Trade is 140 years old. We started in 1872 as the Butter and Cheese Exchange, so obviously we've had a lot of changes ourselves. In 1882 we became the New York Mercantile Exchange.
We are the largest physical commodity exchange in the world. What I mean by "physical" is that you can actually make physical delivery of a commodity, and I'm going to get to which commodities we trade on our exchange in just a few minutes. In 1994 we merged with another exchange called the Comex, which basically trades metals, and that made us the largest physical commodity exchange in the world. In terms of volume, there are other exchanges that are larger. I believe we rank seventh in terms of volume in the world. Based on that, it's to clarify the position that it's based on the physical delivery.
I'm going to spend most of my time addressing my remarks about the Nymex division as opposed to the Comex division, because Nymex is considered the energy division of the exchange and that is basically what my background is and I'm sure what your perspective is.
I said that the New York Mercantile Exchange is 126 years old, and this is correct. However, we've only been in the energy business for 20 years, but we were the pioneers in introducing energy futures contracts and risk management to the energy industry. We introduced the first energy contract in 1978, which was a heating oil contract. For those of you who know much about refined products, it is sometimes referred to as number 2 fuel oil or, as we call it in the south, diesel. For a lot of folks in the northeast, it's referred to as home heating oil.
It was when we introduced that contract in 1978 that we really realized that we had hit upon something. Previous to that, we had traded such commodities as nickel, potatoes, eggs, butter, cheese etc, but it was in 1978 when we introduced the heating oil contract that we realized there was a definite need for risk management in the energy industry. From there on, we began to introduce additional contracts. In 1983 we introduced what we call a light sweet crude oil contract. I refer to it as light sweet crude oil because it is quite often referred to as west Texas intermediate, which is only one of the grades of crude oil that actually fits that label. Affectionately, most people refer to it as WTI, but that would be incorrect.
That still to this day is the bread and butter of the exchange. It is the most actively traded contract we have on the exchange. It trades on average 100,000 contracts a day. In 1990 we introduced a natural gas contract, based on a delivery point in Louisiana called the Henry hub. That contract is probably the second-most-successful contract the exchange has. It trades on an average of about 50,000 contracts a day.
In 1996 the exchange introduced two electricity contracts. I know you were wondering when I was finally going to get around to something that interests you. In 1996 we introduced two electricity contracts that are based on delivery in the western part of the United States: the California-Oregon border and Palo Verde, which is in the Arizona switchyard. That also led us to realize that there is still a need in the electricity industry for risk management as well. In 1998, in fact on July 10, we introduced two more electricity contracts which are based on delivery in the eastern United States. For those of you who are familiar with the reliability councils in the United States, one is based on a mid-Atlantic delivery point, which we refer to as an into-Cinergy delivery. The other one is delivery in the SPP, the southwest power pool, which is an into-Entergy point. Based on that, we now have begun to experience risk management in the electricity industry.
The exchange itself has a volume of about 70 million contracts yearly, on an annual volume. Daily, we have on the Nymex division about 250,000 contracts traded. That's just to give you an idea of what our volume is.
I'd like to take a moment and explain what the economic role of commodities exchanges is, for those of you who may not be familiar. We provide a number of functions. Number one is price discovery. Now, through an exchange which broadcasts that pricing information, you can now know the price of that commodity. What basically happens is -- and a lot of people have a misunderstanding about us. We do not set prices. We are the forum in which buyers and sellers can come together. For those of you have had economics 101, it's purely supply and demand meeting to find that equilibrium price. That's what happens 250,000 times a day on the floor of the exchange. We don't set prices, but we will broadcast them, we will publicize them.
Every day, when a buyer and a seller on the floor come together and transact a deal -- one buys a contract, another one sells a contract -- they establish a price. The moment that price is established, it is reported to a price reporter on the floor of the exchange, who then inputs it into a computer that turns around and sends it out to reporting agencies such as the Bloombergs and the Reuters etc of the world -- I don't mean to particularly talk about them because it could be any of them -- who then turn around and broadcast it for anyone who has a screen. In fact, you can dial up our Web site and go over to a section under charts and data and actually see pricing that is 15-minute delayed as well. There are a number of places you can get that information, but it's price discovery. You can now know what the price of that commodity is and you can see it as it changes. You can see what those buyers and sellers are doing on the floor of the exchange that 250,000 times.
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Another function we provide is what we call a hedging function. That doesn't refer to the bushes outside your house. There's actually a definition that makes most people's eyes cross the first time they see it, but basically what we talk about in hedging is that it provides a forum where you can shift your price risk. You can actually shift that risk to someone else, and we provide the forum in which that can be done. We also do it in a secured environment. That's not exactly one of our functions but it's one of the benefits of actually transacting business on a commodity exchange, that we will provide security. I'm going to talk a little bit more about that in just a few minutes, but it's one of the things I like to point out to people.
The commercial benefit of dealing with a commodity exchange is that there's a reduction of the incentive to hoard. Probably in electricity that's not so much of a problem since it must be consumed the moment it's produced, but in other commodities it can be a very real concern. If you think of wheat, coffee etc, in those particular cases there could be very real concerns to hoard the commodity.
We place the pricing mechanism in the public. As I was discussing earlier about price discovery, now there's a place where the public can come. For example, if you pick up the Wall Street Journal and flip to the back for pricing, you can actually look down there and see what the price of electricity is, because that is published. You can see what the other commodities are, but electricity now being traded on our exchange is considered one of those products and it is printed in the Wall Street Journal. You can go on our Web site. You can look at pricing information such as Reuters and Bloomberg. Eventually it may even be on the nightly news, as it is now for other commodities such as natural gas and crude oil. Probably in the future that will be something in the nightly news; they'll tell you what the price of electricity is.
Last of all, one of the commercial benefits we provide is the provision for a forum for shifting price risk. I usually do these sorts of things where I have flip charts and overhead transparencies to illustrate what I'm talking about. It's a little difficult when you're having to use your imagination now. Nonetheless, the other thing that happens is that there's price volatility. Prices go up, they go down.
For example, to give you some ideas in natural gas, they talk about price volatility as being about 60%. Crude oil I believe has a price volatility of about 35%. I don't even know what electricity is. It's too young yet; we haven't given figures. But I can tell you it is volatile, from what we've noticed on the exchange from the two years' experience we've had with the western contracts. The beauty of it is that we provide a forum where that risk can be shifted.
I want to spend just a few minutes telling you a little bit about how we are organized. First of all, commodity exchanges in the United States are regulated by the CFTC, the Commodity Futures Trading Commission. All contracts must be approved by them before they can be launched or listed for trading and all amendments to those contracts also have to be approved by the CFTC. But we also have certain safeguards in security. This is what I was referring to before. When you actually transact business -- I'm going to speak purely on my exchange but I believe it's the same on most exchanges -- on my exchange your transaction is guaranteed. We have a number of ways, I call them layers of security, that we can ensure that.
Number one is that we are a member organization. You have clearing members and regular members. Clearing members have a heightened liability. They must guarantee those trades which they clear. I can give you a list. There are about 55 clearing members that are members of Nymex, but you're going to find most of them are the major financial houses in the world, who have very large balance sheets. They must guarantee those trades they clear. That is just one mechanism.
Second, in the case of a clearing member defaulting, the other clearing members of the exchange would then have to come in and take on that liability as well. We would ask them to fill the gap. We would first look to the clearing member who guaranteed the exchange and their financial resources. We would next look to the other clearing members who are part of the exchange to then fill that void, who once again are these 55 major financial houses. Then, in addition to that, we also have a guarantee fund. Each clearing member must make a contribution to the guarantee fund of the exchange, and that's based on their capital. It can be anywhere from $100,000 to $2 million. Right now I am told that the guarantee fund that the New York Mercantile Exchange has is about $75 million. We would have a number of different layers of financial resources to allow us to guarantee performance of those contracts traded on our exchange.
Another way we would do this is through the use of margins. I don't know how familiar some of you are with that. If any of you have ever bought or sold stocks, sometimes this can help you clarify some of the points I'm trying to make. If you were to buy or sell a contract on our exchange, you would be required to put up a certain amount of funds, which are called margin, and you would be required to maintain that margin throughout the time that you have what we call a position on the exchange. That's usually referred to as initial margin.
We also have something we call variation margin, which basically means that every day a position is what we call marked to market. The position or the value of the contract would be established every day by the exchange, and if that position was losing money we would expect you to pay a variation margin. This would be in addition to the initial that you must maintain. Every day we are looking at the value of the positions of the contracts that people have bought or sold on our exchange and we will be marking them to market, which means valuing their value, and then we would be determining whether the party buying the contract or selling the contract had made money or lost money. That would then determine whether they had to make a variation payment.
We also set margins as relate to the volatility. As we see volatility in a contract increasing, we have the right to come back and increase margins. Once again, what we are trying to ensure is a fair and orderly market, and we are also trying to ensure that those participants in our market have the financial resources to participate and to perform. That's of great concern to us.
So margin is also another way we would help ensure the performance of those participating in our market, in addition to these other security measures I just referred to a few moments ago.
Another point is that in margins there are rules about how a margin may be paid. For example, initial margin must be met in cash or T-bills, US government securities. We will even take a haircut on the T-bills. In other words, we will only recognize them up to 95% of their value, so you would have to go up and beyond that value to meet your margin requirements. Variation can be met in cash only.
Another safeguard we have is something we call position limits. Once again, as I alluded to, it's very important to us to have a fair and orderly market, and that also means we don't want people manipulating the market. Therefore, we have limits on how many contracts you can hold. We have them in one month; we have them over all the months that are listed.
For example, in electricity right now there are 18 months for future delivery that are traded, so over that 18 months there would be a limit to how many contracts you'd be allowed to hold and there is also a limit in what we call the delivery month. That's the month that would be closest to delivery, and that's usually where we would have the most concern because it's next up for delivery. We would also have limits in that respect too so that we would not be allowing anyone to manipulate the market.
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Just to give you a little information, the electricity contracts, we've noticed -- we have two years of experience now -- in the west we've seen a volume of about 1,500 contracts a day. One electricity contract is 736 megawatt hours, which is deliverable over a month. How we come up with 736 is two megawatts per hour, 16 peak hours per day and 23 peak days per month.
The eastern electricity contracts are going to have 736. We are changing the western contracts to 864, mainly because we noticed that the marketplace wanted to have what we call 6 by 16 blocks versus the 5 by 16. One of the things we do at the exchange is that we stay in very close contact with the market. If we notice that things need to be changed or that the market changes or that there has been evolution or development, we try to change our contracts so that we continually meet our customers' needs.
That's just a very brief overview of who the exchange is and what we are, what we trade. I'll be happy to answer any questions you have. As I said, this is a very complex subject matter that's not going to be completely explained or illustrated in 30 minutes, but I'll do my best to try and answer whatever questions you might have.
The Acting Chair: Thank you very much for a very interesting presentation. You might be interested to know that we have also received a presentation from the Toronto Futures Exchange that was also very intriguing, especially for someone like me.
We first turn to the government caucus. We have four minutes per caucus.
Mr Hastings: Thank you very much, Ms Palmer-Huggins, for coming and making your views known to us on what Canadians and Ontarians would probably regard as a very scary world, because a lot of the presenters before this committee have been concerned about reliability of delivery of electricity. When you bring up the whole subject of risk management, Canadians get a little jittery about that whole terminology. I'd like to hear from you what the specific techniques are for managing volatility in electricity futures and contracts, how you keep that in balance in terms of delivering electricity futures.
I also would like to know if you have any plans as a Nymex forum for expanding to Canada. What would you see as the essential market conditions for getting a futures contracts and options market in electricity trading up in Canada, in terms of the players you have already as members? I suspect most of them are the huge international financial players of the world like Salomon Brothers. Most of our stock exchange members of the TSE have pretty well disappeared in terms of independents. Midland Walwyn is now Midland Walwyn Merrill, I guess, or some such name. We have no specific independents left. I would assume that would also be an essential condition for international trading in this whole area.
Ms Palmer-Huggins: I could probably spend 30 minutes answering that question, but I'll try to do it very quickly. First of all -- I'm going to start with the last and go forward -- in terms of independents on the exchange, we actually have something we call locals. These are just individuals who trade for their own account. In that respect, I'd have to say there are still independents involved in trading. It doesn't necessarily have to be the large international houses. I myself have actually worked for small companies that were customers of the exchange in my 20 years of being in this business, so I can also tell you from that perspective that there are small companies out there that recognize the benefit they can derive from participating in the futures market in that they can shift their price risk to someone else.
Last of all, in terms of volatility and how you would do that, you use two instruments on our exchange: futures and options. This is not something I can explain very easily, without illustration, in two minutes or less, but basically what you do is that you are locking in a price. You can sell futures; you can buy futures. Whether you're buying futures or selling futures depends on what your underlying physical position is. For example, we usually refer to producers of any commodity, whether it's electricity, oil, natural gas, whatever, as being naturally short hedgers, "short" meaning that they sell futures. All they're doing is going into an exchange and doing the same economic function they would do in the marketplace, but they're doing it in a forum where they can do it early.
In other words, if I see the price of electricity at a good price right now and I know I can make money based on that price per megawatt hour, instead of waiting and seeing what may happen to me in the marketplace I can actually go and sell futures, which means sell future power, and I can lock in a price, and at that point I don't care if prices go up or down. They would hurt me if they go down, because it means that as a producer I would not be able to sell the power for as much money, and that is what I would be concerned about. Actually, in using futures, you shift that risk to someone else. You no longer are concerned with what happens with prices.
The downside is that if prices go up, you don't benefit in that either. I have to be fair and honest and tell you there are two sides to the coin. However, I would have to say at that point that's when you look to options. There are ways you can go out and use options, which are options on underlying futures contracts. You can once again use those like insurance policies to give yourself some protection. If that price were to decline you would be able to exercise an option, but if the prices went up you could still benefit in it.
Mr Conway: Thank you, Ms Palmer-Huggins, for a very powerful presentation. I don't profess to understand this business very well at all, but I have a couple of questions on the basis of what you've said.
First, I think you said about the volatility that appears to be evident in the electricity commodity business that in early going, it looked like it was more significant than some of the other commodities. Do you want to amplify that a bit? I'm interested.
Ms Palmer-Huggins: I don't have any figures to tell you. All I can say is that from what we can tell, it looks like the volatility seems to be extreme.
Mr Conway: Any indications of why it would be more extreme than, say, some of the other resource --
Ms Palmer-Huggins: I can venture some guesses if you'd like to be entitled to my opinion.
Mr Conway: Yes.
Ms Palmer-Huggins: I'm not speaking on behalf of Nymex. Basically, I think it has to do with the fact that electricity is not a storable commodity, the fact that with oil or natural gas you can actually put it in a tank, put it in the ground, put it on a ship, put it in a pipeline and you can store it, you can hold it. Electricity has very unique properties that we've not seen in commodity trading before, which means that the moment it's produced it must be consumed. You can't store it. I've asked people before about storing it and I get some very interesting answers about batteries and so forth. Nonetheless, I think that has a lot to do with why you're seeing more price volatility.
Mr Conway: If you're right in that guess, and it sounds like a pretty good guess, that would make all the more important the buffering mechanisms or the protection mechanisms that were there to deal with the risk-management issues that you also raised.
From what you can tell, in the first couple of years of actual experience at Nymex with the electricity exchange, are there going to be any additional measures beyond the ones you've taken to cope with the risk management in a very volatile commodity like electricity?
Ms Palmer-Huggins: So far the mechanisms we have seem to be working. Number one, you can actually take physical delivery of the power. In the western contract, which has been trading for two and a half years now, we have noticed people going to physical delivery. As far as we can tell in the two years, we've had no problems. In fact, just to give you a statistic, 3% to 8% of those contracts traded for western delivery actually go to physical delivery. In that respect, that seems to help as well.
The only other thing we've done to help with the volatility is that we have expanded the price limits. In other words, there are certain limits during a day in which the price can fluctuate, and we've actually had to expand those limits for electricity, which we've never really had to do in some of the other energy contracts.
But in terms of security, what we have seems to be working, and we've had no problems with it. As far as I know, there is no current thinking that we need to change those. Now, that's not to say that if something happens and we see a problem, we would change it.
If you want to go back and look at the Gulf War and what happened with the price of crude oil, we've been tested in other commodities, so we feel pretty certain that those mechanisms work.
Mr Conway: I have a final question. On the basis of the two years of experience with the electricity commodity, what advice would you have for a jurisdiction like our own that is beginning down this path in the next few months? You've had two years of experience in this particular market.
Ms Palmer-Huggins: I'd say go educate yourself about risk management and see if it's going to work for you. I can tell you that the state of Texas actually uses these products to manage the price volatility of their royalty production. In that respect, I would probably urge you to educate yourself so that you could see whether this is something that would be useful to you.
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Mr Lessard: In part of your presentation you mentioned that maybe the price of electricity would show up on the nightly news, along with the price of oil and the price of gold and one that I haven't liked to watch the last few weeks anyway, and that's the price of the Canadian dollar versus the American dollar. Those are things that I can look at and tell; for instance, if I'm thinking about going to the United States, this is going to affect my decision. But when it comes to the price of electricity and the availability of the services that Nymex offers, how can somebody like me or my wife look at our electricity bill and say, "Maybe we could get a better deal or hedge our risks"? How might we benefit as residential consumers from services like Nymex?
Ms Palmer-Huggins: Quite honestly, I don't know that I would recommend for mom and pop to go out and hedge their electricity requirements, because there are risks involved and we're very conscientious about it. On the other hand, mom and pop sitting back watching television and seeing the price of electricity might then take their electricity bill and say: "OK, let's just compare the two. I can see this is what they're telling me on TV was the price of electricity. Let's go over and look at my bill and let's just see if I'm getting a real good deal or not."
Mr Lessard: That gets to the next question about volatility, which we've seen in early July with the heat wave, in Texas especially --
Ms Palmer-Huggins: It still goes on.
Mr Lessard: -- which increased the spot market price of electricity substantially. What happened at the exchange? Were there any failures there? How was that dealt with?
Ms Palmer-Huggins: First of all, I'd like to clarify that the price spikes you saw were in what we call the hourly market, which is not traded on the exchange. We have a monthly product, so we did not see those same extremes that you read about in the press. But we have all the mechanisms in place, like stops. For example, if you hit a price limit, we'll cease trading for 30 minutes. There's a cooling-off time. Then you're allowed to stair-step again. We have certain mechanisms to help the market deal with those cases where there might be extreme volatility within the day. That would be how I'd have to answer that question.
The point is that what was happening there was a number of situations. There were power outages, there was a heat wave and then there was maintenance that was going on at certain utilities. It was basically just your supply and demand: Not enough supply, greater demand, and therefore prices spiked in response to that. But it was in an hourly market; it was not something that was reflected on the exchange.
The Acting Chair: Thank you very much. We really appreciate your coming before us to present a very effective, very powerful presentation. It's obvious that you're very knowledgeable about the exchange. We appreciate the time you've spent with us. If we were to give out a prize for the person who came the farthest distance to present to this standing committee, I'm sure you would be the winner.
Ms Palmer-Huggins: This is true. I came all the way from Houston, Texas.
The Acting Chair: That's marvellous. Thank you very much. I hope you stay for a while and spend some of those cheap loonies and have a safe trip back.
Ms Palmer-Huggins: I can tell you that I was over at the mall earlier today and spent some of those American dollars.
ENERGY PROBE
The Chair: We'd now like to call upon representatives of Energy Probe, please. Good afternoon, gentlemen. Welcome to our committee.
Mr Tom Adams: Good afternoon, Madam Chair and members of the committee. My name is Tom Adams. I'm executive director of Energy Probe. I am joined today by Mark Mattson, counsel to Energy Probe, and Norm Rubin, Energy Probe's director of nuclear research.
The theme of Energy Probe's oral presentation to the committee today is this: On one hand, there is no serious alternative to Bill 35 as it applies to electricity; on the other hand, changes are required to Bill 35 to ensure regulatory due process in gas and electricity.
We have also made recommendations about environmental protection, financial protection for taxpayers, audit requirements and stipulations regarding the creation of the IMO. These are set out in our written materials. Although time doesn't permit us to cover them in our oral presentation, we certainly invite the committee members to carefully review these recommendations, and we also invite questions in these areas or any others that are on the minds of committee members. In the package that we've circulated to the members, there's also an article that I recently wrote in an energy trade journal dealing with Bill 35 that describes some of our praises and concerns regarding the bill.
Energy Probe is a national environmental and consumer advocacy organization with over 10,000 supporters, more than half of whom reside in Ontario. We have been actively representing the public interest in regulatory hearings, in the press and before government committees like this for over 20 years. Since 1982, with the publication of the book Breaking Up Ontario Hydro's Monopoly, by our friend and still colleague Larry Solomon, Energy Probe has actively advocated a competitive restructuring of the electricity system. In 1984, the book was expanded, updated and published as Power at What Cost? Through the 1980s and 1990s, we battled Ontario Hydro and its allies at the OEB and before various boards of the environmental assessment process, including the demand-supply plan hearing, and also in the courts on both competition and environmental questions.
The two main themes of Bill 35, separating competitive functions from natural monopoly functions and empowering consumers to shop for power producers of their choice, match the approach that Energy Probe has advocated since 1982. We are strongly in favour. In our view, there is no serious alternative to Bill 35 as it applies to electricity. The legislative and institutional status quo in electricity is not in the public interest. Our electricity system is suffering from a long list of very serious problems: monopoly, unaccountability, inefficiency, profound environmental liabilities and a long history of politicized decision-making, all of which has occurred in the absence of public regulation with due process.
On the other hand, Ontario's natural gas system is sound and successful, although its regulation could use some fine tuning. If I could leave you with one guiding principle, it would be this: Ontario's marketplace in natural gas, including the regulatory role of the Ontario Energy Board, is a jewel that must be protected. Moreover, that successful example ought to be the model we use in creating a marketplace in electricity.
The main problem with Bill 35, in our view, is that it introduces serious flaws into the jewel that is the natural gas marketplace and it duplicates those flaws in the new electricity marketplace. Both of these problems result from the bill's weakening of due process in the Ontario Energy Board's regulatory function. For example, Bill 35, as drafted, does not require the Ontario Energy Board to conduct its proceedings in open public hearings, as is now required. In addition, Bill 35 as it's now drafted does not require, as is now required of the Ontario Energy Board, that the board record its decisions with written reasons.
While some believe that due process by quasi-judicial regulatory agencies is impossible in a marketplace with publicly owned entities like Genco and Servco, we believe due process can be achieved. In the private sector natural gas marketplace it not only can be achieved but in fact actually is being achieved. Without due process, the regulatory process itself risks losing its independence, its authority and its respect, and the marketplace faces a substantial risk of losing its own legitimacy.
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Now I'll turn to our specific recommendations, page 3 of the package. Our specific recommendations that I'll speak to, given the time we have available, will focus on regulatory policy questions and regulatory process questions, but there are more if you dig through the package.
The first section of specific recommendations that we're making is to draw the attention of the committee to those specific elements of the existing Ontario Energy Board Act of 1980 where the wording or spirit of those clauses ought to be carried forward into Bill 35 but has not been.
The first specific section is section 14 from the existing act, the one that prevails today. You can read the text of it there, but the guts of it is that the Ontario Energy Board is empowered through the legislation with all of the procedural mechanisms that the Ontario Supreme Court, now the Ontario Court (General Division), has. We argue that these formal adjudicative powers are necessary to ensure the legitimacy, authority and independence of the Ontario Energy Board. Procedural order, clarity and fairness benefit all parties to the board's proceedings. We would encourage a carrying forward of this specific clause.
The next clause that I want to draw your attention to relates to how the board deals with references that it receives, or order-in-council statements. The board is required to hold a hearing upon notice on these matters. This is a theme that I'll come back to several times or that you'll notice in the remarks several times. We believe that hearings provide an essential opportunity for evidence to be properly tested. References from the minister or order-in-council statements that are given to the Ontario Energy Board are properly subject to public review, both so their implications can be fully understood and also so the minister himself is disciplined by the prospect of this review.
In contrast to the review of references required in the existing Ontario Energy Board Act, the proposed act contains section 26, which allows the minister to issue dictates to the Ontario Energy Board by fiat and not have them reviewed but simply have them implemented. As noted a couple of times in this package, we urge the committee to delete section 26 on the grounds that it undermines the authority and independence of the Ontario Energy Board. We want to maintain the judicial integrity of the Ontario Energy Board process.
The final specific recommendation that I'll be able to get to is a very simple statement that's found in the original Ontario Energy Board Act, and that is, "Every proceeding before the board shall be open to the public." This is really a very essential element of the energy board's mandate and one of the reasons it has been so successful in the gas arena. Bill 35, as it's currently proposed, does not contain a guarantee that members of the public can observe and participate in the regulatory process. Public utilities ought to be open to public scrutiny, and the regulatory process for public utilities the same. Methods of regulation or self-regulation behind closed doors that might be suitable in other markets, private markets, such as those that are regulated by the OSC, are not appropriate for application by the Ontario Energy Board. Without a clause matching 15(4), which says, "Every proceeding before the board shall be open to the public," it is possible that proceedings dealing with public interest matters might occur in secret, behind closed doors, might be influenced by factors that might not be appropriate.
In light of the time, I'll draw your attention to a couple more just in outline form. We think it's essential that the energy board, when it brings down a decision, publish its reasons with that decision, in the normal way in which the courts usually decide when they explain the reasoning; and of course it's required in the old act.
The final one that I will leave to your attention is this requirement in the existing act that when natural gas utilities are being sold, or when there is a change in disposition of the assets, the energy board must hold a hearing and submit a written report and opinion to the cabinet. This is a function that we think ought to carry forward and apply both to electricity and to gas.
With that, I will open it up for questions.
The Chair: Thank you very much. We have seven minutes remaining for questions from each caucus. We will begin with Mr Conway.
Mr Conway: Tom and colleagues, thank you for your presentation. I want to begin with section 26 of the Ontario Energy Board Act, which you make specific reference to. As you understand the evolving world, why do you suppose 26 is there?
Mr Adams: You're referring to the new 26, not the old?
Mr Conway: Yes, the new 26.
Mr Adams: The old 26 we like. Perhaps Mr Mattson can help you.
Mr Mark Mattson: I am Mark Mattson, counsel to Energy Probe. The only reason I can see the new act contains that section with respect to policy directives is because the old act required the government, if they were issuing a Lieutenant Governor in Council order, to first put that forward to the Ontario Energy Board to have a hearing and then that opinion would go back to the government, such that if the government decided they were going to overrule or overturn the decision of the Ontario Energy Board, they would do so at their own peril because there might be a sense of embarrassment etc that came out of a public due process forum where decisions and reasons were issued. The only reason I can see section 26 is to avoid that embarrassment, or that potential embarrassment, that may exist.
Otherwise, as you are aware, Mr Conway, for the last 20 years gas regulation, for example, has had no government directives or influence and has functioned not only well but exceedingly well. In my 10 years before the Ontario Energy Board, I have not seen government interference in that regulatory process. If the government wanted, for example, to allow British Gas to buy Consumers' Gas, they first have a hearing before the Ontario Energy Board. The board issues its recommendations and undertakings and the government then would either adopt them or adopt them in part.
This section just exempts them from that requirement. I think it may be due to potential embarrassment or whatever, but it certainly allows them to go ahead without the board's approval.
Mr Conway: It's followed, you see, by section 27, which reads, "In order to address the abuse or possible abuse of market power in the electricity sector, the minister may issue, and the board shall implement...." We've had some deputants -- in fact, Hydro Mississauga was here today and I thought they made a good argument that since this is not the gas business, this is the electricity business, particularly over the next few years, as we move to the new world order, there are going to be some potentially significant unknowns. I won't get into the details of Hydro Mississauga's presentation, but they basically suggested to us that you're going to have to be a very wise person to anticipate all the potential contortions and diversions. I think that is a fairly reasonable bit of advice to the committee. Because there are going to be some very significant policy questions here, is that a fair flexibility to leave Her Majesty's government?
Mr Mattson: Mr Conway, this is the Ontario Energy Board Act which will apply to gas and electricity.
Mr Conway: No, I realize.
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Mr Mattson: Second, because it will require a great deal of knowledge and wisdom in order to help provide oversight to this very important energy market, one wonders why you wouldn't leave that to the Ontario Energy Board, which has due process in place, full disclosure, independent decision-making and binding decision-making, as opposed to leaving it open to a political process that may become more prone to political influences, backdoor lobbying etc.
The Ontario Energy Board, which has a 20-year history even with electricity, is really in some way being stripped of that and being told, "Now you're going to be a more of a pawn of government; you're going to take your orders from government; we'll tell you what to do," as opposed to the old method, which was, "Let's give it to the board; let's have a public hearing; they will give us their decision; we don't have to follow it in electricity," and the act didn't make you follow it, but at least you had due process before government made a decision on any issue. This will exempt you from that. It's just, "You shall implement the policy decision," and the board does not have a chance to --
Mr Conway: I think you make a very good argument. I tell you, I've had it with the old order. One of the parts of this policy that I like most of all is that an unregulated monopoly is being replaced by a regulated competitive marketplace and I'm hopeful that will provide some better discipline that we have seen and that you have rightly complained about as a group for several years.
Having said that, it's not gas, it's electricity. If it were just gas, I would totally agree with you, I suppose. It's just that I'm worried that we've got some big surprises around the corner and I guess I'd like some help. How do the politicians deal with those situations that may develop that are highly political and that shouldn't be decided, can't be decided in some ways, by a regulator? Or is that just an unfounded worry?
Mr Adams: No, I think it's a sound concern. But in the marketplace that's envisaged in Bill 35, we've got the government as shareholder. As a shareholder, it can control its own assets. The cabinet has the power to direct its own assets. It doesn't need to yank the chain on the Ontario Energy Board to get its will imposed. To do that would devalue the quality of the regulatory process. It has a mechanism at hand.
Mr Conway: That's a good point. Thank you.
Mr Lessard: One of the things I think you didn't get an opportunity to mention in your opening remarks --I don't know if you did this because I stepped out for a couple of minutes -- is with respect to the environmental protection rules. I want to give you an opportunity to go through that area because that's something that I'm quite interested in.
One of the issues that we've been dealing with, and that we heard about actually with a great deal of force, was in Ottawa from the Atomic Energy Control Board which talked about the requirement for there to be sufficient reserves for decommissioning of nuclear plants and disposal of waste. In fact, they suggested to us that before even the transfer of assets to the new Genco from Ontario Hydro, there would have to be a new licence issued and therefore this would have to be evaluated by them. They said that was their jurisdiction. But in your suggestions here you seem to suggest that the provincial government should have some jurisdiction as well.
Mr Norman Rubin: Perhaps I can speak to that. I'm Norman Rubin. In our view, the Atomic Energy Control Board is decades late in their concerns over decommissioning and waste disposal funds.
Mrs Johns: Thank you very much.
Mr Rubin: Perhaps we can continue what is actually a long-standing tradition of Ontario parliamentary committees raking the Atomic Energy Control Board over the coals and making recommendations for the federal government and regulator, which perhaps a decade or two later, gradually inch toward reality.
One of the possibilities in this field, and there's also a long tradition of Ontario parliamentary committees recommending this, is for the Ontario government to take some responsibility for the environmental and health impacts of Ontario's nuclear facilities. There is no restriction, legally or constitutionally, as far as we can see on overlapping jurisdictions for these things. As you may know, in reality we've gone the other way. Any staff the government used to have that knew anything about this are mostly gone, and that's too bad.
What we have here is a situation where I've corresponded with the president of the Atomic Energy Control Board over a speech she gave recently to the Canadian Nuclear Association in which she said that up till now, and including now, the environmental cleanups of the nuclear reactors are completely guaranteed by the taxpayers of the provinces under provincial guarantees. First of all, I've asked her for legal opinions on that and she's provided none. Second of all, to the extent that those guarantees exist, they are guarantees in which our great-grandchildren may or may not be obligated by law to pay to clean up our mess. The Atomic Energy Control Board, which has insisted that uranium mine operators and others provide real funds and bonds and real provisions to make sure that the funds are paid by the right people, has done nothing to ensure that is the case with the huge liabilities. In other words, they're penny wise and pound foolish on this. They've been completely asleep at the switch.
The good news is that Bill 35 and the rest of the reform of the electricity system and the threat that British Energy or somebody will come in and inject private capital into the nuclear field has awakened the Atomic Energy Control Board. That's the good news. They now see that there might be a problem. What they have failed to see still is that there is a problem. There's no money now. Hydro didn't set aside any money. The government hasn't set aside any money. The money is gone. Ratepayers have paid for a small fraction of the cleanup, some $2.5 billion out of what is now estimated at $18.7 billion in last year's dollars. We've paid that much at least. The problem is it's all gone.
Mr Lessard: It's therefore going to become part of the stranded debt or residual stranded debt, I'm assuming, and will have to be covered somehow.
Mr Rubin: It is a liability and it is stranded in the sense that there isn't much hope that the revenues from the nuclear generating stations can in fact fill that bag with cash reliably before they retire. That depends on a number of assumptions. But however that bag that we plan to pass on to our kids and our grandkids is going to be filled with gold to do the job, it must be filled with gold. We have to provide the funds. It is immoral not to do so. We have some mechanisms in mind, but somehow or other it is immoral, and we must recognize that it is literally immoral, to leave the junk and the garbage and the poisons without leaving the corresponding funds. That must be done now. This is a perfect time to do it because there are balls in the air in this juggling act, in the electricity competition act, and thank heavens we're all being awakened to this.
Mr Adams: I'll just add that in our package at the bottom of page 5 there's a paragraph describing what we think needs to be done in wording.
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Mr Baird: Thank you very much for your presentation. Let me just say at the outset it's certainly very specific and gives us a lot to pause and reflect on over the course of our deliberations. I want to thank you for the specificity pertaining to consumer protection because in this case it's not just consumer protection, it's taxpayer protection as the taxpayers are the shareholders.
I have some questions for you on page 6 with respect to the provincial guarantee. Obviously, the province would continue to guarantee the existing debt, whether that was assigned or residual stranded debt. I'm just curious what would give you cause and fear with respect to the province being in a position where they might be liable for any new borrowing undertaken by Genco or Servco in the future.
Mr Rubin: Perhaps I can take one crack at it. I believe there are two concerns and one is kind of legalistic and the other one is logical. The legalistic one is the concern that if the Ontario cabinet has exercised control over Finco, the new financial company, and directed its borrowings, then even if the bonds they issue do not say on them that they're a general obligation of the province of Ontario, there is concern that will be taken to be an obligation, and should Finco be in a position where, God forbid, it has to default on some loans, there will be successful action against the province to honour those obligations. That's the legalistic one. Perhaps Mark or other lawyers can bat their heads over that.
Let me also address the logical one. This concerns new, unguaranteed borrowing, which presumably will be for new ventures by Genco and Servco, and whether that new borrowing, expressly as written on the bonds and enshrined in law, is subordinate to the existing 30-billion-odd dollars' worth of debt which is guaranteed by the taxpayers of Ontario. If it is not expressly made subordinate, the way a second mortgage is made subordinate to a first mortgage, then the concern is that all new borrowing becomes majority guaranteed by the taxpayers of Ontario.
Let us take a hypothetical example. Servco decides to buy a phone company and there is new borrowing not guaranteed by the province in order to make that happen. Any new venture that involves new borrowing, should there be a shortfall and all of that debt is equivalent in its claim, then should a new $2-billion purchase result in a $2-billion shortfall because it's a stupid purchase, everybody takes the bath. All bondholders, most of which are guaranteed by the provincial taxpayer, would then take a bath proportionately. In other words, the idea of taking the provincial loan guarantee away is so that full commercial responsibility will apply to new expenditures, and our concern is that may not happen unless new borrowing clearly is at its own risk.
Mr Baird: My understanding is section 52 -- I'm concerned about this; you've obviously given a great deal of thought to it -- would limit it, but if you've got anything that you could contribute or send the committee following this presentation to help support that, we'd certainly we would all welcome it to consider during our deliberations after the hearings are over. If there is anything else to support that, we'd certainly --
Mr Rubin: I can just mention that in a recent briefing of finance officials, for example, they said they were still trying to decide whether or not they would make the new borrowing subordinate to the old borrowing, and they said they basically had -- they didn't call it a conflict of interest, but there are conflicting interests. To the extent that the government wants to maximize its shareholder interest in the new companies, it would let them roll it in together, and to the extent that it wants to protect taxpayers from the call on the provincial loan guarantee, it would make the new borrowing subordinate. Anyway, that's my main basis for confidence that there's nothing in this act that eliminates the question and the concern.
Mr Gilchrist: Thank you, gentlemen, for your presentation. I'd like to pursue something Mr Rubin included in his comments, and it was extraordinary. I appreciate your candour and your honesty, and not just because we happen to agree with you. But it would appear your indignation is very well placed that after 40-odd years of sitting on the sidelines as a paper tiger, for AECB to now have the extraordinary gall to come before us and say that because we've opened up this prospect in terms of a change of direction, somehow they've got the teeth to really wrest nuclear issues under control. Had you been privy -- and maybe you've seen a copy of the presentation Ms Bishop made to us where she said, "I might even withhold the licence if you want to bring in a new equity partner." It had nothing to do with the business plan, nothing to do with the actual operation of the plant but, "If I don't like the shareholders you're dealing with, I have that power and I will use that and wield a mighty sword."
My question to you is this: If in fact it is the perception of that federal agency that they are now, and presumably always have been, the final guardians between us and a nuclear holocaust -- those nuclear plants -- what role do they share financially in the absolute abrogation of any fiscal management in those 40-odd years?
Mr Rubin: Let me try to answer that. First of all, God forbid that anybody start filing those claims, because it will mean that we have the holocaust and the money is not there to make it good. That's what would give rise to claims saying exactly who is responsible.
Mr Gilchrist: Let's even look at the decommissioning, the fiscal holocaust.
Mr Rubin: That's right. It might happen when it's time to decommission, and the neighbours insist on some decommissioning and there's no money to do the job. That could lead to such claims, as I said. First of all, let's be clear, God forbid that should ever arise, and this committee and this government forbid that should ever arise.
Second, in my view the responsibility to pay for cleaning up Ontario Hydro's nuclear mess rests with the owners of the generating stations, the customers of the electricity from the generating stations and those who signed the OK to build and operate the nuclear generating stations. That latter category does include the AECB.
Let me make another point. I do not fault the AECB for slowly becoming the regulator I've always tried to urge them to become. It is not the problem that they are now trying to flex their muscles and trying to find their muscles and reaching into a scabbard to see if there's a sword there; the problem is they haven't been doing it enough.
I don't want to fault them for finally saying the legitimate, important principle: that there be cradle-to-grave secure funding for cleaning up the mess when you're done and that that funding be there when you begin. That is their principle. They apply that principle widely to little private sector polluters. They just haven't applied it to the big ones. I don't fault them for now saying it's time to apply that to the big ones. I do fault them for being a bit tardy.
Please don't take this as criticism -- I yield to no one in my criticism of the AECB -- but what they are doing here is certainly a step towards sanity. For them to be concerned that new developments may make that empty bag harder to fill with pieces of gold is a legitimate concern and it depends very much on how a future deal might be structured.
Mr Gilchrist: But you'd agree that their timing is extraordinarily opportunistic.
Mr Rubin: On the other hand, this is the first day of the rest of our lives and the question for our grandkids is how are we, those of us who are around today, going to fill that bag with money, not even necessarily who mostly is at fault for the fact that it's still empty? I doubt you can make a case for AECB being more at fault than Hydro or Hydro's owners.
Mr Gilchrist: It's not a question of more or less value, it's just that as somebody who grew up believing all through my adult life that AECB was that regulator they profess to be today, I was very disappointed to get our hands on the cookie jar three years ago and see the true state of affairs.
Mr Rubin: Well, they're not today either.
Mr Gilchrist: Still not. Thank you for your candour.
The Chair: Gentlemen, thank you for coming before our committee. Your organization has been astute and diligent in its review of this industry over the years and we appreciate your advice. I know we'll read your brief very carefully.
Mrs Johns: Madam Chair, just on a point of clarification: In section 26 of the act, what the government was trying to do -- I'd like Mr Adams to review this and see if he thinks he would like to restate his case, or if he still feels strongly about it. Maybe he could circulate a document after. In an evolving market, we knew there were going to be things in the transitional market, as Mr Conway suggested, that we were not sure about, so we wanted to leave that open. We believe this section adds transparency, because as we prepare directives, of course they're available to the public and they're approved by cabinet.
What happened in the past, we believe, was that the Ontario Energy Board could provide something and we would accept it or reject it. That was the way the system went. Whereas now we're making very clear what the policy directives are, and that's available to the public. Perhaps you could consider that important and maybe get back to us.
The other thing the legal beagles back here are telling me is that some of the directives you put into the first two pages of your section are covered under the Statutory Powers Procedure Act. I wonder if you would have a discussion with them afterwards, lawyer to lawyer, and find out if they actually have covered your concerns and get back to us with that. You can't really comment, but if you could send us a letter, that would be great.
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CITIZENS FOR RENEWABLE ENERGY
The Chair: I now call representatives from Citizens for Renewable Energy, please. Good afternoon, sir. Welcome to the committee. Nice to see you again.
Mr Siegfried Kleinau: My name is Siegfried Kleinau. I am better known as Ziggy. I am the coordinator of Citizens for Renewable Energy. Our organization certainly isn't as well known as Energy Probe, but we've only been around for two and a half years, so keep that in mind when I make my presentation here on behalf of the members and directors of Citizens for Renewable Energy.
Thank you very much that we were invited to make this presentation. Since the inception of CFRE, Citizens for Renewable Energy, our organization, now comprising over 1,000 members, has been heavily involved in promoting energy conservation and replacement of conventional power generation with safe, clean and sustainable renewable-source-generated electricity.
Shortly after our incorporation in January 1996 we made a well-received presentation before the Advisory Committee on Competition in Ontario's Electricity System, the Macdonald committee. We were pleased to see the commission's report contain the statement:
"We do not argue that market forces will, unaided, produce socially desirable outcomes. Where environmental objectives are concerned, similar to other public policy issues, the advisory committee believes that the government will have to stay very much involved.... The advisory committee believes that the process of restructuring...must be accompanied by consideration of the most appropriate regulation or other instruments to secure the protection of the environment and, specifically, to support energy efficiency and the introduction of renewable energy technologies."
This was on page 91 of the report.
On the same page the report states, "The advisory committee supports the use of the transmission and distribution systems as a source of collecting levies to support important public policy objectives, including those related to the environment." This is where our efforts seem to be reflected: to free up monies to help consumers cut energy waste and so benefit their pocketbook in a roundabout way.
We would dearly like for the government to see the benefit of establishing an energy efficiency agency or department within the bounds of the Independent Market Operator, or IMO. This body would be entrusted with overcoming the inherent conflicts between utility profit maximization and the achievement of cost-effective energy efficiency in a competitive market. Delivery of efficiency services would be left to an open ESCO market involving private as well as green community ESCOs and municipalities.
Ontario Hydro itself embarked on an in-house energy efficiency program and proudly reported in the first volume, number one edition of Energy Matters, from March 1996, that a complete retrofit of the lighting system in their head office at 700 University Avenue has cut energy use by 5 gigawatt hours, or about 29%. They explain that is approximately the annual energy use of 500 homes.
In the same publication they also expand on other benefits beyond conserving energy: "Less energy use also means less production of greenhouse gases, acid gas and ash. That, in turn, means Ontario Hydro is producing less emissions for every kilowatt hour of energy delivered to its customers. In addition, there are 'upstream' environmental benefits, such as less use of non-renewable resources, less mine wastes, and a corresponding decline in the environmental impact of fuel recovery, production and transportation."
I believe that sheds light on what is really involved. Therein lies the whole story. We have to see the issue in its whole spectrum. We sincerely wish that this bill will have provisions to force conventional power generators to contribute a certain percentage of their profit towards these energy efficiency projects.
In our presentation to the select committee an Ontario Hydro Nuclear affairs in Kincardine last October, we pointed to at least two of Ontario Hydro's programs that promised substantial power savings from conventional suppliers. These were abandoned well before their expiry date. The reason was the cost and potential asset-stranding implications.
We cannot stress enough that the stranded debt, which stems almost entirely from their nuclear division, should not be allowed to impede energy conservation and integration of new renewable energy generation projects. This stranded debt should be dealt with as expeditiously as possible before competition comes in. That involves stopping all expenditures on the nuclear rehabilitation and recovery plan which would greatly increase this stranded debt. Any expenditure towards restarting the worn out Bruce A and Pickering A reactors is a blatant subsidy on the backs of Ontario taxpayers.
We need dedicated wording in Bill 35 to facilitate the forming of green power co-operatives that will invest private funds in stand-alone projects like the Toronto Renewable Energy Co-op, TREC, for example.
Rural communities stand to be left without bargaining power, while bulk buying municipal electric utilities would benefit urban customers. These direct rural retail customers of Ontario Hydro, while still guaranteed the rural rate assistance, would need the possibility of coming together with like-minded power consumers to form their own associations. This would help to achieve their goal of producing power which is protected from future rate increases through upfront investment and private ownership and does not include fuel processing and waste disposal costs as in conventional power generation.
It would be to the benefit of generators and consumers both to allow free access to transmission lines to distribute this green power. For other rural power users, it should be possible to have their own grid-connected power generation from photovoltaic cells and small wind turbines in a legislated net billing installation that would prevent the need for their own battery storage. The government, through associated legislation, should make low-interest loans and tax rebates available to assist these rural consumers, especially farmers, in financing their power installations. This again would initiate a whole new industry with many hundreds, if not thousands, of new, long-term job-creating potential.
In the white paper issued last November, the government expressed concern about the rapid restructuring in the electricity field going on in neighbouring jurisdictions. It expressed quite eloquently fears of cheaper electricity prices luring industry and jobs out of the province. We have to impress on government that creating a new industry in this province that would need very little support to establish itself is the solution to both of these envisaged problems.
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As the title of this new bill puts the emphasis on creating jobs, let's follow Denmark's example where manufacturing wind turbines has created employment that has more than doubled in three years and has overtaken the fishing industry as the largest employer in this European country.
Job creation of this kind could bring employment to diverse areas of Ontario. It is not centralized like building huge nuclear power plants, benefiting only certain small localities. Many one-industry towns in northern Ontario could be diversified into manufacturing components for wind and solar energy generation. Up until now, practically all these components have had to be imported. Government has to do more to bring these job creation measures into effect, and Bill 35 is a magnificent tool to do it by breaking down barriers against supplying the public with clean and safe electricity from renewable resources.
While paying lip service to integrating renewable energy technology into its generation mix, Ontario Hydro has done all it could to discourage private investment in this clean and safe source to the detriment of job creation in this province. We include correspondence from Mr Rod Taylor of Ontario Hydro in our submission.
Power Workers' Union locals have expressed their interest in job transition to the renewable energy sector. Nuclear phase-out does not mean job losses but new job opportunities. It is high time that new legislation like Bill 35 opens up the transmission lines to people who want to do their part to mitigate greenhouse gas emissions and lethal radionuclide pollution of air and water to help Ontario keep its promise to reduce emissions as outlined by the Premier in personal correspondence dated January 23, 1997, and we attach a copy of that.
Our recommendations to the committee are as follows:
In keeping the overall objective of fairness and transparency to guide the new Energy Competition Act, 1998, we want to see the user-pay principle put at the top of the agenda.
We recommend introduction of a renewable portfolio standard, RPS, of at least 5% from new renewable energy sources, excluding large hydroelectric, to be met by generation companies or retail power suppliers one year after introduction of this bill, with 1% increases each year thereafter.
We recommend that a system benefits charge, SBC, be legislated to provide funding for conservation, efficiency and renewable energy research and development and be administered through an energy efficiency agency integrated in the Independent Market Operator.
We recommend that the stranded debt be paid back by all electricity users on the 60% of their hydro bill that represented the portion from nuclear power generation, but that there be no stranded debt charge on consumers of new, renewable and small hydro-generated electricity.
We recommend that emission caps be set not only on greenhouse gas emissions but also on tritium emissions to meet recommendations by the Advisory Committee on Environmental Standards, ACES, in their 1994 report, A Standard for Tritium, for drinking water quality; as well that carbon-14 releases from nuclear plants be capped in accordance with recommendations of the Advisory Council on Radiological Protection, ACRP-14, July 1995, to protect public health.
Last but not least, we need to see all the external costs, social and environmental, included in all pricing to make competition fair and transparent. The Ontario Energy Board and the IM0 should have full power to enforce targeted legislation.
When will this society ever realize that the steam power generation age is completely outmoded and superseded by new technology, and that with the help of advanced electronics a new age of power generation has dawned, bringing the promise of keeping our world from the brink of environmental destruction? We better start realizing this advantage given to us by nature and put it to work without delay.
We really appreciate the attention given to this presentation and sincerely hope our recommendations will be taken into serious consideration.
The Chair: Thank you very much. We've time for questions, four minutes per caucus. We begin with Mr Lessard from the NDP.
Mr Lessard: Thank you very much for your presentation. It seems as though there's a strong consensus among those who are involved in the environmental area that we need to pursue renewable portfolio standards and system benefits charges within the legislation. Do you think that the government's objective, and they'll tell you this as well, that this is a bill that's going to provide opportunities for those who want to generate and market green or renewable energy, is really going to happen if there isn't some requirement in the bill for renewable portfolio standards or systems benefits charges? Do you think it'll really happen?
Mr Kleinau: The problem, Mr Lessard, is that with open competition it always seems that the lowest price wins and, in that case we have to realize that the renewable portfolio is something that protects the initial high investment in these clean and safe power sources, and that we have to have a regulation in this bill where the government says: "We give all these people who are really demanding a clean and safe energy source be provided, even if they have to pay a small premium on this. That is there and none of the big competitors can overrule this."
Mr Lessard: Do you think there's a limit as to how much people will pay for green or renewable energy and, if so, how much do you think it would be?
Mr Kleinau: There has been quite a substantial survey done by Ontario Hydro under the director for the renewable energy technology division, and it was remarkable how people responded to that, that they would definitely be willing to pay a premium and that they would certainly be willing to pay substantially more just to be assured that they could help mitigate the problems of greenhouse gases and the climate change.
Mr Lessard: In the definition of what you refer to as renewable energy, are you familiar with the environmental choice program definition and, if so, is that one you would agree with as far as how to define renewable energy is concerned?
Mr Kleinau: I'm fairly familiar with the green logo, but in our perception it definitely needs another look. If we say that, for instance, natural gas is a clean source that would benefit the environment, I think we're going a little bit beyond the original green logo certification, because we have to look at where natural gas comes from, how it is treated and what kind of problems it creates out in the gas fields with the flaring and all these other cleaning processes.
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The Chair: From the government, Dr Galt.
Mr Galt: Thank you for your presentation. This is the third or fourth time, I think, that I've been on a committee that you've come before, and I congratulate you on your concern for the environment and for your presentation. I note that you're the first one who pointed out that presently it's almost impossible, if not impossible, to get green power on the grid with Ontario Hydro. Just to bring to your attention, it's very easy for Ontario Hydro presently to import very dirty power from the US, from the Ohio Valley, where there are some pretty dirty coal-fired plants. This bill certainly is moving us in the direction, at least I think you would agree we're moving in the right direction, maybe not quite as far as you'd like to go, but certainly we're moving along there.
I'm curious, do you consider as renewable energy a hydraulic plant that's on a river that has not been dammed up, it's just catching the water going down, because 25% of the power created in Ontario now is from hydraulic plants? That's all inclusive, not just the ones I've described. How much power do you think could be produced in Ontario from renewable energy? Could we replace all the power with renewable energy? Is that potentially possible?
Mr Kleinau: We have research from the Worldwatch Institute, which is a very respected research institute in Washington. It's independently funded. It has no direct, big sponsors. They claim that Canada, of course including Ontario, is one out of the five countries in the world that potentially could use wind power to completely replace all the conventional power.
In regard to your question about water power, hydraulic power, there are all kinds of small hydraulic stations that were actually closed down by Ontario Hydro in this province and could certainly be brought back on stream. Ontario Hydro figured, "If we get all this cheap electricity from nuclear plants, why should we keep up the small" --
Mr Galt: How much more do you think it would cost in the rates for me to buy green power in the future?
Mr Kleinau: For instance, in the project that was put before Hydro by the wind turbine consortiums, they said they could produce it with about 9.5 to 10.5 cents a kilowatt hour. That certainly is not that much above what we're paying nowadays for our power. We're paying eight cents a kilowatt hour from the mix that Ontario Hydro puts on the wires.
Mr Galt: Certainly the Ontario government's very empathetic to some of the concerns you've expressed in your paper. From reading your paper and listening to you, and I'm sure you've been through the bill, do you see anything in the bill that would interfere with some of the objectives you have for the environment?
Mr Kleinau: We certainly don't like the idea of emissions trading, which is something that actually gives a licence to pollute. We're concerned about that. We're concerned that the regulatory bodies mentioned in this bill don't have enough regulatory powers to really promote clean and safe energy.
Mr Galt: I should explain that with emissions trading it would be ratcheting down each time and it would be within a given airshed. It's not simply a licence to pollute but rather ratcheting down the total amount of emissions that would be occurring.
Mr Kleinau: Yes, but still --
The Chair: Excuse me. We're going to move now to Mr Conway from the Liberal Party.
Mr Conway: Mr Kleinau, thank you for your presentation. I have just a couple of questions. First, you dealt I think with Mr Lessard, but I wanted to expand a little bit upon it. You say at the conclusion of your brief, "When will this society ever realize that the steam power generation is completely outmoded, superseded by new technology?" Do I take it from that that you wouldn't favour the kind of cogeneration proposals that the committee was hearing about yesterday in the Sarnia-Lambton area?
Mr Kleinau: I'm glad you brought that up. I certainly was hoping this would be touched on. To make electricity, up until now what we've had to do is make steam to drive a turbine and then this turbine drives a generator. What we have to look at now is that we have the fuel cell coming onto the market very, very quickly and hydrogen would be a good fuel to run this fuel cell. Of course, hydrogen can be made without generating steam first because we have the solar and wind turbine electricity. What we're thinking is that the cogenerating facilities would, in our minds, certainly help to bridge the gap until we could bring in this new technology with full capacity.
Mr Conway: The second question follows up on an exchange that you had with Dr Galt about the apparent appeal of renewables, and I don't think there can be any dispute about that, with perhaps a caveat that I will add on behalf of the scores of my constituents who live alongside what we used to say were rivers harnessed to produce electricity. But that harness fits very unpleasantly on a lot of shoulders at certain times of the year. I just wonder, is there anything we ought to do in the marketplace to put a credit or a price on the evidently negative aspects that attach to certain consequences from generating electricity through hydroelectric means?
Mr Kleinau: For one thing, we never really would like to see any rivers dammed up to generate electricity that way. It would just be the diversion of a natural flow. I just recently talked to a good friend of mine at Bancroft and he said, "Oh, the York River up there, there are at least five or six different places where the flow could be used to generate electricity." Mind you, not a very big amount, but every little bit helps and it's a clean source and it would not hurt fish or anything.
Mr Conway: The point I make in that connection is simply this: Obviously hydroelectric resources are important and on balance I think quite positive, but they are not entirely benign. There are environmental costs associated that sometimes can be very nasty. I just make the point that I have yet to see in this whole debate a source -- but you may have identified one with the hydrogen technology -- for the generation of electricity that is absolutely benign. It seems to me that every one of them has a benefit and a cost and what trustees of the public interest have to do, it seems to me, is just balance in some reasonable way the costs versus the benefits.
Mr Kleinau: We have to really look at that. With renewable energy from wind and solar we don't have to make any fuel. We don't have to go through this long process of mining the fuel and concentrating it, transporting it, all these long processes that have to be done to make the steam to generate the electricity. Here we've got countries like Germany going full blast into using wind energy and solar via the means of the government helping out people who are really interested in doing it.
Mr Conway: I think you make a very good point, but let me just respond by saying that this morning we were over at the Clarkson central operating station, or whatever it's properly called, and we were reminded that on a day like today Ontario will require something in the neighbourhood of anywhere between 17,000 and 22,000 megawatts of electricity. That's what it apparently takes.
Accepting that we need to improve our general behaviours and develop more attractive technologies, how realistic is it to imagine that we can fuel a modern economy like Ontario that has the requirement of thousands of megawatts of electricity entirely through the most attractive of means?
Mr Kleinau: Let me just remind you that Ontarians and Canadians are really energy hogs. They are really in line where they have to come to the point where they realize there's a lot of waste that has to be cut out. At that point, if we address that kind of situation, then we can look at replacing that electricity with clean sources.
The Chair: Good advice for us all to take to heart, Mr Kleinau. Thank you very much for coming before us with your advice. We appreciate it.
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CANADIAN UNION OF PUBLIC EMPLOYEES, ONTARIO DIVISION
The Chair: Now calling representatives from the Canadian Union of Public Employees, Ontario Division, please. Good afternoon and welcome. Before you begin your presentation, please take the time to introduce yourselves formally for the Hansard record.
Mr Sid Ryan: Good afternoon and thank you for the opportunity. Joining me today are Doug Allan, a researcher for CUPE national; and Jim Keenan, a CUPE staff rep and also the coordinator of our electrical utility committee. I'm Sid Ryan, the president of CUPE in Ontario.
The Ontario division of the Canadian Union of Public Employees is pleased to submit our views on the Energy Competition Act, Bill 35. With over 170,000 members in our union in Ontario, and in Canada we've got 450,000, we work and live in every county, district, town, township and city from one end of this province to the other. We provide services to the public. We work for municipalities, school boards, social services, hospitals, nursing homes, airlines, the provincial government and a multitude of other employers. Thousands of CUPE Ontario members work in the electrical utility industry.
Until now, the public sector has played the dominant role in the Ontario electrical utility system. For decades this system was an important cornerstone of prosperity in Ontario, providing inexpensive electricity. Throughout this century the primary instrument for industrial development was the publicly owned Ontario Hydro. The public power system was supported by all political parties.
Now the Conservative government wishes to radically change this system to develop a new system based on business corporations. Not surprisingly, the main exponents of this new system have been Ontario business elites. If there are any beneficiaries of these changes, they will be the first. As participants in the electrical utility industry, they will realize new areas to make a profit -- heretofore, electricity has been produced at cost -- and as electricity buyers they will be in the best position to extract lower prices.
For working people the possibilities are less rosy. As electricity consumers, they face the prospect of being stuck with Ontario Hydro's stranded debt, new taxes and much less bargaining power than the big corporations. As workers in the industry, jobs may be eliminated, contracted out or privatized.
We are pleased to see that the government has listened to some concerns expressed by workers and has not implemented policies advocated by some right-wingers, for instance, the elimination of successor rights, restrictions on collective bargaining and the immediate privatization and pulverization of Ontario Hydro. We note, however, that we will mobilize if the government tries to implement such changes at a later date through regulations or other methods.
In this presentation, most of our comments will focus on the social consequences of the proposed legislation that we are most familiar with, given our time limits.
One gets the impression that the government does not want to say the P word, but make no mistake about it, this government would sell Niagara Falls if they could. This legislation is the stalking horse for broad-based privatization in the electrical utility industry. Some parts are openly revealed. The private sector will move into the retail end and initially some parts of generation, but more will come later.
As some have noted, Bay Street is salivating. We expect Wall Street will take more than a passing interest as well, and so the corporate types should. In Britain, when Margaret Thatcher sold off the electrical utility industry, profits went through the roof, so much so that in July 1997 the new Labour government put a windfall profit tax on the former state-owned companies such as British Energy PLC. Instead of enriching the Exchequer, the profits had been passed on to private shareholders through larger-than-usual dividends and to top executives through embarrassingly high pay increases.
We are concerned that the move to a more corporate-run system will be accompanied by job loss in a number of sectors in the industry. Such was the case when key regulatory controls were removed from the Canadian airline industry, first in 1984 and then in 1987, in the name of the market and competition. The result has been the loss of well over 10,000 jobs. While competition may have been the stated goal, just two airlines effectively control the Canadian domestic airline market now, and despite sharply rising average fares, massive losses have been run up and there has been a decline in service to some regional centres.
In the British electrical utility industry, the overall number of jobs was cut by 27,000 in the early 1990s following the introduction of privatization and competition. As we will discuss later in our presentation, the introduction of business-oriented reforms in the New Zealand electrical distribution sector resulted in significant job loss.
While the barons of Bay Street may be secretly, or in some cases not so secretly, pleased with this outcome, we are not. Through many years of unionization and collective bargaining, workers have made jobs in the electrical utility industry desirable, well-paid positions, jobs you can raise a family with. Just as important, these jobs and the wages that came with them helped build local communities throughout Ontario, creating work for others in every corner of the province.
The creation of good jobs in the electrical utility industry also ensured an experienced, dedicated and expert workforce that ensured reliable service. The importance of this was never so apparent as during this winter's ice storm, where power was restored thanks in large part to the dedication, expertise and hard work of Ontario electrical utility workers.
Cuts in these jobs will deplete this resource and erode the safety and reliability of our electrical power system. Very likely, at least some of the wages lost to these cuts will be diverted to corporate profits and pay increases for top executives, money much less likely to be spent building local communities and families.
Mike Harris promised tax cuts, not tax increases, so it's curious to see that at the centre of this reform are substantial tax increases. For the first time ever, public utilities will have to pay business-like taxes. In part, the taxes and charges will pay down the stranded debt that this legislation will create, but with their market power, large corporations will likely have an ability to force down the price they pay for electricity in the market system, in effect avoiding their share of the stranded debt. The general public will have much less market power and will bear the full brunt of the stranded debt, contrary to what the government has suggested. Furthermore, there is no commitment to cut the new taxes once the debt is paid off. The new taxes could go on and on and on. This is not surprising.
The introduction of these new taxes will help the private corporations moving into the electrical utility industry. They won't be at a tax disadvantage compared to the remaining public industries. Indeed, we are very concerned that the tax on gross revenues that will be placed on municipal electrical utilities will put them at a competitive disadvantage compared to private sector utility corporations that have multiple opportunities to hide profits and avoid taxes. Corporate tax dodges are infamous, but it is after all pretty hard for municipal electrical utilities to hide gross revenues.
The new taxes are a significant burden to bear and build new costs into the system that will be borne by the consumer. This cost increase will be compounded by the higher cost of borrowing money that private businesses face compared with organizations backed by the public.
We are beginning to see some of the tax costs of the Harris reforms. New taxes in the electrical utility sector complement property tax increases connected with provincial government downloading. Durham has just increased property taxes by over 11%. The promise of no tax increases has become a shell game.
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It's amusing to contrast the super-fantastic praise of business-run utilities and implicit condemnation of publicly controlled utilities with the vague commitment that this reform will actually lead to reduced prices for residences and small businesses. Speaking before the legislation was tabled, Hydro chair and Mike Harris confidant, Bill Farlinger, said: "Nobody really knows what the price of power is going to be when competition comes in. History would tell us that the price goes down, but that's a leap of faith." Harris himself is more bullish. He has said he is "quite confident." When introducing the legislation, Jim Wilson ventured that the reforms raised the "possibility" of lower prices. Getting a guarantee is like trying to nail jelly to the wall.
When pressed, Hydro CEO Ron Osborne did claim that rates should be lower for both small and big users of electricity. He cited the recently deregulated telephone business. Unfortunately, while long-distance rates may have gone down, the cost of local services and service calls has gone up dramatically. The result? Big business and other heavy users of long distance are saving considerable sums, but for the average working person it's a different story. Meanwhile, over 7,000 Bell workers in the Ontario telephone industry have lost their jobs and others have been forced to take pay cuts. There has also been increasing pressure to close down small-town offices and centralize services in big cities.
While the public sector has played the dominant role in the Canadian electrical utility system, business plays a much more important role in the American system. So it is noteworthy that electrical power is significantly cheaper in Canada than in the United States.
I've got a document here which comes from the Ontario Hydro board of directors. It's talking about rates and the comparison of rates in Ontario vis-à-vis the United States. There are some charts here that talk about the cost of electricity to large industrial users, those that would be using at least 10,000 kilowatt hours of demand and approximately six million kilowatt hours of consumption. When you compare those to Ontario, our rate for 10,000 kilowatts comes out to be about $383, but if you look at our nearest competition in the United States, which would be Detroit, their cost is $444 for the same amount of electricity. When you compare the cost to the average consumer in Ontario, if you happen to be Toronto Hydro, you can do it at 92 cents per 1,000 kilowatt hours. If you're Ontario Hydro Retail, you can sell it for 95 cents per 1,000 kilowatt hours. The closest we can get in the United States, again Detroit, is at $1.38, or in Chicago at $1.55. I guess it begs the question, if we can produce electricity here more cheaply and sell it more cheaply under the existing system, why are we breaking up Ontario Hydro?
In terms of rate increases, we know that when you privatized Bell Canada and moved to deregulation, we have seen a 27% increase in consumer rates for telephone costs in the last two or three years. Ontario Hydro, on the other hand -- again, this is according to the Ontario Hydro board of directors -- had a zero per cent increase in 1994; in 1995 it actually dropped by 0.1%; in 1996 it dropped by 0.1%; in 1997 it was zero; in 1998 it was zero. When you factor in inflation, there has been an overall decrease in electricity costs in this province over the last five years. That begs the question, why are we going to privatize? Why are we moving to deregulation? For what? Do you think one single corporation in the private sector is going to turn around and offer these kinds of rate decreases and zero rate increases to the average consumer? Like hell they are.
Price and reliability are probably the two issues closest to the public's heart. So the lack of guarantees on prices for residential users and small businesses should be a major concern, especially given the radical nature of the proposed reform.
According to media reports, Hydro CEO Ron Osborne told this committee that in competitive businesses "you either eat somebody else's lunch or you are somebody else's lunch." These may be words to live by for your average corporate tycoon, but we find them to be unsettling, especially when made in regard to a vital public service like electrical power. Will businessmen ensure that the lights stay on while they try to steal each others' lunches and put each other out of business?
Even now, years before the potential introduction of competition in the retail business, there are signs of business shenanigans. There have already been customer complaints about door-to-door salespeople asking to see personal electricity bills. A lot of customers thought they were dealing with utility personnel and some were quite concerned when they found out they had signed a contract with a company they don't know anything about and that can't even deliver on its contract until the year 2000. If the reforms proceed, more funny business may arise.
In New Zealand there were, until recently, almost 50 local power utilities, organizations akin to Ontario municipal electrical utilities. These publicly controlled bodies bought electricity from the Electricity Corp of New Zealand and sold it through their own networks to customers in their areas. Some were controlled by directly elected boards, others were accountable to city councils.
In 1990, the national government sacked the power boards and appointed a smaller number of directors chosen for their business backgrounds. It had been decided to put the boards on a more commercial footing. Then in 1992, the government passed the Energy Companies Act that corporatized the power boards, making them competing companies with a prime objective of making money. The franchise areas were done away with.
Tremendous struggles developed in the local areas over the outright privatization of the power boards. Against the wishes of local communities, eight power utilities were privatized. More became privatized when councils could not resist the temptation to sell them off to forestall unpopular hikes in property taxes.
In Auckland, there was fierce community resistance to the privatization of the old Auckland Electric Power Board, so its directors developed a plan that would keep control away from the real owners, the public, and eventually turn it over to the private sector. They sold 25% of the shares, the rest would be held by a consumer trust, but the trick was that the private shareholders, who owned only 25% of the business, would appoint a majority of the directors who ran the company.
Mercury Energy then set about making itself the dominant force in the New Zealand electricity industry. The company set about reducing staff with a vengeance, cutting costs by cutting corners. The result of this reform? On February 9, Mercury said one of its main cables supplying central Auckland had developed a fault. It was the second big cable to fail. The other had gone down January 20, causing a 20-minute blackout to about 8,000 central city businesses and apartments. Mercury said it was working on both cables but locating and fixing the fault could take two or three weeks. In the meantime, inner-city power users were told to reduce consumption or face blackouts. Despite sweltering temperatures, the public came through and reduced peak loads by 10%.
But a third cable failed on February 19. People were trapped in elevators, shops were plunged into darkness, hospitals had to cancel all but emergency surgery. The next day a fourth cable failed and that was it. People were reduced to candles and portable generators. The big bosses packed up and left the city. It was 66 days before service was restored.
Dabbling with Ontario's electrical utility industry can come with an expensive cost. The electrical power industry is different from many other industries. Its reliability is crucial for every other sector of society, and it is certainly more important than opening up new areas for corporations to make a profit.
I want to talk briefly about schedule C of the bill, which amends the Ontario Municipal Employees Retirement System Act. These amendments create a new category of employer eligible to participate in the OMERS pension plan: associated employers. This category would include the successor corporations to municipal electrical utilities proposed in this bill. Associated employers would also include organizations or businesses that provide a service for a municipality or a local board. So in effect these changes affect all municipal, school board and other local employees, not just those working in the electrical utility industry.
Positively, the amendments allow workers providing municipal or local board services to participate in the OMERS plan whether or not their employer is a local government, a not-for-profit organization or a private contractor. Employees working for a private contractor or not-for-profit organization could possibly begin to participate in OMERS, providing important security for those workers.
However, associated employers would not be required to use the OMERS plan. Under the current legislation, employers in the OMERS sector must use the OMERS plan if they provide a pension plan. In effect, employees with local utilities will no longer be guaranteed that their employers will use the OMERS plan when providing a pension plan.
In the very short run, employers will likely wish to remain in OMERS, as they are currently enjoying a one-year contribution holiday. In the long run, the story may be different. Employers may try to substitute an inferior pension plan. This legislation should not open the door to the breakup of a very successful pension plan.
If restructuring in the public sector does have a benefit, it should be to ensure the use of the most effective and efficient form of delivery, not to undermine the pension benefits of workers. Guaranteeing pension benefits will also ease legitimate concerns of workers concerning restructuring.
In conclusion, few systems have had a more lasting or pervasive influence on the lives of Ontarians than our system of public power. The system of public power has played an important role in Ontario's prosperity. Fundamental changes to the system of public power should not be passed lightly. One-sided, business-oriented reforms open a can of worms: broad-based privatization, problems of reliability, massive profit windfalls for a tiny section of society, rate uncertainty, tax increases, job loss. We hope this committee shares our concerns.
Thank you for taking the time to listen.
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The Chair: Thank you very much. There are four minutes for questions per caucus, beginning with the government caucus.
Mr Gilchrist: Thank you, Mr Ryan. Good to see you again. As usual, a brief that gives us lots to talk about. Time and time again, there is a consistent theme. I really have to suggest to you that you've bought a defective crystal ball and you really should get a refund on it. Implicit in all of your comments is such a degree of pessimism and despair that just is not borne out not only by most, if not all, of the other groups that have appeared before us, but John Murphy of the Power Workers' Union.
They are, I'm sure, quotes known to you, but John Murphy, speaking two months ago said: "There is no reason we shouldn't see the benefits of a competitive environment as a result of this bill." In your last comment you talked about pensions. "They," speaking about his employees, "are not going to worry about losing their jobs or their successor rights or their pension plans."
The president of the Power Workers', by the way, has more members workers in the electrical industry than CUPE. He has 15 of the MEUs plus, obviously, all the Hydro employees, so he's someone who has an even larger stake in this. I would be remiss in not commenting that perhaps the distinction is that that was a union leader who decided to work in the process, instead of standing on the sidelines and crying the blues.
Let me deal with a couple of your specifics because I've got to get --
Mr Ryan: Is that a question?
Mr Gilchrist: -- my question in. That's exactly what I just said.
I must challenge, and I would like you to tell us where you derived your suggestion on page 4, that somehow, as a result of coming up with a more transparent system, something where the taxpayers would see boldly presented for them and where the MEUs and anyone getting into this business would be confronted with the fact that 40% of the hydro bill that your members and I and everyone else in Ontario pays is already going to pay the stranded debt -- I would genuinely appreciate how you see taking that, dollar for dollar, and moving it into another category, whether you want to call it a tax, a competition transition charge or anything else. The fact of the matter is that this bill makes it very clear: Every penny of that will, for the first time ever, go into a dedicated bank account, guaranteeing to get that monkey off the backs of the taxpayers once and for all. How can you even suggest that to have changed that system will somehow increase prices?
Mr Ryan: Let me deal in facts, because you rarely deal in the facts. First off, you don't know this, obviously, so I'm going to educate you a little bit: the Power Workers' Union is a local of CUPE, so the 15,000 members who belong to the Power Workers' belong to the Canadian Union of Public Employees. The 15 municipal utilities that they represent are members of CUPE. So to make a statement that they've got more interest and more stake in this is absolutely pure nonsense.
Mr Gilchrist: Reporting through John Murphy, so why would their spokesman have such a different view?
Mr Ryan: We'll talk about that in a second. John, I'm sure, will come before this committee and make his views known.
Mr Gilchrist: Right, tomorrow.
Mr Ryan: I spoke to him today, as a matter of fact, and he's happy and pleased with this report. You can get into that yourself, about why he feels there are some components of this that he can support.
Crystal ball gazing -- I try to deal in facts. The Ontario Hydro board of directors have clearly come up and said that our rates, in comparison to rates around the world -- I could go through the world rates here, but I'm more interested in the market we'll be directly selling to, which is in the United States. We're more than competitive with our nearest competitor, which is New York state.
Mr Gilchrist: You're on a bit of a tangent. I talked about the taxes.
Mr Ryan: Hang on a second. I'm coming back to your taxes, because it's all part of it, sir. Again, that's the problem with you. You don't fully understand --
Mr Gilchrist: If you want to get onto that issue, having damned businesses as being the beneficiaries, you now want to quote the large industrial user rates, when you know full well that in the blended rates, Ontario has the third-highest hydro rates in all of Canada, so let's not be disingenuous and use one argument to fight another.
Mr Ryan: Chair, I'd like to talk to you a second. Am I going to get badgered here by the Tories or am I going to be allowed --
Mr Gilchrist: Feel free to continue your diatribe.
Mr Ryan: If you'd just listen for a few moments, you might learn something. We have, both from an industrial --
Mr Gilchrist: It would be a first from you.
The Chair: Finish your response.
Mr Ryan: Can I?
The Chair: Finish.
Mr Ryan: From an industrial perspective, we are more than competitive with over half the jurisdictions in the rest of Canada. If you did your homework and took a look at where they produce their electricity and how they produce it, Quebec, one of the ones that are cheaper than us, has an abundance of hydro power. If you took a look at the comparison between hydroelectricity and nuclear electricity and fossil fuels, you'll find that hydroelectricity is far cheaper to generate, one of the factors in why places like Newfoundland and Quebec are cheaper than us. That's something beyond their control.
In comparison to the industrial generators in the United States, which we're trying to emulate here, clearly they cannot produce electricity cheaper than we can here in Ontario. If they could, they would be doing it. Some $155 per 1,000 kilowatt hours on the residential side versus $93 for Ontario speaks for itself, sir. What you're saying is, let's emulate the system in the United States because somehow it's going to give us cheaper rates. The facts, sir -- not crystal ball gazing -- the facts don't support your argument.
Mr Gilchrist: You haven't even come close to answering my question, the taxes about replacing stranded debt, but I'm hardly surprised.
The Chair: We're going to move on to Mr Conway.
Mr Conway: Thank you very much, Madam Chair. Might I say that some exchanges, if they could be harnessed, would increase the electrical output and probably drop rates in the province.
Mr Ryan, you make a number of points, but let me just say a couple of things in response. First of all, I was struck by a comment you made on page 5: "There is no commitment to cut the new taxes once the debt is paid off. The new taxes could go on and on." There has been some discussion, and I just want to reinforce the point, that the bill this committee has before it, in section 86, is very clear what happens to a number of the new charges that will be imposed, understandably, to eliminate the stranded debt. As subsection 86(4) says, once the Minister of Finance determines that the stranded debt is finished, kaput, for example, "all payments that a municipal electricity utility is required to make under this section" go to the Ministry of Finance. The people from Mississauga Hydro were here earlier today and suggested, as others have, that that provision be sunsetted.
But the act we have is very clear. There are new charges. Yes, to be fair, a number of these new charges, these new taxes, are initially intended to write down the stranded debt, quite understandably, but some of the new charges do not terminate with the elimination of the stranded debt. They go on, under the terms of this act as currently written, to the credit of the Ontario government. I just wanted to make that point since you've raised it on page 5 of your brief. That's an area where I would agree with you. There are a number of other areas where I think your concerns are quite legitimate; I'm not going to have time to detail those.
But there is the other side of the equation, and you have to know this, that we are at this point today not just because there are new technologies and new opportunities -- that is part of the equation -- but some of us have been around a while and some of us last year sat on the select committee looking at Ontario Hydro's nuclear affairs. Ontario Hydro, the big public utility that has provided a lot of benefit to Ontario, to be sure, over a 95-year history, is a deeply troubled public enterprise these days, in large measure because the nuclear power division did not perform as advertised. I'm wondering if you have specific suggestions to me and my colleagues on the committee about how the trustees of the Ontario public interest could reasonably deal with what are, by any objective standard, serious and systemic problems in the provincial utility, particularly at Ontario Hydro Nuclear.
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Mr Ryan: I think there are two answers to that. I used to work for Ontario Hydro. I worked for Hydro for 17 years, so I'm very familiar with the corporate structure and I'm familiar with the style of management of Ontario Hydro. I think it's been borne out very recently where employees were surveyed, and the sense that they're getting is that the senior managers are not listening to the employees in the corporation. It holds true, I think, for every sector of society, particularly in the public sector.
We are very familiar with how to deliver a good product at cost. We're very familiar with how to deliver and cut fat out of a system, whether it be those workers who are picking up garbage off the streets, whether it be people who are working in our hospitals or whether it be people who are working in nuclear power plants. I think there's a culture in Ontario Hydro that refuses to acknowledge that the workers on the front lines have a lot of the answers.
Indeed now, as I talk to some senior managers in Ontario Hydro, they're telling us they're going back to a lot of the programs, and are being encouraged to do so by the American gurus who came in just a while ago to help fix up the nuclear industry -- they're going back to some of the programs they had put in place, in co-operation with the union, in the late 1980s and the beginning of the 1990s. I think listening to the employees on the front lines, who work in those facilities, would go a long way towards trying to change some of the culture in Ontario Hydro.
You talked about a company that's in serious trouble. Just reading the financial section of the papers just a few days ago, they made $513 million, which is a 53% increase, in the last six months alone over what they were expecting to make. For a corporation that's in serious trouble, that's not --
Mr Conway: But Sid, let me say it, because I've said it to others --
The Chair: Could you wrap up.
Mr Conway: Yes. The difficulty I have is with the numbers. I don't want the public enterprise to do poorly, but those Hydro numbers, as I said perhaps a bit offensively earlier this afternoon to another witness, and I'm sorry for that, are bogus, if for no other reason that in the last year or 18 months the Hydro board, using apparently its rate-setting authority, just set aside and wrote down $8-billion-plus worth of unrecoverable cost.
Mr Ryan: I can agree that this --
The Chair: I'm sorry to interrupt. You can integrate that answer into Mr Lessard's question, but we're going to move to Mr Lessard.
Mr Lessard: Thank you very much. One of the things I'd like to be able to put in this bill is to tell Ontario Hydro to listen more closely to their employees, but that's not something we will put in the bill, or if we do it may not change how they operate their business.
Time and again with other presenters, I've heard from the government their predictions that Bill 35 is going to create jobs and is also going to lead to lower prices for electricity. Even though we have that commitment to lower prices from the minister, he isn't prepared to put that commitment in the bill. How is it that there's such a difference of opinion? You've mentioned some specific examples in other places where they've gone through some of these. Why is there such a divergence of opinions? You talk about job losses and price increases in your brief.
Mr Ryan: It's simple, to be honest. From a CUPE Ontario perspective, we're looking at this in a more global vision. We're looking at consumers, at costs, at rate increases and at what has happened in other sectors when they become privatized. This here is halfway to privatization. We're looking down the road a little bit, using that crystal ball that Mr Gilchrist was talking about, looking at what happens to the industry when it gets privatized. There we see a potential for job loss.
From the Power Workers' perspective, they're looking at this as a local union who've already lost thousands of jobs in the sector, who have seven nuclear power plants out of commission right now and are looking for somebody to come in and put investment dollars into refurbishing those. The Tories are refusing to refurbish the nuclear power plants so what they're saying is, "We need some extra dollars." When you look at these rates of $95 for 1,000 kilowatt hours, that is more than competitive with the jurisdictions in the United States. They believe that by competing with Detroit hydro and New York hydro and so on -- that if there are investments by private corporations into refurbishing nuclear power plants, they could avail themselves of the ability of Ontario Hydro to generate electricity at a cheaper cost and sell it back into the United States, where it would be very competitive. That investment back into Ontario Hydro, into those nuclear power plants, would rebuild and refurbish seven nuclear power plants. Kincardine, being a town where I used to live, would not be a community devastated by the loss of several thousand jobs.
That's where the Power Workers are coming from. They're looking at it more from an immediate response to a terrible problem, which is the layoff of thousands of workers, because the Tories are refusing to invest money in the nuclear power plants.
The Chair: On that note, we thank you for coming before the committee with your advice.
Mrs Johns: On a point of clarification, Madam Chair: I wanted to add -- I'm sure that the member knows this and just didn't have enough time to go into it -- that of course payments in lieu that are taken from the municipal electric utilities return to the municipality, not the province, as in subsection 86(4).
Mr Conway: That is true. I may have cited the wrong section, but my point is that there are other payments that do not, particularly the adjusted gross revenue payment. That continues, after the stranded debt, to the treasury. That's the point.
Mrs Johns: Our answer to that would be, not necessarily. That's at the discretion --
Mr Conway: But the point I want to make there, and I will debate this in clause-by-clause, is that the bill as written, which is what we're here to talk about, is very clear. The bill as written says once the minister decides the stranded debt is paid down, those MEU charges on adjusted gross revenue go to the provincial treasury. If that's not the intention, then I will be very happy, as will Hydro Mississauga and a number of others, to have an amendment to make it clear that there's some other policy. But the bill as written is very clear as to what the intent is.
The Chair: And I'm very confident that we'll go into that in detail as we go to clause-by-clause.
ONTARIO MEDICAL ASSOCIATION
The Chair: We go to representatives from the Ontario Medical Association. Welcome. You are our last presenters of the afternoon, but in the electricity hearings we are energized by those who come before us, so we are very eager to hear what you have to say to us.
Dr John Gray: Good afternoon. It's almost good evening. My name is Dr John Gray. I'm the immediate past president of the Ontario Medical Association. Our association, as you know, represents the 23,000 physicians working in Ontario. With me are the association's executive director of health policy, Dr Ted Boadway; and Patricia North, a lawyer who works in our health policy department. We thank you for the opportunity to testify this afternoon regarding the Energy Competition Act. I appreciate your comments about being energized. I hope we will help with that energization process.
On May 12, the OMA released a major position statement on the health effects of ground-level ozone, acid aerosols and fine particles. The paper, I believe, has just been distributed to members of the committee. Our research for this statement led us to conclude that air pollution of this type is a public health crisis in Ontario and some other parts of eastern Canada. Air pollution is a public health crisis in Ontario all year round.
In the summer, air masses stagnate and smog blankets Ontario, cities and countryside alike, for several days at a time. There's a kind of crescendo of concentration and of volume in the late afternoon and early evening.
Certain populations are more vulnerable to the effects of pollution, such as children, asthmatics, the elderly and individuals with heart disease or chronic lung conditions. But it's not just these populations who are affected by air pollution. We all are. No amount of air pollution is good for you.
Air pollution appears to aggravate lung infections and may also inhibit the body's ability to fight infection. Even for healthy people, long-term exposure is associated with decreased lung function and increased mortality.
Research commissioned by the Ontario government shows that approximately 1,800 premature deaths across Ontario are due to the effects of air pollution each year.
In addition, air pollution is stealing millions of dollars from the province's health care system annually. A study commissioned for the province forecasts the cost to the province, if air pollution remains at current levels, suggesting that the total cost to the Ontario economy by the year 2015 will range from $398 million to as much as $1.2 billion.
If nothing is done about this crisis, people will continue to die and millions of health care dollars will be needlessly spent. This is a preventable tragedy. Air pollution must be reduced.
In the past, Ontario's doctors have taken a cautious and considered approach to the interrelationship between air pollution and health. For some time the medical community in Ontario found that the existing research was inconclusive. Ontario doctors now have definitive and empirical evidence about the breadth of the public health crisis caused by air pollution. Studies published in the past couple of years have convincingly established the facts, and startlingly enough, the research has been done on us, the people of Ontario. The largest concentrations of air pollution are in the industrial heartland of Canada, the Windsor-Quebec City corridor, where the majority of people live, work and play.
Although a good deal of the pollution is from Canadian sources, at least half of it comes from the United States. People downwind from us of course suffer from the pollutants generated here. So our health problems are not only matters of domestic concern but have international implications as well. Some of our recommendations address this particular situation.
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The pollutants come from coal when it's burned to generate electricity. The sulphur and nitrogen oxides which coal-burning plants generate are emitted from smokestacks and travel long distances with prevailing winds. At the same time, they undergo chemical changes to form ozone and acid particulates. Both are directly toxic to people. This contributes to air no one would choose to breathe and the results are hazardous for some of the people who are exposed to such air pollution.
Dr Boadway will give you a brief slide projection and explanation of how the effects from coal-burning pollution injure people.
Dr Ted Boadway: Ladies and gentlemen, if I could draw your attention to the slides, I think the most important pollution event occurred in December 1952 in London, England. In that particular year an air pollution event occurred. This was just at the time when we could begin to measure particulates. Ordinarily, particulate levels would be down here on an average day. But a temperature inversion occurred in England which caused particulate matter to soar in just a matter of a day or two, as you can see. On an ordinary day in the city of London, the burden of death would be about 130 to 140 deaths per day. But within a one-day lag period, the number of deaths skyrocketed exactly parallel to the pollution level and remained at that level for the length of the pollution disaster. As you can see here, the excess number of deaths represented by this pollution disaster were about 3,500 extra deaths in this community.
That established that pollution can kill. It is only with scientific hindsight that we know that the actual killing episode here was caused by the sulphur in the coal burned in space heating used in homes at that time. At that time they couldn't sort it out, but with hindsight and subsequent research we now actually know the mechanism of death.
I will elucidate that with you. How does that affect people? That was a particulate episode. Ozone is also produced by the nitrogen which comes out of smokestacks; sulphur is produced. They both do the same thing. A burn is a burn as far as the lung is concerned. It causes swelling and inflammation, just like a burn on the back of your hand from hot water or chemicals or sunburns: swelling, inflammation and redness. A burn is a burn.
This is a bronchial passage, the smallest airway just before you get to the alveoli. This is not a bad diagrammatic representation. With ozone or with particulate acidification you can demonstrate, both in the laboratory and exactly the same in the person on the street, that you get a tightening of the muscle, which decreases the overall diameter and therefore this critical air passage part, and it increases swelling in the mucus membrane and increases fluid production, all of which have an effect on decreasing air-carrying capacity. In those of us who are most sensitive to it, such as those who are asthmatic or with chronic bronchitis, it becomes an even worse condition and the airways actually can become closed off.
What that does to you and me is this. This is actually my lung function study. It's a very simple test. This line here represents what happens when I go -- huh -- blow out one hard breath, top to bottom. In the first second, I actually blow out four litres of my total five-litre capacity. In the next two seconds I only blow out one litre, even though I make a lot of noise and make a lot of muscular effort. That amount that comes out in the first second is called the forced expiratory volume in one second, FEV1. It's turned out that the longer we live with it, the more we know about it to be an incredibly effective predictor of survival. I have a good survival. This is what you require as you sit, blink and breath and do nothing more to survive, an FEV of one. If you do anything more, you require more than that. I'm using about this much now because I'm talking and I'm a little nervous, but this represents my reserve capacity. I have to damned near run myself to death before I can use all that. Few of us do that in a day, but that's the reserve we have.
When we have an ozone effect, this is the realistic effect that you and I have had this summer with the ozone concentrations we have had in this city. It's called a subclinical effect because our FEV1s fell -- and you can measure this -- by this amount. It's called subclinical because you were unaware of it -- none of us knew we had it -- but you can test it and find it easily, so we call it subclinical. That is a real effect, the realistic effect each of us experiences with ozone. This is particularly worked out for ozone; you can do the same thing for particulates.
This line here represents your neighbour and mine who has emphysema, chronic bronchitis, the asthmatic kid who comes to your cottage. That's what their line looks like. They have limited capacities. They live very well as long as they live within their capacities. They're doing fine for normal life, until they have the same ozone effect that you and I have. I'm calling it a subclinical effect to show it's the same effect, but in fact when we drop their curve below this line, they die.
That is what these doctors see. When they look at the patient, they do not see an ozone admission. They don't see an air pollution admission. What they see is an asthmatic case gone haywire, the chronic emphysema case with an exacerbation, the congestive heart failure who has tipped over the edge. That's what all those doctors saw in London with the 3,500 people who died in those days. They didn't make a diagnosis of air pollution, but that's what was killing them. It comes through the door as something you recognize as a condition by another name.
The same humps occur in Ontario, more difficult to find. We now understand what they were. I just turn you to the research in Ontario. First of all, I'd like you to look at the dates at the bottom here. The world's researchers have beat a path to the door of Ontario, because we are unique. You have to have a polluted environment to be test guinea pigs; we've got that. You have to have good medical records, and as much as we decry the state of our medical records in Ontario, they happen to be the best on the continent; when you've got it good, you complain anyway. So they can study us, and when they study us this is what they find.
When Burnett studied us, he found that if virtually all the Ontario hospitals, all the biggest ones, related ozone and sulphur admissions to hospital admissions, over five years, if you look at all the admissions, they were responsible for 6% of respiratory illnesses, 15% of the admissions for children and 4% of the admissions for the elderly, huge numbers.
If you look at ozone and hospital admissions in 16 Canadian cities, of which five were in Ontario, they were able to calculate that if ozone concentrations go up by 30 parts per billion, you will have an increase of 4% in admissions for respiratory illness. Remember, we call it a bad pollution day when we have 80 parts per billion, so it's almost three times that, and we in fact will reach rates of 120. That is in keeping with what other researchers have discovered, that in all Toronto hospital admissions, studied over a three-year period, these were responsible for 24% of summertime respiratory admissions in this city.
You send your kids to camp because they're going to get into the pure air and the clean air. Well, you know about drift of air mass by now and how, unfortunately, it blankets the province. Studies reported in 1996 -- we couldn't have made this presentation five years ago because the data weren't there; if I had more time I'd give you the detailed data -- studies on kids in Ontario camps showed that as the ozone went up, the kids FEV1 curves went down, and these were healthy kids at normal camps. These were not asthmatic kids. This was in Ontario camps.
A further study was done by Dockery -- these are all international researchers -- on 13,000 rural children. Four of those rural communities were in Ontario, 2,000 kids, which means that virtually all the kids in those towns were involved, almost none were missed. Studying the admissions showed, once again, a striking correlation between hospital admissions in respiratory diseases and visits to emergency departments in those children with air pollution episodes, and these are rural communities.
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What we see is a situation where air pollution affects everyone, whether it's subclinical or clinical. None of us escapes. Most of us live in a fool's paradise of believing it doesn't affect us and don't know it does when it does, because we don't subject ourselves to the type of maximum exercise that would show it up. Anyone of any age who is particularly affected with cardiac conditions, heart failure or atherosclerotic heart disease, pulmonary conditions, bronchitis, asthma, emphysema and other chronic destructive pulmonary diseases, these are the people who are killed during these episodes.
We are demonstrating that people die in Ontario, that the costs to the system are huge, and of course this is the source. When you see this great big pile of coal, when you see a mountain of coal, even 3%, 4%, 5% or 6% of that represents a huge amount of sulphur, and when it's burned, that generator, which we need so desperately in this province, nevertheless produces a huge amount of nitrogen oxides also, which form part of our load pollution.
Dr Gray: I'd ask you to consider, then, that air pollution, which is a preventable antagonist, is also exacerbating the stress on our health care system, and left to flourish, it will increase its pressure in years to come. So what do we want to see done? While various government regulations have sought to reduce air pollution, Ontario still has a long way to go to catch up to more proactive jurisdictions elsewhere.
Ontario's doctors are concerned that the restructuring of Ontario's electricity market and the expansion in the use of coal to generate inexpensive power will increase, not decrease, the amount of toxins in the air.
In relation to the restructuring of the electricity market, Ontario's doctors recommend four things: (1) regular public disclosure of emission data; (2) Ontario should replace Ontario Hydro's voluntary nitrogen oxide reduction commitments with a mandatory cleanup; (3) restructuring of the electricity market must include more stringent controls on sulphur dioxide and nitrogen oxide emission limits; and (4) there should be a mechanism, such as system benefits charge, to create a fund dedicated to investment in cost-effective energy and energy conservation projects.
In our report, on pages 25 through 28, we make specific recommendations on how this legislation could address these health issues constructively.
Ontario's doctors support a tightening of ambient air quality standards on both sides of the Canada-US border to address some of these health effects. The OMA believes that opening the electricity sector in Ontario to competition provides the government with a unique opportunity to have a positive and beneficial impact on the environment and on the health of Ontario's citizens. This opportunity must not be missed. We all know we need electricity, but we also need to protect health. When faced with two competing needs, the task of the political system is to find, as Mr Conway says, the optimal balance between these needs which results in the least injury. The Energy Competition Act fails to achieve this optimal balance because it fails to use this opportunity to protect the health of our patients by improving current emissions standards.
The Ontario government has known for some months of the damaging health effects which will result from opening the electricity market to competition without proper environmental protections in place. Despite this knowledge, no attempt has been made to guarantee the protection of the health of the people of Ontario.
Among the many recommendations contained in our document, which has been available since May, the only one recognized in this legislation is requiring the public disclosure of pollution emissions. It appears that the government intends to let the market decide whether clean electricity will be produced or not. In our opinion, the market is a particularly poor place to attempt to make this balance because the market doesn't care about health.
The dirtiest sources of electricity are usually the cheapest sources. However, this fails to take into account their hidden expense. At first blush, electrical energy purchased from a dirty polluting source may appear cheaper. However, we now know that this will result in a significant number of deaths and a decrease in the quality of life for the people of Ontario. The cost to our health care system will increase tremendously, an increase which will likely be significantly more than is saved by purchasing cheap electricity. The result of this market transition is a situation in which the cost to the people of Ontario is not decreased overall, since we pay for both sides of this economic equation. Our patients, the people of Ontario, are the casualties of this economic transaction.
Dirty electricity is cheaper to the consumer, but the expense is displaced to the health care system and people suffer needlessly as a result. Increased expense to our already overburdened health care system and poor health for Ontario citizens will be the result of letting the market decide whether to purchase electricity from clean or dirty producers.
It's not too late to use this opportunity to balance the need for electricity with the health and environmental concerns of the people of Ontario. In our paper we offer realistic recommendations on how this can be done. We hope you will seriously consider amending this legislation to achieve a result from which everyone will benefit.
Thank you for your attention.
The Chair: Thank you. We have 10 minutes per caucus for questioning. We begin with the Liberal caucus.
Mr Conway: Thank you very much, Dr Gray and colleagues. It was a very powerful presentation and some very specific advice. As you prepared the paper and undoubtedly looked at the North American environment, are there examples in the United States that you would point to, where the specific proposals, the four points you offer at the bottom of page 3 and the top of page 4 -- could the committee confidently look to state X or state Y as an example of where other jurisdictions in Canada or the United States have done the sorts of things that you recommend we should do here to improve this bill?
Dr Gray: Yes, actually you could look to the state of Ontario. What you would find if you look at the generating sources in Ontario is that we already have generating sources that conform to our recommendations. We didn't wish to be extreme or to go overboard in trying to find something that didn't exist, so we looked to already existing technologies. There is a huge variety of generators in Ontario, some of which already meet what we have suggested here. On the other hand, there are some very dirty generators in Ontario.
If you go to the United States you will find the same thing, especially in the Ohio Valley, a tremendous mix of generators. Of course, in the Ohio Valley they're trying to open some of the oldest and dirtiest ones. We're afraid the same thing might happen here.
Mr Conway: On a follow-up and just a final point, it's no secret that we're facing some very difficult choices in the very short term as we struggle with the nuclear asset optimization plan. It's pretty clear from what you've presented that domestic coal-fired generation is not something we should be looking at without some significant change. Have you any specific advice for the next two or three years, particularly thinking about NAOP, the nuclear asset optimization plan?
Dr Gray: Yes. If you look at the recommendations we've made, we know you can't get there in a year or two. It's unrealistic. But we do believe that if you looked at where you wanted to go in tonnage of emissions and looked at each source of it and then decided what you had to do -- for example, if you took some of your dirtiest ones, like Lakeview, and said, "That's the first on the hit list because that's the one we need to get rid of first" -- you would then be into a replacement scheme over a few years. In the very short term, within a year or two, it may not be doable, but you can set up the scheme that will get you there.
Mr Lessard: I want to thank you for a very convincing presentation. You've demonstrated that air pollution isn't just an environmental concern but is a health concern as well. In fact, it's a health crisis, I would suggest. I'm concerned that by opening up the market to competition we're encouraging lower-priced dirty-coal plants in Ohio and even Michigan to start up plants to sell into the Ontario market. We saw a plant that hasn't been operating for 10 years, Conners Creek, that had planned to start up this summer, but thankfully the Environmental Protection Agency in Michigan wouldn't permit them to do that.
One of the statements you made is that the market doesn't care about health. I agree with that, because they're able to dump those costs onto the public. I don't want to see a change where the market becomes sible for health care, because that means the privatization of the system and I don't want to see that happen.
We've heard from others the suggestion for a systems benefit charge. I've asked other people, if there's not that requirement in the legislation do you think it's going to happen? I think I know your answer to that question. Other people have suggested the renewable energy portfolio standard as well. I want to know if you're familiar with that and whether that's something you think we should put in the legislation as well.
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Dr Gray: You've actually raised two points. Perhaps while Dr Boadway or Patricia might be thinking about the second one, I want to touch briefly on our concern, which I think everyone in this room shares and we certainly share, which is the transborder drift and the possibility of external sources of pollution exacerbating, at least not ameliorating, our current situation. We are well aware of that and we have made strong representations -- Dr Boadway and I have testified before the United States EPA, which is contemplating rule-making to impose stricter standards on the Ohio Valley and other polluters. In addition, we have made representations to the federal Environment minister, hoping there will be some national standards, which I think all provinces could then accept as emission control targets, because currently it's all voluntary targets. We have made it clear in our paper that we believe voluntary targets just don't work.
I'll ask Ted to comment on the second one.
Dr Boadway: We think that if systems benefit charges aren't in the legislation, the chances of that happening are remote. Quite frankly, a systems benefit charge is a very large societal decision. It's the kind of thing that really only the political system can do, because it's the people through their political system saying, "We value this enough to mandate that this kind of thing occurs." I really don't even think it's reasonable to expect a private business to make that kind of decision, especially absent what another business might do. It's not fair to them. Unless we collectively say, "This is what we want to do," it won't happen, because it's not fair and they shouldn't be expected to pick it up themselves.
Mr Hastings: The fundamental question I would put to all of you folks is that you talk about balancing the optimal effect; you want to have the environment protected, you want to reduce air pollution. But in your recommendations I don't see anything that deals with your position on how you balance that optimal effect dealing with nuclear energy. Do we bring back and make a substantial investment in getting some of our nuclear systems back on stream to provide cleaner power?
Also, you don't link up strategically with other options in preserving the environment. I don't see anything in there dealing with other types of generation -- biomass, wind or solar -- in terms of balancing out where you want to have this society go in reducing air pollution and reducing health care costs. I see a silence on both those key vital policy areas.
Dr Gray: We clearly recognize the dilemma for the committee and for all sources of electrical generation. What we've tried to say is that investments made in some of these other sources, which may on the surface appear more expensive, may pay dividends in savings to the health care system. Conversely, ignoring those other systems and allowing coal-fired generation, for example, to increase, particularly older plants that aren't subject to the current standards even, may in fact compound and increase the costs in the health care system.
It is a teeter-totter. If air pollution increases, the costs to the health care system will increase. While the costs to the electrical sector may go up by looking at alternative sources, the costs to the health care system may go down, or, conversely, it could be the other way. We don't have the right answer. We're just saying that all these factors must be considered, and it's not only costs, it's the quality of life that --
Mr Hastings: Does that include reviving our nuclear industry -- because we're grappling with that whole policy issue -- to reduce air pollution?
Dr Boadway: You are grappling with that and I do not envy your task, sir. You are right that we were silent on it, because we don't know what to say. We're ignorant on that and we can't give you wise advice on it. We're not engineers. What we tried to do in our recommendations was focus on the health issues. Our concern is that the health calculation wasn't part of the calculation. We think it should be. We defer to you on some of these larger policy questions not in our expertise. What we would like to do is help you bring the health part into the equation. We will contribute our expertise only where it's of value to you. If you ask me about nuclear generation you're going to get a lousy result, because I don't know the business. But we will help you with the whole equation, if we can do our part.
Mr Galt: Thank you for an excellent presentation that brought back some memories. My background is veterinary pathology. I thought you were putting the message across very well. I certainly have seen lesions like that with ammonia burns in livestock lungs.
I just want to bring two things to your attention. I know we're down on time. On page 4, near the bottom, the dirtiest sources of electricity are usually the cheapest sources. No, fossil fuel plants are relatively expensive in the production of electricity. Certainly nuclear is cheaper, and once you get hydraulic plants set up. Where they do come in very well is for peak periods. Yes, there are an awful lot of dirty plants in Ohio. Presently, it's not set up that we can get the green power on to the grid, but they can buy dirty power out of the States. That's the kind of peak period power they would be buying.
The other comment -- I wanted to relate to the four points you're raising, starting on page 3. The first three very definitely are planned and we want to develop regulations around those as best we can to reduce pollution, certainly not to have any of it increase, and enshrine it in the regulations rather than simply being voluntary. Point 4 is being considered.
Thank you very much, Madam Chair, for letting me get a comment in.
Mr Lessard: I thought you were going to ask about the 1,800 crosses on the lawn.
Mr Galt: The organization that put those there were out to raise money for the organization. They had little concern about the legislation.
The Chair: I don't think we'll go down that path at the end of a very productive day.
Thank you very much for coming before us. We appreciate the advice you've given us. It's been a very interesting presentation to end our day.
Mr Conway: Madam Chair, before we adjourn I want to correct the record and support a point that Ms Johns made earlier. She's absolutely right; I wasn't reading carefully from my copy of the bill. The point I was trying to make -- and I was wrong to cite subsection 86(4). As she rightly pointed out, the sections I should have referred to were subsections 87(1) and 87(2) and, to a somewhat lesser extent but still on the same point, subsections 85(1) an 85(2) of the Electricity Act. Those were the sections I intended and I wrongly cited 86(4).
The Chair: Colleagues, we will adjourn. We reconvene tomorrow morning at 9 o'clock in the Amethyst Room at the Legislature.
The committee adjourned at 1819.