Continued from part 1
October 20, 1997
Mr Conway: But certainly it is your view that this current and longstanding difficulty, malaise and worse at Ontario Hydro has not been helped by the fact it has been a monopoly, correct, in your view?
Mr Rubin: Yes.
Mr Conway: What I want to know is, if monopoly is part of the problem, do you have any advice to the committee? Since there is no question that people like yourselves have been substantially vindicated by the recent testimony of people like Mr Farlinger, accepting that we will not see a continuation of Hydro’s monopoly on generation, can you give the committee any thought or advice around regulation? There are those who would argue it’s not just monopoly, public or private – it doesn’t really matter – but it’s that this has been a monopoly, in this case a public monopoly, that has been unregulated, unlike the gas sector to which Tom was referring earlier. Do you have any comment, any view about a new regulatory framework for this unfolding electricity sector?
Mr Rubin: Let me first address a small part of that, and then I’ll let Tom handle the rest. One important part of that is nuclear regulation, by which we usually mean safety, public health and environmental regulation. I have certainly been a long-time critic of the way that activity is carried out and have urged the province and many earlier select committees, for example, to get the province involved in that regulatory vacuum.
In all fairness, the AECB regulatory vacuum isn’t quite as vacuous as it used to be on the reactor safety side; it is still pretty vacuous on the routine emission and environmental side. The province continually looks the other way, whether it’s tritium in drinking water or whatever. The province loves to say: “That’s a federal matter. They know it. It’s not our jurisdiction.” “Oh, it is our jurisdiction? Oh, well, it’s not our expertise. We’ll find a way not to deal with it.” That part has to be fixed. That’s obviously not the whole story on regulation, because there is also market regulation, and we’ll let Tom talk about that.
Mr Adams: On the market side, in terms of rationalizing Ontario’s electricity system along the principles that have, for example, been guiding the gas market, what we have is a very effective, efficient regulatory agency through the Ontario Energy Board that controls the transmission and distribution system, and that model of having open public regulation of the transmission and distribution, which are inescapably monopoly aspects of the electricity business, is an effective model.
What we are recommending for this unbundling of Ontario Hydro is to separate the naturally competitive enterprises and let the market rule, but with the monopoly aspects, the transmission and distribution system, you make them subject to something like the Ontario Energy Board.
Mr Conway: Norm has done a very good job at describing from his point of view the problems with the public enterprise that is Ontario Hydro, but there would be those who would argue that if we open up, particularly on the generation side, and have a competitive marketplace, that if we get Bechtel or if we get Hughes Energy or if we get the Acme Private Energy Corp of Nowhere, USA, or France or Britain, we may find that the kind of business practices of Ontario Hydro, big and powerful as they are, may not in fact be the province of Ontario Hydro alone.
What would you have to say to those critics who would argue that the business practices and the behaviours of Ontario Hydro, so articulately and ably described by your colleague a few moments ago, may in fact attach to other big players in the sector, whether they are public or private, and how does that get dealt with by some kind of new regulatory environment?
Mr Adams: The key for us is to demonopolize the parts of the enterprise these people might be engaging in. If they’re purchasing generating assets, they need to be beholden to their customers, and we think customers will do a pretty good job of –
Mr Conway: But how do they get regulated? If you look at the US and Britain, one of the things that is striking about the new environment is that very quickly a couple of major players – it’s been a move, by and large, to fewer, bigger players.
Mr Adams: I don’t accept that suggestion. If you read the financial press, it appears there are all these mergers going on. In fact many have been struck down by US regulators, for example.
Mr Conway: The British government had to intervene just a year and a half ago at the cabinet level to stop consolidations that were occurring in that marketplace.
Mr Adams: If you take the British electricity market as an example, when they demonopolized their electricity system in 1989, 100% of the market was controlled by three big companies. Now their market share I think is down to under 60% and falling. The competitive players jumped in the first five years to 11% of the market, and since then I think they’re at 17% of the market. There are other players in the market as well.
The point is that if you have good rules of operation, if you have an independent system operator and you have efficient regulation in the transmission and distribution system, the kind of market power concerns you are raising can be dealt with by ensuring that the pieces are small enough.
The Chair: Mr Laughren.
Mr Rubin: Excuse me, Mr Chairman. Can I add just a couple of words to the answer there? Because we didn’t talk about environmental regulation, and I don’t think any of us wants to suggest for a moment that there isn’t a need for regulating, for example, what comes out of smokestacks, what goes into public water bodies. These are things that have to be regulated whether the owner of the facility is public or private.
Right now I certainly see on the nuclear side sweetheart regulation, privileged pollutants coming out of the nuclear generating stations, but if those nuclear generating stations were made private tomorrow, were sold off, given away, whatever, those problems don’t go away. Heck no, they’re still there. And the problem of regulating acid gas emissions is one that actually needs regulations to be changed. They should have been changed already, because our current regulations really only apply to Ontario Hydro. That’s silly. It’s not the name of the corporation that determines whether you can acidify a lake or not.
For example, in our submissions to the Macdonald committee, we were quite clear on a number of changes that have to be made to environmental regulation whether or not the system is restructured. Some of them are made easier by restructuring, some of them are made harder, and we went into that in an appendix to our brief.
The Chair: That was a good question, Mr Laughren.
Mr Laughren: I’m trying to get a picture, the same kind of picture you have in your mind, of energy at the end of the day. I’m wondering, is there any part of Hydro you would not privatize?
Mr Rubin: I can give you my answer to that. My answer used to be that there was no advantage to privatizing the transmission grid, that it was a public carrier in the benefit of all and that it was part of the birthright of Ontario etc, and that it’s role was to be a public clearing house in effect where producers of electricity and purchasers of electricity met.
I have since changed that view, and now, partly through dealing with private monopolies a lot more than I used to, namely, the gas monopolies whose regulatory hearings and quasi-regulatory meetings I attend fairly regularly, I see that privately owned monopoly working at least as well as the publicly owned monopoly in Ontario ever has. The key, of course, is public regulation. Public regulation, combined with private ownership, I think is an extremely potent mechanism for getting the public interest views heard and maintaining leverage over the monopoly.
There is a certain lack of leverage. If we had the Ontario Energy Board telling Ontario Hydro to do A, B, C and D, or select committees – and we’ve all been involved with select committees telling Hydro to do A, B, C, and D – the key question that’s never answered is, or else what? With a private monopoly that’s publicly regulated that answer falls into your lap: or else we cut your rate of return next year. It is obvious. It is a sharp instrument. It is ever present. It makes private monopolies pay a lot of attention to the happiness of the regulators.
My current answer is that except for, for example, the political unwillingness of the population of Ontario to part with Niagara Falls – that I believe is a reality; therefore it would be foolish to lead by playing into the hands of PWU ads, because they’re right, the public doesn’t want to sell Niagara Falls – so let’s not sell Niagara Falls, from a public policy point of view, I don’t believe there’s a part other than the regulatory institution itself that has to be publicly owned.
Mr Laughren: That part of your vision I believe I understand. The second part that I don’t understand is the role of nuclear at the end of the day. Do you see nuclear continuing to be a supplier of energy in the province, let’s say privatized for argument’s sake for the moment, and if so, for how long?
Mr Rubin: The short answer is nobody knows. I’m on the steering committee of the Campaign for Nuclear Phaseout. The title of that organization makes its goals clear. The sooner the last reactor shuts down, in general the happier I will be. I don’t think it’s a good technology. I think it’s a toxic, inherently hazardous technology. That said, it is conceivable the rules could be set up so that neighbours of nuclear stations are protected, so that environmental regulations are enacted, so Mr Andognini and his pals could slap the Hydroids around the face enough times that they behave in an exemplary, near perfect manner for long enough to combine – I mean, he believes that good management can combine high reliability and economic output with safety, with safe management. He can demonstrate, he and his team, some places where that seems to have been happening for the last few years.
Personally I don’t think it’s sustainable in the long run. I think the technology will out. I think ultimately you are dealing with trade-offs between safety and economics, but I’ve been wrong before. I also was willing to bet against the privatization of the nuclear reactors in the UK. It has now happened. They seem to be success stories in combining good management on the bottom line and in the safety indicators. Obviously, if you have to be a neighbour of nuclear reactors, it’s better to be a neighbour of well-run nuclear reactors than poorly run nuclear reactors. If they’re well-run, they will run for longer before they’re shut down, either by irate neighbours or irate regulators or lack of economic performance.
Mr Galt: I would like to follow through with some of the questioning that Mr O’Toole – you were expressing concern about safety. We had a presentation by the Atomic Energy Control Board, a very impressive presentation, and what I’m hearing from you is you either don’t have faith in or don’t trust the AECB.
Mr Rubin: I think that’s right. First of all, the AECB, as I indicated in my presentation today, is trying to push water uphill by trying to enforce safety. The AECB is a tiny organization compared to Ontario Hydro. The incentives on Ontario Hydro are intentionally cockeyed. Ontario Hydro labours under a Nuclear Liability Act that says, just in case your constituents – those of you who represent constituents near nuclear generating stations – suffer losses of billions of dollars due to, god forbid, a nuclear reactor accident, that it isn’t Ontario Hydro’s problem. It’s not on their bill. They have fought recently and hard to make sure that cockeyed law stays exactly where it is.
In that crazy environment in which we have forgiven the potential polluter in advance for doing the unthinkable, it is then extremely hard to enforce safety even if you have enough troops and if they’re sharp enough and if they’re vigilant enough and if they think like critics; in other words, if they’re aggressive, if they’re loyalty is to public health and safety and not to the industry. I have questions about all of those ifs.
Mr Galt: A moment ago you talked about the British system which is of interest and you talked about privatization of nuclear reactors. The man and woman on the street here in Ontario is pretty concerned about privatization of the nuclear reactor. Why do you think this is so great in Britain?
Mr Rubin: I think what’s happened in Britain, as you probably know, is that Maggie Thatcher, determined to build a bunch of new nuclear reactors, and determined to privatize the electricity system, found out towards the end of 1989 that you couldn’t have both of those things, because the private sector would not invest a nickel in existing nuclear reactors, much less new nuclear reactors.
She chose privatization and kept the nuclear reactors in public hands. I thought, as I indicated a moment ago, they would remain in public hands. What has happened since is that the public entity that ran the nuclear reactors in Britain shaped itself up apparently, and whipped itself into shape where, with relatively minor public guarantees to the private owners of nuclear reactors, willing investors could be found. As I said, I was surprised by that, but a number of indicators are up, including their output and including their safety indicators. Tom Adams wants to add a few words to that if he may.
Mr Galt: Just quickly, you’re saying if there’s to be nuclear out there you would prefer it to be private, is that the bottom line?
Mr Rubin: One of the reasons why –
Mr Galt: With good regulations.
Mr Rubin: Again, coming back to what I said to Mr Laughren, I think regulation is much more powerful when whoever is regulated has something to lose. When you’re regulating Ontario Hydro, it’s like regulating the government. It’s not exactly clear what you threaten them with. With a private entity it’s crystal clear.
Mr Adams: I don’t want to leave you with the impression we are advocates of the British system. Keep in mind that when they sold the nuclear plants in the UK, they sold eight stations. The price they obtained was equal to about half of the cost of construction of the last of the eight stations. It’s like building eight houses as a developer and selling them for the price of half of the cost of construction of your last unit. The value of these assets as represented by market prices just shows an incredible, incredible loss to the public purse. So that’s nothing for the British public to be at all proud of. I just wanted to complete your perspective on our views of the UK system.
Mr Galt: You talked in your last recommendation, I think it’s recommendation 5, you don’t exactly say privatization; you talk about breaking up and it’s very suggestive. We’re sitting here with this stranded debt and that’s got to go some place. If that was to happen according to your recommendation, what would you propose be done with this stranded debt?
Mr Adams: We think the stranded debt ought to be divided. Part of it becomes the liability of taxpayers and part of it becomes the liability of future electricity customers.
Mr Galt: For what reasons?
Mr Adams: Well, for a couple of reasons. The primary reason why taxpayers ought to take a portion of this burden is that when Ontario Hydro was borrowing money, we the taxpayers of Ontario co-signed the cheques. So we really, from a legal point of view, have acquired a liability there. Ontario should be good to stand behind its name. We should not walk away from our obligations. That’s an unsavoury prospect, to have taxpayers bail out Ontario Hydro, but I think legally that’s part of the answer. The reason electricity customers ought to pay is related often to history.
One of the groups you’ll probably hear from will be the Association of Major Power Consumers in Ontario and the Municipal Electric Association. Both of those organizations were vociferous advocates for nuclear expansion. Up until very recently they were proposing Darlington B and C and D. Some of the key customer groups are really part of the problem here, so I think it’s appropriate that electricity customers share a portion of the burden.
In allocating costs to electricity customers, one of the things we want to do is ensure we do it in such a way that cost recovery, those surcharges on the bills, interferes as little as possible with the decisions that customers make, or that other energy producers might make. What we’re proposing is something like a transmission charge or a hook-up charge. It’s a cost associated with the privilege of being connected to the grid. That’s unavoidable by customers who self-generate and customers who take all their requirements from the grid.
The Chair: Thank you very much committee. We have gone past the time. Mr Adams, Mr Rubin, thank you very much for appearing before the select committee. I appreciate your time and your interest. The committee will now stand adjourned until the hour of 7 pm. I will remind members of the committee that very light refreshments are prepared for you in the dining room. If we’ll be back promptly on time, please, our next witness is Maurice Strong, the former chairman of Ontario Hydro.