April 6, 2007
Ontarians would have saved $1.5 billion on their hydro bills over the next 25 years had the government negotiated a smarter deal to refurbish the Bruce Power nuclear station, the provincial auditor general says.
A review also found the government had “only partial success” in reaching its goal of protecting electricity ratepayers from cost overruns that have plagued past nuclear projects.
Among other concerns, the $4.25-billion pact to modernize four reactors at the Lake Huron plant included a “mechanical error” that cost ratepayers an estimated $88 million, and $514 million for pricey enriched fuel.
“It’s not clear cut it’s a good deal,” Auditor General Jim McCarter said yesterday after completing a government-ordered review of the pact.
However, he did find it “successfully” limits ratepayer exposure to most of the financial risks Bruce Power faces in operating – if not refurbishing – the nuclear power plant.
“It was a bit of a mixed bag.”
The controversial agreement was signed in 2005 with Bruce Power, a privately owned firm operating the old Ontario Hydro plant, as the government scrambled to find new sources of electricity to meet fast-growing demand.
The $1.5 billion in missed savings is calculated in today’s terms but will erode to “hundreds of millions of dollars” over the 25-year life of the reactors because of inflation, McCarter said.
The review found the actual price of electricity from Bruce is 7.1 cents per kilowatt-hour and is poised to rise depending on construction costs and other factors.
“That is significantly higher than what we’re paying,” he added, noting the average market price for electricity from all sources in Ontario over the last five years is 4.9 cents per kilowatt-hour.
Translated to hydro bills, saving the $1.5 billion would have trimmed the cost of electricity by one-third of a cent per kilowatt-hour, McCarter said.
The 7.1-cent rate is 44 per cent higher than the average market price, noted New Democrat Leader Howard Hampton, who has been fighting the government’s plans to build more atomic reactors elsewhere.
“This shows, once again, nuclear power is expensive.”
Still, Energy Minister Dwight Duncan said he would sign the same deal all over again.
“The trade-off is what you pay for power,” said Duncan, who was energy minister when the deal was negotiated, before becoming finance minister in October 2005 for seven months and then returning to the energy job.
But Hampton and other critics pounced on the findings, charging that some of the costs were hidden in the deal through measures like accepting lower payments for the plant leased to Bruce Power by Crown-owned Ontario Power Generation.
“The government’s reputation as a defender of the ratepayer has suffered a serious blow here,” said analyst Tom Adams of Energy Probe.
He said the report found the deal was structured so that prices will rise at a higher rate in later years of the agreement, an arrangement politically advantageous to the government, which is facing an election in October.
“They created an artificially low price at the beginning.”
The auditor also found the Liberal government went into the talks two years ago at a disadvantage because of the Liberals’ election promise to close coal-fired power plants by 2007.
That promise – later broken with no firm closing date in mind for several more years – left nuclear as the only practical alternative to meet Ontario’s growing power needs.
“After this deal was signed, the government started to get flexible on coal, so it was a political mismanagement of the negotiations,” Adams said.
In effect, “the government put a gun to their (own) head,” added Progressive Conservative energy critic John Yakabuski (Renfrew-Nipissing-Pembroke).
Duncan said the alternative to this deal was exposing ratepayers to more risks than the government was willing to take given massive cost overruns like the ones that plagued the Darlington and Pickering nuclear plants years ago.
“In the end, this deal is fair for both sides,” Duncan told a news conference.
“We worked to keep the price to consumers as low as possible. … There’s no easy, cost-free way to deal with the challenges we’ve been faced with.”
The auditor’s review, a complicated 29-page document, was critical of the way government negotiators handled a number of elements in the deal.
“We thought these were all reasonable things we thought they could have put on the table. … They could have done better,” McCarter said.
# The review questioned why ratepayers are paying for the Bruce reactors to use enriched fuel, which boosts electricity output, but not getting a price cut in return. Enriched fuel costs two to three times as much as regular fuel.
# A “mechanical error” in calculations saw the government double-count the net effect of tax savings on some interest expenses to the advantage of Bruce Power.
The goof was discovered two days before the deal was signed but not corrected because government negotiators found errors elsewhere that favoured the government.
However, McCarter found “the documentation that the ministry provided to us did not support its assessment of the errors it cited as offsetting.”
# In terms of cost overruns, ratepayers are more protected from major ones than minor ones and there was not enough evidence to agree to pay a $250 million addition to the total cost of the project in the final days before it was signed, McCarter said in an interview.
If costs go 10 to 20 per cent over budget, ratepayers are on the hook but they will pay one-quarter of extra costs when overruns rise past 50 per cent.
# Bruce Power will get full market price for the electricity it would normally produce if the province fails to build enough transmission lines to get it to customers.
“Our concern is that Bruce will have a higher profit margin when the plants are not operating than when the plants are operating,” the review said, arguing a better arrangement for ratepayers would have been to negotiate a lower “floor price” instead.