April 10, 2007
Thanks to the report by Ontario Auditor General James McCarter, issued on the afternoon before the long weekend by the Ontario government, Ontario’s electricity ratepayers are much closer to understanding what electricity from the Bruce A nuclear refurbishment will cost. The bottom line: The McGuinty government signed a disastrous deal in deciding to resurrect nuclear plants that had no cost justification.
Bruce A is a four-reactor nuclear generating station constructed during the 1970s, on a site that also includes the four-reactor Bruce B nuclear station. After initially operating well, Bruce A became problem-prone during the late 1980s and early ’90s. From 1995 through 1998, with the costs of repair prohibitive, Ontario Hydro actually shut Bruce A down. In 2001, a private consortium in the reactor-leasing business thought it could wring some value out of the reactors at the Bruce complex, and leased the site. The consortium, which called itself Bruce Power and whose composition has changed over time, put Bruce A and its prohibitive repair bill on the back burner and initially only operated the economically viable Bruce B reactors.
In 2004, soon after the McGuinty government came to power on a high-profile promise to close all of Ontario’s coal-fired generating station, the prohibitive costs required to refurbish Bruce A no longer mattered much. To keep its promise and still keep the lights on, the McGuinty government decided it had little choice but to refurbish Bruce A. And, as the Auditor General points out, the government’s coal policy “made it difficult for the province to negotiate from a position of strength.”
To minimize political embarrassment, the deal struck between the government and the consortium was designed to obfuscate costs. The Auditor General details a host of measures built into the deal that were designed to make the price to consumers appear much lower than it actually is.
One measure saw the government order Crown-owned Ontario Power Generation, the owner of the site, to absorb part of the cost by rewriting the lease to reduce the rent that Bruce Power needed to pay OPG.
Another measure that the government used to suppress the cost of Bruce A power was to inflate the value of Bruce B power. Until the McGuinty government’s election, Bruce Power received a market price for its power. Now, Bruce B power sells at a more profitable regulated price in which it is protected from a downturn in the marketplace by a price floor.
Still another measure for hiding the cost of Bruce A power utilizes escalator clauses, guaranteeing Bruce Power higher rates in future years in exchange for lower prices in the early years, under McGuinty’s current mandate.
To add insult to injury, the contract did double duty, not only hiding high power prices but also a windfall to OMERS, a public-sector union pension plan and one of the members of the Bruce Power consortium. The Auditor General’s analysis of the tax considerations underpinning the deal reveals that the deal was designed to benefit OMERS. The negotiation hinged on the expected return on capital for the lease owners. Notwithstanding that OMERS is not a taxable entity, the government pretended that it was one for the purpose of setting the price consumers will pay, thereby boosting the expected return for OMERS to 16% to 21%.
The importance the government attaches to its claim that the nuclear refurbishment will yield power at a respectable price is demonstrated by the press release announcing the release of the Auditor General’s report. Whereas the Auditor General estimates that the real cost of power under the deal is more than 7.1 cents per kilowatt-hour, the government’s press release claims that: “Over the past 18 months, the price paid to Bruce Power has been 6.1 cents per kilowatt hour.”
The Auditor General’s findings, though damning enough on their own, actually underestimate the ultimate cost that consumers will bear.
The Auditor General’s report points out that the government used a concept called “ratepayer equity” as another method of hiding the cost of Bruce A power. “Ratepayer equity” is a euphemism for government subsidies. In effect, the government replaced the market price that Bruce Power received for its Bruce A power with a higher regulated price.
The subsidy is higher than the Auditor General realized. When calculating the value of the subsidy for Bruce A power, the Auditor General based his calculations on the difference between the new regulated price and the historic weighted average market price for power, which averages the cost of high-value power (such as from flexible natural gas plants, for example) with low-value power (such as from nuclear reactors, which cannot meet peak demands). Had he based his calculations on the low prices Bruce nuclear plants actually received, he would have determined that the subsidy was some 18% higher.
The subsidy is also higher because the Auditor General’s report fails to estimate the value of the generous force-majeur clauses to which the government agreed. In the event that the refurbishment experiences cost overruns such as those that hit other Bruce reactors, consumers could get hit massively – the government has agreed to transfer up to 100% of cost overruns to consumers, an amount that could run into the billions of dollars.
The contract to which the government agreed provides no incentive for Bruce Power to deliver power from Bruce A during times of the year when consumers value power the most. Because Bruce B and Bruce A share overheads, and because Bruce B can capture high market prices during peak seasons, Bruce Power will want to schedule maintenance for Bruce A during peak demand periods, when maintenance crews would otherwise be idle. Since the market price for power during times of peak demand are higher, consumers can expect to get dinged again.
The Auditor General has done a service to Ontarians by exposing the vast multi-dimensional financial shell game that now exists among the various government-owned and controlled entities that form the power system in Ontario. The Ontario Power Authority – Ontario Hydro’s successor – is now ordering up vast new nuclear investments, largely on the strength of its claims that nuclear refurbishment provides relatively cheap power. Sadly, this only promises more work for future Auditors General.
Tom Adams is executive director of Energy Probe, a Toronto-based think-tank.