Thomas Adams
Energy Probe
January 26, 1998
1. Criticisms of the White Paper
1.1 Continuation of Excessive Market Power
1.2 Failure to Endorse Privatization
1.3 Deficient Financial Planning
1.4 Lack of Firm Commitments to Tougher Environmental and Public Health Rules
1.4.1 Specific Environmental and Public Health Initiatives Required
2. Market Design and Process Priorities
3. Designing Energy Regulation to Implement the White Paper’s Objectives
4. Ongoing Operations of Ontario Hydro and the "Nuclear Asset Optimization Plan"
5. Lessons for Ontario from the Reform and Restructuring of the Power Sector in Victoria (Australia)
6. Recommendations
7. Background Information: Energy Probe’s History on Hydro Reform and Competition
Energy Probe welcomes the publication of the Ontario government’s White Paper, "Direction for Change: Charting a Course for Competitive Electricity and Jobs in Ontario". We have commented publicly on many occasions about the benefits we expect will flow from the approach it has adopted. Energy Probe has encouraged the provincial government to implement the White Paper.
While we support the direction of the White Paper, we have a number of concerns. This statement is organized into six sections: an outline of concerns we have with the White Paper, our ideas on the market design objectives and where the process should go from here, an outline of our concerns with ongoing operations of Ontario Hydro during the transition process including the "Nuclear Asset Optimization Plan", an update and summary of the lessons from the power sector reform process in the State of Victoria (Australia), and some background information about Energy Probe’s history on this issue. We have collected all of our recommendations in a summary after the main body of the statement.
1. Criticisms of the White Paper
While we have some critical comments about the White Paper, we want to emphasize our overall approval of the policy statement. Nonetheless, we believe it can be improved. Our concerns are organized here into four areas: continuation of excessive market power, failure to endorse privatization, deficient financial planning, and lack of firm commitments to tougher environmental and public health rules.
One difficulty for electricity customers which the White Paper would permit to persist is the commanding market power of the new power generating entity.
The White Paper states, "The Government has concluded that there is no need, at this time, to reorganize Ontario Hydro’s generation assets into multiple generation companies. If an open market is approved, competition from imports and other energy sources should be sufficient to maintain discipline on prices and costs, particularly in view of the proposed reduction in Ontario Hydro surplus generating capacity." (p. 19) We do not share this view.
We are concerned that the new generating company’s market dominance will be so great as to present a barrier to entry for prospective competitors in the Ontario electricity marketplace. Private investors in new generating assets in Ontario can only be discouraged by the prospect that their main competitor may be in a position to flood the market to depress price at some times while withholding supplies at other times to inflate price, all for its own commercial advantage.
The White Paper argues that there is a regulatory solution to the generating entity’s market power. After decades of experience in many energy regulatory forums, Energy Probe doubts that regulators will be able to reproduce the customer protection benefits of true competition. We urge the government to work to ensure that the market power of the new generating entity described in the White Paper in the short term is controlled by the Ontario Energy Board for the protection on customers. We consider it critical that the government ensure that the Ontario Energy Board and the market design process institute open market rules for potential competitors.
The White Paper is based in part on the sound principle that no participant in the electricity sector should be permitted to borrow with taxpayer-backed loan guarantees. In the long term, this principle can help ensure fair competition in generation. But government officials have indicated that Ontario Hydro will be permitted to "roll over" its existing (taxpayer-backed) debt with new taxpayer-backed borrowing. We fear that the renewal of these taxpayer guarantees will needlessly delay the onset of fair competition. Furthermore, unless all of Ontario Hydro’s new borrowing is expressly and legally made subordinate to Ontario Hydro’s existing, taxpayer-backed debt — as a second mortgage is subordinate to a first mortgage — all new "unsecured" creditors will receive a de facto taxpayer guarantee on the lion’s share of their investment. Worse yet, Ontario taxpayers will in effect be responsible for losses incurred on future Ontario Hydro investments that are ostensibly made at the risk of unsecured lenders.
We urge the government to immediately cut off all loan guarantees to Ontario Hydro for new borrowing- including borrowing for normal debt renewal or "roll-over"-and to ensure that all future Ontario Hydro borrowing is legally subordinate to the existing, taxpayer-backed debt. These steps should effectively prevent any efforts Ontario Hydro or its successors might make to expand or defend market share with taxpayer-backed financing.
The criticism that the U.K. government received following its restructuring of the electricity sector clearly indicates the hazards of concentrating too much market power in the hands of too few. However, the mistake made by the U.K. government in 1989 of concentrating virtually all the pre-existing Central Generating Board generating assets in the hands of three enterprises (one pubic and two private) was a much less serious mistake than the Ontario government is proposing to commit of creating only one entity.
Since our publication of Breaking Up Ontario Hydro’s Monopoly in 1982, Energy Probe has been recommending that ownership and control of the generating stations be broken up. In order to protect consumer interests, we continue to recommend that Ontario Hydro’s generating assets be broken up into separate enterprises as small as possible consistent with economic efficiency.
Energy Probe has publicly criticized the White Paper’s failure to endorse privatization explicitly. Although we understand the government’s sensitivity to discussing privatization of parts of Ontario Hydro, we urge the government to remain open to this option.
Energy Probe advocates privatization of Ontario Hydro to enhance regulation by breaking up the conflict of interest that prevails when one agency of government regulates a government-owned industrial enterprise. We also advocate privatization of individual generating units now owned by Ontario Hydro to reduce market power and protect customers. Energy Probe continues to recommend that the proceeds of any sales be used to discharge electricity liabilities against the public purse, including Ontario Hydro’s debt and its environmental liabilities.
Some of Ontario Hydro’s assets are worth substantially more in private hands than they are now in public hands. Examples include the now derelict Hearn generating station in Toronto and many of the aging hydraulic stations in urgent need of rehabilitation. The experience with competitive reforms and privatization of the power sector in Victoria, Australia, which we discuss later, powerfully demonstrates this potential for a well-crafted privatization program to reveal hidden value. The recent privatization experience with Cornwall Electric, where a price of about 30 times earnings was negotiated in addition to removal of the tax holiday previously enjoyed by the utility in public hands, rate guarantees for consumers, and employment guarantees for incumbent employees, provides additional evidence that privatization can reveal hidden value.
It is imperative that all privatizations are undertaken in a process that is transparent, demonstrably fair to all potential bidders, and ensures full value for the people of Ontario.
We are also concerned about the financial analysis underlying the plan, and will here particularly focus on financial provisions for nuclear waste management.
Ontario Hydro’s has not set aside any cash to pay for nuclear waste management. It has collected money from ratepayers, ostensibly as a contribution to future waste management costs, but then spent the money. The books of Ontario Hydro indicate that funds have been collected but scratch the surface and you will discover that no accounts with actual dollars exist, only entries in an accounting ledger. Instead of providing assets to accomplish this enormous task, Ontario Hydro has only provided a liability. According to information revealed in the recent Select Committee process, the utility’s current estimate for the cost of nuclear waste disposal and decommissioning is $15 billion in 1996 dollars.(1) This figure is on top of the corporation’s $30 billion in bond liabilities.
Given the vast scale of Ontario Hydro’s liabilities, extra charges on all electricity transmission and the proceeds of income taxes and capital taxes on electricity enterprises may not yield sufficient proceeds to service these liabilities. By virtue of the provincial loan guarantee, ordinary taxpayers may be faced with some of the costs of discharging Ontario Hydro’s liabilities. Although the date at which taxpayers must face up to this unpleasant task can be postponed, at some point the bill will have to be paid. The prospect of a taxpayer "hit" reinforces the need for the government to immediately stop guaranteeing any future electricity debt and to privatize parts of Ontario Hydro, particularly where it can reveal hidden value.
Nuclear waste disposal and decommissioning liabilities should be funded in an account external to Ontario Hydro and separate from general government revenues. In order to guide the formation of this account, the Ontario Government should publish a plan on how nuclear waste management costs are going to be managed and provide all assumptions underlying that analysis. The plan should be subject to regular public review by the Ontario Energy Board. If Ontario Hydro is unable to produce the money (roughly $2.8 billion) it has collected from customers for the purpose of nuclear waste disposal and decommissioning, the government must produce the money, to avoid burdening future Ontarians with the costs of cleaning up after the current generation. All nuclear operators, whether public or private, should contribute to the plan on an ongoing basis. Nuclear operators should be prevented by law from using or borrowing against funds in the account.
1.4 Lack of Firm Commitments to Tougher Environmental and Public Health Rules
The White Paper does not contain any firm commitments to tougher environmental and public health rules.
We believe that implementing the reforms outlined in the White Paper should be accompanied by a significant strengthening of environmental and public health rules. Public support for the electricity reform process can only be advanced by actions to ensure that environmental benefits result.
Although the MDC has been mandated to consider further environmental protection measures in designing the market, the Committee appears to have relatively few members with experience to apply to these issues. The MDC will have to consult with environmental organizations to carry out its responsibilities in this area.
Here we will outline in recommendation form some of the environmental concerns the government must address.
1.4.1 Specific Environmental and Public Health Initiatives Required
The Ontario government should subject radioactive nuclear power plant emissions to the same regulation and control as other persistent toxic agents, therefore reducing emissions of radionuclides from Ontario Hydro’s reactors.
The Ontario government should require full, unlimited liability on all parties responsible for radioactive releases in or affecting Ontario, its environment, or its citizens.
The Ontario government should strengthen nuclear emergency planning in Ontario.
The Ontario government should update Regulation 281 that limits Ontario Hydro’s acid gas emissions so that all the electricity industry’s sources of acid gas are captured, whether or not they are owned by Ontario Hydro.
The Ontario government should upgrade Regulation 281 to introduce tradable emissions rights or acid gas taxes to be applied to cut acid gas emissions in a more economically efficient fashion than is now the case.
The Ontario government should limit emissions of air-borne toxic materials and particulates from fossil fuelled stations.
The Ontario government should strengthen riparian rights so that the drainage basins now developed for hydro-electric production are operated in a manner that more effectively reflects the priorities of riparians other than power generators.
2. Market Design and Process Priorities
The government should seek to create an open and transparent public process capable of making decisions quickly and efficiently to guide the reform of Ontario’s electricity system.
The MDC is an interest group assembly, not an expert group. We are not aware of any members of the committee with working experience building competitive power markets elsewhere in the world. The work of the MDC will have to be subject to thorough public review. We recommend the OEB as the best forum to review the products of the MDC. There will be a need for the OEB and IMO to formally consult with the MDC. We look forward to a published schedule for publicly released products to be created by the MDC.
The market design process will require strong leadership from people with a thorough understanding of the relevant technical and administrative issues. Energy Probe recommends that experts who have designed the successful open, competitive power systems now operating in New Zealand, Australia, and the U.K. be brought in to support or even direct aspects of our reform process. Individuals and firms experienced with the technical issues and project management problems that arise in creating competitive power markets would facilitate our process.
Outside expert assistance might assist us in designing our new system to manage transmission system congestion efficiently. International experience shows that generally transmission system operators, like their counterparts now in Ontario, do not think that transmission constraints are a significant issue before the market starts operating. However, international experience also shows that these constraints generally do turn out to be at least a persistent problem after the market starts operating. When operators say that "constraints are no problem here" what they usually mean is that in the monopoly it was easy to manage constraints, because it was simply a matter of overbuilding the system in the long run and of one employee of the utility calling some others and telling them to turn some generators up and some down in the short run. The cost implications of these forms of congestion management have not been efficiently managed because they were considered small relative to total system costs. But the cost implications of such "minor" investments as transmission upgrades or operating adjustments are not necessarily small for the specific transmission service provider or generators turned up or down. Ultimately, efficient congestion management is necessary to help consumers minimizing their costs. Creating the systems that will achieve this outcome will probably require outside expert help.
3. Designing Energy Regulation to Implement the White Paper’s Objectives
We are encouraged by the government’s endorsement of performance-based regulation, by the decision that the scope of regulation include transmission, distribution, and IMO functions, and most particularly by the decision to give the Ontario Energy Board a duty to promote competition. Several recommendations on principles to apply in developing new regulatory instruments are provided at the end of this letter.
4. Ongoing Operations of Ontario Hydro and the "Nuclear Asset Optimization Plan"
Energy Probe recommends that the eight reactors at Pickering A and Bruce A should be written off and the units permanently closed. In hindsight, it is obvious that the replacement of the pressure tubes in the four Pickering A reactors in the mid-1980s was a terrible investment, and has bought us relatively little power production in return for the billions of public dollars spent to say nothing of several significant safety problems post retubing. In hindsight, Ontario Hydro would have been financially much better off to have simply closed the Pickering A reactors in the mid-1980s rather than re-tube them. Although Ontario Hydro’s forecasts at the time promised large positive returns, what was to have been an investment in retubing turns out to have been a waste.
Ontario Hydro now makes similar claims for the billions of dollars it hopes to invest under NAOP. Unless virtually all the financial risks can be off-loaded to willing investors, the best financial interests of Ontario lie in permanently closing our nuclear units as soon as they face major repair bills, as both A stations now do. Any investment required to refurbish the B units should come from private investors, not the Ontario public, and failure to find willing investors should be taken as an indication of the risks in the "investment".
The likelihood of some system for stranded cost management being implemented in Ontario to deal with the uneconomic electricity sector liabilities, as discussed in the White Paper, creates a substantial risk that Ontario Hydro will expand public liabilities prior to its breakup. Energy Probe is very concerned about the financial incentive Ontario Hydro managers of hard assets now have to maximize cash flowing to their operations. The management of Ontario Hydro has little incentive to minimize the liabilities they create, since their uneconomic costs will be taken care of elsewhere. As recommended previously, in the interest of minimizing financial exposure of the Ontario public, Ontario Hydro should not be permitted to borrow any funds with a loan guarantee from the province, and all non-guaranteed borrowings should be treated as subsidiary to existing guaranteed obligations.
We urge the government to investigate all opportunities for financing future nuclear investments outside the public purse. This should begin with Ontario Hydro’s planned $1.6 billion expenditure for "nuclear recovery" under the Nuclear Asset Optimization Plan. There may be a way to arrange financing from the Ontario Hydro pension fund, which currently has a value of approximately $9 billion. Non-public financing might also be initiated in the form of an equity transfer to Ontario Hydro’s unions of written-off nuclear facilities, facilities that the unions are pressing the government to reinvest in.
Energy Probe continues to be very concerned about inaccuracies and incompleteness of Ontario Hydro’s nuclear accounts. Ontario Hydro’s financial reporting should be thoroughly revised to accurately report all expenditures and liabilities. So that the public is properly informed about the costs and benefits of its investments, Ontario Hydro should not be allowed to capitalize any costs related to operating or maintaining its reactors. In addition, depreciation of nuclear assets and all financial implications related to the depreciation period should be based not on 40 years of reactor service life as is currently the case but on 25 years, and nuclear waste disposal and decommissioning liabilities should be funded in an external account. As previously noted, if, with the removal of the guarantee, Ontario Hydro is unable to produce the money (roughly $2.8 billion) it has collected from customers for nuclear waste disposal and decommissioning, the provincial government should produce the money, to avoid burdening future Ontarians with the costs of cleaning up after us.
The government could move a long way to addressing the environmental and health risks associated with continued operation of the nuclear units by beginning a transition to a world of full nuclear accident liability. The Ontario Government should legislate that as of a date certain in the near future (perhaps 2005) no nuclear reactor will be permitted to operate in Ontario unless its owners and operators are liable without limit for the off-site consequences of a reactor accident, and have demonstrated the capability of discharging that liability.
5. Lessons for Ontario from the Reform and Restructuring of the Power Sector in Victoria (Australia)
Many lessons can be learned from the reform and restructuring of the power sector in Victoria to help the Ontario power system reform process. There are many close parallels between the condition of the power system in Victoria prior to the reforms and those that prevail in Ontario now. This section looks at the experience of Victoria and draws out the lessons for Ontario.
The government of Victoria has successfully dissaggregated the former vertically integrated electricity monopoly, creating a highly competitive market structure, and privatizing the new businesses for total sale values around twice the book value of the former monopoly. Primarily as a result of this, state debt has been cut from $A 32 Billion to $A 11 Billion. Wholesale electricity prices have halved, yet there is strong competition from the private sector to build new capacity which initially is expected to be highly efficient and environmentally more appropriate cogeneration plants.
In 1992 the economic situation in Victoria was in crisis. A left of centre Labour government ran up state debt to the highest per capita level of any state in Australia. The state’s economy, based on relatively highly protected manufacturing, was reeling from the effect of cuts in tariff protection and the collapse of state-owned banks. The labour government in 1991 was forced to partially privatize a partly constructed 1000 MW brown coal power station (Loy Yang B) in order to introduce better labour practices, deal with cost overruns, and to relieve pressure on the state’s borrowings.
Despite abundant supplies of low cost brown coal, Victoria had lost its position as Australia’s cheapest electricity supplier. Like Ontario Hydro, the State Electricity Corporation of Victoria (SECV) was mismanaged, operated in an environment of secrecy, and lacked accountability. Its management were clearly seen by the government as incapable of leading the sector into a competitive and privatized industry environment.
A new conservative government was elected in 1992 and, as part of its policies to arrest the economic decline of the state, decided to completely restructure and privatize the electricity industry.
Victoria’s now functioning competitive structure is remarkably similar to the one in the White Paper:
- an independent system operator responsible for operating the wholesale electricity market,
- separation of generation, transmission, distribution,
- creation of retail supply as a competitive sector separate from the monopoly distribution businesses,
- amalgamation of inefficiently small local distribution businesses,
- phased introduction of customer choice with full access for domestic customers by 1 January 2001, called the "contestability date",
- establishment of franchise fees and a small electricity tax to recover the costs of stranded contracts and to pay down debt,
- creation of an independent economic regulator,
- and integration of the competitive state market with competitive markets being established in neighbouring states.
However, Victoria went further than the White Paper in two key areas:
- the generation sector was split into small companies to create the maximum achievable amount of competition,
- and all electricity companies were privatized as an integral part of the restructuring process.
The reform process was completed remarkably quickly. The design was announced at the beginning of 1994; the creation of the new entities was completed in mid-1994; the wholesale market also commenced operation in mid-1994; the privatization process commenced in mid-1995, with all the distribution businesses sold in the second half of 1995. All the generators (except one small gas generation business) and the transmission grid were sold during 1996 and 1997. A long term contract with Loy Yang B was restructured to bring this company into the competitive market. The first step into a national electricity market was implemented in May 1997 and has been successfully operating for the past six months.
The results have been impressive:
- Privatization has unlocked previously hidden value. In excess of $A 21 billion above book value will be achieved from the complete privatization program. This has been significantly in excess of estimates prior to privatization and can be compared to a book value of $A 10.5 Billion in 1994, and the debts of the SECV, at $A 9.5 billion.
- The Auditor General reports that savings from debt retirement exceeded the dividends and other revenues forgone by the state by $A 718 million in 1997/98.
- Levels of electrical service reliability and generator availability have increased remarkably since privatization. Improvements in performance have been estimated to be equivalent to an increase in capacity of 700 MW (in a system with total nameplate capacity of only 8,400 MW).
- Electricity prices have been extremely competitive. While prices are expected to rise towards the cost of new entry generation (currently estimated at $A 39/MWh), spot prices in the pool have recently averaged around $A 10-12/MWh. This reflects performance improvements in supply and a resulting excess supply of electricity.
- Prices to consumers are falling. Domestic tariffs are to drop by 9% in inflation-adjusted terms between 1996 and 2001 before these customers are opened up to competitive supply. Small business tariffs will fall by 22% between 1996 and the contestability date.
- Many competent Australian managers within the former SECV have retained or improved their positions. Many middle managers have proved themselves in the competitive environment and some are now involved in working with their parent companies in other competitive markets.
Several factors led to the high privatization proceeds achieved. The decision to open the market to off-shore bidders created a much more active bidding process than otherwise would have existed. Disaggregation of the generators, rather than reducing their value-as conventional wisdom would have it-increased their value. Disaggregation of the sector created entities that were of a small enough size that many Australian and overseas companies could bid for them. This resulted in a highly competitive sales process. Breaking assets into small lots for sale contrasts with the U.K. where assets were sold in very large lots but at much lower relative prices. Other significant factors contributing to the privatization’s success were a predictable and stable regulatory environment for the monopoly transmission and distribution assets; a favourable interest rate and bank lending environment; a willingness by both foreign and domestic bidders to pay premiums to gain experience in a highly competitive environment; and an absence of nuclear assets.
Despite a campaign to oppose privatization by the Labour opposition, the government was re-elected in March 1997 with its large majority hardly affected. Victoria is now seen as being at the forefront of economic reform in Australia, and the state economy is undergoing a strong recovery as a result of the improvements in the state’s financial position and other reforms. While, as in Ontario, the public is generally uncomfortable with privatization, the program has been politically successful.
There are many lessons be learned from Victoria for the Ontario government. The Ontario government should split up generation and (perhaps with the exception of the nuclear plants and Niagara generators as the Macdonald Committee proposed) privatize the sector as fast as possible. This would create a more competitive environment with pricing benefits for consumers and the economy and would remove a major potential barrier to new entrants. Ontario Hydro cannot be expected to rehabilitate itself. Its cultural and management problems will be best resolved by splitting the generation assets of the company into a significant number of competing privatized generators, where the business performance of managers and workers will determine their success.
Just as the creation of the Victoria Power Exchange or VPX was a key to creating a competitive market, here the IMO should be set up and made independent as quickly as possible. Until the legal changes can be enacted to make the IMO independent, Ontario Hydro’s corporate structure should be changed to make the current CMO as independent as possible. Within Ontario Hydro’s new corporate structure, the reporting relationship whereby the CMO has recently been transferred to be under the control of Ontario Hydro’s Executive Vice President for Development and Transition should be changed. One option would be to revert back to the previous arrangement, whereby the CMO was more independent and reported directly to the Ontario Hydro president (or acting president as is now the case). A superior option would be to have the CMO report directly to the Chair of the Market Design Committee and therefore to become independent immediately.
Management of the reform process should be overseen within a single government agency and managed by contracted expert consultants who are required to complete the restructuring within a limited period of time and in accordance with the government’s objectives. Establishing a competitive and properly regulated electricity system while facing up to and managing the system security, safety and financial problems with Ontario Hydro is a major undertaking. There are insufficient skills and experience presently within the power sector to create a competitive market, and much of the technical expertise is locked up within Ontario Hydro. Inevitably, vested interests will try to influence the process for their own benefit. Ontario cannot afford to undergo a protracted reform process with outcomes driven by vested interests rather then the interest of the whole community.
The reform process must have strong independent leadership. Implementing Victoria’s reforms involved careful, objective analysis. Extensive consultation was undertaken within the sector on the detailed design of the reforms. The views of the world’s leading consultants were sought out while expertise within the SECV was harnessed to further the objectives of the government.
Privatization of the electricity sector can be a political success story. There must be strong leadership of the implementation process and an active strong focus on managing the risks that can arise during the implementation process.
Ontario should move quickly. The benign economic environment and strong demand for good quality electricity assets from international energy companies may not last. Ontario should capitalize on the present favourable environment by moving to privatize as rapidly as possible. Energy Probe is particularly distressed by the delay in announcing the formation of the Market Design Committee. The delay undermines the timeline the government has set forward to guide the process and suggests weakened resolve to implement the White Paper.
The number system used here refers back to the sections that discuss the matters addressed in each recommendation. Letters are used when more than one recommendation refers to a particular section.
1.1A Ontario Hydro’s generating assets should be broken up into separate enterprises as small as possible consistent with economic efficiency.
1.1B All taxpayer-backed loan guarantees to Ontario Hydro for new borrowing-including borrowing for normal debt renewal or "roll-over"-should be cut off immediately. (Also discussed in Sections 1.3 and 4.)
1.2 The Ontario Government should endorse privatization of aspects of the province’s electricity system.
1.3.A The Ontario Government should publish a plan on how nuclear waste management costs are going to be managed and provide all assumptions underlying that analysis. The plan should be subject to regular public review by the Ontario Energy Board.
1.3.B If Ontario Hydro is unable to produce the money (roughly $2.8 billion) it has collected from customers for the purpose of nuclear waste disposal and decommissioning, the government must produce the money, to avoid burdening future Ontarians with the costs of cleaning up after the current generation. All nuclear operators, whether public or private should contribute to the plan on an ongoing basis. Nuclear operators should be prevented by law from using or borrowing against funds in the account. (Also discussed in Section 4.)
1.4.1 The Ontario Government should make a firm commitment to tougher environmental and public health rules. Specifically:
The Ontario government should subject radioactive nuclear power plant emissions to the same regulation and control as other persistent toxic agents, therefore reducing emissions of radionuclides from Ontario Hydro’s reactors.
The Ontario government should require full, unlimited liability on all parties responsible for radioactive releases in or affecting Ontario, its environment, or its citizens.
The Ontario government should strengthen nuclear emergency planning in Ontario.
The Ontario government should update Regulation 281 that limits Ontario Hydro’s acid gas emissions so that all the electricity industry’s sources of acid gas are captured, whether or not they are owned by Ontario Hydro.
The Ontario government should upgrade Regulation 281 to introduce tradable emissions rights or acid gas taxes to be applied to cut acid gas emissions in a more economically efficient fashion than is now the case.
The Ontario government should limit emissions of air-borne toxic materials and particulates from fossil fuelled stations.
The Ontario government should strengthen riparian rights so that the drainage basins now developed for hydro-electric production are operated in a manner that more effectively reflects the priorities of riparians other than power generators.
2.1 The Ontario government should seek to create an open and transparent public process to guide the reform of Ontario’s electricity system, but one also capable of making decisions quickly and efficiently. Experts with detailed knowledge of successful competitive power systems must be available to assist the process here.
3.1 The Ontario government should grant the Ontario Energy Board the power to order divestiture of non-monopoly enterprises and functions and also the power to order divestiture of generating assets in order to curtail excess market power.
3.2 The future regulatory regime should enshrine the principle that the costs of regulation, whether for the regulated enterprise, the regulator or intervenors, should be internalized within regulated enterprises and borne by beneficiaries of regulation The OEB should retain the power to allow or deny the recovery of costs by utilities and intervenors.
3.3 The Ontario Energy Board should be required to monitor and regulate not just the cost of service to customers but also the quality of that service so that customers are protected from any utility efforts to cut costs at the expense of service.
4.1 The eight reactors at Pickering A and Bruce A should be written off and the units permanently closed.
4.2 Ontario Hydro’s accounts should be thoroughly revised to accurately and completely reflect the reality of its nuclear cost experience.
5.1 The IMO should be set up and made independent as quickly as possible.
5.2 The management of the reform process should be overseen within a single government agency and managed by contracted expert consultants who are required to complete the restructuring within a limited period of time and in accordance with the government’s objectives.
5.3 Ontario should move quickly with electricity reform.
7. Background Information: Energy Probe’s History on Hydro Reform and Competition
Energy Probe is uniquely positioned to promote a competitive electricity market in Ontario. We are actively advocating competitive markets in electricity both in public forums and in technical forums like the Technical Advisory Team process where Energy Probe is the only public interest participant.
We have advocated the creation of a customer choice based electricity system since 1980 our publication of Lawrence Solomon’s book Energy Shock. In the early 1980’s Energy Probe followed up with proposals to break up Ontario Hydro generation and transmission to create competition, in much the same fashion as outlined in the White Paper. Also in the early 1980’s Energy Probe’s Norm Rubin published detailed critiques of nuclear investment risks that have proven prophetic. In the mid 1980’s Energy Probe was perhaps the sole voice advocating deregulation of gas sales to small Ontario users, an innovation that has ultimately saved consumers in Ontario billions of dollars. When the tide of consensus in the energy policy debates swung toward utility-subsidized demand side management (DSM), Energy Probe responded with critiques of flawed DSM economics and warnings that DSM-related debt would become a stranded cost, exactly as has happened. In the late 1980s and early 1990s, we developed and published regression analysis of nuclear performance, quantitatively proving the deleterious effects of reactor aging. In 1989, we published a detailed critique of the report of the Ontario Nuclear Cost Inquiry that had confirmed Ontario Hydro’s assessment that nuclear power was extremely cheap to produce-in the order of 2 cents per kilowatt hour including capital and operating costs. Starting in 1989, we resisted Ontario Hydro’s ill-conceived "Demand/Supply Plan" by arguing that, rather than investing billions in two and a half more Darlington stations as it proposed, Ontario Hydro should be privatized. We were also perhaps the first intervenor to press for incentive regulation for Ontario gas utilities.
Thomas Adams
Executive Director
1. Ontario Hydro, "Summary of Nuclear Waste Management and Decommissioning Report", 1 November 1996.
Energy Probe 