Charles Enman
The Ottawa Citizen
August 18, 1997

Ontario Hydro is not in its death throes, but it faces a difficult future and will be far smaller in five years than it is today, according to an expert on nuclear energy.

"Ontario Hydro cannot and probably should not exist in its present form," says Norman Rubin, director of nuclear-power research at Energy Probe in Toronto. "It is a dinosaur, and the age of electricity has now entered the age of mammals."

These comments come in the wake of last week’s announcement that Ontario Hydro will close down seven of its 19 nuclear reactors — the four operating units at the Pickering A nuclear station east of Toronto and the three operating units at Bruce A on Lake Huron.

The shutdowns came after an internal report found management and training in the utility’s nuclear section inadequate. However, the basic technology of the plants was pronounced sound. Hydro president Allan Kupcis has resigned, taking responsibility for the problems detailed in the report.

Hydro says the shutdowns will allow for an intensive retraining program that will bring the utility back up to par.

As much as $8 billion will be spent on retraining, capital costs, and generating replacement power from three of the utility’s fossil fuel stations.

That will boost Ontario Hydro’s debt to $40 billion, putting an end to the facility’s debt-reduction plan. And debt reduction — which the utility had been achieving at the rate of $2 billion per year — is needed if Ontario Hydro is to compete against other suppliers when the provincial energy market is opened up as expected in the next three or four years.

But the debt-reduction plan itself has caused a controversy. Rick Jennings, of the Ontario ministry of energy and environment, says that for years Hydro has been using money earmarked for retiring nuclear reactors to pay down its debt.

He says the utility has amassed $2.6 billion over the last decade by charging customers a two-cent levy on every kilowatt of nuclear power generated. The money was supposed to cover the cost of closing down reactors at the end of their 40-year-lifespan, he says. But he says Hydro has instead used the money to "invest in the company," paying down its debt.

He said the $2.6 billion must be paid back some day, but meanwhile the utility will be forced to borrow to pay its decommissioning costs if a decision is made to close any of Hydro’s 20 reactors permanently.

Meanwhile, the utility is going to have a rough time competing with new technology, says Mr. Rubin.

"The reason Hydro can’t just spend its way out of this is because customers can generate power more cheaply than they can buy it from Hydro — and will start doing so en masse," he said.

The technology that allows this is called cogeneration and is already widely used by many industrial plants and even by some municipalities, such as Cornwall. (In Ottawa, the Ottawa Health Sciences building and Carleton University are two facilities that use cogeneration.)

Cogeneration is the process through which a facility produces electricity as a byproduct of its other activities. For example, a steel plant may use fuel to heat water to produce the steam that, in turn, heats the plant. With cogeneration, the steam is first used to drive a generator that produces electricity for in-house use. Then the residual steam enters the heating system. The plant’s electricity may come free or nearly free.

Once such practices are widespread, electricity will be cheaper, Mr. Rubin points out. And when such cheap electricity is available from many sources — as it will be once the market is opened — Ontario Hydro’s revenues will fall precipitously.

But it gets worse, Mr. Rubin says. For every dollar it earns, Ontario Hydro pays 65 cents for fixed or capital costs — most often, payments to bondholders. Even when a nuclear plant is shut down, those payments must continue.

"Ontario Hydro used to brag that it was ‘inflation proof,’ " Mr. Rubin says. "And it more or less was, when high inflation made the mortgage seem to shrink and boosted the utility’s revenues."

But today’s low inflation means that the passage of time itself will not make capital payments much less onerous.

Squeezed by high debt, imminent reductions in the price of electricity, and low inflation, Hydro Ontario faces a bleak future, says Mr. Rubin.

The nuclear stations will not be reopened and others will close, he predicts. "I would be shocked if the Darlington station gets to be 25 years old," he says. (Forty years has often been cited as the expected lifespan of the utility’s Candu reactors.)

Mr. Rubin says he doesn’t understand how Ontario Hydro can freeze power rates, as it has announced it will.

"This freeze is artificial," he says. "If they’re planning $8 billion in increased expenditure and (are) not increasing rates, this obviously means they’re not going to make the expenditures needed to maintain their infrastructure," especially the power grid and the hydroelectric generating plants.

Mr. Rubin suggests that the government sell the grid and the hydroelectric plants while they are still in good condition.

He was by no means the only observer to find cause for alarm in Ontario Hydro’s predicament.

Kent Edwards, president of the Municipal Electrical Association of Ontario, says: "We see a dismantling of Ontario Hydro over the next five years. The current environment is one of small and decentralized generation of electricity."

The higher electricity rates that might save the utility are not feasible in the current global environment, says Arthur Dickinson, executive director of the Association of Major Power Consumers in Ontario.

Electrical rates are much lower in the U.S. and in neighbouring provinces, Mr. Dickinson says. "If our already high electrical costs go up, God forbid that industries should have to move. But if they have to, they will."

Energy consultant Neil Freeman says that the utility can survive, though the future is not a rosy one. Mr Freeman, who wrote The Politics of Power, which examined the relationship between Ontario Hydro and the provincial government, says the utility has already been broken up into three functional units, so that it has a generation business, a transmission business, and a retail business.

After the provincial energy market is opened up, the transmission business could act as a common carrier for electricity producers, much as Bell Canada acts as a carrier for other telephone companies, he says.

Similarly, the retail company could act as an energy broker, selling electricity from a range of companies

.

The generation company, which would hold the utility’s various generation stations, would be responsible for sorting out its own problems, Mr. Freeman says. It would be much smaller than the aggregate of current Ontario Hydro stations.

In all likelihood, the generation company would be responsible for many stranded debt charges — money owed for infrastructure on which debt is still owed but which produces no revenue (for example, a closed nuclear plant).

Most of those stranded debt charges would have to be paid either by the government or by electricity consumers, Mr. Freeman says. If consumers wind up paying, they would all pay a small charge for debt retirement, no matter what electricity provider they had chosen. Unfair though it may seem, this arrangement is in wide use in many U.S. states. If only Ontario Hydro customers paid the surcharge, the utility’s effective rate would be nudged out of contention in the market.

In some ways, Mr. Freeman hopes that Ontario Hydro remains relatively intact. If many stations are sold, they are apt to be bought by huge American utilities, who can bid the price up far beyond what Canadian operators might pay.

Mark Winfield, policy director for the Canadian Institute for Environmental Law and Policy, says that expenses imposed by tougher environmental regulations will add to Ontario Hydro’s difficulties.

Under the provincial environment ministry’s Countdown Acid Rain program, sulphur dioxide and nitrogen oxide emission caps will be cut in half.

Oddly, new suppliers of electricity will not be subject to these caps, which are specifically directed at Ontario Hydro. (However, Mr. Winfield expects that the government would move quickly to eliminate this inequity.)

Michael Cassidy, until six months ago a member of Ontario Hydro’s board of directors, believes that the resignation of Mr. Kupcis, though well intended, may aggravate the problems facing the utility.

"In the last six years, the shakeups among senior management have been substantial," Mr. Cassidy says. "With Mr. Kupcis’ departure and another round of management changes likely — well, I’m not sure how well the utility can handle all that."

Mr. Cassidy says the utility’s future is "unpredictable." But he cautioned that it is early to count Ontario Hydro out.

"Don’t write the obituary yet. Hydro isn’t just going to roll over and play dead. But it may not succeed in effecting a cure, either."