Tom Adams
August 12, 2004
The Acting Chair: Our next presenter is the Energy Probe Research Foundation, Tom Adams.
Mr Tom Adams: Thank you very much, Mr Chairman. I will speak briefly in order to leave time for questions. I will restrict my comments to two subjects. One is Energy Probe’s overall analysis of the approach taken with Bill 100 – the legislation itself rather than the surrounding policy issues – and secondly, I wish to address procedural concerns about the approach that’s being taken to the public review of the legislation.
When Ontario’s previous Tory government aborted its plans to open the province’s electricity market to competition, dozens of private power plants that were on the drawing board vanished from existence, their owners writing down their investments to zero. Mr Harris’s successor, Mr Eves, further jeopardized the province’s ability to meet its needs by freezing power rates, encouraging excessive consumption and investing in nuclear power plants – proven non-performers.
Now, Mr McGuinty’s government, panicked by the impending power shortages that Ontario faces due to these decisions of predecessor governments, is going one step further and creating a centralized power authority for the province. Bill 100 will create a new bureaucracy, the Ontario Power Authority, subject to the whims of the government of the day and empowered to develop and implement long-term power plants for the province. It will be able to issue debt and enter into long-term contracts, all backed by taxpayer credit.
Energy Minister Dwight Duncan expects that the power authority will need in the order of $25 billion over the next 16 years but acknowledges that this figure could be as much as 50% higher. Given the sorry history of power authorities around the world, the $40-billion outer perimeter for his estimate may prove to be optimistic.
The Ontario Power Authority is little more than a formal rejuvenation of Ontario Hydro, which collapsed financially and operationally in 1997 under the weight of its nuclear and financial problems. The fates of other centralized power authorities around the world bear an uncanny similarity to the fate that befell Ontario Hydro.
In the UK in 1947, they established something called the Central Electricity Generating Board on the model of Ontario Hydro. Like Ontario Hydro, its preferences were coal and nuclear. By the middle of the 1980s, CEGB was heavily in debt, hounded by serious labour strife and unable to get permission to start the next round of mega-project expansions. In 1987, the Thatcher government lost confidence in CEGB’s ability to meet the country’s future electricity requirements and decided instead to competitively restructure the power system, including breaking up CEGB and privatizing some of the pieces.
Then the truth came out about CEGB’s financial accounts. When CEGB was a government agency, its financial accounts were not subject to the same scrutiny that prevailed when it faced the prospect of issuing prospectuses in public markets. Once the utility needed to meet the disclosure requirements of securities laws, its financial officers faced the possibility of jail time for misleading investors. CEGB drastically revised its financial statements, revealing that its nuclear program was wildly loss-making rather than profitable as previously claimed.
France’s version of Ontario Hydro, called Electricité de France, right now is in the early stages of the same process that killed CEGB. Again, the prospect of privatization is shining light on previously rosy financial accounts. The cash-strapped French government announced in 2002 its intention to sell a portion of its holdings in EDF. Last month, the Economist magazine reported the results of an analysis it had commissioned on Electricité de France’s financial condition. Here’s how the Economist summarized its findings:
"What emerges is a picture of group that used some questionable accounting practices; that has never really made a profit; that has made imprudent use of funds set aside for nuclear decommissioning and waste management; that lacks transparency over the level of its nuclear provisions; and that has indulged in a reckless and costly strategy of international expansion."
California’s botched effort to bring competition to its electricity market failed in 2001, at which point the government of the day decided to switch to central planning. The result: The central planners entered into long-term power contracts with expected costs on the order of $40 billion over the lifetime of the contracts; the expected value, about half that.
The only jurisdictions in Canada where central power authorities have provided low-cost and reliable power are those jurisdictions blessed with abundant natural resources, easily harvested. Quebec, Manitoba and BC have abundant hydroelectric resources. Saskatchewan has practically limitless coal reserves easily available near the surface. In Ontario and New Brunswick, where making electricity is commercially complex owing to the lack of natural resources, central power authorities have accumulated vast debts, far beyond those that could be supported in a market environment.
Jurisdictions around the world that have embraced competition and have had the political capacity to ride out the inevitable bumps along the road have been very successful. Examples include the UK, most parts of the United States – particularly the neighbouring regions where they have a surplus of electricity now – New Zealand and Australia. These jurisdictions have attracted investors and benefited from improved service to customers and, in many instances, lower prices. The only losers in these instances were the existing systems and those that depended on the previous bureaucracies.
Some months ago, Energy Minister Dwight Duncan correctly observed that Ontario’s power system has suffered from political instability in recent years. This government’s comprehensive energy restructuring legislation is supposed to bring an end to this chaos. Unfortunately, by embracing the failed central planning model, Ontario’s electricity chaos is, we fear, destined to continue. Power investments will continue to be dumped into a black hole, and the provincial power supply will be more unstable in future than ever.
Energy Probe’s procedural concerns with this process of review for the government’s restructuring legislation might best be described by contrasting the approach to the review of energy restructuring that is going on now, versus the one that happened the last time we had a comprehensive electricity restructuring effort. As some of you may know, in the mid-1990s, Ontario Hydro internally initiated a process of review to develop the intellectual basis for a comprehensive restructuring of the electricity system. They initiated a process called the TAT process – technical advisory teams – of which Energy Probe became a member. Other customer groups also participated, and a discussion was initiated as to how a new electricity market might be designed. That process continued with the Macdonald committee report, initiated in 1995, and it extended into 1996.
In 1997, the previous government issued a white paper describing its intentions. That white paper was subject to comprehensive debate in public – very detailed, technical debate. A technical committee called the Ontario Market Design Committee was established to develop the legal infrastructure underneath that white paper.
The government’s Bill 35, which was introduced in 1998, was itself subject to extensive review. Finally, when the bill was ultimately passed in October 1998, there was a very high degree of understanding – not necessarily agreement – of what the ultimate intentions were and what the choices were that had been made behind the scenes, as reflected in the legislation.
That process does not prevail now. The public does not have a clear understanding of where this energy legislation is going. These committee hearings are very short. They’ve been hastily assembled. Energy Probe’s attendance at this meeting today was only confirmed yesterday. It resulted in a limited time for preparation. The restructuring of Ontario’s power system is a very complex undertaking. This process is being undertaken in undue haste.
In conclusion, I have two summary comments. One is that Bill 100 will fail to provide a stable structure for Ontario’s power system going forward, and the passage of Bill 100 will necessitate a further comprehensive electricity restructuring in the near future. The second comment is that the review process for this legislation is, sadly, inadequate.
That concludes my prepared remarks. I invite questions from the committee.
The Acting Chair: We have time for one question.
Mr O’Toole: Thank you very much, Mr Adams. You’ve been an observer and a commentator on this topic for a good decade, and I commend you for your review that you’ve given us this morning.
It is a very comprehensive piece, somewhat uncertain in terms of the overarching mandate of the OPA. It’s really just the black hole that you’ve referred to: It’s where they’ll put the money. They’re not sure how they’ll price it, or they’re not sure how they’ll pay for it, except through consumers, either by a direct or indirect tax, as I understand it.
When I look at this bill in a broad sense – because you’ve had a very tertiary view – it’s a regulations bill. It’s a framework bill that’s going to be orchestrated through regulations.
Have you been privy to any of the discussions that I’m told by the minister in a letter that – I raised on his first day of hearings that I wanted to be part of or at least aware of the consultations on the myriad of regulations. Are you aware of any of the regulatory discussions with any stakeholders ongoing?
Mr Adams: No, I’m not aware of any.
Mr O’Toole: You’re not aware, and you’re Pollution Probe, right?
Mr O’Toole: Do you know of any of your colleagues in the industry that are being consulted?
Mr Adams: I represent Energy Probe. I have not specifically asked any other participants or stakeholders in the electricity sector as to their participation, but I’m not aware of any who are participating in the preparation of new regulations. I, personally, am utterly in the dark as to what the intention is for future regulation.
Mr O’Toole: The industry today told us – the large consumers – that we could expect a 30% to 50% increase in the price of electrons. Is that going to have an impact on the economy that drives the rest of our standard of living?
Mr Adams: Electricity prices and overall public welfare are not directly related. All else equal, lower prices are a good thing. But Ontario has, for about a generation or perhaps longer, not paid the full cost of electricity. That’s an unfortunate mistake that will take us perhaps more than a generation to pay off. At the current rate, we’re not paying it off; we’re actually accumulating additional debt. So I disagree with the analysis that’s been presented by some political commentators, complaining that Bill 100 is flawed because it lacks the capacity to direct that customers get lower prices.
The Acting Chair: Thank you for appearing before the committee.
Energy Probe 