Energy Probe

Energy Probe

March 18, 1996

Supplementary Submission to the Advisory Committee on Competition in Ontario’s Electricity System Concerning Renewable Energy

March 18, 1996

225 Brunswick Avenue, Toronto, Ontario M5S 2M6
Telephone (416) 964-9223 Facsimile (416) 964-8239

INTRODUCTION

This submission briefly supplements Energy Probe’s written presentation to the Advisory Committee on Competition in Ontario’s Electricity System of January 26, 1996. This submission addresses the impact of electricity system reform through competition and privatization on the development of renewable energy options in Ontario.

GREEN POWER THROUGH CONSUMER CHOICE

Several individuals and organizations have expressed concern that the introduction of open competition in electricity generation would impede renewable energy development in Ontario and end Ontario Hydro’s Renewable Energy Technologies Strategy (RETS). At least one submission to your Committee has recommended a formal "regulatory set-aside" for renewable energy to guarantee it some market share in a competitive electricity system. Often the unspoken assumption behind set-asides is that renewable electricity generators could not compete on a "level playing field" and would need preferential treatment.

Energy Probe seeks to promote economically sustainable options for renewable energy in the long term–options like wind power, photovoltaic power, and biomass-fired power. However, we believe that an open market and thorough application of the principle of polluter pays (as outlined in our first submission), not subsidies and special protection, provide the best mechanisms to promote beneficial development. Empowering individual consumers to choose their power supplier will likely promote renewable energy development in Ontario more effectively than the RETS program. Customer choice will promote renewable supplies without making suppliers dependent on government or regulatory intervention. Too often, formal set-asides create perverse incentives that encourage unsustainable development. Sometimes, renewable power options have become stigmatized due to public contempt for excesses fostered by special programs.

There are many reasons to be optimistic about the future of renewable supplies in an open market. One obvious reason is that many technologies for renewable electricity production have made, and are making, tremendous progress in cost and efficiency. Meanwhile, the efficiency of the least environmentally attractive options–coal and nuclear–is stagnant or even deteriorating. In addition, the costs of the least attractive options in many cases are escalating. We expect these comparative trends to continue to favour renewable options well into the future.

However, we acknowledge that many environmentally appealing renewable generation technologies cannot yet deliver electricity at the very low costs achievable with natural gas-fired combined-cycle, cogeneration, and trigeneration. Although these gas options are highly efficient and clean relative to other fossil-fired options, they are not renewable. At least in the near future, gas options will likely be the price setters for new electricity supply. Despite the attractiveness of gas, we expect renewable technologies to compete very effectively in an open marketplace that empowers all customers to choose their supplier.

Energy Probe believes that many consumers will want, and be willing to pay a premium to get, "green power". Empowering consumers to directly control their power purchases will boost renewable supplies through customer choice. Given a chance, we are confident that many customers will be willing to pay a premium for renewable supplies. Perhaps even more will be willing to pay a smaller premium for "ABCAN" (i.e., Anything But Coal And Nuclear), thereby bidding up the price of greener, more efficient sources, and depressing the price of "black energy". Customer choice will encourage the most customer-preferred options, while tending to retire or phase out less preferred options.

Despite the institutional status quo, there is already some market indication of a premium value for green power in Ontario. In February, the chair of Toronto District Heating Corporation (TDHC), Councillor John Adams, appeared before the Advisory Committee at the public hearing in Toronto. Mr. Adams indicated that a U.S. power marketer offered TDHC a premium price for cogenerated district heating-derived power.

We expect that some businesses and corporations, given the chance, would incorporate a preference for "green energy" into their own business plans, and into their publicity. (We would not expect, for example, The Body Shop, Mountain Equipment Co-op or most health-food or camping establishments to light their stores with coal-fired and nuclear power if an affordable alternative were available.)

We have not attempted to quantify our forecast–which is admittedly qualitative, not quantitative–nor to document the public preferences on which it is founded, which we consider self-evident. Indeed, one cannot enter a supermarket or look down a Toronto street on "Blue Box" day without seeing ample evidence of the eagerness of typical Ontarians to incur costs or inconvenience to minimize their negative impact on the environment. Similarly, mutual funds with environmental "screens" have made significant inroads in the investment field. Public opinion polls of consumer interest often show a willingness by members of the public to pay a premium to buy "environmentally friendly" products.

Thomas Adams
Energy Analects
April 23, 1996

February 27 was a black day for the environment this year. Destec Energy, a prominent U.S. power producer and marketer, had arranged a perfect deal. Destec had access to idle cogeneration capacity in Ontario, had secured an NEB export license, and had U.S. customers lining up. Destec’s cogenerated power would have displaced dirty coal-fired power in the U.S. and improved the energy efficiency of refinery operations in Ontario. The only piece missing in Destec’s plan was transmission access. On February 27, Ontario Hydro wrote to Destec Energy, "just saying no" to a request from Destec for wheeling service.

In seems intuitively obvious that public ownership of the power industry ought to mean better protection for the environment than would prevail in a private, competitive arrangement. However, the actual experience of public ownership fails to meet this expectation. Experience with the environmental effects of competition elsewhere and the logical implications of the customer choice belies any intuitive preference for public ownership.

Destec’s disappointment just one of a multitude of cases where the Ontario public power monopoly’s interests have won out at the environment’s expense. Secret deals with Sunoco, Amoco, and Imperial Oil have quashed the development of energy efficient industrial cogeneration. Cogenerating district heating, one of the most environmentally responsible means of producing energy, has been killed in Kingston, stalled indefinitely in Toronto, and is under threat of legal harassment in London. Cogeneration is a threat to Ontario Hydro because the energy efficiency of cogeneration translates into lower cost power than the monopoly produces at its inherently inefficient coal and nuclear plants.

There is an alternative to Ontario Hydro’s self-interested, efficiency-killing monopoly abuse. Although ecology was the last thing on Margaret Thatcher’s mind, the U.K.’s power privatization has been a stunning environmental winner. Before Thatcher’s privatization, the U.K. power monopoly relied on coal and nuclear production and was justifiably dubbed one of Europe’s worst polluters. Now, coal use is plummeting, replaced mostly by new, highly efficient natural gas-fired generators. Cogeneration and wind power, stalled in Ontario, are surging there. Privatization killed previously planned nuclear expansion. Instead, many nuclear stations are getting early retirement.

One key to the environmental turnaround in the U.K.’s power system has been financial accountability. Inefficient megaprojects favoured by the former public monopoly are being replaced by smaller scale, efficiency-oriented alternatives to meet the private sector’s needs for flexibility and cost effectiveness. Although none of the nuclear plants have yet been privatized, the private market has provided a clear benchmark to test the worth of nuclear investments. The private sector comparator has proven an unsurpassable hurtle for nuclear investments, whether in new stations or even life extension for aging stations. The environmental gains from financial accountability have been inadvertent but substantial.

Financial accountability has not been the sole reason for the cleanup. Environmental regulations were also strengthened in the U.K. where tightening pollution rules proved easier once government was no longer in a conflict of interest as both regulator and polluter. When the U.K. government no longer owned that country’s coal stations, it imposed tough new rules requiring scrubbers on many stations. As an example of the results, PowerGen, one of the largest fossil-fired power producers has cut sulphur dioxide emissions by 23% and nitrogen oxides emissions by 27%.

The regulation of Ontario Hydro’s environmental performance is deplorably lax. The limit for radioactive tritium emissions into the environment is set at a level for some stations that Ontario Hydro could not exceed even if it released its entire inventory. The Ontario government sanctions drinking water standards that allow the risk of cancer from tritium to exceed by thousands of times the risk possed by some chemical carcinogens. The provincial emission cap for acid gas emissions from coal plants that allows Ontario Hydro to import coal-fired power from upwind U.S. stations with impunity. Ontario Hydro has defacto permission to let production concerns prevail over environmental damage in the operation of ecologically sensitive hydraulic units. The weak state of environmental regulation of Ontario Hydro largely results from government’s conflict of interest as both an owner and regulator of the monopoly.

Far from acting in the interests of its owners, Ontario Hydro vigorously lobbies and litigates in favour of low environmental and public-health standards. Examples include Ontario Hydro’s aggressive defence its nearly complete exemption from nuclear accident liability and its ongoing efforts to minimize emergency planning for nuclear accidents.

In submissions to the Ontario Advisory Committee on Competition in Ontario’s Electricity System headed by Donald C. Macdonald, several individuals and organizations expressed concern that the introduction of open competition in electricity generation could impede renewable energy development in Ontario due to the end of Ontario Hydro’s Renewable Energy Technologies Strategy (RETS). The submission of the Independent Power Producers Society of Ontario (IPPSO) recommended a formal "regulatory set-aside" for renewable energy to guarantee it some market share of new generation in a competitive electricity system. The unspoken assumption behind IPPSO’s proposed set-aside is that renewable electricity generators could not compete on a "level playing field" and would need preferential treatment.

The possibility that an open market and thorough application of the principle of polluter pays, instead of subsidies and special protection, could provide the best mechanisms to promote development renewable seems to have escaped IPPSO. Empowering individual consumers to choose their power supplier would promote renewable energy development in Ontario more effectively than the RETS program or IPPSO’s proposed set-aside. Customer choice will promote renewable supplies without making suppliers dependent on government or regulatory intervention. Too often, formal set-asides create perverse incentives that encourage unsustainable development. As in the case of Ontario Hydro’s existing non-utility generation contracts, renewable power options can become stigmatized due to public contempt for excesses fostered by special protection from competition.

There are many reasons to be optimistic about the future of renewable supplies in an open market. One obvious reason is that many technologies for renewable electricity production have made, and are making, tremendous progress in cost and efficiency. Meanwhile, the efficiency of the least environmentally attractive options—coal and nuclear—is stagnant or even deteriorating. In addition, the costs of the least attractive options in many cases are escalating. These comparative trends are likely to continue to favour renewable options well into the future.

Admittedly many environmentally appealing renewable generation technologies cannot yet deliver electricity at the very low costs achievable with natural gas-fired combined-cycle, cogeneration, and trigeneration (combining production of power, heat, and cooling). Although these gas options are highly efficient and clean relative to other fossil-fired options, they are not renewable. At least in the near future, gas options will likely be the price setters for new electricity supply. Despite the attractiveness of gas options, renewable technologies could compete very effectively in an open marketplace that empowers all customers to choose their supplier.

Empowering consumers to directly control their power purchases will boost renewable supplies through customer choice. Given a chance, many customers will be willing to pay a premium for renewable supplies. Perhaps even more will be willing to pay a smaller premium for "ABCAN" (i.e., Anything But Coal And Nuclear), thereby bidding up the price of greener, more efficient sources, and depressing the price of "black energy". Customer choice will encourage the most customer-preferred options, while tending to retire or phase out less preferred options.

Despite the institutional status quo, there is already some market indication of a premium value for green power in Ontario. In February, the chair of Toronto District Heating Corporation (TDHC), Councillor John Adams, appeared before the Advisory Committee on Competition in Ontario’s Electricity System at a public hearing in Toronto. Mr. Adams indicated that a U.S. power marketer offered TDHC a premium price for cogenerated district heating-derived power.

Some businesses and corporations, given the chance, might incorporate a preference for "green energy" into their own business plans, and into their publicity. Consumers would expect that The Body Shop, Mountain Equipment Co-op, most health-food stores, and camping establishments would not light their stores with coal-fired and nuclear power if an affordable alternative were available.

One cannot enter a supermarket or look down an urban street on "Blue Box" day without seeing ample evidence of the eagerness of ordinary citizens to incur costs or inconvenience to minimize their negative impact on the environment. Similarly, mutual funds with environmental "screens" have made significant inroads in the investment field. Public opinion polls of consumer interest often show a willingness by members of the public to pay a premium to buy "environmentally friendly" products.

The quickest and most sustainable way to start cleaning up our environmental mistakes in the power sector is by privatization and competition coupled with thorough application of the principle of polluter pays. Financial accountability is a critical first step. In addition, we must break up the conflict of interest that prevents government from properly executing its responsibilities as a regulator. The environment will heave a sigh of relief when clean producers lobby for tougher pollution controls for their dirty competitors.

Thomas Adams
The Toronto Star
May 14, 1996

Breaking up and privatizing Ontario’s electricity system—now bloated, polluting and propped up by secret rate discounts for big business—will make the system trim, green and fair. With competition, rates would fall as every user gained the right to shop for big power bargains.

That’s what happened in the U.K., where privatization and competition have paid off big for users. According to the U.K.’s tough electricity regulator, who has rolled back excess profits and improved reliability, the 1990 privatization has made homeowners and small business big winners—their rates are down 10.1% and 11.7% respectively after removing the effect of inflation. The biggest winners have been medium and moderately large commercial and industrial users whose rates have dropped 16% to 17%. The smallest winners, but winners nonetheless, are the largest industrial users whose rates have dropped 6%.

Ontario’s natural gas users have also seen across-the-board rate cuts since competition was introduced ten years ago. Even without shopping, homeowners now enjoy rates down 36% after removing the effect of inflation.

Ontario Hydro is providing secret rate discounts to big power users like Amoco, Imperial Oil, and Sunoco because they have options for cheaper private power. Without these deals, Ontario Hydro will lose sales and its monopoly will collapse. Big business is happy with cheaper, market-priced power and the monopoly is happy with continued control. Meanwhile, small users pick up the tab. If public power was cheaper than private power in a competitive market, as public power supporters claim, then there would be no need for Ontario Hydro to buy off the competition.

Competition and privatization would help the environment. The environment would win because financial accountability would reverse Ontario Hydro’s dependence on megaprojects—risky, uneconomic nuclear plants, and dirty coal plants. Instead, cogeneration, which cuts both pollution and cost through energy efficiency, would flourish.

Although ecology was the last thing on Margaret Thatcher’s mind, the U.K.’s power privatization has been a stunning environmental winner. Before Thatcher’s privatization, the U.K. power monopoly relied on coal and nuclear production and was justifiably dubbed one of Europe’s worst polluters. Now, coal use is plummeting, replaced mostly by new, highly efficient natural gas-fired generators. Cogeneration and wind power, stalled in Ontario, are surging there. Privatization killed previously planned nuclear expansion. Instead, many nuclear stations are getting early retirement.

Competition and privatization will not solve all our power system’s environmental problems. However, tightening pollution rules would be easier when government is no longer in a conflict of interest as both regulator and polluter. When the U.K. government no longer owned coal stations, it imposed tough new rules requiring scrubbers on many stations. Competition here would lead clean producers to lobby for tougher pollution controls for their dirty competitors. Much stricter health and environmental controls are needed for the nuclear stations regardless of ownership.

Ontario Hydro’s managers, perhaps hoping to shield themselves from scrutiny, would have you believe that, since declaring the biggest loss in Canadian corporate history two years ago, the company has financially "turned the corner."

Ontario Hydro’s apparent profitability is a mirage created by aggressive accounting, setting the stage for huge future losses. For example, its accountants pretend our nuclear plants will operate for 40 years, thereby stretching out the loan repayment period. However, the accountants ignore Ontario’s own experience where we now have three prematurely closed reactors. The other nuclear utilities in Canada use the more cautious approach of assuming a 30-year lifetime. Many nuclear utilities in the U.S., where 30 years of service is the standard assumption for reactor accounting, are trying to speed up debt repayment. Just two weeks ago, a major U.S. nuclear utility, Pacific Gas & Electric, requested regulatory approval to shorten the nuclear write-off time by 15 years in order to prepare for competition.

Delaying privatization is already costing us dearly. Private owners would not neglect proper maintenance of its assets as Ontario Hydro does. Many of Ontario’s best power assets, its power dams, are literally falling apart after years of neglect. Even our greatest station at Niagara Falls recently suffered a ruptured water intake pipe supplying one generator.

Last year, Cornwall Electric, the only Ontario utility outside Ontario Hydro’s control, started up a cogenerating district heating system. The first of its kind in Canada, the system produces both power and heating for local buildings so cheaply and efficiently that it could revolutionize our energy economy. The bad news for the rest of us in Ontario is that as technologies for cogeneration make rapid improvements in cost and efficiency, the value of our existing generating stations goes down, just as computers depreciate with each improvement in technology.

Ontario Hydro’s powerful unions are the major forces opposing competition and privatization. With the average annual compensation at Ontario Hydro over $73,000 and with 649 people earning over $100,000, including 357 union members, their enthusiasm for the status quo is understandable.

Maurice Strong was Ontario Hydro’s best chairman, but he wasn’t allowed to finish the job he started. Now, the new premier, Mike Harris, has a mandate to privatize Ontario Hydro and he has the benefit of Mr. Strong’s skilful spadework. Let’s privatize carefully, and let’s do it now.

June 6, 1996

Between July and December of 1916, while the predecessor of Ontario Hydro was taking on the special powers and institutional structure that the monopoly has today, University of Toronto Political Economy Professor James Mavor, wrote a series of 16 articles in the Financial Post condemning the monopoly’s formation.

Ontario Hydro’s early success came from the confiscation of the property of three private companies with power stations at Niagara Falls. Before being destroyed by the public monopoly, these companies competed to supply the growing Ontario market for power. Mavor railed against the provincial laws enacted, in 1916, to facilitate the confiscations. He argued that competition between the private generators would reduce the cost of power while maintaining the fees and taxes that government then received from the private enterprises.

Mavor forecast with brilliant accuracy many of the follies that befell the corporation. Foreshadowing Ontario Hydro’s later tendency toward megaprojects, he warned, "Nothing is more usual in public enterprises of this kind than to disregard the element of risk."

Mavor also warned of the incentives against keeping proper accounts. "Even when they do nominally set aside depreciation and reserve funds, they frequently, as in the case of the Hydro-Electric, employ these funds for the extension of the system or otherwise, instead of using them as such funds ought invariably to be used." Ontario Hydro nuclear waste disposal and decommissioning funds are modern examples of the failure Mavor warned against. Ontario Hydro’s nuclear cleanup funds are collected from customers but, rather than keeping the funds in a secure separate account, are expended on maintenance and new projects.

Mavor argued that "In Ontario . . . there is little need for governmental attempts at industrial monopoly." He urged the public to look beyond "rhetorical exaggeration and appeals to prejudice." He concluded his series of columns with the warning that "the community of Ontario as a whole will suffer for years from the effects of the foolish optimism of the promoters of the movement for public power."

Mavor’s columns are available at Energy Probe’s office at 225 Brunswick Ave., Toronto, Ontario, Canada.

The Canadian News Digest
June 7, 1996

Lower rates promised if Ontario gets competition  

TORONTO (CP) — There are suggestions but no guarantees that the province’s electricity prices will drop if Ontario Hydro sells dozens of power plants to private companies, ending a 90-year monopoly. That’s the bottom line for ordinary consumers from the author of a major new report recommending the provincial government make sweeping changes to the way electricity is sold starting in 1999. "I don’t think one can guarantee anything in this life," said Donald Macdonald, a former federal Liberal energy minister who headed a commission studying ways to open power sales to competition. Nonetheless, the report was applauded by groups and industries pushing for lower rates, a big issue for industries facing cutthroat global competition. The plan also invites power producers in neighboring provinces and U.S. states to sell electricity in Ontario, where the market is worth $9 billion a year. "Everywhere else it’s been tested, customer choice works, it’s lowered costs for consumers," said Tom Adams of Energy Probe.

Media Release
June 10, 1997

TORONTO. A number of environmental groups have formally requested that the Investigations and Enforcement Branch of the Ministry of the Environment and Energy officially investigate Ontario Hydro for discharging tonnes of toxic substances into Lake Ontario. From the Pickering nuclear facility alone, Ontario Hydro may have discharged over 800 tonnes of copper, 360 tonnes of zinc and 25,000 pounds of tin into Lake Ontario since the early 1980s. The toxics come from copper condensers used to cool the processes within the facility. It is not known what the discharges are from other facilities, but it is suspected that other Ontario Hydro facilities using this technology are emitting toxic substances.

The groups, who are making the formal request under the Environmental Bill of Rights, allege that Hydro violated a number of environmental laws and regulations and want the Ministry of Environment and Energy to formally investigate as soon as possible. "We know that Ontario Hydro has announced its own investigation, but in light of the quantities of toxics emitted into the environment and the allegation that Ontario Hydro knew of these offences for a long time, it is only appropriate an independent review of matter be taken. Those suspected of wrongdoing cannot be expected to conduct an impartial investigation on their own activities." noted Irene Kock of the Durham Nuclear Awareness, who co-sponsored a request for an investigation.

"We have learned that the suspect brass tubes are in use not only at Pickering but at coal fired stations in Mississauga, Nanticoke, and Sarnia as well as one reactor at the Bruce station. The public is entitled to a comprehensive assessment," stated Tom Adams, Energy Probe’s Executive Director. This view is re-iterated by Jane Wilkins of Sierra Club of Eastern Canada and Great Lakes United.

The requests for investigation were filed this morning at the offices of the Environmental Commissioner. Under the Environmental Bill of Rights, the Commissioner must pass the requests to the Minister of the Environment and Energy. The Minister must proceed with the investigation unless the request is found to be frivolous, vexatious, not serious, unlikely to cause harm to the environment or is duplicating an on-going investigation. The minister must inform the applicants that no investigation will take place within 60 days or complete the investigation within 120 days (or to give notice as when it will be completed.)

Howard
The Washington Post
August 14, 1997

TORONTO — Ontario Hydro, North America’s largest electric utility and a major investor in nuclear power, is shutting down a third of its reactors after an internal study documented widespread management problems, years of inadequate maintenance and safety practices that were only marginally acceptable.

Allan Kupcis, president and chief executive officer of the company, resigned Tuesday night, on the eve of the public release of the highly critical study by a team of U.S. nuclear power experts.

The study concludes that while public safety was never directly threatened, operators of the province’s 19 nuclear reactors routinely ignored maintenance schedules and pushed the operating capacity of the plants to their limit without regard to leaky tubes and valves and other deteriorating conditions. The release of water contaminated with heavy metals into Lake Ontario was discovered at one plant in the early 1980s, but provincial environmental authorities were never notified.

Another, earlier investigation found management so lax that employees were sleeping on the job and playing video games on control room computers.

In response to the report’s findings, seven of Ontario Hydro’s 19 reactors will be "laid up" over the next year and will only be brought back on line after an estimated $1.2 billion is spent on repairs and billions more in increased fossil-fuel costs — if even then.

The Ontario government is studying whether to eliminate Ontario Hydro’s monopoly and open the province’s large, but still centrally planned, electricity industry to competition. If it does, the utility may find, as have several of its U.S. counterparts, that the repair bill for aging nuclear plants is too high to keep them competitive.

Until that decision is made, Ontario Hydro plans to increase power production at existing coal and other stations and reopen some retired facilities, a step environmentalists say will add to Canada’s already high level of greenhouse gas emissions. Hydro officials say there is no alternative in a province that relies on nuclear power for 60 percent of its electricity and is about to lose a large percentage of it.

"The people of Ontario probably thought our nuclear industry was better than we now know it is," said Ontario Hydro Chairman William Farlinger, who was appointed interim CEO after Kupcis resigned. "The nuclear unit was operated as though there was some special nuclear cult" of technicians and engineers who alone understood how to run the nuclear facilities, he said. "Senior management didn’t dig into what was going on."

When they did, they found that "cult" run by many of the same people who in the 1960s and ’70s helped build what was then considered a state-of-the-art nuclear power system in Ontario. But, relying on Canadian-developed Candu reactors that were felt to be sturdier than other designs, those engineers and builders proved inept as managers and ignored basic operating principles for years.

Staffing levels were thousands of employees short of what was needed to run and maintain the plants, said Carl Andognini, Ontario Hydro’s chief nuclear officer, and senior nuclear managers created an atmosphere that encouraged workers to avoid blame for problems rather than solve them. Most of those senior executives have been replaced over the last year, and Farlinger said more firings are likely.

Farlinger said that despite the increased costs, the utility will avoid raising power rates by extending repayment of billions of dollars of debt accumulated to build the nuclear plants.

Ontario Hydro was still involved in nuclear construction in the late 1980s, when U.S. utilities had largely stopped building new nuclear plants as too expensive. Hydro’s last nuclear station cost $14 billion, more than double the original projections.

Provincial Energy Minister Norman Sterling said that while Ontario wants to open its electricity market to competition, any plan for that will have to ensure that Ontario Hydro can repay this "stranded debt" — all of which is guaranteed by Ontario taxpayers.

"The dynamics are changed somewhat" by the utility’s problems, Sterling said. "If their costs go up, we may have to postpone the date for open competition."

That, said Norm Rubin, nuclear policy director for the local advocacy group Energy Probe, is all the more reason for the utility to do what he feels it should have done years ago: abandon a commitment to nuclear power that continued long after other North American utilities concluded it cost too much.

"They should shut down the [nuclear] stations, and they should open the market as fast as possible so we don’t have to run those dirty, inefficient coal stations," Rubin said. "I don’t think any more money should go into those plants guaranteed by the province."

Michael Woloschuk
The Ottawa Citizen
August 14, 1997

Energy-industry expert predicts end of atomic power in Canada

Ontario Hydro’s dramatic decision to shut down seven atomic reactors signifies the end of the nuclear era in Canada, says one of the country’s leading energy industry critics.

"It looks like the nuclear option is dead in Canada," said Tom Adams, the executive director of Energy Probe, a Toronto-based industry watchdog that is opposed to atomic power.

"This probably signals the early shut-down of reactors in New Brunswick and Quebec as well, and the beginning of a transition towards a non-nuclear Ontario."

Ontario Hydro’s board of directors said they will close four units at the Pickering generating station near Toronto and three at Bruce near Owen Sound.

The closings come on the heels of a damning internal probe on the public utility’s nuclear power system, which was described in the investigation’s report as being among the worst in North America.

Energy Minister Norm Sterling, who received the report, said he accepted the closings because he was concerned about the ability of management and employees to operate the plants safely.

Ontario Hydro’s president and chief executive officer, Allan Kupcis, said he would take full responsibility for the failings raised by the investigation, and resigned.

The utility’s board of directors said the seven reactors were scheduled to remain shut for only one year while overhauls to the nuclear facilities are completed. But Mr. Adams said there was "virtually no chance" of that happening.

"The utility is trying to put a brave face on the closure by saying they may restart some of the seven units," he said. "Basically, Ontario Hydro’s finances are in meltdown here."

Indeed, the utility’s economic problems — especially those relating to the company’s nuclear facilities — have long been a concern of government and financial analysts.

Ontario Hydro, carrying a debt of more than $33 billion, is one of the most heavily leveraged companies in the world. Earlier this year, the company was warned by senior management that its nuclear plants accounted for $25 billion of that debt.

While unloading the financially troubled utility remains a priority for the Conservative government, potential investors might be scared off by the possibility of a multi-billion-dollar lawsuit resulting from a nuclear accident.

By closing the nuclear plants, explained Mr. Adams, the Ontario government would have an easier time shopping Ontario Hydro around to potential buyers.

"The nuclear plants don’t look very privatizable right now," he said. "You’d have to be an absolute moron to buy a Candu reactor."

Although financial experts did not share Mr. Adam’s zeal in describing the unsalability of the utility’s nuclear facilities, they agreed with the industry watchdog that Ontario Hydro would stand a better chance at privatization if its atomic plants were scrapped.

"Nuclear assets are difficult — certainly that’s where the problem lies right now," said Michael Rao, a senior analyst with the Dominion Bond Rating Service. "With all these extra costs coming in — Ontario Hydro was supposed to be reducing its debt by $1.5 billion to $2 billion a year for the next four years. All that cash flow that they were supposed to be generating is now going to go toward the additional costs of overhauling these facilities."

And while Ontario Hydro may be experiencing management and debt problems with its nuclear facilities, that doesn’t necessarily signal the death of atomic power, said a senior official with Atomic Energy of Canada Limited, the Crown corporation that built the Candu reactors at the seven troubled Ontario sites.

"If anything, we see the next century embracing nuclear technology to a greater extent than has been the case," said Gary Kugler, who is the AECL’s vice president of commercial operations. "There will be relatively few environmental options for producing electricity in the next century, and nuclear will be one of them."

Mr. Kugler said the closings at the Pickering and Bruce facilities were due to management and personnel problems and should not reflect on the reliability of Candu reactors.

"Any time a utility that’s as important as Ontario Hydro — and is operating Candu reactors — experiences performance problems, this is not good news for us," he said. "We understand, however, that they see this largely as an internal Hydro problem, a management and work-culture problem. As such, they’re taking the necessary steps to recover. They do stress in the report that they find the Candu technology sound and robust.

"What Hydro will do will address the management and cultural problems. There will be relatively little needed in the way of major repairs. Those reactors have operated for a number of years and most components do wear with time. There has been neglect and Hydro admits to that — that’s the whole point of the report. It’s simply a question of doing proper maintenance — and ideally preventative maintenance — so these equipment problems don’t get out of hand."

If Mr. Adams of Energy Probe had his way, the nuclear plants will never be restarted again.

And he applauded the timing of the shutdowns because they forces the province to consider future electricity sources as well as the privatization of the industry.

Energy Probe, he said, is pushing for a much more decentralized, consumer-driven electricity industry wherein customers choose the company with whom they want to deal — and where most of Ontario Hydro’s assets get sold off.

But the bottom line, he added, is that electrical generation become nuclear free.

"The risk to Ontarians has been meaningfully reduced by closing the crotchetiest, oldest, creakiest reactors," he said. "We’re very pleased that the utility came to its senses about its nuclear problems before they had a big accident with one of these reactors. That’s the good news — they could have waited until after and that would have been a terrible tragedy. As it is, the only damage here is financial."

James Rusk and Chad Skelton
Hydro fiasco to cost billions
August 14, 1997

Hydro fiasco to cost billions ‘Chickens are coming home to roost,’ Harris says after report cites management meltdown

TORONTO – The massive upheaval in which Ontario Hydro will close seven reactors was triggered by an internal report warning that the utility had to move quickly to improve the performance of its ailing nuclear division or the $24.4-billion in nuclear assets would have depreciated beyond recovery.

"I believe the people of Ontario probably thought our nuclear management and nuclear operation was better than we now know that it is," William Farlinger, Hydro chairman, said at a news conference yesterday in which the report was released.

"It appears that the chickens are coming home to roost," Premier Mike Harris told reporters. "It [Hydro] has not been well run. It has not been well managed."

The report was such a scathing indictment of the nuclear division that Hydro president Allan Kupcis resigned on Tuesday at a meeting of the public utility’s board of directors.

The board decided at the meeting to close down seven of the province’s 19 nuclear reactors while the utility tries to revive the nuclear operation.

Resuscitation will be costly. Hydro estimates that the recovery program will cost $5-billion to $8-billion over the next four years, which will hamper Hydro’s ability to strengthen its balance sheet as it prepares for the opening of the Ontario electricity market to competition.

Carl Andognini, executive vice-president of Hydro and head of a team of seven U.S. nuclear experts brought into the utility this year to clean up the problems in the nuclear division, stressed repeatedly at the news conference that the problems were people, not technology.

"I don’t think there’s been an adequate look at what is needed, adequate training programs put in place," Mr. Andognini said.

Indeed, it was the need to embark on massive retraining of Hydro’s staff that led the board to decide to close the four operating units at the Pickering A nuclear station just east of Toronto and the three operating units at Bruce A on Lake Huron west of Owen Sound.

Internal Hydro documentation obtained by The Globe and Mail shows that the utility would have had a shortfall in 1998 of slightly more than 4,000 in the staff of its nuclear division if it had tried to keep all of its 19 units open and do the necessary staff training. By taking a phased approach — closing the seven units and bringing them back into production later — staffing requirements will be minimized.

However, the documents also show that the phased shutdown plan makes it extremely unlikely that Bruce A, which would require hundreds of millions of dollars in technological improvements to bring it up to standard, will ever come back into production.

According to the documents, which were used to brief Hydro employees yesterday, the utility’s board will decide the fate of Pickering A in the summer of 1999, and all four units at Pickering A, into which Hydro has poured nearly $1-billion for new tubes in the reactors, could be fully operational by mid-2002.

Hydro’s board would not consider the fate of Bruce A until 2002.

Hydro must also act quickly to restore public confidence in its management and the safety of its nuclear operations, both of which were badly shaken by the 64–page report. It found that Hydro’s nuclear operations were operating at a minimally acceptable standard.

"Non-performance is accepted — or even expected — because senior management has neither set nor enforced standards for employees, nor have they assigned specific accountabilities and authorities to managers," the report said.

The report was also critical of labour relations inside Hydro, even suggesting that its employees lose the right to strike and be subject to mandatory testing for substance abuse.

Maurice Brenner and Doug Dickerson, two Durham regional councillors, interrupted the news conference numerous times to shout accusations at the Hydro executives.

Mr. Brenner told reporters later that Hydro "said there was no problem. We’ve got a community damaged financially, economically — both in property values and business. We’ve got 2,000 of our citizens that will be out of work. Why? Because they were lax, they had no ethics, they had no conscience about our community."

Hydro’s environmental critics said that the report and the decisions that flowed from it supported their past criticisms of nuclear power.

"This is clearly the beginning of the end of nuclear power in Canada," Dave Martin of Durham Nuclear Awareness said. "Seven reactors is the largest shutdown that any nuclear utility in the world has ever done. It’s unprecedented, and I think it’s going to send tremors in the nuclear community around the world."

John Murphy, president of the Power Workers Union and a Hydro director, said that "if the problem really is a management problem, which the report says, isn’t the simplest solution simply firing those managers who are incompetent and aren’t doing their jobs? Isn’t that a better and a cheaper solution?"

Mr. Murphy said he was pleased that the utility’s plans do not include massive layoffs, but conceded that there will likely be some people let go in the restructuring.

He called the recommendation that nuclear power workers not have the right to strike a "red herring" because the union’s past two contracts with the utility voluntarily gave up their right to strike in exchange for binding arbitration.

Mr. Murphy said the union has been working with management to help establish "fitness for duty" policies for nuclear workers. Calls for mandatory drug testing for employees would not fly in Canada, he said. "We have human-rights legislation in this country that is different than in the United States. And I think that has to be respected."

While not all the costs of the recovery program have been spelled out, Hydro said that about $2-billion will be spent in the nuclear division in increased operating and capital costs while it is being brought up to acceptable performance standards.

A further cost of $3-billion will be incurred because Hydro will have to replace power from the nuclear units being closed with electricity produced from fossil fuels at three generating stations — Lambton, Nanticoke and Lennox.

The remaining $3-billion has not been allocated yet — Hydro has yet to decide whether it will have to take capital writeoffs if it concludes that some nuclear division assets are eventually to be shut down.

Mr. Farlinger said at the news conference that Hydro will pay these costs out of its cash flow, which has been running from $2-billion to $2.5-billion a year.

That will mean that the utility, which has debt of about $32-billion, will not be able to meet its current target of reducing its debt by about $2-billion a year.

The diversion of cash to save the nuclear operations will create major problems for Hydro, as the utility has in recent years been paying down its debts as rapidly as possible so that it would be in a stronger position to face competition in the electricity market.

Hydro estimated late last year that if it lost its monopoly, it would not be able to pay the interest on about $12-billion of its debts.

Mr. Harris said yesterday that electricity markets throughout North America are becoming competitive, and that his government still intends in the near future to release a white paper on how the Ontario market will be opened up.

The switch to fossil fuels will also mean that Hydro’s production of the pollutants responsible for acid rain and global warming will increase.

John Fox, Hydro’s vice-president of electricity generation, said that he estimates Hydro will increase its production of electricity from fossil fuels by about 60 per cent, but because the utility uses coal with lower sulphur content, its output of acid-rain pollutants will not rise by that amount. He said Ontario Hydro will stay well below its acid-rain targets.

Kevin Jardine, a spokesman for the Greenpeace environmental group, said Hydro’s actions are a double-edged sword.

"We’re very pleased about the government decision to shut down the seven most dangerous nuclear reactors in the province," he said. "However, we’re very alarmed that Ontario Hydro right now has no ideas of how to replace that power, other than firing up its very dirty coal and oil plants."

Mr. Fox said Hydro calculates that it will be able to meet Ontario’s electricity needs despite taking seven units of nuclear capacity out of production, accounting for 54 per cent of Ontario’s electrical needs last year.

The production impact from the closing is minimized because the seven units were the least efficient in the nuclear division, he said.

Norman Rubin, director of nuclear research with Energy Probe, said that Hydro’s response to the report is like "having your Ferrari in the shop and taking taxi cabs."

Ontario Hydro’s mismanagement has created a situation in which very expensive nuclear operations will not be used while the utility still has to pay for coal–derived energy, he said.

The solution, he said, is to allow into the market independent power producers that can generate electricity less expensively and in a cleaner manner.

Valerie Lawton
The Toronto Star
August 14, 1997

It’s Ontario Hydro’s darkest hour, but plenty of businesses in the province see new opportunity.

“It augurs really very well for the private sector, people like ourselves,’` James Temerty of Toronto-based Northland Power Inc. said yesterday.

“The folks at Northland are feeling pretty good,” said Temerty, chief executive of the province’s largest independent power producer.

Temerty thinks Hydro’s plans to shut down several problem-plagued nuclear reactors means he’ll be able to sell more power to the crown utility.

And – maybe – Northland will finally be able to add to its customer list. Temerty and others hope Hydro’s woes will zap the Ontario government into moving a lot faster on opening up power-industry competition.

“The pressure is on the government, that’s the good news,” said Norman Rubin of Energy Probe.

Yesterday Ontario Hydro announced it was shutting down seven of its 20 reactors for repairs. “It’s not a good investment,” Rubin said. “I’d rather have Bre-X stock.”

The shutdown and overhaul could cost between $5 billion and $8 billion over five years. Hydro is considering writing off $2 billion in assets this year.

The head of the Independent Power Producer’s Society of Ontario also thinks Hydro’s troubles mean his members are a step closer to being able to sell power to big industry and municipalities.

“The alleged surplus that Ontario Hydro said it had in the past is gone,” said Jake Brooks. “So there’s no plausible reason to prevent alternative suppliers from entering the market.”

His group’s members include large Ontario companies that now generate their own power and would like to sell their surplus.

Advocates such as Brooks argue competition would mean lower power rates for industry and, ultimately, for individual consumers in the province. Others, however, believe large power customers would be able to strike deals at the expense of small users.

The Ontario government is on record as supporting the concept of competition. But Queen’s Park still hasn’t said how that might work.

The province is ultimately responsible for Hydro’s huge debt load, which won’t be getting any smaller during the overhaul. Hydro bonds are guaranteed by the government.

Two major bond raters confirmed their ratings for the province and Ontario Hydro yesterday, but pointed to challenges ahead.

“The effect of these additional costs on Ontario Hydro is to reduce its ability to lower its debt load significantly by the year 2000, as previously planned,” said the Dominion Bond Rating Service.

“And (it) reduces its ability to deal with the future challenge of potential competition due to deregulation.”

New York-based Standard &d Poor’s said the province could accommodate the financial impact of the restructuring but it “has the potential to push back the over-all improvement in the province’s credit profile, notwithstanding the province’s continuing progress with its own deficit.”

Hydro’s nuclear, hydro and fossil-fuel plants generate more than 90 per cent of the average daily electricity supply for Ontario. Independent producers make up the rest.

Competition advocates say the government’s first step should be to give control of Hydro’s transmission system – the network that carries electricity – to an independent body.

Hydro rivals would then be able to send their power to customers.

Top officials at Ontario Hydro have voiced strong public support for competition.

Chairman William Farlinger said the utility would have to meet the rates of would-be competitors.

“At the moment, we are constrained by regulations as to what we charge industrial customers,” Farlinger told a packed news conference at Hydro’s downtown headquarters yesterday.

“With a free and open market, we could have different rates for customers.”

In the meantime, Hydro has promised to continue a freeze on rates, despite the huge costs.

But big companies, such as Falconbridge Ltd., that buy surplus Ontario Hydro power at lower rates, may not have as much of it to choose from after the reactors shut down.

That could mean higher prices, said Lauri Gregg, energy and technical services manager at the mining company.

John Fox, executive vice-president and managing director of Ontario Hydro Generation, said the question of when competition happens is up to the province.

“We are operating with the expectation that Hydro has the obligation to continue to ensure reliable power.”

The utility plans to rely more heavily on its own fossil-fuel power to make up for the shortfall. Hydro will have to consider other options if it eventually decides not to bring its Pickering nuclear plant back up.

“We’d have to look at where additional generation could come from, either from purchasing out-of-province, or developing additional resources within the province, either by Ontario Hydro or by the private sector.”

Hydro said its ability to export power will be reduced. By how much is still unclear, but Fox said the corporation will be talking to its U.S. customers.

Over at Northland Power, Temerty is thinking about projects scrapped and gutted a few years ago, when Hydro told him it didn’t need the extra power.

“We’re just dusting off those old papers and taking a look at them,” said Temerty, whose company has three power plants in Northern Ontario.

“There may be an opportunity to go at some point in the future, and the near future, and say, `Hey look, this made sense for you four or five years ago; it perhaps makes sense again, in light of the changed circumstances.’ ”

“I think the day of building these huge giga-projects is well past.”

AEP Resources Inc., an Ohio-based utility that wants to become a power provider to Canada’s biggest industries, also believes competition is a step closer in Ontario.

“It would appear the situation here in Ontario that’s just emerged in the last few days does mean that generically there will be more opportunities down the road, probably a little bit sooner than anyone had guessed,” said Thomas Drolet, managing director for AEP’s newly opened Toronto office.

“That isn’t clear yet, because we’re not sure of the surplus or deficit power situation” at Hydro.