Energy Probe

November 5, 1997

A huge range of technologies and fuels are used to generate power around the world, but have been largely thwarted in Canada by our electric monopolies, which favour large-scale power sources such as nuclear and coal. Despite the odds, some small-scale entrepreneurial power development has been successful. In Ontario, 1600 megawatts (MW) of private generating capacity is up and running, using the following fuels and technologies:

• natural gas cogeneration, in which the combustion of gas generates both electricity and heat for industrial applications, results in a fuel efficiency at least 2.5 times that of Ontario Hydro’s coal plants, with virtually no sulphur dioxide emissions
• gas & wood-fired cogeneration, applying the same principle, uses waste wood in combination with gas. Plants are already in operation in Cochrane and Kirkland Lake
• hydraulic: the private sector has built or renovated many small-scale hydro stations
• landfill gas combustion, already in place in two Ontario locations, harnesses what would otherwise be an atmospheric pollutant, resulting in a net reduction in greenhouse gas emissions.

If there was a level playing field in the Ontario power market, many more small-scale generating stations would be built along these lines.

Ontario Hydro has been using its monopoly powers and the courts to block private sector construction of the following proven power options:

• natural gas combined-cycle turbines (CCGT), already generating many thousands of megawatts in the UK, are not as efficient as gas cogeneration but are fast to build and far less polluting than coal
• biomass cogeneration: markets for ethanol are expanding, and farmers can now use their corn (and perhaps someday wood and straw) crops to manufacture this environmentally attractive fuel if they can also sell electricity generated using excess process steam. A facility proposed for Sudbury was blocked by Hydro
• district heating cogeneration, which generates power and sells the exhaust for heating nearby buildings, is being blocked in London and Ajax
• wind power, not yet developed to a significant extent in Ontario, could contribute to meeting our electricity demands. Ontario Hydro launched a renewable energy program, received over 120 MW of proposals from the private sector, then abruptly cancelled the whole initiative, incurring a lawsuit. Alberta, which is de-monopolizing its electricity industry, leads Canada in windpower development

All of these power options – small-scale, fast to build, resource-efficient, and cost-effective – could easily replace the nuclear stations that will close. So great is the potential and the private sector enthusiasm for these technologies that when Ontario Hydro first opened its monopoly a crack in 1989 and invited tenders for independent power projects, it received proposals totalling 6,000 MW (only 25% of which it allowed to proceed). Since then, there have been repeated proposals for economically and environmentally appealing power development, and in every case Hydro has wielded its monopoly and denied them all. Since interest rates and equipment costs are now significantly lower than in 1989, private sector initiatives could easily top the 6,000 MW of capacity proposed then, to replace the 4300 MW of nuclear capacity now scheduled to close.

The technologies Energy Probe advocates have been available for a long time, and they are up and running in other jurisdictions, but Hydro itself has not and cannot build them: it has proven itself institutionally incapable. Nor will it allow the private sector to proceed. The technologies listed above will not flourish in the present monopoly structure, in which Ontario Hydro is the construction company, sales agent, and regulator.

What can we do to facilitate these power alternatives?

• Cancel "cogeneration avoidance rates": Hydro must cease buying off developers to abandon new generation construction. Hydro is now so desperate to be rid of the competitive threat posed by independent power that it will pay to have new private power projects cancelled. Domtar at Red Rock in April ‘97 and Shell Canada Products Ltd. in October ‘97 were the most recent recipients of "cogeneration avoidance rates", which trade subsidized power for cancelling self-generation plans.
• Remove Ontario Hydro’s generation monopoly: Alternate sources of power will never flourish in the absence of a level playing field for all power technologies and power developers. Energy Probe has been writing extensively on this subject, and on the design of a future power market, since 1982.
• Give consumers the right to choose their electricity source: In some jurisdictions, customers can order "green" power from renewable solar and wind generators, helping develop renewable markets and hastening the phaseout of more polluting electricity sources. Energy Probe is working with industry experts to design a new electricity market system that would make green power a reality.
• Strengthen environmental regulation: Were pollution rules well-designed and fully enforced, pollution would become costly, and consumers would receive clear price signals about the true social and environmental costs of their buying decisions. This would encourage switching to technologies with low environmental impact. One of Energy Probe’s priorities is to fill the existing loopholes in the air emission laws that Ontario Hydro must meet.

Conservation will also be an important element of meeting the nuclear shortfall. The most immediate and effective ways to decrease power demand are:

• Price power based on time-of-use: If the "peak" demand for power can be reduced, we can get by with running fewer generating stations. By pricing power higher at the times of greatest demand, consumers have an incentive to use power "off peak", which affects not the total volume of electricity consumed, but the number of stations needed to meet overall demand. This concept has been tested in Ontario, but hasn’t been expanded beyond the pilot project phase.
• Switch to other fuels for heating space and water, as these uses for electricity place great demands on the power system. Advertising campaigns and under-priced power over the past two decades had encouraged homeowners to switch to electricity for these applications, largely to increase demand for Ontario Hydro’s product, but Hydro can no longer fill the demand.

These barriers to energy conservation and alternative energy are a national problem, exaggerated in Ontario by its over-reliance on nuclear power but experienced by all Canadians whose electric monopolies have leaned toward megaprojects.

James Rusk
The Globe and Mail
November 6, 1997

TORONTO — After almost a century of near-monopoly, Ontario Hydro will be broken up and the electricity market opened to competition, the government will announce this morning.

In a 29-page white paper that Energy Minister Jim Wilson will release at a news conference, the government will outline its plan for an open, competitive wholesale and retail market for electricity in Ontario, starting in 2000.

While the market opening will result in the breakup of a public utility long regarded as a cornerstone of economic development in the province, the white paper "will be looked on as one of the best reforms this government has brought in," said a senior Conservative involved in the document’s development.

Under the plan, Ontario Hydro and the electricity market will go through a two-year transition, at the end of which three new provincially owned utilities will be created, each with a role in a competitive market, sources say.

The new utilities will be:

A generation company that will run Hydro’s generation facilities, including its nuclear, fossil-fuel and hydroelectric plants;

A transmission company that will operate Hydro’s 29,000 kilometres of high-voltage transmission lines and the switching stations that go with them;

A retail company.

The decision was made only recently to form a separate company for Hydro’s retail operation, which sells power directly to about a million farm and residential customers in rural and Northern Ontario. Through most of the planning for the white paper, retail operations were expected to stay with the generation company.

But a source said the government decided that keeping the generation and retail companies in one unit was inconsistent with a basic principle of the new policy: that generating companies should not have privileged access to either transmission facilities or retail customers.

In keeping with this principle, the government has also decided that municipal electrical systems delivering power to residential customers in urban areas will not be allowed to own their own generating facilities, although such facilities can be owned by a municipal government if it so chooses.

The paper will also propose a number of changes, such as removing existing legal barriers to mergers, to make it easier for municipalities to meld utility systems and to take over Hydro’s retail operations in adjacent rural areas. That will allow county-wide or regional utilities to be created.

Access to the transmission system will be controlled by a central market operator, through which buyers and sellers will arrange the delivery of electricity.

The prices of the electricity will not be controlled, but the rates that both the province-wide high-voltage transmission system and the municipal systems charge for their services will be regulated, as they are monopolies.

The split of Hydro and creation of the new system during the next two years will be under the control of an independent transition agency, which will report to the Energy Minister.

Its job will be to ensure that the three new companies are treated equitably when they are set up and that the changes will be completed by the time the new system comes into effect, an exercise that will involve a massive amount of paperwork and legal effort, including breaking Hydro’s system-wide labour contracts into three to apply to each company.

During the transition, the province plans to take a first step toward a fully competitive electricity market by creating an interim pooling arrangement in the wholesale market to allow wholesale buyers to buy electricity and have it transmitted through Ontario Hydro’s system.

Sources also said the paper will have little to say about stranded debt, which is the chief financial issue in breaking up Hydro.

It is estimated that interest on about half of Hydro’s $32-billion debt, which is guaranteed by Ontario taxpayers, could not be supported if the utility had to pay its way in a competitive energy market.

While it is expected that this debt will eventually be retired by a charge on transmission costs paid by all electricity customers in the province, the paper will say only that the Finance Ministry will find ways of managing the stranded debt by the time the competitive market begins.

And although the new system is expected to produce cheaper electricity in Ontario for both industrial and retail customers, the white paper will not make any specific claims about future reductions in rates, sources said.

Norman Rubin

November 21, 1997

  Select Committee on Ontario Hydro Nuclear Affairs Attention:
Derwyn Shea, M.P.P., Chair (Fax: 416-314-7783)
Doug Galt, M.P.P. (Fax: 416-323-4439)
Sean Conway, M.P.P. (Fax: 416-325-9001) Dear Committee Members: In your deliberations yesterday, you asked Dr. Nigel Roulet to quantify the relative CO₂ emissions of the various forms of fossil fuel generation, but he did not have those quantities in his head. You finally referred the matter back, I believe, to the Chair and the staff, to seek an answer. In the interests of assisting your deliberations quickly, following are some "quick and dirty" numbers that are generally used in this field:

• Coal combustion releases twice as much carbon (or carbon dioxide) as natural gas combustion, per unit of energy released, all other things equal.
• Oil combustion is almost exactly halfway between the two.
• While all fuels are generally burned at comparable (and fairly high) efficiencies in electricity generation, the "thermal efficiency" — i.e., the percentage of the flame’s heat that actually becomes useful energy (electricity) — varies widely. As a result, fuel consumption and atmospheric emissions can vary widely, for the same amount of useful energy provided.
• Large, centralized steam turbines like Ontario Hydro’s (whether coal, oil, gas, or even nuclear) typically convert roughly 30-33% of their fuel’s heat into electricity. The remainder, roughly two-thirds, is released to the environment — through the stack and as "condenser cooling water" to the adjacent lake.
• New off-the-shelf natural gas technology (combined-cycle gas turbines or CCGTs) now convert well upwards of 50% of their fuel’s heat into electricity. In a simple or "stand-alone" CCGT, the remainder, roughly half, would be released to the environment, as above.
• Even more efficient are industrial or municipal cogenerating plants, which replace the combustion of (typically) natural gas for heat, and may also supply cooling, derived from that heat. These plants may use any one of several technologies including CCGTs, and almost always turn at least 75 or 80% — and often over 90% — of their fuel’s heat into either electricity or commercially useful heat. (The ratio of electricity to heat is variable from about 1:5 to about 2:1, and is typically optimized to maximize the value of the return to its owners.)
• Since the economic (and environmental) benefits of natural-gas-fired electricity generation are generally (1) available at relatively small scale and (2) maximized when the generation can be sited where there is a demand for heat, they are generally more attractive to "customers" and "non-utility generators" than to "utilities" like Ontario Hydro. Technically, of course, there is no reason why a centralized utility like Ontario Hydro could not construct CCGTs at its own sites.

Perhaps the best way to summarize the combined effects of the choice of fuel (which you gave some attention to in yesterday’s hearing) and the even more important choice of technology (which was not mentioned in that discussion) is with the following simplified example. Let’s assume that a large commercial customer has a large demand for electricity and a simultaneous demand for twice that quantity of thermal (heat) energy, or its equivalent in cooling. At present, that customer is burning gas to meet its thermal load and buying electricity.

If 100% of that electrical demand is supplied at Ontario Hydro’s coal fired stations (at 33% thermal efficiency), let’s call the resultant CO₂ emissions 1000 units. (The units are arbitrary, as long as we’re consistent.) If Ontario Hydro uses an oil-fired station, the CO₂ emissions would drop to about 750 units. If Ontario Hydro uses a gas-fired station (like the Hearn G.S.), CO₂ emissions would drop to about 500 units. If either Ontario Hydro or the customer or a "non-utility generator" generated the power with a CCGT at 50% efficiency, CO₂ emissions would drop to about 333 units.

But in all these examples, the customer is burning natural gas to supply its heat load, which is twice the size of its electrical load. Assuming 80% thermal efficiency for that gas combustion in a boiler or furnace, it would result in roughly 416 units of CO₂ emissions, all additional to the emissions from the electricity generation. The total CO₂ emissions, from supplying the customer’s electricity and heat needs, would range from a low of 749 units up to a high of 1416 units, depending on the choice of generating fuel and technology.

 If, on the other hand, the customer chose to install a gas-fired cogeneration unit, converting one-third of its energy into electricity and two thirds into heat, its total emissions would equal 500 units — a full 33% lower than the most efficient case dealt with above! Looking at it a little differently, the electrical generation part of this cogeneration application only emits 74 units of CO₂, over and above the 416 units of CO₂ emissions from the boiler or furnace. That is almost five times as "emissions efficient" as the CCGT option above, the most efficient option discussed. Looked at still another way, if the customer’s electricity were generated from a "mix" of sources — nuclear, hydroelectric, and coal — that "mix" would only have to contain tiny 7.4% of coal-fired generation to exceed the total emissions of the cogeneration alternative! (For simplicity, we are ignoring the CO₂ emissions from building the generating stations — including the hydro and nuclear ones — and mining fossil fuels and uranium, etc., as well as the potentially very large emissions of the potent greenhouse gas methane from hydro dams that submerge living plants.)

Incidentally, since the estimated CO₂ emissions for our gas-fired cases are exactly proportional to the natural gas consumed in those cases, we can see that the more modern, more efficient, more decentralized technologies also have significant benefits in saving fuel — an economic advantage to the customer and presumably to future Canadians as well. The CO₂ emissions results (again, in arbitrary units) from these admittedly simplified cases can be summarized in the following table:

These examples are only illustrative and approximate, but I believe they indicate both the significant environmental benefits of choosing natural gas instead of coal, and the equally significant benefits of encouraging distributed, decentralized, super-efficient — in short, non-monopoly — use of that natural gas. Of course, the examples could just as easily have been industrial or municipal (like the cogeneration developments Ontario Hydro is currently opposing in the Courts) rather than commercial. I hope this is helpful, and good luck in your deliberations. Sincerely yours, Norman Rubin
Director, Nuclear Research and Senior Policy Analyst cc: Donna Bryce, Clerk (Fax: 416-325-3505) 1. Assuming 50% of the mix is nuclear, 25% of the mix is hydroelectric, and 25% of the mix is coal-fired. We also assume that nuclear and hydroelectric generation create no CO₂ emissions at all, as discussed above. Furthermore, we do not include any fugitive emissions of methane from (changes in) natural gas consumption.

Thomas Adams
Ontario Select Committee
November 28, 1997

Derwyn Shea, M.P.P
Chair, Ontario Select Committee on Ontario Hydro Nuclear Affairs
by fax: 314-7783 (2 pages)

re: Nuclear Power Costs

Dear Mr. Shea,

On Monday, November 24, Ontario Hydro representatives Ms. Clitheroe and Ms. Ng were asked by M.P.P. Helen Johns what the real cost of nuclear power is. The representatives quoted from Ontario Hydro’s annual report, indicating that in 1996 nuclear power cost 5.5 cents/KWh.

That figure incorrectly reports Ontario Hydro’s actual costs in four main respects.

• The figure provided does not reflect of cost of nuclear-related write-offs. In 1996, nuclear writeoffs were $1.873 billion and in 1993 they were $2.42 billion.

   

• The depreciation costs used to calculate the figure assumes that all nuclear units will operate for 40 years. There is no nuclear power reactor experience in the world that substantiates this assumption. Rather, the average age of the nuclear units "laid up" under the NAOP and the Bruce unit 2 "lay up" is about 22 years. Even supposing that Bruce A restarts and runs to the end of its pressure tube life, it would not come close to 40 years. As is clear from Ontario Hydro’s testimony to the Committee, decisions on whether to restart will be made on the assumption that the initial investment is written off. Ontario Hydro’s depreciation practices should be revised to assume 25 year service lives for the remaining 12 reactors.

   

• The recovery of costs related to nuclear waste disposal and decommissioning reflected in the figures quoted are based on the assumption that the nuclear units will operate at a high level of output until the end of 40 years of service life-and on the continuance of other imprudent accounting practices which have left these enormous and vital tasks essentially unfunded.

   

• The figures understate the cost of current operations due to Ontario Hydro’s persistent use of capitalization for nuclear repair expenditures that are related only to ongoing operations and do not reflect investments in incremental capacity.

Even without corrections to Ontario Hydro’s reporting practices, nuclear costs should be expected to rise by about 10% this year over last year reflecting the shortfall in 1997 production now forecast.⁽¹⁾

If it were true that nuclear power cost only 5.5 cents/KWh, then Ontario taxpayers would face very little stranded nuclear cost.

A complete account of the cost of nuclear power would have to take into account of the value of the subsidies represented by third party liability exemption conferred by the Nuclear Liability Act, the value of the subsidy to nuclear power represented by Ontario Hydro’s access to taxpayer-back loan guarantees, and subsidies to nuclear research and development by the federal and provincial governments such as the direct investments of both these government in Pickering units 1 and 2. Even omitting these, and correcting only the four obvious omissions noted above, we estimate that Hydro’s current cost of nuclear generation is in the range of 8-11 cents/KWh.

These current costs reflect actual historical expenditures on Ontario’s nuclear reactors, and do not necessarily prove that these high-cost sources of electricity would be shut down immediately in a competitive market. Historic over-investments make up the bulk of nuclear power’s enormous costs. Sunk costs, though they must be recovered, should not influence future decisions. To the extent that sunk costs are stranded, they will be recovered some other way, and artificially written out of the cost of future nuclear power. If some of the reactors are allowed to run and can compete on their short-term marginal costs, they will do so, until they need a further infusion of cash that cannot be justified. (Of course, NAOP is just such an infusion of cash, and we have already presented our views on how Ontario should protect its taxpayers from the risks of that investment.)

Inaccurate and incomplete nuclear accounting is one of the reasons that Ontario developed the terrible electricity crisis we now face. Unfortunately, despite the crisis Ontario Hydro has not seen fit to produce better information for the Committee.

Sincerely,

Thomas Adams

Executive Director

c. Ms. Bryce, Clerk of the Committee, f) 325-3505 (to circulate to Committee Members)
Ms. Malen Ng, Ontario Hydro, f) 592-1864
Mr. Rob Power, f) 863-1938

1. According to Ontario Hydro’s October 1997 "Nuclear Report Card", issued November 28, 1997, 1997 total nuclear production is forecast to be 70.6 TWh. In 1996, it was 77.7 TWh.

Thomas Adams
Energy Probe
January 29, 1998

Harvard Electricity Policy Group
Fifteenth Plenary Session

Coronado Island Marriott Resort
San Diego, California

January 29, 1998 (morning session)

On November 6, 1997, the Ontario provincial government announced a "White Paper" policy statement expressing its decision that Ontario Hydro would be restructured and an open, competitive power market introduced in the year 2000. The decision to restructure Ontario Hydro came after years of declining financial performance, operational deficiencies, and internal organizational reforms. The electricity sector reform effort in Ontario will have a significant influence on the future of the power sector in most of the rest of Canada.

Description of Ontario Hydro

Ontario Hydro is the largest utility in Canada in terms of revenues, which were $8,886 million (CND) in 1996. Ontario Hydro, as the first provincially-owned electric utility in Canada, was the model for most of the nation’s power sector.

Ontario Hydro is a generation and transmission, electric only utility that also provides retail service to about one million rural direct retail customers (10% of Ontario’s population) and most of the largest industrial customers. It owns and operates hydro-electric units, conventional simple cycle fossil units (almost all coal), and nuclear units. It has 20 nuclear units, all of the CANDU pressurized heavy water design. The operable number of units by the end of March will drop from 19 where it was last fall to 12 or 14. Additional substantial nuclear capacity cuts within five years appear unavoidable.

In 1998, total domestic requirements are forecast by Ontario Hydro to be 142 TWh, of which 44% is forecast to come from nuclear production, 25% from hydro-electric, 5-10% from purchased generation (mostly gas cogen under long term contracts and short term imports), and the remainder from coal and oil-fired units.

Ontario Hydro’s long term debt is roughly $30 billion CND ($20.7 billion US), more than two thirds of which is attributable to nuclear spending. The debt is fully guaranteed by the provincial government. Ontario Hydro’s estimate of its nuclear waste disposal and decommissioning liability is $15 billion (CND) in 1996 dollars. Its balance sheet is eroding. Writeoffs in the last three reported years (1997 has not been reported yet) have totalled $7.1 billion (CND) offset by $2.2 billion in before-writeoffs-profits. I anticipate even larger writeoffs and lower "profits" in the near future. Its rates are the highest in the industrialized parts of Canada and by my estimate 30% over market.

Nuclear performance is sharply declining-it peaked at 64% of the fuel mix in 1994. The costs for running and fixing the remaining 12 reactors was last fall increased by $1.6 billion (CND) to pay for urgent upgrades.

Ontario Hydro’s sales volume peaked in 1989 and has yet to recover to that level despite significant economic expansion in Ontario since then. The cause of the decline was a 20% real rate increase in the early 1990s and also gas deregulation which has brought the cost of that competing fuel down sharply. Until six years ago, the utility was still planning to build 10 more nuclear units.

The strength of Ontario Hydro’s legal monopoly is moot, but so far none of its customers has tested the matter in the courts.

Until last year, the utility claimed to have over 3000 MW of excess capacity. Recently announced nuclear "lay-ups" have created some question about its load meeting capability during peak periods for the next several years.

The concept of "checks and balances" does not generally apply to the electricity sector in Canada for many complex historical, cultural, and legal reasons. The legal and administrative power Ontario Hydro currently enjoys include:

• the utility’s own board of directors has the authority to set its own rates and lately has done so for cogen avoidance rates without any public process and total secrecy about the prices,
• the board sets and approves its own capital and operating budgets,
• the board regulates the rates of every distribution utility in Ontario (except one little one) and does so in secret and without the distributor having any legal rights of appeal, and
• the board is the legal regulator of electrical equipment safety in Ontario and has recently used that power to harass a tiny district heating cogen competitor.

   

The current chairman of Ontario Hydro, like most previously, is a close political confidant of the provincial premier.

White Paper and the Reform Process

The key elements of Ontario’s "White Paper" electricity policy are:

• customer choice for all regardless of size in the year 2000;
• separation of generation and transmission, and a general commitment to separation of monopoly and competitive enterprises;
• no commitment to privatization "at this time" and maintenance of all generating assets in one provincially-owned corporation;
• independent regulation of rates for transmission and distribution services;
• independent management of the transmission grid to allow non-discriminatory access for producers and consumers;
• competition among generation firms;
• and an end to the current subsidies to the public power sector-taxpayer backed loan guarantees, tax holidays, and permanent dividend holidays.

   

The reform process is to be overseen by three committees: the Electricity Restructuring Committee of Deputy Ministers, composed of senior government bureaucrats from the departments of the Cabinet Office, Finance, and Energy; the Electricity Transition Committee, composed of the Minister of Energy and the heads of various stakeholders organizations; and, the Market Design Committee (MDC).

The MDC is the public face of the restructuring effort. The composition of the MDC was announced last week, which is two months behind schedule. The delay in announcing the MDC suggests weakened resolve on behalf of the provincial government. The MDC is chaired by three respected academics. The remainder is a group of 14 people drawn from various organizations with interests in the electricity sector including Ontario Hydro, industrial power users, municipal utilities, and independent power producers now selling on long term contracts to Ontario Hydro. Our organization has been refused access the MDC. None of the MDC members have international electricity restructuring experience. A research secretariate of the MDC is expected to acquire support from consultants with international experience.

Key Reform Issues

There are four key deficiencies in White Paper: failure to endorse privatization, a reform which is necessary but politically delicate; failure to break up Ontario Hydro’s generation assets; absence of a coherent financial plan; and failure to commit to enhanced environmental controls, a deficiency which could undermine public support for the reform process.

A key strength of the White Paper is the decision to withdraw the loan guarantee for future borrowing. Applied properly, this policy could cause incremental privatization without the government ever using the word. If Ontario Hydro loses its loan guarantees and if future liabilities are made subsidiary to guaranteed debt, its borrowing could become so expensive that it would give the utility a strong incentive to liquidate undervalued assets in order to acquire cash for financing.

The main negative impact of Ontario’s highly centralized electricity monopoly has not been monopoly rents being extracted by owners, rather the negative impacts have been stultified innovation, squandered capital, unnecessary technological risk, and inefficient pricing. The advent of an competitive power market is likely to reveal significant volatility in price. Opponents of competition are likely to use this as an argument against reform.

The demonopolization process is vulnerable to many potential factors. A provincial election will be called in the middle of the process. The MDC may not prove capable of implementing the "White Paper’s" policies. There are clear indications that Ontario Hydro is vigorously seeking to defend its ability to control the factors that sustain it and to retain as much of the status quo as possible, as the historical record shows it has done in the past.

Creating an ISO (called an Independent Market Operator in the White Paper) will be extremely challenging. A proto-ISO (called the Central Market Operator) has been established but is under the control of Ontario Hydro. Energy Probe has been pressing for a voluntary spot market with some kind of scheduling arrangement for those opting out. The trade groups representing major industrial users and the municipal utilities have opposed our dual market proposal. The representatives for the industrials are pushing for a "pure bilateral" market and the representatives of the municipal utilities are pushing for a mandatory purchasing cooperative for all municipal utilities operated by the municipal utility trade group. Enron is advocating a dual market.

Recently, British Energy and secondarily Duke Energy have expressed an interest in taking an equity interest in the nuclear operations. These discussions improve the prospects for generation unbundling because they would lead to a separation of the nuclear assets from the conventional generating assets. In addition, Ontario Hydro’s main union, which had been the leading opponent of privatization, has moderated its stance on privatization in light of the prospect of an equity infusion in their favoured nuclear units. If the difficulties of nuclear privatization could be overcome, the prospects for further privatization would be enhanced.

For about a decade starting in 1916, when Ontario Hydro was gaining its modern powers, the utility was attacked by a now forgotten but prescient University of Toronto professor of political economy, James Mavor. Arguing from first principles, Mavor forecast many of the ills that befell the utility, among them its unaccountability, its fatal blindness to risk, its failure to report real depreciation costs, a continual management crisis, and the scourge inefficient pricing with its consequences for distorted demand.

What is different 80 years on and can we succeed where Mavor failed? The ongoing crisis in the nuclear program and the resulting rate impacts are part of what is driving the reform agenda. Maurice Strong’s tenure in the chairmanship from 1993 to 1995, helped to bring some objective analysis to the issue. Strong made it clear in official circles that the monopoly they took for granted might not hold up in court or on customer premises The defection of the large industrial customers in the early 1990’s from their traditional policy role as Ontario Hydro supporters was also significant. The influential 1995 expert review of the electricity industry, headed by one of Canada’s most respected elder statesman, Donald Macdonald, was another milestone. The influence of our own little organization is difficult to trace. 18 years ago we published a plan to separate generation from transmission and to make the customer sovereign. Long before that and ever since, we have been continually bringing to public attention deficiencies in the existing system. Even today, we are the only public proponents of privatization. Public support for Ontario Hydro has steadily weakened.

The tenuous threads of an open, competitive system are strengthening. We should be cautiously optimistic about someday succeeding, but many battles lie ahead.

Thank you.

Thomas Adams

February 3, 1998

Presented at

The Transition to Competition in Electricity: Overcoming New Challenges and Capitalizing on New Opportunities

This presentation focuses on three aspects of the market structure for Ontario’s new electricity sector: generation, dispatch, and distribution. My discussions of generation and distribution also address the policy issues surrounding privatization.

I think that we need to consider the structure of Ontario’s new electricity sector from a perspective that looks beyond the obvious of doing something good in the near term for customers, taxpayers, Ontario’s business climate, and also the natural environment. The exigencies of today–like how to discharge the uneconomic liabilities resulting from Ontario Hydro’s past and ongoing business mistakes, how to get electricity rates down to fair market prices, and how to wrestle monopoly powers away from Ontario Hydro-have a natural tendency to preoccupy our attention. I argue that we need to take a longer term perspective.

If history is our guide, it may be another 80 or 90 years before Ontario gets around to addressing the fundamental structure of its electricity system. Remaking our power system provides us with an historic opportunity to do something that will benefit Ontarians, for generations into the future. I suggest one of the organizing principles we should build into the new system is tight economic feedback loops which ensure that the consequences of actions are visited upon decision makers as quickly as possible. Absence of such loops caused Ontario Hydro’s downfall. Such feedback loops should produce information that can be used to continuously optimize operating decisions and constantly cross-checked the quality of each investment against reality. Energy Probe argues that the combination of privatization and competition for those functions that can be made competitive appears to be the best mechanisms to create a system based on tight feedback loops. There are also important ecological organizing principles that should apply to the new system but addressing them is beyond the scope of this presentation.

To create an economically sustainable structure, the electricity sector must be radically unbundled. I assume that Ontario Hydro will never voluntarily give up its ability to control the factors that sustain it. Rather, I assume that the monopoly will vigorously seek to defend as much of the status quo as possible.

Unbundling Ontario Hydro’s Generating Assets

For advocates of a competitive generation market in Ontario, the White Paper contains both a great disappointment and a great hope. The disappointment was the decision to leave the generation together in one big genco, a decision that has been panned by many, including me. The reasons I am disapprove of the one big genco proposal are that it potentially injures customers and is also a discouragement to potential new entrants to the Ontario electricity commodity market.

Could the new generating company’s market dominance be so great as to present a barrier to entry for prospective competitors in the Ontario electricity marketplace? Potential competitors should be wary of being up against a highly politicized and entrenched state enterprise. Private investors considering generating assets in Ontario can only be discouraged by the prospect that their main competitor will have a hotline to the Premier’s office and 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 institutional and 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. However, as a short term Bandaid, the government must ensure that the Ontario Energy Board is bolstered to control as best it can the market power of the genco.

The White Paper does contain a seed of hope that this excessive market power can be made to shrink over time. 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. This principle, if applied effectively, can cause an evolution towards effective competition in generation. If Ontario Hydro loses its monopoly and its loan guarantees, its borrowing could become so expensive that it would give the utility a strong incentive to liquidate undervalued assets in order to acquire cash for financing. Withdrawal of the loan guarantee, if the government does it right, is effectively a privatization policy without saying so.

Unfortunately, government officials have indicated that Ontario Hydro will be permitted to "roll over" its existing taxpayer-backed debt with new taxpayer-backed borrowing. I 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.

The solution has two parts: the Ontario government should immediately cut off all loan guarantees to Ontario Hydro for new borrowing-including borrowing for normal debt renewal or "roll-over"-and the government should 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 using taxpayer-backed financing. The White Paper suggests that the loan guarantees will continue to be available to Ontario Hydro until the year 2000. There is no logical reason to wait.

Cutting off the loan guarantee would create an effective discipline over Ontario Hydro’s spending. Cutting off the guarantee is a simple principle, publicly attractive, fiscally responsible, and consistent with Common Sense Revolution. I would suggest that everyone who sees their future in the power business in Ontario but not with Ontario Hydro or the future big genco should be lobbying for the loan guarantee to disappear right away.

Independent Dispatch

Independent dispatch is a necessary but not sufficient condition for a successful competitive power market. The IMO should be set up and made independent as quickly as possible. Until the market operator is made 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 (MDC) and therefore to become independent immediately.

A challenge for the MDC will be to steer the IMO through a minefield of potentially distracting, initiative-sapping debates. Having observed the WEPEX process from a distance with dismay, a particular concern of mine is an unnecessary battle over the dispatch approach to use. Without good guidance from the MDC, we could see a bitter debate between the advocates of a physical spot market operated by the IMO and a market based on pure bilateral transactions without the IMO having pricing information to guide its short run decision making. Energy Probe recommends a voluntary spot market with a generation and transmission scheduling arrangement for those opting out. With such a dual market system, producers and consumers could discover for themselves whether they benefit from load balancing through a physical spot market or not. There is no reason the system operator should not schedule physical bilateral transactions for some parties without any knowledge of their short run opportunity costs, as long as it also provides the option of an efficient spot market for parties that wish it. As much as possible, the market should decide what trading systems to use. The dual market Energy Probe is recommending for Ontario, is now being examined in the UK(1), and is recommended by leading advocates from both sides of the so-called "poolco vs. bilaterals" debate in the U.S., William Hogan and Richard Tabors. Energy Probe has attempted to use the Technical Advisory Team (TAT) process-where we are the sole public-interest participant-to promote the dual market approach but we have found that the TAT process is not the appropriate forum for such decisions to be made.

The Future of Local Distribution: The "Pure Utility Model"

Among the many impressive statements in the White Paper is the policy of separating the naturally competitive from the naturally monopoly.

If we apply this concept rigorously and exhaustively to local distribution companies, where do we arrive? As a thought experiment, think of taking a distribution utility apart according to its essential functions. Building lines, managing tree growth near lines, washing insulators, and fixing lines when they are damaged: all of these are naturally competitive activities. Reading meters and performing customer accounting are also naturally competitive. Bill collection is naturally competitive. Selecting and installing meters is not even a proper job for utilities-rather it should be the business of consumers and marketers, with a government inspector checking up on their work. Even planning the construction of line can be done competitively. Privatization of important elements of the ultimate costs to consumers for distribution services while leaving the municipal utilities in public hands could be achieved by contracting out

If we keep applying this logic, I think we get down to one rarified residual monopoly once all the potentially competitive services are removed. That monopoly is the capital embedded in the lines. That is the "pure utility".

Many municipal utilities in Ontario see themselves in the new world as potential producers or buyers and sellers of commodity electricity. For historical reasons, some already do produce power. Others, seeing the high costs they are charged for power by Ontario Hydro, know they could do better. Although I am sympathetic to municipal utilities with ambitions to beat Ontario Hydro’s price, in a world of open competition, I think existing municipal generation interests should be privatized and distributors prevented from taking an interest in generation.

Buying and selling or generating and selling commodity electricity are inherently competitive businesses, and, in an open market, potentially risky ones too. Municipal utilities do not have properly accountable decision making structures to undertake these risks. Customers will take it in the neck for any mistakes their utilities commit. Distribution utilities will be in a conflict of interest in their roles as common carriers if they also have an interest in the commodity market.

Unbundling is just another bit of jargon utilities and their observers have fastened on to articulate some old fashion wisdom. This wisdom Robert Frost expressed best when he wrote, "Good fences make good neighbours." One neighbour owns the wires and the other neighbours use them. If each keeps to their place they should get along well.

Thank you.

1. 0On 5 November 1997, the UK Office of Electricity Regulation issued a "Review of Electricity Trading Arrangements" that includes a review of a potential dual market.

Tom Spears
The Ottawa Citizen
February 6, 1998

Utility missed deadline for filing plans to improve plants, regulator says

Ontario Hydro’s failure to show detailed plans on how it will improve slipping nuclear safety was "entirely unacceptable," Canada’s nuclear regulator says.

And the Atomic Energy Control Board is calling Hydro’s chairman to come to Ottawa and explain the utility’s actions in person.

A searing letter from AECB president Agnes Bishop to Hydro chairman Bill Farlinger says Hydro missed an important deadline to explain how it will improve the Bruce B nuclear station on Lake Huron.

Dr. Bishop’s staff says this was the latest in a series of deadlines and promises that Hydro has missed.

Mr. Farlinger has promised to appear before the AECB in Ottawa on Feb. 19. It is believed to be the first time an Ontario Hydro chairman has been called to Ottawa to account for the utility’s actions.

The information, due Dec. 31, had not arrived when Dr. Bishop wrote her letter to Mr. Farlinger early last week.

While delays have to happen sometimes, her letter says, "in this instance we do not believe this to have been the case.

"We expect AECB requests for information to be treated with the utmost seriousness by Ontario Hydro staff as well as by its board of directors.

"In our view, the response in this case failed to demonstrate this," she wrote.

She said the board wants to hear from Mr. Farlinger in person to explain the delay "and to receive assurances that this will not reoccur."

Dr. Bishop was unavailable yesterday. But board spokesman Bob Potvin said she and her four fellow board members have been growing dissatisfied with Hydro for years.

"This incident is just one more in a line of missed promises or commitments, or programs that have not achieved the results we wanted to achieve," said Mr. Potvin.

"We have several years now of us having requested and required improvements in certain areas, and Ontario Hydro having made commitments, but the results still are not there to the satisfaction of our board."

He said the board has asked to hear Mr. Farlinger in person because it wants proof of "a full corporate commitment at the corporate head level," and "not just the managers in the nuclear division."

Mr. Farlinger wrote back to the AECB last week to say there was a "misunderstanding" over the dates, and Hydro’s board of directors didn’t know of the Dec. 31 deadline.

Hydro spokesman Terry Young said Hydro also needed extra time to look at the report from the Ontario Select Committee on Ontario Hydro Nuclear Affairs. That committee reported in late November.

Hydro missed another deadline on Dec. 31 as well.

It had promised to install new safety equipment by that date at its four reactors at the Pickering A station, east of Toronto.

The improvements to the shutdown systems were supposed to make it easier to stop the reactors in case of an accident.

But it didn’t make the improvements in time, and consequently had to shut down the whole station on that day.

It has never reopened, and will not reopen unless a major overhaul is made sometime after 2000.

"This whole problem of reneging on commitments certainly suggests the AECB should be able to impose substantial fines on the nuclear operator (Hydro). But they can’t under the Atomic Energy Control Act," said Tom Adams of Energy Probe, an energy analyst firm and Hydro critic.

Paul Waldie
The Globe and Mail
February 18, 1998

Ontario Hydro lost $6.3-billion last year, the biggest annual loss in Canadian corporate history.

The loss included a onetime charge of $6.6-billion that is largely related to a restructuring program for Hydro’s nuclear operations.

"Hydro gets the gold medal for corporate losses," said Tom Adams, an analyst at Energy Probe, a Toronto-based environmental group. "But they also hold the silver medal for corporate losses."

He and other analysts predicted the loss ultimately will be borne by consumers.

Ontario Hydro lost $3.6-billion in 1993, the second-highest corporate loss. The utility lost $2-billion in 1996.

The utility, Canada’s largest, was pounded by problems last year, including a scathing internal report, which rated its nuclear operations minimally acceptable. In response, Hydro laid up seven of its 19 reactors and began a four-year program to overhaul the operations.

The reactors account for about half of Hydro’s electricity production.

Hydro’s operating profit, which excludes the writeoff, fell to $254-million last year from $572-million in 1996.

A year ago, Hydro officials forecast an operating profit of $740-million for 1997.

"We have to do the appropriate accounting in respect of the circumstance that we find ourselves in," Eleanor Clitheroe, Hydro’s chief financial officer, said yesterday.

The $6.6-billion writeoff includes $5.6-billion to refurbish the reactors, buy replacement power and increase provisions for decommissioning reactors. Last summer, Hydro estimated that the nuclear recovery program would cost between $5-billion and $8-billion.

The remaining $1-billion writeoff includes $50-million for costs related to January’s ice storm in eastern Ontario, $340-million to upgrade the utility’s transmission system, $185-million for environmental contingencies and $147-million for costs to prepare the utility for deregulation.

The 1997 loss won’t affect Hydro’s credit rating because the utility’s debt is guaranteed by the provincial government. Ontario currently has a rating of double-A minus.

"There is no effect on the rating," said Stephen Dafoe of Standard & Poor’s Corp.’s Toronto office. "But does it constrain their business position? Absolutely."

Mr. Dafoe said the Ontario government has announced plans to deregulate the province’s electricity market by 2000 and split Hydro into two operating companies — one for power transmission and one for power generation.

The writeoffs, he added, "will have to in some way be borne by electricity users in the province, either through rates charged by the generating company and transmission company or through some sort of stranded cost recovery mechanism that the province will probably have to institute as it moves to opening up competition."

The stranded costs relate to Hydro’s $31.1-billion debt. About half of it is expected to be included in the two new Hydro companies. The remainder will be financed in some other way, Mr. Dafoe said.

"The most obvious way to do this is to simply have a surcharge on electric use," Mr. Dafoe said, adding the government is considering other options.

Hydro was hoping to cut its debt by $4-billion to around $27-billion by 1999 but that was before the problems emerged in the nuclear division. Now that money will be diverted to the nuclear recovery program.

Other analysts said yesterday’s writeoff was done now to prepare the utility for deregulation and competition.

"But there is a long way to go and a lot to be done," an analyst said.

Ms. Clitheroe said the government hasn’t yet decided how the utility’s debt will be paid off. She added that Hydro is sticking to its commitment not to raise electricity rates for two years. Analysts say rates could fall in 2000 as deregulation kicks in.

"The reason that we are taking the loss is because when we look at the future expenditures we don’t expect those costs will be recovered through rates so they represent a loss and that’s the reason they should be provided for now in a writeoff," she said.

"We think that this puts the company in a position to generate the net income over the next three to five years to move the company back into a profitable situation."

Because the writeoff accounts for expenditures that will occur over the next four years, Hydro estimates it will report profits of $640-million in 1998, $750-million in 1999 and $645-million in 2000.

Tom Blackwell The Canadian Press
Windsor Star
April 9, 1998

After years of chipping away at its massive debt, Ontario Hydro will add $1 billion to the figure this year and see no further reductions at least until 2000, says a business plan released Wednesday.

The report underlines the heavy toll taken on the Crown corporation’s bottom line by a sweeping project to overhaul its * troubled nuclear division.

Hydro, among Canada’s largest publicly owned corporations, says there’s nothing new in the figures that reflect a decision to spend * up to $8 billion on the nuclear recovery program and hundreds of millions more on other improvements.

It also won’t affect a promise to keep rates frozen for consumers until the turn of the century, the plan said.

Critics say the figures highlight the electrical giant’s sorry state.

* "The major theme of the report is the nuclear program is dragging Hydro down by the throat," said Tom Adams of the watchdog group Energy Probe. "It confirms Hydro is in a financial death spiral."

The report indicates that Hydro’s debt will jump to $32.3 billion this year from $31.1 billion in 1997, and stay at around the same level at least until 2000.

* The debt was stacked up over years of building expensive nuclear reactors. In the mid-1990s, the elimination of thousands of jobs and other cost cutting, combined with repeated rate hikes, began to wipe up the red ink.

Money redirected

But cash flow earmarked for debt reduction will be spent now on the * nuclear recovery program and other upgrades to the company, the plan said.

The corporation had earlier announced a 1997 write-off of $6.3 billion, believed to be the largest in Canadian corporate history, * to cover much of the cost of the nuclear refurbishment.

But the utility stresses that the investment is needed to keep the reactors viable and will result in a much more productive operation.

The plan also said Ontario Hydro will prepare for competition in the electricity market partly by getting rid of workers "no longer required."

The plan doesn’t mention a target for the "downsizing initiative."

But spokesman Terry Young noted that Hydro chairman Bill Farlinger has suggested a 10-per-cent reduction in the company’s 22,000-strong workforce might be in order.

"We have an over-complement of staff," Young said.

The corporation also wants to create more flexible labour relations and curb pension and benefits costs, the document says.

The company has asked that the workers’ $3.5-billion pension surplus be handed entirely to the corporation, said Power Workers’ Union president John Murphy.

The union has agreed only to share the surplus with Hydro in what’s become a major contract dispute.

Murphy said further staff reductions could be counterproductive, as proven during the ice storm when 100 laid-off linesmen had to be called back.

"The idea of simply cutting staff as a way of meeting a budget goal is a very short-sighted approach," he said.

Daniel Leblanc
The Ottawa Citizen
May 7, 1998

Less than two years before the breakup of its monopoly on the electricity market, Ontario Hydro is still using the provincial government’s signature to borrow billions — money Ontarians could have to pay back.

It’s a spending strategy that critics say may be aimed at helping Hydro maintain a virtual lock on the industry, even after private power companies are allowed into the market in 2000.

And here’s the shocker for Ontario’s energy consumers: Analysts estimate that more than half of Hydro’s $32-billion debt — likely to balloon if new loans are approved — could soon be transferred to Ontarians through increases to hydro bills or income tax.

Don Macdonald, a former federal finance minister who chaired a committee in 1996 on the introduction of competition into Ontario’s electricity market, says Hydro should stop spending public money now.

"The Hydro management is trying to run (the company) in such a way that it’ll continue to have the same dominating position in the market that it has now. I don’t think that’s acceptable from Ontario’s standpoint.

"These people are not competent to run a hydro system. We know that," he says. "They should only be getting enough money to prevent the system from breaking down."

Ontario Hydro is planning to borrow $10 billion in the next three years — or more than $3,000 per bill-payer — yet it will build nothing new. Even though $10 billion is roughly the price of a new nuclear generating station, the money is to be used largely for debt-refinancing.

And a huge portion of Hydro’s debt will likely be "stranded" before the opening of the free market — meaning up to $20 billion would be written off its books and transferred to others.

The move would be used to prevent Hydro from going bankrupt in a free market because its prices are uncompetitive.

And the probable victims of this "stranding" would be all Ontarians, who could end up paying $10 billion to $20 billion of Hydro’s debt through their income tax or a special tax on electricity.

As a result, consumers would reap little immediate benefits from the breakup of Ontario Hydro’s monopoly. Experts say that in order to pay for Hydro’s debt, electricity prices in the province won’t soon drop and may actually rise.

They also claim that Ontario Hydro, with the help of borrowed money, is angling to secure a dominant position in the province’s $10-billion-a-year electricity market, aiming to beat the newcomers that will appear in 2000.

Groups such as the Municipal Electric Association and the Independent Power Producers’ Society of Ontario have asked the Ontario government to immediately stop guaranteeing, or co-signing, Ontario Hydro’s loans.

In November 1997, the Ontario government announced the introduction of retail competition in the province’s electricity market in 2000 and the separation of Ontario Hydro’s electricity production and transmission systems. It said Hydro’s debt guarantee would end in 2000.

In the meantime, Ontario Hydro is planning to borrow $4.7 billion in 1998, $3 billion in 1999 and $2.5 billion in 2000.

Some of the money will be used to refinance maturing debt, but some money could be used to prepare the utility for competition. In order to compete, Ontario Hydro’s facilities, especially its nuclear plants, need massive investments.

The public utility also took a $6.6-billion writeoff last year, almost all of it to clear the way for future expenditures. In a sense, says Energy Probe’s Tom Adams, Ontario Hydro is putting money in its 1997 books that it will only spend later.

The $4.6 billion it set aside in 1997 for the Nuclear Assets Optimization Plan will be spent from 1998 to 2001 — two years after private companies will have been allowed to compete with it.

For example, some of the coal that will be used to produce power in 2001 has already been paid for. When Ontario Hydro starts competing against private plants, from large American utilities to local co-generating companies, it will be benefitting from subsidized energy, Mr. Adams said.

With the publication of its 1997 annual report yesterday, it is clear that Ontario Hydro is facing a debt nightmare unprecedented in Canadian business history:

– Its 1997 net losses were $6.3 billion;

– It incurred a $6.58-billion writeoff last year;

– Its debt and liabilities, at $45 billion according to the Ministry of Finance, are almost half the size of the Ontario government’s own debt;

– It has $4.5 billion in negative equity (it owes more that it’s worth).

Another problem is that Ontario Hydro’s accounting rules overestimate by almost 200 per cent the lifespan of nuclear generators. Hydro had long suggested that they would last 40 years, and used this figure to calculate the depreciation of nuclear assets such as heavy water.

However, the average age of the nuclear units mothballed last August, as a result of a scathing report on their performance, was more like 22 years, said the Independent Power Producers’ Society.

If Hydro changed its accounting practices, it could end up with even more liabilities.

Jake Brooks, executive director of for the independent producers’ society, says Hydro is using public money to finance its way out of its problems. Since the debt is co-signed by the government, he says, Hydro has access to easy capital and doesn’t have to get the market’s approval for its plans.

"This is being treated as the last hurrah with the public’s money. The public won’t be pleased to see the results, given what has happened with the last few billions."

Mr. Brooks and others fear that the Nuclear Assets Optimization Plan, which was put in place to restore underperforming nuclear plants, won’t solve ongoing problems at Bruce, Pickering and Darlington.

The plan "didn’t have detailed development of numbers and, what’s worse, didn’t offer any guarantees in term of power output or financial results," Mr. Brooks said.

The plan, which was set out by American nuclear expert Carl Andognini, is drastic: shutting down seven reactors and repairing 12 others, as well as a massive retraining and redeploying of employees.

But economist David Argue, who has studied Ontario Hydro for 15 years, says it’s only "more money down the black hole.

"The philosophy behind Andognini’s plan is: ‘We know it’s broken, but we can fix it.’ That’s always been the philosophy at Ontario Hydro: ‘We know we’ve made mistakes in the past, but next time we’ll do it right.’ "

In fact, Mr. Andognini said in the 1997 annual report that last year, "We learned there was nothing wrong that could not be fixed."

Mr. Argue pointed to Hydro’s past nuclear blunders to illustrate the difficulties ahead, but also to warn that the cost of the plan could end up being substantially higher.

The Darlington plant was to be completed in 1983 at a cost of $2.5 billion. Instead, it was finished 10 years later at a cost of $14.4 billion.

"It’s certain that the amount of money spent on the (plan) will be above what they predicted," Mr. Argue said. "As they work on the plants, more problems will be uncovered. Once they get into it, we’ll see costs well above what Andognini said was needed to get the plants back to world standards."

Analysts such as Mr. Argue and Mr. Adams also point out Hydro’s long-standing habit of underestimating costs and overestimating benefits.

As late as its November 1997 third-quarter report, Ontario Hydro was forecasting a potential writeoff of $475 million. Three months later, a writeoff of $6.58 billion was announced.

In its 1996-1999 corporate business plan, Ontario Hydro forecast nuclear production of 91.6 terawatt/hour for 1999. In this year’s plan, the forecast is 59 terawatt/hour.

In 1993, it was predicted that Ontario Hydro’s debt-to-equity ratio for 1997 would be below 80 per cent. It is, in fact, 115 per cent (for every $1 in equity, there is $1.15 in debt).

"Either they don’t know what they are doing, or they are misleading decision makers," Mr. Argue contended.