Energy Probe

Daniel Leblanc
The Ottawa Citizen
May 9, 1998

Ontario’s energy minister says the government won’t let Ontario Hydro increase its debt level — exactly what the utility is requesting.

Ontario Hydro is set to ask the provincial cabinet to approve $4.7 billion in loans this year, which would add $800 million to its $31-billion debt.

Ontario Hydro is looking at the government to co-sign these loans. Getting approval, however, won’t be easy.

"We have told them that we would be very prudent as a cabinet, and that we are not inclined in approving borrowing beyond the current debt level," says Jim Wilson, minister of energy, science and technology.

"They are borrowed to the limit now. If they were a private sector company, they’d be bankrupt."

Ontario Hydro holds more debt than what its assets are worth.

Under its plans to borrow $4.7 billion, $800 million would be used for badly needed repair to nuclear plants, while the rest would be used to refinance maturing debt.

In a white paper released last November, the government said Ontario Hydro’s loan-guarantee arrangement with the province will end by 2000 — the point at which competition comes to Ontario’s electricity market.

Some groups, however, say now is the time to stop feeding public money to Ontario Hydro.

"The Ontario government should say, ‘No, thank you (to the loan request). Our taxpayers have enough burden as it is,’ " says Tom Adams of Energy Probe, a nuclear energy watchdog.

"This is a basic taxpayer protection issue, and that’s something the Tories can understand."

Ontario’s Power Corporation Act states that loans incurred by Ontario Hydro must be approved by the provincial cabinet.

Requests for the $4.7 billion in loans still need to make their way through the Ministry of Finance before they get to cabinet. Once there, the government will be pressured to refuse their approval by groups such as the Independent Power Producers’ Society of Ontario, the Municipal Electric Association and the Association of Major Power Consumers in Ontario.

These groups have stated that the sooner the Ontario government stops co-signing Ontario Hydro’s loans, the better.

When they are guaranteed, loans are easy to obtain on financial markets, because the Ontario government shares the ultimate responsibility for repayment. With competition looming, private players in the electricity market say Ontario Hydro should have to fight for its dollars like any other company — and probably pay higher interest rates.

"Ontario Hydro has to start paying the real market rates for its loans," says Arthur Dickinson, president of the Association of Major Power Consumers in Ontario, which represents automotive, mining and other electricity-intensive industries.

Ontario Hydro’s critics say the $4.7 billion in loans would help the utility continue to dominate the electricity market even after the arrival of competition. And they point to Ontario Hydro’s dream of being a huge player in the North American market.

In a speech last March, Hydro chairman William Farlinger said his corporation’s goal was to become one of the top 12 electricity producers on the continent.

"While we will still want to generate electricity for the people of Ontario, we will be looking to compete for power contracts throughout North America, especially in the northeast," he told the Toronto Board of Trade.

Many electricity analysts, however, fear that in order to achieve this position, Ontario Hydro will have to dump $10 billion to $20 billion of its debt on Ontarians, who would pay it through increased hydro bills or taxes.

In its current debt-riddled situation, the utility would struggle to survive in a competitive environment. That’s why the Ontario government might be forced to "strand" a portion of the utility’s debt, by taking it off its books and paying it off through a rate increase.

But Ontario Hydro spokesman Terry Young says that if the corporation cannot obtain the $4.7-billion loan, it could be forced to shut some of its remaining nuclear reactors. The move, he says, would only add to the stranded debt.

Daniel Leblanc
The Ottawa Citizen
May 10, 1998

Suspicious eyes are cast over every one of Ontario Hydro’s moves.

Be it borrowing money, hiring lobbyists, producing an annual report or fixing its plants, Ontario Hydro is constantly accused of shadowy dealings.

And as competition is set to hit Ontario’s electricity market in 2000, the accusations only get stronger.

Publically owned Ontario Hydro, it seems, cannot act as a normal business. That’s because it isn’t.

If Ontario Hydro were a private-sector company, it would be bankrupt. With $45 billion in debt and liabilities, it owes more money than its assets are worth.

Still, private power producers, who want a piece of Hydro’s $9-billion monopoly on the province’s electricity market, are scared of the utility.

They especially fear its efforts to maintain a grip on the market and beat competition to the punch.

An umbrella group called the Stakeholders’ Alliance for Electricity Competition and Consumer Choice has written to Ontario’s Energy Minister Jim Wilson, mainly to urge him to keep Hydro in check over the upcoming months.

The alliance says the utility is negotiating long-term power supply contracts with industrial customers, in order to keep its business even after new power producers enter the market.

"There is a distinct risk for the government should a perception develop that it is supporting predatory pricing by Ontario Hydro," wrote David McFaddan, chairman of the alliance.

The alliance also expressed concern that Hydro, which lost $6.3 billion in 1997, was trying to get others to pay for its debt.

Because it is said that Hydro cannot support its entire debt in an open market — its costs are too high, its performance too low — the Ontario government will probably be forced to "strand" a portion of its debt.

That would take between $10 billion and $20 billion in debt off Hydro’s books.

The alliance wrote to Mr. Wilson that Ontarians would probably have to pay for it, through increased electricity rates or taxes prior to the introduction of competition in the year 2000.

And that’s not the only correspondence that found its way to the minister’s office.

Three weeks ago, an important player in the process to restructure Ontario’s electricity market, Ronald Daniels, wrote to complain about Hydro’s lobbying efforts.

Mr. Daniels chairs the Market Design Committee, which is making recommendations to the government on the structure of Ontario’s future electricity market.

It had voted 12-2 to dilute Ontario Hydro’s power over the electricity transmission system.

Although Ontario Hydro sits on the committee, it hired a Tory organizer to lobby the government against this decision.

In a strongly worded letter, Mr. Daniels countered that the work undertaken by lobbyist Leslie Noble, who was executive director of the 1995 Tory election campaign, was "inimical to the integrity of the debate and analysis that is taking place within the committee."

There are plenty of other complaints against Ontario Hydro.

Last year it incurred a $6.6-billion charge — or writeoff — in order to restore some efficiency to its badly damaged nuclear plants. It was as if the utility had loaned itself money, since the charge would not be fully spent before 2001.

Ontario Hydro said the move was simply to recover the massive investment already made in nuclear power, instead of letting it go to waste by shutting down plants.

But groups such as the Independent Power Producers’ Society of Ontario, as well as individuals such as former federal minister Don Macdonald saw it as a delusion of grandeur. Ontario Hydro, they say, is willing to bet the bank to become one of North America’s electricity potentates.

Economist David Argue shares in many of the criticisms against Ontario Hydro. This week, he railed against its 1997 annual report, after having spent more than 15 hours trying to make sense of it.

"This has brought creative accounting to new heights," he said, mumbling about incremental spending, refinancing of non-depreciated assets, and borrowed profits.

Ontario Hydro’s critics say it isn’t hard to find reasons to rap the public utility. Nonetheless, the trade carries its risks.

It could be said that Tom Adams, a Ontario Hydro specialist at Energy Probe, has prematurely greying hair.

And the folks at IPPSO: Seems that in these hectic times in the electricity field, they need a Tylenol dispenser in their washroom.

Tom Adams
Energy Probe
May 25, 1998

Issue identification:

Bulk metering (also called master metering) of multi-occupancy residential and commercial buildings and flat rate water heaters result in excessive consumption, and there elimination should be a priority target for energy conservation. Individual metering improves customer choice, reduces customer bills, and advances sustainable development. Bulk metering is inconsistent with the sustainable development mission of Ontario Hydro. The load control benefits of flat rate water heaters can be provided by other incentive mechanisms to encourage consumers to participate in load control programs.

Proposal:

1. Ontario Hydro’s service company "Servco" should provide the OMDC with a comprehensive assessment of the extent of bulk metering and flat rate water heating in Ontario including the following:

• the number of bulk metered utility customers (broken out by utility or region if possible, and also broken out by the portion of the bulk metered customers with submetering, also broken out by residential rental, residential condo, commercial rental, commercial condo);

   

• the number of occupancy units represented by the bulk metered customers identified above; and

   

• the annual peak and energy loads represented by bulk metered customers as disaggregated above and

   

• the number of flat rate water heaters in use in Ontario and the annual energy usage of this equipment.

   

2. The OMDC should recommend that the Ontario Energy Board have the mandate and authority to oversee the elimination of existing bulk metering and flat rate water heating by distribution utilities.

3. The OMDC should recommend that the provincial government ensure that building codes, building regulations, rent legislation, and condominium legislation support individual metering of apartments and commercial suites.

Facts:

As of 1991, there were about 900,000 bulk metered residential suites in Ontario with a total annual electricity consumption of about 5.9 TWh [HR 22 5.2.23]. This consumption — about 4% of Ontario Hydro’s sales in the province — does not include bulk metered commercial suites. Ontario Hydro has estimated that bulk metering of apartments results in increase in energy use of 40% or more [HR 22 Ex. 5.3.2: Schedule D]. If this is still true, the value of the energy wasted due to bulk metering in the residential market alone at current rates is about $120 million annually.

History:

In 1980, the Porter Commission recommended:

"To encourage the prudent and efficient use of electricity, such features as declining block rates, uncontrolled flat-rate water heaters, and bulk metering of new electrically heated apartment building should be modified or eliminated" [Royal Commission on Electric Power Planning, Concepts, Conclusions, and Recommendations, Recommendation 11.8, February 1980].

In 1992, the OEB found:

"The Board agrees with one part of ADMIC’s argument namely that there exists a major opportunity for demand savings in electrically heated apartment blocks by installing individual meters" [HR 21 Report of the Board: 3.6.5],

and urged Hydro to:

"quickly formulate a plan in conjunction with the municipal utilities to take advantage of the potential energy savings in these areas" [HR 21 Report of the Board: 3.6.8].

In 1993, Ontario Hydro cancelled its program to encourage individual metering.

Explanation for the High Rate of Bulk Metering in Ontario:

Bulk metering is in the narrow financial self-interest of existing utilities. The excessive consumption created by bulk metering is paid for at retail prices. For distribution utilities, bulk metering also reduces accounting costs including metering, billing and collection.

In a July 1990 report, Ontario Hydro noted:

"Despite the substantial savings potential of individual meters, their market penetration in Ontario is limited, particularly in Metro Toronto. Most Metro utilities prohibit individually-metered rental apartments" [HR 22 Ex. 5.3.7].

The "Recommendation for Submission to the Board of Directors", which led directly to the 1993 cancellation of the program to eliminate bulk metering notes that although building owners and the OEB support the program, the MEA and most municipal utilities oppose individual metering [HR 22 Ex. 5.3.2]. The Submission goes on:

"It is recognized that, although a cost-effective program, individual metering would have been a ‘hard sell’ in the market place. Ontario Hydro’s current budget constraints have made it necessary to question the introduction of an unlaunched program in the present economic climate in which it operates. It is therefore proposed that all program funds be cancelled for individual metering" [5.3.2, emphasis added].

Energy Probe assumes the phrase "market place" in this context refers to municipal utility customers of Ontario Hydro rather than end users of electricity.

Alternatives to Bulk Metering:

Individual metering should be considered a quality of service issue. The OEB should regulate service quality, not just rates, because without service quality regulation, utilities under incentive regulation will have an incentive to cut in this area.

One solution to existing bulk metering is submetering individual units, where the submetering information is used to allocate bulk metered power costs. In the existing regulatory system, submetering has rate advantages over pure individual metering because large bulk metered customers are in a more favourable rate class than households.

In rental situations, collection issues associated with unit-billed utility services can be dealt with by means of prepayment meters or utility security deposits.

Regulatory efforts to eliminate bulk metering should ensure that consumers who now pay for electricity service bundled with their rent are not double charged when the transition occurs.

Alternatives to Flat Rate Water Heaters:

Flat rate water heaters are often used by utilities for load control. These water heaters are wired around the customer’s meter. Switching to metered but load controlled water heating will require wiring changes. Real time pricing would give consumers an incentive to control their own loads.

In the absence of rate time pricing, customers should be compensated for participating in load control programs through fixed payments or bill credits.

Very large hot water users have an incentive to stay on flat rate service. Some fuel switching may occur when flat rate service is no longer available.

James Rusk and Martin Mittelstaedt
The Globe and Mail
June 10, 1998

TORONTO — The chairman of Ontario Hydro has almost doubled the amount of debt that he says the utility must get rid of to be able to operate like a private company.

The comments by William Farlinger come as the Ontario Government tabled legislation yesterday to split the huge utility into four parts.

Two will generate and distribute electricity and they will be required to take on only the part of the debt that they can be expected to carry when they have to operate as private businesses.

The debt they cannot afford to carry, which is called stranded debt, will be taken on by a new Crown corporation. Last year, Hydro estimated that the stranded debt would be $16-billion; yesterday, Mr. Farlinger said it could be as much as $30-billion.

Later yesterday, Energy Minister Jim Wilson introduced legislation to create a new market structure allowing open competition in 2000, ending nearly a century of monopoly for one of the continent’s largest electrical utilities.

"All over the world, the trend is towards competition and open markets and away from monopoly state control," Mr. Wilson told reporters. "Until the 1980s, Ontario enjoyed electricity rates that were very attractive to industry; they made this province the economic engine of Canada. That advantage has eroded."

Mr. Wilson said that Ontario’s electricity costs are now the third highest in Canada, behind only Nova Scotia and Prince Edward Island, and that this has to change if the province is to regain its competitive advantage and create employment.

Thomas Adams of Energy Probe, one of Hydro’s most trenchant critics in recent years, said that "this is a historic day." "This marks the end of Hydro’s 92-year reign as the controller of everything electrical in Ontario," he said.

"This is a totally different electricity system. This is one where there are not going to be captive customers like we used to have, where the power producers are going to be accountable to their consumers. They are not ratepayers any more, they are customers."

Under the proposed law, four new companies will be created out of Ontario Hydro: two operating companies and two Crown agencies. The two operating companies will be owned by the government but will not be Crown corporations, as Hydro is, with the protection of a financial guarantee on their debt.

One of these companies will take over Hydro’s electricity-generating business, including the nuclear, hydro-electric and fossil-fuel plants. The other will take over its transmission and distribution system and its retail electrical business in rural and Northern Ontario.

The government will also create a small Crown corporation, called the Independent Electricity Market Operator, which will supervise the operation of the electrical-distribution system so that customers, distributors and generators all have fair access.

Hydro’s $32-billion in provincially guaranteed debt — or about $2,900 for each of the province’s 11 million residents — will be held by a Crown agency, the Ontario Hydro Financial Corp.

But the estimates provided yesterday by Mr. Farlinger indicate that the stranded-debt problem may be more serious than previously thought.

In addition to the provincially guaranteed debt, Mr. Farlinger said, other amounts Ontario Hydro must pay off, including costs for decommissioning nuclear stations and disposing of their atomic wastes, raise its liabilities to about $47-billion.

Using Mr. Farlinger’s estimates, there is a possibility that more than half of this total isn’t economically viable.

"I think the calculation will be between $20-billion and $30-billion," Mr. Farlinger said, referring to the amount of stranded debt.

He did not offer an explanation for his stranded-debt figures, which exceeded the corporation’s previous estimate of $16-billion. His liability figure also exceeded the amount the company used in its latest audited financial statement.

Mr. Farlinger’s estimates may reflect a view that the financial problems at Hydro are worse than is commonly thought, but it is also possible that the chairman is trying to reduce the debt levels that the utility will take into a competitive market.

Although the proposed law would give the government the authority to impose a debt-repayment charge on all electricity used in the province, the government did not spell out how this would be managed, other than to say that the municipal and provincial electricity companies would pay grants in lieu of taxes to pay down the debt.

Mr. Farlinger favoured Hydro or its successor companies using future profits to pay down the stranded debt. Currently, Crown corporations do not pay income tax and Mr. Farlinger said this type of repayment approach would put both private and public utilities in Ontario on a more equitable footing in a competitive market.

Mr. Wilson said that the Finance Ministry will issue a discussion paper early in July that will make proposals for dealing with stranded debt and that will detail how much of Hydro’s existing debt will be taken on by the new commercial companies.

The level of stranded debt has another important consequence. The higher the figure, the lower the amount of indebtedness that will be carried by Hydro in the new market structure. This would be something of a windfall for the utility because a low debt level would make it more competitive against others hoping to sell power in the Ontario market.

Battles over stranded debt have broken out in the United States, where many utilities that once had a monopoly find they cannot compete effectively with their existing debt burdens.

Turning to electricity rates, Mr. Farlinger said he expected open competition to lead to lower prices.

"Nobody really knows what the price of power is going to be when competition comes in," he said. "History would tell us the prices go down, but that’s a leap of faith."

Mr. Wilson’s legislation also would strengthen the Ontario Energy Board, which would regulate both the new electrical system and, as it does now, the natural-gas business in the province

.

The proposed law also would require a shakeup of municipally owned electrical-distribution utilities over the next two years, as they are commercialized in a manner similar to Hydro.

The law also would allow the government to define pollution-disclosure standards for electricity, so customers could choose a greener supplier, and to define the emissions standards that generators would have to meet to sell in Ontario.

James Rusk and Martin Mittelstaedt
The Globe and Mail
June 10, 1998

TORONTO — The chairman of Ontario Hydro has almost doubled the amount of debt that he says the utility must get rid of to be able to operate like a private company.

The comments by William Farlinger come as the Ontario Government tabled legislation yesterday to split the huge utility into four parts.

Two will generate and distribute electricity and they will be required to take on only the part of the debt that they can be expected to carry when they have to operate as private businesses.

The debt they cannot afford to carry, which is called stranded debt, will be taken on by a new Crown corporation. Last year, Hydro estimated that the stranded debt would be $16-billion; yesterday, Mr. Farlinger said it could be as much as $30-billion.

Later yesterday, Energy Minister Jim Wilson introduced legislation to create a new market structure allowing open competition in 2000, ending nearly a century of monopoly for one of the continent’s largest electrical utilities.

"All over the world, the trend is towards competition and open markets and away from monopoly state control," Mr. Wilson told reporters. "Until the 1980s, Ontario enjoyed electricity rates that were very attractive to industry; they made this province the economic engine of Canada. That advantage has eroded."

Mr. Wilson said that Ontario’s electricity costs are now the third highest in Canada, behind only Nova Scotia and Prince Edward Island, and that this has to change if the province is to regain its competitive advantage and create employment.

Thomas Adams of Energy Probe, one of Hydro’s most trenchant critics in recent years, said that "this is a historic day." "This marks the end of Hydro’s 92-year reign as the controller of everything electrical in Ontario," he said.

"This is a totally different electricity system. This is one where there are not going to be captive customers like we used to have, where the power producers are going to be accountable to their consumers. They are not ratepayers any more, they are customers."

Under the proposed law, four new companies will be created out of Ontario Hydro: two operating companies and two Crown agencies. The two operating companies will be owned by the government but will not be Crown corporations, as Hydro is, with the protection of a financial guarantee on their debt.

One of these companies will take over Hydro’s electricity-generating business, including the nuclear, hydro-electric and fossil-fuel plants. The other will take over its transmission and distribution system and its retail electrical business in rural and Northern Ontario.

The government will also create a small Crown corporation, called the Independent Electricity Market Operator, which will supervise the operation of the electrical-distribution system so that customers, distributors and generators all have fair access.

Hydro’s $32-billion in provincially guaranteed debt — or about $2,900 for each of the province’s 11 million residents — will be held by a Crown agency, the Ontario Hydro Financial Corp.

But the estimates provided yesterday by Mr. Farlinger indicate that the stranded-debt problem may be more serious than previously thought.

In addition to the provincially guaranteed debt, Mr. Farlinger said, other amounts Ontario Hydro must pay off, including costs for decommissioning nuclear stations and disposing of their atomic wastes, raise its liabilities to about $47-billion.

Using Mr. Farlinger’s estimates, there is a possibility that more than half of this total isn’t economically viable.

"I think the calculation will be between $20-billion and $30-billion," Mr. Farlinger said, referring to the amount of stranded debt.

He did not offer an explanation for his stranded-debt figures, which exceeded the corporation’s previous estimate of $16-billion. His liability figure also exceeded the amount the company used in its latest audited financial statement.

Mr. Farlinger’s estimates may reflect a view that the financial problems at Hydro are worse than is commonly thought, but it is also possible that the chairman is trying to reduce the debt levels that the utility will take into a competitive market.

Although the proposed law would give the government the authority to impose a debt-repayment charge on all electricity used in the province, the government did not spell out how this would be managed, other than to say that the municipal and provincial electricity companies would pay grants in lieu of taxes to pay down the debt.

Mr. Farlinger favoured Hydro or its successor companies using future profits to pay down the stranded debt. Currently, Crown corporations do not pay income tax and Mr. Farlinger said this type of repayment approach would put both private and public utilities in Ontario on a more equitable footing in a competitive market.

Mr. Wilson said that the Finance Ministry will issue a discussion paper early in July that will make proposals for dealing with stranded debt and that will detail how much of Hydro’s existing debt will be taken on by the new commercial companies.

The level of stranded debt has another important consequence. The higher the figure, the lower the amount of indebtedness that will be carried by Hydro in the new market structure. This would be something of a windfall for the utility because a low debt level would make it more competitive against others hoping to sell power in the Ontario market.

Battles over stranded debt have broken out in the United States, where many utilities that once had a monopoly find they cannot compete effectively with their existing debt burdens.

Turning to electricity rates, Mr. Farlinger said he expected open competition to lead to lower prices.

"Nobody really knows what the price of power is going to be when competition comes in," he said. "History would tell us the prices go down, but that’s a leap of faith."

Mr. Wilson’s legislation also would strengthen the Ontario Energy Board, which would regulate both the new electrical system and, as it does now, the natural-gas business in the province

.

The proposed law also would require a shakeup of municipally owned electrical-distribution utilities over the next two years, as they are commercialized in a manner similar to Hydro.

The law also would allow the government to define pollution-disclosure standards for electricity, so customers could choose a greener supplier, and to define the emissions standards that generators would have to meet to sell in Ontario.

Thomas Adams
Energy Analects
July 31, 1998

Ontario’s new energy legislation, now through second reading in the house, sets the stage for competition in electricity production and marketing, expansion of gas trading in Ontario, separation of competitive and monopoly activities, and strong public regulation of energy monopolies. While the legislative program is strong, the government’s financial analysis of Ontario Hydro’s liabilities and its plan for discharging those liabilities is weak.

There is much to praise in Ontario’s new energy legislation:

The legislation contemplates disclosure requirements for environmental performance and new mechanisms to maintain or improve environmental performance. Using "virtual" taxation, the new legislation will eliminate the inefficient tax holidays for public utilities, levelling the playing field between public and private enterprises. Municipalities will have a direct interest in seeing the stranded liabilities paid off, since they will receive the proceeds of the virtual taxation once those liabilities have been discharged. The Ontario Energy Board receives extensive new powers to directly investigate potential violations of its rules. The OEB is empowered to monitor and regulate not just the cost of monopoly distribution service to customers but also the quality of that service, protecting customers from any utility efforts to cut costs at the expense of service. The legislation makes a good break with parliamentary fiscal tradition by specifically permitting the creation of a special purpose account to deal with Ontario Hydro’s liabilities. The legislation creates an independent electrical safety authority. Historically, there were clear cases of Ontario Hydro using its control over electrical inspection to harass competitors, perhaps the most egregious example of which was the small district heating cogen facility owned by Trigen and London Hydro where Ontario Hydro’s inspectors ordered upgraded features not used at Ontario Hydro’s own facilities.

The legislative package gives rise to a number of issues that hold the potential for good or bad outcomes, depending on how they are managed.

A particularly serious concern is potentially conflicted roles for the OEB. The legislation would empower the OEB to create rules governing the conduct of parties it regulates, grant the board licensing authority over parties, and allow it to adjudicate rates and other matters. Potential conflicts between these different functions need to be considered.

To receive a licence to trade gas or electricity, a commercial party might be required to reveal to the OEB’s licensing director details about its company’s capabilities and intentions. If this same commercial party were to intervene on some regulatory matter before the board, it might be concerned about the adjudicator’s independence if confidential business information became known to the panel hearing the case.

To prevent conflicts from impairing the functioning of regulation, roles should be clearly demarcated. Separation within the OEB between the director of licensing and the rule makers from the rest of the adjudicators might be necessary.

Another potential stumbling point relates to the Independent Market Operator. The composition of the IMO’s board of directors is not specified in the legislation. The MDC has recommended an interested, "stakeholder" board. This approach is not specified in the legislation, but if it is adopted the IMO may be weakened.

The IMO will have regulatory powers, including the power to make rules and impose financial penalties on market participants, which runs contrary to the belief that regulatory bodies composed of parties with financial interests in the outcome of decisions can not be independent. A potential saving grace is that the decisions of the IMO are generally subject to OEB oversight, but this is a thin thread to rely on. A better solution would be for the minister to appoint to the IMO only those who do not have commercial interests in the outcomes of their decisions.

Another delicate area relates to the extinguishment of contracts with customers to which either Ontario Hydro or the municipal utilities areparties. These contracts include cogeneration avoidance agreements, contracts for subsidized power, and other such tools of the monopolists. If the contracting parties other than Ontario Hydro or the municipal utilities want out of these contracts then it is perfectly acceptable for government to extinguish the deals. Government has the right, like any owner, to direct the companies it has created and effectively owns in the manner it wishes. Getting rid of the deals in question will help advance the cause of competition. Except for cases where the non-governmental party is happy to terminate the arrangement, out of respect for the law, government should not be abrogating contracts, even if the circumstances under which the contracts were signed have changed. It may be necessary to compensate injured contracting parties to obtain their consent to collapse the deals.

There are also some areas where the approach adopted in the legislation is either wrong or does not go far enough.

The legislation does not grant the OEB the power to order divestiture of non-monopoly enterprises and functions. The OEB would be better able to police market power and intra-corporate transfers of costs if it had the power to order divestiture. Particular generating facilities that might play a key role in price formation might be candidates for divestiture, as would gas or electric utility affiliates operating in non-monopoly businesses, if necessary to promote competition and to prevent cross-subsidies. The Board may not have to exercise this power often, but having it may improve the Board’s ability to influence utilities in the public interest.

The ownership structure set out for the IMO is for it to be a non-share capital corporation, a surprising choice given the government’s unhappy experience with the Toronto District Heating Corporation. TDHC is deeply encumbered in debt with little prospect for returning the principle, is not renewing its physical plant, has not been able to modernize its system to incorporate cogeneration, and has been wracked by failed privatization efforts. The accountability problem resulting from no clear ownership structure has contributed to all of these problems. The IMO should have a clear ownership structure to encourage accountability.

Weak Stranded Cost Analysis

In early July, the Ontario Ministry of Finance released the long awaited results of a study it has done on financial issues associated with the electricity reform process, particularly stranded liabilities. The study is based on extensive consultation with stakeholders as well as expert advice from Queen’s University economist Bryne Purchase, and the firms Goldman Sachs, CIBC Wood Gundy, and Midland Walwyn. The performance of the Ministry of Finance so far suggests that management of financial issues may prove to be a bruise on the electricity reform peach.

The study itself, however, is blemished by factual problems that indicate careless work. For example, in a discussion of vesting contracts, the study incorrectly asserts that vesting contracts were used to protect the UK coal industry during electricity restructuring.

Ontario Hydro reports, and Ministry of Finance’s stranded cost paper accepts without comment, a current radioactive waste disposal and decommissioning liability of $2.8 billion, a figure predicated on the ability of the nuclear fleet to operate for 40 years at high capacity factors. In fact, realistic estimates of the remaining life of Hydro’s 12 active reactors suggests a current liability perhaps twice or three times higher. Annual contributions, reflecting the remaining service life, require drastic adjustment, yet the Ministry of Finance accepts the current contributions as appropriate.

A compounding problem not even addressed in the study is that the "provision" on Hydro’s books for radioactive waste disposal and decommissioning is an accounting line item only with no cash to show for it. The fact is that the cash collected for disposal and decommissioning was consumed by Ontario Hydro, and replenishing the reserve will be costly.

The Ministry’s plan for a volumetric stranded cost recovery charge has several flaws, not least of which is its name – the "Competitive Transition Charge" – which suggests that competition caused these costs, rather than simply revealed them. The charge is to be payable by all users, which is fine in principle but problematic in the case of customers of Cornwall Electric who were never a part of the Ontario Hydro system. The most basic problem with the volumetric charge proposal is that it is inefficient because it distorts the marginal price paid by consumers.

The Ministry of Finance expects its administratively determined, official stranded cost will be announced in December. It is hard to imagine how the current process of behind-closed-doors discussions and desk studies can, in the absence of privatization, arrive at a figure that will prove realistic and reliable.

According to the Ministry of Finance, valuation of the new commercialcompanies created out of Hydro, Genco and Servco, will be made based in part on the business plans of those organizations. Even a casual survey of Ontario Hydro’s past business plans compared to actual results reveals such a vast chasm between plan and practice that one can only be very concerned about continued reliance on this source.

The Ministry of Finance study skirts the subject but the likelihood is that taxpayers will get stung for Ontario Hydro’s past mistakes. The new legislation specifically envisions the Ontario government taking on some of Ontario Hydro’s obligations. The new Ontario Hydro Financial Corporation will borrow under the direction of the cabinet, raising the possibility of future claims by creditors against the public purse even where borrowings are not specifically guaranteed by the province.

(Mr. Adams is a consultant with Borealis Energy Research Associates, a principal client of which is the environmental organization Energy Probe, which he represents as executive director.)

Thomas Adams
National Post
October 28, 1998

Shutting down Ontario’s nuclear plants should put $7 to $16 billion into the hands of Ontario taxpayers, according to new information released by the Ontario Ministry of Finance at a press conference Monday. This startling conclusion is based on the government’s $5 billion valuation of the power plants that the new government-owned generating company — a successor to Ontario Hydro — will be inheriting. There’s only one way for Hydro’s power plants — including Niagara Falls and other hydro-electric money-printing machines — to be worth so little. The province’s 20 nuclear reactors have a negative asset value.

The new power generation company — a de facto monopoly for at least 4 years — includes 68 provincially-owned hydro-electric stations and 28 fossil units. Based on recent sales of non-nuclear stations in other jurisdictions, Energy Probe estimates the worth of the hydro-electric stations to be at least $10 billion — perhaps as much as $15 billion — and that of the fossil stations to be no less than $2 billion, and more realistically $6 billion. Combined, they should fetch $12 to $21 billion. For the new generating company to be worth a mere $5 billion, those nuclear assets really represent liabilities of $7 to $16 billion.

To determine the value of Hydro’s existing generating assets, the Ministry of Finance has properly excluded historic debts, disposal costs for nuclear waste already created, and decommissioning costs — liabilities that will total tens of billions more — because Ontarians are saddled with these costs whether or not the nuclear plants continue to operate. Instead, the Ministry of Finance has examined only the power plants’ future operating costs and the expected future revenue from the electricity they would produce.

Although the ministry doesn’t say it in so many words, its valuation of the new company can only mean that the nuclear plants will be running losses in future. If Mike Harris believes his finance minister, and wants to enhance shareholder value, he should phase out the nuclear units as quickly as possible to cut his losses.

Mike Harris would be well advised not to put too much trust in the estimates from his finance minster, or his energy minister or the financial experts at Ontario Hydro. The only competent valuators of the province’s power assets are bidders in the marketplace.

By failing to restructure Hydro properly — which requires breaking up the generating monopoly and selling the system in a configuration that would fetch the highest price — Harris is squandering the province’s crown jewels. The nuclear plants have been a horrible mistake — they should never have been built — but that’s no reason to compound the error.

In fact, some of the nuclear assets, in competent hands, could be worth billions, perhaps as much as the $7 to $16 billion nuclear hole the government wants us to accept. British Energy, the privatized owner of the UK’s nuclear system, has purchased a plant in the U.S. — one of the units at Three Miles Island — and has been scouting around for other purchases — most recently New Brunswick’s Point Lepreau. It planned to put money on the table to buy into the Ontario fleet but, inexplicably, the monopolists at Hydro said no.

If Harris needs proof of his government’s incompetence at establishing fair prices, he need look no further than Monday’s announcement. Hydro assumes – and the finance ministry accepts — that all its nuclear units (except for Bruce 2) will operate at high production for 40 year service lives and that future payments will cover the total liability, now estimated at $19 billion. If the nuclear units are closed after 25 to 30 years of production — as experience with reactors in Ontario and elsewhere in the world suggests – then Ontario Hydro should be reporting a current liability for nuclear waste disposal and decommissioning that’s twice as high.

Ministry of Finance officials haven’t decided if the generation company’s new debts will be subordinate to the old debt. The new generation company will be financed with $1.8 billion in new private sector debt, unguaranteed by the provincial government, and $3.2 billion in equity held by the province. Getting a good return on this equity is important in discharging the liabilities remaining with the province for outstanding guaranteed bonds, overpriced power purchase contracts with independent producers, and nuclear waste disposal and decommissioning costs. If the new generation company pays the government ahead of its unguaranteed debt obligations, the public is likelier to get its money back. Alternatively, taxpayers are at risk of losing their capital and the generation company will be able to further deficit finance its nuclear ventures.

Thomas Adams is executive director of Energy Probe, a Toronto-based public policy organization.

The Ottawa Citizen
November 1, 1998

In 1992, General Motors swallowed a $20.8 billion accounting loss to bring its books into line with what the company was actually worth. It was the biggest writedown in corporate history.

Ontario Hydro is about to take an even bigger hit to prepare itself for the competitive environment it will face in 2000.

Although the crown corporation has $39 billion in outstanding debt, the provincial finance ministry estimates that Hydro’s generating plants and power grid are worth only $15.8 billion – or $23.3 billion less than the Hydro debt.

With help from New York investment banker Goldman Sachs, the finance ministry calculated the market value of Hydro’s transmission wires at $10.5 billion; its 68 hydroelectric stations and 28 fossil-fuel-fired units at $5 billion; and its nuclear plants to be worthless.

As Goldman Sachs vice-president Edward Chapman put it, nuclear plants “basically sell for nothing. The market value, if it were to be sold today, is very close to zero.”

But unlike the case at GM, Hydro’s shareholder – the government of Ontario – has no plans to absorb the $23.3 billion excess debt. It doesn’t believe taxpayers should have to pay.

So the burden falls to someone else. That someone else is the electricity user – who just happens to be the taxpayer wearing his or her consumer hat.

But not to worry. Queen’s Park says consumers won’t see any increase in their electricity costs because existing rates already cover the costs of interest on Hydro’s total debt.

Under competition, the two new companies that are to be carved out of Hydro to generate and transmit electricity will pay the government money in lieu of taxes. Over time, this money will allow Queen’s Park to pay off $15.4 billion of the $23.3 billion debt. And since the companies will be paying this money instead of paying interest on a debt they will no longer have to carry, the cost of electricity to the consumer won’t have to increase.

The rest of the excess debt – about $8 billion – will be financed through a charge added to everyone’s electricity bill. Again, consumers will simply pay this charge directly rather than having it buried in their electricity rates.

So far, so good.

In fact, if competition leads to lower electricity prices, consumers would see smaller electricity bills.

In theory, at least.

In reality, however, what happens to your electricity bill will depend on whether the finance department gets the numbers right and whether competition works the way the government says it will.

As for the numbers, we take little comfort in the caveat issued by the finance ministry when it released its estimates last week. It said: “These estimates will almost certainly change in the future as more information becomes available.”

Indeed, there appears to be plenty of room for error. For example, based on recent sales elsewhere, Thomas Adams, the executive director of Energy Probe, believes the hydroelectric and fossil-burning stations could be worth $12 billion to $21 billion, compared to the department of finance estimate of $5 billion. If he’s right, the debt that needs to be taken off the companies’ books could be as low as $7 billion.

Our second concern is that even if competition reduces the average price of electricity, all the benefits could be captured by the big industrial users, leaving residential customers to pay more for the electricity they use.

All that the Harris government has given us so far is a plausible theory of how much electricity will cost consumers two years from now. But if the theory doesn’t work out in practice, don’t blame the theory. Blame the government that has turned its theory into a promise of how much better off we will all be.

Tom Spears
The Ottawa Citizen
November 2, 1998

The giant Moses-Saunders hydro dam across the St. Lawrence River is destroying fish habitat and indirectly tainting the fish, says a major study by the University of Ottawa.

The river is cleaner than it used to be, and cleaner than most people who live near it realize, the University of Ottawa study found.

But the Moses-Saunders dam at Cornwall, and a second hydro dam downstream at Beauharnois, are now the biggest sources of damage to the river and the living things in it.

The Moses-Saunders dam has so changed the flow of water upstream that whole communities of water plants, bottom-dwelling creatures and fish have been destroyed, the study says.

And it says the dam, which has raised water for the St. Lawrence Seaway since 1958, appears to make cancer-causing pollutants collect in one area just above the dam.

Half the bottom-feeding fish there have cancerous tumours around their mouths, where they rub against chemicals in the river sediment.

The huge, $2.2-million study by 35 professors and 50 students put together the first picture of the biology, water quality and human communities along the upper St. Lawrence between Montreal and Lake Ontario.

"There are a lot of consequences to these projects (big hydro dams) that are often under-appreciated," said Tom Adams of Energy Probe, a Toronto group that studies the environmental and economic effects of utilities.

The dam is owned jointly by Ontario Hydro and the New York Power Authority. Now it needs a new licence to keep operating. Hydro dams in the U.S. need a licence from the Federal Energy Regulatory Commission (FERC), and the Moses-Saunders licence expires in 2003. To renew it, its operators must prove the dam is not a serious environmental hazard.

Hydro dams, running on falling water, once were touted as clean power. But the University of Ottawa study throws new doubts on that, even though it also shows the St. Lawrence is much cleaner than local people realize.

The river carries a huge amount of water — 7,500 cubic metres, or 750 tanker truckloads, every second as it passes Cornwall. That’s more than six Ottawa Rivers in a single package.

Most of this is the distinctively blue-green water of the Great Lakes, descending on a journey that takes hundreds of years from Lake Superior.

While 70 per cent of the people of Cornwall fear the river threatens their health, the U of O study says the river water itself is reasonably clean. It has improved in the past 25 years because factories stopped pumping millions of gallons of chemical waste into it.

The toxic muck that remains, largely from old industrial processes like spreading mercury to kill slime on underwater equipment, is in localized hot spots. Downstream from Cornwall is one such location.

Public warnings against eating too much fish "are still needed because of toxic substances residing mostly in the sediment," the study says. "But sediment quality is improving as well."

The dams "stand accused of being the principal stressors (sources of stress) on the river," the study concludes.

The scientists and their students caught close to 75,000 fish over three years of netting. They measured and released most of them and saved a few for lab analysis.

They keyed in on three main species: white sucker, a bottom feeding species; yellow perch, which feed in the mid-level of the river; and northern pike, a predator at the top of the food chain.

All three species showed up in much larger numbers below the Moses-Saunders Dam than above it, they found. And the fish upstream in Lake St. Lawrence (a shallow lake created by the dam) were fewer and less healthy.

For example, half the white suckers in Lake St. Lawrence had cancerous lip tumours. Downstream from the dam, fewer than two per cent had tumours. The suckers in the area with tumour problems also had levels of polyaromatic hydrocarbons (PAHs, an industrial pollutant) that were 45 per cent higher than in suckers downstream. Their bodies were higher in mercury as well.

Upstream, the team caught only 14 pike; downstream it caught 90.

Perch were also much scarcer above the dam in Lake St. Lawrence, and they tended to be small for their age. Again, the scientists say, the dam is at fault.

The lake’s biggest problem is that it’s not really a lake, but an artificial reservoir. Lake levels don’t rise and fall along with natural, seasonal changes in the flow of water through the river. Instead, they rise and fall by about 1.5 metres a year, according to how people want the dam to operate.

"The wide variability of water levels is the big problem," says Philippe Crabbe, the head of the study team.

In winter, the unnaturally low lake levels let water freeze right to the bottom in some areas. And as ice moves downstream it "scours" the sediment, ripping out the aquatic plants that provide habitat and food for fish, crustaceans and other water creatures.

It’s a bad place to spawn and an unlikely spot for fish that do hatch to reach maturity, the study finds. "The poor habitat is certainly associated with the creation of the reservoir and dam operations, i.e. water fluctuations."

Mr. Crabbe adds, "The biodiversity never had a chance to pick up there."

Ontario’s Environment Ministry also blames the dams for trouble. "We found in our studies (for a potential cleanup) that the dam is the main disruption to habitat both upstream and downstream," said Bob Helliar of the ministry’s Kingston office.

"When they made the Seaway and flooded that land, it tends to liberate metals from the soil and you get mercury (contamination)," he said. Similar problems occurred during flooding at Hydro-Quebec’s James Bay dams, scientists have found.

Still, the water is cleaner than local people believe. This is especially true of the water flowing in from the Great Lakes; it’s the isolated hot spots from local polluted dumping grounds that tend to have the problems.

But 70 per cent of the local people surveyed in the study still believed the river was a threat to their health.

"There’s this perception problem," Mr. Crabbe said. "They have this impression that the quality of the water is much worse than it is.

"We knew (going into the study) that the St. Lawrence wasn’t as bad as European rivers, but we were surprised to see definite signs that it is improving."

Asked whether he would eat fish from above the dam, he said: "I don’t think I would. If we believe firmly that the level of contaminants is higher there, why would I want to eat that?

"I would eat fish from downstream, maybe, from Lake St. Francis. Upstream there aren’t that many fish anyway."

Shoreline wetlands are facing a major threat as well, the study says.

Mammals can survive fairly well as humans move into the shoreline areas, cutting trees and building roads, it said. But everything else — shore birds, reptiles and amphibians — have suffered a decline.

A paved road two full kilometres from a wetland is close enough to interfere with the habitat, the study found. What follows is a loss of the "richness" of wild species — fewer species in smaller numbers than before.

This is significant because most of the government wetland policies protect only a narrow strip of land near wetlands. These narrow strips, the scientists say, "are unlikely to provide adequate protection for wetland biodiversity."

Meanwhile the study admits its authors never got a chance to look at one issue that is preoccupying researchers around the Great Lakes: Water pollution that comes from the air.

Most of the old-fashioned dumping has been vastly reduced around the lakes.

Today, pesticides and other chemicals — including banned pesticides like DDT and toxaphene — continue to fall in rain after evaporating from farms in Mexico, the Caribbean or the southern United States.

Last month the head of the U.S. Environmental Protection Agency’s Great Lakes office said these airborne pollutants are now the biggest danger to the lakes.

"This issue is an important priority for future investigations," the study concludes.

Thomas Adams
National Post
February 21, 1999

Jim Wilson, Ontario’s Energy Minister, is announcing today the ground rules for a new era in electricity, one that will increasingly see free markets replace Ontario Hydro’s monopoly over the province’s electricity system.

The rules are the culmination of a year-long effort by the government-appointed Market Design Committee, on which I sat. They set out the rights and responsibilities of all buyers and sellers in Ontario’s liberalized electricity market, which is about to be established. Starting next year, all customers will be free to shop — or not — for their power. While power prices will constantly be rising and falling, as with any other commodity, barring a major supply disruption — such as new problems at Ontario’s rapidly ageing nuclear stations — everyone’s electricity prices, averaged over a year, will almost certainly fall.

Customer choice and market-based pricing will revolutionize Ontario’s power system. Look for competing suppliers to offer customers one-stop shopping for natural gas and electric service. Or power from environmentally preferred sources. Or locked-in prices for differing terms, the way customers can now choose different mortgage rates.

In the past, whenever Ontario Hydro invested badly or operated inefficiently, it raised its rates or changed its accounting to cover or paper over the shortfall. In the future, inefficient producers will lose customers to efficient ones, and their shareholders will lose stock value.

This new world of electricity will be far from perfect. Over the committee’s objections, the government refused to fully break up the monopoly. Instead, it invited monopoly abuse by giving Ontario Power Generation Inc., the Crown-owned successor taking over Ontario Hydro’s generating stations, control over 80% of the market. As a second-best measure, the committee negotiated a deal that will see Ontario Power Generation cap its revenues from the outset and steadily give up control of most stations over, at most, 10 years.

Other major problems remain as well. Ontario Hydro’s liabilities must be restructured, a process that involves servicing its $30-billion-plus debt and coming to grips with the still-unfunded and growing liabilities for nuclear waste disposal and reactor decommissioning. The Ministry of Environment has yet to deliver on its promise to tighten air pollution controls on the province’s coal-fired stations. The Ontario Energy Board needs to license marketers and carriers of electricity.

One of the most daunting, and perplexing, tasks will involve controlling a newly created Independent Market Operator — an immensely powerful and complex monopolist and regulator charged with reliably and efficiently operating the power system. Although this regulator will set rules for the big players in the power business, representatives of the big players will be sitting on its board. And although it will be responsible to another regulator, the Ontario Energy Board, the Energy Board will be fettered in disciplining the regulator’s owners because, like other Crown agencies, it will have no owners.

Although consumers won’t be forced to change their behaviour, they will benefit from shopping wisely. Under government policy, power prices have been frozen since 1994. But in the future, prices will be subject to market forces, and at times may be volatile. Look for innovations that let customers manage their costs by conserving power when it is most expensive.

The new market participants have their work cut out for them as well. For years Ontario Hydro skimped on maintenance budgets for its high-power, long-distance transmission system, and the successor taking it over will need to beef it up . Strengthening Ontario’s connections with neighbouring utilities — necessary in the short run to allow consumers to tap competing suppliers — will require still more upgrades.

These reforms mark the end of the old Hydro monopoly and the beginning of a new world of competition. Replacing secret decision-making with public regulation over the power system’s remaining monopoly aspects — the Independent Market Operator and the utilities responsible for local distribution and long-distance transmission — will increase transparency and accountability. Having a power system based on decentralized decision-making, where power producers are accountable to their customers and prices reflect value, will prevent future Darlingtons and other boondoggles. High-efficiency power sources with low startup costs — particularly small natural gas-fired stations that produce both heat and power cheaply and cleanly — will grab market share from the polluting nuclear and coal stations so favoured by the old monopoly.

Worldwide, the trend to open electricity markets has benefited consumers and the environment. Ontario’s new rules draw heavily on the best aspects of other competition-oriented jurisdictions. Soon, Ontario may pass on the favour by helping others join the world of competitive energy markets.

Thomas Adams is executive director of Energy Probe, an environmental and economic think tank.