Energy Probe

February 4, 1999

Earlier this week, Ontario Hydro’s "Nuclear Report Card" reported nuclear production 6.4% ahead of target for 1998. In fact, actual nuclear production for the year fell 3.4% short of Hydro’s official "Nuclear Asset Optimization Plan", as it was presented to the Ontario Parliamentary Select Committee on Ontario Hydro Nuclear Affairs in October 1997.

Faced with nuclear output below its official forecast, Ontario Hydro quietly and retroactively lowered its 1998 production forecast by about 10.1%, to a figure below its disappointing production. The original, official forecast formed the basis of the Plan’s approval by Ontario Hydro’s Board of Directors and the Ontario government.

Energy Probe estimates that the financial implications of the 3.4% production shortfall represents a new loss to Ontario Hydro’s "bottom line" of approximately $60 million. That loss is not created because nuclear power is less expensive than alternatives, which it is not. Rather, nuclear costs are dominated by fixed costs like capital and staff benefits, which have to be paid whether or not the plants run. The costs of short-term alternatives (fossil-fired generation, imports, and lost exports) are dominated by variable costs. The variable costs of replacement power are all that is counted in the $60 million estimate.

The Nuclear Asset Optimization Plan as approved represented an $8.8 billion hit to the utility’s bottom line. The recently announced $800 million recovery plan for Pickering A was not included in the $8.8 billion estimate nor was the effect of production shortfalls like that occurring in 1998.

The year end "Nuclear Report Card" also indicates that Ontario Hydro’s nuclear program continues to fail to meet its internal nuclear improvement plan milestones and public safety event targets although other performance objectives are met.

Energy Probe estimates that nuclear power provided 41% or less of Ontario Hydro’s electrical energy in 1998, down from a peak of 62% in 1994.

Greg Crone
Financial Post
February 6, 1999

Performance sliding: Production shortfall means $60M hit to bottom line Ontario Hydro appears to have moved the goal posts for its troubled nuclear division by lowering its 1998 nuclear production target.

The adjustmen allows Hydro to say that it has met and exceede its target.

Based on its original target, Hydro had a production shortfall of 3.4% or an estimated $60-million in lost production. Instead, Hydro lowered its target by about 10% and is now saying its 1998 production was ahead of target by 6.4%.

"The nuclear plants are not turning around," said Tom Adams, an analyst with public interest group Energy Probe. "In fact, they are continuing to slide."

"If the game is not going well, Hydro’s first instinct is to change the rules," said Sean Conway, Liberal energy critic. "If those targets are not met, it will have negative consequences on electricity consumers and the people who guarantee Hydro’s debt, namely the Ontario taxpayer."

Terry Young, Ontario Hydro spokesman, said the target may have been adjusted to reflect operating problems in the Bruce A plant near Kincardine, Ont., where one unit ran sporadically and another did not run at all, contrary to plan. "What we may have done was adjust the targets based on Bruce A."

The nuclear division has been under a cloud since an August 1997 report concluded it was only meeting minimum industry standards. Hydro then closed seven of 19 reactors under the so-called Nuclear Asset Optimization Plan (NAOP). Hydro also took a $6.6-billion writedown resulting in a $6.3-billion loss, the largest in Canadian corporate history. Most of the writedown was to account for future spending associated with rehabilitating the nuclear division.

In the recovery plan, Hydro said its nuclear division would generate 62 terawatt hours of electricity. (A terawatt hour is one billion kilowatt-hours.) A select committee of the Ontario legislature held hearings on the plan and reluctantly endorsed it.

In its latest nuclear report card, Hydro says its production target for 1998 was 56.3 terawatt hours. Hydro reports it actually generated 59.9 terawatt hours, calling the resul "better than target."

Mr. Adams calculates that is actually a shortfall that amounts to a $60-million hit on Hydro’s bottom line and not accounted for in the writedown.

The hit may actually be larger if the coal-fired replacement generation is factored in, as well as reduced export sales and increased import costs, said Mr. Adams.

Ontario Clean Air Alliance and Energy Probe
February 16, 1999

Ontario Hydro’s emissions of nitrogen oxide from its coal and oil-fired units jumped by 30% in 1998, from 43 kilotonnes in 1997 to 56 kilotonnes, based on preliminary data from Ontario Hydro.

Ontario Hydro’s emissions of sulphur dioxide also increased by 15% in 1998 from 124 kilotonnes in 1997 to 143 kilotonnes.

Nitrogen oxide emissions are rising against a backdrop of the utility’s commitment to decrease nitrogen oxide emissions to 38 kilotonnes in the year 2000.

Under the longstanding "Countdown Acid Rain" regulation, Ontario Hydro’s total emissions are legally limited to 215 kilotonnes of sulphur dioxide and nitrogen oxide combined. In 1998, total emissions were 199.6 kilotonnes.

"Environmental solutions for smog are cheap and available. According to a study released by the Ontario Clean Air Alliance in November, Ontario Hydro’s nitrogen oxides emissions can be reduced by 77% for a cost of only $1.86 per month for a typical residential customer", said Jack Gibbons, Chair of the Ontario Clean Air Alliance. These emission reductions can be achieved, between 2002 and 2014, by using natural gas instead of coal to generate electricity. "Cleaner air is on sale for the cost of a cup of coffee and a donut", Mr. Gibbons noted.

"Ontario Hydro’s attempt to cut coal emissions by relying on its faltering nuclear program, which failed in 1998 to meet its recovery program production targets, instead of by cleaning up its fossil program or finding sustainable alternatives, threatens the province’s air quality", said Tom Adams, Executive Director of Energy Probe.

For further information contact:

Jack Gibbons, Chair, Ontario Clean Air Alliance at 923-3529 ext. 23

For more information, please contact Tom Adams, Executive Director, Energy Probe Research Foundation, phone 416 964 923 ext. 239, fax 416 964 8239

Energy Probe Research Foundation is a non-profit organization supported by 18,000 Canadians and dedicated to consumer and environmental protection and advocates the phaseout of nuclear power for a safer, cleaner and more economical energy future.

National Post
February 19, 1999

Ontario Hydro spewed more smog causing gases in 1998 despite promising to slash emissions by 2000. With eight of its 20 nuclear reactors shut down, and the rest requiring more down time than planned, Hydro stepped up its use of coal, which creates air pollution. In 1997, Hydro’s coal fired stations produced 43,000 tonnes of nitrogen oxide fumes. Last year that total jumped to 56,000 tonnes. “We were breathing a lot more pollution,” said Tom Adams of Energy Probe.

Jennifer Wells
ROB Magazine
June 1, 1999

When Mike Harris strode to the apex of Ontario political power that summer of 1995, the agenda, as it was, was crystal clear. Centrally directed economies: bad. Turbo capitalism: good. The ideology was textbook – an affectless pursuit of deficit-slashing and ledger-balancing; the reduction of the high cost of government not just by paring services, but by swapping public debt for private equity.

There were targets eyed and pledges made. Example: In the Common Sense Revolution, his no-nonsense campaign platform, Harris plainly stated that the province’s Liquor Control Board would be privatized. End of story.

The privatization agenda would bring benefits in more ways than one. Reduced debt would mean, ultimately, taxpayer relief. Opening up public industry to private competition, creating what economists call an atomistic marketplace, would herald increased consumer choice and, perforce, lower prices. Win-win.

On the list of privatization candidates, there was none bigger, none mightier, than Ontario Hydro. The largest electrical utility in the country. The largest industrial in the country. A company with $44 billion in assets. Total revenues in fiscal ’94: $8.7 billion. Cash flow: $2.2 billion, which sounds rich, if only it weren’t for the $33 billion in government-guaranteed debt, which was costing the utility, let’s see, roughly $404,566 an hour to service.

In his pre-electioneering days, Harris had given a speech to the Independent Power Producers’ Society of Ontario. He pledged "expanded opportunities for private-sector co-generation along with open competition in power generation, transmission and retailing." Privatization was, as far as the business community was concerned, part of the mandate. A "fundamental restructuring," said Harris, was on its way. Bonus: The beginnings of an intense shakeup of the 90-year-old monopoly, including the reduction of staffing levels by more than 8,000 or so bodies and a $3.6-billion restructuring charge, had already been commenced by the predecessor NDP government under Hydro chairman Maurice Strong, who himself had said the utility must privatize or sink.

So, here we sit four years later, Harris having been given every opportunity to haul government out of Hydro. Instead, he took a pass. How come? Why did he fail the free-enterprise test?

The beginnings were so propitious. A mere month after Harris moved into the Premier’s office, his very good friend Bill Farlinger, the former chairman of accounting firm Ernst & Young and one of the key power brokers behind the Harris ascension, submitted a report that concluded Hydro should be privatized – fast. The report, commissioned by Strong, advocated not only privatization, but privatization of all Hydro’s assets, including nuclear. In the Common Sense Revolution, Harris had excluded nuclear from his privatization thinking. Now Farlinger was saying the "investment fraternity" was giving the green light to the entire slate of Hydro assets. Farlinger warned that if the government failed to move quickly, industrial electricity users, who had seen prices rise by 40% from the start of the decade, could either decamp or self-generate using nifty, relatively new gas turbine technology. The status quo, in which Hydro serviced 86% of the province’s electricity needs, would have to be broken.

In early November, now five months into the job, Harris did two things. He appointed Farlinger Hydro’s chairman, which, optically, ensured that privatization was in Hydro’s future, and he commissioned former federal Liberal energy minister Donald Macdonald to lead the Advisory Committee on Competition in Ontario’s Electricity System. The government wanted competition, it said, it just wasn’t sure how to get there. In working up a recipe, Harris asked the committee to keep an eye on the obvious: financial soundness and affordable electricity rates.

Macdonald and his six-member committee produced their 162-page report, A Framework for Competition, in May, 1996, which they promptly put before the province’s Ministry of Environment and Energy. The committee was precise in its recommendations: that the utility’s monopoly in electricity generation be eliminated, and that non-nuclear generating assets be separated into distinct operating entities and opened up to private equity investment. The committee advised that Hydro’s Niagara River assets, the hydroelectric beginnings of the company, be excluded, a prudent view given the thunderous historic significance of the Falls. As for nuclear, the Macdonald committee veered from Farlinger’s position in recommending that these generating assets be hived off into four companies, but maintained under public ownership.

The report’s main message was not open to interpretation. The generating facilities must, it said, "be sufficiently separated to prevent any one company, or any group of companies acting together, from being able to exercise undue market power."

Months passed. So many months passed after the Macdonald submission that a number of interest groups, including the Association of Major Power Consumers in Ontario (AMPCO) and the Alliance of Manufacturers & Exporters Canada, came together to form a stakeholders’ alliance to address what appeared to be an unseemly delay in the formulation of a government response. "We were concerned that an opportunity was going to be missed," says AMPCO president Arthur Dickinson. AMPCO’s membership – big industrial users such as Stelco and Falconbridge – takes up roughly 15% of Hydro’s annual electricity load, for which members pay more than $1 billion in total. "We felt it [the report] was very much along the lines of our own views as to how the restructuring of Hydro should proceed," says Dickinson. Bottom line, he says, is that his members anticipated that the private sector moving in would see electricity prices moving down by 10% or more.

It was, however, yet another report, this one by U.S. nuclear expert Carl Andognini, that caught the public’s attention in the summer of 1997. Andognini had been retained to provide a "brutally honest" assessment of Ontario Hydro Nuclear. In volume after volume, the woes of the province’s nuclear program were grimly documented. The reactors were chronic underperformers, everyone knew that, and it had long been suspected that the Candus couldn’t hope to achieve their 40-year life expectancy.

Now taxpayers heard how safety standards had been compromised and of managers who lacked "basic management and leadership skills." The report was littered with such hot-button phrases as "uncontrolled contaminated material" and "excessive human error rate." Bill Farlinger said that when he looked inside Nuclear he saw "some sort of special nuclear cult." Seven of the province’s 19 Candu reactors would be laid up as a result of the investigation, said Farlinger. And the problems that could be fixed would, he said, cost somewhere between $5 billion and $8 billion. There was no longer even the slightest hope that Hydro had an ounce of political capital left.

It would have seemed an opportune time for the government to make its intentions for Hydro known. Yet it wasn’t until November, 1997, that the government’s formal response to Macdonald’s efforts came clear when it tabled its white paper, the next big step toward competition and a precursor to Bill 35, the province’s new Energy Competition Act. The white paper veered from the Macdonald committee’s recommendations in just a couple of areas. But one was a whopper. While the monopoly’s generating assets would be separated from transmission and distribution – a move that was favoured by Macdonald et al. – it also said there would be no breakup within generation. The core of the company would remain, instead, a single, Crown-owned entity – nuclear, fossil, hydroelectric, the works.

Some observers were surprised, including, particularly, Donald Macdonald. Whatever happened? He posits the "demon in the works theory," that Hydro is so big, so self-perpetuating, so bureaucratic that the forces for progress were utterly co-opted. Still, he’s puzzled, he says, that a government that could have achieved the dual objectives of debt reduction and competition would just drive off the road the way it did. "What I don’t understand ideologically is why Harris wasn’t prepared to go for sale," he says. At a minimum, he says, the government could have put some assets – the Ottawa River dams, for example – on the market.

Instead, the government left the task of figuring out how to inject competition into an uncompetitive model to yet another group, this one called the Market Design Committee (MDC), a 14-member stakeholder panel appointed by the provincial Ministry of Energy. "One of the walls we came up against," says Tom Adams, executive director of Energy Probe, who sat on the MDC, "was it’s hard to make competition when one party, one player, will have about 80% of the market….The MDC found itself unable to fully develop competition and the rules for competition because of this structural problem."

The committee complained. The committee whined. It sought alternative policy wording. "The government," says Adams, "was just not going to be finessed on this thing. They were committed to the white paper." Why? "That," says Adams, "is one of the riddles in all of this." Was it the impenetrability of the Hydro bureaucracy, as Macdonald would have it? Was the Harris team taken off the free-enterprise path by a small, impermeable cluster of insiders?

Jennifer Wells
Report on Business
June 1, 1999

Why did Mike Harris take a pass on his biggest privatization candidate – Ontario Hydro, the country’s largest electrical utility?

When Mike Harris strode to the apex of Ontario political power that summer of 1995, the agenda, as it was, was crystal clear. Centrally directed economies: bad. Turbo capitalism: good. The ideology was textbook – an affectless pursuit of deficit-slashing and ledger-balancing; the reduction of the high cost of government not just by paring services, but by swapping public debt for private equity.

There were targets eyed and pledges made. Example: In the Common Sense Revolution, his no-nonsense campaign platform, Harris plainly stated that the province’s Liquor Control Board would be privatized. End of story.

The privatization agenda would bring benefits in more ways than one. Reduced debt would mean, ultimately, taxpayer relief. Opening up public industry to private competition, creating what economists call an atomistic marketplace, would herald increased consumer choice and, perforce, lower prices. Win-win.

On the list of privatization candidates, there was none bigger, none mightier, than Ontario Hydro. The largest electrical utility in the country. The largest industrial in the country. A company with $44 billion in assets. Total revenues in fiscal ’94: $8.7 billion. Cash flow: $2.2 billion, which sounds rich, if only it weren’t for the $33 billion in government-guaranteed debt, which was costing the utility, let’s see, roughly $404,566 an hour to service.

In his pre-electioneering days, Harris had given a speech to the Independent Power Producers’ Society of Ontario. He pledged "expanded opportunities for private-sector co-generation along with open competition in power generation, transmission and retailing." Privatization was, as far as the business community was concerned, part of the mandate. A "fundamental restructuring," said Harris, was on its way. Bonus: The beginnings of an intense shakeup of the 90-year-old monopoly, including the reduction of staffing levels by more than 8,000 or so bodies and a $3.6-billion restructuring charge, had already been commenced by the predecessor NDP government under Hydro chairman Maurice Strong, who himself had said the utility must privatize or sink.

So, here we sit four years later, Harris having been given every opportunity to haul government out of Hydro. Instead, he took a pass. How come? Why did he fail the free-enterprise test?

The beginnings were so propitious. A mere month after Harris moved into the Premier’s office, his very good friend Bill Farlinger, the former chairman of accounting firm Ernst & Young and one of the key power brokers behind the Harris ascension, submitted a report that concluded Hydro should be privatized – fast. The report, commissioned by Strong, advocated not only privatization, but privatization of all Hydro’s assets, including nuclear. In the Common Sense Revolution, Harris had excluded nuclear from his privatization thinking. Now Farlinger was saying the "investment fraternity" was giving the green light to the entire slate of Hydro assets. Farlinger warned that if the government failed to move quickly, industrial electricity users, who had seen prices rise by 40% from the start of the decade, could either decamp or self-generate using nifty, relatively new gas turbine technology. The status quo, in which Hydro serviced 86% of the province’s electricity needs, would have to be broken.

In early November, now five months into the job, Harris did two things. He appointed Farlinger Hydro’s chairman, which, optically, ensured that privatization was in Hydro’s future, and he commissioned former federal Liberal energy minister Donald Macdonald to lead the Advisory Committee on Competition in Ontario’s Electricity System. The government wanted competition, it said, it just wasn’t sure how to get there. In working up a recipe, Harris asked the committee to keep an eye on the obvious: financial soundness and affordable electricity rates.

Macdonald and his six-member committee produced their 162-page report, A Framework for Competition, in May, 1996, which they promptly put before the province’s Ministry of Environment and Energy. The committee was precise in its recommendations: that the utility’s monopoly in electricity generation be eliminated, and that non-nuclear generating assets be separated into distinct operating entities and opened up to private equity investment. The committee advised that Hydro’s Niagara River assets, the hydroelectric beginnings of the company, be excluded, a prudent view given the thunderous historic significance of the Falls. As for nuclear, the Macdonald committee veered from Farlinger’s position in recommending that these generating assets be hived off into four companies, but maintained under public ownership.

The report’s main message was not open to interpretation. The generating facilities must, it said, "be sufficiently separated to prevent any one company, or any group of companies acting together, from being able to exercise undue market power."

Months passed. So many months passed after the Macdonald submission that a number of interest groups, including the Association of Major Power Consumers in Ontario (AMPCO) and the Alliance of Manufacturers & Exporters Canada, came together to form a stakeholders’ alliance to address what appeared to be an unseemly delay in the formulation of a government response. "We were concerned that an opportunity was going to be missed," says AMPCO president Arthur Dickinson. AMPCO’s membership – big industrial users such as Stelco and Falconbridge – takes up roughly 15% of Hydro’s annual electricity load, for which members pay more than $1 billion in total. "We felt it [the report] was very much along the lines of our own views as to how the restructuring of Hydro should proceed," says Dickinson. Bottom line, he says, is that his members anticipated that the private sector moving in would see electricity prices moving down by 10% or more.

It was, however, yet another report, this one by U.S. nuclear expert Carl Andognini, that caught the public’s attention in the summer of 1997. Andognini had been retained to provide a "brutally honest" assessment of Ontario Hydro Nuclear. In volume after volume, the woes of the province’s nuclear program were grimly documented. The reactors were chronic underperformers, everyone knew that, and it had long been suspected that the Candus couldn’t hope to achieve their 40-year life expectancy.

Now taxpayers heard how safety standards had been compromised and of managers who lacked "basic management and leadership skills." The report was littered with such hot-button phrases as "uncontrolled contaminated material" and "excessive human error rate." Bill Farlinger said that when he looked inside Nuclear he saw "some sort of special nuclear cult." Seven of the province’s 19 Candu reactors would be laid up as a result of the investigation, said Farlinger. And the problems that could be fixed would, he said, cost somewhere between $5 billion and $8 billion. There was no longer even the slightest hope that Hydro had an ounce of political capital left.

It would have seemed an opportune time for the government to make its intentions for Hydro known. Yet it wasn’t until November, 1997, that the government’s formal response to Macdonald’s efforts came clear when it tabled its white paper, the next big step toward competition and a precursor to Bill 35, the province’s new Energy Competition Act. The white paper veered from the Macdonald committee’s recommendations in just a couple of areas. But one was a whopper. While the monopoly’s generating assets would be separated from transmission and distribution – a move that was favoured by Macdonald et al. – it also said there would be no breakup within generation. The core of the company would remain, instead, a single, Crown-owned entity – nuclear, fossil, hydroelectric, the works.

Some observers were surprised, including, particularly, Donald Macdonald. Whatever happened? He posits the "demon in the works theory," that Hydro is so big, so self-perpetuating, so bureaucratic that the forces for progress were utterly co-opted. Still, he’s puzzled, he says, that a government that could have achieved the dual objectives of debt reduction and competition would just drive off the road the way it did. "What I don’t understand ideologically is why Harris wasn’t prepared to go for sale," he says. At a minimum, he says, the government could have put some assets – the Ottawa River dams, for example – on the market.

Instead, the government left the task of figuring out how to inject competition into an uncompetitive model to yet another group, this one called the Market Design Committee (MDC), a 14-member stakeholder panel appointed by the provincial Ministry of Energy. "One of the walls we came up against," says Tom Adams, executive director of Energy Probe, who sat on the MDC, "was it’s hard to make competition when one party, one player, will have about 80% of the market….The MDC found itself unable to fully develop competition and the rules for competition because of this structural problem."

The committee complained. The committee whined. It sought alternative policy wording. "The government," says Adams, "was just not going to be finessed on this thing. They were committed to the white paper." Why? "That," says Adams, "is one of the riddles in all of this." Was it the impenetrability of the Hydro bureaucracy, as Macdonald would have it? Was the Harris team taken off the free-enterprise path by a small, impermeable cluster of insiders?

Sean Conway, the Liberal energy critic in the last parliament, says there was a "consensus for change" in the legislature. Speaking from the current election campaign trail, he says the Harris electricity policy is a paradox. "On the one hand, they talked about competition in generation and the benefits it could deliver, yet they’ve absolutely refused to break up the Ontario Hydro monopoly."

In the end, Adams says Ontarians were dragged through a "slow, fitful" process toward depoliticizing the province’s energy sector. The AMPCOs of the province were, let’s say, displeased. "It undermines the whole notion of the competitive marketplace," says Arthur Dickinson.

It was into this rather abstract construct that Ron Osborne, freshly departed from Bell Canada, arrived on March 1, 1998. An accountant by trade, Osborne is a Brit best known for his leadership of Maclean Hunter – the publishing and cable company – and for his feisty attempt to foil a takeover by Ted Rogers. From MH, Osborne moved to BCE Inc., then to the helm of its Bell subsidiary, which, having been shaken from its own monopoly, was chewing through CEOs like a beaver through timber. Osborne put in five months.

Last June, three months after Osborne arrived at Hydro, Bill 35 was introduced. The die was cast. It fell to Osborne to oversee the bifurcation of Hydro’s assets: transmission from generation. "The government’s mind was made up," he says. His job was to implement the white paper.

Throughout the months that followed, he says, the issue of busting up the generating assets was revisited constantly. Osborne presents his argument for why the free marketers should not have their way: that there’s a major reallocation of generating assets going on in deregulated American markets, that some players are accumulating "large gobs of assets," that if Hydro were made small, it would lose. "Those assets will all migrate into the hands of the big guys and gals in this business….Quicker rather than more slowly in my view. And Ontario would end up with all its generating assets owned by non-Ontario-based companies." According to Osborne’s handler, he has a favourite saying: Eat somebody’s lunch or you are lunch.

"It seems to me that Mr. Osborne is thinking more in terms of [Hydro generation] than what is good for the customer," says Arthur Dickinson tartly. Osborne’s attitudes are, he says, "Neanderthal" and fail to address what was supposed to be the central issue: "How do we create a competitive electricity market that will benefit customers?"

It was up to the Market Design Committee to set some sort of framework for competition, staying within the restrictions of the white paper. Tom Adams calls the result, dubbed the Market Power Mitigation Agreement, one Band-Aid in a pile of Band-Aids. Under the agreement, Osborne must divest 4,000 megawatts of generating capacity within 42 months of the market being opened for competition, which is expected some time next year. Within 10 years, the generating capacity must be chopped by 15,000 megawatts, which means going from 86% of the market to 35%. The committee calls it "decontrol." How that’s achieved currently appears to be anyone’s guess.

Osborne talks of joint ventures and asset swaps and arrangements by which his company cedes operating control of a plant but retains ownership, thereby meeting the mitigation test. He says he wants to aggressively grow a North American base, particularly into the Northeast and Midwest, from an Ontario stronghold. "To be a major player in generation in the long term." The alternative is simply to watch capacity get chopped by more than half. "That’s not much of a game plan," he says. "You can’t expect people to invest in that plan. Who is going to invest in a company whose modus operandi is diminution?"

It still means that as of today, Osborne’s running a mammoth command-and-control monopoly, precisely the opposite objective that Harris said he was pursuing in 1995. And this "decontrol" business isn’t satisfying the private enterprisers. "That’s forever in the business world," says AMPCO’s Dickinson of the 10-year horizon. Says Osborne: "It is long enough in business terms, in commercial terms, to figure out what your strategy is."

Osborne can, easily enough, see what hasn’t worked. In California, which opened itself up to competition last year, the market model was so preferential to existing utilities that virtually no outside operators dared venture in, a circumstance that echoes for Sean Conway what may happen in Ontario. "By leaving all these generating assets all together, we are really impairing the competitive market in Ontario," says Conway, "and that’s a purely political choice."

Yet it gets to operate under the guise of a commercial enterprise. On April 1, Hydro was officially splintered into five successor companies. Two of these will be capitally structured corporations. The first, Osborne’s generating company, becomes Ontario Power Generation Inc., or Genco. The transmission and distribution assets – the wires – are being run separately as Ontario Hydro Services Co., or Servco, run by Eleanor Clitheroe, Hydro’s former chief financial officer. Additionally, the Ontario Electricity Financial Corp. will service and retire the provincially guaranteed debt of the former Hydro. In the case of Servco, by example, the $4.8 billion in debt assigned to the company exists in the form of promissory notes. Some time this year, Clitheroe intends to start a market-financing program, floating debt to the public and thereby refinancing those promissory notes with the financial corporation for Servco’s share of the debt.

Overseeing Servco and Genco is the Independent Electricity Market Operator, mandated to ensure fair and open market access. Lastly, the Electrical Safety Authority will oversee the installation and inspection of electrical equipment.

Osborne says his growth plan for Genco means that Ontario can "have its cake and eat it." What it looks like currently is that Genco can do just that, for while still ruling the market, its commercial status allows it to duck the Freedom of Information requirements that it was compelled to cede to as a Crown corporation. "You can’t find out what’s going on any more," complains Arthur Dickinson. "It’s like sitting in a card game and you find you’ve got a set of jokers in your hand."

In Osborne’s hand are assets valued at $8.5 billion. The debt apportioned to Genco that must be repaid to the Ontario Electricity Financial Corp. is $3.4 billion. Clitheroe’s wires company weighs in at $8.6 billion on the asset side, with the aforementioned repayment liability of OEFC of $4.8 billion. OEFC has on its books liabilities of $38.1 billion. Subtract from that the $8.2 billion to be repaid by generating and services, and another $8.9 billion to be serviced by the province, and the whole ball of wax deposits a "stranded" debt – that is, stuck with the taxpayer – of $20.9 billion. Of that, $7.8 billion is deemed "residual." That means that even if the revenue streams meet the projected targets, close to $8 billion is unaccounted for and may have to be covered by what the utility calls a Competition Transition Charge, but what its critics prefer to call a rate hike.

Myron Gordon, professor emeritus of finance at the University of Toronto, has been energetically critical of the way in which the numbers have been crunched. He says the asset valuation, particularly for Genco, is absurdly low. Gordon has repeatedly made the argument that a fair-market asset valuation for Genco, based on high performance assumptions for the Candus and a higher valuation for the Niagara Falls assets, is actually closer to $40 billion.

Gordon is no crank. The past president of the American Finance Association, he developed a financial model for determining fair profit rates for public utilities, the use of which has been mandated in the U.S. by the Federal Energy Regulatory Commission. "My suspicion is that he is simply not au fait on all the details," says Osborne of Gordon’s numbers. "At the end of the day, the valuations and the debt allocations were made by the province based on the advice they got from their advisers."

Does it matter? It does, says Gordon, if you believe that the people of Ontario will reap less for the publicly supported assets than is their due. Gordon doesn’t believe that Hydro, or whatever it’s called – certainly the new monikers don’t appear to have much brand-name potential – should be splintered at all. He thinks that with low interest rates and refurbished nuclear plants and the financial picture on the upswing – Hydro turned a $1.8-billion profit last year – taxpayers should stick with the monopoly they’ve got. "This," says Gordon, "is a gold mine."

Harris and his crew, of course, would have expected such views. What’s unexpected is that the utility is neither being kept whole as the monopolists would prefer nor thrust into a market model. What it has become is still not clear. "It’s one thing to be cautious," says Donald Macdonald. "It’s another to fail to be clear in where you want to go." And that, he says, is what it looks like at the moment.

Osborne cheerily cruises a series of nautical metaphors in response to a query of where exactly he’s headed. "Just set sail…not even out of the harbour yet….We’ve just cut the rope at the dock….We’re just about to see where the winds are."

It’s not at all clear that Genco has the skill sets to navigate this. As for Servco, there are rumours on what Macdonald calls the "bush telegraph" that Clitheroe’s on the hunt for acquisitions, again not what the competition crowd had in mind. "There’s the demon again," says Macdonald.

Ron Osborne knows there are expectations. "At the end of the piece, what the public needs to know and be satisfied about is that there is true competition, true choice." That is what Mike Harris promised four years ago. Four years later Ontarians are still waiting.

Thomas Adams
National Post
July 13, 1999

After having undergone one of the world’s largest-ever electricity restructurings, Ontario’s electricity system is still out of control, and still a grave threat to consumers, democracy and the environment. While new legislation has laid the foundation for a fully competitive system, so far the Ontario government has done little more than split the old Ontario Hydro monopoly into two separate, government-owned monopolies: Ontario Hydro Services Co., which runs the power grid, and Ontario Power Generation, which produces the power. If the Tory government, in its second term, doesn’t break with its centralizing ways, Ontarians won’t see meaningful improvements for years to come.

Because Ontario Power Generation — now a for-profit company — commands 80% or more of the market, it will be able to manipulate prices, despite regulatory and contractual band-aids the government put in place to control its excessive market power. Although a contract between the company and its government owner requires that percentage to decline, the old monopoly in its new clothes can maintain its hammerlock on consumers for at least five years. To create real competition — and real protection — for consumers, the government must break up this virtual monopoly. The regulators will have difficulty enough controlling Ontario Hydro Services Co., which has a natural monopoly over the power grid and cannot be controlled by competition.

Both commercial successors to Ontario Hydro are as political and secretive as Hydro ever was, only now their sole shareholder, the Ontario government, expects dividend cheques from them. This profit motive gives the Tory government a keen interest in hiding the companies’ gouging of consumers, and in capturing their monopoly profits for itself. Appallingly, the Tories exempted these two government-owned firms from the province’s Freedom of Information Act, to hide their activities from their ultimate owners — Ontario taxpayers. To aid Ontario Hydro Services Co. in acquiring the province’s municipal distribution utilities and expanding its grid monopoly, the government slapped a 33% transfer tax on private-sector bidders who might offer the municipalities a higher price. If the grid company succeeds in taking over the municipal utilities, the corporate concentration of Ontario’s electricity system will become greater than at any point in its history.

Customers aren’t the only ones who lose out: The environment is also a casualty of the Tories’ failure to break up and privatize the power-producing plants. In many categories of emissions, Ontario Power Generation is Canada’s largest or second-largest air polluter. Because it doesn’t want the expense of abating pollution from its huge fleet of coal-fired stations, the government is compromised by its conflicting interests as both owner and regulator. The Tories have yet to deliver on their 1997 White Paper, which promised environmental improvements along with their electricity reforms. In fact, far from curtailing coal-fired emissions, Ontario Power Generation is upgrading its largest emitter, a coal-burning station at Nanticoke on Lake Erie, to increase energy output.

The government’s failure to modernize environmental rules undermines investments in the power market by keeping potential competitors in the dark about whether the existing government-owned coal plants will continue to pollute for free. It also keeps out of the marketplace vast supplies of clean, gas-fired power, which would have boosted competition and put downward pressure on prices.

Toronto Hydro, Hydro Mississauga and many other electricity distribution monopolists are before the Ontario Energy Board today, seeking regulatory protection from the competitive market. They want to strike down proposed rules that would allow ordinary residential customers to buy straight from producers with virtually no middlemen. Instead, the monopolists and their allies — U.S.-based multinational Enron, the Independent Power Producers Society of Ontario and some unions — who want to sell to a captive market, argue the OEB should bind residential customers to municipal utilities, and regulate them, all in the name of protecting customers. To sugar-coat their monopoly pill, the utilities would make token purchases of green power: from a windmill here or a gas-fired station there. Much to the delight of these monopolists, some environmentalists are joining their effort to restrict customers in shopping for power, opting for this central planning approach in the absence of better environmental rules.

Many believe the public — primarily due to safety concerns — will not accept the privatization of Ontario’s nuclear plants. Yet privately owned plants are sure to face greater scrutiny, and to be held to higher safety standards, than has been the case under public ownership. Should private owners take over the nuclear plants, public pressure would likely force the government to weaken the federal Nuclear Liability Act, which exempts nuclear operators in advance from anything more than $75-million in third-party liability, and undermines the safety culture that is indispensable to running these inherently dangerous machines. Canada’s publicly owned nuclear operators have so far failed to provide for funded waste disposal and decommissioning reserves — a deficiency that a future privatization process should and probably would remedy. Only recently, due to concerns over potential changes of ownership of Ontario’s nuclear reactors, the Atomic Energy Control Board, the federal nuclear safety regulator, demanded explicit financial guarantees for decommissioning and waste disposal.

In a fully competitive power market, private owners would invest more rationally than would ever be the case under public ownership. Ontario Power Generation’s plans to invest in the restart of the Pickering A plant — it is poised to commit $750 million, plus unknown future amounts — is an example of a high-risk decision a purely private investor would probably avoid. More rational investments translate into less nuclear power.

Ontario’s new provincial government is well positioned to push for a better system, since all major stakeholders still support most of the pro-competition reforms. New legislation has created institutions equipped with regulatory powers designed to check monopoly abuse, and to provide fair rules for the competitive marketplace. But they will count for little in a system that remains centralized and politicized.

If we have learned anything from the experience with the old Ontario Hydro, it is that although public ownership looks superficially like public control, the opposite is true. Power privatization done right is in the public interest: It would improve the environment, prevent corporate concentration, lower rates and spare Ontario citizens more of the needless debt the old Hydro saddled them with. Until the provincial government untangles itself from ownership of commercial power businesses, the power business will remain out of control.

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

Tom Adams and Michael Hilson
National Post
October 22, 1999

Ontario’s municipal electric utilities – Toronto Hydro, Ottawa Hydro and other local distribution companies that deliver power to city consumers – will be allowed to raise their rates to the average customer by about one-third next year under a proposed Ontario Energy Board staff plan.

This massive increase would let municipalities, who under Ontario’s new energy legislation now own Ontario’s 250 municipal utilities, pocket a stream of profits in excess of $5-billion. That’s in addition to the windfall they received from being given ownership of the utilities, which before the legislation were effectively owned by no one.

In the case of Toronto Hydro, with assets of approximately $1.8-billion on the books, the city has three ways to capture the windfall. It could sell the utility immediately for a market value of perhaps $2.8-billion (its full book value plus another $1-billion for unregulated opportunities) and then spend the proceeds any way it wished. It could follow Energy Board rules and borrow $1.2-billion against its utility’s book value, pocket that entire amount, have electricity customers pay all interest charges, and earn $60-million per year – a 10% return on the remaining $600-million in equity.

Or it could receive no cash now, and take a dividend from Toronto Hydro of about $140-million per year.

Most of the windfall the cities stand to gain – perhaps two-thirds – would be a direct result of the cash flow stemming from the rate increases. The only complaint from many of these municipalities is that their share of the windfall isn’t rich enough. Lawyers and consultants for the municipal utilities, now for-profit corporations, are campaigning to add another $1.3-billion or so to their equity – or the amount some municipal utilities have received from previous development fees charged to new customers.

If the municipal utilities get their way, ratepayers would see a further 15% rise to their distribution rates, taking the total increase to about 50%.

Since distribution rates represent about 17% of city customers’ total electricity bills, their final bills will rise by as much as 6% or 7%.

Residential customers and small businesses will be hit with larger increases than big customers, because the distributor’s markup is a greater portion of small customers’ bills.

Until now, Ontario Hydro supervised the municipal utilities, and allowed them to follow many high-cost business practices. While utilities in the U.S. and other provinces minimize their costs and rates by financing their investments over a period of years, Ontario’s municipal utilities charged rates high enough to allow them to pay up front and in cash for all their long-term investments – everything from buildings and poles to wires and transformers. Overcharging consumers didn’t stop there: Together, the utilities have charged consumers enough to accumulate about $1-billion in cash and marketable securities. Energy Probe estimates that these utilities required no more than one-seventh of this amount to operate their activities.

Some municipal owners are already benefiting from their new booty. The City of Toronto has transferred to itself $100-million in cash, and $30-million in property, from Toronto Hydro. This is just for openers. The Ontario Energy Board staff approach could ultimately transfer well over $2-billion from electricity consumers to the city’s coffers. Owen Sound has taken over some of its utility’s buildings, properties and other marketable assets.

The proposed one-third rate increase is unnecessary. The provincial legislation that restructured the Ontario electricity sector requires the utilities to adopt more efficient commercial capital structures and accountability rules, and allows the Ontario Energy Board to eliminate the need for the proposed rate shock. Rather than letting the distribution utilities earn a profit on their entire existing assets – all of which have been paid for – the Energy Board should allow profit only on newly invested capital, such as new equipment required to service growing customer needs.

Excess cash should be rebated to the customers. The board should also eliminate the inefficient and unfair "pay up front" method of paying for investments, which leaves current customers to bear the entire costs of investments that will benefit future customers. Failure to make this last change would overstate the utility’s capital costs – and so boost rates – by double-counting some investments. Under Energy Probe’s alternative, customers who have previously paid up front for utility assets would continue to enjoy the benefits of those assets without having to pay twice. Customers would also see a benefit by eliminating "pay up front" in favour of "user pays." Municipalities would still have received billions of dollars in unencumbered electricity assets – assets worth even more if the Ontario Energy Board adopts a system of incentives to encourage utility managers to cut fat from their operations.

Next November, when the electricity market opens for competition, rates may increase. Consumers will have a tough time deciphering the cause – a confusion that may absolve rate-setters from fully accepting responsibility for their actions. When asked what would be an acceptable distribution rate increase, a consultant advising the board staff testified last month:

"It may very well be that consumers will object to the price increase, but at the same time one must also recognize that there is likely to be mass confusion in the market in any case as folks try to understand what has been done to the electric sector, and are in some senses unable to sort it out."

Consumers can be excused for feeling confused. The regulator doesn’t know how actual customer rates will be affected. Nor does the Ontario government.

While it continues to face criticism from municipalities who feel short-changed by provincial downloading, it has never pointed to the multibillion-dollar windfall coming to local governments. The Consumer Association of Canada and the Vulnerable Energy Consumers Coalition (affiliated with the Ontario Coalition Against Poverty) – groups that normally defend the interests of residential and vulnerable energy consumers before the Ontario Energy Board – have so far been strangely quiet, instead bringing in experts supporting the double-payment and double-counting proposal.

Under competition next year, consumers will be hit with several special charges imposed by the provincial government – some less obvious than others. Their proceeds will help pay down leftover Ontario Hydro liabilities. These charges, on their own, risk increasing overall customer bills. However, they are more legitimate than the proposed bonanza for municipalities, since Ontario Hydro’s historic liabilities – which are mostly due to its nuclear program – must be covered.

Raising distribution rates to hand $5-billion of customer-created equity to municipalities is unjust and unreasonable. Municipalities have not invested a dime in their utilities. Our municipal utilities are debt-free and flush with cash. Municipal politicians are unlikely to be prudent when playing with this record jackpot.

At the same time customers face rate increases for distribution services, they face provincial surcharges for Ontario Hydro’s past excesses, including a stranded debt of $21-billion. A fair resolution to this quagmire would see the entire proceeds of any rate increase used to pay down the old Ontario Hydro debt. This would avoid the need for one or more of the provincial charges, and perhaps lower overall rates. It would also lead to a more market-based pricing system in electricity, and bring us closer to the day consumers can enjoy the full cost-saving and environmental benefits to come from electricity deregulation.

Richard Foot
National Post
November 25, 1999

Efforts to reopen Canada’s oldest nuclear power plant — shut down for two years — aren’t receiving enough scrutiny because the federal government refuses to put the project through a full environmental assessment hearing, say groups of citizens who live near the plant.

Community groups want the government to impose a full series of public hearings and not what they call a "whitewash" review of plans by Ontario Power Generation to resume operations at its Pickering A nuclear facility, east of Toronto.

Without a proper assessment, says Irene Kock of the Durham Nuclear Awareness group, "the risk of a catastrophic accident increases. This is the oldest plant we have, and there must be a very clear need established before it is allowed to restart."

The four Pickering reactors have been shut down since December, 1997 because of massive efficiency problems and safety concerns. Ontario Hydro, the provincial Crown corporation that once owned them, has been working for nearly two years to overhaul the management and the infrastructure of its debt-ridden nuclear plants. Its restructured successor, the Ontario Power Generation company, wants to open the four Pickering reactors by 2001.

Ontario Power Generation had asked the Atomic Energy Control Board, the federal agency that regulates the nuclear industry, to allow it to proceed on reopening without an environmental assessment. The AECB said a review was required by federal law.

What upsets Ms. Kock and others is that the AECB has only demanded a shortened form of assessment called a "screening."

This means AECB officials will themselves review an assessment report submitted by the power company before deciding whether the reactors can reopen. A full assessment would require the federal environment minister to appoint an independent panel of experts to review the company’s report and consider the input of other groups at extensive public hearings.

"What we’re faced with now in this screening is absolutely no independent forum in which to raise our concerns," says Ms. Kock. "A full assessment also provides intervenor funding, so we’d be able to hire experts to review Ontario Power Generation’s evidence. Now, we have no resources to bring experts on some of these very complicated issues."

Those issues include how the power company has improved the structure and integrity of the 30-year-old reactors, how it will mitigate the pollutants and nuclear waste produced at the plant, and what economic justification there is for reopening.

Others, such as Norm Rubin of Energy Probe, say they simply don’t trust AECB staff to treat the assessment as objectively as an independent panel would.

"Every time anything in the nuclear industry is reviewed by independent people, the results are quite different from the results we get when the review is done by the guardians of the status quo."

Not so, says Sunni Loratelli, a spokeswoman for the AECB, who says the agency has full discretion under the law to decide what kind of an assessment to impose.

The public can make submissions on the project to the AECB. Ontario Power Generation has also scheduled public meetings.

Tom Adams
Energy Probe
March 16, 2000

Mike Harris’s electricity restructuring is degenerating into a nightmare attack on consumers, taxpayers, and the environment.

Your power rates are about to go up. Air pollution is about to get worse. Nuclear plants that are shut down and should stay mothballed forever may be brought back into production. The Ontario Hydro generating monopoly is virtually intact. And our independent regulator — the Ontario Energy Board — has been stripped of its independence and now takes orders from Mike Harris and his government.

After seven years of turmoil, during which the government was supposed to be deregulating the power system, privatizing it to take it out of the hands of politicians, and giving more power to the consumer, what has the government delivered? Not privatization — nothing has been sold. Not deregulation — if anything, the government’s grip on the power system is tighter than ever before. Not honest regulation — the regulator is now a toothless paper pusher in Mike Harris’s direct employ. Not lower rates — instead, tax upon tax is secretly being added to every aspect of the new power system. Not tougher air pollution controls — loopholes will let coal plant operators increase their emissions.

The electricity restructuring has centralized power with Mike Harris. As a result, the backbone of the old Hydro system — its highly polluting coal and nuclear plants — are protected from competition by cleaner and cheaper power sources, mostly cogeneration and high-efficiency natural gas plants, but also some renewable technology.

We must bring the Mike Harris government to its senses. Ontario doesn’t need to be under the grip of a new Hydro monopoly. We need true competition and strong independent regulation to lower our rates and clean up pollution. In the United Kingdom, which broke up its power monopoly in 1989, rates plummeted immediately and old polluting plants were soon replaced by clean modern ones.

If you agree, please send us a generous donation, to let us spread the word — through more letters and more articles like the one enclosed, through more speeches, more press interviews, and more presentations to government bodies. This government’s Hydro reforms are running off the rails. With your help, we can convince the government to get back on track.

Sincerely,

Thomas Adams
Executive Director

P.S. Please respond quickly with a tax-creditable donation. Time is of the essence. The longer it takes for the government to wake up, the higher our Hydro rates will go and the worse our environment will be polluted.