Energy Probe

Janet McFarland
Globe & Mail
July 13, 2000

God knows there’s no defending Ontario Hydro’s safety record managing its nuclear facilities. But British Energy’s track record isn’t spotless either, and Canadians need to carefully monitor the province’s first effort at hiring a private company to manage a nuclear plant.

The British are way ahead of Canada in the privatization game. British Energy, now a publicly traded company, runs eight nuclear sites in Britain and has signed deals with an American partner to buy five nuclear plants in the United States.

On Tuesday, it announced its first Canadian contract, an 18-year lease to operate the Bruce nuclear plant in Ontario. British Energy owns 95 per cent of the new company established to run the plant, while two unions that represent nuclear power workers own the rest.

The British experiment at nuclear power privatization has been rocky. The biggest black eye for British Energy, which was established in 1996, was the leak last August of a confidential report by Britain’s Nuclear Installations Inspectorate (NII) — the government nuclear regulator — that said BE’s relentless quest to cut costs and boost profits had led it to severely cut staff levels in its nuclear plants.

Since 1996, BE has cut 1,500 jobs or 20 per cent of the work force, including many operating positions in the plants. Some have been replaced by outside contractors.

The NII said this was a threat to safety at the nuclear plants. The inspection report said the staff cuts were done on the assumption that there would be less safety work required in a privatized company, but instead the experience has shown no reduction in workload.

In a number of key safety areas, such as fire protection, BE now has just one specialist for eight different nuclear sites, the report says. It said there is no longer anyone working in the area of severe accident analysis.

The report cites a "widespread attitude" that the top priority was on electrical output and that it was acceptable to delay less immediate safety work. It faults management for not fully appreciating the difference between nuclear and conventional utility management.

Since last August, BE has indicated it still plans more layoffs. However, it has been prohibited by the NII from making further major cuts in key staff areas. Meanwhile, the NII says many if not most employees at the plants are working substantial overtime, and said the actual levels of overtime have been underreported by BE.

In Canada, BE has offered jobs to all 3,500 people working at the Bruce plant. The union partnership at Bruce has already ensured that BE has the unions on side, which could indicate we will not have the same cuts here — at least in the short term.

In the United States, there has been strong opposition by environmental groups to the AmerGen Energy Co. partnership (half owned by British Energy and half by Peco Energy Co.) that owns or is buying five nuclear facilities. Four environmental and anti-nuclear groups, for example, have conducted a campaign to prevent AmerGen from buying the Vermont Yankee nuclear station, citing concerns that safety will be compromised by private ownership. They have extensively quoted the NII report to support their safety criticisms about British Energy.

Nuclear watchdog Energy Probe in Toronto says it does not oppose private management by British Energy. Indeed, nuclear research director Norman Rubin says Ontario Hydro did too poor a job to advocate keeping it in charge.

All faith was swept away in 1997 with the release of a damning report commissioned by the hydro utility, which called the nuclear operation a rogue division that shrugged off serious safety problems. In the report’s wake, Ontario Hydro shut down seven of its 19 reactors, while chief executive officer Allan Kupcis resigned after accepting responsibility for the fiasco.

There’s no evidence to suggest British Energy will do a worse safety job than Ontario Hydro. But there must surely be some time spent acknowledging the British problems.

Ontario residents have been shaken by the Walkerton E. coli crisis and the message it sent about poor monitoring of privatized water testing. This is not the best time to sell the safety merits of privatized nuclear plants. The only way for the Ontario government and the federal nuclear regulator to reassure the public is to openly acknowledge the risks and to learn from the safety concerns in other jurisdictions. British Energy has to earn our trust.

Deirdre McMurdy
Maclean’s
July 31, 2000

Ron 0sborne has one of the most unusual challenges of any chief executive in Canada: his primary job is to create competition for the company he runs.

Osborne, 54, is president and CEO of Ontario Power Generation Inc., the venture that now holds the electricity- generating assets owned by Ontario Hydro before ir was bro- ken up in 1999. Osborne had joined Hydro in 1998, two years after the provincial government announced that it would dismantle the largest power utility in Canada and in- troduce open competition into a monopoly market. Since taking the helm at Hydro, he has been racing to overhaul the utility’s bloated bureaucracy. Within a decade, he must re- duce Ontario Power Generation’s share of the province’s elec- tricity generating market to 35 per cent from its present 90 per cent, to comply with the Tories’ Energy Competition Act.

To that end, Osborne recently inked a controversial $3.1-bil- lion deal that will see British Energy PLC lease and operate the nuclear facilities at the Bruce generating plant on Lake Huron for 18 years, competing with OPG for their existing customers, as well as any new ones. In his view, the deal is a huge step in the right direction. "We’ve been mandated to help create com- petition under Bill 35 and we might as well get on with it," he notes. "It’s not much of a game plan to have the sword of Damocles of decontrol hanging over your head for 10 years."

The transaction has come under intense public scrutiny. For one thing, critics have expressed concern that after the lease expires, Ontario taxpayers will be saddled with an ob- solete facility and a big tab for decommissioning the reactors and disposing of hazardous waste. There has also been a call for assurances that the money from the lease will be directed towards the reduction of the almost $8 billion "stranded debt" left behind after Ontario Hydro’s restructuring. Still others are worried about the environmental standards that will be enforced when Bruce–which is now only partially operational–is no longer under OPG’s control.

In his rapid-fire manner, Osborne briskly ticks off his an- swers to each of those issues. Ontario is on the hook for the cost of de-commissioning and disposing of waste regardless of who operates the plant. And a big block of the lease pay- ments will be directed to those future costs. Both federal and provincial regulators will oversee the environmental stan- dards at Bruce. Furthermore, Osborne points out that British Energy will try to restart several of the Bruce nuclear units that were mothballed between 1995 and 1998. "We can’t re- store service at Pickering and Bruce simultaneously. That’s beyond any management team’s grasp," he declares.

Even Norm Rubin of Energy Probe, a vigilant watchdog on nuclear issues, sees some benefit to the British Energy deal. "There will be no more confusion surrounding this business. We all now know that we are dealing with a company that is out to win, to minimize costs and maximize returns." He adds that "any clarity is welcome."

Certainly, clarity is something that Osborne is struggling to achieve at OPG. He would support privatization of the util- ity–eventually. Although he emphasizes that the Ontario government has taken no formal steps in that direction, he also notes that the government did hire two teams of invest- ment bankers in the spring to help it review options for OPG and its assets. "lf we do a good job, the government will have several options to consider," says Osborne. "If we do a bad

job, it will have few options beyond the status quo or the breakup and sale of assets."

For Osborne, the status quo has never been a viable option. A British-born chartered accountant, he worked for several years as a partner at Clarkson Gordon, before scaling the se- nior ranks at Maclean Hunter. After losing an acrimonious battle with Rogers Communications in 1994 over control of the publishing company, now called Rogers Publishing, Os- borne resurfaced at BCE Inc. As president of the conglomer- ate, and then president and CEO of Bell Canada, he became directly involved in a painful process that taught him many of the lessons he’s now applying at OPG: the end of Ma Bell’s monopoly in Ontario, Quebec and the Northwest Territories.

Perhaps the most important lesson, says Osborne, is the huge cultural adjustment required for successful deregu- lation and competition. "In a monopoly, there’s a sense that you know what’s best and the customer has to take what he’s offered. You dictate to the customer, then all of a sudden you have to learn to listen and respond," says Osborne.

In addition to his self-confessed practice of "preaching from the Mount whenever an employee will stand still long enough," he is also tackling the cultural shift at OPG in a practical manner. "We’ve made it clear that we’ll continue to put bread on the table for our workers," he explains. "But most of the jam for that bread has to come from earnings and corporate performance." To reinforce that message, he has introduced a variety of profit-sharing plans which, he says, "have quickly gone a long way to building an interest in the financial success of OPG."

Any such success will come under some serious strain by mid-2001, when full competition is anticipated to begin in the Ontario power market. Independent power generators, local distributors, aggregators, wholesalers and British Energy will all be vying for their piece of the $9-billion-a-year provin- cial power market. By then, Osborne intends to have OPG even closer to its fighting weight–and his fighting spirit.

Norm Rubin

August 9, 2000

In the wake of the announcement that Ontario Power Generation (Ontario Hydro successor company) will lease the Bruce Nuclear Power plant to British Energy, Norm Rubin, Director of Nuclear Research for Energy Probe appeared in:

Macleans Magazine
The Toronto Star
The Globe & Mail
The National Post
EYE Magazine
CBC Radio’s National and regional news programes
CBC Radio’s Ontario Today with Dave Stephens
CBC Radio’s Here and Now with Avril benoit
CFO Radio’s Open Line in Owen Sound
CTV’s National news
Prime TV’s Prime Business with Deirdre McMurdy.

Mr. Rubin also spoke with:

Toronto Sun
Reuters
Financial Times of London
Owen Sound Sun-Times
Dow-Jones Energy Service
Kitchener-Waterloo Record
Bloomberg
NOW magazine.

Mr. Rubin made the following points:

– The lease will transfer some of Bruce’s financial risk from "unwilling investors" (Ontario taxpayers) to "willing investors" (British Energy shareholders) – a welcome shift.

– Unfortunately, much of the financial risk — of poor operation as well as higher-than-expected costs of cleaning up the radioactive mess — remains with Ontario taxpayers. The cleanup costs have been estimated by Hydro/OPG at $18.7 billion for all 20 reactors, approximately 40% of which relates to the Bruce reactors.

– The involvement of a shareholder-owned, profit-maximizing company in the operation of Bruce will predictably elicit better regulation (safety and environmental) from federal and provincial regulators, and demands for even stricter regulation from the public. Many people have long believed (wrongly) that Hydro’s/OPG’s public ownership and non-profit status meant that they did not "play to win" in regulatory matters. The lease arrangement will bring welcome clarity in that regard, and the clarity will help remind regulators and the public of the importance of regulation. (Indeed, the federal AECB, now renamed CNSC, has already announced that it directly links private ownership with the need for regulatory stringency: specifically, AECB/CNSC says it will ONLY demand that the present generation provide the cash to clean up the nuclear mess IF reactor ownership is transferred to a private, non-governmental party!)

– In all the above regards, an outright sale of the reactors would have been far preferable to the lease. We are disappointed with the lease arrangement, though it is better than yesterday’s status quo. It also appears (from recent reactor sales) that BE was willing to pay MORE for the 18-year lease than it would pay to buy. (Wouldn’t you??)

– All the cash BE pays for this lease MUST be directed to pay down Ontario Hydro’s "stranded" debts, and not left in the hands of OPG to play with and lose. (Minister Jim Wilson has since promised that this "MUST" will be met.)

Mohammed Adam
Ottawa Citizen
September 3, 2000

Ontario-Quebec project would cross wetlands  

Ontario’s Hydro One is teaming up with Hydro-Quebec to build two new $304-million cross-border transmission lines the companies hope will reduce electricity prices, increase reliability and provide backup in emergencies.

Pending approval of the Ontario Energy Board, construction of two 20-kilometre transmission lines from Ottawa, through some of the region’s most sensitive wetlands to Masson in Quebec, will begin this winter. The new grid will be up and running by December 2002. It will carry 1,250 megawatts of electricity — enough for a city of half a million people for about 40 years.

The project will cost Hydro One, one of the successor companies of the former Ontario Hydro, $96.5 million. Hydro-Quebec will pay the balance of $208 million.

David Curtis, Hydro One’s transmission manager, says the main reason for the collaboration with Hydro-Quebec is to provide Ontario residents with another source of power to foster competition, particularly because one company, Ontario Power Generation, enjoys a monopoly. The hope is that another source of electricity will lead to cheaper prices.

For Quebec, however, the main consideration is the desire for a new source of power that will ensure "security of supply" in the event of an emergency such as the 1998 ice storm.

"This project will serve us well because it gives the people of Ontario access to a new source of electricity that will provide competition and lead to lower prices," said Mr. Curtis.

"And it will also serve Quebec well by improving the reliability of its electricity supply."

Mr. Curtis said political considerations played no part in the decision. "From our company’s perspective, the reasons were purely economic. Political considerations were never an issue."

The Hydro-Quebec project is the second cross-border collaboration by Hydro One. A similar project with Michigan is almost done, Mr. Curtis said.

Hydro-Quebec spokesman Eric Moisan said the company’s interest in the project is driven by lessons learned in the ice storm.

During the storm, transmission lines from James Bay froze and broke. Mr. Moisan said the problem was exacerbated in the Outaouais because Hydro-Quebec has only one line to West Quebec and this broke down near Mirabel.

"The main reason we are doing this is to secure our line so if in future we lose one line, we can use the other," said Mr. Moisan. "This will be used to secure the Quebec grid."

Tom Adams, executive director of Toronto-based Energy Probe, an environmental watchdog, says the lines are expensive but necessary.

"It’s an expensive form of insurance against higher prices, but in the absence of real competition in the generation of power in Ontario, we needed more capacity in transmission.

"This is what you get when you don’t do things right. I am a reluctant supporter."

The Ottawa section of the line will run along an existing hydro corridor from Hawthorne Road in Ottawa, cross Green Creek and then run along the edges of the Mer Bleue bog, to Cumberland and across the river.

Mr. Curtis says because the new line is on an existing corridor owned by Hydro One, no discernible environmental damage will occur. He said Hydro One completed an environmental assessment that has been approved by Ontario’s Environmental Assessment Board.

"Most of the potential environmental effects associated with this project are minor and short-term in nature," the environmental reports says.

A public hearing could be held by the Ontario Energy Board on the project. Those who wish to intervene have 14 days to notify the board of their intentions. An ad in Friday’s Citizen sets out a detailed process and addresses of the agencies.

Lily Nguyen
Globe & Mail
September 15, 2000

Plans to spend $400-million on country’s largest co-generation facility.

TransAlta Corp. said yesterday that it plans to spend $400-million on a Sarnia, Ont., power project that could produce enough electricity to light up a city of 500,000.

Observers said the Calgary-based company’s plans to build, own and operate what will be Canada’s largest co-generation plant is a sign that Ontario’s emerging open market for electricity is catching fire.

"It’s really one of the first projects to go forward under the new open Ontario market," said Steve Snyder, TransAlta’s chief executive officer.

Tom Adams, the executive director of Energy Probe, a Toronto- based environmental think tank, hailed the news as a sign that Ontario’s competitive power market is finally becoming a reality.

"It’s a good sign. It’s a really good sign," Mr. Adams said.

The plant, which was originally scheduled for early 2001, is now set for October of 2002.

The natural-gas-fired project, which will produce 650 megawatts of electricity per hour, enough to meet 2.5 per cent of the province’s demand, has been in the works for more than two years. In June, 1998, TransAlta announced it was selected for the power project being proposed by major industrial consumers such as Bayer Inc., Dow Chemical Canada Inc., Imperial Oil Resources Ltd., Nova Chemicals (Canada) Ltd. and Shell Canada Ltd. But as deregulation of the power industry in Ontario stalled, so too did the power project. It’s only now that the company has been able to move ahead, Mr. Snyder said.

"We had to know the rules by which we could sell the power," he said. "We had to wait for Ontario."

Sam Kanes, an analyst with Scotia Capital Inc. in Toronto, said "I think the Ontario government’s happy to see any development, given this delay to open up market and some confusion still over the rules."

Mr. Adams of Energy Probe said that if "there had been a stronger, more stable institutional environment, they could have come to this conclusion earlier."

Deregulation was supposed to happen this November, he said. Instead, the province has shuffled it off to some indeterminate date in the future – although he added he was hopeful it would happen by the middle of next year.

Mr. Snyder said that although the timing of Ontario’s open market is a concern, it’s not enough of one to stall the project any longer.

"We’re patient," he said. "Any market we’ve been in, be it Australia, New Zealand, Mexico ro the U.S., it does take time to go from an unregulated market to a regulated market." He added that the regulatory regime is "getting clearer," and TransAlta has plans to do another project of similar size in Ontario.

But in the intervening time from the initial announcement of the project, many of the original players in the project dropped out leaving only Bayer, Dow Chemical and Nova as acting participants.

In the deal, TransAlta will take over those companies’ existing facilities generating 210 megawatts, build a new plant supplying 440 megawatts, and provide Bayer, Dow and Nova with roughly 175 megawatts.

"They’ve outsourced their electricity and their steam," Mr. Snyder said, adding that the three remaining large customers are enough to make the project viable. That leaves 475 megawatts that can be sold into the market to provide consumers’ needs.

Mr. Adams noted that the project is good for the environment, since natural-gas-fired plants spew less pollution into the air than coal-burning plants. That’s even after environmental initiatives such as one announced by Ontario Power Generation yesterday to spend $250-million over three years to clean up its generators.

Mr. Adams dismissed it as a "Band-Aid solution."

James Mccarten
Hamilton Spectator
September 15, 2000

May prolong coal-fired plants

Environmentalists greeted a $250 million emissions-reduction plan by Ontario’s largest power producer yesterday with scorn and suspicion.

Ontario Power Generation plans to reduce nitrogen oxide emissions at its coal-fired Nanticoke, Lambton and Lakeview stations by 13,000 tonnes a year, president and chief executive Ron Osborne announced yesterday.

New technology to cut emissions at the plants will be among OPG’s largest capital projects, said Osborne, second only to the restart of the Pickering A nuclear plant, shut down amid safety concerns in 1997.

"The solution to the smog problem needs to involve the electricity industry, other industries, the transportation sector and all consumers," Osborne told the Mississauga Board of Trade during a luncheon speech.

"We will not stop making these investments. We will continue to look for other opportunities for cost-effective emission reductions."

But the plan to install the technology — called Selective Catalytic Reduction (SCR) units — at three aging fossil-fuel plants has its critics.

Ontario Premier Mike Harris has already assured local officials that the Lakeview plant in Mississauga must be converted to natural gas before it can be sold.

"What they’ve got here is a 1985 K-Car that’s on the market, and OPG has decided to throw a lot of money at the exhaust system," said Tom Adams, of energy watchdog Energy Probe.

"You’ve got to wonder, is it good money after bad?"

But the investment makes good sense, since converting the plants to natural gas isn’t something that could happen overnight, Osborne said in an interview.

"Even if somebody told us tomorrow to convert all of these to gas as quickly as you can, we’re going to be burning coal in at least four of these units seven, eight, nine years from now," Osborne said.

"Anything beyond a couple of years means that it’s imperative that we clean up our act on this stuff, and we’re going to do that."

Jack Gibbons of the Ontario Clean Air Alliance said he believes that by investing in antiquated facilities, OPG is trying to force Harris to "allow them to extend the life of their coal-fired power plants."

Yesterday’s announcement was made while both Harris and Mississauga Mayor Hazel McCallion were in Australia, Gibbons noted.

"This investment makes no sense if you’re just about to sell on the condition that it be scrapped and converted to natural gas."

Osborne, who denied having any sinister motives in timing the announcement, said it would be unwise to rush into a gas conversion when fuel prices are so unstable.

The environmental benefits of the investment could be outweighed by its relative cost, said Adams, noting that the SCR units don’t reduce toxic metals like mercury, arsenic and lead.

"It’s not a clear win for the environment, and it’s a lot of money."

Once the plants begin producing less nitrogen oxide, they will be used to a greater extent, generating more pollutants that aren’t being adequately screened, he added.

Between nuclear and hydroelectric generation, 75 per cent of OPG’s power results in no smog-producing emissions, Osborne said.

Including its time as Ontario Hydro, the company — responsible for just 12 per cent of Ontario’s nitrogen oxide emissions — has spent more than $1 billion on fossil plant emissions over the last 15 years, he said.

"As a result, today we produce as much power from our fossil plants as we did in the early 1980’s, but with 60 per cent less acid gas emissions."

Stuart Laidlaw
Kitchener-Waterloo Record
October 7, 2000

The world of privately owned nuclear plants that Ontario is about to enter is going through a consolidation as companies build worldwide conglomerates that dwarf the province’s utility.

"There’s a lot of buying and selling going on," said Pat Kane, an analyst with Federated Investors in Pittsburgh. For the last three years or so, American state governments have been deregulating the electricity sector, leading to a wave of utilities selling nuclear reactors.

The trend has extended internationally, with Britain and Norway shifting their nuclear plants to the private sector in hopes of making them more efficient.

"The nuclear industry is really consolidating," said Tom Adams of Energy Probe, a power industry watchdog group based in Toronto.

Ontario Power Generation Inc. announced this week it’s seeking private investment for its nuclear operations. Ontario has 20 reactors, only 12 of them functioning at the moment.

Ontario Power Generation is one of five successor companies to Ontario Hydro, the Crown utility broken up under the Ontario government’s plan to open up the province’s 90-year-old electricity monopoly to competition next year.

In announcing the move to nuclear privatization, Ontario Power Generation president Ron Osborne said Ontario will likely have to look to foreign companies for investment because no Canadian companies exist that could run the plants.

This will take the province into a tumultuous industry where traditionally staid utilities suddenly find themselves selling off entire divisions, buying others and mapping out new strategies.

In the U.S., while power generation companies have been privately owned for decades, they have until recently been heavily regulated.

Now the power generation field has moved out of regulation, while prices and profits in power-line operations have remained regulated, said Kane.

As a result, utilities have had to decide whether to be unregulated power generators or regulated distributors. Once they decide which side of the company to concentrate on, they sell the other part.

"Once they sell off, they are suddenly half the size," said Kane. " They need to get some scale back," which has led to consolidation.

British Energy took its nine nuclear plants private in 1996, and has since been buying up nuclear plants abroad. It has an office in Toronto.

The British company has also set up a joint venture in the U.S. with Peco Energy called AmerGen, which is buying half-a-dozen reactors.

Peco, meanwhile, plans to merge with Unicom Corp. to form the largest utility in the United States, with 14 nuclear reactors and sales of $12.4 billion US.

Another company, Entergy Corp., operates six reactors and has been looking to buy more.

The moves have resulted in a web of companies controlling more than 30 reactors, and Kane expects much more consolidation as companies continue to look for ways to cut costs and boost profits.

Kane said consolidation makes sense since companies can no longer count on state regulators to guarantee a return on investment.

"Nobody seems to want to take on nuclear, except for Peco and Entergy," he said.

They have been acquiring atomic plants at a fraction of the cost it took to build them.

Creating a network of nuclear plants allows a company to cut staff to improve profits. For instance, a company with 10 nuclear plants could operate safely with five fire protection engineers — one for every two plants, Kane said. "But if you only have one plant, you still need one engineer. You can’t have half."

Joanne Paulson
Saskatoon Star Phoenix
October 13, 2000

Uranium supplier invests $100 million in Ontario plants

Cameco Corp. plans to take its first plunge into nuclear power generation with a $100-million investment in the Bruce nuclear plants of Ontario.

Cameco announced Thursday it has signed a memorandum of understanding with British Energy PLC to take a 15 per cent interest in a new company, Bruce Power Partnership. The partnership was established to lease and operate the reactors.

British Energy will own 80 per cent of Bruce Power, and the remaining five per cent has been offered to the unions representing approximately 3,200 workers at the nuclear plants.

Earlier this year, British Energy struck a tentative deal running at least through 2018 to lease and operate the Bruce plants from Ontario Power Generation Inc. (OPG), formerly Ontario Hydro. The British company is expected to take over in mid-2001.

Cameco will also have an exclusive contract to supply all of the uranium, uranium conversion services and fuel fabrication services to the plants.

Cameco CEO and chair Bernard Michel said the deal is "like entering a new world" for his company.

"We have so far been a provider of fuel and fuel conversion, and now we become a 15 per cent producer of electricity from this very large nuclear plant," Michel said Thursday.

Cameco’s financial results will likely show little change until its investment is paid out over two years. However, Michel expects the partnership to be profitable. How profitable depends on long-term electrical and uranium prices.

"This should impact our earnings, after the two first years, increasing in the future by somewhere in the 20 to 25 per cent (range) every year … and cash flow should be about the same."

Michel said he is confident this forecast is based on a conservative assessment of future electrical prices in Ontario.

Bruce Power is in a transition phase, working to satisfy regulatory requirements and gain its operating licence from the Nuclear Safety Commission.

The Bruce project is divided into two parts called A and B, each with four Candu reactors. The four Bruce B plants are operating, although the Bruce A plants have been closed- one because of a technical problem, and the other three for business reasons.

Michel expressed confidence in the Candu technology, citing expert assessments that Candus are reliable, long-term nuclear reactors.

"They were operating with record capacity factors a few years ago, and they continue to do that for instance in Argentina, for instance in Korea, (and) they achieved excellent results in Romania," he said.

"It just needs to be operated well."

Elaine Kergoat, Cameco’s manager of public relations, said British Energy is assessing the possibility of bringing two of the four non-operational plants on stream.

If that occurs, Cameco will supply 1.5 million pounds of uranium and 600 tonnes of uranium dioxide conversion services annually. Otherwise, Cameco will provide one million pounds of uranium and 400 tonnes of uranium dioxide to the four plants.

OPG uses several uranium suppliers, including Cameco, although Cameco already provides all of the uranium dioxide conversion services for the Bruce reactors.

Cameco has always said it was looking for opportunities to expand in the industry without straying from its core business of mining and conversion, said Kergoat.

"This is a perfect fit for Cameco, given what it has been saying over the last several years."

Tom Adams, executive director of Energy Probe in Toronto, said having many partners with different specialties makes commercial logic in the operation of power plants. Energy Probe is a national consumer and environmental watchdog organization.

Adams said the long-term future of the nuclear industry is in doubt, considering declining prices for uranium and little construction of reactors around the world.

But he said plants such as these are still capable of creating substantial cash flow.

The Bruce site has recently been "very controversial" from an environmental point of view, Adams added. Of greatest concern is contaminated water leaking off-site, and it is uncertain where the water is coming from, he said.

News of the deal produced a lukewarm response from investors. Cameco shares rose 50 cents in Thursday trading on the Toronto Stock Exchange, closing at $21.75.

Tom Adams
Speech
October 27, 2000

Eight Lessons for Electricity Liberalization in Atlantic Canada

• Define a public interest mandate for electricity liberalization.

The mandate of Ontario‘s electricity restructuring – to promote jobs and investment – is fundamentally confused. We have too many jobs in the power sector, not too few. We have lots of investment in electricity, although not much of it wise. The confused mandate of the process has made it easily captured by incumbent interest groups and diverted to their purposes. We are watching the commercial Hydro successors, selected major industrial customers, and selected independent power producers capture huge gains at the expense of the legitimacy and integrity of the reform process. You need a better compass to find the true north of the public interest than we have as you negotiate the complex trails of the restructuring. One of the paradoxes of electricity liberalization is that decentralizing power system must to some extent be conducted centrally. A highly successful model used in the State Victoria in Australia to guide what has proven to be one of the most successful electricity liberalizations so far achieved was to set up a special, advisory office responsible to the Ministry of Finance, staffed with recognized experts and mandated to protect the public. In Ontario, we might have achieved something of the kind had we continued the work of the Market Design Committee. Transparency must be a core value of liberalization processes. Virtually all public sector financial data should be released in a timely and complete fashion.

• Aim for a Maritime-wide regional power market rather than province-by-province market.

A significant potential challenge for electricity sector liberalization will be prying the grip of the politicians off the levers of power. Several deficiencies of the Ontario market reform process relate directly to the problem of politicians not wanting to lose their power. Examples include the failure to break up and privatize the commercial Hydro successor companies and the decision to retain directive power over the OEB. The experience in some of the most successful electricity liberalization efforts, particularly mid Atlantic seaboard states (the PJM Interconnection) and Australia, suggests that an interjurisdictional market reduces the grip of politicians.A wider market offers many practical advantages. The costs of establishing the rules and the IT mechanisms for a competitive market are significant so there is an important economy of scale to spread the set up costs. Creating a wider market will improve the ability of the reforms to release efficiencies.

• Quantify your sunk costs once and for all by realizing them.

Without having its electricity liabilities quantified in a hard fashion, Ontario is sliding toward substantially increased liabilities. The best way to avoid this problem is to quantify the liabilities by privatizing them. Privatizing the liabilities may appear costly but the gains in transparency are likely to be highly worthwhile in the long term.

• Think hard about market design and transition/implementation issues.

California separated its power exchange and its system operator, a problem that is now widely thought to have contributed to the current difficulties in that market. PJM initially did not use a system of efficient locational marginal prices for energy on the transmission system. Instead, it used an averaging based pricing simplification. As a direct result, its market had to be suspended in 1997 due to widespread gaming of the system. The market for electricity should closely match the physical reality of that system. Ontario is building its initial market on the basis of the kind of pricing that caused the PJM system to fail in 1997.

• Developing investor confidence is necessary for long term consumer protection.

Problems in California and Alberta with diminished supply reliability and high prices are driven in large measure by the slow pace of investment in new generating stations. Ontario is going there. While investor confidence in Ontario languishes, our power system’s reliability is being undermined and the stage is being set for much higher prices.Investor confidence comes from real competition, real financial accountability, and real independent, arms-length regulation rather than from subsidies and Bandaids

• Don’t forget environmental protection.

Environmental protection is essential to the legitimacy of the liberalization process. If the public gets the sense that the reforms are being carried out at the expense of the environment, public confidence will be undermined. The experience with economically efficient air emission control programs, such as the US sulphur dioxide emission trading regime, proves that major environmental improvements can be made at a very modest cost.

• Get working early on upgrading the metering stock to handle Internet quality data and make commodity electricity prices today start to evolve toward short run marginal cost

High quality, intelligent metering, capable of two-way communication of price and usage data, is a critical piece of the customer protection safety net in a competitive electricity market. Without good metering, customers have little practical opportunity to avoid price spikes by managing their usage of electricity. Without prices that reflect marginal cost, better meters offer little advantage for customers. I suggest that as soon as possible, utilities implement short run marginal cost pricing for commodity electricity and the metering stock be upgraded. Intelligent meters will be most cost effective for larger customers. As the costs of intelligent meters drop, the market penetration can increase.

• Build the knowledge base in Atlantic Canada.

Power system restructuring is a complicated business. Any serious liberalization effort requires expertise in areas such as power system market design, finance, accounting, power system engineering, IT systems development, environmental regulation, interjurisdictional trade law, and administrative law. Although internationally experienced consultants can provide valuable assistance, consultants are both costly and peripatetic. When they leave they take their learning with them. Atlantic Canadians in government, the press, academia, think-tanks, utilities, and industry should be encouraged to study the issues associated with electricity sector liberalization so that your community has a better chance to succeed in this enterprise than appears now to be the case in Ontario.1. Mr. Adams represents the environmental and consumer advocacy organization, Energy Probe, as Executive Director. Energy Probe is a charitable organization that promotes resource conservation, environmental sustainability, democratic decision-making processes, and economic efficiency for Canada‘s energy sectors. He also works for the consulting firm Borealis Energy Research Association. He was appointed by the Ontario Government to the Ontario Market Design Committee, charged with developing the initial rules for Ontario‘s new competition-oriented electricity market. He is now an independent director of Ontario‘s Independent Electricity Market Operator, responsible for managing the integrated operation of Ontario‘s power system at the wholesale level.Energy Probe address: 225 Brunswick Ave. Toronto, Ontario M5S 2M6, ph: 416-964-9223 ext 239, fax: 416-964-8239, URL: www.energyprobe.org, 2. Another overview of Ontario‘s new electricity market can be found at http://www.theimo.com/imoweb/mktOverview/mktOverview.asp. The information on this site mostly aimed at businesses with interests in power generation, marketing, or other services.The Ontario Ministry of Energy Science and Technology offers its own overview of the electricity restructuring at https://ospace.scholarsportal.info/bitstream/1873/4542/1/10280495.pdf. The information provided relates primarily to legal and policy issues. No rate impact analysis of the restructuring is provided on the Ministry’s site. 3. The white paper can be found at .http://www.theimo.com/imoweb/historical_devel/finale.pdf

The following are two links providing analysis about the white paper:http://energy.probeinternational.org/utility-reform/reforming-ontarios-electrical-generation-sector/ontarios-white-paper-learning-austral

http://energy.probeinternational.org/utility-reform/reforming-ontarios-electrical-generation-sector/energy-probes-position-power-sector-r

4. The MDC reports can be found at http://www.theimo.com/imoweb/historical_devel/Mdc/mdc.asp. 5. Energy Probe’s analysis of Bill 35 can be found at:http://energy.probeinternational.org/utility-reform/reforming-ontarios-electrical-generation-sector/notes-presentation-ontario-standing-c 6. Link: www.ontariopowergeneration.com 7. Link inactive: http://www.gov.on.ca/FIN/english/regbull.htm 8. Link: www.hydroone.com 9. Link: www.theimo.com 10. Link: www.oefc.on.ca 11. Link: www.esainspection.net 12. Recent U.S. reactor sales include Pilgrim for $181 (US)/KW, TMI 1 for $228 (US)/KW, Clinton for $22 (US)/KW, NMP 1 for $117 (US)/KW, NMP 2 for 136 (US)/KW. 13. Most customers in rural areas served by provincially-owned Hydro One will be getting a massive rate increase on market opening, but the reasons are different than those described below. Customers served by privately owned local distribution utilities in Sault St. Marie, Gananoque, and Fort Erie will not see the rate increases described below. 14. Dow Jones Newwire, July 26, 2000, "Power Cos Cautious about Ontario Investing". 15. OEB hearing RP 1999-0017, Transcript p. 648, ll. 18-22. 16. IPPSO/FACTO, October 2000. 17. The Market Design Committee’s case in favour of gross load billing can be viewed at http://www.theimo.com/imoweb/historical_devel/Mdc/Reports/Q4Report.asp under "Principles for Recovering Fixed Transmission Charges for Basic and Export Service" p. 4-9. 18. I expect that at the opening of the market, the rebate will apply to approximately 60% to 70% of your power consumption. Within the succeeding few years, assuming the market becomes more competitive, a declining portion of the commodity cost will be covered by the rebate in the event of high prices. 19. A detailed proposal for such a system was articulated by the Market Design Committee in its third quarterly report.

Tom Adams
Speech
October 27, 2000

Energy Probe does not claim that its analysis is definitive. Significant gaps in the financial reports exist. One difficulty is that revenues for OEFC are not sufficiently disaggregated in the reports we have obtained to allow them to be reconciled with the reports of the other Hydro successors. OEFC’s own 15 month income statement appears to contain an internal discrepancy of $40 million.

Despite the limitations of our analysis, we believe our findings warrant a complete and public investigation by the provincial auditor. It is clear that despite all the changes, Ontario’s power system is still not recovering its costs. It appears that the province is not acting as a responsible receiver in bankruptcy. The restructuring has created room for the renewed expansion of the commercial successors to Ontario Hydro.

Continued Subsidies to Industrial Customers

In June 2000, Minister Wilson told the Association of Major Power Consumers in Ontario that the secret deals that Ontario Hydro signed with selected large industrial customers to provide them with discounted power will be extended into the new electricity market. Under Bill 35, the discount deals were set to expire when the competitive market opened. Minister Wilson’s decision contradicted the recommendations of the Advisory Committee on Competition and the government’s commitments in the white paper to allow all customers, regardless of size, equal and fair access to the market.

Continuing the deals requires a mechanism to fund the necessary subsidies. To solve the problem, Minister Wilson ordered the government-owned OPG to continue selling power at the secret prices.

The mechanism bears a little attention. Once the market is opened, consumers will be charged for several separate components of service. Energy Probe believes that the transmission rates, the Debt Reduction Charge, and IMO charges will add up to close to the total discounted rate – in effect, the commodity will be supplied to favoured large industrial consumers at a price close to zero or even possibly negative prices.

The extension of the discounted power deals will have many negative effects on ordinary consumers. Ordinary consumers will directly pay higher prices. Under the Market Power Mitigation Agreement, Ontario Power Generation is permitted to create artificial scarcity sufficient to increase its average revenue on commodity sales to 3.8 cents/KWh. When commodity power prices close to zero are included in the average revenue calculation, the price for the ordinary consumers must rise accordingly. Since the volumes and prices in the contracts are generally secret (there are a few exceptions and some details have leaked out), the cost impact on ordinary consumers is impossible to accurately calculate. For illustrative purposes, if the total volume of sales captured by these deals is 5% of OPG’s total and the commodity price is zero, the price OPG can charge ordinary consumers rises from 3.8 to 4 cents/KWh. If the volume is 10% of the total and the price is zero, the price for ordinary consumers rises to 4.2 cents/KWh.

An alternative interpretation of OPG’s subsidy treatment is possible. If OPG includes its gross revenues from the subsidized sales in the calculation of the Market Power Mitigation Agreement average revenue calculation, the company will see lower net revenues and generate lower profits and dividends. In this event, OPG’s payments to OEFC will be impaired and taxpayers, rather than customers, will cover the cost of the subsidies to big industry.

In addition to increasing average prices, extending these deals will also increase price volatility, reduce competition and investment, and increase environmental emissions. When the market opens, the subsidized customers will be among the relatively few who have the necessary metering and technical means to respond to price spikes by curtailing consumption. In a more efficient market, where these interruptible customers were always on the alert for price spikes, cutting their usage when supply constraints occurred, the savvy shoppers would be very important contributors to price stability. With these customers now comfortably protected from market forces, the amplitude of price spikes for the rest of us will be much greater. Cogeneration investment, which is a major opportunity for reducing environmental emissions, will also be impaired by a climate where heavy industry can solve its energy needs through political processes rather than business effort. The most graphic example of the impact of the price discount extension on cogeneration arose when TransAlta announced its contracts to sell heat energy from its Sarnia cogeneration facility. When the project was originally floated in 1998, there were six customers expected and now there are only three.

Local Distribution Rate Shock

Because of a series of decisions by the Ontario Energy Board and the Ministry of Energy, starting with the regulator’s issuance of its "Performance Based Rate Handbook" decision in January 2000, Ontario power consumers served by municipal distribution utilities will see distribution rates increase over the next 3 years by approximately 35% to 100%.⁽¹³⁾ Municipal distribution utilities — of which at the beginning of restructuring there were about 300 — are responsible for selling about three quarters of the power used by end-use customers of all sizes in Ontario.

Residential customers using the average amount of 1000 kilowatt hours per month in Toronto will see an increase in their distribution rates of 13% in 2001 and 42% by the time the changes is fully implemented. We estimate that the average household will be paying an extra $100 per year due to distribution increases.

To explain the cause of the increase it is useful to understand how the utilities operated in the past. Under the old Ontario Hydro structure, no one legally owned the local distribution companies. The utilities were effectively consumer co-ops. Prior to the electricity restructuring, the municipal distributors were virtually debt free. Further, net income from rates built up a cash surplus across the province of about $1 billion dollars. Distribution rates were set at a level high enough to recover both the annual operating and capital budgets of the utilities. (Normally a regulated utility’s rates recovers operating costs and the cost impact of the rate base.)

Under Bill 35, the municipalities were granted ownership of the local distribution companies and made them subject to regulation by the OEB. Energy Probe supported these measures. Without clear ownership, rationalization of the sector could not proceed. Historically the municipal distribution utilities were regulated by Ontario Hydro, a scheme fraught with conflicts of interest and not adapted for transparency and other due process guarantees.

The opportunity existed at the beginning of regulation to move the utilities to a more efficient capital structure, one that allowed the utilities to incur debt. Rates could have been set to provide for dividends to municipal owners only to the extent that they invested in the system. This arrangement would have permitted service quality to be maintained at lower prices.

Instead, the regulator adopted a cost of service model that allowed the utilities to earn a "market based rate of return" on historic ratepayer capital, thereby transferring the net book value of the utilities to the municipal governments. Consumers will effectively pay again for the capital costs of assets paid for previously. The OEB locked in massive rate increases and a leakage of about $7 billion in ratepayer equity as a windfall to municipal governments.

Without decisive action now by the provincial government, the best electricity ratepayers can hope for is that their property taxes may go down by an amount equal to the windfall granted to municipal governments.

Controversy has dogged the OEB’s deliberations on this subject since the regulator’s staff proposed the mechanism causing the increase in 1999. When asked what would be an acceptable distribution rate increase, a consultant advising the Ontario Energy Board testified in September 1999: "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." In June 2000, Minister of Energy Science and Technology Jim Wilson issued an edict to the Ontario Energy Board ordering it to review distribution costs and later the same month introduced Bill 100 that would defer the full impact of the increases until after the next provincial election. In August 2000, the president of Toronto Hydro testified that the designers of Ontario’s power sector reforms always intended to increase distribution rates, a comment Energy Probe has disputed.⁽¹⁴⁾

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 – sponsored experts who appeared before the regulator supporting large distribution rate increases.

Energy Probe has many concerns about the implications of the minister’s edict and Bill 100.⁽¹⁵⁾ The purpose of Bill 100 appears to be to ensure that the full impact of the distribution increase is not felt until after the next election. However, Bill 100 creates new uncertainties for consumers and investors. Bill 100 is so ambiguous that its implications for ratepayers cannot be determined. Under Bill 100, what happens after 2003? Does the legislation apply to privatized utilities?

Although confusion prevails on many points, it is now clear that all semblance of independent regulation of monopoly services has been lost. The contrast between Ontario’s positive experience with independent, non-politicized natural gas regulation and our bad experience with highly politicized electricity matters under Ontario Hydro indicates that giving up the independence of our regulator is likely to harm the public interest. When our new energy legislation was introduced containing a clause granting the Minister directive power over the regulator, we were assured that it would almost never be used.

The Ontario Energy Board has also implemented an incentive program to encourage distribution utilities to cut their costs. The program, called Performance Based Ratemaking (PBR), may reduce distribution rates by a few percentage points over time. The benefits of PBR will never come close to the losses imposed by the double payment problem from applying a market-based rate of return on the capital historically contributed by ratepayers.

Energy Probe is pleading with the provincial government to institute a "ratepayer equity recovery" program to protect electricity consumers. We argue that the province should recover the full book value of the municipal utilites as of Dec. 31 1998 from the municipalities. The proceeds should be earmarked to offset the Debt Reduction Charge. The book value of the MEUs — estimated at $7 billion — is about equal to the DRC recovery target which we understand to be $7.8 billion. So far we have received no indications of support.

Ontario’s Electricity Investment Climate Goes Sour

With the exception of the TransAlta’s Sarnia cogeneration project, which will add 440 MW of new capacity, no other independent power projects have been firmed up. On July 26^th the Dow Jones news wire carried a story listed many prominent companies, such as Calpine and Utilicorp, that had intended to invest in Ontario but gave up.⁽¹⁶⁾ The article cites a number of issues such as Bill 100, access to information about the power system, and political risk.

A major blow to the confidence of potential investors in the generation market is OPG’s plan to restart the Pickering A. Under this plan 2000 MW of baseload capacity would be brought into service over the next few years. The government has endorsed OPG’s plan. It appears from OEFC’s accounts that the public is financing the restart investment. Competitors have been affected. For example, a representative of Union Gas recently testified at the OEB that, "To the extent that, for instance, the Pickering plant comes back into play, the marginal cost of electricity coming out of that facility will make it very difficult for a start-up (gas-fired) operation to be able to compete with it."⁽¹⁷⁾ It is hard to blame investors for being nervous when competing against an expansionist, highly politicized, taxpayer-financed company intent on advancing its competitive position.

The government is applying a series of subsidy Bandaids to correct the now embarrassing lack of private investment. In the middle of September it announced a sweeping program of tax holidays for new, rebuilt, or expanded water power projects.⁽¹⁸⁾ The government has also politicized the regulation of transmission tariffs in order to artificially encourage investment.

Politicizing Transmission Tariffs

Transmission tariffs recover the cost of the high voltage wires now owned by Hydro One which crisscross Ontario, suspended on tall lattice or tubular towers, delivering power from neighbouring utilities and generating stations to the local distribution companies and large industries. The transmission grid also connects Ontario’s power grid to other grids in Quebec, Manitoba and the United States. It appears that Hydro One’s costs include some liabilities associated with Ontario Hydro’s past mistakes, however the complete data behind the financial restructuring of the transmission system has not been released. Energy Probe is not opposed to recovering some costs for historic mistakes through transmission rates, but in our opinion such costs increase the necessity for fair cost allocation and fair rate design.

Although transmission remains a regulated monopoly, key decisions on how transmission costs are charged to customers have become politicized. Consistent with the history of other energy decisions, when politics enters the decision making, ordinary members of the public generally suffer. After a period of intense lobbying by big industry, Minister Wilson agreed to back big industrial customers in their effort to transfer a portion of their transmission costs, and the hidden taxes embedded there, to smaller customers. The rate impact on the bills of small consumers from this decision is likely to be fairly small for the next couple of years – a few percentage points of the transmission charge. However, the rate impact is very likely to grow in future years and, more importantly, if the principle of cost shifting is accepted for other regulated rates, the impact could become large.

Sixteen days before the OEB released its decision on a hotly contested matter of transmission cost allocation and rate design, Energy Minister Jim Wilson made a speech at a major conference attended by several members of the OEB announcing his opposition to a rate approach that would recover historic costs from all customers on the basis of the total electricity consumed.⁽¹⁹⁾ In the speech, he said "I’ve listened to concerns that gross load billing would make most self-generation projects uneconomic" and that this was an outcome "we want to avoid". He went on, "The issue is currently before the Ontario Energy Board, and I’m confident that the OEB, as our independent regulator, will come up with a decision that protects the best interests of customers and advances competition." Industrial interests preferred a rate design that could improve the cost-effectiveness of self-generation projects by shifting sunk transmission costs to customers who don’t build self-generation projects. The mechanism for cost shifting is called net load billing. Net load billing had previously been rejected in favour of more efficient and fairer gross load billing by the Market Design Committee.⁽²⁰⁾ Representatives of the industry groups lobbying the Minister of Energy in favour of net load billing — chiefly the Association of Major Power Consumers in Ontario and the Independent Power Producers Society of Ontario — were represented on the Market Design Committee and had endorsed gross load billing in that forum. The parties supporting gross load billing included the Consumers Association of Canada, OPG, and Energy Probe.

The OEB’s transmission rate design decision was, issued May 31, 2000, overturned the recommendation of the Market Design Committee on gross load billing, consistent with the wishes of the Minister.

Other aspects of the public interests, beyond the wholesale competition and public finance issues discussed above, are at risk as well.

Residential Electricity Contracts that Hurt

The activities of some marketers selling electricity contracts in the residential marketplace are likely to impair public confidence in the electricity restructuring. I have studied three contracts that marketers are offering to consumers or have been offered to consumers – two from Direct Energy Marketing Limited and one from Toronto Hydro Energy Services, an affiliate of Toronto Hydro. I am urging consumers not to accept any of these offerings.

These contracts contain financial risks for consumers that ordinary consumers have no reasonable chance of understanding. The contracts assign any money that would normally be paid from Ontario Power Generation (OPG) to each electricity customer under a

rebate program outlined in the Market Power Mitigation Agreement to be received instead by the marketer.

OPG’s rebate program requires the company to rebate customers if the annual weighted average commodity price exceeds 3.8 cents/kilowatt hour. The current commodity price, which is not evident on consumer bills, is about 4.5 cents/kilowatt hour.

Factors that might cause electricity prices to exceed 3.8 cents/kilowatt hour include production shortfalls from Ontario’s nuclear plants, high electricity prices in neighbouring jurisdictions such as New York or Michigan, tougher environmental controls on Ontario’s coal-fired power stations, or little investment in new electric generation capacity due to perceived uncertainty. I expect that OPG rebates are very likely to arise in the first couple of years of the market’s operation.

Consumers could be mislead by a marketing pitch from Direct Energy that states "Best of all…you will not be subject to retroactive price adjustments." In Ontario’s natural gas industry, where ordinary consumers have some experience and which bears some resemblance to electricity, homeowners buying gas from their local utility can be subject to retroactive price adjustments which may add to the customer’s bill or provide a credit for a portion of the bill. Once Ontario’s electricity system is open for competition, the only retroactive price adjustments for a consumer under contract with a competitive vendor is the OPG rebate. The rebate can only be credited to your bill and can never increase your bill. However, the credit would revert to Direct Energy under the contract. When Direct Energy states that "protecting" you from retroactive price adjustments is "best of all", the company appears to be counting on widespread consumer confusion about how the new electricity system will function.

Although I expect the market price to exceed 3.8 cents/kilowatt hour, and despite the cost impact on consumers of the extension of special rate deals for large industrial customers, because of the Market Power Mitigation Rebate, the final price for consumers, at least in the first year or two, is unlikely to exceed 4.6 cents/kilowatt hour.⁽²¹⁾ This compares with the price of 5.65 cent/kilowatt hour Toronto Hydro is offering and the price of 5.175 cent/kilowatt hour for the first year and 5.75 cent/kilowatt hour that Direct Energy is offering in its contract dated August 18, 2000.

The contract that Direct Energy has offered, dated April 26, 2000, is based on a pricing formula that depending, on how it is interpreted, could cause a significant rate increase for consumers. Under this so-called "discount program", the price for five years for the commodity component of the bill will be capped at the customer’s current distribution utility’s price, less a discount equal to 5% of the customer’s commodity price. The contract does not define the term "current price". Most electricity distribution utilities currently sell electricity service at a bundled price, where the costs for distribution service, transmission service, and the commodity electricity consumed are rolled together into a single rate and a separate monthly hook-up charge. I anticipate that in Ontario’s future electricity market, the commodity portion of the normal household’s bill will be approximately 40% to 50% of the total bill. If Direct Energy calculates the price for commodity electricity as 5% less than your current bundled price, customers on the program may end up paying in the order of twice as much for the commodity portion of their electricity bill as they do now. I have made repeated inquiries to Direct Energy’s call centre for clarification of the contract interpretation but have not received any clear replies.

Others contractual terms in Direct Energy’s offer may severely disadvantage consumers. If Direct Energy contracts with a supplier such as a generating company, and a failure to deliver by the supplier results in extra costs for Direct Energy, customers buying under contract from Direct Energy will have to cover Direct Energy’s losses. The contract does not set out how consumers will be billed for these losses. With the opening of Ontario’s electricity market delayed, Direct Energy will have the option to continue the arrangement but once the customer signs, the customer won’t have any choice about whether to continue until the 5 year term expires.

Direct Energy had been lobbying the Ontario Energy Board and the Ministry of Energy Science and Technology to have the regulatory rules changed so that, in the event that a dispute arises between Direct Energy and the contracted customer, the contracted customer cannot obtain electricity from their local utility or another supplier. Direct Energy had argued that allowing this safety net for consumers would constitute an interference in its contract. If the rules were changed, consumers could have been stuck with a choice between paying a high bill or freezing in the dark. The Ontario Energy Board rejected the submissions of Direct Energy on this point.

Toronto Hydro has recently complained that Direct Energy sales representatives are misrepresenting themselves as affiliated with the utility.

Although electricity prices are likely to rise for ordinary consumers, the commodity portion of the bill is likely to stay the same or fall in the short term while the regulated component rises. Marketing claims that consumers should sign a fixed price commodity contract to avoid higher prices are generally misleading.

Official bodies with a responsibility for customer protection such as the Ministry of Energy and the Ontario Energy Board have not explained to consumers the implications of the Market Power Mitigation Agreement rebate when contracting for power. As a result, consumers are in peril. When consumers who have signed these deals find out what they mean, the reputation or our restructuring will suffer.

Deregulating Fossil Emissions

The Advisory Committee and Competition, the government’s white paper, and the Market Design Committee all recognized the need for tougher emission controls. During the 1999 provincial election Premier Harris promised to set "strict emission standards for Ontario Hydro and any utility that sells electricity in our province".

OPG’s NOX emissions have been rising since 1995. In 1999, OPG’s NOX emission substantially exceeded its target. Its NOX emissions this year will exceed last year’s emission.

In January, the Ontario Ministry of Environment announced an Emission Reduction Credit Trading program for emissions from Ontario Power Generation’s fossil units. As currently drafted, the government’s Emission Reduction Credit Trading program would effectively deregulate coal-fired power plant emissions.

The concept of emission reduction credit trading is that foregone forecasted emissions are treated as if they are real emission reductions. Credit granted for foregone forecasted emissions can then be used to offset actual emissions.

Here’s how emission reduction credit trading might work: A company might proposed to build a facility like a cement plant that is capable of producing a significant amount of emissions. After duly registering its interest in the facility, the company might then cancel the plan for it or reduce its planned size. The reduction in actual emission below the once forecasted level might then be established as an emission reduction credit and the credit sold to OPG. OPG would then have a credit to reduce its registered emission and increase the utilization of its coal-fired units by a corresponding amount.

Environmental organization in Ontario active on air quality issues are universally opposed to this system of reduction credits. Instead there is a very strong consensus in favour a system of emission caps and emission trading by capped entities, similar to the highly successful US EPA SOX trading system.⁽²²⁾

On Feb. 14, 2000, OPG announced of its plans to sell its Lakeview and Lennox power plants by November 2000 in order to move it toward compliance with the competition objectives enshrined in the Market Power Mitigation Agreement. Environmental groups expressed concern that the sale might result in increased emissions. The provincial government imposed a moratorium on the sale of units in May. The moratorium was originally supposed to last for two months to allow the government to clarify issues around emissions control. There is no sign of the clarification or relief from the moratorium.

Several of the government’s illiberal policy measures have been justified on the grounds of environmental protection, including the hydro-power tax holiday, the transmission rate subsidy and the fossil unit sale moratorium. When effective, light-handed environmental protection measures are rejected in favour of ineffective, bureaucratically intensive ones, the explanation for illiberal actions on environmental grounds rings hollow. It appears instead that the real motivation for these meaures is to avoid having to grapple with the underlying issues and the instinct to maintain political control over the outcomes.

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