Energy Probe

Brad Faught
National Post Business (Special Issue)
October 1, 2001

On the windswept eastern shores of Lake Huron, the orange-coloured bulk of the world’s largest nuclear power station rises starkly against clear blue sky and the green trees that blanket the area. It’s a huge site, ringed by a security fence punctuated by motion detectors. You’d have to be a high-jumping deer to get in here. Within view, three of them have done just that, nibbling grass contentedly on the plant side of the steel mesh. Up close, the two main buildings look like a couple of Soviet-era apartment blocks. My two escorts and I are headed to Bruce B, which houses four of the plant’s eight reactors.

Once inside, one of my guides puts on his dosimetry badge, or Thermal Luminescence Dosimeter, a device that measures a person’s exposure to radiation. As we pass through the portals a disembodied computer voice assures us that we are "clean," which is precisely the verdict the long-suffering nuclear industry has been working hard to achieve. After all, for the past 20 years or so it has endured almost as much bad press as Saddam Hussein. The reasons? Three Mile Island, Chernobyl, cost overruns, radiation leaks, reactor shutdowns, The China Syndrome, capital costs twice those of coal or natural gas, government foul-ups….

Nuclear energy, which once promised to be the high-tech star of the postwar world, has become a byword for disaster and seemed, noted The Economist recently, to have been consigned to the "dustbin of history." So when British Energy plc said its Canadian subsidiary, Bruce Power Inc., had signed a $3.2-billion, 18-year lease with an Ontario Crown corporation to run the 24-year-old Bruce plant, most casual observers were surprised. Why on earth would a publicly traded British firm, one of the world’s largest power companies, bet billions that it could make money on an aging plant located 5,000 kilometres from its head office in Scotland? The British hadn’t shown this much interest in Lake Huron since the War of 1812. What has changed?

Upon entering Bruce B, I’m met by a wave of heat and a thundering roar that sounds like jet planes passing overhead. Plant workers, a few of the 3,000 who populate the site, walk or ride by on large tricycles, the use of which helps shrink the size of the behemoth building. The turbine hall, one floor above entry level, is a gigantic and spectacular feat of engineering. The turbines themselves look like steel-encased humpback whales. They are driven by the steam produced from the intake of 9 million litres of lake water per second. The power generated flows out to begin its high-wire journey across Ontario to Quebec and Manitoba, to New York, Michigan and Minnesota.

Bruce B can generate up to 3,140 net megawatts of electricity from its turbines, currently enough power to keep on all the lights and laptop computers – and do everything else – in a city the size of Toronto. By itself, Bruce B supplies 15% of Ontario’s electricity needs, which can reach some 25,000 MW during peak demand, such as on those muggy days that enveloped much of the province in August. That’s a lot of juice, but it’s an amount that will rise to 20% in 2003, when two of the four reactors at the dormant Bruce A will come online.

At present, North America, with just 7% of the world’s population, accounts for 30% of global energy consumption. Over the next 20 years, according to the National Energy Board, demand for power will rise in Canada by at least 25%. And with just 12% of this country’s electricity being generated by five nuclear plants – Bruce, Darlington and Pickering in Ontario, which together provide 41% of the province’s power, plus one each in Quebec and New Brunswick – British Energy, the U.K.’s largest generator of electricity, is gambling that it can convince Canadians that nuclear energy can play a greater role in supplying the country’s energy needs.

Ever since it was formed five years ago, following the merger and privatization of two government-owned utilities, nuclear has been at the heart of British Energy’s business: it owns and operates 15 U.K. reactors. In 1997, its first full year of operation, it made a profit of $134 million on revenues of $4.1 billion. Earnings rose sharply and steadily over the succeeding two years as the company expanded its operations and improved efficiencies. "They were very good cost cutters. But they argued safety and took no shortcuts," says Alistair Buchanan, head of utilities analyses at the ABN AMRO Bank in London.

By 2000, however, profits fell noticeably – to a mere $22 million. The main reason: a 30% drop in U.K. electricity charges brought about by, thanks to deregulation, an excess in generating capacity. Bringing British Energy a measure of fiscal salvation, though, is the US$66 million in earnings it’s expected to receive this year through a partnership in the U.S. with the Chicago-based Exelon Corp., an electric company that generates some 70% of its capacity through 17 nuclear reactors serving five million customers in Pennsylvania and Illinois. Barry Abramson, senior utilities analyst at UBS Warburg in New York, calls Exelon "one of the stars of the [nuclear] industry, with big economies of scale."

In the mid-’90s, Britain wasn’t the only country where government, fed up with high operational and refit costs, wanted out of the nuke business. All across America, public utilities were looking to sell off nuclear assets – and doing so at fire-sale prices. The two private utility companies that would merge last year to form Exelon were among the first to take out their chequebooks, believing that it could run the plants more efficiently, in part by importing the best practices that had been developed at the facilities it was already running.

For its part, British Energy, which utility analyst Ian Graham, of Merrill Lynch Global Securities in London, calls the U.K.’s "best operationally geared electricity generator," decided it also needed to look outside its home market for future growth. That led to America and Exelon. In 1997, the two formed AmerGen Energy Co. and now jointly operate three reactors, including one at Three Mile Island, site of the infamous 1979 partial meltdown.

Three Mile Island was a good deal: AmerGen paid just US$23 million, approximately 15% of its book value. But once low-cost plants were in play, rival companies began to compete more vigorously. Acquisition costs soared and put a crimp in British Energy’s plan, forcing it to look around for new, and cheaper, possibilities for investment. They found one north of the border – in Ontario.

At Bruce B, my tour leads to a periscope, which offers a glimpse of the inside of a reactor. I am amazed at the stillness. All I can see is a series of lights, much like those on an airport runway, which illuminate concrete cross-beams, under which sits the mechanism used to load aluminium fuel bundles that power the reactor. Nuclear fisson depends on highly radioactive uranium. When atoms are split after being bombarded by uranium, they release several hundred million electron volts of electricity. The energy is harnessed and eventually drives the turbines, producing electricity.

The man in charge of producing the electricity and profits here is Bruce Power’s recently appointed CEO, Duncan Hawthorne, a new breed of manager for a new style of nuclear plant, one on which the strictures of the marketplace are being brought to bear. Forty-six years old, balding and with the thick lowlands brogue of his home town of Greenock, Scotland, Hawthorne, an engineer, rose from the shop floor and now resides in Kincardine, a small town near the plant. Playing golf here isn’t his only reminder of home: "There are more bagpipes in Kincardine than in Scotland," he laughs. When I ask him why the company bid for the lease, he answers simply: "We were good nuclear operators in the U.K." That may be true, but not having to pick up debt or incur huge capital costs seems a pretty clear attraction. In some ways, the Bruce plant is a turnkey operation for Hawthorne and British Energy.

By the time Mike Harris and the Ontario Tories came to power in 1995, Ontario Hydro was over $30 billion in debt – most of it nuclear-induced – and listing badly. Harris wanted to deregulate Ontario’s energy market and so, in 1999, Ontario Hydro was duly dissolved, most of its operations emerging as Ontario Power Generation Inc. (OPG). Shorn of billions of dollars in debt transferred to the province, OPG was a much healthier Crown corporation than Ontario Hydro had been, but also a much less powerful one. The government’s ultimate goal is to make OPG one company amongst many in an increasingly privatized market. Within 10 years of the start of deregulation, OPG’s share of the province’s generating capacity must be reduced from its current 85% to 35%.

Hawthorne has been assigned to make sure British Energy grabs a big share of the market and to add to the approximately $240 million annually it says it will make through the Bruce lease. As his boss, Robin Jeffrey, who this summer was named chairman and CEO of British Energy – in part because of his strong managerial record in the U.S. – said earlier this year: "It is obvious how important the business in North America is to us." In fact, noted the Sunday Times of London in July, following the company’s annual meeting: "Jeffrey [was] rubbing his hands in anticipation of a windfall from British Energy’s operations in America and Canada."

The glassed-in control room at Bruce B looks like something at NASA. Screens and panels proliferate, over which hover a phalanx of nuclear operators trained for up to 12 years to handle every conceivable malfunction in the plant. To win the right to operate this facility and all the staff within it until 2018, with an option for 25 more years, British Energy beat out "about a dozen other bidders, U.S. and European," says Richard Discerni, executive vice-president of OPG.

Immediately upon the announcement, in July 2000, that British Energy had been awarded the Bruce lease, critics of the deal emerged. Probably the most trenchant is Myron Gordon, professor emeritus of finance at the Rotman School of Business at the University of Toronto, and a long-time advocate of public ownership of Ontario’s power generating assets. The lease, he says, is "utterly rediculous." He believes that Bruce Power will be able to generate profits out of all proportion to its $3.2-billion investment. He calculates that, at the very least, the British Energy subsidiary will be able to make $240 million, but $435 million per year, net of its annual lease payments, selling the power generated by six reactors. This figure is based on the four operational reactors at Bruce B plus two of the four laid-up reactors at Bruce A, scheduled for re-start in 2003. Do the math, says Gordon: 2003-2018 is 16 years; 16 times $435-million equals $6.96 billion – plus hundreds of millions from the first two years of operating the Bruce B plant only. But Gordon is sure the profit figures will be even higher, because electricity rates are bound to increase once NAFTA free-market rules apply in a deregulated energy marketplace, where higher American prices will prevail. That’s a return on investment of over 100%. Pretty good, says Gordon, "when the Bruce A re-start can be accomplished for the modest cost of $340 million."

But Gordon hardly dominates the range of views on the Bruce. Disagreeing with him for instance, is Jack Mintz, a colleague at the Rotman School and the president and CEO of the C.D. Howe Institute. "The lease," he says, "was in line with the valuation of OPG’s assets. There should be significant gains to privatization, especially in the areas of plant efficiency."

Most analysts agree, recognizing that, after 20-plus years of operational experience, the industry knows a lot more about how to squeeze more juice out of existing facilities. Advances in technology have also helped. "Yes," says Barry Abramson, senior utilities analyst at UBS Warburg in New York, "generating output of plants has improved over the past 15 years – by as much as 20%." Colin Hunt, director of policy at the Canadian Nuclear Association, an organization made up of utilities, nuclear industries and research institutes, has a similar view. "With private operators," he says, "efficiency will improve, because the generating capacity factor really matters when selling into the market, not to a guaranteed monopoly. Tht is what will drive performance." Accordingly, at the Bruce, the short-term goal is to increase generating output to 90% from 80% of capacity.

In any discussion of the future of nuclear power, safety concerns are always at the forefront, which is why I’ve asked my tour guides to show me where nuclear waste at Bruce B goes to die a very slow death. In an Olympic-sized pool, with a depth of 11 metres, lie some 330,000 spent uranium fuel bundles in stacks over three metres below the water’s surface. At 50 centimetres in length, they look like submerged cords of wood. The fuel bundles give off an eerie blue glow from the cobalt they release, making this water a deadly elixir of radioactivity. "In about 800 years," says one of my escorts, "it would be safe for one of these bundles to be passed between two people." What impresses me, however, is not the danger, but how little radioactive waste there is lying still and silent before me. The contents of this pool are the sum total of all the high-level radioactive waste generated since Bruce B first went into operation back in 1984. One could well argue that what this waste lacks in volume – some 9,000 tonnes, or approximately 20% of the Canadian total of high-level radioactive waste – it makes up for many times over in toxicity. Still, with Toronto sending daily 100 transport trucks brimming with the city’s waste down Highway 401 to Michigan, this pool seems pretty small. In relative terms, Bruce B’s waste is miniscule. Mining and burning coal fill the skies with carbon dioxide and scar the land. Hydroelectricity means dams and dislocation. Natural gas results in long, intrusive, cross-country pipelines.

But despite the tiny levels of day-to-day-pollution generated by nuclear energy, David Martin, nuclear affairs expert for the Sierra Club of Canada, sees public apprehension over nuclear plants as inescapable. "The risk of catastrophic events is always there," he says, and "35,000 tonnes of waste" are being stored in similar pools, or in "dry-storage" facilities across Canada. To him, nuclear energy has proven itself both unsafe and uneconomic and, ideally, should be phased out.

Others aren’t so sure. Gordon Laird, a Toronto-based energy specialist who is writing a book on electricity generation in Canada, Power: Journeys across an Energy Nation, sees nuclear power as an inevitable part of the energy mix. He argues that, even though "greenhouse gas mitigation is not really on the map yet, the different energy sectors are positioning themselves as climatically responsible." And the more society focuses on reducing carbon output, the better carbon-free nuclear energy looks.

As Robin Jeffrey said to the aptly named Power Breakfast put on by the Toronto Board of Trade in June, "As an industry we need to get much better in presenting the environmental case for nuclear power. We are a crucial part of the Kyoto solution, but meantime most environmentalists see nuclear as a bridge too far. But just think about those summer days when the generation system is flat-out: the smell in Toronto’s air and the orange pall of pollution…." He’s saying that a nuclear expansion would mean less smog and less damage to the ozone layer. For a lot of people, that’s a compelling argument.

What Jeffrey didn’t mention, however, is a point that animates Norm Rubin, director of nuclear research at Energy Probe. Yes, he says, Bruce Power can operate the plant better, more cheaply and more safely than its predecessor. But, unlike Ontario Hydro, it can do so without being on the hook for off-site waste disposal or plant-decommissioning costs, which remain under the auspices of the federal and provincial governments respectively. As part of the lease, Bruce Power must pay Ontario approximately $2.7 billion, or $150 million annually. Not enough, says Rubin. "Ontario Hydro’s last estimate in 1999 of decommissioning and waste cleanup was $18.7 billion," [including $7.5 billion for Bruce]." Still, he will take British Energy, which he calls a "bottom feeder," over the old operating model: "I used to be a socialist. Ontario Hydro changed that. An essentially unregulated monopoly is about the stupidest system designed."

Shelley Martel, NDP energy, science and technology critic and MPP for Nickel Belt, also has questions about the Bruce deal. "It is the largest lease of a public asset in the history of Ontario, which will come back to public hands at the end of its term. What are the people going to get back?" For Martel and others, the province may end up with a depleted asset and a mountain of waste.

In an attempt to clarify the terms of the Bruce deal, Martel moved in October 2000 to have the lease evaluated by the provincial auditor. The government agreed, but the audit won’t be completed until 2002. However, she thinks the process is an important one because the "Bruce agreement is a template for the next round of leases or sales." Next time, she adds, it could be the Pickering or Darlington nuclear plants, where the decommissioning and radioactive waste disposal questions are even greater.

Safety and costs also concern Sean Conway, Liberal energy critic and MPP for Renfrew-Nipissing-Pembroke, the constituency where Canada’s nuclear history began back in 1945 at Atomic Energy of Canada’s Chalk River site. But he stresses that Ontario must guarantee its future energy needs. Nuclear power is a fact of life," he says. "We have to get production out of the nukes if we are going to avoid an electricity crisis, which could put us into a California situation."

In front of the offices at the Bruce plant, a lone wind turbine swishes gently in the breeze coming off Lake Huron. More of these giant white propellers are to follow as part of the company’s nod to energy diversification. Still, its main goal is to expand nuclear generating capacity – and that may invovle more than just rehabilitating existing plants. In June, Robin Jeffrey announced that building a new nuclear plant in Ontario is "an issue that we are studying." Meanwhile, in the U.K., the Daily Telegraph reported in August that the Labour government had given its "strongest indication yet" that it will encourage a nuclear revival. In order to meet Kyoto greenhouse gas emission cuts, Tony Blair must reduce carbon dioxide released into the atmosphere by 10%. The British Department of Trade and Industry state in August that "if new build costs prove accurate, and allowing a reasonable value for carbon savings, there are prospects for new build to be economic."

The clear challenge, then, for British Energy and other companies like it is to make the building of new nuclear plants an attractive option for investors. Jeffrey is optimistic. "Market forces in a truly competitive environment will balance supply and demand and encourage investment," he said earlier this year. To do that, lower capital costs as well as faster construction times must become an industry standard. Currently, a small, 110-MW modular reactor – 3% of the size of Bruce B – is being constructed over a mere 18 months in South Africa. Bruce B, by comparison, took 11 years to complete. If successful, this small reactor could provide a model for nuclear power’s future.

But while the U.K., the U.S. and Canada may prove fertile ground for such investment, other countries appear to be heading in a different direction. In June, for instance, the German government signed a deal with energy companies to shut all of the country’s 19 nuclear plants within 20 years. But while no one will ever become rich betting against the moral outrage of environmentalists, the current climate of energy diversity might make nuclear power somewhat more palatable, even to them. That’s the measured view of energy writer Gordon Laird. He thinks that deregulation will increase energy diversity, which will push environmentalists to "make a more nuanced response than in the past to nuclear power." If deregulation means that some less traditional means of power generation – such as wind – receive a real chance to grow, then perhaps the big nuclear plants will be pushed more to the side. Nuclear power won’t disappear, but maybe it can be made smaller, and therefore less menacing, more of a niche player than the Goliath of energy production that it is in Ontario or France where 76% of the country’s power needs are nuclear supplied.

For David Martin of the Sierra Club, however, any amount of nuclear power is too much, whatever it may look like in the future. "There is no question that a hard proposal to build a new nuclear plant would be the environmental confrontation of the decade," he says. Back at the Bruce Power offices I recite the quote to Duncan Hawthorne. He shrugs. "There is no need to chain themselves to a tree." But if they do, there are plenty of trees around here.

Despite conservation’s apparent social strength, energy demand isn’t likely to abate. However, given its history of government dependence and high debt, nuclear power has yet to prove itself in the deregulated marketplace. And with waste disposal and decommissioning still open questions, skeptics remain. The Economist, for one, is less than sanguine. "If the private sector wishes to build new nuclear plants in an open and competitive energy market," it said recently, "more power to it. As [government] subsidies are withdrawn, however, that possibility will become ever less likely." On the shores of Lake Huron, as in the U.K. and the U.S. British Energy is hoping to do what the nuclear industry has never done: prove the skeptics wrong.

Megan Gillis
Brockville Recorder & Times
October 22, 2001

Read the fine print.

That’s the message from a consumer advocate and local utility manager as dozens of new power sellers market long-term contracts now before the electricity market opens to competition next spring.

"The bottom line is I recommend not to sign – those deals represent a significant increase in your cost of electricity," said Thomas Adams, director of the environmental and consumer watchdog Energy Probe. "It appears to be a decrease but it’s a substantial increase and you sign away your rights to a rebate you would receive if you didn’t sign."

"Us being a local distribution company, we are not allowed to express an opinion one way or another," said John Walsh, president of Rideau St. Lawrence Utilities. "I can’t tell my customers if it’s good or bad – we try to educate them.

"Customers should be aware of the term of the contract, signing away the rebate, aware of cancellation charges – some pretty steep if they decide to get out after a year or two."

Walsh stressed that consumers don’t have to feel pressured by contract deadlines to sign up – they’ll still get power at wholesale rates from their local distribution company.

"They shouldn’t panic or worry about disruption in their power supply – there’s no way anyone will not have electricity," Walsh said. "We must give it to the consumer at cost. We cannot mark it up."

Consumers will have a choice about who they buy power from for the first time when the market opens to competition, slated for May. It’s like private long-distance telephone service – the same wires will be used by competing companies.

A letter sent by Ontario Hydro Energy, a subsidiary of Hydro One, for example, invites customers to lock into one-, three- or five-year deals for power at 5.79 to 5.95 cents per kilowatt hour. Residential customers of Hydro One now pay 8.75 cents per kilowatt hour.

The letter boasts that their rates beat their competitors and will protect consumers from a potentially volatile energy market if they sign up by October 21.

But read the part of the company’s brochure where it says that price only covers the power itself – which will rise and fall on the open market – not the other half of the customer’s current bill, fixed distribution costs which are on the way up, Adams said. The current Hydro One rate reflects all these other costs.

"It’s very hard for the ordinary citizen to detect this," he said. "It’s normally rolled in with everything else. It will be broken out. You’ll notice it keeps going up. You can’t shop to avoid this."

Tacked onto that cost per kilowatt hour is a delivery charge from the local distribution company, a transmission charge from Hydro One, a charge from the company that operates the electricity market and charge to pay off the former Ontario Hydro’s outstanding debt.

The Ontario Energy Board – the power market regulator – has approved a phased-in 70 per cent hike in distribution costs. There’s no competition in transmission and distribution.

Energy Probe argues that the typical customer’s bill will rise by one-fifth over the next three years, not because electricity will get a lot more expensive, but because of rising transmission and distribution costs.

They say it will go up even more with fixed-rate plans. They don’t offer a very good deal on the energy itself with customers likely to do better on the spot market, although they will have to tolerate some fluctuations, Energy Probe argues.

The current commodity price is about 4.5 cents per kilowatt hour. The group estimates that in the first year or two after deregulation prices are unlikely to go above five cents a kilowatt hour because of the price-stabilizing rebate.

It’s little known because government has done a poor job of advertising it, Adams said. But the rebate is designed to protect consumers and reduce the dominance of the main electricity maker, Ontario Power Generation, if prices rise above a benchmark 3.8 cents per kilowatt hour during the first four years after deregulation.

If prices reached 5.65 cents, for example, it could net a typical residential user $139 a year.

And Walsh points to the fact that the market regulator, the Ontario Energy Board, has predicted in writing to utilities after detailed studies that the cost of power after the market opens will be 4.3 cents per kilowatt hour.

If they regret the long-term deal, the cost for a consumer to buy their way out of a contract with a marketer could be as much as $180 a year, he added.

But Laima Cerf, director of residential marketing for Ontario Hydro Energy, says the long-term contracts are no different than a fixed-rate mortgage – they insulate consumers from a volatile market because customers get the best price the company can negotiate.

Nor are they hiding the distribution costs – they just don’t yet know what they’ll be, she said, noting that distribution companies are still approaching regulators for rate hikes and in the meantime the fact that energy is only half a customer’s bill is prominently noted.

And one knows how much the price stabilizing rebate will be or if it will happen at all, Cerf said. Customers sign it over because the company is assuming all the market risk to provide a set price, she added.

Similarly, it has to cost customers money to get out of the contract because the company will have already purchased power from their suppliers on their behalf, she added.

The real benefit of contracts like Ontario Hydro Energy’s is highlighted by the natural gas market. The company’s long-term contracts protected their customers from prices that went from 19 cents to 34 cents a cubic meter in a matter of months, Cerf said.

"That’s the kind of volatility on the supply side of costs and what could happen in the electricity market when it opens to competition," she said. "The fixed-rate deal is designed for consumers who want the peace of mind of knowing what 50 or 60 per cent of their energy cost will be for the future."

Richard Mackie and Martin Mittelstaedt/Tom Adams
Globe and Mail
October 30, 2001

The Ontario government has given British Energy PLC the ability to make exorbitant profits from the Bruce nuclear power station without taking on any risks, New Democratic Party Leader Howard Hampton charged in the legislature yesterday.

"For a $7.7-billion asset, British Energy is only going to pay rental fees of $16-million a year. What a giveaway," Mr. Hampton said, citing a report yesterday in the Globe and Mail based on documents obtained using the province’s freedom-of-information law.

"When it’s over, the people of Ontario will have to pick up the costs of decommissioning the nuclear facility and the people of Ontario will have to pick up the costs of storing the nuclear waste," Mr. Hampton complained.

He told Finance Minister Jim Flaherty, "You’re giving away the profits to your corporate friends for virtually nothing and you’re loading the people of Ontario with all of the debt down the road."

Mr. Flaherty defended the deal, saying it had been approved by both government officials and by an outside investment firm. "We had Salomon Smith Barney provide a fairness opinion which was related to the agreement, and the government’s own financial advisers reviewed this transaction as well."

But Mr. Hampton questioned the impartiality of the investment firm because it helped arrange the transaction.

"You cite Salomon Smith Barney. This is the company that you hired to put the deal together. They get $7-million for putting the deal together, and of course after they receive the $7-million they are going to tell you it’s a good deal. They make $7-million on the transaction. What do you expect?"

Outside the legislature, Mr. Flaherty complained that Mr. Hampton was misinterpreting the agreement under which Ontario Power Generation leased the Bruce nuclear plant, the world’s largest nuclear complex, to a firm set up by British Energy.

Four of the plant’s eight reactors are currently idle, and British Energy wants to restart two of them. The lease has provisions allowing it to run until 2043.

Mr. Flaherty said any investment to restart the reactors benefits taxpayers.

"Should we be taking public money and using it for that or should we be using it for other priorities like health care?"

But Mr. Hampton warned that the Bruce nuclear deal may set the stage for the government and OPG to divest other power plants at far below the cost to build them.

Some independent energy analysts were also critical of the deal.

"There is no question that Bruce Power has a sweetheart deal," said Dave Martin, a nuclear power consultant for the Sierra Club of Canada, referring to the British Energy affiliate that signed the lease.

And if electricity rates go up under the competitive market that the Tories plan to allow next year, British Energy could earn large profits.

"If the plant does famously well and has a long and productive lifetime with minor costs and good revenue, the upside potential for the public purse is limited and Bruce Power captures a big windfall," said Tom Adams, executive director of Energy Probe, an environmental policy think tank.

Under the lease, Ontario Power has a revenue-sharing agreement with British Energy that is linked to the output of the Bruce facility. Terms of this arrangement have never been publicly disclosed.

Critics contend that the revenue sharing may undermine the government’s stated policy of creating a competitive electricity market because both Ontario Power and British Energy have incentives to co-operate, rather than be true competitors.

Tom Adams’ letter to the editor in response to this article

October 31, 2001

Letters Editor, Globe and Mail,

Re "Bruce deal ‘a give away,’ NDP says" (October 30, 2001)

Your article inaccurately recorded my concerns with the Bruce power lease. I did not tell your reporter, Martin Mittelstaedt, that the deal was unfair, as your reporter implies, quite the contrary. I told him that the auction process appeared fair, that no unsuccessful bidders have identified deficiencies in the outcome, and share price movements of the successful bidder has not reflected anticipated windfalls. I only regretted that the lease limits competition compared to an outright sale since OPG retains a financial interest in Bruce Power’s profits.

Sincerely,
Tom Adams, Executive Director, Energy Probe

cc: Dr. Robin Jeffrey, Bruce Power
Mr. Floyd Laughren, Ontario Energy Board

The Globe and Mail did not print this correction.

Paul Weinberg
Straight Goods
November 4, 2001

Not so long ago, John Murphy was president of the 15,000-member Power Workers Union of Ontario (PWU), a foe of privatized energy services and a supporter of the NDP. But the one-time staunch unionist surprised friends and foes alike last May when he quit that position to accept the job of executive vice-president for human resources at Ontario Power Generation (OPG), the major generator of electricity in the province in the new deregulated, post-Ontario Hydro era. For Tom Adams, Executive Director of Energy Probe, Murphy is simply "a pragmatic politician." But Jim Stanford, economist for the Canadian Auto Workers, has a different view. "There is nothing new about being a management stooge," he says. "I view his switching of camps as a real disservice to those unions who are trying to better their workers."

Outside of police unions, no other labour organization is as tight with the Ontario Tory government as the Power Workers.

Zeal of a convert

An assistant to one of Ontario’s labour leaders was surprised that I had snagged an interview with Murphy. After an hour in his office in the Ontario Hydro building, however, it dawned on me that I was facing a man who had undergone a conversion and was anxious to spread the news. But like anyone with a new faith, he can be impatient with former colleagues, who are stuck in what he calls the "North American model" of adversarial labour-management relations. As OPG prepares to compete in a deregulated power market, Murphy is responsible for ensuring that both workers and managers are, as he says, "motivated, engaged and empowered." Upon closer examination of his recent history, Murphy’s action does not appear surprising. For a year after Mike Harris came to power in 1995, Murphy stood with Howard Hampton and the NDP against the sale of Ontario Hydro to private interests. In fact, the PWU is credited with having boosted support for public ownership and delayed Queen’s Park’s privatization plans. Eventually, however, Murphy began to shift his position as it became clear that the Harris government was hell-bent on taking control of power away from Ontario Hydro. Using the Energy Competition Act of ’98, the province broke Hydro up into a series of separate entities (still largely publicly owned), each of which is expected to duke it out in a deregulated market with other players, including U.S. companies.

Schmoozing with the enemy

Murphy began writing articles and speeches in favour of deregulation (ironically, he and his union had earlier railed against similar schemes in Margaret Thatcher’s Britain). He also joined the electricity transition committee, established by Ontario Energy Minister Jim Wilson – who was featured on the cover of the PWU’s magazine and invited to speak at a union function. And one of his last acts as PWU president was to schmooze with Mayor Mel Lastman, backroom guy Paul Godfrey, police union chief Craig Bromell and Harris at a PC fundraiser. Murphy defends his change of allegiance, saying, "We have not experienced any government that has done such broad consultation with the union on every step of the electricity industry restructuring as Mike Harris’." Murphy, who started as a technician at the Pickering Nuclear Station, may have simply been trying to save his members’ jobs in the face of the inevitable Tory restructuring. "If you keep saying you are opposed to a change but don’t have any alternatives, you are going to get marginalized, and are not going to have any opportunity for influence," he explains.

Creative horse-trading

Indeed, in exchange for co-operation with the energy ministry, the PWU won the right to maintain representation of the members in all of the reconfigured post-Ontario Hydro units, including the Bruce nuclear facilities leased last spring sold to British Energy. In addition, it will gain hundreds or possibly thousands of new members in Ontario’s newly restructured municipal electric utilities, although the stage could be set for a clash with other unions in those workplaces, including the Canadian Union of Public Employees (CUPE) – the Power Workers as local 1000 are part of CUPE, but have always maintained a separate identity.

Energy Probe’s Tom Adams suggests that a damning August ’97 report by Ontario Hydro chief nuclear officer Carl Andognini on poor management and labour practices in the nuclear power plants frightened the PWU, causing it to alter its opposition to deregulation and privatization. "It was a fundamental threat to the existence of the nuclear program," Adams says. But Myron Gordon, a U of T finance professor who advised the PWU when it was trying to save Ontario Hydro, says that Murphy and his union "threw in the towel" by siding with their own self-interest rather than the greater public good.

While deregulation might make sense in telecommunications because it encourages the development of new technologies, he says electrical power is an industry where little innovation is occurring. "People in the union are not exactly working at the minimum wage," he says. "They are more like doctors than orderlies." (Indeed, some PWU members earn salaries as high as $100,000.) Gordon says deregulation and privatization will mean higher electricity bills for Ontario consumers, billions of profits going into the pockets of foreign companies and a less secure provincial economy, which has traditionally been reliant on cheap electric power. But Murphy claims his move was a natural extension of his work in eliminating friction between the PWU and management. "My own view and the view of [OPG president] Ron Osborne is that the only ‘us and them’ in the future is going to be us as the company and the competition that wants our business," he says. But critics like Bruno Silano, president of CUPE Local One at Toronto Hydro, say some friction is necessary because unions and management represent different interests. "There is always inequity," he says. "The only power we have is in the collective agreement."

Geoff Bickerton, a labour columnist for Canadian Dimension and research director for the Canadian Union of Postal Workers, wonders if Murphy’s past negotiations with Ontario Hydro and OPG management as union president might have been compromised by his ambition for advancement within the corporation. But Don MacKinnon, the new president of the PWU, counters that no concessions regarding wages and benefits were made after the Harris government embarked on its restructuring process. And Murphy says that the number of employee grievances has dropped from 3,000 two years ago to 300 today, a result of a changed atmosphere inside the post-Ontario Hydro orporation.

Still, Patrick Case, an ombudsman for a brief period at OPG and an expert in human rights and race relations, says that in 1998 the PWU negotiated an "unusual" agreement with OPG that essentially allowed the corporation to force employees to transfer from the Bruce facilities at Port Elgin to Darlington or Pickering, east of Toronto, regardless of the disruption for families and themselves. MacKinnon stands by the PWU’s partnership agreements with OPG and the rest of the post-Ontario Hydro companies. The PWU is officially non-aligned, but outside of the police unions in the province no other labour organization is as tight with the provincial Tory government as is this one. All this might change, however, in view of Labour Minister Chris Stockwell’s changes to provincial labour legislation. The PWU has called for the maintenance of the status quo – one of the few times the union has made public statements about issues outside power. Meanwhile, University of Toronto political science professor Nelson Wiseman suggests that the Harris government probably does not regard its coziness with the PWU as a valuable political asset. "It doesn’t fit with the redneck image they like to convey," he says. As an aside, John Murphy is originally Irish as is Ontario CUPE president Sid Ryan. Both worked at Pickering, became active in the PWU and sparred as rivals within the councils of labour. But they remain personal friends despite their ideological differences. Together, they went to Northern Ireland to support the peace agreement. Reached on the cell phone, the usually outspoken Ryan, a committed left-wing, was suddenly mum. He apologized and said he couldn’t comment on Murphy’s move.

Paul Weinberg is a Toronto journalist specializing in information technology issues. A shorter version of this article was originally published in Toronto’s eye Weekly magazine.

November 13, 2001

California’s continuing electricity nightmare

By Tom Adams, Energy Probe

I had the occasion last month to meet with some of the responsible agencies involved in California’s electricity reforms and some of the State’s key decision makers. These players include Kellan Fluckinger a senior advisor to Gray Davis and the California Power Authority, several people at the California Energy Commission, a representative of the California Independent System Operator, two representatives of the Electric Power Research Institute, and a prominent utility reform advisor to the environmental NGO community. As a result, I anticipate continuing instability in California’s electricity system. The ongoing problems in California’s power system suggest a general observation about the difficulty of achieving successful electricity reform.

What principles?

Durable economical principles are noticeably lacking from the plans of the major California government organizations now defining the state’s electricity future. The following concepts are widely accepted as true and constitute some of the main ideas guiding the sector.

· Government should make the major decisions for the power system, including directly controlling the physical dispatch of the system. Since the governor’s office took over the California Independent System Operator by replacing its board, the organization is no longer independent. (The successful liberalized power markets around the world all have some level of independent governance regarding rules for system dispatch.)

· Customers should not be charged market-based marginal cost prices, but instead should be charged fair (meaning politically determined) prices.

· California’s crisis is caused by greedy generators and the Federal Energy Regulatory Commission (FERC). The FERC must exercise regulatory control of much of California’s electricity sector. (Why these culpits haven’t caused the same crisis in Pennsylvania Jersey Maryland Interconnection is never explained. Notice how this desire contrasts with the traditional state views of state rights.)

· Greedy generators should have their property confiscated through abrogation of contracts, windfall profits taxes, and/or default on payment of arrears now owing to generators.

· Assets of local distribution and transmission companies, and potentially also generators, driven into bankruptcy by chaotic government and regulatory actions should be taken over by the state.

· The quality of life in California is positively correlated with the number of wind turbines installed and program spending for conservation. Further, many people believe that subsidies to conservation and renewable energy production recovered from customers constitutes internalization of otherwise externalized environmental costs of conventional power provision. (Environmental NGOs have played virtually no role in designing the market rules. Now they find that delivering firm power for a defined period, as required by the rules, from intermittent generators like wind turbines, is an inherent problem without an open spot market to cover imbalances between forecast and actual production.)

Regulation’s logical limits

A fundamental regulatory confusion is developing in California. There is enthusiastic support in many quarters for a return to regulation of power investments and prices by the California Public Utilities Commission (CPUC). At the same time, there is widespread support for nationalization of power supplies, either directly by government building or taking over assets, or indirectly through government contracting for power. Recognition of the logical problems inherent in one state agency regulating another appears to be absent.

At the height of the power crisis, a state organ called the Department of Water Resources (DWR), at the insistence of Governor Gray Davis, signed a number of long term power purchase contracts that together sum to a large portion of the state’s supply needs. With falling market prices, these contracts now represent a significant net liability to DWR. The CPUC appears to have authority to control the recovery through rates of the DWR’s costs associated with those contracts.

There was widespread approval for the decision of the CPUC in early October that apparently moves toward denying the rate impacts of the DWR contracts, which may result in abrogation of the contracts. Ratepayer groups appear to believe that any short-term harm that might be imposed on generators is good by definition. Environmental groups see the abrogation of the contracts – most of which are based on gas-fired generation – as an opportunity to replace that supply with wind power.

The DWR has taken the lead not only in power procurement but also in advocating elimination of customer choice, explicitly on the grounds that it wants to ensure that customers cannot escape having to pay for above-market power costs locked in by its contracts.

Ontario Hydro of California

California’s drift toward nationalization of substantial portions of its power sector is very similar to what happened in Ontario during the first two decades of the twentieth century. The nationalization of California’s power sector might lead to some early apparent policy successes, and fuel opposition to power sector liberalization developing elsewhere in the world.

The two largest investor-owned power distributors in the state, Southern California Edison and Pacific Gas & Electric, are being driven into bankruptcy by a complex series of factors including chaotic government and regulatory actions, internal management errors, and major financial and technical deficiencies in the original restructuring plan. Assets of those firms may end up in state control. Mr. Fluckinger expressed to me the view that the State should control enough peaking generation to be able to manage prices within a “reasonable level.” The bond issuing authority and contracting capacity of DWR and the CPA are more than sufficient to achieve substantial price control.

Nationalization of the power sector through confiscation and bond issuance parallels the Ontario Hydro model from the period 1906-1922. The Ontario experience demonstrates that nationalization of a poorly functioning private market through confiscation and bonds can appear to be a superior form of organization for the power sector. It took a long time for the Ontario public power system to collapse under self-inflicted wounds perpetuated by an overall lack of accountability. If Ontario’s experience holds in California, even after the nationalized electricity sector has converted massive taxpayer-backed subsidies, not into net assets, but into even greater net liabilities, there will be true believers who will complain that the government electricity company would have succeeded if it had only received greater subsidies.

Implications of complexity

Electricity system restructuring is irreducibly complex. The physical function of modern electricity grids requires that each electrical component is connected to, and can affect, all other components. Grid engineering allows a very narrow range of operational flexibility. High fixed and variable costs make the system vulnerable to financial disruption. The societal costs of unreliable power are extremely high and rising. The power sector is vulnerable to political influence not only because it has so many points of connection with public interest priorities, but because regulatory mechanisms, which are difficult to shield from political influence, are needed.

The interconnected engineering, financial and regulatory minimum requirements for operable electricity systems imposes demands on the policy environment. Randomness, confusion, bias, illogicality, and distraction in the policy environment can have severe consequences on electricity supply reliability.

Despite the availability of vast intellectual resources, the design and implementation of California’s electricity restructuring has so far come up far short of a workable system. California’s experience with electricity restructuring illustrates the challenge of complexity.

Tom Adams

November 21, 2001

Letters Editor
The Globe and Mail

Re: "Not-for profit Hydro One best path for power giant," November 20, 2001.

Andrew Willis’ column on the options for the future of Ontario’s power grid, called Hydro One, overlooks our most attractive option. Both options he discusses – privatizing our power grid through a public share offering or creating a glorified co-op controlled by government and a handful of smokestack industries – suffer from the common flaw of allowing existing management to become entrenched. The dilapidated condition of much of Hydro One’s transmission system, its slow response to new generators seeking grid connections, and the fact that it doesn’t have reliable downtime statistics for its rural distribution network demonstrates why sweeping change is needed.

Adopting the co-op model for our power grid eliminates the possibility of effective regulation. As the Ontario Hydro experience demonstrates, government regulators overseeing government industrial operations are conflicted. On the other hand, Ontario’s regulatory experience with the natural gas distribution sector shows that having shareholders to whack when mistakes are made encourages responsive management.

Letting a few power guzzlers directly influence how much of their transmission costs the rest of us pay will lead to predictable results.

Happily, Ontario has a better option. Existing businesses within Hydro One – mostly high-voltage bulk transmission and low-voltage regional distribution – should be separated and the parts auctioned. The public could be guaranteed fair value, the private sector would have the opportunity to reassemble more efficient businesses, and the new owners would be able to get management in place that can build value. Independent regulation would ensure that these benefits are ultimately shared with consumers.

Sincerely,
Tom Adams
Executive Director

Tom Adams

November 22, 2001

Hon. Jim Wilson MPP
Minister of Energy, Science and Technology
4th floor Hearst Block
Toronto, ON
M7A 2E1

Re: Hydro One’s Future

Dear Minister Wilson,

Energy Probe opposes converting Hydro One into a non-profit co-op controlled by political appointees.

The non-profit co-op proposal is contrary to your 1997 White Paper and exactly opposite to the restructuring imposed under Bill 35 on the MEUs. We remind you of your commitment in the 1997 White Paper that "the Government is proposing to provide Ontario Hydro’s successor companies with clear business mandates, consistent with the Ontario Business Corporations Act (OBCA)." Under Bill 35 the ownership of the MEUs was clarified and the MEU were brought under an orderly corporate legal structure. Both of these measures represent important public interest improvements over the previous situation under the Power Corporation Act and the Public Utilities Act where ownership was moot and the corporate structure ill-defined. (I note that while Energy Probe supports Bill 35’s provisions for MEU restructuring, we oppose the rate treatment for historic ratepayer invested capital adopted by the OEB and your government subsequent to the enactment of Bill 35.)

In future, the transmission business will be more commercially risky than it has been historically. New technology like solid-state high-voltage switching and new commercial opportunities driven by the maturation of markets through measures like locational marginal prices for energy will create opportunities for unregulated, entrepreneurial transmission investment. A non-profit co-op is ill-suited to flourish in such an environment. In the absence of shareholders, ratepayers will have to pick up the tab for any commercial failures. Since ordinary ratepayers will have no effective means to influence the investment decisions of the entity, management will be subject to minimal risk of discipline in the event of failures. Wild adventuring with public funds, like the province witnessed with the old Ontario Hydro, would be encouraged by the non-profit model. Under the non-profit co-op model, the public’s best protection would lie in preventing Hydro One from investing outside its narrow core business, a defensive strategy that would likely leave much theoretical investment potential untapped.

Adopting the non-profit co-op model for our power grid eliminates the possibility of effective regulation. As the Ontario Hydro experience demonstrates, a government regulator overseeing a government-controlled industrial monopoly is conflicted. Conflicted regulation is often worse than no regulation. On the other hand, Ontario’s regulatory experience with the natural gas distribution sector shows that having shareholders to penalize when mistakes are made encourages effective regulation and responsive management.

A comparative analysis of the benefits of private ownership and public regulation of energy utilities, compared to public ownership was undertaken in 1992 by Dr. Mervin Daub, Professor of Business at Queen’s and at the time a member of the Ontario Energy Board. He made a case that public regulation and privatization of Ontario Hydro would provide a superior form of social control than is available through public ownership. He argued that his recommended combination of regulation and privatization would not require recourse to taxpayers for future costs since private investors would be responsible for future liabilities. He argued that politicization of decision making could be eliminated and that more intense scrutiny could be applied by professional regulators with a narrow mandate than by politicians with broader interests and responsibilities. He argued that there was a basic governance problem with the old Ontario Hydro by pointing out, "Several small hands touching an elephant irregularly will not likely change its course, especially when it has learned that in important respects it is really free to do more or less as it wishes." He also noted, "There is an abundance of historical evidence that the government has not always resisted this temptation to ‘close the distance’ between Hydro and itself, whether because of strong direct interest-group lobbying representation, or for its own reasons." In contrast, he observed that gas regulation was conducted at regular intervals in public hearings, the public is invited to participate, decisions with reasons were issued, and the whole process was open to scrutiny. "As a result, it is likely that there is less capriciousness about the political interference with the gas industry than there is in the case of electricity." One of Daub’s conclusions was that "the social control of Hydro that does exist is too diverse to be effective."

To best promote the public interest, Energy Probe believes that existing businesses within Hydro One – mostly high-voltage bulk transmission and low-voltage regional distribution – should be separated and the parts auctioned. By this approach, the public could be guaranteed fair value, the private sector would have the opportunity to reassemble more efficient businesses, and the new owners would be able to get management in place that can build value. Independent regulation would ensure that these the last two of these benefits are ultimately shared with consumers. The dilapidated condition of much of Hydro One’s high-voltage transmission system, its slow response to new generators seeking grid connections, and the fact that it doesn’t have reliable downtime statistics for its rural distribution network suggests that some significant changes are warranted.

Hydro One’s management appears to prefer a future that would protect the management from potential disruption and has taken actions that would make Energy Probe’s recommended course of action difficult to implement. One of the clauses of Hydro One’s first bond prospectus appears to require debenture holder approval in the event that privatization is effected through the sale to a new major shareholder or through an amalgamation in which Hydro One loses its identity. The prospectus reads in part that Hydro One "will not enter into any transaction in which all or substantially all of (its) property and assets would become the property of any other person, whether by way of reorganization, consolidation, amalgamation, arrangement, merger, transfer, sale or otherwise, unless …(the new entity) shall expressly assume, by supplemental indenture executed and delivered to the trustees in form satisfactory to the trustees, all of our company’s obligations under the indenture."

The non-profit co-op model eliminates federal tax leakage whereas privatization options, whether the IPO option preferred by Hydro One’s management or the dismantle/auction option preferred by Energy Probe, permit federal taxes to apply. Energy Probe supported the commitments you made in the 1997 White Paper when your government stated that you would create a "level playing field on taxes" with the private sector and that the new financial regime for the electricity sector would "reflect the amount of corporations tax that would be paid if the corporations were privately owned." I hope you agree that environmental and economic progress benefit if all energy producers and service providers are required to pay their fair share of taxes.

Energy Probe opposes the suggestion that a few concentrated interests ought to have some direct control over the system’s governance. As we saw in the Ontario Hydro experience with stakeholder governance, unionized labour and a handful of industrial customers were able to capture significant benefits at the expense of more diluted interests. Ontario Hydro’s average compensation reached about $80,000 per year and preferred industrial customers got special treatment like getting paid not to generate their own power or having access to nearly firm power at interruptible rates.

Another flaw with stakeholder governance demonstrated by the Ontario Hydro experience is the impediments it creates to successful innovation and investment. Your government’s official estimate of Ontario Hydro’s stranded liabilities in excess of $21 billion should be understood as a cautionary tale about unaccountable investing. Even if we ignore the White Paper’s commitments and the societal advantages of fair taxation, the benefit to Ontario of eliminating federal tax leakage through the non-profit co-op model must be netted against the expected value loss due to unaccountable investing and the value forgone by adopting a model that is unlikely to realize the benefits available through innovation.

The non-profit co-op model also creates the potential for trade friction with the United States. The current softwood lumber dispute with the United States illustrates a potential downside of providing trade-oriented sectors with subsidies. Just as some United States lumber interests complain about some Canadian provinces providing valuable timber rights to some firms at less than market value (and in some cases below the province’s own costs), electricity interests in the United States might make similar complaints in future about elements of Ontario’s electricity system shielded from equal taxation. I hope you agree that Ontario’s electricity market should be integrated as seamlessly as possible with neighboring markets and that therefore we should organize our market to eliminate the potential for structural incompatibilities.

We believe that overall investment confidence in Ontario’s electricity market would be harmed by removing Hydro One’s assets from the pool of future sales. On the strength of your government’s White Paper and other commitments, major industrial firms have come to Ontario seeking to participate in our electricity future. They have brought with them knowledge and expertise from other jurisdictions that could be of great benefit to us. Difficulties in getting our market open and in stabilizing our policy environment has meant that too many have already lost heart.

Your government has experienced directly the difficulties of restructuring industrial firms which have no owners, including Ontario Hydro, Ontario’s MEUs, and Toronto District Heating Corporation. To create a new firm of this kind would be to ignore the difficult lessons of experience.

Sincerely,
Tom Adams
Executive Director

Andrew Taylor
Financial Times
November 26, 2001

All price controls on Britain’s household electricity and gas sales were lifted on Monday by Callum McCarthy, energy industry regulator.

The move represents a decisive step in the liberalisation of Britain’s energy markets, which began 15 years ago when the gas industry was privatised. Few people then expected that consumers would be able to move freely between suppliers, which would compete against each other on price and service.

Gas prices since then have fallen by 37 per cent in real terms, while average electricity prices, on the same basis, have fallen by 28 per cent since 1990, a year after the industry was privatised.

Almost 33 per cent of household gas customers and about 30 per cent of electricity consumers have switched from their former public sector suppliers since the markets became fully competitive in 1998 and 1999.

The increase in competition – some 100,000 electricity and 67,000 gas customers switch each week from their existing supplier – has persuaded the regulator that it is time to remove remaining price controls on energy retailers.

From Monday all energy retailers, including former public monopolies, will be free to raise or lower prices.

The removal of most price controls from household gas charges earlier this year prompted British Gas to raise its prices by an average 4.7 per cent in line with rivals.

Only charges paid by suppliers to monopoly owners of wires and pipes used to transmit electricity and gas to homes and industry will stay under regulatory price controls.

Ofgem, the regulator, says it retains sufficient powers under competition and utilities legislation to take action against suppliers that behave uncompetitively or mis-sell products.

Companies that misbehave or breach licence conditions can still be fined, it says.

It is concerned that generators, although outside price controls, can still manipulate power station prices despite the introduction last March of new electricity trading arrangements.

It wants government backing for the reintroduction of market abuse clauses in the operating licences of power stations.

A "catch-all" licence clause giving Ofgem wider powers to investigate and halt suspected market manipulation was thrown out last year by the Competition Commission following complaints from British Energy, the nuclear generator, and AES, a US energy group.

The Association of Electricity Producers says the reintroduction of the clauses is unnecessary, would increase costs, deter new investment and undermine earlier commission rulings.

The regulator also faces criticism over plans to develop new markets for balancing gas supply and demand and requiring electricity generators and suppliers to pay for access to the national grid.

Mr McCarthy says the new markets will identify where investment is most needed and make competition fairer and more effective.

The British market, he says, is one of the most competitive in Europe, providing a model for utility privatisation. "A liberalised and increasingly deregulated market for gas and electricity in Britain is working well. It has delivered large benefits to consumers in terms of quality, supply and price," he says.

"Since May 1999 every single household in Britain, and every industrial and commercial customer, has had complete choice as to which supplier provides its gas and electricity. All this has been achieved without any deterioration in customer standards …Interruptions to supply are even rarer today than they were a decade ago; our generating margin over peak demand stands at just under 30 per cent."

Eric Reguly
The Globe and Mail
November 29, 2001

As press releases go, it was one of the duller offerings. Hydro One, Ontario’s electricity transmission company, and Hydro-Québec revealed plans this week to sink a line under Lake Erie.

Imagine a huge extension cord carrying power from Canada to the U.S. Northeast.

But in the context of the behind-the-scenes effort to turn Hydro One into a not-for-profit entity, the press release takes on new meaning. If the effort succeeds, Hydro One probably won’t be building transmission lines to the United States. It and its transmission network would be boxed into Ontario, turning Canada’s economic heartland into an energy island. The concept fills the province’s biggest electricity eaters, such as Dofasco, with delight; since Ontario’s electricity rates are lower than those in the U.S. Northeast, they apparently believe that the island approach will guarantee the status quo.

The poor deluded souls don’t realize that precisely the opposite is more likely to happen.

First, some background. Ontario electricity deregulation, put on hold by politicians who lost their nerve when they saw the lights go out in California (they’re back on, by the way), is supposed to be coming sometime next year. In anticipation of this event, the government’s 1997 White Paper on electricity proposed giving Ontario Hydro’s successor companies – Ontario Power Generation and Hydro One – "clear business mandates, consistent with the Ontario Business Corporations Act." The assumption was that Hydro One would become a fully commercial company by way of an initial public offering or outright sale to a competitor.

So far, so good. Then along came Tony Fell and Duncan McCallum, two heavy-hitters at Royal Bank of Canada’s Bay Street shop. Assuming they wouldn’t get a juicy chunk of the IPO action, the lads invented their own deal: Scrap the IPO and turn Hydro One into a not-for-profit entity with no share capital. This non-company would issue $10-billion or more of bonds, which would be applied to the $21-billion of stranded debt piled up by the old Ontario Hydro. And, by the way, Messrs. Fell and McCallum would be happy to take a small fee – up to $40-million – to flog the bonds. Premier Mike Harris, government insiders say, is taking the not-for-profit concept seriously and will determine Hydro One’s fate by Christmas.

The only groups to have come out in favour of the idea are Tony Fell and company, and the Association of Major Power Consumers of Ontario (AMPCO). Hydro One hates it; British Energy, the biggest foreign electricity generator in the province, hates it. Energy Probe hates it. RBC apart, all of Bay Street hates it. Ontario Power Generation is officially sitting on the fence (which tells you something). The latest non-fan is Jim Baillie, the Torys lawyer and chairman of the Independent Electricity Market Operator, the body that oversees the bulk supply of electricity. In a speech this week to the Independent Power Producers’ Society, he said the not-for-profit model "horrifies me" and that it would become a "self-defeating prophecy."

Let’s go back to the press release. Hydro One wants to play the deregulation game. That means exporting electricity when Ontario has a surplus, and importing it when it doesn’t. In preparation, it’s willing to take on the risk of building transmission lines, like the Lake Erie one, which would be rented by generating companies to get the juice to market. Now suppose Hydro One becomes a non-commercial entity. It couldn’t raise money from shareholders to fund development because shareholders wouldn’t exist. It wouldn’t have a commercial company’s market discipline or incentives, meaning it would be more inclined to sit still than innovate, expand and become efficient. Its cash flow would be devoted almost entirely to debt service, leaving little for capital expenditures. With an inert business strategy, its network would truly become an island. Generating companies would stop investing in Ontario because they wouldn’t be able to get their electricity out. In fact, TransAlta, the Alberta energy company, has already said it might bail out of Ontario if Hydro One takes the not-for-profit route.

Guess what happens when there’s not enough electricity generation and transmission capability to meet rising demand? Prices rise. Guess what happens when demands soars during a heat wave? Again, prices rise, because the shortage of wires constrains imports. Given these risks, it’s extraordinary that Dofasco and the other big energy consumers support Mr. Fell’s loony idea.

Richard Brennan and John Spears
Toronto Star
December 13, 2001

Energy giant Hydro One is to be sold off in the largest privatization in Canadian history.

And Ontario is to announce next week the date in 2002 that the province’s $10-billion-a-year electricity market will be opened up to competition.

Premier Mike Harris yesterday rejected suggestions the two moves will translate into stiff price increases, but critics warned consumers can expect electricity rates to soar as they did in Alberta and California when electricity markets in those jurisdictions were privatized.

The warning came after Harris ended months of speculation by announcing that Hydro One, the Crown corporation with $10 billion in assets that transmits power in the province, is to be privatized through the public sale of shares.

The privatization of Hydro One will eclipse both the sales of Highway 407 at $3.1 billion in 1999 and CN Rail at $2.3 billion in 1995.

Some critics caution that selling off Hydro One and opening the market could mean soaring prices similar to those in California, where privatization led to a tripling of rates, blackouts and the near-bankruptcy of utilities last winter.

"The announcement today doesn’t steer us clear of shoals with the words California written all over them," said Tom Adams, head of Energy Probe, the province’s energy watchdog.

In Alberta, more than $1 billion in consumer rebates was issued this year alone after rates soared and some businesses were forced to operate at night, when power costs were lower.

The Harris government had initially promised deregulation by November, 2000, but got cold feet after the experiences in Alberta and California.

Opposition critics were quick to raise fears of runaway electricity rates for consumers and condemned the Conservative government for making such an important decision without debating the pros and cons in the Legislature.

"In virtually every jurisdiction in the world, deregulation and privatization of electricity has been a dismal failure. Prices increased dramatically and reliability suffered," New Democratic Party Leader Howard Hampton said in an interview, noting that in some cases rates went up 100 per cent.

"Imagine … if you’re an ordinary consumer and you’ve been paying $1,000 or $1,500 a year for electricity and suddenly you get the bill in the next year, the next two years that says you’re paying $3,000," Hampton said in the Legislature.

Liberal critic MPP Sean Conway (Renfrew-Nipissing-Pembroke) complained the decision was made by cabinet behind closed doors.

"What the Legislature has an obligation to … ensure the consumer’s interest is not sold down the road by Mike Harris as he sold the consumer’s interest down the road with the privatization of Highway 407," Conway said, referring to the privatized highway that recently announced it would raise tolls in the New Year for the fourth time in 27 months.

Harris said the value of the offering remains to be determined by SuperBuild, the government’s Crown corporation that looks at public private partnerships, and its financial advisers.

He said details of the share offering cannot be disclosed until the prospectus has been filed with security regulators.

Hydro One, which transmits electricity through the hydro grid, is part of what remains of the former Ontario Hydro, the largest public utility in Canada before the Conservatives split it into separate entities. Another arm, Ontario Power Generation, produces the province’s electricity, will be opened to competition that will allow generating companies to plug into the electricity grid and offer power for sale.

The Premier said whatever money is raised will be put towards Hydro One’s $21 billion debt.

Major wholesale electricity users such as automakers and steel plants had lobbied for an alternative plan which would have turned Hydro One into a not-for-profit entity.

Harris said he was not worried about skyrocketing rates since the arm’s-length regulator, Ontario Energy Board, will continue to set the transmission rates just as it does now for Hydro One, while the Independent Market Operator (IMO) will oversee the standards of service.

"This move will encourage investment in Ontario, it will help stimulate economic growth while ensuring a continued supply of safe, reliable power," he said.

Hampton said with the privatization of Hydro One, the opening up of the electricity market to competition and other associated costs, consumers can expect at least a 20 per cent increase in rates "just to pay all these new profit takers."

Hampton also raised alarm bells over Hydro One’s plan to be a major player in serving the power-hungry U.S. market.

Ontario residents will then pay the prices that prevail in the U.S.