Energy Probe

John Spears
Toronto Star
August 2, 2002

The current heat wave pushed Ontario’s electricity system to the limit yesterday as the province set a new unofficial record for demand.

As demand soared, industrial customers faced stiff extra charges to cover the cost of imported power – though the true price of imports is masked by the current market system.

Demand for power averaged 25,432 megawatts between 5 and 6 p.m. yesterday, breaking the old mark of 25,330 megawatts set July 3. Figures are sometimes adjusted slightly at a later date.

The extra demand for power used by air conditioners on hot days is roughly equivalent to adding a second City of Toronto to the electricity grid on a normal day.

The Independent Electricity Market Operator (IMO), which runs the provincial power grid, has asked householders and businesses to curb unnecessary power use.

The price of power rose strongly early in the afternoon, hitting nearly 40 cents a kilowatt hour at 2 p.m. But it subsided to less than 10 cents by 5 p.m. – despite the fact that demand was building through the afternoon.

The IMO can import power as demand builds, but the imports are expensive.

Industrial customers were paying an extra "uplift" charge of nearly 12 cents a kilowatt hour late yesterday afternoon to cover the cost of the expensive imports.

Reuters News Service
Planet Ark
August 5, 2002

NEW YORK — Bruce Power said it expects to restart two 750 megawatt units at its Bruce A nuclear power station in time to meet next summer’s peak electricity demand, several months ahead of its earlier schedule. Company officials said the earlier restart was due to an accelerated hearing schedule with Canadian energy regulators.

"We understand our case will have to be made at the hearings to justify our restart . . . (but we have) high confidence for a successful outcome," Bruce Power Chief Executive Duncan Hawthorne said in a statement this week.

With the Canadian Nuclear Safety Commission hearing expected next February, Bruce Power said Bruce A unit 4 could start supplying energy as early as April of 2003, well ahead of its summer 2003 objective. Hawthorne also said unit 3 could be in service before next summer, further helping Ontario meet its power needs during the peak summer months. Electricity demand typically peaks during the summer, when air conditioning accounts for about a third of all power used.

Ontario residents consumed an all-time record 25,342 MW of power on Thursday, while the Ontario grid imported some 3,000 MW from its neighbors in Manitoba and Quebec in Canada and New York, Michigan and Minnesota in the United States. When both units return, Bruce Power will be able to provide another 1,500 MW of electricity to the Ontario market the Bruce A station will provide Ontario with another 1,500 MW, enough to power about 1.5 million homes.

Bruce A unit 4 was taken out of service in Dec. 1997 and unit 3 in May 1998. All four units of Bruce A were shut by the former Ontario Hydro, the owner and operator at the time. There are no plans to restart units 1 or 2.

Bruce Power estimated the cost to restore the Bruce A units at C$400 million, which is above the company’s initial C$340 million estimate due, in part, to security enhancements made after the Sept. 11 attacks.

To date, Bruce Power has spent about C$195 million on the restart. Since the province’s electricity market opened to competition three months ago, Bruce Power said its four operating reactors at the Bruce B have worked at a capacity factor of nearly 100 percent. Bruce Power is a partnership among British Energy Plc, the UK’s largest electricity generator, Canada’s Cameco Corp. (15 percent), the largest uranium fuel supplier in the world, and the two main unions at the Bruce site, the Power Workers’ Union (up to 4 percent) and the Society of Energy Professionals (up to 1.2 percent).

Paul Waldie – with files from Bloomberg and Reuters
Globe and Mail
September 6, 2002

Canada’s nuclear regulator has ordered the operator of Ontario’s Bruce nuclear station to provide a guarantee by next week that it can meet its financial obligations or the reactors could be shut down.

The future of Bruce Power LP, which operates eight reactors at the station, has been thrown into question as financial problems mount for the company’s majority owner, British Energy PLC.

Yesterday, British Energy said it faces insolvency if it does not receive a bailout from the British government. British Energy, which lost more than $1-billion last year, has an interest in 26 nuclear reactors in Britain, Ontario and the United States. The British government has yet to respond to the request but British Energy’s problems are already having an impact in Ontario.

The utility owns 82.4 per cent of Bruce Power and provides it with several financial guarantees. One key commitment is so called "shutdown money" that is required by the Canadian Nuclear Safety Commission, or CNSC.

The CNSC, which licenses nuclear operators, requires Bruce Power to set aside enough cash to operate for six months in the event the station has to be shut down in an emergency. Under the terms of its licence, Bruce Power must show the CNSC every three months that it can meet the shutdown requirement. So far, British Energy has provided the guarantee, which amounts to $222-million.

On Aug. 12, Bruce Power filed its regular report confirming the guarantee was in place. But on Aug. 29, the CNSC wrote back saying it was concerned about British Energy’s ability to meet the commitment.

The commission gave Bruce Power until Sept. 10 to demonstrate either that British Energy can still provide the money, or show where else it would come from.

The British Energy option "seems to have been denied by BE to some extent in their news release [yesterday]," said Michel Cleroux, a spokesman for the CNSC. "So, we want to know the measures that [Bruce Power] would take to supply that guarantee of shutdown money on their own."

The commission’s "ultimate power is to take any decision necessary to ensure that the safety of the Canadian people is put first and foremost. Licences can be revoked, they can be modified, the person can be ordered to decommission or things of that nature to put it into a safe state."

Steve Cannon, a spokesman for Bruce Power, declined to comment on what the company will do. "We will respond to [the letter] as appropriate," he said yesterday.

The financial problems at British Energy could have other far-reaching consequences in Ontario.

The utility leased the operation of the Bruce station last year from the Ontario Power Generation, or OPG, the provincial entity that owns Ontario’s 20 nuclear reactors. Under the terms of the lease, which runs to 2018, British Energy still owes OPG $225-million and up to $102-million in annual fees for this year. (The other partners in Bruce Power are Cameco Corp. of Saskatoon, with 15 per cent, and the Power Workers Union, at 2.6 per cent.)

John Earl, a spokesman for OPG, said yesterday that the company is monitoring British Energy’s troubles but feels "quite secure with our lease."

Mr. Earl noted that Bruce Power is one of British Energy’s best-performing divisions. In British Energy’s previous fiscal year, ended March 31, 2002, Bruce Power’s revenue was $856-million and its operating profit was $103-million.

However, four of the Bruce reactors are shut down and Bruce Power has said it plans to have two operating of them by next summer. The cost of getting those reactors running will be nearly $400-million and some analysts wonder whether that project will proceed given British Energy’s troubles. Bruce Power faces financial penalties under the lease if the reactors are not put back into service.

Tom Adams, the head of Toronto-based Energy Probe, said he is also concerned about the safety at the Bruce station given British Energy’s problems.

"When you have a financially distressed operator, starving for cash, the instinct of just ignoring one of the alarm bells and keeping a unit in service, if it is generating revenue, has got to be a more powerful incentive," he said.

Analysts say British Energy’s problems relate in part to the government’s decision to deregulate the British electricity market earlier this year. That forced down prices the utility could charge its customers.

"It sounds like British Energy is in a lot more trouble than the market had thought," said Philip Hollobone, an analyst at SG Securities in London.

Most analysts expect the government to offer some kind of bailout. But some say British Energy may have to file for court protection from bankruptcy first.

"The last thing the government wants is 25 per cent of the nation’s electricity disappearing overnight," said UBS Warburg analyst Andrew Wright in London.

British Energy also said yesterday that it is considering selling its U.S. interests.

John Spears
Toronto Star
September 6, 2002

The Canadian Nuclear Safety Commission is seeking assurances from the financially troubled majority owner of Bruce Power that it can make good on guarantees of its ability to operate the nuclear plant safely.

British Energy PLC, which owns an 82.4 per cent stake in Bruce Power, announced yesterday that it is seeking a bail-out from the British government.

If no suitable bailout is forthcoming, "the company may be unable to meet its financial obligations as they fall due and therefore the company may have to take appropriate insolvency proceedings," British Energy said in a statement.

A Bruce Power spokesperson said yesterday that the nuclear station near Kincardine, which supplies about 15 per cent of the province’s power, continues to operate normally but would make no other comment.

Bruce Power holds an 18-year lease on the Bruce facility, expiring in 2018. The minority partners are Cameco Corp., which supplies uranium fuel, and Bruce Power’s two unions.

Currently, it is operating only one of the two plants on the Bruce site. But it has plans to restart two of the four reactors in the other plant, known as the Bruce A plant, as early as next spring.

The $340 million project is seen as important to the province, whose power grid was severely strained by this summer’s hot weather.

But Bruce Power wasn’t commenting yesterday on the future of the Bruce A restart.

As for the immediate future, Michel Cléroux of the Canadian Nuclear Safety Commission said in an interview that a condition of Bruce Power’s operating licence is that it must prove it has the financial ability to operate for at least six months, even if its revenues dry up.

That would give enough breathing room to find another operator or, in the worst-case scenario, allow for a safe shutdown of the nuclear reactors.

Cléroux said the commission received such a guarantee from Bruce Power on Aug. 12. But the commission wrote to British Energy again on Aug. 29, after seeing reports that slumping electricity prices in Britain were putting pressure on the company.

The letter asked Bruce Power to demonstrate that it can make good on its guarantee from British Energy – a guarantee that Cléroux acknowledged seems in question following yesterday’s announcement.

Alternatively, the letter asked British Energy to come up with another way of guaranteeing the six months of operating funds. The company has been given until Sept. 10 to reply, he said.

Cléroux wouldn’t speculate on what would happen if the company missed the deadline, or if the response was unsatisfactory.

In its release, British Energy said it "continues to comply with all safety and other regulatory requirements."

The company blames its problems in part on what it considers are tax disadvantages in Britain.

Bruce Power has been a money-spinner for British Energy since the 18-year lease took effect in May, 2001. British Energy reported that it earned $101.6 million in its first year of operating Bruce, by far the strongest performance of any of its units.

That’s a point in Bruce Power’s favour, noted energy consultant Jan Carr, who said it would be in the interests of all concerned – shareholders and creditors alike – to keep profitable units operating.

Carr said he doesn’t have inside knowledge of British Energy’s financial arrangements, but said it has a tradition of structuring deals with customers and suppliers so that they share rewards for good performance – and risks of potential failures.

While it’s "not positive news" for Bruce Power, Carr said British Energy’s troubles won’t necessarily lead to serious problems for Bruce Power, depending on the terms of the ownership.

Tom Adams, executive director of Energy Probe, was more worried, noting that if managers get sidetracked by worries over financing or legal issues, they would have less time to devote to operating the plants.

There’s also an incentive to operate with a short-term rather than a long-term view during a crisis atmosphere, said Adams, who said regulators should keep a close eye on the plants.

Ontario Power Generation, which owns the Bruce nuclear plants, was maintaining a calm demeanour yesterday.

Spokesperson John Earl noted that British Energy has boasted of Bruce Power being one of its jewels. Obligations under the lease with OPG have been met, Earl said.

Bruce Power has agreed to make fixed payments of $625 million, plus variable annual payments over the life of the lease to be determined by an agreed-upon formula. The payment for the year ending March 31, 2002, was $86 million.

Paul Waldie
Globe and Mail
September 7, 2002

British Energy PLC’s financial problems could cause electricity shortages in Ontario next year and drive up power prices for consumers, analysts warn.

British Energy owns 82.4 per cent of Bruce Power LP, which runs eight nuclear reactors in Ontario. The British utility has said it faces insolvency if it does not receive a bailout from the British government.

Currently four of Bruce Power’s reactors are operating and two more are slated to come into service next summer. Restarting those two reactors is expected to cost $400-million.

Tom Adams, head of Toronto-based Energy Probe, said yesterday that given British Energy’s financial problems, it is doubtful those reactors will go on line. That means Ontario’s power supply, which has been stretched to capacity this summer, could suffer.

"It was just through the aid of our neighbouring utilities that we were able to make it through the summer," Mr. Adams said.

Electricity demand and prices were at record levels this summer which forced the province to import power from outside sources. However, Ontario’s transmission system is limited in how much power it can import and Mr. Adams said the province surpassed its limit this summer.

The supply situation "was bad enough when we had a solvent operator running Bruce Power and now that that’s a question mark, the overall supply reliability perspective is more gloomy."

In a recent 18-month forecast, the Independent Electricity Market Operator, or IMO, which runs Ontario’s power market, warned of price hikes if the Bruce reactors do not come into service.

The effects of the two Bruce reactors not coming on line "include upward pressure on market prices and limited opportunities for the IMO to approve the release of generators for planned maintenance," the report said.

Duncan Hawthorne, Bruce Power’s chief executive officer, declined to comment yesterday on British Energy’s troubles. "However, I can say that during discussions with the British Energy board of directors, I received no change in direction with respect to our activities at Bruce Power," he said in a statement.

British Energy’s problems deepened yesterday as three credit rating agencies downgraded the utility’s debt rating to junk status.

Moody’s Investors Services said the downgrade means British Energy will have to post added collateral for some financial commitments.

"Moody’s believes that the additional liquidity requirements are of the order of hundreds of millions of pounds," the agency said.

In a recent securities filings, British Energy noted that some of Bruce Power’s energy contracts require the parent company to have an investment grade rating. If British Energy’s rating is below investment grade and it cannot provide alternative credit support, the contracts can be terminated, the filing said. Bruce Power has contracts with large customers for 65 per cent of its production.

Bruce Power has also been told by the Canadian Nuclear Safety Commission, or CNSC, to provide assurances by next week that it still has access to $222-million in emergency "shutdown money".

That guarantee has been provided by British Energy, but the CNSC is now concerned that the company can no longer meet the commitment.

In the security filing, British Energy said that if the commitment cannot be properly satisfied, "the CNSC may terminate Bruce Power’s licence to operate the Bruce nuclear station."

Mr. Adams of Energy Probe also yesterday urged the CNSC to increase its safety supervision of the Bruce station.

John Spears and Kate Harries
Toronto Star
September 7, 2002

Ontario Energy Minister John Baird says he’s seen no signs that the financial trouble of Bruce Power’s majority owner will delay plans to bring two nuclear reactors back into service next year.

In an interview from Ottawa yesterday, Baird said he’s spoken with Bruce Power’s chief executive, Duncan Hawthorne, twice in the past two weeks.

Bruce Power’s majority owner is British Energy PLC, with an 82.4 per cent stake. British Energy said Thursday it’s seeking a bailout from the British government and that it could go broke if it doesn’t get the help.

Bruce Power, which holds an 18-year lease on the Bruce nuclear station near Kincardine, is in the midst of a $340 million project to refit two reactors at its Bruce A generating plant and return them to service by spring.

Bruce Power hasn’t answered questions about the impact of British Energy’s woes.

Hawthorne, who was in Britain this week, released a statement yesterday saying that in his talks with British Energy’s directors, "I received no change in direction with respect to our activities at Bruce Power."

"On that basis, we continue with our Bruce Power business plan. My prime focus at this time is to ensure that Bruce Power’s employees are not distracted by this situation and that we continue to operate the Bruce reactors in accordance with the excellent performance we have delivered to date."

Ontario’s power supply was stretched to the limit this summer and the province had to rely on imports. The province has said its electricity reforms will encourage private investors to add generating capacity.

Baird said yesterday he’s not worried about Bruce Power’s plans to restart the Bruce A reactors, although "obviously there are challenges in the U.K." for its parent.

"There’s been no indication whatsoever at this stage, because of the financial issues, that it’s going to have an effect on the timing" of getting the two laid-up Bruce reactors back in service, he said. Baird, who took over as energy minister last month, said he’s already acquainted with Bruce Power’s Hawthorne.

"I talked to him personally last week, and I talked to him by telephone on Monday. We’re in close contact. We’ll watch it closely."

Market planning documents prepared by the agency that runs the Ontario power grid show the Bruce A project is by far the biggest project among any near-term expansions of the province’s power grid.

The latest projection by the Independent Electricity Market Operator (IMO) shows 2,371 megawatts of power coming on stream by next September. Of that, the Bruce project is supposed to deliver 1,500 megawatts.

Tom Adams, executive director of Energy Probe, was skeptical of Baird’s confidence. The IMO’s most recent projections underestimated peak demand this summer, Adams said.

Ontario had record-setting demand of more than 25,000 megawatts on several occasions. The IMO projections showed demand running about 23,000 megawatts or less.

In Inverhuron, a community of about 1,000 people a few kilometres from the massive Bruce nuclear complex, unease greeted news of British Energy’s difficulties.

"I think the first concern is safety when any corporation is struggling with cash-flow problems, " said Norm Chevrotiere, a member of a residents’ watchdog group.

"Will they cut corners?" he asked.

Kincardine Mayor Larry Kraemar said he doesn’t think so. "With the nuclear industry one always has to be extra cautious, but at this point I have no undue concerns," he said, noting Bruce Power is said to be properly financed and profitable.

Chevrotiere said the fact the Bruce plant is privately owned has made it hard to monitor safety concerns, because freedom of information legislation does not apply.

"I’m still trying to figure out how to get significant event reports," Chevrotiere said. These reports of radioactive releases would come several times a year when the facility was owned and operated by Ontario Hydro.

"It does make you wonder how economically viable nuclear energy is in a deregulated environment," he added, "especially when these corporations keep on having to go to the government cap in hand asking for more money."

Jeffrey Jones
Yahoo! Finance – UK & Ireland
September 12, 2002

CALGARY, Alberta, Sept 11 (Reuters) — The chief executive of Ontario’s Bruce Power nuclear partnership, which is majority owned by struggling British Energy Plc, will address concerns about the generator’s financial viability at a hearing in Ottawa on Thursday, an official with the group said.

Among topics expected to be addressed by Bruce Power CEO Duncan Hawthorne at the public hearing are the group’s ideas for alternative emergency financing should it be needed in the event of a shutdown, including getting its own credit rating and changing the partnership structure.

The British government has given British Energy, its largest electricity producer, 410 million pounds ($635 million) to prevent the company’s immediate collapse, but that has not assuaged the concerns of Canadian regulators and energy industry players over Bruce Power’s ability to keep operating.

The Bruce complex on Lake Huron provides 15 percent of the power in Ontario, Canada’s biggest power market, now faced with the latest of several bumps on the road to deregulation.

Bruce Power spokesman Steve Cannon said Hawthorne will be among several top executives to appear at a regularly scheduled public hearing before the Canadian Nuclear Safety Commission in Ottawa. But he declined to say if his message would be one of assurance that the Bruce plant is in no financial trouble.

"All I can tell you is, yes, he intends to touch on the British Energy situation during his presentation to the CNSC," Cannon said.

British Energy owns about 82 percent of the partnership, which operates the reactors in a leasing arrangement.

The regulator, prompted by news of British Energy’s troubles, had asked Bruce Power to respond by Sept. 10 on whether it could guarantee the facility would be funded for six months should a decision be made to shut it down. That is a standard commitment for all Canadian nuclear operators to ensure a safe shutdown.

According to a CNSC document, Bruce Power, in its response, said it believed that British Energy’s guarantees were still in full force, but acknowledged the British government did not mention the Ontario liability as part of the bailout.

The partnership also recognizes the need for further assurances and was exploring alternative "Canadian-based solutions," such as obtaining insurance coverage for a shutdown, achieving its own credit rating, developing new bank facilities or changing the partnership structure, said the document, signed by the director general of the Directorate of Power Reactor Regulation.

‘Safety catch’

"Bruce Power is operating safely, and there’s nothing to indicate a need to close down for any reason we can see," CNSC spokesman Michel Cleroux said. "That’s important to remember – all we’re asking for is the guarantee, this safety catch."

Despite the bailout, some British ministers have warned there were no guarantees they will keep British Energy afloat beyond the end of the month.

Analysts and energy players have warned Ontario’s power market would be hit hard if Bruce Power could not operate.

Tom Adams, executive director of independent watchdog Energy Probe, said he believed Direct Energy, a unit of Britain’s Centrica, and Toronto Hydro Energy Services were Bruce’s two top customers. Cannon would not confirm that, saying Bruce Power did not detail contract information.

The power market is already extremely tight in Ontario, a province of 11 million people, and highly reliant on imports from utilities in Michigan and New York, Adams said.

"If further complications develop on the production side, like if Bruce Power can’t meet the regulatory requirements, that would constitute an emergency condition," he said.

In addition, the facility could be pressured should customers shy away over credit concerns, regardless of what the regulator decides, he said.

Bruce Power’s other partners are uranium producer Cameco Corp., the Power Workers’ Union and the Society of Energy Professionals.

A Cameco spokesman said on Tuesday the firm has discussed the possibility of increasing its stake from the current 15 percent, but that there had been no formal offers.

Lawrence Solomon
National Post
September 18, 2002

Rooftop power plants are sprouting in California, a state that has suffered from volatile power costs and electricity shortages, and before the end of the year, they’ll be sprouting in New York and New Jersey. By the end of next year, they may have come to electricity-challenged Ontario, where another botched deregulation is leading to wildly fluctuating prices, brownouts and threats of California-style rolling blackouts.

The power plants – pioneered by a new California company called RealEnergy – do more than provide security for their customers against power interruptions. They can also lower energy costs and dramatically slash environmentally harmful emissions. If economics, rather than politics, determines the future of these new plants, they will put many if not most large-scale generating plants out of business.

RealEnergy, which is installing dozens of systems in the United States and is in talks with several property owners about installations north of the border, gives building owners an offer they can’t refuse. It leases unused space on the roof of an office building or hotel – 1,000 square feet or more of space that doesn’t currently provide landlords with revenue – and builds a small power plant there, entirely at its own expense. It then offers power to the building – typically meeting 40% to 50% of the building’s entire needs – at rates no higher than the building currently pays the local utility.

Landlords find themselves owning a building offering a premium amenity while earning some additional rental revenue, and tenants appreciate the immunity from blackouts – a growing concern for many companies.

RealEnergy can make the kilowatt-cost guarantee because it has inherent advantages over traditional utilities, which must often transport power great distances from remote hydro, coal or nuclear plants. By avoiding the costs associated with transmission and distribution – often 20% of the total power bill – RealEnergy gives itself one big advantage over its central utility plant competitors. By using the rooftop plant’s waste heat to meet the building’s hot-water needs, RealEnergy gives itself another advantage: Rather than lose the heat to the atmosphere, as utility companies generally do, the water it heats provides a lucrative revenue stream. It all adds up to higher efficiency, less waste, and more profit.

RealEnergy uses no new technologies. It attaches its generating plants to the natural gas or other fuel supply that’s already available to a building. The plants themselves are off-the-shelf – whether natural gas-driven internal combustion engines, microturbines, or, when they become economically viable, fuel cells. RealEnergy typically requires six to nine months to install a system, most of it in obtaining permissions of various kinds. "Ideally, if all the permits are in place and the physical environment doesn’t present challenges, a system can be installed in three months," says RealEnergy’s president, Paul Slye.

The advent of distributed power – the industry buzzword for small-scale plants located close to customers – is long overdue, almost 100 years overdue. The world’s first power plant – built by Thomas Edison in 1882 in lower Manhattan with help from financier J.P. Morgan – supplied 59 customers in 12 city blocks, and generated both power and heat. Edison accurately foresaw a proliferation of small-scale, localized electricity generation companies, and numerous on-site generators. A decade later, power plants had spread throughout the continent and two-thirds of all power was generated on site.

What Edison didn’t foresee was the industry’s hijacking by promoter Samuel Insull. Early in the 20th century, Insull struck a pact with the state of Illinois: If the government allowed him to wipe out small competitors – they were inefficient and ultimately costly to customers, he explained – he would voluntarily agree to allow the government to control the rates he charged. "In order to protect the public," he claimed, "exclusive franchises should be coupled with the conditions of public control, requiring all charges for services fixed by public bodies to be based on cost plus a reasonable profit."

Illinois agreed and the rest is history. State-sanctioned power monopolies soon became established across the United States and Canada, and wasteful, large-scale generation became the law. Large power plants typically convert only 30% to 35% of the energy they burn into electricity, and allow 65% to 70% of the energy to escape, heating the atmosphere to the environment’s sorrow. In contrast, Edison-type systems that capture waste heat achieve efficiencies of 80% to 90% or more. Put another way, we use two to three times the fuel we need to meet light, heat and various other energy needs because of the regulated monopolies that Insull pioneered.

Electricity regulation made that immense economic and environmental loss possible in the early 20th century. In the early 21st, electricity deregulation is making efficient energy use once again possible, and unleashing a torrent of innovation. Capstone, a California company, manufactures a 30-kilowatt microturbine the size of a washing machine that can supply a small office building or a restaurant. Calgary’s Enbridge, meanwhile, is betting big on fuel cells, possibly the ultimate on-site power system.

Ironically, the need for efficient small-scale systems is best understood in jurisdictions that have most botched the job of deregulation. Central utilities have their place, building owners and tenants are deciding – as a backup to clean, reliable and more efficient home-grown electricity.

Tom Adams

October 7, 2002

The Line Between Legitimacy and Ignominy

Canadian Competitive Energy Summit 2002
September 24, 2002

Thank you for the opportunity to share some ideas with you on the subject of profiting in Ontario’s new electricity market. The purpose of this presentation is to discuss the conditions that are likely to support broad public acceptance of profitable electricity businesses. Businesses that expect to be in and out of our electricity market, businesses that are not making a lasting commitment to the market, will have little interest in the comments I am offering here. Instead, my comments are directed at those who expect to be around for the long haul to be a part of Ontario’s electricity future.

Looking at the title of this presentation, you might be excused in thinking to yourself, what can my company or my clients possibly learn about profit from a guy who works for a non-profit and who has never made five cents in profits from the electricity sector.

My message today is that profits for particular electricity businesses will only be broadly accepted as legitimate if the overall electricity market is considered legitimate. Electricity businesses hoping to prosper over the long haul in the new electricity market have an interest in helping to create and sustain a legitimate market.

My presentation will focus on five issues, some of which are generic concerns and some of which may be of interest only to some electricity firms: the need for depoliticization of the power system, the need to restore the credibility of the retail market, the need to upgrade metering, the need to support effective regulation, and the need for industry pressure to cut Crown corporation spending now driving taxpayer-backed debt up.

The electricity businesses that have been most active in shaping Ontario’s electricity future have so far been the commercial Crown corporation successors to the old Ontario Hydro – OPG and Hydro One. These entities appear to be single-mindedly focused on bulking up as much as possible. Most of Hydro One’s attention has been directed at vacuuming up distribution utilities, paying huge prices for these assets. Hydro One bought $385-million worth of distribution assets for $555 million. OPG’s attention has been directed at huge capital programs, primarily the Pickering A restart project and its program to increase the output from the Nanticoke and Lambton coal-fired stations. The Pickering A project was originally promised to have all four reactors in service by 2002 at a cost of $800 million. The current official outlook is for all units to be returned to service by some time in 2005 at a cost now estimated at $1.9 billion to $2.2 billion. OPG’s and Hydro One’s drive to expand has had important negative effects on Ontario’s electricity outlook.

Independent electricity businesses have grown too quiet in the debates over Ontario’s electricity future, particularly in their too-polite response to OPG’s and Hydro One’s expansion drive.

Competitive electricity markets face a major public relations challenge. Ignominy has haunted the energy sector, particularly since California’s botched liberalization attempt and Enron management’s assault on that company’s investors. These events have poisoned the public attitude towards what many people loosely call "electricity deregulation." In last Saturday’s National Post, David Frum observed that in recent times the broad worldwide consensus once in favour of freer markets has weakened. Terrible setbacks in energy markets have contributed to this retreat.

Paradoxically, like the groundswell against market economies now building in many parts of Latin America, it is a popular presumption in Ontario that government-owned, non-competitive, and centrally planned power systems are better, notwithstanding Ontario actual experience of public power. Any for-profit, competition-based alternative faces an uphill battle in demonstrating and being recognized for its superior potential to serve the public interest as compared with the previous centrally planned non-profit model. Part of the reason that this battle is up hill is because the former Ontario Hydro was so successful in appearing more successful than it really was. To illustrate Ontario Hydro’s impressive myth-making capacity, notice that many people still believe that Ontario used to have a power system based on the principle of power at cost. It is only through the miracles of creative accounting that the former Ontario Hydro was able to go through its entire history without a single annual loss before writeoffs and yet end up at its dissolution with a liquidation value estimated at negative $21-billion.

Ontario’s electricity reforms are only legitimate if these reforms result in a higher standard of public service over the long term than the system it has replaced.

I suggest that the public interest in electricity service is a function of four criteria:

1. Lowest sustainable rates;

2. Eliminate taxpayer liabilities;

3. Mitigate environmental harm;

4. Maintain system reliability.

How are we doing against these criteria?

First the good news. Ontario has made modest environmental gains in some specific areas. The two most significant are improved rules for nuclear waste funding and modestly tightened limits on emissions of smog precursors. Ontario’s new power market has made some reliability gains by introducing demand-responsive wholesale prices, much greater transparency around demand/supply balances, and stronger transmission inter-ties with neighbouring power systems.

You know that the news is not all good. With a heavy heart, I have to conclude that on balance, the overall record of the restructuring so far is unfavourable from a public interest perspective. After netting out my estimate of the Market Power Mitigation Agreement rebates, I calculate that ordinary consumers not signed with a marketer are now paying all-inclusive rates about 15% higher than under the old Ontario Hydro regime.

Taxpayer-backed electricity liabilities, which the government promised would begin shrinking and would soon disappear, are rising. Out of concern that the basic facts of this issue and the underlying problems related to taxpayer electricity debt are not widely enough understood, I want to spend a couple of minutes later in this presentation sharing with you my understanding of what is going on with our electricity debts.

The environmental record of Ontario’s power reforms is stained by OPG’s massive reinvestments in nuclear and coal generators. Ontario is on track to overshoot the emission limits set down in the new Canada-U.S. air treaty called the Ozone Annex.

The reliability of Ontario’s power supply is dangerously fragile. Had it not been for surplus power being available in neighbouring regions, Ontario would have suffered rolling backouts this summer. We had periods where our transmission system was operated beyond its rated capacity, where 16% of Ontario’s supply was imported. This desperate situation arose despite assurances from former Energy Minister Jim Wilson in the lead-up to market opening this May that Ontario would have a surplus and be a significant exporter. Ontario’s inability to meet its own needs with internal resources is very worrying.

Support Depoliticization

If we look beyond the myths, Ontario’s track record with its politicized power system was demonstrably unfavourable, except in the area of reliability, where the old Ontario Hydro’s performance was very good. After an official recognition, in the Harris government’s 1997 White Paper, of the failure of politically-controlled, centrally-planned administration of the power system, Ontario’s power market reforms slipped off the straight and narrow path away from depoliticization. Since May 2000, Ontario has slipped backward in the direction of politicization.

In May 2000, former Energy Minister Jim Wilson attacked the independence of the Ontario Energy Board, ordering the board to adjust its rate orders for municipal distribution utilities so that planned rate increases would be stretched out, perhaps past the next election.

In June 2000, Minister Wilson told the Association of Major Power Consumers in Ontario that the secret deals Ontario Hydro signed with selected large industrial customers to provide them with discounted power, would be extended into the new electricity market. Under Bill 35, the discount deals were set to expire when the competitive market opened. On top of contradicting his own legislation, 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.

More recently, the government has been retreating from the planned privatization of Hydro One. Initially, the whole company was for sale, then 49%, and more recently the government has floated the idea of parting with only 9.9%. The government’s retreat is a sad development for the electricity market. The privatization of Hydro One would be broadly beneficial. Regulation, now conflicted by a web of government interests, would be clarified. New commercial parties would have a reason to inject their badly needed expertise and capabilities into meeting consumer needs and increasing the value of Hydro One’s assets. Successful privatization of Hydro One would benefit investor confidence in other elements of our power system.

Perhaps the worst possible outcome from Ontario’s backsliding toward politicization would be if we get to the stage where political decisions determine a who profits and how much. If profits are politically administered, the legitimacy of profit is fundamentally undermined. Slipping to the level of politically determined profits would also create conditions conducive to corruption.

If the structure of the market is sound, then vigorous pursuit of private interests can enhance the legitimacy of the market. Events surrounding the collapse of British Energy illustrate the point. On Sept. 12, American Electric Power Co. Inc., the owner of two of the U.K.’s largest power stations, and producer of 8% of the U.K.’s power, warned that a U.K. government rescue of the nuclear power generator British Energy PLC could have "serious repercussions" for future foreign investment in the U.K. energy sector if it is at the expense of other electricity producers. AEP is concerned that financial assistance for the company would prevent a much-needed reduction in U.K. power station over-capacity.

Here in Ontario, clean generators should be actively advocating for tougher emission rules for dirty generators. Instead, some clean generators have focused their lobbying on securing government protection for their profits, advocating rules that would compel customers to buy from designated generation. (Shades of British Energy.) All independent generators should be actively advocating against the restart of the Pickering A station.

The political dialogue surrounding our electricity reform process has deteriorated into a swamp of misinformation. It was not always thus. During the collapse of Ontario Hydro’s nuclear program in 1987, the Macdonald Committee process, the publication of the White Paper and the legislature’s development of Bill 35, the overall atmosphere of political discourse was generally constructive, even comparatively enlightened. How the discourse has changed!

In February, former energy Minister Jim Wilson published a study, with the endorsement of Fred Lazar, a professor of economics at York University, claiming "average electricity prices in Ontario’s new competitive market will, over time, be considerably lower than what they should have been under the old monopoly-based system." The first problem with that statement is that it is unfalsifiable. Although the former minister’s comments explicitly refer to overall rates, the scope of the study excluded consideration of the largest contributor to overall rate increases so far – increases in the distribution component of power bills. The truth is that power costs for ordinary customers have risen since the beginning of Ontario’s electricity reforms.

For his part, Mr. McGuinty has done little to raise the standard of the debate. In the midst of unprecedented power demands and a large dependence on imported power brought into Ontario to cover for a supply shortage that has brought our power system eyeball to eyeball with rotating blackouts, Liberal leader Dalton McGuinty says that we should close our coal-fired plants by 2007. Mr. McGuinty’s good intentions alone will not keep our lights on. These plants provide almost all of our dispatchable generating capacity and, in 2001, 29% of our energy. Although I fervently hope we can soon close Ontario’s coal plants, Mr. McGuinty offers no serious program capable of filling this gap. The only way to fill the gap is to restore investor confidence enough to get the paper power plants Ontario has in abundance, converted into real power plants. Mr. McGuinty’s interventions so far have done nothing to inspire investor confidence.

Mr. Hampton has distinguished himself as the loudest but weakest forecaster of Ontario’s power developments. As the market was opening, he warned at the top of his lungs that when the market opened, power would flood out of Ontario into the U.S., thereby driving up prices in Ontario. Here is what Mr. Hampton told anyone who cared to listen in a press release from January 23, 2002: "The new private owner will do what good for its shareholders – it will get the highest price possible, which is the American price. When a lot of our power is diverted to the United States there won’t be much for Ontario consumers – unless they want to match the American price." What actually happened after market opening was the opposite of what Mr. Hampton forecast. Power flooded into Ontario, mostly from the U.S., driving down prices here, much to the chargrin of Ontario-based generators.

This gloomy landscape of political spin needs to be challenged by people involved in the power system who understand how it works and what the electrical facts of life are.

Ontario’s power system needs depoliticization on many fronts. IMO board members should be directly elected by market participants. OPG and Hydro One should be privatized. I will make some remarks later on increasing the independence of the OEB.

Restoring Credibility to the Retail Market

Electricity retailers face a particular legitimacy challenge. So far in the market, purported customer solutions appear mostly to be attempts to take advantage of customer confusions.

The record of electricity marketers so far is unfavourable. Many, and perhaps most, customers who signed with electricity marketers prior to market opening thought they were getting lower cost power than they then paid.

Door-to-door representatives of energy marketers have been trained by their companies to get consumers to show their gas and electricity bills, thereby revealing the all-important customer identification number. In the past, there have been allegations of door-to-door sales agents obtaining access to customer identification numbers, forging the customer’s signature, and locking them into long-term energy deals. Customers trying to get out of unfavourable deals have had to obtain copies of their contracts from energy marketers, which has led to protracted disputes between marketers and their clients.

Disappointingly, Ontario has so far not seen any value-added bundling from marketers. Value-added bundling may ultimately be one of the only ways for energy retailers to really benefit their customers over the long term since almost all consumers are better off with unstable prices rather than paying insurance premiums for so called "price protection."

For many ordinary citizens, Ontario’s electricity market reforms means door-to-door marketing. For these consumers, marketers are the ambassadors of the new electricity market. The violations of the OEB’s Affiliate Relationship Code that have gone on, Toronto Hydro’s confusing branding of regulated and unregulated businesses, and repeated allegations of fraud by door-to-door sales agents give the overall restructuring a black eye.

Upgrade the Cash Register

Most consumers in the new market need intelligent, interval metering, capable of measuring usage at a high enough resolution so that they can be accurately billed. Providing this measurement service to consumers is probably going to be one of the most profitable business opportunities in the new market. Because of the purity of our spot market, our reliance on spot pass-through, and our seamless wholesale/retail markets, Ontario is uniquely positioned to lead the world in retail metering modernization.

If you are, or intend to be, a peaking generator, interval meters will directly compete against you.

Intelligent metering is the front line of customer protection. "Customer choice" without appropriate measurement constitutes a structural flaw in the market.

A variety of technology uncertainties make the future of metering hard to forecast. Is the best technology route based on one-way or two-way communications? What role for the Internet? What are the best ways to avoid obsolescence, like that which wiped out the old time-or-use meters? And perhaps the most significant question, how will advanced meters integrate with energy management systems?

Interval meters can help protect consumers from price excursions. It can also protect consumers from intra-class cross-subsidies. Ultimately advanced meters may be providing consumers with power quality and power reliability measurement.

Interval metering will benefit not just individual consumers but also the overall market. Widespread use of the meters will reduce the amplitude of price excursions, mitigate the abuse of market power, enhance supply reliability, cut societal capacity costs, encourage conservation, and lower LDC capital requirements from fine-tuned transformation requirements.

At least at their outset, interval meters will not be cost-effective for all customers. For example, small customers with standard marketer contracts will get no value.

A number of regulatory barriers are slowing the introduction of interval meters. Measurement Canada’s requirement for meter verification are one such barrier.

OEB’s Distribution System Code creates a maximum threshold for interval metering and also limits customer choice in meters. Under the code, existing customers >1 MW must have interval meters and new customers >500 KW must have interval meters. (DSC Section 5.1.3) However, LDC controls the metering and communications options. (DSC Section 5.1.6)

The OEB’s performance based ratemaking formula for LDCs creates a disincentive to expand the range and quality of services offered to consumers. To introduce interval meters for ordinary consumers utilities must file special applications.

Under the OEB’s rules, interval metering’s third party benefits are not recognized. Instead, customers requesting advanced meters must compensate the LDC for all sunk and incremental costs associated with that meter and the meter it replaces. (DSC Section 5.1.5)

Energy Probe champions the creation of a Retail Interval Metering Implementation Committee. This body would be mandated by the OEB and the Ministry of Energy to maximize the conversion of Ontario’s electricity meter stock to interval meters consistent with their cost effectiveness. We recommend that the composition of the body include representatives of the IMO, the OEB, the CEA and/or metering industry, Ministry of Energy, LDCs, and consumers (possibly also including marketers).

Support Effective Regulation

Effective regulation is an essential ingredient of a legitimate market.

The OEB needs legal independence from the provincial government. To achieve legal independence, Section 27 of the OEB Act must be repealed.

In addition, the OEB needs adequate resources to perform its work. Currently, the OEB staff are compensated at the pay scale of the Ontario public service, a requirement that makes it difficult for the OEB to attract and retain staff in highly technical positions.

Financial Update on Ontario Electricity Financial

Ontario Electricity Financial Corporation (OEFC), the legal continuation of Ontario Hydro, released its 2001-2002 financial results on Aug. 29. The financial results were released two months behind the schedule required by law, but this delay was much less that the delay in reporting during its first two years of operations. OEFC commenced with the breakup of Ontario Hydro in April 1999.

In its latest report, OEFC declares a loss of $69 million compared with a restated net income of $18 million last year. Prior to restatement, OEFC had claimed a net income of $244 million last year.

OEFC’s reported "unfunded liability" rose to $20.085 billion this year from $20.016 billion in 2001 – an increase from $19.433 billion in April 1999.

OEFC’s statement of "unfunded liability" should be treated as an estimate. The "unfunded liability" represents the net figure of OEFC’s total liabilities: mostly Ontario Hydro bond obligations, and its estimated costs for dealing with nuclear waste and getting out of high-priced power purchase contracts, some of which extend until 2042 – offset by notes receivable from the Province, Ontario Power Generation, Hydro One, and a small amount from the Independent Market Operator. Although, both OPG and Hydro One have seen their financial positions decline, the impact of these declines on the notes held by OEFC is difficult to judge.

OEFC’s financial losses were sustained despite the Ontario government’s decision last year to break one of its promises to ratepayers by accelerating the implementation of a special electricity tax earmarked for OEFC debt repayment to start collection prior to Market Opening. The Debt Reduction Charge (DRC) was first implemented on June 1, 2001, but renamed as the Wholesale Market Surcharge.

OEFC reports $524 million in accounts receivable from OPG and Hydro One as assets offsetting some of OEFC’s liabilities. These accounts receivable correspond to the retained earnings of OPG and Hydro One accumulated since their creation in April 1999. OPG has invested more than its total retained earning in the restart of the Pickering A nuclear station. Additional funds for the Pickering A project appear to have come from the liquidation of Mississauga hydro-electric assets, lease payments from Bruce Power, and deferring debt payments to OEFC. Hydro One has invested more than its retained earnings in the acquisition of municipal distribution utilities. Additional funds for Hydro One’s acquisitions appear to have come from the issuance of new debt, which has diluted the taxpayer’s interest in Hydro One.

This year, OEFC’s accounts receivable were adjusted downward by $122 million relative to last year. Further downward adjustment of OEFC’s accounts receivable cannot be ruled out.

Consumers were promised that the DRC would be temporary, in place long enough to recover Ontario Hydro’s unfunded liabilities. Since the unfunded liabilities are growing, the outlook for the DRC is that it will become a larger, longer lasting or permanent tax. In future, the rate charged for the Debt Reduction Charge is likely to increase from 0.7 cents/kWh to at least 1 cent/kWh.

OEFC has claimed since its first annual report to have a plan that shows the unfunded liability being eliminated. The plan is secret. In 2000, the Provincial Auditor asked that the plan be subject to independent review. The reviewer retained was Ernst & Young, the same company that signed off on Ontario Hydro’s financial statements, statements we now know were materially inaccurate. This year, OEFC claims that the date at which its unfunded liabilities are defeased has slipped from 2010 until 2012, but no supporting explanation is provided.

The continuing slide of OEFC’s financial performance represents a major threat to Ontario’s power market. The longer OEFC is allowed to ramp up debt, the higher rates will ultimately have to go for consumers. Rising OEFC debt is the direct result of two out of control Crown corporations pursuing expansion plans that do nothing to strengthen Ontario’s power market.

Conclusion

I hope there are voices in this room that will speak up more loudly in defense of Ontario’s new power market. Ontario’s electricity restructuring will not succeed unless it enhances the public interest. Among the necessary steps to enhancing the public interest are depoliticization of the power system, restoring the credibility of retail marketing, modernizing electricity metering in Ontario, achieving higher standards of independence and effectiveness in regulation, and cutting the Ontario taxpayer’s electricity liabilities.

John Spears
Toronto star
October 8, 2002

A week after saying he is "frustrated and annoyed" over a decision by the Ontario Energy Board, Premier Ernie Eves has launched a wide-ranging review of its mandate, performance and financing.

Board chairman Floyd Laughren said he welcomes the review, and says it will give the board a chance to argue it needs more leeway to recruit – and pay – top-quality staff.

The review will be conducted by Energy Minister John Baird, who said he’ll report to Cabinet within 100 days. The study will encompass the legislation governing the board’s powers, resources, performance measures and retroactive decisions.

"The review of the Ontario Energy Board will be good for consumers and will be good for investment and industry," Baird said yesterday.

"What we want is a watchdog, a cop on the beat to look out for the best interest of consumers."

Retroactive decisions became a sore spot when the board recently approved a rate increase for Union Gas, retroactive to 2000, that will cost an average householder $120.

Eves publicly questioned the decision and hinted he’d launch a review.

In an interview, Laughren said he was aware of Eves’ view of the Union Gas decision. "I don’t think there’s any question but that was part of the trigger," he said. "On the other hand, if that trigger will help us get on with a good review, so be it."

The board’s mandate has expanded to include areas such as drawing up and enforcing consumer protection codes and levying substantial fines, Laughren said.

Carrying out those jobs means the board has to hire more professionals such as lawyers and accountants, he said. But that has been difficult because the board works under civil-service salary limits. The review will give the board a chance to argue that its resources should match its mandate, he said.

Tom Adams, executive director of Energy Probe, said the review is "bad news" because it’s being called in the wake of Eves’ critical comments.

"That kind of atmosphere militates against a careful, considered review of the board’s processes and surrounding issues. This is another step toward politicization of the energy markets."

NDP Leader Howard Hampton said the hastily ordered review is a bid to divert attention from failings of privatized, deregulated hydro.

"It’s a shambles," said Hampton. "This government’s strategy of privatization and deregulation is not working and it’s getting Ontario into trouble . . ."