Energy Probe

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 . . ."

Paul Vieira
National Post
October 10, 2002

A major credit rating agency says it may have to downgrade the power utilities doing business in Ontario unless the Conservative government refrains from intervening in the electricity sector and flaws in the market are fixed.

The statement from Dominion Bond Rating Service Ltd. is the latest blow to Ontario’s $10-billion power market – this one two days after the province launched a review of the Ontario Energy Board, the agency that regulates the market, and an independent panel warned of a "serious shortage" of electricity that could lead to California-style rolling blackouts next summer.

Any move by DBRS will hit consumers, because a downgrade increases the utilities’ cost of raising cash – and those increased costs will be passed on to consumers through higher rates. Consumers are already reeling after receiving their recent hydro bills, which have doubled or tripled from the last statement.

"It’s unavoidable. That’s the consequences," said Tom Adams, executive director of Energy Probe, an industry watchdog.

In its statement, DBRS said political interference in the power market has come with a price.

"The combination of political intervention in the Ontario electricity market since the spring of 2002, certain market design flaws and various regulatory issues has created disincentives to investing in the Ontario market. If political intervention continues either directly or through the OEB, such that the financial position of those companies whose operations are concentrated in Ontario is materially affected, rating downgrades could be warranted."

The rating agency added that political interference creates uncertainty about the market, and "reduces the incentive to invest in Ontario, which could exacerbate the tight demand-supply conditions over the medium term.

"Any situation that causes electricity prices to remain high could result in further government intervention at the expense of electric utilities," the agency said.

Mr. Adams said the DBRS statement highlights the flaws in the government’s electricity policy.

"This is a perverse situation because [Premier] Ernie Eves is taking these panic measures to try and protect consumers. But his approach is like throwing a boomerang – it is coming back to harm consumers."

John Baird, Ontario’s Energy Minister, played down the DBRS statement. "I think we’d all like to see a greater degree of certainty [about the market] and that’s something I’m working on."

Companies affected include Crown-owned giants Ontario Power Generation Inc. and Hydro One Inc., and a number of local utilities that distribute electricity throughout the province. "These distributors are already stressed to meet capital and cash flow requirements," Mr. Adams said. "This news from DBRS will make a bad situation worse."

Since last spring, when Ontario’s market was opened to competition, the government has "intervened frequently" in an effort to protect consumers, DBRS said. The moves include: a decision to kill the privatization of Hydro One, the transmitter; the review of the OEB; and statements from Mr. Eves indicating OPG will have to pay out rebates promised to consumers even if the Crown utility’s revenue drops through the sale of assets – a requirement under the market regulations.

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Andrew Callus
Planet Ark/Reuters News Service
November 4, 2002

LONDON — The U.K. government was considering this week whether to extend its emergency loan to stricken nuclear firm British Energy for a second time as a four-week countdown began to deciding the company’s future.

A 650 million-pound ($1.02 billion) state-bailout loan to the producer of a fifth of Britain’s power is due to expire on November 29.

Privatised British Energy cannot make money at current electricity prices, which have dropped below its cost of production after market reforms exposed industry overcapacity.

Other British power generators are in financial trouble too, but ministers happy to let market forces do their work elsewhere have acknowledged that they cannot walk away from British Energy for reasons of safety and security of supply.

Forcing the firm into administration and potential insolvency by withdrawing support at the end of this month will not make the problem go away. Analysts said it could prove even costlier in the long run because the state’s own loss-making nuclear fuels arm BNFL depends on British Energy.

But propping it up indefinitely with taxpayers’ money is not an easy option either. EU rules against state subsidy are getting stricter and other power producers would have a case for subsidy as well. Meanwhile environmentalists and supporters of renewable energy who want to phase out nuclear power are planning court action against the current loan.

"They (the government) just don’t want this thing on their balance sheet," said a senior industry executive involved in wide-ranging talks about the future of the UK’s power industry.

"Next year’s energy policy review is the key to resolving this whole thing. A debt rollover until the government is clear about where this (policy) is going is where I think things are heading."

A source close to the government said a decision on whether to roll over the loan – extended and increased once already in September – would be taken "very close indeed to November 29".

Ministerial minds have not been made up, he said. "But if there is an extension on November 29 the decision will have been taken that British Energy should survive."

Capacity payments

According to the industry source, one likely change to energy legislation next year that could alleviate British Energy’s difficulties is a return to "capacity payments" – where wholesale power prices include a fee paid to generators for making capacity available.

Capacity payments were abolished with the reforms that introduced New Electricity Arrangements (NETA) last year.

Although regulator Ofgem and many customers are happy with the 40 percent slide in wholesale prices since 1998, generating firms say a power market needs spare capacity, and that there is no longer any incentive to own capacity that is not in use.

They say the situation could end in a capacity shortage. Capacity payment would apply to all types of power producer, so discrimination in favour of nuclear energy would not be an issue.

Another key element to the British Energy puzzle is the future of BNFL, whose contract to recycle fuel costs British Energy 300 million pounds ($469 million) a year.

One neat way to cut the cost of that contract might involve BNFL, which has its own privatisation plans, taking an equity stake in British Energy, possibly swapped for easier contract terms.

Sources have said this is also among the ideas on the table in ongoing talks between industry and government.

Industry sources said Chancellor of the Exchequer Gordon Brown, who runs the nation’s finances, will have the final say on November 29 even though the Department of Trade and Industry (DTI) is officially in charge.

The DTI said talks were continuing, and the Treasury said British Energy was a matter for the DTI.

Adria Vasil
NOW magazine
November 7, 2002

Anxiety over ongoing expansion efforts at the Bruce nuclear facility is running high. Locals were thrown another curve this week when Energy Minister John Baird suggested that troubled reactors at the facility could be pressed into action to help fill any energy gaps facing the province in the future. Baird tossed out the Bruce option as it became apparent Monday that four reactors at Ontario Power Generation’s Pickering plant, which generates most of the province’s electricity, will not be up and running for months to come – if ever.

The prospect of hurrying the Bruce facility’s notoriously problematic reactors back into service, several of which have been out of commission since 98, has locals and anti-nuke activists worried about the environmental fallout. But Bruce Power (BP), the private company now running the generating station, is getting ready to spark up two of the Bruce A reactors.

Residents have little trust in the old reactors, which have been plagued by technical problems and poor performance. They worry that the reopening will mean even higher levels of the radioactive toxin tritium in their drinking water.

The local Inverhuron Ratepayers Association has documented several "emergency" releases of tritium directly into Lake Huron because of mechanical breakdowns and mishaps over the years. Though considered by some to be a relatively benign radionuclide, tritium has been linked to leukemia and Down’s syndrome.

Even BP admits that tritium levels will lilely rise. The company, however, denies that the carcinogen has ever reached harmful levels.

BP spokesperson Steve Cannon says, "Bruce Power only undertook the restart program for Bruce A following the most comprehensive assessment of CANDU reactors ever done."

Locals say BP is downplaying the dangers. Normand de la Chevrotiere, a spokesperson for Inverhuron residents, was dismayed to discover that Health Canada’s guideline for the maximum level of tritium in drinking water is 10 times higher than that established more than 30 years ago in the U.S.

"It prompts the question," says de la Chevrotiere, "why are allowable Canadian levels still so much higher than those in the U.S.?"

Norm Rubin of nuke watchdog Energy Probe says the looser standards were put in place to accommodate the fact that the technology used in CANDU reactors produces more tritium.

"Unfortunately, the polluters are powerful enough to make it work that way," says Rubin.

According to the UN Safety Committee on the Effects of Atomic Radiation, Canada’s much-vaunted CANDUs actually release up to 20 times more tritium into the environment on a regular basis than comparable U.S. reactors. And with childhood rates of leukemia in the Bruce region 40 times the provincial average, locals are eyeing the toxin as a serious suspect.

But Health Canada spokesperson Andrew Swift says, "Our limit is one-twentieth of what it is possible to be naturally exposed to."

That BP’s parent, British Energy, is on the financial rocks, is heightening concerns about safety.

"Would a private firm be tempted to cut corners if it were in economic difficulty? Yes, perhaps," offers Michel Cleroux, a spokesperson for the Canadian Nuclear Safety Commission (CNSC). "However, if ever we saw that a firm was in economic difficulty . . . we would ensure that none of that would occur."

But Bruce, the notoriously leaky home to all the low- and medium-level waste from 20 of Canada’s 22 reactors (nuclear waste is also stored aboveground near the reactors), has already been leaching exceedingly high levels of carcinogenic tritium into nearby groundwater. So much so that the CNSC decided to increase official maximums for the toxin by 500 per cent in order to renew the facility’s operating licence in 2000.

Relying on Bruce to pick up the electricity slack may not be in the Tories’ best interest, given the potential eco fallout. But the howls of disgruntled consumers about energy costs may preclude a change of heart.

Richard Mackie
Globe and Mail
November 7, 2002

Premier Ernie Eves is expected to announce tomorrow a package to protect Ontario consumers from soaring electricity prices in response to the unprecedented political pressure his government is feeling on the issue.

The Premier told the legislature yesterday that the government also will protect people who risk having their power cut off because they cannot afford to pay the increases in their bills.

The package to help consumers will include rebates to cover some of the steep increases in electricity prices since the market was opened to competition on May 1.

The government also is looking at placing a cap on electricity prices and at ways to encourage private companies to build new generating plants.

The prospect of increasing rebates and capping on electricity prices was strongly criticized yesterday by experts in the industry.

"Ultimately it all comes back to taxpayers" to subsidize rebates, Tom Adams of the watchdog agency Energy Probe said.

"A rate freeze would increase the risk of blackouts this winter," he warned, and would discourage investment in new generating plants.

Since May 1, the basic wholesale price for electricity has averaged 5.17 cents a kilowatt-hour, according to the Independent Electricity Market Operator, which is responsible for ensuring the province has enough power to meet demands. When the market was being set up, the price was supposed to average 4.3 cents.

At times the prices have hit six cents and seven cents, and even exceeded eight cents.

As bills have risen sharply, members of the legislature have been swamped by complaints that even Progressive Conservatives admit exceed anything they have experienced in the past.

Enterprise Minister Jim Flaherty said yesterday that when he talked with voters in his riding of Whitby-Ajax, he was inundated by demands that the government do something.

"It’s a genuine concern, particularly by small businesses and individuals in their homes. So we have to address it," he said.

Even without government action, consumers are in line to receive rebates averaging $52 a household as of Oct. 31, according to Mr. Adams.

But government sources acknowledge this would be inadequate to calm the wrath of the four million consumers who pay electricity bills in the province, especially from a Premier who used his last budget as finance minister to send out tax-rebate cheques of $200 to every taxpayer.

The rebate program will be enriched by drawing more money from Ontario Power Generation or from the general revenues of the province.

Mr. Adams complained that in either case taxpayers would end up paying more in taxes, either to top up revenues or to cover the increased debt at the Ontario Electricity Financing Corp., which is responsible for debt run up at the old Ontario Hydro.

A similar complaint came from John Wilson, formerly on the board of directors at Hydro One. "The big problem with paying out rebates to everyone is that those rebates are not really rebates. They’re taking our own money and paying us with it. So we’re not really gaining. It just looks like something is happening."

The idea of freezing the rates people have to pay for electricity also drew negative comments.

Keith Stewart of the Ontario Electricity Coalition said that taxpayers, again, would eventually have to cover any difference between the capped rate and the price paid to generating companies supplying the electricity.

"If you are capping how much people pay on their bills, but not how much the private producers are getting, there is a difference there that has to come from somewhere. . . . If that is coming from the public purse, as it probably would, then what we are doing is we’re essentially giving a massive subsidy to private producers out of tax dollars."

Mr. Adams said a rate freeze increases the risk of blackouts because higher prices force consumers to cut back on their use of electricity, curbing demand.

Richard Brennan
Toronto Star
November 12, 2002

Ontario Hydro consumers will get about $700 million in rebates from the provincial government to offset electricity costs that soared over the summer.

Premier Ernie Eves yesterday announced a nine-point plan that calls for rebates for consumers of $75 before the end of the year and more as a credit on their hydro bills next year, and a rate freeze that will last until 2006.

A protester dubbed "Hydrozilla" parades outside a Mississauga residence where Premier Ernie Eves announced yesterday rates will be capped and rebates will be issued. Credit: Frank Gunn, Toronto Star

"There are a lot of things you can do without," Eves said, "but electricity isn’t one of them."

Eves said "it is unacceptable that families are being hit with hydro bills they can’t afford, and businesses are facing cost increases significantly larger than they can handle. The problem requires immediate action and we are taking it. From now on, the only time your electricity bill will go up is when you use more power."

Eves said the money will come from a Consumer Price Protection Fund, money set aside by the government-owned Ontario Power Generation (OPG) and Hydro One for rebate purposes.

"At the end of this month that fund will be well in excess of $700 million," the Premier said.

Critics say the real cost will be billions of dollars.

And Arthur Dickinson, president of the Association of Major Power Consumers in Ontario, said the rate freeze means the future supply of electricity in Ontario is now in jeopardy.

Dickinson warned the price cap will deter new suppliers from setting up shop and could lead to power shortages given the ongoing delays in restarting nuclear reactors in Pickering and Kincardine.

Under the plan, which must be approved by the Legislature, the rate will be fixed at 4.3 cents a kilowatt hour effective Dec. 1 – about half what it was in September – and consumers would be repaid "every penny" of the difference retroactive to May 1 when the market was opened up to competition.

The government’s plan also calls for an investigation into delays in getting the four nuclear reactors at the Pickering A generating station back on line and changes of the board of directors at OPG, the government-owned producer that still controls 70 per cent of the electricity produced in the province.

Tom Adams, of Energy Probe, an industry watchdog, said the government’s meddling in the market will drive away potential investors.

"Ontario electricity supply is in a lot of danger . . . the likelihood of blackouts this winter went way up.

"Ontario does not have enough power supply," Adams told reporters.

Eves picked a sprawling neighourhood in west Mississauga to make his announcement, where owners with pools and air conditioning saw sharp increases.

Eves actually looked at a hydro bill for Mississauga couple Keshab Hardatt and his wife Meena whose home he used for his press conference, and with a pen explained that they would see a retroactive rebate of about $150.

Premier Ernie Eves visits the home of Meena Hardatt and her husband Keshab in Mississauga yesterday afternoon to announce that Ontario’s hydroelectricity rates will be capped and rebates paid. Eves calculates how much the Hardatts will save on their bill. Opposition critics say he’s refusing to admit privatizing hydro won’t work. Credit: Tony Bock, Toronto Star

Today Energy Minister John Baird is to make an announcement today about the issue of the supply of energy. Tomorrow Baird and MPP Steve Gilchrist will launch initiatives to encourage conservation, clean electricity and alternative energy.

Liberal Leader Dalton McGuinty said the true cost of the rebates could be much higher than Eves suggested.

"My real concern is how much is it going to cost all of us over the long term.

"We are talking about billions and billions of dollars that are either going to be added to the hydro debt or to the provincial debt," McGuinty said.

NDP leader Howard Hampton said "to engage in this kind of cover-up we estimate will cost a half a billion dollars a year, which means the government will be using tax dollars to hide the cost of privatized, deregulated electricity from consumers."

Under the plan, consumers will pay a fixed rate of 4.3 cents a kilowatt hour but producers will still charge the fluctuating market rate, leaving the province to make up the difference.

"The market will continue to operate in terms of those who generate power . . . the difference is the consumer won’t see that fluctuation," Eves said.

Customers of Toronto Hydro, who have been paying 4.3 cents, won’t be faced with additional costs they had expected to pay.

People who signed contracts with electricity retailers will also pay 4.3 cents with the province subsidizing these companies for the difference.

Eves said consumers will be reimbursed even if they signed contracts that say the retailer gets any rebate.

The combination of a hot summer and insufficient power produced in Ontario forced the province to import expensive electricity to meet the growing need, which sent rates soaring.

Other highlights of the plan include:

• The charge for delivering the power to people’s homes and business would be capped at current levels;

• An independent review of how other charges on electricity bills are calculated to ensure they are reasonable, including the fixed monthly charge and create standard province-wide electricity bills that are easier to understand;

• Demand Ottawa stop charging the GST on electricity bills;

• A plan to ensure a long-term electricity supply at reasonable costs;

• Incentives for conservation, clean energy and alternative fuels, including tax incentives and tax holidays.

Richard Mackie – With a report from Canadian Press
Globe and Mail
November 12, 2002

Ontario electricity consumers will get their power at the frozen rate of 4.3 cents a kilowatt hour, and can look for rebates of up to $100 on average under a major policy reversal announced yesterday by Premier Ernie Eves.

The new scheme could end up costing billions of dollars, critics warned. However, Mr. Eves insisted the costs will be minimal.

After 6½ months of staunchly defending the attempt to deregulate the industry, Mr. Eves said his government will bow to public opinion and end the experiment of allowing competition to set the price of electricity.

His decision came after a public outcry threatened to destroy his government.

"It is unacceptable that families are being hit with hydro bills they can’t afford and businesses are facing cost increases significantly larger than they can handle," said Mr. Eves during a heavily choreographed announcement at a private home in Mississauga.

"From now on the only time your electricity bill will go up is when you use more power."

Mr. Eves set out a plan to freeze the basic electricity rate at 4.3 cents, and repay consumers and small businesses for the excesses they have paid since May 1.

The price freeze is effective Dec. 1 and is to last until 2006.

Critics warned that ending deregulation eventually will cost taxpayers billions of dollars and increase the probability of brownouts and blackouts.

"The risk of blackouts was serious before today. After today there is a very high likelihood," said Tom Adams of the electricity watchdog agency Energy Probe.

The rate of 4.3 cents a kilowatt hour was the price at which electricity charges were frozen in 1994 by the New Democratic Party government. They remained at that level until May 1.

Mr. Eves said there will be no cost to consumers or taxpayers to put the price freeze and rebates in place, because Ontario Power Generation, the government’s electricity-generation company, makes money on generating power in the range of two cents to three cents a kilowatt hour from water and nuclear sources.

This profit can cover the cost of paying for power generated at a cost of five cents, six cents or seven cents, he said.

However, critics warned that 4.3 cents is far below the cost of producing and importing much of the electricity used in Ontario.

Since the market was opened, the wholesale price for electricity, adjusted to take into account the times of heavy use, has been about 5.6 cents, and it spiked several times. In the first week in September, the price averaged 10.9 cents a kilowatt hour.

Mr. Eves’s announcement echoes Alberta’s experience two years ago, when soaring electricity prices in a deregulated market forced political action.

Premier Ralph Klein provided rebates totalling $300 to every taxpayer, along with other benefits to quell a public outcry against the problems in the industry.

In California, a shortage of electricity pushed up prices to the point where the state had to reregulate its deregulated market.

Stakeholders in the electricity industry, who received a special briefing on the policy reversal from the Premier’s office, said later that they could not obtain answers to their questions on where the money will come from to pay for the price freeze and the rebates. Nor could they obtain answers about how the government will encourage new investment in electricity-generation plants needed in Ontario.

Judith Andrew, Ontario vice-president of the Canadian Federation of Independent Business, said: "There was discussion today about how [the new system] was supposed to be self-financing. But the real question is how that will happen. . . . We had a long period of price freezes . . . and that’s when the debt was built up." When Ontario Hydro was broken up four years ago, it had a debt of $38-billion.

Len Crispino, president of the Ontario Chamber of Commerce, said: "We did not get adequate answers to our questions today with respect to who pays for this. It’s supposed to be revenue neutral, but we have our doubts."

Energy Minister John Baird is to hold news conferences today and tomorrow to elaborate on Mr. Eves’s announcement, while the Premier takes what his office described as "private time with his family." The legislature is not sitting this week.

About one million of the four million consumers in the province who have contracted to buy electricity at fixed rates, usually 5.5 cents or more, will pay the 4.3-cent rate and be entitled to rebates similar to those that will go to those without fixed-price contracts.

The first instalments of the rebates, set at $75, will be sent before the end of the year, Mr. Eves said.

The balance of the rebates will be applied to future bills. Most of the money will come from Ontario Power Generation, which has a $700-million rebate fund.

The changes announced by Mr. Eves put an end to the attempt to establish private companies to sell power to homes and small businesses on fixed-price contracts, Mr. Adams said. He predicted that it will cost the government up to $1.5-billion to buy out companies in the business of selling electricity on a retail basis through fixed-price contracts.

Mr. Eves had other announcements, including plans to look at other charges on electricity bills to see whether they should stay. An easy-to-read bill is to be designed.

Further, the government will make changes at Ontario Power Generation to make it more concerned with the interests of consumers. And the government will set up an investigation into why the four nuclear generators at the Pickering A station are out of service more than five years after they were shut down for repairs.

John Heinzl
Globe and Mail
November 13, 2002

When Ernie Eves dropped in for a choreographed, election-style visit with a Mississauga family to announce a freeze on electricity prices, the goal was to portray the Ontario Premier as a politician with a common touch.

Instead, the episode may one day serve as the basis for a public relations textbook titled 101 Ways to Ruin a Press Conference. The ham-fisted effort has left reporters angry and PR experts scratching their heads.

First, there was the ill-chosen venue.

If Mr. Eves’ handlers were trying to depict him as a man of the people, why did they choose a 3,500-square-foot suburban home with a 50-inch Sony television and a fridge with an ice maker? This family doesn’t need lower hydro prices. It needs its own generator.

Surely, there are thousands of Ontario families who would have made a more convincing case for a hydro rate freeze.

Poor optics weren’t the only reason observers criticized the location. As expansive as the Hardatt’s home is, it wasn’t big enough to accommodate the crush of media that converged on the upscale Mississauga neighbourhood to cover the government’s stunning policy reversal, reporters said.

"It was a real disaster from a PR standpoint," said John McGrath, a CBC Radio reporter and president of the Press Gallery at Queen’s Park.

"There were certain things done that were appalling for a government news conference."

Some cameras could not even get inside the Hardatt’s home, because it was already bursting with reporters, he said. Some news organizations ended up sharing footage. That sort of thing shouldn’t happen at such an important announcement, he said.

Because of the crowds, Mr. Eves’ handlers even tried to deny entry to Tom Adams, executive director of Energy Probe, an industry watchdog, Mr. McGrath said.

Mr. Adams was eventually allowed in after Mississauga Mayor Hazel McCallion entered with no resistance, Mr. McGrath said. Reporters are so furious about the venue that yesterday Mr. McGrath was weighing whether to write a formal letter of complaint to the Premier’s office.

"It was like trying to have a picnic in the middle of Verdun," he said. "I’ve never heard the gallery so angry."

Barry Wilson, senior media adviser to Mr. Eves, put a different spin on the events. The news conference did not cause any undue inconvenience for reporters, he said, and only one expressed his disappointment at not being able to ask a question.

"All the cameras made it into" the house, he said, adding that "it is fully within our authority to choose what venue we would like to make these announcements in."

Meena Hardatt, whose home was the scene of Monday’s debacle, said in an interview that she has no political connections to the Progressive Conservative Party and doesn’t even remember how, or if, she voted in the last election.

Someone just called her family out of the blue last Friday – a friend had provided their name – and asked if they would mind having the Premier and a bunch of reporters in her kitchen. Sure, they said.

Not that Ms. Hardatt was complaining. Having the press conference in her house was a great idea, she said. Mr. Eves "showed me how [the rate freeze] related to me and how it affected me and how I would benefit. He got out his message and put my mind at ease and a whole lot of other people."

Patrick Gossage, a long-time Liberal PR strategist, said Mr. Eves’ people picked the wrong venue to make such an important announcement. They should have held it in a large room equipped for press conferences.

By holding it in a private home, there were too many distractions, he said. The goal may have been to provide fodder for the cameras, but the strategy backfired, he said.