Energy Probe

John Spears
Toronto Star
December 17, 2003

Dave Martin of the Sierra Club of Canada said the committee of "a banker and two recycled politicians from the Mulroney and Chrétien cabinets" is unlikely to come up with the dramatic new ideas on conservation and renewable energy that Ontario needs.  

Eric Reguly
The Globe and Mail
December 18, 2003

Eleanor Clitheroe, the disgraced former CEO of Hydro One, the sister company to Ontario Power Generation, must be smiling. The reason: It looks like the provincial government whacked the wrong board. While it is unfashionable to say anything nice about poor Eleanor, she can claim Hydro One hit its financial forecasts when she was running the show (pity she allowed excessive limo service and other goodies to blow away her own financial forecasts). Still, the Ontario government sacked her and the other directors.

Meanwhile, down the road at OPG, the generating boys were having a merry time blowing obscene amounts of money on the Pickering A nuclear plant overhaul. But that didn’t matter, because OPG was profitable and was more or less meeting its (diminished) financial targets. Or so we thought until Tuesday, when Ontario Energy Minister Dwight Duncan dropped a bombshell. OPG, he said, expects a cash shortfall this year of $350-million. Next year, the shortfall will range between $300-million and $750-million, raising the after-tax loss to about $250-million. That’s $850-million worse than the projection contained in OPG’s 1999 Corporate Financial Restructuring Plan.

Things are so bad that OPG is selling receivables, that is, future income streams, at a discount to help cover the cash shortfall. Desperation tactics like this are normally associated with companies facing insolvency, a scenario not ruled out by the Liberals. "The future viability of the company is at stake," said Mr. Duncan, who launched a review of OPG and promised to appoint new board members (CEO Ron Osborne and chairman Bill Farlinger were ousted earlier this month).

OPG has been the bearer of grim news for some time. Nonetheless, the cash shortfalls ranked as a true shocker, even more so than the multibillion-dollar cost overrun at Pickering A; it was apparent as early as 2000 that the nuke plant’s original $780-million overhaul estimate was sheer fantasy.

How did OPG find yet another hole to fall into? The government couldn’t readily explain the horrendous cash shortfall, but hinted that OPG couldn’t take all the blame. "As we drill down into the operations at OPG," Mr. Duncan said, "we’re finding out more and more about the astounding magnitude of the problems left by the Tory government."

One credible explanation is that OPG was the victim of blatant and cynical political interference. Tom Adams of Energy Probe, an early and accurate forecaster of Ontario’s energy meltdown, believes this, as do energy executives who recently left the industry. Sources said Premier Dalton McGuinty’s energy team has been told by OPG officials that this was indeed the case – OPG was urged to sell electricity at less than the market could bear, leaving a gaping hole in the cash account. If this is true, the former Tory government is guilty of taxpayer sabotage on a grand scale.

We know the Tories were absolutely freaked out by high electricity prices, thanks to extreme temperatures and a shortage of generating capacity, in the months after the spring, 2002, opening of the electricity market. Their solution was, in effect, to close the market by fixing electricity prices at 4.3 cents a kilowatt hour for the residential and small business market, equivalent to roughly half of the overall market. The problem was that wholesale prices were consistently higher than 4.3 cents. The difference between the (high) wholesale price and the (low) retail price – hundreds of millions of dollars in a relatively short period of time – was subsidized by the government, which meant it was slathered onto the public debt. Taxpayers were being bribed with their own money and the headlines about the blatant rip-off made Ernie Eves and his election-bound Tory buccaneers distinctly uncomfortable.

In other words, it was in the Tories’ best political interests to make sure the price subsidy was as small as possible. Sources said OPG was encouraged to do its bit to make this possible. How exactly this was done, and who was approached, isn’t known, but it looks like OPG’s so-called market power mitigation agreement might have been at the centre of any effort.

The agreement was designed to give all electricity users some degree of protection from price spikes once the market opened. If the price was higher than 3.8 cents a kilowatt hour, OPG, as the dominate generating company, was obliged to rebate a portion of the excess revenue to consumers (in the first three quarters of 2003, the rebate came to $1.27-billion). The wrinkle in the equation was that, as OPG’s market share came down – it was required to fall from about 80 per cent to one-third of the market within 10 years – the company could sell more and more power at prevailing, and presumably higher, market rates than 3.8 cents. This was designed to give OPG an incentive to shed market share.

Often in the past year and a half or so, the wholesale price was 6 cents. The question is whether OPG was getting that much for the juice, or was it taking less in an effort to appease its political masters? This is what the Liberals are trying to determine. Certainly, that’s what the hole in the OPG accounts suggests.

Selling below market prices would take one mistake – the fixed retail price – and double it. It would wreck OPG’s finances, if it hasn’t already done so, and damage the taxpayer in the process. OPG is 100 per cent Crown owned, which means it’s the taxpayers’ baby. If the government has to pump money into it to keep it alive, that cost is ultimately borne by the unwashed masses. Furthermore, the sale of electricity at artificially low rates would scare off independent generating companies, delaying the transition to a competitive market.

If ever there was an argument to remove electricity from government ownership, this is it. The Tories were not above gaming the electricity market for political gain. Ms. Clitheroe was fired, Hydro One’s privatization was reversed, the 4.3-cent fixed retail price was put into place. And now we learn about OPG’s potential collapse amid allegations of price manipulation. The only way to end the political risk is to remove politicians from the market.

Tom Adams
Financial Post
December 20, 2003

Ontario Premier Dalton McGuinty, alarmed at the $1-billion-plus deficit facing government-owned Ontario Power Generation, has appointed former federal finance minister John Manley to get to the bottom of the crisis.

If $1-billion alarms Mr. McGuinty, he should ask Mr. Manley to check out the rest of Ontario’s crisis-wracked power system, starting with Ontario Electricity Financial Corp., a Crown agency created, in part, to track the province’s power-related liabilities.

OEFC claims Ontario’s taxpayer-backed electricity debt fell by almost $4-billion: from $30.5-billion in 1999, when Ontario Hydro was wound up, to $26.8-billion in March, 2003. In fact, the taxpayer-backed electricity debt has been rising, and hit $32-billion last March. OEFC arrived at its $26.8-billion figure by shifting almost $5-billion in liabilities off its books and on to those of other publicly owned agencies, primarily Hydro One.

About two-thirds of OEFC’s debt represents electricity liabilities not backed by assets — the so-called "stranded debt" left over from Ontario Hydro’s de facto bankruptcy. OEFC reassures us that it will eliminate all of this stranded debt by 2012. To accomplish this, it has been touting a business plan — albeit a secret one — blessed annually by the provincial auditor, Erik Peters, and in 2000 by auditor Ernst & Young. OEFC’s business plan incorporated the business plan of OPG, which was also kept secret. Year after year, auditors bought into an implausible business plan of fictional numbers based on wild-eyed forecasts.

The facts tell a sobering story. Taxpayer exposure to stranded debt is rising. Even in OEFC’s own version of the story, stranded debt rose from the $19.4-billion inherited from Ontario Hydro to $20.2-billion in March, 2003. But the real story is much worse.

OEFC’s chief assets are IOUs, some from a troubled Hydro One, more than one-quarter from a near-destitute OPG. Any prudent auditor would consider these assets impaired: The Energy Minister himself now recognizes that OPG risks bankruptcy.

OPG’s collapse is all the more remarkable considering that it has had unexpected cash to burn. For example, during the last 18 months, power prices have been far above those forecast when OPG took on its debts. OPG’s voracious expenses have eaten up this windfall and more, so much so that it has been forced to sell accounts receivable to pay its bills. To boot, OPG liquidated $342-million in assets at the Mississauga hydroelectric stations. But instead of putting the cash toward cutting its debt, and making good on its promise, the money was lost on the unlikely gamble that the Pickering A nuclear plant could be successfully renovated.

Hydro One, meanwhile, also burned up provincial resources in empire building. During its heyday under Eleanor Clitheroe, Hydro One bought 95 municipal distribution utilities at prices far above those private sector competitors were prepared to pay.

Although Hydro One’s profits have been falling since it was created while its debt has been rising, OEFC’s accounts do not reflect Hydro One’s decline in value. On the contrary, when Hydro One issued fresh debt and used a portion of the proceeds to repay OEFC, OEFC reported that as a "highlight" for the year, implying that taxpayer liabilities were reduced. In fact, debt issued by Hydro One impairs the taxpayer’s claim on Hydro One’s assets and cannot therefore be ignored.

Ontario taxpayers are paying another way, too. To keep OEFC afloat, the province has committed to provide it with $520-million a year from general tax revenues. OPG and Hydro One, in turn, were to reimburse the province with $520-million in annual dividend payments. In 2002, the dividends fell short by $362-million, forcing taxpayers to directly pay a portion of the consumer’s power bill. The dividend shortfall is all but certain to rise in future. In fact, the province is considering a $1-billion cash injection in the coming year.

Transparency for Crown operations ought to be a basic taxpayer right. Every year since it was created, OEFC has failed to release its annual report on the schedule required in the Electricity Act. Its failure to comply with the law is never noted in the auditor’s report.

Perplexingly, the audit opinion is always issued months prior to the actual release of the report. In one case, the opinion was signed more than six months prior to the release, raising a question about what happens during the intervening period. By rights, OEFC’s financial reports should be issued promptly after the close of each quarter and its financial plans should be published annually.

But transparency will not solve the structural flaw that fuels this covert money bonfire. For that, privatization and competition are needed. Some jurisdictions, such as California, have botched their deregulation efforts. The great majority have not — the United States, in fact, now has an immense surplus of power while Ontario has been unable to build the power plants it desperately needs.

The only way to freeze taxpayer liabilities is to privatize the government’s power businesses. Had the province done this when Ontario Hydro suffered its de facto bankruptcy in 1997, it would today be billions of dollars — and dozens of power plants — ahead.

James McCarten
The Canadian Press
January 2, 2004

TORONTO (CP) – Blackout 2003 was a study in contradictions: a moment of empowerment sparked by the absence of power, a blanket of darkness that trained a spotlight on the best in human nature.

It came at 4:11 p.m. on a steamy August afternoon – a massive power outage that energized unsuspecting residents of Ontario and much of the northeastern United States even as it robbed them of electricity.

In the middle of chaotic downtown intersections, Good Samaritans appeared to pry helpless commuters free from a rush hour paralysed by lifeless traffic lights and frozen electric streetcars.

Cash was king again; without electricity, computers, credit cards and other essential accessories of life in the 21st century became nothing more than encumbrances. Gasoline was gold.

Downtown bars, restaurants and convenience stores offered comfort to anxious customers while hotels threw open their doors to those unwilling to brave the worst traffic jams in recent memory.

And as the sun vanished behind office towers, darkening parks blazed with candlelight beneath a canopy of stars never before seen from the heart of Canada’s most populous city.

"There is a real deep level of decency out there, and it was evident," said Tom Adams, director of Energy Probe, Canada’s leading power watchdog.

"There was a very good feeling that arose out of it in a lot of ways. People did help each other out, and we need to pat ourselves on our back for that."

It was the largest blackout in North American history, leaving some 50 million people across eight U.S. states and much of Ontario without power for anywhere from several hours to nearly a week.

The affected area included major U.S. cities such as New York and Cleveland and cost an estimated $6 billion US in lost business.

In Ontario, then-premier Ernie Eves declared a state of emergency, sent home non-essential government workers, urged the public to forgo air conditioning and asked industrial users to halve their usage.

As the outage persisted, tempers flared while long lines of cars snaked out of gas stations – most pumps stopped working without electricity – and Ontario hospitals cancelled scheduled appointments and surgeries.

Canadian businesses lost nearly 19 million lost work hours, Statistics Canada reported, while the Canadian economy, nearly half of which is rooted in Ontario, contracted sharply in August.

And it all began when three high-voltage transmission lines in Ohio were knocked out by untrimmed tree limbs, a report by Canadian and U.S. authorities confirmed last month.

FirstEnergy Corp. in Akron, Ohio, failed to take notice or inform neighbouring utilities about the problem because their control room alarm system and monitoring equipment weren’t working properly, the report said.

There were also problems at the Midwest Independent System Operator, which co-ordinates power transmission in the region but failed to deal with the problem before it got out of control.

"This blackout was largely preventable," U.S. Energy Secretary Spencer Abraham said in releasing the report last month.

"However, the report also tells that once the problem grew to a certain magnitude, nothing could have been done to prevent it from cascading out of control."

Mandatory reliability standards for the power grid exist in Canada but have long been voluntary in the U.S.; authorities say the blackout likely wouldn’t have occurred were American utilities held to Canadian standards.

"There needs to be consequences for people who do not follow the rules," Abraham said.

Natural Resources Minister Herb Dhaliwal has said Canada is investigating the possibility of buttressing its own east-west power system for "greater flexibility in times of trouble."

Ontario’s nuclear power plants all disconnected from the grid safely at the time of the blackout to ensure there was no health threat to workers or the public, Dhaliwal added.

But for Adams, Blackout 2003 exposed a fragile, aging and outdated power infrastructure on both sides of the Canada-U.S. border – especially chilling in an era of terrorism.

"The power grid is a weapon in the hands of those who would harm us," Adams said.

"Imagine what could be done by a malicious actor intent on causing harm. I think this should be a wakeup call. Our power grid is very fragile and it’s fragile not just to mechanical accidents like Aug. 14."

Despite official reassurances that the Canadian grid is robust, Adams said the time is now to examine a more decentralized system with more redundancies to avoid similar cascades of catastrophe in the future.

"A grid that’s more modular, more redundancy, that’s less reliant on any single big trunk lines," one modelled after the much more reliable Internet or phone networks, is what’s needed, he said.

"Here’s what our power grid can do, the kind of belly flop it can perform, when it’s not pushed," Adams said.

"We need to be planning a power grid for the future that’s more resilient. We can’t have our whole capability as a society hanging from such a fine thread."

Being linked with the U.S. grid is a benefit that saves industrial consumers a lot of money, said David Goldsmith, president of the Association of Major Power Consumers of Ontario.

"I don’t think we want to throw the baby out with the bath water and rebuild the entire system, or build huge amounts of redundancies in there," Goldsmith said.

"It’s a good thing to be interconnected."

But the Ontario government’s blanket request that companies cut their consumption by 50 per cent was impossible for many manufacturers to meet, since they either run at full capacity or not at all.

"In a gross sense, it was not unreasonable, but on a plant-by-plant basis, or a customer-by-customer basis, it was hugely impractical," Goldsmith said. Playing politics at a time of crisis didn’t help either, he added.

"Anyone who didn’t respond was threatened with the government coming in and going to the press and saying, ‘so and so ran on the backs of the residents.’ They made it very, very unpleasant behind the scenes."

Eves, fresh from an aborted attempt to introduce competition to the province’s power grid and a hasty rate freeze six months later when the cost of power soared, was indeed fired up by the blackout after being initially slow off the mark.

His frequent briefings and level-headed, soporific style emanated from battery-powered radios across the province, soothing jangled nerves and lending his approval ratings a badly needed jolt.

Internal reviews of his performance were so strong that he called an election just weeks later, only to be trounced by the opposition Liberals under leader Dalton McGuinty.

But Adams said he has his doubts about whether voters were really listening to Eves when he urged people to cut their power consumption in the days after the lights came back on.

"It was coming from a premier who had no credibility on electricity issues," he said. "People didn’t take him very seriously."

It remains unclear just how much of a dent residential users made during the power shortage, or indeed whether they made much of an effort at all. Their consumption rates didn’t change all that much.

But numbers can be deceiving, said Terry Young, spokesman for the province’s Independent Market Operator, which governs Ontario’s electricity market.

With so many people staying home from work, the fact that consumption remained flat means that a great many people were indeed cutting back, Young said.

"We did see a lot of savings from residents; we did see people cutting back on their air conditioning, and we saw a lot of people not using electricity during peak hours," he said.

Eves asked residents to avoid running major appliances like dishwashers and clothes dryers until after peak hours, and that’s exactly what happened, Young added.

"The way that businesses, industries and residents responded was truly remarkable."

For Adams, Step One towards a more resilient power grid would be to mothball the province’s notoriously slow and unreliable nuclear power facilities in favour of more gas-fired and hydroelectric power.

Ontario’s existing gas and hydro plants were instrumental in getting the province back up and running because they can go from full stop to full power in a matter of minutes, he said.

To offset the often high cost of natural gas, countries like Denmark use co-generation, harnessing the waste heat that’s produced when burning fuel to spin electrical turbines.

"If you go to Copenhagen and take a shower, the heat that’s coming to warm up your toes is coming from places like the Carlsberg brewery," Adams said.

"At Carlsberg, they generate power, beer and warm showers all at the same time."

Tom Adams
Toronto Star
January 4, 2004

Smaller, more numerous power plants would cut risk of blackouts

How to prevent a repeat of the Aug. 14 blackout – one of the biggest news stories of 2003 – is the challenge now facing the U.S.-Canada Power System Outage Task Force.

In November, the international Outage Task Force published a thorough report setting out its immediate causes – particularly maintenance and communications failures by several utilities and grid operators, and failure by the Ohio utility First Energy to follow co-operative reliability rules.

The Outage Task Force’s final report is expected to focus on preventing future blackouts and is due out early in the new year.

Greater reliability can be achieved by developing a power grid emulating the web-like structure of the Internet, with multiple paths and intelligent nodes directing traffic where it can move easiest and safest. High power solid-state technologies are rapidly advancing, capable of directing electricity traffic on the transmission highways of the future.

While Ontario now relies on relatively few, but very large, generating stations, we would be better off with smaller but more numerous power plants. Such diversity would cut the risk of blackouts when individual generators fail.

High-efficiency co-generation stations, which supply both heat and power locally, reduce not only fuel costs and emissions in ordinary operations but also customer impacts in the event of fuel shortage.

Locally generated power reduces our reliance on inherently vulnerable transmission networks. Designing the overall grid around the concept of decentralization offers substantial reliability advantages as well as significant environmental and economic benefits.

Nuclear plants – the epitome of a highly centralized power system – are particularly vulnerable.

Just when we needed their electrical output most, many of Ontario’s large nuclear generators were among the province’s largest power users following the blackout.

Ontario is twice as nuclear-dependent as New York, which is the reason why the post-blackout emergency lasted eight days in Ontario while New York was back to normal in two days.

A more decentralized design is urgently needed so that our power system can develop greater resilience, not just for mechanical failures but also for malicious attacks.

The Aug. 14 grid collapse happened without an external initiating event. Given this demonstrated vulnerability, consider the damage our power system could suffer if groups like the architects of the Sept. 11 attacks, or their students, aim their ingenious malice at our power system.

While ruling out terrorism as a cause of the blackout, the November report of the international Outage Task Force notes that the power system "has been, and continues to be, the target of malicious individuals and groups intent on disrupting the electric power system."

The Canadian Union of Public Employees (CUPE), in presenting its views to the international Outage Task Force, has suggested that Ontario should not have electrical interconnections with the United States.

At public hearings in Ontario earlier last month, Brian O’Keefe, CUPE Ontario’s secretary-treasurer, said that interconnection and commercial trade between Ontario and utilities in neighbouring states is "dragging us into a swamp."

The opposite is true.

Ontario, of all the provinces, is most reliant on large two-way flows of power across the international border. Without the access to U.S. electricity supplies, Ontario would have suffered rolling blackouts during the winter of 2002-2003, during August and September 2002, in May 1999, and for extended periods in 1990.

Some have pointed to Quebec’s success in avoiding the August blackout, suggesting Ontario should adopt Quebec’s approach of isolating its power system from the rest of the eastern North American grid.

Isolating our power grid would be a mistake.

Due to Quebec’s isolation – made necessary to protect the rest of eastern North America’s grid from risks created by the extremely centralized "hub and spoke" grid architecture in Quebec – consumers there suffer more interruption than consumers in Ontario.

For practical reasons, Ontario’s primary electrical interconnections are with Michigan and New York.

Happily, regions of the U.S. capable of helping meet Ontario needs, like New York, New England and Pennsylvania, are rapidly modernizing, expanding and decentralizing their power generators. Motivated by competition to cut costs, the reliability benefits are just gravy.

Now is the time to weave an electrical safety net of the future based on the concept of decentralization. With many more treads, each designed to avoid failure but to fail gracefully when they do, our power grid would serve us better.

Canadian Press
Toronto Star
January 14, 2004

The Ontario government can still shut down the province’s coal-fired power plants by 2007 despite a new report that warns of a looming energy shortage, Energy Minister Dwight Duncan said today. Without more generating capacity and better conservation, Ontario will face a power shortfall within two years, said the report released today by Ontario’s Electricity Conservation and Supply Task Force.

"To avoid major supply risks, coal plants may need to be kept in operation until adequate replacement generation and demand reduction measures are in place," the report warns.

But Duncan insisted today the government intends to keep its promise.

"We can’t back off from that," Duncan told a news conference. "It’s not in the public interest to back off from that."

The province’s five coal-fired electricity plants, which produce about 25 per cent of Ontario’s electricity, spew too much pollution and carbon dioxide into the air, Duncan told a news conference.

And while he acknowledged that coal-fired electricity is cheaper than alternative sources of energy, Duncan said the health and environmental consequences are too great to ignore.

But the report doesn’t criticize the government’s plan to close the coal plants, nor does it say it’s impossible, said task force chairman Courtney Pratt.

Rather, it’s warning the government to "make sure you have the plans in place before you phase it out," Pratt said.

Critics said they doubt the government could close the coal plants and get enough replacement power online by 2007, since it takes at least three years to construct a gas-fired plant.

"There is no plan on the table, including this plan, that gets us to a coal-free Ontario by 2007," said Tom Adams, executive director of power watchdog Energy Probe.

The plan outlined in the report "will not work," Adams said. Without the supply from the coal plants, "we would not have enough power to keep the lights on."

Environmental activists, meanwhile, cheered the report, citing it as proof that the government can get rid of dirty coal plants on schedule.

The report, which came as frigid temperatures continued to push power consumption levels higher across the province, also called for a "conservation culture" in Ontario to reduce power usage.

The government also has to ensure prices are stable and policies clear so that private investors will be encouraged to build new capacity, the report said.

Duncan said the government will achieve its goal of closing the coal plants by focusing on conservation, relying more on renewable energy and by stabilizing the electricity market to make it more attractive to private investors.

By 2007, Duncan said the government wants to reduce consumption by five per cent through conservation and have five per cent of energy coming from renewable sources. Both will increase to 10 per cent by 2010.

"Conservation is going to be at the top of the agenda," he said.

Canadian Press
Toronto Star
January 20, 2004

Ontario: With the clock ticking on a promise to scrap Ontario’s coal-fired power generators, the Liberal government said today it is looking to hire someone to oversee the process of contracting for new electricity supplies. Energy Minister Dwight Duncan said the announcement is a sign the government will keep its promise to phase out the coal plants by 2007, but he refused to put a cost on the replacement power.

"It’s fair to say that we’re talking about a substantial sum of money," Duncan said.

"It’s also fair to say that if we don’t do this, we’re going to have an even more substantial problem in terms of not having adequate supply."

Duncan said the government is looking for up to 2,500 megawatts of new generation capacity or conservation measures to be in place as early as next year, but no later than 2007.

That represents about one-third of what will be needed to do away with the five pollution-spewing coal plants – a promise Premier Dalton McGuinty made before and after the October election.

Skeptics argue the province won’t be able to meet the target given that coal accounts for about one-third of the province’s power on peak days.

While details have yet to be worked out, Duncan said private companies will enter into long-term contracts with the government to build generators and supply power at a certain price to the province.

He could not say what that price would be or how long the contracts would run.

Energy analyst Tom Adams said experience in Ontario and California has shown that taxpayers bear a substantial risk with such power-purchase agreements.

In the worst cases, the contracts ended up costing billions more than the power they bought, he said.

"The public usually gets screwed," Adams said. "These contracts do represent a very substantial commercial risk to taxpayers."

New Democrat Leader Howard Hampton estimated the contracts would cost as much as $2.5 billion over 15 or 20 years and warned electricity prices will soar.

"This is going to be very expensive power," Hampton said.

"This is going to be private power. This will be produced by private, profit-driven companies."

Currently, Ontario residents pay a fixed 4.3 cents a kilowatt-hour. Starting in April, that will climb to 4.7 cents for the first 750 megawatts used in a month, and 5.5 cents for amounts above that. The pricing regime will stay in place until May 2005.

Duncan said the government will likely choose a technical adviser next week from among three Canadian and three American companies with the required expertise to oversee the competitive bidding process.

He said he hopes requests for power-supply proposals can go out sometime next month.

The province has skated perilously close to blackouts due to electricity shortages in the past and has been forced to rely on expensive imported power to keep the lights on.

Last week, a task force warned of a looming supply crisis in Ontario and expressed doubts about shutting the coal plants by 2007.

April Lindgren
CanWest News Service
January 21, 2004

Ontario’s Liberal government announced yesterday it is taking the first steps toward contracting for replacement power to prepare for its promised shutdown of the province’s five coal-fired electricity-generating plants by 2007.

Dwight Duncan, the Energy Minister, said he will have a new technical advisor in place next week who will oversee a competition to supply the province with 2,500 megawatts of power, through new generating plants, conservation measures, or a combination of both.

The actual request for proposals to replace one-third of the electricity now generated by coal is expected to be issued in February, Mr. Duncan said.

Ontario’s polluting coal-fired plants generate about 7,500 megawatts of power, including 1,200 from the Toronto-area Lakeview plant. Under a law passed by the previous Conservative government, the Lakeview site must by shut down by April, 2005.

"The phase-out of coal is a goal that we want to keep, and we’re beginning down that path today," Mr. Duncan told reporters, noting the government is also seeking up to 300 megawatts of renewable energy capacity to go into service as quickly as possible.

Mr. Duncan said that in addition to submitting plans for energy saving through conservation, private-sector bidders will propose to build gas-fired plants because they can be constructed quickly enough to meet the government’s 2005-2007 deadline.

The Minister said the companies will "enter into a contract" with the government or an agency of government to supply power at an agreed upon price.

NDP leader Howard Hampton attacked the Liberals for hiring a consultant to design and oversee the bidding process when, during last fall’s election campaign, they committed to not get into the consultant-hiring business.

"And this is going to be very expensive power. This will be produced by private, profit-driven companies," he said, arguing that the wholesale price will likely be 6¢ or more per kilowatt hour. Ontarians currently pay an artificially low 4.3¢ a kilowatt hour, a government-subsidized price that will rise to between 4.7¢ and 5.5¢ in April under a new pricing plan introduced by the Liberals.

Mr. Hampton said part of the higher cost will be driven by the companies’ need to borrow up to $2.5-billion to finance the plants.

"Keep in mind when a private, profit-driven company goes out and borrows this kind of money, they’ll pay a significantly higher interest rate than government would if government were building on a not-for-profit basis," Mr. Hampton said.

Tom Adams, executive director of the energy watchdog group Energy Probe, warned that plans for long-term electricity contracts might turn out badly as they did in California in 2000-2001.

Panicked officials there, he noted, signed long-term contracts when prices were at their peak, a move that resulted in the state paying twice as much as necessary for long-term power supplies.

John Spears
Toronto Star
January 27, 2004

Energy board calls for central agency

Clean Air Alliance says idea would fail

Ontario should set up a central agency to design programs to reduce demand for electricity and natural gas in the province, says a staff report to the Ontario Energy Board.

But an environmental group says that approach is doomed to fail because the utilities that are supposed to help deliver conservation programs would be punished for success, as their sales and profits would decline.

The energy board mulled a choice between having a central agency to run conservation programs, or asking local and provincial utilities to design and run their own conservation programs.

Board staff said that going with a central agency has several advantages, among them:

• The cost of marketing conservation programs is likely to be lower.

   

• Businesses with many locations around the province would deal with the same programs in all areas.

   

• Measuring results of conservation efforts could be done accurately and consistently across the province.

Allowing each utility to run its own conservation programs would lead to an inconsistent patchwork, the board staff argues.

Under the proposed system, the Ministry of Energy would set broad conservation goals for both electricity and natural gas. The central conservation agency would then devise plans for meeting it. Plans could include paying some consumers a fee for not using energy in periods of high demand; helping to install more sophisticated meters that allow consumers to buy energy at lower prices during periods of low demand; or encouraging the use of more energy-efficient appliances.

The agency would be funded by a fee paid by all consumers through their electricity bill.

The board has asked for comment on the staff report by Feb. 9.

The Ontario Clean Air Alliance gave the report’s proposals a quick thumbs down, because it would eliminate incentive payments to utilities.

Enbridge Gas Distribution Inc. currently receives incentive payments if it exceeds conservation targets, but the report recommends ending that system.

Jack Gibbons of the alliance branded the proposal "totally absurd," saying the Enbridge model has achieved "fantastic" results and should be extended to the electricity industry.

Electric utilities can only be expected to implement conservation programs effectively if they are rewarded, he said.

"Why would the electric utilities want to deliver conservation programs if it’s going to reduce their profits?" he asked.

Tom Adams of Energy Probe was skeptical of the report’s proposals. He characterized the report as "OEB bureaucrats decide what we need is another bureaucratic agency."

The OEB proposals are in line with several other recent reports advocating more centrally planned energy markets and systems, Adams said. That’s a trend toward a return to the old, centralized Ontario Hydro monopoly, he warned.

Adams was less enthusiastic than Gibbons about rewarding utilities for setting conservation targets and beating them.

Much depends on how realistic the targets are in the first place, he said. And it’s inherently difficult to prove how much energy would have been used in the absence of conservation targets.

John Wilson
Toronto Star
January 28, 2004

Negotiating from a weak position is a bad idea, especially if you don’t have to. And yet, our provincial energy minister has announced this is exactly what he intends to do.

Although the freeze on electricity rates doesn’t show it on our bills, prices in Ontario’s unregulated electricity market are high.

This isn’t a position that would allow our government to negotiate reasonable contracts for more electricity production. Unless we make changes that enable us to negotiate from a position of strength, Ontarians stand to lose billions of dollars because of bad deals.

Energy Minister Dwight Duncan announced last week he is beginning the process of contracting out new electricity supply. He also acknowledged that these contracts would involve substantial sums of money, but declined to say how much.

In 2001, Californians ended up signing electricity contracts under duress when they faced high prices. Later, S. David Freedman, then head of the California Power Authority, told me those contracts would have to be either renegotiated or changed in the courts.

Californians were able to renegotiate some of the contracts and to use the courts to change others, but they still ended up losing billions of dollars. Energy Probe‘s Tom Adams has noted that because California signed contracts when prices were peaking, the state paid double what it should have.

Here in Ontario, our high electricity prices are caused by our uncompetitive market.

Almost no new production has been built for a decade. As a result, we now face a supply shortage for many years to come. In a supply-short market, prices are high – much too high. Negotiating when prices are high puts us at a disadvantage and virtually guarantees we will pay more than we ought to.

Premier Dalton McGuinty acknowledged this situation when he said, while still in opposition, "the market is dead." Ontarians listened and voted the Tories out. Now it’s time for McGuinty to earn our trust by beginning to bury the money-eating market. This would allow the government to negotiate from a position of strength.

The first step is to announce a closing date for our uncompetitive market that will signal to producers that the time for high prices is over. This will radically reduce the price we would have to pay for future electricity production.

Next, we should negotiate supply contracts with producers with the understanding that these contracts are part of a transition back to regulated prices set by a public power authority at arm’s length from the government.

Most Canadian provinces and most American states regulate electricity production prices. Provinces and states with regulated production have electricity prices that are significantly below those of their unregulated counterparts.

For almost a century, before the Tories foolishly put us at the mercy of the market, regulated prices provided Ontario with low-cost, dependable electricity.

Unless our government sets itself up with the leverage it needs to negotiate for Ontario’s electricity future, we will all lose. We will lose because Ontario’s economic edge depends on reliable, relatively inexpensive electricity.

Losing our competitive advantage would soon make us look like a U.S. rust-belt state without the money to assist struggling schools and hospitals.

Fully regulated production prices combined with an aggressive efficiency and conservation program and the building of clean, public electricity production would provide Ontarians with the least expensive and most reliable electricity possible.

John Wilson is a former board member of Hydro One and former chief negotiator for the Society of Energy Professionals.