Watchdog warns of dirty emergency

Posted on June 30, 2009 by energyprbe

Michael Higgins
National Post
May 1, 2003

The Ontario government has started the tendering process for companies to provide emergency electricity power generators as an energy watchdog warned yesterday the stations are likely to be costly diesel units that spew black smoke and are located in residential areas.

One of the tender conditions is that the units must be capable of operating for a maximum of four hours a day between the hours of 7 a.m. and 11 p.m.

Likely sites in Toronto are the Kipling/Dundas intersection and the Leslie/Finch area, said Tom Adams, executive director of Energy Probe, who warned of the pollution danger.

His warning comes as the Attorney-General of New York launches a challenge today under the North American Free Trade Agreement to pressure the federal government to rein in pollution from three coal-fired power plants in Southern Ontario.

Eliot Spitzer will formally complain to the Commission for Environmental Co-operation – the environmental body established by NAFTA – that the federal government is failing to enforce the Canadian Environmental Protection Act and the Canadian Fisheries Act by allowing the power plants to expel pollutants into the air.

The three power plants in question – Nanticoke (on the shore of Lake Erie), Lambton (near Sarnia), and Lakeview (near Toronto) – are all owned by the Ontario government through Ontario Power Generation.

Meanwhile, as part of a "worst-case scenario," Ontario wants to set up temporary power stations to ensure the province’s over-worked electricity grid does not suffer blackouts this year.

The province wants temporary generating units to be operating by summer and able to provide 200 to 400 megawatts of power.

Dan Miles, a spokesman for John Baird, the Minister of Energy, said, "Our preference and our priority is clean and green power." He said the reason for the competitive process was to see who would come forward to provide the temporary generators and where.

"I think location is also something that will be determined through the competitive process," Mr. Miles said. "The temporary generators are strictly a backup, a prudent move that we should prepare for in a worst-case scenario."

However, Mr. Adams said, "The generation that they are going to add to the system is going to be very costly, the fuel efficiency will be very low, the fuel is likely to be mostly from diesel-generated resources, and most of it is likely to be located in urban centres."

He said the new power units could be expected to look like an industrial site or a parking lot with a row of big trailers.

"They’ll have these screaming generators on them, diesel-fired machines that will be quite noisy up close. They’ll have low stacks, low exhaust pipes from the generators and there’ll be black smoke pouring out of them," he said.

Ontario faced record high temperatures last summer and the province was forced to import 21% of its electricity during peak periods to prevent blackouts and brownouts.

In March, record cold temperatures sent electricity consumption soaring and forced the Independent Electricity Market Operator, which regulates wholesale electricity, to issue a rare "power warning."

It is expected Ontario will have three nuclear units back on line shortly to add to the power supply, but Mr. Adams expressed doubts about their reliability.

He said Pickering Unit 4 was originally expected back on line in December, 2000. It is now scheduled to open in June.

Bruce Unit 4 was expected back on line in April but is now expected to be operating by the end of this month. Bruce Unit 3 is expected to be operational by June.

"These three reactors when operating last, back in the mid-90s, were very unreliable stations and I think the government is expecting them to be very reliable," Mr. Adams said.

Posted in Reforming Ontario's Electrical Generation Sector | Leave a comment

Energy chiefs pull plug on Hampton

Posted on June 30, 2009 by energyprbe

John Partridge
Globe and Mail
August 19, 2003

Toronto: Power industry players yesterday dismissed arguments by Howard Hampton, leader of Ontario’s New Democratic Party, that last week’s massive electricity blackout means the provincial government should re-regulate the business.

"The thesis that the blackout has been caused by the Harris government’s privatization and re-regulation agenda barely warrants a response," Tom Adams, executive director of Energy Probe, an energy and environmental research group, told the opening session of an energy conference in Toronto, referring to former Ontario premier Mike Harris.

"It’s certainly not the deregulated market . . . that caused this," concurred lawyer Peter Budd, chairman of the Ontario Energy Association (OEA). "It’s remarkable that an elected person would say that."

Since the blackout last Thursday, Mr. Hampton has been trashing the Ontario government’s on-again, off-again efforts to privatize and promote competition in the electricity market. At a news conference on Friday, for example, Mr. Hampton said the blackout shows that electricity is "too essential to be put in the hands of companies that put profit before reliability."

In a dramatic reversal, current Ontario Premier Ernie Eves stepped in to freeze electricity prices last December, just seven months after deregulating the market, following a public outcry over spiking prices. Early this year, he dropped plans to sell to the public a large share of Hydro One, which runs Ontario’s electricity transmission grid.

Ed Houghton, chief executive officer of Collingwood Utility Services of Collingwood, Ont., and one of the directors of Ontario’s Independent Market Operator, told the conference that the government’s decision to freeze prices has taught the industry a number of lessons.

"The first, certainly, is that politicians will not tolerate unpredictable prices for small-volume electricity consumers," he said. "Nor will they tolerate prices that are seen as high by Ontarians, who base their perceptions on over a decade of subsidized rates that are far lower than prices elsewhere in North America."

What’s more, with an apparent reference to newly formed energy retailers that went out of business following the price freeze, Mr. Houghton also said that to avoid paying a short-term political price with their constituents, "politicians are willing to sacrifice entire sections of this industry."

As well, in response to a question by session moderator Steve Paikin, co-host of Studio Two, a TVOntario current-affairs show, Mr. Houghton said consumers will tolerate unpredictable gasoline prices but not unpredictable electricity prices because taxpayers essentially still own the supply and because electricity is "a necessity of life," while a car is not essential.

The conference took place at a downtown Toronto hotel, where, despite weekend calls for restraint made by Mr. Eves and others, meeting rooms were being kept at near refrigerator temperatures by the hotel’s air-conditioning system. Conference organizers hustled to get the temperature raised during a break between sessions.

In a separate session at the conference, OEA vice-president Adam White said the electricity industry ought to accept some of the blame for the Ontario government’s decision last December to cap prices. "I think we moved too soon, too fast to a competitive model," he said.

Mr. White warned that the business is being constrained by prices that do not reflect reality and a congested transmission system. As a result, electricity in Ontario "is not attractive for private capital and investors."

He also said that a key challenge for the industry is to develop real incentives to encourage consumers to conserve electricity.

Posted in Reforming Ontario's Electrical Generation Sector | Leave a comment

Power plants on tap

Posted on June 30, 2009 by energyprbe

Chip Martin
The London Free Press
April 14, 2005

Two new power plants fired by natural gas will be built near Sarnia in a $1-billion investment that will improve Southwestern Ontario air quality, as a dirtier, coal-produced power plant is closed. The Ontario government yesterday announced 20-year deals to build replacements for Ontario Power Generation’s aging Lambton generating station near Courtright.

"(It’s) great news for the lungs of London and of Southwestern Ontario," said Jack Gibbons, chairperson of the Ontario Clean Air Alliance. "The Lambton coal-fired power plant is now the No. 2 source of air pollution within Ontario," he said.

Gibbons noted the Ontario Medical Association has attributed 80 deaths a year in the London region to pollution.

"You’re definitely going to benefit," Gibbons said.

The two new projects are expected to create about 1,200 constructions jobs, but closing the Lambton station will cost about 400 well-paid jobs.

The new juice brought on stream will be enough to power more than 650,000 homes and nearly replace the 2,000 megawatts produced by the Lambton plant, said Ontario Energy Minister Dwight Duncan.

In Toronto, Duncan said the deals are part of the Liberal government’s plan to shut Ontario’s coal-fired power plants by the end of 2007.

"We are on target to meet our objective," Duncan said, adding more announcements about coal-fired plants in Northern Ontario and another near Toronto are imminent.

Duncan said once the coal-fired plants are gone, the environmental impact will be "the equivalent of taking every passenger car and light truck off the road in Ontario."

Other reactions:

  • Sarnia Mayor Mike Bradley, his Chemical Valley city already expecting $2 billion in new plants and expansions in coming years, hailed the economic and environmental effects, but said "a juggling act" will be required to find enough construction labour. "When the trades work in Sarnia, the whole city works."

     

  • Mike Ireland, senior development consultant with the Sarnia-Lambton Economic Partnership, which worked to land the plants, predicted 1,200 construction jobs and said each plant will need about 30 full-time workers to operate.

     

  • Tom Adams, executive director of Energy Probe, said it’s unclear how costly electricity from the new plants will be, but predicted it would be about seven cents a kilowatt-hour, up from the five-cent basic rate charged today.

    "I can see somewhat higher electricity prices for consumers," he predicted. He wasn’t as certain as Gibbons the London region would see appreciably cleaner air, since so much of the region’s pollution blows in from the U.S.

    The Sarnia area is already home to Ontario’s first major privately-owned power plant, built by Alberta-based TransAlta and opened in 2003.

    The new plants will be built in St. Clair Township south of Sarnia. The largest will be a 1,050-megawatt plant, Greenfield Energy Centre, a partnership between Calpine Corp. of San Jose, Ca., and Mitsui and Co. Ltd., of Japan.

    The smaller is St. Clair Power, a 570-megawatt partnership between Invenergy of Chicago and Stark Investments, based in Milwaukee. Construction is expected to start late this year.

    As he announced the Sarnia-area projects, Duncan also unveiled deals to co-generate 90 megawatts of power at the Toronto Airports Authority and with Loblaw Properties to reduce and shift power demand in 80 grocery stores to save another 10 megawatts.

    Duncan said the new plants to be built across Ontario will increase its reliance on natural gas to 13 per cent of its power supply, up from eight per cent. That should also reduce bad-air alerts when kids with asthma and the elderly are told to stay indoors.

    "Hopefully we will stop seeing smog days in Algonquin Park," Duncan said.

    Gibbons said the move away from coal will help Ontario meet its environmental targets under the Kyoto protocol.

    "We’ll have clean hands and we can ask the Americans (who have not signed the Kyoto treaty) to reduce their pollution," he said.

    At Queen’s Park, New Democratic Party Leader Howard Hampton blasted the deals as an "Americanization" of Ontario’s power system.

    Besides TransAlta, Canadian companies including TransCanada and Atco already have power projects in Ontario, but they’ve been wary of investing more in the province after the former Conservative government flip-flopped on its energy policies.

    THE NEW PLANTS

    Greenfield Energy Centre

     

  • Output: 1,050 megawatts.

     

  • Location: St. Clair Parkway and Bickford Line in Courtright.

     

  • Partners: California-based Calpine Corp. and Mitsui Co. Ltd. of Japan.

     

  • Workforce needed to build: Up to 800.

     

  • Workers needed to operate: 25 to 30.

     

  • Operational: February 2008.

    St. Clair Power

     

  • Output: 570 megawatts.

     

  • Location: Highway 40 and Petrolia Line, east of Corunna.

     

  • Partners: Invenergy of Chicago and Stark Investments of Milwaukee.

     

  • Workers needed to build: An estimated 400.

     

  • Workers needed to operate: 25 to 30.

     

  • Operational: late 2007, early 2008.

    • Posted in Reforming Ontario's Electrical Generation Sector | Leave a comment

    NDP position on competition in the electricity sector

    Posted on June 30, 2009 by energyprbe

    November 1, 1997

    OFFICIAL NDP CAUCUS REPORT TO THE SELECT COMMITTEE ON THE ONTARIO HYDRO NUCLEAR AFFAIRS (1997) – Appendix 7 p. 10 (1st Session, 36th Parliament, 46 Elizabeth II):

    Re. "White Paper on Competition in the Electricity Sector":

    "We support changes to the way Ontario’s electricity market is structured, but we want to make sure that the environment and the consumers are protected. Given the government’s record, it is safe to say these things are far from guaranteed. We strongly recommend that the White Paper be the subject of public hearings early in 1998." (Historical note: Public hearings on the legislation that resulted from the White Paper were conducted by the Ontario Legislature Standing Committee on Resources Development in 1998.)

    Posted in Reforming Ontario's Electrical Generation Sector | Leave a comment

    Expect an initial shock on Ontario Hydro reform

    Posted on June 30, 2009 by energyprbe

    Thomas Adams
    The Financial Post
    October 15, 1997

     

    "One day the unsoundness of the method must be apparent."

    So warned James Mavor, a University of Toronto political economy professor, in The Financial Post in 1916, decrying the consolidation that created Ontario Hydro’s modern powers.

    That day has arrived. In a white paper on Ontario’s electricity system unveiled Nov. 6, the provincial government says it will unravel that consolidation of power by allowing the cleansing breeze of competition and accountability that Mavor advocated to blow through Ontario’s electricity sector.

    The government’s positive initiative portends significant benefits for all power users and deserves support.

    However, no one should expect instant solutions. Opening Ontario’s monopolistic power system will reveal the extent of the province’s power crisis.

    The process will be difficult, but ultimately beneficial in terms of capping liabilities against the public purse, lowering electricity prices, and bringing productive investment to the power sector.

    The keystones of Ontario’s new electricity policy are:

    • Customers, regardless of size, will be able to choose power their power supplier in 2000.
    • Ontario Hydro’s monopoly and competitive enterprises will be separated.
    • Ontario will split the utility into three government-owned companies. One commercially oriented company will hold its power generating assets, another similar firm will take on transmission and rural power distribution. The third company, a non-profit Crown corporation, will manage independently the transmission grid to allow non-discriminatory access for producers and consumers. Rates for transmission and distribution services will be independently regulated.
    • Power generating companies will compete for business.
    • Current subsidies to the public power sector — taxpayer-backed loan guarantees, tax holidays and permanent dividend holidays — will end.

    Ontario will encounter many difficulties implementing this progressive vision.

    One may arise because of the proposal to keep all the utility’s generating assets in the new company. Even taking into account private industrial generation, the small amount of municipal generation, and interconnection with neighboring utilities, the new generating company will control about 80% of the market — more than enough market power to keep prices up.

    The nuclear program is likely to remain a severe headache, both in terms of operational reliability and uncompetitive cost, well into the future.

    A recent report from a panel of U.S. nuclear experts found severe management difficulties in the nuclear division. Ontario Hydro is shutting seven of its 19 reactors indefinitely and is spendings $1.6 billion on fixing the problems in the remaining units.

    Carl Andognini, who led the panel of experts and who is now head of the utility’s nuclear division, says of the division’s problems, "we haven’t hit bottom yet."

    Despite these woes, nuclear is likely to remain the main source of supply for some time. Dependence on nuclear power peaked in 1994, when it represented 62% of Ontario’s electricity supply; it will fall to 45% or less next year.

    The combined effect of excess market power remaining with the new generating company and the faltering nuclear program means consumers should anticipate volatile prices at the outset of an open market.

    However, experience in other jurisdictions that have moved to open electricity markets, including Alberta, Chile, New Zealand, Britain and parts of Australia, shows marketers will be eager to offer consumers options contracts to mitigate this price volatility.

    Another difficulty in implementing an open power system is paying off Ontario Hydro’s existing liabilities. The first challenge is to quantify these liabilities. Ontario Hydro’s taxpayer-guaranteed bond obligations — $30 billion at the end of 1996 — are only part of the issue. The utility estimates its nuclear waste disposal and decommissioning liabilities to be $16 billion in 1997 dollars.

    No cash has been banked to offset this liability. Uneconomical long-term contracts to buy from private power suppliers are another liability. And nowhere recognized on the utility’s books is the fact aboriginal groups claim a substantial portion of Ontario Hydro’s northern hydroelectric dams.

    The government hopes the new power system will be able to service all the existing liabilities. Ontario plans to burden the new generating and distribution companies with debt comparable to the level private firms could bear. This could account for as much as half the total burden.

    As for the remainder — the "stranded debt," — it will be serviced by taxes and dividends required from the restructured public power businesses. These are fair and efficient mechanisms, but they might not be up to the task.

    Although prevailing rates in Ontario exceed those paid by the vast majority of Canadians elsewhere, Ontario Hydro revenue does not meet its costs. In the period 1993 through 1996, Ontario Hydro’s accumulated losses were $4.4 billion. Further dramatic write-offs should be expected. According to information Ontario Hydro provided to the Ontario Select Committee on Ontario Hydro Nuclear Affairs, writeoffs in 1997 might be as high as $4.3 billion.

    Ontario Hydro’s financial weakness has several causes:

    • Its investment in nuclear technology has generated liabilities, not assets.
    • Much of the financial benefit of its monopoly status was captured by its employees (the average compensation per employee in 1996 was $78,684).
    • It placed undue confidence in its own forecasts. For instance, it depreciates its nuclear power units on the assumption they will last 40 years, when experience shows they are lasting only 18 to 26 years.

    The inexorable logic of taxpayer-backed liabilities, prevailing power prices exceeding market prices and prevailing revenue not meeting costs is that, unless costs are drastically cut or hidden value discovered somewhere in the system, taxpayers will get stung.

    Price volatility, liabilities exceeding those the new power system can bear and resulting impacts on taxpayers are all problems revealed, not created, by the move to an open market.

    Supporters of an open, competition-oriented power system can expect to hear from superficial commentators and beneficiaries of the status quo who might attempt to blame the reform process for results caused by past mistakes.

    Building public confidence to overcome the hurdles to reform will require more than simply implementing the sound principles the government has enunciated so far.

    The government should move now to separate and bolster an independent transmission system operator, make a firm commitment to tougher environmental regulations, institute an open and fair process for developing the new rules and public institutions the province will require, and make a firm commitment to fully honor existing liabilities.

    Ultimately, we should expect a power system that is much more affordable than Ontario Hydro, less risky, and not reliant on the public purse. As the prescient Mavor observed in 1916, "in Ontario, of all provinces in this country, there is little need for governmental attempts at industrial monopoly."

    Thomas Adams is executive director of Energy Probe, a national environmental and consumer advocacy group. Energy Probe first published a customer choice-based alternative to Ontario Hydro’s monopoly in 1980.

    Posted in Reforming Ontario's Electrical Generation Sector | Leave a comment

    Ontario's White Paper: Learning from Australia to make its good principles work

    Posted on June 30, 2009 by energyprbe

    Thomas Adams
    Energy Analects
    December 5, 1997

     

    The Ontario Government’s new White Paper, Direction for Change: Charting a Course for Competitive Electricity and Jobs in Ontario, is a marvellous achievement that if properly implemented will help cap liabilities against the public purse, lower electricity prices, and promote productive investment to the power sector. To guide the work that needs to be done to implement this vision, Ontario would do well to follow the successful approach to power reform used by the State of Victoria in Australia.

    The keystones of Ontario’s new electricity policy are:

    • Customers, regardless of size, will be able to choose their power supplier in 2000.
    • Ontario Hydro’s monopoly and competitive enterprises will be separated. Ontario will split the utility into three government-owned companies – two commercially oriented companies to hold its generating assets and its transmission and rural distribution operations and a third, non-profit Crown corporation to independently manage the transmission grid to allow non-discriminatory access for producers and consumers. Rates for transmission and distribution services will be independently regulated.
    • Power generating companies will compete for business.
    • Current subsidies to the public power sector — taxpayer-backed loan guarantees, tax holidays and permanent dividend holidays — will end, thereby levelling the field with the likes of gas utilities, independent power producers, and energy conservation service providers.

    For all its strengths, the White Paper on its own still doesn’t provide enough assurance for developers of competitive alternatives to Ontario Hydro to make investment decisions. To break the dam on investment, the government will have to bring in legislation that inspires the confidence of financial decision makers.

    So far, the financial community has remained suspiciously silent in response to Hydro Chairman Bill Farlinger’s assertions that the value of Ontario Hydro is maximized by keeping the assets bundled together. One wonders where the analysts are hiding who in recent weeks have praised the corporate unbundling of NOVA Corporation and Noranda Inc. The logic behind the NOVA and Noranda breakups applies with even greater force to Ontario Hydro.

    With the government now committed to taking the uneconomic portion of Ontario Hydro’s liabilities off the books of its successor companies, the financial incentive for those inside the utility now is to maximize the flow of cash into the productive assets regardless of liabilities incurred. Ontario Hydro’s "revelation" in August that its nuclear plants were in trouble was not just a statement of the obvious but a scheme to secure a cash infusion. In light of the White Paper, which Ontario Hydro would have known about in August, the Nuclear Asset Optimization Plan (NAOP) looks like an effort to grab more public cash while it is still available. Effectively, NAOP is a request for incremental public investment in nuclear power, starting with $1.6 billion. If NAOP is approved, Ontario Hydro’s ability to hang on to market share improves; if it is ultimately turned down, the utility is left in the position it was in prior to August with seven reactors not worth operating and 12 others hurting for maintenance. The only sensible way to determine whether more nuclear investment should be committed is to let willing investors decide. Much to its credit, Ontario Hydro’s main union, the Power Workers Union, has proposed a form of nuclear repair investment privatization.

    The White Paper’s commitment to stop guaranteeing new debt is one of its highlights. The pernicious effect of the loan guarantees, as an effective subsidy to risk, is a key cause of the collapse of Ontario’s electricity system. Unfortunately, Ministry of Finance officials, who should be on top of the loan guarantee issue, indicated at the press conference launching the White Paper that they had not considered whether the unguaranteed debt would be preferred to guaranteed debt, whether the entitlements of holders of both types of debt would be pooled, or whether unguaranteed debt ought to be subordinate to guaranteed debt.

    Another issue that Finance officials had not decided was whether roll-over borrowings would be guaranteed. In order to protect Ontario taxpayers now holding the bag for Ontario Hydro’s mistakes, all debt issued by Ontario Hydro or its remnants starting immediately should be unguaranteed and subordinate to existing debt. Taxpayers should not be forced to continue as involuntary investors by cosigning for such a suspect enterprise.

    The market power of one big generator created out of Ontario Hydro is a weakness in the government’s approach. Despite the assertion in the paper that there were "extensive discussions" with stakeholders over the decision to leave all Ontario Hydro’s generation together, all the major non-Ontario Hydro and non-union stakeholders have complained about this point.

    The Toronto Star editorial board has taken the astonishing position that Ontario Hydro just needs more time to work out its problems before competition is introduced. If the Toronto Star’s editorial position is based on anything more than reactionary support for the Hydro status quo, the editorialist must believe that Ontario Hydro has turned the corner and is on the road to recovery. On the contrary, there is every indication that Ontario Hydro will have grave difficulty keeping the lights on this winter, that supply security may weaken further next summer and next winter, and that the financial writeoffs we have seen in the last four years — $5.03 billion net of profits — are just the beginning.

    Power Reform Down Under Shows the Way for Ontario

    The experience with power sector reform in Victoria provides three key lessons for Ontario in implementing the White Paper. Whereas the White Paper is mum on privatization in Ontario, privatization in Victoria was the key that unlocked billions of dollars in value hidden in the power system. Ontario will need to maximize every value that exists in our system to offset the monumental liabilities our Ontario Hydro has rung up. Second, while the Ontario government opted to leave all Ontario Hydro’s generation in one enterprise, privatization in Victoria was a successful device to break the market power of producers and lower rates. Third, the reform process in Victoria provides a good outline of how to keep the reform process on track and above the heads of the interest groups that will seek to divert or obstruct implemention of the government’s principles.

    There are many close parallels between the condition of the power system in Victoria prior to the reforms and prevailing conditions in Ontario.

    In 1992 the economic situation in Victoria was in crisis: A left of centre Labour government ran up state debt to the highest per capita level of any state in Australia. In 1991, the Labour government was forced to partially privatize a half-built 1 000 megawatt station (Loy Yang B) in order to introduce better labour practices, deal with cost overruns and to relieve pressure on the state’s borrowings. Power prices were rising. The State Electricity Corporation of Victoria (SECV), like Ontario Hydro, was mismanaged, operated in an environment of secrecy, and lacked accountability.

    A new Conservative government was elected in 1992 and among its policies to arrest the economic decline of the state, it decided to completely restructure and privatize the electricity industry.

    The model was similar to that proposed by the government of Ontario: an independent system operator responsible for operating the wholesale electricity market; separation of generation, transmission, distribution; creation of retail supply as a competitive sector, ringfenced away from the monopoly distribution businesses; amalgamation of inefficiently small local distribution businesses; phased introduction of customer choice with full access for domestic customers by Jan. 1, 2001; establishment of franchise fees and a small energy levy to recover stranded costs and pay down debt; creation of an independent economic regulator; and integration of the competitive state market with competitive markets being established in neighbouring states.

    But Victoria went further in two key areas: the generation sector was split to create the maximum achievable amount of competition; and the whole sector was privatized as an integral part of the restructuring process.

    The reform process was completed remarkably quickly. The reform design was announced at the beginning of 1994; the creation of the new entities was completed in mid 1994; the wholesale market also commenced operation in mid 1994; the privatization process commenced in mid 1995 with all the distribution businesses sold in the second half of 1995. All the generators (except one small gas generation business) and the transmission grid were sold during 1996 and 1997. A long term contract with Loy Yang B was restructured to bring this company into the competitive market. The first step into a national electricity market was implemented in May 1997 and this has been successfully operating for the past seven months.

    The results have been impressive. Privatization has unlocked previously hidden value: In excess of $21 billion ($Aus) in value will be achieved from the complete privatization programme. This has been significantly in excess of estimates prior to privatization and compares favourably to a book value of $10.5 Billion in 1994 and SECV’s debt of $9.5 billion. The Auditor General reports that savings from debt retirement exceeded the dividends and other revenues foregone by the state by $718 million in 1997/98.

    Several factors led to the high privatization values achieved. The decision to open the market to off-shore bidders created a much more active bidding process than otherwise would have existed. Disaggregation of the generators has increased value by creating entities small enough that many Australian and overseas companies could bid for them. This resulted in a highly competitive sales process. Other significant factors contributing the privatization success were a predictable and stable regulatory environment for the monopoly transmission and distribution assets; a favourable interest rate and bank lending environment; and a willingness by both foreign and domestic purchasers to pay premiums to gain experience in a highly competitive environment.

    Victoria’s electricity supply situation today is strong. The newly privatized generators have effectively increased the capacity of the existing stations by over eight per cent through reliability improvements. The result has been falling prices. While prices are expected to rise towards the cost of new entry generation (currently estimated at $39 per megawatt-hour), wholesale electricity prices now are in the region of $22 per megawatt-hour, while spot prices in the pool have recently averaged as low as $10. Despite these falling prices, there is strong competition from the private sector to build new capacity which initially are expected to be highly-efficient gas cogeneration plants.

    Prices to consumers are falling. Domestic tariffs are to drop by nine per cent in real terms between 1996 and 2001 before these customers are allowed into the competitive marketplace. Small business tariffs will fall by 22% between 1996.

    Victoria’s experience is almost universally viewed as a huge success. Other states and the National Electricity Market Company are using the Victoria model as the basis for their systems.

    Establishing a competitive and properly regulated electricity system while facing up to and managing the system security, safety and financial problems with Ontario Hydro is a huge and complex undertaking. There are insufficient skills and experience presently within the sector necessary to operate in a competitive market. The technical expertise is locked up within Ontario Hydro. Inevitably, vested interests will try to influence the process for their own benefit. Ontario cannot afford to undergo a protracted reform process with outcomes driven by vested interests rather then the interest of the entire province.

    Victoria’s reform process proved the value of strong independent leadership responsible for careful, objective analysis. It also proved the value of extensive consultation within the sector on the detailed design of the reforms. The views of the world’s leading consultants were sought while expertise within the SECV was harnessed to further the objectives of the government. In Victoria, management of the reform process was undertaken within a single government agency which contracted with expert consultants who were required to complete the restructuring within a limited time period and in accordance with the government’s objectives. Ontario should do the same.

    (Tom Adams is a consultant with Borealis Energy Research Associates, a principal client of which is the environmental organization Energy Probe, which Mr. Adams represents as executive director.)

    Posted in Reforming Ontario's Electrical Generation Sector | Leave a comment

    Energy Probe's position of power sector reform in Ontario

    Posted on June 30, 2009 by energyprbe

    Thomas Adams
    Energy Probe
    January 26, 1998

    1. Criticisms of the White Paper

    1.1 Continuation of Excessive Market Power
    1.2 Failure to Endorse Privatization
    1.3 Deficient Financial Planning
    1.4 Lack of Firm Commitments to Tougher Environmental and Public Health Rules
    1.4.1 Specific Environmental and Public Health Initiatives Required

    2. Market Design and Process Priorities
    3. Designing Energy Regulation to Implement the White Paper’s Objectives
    4. Ongoing Operations of Ontario Hydro and the "Nuclear Asset Optimization Plan"
    5. Lessons for Ontario from the Reform and Restructuring of the Power Sector in Victoria (Australia)
    6. Recommendations
    7. Background Information: Energy Probe’s History on Hydro Reform and Competition

    Energy Probe welcomes the publication of the Ontario government’s White Paper, "Direction for Change: Charting a Course for Competitive Electricity and Jobs in Ontario". We have commented publicly on many occasions about the benefits we expect will flow from the approach it has adopted. Energy Probe has encouraged the provincial government to implement the White Paper.

    While we support the direction of the White Paper, we have a number of concerns. This statement is organized into six sections: an outline of concerns we have with the White Paper, our ideas on the market design objectives and where the process should go from here, an outline of our concerns with ongoing operations of Ontario Hydro during the transition process including the "Nuclear Asset Optimization Plan", an update and summary of the lessons from the power sector reform process in the State of Victoria (Australia), and some background information about Energy Probe’s history on this issue. We have collected all of our recommendations in a summary after the main body of the statement.

    1. Criticisms of the White Paper

    While we have some critical comments about the White Paper, we want to emphasize our overall approval of the policy statement. Nonetheless, we believe it can be improved. Our concerns are organized here into four areas: continuation of excessive market power, failure to endorse privatization, deficient financial planning, and lack of firm commitments to tougher environmental and public health rules.

    1.1 Continuation of Excessive Market Power

    One difficulty for electricity customers which the White Paper would permit to persist is the commanding market power of the new power generating entity.

    The White Paper states, "The Government has concluded that there is no need, at this time, to reorganize Ontario Hydro’s generation assets into multiple generation companies. If an open market is approved, competition from imports and other energy sources should be sufficient to maintain discipline on prices and costs, particularly in view of the proposed reduction in Ontario Hydro surplus generating capacity." (p. 19) We do not share this view.

    We are concerned that the new generating company’s market dominance will be so great as to present a barrier to entry for prospective competitors in the Ontario electricity marketplace. Private investors in new generating assets in Ontario can only be discouraged by the prospect that their main competitor may be in a position to flood the market to depress price at some times while withholding supplies at other times to inflate price, all for its own commercial advantage.

    The White Paper argues that there is a regulatory solution to the generating entity’s market power. After decades of experience in many energy regulatory forums, Energy Probe doubts that regulators will be able to reproduce the customer protection benefits of true competition. We urge the government to work to ensure that the market power of the new generating entity described in the White Paper in the short term is controlled by the Ontario Energy Board for the protection on customers. We consider it critical that the government ensure that the Ontario Energy Board and the market design process institute open market rules for potential competitors.

    The White Paper is based in part on the sound principle that no participant in the electricity sector should be permitted to borrow with taxpayer-backed loan guarantees. In the long term, this principle can help ensure fair competition in generation. But government officials have indicated that Ontario Hydro will be permitted to "roll over" its existing (taxpayer-backed) debt with new taxpayer-backed borrowing. We fear that the renewal of these taxpayer guarantees will needlessly delay the onset of fair competition. Furthermore, unless all of Ontario Hydro’s new borrowing is expressly and legally made subordinate to Ontario Hydro’s existing, taxpayer-backed debt — as a second mortgage is subordinate to a first mortgage — all new "unsecured" creditors will receive a de facto taxpayer guarantee on the lion’s share of their investment. Worse yet, Ontario taxpayers will in effect be responsible for losses incurred on future Ontario Hydro investments that are ostensibly made at the risk of unsecured lenders.

    We urge the government to immediately cut off all loan guarantees to Ontario Hydro for new borrowing- including borrowing for normal debt renewal or "roll-over"-and to ensure that all future Ontario Hydro borrowing is legally subordinate to the existing, taxpayer-backed debt. These steps should effectively prevent any efforts Ontario Hydro or its successors might make to expand or defend market share with taxpayer-backed financing.

    The criticism that the U.K. government received following its restructuring of the electricity sector clearly indicates the hazards of concentrating too much market power in the hands of too few. However, the mistake made by the U.K. government in 1989 of concentrating virtually all the pre-existing Central Generating Board generating assets in the hands of three enterprises (one pubic and two private) was a much less serious mistake than the Ontario government is proposing to commit of creating only one entity.

    Since our publication of Breaking Up Ontario Hydro’s Monopoly in 1982, Energy Probe has been recommending that ownership and control of the generating stations be broken up. In order to protect consumer interests, we continue to recommend that Ontario Hydro’s generating assets be broken up into separate enterprises as small as possible consistent with economic efficiency.

    1.2 Failure to Endorse Privatization

    Energy Probe has publicly criticized the White Paper’s failure to endorse privatization explicitly. Although we understand the government’s sensitivity to discussing privatization of parts of Ontario Hydro, we urge the government to remain open to this option.

    Energy Probe advocates privatization of Ontario Hydro to enhance regulation by breaking up the conflict of interest that prevails when one agency of government regulates a government-owned industrial enterprise. We also advocate privatization of individual generating units now owned by Ontario Hydro to reduce market power and protect customers. Energy Probe continues to recommend that the proceeds of any sales be used to discharge electricity liabilities against the public purse, including Ontario Hydro’s debt and its environmental liabilities.

    Some of Ontario Hydro’s assets are worth substantially more in private hands than they are now in public hands. Examples include the now derelict Hearn generating station in Toronto and many of the aging hydraulic stations in urgent need of rehabilitation. The experience with competitive reforms and privatization of the power sector in Victoria, Australia, which we discuss later, powerfully demonstrates this potential for a well-crafted privatization program to reveal hidden value. The recent privatization experience with Cornwall Electric, where a price of about 30 times earnings was negotiated in addition to removal of the tax holiday previously enjoyed by the utility in public hands, rate guarantees for consumers, and employment guarantees for incumbent employees, provides additional evidence that privatization can reveal hidden value.

    It is imperative that all privatizations are undertaken in a process that is transparent, demonstrably fair to all potential bidders, and ensures full value for the people of Ontario.

    1.3 Deficient Financial Planning

    We are also concerned about the financial analysis underlying the plan, and will here particularly focus on financial provisions for nuclear waste management.

    Ontario Hydro’s has not set aside any cash to pay for nuclear waste management. It has collected money from ratepayers, ostensibly as a contribution to future waste management costs, but then spent the money. The books of Ontario Hydro indicate that funds have been collected but scratch the surface and you will discover that no accounts with actual dollars exist, only entries in an accounting ledger. Instead of providing assets to accomplish this enormous task, Ontario Hydro has only provided a liability. According to information revealed in the recent Select Committee process, the utility’s current estimate for the cost of nuclear waste disposal and decommissioning is $15 billion in 1996 dollars.(1) This figure is on top of the corporation’s $30 billion in bond liabilities.

    Given the vast scale of Ontario Hydro’s liabilities, extra charges on all electricity transmission and the proceeds of income taxes and capital taxes on electricity enterprises may not yield sufficient proceeds to service these liabilities. By virtue of the provincial loan guarantee, ordinary taxpayers may be faced with some of the costs of discharging Ontario Hydro’s liabilities. Although the date at which taxpayers must face up to this unpleasant task can be postponed, at some point the bill will have to be paid. The prospect of a taxpayer "hit" reinforces the need for the government to immediately stop guaranteeing any future electricity debt and to privatize parts of Ontario Hydro, particularly where it can reveal hidden value.

    Nuclear waste disposal and decommissioning liabilities should be funded in an account external to Ontario Hydro and separate from general government revenues. In order to guide the formation of this account, the Ontario Government should publish a plan on how nuclear waste management costs are going to be managed and provide all assumptions underlying that analysis. The plan should be subject to regular public review by the Ontario Energy Board. If Ontario Hydro is unable to produce the money (roughly $2.8 billion) it has collected from customers for the purpose of nuclear waste disposal and decommissioning, the government must produce the money, to avoid burdening future Ontarians with the costs of cleaning up after the current generation. All nuclear operators, whether public or private, should contribute to the plan on an ongoing basis. Nuclear operators should be prevented by law from using or borrowing against funds in the account.

    1.4 Lack of Firm Commitments to Tougher Environmental and Public Health Rules

    The White Paper does not contain any firm commitments to tougher environmental and public health rules.

    We believe that implementing the reforms outlined in the White Paper should be accompanied by a significant strengthening of environmental and public health rules. Public support for the electricity reform process can only be advanced by actions to ensure that environmental benefits result.

    Although the MDC has been mandated to consider further environmental protection measures in designing the market, the Committee appears to have relatively few members with experience to apply to these issues. The MDC will have to consult with environmental organizations to carry out its responsibilities in this area.

    Here we will outline in recommendation form some of the environmental concerns the government must address.

    1.4.1 Specific Environmental and Public Health Initiatives Required

    The Ontario government should subject radioactive nuclear power plant emissions to the same regulation and control as other persistent toxic agents, therefore reducing emissions of radionuclides from Ontario Hydro’s reactors.

    The Ontario government should require full, unlimited liability on all parties responsible for radioactive releases in or affecting Ontario, its environment, or its citizens.

    The Ontario government should strengthen nuclear emergency planning in Ontario.

    The Ontario government should update Regulation 281 that limits Ontario Hydro’s acid gas emissions so that all the electricity industry’s sources of acid gas are captured, whether or not they are owned by Ontario Hydro.

    The Ontario government should upgrade Regulation 281 to introduce tradable emissions rights or acid gas taxes to be applied to cut acid gas emissions in a more economically efficient fashion than is now the case.

    The Ontario government should limit emissions of air-borne toxic materials and particulates from fossil fuelled stations.

    The Ontario government should strengthen riparian rights so that the drainage basins now developed for hydro-electric production are operated in a manner that more effectively reflects the priorities of riparians other than power generators.

    2. Market Design and Process Priorities

    The government should seek to create an open and transparent public process capable of making decisions quickly and efficiently to guide the reform of Ontario’s electricity system.

    The MDC is an interest group assembly, not an expert group. We are not aware of any members of the committee with working experience building competitive power markets elsewhere in the world. The work of the MDC will have to be subject to thorough public review. We recommend the OEB as the best forum to review the products of the MDC. There will be a need for the OEB and IMO to formally consult with the MDC. We look forward to a published schedule for publicly released products to be created by the MDC.

    The market design process will require strong leadership from people with a thorough understanding of the relevant technical and administrative issues. Energy Probe recommends that experts who have designed the successful open, competitive power systems now operating in New Zealand, Australia, and the U.K. be brought in to support or even direct aspects of our reform process. Individuals and firms experienced with the technical issues and project management problems that arise in creating competitive power markets would facilitate our process.

    Outside expert assistance might assist us in designing our new system to manage transmission system congestion efficiently. International experience shows that generally transmission system operators, like their counterparts now in Ontario, do not think that transmission constraints are a significant issue before the market starts operating. However, international experience also shows that these constraints generally do turn out to be at least a persistent problem after the market starts operating. When operators say that "constraints are no problem here" what they usually mean is that in the monopoly it was easy to manage constraints, because it was simply a matter of overbuilding the system in the long run and of one employee of the utility calling some others and telling them to turn some generators up and some down in the short run. The cost implications of these forms of congestion management have not been efficiently managed because they were considered small relative to total system costs. But the cost implications of such "minor" investments as transmission upgrades or operating adjustments are not necessarily small for the specific transmission service provider or generators turned up or down. Ultimately, efficient congestion management is necessary to help consumers minimizing their costs. Creating the systems that will achieve this outcome will probably require outside expert help.

    3. Designing Energy Regulation to Implement the White Paper’s Objectives

    We are encouraged by the government’s endorsement of performance-based regulation, by the decision that the scope of regulation include transmission, distribution, and IMO functions, and most particularly by the decision to give the Ontario Energy Board a duty to promote competition. Several recommendations on principles to apply in developing new regulatory instruments are provided at the end of this letter.

    4. Ongoing Operations of Ontario Hydro and the "Nuclear Asset Optimization Plan"

    Energy Probe recommends that the eight reactors at Pickering A and Bruce A should be written off and the units permanently closed. In hindsight, it is obvious that the replacement of the pressure tubes in the four Pickering A reactors in the mid-1980s was a terrible investment, and has bought us relatively little power production in return for the billions of public dollars spent to say nothing of several significant safety problems post retubing. In hindsight, Ontario Hydro would have been financially much better off to have simply closed the Pickering A reactors in the mid-1980s rather than re-tube them. Although Ontario Hydro’s forecasts at the time promised large positive returns, what was to have been an investment in retubing turns out to have been a waste.

    Ontario Hydro now makes similar claims for the billions of dollars it hopes to invest under NAOP. Unless virtually all the financial risks can be off-loaded to willing investors, the best financial interests of Ontario lie in permanently closing our nuclear units as soon as they face major repair bills, as both A stations now do. Any investment required to refurbish the B units should come from private investors, not the Ontario public, and failure to find willing investors should be taken as an indication of the risks in the "investment".

    The likelihood of some system for stranded cost management being implemented in Ontario to deal with the uneconomic electricity sector liabilities, as discussed in the White Paper, creates a substantial risk that Ontario Hydro will expand public liabilities prior to its breakup. Energy Probe is very concerned about the financial incentive Ontario Hydro managers of hard assets now have to maximize cash flowing to their operations. The management of Ontario Hydro has little incentive to minimize the liabilities they create, since their uneconomic costs will be taken care of elsewhere. As recommended previously, in the interest of minimizing financial exposure of the Ontario public, Ontario Hydro should not be permitted to borrow any funds with a loan guarantee from the province, and all non-guaranteed borrowings should be treated as subsidiary to existing guaranteed obligations.

    We urge the government to investigate all opportunities for financing future nuclear investments outside the public purse. This should begin with Ontario Hydro’s planned $1.6 billion expenditure for "nuclear recovery" under the Nuclear Asset Optimization Plan. There may be a way to arrange financing from the Ontario Hydro pension fund, which currently has a value of approximately $9 billion. Non-public financing might also be initiated in the form of an equity transfer to Ontario Hydro’s unions of written-off nuclear facilities, facilities that the unions are pressing the government to reinvest in.

    Energy Probe continues to be very concerned about inaccuracies and incompleteness of Ontario Hydro’s nuclear accounts. Ontario Hydro’s financial reporting should be thoroughly revised to accurately report all expenditures and liabilities. So that the public is properly informed about the costs and benefits of its investments, Ontario Hydro should not be allowed to capitalize any costs related to operating or maintaining its reactors. In addition, depreciation of nuclear assets and all financial implications related to the depreciation period should be based not on 40 years of reactor service life as is currently the case but on 25 years, and nuclear waste disposal and decommissioning liabilities should be funded in an external account. As previously noted, if, with the removal of the guarantee, Ontario Hydro is unable to produce the money (roughly $2.8 billion) it has collected from customers for nuclear waste disposal and decommissioning, the provincial government should produce the money, to avoid burdening future Ontarians with the costs of cleaning up after us.

    The government could move a long way to addressing the environmental and health risks associated with continued operation of the nuclear units by beginning a transition to a world of full nuclear accident liability. The Ontario Government should legislate that as of a date certain in the near future (perhaps 2005) no nuclear reactor will be permitted to operate in Ontario unless its owners and operators are liable without limit for the off-site consequences of a reactor accident, and have demonstrated the capability of discharging that liability.

    5. Lessons for Ontario from the Reform and Restructuring of the Power Sector in Victoria (Australia)

    Many lessons can be learned from the reform and restructuring of the power sector in Victoria to help the Ontario power system reform process. There are many close parallels between the condition of the power system in Victoria prior to the reforms and those that prevail in Ontario now. This section looks at the experience of Victoria and draws out the lessons for Ontario.

    The government of Victoria has successfully dissaggregated the former vertically integrated electricity monopoly, creating a highly competitive market structure, and privatizing the new businesses for total sale values around twice the book value of the former monopoly. Primarily as a result of this, state debt has been cut from $A 32 Billion to $A 11 Billion. Wholesale electricity prices have halved, yet there is strong competition from the private sector to build new capacity which initially is expected to be highly efficient and environmentally more appropriate cogeneration plants.

    In 1992 the economic situation in Victoria was in crisis. A left of centre Labour government ran up state debt to the highest per capita level of any state in Australia. The state’s economy, based on relatively highly protected manufacturing, was reeling from the effect of cuts in tariff protection and the collapse of state-owned banks. The labour government in 1991 was forced to partially privatize a partly constructed 1000 MW brown coal power station (Loy Yang B) in order to introduce better labour practices, deal with cost overruns, and to relieve pressure on the state’s borrowings.

    Despite abundant supplies of low cost brown coal, Victoria had lost its position as Australia’s cheapest electricity supplier. Like Ontario Hydro, the State Electricity Corporation of Victoria (SECV) was mismanaged, operated in an environment of secrecy, and lacked accountability. Its management were clearly seen by the government as incapable of leading the sector into a competitive and privatized industry environment.

    A new conservative government was elected in 1992 and, as part of its policies to arrest the economic decline of the state, decided to completely restructure and privatize the electricity industry.

    Victoria’s now functioning competitive structure is remarkably similar to the one in the White Paper:

    • an independent system operator responsible for operating the wholesale electricity market,
    • separation of generation, transmission, distribution,
    • creation of retail supply as a competitive sector separate from the monopoly distribution businesses,
    • amalgamation of inefficiently small local distribution businesses,
    • phased introduction of customer choice with full access for domestic customers by 1 January 2001, called the "contestability date",
    • establishment of franchise fees and a small electricity tax to recover the costs of stranded contracts and to pay down debt,
    • creation of an independent economic regulator,
    • and integration of the competitive state market with competitive markets being established in neighbouring states.

     

    However, Victoria went further than the White Paper in two key areas:

    • the generation sector was split into small companies to create the maximum achievable amount of competition,
    • and all electricity companies were privatized as an integral part of the restructuring process.

       

    The reform process was completed remarkably quickly. The design was announced at the beginning of 1994; the creation of the new entities was completed in mid-1994; the wholesale market also commenced operation in mid-1994; the privatization process commenced in mid-1995, with all the distribution businesses sold in the second half of 1995. All the generators (except one small gas generation business) and the transmission grid were sold during 1996 and 1997. A long term contract with Loy Yang B was restructured to bring this company into the competitive market. The first step into a national electricity market was implemented in May 1997 and has been successfully operating for the past six months.

    The results have been impressive:

    • Privatization has unlocked previously hidden value. In excess of $A 21 billion above book value will be achieved from the complete privatization program. This has been significantly in excess of estimates prior to privatization and can be compared to a book value of $A 10.5 Billion in 1994, and the debts of the SECV, at $A 9.5 billion.

       

    • The Auditor General reports that savings from debt retirement exceeded the dividends and other revenues forgone by the state by $A 718 million in 1997/98.
    • Levels of electrical service reliability and generator availability have increased remarkably since privatization. Improvements in performance have been estimated to be equivalent to an increase in capacity of 700 MW (in a system with total nameplate capacity of only 8,400 MW).

       

    • Electricity prices have been extremely competitive. While prices are expected to rise towards the cost of new entry generation (currently estimated at $A 39/MWh), spot prices in the pool have recently averaged around $A 10-12/MWh. This reflects performance improvements in supply and a resulting excess supply of electricity.

       

    • Prices to consumers are falling. Domestic tariffs are to drop by 9% in inflation-adjusted terms between 1996 and 2001 before these customers are opened up to competitive supply. Small business tariffs will fall by 22% between 1996 and the contestability date.

       

    • Many competent Australian managers within the former SECV have retained or improved their positions. Many middle managers have proved themselves in the competitive environment and some are now involved in working with their parent companies in other competitive markets.

    Several factors led to the high privatization proceeds achieved. The decision to open the market to off-shore bidders created a much more active bidding process than otherwise would have existed. Disaggregation of the generators, rather than reducing their value-as conventional wisdom would have it-increased their value. Disaggregation of the sector created entities that were of a small enough size that many Australian and overseas companies could bid for them. This resulted in a highly competitive sales process. Breaking assets into small lots for sale contrasts with the U.K. where assets were sold in very large lots but at much lower relative prices. Other significant factors contributing to the privatization’s success were a predictable and stable regulatory environment for the monopoly transmission and distribution assets; a favourable interest rate and bank lending environment; a willingness by both foreign and domestic bidders to pay premiums to gain experience in a highly competitive environment; and an absence of nuclear assets.

    Despite a campaign to oppose privatization by the Labour opposition, the government was re-elected in March 1997 with its large majority hardly affected. Victoria is now seen as being at the forefront of economic reform in Australia, and the state economy is undergoing a strong recovery as a result of the improvements in the state’s financial position and other reforms. While, as in Ontario, the public is generally uncomfortable with privatization, the program has been politically successful.

    There are many lessons be learned from Victoria for the Ontario government. The Ontario government should split up generation and (perhaps with the exception of the nuclear plants and Niagara generators as the Macdonald Committee proposed) privatize the sector as fast as possible. This would create a more competitive environment with pricing benefits for consumers and the economy and would remove a major potential barrier to new entrants. Ontario Hydro cannot be expected to rehabilitate itself. Its cultural and management problems will be best resolved by splitting the generation assets of the company into a significant number of competing privatized generators, where the business performance of managers and workers will determine their success.

    Just as the creation of the Victoria Power Exchange or VPX was a key to creating a competitive market, here the IMO should be set up and made independent as quickly as possible. Until the legal changes can be enacted to make the IMO independent, Ontario Hydro’s corporate structure should be changed to make the current CMO as independent as possible. Within Ontario Hydro’s new corporate structure, the reporting relationship whereby the CMO has recently been transferred to be under the control of Ontario Hydro’s Executive Vice President for Development and Transition should be changed. One option would be to revert back to the previous arrangement, whereby the CMO was more independent and reported directly to the Ontario Hydro president (or acting president as is now the case). A superior option would be to have the CMO report directly to the Chair of the Market Design Committee and therefore to become independent immediately.

    Management of the reform process should be overseen within a single government agency and managed by contracted expert consultants who are required to complete the restructuring within a limited period of time and in accordance with the government’s objectives. Establishing a competitive and properly regulated electricity system while facing up to and managing the system security, safety and financial problems with Ontario Hydro is a major undertaking. There are insufficient skills and experience presently within the power sector to create a competitive market, and much of the technical expertise is locked up within Ontario Hydro. Inevitably, vested interests will try to influence the process for their own benefit. Ontario cannot afford to undergo a protracted reform process with outcomes driven by vested interests rather then the interest of the whole community.

    The reform process must have strong independent leadership. Implementing Victoria’s reforms involved careful, objective analysis. Extensive consultation was undertaken within the sector on the detailed design of the reforms. The views of the world’s leading consultants were sought out while expertise within the SECV was harnessed to further the objectives of the government.

    Privatization of the electricity sector can be a political success story. There must be strong leadership of the implementation process and an active strong focus on managing the risks that can arise during the implementation process.

    Ontario should move quickly. The benign economic environment and strong demand for good quality electricity assets from international energy companies may not last. Ontario should capitalize on the present favourable environment by moving to privatize as rapidly as possible. Energy Probe is particularly distressed by the delay in announcing the formation of the Market Design Committee. The delay undermines the timeline the government has set forward to guide the process and suggests weakened resolve to implement the White Paper.

    6. Recommendations

    The number system used here refers back to the sections that discuss the matters addressed in each recommendation. Letters are used when more than one recommendation refers to a particular section.

    1.1A Ontario Hydro’s generating assets should be broken up into separate enterprises as small as possible consistent with economic efficiency.

    1.1B All taxpayer-backed loan guarantees to Ontario Hydro for new borrowing-including borrowing for normal debt renewal or "roll-over"-should be cut off immediately. (Also discussed in Sections 1.3 and 4.)

    1.2 The Ontario Government should endorse privatization of aspects of the province’s electricity system.

    1.3.A The Ontario Government should publish a plan on how nuclear waste management costs are going to be managed and provide all assumptions underlying that analysis. The plan should be subject to regular public review by the Ontario Energy Board.

    1.3.B If Ontario Hydro is unable to produce the money (roughly $2.8 billion) it has collected from customers for the purpose of nuclear waste disposal and decommissioning, the government must produce the money, to avoid burdening future Ontarians with the costs of cleaning up after the current generation. All nuclear operators, whether public or private should contribute to the plan on an ongoing basis. Nuclear operators should be prevented by law from using or borrowing against funds in the account. (Also discussed in Section 4.)

    1.4.1 The Ontario Government should make a firm commitment to tougher environmental and public health rules. Specifically:

    The Ontario government should subject radioactive nuclear power plant emissions to the same regulation and control as other persistent toxic agents, therefore reducing emissions of radionuclides from Ontario Hydro’s reactors.

    The Ontario government should require full, unlimited liability on all parties responsible for radioactive releases in or affecting Ontario, its environment, or its citizens.

    The Ontario government should strengthen nuclear emergency planning in Ontario.

    The Ontario government should update Regulation 281 that limits Ontario Hydro’s acid gas emissions so that all the electricity industry’s sources of acid gas are captured, whether or not they are owned by Ontario Hydro.

    The Ontario government should upgrade Regulation 281 to introduce tradable emissions rights or acid gas taxes to be applied to cut acid gas emissions in a more economically efficient fashion than is now the case.

    The Ontario government should limit emissions of air-borne toxic materials and particulates from fossil fuelled stations.

    The Ontario government should strengthen riparian rights so that the drainage basins now developed for hydro-electric production are operated in a manner that more effectively reflects the priorities of riparians other than power generators.

    2.1 The Ontario government should seek to create an open and transparent public process to guide the reform of Ontario’s electricity system, but one also capable of making decisions quickly and efficiently. Experts with detailed knowledge of successful competitive power systems must be available to assist the process here.

    3.1 The Ontario government should grant the Ontario Energy Board the power to order divestiture of non-monopoly enterprises and functions and also the power to order divestiture of generating assets in order to curtail excess market power.

    3.2 The future regulatory regime should enshrine the principle that the costs of regulation, whether for the regulated enterprise, the regulator or intervenors, should be internalized within regulated enterprises and borne by beneficiaries of regulation The OEB should retain the power to allow or deny the recovery of costs by utilities and intervenors.

    3.3 The Ontario Energy Board should be required to monitor and regulate not just the cost of service to customers but also the quality of that service so that customers are protected from any utility efforts to cut costs at the expense of service.

    4.1 The eight reactors at Pickering A and Bruce A should be written off and the units permanently closed.

    4.2 Ontario Hydro’s accounts should be thoroughly revised to accurately and completely reflect the reality of its nuclear cost experience.

    5.1 The IMO should be set up and made independent as quickly as possible.

    5.2 The management of the reform process should be overseen within a single government agency and managed by contracted expert consultants who are required to complete the restructuring within a limited period of time and in accordance with the government’s objectives.

    5.3 Ontario should move quickly with electricity reform.

    7. Background Information: Energy Probe’s History on Hydro Reform and Competition

    Energy Probe is uniquely positioned to promote a competitive electricity market in Ontario. We are actively advocating competitive markets in electricity both in public forums and in technical forums like the Technical Advisory Team process where Energy Probe is the only public interest participant.

    We have advocated the creation of a customer choice based electricity system since 1980 our publication of Lawrence Solomon’s book Energy Shock. In the early 1980’s Energy Probe followed up with proposals to break up Ontario Hydro generation and transmission to create competition, in much the same fashion as outlined in the White Paper. Also in the early 1980’s Energy Probe’s Norm Rubin published detailed critiques of nuclear investment risks that have proven prophetic. In the mid 1980’s Energy Probe was perhaps the sole voice advocating deregulation of gas sales to small Ontario users, an innovation that has ultimately saved consumers in Ontario billions of dollars. When the tide of consensus in the energy policy debates swung toward utility-subsidized demand side management (DSM), Energy Probe responded with critiques of flawed DSM economics and warnings that DSM-related debt would become a stranded cost, exactly as has happened. In the late 1980s and early 1990s, we developed and published regression analysis of nuclear performance, quantitatively proving the deleterious effects of reactor aging. In 1989, we published a detailed critique of the report of the Ontario Nuclear Cost Inquiry that had confirmed Ontario Hydro’s assessment that nuclear power was extremely cheap to produce-in the order of 2 cents per kilowatt hour including capital and operating costs. Starting in 1989, we resisted Ontario Hydro’s ill-conceived "Demand/Supply Plan" by arguing that, rather than investing billions in two and a half more Darlington stations as it proposed, Ontario Hydro should be privatized. We were also perhaps the first intervenor to press for incentive regulation for Ontario gas utilities.

    Thomas Adams
    Executive Director

    1. Ontario Hydro, "Summary of Nuclear Waste Management and Decommissioning Report", 1 November 1996.

     

    Posted in Energy Probe News, Reforming Ontario's Electrical Generation Sector | Leave a comment

    Hydro Utility to rein in compensation

    Posted on June 30, 2009 by energyprbe

    Robert Benzie and Paul Vieira
    National Post
    June 1, 2002

    TORONTO – The embattled board of directors at Ontario’s hydro utility yesterday caved in to a government ultimatum to reduce the lucrative salaries and compensation packages being awarded to senior executives.

    But Conservative and corporate sources said the move casts doubt on plans to privatize the publicly owned utility.

    After days of controversy surrounding seven-figure golden parachutes for executives of the publicly owned Hydro One – and its $360,000 sponsorship of a racing yacht – the board agreed "to review the salary and compensation packages of its senior executives," said Chris Stockwell, Minister of Environment and Energy.

    "The board has agreed to comply with the government’s directive that salaries and compensation paid to Hydro One senior executives be renegotiated," he said.

    At issue are the wages and severance agreements of the five-member senior-management team at Hydro One, which the Conservatives were planning to privatize for up to $5.5-billion until an Ontario Superior Court ruling in April blocked the sale. In the event Hydro One is privatized, the executives could walk away with $13.5-million in buyout fees – including about $6-million for CEO Eleanor Clitheroe, who would also be eligible for a hefty pension.

    Sources said yesterday’s capitulation has caused irreparable damage to the Hydro One team and the prospects for privatization.

    "We think the sale is all over. It’s irrelevant now," one financier said. "[Ms. Clitheroe] has lost credibility completely."

    The board’s decision to renegotiate is "a truce," he said. "It’s not a surrender, and this issue is not quite resolved. [But] they’ve managed to destroy the credibility of the company."

    Others close to the situation predicted the political turmoil swirling around Hydro One will take more casualties.

    "I’d be amazed if there aren’t some resignations over the weekend at this stage," another Bay Street source said. "I don’t know how many survivors there will be from this carnage."

    Said one senior Conservative who supports the sale of Hydro One: "At some point, [the executives] can only suck it up for so long before they realize that their credibility has been shot and it’s time to walk away and do something else."

    Prior to the 5 p.m. deadline, Ernie Eves, the Premier, warned that he was prepared to "take appropriate action" if the board did not acquiesce.

    "The severance package . . . in its entirety is very inappropriate," said Mr. Eves, who helped create the company in 1998 when the old Ontario Hydro was broken up and noted that he hoped it would be "run like a private-sector model."

    Both Ontario opposition parties, who have attacked the Conservatives over the proposed privatization and the compensation, were unimpressed by yesterday’s developments.

    "Chris Stockwell and Ernie Eves [the Premier] are kind of like the babysitters you always wanted to have because they’ll let you get away with murder," said Liberal MP George Smitherman.

    Howard Hampton, the NDP leader, said the move was just "government spin doctoring."

    But Tom Adams, executive director of Energy Probe, said reforms at Hydro One are essential.

    "[Ms.] Clitheroe’s tenure has become clouded," he said. "The province can’t leave Hydro One the way it is – it’s a poorly performing company that’s become a political embarrassment."

    Mr. Adams added the proposed privatization is "dead," because the province "can’t get the confidence of the [stock] markets or consumers."

    "They need to go back to the drawing board and come up with a plan that has wider public support and can secure the long-interests of the market."

    Posted in Reforming Ontario's Electrical Generation Sector | Leave a comment

    Dirty energy plan

    Posted on June 30, 2009 by energyprbe

    Thomas Marr-Laing
    Globe and Mail
    June 13, 2002

    Letter to the Editor:

    OTTAWA — Re Unfettered Electricity Markets Fuel Cynics In Alberta (June 6): Tom Adams of Energy Probe suggests that electricity deregulation in Alberta has helped the province move to a less coal-dependent power system. This offers a limited reflection of what’s really happening in this province.

    While we have seen an increase in natural gas generation and wind power relative to coal since deregulation, more than 2,400 megawatts of new coal generation has been announced – half of this capacity has been approved and one plant is under construction.

    Companies are more wary about placing 40-year bets on coal plants, so, to offset the economic uncertainty of deregulation, the provincial government and industry have agreed to weak (i.e. cheap) pollution-control standards.

    In fact, Alberta is on a track to increase greenhouse gas emissions from the electricity sector by more than 80 per cent by 2010, with large increases in emissions of particulate matter, nitrogen oxides, sulphur dioxide, mercury and other pollutants as well.

    The future of deregulation points to higher consumer prices, higher pollution and more coal.

    Thomas Marr-Laing
    Director, Energy Watch Program, Pembina Institute

    Posted in Reforming Ontario's Electrical Generation Sector | Leave a comment

    CEO takes on power

    Posted on June 30, 2009 by energyprbe

    Alan Findlay/Queen’s Park Bureau
    Toronto Sun
    July 24, 2002

    A recent political appointment at one of Ontario’s electricity companies is raising concerns about more trouble ahead following the controversy at Hydro One.

    The province recently hired Michael Gourley as CEO of the Ontario Electricity Financial Corp., which manages the $38-billion debt racked up by the old Ontario Hydro.

    "Gourley is high-priced help," Tom Adams of Energy Probe said. "This guy is not a B-team player, so he’s an expensive guy."

    Gourley was deputy minister of finance when Premier Ernie Eves was minister of finance in the mid-1990s.

    He then headed for Bay Street as a consultant with Price-Waterhouse Coopers.

    Adams said Gourley’s arrival suggests that the financial corporation faces serious problems. The company has already missed three consecutive statutory deadlines in filing public reporting of its finances, he said.

    "Gourley’s got a tiger on his hands here," Adams said, adding the company’s massive chunk of public liability has likely grown to $40 billion, thanks to problems at sister companies Hydro One and Ontario Power Generation.

    First, former premier Mike Harris’ planned IPO was scrapped by his successor Ernie Eves. The company’s board later resigned.

    Last week, the interim board fired president and CEO Eleanor Clitheroe, citing six-figure travel and recreation expenses.

    Liberal MPP Michael Bryant said there may be another electricity shocker in store for the public and electricity ratepayers.

    "It looks like they’re bringing in the top guns to clean up a company that has failed to produce any public disclosure," Bryant said.

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