Thomas Adams
Energy Probe
August 19, 1998

 Good afternoon. I am Tom Adams, Executive Director of Energy Probe. I am joined today by Mark Mattson, counsel to Energy Probe, and Norm Rubin, Energy Probe’s Director of Nuclear Research.

The theme of Energy Probe’s oral presentation to the committee today is this: On the one hand, there is no serious alternative to Bill 35 as it applies to electricity. On the other hand, changes are required to Bill 35, to ensure regulatory due process in gas and electricity.

We have also made recommendations about environmental protection, financial protection for taxpayers, auditing requirements, and the creation of the IMO. These are set out in our written materials. Although time does not permit us to cover them in our oral presentation, we urge the committee to carefully review these recommendations, and we invite questions on these matters. We have also circulated a recent article I wrote, discussing Bill 35.

Energy Probe is a national environmental and consumer advocacy organization with over 10,000 supporters, more than half of them in Ontario. We have been actively representing the public interest in regulatory hearings, in the press, and before government committees like this, for over 20 years. Since 1982, with the publication of the book Breaking Up Ontario Hydro’s Monopoly. by Lawrence Solomon, Energy Probe has actively advocated a competitive restructuring of the electricity system. In 1984, the book was expanded, updated and published as Power at What Cost?. Through the 1980s and 1990s, we battled Ontario Hydro and its allies at the OEB, at various environmental assessment processes including the Demand/Supply Plan hearing, and in the courts on competition and environmental issues.

The main theme of Bill 35 – separating competitive functions from natural monopoly functions, and empowering consumers to shop for power – matches the approach advocated by Energy Probe since 1982.

In our view, there is no serious alternative to Bill 35 as it applies to electricity. The legislative and institutional status quo is not in the public interest. Ontario’s electricity system is suffering from a long list of problems: monopoly, unaccountability, inefficiency, environmental liabilities, a long history of politicized decision making, and an absence of public regulation with due process.

On the other hand, Ontario’s natural gas system is sound and successful – although its regulation could stand some fine tuning. If I could leave you with one guiding principle, it would be this: Ontario’s marketplace in natural gas, including the regulatory role of the Ontario Energy Board, is a jewel that must be protected. Moreover, that successful example must be the model we use in creating a marketplace in electricity.

The main problem with Bill 35 is that it introduces serious flaws into the jewel that is the gas marketplace, and it duplicates those flaws in the new electricity marketplace. Both of these problems result from the Bill’s weakening of due process in Ontario Energy Board regulation.

For example, Bill 35, as drafted, eliminates the requirement for the OEB to conduct open public hearings and the requirement for the OEB to support its decisions with written reasons.

While some believe that due process by a quasi-judicial regulatory agency is impossible in a marketplace with publicly owned entities like GENCO and SERVCO, we believe that due process can be achieved. (In the private-sector marketplace of natural gas, it not only can be achieved, it is already being achieved.) Without due process, the regulatory process risks losing its independence, authority, and respect, and the marketplace itself risks losing legitimacy.

I will now turn to our specific recommendations.

Energy Probe’s Recommendations on Bill 35

Clauses from the existing OEB Act whose exact wording or spirit must be included in Bill 35 to ensure due process:

14. The Board for the due exercise of its jurisdiction and power and otherwise for carrying into effect this or any other Act has all such powers, rights and privileges as are vested in the Supreme Court with respect to the amendment of proceedings, addition or substitution of parties, attendance and examination of witnesses, production and inspection of documents, entry on and inspection of property, enforcement or its orders and all other matters necessary or proper therefor. R.S.O. 1980, c. 332, s. 14.

Discussion:

These formal adjudicative powers are necessary to ensure the legitimacy, authority, and independence of the OEB. Procedural order, clarity, and fairness benefits all parties to Board proceedings.

15 (3) Subject to subsections (1) and (2) of this section, subsection 19 (11), subsection 22 (2), section 23 and subsection 46 (3) or this Act and to the Energy Act and any predecessor thereof, the Board shall not make any order or proceed in accordance with any reference or order in council under this or any other Act until it has held a hearing upon notice in such manner and to such persons as the Board may direct.

Discussion:

Hearings provide an essential opportunity for evidence to be properly tested. References from the Minister are properly subject to public review – both so that their implications can be fully understood, and so that the Minister is disciplined by the prospect of this review. In contrast to the review of references required in the existing OEB Act, the proposed Act contains Section 26 that allows the minister to issue dictates by fiat. As noted later, Section 26 should be deleted from the bill, on the grounds that it undermines the authority and independence of the OEB.

15 (4) Every proceeding before the Board shall be open to the public.

Discussion:

Bill 35 does not currently contain a guarantee that members of the public can observe or participate in regulatory processes. Public utilities should be open to public scrutiny. Methods of regulation or self-regulation, behind closed doors, that might be suitable for private markets (such as those used by the OSC) are not appropriate for application to the OEB. Without a clause matching Section 15 (4) of the existing OEB Act, proceedings dealing with public interest matters might occur in secret.

17 (1) Where an application has been opposed, the Board shall prepare written reasons for its decision.

Discussion

Written reasons for decisions are the most effective method available to keep the regulator accountable and the process efficient. Proponents and intervenors are entitled to know how their evidence and submissions were considered. Just as the common law builds up a literature of reasoned precedents, so too should regulatory decision-making create a documented record of deliberation, to create continuity, order, and discipline.

26 (4) An application for leave under this section shall be made to the Board, which shall hold a public hearing and submit its report and opinion to the Lieutenant Governor in Council. R. S. O. 1980, c. 332, s. 26 (1-4).

Discussion:

Under the corresponding Section 42 of the proposed OEB Act, no hearing is required for public review of changes in ownership. Without requiring hearings for changes in ownership, Bill 35 will fundamentally weaken due process. Section 26 (4) played a key role in ensuring that the public interest was protected during the sale of Consumers Gas to British Gas and during the takeover, and later during the merger, of Union Gas and Centra Gas.

In addition to the foregoing recommended additions, the general scheme of Section 37 of the existing OEB Act, which required hearings for rate changes proposed by Ontario Hydro, should be followed under Bill 35. Bill 35 should be amended to ensure that applications for rate changes, or changes to conditions of service, or changes to formulae used to calculate rates that are proposed by monopolies under the OEB’s supervision are reviewed by the Board in public hearings.

Clarification and Separation of OEB Functions

The two executive functions of the new OEB – rule making and licensing, which can be considered a subsidiary rule making function – should be structurally separated from the Board’s core adjudicative function, with which they naturally conflict. Whereas rule makers properly ought to consult with affected parties, circulate draft decisions, and undertake other activities suited to policy development, quasi-judicial adjudicators would undermine their authority by engaging in such activities. The new OEB Act should make it very clear that OEB adjudicators are not appropriate targets for lobbyists. The Act should direct the members of the adjudicative tribunal part of the Board to base decisions only on tested evidence, and not on informally gained information. Secrecy, which is often required in policy development processes, is total inappropriate for arriving at regulatory decisions on public utilities.

Depoliticization of Regulatory Decision Making

OEB Act 1998 Section 25 (6) and Section 26 should be eliminated. Both empower cabinet to interfere in the regulatory process in ways that undermine the authority and independence of the OEB. Gas regulation has succeeded, in large measure because it was insulated from political intervention. The contrast between gas and electricity in terms of environmental liabilities, investment liabilities, and value for customers could not be more stark. Why in the world would we perpetuate the failed model, when there is a successful one so handy?

Strengthening Environmental Protection Rules

The general approach that Energy Probe recommends for environmental protection is based on the "polluter pays" principle.

The Committee should recommend that the Ontario Government begin a transition to a world of full nuclear accident liability. The Ontario Government should add an amendment to the Environmental Protection Act (in Section 10, Schedule D of Bill 35) requiring 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 up to some appropriate level (perhaps $10 billion).

A segregated, funded, arms-length nuclear waste disposal and decommissioning fund should be required by law, and sustained by nuclear waste generators. The provision and its management should be subject to periodic review by the Ontario Energy Board in a public hearing.

No Access of Operating Companies to Provincial Financial Guarantees

The provincial government’s White Paper supported the financially responsible position that taxpayer-back loan guarantees should not support the electricity sector. Bill 35 waters this position down substantially.

The new Ontario Hydro Financial Corporation ("Finco") will borrow under the direction of the cabinet (Electricity Act, Section 61), raising the possibility of future claims by creditors against the public purse even where borrowings are not specifically guaranteed by the province. Under Sections 63 and 64, government loan guarantees may be provided to the Financial Corporation directly or indirectly. Energy Probe urges the Committee to eliminate these potential taxpayer risks by ensuring that no future borrowings by participants in the electricity sector are guaranteed by the province and that existing guaranteed obligations are treated as preferred, while future, unguaranteed obligations are treated as subordinate to them (as a second mortgage is subordinate to a first).

Even if this approach is rejected, the Financial Corporation should be specifically enjoined from lending funds to Genco or Servco, so as to ensure that those two entities do not indirectly gain access to the provincial loan guarantees supporting the Financial Corporation.

Formation, composition and regulation of the IMO

The Electricity Act Section 3 (1) should be amended so that the ownership of the IMO is clear in a way that allows the IMO or its property to be alienated.

The Electricity Act Section 2 (b) should clearly indicate that members of the IMO board not have a commercial interest in the matters they are responsible for. Since the IMO will have regulatory powers, including the power to make market rules, oversee market power issues, and administer fines, it would be inappropriate for any member of the IMO board of directors to have a commercial interest in the electricity sector.

Electricity Act Section 18 (4) should be amended to indicate that the OEB shall hold a hearing on changes to the IMO’s requirements and fees.

Auditing

Under the Electricity Act Section 74, the books of the Financial Corporation shall be subject to an annual audit by the Provincial Auditor. This same audit requirement should exist for Genco and Servco so long as they remain publicly owned.

Also see: Followup letter to EP’s presentation to Ontario Standing Committee on Resources Development Regarding Bill 35