ENERGY COMPETITION ACT, 1998 LOI DE 1998 SUR LA CONCURRENCE DANS LE SECTEUR DE L'ÉNERGIE
MINISTER OF ENERGY, SCIENCE AND TECHNOLOGY
MUNICIPAL ELECTRIC ASSOCIATION
BOARD OF TRADE OF METROPOLITAN TORONTO
CONTENTS
Tuesday 11 August 1998
Energy Competition Act, 1998, Bill 35, Mr Wilson /
Loi de 1998 sur la concurrence dans le secteur de l'énergie,
projet de loi 35, M. Wilson
Ministry of Finance
Mr Steve Dorey, assistant deputy minister and chief economist
Minister of Energy, Science and Technology
Hon Jim Wilson
Encore Energy Solutions
Mr Martin Merritt
Mr Paul McMillan
City of Toronto
Mr Jack Layton
Ontario Hydro
Mr Ron Osborne
Ms Eleanor Clitheroe
Greenpeace Canada
Mr Kevin Jardine
Municipal Electric Association
Ms Pauline Storks
Mr Bob Lake
Mr Tony Jennings
Probyn & Company
Mr Steve Probyn
Nuclear Awareness Project
Mr David Martin
Board of Trade of Metropolitan Toronto
Ms Elyse Allan
Mr John Bech-Hansen
Mr Doug Cranston
STANDING COMMITTEE ON RESOURCES DEVELOPMENT
Chair / Présidente
Mrs Brenda Elliott (Guelph PC)
Vice-Chair / Vice-Président
Mr Peter L. Preston (Brant-Haldimand PC)
Mr David Christopherson (Hamilton Centre / -Centre ND)
Mr Ted Chudleigh (Halton North / -Nord PC)
Mr Sean G. Conway (Renfrew North / -Nord L)
Mrs Brenda Elliott (Guelph PC)
Mr Doug Galt (Northumberland PC)
Mr John Hastings (Etobicoke-Rexdale PC)
Mr Pat Hoy (Essex-Kent L)
Mr Bart Maves (Niagara Falls PC)
Mr Peter L. Preston (Brant-Haldimand PC)
Substitutions / Membres remplaçants
Mr John R. Baird (Nepean PC)
Mr Steve Gilchrist (Scarborough East / -Est PC)
Mrs Helen Johns (Huron PC)
Mr Monte Kwinter (Wilson Heights L)
Mr Wayne Lessard (Windsor-Riverside ND)
Also taking part / Autres participants et participantes
Ms Marilyn Churley (Riverdale ND)
Mr W. Leo Jordan (Lanark-Renfrew PC)
Mr Gerry Phillips (Scarborough-Agincourt L)
Mr Les Horswill, assistant deputy minister, policy division,
Ministry of the Environment
Clerk / Greffière
Ms Donna Bryce
Staff / Personnel
Ms Anne Marzalik, Mr Lewis Yeager, research officers,
Legislative Research Service
The committee met at 0905 in committee room 1.
ENERGY COMPETITION ACT, 1998 LOI DE 1998 SUR LA CONCURRENCE DANS LE SECTEUR DE L'ÉNERGIE
Consideration of Bill 35, An Act to create jobs and protect consumers by promoting low-cost energy through competition, to protect the environment, to provide for pensions and to make related amendments to certain Acts / Projet de loi 35, Loi visant à créer des emplois et à protéger les consommateurs en favorisant le bas prix de l'énergie au moyen de la concurrence, protégeant l'environnement, traitant de pensions et apportant des modifications connexes à certaines lois.
The Chair: (Mrs Brenda Elliott):Good morning, everyone, and welcome to the hearings on Bill 35. The standing committee on resources development is called to order for the purposes of receiving submissions on Bill 35.
This promises to be a very interesting series of hearings. I could make a whole lot of bad jokes about how we are about to be enlightened and that the presentations will be illuminating, but I will spare you those bad former Minister of Energy jokes and say that I think we are going to find this not only a series of historical presentations but an opportunity to enact some interesting legislation for this province and for our citizens.
Colleagues, our first order of business is to attend to the subcommittee report. Do I have someone who will move that for the committee, please? Ms Johns. Any discussion on that report? All in favour? Opposed? It's adopted.
MINISTRY OF FINANCE
The Chair: We move on then to our next order of business. On your agenda you will see that our first presenter was to have been Minister Wilson. That has been changed, so instead we are going to switch our first two presenters and in fact we'll hear from the Ministry of Finance first. The first presenter is Mr Dorey, the assistant deputy minister and chief economist. Welcome, please make yourself comfortable.
Colleagues, as you know, our first presenter has an hour of time to use. The time remaining from his presentation will be equally divided between the caucuses and of course we'll begin with the official opposition.
Welcome, and if you would kindly introduce your colleagues for the Hansard record, you can begin any time.
Mr Steve Dorey: Bill McLean is from the office of budget and taxation, Karen Sadlier-Brown is from the office of economic policy, and Christl Beck is from the office of budget and taxation.
There is a small set of slides that is being distributed.
I'd like to thank you for this opportunity to present the financial aspects of electricity sector reform and to deal with your questions. It's a real pleasure.
By way of introduction, I'd like to take a few minutes to outline the principles, legislative measures and work now under way as the government prepares to implement the financial reforms associated with electricity sector reform.
As you know, last November the government released a white paper that set out a comprehensive plan to restructure the electricity industry in Ontario. The purpose of that plan was essentially to move the industry from one based on a vertically integrated monopoly passing through all costs to consumers into a commercial and competitive industry where consumers can choose their own suppliers and markets will determine prices.
The first slide you have simply outlines that transition of the industry from the monopoly status to the competitive status. Again, as you know, the white paper was followed by legislation introduced in June and a financial update produced by the Ministry of Finance in July. That update described the proposed restructuring of Ontario Hydro and outlined the government's approach to managing the debts and liabilities associated with that restructuring. It also described options for dealing with any debt that is stranded, options which were identified by a variety of stakeholders and experts in consultations over the spring.
The process of designing electricity reform has been an extremely open one. We have had dozens of meetings with stakeholders, investors and the public to discuss the principles and options in the white paper and subsequent documents. We have found broad support for the proposed direction and a good deal of constructive advice on how these reforms should be implemented. That advice is reflected in the draft legislation you have before you. I think there is widespread recognition of the benefits of greater customer choice, market-driven investment decisions, increased efficiency, and safe and reliable electricity at the lowest possible prices.
The white paper presented a nine-point plan -- that's the second slide you have -- to reform the electricity industry. They are obviously interrelated measures. The Ministry of Finance is working closely with the Ministry of Energy, Science and Technology, the Market Design Committee, the Ontario Energy Board and others to implement the nine-point plan. The final three are really the three that are the focus for the Ministry of Finance. Those three are establishing a level playing field on taxes, regulation and financing; restructuring Ontario Hydro into new companies with clear business mandates; and putting the electricity companies on a sound economic and financial footing.
Let me briefly expand on those three points. With respect to a level playing field, it's essential to create an industry with true competition. Market participants have to face comparable taxation and regulatory obligations. As a result, the legislation provides for payments in lieu of taxes approximating private sector norms for public sector entities for federal, provincial and local tax equivalents. In order to ensure the lowest possible prices and to deal effectively with stranded debt, the government has committed to dedicate all of those payments in lieu to dealing with that stranded debt until it's eliminated. Part VI of the bill provides the authority to design and levy those payments in lieu of taxes.
Government-owned companies will also be expected to borrow on commercial terms without the benefit of the government guarantee. Again, that's an essential element of creating a level playing field.
In terms of creating new companies with clear business mandates, Ontario Hydro will be divided into four new companies: two commercial and two non-commercial. The Independent Market Operator will run the market, the Financial Corp will be established to service and retire the existing debt, and there will be two commercial companies, designated in the legislation as the Ontario Electricity Generation Corp and the Ontario Electric Services Corp. Those two companies will be registered under the Ontario Business Corporations Act, given new commercially oriented boards of directors and mandates that reflect their role in the competitive electricity market. Part IV of the bill provides the authority to do that.
Finally, with respect to sound economic and financial footing, the new companies will require financial structures that allow them to operate as viable commercial companies and to borrow at commercial rates. At the same time, they will be expected to maximize their value for the shareholders -- the taxpayers of Ontario -- by finding all possible opportunities for more efficient operation.
Determining the optimum financial structure for these new companies will require a careful evaluation of the new companies' assets and their earning capacity. We have retained leading investment bankers and industry experts to help us with that task, and it is well underway. The process, though, is a complex one, because there is a strong interaction between the various elements of reform.
The third slide you have here gives you a bit of a sense of how the various pieces of the puzzle have to come together. It's clear, for example, that the design of the market will have a significant impact on the earning capacity of the companies going forward, as will the regulations, as will prices. So we have experts looking at all of those things and working closely with the Market Design Committee and others to deal with those.
The recapitalization is expected to require that the new companies be relieved of some of their existing debt to reflect their new commercial status and likely price developments, likely price declines, in the competitive market. That debt is said to be stranded, at least stranded from the perspective of the companies, in that the successor companies cannot reasonably be expected to service that debt and retire it in a competitive and commercial market.
The following slide you have gives a sense of the process of how we go about calculating stranded debt. The first step is to look at the total debt and liabilities of Ontario Hydro, to do a detailed valuation of the new companies and their future earning capacity. The result of that is stranded debt. A good deal of the stranded debt, though, is effectively self-financing. It will have, for example, payments in lieu of tax streams that will service the associated debt. The part that's not self-financing from dedicated revenue streams we've referred to as residual stranded debt. That will come primarily from declines in prices, and to the extent that that residual stranded debt exists, we may have to resort to competition transition charges on consumers to recover that.
Experience in other jurisdictions has shown that competition generally does lead to lower prices for producers and to greater efficiencies throughout the electricity market. For example, in England and Wales residential taxpayers have seen a 15% rate decline since 1990.
While lower prices are a key goal of electricity industry reform everywhere, they do create transitional difficulties. Lower prices in other jurisdictions have had the effect of making it impossible for utilities to fully recover the debt servicing costs associated with some past investments, such as investment in nuclear capacity at relatively high interest rates or investment in non-utility generation contracts with above-market prices. Since those investments were undertaken on behalf of all ratepayers in a monopoly regime, regulators in most jurisdictions have provided for the recovery of those costs, the costs embedded in those obligations, from ratepayers via competition transition charges.
This is roughly analogous to a situation where interest rates fall. You live with a 12% mortgage and interest rates are 7%. You would like to live in the new world and certainly you can once you've discharged your existing obligations. It's that kind of transition to the new lower-price world.
As some of you are aware, the ministry retained Dr Bryne Purchase from the school of policy studies at Queen's University to undertake on its behalf a series of consultations with stakeholders and experts on options for recovering stranded debt and on the principles that should guide the design of any recovery mechanism. The final slide addresses some of the things that Dr Purchase heard.
Stakeholders were clear that any competition transition charge should be efficient, fair and transparent. "Economic efficiency" is defined there as a charge that's administratively simple and does not cause market participants to incur costs they would not otherwise incur; it doesn't distort the market. "Fairness" was generally taken to mean that all ratepayers ought to share the cost of meeting past obligations. "Transparency" means that market participants want to see clearly that any charge is used only to meet existing and unavoidable obligations.
Stakeholders were also supportive of the consultative process undertaken to date and urged ongoing consultation as recovery mechanisms are designed.
Part VI of the bill provides the authority to design and levy a competition transition charge on consumers and generators. It also provides the ability to exempt classes of customers, and that provides the ability to make sure that no one would pay any transition charge twice because they were both a generator and a consumer.
With respect to the impact of electricity reform on electricity rates, the introduction of competition and commercial discipline into the electricity industry is designed to ensure the lowest possible electricity prices.
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The current price freeze runs to the end of the year 2000. Nothing in the proposed legislation will lead to higher electricity prices. The government has committed that all incremental payments will be devoted to dealing with existing Ontario Hydro debt obligations and to residual stranded debt until that debt is retired.
Finally, in conclusion, as I noted earlier, there is broad support for the move from monopoly to competition. There is agreement that this provides the best guarantee of safe and reliable electricity at the lowest possible prices, prudent investment and a strong job-creating economy.
From a financial perspective, this requires that we balance three objectives: the creation of a truly competitive market; the preservation and creation of value in the successor companies on behalf of the shareholders, the people of Ontario; and the fair and expeditious repayment of stranded debt. The Electricity Act provides the framework to achieve those three objectives.
The Chair: We have just slightly over 15 minutes for questions from each caucus, and we'll begin with the official opposition.
Mr Sean G. Conway (Renfrew North): Thank you, Mr Dorey and colleagues. I very much appreciate your attendance this morning. I'd like to get directly to my questions.
Mr Dorey, two years ago, in May 1996, the Macdonald advisory committee on electricity reform made very plain that an absolutely critical step in laying the groundwork for a competitive marketplace was the breakup of the generation company that is Ontario Hydro. They were emphatic in that recommendation. I can cite page 56 from the Macdonald committee in 1996.
Just a few weeks ago, the government of Ontario's special advisory committee, the Market Design Committee, in language that could not be clearer or blunter, made plain their support for the Macdonald committee's view that competition, which is the lifeblood of this policy, will occur to the benefit of Ontario's residential and other electricity consumers if and only if the market power of Ontario Hydro is broken up much beyond what is contemplated in this bill that we have before this committee.
The government has clearly chosen to ignore central advice that would, we are led to believe, establish a truly competitive marketplace. How do you, from a financial point of view, expect to get the benefits that competition is supposed to provide when Bill 35, which is the bill before this committee, specifically does not accept the advice of the Market Design Committee and the Macdonald committee, namely, the breakup of the massive market power of Ontario Hydro's current generating capacity?
Mr Dorey: The bill does clearly separate generation from transmission. That was an important step in terms of bringing competition to the market. The government determined in its white paper last fall, as you're aware, that in its view it was not necessary at this point to break up Ontario Hydro into parts to achieve competition.
Certainly it was necessary to weigh the increasing trend across North America to larger utilities which serve broader markets, to balance that with the advantages of breaking up existing utilities. When the government looked at that balance, it determined that there are other ways to achieve the market power mitigation goal without giving up the potential gains from a larger utility.
Mr Conway: I think I heard you say that competition was critical to delivering downstream benefits to electrical consumers in this province.
Mr Dorey: Absolutely.
Mr Conway: Absolutely. The government's own committee, the Market Design Committee, the expert committee, just a few weeks ago said you would not get true competition if this government, if this Legislature, did not break up Ontario Hydro's generating capacity beyond the two successor companies that are contemplated in this bill and the attendant policy documents.
How are we going to get the benefits of competition advertised by the government, on the one hand, and not break up Ontario Hydro's massive market power along the lines suggested by not just the Market Design Committee last month but the Macdonald committee two and a half years ago?
Mr Dorey: The Market Design Committee is working actively with Ontario Hydro and with oversight or observation from the government on mechanisms to control market power in the market going forward. There are a variety of mechanisms you can use to achieve that, including leases, vesting contracts and so on. We are in the process of looking at options to achieve that without breaking up the company.
Mr Conway: Mr Dorey, it's mid-August and we've had some weeks now to look at Bill 35. We've had the benefit of the Ministry of Finance's document which was released six weeks ago, Electricity Competition: A Financial Update. So my next question is very specific. Since the question of stranded debt is absolutely critical to this whole policy, and to the millions of Ontario electricity consumers stranded debt has got to be important because it's obviously a central part of the equation that might very well affect rates, my first question is, in mid-August, what are you able to tell this committee is your best estimate, the best estimate of the Ontario Ministry of Finance, as to the likely or projected stranded debt that will be left behind once the new commercial companies are established?
Mr Dorey: At this point, our view is that it's premature to produce an estimate of stranded debt. The final determination of stranded debt will depend to a large extent on the design of the market, the regulatory framework, and the detailed evaluation of the companies and their earning capacity that's now under way.
Mr Conway: It may be premature for the Ministry of Finance, but the committee is seized of this bill. We are in the committee stage. You would agree that the stranded debt is likely to be in the billions of dollars, would you not?
Mr Dorey: Again, I think it's premature, but yes, it will be in the billions of dollars.
Mr Conway: So you would agree that the stranded debt is likely to be in the billions of dollars. If it is premature today for the Ministry of Finance to address more specifically this central question, when do you, Mr Dorey, expect to be in a position, as a very important public trustee in this matter, to tell this committee and the people of Ontario what that stranded debt is likely to be? Next week? Next month? Next quarter? Next year? The next millennium?
Mr Dorey: The recapitalization of the companies and the financial restructuring of them will require a determination of that. The companies are to be launched early next year. That work is ongoing as quickly as we can do it. Sometime this fall, we will determine the amount of debt the successor companies can reasonably carry and the amount of stranded debt.
Mr Conway: Turning to Bill 35 and looking specifically at sections 85, 86 and 87, your government's policy contemplates a range of new charges to retire the stranded debt and the residual stranded debt. A number of these charges are new. I want to ask you to confirm that in this bill you contemplate the imposition or levying of new charges, one of which will be payments in lieu of federal and provincial corporate taxes. In other words, the successor Ontario Hydro companies, Genco and Servco, will, upon the passage of this bill, begin to pay for the first time payments in lieu of provincial and federal corporate taxes. Is that not correct?
Mr Dorey: That's correct.
Mr Conway: Those new charges, those new hydro taxes, will be paid by electricity consumers in the province. Is that correct?
Mr Dorey: What are represented there are payments that electricity consumers are currently making. The payments are dedicated clearly to dealing with existing Ontario Hydro debt. As we remove an amount of debt from those corporations to make them capable of operating as commercial companies bearing a commercial tax burden, if you like, the effect of that will be to strand some amount of debt. By dedicating those payments in lieu of taxes to dealing with that particular debt stream, it's effectively self-financing. So it's not effectively a new burden on taxpayers; it's something taxpayers are paying in their rates today.
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Mr Conway: But we have not before paid a specific charge on our Hydro bills in lieu of federal corporate taxes. Is that not correct?
Mr Dorey: The consumers of Ontario have paid about 40% of their electricity bill to deal with the debt of Ontario Hydro, both servicing and retiring debt, and these payments will go to deal with that existing debt. It's simply a restructuring of the company and the charges to achieve the end of dealing with existing debt.
Mr Conway: Mr Dorey, section 87 of Bill 35 proposes for the first time that all of us who get our electricity from municipal utilities like Toronto Hydro, Ottawa Hydro or, in my case, Pembroke Hydro -- under the provisions of 87(1) and 87(2) of Bill 35, you, the Ministry of Finance, will upon the passage of this bill take in perpetuity an annual cut of the gross adjusted revenues of the municipal utilities. How is that not a new permanent hydro or electricity tax, particularly since, under the provisions of subsection 87(2) of the bill, it is clearly contemplated that upon the complete retirement of the residual stranded debt, your cut, your slice of the adjusted gross revenues of all municipal utilities, will carry on in perpetuity to the credit of the Ontario treasury? How is that not a new permanent electricity tax?
Mr Dorey: In order to establish a level playing field to create a commercial market, it is necessary to put market participants on an equal basis, a level playing field, if you like, with respect to taxation. Therefore, those charges are being levied on the local utilities to put them on the same basis as comparable and competing commercial enterprises. That money will be dedicated to dealing with stranded debt, and so effectively it will not increase the price of electricity. It will deal with a cost that's already there, those debt payments, until that stranded debt is retired.
At that point, the government then clearly faces a choice: Does it continue to receive that revenue? Presumably it has to to maintain a level playing field. The government, though, can decide to cut taxes either somewhere else in the electricity sector or somewhere else in the entire tax world, if it chooses to do that, in order to ensure that there is no incremental tax burden. That's a choice the government is going to have to make.
Mr Conway: Well, it's very clearly made in subsection (2) of section 87 of this bill. Let me read what the bill says: At a date prescribed by the cabinet, "all payments required by this section shall be paid to the Minister of Finance, instead of to the Financial Corporation."
I know my time is limited. I want to come to the impact of these charges, these new electricity taxes, on rates, particularly in the period between the year 2000 and, let's say, the year 2005. Experts have said that once the rate freeze is lifted sometime within the year, it is impossible for these new charges not to have an adverse impact on the hydro or electricity rates that will be paid by the millions of Ontario electricity consumers. In fact, one expert told a conference not too long ago that the adverse impact on general electricity rates in the transitional period -- that is, the first few years of deregulation -- could be in the order of 15% to 20% annually; that is, a 15% to 20% increase on general hydro rates.
How is it possible for you to argue in the paper that was published a few weeks ago, Electricity Competition: A Financial Update, that when the rate freeze ends within the next year and when these new electricity charges or new hydro taxes are imposed on, particularly, residential electricity consumers -- how is it possible for people to ignore the expert advice which says, "Yes, there will be, particularly in the next few years, adverse impacts on the general electricity rates that all residential and farm consumers will be expected to pay"?
Mr Dorey: I think you are referring to Patricia Mohr's comments that prices could rise by 1.3 cents following the end of the current price freeze. I understand that was taken from an analysis based on the Dominion Bond Rating Service that estimated stranded debt, but neglected to take account of the efficiencies this reform is intended to produce.
Those efficiencies are quite simple. There are studies that show efficiencies in the distribution sector as large as tens of millions in the GTA alone. We know this bill provides pension reform that will provide a saving to the new companies approaching $200 million a year in pension payments. There is a variety of efficiencies that will occur in the industry as a result of competition. If you take account of those, there is no need for electricity prices to rise.
Mr Conway: Mr Dorey, some of those efficiencies are obviously going to occur. I support competition. I think most of the committee supports competition. But we have before us what we didn't have when we last discussed this six weeks ago: I've got the Market Design Committee's report of early July and it couldn't be clearer. The centrepiece to make competition work and get at the big efficiencies you need to write down a massive, multi-billion dollar stranded debt is in generation.
The Market Design Committee -- do you want me to read it? Let me read from page 3 of --
The Chair: I remind you that you have about 30 seconds.
Mr Conway: The Market Design Committee said what the Macdonald committee said, that if you don't deal with the market power, if you don't break up Genco, Ontario Hydro's massive generating capacity, you will not get the competitive benefits and the significant efficiencies you must have to deliver the promised benefits to the residential and farm electricity consumers, particularly in the first five years of this policy.
Mr Dorey, what do you know in this connection that the Market Design Committee and the Macdonald committee didn't seem to figure out, particularly with the view to ensuring that the millions of residential and farm electricity consumers in this province will see real benefits in rates at the same time as the big electrical consumers in this province?
Mr Dorey: The government has clearly come to terms with the issue of: Is it necessary to break up Ontario Hydro at this point to achieve the benefits of competition? Its view is that's not necessary. The Minister of Energy has received that report. I assume he will be responding to it shortly and that's where I would look for an answer.
Mr Conway: Thank you.
The Chair: Moving to the third party, Mr Lessard.
Mr Wayne Lessard (Windsor-Riverside): Welcome, Mr Dorey. I appreciate the opportunity to hear from you. I know there are a number of members of this committee, and the public in general, who are interested in your opinions and your expertise in this area.
One of the questions I have is one that's been touched on by Mr Conway. I want to put it to you directly: that any possible savings that consumers may be able to derive as a result of competition, if we all agree that competition may result in decreased rates for consumers, is dependent on the guess with respect to stranded debt being made correctly, and also that Ontario Hydro is broken up to such an extent that there truly is competition in the electricity market, and not just deemed or imaginary competition.
My question is, what would the impact be if the guess with respect to stranded debt is wrong, whether it's too high or too low? Could you explain that to us, please?
Mr Dorey: When we've consulted with stakeholders and experts on the design of stranded debt recovery mechanisms one of the things that was pretty clear is that it's a very difficult number to determine and ultimately you're going to get it wrong.
As you know, a swing of one cent, for example, in the price of electricity will swing the amount of stranded debt by something in the order of $10 billion. Among the advice we got was that any charge should be designed in such a way that it is flexible enough to adjust to movements in prices or other developments which result in more or less stranded debt going forward.
Certainly, the update we provided in July provides a framework for discussing how one might design a charge which could be adjustable to reflect price movements and other developments going forward, and at the same time ensure that there's commercial discipline at the successor companies and that they are not insulated from the market. By having a flexible charge it is possible to deal with errors in initial estimates of the size of stranded debt and not impose a burden on either taxpayers or ratepayers.
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Mr Lessard: You've said this morning that it's premature to estimate what the amount of the stranded debt may be, but you've agreed that it's in the billions of dollars, so we know that it's at least more than a billion at this point in time. But what you're really doing, no matter how it is you determine this amount, is taking a wild stab in the dark, wouldn't you say? If you're wrong in picking that number, I'm interested in knowing what impact that is going to have on the broken-up assets of Ontario Hydro. What happens to the new corporations that are set up as a result of Bill 35 if the stranded debt is estimated to be too high or too low?
Mr Dorey: In determining the appropriate amount of debt to assign to the new companies, a key element is that they be able to operate as viable commercial companies and to borrow effectively at commercial rates. We are, therefore, looking at investment grade ratings -- BBB or A -- that would allow them to do that. That implies a certain debt structure, a certain amount of debt they would be able to carry in that kind of a world.
They're then going to go forward as commercial companies and, as all commercial companies, will have to deal with the fact that they have either too little or too much debt going forward. That will have an impact on the dividends, for example, that they pay to their owners: us. If they're too large, we could use those dividends to offset the impact on competition charges.
There is the capacity to protect ratepayers. This is not, though, about protecting the new utilities going forward. The new utilities are going to have to go forward as commercial enterprises and prosper or not in the commercial market.
Mr Lessard: Is there any provision in Bill 35 to accommodate either a raising or a lowering of the stranded debt? Is there that flexibility or is this is a number that we have to pick at some point in time -- the Minister of Finance has to pick this number -- and then we're stuck with it for all eternity?
Mr Dorey: It's really a two-step process. As I went through it, we will determine on a once and for all basis the appropriate capitalization for the new companies associated with their value. The distribution, though, between the stranded debt that's self-financing from payments in lieu of taxes, dividend payments and other sources, and that which is necessary to recover from ratepayers through any competition charge, is possible to change, and in fact the legislation provides that from time to time the Minister of Finance will adjust those numbers or those rates accordingly.
Mr Lessard: That number you're referring to is what's called the residual stranded debt. That's what you're referring to. In fact, that number is going to be determined by the Minister of Finance and it's a number that can't be appealed by anyone to any court once he deems that amount to be in place. Isn't that correct?
Mr Dorey: That's correct.
Mr Lessard: That is the number that's going to be used for the purposes of determining these other charges that Mr Conway has referred to, and that is, the payments in lieu of federal taxes. Is that --
Mr Dorey: No. The payments in lieu of federal and provincial taxes will be based upon comparable tax payments paid by comparable utilities. Private sector norms will be used to determine the appropriate payments in lieu of taxes and the amount of debt or the present value of the associated debt will have to be removed.
Mr Lessard: If there were a competitive company that was involved in the market, it would be paying taxes actually to the federal government, right? In this case, they wouldn't be making those payments to the federal government; they'd be making them to the Ontario government, so the Ontario government would be collecting federal taxes.
I know that in the election campaign in 1995, and before that, Mike Harris always said, "A tax is a tax." Whether it's a user charge, a special levy or a competition transition charge, whatever you want to call it, it's going to be a tax in this case and it is going to impact on electricity rates. It is a federal tax. It isn't going to be going to the federal government; it's going to be going to the provincial coffers, and once the government has its hands on those taxes, I think it would be pretty hard to give up.
That's a political question I don't expect you to respond to. But I do want to ask you whether there need to be some negotiations with the federal government to collect federal income taxes by the province and hang on to them.
Mr Dorey: I think you made two or three points there. The money is not going to the government. It's going to the Ontario Hydro Financial Corp, which will use it to deal with the existing debt.
Second, on the question of transparency, the Ontario Hydro Financial Corp will report annually on the status of stranded debt, the money it has taken in, what it's used for and so on. There will be full transparency to ensure that this money is in fact used for the purpose it's designed for.
Third, with respect to the federal government, the constitutional provisions provide that effectively governments don't tax governments. The way that's interpreted in federal law is that if entities are more than 90% owned publicly by the province or municipality, they're not subject to federal tax. So that's not an issue that has to be negotiated. The law is pretty clear on that, and that's based on the constitutional provisions.
Mr Lessard: Perhaps it may be transparent. I guess my question for the minister when he arrives is, why is it that when he determines the amount of the residual stranded debt and determines when that amount's going to be paid off, his decision is final and can't be appealed in any way or challenged by anyone? That's a question I'm going to ask him.
In Electricity Competition: A Financial Update, some of the things that have been suggested with respect to the breakup of Ontario Hydro into separate companies are the possibility of joint ventures and other strategic partnerships. I noticed that in one of the little asterisks in the slides, which I don't think you showed us this morning, and I was wondering what may have been referred to in that. What's your understanding of "joint ventures and other strategic partnerships"?
Mr Dorey: I think the electricity reform is in large measure taking advantage of the expertise and money that the private sector can bring to this industry, either by investing themselves or entering into joint ventures, leases, a variety of possible arrangements -- asset sales -- with the Ontario Hydro successor companies, so that's certainly left open. The successor companies will be commercial ventures and will be encouraged to go forward and find constructive and profitable opportunities to work with partners, whether those are local utilities, private sector enterprises or others.
Mr Lessard: Some of these other, private sector partners could be corporations with shareholders who are other than citizens of Ontario. Would you agree with that?
Mr Dorey: That's right.
Mr Lessard: It sounds to me a lot like privatization. Even though the minister has said to us on numerous occasions that there are no plans to privatize Ontario Hydro, by the way it's been described in this book and the way you've responded to my question, it really does open the door to the privatization of Ontario Hydro and there don't seem to be any limits in the bill.
Mr Dorey: The intent of the bill is to bring commercial discipline to the industry. That doesn't rule out privatization, but it doesn't require it. These will operate as commercial entities in competition with the private sector.
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Mr Lessard: Let me just understand you when you say that there really aren't any restrictions on privatization of Ontario Hydro. From what you're saying, it opens the door but it doesn't put any limits on privatization.
Mr Dorey: In the bill itself there are no restrictions, that I'm aware of, on the form that partnerships could take.
The Chair: We move now to the government caucus, beginning with Mrs Johns, the parliamentary assistant for energy.
Mrs Helen Johns (Huron): Chair, I'd like to share my time with John Baird, who is a parliamentary assistant for finance.
I just have a very few questions, Mr Dorey. There was quite a bit of talk this morning by Mr Conway about the breakup of Genco. I know we're here to talk about Bill 35, and that really comes into the Market Design Committee, but can you speak to the issue of the Market Design Committee report? Can you tell us if the market design report, even though it had suggestions about Genco, came up with some recommendations that would in effect curtail market power of Ontario Hydro? I know this is best answered by Steve Probyn, who's coming later today, so I don't expect you to go into great detail, but could you just talk to that issue for a second?
Mr Dorey: Yes. I think the Market Design Committee looked at the options available to it to deal with market power in the context it had and determined that there is a variety of them. Certainly it is possible to enter into vesting contracts, for example; those are contracts that fix the price for a large proportion of Ontario Hydro's production so that it takes away any incentive to manipulate the market.
It looked at the possibility of leases so that Ontario Hydro, for example, could lease some of its facilities to private sector enterprises. Again, the private sector enterprise would not have an incentive to take advantage of market power on behalf of Ontario Hydro; it would pursue its own interests. They're looking at a variety of other mechanisms and those could include asset swaps and a variety of other things.
Mrs Johns: When you were answering some of the questions by Mr Conway you kept referring back to the need to have a level playing field. You talked about having to have taxes so that the municipal electric utilities, for example, would be on a level playing field with anybody else who came in to provide that service. Can you tell us and the people who might be watching what's so important about having a level playing field within this market?
Mr Dorey: It's absolutely essential that businesses that are competing with each other compete on the same basis, that they're subject to the same kinds of charges, that they not have a particular advantage because they're government-owned, or a particular disadvantage, for that matter. The municipal utilities are in a similar position to the successor corporations. Many of them will, for example, enter into the retail business in competition with other retail providers. If you're going to have an efficient market there that gets the true benefits of competition, it is necessary that they all operate with the same kinds of obligations and rights. That's really what we mean by "level playing field."
Mrs Johns: So you're saying that if we didn't put those taxes on those corporations, there would be a disadvantage to the private sector individuals who might come into the marketplace?
Mr Dorey: That's right.
Mrs Johns: Can you tell me now if the ratepayers of Ontario are paying for the debt charges that have been incurred by inefficiencies or government or Ontario Hydro decisions over the last 30 years.
Mr Dorey: Ontario Hydro has, as you know, about $31 billion of debt at this point, and approximately 40% of the electricity bill currently goes to deal with servicing and retiring the existing Ontario Hydro debt. Those obligations were -- some may have been prudent; some may have been imprudent -- certainly all undertaken in the interests of the ratepayers of Ontario and they're obligations that are not going to go away. The government's desire at this point is to deal with those obligations, have ratepayers deal with those obligations rather than to put that burden on taxpayers. I think that's reasonable. That's what has been done in most jurisdictions in dealing with that kind of legacy debt when you move to a competitive environment.
Mrs Johns: The ratepayers of electricity right now are paying for the debt charges and the ratepayers will be paying for the debt charges after Bill 35 comes into effect. There's really no difference, although the fees will be much more transparent after we get through this process, so people will know exactly what is for the debt and what's for operating costs and existing services they're getting. Is that correct?
Mr Dorey: That's right. The existing debt payments will continue because those are obligations that have to be covered. We're taking advantage of the fact that in the transition to competition a level playing field is essential. There is a revenue source here. If in fact that revenue source were directed to the government coffers, either from the local utility's payments in lieu of taxes or the successor corporation's payment in lieu of taxes, that would be a leakage from the electricity system and could potentially lead to higher prices. That's precisely why the government has chosen not to do that but to direct that revenue to dealing with the associated debt.
Mrs Johns: I'm going to pass to my colleague, but as a ratepayer of electricity I'm absolutely amazed that I pay 40% of my bill to the debt that Hydro has incurred over the last 30 years.
Mr John R. Baird (Nepean): Thank you very much for appearing this morning and for the time you've put into your presentation.
I want to revisit some of the points that my colleague from Huron mentioned. One of the previous questioners talked about the importance of competition and expressed I think not an invalid concern about the power that Ontario Hydro has had and what kind of power it will have in a competitive market, which I think we are all concerned about, and about the need to create a level playing field and does this bill even go far enough to creating a level playing field, which is something I guess we'll hear from other presenters and have time to reflect on over the next few weeks.
Could you have a competitive environment where there is one player who we all acknowledge has had far too much power and who, some would charge, will continue to have too much power if they were exempt from paying taxes? Could you have competition where one player, who already has too much power, would not have to pay taxes like every other company and every other individual in the province?
Mr Dorey: I think that would be very difficult. When people make investment decisions, they're going to have to take account of all the consequences of those investment decisions, including the tax implications and so on, and to have a tax-exempt entity competing directly with a taxable entity would create a situation where you would seriously disadvantage the taxable entity and move back towards monopoly. That would be the general effect of it.
Mr Baird: Would it seriously disadvantage or would there just be no one on the field to play, let alone having a level playing field? You'd only have one team. For a company the size of Ontario Hydro, one of the very largest corporations in the province of Ontario, let alone in the country, to be exempt from having to pay taxes, and the commensurate MEUs, would there even be another team on the field, let alone a level playing field or anything approximating it?
Mr Dorey: I can't answer that but it would be a good question to ask people like Mr Probyn, who I understand is appearing this afternoon and is in that business: How would he like to compete against a tax-exempt utility like Ontario Hydro?
Mr Baird: Looking at other monopolies that have been broken up, I can't imagine having to ask Bell Canada or AT&T Canada or Sprint Canada to say, if Bell Canada didn't have to pay taxes, what that would do to the other companies participating in that marketplace. I would charge that it wouldn't be a question of a level playing field; it would only be one team on the playing field and I think we're all concerned that that one team has in the past exercised far too much power and control in this area.
I wanted also to talk about the issue of the tax revenue. Are there any new tax regimes being established under this bill or are they just using the existing tax regimes that are already in place?
Mr Dorey: The payments in lieu of taxes essentially subject what will be commercial entities in the industry, the government-owned commercial entities, to existing tax regimes. The bill provides that the local utilities will pay an adjusted gross receipts tax, and that's slightly different from the corporate and capital taxes that would be paid by a commercial entity, but it will be designed to be equivalent or approximate that particular charge.
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The reason for going with that particular provision is concern that utilities be treated equally, so if one utility were to organize itself as a non-profit utility, and next door, in the next municipality, you had a commercial utility, you want to have comparable tax treatment between the two so as not to discriminate between the residents. The decision was to look at an adjusted gross receipts tax, which takes a proportion of gross revenues, rather than being based directly on profit.
There is also provision in the act, though, that the minister can in fact apply the comparable commercial charges to those utilities if they are organized on a commercial basis.
Mr Baird: Does that revenue go to the consolidated revenue fund or does it go to paying off the stranded debt?
Mr Dorey: That revenue goes to stranded debt.
Mr Baird: The more I've read and the more I've studied the issue, it astonishes me that well over $30 billion in debt was built up by successive governments of all three stripes over the last number of years and it has not been a good end result for taxpayers in terms of the customers of Ontario Hydro having to pay that.
I don't have the Macdonald report, but I do have the report by Nepean Hydro, which came with my Nepean Hydro bill. They have a little chart, "Where your electricity dollar is spent." It says here that 10 cents go to Nepean Hydro and the other 90 cents go to the two operations of Ontario Hydro generation and transmission. I looked into that 90 cents of my Nepean Hydro dollar and we're paying about 40 cents, 44 cents to the Ontario Hydro debt right now. Is that an approximate amount?
Mr Dorey: Sorry, about 44%?
Mr Baird: Of your current Hydro dollar would go to pay for Ontario Hydro debt now.
Mr Dorey: That's right.
Mr Baird: In introducing a new competitive environment, that debt can't just disappear. We can't just renege on that debt. We can't just make it go away. I see nothing in Bill 35 that's going to do that. The tax revenue coming from creating a level playing field will essentially go to just paying that current 40%, 44% of my hydro bill now. Is that correct?
Mr Dorey: Yes. That's interest and principal payments over the last few years by Ontario Hydro.
Mr Baird: So essentially you would have a situation where I'm paying 44 cents now on Hydro debt and then, under a competitive environment, I would continue to pay that 44 cents.
Mr Dorey: Yes. That may decline over time but that's about right.
Mr Baird: So there's really no change. It's the same now and the same the day after Bill 35 is not just enacted but when competition arises after the year 2000.
Mr Dorey: Yes. The difference is that as long as Hydro has its monopoly, it's straightforward to incorporate those charges directly in the electricity bill of every consumer, like you. When the monopoly is not there, you don't want to create a situation where you, who deal with Nepean Hydro and Ontario Hydro, are paying for that historic debt and somebody who chooses to deal with another utility doesn't. That's why you have to structure it so that everybody bears their fair share. We've heard very loudly from stakeholders when we've talked to them that it's simply unacceptable that some ratepayers would carry part of this burden and others wouldn't.
Mr Baird: It's almost like a mortgage on a house. Just by moving you can't renege on the mortgage; you've got to replace that revenue.
Mr Dorey: That's right.
The Chair: I believe that concludes our questions for you. Thank you very much for being our leadoff presenter today. We very much appreciate it.
MINISTER OF ENERGY, SCIENCE AND TECHNOLOGY
The Chair: Our next presenter: We welcome Minister Wilson himself. Please come forward. Minister, we're delighted to have you join us this morning. You may begin at any time.
Hon Jim Wilson (Minister of Energy, Science and Technology): Thank you, Madam Chair and members of the committee. I apologize for being somewhat delayed this morning but I'm very pleased to be here.
"This...could turn out to be the greatest single contribution made this decade to Ontario's economic development." That's what Allan Barnstaple, president of the Independent Power Producers' Society, had to say about Bill 35, the bill under consideration with your committee. I hope that when these hearings conclude, all of you will agree with Mr Barnstaple's observation.
May I say it's a pleasure to appear before you as you begin this important public process to consider the government's proposed Energy Competition Act.
If enacted, Bill 35 is legislation which will ensure that the people of Ontario receive the kind of safe, reliable and affordable electricity supply that they demand and deserve. Competition will create new jobs and increase opportunities for investment in our huge $10-billion electricity sector.
This legislation represents a tremendous opportunity for us to modernize our electricity system to meet the new realities too long ignored by previous governments and previous Hydro regimes. This Bill will put the customer in the driver's seat.
I and many members here today have said before that Ontario Hydro, as envisioned by Sir Adam Beck more than a century ago, has served this province well. Hydro can proudly lay claim to much of the credit for the success of Ontario's economy.
Inexpensive, reliable electricity is largely responsible for making Ontario the economic engine of Canada, and rural electrification helped bring jobs and prosperity to the rural and remote areas of our vast province. Now we have a historic opportunity to build on this great heritage and ensure that Ontario retains its position as one of the best places in the world to live, work and raise a family.
We are not alone in seeking to introduce competition in the electricity industry. In the United States, President Clinton has proposed that every American be allowed to choose their electricity supplier by the year 2003. Competition is seen as so vital in that jurisdiction that people like Tim Burns, the chairman of the Electricity Customer Choice Group, says, "Each day that we delay opening the electricity marketplace to competition robs consumers and businesses of $200 million." The success of competition to date has been worldwide. Customer savings have been very significant in countries like Great Britain, New Zealand, Argentina and wherever electricity monopolies have been exposed to the discipline of a competitive market.
I and many of the presenters, I would presume, who will appear before you over the next couple of weeks believe a competitive market would offer enormous benefits to all Ontarians by creating new jobs and an economy that is attractive to investors. It would ensure a reliable and safe supply of electricity at the lowest possible price while offering protection to consumers both big and small.
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It would restore the financial soundness and viability of the electricity system and ensure a level playing field for all participants. And our proposed legislative framework is designed to be flexible enough to respond to the healthy evolution of a robust marketplace.
Bill 35 is another promise made and kept by this government. It follows closely the policy directions set out in our white paper, entitled Direction for Change: Charting a Course for Competitive Electricity and Jobs in Ontario.
Our proposed legislation is also consistent with the recommendations of industry and customer experts on our Market Design Committee, the select committee on nuclear affairs, the Macdonald commission, and the Minister's Electricity Transition Committee.
So you can see that we didn't get to this point all by ourselves. It was a co-operative effort. We did our homework by consulting -- extensively -- with all of our stakeholder groups and interested parties. These public hearings create yet another opportunity for interested parties to express their views and make suggestions on improving Bill 35.
You will hear over the next two weeks concerns expressed about generation market power. I am here to tell you that we will not permit Genco, Ontario Hydro's generation successor company, to abuse its market position. Both the Independent Electricity Market Operator and the new and strengthened Ontario Energy Board, headed by Floyd Laughren, will be responsible for promoting competition in the best interests of customers. For example, the Ontario Energy Board will use its licensing powers to guarantee that cross-subsidization won't occur. Monopoly businesses, the wires business, will not be allowed to subsidize the competitive elements of the utility, thus ensuring a level playing field.
Bill 35 and the introduction of a competitive electricity market is good for the environment. This legislation is consistent with our government's commitments to maintain and enforce strong limits on emissions and to meet national and international commitments.
Competition will open the Ontario market to generators of more environmentally friendly sources of electricity like wind, solar and biomass, and for the first time, customers will be able to demand green sources of energy from energy suppliers.
Some critics may attempt to frighten you with talk about stranded debt. I would say don't be fooled. Whatever debt there is, it is not new. Bill 35 doesn't add one cent of new cost to this industry. It is the same debt you and I and every other ratepayer pays right now. It's embedded in our monthly hydro bill. Stranded debt will be recovered in a way that is fair to everyone.
On the issue of taxes, my position and that of our government is clear. We are opposed to any sort of tax increases. Prior to 1995, I spent five years at Queen's Park fighting crippling new taxes introduced by previous governments. As part of the Mike Harris government, I have been proud of our track record -- 66 tax cuts over the past three years and an average 30% cut in personal income tax for Ontarians.
Let me be clear. Bill 35 is not about new taxes. It's about levelling the playing field. The Canadian Energy Research Institute tells us that "true competition requires that the success of any one competitor is due to superior performance, not built-in advantages." In fact, their study goes on to say that publicly owned distributors should be "subject to similar requirements for items such as borrowing costs, rates of return, and taxes...." Again, Bill 35 is about levelling the playing field for all participants in the electricity sector.
Introducing competition is an opportunity too important to pass up. It means more jobs and new investment. It means that electricity customers would have greater choice, lower prices and a safe and reliable power supply. It would mean fair competition on a level playing field for all competitors.
Our proposed Energy Competition Act will cause Genco to lose market share -- that's something I think we're all very much aware of -- but we're not throwing out the baby with the bath water. Instead, we are creating a new opportunity for Genco to become one of the top 15 generators on the North American scene, serving markets from Illinois to New York and from Ontario to Kentucky.
My dream is that the new Ontario Hydro will once again be a symbol of pride for our province, returning a healthy profit back to its shareholders -- each and every Ontarian. While it will give up market share here at home, it will take the northeastern United States by storm. I am confident that the new Ontario Hydro can and will succeed as a power to be reckoned with in the North American market, but it will require the united efforts of management, staff and unions to make that work.
Our legislation would also offer new and exciting opportunities for municipalities and local electrical utilities across the province. For example, Bill 35 clarifies, once and for all, the ownership and control of municipal utility assets. Over $5 billion in equity will be vested with municipal governments. I note that just last week Cornwall sold its utility for $68 million, almost three times its book value.
In the past, local utilities have had their hands tied by outdated legislation and oversight by their regulator and competitor, Ontario Hydro. Bill 35 would provide them with business flexibility. They will be able to seek out new partnerships and ventures which would allow them to compete and respond to new and innovative opportunities for themselves and, most importantly, for their customers.
Ontario has more than 275 local utilities. That's 12 times more than the rest of Canada combined. Competition will encourage these utilities to come together, to amalgamate, to provide better, more efficient services while reducing costly duplication. That will mean better service and lower prices. For example, here in the GTA distribution rates vary between 8% and 24%. A 1993 study by Mississauga Hydro estimated that efficiencies could result in an incredible $100 million in savings. That's 25% of distribution costs. More recently, Ontario Hydro and the Municipal Electric Association estimated 8.5% in savings across the entire province, achieved through greater efficiencies in providing services and purchasing.
In addition to cost savings, customers will also enjoy greater protection under Bill 35. The bill proposes to continue rate protection for rural and remote electricity customers. It ensures that distribution companies fulfill their obligations to connect and serve their customers.
It also proposes protection against unethical natural gas and electricity marketers. All marketers selling electricity or natural gas to residential customers would require licences. In the interim, I want to assure members that we are monitoring these activities very closely and we are prepared to take action to protect customers in the transition. All participants in the new electricity market would be licensed by the Ontario Energy Board.
Once again, the proposed Energy Competition Act would ensure that strong environmental protection measures are built into the new electricity market. Bill 35 allows for emission caps and trading, disclosure of emissions by generators, and emissions standards for those wanting to sell electricity in Ontario.
Over the next several months, staff from the Ministry of the Environment and from my ministry, along with the Market Design Committee, will continue to work with environmental groups and other experts to make sure that these standards are fair and that they indeed do protect our environment.
Bringing competition to the electricity market is not a one-day project, it is an ongoing process, and as all of you know, there is still much to be done. There is, however, an unprecedented level of support for the changes that this bill proposes. Public opinion strongly endorses the idea that the status quo is not working.
This public consultation process that you have begun today will contribute significantly to the process of bringing full competition to Ontario's electricity sector. Your input will help take us one step closer to boosting the economy by encouraging job creation and investment, one step closer to ensuring a level playing field for all who want to take part in this new market and one step closer to allowing gas markets to function more efficiently. Our goal is to make Ontario's electricity industry competitive in world markets while it contributes to the retooling of our province's economy.
Madam Chair, I want to thank you for this opportunity to appear before the committee this morning. I look forward to hearing your comments and the comments of all the participants who will appear before you over the next couple of weeks. I can assure you that we will consider each and every comment very carefully as we move towards presenting a final bill to the Legislature, hopefully soon after it resumes, provided these hearings go well.
I thank you for your patience and your time and I'd be happy to answer any questions you have.
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The Chair: Thank you, Minister Wilson. We'll begin with questioning from the third party.
Mr Lessard: My concern, Minister, is for the consumers of Ontario Hydro, not just for the large industrial consumers but for residential consumers and small business people. The most salient feature of your initiative is the assurance that rates for hydro are going to go down. What commitment, what guarantee is there in Bill 35 that rates will go down for residential consumers in Ontario?
Hon Mr Wilson: Thank you for the question, Mr Lessard. Throughout the legislation please keep in mind that in the new regimes that are being set up, whether it be the Ontario Energy Board or the Independent Electricity Market Operator or the successor companies to Ontario Hydro, the cardinal rule here is that the customer always comes first. The Ontario Energy Board, for example, as part of its new mandate, and its existing mandate in the gas industry because it doesn't regulate electricity at this point, must always take into account in its decision-making all consideration to the customer coming first and to ensuring that lower rates are sought in any decisions it may make.
Second, the experience around the world to date in jurisdictions that have introduced competition in the electricity market is that prices have fallen. Throughout the world many countries, many states and other provinces have moved or are moving in the same direction that Bill 35 proposes, and we have no experience with higher rates.
There are three areas really where we expect to see savings. One is, as the debt is paid down, we will ensure that every dollar of savings is passed on to the customers.
Second, we expect significant savings from the distribution system itself, through amalgamation and greater efficiencies in the municipal electrical utilities. Toronto would be a very good example with its amalgamation. Its rates are significantly higher than, for example, Mississauga's. Toronto's overhead costs in distribution are in the 20% range and Mississauga's are in the 8% range. By their own admission, Toronto expects to see significant savings because of the amalgamation that was caused through the megacity.
Third, we certainly expect, and the experience in other jurisdictions is that with competitive generators, with some check on the price actually of electricity -- because Ontario Hydro for the past 100 years has never had any competition. It has never had its prices checked against a market. From the experience in other jurisdictions, given that over 70% of the cost of your home hydro bill is costs that are incurred in the generation of electricity, we expect to see significant savings through competition in the generation business.
Mr Lessard: If you're so convinced that rates for consumers are going to go down, are you prepared to put that commitment in the bill, a guarantee that consumers will have lower rates for electricity in Ontario?
Hon Mr Wilson: I would certainly be prepared to entertain any wording that may come forward. At this point, when you're setting up a free market, it's very difficult to put that in the type of legislation that's before you, but clearly we wouldn't be doing this as a government if it didn't lead to lower rates. We're all about bringing back Ontario to the competitive position it once held.
Mr Lessard: Another concern that I have is with respect to consumers who are being approached by brokers right now. We know the experience that has occurred with respect to gas brokers and we know that consumers have been taken advantage of. You have addressed that in your remarks, indicating that you are monitoring this change and that you're prepared to take action during this transition period against the brokers who are out there selling electricity contracts that they may or may not be able to deliver on. What steps are you prepared to take to ensure that consumers aren't subject to abuse by brokers who are out there in the marketplace now?
Hon Mr Wilson: It's a very good question. We do get a lot of complaints, as does the Ministry of Consumer and Commercial Relations. The ministry has a phone line available for people to call in and quite a few people have availed themselves of that service. They track down and investigate every single complaint. I think the best message we could pass along at this time is that people shouldn't sign anything, that there is not a competitive market right now for electricity and that they should not be signing up with marketers or brokers or agents at this time.
I give full credit to the Municipal Electric Association, which I think got very good coverage in recent weeks with respect to their campaign -- I fully endorse the campaign -- to warn people not to sign anything. We take very seriously any complaints that come to our attention.
Mr Lessard: Consumers are also interested in security of supply. We all want to be confident that when we turn on the light switch, the lights are going to go on. One of the provisions of Bill 35 is to repeal the Power Corporation Act, which puts an obligation to ensure that Ontario Hydro maintains security of supply for consumers in Ontario. What will be the impact of the repeal of the Power Corporation Act on security of supply to ensure that consumers are going to have electricity when they need it?
Hon Mr Wilson: We certainly have made provisions for that. One of the primary responsibilities of the Independent Electricity Market Operator is to make sure the lights are always on and to respond to the demand of the market and of the customers. It will be a non-profit crown corporation that has, as I said, the primary responsibility for exactly that. So the obligation to supply electricity continues in the system, and the obligation to connect customers, for example, someone who is at the end of the concession line. It may be quite a high cost to connect somebody in a remote area. The local distributors, which for the most part will continue to be the municipal electrical utilities, continue to have the obligation to connect those customers. So the benefits of the current system are contained in Bill 35.
Mr Lessard: What about emergency planning? We've seen the disaster that took place during the ice storm this past winter when the infrastructure of Ontario Hydro was destroyed in part of the province. What sort of assurances are there in Bill 35? What mechanisms are there in this new reality, this broken-up electricity system we have that will ensure that hospitals, factories, nursing homes and schools are going to be able to get power in the wake of an emergency such as the one we had last winter?
Hon Mr Wilson: Perhaps you could see Bill 35 as an improvement on the current situation, because you have two bodies now, along with all of the local distribution companies, that are required to ensure that people continue to receive their electricity and that repairs are made in times of emergency: the Independent Electricity Market Operator, the Ontario Energy Board and all of the distribution companies.
For example, the Ontario Energy Board, I suspect, would very quickly pull the licence of any local distribution company that failed to connect customers who needed to be connected or failed to do repairs as a result of a disaster or an emergency. As I said, for the most part, and I would assume for many, many years to come, the local distribution companies will be the current municipal electrical utilities. The indication we have from almost all 275 of them is that they want to continue to be in the distribution business, and they do a very good job in this province.
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Mr Lessard: One of the concerns I've expressed and our caucus has expressed is with respect to privatization. We've seen the appointment of Sir Graham Day, whom we've referred to as a serial privatizer, from Great Britain. We've seen the contract of the chief executive officer of Ontario Hydro refer specifically to privatization. We heard this morning from the presenter from the Ministry of Finance that there is an encouragement of strategic partnerships and other methods of providing financing for Ontario Hydro and that there are no restrictions on privatization of Ontario Hydro in Bill 35 whatsoever.
What guarantees are there, if any other than your own assurance, that this isn't the direction that your government and Ontario Hydro are taking, leading us to the privatization of Ontario Hydro?
Hon Mr Wilson: I would just reiterate for you what the government's position has been since the release of the white paper last November, and that is that we're very much in favour of public-private partnerships. But at this time, to be quite frank, Ontario Hydro is a badly devalued company. Nobody in their right mind would bring that company to the private sector at this point in time. My opinion is that it needs a number of years to get its house in order and to increase its value and to improve its management and operations. Certainly each and every one of us in this room and all Ontarians are the shareholders and we're not interested in a fire sale of Ontario Hydro at this time. That's what it would equate to, I think. Mr Kwinter probably would agree that you do not go to market with a badly devalued company.
Secondly, I would say that most of the talk about public-private partnerships, frankly, has come from the Power Workers' Union. They're the ones who took out the full-page ads and the radio ads and others to urge the government to move forward. I think they see the writing on the wall in terms of understanding, as most Ontarians do, that the status quo is simply not an option. Hydro rates have gone up some 50% over the past 10 or 15 years in this province. We're now the third highest in Canada. In the 1960s and 1970s, when we attracted the major manufacturing industries to this province, we had extremely low hydro rates. In fact, we used to have the most competitive rates in Canada and, as I said, now we're the third highest.
This bill is all about putting in a regime that gives us the best possible guarantee of lower rates, introducing competition, giving customers choice, and allowing for the first time those who produce environmentally friendly forms of electricity, green power, an opportunity to actually sell that power on the power grid to willing customers, something they haven't been able to do for the last 100 years in this province.
Mr Lessard: I can't let it go unnoticed that a big part of the rate increases were the result of the mismanaged construction of the Darlington nuclear power facility that increased Ontario Hydro's debt substantially and that it was the New Democratic government that actually froze rates in the early 1990s and it was the PC government that built Darlington.
My final question has to deal with environmental protection. The bill provides the ability for the government to pass regulations to protect the environment. It says "may." It doesn't say that the government "shall" pass regulations ensuring that there's environmental protection.
You know, Minister, that the air quality in the Windsor and southwestern Ontario area is a major concern. We've heard that up to 1,800 people die each year as a result of bad air in the province, and we don't want to see cheap Ohio Valley coal-generated power being transported into Ontario and all we end up with is the bad air. We would like to see a commitment from you that a certain percentage of renewable energy sources is required by the Independent Market Operator.
I would also like to draw your attention to section 147 that says, notwithstanding the fact that other legislation may have environmental protections or regulations may be passed that require the environment be taken into consideration, that section of the bill gives the government the opportunity or the ability to override any of those regulations or legislation. I'm asking for your commitment today to ensure that any protections for the environment that you pass through regulations aren't going to be overridden by this section of the bill.
Hon Mr Wilson: That section of the bill is there because the lawyers put it there.
Mr Lessard: Take it easy on the lawyers.
Hon Mr Wilson: It's a carry-over from the current legislation and it gives the government the ability to do exactly what you're asking, and that is to be extremely tough on the emissions. Ontario Hydro has a tremendous record of meeting both its statutory and its voluntary emission targets, which are some of the toughest in the world.
This bill is good for the environment. The vision of Ontario Hydro and its successor companies will be to be a major player in the North American market, and rather than burning dirty coal in the States, of which most of that air seems to end up here with our neighbouring states to the south of us, after NAOP is successful and all of the nuclear reactors come back on-line, or we hope eventually all of them come back on-line, that's clean power. When we take over a major part of the northeastern United States market, we'll be shipping clean power into the United States, and it's a real marketing advantage. We already know that.
Also, as I said, for the first time people will have choice. Customers will have choice. In the United States, without legislation in many states, customers are exercising the choice to purchase green power. They're willing to pay half a cent or a cent a kilowatt hour more and they are exercising that choice.
We will do our best and I hope all legislators will do their best to promote those options. We know that marketers will come to your door and probably ring your phone a few times, beginning in the year 2000 when competition begins, and they will be offering portfolios, packages of electricity. They will probably come to you and say, "Do you want 20% of your electricity to be generated through a green source and another part through nuclear and other sources of hydroelectric power, other sources of generating electricity?" That's what's happening in other jurisdictions.
Finally, I'd like to say that there's nothing in Bill 35 that in any way dilutes any of the statutory requirements that Ontario Hydro has today. The Ontario Energy Board and the Independent Market Operator, but more specifically the Ontario Energy Board, won't grant a licence to anybody in this province unless it meets the very, very tough environmental standards we have. Again with customer choice and with the ability now to sell green power because all of the hydro lines in the province become common carriers as our gas lines and our telephone lines are now, people who produce green power will actually be able to sell it to customers and we expect many customers will avail themselves of that opportunity.
Could I just say too, in every single speech I've ever given, which is well over a hundred on this, we have always said that the emissions or the way in which your power is generated will appear on consumers' bills in the future. That's always been part and parcel of this legislation. The Sierra Club had a press conference last week or the week before and called on the government to do that.
I just want to say as respectfully as possible that has always been the policy since we held the first press conference on the white paper last November. Customers for the first time will be able to see on their bill the types of emissions, the amount of emissions that were incurred for the production of their electricity. I think, as the years go on, we're going to have even more informed consumers and environmentally conscious customers in the electricity sector.
The Chair: Thank you. To the government caucus, beginning with Dr Galt, followed by Mr Hastings.
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Mr Doug Galt (Northumberland): Thank you, Minister, for the presentation and the thoughtful comments. I'd like to start by exploring some of the last comments and the question by Mr Lessard in the area of environment. Certainly environment's very close to my heart and of great concern. I'm very pleased to read some of the performance of Ontario Hydro in the past. It produces some of the cleanest power in North America, if not the cleanest power in North America.
You've made a couple of references in your speech: one, in the beginning, about being more environmentally friendly, and two, near the end, talking about strong environmental protection measures. However, just recently reading in the paper, on August 5 in the Globe and Mail, John Bennett, director of atmosphere and energy activities with the Sierra Club, and -- I also looked at the Hamilton Spectator -- Elizabeth May, the executive director, were sort of slamming the bill about the environmental aspects and where that may go, and it goes on to Greenpeace with Kevin Jardine talking about the bill and the problems with the environment and their concerns.
I have similar concerns that our environment will be protected, Minister. How do you see some of these things being posed in the press recently as being in any conflict with our bill? Are they justified in the criticism that they're levelling against the bill of our government?
Hon Mr Wilson: I appreciate the question because they're actually, for those who attended the press conference, not criticizing the government. I've met with the Sierra Club. When the white paper was introduced in November, I think we had an unprecedented consensus in the province. We not only had unions and management, large and small industries and the Consumers' Association of Canada, but we also had the environmental groups lining up onside and very much encouraging us to move forward with the type of legislation that you have under consideration, Bill 35.
The misunderstanding comes from -- I suppose electricity speeches aren't the most exciting thing in the world, Dr Galt; we don't get a lot of press at my speeches and the word may not have gone out that we were going to put on the customer's bills, make sure they're well informed on the way in which their electricity is generated in the future, which is a vast improvement over today. I don't want to be critical at all of the Sierra Club; they've been very supportive.
We have environmentalists on the Market Design Committee. They have a very effective environmental committee. They have met with all of the major environmental groups in the province. The Market Design Committee is chaired by Professor Ron Daniels, dean of law at the University of Toronto. They've done an exceptional job, and we look forward to their next report where they'll have more recommendations on how we can better protect the environment.
I look forward to hearing from presenters who appear before this committee also because, as Mr Lessard pointed out, there are a lot of regulations to be written and many of the environmental measures will be contained in regulations. Any way you slice it, Bill 35 is a vast improvement over the current situation in terms of protecting the environment. In fact, I think, as Mr Sterling said in the House on one of the last days before the session ended, it's the most significant environmental measure that this government has taken or that any government has taken in many decades in this province.
Mr Galt: It's my understanding that currently the Minister of the Environment is having consultation sessions and inviting environmental groups to be part and parcel of the decision-making on the regulations that will be on the Environmental Bill Of Rights registry down the road for all kinds of input by environmental groups. Just to query you for a moment -- you were talking about environmentalists and environmental groups being on various committees -- could you elaborate on the committees that they're involved in and the decision-making in this process?
Hon Mr Wilson: I'm going to ask the assistant deputy minister, Les Horswill, to give the titles of the gentlemen who are on our committees. As I referred to in my remarks, environmental groups are represented both on the Minister's Electricity Transition Committee and on the Market Design Committee. The assistant deputy minister wants to elaborate here.
Mr Les Horswill: On the transition committee which the minister meets with on a monthly basis is Bruce Lourie, who is well known to those involved in energy conservation and is involved with the Canadian Energy Efficiency Alliance. On the Market Design Committee has been Mitch Rothman, and the thing that's necessary to add, and you'll be hearing this afternoon from Steve Probyn, certainly -- IPPSO and Steve Probyn have long been advocates of green power to customer choice. At least those three individuals, though I wouldn't suggest any other members on those committees are uninterested in making sure there's a clean structure --
Mr Galt: If I can just wind up my question and one more that relates to Mr Kevin Jardine's comment that coal plants in Ohio will be able to sell electricity into Ontario and we'll have to live with all of that air pollution because it will drift right over here, what is the intent to try and stop that kind of activity? It's a very disturbing comment to read in the press. I can't agree with it, but I'd just like to hear your comments on how we're going to control the extra precursors to ozone coming across Lake Erie, Lake Huron etc.
Hon Mr Wilson: The Ministry of the Environment is advising us, and they are still doing consultations. In fact, many of the environmental representatives who will appear before you -- and I hope everybody's an environmentalist, by the way.
Mr Galt: Absolutely.
Hon Mr Wilson: It might be appropriate to ask those representing certain associations their involvement in the process with the Ministry of the Environment, because I think it's been fairly extensive.
Our objective in a competitive market is to level the playing field. We are looking for regulation that ensures that people can't dump dirty hydro into this province. Currently they can. Bill 35 gives us the teeth to ensure there is a level playing field. We certainly do not want cheap, dirty electricity coming into Ontario and unfairly competing with our own companies, in particular Genco, for example, and we will absolutely ensure that the rules are fairly applied to all. They won't get a licence to sell electricity into this province if it doesn't meet our environmental standards.
That's the goal. As you know, it's easy to say that; it's a rather complicated thing to put into law and to put into practice. Again, we buy hydro from the United States every day in this province to meet peak demand, and those securities are not in place in law today. We'll be looking to this committee and others to help us draft the regulations to ensure that those who want to sell electricity into this province meet our environmental standards.
Mr Galt: I think there are two points that have come out of this discussion. One, pre-Bill 35 we are able to purchase or have dumped into Ontario dirty hydro; two, up until now it has really not been possible to put green power on to the grid. I think those are two very interesting points that you've brought forward.
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Mr John Hastings (Etobicoke-Rexdale): Minister Wilson, there's a New York Democrat for Congress, Charles Schumer, who is running to try and replace Republican Senator D'Amato in the upcoming senatorial elections this fall. The key, fundamental platform plank in his campaign is considerably reduced rates for the New York Power Authority.
I'd like to know from your own discussions with all these groups you've been meeting with -- the independent power producers, the large power producers, the local electrical utilities, the automotive sector, agrifood, retailing, anybody who has to buy power from monopolistic Ontario Hydro right now must be telling us what are the missed opportunities in terms of jobs that we're not retaining and jobs that we ought to be attempting to create out of this whole mix in terms of the breakup of the monopoly. I'd like to know what would be a very conervative estimate of jobs in some of those sectors and in the others you may have looked at where we're losing jobs, and where we need to make these fundamental market reforms for creating some jobs.
Hon Mr Wilson: It's a very good question. We have a $10-billion electricity industry right now in the province. We conservatively estimate that over the next 10 to 15 years we will see $10 billion to $12 billion worth of new investment in the sector. Much of that is to modernize the electricity grid itself in the province. I think you'll see new interconnects between not only our neighbouring provinces, but between ourselves and the United States, so there will be an upgrading of the wire infrastructure in the province.
We expect that a tremendous amount of that $10 billion to $12 billion will be in the generation business. TransAlta, as you know, one of Canada's very large energy companies, has already announced and proposes to build a $400-million cogeneration plant in Sarnia. When you appear in Sarnia I think you'll find that the people of Sarnia, the small businesses on the main street, are extremely excited about this legislation. In fact, that day that we're in Sarnia, I'll be speaking to the chamber of commerce at their invitation because they're very optimistic. That type of investment, $400 million signalled already by TransAlta, is unprecedented. I think that would be the largest or the second largest cogeneration project this country has ever seen, and we expect to see more of it.
It's also good for the environment. They're using high-efficiency gas to generate the electricity. That's certainly better than coal and other fossil fuels.
We have a standard formula, which the assistant deputy minister and I can't remember at the moment, in terms of what $10 billion or $12 billion means in jobs. In the United States already we've seen a tripling of the number of jobs in the energy sector since many of those states began to introduce competition over the last few years. Mind you, many of those jobs are on the marketing side, but there have also been significant numbers of new employment in the generation, distribution and retailing business.
The Chair: We'll move to the official opposition, Mr Conway.
Mr Conway: Thank you very much, Madam Chair. I want to share some of the time with my colleagues Mr Kwinter and Mr Phillips.
Thank you, Minister, for attending this morning. I'd like to get directly to my questions. When does the current electricity rate freeze in Ontario come to an end?
Hon Mr Wilson: At the end of the year 2000.
Mr Conway: When do you expect your competitive electricity policy to effectively begin?
Hon Mr Wilson: Sometime in the year 2000.
Mr Conway: So it is your expectation that the competitive marketplace will begin at approximately the same time as the rate freeze comes to an end?
Hon Mr Wilson: Again, the competition start date will be when we're ready, and that's sometime in the year 2000. Clearly the government's policy is that the freeze remains in effect until the end of the year 2000. The competitive market will take a while to develop, though. It will take a while to evolve, probably a number of years.
Mr Conway: Are you prepared as minister today to commit to extending the rate freeze beyond the year 2000?
Hon Mr Wilson: Our hope is for lower prices, and all indications are that there will be lower prices.
We know a couple of things. All moneys coming in to government in the future in this sector will go towards paying down the debt. Every dollar we save there will help to lower consumers' electricity bills. Secondly, I haven't talked to any of the 275 municipal electrical utilities that are in amalgamation discussions around the province -- they're doing those amalgamations because they are achieving cost savings, and they are passing those savings on to their customers.
So in those two areas alone, we expect to see prices lower. They have to go lower. We're out of whack with our competitors. Ontario Hydro's prices have gone unchecked for far too long, and a competitive market will bring some discipline to those prices.
Mr Conway: Minister, I think all of the committee shares that hope and expectation, and I share the view about competition. I support key ingredients of this policy. But the devil will be in the details. Thanks to your Market Design Committee, we have now before us some very specific, telling evidence about what has actually happened in places like England and Wales and New York and California and Argentina and Australia.
It is with that in mind that I ask you today, what specific guarantees are you prepared to give to the residential and farm consumers of electricity in Simcoe county or in Renfrew county that in the period between 2000 and 2005 their residential and farm rates will not go up beyond what they were paying at the beginning of the competitive marketplace in mid to late 2000?
Hon Mr Wilson: In places like New South Wales in Australia, England, California, because they dickered around for a decade, the government finally gave a 10% across-the-board cut, because they knew prices would go even lower than 10%, so it was very safe for the government, in hindsight almost, to legislate that 10% cut. Prices have fallen anywhere between 8% and 40% around the world. We have no experience at all of prices going up. I guess my best guarantee is to review the history around the world that shows that competitive markets bring lower prices.
Mr Conway: I'd like to then turn to that. I accept what you and Mr Dorey said about the expectation that there will be savings on the distribution side. Absolutely. That's a given. But as you yourself a moment ago said, 70% or more of the average electricity bill has to do with generation. That is the single biggest item.
Minister, it has struck some of us, me particularly, that you, in developing this policy that is contained in Bill 35, chose to ignore critical advice you received from the Macdonald committee in May 1996 and you have ignored advice tendered from the Market Design Committee, namely, that if we are going to get significant benefits from competition, we as a Legislature and we as a province, Ontario, must deal with the fact that as we head into this competitive marketplace, Ontario Hydro has a massive market presence of approximately 90%.
So my question is, why did you choose to ignore the advice of the Macdonald committee and of your own Market Design Committee and not break up Genco's massive market power beyond the very limited breakup that is contemplated with just the two companies, Genco and Servco? How is that going to help produce the lower rates we all want, particularly for residential and farm customers in places like Simcoe and Renfrew county?
Hon Mr Wilson: With all respect, Mr Conway, the Market Design Committee's report does not recommend to the government breakup of Ontario Hydro further than what's contemplated by the government. The part that you quoted from in the first hour this morning is the early pages of that report in which it talks about one of the ways to deal with market power being to divide the entities. It goes on, though, as I think Mrs Johns pointed out after your comments this morning, to post a menu of other ways to deal with market power.
It reeks with confidence, the entire report -- and Professor Daniels himself in presenting the report to me, and the unanimity of the Market Design Committee and the experts advising them and us -- that it's very possible to deal with the issue of market power without further breaking up Ontario Hydro.
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We're not interested in further devaluing Ontario Hydro. It needs to be a very strong entity in order to beat the Americans in the electricity market. We expect the successor company to Ontario Hydro, Genco, to be one of the 12 to 15 major power producers on the North American continent. The United States, as you know, right now is likely to divide up into about 12 or 15 major power generators with all the amalgamations that are going on. These are huge power companies. You can't go in there with a thin stick. You need a very strong, very healthy company.
Ontario Hydro will have to give up probably in the range of 40% of its domestic market share here in Ontario in order to level the playing field and to allow new entrants to generate electricity in this province and to ensure that we have a competitive market. They owe it to us, the shareholders, each and every Ontarian, to replace that market share with new business in the United States and elsewhere. That is their vision and that is what the new people at Ontario Hydro and its board are aiming to do.
The decision was taken to try and have a very healthy and a very large generating company, a very diligent and very strong Independent Electricity Market Operator and the Ontario Energy Board to ensure that there isn't gaming in the system, to ensure that there isn't abuse of market power, and that's what the bill before you does. It contains a menu of ways of dealing with market power. It brings new tools to the new marketplace for the regulator, like the Ontario Energy Board and the market surveillance panel of the Independent Electricity Market Operator to use as hammers, if you will, if there is any abuse of market power in the system.
But you and I own Ontario Hydro and we want it to succeed. At the same time, we need to introduce a competitive market in Ontario. We can only do that if Ontario Hydro succeeds with its plans to enter the North American marketplace in a big way.
Mr Conway: Minister, what do you believe the stranded debt of Ontario Hydro to be today?
Hon Mr Wilson: I don't know. We're waiting for --
Mr Conway: I accept that you don't know. When do you expect to know?
Hon Mr Wilson: Later in the fall. We need to know sooner rather than later I think is where you're going, Mr Conway --
Mr Conway: I understand that.
Hon Mr Wilson: -- in order to, as Mr Dorey I'm sure must have explained this morning --
Mr Conway: But later this fall -- my time is limited. I want to make the point that Mr Dorey doesn't know till later this fall and you don't know till later this fall. The committee has to know. The people of Ontario surely have to have some details around this multi-billion dollar calculation before this committee, as a trustee for the public interest, can make some determination as to the efficacy and the appropriateness of some very important rate-related decisions that we will make. How can this committee proceed to deal with this bill without having that information?
Surely, Minister, we're being asked as a committee to sign a mortgage on behalf of the electricity ratepayers in this province without knowing what the interest rate is and without knowing what the period of amortization is. How is it that the public can be well served by at this late date not having any specific idea as to what that stranded debt's going to be and how precisely it is going to be equitably apportioned across all rate classes? This has to be a very important question for all fair-minded people.
Hon Mr Wilson: Could I just say in fairness to Ontario Hydro that not only have we had the rate freeze in place since this government came to office in 1995, and that will continue to the year 2000, but Ontario Hydro has never missed a debt payment and it continues to pay down its debt. As we speak, debt is going down. We've not added a penny of new borrowing as a cabinet since coming to office in 1995. As you know, all significant new expenditures would have to be approved by cabinet and this cabinet has not added to Ontario Hydro's debt in any way.
Also, we would all like to know exactly what the stranded debt or the residual debt is, but it isn't, if I may say so with respect, a figure you necessarily need to know to deal with Bill 35. It would be nice to know. I think we are familiar with the ranges that are out there, but the actual legislation before you doesn't need a figure on stranded debt to be dealt with. What it does say is that the debt will continue to be dealt with in a transparent and fair manner and, yes, it will be apportioned across the successor companies. For the first time the government's committing that all moneys coming in through corporate taxes, payments in lieu, will go aggressively towards paying down that debt.
Bill 35 is a debt reduction bill and it ties the government's hands to ensuring that every penny of revenue coming in in the future in the electricity sector to the government of Ontario goes aggressively towards paying down that debt. That's good news for prices and good news for customers.
Mr Gerry Phillips (Scarborough-Agincourt): I fundamentally disagree with you. We need the numbers. I just cannot believe you would say that. We're dealing with a bill that will make fortunes for people in this province and could potentially leave the taxpayers with huge bills. I say to you, Minister, we do need the information. I assume it's a very quick question. We need the stranded debt information before we approve this bill. Will you undertake to give us that? You have indicated today that you expect Ontario Hydro will lose 40% of the market and will sell that electricity into the US. Will you give us the studies you've done that prove that those generating plants will be competitive under some reasonable assumptions on how you're going to assume stranded debt? You've indicated that Ontario Hydro is paying down debt. I see that in the last two years Ontario Hydro has lost a total of roughly $8 billion. The debt has been barely paid down at all and there's no indication on the Hydro books that they can service and pay down the debt on existing rates.
I'm saying to you that we need the information. Rhetoric and your hundred speeches are all very nice and good but we want to make decisions on the basis of facts. Will you undertake to give us those facts before this bill is approved?
Hon Mr Wilson: I'm very hopeful that finance will have that information available by the time legislators vote on the final version of this bill, which, if all goes well, I expect would be in October, given that the House is coming back in late September, I believe. We certainly want the information ourselves at that point.
Let's not leave the impression out that Ontario Hydro has missed any bill payments; 30% to 40% of the cost of Hydro coming into your home today is debt servicing. This bill doesn't add any new debt. In fact, it sets up an aggressive regime to pay down debt, which is a direction, frankly, that previous governments should have taken and should have done sooner rather than later. However, we are dealing with it in this legislation.
At current Ontario Hydro prices, there's no problem paying off their statutory debt obligation.
Mr Phillips: Give us the information.
Hon Mr Wilson: It's given that prices are expected to go down, which is why finance is out discussing with everybody that has an opinion on this. It's very difficult to guess what the new low prices are going to be; therefore it's very difficult to put a figure on.
I think Mr Dorey probably explained that the litmus test will be after the successor companies are set up, when they go to the markets for a credit rating. That's when we'll know whether we've pegged the residual stranded debt at a proper figure. As I said, we expect to hear from these hearings more information that will be helpful in pegging that number.
I can't think of a more transparent process, though, with Dr Bryne Purchase, the former chief economist of the province.
Mr Phillips: Will you file the information?
Hon Mr Wilson: He has consulted with everyone, including yourselves, all political parties.
Mr Phillips: Will you file the information, though, Minister?
Hon Mr Wilson: There is a paper available that was just published, as you know, by finance.
Mr Phillips: I asked you for three specific pieces of information. Will you provide those?
Hon Mr Wilson: I'll be happy to present that paper to you.
Mr Phillips: No, will you answer the three questions?
The Chair: Minister, we're just out of time, if you would just wrap up, please.
Hon Mr Wilson: Every step that's been taken to date and everything that we know to date is in the paper that the Ministry of Finance released last month. We look forward to people's comments. Again, we're all eager to know the final figure and we'll have that just as soon as humanly possible.
The Chair: With that, Minister, we thank you very much for taking the time to come before the committee this morning. We will, as you wish, seek public comments on this bill.
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ENCORE ENERGY SOLUTIONS
The Chair: Our next presenters this morning are representatives from Encore Energy Solutions. Welcome. Please make yourself comfortable and introduce yourself, your position and your colleagues as well. The time allotted for your presentation is 30 minutes. You may use that in any way you wish, either all for presentation or you may leave time for questions from caucuses.
Mr Martin Merritt: Good morning, Madam Chair, and thank you for having us. It's a pleasure to be back here in my hometown. My name is Martin Merritt. I'm the director of portfolio management and trading for Encore Energy. We are a Canadian company based in Calgary, Alberta, and have been working actively in deregulated electricity markets in Alberta, in California and most recently here in Ontario, and look forward to doing more of the same.
I will be making the presentation, although I'd like to acknowledge my colleagues who will be available to answer questions following the presentation: Bruce Sharp, who is our manager of power services and is based in Cambridge, Ontario, just west of here; and the general manager of our business, Paul McMillan, who is based in Calgary with me.
I see we have a handout coming around. Are we going to plan to speak then to the paper handouts rather than any other audio-visual?
The Chair: No, as you wish. Do you have slides?
Mr Merritt: I do, but I'm quite happy, if there are enough handouts to go around, just to speak to the paper that's in front of everyone.
The Chair: It might be easier. OK.
Mr Merritt: Let me just start by adding a little bit to my own background and then I'd like to introduce our company.
As I said, my name is Martin Merritt. I'm a mathematician by background. I went to school just west of here in Waterloo, Ontario, and have spent pretty well all of my 20-year career in the energy commodities industry, based mostly in Calgary, and specifically in the last three and a half years focused on electricity in North America's first deregulating markets, Alberta and California, and in the last year focusing here on Ontario with the expectation that there will be opportunity here.
The business I work for and for which I'm the director of portfolio management and trading is a three-product-line business. We are engaged in the business of portfolio and risk management. That involves consulting, training and outsourcing services to electric utility companies both municipally and investor-owned in deregulating markets.
Our power services business is focused on end-use consumers from the medium to the large size, and providing them with consulting services and commodity products and trading, which is essentially a manage-risk-for-profit kind of business not unlike foreign currency trading or interest rate trading or other energy complex trading.
As I indicated, we're active in Alberta, California and making initial forays here into the Ontario market.
We'll flip to the second slide. Just to give the committee some advance description of where we're going to go here, I only have six slides. I would like to cover the high spots and provide at least half of the time that is allocated for questions. You can feel free to interject if you wish or save them to the end, whatever is your pleasure.
Our experience has been that competition always, always leads to lower prices. We have seen that in the natural gas industry, which deregulated beginning in November 1985, in the airline industry, and most recently in the telecommunications industry. It offers much greater choice to consumers than monopoly providers will ever make available, new products and services, and a fundamental redistribution of risks. We'll talk a little bit about that later because that does create some issues.
I think it's appropriate to set my remarks off in that context, that it is our expectation, based on experience, that competition will lead to lower prices, greater choice and new products and services. There is absolutely no doubt about that or we would not be here.
The structure that follows is that I would like to recap some of the lessons we have learned in Alberta and California, and then offer some opinion on what we have read from the Ontario Market Design Committee and offer opinions about what we believe will and will not work from among the recommendations that are on the table now.
To recap, Alberta wholesale competition, as you heard earlier today, has lowered prices. There is absolutely no doubt about that. In 1994 and 1995, prior to the opening of wholesale competition in Alberta, prices were averaging -- the marginal costs; this is excluding the fixed costs -- in the $17 per megawatt hour range, and in the first year that wholesale competition opened up, they dropped to $14.50.
As you may know, Alberta's economy has been booming for the last couple of years. A record load growth has eaten up the supply overhang that regulated markets inevitably build. That has improved the efficiency of the total system, but as we have eaten up that supply overhang, prices have now begun to rise. They will be abated when new generation comes on line. Unfortunately, the delay to contemporaneously introduce retail competition in Alberta has been a major mistake and market power remains a problem in Alberta. The fix has been passed in legislation now and will have effect over the next three years.
The end result in Alberta is that because the government made the choice to deregulate the wholesale and retail markets separately, with the wholesale preceding, the benefits of competition did not flow down to consumers. Municipal utilities by and large enjoyed the initial windfalls of wholesale competition, but were not forced to flow those benefits through to retail customers, and so the benefits, while they were there in theory, remained trapped with the MEUs.
Now that those benefits have remained trapped with the MEUs, new generation has not been incented, prices are beginning to rise and volatility is beginning to rise. The MEUs, which naturally were advocates of wholesale competition but not retail competition, are now facing volatility risks that they have neither the skill, appetite nor mandate to manage.
Finally, without access to end-use customers and reservations about the fairness of the market, no significant new generation is under construction. So I think Alberta was initially on the right track. The major shortfall in their strategy was to not open up the retail market at the same time they opened up the wholesale market, and they did not deal well with the issue of market power despite knowing full well that it was going to be an issue.
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Let me just recap a little bit about the California experience, and then I'd like to contrast that with what we see on the table for Ontario. Alberta, like Ontario, made the decision not to force divestment. It was a practical, political and fairness decision. California did not go down that path; in fact they did force divestment, so there was a little more heavy-handed approach to how they were going to undertake deregulation. I think that's well documented in the Market Design Committee's reports.
One lesson they learned was that they simultaneously opened the wholesale and retail markets for competition. They did that despite the naysayers who said the lights would go out if you tried to undertake something so ambitious. They pulled the switch this March 31 past and the lights did indeed stay on. Their power pool has actually exhibited some hours where the price has been zero, if you can believe it.
The point I'd like to make about California's experience, and it will follow on some questions I heard earlier today, is that they had very strong consumer protection components in their legislation, virtually mandating 10% price reductions. In fact, the protections for consumers were so strong that it has been impossible for new retailers to make any money. This overzealous commitment undoubtedly felt good at the time the legislators made it and it has undoubtedly generated short-run benefits for consumers, but at the expense of ruining the competitive environment that is necessary to generate the long-run objectives the legislation had for them. We've had a major marketer pull out of California already, and I would imagine that the legislators are rethinking that aspect of it. Competition is good, and certainly consumers who have paid the freight to date in a regulated environment ought to benefit from the assets they have caused to be put in place, but it's possible to get so overzealous with the commitments that you ruin the competitive market that's designed to generate the long-term benefits. I think that's one of the key lessons from the California experience.
Let me just comment a little bit on the market design we have on the table here now. First off, I cannot emphasize strongly enough that the fundamental goals and sense of urgency that you have are well founded. You are sufficiently back from what I would call the bleeding edge to have had the benefit of learning from the mistakes that were made in Alberta and California, but you are well ahead of the vast majority of jurisdictions in North America which are considering deregulating their electricity environments.
I think the OMDC has been successful and to a large extent the government has been successful at taking their advice in embracing the key design elements that have been proven elsewhere and avoiding the ones which have not worked elsewhere. Specifically, there is the creation of a pool market with the ability to do some bilateral transactions overlaid on top of that. The creation of an independent market operator is absolutely necessary and I think has been proven in every market worldwide that has gone this route. It's natural to retain both the transmission, the high voltage and the distribution wires as to regulated monopoly. That's a road most other jurisdictions, or all others that I know of, have taken and I think that's a wise and obvious choice, frankly.
Simultaneous wholesale and retail competition: Despite the fact that it takes longer to do it and it's more complicated, it is absolutely, positively the only way to do it. I think Alberta and California are the only two jurisdictions you need to look at to realize that's the way it has to be. There is no other way to flow benefits to end-use consumers other than to open them up to competition simultaneously. There is no other way you're going to attract new investment and cause people to build generators if they don't have access to end-use customers.
Lastly, the potential for congestion pricing: The whole model of congestion pricing has been well developed in California and I think it's a wise choice for a province as geographically and industrially disparate as Ontario.
In summary -- and I am going to talk about some reservations I have on the next slide -- our high-level comment on the OMDC's work and Bill 35 is that the current proposal is well positioned to create a three-way win: for consumers, for shareholders and for taxpayers. You're very fortunate indeed here in Ontario that shareholders, consumers and taxpayers are virtually one and the same, which is not the case in very many jurisdictions. In some respects it makes the difficult decisions you have to make around stranded debt quite a bit easier than they would be otherwise, because it's a question of deciding which hat the same person will be wearing when he takes the hit for past mistakes. Let me just focus a little bit on some of the outstanding challenges that I see for you.
I am not going to comment on the practical or political wisdom specifically of the choice to not break up Ontario Hydro. Let me say this, though: It is a very, very difficult problem and absolutely fundamental that the issue of market power be solved and be seen to be solved by all would-be participants in this marketplace.
The bag of solutions that has been put on the table I think in principle is feasible. The proof, however, will remain in the pudding and the devil will be in the detail. Addressing the issue is absolutely key if we're going to harvest the benefits that competition promises and if we're going to attract new investment.
We have quite a kit bag of tools that the OMDC has advocated. Some of the tools are conceptually similar to the fix Alberta legislated this past spring and which will take effect over the next three years. At a minimum, you've avoided the first round of ill-advised designs that Alberta went through and you've jumped right to the second step. I have to say I'm confident that Alberta's recently legislated fixes will work. I am disappointed they're going to take three years to be implemented, but obviously I have to be equally confident that you've latched on to the mark 2 version that took Alberta one extra go-around to get sorted out.
There is a large array of tools available and I think the OEB and the legislators and other market participants are going to have to be very on the ball about using that entire kit bag of tools to solve the problem, given that divestment has been ruled out.
Credit risk: An unregulated market will fundamentally redistribute risk, in particular credit risk. Right now the risk that I do not pay my electricity bill is not borne by my neighbour. It's borne exclusively by me because my municipality by and large has the right to add my unpaid bill to my taxes and collect it if and when my property is ever sold.
In the future the risk that I don't pay my bill is going to be borne by all of us and my neighbours in much the same way that the cost of shoplifting is borne by all shoppers.
The market design report deals with -- I heard some questions earlier this morning dealing with the risk LDCs will have in dealing with me as a private marketing company, but I don't see very much written on how I am going to deal with the risk that my customer doesn't pay his bill, given that I do not have the same prerogatives to add it to the tax bill that the municipality which was previously serving that customer might have. Frankly, that's going to cost money in much the same way that a store has to add a little bit to all of its merchandise to pay for the stuff that walks through the door unpaid for. It's a small point, but it's one that we have to recognize will be a factor in an unregulated market.
The meter monopoly: We are directionally very supportive of the idea that meters ought to be a competitively procured and installed service. We are a little disappointed to see an artificial cut-off on the size of consumer that ought to be allowed to have XYZ company come and install their meter. The 50-kilowatt cut-off that is proposed right now perhaps make sense based on the current economics of meters today, but let's not preclude the creativity of meter manufacturers. If a $10 Internet-readable meter were to be invented tomorrow it would reinvent the way in which the retail business could work.
Rather than regulate or legislate artificial cut-offs on where the meter business will be competitive, our advice to you would be to let technology move at whatever pace it's capable of moving at and allow the meters to be competitive. It's quite clear that as a homeowner I'm not going to spend $500 on a meter, but if a $50 one comes out next week I might. Let's not preclude the possibility. Our advice would be to reduce the artificial ceiling on the portion of the market that has to procure meter services from their LDC.
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Lastly, I'd like to comment on what I'll call derivative paranoia. It's a very unfortunate word and I think it would be nice if we could somehow eradicate it from our vernacular and invent some other word, but it does tend to come with a lot of baggage.
Financial instruments -- let me call derivatives that, which they more appropriately are termed -- are a natural by-product of unregulated markets in much the same way that automobile insurance was a natural by-product of a growing number of automobiles in the early part of the century. With the faster speed and the greater potential to hurt people, insurance was a natural by-product of that phenom.
Financial instruments for managing the price risk associated with a volatile commodity market are a very natural evolution. The risk that is created by derivatives is not so much inherent in the tools themselves as it is in the price fluctuations that are created by the exercise of market power by a dominant player. There are necessary elements, by whatever name we call them. I realize it's not part of the legislation but I would just encourage us not to spend a lot of time trying to stickhandle around derivatives or pretend that they aren't there or create nomenclature exercises that make them appear to not be necessary. They are a natural by-product of a market and all players in the market will learn how to use them over time.
That's probably it for prepared remarks. We'd be very happy to answer any questions you may have.
The Chair: That leaves us with just about three minutes for questions from each caucus. We'll begin with the government caucus.
Mrs Johns: Thank you for being here with us today. We certainly appreciate it. I'm sure that like many of my colleagues here I've been out with a number of my PUCs and MEUs, talking to them about what they think of the bill. I was surprised by your remarks about derailing retail competition. I know the government spent a great deal of time thinking about whether we should move forward at the same time with wholesale-retail or whether we should go other ways. You seem pleased with the decision that was made.
You made a comment about the MEUs and how they made windfall profits as a result of this in other areas. Can you explain that to us a little bit so we can understand where they're coming from when they make this kind of presentation to us?
Mr Merritt: Sure. Among the strongest advocates for a two-stage evolution in Alberta were the MEUs, for the simple reason that an MEU is an organization that by definition feels that competition is good for their suppliers but not for their customers. They know that competition will lower their costs but they're very loath to flow the reduced costs to their customers. So they have all manner of arguments why their suppliers ought to compete for their business but why other people ought not to compete for their customers. The only way to meet the government's objective of flowing the benefits through to customers is to simultaneously open the retail competition when the wholesale opens.
Mrs Johns: Their argument would be that it's happening way too fast and that there are going to be all sorts of fallout as a result of that. Do you buy that argument?
Mr Merritt: Not a bit. We've seen this in California, and mercifully the Legislature there had the wherewithal to put up with the noise and go ahead, and indeed the lights stayed on. But the basic thrust of the arguments that municipalities use to thwart progress is what I'll call "orderly transition." They have all manner of orderly transition types of arguments but at the end of the day the two-stage implementation in Alberta caused problems; the one-stage implementation in California introduced real competition and indeed the lights stayed on. I rest my case.
Mrs Johns: Your premise when you started here was that the prices were going to go down. You said competition did that. My colleague across the way has been pushing the government -- well, pushing the minister or the last two -- to suggest that there should be some cap on pricing or to set a level of pricing because of concern, as we all should be concerned, about the consumer. What confidence can you give us that the price will go down and that we have done the right thing in the bill by moving forward and not putting a cap on pricing?
Mr Merritt: In California they tried to legislate the savings and at the end all they did was scare away the people who were going to come into the market to generate the long-run savings. Certainly price caps, bid caps are tools that the OMDC have put on the table as possibles, and I wouldn't rule those out. I would be reluctant to entrench them in legislation. People's willingness to invest and come into this market is going to be based on their perception of how it will work, and I think legislation is a pretty heavy-handed way. I think you have to have confidence that the supply-and-demand balance, the new generation and the creativity of the private sector are going to push prices down. If you try to legislate what you believe will happen, I think all you're going to do is prevent the goose that will lay the golden egg from coming into the market in the first place.
Mrs Johns: One of the concerns we had when we were doing this was the metering. What we didn't want to have was seven meters on a person's house. We didn't want people to be changing meters and flipping quickly. What will stop that from happening? Why do you say that we should just allow this to open up?
Mr Merritt: It's not a question of having seven meters on a house. It's just a question of allowing whether or not my meter will be provided and installed by Toronto Hydro or ABC Co. There will only be one meter, there's no question about that, and it needs to be a revenue-approved meter so it's technologically sound. The issue of who owns the meter needs to be the subject of competitive forces.
Mr Monte Kwinter (Wilson Heights): Mr Merritt, let me talk to you about competition. My definition of competition is unfettered competition. You produce a product and you sell it at the cheapest price at which you think you can continue to stay in business.
We have a situation where in Ontario they talk about competition but it's a different kind of competition in that the government is saying, "Yes, you may come into our market but everything that you do will be subject to a surcharge." That surcharge in fact is going to be called a competition transition charge and that is to pay for our past problems. The other problem with that, of course, is that's open-ended. We don't know that's going to be.
We talk about stranded debt and the government is going to make payments in lieu of taxes to deal with that. But there's also the potential of stranded assets and stranded decommissioning charges on our nuclear facilities, all of which can be apportioned to everybody that comes into the market. Even the cogeneration plant that the minister talks about in Sarnia is going to be subject to that same surcharge. How do you feel that is going to impact on the desirability of outsiders to come in to compete in this market?
Mr Merritt: I don't think it will impact at all, because it's supplied across the board. The issue of whatever the figure is, $20 billion or so in money that we wish we would not have spent, with 20-20 hindsight, that stranded debt is a fact. The issue of how to apportion that historical figure among shareholders, ratepayers and taxpayers is really a public policy decision that I'm sure the Legislature will make.
For new market entrants, the real benefit in Bill 35 relates to what we will create in the future. With whose money will the next generator be built? At whose risk will the next generator be built? What will be the price of the next megawatt of generation coming into the market to serve the Ontario load?
The objectives of the bill will be adequately served by making sure that the incremental investment and the incremental generation required to service the load is the product of a competitive environment.
The issue of how to allocate $20 billion worth of past mistakes I think is largely an administrative one. As I said at the outset, in Ontario, because taxpayers, ratepayers and consumers or shareholders are one and the same, it's a public policy issue but it's not going to affect the way in which the next increment of generation is competed for or how it's priced. All competitors are going to have to deal with the CTC. California has the same feature in their market.
Mr Kwinter: What I'd like to do is get your comments. I agree with you that it's not going to impact on what happens in Ontario because everybody will be subject to the same surcharge. How is it going to impact on competitive jurisdictions that don't have that debt to deal with in the way of attracting new investment of hydro users, not necessarily hydro generators?
Mr Merritt: I'm not sure I understand either the question or the concern. There's something I'm missing.
Mr Kwinter: You're saying that the hydro generators will play in the game because everybody is subject to the same rules and if there's a surcharge it applies to everybody. But that, in my feeling, is going to raise the price of generation in Ontario vis-à-vis other jurisdictions that don't have that same debt problem that they have to recoup, which means that the users of hydro -- new users, new industry that comes into the province -- will look and say, "Why should I go in there and have to pay for their past mistakes when I can relocate in a jurisdiction that doesn't have that surcharge?"
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Mr Merritt: The issue of stranded debt is a pan-North American one; there are very few jurisdictions in North America that do not have stranded debt. On the margin, new generation is going to cost whatever the market dictates. The issue of whether or not the government should take a $20-billion or $30-billion writedown or whether they should divest of Ontario Hydro is really an allocation issue. On the margin, it is not going to affect the way in which the competitive marketplace works.
The money that has been spent, perhaps unadvisedly, in the past is a done deal. I think what you're talking about is a public policy allocation issue, not something that will have the least impact on the way in which the incremental generation is decided on or built.
Mr Paul McMillan: Mr Kwinter, I think you've just referred to the fact that if I was deciding to build a cogeneration plant in Sarnia and it was susceptible to a CTC or a transition charge and that wasn't the case in Michigan, then ultimately, as an investor, one who's putting up capital for the cogeneration facility, I am going to have to deal with where can I find the best return. In that circumstance, if the market is such that playing in Ontario means that it's a disadvantage compared to playing in Michigan, then I think I would look at making an investment outside of the province in that circumstance. I think that's where your question is leading.
Mr Merritt: But the CTC will be funded by the ratepayer. I'm not a physical generator, but if I were, I would be attaching the CTC to the charges I was paying. No matter how you slice the $20 billion, no matter how you charge for it, it is going to come out of the pocket of the -- pick your favourite hat -- shareholder, ratepayer or taxpayer. That's all the same player. Now whether you collect it with a tax, whether you force industry participants to have a surcharge on the energy that they produce, at the end of the day, if I'm a constructor, an operator of a generating facility, I'm going to sell at a rate which reflects my cost of capital and cost of fuel and all those things. If as an administrative requirement you ask me to collect the surcharge from the people I sell to, I'll do that. But the money is coming from one, and only one, place at the end of the day.
The Chair: To the third party, Ms Churley.
Ms Marilyn Churley (Riverdale): Thank you very much for your presentation. I would like to follow up on the information you gave about California and the fact that you said that very strong consumer protection made it impossible for new retailers to make money. I assume from what you said in answer to a colleague's question that part of that was the actual trying to regulate the cost of energy. What other consumer protection measures were in place that actually made it impossible to make money? We want strong consumer protection here; we want strong environmental protection as well.
I'm concerned that in trying to strike that balance we may lose some of that, especially where -- we're standing on a bit of a cliff here -- we don't have a lot of the regulations in place yet. Although overall it is a good idea to be going in this direction, I'm concerned about that statement and what it means to consumers here, the bit about: "Trust us. Competitively we will make sure the costs go down."
Mr Merritt: Sure. The major investor-owned utilities in California were required to offer 10% rate reductions to their customers.
Ms Churley: Right away?
Mr Merritt: Right away. As a result, as a wannabe retailer, I come into that market having to buy power out of the California Power Exchange and immediately turn around and sell it in order to compete with the incumbent investor-owned utility for less than I paid for it. I have to have a lot of faith in order to, basically, buy market share on a money-losing basis, that somehow, someday that's going to turn around. As a result, people are staying away in droves.
Ms Churley: Did California bring in emission caps and strong environmental regulation as well?
Mr Merritt: They have always been a leader in that regard, as you know, from the automotive side. They have more wind hydro and geothermal generation in the state of California than in any other jurisdiction in North America.
Ms Churley: Did you find that opening up the market was good or bad or neutral for the renewable energy sector?
Mr Merritt: I don't think we've seen it yet. They only opened up at the end of March and the investment cycle for new generation technologies of course is measured in terms of years, not months. California has an enormous hydro impact and the spring is when hydro flows. It has been a wet year and they've had a lot of hydro flowing. In terms of investment decisions, we haven't yet seen the impact that will make.
Ms Churley: Could you support, for instance, strong emissions caps across the board in this legislation?
Mr Merritt: That is such a complex question that relates to many other things that I can't comment on today related to emissions trading mechanisms. The whole idea of how to regulate emissions is a very broad subject and to give you a narrow comment on that I just think would be inappropriate, but there are financial ways to deal with emissions issues.
Ms Churley: Finally, just to get a clear answer on the question previously put, and that is, would you support this legislation in the year 2000 when the rate freeze is ended? Would you support the government writing into the legislation that the rate freeze would continue -- not talking about a reduction but the rate freeze?
Mr Merritt: While I have every expectation of a rate reduction, I think when you legislate a rate freeze or some kind of a cap, what you're really saying to all would-be investors who come into this market is, "If you bring your energy and your talent and your capital and take a lot of risk, we would thank you for it and in return we would freeze the amount that you could potentially earn down the road."
You're not going to attract investment if you legislatively cap people's upside. I have every expectation that prices will decline because they have declined in every other market. But the notion of legislatively entrenching that will only ensure that the people you want to come to the party to deliver the benefits will not show.
The Chair: All right. With that, on behalf of all the members of the committee we thank you very much for coming before us to give us your advice from other jurisdictions. We very much appreciate it.
CITY OF TORONTO
The Chair: I'd like to now call upon representatives of the city of Toronto and to welcome Councillor Jack Layton. Do you have colleagues joining you?
Mr Jack Layton: Yes.
The Chair: If you would be so kind as to introduce your colleagues. As I'm sure you know, you have 30 minutes for presentation time. You may choose to use that in any way you wish.
Mr Layton: Terrific. First of all, thank you very much for the opportunity. It's good to be here. I'd like to introduce my colleagues representing the city today. Tom Denes is executive director of our works and emergency services department and Kevin Loughborough is a senior engineer with our department specializing in these areas. I'm here representing our mayor, Mel Lastman, who is unable to be here to present today. I'm his representative on our local utility as well, Toronto Hydro -- you'll be hearing a submission from Toronto Hydro specifically on Friday, I believe -- and I'm chairing our environmental task force.
We've handed out a copy of our brief, and I'd just like to skim through the main highlights quickly so that if you have questions about it we have time for that.
Our main concern is to take full advantage of the opportunities for achieving our city's objectives around smog in particular and around making sure that the most advanced forms of energy supply are available to our consumers. We'd like our city to be famous for its clean energy supply sources and we'd really like to be known as something other than Smogtown. We prefer Hogtown to Smogtown, but we're rapidly becoming Smogtown, as you all know. In fact, our incidence of smog this year is up quite dramatically.
We've already had 12 smog alert days in the city. I believe last year it was less than half than that and we're only partway through the summer so far. If any of you have asthmatic kids, as I do, you know what a smog day can mean. It can be pretty scary. The medical data I know you're familiar with that has been submitted by the various medical authorities. One of our prime concerns is smog, as you'll see as we run through the brief here.
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First of all, because we're a very urbanized area we have, we think, a direct interest in Bill 35 with regard to environmental protection and our input will really focus on four or five key areas. We have joined the Clean Air Alliance. City council took a very close look at the stated objectives of that organization and decided to endorse them, as did Toronto Hydro, as you'll hear on Friday. That was approved at a city council meeting, which is noted here.
We've had a lot of interest and reports in front of our council on smog and electricity. I think in general our council is becoming increasingly aware of the connection between something we all used to just take for granted, flipping a switch, and our air quality. It's not something that many of us understood all that well for a long time, and I don't think the public has made the connection. In fact, I doubt very many people realize that if they turn on a light or an air conditioner at 4 o'clock in the afternoon, somebody's throwing more coal on a burner or in a furnace down in the south end of Mississauga and that's directly contributing to our smog situation here.
On the issue of electrical generation, naturally fossil fuels are one of the major sources that we're dealing with in producing electricity. It's recognized in Bill 35 in a section supporting the making of regulations to control emissions and to support emissions trading. We very strongly support these kinds of regulations and we'd like to be involved in whatever way you deem is appropriate in helping to set them.
Of course, you know that recent reductions in the nuclear production have resulted in increased fossil fuel emissions from Lakeview and we believe that's one of the reasons why we've had an increase in smog days here in Toronto this year. It's a fairly direct relationship, we feel.
Fossil fuel emissions vary widely depending on the characteristics of the particular generating station. Our information is that the Lakeview plant -- do you all know where that is? Those three big stacks in the south end of Mississauga. The pile of coal out there is quite amazing. It's huge, and I really think most people don't know much about it.
We understand that this particular plant emits significantly more pollutants per unit of electricity produced than other fossil fuel plants operated by Ontario Hydro or other electricity utilities even in the Midwest, and we often talk about the Midwest as that place that we want to avoid the power from, but of course they have a great variety in emissions as well. Actually in 1995, which is the latest information we were able to get on Lakeview, the emissions were 17.5 pounds per megawatt hour of SO2 compared to 10.2 pounds, which is roughly 60% at Nanticoke, so there's a real difference between the plants operated by Ontario Hydro. In the Ohio Valley the range runs from 1.61 pounds, which is a minuscule fraction of our Lakeview situation, right up to 53 pounds, which is dramatically more than our Lakeview station.
What this suggests is that whenever we develop caps and regulations, we're really going to have to take a look at specific installations as we do that and try to construct our caps to phase out or control the dirtiest sources and encourage the use of power from the cleanest sources. The independent agency that's making the selections on power of course can have a huge influence on this decision and we need to set up a regulatory framework where the decisions they make clean up our air. That's the basic proposition we're making.
With regard to emissions caps -- I'm on page 2 -- the Toronto air shed would certainly benefit from the setting of emissions caps initially for NOx, SOx, toxics and carbon. Consideration should also be given to the setting of caps for each generating station or a cluster of generating stations in any particular air shed, in addition to a cap for the province as a whole, because otherwise you could end up with some localized very serious problems, which is what we think we're facing in Toronto right now. And of course the caps have to apply to electricity not generated in Toronto because a significant chunk of our smog -- not all of it -- comes across the lake from other places.
Caps should have a time criterion as well. You probably need daily and monthly caps so that you don't have spikes that send you through the roof because that, combined with certain air conditions, can really create problems here in terms of smog. Provision should be considered in the legislation to allow for special control of emissions on smog alert days. This is not provided for at the moment, and I'd ask you to seriously consider that whenever a smog alert has been declared by either the environment ministry or a medical officer of health special provisions and special caps go into play in those circumstances. It really could make a difference to the health of those facing asthmatic conditions and seniors and so on.
The Toronto air shed could include both the Lakeview and the Hearn. Do you all know where the Hearn is? It's the plant that's not operating at the moment down in our port lands. We're not unalterably opposed, by the way, to opening up the Hearn in some new configuration that would be much more energy-efficient, perhaps using natural gas and perhaps involving cogeneration. Something along those lines may be something we could look at.
Station emission caps should be designed in a way that provides an incentive for the proposed province-wide Generation Corp to use cleaner stations whenever possible. So use the clean ones first and the dirty ones last. If you can structure the regulations that way, that would have a big impact. The Hearn station site in the port area is presently served by natural gas, and shifting production from Lakeview to Hearn is an option that would significantly reduce air pollution, especially if we made it a cogen plant. The efficiencies there could be really terrific. Shifting production to the Hearn would bring combined heat and power into the downtown heating market which is served by our district utility, Toronto District Heating Corp, which is the largest in the country, by the way.
On cogeneration, we believe that the development of cogeneration of heat and electricity in Toronto would improve air quality by increasing the efficiency substantially. Our district heating company of course is really impacted by rising gas prices. If we switch to cogeneration, the efficiencies that they pick up as a result can help to insulate the customer from the impact of shifting gas prices.
You might be interested to know that we've recently approved a cogen facility in North York which is actually going to use compost from multiresidential buildings, which we will digest and use the gas to produce combined heat and power. There's an environmental win-win-win, and we have a private sector partner. It's a terrific partnership, and it might become the beginning, we hope, of a little industrial energy park up there in North York which should bring some business to the city as well, and of course it means we're not sending those tonnes of smelly organic materials to Richmond Hill's landfill either, so we may make some friends up there. We really feel that cogen is an important element of the future here and we want to make sure that whatever regulations you put in place help to encourage that new industrial sector to grow.
On the community energy systems, Bill 35 should specifically, we think, support community energy systems in urban areas and establish highly efficient combined heat and power, cogen, plants. The legislation should support the integration of electricity, heating and cooling systems because the integration has the potential for a major improvement in energy efficiency, lower fuel costs and better air quality.
We've actually, through the Federation of Canadian Municipalities, just come back yesterday from a study in which 40 mayors and senior councillors participated, looking at cogeneration in Europe. Believe me, it's astounding what they're accomplishing over there, and the excitement about what we could do here is growing rapidly.
You've probably also heard about our plan to use lake water to try and cool our downtown buildings and shut down these huge air conditioners. If you're interested in that, I'd be happy to tell you more about it, but it looks like a project that's going to go ahead and will dramatically reduce air emission problems here in Toronto. This is a megaproject of sorts with real positive environmental benefits and it'll finance itself, by the way. We won't be coming to ask you for any financial support.
Ms Churley: You wouldn't get it anyway.
Mr Layton: Well, one remains ever hopeful on all fronts. Don't we all? If we were asking for money, I think Mayor Lastman would be here making the request, not me. He has a turn of phrase.
I'd like to move to the question of renewables. We really do believe strongly that a renewable energy portfolio standard should be a part of what you're doing and in fact we're actively exploring through Toronto Hydro and through the city renewable energy projects.
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Again, in Europe we just found out that in Holland, for example, they're approaching 2% of their supply coming from renewables. They've set 5% as their target for the year 2000 and 10% down the road. The way they've done it is to simply say, "As a part of the mix of generation in our community we want to see renewables enhanced and we're going to have a gradually escalating percentage of renewables to be a part of the mix." They've found that the public there really strongly supports this. They like to know that some of their power is coming from renewables.
It's interesting, you know. We actually have an excellent wind regime along our waterfront that is as good as what we saw in Holland, so the possibilities to look at wind energy, for instance, in Toronto I think are there and we're very actively looking at them. Of course, they have a price of energy in Holland that is rather different from ours, which makes the economics of some of these things look rather different as well. But we think the public would very strongly support it. Gradually, when you create these renewable energy standards, you create markets for new businesses in that field and the price per kilowatt hour is going to drop dramatically as the technologies and efficiencies improve. There's no question that would really help out in our effort.
Speaking to that, we are using a major renewable energy technology ourselves right now, which is collecting landfill gas and producing electricity from it. If we regard food as a renewable resource, which I think we can at least for the moment, then the digestion of that, whether it's in a landfill or, better yet, even in a special digester, this is a renewable -- green, if you will -- approach to producing electricity and we're moving on that. Kevin and Tom can tell you more about that, but it's a big project and we think you can include that in your renewable energy standard.
It's not as though we don't have renewable energies already in Toronto. We do, and they'll be growing very rapidly as we divert more and more organic waste into a process that generates methane to then generate combined heat and power. This isn't some wild notion, that we could have renewable energy. We're not talking about expensive windmills on everybody's houses and photovoltaics on everybody's roofs, although there may be some on some people's roofs if they want to get involved in that. Toronto Hydro will tell you about their program for that.
In terms of the future cost of electricity, naturally we are concerned. We are concerned about any potential rise in electricity prices to our residents because ultimately that affects our competitiveness as a city in attracting economic activity, so you would expect us to be concerned, as I know you are. Cross-border capacity is reported to be approximately 4,000 megawatts, or about 18% of the total at the moment. If the entire cross-border capacity were used to transmit electricity from out-of-province sources to the Ontario market, Genco would still enjoy three-quarters of the Ontario market, with competition initially limited to a few existing non-utility generations. However, the limitation in cross-border capacity should not be increased if an increase would result in the importation of more high-emission electricity from the US Midwest.
We really feel strongly about this. In 1995 the S02 emissions from stations in the Ohio valley and Great Lakes states ranged as high as 53.87 pounds per megawatt hour compared to the 10.2 pounds at Nanticoke, so shifting power to those sources is going to be five times as bad for our environment. We really need you to withstand any pressure to bring in that power, even though it might be lower-priced, because we'll be paying the costs in other ways in our community.
In addition, cross-border capacity should not be increased without providing the conditions in Ontario to support the development of cogeneration at home and community energy systems. The citizens of Ontario, and particularly in the city, will look to the Ontario Energy Board to strike a balance that will support and nurture local cogen and other environmentally advanced power projects. If considerable capital dollars are spent on increasing cross-border capacity first, it may not be possible to build the business cases for the cogen and environmentally advanced projects in Ontario. It's a question of where you divert your resources at the outset and we're just calling for a balance. That's all we're asking for here: Make sure that we're investing at the same time or permitting investment in those projects as well as in the cross-border capacity.
We're recommending that section 65 of your legislation be augmented by enabling text giving the OEB the authority to establish minimum emission standards for out-of-province sources of electricity, in addition to ensuring equal access to respective markets.
I've already talked a little about landfill generation projects so I won't repeat those paragraphs, but we just want to make sure that the legislation facilitates this kind of thing, because if we can collect methane from landfill and produce power and maybe even cogenerated heat and power, this is a very, very positive thing. We want to make sure that the legislation doesn't stand in the way of it. I don't think we have any specific recommendation on that at this point, Kevin and Tom, but we're flagging it and we'd appreciate it if your legislative drafters could have a look at this and make sure there are no obstacles to this very positive direction.
On emissions trading: A market for emissions trading would provide additional revenues to support the business case for landfill gas to electricity and other green and energy-efficiency projects. An emissions trading system should be in place at the start of the deregulated market. I know a lot of work is being done on that right now, both provincially and nationally. We just think it's critical that these things have to be in place at the outset.
The system should be designed to provide credit for early actions so that people who are getting started on innovative projects get some credit for that right now. The city is developing a position on emissions trading which we'll be making available to you very soon.
On distributed generation: The distributed generation of electricity geographically is an alternative way to relieve pressure on developing capacity limitations in the transmission grid. As you probably know, downtown Toronto has a huge demand and the transmission capacities are an issue down there. A separate services corporation responsible for transmission, Servco, should consider local generation as an alternative to investing in additional transmission capacity. If you've got dollars to spend you can either put in bigger wires and transformers, or maybe it makes sense to put new generation closer to where the demand is, and that new generation would be more energy-efficient than the old generation that would be phasing out; for example, Lakeview. So rather than spending on larger wires to take more Lakeview power to downtown, maybe we could put a more efficient energy production system close to downtown. That's the kind of thing we are hoping you will help us to facilitate.
There are some illustrations here that I won't go through which you can read over. But the legislation should define the core business of Servco to include not only the provision of transmission and transformation but also the provision of local generation or the facilitation of that where this is more cost-effective. So you should require Servco to look at the business case for investing several hundred million dollars in new wires and transformers versus putting that investment into new energy generation. If you define their mandate very narrowly just to transmission, then they may miss that opportunity and that would be I think a lost opportunity which would have environmental benefits as well as economic ones.
The last couple of points. On customer choice at the end of our brief: Clear disclosure of generating sources and associated emissions to customers, in addition to you, the Minister of the Environment, would give customers the required data to make informed decisions. I think we've all become used to that kind of labelling on some of the appliances we buy and certainly on the food products. We're always checking to see what the ingredients are. We should do the same thing with electricity, so that when people are buying electricity they know where it's coming from and it's clearly and validly stated. We think that then the market will be transformed, as some consumers at least decide they want to buy cleaner power even if it has a little bit of a price increment. They just decide they're going to make that choice, and if we give them that choice, things will start to move.
Certainly at Toronto Hydro we would want to be known by our customers as a company providing a mix that includes some environmentally advanced programs. We think it's a good marketing technique. Of course we can see that most of the utilities in the States are doing this too. For example, if customers are informed about the environmental benefits of gas-fired electricity generation at landfill sites, they may choose to purchase that clean source of electricity, especially if they live in the same air shed, because we can then draw the direct benefits of a decision they make that will reduce the incidence of smog in the city.
To summarize, we support the provisions in Bill 35 to minimize the emissions from power generation. We request the opportunity to provide some input into the setting of standards when that time comes, regulations and market mechanisms, to achieve these regulations. The citizens of Toronto who live in this highly urbanized area will benefit from actions to improve air quality under Bill 35.
Perhaps I could wrap up. You're probably getting near lunch. We're available for questions as long as you want to give them to us.
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The Chair: You might get some questions. We have three minutes allotted for each caucus. Just to remind you, colleagues, that includes time for the questions and the answers. We'll begin with the official opposition.
Mr Conway: Conway asking and Layton responding in three minutes. Jack can be here representing Mel Lastman. He and I can have a question-and-answer that takes less than three minutes.
Question: Councillor Layton, on the distribution issue in the city of Toronto, one of the questions the committee is going to have to deal with is the boundary. There's going to be a rationalization. There are going to be changes to streamline the whole system, including distribution. I'm not as familiar as I probably should be with what is now the Servco involvement within the city of Toronto. But you've certainly attracted my attention with that observation in the latter part of your brief. We'll have Osborne from Hydro here this afternoon. But what would the view of Toronto city council be in terms of Servco's ongoing activity within, say, the city of Toronto given the maturity of the grid system?
Mr Layton: Right now, and I'll ask Tom and Kevin to help me out with this one, of course we're primarily purchasing power from what would become Servco through Toronto Hydro and then distributing it to our local customers. We don't see Ontario Hydro going direct to our customers. We believe our utility can do a fine job in that area. As far as that goes, I wouldn't see a major change. No doubt we'll have competitors also coming direct to our customers. We expect that and we're preparing ourselves for that. We're going to do fine as long as the framework is set up in a fair way.
I wouldn't quite share the perspective of the previous deputant on the attitude of municipal utilities. We believe we can retain the vast majority of our customers. We have a long history with them and we're going to make sure that we're competing with anybody who wants to try and take them away and we'll compete and succeed in the vast majority of cases. Did you want to add any comments, Tom, Kevin, on this question?
Interjection.
Mr Conway: The minister hinted, by the way, in his testimony, and I could cite the page if you want it, that the distribution costs in the city of Toronto are relatively high.
Mr Layton: Yes.
Mr Conway: And you expect those, of course, to be pressured downward, I assume, in this new scheme of things?
Mr Layton: Yes. We're already working with the amalgamation now of our utilities and that's producing some efficiencies. As well, we're dealing with very old plants. This needs to be recognized, especially in the old city of Toronto. There we're dealing with old technology. They don't make the parts for some of these babies any more. It's literally down to that. It also means that for our workers there are additional health and safety concerns. They're dealing with older equipment. So there are some premiums.
Of course the density and the complexity of the provision of power to a complex of high-rise buildings and institutions downtown is going to be different from, let's say, a suburban subdivision, dramatically different, and everything is worked in close quarters. There will always be some extra costs. But we wouldn't accept the proposition that Toronto Hydro has somehow been a profligate spender. That simply hasn't been the case.
The Chair: To the third party.
Mr Lessard: I just have one short clarification with respect to what you said about the renewable portfolio standards, which I think has some merit to it. If you have some recommendations for changes that can be made to the legislation, we'd appreciate receiving those from you at a later date. You also said there should be greater customer choice in that knowledge of where power is being produced will give customers the choice of whether or not they want to pay more.
I'm wondering whether those two things are opposite to one another. First you're saying the government should regulate a percentage of renewable power and then you're saying there should be consumer choice as well and consumers will choose various options even though they have to pay more, and I'm not sure if that's the case. I think at the end of the day that consumers are more likely to go to the cheapest source. That's basically what I think the market will drive things towards.
Mr Layton: Let me try to respond to that. I see these as complementary mechanisms. The renewable standard would be the baseline and there will be some sellers of electricity who may want to exceed that. I'd liken it a little bit to what you see in health foods, for example. Health Canada sets certain basic standards around the production of foods and most people buy those foods, but some people want something extra. They have special concerns about that issue, and the fact that you've required the labelling gives people that option to go beyond the minimum.
Besides, the minimum should also be a moving target. As the years go by you would expect that standard to rise gradually so that you're continually moving towards a more renewable and more sustainable energy supply. In a sense the two can work together because you get some people used to buying a more advanced renewable power source, then you're building a market for those products and the price begins to come down and then your standard can move up without imposing an unreasonable hardship on those consumers who aren't motivated primarily by an environmental objective. So you get that kind of moving target. There are some very interesting examples in the States where this kind of thing has happened, where moving targets have been set, and it really does open up new markets. Old technologies get phased out more quickly and new ones are brought on more quickly.
The Chair: To the government caucus.
Mr Hastings: Mr Layton, I hear your very rosy scenario about how Toronto Hydro will be able to compete in this new deregulated market, but do you realize that under Bill 35 all the utilities will have to submit their pricing and their costs of operation to the OEB in its new, mandated role? I can't for the life of me see how Toronto Hydro is going to be able to compete on a per kilowatt hour with all the things you have in terms of the old infrastructure in the old city of Toronto, in terms of the disconnected computer models for geographic systems. Etobicoke got way ahead of the rest. North York was following.
In terms of everything you want to do, I think Toronto Hydro faces some major, major cost challenges to be able to be competitive in that deregulated market. When you look at consumer choice you're going to have the option, people will have the option, of consumer choice not just of where the dirty emissions come from but in terms of the actual day-to-day operations of replacing that infrastructure.
I don't know how you're going to do it, because you've got billions of dollars of new replacement that you need not only in the old city of Toronto but in some of the older areas of the suburban cities. I don't know where you're going to get those costs ratcheted down in an economic model that can go in there and compete with whoever comes along as a local retailer, because the MEUs are going to be competing not in a very protected market but in an open one eventually.
Mr Layton: I hope you'll also ask that question of our Toronto Hydro representatives, who will be able to answer it more technically. We look forward to the regulation of our distribution of electricity. In the past we've gone to Ontario Hydro. Ontario Hydro has regulated our pricing. There's been a weird relationship there which we won't get into, but we think that having to come out in a very public environment to justify our costs is a good discipline for us to get into.
We're preparing ourselves for it. We're optimistic. Anybody selling electricity within our city will have to use our wires, so we have to be sure that we're offering an economical and justifiable service when we charge for that service. The OEB I'm sure will work with us, challenge us; we'll have environmental groups and competitors in the hearing room putting our noses to the grindstone and we're prepared to deal with that. We're excited about that opportunity. I'm not going to say it's not a problem; I'm going to say it's a challenge.
Mr Hastings: Huge.
Mr Layton: Sure, it's a big challenge but we think we're up to it.
Mr Conway: That's exactly the word.
The Chair: That's our time for questions. On behalf of each of the members of the committee I thank you for taking the time to come before us this morning. We appreciate your input.
Mr Layton: Thank you. We'll respond with something more on the question asked by Mr Lessard.
The Chair: OK. Colleagues, in the presentation just before this group there were a couple of short-form views and I'll try to catch these in the future until we're all on to the jargon to make sure we're clear on this. "LDC" is "local distribution company"; that's the wires company. The gentleman I think was saying "OMBC" and he was really referring to OMDC, the Ontario Market Design Committee. We'll try to watch for that so it's not confusing as we go through.
That concludes our presentation this morning. We will recess now and reconvene in this room at 1:30 this afternoon.
The committee recessed from 1221 to 1330.
ONTARIO HYDRO
The Chair: Good afternoon, everyone. The standing committee on resources development hearing Bill 35 is called to order for our afternoon session.
We're very pleased to welcome representatives from Ontario Hydro this afternoon, led by Ron Osborne, the president and CEO. Would you introduce yourselves for the Hansard record, please. As you know, an hour has been allotted for your presentation. You may use all of it for presentation time or you may leave time for questions.
Mr Ron Osborne: Thank you, Madam Chair. Good afternoon, ladies and gentlemen. As the Chair indicated, my name is Ron Osborne. I'm the president and CEO of Ontario Hydro. I'm sorry that our chairman, Bill Farlinger, can't be here this afternoon. We have a board meeting and a nuclear review committee meeting taking place as we speak in Darlington, which I attended this morning.
I am here representing Hydro this afternoon, together with three executive vice-presidents: Eleanor Clitheroe from the services company, or Servco, as we call it; John Fox from the generating company, or Genco; and Carl Andognini, who is our chief nuclear officer.
Over the next few minutes I will briefly update you on our preparations for the new competitive marketplace. I will also give you Hydro's perspective on the restructuring of the electricity industry and some of the restructuring issues that I am sure you will be considering as these public hearings progress over the next few days.
I want to say at the outset that we believe Bill 35, the Energy Competition Act, will greatly benefit the electricity customers as well as the taxpayers of this province. Opening the electricity market to wholesale and retail competition and encouraging customer choice will put the customer in the driver's seat for the first time. Electricity companies will no longer choose their customers; customers will choose their suppliers. Electricity companies will have to produce and deliver power better, cheaper and in an environmentally friendly manner to become a market leader.
Because competition encourages cost control, it will produce the lowest prices, and that in turn will make all of our industry more competitive. This will result in jobs and economic benefits for all Ontarians.
Let me give you an example from a sector that I am somewhat familiar with, the Canadian telecommunications industry. The overall effect of telecom deregulation and competition on employment has been positive. While the original players may have lost some jobs, competitors created many more new jobs, and suppliers also made major contributions to employment, particularly on the R and D front.
In my comments today, I want to focus on three specific restructuring areas that are addressed in the legislation. These areas are: (1) The launch of the successor companies to Ontario Hydro on a sound financial footing, thus protecting the value of the investment that the province has made; (2) the creation of a competitive electricity market that provides the lowest possible prices and supports job creation; and (3) the need to ensure that stranded debt is paid off efficiently, fairly and expeditiously.
Let me begin with the launch of the new companies. As you are aware, we are about to launch three new companies from what is now Ontario Hydro. One is the Independent Market Operator, the IMO, whose role will be to ensure that the electricity market is operated fairly. The other two will be commercial electricity companies. One will take over our current generation business and the other will hold our energy services and wires businesses.
The new companies are being created from what is a very valuable collection of assets owned by the province. Ontario Hydro today provides very reliable power at competitive rates. We are especially competitive with utilities south of the border in our extended market area, which is the northeastern and Midwestern US states. We are based in Ontario and we employ 21,000 people.
As the successor companies enter the competitive marketplace, our goal is to preserve and maximize the value of these provincially owned assets. There are still many matters under discussion as we move from a monopoly system to competition, such as the appropriate financial structures for the new companies, the mechanisms for paying off stranded debt, and market design. We will address these later, as I am sure others already did this morning and will over the next few days. However these matters are resolved, let me emphasize that our number one objective as we move forward is to create value for our shareholders, the taxpayers of Ontario, in this new market.
I'll give you a brief description of the two new commercial companies about to be created, and I'll start with Genco. Genco will take over the current generating assets of Ontario Hydro. Ontario Hydro's generators now supply some 86% of the province's electricity demand. We generate electricity from five nuclear stations, 69 hydroelectric stations and six fossil-fuelled generating stations. The balance of the Ontario market is supplied by non-utility generators, such as TransAlta, Westcoast Power and Northland Power, which supply some 7%; imports from other utilities such as Hydro-Québec, Detroit Edison and the New York Power Authority, which supply some 2%; and other sources, such as power generated by industries for their own use, which satisfy some 5%.
That's the situation in power supply today. Over time this will change dramatically as other generators, perhaps including some municipal utilities, displace some of our generating capacity. This will inevitably prompt Genco to look elsewhere to utilize its capacity, and that means southward to US markets. Over time we will undoubtedly swap or lease some of our assets in Ontario and acquire assets in the US northeast. The number of market players in Ontario will increase as a consequence.
What is the backdrop against which Genco will in fact compete in US electricity markets? Genco is being created in the midst of a North American electricity restructuring that will likely result in some 10 to 15 major generators a decade from now. There are widely held views within the industry that there could indeed be some generators with as much as 80,000 megawatts of capacity, almost three times Hydro's current generating capacity.
Recently, American Electric Power and Central and Southwest Services announced a merger that will result in a combined capacity of more than 37,000 megawatts, making that company, merged, the largest generator in North America. At one time in the recent past, we at Hydro had the distinction of being the largest generator in North America. Today we are in the top five, with roughly 30,000 megawatts. That assumes the ultimate bringing back of Pickering A and Bruce A.
We believe it is important that the province maintain a large electricity generating company with its head office right here in Ontario and that this company do business and compete with North American competitors, however large. The white paper implicitly recognized that it is important that our Genco maintain a certain critical mass of assets so that we can compete effectively in this larger marketplace. As a large generator with its initial focus in Ontario, we have a far greater likelihood of maintaining jobs here in this province and creating other economic spinoffs, including R and D.
Genco's strategy is to remain one of the major continental generators, based right here in Ontario but with a growing presence in the northeastern US market. We see many opportunities as the US electricity market opens to competition. Genco's market area in the northeastern portion of the continent is a US$30-billion market. Our 30,000 megawatts constitute about 15% of the generation in this market area, which stretches from Illinois to New York and from Ontario to Kentucky, giving you some idea of the scope of that potential marketplace.
Genco will have some major competitive advantages that will help it compete in the electricity business in the US. For example, we generate electricity at a lower cost today compared with US utilities in our market area. We have a very favourable generation mix of water power, nuclear and relatively clean fossil generation. Our air emissions system-wide are low compared to our competition, which generates electricity mainly from coal.
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We are looking forward to the challenges of competing in this larger market. We're also encouraged by the support for our strategy that we received from the Ministry of Energy, Science and Technology during the minister's introduction and second reading of the bill some weeks ago.
Let me now turn to Servco. This is the second major company to be created under the act. This company will hold transmission and distribution businesses, as well as retail and energy services businesses. Its focus will be to ensure safe and reliable delivery of power to customers at competitive prices through continual productivity improvements. These improvements will be driven by competition and by growth.
Servco operates one of North America's largest and most reliable transmission systems, one of the largest microwave systems on the continent, and the largest electricity distribution system in Ontario. It has a presence in all corners of the province, retails directly to almost a million customers, and has a skilled workforce that designs, builds, operates and maintains network services.
The wires portion of Servco's transmission and distribution businesses will continue to be regulated with a goal of ensuring that Ontario continues to have a safe and reliable transmission grid and distribution network. Servco's goal for its unregulated, competitive businesses is to expand into a major, successful energy services company. There will be an appropriate degree of separation between its regulated and its competitive businesses.
Servco's vision is to contribute to the province's objective of gaining efficiencies in our electricity distribution sector by entering into a wide range of negotiated business arrangements with municipal utilities. Servco and the municipal utilities could provide services to each other, enter into partnerships and joint ventures, or even acquire each other's assets. These future negotiated business arrangements will help improve productivity, reliability and service, as well as lower costs and increase financial returns to the provincial and municipal shareholders.
Another growth area for Servco is to provide new interconnections in the future so that more power from other jurisdictions can be brought into the province. It is also in the services area that many new electricity products and services will emerge, such as district heating, small-scale generation at the customer's premises, and building energy system services within buildings.
We are now in the process of readying these two companies, Genco and Servco, to compete in this new marketplace. There is a tremendous amount of work to be done in separating the successor companies after 92 years as one whole company. The government has advised us that we should target late in the first quarter of 1999 for the two successor companies to begin operations.
Over the next few months, after the Legislature has reviewed and, I will assume for this purpose, passed Bill 35, the government will appoint the new boards of directors, the management structure will be put in place, and employees will move into the two new companies. Genco and Servco will be in a good position to compete when the market then opens a year later in the year 2000, and we intend to provide a substantial return to our shareholder, the people of Ontario.
Up to this point I've been focusing on our preparations for the new market. However, please be assured that we are not taking our current operations for granted. So far, this has been a very eventful year from an operations standpoint.
As you well know, in May and June we were able to maintain electricity supply, despite record heat and demand for power, when other utilities to the south were appealing to customers to limit electricity use. We were also able to participate, I might say, in a very positive way in the export market during those months.
Recently, we have been working hard to correct billing difficulties for our customers, or some of our customers, created by the switchover to a new billing system. Let me assure you that we haven't lost sight of the day-to-day. This is a major priority for us, and particularly Servco. We have dealt with a lot of justifiably angry customers over the past few weeks and we are doing everything possible to make the situation right with each of them while fixing the problems in the new system.
We're also continuing to focus resources on recovering our nuclear operations to their former operating excellence. It was a year ago tomorrow, I'm told, that Ontario Hydro held a press conference to discuss our nuclear problems and our proposed solution. Since then, the select committee on Ontario Hydro nuclear affairs has reviewed our recovery program and our board has reconfirmed the basic decisions within that program, including the layup of Pickering A and Bruce A units.
Over the past couple of months we have reached lateral transfer agreements with our two major unions, the PWU and the society, that make it easier to move staff to where they are needed to achieve the nuclear recovery plan.
We are also pleased to announce that we have reached a new collective agreement with the Power Workers' Union that gives us more flexibility in deploying staff over the longer term, not just in the context of the NAOP program. I believe that this is indicative of a new spirit of cooperation between Hydro and the Power Workers' Union.
We are also now seeing encouraging early signs of nuclear recovery progress. The World Association of Nuclear Operators, or WANO, as part of their scheduled visits to Pickering and Bruce have recently performed extensive studies of our program and have concluded that it is sound. We know we still have a long way to go -- it was, after all, a five-year program -- but we're determined to get there. Once we fully recover our nuclear operations, we believe this will be a big competitive advantage for us and a very valuable asset for this province.
This brings me to the second area that I want to discuss, which is to ensure that a competitive electricity market is created, providing the lowest prices and supporting job creation. I stated up front that we're very supportive of the province's move to electricity competition. There are still some issues that need to be dealt with to ensure that a fair and competitive market is put in place.
I mentioned earlier that Genco starts out with about 86% of the Ontario generation market. This has led to much discussion of the company's potential market power. Can there be a truly competitive market for electricity generation when one company starts out with most of that generation?
We believe that Genco's market share in Ontario will clearly be reduced over time as other generators enter the market. The questions of what our market share should be, how quickly Genco should move to that market share and what interim measures should be taken are all questions which the Market Design Committee is currently reviewing.
Some of the options they are examining to mitigate Genco's market power include vesting contracts, asset swaps, leasing some of our generating facilities, as well as building new inter-ties with the neighbouring provinces and states to bring in more power from outside.
Another important issue related to competition is to ensure that Ontario electricity companies have the ability to compete in other jurisdictions when companies from those jurisdictions are competing in Ontario.
We have many electricity customers right here in Ontario that have facilities across North America. We will be interested in contracting supply to all of the facilities of these companies within our market reach, just as competitors from other provinces and the US will be attempting to supply all their needs. We must have access to all those markets to compete for these customers.
I was greatly encouraged that the new legislation recognizes this issue, proposing to give the Ontario Energy Board the responsibility for considering comparable access in determining the entry of players into our electricity market.
Environmental protection is another area where we will require a level playing field. We support the provincial government's intention to take strong environmental protection measures in the design of the competitive electricity market. It is only fair that any generators wanting to sell electricity in our market should meet the same emission performance standards that we will be meeting in Ontario.
Now I'd like to discuss briefly the third restructuring area, which is to ensure that stranded debt is paid off efficiently, fairly and expeditiously. Stranded debt is defined in the legislation as the amount of debt and other similar liabilities that cannot reasonably be serviced in a competitive electricity marketplace.
There are two points that I would like to make on this subject.
The first is that when we talk about stranded debt, we are not talking about new debt. There will be no new debt on anybody's balance sheet as a result of the restructuring of the electricity industry. The debt is already on our balance sheet.
The interest on our debt is now and always has been fully incorporated within the price of electricity. There will be no new government-guaranteed debt that will have to be recovered in future rates.
Ontario Hydro's current debt level is $31.1 billion. We have had no new net borrowing so far in 1998, and at this time we do not expect to increase the level of debt by year's end. In addition to the debt, we also have liabilities for our contracts with non-utility generators, the so-called NUGs, and liabilities for future nuclear waste disposal and the decommissioning of our nuclear reactors. All of these liabilities have been accounted for in the past within our current rate structure on an amortized basis.
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The second point I want to make is that all the discussion surrounding stranded debt is simply about how to allocate the existing debt and other liabilities within the restructured electricity industry.
The Ministry of Finance is currently determining how to deal with that portion of the debt that will be stranded in the move to competition. It is a matter of estimating the financial results and value of Genco and Servco, valuing the successor companies after considering such factors as potential productivity improvements and revenue reductions caused by competition, and then establishing the level of stranded debt.
As you know, the government has indicated the importance of ensuring that these companies are viable and financeable. Genco and Servco need to be corporatized on a sound financial footing with an appropriate level of debt that they can service. At the same time, they will be required to make payments in lieu of property and income taxes, interest payments and dividends to the new debt holding company that will gradually discharge the stranded debt. Any residual stranded debt that Hydro cannot service through these cash flows will be paid off through a competitive transition charge.
There has been a lot of discussion about stranded debt, but it still isn't widely appreciated that Ontario is not unique in dealing with this issue. US regulators are also dealing with stranded debts of utilities in those jurisdictions that are deregulating their electricity industries. They are allowing for the recovery of utility debt that is not serviceable in a competitive marketplace, recognizing that the utilities made investments to serve a monopoly market.
Here in Ontario, we must also determine the fairest and most effective way to manage and pay off all debt, including stranded debt. I am confident that the government will implement a solution that will not result in a burden to electricity customers or the province's taxpayers.
Let me conclude my remarks now by saying that we at Hydro are very supportive of the intention of the Energy Competition Act. You may recall that Hydro has consistently and publicly been in favour of competition over at least the past five years. This new legislation is very much in keeping with what my predecessors have advocated over those years. It will result in a competitive electricity market, and competitive markets put the customer first. Our successor companies are keen to compete in this new marketplace, an expanded North American marketplace creating real value for the people of Ontario.
The new market will evolve and competition will gain increasing momentum over time, but we will all have to walk before we can run. We must be prepared to give the new market time to develop, and it will take time to work out some of the issues such as market power, equivalent access, or reciprocity, and finding the appropriate mechanisms for paying the stranded debt.
This is, of course, new territory, yet I am confident we will all reach our goal of a fair, competitive and transparent market that benefits electricity customers and the province.
We wish you well as you proceed with your hearings and we look forward to your questions.
The Chair: Thank you very much. We have about 11 minutes for questions from each caucus and we'll begin with the third party, the NDP caucus, Mr Lessard.
Mr Lessard: Mr Osborne, in your remarks you've made an estimate of the current debt level at $31.1 billion. One of the issues that we've been struggling with and will continue to struggle with is what the amount of the stranded debt may end up being. I'd like to know if you have any ideas as to what the stranded debt may be and whether you are involved with ministry representatives in determining what the stranded debt may be and what criteria you feel are important in determining what that number is, because we as legislators feel that that is critical in determining whether Bill 35 is going to be successful in lowering rates for consumers in Ontario. Until we actually know what that number is, I certainly am not comfortable, and our caucus isn't comfortable, with moving ahead with this legislation based on the vague assurances from the minister that this is good for consumers and the environment in Ontario.
Mr Osborne: We of course look forward as much as anybody to knowing what the stranded debt calculation finally looks like, since we are in a sense both the victim and the beneficiary of whatever results from that. The reality is that the stranded debt calculation is part of a series of interrelated activities, including market design, and what comes out of the Market Design Committee with respect to recommendations for, for example, vested contracts or other ways of mitigating market power is a function of a variety of issues such as the appropriate payments in lieu of property taxes and income taxes that are being calculated as we speak and will be a function of the valuation of the anticipated revenue streams of these companies.
The Ministry of Finance has hired the best advisers that it can find from both within Ontario and the United States. We equally have hired the best advisers that we can find. Our role is not to determine the stranded debt. Our role is simply to provide inputs as requested to the Ministry of Finance and its process. We are active in that regard both through the Market Design Committee and directly with the Ministry of Finance.
I would re-emphasize that in assessing the potential impact of stranded debt one should not lose sight of the fact that the debt is there today. There is no new debt coming out of this process. The $31 billion that you refer to is our straightforward debt on our balance sheet. In addition to that, there are obligations ongoing with respect to the NUGs I referred to, or the non-utility generators, and there are the nuclear decommissioning and nuclear waste disposal costs accrued to date in our balance sheet at approximately $3 billion.
Those are not going to go away. Those are there. Those obligations are there. The issue is how you apportion those obligations between the debt company and the successor, surviving companies, Genco and Servco.
We are today servicing the interests and the carrying costs, other than principal repayments, because we have a steady state balance sheet, out of our current rate structure. We are paying all of our interest. As I indicated earlier, we do not anticipate increasing our debt level this year, so this year's capital expenditures will be funded out of this year's cash flow. That is an objective we have set ourselves and these will be the kinds of objectives that the successor companies will set themselves going forward.
I, like you, would like to see the figures sooner rather than later. It's an iterative process that will come to a head sometime in the fall, and we're all busy beavering away and providing information to all those parties that are scrutinizing and dissecting our balance sheet as we speak.
Mr Lessard: At some point in the fall we will get that number as to what the stranded debt may be. I'd like you to explain to us, from Ontario Hydro's perspective, what the impact would be if that guess of the stranded debt is either too high or too low.
Mr Osborne: If the amount of debt that is left with the successor companies is too high, which is another way to express the equation, then those companies will end up with a credit rating that is not sufficient to raise the right investment grade money without a provincial guarantee and there will have to be a refinancing of the balance sheet at some point.
If the debt that is allocated to the successor companies is too low, then those companies will end up with too good a credit rating, too high a credit rating, and there will be too much value that, if you like, accumulates to the shareholder. It so happens the shareholder is the province, so that's a zero-sum game, if you like.
Quite obviously, there are competitive impacts in that sense. Nobody's intention is to undercapitalize or overcapitalize the successor companies' balance sheets, but to the extent that you put too much debt or too little debt on the successor companies' balance sheets, you will in effect either increase or decrease the shareholder value in the equity portion of the financing going forward. That is why it's important that we get it right.
We will be going for credit ratings in the early part of 1999. We will hear from the Moodys, the DBRSs and the Canadian Bond Rating Services what they think, and they in a sense will, over time -- because it won't be self-evident from day one -- tell us whether we got within an appropriate range. To the extent there is a mistake and too little debt is left with the successor companies, clearly the province will get higher dividends, will have higher income taxes from these companies and will pay off debt faster. To the extent there is too much debt left with the companies, interest taken out will be too high, but dividends and income taxes will be reduced.
In a sense, given that we are carrying all that debt today in our rates, it balances. Our objective is to get the right balance so that we end up with an appropriate investment credit rating from the rating agencies.
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Mr Lessard: My concern is that we as an investor get it right as well, because you know the possibility that Ontario Hydro isn't competitive isn't something that I look forward to seeing in the future because the ramifications of that are quite substantial for taxpayers in Ontario.
One of the factors to be considered in determining what that amount is is the anticipated revenues of the new companies. I wonder whether you can support the extending after the year 2000 of the freeze in rates that's been in existence for a number of years now.
Mr Osborne: Hydro has agreed to freeze its rates through to the beginning of the year 2000, at which point the marketplace will open up. In my view, it would not make sense to impose a freeze at that point because you will in effect be subverting the marketplace. The objective is to have a competitive marketplace where market forces will dictate. We acknowledge that there will have to be mechanisms in place for a transitional period to deal with the so-called market power issue, but once those transitional measures are in place, the marketplace should be allowed to stand and to determine what is the appropriate wholesale rate.
A large portion of the rates will of course be regulated by the OEB because transmission and distribution will continue to be a rate-regulated business and that's a fairly substantial portion of the ultimate rate. The portion of the rate that is subject more to the whims of the market, if you like, is the generating wholesale rate, or the rate that generators charge to people buying wholesale or on a direct basis. The whole purpose here is to create a competitive marketplace in which market forces will dictate. I don't think it would be appropriate in that context to be introducing rate freezes.
Mr Lessard: The minister seems quite confident that rates will go down in a competitive environment. I wonder whether you share that confidence, because in the report, Electricity Competition: A Financial Update, it indicates that the amount of stranded debt can be reduced because successor companies will operate more efficiently than their predecessor.
In your remarks you said that Ontario Hydro has been a reliable and efficient deliverer of electricity in Ontario. It seems as though the projections by the minister of reduced rates are based on the fact that Ontario Hydro hasn't operated efficiently in the past and the successors will operate more efficiently.
Mr Osborne: I think it's almost a matter of philosophy or religion, I suppose. I happen to believe that companies that operate in a competitive marketplace operate almost de facto more efficiently. Competition is much better than a regulator can be at ensuring efficiency. Having just come out of the telephone business where we've seen long distance rates, for example, plummet from an average of $1 a minute to now, if you like, 10 cents a minute and all you can eat for $20 a month, nobody dreamed of that five or 10 years ago.
I can assure you that in a fixed-cost business with highly capital-intensive business of the sort that electricity is and telecom is, pricing gets pushed towards marginal costing. Undoubtedly, competitive forces will have a greater impact in bringing electricity rates down than any amount of forced regulation.
Mr Lessard: You mentioned the problems you've been having in changing the billing system for your customers. I've noticed in ads in my local newspaper, the Windsor Star, the 1-800 number to the call centre to address concerns of customers. It's been tough to get through to that and I wonder where that call centre is located and what the cost has been for the ad campaign and the establishment of the call centre to try to deal with the problems that resulted from changing the billing.
Mr Osborne: There are two call centres that are in reference here, one in London and one in Markham, but I'll ask Eleanor Clitheroe to answer specifically, and to the extent we don't have dollars and cents to satisfy you, we'll get back to you with numbers.
Ms Eleanor Clitheroe: The problems we've been having with the call centre are really regrettable and we are very concerned about them with respect to our customers' ability to get through. Over the summer, starting in June with the conversion of our customer information system and our billing system, a couple of things happened simultaneously. One was the conversion of the system and the other was a series of electric storms that went through the province, so our customer information centres, which are geared to a certain call volume and which we had increased to account for the issue of changing to the conversion, were overloaded with a series of spikes all through the summer that we had not anticipated. For example, we generally would receive somewhere in the neighbourhood of about 5,000 calls a day from around the province in there, and we received on one day 172,000 calls, so that the ability for the centre to cope with that has not been feasible.
The problems that we experienced there, other than the issue of people calling with respect to the outages on the storms that went through, were really three-fold, all of them issues of concern to us and to the customers. One was the issue of changing the due date which the customer is to pay the bill on. We had looked at industry practice and had announced the change prior to, and then implemented the change on, the June bill, moving from 21 days to 16 days. We have, due to the customer reaction, subsequently reversed that decision, and that will be effective for bills that come out after the September 1 ability to change the system and we will be answering calls around that to that effect. However, the changing of the due date has generated a lot of calls and questions and queries for people.
The second issue affected a smaller group of customers but was a very confusing issue for customers, and that was primarily cottagers who are what we call seasonal customers. The way the billing system worked was that for the conversion bill alone, as opposed to on an ongoing basis, for the first bill that the system put out for that customer, there was a calculation done back to a year ago. For many of those customers, the ability to read that bill -- it was a very confusing bill. It admittedly was a very confusing bill. The literature that we put out around it was an attempt to explain the bill but it was inadequate. We are currently obviously answering questions by letter, fax, e-mail and telephone, but we are also putting out additional literature and information for customers to explain the confusion around the bill they got in June. It's a one-time issue. The bill, having gone through the conversion, would not have those same confusing features next time, but it's important for us to explain to the customers what went wrong. There were about 60,000 to 80,000 of our 160,000 seasonal customers who were affected by that particular very confusing issue.
The third was obviously the inability, given the volume of calls to the call centre, to handle that volume. We're looking at a couple of ways of trying to alleviate that problem. In the meantime, we've put in the 1-800 line, which is also still very heavily used, and a taped answering system. We've increased the number of staff to answer calls. We've tried to accommodate the volume of calls but we're also looking at methods of ensuring that we can staff up for emergency spikes like that in the future, as well as to handle the ongoing volume of calls that we would expect on a regular basis.
I actually have a little pamphlet which I've brought copies of here. I'll leave them behind. If anybody has any other questions, more detailed questions, the package is available.
Mr Conway: We're beyond the pamphlet stage, Eleanor.
The Chair: We're moving to the government caucus.
Mrs Johns: Welcome. Although you weren't here, Mr Osborne, for the select committee, a few of us feel like we're in déjà vu all over again. Putting that aside, I'd like to comment that after having gone through the select committee and having spent a great deal of time on Ontario Hydro over the last year, I'm not as concerned about the stranded debt probably as others in the room are because I believe that the marketplace -- the shareholders will either get the benefit, which is all the taxpayers, or however we do that, the allocation will work out to be fair to the taxpayers.
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I'm more concerned about the ability of Hydro to become more efficient. We talk daily about how the price is going to go down and part of the reason the price is going to go down is because we hear Genco can efficiently produce more power or Servco can better service the customers. I guess, being the doubting Thomas I am, after having watched the old corporation go through 30 years of this, I have some concerns about whether that can actually happen. I'm interested to hear from you today as the new management team what the vision is for Hydro, how you're going to step up a totally inefficient business to make it something that's competitive and how you're going to move the generation into that, move Servco into this new thing and how we're going to maintain some supply as we go through this time when we haven't got competitors coming forward just yet, but will in the next three, four, five, six years.
Mr Osborne: Thank you, Ms Johns. There are lots of questions in that one question. I'm going to use an expression that I've used in talking to employee groups within Ontario Hydro. We are about to enter an entirely different ball game. In the past, the dialogue around Ontario Hydro was essentially, if you like, how to divvy up a pie that was granted to Ontario Hydro by the PCA to monopolize. In effect, the argument was about how much went to the government, if you like, in the form of accumulated value, how much went to the employees in terms of salaries, wages and benefits, and how much went to customers in the form of reduced rates etc. We were divvying up a pie that was to be granted.
The future of the game is quite different. The dialogue has to be about how you in fact bake that pie because all kinds of other people will be out there trying to bake their own pies. More importantly, they'll be trying to take a piece of ours. I was quoted in the press in a somewhat right-wing fashion, and it isn't really me, but I'll repeat it anyway and our press colleagues can decide whether they want to use it again: "In a competitive business you either eat somebody else's lunch or you are somebody else's lunch."
Mr Conway: Charming.
Mr Steve Gilchrist (Scarborough East): But true.
Interjections.
The Chair: Order.
Mr Osborne: That's an exaggerated way of making the point about the difference between a competitive business and a non-competitive business. You are either, in a sense, predator or prey. I make these points not because they are bang on, not because they exactly pinpoint the difference between monopoly versus competition, but they certainly give you the flavour and the direction.
In going forward, Ontario Hydro has to act just like any other competitive business. We will have to live by the wits of the people we employ, utilizing the assets which we've been granted, to make sure that in future customers who in the past had to do business will want to do business with us. That's the single, most important thing that Ontario Hydro has to deal with going forward. That's not easy with 92 years of baggage, as you refer to. We have very good relationships with all of our customers, but you can imagine the kinds of tensions that build up over 92 years. Some of it is evident in various position papers put before you, I'm sure. The single biggest thing we have to do is make sure that our people understand that in the future we earn our keep, we haven't inherited it under the PCA. That's the first point I would make.
I would say that we have had very fruitful discussions with our union leaders in this regard. We have completed the first round of negotiations with the PWU. That I guess was made public some six or eight weeks ago, somewhere around that time frame, not without difficulties. Nobody suggests that it's easy or that there's a Pollyannaish solution here, but we did come to, I think, a very good first step towards reordering the relationship between management and labour union membership. I'm hopeful that a similar outcome will occur over the next month or two as we enter negotiations with the society. So 15,000 of our 21,000 people are in a union which has already agreed to a number of important evolutionary steps that will help both us and their members be more competitive in the future, and we're now working on the other union.
The third thing I would say is that in this competitive environment we will have to find ways to make greater use of incentives as opposed to entitlement. Whether it's in the form of profit-sharing or gain-sharing, productivity-sharing, I don't know at this point, it's far too early in the game, and I haven't had a chance to turn my mind to the specifics. But quite clearly there will have to be more of our collective reward as 21,000 people working at Ontario Hydro that is a function of how we perform and not simply just showing up every day, and we will have to have a far greater incentive-based compensation package than we've had in the past.
We recognize that we do not have all the management skill sets that will be necessary. We run very good plant including, I might say, very good nuclear plant. If Carl had a chance, he would tell you that 12 out of 12 nuclear units are running today as we speak and 11 out of 12 operated throughout the past two months when we had such strains put on the system, and the 12th was simply out because of a planned maintenance outage. We are in fact seeing improvement on that front. We run very good hydroelectric and fossil plant. We run good transmission and distribution systems.
I suspect where we are going to need help on the management front is in understanding the dynamics of a more competitive marketplace and particularly how to do business with and against those intruders, if you like, from the south, the large American generating companies that will be coming over our border just as we attempt to go over theirs. We realize that we're going to have to beef up on the marketing and strategic fronts within our generating operations, and John Fox and I are strategizing on how we go about that.
At the end of the day the single most important thing, though, that will make a difference to our bottom line is getting all of our generating assets running at full tilt at the highest possible capacity factor, because with our natural advantage with the type of plant that we have we believe we can (a) be competitive in Ontario, but (b) export surplus power that will be created by the competitive marketplace into the United States where we believe we have a great opportunity to make money on behalf of the shareholders.
Mrs Johns: I'm going to pass on to my colleagues but I would just like to say that part of successful business is having good market relationships with your customers too and I don't think the billing was a good step into the right direction from an MPP's perspective.
Mr Osborne: Well, I'm glad it happened two years before the market opened.
Mrs Johns: I hope it doesn't happen again.
Mr Osborne: So do we.
Mr Galt: Thank you, Mr Osborne, for a very competent presentation. Just focusing in on the last two pages, if I may, the first question relates to equivalent access or reciprocity and this being a provincial bill becoming an act. I'm wondering what some of your thoughts might be in legislation to make it work and/or in regulation that might make that work. I think it would tend to be more of a federal government area, but I'm curious as to your thoughts on how we can make that work.
Mr Osborne: I guess it's probably a three- or four-party effort we're talking about here because you're absolutely right. There are issues of interprovincial trade attached to this which involve not just this province but other provinces as well as the federal government. As you know, there is a draft agreement on interprovincial trade and energy which is under review right now and which I suspect a number of you have been exposed to, and in that context I think it would be very important that issues of reciprocity be appropriately addressed. There are also issues north-south under, I guess, more NAFTA and FTA than GATT, but nevertheless on the international trade front there are a variety of restrictions and encouragements on how countries will do business with each other.
Interestingly enough, as we sit here today, there is an agreement on energy as part of the NAFTA and FTA rules with the United States that does not directly countenance reciprocity. It countenances something called national treatment. I'm not a trade lawyer and I don't want to get into the specifics, but it does not specifically countenance reciprocity.
Having said all that, we have been prevented from having what is called a FERC licence, which is the equivalent of an OEB licence in the United States, precisely because of reciprocity issues. This is not an uncommon trade. I can give you many examples of foreign jurisdictions, including our good friends to the south, using reciprocity issues in the telephone field, for example, against Canadian companies.
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I don't profess to understand all the legal manoeuvrings that are possible or not possible, as the case may be, through interprovincial and transborder negotiations. All I know is that everybody else is going to be looking at reciprocity and we better look after ourselves. I don't wish to demean the Boy Scout movement, which I'm just about to do, I guess, but I'm fond of saying we don't want to be the Boy Scouts in this process unless everybody else is going to be a Boy Scout in the process. I think it's very important that we look after our own interests. We will import power; we want to export power.
Mr Galt: The second question is on page 7, the second paragraph, relating to liabilities. You talk about future nuclear waste disposal being in the current rate structure. I'm a little confused there. Going back to the Hydro select committee, my understanding was that nuclear waste disposal was put on hold and out in never-never land, and we really didn't know what that cost was going to be. You're changing my feeling. Either it's in that $31.1 billion or it's in the billing; therefore, if it's in the billing, you must be billing your reserve someplace. I don't follow your comments here. I need some explanation.
Mr Osborne: It's not in the $31 billion. That's the first thing.
Mr Galt: I was pretty sure of that.
Mr Osborne: We have been including in our cost-of-service calculations what I'll call an amortized estimate of both nuclear decommissioning and nuclear waste disposal. They are two different issues, as you know, the costs. The way those are calculated is essentially as follows: One estimates the final waste disposal and nuclear decommissioning cost at the end of a nuclear plant's life. One then spreads that cost over the life of the plant and amortizes it in a fashion in which you have gradually inclining annual charges to the cost of service which allow for the amortization, plus the accumulation of an investment return on previous allocations. That amortized cost is charged to the income statement and into the cost of power under the old technique. We have approximately $3 billion in our balance sheet that's been accumulated in this fashion. That $3 billion -- I think it's actually $2.9 billion -- has therefore been billed into our cost of power and our rate structure in the past.
Mr Galt: That's in an investment or a bond or set aside?
Mr Osborne: No, it's simply invested in the assets of Ontario Hydro. There are two ways you could do this. One is you could set up a segregated fund and put it in government of Canada bonds, government of Ontario bonds, shares of Bell Canada or some reliable company like that, and allow the income to accrue on that segregated fund, or instead you could invest those funds back into the assets of Ontario Hydro and in effect reduce the funding requirement for ongoing operations.
Mr Galt: Then it goes back into the $31.1 billion.
Mr Osborne: Well, had we set up a segregated fund, we would have had a debt of $34 billion, roughly, and we would have had an additional asset of $3 billion sitting in the segregated fund. That's how it would work. So in effect the $3 billion has been reinvested within the asset base of Ontario Hydro, not set up in a segregated fund. Going forward, there will be a debate as to whether or not there should be a segregated fund. That's an issue that undoubtedly this committee will hear about and it's one that is being dealt with by the Ministry of Finance.
The Chair: To the official opposition.
Mr Conway: I'll be sharing my time with my colleagues. I want to welcome the deputants.
Mr Osborne, it has now been nine months since the government of Ontario released its white paper outlining the policy framework that would guide the competitive marketplace in electricity. You are the new CEO of Ontario Hydro and you have at your disposal considerable resources. My first question to you today is, nine months after the white paper was released, can you tell this committee what your best estimate is within Ontario Hydro today as to the amount of debt that Genco and Servco could be realistically expected to carry into this new world of competition?
Mr Osborne: No, I'm not in a position to do that today. There are still too many factors that have to be determined. The major factors clearly have to do with market design and --
Mr Conway: So you can't tell me today. Because time is short, when would you expect to be able to tell me and this committee?
Mr Osborne: The answer won't come from me, actually, it'll come from the Ministry of Finance.
Mr Conway: If you can't provide the answer, then that's fine. We'll move on.
Mr Osborne: It will come from the Ministry of Finance at the end of September, October, as I think I indicated.
Mr Conway: You can't tell me today and you really think the Minister of Finance will have to give me that answer. All right.
Second question: Mr Osborne, I'm one of your one million direct customers in my recreational property, so I want to reduce this to a very personal level. You made a very powerful presentation here today, a really powerful presentation that in light of what we've been told by the Market Design Committee and what many expect in this new world order is a truly remarkable presentation.
All of that aside, I've got a very direct question for you. You've got me now; I suspect, since my cottage is deep in the hardwood bush of the central highlands of Renfrew county, that you're probably going to keep me. Today, I pay on an annual basis approximately $1,450 for the service I receive. I must say, unlike my friend Mr Phillips, who has had a bill in recent times, one of those remarkable bills -- and Eleanor, you should be so lucky that we're being as polite as we are. But I'm not like Mr Phillips, because, you see, I can't get a bill. I keep phoning Hydro and asking for a bill that I'd like to see and I want to pay. Despite my several calls, I can't get a bill.
But let's set that minor irritation aside. You've got me and you're apparently going to keep me and you want me and you want to serve me well and you want to give me benefits. So, Mr Osborne, my question, as a customer, is simply this: It's the summer, August 1998. My current baseline annual bill is $1,450. Assuming you keep me and assuming there's nothing really dramatic that happens, what's my bill going to look like three years from now in the year 2001? How much of a discount am I going to see on my residential bill at the cottage, a bill which is now $1,450? Assuming no change in consumption pattern, what's that $1,450 bill going to look like in the year 2001?
Mr Osborne: If I could honestly predict that with accuracy, I wouldn't need to work for a living. I would be able to speculate on various markets and make a killing out of my prophetic capabilities. What I can tell you is that rates will be lower in a competitive, deregulated marketplace than they will be in the kind of structure we have today. That's what this bill is about. This bill isn't about, as far as the legislation itself is concerned, trying to predict with accuracy specific rates on specific dates for specific issues.
Mr Conway: I'm happy to have a ballpark.
Mr Osborne: We're trying to create the framework -- maybe I could just finish my answer.
Mr Conway: I want some answers. I need answers. You're a chartered accountant, Mr Osborne. You're a fellow of the institute. I'd ask you this: As a chartered accountant, what would you advise a client, given this set of circumstances? I like the policy, I just want to see some measurable benefit. You can't tell me the stranded debt. Nobody can tell me the stranded debt. You can't deliver a bill. They'll tell me two or three years from now -- well, it's no joke. I've got hundreds of constituents, I'll tell you, who'd like to be in my place today. They'd raise a hell of a lot more hell than I'm raising now.
I want to know what the benefits to the residential and farm customers I represent, a million of whom generally you serve, are going to be under this policy two or three or four years from now. I need something more than a hope and a prayer. I need something more than a leap of faith, notwithstanding the fact that I'm a Catholic and I'm told to believe in miracles.
Mr Osborne: I would advise your client that he or she should support a competitive marketplace because that will ensure a far lesser likelihood of the kind of screw-up that we had two months ago with the billing system than we had under the monopoly regime in the past, because the reality is that it's competition that keeps people on their toes, that makes them do a better job. I will assure you that we will get you a bill very quickly.
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Mr Conway: The Market Design Committee, a group of good people, has given this Legislature a report four weeks ago and in that report they make it clear that the single biggest impediment to a genuine competitive marketplace is the kind of market power that Genco is going to have into the foreseeable future. The government specifically forbade the Market Design Committee to unbundle, to disaggregate, Ontario Hydro beyond Genco.
I ask you as a final question before turning to Mr Phillips, given your belief in a competitive marketplace, how am I to square that belief with the Market Design Committee's very blunt warning that your market power going into this brave new world of competition is probably the single biggest threat, in the short and intermediate term, to getting the kind of rate benefits that all of us want to see delivered, particularly to regular Ontarians?
Mr Osborne: I would step back and I would say to myself, "This legislation is designed to do three things." It's designed, clearly, to create a competitive marketplace. It's designed equally to ensure that we have an orderly transition under which the successor companies have a reasonable chance of being successful in a competitive marketplace. Thirdly, this legislation is designed to create the framework within which the existing debt of Ontario Hydro, as we've just discussed, will be paid off in an orderly and expeditious fashion. This is inevitably a balancing act of three, to some extent, differing objectives.
Quite clearly, one of the key objectives, as I indicated in my initial remarks -- and we at Ontario Hydro clearly endorse this -- is to ensure that we have successor companies that have the critical mass and the wherewithal to in fact be major players when the dust has settled and the competitive marketplace has unfolded, not just in this province but in the northeastern region of the United States. That will require us to use our best wits and intelligence and our best efforts to redeploy those assets over a period of time. You will not have the best utilization and redeployment of those assets by holding some kind of a fire sale.
We will, over the next few years, be inevitably incentivized by the very report you refer to, the Market Design Committee report. We will be incentivized to have our market share in Ontario go down and it is our intention that we would replace that lost market share with market share outside this province. That will be done through a variety of techniques that are referred to in that document. Those techniques are under review now, as we speak, with the Ministry of Energy and the Ministry of Finance. They include vesting contracts, leasing contracts, out-and-out swaps of assets or productivity of assets over time. Quite clearly, over time, we will create a marketplace where Ontario Hydro is no longer 86% of the generation in this province.
There is no way that you can go from a monopoly situation to a fully open, competitive marketplace without some kind of transitional period in a framework in which you have to satisfy all three objectives that I've referred to. It's taken 10 years for a fully competitive telecom industry to unfold. It even goes back further than that, 15 years, in the United States, to the creation of MCI and the breakup of AT&T. It didn't happen overnight. The issue is to create the framework which will allow market forces over time to create the competitive marketplace that will answer the kind of questions you were putting to me earlier. It will keep our feet to the fire at Ontario Hydro and will keep all of the competitors' feet to the fire.
Mr Phillips: Just a quick question, but first a comment. I must say I'm quite surprised that Hydro had no suggestions for improvements in the bill. Also, I will go on record as saying I am concerned that the chairman is on the board of -- a very reputable firm, but I would have asked him this question if he'd agreed to come. I'm concerned about the chairman being on the board of Newcourt, which is a company that I think will be involved in this issue as a competitor of Hydro in the end. As I say, I'm disappointed that you have no recommendations for improvements in the bill.
The minister this morning indicated that Hydro would probably get down to supplying about 60% of the Ontario market with electricity. You therefore are going to have to sell -- you said the single biggest thing is to have your generating assets working at full capacity; that's the key. Will you table with us the study that shows that when you've assumed a reasonable level of debt and of taxes, you are still going to be able to produce electricity and sell it in the US at a lower rate than our border competitors? That's the basis of your recommendation here. Will you table with us that study that indicates that?
Mr Osborne: I think what we can table with you in reasonably short order, Mr Phillips, is a comparison that is essentially available in the public domain of our rate structure and our cost structure vis-à-vis our US competitors as we sit here today.
Mr Phillips: With some assumptions on debt and taxes; that's the basis on which you're going to have to compete.
Mr Osborne: We can look at it in the context of the specific question you're asking, but one would have to be careful to make sure that anomalies in capital structures north and south of the border were eliminated from the comparison. But we're happy to provide whatever we can, and we will do so after the event.
Mr Phillips: After what?
Mr Osborne: After this hearing. We'll go back and we'll take a look at precisely the question you're asking.
Mr Phillips: Pretty key, isn't it?
Mr Osborne: It is pretty key. I don't mean to make light of it, but the reality is, we have a lot of nuclear capacity in this province, which Carl is working diligently to improve the productivity on, which by anybody's calculation will have incremental power costs which are significantly below the vast majority of our competitors' south of the border, which are burning for the most part a lot of coal. The incremental costs of coal-fired generation relative to nuclear are obviously much higher.
We also have an extremely efficient hydroelectric plant in this province, and we have fossil plant, coal plant, which relative to our competitors south of the border is not only in relatively good environmental shape -- and everything is relative in the environmental frontier, as you understand -- but is also extremely efficiently run. There's isn't a plant the size of a Nanticoke, for example, south of the border. We have cost efficiencies there that are self-evident.
Quite clearly, we will be attempting to ensure through the process of discussions between the Ministry of Energy, the Ministry of Finance, the Market Design Committee and all other interested parties that the ultimate balance sheets that are created for these successor companies do not make us non-competitive. That is the key objective that we have. While we will not be making decisions or determinations of stranded debt or valuation, we will clearly be having input and we will be making our input into those debates. You hit the key on the head: We will be making sure that our voice is heard. This is what will make this a competitive business.
The Chair: Time's up, sorry. Thank you, Mr Osborne, to you and your colleagues, from all of us. We appreciate your taking the time to come before us with your advice and your thoughts on this bill.
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GREENPEACE CANADA
The Chair: We'd now like to call on representatives from Greenpeace, please. Good afternoon, Mr Jardine. Welcome to the committee.
Mr Kevin Jardine: My name is Kevin Jardine. I'm atmosphere and energy campaigner for Greenpeace.
Greenpeace has about three million supporters around the planet, about 150,000 or so in Canada, and 75,000 of those supporters are in Ontario. Internationally, we run two major campaigns, one on fossil fuels, another on nuclear power, that are directly relevant to Bill 35.
I appreciate the opportunity to be here this afternoon to address the committee. I'm basically going to be giving a three-point sermon here this afternoon. The main points I want to make are that air pollution, in particular air pollution from coal-fired power stations, is a major threat to human health and the environment; second, that electricity restructuring could increase or decrease air pollution, both possibilities may occur; and third, because there is at least a possibility that an unregulated system could increase air pollution, regulations are needed now as an insurance policy to prevent that increase and to protect human health and the environment.
First of all, to deal with the first point about air pollution being a major problem, coal and oil-fired power stations are a major source of air pollution in Ontario, generating 16% of sulphur dioxide emissions, 12% of nitrogen oxide emissions and 18% of carbon dioxide emissions in 1990. Of these pollutants, only sulphur dioxide emissions from electricity sources has an explicit mandatory cap of 175,000 tonnes, but Ontario Hydro has also adopted voluntary caps for nitrogen oxide and carbon dioxide emissions.
The Inhalable Particulates/Respirable Particulates Strategy Working Group used figures from the Ontario government to estimate that small particles less than 10 micrometers in diameter are associated with 1,800 deaths in Ontario each year, as well as 118,000 cases of bronchitis in children, 12,000 cases of adult chronic bronchitis and 64,000 emergency room visits. These fine particles are a component of smog and are created through chemical reactions in the presence of either nitrogen oxides or sulphur dioxide. Greenhouse gases such as carbon dioxide are also a threat to human health because they help create the high temperature days that produce large amounts of smog.
The committee members may be aware that yesterday the US National Oceanic and Atmospheric Administration announced that July was the hottest month ever recorded in the last 160 years in which temperature records have been kept. That's worldwide. In fact, 1997 was the hottest year ever recorded, so this year is already well underway to beating that, and that's one of the contributing factors to the increase in extreme smog events in Ontario.
The Ontario Medical Association has recently produced an excellent report which notes that ground level ozone and fine particles are associated with increased emergency room visits for asthma, especially for children. The OMA concludes that school absences, childhood asthma, bronchitis and chronic obstructive pulmonary disease, as well as increased child death rates, are all associated with air pollution. Moreover, the OMA points out that "this is particularly true of the pollution that follows uncontrolled coal burning."
The existing toll of air pollution on human health is already enough evidence that current regulations are inadequate, but there are also serious environmental impacts. The federal Acidifying Emissions Task Group recently reported that even with existing caps, by the year 2010, "almost 800,000 square kilometres in southeastern Canada -- an area the size of France and the United Kingdom combined -- would receive harmful levels of acid rain."
They've called for a 75% cut from existing caps on sulphur dioxide emissions. As a result that would, among other things, prevent 830 premature deaths and 2,300 emergency room visits each year, and would produce annualized health benefits ranging somewhere between $890 million to $8 billion.
Noting this conclusion, the Ontario Medical Association endorses a 75% reduction for Ontario's sulphur dioxide cap. Applied to the electricity sector, this would reduce Ontario Hydro's current cap from 175,000 tonnes to 43,750 tonnes.
The OMA also recommends that a mandatory cap be imposed on electricity-related emissions of nitrogen oxides of 6,000 tonnes.
Implementing these OMA recommendations would require real, actual reductions in electricity-related emissions, not just reductions in emission caps. For example, looking at the year 1996, sulphur dioxide emissions would need to be reduced by 48% -- that's the existing emissions --from 1996 levels, and nitrogen oxides emissions would have to be reduced by 83% to meet the OMA's proposed emission caps.
Instead, as we all know, Ontario Hydro's emissions have increased dramatically since 1996 because of serious problems with its nuclear facilities. For example, production at the coal-fired Lakeview thermal generating station has increased two and a half times since 1996. That's the station which is located just on the border of Toronto. According to the Environmental Commissioner, emissions of several air pollutants are expected to rise province-wide by about 70% between 1996 and 1998. It's very clear that we have a serious problem with the current emission system and we need to have significant reductions.
The next point I want to make is that restructuring could increase or decrease air pollution. Bill 35 could make a major difference in cleaning up Ontario's air. By allowing dozens, and conceivably thousands, of independent electricity generators, the bill could encourage the development of clean, small-scale, decentralized electricity generation such as wind, small hydroelectric, and landfill gas or natural gas cogeneration. Consumers would have the option of choosing to purchase more expensive but greener energy sources such as solar and wind. This is certainly what we are hearing currently from the Ontario government; for example, Minister Wilson's presentation this morning. That is a possible scenario.
Unfortunately, there's another scenario. The cheapest way to generate electricity is simply to burn more coal from existing power stations. Most of Ontario Hydro's coal-fired power stations have excess capacity, in fact large excess capacity. For example, even with its current large increase in production, the Lakeview station is only running at 30% to 40% capacity in 1998. We've heard statements from the president of Ontario Hydro and we've heard statements from members of this committee around the table that Ontario Hydro should be encouraged perhaps to sell off more of its assets, that Genco shouldn't control as much in the future of the electricity system. If someone is going to purchase a coal plant, they're going to want to run it at more than 30% to 40%.
We're also concerned about the potential flood of coal-fired electricity from outside the province. There are companies -- for example, American Electric Power -- which have special, long-term rates with coal mines, with power plants that are actually physically located right next to coal mines, and that have very low rates and are quite eager to sell into the Ontario market. In fact, American Electric Power has already opened up an office in Toronto specifically for that purpose, to prepare the way for competition, because they think they might be able to sell into this province.
There is a gamble going on right now. We are hearing from the government on the one hand that it could clean up the system, but there are a number of reasons why we might expect that that is not the case. For that reason, and also the reason that the current existing caps on air pollution are entirely inadequate, Greenpeace is saying that the regulations that accompany Bill 35 are extremely important. We would like to see new mandatory caps, substantially lower than the ones that exist currently, introduced for sulphur dioxide, for nitrogen oxides and for carbon dioxide. We believe these caps need to be introduced now, at the same time as the legislation.
I am going to now move into the third part of my presentation: Why do the caps need to be introduced now? These caps, by the way, should not only be on electricity generators in Ontario but also on anyone who wants to sell into the Ontario market, because we don't want to simply encourage generation to shift to the Ohio Valley in a way that's unregulated.
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The reason we need to introduce these caps now is that if we wait, if we allow restructuring to go ahead, if we allow companies like American Electric Power to sign contracts with potential customers in Ontario, there is an enormous possibility that if the government were to introduce these regulations there would be lawsuits, there would be free trade disputes, there would be a situation developing such as developed with Ethyl Corp around MMT. These large American utilities would aggressively oppose any attempt to restrict their sales by introducing new regulations after they have already signed contracts, so it's extremely important that the rules be put forward now, not introduced later.
That's the main point I wanted to make. There are a number of other recommendations in my paper about mandatory disclosure, assistance benefit charge and a renewable portfolio standard. I encourage you to read that, but the main point I wanted to make, and I think it's extremely important, is that we need to see mandatory caps, and we need to see them introduced now.
The government has been looking at a number of options. None of them include imposing caps on generation which occurs outside of the province but sells into the province. They have largely been dealing with something which they call emission performance standards. The trouble with emission performance standards is that they only look at the amount of pollutants generated per kilowatt hour. Of course, as electricity demand increases, pollution will also increase at the same time, so we believe that's inadequate, that we need to see caps and we need to see them now.
The Chair: Thank you very much. We'll go first to the government caucus, to Dr Galt. It's about five minutes per caucus.
Mr Galt: Thank you for the presentation. Interesting, the mandatory caps that you're suggesting; they are certainly very energetic recommendations that you're suggesting there.
I don't mean to be sarcastic with my comments, but organizations such as yours do have to get press headlines, do have to create some protest to raise money, but there's also being productive in working with the regulations and working with the Minister of the Environment. Is it your intent to come to the table to help design some of these regulations that the ministry is currently struggling with, both inside and outside of Ontario?
Mr Jardine: Certainly we'd be happy to do that. In fact, we attended a meeting last Friday with Tony Rockingham to discuss exactly that point.
Mr Galt: And you plan to continue with that activity until these regulations are in place?
Mr Jardine: We are eager to do whatever we can to ensure that electricity caps are as low as possible, both inside government meetings and outside.
Mr Galt: OK. Great. You heard the minister this morning, and I gather from your comments earlier that you're quite in agreement with having pollution disclosure on the bill. Is that a direction that Greenpeace is comfortable with?
Mr Jardine: We've very supportive of having pollution disclosure on the bill. I think it's quite important that people understand the amount of air pollution that their electricity consumption generates. However, we believe environmental regulation is a matter for the provincial government, not for individual consumers, so we shouldn't count on consumer choices to determine the level of air pollution in this province.
Mr Galt: I think it was very capably mentioned this morning by one of the presenters that when it comes to foods, organic foods etc, grown in different ways as a comparison, people do make a choice and do pay more for what they consider more healthy foods. I thought it was an excellent comparison. I would think that would extend into the purchase of electrons as well.
This will be my last question. I thought the presentation this morning that Mr Layton made put forward an excellent and very practical environmental concern. He talked about people not really connecting turning on the switch for the lights or air conditioner or whatever, relating it to another shovelful of coal going into the furnace just up the highway that's producing electricity to run that air conditioner or whatever. I'm wondering what kind of education program you would suggest should be implemented to make people more aware of why some of that pollution is coming out.
Mr Jardine: I think the first amount of education I would like to engage in is with the government, to ensure that electricity caps are imposed. Greenpeace believes that consumer behaviour and consumer choice has an important role to play in reducing electricity and other pollution even further below the level of what human health requirements should be. However, we think the government needs to set the floor, and the floor needs to be in line with what the Ontario Medical Association has recently recommended.
We believe the first, foremost and most important thing the government should be considering is substantial reduction in the current emissions of air pollutants. Perhaps as part of the introduction of these regulations there can be a public education campaign to inform people about why that's necessary, but we don't want to support the suggestion that environmental regulation should be left up to individual consumer choices. Green power is not going to clean up the air. It will help to put more wind turbines on the ground, it will help to put more solar panels up, but it won't shut down dirty coal plants. It's up to the government to do that.
Mr Galt: Do I have more time?
The Chair: There's about three minutes left in the government's time.
Mr Galt: I'll keep going, then. Basically you're cutting the acid gas to a quarter, I think your recommendation is, similar to the other components. In calculating this, you must have come up with some thoughts on how much that would increase the cost of power. In my home, say the bill I'm getting is $1,000 today. If electricity production went to those levels for importation in Ontario, what would my bill increase to?
Mr Jardine: The difference between dirty energy sources like coal, for example, and cleaner energy sources like natural gas and wind, for example, is relatively small. It's about two cents a kilowatt hour. The electricity system that we are proposing wouldn't deliver the lowest possible rates, but on the other hand it would substantially reduce the number of people who die every year from air pollution.
I would like the members of the committee to remember that it is a saw-off, that we can't have the lowest possible rates and at the same time protect human health and the environment. We do have to make a choice. We are saying that regulations need to be introduced to prevent and exclude the dirtiest plants from getting access to the grid. That doesn't have to result in substantial increases in cost. The next cheapest power is from gas, three or four cents; wind can be five or six cents if it's built in large enough wind farms. Those costs aren't huge. What we like to say is that clean power is affordable even if it's not the cheapest.
Mr Galt: I should assure you that the intent of this government is to ensure that it will not increase over what it is now just because we open up the border and have competition. I think it's interesting to point out, if you were here when the minister spoke this morning, the fact that today it's very easy to import dirty power and it's also very difficult to get green power on to the grid. So just with a simple change in this bill, nothing too fancy, we're going to be able to correct those two problems that pre-Bill 35 has had. We're moving quite a ways in the environmental direction; maybe not as far as Greenpeace and Mr Jardine would like to go, and I totally empathize with your thoughts and your concerns. I think everybody around this table is really an environmentalist and is quite concerned about the whole and the future down the road.
The Chair: I'm sorry. We're going to have to move to the next caucus. Mr Kwinter.
Mr Lessard: It's a good place to cut him off.
Mr Jardine: I do agree, sir, that this bill will allow more access to green power. It will also allow more access to dirty coal, and that's what we have to worry about.
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Mr Kwinter: Mr Jardine, I read ahead in your proposal, even the parts that you didn't cover, and I agree with your goal. I don't think anybody would disagree. I think, as you've said, everything is a trade-off, and when you live in an industrialized economy, there are trade-offs. In a perfect world there would be no pollutants and we'd all live long, happy lives without any of these emissions, but the reality is that we have to produce the things that we do. We have electricity, we have manufacturing and all these things, and there is an environmental cost. What we have to do is try to minimize what that cost is.
You're advocating caps on these various emissions, and it would seem to me that some of them are quite dramatic, where you have 175,000 tonnes and you want to cut it down to 43,000. That is a huge, huge reduction. My question to you is, how practical is that given what it would take to do that?
Mr Jardine: I'm sure there are lots of examples of emission reductions in moving from a dirty energy source to a clean energy source, but let me give you one particular example: moving from coal-fired electricity to natural gas cogeneration. A coal plant is about 30% efficient, so 70% of the energy which is generated just goes up the smokestack. It also produces twice as much carbon dioxide per unit of energy generated as natural gas cogeneration. So if you look at that from just the point of view of carbon dioxide emissions like greenhouse gas, you can go from a coal-fired power station to natural gas cogeneration and get about a 75% or 80% reduction in emissions. If you go even beyond that to wind power or landfill gas, which as I said are more expensive but only by a penny or two a kilowatt hour, you can get emissions which are much lower -- in the case of wind, even zero.
It is possible to get substantial reduction in emissions. The Ontario Medical Association isn't crazy in proposing these new caps. They are concerned about human health, and I think everyone in this room should be concerned about the 1,800 people who die in Ontario a year because of air pollution, about the 64,000 emergency room visits, about the 130,000 cases of bronchitis. My father has bronchitis and I grew up listening to him cough sometimes all night, having to leave my parents' bedroom and just spend it on the sofa, coughing and coughing, because of his lung ailment. I understand how much pain that is. I understand what effect it has on families, and I think that everyone around this room should take that into consideration when you are looking at electricity regulation. It's not just a matter of dollars and cents; it's life and death.
Mr Kwinter: I'd like to talk to you about wind power. When we sat on the select committee, we had proponents come forward and advocate wind power. I have been to Holland, where I have seen their windmill farms where they're generating electricity. The experts tell us that there is no question it's a very environmentally friendly technology. The practicality is, could you generate enough power using windmills or these wind turbines to satisfy our energy requirements, and seemingly the technical answer is no. There's no question you can do it in specific cases, and you can run certain facilities that way, but it just isn't practical to fill up the whole country with these things to replace what we have with nuclear, hydro and coal-fired.
Mr Jardine: I agree that there is no one solution to reducing air pollution or even dependent on nuclear plants. In the case of wind, IPPSO can come and give you the numbers, but according to their analysis the technical potential for wind in Ontario, given the amount of land that's available and the location of the windy areas, is about 6,000 megawatts. Realistically, only about 2,000 or so of that could be considered to be cost-effective; 2,000 megawatts would be more than enough to shut down the Lakeview thermal generating station, and that would go a significant way to cleaning up the air in the greater Toronto area, for example.
It isn't the only thing that's required. If we lowered the caps, that would encourage more natural gas production. If we added a systems benefit charge to pay for energy-efficiency programs, we could use that to reduce our electricity bills and also air pollution. There are a number of things that need to be done, and it's the combination that can get us to where the OMA says we need to go.
Mr Kwinter: Are you advocating mandatory caps or targets?
Mr Jardine: We're advocating mandatory caps. We have just heard from Ontario Hydro that in the new system they intend to be predators, not prey. Only mandatory caps will mean something in a privatized competitive market.
The Chair: Thank you. To the third party.
Ms Churley: God forbid that Jack Layton would want me to correct the record for him, but he's not here to do it himself so I want to do that, because the inference made by Mr Galt was that Mr Layton merely suggested that education and labelling would be the answer. I don't think Mr Galt meant to imply that alone, but Mr Layton's concern was that the bill wasn't adequate in terms of making it permissible for renewable energy to come on board under the new bill. They came with recommendations to make sure that the bill be strengthened, to make sure that the option for the renewables be real as opposed to being just on paper, and they expressed concerns about some of the reasons which would in fact keep them out. That was very clear in his presentation. I wanted to just get that on the record. Then he proceeded to make some recommendations.
I want you to comment on the importance of getting the renewables in the door. Certainly I don't think anybody here believes that wind power is going to solve the problem for us tomorrow. The concern has been, in the past, partly because of the Hydro debt -- I well remember from when we were in government the difficulties of allowing the renewables and the cogens and all of those to come on board. As you said, this is an opportunity now, as we change the structure, to allow them in the door in a very realistic way.
Besides lowering the emission caps or actually strengthening the emission caps and putting them on in some cases where none exist, what else needs to be done? How would you strengthen this bill to make sure that the renewables are actually invited in and get in the door?
Mr Jardine: There are three things I didn't get to in my oral presentation that are listed in my written comments. Number one is that we need to have on-bill disclosure so that people can actually see the emissions from their electricity consumption. That will help to drive the green power market. But we don't believe that's sufficient.
Number two is that we need to include the research and development for experimental renewable energy sources like photovoltaics, for example, in a systems benefit charge. Ontario Hydro has been doing good, useful research on solar power, on fuel cells, on a number of projects, and we believe that a very small charge, perhaps raising $100 million or so a year, could be enough to finance energy-efficiency programs and research and development into longer-term green power sources.
The third thing that we think is very important is the renewable portfolio standard. That has actually been recommended by the US Department of Energy as a thing that should be taken into consideration as part of the restructuring that's going on now in the United States. The idea there is that if you wanted to sell into the Ontario market, you would have to include a certain percentage of green power in the portfolio that you're offering your customers. In the United States they have proposed a portfolio of 5.5%, but they don't include hydroelectric for reasons that I find a bit puzzling.
We're proposing that the Ontario program adopt the federal environmental choice definition of green power, which also includes environmentally sustainable, small-scale hydroelectricity, and because our definition is a little bit more flexible, that the portfolio standard be moved up to 10%. That would enable the renewable energy industry to really take off in this province in a way that I think individual consumer choice may not. I'm not personally convinced that 10% of the population is prepared to spend very large amounts to subsidize, to buy 100% of their power from wind, but I think a large number of people would be prepared to spend just a little bit if they knew that the cost of renewables was spread evenly and fairly across the province. After all, everyone benefits from reduced air pollution, so why not have everyone pay a small amount extra to kick-start an energy industry which will provide emissions-free power to the province.
The Chair: I'm sorry, we're out of time on this section. On that note, on behalf of each of the members of the committee, I thank you for coming before us with your ideas and suggestions for the bill. They're much appreciated.
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MUNICIPAL ELECTRIC ASSOCIATION
The Chair: I would now like to call upon representatives from the Municipal Electric Association, please. Good afternoon. Welcome.
Ms Pauline Storks: Madam Chair and members of the resources development committee, good afternoon. My name is Pauline Storks and I'm here in my capacity as chair of the Municipal Electric Association. I also serve as a commissioner on the Clarington Hydro-Electric Commission. With me today are MEA's president, Bob Lake, who is the general manager of the Peterborough Public Utilities Commission; and Tony Jennings, the MEA's chief executive officer. They will be available at the end of our formal remarks to answer your questions. I will not read our brief in its entirety since we have provided you with copies. I will simply give you the highlights.
Our members serve on the front lines of the public power industry in this province. They operate on a not-for-profit, businesslike basis and fulfill a mandate to provide a safe and reliable supply of low-cost electricity and quality service.
Ontario's local municipal utilities have a long history of public service. We don't mind being a Boy Scout or a Girl Guide, and as a little old lady I don't mind being helped across the street. Our years of experience in the electric utility business mean that we know our business. We know our customers and we also have strong views on how the industry should be restructured in the best interests of those customers.
The MEA and its members aren't newcomers to the debate about electricity industry restructuring. In fact, we began to examine why and how the industry needed to change back in 1992. As we refined our approach to reform over the course of the next four years, we did so with one important first principle in mind, which is simply this: The MEA and its members believe that any electricity industry reform in Ontario must be in the best interests of all the province's electricity customers. That means that making the industry more competitive, a position we wholeheartedly support, should deliver real benefits in the form of lower rates or at least the potential for lower rates. It's a message we intend to continue to deliver as this bill winds its way through the legislative process. In fact, in our detailed analysis of the legislation, we used the best interests of customers as the benchmark against which we assessed Bill 35.
While we applaud the government for taking on the very complex and challenging task of reinventing the industry, we still believe the legislation does not go far enough to meet the needs of Ontario's electricity customers. We have a number of detailed policy observations and will be seeking a series of amendments or clarifications to the bill. These details will be available in our written submission to the committee, which will be delivered by the August 20 deadline.
Today we'd like to walk you through our view of the big-picture policy issues involved in this bill. The intent is to give you a clear sense of the MEA's position on these issues, given our goal of protecting and advancing the interests of all customers.
Although most of the government's statements on Bill 35 are about achieving low-cost energy for the consumer, this is not entrenched in the legislative language.
For the information of committee members, under similar circumstances other jurisdictions have legislated a price reduction for small customers. The promotion of low-cost energy is important and should be explicitly included in the purpose section of the Electricity Act and in the objectives section of the Independent Market Operator, IMO, and the Ontario Energy Board, OEB. Given the complexity and lack of detail in the bill and noting the litigious nature of the transition in other jurisdictions, this change would provide lawyers, judges and regulators with a critical touchstone for use in decision-making.
Let me move on to an issue that has received a great deal of attention to date and is directly related to low-cost power. The issue is Ontario Hydro's market power, or its continuing ability to dominate the generation sector through its successor company, Genco.
Generation of electricity accounts for about 70% of the cost of electricity. In contrast, the distribution and transmission sectors each account for about 15% of the cost of power. Generation is the one sector where monopoly functions need not be continued and thus is most susceptible to improvements through competition. With these facts in mind, it has always been clear that making the generation sector more competitive represented the biggest and best opportunity to provide savings, which could then be passed on to the customers in the form of lower rates.
For this reason, in jurisdictions around the world the generation sector has always been the primary target for aggressive restructuring. Here in Ontario, however, instead of opening up this sector to real competition within the province, the government has chosen to maintain one large monopoly-like generation company.
Ontario's transmission ties are very limited and cannot be expanded quickly or extensively. No matter how extensive the financial trading in electricity becomes in the next year, at least 80% of the electrons used in Ontario will be generated in Ontario and paid for at prices the generator demands.
Genco's very size and stature within the Ontario marketplace preclude the entry of significant new players in generation. In turn, fewer new and significant market entrants mean less competition. More importantly, less competition means that lower rates are less likely.
To date, however, despite acknowledging the legitimacy of these concerns, the government has chosen to not entertain the obvious solution to this problem: that of further unbundling Genco into a number of individual, publicly owned companies as a means of generating more competition.
The government has asked the Market Design Committee to find other ways to mitigate Genco's market power. The MEA has a couple of members who sit on this committee and we're pleased to assist in developing mitigation options, even though they are acknowledged to be a second-best solution.
We think there is an opportunity to strengthen the legislation in this regard. Our recommendation is that the bill entrench a review of the status of Genco within a two-year time period. If it is revealed that the company's market power continues to pose a threat to real competition, the legislation should allow for the further unbundling of Genco.
A number of new taxes and charges against municipal electric utilities are anticipated by Bill 35. Municipal electric utilities accept that they and all their customers must pay their fair share of stranded debt. That includes utilities, and large and small customers alike. As such, we don't object to making payments in lieu of taxes until this debt is retired. What we do not support, and what every customer in this province would object to, is the subsequent entrenchment of these special payments as new taxes.
Right now that's what Bill 35 says, that these new taxes will continue to be collected from local utilities even after the stranded debt is paid off. Continuing payments cannot be justified from a customer interest perspective because they mean, very simply, that the customer will have to pay more than they should for their power.
On the issue of taxation and a level playing field, the MEA contends that municipally owned distribution companies, which the legislation dictates must incorporate under the Ontario Business Corporations Act, or OBCA, within two years of the new act coming into force, should be subject to the same tax, or tax-equivalent calculation, as any other OBCA market participant.
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In this context, what the bill calls the adjusted gross revenue special payment being levied against local utilities seriously disadvantages these utilities in their bid to compete with new players. As such, we are asking that this special payment or tax be eliminated in the interest of maintaining a level playing field and customer benefits.
We'd like to address another significant competitive issue for local utilities. While Bill 35 requires that municipally owned electricity distributors and their affiliates compete in the electricity industry, it then places restrictions on the kinds of businesses the affiliates can engage in.
What we want this legislation to stipulate very clearly is that the competitive businesses associated with local utilities must be able to pursue the same activities that other competitors and Ontario Hydro's successor companies can pursue.
Right now, under the provisions of Bill 35, this is not the case. Local utilities should certainly be allowed to enter all forms of energy and telecommunications businesses.
By imposing restrictions on local utilities, this bill restricts the benefits that local ratepayers, taxpayers and local municipalities can derive from these municipally owned companies.
The next issue we want to review is the impact that Bill 35 will have on the ability of municipalities and local ratepayers to control their local electricity assets.
The MEA has always maintained that utilities should be controlled locally in order to ensure that they are accountable to their ratepayers.
One of the traditional and critical ways municipalities have exercised local control is through the granting of electricity franchise rights. Under Bill 35, municipalities lose this right to the OEB. While we support an expanded role for the OEB in the new competitive market, the MEA believes that the municipality, on behalf of its ratepayers, should continue to have a say in who serves them.
Another aspect of local control compromised by this bill is the issue of utility boundary expansions. One of the clear intents of this government is to encourage the amalgamation of local utilities.
There were many studies, initiated by local utilities, underway before this legislation came into being. A good number of them were proceeding under the terms of Bill 185, which in basic terms laid out the rules for accommodating utility boundary expansions.
Unfortunately, one of the provisions of Bill 35 is to repeal the Power Corporation Act and its provision allowing for municipal electric utility service area expansions. One such restriction is that expansions must be negotiated on a case-by-case basis with Ontario Hydro.
Given that Ontario Hydro continues to be in the retail business, in direct competition with local utilities, it seems unlikely that Hydro will be either ready or eager to support such expansions.
The MEA therefore requests that the requirement for the transfer agreement with Ontario Hydro be removed from the legislation.
We are also suggesting that boundary expansions be allowed to proceed where local utility commissions have passed expansion bylaws by the date of the proclamation of the bill.
Another area of significant debate revolves around the issue of the separation of distribution and transmission functions of Ontario Hydro. Under Bill 35, which creates Servco, there is no such separation.
The MEA has been assured by energy ministry officials that the OEB will ensure that abuses such as cross-subsidization between transmission and distribution are prevented. Cross-subsidization within Servco could seriously disadvantage local utilities and their customers.
Once again, an Ontario Hydro successor company would be in the position to abuse its market power and manipulate the market in its own favour.
For this reason, the MEA is recommending that the legislation be amended to clearly separate these two functions into two separate entities.
As noted earlier, leading jurisdictions around the world moved to restructure their generation sectors before they took aim at the retail or distribution sector.
The economic rationale for this approach is that the biggest potential savings are available by making the generation sector more competitive, given that it accounts for about 70% of the costs all of us pay for our power.
There are also technical reasons why these jurisdictions proceeded more slowly on retail restructuring, some of them relating to the complexity of introducing competition in a way which (a) would not cause undue disruption to the system and (b) would actually deliver real benefits to smaller residential and commercial customers with limited buying power.
In Ontario, the government rejected a staged approach to restructuring. It is taking the opposite approach of those taken by competing jurisdictions, by moving ahead aggressively on the retail side of the equation.
Based on the examples of other countries and states, we think it's safe to say that this is a somewhat risky approach. After all, in the UK and California, they've been working on retail access for eight and four years, respectively, and still haven't fully implemented it in either place. To expect that Ontario could achieve in 18 months what the UK and California haven't been able to achieve in eight and four years may be unrealistic.
That being said, there are steps that we can take as a province to try and achieve an orderly transition to retail competition in the time prescribed by Bill 35. Our collective goal should clearly be to protect the interests of our customers over this period. The MEA has a couple of recommendations in this regard.
First, the bill should stipulate that any supply contracts signed by customers prior to a retail business being licensed by the OEB should be deemed invalid unless confirmed again, after the market opens for competition, by the parties. This provision will help protect customers from unscrupulous energy brokers.
At the same time, we believe the act should mandate that retail access pilot projects be undertaken to test the market and ensure its readiness.
Finally, we believe that a one-year transition period to full and open access retail competition should be set once the market has been declared ready.
The MEA has also advocated, along with a number of other stakeholders, for a government-executed public information program. Such a program should be dedicated to helping Ontarians understand the changes to the electricity system and how these changes will impact on them as customers.
Let me end by saying that the MEA and its members applaud the Ontario government for taking on the very complex and challenging task of reforming the province's electricity industry. That being said, we have outlined some serious concerns and offered what we believe are constructive suggestions to make this a better piece of legislation. We would urge you as legislators to carefully consider the "best interests of customers" benchmark the MEA has established when you are assessing Bill 35.
Thank you for the opportunity to address the committee. We would now be pleased to answer your questions.
The Chair: Thank you. We'll begin with the official opposition. There are about three minutes per caucus for questions and answers.
Mr Conway: Ms Storks, Mr Lake and Mr Jennings. I appreciate your presentation. There is virtually no time so let me just observe and ask you to comment. I've known most of you for some years and I've thought of you as many things but I've never thought of you as Ron Osborne's lunch. I have to tell you, I'm still kind of trying to recover from the remarkably aggressive presentation we just received from Ontario Hydro.
In many respects, I think most of us who have been around this debate were expecting, particularly in southern Ontario, that by and large this rationalization was going to see, consistent with movements that had started with Bill 185, that there would be fewer MEUs, that they would be larger, that they would be more dynamic and hopefully more efficient, but that the retail company that is Ontario Hydro would substantially recede from much of southern Ontario.
What we have here today is confirmed in a conversation I had with some senior Hydro people the other day: that the plan of the new Hydro group is an aggressive expansion of Servco, the retail company, in southern Ontario. Eat or be eaten, I think was the phrase; prey or be preyed upon, and the Hydro people today made it plain they do not intend to be your lunch.
Having said that, I'd like you to comment. Are you surprised at the apparent posture of Servco particularly to aggressively expand the retail company in southern Ontario, or is that what you expected this competitive marketplace would mean for many of your customers?
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Mr Bob Lake: The relationship between Ontario Hydro and the municipal utilities, in my opinion and generally all utilities, has deteriorated drastically in the last three years. Up until the last three or four years Ontario Hydro and the municipal utilities did co-operate on just about every front. If we had some difference of opinion, we usually found some way to sort it out. In a whole number of various areas, and we don't have the time to go into them today, we have found ourselves being at odds with Ontario Hydro in a number of situations, and the epitome of it, I suppose, is the fact that we have in fact taken Ontario Hydro to court and we intend to proceed.
Mr Conway: Bob or Tony, just quickly, how big is the municipal utility rate base in terms of number of customers and in terms of annual revenues?
Mr Lake: Annual revenues are about $7 billion; customers about two and three quarters.
Mr Conway: It's 2.75 million customers representing an annual revenue base of about --
Mr Lake: About 70% of the province, about $7 billion.
Mr Conway: Just a final question, then. I'm trying to figure out these new charges. I'm expecting that if I was the Minister of Finance, the charge that I would like most of all in this new basket of hydro taxes would be the one that would give me a slice annually and forever of your rate base. Would I be right in thinking that if your rate base is roughly 2.7 million customers representing annual revenues of about $7 billion, making adjustments for the regulations, that I would need to have a very big percentage to get myself an annual yield of hundreds of millions of new dollars?
Mr Lake: I think that's why a lot of the private sector have a lot of interest in us.
The Chair: For the third party, Mr Lessard.
Mr Lessard: Thank you very much for your presentation. I look forward to getting more of the detailed suggestions with respect to amendments of the bill.
I can tell you that the members of the New Democratic caucus share your concerns about the government perhaps moving too fast in making the changes they're suggesting and share your concerns that there need to be some changes to this bill. We've seen past legislation, for example, Bill 160 comes to mind, where even a court judge found that the government had moved too fast and there hadn't been full consideration given to the legislation before it had been pushed through. Where it's all going to end up in the end, only time is going to tell. I would hope we're not going to end up in a similar situation with Bill 35.
Having said that, I have a couple of questions. One has to deal with the issue of taxation that you've mentioned, the entrenchment of special payments as new taxes. You ask that these special payments be ended once the stranded debt has been paid off. The legislation says that the Minister of Finance will be the final arbiter as to when that magical date may be. Who do you think should decide, and should there be some mechanism to appeal that decision by the minister if it ever does get made?
Mr Tony Jennings: Let me try that. I don't think we would object to the Minister of Finance being the decision-maker. The Minister of Finance is responsible for finance. We understand the books of Financeco will be open so it will be fairly easy to see whether things are happening at the right time.
We don't read the bill, unfortunately, as giving the government of the day the choice that Mr Dorey mentioned this morning. That would be one of the detailed suggestions we would make. As the bill is currently written, it gives the government the choice of when to turn that into a tax rather than a special payment. It doesn't give them the choice of whether to turn it into a tax.
Mr Lessard: One final question: If none of your concerns are addressed, are you still supportive of the bill?
Mr Lake: We have no option.
Mr Jennings: We could carry on with what we have today, which is a regulator and a mandatory supplier, saying they were a competitor.
Mr Lake: And going to meet us for lunch.
The Chair: To the government, Mr Gilchrist.
Mr Gilchrist: Thank you, Ms Storks and colleagues. I appreciate your coming before us. A lot has changed in the last year since I spoke to your eastern district, I guess about a year ago now. Let me thank you in particular for the detail you've put into your presentation. These processes work best when people give us some specific direction, and I very much appreciate all of your submissions and we certainly will be considering them all.
Before getting into my question, let me just give you some peace of mind. There are a number of things where perhaps it is just a question of the different interpretation on reading the bill. Under the heading of "Ensure orderly transition to retail access," for example, the legislation already does enable pilot projects to be launched in advance of wholesale change, and a number of other specifics like that. I'm sure we'll address all of your points in detail.
However, in the couple of minutes we have here now I am intrigued at one apparent contradiction in your presentation. You're suggesting that it is appropriate for Hydro to shed some of what you perceive to be its still near-monopolistic power by breaking up Genco even further. So is it fair for me to surmise, having read your presentation, that you think it's appropriate for greater competition for your suppliers but not for your customers, because you ask for even a further delay beyond the two-year phase-in for the MEUs to set up a corporation?
If we divide the number of customers, you just answered Mr Conway, of about 2.7 million customers, that works out to bang on 10,000 customers per MEU, and I can tell you 10,000 wouldn't even justify a decent hardware store. In today's day and age, with Hydro at a million customers and the average MEU at 10,000, I think it's perhaps not inappropriate to look at it in the light of any other competitive situation out there.
I am intrigued why you would not think the MEUs should similarly immediately -- if in fact Genco should be broken up, why shouldn't the MEUs be immediately required -- let me take a word out of your own presentation, "benchmarks" -- to publish benchmarks so that the customers today could know exactly what the difference in cost would be, depending on which MEU they wanted to buy their power from?
Mr Lake: The costs of electricity are published annually and they are sent around to each municipal utility. They are public information. They are available to Ontario Hydro, if you'd like them. The rates are all over the place in terms of how much they are. Typically, they're quoted in terms of 1,000 kilowatt hours per customer per month for residential customers, and then there are two benchmarks for general service classifications, one of them being about 50 kilowatts in 10,000 kilowatt hours. In the other one, I think it's about half a megawatt.
Those numbers are published now. Our association has a voluntary benchmarking scheme where utilities can participate and send in a whole bunch of benchmarks, not just rates. It can be financial ratios, it can be reliability ratios, it can be turnover ratios for stock, that kind of thing, and it covers every area of operation of the utilities done on a voluntary basis. That way the utilities can compare themselves not only to their past performance, but to the performance of other utilities in the province.
Mr Gilchrist: What would happen if the customers in every MEU were sent that information? Would they naturally want to move their business to the lowest-cost provider, and if that's true, why wouldn't we want to facilitate that?
Mr Lake: Our market information indicates that customers generally will not move from where they're at with their provider, be it long-distance telephone services or cable TV or natural gas, unless there's about a 15% change in price.
Mr Gilchrist: And that would true, comparing Toronto to some of the other MEUs across Ontario, wouldn't it, just as an example?
Mr Jennings: Can I jump in on that? There are two or three things.
First of all, Bob has already mentioned the data that are available and we paid about $30,000 to Ontario Hydro to keep them producing that a while ago, because they were planning to stop producing those stats.
Secondly, you talked about the efficiencies. The study the minister quoted this morning talked about 8.5% potential savings from amalgamations. That's 8.5% of controllable costs which are, on the typical utility, less than half of their cost. Their costs are at about 15%, so we're talking 8.5% of 7%.
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One of the reasons we've been cautious about retail access is the significant cost of setting up an IMO and other things and whether those can be offset by the gains you can get downstream. That same study, before it was abandoned by Ontario Hydro, was indicating that the optimum size of utilities, based on that analysis, and a similar analysis in Norway found similar things, was 20,000 to 40,000 customers, much smaller than most people would expect. So we've got some caution on those types of things.
Mr Lake: Just to emphasize that point, I once served on a committee when I was employed by Ontario Hydro. I worked for 15 years in what was called the Georgian Bay region at the time and Al Pertula was the director of the region at the time. Our mandate was to find what the optimum size retail operation was because Ontario Hydro at that time had priority small retail operations, some as small as 6,000 customers. The results of our studies were in the range of 20,000 to 40,000.
By way of observation, there's quite a difference between hardware stores and electric utilities. If electric utilities had 10,000 customers, I would estimate their annual revenues to be in the order of $17 million.
Mr Gilchrist: That's a decent Canadian Tire store today.
Mr Jennings: The other factor that affects it, Mr. Gilchrist, is the way Bill 35 is structured, we're parsing the charges so everybody is going to pay whatever you pay for the 70 cents on the dollar. Everybody is going to pay whatever it is for the 15 cents transmission and everybody's going to pay for the local controllable costs.
The thing that we're competing on is only those electrons that come through from whoever the generation supplier is. The wires are still monopolies either way. They're not competing with each other directly and that's another reason why we don't understand why you need taxes on that for a level playing field because you're not competing for customers, unless we want to have two or three sets of wires going to the same house.
Mr Gilchrist: Don't forget convergence. The technology is out there. I would hope you would not expect to get away from paying taxes if you took on, say, the cable TV business in the town and had a competitive advantage over Rogers or Shaw.
Mr Jennings: We would expect any of the competitive businesses to be on a profit basis. We don't understand how it could be otherwise.
The Chair: On behalf of all the committee members we thank you for coming before us this afternoon with your presentation. We appreciate your advice.
PROBYN & COMPANY
The Chair: I'd like to now call upon representatives of Probyn & Company. Good afternoon and welcome.
Mr Steve Probyn: Thank you.
The Chair: As I'm sure you know, you have 30 minutes for presentation time. I think you're an old hand at this so you know that you can either use it all for presentation or you may allow time for questions.
Mr Probyn: Probably the latter. Thank you very much for permitting me to share my views on Bill 35 with the committee. I'm delighted to be here. I thought I'd start simply by outlining the activities of our group of companies so that you can understand where my comments are based.
We have three businesses: project finance, operations and energy services.
In project finance we work with a group of institutional lenders, led by Mutual Life of Canada, and have assembled a portfolio of approximately $1.1 billion in independent power finance. The projects that we have financed include natural gas, hydraulic, biogas, wind generation and biomass.
Our operations side includes four plants controlled by our affiliate, the Canadian Environmental Energy Corp, and one other controlled by our lender group, which is a total of 230 megawatts of biomass and gas generation. These facilities are located in Alberta, Ontario, Quebec and Nova Scotia.
In terms of energy services, one of the services that we offer which exemplifies the changing nature of this market is our DTE/Probyn Energy Solutions affiliate. It's a joint venture with a sister company of Detroit Edison and is responsible for developing and implementing utility services to utilities throughout Canada.
A primary focus for all of our activities is a commitment to the environment. One of our group, the Whitecourt biomass generation station, became Canada's first power station to earn the EcoLogo by meeting Environment Canada's most stringent environmental guidelines. We played a key role in the development of Alberta's green power program, working with Enmax Corp, which is the city of Calgary's electric utility, as a principal supplier of green energy.
Turning now to restructuring the electric power industry, we believe this initiative of the government's is one of the most important economic measures it has undertaken in its term of office. This is absolutely essential to compete with deregulating markets across the United States. We see very rapid movement to deregulation both at the federal and at the state level. That means our industries will have to compete with their competitors who are located in competitive markets where they are able to reap the benefits of low-cost competitive electricity.
I'd also like to commend Jim Wilson and his team, both on the political and the bureaucratic side, for what is an outstanding effort in terms of consultation, in terms of working with the various stakeholder groups to build our consensus. I think it's a testament to the consensus that all of the major stakeholder groups of which I am aware are in support of the principles behind the legislation.
I should add personally that it's an honour for me to serve on the Market Design Committee. We have been chaired, as many of you know, by Ron Daniels, the dean of law of the University of Toronto, who has done an absolutely outstanding job in moving the agenda forward. Our committee produced on-time delivery of its first two reports, and I think we are moving towards on-time delivery of our third report.
I believe, based on what I've seen in that committee, that we are going to make our target of a retail access market by the year 2000. Quite frankly, that's something I was somewhat skeptical about when I joined the committee. Because of what I've seen with the executive and also with the stakeholders -- the will to work together, the time after time that parochial interests have been put aside in the interest of moving the reform agenda forward -- I believe that this is actually going to happen.
I'd also like to commend Ontario Hydro -- and that is, for those of you who know me, an unusual position for me to be in -- for its positive role in the process. I think Bill Farlinger deserves a lot of credit for moving the process forward, for taking on board new ideas, many of which didn't actually originate with Ontario Hydro.
I'd like to also stress the stakeholder role. The Stakeholders' Alliance for Competition and Customer Choice has played a key role in the development of both the legislation and the market roles, and I'd like to commend its chairman, David McFadden, for an excellent job.
That having been said, I think we have a major undertaking in terms of public education, and I'd like to associate myself with the remarks of the Municipal Electric Association on the need for substantial public education. It would be a shame if our urgency, which I believe is justified, put us so far ahead of the public that we were not able to communicate the benefits of this important program.
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I'd like to speak briefly about Bill 35 and cover some detail.
The new legislation makes no mention of existing IPP contracts with Ontario Hydro. We are of the view that the act should specifically deal with these contracts, given their importance and the fact that they are existing long-term obligations of Ontario Hydro and, in that respect, very analogous to debt instruments that were issued by the corporation. More specifically, the administration of the contracts and the payment of amounts due for the electricity purchased under them should be a specifically enumerated responsibility of the Financial Corp in clause 52(1)(c) of the Electricity Act.
The legislation should not permit the IPP contracts to be transferred to the Generation Corp or the Services Corp or another third party, and if such transfers are made under section 115 of the act -- the proposed bill, I should say -- the ultimate responsibility for the contracts should continue to rest with the Ontario Hydro Financial Corp. These contracts were signed with a crown corporation, and it's important to realize that this credit should not be diminished. Financial Corp's obligation under the contracts would continue to be guaranteed by the government as a result of section 53 of the act.
Genco in particular would have an incentive to try and renegotiate or possibly disrupt these contracts since it would be a competitor of the generators in question. So that's an additional rationale for not transferring the contracts to Genco.
I would like to make one point in terms of the lenders' position in these contracts. As many of you are aware, the projects were financed largely with project debt. We made our credit decisions based on off-take contracts that were with a substantial sovereign utility with a AA- credit rating. For those contracts to be transferred to Genco, say, where the Ministry of Finance has announced a targeted BBB credit rating, would be an expropriation in the order of 50 basis points of value, which, given the size of our portfolio, is a substantial expropriation.
In addition, we feel the definition of "stranded debt" in subsection 79(2) should be broadened to specifically identify existing NUG contracts as a Financial Corp liability to be included in the calculation of what is ultimately determined to be stranded debt.
Finally, in respect of the position of the lenders and the contractors, section 23 of the act provides that any contract entered into by Ontario Hydro and a municipal corporation or any other person before a regulation is made under section 45 for the supply of electricity to the municipal corporation or other person ceases to have effect on the day that subsection (1) comes into force. This section should be amended to state that it does not apply to contracts between Hydro and independent power producers entered into prior to the date of the new regime coming into effect.
I should explain that most independent power contracts that I'm aware of actually contemplate the sale of power by Hydro to the independent power producer. This is necessary for black start requirements. It's very important, in fact vital, to us that this provision, subsection 25(3), doesn't sweep our contracts into the general termination proviso.
I would like to say at this point that we have had discussions with officials on these matters, and in general we feel the response has been somewhat positive. I would, however, point out that these changes are critical to the success of this legislation.
First of all, under the common law there is a right to compensation unless the right to compensation is specifically extinguished by legislation. That clearly encompasses the concept of an arbitrary reduction in the credit quality of our security.
Secondly, NAFTA protects US and Mexican nationals from expropriation without compensation, and I should point out that there are a number of US lenders and other participants in the independent power market and their rights would enjoy the benefit of NAFTA protection.
Thirdly, in terms of constitutional law, there is an argument that the province cannot legislate extraterritorially. To the extent that this is an expropriation of a part of our security rights and those bonds are resident extraterritorially, this would subject the act to constitutional challenges.
What I'm saying is that I think we all agree on the nature of these contracts. They are stranded assets of Hydro, not unlike the debt that was incurred to build nuclear facilities. It's important to the lending community that this principle is respected, and I think it's important to the progress of the bill in its entirety that it isn't subject to challenge by a number of parties protected under the common law, NAFTA or constitutional practice.
I would say, just to give you a sense of a solution, and we will be making a written submission later on, that our solution would be simply to exclude those contracts by schedule from the provisions I have described. That would, from our perspective, ameliorate the issue.
The final issue I wanted to talk about is the environment. The act is very supportive of the environment in the sense that it gives the minister many powers to protect the environment. At Market Design we have looked at a number of issues, and the report of the Market Design Committee which was issued at the end of June will give members of the committee an elaboration of some of the key issue areas.
One area where the work has yet to be finalized is in the question of renewable portfolio standards. These standards would apply to entities selling power in the Ontario market. Where one was selling power in the marketplace, a condition of licence would be that a small fraction of overall sales come from renewable energy assets. This mirrors a US Department of Energy provision which is currently proceeding as part of the Clinton energy plan. I believe there are a number of US states which either are in the process of adopting or have adopted renewable energy portfolios.
Why is this important? It's important because our industry is one of the single largest causes of greenhouse gas emissions. We must move to sources which reduce our output of these gases. The public is seeing the effects in terms of climate change, the extreme weather, the changes in economics that accompany these climate changes. We have seen very strong support for Canada's national position in Kyoto, and I believe our industry must not be part of the problem but must be part of the solution. For this reason, a renewable portfolio standard would provide a stop-gap between the current situation and the implementation of emission cap and trade policy.
I believe it is important for us to understand that the competitive market, because of its nature, can mitigate against renewable resources. The intermittent resources have great difficulty bidding into the type of market structure that's envisioned. As well, the renewable resources which are capital-intensive, and most of them are -- small hydro, wind, biomass -- are "discriminated against." I use that in quotes because it's simply the action of a particular market mechanism -- and I believe we need to take legislative action or, alternatively, administrative action to redress the balance.
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Finally, I would also point out that in terms of the environment it's important to look at the overall context. I've long been an advocate of the responsible use of nuclear power and I believe it is critical for us to begin to get our nuclear units back on-line so that we can supplant some of the fossil energy that we are currently using as an alternative. It's only if we move forward and provide a comprehensive program for the reduction of these emissions, both through the rehabilitation of mothballed nuclear plants and the implementation of a renewable portfolio standard, that I think we can be seen by the public as making the kind of motion towards the objective of their environmental goals. So I would commend the committee to moving forward on the implementation of the renewable portfolio standard and other measures necessary to support our greenhouse gas objectives.
That concludes my presentation and if there are any questions, I'd certainly be delighted to take them.
The Chair: We have slightly over three minutes for questions from each caucus.
Mr Lessard: If some of the changes that you've asked for aren't made, is it your anticipation that there will be some litigation as a result of this bill, and if so, what grounds do you think that may take? Would it be with respect to expropriation of your rights or challenging the constitutionality of the bill? What form do you think it might take?
Mr Probyn: There are a number of possible paths that this could take and I outlined three of them. Certainly, for example, NAFTA corporations, US corporations that are investors in these projects would find themselves in a position, if they felt their rights were expropriated, to undertake both administrative action and potentially legal action. There are questions of the rights of contracted parties under common law. All of these are very important questions.
I anticipate that the government will take these comments to mind and will move to ensure that there aren't the grounds for any challenge through ensuring that the contracts remain as ultimate obligations of the Ontario Hydro Financial Corp.
Mr Lessard: Do you believe there should be caps on emissions, caps that not only include generation in Ontario but generation outside of Ontario that supply the Ontario market?
Mr Probyn: Yes, I believe we certainly must maintain our caps. We must bring forward caps on greenhouse gases. I think that has to be a matter of urgency for those in the environmental side of government. One of the problems you have in this field, of course, is that while you're dealing with energy markets, you impact on other folks who are dealing with the environment and they have their own agendas.
In terms of a kind of extraterritorial application of these caps, I'd have to think through the workability of it. The Americans are often accused of applying their laws extraterritorially to us. Presumably what's sauce for the goose is sauce for the gander, but I'd have to think it through and ensure that we weren't in violation of some of our other obligations.
The Chair: We'll move to the government caucus. We have questions from Mrs Johns and Mr Hastings.
Mrs Johns: I was not going to ask any questions today because I'll get to you later, but I just wanted to reaffirm that the government is going to work with independent power producers to deal with this issue of the existing NUGs. We will be working with you. We will be eradicating any chance of legal issues in the future. We recognize this is one of the problems we're going to have to deal with, so we appreciate your bringing it up and bringing solutions. I'll leave the questions to Mr Hastings.
Mr Hastings: Mr Probyn, thank you for appearing today and for doing some pretty good work on the Market Design Committee.
My question relates to the urgency of dealing with the Energy Competition Act and getting it through the Legislature, hopefully by the end of the year, yet we've heard from some deputants today that they would like to stop the world and get off. We had some of those statements from the vice-chair of the Sudbury Hydro commission. I got the distinct impression that the people who were here from MEA were reluctant partners to the tango, so to speak, that they want to have more time and use orderly transition. They were using that phrase 12 years ago when I was a member of the MEA. Now it's nearly 1999.
Can you state the case as to where we are at the hour in terms of competition from other parts of the world, and if we don't get on with getting this major piece of legislation through, how that applies to jobs and investment as well?
Mr Probyn: I would say that we're late in the game, Mr Hastings. We've gone into this game about three or four years after some of our major competitors, and I'm not simply talking about California. States like Michigan and New York have all taken substantial steps to move forward and are on a track to achieve deregulated markets in much the same time frame that we've set ourselves. So I think it would be a real mistake for us to slow down the momentum. I've seen what happens when you do that, and that is that you become inert very quickly. Inertia is our enemy. We need this.
You'll hear, I think, from industry that they're in a competitive framework. If you look at any of our major industrial facilities, if you look at our automotive industry, they're sitting there and they're always being benchmarked on a variety of factors, in particular energy costs, in competitive markets against plants in Ohio, Florida, California and Michigan. If they don't cut it, they're gone.
I think we've got to realize that we have to really begin to move this agenda. It's difficult. There are issues. It's going to require a lot of late nights and lost weekends, but I think we don't have a choice.
Mr Hastings: In terms of job retention or job creation, could you give us some sort of realistic assessment? Because we're late into the game, how has this affected job retention or job creation in any of the sectors you have alluded to, or is that not possible?
Mr Probyn: It's very difficult. I've been in the energy policy game since 1973 and I was thinking the other day about the oil crisis of 1973, which is of course another extension of monopoly power, a different type. The move to competitive markets was an article of faith, some would say it was a leap of faith, but people made it and they found that competitive markets worked.
The problem has always been leadership. You can't say, "I've got an economic model that's going to show a gazillion jobs." I'm sure somebody does. They'll come here and sit at this table and say, "I've got an economic model that shows a gazillion jobs." I view those models with a degree of skepticism. I think it's a matter of knowing how to get the economic principles right and applying them, looking elsewhere in the world at electric power sectors such as that in the UK where you have accomplished job creation and reduction in costs that have really been very substantial. That's what we have to look to and I think we have to emulate those examples.
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The Chair: To the Liberal caucus, Mr Kwinter.
Mr Kwinter: Mr Probyn, I apologize. I came in just as you were finishing up your concern about the transfer of contracts from the guarantee of the government, effectively -- notwithstanding that it's Hydro, but Hydro's debt is guaranteed by the government -- to these new companies, which would have a lower rating which would effectively give you 50 basis points of penalty. Is that correct?
Mr Probyn: In effect. What I'm giving you is an estimate. What I'm saying is that if I'm relying on the credit of a AA- sovereign off-take contract, I have one pricing, and if I'm relying on a BBB competitive market player, I've got another. In today's market, my estimate, and I confirmed this with some of my friends in the institutional world just today, is in the range of 50 basis points.
Mr Kwinter: When the minister made his statement with regard to the white paper, I was listening very closely and I got the impression from what he said that the Ontario government would continue to guarantee the debt of Hydro, even after the so-called competitive regime. What would happen is that after the year 2000 they would no longer guarantee any new debt.
Mr Probyn: Precisely.
Mr Kwinter: So I don't see what your concerns are. Even if they transfer so-called stranded debt, what is going to happen is that that stranded debt -- we don't know the number and that's one of the questions we've been asking. It ranges from $15 billion to $30 billion. If it's $30 billion, it effectively means that all of Ontario Hydro's is stranded; if it's somewhat less, then it isn't. But it would seem to me that the number that gets transferred is going to have no relationship to anything other than the ability of those two companies, as the president said, from an investment point of view, to carry that debt. Everything over and above that will be transferred to the so-called transition charge, and that number is just a factor of what they think the other companies can carry. So I'm not certain about why you have this concern.
Mr Probyn: I'm very heartened by the words of Mrs Johns earlier in this presentation. In the legal sense, and I don't want you to take it that I believe the government has this in mind, but for example, as I read the legislation, and possibly I am subject to correction, you could take, say, a contract with Ontario Hydro to supply power over 20 years and you could transfer that to 1234 Corp, which has no substance at all.
So the contractor -- and under some provisions of the legislation there is the right to do this without the consent of the contractor -- would then go to the purchaser of power and say, "Here's my bill for the power you consumed this month," and 1234 Corp says, "Sorry, can't pay." Effectively that contractual obligation has been constructively expropriated. That's the theoretical concern, the way I see the act working.
I don't see the government as intending to do that and I think the statement of Mrs Johns confirms me in that view, but I feel obliged, on behalf of the lenders we advise, to raise this concern so that the committee in this stage can make the corrections. I've always believed that committee stage is the stage at which, in a reasonably bipartisan spirit, corrections are made. Incidentally, I think one of the things that really impressed me about this legislation is the bipartisan spirit behind it, which is evidenced by the second reading.
Mr Conway: If I can just pursue that, I want to congratulate you, Mr Probyn, and your colleagues, particularly for your work on the Market Design Committee. Since the second reading debate in mid-June, we received this report, which, as you rightly noticed, arrived on time, as did the first.
I was very struck by the cogency of the consensus argument which you as a group advanced around market power. You are right. There is bipartisan, there's tripartisan support, I believe, for the principles of competition and the benefits, presumably over some rough spots, that competition in generation especially is going to bring to all classes of ratepayers.
I'm obsessing, though, with this report because I read this, and you couldn't be clearer as a group. You say that the single biggest impediment to the proper dynamic of the competitive marketplace in electricity is market power. In ways that I would not have imagined, you detail what has gone on in England and in Wales. For example, I was astonished by the data contained in 2.5 and 2.6 about what you found out, seven years in England, as to the behaviour of entities that are not as big -- big, Powergen and National Power, yes -- as Genco.
According to your own report, which has just arrived, Brealey and Lapuerta did a study in 1996, seven years after vesting day in 1989. What did they find? They found that marginal rates were £700 million above what they should have been, largely because of market power. Then you go on to talk about Victoria versus New South Wales. You might say, what has this got to do -- I think you've given the committee some very powerful evidence. My question simply is -- there's something wrong here. We support competition, you support competition, but we are allowing to go forward the one thing you tell us in this report is the biggest problem.
Then you go on to say something else about second measures. I'll end with this and a quick response --
The Chair: Yes, briefly.
Mr Conway: I'm deadly serious.
Mr Gilchrist: Come on. Three minutes ended five minutes ago.
Mr Conway: You say on page 16 of that report that vested contracts are a problem. Why? Because they may very well become non-transparent mechanisms to force a disproportionate share of the stranded debt on to the back of retail customers. So my question is, what about this market power and the failure of this policy to deal with it?
Mr Probyn: Maybe I could explain my perspective as a member of the committee, and of course I was heavily involved in the discussions that led to the publication of the report.
First of all, I think it's important to realize that the committee took as its text the white paper. It was our view that the white paper was attempting, and I believe successfully, to strike a balance between the future of Genco in a competitive North American marketplace and the need for competition.
Having said that, in Ontario the policy is to have a balance between these two apparently opposing interests. The question is, how do we square that circle? I think what we are saying is that the way to square that circle ultimately is to reduce Genco's control over its asset base.
That can be done through a number of long-term mitigative measures. Long-term leases, for example, provide essentially the same benefits in terms of divestiture as outright divestiture. They also address one of the key problems that was referenced by Donald Macdonald in the original Macdonald committee report, and that is this problem of the patrimony of Ontario. If, for example, one is dealing with Ontario's hydraulic resources -- they belong to the people of Ontario -- what would be said by critics if these were somehow sold off to private interests in order to achieve market competition gains? I think the critics would be saying, "You've sold something that belongs to the Ontario people ultimately and that's a problem for us."
My view is that, for example, leasing out those assets so that they're controlled by private sector operators provides the mitigant to market power while ensuring that these assets ultimately reside with the people of Ontario.
We have a number of other long-term solutions to market power. We said that in the short term we have to ensure -- and I'll be brief, Madam Chair -- we can move rapidly to meet our agenda. As I pointed out to Mr Hastings, it's very important for us to move quickly to that agenda. We need to mitigate market power and we need to create a process for valuing, particularly Genco, so that it can receive the appropriate infusions of data and equity. There we looked at the vesting contract as a solution to that.
Because of the cap on prices, and our proposal is a so-called one-way vesting contract, we believe that Genco will not have a short-term motivation to gain the system because they get nothing out of it. That was the logic to the vesting contracts, followed by the longer-term measures, together with the incentives to motivate Genco to achieve those methods.
I hope I've not been a bit long-winded. What I've tried to explain is that the committee believes that this is a viable solution that will achieve the objectives of the white paper and also provide the mitigation of market power that you're looking for.
The Chair: On that note, we've gone over a little bit and I know that some of my colleagues are a bit cross. But I thought that from your Market Design experience you might have an interesting answer because this has come up several times through the day. That was the call of the Chair, colleagues. Hopefully it won't happen on a regular basis.
Interjection.
The Chair: I know. You have a plane to catch. Mr Probyn, on behalf of all the members of the committee I thank you for coming today with your advice and your experience.
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NUCLEAR AWARENESS PROJECT
The Chair: Calling representatives from the Nuclear Awareness Project, please; Mr Martin, I believe. Welcome. You have 30 minutes. Please begin.
Mr David Martin: Good day. Thanks for hanging in. You should have before you two things. One is a brief entitled Green Energy: Environmental Aspects of the Energy Competition Act, Bill 35; and separate but appended to that is Recommendations to the Standing Committee on Resources Development. Those recommendations are simply extracted from the longer paper. I don't propose to read through that paper but I would like to make some general comments and then give you a few highlights.
In his statement to the Legislature back in June when he introduced Bill 35 and again this morning, the Honourable Jim Wilson made precisely the same statement. I'll quote it for you. He said: "There is...an unprecedented level of support for the changes that this bill proposes. Public opinion strongly endorses the idea that the status quo is not working." I would suggest that we intuitively know that there's a lot of truth in that statement. For most of my life I've been hearing people say that Ontario Hydro is out of control, that something has to be done, that the problems are just too serious to ignore, and so it continues.
The problem is that in several very fundamental ways Ontario Hydro is continuing to play the same game it has played for the last 40 years and proposes to play that same game in the new millennium in the new restructured electricity sector. That is, instead of embracing a cleaner and greener world, Ontario Hydro is rededicating itself to, the very status quo that Minister Wilson referred to: the same technologies that have landed it in the current disastrous situation that it's in, namely, nuclear power and coal generation. It can't be denied that phenomenally bad nuclear performance is responsible for Ontario Hydro's current dilemma in large part. The performance of Candu reactors in 1997 was the worst in the world of all major reactor types.
So what is happening here? Instead of turning a new leaf, instead of embracing a green energy future based on efficiency and renewable energy, Ontario Hydro recently decided that it would spend $22 billion on the nuclear asset optimization plan, the NAOP. It is reinvesting in that same failed technology and it has decided that it will restart the four reactors at Pickering A and the four reactors at Bruce A. "Trust us," says Ontario Hydro. "We can do it differently. We can turn around this disaster. Even though we've never been able to do it in the past, this time it's going to be different."
I refer you to today's Globe and Mail and an article by Mr Rusk entitled, "Ontario Hydro's Nuclear-Recovery Plans Lagging." Why am I not surprised? Contrary to what you heard from Mr Osborne this morning, things aren't going well, still aren't going well even under the new American regime in the nuclear division of Ontario Hydro. Things are going just as badly. The same bad decisions are being made now as when decisions were made to build Pickering, Bruce and Darlington.
You've heard a lot about the need for caps on fossil emissions and I certainly echo that need, but I would like to note that it's the failure of nuclear power that's responsible for the current increased use of coal generation. If Ontario Hydro did not intend to restart Pickering A and Bruce A, it would not have made that short-term decision to increase coal generation. Any logical course of action would have dictated that Hydro would have invested in cheaper and cleaner technology than those old, aging, dirty coal stations.
Make no mistake about it as well on the stranded cost issue. Those stranded costs are stranded nuclear costs. Mr Farlinger now claims that stranded costs could be as high as $20 to $30 billion. Mr Conway has gone now but he repeatedly asked. We've seen the figures on the table, and the most recent one is up to $30 billion, according to the chairman of Ontario Hydro, who was absent today. So Hydro is clearly manoeuvring for a larger stranded debt because that stranded debt is essentially a subsidy for its old, dirty, risky nuclear and coal stations.
What about that old status quo? We've heard a lot about market control. Certainly I think Ontario Hydro is defending the status quo in that way as well; that is, by defending its own monopoly in control of 90% of the electricity generation in this province. This is without a doubt the single biggest failure of the current restructuring process and it is quite likely that allowing Ontario Hydro to maintain its virtual monopoly is going to snatch defeat from the hands of victory.
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To sum up, Hydro's commitment to nuclear power is at the heart of all of these dilemmas, and the solution, I would argue, is a simple one: Shut down Pickering A and Bruce A permanently. The elimination of those 5,000 megawatts of nuclear power will go a long way to eliminating Hydro's monopoly. In the long run the economic benefits will be huge if, as I would predict, performance isn't going to be restored to the astronomical levels that Ontario Hydro claims it will. And we will have some side benefits. We'll stop emitting radioactive pollutants. We'll stop producing more radioactive waste that we don't know what to do with and we'll eliminate the risk of a catastrophic accident.
I will admit that these issues are political in nature and beyond the scope of the current legislation, but they set the context for this legislation and I think for the environmental recommendations that I'd like to make to you today. They underscore the urgency of those recommendations.
By allowing Ontario Hydro to maintain its monopoly and to rededicate itself to nuclear power and to coal generation, the restructuring effort really has two strikes against it. We can't afford to get the rest of it wrong as well.
I'd like to run through just briefly some of the recommendations and I'd like to start on one in which I join, I note, the city of Toronto, Greenpeace and Mr Probyn, and I'm sure you'll hear a lot more people supporting this measure, and that is a renewable portfolio standard, an RPS.
This is a requirement for generation or retail companies to provide a specific amount of their generation or their sales from renewable sources. It's a very popular and, I would argue, very flexible and market-based approach that could make use of renewable energy credits, so that you could have a trading system. It's in place, as you heard, nationally in the USA. It's now in place and proposed in the European commission. It's in four different American states. It's a way of kick-starting renewable energy to try to compensate for some of the market failures that are blocking its entry into the marketplace.
Similar to a renewable portfolio standard, we support the creation of a system benefits charge. That's an across-the-board charge that would provide funding typically for conservation efficiency programs, as well as for renewable research-development measures. It provides an excellent match for the RPS, again to provide that kick-start. I note again that it's in place, and you can refer to my brief, in a number of states in the US already.
In order to facilitate that system benefits charge, I would argue that the Financial Corp needs to be given a conservation mandate. It's also appropriate to give conservation mandates to the Services Corp and as well, I would argue, to the newly incorporated municipal utilities. It's something that's just absent in the bill, and I think that the objects of those companies need to be amended to include conservation.
You've heard a lot about disclosure and electricity labels. They're a very important matter and I think one in which the Market Design Committee and this legislation deserves significant congratulations. That's all about disclosing, of course, generating fuel sources and emissions, on bills, on advertisements, on all the publications of the retail companies or the generating companies.
I would make one suggested amendment, though, to the bill and that is that the government should not be given discretion in this but should be required to make these regulations for adequate disclosure. I would also suggest and have suggested in my brief an amendment to that particular section so that it should be more explicit that the sellers of electricity should be required to prepare a standard label that must appear in all of their materials and advertisements.
The details of what goes in that label of course are beyond the legislation and need to be resolved urgently so that this can be in place when competition is introduced in the year 2000. That is a point which I can't stress enough.
I do have a beef with the Market Design Committee, and that is that they seem to be getting more than a bit hung up on concerns about verification of green power, so much so that they're talking about the possibility of delaying this labelling and disclosure procedure past the introduction of competition. I think that would be a terrible disaster and would certainly prejudice the entry into the market of green power companies.
You've heard a lot about the need for caps on fossil emissions, and again I'll lend my support there. Caps have to be tough, they have to be mandatory, they have to also be implemented soon and they must address the whole problem of pollution from electricity imports as well as the domestically produced electricity. Timing here is everything. If these caps aren't in place, it's going to prejudice green power in the new marketplace after the introduction of competition, so the timing on this is absolutely urgent.
In addition to separate acid gas emission caps for sulphur dioxide and NOx, for the first time we believe that meaningful, mandatory caps must be placed on greenhouse gas emissions as well. We would also suggest to you that new caps must be placed on toxic emissions, something which has never been done in this jurisdiction.
These caps all must not only be implemented prior to the start of competition but also, we would argue, they must be introduced before any emissions trading program is put in place. They should, if emissions trading is going to work, also include long-term schedules for phased reductions of those pollutants over time. That's how the trading system is going to be given some real meaning.
In addition to the caps on fossil emissions, we believe there should be caps on radioactive pollutant emissions from nuclear facilities. This can be done. Similarly, under schedule D, amendments to the Environmental Protection Act. Caps should be applied to tritium and to carbon-14 emissions from nuclear power plants, radium and radon from uranium tailings, and uranium emissions from uranium processing facilities. Radioactive pollutants are air pollution just as much as fossil emissions are.
I'd like to wind up on something which I think is extremely important. It has been touched on several times today already, but the dollar figure hasn't been mentioned. I'm talking about the reactor decommissioning and radioactive waste management liability of Ontario Hydro.
In the spring, Ontario Hydro came up with a new figure. It's a staggering figure of almost $19 billion. That's what they estimate the cost to be. Ron Osborne said very euphemistically that Ontario Hydro has "invested" the $3 billion that they have collected from Ontario ratepayers for that liability in Ontario Hydro. That's another way of saying they've spent it. It ain't around. The issue here is the creation of a real, independent, segregated fund where that money actually sits and is available when it is needed, as it will be needed, to take apart those reactors when they have reached the end of their useful life, and to look after the management of the approximately 20,000 tonnes of high-level radioactive waste that Ontario Hydro is currently the proud owner of.
A further note: That fund should be collected in a timely fashion. I know that's somewhat vague, but what I'm trying to say is it shouldn't be collected over the next 50 years; it's got to be something a lot shorter than that. I think this enters into the whole question of stranded costs as well. There's a real question as to whether this would be allowed as a stranded cost. We don't think so. We think it should be carried by the generating corporation.
I'll leave it at that. I know I've rushed through the brief but I'd be happy to answer any questions.
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The Chair: We'll begin with the government caucus.
Mr Galt: Thanks for your presentation. In your recommendation 1, you're suggesting the closing down of several nuclear stations. I don't seem to be picking up on where you're suggesting we might compensate or get replacement power once they'd be shut down. What is your suggestion?
Mr Martin: Well, they are shut down already. That's point number one.
Mr Galt: Well, we're bringing them back.
Mr Martin: What I'm suggesting is they should remain shut down. Pickering A is scheduled to be restarted beginning in the year 2000, the first reactor, and then the other three.
Mr Galt: With them running, it's the real capacity of Ontario Hydro, along with the fossil plants, along with the hydro plants and along with a bit of green power.
Mr Martin: Are you asking whether --
Mr Galt: If they are left shut down, you're suggesting that we just operate with the fossil fuel plants and continue.
Mr Martin: I'm suggesting that they should be removed from Ontario Hydro's generating capacity, yes.
Mr Galt: And you're only referring to the two A plants?
Mr Martin: Correct.
Mr Galt: You're not referring to Darlington and the B plants?
Mr Martin: No, I'm not.
Mr Galt: Why are you zeroing in on the A plants only?
Mr Martin: Because they're the oldest stations, they have the highest costs and they are currently the subject of a massive rehabilitation program. Ontario Hydro is spending, between 1997 and the time when competition is introduced, almost $8.5 billion on their nuclear program. I realize not all of that is rehabilitation, but a significant chunk of that of course is being dedicated to Pickering A and Bruce A. It's a very high cost and, certainly in the case of Pickering A, a very high risk in terms of possible accidents. It's a very high-risk nuclear station since, as the oldest station in the country, it doesn't have a second emergency shutdown system.
Mr Galt: You made reference earlier to the liability as it relates to decommissioning and also the storage of spent fuel. I've never come across a very accurate figure on what that might cost in the end. We heard earlier, and you repeated, the approximately $3 billion that has been collected and then reinvested. Do you have any estimate on what it will cost to decommission the present nuclear plants in Ontario?
Mr Martin: Suffice to say we believe it is significantly more than what Ontario Hydro is suggesting. We believe it could be two to three times as much as Ontario Hydro's most recent estimate.
Mr Galt: And their most recent estimate is?
Mr Martin: Their most recent estimate, as of April, is $18.7 billion. That's for both decommissioning and high-level radioactive waste management.
The Chair: Moving to the Liberal caucus.
Mr Conway: Could I just yield to the New Democrats and then we'll come back? I apologize for having to run out.
The Chair: OK.
Mr Lessard: I appreciate your suggestions with respect to conservation efficiency initiatives, not only by the Financial Corp but the municipal utilities as well. It's one thing to put those in the objects but it's another thing to actually be able to achieve those. How is it that you suggest those conservation efforts be implemented? Is it through some sort of incentives? What do you have in mind there?
Mr Martin: Certainly with respect to the system benefits charge we're suggesting it could and should be collected by the Financial Corp in the same way that it will collect the charge for the stranded debt. Those moneys would be collected and should be turned over to some other implementing agency. It could be an existing agency such as the Ontario Energy Board or even the Ontario Ministry of Energy or it could be a new entity created for that purpose. I would certainly suggest that the delivery mechanism would be private sector companies, energy service companies that are out there in the marketplace ready and willing to do this work.
Mr Lessard: Chair, can you tell me how much time we have?
The Chair: You have time for one brief question.
Ms Churley: Thank you very much for your presentation. I just wanted to ask you quickly about the suggestion that Pickering A and Bruce A be permanently shut down. What would you see in the immediate and long-term future of power provision in Ontario with those plants not in service? As you know, a concern in the immediate future, right now, is using dirty coal. That is one of the problems we face. What do you suggest we do about that?
Mr Martin: The irony of this whole situation is that if Ontario Hydro had made a decision not to restart Pickering A and Bruce A it wouldn't be running those coal stations. It would have invested in much cleaner, more efficient and cheaper gas-fired cogeneration facilities in all likelihood. In terms of the immediate crisis, it's obvious we don't need the power. The lights aren't going out. There are no blackouts. There are no brownouts. We don't need those 5,000 megawatts today.
The questions I guess you're really asking are, what would replace it, and would there be a potentially adverse environmental impact? I would suggest to you that there are large and significant net environmental benefits from that shutdown, as we would see a shift into cleaner and greener electricity production to fill that gap, because running those coal stations in the long run isn't an option.
Ms Churley: Would you say that opening them up again might have the opposite effect and prevent some of these new energy-efficient and renewable projects coming on board?
Mr Martin: Absolutely. This is 5,000 megawatts which is going to prevent entry into the marketplace of cleaner, greener options. I might add that it ties us into the vicious circle that we've been in with nuclear power since its inception in this province whereby coal stations are used to do two things: to meet the peaks that nuclear power doesn't meet because it's run as baseload capacity, and to meet the gaps when the nuclear power stations break down, as they have with alarming and increasing frequency.
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Mr Conway: I apologize, David, for having to run out for a part of your presentation.
I want to follow up on the point that Ms Churley was just making. One of the difficulties I see as we move into the new market is that there are going to be some transitional issues. In fact, Mr Dorey earlier today talked about some of the problems. He had a very nice phrase for some of those transitional issues. Ms Churley makes the point that if we were to pull out or not bring back X hundreds or thousands of megs of installed capacity, some of which is very close to a very large demand centre --
Mr Martin: Are you thinking of Pickering? You can't be thinking of Bruce.
Mr Conway: Yes, I am thinking about Pickering -- because there are locational power issues here that are starting to rear their heads. My question is, if you're running the system, how do you do that in the short term, in the next two to three years?
Mr Martin: The entire trend in the new electricity market is to have generating plants located closer to the areas of consumption. That's what it's all about. In large part, cogen facilities need to be close to population centres for those heat loads to be used, so I would suggest to you that it isn't an issue, that the alternative that will be put in place will be better than what we've got. Let's face it, Bruce A is certainly not close to demand centres. Yes, Pickering is, but let me tell you I live next door to Pickering, and that in itself is a problem, given the accident risk and the pollution from that plant.
Mr Conway: What is your latest information? What are you hearing through your sources about the current state of NAOP? Today one of Toronto's national newspapers reported that the utility was somewhat behind the targets. You have always been well informed, well connected on these matters. What is your scoop on that?
Mr Martin: I mentioned -- you might have been out of the room -- Jim Rusk's article, "Ontario Hydro's Nuclear-Recovery Plans Lagging." Ontario Hydro, surprisingly, didn't mention this in their presentation this morning, but they are suggesting that they are at least six months behind where they should be in terms of their recovery plan -- "But don't worry, we'll catch up. Just because we're behind now doesn't mean that we'll be behind later." If you have followed the nuclear division in Ontario Hydro as I have for close to 20 years, this is the story you always hear. The story is, "You know, we're having a problem now, but believe me, we can fix it and we're going to turn it around." It has gone from bad to worse and I would argue that in the future it will continue to go from bad to worse, so we're throwing good money after bad with the $22-billion investment in the nuclear asset optimization plan.
The Chair: I'd like to thank you, on behalf of all the members of the committee, for bearing with us today and for coming before us this afternoon with your advice on this bill.
Mr Martin: My pleasure.
BOARD OF TRADE OF METROPOLITAN TORONTO
The Chair: I'm now calling the Toronto board of trade, please. Good afternoon. Welcome. Please make yourselves comfortable. If you would introduce yourselves first for the Hansard record, you have 30 minutes of presentation time.
Ms Elyse Allan: Good afternoon. Thank you for having us. My name is Elyse Allan. I am president and CEO of the Toronto board of trade. With me this afternoon is Doug Cranston, who is a volunteer member of our electricity task force, and John Bech-Hansen, who is the board's staff economist. My comments today reflect the work of our electricity task force, which has been focused on the electricity system restructuring since 1996.
The board first of all wants to congratulate the government on the introduction of legislation to bring competition and customer choice to Ontario's electricity system. Ontario's electricity consumers, the provincial economy and the competitiveness of Ontario businesses will all benefit from the competitive electricity prices the bill is intended to introduce. Competitive power costs are an important component of competitive advantage to GTA businesses in the traded goods industries, upon which the health of the provincial economy largely depends.
We support the key components of the legislation, which separate Ontario Hydro's operations into three distinct entities: the Ontario Electricity Generation Corp, or Genco; the Ontario Electric Services Corp; and the Independent Market Operator. We also support the bill's provisions to encourage the rationalization and incorporation of municipal electric utilities and to empower the Ontario Energy Board to protect consumers and ensure a smooth transition to competition.
The board of trade nonetheless has a few concerns with the proposed legislation. These relate mostly to the market power issue, and I should emphasize that we don't see these as deal breakers. We simply think they will provide greater assurance of a truly competitive marketplace in electricity.
First, the board of trade is concerned that the legislation provides for only a single Genco. We believe that Ontario's electricity generation facilities should be sufficiently separated to prevent any one company, or narrow group of companies acting together, from being able to exercise undue market power. A single Genco will dominate and will be well placed to engage in anti-competitive behaviour. It could hold prices above competitive levels or below them, as the case may be, to deter potential competitors from entering the market.
We believe that a minimum of three generating companies should be established. Each of these should contain a balanced, representative and competitive mix of generating technologies. This is the most viable approach to reform and the one best suited to competing in the new North American electricity system. We believe that the legislation should be amended so as to require this to occur.
Second, we believe that the government should seriously consider the introduction of private equity in the ownership of the proposed new Genco. Without the discipline, accountability and true market responsiveness instilled by private ownership, the benefits of competition could be unnecessarily limited and delayed. We note that the Market Design Committee has found that most jurisdictions which moved from a public monopoly ownership model to competition have done so by both dividing and divesting the generating sector before opening the market to competition.
As committee members know, however, the Market Design Committee has been compelled to develop alternatives to splitting and/or divesting Hydro's generating assets. While it has succeeded in doing so, the options it lays out seem very complex. For example, it recommends the adoption of vesting contracts on most of Genco's baseload generating capacity, as well as auctioned bidding rights, capacity limitations, demand-side responses and bidding, bilateral contracts, price and bid caps etc. While these might work, it strikes us that achieving the desired outcomes of the bill could be achieved in a much more straightforward fashion through an orderly process of division and divestiture.
Third, we have always been concerned with any proposed restructuring which would see the government of Ontario established as the sole shareholder in the successor companies. Under the new structure, Genco will be given a clear business mandate and made to pay dividends in line with public sector norms. With the province as sole shareholder, our concern is that the government may be presented with an incentive to maintain Genco's commanding market share to maximize its revenues, in conflict with the stated objective of achieving lower electricity prices.
We believe the separation of the generation side into at least three competing units would reduce this moral hazard if introducing private equity is not an acceptable proposition.
Fourth, the transmission system must be expanded and upgraded to provide access to potential new suppliers in particular by building new interconnections to jurisdictions with competitive power prices.
Ontario is virtually an island in terms of the extent of its transmission inter-ties. This has had the effect of reinforcing Hydro's historic near monopoly on power supply in the province. If the physical constraints imposed by today's insular transmission system are dealt with, the competition potential of the market will be maximized. This will be particularly important if Hydro's generation is not separated into the smaller competing units we're recommending. We believe a balanced system of connections to adjacent jurisdictions is also essential to giving Ontario a more flexible and reliable supply of electricity.
Fifth and finally, Bill 35 provides no assurances that the new payments which will be made by the successor companies to the province in lieu of corporate income, capital and property taxes will be reduced when Hydro's stranded debt is extinguished. Failure to do so could create a windfall for the provincial treasury. To ensure a level playing field between public and private competitors, we believe the government should commit to reducing both provincial business income tax rates and payments sufficient to offset this windfall. If it does not, the provincial government should at least commit to earmarking these windfall revenues for improvements in the province's energy infrastructure.
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These concerns notwithstanding, the board of trade supports the objective of Bill 35 and believes they can be resolved prior to passage of the legislation. We emphasize again that our concerns should not be viewed as deal breakers. Even as it stands the bill will bring vastly more competition and choice into the provincial electricity system than has ever existed before. We simply think it could go a step further by making changes that will provide greater certainty of the desired outcomes.
Thank you, and we're pleased to answer any questions.
The Chair: Thank you very much. To the Liberal caucus
Mr Conway: I want to thank Ms Allan and her colleague. This is a very clear and helpful brief and I thank you for it. I find myself quite attracted to a couple of its specific recommendations.
Mrs Johns: Just don't go any further.
Mr Conway: I don't want to beat a -- no, listen, because I think there is broad support for the principles here. There is your wonderfully felicitous phrase "the moral hazard." You deal with a point I don't think anyone else has dealt with in quite that way, that for reasons that I understand about the level playing field -- Mr Dorey was here today; I think I understand what he's trying to say about levelling the playing field -- you have to do certain things with the tax regime.
There is one incidental but highly beneficial consequence to Her Majesty's exchequer. The Minister of Finance, whoever he or she is, is situated under the provisions of this bill as a very important umpire and, after a certain point in time, someone who is going to receive a lot of money. That's the moral hazard that you speak to and it is a real issue. I don't mean it as a partisan criticism of the current government. I think you do have to level the playing field but I think objective people would say after this residual stranded debt is paid there is a tax windfall. The way this act is written now that is clearly the case, and I appreciate the point that you've made there.
A second and I guess final observation is market power. I think we have a problem. Macdonald could not have been clearer. Despite Mr Probyn -- he was very good. The trouble I had with Mr Probyn's testimony is his report, what the report says. The report says: "Regrettably, we were not allowed to look at divestiture. That was not on the table." And the report, to use a phrase of earlier today, reeks with a concern of what the loss of that option is going to mean in terms of the second-best option.
Again, I appreciate what you said about the disaggregation issue and I'm hopeful that the committee is going to be able to in some way address the problem that the Market Design Committee has identified in that connection as well.
Mr Lessard: I'm waiting for Mr Conway's suggestions in that regard as well to come later on.
One of the things you suggested is splitting generation into competing units, and that isn't something that we've heard, at least so explicitly, in the presentations that have been made today. You're suggesting three generating companies and that they should be "a balanced, representative and competition-capable mix." I was wondering whether that is a suggestion that's just coming from the Toronto board of trade or whether this is an initiative that's coming from somewhere else. If that is a suggestion, how do you suggest that these three generating companies be established? Would it be based on geography, the means of supply, such as nuclear, hydroelectric, coal-fired; or would it be based on the cost to produce electricity at each of these units; or would it be the value of the assets, considering where they are and, if they were nuclear, the decommissioning costs? Maybe you could elaborate on that.
Mr John Bech-Hansen: I think you're going to hear a lot more, if you go ahead, about the potential of splitting the generating companies. If we're the first, I'm kind of surprised because I think that's a consensus from a lot of --
Mr Lessard: It was suggested by the MEA, but they didn't mention number three; they weren't specific at all. There's just been concern expressed that perhaps the generating companies shouldn't all remain intact. That's as far as it's gone so far.
Mr Bech-Hansen: We've only suggested three as a minimum simply in view of the perception that the experience in the United Kingdom with only two was that that was insufficient to eliminate problems associated with excessive market power. It's really just a general observation, looking at the UK experience, that you would have to have at least three, preferably more than that. As I said, you will hear more about this from other organizations such as the I_ve left this in upper case even though it_s not the full name: Stakeholders' Alliance for Competition and Customer Choice.
Stakeholders' Alliance, of which we are a founding member. We have many points of view in common.
In terms of the distribution of the different types of plants and technologies, the discussion that we had at our task forces on several occasions was that because different power generating technologies have different scale economies, different capacities to adjust to prevailing levels of demand, ideally you would have a representative mix of existing technologies in each of the companies. We hadn't considered any division based on geography or value of the assets.
You've raised a very important question about the nuclear assets and we have certainly decided -- and I have said so in the letter to the minister -- that despite what we say about having a representative mix in each of the separated generating companies, our position is that we don't have a position on whether Hydro's nuclear assets should be kept together or divided up among the separated companies. There may be reasonable cause to keep the nuclear assets in a single company, publicly owned.
Mr Lessard: What would that be?
Mr Bech-Hansen: What would it be? How do you mean?
Mr Lessard: The reasons to keep them publicly owned.
Mr Bech-Hansen: I would surmise mostly political at this point. There's just more public concern on the nuclear side than there is about the other generating assets.
Mr Lessard: I'm more inclined to keep these assets publicly owned than to see them be privatized, which is part of the direction that your suggestion is going towards. We heard from Mr Osborne earlier today who was suggesting to us the need to have large utilities to compete with those in the United States and in fact to enable them to move into the United States to compete in that country. One of the things that might be interesting to consider in your suggestion is if it were broken up into three entities but they were all publicly owned and were competing with each other and see how that might work.
Mr Doug Cranston: Yes, they would be competing with each other; however, we still get back to the same issue of one owner of three separate operating units.
Ms Allan: -- represents what we would call a -- similar and public ownership.
Mr Baird: Thank you very much for your presentation. We certainly appreciate the time that you took, not just with your group, but to come here today and present to us.
I just want to touch base on the issue of elimination of the stranded debt charges and what that would do with the commensurate tax revenue. Obviously we all can see that to have true competition we need to have a competitive tax regime. I was thinking this morning how Bell Canada could operate if they didn't have to pay any taxes and what effect this would have on AT&T Canada and Sprint, the monumental reductions we've seen in long-distance telephone charges. Mr Osborne mentioned this afternoon that it was almost $1 a minute and now it's 10 cents a minute or all you can eat for $20.
There hasn't yet been a decision with respect to how long it would take to pay off the stranded debt. One of the representatives of my public utility suggested 25 years would be good. I know some of the stakeholders suggest 15; others have suggested five or 10. I guess until the market representatives look at the financial calculations they'll have to undertake for a debt equity swap with both Genco and Servco to identify exactly what the stranded debt is, we won't get a sense of how long it's going to be until this is paid off. Essentially we could be seeing something in 10, 15, 20 years. I guess the one thing we know about this government, the current government, is that everything we're doing is about cutting taxes to try to create jobs. Just in the city of Toronto the government's undertaking a $400-million tax reduction with respect to equalizing commercial and industrial taxes. There's everything else from the employer health tax to cutting small business taxes by 50%, even put in legislation by Bill 15 over the next eight years. The good news is it's not a leap of faith. If the stranded debt is paid off in 10 or 25 years, there's already legislated tax cuts going into effect over the next eight years. The legislation is passed for both the small business and the commercial-industrial equalization.
Certainly everything that this government wants to do is to see taxes go down, not up, but obviously we've got to have a competitive level playing field, otherwise we'd have only one team on the field if you just exempt the current player from taxes. You mentioned in your presentation your concern that maybe Genco still has too much power. Certainly we wouldn't disagree that exempting them from taxes would be anything but demonstrably worse than what some would argue today.
Obviously the government of the day in 10 or 20 years, depending on when that stranded debt is paid off, would want to look at something like an investment in the energy sector infrastructure, which you mentioned. A commensurate tax reduction in another area would be another option. But that's a decision 10 or 20 years down the road, and the good news is that there are legislated tax cuts for the next eight years in two areas already. If you look at the last three budgets, we had 66 tax reductions. If that trend continues, it'll be obviously considerably more than has already been taxed. It's more just a comment than a question.
Mrs Johns: I have a question actually. I've been reading your presentation here and I'm interested in the section that's labelled diversement. When I was a Bay Street joint venture capitalist before my new-found moral high road here, we used to look for ways to bring private investment into public corporations. Going back to that hat I once wore, and knowing that many of the people at the board of trade wear that same hat, it surprises me that you would suggest at this particular time that we should introduce private funds in there because we would obviously all know that whoever invests at this particular point will be investing in a severely deflated company with not very much value. The potential is all in how we turn this thing around.
When I used to be in the venture capital business, that used to be something that made us a lot of money if we invested from the private sector, and usually the public sector got a little ripped off unless you looked at future values and all sorts of things, which I don't think you can do with Hydro right now. When you're suggesting that we should move into a private equity issue right now, I would hope or assume that you're talking about a small-dollar private equity investment for specific assets and that you're not talking about us privatizing Ontario Hydro at this particular point. Is that correct?
Ms Allan: Yes, that's correct. We're trying to make some movement in that direction, seeing that as the long-term goal. John and Doug might like to comment additionally.
Mr Bech-Hansen: Just at the task force level we've had discussions about it and it always has been viewed that individual plants might be offered to the public market, that sort of thing, not a holus-bolus privatization of the entire generating side of Ontario Hydro in one go because that's really just not a viable proposition.
Mrs Johns: As the minister said today, and I actually agree with him very strongly, a fire sale of provincial assets is not in anyone's best interests from the taxpayer right through to the ratepayer, and I'm sure it's not in the interest of the board of trade also.
Mr Bech-Hansen: Yes.
Ms Allan: I think we would concur with that.
Mr Bech-Hansen: We specifically have also discussed the idea that mothballed generating plants, for example, could be offered to the market right now. I don't know to what extent they're there, but that was the one consideration.
The Chair: On that note, we thank you for coming forth this afternoon with your ideas and your views on these changes. It's much appreciated.
Colleagues, we will stand adjourned and we'll reconvene at 9 o'clock tomorrow morning. Our transportation is leaving at a quarter to 6 at the front doors tonight.
The committee adjourned at 1715.