ENERGY COMPETITION ACT, 1998 LOI DE 1998 SUR LA CONCURRENCE DANS LE SECTEUR DE L'ÉNERGIE
WEST LAMBTON ELECTRIC UTILITY RESTRUCTURING STEERING COMMITTEE
MOORE TOWNSHIP HYDRO ELECTRIC COMMISSION
CITIZENS ENVIRONMENT ALLIANCE OF SOUTHWESTERN ONTARIO
SARNIA REGIONAL COGENERATION PROJECT
ELECTRIC UTILITY RESTRUCTURING COMMITTEE
ONTARIO FEDERATION OF AGRICULTURE
SARNIA LAMBTON CHAMBER OF COMMERCE
CONTENTS
Tuesday 18 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
West Lambton Electric Utility Restructuring Steering Committee
Mr Robin Moore
Mr Doug Darrach
Moore Township Hydro Electric Commission
Ms Jane Marsh
Guelph Hydro
Mr Dan Moziar
Mr Jim MacKenzie
Trigen Energy Canada
Mr Derek Macartney
Ms Susan Shaw
Mr Mark Hall
Sunoco Inc
Ms Gia DeJulio
Mr Don Heath
Windsor Utilities Commission
Mr Kent Edwards
Citizens Environment Alliance of Southwestern Ontario
Mr Rick Coronado
TransAlta Corp
Mr Jim Dinning
Mr Barry Chuddy
Sarnia Regional Cogeneration Project
Mr Mike Ireland
Mr Ken Ball
Mr Martin Bruce
Electric Utility Restructuring Committee
Ms Nancy Hutton
Ontario Federation of Agriculture
Mr Peter Canning
Mr Darren Hannah
Sarnia Lambton Chamber of Commerce
Mr Michael Van Pelt
Mr Joe Zanyk
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 Dave Boushy (Sarnia PC)
Mr Steve Gilchrist (Scarborough East / -Est PC)
Mrs Helen Johns (Huron PC)
Mr Wayne Lessard (Windsor-Riverside ND)
Mr Gerry Phillips (Scarborough-Agincourt L)
Also taking part / Autres participants et participantes
Hon Jim Wilson, Minister of Energy, Science and Technology
Clerk pro tem / Greffier par intérim
Mr Tom Prins
Staff / Personnel
Mr Lewis Yeager, research officer, Legislative Research Service
The committee met at 0900 in the Best Western Guildwood Inn, Sarnia.
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.
WEST LAMBTON ELECTRIC UTILITY RESTRUCTURING STEERING COMMITTEE
The Chair (Mrs Brenda Elliott): Good morning, everyone. We are in Sarnia this morning. We've had excellent presentations in the week and a half that we've been on the road and we're looking forward to more enlightening, energizing advice today and in the next couple of days.
Our first presenters this morning are representatives from the electric utility restructuring steering committee for West Lambton. Good morning, gentlemen. As I'm sure you know, you have 30 minutes for presentation time. We always hope you'll leave time for questions from the three caucuses. If you would begin by introducing yourselves for the Hansard record.
Mr Robin Moore: On my left is Dick Kirkland, who is the vice-chair of the Point Edward Public Utilities Commission, and on my right is Mr Doug Darrach, chairman of the Petrolia Public Utilities Commission. Good morning, Madam Chair and members of the resources development committee. My name is Robin Moore, and I am chair of the Sarnia Hydro-Electric Commission.
My colleagues and I are here today representing the West Lambton Utility, which is the proposed amalgamation of our utilities plus that of Moore township. In Sarnia and Lambton county we not only endorse the direction of Bill 35, but we have also pressed forward in a joint effort to support one of its key objectives: the amalgamation of neighbouring utilities to provide ratepayers with the benefits of the resulting economies of scale. The purpose of Bill 35, "to create jobs and protect consumers by providing low-cost energy through competition," is embraced by our members.
In 1995, officials from these municipalities and utilities understood the benefits of a combined distribution utility and worked diligently towards achieving this objective. On June 22, 1998, after completing very extensive studies, a private bill, Bill Pr8, An Act to Establish the West Lambton Electric Commission, was introduced into the Ontario Legislature by Mr David Boushy, MPP, Sarnia, and received first reading. For those familiar with Bill Pr8, it will be apparent that our objectives are also represented in Bill 35, and this has only strengthened our support of Bill 35.
It is the intention of this panel to demonstrate its total support for Bill 35 and to facilitate its implementation in a timely and coordinated fashion to the best of our ability in Lambton county.
Some of you may be aware that a number of us in this area had expressed concern about the lagging position of our industry as a result of increased electricity costs in the late 1980s and early 1990s. As a result of this concern, Sarnia Hydro, as part of a larger group of utilities in the province, aggressively intervened in the 1996 Ontario Energy Board hearing with Ontario Hydro, HR24, to articulate our concern about the need for competitive rates in the electricity sector. Today, West Lambton Utility views Bill 35 as the assurance that in the future our ratepayers will benefit from competitive rates and that our communities will benefit from job creation and capital investment.
West Lambton Utility and its individual members have supported this government's initiatives in reforming the electric industry in Ontario. From the encouraging report of the Macdonald task force, A Framework for Competition, in 1996, to the issuing of your white paper Direction for Change: Charting a Course for Competitive Electricity and Jobs in Ontario, in 1997, to the introduction of Bill 35, the Energy Competition Act, this year, we have been preparing for a competitive market for several years. To better understand our determination, I refer you to Sarnia Hydro's 1997 annual report, where our efforts are summarized for the benefit of our ratepayers. I have provided adequate copies of this report and I encourage you to read it to better understand our position.
We feel it is impractical for us to try to address any more than three points in the legislation, in the interests of time and fairness to others. Nevertheless, a number of points that will be made by others are also supported by West Lambton Utility.
For example, in the following presentation, Moore township representatives will explain to you the difficulties they are experiencing in acquiring a distribution system to enable them to participate in the amalgamation of the distribution systems with Sarnia Hydro, Petrolia PUC and Point Edward PUC. We support their position in that the proper authority should be granted to the IMO or the OEB to mitigate the market power of Ontario Hydro retail.
Similarly, you will hear from other stakeholders in our communities of the need for supporting legislation to allow a major new cogeneration project in our area to proceed and for that project to demonstrate that jobs can be created and that consumers can be protected by promoting low-cost energy through competition. We support their views as well.
Specifically, West Lambton Utility recommends to this standing committee that Bill 35 can better meet its objectives by ensuring the following three points are properly addressed:
(1) The distributor's affiliate, which is owned by a municipal corporation and set up to provide competitive retail services, should have the same flexibility to operate in its markets as its competitors, it should have the ability to respond to its customers' demands and to pursue the same activities as its competitors, and it should also have the same ability as gas and electricity marketers to enter into contracts.
(2) The collection of the stranded debt should be assigned in such a way that it becomes a fixed monthly charge per customer class, as opposed to a consumption charge per kilowatt hour that will act to stifle growth.
(3) It should be the intention of Bill 35 to treat amalgamations between municipal electric utilities and Ontario Hydro retail utilities in the same manner and fashion and with the same provisions as amalgamations between municipal electric utilities.
Let me explain the first point. We believe it is critical for the distributor's affiliate, which is owned by a municipal corporation, to be able to compete on a level playing field. Currently, under the provisions of Bill 35, the distributor's affiliate is restricted to electricity-related businesses -- section 72, Ontario Energy Board Act -- and the affiliate is prohibited from supplying its customers with the type of services and products they demand in the same fashion that competing retailers are capable of providing.
West Lambton Utility is seeking clarity on this point. If it is the intention of the legislation to provide a level playing field, we recommend that the wording be changed in the legislation to more clearly set out the unrestricted ability of the distributor's affiliate to compete.
As an example, under the current provisions of Bill 35, the distributor's affiliate, which is owned by a municipal corporation, could not enter into an activity such as the provision of a combined electric and water billing to its customers, despite the fact that this activity may be a core competency of that distributor's affiliate. Such restrictions impair the ability of the distributor's affiliate to compete evenly with other suppliers and limit the benefits to its municipal owners.
Further to this same point of a level playing field is the fact that contracts entered into by the distributor's affiliate should be treated in the same manner as contracts entered into by power marketers. Bill 35 provides that contracts entered into by distributors and their distributor's affiliates are not in force on the day that open access is proclaimed -- Electricity Act, subsection 25(4). Gas and electricity marketers are currently signing customers by making offers that are unavailable to municipal electric utilities. It is the position of West Lambton Utility that there should be equal treatment for both participants.
The ability of the distributor or the distributor's affiliate to negotiate power contracts between now and the day that open access is proclaimed is essential. Large marketers, some of which are foreign, are currently offering power contracts to selected customers while distributors and their retail affiliates cannot. This can only ensure disparity between the rates that their respective customers will receive.
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Early entrants in this market will unfairly be able to select customers whose service costs are lower and thus be able to offer a more competitive rate for power, whereas the last entrants into the market will be left with customers whose cost of service is higher and as a result will experience a higher end rate. In simple terms, the diversity advantage will only benefit the early entrants into the market. It is our recommendation that this inequity be addressed in Bill 35.
Secondly, I would like to put forward the concerns of West Lambton Utility on how the stranded debt is recovered from the competition transition charges. It is critical, in our view, that consumers see their end rates as fair and that incremental consumption is encouraged in the system.
West Lambton Utility agrees with sections 83 to 88 of the Electricity Act that set out that the stranded debt be recovered through the competition transition charges to generators and consumers. It is the opinion of West FLambton Utility, however, that the stranded debt, which is defined as that part of Ontario Hydro's financial obligation that cannot be recovered through its assets once its monopoly has been removed, be assessed to the consumer in the form of a fixed monthly charge per customer class.
It is inappropriate to collect a fixed stranded charge through a consumption tax, as it will encourage fuel switching to other energy sources. It is the opinion of West Lambton Utility that a fixed monthly charge per customer class, at the meter and collected by the regulated distribution company, will behave as a rate reduction and will encourage growth in the electrical sector, creating both capital investment and jobs. It is a position that can be supported by all customers, as all customers benefit and are not surprised by unexpected costs.
Contrasted to this is a consumption charge where the more a customer uses, the more he pays. Thus, to avoid paying his fair share, a customer currently using electricity for a process or for an appliance will switch that process or appliance to another fuel. The result is that the recovery period for the stranded debt will be extended and overall consumption will drop, thereby discouraging investment and jobs and potentially creating a less efficient infrastructure.
In the early 1990s, the electricity industry in Ontario suffered high load losses due to fuel-switching activities from electricity to natural gas. This resulted from the fact that consumers viewed the kilowatt hour cost of electricity to be too high. The industry will be at similar risk, after open access, if a consumption charge is imposed, thus limiting Bill 35's effectiveness in providing job creation and consumer protection through the provision of competitively priced energy.
To illustrate why a fixed monthly charge per customer class is essential, please consider the example of a customer who owns an electric water heater. If the customer is assessed a fixed monthly charge, he or she has no economic incentive to switch water heaters. If, however, the recovery of the debt was a kilowatt hour consumption charge as measured at the meter, the customer could simply replace the electric water heater with a natural gas water heater and avoid incurring the charge because he or she reduced his or her consumption. This fuel switching could become widespread and would have the effect of unfairly switching the debt burden to others, extending the pay-off period of the stranded debt and reducing total consumption province-wide, which discourages the creation of jobs and investment in the electricity sector.
My third and final point concerns the intentions of Bill 35 regarding amalgamations. You will hear more of this concern from Moore township following this presentation. West Lambton Utility is concerned about Bill 35 on this issue. In section 130 of the Electricity Act and section 84 of the Ontario Energy Board Act, 1998, Bill 35 permits the amalgamation of two or more municipal corporations. We cannot see, however, any reference to amalgamations between municipal corporations, ie, municipal utilities, and Ontario Hydro retail utilities.
As stated earlier in this presentation, Moore township, which has established a municipal electric utility, is currently seeking to acquire control of the distribution assets from Ontario Hydro to join with this amalgamation of the distribution systems of Sarnia, Point Edward and Petrolia to form the new West Lambton Utility that we are representing here today.
As West Lambton Utility, we are seeking clarity on the intention of Bill 35 on this point. If it is the intention of Bill 35 to treat amalgamations between municipal electric utilities and Ontario Hydro retail utilities in the same fashion as it treats amalgamations between municipal corporations, ie, municipal electric utilities, then it would be the expectation of West Lambton Utility that Moore township will be a part of our new utility and that substantial savings can be realized and competitive rates achieved. If, on the other hand, these amalgamations are treated differently, it will impose barriers to Bill 35's ultimate ability to create jobs and to provide consumer protection by impeding its ability to provide competitive rates.
In summary, let me assure you that all members of this panel applaud this legislation. It is our hope that our recommendations will be viewed positively and that they will provide even greater benefits to Bill 35. Again, let me assure you that we are most anxious to help move this legislation forward and offer our services to you in this regard.
Thank you for the opportunity of addressing this committee on this important legislative initiative. We will be pleased to answer any questions, provided they are easy.
The Chair: Not a chance. Colleagues, we have four minutes for questions from each caucus. We begin with the government and Dr Galt.
Mr Doug Galt (Northumberland): Thank you for the presentation. I'm intrigued with your second recommendation and struggling a bit with understanding and being clear on it. Where I'm coming from is what happened with Ontario Hydro a couple of years ago when they upped the rate for farmers who had a second barn or third barn or service.
We'll look at Moore township, and we're on concession 4, lot 20. Mr Smith is there with a big farm and he's getting this customer class charge. A mile down the road he has another barn and all he needs is lights to feed the steers at night. He uses nil kilowatts. If you're suggesting that at both locations he would pay a full charge for this, it's going to be a very tough sell to Mr Smith to have these two charges, unless you consider that as one customer on two locations. He might have four locations, and in another place he may have a pump that he needs to pump water for cattle or something. How do I sell that idea to Mr Smith?
Mr Moore: You're assuming there that both of them are in the same class. It could be that they're not in the same class. I suppose the farmer who is only feeding his herd might be in a different class than the man who has a grain elevator and other higher consumption.
Mr Galt: My understanding is that you were putting an amount on each class, but whether it's in class 1 or class 5, there's still a charge for class 1 and a charge for class 5, rather than a few cents on each kilowatt. When he uses only a few kilowatts he would only be expecting to pay a few cents on the stranded debt, and on the big farm he would be paying a significant amount. How do I explain to him he's got to pay two times X or three times X?
Mr Moore: Again we're assuming he's in the same class. In any class there's probably always going to be someone who's unfairly treated. I think that's a fact of life. If they're in the same class, they would pay the same. I really can't answer other than that the classes would have to be different.
Mr Galt: Because he would have a small service on a small barn, he's still going to get caught in the same --
Mr Moore: He might be a different class than the other one. I think the government is going through problems right now with property tax. It could very well be the same type of problem. We still feel that the class system is better than paying on consumption.
Mr Galt: It's just a unique --
Mr Moore: Yes, that's right.
Mr Galt: We hadn't heard this one before.
Mr Moore: Probably there will be exceptions to all of these classes, but we still don't feel that it should be a consumption tax. It should be a class-type tax.
Mr Galt: Do you have any gut feeling on how many classes there should be?
Mr Moore: No, I don't. I'd be glad to sit on a committee to help figure that one out, though.
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Mr Sean G. Conway (Renfrew North): Thank you very much, gentlemen, for a very helpful presentation. I want to come back to the point Dr Galt was just pursuing from a slightly different way. The bill and the attendant policy on the relief of the stranded debt, whatever it is, contained a menu of possible instruments. It's pretty clear, I think, from the Ministry of Finance officials that the last item, the least attractive of the options, is the CTC charge, the competition transition charge. Assuming that's the one we want to use last for a number of reasons which have been advanced in this committee, there are then four or five other charges possible. Thinking about fairness and efficiency, what would your recommendation be as to how a prudent policy-maker should select from the other five? You know what they are. I can read them if you want.
Mr Moore: Refresh my memory.
Mr Conway: Set out in the bill is the competition transition charge, which was the one we talked about earlier. It will be the payments in lieu of federal and provincial corporate taxes, which will be imposed on Servco and Genco to level the playing field. There will be other payments presumably imposed on the commercial companies, Servco and Genco, of dividends and other things. There will be payments in lieu of additional municipal and school taxes. There will be MEU transfer taxes. My favourite is the provincial slice of the adjusted gross revenues annually and in perpetuity of the municipal utilities. Those are the other five.
Thinking about issues of parity and efficiency, what would the proper mix be? If you had to make a casserole from those fixings, how would you make it?
Mr Doug Darrach: On the one issue, in regard to the taxes and those fees put on Genco, the one concern we had was to make sure that Ontario Hydro generating plants, the nukes, those sort of things, got the same amount of debt put to them so that it didn't make an uneven playing field for the new energy sources coming in like Genco. We had a feeling that if Genco was put with a greater portion of the stranded debt, they would be left producing hydro at a greater cost than, say, the nukes would be because the nukes were the ones that created most of the stranded debt. We didn't really see that in regard to creating new enterprises and new jobs in this area. That was an option that didn't look very promising to us.
Mr Conway: My concern is that we're going to have a debt of some kind and it's going to have to be paid out. It's not going to be pleasant, but it's got to be done and it's got to be borne fairly by all classes. In Ottawa yesterday we had some evidence tendered by a public interest group which took us through some of the telecommunications, from their point of view, the restructuring of the telecommunications sector in the last number of years. If you were a bit skeptical, you'd say, "Well, the big boys got more benefits earlier than the broad class of general customers."
My worry about this menu is that a couple of them may impact unfairly on residential electricity customers in your part of the province or in mine for a variety of reasons, not the least of which is the MEU payment, what I call the adjusted gross revenue payment, and what I'll call the dividend payment from Genco and Servco. When the stranded debt is paid off, under the language currently in this bill, those payments continue to the credit of Her Majesty's provincial treasury.
I don't mean this as a criticism of the current government, but if I were a finance minister, let me tell you, I would be very interested in those two items, because when the stranded debt is paid, all of a sudden I have got myself a very nice dedicated revenue stream, ostensibly to level the playing field tax-wise, but, boy, I'm the finance minister and I've got myself new tax revenues that would be substantial. I'm going to guess that the MEU payments, the annual slice of the gross revenues of all municipal utilities, would give me hundreds of millions of dollars with not a very large percentage. Is that a concern, as far as you're concerned, with your electricity consumers?
Mr Moore: Anything that's going to increase the cost to our consumers is a concern. We only had a chance today to talk about three points. That's one that certainly is in the bill, but we did not address that.
Mr Conway: But your second point --
The Chair: We must move on.
Mr Wayne Lessard (Windsor-Riverside): You would agree with me that at some point we're going to have to determine this number for the stranded debt. There may or may not be something that's referred to as the residual stranded debt. Part of the issues we're trying to deal with is how to allocate the payment of those two amounts in a way that's fair and reasonable.
I'm assuming that at the current time you probably have a rate structure that treats different consumers differently. Would I be correct in that?
Mr Moore: Yes.
Mr Lessard: How many different classes do you have now, or is that how you divide them up?
Mr Moore: I can't really answer that. Four.
Mr Lessard: I would further assume that's probably based on consumption. You have larger consumers that have a different rate than your residential consumers and probably the largest consumers would have the lowest per kilowatt hour rate.
Mr Moore: Yes.
Mr Lessard: To take that further, when we're talking about dividing up rate classes for the payment of the stranded debt, my concern isn't that small residential consumers are going to look at their bills and consider appliance switching, but that large industrial consumers are going to be looked at by residential consumers saying, "If you guys are getting a break, then I'm going to be the one who's going to have to pick up the slack." That's my concern. If residential consumers are going to see their rates rise disproportionately to large consumers to cover the stranded debt, I think it might be more likely that residential consumers would be switching appliances like hot water heaters, for example.
Mr Moore: Do you mean if it's charged on a consumption charge?
Mr Lessard: You said that your rate classes are connected with consumption because a person who consumes the most has the lowest rate.
Mr Moore: I'm not just sure --
Mr Darrach: But it doesn't mean that the distribution of the stranded debt would go that way. It may mean that the large corporations are able to have a surplus in their usage. They may get charged higher amounts for stranded debt and the consumers on the home front would get a lower portion of that, because in regard to the amount they're using it's less. The creation of the debt was probably to the benefit of the large corporation as opposed to the individual home user. They haven't received the benefit. Maybe now it's time that the larger corporations pay the larger portion of it.
Mr Lessard: So you're actually suggesting that larger industrial consumers may pay a larger portion towards the stranded debt.
Mr Darrach: Yes.
Mr Lessard: Interesting. Do you currently offer water services?
Mr Darrach: We do in the town of Petrolia, yes.
Mr Moore: In Sarnia we don't.
Mr Lessard: But you offer the billing services in Sarnia. Have you considered getting into gas distribution as well? Yesterday we heard from Cornwall and they're doing combined services there. The choice about switching wouldn't be as big a factor if you were involved in that. We'd just be talking about energy.
Mr Moore: If we took over the local gas distribution, I suppose that's right. I'm not sure how practical that is at the moment, but it's a good point.
Mr Lessard: But you see restrictions in Bill 35 as far as being able to not only amalgamate, but also offer the same services that you currently offer in all of the areas where you have service. Thanks.
The Chair: Gentlemen, we appreciate your starting off our morning here in Sarnia. Thanks for bringing your best advice to us.
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Mrs Helen Johns (Huron): Madam Chair, just as a point of clarification: There are two things I think we should clarify. In the act, it does not preclude Servo and the MEUs from negotiating. There is no section that precludes that, so that could happen.
Secondly, in response to Mr Conway's prelude, it's certainly not our intention to use the CTC for stranded debt costs, but we have not precluded using the CTC costs for residual stranded debt.
The Chair: We have air conditioning in this room today and periodically you'll hear it come on and off. It's very loud, so I would encourage everyone, and that includes our guests, to pull their mikes close to them so their voices can be picked up. It is hard to hear. I can see the audience is straining as well.
Mr Conway: I wonder if it's possible to operate without the air conditioner. Would this place become as stuffy as the map room in short order?
The Chair: We've been experimenting with that, but we do have to go through this all day.
MOORE TOWNSHIP HYDRO ELECTRIC COMMISSION
The Chair: Our next presenters are representatives from the Moore Township Hydro Electric Commission. Good morning. Welcome to our committee. We're pleased that you're able to join us today.
Ms Jane Marsh: We're very pleased to be here also, and good morning. To the members of the resources development committee, my name is Jane Marsh. I am the chairperson of the Moore Township Hydro Electric Commission. Sitting with me are members of our commission, Charles Bailey, Charles Nisbet, Stan Campbell and our mayor, Chris Muller. We also have our secretary, Don Lougheed.
I've met some of you before in my previous life as the mayor. Mr Conway, I was pleased to be up in your territory plowing at your international plowing match. That was a great place to be at that time of the year.
However, we're here to talk about electricity and Moore township's frustration at trying to work towards a better system. I would like to confirm that in general our commission supports most of the initiatives included in Bill 35. These initiatives are largely consistent with the efforts of Moore township, like the province, to change the current electrical supply arrangements.
I'm going to have to go into a little history here in order for you to understand why we're here and why we're so frustrated. The Moore Township Hydro Electric Commission was officially formed in 1997 and we have yet to receive control and management of the supply facilities within the township of Moore from Ontario Hydro. By the way, the township of Moore is just south of Sarnia. We have a very large corporate entity and 50% of our assessment is paid by the corporations. We have three Nova plants, Shell, Lambton generating, Ethyl, Dupont. We're a healthy community.
The forming of the commission followed all legal and historical precedents, including an election and a referendum. We have found, therefore, Ontario Hydro obstructionist in surrendering said control and management to our commission. Our efforts to provide local control and management of electrical supply commenced well before the introduction of Bill 35, and further, significantly prior to the government of Ontario white paper issued in 1997. Our activities go back to early 1995, and attached, when you have a chance to go through our submission, you will find the procedures that were followed and the dates.
We initiated discussions in 1995 with Sarnia Hydro and other municipal electric utilities regarding the establishment of a combined municipal-controlled electric utility, West Lambton Electric Commission, which you have just heard from.
Subsequent studies prepared for us by our consultant indicated that the savings to the residents of Moore township could amount to a minimum of $2 million over a five-year period. While reliability of service from Ontario Hydro has never been an issue, given the potential savings, a view to economic growth and desirability for local control of the management and works, we decided to pursue establishing the Moore Township Hydro Electric Commission.
In November 1995, we wrote the then president of Ontario Hydro, Dr Kupcis, requesting advice on how best to set up our hydro commission. Based on his response, we requested an inventory of the plant within the township of Moore from Ontario Hydro. The inventory would be completed and the cost available, we were told, by the end of September 1996.
In the last half of 1996, we advised the Minister of Energy and Environment that we had decided to form our own utility, passed the necessary bylaw to establish our own commission, and proceeded with establishing a cost contract for the supply of power. We advised Ontario Hydro of these activities and requested system separation costs from them.
On February 13, 1997, the Ontario Hydro secretary and general counsel advised our commission of the need for a referendum to complete the requirements to establish a cost contract. Of course, on election day the residents of Moore township, by referendum, approved entering into an agreement with Ontario Hydro to purchase energy from Ontario Hydro and agreed to pay the asking price, which we'd been given by that time.
In December 1997, following establishment of our commission, we wrote Ontario Hydro requesting transfer of control and management of the works effective January 1, 1998. On January 12, we again wrote Ontario Hydro requesting their response. Ontario Hydro has continued to delay and procrastinate, despite their ongoing encouragement in specifically setting out each of the requirements for Moore township to establish a cost contract supply.
We have acted in good faith, complied with all the requirements and Ontario Hydro suggested activities, including the referendum, and we have accepted the price that was given to us at that time, which was book price, book value, of $4.7 million. We have incurred several thousand dollars of expenses at the suggestion of Ontario Hydro and yet still are being frustrated by them.
On June 24, 1998, we met again with Ontario Hydro with the view of establishing the utility post-haste. Despite all our efforts and following all the conditions laid out by Ontario Hydro, they have now informed us that the rules have changed, and instead of the $4.7 million we accepted, the price is now in excess of $15 million. They have advised us that this new price represents market value for the assets and that they are unwilling to proceed with the transfer under the former rules of existing statute. The $4.7 million is based upon the residual debt associated with the facilities within our township.
The committee should be aware that Moore township formerly had owned and operated electric utilities within its geographic boundaries. They included Brigden and Courtright hydro systems. When these assets were transferred to the Ontario Hydro retail system, they were done so on the basis of residual debt at zero cost to Ontario Hydro. While we are not seeking a zero price from Ontario Hydro, it is reasonable for us to reacquire these areas and in fact the entire township on the basis of residual debt quoted to us by Ontario Hydro at the $4.7 million on April 21, 1997.
The foregoing historical background on our attempts to establish the Moore Township Hydro Electric Commission is a concrete example of Ontario Hydro's abuse of power. Surely their actions could be construed as acting in bad faith. In Bill 35, it is extremely important to give the Ontario Energy Board, the independent regulator, the powers it will need to protect consumers. Had the OEB been in place with mitigating powers, perhaps our situation could have been settled with a satisfactory conclusion for the residents and hydro customers in Moore township.
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You will be aware that Moore township has been meeting with its neighbours to establish the West Lambton hydroelectric utility. Under Bill 35, existing utilities will be able to amalgamate in order to continue their business in a more economical and competitive fashion. However, should Ontario Hydro be successful in stonewalling our efforts -- and it's pretty obvious that they've done a good job so far -- Moore township will be excluded from participating in the West Lambton Hydro Electric Utility initiative, because Bill 35 does not provide for the formation of new hydroelectric commissions. This will result in our residents missing the potential benefits of such a merger. One must wonder again if it is Ontario Hydro's way of keeping the large hydro users within Moore for themselves.
Bill 35 clearly and appropriately grandfathers the Bill 185 municipalities. The test in Bill 35 appears to be which municipalities passed bylaws prior to the June 9 introduction of Bill 35, when the rules clearly changed. Not only have we passed a bylaw but we have completed a successful referendum and requested a transfer of control and management of the works at the price offered by Ontario Hydro, all prior to 1998. It appears that Moore township is being subjected to a higher standard than other municipalities in Ontario. Ontario Hydro's current position is clearly in conflict with the government's policies.
Before closing, one additional item that is of great concern to all our residents, commercial users and industries: We agree with reassessment within Ontario and particularly with Ontario Hydro properties such as the large hydroelectric generating station in Moore township. In the past, the payments in lieu of property taxes have not been fair in comparison with other assessments within Moore and in comparison with other industrial properties. We urge you to include in Bill 35 the provision that all Ontario Hydro properties pay municipal taxes to the municipality based on fair market value as established by the province of Ontario. Moore township should not be penalized by paying twice -- once for the individual stranded debt and once by not receiving the proper municipal grant in lieu of taxes. It is just not fair.
In conclusion, while we accept the need for change, we ask the committee to include in Bill 35 a requirement that Ontario Hydro complete its obligations to transfer the customers and works at the April 21, 1997, price and enter into a cost contract with Moore township under the existing statute. Or we need to be grandfathered as a Bill 185 utility, section 83 of the PCA, and order Ontario Hydro to enter into a transfer agreement and an electricity supply contract with us at the agreed-upon price.
Ontario Hydro should not only pay corporation taxes like any other utility and corporation, but should pay municipal taxes just like any other utility and corporation.
This request is duly submitted for your consideration and approval. We hope we're able to answer your questions. We are the new kids on the block and we'll try to answer them.
The Chair: We have five minutes for each caucus. We'll begin with Mr Conway.
Mr Conway: Thank you, Ms Marsh and colleagues from Moore township. It's very good to see you this morning.
Let me get to the essential question here as far as I'm concerned. One of the expectations of this policy that's widely endorsed is that there be a rationalization of the distribution system, particularly in southern Ontario. I was just looking again at the Macdonald committee, which reported in May 1996, and on this subject they were absolutely clear, as have been most other people who looked at this, and said, "Listen, the world of Ontario Hydro retail and 275 or 300 MEUs in this province has got to change." There is 15% of the consumer's bill which relates to distribution. There are obviously some efficiencies that can be gained there, in addition to which presumably a wider range of perhaps improved services at the same time. I think that's a given.
I was quite frankly concerned to hear your testimony because it seems you have been working for two and a half years to do what we all want to have done. How would you characterize the change in attitude from Ontario Hydro in the course of that two and a half years, say, from the early period in the winter-spring of 1995 to the spring of 1997? For example, on the valuation of assets, there appeared to have been a significant change along the road. What occasioned that change of attitude as far as you could tell?
Ms Marsh: First of all, I would say the attitude went from bad to worse. We have had just a terrible time communicating with Ontario Hydro. Of course it isn't Ontario Hydro's fault that every time we communicate, it's a different person -- that goes with the territory -- but it's just like pulling teeth getting any information out of them. We would request information and figures and we would wait months to get those figures.
Mr Conway: But they obviously changed their position on a critical question. I would assume that the appropriateness or the appeal of rationalization is going to turn, in some considerable measure, on how you treat and how you value the assets, moving in your case, let's say, from Ontario Hydro retail to the hydro commission of Moore township. In the space of a relatively few months, Hydro went from asking $4.7 million to $15 million, a threefold increase. Is the proposed creation of your new structure really badly damaged, perhaps scuttled, by that change in valuation, or is it a problem but you could manage it?
Ms Marsh: We've looked at it seriously and, first of all, the savings won't be there for our customers. The savings won't be there to merge into a West Lambton situation. I'm not sure they're going to want us at $15 million compared to $4.7 million. Certainly I can understand where we've gone from book value to market value, and things have to change, but we're caught in the middle of all this. I don't have a problem with market value in the new bill, but just let us get from where we were to where we'd like to be. Because we've been caught in the middle, don't penalize us.
Mr Conway: You're not the first group that's made this submission. We had a submission from learned legal counsel last week someplace, I think Sudbury, the Aird and Berlis --
Mrs Johns: Thunder Bay.
Ms Marsh: We've met with them all.
Mr Conway: He was representing a dozen or 15 MEUs.
Interjection.
Mr Conway: Sorry, I didn't bring his brief with me today. Thank you, Mr Lessard, for reminding me that he may be known to these deputants.
He made it very clear in his submission that there are impediments in the bill as currently written or factors that are going to be barriers to prevent the expansion naturally of franchise areas like yours. Of course we got into this big debate about the attitude. The way the bill is currently written, Hydro has the upper hand in that the time lines are such that they just need to sit there and be difficult or obdurate or non-communicative and after a while they will win simply by attrition. That has been your experience, I take it.
Ms Marsh: Yes.
Mr Conway: On the market value question -- and one of my colleagues, Mr Gilchrist, will undoubtedly pursue this -- one of the issues here has to be some fairness and equity. If I were a customer out in Moore township, particularly if it was going from one part of the public sector to the other -- I think I would have a different view if it was a transfer out of the public sector to the private sector, but that's a debate I'd probably want to think a little bit about -- would it be the view of people in Moore township that they shouldn't be paying twice? If we're simply talking about the distribution of assets of Ontario Hydro retail that they have paid for over the course of however many decades, they would not consider it a fair transaction, that if as it moved from one part of the public sector, namely Ontario Hydro, to another part of the public sector, Moore Township municipal PUC, they shouldn't essentially have to pay some kind of transfer tax or other special charge that was effectively going to mean double payment for the assets and an effective increase or surcharge on their electricity rates.
Ms Marsh: You make a very good point. I think it would be wonderful if Ontario Hydro transferred the assets to us at zero cost.
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Mr Conway: I'm not saying zero cost. I'm not saying that, but my concern is very simple. There has to be fairness.
Ms Marsh: Yes.
Mr Conway: We can't be giving, you know, sweetheart deals to anybody. What my concern is --
The Chair: I'm sorry. To be fair, we have to move on.
Mr Conway: I'll conclude. My concern here is that I don't want a policy that effectively says the only rationalization we can really get is one in the name of Servco, because Macdonald and others said the rationalization, particularly in southern Ontario, on the distribution side should go the other way, it should go down to locally based municipal utilities. If we end up with a policy that effectively creates significant reductions and rationalization on the distribution side in favour of Ontario Hydro retail, I don't know that that's what customers in Moore township or the Ottawa Valley expect out of this policy.
Ms Marsh: No, and you're right.
Mr Lessard: I'm just going to follow up on that and be brief, because I look forward to Mr Gilchrist's debate with you further about the issue of the pricing of the assets.
You're not the only people having difficulty communicating with Ontario Hydro. We've been throughout the province and have heard example after example of people who called the 1-800 number after the billings were changed, and I'm sure the people in Moore township weren't alone in having difficulty getting through to the 1-800 number as well.
I just get this sneaking suspicion that part of the reason Ontario Hydro was stalling in its negotiations with you, or the completion of the agreement -- I guess the negotiations had already been concluded -- was because they really knew something you didn't. They have been involved in consulting with respect to the drafting of the legislation and were I think just stalling in anticipation of the bill being introduced. One of the things you suggested is that Ontario Hydro's current position is clearly in conflict with the government's policies, but do you really think that? Maybe they're both in sync. Maybe it's possible that they're both going in the same direction.
Mrs Johns: Maybe we didn't consult with anybody but Hydro.
Mr Conway: I want to know if Ontario Hydro --
The Chair: Order. We have guests who want to answer. Please go ahead.
Ms Marsh: I need to ask you again, what is your question?
Mr Lessard: I'm just wondering if you think there really is a conflict between Ontario Hydro and the government's policies, or is it possible that there isn't a conflict?
Ms Marsh: From our viewpoint it looks like a conflict. I hope things would move ahead a little better and a little easier for people like us. You say there are others like us in the same position. If we're grandfathered in Bill 35, we're able then to work through this with the present rules, which are book value. That's all we're asking. We can work through it as soon as we're formed. I think Ontario Hydro made the statement to us, "We're afraid that as soon as you're formed you're going to flip it, you're going to sell it," and we have said: "No, we're there for our residents. We're there for our customers." We know we're going to put it into the West Lambton Utility because a larger utility is going to have more efficiencies. We're going to work better together. We're all in this Chemical Valley together. We can do a good job for our customers if we're together.
Mr Lessard: Perhaps there are some restrictions that we could put in the bill as well about flipping the assets or making it subject to Ontario Energy Board approval. Are those suggestions that you think would be reasonable?
Ms Marsh: Yes, we would certainly agree to that.
Mr Lessard: You've certainly given us a vivid illustration of what the future may hold for others who may want to follow a similar course to what you've followed, and it really isn't very optimistic.
Ms Marsh: It hasn't been, no.
Mr Lessard: I can't imagine other people wanting to follow the same course that you've followed, and if they're not going to, that really leads me to wonder whether there will be a big change. If there is a change it may be the other way, Ontario Hydro actually leading the rationalization efforts and not the municipal electric utilities or municipalities.
Mr Steve Gilchrist (Scarborough East): Thank you, Ms Marsh. I appreciate your presentation here this morning. It must bear stating on the record that it hardly was private meetings with Ontario Hydro that were the inspiration for what we're doing here today. Mr Lessard has seen the list of the literally hundreds of meetings with dozens and dozens of organizations that have taken place. I'm sure people from your neck of the woods have been involved as well, as have people from every part of the province in all aspects of electrical production and consumption.
I'll surprise my colleagues opposite by saying I have some considerable sympathy for your position and one of the things is that we're going to have to go back to get a legal answer on the relative ranking of Pr8 versus this bill and whether there's a need to put something extra into Bill 35 or just pass Pr8, whether that has the same effect. We'll certainly make those inquiries before matters proceed to their conclusion.
I would like to explore the issue of pricing with you a little bit because of what I see as a contradiction in your own presentation here. The issue of whether you get it for $4.7 million or $15 million that I think you've put on the record relates to the fact that Hydro now is charged, if they dispose of any of their assets, with recovering something towards the stranded debt. Would you agree with me that every dollar they mark something down increases the debt that's left? I mean, conversely, the more money they bring in, the more money they make, the less debt they would have. Would you agree?
Ms Marsh: I hope so, yes.
Mr Gilchrist: I'm not trying to trick you or anything, just as a philosophical concept here before moving into the question. So that I don't think is anything people would disagree with. Forty per cent of the cost from Ontario Hydro is debt service. That doesn't go away when this bill passes. That's still a debt that every taxpayer in Ontario has guaranteed. How we recover it may be open to some debate, but it must be recovered.
On the one hand, if you do get the assets for the lower cost and no money goes against stranded debt, we then have the contradiction of your issue of taxation, because -- and I hope it's been pointed out to you -- the higher assessment will be charged but the difference between the $86.11 per square metre that you're collecting right now and the full assessment will go towards paying the stranded debt.
Ms Marsh: Right.
Mr Gilchrist: So contrary to your presentation, you must have one or the other. If you get it for $4.7 million, then somebody in Moore township somehow has to pay their fair share, and I think at the minimum the ongoing payments towards the stranded debt in the form of the difference in assessments -- something you've never had before. If I may be so bold, municipalities weren't knocking on anybody's door saying $86.11 was inappropriate before this bill came up.
Ms Marsh: We did.
Mr Gilchrist: Well then, you're the exception, because no one's ever written to me at municipal affairs on this matter in the two years I've been there. Would you not agree with me that the people in Moore have an equal share with the rest of the people in Ontario in somehow making their contribution towards paying down the debt?
Ms Marsh: But I believe that the people of Moore township will be paying their share of the stranded debt once you figure out how to do it, whether it's on the hydro bill or the usage or whatever. Therefore, again, why are we paying twice? We should be paying book value. If we pay market value, we're paying more than our share.
Mr Gilchrist: On the assumption that you haven't done that, you still seem to have, if I read your report correctly, a problem with the concept that the difference between $86.11 and full assessment goes towards the stranded debt, or am I misreading you there?
Ms Marsh: No. I think the point I should have highlighted was that we believe municipal taxes should be paid to the municipality, that 100% taxes should go to the municipality. Then maybe there should be a way that the government can take back from the municipality that share of the stranded debt, if that is a fair way of doing it. I like Mr Conway's word "fairly."
Mr Gilchrist: It sounds like a bit more bookkeeping. A very quick final point --
Ms Marsh: It should be paid to the municipality. I don't think taxes should ever be paid other than to the municipality.
Mr Gilchrist: We don't have time to go down that road. But very quickly then, if in fact you get the assets for book value, are you prepared to put on the record that if you ever sell those assets again it will be at book value? And if not, why not? Why should the people in Moore township recover, in effect, a windfall instead of Ontario Hydro recovering their investment, not Moore township's investment -- the aggregate of all the debt that has to be divided over all the province? If you are, then that's great. Are you prepared to put on the record today --
Ms Marsh: We've already told them that.
Mr Gilchrist: -- that West Lambton as a utility will never sell to Consumers' Gas, will never sell to any of the other interested bidders out there at anything other than book value?
Ms Marsh: I'm here representing Moore township and we did make clear to Ontario Hydro representatives that we would buy it at book value and that if it ever got sold for anything other than book value -- the market value -- they would get their share in the difference. We were prepared to agree to that.
Mr Gilchrist: That's an important concession that we haven't heard from other MEUs. That's kind of you.
The Chair: On behalf of all of the members of the resources development committee, we thank you for coming before us today. We appreciate your telling us your story in person. We will give careful consideration to your request.
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GUELPH HYDRO
The Chair: Now calling representatives of Guelph Hydro, please. Good morning. Thank you very much for coming to the committee this morning; nice to see you. Before you begin, please introduce yourselves so my colleagues know who is making the presentation.
Mr Dan Moziar: My name is Dan Moziar and I'm here in my capacity as the chair of Guelph Hydro. With me is Jim MacKenzie, the general manager of the utility. In the back of the room we have our director of operations, Rene Gatien, and our director of engineering, Arthur Stokman. Each member of the committee should have a copy of our detailed written submission. This submission contains a number of recommendations on amendments to the proposed legislation and some examples of the potential impacts on electricity prices to consumers that could occur should this bill pass in its present form. In my remarks there's not time to address all the issues raised in our formal presentation. We would be pleased to respond to any questions on this material at a later time, at your request.
Guelph Hydro has served the citizens of our city since 1903. Guelph was one of the 13 municipalities that created the Hydro-Electric Power Commission in 1906. We have fulfilled our mandate to provide a safe, reliable supply of low-cost energy throughout our long history. We have done so in the spirit of a committed public service. So we say with confidence that we understand the business and we know our customers. We have some very positive views on how this industry should be restructured and how the interests of all our customers can best be served.
We have been involved in the debate about electricity restructuring since 1992 when the Municipal Electric Association started to examine options to restructure the industry. Back then we knew the industry had to change. A couple of years of dramatic increases to our wholesale rates in the early 1990s were evidence of that. In 1998, power purchases represented 88.4% of our costs; that is, 88.4 cents of every dollar goes to Ontario Hydro. Over the past nine years our gross margin has declined from 14.7% in 1990 to 11.6% in 1998. Local improvements can result in rates being stabilized or reduced; however, reductions at wholesale level are necessary to achieve meaningful reductions. I draw your attention to chart 1 and chart 2 in appendix 3, which will give you a cut on that. Efficiency gains at the wholesale level have a much greater impact. Clearly improvements in the area of greatest cost will provide the greatest benefit for all customers. One of the prime motivations for change is the goal of maximizing benefits to all customers. It is important that all customers share the gains resulting from these changes equitably and these changes should lead to real benefits in terms of lower prices.
We congratulate the minister for taking on the challenge of restructuring the industry. The task is complex and difficult, some might even say daunting, but one that must be done. We believe the legislation proposed does not go far enough to accomplish the restructuring that is required to deliver real change for Ontario's electricity consumers. I would like to provide you with an overall sense of our areas of concern as they relate to low-cost energy, market power, taxation, level playing field, local control, Ontario Hydro Servco and retail access.
Low-cost energy: The legislation was introduced with the preamble that it is "An Act to create jobs and protect consumers by promoting low-cost energy through competition." However, the purpose section of the act does not explicitly address low-cost energy and it's not specifically defined in the Electricity Act or the Ontario Energy Board Act. To ensure that future decision-makers understand the purpose of the legislation, there should be specific reference in both acts to the commitment to low-cost energy.
Market power: The issue of market power has been the subject of much attention. There's no doubt that Genco will be the dominant player in the Ontario market. It is difficult for us to believe that we will have meaningful competition in the electricity supply business as long as one player has 93% of the production capacity. The concern is that this situation will discourage new entrants to the market and prevent real competition where it is so critically needed. If left unrestrained, any dominant player in a market -- and there's no doubt Genco will be a dominant player -- will have a real opportunity to use its position to abuse the market and effectively block competition. This would be contrary to the government's stated objectives of lower energy prices and job creation.
The government must provide for regulatory intervention. The Market Design Committee has made several recommendations as to measures that should be introduced at the outset and the interventions in the market should there be signs of abuse of market power. The legislation should include the goal of enabling further unbundling of Genco assets as a means of making this sector more competitive in the future; I believe you people prefer the word "disaggregation." There should be a process for the review of market power issues within two years of the legislation being enacted.
Taxation: Bill 35 provides for the successors to municipal electric utilities to be established under the Ontario Business Corporations Act. The bill provides for those successor companies to be subject to the same tax calculation as any other OBCA participant in the market. If a tax exemption exists under the federal Income Tax Act, then the successor company pays the equivalent of tax to the Financial Corp to retire the residual stranded debt. The bill proposes that for local distributors the tax-equivalent payment is to be based on adjusted gross revenue. No other market participant will be subject to tax based on gross revenue. Other participants' tax obligations will be a function of business net income as determined under generally accepted accounting principles. Local distributors should not be treated differently.
Our utility and our customers must pay their fair share of the stranded debt; we all have that responsibility as electricity customers. We support payments in lieu of taxes towards this obligation. However, it is inappropriate to continue these payments after the obligation has been paid. The payments should cease once the stranded debt has been retired. No other market participant has this obligation. To continue with this in the bill can be construed as a tax grab. These continuing payments surely are at odds with the government's tax cuts in other areas and the goals for restructuring.
Level playing field: I wish to comment on the idea of a level playing field for market participants. The bill expressly provides that municipally owned electricity distributors and affiliates be created as Ontario business corporations to compete in the industry. The proposed legislation then places limitations on the affiliates' business activities. It would be more appropriate to allow those municipally owned distributors and affiliates to engage in business on the same basis as others in the market. This bill should not restrict local utilities from pursuing the same activities as other competitors. By limiting the business activities of only local utilities, this bill unfairly impacts the potential benefits we could deliver.
Local control: We also wish to bring to the committee's attention our concerns that the bill does not pursue the Macdonald advisory committee recommendations on the creation of shoulder-to-shoulder local utilities. There is little incentive for the mergers and amalgamations as suggested in the white paper.
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The proposed Electricity Act appears to deny the rights of municipalities to set up their own local electrical distributor. Where a utility commission does not currently exist, the bill predetermines that the supplier, at least of the wires service and the default supply, will continue to be Ontario Hydro Servco. We understand that ministry officials have advised the MEA that the intent of the bill is not to deny municipalities the opportunity to create local utilities where one currently does not exist. If that is the intent, then the legislation should be amended to clearly reflect and encourage that intent.
Prior to and immediately following the release of the Macdonald report, some 230 municipal utilities were involved in conducting about 60 studies on the creation of shoulder-to-shoulder local distributing utilities. Guelph Hydro is involved in one such study in Wellington county. Our study, like others, was developed on the basis of the assets of all participants, including the Ontario Hydro rural system, being transferred to a new county distributing utility at book value.
With the emphasis in this legislation on mergers being voluntary and on a commercial basis, the prospects of achieving the Macdonald recommendations are less likely. Two issues stand in the way. Ontario Hydro, or its successor, Servco, may not agree to relinquish the assets. Second, the commercial market price may be significantly greater than the current book value. As the declared shareholder of Servco, the government may see this as an opportunity to benefit from the sale.
A transfer at book value would be consistent with the current Power Corporation Act and the Bill 185 amendment. Disposal at above book value would result in the new owner defining its rate of return on a higher equity value, and as a result customers would pay more. This does not appear consistent with the objective of the legislation.
We also note that the legislation would eliminate the municipality deciding who is to serve the municipal area. It appears that a municipality will not have the right to decide which entity serves the local residents. The Ontario Energy Board Act refers to licences as not being exclusive in an area. While this is expected in a competitive business, in the area of the monopoly wires business it is reasonable to expect that the local single electric distributor would provide the service. Otherwise, we could have several monopoly businesses competing for space on municipal rights of way to build redundant monopoly infrastructures.
In the case of municipal annexation, the local council has always expected the local utility to serve the newly annexed area. However, the proposed legislation would suggest that residents could possibly have wires service, and as a result default supply obligations, from more than one local provider. We do not view this as a positive outcome.
The Ontario Electric Services Corp: Servco is created as an Ontario Hydro successor corporation. Bill 35 provides that the transmission and distribution functions operate the wires business in a single entity. In this single corporate structure there is the potential for conflicts and cross-subsidization which could negatively impact the competitors and their customers. One of the primary principles of restructuring is to separate transmission from distribution, such that costs of distribution cannot be artificially lowered by allocating costs to transmission through creative accounting.
We note that the transmission entity serves both the municipal distributors and the Ontario Hydro retail system. Given that, it is in our view inappropriate that the successor to the Ontario Hydro retail wires business be part of the same corporation. There is the obvious potential for conflict. Separation into two distinct corporations is the appropriate step in restructuring at this time.
Finally, retail access: The restructuring legislation is formulated around the idea that creating competition, moving away from the monopoly structures of the past, will provide benefits to all customers. However, we're not starting from scratch. There is a system in place that has generally served people well for over 90 years. The legislation must ensure that there is the appropriate level of protection for customers during the transition period.
During this period customers are vulnerable to those who seek advantage from uncertainty. The legislation should ensure that contracts for the supply of electricity before a retail business is licensed by the OEB will be deemed invalid unless reconfirmed by both parties to the contract. The legislation should also contain provisions for a one-year transition period. This period would allow consumers to be educated and informed about the new market.
The transition to a competitive market in the natural gas industry has taken over 12 years and there are still market issues being debated. With the greatest respect to the gas industry, we believe that the electricity industry is a bit more complex and to complete the transition in two years will be very difficult for all parties.
Other jurisdictions have moved cautiously and slowly on retail access. It is unrealistic to expect that Ontario will achieve in less than two years what has taken eight years in the United Kingdom and almost four years in California.
So as we move down this path we would caution the committee and the government that the end-use consumer must be well-informed and a public education program put in place as part of the restructuring activities.
In closing, Guelph Hydro applauds the Ontario government for taking on this complex task. Our staff have been involved in much of the work of our association in developing a local utility perspective on industry reform. Our staff are still involved and are assisting in the Market Design Committee technical panel activities. So we are familiar with the issues and the complexities of introducing change.
We support the broad objectives of the government to make the electricity industry more competitive. Today, we have outlined some of our concerns about Bill 35 and the restructuring process. We ask that you consider our comments and the best interests of the customers we serve when you deliberate on Bill 35.
Thank you for the opportunity to address the committee. We would be pleased to respond to your questions.
The Chair: Thank you very much. We have four minutes for questions from each caucus. We'll begin with Mr Lessard from the NDP.
Mr Lessard: Thank you very much. It's a very detailed and well-presented presentation that you've given to us this morning. You've certainly put a lot of work and thought into it.
I share your advice and concern with respect to exercising caution as we go down this road moving towards competition. You mentioned a couple of other examples, in the United Kingdom and California, and the length of time that it took them to finally bring into place the restructuring there.
I wonder if you could comment about what you see as the downside, some of the problems we may encounter, if we do move ahead too quickly, based on your experience in those other jurisdictions.
Mr Moziar: One of the first things obviously is, what is this market going to look like? The first question I asked -- Jim is on one of the Market Design Committee technical panels -- was, "Can you tell me how the money flows?" And they said, "No." So the first issue we get into is the whole process of settlement and paying, who pays what and who collects and who meters. Just to put that in place in two years I find will be extremely challenging. Jim, do you want to add?
Mr Jim MacKenzie: One of the issues as we move into a competitive market -- and we've already indicated that we support that objective -- is that consumers in this province have been used to a particular system for many years. Although there are problems with the monopoly structure, they are at least used to that. When we move to a different form of market, then it's very important that consumers be well-educated. I think the large consumers are generally pretty sophisticated. Large consumers can look after themselves generally pretty well. It's the smaller consumer, both residential and small business -- the chap who runs a small tool and die company, generally a smaller industrial concern -- who doesn't have the time or the background to delve into the intricacies of a competitive market. Those are the folks we really have to spend some time educating.
That's something that we've obviously outlined in our presentation and in our submission. Consumer education is very important, and the protection of those consumers, because there are folks out there who will take advantage of people during a time of uncertainty. That was evidenced in the gas business as well.
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Mr Lessard: There seems to be broad agreement with respect to competition, based on the government's assurances, that prices are going to decrease as a result. Whatever benefits may be available, we want to ensure that all consumers are going to benefit, including small businesses and residential consumers.
You said in your opening remarks that you thought there may be some impacts on price. I'm wondering if you believe the government's assurance that prices will go down, either in the short term or in the long term, or do you think this is what has been referred to as a leap of faith?
Mr MacKenzie: I would say initially it certainly is a leap of faith. There is no guarantee that prices will go down in the short term, at least for the average or smaller consumer. If you turn to appendix 3 in our submission and if you look at chart 2, which reflects the total cost of electricity in terms of the purchase of electricity over 1,000 kilowatt hours, I think one of the reasons we're here today and one of the reasons we have Bill 35 is that the blue portion, which is the cost-of-power portion that we pay to Ontario Hydro, has increased dramatically. That's the reason we're doing this. It's because prices have escalated at a fairly significant pace during the 1980s and the 1990s. We have to focus on that.
I think some of our submission speaks to really addressing the cost at the wholesale level. If we don't address cost at the wholesale level, we won't lower prices. I think that chart speaks to that, as do the other two charts that are behind it.
Mr Moziar: Two things on that: One, Hydro is the dominant player in the marketplace. Second, even if it weren't, there is no way of getting the traffic in. The tie lines only give you 15% inflow of new market participants from other jurisdictions, so I don't view that as meaningful competition. Again, disaggregation might help or should help get that competitive thing going.
Mr Gilchrist: Thank you, gentlemen. I appreciate your presentation. I particularly appreciate the detail you've gone into in your appendices. Particularly in appendix 1, you make a number of specific, somewhat technical in some cases, recommendations, and we'll certainly take those back as well as your general comments.
You say in clause 106(1)(k), part IX, "the section may be in conflict with existing federal standards and requirements on the use of meters." Perhaps you could flesh that out and send us your written thoughts on why you think that conflict exists.
In the limited time we have here today, I would like to explore a couple of points with you; first off, low-cost energy. I guess you're right, you could put any comments reflecting wishful thinking in the preamble of a bill. I don't know the relevance. I would invite you to offer your observations on any jurisdiction that went through what we're going through that didn't see a reduction in price. With all the empirical data that's out there around the world, why would we need to do something that is a given? Any number we pick, any arbitrariness that we put in, clearly would wind up being something that limits the market. Are you aware of any jurisdiction that hasn't seen a price decrease?
Mr MacKenzie: I think you've got to be very careful when you draw some very broad conclusions and say that what happened in Argentina, for example, where they've experienced a 40% decrease, is going to be something that happens here in Ontario. They may have a completely different system. They may have completely different debt-equity ratios. Their whole system could be so different from Ontario that to draw an exact parallel will be very difficult.
If you take a look at the UK, there was very little debt involved in the UK when they restructured and privatized. It's very difficult to draw exact parallels.
I would say that in the short term, for the average consumer, prices likely will not go down; in the long term, likely they will but it will take a number of years. I wouldn't want to jump to a conclusion that says in five years we'll have a certain percentage in terms of price reduction. I don't think I would be bold enough to commit to that.
Mr Gilchrist: That's why we don't think it's appropriate in the preamble of a bill.
Mr MacKenzie: If I can get back to the point about the preamble, I think it should be very clear to this government and any future governments that the objective of the legislation and the objective of the Energy Competition Act should be to lower prices to consumers. That should be the objective. If future governments are looking at this bill and, for example, the Ontario Energy Board is looking at aspects of the industry, they should have that as a touchstone, that the objective is lower prices. If you don't have that as a touchstone, then you're allowing yourself to see prices go all over.
Mr Gilchrist: I think we're on record in enough forums that that's our goal, so I guess I can state as a given that as long as we're around, you've got the guarantee that that will be the objective.
Mr MacKenzie: I don't think it would be appropriate for me to comment on that.
Mr Gilchrist: No, it wouldn't, I'm sure. Very quickly, because I know my time is running out here, another major part of your presentation, and we've heard it from other MEUs, is market power. It's intriguing to me, sitting here in Sarnia, and just last Thursday there was in the Financial Post an announcement of another cogeneration project here in Sarnia. I'm sure that's something very exciting to the locals here, another great investment. They mention TransAlta, a presentation we're going to get this afternoon and I'm sure we'll touch on their cogen. Those two projects alone could supply 25% of the power of Sarnia tomorrow, if they were up and running. That's one town.
Why would anybody have this belief that you have to break up Genco in order to get competition? We've got the prima facie evidence that by simply allowing for a competitive marketplace, people are going to come and reduce Genco's percentage the other way, by creating new supplies.
Mr Moziar: How are you going to handle three issues? One, that new capacity causes a greater problem with your stranded debt. That's the first you deal with; you look at those sources of supply. The next thing is, if you're going to allow those people to go in and put in NUGs, cogeneration plants, why won't you allow us to put them in? We could do the same thing as well and we have sites that are economic, and we agree, so hopefully under the new regime, under the new rules of the OEB we will be allowed to participate in that market on a competitive basis. As Bill 35 is written right now, we are restricted and we don't appreciate that. We don't agree with it.
Mr Gilchrist: There's a bit of a contradiction there, I'm sure you would agree. On the one hand the MEA has taken a position that we should be busting up the suppliers, and yet your suggestion is perhaps we should allow even greater consolidation for the MEUs.
Mr Moziar: The argument is you've got to get competition from 15% up to at least 50%, so how you do that is an interesting problem. You're saying, "We'll build more NUGs." We have no difficulty with that except that as you build more NUGs, you have this problem with the stranded debt and the assets keep adding on to it. So that becomes a difficulty.
Mr Gilchrist: Hopefully in all of that we'll see greater efficiencies and the taxpayers will win and the ratepayers will win, by simply seeing Genco and Servco --
Mr Moziar: Not if the price is increasing. You're squeezing a balloon as far as I'm concerned and it's popping out in another area.
Mr Gilchrist: We have great faith that the new jobs and the new investment will also be giving us revenues that go towards that.
Mr Conway: Thank you very much, gentlemen, an excellent brief. I want to say again in the presence of my colleague the Chair that my experience in this debate is that the people at Guelph Hydro are among the most knowledgeable people I've met in my time as the critic.
Mr Gilchrist: You say that in every town.
Mr Conway: No, I don't. I want to be very blunt. I'll tell you, the two people before us are as good as I've found it gets in this business. I just say that quite unashamedly.
Mr Gilchrist makes a very good point. There is no doubt there is new technology that's out there that will, under current assumptions, drive rates down. I'm absolutely convinced of that. The problem surely is, in the short term, how we manage, particularly the great nuclear experiment that did not work as advertised. Twenty-five years ago the religion of the time was, "Just build these big nuclear power plants and they will give you the most efficient, cost-effective, smooth-running power plants imaginable," and it didn't work out. That's our problem in the short term. One of the big parts of the problem is how we manage that.
I would expect that in a normal market people will run as fast as they can and as far away from things like stranded debt and the troubled nuclear power division. That will be somebody else's responsibility. That's what I expect. In the public interest, we're going to have to try to manage it in some fashion that's fair to everybody, including the broad base of residential and farm consumers.
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I want to focus on one particular point because it goes back to the conversation we had with Moore township. I am really concerned by what I have seen in the last few weeks, particularly by the testimony last week of Mr Osborne, who told the committee basically it is the stated ambition of his new mandate at Ontario Hydro to grow the retail company. The Macdonald commission made plain that it was their expectation that there should be a rationalization, and in southern Ontario it should be largely in the area of fewer but larger MEUs. Let me read from page 70 of the Macdonald commission report of May 1996:
"Ontario's municipal electric utilities have combined assets of about $5 billion, little debt and a relatively large net income. Ontario Hydro retail, while it has assets of $2.8 billion, also shares a portion of the debt load of Ontario Hydro," which at the time was estimated at $33 billion.
One of the real fights we've got here on the retail distribution side is who gets at the assets and who gets the debt. In the reign of Pope Maurice I, three or four years ago, I remember Mr Strong saying he looked covetously at the multi-billion dollar asset base of the MEUs, and he was literally salivating trying to figure out how he could get the Ontario Hydro snout into that, and I don't blame him. If I were the chairman of Ontario Hydro, I'd be looking there too.
That's surely one of the real power plays that is going on here. If I'm running Servco, particularly a Servco that's going to be commercialized -- when I say "commercialized," it's not going to have any Ontario government debt guarantees in the new order -- I'm going to want to aggressively get into new business, and more than anything else, I'm going to want to feed to the greatest extent possible on the large assets base of the MEUs and the very limited debt obligations.
On the other hand we're told that what really will give us the efficiency that we want in southern Ontario is to reduce substantially the number of MEUs, to bring in private sector partners, but essentially to move Ontario Hydro retail out of a lot of the southern Ontario business.
My question is, how does this committee arbitrate the multi-billion dollar power play that is already at work in the retail side? Because I'll tell you one thing: The residential customers I know are going to want reliability, good service -- which many of them feel they haven't been getting in recent days, particularly from Ontario Hydro retail -- and they are going to be mad as hell if they end up paying some kind of special charge between various elements of government.
Mr Moziar: The first point on that, Mr Conway, we indicated in our presentation that you've got to separate Servco's distribution retail from the transmission. If you don't do that, there are great difficulties. So that's the first thing. If you do that, then I'm not afraid that the MEUs or the local distributors will be able to take Hydro on and beat them, because I think we run better.
Mr Conway: Jim?
Mr MacKenzie: I want to get back to this issue of -- you ask how you arbitrate. I think we have made recommendations in our submission with regard to sections 130 through 136 of the Electricity Act and some recommendations in terms of the OEB act that would deal with the transfer of assets from Ontario Hydro Servco to local utilities. We participated in a study with all other utilities in Wellington county to develop a county utility, and that was based on the transfer of assets at book value.
To the point that now Ontario Hydro is looking at market value as a result of Bill 35, I would suggest that you end up having those customers paying twice for the equity they have already put in the system. I think someone has made the point that if they pay market value, the excess will go towards paying the stranded debt. That would seem appropriate, but I think it's inappropriate in that those customers will already be contributing to the stranded debt through the competition transition charge, they will already be contributing to the stranded debt through the payment of taxes in lieu through their local utility. To then have those customers pay an additional sum because their utility has amalgamated with some others, including Ontario Hydro retail, is to my mind inappropriate. I think Moore township made the point very well this morning. You've got to be very careful that in those places where amalgamations and mergers make sense you don't penalize those customers who are involved.
We annexed an area of Puslinch township several years ago and the residents of that area saw an immediate 12.9% reduction in their rates. That should say something.
The Chair: I hate to interrupt. I know this is an interesting topic, but we do have to move on to be fair.
Mr Conway: And interesting people.
The Chair: And interesting people. Gentlemen, thank you for coming before the committee. You do have a very detailed brief, and I know all my colleagues will be anxious to read this through and look at your advice.
Mr Moziar: Please contact us if you want to discuss any of the items. Thank you very much.
TRIGEN ENERGY CANADA
The Chair: Now calling representatives from Trigen, please. Good morning and welcome to the committee.
Mr Derek Macartney: I'm Derek Macartney, vice-president of Trigen Energy Canada.
Ms Susan Shaw: I'm Susan Shaw, president of Trigen Energy Canada.
Mr Mark Hall: I'm Mark Hall, director of government affairs for Trigen Energy Corp.
Mr Macartney: That blew my introductions.
Good morning. I welcome the opportunity to address this committee on the very important subject of Bill 35. We are here representing Trigen. Trigen Energy Canada is a wholly owned subsidiary of Trigen Energy Corp, which is based in White Plains, New York.
Trigen is the leading thermal science company in North America, serving governments, industry, commercial, residential and institutional customers with thermal products such as steam, hot water, chilled water and electricity from 31 plants in 23 locations. We currently have operations in two provinces and 14 states in the US.
Trigen Canada's present operations are comprised of two district energy systems with combined heat and power plants, in London, Ontario, and Charlottetown, Prince Edward Island.
Trigen London is the oldest district heating system in Canada, and in 1996 we installed a 3.5-megawatt combined cycle plant. In 1997 it received the prestigious award from the Institute of Power Engineers for the best cogeneration facility under five megawatts in North America.
Trigen Canada became involved in PEI when the provincial government recognized it needed additional investment and expertise to fully gain the benefits of district energy. In a very short time frame, Trigen and the Prince Edward Island government had achieved their goal of a state-of-the-art district energy system. The new facility in Charlottetown combines three independent heating and cooling loads. A 1.5-megawatt steam turbine was added to the plant, with excess electricity sold to the grid.
Before we discuss our comments on Bill 35, which Mark Hall will address, it may be helpful to review the events that led to the current status of the electrical industry. The initiative underway in Ontario is reflective of governments addressing the same issues around the world. Our current model is not unique.
Electricity was not developed for commercial use until the 1880s. The electric industry developed for the next 30 to 40 years, with many entrants entering into the marketplace. Beginning in 1920, electric generation and distribution was made a protected monopoly by governments all over the world and was not subjected to market forces anywhere until 1989, when Great Britain began to deregulate electricity generation and supply.
The good news is that technology has changed, that inventors and developers are constantly seeking new ways to provide desired services. The bad news is that laws do not change automatically, and that is why your task is so important. If history is any guide to the future, this process of fully opening the Ontario electric markets to true competition could be delayed for years beyond the actual end of the natural monopoly.
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There are no longer any natural monopoly characteristics associated with electric generation. As our plant in London demonstrates, the technology of small-scale generation exists and is quite mature. Technically, all of the generating plants can connect directly to an end user or to the grid, and sell electricity in a competitive market. What is more important, and often overlooked, is that there is always heat left over when electricity is traditionally generated with fuel. This wasted heat should be captured and sold, reducing the cost of the electric generation and reducing the impact on the environment. It is not difficult to accomplish this, provided that the electric generation plant is close to the heat user.
Sadly, for the past 70 years consumers have been denied the competitive possibilities of dispersed power generation that combined heat and power plants can provide. Those early years of the developing electrical industry were exciting times. Government leaders dreamed about the significant increase in the standard of living for their citizens if they could electrify their community, and it became important to government leaders to provide this service for as many citizens as possible. While this was made possible by establishing monopolies, the same monopoly of service now prevents government leaders from reaching the same objectives today.
I'd like to ask Mark to address the points on Bill 35.
Mr Hall: Good morning. We believe that Trigen is in a good position, through our historic actions, to demonstrate to the committee how competition will affect generation in Ontario. We believe that if a truly competitive marketplace is created, then electric rates will be lower than they are today for consumers. There will be less reliance on our extensive electric distribution network and the province will, among other things, move towards small, distributed energy facilities like combined heat and power plants that use the same fuel twice, once to make electricity and once to make heat. We will simultaneously reduce air pollution from the energy sector. As competition is unleashed, distributed combined heat and power plants, renewable energy projects, fuel cells and other technologies will become the new paradigm and will ultimately render most central plants obsolete.
The government has recognized that monopoly regulation of the electric utility industry is a poor substitute for the competitive marketplace when it comes to creating an efficient, low-cost electricity market. Importantly, we all recognize that the guiding hand of government is needed to ensure that the health and welfare of our people and the environment are protected. However, we must be ever diligent to avoid the replacement of a monopoly regulatory system, rife with arcane and outdated rules and regulations, with a new system of burdensome regulations which will stifle competition. We recognize that this is really a process of re-regulation instead of deregulation. However, the benefits sought by this process will only be achieved if we strive for equity and balance. We consider this to be an important first step.
Let me turn now to discussing some of our thoughts specifically on Bill 35. All in all, we commend the efforts of this committee and the government at large to open Ontario's electricity market to competition. The bill before us is a testament to the hard work of many people.
I'm going to focus my comments on four points today: market power, generator and consumer charges, licensing; and contract sanctity. The written comments that we've submitted also address other topics, including the Electrical Safety Authority, special payments, default supply provisions and regulations of the Minister of the Environment.
As a company which has direct experience with the extent of market power that monopoly electric utilities can bring to bear to eliminate unwanted competition, we are very concerned about the market power that the Financial Corp and the Generation Corp will have, and will inevitably use, to reduce competition. We agree with the Market Design Committee that the decision to rule out divestiture of Ontario Hydro's assets places a severe limitation on the ability of the IMO and OEB to minimize the exercise of market power. In our own experience, laws, regulations, oversight boards and even courts have not been able to effectively imitate what plant-by-plant divestiture of assets accomplishes.
Plant-by-plant divestiture spreads out the ownership of what currently amounts to almost 90% of the generation capacity of Ontario to multiple owners who will be forced to compete head to head to win customers' business. This will ensure that technological innovation will come quickly to the marketplace instead of slowly over a period of many years. While it may be possible that the oversight bodies established by this legislation will be able to curb market power to some degree, we believe that without divestiture, competition will be hampered by the market power of Genco. It may be possible that some of the mitigation techniques offered by the Market Design Committee could alleviate some but not all of our concern.
As an additional point, divestiture provides the only real opportunity to dramatically reduce and possibly eliminate stranded debt. This legislation would allow Ontario Hydro to take all of their historic debt and perhaps all the additional new debt from the refurbishment of their many nuclear plants and coal-fired operations and move that into the Financial Corp. Then they will get to transfer unencumbered generation assets into Genco. The revenue from divestiture of the generating assets that would be transferred to the Generation Corp could be used to substantially reduce, if not eliminate, the stranded debt. This would accelerate the transition period, allowing additional savings to be delivered to consumers more quickly.
A related issue involves the requirements under section 79, subparts 4 and 5, which require every generator in Ontario to pay a charge to the Financial Corp and every consumer to pay a similar charge to the Financial Corp for electricity used in Ontario. This is problematic as it creates numerous opportunities for inequity. Electricity imported into the province would avoid the generation charge and electricity exported from Ontario would avoid the consumer charge.
Ontario consumers are the ones who will ultimately pay for stranded debt. There is no reason for generators to pay a charge that will just get passed on to the consumer, when the consumer is already paying a charge. Generators in Ontario which serve Ontario consumers should not be required to pay an additional charge. For existing Ontario Hydro assets that are transferred to Genco or maintained by the Financial Corp, these facilities could pay a charge for electricity exported and the charge should be used to pay down stranded debt. Ontario consumers should not have to pay a charge to pay down debt if Genco will generate more profit by exporting the power. Certainly there appears to be nothing in the stranded debt formulas that account for revenue from exports of power, although it's clearly contemplated. The elimination of a generation charge puts importers and generators in the province on equal competitive footing.
Furthermore, the definitions of "generating facility" and "generator" are overly broad and could be interpreted to include self-generation facilities which were already built and paid for prior to the enactment of this legislation. These facilities did not contribute to Ontario Hydro's stranded debt and should be exempt from any charges, licensing requirements or other new requirements. We feel strongly that no generation facility should have to pay a charge to the Financial Corp. However, we feel even more strongly that should generators be forced to pay a charge, self-generation facilities, whether self-owned or third-party-owned, should not be defined as generators subject to charges or licensing requirements.
One of the purposes of this act is "to facilitate energy efficiency and the use of cleaner, more environmentally benign energy sources." Several organizations, including the Market Design Committee, have suggested ways to achieve this purpose, and I will specifically address the concept of a renewable portfolio standard later in my comments. However, in the context of assessing competitive transition charges, it seems to us that one sure way to encourage the construction and use of highly efficient fossil-fuel-fired generation assets and renewable energy technologies is to exempt or partially exempt these facilities from competitive transition charges.
Consumers who agree to purchase electricity generated from highly efficient combined heat and power facilities, fuel cells, biomass, hydro or solar panels could be excused from paying the charges. This would have the effect of lowering the cost of using these innovative and environmentally sustainable technologies which have important air quality benefits, combat against climate change through the reduction of carbon dioxide emissions and help to bring along these fledgling industries.
In a related vein, the Ontario Energy Board Act establishes numerous licensing requirements. It is unclear whether individual facilities may require multiple licences for their basic operations. In general, we agree that licensing of market participants is reasonable and desirable to limit fraud and abuse. However, we would again offer caution against creating a process which overly burdens new market entrants.
As stated before, legislative language should be added to ensure that regulatory agencies strive to balance the interests of all parties and strive to minimize any new barriers to new market participants. A consolidated licence might be one solution to avoid the need for multiple licences to generate electricity, retail electricity and purchase electricity.
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Trigen Energy Canada, through Trigen London, generates electricity that is provided to London Hydro and is sold by them. We are taking advantage of combined heat and power in an urban setting where both electricity and thermal energy are required and can be cogenerated together cleanly and efficiently. Currently there is a provision in the bill that appears to cause all contracts entered into between a municipal corporation and any other person to cease to have effect once the standards of non-discriminatory access come into effect. Should this become law, we could be significantly harmed.
While no one can predict the future with certainty, the sanctity of a contract should be respected. Like Ontario Hydro, we built a plant to meet the needs of the city of London based on an expectation and a contract that we would be fairly compensated. Unlike Ontario Hydro, our facility cannot recover any stranded investment or debt and is in fact likely to be burdened with further penalties through generator charges. At the same time, the contract for the facility could be nullified without providing the opportunity for access to another equivalent market. The only one that would be available would be subject to transmission fees, generator charges and wholesale auction rates.
This result may not have been foreseen when the applicable section of Bill 35 was drafted, but its unintentional consequences are indeed severe for us.
I would like to make one brief comment on a topic not specifically addressed in Bill 35 but which has been discussed at length in documents prepared by the Market Design Committee and others.
The technology for using renewable sources of fuel to create electricity is expanding at a rapid pace. Biomass, solar, wind and hydro projects still all have high capital costs, but they are increasingly important for their minimal impact on the environment and their lack of reliance on limited fossil fuel resources. The energy sector of the future must be dominated by these technologies to ensure the environmental sustainability of our province, our country and the world. However, a mandate to force suppliers to adopt these technologies on a widespread basis too quickly could dramatically increase the price of electricity for consumers. In addition, of the renewable energy choices, only biomass provides necessary steam at various pressures for industrial processes, and this may severely limit the technical options for many new competitors.
Trigen believes that the objective of the renewable portfolio standard is to reduce fossil fuel dependence and reduce air pollution. Several fossil-fuel-based technologies dramatically reduce fossil fuel dependence and have limited impacts on the environment, at substantially less cost than traditional renewable technologies. While we support the development of renewable energy wherever feasible, we believe a broader standard will allow the market to decide how best to save fuel at least cost.
Trigen suggests that the committee add high efficiency generation to the power that qualifies for the renewable portfolio standard and change the term to "fossil fuel reduction portfolio standard." In order for plants to qualify, establish a starting point and allow for that to stay the same over time, or possibly increase. Parties subject to the law would then have a choice between investment in renewable energy or energy efficiency. This is certainly consistent with the purposes of the act and should help to spur additional technological innovation. We would be happy to supply additional detailed information about this concept, if appropriate, to the committee.
Thank you for your time. We'd be happy to answer any questions.
The Chair: Thank you. We have three minutes for questions from each caucus.
Mrs Johns: Thank you very much for your presentation. I appreciate it. You certainly raised a lot of issues and we may have to explore some of those after.
I just want to talk about a couple of things. You have done some work in green power issues, I think. You're one of the forerunners in the province who has done some things on this issue. I'm wondering if you can tell me, if we put a cap on the rates in the purpose clause or somewhere throughout the act, would that limit the amount of choice that a consumer would have to be able to choose green power? Do you think that people may choose green power at no matter what price, that some people might be into that? Could you comment on that?
Mr Hall: Yes, I think a cap on price would limit the ability of a number of green power options to come to market. Clearly, what we have seen in deregulated markets elsewhere is that people are willing to pay sometimes 10%, sometimes 20% more for green power and are interested in supporting that. The price cap could keep those projects from being built locally.
Ms Shaw: I'd also like to point out that there are green power projects which are not necessarily more expensive.
Mrs Johns: Exactly. I understand that too. As I heard from your presentation, some of your technologies are coming so far so quickly that it may be that they're in the price range that some people may well choose also.
One of the issues we've heard a lot about is that competition will enter the marketplace. One of the reasons we wanted to have you here was that you have provided meaningful competition in the city of London for some time, or would like to, depending on how you look at that. Can you just tell us if you believe that meaningful competition is going to come into the marketplace as a result of Bill 35?
Ms Shaw: Bill 35 is certainly a very important first step. I think it is only a first step, but the outcome is inevitable. Competition will occur. This is an important method to get that started. In places earlier the projects in Sarnia were referenced. There is competition going on now. This will certainly enhance it, but I hope in the future it goes farther than Bill 35 allows.
Mrs Johns: Do you see the day when a company such as yours, competitive companies, can match or lessen the price that Ontario Hydro will have to charge?
Ms Shaw: What I really have to answer that question is a basis of other industries which have deregulated. If you look at a lot of the monopolies in the US that have deregulated over the last 20 or 30 years, things like long-distance telephone service and railroad transportation, prices have dropped, as a result, an average of 20%, I believe, and I think that is inevitable in Ontario as well. I personally believe that is a fact of life, given true market competition, and that will occur when we get to true market competition.
Mr Hall: Our experience in other locations is that we can compete with the utilities --
Mrs Johns: That you can?
Mr Hall: That we can, absolutely. Just one quick case is in our operation in Philadelphia. The Grays Ferry project has a long-term power purchase agreement. It's a combined heat and power plant that serves a large district steam system as well as providing electricity. It is a contract for 90% of the wholesale price going out 20 years. So it can certainly compete very favourably with any utility into the future and will guarantee it.
Mrs Johns: And those savings would be passed on to the customer, then, of course.
Mr Hall: Of course.
The Chair: I'm going to move on, because we're into Mr Phillips's time at this point.
Mr Gerry Phillips (Scarborough-Agincourt): I have a three-part question, because sometimes you never get to the second question. I'd just ask you to comment on these three things. One is, the reason we've been told that Genco will retain the capacity is in order to compete in the northeast of North America. That's an essential mass that one needs to compete. Obviously you have some disagreement with that, but why would you disagree with that?
The second thing is I actually have the opposite concern that you do. My concern is that too high a share of the stranded debt will be assigned to Genco, making them uncompetitive over the haul, making it, frankly, tremendously to your benefit and to other cogenerating benefits, but leaving the taxpayer on the hook, because by retaining all of Genco in one pot, in my opinion, the value of those assets drops the day the bill is passed, or at least the day the debt is assigned to it, because it then becomes far more attractive for cogeneration. That's why many of the people are in this room. There are huge profits to be made.
My third question is, you must follow Ontario Hydro, and I'd like you to comment on -- I see Ontario Hydro's profits jumped 58% today -- the way they report their finances. Their 1997 annual report was done in a way that no private company could ever do. They used what's called the rate-setting authority of the board of directors to essentially, in my opinion, report the finances in a way that's very different than any private sector company -- I'm choosing my words carefully here -- by writing off against previous years things like future tree trimming, future interest costs, $2.3 billion worth of --
The Chair: We'll need time for an answer.
Mr Phillips: Those are my three parts. Your view on Ontario Hydro's financial reporting.
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Ms Shaw: I'll try to address your points in order, the first being Genco competition in the northeast of the US. I've read Mr Osborne's comments in front of this committee last week and I beg to differ. He's looking at a potential service area of which he is going to have perhaps 15% of the generation capacity. I think, though, that if I look at the prices of electricity in the northeast, yes, they are indeed very high. Every utility from Mexico on up believes it can sell into that market successfully. I don't know that any of them really have a guarantee on that. I am aware that the FERC recently, I believe in June, denied Ontario Hydro's appeal for FERC licensing, so at present that is speculation at best. No one knows what's going to happen.
Your next point, about worrying about too much stranded debt ending up in Genco, very much leads me to the same result as not having enough, which is, the only way to effectively do that is to do some divestiture and find out what the assets are indeed worth and apply that against the existing debt.
Mr Macartney: The only thing I would like to add to that is we don't want to see an uncompetitive marketplace in any direction. Good competitors make for good marketplaces, so it's not to our advantage in the long run to see Ontario Hydro weak or strong. What we want to see is a good economic balance and a balanced marketplace. That is our objective.
The Chair: We move now to the NDP.
Mr Lessard: I appreciate your comments with respect to renewable energy portfolio standards, because if there are a couple of areas where I have the greatest concern, they are (a) with respect to ensuring that environmental quality is improved as a result of Bill 35, and (b) if there are any price benefits consumers can get, if and when they happen, that everybody shares equally.
I take it that what you're suggesting is that renewable energy or green energy, or however you want to define it, should be subject to some sort of a rating, because that's the only way you're going to be able to get natural-gas-generated electricity included in the renewable energy portfolio. Just to follow from that, I wonder whether you think there's some sort of rating or whether it's possible that nuclear power might be considered renewable energy as well, based on that sort of standard that you want to apply.
Ms Shaw: I think, first of all, there is a basis that already exists for looking at natural-gas-fired electric generation as a type of generation to be promoted. I think the federal rules on depreciation which allow accelerated depreciation for highly efficient assets like this are the sort of thing that the province should also promote.
Candidly, I'm sorry, but unfortunately part of my background is in the nuclear power industry, and I do believe that while there are safety aspects that need to be taken care of and that while a nuclear power plant must be very carefully looked after, indeed nuclear power is one of the options that needs to be considered. Certainly from a greenhouse-gas perspective it's undeniable that there are no greenhouse gases.
Mr Lessard: I was afraid of that.
The Chair: That's all the time we have for this presentation, but on behalf of all the members of the committee, we thank you for coming forward with your advice. It's a detailed brief, and I know we will all read it carefully later.
SUNOCO INC
The Chair: I would call now representatives from Sunoco, please.
While these people are getting settled, I'd like to extend a special welcome to David Boushy, who is our local MPP -- David has joined us this morning; he's at the back of the room here -- and of course a special thanks to our minister, who is making a presentation at lunch here in Sarnia and has taken the opportunity to join us. We're pleased to have you both.
Mrs Johns: On a point of clarification, Madam Chair: The group that was just here mentioned FERC. I just wanted to, for my colleagues, say that FERC was denied basically because of the market power that Ontario Hydro held. Both Ontario Hydro and the government believe that introducing competition into this marketplace may well mitigate the concern that FERC expressed earlier.
The Chair: Thank you.
Good morning and welcome to the committee.
Ms Gia DeJulio: Good morning, ladies and gentlemen. My name is Gia DeJulio, and I'm with Sunoco. I'm the director of energy supply and regulatory affairs. I'd like to say thank you very much for allowing Sunoco the opportunity to express its views here today.
Suncor Energy is an integrated energy company. It produces oil and natural gas and is also the parent of Sunoco. Sunoco is a large industrial user of natural gas at its refinery here in Sarnia. Sunoco is also a significant supplier of natural gas through its residential and commercial retail gas marketing business in Ontario. With the introduction of competition in electricity, Sunoco also intends to market electricity to residential and commercial customers in Ontario.
Since launching its natural gas retailing initiative in April 1997, Sunoco has participated extensively in many Ontario Energy Board proceedings and industry association activities with two clear objectives in mind: first, to assist in the transformation of the formerly separate monopoly markets of natural gas and electricity sales into one new competitive energy market. Sunoco's second objective was, and remains, to address and remedy the negative perception of gas marketers among natural gas consumers. These two objectives are related, because an effective business environment requires customer confidence.
Sunoco has worked in support of consumer protection with the Ontario Energy Board, the Ministry of Consumer and Commercial Relations, the Ministry of Energy, Science and Technology, and with other market participants and consumer groups both informally and through the Ontario Energy Marketers Association, which we call OEMA.
I personally am a director of OEMA, where I participate in a number of committees, including those responsible for government relations and customer communications. I have devoted a significant amount of time to these responsibilities, and I would like to introduce you here to the person who has tolerated my time-consuming contribution to this industry: Mr Don Heath, vice-president of energy solutions at Sunoco.
Mr Don Heath: Good morning. Thank you for the opportunity to address the committee on a matter which is of interest to all consumers in Ontario.
The intent of Bill 35 is clearly evident in its title, Energy Competition Act. It recognizes that the competitive market which Bill 35 aims at creating and maintaining is one energy market, not two separate markets for gas and electricity. Sunoco strongly supports this approach. Customers, who should be the ultimate beneficiaries of this bill, need energy. Whether that energy originates from gas or electricity is irrelevant. Bill 35 should therefore recognize and develop one competitive energy market.
In Sunoco's view, the development of this competitive energy market should be driven by the following three principles: First, there should be consistency in the treatment of gas and electricity markets; second, monopoly ratepayers should be protected from cross-subsidizing competitive activities; and third, the timetable for competition should be aggressive and specific.
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Sunoco advocates convergence in the energy market so that consumers may seamlessly move from one energy form to the other. This provides customer choice and customer mobility, which are the hallmarks of a competitive market. Energy marketers such as Sunoco also need the ability to move seamlessly between these markets because harmonization provides economies of scale and operational efficiencies which allow us then to offer customers a wider range of energy products and services.
Bill 35 largely encourages convergence of energy supply, and we support it on that basis. However, there are some differences in Bill 35's treatment of gas and electricity which we believe should be addressed.
First, the energy board act empowers the Ontario Energy Board to consider a number of objectives for both gas and electricity. The inclusion of an objectives section in Bill 35 is valuable because it provides the board with guidance in its approach to the many issues it will have to address in the future. But convergence requires that the objectives of the board respecting electricity and gas should be consistent. In Sunoco's view, Bill 35 largely achieves the goals of establishing a single competitive energy market. However, one area where we suggest improvement could be made is in providing greater harmonization between the objectives that the board should pursue in electricity and in gas.
In general, the objectives respecting electricity are preferable to the purposes respecting gas. In particular, the following objectives respecting electricity should also apply to gas, with the appropriate modifications:
Section 1, paragraph 2, which reads, "To provide generators, retailers and consumers with non-discriminatory access to transmission and distribution systems in Ontario."
Section 1, paragraph 4, "To promote economic efficiency in the generation, transmission and distribution of electricity."
Second, market participants in either energy form should be subject to the same regulatory rules and conditions. In effect, there should be one-stop shopping for gas and electricity retailers. Unfortunately, Bill 35 sets up two licensing systems, one for gas and one for electricity. These systems should be merged.
For example, gas marketers can have their license application refused if they have not carried on business with integrity and honesty. However, the requirement for honesty and integrity is not explicitly stated for electricity brokers. The reality is that gas brokers and electricity brokers will often be the same people. In other words, the situation could arise where a marketer is found to have inappropriately conducted themselves as a gas broker and not be entitled to a licence, but could qualify as an electricity broker. In our view, requiring honesty and integrity just makes good business sense, and it should apply to both gas and electricity brokers. They are both serving one market, the energy market, and they should be held to the same standard.
I would like to digress here for a moment and address past consumer protection issues and concerns in the natural gas market.
The major impediment to the development of an effective natural gas market was the prohibition under the old Ontario Energy Board Act against the sale of natural gas in Ontario by anyone other than local distribution utilities. This prohibition prevented customers from making simple and direct purchases of natural gas from competitive suppliers. The result was a series of buying arrangements that were aimed at ensuring that the actual sale of gas, ie, the title transfer, occurred outside the province. The result was complicated, cumbersome and, most important, confusing transactions which left many residential consumers unsure of who was actually supplying their gas. This led to many complaints from customers who said they were being taken advantage of.
Bill 35 removes the prohibition against title transfers. Sales therefore will be more transparent and above-board. I am confident that allowing straightforward natural gas transactions in the province will lead to significant improvements in terms of accountability, responsibility and integrity in the industry.
One of the basic principles of transforming energy from two monopoly utility services to one competitive energy market is that customers of the monopoly distribution companies, whether they be gas or electricity, do not cross-subsidize any competitive activities. Cross-subsidization is unacceptable for a number of reasons.
First, distribution customers are vulnerable because they have no choice other than to pay for a monopoly distribution service. They have to be protected from paying for services which are not strictly limited to providing distribution of the commodity.
Second, cross-subsidization creates an unlevel playing field in favour of those who are subsidized. Because they rely on this subsidization, they have an advantage over their competitors who bear all of their own costs. The result is inefficiency and unfair competition.
The Ontario Energy Board is charged with the responsibility under Bill 35 to prevent cross-subsidization. To do this, the board must be able to do at least three things:
(1) Ensure that the distribution company is providing only a distribution service and not other competitive services;
(2) Regulate the relationship between the distribution company and other companies to ensure that there are no subsidies; and
(3) Set the rates for the distribution service to ensure that these rates do not contain any cross-subsidies.
I'll briefly address how Bill 35 addresses each of these matters.
Bill 35 recognizes the need to create pure distribution companies in the electricity context, but not in the gas context. With respect to electricity, Bill 35 provides that Servco, the Ontario Hydro transmission company, and all distribution companies can only provide delivery and transmission services. All other services have to be provided by affiliates.
This principle should also apply to gas. However, the amendments to the Ontario Energy Board Act do not do this. Instead, they only provide the board with the authority to order a delivery company to cease providing "any gas sale service." In other words, the board can order gas distribution companies to no longer sell gas but it cannot order them to no longer provide other competitive services. Other competitive or potentially competitive services include load balancing, backstopping, gas storage, metering, billing and collection.
Both the board and the Market Design Committee have recognized that these types of services may be provided in a competitive market and should therefore not be provided by monopoly distribution companies. Indeed, the Ontario Energy Board's Report on Legislative Change states:
"The board concludes that the legislation should be amended to provide the regulator with the authority to order the LDC to provide services, or cease providing services, such as load balancing and backstopping, where such authority is required to ensure the development or maintenance of a competitive market."
Sunoco agrees that the board should have the power to order the gas distribution utilities to cease providing competitive services. This would follow the pattern in electricity restructuring which provides that electricity distributors only provide a distribution service.
Bill 35 permits the board to establish market rules, including a code of conduct governing the relationship between gas distribution companies and market participants. Codes of conduct are important because they can be used to prevent preferential treatment and the sharing of confidential customer information. Sunoco is therefore very supportive of this initiative. However, there are two points which should be made.
First, it should be made clear that the board may also require electrical transmission and distribution companies to comply with a code of conduct. Bill 35 only specifically refers to codes of conduct for gas distribution companies and electrical generation companies. It does not specifically state that electrical transmission and distribution companies may also be subject to a code of conduct. To avoid arguments and confusion in the future, the board's power should be clarified.
The second concern relates to the procedure which the board should follow to ensure that it takes account of all relevant evidence and all participants' views to produce an effective code. Bill 35 could use a bit of improvement in this regard.
First, Bill 35 provides that the gas distribution companies' codes of conduct be addressed through written submissions, without the possibility of oral hearings. While written submissions will often be sufficient, there will also be cases where the board will be better able to address whether a particular practice results in preferential treatment if it has an oral hearing with evidence on the effects of that practice in the marketplace. For example, if a party claims that advertising a relationship between a distribution company and its affiliate creates customer confusion, it would be helpful, I would think, for the board to hear directly from oral evidence delivered by customers.
Second, and compounding the first problem, Bill 35 requires the board to consult privately with gas distribution companies prior to making or amending rules respecting codes of conduct. In other words, the board is required to consult with the LDCs on their codes of conduct, but other parties are not entitled to either participate in that consultation or to participate through a hearing. They're only entitled to file written comments.
The third component of preventing cross-subsidization is the board's ability to effectively regulate the rates of distribution services so that distribution ratepayers do not subsidize other activities.
Sunoco supports the rate regulation powers given to the board, with one important exception. The board has not been given the power to set rates for municipalities or municipal public utilities that are already distributing gas. Municipal utilities should be subject to rate regulation just as any other distributor; there's simply no reason why they should be exempted. Again, the board recognized this in its Report on Legislative Change under recommendation number 14. Now more than ever, municipalities are in competition with other energy service providers. They're not exempt from rate regulation for electricity distribution and should equally be subject to rate regulation for gas distribution.
Sunoco strongly supports the government's timetable, as set out in the white paper, for competition in the year 2000. Unfortunately, that timetable is not set out in Bill 35. The only specific timetable set out in the bill is the requirement that municipal electric utilities restructure themselves into new corporations within two years. There is no similar timetable for the restructuring of Ontario Hydro. To the contrary, Bill 35 states that cabinet "may" create new corporations to restructure Ontario Hydro. This requirement is therefore neither mandatory nor subject to a deadline.
Although we recognize that the government may require some flexibility for the whole new system to be put in place, we urge the committee to consider imposing a mandatory timetable on Ontario Hydro which follows the same two-year timetable as for municipal electric utilities' restructuring.
In conclusion, Sunoco supports Bill 35. In our view, Bill 35 will bring openness and transparency to a new, competitive energy market. Sunoco believes that Bill 35 is a major improvement over the current system but would benefit from some very important fine tuning to ensure that ratepayers are protected from cross-subsidizing competitive activities and that the government's commitment to competition in the year 2000 is accomplished.
Thank you for your attention. I'd be pleased to answer any questions which you may have concerning the material we've presented.
The Chair: Thank you very much. We have three minutes for questions from each caucus.
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Mr Phillips: I want to focus on the cross-subsidization issue for a minute and put it into terms that will perhaps help us understand the impact of your concerns.
One of the thrusts of the bill is to bring in competition, so in theory we shouldn't be encumbering the competitors unduly. If there is cross-subsidization, presumably somebody is getting the benefit, and if somebody is cross-subsidizing, they are therefore charging somebody too much to charge somebody less than they should be, presumably. In theory, the competitive forces are at play and that organization finds it can't compete where it is charging too high a price to subsidize some other area of the business where they're charging too low a price.
Your comments on cross-subsidization imply potentially a higher level of regulation on the players in the industry. Maybe I've misinterpreted what you've said. Maybe you can just help me. Give me a real-life example of your concern so I can humanize it a little bit, and maybe that makes it easier to try and solve it.
Mr Heath: One area that has been contentious on a number of fronts would be water heating, either electricity or natural gas. Utilities would argue that water heating provides a baseline load for their system and therefore contributes to the dynamics of how they manage their system and therefore should be viewed as part of the load management system they have, and that if they didn't have water heating their loads would be much more erratic and there would be more fluctuation, resulting in higher prices. Therefore they tend to blend in the rates for their water heaters with the overall rate they charge, allocating costs to different categories.
If, on the other hand, the water heater program were forced to stand on its own merits in another company, then that linkage would be broken and the board would not have to delve into which costs should be allocated to which bucket. It would simply be a matter of saying costs associated with distributing power -- gas or electric -- go over here and are subject to regulation; costs related to providing a water heater program go over here and are not subject to the purview of the board because they're in the competitive environment.
Mr Phillips: OK. You have experience with residential consumers being able to purchase their gas from a variety of sources. Can you give us an indication from your experience of what this bill is likely to mean for electrical consumers? I realize that's not your business but it would be helpful, you having the experience. What should we expect three years from now or five years from now will be the experience of residential electrical users?
Mr Heath: I think there will be a greater degree of awareness among consumers. After in excess of 10 years of deregulation in the natural gas industry, there are still a number of residential consumers, small-volume consumers who don't understand the complexity or the variety of choices that face them. So the level of customer awareness and consumer awareness will increase dramatically because now both power forms will be available for customers to choose. I think that in three years' time you'll see customers finally starting to understand the variety of choices. Some, like in the telecommunications industry, will long for the good old days when they didn't have any choice and that was just fine because they didn't have to think about it, as compared to today where they've got 40 or 50 different alternatives and they're really trying to find which is the best one for them.
I think the difference is the recognition that monopolistic systems create a one-size-fits-all kind of formulation, where it may not be the best for anyone but it's the best for everyone. Competition creates a variety of small niche markets where different products and services are specifically tailored to individual classes of customers. So the customer who makes lots of long-distance telephone calls will choose a program that benefits them, whereas someone who rarely speaks outside of their own city or community will choose another plan.
The same will happen in power. People will find that there are variances in their energy needs. A family with demands for power at specific times of the day will choose a different program than a small business which has a more constant or flat-load profile. So you'll see the market actually become segmented into a variety of smaller markets each served by different providers. There will be more choice and a better fit between the needs of the individual customer or business and the marketplace.
Mr Phillips: I already know because we turn the air conditioning on and off at different times in this room.
The Chair: That's so we can hear each other.
Mr Phillips: Oh, is that what it is?
The Chair: That's what it's for. No, sorry, it's strictly so we can hear. Mr Lessard.
Mr Lessard: I'd like to know if Sunoco is interested in getting into the electricity marketing business or any other types of consumer marketing.
Mr Heath: It is our stated intent publicly that we intend to become a retailer of electricity when the market is deregulated, the same as we retail natural gas now.
Mr Lessard: There is an ability to put some sort of firewall protection in, I guess, to ensure that there isn't cross-subsidization between the different aspects of your businesses. Is that something that should be provided for in the legislation or in the regulations, or should it go in the market rules? What influence should the Ontario Energy Board have in determining those rules?
Mr Heath: I think the bill generally lays out that those activities which do not have any competitive basis should be regulated by the Ontario Energy Board. Any marketplace activity that could be provided by one or several providers, and the environment exists where they can compete on an equal basis, should not be regulated by the Ontario Energy Board. The challenge is the transition from a marketplace which was dominated by very few players to a marketplace where there will be very many players. Moving from where we are now to there is the transition which concerns us most. I think the principles as laid out in the bill and the government's white paper are exactly on point.
Ms DeJulio: Can I just add something there? I don't see Sunoco being subject to any kind of questions about cross-subsidization because Sunoco has no intention of getting into services which will be provided on a monopoly basis. Sunoco intends to be active in the competitive market for energy, which might include other services such as metering or billing. We don't intend to be a transmitter or a distributor of any of the energy, which would be the monopoly function. That question of cross-subsidization will apply only to companies that will be providing both monopoly services as well as competitive services.
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Mrs Johns: Thank you very much for your presentation. I think today is the first day that we've really had an analysis of the gas-versus-electricity parts of the bill. We would certainly appreciate receiving any of your comments in writing. I know you haven't handed something out today, so we'd like to see those as soon as you could get them together for us.
I just have a couple of comments about your presentation and then I have a question. The government was very concerned about cross-subsidization. We've heard a lot about that over the time that we've met with stakeholders over the last year and a half, two years, and all the stakeholders we've met have been very concerned about that. I ask you to take and consider a few sections in the act, because we certainly were trying to limit cross-subsidization. In clause 69(2)(f) in the Ontario Energy Board Act we talk about both Servco and the MEUs and how they would be affected by licence requirements. We also do that in section 70 of the act, which takes into effect the Ontario Business Corporations Act. In the Electricity Act we talk about it in subsection 47(4). We believe we have limited the potential of cross-subsidizing. I wonder if you would consider those and give us your best estimate on whether we have done what we wanted to do.
I was interested when you were talking about the people longing for the good old days when they didn't have to make any choice. We think we have covered that by saying there's a default supplier here. If I don't want to put my mind to this, like I haven't in gas, I have to admit, I have the ability to just stay with my good old default supplier and deal with that. We think we've covered that person who longs for the good old days, and if that isn't the case we'd like to hear more from you on that.
I was going to ask the same question as Mr Lessard, so I'm going to go just a little bit further. Now that you've stated your intent to enter the retail marketplace, and we've certainly seen that in the communication, I'm interested in the effect of that entering of the marketplace. Will that create jobs or investment, first of all, in Sarnia or in Ontario? Can you comment a little on how you think that will affect the Ontario marketplace?
Ms DeJulio: I can say that Sunoco right now has quite an expertise in natural gas, less so in electricity, and frankly we're probably going to have to add some staff with some of that expertise. I don't know if that's going to be a significant number of people, but as we expand into the electricity market we will certainly need to beef up our expertise there.
Mr Heath: One of the reasons why Sunoco got into the energy marketing business in the recent past was not only to give customers an alternative and because it appeared to be a good business opportunity given that the industry was changing, but also the fact that Sunoco as a corporation is committed to the province of Ontario. We have significant holdings here in the province. We have a refinery here in town. We have over 300 brand-name gasoline stations. So our commitment is to this province; we cannot take those stations and move them elsewhere.
We're looking at ways in which we can reinforce and improve the competitiveness of Ontario. As we are all too aware, there have been many industries that have said, "The costs of doing business in this province are higher than they are in other jurisdictions and therefore I will move." One of the benefits of legislation which makes energy more competitive in this province is not only the creation of new jobs but the preservation of the ones we've already got. So the exodus to Tennessee and various other jurisdictions which have attracted businesses from this province can be arrested to some extent by providing competitive energy, because if we don't do it they sure as hell will in other jurisdictions. By the same token, the industrial base in Ontario was built in part on the basis of cheap power. We have to get back to that base because many of our businesses are no longer competing nationally or even on a North American basis. We benchmark our refinery not against the best in Sarnia but the best in the world. Many plants in this province of ours do the same and they must be competitive on that basis.
Mrs Johns: So you believe prices will go down.
Mr Heath: Yes.
Mr Conway: Do you miss that Ontario government ownership of your business?
Mr Heath: Check our stock price.
The Chair: We thank you very much for coming before the committee with your advice. We look forward to further written comments.
WINDSOR UTILITIES COMMISSION
The Chair: Calling now representatives from the Windsor Utilities Commission, please. Good morning. Welcome to the committee. Please begin by introducing yourself.
Mr Kent Edwards: Good morning, Madam Chair, Mr Minister, ladies and gentlemen. My name is Kent Edwards. I'm general manager of the Windsor Utilities Commission. For those of you who may not be familiar with the Windsor Utilities Commission, since the amalgamation of Metro Toronto we're now the largest public utility commission in the province. We supply electricity, water and district energy to Windsor and to some of the surround.
The Windsor Utilities Commission is highly motivated by a drive to foster and develop the primary engine of our local economy, the auto industry. High electricity rate increases were implemented in Ontario in the early 1990s. By comparison, our nearest competitor for energy supply to the auto industry, Detroit Edison, has kept relatively stable rates since the mid-1970s. This caused the gap between Windsor Utilities and Detroit to narrow to insignificant differences, down from a 50% rate advantage in the 1980s. The local auto manufacturers must compete internationally for new products. The loss of advantage in energy cost in Ontario severely erodes our competitive position.
In response to these competitive pressures, power purchase contracts were negotiated by the Windsor Utilities Commission in 1991 to generate power locally, at a price 30% lower than supply from Ontario Hydro. The rest is history. Ontario Hydro exercised monopoly power to prevent this competition. The Ontario Hydro demand-supply plan was scrapped. Policies were reversed on extending the first refusal to local utilities for local generation. This led, in part, to the exodus of two Ontario Hydro chairmen and two Ontario Hydro presidents and prompted the provincial government to impose a rate freeze.
Windsor Utilities has continued to advocate lower prices both through local activities and through increased actions at the provincial level. The past year, I was elected president of the Municipal Electric Association, which you're familiar with, representing Ontario's municipal electric utilities. Also, our vice-chair, Mr Paul Anderson, is on the MEA board as director representing large utilities in the province.
Many positions and policies were explored by the MEA to provide best service at lowest cost to customers. The MEUs severally, including the Windsor Utilities Commission, and collectively have made representation to government and special committees such as the Macdonald committee to advance the cause of customers. The resources development committee has had opportunity already to hear from the MEA on the broad industry needs, so I don't propose to duplicate that presentation today, for which I'm sure you'll be thankful.
I am presently serving on the Minister's Electricity Transition Committee to provide feedback on industry deregulation issues, and that endeavour is indeed a most positive and productive activity. The guidelines set out in the white paper and carried forward to Bill 35 set the terms of reference; however, on some issues they also limit the scope of the options available to the committee. Nevertheless, Mr Minister, I appreciate the opportunity to assist and participate on that committee and I am committed to make it work no matter what guidelines are imposed, in order that consumers may get full advantage.
I appear before you today, however, to express the concerns and recommendations of the Windsor Utilities Commission. The objective of the Windsor Utilities Commission parallels the title of Bill 35: "to create jobs and protect consumers by promoting low-cost energy through competition, to protect the environment" etc. Our commission is concerned that the framework set out in Bill 35 will not achieve these goals to the extent that is so urgent to Windsor customers. Our recommendations are presented today to strengthen Bill 35 and hasten the achievement of the bill's underlying objectives.
We have been a leader in the deregulation movement by introducing significant competition from lower-cost, cleaner generation. Unfortunately, when it became apparent that Ontario Hydro generation was not competitive, those most dependent on their own wellbeing for the continuance of Ontario Hydro rose to the monopoly utility's defence. Ontario Hydro's management mounted the ramparts to defend the monopoly and Hydro's unions launched a successful media campaign disclaiming privatization of any part of Ontario Hydro.
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These powerful forces did influence public opinion, limiting in part the government's options to proceed with full competition. Bill 35 has not, therefore, proceeded to further divide Ontario Hydro generation into more competitive units as recommended by the Macdonald committee. Bill 35 leaves up to 95% of the province's generation together and in public hands.
As Bill 35 has been brought forward, our concern has mounted that failure to require Ontario Hydro to divest of a large part of its generation to create true competition will not achieve the full objective of the bill. Government ownership will continue to leave our community at risk of further failure of the Ontario Hydro generation fleet. If these units fail to perform effectively, our customers will be asked to bear further losses. As presently set out in Bill 35, there is no alternative. Customers continue to hold the risk of further generation failures at a time when the competitive advantages of generation from our natural resources have already been fully exploited. Any further failure by Ontario Hydro will expose our customers, and Windsor's economy, to unacceptable risk. Continuing the Ontario Electricity Generation Corp as a single entity without any fundamental monopoly need, or advantage, into an open and competitive marketplace with private, unregulated competition is courting disaster far outweighing any potential benefits.
We think that conditions have changed since the inception of the white paper and Bill 35. Certainly, the unions have reconsidered their opposition to privatization, as evidenced by the Power Workers Union offer to purchase Bruce nuclear station through investment of pension funds.
If the public is to have a choice of suppliers, then there must be many choices of suppliers available. One choice is no choice and the public will not be fooled. Public understanding of the issues I think continues to grow and provide support. There is no need to expose Ontario consumers to an uncertain future of second-best solutions.
The excellent work of the Market Design Committee will indeed create a market, and we commend the government for facilitating stakeholder participation in setting the market rules. However, the underlying costs of generation that form the overwhelming share of the customer's bill will be insulated from the true benefits of competition. The limits on further subdivision of generation have caused the Market Design Committee to consider shielding up to 85% of Ontario's generation from true competition through vesting contracts. Under this scenario, Windsor does not expect to see needed rate reductions as a benefit of electric industry deregulation. Even the Market Design Committee, in its second interim report, concludes that their solutions are second-best to divestiture of generation, which is not permitted within the committee's terms of reference. I fear that the necessary conditions recommended by the Market Design Committee to control market power will also stifle creativity and efficiency of government-owned generation, leading to even further deterioration of those assets.
We think there are solutions available to the government to further the goals set out in Bill 35. The Windsor Utilities Commission recommends that the new Ontario Electricity Generation Corp be given a clear directive and mandate within Bill 35 to rationalize its assets and operations for subsequent divestiture of generation in Ontario in a manner best meeting the goals of competition and consumer value. Experience elsewhere has clearly shown that the compensation received for sale of generation assets may be expected to exceed book value, and can be applied to reduce the significant debt to be held by the Ontario Hydro Financial Corp, while enhancing the goal of competition.
The Windsor Utilities Commission recommends further that Bill 35 should charge OEGC, the successor generating company, to provide a recommendation to the government on the best course to achieve the mandate of divestiture in the year 2000. Unless the successor generation company is clearly mandated in this manner, we can only predict that the continuation of that company will prevent real competition and increase the risk that publicly owned generation imposes on consumers.
Until full competition in generation is achieved, our utility will continue to be concerned for the erosion of our base automotive industry, with loss of jobs and economic strains on our community. No time should be lost to achieve this goal of full competition and removal of the risks of ownership from unsuspecting consumers.
Now I'd like to turn to the new Windsor Utilities Corp, as envisioned in Bill 35. In most respects, Bill 35 supports the objectives of the Windsor Utilities Commission. We have advocated for utilities to be placed under the Ontario Business Corporations Act and have supported full, open competition of non-monopoly affiliates without recourse to subsidy from our monopoly infrastructure system. We have, however, two requests that we put before the government to level the playing field with our new competitors. We recommend that the restrictions to be placed on affiliates under section 72 of the proposed Ontario Energy Board Act be relaxed. We further recommend that competitive affiliates be placed under the equivalent rules for payments in lieu of income tax as our competitors.
The strength of the municipal utilities is their knowledge of their customers and their customers' needs. Following commodification of electric energy, energy alone will be a low-margin, highly competitive product. There will be a limited market advantage and unlimited risks, best suited to big players in the electric commodity markets. The municipal utility affiliates will engage the assistance of deep-pocket partners to compete in these markets. The niche role of the utility affiliates will be to bring value added services to utility customers. This requires bringing a full service package to customers, tailored to their specific needs. This is a role not well filled by the large international marketers.
Unfortunately section 72 limits dramatically the scope available to retail affiliates to service total customer needs. I'm reminded of the error of the early railroad industrialists who mistakenly defined their business as railroads and not transportation, preventing them from fully integrating transportation services. The municipal utilities cannot be limited to wires or electricity, as proposed in section 72. Our competitors will not be so constrained.
Our customers need energy and related utility services in all forms. Our competitors will displace our competitive affiliates through their ability to provide total utility services. Our customers need flexibility for the provision of all utility infrastructure and utility infrastructure services. Our affiliates must have opportunity to participate in alliances to provide all utility infrastructures and commodities, inclusive of electricity, natural gas, telecommunications, water and sewerage. Section 72 limitations will restrict the new Windsor Utilities Corp from maximizing service, economies of scope and scale, and skills for the benefit of our customers and our community.
For similar reasons, we ask that the new Windsor Utilities Corp face equivalent tax rules as our competitors do. We seek to avoid both an advantaged position or a disadvantaged position. We wish to compete within the same rules. Bill 35 proposes payment in lieu of income tax to the Ontario Hydro Financial Corp based on a percentage of adjusted gross revenue. We recommend that payments by municipal electric utilities must be patterned simply on the same formula as corporations not exempt from the Income Tax Act.
To conclude, I want to express the appreciation of the Windsor Utilities Commission for the government's initiative and dedication to introduce needed competition into the electricity supply industry. Our recommendations are submitted to be constructive. Our expertise and leadership in the industry is well proven. The government has taken courageous measures to initiate competition. We believe electricity consumers, the Ontario economy and Windsor will be best served if the government takes full measures now to gain the maximum benefits of competition without unnecessary delay. We look for the government's support of these recommendations to strengthen Bill 35. I have summarized those. I'll leave those for you. I'm prepared to take questions.
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The Chair: Thank you very much. We have four minutes for questions from each caucus, and we begin with Mr Lessard.
Mr Lessard: Thank you very much, Mr Edwards. It's a pleasure to see you here in Sarnia. As one of your customers, I'm pleased that you took the time to make your comments known to the committee. The Windsor Utilities Commission has always been innovative and creative and aggressive. I like to think that part of that is a result of my uncle's involvement on the commission for many, many years. He is not currently there. However, I respect and I know the minister respects a great deal your opinions with respect to the changes that are contemplated.
It's because of that that I want to focus on section 72, that you spent a great deal of time discussing, the restrictions that is going to place on the new Windsor Utilities Corp. I'd ask you whether you can speculate for me, if you will, about why the provision is set up the way it is, why the percentage, 50% -- and you're suggesting this whole section should be gone. Why would the government pick 50% ownership as the criterion for the restriction in different businesses? I've been trying to understand this for the last week and a half that I've been listening to presentations to this committee, but I can't understand it.
Mr Edwards: I have no answer for the question. The 50% target is simply a part of the bill. There was also a 10% or a 20% target dealing with ownership that is a tax issue. I don't know the basis for the 50%.
We just had a presentation from Sunoco indicating their intention to get into retailing electricity in competition with the utilities, which also will be retailing electricity, but section 72 could well be interpreted to indicate that the utilities could not also retail natural gas.
Mr Lessard: The other question I have is with respect to the divestiture of the assets of the Ontario Electricity Generation Corp, Genco. You've suggested that it should be Genco's mandate to come up with a recommendation for the government.
I was wondering whether that might not be better left as a responsibility for the Ontario Energy Board and for the energy board perhaps to be involved in the valuation of the assets of Genco as well. Don't you think there would be a conflict of interest if Genco were the ones who were supposed to come up with a recommendation on divestiture?
Mr Edwards: Keeping in mind that it is a recommendation -- and I don't wish to make light of the skills available inside Ontario Hydro; they have been a very successful company for a very large number of years -- I think they best understand their business and best know their business. I fear that their motivation under Bill 35 as it stands will either be to grow and stifle competition, or it will be one of non-direction; that is, waiting for them to succumb to competitive pressures over time due to limitations that are being proposed by the Market Design Committee. If we can launch the new corporation with a clear mandate, with a goal, they will work towards structuring it in the best interests of the consumers.
Mr Gilchrist: Thank you, Mr Edwards. I appreciate your making the trek up here and your comments, particularly your very supportive comments about the direction we're heading and your expression of the accommodation to make sure that your views and other MEUs' are being heard as the Market Design Committee and the ETC do their good work. We appreciate your involvement there as well.
What I'd like to touch on, because we just have a couple of minutes, is the issue of Genco's ongoing power, as you see it. I guess first off I could say that both the OEB and the IMO will have the ability to set rules, different aspects of how they can control any potential abuse, as they see it, in the marketplace. But the OEB, through its licensing, and the IMO in terms of the market rules it set up have all the tools to ensure that Genco continues to be reined in, in the sense that it won't be able to abuse it.
But I'm intrigued, and you may have heard me allude to it earlier to an earlier presenter -- let me very quickly read to you and invite your responses. I have to take from the comments we get from different MEUs that Genco is so big that everyone else will be scared away, nobody will come in, there's no competition.
"Ontario's move to set up a competitive electricity market by 2000 has encouraged plans for another cogeneration project. Sentinel Power Corp has said yesterday it will build a 100-megawatt cogeneration plant in Sarnia. Construction of the $100-million project is to begin in early 1999 and is scheduled to be completed by 2000 to coincide with the start-up of the new market.
"The plant will include two 50-megawatt generation units. One will create fuel from pellets pressed out of processed municipal solid waste and hydrocarbon residue that's a by-product of oil refining. The other will use natural gas that's burned off as refinery waste at present."
That's an extraordinary technological leap forward, environmental good things being done, $100-million investments. It goes on further to say 500 construction jobs, 80 permanent jobs, and that's over and above the 520-megawatt TransAlta plan that's already been announced.
Given the demand here in Sarnia right now, those two projects alone would take 25% off Hydro's back. Why would we have any reason to believe that this is just the tip of the iceberg? Why would we believe that these are unique and that somehow no one else is going to be prepared to pony up the money and the ideas to take on Genco and in fact would be scared away by what you see in Bill 35?
Mr Edwards: Let me take your issues one at a time. On the issue of market power, I agree with you. I believe what the Market Design Committee is proposing will control Ontario Hydro's market power. It will not, however, expose Ontario Hydro to competition, so the benefits of competition in generation will not flow through into lower rates. They will be locked-in rates under vesting contracts or whatever rules are ultimately decided. The rules will aid to prevent Ontario Hydro from exercising market power in preventing competition. I agree with you to that point.
I think Genco being reined in, however, is perhaps a deterrent for the organization to perform in the most efficient and entrepreneurial and effective way, so the benefits of cost reductions that should come from generation are not likely to be seen in Ontario for some period of time.
On the issue of the cogeneration projects that are announced in Sarnia -- and I can tell you there are a number of others proposed across the province, including Windsor -- first you have to look at them in context. The 500-megawatts, first of all, is a drop in the bucket in the context of Ontario's total generation. Second, you have to stand back from this issue and say, there is competition. That means there are going to be winners and there are going to be losers. If TransAlta and the other corporation proposing to locate in Sarnia are successful, who is the loser? It's the rest of the generation in the province. And who owns the rest of the generation in the province? You and I and all of our customers.
Mr Gilchrist: How will Hydro respond?
Mr Edwards: What I would propose is that if the risk of managing those assets is put on the same footing as the TransAlta cogeneration etc, then let competition prevail.
Mr Conway: Thank you, Mr Edwards. A very good presentation and a very good exchange, which I certainly enjoyed.
I've got two questions. Surely the problem we have in the short term is how we are going to manage, in a sensible, safe and prudent way, the great experiment that didn't work out as it was advertised to work out 30 years ago, the nuclear commitment? Ontario Hydro, as it stands today, is largely a nuclear company, with a lot of trouble and a lot of debt and some very difficult choices. How do you propose that we get through the night with that problem?
It seems to me that down the road five or 10 years, for the reasons Mr Gilchrist and others have advanced, there is some real hope. But I am struggling with, what do we do with -- much of the debate focuses on stranded debt, but a lot of the stranded debt and residual debt is going to really attach to the fundamental problem. What do we do with the multi-billion-dollar, underperforming nuclear power division?
Mr Edwards: There are a number of issues and you're probably aware of some of my views from your work on the committee that investigated the nuclear issues.
First of all, I do have some background in nuclear and I have great faith in the technology. I do not think it has been properly managed, it has not been properly maintained, and certainly at the present time it has been largely responsible for pushing up the rates into a non-competitive area, causing all this to happen.
The nearest parallel I can draw on is the UK, in which case they ultimately privatized the nuclear. Although they said, "Hands off; you can't do this: it's not practical, it's not safe, it's not prudent," they proved it was and that it could be done.
I think leaving those plants under the control of a corporation that is not strongly motivated to be efficient, to be productive, continues to put us at risk, and we have to find ways to move that risk off the customer's shoulders.
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Mr Conway: We come back, then, to one of the central points of your presentation, which is divestiture beyond what we've got in the package of proposals and legislation to date.
Mr Edwards: Much beyond what we have in the package to date.
Mr Conway: I think you make a very powerful argument there, because notwithstanding what those of us in the committee might say, the two independent panels of experts -- the Market Design Committee in July and the Macdonald group of two and a half years ago -- both said that absolutely central to delivering the benefits through competition to all customers is disaggregation. You've got to break it up in a variety of ways, because anything with the kind of market power that Genco's got is going to frustrate it in ways that you've indicated.
I think we're all agreed on the objective. Everybody here believes that true competition, reasonable competition, will deliver the benefits. That's agreed to. But our problem, my problem at least, is that I don't see this bill as currently written, with the allied policy documents, meeting the minimum test that Macdonald and the Market Design Committee have both indicated.
We can make all the savings we want on 5% or 10% of distribution, and we need those and we want those, but if we don't deal with the 70% or 80% of the bill -- Guelph Hydro told us that 88% of their cost is the cost of power. What do you recall Macdonald saying about the treatment of assets that might move from Ontario Hydro retail over to distribution assets, that might move from Ontario Hydro retail to an expanded MEU? Do you have any memory of what the deliberations of the Macdonald committee were on that, keeping in mind what Macdonald in the end recommended, that there had to be many fewer distributors, particularly in southern Ontario, and that ideally there should be shoulder-to-shoulder MEUs, with Ontario Hydro retail basically retreating from the field?
Mr Edwards: Let me answer all three of your issues. The market test, as the bill is presently constructed, I think cannot be met. We've made a proposal. I don't think this is an issue that can be addressed in very broad terms. It needs some detailed study. It needs to have the generation critically looked at, to be rationalized to create a competitive situation in Ontario that will benefit consumers in the best possible way. I think our proposals address that issue and suggest that can be done.
On cost of power, we get great synergy of scope and scale out of operating multiple utilities. I commend Guelph for getting down to only 88% as cost of power. That leaves 12% as their own gross margin. Ours is down in the 8% to 10% because we get the benefits of scale and scope out of operating water and district energy, those kinds of things. That's going to be a little more difficult in future, depending on how we actually structure the new corporation and whether we're able to continue to do that.
On the retail assets, I believe you answered the question, if I understood it correctly. Macdonald suggested shoulder-to-shoulder municipal utilities to operate the distribution system.
Mr Conway: But how do we value the assets? The key question there is that if that's going to happen, how do you treat the valuation of assets that move from one part of the public power system to the other?
Mr Edwards: As I recall Macdonald, and I stand to be corrected, it was the net value formula, not at market value as currently proposed. I certainly have heard the presentations this morning suggesting that that would create a double payment for those customers who are involved in amalgamation. Paying market value when they've already contributed equity through rates is a double payment. If we don't amalgamate, I suppose I can thank those customers for subsidizing my utility, but I don't think that's the intent.
The Chair: On that note, we thank you very much for coming before us with your advice.
Mrs Johns: I have a point of clarification. On the Market Design Committee are two representatives of the municipal electric utilities. Karl Wahl is the representative from Mississauga Hydro. There are two members of the MEUs on the electricity transition committee also. I believe the other gentleman's name is Bob Lake.
Mr Edwards: Bob Davie.
Mrs Johns: Bob Davie. Could we change that? He'll be very upset. He's from Collingwood, I believe.
The Chair: We are facing a very short time line. There are a number of people expecting us to be in certain places in a very few minutes. If you are part of the group that is making a trek over the lunch hour, I suggest you be at the front door in the next few minutes. We are leaving.
We are recessed until 1:30.
The committee recessed from 1206 to 1331.
CITIZENS ENVIRONMENT ALLIANCE OF SOUTHWESTERN ONTARIO
The Chair: We're pleased to welcome our first presenter this afternoon, the Citizens Environment Alliance of Southwestern Ontario. Welcome, sir. We're very pleased you're able to join us this afternoon.
Mr Rick Coronado: My name is Rick Coronado. I'm the research director for the Citizens Environment Alliance of Southwestern Ontario. We also have an office in southeastern Michigan, so we are a binational grassroots organization that has been in existence since 1985.
I'm here today to make some brief comments on Bill 35, the Energy Competition Act. I'll begin with my introduction and then I'll discuss some background on some of the issues.
Ontario Hydro is in a crisis: This is the conclusion of the independent integrated performance assessment. They stated that the state of Ontario nuclear reactors was minimally acceptable. As a result, Ontario Hydro adopted the nuclear asset optimization plan. The main feature of this plan was the temporary shutdown of four Pickering A reactors at the end of 1997 and the three remaining Bruce A reactors on March 31, 1998.
Ontario Hydro refuses to invest in cleaner energy sources. Hydro is committed, as part of this plan, to restart the four Pickering A reactors between 2003 and 2009. While refusing to commit to cleaner green energy, Hydro has replaced the nuclear stations with coal-fired plants, resulting in increases of ozone particulate and greenhouse gases and other hazardous air pollutants.
This is the worst of all possible worlds and the blame is pointed at Hydro and its cronies for dirty coal and then the ongoing commitment to expensive, risky nuclear power. Ontario Hydro is ignoring the truly sustainable alternatives: efficiency, conservation and renewable.
Some of the background to these issues that I want to briefly discuss are the importance of a permanent shutdown of Pickering A and Bruce A nuclear stations, and the importance of not allowing Ontario Hydro to pass on its stranded debt to consumers while continuing to operate dirty coal and dangerous nuclear stations.
Some of the green environmental points: a renewable energy portfolio, a systems benefit charge, disclosure, caps on fossil emissions and the requirement that there be a nuclear decommissioning and waste management fund.
The issues: The most important background issue is to permanently shut down the Pickering A and Bruce A nuclear stations. Nothing in Bill 35 speaks to this, but it is the underlying issue that directly or indirectly affects all of the other environmental issues, as well as the fundamental problem of Ontario Hydro's continuing market dominance in the generating business. Restarting eight reactors will perpetrate the day-to-day emissions of radioactive pollutants such as tritium and increase stockpiles of deadly radioactive waste. Currently, Hydro's liabilities are $47 billion, with $15 billion for radioactive waste management.
The second important issue is Ontario Hydro's stranded debt. This stranded debt is effectively a subsidy to the nuclear and coal-generating capacity of the Ontario Electricity Generation Corp, OEGC, and an impediment to the creation of new, greener, cheaper generating sources. The greater the residual debt, the greater the threat to the efficiency and competitiveness of the new market.
What's missing from the legislation? The Energy Competition Act leaves out some important areas; for example, a renewable portfolio standard, a mandatory renewable energy quota that all electricity producers must either purchase or produce. Currently in the US there are several states that have this in place, as well as the US nationally.
System benefits charge: A system benefits charge provides funding for conservation, efficiency and renewable energy research and development through a special charge on electricity.
Caps on fossil emissions: There is a provision in the bill, but is there the political will? This cap should be applied to all electrical generating plants. The entire electricity sector must be regulated. By imposing caps significantly below current levels of air pollution, the Ontario government can ensure that their restructuring process will help to clean up our air and will contribute to Canada's Kyoto commitment to reduce emissions of greenhouse gases.
There's a need for disclosure and electricity labels. The disclosure of information on the generating fuel sources and pollutant emissions from those sources will allow consumers to make informed choices on their electricity purchases. Disclosure and labelling are fundamental to allow for green power marketing as well as the promotion of renewable energy sources.
There's also a need for radioactive emissions caps. In addition to fossil emissions caps, Ontario should also apply caps to radioactive pollutant emissions from nuclear facilities. The current objective for tritium in drinking water is 7,000 becquerels per litre. The standard should be much tighter, starting with 100 becquerels per litre, and be further reduced to 20 becquerels per litre after five years. Currently, the background level of tritium in the Great Lakes is below 10 becquerels per litre.
The creation of a decommissioning and radioactive waste management fund: Bill 35 should require the creation of a real, independently controlled fund for reactor decommissioning and nuclear waste management. This fund should also contribute to a workers' fund for job adjustment, such as re-education, early retirement and pension credits.
There are two other green environmental points I want to further elaborate on, the renewable portfolio standard and the system benefits charge.
A renewable portfolio standard requires generation companies or retail electricity suppliers to provide a specified amount of their generation or sales from renewable sources. Note that it generally applies to energy rather than capacity. Although not essential, an RPS can include a secondary market in renewable energy credits, providing a flexible market-based approach for achieving a valuable environmental benefit: the promotion of renewable energy at the lowest possible cost. This makes a logical and compatible companion program for a system benefits charge, which is typically used to fund conservation and efficiency programs as well as research, development and commercialization of new renewable energy technologies.
Finally, the systems benefit charge: Throughout the 1980s and early 1990s, utilities across North America were required to adopt demand-side management programs as part of the integrated resource planning programs. Restructuring or impending restructuring has thrown these programs into disarray. For example, here in Ontario, Ontario Hydro performed yet another about-face and abandoned its conservation programs in a headlong rush to sell more electricity.
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I might add that Ontario shouldn't feel bad because Michigan has done the same thing. We recently won round one at the shutdown of a facility on the international border between Detroit and Windsor: the Conners Creek coal-fired plant. Basically that plant is there, and Detroit Edison is attempting to run it, for the simple reason that in their deposition to the Michigan Public Service Commission they suggested that it was cheaper to generate electricity than it was to conserve it. They cancelled their demand-side management programs in 1996.
In 1996 Hydro wrote off $398 million in demand-side management investment. However, the rationale for demand-side management programs has not disappeared. Inefficient use of electricity is widespread and clearly there are cost-effective efficiency measures that are not being implemented due to market barriers. The most obvious barrier is Ontario Hydro's monopoly. Since Hydro's generating monopoly will not be broken up in the impending restructuring, this will continue to be a problem. Other barriers include inadequate market information and promotion; inadequate financing for efficiency measures; absence of metering for real-time prices; bulk metering; split incentives between purchases of equipment and users; flat-rate metering for water heaters; and unavailability of efficient equipment.
That's basically my presentation. I didn't bring anything to hand out. I have a summary of my comments which I can make available to the committee before the 20th. I also have a copy of the current program we are working on with Greenpeace called the solar city. Solar energy is available now to phase out fossil fuels and nuclear power. A lot of organizations such as ours are working with Greenpeace on this program. I want to add that this program is important to a lot of us for the simple reason that the design of this plan could create 3,000 jobs. It also could produce annually over 500 megawatts of solar power. That ends my formal presentation.
The Chair: Thank you very much. You have left five minutes for questions from each caucus. We'll begin with the government.
Mr Galt: Thank you for your presentation and being here today. Maybe you could start by telling us a bit about your organization. How long has it been organized?
Mr Coronado: Citizens Environment Alliance came into being in 1985. We're based in Windsor and we also just set up an office in Detroit. We are now a binational --
Mr Galt: Now it's international. How many would belong to it?
Mr Coronado: If you count all the organizations and individual members, it's probably 40,000.
Mr Galt: You talked a lot about renewable energy and replacing some of our energy with electricity supplied by wind and solar. What percent of the total electricity being produced in Ontario could be replaced by wind and solar energy in your opinion?
Mr Coronado: That's a good question. I don't know. I think between demand-side management, solar in some areas, wind in others; it's a combination of all those things. I don't know exactly what the percent --
Mr Galt: Do you think it'd be below 50%, over 50%?
Mr Coronado: Currently, right now, I couldn't tell you. I don't know what we would target. I would say that a lot of companies like Ford and Chrysler have experimented with solar. In Windsor we have five cogenerating plants: Chrysler, the University of Windsor and a number of other places. There is a tendency now to try to move to a fossil that has less carbon content and also to solar. We've worked with Ontario Hydro on an integrated management plan in the last several years in the Windsor area. That question came up several times. I think there needs to be more study on the availability and the geographical locations for solar. But I think there were some significant studies done in that area back in the 1940s and 1950s. Maybe some of those studies need to be brushed off and brought into the light of day now.
Mr Galt: When it comes to the environmental area, this particular bill is essentially enabling legislation. The government's certainly encouraging and will be writing regulations in most of the areas you're referring to. Have you seen in the legislation anywhere that it would interfere with some of the thrusts you're putting forward?
Mr Coronado: I think the whole program Ontario Hydro is laying out now is going to perpetuate their nuclear program. It's going to hinder development of green energy. The entire environmental community is certainly pushing for that. I understand that Greenpeace in their hearing on the 11th had 1,800 crosses put in the grass outside the hearing. That's one of the issues we are pushing. We've seen the Ontario Medical Association report. I come from an area where traditionally air quality has been very bad for many years. We think we need to be moving to cleaner energy, to demand-side management. It's a combination of those things. I don't think it's a difficult problem, but it's getting Ontario Hydro out of its monopoly and starting to invest in that. That's where the future of the job market is as well.
Mr Galt: The group that put the 1,800 crosses on the front lawn of the Legislature, I suggest, was to raise funds for the organization. It had nothing to do with doing something about this particular bill. I questioned you on --
Mr Coronado: I'm not sure I understand the question -- 1,800 crosses.
Mr Galt: Is there anything in the legislation that would block what you are suggesting we do here?
Mr Coronado: How would you raise funds with 1,800 crosses on the lawn? What were they doing, charging for people to put their crosses on the lawn? There are 1,800 people who die in this province every year according to the health statistics. Are you telling me that those 1,800 crosses were just a ploy? That was to bring the issue across to the people.
Mr Galt: They were out there to develop the emotional issue to raise funds for their organization.
Mr Coronado: That's why we're here. I'd also suggest to you that maybe the agenda's already been set.
Mr Galt: I asked you a question earlier on the legislation and you sidetracked to Ontario Hydro. Is there anything you have read in the legislation that would block the kinds of things you were suggesting?
Mr Coronado: I already told you.
Mr Galt: Where is it in this proposed bill? Could you give me the section?
Mr Coronado: I can't give you the section; I didn't bring the bill with me.
Mr Galt: You made reference to Ontario Hydro and their nuclear production. But I was looking for: What's in Bill 35 that would block any of the efforts, any of the thrusts that you're suggesting?
Mr Coronado: That's the problem; it's not in the bill.
Mr Galt: It's enabling legislation. We're interested in groups such as yours being involved in consultation to write these regulations.
Mr Coronado: I think the message we're trying to bring across --
Mr Galt: Would you be interested in being part of the consultation?
Mr Coronado: We want to see a going away from nuclear; we want to see less investment in nuclear; we want to see it phased out. We don't want to see $47 billion, $15 billion of it going into nuclear management, going into another nuclear program that's just going to perpetuate, as I've already pointed out. We don't want that anymore. We think there are ways of getting around that, saving lives, cleaning up the air, cleaning up the environment and having clean energy production.
Mr Galt: It may be of interest to you to be aware that at present there's nothing in the present legislation -- I'm not talking about Bill 35; it's already what the Ontario government has -- to allow green power on to the grid; however, it's wide open to bringing in power from the States that may be produced from some of the dirtiest plants in Ohio. Certainly, this bill is moving a long way environmentally.
Mr Coronado: Good. We'll certainly keep an eye on it. What we mentioned about caps and electricity labels is hopefully going to be in the bill because consumers are going to want to know where that power's being bought. If we're buying dirty energy from places like Conners Creek or from other coal-fired plants in the United States, then we want to know about it and give the consumer the opportunity not to buy it.
Mr Galt: It'll certainly be in the regulations related to this bill, no question.
Mr Conway: Mr Coronado, thank you for your views and the vigour and tenacity with which you evidently are prepared to advance them. Do you see green power as providing much of the baseload power for the industrial economy that is modern Ontario?
Mr Coronado: I see that at this point in time we're moving away from fossil; we're getting into natural gas. Windsor has five cogenerating plants. Chrysler has a cogenerating plant. Ford has a cogenerating plant. Ford many years ago had a solar wall at their factory in Windsor but got off it because it was cheaper to buy natural gas. To answer your question, I think the bulk of it now could be covered probably by cogeneration.
Mr Conway: I think there's a lot of interest, and you're fairly telling in your criticism about the nuclear commitment that has clearly not worked out as was expected, but we do have a requirement obviously to meet the needs of a diverse and large economic and social community. There is widespread interest in more green power; I don't think there's any question.
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One of the problems that I see in looking at the literature elsewhere is the market. The market under this policy is, I think rightly, intended to determine price and in many ways determine the method by which we generate electricity. Right now, for example, natural gas is very attractive. It's available; it's attractively priced; we've got the technology.
How do we deal with a situation where it might be natural gas, it might be -- the price of oil today is such that if it were to stay at US$13 or US$14, that would be attractive in ways that it wouldn't have been 10 or 15 years ago. The difficulty is the prices don't stay put. There are always behaviours in the market that nobody quite advertises.
My concern about green power is, in a market that's as volatile as this energy market, how do we on the one hand let the market decide and on the other hand provide an opportunity for green power to get its head up over some of the competition which may have significant advantages over a short-term period?
Mr Coronado: Let me answer it this way, Mr Conway: One thing I did leave out is photovoltaic cells. Ford has invested $400 million; Mercedes-Chrysler is going in the same direction. We realize that in the next five to 10 years, the steel industry, the auto industry and the chemical industry are going to be stood on their heads because there are vast changes coming. The companies are way ahead of you people at Queen's Park. They know where they want to go; they know where they want to save money. We have to get there too, and I think that's where we want to go with green power.
Photovoltaic is the thing of the future. There is both stationary development for the photovoltaic cells and also transportation and mobile.
Mr Conway: I'm out someplace in mid-northern Ontario. I've got a lot of winter and I've got a lot of moose pasture, and I want to be environmentally responsible. I haven't got any natural gas anywhere near me. By the way, I might have some hydroelectric power that I don't really like, because there's a lot of preaching going on about its appeal, but I get the crap. I get the up and down of the creek and the river and all the rest of it, so I may not be as warm and fuzzy in my attitudes to hydroelectric power as people who live in Windsor, who don't actually get the results that I get on my front porch.
What are the answers for people living in rural Canada, northern Ontario, in this whole green power debate?
Mr Coronado: We have an office in Lindsay. It's actually a suboffice for our waste management organization. That whole place is run on solar and wind, their computers, their washing machines, everything. They back it up with batteries right now, but the entire facility is run. There is no electrical wiring going into that place.
Mr Conway: What kind of demand do you have at the office? Is it significant? Could we expand it into a larger part of, say, metro Lindsay?
Mr Coronado: Sure. Why not?
Mr Conway: It's a serious question. Could you do it?
Mr Coronado: Sure, if we had the investment to develop solar. You know, in 1974 there was a book that came out in the United States that was endorsed by the UAW, because they did the mathematics on the assembly and installation of solar panels and what it would mean for the development of solar panels and the manufacture of solar panels for every house and every building in the United States. That math is still pretty sound.
Mr Conway: I know, but my problem is that Georgia isn't Chapleau. It's a very serious issue. This energy debate -- I'm always struck by the number of people who just seem to believe that southern California is Timmins. Pelee Island is a pretty salubrious climate, but it's not my part of the world. I'm interested and I want more of this green power, but one of the concerns that I sense from talking to my constituents is reliability, particularly during long, deep, cold winters.
Mr Coronado: So what are you suggesting?
Mr Conway: You have rightly pointed out that some of the failed experiments of the past have left us with a bit of a mess. In moving forward with green power there are a couple of things that I see as problems -- and there are obviously opportunities -- but one of them is the market. I'm not sure that we have yet figured out a way to price this commodity to fairly take into account downstream environmental degradation. I don't sense that the current price of the commodity takes that into account, and I think that hurts green power, to be perfectly frank. I don't have any easy answers.
Mr Coronado: I'm not sure I understand that.
The Chair: While we think on that, we're moving to Mr Lessard.
Mr Lessard: I'll try and follow up from there and talk about some of the concerns I have about the market, ensuring that there are more green and renewable energy options for the residential consumer, which is really where we want to see this heading. The government keeps saying that this is enabling legislation: "Wait for the regulations. It's going to be great for the environment."
One of the things you said that struck me was the Conners Creek example -- that's a power plant in Detroit, right across from my riding as a matter of fact -- that without a lot of intervention by your organization and others, it may be spewing out dirty coal emissions in order to meet Detroit Edison's peak power demands. They have appealed that decision not permitting them to operate, and it may be that next summer they start that plant up.
One of the things that we don't want to encourage is the generation of cheap coal-fired power in Detroit or in Ohio and end up with the emissions coming back across into Ontario. In moving to a competitive market, the price is going to be determined by the market, and I think that people will pay a premium for renewable energy options but there is a limit to that. Mr Galt is saying, "Is there anything to prevent people from making those choices or suppliers providing those?" Do you think without that commitment or the provisions in the legislation to have a renewable energy portfolio standard required, something like that, that people will pursue those options for renewable power if there isn't some requirement in the legislation? Will it develop as a feasible market in the future?
Mr Coronado: No. As I said in my remarks, the things that are missing in the legislation are just the very things you're mentioning: renewable portfolio standard, a system benefits charge, disclosure in electricity labelling, those types of things. Without those things in the legislation, Ontario Hydro is going to carry on to do what it does best, run up debt and continue to carry the population of this province further down the stream.
We had a report, as I mentioned in the introduction, that said that the nuclear program in Ontario was minimally acceptable. They're talking about billions and billions of dollars to be invested to go ahead to continue this monopoly. I'd be the first one to say that years ago when I was in political science in university, I thought monopolies were a great idea and I thought Ontario Hydro was a very good example of a crown corporation, but I have since had the opportunity to change my mind.
Mr Lessard: You're not alone.
Mr Coronado: But again, there are different ways of going about it. With the help of the environmental community, with the help of the health community, if the mathematics are done right and we look at serious cost-benefit analysis, we can actually show where energy conservation renewables can lead us out of this nuclear wilderness of coal-burning and nuclear reactors.
Mr Lessard: You mentioned the example of Greenpeace projects that you're involved in. I'm familiar with another one as well, and that's with respect to energy-efficient refrigerators that are CFC-free that they're involved with in Europe. I wonder why we don't have programs and options like that available in Ontario. Even though my friends will say there are no restrictions in this legislation, I ask, why is it that we don't have those options now in Ontario? Do you see us expanding those sorts of options for consumers in the future based on what you see in Bill 35?
Mr Coronado: Yes, I do.
The Chair: Mr Coronado, on that note we thank you on behalf of the committee for taking time to come before us with your views. They are much appreciated and will be considered.
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TRANSALTA CORP
The Chair: Calling now representatives from TransAlta Energy Corp, please. Good afternoon and welcome to the committee.
Mr Jim Dinning: Thank you, Madam Chair. My name is Jim Dinning, and I'm here representing TransAlta Corp. I serve as the executive vice-president of energy marketing for the company. I'm joined, on my left here, by someone we call Mr TransAlta in Ontario, Mr Barry Chuddy, who serves as our director of independent power project development for Ontario.
Mr Conway: Before you people begin, I presume everybody knows, and if you don't it's because he's too -- Jim Dinning of course is the former Minister of Finance for Alberta, just in case people don't know. So he's not exactly a neophyte in these matters.
Mr Gilchrist: But it is somewhat novel being on the other side of the table.
Mr Conway: I wanted to be sure the full context was understood. Thank you.
The Chair: You're most welcome.
Mr Dinning: Madam Chair, the helpfulness of your members is appreciated.
The Chair: No doubt.
Mr Dinning: I did want to say, on behalf of TransAlta Corp, that we are here to express support for Bill 35 as it is appearing before the assembly today. We compliment you, Madam Chair; your colleague the Minister of Energy, Jim Wilson; and indeed all of your colleagues from all corners of the House for the progress you've made in restructuring Ontario's electricity market. We believe that Ontarians will see the benefits of more competition in electricity. At a minimum, the investment dollars needed for a competitive market will come from companies confidently willing to invest in the province's growth -- dollars from those companies, not from the taxpayers' pockets.
Today I want to talk to you about TransAlta and a project we are working on here in Sarnia. It is appropriate that your hearings would bring you to Sarnia, because we believe that the project highlights some of the key issues that need to be addressed as you deliberate on the legislation.
As most of you may well know, TransAlta is an investor-owned energy company that has been in business since 1911. We have assets of over $5 billion, and operate in Canada, New Zealand, Australia, Argentina and the United States. We have been active in Ontario since 1988, and we currently employ over 60 people in the province. We have invested in three cogeneration plants in the province, 230 megawatts of power, and we operate those three plants in Windsor, Mississauga, as well as Ottawa.
We have experience in other markets that are going through the struggle of electricity restructuring. We own and operate significant electricity generation, transmission and distribution assets in Alberta. As a result, we have been involved in restructuring in the province there since 1996.
We are also in the New Zealand market, and that market has been under active restructuring since 1994.
We are an energy marketing player in the west, especially since we became Canada's first marketer affiliated with a utility to get a FERC licence to sell power at market-based rates in the United States.
So, to the Sarnia project. A few months ago the company was selected to develop a 520-megawatt, $400-million cogeneration facility here in the city. We are joined at your hearing today by the companies we are working with, each having shown some pretty strong leadership in venturing forth into the new electricity world. These employers in the community, whether it's Bayer, Dow, Imperial Oil, Montell, NOVA, Shell or Sunoco, to name just a few, require low-cost, reliable power and steam for their operations. We believe those industrials, together with TransAlta, have created a model for power development in this community.
In fact, what's interesting in preparing our thoughts, we've heard from others their belief that if the Sarnia project cannot be feasible because of restrictions in either legislation or regulation, then it's going to be mighty hard for any project of this kind to get off the ground in most other parts of Ontario. With the number of industrial customers in the area, and Barry had a chance to drive me -- this is my first time in Sarnia -- down the strip and see all of the industrial activity in this area, both the power and the steam demands are ever so apparent.
Sarnia is a prime site for cogeneration. We believe that the benefits of lower-cost, reliable power will be passed on not just to those industrial customers but, equally important, to the residents in the area that is served by Sarnia Hydro.
The project also fits in with the legislation's objective of more environmentally sound generation. The project uses world-proven technology to provide low-cost power and steam. In contrast to a coal-fired plant or in contrast to convention power and steam generation, we see a reduction in CO2 emissions in the order of about 2.5 million tonnes per year.
We're investing $2 million in development costs for the project this year, and more again in 1999. In total, we're on stream to invest about $400 million in the project. I remind you again, they're shareholders' dollars, not backed up by the residents or the taxpayers of Ontario. In order to get final corporate approval to proceed with the investment, TransAlta is looking for resolution on four key issues early in the months ahead so the plant can come on stream in 2001.
The first thing we're looking for is the need to allow for physical bilateral contracts; second, the need to have competitive access to the transmission system; third, there needs to be equitable and defined treatment of the stranded debt; and lastly and probably of the greatest importance, there needs to be access to an open market to sell electricity in Ontario or adjoining markets.
We're quite convinced that Bill 35 ensures that fair and open access to the market, and I think that has to be the standard.
Let me address the first three quickly. First is the need for physical bilateral contracts. Price certainty is a critical issue for customers in projects such as Sarnia. We agree with the Market Design Committee when it recommends using physical bilateral contracts. These allow suppliers to contract directly with their customers on specific details, including the price for physical supply. In our view, they are one of the only ways to achieve price certainty in a deregulated environment.
I'll be careful in making these remarks, because I'm reflecting on my own home province of Alberta, but there we currently have a mandatory power pool without physical bilateral contracts. Frankly, it's not working very well at all. We have a market where customers don't know what their price is going to be because pool prices are based on market supply and demand at any given time, so prices generally are not well known or not specifically known in advance. The only way to manage the risk of that price volatility is to enter into financial agreements, but more often than not, customers and indeed suppliers are either unable or unwilling to enter into these financial agreements because they take a lot of time, they take a lot of money and they take a lot of effort to put the infrastructure in place.
The result is a less than liquid market, where contract premiums are pretty high. Customers are left to manage price risk by absorbing it themselves by buying power at fluctuating prices or paying high premiums for risk management instruments. Neither alternative is all that attractive. Allowing physical bilateral contracts in addition to the power pool that you will establish is the best way to ensure price certainty and a more liquid market in the unregulated Ontario market of the future. I would suggest that because of the importance of bilateral contracts, we would recommend that you include explicit wording in Bill 35 to allow for those contracts.
Our second key issue involves competitive access to the transmission system. Even though the transmission and wires function will continue to be operated primarily as a monopoly service, there are ways, in our view, to enhance competitive incentives so monopoly wires providers ensure their prices remain competitive. This has happened in the natural gas distribution business, so we're not advocating something without precedent; it in fact exists in the natural gas business today. It can be done through your legislation and the regulations, which will promote precisely this type of competitive discipline in the wires business.
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One benefit of cogeneration, with both power and steam, is that the power source is very near to where the power is actually required. That's why Sarnia is a perfect site for cogeneration. There isn't the need for long transmission lines to bring the power from far away to the customers. There is less risk of the power going out, like you saw from the ice storms earlier this year, and there is far less power lost in transmission, which makes the system far more efficient. However, the problem is that customers, both residential and industrial, don't get the benefit if they have to pay a high rate for transmission.
Customers in Ontario should be able to pay a competitive price for their power transmission. You can do that one of two ways: either by letting those customers pay what the lower-priced alternative would cost or by allowing others to build the transmission line at the lower cost. Either way, the savings get passed along to customers. In fact, anything less means that customers will pay higher rates than are necessary. In the case of TransAlta here in the city of Sarnia, our project will not be viable without competitive transmission rates.
In Alberta, where industrial sites can span many square miles -- a good example is the oil sands site in northeastern Alberta -- competitive transmission is fundamental to those large cogeneration projects. It's the same in New Zealand, where competitive transmission is a cornerstone of the restructuring process. It's being done in those places and elsewhere because it works and it keeps prices down.
Third is the subject of stranded debt. You won't be surprised when we say it is a critical issue. You've heard plenty of that at this committee in all your hearings to date. It's our view that no one should avoid paying the stranded debt charge. It's our view that it needs to be spelled out clearly in the legislation that all and sundry should pay that stranded debt charge. This ensures that all generation operates on a level playing field, that no entity gets a leg up as we enter this new era in Ontario.
The method by which the debt charge is determined is also critical. We believe that no competitive advantage should be given to Genco as a result of the stranded debt allocation. As for Genco's capital structure, I would add that it should be comparable to its competitors in the private sector, with an appropriate amount of debt remaining on Genco's books. Again, anything else or anything less would confer an unfair leg up and consumers would not come out the winner in this process. Frankly, again I would advocate the inclusion of that notion right in the legislation, because as Mr Conway will suggest, I know all too well how regulations can produce fog over an important issue such as this.
There's one other issue that we think needs to be addressed, and that is interim controls on Ontario Hydro. We've read the Market Design Committee's second-quarter report and we support the direction they're moving in, in addressing market power by the year 2000.
In order to bring projects like Sarnia on stream in time for 2001, we must make investment decisions now. But in this interim period we are concerned over the mitigation measures that are placed on Ontario Hydro. In our view, Hydro should not be able to access taxpayer-backed capital or assets or special rates, nor should they use their unique situation as the monopoly provider and regulator now to give them an unfair advantage as the competitive market opens. We believe the Market Surveillance Panel needs to be given an oversight role immediately. We'd advocate that because you're building the rules for how the market is going to open up, and we hope that nothing would be done now that would undo prematurely the work that you're doing around this table.
We would close by saying the work you've done has been a significant factor. What has happened in this province in the last number of months has been a significant factor in TransAlta's decision to pursue the Sarnia project, in addition to others that we are considering about the province. As you can see, there are still some issues that need to be addressed, but we are confident that you are on the right track; that gives us the confidence to invest our shareholders' dollars.
I'll leave it at that. Barry Chuddy and I would be happy to answer any questions that you or your colleagues might have.
The Chair: We have just over four minutes for questions from each caucus. We'll begin with the Liberal caucus.
Mr Phillips: I appreciate the presentation and appreciate the chance to meet you. You have a very good reputation and I'm sure you bring your talents well to this organization.
I want to start on the stranded debt issue, because I have concerns on the other side of the issue. My worry is that Genco will be saddled with too much of the stranded debt. Organizations like yourself will do very well competing against them, but the public is left with a huge operation, Genco, that in my opinion may not be competitive. But I could be satisfied, if there is a way in the legislation -- because right now we will not know how the stranded debt's going to be assigned until after the legislation is passed. It will all be done away from the glare of the public.
I'm attracted to your thought of including wording in the legislation that would add some certainty, because I would like that as well. Have you any suggestions for us on wording in the legislation that might satisfy all of us that we would have a much better understanding of the principles on which the stranded debt is going to be assigned?
Mr Dinning: Mr Phillips, I don't have wording in my hip pocket, but we would be happy to go home and think about that and provide it through the Chair to you and come back to you.
Our position, and I hope you heard it in my remarks, is we don't believe that anybody should have a leg up; that putting the stake in the ground as to how much the stranded debt is and how much stays with Genco perhaps becomes almost a policy issue within government and within the Legislature, as to how much you actually want Genco to truly be able to compete with others who are going to come into the business. You know better than I do the fine balance that is going to have to be struck in putting that stake in the ground.
Mr Phillips: I agree. I would appreciate any wording.
Mr Dinning: We'll happily provide it.
Mr Phillips: The government has decided that the big thing that could reduce the stranded debt is the selling off of some of the Genco assets. That's not in the cards. There will be a huge number, between $15 billion and $30 billion, I gather, so I would appreciate any advice on that.
Mr Dinning: You're all looking for reduced, or at least capped but better still reduced, prices. Don't give it such a leg up that the competitors who come in to try and do that are hobbled by, may I say, a Godzilla that has an unfair advantage.
Mr Conway: Thank you very much, Jim. On the other point about competitive access to transmission, you make a very strong argument, but I hear you saying on page 4 that for projects like the TransAlta project to work in Sarnia you're going to need a couple of things. You're going to need fixed bilateral contracts, which the Market Design Committee does say it's certainly favourably disposed to, but you've also got to get access to the transmission system. You use the phrase "competitive access," but some people might say it might even be preferential access. How is it not preferential access?
Mr Dinning: Let me try to start it and then I'm going to ask Barry to finish it off. You're pretty unique. When you look at Sarnia -- I said to Barry I had an opportunity to meet with the mayor this morning.
Mr Conway: We all like the project. I like it as well.
Mr Dinning: Sean, there is not a strip of industrial and commercial activity anything like Sarnia, I don't think, anywhere in this country. You've got such a confined area with such a concentration that requires not just power, because most generation isn't with steam, it's just power. You've got power and steam. Just as in natural gas where there is concentration of demand and requirements in other areas of the province, there is a competitive rate.
We can do one of two things: negotiate, such that Servco still gets its fair whack of dough for the services that it provides, or we can show you -- I think Barry will be able to show you, ultimately -- here's how much it would cost us to build a competitive transmission line beside the one that's there now. Well, that doesn't make any sense, but that could be and should be the benchmark. I ask Barry to complement the answer.
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Mr Barry Chuddy: What we're proposing is really a surrogate for competition in the wires business, where we concur that the wires of transmission is really a monopoly function but the need to impose some competitive forces on that seems to be a good way to ensure that the efficiencies in that part of the business remain even though the monopoly must stay.
What we're talking about is not preferential. As Jim mentioned, we're proposing a mechanism where that has been prescribed and there are precedents set in the gas business where the uniqueness of a situation is identified and recognized and, on the basis of that uniqueness, we would have the obligation, likely through the Ontario Energy Board, to demonstrate why what we're proposing will make sense. Today our interest is in ensuring that the mechanism is there that allows us to make the case for something that allows lower cost power to be generated by this large facility, which becomes an aggregator of steam and power.
Mr Conway: I appreciate that. One of the concerns we've got is making sure that there is equity and that people aren't, for a variety of good and special cases, hopping the fence away from some general obligation.
On the stranded debt, the policy prescribes a menu of instruments by which the debt can be written down. Thinking about it from TransAlta's point of view, you make a very strong argument in your brief that it should be a non-bypassable stranded debt charge, in whatever form. Beyond that, have you got any advice to the committee, thinking about TransAlta's situation, as to which of the instruments would be the most attractive or the fairest?
Mr Chuddy: What's currently on the table is fundamentally two mechanisms where that could be collected either at the generator level or at the consumer level. We believe that, subject to the Market Design Committee getting all the details sorted out, either of those, and in some combination, depending on the circumstances, makes an awful lot of sense. Our view is that imposing that collection on the transmission system is probably not the right way to do it, but that the right way is either at the generation or consumer level.
As we look at competing in the province and we look at those that we'll be competing against, certainly imports from other provinces and from south of the border are something that we need to be sensitive to as we configure our plans. The way it's prescribed, to allow a mechanism to capture that charge at the consumer level helps address that type of concern where you're dealing with imports and, on the generation level, captures both sides of the equation, and I think what's left in the middle is the transmission. So that would be our current perspective on that.
Mr Conway: A very artful answer.
Mr Dinning: He's running next year.
Mr Lessard: Thank you very much for your presentation. We've seen the benefits of cogeneration in the Windsor area. TransAlta I think was one of the first projects that got underway there. It's unfortunate that the government didn't pursue that as a policy option 20 or 25 years ago. We may not have ended up with the stranded debt problem that we have at the present time.
One of the questions I had was the one that Mr Conway just asked and it was about who should pay the stranded debt. One of the things you said is that no one avoids paying, and that's an important principle. Another one to me is that no one avoids paying their fair share. We don't want one group of consumers to be paying a higher share, especially residential consumers. You've answered the question about how that can be allocated but that the determination of what that amount actually is is critical as well.
I wonder whether you feel as though there should be some further opportunity to have input into determining the stranded debt, either before the Ontario Energy Board or through some other method. The way it stands now, it's the Minister of Finance who is going to make that call. Ultimately it will be a political decision. I think it should be transparent and should have some input by all the stakeholders.
Mr Dinning: Mr Lessard, we would certainly advocate the principle of transparency so that all the facts are on the table. Again, it comes down to a judgement call, indeed, on the part of the Minister of Finance. I can say from some experience that that will be a tough one to call, because it isn't just Ontario Hydro that you're talking about. You're talking about, ultimately, the books and the overarching debt for which Her Majesty's government is on the hook in the province. It does come down to a policy issue, and it also relates to how competitive Ontario Hydro ultimately is going to be allowed to be. But we would certainly advocate the notion of transparency. I suppose we're not likely to be the characters at the head of the line demanding a review if it's too high, because I'm sure there would be others of your constituents who would be well ahead of us.
Mr Lessard: I understand your position with respect to who should pay and what it should be.
Mr Dinning: We try to be in the energy business rather than the giving advice to the Minister of Finance business anymore.
Mr Lessard: One of the things you mentioned are these physical bilateral contracts. I'm not sure I understand completely that concept. I wonder if you can elaborate a bit further for me.
Mr Dinning: May I just use the example -- I'm responsible for a trading floor where there is a spot market price, minute by minute, hour by hour. Those who agree to go in and not use a regulated rate can buy their product at the spot market price. But I can't tell you what it's going to be next year. I can't even tell you what it's going to be 10 minutes from now for sure, but I certainly can't tell you what it's going to be a year from now.
Once we no longer have those regulated rates, if you and I want to buy power from Barrie, we'd like to know, for the economics of our project, how much that's going to be. Well, in a bilateral contract, you and I can settle out all the details of that contract: when it's going to be delivered, how much it's going to be, how many megawatts, and at what price. In a pool mechanism, because you're just buying at the pool price, whatever it is, you can't budget for sure, for sure. Whereas you and I, if we wanted, could nail that and contain that cost and put it in our budget.
Mr Lessard: I know you said "you and I," but as a residential consumer, I don't think I'm going to be jumping into that market.
Mr Dinning: Sarnia Hydro can. Sarnia Hydro can nail down its price.
Mr Lessard: One of the things that has been suggested to us is an electricity futures market. Is it similar to that, or is that an option that you think is worth considering as well?
Mr Dinning: What the futures market does is help to nail down, find and determine a price.
Mr Chuddy: You really impose somebody else to find a way to quantify, mitigate and get comfortable with the risk of that future price. The experience that I've had in working with industrials, that tend to be pretty shrewd negotiators and also very capable businessmen, is that they tend to get pretty suspicious of the kind of premiums you're building in to provide that kind of assurance for them against the financial market. I think there's a greater degree of comfort in being able to negotiate an arrangement that defines the price of power, for a long term that's not conditional or contingent on some derivative arrangement.
There's another point that I think is important. When we talk about a cogeneration project, this is a project that does not simply produce electric power. It produces electric power and steam. The way it produces steam is by generating electricity. When you give an entity the option of then fulfilling their power obligations through futures markets and other mechanisms, you tend to move away from the certainty that it'll be that generator running that produces the power, and therefore that generator that has the capability of producing steam. One of the key components of what we're doing in Sarnia is being able to demonstrate to the people we're working with that the reliability of steam production will not suffer for a cost benefit. One way to do that is to have a physical bilateral contract for power that obliges us to run generation to fulfill our obligations to produce steam. So it's several issues together. I don't think one by itself would make the argument, but I think collectively they make a compelling argument.
Mr Gilchrist: Thank you both for your presentation. I guess if we're setting out the full context, Mr Conway, we'd also have to admit that 25 years ago, Jim Dinning and I would hardly have imagined today would be in our future, where he was part of generating electricity and I'm part of regulating it. We were busy, as fellow Queen's commerce students, just worrying about paying that month's hydro bill, as paltry a bill as it would have been back then.
Mr Conway: The mind boggles.
Mr Gilchrist: Indeed.
I'd like to explore a little further a couple of your suggestions. I do that very much in the context of offering to you our appreciation. As a company with experience in virtually every significant jurisdiction that has gone through what Ontario's proposing to go through now, you have a wealth of experience that you bring to the table. I guess that fills me with even greater comfort and resolve that the bill is pointing us in the right direction, given your willingness to consider not just this but other investments in Ontario if in fact the market is opened up.
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You opened by talking about the need for physical bilateral contracts. It would be both impudent and imprudent for anyone other than the minister to make a 100% commitment, but let me offer you this: We are absolutely committed to the most liquid market possible. We appreciate -- and you've pointed out here again, at some risk -- that Alberta has not worked well by having far too restrictive a pool. Without saying categorically that it's in the cards, I hope I can give you the comfort that the mechanisms will be in place to ensure that we don't follow Alberta's example.
The other point -- and it's a very important one, and we've had it approached myriad ways in different presentations -- is of course the stranded debt. As a company that will have to go out to the marketplace to get shareholders to put their money on the table, to put their money where their mouth is, on any investment that you propose to make, you offer a comment in here about Genco's capital structure that I think is quite appropriate: "It should be comparable to its competitors in the private sector, with an appropriate amount of debt remaining on its books."
Would you agree with me that that's not really all that difficult an equation to come out with? If one were to first select a category -- do you want it to be A, A-, B, depending on what price you're prepared to pay for your borrowings -- it flows from that, the ratio of debt that could be supported? Are you comfortable, given the feedback we'll get from people like yourselves and of course the work done by the Ministry of Finance, that there is a number that will fairly allocate to Genco, if in fact that's the means of doing it, if you simply went and used the market test? It won't be perfect, but will it be at least appropriate, speaking as a former treasurer?
Mr Conway: And thinking about bags full of nuclear assets.
Mr Lessard: He wants a political response.
Mr Dinning: Does he?
Mr Gilchrist: No, a business response. I don't believe anyone at this table has suggested, but certainly others have, that somehow it's a number that's just going to be picked out of the air. I've never believed that or I couldn't support an awful lot of what's in this bill. I think there is a mathematical calculation that will be derived from the appraisal of the assets, and that, in turn, is a function of the income they derive. What comfort, politically or from a business perspective, could you give to the taxpayers in Ontario that at the end of the day -- we could all quibble $100 million one way or the other -- basically there is a mechanism to determine the appropriate level of debt?
Mr Dinning: We've had an opportunity, as others have, to put our views forward on it and ask questions as to the process that the ministry is going through. We're confident in the people who are making the difficult calculations, and then we're confident in the government and the Minister of Finance to make that call. It's not purely a financial one, but we know that in the best interests of the objectives of this bill a fine balance must be struck, and we're confident that Mr Eves will strike it.
Mr Gilchrist: Would it be fair to say, then, that your problem with stranded debt is not so much how it's calculated but the timing, that for you to proceed you need to know that number in the next few months, certainly before the end of the year?
Mr Chuddy: I think it's timing. I think it's certainty as well. The timing is critical in the context of ensuring that we can meet our commitments to the customers we're working with to bring a project on stream that provides the benefits we've suggested. Certainty, in the context of, as my colleague has mentioned, investing $400 million of the shareholders' money is not something that gains a lot of forgiveness if we've made a mistake. Therefore, we want to be certain that we're entering down a road with clarity and understanding of what the competitive forces will be that we're going to be working in. We need to know that before we commit the funds necessary to build the project.
Mr Dinning: You want companies like TransAlta, and lots of them, to be making more and more of these investments. We're confident that the Minister of Finance knows exactly that, so that's the balance he's got to strike so he doesn't make a decision that's going to say to a bunch of potential investors, "Stay away." He wants to make it so that a bunch of them come and put their money down.
As to your comment about experience at the outset of your comments, I'd remind you of my favourite cowboy poet, who says that experience is what you get when you don't get what you want.
Mr Gilchrist: Good luck in your current career.
The Chair: We have had the pleasure of a number of experienced people coming before our committee with their best advice. We are listening very closely and are grateful to you and the other presenters for taking the time to share that with us. Thank you very much.
Mrs Johns: Madam Chair, maybe he'd like to comment on whether Mr Gilchrist got a degree, frankly.
Mr Dinning: I can assure you, Madam Chair, that Mr Gilchrist and I both got our degrees.
The Chair: That's good to know. We were quite concerned.
SARNIA REGIONAL COGENERATION PROJECT
The Chair: Now calling representatives from the Sarnia regional cogeneration project, please. Good afternoon, gentlemen. Thank you very much for coming before the committee.
Mr Mike Ireland: Good afternoon, Madam Chair and members of the committee. My name is Mike Ireland. I'm employed as the senior business development officer with the Sarnia-Lambton office of economic development. I'm joined today by Mr Ken Ball, vice-president of refining for Sunoco, and by Martin Bruce, leader of planning and growth with Nova Chemicals (Canada) Ltd. We are here today to discuss the requirements of Bill 35 and sequent regulations which will facilitate the establishment of a major economic development initiative in our community, the Sarnia regional cogeneration project.
In my comments, I'd like to provide some insight into the anticipated benefits arising to our community from Bill 35, along with an overview of the regional cogeneration project. Mr Ball will then discuss the concerns of our major industries in this initiative which Bill 35 must address to ensure that the project comes to fruition.
For your information, the Sarnia-Lambton office of economic development is the main economic development body for Sarnia and Lambton county. We work quite closely with other representatives from private and public sector organizations to increase the attractiveness of our region as a place for investment. Our efforts focus on the attraction of new industry, the growth and retention of existing industry, and improving the competitiveness of local infrastructure.
Bill 35 and Sarnia-Lambton: The office of economic development is very supportive of the goals and objectives of Bill 35. The introduction of competition into Ontario's electricity market will lower energy costs and improve the attractiveness of the provincial investment climate, creating new jobs and economic growth.
Sarnia's petrochemical industry will benefit substantially from Bill 35. The magnitude of this benefit was identified in 1997 by the Canadian Chemical Producers' Association, which forecast that Ontario, and specifically the Sarnia area, had the potential to attract over $2 billion in chemical investment over a three- to five-year period through the elimination of certain investment barriers, a key one being high electricity costs. Bill 35 will enhance the long-term viability of Sarnia-Lambton as a chemical centre.
Now I'd like to give you a little bit of background on how this project came into being and where the next steps are for us. In 1996, an economic development blueprint for our community was released, which we're now in the process of implementing. This document, The First Step: A Strategy for Economic Renewal in Lambton County, identified seven objectives for revitalizing our local economy. Two of these objectives identified the need to improve the competitiveness of the existing infrastructure, along with the need to diversify the local economic base. In meeting these objectives, the challenge for us has been to develop a unique competitive advantage. The energy sector, and specifically opportunities in the area of cogeneration, was identified as having potential for creation of this advantage.
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This potential, together with the release of the white paper this past November and its encouragement of private sector generation projects where they make economic sense, provided the impetus for our community to pursue the development of a Sarnia regional cogeneration facility. This January, a committee comprised of the major power consuming industries, Sarnia Hydro and my organization was formally established. By late May, TransAlta Energy Corp was selected as the developer for the project. Since then, all parties have been working very diligently to develop the project.
The legislation this committee is now studying, Bill 35, provides the legislative framework to realize the creation of the Sarnia regional cogeneration project.
We have two primary objectives with the project, and that is to create the Sarnia-Lambton energy advantage in two areas. First, the project will provide a long-term source of reliable, low-cost electrical power and steam for our local industries, thus enhancing their ability to compete and eliminating a critical investment barrier. The second thrust of the advantage is the availability of competitively priced electricity for merchant sale, expansions and new industry to the area.
The Sarnia regional cogeneration project is a major economic development initiative for both Sarnia-Lambton and Ontario. Bill 35 is the beginning point, but there is a lot yet to do by way of supporting regulation to bring this project to fruition. TransAlta has already spoken to some of their concerns as developers in making this project a reality. Sarnia's major industries also have specific concerns, which Ken Ball will now address.
Mr Ken Ball: Thank you, Mike. Good afternoon, Madam Chair and members of the committee. As Mike has indicated, I am the vice-president of refining for Sunoco, but today I am speaking to you as a representative of the interested parties in the Sarnia project. At the present time there are seven companies involved in the project that have indicated interest, and we are working with the project developer, TransAlta, to develop this sizeable thermal-steam and electric-power project.
I am joined today by Mr Martin Bruce from Nova Chemicals, who will also assist me with any questions. As well, seated in the audience we have representatives from all the interested parties, namely, Bayer, Dow Chemical, Imperial Oil, Montell, Shell Canada and myself from Sunoco. Collectively, in the Sarnia area these seven industries account for approximately 350 megawatts of electricity demand. They also account for an industrial steam demand or requirement exceeding 1.5 million pounds per hour and a current employee base in the Sarnia area exceeding 5,600. We are brought together by one common objective, namely, the search for a reliable source of low-cost power and low-cost steam that will allow us to compete efficiently in the global marketplace. The legislative proposal which you are considering should enable these companies to benefit and be competitive from the development of this project.
Bill 35 and the related work being undertaken by the Market Design Committee and other committees goes a long way to laying the foundation for competition in the electric power industry in Ontario. By doing so, it offers both industrial and retail customers the opportunity to have efficiently produced electricity at highly competitive prices. We strongly support the overall intent of Bill 35 and recommend its adoption at the earliest possible date.
The Sarnia project is a tangible example of the type of opportunity that will emanate from the restructuring of the Ontario industry. However, the success of this restructuring will depend heavily on the underlying regulatory details that support the legislation. In this regard, for projects such as the Sarnia project to proceed, it is absolutely paramount, from the perspective of large industrial users, that three critical concerns be appropriately addressed. Specifically, the three concerns are (1) the ability to enter into physical bilateral supply arrangements, (2) the ability to negotiate transmission optimization rates or equivalents, and (3) the implementation of a fair and equitable stranded debt regime that will not place Canadian industry at a global cost disadvantage. Let me address each of these individually.
The need for physical bilateral arrangements: This project will supply critical quantities of both electricity and steam for the Sarnia area. Steam is a direct by-product of the cogeneration process and is required on a continuous basis by each of the industry members. If no electricity is produced at the plant, then there is no steam either. It is critical that the physical bilateral contracts be in place to ensure that physical production of electricity occurs at the Sarnia project facility so that steam can flow to industry participants on a continuous and reliable basis. This is similar to the gas industry, which has had the ability in Ontario since deregulation of this market to have physical contracts, which have worked well, where required. Similarly, the MDC has recognized this need and has recommended it in their second interim report, released in June. This Ontario-based project will not proceed if steam availability cannot be assured and enabled by physical bilateral contracts.
The second area of concern, and equally fundamental to this project proceeding, is the ability to negotiate a transmission optimization rate or, alternately, to have the capability of constructing one's own transmission facilities and operating them independently. The concept of a transmission optimization rate will induce a general competitive market discipline to the transmission monopoly and provide competitive options for producers. In the case of the Sarnia project, it is fundamental to have a transmission rate that is representative of the true cost of distributing power in Sarnia from these distributed power generation facilities to the industry members. Otherwise, the project is not economically efficient.
The third area deals with stranded debt or the debt charge. We feel that the stranded debt or the debt charge placed upon the system must be fair not only in a ringed-fence Ontario context but also on an international and global basis. The benefits of competition in terms of lower electrical costs must not be clawed back in the form of higher stranded-asset charges. Sarnia-area industry sells its products on world markets, competing against the likes of Gulf Coast producers who have significant cost advantages in their production of electricity due to low-priced natural gas and massive economies of scale. In addition, we recommend that any stranded charge should be highly visible to consumers and be removed as soon as repayment of the stranded charges occurs.
The overall Sarnia project supports the goals of Bill 35. It is highly efficient as a result of the large thermal steam load, allowing for optimum design efficiency from an energy standpoint. Very few other locations in the province combine such high demands for steam and electricity in one location. This project also results in improved greenhouse gas emissions. Clean-burning natural gas will be utilized to back out a variety of fossil fuels that are currently used for production of the area's power requirements.
This project is clearly financially viable, provided that appropriate competitive regulatory regimes are instituted. The combination of a financially strong developer, large industrial customers and substantive economies of scale in the project design result in a robust project on a global scene for the long term.
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In addition, the Sarnia project provides a significant source of competitive merchant power available for the Sarnia-area customers, as well as for input into the Ontario grid. Approximately 25% of the 520-megawatt design capacity will be available for the merchant power sector, with power production costs significantly lowered as a result of the tie with the large industrial baseload and the attractive cogeneration economics.
In summary, on behalf of the Sarnia industry, the Energy Competition Act lays the framework for competition. For the Sarnia project to proceed, the industry participants require this legislation, along with subsequent regulations, to address appropriately the three concerns, namely, the physical bilateral supply arrangement options, the ability to negotiate competitive transmission optimization rates and the incorporation of a visible and equitable stranded debt-asset regime.
The Sarnia project will add between 2% to 3% to the generation capacity of Ontario in a highly competitive fashion. We strongly encourage the government to retain the aggressive time schedule established by the minister and urge you to ensure that the resulting regulatory regime provides clarity and certainty for the industry, who themselves will be making long-term commitments to new power alternatives in the province.
Thank you for the opportunity to provide input on this very important legislative initiative.
The Chair: We have four minutes per caucus for questioning. We begin with the NDP caucus.
Mr Lessard: Thank you very much for your presentation. Do you support a competition transition charge on all generators of electricity in Ontario?
Mr Martin Bruce: There is an issue that some of the generators have been long-time generators and self-sufficient. The group hasn't really discussed that as an area group, and you might get some different opinions.
Mr Lessard: So there's a possibility that you might agree that there should be some exceptions, I guess.
Mr Bruce: Some factions believe that's the case, yes. The group is being very careful, trying to work on a project of this nature, about what things we discuss as a group and what we don't, trying to work with a single developer. We haven't really talked about that issue, so speaking as the group, we can't give you an answer.
Mr Lessard: I guess if it's not on generators, it goes on consumers, or it's possible that it may not go on anybody. But that's one of the choices the government is going to be faced with, whether it goes on generators or whether it goes on consumers. Right now the legislation doesn't say anything with respect to whether it covers generators from outside Ontario. That's another area that needs to be looked at as well.
In your submission you said that the payments for the stranded debt need to be visible, and that's for consumers. I'm wondering whether you support a competition transition charge on consumers rather than generators. Would that be your favourite option?
Mr Bruce: It's an option that provides fairness and it deals with the import of power from outside the province.
The Chair: To Mr Boushy.
Mr Dave Boushy (Sarnia): First of all, I just want to say that I'm sorry I haven't been able to attend the meetings all day. I had a busy day. I wanted to welcome you to Sarnia and I hope you have had a good day. We have a tremendously good community. Come back and see us again.
I visited the Gulf Coast a couple of years ago and I saw how industries are booming there. One of the reasons is the low cost of electricity. Do you believe that the bill we have now would allow you, our industries in this area, to bring their energy costs in line with those in the Gulf Coast?
Mr Ball: Yes. Each of the companies has done their own individual economic analysis with regard to where the industry is going in North America from the sense of power costs and also the options with regard to imports long-term, where the North American pricing is going and where the US pricing is going. We're convinced, in the scenarios each of us has looked at, that this particular project, the Sarnia project, has the economics whereby the cost of energy and steam to the industries here is equally competitive with what can be created elsewhere within the US and Canada. It is a very viable project economically. The power costs we're looking at are in line with the power costs in other deregulated areas that have already occurred and also in line with forecasts available out there with regard to where power costs will go in North America as the industry deregulates. We feel this is a very solid project, with the right enabling legislation that would make it competitive against elsewhere on a global market scale.
Mrs Johns: I have a question relating to the retail customer. We've heard all along that this is going to be good for the industrial customer, but I see in this project that you have made some power available to your retail customers also. Can you talk about how much of this power will be going to the retail customer and what kind of breaks they may get? I was wondering if you could specifically outline for me the price per kilowatt hour that the line charts -- when you get to the line, how much that would cost to generate this power.
Mr Ball: The chaps you had earlier were better for this. Basically, the answer is that the industry itself is set up as industrial customers. TransAlta has designed a plant that has additional capacity available to the grid and can be sold into a merchant power regime. If you put in place a concept of physical bilaterals, then what we'd see or what TransAlta would see is basically being able to sell that additional energy on a physical bilateral arrangement to a muni or elsewhere. That again would be a separate contract, a separate undertaking with that customer. We ourselves, as industry, have not looked at the residential retail side of the market as far as price goes.
As far as the pricing for each of the individual members of the industry is concerned, again that's been taken as an organization-by-organization discussion between the developer and each of the member companies. Call it a public posted rate that's being established. Each of us has different power and steam demand mixes, and that influences the way in which you would establish a net price. Several of us currently have our own steam generation or our own power generation facilities and that has to go into the equation.
So it's not possible to give the committee a number that the industry will see. Each of the industry members, though, have evaluated their respective economics versus options they may have if they did something on their own or went elsewhere and are still individually satisfied that the project is a viable project for them and is their best competitive choice long-term. It makes a significant difference in the overall competitiveness of each of the members as we go forward.
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Mr Phillips: One of the challenges for us is to try and have an eye out for the taxpayer here who is going to be left with the remnants of Ontario Hydro. Your project is just the first of many across the province. Ontario Hydro must shiver a little bit because they'll be losing, I would think, some of their most profitable customers, first here, and the jewels will be picked off around the province one by one. Of your three concerns, at least two of them -- the government today indicated the physical bilateral supply arrangements will not be a problem and I think there was some reassurance on the transmission side.
My question really is, can you give us any help in our role of trying to make sure that when the smoke all clears and all of the good customers have left Hydro, and Hydro still has retained 100% of its existing generating plants -- they're getting rid of none of them. Has your organization any advice for how Ontario Hydro is going to survive under those circumstances, and whether the decision to allow Ontario Hydro to retain 100% of its generating plants is the right policy one?
Mr Ball: In all honesty, we haven't discussed that particular perspective as a group to this point in time, because we haven't had that perspective. The perspective we've had is just basically the fairness and the visibility of any stranded asset charge that is established, and then a concern with regard to how large it is based upon the term that is selected for repayment. From the perspective of answering the question, I would say that we haven't had any dialogue as a group against that perspective.
Mr Phillips: What is your expectation of the percentage saving your members may see on their equivalent bills?
Mr Ball: It's a relative range. Each of them is different. Each of the organizations is starting from a different place. If you are basically working in a range of 15% to 20%, or 15% to 25%, I think that is the range of possibility.
Mr Bruce: Can I make a comment on your previous question?
Mr Phillips: Sure.
Mr Bruce: Again, it's not as a group, but our company objected to Hydro's application to export power under FERC because of the very restrictive rules and that it was not really a free marketplace. I think the solution to your issue is that the more projects like these that come along that will free up capacity and allow Hydro to pass FERC rules and export to the fairly lucrative --
Mr Phillips: I'd sure like to see evidence that we can do that.
Mr Bruce: Unless projects like this come along, and unless the rules are changed from the current Ontario Hydro system, I think you will continually be denied; and companies like us will continue to object because we're part of the existing power joint venture and couldn't get our own newly acquired plant rolled into that agreement because of Ontario Hydro's resistance to that. I think the solution is a broader market. Minister Wilson was talking at lunch about the prospect for Hydro serving 50% of the northeast needs over the next five years. I think there is huge potential.
Mr Conway: I think your project is a very attractive one. I've been one who has been saying throughout the piece that my primary concern is for the broad base of residential and farm customers, but it has to be said as well that there is a major industrial component in this province on which we all depend and it has to be recognized. I think the cogeneration possibilities -- and as my colleague Mr Phillips said, and I think you've said it as well, if there ever was a place for this to work, it should be here. That is something that we want to support.
The concern I have is that I see a very attractive localized set of circumstances here. I can imagine a number of others around the province and I certainly hope they materialize. It's in that next few years that we have to manage a very substantial debt, and most of the debt attaches to this nuclear division. The difficulty with this whole equation is this market. How does a market treat Ontario Hydro Nuclear? Who is really going to want it? At what price?
Yesterday in Ottawa we were told by the federal regulator some rather interesting observations about what they would expect. A market test is going to be downstream costs for decommissioning and waste management. Those costs are going to be substantial. They are real. They are going to have to be met. How do we factor that into a marketplace?
Similarly, the geography of Ontario: If we don't end up with the entire economic activity of this province at or below Highway 7, I wonder and I say quite seriously -- I asked the TransAlta people a question around competitive versus preferential rates and I think I understand exactly what they need to get here to make it work. I understand that and I don't want to injure that possibility. On the other hand, I'm very anxious that a lot of folks out in lower-density parts of the world in this province not get stranded by just their geographic disadvantage and that the economic imperatives of the marketplace really start to militate in favour of Niagara Falls and Sarnia and Toronto and London. God help you if you live in Moose Pasture, Ontario.
It's more an observation than a question, obviously.
The Chair: I think that's exactly what they're thinking, Mr Conway, and they don't want to go near it. Gentlemen, thank you very much for coming before the committee with your advice, which we appreciate, and we will consider your comments.
ELECTRIC UTILITY RESTRUCTURING COMMITTEE
The Chair: Now calling representatives from the Electric Utility Restructuring Committee, please. Good afternoon and welcome. After the large presentations of several people that we've had, you're very brave coming all by yourself now.
Ms Nancy Hutton: I am all by myself, you're right.
Mrs Johns: That's because she's from London.
The Chair: We're anxious to hear what you have to say. Please introduce yourself for the Hansard record and begin.
Mr Conway: Adam Beck came from London, remember that.
The Chair: Don't let that scare you.
Ms Hutton: My name is Nancy Hutton and I'm the sales and marketing manager for London Hydro. Today I'm here representing a group of utilities that are commonly known as the Electric Utility Restructuring Committee. Our members consist of a number of utilities, namely, St Thomas PUC, Ingersoll PUC, Woodstock PUC, North Bay Hydro, Tillsonburg PUC, Strathroy PUC, Stratford PUC, Sarnia Hydro and London Hydro. This committee of utilities has been reviewing Bill 35 since it was introduced in June of this year.
I am happy to advise you that our Electric Utility Restructuring Committee is pleased with the legislation and feels that its objectives of job creation and the protection of consumers by the provision of low-cost energy through competition are supported by all of our members.
I realize that today you have had a long day and have heard a lot of presentations so I will get right to the point of my presentation. We feel that although the legislation is good, we have a few suggestions that will make Bill 35 even better. The three main points that I wish to discuss today are the need for a level playing field, market power in generation and operational concerns.
Each of the points that I have mentioned has several subpoints. However, in light of time and fairness to those presenters who are to follow, I will leave you with the written presentation today that will address the other information and I will just touch on one of the issues in each of these areas.
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Under level playing field, we feel that the retail affiliates of distribution companies owned by the MEUs should have the same flexibility to operate in the market as their competitors. Bill 35 restricts the business of municipally owned distribution affiliates to electricity-related activities. Other retailers may respond to customer demands by providing any services that customers require. Municipal distribution affiliates must be able to meet the demands of their customers and should not be required to obtain regulatory clearance to do so.
Moving into a competitive environment, our goal is to set up retail affiliates that are market-driven organizations, and in order to do that, it doesn't seem fair that we would have to go before the board and reveal our strategic plans as to business opportunities we want to undertake. I realize that some of the reasoning behind that may be due to the risk to the end consumer because they're municipally owned, but we feel that right now the commission, and soon to be the board of directors that would govern these companies, should be ultimately responsible for due diligence that would be required to be performed before embarking on any new business adventure. What we're asking is that in order to ensure there is a level playing field, the restrictions that are addressed in Bill 35 be removed.
Under market power in generation, Genco's market share in Ontario generation makes it crucial that alternative sources of electricity be available from outside Ontario. Bill 35 allows the board to effectively prevent the importation of electricity based upon whether the foreign jurisdictions allow access of Ontario-based electricity. Ontario purchasers should not have their opportunity to import electricity adversely affected through the energy board's licensing authority.
Everyone's goal here is to ensure that there are better prices for all end consumers, and we feel that the only way that can happen is to ensure there is competition and that it is indeed true competition and that we allow foreign generation into Ontario's market.
The third issue is an operational concern, dealing with the default supply option. The unpaid rates under the default supply option should continue to be subject to statutory collection remedies under the Public Utilities Act. The default supply option is effectively a public utility service which distributors must provide. The cost of providing that service will be averaged across customers and should not be increased by increasing the cost of collecting unpaid rates. Bill 35 increases the collection costs for unpaid rates by removing the statutory collection remedies under the Public Utilities Act.
We agree that on the competitive side it should be removed on the affiliates and that it be fair competition. But on the distributors' side, if we're required to look after the default supply customers, then we should be able to use the same methods of collecting unpaid debts from those customers.
In summary, I would like to assure the members of this committee that you have introduced good legislation and that we are anxious to see the legislation passed. Contrary to some of the opinions out there, most municipal utilities are very anxious to welcome competition in the electric market and are looking forward to the challenges.
We hope that the issues we brought forward are helpful and that we've expressed the concerns of our group of utilities. We feel that it's an important legislative initiative and we are grateful to have had the opportunity for some input.
The Chair: Thank you very much. We have eight minutes for questions from each caucus. We'll begin with the government caucus.
Mrs Johns: I'd like to explore some of the issues you've brought forward that we haven't really heard about before. You talked about the municipal electric utility being the default supplier and that you feel that your protections under the act do not protect you from bad clients or someone not paying their bill, I assume. What is it that you would like to see in there, a shorter period of time or a lien on the property? What is it that you really want to have that you could deal with?
Ms Hutton: The lien on the property is exactly what we're looking for. That's the avenue we take now in order to collect on outstanding debts. We would like to continue to be able to do that on the distribution side.
Mrs Johns: I don't know if you can answer this question, but from London Hydro's perspective -- how many customers do you have?
Ms Hutton: There are 130,000.
Mrs Johns: There are 130,000 households?
Ms Hutton: Yes.
Mrs Johns: How many liens on property would you put on in a year?
Ms Hutton: Our bad debt expense is probably in the neighbourhood of $800,000, and I would say that 30% to 40% of that would be tax rolls.
Mrs Johns: Regarding the alliance that you mentioned at the beginning of your presentation, you're starting to talk with a large number of people. I missed all of the groups, but it seemed to be southwestern Ontario, missing of course my great home community of Huron county. Can you tell me, does Bill 35 allow you the opportunity to be able to amalgamate and to do the things that you want to do in your united presence?
Ms Hutton: It does, although the boundaries don't make it possible to amalgamate within the group that we're working with. As far as rationalization of the municipal utilities is concerned, I would suggest that probably the most appropriate approach would be to follow the new boundaries of the school boards.
Mrs Johns: I'm sorry, are you saying that there's a boundary that should be the same for all issues? I guess I'm confused. What do you mean by that?
Ms Hutton: There's been a lot of talk about a reduction in the number of municipal utilities within Ontario, and we know that the legislation certainly encourages amalgamation. What I'm saying is that we probably need a kick-start, that it's not going to happen on its own. We need some kind of guidelines as to where the amalgamations should happen.
Mrs Johns: Are you looking for the government to tell you where those lines should be? Is that what you're suggesting to me today?
Ms Hutton: Yes, I am.
Mrs Johns: Isn't that interesting.
My last question is with respect to the market share in Genco. You suggested that we really need to bring power in from the US. Of course, being in the electricity industry already, you would know that we have very limited capacity to bring it in. I think our lines only allow us to bring in 15% to 18% of the power that's required in Ontario through that process, and we're pretty much doing that right now. On any given day we're pretty much up to our maximum, especially for this hot summer we've had. There's not very much more capacity to explore on that side. We believe we have to introduce competition within the province, and that's why you heard TransAlta, Great Lakes Power and Northland Power speak about the opportunities within the province. Do you believe there's some way we could bring more power in from the States or from Quebec or Manitoba than we are at present, or does London Hydro believe that?
Ms Hutton: I think the group of utilities believes that. With my technical background, I wouldn't be able to answer as to how they would do it, whether it's increasing the interconnects or whatever. But if Ontario Hydro has a majority of the market power, market share, it's not very likely that we're going to get true competition in the first few years, and that's truly what we're looking for.
Mrs Johns: I can't remember the number, and maybe Mr Conway or Mr Galt will help me, but I remember in the select committee the dollar value they talked about for stringing a mile of wire was something that I don't think the layperson can imagine, the costs were so prohibitive. I don't know if someone could do that more reasonably, but it certainly was very expensive. We've always moved with the thought process that we're going to have to generate most of our power from inside this island we call Ontario.
Mr Conway: Thank you very much, Ms Hutton. I almost want to say Deborah, but it's Nancy.
Mrs Johns: You get smoother by the moment.
Mr Conway: You are involved with London Hydro and you're in the sales and marketing office, so I take it you're sort of out there talking to customers and looking at market activity, front line, right?
Ms Hutton: That's correct, yes.
Mr Conway: I'm very interested to know what you're seeing and hearing and experiencing from Ontario Hydro retail these days on the ground in the London area of southwestern Ontario.
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Ms Hutton: From the customers?
Mr Conway: No. What's Servco up to in the marketplace these days? Anything unusual?
Laughter.
Mr Conway: It's a very serious question. You're in the market and I keep hearing some very interesting things. In fact, I meant -- well, answer that question first. How long have you been at London Hydro?
Ms Hutton: I've been there 12 years.
Mr Conway: So you've got some good experience. With that experience in mind, is Servco, the Ontario Hydro retailer, more or less active and/or aggressive than --
Ms Hutton: They're very aggressive right now.
Mr Conway: More aggressive these days than, say, two or three years ago?
Ms Hutton: Definitely.
Mr Conway: Can you give us a few examples of their aggressive behaviour in the marketplace?
Ms Hutton: They've approached some of the larger customers prior to the bill coming out, looking to have customers sign contracts with them, now realizing that those contracts will be null and void.
Mr Conway: I've heard they've actually approached some of the smaller utilities directly and said, "Listen, would you be interested in selling to us?" Have you heard those stories as well?
Ms Hutton: I've heard those stories. They haven't approached us but I have heard the stories.
Mr Conway: Any other examples of Servco's new-found enthusiasm in the marketplace of southwestern Ontario?
Ms Hutton: I don't have any specific examples, other than just generally. They've been approaching a lot of our customers and customers in the surrounding area.
Mr Conway: The reason I ask the question is that last week we had the new president of Hydro, Mr Osborne, quite a formidable presence, tell us that it is the corporate strategy of the new management at Hydro to grow the retail company. I just wanted to confirm that is the sense on the ground, at least in the London area.
Ms Hutton: Definitely. It will be our main competitor. That's the way we see it. We will be their main competitor.
Mr Conway: Just on that, because I've never been out actually selling electricity, or much else actually --
Mrs Johns: Selling every day.
Mr Conway: It's amazing how far I've gotten in this world. I used to be able to say it was all pensionable service.
What kind of instruments, what kind of sales tactics is Servco applying in the marketplace these days that might appeal to some of your customers that you mightn't be able to match, or are there any?
Ms Hutton: That we might not be able to match?
Mr Conway: Yes.
Ms Hutton: Price is one.
Mr Conway: Is that the big one?
Ms Hutton: Definitely.
Mr Conway: That's very interesting. The customers they've been approaching, they're the large customers?
Ms Hutton: That's correct.
Mr Conway: Another area I just wanted to touch on briefly, it seems to me that all of the literature I've seen about this new electricity business is that we're going to have to have a fairly aggressive campaign to reasonably educate consumers. Have you got any advice for the committee on consumer education and what should be done and by whom it should be done?
Ms Hutton: I think it should be done by the electricity suppliers, whether it be the affiliates or the distribution companies. I think we need to start relatively soon to ensure that the customers understand what deregulation is and what it means to them. It ended up being a real mess on the gas side. Customers still haven't made a choice because they don't understand the issue that's before them and they don't understand what their choices are.
The real problem we have in London is the power brokers who are out there, knocking door to door. I can give you an example of what's happened in London. We just gave back to our customers a surplus of operating capital of $15 million from 1996. The power brokers approached our customers door to door, telling them that they wouldn't get their rebate unless they'd signed a contract to buy power from them.
Those are the types of activities that are going on right now with our customers, causing a lot of confusion. They seem to focus on a lot of the elderly who are really confused and don't know what they're signing. They seem to misrepresent themselves, to represent themselves as a local utility in order to get people to sign the contracts.
Mr Conway: Just on that, because the poor old brokers, as a group, have gotten a bit of a bad rap. I think we've heard in this committee several witnesses say there have been problems. I know I've certainly had some in my part of eastern Ontario. I can't imagine that they're all bad, but some of the behaviour seems to be quite extraordinarily bad.
Ms Hutton: We get daily complaints from customers because they feel they've been bullied into signing something. Sometimes they are left with a contract so they can read it over and have a better idea of what they've signed. A lot of times, they're not left with a contract. They've signed something and the representative goes away and they're not really sure what they have signed. They're confused whether they signed something with us or someone else.
Mr Conway: Is the problem almost always with residential customers or do you have some experience that would suggest that some smaller commercial customers also have some problems with the brokers?
Ms Hutton: Some commercial, mostly residential.
Mr Conway: And what you're seeing in the early going in the electricity market is that the electricity brokers are up to at least as many bad tricks as the gas marketers were.
Ms Hutton: Certainly. Yes, if not more, and they're offering them something -- they really don't know what price they can offer the customer when we reach deregulation.
Mr Conway: So what do we need to do? The marketplace assumes a certain basic literacy, so caveat emptor, I suppose, is one part of the policy, but surely other things have to happen. What? Consumer education? Is there any sense that really bad players get penalized for truly bad behaviour?
Ms Hutton: I think that all the contracts need to be set aside day one and everybody starts fresh. You're talking about a level playing field. That's the only way we're going to get it, if everyone starts from scratch on day one.
Mr Conway: Thank you, Ms Hutton, and good luck.
Ms Hutton: You're welcome. Thank you.
Mr Lessard: I was curious as to why the utility restructuring group was established, how the membership got together and what the goals of that organization are.
Ms Hutton: The reason it got together, actually I initiated it and called some of the general managers from the area around our utility, as well as some other utilities that I knew. North Bay obviously isn't within our area. I asked if they would be interested in getting together and discussing some of the issues so that we were really on the same wavelength. With there being so many utilities in Ontario, it seemed better. If we were together and going through the changes as a group, we'd be able to make decisions and bring our positions forward in this manner so that we're heard from as one voice.
Mr Lessard: Are your members affiliated with the Municipal Electric Association as well?
Ms Hutton: We certainly are, yes.
Mr Lessard: OK. I hope you're all saying the same thing then. Are you, or are there some areas where you have some differences of opinion?
Ms Hutton: I'm sure, as in anything, there are areas where we have differences, but for the most part I think we're singing the same tune.
Mr Lessard: One of the things that we're concerned about of course are these energy brokers who are going out there and basically selling boxes of smoke to people, because they aren't able to offer anything to people other than some hope that they'll be able to supply them energy at a lower price at some point in the future. They aren't licensed to do that selling right now.
Ms Hutton: That's correct.
Mr Lessard: I guess that if the legislation doesn't say that those contracts are void, we may need to make those changes to the legislation. But the complaints that you've been getting, are people going to have some other damages if the contracts are voided? Have they been having to pay deposits? If the contracts are void, will they still have some obligation or some losses that they have experienced?
Ms Hutton: I know when the gas brokers were out there, there were deposits required. I don't know of any of our customers who have given deposits, but they have signed long-term agreements, in some cases five years.
Mr Lessard: You were mentioning that people don't get their rebates for their gas supply, that somehow they've tried to tie both of those in together.
Ms Hutton: That's right.
Mr Lessard: They may have tried to deny people their benefits under their gas contracts and varied the original contracts with gas brokers somehow. I'd like to have a look at those contracts if anybody has provided those to you.
Ms Hutton: Yes, I have a file a few inches thick. You're welcome to it.
Mr Lessard: Are your members involved in or are you planning on any consumer education programs? Is that an initiative that you're considering?
Ms Hutton: We're already started. We've put some ads in the local newspaper. We've done some spots on television just through the local news station. We've also put some information in our billing inserts. We're trying to keep customers aware. It seems to flare up every once in a while that the media usually approach us for clarification and looking for help for the customers.
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Mr Lessard: Do you think that part of the reason that these energy brokers are out there again is as a result of the introduction of Bill 35?
Ms Hutton: Certainly it is.
Mr Lessard: That really points to one of the downsides of the legislation. I wonder if you can tell us what you see are the benefits to consumers of your member utilities, and in the outlying area as well, as a result of this bill.
Ms Hutton: I think ultimately we're all looking for lower prices and better services for our customers, so on the affiliate side we're looking for competitive services, whatever they might be. I won't reveal any of our plans today, but there are all types of competitive services and products that will be available to the customers through the affiliate company. Competitive rates is what we're looking for. No one really knows in the Ontario Hydro price right now what we're really paying for on the electricity portion of that. I think this will help to solve all of that and prices should be lower.
Mr Lessard: One of the things that you mentioned are the affiliate businesses as well. One of the suggestions we heard this morning was that section 72 of the Ontario Energy Board Act be completely eliminated so that there isn't the requirement of the 50% ownership of the affiliates to be involved in any other activities.
Is that a suggestion that you favour, or do you think there should be some minimums as far as ownership requirements? Should municipal corporations be permitted to be involved in any services without limits, or should the Ontario Energy Board have some jurisdiction in determining which business --
Ms Hutton: I don't think the OEB should have any jurisdiction in saying what businesses we're involved in. What you have to keep in mind with the municipal utilities is, we don't have any seed money to start up new business ventures like the private sector does. The gas company has the money from the shareholders that they're able to invest in developing new products and programs. We don't have that. On day one we don't have that, so we're actually starting from scratch.
What I would suggest is that we're allowed to pursue any business opportunities that we see that would benefit our customers, bearing in mind that under the Business Corporations Act the board of directors governing that affiliate company at that time will be ultimately responsible for ensuring that due diligence is performed before embarking on any new business ventures. They would be held accountable if any of those business ventures fail.
Mr Lessard: You're from London Hydro. Are you considering expanding the jurisdiction of your service beyond your current borders, and if so --
Ms Hutton: Yes, we are.
Mr Lessard: -- do you think there's anything in Bill 35 that's going to be of assistance? Or do you see some hindrance there, either in the bill or with the attitude of Ontario Hydro that you've told us that you've seen some change in recently?
Ms Hutton: I don't think Ontario Hydro will affect it. I think it's more the mindset of the utilities themselves as to where they want to go. Some of them are reluctant to start amalgamations or mergers. That's what I said earlier, that I think we need some guidance as to --
Mr Lessard: So that's the reason you made that suggestion about the boundaries. Thank you.
The Chair: On behalf of the members of the committee, we thank you for coming forward. Mr Boushy welcomed us earlier. All I can say is that with each presentation we are more enlightened. We will leave here energized thanks to presenters like you.
Mrs Johns: On a point of clarification, Madam Chair: I just wanted to draw to the members' attention that in the bill, under section 75 of the Ontario Energy Board Act, we can get rid of or eliminate people who have a licence for a breach of licence. That's in section 75. In section 56 we can withdraw or make sure that people don't get a licence if they don't meet certain criteria. In subsections 25(3) and (4) of the Electricity Act we can void contracts with Ontario Hydro and the municipal electric utilities if they enter into contracts prior to the time that the bill comes into force.
ONTARIO FEDERATION OF AGRICULTURE
The Chair: Now calling representatives from the Ontario Federation of Agriculture. Gentlemen, as representatives of the Ontario Federation of Agriculture, thank you very much for coming before us.
Mr Peter Canning: My name is Peter Canning. I'm executive director for the Ontario Federation of Agriculture.
Mr Darren Hannah: I'm Darren Hannah. I'm a policy analyst for OFA.
Mr Canning: I'd like to thank the standing committee on resources development for the opportunity to speak to this bill. I have provided a written brief that I'd like to be recorded.
The Ontario Federation of Agriculture is the voice of the Ontario farmer. We represent 40,000 farmers and about 30 commodity groups. Ontario agriculture has a lot of really good advantages. We have a very favourable climate, good soils, a very educated and skilled workforce.
It's also interesting that we have 100 million consumers within a day's drive of our area. Ontario agriculture and agrifood contribute about $22.2 billion to the Ontario gross domestic product. We have approximately 672,000 people employed. It's interesting that 24% of Canadian agricultural products are produced here in Ontario.
Why are we concerned about this bill? Electricity is becoming increasingly important in the production of food. In 1996, farmers purchased approximately $149 million of hydro. Electricity now represents a third of all input costs on to the Ontario farm. That's up from a quarter in 1980. The main reason for this is the increased automation on the farm, the increased consumption, increased technology that we now work with.
Given its importance, it follows that the price of electricity is a very important determinant of farm businesses. As the advisory committee on compensation on the Ontario electricity commission stated, "While electricity users have an interest in keeping the rates as low as possible, it is an especially important issue for the agricultural community and large electricity intensive industries that must compete in the global marketplace."
Ontario farmers currently pay the third highest electricity rates in Canada. The focus and the goal of electricity restructuring in Ontario must be on reducing rates for all electricity consumers -- urban and rural.
What we're principally concerned about are three issues: the accessibility, the affordability and the reliability.
In relation to the accessibility, OFA is very happy to see there's a strong obligation to preserve "to serve" provisions that have been included in the legislation. However, we urge that the Ontario Energy Board, when given the power, be vigilant in enforcing its obligation on the "to serve" provisions. Farmers are not to be placed at risk of shortage of supply due to the Ontario Energy Board underestimating the risk of energy shortage in a particular area. We ask that they would err on the side of security of supply.
In regard to affordability, the Ontario Federation of Agriculture believes that, if properly implemented, restructuring can lead to lower electricity rates. But several problems do exist with this current legislation.
The legislation does not entrench the principle of uniform or postage-type transmission pricing to ensure that rural customers are not disadvantaged because of the location. No provision is in place to ensure the maintenance of the rural equity in the existing Ontario Hydro distribution service areas. Local groups wanting to purchase an existing Ontario Hydro distribution area to establish their own municipal electric authority will end up paying again for the local distribution network. The cost, of course, will be passed on to consumers in the form of higher distribution rates. This, we feel, would run counter to the government's goal of reducing the cost of electricity through restructuring.
While we applaud the extension of the rural rate assistance benefits to the municipal electrical customers, OFA believes that the government should ensure through legislation or regulation that those who are currently receiving the rural rate assistance continue to benefit at least as much as they currently benefit under the present program, that those in need of assistance who beforehand have been denied access to the program now be included, and that the 15% rate differential goal be maintained or enhanced.
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If farm and rural customers are in any way disadvantaged in the changes to the transmission pricing, distribution, ownership or rural rate assistance, the Ontario Federation of Agriculture calls upon the government to exercise its powers under clause 80(1)(k) of the Electricity Act to reduce or remove the burden of competitive transition charge from farmers and rural customers to compensate.
Regarding reliability, the Ontario Federation of Agriculture supports the inclusion of provisions that oblige local electricity distributors to act as suppliers of last resort. The Ontario Federation of Agriculture cautions the energy board to be judicious in its use of provisions found in the Electricity Act that can exempt local distributors from their obligations as suppliers of last resort if sufficient competition exists in the local market. As we said before, the energy board should always err on the side of assurance of supply.
In conclusion, from the inception of the restructuring project, OFA has always stated that it is not opposed to competition in the electricity system as long as the interests of farmers are not compromised. Our position has not changed. The OFA believes that the interests of farmers can be accommodated within a competitive electricity system. By introducing the amendments we have proposed and addressing the questions we have raised, the government can ensure that a restructured competitive electricity system acts to enhance the competitiveness of the Ontario agricultural industry, both in the domestic market and foreign markets around the globe.
The Chair: We have six minutes for questions from each caucus. We begin with the Liberal caucus.
Mr Conway: Thank you very much, gentlemen. A very helpful brief. One of the concerns I have, and others here: Dr Galt, Ms Johns and I, to name three, represent a good slice of rural Ontario with lots of farmers. Certainly, your members have been very quick to tell me, and I'm sure others, of their concern about the whole electricity business.
My first question: What assurance or comfort has the OFA been given, if any, by the Ministry of Agriculture and Food and/or Energy about the postage stamp transmission principle?
Mr Hannah: I put the question at the technical briefing that was held concurrently with the release of the first draft of the legislation to officials at the time, and they publicly gave assurance that postage stamp or uniform pricing would be the method adopted. Beyond that, the topic hasn't been raised since.
Mr Conway: So you were given some assurance by officials at that technical briefing that there was a commitment to postage stamp transmission prices.
Mr Hannah: Yes. If memory serves, I asked, "Will you be using postage stamp transmission pricing?" and the response was, "That is the intent." That seems to be clear to me.
Mr Conway: I'm sure Ms Johns will correct me if I'm wrong, but that is the operating assumption of the committee. There's no indication that there's any policy to the contrary.
Mrs Johns: No.
Mr Conway: Another area -- again, I'm from eastern Ontario.
Mr Hannah: So am I.
Mr Conway: Where about?
Mr Hannah: Madoc, right on Highway 7.
Mr Conway: I was there last night. It looked like a very contented place at about 7 o'clock.
At any rate, the question about service: A lot of the people who were through the ice storm -- but not just the ice storm; I guess the ice storm sort of brought it to a head. There's a growing frustration in my part of the province that the old days of good customer service from Ontario Hydro seem to have been substantially reduced. Do you hear much from your constituents at the OFA as to their general level of happiness or displeasure with customer service from Ontario Hydro retail?
Mr Canning: From our perspective the people in the eastern ice storm had nothing but praise for the service of Ontario Hydro. We have no complaints with the current service, no.
Mr Conway: No complaints at all?
Mr Canning: Not at this stage.
Mr Conway: That's good. That's quite encouraging because I certainly must represent the many -- no complaints at all about --
Mrs Johns: Take yes for an answer.
Mr Conway: I'll be going to the OFA meeting at home and I'm going to want to report this.
Mr Gilchrist: You're bullying the witnesses.
Mr Conway: A very good point. But you don't hear any complaints even about the call centre at Markham?
Mr Canning: In relation to the ice storm --
Mr Conway: I'm not just talking about the ice storm; I'm talking about general customer service from Ontario Hydro retail.
Mr Canning: As a general rule, no, we do not have many complaints against them.
Mr Conway: I appreciate that; that's fine. That's a good answer and I'm happy to have it. Listen, we've got a big investment in public power. I'm not here to crap all over it. I hear some bitter complaints from people about the bloody number, but I'm not talking to 10 million people in Ontario. I'm prepared to get a direct answer that I may not necessarily like but I have to respect.
The rural rate assistance: What kinds of assurances have you been given at technical briefings as to where that's likely going to come to rest?
Mr Hannah: The assurances we've been given to date have principally come from the legislation itself and the notes attached therewith. We're still waiting to find out more, to be honest. That's why we've made it such a significant issue, because it is so vague right now.
Mr Conway: You've raised a number of issues in the brief. In terms of remedies, the difficulty I had is that I had a brief and you were reading from a text and they were not the same thing. It was problematic. Any specific advice as to how we might reasonably remedy some of the imprecision or some of the concern?
Mr Hannah: Which part of the imprecision are you talking about?
Mr Conway: I thought I heard you say something about vagueness.
Mr Hannah: Yes, with respect to rural and remote. In the legislation they talk about providing assistance to people who live in rural and remote areas. What does that mean? Define that for me. It's not at all clear.
Mrs Johns: I think that's the grandfathering clause, 78(2), he's talking about.
Mr Conway: Good. I appreciate that. Those are my questions. I appreciate the brief.
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Mr Galt: Thank you for the interesting presentation. I have a few questions more on what you didn't say -- I'm a little surprised on some of it -- than what you really did say in the brief. The first one relates to ozone and the levels coming across the lake and the damage to crops. The levels that we're seeing the highest, at Long Point, Grand Bend, Teeswater, are ozone plus some particulate; we have smog. We're hearing from a lot of environmentalists how much crop damage is done because of ozone. Of course, if we get these big fossil fuel plants generating electricity out of the Ohio Valley and out of Ontario, we can get a lot of NOx, nitrous oxide, coming from them, the precursors of ozone. How much damage do you think occurs to Ontario crops because of ozone?
Mr Hannah: I have absolutely no idea. I don't have the technical background to answer that question for you; I'm sorry.
Mr Galt: It's interesting because I keep hearing, as the parliamentary assistant for the Ministry of the Environment, about the millions and millions of dollars of crop damage that's being done. If it's millions and millions, causing that much harm to agriculture, I'm sure you would be aware of it, so it's interesting, refreshing, that you're not aware. I think not knowing tells me an awful lot, that maybe it isn't all that great.
Mr Canning: I think it's interesting that this year we can't tell how much damage is from the environment because of the fact that we have no rainfall so the crops are not growing anyway.
Mr Galt: It's far more significant than the ozone.
Mr Hannah: If the Ministry of the Environment can do something about the rain.
Mr Galt: That's a federal responsibility. I don't know if you were here for the first presentation this morning. I have a little feeling that everyone, besides the committee members, should have to be here for the whole day's hearings and serve a little bit of purgatory. Since you missed it, it relates to, and you mentioned, the rural rate assistance. The presentation this morning -- if I can quickly find it; I can't seem to lay my hands on it -- had to do with they felt that for the stranded debt, rather than it being put on as an added bit on each kilowatt that was down the wire, each resident or each customer be charged for that as a block.
I protested it because of knowing what came to my office a year and a half or two and a half years ago when Ontario Hydro upped the rates for service something like $40. My phone was just ringing off the wall because the farmers were upset that their second barn with a few light bulbs or a pump someplace -- it was West Lambton and the recommendation that they were making said, "That the collection of the stranded debt be assigned in such a way as it becomes a fixed monthly charge per customer class, as opposed to a consumption charge per kilowatt hour that will act to stifle growth." Do you have any comments on that?
Mr Hannah: It's not something we've officially addressed in any manner. I'd be curious to see how it would work out. I don't know offhand. I recognize, though, that certainly in some instances where you have a farmer who has multiple services, I don't think he or she would be all that enamoured with the idea of paying a fixed charge on a service that's only in operation for two months of the year.
Mr Galt: My last question: Environmentalists are pushing wind and solar, understandably, also biomass. I haven't had them describe what they really mean in biomass as yet, but it would be products that would be produced on the farm to create steam one way or another, whether through fermentation to alcohol or whatever. How much biomass could be created in Ontario to create electricity?
Mr Canning: A lot of our farmers are interested in cogeneration issues with methane plants and all sorts of wind and solar set-ups. We have the land base. There are farmers who are very interested in looking at this avenue. Once we get more details of how we can fit into this mould, I think you will find a lot more farmers will take up that issue.
Mr Galt: Solar farming. I turn to Mrs Johns.
Mrs Johns: I just have one question for you. I'm looking at your brief and I don't know if you touched on this. I'm looking at section 4.3 on page 8. You're talking about easements and rights of way. I'm on the fifth line of 4.3, "A number of farmers have easement/right-of-way agreements with Ontario Hydro and the status of those agreements must be clarified in the transfer process." Can you tell us what you'd like to see from a clarification standpoint. Do you want the same kind of agreement you have now? Do you want something different as a result of Bill 35?
Mr Hannah: Farmers are in the business of farming, not in the business of drafting agreements. To the extent that you can maintain what's in existence and just roll it over, I think they'd be just as happy. Every day you spend negotiating agreements is a day you spend away from doing what it is you're doing to earn your living.
Mr Canning: What we're trying to say is, if we're transferring to a municipal electric utility, we'd like the signed agreements that are already in place with Hydro to exist with the new utility.
Mrs Johns: It becomes obvious that we're looking to the Ontario Federation of Agriculture to ensure that section 78 and the Ontario Energy Act is appropriate. If we have any more comments I'm certain the committee would like to see any analysis of section 78 that you have, which is the rural rate assistance.
Mr Canning: We'd be glad to help.
The Chair: Gentlemen, thank you very much for bringing the farmers' perspective before the committee today. We very much appreciate -- oh, sorry,Wayne. You were out for a moment. Did you have questions before we break from this group?
Mr Lessard: Just one question and comment with respect to the costs to transfer assets of Ontario Hydro to local utilities. We've heard this raised as a concern a number of times in other areas, but you give a very real example as to what might happen if the transfer of those assets is at market value and not at book value, as far as the impact that may have on the farm community, on rural consumers. That is a point that's well taken.
I wasn't here to listen to all the questioning. Mr Gilchrist isn't here. He usually raises this issue in his debates with the presenters. I don't know if you have any further comment with respect to that or whether it was raised while I was out, but it is well taken.
Mr Hannah: I think our comments are put about as succinctly as we can within the brief itself. It's an issue we believe to be of concern and we believe must be addressed in this province.
The Chair: We appreciate you talking the time to come to Sarnia this afternoon.
SARNIA LAMBTON CHAMBER OF COMMERCE
The Chair: Let's call representatives of the chamber of commerce. Good afternoon. Welcome to the committee. For those of us who were able to attend your luncheon, thank you for your hospitality today at noon. We much appreciated it.
Mr Michael Van Pelt: I'm Michael Van Pelt. I'm the general manager of the Sarnia Lambton Chamber of Commerce. Lyall Snively is a member of our energy committee and a site manager for Air Products, one of the major industries in our petrochemical complex. Joe Zanyk is an energy consultant. The reality is, he's the father of cogeneration. He's been with Dow for 35 years. I would suggest that few you have met are more knowledgeable than he is in some of these areas.
Thank you very much for the opportunity to allow us to present. We'll try to be brief and to the point. Our thrust is not to get into the minor details of the legislation. We want to take more of an overview, a philosophical approach, and also give you just a quick sense of what this really means for Sarnia-Lambton. Many of our members at the chamber have already presented to this committee during the course of today and dealt with some of the more specific issues. Our analysis is that the chamber saw a lot of consistency in those messages.
We'll deal with some of the broader, but we think critical, issues. You have a presentation in front of you. I will try to move through that as quickly as possible. I know it's been a long day for all of you.
Just a quick look at the table of contents on page 2 to give you a sense of some of the issues we want to deal with: some quick background; the whole issue about competitive prices and how that affects Sarnia-Lambton; some issues surrounding cogeneration issues and then some specific concerns to Bill 35 itself.
With respect to the introduction, a number of key points: The Sarnia Lambton Chamber of Commerce is in support of Bill 35, the Energy Competition Act. There are many principles, but there are two principles we wanted to lay on the floor as being critical to why we support this. Number one is really efficiency. The impact of the legislation, with a few assumptions having to be made, will allow the energy industry to operate with a higher level of efficiency. That's on a much broader basis. Number two, Bill 35 will create a more competitive marketplace, causing real investor confidence and more jobs for Ontario and more jobs for Sarnia-Lambton.
The primary reason for the Sarnia Lambton Chamber of Commerce supporting this legislation is that the success and prosperity of our whole community, not just a single company or single group of companies, is at issue here. If you would evaluate communities all across Ontario, I think Sarnia-Lambton would be very unique in its dependency on the success of this legislation. So if we overstate our excitement or our concern about this piece of legislation moving in the right direction, it's because we're not talking about a specific industry here; we're talking about our community, and the heart rings louder when you're dealing with those kinds of issues.
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Really we have four objectives, on page 4: to show how Bill 35 will protect our industrial base; to indicate how Bill 35 will prompt new industry growth -- we'll do that by example; to illustrate how cogeneration opportunities are a natural for Sarnia-Lambton; and then some specific concerns about the legislation from a broader point of view.
Just a quick note on who we are: We are Sarnia-Lambton's largest business organization. We've been around for a long time, nearly 100 years. We don't plan to go away. Our energy committee is a very solid committee of the chamber, with a tremendous amount of expertise, as you can well imagine looking at the nature of our companies. Furthermore, it's very interesting that many representatives from Sarnia-Lambton not only have a role here at the local chamber but at the Ontario Chamber of Commerce, AMPCO and numerous other lobby and interest organizations that have input to this bill.
Just a quick community profile: I could really shorten this up and say that Sarnia-Lambton is the best municipality in Ontario.
Mrs Johns: Except for Huron.
Mr Van Pelt: We're looking for an argument here, aren't we? Huron's west coast is pretty good too.
We are, interestingly, the largest city on Lake Huron. I say that because most people don't know that and we'll get that changed.
Just a quick community profile for you: Obviously you are familiar with the substantial petrochemical complex we enjoy. I'm sure you're aware of the massive changes it has dealt with in the past number of years and our interest in moving the economy into more diversified environments. It's simply something that has to happen. It will happen and this bill will start that process. I'll get to that later. So that for community background.
A quick background on page 7: This is a little bit disturbing and quite interesting. We tried to make the background as quick as possible so we did it on one single page. In the past, 55% of the Canadian chemical manufacturing industry was located in Ontario. Today, at present, 47% of that industry is now located in Ontario. You can imagine where it's gone. In the future -- I'm not sure if this is exciting or if this is disturbing or what it is -- and this is on a North American basis, of the $55 billion in investment on the table right now, for 1998, less than 1% of that will be in Ontario.
We have a major petrochemical complex here. We have major amounts of capital investment. I'm not sure how we deal with this background. I think the legislation maybe has some answers for that.
Moving to page 8, competitive power prices in Sarnia-Lambton, I've just stated basically that the petrochemical industry will exceed $50 billion in 1998. We have a negligible amount of that.
Two points: To forecast the effect the competitive power process would have on investment conditions is very difficult. I don't think anyone would be able to provide you with a straight answer. All we need, though, is a small percentage change and it could have a very positive effect on the economy. We don't need dramatic change. Especially the companies that we're dealing with, if you look at their controllable cost of operations, which is a very small amount of the total movement of dollars, at first glance that's not important, but at second glance, when you look at the controllable factors, it's a very important issue, and we'll prove that.
If you look at page 9, under what we call power costs determination, this is interesting so I'm just going to read through it. The United States Gulf Coast petrochemical producers are projecting new production electricity costs in the range of 2.5 to 3.0 cents per kilowatt hour. This represents approximately half the amount of the large industrial user rate and one third the Sarnia medium industry rate. A reduction to this level would represent an annual savings to the typical Sarnia petrochemical producer of approximately 10 million to 12 million bucks. It doesn't look like a lot of money, but in a very, very competitive environment, it's a lot of money. Therefore the point is that it's only a small fraction of the total variable cost but it's enough to make it a competitive issue and for us to either lose or win companies to the Gulf or to Alberta etc.
In illustrating what we mean by protecting our industrial base, we thought we could make all kinds of arguments to do that but the best way to do that was simply by an example. Pages 10 and 11 are an example, so could you work with me to try to understand this.
Just a note from the energy white paper to remind ourselves: "Ontario industries now pay considerably higher rates than their competitors in most other Canadian provinces. They have a narrow rate advantage over their US competitors." Not true in the petrochemical industry. Our competitors, both in the Gulf and in Alberta, have better rates than we do now, except for some innovative exceptions here in Sarnia-Lambton which we'll get to.
There's a report that went out from Environment Canada, called Opportunities of Industrial Ecological Parks in Canada -- Case Study: Sarnia-Lambton Industrial Complex, that illustrates this very powerfully.
In the context of the cogeneration alliance, which I know the minister had an opportunity to see today -- that's basically a very innovative joint cogeneration venture between Bayer, Dow and Novacor -- the article stated:
"Novacor Chemical...needed an economical source of steam to make its styrene unit more efficient in a very competitive market. An additional driver for Nova was the fact that rising Ontario Hydro power rates were threatening the styrene unit's competitiveness. Nova could have installed a package gas turbine to generate its own power and steam at a marginally higher cost. Their decision to seek a pooled solution" -- the joint venture -- "was based on a conscious effort to prevent downsizing of other operations in the Sarnia-Lambton complex and to maintain the critical industrial mass in the area to avoid further decreases in competitiveness vis-à-vis the Gulf Coast."
This is a very solid example that if it weren't for the innovation here locally to really skirt an existing environment, ie, the Ontario Hydro environment, we would not have this plant here. We'd be losing. We wouldn't be able to protect our industrial base. That's how far we've gone already, to this point. It's a very powerful example of how we need to protect our industrial base.
The next one is a case study -- if you could just flip to pages 13 and 12; I apologize for this collating challenge at the office, as we call it -- of the H.C. Starck plant. This is to illustrate the potential for new industry. It's the same principle as the joint venture.
In 1995, Bayer subsidiary H.C. Starck decided to build a $50-million plant in North America to manufacture nickel hydroxide and tungsten. Every existing Bayer manufacturing location was considered for this plant. There were four criteria: proximity to large North American market; trained and educated workforce; good existing site infrastructure; low energy cost compared to other Bayer plants. I would like you to know that on the first three we were top-notch no matter what. If you look at the numbers in terms of the North American market, there is just no question where that plant would have been. If you look at the other issues, there's no question. If you go at the fourth one, low energy cost compared to other Bayer plants, there's our challenge, and we met that challenge, or Bayer did, through the joint venture.
Low energy cost was perhaps the most tangible and significant issue in attracting this plant to Sarnia. The achievement of low energy costs in Sarnia is the result of innovative thinking and the development of the Bayer-Dow-Nova energy joint venture. Again, if it weren't for us being innovative in skirting the existing problem we had, which the bill is trying to deal with, I'm not sure we would have H.C. Starck either. So there's two.
Just by example, to prove how critical this is for our community -- you can make strong arguments but the examples hit home a little harder -- the challenge in this case study is this, and we're now going into the future. Bayer plants in the US Gulf Coast area are in the process of constructing projects that will reduce energy costs by 15% to 20%, making them more effective, more attractive than Sarnia. It never ends.
Bayer announced in April 1997 that it intends to spend US$4.6 billion in capital and $4.1 billion in R&D up to the year 2000. The Bayer Sarnia site has the potential to attract a significant portion of that investment but it is competing with other Bayer sites. In the petrochemical industry or complex here, we're not competing against XYZ, a city in Ontario or another company in a city in Ontario; we're competing within our own family of companies. We have numerous multi-sited, multinational companies that are competing within their own families. Timing is an issue here. Technically, we could be losing a plant tomorrow or today or yesterday or a week from now, so critical by example again.
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Now to cogeneration opportunities: Sarnia-Lambton is poised for cogeneration opportunities and investment. It's estimated that we could attract over $1 billion in investment in cogen. As you know, over $500 million has already been identified. We know confidentially that there are other projects in study or about to be on the table that will reach the $1-billion mark.
Just to create a sense of why this is so important for us, we do have the infrastructure. Looking at page 15, Sarnia-Lambton has the infrastructure for cogeneration: ample steam load; ideal industrial cluster of energy and petrochemical companies; substantial supply capability and demand requirements; and affordable feedstock.
We have a cogeneration mentality and mindset. Joe is really a symbol of the fact that we have that mindset. Sarnia-Lambton's advantage from existing cogeneration opportunities is that we have a very successful history of cogeneration, starting, by the way, in 1963. So this is nothing new to Sarnia-Lambton: 1963, first initiative; 1972, next; constant movement since then. So a strong basis for cogeneration here, and we'll make some arguments later for how the government would look at that in terms of potential models.
Another major factor which you've been inundated with from many members who have presented here is the notion of trading public debt for private investment. Again from the white paper: "The Ontario taxpayer guarantees the debt of Ontario Hydro." I'm not sure whether they're going to guarantee the debt of the new companies either, but we're moving in the right direction here.
Very simply, the private sector has a proven track record at producing lower-cost energy. Coupled with a strong private sector investment interest, cogeneration is an ideal alternative. Its benefit to the Ontario consumer, besides lower-cost power, is that it doesn't risk public funds; reduced liability to the Ontario taxpayer. Considering your most recent presenter, it definitely does have significant environmental benefits over fossil fuel.
Moving to page 19, diversifying the Sarnia-Lambton economy, this is what our challenge is. In fact, we are a single-industry economy, or we were a single-industry economy. We're moving away from that very quickly. We've experienced dramatic downsizing adjustments.
Even changes in technology that mean capital investment into the petrochemical sector will not necessarily constitute job creation. In fact, it will often mean the opposite. A couple of weeks ago I went to a plant with a $30,000 expansion and it will save them 10 jobs. So it's interesting; you have a $30,000 expansion at XYZ company and you think the jobs are going to come along, but they don't. The mindset is to make sure we look at that from a positive point of view, not a negative point of view. Our companies need to be at the forefront of technological advantage.
Moving finally to concerns and recommendations, some of these we will give lightly.
The Sarnia-Lambton Chamber of Commerce supports the suggestion of the Market Design Committee regarding breaking the generation company, Genco, into smaller units. Our concern here is not as strong as that concern, but it needs to be stated.
The chamber further recommends serious consideration by the government to allow private sector ownership of the assets of the generation company. We know there are various ways of doing that. We know you've already been presented with various options for doing that. We're not going to make recommendations on what those options should look like. Let's get the legislation through and let's get this inquiry moving immediately upon the bill being passed. We know you can't accomplish everything all at once. We're understanding of that.
The chamber of commerce is very concerned that with a single public generation company and a single shareholder, namely, the province of Ontario, the government will have a strong incentive to maintain Genco market share control to increase its revenues. Please do not interpret that as a lack of confidence in governments, but in difficult financial times it's very interesting how innovative we can be to try and bring revenues into government coffers. We'll leave it at that.
What is not in Bill 35 is probably of more concern than the bill itself. The chamber is concerned that the devil is in the details -- and probably everyone has said that to you -- details not yet known. In fact, the philosophical intent of the legislation as noted in the white paper can be completely undermined by what is not in the bill.
The level of debt attributed to new companies will be a determining factor to how competitive they will be in the private sector. If the level is improperly determined, it will undermine private sector willingness to invest in an anti-competitive environment, again a very popular concern by my reading of some of the reports you have seen.
Quite frankly, we are concerned that the process to establish stranded debt, if there is any, will receive political interference.
Next, establishing unfavourable distribution costs, ie, the whole wheeling charges issue, will put the private sector at a competitive disadvantage to OEGC and OESC.
This one probably is the most critical one: Timing issues surrounding regulatory issues not in the bill could undermine present initiatives for expansion. Quite frankly, companies won't wait forever, and they need to know hard facts if they are going to make decisions. You can't make decisions without wheeling charges being known and you can't make decisions without some indication on the stranded debt. Especially in Sarnia-Lambton, where we are dealing with families of companies that are every single day looking at whether they can bring a plant in or not, timing is a very important issue. We urge you to move the process, and Minister Wilson indicates that he intends to do that -- anything to move this process quickly.
Finally, a specific concern to our community: The chamber is very concerned about Ontario Hydro's dealing with the Moore township public utility. You have already had that presentation. Our concern is their concern in this case. However, the timing of Hydro's change of direction on the purchase price of the infrastructure is suggestive of Ontario Hydro's manipulation of industry adjustments caused by Bill 35. This action must end. We say that cautiously. That's not an accusation, but one might be prompted to think that when they look at this situation.
Madam Chair and members of the committee, thank you so much for allowing us to make this presentation. It is a presentation on behalf of the 750 members of the Sarnia-Lambton Chamber of Commerce. Thanks for your consideration.
The Chair: We have five minutes for questions from each caucus. We begin with Mr Lessard.
Mr Lessard: I'm interested in knowing what your concerns are about the establishment of the stranded debt, especially as it relates to the possibility of political interference.
Mr Van Pelt: You saw how we wrote that. We wrote that very carefully. You can try to push us to make a strong comment on that and it won't come. We all know the realities. If you owned Ontario Hydro right now and had to be ready by the year 2000, you would be using all the efforts and knowledge and influence you have to put yourself in the best economic position ready for 2000. All we're saying is that we want to make sure that this is dealt with with complete fairness and there is no political push to weigh strength one way or the other.
Mr Conway: Helen, defend yourself.
Mrs Johns: I don't need a defence; this bill is defence enough.
Mr Lessard: Ultimately you recognize that this is going to be a political decision and that the government has the real interest, the financial interest, one that I'm sure they will take into consideration when that amount is picked.
One of the things that I've been suggesting is that perhaps we should have somebody involved in the process other than the Minister of Finance. Perhaps the Ontario Energy Board should have some responsibility to look at the process and determine the amount. If there is a transparent process and those who are stakeholders have an opportunity to participate -- in the end, we were told yesterday by Dr Bryne Purchase, who has done a lot of work on the process to determine the stranded debt, that whatever number we pick it's going to be wrong. At least, if it's going to be wrong, we should have the comfort of knowing that we have all participated in it.
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Mr Van Pelt: I think just the reality of acknowledging that this challenge exists is probably the most powerful step to make sure that it doesn't. From the point of view of business, we elect people to the Ontario Legislature and that's part of their job. Also, we would suggest to take that challenge and make sure it's part of the marketplace of ideas in this decision-making process, but we're not going to be pushed to the point where we're going to bring that any further. Being said is the most powerful way of solving a problem.
Mr Lessard: You have also indicated -- at least this was in the slides that you provided -- that you need some indication whether in fact there will be lower energy costs. My suspicion is that in the short term there may very well not be lower energy costs, and even if there are, in the long term it's possible that not all consumers will benefit, that perhaps large consumers whose interests you have talked about here this afternoon will be able to benefit from lower rates, but a whole lot of other people won't. To protect them, we have asked that there be some guarantee in the bill that there be lower prices. I don't think the government is going to do that, but I wonder if that's the sort of indication that you might like to see.
Mr Van Pelt: Let's let the marketplace work. Who knows? That means the prices can go up or they can go down. But I would suggest that from the point of view of the chamber of commerce we're very confident of the marketplace. I think more the concern is to make sure that the marketplace will be able to act as it should. That issue reverts more to a timing issue. We know it's going to take time to deal with the fallout with regard to pricing. However, I guess the background to that is that the faster we can get to that, the more ability companies, our members, have to make decisions, the quicker they will be able to make decisions for investment, which is good news for us. I think that's where the motivation is to the point you made there.
Mr Boushy: I just want to say that I think members of this committee from both sides would remember the lobby I made in regard to Bill 31. Bill 31 is labour law, and basically what it does is give the opportunity to lower the cost of construction in Sarnia and Ontario. My question to you is, is there anything in Bill 35, is there an implication -- because we have counted on Bill 31, the labour law, to bring industries and opportunities and jobs to this area in Ontario -- to hinder that effort or, in your opinion, does Bill 35 complement Bill 31 and bring more investment to this area as well as Ontario? How does it complement, if you think it does complement?
Mr Van Pelt: You can fight to get into the details and find some problem, possibly on the labour issue side of it or the human resources side of it, but philosophically these are two complementary pieces of legislation.
Mr Boushy, you know that it's going to take a lot more than that to make changes for the better in Sarnia-Lambton, but these two pieces of legislation are critical, especially for our petrochemical industry to be able to grow and diversify. We don't see contradictions in that legislation. Let's just get the job done.
Mr Boushy: Just from a selfish point of view -- I'm talking as a member from this area -- you and I know the industries are thinking of coming to this area, as well as Ontario, regarding Bill 31. Do you know of any more companies that would come that I'm not aware of? Can you predict any more growth?
Mr Van Pelt: -- a $1-billion investment. You might be more aware than I, but there are some that we know exist you simply can't put out into public discussion. The concern is if you take both pieces of legislation, philosophically they're going in the right direction, but even the labour bill, and this bill is no different -- it's in the details. Let's see, on the labour side, how the project agreements get negotiated. If they don't get negotiated effectively, we're in a tough spot. The same with this piece of legislation. If we don't get good, solid indication on the stranded debt issue, or if the new Ontario Hydro companies don't have appropriate debt, they'll create an anti-competitive environment. What's it all mean anyhow? It is in the details. But philosophically, this is good news on both fronts.
Mrs Johns: Can you tell us how long Sarnia-Lambton has felt that there need to be changes in the electricity structure in Ontario and how long you've been making your views known to political people?
Mr Van Pelt: I'll defer that one to Joe.
Mr Joe Zanyk: Would you mind repeating the question?
Mrs Johns: I guess my question was that I'm sure that this change you felt you needed -- I've been provoked, I have to say that. You've been asking for this change for quite a while. I would assume that all through the 1990-95 time, when the NDP were in power, you were asking for changes to be made in this bill and they didn't come. Is that correct?
Mr Zanyk: That's right.
Mrs Johns: So from that standpoint, when the opposition says things like they do here, they could have done something to move this bill forward and basically chose to ignore your requests.
Mr Zanyk: That's correct, and even going longer than that.
Mrs Johns: Oh, 10 years. The 10 last years.
Mr Zanyk: There's been a need. This is something that I believe a lot of people don't understand. Recently, the word "cogeneration" has been very bantered around. When I was first involved with it, we called it "saving money." It has to be recognized, though, that there's a limited amount of capability of cogeneration. That is making electric energy and heat energy, steam, and supplying that to the industry's needs.
Sarnia has a great opportunity for that, because of the petrochemical industry. The attitude of Ontario Hydro has restricted that type of expansion, even to the point that where the industry had made changes and had surplus energy to sell to Ontario Hydro or to sell among themselves, they were restricted, causing the industry to cut back and shut down some of this cogeneration capability, which hurts the whole province.
Considering one key factor that I mentioned to Mike earlier, which is that Ontario does not have a great, vast resource of hydrocarbon energy like Alberta, or Ohio in coal, we have to import all that. In the form of not using that energy efficiently, we as a province suffer by paying other people a profit to bring in their energy to our province. By having cogeneration we could improve our efficiency, save that effort and give ourselves better opportunities to be competitive.
I'll go back a little bit in my history with Dow Chemical. In 1970, Dow Chemical felt that because of their chemical business they could not afford to continue to buy electricity from Ontario Hydro and be competitive with their sister companies down on the Gulf Coast. That made a major decision to add to our cogeneration plant at that time, competing against fuel prices where down on the Gulf Coast it was 10 cents a million BTUs for gas, versus natural gas in Sarnia that was 40 cents. However, because it was 10 cents on the Gulf Coast, they were very inefficient. We put together at Dow a cycle efficiency of 83%, which made us competitive.
That brought into Dow at that time an additional chloralkalide plant, which was a multi-million dollar expansion. That plant ran and was, of course, unfortunately shut down because of competition last year. But at that time, 1969-70, my assignment at Dow was to find a way of producing cheaper electric energy and be competitive with the Dow Chemical plants in Louisiana and Texas. The result was a cogeneration plant which was the most efficient one in all of the world at that time. We were very proud of it and we were very successful.
We were also very successful, at that time, because of political pressure to export 50 megawatts of power that was surplus in Sarnia to our sister plant in Michigan. That took a very big fight with Ontario Hydro, and the other utilities -- Detroit Edison and Consumers Power -- to do that, but it showed our ability to generate cheap energy here by our infrastructure. The resources are there. It was just a matter that too many people didn't like that resource and didn't want that competition in their backyard. This is an opportunity, as I see it, to change those laws and change the rules. Sarnia could handle a tremendous boost.
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Mr Phillips: I appreciate the work of the chamber and I appreciate the work of volunteers at the chamber as well.
On the first part of your presentation, it's going to happen, it's a done deal. The bill will pass this fall and the cogeneration will move on.
I want to focus on the last two pages of your presentation, the concerns, because this is huge. We're talking about a debt at Hydro of, I don't know, $30 billion, a stranded debt of somewhere from $15 billion to $20 billion. That's going to impact every business in Ontario, not just the ones in the Sarnia area.
Essentially what we're betting on here, as you point out in your brief, is that Genco, or Hydro's generating company after this, will retain 100% of the generating capacity that it currently has and will pick up an unknown amount of stranded debt. It's a huge issue, because if it's not properly allocated, it's going to have a huge impact. But we're also being told that the reason for Genco to keep all of this is because it is going to be able to sell into the northeast US profitably.
An alternative would have been to say, "Listen, these assets will never be worth more money than the day the bill goes through, because that's the day that all the other competitors start to build their plants." I think it was you who said there is $1 billion worth of investment, much of which we don't know about. I think right across Ontario there are all sorts of companies just waiting to build generating plants. Hydro will have 100% of the capacity and the jewels in its empire will be picked off. The best jewel probably is the petrochemical industry right here. But there will be other jewels across Ontario picked off quickly, leaving Hydro with loss of a lot of its profitable clients, customers, and with a lot of excess capacity.
My question to the chamber is, because you people know this, is the legislation being realistic in assuming that Hydro can sell profitably into the northeast US?
Mr Van Pelt: There are a couple of questions in that. I'll respond to the first one. I don't think you're going to see the Sarnia Lambton Chamber of Commerce make strong statements in terms of the nature of what Genco should look like past the legislation. The legislation is going to go through; we're going to have a Genco. We're saying that consideration and serious inquiry into how that Genco company looks or whether it should be broken up -- that it should be broken up, rather -- has to happen. That consideration and inquiry has to happen immediately.
Mr Phillips: Before the bill is passed?
Mr Van Pelt: No. Let's get the bill passed, OK? If we start playing with those kinds of issues, we might have an election by then. Who would want to see a bill die on the order paper? Let's get this job done. That's what industry is telling us. That's what our members are saying to us: "Get the job done." But immediately let's start dealing with the issue of ownership, public equity or private equity possibly into Genco or Servco. That's as much of a statement as we're going to make on that particular issue.
Mr Conway: Just on that, can I ask, would you sign a commercial or a private residential mortgage on those terms?
Mr Van Pelt: Explain on what terms.
Mr Gilchrist: He has already got the mortgage. You are asking him to refinance.
Mr Conway: My point is that this is a critical question, and it's not easy.
Mr Van Pelt: I'm wondering if it's a hypothetical one, though.
Mr Conway: It's not a hypothetical question and it's not an easy question. There's a bit of mischief in asking it, but we are trustees for the broad public interest. It's a very critical question. I don't profess to have all of the answers. You people are in business. All I know is that if I went to renegotiate a mortgage on my house, let me tell you, I'd make an investment in prayer in terms of young Mike here, who looks like a good guy and is a good banker, but prayer and faith are only going to get me so far. There is a point where I want to see details before I sign, and that's my problem: I'm being asked by a lot of serious, responsible people to kneel down, pray like hell, sign quickly and hope the details work out reasonably. Now, I want to hope for that, truly I want to hope.
The Chair: We have to wrap up.
Mr Van Pelt: That's definitely dramatic. Let me answer your first question. I'd go for a mortgage right now with a line of credit rather than a five-year. I don't know if that answers your question.
The Chair: At that point, we must stop, colleagues. We thank you all for coming before us this afternoon. It has been a very interesting afternoon here in Sarnia. We've really enjoyed our visit here. We thank you all for the input we've received. We are going to adjourn.
Colleagues, there will be taxis waiting in front of the hotel in about six minutes to take us to the airport. We will meet in front of the Legislature tomorrow morning at 8:15 to be picked up for the tour. We'll be adjourned formally until the afternoon session at 1 o'clock.
The committee adjourned at 1636.