Assemblée législative de l'Ontario

ONTARIO HYDRO

CONTENTS

Monday 6 October 1997

Ontario Hydro

Mr William Farlinger

Mr John Fox

Ms Eleanor Clitheroe

SELECT COMMITTEE ON ONTARIO HYDRO NUCLEAR AFFAIRS

Chair / Président

Mr Derwyn Shea (High Park-Swansea PC)

Vice-Chair / Vice-Président

Mr Monte Kwinter (Wilson Heights L)

Mr Sean Conway (Renfrew North / -Nord L)

Mrs Barbara Fisher (Bruce PC)

Mr Doug Galt (Northumberland PC)

Mrs Helen Johns (Huron PC)

Mr Monte Kwinter (Wilson Heights L)

Mr Floyd Laughren (Nickel Belt ND)

Mr John R. O'Toole (Durham East / -Est PC)

Mr Derwyn Shea (High Park-Swansea PC)

Clerk / Greffière

Ms Donna Bryce

Staff / Personnel

Mr Lewis Yeager, research officer, Legislative Research Service

Ms Anne Marzalik, research officer, Legislative Research Service

Also taking part / Autres participants et participantes:

Mr Robert Power, legal counsel

The committee met at 1530 in room 151.

ONTARIO HYDRO

The Chair (Mr Derwyn Shea): The select committee will be in order, please, and we continue with our agenda. You will note we have three witnesses before us today from Ontario Hydro. Let me just go through a couple of pieces of information for the committee that flows from the subcommittee's meeting earlier today, just to remind us of our proceedings to make sure that we can facilitate the work of the committee.

The first is, we have determined that the witnesses will have an opportunity for five minutes each. I welcome you, Mr Farlinger, and I'm pleased that you're here, and Mr Fox and Ms Clitheroe. They'll have a chance to speak for five minutes each, and then we will proceed into questioning by the select committee. We will proceed by caucus because, as we know, members of the House may join us from time to time. That makes it awkward to be quite as easygoing as we were in the past week. We will rotate by caucus, five minutes at a time, and we will keep moving around. The caucuses may wish to focus their questioning upon one witness or another, as the topics lead them, in progression.

Clearly, all of our witnesses will have the opportunity to be invited back. I think this will not be the only time that we may have a chance to chat. For that reason, I want to explain why it is determined by this committee that today we will focus upon what went wrong and why, and I think Mr Farlinger is aware of our intent to move in that direction. Then we will proceed at a later stage in the questioning by the select committee to consider the recovery plan and any other information that may flow from other government papers or papers from any other source.

So for today, I will ask the committee members to keep their questioning, their explorations, very tightly focused. If all the caucuses would give me their cooperation, I would appreciate that, and we'll have a good use of our time today. As I mentioned, we will rotate.

There is information put before members of the committee that you may or may not wish to use from our general counsel and from our consultant that may be of help to you. You may also choose to disregard that, members, and move down areas of your own interest for questioning.

Finally, as the witnesses are asked to proceed into their testimony, I would, for the purpose of Hansard, ask them to do us the courtesy, although they are all well-known in their own rights, of identifying themselves and their positions. Having said that, we will proceed then with the testimony. Mr Farlinger, we are in your hands.

Mr William Farlinger: Mr Chairman, my associates were planning to speak for five minutes. I was planning to speak for 15. If you give me 10, I could probably get through my remarks.

The Chair: I would think the committee would be of a mind to approve that. Agreed? Yes.

Mr Farlinger: Thank you.

The Chair: We are asking to be sure that we are focused in that area.

Mr Farlinger: Yes. I think the last part of what I was going to say is on a little different tack, so we'll leave that for another day, or for the future.

Thank you very much for inviting us here. We appreciate the opportunity of being here today. This committee will examine Ontario Hydro's independent, integrated performance assessment of its nuclear business and its recommendations for improving the performance of nuclear generation. This afternoon I'll try to provide a background on why a brutally honest assessment of Hydro's nuclear business became necessary. Secondly, I'd like to review the facts that formed the basis for the Hydro board's decisions on the nuclear assessment and the recovery program. Finally, I'll review the key features of the plan, including its potential impact on hydro in the province.

I'd like to begin by tracing for the committee the declining nuclear performance and the decisions by the Hydro board to take corrective actions. The board's actions have led to the NAOP.

When I arrived at Hydro in late 1995, and even before that, from my previous work in the industry, the reputation of Hydro Nuclear seemed sound. A trip to the UK I took in 1994 suggested that British nuclear people held Hydro Nuclear in high esteem, but it's clear that Hydro's Nuclear reputation did not match the reality.

Disturbing signs of nuclear decline were already apparent at the time I took over the chairmanship in late 1995. Nuclear plant production was down. In the spring of 1996, all the Pickering units went down at one time. We were in trouble with our regulator, the Atomic Energy Control Board. There were short-term shutdowns, licences to operate at less than full power and shorter licence periods -- six to nine months rather than the normal two years. It was becoming increasingly questionable whether units would be able to return to service on schedule.

In fact, they didn't. Peer evaluations showed a significant decline in the condition of the stations and serious attitude problems among the staff.

The deteriorating availability of the nuclear units prompted the board to voice concerns and management to develop a nuclear excellence program over the spring of 1996. This plan had a small impact but was not dramatic enough to provide assurance that nuclear availability would be restored. Performance targets continued to fall well short of the mark, with capacity factors declining from 73% to 60% over the last four years.

In fact, I remarked on this decline in a number of speeches during the fall of 1996. At the IPPSO conference in October, I said there was a time when the operation of our nuclear facilities was seen to be in the top 10% of nuclear plants in the world. I went on to say, "Now we are clearly in the bottom decile."

The Hydro board's concerns continued into the fall of 1996, and while nuclear performance targets had been clearly identified, the board was becoming seriously concerned that they would not be met. That concern was well communicated to Hydro management. It was clear that past approaches of self-diagnosis and pulling ourselves up by our bootstraps were not doing the job. Hydro needed people changes, serious outside help and a completely revamped approach.

In the fall, our CEO went out and, with the assistance of the Institute of Nuclear Power Operators, INPO, recruited Carl Andognini to select a team of the best nuclear turnaround people in the world. Mr Andognini was given the mandate to identify all that needed to be done to bring our plants up to high world standards of performance. Carl Andognini was appointed chief nuclear officer in January 1997 and his nuclear performance assessment group began their assessment work early in 1997, completing that work and making their final report to the Hydro board in August, following three interim status and progress reports.

They presented to the board the independent, integrated performance assessment on nuclear and a subsequent nuclear asset optimization plan. The first assessed the condition of Hydro's nuclear program; the latter provided a recovery blueprint for this province's considerable investment in nuclear technology.

That's the background leading up to the recovery plan. Let me comment on its reception by the Hydro board. The revelations to the board over time on the deteriorating condition of the nuclear plants were confirmed by the IIPA. The IIPA progress reports over the four previous months had clearly portrayed significant deterioration in the operating conditions of the stations. By August, the board had come to the realization that action had to be taken to begin to arrest this deterioration, but the specific course of recovery actions recommended in NAOP was a difficult pill for the board to swallow.

The fundamental conclusion of the nuclear performance and assessment group was that an attempt to continue operations of all 20 units would continue to degrade long-term safety and performance. Recovery would mean laying up, at least temporarily, seven nuclear units in order to bring the other 12 back to a high level of safety and efficiency.

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NAOP represented a commitment that the board spent considerable time wrestling with. They had to be technically assured that the recovery plan would respond robustly to a range of circumstances and would deliver what it was targeted to do. Mr Andognini was tested on all aspects of the plan and why the plan was not just one preferred option but the necessary one.

After considerable deliberation and considerable time discussing the issues and options with Mr Andognini, the board was satisfied that the recovery plan was the appropriate action to be taken, the responsible thing to do and the only thing to do. I am sure that you will scrutinize the plan and probe Mr Andognini too, and I believe that you too will conclude that the recovery plan is the preferred course of action.

The board decided to take the first steps towards nuclear recovery. Because the NAOP spans several years, there would have to be ongoing future assessment decisions, monitoring of progress, and flexibility to respond to changes of conditions and any new discoveries.

I'll just comment on a few of the major aspects of the plan. Carl Andognini will be meeting with you on Wednesday, and John Fox and Eleanor Clitheroe will speak to you later today on both the supply issues and the financial issues.

Safety is fundamental to the recovery plan. It is true that all of our nuclear units can be operated safely today, but it is tomorrow that concerns us. Minimum acceptability is not good enough to satisfy us and I'm sure not good enough to satisfy most Ontarians. We need strong and sustainable long-term improvement in nuclear operation to give larger margins of safety, and we only have enough employees to really work out 12 units at a time. Safety is the fundamental driver of the decision to lay up seven and recover 12 units over the next two to three years. But safety won't be the only challenge. We need to preserve reliable supply, manage environmental impacts and ensure that the cost of the recovery plan is affordable.

Typically, nuclear stations produce about two thirds of Ontario's electricity needs during a period of low demand, with hydro-electric, non-utility generation and a little bit of fossil making up the balance. At periods of peak demand, nuclear still provides about half the energy, while fossil picks up the rest.

Hydro's high reliance on nuclear-generated electricity means that implementing the recovery plan will also mean a tight supply situation for meeting peak demand over the next two to three years. The loss of a third of our base load nuclear -- that's about 15% of our overall generating capacity -- means that fossil stations, which have usually been used for meeting intermediate and peak periods, will have to be run much harder. We'll have to run our coal units to increase capacity and return the Lennox station to service to burn oil and gas. We believe that we can do so while still meeting environmental regulations with regard to air emissions. Conversions to natural gas and the use of more low-sulphur coal are all options we can use to support our environmental performance.

In addition, we will cut back exports and increase purchases, most of which will have to come from outside the province. Fortunately, Ontario has a robust transmission network and we anticipate that we can rely on that system to best advantage to bring power in from other sources. However, we will need to look at reducing some transmission constraints and beefing up some interconnections, for example, with Quebec. John will be talking about all of that a good deal more.

Eleanor will be talking to you about the financial aspects of this, so I will pass on the remarks I was going to make there.

The bottom line is that we believe we can meet our obligation to provide enough electricity in the province over the next few years of this plan. We won't have the sort of reserves we have had in the past.

Most of the cost that's involved in this program is driven by alternative supply. The additional fossil and the outside purchases are much more expensive than was the case when we could run our nuclear full tilt. That's really the issue that's driving the cost. Laying up seven units to save 12 is the fundamental assumption, and that's what drives most of the cost. I'm sure you will be probing us very hard on whether that is the right decision and you will be probing Mr Andognini and perhaps the rest of us on that issue today and perhaps in the future. That's the fundamental issue that you will want to become satisfied with, that it is necessary to do that.

Mr Chairman, that's the overall situation. Perhaps John could speak to us a little bit now on the supply issue.

The Chair: All right. Mr Fox, if you would just identify yourself for Hansard, please.

Mr John Fox: I am John Fox. I am the executive vice-president of the generation company at Ontario Hydro.

Thank you, Mr Chairman and committee members. Given that your focus is on what went wrong, I will perhaps save a little bit of the five minutes. The chairman has briefly given an overview of what our response plan is to the lower availability of nuclear power. I would like to address it in the near-term issues and the longer-term issues and note, as perhaps an opening comment, that the program we have put in place to ensure ongoing reliable supply to the province is done within the existing emissions guidelines that are in effect and govern our operation at this point, and have been in many ways driven by the need to respect the existing environmental expectations.

In the short term, we have made decisions to take two Lennox oil-fired units out of mothballs and that, combined with the increasing operation of other fossil fleet, we believe will provide adequate energy and capacity to meet the needs between now and the year 2000. As a contingency, we have secured options to purchase on the interconnected market. We are dealing with the independent power providers to see to what extent additional supply may be available within the province. We are in the process of trying to negotiate out of some of the export contracts we have to ensure that power is available for internal use.

We will be increasing our fossil operation by approximately 67 terawatt-hours. This will result in additional coal costs to us of about $2.1 billion over the next five years. Additionally, there's approximately $500 million total associated with the increased needs of operating the existing fossil fleet, and we anticipate a lost contribution of about $500 million from exiting our export contracts.

We recognize that if Pickering A and Bruce A are delayed beyond the scheduled return time, the province will need additional supply. We have identified generically what type of supply that would likely be, which would be gas-fired turbines, either combined cycle or simple cycle. We have not gone beyond the planning process at this time, as how and who would build those units I think will be dictated largely by the outcome of the white paper.

If Ontario Hydro was left with the obligation to serve after industry restructuring, then we have identified a number of sites that we would construct new plant on. If, on the other hand, there is a determination that the marketplace should provide this, then of course I assume there would be a bidding process that would allow anybody in.

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We believe that the program we have put in place in the short term ensures reliable supply. We continue to monitor obviously the performance of the nukes as well as the availability of all options. We have put an RFP out to see if there is additional supply that we are unaware of available to us, either within the province or without that would be available to us on a cost-effective basis. We will be advised by the outcome of the white paper as to what course our contingency planning will follow for the longer term.

The Chair: Mr Fox, before I go to Ms Clitheroe, I will remind us that we are trying to focus on what went wrong. I appreciate the concern of the chairman and of Hydro management to focus on the recovery plan and to get there as quickly as you can. To do it properly, I think this committee really would like me to bring us into focus for today's topic: What went wrong and why. Ms Clitheroe, please, if you would.

Ms Eleanor Clitheroe: In light of that, I'll also be very brief and just give you a summary. My name is Eleanor Clitheroe. I am executive vice-president of Ontario Hydro and the key financial officer. My intention was to give you just a few minutes on the overall impact of the situation on the financial statements of the company.

The analysis work that has been done has been based on the assumptions provided by the nuclear experts and the generation company. The work we've done has looked at a five-year impact, from 1997 to 2001, for net income and capital in a situation where Pickering A and Bruce A stations do return to service and in a situation where they do not return to service. Briefly, and I won't go into any detail here, where Pickering A and Bruce A do return to service, there would be a reduction of net income of $5.5 billion and an increase of capital costs of $1 billion compared to the previously planned levels of the corporation. In this situation, Hydro would in general experience negative income over the five-year period. However, although retained earnings would decline over the five years, they would remain positive over that period.

Where Pickering A and Bruce A do not return to service, the net income is reduced by about $7.6 billion and capital costs increase by about $1.2 billion. In this scenario, Hydro would in general experience negative income over the five-year period, and in addition, net equity becomes negative over the period due to the write-offs of the A stations.

Although the cost of the NAOP plan is significant, it can be financed from internally generated cash flows. The effect of this would be to slow down planned debt reduction. Prior to this situation, we had estimated the debt reduction would be about $7.9 billion over that same five-year period.

In the situation where the A units return to service, the net reduction is estimated to be about $1.6 billion. In a scenario where they do not return to service, the debt reduction is estimated to be about $2 billion rather than the $7.9 billion planned. In the absence of rate increases, the increased cost would result in a net loss over the next five-year period, with the result that Ontario Hydro would not meet its statutory debt retirement at legal requirements.

Under the Power Corporation Act, the Hydro board has a responsibility to set rates on bases which cover costs. These costs are deemed to include the SDR. The SDR is based on a formula in the act. Hydro board can use a rate ruling to accrue future costs and charge them to retained earnings in 1997. This would result in negative retained earnings in 1997 but would allow us to meet SDR requirements. Alternatively, Hydro board could take a rate ruling, which would exclude those costs, year over year. Either of these two approaches may be used, but the board has not made decisions around this yet and that will be coming up in the fall.

I will pause there. I had a few other remarks, but perhaps in light of the committee's focus I'll stop there and move to questions.

The Chair: Thank you, Ms Clitheroe. I appreciate that. Mr Farlinger, a final comment?

Mr Farlinger: Yes. I think I could just say a few things on your particular focus, and I'm sorry we didn't come here today with that as our focused message. The nuclear performance in this company was excellent in its early years, and we were regarded as top of the heap in world circles. The company had a performance percentage of about 85%, you say even higher, John, in the early 1980s. That deteriorated through the 1980s, and by the end of the 1980s it was 73%. In the last seven or eight years it has gone down to where we are, at 60% now, so that's an indication of the amount of time these units are running, and they're down -- basically these units would run full-time. It's our base load, so it's not a question of supply and demand; it's a question of how long you can keep the units running without putting them down. There has been a gradual deterioration over the years, with a little blip up and down a couple of times.

Why is that? The Andognini report will tell you it is management, it's the high-level and medium-level management in these plants that has let the method of operation deteriorate. There has been bad discipline with respect to the workers brought on in part by very, very difficult labour contracts, but that doesn't take the responsibility away from the management. The management have really done a bad job and there has been a bad system of communication from the nuclear company up to senior management in the company and much of what has been going on has not been communicated. We've got reports from the regulator in the last few years of issues that the company has been asked to address and the company doesn't address them. They're outstanding over periods of time, so weak, bad management at all levels in the nuclear units. That would be my capsule comment on what went wrong. It's been going wrong for a long time.

The Chair: Thank you, Mr Farlinger. You came full circle back into the term of reference for the committee and we'll begin by caucus. Is there a point of order you want to raise, Mr Galt?

Mr Doug Galt (Northumberland): No.

The Chair: Fine. I'll begin with the Liberal caucus and I'll move to the NDP caucus. Five minutes for caucus.

Mr Monte Kwinter (Wilson Heights): Thank you for those final remarks, which really hone in on some of our concerns. Mr Farlinger, in your annual report you list all the various responsibilities. You have here that the nuclear review committee and the committee will ensure that Ontario Hydro's nuclear facilities are operated and maintained in a rigorous and vigilant manner and in keeping with the best practices in the international community. The nuclear review committee met five times during 1996, including two site visits to Pickering and one site visit to Bruce. I notice that you're a member of that committee.

Mr Farlinger: Yes sir.

Mr Kwinter: As a result, you should be familiar with what is going on in that particular committee and in the nuclear area as not only the chairman but now the CEO. One of the concerns I have is that on April 16 a letter was sent to the Atomic Energy Control Board by Mr Andognini, executive vice-president and chief nuclear officer, in which he requested a renewal of the licence at Pickering, and not only suggested that 10 years might be okay but certainly five. In it he listed many things that Ontario Nuclear had done, saying that safety and operability are okay and there are qualified and trained personnel and maintenance improvements have been made. That was on April 16.

On April 17, the very next day, a report was tabled, the Independent Integrated Performance Assessment, phase 1, with the board at Hydro. This is their definition: They talk about "minimally acceptable," and in your final report virtually every operation at Ontario Nuclear was "minimally acceptable." It says:

"Performance improvement is required in virtually all attributes. Strong and immediate management involvement and corrective action is required. Nuclear safety margins may be compromised."

This is their own analysis, yet the day before, a request is being made to the regulatory body suggesting that the Pickering facility should be given a five-year license because it meets all of these standards. The next day they talk about all the things they don't do. They say there is inadequate training, there's lack of configuration management, there's inadequate maintenance, all of this in a report that is tabled, all of this that has gone to your board and has been, I assume, approved by the board, and we have this conflict.

My concern, and I assume that many of the citizens of Ontario are concerned, is that we are being asked for, and we are going to be looking at in a very short time frame, a solution to a problem that is being put forward by the people who created the problem and are saying: "Yes, we have done all of these things that are inadequate. We are wanting in the way we run this operation. But having said that, here's how we want to fix it and here's how we want to expend some of our funds."

I'd like to ask you, what kind of confidence level can we, representing the people, have when we see this report? Can you at least explain how one day you're asking for a five-year licence and the next day an internal report says the place is virtually in chaos?

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Mr Farlinger: I'll try and answer the question. First, it might better have been put to Mr Andognini, but you don't have him yet and I'm sure you will put it to him again.

Mr Andognini comes from a background in the United States, where it's normal to give 10-, 20-year or indefinite periods of time on a licence. The regulator can close up a plant any time it wants, but they're not for term periods. By the way, here the regulator can close the plant any time it wants as well.

I think it's a silly debate, sir. I think it was a silly debate for Andognini to get into. It wasn't approved by the board. He simply wrote the letter based on his own experience and wanted a five-year report. So why we're debating that I really don't know.

In our system we get a two-year licence, and we know if we don't get a two-year licence, as we did not in Pickering -- we got a six-month licence, as you know, and then another nine-month licence -- that's a strong message in our culture. I can't respond other than that. That is the discussion I have had with him since he did that, but I can't speak for him any more than that.

The Chair: The NDP caucus.

Mr Floyd Laughren (Nickel Belt): Mr Farlinger, it's my understanding that the Hydro board had a nuclear oversight committee. Is that correct?

Mr Farlinger: It has a nuclear committee, yes.

Mr Laughren: It has a nuclear committee. Perhaps I'm not using the right words. Was Mr Kupcis on that committee?

Mr Farlinger: Dr Kupcis was on all the committees as the CEO, yes.

Mr Laughren: Was that nuclear committee aware of the problems in the nuclear division?

Mr Farlinger: I can only speak to less than the last two years by personal observation, but certainly it was aware that nuclear was in trouble when I arrived and I'm sure for some time before that.

Mr Laughren: So the board was aware of the problems in the nuclear division?

Mr Farlinger: Absolutely. It took many steps to deal with them.

Mr Laughren: I don't want to put words in your mouth. You wouldn't allow me to do that anyway. The board, through Mr Kupcis, then asked Mr Andognini to come in and do an independent assessment. Am I correct?

Mr Farlinger: Correct.

Mr Laughren: It was a board decision to do that.

Mr Farlinger: That was Dr Kupcis's decision. It was endorsed by the board, yes.

Mr Laughren: I wondered what the level of frustration was at the board about their ability to get information about the problems in the nuclear division.

Mr Farlinger: I can assure you the board was pressuring Dr Kupcis to move from the recovery plan he had put in place in September to outside people because we didn't have enough confidence in the people we had.

Mr Laughren: I'm particularly grateful to Mr Kwinter for pursuing his line of questioning because it allows me to be briefer. The interim report to which Mr Kwinter referred came down on April 17. Would it not be normal for the Hydro board to brief its minister on a report like that?

Mr Farlinger: Let me go back a minute. I heard over the weekend that there was quite a fuss about this interim report. I must say I didn't see that report as anything very different from the reports we've been getting every month on nuclear for the past year and a half. I don't see that report as being anything other than a compilation of information we'd been receiving for some time and which we'd been making public for some time.

Mr Laughren: Were you surprised at the downgrading of the nuclear division between April and August?

Mr Farlinger: We're talking about April 1996 to August 1997. At least I am.

Mr Laughren: April 1997.

Mr Farlinger: April 1996 is when Pickering went down.

Mr Laughren: Then I'm sorry: When Mr Andognini's group brought in its interim report on the nuclear division on April 17 this year, the ratings given the nuclear division were higher than the ratings his group gave them in August. I'm wondering whether you were surprised at how rapidly the standards had deteriorated at the nuclear division.

Mr Farlinger: That's not my impression, sir. We had consistently --

Mr Laughren: It's in the reports.

Mr Farlinger: -- bad reports from Andognini every month he was there, from January through August, with a little more meat around the bones, if I may put it that way, but I don't recall any surprises in August. The only surprise in August was what the treatment would be for the disease, not the fact that the disease existed.

Mr Laughren: To be fair, I don't want to beat this to death, but the rating standards that go down to minimal acceptance in A, B, C, D and E were lower in August than they were in April, and that's not a long period of time. I wondered whether you were surprised that would happen. Could I ask you another question? I suspect I'm running out of time.

The Chair: Very briefly.

Mr Laughren: What options other than shutting down the seven reactors did you consider in August?

Mr Farlinger: There are about six formal options. I don't have them in front of me here. I'm sorry, I really think this is a question -- I don't mind you asking me the question, but I wish I had brought the material to sustain that.

Mr Laughren: But you understand that, as someone said, the same people who got us here have now endorsed the recovery plan and we'd like to pursue this matter.

Mr Farlinger: The people who were brought in to produce the recovery plan were also brought in to manage the company, so they're operating and wearing two hats in that sense. I absolutely agree with you. They're managing the operation, and at the same time, with the help of many others, producing a recovery plan.

Mr Laughren: Thank you.

Mr Galt: Mr Farlinger, I think the number one question the people of Ontario are asking has to do with the safety in the operation of these three sites. I'm sure that you feel it's safe, but what can you tell me, tell this committee to reassure the people of Ontario that the operation of these sites, continuing operation of the other 12 and taking these down and bringing them back up, operating them till we take them down, is safe? There's a lot of concern. This is really a performance issue.

Mr Farlinger: I can tell you that at every turn I've been told that these plants are safe. I've been told this by the regulator whom I visited with a year and a half ago. I've been told this by the regulator more recently whom I had the same discussion with. I've been told this by the Andognini group, which has assured the board at every meeting since January when they arrived that these plants are safe. In fact, I haven't heard anybody who had any real knowledge or information about them say the plants are not safe.

Mr Galt: They say, "...brutally honest that they're minimally acceptable," and that puts people pretty ill at ease.

Mr Farlinger: Absolutely.

Mr Galt: You're saying they are safe. The deterioration you talked about earlier -- what I read in the IIPA report is that we're talking about a deterioration of the ability to manage and possibly the management-union relationship. Is there any difficulty with the equipment, the hardware?

Mr Farlinger: Yes, there is some difficulty with the hardware, particularly at Bruce. At the Bruce A plants there's some difficulty right now with the hardware, but that's fixable if everything else is fixable, I suppose. Basically the problem is with the management and the method of operation.

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Mr Galt: You were recently appointed as chair of Ontario Hydro, and I'm sure you have all kinds of qualifications. Maybe you could tell us how you became chairman of Ontario Hydro and the qualifications you bring as the chair.

Mr Farlinger: In my former life I was the chairman of Ernst and Young, an accounting consulting firm, which doesn't give me any particular credentials for the electricity business, other than general management experience. When I retired from Ernst and Young, Maurice Strong asked me to do a couple of studies on the industry and I spent about half my time for two years working with Ontario Hydro, so I got to know the people and the industry in a way that I thought probably qualified me well for the chairman's job. I don't pretend to be qualified to be the CEO of this company. I just happen to be that for the time being.

Mr Galt: In the IIPA report, they talk so much about human resources and the problems there. Why did we deteriorate into this kind of a position in human resources? You talked about going down to 73% at the end of the 1980s and by now it's down to 60%. I gather from this report it mostly relates to human resources, inner human relations within the organization, management. They first talk about being authoritarian and then they contradict that. They talk about a problem dealing with a union that has ended up with extremely strong negotiated positions. How did we end up in this position, mainly because of people?

Mr Farlinger: It's not unusual for this sort of thing to happen in the nuclear units, the utilities in the United States, I'm told. The nuclear part of the business seems to operate unto itself and the culture has deteriorated in a number of plants there. Andognini tells me that our cultural problems and management problems are no surprise. There are many examples of like this. Why does that happen? I'm not sure.

The Chair: May I make a suggestion to the committee? We're moving well and I think that's appropriate. Would it be helpful for the committee if we extended the time for each caucus to 10 minutes rather than staying on the tight five minutes? Would that be helpful for you?

Mr Sean G. Conway (Renfrew North): Yes.

The Chair: Fine. Then we'll begin now as we start the rotation again, and back to the Liberal caucus.

Mr Kwinter: Mr Farlinger, I'd like to pursue my earlier questioning. I just want to question you about a statement you made that nowhere has anyone questioned the safety at any of the nuclear facilities.

My concern is that in this interim report, by their own gradation system, they have ranked the nuclear facilities as an E, which is minimally acceptable, and part of that grading says, "Nuclear safety margins may be compromised." I know in the nuclear world they may feel: "That's okay. They may be compromised, but on the other hand they may not be." But I can tell you that if I was a resident at Darlington, Pickering or up in the Bruce, and I was told I was living next to a facility that has a nuclear safety margin that may be compromised, I would be very concerned that a facility ranked as one of the top in the world is tolerating a particular situation where safety margins may be compromised, and I can't say that strongly enough.

This is something that in other jurisdictions and other areas leads up to a Chernobyl. I don't want to be overly dramatic, but we have a situation where there are five grades they could have assigned to that nuclear facility and they gave it the lowest. I shouldn't say the lowest; I'm sorry, there's one more: It's "indeterminate." But of any one that really has a definition, it was ranked by these experts as being the lowest other than "indeterminate."

The concern I have is that these reports have been forthcoming. Today we heard from the minister when he said he hadn't seen the report, but if he had seen it, he wouldn't have done anything about it anyway. You say to yourself: "Who's in control? Who is determining public safety, particularly in an area where the potential harm is staggering?" It seems to me there's almost a cavalier attitude: "Well, you know, this is way we do it. Don't be too concerned because we're not terribly concerned about it."

I'm concerned. I'm concerned as a citizen, I'm concerned as a legislator that somewhere along the line you would expect that Ontario Hydro, the largest public utility in North America, would be at the top of the list. When you consider the amount of investment that has gone into it, when you consider that it's a publicly backed institution, you would think that perfection is acceptable and nothing less. Here we have a situation where it is considerably less and there seems to be an attitude, "Well, no one should be terribly concerned about it." What's your reaction to that?

Mr Farlinger: No, Mr Kwinter. You're right up until you say that. You're absolutely wrong if you're suggesting nobody's concerned about it. The board is enormously concerned about it. That's why they brought in these outside experts to take over the company. We've taken action because we didn't believe the people who were running the thing were doing the job, so we brought in new people.

Mr Conway: I'd like to begin a series of questions to the panel. Mr Farlinger, you indicated to Dr Galt that you had been asked by Maurice Strong to join a Hydro study team. Can you repeat at what point Mr Strong asked you to do that and what those responsibilities were?

Mr Farlinger: Let me get the date right. In November or December 1993 he formed a group of four or five people whom he wanted to use as advisers, which group was only supposed to meet -- this is a little bit of a long story; not too long, I hope -- with him about every two or three months, a varied group of business people. Eleanor had just joined the company as the VP finance and she and Maurice met with this group. After the first meeting, he asked me if I would like to work with Eleanor and a group of outside investment bankers and lawyers and so on and do a review of the industry, what was happening in North America etc, and we did a report about eight months later.

Then subsequently he wanted an independent report that didn't include any company people, so he asked me and two others to make a more exhaustive report along the same lines. It sort of went from being on this part-time group that met every few months to about a half-time job.

Mr Conway: So I'm correct in understanding that it was in the fall of 1993 that the then chairman of Ontario Hydro, Maurice Strong, asked you to join an advisory group and --

Mr Farlinger: Correct.

Mr Conway: -- you have had a varying degree of involvement with Ontario Hydro ever since, assuming the chairmanship on -- the announcement of your appointment as chair was, I think, made by the Premier's office in November 1995.

Mr Farlinger: Correct.

Mr Conway: What I'm trying to establish is that you have been around Ontario Hydro at the senior levels as chairman for two years approximately and in an advisory capacity in varying degrees since about the fall of 1993.

Mr Farlinger: I wouldn't say an advisory capacity. What I was doing was writing reports on what was going on in the industry and what should go on in the industry.

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Mr Conway: The reason I want to deal with this chronology is that it was about that same time, the fall of 1993, that the federal regulator of Ontario's nuclear power reactors, the Atomic Energy Control Board, begins a series of very critical analyses of the deterioration at various of the Ontario Hydro nuclear power stations. As I recall, you became chair of Ontario Hydro some time late in the fall of 1995. In the following year, I believe it was December 1996, the federal regulator takes an unprecedented step in your business, that is the nuclear business. You're now chairman of Ontario Hydro. We're talking about December 1996. The federal regulator in an unprecedented move restricts the licence renewal of Pickering to six months because they are very worried about the deteriorating operational standards at Pickering and the inability of management to do anything about it.

At about the same time, December 1996, Dr Kupcis, responding to those concerns identified by the AECB, launches what we now know as the IIPA. Four months later in April 1997 -- this is now 16 to 18 months after you've become chair of an organization that is largely a nuclear utility -- we have, as my friend Kwinter observed 15 minutes ago, a remarkable spectacle. We have two incidents a day apart. We have Hydro going before the federal regulator that just four months before, in an unprecedented slap of the wrist and raise of public alarm, giving only a six-month renewal to Pickering -- Ontario Hydro has the chutzpah, the nerve to go before that self same regulator and say, "Give us a five-year renewal," for a plant that we find out the very next day your senior managers, Mr Farlinger, are confessing within Ontario Hydro is failing in more ways than have ever been made public. This, 17 months after you've become chair. What I want to know is something about the cult of senior management in the president's office and in the chair's office during those 17 months while you were the top dog. What was going on?

Mr Farlinger: I'll tell you what was going on. As I have said, the board was recognizing we had a serious problem. That was quite evident by April 1996 when Pickering went down. You don't have all these units go down and not come back up when promised unless you've got serious trouble. So we pressed on the senior management and replaced three of the senior managers in the units. There was a plan for nuclear recovery developed by the president and it looked like that was going to do something.

In July, at this very same time, the president and I went to see the chairman of the AECB. We had discussions about what we were doing. They seemed to think we were on the right track. We thought we were for a while, and then, as I've said, we thought this wasn't going to do the job and the board then discussed with the CEO, "We need some outside help." We went to get outside help. And if you think the outside help we got took a long time to report, I think you were alluding to that, so did we, but they have a particular process they go through. This is a very, very major thing and it took them six or seven months to get the solution on the table.

Mr Conway: That's not my principal problem.

The Chair: We'll come back to that. Third party question.

Mr Laughren: I think, Mr Farlinger, you can perhaps detect a sense of incredulity, if not suspended belief, of the committee members about what's happened at Hydro because it is truly bothersome that events have transpired the way they have, particularly the chronology of events in which you get, as my friend Mr Conway pointed out, the six-month licence approval, and then a request from Mr Andognini for five years, and in that same letter implying that 10 years would be better.

I just have trouble comprehending that a man in his position would do that and then four months later recommend that seven reactors be shut down. Being right there in the centre of it all perhaps you wonder why we have this sense among ourselves, but I can tell you, and I don't think -- I don't want to speak for anybody else on the committee -- it's based on party politics at all. It's a sense of, what the hell's going on at Hydro?

When I read the report, and you might expect me to feel some sympathy for the workers, given who I am, but then to see blame placed on the workers and their union contract that had been negotiated with management, the whole thing looked to me like it was not written on this planet. I really am taken aback by what I hear and I'm not reassured at all by what I hear, I must say.

I want to ask in another round about the statutory debt retirement because I know how good Ms Clitheroe is in translating legalise into lay language and I want to ask her about that, but I really want to know what happened when Mr Andognini's report came down and was presented to the board, when it was actually presented to the board, when the board wrestled with the contents, with the report, and who it was that said, "We've got to have an immediate response on a recovery plan." I couldn't figure that out either, why you needed this immediate response -- why many of us are sceptical about the recovery plan; I speak for myself, I hasten to add, but very sceptical about that recovery plan. It was done with apparent undue haste. I don't know that's for sure, so I really would like to know about the timing that report was given to the board, and who it was that said, "We've got to act immediately on this," and to what extent -- I almost hate to use this term -- there was the creation of a sense of crisis around the development of the recovery plan and what purpose that served. I really am concerned about that and I would appreciate your response.

Mr Farlinger: The last part first: Mr Kwinter says he's worried about safety. We're all worried about safety. I don't think you'd expect us to sit around when we really had a plan and not start making the place safer. So is it important to get moving? Absolutely. Now as to the issue of it taking us a while to get our head around this and get it fixed, it's absolutely true, it did. It took us 18 months to undo 10 years of bad work, so it did take us some time. We had a false start on trying to fix it internally by getting rid of the leadership and changing the leadership, and the changes didn't work. That's why we brought in the other people. As to scepticism about the need to put down seven units in order to fix 12, there was very healthy scepticism about that by the senior management, I'm sure, including the people sitting beside me. They can speak for themselves.

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Certainly at the board level, the first meeting we had, it wasn't accepted by many of the board members. They said they would receive the report and accept it in principle and come back to us with more reviews. We hired the outside auditors to review the numbers and the principles. We spent a couple of days at the next board meeting going through all this material again. We've had ongoing due diligence on it. Of course each part of the plan will have to be approved each board meeting as we move on down the road, so it may change. You may come up with some ideas that show us a better road ahead than the one we have plotted, and we're prepared to listen to that. And other events may come along. We may have to change the plan again. We don't know. So this plan is not carved in stone. It's the best plan we can see for the company at the moment.

Mr Laughren: Could you respond to the questions about when the report was given to the board and when they responded with what's now known as the recovery plan?

Mr Farlinger: The board, of course, had been receiving reports from Andognini every month since he was there. We have monthly meetings and the board had been receiving monthly -- so the fact that we had real trouble was not a surprise; the nature of the trouble was not a surprise. The nature of the fix was a surprise. The board had the plan sent to them a week before the board meeting, and then we had the board meeting --

Mr Laughren: That was in August?

Mr Farlinger: That was in August. As I say, the plan was approved in principle, but the due diligence has been ongoing since that time, with outside help.

Mr Laughren: I hope you'll forgive my scepticism. You talk about the need to move quickly because of the questions of safety raised by Mr Kwinter, but the interim report in April also raised concerns, as well as the AECB raising the concerns, yet suddenly in August was when you decided to lay up the reactors.

Mr Farlinger: Mr Chairman, if I gave the impression that the company was doing nothing about any safety concerns along the road, I'm sorry, because every safety issue that Andognini and his group came up with as we were walking down the road through February, March, April and May was attended to. We weren't waiting until August to attend to any issues that came to their attention.

Mrs Barbara Fisher (Bruce): I'd like to address about three issues as they relate to staffing; as they relate to capital investment required to repair -- not to talk about the plan of repair but dollars instead; as well as the economic impact to areas that Ontario Hydro seems to have overlooked in its review and coming up with its plan for recovery.

Starting with the staffing issue, I appreciate, Mr Farlinger, that you weren't there maybe in the past when some decisions were made that saw Ontario Hydro redeploy or lay off -- in other words, basically buy out -- a number of employees. I concur with Mr Laughren's statement. I don't want to get into politics in terms of political sides, but we have to make sure that this time through we get it right. I think those kinds of questions need to be reviewed when making sure that the plan that's put forward before us now is right.

I understand that between 1992 and 1995 there was a layoff pattern of about 10,000 Ontario Hydro employees, many of them on buyout packages. I know there was a rule set at that time that said, "Once you take the package, regardless of your seniority within the company, you no longer can become an employee of Ontario Hydro again." It would seem to me that if we're in a shortfall of employees today, somebody should be revisiting that pool of expertise that might still be there and be interested in putting that expertise back to work again.

I personally believe that maybe we're taking a wrong approach with regard to using the staffing issue as an excuse for not bringing up some of the corrective works to the nuclear stations today as opposed to bringing up thermal burners and putting in millions of dollars' worth of scrubbers and those types of things in an energy production that's not environmentally acceptable.

I also know for a fact that a week ago there was a CNA conference locally, at which time there was a disclosure that because of the success of the rehabilitation of the British nuclear system, there is a pool of workers available of whom many would be happy to be working again in the nuclear field, perhaps in Canada. I just wonder if those things were brought into consideration. Instead of spending millions into bringing up things that Hydro in the past had made a good decision, in my opinion, not to invest in any further, why are we not considering those people out there?

Mr Farlinger: That's a good idea about bringing back some people who took packages. We have done some of that and we're willing to do that. That's a change in the company's strategy.

Mrs Fisher: I appreciate it would be, and I understand why it might have been passed over easily because of these packages and the commitment not to return them to the workforce. But there are hundreds of millions of dollars invested in some very junior people, three-, four- and five-year people, who today would be very valuable to substantiate the requirements in staffing under the AECB licensing process. I don't know how we can address that. Maybe we could see how that was reviewed in the decision, before the decision was made.

I would like to talk a little bit about the timeliness and soundness of the board decision as well. I can see in reviewing the IIPA report that there are many things in there that are very sound and absolutely have to be dealt with for safety requirements. There's no argument from anywhere, it seems, on that issue. My question would be with regard to the options of what was reviewed before those decisions were made.

My understanding is that that board report goes to the board about a week ahead. When I finally got a copy of it, it's about 16 volumes high. I ask the question: I guess all options were discussed; other than dollars, what might happen to a community, for example, if a certain four units were brought up preceding another four, or the severity of a shutdown process, like a dry layup or a wet layup, as it relates to Bruce A and the timeliness of its recovery versus that of Pickering. I don't know how we could get to understand better in the public on what basis those decisions were made. Could you help me out there a bit?

Mr Farlinger: Mr Andognini will be bringing the six options that were considered. I guess he could bring that in written form first. We can table that with you in anticipation of his visit and you can question him on it.

Mrs Fisher: That would be excellent.

Another area I want to talk about a little here is our commitment to the people and businesses of Ontario, residential consumers as well as industry and commercial bases, with regard to the rate freeze. I think we have all recognized that in the open field of competition and the convergence of other forms of energy, not only forms of energy but from other sources, the rate becomes a significant issue as to whether or not you retain business in Ontario. With the government's goal of maintaining a rate freeze -- I guess this is directed to Ms Clitheroe. To make this plan as it's presented today be successful, how we would we ensure that there wouldn't be a rate increase?

Ms Clitheroe: There are a couple of options which the board can pursue, and those are going to be considered over the fall. The way the Power Corporation Act operates is that the company must plan to meet what's called SDR, the statutory debt retirement provision. If the plan looks like it cannot meet that, the options are to raise rates or exclude certain costs from the calculation of rates. The question the board will be considering, given government policy around the rate freeze, is the option either to exclude, up front or year over year, the costs as they are incurred from the rate base, or they have the option of capitalizing some of those costs and amortizing them over an appropriate period of time. We've discussed those options with counsel and with our external auditors to determine whether all these options are available to the board; they are, so it's a question of bringing them forward to the board for their review later this fall, probably in November.

Mrs Fisher: Last week we had the opportunity to have the Ministry of Energy give us an overview of the corporate operation and structure of Ontario Hydro. I'm pretty familiar with the fact that onsite at each of the three locations when we're talking nuclear, and I'm sure with the others as well, the budgets are created onsite and they go through certain site approval levels and then they finally get to head office, commonly known as the 19th floor.

I am familiar with the fact that in the past, proposals, which I've been exposed to in detail, have been put forward from site management that made a heck of a lot of sense, yet I can see where those decisions weren't accepted by the corporate level onsite level, the highest management levels, up into the corporate office. I appreciate that you have to do a global budget for Ontario Hydro, but we pay people a lot of money to be onsite and manage as well.

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In the future program, is there any anticipation that there might be some independent thinking and decision-making being allowed on a financial basis at the sites, where if they work their little heads off out there and it seems to be a reasonable and viable proposal, their brain power is supported?

I hate to sound a little bit negative on this, but I can tell you that my experience has been, representing our community in a different number of capacities for 20 years, fully attached to Hydro, that it almost is like, "Do your work and then park your brain and hope it works." I feel very sorry for the employees, to feel that. In fairness to them, I want to say that perhaps that culture was not something they wanted to be in; I think it was something that was created. I just want to know, are we going to look forward to a bit more site determination and site decision-making when it comes to making sure that their finances are in order so they're self-sustaining?

Ms Clitheroe: You might want to address the question to Mr Andognini when he comes, but let me give you my perspective on it from corporate finance's point of view.

The board, in approving the general direction of the nuclear program, the asset optimization program, has taken that program as the planning base for looking at the next three-year plan, especially the 1998 budgets. Those will be under the responsibility, obviously, of Mr Andognini as they come forward for proposal. Each of those specific programs inside, whether they be capital or large programs of another nature, such as training and so on, will come forward to the board under the auspices of that plan for individual approval at the appropriate time for implementation.

It's my understanding, and this is where I suggest you ask Mr Andognini, that when they were looking at the assessment of the IIPA and creating the asset optimization plan for the nuclear assets, it was not only the external experts who were providing input into the program, although obviously they were very heavily influenced by them, but they also met with all the management and with workers across the whole nuclear operation to get their ideas, to get their concerns and to build those into the program and into the remedial programs that they felt were required. I think there is a combination of views there and that process of obtaining views within the corporation and marrying them with the external experts' views is in progress. I think you'll see that continue over the 1998 planning program.

The Chair: Mr Farlinger, just as an aside, what credential is given by the board to the Andognini report?

Mr Farlinger: The board has received the report and approved it, subject to ongoing financial review and approvals as we go along.

Mr Conway: I want to come back to what went wrong and what you, Mr Farlinger, you, Mr Fox, and you, Ms Clitheroe, but most especially you, Mr Farlinger -- you're the big cheese. You're not only the current chairman but you're the acting CEO.

The difficulty I have is that the so-called Andognini report, the IIPA, which was released with much fanfare by you in August of this past summer, has nothing qualitatively in it that the Atomic Energy Control Board has not been saying for three years. My problem is that Andognini in August 1997 basically confirms or underlines most of the major criticisms that the federal regulator had been making for at least three years. In that sense, there was no breaking news in the Andognini report, particularly if one compared it to about three years of ongoing critical analysis by the federal regulator, a rather important person in this equation. That's where I'm coming from on this.

Having said that, I want to ask you, Mr Farlinger, and your colleagues can comment, is there anybody on that panel sitting before me who would disagree with my assessment that that unprecedented action taken by the federal regulator, the Atomic Energy Control Board, in December 1996, namely, giving only a six-month renewal for the licence at the Pickering generating station -- that that unprecedented, very short-term renewal of the Pickering generating station licence was a very significant development in the atomic industry in this province and country? Does anybody up there disagree with me about that assessment?

Mr Farlinger: My associates can speak for themselves. I think it was an inevitable thing for them to say after the April 1996 issue, earlier than that, when this whole plant went down and couldn't get back up. That, to me, was the epic issue in this play, not the fact that five months later the licence only had a six-month renewal. I would have thought that was inevitable. I think the big signal was Pickering going down in April 1996.

Mr Conway: I find that absolutely breathtaking. Your attitude, Mr Farlinger, to the federal regulator is quite breathtaking. I can't imagine that you'd have that attitude to Standard and Poor's or Moody's. Regular folks would think that in this highly charged, very controversial industry, when the federal regulator in December 1996 stands up for the first time in the history of Ontario and says, "We are so concerned that we will, for the first time, only grant a six-month extension" -- you just create the impression, as chairman of Ontario Hydro, I might add, that this is was inevitable, that it was no great --

Mr Farlinger: No, that isn't what I said.

Mr Conway: You'd better be more clear, then, as to what you really felt when they did that.

Mr Farlinger: I'll do my best, Mr Conway. What I'm saying is that after April 1996 everybody who knew anything about this company knew it was in trouble. The fact that the regulator then, when the licence came up, six months later gave it a six-month renewal was a rather logical thing for them to do. I'm not detracting from their having done it, I'm simply saying that the issue was that the company proved to everybody that it was in big trouble when it couldn't get its nuclear units back up.

Mr Conway: Can you explain what kind of renegade operation you were running that allowed somebody four months later, in April 1997, to go before that same regulator and say, "Give us a five-year, maybe even a 10-year, extension"? On whose authority was that person acting?

Mr Farlinger: He did it on his own authority, as far as I know. He certainly didn't come to the board to ask for that.

Mr Conway: Are you serious?

Mr Farlinger: I'm just repeating myself. I said this after Mr Kwinter asked me.

Mr Conway: This committee and the people of Ontario need to know that four months after the federal regulator rang that alarm bell, you were running a corporation that allowed somebody to go back to the regulator and say, "Give us a five-year extension," for a generating station that, we find out, the very next day you are telling everybody inside the corporation has more problems than perhaps even the regulator understands.

How much do we pay you to be chairman of Ontario Hydro, Mr Farlinger?

Mr Farlinger: You pay me $250,000 to be chairman of Ontario Hydro.

Mr Conway: Most people would think that's a pretty good salary. You bring very excellent credentials to the job. You're from Ernst and Young. It just seems incredible. Why shouldn't the taxpayers order your firing for allowing two things: for allowing the AECB alarms to go unresponded to for so many months before you took any action --

Mr Farlinger: Pardon me, that is wrong. I didn't let them go unminded at all. I've been working ever since I got in this company to fix this mess.

Mr Conway: The federal regulator gave you a very sharp rebuke in December over one of your biggest operations, and four months later your agents were before that regulator saying all was well and, "Give us a five-year extension."

Mr Farlinger: I explained that to you as best I know. Mr Andognini comes from a different environment and he asked this question in a way that related to his past experience. You'll have to talk to him about it.

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Mr Conway: I'm talking to you because you're the chairman and the acting CEO.

Mr Farlinger: You can talk to me about it, but I -- I asked Andognini why he did this afterwards. He told me that it shouldn't be this way, it should be a complete open licence, but he'd asked for five years.

Mr Conway: You see, you've got a real credibility problem with many people, and I'm sensitive to the difficult situation in which you find yourself. This is not all of your making. That has been said, and I agree.

But I just look at the way in which in the last 18 months information has been handled by this corporation, and we'll be discussing later -- I mean, we found out in the last six months that the poor old minister appears to be told little or nothing. Norm Sterling in all of this is rather like one of those referees in a professional wrestling match, where while the villain is gouging out the good guy's eyes, the minister is distracted by some irrelevance in the upper tier. We know the minister knows nothing and has almost been proud about his boast.

You never felt, apparently, in the last six or eight months that it was worth your while to tell the minister responsible for Ontario Hydro that Andognini was doing these things in April, that there were a variety of other problems, of which ignorance the minister has now confessed. We've had the minister stand up in the House and tell us for weeks and months now he wasn't informed about the heavy water releases, the tritium problem. Not only was the minister not told, but people out in Durham region weren't told. We're here to try to get some answers as to what's going on.

I am continuing to struggle with a situation where we've had in 1993, 1994, 1995 and 1996 clear, consistent criticisms from the federal regulator, culminating with that unprecedented decision in December 1996. Then we get two things: We get a six-month extension for Pickering and we get the Andognini IIPA launched. That's understandable.

What is remarkable and unbelievable to me is that then in the next six months we get three things. We get Andognini or his agent going up to the federal regulator and saying: "Not to worry. We are now ready for a five-year, maybe a 10-year extension on Pickering GS." The very next day, as my friend Kwinter has indicated, a very different story is being told.

Then, perhaps most remarkable of all, in August of this summer we have you as the chairman of Ontario Hydro releasing this report, which in terms of information says nothing that the federal regulator has not been saying for three years. Then two things happen. You go out of your way to say, "The real problem, one of the big problems, is Ontario Hydro nuclear is run by a cult sort of out of control and my pal Kupcis, the president, has accepted responsibility and has walked off into the sunset."

The problem I have with that is that the IIPA tells us nothing that we haven't known for three years. So why didn't people like Bill Farlinger and John Fox do more than they appear to have done and why shouldn't Bill Farlinger and John Fox go the way of Al Kupcis? It doesn't seem to me that you have met the test of responsibility and accountability here. I would cite that remarkable performance by Andognini in April of this year as in itself just cause for very serious retribution visited upon you as the chairman of this board.

Mr Farlinger: Is there a question that you asked in all that?

Mr Conway: Yes. Why shouldn't you be fired for failure to exercise an appropriate level of duty and responsibility?

Mr Farlinger: I don't think the five-year request is a big deal, so that's a difference between you and I. I think it's a minor peccadillo if someone comes from a different tradition and made a request.

Mr Conway: You think it's a minor peccadillo to have a senior Hydro executive on one day go before the federal regulator and say, "Give us a five- or 10-year extension," on a big nuclear power plant, and on the very next day confess that there are a whole series of problems that would be of material interest to that issue, to say nothing of their interest to the people in Durham region, southern Ontario and the province as a whole. You think that's just a peccadillo.

Mr Farlinger: Not everything you've said is a peccadillo.

Mr Conway: Help me understand what's peccadillo and what --

Mr Farlinger: The five-year licence request in my opinion is a peccadillo.

The Chair: I want Mr Farlinger to be able to complete his response and then we'll go to the third party.

Mr Farlinger: It's the third time I've responded to the same question, Mr Chairman.

Mr Andognini comes from a different environment where long-term licences are given and it doesn't affect the regulator's action in any way. He can lean on or close up the operation any time he likes. He made that request. Why would he make that in our environment? You better ask him. That's all I can say. I don't think it's a cause for dismissing Mr Andognini.

Mr Conway: It wasn't Mr Andognini's dismissal I was recommending.

Ms Marilyn Churley (Riverdale): Mr Farlinger, I attended the press conference and I will not repeat particularly what my good friend Mr Conway has said here, but I want to impress upon you that the questions so far do focus on the biggest problems in terms of credibility that I think most members of the committee feel.

When I attended that press conference, I came away shaking my head in wonder and so did many others. What was this about? It almost felt like -- and I'm not the only one who said it. This is a strange atmosphere. It almost feels like they are trying to create an aura, a feeling of crises, and particularly on top of the fact, as my colleagues have been saying, there wasn't a whole lot new said at that press conference except for the very in-depth, cost-factored solution, recovery plan. So we are trying to get to the bottom of what really went on there.

I heard you say at the press conference and again today that there were 10 years of, as you put it in the press conference, the nuclear cult at Ontario Hydro. But I find it interesting that our concerns about Ontario Hydro, as you may remember, we learned about before your press conference, about the copper and zinc leaking out of your steam condensers at Pickering A. This had been apparently going on for 20 years. I would like to know, if that had been kept secret, under wraps -- some people believe there was a deliberate coverup -- for 20 years with now all three governments in power, I would like to ask you, and I've never satisfied with the answer on that: Did the board know about it? At what point was it reported to the ministry and to the public? And why did it take so long?

Mr Farlinger: First, I can tell you that in my time on the board we did not know about it until it was discovered. I believe you're right in saying it had been going on for 20 years. It has to do with the way the water flushes against the tubes, and the copper that lines the tubes ends up in the lake. What was the rest of your question?

Ms Churley: My question was, I know what the physical problem is, but this had been kept under wraps. Let me frame it another way. Do you believe that there was on some level a deliberate coverup of that situation?

Mr Farlinger: I don't believe that, but it could be.

Ms Churley: It could be?

Mr Farlinger: It had to be known to somebody.

Ms Churley: I just want to emphasize again that we're talking about a situation here within that division that had been kept from the public and the different governments for 20 years.

I want to come to one other issue, and that is not about the past but is about the future, because in your presentations you all talked about where we go from here, and we'll be getting more into that. But what I want to talk about is a burning environmental question, if I may say, and you did mention you believe you can meet existing environmental expectations. I would say, given the latest acid rain report which was just released -- and as you know, in the past Hydro was one of the bigger generators of acid rain and played a major part in the previous air emission reductions. Now obviously governments are going to have to very quickly tackle that problem again.

So my question is in terms of your comments that you believe you can meet present environmental expectations, I believe you said. I believe they're going to have to be changed and there will be even fewer emissions allowable. I'm wondering if you could comment on that and whether that now will be taken into consideration as you fire up the fossil fuel plants.

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Mr Farlinger: I think John is probably more equipped to deal with that than I am.

The Chair: Can I just break in for a moment and remind us we are still focusing on what went wrong? I can appreciate the concern of Ms Churley wanting to get at some of the implications and impacts of some of the recovery plan protocols, but if you can just keep your comments fairly brief because we will be, I'm sure, coming back to that issue, Ms Churley.

Ms Churley: Mr Chair, just in response to that, and I respect the will of the committee here, but this was an issue that was talked about repeatedly in the presentations, and this particular new information was not, and so it can be very brief, but I'd like to know the answer. I believe that's what you said: He should keep it very brief.

The Chair: If I did --

Ms Churley: You did.

The Chair: -- you may not like my interpretation of brief, but let me suggest, Mr Fox, you keep it very tight because the committee is at pains to make sure it really does examine what went wrong. So please respond and then we'll come back to that question, Ms Churley, when we get into the second phase.

Mr Fox: To the extent that there are changes promulgated in the environmental limits, we will obviously do our best to comply with them.

Ms Churley: Are we therefore then allowed to ask questions about the economics of the --

The Chair: Of what went wrong.

Ms Churley: Of what went wrong, as opposed to --

The Chair: Of what went wrong and why. You are at total liberty to have a go at it.

Ms Churley: Perhaps I will give permission to my learned friend here to -- no, no, you go ahead.

Mr Laughren: I wanted to pursue the question of accountability at Hydro. I'm wondering how you decide when you're going to tell the minister something. Who makes that determination?

Mr Farlinger: I guess it depends on the minister. I've had two ministers. There is a protocol where we send a report to the minister after every board meeting, giving him the highlights. That was true with both ministers. The first minister I had, we had regular meetings. I think it was every two weeks, so we covered the waterfront of whatever was going on. With this minister, he suspended the regular meetings or he didn't want regular meetings, but he calls me or I call him on any issue that I think should be communicated to the government. There's a lot of discretion in that as to what you should communicate and what you might not. We have had a few meetings on some of these issues, but mostly it's ad hoc.

Now there is a protocol in the company that certain issues are communicated routinely with the minister, and of course we have the deputy minister on the board. The deputy minister is a non-voting member of the board and attends all the board meetings. So those are the methods of communication.

Mr Laughren: The reason I ask is that I have some empathy with ministers who get hung out to dry and --

Mrs Helen Johns (Huron): Why would that be?

Mr Farlinger: They're like chairmen.

Mr Laughren: Never by our deputies, of course, but by a lot of other people.

It was made clear to us the other day on the committee that basically the ministry has no statutory authority, virtually none, over Ontario Hydro. I don't know of politicians of any political party who haven't resented that. Whether they would admit it to you today or not, I don't know, but there is a sense that Ontario Hydro has its own agenda and is a government unto itself.

I'm surprised that there haven't been these regular meetings. I'm not blaming you for Mr Sterling not wanting to have regular meetings but, for example, when the interim report of Mr Andognini came in, was that presented to the board in April?

Mr Farlinger: We were getting reports from Andognini every month, and this so-called interim report that everybody seems to be focusing on at the moment I would be confident would have been placed at the board.

Ms Clitheroe: My recollection of that is that Mr Andognini did read a summary of his findings midway through to the board. I cannot remember if the deputy minister would have been there, but my recollection is that she was.

Mr Laughren: Mr Farlinger, you're somewhat dismissive of our preoccupation with the interim report in your tone, but believe me, I find it offensive that a report would come down in April which indicated the problems that were clearly there in the nuclear division, and yet nothing was done then, and then presumably it went to the board. I take the minister at his word. I think he's an honourable person. He didn't know anything about it, and I wonder why. Why wouldn't that be something that the chair would say or the CEO would say, "For heaven's sake, this has got to be given to the minister," because that's the person who ends up out there having to explain your behaviour and the behaviour of the rest of Hydro?

Mr Farlinger: This interim report was one of a succession of reports that we were getting from Andognini every month. What it did was sort of say, "Here's the situation up until now." I didn't and I don't attach very much importance to it. All the reports we got from Andognini were that there was big trouble. We knew there was big trouble. That's why we brought Andognini in. So I didn't see that as a pivotal point in anything. What was pivotal was when we got the final report that the corrective action was so dramatic that we had to take.

Mr Laughren: Okay.

Mrs Johns: I just have some questions of Mr Fox because I'm interested in the reactors in the past and how they have fared, I guess, and how they have come to this point where they have some problems. I know you've been there since 1990 and you may have information that goes back further than that, Mr Fox, but can you tell me, for example, how each of the nuclear plants has -- when it's been up, how long it's been down, those kinds of things, over the time frame we're talking about?

Mr Fox: I'm not sure that these questions aren't better directed to Mr Andognini. I'm not sure what the source of your information is. I've been at Hydro since 1993 and have not had responsibility for the nuclear plant operations.

Mrs Johns: Okay.

Mr Fox: As a general comment, in my tenure there we have seen a gradual but consistent erosion of nuclear output which has caused us to take other decisions on the other generation sources, primarily the fossil fleet, to accommodate the low performance. To the extent I think you want to pursue specifics on reactors, your best bet is to talk to Carl.

Mrs Johns: Can you let him know I'm going to be asking that question so I can get some data and he can have the data ready when he comes in here, please?

Mr Fox: Yes.

Mrs Johns: I'll leave that then and I'll just talk about some of the documentation that we have received from Hydro over the weekend.

I'm interested, first of all, in the human resource issue. Last week, when the Ministry of Environment and Energy was here, they talked about the human resource committee that's part of the board. At that point they talked about a number of people being on that human resource committee and their ability to make human resource decisions. I guess my concern, since most of Carl Andognini's report talks about human resources and the depletion of human resources and the human resources not being there, is, what's the correlation between the human resource committee at the board level and the everyday human resources that happen in the nuclear facilities, for example?

Mr Farlinger: Only in terms of statistics and watching brief and so on. The human resources hands-on role is in dealing with executive compensation. That's where its real approval procedure comes in: The human resources, specifically in the various business units, are subject to the budget approvals and the overall approvals the board bring to it but not into detail.

Mrs Johns: Would packages for making your human resource staff smaller be reviewed?

Mr Farlinger: Okay, that would be, because that was a major issue. That's before my time, and John's and Eleanor's. But obviously that would have been approved by that group at that time.

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Mrs Johns: I was interested when you said earlier, Mr Farlinger, that if the committee or further work from Ontario Hydro came up with alternative solutions to the recovery plan you are now dealing with, you would be prepared to look at those and maybe change your direction. Did I hear you right when you said that?

Mr Farlinger: Absolutely.

Mrs Johns: Can you tell me, when you issued the RFP process last week about alternative energy sources, have you made inquiries into alternative energy sources throughout Ontario, and do you know there is capacity there to meet our needs in the future?

Mr Farlinger: You now are asking a question that's in John Fox's department.

Mrs Johns: Thank you for putting me on the right side.

Mr Fox: We are aware there may be some additional Ontario-based generation available to us. We are uncertain whether it is available to us at a price that is lower than that of the marginal cost of running our own units. That's what that RFP is out there to do. If there is a more economic way to meet the needs, we want to know it, and so we've put the RFP out to see if we can attract additional supply.

Mrs Johns: I have received a fair amount of documentation from people outside the industry, as you might well gather, as I think all the select committee members have, and one of the pieces of documentation I've received quite a few times is the evolving role of nuclear power in the electricity or energy supply that will happen in the future. For example, I've read a couple of documents that talked about nuclear power taking a lesser role as we proceed into, let's say, 2020 or 2030. Does Ontario Hydro have a strategy that starts to use less nuclear power all the time?

The Chair: Mrs Johns, I know you desperately want to get in there, along with other members of the committee.

Mrs Johns: Why I'm asking this is because --

The Chair: Will you rephrase it to make sure you come back to what went wrong, please.

Mrs Johns: What went wrong. I'm trying to decide why they have this kind of balance of nuclear power they have and have chosen that in the past.

The Chair: You're moving through in expert fashion, but if you can just make sure to rephrase that, thank you.

Mrs Johns: Do I have to rephrase the question?

The Chair: No. I'd just ask him to be reasonably precise in this response, as I'm sure the committee will want to visit this with some depth in the next several weeks.

Mr Fox: We don't have plans to construct additional nuclear plant. The question going forward is the level of operation of the existing plant. The studies we have done suggest that if the nuclear recovery program is as effective as we hope it would be, then utilizing the existing nuclear plant to the fullest degree is the lowest-cost overall option on a going-forward basis that we have. So obviously in terms of the size of the bill Ontario pays for electricity, it would be lower with increased nuclear production from existing facilities.

Mrs Johns: Mr Farlinger, I have to say I have kind of a different approach to what has happened than Mr Conway. I believe that for the first time in the history of Ontario we've basically got some information out of Ontario Hydro that we should have been getting all the way along. I think you are instrumental in that happening. Maybe there's a lot of political pressure or maybe there are a lot of different reasons for that happening. From my standpoint, I see it as finally someone having had the nerve to put this out for the public to have a look at. I commend you for that.

What I'd like to ask you is, if you had control of where this all went wrong and you could start back again 10 years ago or something, who should have been regulating the system better to ensure this didn't happen, that the public's information was out there and the public wouldn't have been finding out things when there's an environmental leak and someone finds it out, or when the human resources get so bad we get minimally acceptable? Who do you think should have been telling us about this over the past 10 years?

Mr Farlinger: I think there has been, I don't say enough disclosure, but there has been disclosure of some problems in nuclear over the years. In the briefing book you got, which I read over the weekend too, I discovered that Ken Hare was appointed in 1989 because the government was worried about nuclear. So this isn't exactly a new issue.

Strangely enough, according to that report, he was quite prophetic. What he said was that the nuclear units are safe, but that we've got to really watch our human resources, we've got to watch our management who are looking after them, because that's where it can all go wrong. If we had paid enough attention to Ken Hare's report at that time, maybe we wouldn't be as badly off now as we are. All I'm saying is that this has been looked at before.

Where did we go wrong? How could we have improved it in the past? I don't know. We do need open accountability in a government-owned company and we haven't had completely open disclosure of everything that was going on in this company, particularly in nuclear. That's my take on it.

The Chair: Thank you, Mr Farlinger. I want to remind the committee that we have time for one complete round, again staying to the 10-minute cycle. We'll now begin with the opposition party.

Mr Conway: I want to just correct the record. Tom Adams was quite helpful in reminding me that the AECB has in fact had restrictions of six months on at least one other occasion, at Bruce in 1991. I appreciate Tom's help on that, although I have been referring all afternoon to AECB documents that were released following the announcement on August 13, 1997, where they themselves refer to the unprecedented six-month renewal for Pickering in December 1996. So it's very clear that the federal regulator viewed the situation in the fall of 1996 as a very serious matter.

Having corrected that, I want to come back, because time is obviously very limited, and I want to be very direct, Mr Farlinger. I'm having a very real problem because you're a senior executive from Bay Street and you're nonchalant in some respects to a remarkable degree. You're running a nuclear company, essentially, and there are all kinds of problems inside and outside being commented upon, and again it all culminates in August 1997 with the IIPA report, which doesn't tell us anything new but sure leads to a dramatic development. Never in the history of the utility, never in its 90 years has there been such an abject public confession of failure, maladministration, incompetence and stupidity as we saw that day in August 1997.

I ask myself the question, "What else is going on here?" Those of us who have been close to this debate for a while know that alongside this debate there has been a very vigorous debate in the community, certainly within Hydro, and as between Hydro and the government, about the future of Ontario Hydro: Should it remain a public utility, should it become a private enterprise or should it become some enterprise that brings the two together?

Now I go back to your document. You were telling us a while ago that Maurice Strong asked you in 1993-94 to join a group of people and give some advice. That you did in a variety of ways. You released, together with Mr Homer and Mr Caine, a report dated June 22, 1995, titled Ontario Hydro and the Electric Power Industry, where your well-known views about privatization were laid out, in quite a compelling way I might add. But when I think about what happened in August 1997 and reflect upon the advice you gave in June 1995, what do I have to reflect on? You observe there's big change coming in this sector, that your strongly held view and that of your colleagues is it must go private if it's going to compete in a continental market. You then go on to indicate that there has to be clear government leadership, that public enterprise is just not going to be able to function in the electricity sector in the 21st century.

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You indicate, very interestingly, particularly in your appendices, that where denationalization or privatization has occurred, whether it was in Konrad Adenauer's Germany or in Margaret Thatcher's Britain, one of the preconditions was to demonstrate very clearly that state-owned enterprises weren't up to the task, were miserable failures. You do so indirectly by citing the three academics in the Journal of Finance, June 1994.

Well. What we certainly got in August 1997 was the chairman of Ontario Hydro telling the people of Ontario, "This is a cult-ridden company we've got and you ought to be concerned about the fact that they're running minimally acceptable nuclear power plants." Then we also get a recovery plan that says, "We should and we will lay up the four units at Pickering A and three units at Bruce A," ostensibly for safety reasons, although I find it interesting that on September 23, 1997, the federal regulator certainly has some questions as to whether or not that action was justified. They'll talk to that when they get here, but they certainly have indicated they thought that might have been precipitous action on your part.

Then I think, one of the things Bill Farlinger makes very clear in his paper in June 1995 is that there is this problem of stranded assets. If you're going to take companies like Ontario Hydro private, you've got to deal with the stranded assets, particularly the high-cost, low-performing nuclear assets. You've got to get them off book. Wow. One thing this recovery plan does is that. It certainly gets a good chunk of the nuclear division laid up and eligible for inclusion in what objective observers might consider stranded assets.

Being from Missouri, a person might think; "Really, since Andognini and the IIPA didn't tell us anything in August 1997 that the federal regulator hadn't been telling us for three years" -- and yes, it had to be dealt with etc and the federal regulator appears to be coming along and is somewhat more comforted by some of your later actions -- "could there be another agenda here in the best tradition of Adam Beck? Might we only be getting part of the story from the chairman? Is Bill Farlinger, in the best tradition of Ontario Hydro leadership, operating with not one but at least two agendas?"

Mr Farlinger, how do you deal with those people who might say: "You know, that Bill Farlinger put on quite a show that day in August 1997 when he went out of his way as often and as colourfully as he did to talk about that nuclear cult running this space-age technology next door to the biggest metropolitan community in Canada. You ought to be worried, because they're cultists, running minimally acceptable plants"?

It seems to me you did two things. You certainly reduced public confidence, not just in Ontario Hydro Nuclear, but since Ontario Hydro is largely a nuclear company, boy, did you do a number on the public's confidence about the public enterprise that is Ontario Hydro. So like Konrad Adenauer and Margaret Thatcher of your description two years ago, you certainly met one important objective of denationalization or privatization. Then, with this recovery plan, you laid up seven of 19 nuclear reactors, which just happily provides absolution to the stranded assets problem that will confront anyone who wants to privatize Ontario Hydro.

How would you respond to that Missouri analysis of what you might be up to here on a different plane?

Mr Farlinger: I've been trying to make notes, Mr Conway. You dealt with about 15 different items, as far as I can see.

First, I absolutely do not agree that there was nothing new in the Andognini analysis. It put a complete review of the whole nuclear situation down on paper where you could examine it, together with a plan as to how to fix it. To say there was nothing new there is absolutely wrong.

I don't know what you were getting at about stranded assets.

Mr Conway: I just want to be clear. I said there was nothing in my view that was qualitatively new between Andognini and the recent AECB reports.

Mr Farlinger: As to where you're going on the plan tying into my public views on privatization, I don't quite -- I don't think you've even got the answer to that one yet, because I don't know where you're going. I didn't write this report; Andognini wrote it. At the time Andognini wrote it, I was chairman of the company. I was not the CEO. I had no control over Andognini whatsoever.

Mr Conway: This is the report I'm talking about, that has Bill Farlinger's name on it, June 22, 1995.

Mr Farlinger: No, you drew some connection between the Andognini report and the Farlinger report of 1995. It eludes me what that connection is.

The Chair: The third party.

Mr Laughren: I almost want to give Sean more time, but I know that wouldn't solve the problem.

I want to pick up on that because I think I see where Mr Conway is coming from. Using his Missouri analysis, if you wanted to undermine public confidence in Ontario Hydro, which would aid in the privatization of it in a political sense out there in the community -- because people are very uneasy about the privatization of public power. If that's what you're out to do, to make privatization more acceptable, certainly one way to do it is to say: "Look, these people over there at Ontario Hydro couldn't run a peanut stand. We better turn it over to the people who know how to do that."

It seems to me that scenario -- I've had it expressed to me by many people, that this is all a setup for the privatization of Hydro. You take the nuclear section and you do what you will with it, but then you say, "These people can't run this." I don't want to put words in Mr Conway's mouth on that.

Mr Farlinger: How do you get from Andognini, an American who came in to do a report on a nuclear plant, to the privatization of the company?

Mr Laughren: That's not much of a leap if you're from Missouri. Surely what Mr Andognini's report does is undermine the whole nuclear division of Ontario Hydro. I'll let Mr Conway make that argument at another time.

I want to ask about the debt retirement, because it is statutory, as we know. If the government of the day has said there will be no rate increases regardless of the problems at Hydro, then may I assume that rate, whether or not it makes sense to extend the debt repayment or -- I'm not sure how you do this -- write down assets in the company, you would do that rather than go against the will of the government of the day, even though you don't have to listen to the government of the day in a statutory sense?

Ms Clitheroe: As you know, the way the Power Corporation Act is set up with this SDR requirement, the company must plan to meet that formula in the act. The options around making that are either to have your cost pass on into rates or the board has the rate-setting or rate-ruling ability to exclude costs from rates. They can do that either by excluding them from rates and attributing them against the equity of the company, or they can exclude them by capitalizing them and them amortizing them over a period of time.

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Mr Laughren: Can you help me out on that, then? How can you exclude costs from being part of the -- unless you put off into the future their payment?

Ms Clitheroe: The two ways the act allows for, according to counsel, is that the board can either capitalize those costs and write them off over a longer period of time --

Mr Laughren: Right, that I understand.

Ms Clitheroe: -- so they get passed on into rates but simply over a longer period of time, and in that way you're meeting your SDR requirement, or you can opt not to pass those on into rates at all and exclude them from the rate base. In that event they are attributed against the equity of the company. That's in the business judgement of the board as to what is in the best interests of the company. Taking into account what is the business judgement of the board would be, what is the government policy of the day? The government of the day, of course, as you know, always has the ability to give a government directive to the company. It could do so, and the board would then take that into exercising its business judgement.

Mr Laughren: But the board doesn't have to follow the government directive, right?

Ms Clitheroe: On the government directive, yes, the company would be obliged to follow the government directive.

Mr Laughren: That's in the Power Corporation Act? We were told there was nothing like that in the Power Corporation Act that required the Hydro board to follow any government directive.

Ms Clitheroe: I believe if there is a government directive, then the board would be taking that as a given in the exercise of their business judgement, but I can check with staff who provided you with an earlier briefing to determine whether that is inconsistent with something you've been advised earlier.

The Chair: Ms Clitheroe, you are a member of the board?

Ms Clitheroe: Yes, I'm a member of the board.

The Chair: So that is your understanding as a member of the board?

Ms Clitheroe: That's right.

Mr Laughren: That's interesting, because I understood that the Hydro board, if they didn't like the directive of the government or felt that it was irresponsible and being done for political reasons -- these are my words, not anybody else's -- you could then say -- not that you would use this language, Ms Clitheroe -- "Go blow it out your ear. We're not going to do that. We're not going to be part of your political solution on rates, and the only responsible thing to do would be to raise rates." That's a scenario that I think is quite possible, although I take guidance from people who know more about the Power Corporation Act than I.

Ms Clitheroe: I understand that in a briefing I think you received last week, having read the transcript of the briefing last week, you were advised that government policy would be considered by the Hydro board. Then more directly, I don't know if the issue of a written government directive was considered, but certainly that would be stronger than simply expressed government policy.

Mr Laughren: Is our legal counsel able to help me out?

The Chair: I'm already inquiring in that direction, Mr Laughren.

Mr Robert Power: I may not have caught part of the context as we were moving around, but within the Power Corporation Act there are provisions under section 10 that the minister may issue policy directives through the Lieutenant Governor in council basis. As well, there's a memorandum-of-understanding provision under section 11. The MOU as we understand it -- we're checking on this -- has not been executed. That would expressly require the corporation to do certain things. Unless there's a specific policy you have in mind which the minister may have passed, we can't comment without --

Mr Laughren: I'm thinking of rates specifically. If the minister or the government of the day says there's going to be no increase in Hydro rates, they're going to be flat-lined, which governments have been known to do, what responsibility does Hydro have? What if the Hydro board says, "It's our considered judgement that that's an irresponsible position, given all sorts of scenarios"? Who has the final say if it comes down to a crunch? That's the question for me.

Ms Clitheroe: My understanding of the government directive is that a government directive cannot override specific provisions of the Power Corporation Act, but in the event that the government directive is not overriding a specific provision but simply directing the board to operate in a certain way, the board would be obliged to operate in that way.

Mr Laughren: I think they would be advised to; I'm not sure they would be obliged to. But that's another question, I suppose.

I don't know how much time I have.

The Chair: You have another minute and a half. You'll make that seem like two hours.

Mr Laughren: Thank you, Mr Chair. I think that's being damned by faint praise.

I wanted to ask about the whole question of, in the IIPA report they talk about the problems and the culture in the nuclear division. I wondered whether the problems in the nuclear division are unique to that division or whether they are more broadspread throughout the corporation.

Mr Farlinger: So is the board wondering that. We've taken on an initiative to review the other major operating divisions in a manner similar to the Andognini report, with the help of outside consultants, to determine exactly that. What is our guess? Our guess is that the rest of the units of the company are not in the same culture exactly as nuclear, because there is a nuclear culture, so we're told by nuclear experts. But could there be problems in the rest of the company of a similar nature to some degree? Yes. So we're having that review done.

Mr John O'Toole (Durham East): I'm from Durham region. I have two nuclear operations in my area, so I'm quite concerned for the safety and need to be reassured that the public safety is certainly assured.

Just to start on a fundamental question -- I have two or three questions, one to do with safety and a couple to do with the recovery plan. I'm just wondering, did your predecessors, Maurice Strong and others, have the degree of alarm with respect to the short-term safety concerns as you have or had?

Mr Farlinger: I don't know how to answer that. I don't think so.

Mr O'Toole: To your knowledge, is there any precedent to the fact that a safety concern not initiated by AECB has resulted in significant initiatives on your behalf and Mr Kupcis's with respect to the Andognini report, or has the safety always been initiated by the regulator?

Mr Farlinger: My understanding is that this sort of major change has usually been initiated by the regulator.

Mr O'Toole: I appreciate that.

Mr Farlinger: I guess we believe, as Mr Conway stated so eloquently, that we were getting a big message from the regulator --

Mr O'Toole: That's where I came up with that point.

Mr Farlinger: -- with the six-month and the nine-month licences.

Mr O'Toole: Right, and the fact that the regulator has a responsibility in all of this as well to signal somehow to you, as the operator, or the public.

I want to focus for a moment, if I may, on the recovery plan itself. As other members have said, we were briefed basically with the financial reports etc, but with some concern I looked at 1995, showing a profit of some $628 million, and then very quickly in 1996 you did about a $2-billion write-off. I suspect those were, in some respects, unutilized assets of some sort. I'd be looking for some kind of explanation of the variation from profit to loss for a company that clearly on record has this huge debt of $30 billion-plus. I understand how you must recover costs and how you show it openly on statements. There's a fair degree of variation there, though.

That doesn't give me much confidence for the hastily initiated recovery plan, which is a quick pull on $8 billion. There are some swings there that I have some discomfort with in such a volatile environment. We're dealing with very significant assets that are being shelved; the variation to say that some time earlier on some group of managers decided that we had 19 generators or reactors here and all of a sudden we lay off some 10,000 people, pay them bonuses, and now we've got a shortage problem with personnel, an HRM planning problem. It doesn't give me much confidence.

Now that I'm saying I've paid them off, now I'm going to try to hire them back, as Ms Fisher suggests is one of the options. This kind of expertise leaves me feeling rather uncomfortable. I gather you've addressed it and put it in the opening, and I appreciate that because we need to make sure that you have qualified personnel. You can respond as you wish.

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My last point comes from Mr Fox's statement basically in the opening remarks. You said that some portion of the generating capacity was to be sold, I gather, on contract to someone, probably in the United States or someplace. That's the case that showed us kind of a revenue side somewhere in your plan. Now that's being nixed. That's being removed because obviously we want to ensure stability of supply here.

I have some problem now with the great planning wisdom that I've seen, not to be too critical here, but we're going to have to buy our way out of contracts for a utility that knew was progressively -- you told me from 1980 to 1995 we've had about a 50% or a 40% reduction in capacity performance. We're doing this kind of thing on one hand and now we're going to have to pay a penalty to get out of it. I'm not really confident in that kind of environment. That kind of planning horizon just leaves me really quite uncomfortable with this instantly put forward recovery plan of some $8 billion. I need to be reassured. In the long run, I'm sure we'll hear some comforting remarks. If you can respond those observations, I'd appreciate it.

Mr Farlinger: I'll let John respond to the last one first, which is his department, and then I'll try to respond to the earlier part.

Mr Fox: One clarification. In my comments I didn't make any reference to paying a penalty to get out of contracts. We are trying to negotiate out of those.

Mr O'Toole: There's no penalty to get out of your export contracts? How much were those contracts? A couple of billion?

Mr Fox: I'm not sure on the total dollars. There are about 600 megawatts of capacity via contract, but as I say, those negotiations are ongoing and I think it's premature to presuppose there is a penalty associated with the renegotiation.

I would also note that those contracts, the ones that we are negotiating out of, I think from memory and subject to check, were entered into in the 1994-95 time frame, when we were not aware of the magnitude of the erosion of nuclear performance. We entered into those at a time when we were reasonably certain that we would have adequate capacity to fulfil them.

Mr O'Toole: I would put to you then, if you put this on a graph from 1980 to 1995, it's a negative slope. I'm telling you, anybody who's been in the business would -- I'm not trying to be smart, but you knew your performance was on that side, not the other side. Your demand lines have all been wrong for the last 20 years. They've actually been decreasing. But anyway --

The Chair: Mrs Fisher.

Mr O'Toole: I haven't really -- if I may --

The Chair: Oh, I'm sorry.

Mr O'Toole: -- Mr Farlinger was going to respond.

Mr Farlinger: I was going to respond to the first part, which had to do with the decision to lay up the seven units. That is indeed the critical issue in terms of the plan, and Andognini will be speaking to you about that. I can speak fairly quickly to part of it though. We're talking about three units at Bruce and four units at Pickering. At the moment, we have no units operating at Bruce, so there are some problems at Bruce. Whether we want to keep those Bruce units going -- which we do in our plan -- to March 31 or not, at the moment they're all down. This isn't a little myth that there's an issue or a problem here. Can we get them back up? We're trying to and we're hopeful that we'll get them back up to run for a while this winter, but right now they're not running.

The units at Pickering, there's a long-standing arrangement with the regulator to make some adjustments in those A units and the date for that one is December 31. Now, either one or two units are not affected by that deal, but two of them are on a deal. Could we get the regulator to back off that? Maybe, but it's a long-standing deal that they would go down anyway. That's sort of why -- the decisions weren't just, "Let's close up seven." When you do close up seven, it does give you the resources to fix 12, but you'll hear a lot more of that because that is indeed the critical decision that's being made that drives all the cost in this whole program.

Mr O'Toole: Oh, yes.

Mrs Fisher: I just want to revisit the issue that has sort of been spotted a couple of times this afternoon. If in the end of all of this hearing process we find that there are other options for consideration, I just want to make sure one more time that in fact the door is open to that type of discussion and the door is open to that type of consideration.

Mr Farlinger: Any plan that will provide us with equal or better safety and will help us with our supply problem in the province and, within limits, wouldn't cost any more is on the table, if it can meet those criteria.

Mrs Fisher: I just want to come back to one other very short question. I alluded to it earlier and I didn't wait for the response, or maybe it got lost in a few other questions. Again I come to the question of timing here and decision-making and approval by boards. We're on the cause and effect, if you will, today, a what-happened-and-why scenario. I guess that's up to the decisions made prior to today.

I just want to ask this question: How long did the board members have the report before it was voted on to be adopted and implemented as it is? How far in advance of that board meeting?

Mr Farlinger: The board had the report itself for a week. The board of course had heard reports every month since Andognini came along about where it was going, but on the recovery plan itself, that was a surprise.

Mrs Fisher: Yes.

Mr Farlinger: The board wasn't happy with the economic results of that, and extensive due diligence was done at the time of the next board meeting to review, and the auditors, as I've said, were hired to assist in the review. So a very extensive review was done of the plan and more members of the board became true believers. I promise you, you people will have to spend quite a little bit of time understanding the issues before you will become true believers, if you do.

The Chair: On the issue of true believers, maybe I can step in at that point and bring us to a smooth conclusion, Mr Farlinger. The committee has perhaps indulged me from time to time with asking a question. Maybe I could just ask one simple one in conclusion for today.

We are looking at what went wrong and why. When I sailed into this process not long ago, I had brown hair and it was in abundance. I can perceive you've been through the waters longer than I. Let me ask you to respond to this. One of the areas that I've looked at has been the issue of the human resources. Obviously it's been alluded to by all the members of the committee. In your experience and in the discussions of the board, were there any reports that have preceded the reports we see before us today over the past five, 10 years that have given any indication to a collapsing corporate culture, have given any indication to severe difficulties in what we might call human management?

Mr Farlinger: I'll try to think of as many as I can. I alluded to the 1989 report that talked about keeping an eye on the human resources. So that was raised with the board at that time. That gave rise to a group called TAPNS, a technical advisory panel which reported to the company and the board every year. Their direction was more technical than people-resourced, but I guess they must have made some comments on people resources.

The Chair: Is it reasonable to assume that at least from 1989, if not before that, there is the twisting of the alarm bell that there are some problems occurring and it's being identified for different levels of management, up to and including the board?

Mr Farlinger: Yes.

The Chair: The kinds of issues identified in the IIPA did not just occur; there is a whole range of precursors.

Mr Farlinger: Many years, for sure.

The Chair: Thank you. I appreciate very much your attendance at the committee today, Mr Farlinger. Obviously the time is completed and we have to go up to the House to vote. I want to thank all witnesses for being present today on behalf of the committee. I know they have appreciated it and I would just hope you would be held available for another return visit to the committee as we go through the next round as well. I appreciate your forthrightness and your presentation today to the committee, Mr Farlinger.

Mr Farlinger: Thank you.

The Chair: May I remind the committee members that we meet tomorrow at 3:30 pm, and that is here in this room, to deal with the Atomic Energy Control Board. We have Dr Agnes Bishop who will be here and Jim Harvie, the director general, reactor regulation. I remind you also that at 7 pm the committee will resume again. Dr Allan Kupcis will be with us. I know a number of questions arise out of today's questioning and hopefully we'll have the detail together.

Mr Conway: Just a quick information request, and I make it while Mr Farlinger is here. My knowledge is that the Hydro corporation is seeking a new president. I've been requesting for some time a copy of the job description that Hydro has prepared as it seeks a candidate through the good offices of your good friend and mine, Tom Long, to find a new person to take over as the new president, so what I would like for the committee is a copy of the job description that is being circulated --

Mr O'Toole: You already have a job.

Mr Conway: I'm quite serious. I'd just ask Mr Farlinger if he would make that available to the clerk of the committee.

The Chair: That's a reasonable request.

Mr Farlinger: Of course.

The Chair: With the exception of the aside, that slipped by just as well as mine do, that would be a reasonable request and let's ask for that, if we wouldn't mind.

Then with that, the committee will stand adjourned until -- oh, sorry. Hold it.

Mrs Fisher: Before we adjourn, so we can come prepared on a daily basis, I just want to be clear I understand who's coming tomorrow. Are we pursuing the same train of thought, past and why, or where are we now?

The Chair: You are still in the what-went-wrong-and-why phase because you're dealing with the atomic energy board and that's a regulatory body. There may be a little bit of movement on the envelope on that one tomorrow, but we start from what went wrong and why and what was the role of the AECB in all of that.

Mrs Fisher: Thank you very much.

The Chair: Then we will stand adjourned until 15:30 tomorrow.

The committee adjourned at 1752.