ASSOCIATION OF MAJOR POWER CONSUMERS IN ONTARIO
CONTENTS
Wednesday 22 October 1997
Ontario Energy Board
Ms Marie Rounding
Mr George Dominy
Dr Roger Higgin
British Energy
Dr Robin Jeffrey
Mr Robert Armour
Dr Kenneth Hare
Association of Major Power Consumers in Ontario
Mr David Goldsmith
Mr Arthur Dickinson
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)
Also taking part / Autres participants et participantes
Ms Marilyn Churley (Riverdale ND)
Clerk / Greffière
Ms Donna Bryce
Staff / Personnel
Ms Anne Marzalik, research officer; Mr Lewis Yeager, research officer, Legislative Research Service
Mr Richard Campbell, consultant
Mr Robert Power, legal counsel; Mr Adam Chamberlain, legal counsel
The committee met at 0913 in room 151, following a closed session.
ONTARIO ENERGY BOARD
The Chair (Mr Derwyn Shea): I'm very pleased to welcome a number of very distinguished witnesses to the committee today. We begin with witnesses from the Ontario Energy Board. I am pleased to welcome, on behalf of the committee, Marie Rounding, chair, Roger Higgin and George Dominy. I'm particularly pleased that they have graciously accepted the invitation of the committee. We have up to two hours with the witnesses from the Ontario Energy Board. For purposes of Hansard, if you would be good enough to introduce yourselves, we are in your hands for your opening statements and then questioning. Welcome.
Ms Marie Rounding: Thank you very much. Good morning, Mr Chairman and members of the select committee. My name is Marie Rounding, and as chair of the Ontario Energy Board I'm very pleased to be invited today to assist the committee in whatever way we can. Also in attendance with me are two members of the Board: my vice-chair, Mr George Dominy, and a member of the board, Dr Roger Higgin. All three of us have sat on various hearing panels to review Ontario Hydro matters.
With the indulgence of the committee I would like to take a few moments to highlight how the Ontario Energy Board has dealt with Ontario Hydro matters that have come before us. To do this I will focus on three key areas: (1) the mandate and responsibility of the board with regard to Ontario Hydro rates and the differences between those responsibilities and our responsibilities regarding the rates of the province's natural gas utilities; (2) the board's reviews of Ontario Hydro's nuclear generation; and (3) constraints on the board's review of Hydro rates.
First of all, who we are: The Ontario Energy Board or, as I may start to call it, the OEB is an independent, quasi-judicial tribunal which reports to the Minister of Energy, now the Minister of Energy, Science and Technology. Most of the board's responsibilities are established in the Ontario Energy Board Act. In addition, five other statutes give jurisdiction to the board: the Municipal Franchises Act, the Petroleum Resources Act, the Public Utilities Act, the Assessment Act and the Toronto District Heating Corporation Act. I will, though, focus my comments today on the Ontario Energy Board Act.
The Ontario Energy Board usually has seven full-time members, although we're short one right now, including the chair and vice-chair and four part-time members. The board members are a multidisciplinary group composed of economists, lawyers, engineers, chartered accountants and business people familiar with the energy industry.
The OEB is known as an economic regulator. Our primary focus, whether we are dealing with natural gas or electricity issues, is on ensuring that the rates for energy and related services supplied by a monopoly energy utility to its customers are just and reasonable. We do this through an examination of evidence adduced through the public hearing process. In other words, our job is to protect the public interest where a monopoly exists.
In the case of natural gas, our role includes overseeing the development of the natural gas storage, transmission and distribution system in the province and the capital investment plans of the gas utilities, which have a major impact on rates.
The primary difference between gas and electricity is that the large natural gas distribution utilities, that is, Consumers' Gas, Union Gas and Centra Gas, are subject to regulation under the Ontario Energy Board Act, whereas Ontario Hydro is not.
I'd next like to give you an overview of the board's role in setting natural gas delivery rates.
The investor-owned gas utilities are required under the Ontario Energy Board Act to submit any proposed change in rates to the OEB for review and approval. Following a public hearing, the board establishes just and reasonable rates that the utilities may charge for transporting, storing and distributing gas. The board sets gas delivery rates as low as possible while providing utility investors an opportunity to earn a fair return. The board periodically approves a pass-through of the gas price the utility pays in the competitive market and establishes the buy/sell reference price to be paid to a direct purchaser or his/her agent, broker or marketer, what we call ABMs. However, the board has no control over the prices charged by, or marketing practices of, ABMs operating in the competitive gas market.
The board also approves applications for franchises, storage, transmission facilities and distribution system expansion plans.
The OEB's primary objective when setting gas utility rates is to ensure that the overall public interest, which includes customers, employees and shareholders of the utility, is served and protected. The board's energy returns officer monitors the financial performance of the gas utilities and their compliance with the board's orders on an ongoing basis, and if a utility's financial picture changes significantly, the board may hold an interim rate hearing to grant relief to either the company or its customers. This role does not apply to Ontario Hydro.
Next I will turn to the main topic of today's presentation: the OEB role in reviewing Ontario Hydro rates. Ontario Hydro is not subject to the provisions of the Ontario Energy Board Act except when it proposes to change bulk or wholesale power rates to customers having an average annual power demand of 5,000 kilowatts or more, including large industrial customers, a municipal corporation or a municipal electric utility.
Ontario Hydro is required under section 37 of the Ontario Energy Board Act to submit any proposed change in its bulk power rates to the Minister of Energy, Science and Technology, who then is required to refer the proposal to the board for review. This is not discretionary. The board is not mandated to review Ontario Hydro's capital plans, though, or the development of the electricity system.
The minister, by letter of reference, requests the board to consider the proposal and to make recommendations to Hydro and the minister, to ensure that rates are set as low as reasonable to minimize the impact on electricity customers, while giving regard to whether or not the proposal will maintain Hydro's financial soundness and integrity, maintain reliability and quality of service. The board's role is an advisory one and its recommendations to Ontario Hydro and the minister are not binding. Ontario Hydro's board of directors is responsible for the final approval of the utility's wholesale rates.
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The extent of review into matters affecting proposed changes to Hydro's wholesale rates can also be scoped by the minister's reference letter which establishes the matters the OEB is, or is not, specifically required to review. Some reference letters include additional items to be reviewed. In HR 22 the OEB was requested to review Hydro's restructuring and experience in experimental rate options, while HR 21 requested a review of executive compensation.
The OEB typically reviews Hydro's proposed revenue requirement, including its forecast of sales, operating expenses and depreciation expenses. Hydro's proposed financing plans and the issue of financial soundness is considered in determining the net income for the test year. The board has always considered Hydro's financial soundness and specifically its net income policy as integral to the Hydro rate reviews. One significant difference between the rate reviews of Ontario Hydro and the major natural gas utilities is the return-on-equity component. The board is required to approve a fair rate of return on gas utilities' investors' equity which amounts to approximately one third of a gas utility's total capital. However, there is no similar requirement for Ontario Hydro.
The OEB examines how Hydro's costs are allocated to its three main groups of customers -- direct industrial, municipal and rural retail -- to ensure just and reasonable rates. The last two ministers' referral letters have narrowed the board's review, in that they have requested the board to focus its review only on rates and cost allocation or on rate design, that is, there would be no revenue requirement review.
The last review of an Ontario Hydro rate change proposal by the board was held in June 1996, and that was HR 24 for 1997 rates. The proposal consisted of a number of new rate options and a change in the form of rates for municipal electric utilities. The reference from the minister directed the board to review these matters and their effect on Hydro's financial soundness. Under the overall rate freeze, there was no change in average rates or revenue proposed by Ontario Hydro. The board recommended continuation of certain rate options, but did not recommend the implementation of other proposed options because of significant concerns regarding fairness and the appropriateness of the terms of the options. The board also stated its concern with Hydro's reluctance to address outstanding board recommendations regarding rate design. Ontario Hydro rejected the board's recommendations and implemented its proposed rate options.
My next topic is the board's review of Hydro's nuclear production or what the OEB has had to say about Hydro's nuclear program over the years. A summary of the board's recommendations from HR 15 in 1987 to the present has been provided to the committee in the background notes.
The OEB has always looked at Ontario Hydro's overall energy production forecast and generating plant performance, since this is the single largest variable cost driving rates. The performance of nuclear generating stations, because of their significant contribution to Hydro's overall energy production plans, has been of particular importance, not because they are nuclear, but due to the fact that they have been the single largest generation cost factor for the utility in any given year.
It is clear from the hearing record of the last 10 years that the board became increasingly concerned about the poor economic performance of Hydro's nuclear generation facilities and the serious impact on rates that this was having. However, it was also clear that Hydro did make efforts over the years to improve nuclear performance. In HR 22, that is, the 1995 rates case, Hydro presented an improved nuclear performance outlook which was supported by recent trend data, as well as a new nuclear business mission statement which emphasized safety and reliability.
The board has, over the years, made recommendations with respect to nuclear decommissioning costs, including the disposal of Ontario Hydro's nuclear waste. Going back to HR 16, dealing with rates for 1988, the board recommended that the minister refer the matter of decommissioning costs for a separate and independent hearing. The board also recommended that Hydro complete a study of irradiated fuel storage costs. In the next two reviews, HR 17 and HR 18, the board recommended that the minister request it to hold a hearing specifically on decommissioning cost estimates. In HR 19, the board reviewed the change in Hydro's policy regarding fuel storage. In HR 21, dealing with rates for 1993, the board recommended that Hydro review its provision for low- and intermediate-level radioactive waste disposal. Most recently, in its HR 22 report dealing with Hydro's proposal for 1995 rates, the board supported the principle that Ontario Hydro establish a financed nuclear decommissioning fund.
Lastly, I would like to address the constraints and benefits of the Ontario Hydro rate review from the board's perspective.
The first constraint is the mismatch between the statutory requirements and Hydro's planning and budgeting process. Over the past few years, in particular in HR 18 through HR 22, the board has expressed concerns about the timing of the rate review as it relates to the planning and budgeting process used by Hydro. The board's concerns were that the effectiveness of the board's rate review was being compromised by the use of stale data and forecasts.
In HR 18, the board expressed a concern that Hydro's internal planning process was continuing on and updating information, while the hearing worked with the previous year's estimates. In HR 19, Hydro's plans and budgets for 1991 were updated to such a degree that it prompted the board to question whether filing of such a preliminary proposal met the spirit of the Power Corporation Act. In HR 22, the board urged Ontario Hydro to revise its planning process in order to present actual business plans for the test year as opposed to a forecast of the test year plan contained in the current year's actual business plan.
Second, there are major time constraints and pressures resulting from the statutory deadlines.
Ontario Hydro is required to submit to the Minister of Energy any proposal to change rates no later than eight months prior, and that turns out to be April 30th, to the date the proposed change is to take effect, which is January 1, when they implement their new rates.
A letter from the Minister of Energy refers Hydro's proposal and, upon receiving a referral, the board must hold a public hearing and make a report, or an interim report, to the minister no less than four months prior, and that is August 31, to the date the proposed change is to take effect. This means that the entire hearing process from the filing of evidence to the board's report must take place within a four-month time frame.
Ontario Hydro typically provides limited evidence in its April filing because its business planning and budgeting process, as I mentioned, is going on in parallel and is not synchronized with the statutory requirements. Consequently, much of the evidence is created by the process of filing interrogatories with the utility and waiting for their responses. Hydro also has a general tendency to provide piecemeal updates to its evidence during the hearing, and this can become a frustrating exercise for all parties.
Participants in the hearing have, from time to time, expressed the view that the process is of limited value given the effort of the parties involved and the fact that the board's report with its recommendations can be simply ignored by Hydro without consequence. However, the board believes that the influence of the board's report may be greater than a strict count of which recommendations were implemented in full might indicate.
There are some positive aspects to the Hydro rate review process, if we accept the theory of "second best":
It gives stakeholders a forum to question Hydro's management about forward plans and rate changes.
It provides the only regular, independent, public review of Hydro operations.
Analysis has demonstrated that the OEB's rate recommendations have at times been heeded by the Ontario Hydro board and had a moderating impact on rate increases, at least during the 1980s.
The OEB believes that the overall benefit to cost of the Hydro reviews has been a positive one.
That concludes my opening remarks. We are available to answer any of your questions.
Before we do so, I should point out that if you are looking for a historical perspective or would like to raise questions with regard to any specific rate review, we have a wealth and depth of experience in both of the board members with me today. Mr George Dominy was involved in HR 22, which was the last major rate review we had. That was a full rate review, looking at the revenue requirement, and also involved the Ontario Hydro restructuring. Dr Roger Higgin was involved in HR 18 and he was also the presiding member of HR 19, which took a look at the net income policy of Ontario Hydro. Mr Dominy and I were also involved in EBRLG 36, which was the reference to look at Ontario Hydro International Inc matters.
I should just point out that all three of us have been at some time or are now civil servants and have actually been at the Ministry of Energy at some point in the 1980s, although not necessarily dealing with Ontario Hydro matters. In fact, Dr Higgin and myself also had a previous term on the board in the 1980s, which is why Dr Higgin is able to speak to HR 18 and HR 19 matters. We're happy to answer any questions you may have.
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The Chair: Thank you for your presentation, Ms Rounding. We will do the circulation by caucus. Maybe I could just ask you, in light of your information about the history, both of the deputants today and the relationship between the energy board and Hydro, to indicate to the committee very briefly before we go to the caucus that working relationship that has existed or not between Ontario Hydro and the energy board.
Ms Rounding: The staff of our board do have a working relationship with the staff of Ontario Hydro and they regularly exchange information. One of the things we tried to do on an ongoing basis was to have a meeting after each rate review to discuss how the rate review proceeded, whether there was more information that we could have had, more timely information, and some of the concerns I've expressed in my opening remarks are reviewed with the Ontario Hydro staff at that time.
The Chair: Is it your opinion that historically Ontario Hydro has been conscious of and attendant to the opinions and views of the energy board?
Ms Rounding: I think that over the long term the recommendations of the board have had an impact on Ontario Hydro and I think just the whole public review process has had an impact. Sometimes in the short term they have not followed our recommendations and there have been some concerns.
The Chair: We'll begin the questioning with the government caucus.
Mr John O'Toole (Durham East): Thank you very much for your presentation and for being with us this morning. The presentation, I think, is somewhat qualified in the closing remarks on page 6, where you say if second-best counts for anything. Overall, my consideration is going to be, what is the point of spending the time and money? I don't mean that facetiously.
I'm going to start with a couple of things, HR 15, for example. It states that "the board was not convinced by Hydro's testimony that it would soon experience declining cost pressures." HR 15 was saying that you weren't convinced, but Hydro was telling you that they had declining cost pressures. That's not exactly the environment we're in today, but do you have any reasons why you were not convinced? Could you elaborate on that particular HR 15 report?
Ms Rounding: I'm afraid HR 15 predates any of us here. Would you be able to comment on this, Dr Higgin?
Mr O'Toole: I wouldn't labour on it too much. I think it's substantiated by the dilemma we're in today. I guess in a broader sense I've had some lack of confidence, looking at the annual reports, which would show that periodically there are significant write-downs. I think it's $7 billion over the last four or five years. That's a fairly unstable fiscal climate. Would you comment on that, the ability to audit rates and pick out this little piece of what a kilowatt costs in a background of a lot of complete unknowns?
The next one is HR 22, which you may have some familiarity with. The decommissioning costs, maybe counting in that light, are not even part of the equation, really.
Ms Rounding: Perhaps I could refer this to Mr Dominy, as he sat on HR 22.
Mr George Dominy: The question of decommissioning costs is an issue which I believe over the years the board has requested an investigation of what it is, and this review has not been taken in detail. With regard to that issue in HR 22, the principal question that was raised related to the fund that was being established for the storage of spent fuel. The board's recommendation in that regard was that it supported the proposal put forward by Hydro that they would create a financed fund as opposed to putting in a provision, which means you collect money from the ratepayers and then it's reinvested in Ontario Hydro, but it's on the books, you've collected the money, and when the time comes to require the money, then Hydro would raise it by other means. The principal issue in this regard was the question of making that a financed fund as opposed to a notional fund.
Mr O'Toole: A notional fund is the way it's currently carried, sort of on the books as part of the overall debt.
Mr Dominy: The board certainly endorsed the proposal, which was made by Hydro itself, that they would seek to make that a financed --
Mr O'Toole: Just probing a little bit -- I sure will be jumping around here -- is the actual model they used to forecast the decommissioning costs in any sense accurate?
Mr Dominy: I'm afraid I'm not able to answer that.
Mr O'Toole: Who is? Who would I have to ask that question to? It is a serious question.
Mr Dominy: I think the board said it felt this is an issue that needed investigation. I think it's an issue you really would want to pursue further with Ontario Hydro itself. The board has not done a review; it has recommended in the past that such a review be made.
Mr O'Toole: In a broader sense, I'd like your comment. We've heard that none of your decisions are binding, and I don't mean that facetiously. I'm returning to that particular line. It must be very frustrating because you have, as you said, really a very short four-month window to review the rate, and in the background we have a plethora of technical, unsubstantiated, somewhat abbreviated data, always being augmented and always out of date. Without being flippant, how useful is the exercise at all?
Mr Dominy: One of the issues about the Hydro review process is, it is not the board by itself alone that is participating in it. In HR 22 there were 40 active intervenors. When you add the collection of the input of all these different groups, you get a more detailed look at Hydro's plans or activities than you would get if you relied purely on a single entity to do it. This is an advantage.
Many questions and issues are raised by the interest groups, people like the stakeholders, people like the Municipal Electrical Association, people like the Association of Major Power Consumers in Ontario, by board staff, by many other intervening parties. People from the Bruce community were intervenors, and various other groups. I think if that assists -- it's a very complicated, very wide-ranging area.
Mr O'Toole: I'm going to oversimplify it, then. We have a summary of the HR costs, basically $1 million or more for every one of these HRs, which includes the intervenor costs and the awarded costs. We're aware it's an extremely expensive process. I guess the issue I'm bringing to you is, of what value is it as opposed to signing some kind of record of testimonial, which I think is an important scientific observation. Whether or not the government takes action, it's kind of out of your hands, really.
Ms Rounding: I think it is a frustrating process when from year to year you find that your recommendations are not implemented and you're not able to move ahead on a particular issue. But I agree with what Mr Dominy has said, that the public review process in itself does have some moral suasion with regard to Ontario Hydro. They have made some changes, as I indicated in my closing remarks.
I think I also indicated that we think it does have some value and that although there are some costs to the process, we feel the benefit-to-cost ratio is positive. I think Dr Higgin would like to speak more specifically to that point.
Dr Roger Higgin: I think the board's experience in regulating large utilities was applied to Ontario Hydro in this way. We took a thorough look at their revenue projections, and usually the tendency is to be overoptimistic, and also the costs, and the tendency there is usually to underestimate certain costs.
On the other hand, what the board's review I think ended up doing in many cases was making recommendations which would result in a lowering of the overall rate proposal, and a very important point is the updated data, which usually indicated a much higher rate increase than was originally filed. That was the experience we had, by the time all the costs were updated, indicating ways in which they could moderate the impact of the rate increase through cutting costs and so on.
Also I think we had a significant impact on maintaining the financial integrity of the utility by making adequate provisions for covering net income allowances.
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Mr O'Toole: I'm just going to switch; I have one more minute left. The switch I have here is that we are going to hear a lot of inquiry about alternative energy sources. The most popular, perhaps the most environmentally friendly, would be the natural gas utilities.
That being said, if the whole market sort of dynamically shifts around so the demand side on natural gas goes through the roof, you're going to experience -- I'm asking the question: If the utilities make a major switch and yet the costing justifications for any of the applications to provide alternative sources are based on today's prices, what would your expert advice tell me about the future price of natural gas? If there's some pressure on the market to move from nuclear to this very environmentally friendly form, what degree of confidence have I to make a comparison to say that it's a good formula but it's based on 1996 data which say the price is marketable, but under current conditions the demand goes through the roof and the supply falls and, wham, you get a price increase.
Last year I had many complaints in my riding about the tacked-on price of natural gas. If you recall, there was a kind of bundling up boosting the price and they all got a bill of $250 or more, every constituent, to bump up the price of natural gas. You bulk it up based on the best-known demands and at the end you kind of give them a rate increase.
Ms Rounding: Was that the retroactive rate increase from Consumers' Gas?
Mr O'Toole: Yes, that's the one.
Ms Rounding: That is of course because the cost of gas did go up and the utilities don't make a margin on the commodity cost.
Mr O'Toole: That's really my question.
Ms Rounding: It is passed through to the consumers.
Mr O'Toole: Exactly.
Ms Rounding: It's difficult for them to understand that we don't regulate that other than looking for prudency in the purchasing.
Mr O'Toole: The commodity cost is what I'm talking about, though. Without trying to interfere with you, that's the margin I'm trying to get to. You look at the longer-term stable costs and then all of a sudden you get the demand costs, the marginal increase. That's not even regulated. It's passed through to the customer. I'm forgiving you for that, but that's the climate we'll be in if we did, en masse, switch to some kind of natural gas option.
Dr Higgin: Natural gas fired cogeneration combined cycle plants are the current main mechanism of adding incremental generation capacity. You're correct that the main factor affecting the cost of production of power from those facilities is the cost of gas. There are ways in which, through contractual arrangements, the owners of those plants can minimize the impacts of gas over the short term and, to a degree, over the long term as well. But that is a key question. Natural gas fired cogeneration may look attractive now. Should there be an increase in natural gas prices that is significant, they may not look as attractive, although on the other side, plants that are built now will have depreciated most of their fixed assets and will have lower fixed costs at the same time. So those two may offset one another.
Mr O'Toole: What about the pipe corrosion theory? I want to get into the theory. We've got the natural gas, that's the main form. Now we've got the pipe problem. We've got all these pipes that have stress fractures or whatever they are. I guess that's a significant industry problem.
Ms Rounding: I think the National Energy Board has a program to deal with the stress corrosion problem.
Mr Sean G. Conway (Renfrew North): Thank you, Ms Rounding and colleagues, for a very clear and very helpful presentation. I think this in the end is going to be very useful testimony and I thank you for it.
Let me get right to the primary interest I have. How long have you been on the board, Ms Rounding?
Ms Rounding: I've been chair for almost six years now and I was also on the board from 1984 to 1987 as a member.
Mr Conway: So you've been there for the better part of 10 years.
Ms Rounding: Yes.
Mr Conway: Do you see or feel from that almost decade-long experience any administrative or policy reason why the people of Ontario shouldn't move from second-best to presumably better or best regulatory environment, whereby Ontario Hydro and their friends in the electricity sector are subjected to a thorough and binding regulatory framework?
Ms Rounding: Obviously, as a regulator, we would prefer first, best, we would prefer to regulate on a level playing field. I feel it's increasingly important, as we move to deregulation and we move to convergence of the two industries, where energy is going to be interchangeable, that if we are going to regulate the monopoly functions of the natural gas industry, it probably makes sense that we also regulate the electricity industry on an even keel.
Mr Conway: Moving forward with that, as you see the future unfolding, what are the areas of the electricity sector that a board such as yours ought to be regulating in a thorough and binding fashion?
Ms Rounding: If we go back to the theory of regulation, we should only be regulating that which remains as a monopoly, and where there's effective competition, we should allow the market to operate. What we have to do, and what we're doing in the natural gas industry right now, is to try to decide when there is effective competition so that the board can forbear and not regulate in certain sectors. We can foresee in the future that generation can perhaps become competitive. Until it is competitive, I think there is a role for regulation because it would still be a monopoly for a certain period of time.
Transmission, I think most people accept, will probably remain a monopoly and so regulation of the transmission makes sense. If you go to the distribution function, if we go to full retail competition, then there would probably be regulation of the distribution function if it remains a monopoly, as it is.
Mr Conway: The government is in the process of preparing a white paper on electricity reform. Ms Rounding, have you or any of your colleagues and/or staff at the energy board been consulted by the officials in the government who are preparing that white paper?
Ms Rounding: We have not seen the white paper. We have been consulted on certain issues and asked, "If this were to happen, what would your situation be?" We've provided some advice, some research on a number of issues for them, but we have not been privy to the white paper itself.
Mr Conway: What specifically were the issues on which your advice was requested?
Ms Rounding: I think some of the things were resource requirements that we would need if we were to regulate Ontario Hydro --
Mr Conway: You can take the question as notice, if you want to return to it later.
Ms Rounding: One of our staff members who did some of the research is here with me today. There was history of gas deregulation, so that you could see the parallels that were being drawn in the natural gas industry to the electricity industry. It was more general research rather than specific research for the white paper.
Mr Conway: On that point there is a great debate in the community about gas and electricity. In fact many in the business community are quick to point out: "You've deregulated natural gas in this regulatory framework. There should be little or no difficulty doing the same with electricity." Could you compare and contrast the natural gas and electricity sectors, particularly with a view to the policy issues that any Parliament and Legislature, and certainly the government, are going to face?
Ms Rounding: Are you asking in terms of deregulation?
Mr Conway: In terms of a competitive market, in terms of regulation. The argument is made that there really is no difference between electricity and natural gas. I, for one, believe there is, because certainly I represent a lot of people who fully expect they're going to get electricity and know they'll never get natural gas. As an elected official, I find a clear difference in the mindset of my constituents in terms of their expectation of electricity and their expectation of natural gas. I may be the only person in the land who feels that.
Ms Rounding: We have had various arguments over the years as to whether natural gas and electricity are essential services and perhaps the public does tend to see the provision of electricity as more an essential service than natural gas. But if you take a look at the two industries, obviously there are quite a few number of suppliers on the gas supply side, but on the electricity side right now we really just have the one major supplier of electricity. Of course there's another major difference in the sense that gas can be stored and electricity can't. The transactions and trading and interchange take place on a split-second basis, so the central market operation function is a very key function in the electricity industry. It's very important that in any change towards deregulation you get that function correct. I think it's much more crucial than it is in the natural gas industry, although it is very important there as well.
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Mr Conway: Just reiterate why in electricity -- is it because you can't store electricity and you can natural gas? That's the fundamental difference?
Ms Rounding: That's right. In fact in Ontario the direct-purchase market for natural gas has developed more quickly than it has in other provinces such as British Columbia. One of the reasons British Columbia gives for the fact that they haven't developed the direct-purchase market there is that they don't have the same access to storage we do here. We have that security of supply and there aren't concerns; there will always be gas there, at a price but the supply will always be there. There is some security here that there isn't in other provinces. That's what we have to make sure of on the electricity side, that there is some security of supply when we move to a competitive market.
Mr Conway: What other lessons are to be learned, particularly as we think about the electricity market becoming more competitive? What lessons ought we to take into account when we think about the experience of the gas sector over the last 10 years?
Ms Rounding: I could begin, and my colleagues may want to add something. Some of the lessons we have seen are that, first of all, it takes a while. We've been at natural gas deregulation for 12 years now and we're still not all the way there. One of the other things we've learned is that it's very important to involve the industry. We have tried to make the industry come up with solutions because we feel that if you can get buy-in from a number of stakeholders, you're going to get a more effective solution than if we just impose one solution or another.
That has worked quite well. Unfortunately, though, getting consensus is not always easy, but it's a good starting point. Even if it means the board or the government has to make the final decision on some of these issues, you can scope the issues and narrow the different positions a lot better if you have some industry input. Also it achieves the purpose of educating the various stakeholders.
We had in the natural gas industry a working group that worked for eight months extensively. They didn't reach a great deal of consensus, but I think over the time they increased the level of awareness of everybody involved in the process so that when we eventually go to the hearing, hopefully it'll be more expeditious and we can focus very quickly on the areas of difference.
Mr Conway: Taking those points into account and keeping in mind that electricity is in some respects a fundamentally different commodity, and viewed as such by the public, and that we're going to be heading into a world where substantially there is really only one supplier for a lot of people and it probably will remain that way for some limited time at least, from your point of view, what would be the pitfalls that the Legislature and the government should be very careful to try to avoid?
Ms Rounding: Just to follow up on the last question that may lead into this question, one of the other things I was going to say with regard to natural gas is that we have to be very careful not to erect barriers to entry for new competitors. In some of the provinces, in natural gas they didn't allow, for instance, aggregation of accounts. They had higher exit and entry fees for new entrants, so it made development of the market more difficult. Obviously here there's a different situation where there aren't as many players in the game. I think that's something the government is going to have to look at. If it's really looking for a true competitive market, it has to make sure there aren't barriers to entry.
Mr Conway: Does that mean that --
The Chair: Thank you, Mr Conway. We'll come back.
Mr Floyd Laughren (Nickel Belt): Ms Rounding, welcome to the committee, to you and your colleagues. My instinctive reaction is to encourage you, with your expertise and Mr Conway's money, to launch a hostile takeover bid of Ontario Hydro to bring them to heel.
The Chair: I will permit a couple of minutes of rejoinder by Mr Conway later in the meeting.
Mr Laughren: All right, I'll accept that. At the beginning I wanted to ask you about the Ontario Energy Board and the AECB and what kind of relationship or links there are between the two organizations when it comes to Ontario Hydro's nuclear division. I appreciate that you deal with rates and they deal with safety, but is there any overlapping there, because sometimes the rates could affect safety and so forth?
Ms Rounding: We haven't really had any liaison with the AECB. We view it as two distinct, different functions. We really look at nuclear from the point of being a cost-driver.
Mr Laughren: That's interesting because it seems to me you could make the argument that there is a link between rates and safety at Ontario Hydro. The argument has been made that because of the freeze on rates and the pressures on Hydro on rates, they didn't engage in the preventive maintenance they should have and reduced the staffing at the division.
Ms Rounding: I'm sorry, yes. You'll see in a couple of the summaries of our HR cases, we have expressed some concern about the level of staffing for maintenance and for safety. Although we haven't commented directly on safety, we've commented on that in terms of the O and M levels to make sure there were adequate levels there to ensure safety, but of course we didn't overlap with the jurisdiction to actually look at those safety issues.
Dr Higgin: The focus of our analyses was on performance; in other words, the capability factors that were being projected for the nuclear plants and the energy production forecasts that were related to those capability factors. They were obviously affected by a number of things including the level of O, M and A, and maintenance that was put into the plants. Those things also, of course, would affect safety and other things related to the operation of the plants.
Mr Laughren: Do you think there should be a closer relationship between the OEB and the AECB?
Mr Dominy: I just want to comment that in HR 22, which is the last time the board looked at Ontario Hydro in a broad way, there were presentations made by the then general manager of Ontario Hydro Nuclear who stressed the importance of safety as a key objective. They made the statement that financial constraints would never compromise safety.
In that report I think the board mentioned that they were encouraged by the improvement in the performance that was shown, at the time, of the nuclear units' higher capacity factors. They did caution that having been impressed by the improvement, they still were a bit concerned whether it would be sustained, but also identified in the board's concern that Hydro make sure there were adequate resources devoted to maintenance. That was the position the board took in HR 22. As I say, it's the last time the board has looked at it broadly.
Ms Rounding: I think an independent look at safety is probably a good idea, for instance, in the natural gas side. The Energy Act deals with safety issues. We don't administer that act; it's the Ministry of Consumer and Commercial Relations. But there is an independent look at it. I think it is very important.
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Mr Laughren: I personally think there is a relationship, and it should be a closer one than at present exists. I wonder if I could turn to page 5 of your presentation this morning which I found, as Mr Conway did, to be a helpful presentation.
In the second paragraph you list a number of recommendations. The paragraph starts, "The board has, over the years, made recommendations with respect to nuclear decommissioning costs" etc. You go through a whole list of recommendations there to the end of the paragraph. You don't say to what extent they were complied with. Could you tell me what happened with those? You can start right at the first one, if you wish.
Ms Rounding: With regard to decomissioning, there has never been a separate or independent hearing, which we did recommend for a number of years. As we have indicated in HR 22, we did indicate that we agreed with Hydro's proposal to set up a separate decommissioning fund. That, I believe, has been done on the books, although not a separate fund per se. With regard to --
Mr Laughren: The irradiated fuel storage?
Ms Rounding: Because 18 and 19 were Dr Higgin's terms, I'm going to turn now to Dr Higgin for those.
Dr Higgin: Although it's a related issue to decommissioning, in 19 the focus was on the spent fuel management; in other words, the storage of spent fuel. The allowances that were made for that were based on a 40-year storage period, which the board felt was inappropriate and should be shortened. Whether it was based on that recommendation or Hydro's own analysis, that change was made to the lifetime for the provisions for spent fuel storage.
Ms Rounding: In addition, we provided the committee with the responses of Ontario Hydro to our recommendations from HR 17, 19, 20, 22 and 23. Of course they're quite extensive in each hearing, but if you were looking for more details, you'll find them there.
Mr Laughren: What I was really trying to get at was, if you were to look historically and try and summarize the response of Hydro to the OEB's recommendations over the years, what kind of picture would be painted?
Ms Rounding: As you are aware, I know they respond each year to our recommendations with the report that is in your package. With each recommendation they give an explanation for whether they either accept, agree or reject our recommendation and why. I know the committee requested statistics on that. We weren't able to supply statistics, because when you take a look at the response, sometimes they give a qualified acceptance of what we have recommended, and sometimes they give an explanation of why it is not possible to implement what we have recommended. It's very difficult to give a quantitative analysis, although Dr Higgin prepared some statistics on the acceptance and rejections in the 1980s, did you not? Would you be able to comment on that?
Dr Higgin: Yes. When I was there, with the board, the issue of what impact the board's recommendations was having on Hydro was still there. I did an analysis and it showed that in general the board's recommendations were being followed, at least as far as the general rate increase in the 1980s is concerned.
In other words, at that time the proposal was so much and there's a line that reflected those series of proposals, and then there was the board's recommendation and Ontario Hydro's actual rate increases. Over the period, although some years it was one way or another, the two lines, the average lines, between the board's recommendations and Ontario Hydro's actual rate increases were quite close and much lower than the proposals for rates.
Ms Rounding: I could give you the details on 1990: Hydro accepted or agreed with 37 of the 49 recommendations. However, it rejected five of the seven key recommendations directly affecting the revenue requirement and opposed three of the four recommendations to the Minister of Energy on Hydro policy matters. And "accept" is defined as "agrees with the rationale and specific action recommended," and "agrees" is "agrees with the rationale but rejects the specific action." That 37 out of 49 may not be quite what it seems.
Mr Laughren: To what extent is the OEB proactive? By that I mean that if, for example, when you hear Ontario Hydro has a recovery plan in place that's going to cost anywhere up to $8 billion or $9 billion, to what extent are you allowed to be or are you proactive in saying, "Hold the phone, we're going to take a look at this?"
Ms Rounding: Unfortunately we have no mandate to do so. We can only do what is referred to us by the minister in the letter of reference with regard to Ontario Hydro.
Mrs Barbara Fisher (Bruce): I recognize the faces sitting at that end. We always seem to be across the table, though. I want to pick up a little bit what Mr Laughren just touched upon. I've watched a couple of things in shock for a number of years now: how in the end Hydro manages to get its way anyway, regardless of what you say or do or act or think or recommend. If I was sitting in any of these positions here this morning on your panel, I would probably be as frustrated as you probably are but aren't showing as much as you'd like to. I commend you on your professionalism here.
I want to get to one thing that I think we're missing here. You're appointed with a mandate and a responsibility to give recommendations, but the mandate and your appointments come from the minister, from the Minister of Energy and Environment, now from the Minister of Energy, Science and Technology. However, your recommendations of your findings in the case of Ontario Hydro, your Ontario Energy Board rate hearings, go to the Ontario Hydro board of directors.
Having been a participant in that process in the past on a number of occasions, and I'm now getting a little sensitive here to the community's emotional feelings on leaving those hearing procedures, I found it rather ironic that I think we were one of the very first-ever communities that came and made formal application to be heard at the Ontario Energy Board rate hearings with regard to electricity. It's maybe a phenomenon of the Bruce community that makes that happen, but so were they also in the regulatory body hearings with the AECB.
My questions go along this line: I often felt that you would have the parties in from Ontario Hydro with respect to each of the individual responsibilities of the vice-president offices. It could be a Clitheroe or it could be a Fox or it could be a whatever -- whoever was there that day. Most of them seemed consistent over the past number of hearings I've been at. But there's also this thing called "legal counsel." I would like an opinion as to how you feel when legal counsel makes recommendations to a board of directors -- supports it vehemently, if I might use that word, at the OEB rate hearings on behalf of Hydro, as it's paid to do -- and then it turns around and has some type of input as to the decision that's made as a result of that recommendation. How can anybody get in and make change? How can anybody have an influence?
We've reviewed a little bit the percentage of the number of recommendations that you've made versus the abysmal failure for them to accept those recommendations and act on them. Is there any connection? I see that position, that legal counsel representation at the hearings, no differently than a vice-president role in making the decisions at the board. I've been on the outside and watched it; I've been in the hearing process and watched what happens.
Ms Rounding: I think there is a distinction to be made, first of all, with regard to Ontario Hydro. Usually they use outside counsel to represent them at the hearing. They have a history of using the same firm over a number of years. Generally speaking, when it gets to -- I'm not privy to this, of course, but with regard to the board of directors, Mr Leonoff is their general counsel, I believe he is on the board of directors and I'm sure he would be advising the board of directors, as opposed to the outside counsel who's involved in the hearing process.
Mrs Fisher: I think you hit the nail on the head when you said it's been consistent over a number of years. Whether or not the party moves from firm to firm or whatever, I can tell you that from the 25-year supply-demand studies forward, which are now obviously becoming the more important features of Ontario Hydro and where it's headed and where it's not headed and where it should be heading, it seems to me there's some consistency in the legal counsel representation to your board hearings. Am I right?
Ms Rounding: In recent years, Ontario Hydro -- to correct myself a little bit -- has started to sometimes use internal counsel. But over a number of years, there was consistency in terms of the external counsel they used, if I understand your question correctly.
Mrs Fisher: Yes. I find that the counsel who comes before the hearing process should not only be there to represent Hydro, but the best interests of the consumers and the constituents in Ontario. I didn't feel that was what was happening. Can you reflect on that?
Ms Rounding: Yes, I think their role is there to assist Ontario Hydro. The Ontario Energy Board has traditionally had board counsel who have played that public interest role in making sure the evidence is thoroughly canvassed in the interests of all the ratepayers in Ontario. That's really a role that's more proper for the Ontario Energy Board.
Mrs Fisher: I'd like to take it a step further then. At the beginning of these hearings I asked for a summary of the costs of all of the past hearings from, 19-whatever back; I can't even remember the year now, 1975 or whatever. We got that; we got a comparative as well of the number of recommendations that were made versus those accepted. My feeling is that if a minister appoints a board with a mandate to make recommendations, and it's quasi-judicial and therefore something aside from Ontario Hydro and something aside from government, and it makes recommendations, one would think they should be listened to, wouldn't one?
Ms Rounding: One would hope so.
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Mrs Fisher: I won't go on that much longer. I think I made my point. I have one very quick question. Was the OEB consulted at all with regard to the 25-year supply-demand study?
Ms Rounding: There was one cross-appointment, Dr Connell. Although he had not actually served on the Ontario Energy Board, he was appointed to the Ontario Energy Board for the purposes of this hearing, so he never did actually sit on a regular OEB case.
Mrs Fisher: I do note that back as early as 1988 in one of the HR hearings, at least from the information we have, some concern was expressed with regard to the safety performance and the safety implications of Hydro. Am I right?
Ms Rounding: Yes.
Mrs Fisher: Let's get back to this issue of how you are appointed and who you answer to. After you make your recommendations to the Ontario Hydro board of directors, do you also send the minister a copy of the letter?
Mr Dominy: We report it to the minister, and the legislation requires us to send a copy to Ontario Hydro. The minister usually asks us to separate the recommendations out into those that are to Hydro and those that are to the minister.
Ms Rounding: But our full report is to the minister.
Mrs Fisher: So when there is an OEB hearing, has it been consistent history that it goes over to Hydro, and obviously you leave them to make their decisions based on your recommendations, but do you also then meet with the minister, and have you met with the minister, after each of the hearings to step through each of those recommendations?
Ms Rounding: We meet with the minister to brief him or her on our report.
Mrs Fisher: What I want to get at here is there doesn't seem to be a connect between regulatory licensing, the minister and Hydro. As we have gone through the past two weeks here, we have continued to see that. You are a major part of that connect -- I personally believe you are and you should be -- but it's not really happening, so I'm trying to get us to why it's not happening.
When the minister receives the report, you meet. Do you go through those recommendations in detail?
Ms Rounding: Whenever the minister requests it, we do.
Mrs Fisher: Has that been the history of what happens?
Ms Rounding: Sometimes it does and sometimes it doesn't, depending on the minister.
Mrs Fisher: Can you be more specific? Let's start back with the 25-year supply-demand study as your cut point. Come forward from there.
Ms Rounding: I'm not sure I'd be able to remember each one.
Mrs Fisher: Just to let you know why I'm asking this question, much of the process to date has hinged on what happened and why. It's not so that we can point fingers of blame so much as to go forward and get it right. That's my objective anyway, on a personal note.
I'm trying to get the connect here. If the minister knew consistently starting in 1988 that you had a safety issue and the AECB was telling Ontario Hydro in, at minimum, 1988-89 its issues with regard to safety, and if the board of directors knew that you were making recommendations to do something about that and if the AECB was doing that, and they seemed to be the only ones that have any not control but influence, or should have, over Ontario Hydro -- I don't mean to put you on the spot here, but it's an important question.
Ms Rounding: I think that in recent years the minister has not necessarily always requested a briefing, but we have always made ourselves available to do a briefing. We have in fact briefed staff, and our staff has also briefed staff of the minister and of the ministry, so there has been a full exchange of information. If what you're getting at is to make sure that they understand where we are coming from in terms of all our recommendations, I think there is a thorough sharing of that information so they are familiar with where we are coming from in our recommendations.
Mrs Fisher: Maybe it just wasn't acted on, kind of like the recommendations.
Mr Conway: Ms Rounding, I want to come back to some previous questions. You are, as you say on page 2 of your brief, an economic regulator, and I think I understand that. We have before us in this committee quite a fascinating and remarkable recovery plan presented to the people of Ontario by the chairman of Ontario Hydro on August 13 that has very substantial consequences financially.
According to Hydro's own data, this multibillion-dollar recovery plan will put the utility, Ontario Hydro, in the next few years in a situation where they will be reporting negative retained earnings, where they are going to be reporting annual operating losses and where, according to Hydro's own data, they don't expect to be able to meet their statutory debt retirement obligations. Do any or all of those issues give you any concern over at the OEB?
Ms Rounding: Yes, of course they do. Those are all issues that would impact on rates, so they would all be something that we would take a close look at if there were a letter of reference to us with regard to any rate review proposals in the future and they would all be significant things that we would look at very closely.
Mr Conway: Do you want to just elaborate on the significance of those issues, the negative retained earnings, the annual operating losses and the inability to meet the statutory debt retirement obligations?
Ms Rounding: Dr Higgin would like to respond to that.
Dr Higgin: I can just speak to the benchmarks that were prevailing in the past, and they were based on expert testimony from financial experts. The prime consideration is gross interest coverage and maintaining those ratios recommended previously, 1.2 to 1.3, and also targeting, even under the current structure, towards a debt ratio of 80% debt, 20% "equity and reserves." I have no familiarity with the numbers you have just cited, but based on the board's experience, they would appear to be outside the benchmarks that we have applied in the past as being indicators of the financial integrity of Ontario Hydro.
Mr Conway: Would a reasonable person therefore conclude that a utility that was going to be facing a couple of years or more of negative retained earnings, annual operating losses -- I think what I hear you saying is that a reasonable person might conclude that would have at some point a potential impact on rates.
Ms Rounding: Yes. We would be concerned about the financial integrity and the financial soundness, and those are two things that we look at each time we do a rate review.
Mr Conway: I was struck yesterday. A couple of Hydro board members made reference to the fact that the Hydro board appears to have a legal opinion that suggests the Power Corporation Act may not really impose a certain statutory debt retirement obligation on Her Majesty's provincial utility known as Ontario Hydro. Would that strike you as a bit strange, that that kind of a legal opinion might exist?
Ms Rounding: I thought it was a statutory requirement in the Power Corporation Act. Did you want to elaborate on that, Mr Dominy?
Mr Dominy: I'm sorry, I haven't seen the legal opinion, so I couldn't comment on that.
Ms Rounding: I'm unfamiliar with any such opinion.
Mr Conway: My memory is that the Ontario Energy Board has in the past tried to gain access to certain of these Ontario Hydro legal opinions and that you haven't been successful. Is that a correct understanding?
Ms Rounding: I have no experience with that, and I don't think either of my panel members do either. There have been times in the past when we have had difficulty obtaining information from Ontario Hydro, but I could not specifically say with regard to any legal opinions.
Mr Robert Power: Other parties.
Mr Conway: Legal counsel reminds me that other parties have tried to get these opinions, but just to be clear, your understanding is that the Power Corporation Act imposes a clear statutory debt retirement obligation on the utility, and that is your understanding of what the law requires.
Ms Rounding: That is our understanding.
Mr Conway: You would not be aware of any waiver that Ontario Hydro might be able to apply to exempt it from that statutory debt retirement obligation?
Ms Rounding: We're not aware of anything, but it's difficult without seeing the legal opinion.
Mr Conway: I want to come back to Dr Higgin. In earlier testimony, I thought I heard you say that, generally speaking, over the period of say 1985 to 1997 it would not be unreasonable to conclude that Hydro in its appearance before the board overstated operating successes and understated problems and costs, particularly on the nuclear division. Is that a fair --
Dr Higgin: I can't speak to the period from beyond 1991, but in the hearings that I was in, that was the pattern that emerged. This is not untypical of any regulated entity that is presenting forecasts. They tend to be somewhat overoptimistic on how much they're going to sell and what the revenues will be, and equally optimistic about their costs.
Generally what happens is that cost pressures come as a result of actual operating experience during the period when they're looking at the outlook for the next year, and then saying, "Heck, we can't meet those costs because we're already at this level now." Then they tend to update the costs upwards. That's a typical pattern that often occurs.
Ms Rounding: It's complicated by the fact of what I referred to in my opening remarks of the business cycle being out of sync so that there's always the excuse that the information is stale-dated.
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Mr Conway: Would your experience over the last few years be such as to make the committee -- the committee is going to be asked to passed some judgement on this recovery plan. The recovery plan was presented to the board after a lot of good work done by Mr Andognini and his colleagues, but the board got the plan a few days before the board decided to accept the plan on August 12. They announced a move-forward plan on August 13 and it has billions of dollars of costs associated with it. I take it from what Dr Higgin said that the committee wouldn't go wrong if we were a bit sceptical about some of the numbers associated with these plans, based on your experience over the last four or five years.
Dr Higgin: I have no idea how well those numbers were tested by the people that submitted them to the board and what testing the board did. The general experience is that when you're forecasting, particularly difficult technical and engineering-based costs, based on engineering and technical improvements, the experience is usually that costs tend to go up, not go down.
Mr Conway: I want to come back, Ms Rounding, to the whole business about the future. You made a point that it would be in the deregulated electricity sector, particularly if the natural gas experience is any guide, it will be really important that the central market operating function be very strong and very clear and fair. Did I correctly understand you there?
Ms Rounding: And that there be fair access to the system.
Mr Conway: Do you have any particular views or observations you would like to share with the committee about the future, because clearly there are changes coming, there is going to be competition in the electricity sector. One of the issues that is going to confront the public is the so-called disaggregation of the monolithic utility that we now have.
A very heated debate of course is whether or not -- you yourself said the transmission function will probably remain a monopoly and for some considerable time the bulk of the generation is going to come from Ontario Hydro. A lot of people say that if we're going to have a reasonably competitive marketplace, we're going to have to deal with some of the obvious in-built conflict of interest that will be there. Do you have any views about the disaggregation of the provincial utility, particularly with a view to assuring fairness and open access?
Ms Rounding: Again, I guess I could go back to our experience in natural gas deregulation, and there's one point I should have added in terms of what we have learned, that consumer education is extremely important. We're finding right now in natural gas deregulation that the public still do not understand it. They don't understand the choices. There isn't price transparency so there are a lot of customers making decisions on inadequate information, and I think that's going to be a real key in the electricity industry as well, that people understand the process.
But in terms of disaggregation, one of the things that we have found in the natural gas industry, and I think it would apply equally to the electricity industry, is that if you're separating out the different business functions as to whether they're competitive or not competitive, it is much better if you can make a clean break. For instance, in gas, we are requiring that if they diversify into water projects, or you've seen some of the other projects at Consumers' Gas on the west coast they have been involved in, across the country, that they do it in a separate affiliate. We have a code of conduct for the relationship between the utility and any of their affiliates. Right now we only have a code of conduct for the marketing affiliates but we're working on a code of conduct for all affiliates to keep that separation so there's no cost subsidization.
Mr Conway: All right, and I understand that. But then one of the key questions is the relationship, in the electricity sector, between the transmission function and the generation function. From the point of view of economic regulation, do you have any view as to whether you would or should separate out, in a clear and discernible way, the transmission function from the generation function? I guess I'm trying to get to the point that there are those who argue that you'll never have a level playing field if the provincial utility continues to combine a substantial part of the generation and the transmission. Do you have a comment, from a policy point of view, as an economic regulator, about that relationship?
Ms Rounding: As a regulator, as I indicated from our experience, the more separation the better in terms of the regulator's job to make sure there is clear differentiation between the two functions, and in terms of access. I think it's really important to have a completely separate function.
Dr Higgin: I think you'll find that has been the basis of the operation of the Federal Energy Regulatory Commission in the United States. They've found that that separation is desirable from a policy point of view and from a regulatory point of view.
The Chair: Thank you, Mr Conway. Mr Laughren. I'm sorry. Did you want to continue?
Ms Rounding: I just want to say it's particularly important for the access issues.
Mr Laughren: I think that some of us, and I'm certainly one those, feel that in the world that's unfolding before us -- it may not happen this year or next year, but the energy picture is going to change quite dramatically. I don't think you have to be a rocket scientist or a nuclear physicist to see that.
If, when that world does come, and you have competition on generation, you would have Hydro presumably as one, and you would have all sorts of people feeding into some kind of grid or pool for power, then you would have the transmission itself and you would have competition at the retail level probably as well. That's one possibility out there.
If that was the world that would be there, what would you regulate? How would you pick as you regulated and would it be possible to regulate them under the present set of rules or would the present rules become inadequate?
Ms Rounding: No, we couldn't regulate them under our present rules. Our power is so limited it's purely at reference from the minister. In that case, if generation was competitive and there's a possibility of a competitive distribution market, although I tend to believe that's still going to remain a monopoly, we would just regulate the transmission, much along the lines as I think eventually we will do in natural gas. We'll just regulate the pipe lines.
Mr Laughren: If you regulate that, then people have to toe the line to feed into it. Is that the idea?
Ms Rounding: Yes, exactly.
Mr Laughren: I see. I think that many of us feel that the day has come already when the regulator has to have authority, not just play an advisory role. I think that's what's coming. I hope that's what's coming. There's enough evidence that the present system can't continue to work.
When you do work with Ontario Hydro, do you have any problems with them in getting information that you need? I'm not talking about the time element here -- I appreciate the time problem where they get updated and so forth -- but do you have any problems with actually getting information that you seek?
Ms Rounding: Sometimes we have had difficulty in getting information, yes. I know in the Ontario Hydro International Inc hearing that I sat on, there was some difficulty with regard to information that was claimed to be confidential. We eventually got some of that information by separating out those particular areas where Ontario Hydro claimed that there could be some commercial harm; but by not excluding the whole document, just those areas where there was some commercial harm. But it has been a problem.
Mr Conway: Costa Rica is a long way away.
Mr Laughren: How do you regulate a rain forest, anyway? I digress. I shouldn't have gone there.
Ms Rounding: I could say that when you're asking a question about where else we regulate, there's a possibility as well, depending on what the government decides, that we could have an oversight role over the central market operator, or if there were disputes or questions about the rules that the market operator use, we could be an appeal body to adjudicate those disputes or to take a look at those rules. That's a function the board could also play.
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Mr Laughren: Thank you for bailing me out. Now I recall what I was going to ask you about. When the minister sends a reference to you, a letter of reference or whatever it's called, then you undertake a hearing based on that letter of reference. Am I correct?
Ms Rounding: Yes, that's correct.
Mr Laughren: You then hold a hearing and make a recommendation, and that recommendation presumably goes to Hydro and goes to the minister. Correct?
Ms Rounding: Yes.
Mr Laughren: Is there any appeal after that? What happens if Hydro says: "Thank you, OEB. Blow it out your ear"? Is there any kind of appeal at all?
Ms Rounding: Appeal for whom? Ourselves or the other parties?
Mr Laughren: Appeal for you to say to the minister: "Look, Minister, for very good reasons we made the following recommendations to Ontario Hydro, and for whatever reason, they have chosen not to comply. Would you please revisit this or send me another reference letter?"
Ms Rounding: I'm afraid that has never happened, because it really is the board of directors of Ontario Hydro that makes that decision. Even the minister does not make that decision. I'm sure he can have some influence on Ontario Hydro, but we do not have that kind of appeal mechanism.
Mr Laughren: You're quite right about the minister's role too. We finally got it sorted out, I think, subject to legal counsel's views, that the minister cannot overrule Hydro, that if Hydro says, "These are our rates," that's it, and the minister can humph and harrumph all he likes. At the end of the day they can, of course, change the board of directors of Hydro once their term is up.
Ms Rounding: Unless there is cause.
Mr Laughren: That's right. Unless there is cause.
Mr Conway: You're talking about the notional minister, not the real minister.
Ms Rounding: I think that is correct. It is unusual. In many cases where there are crown corporations, the cabinet may have the ultimate decision rather than the board of directors of the crown corporation.
Mr Doug Galt (Northumberland): Good morning. As we listen to your presentation and other presentations, we hear more and more horror kinds of situations. I'd like to start out by asking you to reconfirm what I'm reading on page 2 in this document that was sent to us that concerns rural rates. I'm thinking of my own riding of Northumberland.
At the bottom of the page, 1.3 --
Ms Rounding: Excuse me, sir. Is that in the background notes or in my brief?
Mr Galt: In the background notes. I'll just read the first statement for clarification:
"Ontario Hydro is not subject to the provisions of the OEB Act except when it proposes to change rates or charges to customers having an average annual power demand of 5,000 kilowatts or more."
Am I hearing that they don't even have to come before you people to change the rural rates, that they can do it at a whim any time they want?
Ms Rounding: Mr Dominy?
Mr Dominy: That is correct. The board's review relates to the wholesale power rates which are, as stated there, for a customer with a consumption above 5,000 kilowatts or a municipal corporation or a municipal utility.
Ms Rounding: Right now, Ontario Hydro regulates the municipal electric utility rates. We don't have any role in the retail rates.
Mr Galt: I thought you were a toothless tiger before. In your ability to do something with Ontario Hydro rates you're not even close to being a toothless tiger. From what you're telling me here, it's a kind of sounding board, maybe. You listen and you make a suggestion in some areas only -- it's not all areas of rates -- and then they don't even have to listen to you. It was just mentioned by Mr Laughren that the minister can huff and puff and make all kinds of sounds but has absolutely no control or power over what this monster of a monopoly can do.
Ms Rounding: Yes, that is true. We only advise on wholesale rates and no authority whatsoever over retail rates. Ontario Hydro regulates that itself.
Mr Galt: There was tremendous concern in my riding a year or a year and a half ago when the rates were adjusted. Now I'm starting to understand it was more than a gentlemen's or ladies' agreement that these average rates would be there, but over and above, it can go wherever they want, is what I'm hearing.
If you had broader powers to regulate and get some control and get some teeth back into the tiger, what kind of control would you anticipate, or fines, penalties? How would this be monitored? Would it be similar to gas, or how would you go about it?
Ms Rounding: I think we would be looking for would be a level playing field in terms of the method of regulation of both gas and electricity. Right now the gas regulation, unfortunately, though, is more constrained than we would prefer it to be. In fact I think there's a bill in the Legislature right now with regard to making a minor amendment to our act that would give us the power to bring in incentive regulation. I think we would agree to what Mr Macdonald recommended in his report, that there be lighthanded regulation both of the gas and the electricity sector.
Of course, "lighthanded" regulation means different things to people. Our recommendation would be that the board be given the flexibility to use different types of regulation, because right now our hands are tied in the natural gas sector to using rate base rate-of-return regulation, and it's right in the act that we can't use any other method. As the market evolves, you sometimes have to evolve the method of regulation. Sometimes price caps are most pertinent, other times another method of regulation might be important, especially if you're regulating different sectors.
Regulating the transmission sector, you might use a different type of regulation than you would for the municipal electric utilities. Even if they were rationalized down to 20 to 30 municipal utilities, you'd still have to use a different type of regulation. You couldn't do a one-on-one regulation of each one of those. You have to have some flexibility, but I think we should move towards incentive regulation in both sectors.
Mr Galt: I'm absolutely intrigued by this suggestion of lighthanded regulation. I'd kind of like that on the 401 when the OPP pulls me over. It might be a little more tolerant and understanding. They don't seem to be. Are you suggesting that a lighthanded approach would be through disincentive? I can't imagine what kind of incentive we would give electricity rates. It's mind-boggling.
Ms Rounding: In incentive regulation we're trying to give them some incentives to keep their costs down by having a sharing of the savings. That's one method of doing it.
Dr Higgin: The big difference with gas is that it is investor-owned. There is a shareholder --
Mr Galt: Yes, all of us.
Dr Higgin: No. In the case of Hydro, but in the case of a gas utility there is a main shareholder. It used to be shareholders. As Ms Rounding said, that's the way in which incentives can work. You incent them to lower costs, and part of those "savings" become a bit of a higher return that these shareholders are able to make and part of them reduce the rates to customers. That's how, in general, the incentive scheme works.
Also, with a shareholder one of the prime regulatory mechanisms is to disallow costs from recovery in rates. Those costs then are still there or may still be there if they're not able to eliminate them, and in essence the shareholder then is not able to earn the same return they would have otherwise. Those are two differences.
Ms Rounding: With regard to the powers, when we restructured the board recently to move ourselves and ready ourselves for deregulation both in gas, and if eventually we get Hydro we should be prepared for that as well, we move away from more a hearing-type function, which is traditional rate-of-return regulation, to this more incentive regulation, where there's more emphasis on monitoring and compliance. The board could take on a different role. We would still have enforcement powers, but you would do it more through monitoring and auditing functions.
Mr Galt: I will just change the direction of my questioning. I'd like to move to the horrendous investment we have out there in nuclear. I'm told somewhere around 80% of the debt is related to nuclear facilities. We're at a point where we have to make some recommendations. We've spent all this money. In your humble feeling, is it wise to continue down this kind of road because it's out there and it's costing, or is this a time to look for alternative directions and ideas? A loaded question.
Ms Rounding: I'm not sure it would be appropriate for me to answer that question.
Mr Galt: But it relates to costs and rates down the road. It's all part and parcel.
Ms Rounding: Are you asking whether we should turn in a different direction, away from nuclear?
Mr Galt: I'm asking, can we keep our rates at a better price, go in a new direction, in your opinion, or should we continue the nuclear route because we've been assured through AECB of the safety, that it's just a matter of performance that's a problem? As we change in performance to ensure safety, that relates to cost. There's a very direct relationship. That was discussed earlier, your relationship to AECB. I think you should be very closely related and talking back and forth regularly.
Ms Rounding: Costs are going to be very important to us. There's no question around that. But if we're truly going to have a competitive market, we've got to encourage other sources of generation as well that are going to compete with the nuclear.
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Mr Conway: I want to come back to you and your colleagues, Ms Rounding, in your role as an economic regulator, because we are seized with some very important business, which is to pass judgement on this recovery plan. One of the questions I think we owe answers to the public about are the economic and financial implications. You're the only economic regulator we have, and Dr Galt quite ably described the unique role you play in that respect.
I want to come back to the second-quarter report Hydro filed with various financial authorities and with the public. I think it was released after the recovery plan in late August or early September of this year. Again, I'm trying to look at this from the point of view of a ratepayer and as a citizen in Ontario. We're told in the second-quarter report that Ontario Hydro, in addition to the nuclear plan and problems -- the laying up of the 19 reactors. Just reading from that report, the utility reports, "In addition to these nuclear-related financial impacts, Ontario Hydro is considering other asset write-offs or provisions which could total approximately $2 billion in 1997." So in addition to the nuclear issues, they're telling the market that they're going to be considering asset write-offs of an additional $2 billion. They're reporting that operating costs are higher than expected and revenues are lower than they were at this point last year.
So back to Dr Higgin's observations that the actuals are not as good as the projected. Revenues down, operating costs up; in addition to all this nuclear business, they're looking at an additional in-year 1997 write-off of $2 billion. Then we get the extraordinary comment: "But we maintain our pledge not to increase average rates to the end of this decade."
As the economic regulator, how much confidence ought we to have in Hydro's assertion that against all of this backdrop, rates don't need to be increased for at least another two or three years?
Ms Rounding: It's obviously difficult for us to comment, since we haven't had a thorough look at the financials of Ontario Hydro since HR 22. From what you've said, it's obviously going to be difficult to understand, without looking at the financials, how they can do that without a rate increase.
Mr Conway: I want to come back to the statutory debt retirement. You're not aware of any provision, any mechanism, that would excuse the utility from that SDR, statutory debt retirement obligation?
Ms Rounding: We're not aware of any, no.
Mr Conway: I've been around this debate for a long time. Dr Galt, who has left us for the moment, very colourfully describes the peculiar non-regulation of Ontario Hydro, for which all the political parties are responsible. If there is one consequence of the dramatic developments of August 13, 1997, the day on which Mr Farlinger announced in the best Adam Beck tradition: "We've got problems, big problems. The Flat Earth Society basically was right all along. But we have a brand-new cure that will solve all these problems" -- and they may be right. They've been wrong more than right, but this time they may be right.
It seems to me that the public ought to now get something they've never had, which is that rather than run around the Legislature and run around the advertising sheets of the daily newspapers, Hydro ought to be made to go down with their recovery plan to you people, and you people ought to be given a mandate to have a thorough and binding oversight of this plan. Would you have the resources presently to provide, in the public interest, the kind of oversight of this recovery plan that the public might expect?
Ms Rounding: It would be difficult to do it with our present resources, but we've taken on greater challenges in the past. I think it's something we could take on. One of the difficulties, as you have indicated, is that once the plan has been agreed to and implemented, we will have to deal with any rate reviews in the future which will have the implications you mentioned earlier on, and it's a little difficult to do it after the fact.
Mr Conway: There's a cultural issue. I was struck by Andognini's very interesting report about the cultural problems inside the nuclear division. He's an expert and I'm not, but one of the cultural environments I'm interested in has to do with Hydro and its long history of non-regulation. If you think about it for a moment, it's really an incredible situation that we've all allowed to occur. Now, Adam Beck was doing God's work, and God's work generally doesn't need regulation, as you can understand. We have a situation where a provincial utility, doing God's work, providing a vital resource, which is for that very reason enormously sensitive and therefore political, was unregulated: a monopoly, doing God's work, that was unregulated over a period of about 90 years.
One can only imagine the kinds of behaviours that develop inside that culture, inside that corporate world. Do you want to just share with the committee any additional observations about the kind of culture that has developed at Hydro after decades of that kind of activity? I think it is important, because we want to change that. That's got to be changed.
One of the great fictions, from my point of view, and I spent five and a half years in government -- the Minister of Energy was minister of everything, but not for Hydro, by and large. The minister responsible for Hydro was the Premier. That's a very happy state of affairs, because he or she is the busiest person in the government. If I want to have a minister, that's the kind of minister I want, because I'll tell you he or she is going to be easily distracted. But very few people out there and a lot of academics don't seem to understand that: The Minister of Energy is only the notional minister where Hydro is concerned. The real minister is the Premier. That's an operating reality, and has been for a long time in this province.
What additional information on that culture do you want to share with this committee, particularly as we think about a new framework that is hopefully going to provide more thorough and more binding regulation, not just of Hydro but of other players in this new world of electricity competition?
Ms Rounding: We're obviously not privy to the culture within Ontario Hydro. I guess the only culture we experience is within the hearing process itself. We see a difference in culture between the natural gas utilities and Ontario Hydro.
Mr Conway: What are some of those differences?
Ms Rounding: I think we find that the gas utilities, because they come before us time and time again as an economic regulator, recognize that cooperating and providing information is probably better in the long run, and I think we have had some frustrations in terms of the amount and type of information supplied by Ontario Hydro. In fact, in the OHII hearing I did suggest, I think to Mr Strong, that Ontario Hydro might want to talk to the gas utilities with respect to the type of information and evidence they filed in a timely and thorough fashion in the gas hearings. I was at that point, I think, expressing some frustration.
The Chair: Thank you, Mr Conway. Ms Johns?
Mrs Helen Johns (Huron): I think we're seeing consensus around the table that there needs to be more teeth in the Ontario Energy Board. From that standpoint, I want to move to the other people who may wish to enter the energy market in the future. They obviously have had some bad experiences from the fact that Ontario Hydro hasn't been regulated in the past. I guess they will be looking to a regulator with some teeth to be able to keep a level playing field open so they can enter that marketplace. Can you tell me the kinds of opportunities or things you need to see or the changes you need to see in legislation to be able to provide these new market players with the guarantee that you'll provide a level playing field for them?
Ms Rounding: There would have to be a complete rewrite of the legislation. There is no regulatory authority right now, so we would have to have a complete regulatory framework set up along the lines of gas. It would have to make it clear over which areas we would have authority, what kind of authority, the enforcement powers, and the question of whether we would have any authority over any of the other players in the market. Right now there are some questions being raised as to whether we should have some licensing authority over the gas marketers. I think Mr Macdonald recommended in his report that there be licensing of the electricity brokers as well. That might be something that would be considered, whether we had legislative authority over licensing of those brokers as well.
Mrs Johns: You're obviously optimistic about the prospects of having a more toothful regulatory body.
Mr Conway: Toothful?
Mrs Johns: Toothless, toothful.
Ms Rounding: I think it's fair to say that we would like to get some teeth and I think we would like to be fair in our regulation as the energy sectors become more one. They're converging and it's very difficult to have a lopsided regulatory framework.
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Mrs Johns: I just have a manpower issue. We've heard so much about human resources over the past three weeks, and the lack thereof, so let me ask you this question. Obviously right now you have seven members -- maybe one board position is empty. You do natural gas right now. Tell me if the contingency of human resource people that you have at the Ontario Energy Board could handle this, or what kind of expertise we would need to be able to find that would supplement your ability to regulate this.
Ms Rounding: We spend some of our time right now on Ontario Hydro matters even if our decisions aren't binding. When we get into a regulatory rate review, it obviously takes our resources to the same extent it would if the decisions were binding, although we have not had a complete rate review in the last few years. So we do have certain resources already and certain expertise that's directed to Ontario Hydro matters.
If we were to take on a full regulatory framework with Ontario Hydro, I think there's no question that we would have to have additional resources in all sectors in terms of expertise. We have, as I indicated before, recently reorganized the board and restructured it so we were in a position where we could add on positions fairly easily to accommodate such a challenge.
The Chair: Mr Conway, time for one quick question.
Mr Conway: Just a final observation: I have found your testimony extremely helpful and I really appreciate it. I think that the committee is in your debt. I know I am. I just can't be more fulsome in my appreciation for the candour and the directness with which you've answered questions. You've certainly give me, and I suspect all of the committee, some very helpful advice, particularly on the future that's to come.
The Chair: I have just a couple of questions to ask before you leave the stand, Ms Rounding, to clarify a couple of points.
Out of a response to Mr Conway concerning the issue of Hydro rates and the promise to maintain stability of rates until the end of the decade -- your response led the committee to believe that it would be difficult to maintain that envelope. I assume you meant that within the current structure of the generating body at this point, but in fact rates might be maintained or not if there was a change in the way in which Hydro is generated and so forth. Would that be fair?
Ms Rounding: It's possible, yes. It's very difficult for us, without seeing the financials, to make any kind of definitive statement on that. For instance, I don't know what they're looking to write down in 1997, what's behind all that, so it would be very difficult to say. But I guess on the face of it, it's difficult to see how they can make all those adjustments and keep rates even to the end of the century.
The Chair: That's assuming you stay with the existing model.
Ms Rounding: Yes. If the model were to change --
The Chair: If the model were to change, then it would follow that it's now an open analysis, that rates could go down, they may be stable, whatever.
Ms Rounding: Yes. If they're a competitive market, things could change dramatically and you couldn't predict that.
The Chair: Thank you. I just wanted to make sure I had clarified that.
The other point I wanted to pick up on flows from questioning by all members of the committee, and that deals with the financial health of Ontario Hydro, which to my mind at least is the very foundation of many of the issues that are bandied before us at this point. Certainly the financial health of Ontario Hydro affects both the rates and the safety issues that are of some paramount concern to many members. We're trying to determine how Ontario Hydro is regulated in that regard, who regulates the issues that are involved; identify the issues over which there is no regulation.
We've seen that the Atomic Energy Control Board regulates safety at one end. The question I put to you is, who regulates the overall financial wellbeing of Ontario Hydro, in your mind? Indeed, if there is no overall regulatory control of that, who ought to be doing that?
Ms Rounding: Ontario Hydro does it right now. Obviously there is no regulatory control. If we were asked to regulate Ontario Hydro, we hope we could do that.
Mr Conway: There's a very important clarification arising out that second-last exchange between the chair of the board and the Chair of the committee and I want to be clear about it. This is on the rate question: If competition begins in the electricity sector, the Chair's question seemed to suggest and brought an answer, "Yes, rates could go down."
I thought I understood yesterday that even the Hydro board understands that if they face competition in the next couple of years, the financial pressures, particularly in debt retirement and other issues, could put Ontario Hydro in an even more precarious situation. Did I wrongly understand that?
Mr Power: That's a concern, yes.
Ms Rounding: It's possible that rates could go up too, initially, in a competitive market. Nobody could make any predictions right now.
Mr Conway: I'm not disputing that rates could go down with competition. I'm thinking about Ontario Hydro and its financial plan. I thought I heard the board members say yesterday, "If we face competition in the next few years, it could impair further the financial -- particularly the debt recovery, the debt retirement."
The Chair: It may or may not and that is indeed a question requiring financial evaluation by all parties. My concern was to clarify the picture so it wasn't just leaving an impression that changes in rates could not happen or would happen, given the current structure, that there would be other possibilities and they would yield different results.
Ms Rounding: Yes, that's correct.
The Chair: That's all I wanted to know for clarification of the committee.
Mrs Johns: Can I ask for a point on that too, since we're asking, on your last question?
The Chair: We weren't. I was just trying to finish up that moment, frankly, Mrs Johns. I want to thank you so much in that regard. I'd rather not reopen this matter now. The Liberal caucus did formally complete the questioning.
Mrs Johns: It is unfair, and you were being a reasonable Chair.
The Chair: Mrs Johns, so you will bear with me and know why, I'm trying to continue to be scrupulously fair, and as the day unfolds I think that will be increasingly evident. Thank you for your indulgence.
Ms Rounding, I thank you very much for attending upon the committee. I echo the comments of all members of the committee that the presentation you've brought, including Mr Higgin and Mr Dominy, have been very helpful for this committee and we appreciate it very much. I hope you will be prepared to accept an invitation to return if it's necessary.
Ms Rounding: Thank you very much, Mr Chairman, and members of the committee. We were delighted to be here and we would certainly return if you found that helpful. If we could provide any further information, we would be happy to do so as well.
The Chair: Counsel may be forwarding other questions along to you over the next week or two and I'd appreciate your immediate response where possible.
Ms Rounding: We would be happy to assist.
The Chair: Thank you very much for attending upon the committee. You're excused for now.
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BRITISH ENERGY
The Chair: Our next witness will be Dr Robin Jeffrey, of British Energy. If Dr Jeffrey is able to find his way to the witness stand, I would appreciate that. I remind members of the committee we have up to two hours to meet with Dr Jeffrey. I welcome you to the committee. We appreciate your attending upon us. We are prepared to receive any deputation you may wish to make. Just before you begin, if you would be good enough to identify yourself and your colleague for Hansard, then we can proceed with any comments you wish to make and then move around, by caucus, for various questions. We're in your hands.
Dr Robin Jeffrey: Chairman, thank you very much for the invitation to attend here this morning. I appreciate the invitation from you and your colleagues on this committee.
My name is Robin Jeffrey. I am deputy chairman of British Energy. With me this morning is Robert Armour, who is the company secretary of British Energy. I thought it would be helpful if Robert were to come with me this morning, since in the restructuring of the nuclear industry that's taken place in the United Kingdom over the past few years, Robert has been one of the key players in that and I thought his advice would be of interest to the committee as well as my own.
I had circulated a document that looks like that, which I hope everyone has in front of them. I'd like to lead the committee through that document and enlarge on the various points starting on page 1, and I think it might be of interest just to give a bit of my own background.
I've had some 40-plus years' experience in the power engineering industry in the UK. I joined Babcock&Wilcox boilermakers, Renfrew, when I was 16 in 1956, and they put me through a student apprenticeship which was in part at college and part in the works.
I then spent a number of years at Cambridge University, taking a doctorate in fluid flow. In 1964 I returned to Babcock and worked with them in research and development activities associated with a wide range of boiler plants. Some of it was nuclear, some of it was gas-fired, oil-fired, coal-fired. My final position with Babcock was as the head of the engineering research and development activities.
In 1979 I joined the South of Scotland Electricity Board, which was state-owned, reporting to the Secretary of State for Scotland. That is the company that provides all the electricity, vertically integrated, to the 5.5 million people in Scotland. I joined them to head up their technology division. Then, from 1980 to 1988 I was responsible for the construction of the most recent advanced gas-cooled reactor in the UK at Torness. I headed up the construction of that nuclear power station.
In 1988 my familiarization with restructuring and privatization began because at that time I was appointed the chief engineer of SSEB but seconded to head up their privatization think tank. That work culminated in 1990 with the first restructuring of the industry in the United Kingdom. At that time, SSEB was split up into a private sector company, Scottish Power, and the nuclear part of the company stayed under state ownership.
In 1990, when that was done, I remained for two years with the private sector company, Scottish Power, as one of their managing directors. Then in 1992, I moved back into the state-owned sector to be chief executive of Scottish Nuclear, which ran the two nuclear power stations in Scotland.
In 1996, when the new nuclear plant in the United Kingdom was rationalized into British Energy, I became deputy chairman of British Energy and I continued as chairman and chief executive of Scottish Nuclear. That is my present post, deputy chairman of British Energy, a privatized company, and within that, chairman and chief executive of Scottish Nuclear.
I have participated very deeply in two major restructurings in the UK. I have gone from the private sector to the public sector to the private sector to the public sector, and I am currently in the private sector.
I thought it would help if I just briefly outlined my background. The evidence that Robert and I will outline to you this morning will help you to understand what's involved in the restructuring of major utilities.
Perhaps it would be helpful, Robert, if you would just like to speak briefly.
Mr Robert Armour: As Dr Jeffrey has mentioned, I am company secretary of British Energy. That combines the role of corporate counsel and corporate secretary. I am qualified as a lawyer, a solicitor in Scotland.
I came to this industry acting for independent power producers under the 1983 Electricity Act in the UK, which was the first of the acts to open up the electricity industry to independent power producers. Then, when the industry was restructured in 1989, I was brought in to establish the legal and administrative framework of the nuclear company in Scotland, Scottish Nuclear, which supplies around 50% of the generation in Scotland. Over the course of the next four years, I acted in that role and in a variety of other capacities, looking after information systems, the culture change program in the company and so forth.
In 1995, I was designated as company secretary of British Energy in the second restructuring of the nuclear industry. As part of my role, I had to look after the legal aspects of restructuring and flotation of the industry through 1996. I am currently company secretary of the privatized company, British Energy PLC.
Dr Jeffrey: If I could direct you to page 2. Chairman, I would be perfectly happy either to give the presentation and deal with questions or, if the committee thought it helpful --
The Chair: If you wouldn't mind, if you'll do the presentation so we have it totally encapsulated, then we can proceed with questioning. Thank you.
Dr Jeffrey: Right. On page 2, that dials the clock back to 1989. At that point in time, the intention of the government in the United Kingdom had been to privatize the entire electricity supply industry, nuclear as well as fossil. That had been the intention.
Towards the end of 1989, there was a lack of confidence in the city of London that nuclear could be successfully sold off. Initially it was decided that the old stations, the Magnox stations, first-generation stations, should be withdrawn from the sale. Then in November 1989 the government decided that if it were to stick to its timetable, it had to remove nuclear totally from the sale, and that was done. So the privatization that took place in the UK in 1990 was everything other than nuclear. It was coal-fired-generation hydro; it was transmission; it was distribution; it was end sale of the electricity to the customers.
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It was a very traumatic time for people who were engaged in the nuclear industry at that stage. The reason why there was lack of confidence in the city that nuclear could be privatized I think was for four reasons.
The first of these is the uncertainty of the costs of decommissioning. In the 1970s and 1980s, the estimates of the costs of decommissioning, shutting down nuclear power stations, had steadily increased, and there was no confidence that people knew the technology and no confidence as to what it would cost.
The second is that in the UK, spent fuel is dealt with through reprocessing in order that you can extract the uranium and reuse it in new nuclear fuel. The plant which was being constructed in the UK to carry out reprocessing had gone through a very difficult public inquiry and there was again no confidence in what the costs would be and whether this plant would ever be brought into commission.
The third reason for concern was how to dispose of the final waste products, how that would be done. There had been discussion of a deep repository in the UK and there was uncertainty on where that would be and how much it would cost.
Finally, the nuclear industry had commenced the building of the new pressurized water reactor at Sizewell B and there was a lack of belief that this could be built to budget and to program.
On that basis, the UK government decided that the straightforward thing to do was to pull nuclear lock, stock and barrel out of the sale and get on with privatizing everything else.
Page 3 shows you what was done at that time. The first three boxes on the left, National Power, PowerGen and Nuclear Electric PLC, were the generating bits of CEGB. National Power was floated as a private company containing only fossil. PowerGen was also floated as a company containing only fossil. Nuclear Electric PLC stayed in state ownership. The National Grid Co was split out into a separate transmission area. The 12 regional electricity boards which previously had been state-owned were sold off as 12 independent, separate, private sector companies.
On the left-hand side going further down, Scottish Nuclear was created as a new company split out of the South of Scotland Electricity Board, and the rest of the South of Scotland Electricity Board was turned into Scottish Power. That remained a vertically integrated company with generation and transmission and supply to end customers.
Mr Laughren: Sorry. Was that state-owned?
Dr Jeffrey: Scottish Power was sold off into the private sector.
Scottish Hydro-Electric, which previously had been the state-owned North of Scotland Hydro-Electric Board, was sold off into the private sector as Scottish Hydro-Electric.
Those were the changes that were carried out in 1990, and there were a whole raft of contracts put in place at that time, some of them between, for example, Scottish Nuclear and the other Scottish companies and some of them between Scottish Power and Scottish Hydro-Electric. There was a huge quantity of legal work and restructuring contracts, and many of these contracts were designed to run about 50 years.
Mr Conway: Everything on that grid was privatized except the nuclear bits?
Dr Jeffrey: Everything was privatized other than Nuclear Electric PLC and Scottish Nuclear, yes. Everything.
Mr Laughren: I thought you said Scottish Nuclear was privatized.
Dr Jeffrey: No, at that stage, in 1990, Scottish Nuclear stayed under state ownership. So Nuclear Electric PLC, state-owned; Scottish Nuclear, state-owned; everything else sold off into the private sector.
At that time, in 1990, the government said it intended to review in four years' time, in 1994, how these arrangements had settled down. It said that in 1994 it would revisit the status of Nuclear Electric and Scottish Nuclear. In 1990 it also put in place what was effectively a state subsidy for nuclear power. The intention was that this state subsidy would be phased out over the next eight years.
Mr O'Toole: Actually, the transmission grid, is that public ownership or state?
Dr Jeffrey: In 1990, what happened was that the 12 regional companies --
Mr O'Toole: They were privatized.
Dr Jeffrey: -- which were privatized, owned the transmission system.
Mr O'Toole: But privatized.
Dr Jeffrey: But it was privatized. Since then it has been sold off as a separate private sector company.
If you turn to page 4, the objectives which were then given to the state-owned nuclear companies, Nuclear Electric and Scottish Nuclear, are as set out there.
Safety was to be the number one priority and on no account was to be compromised.
The commercial performance of the company had to be improved because the state-owned companies were now selling into a private sector liberalized market, so the commercial performance of the company had to be improved.
The two companies had to move over a period of eight years to being able to operate commercially without any state-owned subsidies. It was set out in 1990 that these subsidies were to be phased out.
The uncertainties that I referred to earlier of decommissioning and waste management etc, the companies had to address and resolve these various issues which had made privatization of nuclear impossible.
Finally, the companies had the responsibility to make sure that the new major capital project, Sizewell B, of about C$5 billion was constructed to program and cost.
I ask you to turn to page 5.
Mr Galt: I'm not clear about Sizewell B. I don't follow.
The Vice-Chair (Mr Monte Kwinter): That was a new major nuclear facility.
Dr Jeffrey: Yes, it was the new capital project that was begun in 1988, a pressurized water reactor called Sizewell B.
Mr Galt: Sorry, I missed that.
Dr Jeffrey: On page 5 --
Mr Conway: That eight-year subsidy began --
Dr Jeffrey: It began in 1990. Robert, would you like to summarize?
Mr Conway: It's 1990 to 1998, roughly.
Mr Armour: Yes. It didn't actually extend to 1998. It started at around 10% in 1990 and there was a charge, a levy on electricity sales, which was to subsidize nuclear and renewables. In practice it was removed on privatization. But we'll come back to that.
Dr Jeffrey: In 1990, when it was set up, it was to proceed for four years and then it was to be halved. Then in 1998 the original plan was to remove it altogether.
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Mr Conway: The original plan was a state subsidy declining over a period of eight years directed at nuclear only?
Dr Jeffrey: As a technicality, it wasn't actually a state subsidy. It was a levy on the end sale of electricity that was then provided to the nuclear companies, so in effect it was a subsidy.
Mr O'Toole: If we're going to move along, if I may, in that subsidy, was it to defer any capital cost or debt load or liabilities of the state-owned nuclear over that period?
Dr Jeffrey: The principal purpose was that it was recognized that the first generation of nuclear power stations -- some of them had been closed down; the ones that were operating were recognized to be uneconomic. It was to offset the poor economics of the first phase of nuclear built in the UK.
Mr O'Toole: But who held the debt? Were they debt-free, even the old plants?
Dr Jeffrey: The debt was within the state-owned company. That was where the debt was.
Mr O'Toole: Who is going to end up owning it?
Dr Jeffrey: Can I deal with that later on?
Mr O'Toole: Sure. Move along.
Dr Jeffrey: In 1995 the government carried out its review. It was called the Nuclear Review. It was the equivalent to some extent of the white paper that is being considered in the province here. It was a government review of where nuclear had got to, and the outcome of that review was that in the intervening five years, the performance of the nuclear companies had been transformed. The uncertainties of decommissioning had been resolved through the engineering studies and the detailed costing. The reprocessing plant had been successfully brought into operation. There had been a lot of progress in terms of ultimate waste disposal. The new nuclear plant at Sizewell had been constructed to budget and to program and was operating well.
The government decided at that time that the seven modern, advanced gas-cooled reactors and the pressurized water reactor could be successfully sold off into the private sector. They created a new company called British Energy as the vehicle to do so. The ownership of the seven AGRs and the pressurized water reactor was transferred into British Energy, and the government stated that that would then be floated off into the private sector.
The first generation of nuclear plants, the Magnoxes, of which three had been closed down and five were still operating, stayed within the state-owned sector under a new company that was created called Magnox Electric PLC, and Magnox Electric PLC had all the liabilities and debt associated with the first generation of plant.
Mr O'Toole: But the state --
The Chair: Mr O'Toole, we did agree we would complete the entire envelope and then we'll go into questioning, and I'll be very happy to go from there.
Mr O'Toole: On a point of order, Mr Chair: The previous Chair was much more friendly.
The Chair: Now having reported on the Vice-Chairman, I will deal with him during the lunch-hour. Thank you, Mr O'Toole, for telling tales out of school, and shame on you.
Dr Jeffrey, would you continue with your presentation. We'll have the envelope completed, and then I can have the caucus in line, in proper rotation.
Dr Jeffrey: Yes. When the cat is away, the mice will play.
With respect to British Energy, the company to be privatized, all of the debts, liabilities and uncertainties were transferred into that company. There was no retention of any sort by the UK government of debt or risks associated with the company to be privatized. British Energy was to be totally responsible for decommissioning, responsible technically and responsible financially. The government then decided at the point of privatization in 1996 that the subsidy that we referred to earlier, which was planned to continue to 1998, should then be phased out for all of the activities of British Energy, and so that subsidy ceased two years ahead of the government's initial plan.
Page 6 then shows you how the companies were restructured. On the left-hand side, Scottish Nuclear Ltd, the Magnox which was closed down was transferred into Magnox Electric. The two AGRs flowed into British Energy. On Nuclear Electric PLC, the five AGRs and the PWR were transferred to British Energy, and the six operating Magnox and the two closed-down Magnox went into Magnox Electric, state-owned.
The next page gives you a little bit more detail of the seven AGRs, which are the orange squares, and the Sizewell B pressurized water reactor. The committee might find it helpful if I say that the construction of the early AGRs transferred to British Energy started in the late 1960s, and they were brought into service in the mid- and late 1970s. Therefore, they are roughly contemporaneous with Pickering 1 to 4 and Bruce 1 to 4. The Magnox stations were of an earlier generation than the Candu reactors here.
The more modern AGRs of Heysham 2 and Torness, work started onsite on them in the late 1970s, and they were brought into service in the late 1980s. Therefore, broadly, they are contemporaneous with Pickering 5 to 8 and Bruce 5 to 8.
Construction on the Sizewell B pressurized water reactor started in 1988, and it was brought into service in 1995. Therefore, it's roughly comparable to Darlington.
Turning to page 8, this shows how the market was restructured and how it stood in 1996. British Energy, just moved into the private sector, had about 21% market share; National Power, 22%; PowerGen, just under 20%; Magnox Electric, the state-owned company, 6%; in Scotland, the privatized Hydro-Electric and Scottish Power, 6.5%; and others, IPPs and some electricity bought over the interconnector from France etc, 25%. I think that diagram shows that there was a genuine liberalization of the market, there was genuine competition, and in a minute I'll come to what that means in terms of quality of service and prices.
The move within the UK market is an increasing move to gas generation and an increasing move to the number of independent power producers. It's actually quite remarkable when you see the number of projects that are currently being developed within the United Kingdom.
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So British Energy came into existence as a private sector company in 1996. I'd like to take you through some of the changes that have taken place over the period of British Energy.
Page 9 shows the performance of the AGRs and the pressurized water reactor over the past six years. It's an increase in output of some 64%, and that increase in performance has come about by technological improvement on the plant, increasing the plant reliability, increasing the onload refuelling capability of the plant, reducing the period of outages and increasing the time between outages. I emphasize that the company's number one objective is safety first, and all of these changes were achieved whilst actually continuing to improve the safety culture and performance. I'll talk about that in a moment.
Page 10 shows the reduction in the cost of generating a unit of electricity from these eight plants. The definition of nuclear cost you will see on the next page, but what that shows is in constant money values, in the money values of 1992, a reduction of 36% in the cost of generating a kilowatt-hour of electricity from these eight plants.
Mr Laughren: That was all the plants?
Dr Jeffrey: That's the average of all eight plants.
The Chair: Just disregard the questions for a moment, Dr Jeffrey.
Dr Jeffrey: Overleaf, on page 11, that shows the elements of the cost of manufacturing a unit of electricity. "Fuel" is both front-end new fuel and also the provision made for waste management, waste disposal and decommissioning of the plant.
Page 12 shows how these eight plants, originally under their two separate owners and then in 1996-97 under British Energy -- how a loss of about C$600 million at the operating level has been transformed into a profit of almost $700 million. Interesting to note that when the shares in the company were initially sold, they were at _2, and they are currently trading, as of yesterday, on the stock exchange at _4.14.
Page 13 shows two things. The purple histogram shows the reduction in staff from a little bit over 8,000 in 1992 down to 6,300 as the average for financial year 1996-97. That number is actually about 5,900 today, so there has been a steady reduction in the number of people employed in the various headquarters and in the plants. The orange line shows the increase in productivity. That is kilowatt-hours per person employed. Productivity has been almost doubled, up by 96% over these years.
I think it's that issue of reduction in staffing where it would be appropriate for me to say something about safety. The number one value of British Energy is safety first, and that comes in our corporate set of values higher than our number two corporate value, which is profit through progress. Our number one value is safety first.
If I try and quantify the improvement in safety which has taken place over the past six years, with respect to industrial safety -- that's the trips, slips and falls, lost-time accidents that happen in every manufacturing workplace -- in the United Kingdom there's an independent authority called the Royal Society for the Prevention of Accidents, and their highest recognition is what they call gold awards. Six of our power stations received gold awards last year. One of our plants has received a gold award for six years running.
The incidence of accidents, which is called the lost-time accident rate, or the number of accidents where people are off work for more than a day per 100,000 hours worked, has fallen from 0.92 down to 0.27 over the past six years. So it's fallen down to a third of what it was previously. At the beginning of this week, on Monday, we received the first gold award to be given in Scotland by the UK government as being the company that looks after the health of its workforce best. That is very important.
If you then think about nuclear safety, since 1990 there has been only one nuclear event on these eight plants at what we call level 2. There has been nothing any higher than level 2. The level 2 incident that took place was a valve on a diesel oil tank that was closed when it should have been open, and that could have meant potential unavailability of some plant if it had to be brought into service. There would have been more than adequate time for people to have tried to start the piece of plant, find it hadn't started and go out on to the field. So it is not a nuclear incident in any form or shape. It was potential unavailability of a piece of plant, and that would have been addressed through our procedures.
If you look at the radiation dose that our workers receive, that has steadily fallen throughout the years and is about one fourteenth of the world average.
We've achieved all of these enhancements of safety culture operating in a very active commercial framework because of the training and the quality of our people. We operate what we call a "no blame" culture. We operate a system that we call "near miss-reporting," that if any employee of the company sees something that causes them concern that it could potentially result in a lost-time accident, they report it and it's dealt with. Those improvements can only be achieved through people. People are vitally important.
Page 14 will need a little bit of explanation of what it is, but that shows the improvement in the quality of supply service to end purchasers of electricity in the United Kingdom.
Each year the regulator, Professor Littlechild, publishes an annual report on the quality of service to end customers. If I could give you just one example, "repair fuse" is at the one at the top of the page. If the fuse blows at the inlet side to an end customer, whether it's a house or whether it's someone's works, there is a specified time within which the supplier of electricity has to go there and repair it. If that is not done within the specified time, the supplier -- and remember, I told you earlier about the 12 privatized distributors -- is fined and the fine is paid to the person who has suffered the inconvenience. There is a total of 12 such parameters that are annually published in the UK, and it's not so much that you've been fined; it is the fact that in your peer comparison with the other distributors or suppliers your performance is seen to be poor.
What that spider's web shows, the outer one, is the position as it was in 1992-93. So if you look at the repair fuse, there were about 100 occasions on which suppliers were fined. The green line is 1996-97. The number had fallen to I think about 17. So against all these 12 criteria of quality of service, the net result of the liberalization and the introduction of market competition in the United Kingdom, you can see there has been a substantial improvement on all 12.
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Finally on page 15, that shows the prices to end customers. There are four lines there. The blue one is domestic customers; the yellow is small industrial; green, average industrial; and red, large industrial. That's shown in cents per kilowatt-hour.
The important thing about that is that for all four categories of customer there have been reductions in constant money values, in real money values. There have been reductions in the price paid by the end purchasers of electricity, varying from 10% to 14% over the piece.
I apologize if that's taken rather a long time, but that was my presentation. Robert and I would be very pleased to deal with any questions.
The Chair: Dr Jeffrey, please don't apologize. That was a fine presentation, very helpful, and gives a good overview for us now to begin the questioning.
Mr Galt: Mr Chair, on a point of privilege: I've had a request to have the air-conditioner turned off.
The Chair: We have dealt with that matter and we are now adjusting it either off or warmer so that it provides more comfort for members.
Mr Laughren: The Vice-Chair probably dealt with it.
Mr Galt: How long before we expect to see a response?
The Chair: It will be in God's fullness of time.
Mr Galt: Thank you, Reverend, sir.
The Chair: Picking up on Mr Conway's comments -- although I do note the comments from the millionaire's row here. I have to keep a very close eye on it.
Mr Conway: I warn you, Hydro, like other divine authorities, is watching and willing to wreak vengeance.
The Chair: Can we now carry on with the appropriate kind of questioning? Let me begin with Mr Laughren.
Mr Laughren: Thank you, I think.
I enjoyed your presentation very much. It's very clear and very succinct. I wanted to ask you about the decommissioning and disposal issue on the nuclear. I don't know whether you have the same kind of nuclear waste we do with our Candu system. I don't know and others don't know the answer to that.
Dr Jeffrey: Broadly, yes.
Mr Laughren: So you do have the spent fuel rods.
Dr Jeffrey: Yes.
Mr Laughren: Did you store them in what we call swimming pools here as well? The lay language is that they're stored in water after they are --
Dr Jeffrey: I swam in a swimming pool in Toronto this morning and I can assure you there was no spent fuel in the pool I was in.
Mr Laughren: Was the water warm?
Dr Jeffrey: The method of dealing with spent fuel is that when it comes out of the reactor, it is very radioactive, and the practice throughout the world is to put it into what's called a pond for a period of time while much of the initial radioactivity cools off. What then happens in the United Kingdom is that the spent fuel is transported to Sellafield, where it is reprocessed and the uranium separated from the rest of the material in order that the uranium can be reused into new nuclear fuel.
I think within Canada the arrangement is to store in a pond for a very much longer period of time and then to directly dispose of the spent fuel rather than to reprocess. Someone will correct me if I'm wrong on that.
Mr Laughren: I think that's correct. The way you describe it, it sounds like it's so logical to do it the way you're doing it, but I don't know enough about it to know why we don't do that here as well. That's not for you to answer, I suppose.
Dr Jeffrey: I think it's all to do with economics. Irrespective of whether it's stored in a pond for 50 years and then disposed of directly or whether it's reprocessed, it will be done fully compliant with the demands of the safety case, and therefore, through either route, it is safe.
Mr Laughren: In your country, is there no spent fuel to worry about, then? Do you just keep recycling? They must reach a point --
Dr Jeffrey: No. Having taken the spent fuel and put it through the reprocessing plant, you separate out the uranium -- and we've talked about that -- you also separate out the plutonium, and you end up with what is called highly active waste. Some of the other products are classified as highly active waste. The plant I referred to earlier, which is now operating fully in the UK, takes these highly active wastes and turns them into solid glass, into a rock-like substance. Then that has to be disposed of in a repository in very much the same way as you can choose to dispose of the spent fuel rods.
Mr Laughren: That's helpful. That's getting to where I was seeking information, that at some point you have to decide what to do with that spent fuel.
Dr Jeffrey: Yes.
Mr Laughren: Have you decided that yet? Do you bury it?
Dr Jeffrey: If you look worldwide, the nuclear industry believes that the correct way of dealing with high-level waste, whether it's the solid glass or whether it's spent fuel rods, is to encapsulate it and put it underground in a deep repository. In certain countries like Finland and Sweden these deep repositories are advanced, and there are some repositories for intermediate-level waste already functioning. It's not a difficult technology.
At the same time as the United Kingdom was reviewing nuclear power, it also reviewed radioactive waste management. The United Kingdom's strategy is to have a deep repository for high-level waste available round about 2080. It is planning to have an intermediate-level waste repository somewhat earlier, although recently there has been a rejection of a planning consent for the intermediate-level waste repository. There's a bit of uncertainty as to physically where that's going to go, although the technology and the approach are clear.
Mr Laughren: I don't think we've reached that point in our country, as to what to do with that. I don't think there's any agreement on storage at all.
When we talk about decommissioning a plant that's no longer a nuclear reactor, that's no longer useful for whatever reason, that's totally different than dealing with the spent fuel rods, right? My understanding was that the plant itself becomes radioactive. I don't know if that's true or not. How do you decommission and control the cost of decommissioning a plant that's no longer in use?
Dr Jeffrey: Over the 30 or 40 years when the nuclear power plant is operating, it produces spent fuel rods. So throughout the period of operation, those have to be dealt with. When ultimately the power plant is shut down, the stages of decommissioning are, first, to take out the inventory of fuel that's in the reactor at that point in time and deal with it in the same way as you've dealt with all the other spent fuel throughout the 40 years. That is established technology. It's worthwhile saying that removes, I think, something like 99.5% of the radioactivity from the site.
Mr Laughren: That's what I wanted to know.
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Dr Jeffrey: The second thing is, you demolish everything other than the reactor core itself and the areas that have been contaminated. That's just like decommissioning a coal-fire power station. You knock down the turbine hole and the administration building. You then leave the reactor core for a period of time, and when the radioactivity has decayed to an acceptable level you chop it up, encapsulate it and put it into the deep repository that we talked about earlier. Then the site is ready to be reused for other purposes.
Mr Laughren: Is it safe to say that you and your colleagues did not shake in your boots when Tony Blair was elected as Prime Minister?
Dr Jeffrey: We did not shake in our boots. The Labour administration in the UK believes in a balanced energy strategy and recognizes that in order to have sustainability and security, you want to generate in part from hydro, in part from gas and in part from nuclear.
Mr Laughren: Has the politics been taken out -- I mean that in a positive way, I hope -- of the whole issue of privatization of power in the UK or is it still a big issue politically?
Mr Armour: There is a divide between the parties on how far to go on privatization. The privatization route we went through in 1996 did not encounter as much opposition as had been thought but, if one also goes back, many of the power stations in the UK on the nuclear side were instructed when the last Labour government was in power. So at that time there was not a hostility to nuclear. At the present time there is in the runup to Kyoto a look again by all parties saying, "How are we going to find a generation mode that will allow us to meet our greenhouse gas aspirations?" So it's an open question.
Mr Laughren: We have had a lot of information here from the UK on the privatization of water. I'm not saying I've got the whole picture, but the information I've received -- and I have a bias to which I confess which is, generally speaking, against privatization -- was very negative about the privatization of water -- if that's true. I'm not sure I'm getting objective information, but if I am, is it true in the UK as well that there's a lot of antagonism towards the water privatization issue?
Dr Jeffrey: I think the problem with water is that there isn't a national grid to distribute water in the same way as there is a national grid to distribute electricity, therefore the privatized water companies are still local monopolies. The important thing about the graph I showed you earlier of market share of British Energy, National Power, PowerGen and the IPPs is that people, wherever they are in the UK, can buy their electricity competitively. They cannot buy their water competitively.
Mr Laughren: What about the price regulation of electricity? Is there any?
Dr Jeffrey: Oh, yes, and the document I referred to earlier -- there is the office of electricity regulation. There is a regulator. He has very strong and powerful teeth. He progressively has moved the UK. Initially in 1990 it was only customers who took more than one megawatt who could buy competitively, in 1994 it became everyone above 0.1 megawatts and in the spring of next year it is every customer. So the office of electricity regulation is a very important office. Every year he publishes a series of annual reports, and that was one of his reports that I was quoting from earlier.
Mrs Johns: Thank you for being here. You presented us with some great documentation, both before and today. So I'd like to thank you first of all for that.
I understand you're going to be cautious in your analysis of the IIPA report and the recovery plan, but I was wondering if you could answer this for the committee: Do you see similarities between the Ontario system and Britain at any time over its changing ways, over its evolution in nuclear energy?
Dr Jeffrey: Although I've read the documents you've mentioned, I've not studied them and it would be quite wrong for Robert or me to make any comments on these specific documents. I think the relevance of what's happened in the United Kingdom is the improvement to the end users of electricity in terms of improvement in quality of supply and improvement in prices. It's probably fair to say that for those of us who have been running these industries, there's no question at all in my mind that as being part of a competitive market, everyone has to work extremely hard and it's very demanding. But at the end of the day the fact that as an electricity supply industry we're reducing our prices and we're improving our quality of supply gives enormous pride in being part of this very important industry.
Mrs Johns: I understand from the research I did that you have, and I think you said, a great deal of nuclear experience and education. Can you tell me if you have confidence in the Candu reactor?
Dr Jeffrey: Yes. Let me start by saying that in a sense there's been some similarity between the way in which Canada had enormous pride in its development of Candu and the United Kingdom had enormous pride in its development of the advanced gas-cooled reactor. To some extent both countries were running against the stream, which was concentrating on volume water reactors and pressurized water reactors. For many years the Candu reactors had a very high reputation indeed in terms of their high load factor and their performance, the fact that they had 100% on-load refuelling. So although by no means am I an expert in Candus, they were reactor systems that have operated extremely well and I believe should be able to do so.
Mrs Johns: I spent many years in the stockbroker business and I'd like to say that your return on investment since you've been made public is quite a rate of return. Have there been stock splits or any of those things? Have you had stock splits or dividends to your shareholders in that time frame?
Dr Jeffrey: Yes, that's Robert, in terms of our share option scheme.
Mr Armour: We were privatized in 1996 on a partly paid basis. Originally investors were asked to subscribe effectively _1. They received a return of effectively 17% in dividend in the first year. At the end of the first year there was a second instalment of a further _1, which has taken the stock initial value to _2. The amount of stock in issue has not changed during that whole period.
Dr Jeffrey: In terms of our employees, because earlier I emphasized that you only achieve a performance like this through your staff, through your people, at this point of time 98% of all our staff have shares in the company.
A few months ago we also did something that we believe is highly innovative. We gave share options to everyone in the company. Usually share options are limited to the team of top executives or maybe senior managers, but all our employees have been given the opportunity to take up share options.
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Mrs Johns: Do you attribute part of that philosophy to the output per employee increase that's so substantial, on page 13?
Dr Jeffrey: That is for the future. I think that will help and be a factor in the future. If you look at what's been achieved, we have run for many years a scheme which we call gainshare, and that is for every $3 of extra bottom line that is created over and above the corporate plan, because the output is higher than the corporate plan or the reduction in controllable costs is greater than the corporate plan. For every $3 to the bottom line, the company keeps $2 and the members of staff get $1. The way that operates is that for everyone in the company, whether it's a storekeeper or a director, it's a flat lump sum that can be round about C$4,000 paid in a year. It's a very significant and motivating sum. It's not just in terms of the financial indicators. There are also factors fed into that of what we call safety, quality and excellence moderators. So the safety performance of the company has got to improve as well.
Mrs Johns: British Energy, which is your nuclear position, basically has competition from National Power and PowerGen, and it has competition, I would assume, from outside sources also. Other companies have come in since that point, independent power brokers?
Dr Jeffrey: Yes.
Mrs Johns: So in that time frame, that competition no doubt has led to some of the reduced pricing you have graphed out on pages 10, 11 or 12. Can you comment on how much independent power has come into the system? I know there were these three companies that were state-owned. What have we had come in from outside of those three state-owned organizations?
Mr Armour: As well as National Power and PowerGen, which operate in the England and Wales market, other established producers were Scottish Power and Scottish Hydro-Electric. Since 1990, we have seen a huge move in the UK towards gas generation. Much of that has come in through independent power producers, many from outside, from the US, from Finland, and as result of oil majors, shall we say, teaming up with other companies, particularly ABB and manufacturers of kit, and they will team up to produce new power plants, so that we're now talking about 25% of the UK market produced through gas generation. Some of it is gas owned by National Power and PowerGen. Most of it is gas capacity owned by other companies.
Dr Jeffrey: Maybe about 20 or 30 significant owners of IPPs. But if you then look at renewables, anyone who wants to develop a small wind farm can come in as an independent producer. There may 100 renewable projects, maybe even more.
Mrs Johns: Magnox, the company, seems to be the real loser in this issue. It has the debt, it has all the liabilities from previous times, and you start off with all the perks of having a corporation here with really no capital costs associated with you, as I understand from what you've told us today. I have a couple of questions here. Your cost of power doesn't have any capital assets associated with it, so you obviously are not on a level playing field with the gas generators that are coming in. My second question is, it seems to me that the taxpayers or the ratepayers are on the hook for this money in Magnox. Who got hit and how did they get hit and how equitable was that?
Dr Jeffrey: First, if you remember the operating costs, the pie charts I showed you on page 11, the depreciation is 21% and that is a capital charge. That recognizes the capital investment.
Mrs Johns: Does that go to Magnox then? You collect it and it goes to Magnox?
Dr Jeffrey: No. British Energy is a totally freestanding company owned by shareholders.
Mrs Johns: So any dollars of debt that were incurred to build that plant went to British Energy?
Dr Jeffrey: Correct.
Mrs Johns: So even if there were huge capital cost overruns like we might have here in Darlington, where it was $4 billion and it ended up being $12 billion, you got all $12 billion of that baby?
Dr Jeffrey: Correct, with one qualification, which is the book value of Sizewell B. As a financial transaction, the book value was written down. That's a balance sheet issue; that's a number on a balance sheet.
Mrs Johns: So it was written down.
Dr Jeffrey: Yes, but that's a different issue from debt, which is, you owe a bank a billion dollars.
Mrs Johns: Yes, I understand.
Dr Jeffrey: The debt attributable to all of these eight plants, any debt was transferred into British Energy. There is this 21% depreciation charge within British Energy. British Energy, when it moved into the private sector, took with it C$8 billion in liabilities. That $8 billion is in respect of, for example, spent fuel which had been removed from the reactors in their operating life up until that point of time and was with BNFL in their swimming pool, in their pond, waiting to be reprocessed, because the arrangement there is pay as you go. So all of the debts and liabilities, all of the cash issues associated with these eight plants, transferred into the private sector.
Mr Armour: It would be worth saying there was intense scrutiny of this transaction by the European Community to ensure there was no state subsidy, and very close watching by the other competitors in the market.
Mrs Johns: And it would work out to be the same proportionate amount too, six reactors.
Mr Kwinter: I enjoyed your presentation. I enjoyed your presentation when I heard it a few weeks ago as well. When you talk about restructuring, this is something we are waiting for with this white paper, which will give us an idea of what the government's strategy is on restructuring. One of my concerns is that when this restructuring took place -- one of the things this committee is charged with is taking a look at the recovery, as opposed to restructuring, and that recovery, although you say you have read the report, the IIPA, and the recovery plan, you haven't really studied it at great length. When you assumed these assets, were any of them in the situation where there were massive amounts of capital required to bring them up to serviceable levels?
Dr Jeffrey: Yes. Obviously, on the new pressurized water reactor, the answer to your question is no, because that was a state-of-the-art new plant that was operating extremely successfully and that in service has turned out to the be one of the world's best pressurized water reactors. With respect to the seven advanced gas-cooled reactors, five of the earlier ones, I should think on each of them for a number of years we spent about £20 million per year. So it's £20 million times five -- about C$200 million per year for several years in order to achieve the increased performance that came up on some of my performance graphs, but also in order to bring them up to a standard where they would meet the more demanding safety case requirements that as an industry we're now faced with.
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Mr Kwinter: In your business case scenario, when you evaluated these things, that wasn't an impediment to turning them over to the private sector?
Dr Jeffrey: No. It's almost the other way around. In order to be able to say to our shareholders, "This is good-quality plant; it's going to operate for another 10, 20, 30 years," in the prospectus for the flotation of British Energy, which is this rather detailed 240-page document, we addressed the state of health of all of the plant and could make confident statements regarding the ongoing life and commercial viability of the plant.
Mr Kwinter: The Magnox facilities were not included and they remained state-owned.
Dr Jeffrey: Correct.
Mr Kwinter: Was that because they couldn't fit into that criteria?
Dr Jeffrey: Three of them were already closed down and the others had got a relatively limited life, only another five or so years, and therefore they weren't a viable business proposition.
Mr Kwinter: But right now they are still producing about 6% of the energy.
Dr Jeffrey: About 6%, yes.
Mr Kwinter: But that means that in just a very short time frame they won't be producing anything?
Dr Jeffrey: Progressively over the next few years they will retire, unless the owners believe that it's worthwhile continuing to invest.
Mr Kwinter: When you say the "owners," you mean the state?
Dr Jeffrey: I mean the state, yes.
Mr Kwinter: Are those the only facilities that the state owns?
Dr Jeffrey: In terms of electricity, yes.
Mr Armour: Yes. The state owns the other parts of the nuclear cycle in terms of reprocessing and the fuel production, but otherwise it has privatized the whole of the electricity industry.
Mr Kwinter: When the state had the monopoly, and I'm trying to compare it to the Ontario situation, when they did, did the state pay taxes? I assume they didn't. There were no taxes assigned to the facilities. Was there any guarantee by the state of the debt?
Mr Armour: There was. All the publicly owned corporations are subject to a treasury guarantee. That treasury guarantee, of course, no longer applies to our company now it has been sold off. The companies were, I believe, liable to tax but in many cases they had large capital building programs which could be set against tax. So in general, the amount of tax paid was very little.
Dr Jeffrey: When Scottish Nuclear and Nuclear Electric were operating between 1990 and 1996, still under state ownership, the arrangements for doing that were quite interesting and they might be relevant to your deliberations.
If I take Scottish Nuclear, although it was still state-owned, it was a limited liability company under the Companies Act, in which the shareholder just happened to be the Secretary of State for Scotland. But it was constructed as a private sector PLC would be constructed, with a chairman and chief executive and board and non-executives who ran the company in the way in which you would expect a private sector PLC to run a company.
Mr Armour: This was deliberately to, first of all, bring slightly more commercial discipline to the running of the companies and also to replace a board procedure which had preceded that, where the companies were established by statute but were not subject to the Companies Act and the general legislation.
Dr Jeffrey: It's a sort of halfway house between being state-owned and being privatized.
Mr Kwinter: Prior to the privatization, was the Office of Electricity Regulation in existence?
Mr Armour: Not prior to 1990. It came in with the privatization of the first wave of the industry in 1990. Prior to that, the whole of the industry was under government control and therefore it was more following to answering to the minister.
Mr Kwinter: So there was no regulation prior to the privatization?
Mr Armour: There was a variety of regulation. There would be the nuclear installations inspectorate under the government, but in general, the economic regulation, the commercial regulation, would be subject to government discussions with the generating boards that were then in place.
Mr Kwinter: The last thing I want to talk about is the transmission. You state that the transmission grid has also been privatized.
Mr Armour: Yes.
Mr Kwinter: Has that created any problems in the way of stranded assets? I'd just also like clarification. You've got the National Grid Co, which is a private company, I assume, and you've got Scottish Power. Is that just because of geography, or are they competing grid companies?
Dr Jeffrey: No, the National Grid Co is a bit of a misnomer. The National Grid Co applies to England and Wales. In Scotland, Scottish Power is responsible for transmission in its licensed area and Scottish Hydro-Electric is responsible for transmission in its licensed area. But the National Grid Co, there were no stranded assets. It was the same issue that all debts, all liabilities, everything was transferred into the private sector, and it has proved to be a very effective private sector company that is now actively participating in the acquisition of transmission systems overseas.
Mr Kwinter: Are they regulated by the Office of Electricity Regulation as well?
Mr Armour: Yes. National Grid is subject to OFFER. OFFER is the Office of Electricity Regulation.
Mr Conway: I want to pick up on the point that Ms Johns made earlier and it has to do with assets and liabilities, particularly with respect to reactors. Can you just clarify, Dr Jeffrey, as you understood it, at the point of privatization, your estimate of the liability or debt associated with each of your reactors and the corresponding revenue stream for each of those reactor sites?
Dr Jeffrey: The company, when it publishes its accounts or for purposes of the flotation, does not distinguish between the eight power stations, although within its management accounts obviously it does recognize this and people are set appropriate targets. But it's a company which owns eight power stations. When the company was privatized, the assets were transferred into British Energy. All of the assets and all of the liabilities associated with all eight plants were transferred into British Energy.
Mr Conway: I'm trying get a more specific calculation. If you take the pool and break it out on an average basis, what was the average debt per reactor at the time of transformation and the average income stream annualized per reactor?
Mr Armour: It's very difficult to be exact because at the time, when it's historical cost accounting, the cost of building a reactor in 1975, which would be a few hundreds of millions --
Mr Conway: How much debt was there in 1996? At the point you became a private company, what was the debt assigned to each reactor and what was the revenue --
Mr Armour: The company was created with seven hundred million of debt, which is owned by the government and which they --
Dr Jeffrey: UK sterling: _700 million UK sterling.
Mr Conway: We may want to do this through a written correspondence because I think that's important data to get as we think about a corresponding situation with Ontario Hydro. I'm just trying to get some comparison on the basis of our actual experience with your reactors versus what our situation would be with our reactors in Ontario Hydro Nuclear.
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Dr Jeffrey: But it's not done on a reactor-by-reactor basis. We do not keep our PLC accounts like that. The tangible assets of all eight power plants -- and what I've got here is our annual report and accounts and we'll give you a copy of that. It shows the value of the eight reactors -- sorry, it's not that there are eight reactors, there are eight power stations, so seven of these power stations have got two reactors. It's actually a total of 15 reactors, which is a little bit similar to Ontario where you've got 20 reactors. So there are eight power stations, seven of which have got two reactors, and therefore a total of 15 reactors. In our books the tangible assets of the 15 reactors and the value of our various offices etc is _5.1 billion UK sterling. When the company was created it had _700 million UK sterling debt. Since then, we've paid off a lot of that debt.
Mr Conway: And the income at that same point from those 15 reactors?
Dr Jeffrey: Was _1.9 billion sterling. But it's all here in our accounts.
Mrs Johns: I just want to ask one question. Is that the initial financial statement? Could I borrow that for a few minutes?
Dr Jeffrey: This is where the questioning is going to get very detailed, isn't it?
The Chair: Dr Jeffrey, thank you. Picking up on Mr Conway's point, there may be a number of questions that will flow out of today and I'd appreciate your written responses to help us in this regard.
Dr Jeffrey: Yes, we shall do that.
The Chair: I want to make sure there's an appropriate comparison, we understand that we're dealing with apples and apples and so forth.
Mr Laughren: A couple of questions, part of it being triggered by some of Mr Conway's questions. I don't understand how the value of the asset was established when it was privatized.
Dr Jeffrey: It's quite straightforward and it's actually a very important and interesting --
Mr Laughren: Robert is looking a little quizzical about that statement.
Dr Jeffrey: No, it's straightforward and it's actually a rather important private sector concept, which is, you forecast the future profit stream coming from the company. That is, you model the selling price of electricity from the plants and you model the cost of running the plants and you then discount that at the appropriate rate that financial advisers agree with the government. That is then a measure of the profitability of the company over a future pay rate of years on which to base the value of the company. The value of the company has got nothing at all to do with the value of its assets. It is what is going to be the profitability of this company and therefore establish the viability of the company to pay dividends to its shareholders.
Mr Armour: But I would say if you can get a tight answer from a merchant banker that tells you what the valuation of a reactor is with its liabilities, you're doing quite well.
Mr Laughren: Did that become an issue at all?
Dr Jeffrey: The negotiations associated with privatization are extremely complex and difficult and sometimes lurch from crisis to crisis.
Mr Armour: Like any negotiation.
Dr Jeffrey: Practical solutions have got to be found.
Mr Laughren: I wanted to ask you about the chart on page 15 of your presentation. It has to do with price reduction; not so much the price reductions but the variable rates that seem to underlie this chart. Do you have different rates for large industrial, average industrial, small industrial-commercial and average domestic?
Dr Jeffrey: These are the prices paid by the end consumer.
Mr Laughren: Correct.
Dr Jeffrey: And that doesn't bear an immediate relationship to the cost of production. These are the prices paid by the end consumer, recognizing the costs of distribution, of supply, of generation, of transmission etc.
Mr Laughren: You don't necessarily set those rates yourself?
Mr Armour: The rates are not set. Different parts of the market -- to understand the UK market, in 1990, when the first privatization occurred, the large industrial users, over one megawatt, that was an open market that anyone could compete for. The market has gradually been liberalized so that it took it down to the 100-kilowatt level a few years ago and in 1998 we move to a situation where any household can buy from any supplier. The price is set by competition between suppliers. It is in the retail market increasingly capped by the regulator, but in practice it has not had to be capped in many of these markets because the price has been driven down by competition.
Mr Laughren: The reason I ask that is we've lived in a world here of a monopoly, just as I gather you did before, and the one comment that I have received since this committee was struck, and some phone calls I received and so forth, has to do with the fears by some that if we were to privatize our system here, the large industrial users would end up with a very, very good price for their energy, to be subsidized by the domestic user because of the power of the large industrial user. I live in a community where Inco and Falconbridge are both located and they have enormous purchasing power. I think Falconbridge is the largest energy consumer in the province. There is a fear that's what would happen and that they'd end up being subsidized by the domestic user.
Dr Jeffrey: That is where the power of the regulator is so very important because he has access to all of the company accounting information and he has to form a view as to whether the pricing policy being established is fair for the end regulated users.
Mr Laughren: Which is why the regulator must have power?
Dr Jeffrey: Yes.
Mr Laughren: You wouldn't disagree with that.
Mr Armour: The other thing is the regulator in the UK operates under what we call an RPI-X regime. The target set to the electricity distributors is inflation less a figure. If they can reduce their costs faster, they do well. But the incentive is there to reduce prices.
Mr Laughren: The only other question I had has to do with the life expectancy of the nuclear plants. It seems to me that here, and I'm not an expert on this, they started out with life expectancies of 40 years and now people are saying it's more like 25, and even then you've got all this retubing and so forth that has to be done in that interim period, so that the whole idea of life expectancy has more or less gone out the window. I'm wondering to what extent you've had to deal with that problem of life expectancy.
Dr Jeffrey: To a very considerable extent I think is the answer. I can't comment specifically on the Candus but, in general, engineers are incredibly ingenious people and if there is a problem with a plant, they will be able to analyse it, understand it and engineer a method of retubing or replacing a vat or cutting out a weld and replacing it. They'll be able to do that to the necessary demanding safety standards. The issue is what is it going to cost and is it economic to do it. I think life expectancy broadly is not an issue per se; it is, what is the cost and is it worthwhile to make the investment?
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As far as the AGRs are concerned, in our books they are shown to have approximately 30 years. They vary from reactor to reactor, but they are in our books at about 30 years. The company is very confident of delivering the statements made in the prospectus, that at the end of March 1998 we will have completed all the work to justify going from 30 to 35 years on four of those reactors, and in a year's time to complete the same exercise for another four of the reactors. The size will pressurize whether the reactor is in our books at 40 years, and we are confident of achieving at least 40 years from that plant.
Mr O'Toole: Mr Chair, I'm going to share my questions with Mrs Fisher. Just quickly, I'm going to move to your chart on page 8 which talks about market share. I understand that whole pie chart represents 100% of the market, not just the nuclear.
Dr Jeffrey: No, 100%.
Mr O'Toole: What I'm really wondering is British, your particular firm, has 21%. That's your max load capacity or whatever, based on some ability to share in the marketplace. You're at 21% of the full capacity of the --
Mr Armour: No, it's sales, not capacity.
Mr O'Toole: That's really my question. Who allocates the base load and the peaks and valleys? Who says when your plants go down and up? Do you submit a business plan that says, "Here's our scheduled maintenance outages?" There's got to be a base load supply and somebody has got to perform the high-cost peaks. Where the real cost to power is is the peaks, that's the cost. When you look at this, who sets those shares in the base load?
Dr Jeffrey: The arrangement for selling generation in the UK is an arrangement called the pool. I don't know whether that's something you've studied and you know about.
Mr O'Toole: No. Just that somebody is a broker.
Dr Jeffrey: Right. There is a broker called the pool. All generators bid into the pool, and they do so 24 hours ahead. They say, half-hour by half-hour, "This is our price for supplying so many megawatt-hours for that half-hour." The pool then purchases, starting at the cheapest schedule, and the price everyone gets is the price of the most expensive bid-in for that particular half-hour.
Mr O'Toole: That suffices for my needs, but I think there are other people listening. The other one I have is somewhat unrelated. I don't think that Mrs Johns's question or Mr Conway's question with respect to the plight of Magnox has been completely answered. Perhaps with Mrs Johns looking at your statements, I don't think that will show what we need to know about that. They're holding two decommissioned plants and some other sick liabilities, in my view. I'm not particularly satisfied with the response but I'm going to use my question to go to page 13.
On page 13 you talk about the reduction in manpower, really, or the increase in output per manpower, however you want to state it. A couple of questions there. You did talk about two things. I have not heard you mention the word "union" but I did hear you mention "profit-sharing," and a word we hear a considerable amount is the "culture" and the "turnaround attitude." Have you got the same employees as you started with? You've turned everything completely upside down, from a $600-million loss to a $600-million gain, and the slope is exactly negative in the same proportion when it comes to manpower. Tell me about the culture. Are you using the same people top to bottom? Is there a union? That's a simple question.
Dr Jeffrey: The answer to that is yes, and I will address that in just a minute.
Mr Conway: Say that again very clearly so that you all hear that.
Dr Jeffrey: The answer is yes.
Mr Conway: The evil union.
Mr O'Toole: I didn't say "evil." I said --
The Chair: Let's be steady here, please. The wealthy members are getting upset.
Mrs Johns: There is some problem here, isn't there?
Dr Jeffrey: I will come back to that.
Mr O'Toole: Profit-sharing is inconsistent with that.
Dr Jeffrey: I'll answer all of these questions precisely. As to your comments about not being satisfied with what I'd said about Magnox, I just want to restate that all of the debt and liabilities and costs associated with Magnox were ring-fenced and put into the Magnox company, and all the debts and liabilities and costs associated with British Energy were put into British Energy company. These matters were scrutinized in very great detail by a select committee of the UK Parliament and they were satisfied that what had been done was fair and proper.
Having said that, I'd like to go back --
Mr O'Toole: They have eight plants and 6% of the grid capacity. They have eight plants, two are down and six are up.
Dr Jeffrey: Three --
Mr O'Toole: I don't want to get into that. Actually, I want the union one answered.
Dr Jeffrey: Three are down. Could I come back to the unions as well, because I think that's very important. The structure of unions within British Energy, they are the same unions now as they were when we were under state ownership. There is a professional engineers' union called the EMA, the managers' union. These represent the more highly paid people in the plants. There are also craft unions, two or three of them, and there are also clerical unions. The industry is unionized in precisely the same way now as it was dial the clock back 10 years ago.
I think the important issue is not so much that we've turned it upside down -- maybe we've done that with its performance -- but in terms of the evolution of the culture, it has been a steady progression. If you take Scottish Nuclear, every one of our employees was put through a commercial awareness course. It didn't matter whether it was a plant manager or whether it was a storekeeper. Every one of our employees was put through a commercial awareness course so they understood the issues facing the company. You've got to take people with you, and they want to understand.
Mr O'Toole: Good. Mrs Fisher.
Mrs Fisher: I have a few questions to ask. The first one I'll ask is, I'd like to come back to the decommissioning situation. I don't want to spend a lot of time on any of these because we're going to have to get some quicker answers here.
With regard to the lay-up and the decommissioning at the high-level waste long-term storage, what regulatory body approved the proposal so that the costing has been substantiated as being correct?
Dr Jeffrey: It was approved by the NII, by the regulator. They looked at the decommissioning plan. The government appointed an external firm of engineering consultants to look at that and an external firm of accounting consultants to look at the costing.
Mrs Fisher: So the costs on the energy prices today include the projection reserving for the funds required for the long-term storage?
Dr Jeffrey: That is correct.
Mrs Fisher: Based on -- it almost has to be hypothesis because somebody hasn't experienced this. We're all in the same stages here of dealing with this lifetime problem of high-level waste storage.
Dr Jeffrey: In the UK stage 1, decommissioning has been completed in three plants and we're into stage 2 decommissioning. Experience to date has demonstrated that that work is being done within program and within budget.
Mrs Fisher: Coming back to the employee issue that Mr O'Toole raised, obviously there have been many reports with regard to privatization. I would suggest that my office is certainly familiar with the issue in that there has been a demonstration already, before privatization even has been decided upon or, more openly, the competition convergence issue.
Let's talk about how the employees were dealt with in the transition from public to private sector employment. I heard you respond that in fact the same employees now are in place in terms of work. The same number of employees?
Dr Jeffrey: No. One of the charts on page 13 showed a reduction from 8,200 to 6,300, something like that.
Mrs Fisher: And the safety levels, as we know by the awards you're earning now, have certainly increased, so that's a significant issue.
I come to the issue of the state of the reactors at the time you privatized. Were they under concern or direction by the regulatory bodies, that they were reaching an unsafe situation of operation?
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Dr Jeffrey: No, they were not. At no time have we operated any reactor other than truly complied with the safety case.
Mrs Fisher: I'm not suggesting you would. What I'm saying is that we're getting to our minimally acceptable safety standards, in terms of what the AECB has reported to us. What I'm trying to get at is that even though you made that transition, in fact your safety performance in operation and measures has improved.
Dr Jeffrey: I can't comment on what has been reported to you through the AECB. The normal procedure in the UK when you take a reactor out for its statutory inspection is that before you restart it, you have to submit very extensive documentation to the regulator and you apply for a consent to run for the next two years or the next three years, depending on the period. At no time, to the best of my knowledge, have we ever received anything than the two or three years we requested.
Mrs Fisher: One more thing on the employee thing: You mentioned that the same unions represent the same workers in almost the same work setting; it's just different ownership now.
Dr Jeffrey: Yes.
Mrs Fisher: We've heard comments before with regard to huge salary drops and benefits becoming at risk and these types of things. I'm talking about what we've heard, some of the things that have been presented in that transition here in Canada. Could you give us an idea -- the number of employees changed. Did the salary rates change? Did the benefit packages change? How was it managed in terms of successor rights? Who got to go and who didn't get to go?
Then I'd like a further comment on the reaction by the employees to the gainsharing and share options that have been commented on in this book, that have been basically a merit or a reward system for high performance and a turnaround. Could you hit each of those things for me?
Dr Jeffrey: The reduction of the staffing levels is a very important issue. The arrangement British Energy operates is what is called SDS, selective voluntary severance. The word "voluntary" is very important because it means the individual must volunteer. The word "selective" is even more important because the company decides whether an individual who wants to go is allowed to go. There have been quite a number of instances where someone has come to me and said, "I want to go on SDS because I want to do other things," or what have you, and I have said to these individuals: "No, you can't go. You are too important to the company. You can't go."
Mrs Fisher: Maybe we should have used that in the 1993 strategy here.
Dr Jeffrey: In a number of other instances, what I've said is, "You can't go now, but I will ensure that there's someone shadowing you, someone becoming your replacement, and in about three years' time, subject to transfer of knowledge, you can go." This arrangement of selective voluntary severance is extremely important.
Mrs Fisher: With regard to wages, what was the impact?
Dr Jeffrey: The wage bargaining is precisely the same now as it always was previously, which is that each year the unions write us a letter and say, "We claim this, that and the next thing," and the management sits down with them and you negotiate something.
Mrs Fisher: That's the process. I'm more concerned about the dollar value impacts.
Mr Armour: I don't think any employee is worse off after the exercise than before. I can't think of any employee who is not better off. In addition to their existing salary and benefits, which they retained or which were enhanced through the normal negotiation procedures, they have participated in gainshare, in options and in a variety of enhanced benefits.
Mrs Fisher: One last question, and it has to do with the other industries, other than nuclear: You raised the point with regard to the Kyoto conference. We talked about the impact environmentally and we're as much concerned about that as anybody. I think that's one of the major reasons we went to nuclear energy to start with.
Is there any discussion right now, in your new way of doing business, of imposing a pollutant factor, a surcharge on the thermal burners, if you will, to make more fairly a level playing field for competition in the whole of the industry? If everybody agrees that there has to be a blend and a mix -- where are you? You are ahead of us, obviously, in this transition, so somebody must be saying, "Level the playing field." Are the regulators saying there will be, and are they going to transition in that incremental charge, just like they did against nuclear in the surcharge for high-level waste storage costs and the decommissioning costs? Where are you in that?
Dr Jeffrey: You're absolutely right --
Mrs Fisher: Thank you. This may be the first time.
Dr Jeffrey: -- and we'd give you 100% support in the UK.
Mrs Johns: Of course.
Mrs Fisher: Well, it's a fair question. It has to come into the balance of play.
Dr Jeffrey: It is a very important question. In the UK, we call it a carbon tax. As you say, it's a tax on the burners. But are we making any progress with it? I think the answer is no. It does not exist in the UK. It is something that has to emerge from a world summit. Individual countries are fearful of imposing a carbon tax within their country which could mean more expensive electricity in that country, disadvantaging the industry of that country, so it's got to be an international movement.
Mr Armour: There is a number of proposals for energy taxes, carbon taxes, permits for trading in emissions etc which are currently being bandied about throughout Europe. There's no agreement as yet on how to take that one forward.
Mr Conway: Dr Jeffrey and colleague, I want to pursue some questions, some of which have been covered before. Overall, yours is an incredible story. I was sitting here thinking you're good salespeople as well. I noticed in one of your documents that your current strategy, to read from that document, is "to expand operations in the United Kingdom and internationally in both nuclear and conventional energy sectors," and you're looking for partners. You may in fact have come to the right place, but that's not for me to say.
But this is a very impressive story you're here to tell. I want to pick up on something Mr O'Toole was asking earlier. Just in summary, looking at the period from 1989, I guess -- when did the Thatcher government announce a plan to privatize all or part of the electricity sector?
Mr Armour: It was 1987.
Mr Conway: So if we look at the period from 1987 to 1997, there has been, from your recitation, a dramatic, a remarkable, a positive change, and your story is a big part of that, probably the biggest part because it was the most unlikely, people saying at the beginning that the nuclear side of energy was going to be the most problematic.
In summary, what were the key ingredients of changing the culture in British nuclear operations between 1987 and 1997 that made these numbers so favourable?
Dr Jeffrey: The fact that the company, although still state-owned, was operating in a competitive market and having to sell its product against private sector generators. That was the driving force which meant, "We've got to take costs out of the business and improve the business," while always being safe.
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Mr Conway: So competition. But when I look, for example, at some of the American utilities that are privately owned and in the nuclear business, one can think of several in New England where they had all kinds of problems that were not unlike Ontario Hydro's, for example. They were presumably operating in something of a competitive market, but there seemed to be something to the nuclear culture -- we had the president of our utility stand up in the full light of day here two months ago and say that as far as he's concerned, one of the real problems is that nuclear in this province is run by a cult. Now, others have come to say, "No, we don't share that view." Some have said it was a priesthood.
So the introduction of competition was important. It also seems to me from what you've said that your human resource development was a key as well. They not only bought in: 98%, I see in one of your documents. One of the questions I have there, by the way, is, at the present time how much of the stock is held by people who work at British Energy?
Mr Armour: About 3% or 4%.
Mr Conway: So it's clearly a minority.
Mr Armour: But it is very widely distributed within the employees. It is perhaps worth saying that the nuclear industry in general, because of the nature of the industry, has very high quality employees. It employs people usually with very skilled training and with a very substantial talent in running businesses and addressing them ingeniously, if you utilize and release that talent.
One of the things we have concentrated on over the last 10 years has been tapping the resource within our employees. They used to have the phrase that you entered the plant and you parked your brain at the gate. Taking that and turning it around so that we took our employees with us has been a major exercise.
We talked about the gainshare program that was motivating improved performance. That program was designed by our employees and then sold by those employees who designed them to their colleagues. They brought it to us and they deserve the credit for it.
Mr Conway: And much of your operation is unionized.
Mr Armour: Virtually all of it.
Mr Conway: A number of people have come to the committee, certainly a number of outside analysts have pointed over time to the very difficult labour-management situation at Ontario Hydro. I think it's fair to say that a number of people, including the most recent outside analysts, have said that the collective bargaining process at Ontario Hydro Nuclear is part of the problem. In your experience I take it that it's not so much the fact that it's a unionized labour force as much as the participation, the involvement, the ownership of the labour force in the operation.
Dr Jeffrey: That's the key thing because the people who are employed in these plants believe in nuclear power and they want nuclear power to succeed and they know they've got to be commercial. The union officials want to deliver a successful industry as well.
Mr Conway: You may have answered this and I may have missed it, but do your unionized employees have the right to strike?
Dr Jeffrey: Theoretically, yes. They never have.
Mr Conway: They never have. Why don't they strike?
Mr Armour: They did in fact back in the early 1970s. They don't strike because we get on with them.
Mr Conway: But theoretically they do have the right to strike.
Mr Armour: Yes.
Mr Conway: But the strike issue is not an issue because there is a good, cooperative environment, I take it, between labour and management; obviously, you've said that.
Mr Armour: Yes.
Mr Conway: I still have a problem with the way it was set up because it appears to me -- I wrote down "Magnovox the dog." It appeared to me, from what you were telling me, the way this thing was set up it was that anything that was kind of good and viable was assigned to British Energy and Magnovox got --
The Chair: Magnox.
Mr Conway: Have I got it wrong? Magnox got what was left over. I just want to be clear how Magnovox operates with that portfolio.
The Chair: It's Magnox.
Mr Conway: Magnox, I'm sorry.
The Chair: They may not want us to give the wrong information.
Mr Conway: Thank you very much, Mr Chairman.
Dr Jeffrey: "Magnox the dog," I like it. What you can see happening in the UK is progressive privatization, starting with the easy bits. So what was done in 1990 was to sell off non-nuclear. What was done in 1996 was to sell off the modern nuclear.
Another twist to the story is Magnox stayed in state ownership but the government decided that Magnox should be transferred into BNFL, which is a state-owned company. That's the front-end and back-end fuel company. There are already stories within the UK that BNFL itself now wishes to be privatized. So you just move incrementally.
Mr Conway: Listening to your presentation, one of the impressions I had is that incrementalism was an important policy for the successful privatization. Would that be a fair observation?
Dr Jeffrey: As in all aspects of life, you do the straightforward things first and the more difficult ones later.
Mr Conway: I don't disagree with you, but there are some revolutionaries abroad in the land, the lady is not for turning, poll tax or --
Mr Armour: Could I just clarify this impression given that we took all the liabilities and dumped them at Magnox? That was not the case. Under the companies act Magnox has its separate board. There was no legislative framework of allocating liabilities or assets. This was done by negotiation between two companies so that in selling Magnox -- it used closed reactors from Scottish Nuclear -- we had to get an independent evaluation, which is why I referred to the difficulty of pinning down the merchant bankers.
We then had to negotiate with them so that they, as companies act directors, would not be liable for buying or taking this liability without getting due recompense. The transaction was all done at arm's length through an arm's-length negotiation and we paid them very substantial sums to take that reactor off us. As a result, Magnox was set up so that it was confident it would meet the tests of solvency.
Mr Conway: But we've just had our national Auditor-General tell the people of Canada that in a recent privatization -- in this case, our national air transport system. He has done an independent evaluation and he believes Her Majesty's Canadian government sold it off for about $1 billion less than it was really worth. That's just been in our news in the last 10 days.
One of the real concerns here, regardless of where you stand on privatization, is getting the best value for the taxpayer who has paid for this. When I look at this, and again you people are here and you've done a very good job and it's quite a story, I suspect we're not getting the whole story, and I don't mean that as critically as it must sound. I'm always concerned, and when I see the Magnox story I think: "Was this a careful way of dealing with a lot of dog assets, stranded assets? Just pile them up over here? Yes, British Energy and a lot of these other people, we've got to prepare them for this new world and they've got to be able to stand and compete and run, but none the less, we've set aside some not very attractive assets."
Dr Jeffrey: The answer to your question, and both Robert and I have said it again and again, is no. All the costs and liabilities and debts properly associated with Magnox and audited to be associated with Magnox and scrutinized by the UK parliamentary select committee were put into Magnox, and all the debts and costs and liabilities and everything else associated with British Energy were put into British Energy.
The Chair: Dr Jeffrey, thank you very much for attending upon this committee. I particularly appreciate the timeliness of your presentation. I would hope that you would be prepared to respond to another invitation to be with us, if that is possible, before this committee completes its duties.
Yes, Mrs Johns?
Mrs Johns: As a point of order, Mr Chair, I was wondering if the committee could ask for British Energy or someone to get the opening financial statements, as of the day of the transfer, for both Magnox and British Energy.
Interjection: There you go.
Mrs Johns: I don't think it has the opening financial or maybe it does.
The Chair: I think your request is reasonable and obviously it's been responded to. That shows you the speed with which the Chair responds to the requests of any member of this committee.
Dr Jeffrey, again I thank you both for being present. It has been very helpful indeed. There will undoubtedly be a number of follow-up questions that will come to you at least in writing, and we may engage in teleconferencing if not have you here directly as well before the end of the committee. I appreciate your time.
Dr Jeffrey: We will provide the information you wish.
The Chair: I thank you so much. I remind the committee, we will adjourn and meet again at 1400 hours. That's 2 pm for Mr Conway and his colleague.
Mr Conway: Will there be any heat this afternoon?
The Chair: That is being dealt with right now. The committee will now stand adjourned until 2 pm.
The committee recessed from 1300 to 1405.
The Chair: The committee will be in order, please. We resume the hearings. Witnesses this afternoon include Dr Kenneth Hare, and then there will be the Association of Major Power Consumers in Ontario. One hour has been scheduled for Dr Hare.
KENNETH HARE
The Chair: Dr Hare, I'd like to welcome you to these hearings. I would appreciate it if for the purpose of Hansard you would identify yourself, and then we are in your hands. If you'd care to make your opening statement, then we'll proceed with questioning, rotating by caucus.
Dr Kenneth Hare: Thank you for the opportunity of addressing this committee, whose work I think is extremely important. I'll introduce myself in a moment. I just want to make it clear that I have distributed a document, Notes for Testimony, which includes the essential biographical material, for members of the committee. Mr Campbell has copies of it.
I am Kenneth Hare, of Oakville, Ontario. I have been involved in the science policy area in most aspects of environmental questions. I was the first director-general of research in the federal Department of the Environment. I stepped out of that particular frying pan into the fire of the nuclear industry in 1977, when I became chairman of the federal inquiry into high-level nuclear waste disposal, whose report has been acted upon by Ontario Hydro, the province of Ontario and the government of Canada and has led to the federally sponsored waste disposal program that is now being spread out before their own assessment program.
That was my first real meeting with Ontario Hydro, because Ontario Hydro did a lot of the preparatory work for that. They are sometimes accused of not having looked at the waste disposal issue in time, and I think that was probably true of the corporation as a whole, but it wasn't true of the people who worked hard on documentation for my inquiry. I'd like to make it clear that we relied heavily upon them. They do a good job.
When Chernobyl happened, I thought by that time I'd finished with the nuclear industry -- I'm not a nuclear engineer and have no special interest in the nuclear industry -- but that was not the case. In 1986, when Chernobyl happened, the government of Ontario asked me if I would become commissioner of the Ontario Nuclear Safety Review with the responsibility of answering questions such as: Could Chernobyl happen here in Ontario? Are the reactors of our provincial utility being operated safely?
This was a very large-scale investigation. Although I was the only commissioner and was solely responsible for the output, the input was enormous. It came from a large group of consultants, it came from a lot of public interest groups that intervened and it came from a team of specialists appointed by the Royal Society of Canada. I think you have seen the report on the safety of reactors. What you may not know is that I have updated that report in two documents, one through 1991 but dated 1993, and another one that brings events up into 1993. This, in other words, has been a continuing responsibility for me.
In fact, I carried it on with enthusiasm until 1994, when I had a heart attack. I'm not saying the affairs of Ontario Hydro were responsible, but I had a heart attack and I've slacked off quite a lot since then. I'm still a member of the technical advisory panel which this group recommended be appointed, but I'm not particularly active in the area at the present time.
I'd like to say that I have read a little bit in the press of what has been said to this committee already. I didn't hear anything that I wanted to dissent from very strongly, but their reports were not complete. I can't endorse everything that I didn't in fact hear, but read about. All I can say is that I'm starting on the assumption that you already heard from the big guns in Ontario Hydro and some of their critics.
I'd like to step back myself for one moment to the main conclusion of the ONSR report. I recommended in that report that Ontario Hydro ensure that at an early date its operational organization be thoroughly re-examined in close cooperation with independent consultants who have international management experience; second, that they commission a study of factors affecting human performance throughout the utility for the purpose of achieving optimum efficiency and the maintenance of high standards of safe operation; and third, that they examine and revise their arrangements for establishing and maintaining an overall quality assurance program for each of the plants after taking advice from independent specialist consultants.
The question of safety in the nuclear industry is usually discussed in the context of the safety of the technology itself, the hardware. After years of study, I came to the conclusion that the principal hazard to public safety, if there is one, is the malfunctioning of the operational system, all the way from the management of the enterprise at the board level down to the humblest starting apprentice in the stations. We found a great many examples of cases where really an excellently conceived program was being second-guessed by people who thought they knew better. We constantly encountered people who, with the best of intentions, had departed from agreed procedure. It was that which led us to conclude in the 1987 report the recommendation that I just read.
May I say in conclusion that it seems to me that Ontario Hydro tried to respond to this. They immediately set up a contract with an American consulting company -- this was back in 1988 -- which reported on issues of safety and operational conditions. They carried out a corporate support evaluation for the program some years later. Perhaps you have seen that; if you haven't, you certainly should. Finally, they turned, and I have to say in desperation, to this team of American external appointees who have just taken over the administration of Ontario Hydro Nuclear as vice-presidents of the central operation and also of the stations themselves.
It's taken a long time, but I feel I ought to say that I do support the actions that have been taken to go outside. I'd like to explain why.
It seems to me that Ontario Hydro has suffered enormously from early miscalculations of what they ought to be achieving in this area. When I first saw Ontario Hydro at work in 1977 in the waste disposal context, the first reactors had already been in operation for some time; others were under construction. The whole enterprise was seen almost as a crusade, a crusade to put the central base load supply of the province of Ontario on to the nuclear base. An enormous amount of energy, enthusiasm and good intentions was put into that effort.
The next time I looked at them, of course, was after the failure of the pressure tubes in Pickering in 1983. This really began the process of what some people inside the corporation itself have called a "retreat from glory" into the pessimism of the present time. It seems to me that the biggest impression I've been left with is one of amazement that such an enormously self-confident start could end up in the kind of trouble they found themselves in a few years ago.
It would be a mistake to say that the confusion started in 1993. It wasn't simply Mr Strong's reorganization of 1993 that led to it; it was the growing realization, first, that the hardware was fallible -- that is to say, the reactors were capable of faults that derived from original design defects -- and secondly, that the operating system that had been set up was also highly fallible in that it occasionally led to failures which could only be attributed to human error.
The whole point about a safe operating system is not that it eliminates human error, which you can't eliminate, but guards against it. It has guarded against it. There has been no actual, as far as I can judge, minus sign in the balance sheet of the population of Ontario on health and safety grounds.
On the other hand, on economic grounds, the burden of repair that has followed the various failures that have taken place has been enormous and has brought the corporation, as you know, into the economic situation in which it finds itself today.
That retreat from glory, which was a phrase I heard at a meeting of one of the board's committees, was itself brought about by the realization that this very large organization could not bring about an effective system of internal reform. It wasn't possible for them to grab hold, or they didn't succeed in grabbing hold, of what was wrong with the organization, even though almost everybody inside Ontario Hydro Nuclear could have told you what was wrong. That is true of large organizations everywhere, which is why I say that I think they had no recourse but to do what they did, to go to outside consultants.
The outside consultants have reported. You've undoubtedly seen their enormous report and heard from their leader. They were being paid to be as harsh as possible and to be as drastic and as radical as possible with a view to bringing the reactors back into service. I realize that this, for this committee, presents the catch-22 situation of whether it is worth the cost of doing that, because it will be an expensive operation. My own view is that one doesn't have much choice. There is a limit to the amount of stranded hardware that you can leave lying around the province of Ontario and pick up the bills afterwards. But that is obviously for you to decide and not me.
May I close by saying that every time I see Ontario Hydro attacked in the press or on the floor of the Legislature or anywhere, I'm compelled to say that in the years that I have dealt with this corporation, I have had nothing but the best of relations with the staff, including everybody from the chairman right down to the shop floor. I've been impressed, as all my colleagues have, by the immense reservoir of ability there is inside the utility. But equally I've been depressed by the inability which that ability has to harness itself and bring about the result we all look for.
That's all I wanted to say to start with.
The Chair: Thank you very much for your presentation. I appreciate and welcome it. We will now begin questioning by rotation.
Ms Marilyn Churley (Riverdale): Thank you very much for appearing before us today. I appreciate the fact that you remember my days at city hall and, although most people have forgotten now, the fact that I started at the energy efficiency office at city hall. I guess that tells you where I'm coming from in this question I'm going to start off by asking you about the recovery plan, which you have stated that you support, and you don't see at this point any choices in where we go.
I'm concerned that the recovery plan doesn't involve any strategies to reduce the amount of coal being used as replacement power through things like conservation, fuel switching and renewable energy.
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What kind of plan do you think Hydro could put in place? I expect you're going to say, as everybody does, that in the short term the amount of power that's going to be lost for a while cannot be replaced quickly by those alternatives, but I'm quite concerned that this hasn't been looked at. Our government, as you know, started on a very small scale the beginnings of doing more serious work around these areas, but for the most part those programs are not operating any more. I'm just wondering what you think about a recovery plan that doesn't include any of those options.
Dr Hare: Well, I didn't actually say that I approved of the plan. I said I approved of the tactic of bringing in external consultants who are not subject to the clan loyalties that affect people from inside the organization. You'd be amazed how loyal the staff are to one another and the inability they have of being rude to one another. You have to be very rude indeed in this situation to make any sense. They went out and asked people who were not bound by those ties, so specifically what I've approved of in my remarks is this decision to make an external job out of it.
I agree with you that a weakness in the action taken by the board of directors, as I understand it -- I was not there and I only know what I've read in the press about it -- is that there is not an explicit suggestion of where we go from here. If you shut down 5,000 megawatts of power, you're certainly going to have to replace it quickly. I understand that Energy Probe came and testified to you that they were worried about what would happen this winter. Well, so am I. The margin of safety that we have had in terms of the security of supply has obviously been eroded and will be eroded still further if we are forced, as we are being forced, to shut down these reactors.
As regards replacement sources, I also regret the fact that our various governments have tended to retreat from the systematic study of alternatives. Having said that, I have to point out that we are, by our lifestyles, committed to very high energy density consumption. We consume an awful lot of engineered energy per square kilometre, as well as per head, and we'll have to use an awful lot of solar, an awful lot of biomass, an awful lot of any alternative to make good what is now being lifted out of production. I assume that a considerable amount of the loss will have to be made up from purchases from our neighbours, some of which will be nuclear, paradoxically.
But I agree with you that it would be desirable that the governments of Canada -- I put them in the plural because there are at least four provincial jurisdictions that should be in this game in depth -- should look again at the question of alternatives in supply.
Ms Churley: I understand that you had looked at and studied Hydro in the early 1990s, was it?
Dr Hare: It was on and off.
Ms Churley: It was on and off.
Dr Hare: It's on the page there. The basic study, the big, fat volume here, the work was done in 1986 and 1987, 10 years ago. These two were done in the years between 1988 and 1993.
Ms Churley: Many people, including Maurice Strong and others who have been involved with Hydro for years, have said that the problems with the nuclear system have been long-standing. I know you alluded to this a bit, but I'm wondering what you found in your last study or any of those studies. Would you agree that these problems were long-standing, and had you identified some of them?
Dr Hare: Yes, they are of long standing and yes, I did identify some of them, but I didn't identify them strongly enough. Furthermore, the decay period was largely in the volume that was never published.
Ms Churley: So you did identify some of the problems that were outlined at the press conference, and the recovery plan was announced almost immediately afterwards. Were you surprised at all or had you known that most, if not all, of those problems had existed for some time?
Dr Hare: I knew that they existed. I have known for a long time that they existed, and so has everybody else at Ontario Hydro. I'm not a member of Hydro's staff but I talk to Hydro people a lot and I know perfectly well that they were aware of their own deficiencies and they were pessimistic about future developments. There's no question about it.
Ms Churley: Do you think there is a nuclear cult? That's the word, that's how it was described, and it's talked about a lot. Is it, do you think, because there is a cult that the information didn't really get acted upon, that governments weren't aware particularly about what was going on?
Dr Hare: I don't really think so. That was Bill Farlinger's term, and he sometimes goes in for colourful language. I don't think so. There's not a cult, but there was a sense of high mission back in the 1970s and early 1980s. This was a crusade being carried out by people who really believed in what they were doing. There was a major national objective and Ontario was going to lead the world.
That is completely dead and gone. The people who engineered that have virtually all retired and the attitude of the last few years inside the staff of Ontario Hydro I would say has been fundamentally apprehensive and pessimistic. That doesn't mean to say that they have actually turned against the belief in the technology. On the contrary, most of the nuclear engineers will still tell you, as indeed I would say, it's perfectly feasible if you can work out an adequate operating system. It isn't the reactors, it's the people that run them, and that view has been accepted through a very large part of Ontario Hydro.
The evidence that has been presented to you, which may have come as a shock to some members, would not have come as a shock to anybody who had ever set foot in 700 University Avenue, which is a wasteland. Half of 700 University Avenue is empty because of the gutting of the central administration of Ontario Hydro.
Ms Churley: I haven't been at all the committee hearings, but when I have been here I have noticed a difference in opinion as to whether part of the problem, particularly over the last several years, is because, as Mr Farlinger -- we were led to believe on the day of the press announcement about this that it was a management problem, again because of the cult existing there.
We've had discussions as well, of course, that when the NDP was in government there was, as you know, some downsizing, bringing Hydro under control, trying to freeze rates, all of those things that I think all governments are preoccupied with in terms of Hydro rates.
There are some who say, and I'm not clear on what it really is, that it's a management problem. There are others who are saying that because some of the experts, some of the manpower that was needed, were let go, that may have contributed to the problem. What do you think?
Dr Hare: Certainly the corporation appears to me to have lost a great deal of ability over the downsizing process, because one of the consequences of assisted downsizing is that the able people leave and get jobs somewhere else. There was certainly an exodus of talent in the years following the reorganization in 1993 that the way in which the process was undertaken tended to encourage rather than discourage.
On the other hand, I have to say in defence of the nuclear business that it seemed to me they did make a very honest attempt and a largely successful attempt to protect the safety function in the stations. As a member of the safety review, I don't remember feeling that some program was being starved of people and resources because of the downsizing. What I felt was that the downsizing had affected primarily the headquarters of the corporation, and I wasn't joking when I said that 700 University Avenue is a ghostly, eerie sort of place in the evening nowadays. You go in there and half the floors seem to me to be half empty.
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What happened in the years immediately after 1990, when it really began to sink in that there was a lot wrong in the nuclear division, is that the new head of OHN proceeded then to adopt the policy, with the obvious concurrence of the board and probably the majority of his colleagues, of moving functions out to the stations. The stations actually received people from headquarters; they received functions from headquarters.
One of the consequences of this was that there tended to be differences of standard between the stations in performance and in the emphasis they laid on various aspects of the performance business, in the language they used to describe safety measures. They tended to differ as between stations following this decentralization movement, and that's one of the things I can't stomach. I believe safety standards should be identical throughout the corporation and that no measures should be taken to decentralize if decentralization means you lose control over the most important consideration of all, which is safety.
Mr Galt: Thank you, Dr Hare, for coming this afternoon and bringing us some interesting information. Responding a little bit, it hasn't been just the last chair of the board who has brought out some rather interesting comments. Certainly Mr Strong, when he went on the board, described it as a crisis at Ontario Hydro. More recently, he referred to it as a nuclear culture.
There's no question, as we look at it over the last few years, that we're seeing efficiencies of the reactors being pulled back, as I understand, for safety reasons. It's perfectly safe if you use them less and therefore reduce your efficiency.
I was a little late coming in. My apologies; I may have missed some of the things I'll be asking about. One relates to the organization you were chair of, the Ontario Nuclear Safety Review. I'd like to understand that a little better and get clarification from you to give some assurance to the people of Ontario that the operation of our nuclear plants is indeed safe.
Dr Hare: Do you want to pose a specific question or do you want me to make a general statement?
Mr Galt: Just safety in general. I'd like you to spend a minute or two on that, and the organization you were chair of: where it came from, what its teeth are.
Dr Hare: I was chairman of the Ontario Nuclear Safety Review from the beginning of 1987 until I reported to Bob Wong somewhere in the spring of 1988. The organization was established in the wake of Chernobyl. What happened was that the Liberal government at the time was confronted with whether to allow the completion of the remaining two units at the Darlington nuclear generating station. They had been started but they hadn't gone beyond the point of no return. The question that arose was, could a Chernobyl-type accident affect the kind of reactors we have?
The Premier and his Minister of Natural Resources, I believe it was, approached me and asked if I would undertake the job of organizing an internationally based study of the Ontario reactors to see whether they were safe or not. I said I would, and it took a year and three months to do it. I was given the funds, a very large amount of money indeed by my standards, $1.7 million, to hire the best we could find anywhere in the world to make comparative studies of our reactors versus the alternatives. This big, fat report was the result, plus five other volumes of the same size, I'm sorry to say, which are the consultants' reports.
What we found then was that first of all we could trace no impact on the population near the stations from the persistent release of radioactive materials. It was strongly represented to us that such leakage did take place and that there was therefore a threat to the people around the stations. We investigated that as best we could, in collaboration with the Atomic Energy Control Board, the federal regulator. We pressed for the creation of studies of the incidence of leukaemia and Down syndrome around the nuclear stations, and they were carried out. We also pressed for an independent review of the mechanical side of the safety question from the International Atomic Energy Agency in Vienna, their OSART team. That's in here. It was published. In a nutshell, at that time they seemed safe, if by safe you mean acceptably low-risk, because there's never zero risk.
Mr Galt: We're being confronted in the recovery plan that they're going to take down both A plants, at both Pickering and Bruce. Are they that unsafe? Do both need to come down now? Could one stay up for a while while the other one is being retrofitted? Could there be a sequence in retrofitting, in your opinion, and still be safe?
Dr Hare: Probably not. I think it's going to be a question of doing what the American consultants have suggested. I say that because the problems at Bruce have been going on for years now; they're not new. They arise from the failings of the older reactors in Bruce A, particularly the steam generators, which are one of the most intractable jobs of rehabilitation you can imagine, some thousands of pipes through large vessels, and you have to get inside every one of those pipes and somehow clean them out. Although every attempt was made, in the years I was interested in this, the early 1990s, to do this without closing the entire station down, each one led to renewed trouble in another of the Bruce reactors. I'm not saying there was any cause-and-effect consequence; it was just that the design of those reactors and the boilers which they support, which are enormous, was such that it was a question of whether it was worth operating at 50% capacity or less, which was what they were going to do.
Mr Galt: Are you surprised they've deteriorated as fast as they have?
Dr Hare: Yes, I am, very surprised.
Mr Galt: So you're disappointed in that.
Dr Hare: Extremely disappointed. I bought the argument that this was a very superior design.
Mr Galt: We're hearing that they have not been properly serviced, as a nuclear reactor management problem. Does that fit in with your thinking?
Dr Hare: A principal finding of this big, fat volume is that there was inadequate attention and resources devoted to the maintenance function.
Mr Galt: So now the taxpayer is going to have to pay for that level of mismanagement and that lack of service to those reactors.
Dr Hare: I'm tempted to say that that's not peculiar to the nuclear industry, but I agree with you. We're all going to have to pay for the mistakes of the past. It's not error, you see; it's not deliberate, malicious error that's involved. It's mistakes.
Mr Galt: Sure. I was intrigued by your use of the phrase "retreat from glory." I've certainly run into other organizations where they've won an award or they were one of the best at the time and they kept patting themselves on their back until they couldn't reach it any further and almost broke their arm doing it while they went downhill. They weren't looking out to see what else was happening in the world. They either stayed at the same level or deteriorated. I'm kind of getting the feeling that maybe that's what was happening here. We developed the Candu reactor, we were the best in the world once upon a time, and we rested on those laurels. Along those lines, do you see that that may have been what happened to our industry?
Dr Hare: Yes, to some extent, but it's not entirely fair to the industry. They were already aware back in the late 1980s that these problems were coming to the surface. They could have pressed harder for the maintenance functions; they could have pressed harder for immediate attention to difficulties that turned out to be chronic. I suppose they were perhaps more optimistic than was justified, because they were the people who built them in the first place. It's very hard to say that the machine you built is not working right.
Mr Galt: Listening this morning to the British experience -- I don't if you were able to listen in.
Dr Hare: No, I didn't, but I know the gentlemen concerned.
Mr Galt: Everything has just totally turned around there: efficiency, people working at the units, the cost of electricity going down, the private sector taking it over. I even got the feeling that with improved safety, certainly in many areas they had figures to show it. I still have concern about nuclear safety. The people of Ontario have been concerned, from what I've heard, that if it's transferred to the private sector, safety would go downhill. That's certainly not what I heard this morning from the British experience. Do you have any feelings, if we move from monopoly to competition to privatization -- one of those steps -- about what happens with safety as we go?
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Dr Hare: I think it's perfectly possible to maintain high safety standards with private ownership, provided that you have strong central regulation, as the Americans do, as the French do, although the French have a nationalized service. Their regulator is strong and technically competent.
I think you have to dissociate or detach the controversies concerning private ownership versus public ownership from the functional question of how you maintain safety. Safety is something that requires, first of all, attitude on the part of the workforce, and morale is therefore absolutely crucial. If you privatize and as a result of privatization you lead to low morale in the staff, then that's a big minus. If, on the other hand, you turn around to the staff and say, "You'll be better off under private ownership. There won't be any cap on your negotiations. The unions can press hard against a small supplier" and so on, that's a different ball game. In the United Kingdom, they have in fact, I think, achieved a lot of that. On the other hand, the Americans have achieved a great deal of it -- not a lot but most of it -- and they've done it by sheer hard, gutsy work. These fellows -- fellows and one girl -- lady. I'm sorry, woman.
Mr Galt: Woman.
Dr Hare: Yes, it's sort of hard to know what to say.
Interjection.
Mr Galt: And it's all in Hansard.
Dr Hare: I'm glad it's in Hansard because it'll teach future witnesses to guard their tongues.
But the point is that these fellows and girls who have come to work for us --
Ms Churley: Well, now you're in it.
Dr Hare: -- have all been through this particular hoop. They're all people who have taken part in rehabilitation exercises on the US side and on the US side they have taken government-owned enterprises, like the Tennessee Valley reactors, and pulled them back again, and I think that it can be done here.
Mr Galt: It's interesting, your comments about people. We're really hearing it's a people problem, not a mechanical gizmo problem. That's certainly the message in the IIPA report and, as you're mentioning, if you're looking at bringing competition into Ontario Hydro or taking it the next step to privatization, it's very much people-related and maintaining that morale within there.
I'm curious to know -- we're talking about restructuring. We've had the Macdonald commission come in with the report, one that the government has been wrestling with and coming out with a white paper. Do you see this direction that the government should be taking on restructuring? Do you have any feelings in that area?
Dr Hare: The privatization of the provincial industry?
Mr Galt: They were talking about competition. That was more the buzzword being used in that report.
Ms Churley: "Buzzword" is right.
Dr Hare: I've no special standing in this. I'm a pure pragmatist in matters of this kind. I don't think there is a uniquely right way of organizing an energy system. I think there are some uniquely wrong ways of doing it but not uniquely right ways of doing it.
I know Donald Macdonald very well. I know how he thinks, and I don't dissent from the things he says in general. However, if you think that simply by introducing competition into the market here you will get rid of these problems automatically, you will have to wait 20 years and there aren't 20 years available. In other words, if you're going to salvage these reactors and not add to the great load of stranded assets, action has to be taken now.
Mr Galt: Put another way, if we'd gone to competition in the late 1980s would that have improved it?
The Chair: Mr Galt, I know it's always frustrating when you're almost there with another question, but I have to get a little tougher on this.
Mr Kwinter: Dr Hare, we heard from British Energy that their mandate is to make sure that safety in the nuclear industry is number one. We keep hearing that here, but you suggest that somehow or other there isn't a safety culture. You were asked by the then government in 1986 to take a look at the Ontario nuclear review, and in your report I was interested to see that you said, "The most serious technical safety-related issue in Ontario Hydro's reactors is the poor performance of the pressure tubes." Although your report was in 1988, I guess it was 1986 and 1987 in which you did your investigation.
Dr Hare: Yes.
Mr Kwinter: You also stated that, "Present annual expenditures of $42 million for research and development on the pressure tube problem appear small in relation to the problem and to Ontario Hydro's revenues of $2.5 billion for nuclear power sales alone." The question I'd like to ask you, in your investigation were you satisfied that the basic design of the reactors, if they were properly maintained, was adequate? In other words, was it a design flaw or was it a combination of design flaw and poor maintenance?
Dr Hare: There were design flaws. No question about it. The principle behind the design is, I think, sound enough. You can argue that the Candu reactor is too complex. I hired expensive consultants to answer the question, "How do our reactors shape up alongside the light water reactors in terms of safety?" I got an almost 50-50 assessment that there was no great advantage to the Candu technology but no deficit either.
Mr Conway: You had good consultants.
Dr Hare: I think we had good consultants.
Mr Conway: They were 50-50 in the end.
Dr Hare: Yes. That's what consultants were about.
The Chair: We'll do the question one by one, Mr Conway.
Dr Hare: The defects are those of a first-generation technology. There's probably no case in history in which we have invested all these tens of billions of dollars in a new and untried technology, and that is what has happened here. Ontario Hydro's reactors are the first-generation application on a monumentally large scale of a technology that had only been developed in research reactors up till that time and mistakes were made that became apparently only in use. The same thing happened at the beginning of the railway age. Boilers burst and so on. But we jumped in with both feet and got going on the very large scale before that had been done.
The pressure tube issue I headlined because it's a classic case in point. Nobody had ever, to my knowledge, made extensive use of zirconium alloys before. It is essential to the Candu principle that zirconium alloys be used because zirconium is the only metal of adequate strength that has the required properties that allow the neutrons to fly around and so on. But the question is, which alloy, and we picked the wrong alloy. In the first instance, this country adopted an alloy that turned out to be capable of deformation and blistering under stress and the failures at Pickering were the direct result of this, not of human error but of the initial error in picking the wrong alloy. That has been corrected at enormous cost, but it has been corrected.
So it isn't just a question of management. It's much more now management because most of these technical glitches have been removed by research and experience and development. I believe that answers your question.
Mr Kwinter: Yes. Actually you answered my next question because it would seem to me that Ontario Hydro has always prided itself on its technical capability, its ability to build, and if this problem was identified and you now say that it has been corrected, we no longer have the problem of the design deficiency. It's a matter of maintenance and it's a matter of having the corporate culture to be conscious of this particular problem. The question I want to ask is that if the same attention had been given to replacing the design defects and also accompanying it with the maintenance awareness and the safety awareness, would we be in the problem that we're in now?
Dr Hare: I think the answer is that we would not be in the problem. If we had given adequate attention -- by "we" I mean the people of Ontario; I'm not talking about anybody or any level within the corporation. We allowed our provincial utility to put undue stress on the technical aspect of this question and not enough stress on the managerial question. It's one heck of a job to run a corporation like this. It's one heck of a job to run a single reactor.
You take those big reactors, they contain 480 pressure tubes. Every one of those 480 pressure tubes is refuelled from time to time. Every one of them has to be inspected. Every one of them has to be monitored. Each one connects up with a macaroni pie of feeder tubes, some of which have been showing signs of corrosion in recent years. That is quite an enormous job, but it nevertheless has been undertaken, as you suggested. It has been undertaken, unfortunately, at a level of cost and with a degree of thoroughness which has, in the opinion of many of my own personal advisers, gone overboard a bit.
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I take it the committee's aware of the power deratings at Bruce. They were undertaken because of a hypothetical calculation that there might be a shifting of the fuel within the tubes. No such shifting has ever been observed. It lost the corporation 30% of the productive capacity of all those reactors for a period of about two years simply to make that hypothesis. That hasn't been corrected because it's an untested hypothesis. The pressure tube thing has been corrected at a cost, which is part of the reason why the corporation's finances look so difficult.
Mr Kwinter: Dr Hare, you stated that you had a lot of confidence in the individuals at Hydro, but collectively they don't seem to have the ability to manage the facility safely and properly. Is that a fair evaluation?
Dr Hare: They have not had in the past. I have a good deal of confidence in the present administration, the top end of the corporation.
Mr Kwinter: Do you have a lot of confidence that they have the ability to implement the recommendations made by Mr Andognini?
Dr Hare: I don't think they have the ability, sir, I think they have the guts to do it.
Mrs Johns: Thank you, Dr Hare.
Mr Kwinter: What would you suggest that they do? I think it takes a little bit more than guts. I think there has to be that ability.
Dr Hare: The ability is there. The question is, how do you identify it and -- I hate to use a word that sounds a bit outdated now -- empower the ability? I never came across more underemployment than I've seen in Ontario Hydro, say, five to 10 years ago. It's no longer the case but it certainly was. By underemployment I mean not that people were fiddling their hands with nothing to do, but that they were wasting their time doing things that didn't need to be done -- committees, task forces. You wouldn't believe it.
When I was director-general of research in Environment Canada I discovered that my colleagues were represented on over 403 departmental conferences and discussions required by Treasury Board rules. Since there were only 1,200 of them altogether, that meant that 50% of the effort was going into talking in rooms like this. Now I'm not saying you're wasting the public's time or that I am. But when you take highly trained engineers and you give them nothing to do but just talk to one another from one end of the week to the other, that's a waste of effort. Certainly that used to be the case, but it's gone. If anything now, there is a staff shortage on the reactors. Several of the stations' people seem to me to be dangerously overworked.
Mr Kwinter: I just want to clarify. You're saying that problem is gone; it isn't gone because there has been a shift in attitude, it's because there has been a depletion of people.
Dr Hare: There has been a depletion of people and there is still probably some misallocation of resources. It's not easy when you're dealing with organized labour and with the society, who have both appeared before you. You have to wait for contracts to run out. You have to negotiate a contract which changes the rules of the game. I respect that, but it is a slow process and you have to adapt very quickly in this game.
The Chair: There is time for one question per caucus.
Mrs Fisher: Since we're doing one here, I would focus on this question. There seems to be concern with regard to how and who in fact should be responsible for the regulation of continued safe operation, how that meshes together between the regulatory and the licensing bodies. Your area of expertise is that of safety, so I would ask this, then, in a two-part question.
For the continued operation and licensing, there seems to be a disassociation between the Ontario Energy Board process, which, yes, primarily looks at rates but looks at other things and this morning voiced opinion with regard to safety, and the Atomic Energy Control Board, whose responsibility it is to license but seems to be somewhat separated from approval input, not just input or recognition of a good plan for safe operation that's presented by the management board of Ontario Hydro.
Is it time that regulation, I guess in the true sense of the word, was enforced in the operating status of the plants so that the AECB also carried some responsibility for agreeing that the four repair or recovery plans that were placed before it in the past 10 years in fact weren't going to meet it or cut the requirements that would allow for continued safe operation?
The AECB seems to be the body --
The Chair: Mrs Fisher, please, if you could just get to the question. We only have enough time for one each and I have less than five minutes.
Mrs Fisher: The AECB seems to be a body removed and yet it has full legislative power per se in terms of licence. Should there be some approval process in that so that when they also say it will work, it works?
Dr Hare: That's a very long question, a very difficult question to answer. I certainly think the role of the Atomic Energy Control Board is often negative. It's negative in the sense that it takes them a long time sometimes to respond to the examination of things, whereas the American Nuclear Regulatory Commission interacts extensively. On the other hand, the American NRC dictates to the utilities how they will solve a problem. We don't do that.
Mrs Fisher: That's exactly the question I'm asking.
Dr Hare: The present AECB does not have the staff to undertake the job that is required here. On the other hand, I would very much like to see some softening of the relationship between the control board and Ontario Hydro, other utilities generally, because the same is true of Quebec and New Brunswick.
Mr Conway: Dr Hare, I have in my hand the 1996 annual report of the technical advisory panel on nuclear safety at Ontario Hydro. You're a member of that panel -- it's chaired by a former president of the AECB, Jon Jennekens -- a very distinguished group of people. In that report for 1996, which was, I gather, presented in early 1997 -- let me just quote some of the report.
It is your panel's view that the unacceptably poor performance of the eight Candu units at Pickering during 1996 are not the result of short-term causes but rather a series of cumulative effects. You highlight five: a lack of corporate understanding, inefficient and ineffective corporate management processes, latent effects of the dislocation and disruption of personnel both at work and at home resulting from the 1993 reorganization and downsizing, and on you go.
That went up from a pretty impressive panel to the top brass, and I gather not for the first time. I just picked one document. I'm very encouraged, as is Ms Johns, to hear you say, boy, you're confident now because you sense that the new team seems to have the guts. Well, this is some of the new team that was getting this advice. Is it the Andognini crowd that really impresses you as having the guts to go in there now and really --
Dr Hare: No, it's Bill Farlinger, the chairman, and his senior officers.
Mr Conway: The question I guess I have to ask is, this stuff was being -- I see some of the government members are chuckling and their staff are. Listen, I'm delighted.
The Chair: Mr Conway, please, just complete the question.
Mr Conway: Except the problem is Bill Farlinger was getting this stuff. In fact his response to your panel was kind of a middle-finger salute. I've got the letters here and it's quite an impressive response from Mr Farlinger.
I hope you're right. I mean, God, it can't get any worse. But your report went up and nothing seems to have changed.
Dr Hare: Of course one of the reasons why nothing seems to have changed is that all the time we were writing that, we didn't know the board had this plan to go and get Mr Andognini and his team in, that in fact the answer was to bring in a radically stronger solution than we would have dared to recommend. It didn't occur to us that that was the thing to do.
Ms Churley: Dr Hare, I'm really worried about the billions of dollars that the recovery plan -- I know you're not an economist but I think this is an important question. My question is, do you have any idea from your history with Hydro why Hydro's cost and demand forecasts have been so unreliable and out of whack; for instance, Darlington's cost jumping from $4 billion to $14 billion? I could go on with other examples, but I do want to have the time for you to answer that question. I'm very worried about that. I don't believe it's possible to freeze rates, for instance, even at the amount they're saying it'll cost now, but I'm also worried it's going to be a lot more.
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Dr Hare: I don't see any way in which you can solve the present situation without spending a great deal more money, in addition to servicing the existing heavy debt which, God knows, is outrageously high. How does it happen? It happens obviously by taking bad advice -- I will not say from economists -- but at any rate certainly not from people like myself.
Let me qualitatively say why Darlington cost too much and then you can apply it to the entire situation. It was (1) that the original figure of $4 billion was ridiculously underestimated; (2) that there were constant delays in the construction of the enterprise, imposed partly by the provincial government looking for more favourable times to borrow money and things of this sort; (3) by absurd forecasts of future demand -- perhaps the most important thing was an exaggerated idea of future demand; and (4) by delays over technical problems with the Atomic Energy Control Board. I could add a fifth, which was the unsympathetic attitude of the local authority at Newcastle to the enterprise.
The whole thing was a nightmare of public financing. I would be prepared to lay a bet -- not as an economist or as an engineer, but as plain Ken Hare who is damn nearly 80 and therefore not very much afraid of his enemies any more -- I would be prepared to bet that if that had been built properly, with no delays, it would have been built for less than half the actual accrued cost.
The Chair: Dr Hare, may I thank you on behalf of the committee. My colleagues I think will share my views that you've been very helpful and we have appreciated your evidence. I hope if we have cause to call upon you, you'd be prepared to attend upon the committee again while the hearings continue. We'd appreciate that very much. There may be some requests of you to offer more information by way of written comments, and we would certainly welcome your response in that regard as well.
Dr Hare: Thank you, sir. It's not far from Oakville.
The Chair: We thank you very kindly for being with us, Dr Hare. You are excused. Thank you.
ASSOCIATION OF MAJOR POWER CONSUMERS IN ONTARIO
The Chair: The next witness will be the Association of Major Power Consumers in Ontario. That will include David Goldsmith, Arthur Dickinson and Mark Rodger. If you will take your place at the witness table, please, we'll give you a moment or so to get organized and then I'll call upon you formally.
Welcome to the committee and to the hearings of the select committee. I would ask, for the benefit of Hansard, that you identify yourself. Then if you would be prepared to present your brief and we'll proceed with questioning by caucus in rotation.
Mr David Goldsmith: Thank you, Mr Chairman. My name is David Goldsmith. I am the past chairman of the Association of Major Power Consumers in Ontario, or AMPCO. On my right is Arthur Dickinson, the executive director of the association, and on my left is Mark Rodger, counsel to the association.
I would like to summarize some of the points in the brief. I am sure that you have received it already.
AMPCO is an association of 65 large industrial companies in Ontario generating more than $60 billion in annual sales. Our members collectively spend over $1 billion a year on electricity and we represent over 16% of Ontario Hydro's primary electricity sales. Essentially, as one voice, we represent the largest group of end users of electricity in Canada. We employ over 100,000 people directly and 300,000 people indirectly.
Our main concern is that electricity rates in Ontario are not competitive. This is the issue for industry in Ontario. In 1992 in the United States they introduced the Energy Policy Act leading to FERC opening up the transmission system and creating competition in the wholesale market for electricity in the United States. This has led to industrial rates falling across the United States and, at this point, Ontario's rates are some 20% to 30% above competitive levels of industrial rates in the United States. That's a very important concern to our members. For the majority of our members, electricity represents some 15% to 25% of operating costs. For a smaller number of members, electricity represents up to 70% of operating costs.
The result of the recent nuclear operating deficiencies in Ontario has been increases in all of the rate options that Ontario Hydro has developed in the last couple of years to provide industrial users with flexibility in how they operate. For example, Ontario Hydro's numbers indicate that RTP 1 customers will see an increase of 7.8%, RTP 2 47%, surplus users 20% and DDS users 25%. These increases will critically undermine new or existing investments in Ontario and affect jobs.
We are concerned that Ontario Hydro's proposed solution has been adopted too quickly. Ms Clitheroe indicated that at least $6 billion of additional spending, including $1 billion of new capital, will be required over the next five years if the recovery plan is adopted. This has the potential to spill into rates for all customers, and until other options have been carefully examined, Ontario Hydro should be limited in what spending it can commit to.
We believe that this committee should explore using an independent third party such as British Energy to take a critical look at the recovery plan from a different perspective and to examine options such as either keeping Bruce or Pickering A or both open and recruiting former staff to assist in the process. This would have clear and immediate benefits over the proposed recovery plan by reducing the cost of replacement energy.
We're also concerned that the problem extends beyond the nuclear division. As we stated on page 2 of our brief, "The 'cult' of the nuclear division is far more likely to be a manifestation of a management culture in Ontario Hydro which transcends organizational boundaries, spilling into every area of operation."
We've provided the committee with a summarized history of the attempts that our association has made at the last four Ontario Energy Board rate hearings to have Ontario Hydro accept, introduce and table results of benchmarking activities. Ontario Hydro's response was far from satisfactory. It is our view that, had benchmarking been introduced sensibly, many of the problems in the nuclear division could have been identified earlier.
Moreover, we are not reassured by the findings in the IIPA report, which use best industry practices to measure the nuclear division's performance. The outcome was clear failure, and AMPCO is convinced that the same shortcoming will be find in the other business units. The only way to ensure Ontario Hydro's operations become efficient is to expose them to the discipline of competitive market. This is why release of the government's white paper is so important. We believe that, other than for safety reasons, all significant investments and decisions regarding plant shutdown in nuclear operations should be frozen until the white paper is released. Too much is at stake to do otherwise.
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Again, referring to our report, we have indicated that it's our belief that a large proportion of the costs identified in the recovery plan are not directed to safety but to preparing and positioning Ontario Hydro for competition, and we believe this is an inappropriate position for Ontario Hydro to take as a public monopoly.
Furthermore, we believe that other options should be considered. There is a significant danger that Ontario Hydro will use this apparent crisis to press ahead with further investments and spending that cannot be justified on pure economic grounds. Based on the evidence presented, there is no urgency to make any investment decisions today since the nuclear plants continue to operate safely and particularly when the government's white paper on the industry restructuring is anticipated.
Finally, we have concerns that Ontario Hydro cannot legally pursue some of the remedies it has identified, and we have outlined these concerns in our submission. It's our understanding based on some information that was submitted to this committee yesterday that there is now a contradiction in the information that Ontario Hydro has presented regarding its own opinion of the legal viability of some of the options.
We believe it is incumbent on Ontario Hydro to release those legal opinions on which they are relying for their proposed financing options. We believe this committee needs to be fully apprised of Ontario Hydro's legal status and the government's position with regard to possible intervention before recommending any solutions.
Just to summarize the specific recommendations in our report, first, we feel the committee should recommend an independent, internationally recognized third party such as British Energy to take a critical look at the recovery plan, to provide an independent assessment and to determine whether better, lower-cost nuclear options exist. The government should not issue a policy directive or grant Ontario Hydro by any other mechanism a reprieve from its legal obligations under the Power Corporation Act until this independent third-party assessment has been completed and the results made public. Ontario Hydro should freeze major nuclear spending and operating decisions pending such a review.
We should explore the possibility of developing a public-private partnership with an organization such as British Energy to inject tested solutions into the nuclear operation. Ontario Hydro should be directed to table immediately its detailed benchmarking initiatives for public review. Ontario Hydro cannot be allowed to regulate itself.
The government must release its white paper to set the context in which the committee can review the nuclear recovery strategy, and Ontario Hydro should be directed to produce immediately all legal opinions the corporation relies upon for its proposed financing options.
That summarizes what we have presented to the committee, and we would be pleased to answer any questions.
The Chair: Thank you very much, Mr Goldsmith. We appreciate that, and we will proceed by caucus. We'll begin with the government caucus.
Mr Galt: Thank you for your presentation this afternoon. It was most interesting and, of course, very significant on your operations, free trade, competition, especially when you tell us that you're paying 20% to 30% more for electricity here in Ontario than you would on average throughout the US.
It was kind of interesting about a year and a half ago, being involved with regulatory reform for the Ministry of Environment, meeting with some people from the Ford Motor Co. I was rather shocked to hear the figures they were using at that time. They were telling me that in 1985, of the 17 regions in which they produce cars in North America, Ontario had the cheapest electrical rates of the 17 regions of North America where they made those cars. They also told me that by 1995 they had slipped to the 13th or 14th -- I wouldn't want to be quoted on one or the other, but it was one of those two positions -- most expensive for electricity to produce cars in North America. That certainly does not help Ontario to be in a competitive position, and you're telling me that you're looking at a significant increase.
We have talked quite a bit about cults, and we have beat that word up quite a bit. You are saying today that it's through all segments of Ontario Hydro. We have had a lot of segments of Ontario Hydro come before us, and they have been very consistent. They have all said, "It's not us." But I did hear yesterday, and I was extremely disappointed when, I think he was, the president of the society came and said the status quo was just fine and "We'd like to continue." I may have beat him up worse than I should have, but I could not believe that anybody would come before us and tell us the status quo was satisfactory. I couldn't believe anybody would have that kind of gall.
Tell us why you think the cult -- or nuclear culture, as Mr Strong said, or Mr Farlinger. There's some consistency there. We also heard the previous chair of Hydro use similar terms, but he had brought it under control. Strong said he improved it. We now are in this position where finally it has been brought to a courageous head and to the point that the select committee is looking at it, but Farlinger did bring it to a head. Tell us about your opinion that this cult is throughout all segments of Ontario Hydro.
Mr Goldsmith: I think you have already answered part of your own question with the reaction of the society.
First of all, I believe that, had you asked the nuclear division that same question prior to the release of the IIPA report, you would have had the same answer as you are getting from all the other divisions: "It's not us. There is nothing wrong. We are doing quite well, thank you very much. The AECB has approved our operations. Oh, there's the odd problem here and there, but everybody has problems."
It's true that everybody has problems, but the type of management culture that was described in the IIPA report, which is an inability to deal with labour relations, a lack of accountability of management from first-line supervision on up, a lack of authority from first-line supervision on up to make things happen, a lack of direction to that management and supervision, a lack of vision perhaps, these are things that are not unique to the nuclear division. These things start at the board of directors of Ontario Hydro and, quite frankly, knowing some of the individuals involved, I'm shocked that Dr Kupcis resigned and not the board.
Mr Galt: We're talking for many years back, all stripes of government?
Mr Goldsmith: Oh, yes. This is not a government issue. This is a matter of a large corporation that did not have direction from the top and went from a very focused mandate probably 20, 30 years ago and before that -- and that mandate was growth, construction, design and management of those operations, and it was doing very well at them in those contexts -- to one where all of a sudden they changed direction, slowed down, had to consolidate and stabilize, and they weren't prepared for it. Over a period of years -- I don't think this happened overnight -- the corporation got to the point where we find it today.
Mr Galt: I'd like to change direction just a little bit here. My understanding of the Power Corporation Act is that you're limited in what you can do on producing power, cogeneration, if you buy from Ontario Hydro. If that was opened up, how would that change your operation? How would you see that as different?
Mr Goldsmith: You're talking about allowing open access to the transmission system?
Mr Galt: That you could cogenerate or produce power and then top up whatever you needed from Ontario Hydro.
Mr Goldsmith: I believe there is no restriction on doing that today. The restriction is on selling power into the grid. If I want to, as a user, generate my own power and replace what I'm buying from Ontario Hydro, I can do that. They may or may not accept my excess from me, they may or may not supply me enough to make up the difference when I can't generate, but I can do what I want for myself. The issue is access for my generation to the grid to sell my excess or to buy someone else's excess, and that would have a major impact on competition -- positively, I mean.
Mr Galt: If you were producing your own, they might not give you the power to top up is the concern that you are expressing?
Mr Goldsmith: That's correct.
Mr Galt: We heard this morning from the Ontario Energy Board in discussing, as I described then, what sounded more like a toothless tiger, "Yes, you can run it before us, but neither the Minister of Energy, the Ontario government or anyone else has power to change what Ontario Hydro would decide on rates."
If you could see your picture on how the Ontario Energy Board should be able to operate in setting the rates or penalties, incentives, whatever, how would you go about it?
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Mr Goldsmith: We described our position on regulation in our submission to the Macdonald committee. I think the answer to that question really has to be phrased in the context of what the utility industry looks like at the point in time. For example, in a competitive environment where the main regulated monopoly would be the transmission system, we believe that should be set up with an incentive form of regulation and that the regulator, whoever it might be, needs to have the skills to analyse and understand that type of system operation. I don't believe the current Ontario Energy Board is equipped for that, but whatever the regulator is of the future electricity system, our belief is that it should be set up as an incentive regulation.
Mr Galt: Of the people who have come before us, very few have given any suggestions on how the recovery plan might be developed in a different sort of way. The Power Workers' Union came forward with some suggestions. If you're familiar with them, would you agree with some of their suggestions? Is that not in order? How would you see it?
Mr Goldsmith: I believe, if I understood Mr Murphy correctly, his main focus was to keep Ontario Hydro's options open for continuing to operate all the facilities that are being shut down, and in particular he offered voluntary labour to support the mothballing of the heavy-water plant. We've said for a number of years that we believe Ontario Hydro should be shutting down the heavy-water plant, that it's not necessary. Even assuming all the nuclear stations stay in operation, we don't need it. We don't need the water. We have plenty. So we don't feel that is a viable option.
On the other hand, some of the suggestions Mr Murphy made did have some merit, including the possibility of public-private partnerships to develop some of these facilities or to rehabilitate some of these facilities. That is a suggestion we've made in the past.
Mr Galt: We've heard different discussions, we've had the British picture laid before us this morning, talking about improved safety, improved pricing. Everything seemed just wonderful. We did not see any down side to it. I'm sure there has to be some out there some place. Have you been following this, the British, how it has evolved, and do you see that a similar thing might work here in Ontario?
Mr Goldsmith: I believe the last witness said it very well when he commented that there is probably no unique right way to do things.
Mr Galt: But there are unique wrong ways of doing things, he said.
Mr Goldsmith: Yes, there are. We don't support all aspects of the British model.
Mr Galt: What don't you support?
Mr Goldsmith: The power pool as they have it set up is set up in such a way that it can be gamed and has been gamed by the generators, gamed in the sense that generators force the pricing one way or another to support themselves, and the regulator there was not strong enough to control that. So for the first few years since 1989, when they first "commercialized" the utility system there, even though almost all customers benefited, they didn't benefit nearly to the extent they could have, had proper competition been introduced.
Mr Galt: The feeling I got from it -- but I never got really clear how it operated through the grid -- it was a pooling system, the generators pooled in and then they sold it to the best price out. That was a feeling I received when they were talking earlier this morning.
Mr Goldsmith: There's a system operator who controls which generators are on line at any given time, and the generators put bids in, how much they're willing to sell their energy for: "I have so many kilowatt-hours and I'll sell them to you at so many dollars."
Mr Galt: Almost like a mini-auction approach.
Mr Goldsmith: What they do is, they take the cheapest ones in first and depending on what the demand is, they build up the generation to match it using the cheapest one first.
Mr Conway: Mr Goldsmith and colleagues, thank you for attending. You've been around this debate a long time and I appreciate what you've had to say today. I want to focus in on the part of your brief, your presentation, which concerns itself with Hydro's recovery plan and particularly the financial components of that plan. You recommend on page 6 of your brief, "AMPCO believes an essential prerequisite of any review of Hydro's financial justification of its nuclear recovery strategy is an independent, comprehensive verification of Hydro's projections." Then you go on to basically say that it's been your experience over the years that Hydro's numbers are just unreliable, particularly in first instance. Is that a fair --
Mr Goldsmith: You've related our comment to our past experience. I'd like to make it a little more temporal in the sense that what we said in the sentence following the one you read is, "AMPCO has little confidence that Ontario Hydro can itself properly assess what a nuclear recovery program should cost, let alone whether such a project should even be embarked upon." Our concern there is that we have just had a scathing report on the management capabilities of Ontario Hydro, and to turn around and tell that same management, "Okay, you blew it, now fix it," and for them to say, "This is the recovery plan," seems to me a little bit naïve.
Mr Conway: I don't disagree with that. One of my concerns is that four years ago, under very strong and capable leadership, Maurice Strong came to these very rooms and said: "I've got a fix. Here it is." It was quite well reviewed, I remember at the time, I think by most people. But one of the things we clearly did not understand was that the downsizing was taking out or was about to take out of the corporation some very valuable human resources that were going to exacerbate, according to what we now hear from people like the technical advisory committee, the good operating standards of the nuclear power plants.
Mr Goldsmith: If I could just rephrase one part of that, it's my opinion that it was not the downsizing per se that did it. It was the method of downsizing that did it.
Mr Conway: All right, yes, but the fact is that according to a lot of the evidence we're now seeing, that recovery plan, I'm sure inadvertently, undermined or worsened one of the conditions they were trying to heal.
Let's look at this recovery plan. It came very quickly. We saw Dr Andognini and he was, I must say, a very impressive witness. I thought he was quite impressive, but I for one was struck by the fact that the board got the assessment of the recovery plan in the space of a few days and basically decided to go forward with a multibillion-dollar recovery plan on the basis of some questionable numbers and without any independent analysis of the whole situation.
Looking at that recovery plan, one of the key ingredients in it is the replacement energy cost. Does AMPCO have any views about the reliability of those numbers? They're key numbers in this plan. They're the first or second-largest cost item in the recovery plan, depending on how you look at it. If you take the low estimate, it's about 40% of the total cost of $2.5 billion. It's replacing the energy that will be lost to the corporation because seven nuclear power reactors will be laid up for a period of time.
What would you have to say to the committee about the reliability of the numbers in that part of the recovery plan?
Mr Goldsmith: They can't be much better than estimates; they're guesstimates. You're talking about a regime which doesn't exist today, and what I mean by that is a tremendous demand for electricity that is not being filled by the old stalwart, the nuclear base load, which means it's going to have an impact on natural gas supplies, oil supplies possibly, coal supplies, purchases from outside the province. None of those items, the three fuels or the purchases, is under Ontario Hydro or Ontario's control, which means that should this surge in demand for those inputs drive the price of those inputs up beyond their market price today, that will have a multiplier effect on the numbers that are being used there.
Mr Conway: Are you still with IVACO?
Mr Goldsmith: Yes, sir.
Mr Conway: For the benefit of the committee, IVACO is a major corporation doing business in eastern Ontario and in the US. You're at Hawkesbury, near the Quebec border.
Mr Goldsmith: Yes.
Mr Conway: Do you have any power purchases with Quebec?
Mr Goldsmith: No, sir; they're not allowed in Ontario.
Mr Conway: You've no historical relationships. We've got them up the line. I just wondered if you had. Are you aware if Quebec Hydro has any meaningful power to sell into the grid in your part of southeastern Ontario?
Mr Goldsmith: There's a high-voltage line within sight of our plant on the other side of the Ottawa River. Yes, there is power available. On the other hand, Quebec does have technical problems with selling power into Ontario. They have to hive the generation off their system and phase it into Ontario Hydro's system to do that. The answer is yes, there is capacity availability. There are technical limitations to how often or how much they might want to sell.
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Mr Conway: You're business people. We've been told by Hydro that they've got a recovery plan that is, even assuming best estimates, going to leave the corporation with negative retained earnings, operating losses, and, they tell us for a few years at least, they're not going to be able to meet their statutory debt retirement obligations. What kind of impression do you think that's going to leave out in the marketplace? I ask that seriously.
Mr Goldsmith: I don't take it any other way; I'm just trying to think of how to answer it. It's not the way you run a business. It's not going to create a healthy business for a competitive market. I think it's counterproductive, is the bottom line.
Mr Conway: I was struck by something you said in your testimony, and I got the impression from what you said that when you look at the recovery plan, you imagine that perhaps some of this recovery plan, perhaps more than a bit of this recovery plan, is aimed at positioning Ontario Hydro for the new competitive marketplace and not for recovering the troubled parts of the utility. Did I hear you suggest that?
Mr Goldsmith: It's the expenditures we were referring to. I believe what we said was that Hydro is using the crisis to generate approvals for expenditures which can be used to create a better position for a competitive market, to position it better for a competitive market. Certainly the issues you've referred to, the negative net income, negative equity situation, additional borrowing at a time when they could be paying off debt, are not conducive to preparing for competition.
Mr Arthur Dickinson: I wonder if I might add something to my colleague's comments. You're asking about how it's being received in the industrial community. When the monopoly supplier advises the community at large that costs are going to increase by $5 billion at least, or $6 billion, over the next five years, that is hardly a reassuring message to industry, which is trying to compete in an international market these days. As a result of the problems with the nuclear facilities, as David already referenced, some of the rate options which are being put in place to assist industry here in Ontario to meet the competitive challenge are going to increase substantially in price.
I already know of one facility that is shut for sure now: small, but nevertheless in that community it's important. It's an abrasives operation in Niagara Falls; another one, Norton Advanced Ceramics, is almost certainly stalling new investment because of these increases; the CEO of a major pulp and paper manufacturer has already advised the Premier that unless this white paper is delivered and competitive electricity put in place, they doubt they'll be able to put more investment into Ontario. There are lots of negative messages stemming from this whole situation.
Mr Conway: On the other hand, we had a very eminent Canadian scientist, before you arrived to testify, Dr Ken Hare, who's well known in this debate and many in the committee took comfort in the fact that Ken Hare, who's been around this debate a long time, says he feels comfortable now because he senses the new leadership has the guts to do what predecessor groups were unwilling to do or incapable of doing. Do you have that same degree of comfort that there's a gutsiness now over at 700 University Avenue that has just not been around for a while?
Mr Dickinson: I think it's refreshing that they're being a little more honest than they have in the past about the problems they're facing. I'm not sure guts comes into it. From our perspective, the issue is the economic environment in which we operate. We want to see the best possible economic solution put in place to deal with Hydro's problems. We're not satisfied that what has been examined to this point in time is adequate.
Ms Churley: Thank you for your presentation. I want to start to talk about you as business people and concerns about rates. I just want to clarify something with you and make sure I've got it right before I ask the question around it. I understand that some of your members have been taking advantage in recent years of so-called load retention rates. I understand that the rates are lower than rates generally available and that the whole idea behind it is that they're one-off deals to encourage manufacturers, say, to stay on the Hydro grid and not to self-generate. Is that an accurate description of what that is?
Mr Dickinson: Not only not to self-generate, but to avoid moving investment into other jurisdictions. That's reasonably accurate.
Ms Churley: My question around that is -- I understand that it was predicated on the basis of the existence of a power surplus. Is that right?
Mr Dickinson: Essentially I think that's correct.
Ms Churley: I think that's correct. From what I understand about it, that is a significant question, maybe, because now that surplus is gone. I'm just wondering if you have any idea whether some of your members will be negatively affected because that surplus is gone now. Do you know of any who are negatively affected or who might be, who might even go out of business because of this?
Mr Dickinson: I've just mentioned two: where investment in one case has been stopped, and the other case where they've shut down a plant.
Ms Churley: Were these companies taking advantage of this?
Mr Dickinson: No. To be honest, I don't know. I'm the executive director of AMPCO. But I am not privy to all the load retention rates. That is something Hydro will not reveal. There's an issue of -- what's the word I'm looking for? -- confidentiality. At the various rate hearings we have made the point that we're concerned that these deals are being put together, but nobody is aware of who is doing a deal. This is creating imbalance in the energy market. One company in one sector may be getting a deal and not another. That is creating problems for my members. While we understand and have some sympathy with what Hydro has done, we have concerns about the manner in which it is being done.
Ms Churley: Do you think your members would be open, at this point in history, to use this as an opportunity, again coming back to the fact that surplus isn't there any more, to work with the government and Hydro in some kind of partnership on energy conservation and renewable and switching power? Do you think that business would be interested in now seriously tackling that? Hydro before, as you know, didn't like cogeneration, and frankly, neither did governments because of the debt, and wanted to keep all that within its own purview. What do you think?
Mr Dickinson: I can't speak for individual companies, obviously. What I will say, though, is that all of them have been pursuing energy efficiency initiatives where they make economic sense. Inco is a good example. They've made substantial reductions in their energy use because of the energy programs they've put in place. Sometimes they've taken advantage of program initiatives that were available from Ontario Hydro in the past, likewise from the Ministry of Energy as it was. In terms of whether or not they'd be prepared to go into partnerships on energy efficiency, I'm not sure what that means.
Ms Churley: I'm not either. I just think this does give us an opportunity, that Hydro has come forward with a plan for spending huge amounts of money, billions of dollars. You may have heard me questioning Dr Hare earlier because of very unreliable forecasts in the past around not just Darlington; I mentioned that in particular. I'm very worried, as I expect you are, about the final cost to this plan.
I'm not naïve enough to think that energy conservation and switching and all that right now would solve the immediate problem, but I see it as an opportunity as well, because that surplus isn't there now, to take it more seriously and seriously invest, as opposed to just nibbling at the edges. You're right that some have done better than others.
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Mr Goldsmith: I would object to the presumption in your question that it hasn't been taken seriously so far. To my knowledge, industry investment in alternative fuel supplies, alternative energies and so on have been limited not so much by how seriously they view the situation as by how advanced the technology is for those to work. Part of it is economically driven, part of it is technology-driven, but the technology is not there today to do some of the things that I think you're referring to. Also, it's not necessarily more energy-efficient. It may be more electrical-energy-efficient to do some of the switching. It is not necessarily more energy-efficient in an overall sense.
One of the examples quoted by the OECD in Paris, their energy group, in analysing energy use in Canada is that the most energy-efficient way of heating a home in a climate like ours is with a ground-source heat pump. If we, as let's say the province of Ontario, made the decision that everybody in the province was going to switch to heating their home with a ground-source heat pump, we would reduce energy -- I'm using global energy -- consumption by half because the majority of energy use in Ontario is home heating. On the other hand, we would destroy the electrical system because there just isn't enough electricity to run them all.
Ms Churley: I think there needs to be more debate about it because obviously there are those who are involved in alternative sources of power who take a different view. I believe that it is an important opportunity for us to explore more and I'm personally disappointed that the recovery plan came so quickly, but there's nothing, no other options either for short term or long term, there.
I wanted to come back to Darlington. You talked earlier about -- and I'm not talking about you personally, but I guess it's AMPCO -- its position on building Darlington way back. I come back to that because I think there have been miscalculations and mistakes made for a very long time about forecasting, for instance, how much power we think we need or we thought we needed at that time. What was your position on Darlington when it was first --
Mr Goldsmith: Our position on forecasts is that the best forecasts are done after the fact.
Ms Churley: We found that out.
Mr Galt: Like the weather.
Mr Goldsmith: At the time, we supported the building of Darlington, and I would say we would still support that decision because the information that was available at the time indicated that load growth would continue at a rate which would support the construction of Darlington. Darlington's biggest problem was delays, not so much because of escalating costs that result from starting and stopping and starting and stopping but because one of the rules of the game for Darlington was, and I assume it's generally true in the nuclear industry in Ontario, that as time goes on, regulations and regulatory requirements change.
Every time the Darlington construction project was stopped and restarted, it had to be redesigned to meet current regulatory standards before it could proceed with construction. Those redesigns were done in the field and were add-ons to the original design. The final Darlington we got, however good or bad it is, is not the Darlington that was originally designed. It's not the Darlington that was originally budgeted. It is a different animal entirely. I wouldn't tar the nuclear business with the brush of Darlington, which was a product of a whole series of events and decisions.
Ms Churley: But you also supported Hydro's $60-billion expansion plan put forward in the 1980s, and I guess that's you said earlier applies here, that the best way you can predict is after the fact.
Mr Goldsmith: I know everybody else is saying right now that the load growth didn't materialize, but had it materialized -- even after it was clear that the load growth projected by Ontario Hydro in 1989 was not going to materialize, a difference of as small as 1% a year in the load growth projections of Ontario Hydro one way or the other would have had a phenomenal impact on the ability of the province to cover the load. We're talking about very small differences here.
Ms Churley: So you don't regret your past position on relying so heavily on nuclear?
Mr Goldsmith: No, I don't at all. My colleague was just reminding me that the position the organization took in the 1980s regarding the construction of Darlington was that the government approval should be given with the actual construction held until the load growth justified it. In other words, the approvals process itself was a multi-year process and the association was saying, "Let's get through the approvals process and then do the actual work when it's necessary."
Ms Churley: How much time do I have, Chair?
The Chair: You have about a minute and a half.
Ms Churley: Oh, well, I won't ask the more complicated question. To sum up, in view of what you said about concerns about rates, you seem to be suggesting that Hydro should hold off on moving forward with the recovery plan that was so very quickly adopted. I think I heard you say that. I think we all we would agree here that we were surprised at how very quickly, after the problem was outlined, the board accepted that recovery plan.
Mr Goldsmith: And with how little analysis.
Ms Churley: Yes. You would like to see the outside analysis done and not to proceed at this time until that's done and there are more alternatives put in place or perhaps a better alternative?
Mr Goldsmith: That's correct.
The Chair: Before I go to Mr O'Toole, just a question to pick up on that last part because I've asked legislative research to get some information for us, if necessary. The evidence you just gave a few moments ago about the escalation of costs on Darlington, as a case in point, were attributed in some large measure, according to your evidence, to changing codes, new regulations as the construction was unfolding. Is that correct?
Mr Goldsmith: That's correct.
The Chair: When the original plan was given approval, didn't that lock in all of the regulations at that moment in time?
Mr Goldsmith: No, sir, it didn't. The way the nuclear business worked -- had they proceeded with the construction of the station at that time and gone from start to finish, then I believe what you just said is correct, but that isn't what happened, and every time it stopped and restarted, it had to restart according to the new regulations in effect at that time.
The Chair: I'm just confused because you gave the impression that it was required to stop, to redesign because of new regulations, but that's not exactly what you're saying now?
Mr Goldsmith: No, that's not what I meant. I'm sorry if I created that impression.
The Chair: Please, maybe you'd just elaborate.
Mr Goldsmith: The numbers I've seen indicate, for example, that had Darlington started, gone through to completion and started up without interruption, it would have cost about $6 billion as opposed to the original $4 billion that it was estimated at and the $14 billion that it actually cost, which I guess is similar to the number the previous witness was indicating when he said something like less than half.
The difference between the $6 billion and the $14 billion is a combination of things. Part of that is cost escalation over the years of delay; part of that is mobilization and demobilization of construction over the years of delay. I believe the largest portion, and I do not recall the number, of that $8-billion overrun was caused by redesigns of the plant on the fly to comply with changing regulations as the construction was started, each time it was started.
The Chair: Thank you. I understand.
Mr O'Toole: Thank you very much. I'm finding it quite interesting thus far and some of my questions have been sort of addressed. We heard from members of the board yesterday, Mr Bullock and Mr Kerr, who both probably are, in some respects as members of the board, members of the consumer group given that Noranda, I think, is one of the companies, and Laidlaw is the other. I suspect that as members they supported the recovery plan and seem to be fully on side as board members and, as they said yesterday, as taxpayers. We're all basically in this together, I suppose we're looking for the answer, but I'm intrigued when I go through the annual report. You're probably familiar with Ontario Hydro's annual report, which was published in February 1997. So a lot of the detailed accounting, probably all of it, would be done prior to that, some time in 1996.
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I'm going to dart around a bit but I'm trying to establish in some linkage a point. I'm going to start with the function of the OEB. I'll read it here. It's a truncation of the summary notations made on the financial statement. This is notation 1 here. It says: "After considering the recommendations of the Ontario Energy Board, Ontario Hydro's board of directors, under the authority of the Power Corporation Act, establishes the electricity rates to be charged to customers." In other words, they listen and then they do what they want. Basically that's what the OEB said here this morning. I guess you concur with that in some respects, its ineffectiveness as a regulator.
I'm going to go on and make several points. If you have a problem with the point I'm trying to establish, interrupt at any time.
Further down in that same statement it says that the board "...operating in a non-rate-regulated environment, said these amounts would be included as gains or losses of the current period. The board of directors has used its rate setting authority to specify that costs of the rehabilitation program for steam generators at Pickering 'A' and 'B' and Bruce 'A' nuclear generating stations shall be deferred for recovery in future periods." So they are arbitrarily loading into the debt sheets somewhere, continually, at their discretion, to stabilize rates; although they're really not the rates. It's not full-cost recovery. "Under generally accepted accounting principles for enterprises operating in a non-rate-regulated environment" -- they admit clearly they are non-regulated -- these costs would be expensed as incurred."
This is the most important and most interesting, I found: "The board of directors has also used its rate setting authority to specify" -- get the date here; this is 1996 -- "that the nuclear recovery expenditures" -- which they knew; they got the reports; they know what's wrong; they don't need some group to come in and tell them -- "planned to be incurred over the period 1997 to 2001" -- that's the nuclear recovery plan; all been thought through in 1996; it's right here in their annual report -- "shall be charged to operations in 1996."
If I go back to the actual consolidated statement, the operating expense, they did in fact charge the first $2 billion. If you look at note number 6, the consolidated statement, it says very clearly "Corporate Write-Offs." "Hydro has embarked on a program to ensure that adequate nuclear recovery plan expenditures" -- that's what we're talking about here, the IIPA response, which some outside person came in and put some numbers to; they've already accounted for the first leg of it in 1996; not the buying of the fuel, just the technical recovery -- "are made in future years to allow for the achievement of its nuclear excellence strategy." These costs will be incurred in the years 1997 to 2001 but charged to 1996 operations.
I put it to you, all through Ms Clitheroe and the rest trying to give us some kind of full-cost accounting -- I'm sorry, I don't get it. That's why no one in Ontario, as the current owners, all of us here, has any confidence in the openness of their accounting principles; absolutely untransparent, as admitted to us by the energy board and others.
I'm going to one other function when it comes down to the specific rate process, the hearings which you participated in. I'm referring to the hearings I referred to this morning, HR 23 and 24, which were basically rate hearings. They said basically the same thing, the same response, from the process I've just described, that the board decides the rates; on what basis of accounting or standard principles, I have no idea.
They are just going to download another $8 billion into public debt really. You want British Energy to come in here and take this over. We're trying to be competitive. How do you think we're going to charge off this legacy? Mr Conway has told you the retained earnings are going to be in a negative position. In fact they've written off $7 billion in the last four years against their asset values. We were told that all the assets are overvalued by some $12 billion. Who is going to suck up the debt? How is that going to be expensed out? Is it going to be charged in rates like a tariff on the line? Can you respond? You want competitive rates, and I don't think we're headed in that direction.
Mr Goldsmith: Certainly not with a plan like this, which is our concern with the plan. You've made a number of points --
Mr O'Toole: Are they accurate? I'm reading.
Mr Goldsmith: For the most part, you're making statements of fact. They are not disputable.
Mr O'Toole: That's right.
Mr Goldsmith: One thing I would like to mention -- you referred to the openness of Ontario Hydro. I think we have a problem in Ontario Hydro today. The corporation is still a public monopoly. It is still, at least theoretically, accountable to the people of Ontario.
Mr O'Toole: An unregulated public monopoly.
Mr Goldsmith: But it's still, at least theoretically, accountable to the people of Ontario and to the government of Ontario, and to the Legislature of Ontario as representatives of the people of Ontario, yet there are people in the management of Ontario Hydro who refuse to release information or to discuss issues relating to the corporation or the corporate management on the grounds that it is preparing for a competitive environment, and release of this information would have a negative impact on its competitive position should it become competitive.
I think this is a conflict of interest, a conflict of its duty to the public. What it is doing is diverting the debate. Every time somebody brings up something: "We can't talk about that. We're preparing for a competitive environment. It would affect our competitive position." That is a totally inappropriate position for a public monopoly to be taking. Part of the problems you're referring to in terms of getting the information behind the numbers, or why is this being done or why is that being done, is being cloaked under that protection, if you will.
Mr O'Toole: That's the cult or culture we've been referring to or someone has been referring to. Certainly I've heard it. I'm just using what I've heard.
I'm going to conclude my remarks by referring to your report, page 7, which really summarizes quite nicely. I'll just read it, as I've done with the other stuff. It really supports the observation I've made. This is the third paragraph: "There is a significant danger that Ontario Hydro will use this apparent crisis to press ahead with further investments and spending that cannot be justified on pure economic grounds." I tend to be rather supportive of that view.
I think it's the job of this committee, through the various deputants who bring a point of view to it -- we're all in wait of the white paper to see the actual framework for the environment in the future. I would ask you to say, are the options exclusively nuclear? Is that the one way we should go? We have to have guaranteed power. You said the fossil and the other kinds of fuel sources don't even reside in the province. We're going to have to buy them. Is nuclear the main option? That's the strategy. This whole strategy is predicated on, "That's the option."
Mr Goldsmith: I'm not sure if that's what it's predicated on. I can't really answer your question because I haven't done the analysis either. I'm not sure I'm competent to do the analysis, but whether I am or not, I certainly have not done it, any more than Hydro's board has or anyone else has. I believe the analysis needs to be done by somebody who knows how to do it.
Mr O'Toole: But it is the nuclear option. That's clearly the title of the report. It's the nuclear recovery plan.
Mr Goldsmith: The nuclear recovery plan seems to be to shut down a good portion of the nuclear system and just maintain the rest of it. To me, that's not a recovery plan.
Mr Kwinter: Would it be fair to say that your goal is to have security of supply at competitive rates in the most benign environmental situation we can find?
Mr Goldsmith: Yes, it would. That's actually the mission statement of our association.
Mr Kwinter: In other words, you have no particular leaning one way or the other as long as you can meet those goals, as long as they meet those criteria.
Mr Goldsmith: That's correct.
Mr Kwinter: One of the concerns I have, and it was just touched on by Mr O'Toole, is that the ability of Hydro to deliver power at competitive rates is going to depend to a great extent on what kind of competitive environment they're going to be working in. If they are a monopoly, they go one way; if they are not going to be a monopoly, they're going to have to go another way. We had the chairman of the Ontario Energy Board questioning the ability of Hydro to make these expenditures, meet the mandate to keep energy rates frozen until the end of the century and to service their debt and all of the other things within a competitive environment, and yet we don't know what environment they're going to be in. Do you have any comments on that?
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Mr Goldsmith: First of all, we don't believe they have the ability to do those things you just said in the current environment, not a competitive one but the current monopoly environment, and stay within the law. There is a law which governs the way they're allowed to operate, and we have not seen anything, and I don't believe this committee has seen anything, which indicates that they can do all of those things and remain within the law other than through government fiat, if the government of the day chooses to excuse them from the law, which I guess through order in council or whatever the mechanism it has the right to do. But I haven't heard from the government that it's willing to do that and I don't know that there is another option that is legal. I don't think the issue with respect to your question is the competitive environment or not. The issue is, I don't think they can do what they say they can do.
Mr Kwinter: Which leads me to the next progression, and that is, that almost invariably means there's going to have to be a rate increase in order to be able to even come close to the projections they are putting out.
Mr Goldsmith: With the current plan, that's probably true.
Mr Kwinter: That of course is your concern as major power users.
Mr Goldsmith: Yes, sir, it is.
Mr Kwinter: The next question I have of you: We have a recovery plan. I can tell you that from questioning that we had yesterday of two members of the board of their interpretation of the minister's letter -- I'm sure you've seen the minister's letter, or you know of it, that was sent to them. Notwithstanding that the minister said, "Examine all options," their interpretation was to examine all nuclear options. In other words, Andognini put forward six options and he recommended number 5 and maybe number 6. Their interpretation is that the minister has charged them with making sure they really examine all the options but there isn't, in their opinion, the opportunity to look outside of that nuclear recovery. Do you think this is something that should be done?
Mr Goldsmith: Absolutely. I can't imagine how a board could sit there and not ask those questions.
Mr Kwinter: That's the crux of the issue, and what is happening and my concern is that we as a committee which really has no control over Hydro -- nobody seems to have any control over Hydro.
Mr Goldsmith: Not even Hydro, according to this report, anyway.
Mr Kwinter: Yes. So what is happening is that we are listening to people and we have people concerned, as you are, about what is going to happen when in fact the die has already been cast in that the only solution seems to be an acceptance, as the Hydro board has already done -- they've accepted the recovery plan. They're going to monitor it to make sure the costs are what they say they're going to be. My question is, if the costs aren't what they say they're going to be, what are they going to do about it?
Mr Goldsmith: They're going to charge us for it.
I don't think the decision is irreversible. The board has made a decision; you're correct. That's a statement of fact. But this committee is reviewing the circumstances of that decision and the investigations that were done and it is still within the government's purview to listen to a recommendation from this committee which says this is not the way it should be done or that further investigation is required before deciding that this is the way it should be done. Maybe this is the best way of going, but we're not convinced of that. We haven't seen any evidence to that effect and we certainly haven't seen a proper evaluation of the alternatives, whatever they may be.
I don't believe it has to cost $7 billion to recover from a poor management culture. If my company was suffering from a poor management culture, which it has in the past, it wouldn't cost us that kind of money to correct that kind of problem, and I can't imagine any company where it would.
Mr Kwinter: You have to understand that the largest portion of the money is for replacement energy.
Mr Goldsmith: That's correct, but why do we need the replacement energy? That's to shut down stations that for some reason somebody feels it's better to shut down than it is to correct the management culture and get them running right. These stations have all been designated as minimally acceptable by the report from a safety perspective and an operating perspective. "Minimally acceptable" is defined in the report as meeting all safety standards but requiring management intervention to ensure that it doesn't slip and it turns around and starts to get better. That to me is not a capital expenditure. There may be some capital expenditures required for safety reasons or whatever, but they're a small part of this recovery plan in terms of dollars. We're not questioning those dollars except insofar as Ontario Hydro tends to spend a lot more dollars to do the same thing than we would spend in private industry.
Mr Conway: Just on that, one of the things that struck me -- I said earlier in this committee that I didn't come in here with a conspiratorial frame of mind, strange as that might seem. But when you look at that recovery plan, you say to yourself that a lot of people have come to the same conclusion as you have: It seems to overreact to the problem they've got. So what might the other agenda be?
Is it, do you think, unreasonable to conclude that another agenda might be trying to position the utility for an aggressive posture in this new world of competition that almost certainly the white paper is going to recommend?
Mr Goldsmith: I think that is a very definite possibility, that that's what the agenda is. I think it's entirely inappropriate but --
Mr Conway: I ask that because there are going to be people who say, "It's only people with a conspiratorial frame of mind who are going to think that," but you don't look like a conspirator to me. I say that seriously. This is really a major issue here. I thought you put it better than anybody I've heard. If you look at what the problem was and what the response is, the response in this recovery plan seems to be dramatically more expansive than the facts of the case would seem to warrant and to beg the question, is there something else going on here?
Mr Goldsmith: As I said, it's certainly a possibility that that's the agenda. As I also said earlier, we have a general concern which addresses the same issue, which is that Ontario Hydro seems to be in a general way, not just with this report or its response to this report, trying to position itself for a competitive market. I think that's totally inappropriate, because whatever the white paper says, there is going to be a successor organization or group of organizations to Ontario Hydro. But the white paper and competition is not about Ontario Hydro; it's about us, the consumers, all of us in this room. It's about creating a market that gives us choice and gives us lower costs. It's not about preserving an arbitrary entity.
Mr Conway: I want to move quickly to that question. As we look to the future and we look to a competitive environment, which is almost certainly coming, one of the issues that's obviously on the minds of people running Ontario Hydro is, what do we do with poor, underperforming assets that belong to the provincial utility?
I've been one of those who have been sort of jaw-boning with people like Arthur here and saying that my worry, even if we move to that -- we are moving to a competitive world, unavoidably, it seems to me. One of the real questions that the Legislature and the government have to look out for is to make sure the Ontario taxpayer isn't hosed with a lot of stranded debt and poor assets.
Mr Goldsmith: I agree with you, and we believe, and Ontario Hydro's own numbers indicate, that without this recovery plan that wouldn't occur, the stranded asset problem wouldn't occur. But with it, it will almost certainly occur.
Mrs Johns: Just to preface my remarks, I guess I believe as an elected representative that the most crucial area we have to look at as members of this committee is the safety issue. I believe so far, from what I've listened to, that a lack of management and interactive labour-management cooperation could lead to safety issues. Therefore, I am a little hesitant to say that we shouldn't follow through with at least some of this plan because of the safety implications.
Mr Goldsmith: We've said the same thing.
Mrs Johns: From my standpoint, I come to the point where for two years we have a shortage of power in the province of Ontario. We have limited access in lines to get power in here. We can get, I think, 4,000 megawatts into the province through lines coming from outside of the province, either from Quebec, the States or Manitoba. Really what it comes down to is that Ontario is an island where they have to get most of their power themselves exclusively in-house.
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You represent some of the most wealthy and biggest businesses that are out there and that have thought a lot about energy needs, because you've come together. I guess my question to you, and it's probably to Mr Dickinson, is, if we needed to get power quickly in this province, how fast could your members come up with cogeneration activities or an ability to alleviate some of my problem?
I want to understand that in conjunction with, which group of your members is answering the RFP that Ontario Hydro has put out looking for alternative energy sources, and how much power might there be out there from your group?
Mr Dickinson: Well, there's some. Dow, for instance, has been trying get access to Hydro's transmission line across the Detroit River, because they have a lot of surface power that they could --
Mrs Johns: The turbine has not been used, I understand.
Mr Dickinson: Absolutely, and there may be others. I don't know that. I don't get into individual corporate situations.
I'd first like to address the comment you made very early on when you talked about the safety issue. It isn't clear to me that there is a safety issue. In fact, Dr Agnes Bishop said the standards that the AECB imposes are probably greater than are used internationally, which is quite reassuring, I think. We are not suggesting anything should be done that would give any cause for concern in terms of safety.
Mrs Johns: I'm not suggesting that safety is an issue. I'm just suggesting that lack of manpower could lead to a safety issue, and I think we've heard that a number of times through committee. At this particular point we all agree that safety is there. So really I'm just looking to see, if it closed down, how quickly your members could come up with power. I'm looking for alternative energy sources, which is part of the mandate of this committee. That's what I'm looking for from you.
Mr Dickinson: Right. The first thing I would add is that the assumption is they would have to come up with power. Why do we have to shut Bruce and Pickering "A" stations down as quickly as Hydro wants to before we've had a thorough review of alternatives? I believe Mrs Fisher yesterday talked about re-recruiting some of the staff that left in 1993.
Mrs Johns: I'm not suggesting they have to close down "A's"; I'm just asking for alternative power sources that your organization might have.
Mr Dickinson: We have not got much alternative power. Very few of my member companies have invested in cogeneration facilities, because that is not their business. Their business is either metals or oil or chemicals or whatever. It is not generating electricity. They look to the local utility to do that.
Another reason for this is because they are not allowed under the existing regime to sell excess or even transmit excess generation to other locations where they have facilities. Hydro won't let them do that. There's a major inhibition in place to prevent them from doing some of the things they might otherwise do.
Mr Goldsmith: I think you also have to understand that in a situation such as you're postulating, and I'm not sure we're close to that kind of a problem, where there is a shortage of energy in the province, the cost of that energy is going to go up because of the cost of fuel or whatever the reason. Given that we're in a situation where at current costs Ontario is not competitive in energy supply, you may see your shortage alleviated by the fact that the companies shut down and leave the province, taking their jobs with them.
Mrs Johns: We're all concerned about the jobs opportunity too, so I understand that. I just have met with Dow over the past and know they have excess turbine capacity and I'm interested in where that might lead us.
You were concerned about the CMO, the central marketer or the independent supplier, the wholesaler if you will, of power in the British experience. Can you explain how you would like to see that set up?
Mr Dickinson: What we have suggested to the Macdonald committee, and it's our formal position, is that a bilateral contract should be established. You don't really need to have the great infrastructure that is in place in Britain, where you have an exchange established, you bid into the central system, and the last unit supplying the market fixes the price of that market. That's a very complex infrastructure. There's no reason to do that. In fact, in California, where initially they were going to adopt the pool approach, they're now looking at a mix of bilateral contracts and pool, as I understand it.
So there certainly should be other opportunities examined in putting in place the system for the exchange of electrons between a supplier and a user.
Mrs Fisher: I don't think we're too far apart on some of the ideas. I understand where Mrs Johns is coming from when she looks at alternative, because if you look at the whole picture, you'd wonder where this is going to end up. But let's come back to your referral to my position yesterday, and I think I've done it every day. I'm glad somebody's noting it anyway.
Mr Conway: Don't despair.
Mrs Fisher: Thank you. I have a new fan.
Mr Conway: I'm on your team.
Mrs Fisher: That's great. We need them all.
Where we'll end up with this, nobody knows right now. I think it's a very fair question that was raised a moment ago. If you take a look almost from day to day and hour to hour within this room, there are new proposals and new ideas and so on, but let's go back to the private sector, of which you are part.
If everybody could run from their debt, like one might think we could do as a province with this, the answer would be the alternative sources and at a less costly basis to the consumer. I would imagine you would agree with that. But we're not faced with that luxury. I think as elected representatives we have a responsibility to not only protect the consumers, those including businesses, from price increases, but the provision and access to affordable electricity. Wouldn't you agree that's our job?
Mr Goldsmith: Yes.
Mrs Fisher: We'll get to the staffing issue then, because you did refer to it. The IIPA, as you have so professionally outlined in your response to this committee as well, suggests that the tools are there to be able to go forward and maintain a reasonably competitive market in the electricity exchange within the province. Would you agree? Can we compete with the system as it is and still meet your needs?
Mr Goldsmith: Absolutely. We've detailed exactly how in our submission to the Macdonald committee.
Mrs Fisher: It's funny that we see each other at this table today. I've actually been in the same room in the past as your representatives to the Ontario Energy Board rate hearings, where I didn't necessarily always agree that only large business should be considered for rates that make it appropriate for them to do operations.
Mr Goldsmith: I would say that our submission to the Macdonald committee lowered rates for all users.
Mrs Fisher: I appreciate that, because that certainly is an update in time from when I met you at the HR 22 hearings and people were concerned about major power users and were forgetting about the ones that might be budding new stars today had they been treated the seem way. I say that with a little bit of reservation because I appreciate where you come from.
I also appreciate that in fact rates in the province in the past number of years have driven business away from Ontario, and I want to highlight your comment today with regard to that potential again. I absolutely agree with you. I feel that if we stray from our ability to maintain the rates where they're at, we are going to force further business away from the province and what we'll end up with maybe then is an overproduction again of electricity because nobody will be left to use it. That would be a very sad state.
Mr Goldsmith: And the people who are left will not have jobs and will not be able to pay for it anyway.
Mrs Fisher: There you go.
Mr Goldsmith: The concern is not just that we maintain rates at their current levels, but that we drop them by 25% to make them competitive. We believe that is possible, that it can be done with the proper competitive environment in the province and it can be done relatively quickly.
Mrs Fisher: Mr Conway, back on the second or third day of presentations when we had the senior corporate executive management board before us, was making suggestions. I heard you make a suggestion as well. I'm not so sure all senior management has to leave. Did somebody say -- it was this afternoon -- that maybe the wrong one went?
Mr Goldsmith: I think I made that comment.
Mrs Fisher: It was you who said that.
Mr Goldsmith: Yes, but I didn't say that the other senior management should leave. I said the board -- which is the one, or should be, that generates the management culture -- should have left. I didn't make any comment about any particular managers.
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Mrs Fisher: Then you think that all the decisions of the executive vice-presidency level, who make those recommendations so the board can or can't agree, aren't to be held responsible for this at all, that they're okay? It's the board that was supposed to be the only one accountable?
Mr Goldsmith: No. I was addressing the specific comments in the IIPA report relating to management culture and lack of accountability, lack of direction, lack of vision. All of those things have to start at the board level. If the executive vice-presidents are making poor recommendations -- if they are -- then to me it is the board's responsibility to question those recommendations and request alternatives. If they're just accepting what they're being told at face value, then there is no accountability and I don't see any reason for the management to work any differently. They're doing what they're told.
Mr Conway: I want to pick up on that. I understand, for example, that Dr Kupcis's departure at one level makes eminent sense. He was running the organization and he gets this IIPA report, you know, "on my watch," and he goes.
Mr Goldsmith: Yet he was the one who commissioned the report and he was the only one in years and years and years to recognize that there was something that needed to be reported on.
Mr Conway: Exactly. Well said. Yesterday we had David Kerr, who's a very impressive guy, runs Noranda. He sat here for an hour and a half, and there was just this incredibly untroubled quality about him about what had gone on for four years while he was on the board. But be that as it may, I want to talk a little bit about the future.
I must say something. You might not like this, but I want to get it off my chest. Ms Churley was sort of touching on it. I said to somebody not too long ago that one of the things about the Ontario Hydro we've got in the late 1980s and the 1990s is that for me it represents the consensus of big government, big business and big labour. We were all in it together. We might talk as we do about Darlington now, but I remember that in 1981 Darlington was the centrepiece of an election campaign and the proponents of Darlington got a clear green light from the general electorate of Ontario, about which I have no complaint. But I think a fair observation has to be -- and this touches to some extent on you people. Of course, none of you was here 25 years ago, and that's the great thing about this debate: Nobody's ever here when the chickens come home. But big government, big labour and big business were all singing out of the same hymn book, and for a lot of good reasons.
Mr Goldsmith: Are you suggesting that that decision was wrong?
Mr Conway: I think there were aspects of our energy policy that were imprudent. We ended up putting too many of our eggs in one basket. We've got people like Dr Hare telling us today that there were some design problems that simply weren't recognized. Al Kupcis was here a week ago saying he was beavering away inside Hydro giving them advice about the tubing issue, I think it was, and it didn't appear to be listened to.
Mr Goldsmith: But isn't that the problem?
Mr Conway: Well, listen, there are a number of things. I think one of the things about an energy policy is that you want balance, and our policy got imbalanced for whatever good reason.
But looking now to the future -- and that's the interesting thing about the energy question. We were talking about the fact that by the time Darlington was finally authorized, we had some very smart people up in Ottawa, ably led by Marc Lalonde, not a man to discount his own intellectual powers. They gave us the national energy program -- remember that, 18 years ago? -- the only lasting legacy of which appears to be Preston Manning. That was a package that, looked at now, doesn't hold much water. That's not unusual, apparently, in this energy debate, and that's why forecasting is so complicated.
In the United States, imported oil is the centrepiece of their energy program. You always want to ask yourself the question, how much of the Gulf War do you charge to the energy account?
As we look to the future, what I want you to tell the committee is, what are the ingredients, from your perspective, of good public policy that ought to inform the electricity reforms that are clearly coming, that will serve not just the interest you are here properly to represent and speak to, but will ensure that the taxpayers of Ontario will not be hung out to dry and that ratepayers everywhere in the province are going to get a fair shake in the new scheme of things? What are the basic policy ingredients, as you see them, that you would recommend this committee think about?
Mr Goldsmith: I think you need to recognize what has changed in the electricity regime in Ontario in, I would say, the last 10 to 15 years, without second-guessing any decision that was made in the past. Ontario Hydro has had a long and distinguished history of management of the electricity business in Ontario. They may have made a few mistakes along the way, but by and large it's been extremely good for the development of the province. It grew at a time when the only way to build electrical generation was through large mega-projects, through essentially a government-financed organization that could afford to build mega-projects and could afford, in some sense, to make a mistake and still be around.
What has changed is that the technology has advanced now to the point where you don't need large mega-projects to satisfy that same need. We've also had a decoupling of the growth in energy demand from the growth in GDP. They used to go hand in hand. In fact, there was a multiplier, I think, where electrical energy growth was faster than the GDP; now they're very close.
Those two things taken together mean that a different policy is more appropriate today than it was 20 years ago. That's why I won't second-guess what happened 20 years ago. I think those decisions were made with a different technology looking over our shoulders, with a different set of drivers.
To answer your question, "What does it take today?" it takes a corporation or group of corporations that is nimble, is able to respond, able to meet the needs of the customer. What does that mean? That means two things: competition and customer choice. You give those two things to the electricity business in Ontario and you will have accomplished all those other things you were talking about: equity for all customers, lower rates for all customers, a more responsive electricity system, a lower-cost system, a system that doesn't burden the province.
How do you do it? You dismantle the monopoly. You level the playing field. Introduce customer choice across the board. Allow the market to establish the price. We're not saying the price has to go down necessarily; we think it would go down now, but eventually it might go up. Encourage competition among as many suppliers as you can and have very light-handed regulation based on incentives.
Mr Conway: One of the centrepieces of Ontario energy policy for almost all of this century was the policy that sought to provide the greatest degree of self-sufficiency possible. That was one of the great appeals of nuclear; it played into that. We had hydro-electric resources, and that also reinforced that very important value. The impression I get now is that self-sufficiency is just not an issue. Nobody seems to think it is, and I understand how that might be.
But one of the interesting things for me is that most people, particularly most power generators you talk to, or potential generators of electricity, are assuming they are going to generate their power with natural gas most especially; that's the principal one. We have very little natural gas in Ontario. There's no question that it's going to give rise -- particularly if most utilities east of the Mississippi and Red rivers all move at roughly the same time to the same kind of program, gas-fired.
I wonder if you've got any concerns about what kinds of potential stress that might put on the natural gas market in terms of demand, cost, transmission questions, intergovernmental and inter-regional tensions that have historically been there. Or should those simply be left to think tanks at hard-to-find universities?
Mr Goldsmith: I think a competitive market would work those things out for itself, but the issues you're raising are issues we raised in response to the 1989 demand-supply plan of Ontario Hydro, where they planned to build some 32 or 36 -- I don't remember -- gas-turbine generators over the next seven years or something like that. If you looked at that in reality, there weren't enough turbine manufacturers to make that many turbines in that time period and there wasn't enough capacity in TransCanada PipeLines to get the gas here. I think it involved a doubling of the TCPL pipeline just to service that need. So the concerns you're raising are very real.
The Chair: Thank you, Mr Conway. There is an agreement among the caucus leads that that will terminate the questioning for the day.
I would like to thank the Association of Major Power Consumers in Ontario for being present. Mr Goldsmith, Mr Dickinson and Mr Rodger, I want to thank you for your helpful testimony. I hope that you would make yourself available should the committee require you to come back for further evidence, that you might do so and accept our invitation, and if there is a written request, that you would be able to respond to that in kind as quickly as you could as well. We'd appreciate that. Thank you very much for being with us.
If I may speak to the committee for a moment, I'd remind you that the subcommittee will meet tomorrow morning at 8:30.
Mr Conway: I think the subcommittee should get a tent and go out to High Park and camp out.
The Chair: I'm sure we will be blessed with Mr Conway's presence. At 9 the committee will meet formally and we will continue. I want to remind you of the change of agenda, particularly for those who have been watching the meeting this afternoon, to let them know that there is a change in some of the scheduling.
At 9 am, the Municipal Electric Association will present. At 10 am, John Murphy, who is a board member of Ontario Hydro, will be a witness. At 11 am, Murray Stewart, president of the Canadian Nuclear Association, will be a witness. There will then be a two-hour break for members of the committee to attend to their household duties. At 2 pm, the Ontario Natural Gas Association will deputize, and then at 3 pm, for two hours, the Independent Power Producers' Society of Ontario will present, or whatever portion of the two hours is necessary to complete their evidence.
Is there any other business to be conducted?
Mr Conway: Yes. Perhaps Rob might help us with this. Somebody today mentioned -- I just want to be clear. Have we had some written communication from Ontario Hydro telling us as a committee that they will not share with us certain legal opinions with respect to their obligations and their view of their obligations under the Power Corporation Act? I think I read in some of the documentation today that that "Thank you and get lost" communication had been received. I just wanted to be clear.
Mr Power: Now that I'm back in my proper spot, we had requested from Ontario Hydro the legal opinion that had been referred to in one of the documents and had met with Hydro counsel because they had concerns about disclosing that, their rationale being that they are engaged in litigation with the Municipal Electric Association. We had asked them to outline their position in writing to us by this Friday, and at that time we would consider whether further action is required. You're correct in that one of the documents we've received today does indicate it has been refused. We didn't quite have to push it that far yet, so I wouldn't say we're at the refusal stage per se.
Mr Conway: I have great faith in the Chair and legal counsel and consulting staff, because I must say I have some concerns. This is an old story. I don't want to be unreasonable, but I think the committee has some obligations to meet.
The Chair: Mr Conway, may I give you comfort? We'll raise the matter with the subcommittee in the morning, and the Vice-Chair will be ever vigilant to ensure that we deal with this. I give you comfort to remind you that the committee does have authority to execute its will where appropriate.
Is there any other business before the committee? Then until, for the subcommittee, 8:30 in the morning, and for the committee 9 o'clock, we stand adjourned.
The committee adjourned at 1634.