Assemblée législative de l'Ontario

POWER CORPORATION AMENDMENT ACT, 1991 / LOI DE 1991 MODIFIANT LA LOI SUR LA SOCIÉTÉ DE L'ÉLECTRICITÉ

ONTARIO HYDRO

CONTENTS

Monday 17 February 1992

Power Corporation Amendment Act, 1991, Bill 118/ Loi de 1991 modifiant la Loi sur la Société de l'électricité, projet de loi 118

Ontario Hydro

Marc Eliesen, chair

Dane MacCarthy, vice-president, environment and corporate planning branch

Allan Kupics, vice-president, procurement and power systems planning branch

Elgin Horton, vice-president, nuclear operations branch

Marion Fraser, manager of commercial programs, energy management and corporate relations branch

STANDING COMMITTEE ON RESOURCES DEVELOPMENT

Chair / Président: Kormos, Peter (Welland-Thorold ND)

Vice-Chair / Vice-Président: Waters, Daniel (Muskoka-Georgian Bay/Muskoka-Baie-Georgianne ND)

Arnott, Ted (Wellington PC)

Cleary, John C. (Cornwall L)

Dadamo, George (Windsor-Sandwich ND)

Huget, Bob (Sarnia ND)

Jordan, Leo (Lanark-Renfrew PC)

Klopp, Paul (Huron ND)

McGuinty, Dalton (Ottawa South/-Sud L)

Murdock, Sharon (Sudbury ND)

Ramsay, David (Timiskaming L)

Wood, Len (Cochrane North/-Nord ND)

Substitution(s) / Membre(s) remplaçant(s):

Brown, Michael A. (Algoma-Manitoulin L) for Mr Ramsay

Coppen, Shirley, (Niagara South ND) for Ms S. Murdock

Farnan, Mike (Cambridge ND) for Mr Wood

Jamison, Norm (Norfolk ND) for Mr Kormos

Marchese, Rosario (Fort York ND) for Mr Dadamo

Clerk pro tem / Greffière par intérim: Manikel, Tannis

Staff / Personnel:

Cutbert, Graham, Legislative Counsel

Yeager, Lewis, Research Officer, Legislative Research Service

The committee met at 1404 in committee room 2.

POWER CORPORATION AMENDMENT ACT, 1991 / LOI DE 1991 MODIFIANT LA LOI SUR LA SOCIÉTÉ DE L'ÉLECTRICITÉ

Resuming consideration of Bill 118, An Act to amend the Power Corporation Act / Projet de loi 118, Loi modifiant la Loi sur la Société de l'électricité.

ONTARIO HYDRO

The Vice-Chair: Seeing all three caucuses here, I will call today's hearing to order and turn the floor over to Mr Eliesen, who is going to be before us this afternoon. I believe you have an opening statement that you wish to make, so perhaps we could start with that as the last few members start coming in.

Mr Eliesen: Perhaps before I begin my formal presentation I can take a second to introduce some of my colleagues from Ontario Hydro who are with me here today. First there is Dane MacCarthy, who is the vice-president of environment and the corporate planning branch; Allan Kupcis, who is the vice-president of procurement and the power system planning branch; Elgin Horton, who is vice-president of our nuclear operations branch, and Marion Fraser, who is the manager of commercial programs in the energy management and corporate relations branch.

Thank you for the opportunity to appear before your committee today to address the proposed amendments to the Power Corporation Act. I have been closely following the hearings and have been impressed with the range of topics and the depth of feeling that have marked the presentations. It is obvious that Hydro still draws as much attention today as it did when it was set up by the province of Ontario in 1906. Public scrutiny of the provincial monopoly utility is a long-embedded and justifiable tradition in Ontario. In more recent times we have been the object of study by the Porter commission and various select committee hearings in the 1970s.

In the 1980s our demand-supply plan underwent public and government review during its own study and planning stages. We also had the Hare report on nuclear safety and a legislative review of the Darlington nuclear generating station.

We are currently in the middle of an Environmental Assessment Board hearing in which our demand-supply plan is being exhaustively examined, and, of course, over the past two decades our operations have come under annual review by the Ontario Energy Board.

Many of the presentations this committee has heard over the past month have revolved around some longstanding issues as well. The issue of privatization versus public power has been argued as long as there has been an Ontario Hydro.

The repeated reminders that Hydro's mandate is power at cost are another echo of earlier debates and earlier times when electrical power was indeed a bargain in Ontario. Power at cost is still the byword at Hydro, but what goes into that cost today has obviously become much more complex. There is, however, no doubt that providing power to the people of Ontario today is becoming more costly. That reality hit home, certainly to me, last fall when Hydro's board of directors had to determine the 1992 rate increase.

The financial situation was not reassuring. Revenues were down significantly because of the recession we are all experiencing. Net income was also suffering because generating performance, particularly in our nuclear plants, was down considerably. Net income had dropped from about $700 million in 1989 to $129 million in 1990. Last year we took in revenues of about $7 billion, but our net income was only about $200 million, well short of the comfort level required for such a large corporation. One significant event on our system could potentially wipe that out. This is obviously the scale of the system that Hydro operates today.

There is no question that our 11.8% rate increase for 1992 has not been a welcome announcement at a time when the province is attempting to climb out of a major recession. The main cause of that increase is the $13.5-billion Darlington nuclear station, which is only now coming into our rate base. We are also learning that the cost of running nuclear stations is much higher than anticipated. Equipment has had to be replaced earlier than anticipated, there were underexpenditures in operations and maintenance in recent years, and there are ever-higher standards being set by the Atomic Energy Control Board.

The Darlington experience has led Ontario Hydro to look at other options when planning for the future. Smaller, single-unit stations are definitely more appealing from a financial perspective. They do not tie up as much capital, there is more certainty about cost estimates and they have a much more moderate impact on rates when they come into service.

Our demand-supply update, which we released last month, looks to energy conservation, cogeneration and rehabilitation of our existing system as priority options. When new supply sources are required, as they eventually will be, smaller, more versatile single-unit stations may provide more flexibility and less impact on the environment. This should help prevent the kind of rate shock that our customers are seeing this year.

As some of you may recall, Hydro has had to impose even higher rate hikes before. In the mid-1970s rates jumped by 13%, 22% and 30% in consecutive years. At that time, Hydro was also absorbing the impact of new facilities going into service and into the rate base.

Darlington and other unanticipated nuclear costs account for more than half the 1992 rate increase: 6.6% of the 11.8%. The remainder is not much more than the anticipated rate of inflation.

When Darlington is fully commissioned it will represent 30% of Hydro's assets but it will not cause anything like the rate increases of the mid-1970s. In fact, I believe that after 1993 we can anticipate far more modest, single digit rate increases, which have been the norm of Ontario Hydro over many years. We realize the importance of keeping our rates competitive. Our customers certainly remind us -- remind me, at least -- in phone calls and letters. The fact remains, though, that we are still competitive.

Notwithstanding our significant exchange rate appreciation from a 77-cent to an 80-cent dollar, if Ontario industries go comparison-shopping for electricity rates with our direct competitors in neighbouring US states they will still find Ontario Hydro roughly 20% to 30% more favourable. Other foreign competitors pay bills that, on average, are 93% higher in England, 58% higher in Japan, and 36% higher in France.

I intend to have Hydro remain competitive as well. I also intend that cost increases will not be routinely passed on as higher rates to customers as if there were no alternatives -- and there are alternatives. One is improved productivity, and another is cost control. By cost control I do not mean simply putting a lid on costs, but making a concerted attack on cost structures and embedded practices. We must question the validity of costs, not simply include them year after year and automatically escalate them.

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One major cost-cutting measure last year was the cancellation of our expensive uranium contracts with Rio Algom and Denison in Elliot Lake. For the last 10 years the premium Hydro has paid for uranium from the Elliot Lake mines amounted to $1 billion. Ending those supply contracts by 1996 will save ratepayers $1.5 billion on uranium for our nuclear generating stations. After the assistance package of $250 million to help the community adjust to the mining phase-out, Ontario ratepayers will be saving over $1.2 billion in the next 10 years. That is the equivalent of a 1.5% to 2% reduction on annual Hydro rates. I believe those are the facts that should be kept in mind when deliberating the merits of the Elliot Lake package. In the end, our customers are going to be better off.

The purchase of the Smoky Falls generating station near Kapuskasing is another good example of good business. That station is the key to our plans to expand our existing three stations on the Mattagami River: Harmon, Kipling and Little Long. We already had an agreement to purchase the plant from Spruce Falls Power and Paper Co, and therefore we are only advancing the timing of the purchase. If we -- Ontario Hydro -- fail to obtain environmental approvals to redevelop that dam and three others, the provincial government will cover our commitment. In other words, power consumers will not be on the hook. So a good business decision also helped in the restructuring of Spruce Falls Power and Paper Co. It was an excellent example of what can happen when business, government, a public utility and unions work together. Incidentally, neither the Elliot Lake nor the Kapuskasing deal had any significant impact on this year's rate increase.

Reliability of our service, particularly for our industrial customers, is just as important as cost. Ontario Hydro has a worldwide reputation for dependability and reliability. In fact, in a recent study the North American Electric Reliability Council rated the reliability of Ontario Hydro's system as number one in Canada and number 11 out of 152 North American utilities.

To guarantee that our customers can continue to depend on the reliability of our system, Ontario Hydro has now embarked on the largest rehabilitation project in Hydro's history. We are going to spend $3.6 billion on our transmission system alone by 1996. We are adding three new high-capacity lines in eastern Ontario, reinforcing transmission facilities in our biggest load centre, Metropolitan Toronto, and upgrading older lines between Burlington and London.

Our nuclear upgrading program is just as big. We have approved close to $4 billion for rehabilitation and retubing. Two reactors at the Bruce A station and one at Pickering A station will be retubed, and there will be a full station rehabilitation at Bruce A. Rehabilitation will continue at the Lakeview and Lambton coal stations at a cost of over $1.6 billion, and a substantial investment in the electricity system of Ontario remains in the demand-supply plan update.

About $7 billion and 50,000 person-years of employment are associated with the building of the transmission line for the 1,000-megawatt Manitoba purchase and various hydraulic projects during the 1990s. The Sir Adam Beck 3 at Niagara Falls will have a capacity of 1,000 megawatts. The Mattagami and other northern projects will provide 750 megawatts of power.

There will also be substantial investments as a result of our decision to rehabilitate our coal-fired stations instead of retiring them. These investments will ensure a reliable, financially sound and environmentally sensitive electricity system in the future.

However, even if price and reliability are reasonable, our customers expect something different from Hydro than they did 10 or even five years ago. Our whole world has changed irrevocably, and Ontario with it. Hydro, at its best, is a mirror image of that changing society. We too are changing from a production supply company to a service company providing energy and energy services. We must not only ensure Ontario is supplied with electricity; we must encourage Ontarians to use it efficiently, or in some cases not to use it at all.

There are traditional means of ensuring new supply: Build more generating stations. But there is an even more significant source of supply and that is demand management or energy conservation, and it has dramatically fewer or nil environmental effects. Our energy efficiency or conservation programs are all targeted to be less than our avoided cost, so in the long run Hydro's costs and average customer bills will be lower than if we had to supply those megawatts with new generating stations.

Our updated demand management target is to reach 5,200 megawatts by the year 2000. That is 5,200 megawatts of supply we do not have to build. To obtain that objective, we are investing $6 billion in energy efficiency and conservation, much of it in programs to help Ontario industries cut energy costs and become more competitive. Furthermore, these programs could create an estimated 50,000 person-years of employment.

For example, we have recently embarked on a demand management program with Canadian Pacific Forest Products Ltd that is expected to save its Thunder Bay mill about $7 million a year. It is also power we do not have to produce. The company saves and becomes more competitive. Hydro saves by deferring the need for new supply, and that means savings to all our customers. In other words, everyone wins.

Ontario Hydro has a wide variety of programs and incentives in place to encourage all our customers -- industrial, commercial and residential -- to use energy efficiently. Darlington will cost ratepayers more than double that $6 billion and produce only two-thirds as much electricity. So demand management is a good deal for the environment and it is a sound business deal for Hydro's customers.

The idea of paying people to use less of our product has been a little tough for some people in the electricity business to accept, but actually paying people to switch to what they see as the competition really makes some of the traditionalists unhappy. Perhaps this explains the depth of feeling you have encountered about the amendment that would enable Ontario Hydro to actively encourage and, in some cases, offer incentives for residential or industrial customers to switch fuel sources.

Let me spell out Ontario Hydro's position clearly. We are in favour of fuel substitution as a mechanism to promote energy efficiency in Ontario. I am not saying something radically new for Hydro. My predecessor, Robert Franklin, spoke of the role of natural gas as an example of an alternative fuel in a speech to the Ontario Natural Gas Association, and I quote: "Natural gas plays a large part in Hydro's long-term planning precisely because we believe our customers stand to benefit from its expanded use....What we both have to do is concentrate on those areas in which we can do the most to satisfy the customer....Minding our business means cooperating and competing to give the customer the service that best meets his or her particular needs....we bit the bullet and admitted that...yes, there are some things gas can do as well as or maybe even better."

So it should not be surprising we still are counting on fuel substitution to help reach those 5,200 megawatts of energy savings in the 1990s. It is a case of using incentives where necessary, but not necessarily using incentives.

The evidence you have heard from municipal utilities has been straightforward. People with electric water heaters are already switching over to natural gas in those areas where it is available. It is simple economics for the home owner. The cost is lower and the payback period brief. For us, that should be enough of an incentive for people to switch.

This will continue with or without Ontario Hydro. But not everyone is on a natural gas system. Ontario Hydro alone has 900,000 rural customers, many of whom do not and will not have access to natural gas. There are many other energy management programs available to those customers.

Not every program is available or suitable to each customer's needs. Fuel substitution provides one more tool in the campaign to make Ontario energy efficient. We will not implement it at the undue expense of any particular segment.

We expect municipal utilities are going to lose their water heater customers as a matter of course. Space heating is a different matter. There are large gains to be made in this area, but any program to encourage fuel substitution on space heating will be developed in close consultation with the municipal utilities.

The people of Ontario want their energy resources used more efficiently and they want to make their individual contributions. The evidence is there. Already conservation programs have saved about 600 megawatts of power, more than the power produced by a Pickering nuclear reactor and enough power to meet the needs of Etobicoke, at an immeasurably smaller cost to the environment.

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Furthermore, this is not a bridge or a quick fix until the next supply stations can be built. In Ontario, demand management through energy efficiency and conservation is the primary alternative to any new supply.

During these hearings, some ghosts from the past have reappeared. I am thinking particularly of the Live Better Electrically campaign of the 1960s and the off-oil campaign that was the offspring of the 1982-83 recession. Again, to quote from Mr Franklin's 1990 speech: "When I came to Hydro we had completed a campaign to persuade customers to convert to electric home heat. We were in the midst of another one to try to win customers over to electric hot water heat. I stopped that campaign."

The people of Ontario have long and accurate memories. Those campaigns were part of the historical cycle of Ontario Hydro. When demand was up, we sold conservation. When demand was down, we sold plenum heaters. That was the quick fix. Everyone did it.

Personally, I would like to assign those particular campaigns to where they belong: the historical dustbin. Everything we are working for in planning for the future is to avoid those peaks and valleys of power supply and demand. Energy management, non-utility generation, load shifting and time-of-use rates are all geared to eliminating that pattern.

Hydro is operating in a different social and economic era now and I believe we have learned from the past. We have also learned that it makes good business sense for Hydro to pursue alternative energy sources. Finding alternative, cost-effective, environmentally benign fuel sources is another important utility activity that cannot be ignored or underestimated. It is another critical component of the flexibility we are trying to achieve. Like all major utilities in North America, Europe and Japan, we are accelerating the search for these alternative energy sources.

Some of the independent producers selling electricity to us are generating it from wood waste and methane gas from garbage. Ontario Hydro's alternative energy research includes the investigation of fusion technology, the development of wind and solar energy applications in Ontario and the testing of different types of fuel cells.

We are watching with particular interest the practical test of fuel cells in buildings in Japan, Europe and the United States. In addition to environmental benefits, buildings generating their own electricity from fuel cells could help ease Ontario Hydro's strained transmission and distribution capacity.

Some of these developments are a long way off, but these are the kinds of considerations we have to keep in mind when trying to change the nature of our business into one that truly provides what I believe our owners and shareholders, the people of Ontario, want from us today and tomorrow. Today, we can see, if we look carefully enough, many of the changes that will determine what we will be tomorrow. We will be more environmentally conscious and more service-oriented. We will be obtaining most of our new supply from more efficient use, from switching to other fuels, from non-utility generators, from smaller stations, and from rehabilitated stations. Bill 118 will provide needed assistance in achieving that goal.

Thank you very much for your attention, and my colleagues and I would be more than pleased to answer any of your questions.

The Vice-Chair: Thank you, Mr Eliesen. Before we get into the questions, I would be somewhat remiss if I did not comment on the juice. It has been a long-standing practice of our normal Chair to comment on the Canadian or non-Canadian products that sit over in the corner, and those products as well as the tea and coffee are there for everyone's pleasure. So whenever anyone feels like a coffee, just feel free.

We will start the questioning off with Mr McGuinty and your people. You have half an hour.

Mr McGuinty: Are we going to proceed through the natural rotation, a half hour each for questions?

The Vice-Chair Yes.

Mr McGuinty: Welcome, Mr Eliesen, to the committee.

Mr Eliesen: Thank you.

Mr McGuinty: You have, in speaking today, made reference to Elliot Lake, and that has been the subject of some discussion during the course of our committee travels. The government members have and you today have referred to what the government did at Elliot Lake as somehow providing us with some kind of savings.

It was my understanding, and you can correct me if I am wrong in this regard, that the contract Hydro entered into in order to purchase the uranium contained a provision, an option, that had to be exercised prior to the end of 1991. That provision enabled Hydro to get out of the contract completely without cost or penalty in 1993.

I am unclear as to how paying $250 million to help the good people of Elliot Lake constitutes a savings when there was no obligation, as such, found within the contract to do so. Also, why in extending the contract to purchase uranium until 199~and I understand we are purchasing the uranium there, although at a reduced rate than it was provided for in the original contract, though still higher than the price for which we could obtain it elsewhere.

Does that constitute a real saving? I thought we could get out scot-free.

Mr Eliesen: There had been opportunities in the past on Ontario Hydro's contracts for sourcing uranium from Elliot Lake which could have been amended, could have been adjusted. The premiums had been in existence for a long period of time. People were aware for quite a number of years, all during the 1980s, of the dramatic changes that had taken place in the uranium prices, and there were opportunities for Ontario Hydro to amend those contracts. They were not exercised at those particular times and the ratepayers lost accordingly during those years. The decision taken this time was to exercise the option, as you quite rightly put it, to avoid continuing to pay those premiums in the future as they have been paid in the past. So in our way of looking at it, and given the historical record, it does reflect a saving of the amounts I indicated in my speech.

Furthermore, Ontario Hydro does not operate as a simple private sector company. We have a responsibility, I believe, under the power-at-cost principle to ensure that the communities or the areas which are significantly impacted as a result of our decisions over many years are ameliorated. If the decision was taken to cancel those contracts, we have a responsibility to share a limited part of those savings with the communities affected and still ensure that there were considerable savings in the future. To me that reflects not only a good business decision but also means that Hydro would continue fulfilling its responsibilities to the communities being impacted.

Mr McGuinty: From a strictly legalistic perspective, there was no obligation on Hydro to pay $250 million to the people of Elliot Lake and there was no obligation on Hydro to continue purchasing uranium beyond 1993. Is that correct?

Mr Eliesen: There was no legal specific factor which would allow Ontario Hydro to continue those contracts if it chose not to do so, similar to, as I mentioned earlier, during a previous era when those contracts could have been adjusted and they were not.

Mr McGuinty: What I am taking issue with, as I am sure you could understand, is the use of the term "savings." That is, to my mind, entering into the realm of the political. We are putting a spin on something that happened here. If I was to enter into a contract to lease a car and I was able to get out of that contract at a certain point in time and, rather than exercise that option, I decided to continue on for some period of time, I could, I guess, say I am saving money in a sense, but not in any realistic sense. I am saving money because I could have gone on even further beyond that point, but realistically and responsibly I do not see how we can call this a saving. There is an issue here as to how the people of Elliot Lake should have been helped and who should have helped them. In order to be responsible to the ratepayers of Ontario Hydro, I think we should not categorize this as a saving.

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Mr Eliesen: I guess I differ from you in your interpretation, Mr McGuinty. In the standard that has operated in the past, had Ontario Hydro in fact done what you have put forward, then I think it should have amended those contracts during the 1980s. It did not. It certainly did not do it to the benefit of the ratepayer. When Ontario Hydro makes a very explicit decision to cancel those contracts when it has the opportunity where it could have continued for another 10 years in a similar way to a previous period, I regard that as a saving.

Furthermore, and I am attempting to answer your question as to what I believe to be Ontario Hydro's responsibility to the community, if in doing that we share some of the savings with the local community being impacted, I believe that is fulfilling Ontario Hydro's mandate and responsibility under the Power Corporation Act. I can dig up additional examples from the past where in strictly legal matters Ontario Hydro did not have to do a, b, c or whatever. The point is that it did because there was a broader socioeconomic responsibility attached to the public utility.

Mr McGuinty: I want to pursue Elliot Lake in a different context, because I think it contains some symbolism which should not be lost upon the members of this committee. First of all, you tell us you believe in the principle of power at cost and it is your intention to ensure that Hydro continues to operate with that in mind. You are telling me, I gather, that the $250 million and the manner in which it was disbursed in connection with Elliot Lake fell quite legitimately within Hydro's mandate to provide power at cost. Is that correct?

Mr Eliesen: Yes, I have answered in the affirmative.

Mr McGuinty: We used some of that money -- I think it was $30 million; I do not have the figure here at my fingertips -- to pay off some municipal debts, and we used some other moneys for some short-term job creation programs. As a ratepayer, I am wondering how that falls within Hydro's obligation to provide me with power, especially power at cost.

Mr Eliesen: Let me answer the part of your question on the definition of power at cost first. I believe there was a whole variety of questions asked of Ontario Hydro by Mr Jordan which we made available to all members of the committee. One of those questions was the definition of power at cost. You will see in the answer being provided that the definition of power at cost is not black and white. It has been interpreted broadly over the years. It includes a whole variety of components, and then it is allocated in accordance with what was included in the appendix provided to the answer. So it is not a case that there is a finite, black and white answer to what power at cost is. Power at cost, quite frankly, has been interpreted quite broadly over many years at Ontario Hydro.

With regard to Elliot Lake, I simply repeat what I indicated earlier. A decision was made by the board to cancel contracts which would have continued for another 10 years. To share some of those savings related to those contracts fell within our mandate of power at cost. As a result of our decision, as opposed to allowing those contracts to continue for another 10 years, which would have been detrimental to the ratepayer, the overall business decision means that the ratepayer gets a reduction of 1.5% to 2% each year. Clearly we would interpret that within the power-at-cost mandate.

Mr McGuinty: I am choosing to interpret what you are telling me, Mr Eliesen, seeing as there is a fairly subjective interpretation being applied to the principle of power at cost. That does not lend me much comfort and I do not think it lends comfort to ratepayers, because what you are saying is that Hydro's funds may be used in a manner which whoever happens to be in charge at the time considers to fall within the operative of power at cost.

Along those lines, why was it that the order in council, which directed Ontario Hydro to spend the $250 million in the manner in which it was directed to do in connection with Elliot Lake, contained a provision which absolved the directors of liability when they went along with this? What I am getting at here, Mr Eliesen, is that if the government is doing something with Hydro that I as a ratepayer am concerned about, at least I am thinking in my mind: "Thank God we have the board in place. The board will stop them and look out for my interests." But they did not stop them here, and furthermore there is a provision in the order in council which says they were absolved from liability. Why would they request that kind of provision?

Mr Eliesen: There are two parts to your question, Mr McGuinty. Let me answer the part on power at cost first.

Again I would insist that as a result of our business decision, if ratepayers will pay lower rates as a result of that decision, then that should be adequate evidence for them that we are operating within power at cost. It is not a case of whether I am or my board of directors is making wildly subjective judgements as to what should or should not be included in that power-at-cost definition.

We are asked to be accountable and we are accountable, not only to legislative committees but also to the regulatory hearings on an annual basis. We have to justify why we have made those business decisions. We are called to account and we do account for those decisions and why they should be included in the power-at-cost definition. In this case, again, the ratepayer is better off as a result of the decision made by Ontario Hydro.

With regard to the second part of your question, why there were certain aspects in an order in council, I am afraid I am not the person to ask. I did not draft that order in council; it was the government that drafted it. The government had discussions. Obviously I was aware, because I was wearing a different hat, that of Deputy Minister of Energy, at the time, that there was a request from Ontario Hydro to include the provision you referred to. I think you are far better off asking government for the answer to that as opposed to myself.

Mr McGuinty: I think the logical inference here, Mr Eliesen, is that the board of directors felt in its heart of hearts that this was not the right thing for Hydro's ratepayers to do at Elliot Lake. For that reason they felt they were going to suffer from what we call exposure, in terms of liability, and required that the provision be entered into the order in council.

Let me talk a little bit about the Update. Again, back to the board: It is my understanding that the full document is some 325 pages long. Is that correct? I have not seen it.

Mr Eliesen: I am sorry; you will have to be more specific. The Update we have tabled before the Environment Assessment Board?

Mr McGuinty: Yes.

Mr Eliesen: It includes quite a number of pages. It was not 300 pages but it was an extensive document.

Mr McGuinty: A very extensive document.

Mr Eliesen: Forty pages, I am informed, if you are referring to the Update. The Update we deposited with the Environmental Assessment Board is shorter.

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The Vice-Chair: Excuse me for a moment. We do have a problem with Hansard. If people wish to participate, would they come forward to the mikes. If you use the mikes, I gather it is okay at the ends of the tables. If you have support staff, they can use those places that are open where there are mikes. It would make it much simpler for us all and for Hansard.

I would remind Mr McGuinty that his colleague has a couple of questions too, if he would leave enough time at the end.

Mr McGuinty: How am I doing on time there, Mr Chair?

The Vice-Chair: You are about 15 minutes into your time, just a bit over.

Mr McGuinty: Mr Eliesen, just so I am clear on this, I have in my hand here a brochure entitled Update 1992: Ontario Hydro's Plan To Serve Customers' Electricity Needs: Providing the Balance of Power. Is that the only document that is around? I have a briefer version, a smaller brochure, as well.

Mr Eliesen: There is a lengthier document which was tabled before the Environmental Assessment Board. It is the 40-page document that has been referred to.

Mr McGuinty: It is my understanding that some four, five, six years went into the preparation of the original demand-supply plan.

Mr Eliesen: That is my understanding.

Mr McGuinty: The original demand-supply plan laid out proposals in order to meet Ontario's electricity needs for a 25-year period -- very extensive, very detailed, very thorough and very considered, but very methodical. I want to come along to the Update now. How much time went into its preparation?

Mr Eliesen: The Update was a simple mechanical operation reflecting the decisions that were made on goals and objectives that had been announced by Ontario Hydro during the summer and into the fall as we were proceeding through the Environmental Assessment Board. For example, the goal of demand management, the target which was increased from 3,700 megawatts to 5,200 megawatts by the year 2000, took place at the beginning of the summer.

Then the enhanced goal for non-utility generation, which went from roughly 2,100 to 3,100 megawatts by the year 2000, was done in August. As we proceeded to go through the various panels -- there are 10 panels associated with environmental assessment -- we were updating. That was consistent with what we had to do: update our goals and objectives.

When it came time to start pulling all these threads together to also take into account the update that we had provided on load forecast, which is the degree to which the demand for electricity was changing both in the short term and the long term, it was necessary for us to provide that Update.

The preparation of the Update was really a two- to three-month exercise. The results simply reflected that instead of major a new supply to come on in the year 2002, there was roughly a seven-year deferment to the year 2009. That is really what the Update is all about, given the new goals and objectives. The same items, the same considerations, the same kind of flexibility that had been articulated within the original DSP plan were all reconfirmed with the Update.

Mr McGuinty: Would this document have been produced in essentially the same form, notwithstanding which party happened to win the election of 1990?

Mr Eliesen: I believe so. It was taking place within Ontario Hydro regardless of which party formed the government. There was a major economic downturn. Our level of demand today is less than it was in 1989. No one had forecast the severity of the reduction. Instead of going up at the usual 3% to 4% to 5% per year, we were going down; we were not growing at all. That major change would have taken place regardless.

Mr McGuinty: I want to speak to you as a concerned ratepayer again, Mr Eliesen. You referred to some of this when you addressed the committee at the outset here today. At one time Hydro told me as a ratepayer that the best thing I could do in terms of electricity was to use it; that I should live better electrically. Now they are telling me that we should conserve. They told me at one point that Darlington would cost some $2.5 billion. I think it is now close to $14 billion. I recognize that there have been interest costs and incidents of government tinkering in the interim.

It is my understanding that Hydro was quite a bit off in the projections made during the last recession in the early 1980s as well. I have a copy of a transcript from The 5th Estate which was aired December 17, 1991, which I am sure you are familiar with. At one point Victor Malarek asks Mr Niitenberg, Hydro's vice-president of operations, "Well, how did you guys get the projection so wrong?" This is talking about the 1970 forecasts. Arvo Niitenberg replies: "How did we get it wrong? We had the best estimate that we could get in terms of what loads were going. The whole economic forecasting for that particular time period was in error."

I have an article here from the Financial Times dated January 27, which says: "Rothman, the utility's own chief number cruncher, doubts that. He says, 'Officially, Hydro insists that there will be no doubling of prices in this decade.'"

As a ratepayer I wonder if this time I can rely on what Hydro is doing. A lot of good work went into the preparation of the 25-year DSP. There has now been a dramatic turnabout. Some two years subsequent to its submission to the Environmental Assessment Board, we are told that we are going to defer major generation. I guess we needed the first one on stream by 2002; now we are back to 2014. We are going to spend $6 billion between now and the year 2000, I believe, for energy conservation programs. As a ratepayer, why should I believe this time that we are on the right track, that we are not making another mistake and that we have not made sufficient provision in the event we err?

Mr Eliesen: I think we are on the right track and I think we should be judged by our actions. We want to avoid the kinds of examples you have referred to: major exposure and financial risk as a result of getting committed earlier in the game to the large generating stations you referred to. We are experiencing, and the ratepayers are experiencing, those rate shocks today. Darlington nuclear station, which was built as power at cost, was built on what I would describe as a ping-pony construction schedule -- stop, start, stop, start. Whether it is nuclear or fossil or hydraulic does not matter; that is not the way to build any station.

I think Hydro is learning from the experiences. We are also learning that we are operating in a new environment. It is not only Ontario Hydro. You do not have to look very far, whether it is at Hydro-Québec or any other utility in North America. The kinds of things that society or governments allowed their utilities, whether they were public or private, to do then is simply not acceptable today. We are trying to be much more cost-conscious, to not apply ourselves on major commitments from which we cannot get out because they are sunk in investments. I think the current ratepayer should judge us by the actions we are taking in order to reduce those financial exposures, in order to reduce those financial risks.

Let me just make one brief observation of your description of the Update as dramatic. In my judgement it is not dramatic. It reflects a reality of a seven-year -- not more -- deferment of major new supply. I have outlined in my speech all the items for rehabilitation, for new projects which were part of the original plan and part of the update as well. Whether it is the transmission line as a result of the Manitoba purchase, whether Mattagami rebuilds, whether it is Beck 3, all those projects we are still going ahead with. We are going ahead with the rehabilitations that were described in the original update. In my judgement this is not a dramatic change; it is a recognition of the fact that we are living in a new era where perhaps the kind of need related to the downturn we are experiencing is less severe. Therefore we should give ourselves much more security, before we commit for major kinds of base-load generation, that we do not get into it and provide future rate shocks to the people of this province.

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Mr Cleary: In our discussions of Bill 118 in recent weeks one thing has made itself clear, and that is that the government and Hydro officials have suggested there has been wide consultation on the amendments to the legislation. In that vein, I would like to ask you whether you would extend the same degree of openness to an Ontario Hydro project study already under way for additional generation to be installed at the Robert Saunders power generating station in Cornwall?

I have with me today a copy of a proposal which outlines the logic of a potential Ontario Hydro public relations opportunity alongside the construction of any new generator. The idea would be a park tourist attraction to be developed adjacent to the dike closure structure of the Robert Saunders dam, and that is right in the St Lawrence Parks Commission area, and to be considered as part of the whole view of Ontario Hydro service in that area. I would like to ask you whether you and your staff would consider allowing local service clubs to participate in any discussion for modifications that may be made in that location and that generating station with respect to the proposal for a park which would allow Ontario Hydro to make a favourable impression on the tourists in eastern Ontario.

Mr Eliesen: I am aware of the fact that we are currently rehabilitating the particular station you refer to. We are certainly open to listening to any group, service clubs or what not, which has specific representations to make, and we certainly will see whether we can accommodate what it is putting forward. But I personally, at least, am not aware of receiving such representations. If you pass over to me what the concerns are I will be more than pleased to look into them.

Mr Cleary: I have a copy of it right here and I told them that I would try to see you today to have their input into that project. With that I will pass, because I know my colleagues have a few questions.

Mr Brown: I wish we had a little more time. I too would like to welcome Mr Eliesen to the committee. I have been puzzled totally by the fact that we have an update to the DSPS -- it is a 25-year plan. I spent one very hot summer reviewing the plan, remembering that there were brownouts during the time we were considering it.

First, it appears to me, having looked at this, that the update is within the range of the first plan. The first plan had very broad ranges of what would happen, a kind of staged: "If this happens, this is what we do. If it doesn't happen, this is what we do, etc," as you go through. I have not detected much change, other than to note that I think your policy can be clearly outlined as high-cost, because I have a lot of evidence showing that rates are going to increase dramatically. I would suggest to you that even within your own speech you allude to that: when your demand drops, the price has to go up to cover that cost -- that is pretty clear; that is the way it is in all businesses -- and that you are committed to a fossil fuel future, you are committed to CO2 emissions, you are committed to NOX. That is what you are committed to. That puzzles me as somebody who went through the former plan, which did at least mention the environment when the speeches were given.

Mr Eliesen: Mr Brown, the only thing I can say is, I reject everything you have just said.

Mr Brown: I knew you would.

Mr Eliesen: It is not the update that I am familiar with and it bears no relationship to what we put forward before the Environmental Assessment Board. In fact, it is just the opposite of what you have indicated. The road we are trying to go down is to avoid the kind of rate shocks we are experiencing today, not as a result of decisions today but decisions taken 10, 12, 13 years ago. People talk about power at cost. Darlington nuclear station was built at power at cost. Ping-pong construction was -- sorry?

Mr Brown: Can I ask you about that, then?

The Vice-Chair: I am sorry, Mr Brown, but your time is up. You may finish what you are saying.

Mr Eliesen: Just simply that the update emphasizes the low-cost alternative and that is with demand management being the preferred route for anyone concerned for the environmental.

Mr Brown: But that was in the plan before.

Mr Eliesen: It was, but not to that concern. The 3,700 megawatts becomes 5,200 megawatts, so there is a larger component of demand management in the update than there was in the original plan.

The Vice-Chair: We will now move on to the Conservative caucus and start with Mr Jordan. I will let you know when you are about halfway through your half-hour so that you can make a decision.

Mr Jordan: Thank you, Mr Eliesen, for attending, along with your vice-presidents and senior executive people. Certainly we appreciate your taking the time to come before this committee. As you know, we have travelled across the province. The real subject here today is Bill 118 and that is our concern, basically. First of all, my question to you is, why does the government want Bill 118 in order to take control away from Ontario Hydro's chairman and board?

Mr Eliesen: I believe that is a more appropriate question to raise with the government. I have always believed that the role and accountability between the government and the utility is something for the government to determine. We do not determine the rules of the game. The only reference with regard to Bill 118 which I can comment on, which I have commented on in my opening remarks, is really on fuel substitution. I guess the whole area of accountability and responsibility and policy guidelines etc is something that should be directed to the government itself.

Mr Jordan: That might be a fair assessment from your perspective at the present time, but I am sure that when the bill was being written and being presented in June 1991 you were well aware of the contents and you were well aware of the effects that it would have. Increasing the board members in numbers -- there was no real purpose in doing that that we can assess. As a matter of fact, we feel that a smaller number on the board would be a more efficient management group.

I am concerned that you have a contract yourself for five years, I understand, and that your board members are not going to be held accountable for their actions. So in my opinion, here sits the Minister of Energy, who is going to take it in the neck if this conservation program, which Mr Franklin quoted in the estimates hearings of a year ago, is very difficult to measure. Out of the discussion at that time came the fact that every three months we would get a report from the Minister of Energy as to the megawatts saved. I do not want to put too much in one question here. I want to concentrate on Bill 118, if you do not mind, and the powers it gives the government over Ontario Hydro.

Mr Eliesen: First, I want to state in the most unequivocal way I can that when the Premier made me aware of his intentions to nominate me as the chairman of Ontario Hydro, I quickly and immediately absolved myself of any perceived or real conflict of interest. I am aware of the fact that there have been allegations made that I was involved. Let me assure you and members of the committee that when I was informed by the Premier of this, any matters under my responsibility dealing with Ontario Hydro was quickly referred to the assistant deputy minister. I had no involvement in the preparation of any of the policy material that went to the cabinet, I had no involvement whatsoever in the preparation of Bill 118, and I did so deliberately to avoid the kind of suggestion that people would make: that somehow I would be in a conflict of interest.

Since 1972 I have been a deputy minister for five different governments in three different provinces under eight or nine ministers of the crown. As a professional public servant I know very well the importance of avoiding the kind of conflict you refer to. So I had no involvement at all in the writing or the approval or anything whatsoever of Bill 118.

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Mr Jordan: I guess I do not want to dwell on your personal involvement, Mr Eliesen.

Mr Eliesen: Well, you asked the question, Mr Jordan, and so I am responding.

Mr Jordan: I asked the question as to why you felt it was necessary at that time to have government control. It is basically what Bill 118 does. It overrides the board of Ontario Hydro.

Mr Eliesen: My only answer is that that is a question you should ask of the government of the day. Any government, in my judgement, is the people penultimately responsible for the crown utility and they have to account for their actions. The minister, I am sure, has given the reasons and the government has given the reasons why they are moving in this way.

Mr Jordan: I think I would like you to try and picture it as the chairman and chief executive officer with a board of directors running a large corporation. Here you are getting policy directives -- not policy statements; policy directives -- coming directly from the Minister of Energy to you and your board which state that they must be implemented immediately. They are going to bypass the Legislature. I, as a member for my riding, because I do not happen to be a member of the government, am not going to have a chance of any input into those directives. It is going to be a strict, dictatorial directive from the Minister of Energy to the chairman and his board, and the board has been told: "Carry them out immediately. You will not be accountable."

You think about a large corporation. Give me a parallel of one that is run that way.

Mr Eliesen: As I indicated in my earlier answer, really that is a question you should ask of the government. The question of directive power is one that has been included in other jurisdictions. The extent of its utilization is limited. I have always, as a public servant, believed that it is the government which has to set up the long-term policy guidelines for Ontario Hydro to operate under, because it is penultimately responsible. I am not elected and neither are any of the members of my board or senior management. So our shareholders are the people of the province, reflected in the government of the day. We have to respond, quite rightly in my view, to those policy directives.

If we disagree to such a degree, then we have a choice. We can walk away from our responsibility. But my understanding of Bill 118 is that the power is there to be exercised for long-term policy direction and that the commercial, day-to-day operation continues with Ontario Hydro.

Mr Jordan: Where is the planning if you are only going to give day-to-day operation to the board and the president? My God, all the long-range planning -- I do not know who is going to add to the Minister of Energy the capabilities to provide this long-range planning, this expertise and research, that you have within your corporation. I just cannot see that you are comfortable receiving these directives from the Minister of Energy telling you how to run your corporation.

Mr Eliesen: If I receive directives which I feel are improper or imprudent, then I have a choice and so do members of the board of directors or, for that matter, senior management. If our professional integrity is being called into question on what we believe, we have a choice. But, again, to go back to the basis of your question, we are not the elected people. We are not accountable in the elected sense for Ontario Hydro. Our shareholders are through governments, and I just cannot conceive of a situation where Ontario Hydro goes off on its own road without any relationship to the government of the day.

Mr Jordan: I think that is where we are differing. In all due respect, Mr Eliesen, you are saying that your responsibility is to be accountable to the government of the day. I am saying that your responsibility and that of your board members is to be accountable to the ratepayers of Ontario Hydro, because we cannot flip-flop our direction with a corporation of this size every time the government changes. We have got to get our sights on something and planning and stay there to have any stability. What do you suggest I tell major power users to create in their minds some certainty of cost, some certainty of supply? At the present time they are just throwing up their hands. They say, "We don't know where we're at."

Mr Eliesen: With respect, we want people to judge us by our actions. In the actions we are taking, it is just the opposite. We are trying to control the escalating costs that have taken place over many years. We are reviewing all the cost elements which are going into the rate base, as I made reference to in my prepared text: the kind of contracts, whether they are coal or nuclear, the kinds of administrative costs. I would want the members of the Association of Major Power Consumers of Ontario and the industrial firms to look at our actions and what we are doing to control costs. I would want to be judged on that basis, because that is the only basis upon which the ratepayer will have that comfort level for the future.

Mr Jordan: I am glad you raised that point, Mr Eliesen, because we have been pressured, if I might use that word, or seriously questioned as to the operation, maintenance and administration costs at Ontario Hydro relative to other corporations of a similar makeup. Do you have any plans to bring the OM&A costs into line, or do you see them as being out of line?

Mr Eliesen: Right now we are going through a major exercise within the corporation of controlling our administrative and operating costs, and we are having some success. I hope our success will be reflected in the rate increases, which hopefully will be lower than anticipated in the future. We hope we would be judged on those actions.

Mr Jordan: How do you plan to eliminate costs?

Mr Eliesen: We are going through line by line. We have just completed an exercise within the corporation of going through each branch, through productivity improvement measures and measures related to quality management. There is a new era of labour-management relations with regard to society and CUPE 1000. We are participating in a joint matter, not in an adversarial way, which had been a characteristic of the past. So there are very positive things taking place. Obviously you cannot do it in one single day, but the movement is there. It is very positive to costs and I hope it will be reflected in a lower rate than would be necessary when we petition the OEB in April.

Mr Jordan: What percentage of the Hydro rate increase reflects the OM&A budget?

Mr Eliesen: I believe you are talking now of 1992.

Mr Jordan: Is it 3% or 4% of your present rate increase?

Dr Kupcis: No, less than 1%.

Mr Jordan: Due to OM&A?

Dr Kupcis: Less than 1%.

Mr Eliesen: Do you want to provide that answer?

Dr Kupcis: Sorry. As has been indicated before, Mr Jordan, it is Darlington coming into the rate base that is a large driver for the rate increase.

Mr Jordan: There have been two figures on that. I just heard 6% today and 3.5-

Dr Kupcis: No, that is coming into the rate base through depreciation and interest costs being charged to the rates. That is not an OM&A cost.

Mr Jordan: No. That is separate.

Dr Kupcis: You were asking how much of the OM&A increases has contributed to that increase of 11.8% in the last year. It is in the order of 1%.

Mr Jordan: What is your objective for it? Are you going to reduce it?

Mr Eliesen: It is our intent to drive it down as low as possible. We have to do that, consistent with demands being placed upon us in the context of reliability and maintaining the security of the system. But I am indicating to you that in the short period I have been at Ontario Hydro we are having some significant success. We hope that can translate into lower rate increases than would have been anticipated without these measures taking place.

Mr Jordan: Also, Mr Eliesen, you have indicated a considerable dollar saving. You just mentioned one in Thunder Bay which is good; it is a $7-million saving per year to one customer through the incentives provided by your corporation. Of course, looking at it from a business point of view, it is also $7 million lost in revenue to the corporation.

Mr Eliesen: Not to the company. The company being impacted has $7 million less in costs.

Mr Jordan: Let me finish, please. We are saying a kilowatt saved is a kilowatt made, but we seem to be forgetting that it is not. It also includes a kilowatt not sold, relative to your revenue. It is going down, down, down.

It is the same as the Ontario government is beginning to realize. The revenue is not there to implement the Agenda for People. They would like to, but there is no revenue there to do it. You are going to find yourself in the same situation here, with revenue going down, down, down and rates going up, up, up.

Mr Eliesen: With respect, it is just the opposite. Our demand management programs, our energy conservation programs, are the lowest possible avoided costs. I will ask Marion Fraser, if you are interested, to give you some of the details of the kinds of programs we have been involved in to reflect those kinds of savings.

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Ms Fraser With respect to industrial programs in particular, many of the large corporations that have been represented by AMPCO have participated very heavily in our programs. In the example you use of CP Forest Products, the $7 million, essentially what that does is free up a kilowatt that we can sell to somebody else rather than producing it. Particularly if it is on peak, we are saving the fueling costs, the coal, and the impacts in terms of CO2, so there are very many benefits. In every case, our demand management programs cost less than the --

Mr Jordan: Than the building of a new plant.

Ms Fraser: -- the avoided cost.

Mr Jordan: So that is the saving you try to relate, but I hope we are not getting so concentrated on the conservation and efficiency aspect that we forget completely the revenue aspect and then all of a sudden wake up some morning and say, "Where did all the money go?"

Ms Fraser: What we are looking at is reducing the total electricity bill of the province. If we can do that in a way that is less expensive than building a new plant, I think the province is better off as a whole. That is what we are interested in doing.

Mr Jordan: It seems to come to mind that we are looking at existing industry, existing loads, existing equipment that uses electricity. We must be thinking also -- I am sure you are, although it is not being portrayed here -- of the new uses that are coming on the market for electricity.

Ms Fraser: Exactly. There are many more new uses.

Mr Jordan: And very substantial ones too.

Ms Fraser: Yes. That electricity also is required to be of very high quality, high reliability. Things like power electronics, variable speed drives, all that sort of thing -- that industry is very important, and the path we are following will give us a lot more flexibility to deliver that kind of reliability.

Mr Jordan: Our concern is that your conservation program at best might meet the existing growth without the new loads coming on. We are not going to stay in this recession.

Ms Fraser: Absolutely not. There will be growth. Right now the recession has certainly had a very severe impact in terms of our load for this year.

Mr Jordan: Can you separate that, when you say you have saved -- was it $600 million?

Ms Fraser: It was 600 megawatts.

Mr Jordan: Sorry, 600 megawatts. I am mixing it up with dollars. Can you separate that from the recession?

Ms Fraser: Very much so. In fact, in order for us to account for those megawatts -- for instance, in commercial and industrial, those are projects that our field staff are actually involved with. In the example with CP Forest Products, there is basically a joint energy management team composed of CP staff and Ontario Hydro staff. Those savings are registered right on the meter.

We have some major projects in downtown Toronto; for instance, the new building that IBM put up at 3600 Steeles Avenue. Because it used thermal cool storage technology to improve the efficiency of its cooling system, it actually reduced its load by 1.8 megawatts from what it would have been when that new building was built. We tracked that with engineering analysis and calculations, and they are actually finding they are getting more than they expected out of it in terms of savings. So with each one of those projects in commercial and industrial, we work very closely with the customer to make those savings happen.

Mr Jordan: My concern directly is for the people in the riding that I represent, who have sawmills and so on. The projected rate increase puts them out of business. Between the rate increases and -- I know this has nothing to do with Ontario Hydro, but the new building code being enforced as of January disallows any lumber that is not graded being used on farms, so the sawmill operator is out of business, because that was not the type of business he was in. He was in the ungraded lumber and so on. If you take that together with the increases in hydro, he is losing his market and he cannot afford to pay the hydro bills.

Ms Fraser: Maybe there are some opportunities to reduce his electricity bill and his energy bill, and we can help him do that.

Mr Jordan: These are relatively recent, upgraded sawmills where they went from diesel to electric with the new efficient motors. They are a very good operation that way. I just noticed that Mr Franklin had said, the last time he was interviewed here, "It is only when we have done all of those economic things first that we believe we should turn to the next supply item, which is new generation."

So that thinking is not new, and this is what scares us a bit. If we were not in the recession -- Ontario Hydro was doing this without government interference. It was doing this.

I want to come back and close with Bill 118. I say we do not need it. You people are quite capable of running Ontario Hydro. You do not need policy directives from the minister. We just do not need it. I still say that you should be supporting us in asking us to ask the government to withdraw that bill.

Mr Arnott: I have just a couple of brief questions. On page 4 of your presentation, Mr Eliesen, you talk about reliability of service and about Ontario Hydro being very reliable: number one in Canada, number 11 in North America. Why are we not number one, and what steps are you taking to make us number one in terms of reliability of supply?

Mr Eliesen: Is your question why we are?

Mr Arnott: Why are we not number one?

Mr Eliesen: Sorry; we are number one in Canada.

Mr Arnott: In North America. What steps are we taking?

Mr Eliesen: Let me assure you that being number one in Canada and being number 11 of 1S2 utilities is quite an impressive performance. It is not simply a performance that we recently achieved; this has been consistent through Ontario Hydro's history. But you are right; we should try to be number one of the 152 utilities. That is why in my speech I emphasized specifically the kinds of investments that are taking place in rehabilitation in both the generation and transmission areas to ensure that the high degree of reliability that the Ontario ratepayer has received from Ontario Hydro will continue in the future. Those are the kinds of investments we are making in order to ensure that reliability is enhanced in the future.

Mr Arnott: The issue of whether you build new capacity or you regenerate or rehabilitate used capacity -- I have raised that question with some knowledgeable people. They tell me it is something like buying a new car versus fixing your old car. At some point you cannot continue to fix the old car; you need to buy a new car. How would you comment on that? Is that an applicable analogy?

Mr Eliesen: To some degree, yes. You also learn from others the way they have repaired their cars and the kinds of experience they have had. In this context, the context of fossil-fuel plants, we are learning from the experience of others who have been involved in the business of rehabilitating and extending their usual life. They are finding and it is being reported that the experience has been quite significant.

Maybe I can ask Al Kupcis to provide some additional information in this area.

Mr Kupcis: I think the analogy is useful to get your mind in gear on a personal level around what we are talking about. I might put in the fact that we have a hydraulic plant that is over 80 years old and we keep rehabilitating it. As long as the safety and economics of that rehabilitation still hold, that reinvestment in the infrastructure is still the economic thing to do. So today we do not talk about a lifetime for hydraulic plants, because our experience has shown that we get a long life out of them as long as we look after them.

The fossil plant which we have in our DSP update indicated we will take a life management approach to as opposed to shutting down after 40 years reflects also a utility experience worldwide of the reality that in terms of replacing boilers and piping components there is no need to stop at 40 years. You might not get 100 years out of it, but certainly life-extending for the 20 or 30 years that the industry is now expecting through life management approaches is still by far the lowest long-term economics of continuing your infrastructure. The car analogy is, yes, at some point you do have to get a new car when your chassis and body are eaten away by rust. We think 40 years is not that point right now for fossil.

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Mr Eliesen: Mr Arnott, if I could add one supplementary observation, at times, particularly in the current environment, we may not be given an opportunity of buying a new car. The regulatory and environmental as well as the judiciary process is such that we do not have an alternative of going out, or the alternative of buying a new car is so uncertain and so financially risky and the exposure to us as a result of doing that leads us to look more seriously at rehabilitation and life extension.

Mr Arnott: If you look a few years down the road and your demand management initiatives, in spite of the significant billions of dollars you are prepared to commit to that part of your policy, are not successful, do not save the numbers of megawatts you hope, then what do we do?

Mr Eliesen: We have a whole variety of contingency plans. That to us reflects the benefits of the update. We know we can add additional supply with much greater ease. This includes combustion turbine units, it includes non-utility generation, it includes some of our mothballed plants, for example; so there are a variety of mechanisms whereby we can easily bring in additional capacity on an economic basis.

Our problem right now, given the level of demand, given the additional supply, is that we have had to manage the possibility of perhaps surpluses taking place on our update. No doubt you are familiar with non-utility generation. We have a situation right now where we have expanded the program so considerably that we have to manage the success of the program so it does not come in all at the same time when we do not have a need for it. More specifically, we know there are all these contingency altematives available to us if the world changes dramatically and the demand escalates the way it did during the 1980s.

Mr Arnott: One of my biggest concerns if I look long term is that if Ontario Hydro does not have the capacity that is required for our economy, Ontario Hydro will be forced to upwardly manipulate the price of hydro so as to effect conservation. I am wondering if you can rule that out categorically, that in your opinion that would never be required.

Mr Eliesen: If your question relates to whether we should look at rate increases as a method of enhancing conservation, yes, we rule that out. Electricity is an essential service and we do not believe rate increases should be a method by which we restrict the consumption. We do say, though, at the same time, that there is a whole variety of mechanisms and programs that Marion Fraser is involved in and are being successful.

Let me assure members of the committee, this is not pie in the sky. This is real. When I say 600 megawatts, it is real. It is like a reactor at Pickering. We take a look at the experiences at some of the large utilities in the United States -- and these are private utilities, based on rate of return, regulated etc -- and at Pacific Gas and Electric, 75% to 80% of its increased load is going to come from demand management and energy conservation. So we are talking about real things that apply both to the private sector as well as to ourselves.

The Vice-Chair: Mr Arnott, you are rapidly running out of time and Mr Jordan wanted to speak. A quick one.

Mr Arnott: With a new Minister of Energy now -- and I would like to bring us back a bit to the period before the government was sworn in -- I believe he speculated in the newspaper that he was going to be Minister of Energy and that one of the programs that might be considered would be free refrigerators so as to reduce the demand on hydro. If the new Minister of Energy is given the directive power which is inherent in Bill 118, what is to stop him from giving free fridges out to every place in Ontario right before an election?

Mr Eliesen: My simple answer to you is, that minister and that government will ultimately have to be responsible for the decisions they take.

Mr Arnott: So you do not feel you have any responsibility in that respect.

Mr Eliesen: Certainly. I have a professional responsibility to tell the minister and to tell the government the pluses or minuses associated with the program, the costs and what it means to the ratepayer. I have a mandate and a responsibility to do that and I certainly would carry that out, but if the minister and the government felt it their prerogative to do so, then they penultimately are the ones who are going to be responsible. I will ensure that our input and our knowledge are both privately and publicly articulated on where we stand on the issue. That is our professional responsibility, but penultimately it is the government of the day that is responsible for those powers.

The Vice-Chair: Mr Jordan, very quickly.

Mr Jordan: Previously the president has said, "We have said, for the base load, in our opinion, the most economic and environmentally sound decision is to use nuclear power." That is for the base load. "For the intermediate load, we believe we should use coal, properly equipped with scrubbers, and to that extent we can rely on our existing coal stations to handle that once they are so equipped, and we say that if demand continues to grow beyond that, we should use gas turbines for the very few hours a week or day that you need it for peak load, because of the CO2 emissions."

We are being told here that nuclear is the most benign to the environment of all the base loads they looked at, and we seem to have turned the ship around now. No? You do not think so?

Mr Eliesen: I told you before, Mr Jordan, that all technologies in generating electricity have some impact on the environment, whether it is nuclear in the context of waste and health and safety, whether it is hydraulic in the flooding of lands, or whether it is fossil with regard to global warming and NOX, SOx and what not, so there is no one particular technology. I believe personally that it is society, through responsible governments, that has to make the penultimate choice. What we have been able to do is emphasize demand management, which has a benign -- or nearly -- effect on the environment, and to push that as a number one priority.

Mr Jordan: What do you plan for base load?

The Vice-Chair: Thank you, Mr Jordan and Mr Arnott. Mr Huget, you have half an hour, starting now.

Mr Huget: Thank you, Mr Eliesen, for taking the time to appear before us today and give us your views.

I think one of the things that has impressed me over the last several weeks of public hearings is the debate about a conservation efficiency strategy and a building-of-supply strategy that seems to have come out of almost two opposing camps, if you will.

I am interested in clearing up something for my own perception. I have heard the figures bandied about during the hearings, but I wonder if you could enlighten me in terms of the cost of building, for example, a megawatt of supply as compared to the cost of conserving a megawatt and what impact that would have on Hydro and ultimately, in the long run, on the consumers of the province.

Mr Eliesen: I am going to refer to my colleague here to give a more general answer. The one observation I will make is that demand management or energy conservation is not new in Ontario Hydro. It has been re-emphasized in the whole context of an opportunity now with fuel substitution, and I do not mean natural gas. Fuel substitution involves other possible fuels as well, whether it is wood waste or oil or methane gas or what not, but it does provide an opportunity for us to enhance the demand management programs both directly through Ontario Hydro as well as through the government through a mandated area. It is the cheapest form of generating electricity, but I will ask Dane MacCarthy to provide some of the more specific comparisons.

Mr MacCarthy: If we look at the cost of new supply, it would vary depending on the particular supply alternative that is chosen. If we are talking about nuclear plants we are talking about $3,000 to $4,000 per kilowatt. Typically our demand management programs are substantially less than that, in the order of maybe $500 to $600 per kilowatt, in terms of avoided cost. So there is a significant advantage to the demand management initiatives in terms of comparing it with other supply alternatives. When we move down into our fossil plants we are into the $1,500 to $2,000 range per kilowatt, and again our demand management would still be significantly less than that.

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Mr Huget: You mentioned fuel switching briefly just a second ago, and of course in your presentation. If we look at that cost factor, what impact do you see fuel switching having on rates in the province?

Mr Eliesen: We would regard fuel switching as simply another opportunity to ensure that the long-term electricity costs are lower than they would be without fuel switching. This approach has been consistent at Ontario Hydro. I mentioned Bob Franklin and his policy, which continues under myself. I will ask Marion Fraser. Perhaps she can go into some detail on where we would see fuel switching providing another program or activity of a whole variety of activities we have evolved on demand management.

Ms Fraser: What removal of the prohibition against fuel switching will allow us to do is to really widen the range of tactics we use with customers. This becomes quite critical, particularly dealing with commercial and industrial customers. Most of the discussion, I have noted, that has taken place in these hearings has really dealt with residential space heating, but when we are looking at overall energy management in a commercial building, for example, very often you have to be able to look at the total energy package of a building. That is what the new Association of Heating, Refrigeration and Air Conditioning Engineers performance base standard does; it uses an energy budget as opposed to just looking at electric options versus the gas options, and very often it is a blend of these sorts of options that makes the best sense.

If we had to pursue a path, as we are right now, where we could not look at the substitution of gas for electricity in that kind of situation, you may be getting the second-best kind of solution for the customer overall. You may be leading them to something that is more efficient electrically, but if you looked at their total energy use and perhaps blended in things like load displacement, cogeneration, along with gas absorption chilling and using a heat pump to move the heat from the warm middle parts of the building to the colder perimeter in the winter and things like that, you are really looking at the total balance of the building and that is really where I think the critical points will come in.

I think we basically agree with the municipal utility perspective that with respect to electric water heating, for example, it is just such a good deal for the customer that he is going to do it anyway. I know I switched mine about three weeks ago.

Mr Huget: Just sticking with the efficiency and conservation issue, I hear a great deal about the success of your conservation programs. I wonder if you could elaborate on some of those programs with some specifics in terms of how much energy you have saved and how you have done it. I guess I am interested to know how that is in reality, because you certainly hear a lot about the success of those programs.

Mr Eliesen: Just in a general way and then I will pass it over to Marion, I think the degree of success has surprised a lot of people, and a lot of people within Ontario Hydro. We have been at it now for roughly three years, and leadership was provided by Dane MacCarthy on my left here. It exceeded far more than anyone's expectations the kind of megawatts that could be saved, to the degree that now we are over 600 megawatts after roughly a two-and-a-half to three-year period of the various programs. But to give a little bit of definition rather than these large ballpark numbers, Marion can review some of the specific programs and how it relates so people can understand.

Ms Fraser: Probably one of the most successful programs we have is Savings by Design, which is a program that applies to commercial and industrial heating, ventilation and air-conditioning applications. That is a long-term program in the sense that it takes a while to work with the consulting engineers and the design people. So they do not always happen immediately but we have a lot of commitments as well as projects that are in service. We currently have over a thousand applications, and these are from many of the large users and direct industrial customers we have. We have 354 of those projects in service. There are another 155 committed. It is just a matter of installing the equipment, and the customers are working on that. That has really been done in the last two years as that program revved up.

Among some of the major projects we are talking about there is almost a two-megawatt saving at First Canadian Place and over a one-megawatt saving in Hydro's own chemical research laboratory, by using a heat pump rather than resistance heating. The Toronto-Dominion Centre saved over half a megawatt. The same thing with the Shipp Centre out in Etobicoke: When it was built it used that new thermal cool storage technology. The list goes on and on.

The other major program in commercial and industrial is lighting. That program has achieved about 76 megawatts of actual savings. Those savings are very valuable to us because quite often the lights in commercial and industrial buildings are on not just two or three hours a day, as the lights in your house are on, but 12, 14, sometimes 24 hours a day if the plant is working three shifts.

In addition to the 76 megawatts we have actually saved, there are about another 70 megawatts of savings committed on the books now. Also, we are looking at major savings in a project with a major mining company in Sudbury. We are looking at saving more than four megawatts over three years just in their lighting application alone. Carleton University represents the largest installation of T8 lights, a more advanced version of fluorescent lights, which are much more efficient in North America. They have saved almost a megawatt at Carleton University, with an incentive from Ontario Hydro of $770,000.

We have in industrial another accelerated payback program which helps customers make process improvements in their actual industrial process. We have had some fairly substantial projects there as well. Laidlaw Waste Systems has improved its steam turbine drives. Stelco has done some fairly major projects as well. Then there is CP Forest Products, one we mentioned earlier.

In addition, we have a street lighting program that is literally tearing up the province in terms of replacing street lights. Over 111 municipalities have already changed their lights as a result of that program and we have another 100-some applications under way. We are looking at savings in North York of almost two megawatts; Scarborough, two megawatts; Hamilton, one and a half, and so on. Those are pretty substantial savings.

In the residential sector we have a whole range of programs to deal with the very varied types of savings that are potential in the residential market. We have heard quite a bit about the lightbulb program that was run this fall. That, we currently estimate, has achieved savings of about six megawatts, and the actual cost of that program was about $1.5 million less than we originally estimated. We are working on a refrigerator buyback program, we have coupons on compact fluorescent lights, ground-source heat pumps and so on, a whole range of things, because obviously you do not get a huge hit in residential; you get a lot of little ones.

Mr Huget: In your experience, first, do you feel you have exhausted the potential for energy conservation and efficiency? Second, what has been the reaction from the public and the business community?

Ms Fraser: No, we have just begun to scratch the surface of energy efficiency. We are working with the federal and provincial governments on targets of around 20% savings in their buildings. That will make for some pretty significant savings when you think about how many government buildings there really are in the province. The city of Toronto is also looking at a fairly aggressive program. We have just completed audits which have identified savings in excess of 20% in their buildings. I think we are just beginning.

In terms of how business and customers feel about it, our most recent research basically says that the more we are involved with customers, helping them to manage their energy services, the better they feel about the product, the company and the degree of service they are getting. It increases the opportunity for a positive relationship when we start building that over time rather than dealing with it as a one-of kind of a situation.

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Mr Jordan: As long as it is there when he flicks the switch.

Ms Fraser That is certainly the most important, and that is what we are aiming to do.

Mr Jordan: I have a lot of experience with customers; they can turn on you very fast.

The Vice-Chair: I remind Mr Huget that two of his colleagues would also like questions.

Mr Huget: Thank you. One final point: Briefly, you mentioned that the recession is at least one part or component of the update to the demand-supply plan. I am curious to know what your experience is of other utilities having to deal with this recession issue and what impact it has had on other utilities.

Mr Eliesen: As I mentioned in response to some of the earlier questions, Ontario Hydro is no different from other utilities, whether in Canada or the United States. Our experience in context with other utilities has shown that they find themselves in similar positions, where their level of demand is down significantly. Again, the two main factors are the economic downturn, which everyone is experiencing in North America, and, given various degrees of success, the demand management programs. That is why you hear, for example, from the eastern seaboard that the level of demand required there, particularly what Hydro-Québec was going to supply through James Bay, is now being reviewed by the New York Power Authority and other users, because the need is not there the way it was perceived two years ago. It has been pretty dramatic. It is not only happening here in Ontario; it is happening in other provinces and it is happening throughout North America, for that matter.

Mr Huget: I defer to Mr Jamison.

Mr Jamison: Thank you, Mr Eliesen. I do not usually sit on this committee, but I am pleased to be here today to hear what you have to say.

My responsibilities with the government are with the Ministry of Industry, Trade and Technology. I have become very aware that just-in-time delivery in the industrial sector is a very important aspect of doing business. So when you talk about that, I am very pleased to hear about Ontario Hydro not building beyond what would be needed.

I think your explanation here today is a valid one not just for Ontario Hydro, because people talk about Hydro as a crown corporation in one sense and then other people talk about how it should be left on its own to be run strictly as a business without the general good of the population taken into account. I think it is important that you have moved with and recognized the times, because too many people have seen Ontario Hydro as not able to do that in the past. I think that is very important.

I have a question. It really deals with energy efficiency and the way you can help companies in that area to be more competitive, because that is a major question today in our economy. How can we be more competitive? How can we get there? I wonder if you can tell me the kinds of programs -- for example, you mentioned a company that is very important to the area I live in, Stelco, in my riding. How have you helped Stelco become more competitive, bringing down the amount of energy usage within that plant and at the same time making it more competitive in the global marketplace? There are other companies, like Esso in refining. I imagine there is probably some cogeneration that could take place in a number of places like that. That is the question. How have you helped in those areas?

Mr Eliesen: Marion, this is your forum.

Ms Fraser: I guess so. I am looking for the project description of some of the work we have done at Stelco, a project under examination there that could save about 440 kilowatts -- that is half a megawatt -- which is quite substantial. Some of these projects of course are, because of the nature of the industry, confidential. I cannot tell you the details of all of them, but certainly improving the competitiveness of Ontario industries is something that is front and centre.

A few weeks ago I was having discussions with our field staff in terms of what they saw our business being, and unequivocally they came back and said that what we are in business to do is help our customers stay in business. They see very much that the kinds of projects they are helping customers identify in terms of energy savings, whether it is replacing lighting, whether it is putting variable-speed drives on motors, whether it is high-efficiency motors themselves, are very critical to doing that.

When we did our original estimates we did not see as much potential in the industrial sector as we did in the other two sectors, because we assumed that if they had been "good business decisions" they would have been made, with reasonable paybacks.

But we are finding that industry needs to see where a project has been done before. They are very keen on making sure that their process works well. If we can give them information or demonstrate where another company has used that kind of technology, they are much more likely to try it themselves. That is the approach we take. I used to use a lot of testimonials in newsletters and sales presentations that our field staff do with particular customers. As I said, in some cases we are actually putting Ontario Hydro staff in plants for six months to work with the energy management committee or help to establish an energy management committee. From the response we have had back from customers, it has been very positive.

Mr Jamison: One more?

The Vice-Chair: Yes. Please leave time for Mr Klopp.

Mr Jamison: You went on to describe one area. I think you mentioned CP Forest Products having savings of $7 million?

Ms Fraser: Correct.

Mr Jamison: In an area that is under some severe pressure for a number of reasons, I find that to be very significant, because again, there has to be money for reinvestment purposes in that industry, for upgrading technologies and so forth. Could you describe to me what was done there?

Ms Fraser: That project is really developing an overall energy management program and helping the customer shift its use to off-peak times. As you know, now with large users and direct customers we provide time-of-use rates which allow them to utilize off-peak power, which is less expensive. Being able to shift their operations to those times is quite a benefit for them. Their bill last year, just as an example, was $60 million. Bringing that down $7 million is more than a 10% reduction, so that is quite significant for them.

Mr Jamison: I defer to Mr Klopp at this point.

Mr Klopp: Thank you very much. It has been an interesting day. Unlike Leo, I went on farming; I did not get into the electrical business. I decided to do something that did not make as much money, but that is the way it goes.

Mr Jordan: You made other mistakes too.

Mr Klopp: That is only one mistake I made. However, over the last couple or three weeks we have been hearing a lot of criticism that has tried to tell me that Ontario Hydro is only really benefiting cities and people and industries in those cities. I come from a rural area and I feel that we need to have some benefits for the farmers, especially our industry -- agriculture. Are there any benefits that Ontario Hydro has to help us reduce our energy needs and save me money?

Mr Eliesen: There is a whole variety of programs, and I am about to get Marion to go into some detail. But before I do so, I should make a general observation with regard to the rural area. There is a benefit, quite a significant benefit, included in the act. It provides a subsidy for the rural ratepayer, to the tune of roughly $110 million on an annual basis. That is a discount in the rates the rural people get compared to people within metropolitan areas. In addition to that, there is a whole variety of significant programs, whether it is ground heat pumps or what not. Maybe I will ask Marion to give a general description.

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Ms Fraser: Certainly. We have a number of programs that deal specifically with the farm population. We have an audit program which provides an in-depth audit of the farm operation, to help the operator identify where he can make savings. We had a special on last year in terms of low-wattage heat lamps and we saved about a megawatt there. That is quite a few lamps when you start to add it up. In terms of lighting improvements, which would be both high-pressure sodium and compact fluorescent, this last year alone there were three megawatts of savings in farm operations. That provides some pretty substantial benefits.

If I go back to the research I was talking about earlier, if you looked at it as a popularity poll, our agricultural customers are probably the happiest of all with us in terms of the kinds of service our agricultural field representatives can give them. They have been working very closely with them for quite some time.

Mr Klopp: The changes with regard to Bill 118 are not going to inhibit those but only improve them, I assume. The rural area is not going to be forgotten?

Ms Fraser: Oh, absolutely not.

Mr Huget: With regard to Hydro itself, I think we have heard some criticism from various sources over the course of the hearings in terms of Hydro's costs and issues related to costs. Seeing as I am talking to the boss of the corporation, I would like to know what Ontario Hydro has undertaken since you have become chair to deal with the issue of costs and reduced expenses.

Mr Eliesen: I cut my salary.

Interjections.

Mr Eliesen: As my colleagues around the table have mentioned, I froze some of theirs as well.

Mr Huget: You are not alone, Mr Eliesen.

Mr Eliesen: We have undertaken a significant exercise within the corporation to try to get a better handle on costs. Obviously there are fixed costs that we cannot deal with overnight. Our interest costs are roughly 35% to 40% of our overall costs. Whether we like it or not, we have to pay the interest on the long-term debt. More specifically, though -- and I believe I mentioned this earlier in one of my replies -- we are looking at the Ontario Manual of Administration, we are looking at administrative costs, we are looking at fuel costs and we are making significant changes there. I am not in a position today to make any specific announcements on some of those cost measures, but I think they reflect a change from past activities where perhaps the long-term contracts prevented some of those changes from taking place.

It is important for Ontario Hydro to ensure that its ratepayers pay as little as possible and I believe we will be successful in the long run. Unfortunately the large double-digit rate increases we are experiencing this year are a reflection of decisions made many years ago. I think it is important for people to focus on that so we avoid making those errors now, which means ratepayers in the future will be subject to those same kinds of rate increases. We are trying to avoid those financial risks and exposures, those long-term financial commitments that have caused the utility to carry a lot of heavy costs during many years. I believe we will be successful.

The Vice-Chair: You have about two minutes left of your caucus's time if you have any questions left.

Mr Huget: I have one brief one and that is around the question of public awareness. I think it is safe to say that the subject has come up, usually with the assistance of Mr Jordan, during committee hearings about public awareness and things like the lightbulb campaign. I think Hydro spends a significant amount of money on those activities and I guess I would like to know why. Is it worthwhile? Are you getting any benefit out of this? Are we getting any benefit out of this?

Mr Eliesen: We are getting tremendous benefit. I was waiting for someone to ask a question on the lightbulb program, since I noticed in the committee hearings a lot of people had comments and what not. It has been a positive success; it has been a tremendous success, far greater than we ever anticipated. Yes, when you do this massive kind of distribution there are going to be glitches and some people will not find their lightbulbs for a variety of reasons. But I can ask Marion, if you will bear with me for a couple of minutes -- she can go on for 10 or 15 -- to give you a summary of some of the successes of that particular program.

Ms Fraser: What the program was designed to do originally was really three things. It was to make the savings that would come from replacing a 60-watt lightbulb with a 52-watt lightbulb. It was intended to enhance awareness, as you mentioned, and that is a big one, with respect to the variety of opportunities for saving with respect to residential lighting.

We had done the promotion the year before with compact fluorescents, the joint promotion with Loblaws, that had been overwhelmingly successful. We wanted to communicate that we realize that a compact fluorescent was not an appropriate bulb for every spot in the house, that there are other places that are not used as much and so on, and that there are ranges of savings.

We also wanted to encourage the manufacturers and distributors of these lightbulbs to start stocking and promoting the energy-saving lamps and give them shelf space. Prior to our campaign with, as we call it, the bulb drop this fall -- I hope not too many of them were dropped -- only one company was putting those on the shelf very often. They would do it as a promotion every once in a while. It was not seen as a big pan of their product line. We are now seeing situations where you go into any grocery store or hardware store and the different companies are now offering them promotionally and including that broader range of things.

Actually, Shell Canada is starting a program today that we are cooperating with in terms of taking steps to save energy. There are coupons both for compact fluorescents and the 52-watt lightbulb. They came to Ontario Hydro because of the credibility they saw we had developed with that program and with the awareness of it.

One of the questions people put to us with respect to this program is: "Where do people put those lights? I bet you anything they put them in place of a 40." In actual fact what we have found is that probably fewer than about 3% of the people who installed the lamps put them in place of a lower-wattage lamp. Some 78% of them actually did replace a 60-watt bulb with them and 15% replaced a 100-watt bulb. There were 4% who said they did not know what they replaced with them, and actually I think I fall into that category because I could not remember today whether it was a 60 or a 100 I had replaced with mine.

So in actual fact, because of those numbers, the impact from that program is probably going to be greater than we anticipated, and we really will not know the true impact of the program until we start to see what is on the shelves next year or the year after. We are really going after the hearts and minds of Ontarians and giving them opportunities and information so they can save energy and help the environment. One of the things that comes through loud and clear in our research is, "Tell us the kinds of things we need to do and we'll do them." Right now they sort of think they have done everything they can, so we have to broaden the awareness very much to help them find ways to save energy, because they do want to.

The Vice-Chair: Thank you. I would like to thank you, Mr Eliesen. It was agreed some time ago that each party would have a half an hour with you and we have eaten up all that time. I know there are still questions left. There are some questions, I believe, that people asked of some of your staff. I believe there are still a few questions there that they would like to put forward. You are more than welcome to stay and enjoy the afternoon. It is probably less hectic than the office. But this was the agreed upon amount of time, so what we will do now is go into if anyone else has any questions of the support staff. I wish to also thank the staff, by the way, for their facts and figures that helped bring some of this out for us.

I have one question myself that I have been dying to ask all afternoon because the bag is not here with the little bulbs. Mr Jordan, for the sake of those committee members present, did you use your lightbulbs?

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Mr Jordan: I think I did more to advertise those bulbs than your $7 million.

Mr Klopp: There is a rumour that Leo took those to every room we were in and plugged them in at night when he was reading. That is the rumour.

Mr Jordan: I tell you, representing a rural area, and I am sure you people interested in the customer want to hear it, all it was to them was increased cost, because the hydro bill came the day after the bulbs, and it went up I forget what percentage in January. When they came into the constituency office, believe you me, they did not think like you or I are thinking of the wattage you are going to save there. In the rural there were some 40-watt bulbs replaced with 50-watt, no question about it.

Maybe the program did create awareness. I am not arguing that, because I am as much a conservationist as anybody. I am just frightened that we get overdependent on it and get caught. My partner has a question for the chairman.

The Vice-Chair You can respond if you wish.

Mr Eliesen: I am in your hands. I am more than prepared to answer any questions.

The Vice-Chair: If you wish to stay and join in the questions and answers for the afternoon. However, I warn you, sir, you do so at your own peril. We had agreed to the half hour and after this it will go around.

Mr Eliesen: If there are any specific questions people have, I am more than prepared to answer.

Mr Arnott: There has been a trend that has been noted that we are getting towards a summer peak for Ontario Hydro, away from a winter peak. The trend seems to be going in that direction. Has Hydro studied that matter, and is there a projection that we may in a number of years see a summer peak?

Mr MacCarthy: Yes, we have studied and we have looked at it. There still is a very significant difference between the summer peak and the winter peak, but the summer peak is moving more rapidly than the winter peak. But it will be a substantial number of years before they are comparable. In the meantime, though, we have programs which are also addressing the summer peak as well, like air conditioning, for example.

Mr Arnott: Can you give me a year as to when the summer peak will exceed the winter?

Mr MacCarthy: I do not think I could. I think the difference is about 6,000 megawatts between summer and winter peaks.

Mr Eliesen: That is a significant difference, 6,000 megawatts right now. I guess the question will be -- which will reflect on the success of our programs -- how we can limit or abate both the summer and winter peaking.

Mr Arnott: This committee travelled to St Catharines, whose public utilities commission already experiences a summer peak.

Mr MacCarthy: Several of the southern Ontario utilities do have a summer peak, but if you look at the total system, the winter peak still is --

Mr Arnott: Excuse me. The fuel-switching initiatives that have been sold to us have largely been eliminating the demand for hydro for the use of space heating. If we experience a summer peak in the not-too-distant future, and we are not sure exactly when -- "considerable number of years," I think, was the terminology used -- does that not lead us to question the demand-supply plan?

Mr MacCarthy: I do not think it does. We will be addressing that as we go. It is not something that is going to happen overnight. If we see that pattern developing, then we would have to come up with more programs to address the summer.

Mr Jordan: Are the 311 or 312 utilities going to have -- and they have elected representatives -- the freedom to say: "We don't want that program to lose our heating and hot water load, because we have a summer peak on which we're charged for hydro and we want those kilowatt hours for revenue. We need it to support our distribution system"? Are they going to have that freedom or are you going to come on with a blanket policy on top of them?

Mr MacCarthy: We will be working with each of the municipal utilities to come up with a program that is acceptable to them. We cannot be successful in our overall demand management initiatives without the support and commitment of the municipal utilities.

Mr Jordan: They feel they have been left out, and I always think when people are Ontario Hydro-bashing they have been looking at it as a big monster. In reality, it is 312 companies that are retailing.

Mr Eliesen: Quite frankly, as Dane has indicated, we need their support. We cannot do it ourselves. We are ensuring that, through the proper committee stages and then through the MEA as well as direct contact with the local utility, that kind of joint partnership can be enhanced in the future.

Mr Jordan: Thank you.

Mr McGuinty: One of the biggest issues as far as the average ratepayer is concerned today is what we pay for our electricity. First, the former minister, Mr Ferguson, indicated that rates would not increase. I may be misquoting, but I can recall some article appearing in the newspaper to the effect that we would not be experiencing double-digit increases over the next few years, as many of us had anticipated. Can you provide that kind of a guarantee?

Mr Eliesen: The guarantee I will provide to members of this committee is that the board of Ontario Hydro, as called for under the Power Corporation Act, will determine and make the decision on the kinds of rates that are appropriate for the future. We go through an annual regulatory approval process with the Ontario Energy Board which provides parties to intervene and question us on our rate proposals, but the Power Corporation Act -- and I have not seen any changes -- calls upon the board to determine what rates are appropriate.

With regard to the double-digit increases, as I indicated, some time earlier I saw, with the problems of the nuclear system and with Darlington coming in, that we were looking at a period for a couple of years or so of double-digit increases, and we are going through that this year. It is my hope, though, that we can avoid the double-digit increases, and the board of Ontario Hydro has yet to determine a rate that it wants to put forward for 1993. We do this in April and we submit it for public scrutiny to the Ontario Energy Board. But it is my hope and expectation that it can be below double-digit; in other words, back to the single-digit one. That is something that the board will have to determine and make its recommendations.

Mr McGuinty: The public utility commission people who appeared before us -- I think there was no exception in this regard told us they believed that if we went ahead with the fuel-switching program, as would be authorized by Bill 118, rates would go up as a result of the fuel switching program. How do you respond to that?

Mr Eliesen: I do not know on what basis they would make that kind of allegation. We have yet to determine, as I mentioned in my speech, incentives if necessary, but not necessarily incentives. We have not done the necessary research or homework in this area because we have been precluded through legislation from looking into that area. I have indicated specifically with space heating that we do not believe any incentives are required. In a large number of these areas it is simply information and advice, which we are basically forbidden to do by legislation. We will provide an opportunity to tell the ratepayer how to reduce his or her electricity or energy costs in the long run. As I mentioned further, again in reference to the municipal electric utilities, it is something we have to work through with them. We do not have the power or the ability to do it. We have to work with the 300-plus utilities in this entire area.

Mr MacCarthy: If I may comment on that, in the short term there can be a rate increase. Clearly if you have assets in place and you are getting less revenue there will be an increase in your rate requirements, but what we are addressing is a longer-term perspective. As you require additional assets, if you can avoid more costly assets which would increase the requirements, in the long term you will be better off. In the short term, clearly, if you had no change in your assets and you were getting less revenue in and you had to allocate those assets across a smaller number of kilowatt-hours, the rates would go up. I suspect that is probably what the municipal utilities were talking about.

Mr Eliesen: Mr Chairman, I have a previous commitment. I am advised I am late already, so I am going to have to leave the committee at this stage, if that is acceptable.

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The Vice-Chair: I thank you once again for the extra time. I know the parties appreciate that. Some of your people were going to stay and help us if there were any other questions. I believe there were questions for some of the support staff.

Mr McGuinty: If there is any one here who could deal with the economics of fuel switching.

Mr Eliesen: Marion Fraser certainly will.

The Vice-Chair: Thank you again, Mr Eliesen. Mr McGuinty, the floor is yours.

Mr McGuinty: Ms Fraser, pursuing what I raised with Mr Eliesen before his departure, as I said, the public utilities commission people are very concerned about the impact a fuel-switching program would have on the rates they would have to charge their local consumers.

Ms Fraser: Yes, it is a similar concern they have expressed with respect to demand management generally.

Mr McGuinty: Right. As a member sitting on the committee, it is pretty compelling evidence for these people, who are elected from within their community and who have a responsibility to look out for the interests of their local ratepayers. It is very difficult for me to dismiss it outright either as part of some kind of conspiracy or as some kind of positive initiative that they are all independently acting to thwart.

I am concerned as a result of their concerns. They are telling me that if we pay people who are now heating their homes electrically to switch to natural gas for instance, it is going to cause the rates to go up. If you cannot provide this kind of information today, I will accept your undertaking to provide it to the committee in writing. What kind of projections have you made in terms of rates increasing as a result of people using less electricity? How long is the payback period? By that I mean -- I forget the gentleman's name who is sitting beside you.

Ms Fraser: Mr MacCarthy.

Mr McGuinty: Mr MacCarthy made reference to the fact that at some point it is going to turn around. If we can label that a payback period, how long is that period before ratepayers will be better off for having bitten the bullet at the outset rather than not having bitten it and having been forced to deal with increased generation costs?

Ms Fraser: Maybe I could just take a step back. We look at the current approved programs that we have with respect to demand management and we do a number of different financial tests when we assess each program. One of those financial tests is to assess the rate impact on the distribution utilities as a whole.

Of course, this does not include any fuel-switching programs at this time. As Mr Eliesen pointed out, we do not have any of those yet. With the current slate of approved programs, the net impact on the distributor rates is actually positive as a result of a number of things. One is quite often the load we are looking at saving in our programs comes off their peak as well as our peak, and that can bring down the rates they pay to us. So even though they might be taking in less from the customers, they are also paying Ontario Hydro less for that rate.

In addition, the expansion they have to go through for distribution systems -- and certainly it varies across utilities, different patterns of local growth -- will not happen if demand management results are achieved in those areas. Quite often distribution expansion is financed out of current revenues as opposed to borrowed and then repaid over time. So I think the simple formula -- fewer kilowatts is fewer kilowatt-hours, fewer kilowatt-hours is less revenue, less revenue means rates go up -- is much more complicated than that. One of the things we want to do is help the utilities understand their own particular circumstances with respect to the impacts of demand management. That will include fuel switching, if it is allowed to be included.

Mr McGuinty: Ms Fraser, certainly a hallmark of Bill 118 is this business of fuel switching. I can assure you that if this bill goes ahead, and there is every indication it will, and becomes law, this government will want to have fuel switching initiatives of some kind or other put in place. But you are telling me that Hydro has not studied the impact of fuel switching; it has not made projections in terms of savings because it is not allowed to by law. Is that correct?

Ms Fraser: So far we have done some financial analysis on specific kinds of loads, for instance, space heating and water heating and residential. We have done limited analysis with respect to absorption chilling in the commercial sector, looking at the impact both in terms of CO2 reductions as well as the overall energy efficiency we are looking at.

But we do not have a comprehensive analysis that "this amount of fuel switching will have this amount of rate impact," because until you design the program you do not exactly know what that is going to be. We could, for instance, design a program in which perhaps Ontario Hydro paid for the full cost of the conversion up front but then, to pay for that, charged back the customers who benefited out of their savings on their energy bills. In that case, the program could actually run as a basically neutral impact in terms of our costs. That would have very different rate impacts then if we paid for the whole kit and caboodle and then charged it to all the ratepayers.

So the question you asked really requires some pretty in-depth program design kinds of things before you can come up with a blanket statement that it is going to have this impact on rates. Again, it is the long-term versus short-term kinds of opportunities.

Mr McGuinty: So if Bill 118 becomes law, we will still have to perform the necessary studies that will enable us to determine if any fuel-switching subsidization -- if I can use that word -- programs would not be effective.

Ms Fraser: We would have to look at the cost of benefits and the specifics. Obviously if you are looking at replacing a forced-air electric furnace with a gas furnace, that has one set of costs. If you are looking at a two-story house that is built with baseboard heaters, then you are going to have to look at putting in duct work and all the costs associated with that as well as problems that the consumer might find in having all of a sudden ducts where you did not have ducts before. They are very different situations. The kind of in-depth analysis we do, program by program, is to look at those costs and benefits.

Mr McGuinty: Those have not been done yet?

Ms Fraser: Not in terms of designing a program. In terms of ballparking the costs and benefits to determine the potential, all that information was filed at the Environmental Assessment Board this summer.

Mr MacCarthy: If I may add to that, Mr McGuinty, I think the likelihood is that we would move on a stage basis because some of the options, like conversions to gas, are really quite attractive now, so the initial approach would be a more substantial information program to try to get those conversions in place. We try to avoid with our existing programs what we call "free riders," the people who would make those decisions in any event. So as a strategic initiative we would start off with a more substantial information program to get as many conversions as we could through that process and then gradually move towards incentives. There is some timing involved in this process.

1620

Mr Cleary: Thank you, Ms Fraser, for being here in Mr Eliesen's seat. We had the opportunity to speak to him a moment or two before the meeting started.

You listed all the things you were doing to help the agricultural community. There is another way you could do that, and it would really be impressive if you would consider what I am about to say.

Throughout our discussions on Bill 118, and particularly in the February 7 non-utility generation report, the committee has heard about a positive aspect of fuel switching for environmental purposes. You said both natural gas and ethanol are environmentally preferred fuels. The cost-efficient manufacture of ethanol requires an interconnection between the two. With a cogenerating plant, this, coupled with greenhouse, provides not just an environmentally friendly fuel but an environmentally acceptable product method. Given these facts, would such a complex be given special project status, as referred to in your report?

Mr MacCarthy: The plain answer is that we would have to look at the details of the proposal and compare it with other options. I would have to study it further before I would just automatically say at this point in time that we would grant special project status.

Mr Cleary: We have already sent a document to your office with a proposal. I also have a copy of my question here.

Mr MacCarthy: Have you got an answer back yet?

Mr Cleary: No. We were supposed to have a meeting back in December and it was cancelled out with your chairman and the Environment minister.

Mr MacCarthy: We will be forwarding an answer to you.

Mr Cleary: If you need another copy of the project, I can send you another one.

Mr MacCarthy: I am sure it is being reviewed by the staff and a decision will be made.

Mr Cleary: Maybe I will leave a copy of my question with you, then, too.

Mr MacCarthy: Yes, that is fine.

Mr Brown: I would be remiss not to ask Ontario Hydro's probably most capable employee, at least in the head office staff, who was born and raised in Gore Bay, Manitoulin Island --

Ms Fraser: You had better qualify that.

Mr Brown: I had better be careful.

Ms Fraser: Yes, you had better qualify what is intended --

The Vice-Chair: We will be sending this back to Gore Bay.

Mr Brown: That is right. I could be in big trouble back home, Marion. Mr Eliesen spoke about avoiding cost and said that all of your initiatives would be below avoided cost. When he talks about avoided cost, what really do we mean? Do we mean the net avoided costs? You obviously receive revenue from producing electricity, and there is a cost. Is it the difference we are talking about? I do not know whether I made myself clear. You are probably better at it than me, so take a crack at it.

Ms Fraser: When we determine if a demand management initiative is cost-effective, basically we are doing that from a total societal perspective. There is a cost with respect to generating electricity to supply that kilowatt or megawatt. That cost is composed of both the capacity cost, ie, the plant required to do it, as well as the fuel required to support it. Then we look at the measure itself, if it is putting in more efficient lights and, say, in the case of a retrofit measure, where we would have to take out all these lights and put new lights back in, and we would probably have to do something to make sure that it looked as nice as it does now -- it would probably look better with more efficient lights. We will compare the cost of that, which is really the demand management. It is not just what we pay, but the total cost of it. Sometimes customers pay all of that, sometimes they pay part of it, sometimes incentives do, but really it is the cost of that measure versus what it would cost on the supply side, to compare those things.

At this point, rates do not enter into that calculation. If we were to take rates into that calculation, we would be using something called the no losers test, which essentially was the test that I believe the select committee gave us direction not to use in terms of our demand management activity. Really it would be very difficult to find applications that were so perfect that you would not be losing some rates in the short term.

Again, what we are trying to do by using this total customer cost test is to reduce the total electricity bill for Ontario, as opposed to keeping the rates low. If the rates go up but people are actually using less, then they are ahead and the province is ahead. That is the fundamental point. Everything has to be economic in those terms in order for us to pursue it.

Mr MacCarthy: That is a fundamental point associated with demand management which is quite often not understood, in that the focus is on a lower bill versus a lower rate. That is really the difference it makes to the end user. If you can provide an incentive which will cost more but the reduction in electricity use more than compensates for that incentive cost, the province is better off. That is the philosophical orientation.

Mr Jordan: We pay more for less?

Mr MacCarthy: Yes, but the net result is that you are better off. What I care about is what I pay in my bill. If I can use half the electricity and pay a higher cost per kilowatt-hour, I am still better off.

Ms Fraser: The way we look at it, it is not the electricity that the customer wants; it is the benefit. It is either the heat or the light. If we can put into a room like this a new lighting system that uses 40% less electricity but gives you the same lighting level, and actually if it were replaced with the T8 lights, the quality of light would be much better as well. We would all look healthy instead of sallow and it would be a benefit.

Mr Klopp: There is hope, Leo.

Ms Fraser: That is right. The deputy minister's boardroom in Energy, Mines and Resources was the first room I was ever in with T8 lights. It is a substantial difference over and above the energy savings.

Mr Brown: I can understand that a particular user can make the assumptions and go through that, but the avoided cost, what we are talking about there is the generating and what it might be like for all the consumers across the province. I might win by having you subsidize me to a certain level, but maybe all consumers will pay a little bit more than they might if a new generating station of whatever type was built somewhere. Are you telling me that cannot happen?

Mr MacCarthy: The idea behind it is that the program base is sufficiently broad that everyone can participate. If at the end you choose not to participate, then you could have a higher cost without the associated benefit. Okay?

Mr Brown: I do not know whether I am okay or not. I have been struggling with this. I am familiar with these issues. It is really an accountant's issue. The bean counters can figure this one out; poor MPPs like me never can. My concern is that in doing this, Hydro distorts the energy market. I think you would agree that you are attempting to do that.

Mr MacCarthy: Yes.

Mr Brown: My concern is that the other parts of the energy market, whether it be fossil fuels or whatever, are not subject to the same kind of societal value situation. We have Hydro doing one thing, probably for very good reasons, but we leave a whole segment of the energy industry out there doing whatever it will. I have this problem. I have wondered aloud why we do not have a provincial policy, perhaps a crown corporation, to chase down conservation everywhere rather than just target Hydro. I think that often when you are making these decisions you are in almost a conflict-of-interest situation and that it might be better to be doing this across the board rather than in particular -- I know you should not answer that question, so I am not going to ask it.

Mr MacCarthy: I was going to direct you to the government officials.

Mr Brown: That is the nature of my concern.

Mr Jordan: Mr MacCarthy, I will my direct my question to you. I had a letter from my colleague Mr Huget, who gave me the reasoning behind an agreement between Ontario Hydro, the Ministry of Energy, the Ontario Home Builders' Association and the gas company that if there is a subdivision that is serviceable by natural gas and there are R-2000 homes in there, I cannot go in and buy a lot and put an all-electric home in that subdivision.

Mr MacCarthy: I am not familiar with that specific provision myself.

Mr Jordan: I just thought it was a little strong.

Ms Fraser: We do not provide incentives for R-2000 homes that are in areas served by gas because we do not want to encourage people to switch from gas to electricity by providing an incentive. That would be counter --

Mr Jordan: That would indeed be an incentive. It is a new home, I am building in an R-2000 subdivision.

Ms Fraser: Yes. That is right. We do provide incentives for R-2000 homes in areas that are not served by gas. The reason we make that distinction is to ensure that we do not end up making it more attractive for someone to use electricity than gas, upfront costs, when we know that the long-term operating costs are going to be much higher for electricity than for gas in an R-2000 home.

Mr Jordan: I think Mr Huget answered it all, except that one point is still being tossed around. If you are developing a subdivision and there are going to be R-2000 homes and there is natural gas available, I cannot go to the builder and say, "That's fine, but I'd like an all-electric home." The way I read it, and I have not seen a copy of it, is that it is not acceptable.

Mr MacCarthy: Definitely it would be the case that Marion specified: that we would not be providing an incentive in that situation.

Mr Jordan: To the home builder, you mean?

Mr MacCarthy: That is right.

Mr Jordan: It is not fuel switching; it is the first fuel going into the home.

Mr MacCarthy: Yes.

Mr Jordan: So what type of incentive would you be providing?

Mr MacCarthy: We would not be providing an incentive.

Mr Jordan: No, but what would you have been providing?

Ms Fraser: For an R-2000 home there is both an incentive for the purchaser and for the home builder.

Mr Jordan: For the insulation in it.

Ms Fraser: That is right.

Mr Jordan: Why would the gas company not provide that incentive in an all-gas subdivision with R-2000?

Mr MacCarthy: They could. We do not control the gas company.

Mr Jordan: Maybe we should.

The Vice-Chair: Are there any other questions? Hearing none, I thank you very much for spending the afternoon with us. It has been most informative and a lot less tense than I expected.

Mr McGuinty: We are very civilized here, Mr Chair.

The Vice-Chair: Yes. I appreciate that with this committee. I have subbed in other committees and I appreciate the way we handle ourselves in this committee. I thank everyone again for today. We are adjourned until 10 o'clock tomorrow morning, at which time we will commence the clause-by-clause.

The committee adjourned at 1634.