IPPSO FACTO, February 1996,
electronic edition

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Excerpts from the magazine of the Independent Power Producers' Society of Ontario

Editorial

Hydro's flouting of OEB sets dangerous precedent

Ontario Hydro, and everyone else for that matter, shares a common interest in keeping the cost of regulation to a minimum. All players in the sector recognize that the regulatory system is about to change, and most have something to say about how the new system should look. Hydro for its part is leaning towards something called "incentive regulation" which it indicates means something very light-handed, with rewards and punishments for certain corporate behaviours. How then can our largest public servant justify proposing rate structures that are increasingly difficult to analyze, and even worse to regulate? Such complexity necessarily involves more expensive regulation. Given that the OEB, like other public agencies, must cut its budget by as much as 30%, it's hard to see how it is supposed to do its job of protecting the public interest when the task handed to it by Hydro is getting more complex. Good luck to the staff of the OEB who will have to do a lot more in terms of efficiency this year than any of the utilities they regulate!

Ontario Hydro has not always lived within the dictates of its regulator. There have been many minor transgressions, and a few major ones. In the twenty-odd years since the OEB was established, rarely did Hydro ever adopt the rate increase recommended by the Board. At times, court orders have been necessary to enforce payment of certain costs or disclosure of certain information. Heavens, it's a matter of record that Hydro has been in technical default with respect to its own Power Corporation Act on more than one occasion.

If Hydro is to accomplish the light-handed and low-cost regulatory system that we all desire, it will have to start acting like an agency the regulator can trust when its back is turned. Hydro can't use every technical excuse in the book for evading the spirit of the regulator's dictates, if not the letter. To maintain the status of the guardian of a public trust, Hydro must act like it is worthy of the public trust.

Claiming that "We're too busy to propose transmission rates" is worse than flouting the public's trust. It is deliberately obstructing competition, and frustrating the development of efficient and effective regulation. Once Hydro proposes a system for transmission rates, there will inevitably be discussion, advocacy, conflict and eventually resolution. The sooner we get that resolution, the better off the system will be, and the more efficient our regulator will be. Delay not only costs Hydro's competitors, but it costs the public because more issues will have to be worked out under more severe time pressure, and under the supervision of a regulator with little experience in the area.

Trying to have a competitive power system without transmission rates is like trying to have an efficient trucking system when only one company's trucks are allowed to use the roads. The US, Europe and Canadian jurisdictions outside Ontario have recognized this and have moved to force transmission utilities to post non- discriminatory rates for use of the transmission facilities. The same system is commonplace in Ontario for natural gas and telephones.

Sure, it will take some time to develop the new transmission rate structure. But Hydro has dallied for years since it knew that new rates were necessary. Hydro was asked to file such rates in the 1980's. Hydro 'temporarily' suspended its former wheeling rates in 1993, and promised voluntarily at that time to have a new policy in place within months. The next year, Hydro was ordered by the OEB to file proposed transmission access rates and policies in 1994. They didn't appear. In early 1995 Hydro committed to IPPSO that it would file the required report very shortly. None of these obligations were respected by Hydro. Now Hydro says it wants to wait until next summer because there is a public Committee looking at the electric system, even though the Committee is not supposed to examine transmission rate structures. President Kupcis suggests that it's not so much the Committee that has caused the delay, but the heavy demands on his staff's time. It makes one wonder if Hydro is grasping for explanations. Any guesses on what Hydro's excuse will be next summer?

One company has even offered to pay Ontario Hydro $5 million per year for access to some of its unused transmission capacity in order to export power. But no-ooo....

The OEB is taking a very restrained approach. It's not telling Hydro what it should charge, or how it should develop rates or policies. It's not even saying what the principles ought to be. It's just saying tell us what your position is. Like everyone else, the OEB is probably wondering if Hydro's lack of any statement is a convenient cover for changing its position from day to day, depending on who it's talking to. A minimalist approach to regulation could say, we don't care what your position is, as long as it's internally consistent, and consistent from month to month or year to year. But with no position at all, Hydro isn't even constrained by the burden of internal consistency!

It's not just on transmission rates that Hydro has flouted this kind of instructions from the OEB. Hydro was also ordered to work with IPPSO and others on its small hydro plant rehab program, and hasn't. It was ordered to bring forward a program for integrating high-efficiency load displacement cogeneration into its efficiency policies and programs, and hasn't. The list goes on.

Hydro is the public's servant, and will remain so for the time being. There is no reason why it needs to develop these policies in isolation from the public. Consultation and openness are not just current catch-words, they are a means of getting to workable solutions more quickly. Hydro and its staff undoubtedly have many ideas on these subjects already. Why can't our public servant open up the doors for discussion, and work with its many clients and partners on these important topics? No one expects the perfect proposal to spring forth fully-developed the first time Hydro releases anything on a topic. Hey, it would even help Hydro comply with its legal obligations!

It is clear that no one can make Hydro act openly and responsively on these questions. Hydro has to do so of its own volition. But doing so has its own rewards for Hydro. Regaining public confidence that light-handed regulation is workable in Ontario is worth more than a million bucks, net present value, I'm sure. How much could it cost to be internally consistent and comply with the requests, if not the findings, of the OEB? - Jake Brooks

New OH proposal thwarts competition, IPPSO says

Support grows for privatization

"Why should consumers have to wait until the year 2000 or some undefined date in the future to get the benefits of competition?" asked IPPSO President Tom Brett. "Unlike previous versions, Hydro's latest proposal doesn't even give a specific date for the start of wholesale competition." IPPSO and others are concerned that the latest Hydro proposal is actually a step backwards from previous Hydro proposals which allowed for wholesale competition to supply the pool by 1997. In this document, Ontario Hydro is asking to be granted "commercial rights" which some describe as "absolute freedom without meaningful regulation or competition for an indefinite period of time." At the same time, Hydro suggests that open access might begin in the year 2000, but qualifies this date as "notional only" on the first page of the document. "Hydro wants new commercial rights at the same time as it retains the right to build with public money and keep out its competitors indefinitely," IPPSO Executive Director Jake Brooks said.

The latest draft, dated January 25, 1996, makes two or three major changes from previous drafts, notably the endorsement of privatization. "However, the crucial problem with Hydro's position remains the same," according to Brooks. "Competition is only permitted within constraints that protect Hydro's dirtiest and least efficient plants from cleaner and more competitive power supplies." Hydro management's report suggests that the changes should come at some non-specific date in the future, creating no internal sense of pressure on Hydro to discipline itself now in terms of capital or operating spending. "There is no need to wait for wholesale competition," Brooks said. "We can have it now, and the whole process would work better if we had the price benefits and practical experience under our belts sooner. In the meantime, this proposal actually encourages Hydro to keep on building uncompetitive plant with public money for an indefinite period of time."

"In this document, Ontario Hydro management continues to equate Ontario-based independent generation with low-priced imports from US utilities," Brooks complains. "Sure they can both be described as competition to Hydro, but they have very different characteristics, and putting reasonable limits on international dumping needs to be separated from allowing home-grown efficiency. Confusing the two, besides costing money opens us up to trade sanctions and destroys any concept of sustainable development."

In the process of the Macdonald hearings, a majority of parties appear to have come out in favour of some form of privatization, even parties who had not done so in the past: AMPCO, the Association of Major Power Consumers, OCOC, the Ontario Chamber of Commerce, and Hydro management, to name a few. Labour unions appear to be the only major group opposed to any form of privatization, and even they have varying views.

Hydro used to say that the question of privatization was up to the government. Now it says "The definition of objectives, and therefore the choice of divestment strategy, belongs to government."

"This proposal actually encourages Hydro to keep on building uncompetitive plant with public money"

Curiously, Hydro seems to have retreated somewhat from its previous view that generation should be split up amongst several companies. "The pressure to split up the ownership of generation solely for Ontario market power concerns is now seen as less important, and must be weighed against retaining larger blocks of generation sized to compete effectively in a North American market." Similar remarks were made by Ontario Hydro Chairman Farlinger recently (See story on page 4 of this issue of IPPSO FACTO).

Two other components of Hydro management's recommendations for restructuring differ from previous versions of the 4C's document: - Hydro proposes a "Central Market Operator (CMO) should be formed as an independent Crown entity, with responsibilities to both manage Ontario's financial exchange for electricity, as well as for system dispatch and security" - the amalgamation of the municipal electric utilities into a single "Wires Company" along with Hydro's existing transmission company, to handle transmission and distribution.

In this document, the "obligation to serve" is removed from the generation side of the business. Hydro believes the obligation to serve should be transferred to the transmission and distribution utilities. "This is probably appropriate," Brooks says, but stresses that such matters merit careful consideration by regulators and the public.

Hydro deals more directly with stranded assets in this document than it has previously. "In the event of stranding, costs to be identified and recovered through a charge imposed by the regulator or by the government through taxation," it says. "Stranding is a problem only of transition ... Once assets are sold to private investors, or the stranded costs are covered through some time-limited regulatory charge, the issue disappears."

Another puzzling feature of Hydro's new proposal is that transmission rates would be "regulated through a form of incentive regulation." Incentive regulation is not very well defined, and more importantly, is not very effective when applied to a publicly owned entity, or an entity with no central majority shareholder capable of responding to incentives.

"Hydro's talk in this paper contradicts its actions on the ground," Brooks says. Hydro notes "the primary regulatory function will be oversight to ensure that real competition is happening by discouraging anti-competitive behaviours such as the abuse of dominant market positions." Brooks says there are numerous instances of exactly this kind of anti-competitive behaviour taking place all the time. These include secret load retention deals, unfair backup charges, unfair buyback rates, subsidization of Hydro's own generation, a ban on wheeling, and simple bureaucratic obstructionism.

The document proposes that until the year 2000, "Generation planning would not be subject to regulation, except for EA approvals for siting." It also allows for special non-avoidable charges to cover the cost of anything Hydro builds during this period of time, during which time Hydro acquires almost complete commercial freedom, and competing suppliers are not allowed access to the wires.

Most puzzling about Hydro's new proposal, according to Brooks, is its approach to sustainable development. "The latest document lists sustainable energy development as key objective number 6, but nothing in the strategy leads to environmental sustainability. Hydro has a long section on regulation that doesn't really specify the priority to be placed on environmental objectives. That's a pretty major omission as far as I'm concerned."

Consideration of Sustainable Energy Development in this report is relegated to an appendix. In its conclusion it states that "Ontario Hydro supports the view that the companies which will be setting the competitive standard in the future will be those that see environmental requirements/issues as business opportunities and not just added costs. For Ontario Hydro, SED is the pursuit of operational excellence in a range of business activities..."

One part of the the appendix discusses Hydro's plans to "Use strategic partnerships" to explore "opportunities for cogeneration." The initiative, which apparently originates in Hydro's Fossil Business Unit, seeks to increase thermal efficiency, mainly for financial reasons. It says "In 1996 Ontario Hydro's Fossil Business Unit plans to make significant improvements to its fuel conversion efficiency, the conversion of fossil fuels to electricity, in part through cogeneration. Partnership opportunities are being explored."

Surprisingly, there is no mention of full cost accounting, except as a business unit general research activity, in the entire Hydro submission to the Macdonald Committee, including its Sustainable Development appendix. "This should raise serious alarm bells for policy makers," Brooks says.

The document says "support for renewable energy technologies will likely weaken. The majority of these are still more costly than conventional generation, even when their environmental advantages are factored in." Hydro has not done enough full cost accounting to make such a statement, Brooks contends.

IPPs prevail on Paul Martin to make budget fair to NUG

A delegation representing the Independent Power Associations of Alberta, British Columbia and Ontario as well as the Canadian Wind Energy Association met January 8-10 with officials from the Departments of Finance, Natural Resources Canada, Environment Canada, Industry Canada and the Prime Minister's Office to explain that efficiency and renewable energy are heavily burdened by current tax legislation which, if left in place, will prevent the development of Canada's vast potential in these sectors.

"No other active business sector nor any other competitive primary energy source faces the same kind of restrictive application of tax incentives," says Fred Gallagher, Managing Director of Canadian Enhanced Energy Development Ltd. of Calgary and leader of the Independent Power Stakeholder Task Force. "The tax treatment of renewable energy and efficiency investments should be comparable with the treatment of other energy investments."

Compared to the petroleum sector, renewable and efficiency investments have lower raw incentives and lack a similar delivery mechanism (flow-through shares) by which the incentives can be utilized. "Finance has provided a 30% Capital Cost Allowance (CCA) with one hand, and then taken it away with the other through the Specified Energy Property Rule," says Gallagher. "We have no problem with the level of incentive, it is the restriction that essentially denies renewable and efficiency investments a mechanism to deliver the tax incentive to potential investors that is of concern. Businesses developing tangible assets in other CCA classes can use the deductions against other unrelated business income. Renewable energy and efficiency focussed companies cannot.

The Task Force has asked that all competing primary energy investments be treated in a similar manner. This could be accomplished by including renewable and energy efficiency investments within the CEE/CDE (Canadian Exploration Expenses/Canadian Development Expenses) and flow-through share rules. If this is not possible at this time, then at the very least, the Task Force is asking for a removal of the Specified Energy Property Rule from Class 43.1.

Finance has expressed concern that the proposed changes might create the possibility for tax abuse. But under the changes as proposed, investor money will always be at risk. Further, the 30% legislated CCA is not sufficient to attract abusive schemes as evidenced by the fact that the petroleum industry has not seen abuse resulting from flow-throughs.

If there is concern about potential abuse, then the government should consider a sunset clause, the Task Force argued. They recommended testing the market for a period of 8-10 years to see whether any abuse develops.

"Canada is no longer in a mode of pent-up tax shelter demand as it was in 1988, shortly after tax reform," notes prominent Toronto tax lawyer Jay Shepherd, founder and Past-President of IPPSO. "In 1996, investors are much more risk averse. Also if there were a problem, Finance should not permit flow-through either. Yet flow-throughs are working - they are creating jobs and they are not being abused. Renewable energy needs a level playing field in this regard."

The Task Force came together in November, 1995 in response to a draft "level playing field" study conducted by Natural Resources Canada which concluded that the tax treatment of conventional energy and renewables/efficiency was comparable. (See IPPSO FACTO December 1995, page 21.) The submissions of the task force have demonstrated that with respect to equal access to sources of capital, the playing field is extremely unlevel.

"Following the suggestions of the Task Force will not only level the playing field. It will create thousands of jobs regionally across Canada, and it will be an indication that the Liberal government is following one of its Red Book commitments to promote efficiency and renewables as part of Canada's national response to climate change and the desire to reduce greenhouse gas emissions. These measures will see real hardware in the ground for which the Liberals will be able to take credit in the next federal election," says Gallagher.

Other members of the Task Force include chartered accountant John Keating, President of Canadian Hydro and Vice-Chair of the Independent Power Producers' Society of Alberta, and policy analyst Jeff Passmore, Senior Vice President of IPPSO and President of the Canadian Wind Energy Association.

Copies of the complete submission are available from any one of the four associations.

Jeff Passmore also delivered a presentation to the House of Commons Committee on Environment and Sustainable Development. The presentation was made on November 28, and copies are available from IPPSO or the Canadian Wind Energy Association (1-800-9CANWEA or 403-289-7713).

Canadian company to build 800 MW NUG in India

Although the Power Purchase Agreement was signed in June 1995, during the 'Team Canada' trip to India an extra pillar was added, in the form of a counter guarantee by the Uttar Pradesh State Government, to guarantee the obligations of its state-owned utility contained in the Power Purchase Agreement.

The deal calls for Canasia subsidiary Jawaharpur Power Ltd., (JPL) to build 2 X 400 MW of baseload coal-fired capacity in the next five years. The Jawaharpur Power Plant will cost about US$1.1 billion. Electricity generated will be purchased and transmitted by the Uttar Pradesh State Electricity Board through its own grid. Of this total, as much as $400 million could involve purchases from Canadian sources. The power purchase agreement is for a 30 year term. Canadian High Commissioner to India S.E. Gooch publicly commended the project, noting that it is located in "the most populace and power deficient State in India ... an area of India, that needs it the most." The population of Uttar Pradesh is 135 million.

The 800-acre site was carefully chosen by Canasia. This creates a special industrialized zone around the project, attracting additional industry from Agra. This would have an environmentally beneficial impact on the Taj Mahal and Canasia believes the project will greatly add to the efforts to "Save the Taj" from the effects of industrial pollution. The site is on agriculturally poor land, flat with water canal, rail line and the main highway adjacent. The main power grid is within 4 km of the site. New Delhi sorely needs the power and the project is some 200 km from the capital city, within wheeling distance. The project's location will also greatly stabilize the northern grid.

Included in the project is the construction of a colony of approximately 2,000 people within the station boundaries. This will provide immense benefits from improved living standards, employment opportunities, standard of health and hygiene, skills and technology, environmental awareness, social/gender/equity impact, income enhancement, education, etc., and last but not least, the goodwill established for the future.

Canasia Power Corporation has its head office in Vancouver, an office in Mississauga, and also maintains an office of seven in New Delhi, India. Dudley Abraham, former Vice President of SNC's thermal power division, is the Executive Vice President of Canasia. With emerging markets in Asia, Canasia turned its attention outside of Canada, and Jawaharpur was one result. Canasia conducted and managed all development work on JPL and has other projects in initial stages of development.

The Jawaharpur project has attracted the active interest of several major electrical utilities in North America and Europe. Discussions are now underway with New Brunswick Power Corporation for the operations and maintenance contract. New Brunswick Power along with Monenco AGRA Inc. are Canasia's engineers and project managers for Jawaharpur. NB Power was selected partly because, having completed its 450 MW Belledune station, it is the utility in Canada which has the most recent experience with building a coal- fired power plant.

Dudley Abraham notes that there is significant interest in the Jawaharpur project from the Canadian government: The Export Development Corporation and the Canadian International Development Agency "are committed to working with Canasia and other interested sponsors, lenders and EPC contractors, in developing a bankable project structure with a view to participate as a senior lender in a competitive export credit facility to support the Canadian supply for the project." By industry standards, the JPL project has been unusually successful in obtaining the required government clearances and permits. This is the result of Canasia's strategy of establishing its own offices in New Delhi, staffed by carefully selected professionals dedicated to the agenda set by Canasia.

The majority ownership will be Canadian, with Canasia, and an unrelated Canadian company or companies possibly holding major equity positions. Discussions have also started with the development subsidiary of a major non-Canadian power utility to take another significant equity position in the project.

JPL plans to build a US$30 million 30 MW combined cycle power plant at the construction site, to help with the power demand created by construction itself, and to alleviate power shortage in the area. Construction is expected to last 48 months for the Jawaharpur Power Plant.

JPL hired ENC Consulting, a respected environmental engineering firm approved by the Government of India, to perform environmental impact studies. Subsequently, JPL was granted conditional environmental clearance. Final clearance is expected to follow the submission of performance data from the selected turnkey constructor. Invitations to bid have been issued.

A financial forecasting model, which formed the basis for the commercial terms of the Power Purchase Agreement, was developed by the Economic and Technical Analysis Group of San Francisco California. Legal advice was provided by Russell and DuMoulin of Vancouver. Morgan Grenfell and Co. Limited, of London, England, with a history of financing multinational power projects, provided advice on project financing, risk assessment and contractual terms. The auditors are Arthur Anderson and Company, BC; the insurance advisors are Fenchurch of London, England; and Michael Wilson International Inc. are the international advisors. Coal is to be supplied by Coal India Limited and transported by India Rail Limited.

For more information please contact Dudley Abraham, Executive Vice President, Canasia Power Corporation, 3442 Wagondust Rd., Mississauga, Ont., L4Y 3L8, tel./fax: 905-279-6241. See also related story on other new Canadian energy developments in Asia "Chretien Asian trade mission nets independent power deals", elsewhere in this issue of IPPSO FACTO.

photo: On January 13 Ashok Dhillon, President of Canasia Power Corporation and officials of Uttar Pradesh State Electricity Board formally concluded an agreement providing for Canasia to build 800 MW of NUG in northern India. The deal was in development for two years, but was formally confirmed as part of "Team Canada's mission" to India with Prime Minister Jean Chretien.

New OH proposal thwarts competition, IPPSO says

Support for privatization grows

"Why should consumers have to wait until the year 2000 or some undefined date in the future to get the benefits of competition?" asked IPPSO President Tom Brett. "Unlike previous versions, Hydro's latest proposal doesn't even give a specific date for the start of wholesale competition." IPPSO and others are concerned that the latest Hydro proposal is actually a step backwards from previous Hydro proposals which allowed for wholesale competition to supply the pool by 1997. In this document, Ontario Hydro is asking to be granted "commercial rights" which some describe as "absolute freedom without meaningful regulation or competition for an indefinite period of time." At the same time, Hydro suggests that open access might begin in the year 2000, but qualifies this date as "notional only" on the first page of the document. "Hydro wants new commercial rights at the same time as it retains the right to build with public money and keep out its competitors indefinitely," IPPSO Executive Director Jake Brooks said.

The latest draft, dated January 25, 1996, makes two or three major changes from previous drafts, notably the endorsement of privatization. "However, the crucial problem with Hydro's position remains the same," according to Brooks. "Competition is only permitted within constraints that protect Hydro's dirtiest and least efficient plants from cleaner and more competitive power supplies." Hydro management's report suggests that the changes should come at some non-specific date in the future, creating no internal sense of pressure on Hydro to discipline itself now in terms of capital or operating spending. "There is no need to wait for wholesale competition," Brooks said. "We can have it now, and the whole process would work better if we had the price benefits and practical experience under our belts sooner. In the meantime, this proposal actually encourages Hydro to keep on building uncompetitive plant with public money for an indefinite period of time."

"In this document, Ontario Hydro management continues to equate Ontario-based independent generation with low-priced imports from US utilities," Brooks complains. "Sure they can both be described as competition to Hydro, but they have very different characteristics, and putting reasonable limits on international dumping needs to be separated from allowing home-grown efficiency. Confusing the two, besides costing money opens us up to trade sanctions and destroys any concept of sustainable development."

In the process of the Macdonald hearings, a majority of parties appear to have come out in favour of some form of privatization, even parties who had not done so in the past: AMPCO, the Association of Major Power Consumers, OCOC, the Ontario Chamber of Commerce, and Hydro management, to name a few. Labour unions appear to be the only major group opposed to any form of privatization, and even they have varying views.

Hydro used to say that the question of privatization was up to the government. Now it says "The definition of objectives, and therefore the choice of divestment strategy, belongs to government."

"There are significant benefits to be achieved through private ownership of some parts (of the electricity industry in Ontario)" - Ontario Hydro, January 25, 1996

Curiously, Hydro seems to have retreated somewhat from its previous view that generation should be split up amongst several companies. "The pressure to split up the ownership of generation solely for Ontario market power concerns is now seen as less important, and must be weighed against retaining larger blocks of generation sized to compete effectively in a North American market." Similar remarks were made by Ontario Hydro Chairman Farlinger recently (See story elsewhere in this issue of IPPSO FACTO).

Two other components of Hydro management's recommendations for restructuring differ from previous versions of the 4C's document: - Hydro proposes a "Central Market Operator (CMO) should be formed as an independent Crown entity, with responsibilities to both manage Ontario's financial exchange for electricity, as well as for system dispatch and security" - the amalgamation of the municipal electric utilities into a single "Wires Company" along with Hydro's existing transmission company, to handle transmission and distribution.

In this document, the "obligation to serve" is removed from the generation side of the business. Hydro believes the obligation to serve should be transferred to the transmission and distribution utilities. "This is probably appropriate," Brooks says, but stresses that such matters merit careful consideration by regulators and the public.

Hydro deals more directly with stranded assets in this document than it has previously. "In the event of stranding, costs to be identified and recovered through a charge imposed by the regulator or by the government through taxation," it says. "Stranding is a problem only of transition ... Once assets are sold to private investors, or the stranded costs are covered through some time-limited regulatory charge, the issue disappears."

"This proposal actually encourages Hydro to keep on building uncompetitive plant with public money"

Another puzzling feature of Hydro's new proposal is that transmission rates would be "regulated through a form of incentive regulation." Incentive regulation is not very well defined, and more importantly, is not very effective when applied to a publicly owned entity, or an entity with no central majority shareholder capable of responding to incentives.

"Hydro's talk in this paper contradicts its actions on the ground," Brooks says. Hydro notes "the primary regulatory function will be oversight to ensure that real competition is happening by discouraging anti-competitive behaviours such as the abuse of dominant market positions." Brooks says there are numerous instances of exactly this kind of anti-competitive behaviour taking place all the time. These include secret load retention deals, unfair backup charges, unfair buyback rates, subsidization of Hydro's own generation, a ban on wheeling, and simple bureaucratic obstructionism.

The document proposes that until the year 2000, "Generation planning would not be subject to regulation, except for EA approvals for siting." It also allows for special non-avoidable charges to cover the cost of anything Hydro builds during this period of time, during which time Hydro acquires almost complete commercial freedom, and competing suppliers are not allowed access to the wires.

Most puzzling about Hydro's new proposal, according to Brooks, is its approach to sustainable development. "The latest document lists sustainable energy development as key objective number 6, but nothing in the strategy leads to environmental sustainability. Hydro has a long section on regulation that doesn't really specify the priority to be placed on environmental objectives. That's a pretty major omission as far as I'm concerned."

Consideration of Sustainable Energy Development in this report is relegated to an appendix. In its conclusion it states that "Ontario Hydro supports the view that the companies which will be setting the competitive standard in the future will be those that see environmental requirements/issues as business opportunities and not just added costs. For Ontario Hydro, SED is the pursuit of operational excellence in a range of business activities..."

One part of the the appendix discusses Hydro's plans to "Use strategic partnerships" to explore "opportunities for cogeneration." The initiative, which apparently originates in Hydro's Fossil Business Unit, seeks to increase thermal efficiency, mainly for financial reasons. It says "In 1996 Ontario Hydro's Fossil Business Unit plans to make significant improvements to its fuel conversion efficiency, the conversion of fossil fuels to electricity, in part through cogeneration. Partnership opportunities are being explored."

Surprisingly, there is no mention of full cost accounting, except as a business unit general research activity, in the entire Hydro submission to the Macdonald Committee, including its Sustainable Development appendix. "This should raise serious alarm bells for policy makers," Brooks says.

The document says "support for renewable energy technologies will likely weaken. The majority of these are still more costly than conventional generation, even when their environmental advantages are factored in." Hydro has not done enough full cost accounting to make such a statement, Brooks charges.

IPPs prevail on Paul Martin to make budget fair to NUG

A delegation representing the Independent Power Associations of Alberta, British Columbia and Ontario as well as the Canadian Wind Energy Association met January 8-10 with officials from the Departments of Finance, Natural Resources Canada, Environment Canada, Industry Canada and the Prime Minister's Office to explain that efficiency and renewable energy are heavily burdened by current tax legislation which, if left in place, will prevent the development of Canada's vast potential in these sectors.

"No other active business sector nor any other competitive primary energy source faces the same kind of restrictive application of tax incentives," says Fred Gallagher, Managing Director of Canadian Enhanced Energy Development Ltd. of Calgary and leader of the Independent Power Stakeholder Task Force. "The tax treatment of renewable energy and efficiency investments should be comparable with the treatment of other energy investments."

Compared to the petroleum sector, renewable and efficiency investments have lower raw incentives and lack a similar delivery mechanism (flow-through shares) by which the incentives can be utilized. "Finance has provided a 30% Capital Cost Allowance (CCA) with one hand, and then taken it away with the other through the Specified Energy Property Rule," says Gallagher. "We have no problem with the level of incentive, it is the restriction that essentially denies renewable and efficiency investments a mechanism to deliver the tax incentive to potential investors that is of concern. Businesses developing tangible assets in other CCA classes can use the deductions against other unrelated business income. Renewable energy and efficiency focussed companies cannot.

The Task Force has asked that all competing primary energy investments be treated in a similar manner. This could be accomplished by including renewable and energy efficiency investments within the CEE/CDE (Canadian Exploration Expenses/Canadian Development Expenses) and flow-through share rules. If this is not possible at this time, then at the very least, the Task Force is asking for a removal of the Specified Energy Property Rule from Class 43.1.

Finance has expressed concern that the proposed changes might create the possibility for tax abuse. But under the changes as proposed, investor money will always be at risk. Further, the 30% legislated CCA is not sufficient to attract abusive schemes as evidenced by the fact that the petroleum industry has not seen abuse resulting from flow-throughs.

If there is concern about potential abuse, then the government should consider a sunset clause, the Task Force argued. They recommended testing the market for a period of 8-10 years to see whether any abuse develops.

"Canada is no longer in a mode of pent-up tax shelter demand as it was in 1988, shortly after tax reform," notes prominent Toronto tax lawyer Jay Shepherd, founder and Past-President of IPPSO. "In 1996, investors are much more risk averse. Also if there were a problem, Finance should not permit flow-through either. Yet flow-throughs are working - they are creating jobs and they are not being abused. Renewable energy needs a level playing field in this regard."

The Task Force came together in November, 1995 in response to a draft "level playing field" study conducted by Natural Resources Canada which concluded that the tax treatment of conventional energy and renewables/efficiency was comparable. (See IPPSO FACTO December 1995, page 21.) The submissions of the task force have demonstrated that with respect to equal access to sources of capital, the playing field is extremely unlevel.

"Following the suggestions of the Task Force will not only level the playing field. It will create thousands of jobs regionally across Canada, and it will be an indication that the Liberal government is following one of its Red Book commitments to promote efficiency and renewables as part of Canada's national response to climate change and the desire to reduce greenhouse gas emissions. These measures will see real hardware in the ground for which the Liberals will be able to take credit in the next federal election," says Gallagher.

Other members of the Task Force include chartered accountant John Keating, President of Canadian Hydro and Vice-Chair of the Independent Power Producers' Society of Alberta, and policy analyst Jeff Passmore, Senior Vice President of IPPSO and President of the Canadian Wind Energy Association.

Copies of the complete submission are available from any one of the four associations.

Jeff Passmore also delivered a presentation to the House of Commons Committee on Environment and Sustainable Development. The presentation was made on November 28, and copies are available from IPPSO or the Canadian Wind Energy Association.

"Don't get bogged down by stranded assets" - McCready

McCready noted that a "profound transformation" in the utility industry has been brought about by technological advances, and by the separation of energy supply from common carrier. These factors, combined with government capital requirements and the need for more efficient management of power systems, have meant that "dragging public utilities into the private market is inevitable".

TransAlta has long been a leader in embracing competition and open access in the electric system. Recognizing that deregulation would allow it to serve its customers better, TransAlta first proposed open access to its transmission and distribution network in 1992. The offer was denied by regulators, largely due to strong resistance from competitors and municipal authorities. But McCready said TransAlta held to its assumption that deregulation was inevitable, building on a long history of competing with low-cost natural gas in an integrated provincial energy marketplace.

"We had to learn to deliver the lowest-cost reliable power," and one result was a recent benchmarking study in which TransAlta was identified as owner of three of the four most efficient coal- fired generating stations in North America. The company's performance also shows up in its client base: 30% of its capacity is sold to the cities of Calgary, Lethbridge and Red Deer, all of which have the option of buying power from other sources or generating it themselves; and 40% is destined for large industrial users that can use cogeneration or natural gas to satisfy their own needs. McCready said one customer, Dow Chemical, generates 100 MW of its own power and buys another 100 MW from TransAlta, based on the lowest industrial power rates in North America.

McCready said restructuring "is a journey, rather than an event", in which the nature of the market can evolve over time. He stressed that the precise form of restructuring must reflect specific conditions in each jurisdiction with respect to stranded assets, the presence of competition at the border, the price of power to industrial customers (and the corresponding need for price reductions), the presence of social charges or subsidies, and overall government philosophy with regard to regulation.

McCready noted that restructuring is a political process, in which plans and expectations must be tailored to a pragmatic world. He said TransAlta has had positive experiences with multi- stakeholder consultations in Canada and around the world, noting that a particularly effective process in New Zealand had reflected the views þ and won the eventual endorsements þ of consumers, conservation and environmental interests, independent power producers, and the existing monopoly generator. This breadth of participation "was essential to the integrity of the process, and the result was consensus-based."

Restructuring is also a long-term process. Over the long term, McCready said utility reform could include: - Bid pools open to all generators; - Deregulated energy supply by many marketers to individual customers over a single common carrier; - Regulation of a single common carrier for distribution; - Regulation of a common carrier for bulk distribution, as a means of ensuring open access for all generators and distributors; - Increased interchange between regional pools, coinciding with a convergence of energy forms þ especially electricity and natural gas.

Ultimately, McCready said this revolution in technology and structures will "lead inexorably to expanded customer choice". He stressed that customers have little or no loyalty to specific supply sources, but are much more interested in receiving "heat, light and horsepower in order to have comfort, safety and security". Against this background, he predicted that "marketing will take over the battle for enhanced competitiveness", and that natural gas producers will build on their 10 years of experience with deregulation in attempting to capture markets from electric utilities.

In a brief question period, a participant noted that most of McCready's examples had been based on jurisdictions with little or no transboundary competition, and asked him to comment on the impact of interprovincial and international supply links in a deregulated market. McCready said a continental energy market is inevitable in North America, and that even Alberta had initially been able to approach deregulation as if it were an island.

In response to an audience question on customer choice and market integration, McCready predicted that vertical integration will gradually unravel. He stressed that bulk transmission must be open to all players, with consistent tariffs and charges.

A participant said McCready had only commented briefly on the issue of stranded assets, and noted that the problem might be more significant in Ontario than it was in Alberta. McCready said Alberta addressed the issue through a grandparenting process, in which TransAlta customers in southern communities have continued to subsidize stranded assets in the northern part of the province. The problem was minimized because the price of existing supplies was still competitive with new generation, even with averaging taken into account. But he added that "the reality is that there are going to be write-downs," some on the part of customers, others to shareholders. "Maybe that's not inappropriate, in that management has the responsibility to see ahead." Stephen Probyn closed the session by observing that, in Ontario's system of public ownership, "we all know who the shareholder is".

At press time it was learned that Ken McCready would soon be leaving his position as head of TransAlta. For further information on the new transmission rates adopted in Alberta, see article elsewhere in this issue of IPPSO FACTO.

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Farlinger considers centralized Genco

Almost paradoxically, Farlinger had earlier said, "I don't see how we can achieve a competitive industry inside the walls of this Province without divesting at least some of our existing generation." His more recent remarks came during a meeting organized by the Institute of Electrical and Electronic Engineers (IEEE) on November 29. Then, in a TVO interview with Steve Pakin January 22, Farlinger indicated his view was that 3 or 4 generating companies would be best.

Toronto Globe and Mail business columnist Terence Corcoran labelled Farlinger's comments "Jurassic" and particularly ironic, given the convulsions Hydro and government have undergone of late adjusting to the realization "that large scale monopolies producing increasing economies of scale were things of the past."

IPPSO Executive Director Jake Brooks said, "The very reason for all this restructuring was that smaller companies had proven themselves capable of out-competing the mega-utilities, at least in terms of building new generation capacity, and being more accountable in other respects. Only a system determined to go against market forces could change that."

In his speech, Chairman Farlinger outlined the basic terms of Hydro's "4Cs" proposal (see IPPSO FACTO September 1995, page 10, and December 1995) and commended the outgoing chairman Maurice Strong: "We must give full credit for the turnaround in the corporation's performance to the management of Ontario Hydro, particularly for the very capable stewardship of my predecessor Maurice Strong, and the vigilant guidance of our president, Allan Kupcis."

He also laid out a challenge to the municipal utilities. "I think it is self-evident that 306 separate municipal utilities with geographic monopolies cannot be an efficient delivery system in the competitive future."

Chairman Farlinger concluded his remarks with a reassurance that he has not made any decisions about privatization, and that he does not view restructuring as purely an opportunity for private gain: "During the upcoming deliberations, the public interest must guide our industry's course into the next century, as surely as it did at the beginning of this one."

Photo: Pictured above are some of the speakers at the IEEE (Institute of Electrical and Electronic Engineers) conference, November 30 in Toronto.

Figure 5, page 71, Hydro report

Minister promises help on waterpower tax and load retention rates

In a very upbeat speech, the Minister echoed many concerns of the alternative energy industry, saying for example: "The government shares your commitment to change ... Change in the electricity sector means moving toward a more efficient and competitive system. ... There will be more flexibility and autonomy for business, industry and local officials to make decisions for their communities."

Minister Elliott outlined her government's plan to revitalize Ontario over the next five years, resulting in lower income tax rates, a balanced budget, and low-cost government services. She said "one of the cornerstones of the new Ontario will be a revitalized electricity sector. Independent Power is an important part of this picture. I want you to know that I recognize the frustration you have felt in the past. You were told that Ontario Hydro would buy your power, but only after the utility used up its excess capacity. Contracts were cancelled, the goalposts kept being moved back."

"I think you will find this government very much in tune with your thinking. Non-utility generators have a lot to offer. You operate on a smaller scale and have the flexibility that business demands. This flexibility positions you well for taking advantage of the latest and most environmentally sound technologies. In my recent discussions with IPPSO and other industry stakeholders, it was very clear that reform must be examined. Two major themes emerged during our discussions: competitive rates and reliability; directing the existing structure away from the monopoly setting."

Towards the end of Ms. Elliott's remarks, she turned to the question of taxes: "I know you have complained on several occasions about municipal tax increases for privately-owned hydroelectric stations. I, too, am concerned that the added tax burden has made some plants uneconomical .. and it's a threat to future investment. (applause) The Minister of Finance shares our concerns. He is looking at options for providing tax relief for existing and future small hydro projects. I know that IPPSO is working with the interministerial committee dealing with this issue."

On the same day of the speech, Minister Elliott's office delivered a letter responding to IPPSO's concerns about load retention rates. (See IPPSO FACTO, December 1995, cover story.) The letter stated, "I have asked my staff to pursue immediate discussions with Ontario Hydro on issues regarding pricing, fairness, duration of LRER ["load retention and expansion rate"] contracts, and the review process relating to this rate. I understand that arrangements are underway to to schedule a meeting as soon as possible. ... I will certainly keep you informed of discussions with Ontario Hydro on this issue. Thank you for bringing your concerns to my attention and for taking the time to write."

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Hedley Palmer award winner

Robin Dodokin tells IPPSO members "Never lose your entrepreneurial spirit"

Accepting the award on behalf of her father, Ms. Dodokin delivered a heartfelt and pointed speech, largely focussing on the reason that her father kept going as a small independent power developer, sometimes against heavy odds. She echoed her father's view that small hydro is a clean, economic and appropriate form of energy development for Ontario. And she clearly shared the frustration of many in the independent power business who often come face to face with bureaucrats in Hydro or government who try to put obstacles in the way of independent power projects.

Also present at the award ceremony were relatives Gail, Tracey and Jason Dodokin. Robin Dodokin thanked IPPSO and the 300 people present for making the award to her father, and gave the audience one ringing piece of memorable advice: "Never lose your entrepreneurial spirit!"

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Rounding asks "great" questions

The Advisory Committee's challenge, she said, will be to strike a reasonable balance between competing interests, by asking some of the following questions: - What is the most appropriate market structure? - Is there sufficient competition in electricity supply? - What degree of regulatory oversight is required? - Should generation, transmission and distribution functions be separated? - Who should pay the transitional costs associated with restructuring, including the cost of stranded assets? - Which parties have the obligation to serve?

It may not be possible for restructuring to resolve all of these issues, Rounding said, but it's reasonable to look forward to a market structure that maximizes benefits for all Ontarians. The Advisory Committee will have to determine whether the economies of scale and scope in a large utility outweigh the cost-effectiveness of private sector innovation and competition, and should be expected to choose competition where it emerges as the best market structure. She said the Committee should also conduct separate analyses for generation, transmission and distribution services, recognizing that generation lends itself most readily to deregulation.

Rounding noted that the OEB was about to launch a 10-year review of deregulation in the natural gas industry. The Board also keeps an eye on the U.S. energy industry, where market power is being consolidated in smaller numbers of ever-larger firms. In situations where horizontal and vertical integration may limit competition, Rounding said, regulators have an important role to play in preventing large players from blocking the entry of smaller companies.

In Ontario, competition will be introduced into a buyers' market, with sufficient excess capacity to place downward pressure on rates. Rounding said prices can be expected to rise over time, particularly because additional capacity will only be built when it is likely to be profitable. This long-term view will be important to the restructuring process.

Another key question will be the impact of competing energy sources, particularly alternate sources provided on a monopoly basis. Rounding stressed that competition in electricity must not place the natural gas industry at a disadvantage because of the regulatory requirements it must meet.

One way to approach restructuring is to address the need for regulation at three stages: prior to restructuring, during the transition, and after the process is complete. Rounding recognized IPPSO for identifying the OEB as the regulator of choice, stating that the Board could indeed serve as an independent forum for exploring technical issues and resolving disputes as the restructuring process unfolds. Ongoing monitoring will also be required after restructuring is complete to ensure that markets remain competitive, that undesirable market concentration does not occur, and that the need for appropriate environmental, safety and operating standards is not overlooked.

The Advisory Committee will also have to determine the degree of regulation that is required for each segment of the restructured market. While generation may be able to operate equitably and efficiently with little or no regulation, transmission and distribution are expected to remain in monopoly form and will require some degree of oversight. Regulators will also have to pay attention to the interface between generation and delivery functions, and to the range of activities taking place within each component of the market. For example, retail competition for residential customers would call for a more complicated form of independent regulation, and fuel switching should only be encouraged in a way that promotes overall system efficiency.

Rounding suggested that the theme of the conference, pragmatic privatization, can be considered independently of the restructuring process, adding that its impact can be summed up in three "trade- off questions": - Should the process maximize competition or net proceeds? - Should generation assets be sold now or later? - Should top priority be placed on debt implications or rate impacts?

Decisions on these questions, she concluded, could have "substantial impacts" for Ontario.

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IPPSO tells Macdonald that delay is costly

Five IPPSO representatives met with the Macdonald Committee on January 26. Toronto business columnist Terence Corcoran underlined the dangers of delaying the advent of open access: "the words 'phasing in the competition' should be taken to mean the shortest possible time; one year or two at the most, should be enough time to transform the power industry, rather than the next century perspective favoured by the status quo tyrants."

IPPSO's presentation to Macdonald's Committee drew largely from IPPSO's position paper "Clean, Competitive, Customer-Driven Power," which was published in association with the last IPPSO FACTO. Copies are available from IPPSO. The primary points made were as follows:

Principles: - Establish a regulator - Restructure generation first - Transmission is a natural monopoly

IPPSO's Proposal: 1. Establish regulator - permanent, binding, non-discriminatory - OEB is the best candidate 2. Unbundle functions and infrastructure - Ontario Transmission (regulated monopoly) - Power Pool (rate equalizer) - Gencos (competitive) 3. Competition in generation should begin immediately 4. Direct Access should begin immediately for up to 10% of electricity sales 5. 20% of new power purchases from renewables

Advantages of IPPSO Model: 1. Allows consumers benefit of competition immediately 2. Treats all generators equally 3. Ensures viability of Ontario's renewable energy industry 4. Politically acceptable 5. Orderly retirement of debt (debt not transferred to taxpayer) 6. Diversity of technology (risk reduction and operational flexibility) 7. Diversity of owners (avoids abuse of market power) 8. Minimizes imports (makes Ontario products more competitive because our power costs are reduced) 9. Ends the use of public debt (pay generators for performance only) 10. Safely introduces customer choice 11. Applies market discipline to stranded assets and their retirement 12. Clears path for practical (staged) approach to privatization 13. Does not disturb structure of MEUs, but creates incentives for them to adapt to a competitive environment 14. MEUs allowed to build own generation if no local cross- subsidies exist between distribution and generation

Beware False Competition: - Hydro's model for competition preserves Hydro's sales monopoly and its right to build with public money - It does not deliver the benefits of true competition - Hydro plans to take control over $5 billion of municipal equity

Move Quickly: - The North American market is moving quickly - Ontario loses industry if left behind - Ontario consumers pay too much if left behind

Municipal Taxation of Small Hydro and "The Level Playing Field" - In 1992 the Ministry of Finance changed the method used to assess small hydro projects - The result has been a dramatic increase in taxes (takes away 75 to 100% of free cash flow) - Projects have become uneconomic and cannot compete with Ontario Hydro projects (e.g. OH's 11 MW project pays $13,500, while independent 4 MW project in same area pays $125,000) - Possible solution: Tax based on 3% of gross revenue

Summary: - Establish Regulator - True competition on a level playing field.

For an overview of the positions of the major parties submitting briefs to the Macdonald Committee, see article elsewhere in this issue of IPPSO FACTO.

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Sherwin warns that exit fees have repercussions

"Sherwin challenged Hydro to do better in terms of open access," said IPPSO Executive Director Jake Brooks. Sherwin stressed that open access to the grid without exit fees is a "prerequisite" for privatization and other forms of industry restructuring.

Sherwin identified the five primary objectives of restructuring as: * Maintaining reliable service, in compliance with safety, health and environmental standards. * Developing an efficient industry structure which provides incentives for improvements in performance. * Providing customer choice. * Maintaining rate stability and Ontario Hydro's financial integrity. * Ensuring that all stakeholders (including government) receive net benefits from restructuring.

Only the first objective, Sherwin said, is not negotiable.

Sherwin told participants that he did not subscribe to the view that publicly-owned utilities are inherently inefficient, noting that excess staffing has been pervasive across all segments of the North American electric utility industry. As monopoly gives way to competition, risks will shift from ratepayers to private owners, who are more likely to push for an efficient allocation of resources. Competition, he said, "is the best guarantor for efficiency". Privatization, however, is "only a means to achieving a desirable end", and may in some situations be incompatible with rate stability.

Sherwin dismissed "managed competition" as a euphemism which would mask the perpetuation of the market power of generators and distributors, and bar access to the transmission grid. Retail competition should be viewed as an integral goal of the restructuring process.

He said that there should be wide latitude for the development of market mechanisms, which should include an Exchange Pool to allow customers instantaneous access to price and availability information for power and for transmission capacity. Bilateral contracting, while having the potential to impede competition, is also necessary to ensure that Hydro's generating capacity can be sold for a fair market price. No company should be able to commit more than 50% of its generating capacity through bilateral contracts.

Sherwin observed that in order for Hydro to get a good price for its generating assets, privatized companies with a balanced mix of base, intermediate and peak load generating assets should be created. Each generating company must, therefore, have a share of the nuclear capacity which provides 65% of Hydro's base-load, however this will limit the number of companies to three or four. In order to develop effective competition with only three or four companies, the distribution of assets should be such that each company has similar marginal costs, similar generating capacity, and similar average costs.

Sherwin said that public concern about the safety of privately-owned nuclear power plants is legitimate, and best addressed by placing responsibility for supervision of safety standards with an independent outside agency, perhaps on the American or French model.

If Hydro were to retain any generating capacity while owning and operating the distribution system, it would be difficult to prevent self-dealing, and virtually impossible to ensure a level playing field for privatized companies facing different tax regimes.

Sherwin suggested that an ideal program of privatization of generating plants would maximize asset values for Hydro, while minimizing the income tax burden and allocating risks of future stranded costs, nuclear decommissioning and fuel disposal costs. To achieve these multiple objectives, Hydro should sell hydro and fossil fuel plants. Recent Revenue Canada initiatives limiting CCA to the purchase price of Hydro's assets have, through their impact on capital requirements and income tax liability, made privatization of the ownership of the nuclear plants less feasible. In view of the Revenue Canada initiatives and the operational economies associated with keeping the nuclear units intact, Sherwin proposed long-term leases between Hydro and the privatized companies for the operation of these units.

Sherwin expressed confidence that privatization of generating capacity, accompanied by privatization of the major distribution MEUs or the leasing rather than sale of nuclear generating assets, would create no stranded costs. This is premised on the belief that while the privatized generators should cover nuclear decommissioning costs, nuclear disposal costs should be borne by the ratepayers.

Sherwin said there is almost universal agreement that the grid is a natural monopoly, that it performs a distinct function whose costs should be separately determined, and that safeguards are needed to ensure reliability of service and the capacity of the grid to accommodate growth in demand for electric power. He suggested that the key issues relating to the transmission function are whether it should be publicly or privately owned, and how services should be defined and priced. He said he assumed that the Exchange Pool would, regardless of ownership, be operated by the grid.

Sherwin told participants that while public ownership of the power grid is not inherently or inevitably less efficient, privatization may offer greater efficiencies in construction and operation. Little new construction is, however, likely to be needed over the next 5-10 years, and it is by no means certain that private ownership will improve operational efficiency. The importance of reducing Hydro's debt as a reason for privatization of transmission becomes much less compelling once generation has been privatized.

"The grid," said Sherwin, "is a natural monopoly." He said Hydro should offer unbundled services to all customers, including generation and distribution companies. Prices should be based on economic costs, including a return on equity and a capital structure which reflects the risks associated with transmission. The repricing of depreciated book assets which this would require, would raise Hydro's transmission base from $5.1 billion to $7.7 billion (1994), and increase transmission costs from about .8›/kWh to about 1.05›/kWh.

The additional revenues from transmission services should be used to fund rural subsidies and nuclear fuel disposal, Sherwin stated. It would not be in the public interest to assign disposal costs to privatized generators: the risk premium which investors would require for the uncertain costs of disposal would perform no economic function.

Sherwin explained that key elements of restructuring transmission are the repricing of the grid, unbundling of grid services, and open access to the grid, without exit fees.

Regulation must be adapted to the economic characteristics of the regulated industry, Sherwin said. To subject all segments of an industry with diverse economic characteristics to a uniform regulatory framework is bound to be inefficient. While transmission and distribution will continue to be natural monopolies and hence subject to regulation, effective competition in generation will require only "light-handed" regulation permitting greater managerial freedom and innovation.

While the OEB is considered to have created a fair regulatory environment for gas distribution, it may be appropriate to limit OEB jurisdiction to electric power distribution, and to develop a specialized agency to oversee generation, the Exchange Pool and the grid.

Sherwin said that placing distributors of electricity and gas under OEB jurisdiction will help to create a level playing field. Regulation of generation, the Exchange Pool and the grid, on the other hand, must focus on avoidance of self-dealing and the transparency of market mechanisms. A new agency - the Ontario Electric Power Board - should be assigned this role.

There are three basic models of rate regulation: * Cost of service/rate of return; * Cost of service coupled with incentive mechanisms; * Price cap.

Because price cap regulation is least intrusive and provides greater incentives for efficiency, Sherwin described it as the most appropriate regulatory model for the transition of Hydro's generation and transmission segments to a competitive environment.

Sherwin stated that the rationale for price regulation in a competitive environment arises from the uncertainty that effective competition will in fact develop. It cannot be assumed that privatization will inevitably lead to competition which obviates the need for price regulation.

Sherwin expressed a preference for price cap regulation without a productivity factor. While most price-cap mechanisms provide for efficiency or productivity adjustments, these may become devices for return regulation. Sherwin suggested that the regulator be empowered to modify the price cap only by the addition of an "investment" factor, if that is deemed necessary to provide an incentive for adequate reserve capacity.

The mode of regulation of the transmission grid should (regardless of ownership) be based on an initial determination of a revenue requirement based on the cost of service/rate of return model. After that, price cap regulation should prevail, with neither a productivity nor a cost pass-through factor. If Hydro or private owners require additional revenue to undertake necessary capital expenditures, they should be entitled to a revised cost/return calculation to establish a new price cap.

Large distribution companies should initially be regulated on the traditional cost of service mode, with adjustments to provide incentives for improved operating efficiencies and economies achieved in power purchases. Smaller companies should be allowed to choose between price regulation with an efficiency factor and a three-part formula consisting of return on capital, capital recovery charges and a mark-up on purchased power to recover overhead costs.

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First Rolls Royce Trent engine to be installed

According to project engineer John Trebilcock, preliminary site work has just begun after final contracts were awarded in November 1995. After completion, scheduled for the fall of 1996, electricity will be supplied to the Ontario Hydro grid and process steam will be used by Atlantic Packaging's paper mill, which is where the cogen plant is being built.

The Trent engine successfully completed final testing in the fall of 1995 after three years' development. According to Rolls Royce Canada, it can generate more than 50 MW at a record 42% thermal efficiency in single-cycle applications. It also has dramatically reduced exhaust gasses such as NOx and carbon monoxide throughout its operating range. The technology is based on the Rolls Royce aero-engine successfully used in the aerospace industry since World War II. The latest aero version, based on the Trent engine, is currently being tested on Boeing 777 aircraft.

The plant will also use a supplementary fired, once through heat recovery steam generator and auxiliary equipment and facilities. The Trent engine will be constructed at Rolls Royce's Montreal plant, the steam generator will be made in Ontario by Innovative Steam Technologies.

SNC Integ is the owner's engineer. The turnkey engineer is Nicholls Radtke. Klohn Crippen is the consulting engineering firm.

The Rolls Royce Trent engine, which is to be installed at Atlantic Packaging's cogeneration plant in Whitby, Ontario.

Largest-ever load retention deal

Load retention rates kill multi-million dollar industrial expansion project

The most recent offers in Sarnia involve Amoco and Imperial Oil. In the case of Imperial Oil, the deal kills a planned $135 million investment in cogeneration. Each company, like Suncor before them (See IPPSO FACTO, May 1994, page 5), had a serious plan to develop cogeneration to reduce costs internally. And each company was offered a financial incentive to dissuade them from proceeding with cogeneration. The cost of the incentive is paid for out of Hydro's general revenues - which means through other customers' power bills. Hydro argues that it would cost customers even more if it did not offer the discounts and thereby risked losing some load.

Of particular concern in the latest Sarnia deals is the fact that the load retention rate deals may be attractive for the recipient, but they do not position the recipient company for long- term competitiveness. Load retention rates are of short duration, and plant expansions tend to be built where long-term efficiencies can be assured. In this recent case, a multi-million dollar expansion of the Sarnia plant is clearly in jeopardy if the load retention rate is allowed to forestall the installation of cogeneration. Sarnia loses the plant expansion and the cogeneration plant construction, the factory is less efficient, more pollution is produced, and ordinary consumers have to pay the costs.

"As far as we're concerned these load retention deals from Hydro are just not on," said Ian Cunningham of the Ontario Chamber of Commerce.

"One of Sarnia's strategic advantages is lower cost natural gas than most of its US competitors," said IPPSO Executive Director Jake Brooks. "This kind of decision prevents Sarnia from using this advantage to attract and retain investment. If manufacturers can choose other locations to expand that do allow cogeneration, it will be almost impossible to keep their expansions here."

The Ontario Chamber of Commerce and the Sarnia Lambton Chamber of Commerce issued similar statements on January 22 decrying the load retention rate offers. They said, in part, "Special incentive rates which have been subject to full public review and which benefit both the utility and the consumer should be made available, providing these rates do not discriminate against customers of the same class or type. Ontario Hydro should not be permitted to use this as an invitation to buy out Non-Utility Generation (Co-Gen) projects being built or contemplated by their customers." The Chamber is particularly concerned that if these latest rate deals go through "others in the same sector will be competitively disadvantaged" because Hydro will not offer the recipients' competitors the same deals. "It seems like a ludicrous way for Hydro to be doing business," said one Sarnia official. "If these companies can secure such special rates, all their competitors should be able to demand equal treatment too. Then where would Hydro be?"

Peter Dyne of the Consumers Association of Canada reiterated his group's view that if such deals are proposed by Ontario Hydro "at the very least they should be scrutinized by a public regulator."

Bill Hale, Ontario Hydro's Manager of Electricity Sales, said that Ontario Hydro is currently negotiating similar rate reductions with six other of its industrial customers who are threatening to leave the province unless their electricity costs are reduced. He did not describe how lowering rates for Imperial Oil, and other companies that Hydro has or is making similar deals with, will affect residential customers and small businesses who don't have the option of leaving the provincial grid.

According to a CKVR TV report, the City Council, Sarnia Chamber of Commerce and the District Labour Council were all calling on the provincial government to reject the deal.

Government consults on removing energy measures from Ontario Building Code

"These changes will not reduce the cost of new housing for home-buyers," says Michael Lio, a Toronto engineer and specialist in energy efficiency for buildings. "Few home-buyer purchase their buildings outright, and in terms of carrying costs for a house when you factor in its energy bills, the less efficient houses cost more."

The savings in construction costs may not lead to reduced house prices either. Homebuyers are not normally capable of assessing a building's energy efficiency before purchase, so the efficiency of a house is not always reflected in its market price.

For example, previous standards that required basement insulation several feet below ground saved up to two thirds of the cost of heating basements. It's a very cost-effective investment, but not one that the market rewards properly. Without the standards, only a small percentage of new houses will have such insulation, and retrofitting below-ground insulation is much more expensive than installing it during construction.

The Ministry is asking to have all comments on the proposed changes in to it by February 29.

Ministry budget down 18%

Hardest hit were the Ministry's energy grants, which previously had been about 24 million. There is almost no money anymore for demonstration of renewable energy or energy efficiency technologies. Also cut were municipal grants, business grants, boards and committees and internal administration. Existing commitments will be honoured.

The following programs are expected to be phased out: - Enersearch and Industry Renewables Program - Industrial Process Equipment Demonstration Program - Market Entry for Energy Efficient Technologies - Industrial Energy Retrofit Program - IESP Feasibility Studies Program - Industry Energy Partnerships - Transportation and Commercial Energy Management Programs - Scrap Tire Program

The Ontario Energy Board will have its budget cut by 15 per cent. Provincial contributions to the Canadian Council of Ministers of Environment and Energy were also reduced across the country, forcing the organization to curtail some of its efforts.

The government seeks to reduce its costs by about one-third overall, so these cuts are not likely to be the end of restructuring for the Ministry.

Hydro union says Macdonald in conflict of interest

Macdonald is also Director of two energy companies that could stand to benefit greatly from changes in Ontario's energy sector. Murphy is calling on him to resign as Director of TransCanada Pipelines Ltd. and Alberta Energy Company Ltd in order to restore confidence in the committee. "Mr. Macdonald has a huge conflict of interest here," says Murphy.

If the committee's recommendations lead to competition in Ontario's energy sector, as is widely expected, Murphy says Macdonald could benefit as director of these two gas-related companies. Gas would be one of the main sources of competition for Ontario Hydro which relies on more expensive nuclear generation. TransCanada Pipelines already owns three gas-fired generation plants in Ontario that sell into the Ontario Hydro grid.

"We don't see that as a conflict at all," says Scott Robbins, spokesperson for Environment and Energy Minister Brenda Elliott. "We're totally comfortable and confident in his ability to be impartial in this capacity." He also adds that the Macdonald committee will only be issuing recommendations. It is the government that will make decisions about the future of energy in Ontario, including ownership of Ontario Hydro and competition. Robbins says that it would be difficult to find anyone qualified to head the committee who wasn't in some way connected to the industry.

Macdonald was required to sign a confidentiality agreement preventing him from using any information he gained through the committee for personal use.

Macdonald has been a director of TransCanada Pipelines since 1991 and owns 200 shares. Since he joined the Board, the company has been involved in a major dispute with Ontario Hydro over plans for two new gas-fired plants in Northern Ontario. TransCanada planned to build plants in North Bay and Kapuskasing that would have produced 300 MW. Hydro originally blocked the plan, but later agreed to a scaled down version of 80 MW.

Municipal News

Orillia ratepayers get cash, thanks to independent power

The Commission's CEO Gord Davidson said there were other factors contributing to the ability to offer the rebates. He cited in particular a 'highly motivated and dedicated workforce,' automation of their small hydro stations, a 16% staff reduction through early retirements, and income from the completion of work for other organizations including an adjacent municipal utility.

Payments were to be distributed to approximately 12,000 customers, according to the amount of power consumed in November 1995. The City's largest power consumer received about $77,000, and the average cheque per household was $50.

Commission Chairman Frank Kehoe, an IPPSO member, said "No other electrical utility in Ontario has ever distributed such a dividend, and we know of no such payment ever made before in Canada." OWLPC already has the second lowest electric rates of all municipal utilities in Ontario. Kehoe added, "The Commission considered using some of the net income to further reduce rates to subscribers. This was rejected because rates are already so low that a further reduction would have pushed them (in some cases) below the cost of buying power [wholesale] from Ontario Hydro."

Mayor Clayt French said, "This decision is an example of why utilities with local or regional governance are effective, since they are close to the needs of the communities they serve." The Ontario government is considering amalgamating its 306 existing municipal electric utilities into a few regional utilities. French said that such utilities would be too large to be responsive to the concerns of individual communities.

OWLPC is also concerned about Ontario Hydro's new U2 rate which provides lower cost power to the larger urban municipal utilities. Clearly, such a rate would have the effect of raising power prices in smaller jurisdictions such as Orillia.

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Bill 26 brings MEU privatization a step closer

"It must be a lot for MEUs to deal with all at once," said IPPSO Executive Director Jake Brooks. First of all it's not clear if Bill 26, before the MEU exemption, would be sufficient to enable MEU privatization. There are some legal uncertainties about ownership and rights to sell, at least in the cases of certain municipalities. A municipalilty proceeding to privatization on the strength of Bill 26 alone could have engendered various lawsuits. However, Bill 26 also set up an incentive for municipalities to move to privatize as soon as possible. That incentive is simply that if they privatize their MEUs, Ontario Hydro or the provincial government will not be able to easily confiscate the MEU assets at a later point in time. Most observers believe that any major privatization and restructuring of Ontario Hydro will have to be based on the formal amalgamation of MEU assets with Ontario Hydro assets. The only way that a city and an MEU could protect its hold over its local MEU assets would be to privatize them, and keep the proceeds, before any further legislation is introduced (or provisions de-exempted) which means as soon as possible.

The letter from Ministers Leach and Elliott said simply, "It is the Government's intention to exempt municipal electric utilities from the provisions of Bill 26, the Savings and Restructuring Act, relating to municipal control of local boards." The letter also discussed the government's Advisory Committee (Macdonald Committee) process.

Even if the MEUs are formally exempted from Bill 26 (which apparently is not a fait accompli), MEU privatization will now be much easier. All that is required apparently, will be to remove the exemption. The Ministers' December 22 letter implied that the exemption might last only for the duration of the Macdonald Committee. It is likely that the Government will issue further clarification on this question by the time of the conclusion of the Macdonald Committee's process.

Bill 26 was criticized by the Province's Environmental Commissioner, Eva Ligeti, on January 19. She said the bill breaks the intent of the province's Environmental Bill of Rights.

Possible attack on the MEA

Hydro stops collecting MEA dues

However, in the future, the MEA will have to collect these fees individually from each of the member MEUs, which may prove to be a difficult task. Some MEUs may be unwilling to pay, others may dispute the amount or the timing and add to collection costs, and others may have trouble deciding how to pass the amounts on to their own customers. It will be tempting for some MEUs to revise their billing systems so as to show the MEA membership fee as a separate but obligatory charge on customer bills. This would lead to more pressure to reduce or eliminate the payments altogether.

In all, it looks as though the MEA will have to spend more money to collect its membership fees, and that the process will net it less fees than the Association has been used to receiving. In a sense, the membership base of the Association could change from 'quasi-mandatory' to voluntary, and in theory competing federations could even mount a challenge to the MEA. Some MEUs have already begun intervening separately from the MEA in public hearings.

"This removal of market protection for the MEA by Hydro might be understandable," said IPPSO Executive Director Jake Brooks, "if Hydro was also exposing itself to the voluntary decisions and whims of the market." Except for labour unions, the other major stakeholders in the electric sector all depend on voluntary memberships: consumer groups, environmental organizations, ratepayer groups, AMPCO and IPPSO. "There's no reason Hydro should have this sort of protection of its client base, and deny it to the MEA. It's the same kind of unfair competition Hydro now engages in with respect to its competitors in generation."

Hydro also seems to be subtly attacking the MEA in its latest document which it submitted to the Macdonald Committee. (See article elsewhere in this issue.) While recommending the absorption of the MEUs into a central "Wiresco," the Hydro document ignored the MEA as an association, suggesting that municipalities which currently own MEUs be given shares in the new Wiresco. The MEA would apparently be redundant.

Toronto hands out 3 contracts in major efficiency program

Richard Morris, Director of the City's Energy Efficiency Office released a "Call to Environmental Action" on January 22. The document summarizes plans for a major energy efficiency program in the City, of which the 3 energy service contracts are a significant part. The plan was devised by EWSCO, the Energy and Water Savings Committee, a joint effort of Toronto Hydro, Consumers Gas, the City of Toronto, Ontario Hydro and concerned citizens.

The contracts are intended to retrofit about 100 buildings in the City of Toronto for energy and water efficiency. Experts estimate that the renovations will result in annual savings of $3 million per year in energy and water bills for the buildings' owners and/or tenants.

The three Energy Management Firms (or EMFs) who won contracts are Besto, Rose, and Tescor. They will have a little over two years to complete the work. Of the $30 million, $18 million is expected to come from the private sector, and will be focussed on privately owned buildings. The other $12 million will come from the Canada- Ontario Infrastructure Program, a joint federal/provincial and municipal works program. Consumers Gas is providing half a million dollars to securitize its financing.

One of the most innovative features of the program is on-bill financing, and on-bill collection. Building owners will be able to get the renovations done at no up-front cost to themselves, with payments made over time, as part of their energy bills. The good thing about this is that the new energy bills, including the amortized payments for the renovations, will still be smaller than the bills would have been if the renovation work had not been completed. Everybody wins.

This project is really just a pilot project in preparation for a much bigger scheme that will involve renovating many more buildings. The full-blown version of the plan envisions as much as $3 billion worth of energy efficiency retrofits in the Toronto area.

Morris says that "more money is likely to join in," because the investments are relatively attractive. He also hastens to point out that the program seeks to integrate Renewable Energy Technologies as soon as possible. It remains to be seen if consumers will be able to finance these innovations with on-bill payments.

Mississauga Hydro to install fibre optics system

While MH will be responsible for installation, operation and administration of the new system, OPN will underwrite the costs and design the system. The system will use the latest digital technology, "for demand-side energy management and telecommunications capability throughout the City of Mississauga," according to Network Mississauga Project Manager Dave McCarrel. In terms of the advantages over existing communications systems, he says it is, "analogous to an 8-lane highway compared to a dirt road or an 8 foot sewer pipe versus a garden hose." The system will be able to carry voice, video and data two-way simultaneously.

MH will benefit from the system in several ways. It will allow automated remote meter reading as well as electronic billing. It will allow greater monitoring and control capability over the city grid and permit time-of-use pricing for peak load periods. This way, customers will be able to monitor and reduce energy use at peak load times, thus reducing MH's need to expand and upgrade transmission systems. They will also be able to install automatic outage detection mechanisms that will locate and determine the nature of a power disruption and immediately notify repair crews.

Mississauga residents will benefit by being able to monitor and manage their electricity consumption, thereby reducing their electricity bills. Phone service will improve in quality and, when regulations permit, local phone competition will be possible. The system will also allow the eventual use of advanced video communications such as two way video conferencing and video-on- demand. It will also allow better, faster and more efficient access for computer communications such as the Internet.

Mississauga as a whole will benefit, according to McCarrel, by attracting communications and high-tech industries to the city. "Through Network Mississauga," he says, "Hydro Mississauga is installing a world-class energy management and enhanced telecommunications system that will meet the present and future needs of all our customers."

Mississauga Hydro logo

Trash-to-cash electricity proposal passed over by Metro

The proposal was presented by Eastern to Metro in response to a call for proposals for a new landfill site once the current Keele Valley site reaches capacity by the end of the decade. Under the proposal, Eastern would build two $125 million dollar plants that would each process 500,000 tonnes of garbage a year. This is the amount of garbage Metro will need to get rid of per year at the turn of the century, meaning that Eastern's proposal would eliminate the need for a new landfill site. Over the past several years, Metro and the Province have spent millions of dollars unsuccessfully trying to locate a new landfill site.

Greg Vogt, co-owner of Eastern, told Metro that his company could dispose of Metro's waste at a maximum cost of $65 per tonne, $10 cheaper than the next closest bid. The electricity produced would also generate money, which no other proposal included.

Metro Public Works staff, however, dropped Eastern's bid from the shortlist and placed a gag order on them, and four other unsuccessful bidders to prevent them from taking their bid directly to councillors or the media. "We asked for (the gag order) when it became clear that there was going to be an intense amount of lobbying being done," said Shaun Hewitt of Metro's Treasury Department. He adds, though, that, "Staff have written a report to council taking the media out of that clause."

To date, Eastern has only been given about five minutes to present their case to the committee that will decide the future of Metro's garbage. They were 88th out of 95 deputants at a December 1995 meeting of the committee. They finally spoke 11 hours into the meeting, when only eight councillors and one reporter remained. Vogt told the committee that he had a written guarantee for financing from a European bank and has already proven a very similar technology, though on a smaller scale, at plants it operates at the Keele Valley and Brock West landfill sites.

The existing, and proposed, plants use anaerobic digestion to break down waste into combustible gasses, such as methane. The gas is then burned to generate electricity. This process has been successfully used in other parts of the world and is considered to be a clean, environmentally benign source of power. Methane and carbon monoxide are natural byproducts of landfill sites, and they're extremely toxic and contribute to the greenhouse effect. "What Eastern Power is doing at the two landfill sites," says Norm Rubin of Pollution Probe, "is eliminating all that (gas) and generating electricity that, otherwise, Ontario Hydro would generate using coal."

According to Hewitt, staff rejected the Eastern proposal because, "Their proposal did not provide sufficient technical detail. In addition, they didn't provide their financial capability which we had asked for." Hewitt also said that staff found it difficult to judge if additional facilities, such as landfill or incinerators, would be necessary to dispose of 100% of Metro's waste.

The experiences of other jurisdictions in North America, and the world, however, suggest that, not only can the need for new landfill sites be eliminated, but existing landfill sites can be "mined" for the same purpose. On a smaller scale, this is the case with Eastern at Keele Valley and Brock West.

Collier County, Florida, pioneered landfill mining in 1988 in an attempt to reduce groundwater contamination, recover reusable materials and reclaim landfill capacity. The plan was successful enough to now be included as an integral part of the counties waste management strategy.

Lancaster County, Pennsylvania, has also successfully employed landfill mining to recover reusable materials and to fuel an incinerator which generates electricity. Executive Director of the counties Solid Waste Management Authority Herb Flosdorf says, "Because one of the County's major resources is farmland, we had to find a way to protect the land by extending the life of the existing landfill as much as possible. We did not want to use up valuable farmland to build another landfill." Essentially, the county faced the same situation Metro faces now.

Lancaster excavates about 2,650 tonnes per week from the landfill, of which 41% is recycled, 56% is incinerated and only 3% was unusable and returned to the landfill. Flosdorf estimates that the life of the landfill has been extended by 15 years, and the county has, so far, avoided having to build 2 new landfill sites that would have used 300 to 400 acres of farmland.

photo of Eastern's Keele Valley plant - being delivered Wed. afternoon

Toronto Hydro cuts rates for second year

Commercial rates will drop the most, by 1.7%, while residential rates will go down by 0.75%. According to Toronto Hydro Director of Communications and Corporate Planning, Blair Peberdy, residential cuts are lower because residential rates are subsidized in the city by business and commercial rates.

"The total savings to users city wide will be $10 million," says Peberdy. "This will give Toronto Hydro users some significant cost relief." Individual residents should save about $9 in 1996, he says, while business would vary. A typical convenience store could save around $64, while a medium sized office building could save over $5,000. A large corporate electricity consumer, like the TTC, could save about $200,000.

These cuts are made possible partly by an Ontario Hydro rate freeze, and partly by downsizing at Toronto Hydro. Around 230 staff have left the utility either voluntarily or through early retirement. This has resulted in a $10 million reduction in operating costs in 1995. Despite these cuts, Peberdy says that service will not be affected. In fact, major upgrading projects are planned for 1996.

"We're not sacrificing capital operations or efficiency with these cuts," he says. "Our plans for 1996 include rebuilding the distribution system in residential neighbourhoods, and several other major projects." These will include burying lines along major streets and the construction of a new service centre by the harbour at Carlaw and Commissioners Street.

Municipal utilities in Etobicoke and North York will also see cuts of 1% and 1.5% respectively. Scarborough, York and East York utilities are freezing rates at 1995 levels.

Tax ruling wallops GLP

The Ontario Municipal Board (OMB) overturned a 1992 ruling of the Assessment Review Board which had found that GLP was a power 'producer,' not a power 'manufacturer.' Manufacturers are required to pay business taxes equivalent to 60 percent of their property assessment, whereas producers only have to pay taxes equivalent to 30 percent of the same figure.

The municipalities and school boards of Sault Ste. Marie and Wawa believe "They've won a very, very large victory," according to their lawyer Gerry Nori. However, the tax increases are almost certain to be passed on to local residents in the form of higher electricity rates, and reduced income from international power sales.

Great Lakes Power is seeking leave from the Ontario Court to appeal the ruling to the Ontario Divisional Court. With about 300 MW in operation, Great Lakes Power is the largest private power producer in Ontario.

Pictured left to right are Dave Martin of the Nuclear Awareness Project, IPPSO Executive Director Jake Brooks, and John McGinnis of the Deer Park Ratepayers Association, speaking at a public meeting about utility privatization issues at Toronto City Hall December 14. The meeting was sponsored by the Energy Action Council of Toronto (a chapter of the Solar Energy Society of Canada) and the Coalition for a Green Economic Recovery. Lively discussion followed. Further information available from IPPSO or Eneract.

First Nation partner in wood-chip cogen

This plan is part of a larger development project by the community that calls for the construction of new infrastructure, services and business for the town of 250 people near Thunder Bay.

According to Adolph Rasevych, Ginoogaming's economic development advisor, new developments, including the cogen plant, are necessary to prepare Ginoogaming for the advent of self- government. He sees this coming, "in some form," by the year 2000. First Nations, he says, must find ways of becoming self-reliant before self-government in order to secure their future.

Energy is a major factor in achieving self-reliance, particularly in remote northern communities where the cost of current diesel generation is far above the provincial average. By using waste wood chips, Ginoogaming not only can meet its energy requirements, it can eliminate the need for landfill sites for wood waste. In August 1995, a fire began in one of these landfill sites and destroyed 200 hectares of forest al"ccong the highway leading into the community.

Plans for the 7 kW plant began in March 1994, when the Ginoogaming elders decided to take advantage of grant programs made available by the previous Ontario government. Rasevych says that, at that time, he believed government grants were "going to erode" as early as 1996. He convinced the community to develop plans to achieve self-reliance, which appear to be paying off.

With an additional 3 kW expansion already being considered, the plant will not only meet energy expansion requirements of the town, it will also create an estimated 26 to 30 jobs in an area with 85% unemployment. Ontario Hydro will also be able to avoid upgrading hydro lines from Geraldton, 32 km away, which would otherwise be necessary at an estimated cost of $32 million. The cogen plant is estimated to be completed at a cost of $20 million.

One problem that still remains to be worked out is what the relationship with Ontario Hydro will be. Currently, Ontario Hydro is mandated to provide all power to remote communities in Ontario. If Ginoogaming takes over its own electricity production, Hydro is concerned that it may still be legally required to maintain backup generation unless allowed out of this obligation.

According to Lionel Smith, Manager of Remote Community Electricity Systems at Ontario Hydro, no options have yet been ruled out. He says that any proposals will be looked at from a business standpoint, taking into consideration the current $2 million annual operating losses in diesel generation for remote communities. The First Nations "want to be, and should be, involved in generating systems," he adds, noting that the First Nations governments are the only ones mandated to look at the many social impacts of energy.

Rasevych says that Ginoogaming could sell the energy they produce directly to Ontario Hydro, they could service their own community and sell any excess power to Ontario Hydro, or they could form their own utility independent of Ontario Hydro.

Whatever the final arrangement is with Ontario Hydro, Ginoogaming and Long Lake Forest Products will benefit from the independence gained through the cogen project, Rasevych believes. The two have worked well together since 1993 when they signed a unique partnership agreement. Ginoogaming controls all hiring at the mill, one of six owned by Long Lake, and have formed their own Ontario Labour Board-certified union local. This allows local residents to be employed and gives the First Nation the ability to set work schedules that reflect the indigenous way of life. For example, employees can take two months off for hunting, and lose only their pay for that period.

Work on the non-energy aspects of the redevelopment plan are also set to begin in March, 1996. Work will start then on the first of four new town buildings that will provide new services and revenues for Ginoogaming, with the aim of making the community self-sufficient.

This first building will house a bingo hall and a restaurant. Bingo, Rasevych says, is seen to be the key to the financial success of the community as Ginoogaming is one of only three First Nations in Ontario to hold a provincial license. Revenues will be used to help finance the next three buildings.

The second building will house other commercial ventures, including a general store, gas bar, hotel, laundry, fur storage, arcade, shops and a conference and training centre. The third building will house recreational facilities including an indoor pool, youth centre, Elders centre, day care and library. The fourth building will house a police station, fire hall and ambulance station. There is also a proposal to build hockey, baseball and soccer facilities.

The construction schedule represents three phases, says Rasevych. Building one represents wealth generation, building two represents wealth retention and buildings three and four represent wealth returned to the community. "The development will be self- supporting," he says, creating jobs and meeting the strategic planning and development objectives. These objectives are: employment, sustainability, autonomy, co-operation, preparing youth for the future, and accountability.

Total costs for redevelopment, including the cogen plant, are not expected to exceed $40 million.

photo of Adolph Rasevych

logo of Ginoogaming

Hydro News

Ontario Hydro becoming the Honest Ed of power?

Ontario Hydro's "Draft New Standard Rates and Pricing Options Under Consideration for 1997" is a preliminary document for discussion purposes only, and it has certainly been successful in prompting a lot of discussion. The document, dated January 15, 1996, describes no less than 17 new pricing options under consideration. They include: 1. Surplus Power for Municipal Utilities 2. Surplus Power: Economic and Export Buy Through Options 3. Shorter Cut Period for Surplus Power 4. Week Ahead Committed Surplus Power 5. RTP (Real Time Pricing) II with Weekly/Monthly Prices 6. RTP II for RTP I Customers 7. RTP II for New Customers 8. Time of Use with Customer Baseline 9. Rolling Customer Baseline Linked to Contract Period 10. Residential Retention and Expansion Option 11. Aggregation Option 12. Preferred Payment Option 13. Premium Reliability Service 14. U.S. Dollar Price Option 15. Environmental Equipment Price 16. Hydro Advantage Points 17. Economic Development

Ontario Hydro already has a large number of rates for various types of customers (direct customers, municipal utilities, and non- utility generators have certain rates applicable only to them for example). Observers concerned with protecting general consumer interests have three or four major concerns with the proliferation of the rates such as Hydro is proposing: a) Most of these rates amounts to special types of discounts, which means that unless you find a way to qualify for a special rate, you may be left to pay the higher amounts, and may even end up unwittingly subsidizing those who receive the discount rates. b) The rates do not tend to encourage efficiency. c) The complexity of the rates is not only beyond the ability of the average consumer to manage, but could be beyond the ability of most public regulators to analyze and manage effectively - unless we are willing to spend more public money on regulation. d) The administrative costs of designing and implementing these rates could be relatively small for Hydro, compared to the administrative costs for consumers who will be forced to hire experts to analyze and compare these rates, possibly only to find that the rates are discontinued in the near future.

Perhaps the most humourous reviews have been attracted by Hydro's proposed rate called "Hydro Advantage Points." Similar in concept to frequent flyer points or "Club Z points," Ontario Hydro customers would be awarded a credit in proportion to their purchases of electricity from Ontario Hydro. Then, at a certain time in the future, the customer could redeem his or her credit points against the cost of their Hydro bill. Hydro literature says that "Initial thoughts are that the credit would be in the range of ¬% to 3% and would be redeemable in the fourth or fifth year after being earned. The credit would not be transferable." The literature also notes that should open access become a reality during the term of this program, Hydro Advantage Points could only be used to buy Ontario Hydro power, not transmission or distribution services.

Consumers Association of Canada representative Peter Dyne said, "This is a foretaste of things to come. If we don't watch out, with a competitive open market, we'll be knee-deep in this sort of thing."

"Loyalty has its rewards," joked one commentator. "But when will we see the Freedom 55 pricing option?"

RETS bidders delayed one month

Some bidders are uncomfortable with the delay because Hydro has not yet given them any letters of intent or written assurances that their projects are going ahead, subject to pricing approval of course. Bunli Yang wrote IPPSO on January 18, saying "Contract awards are still expected by Ontario Hydro this spring. Proposals for the remainder of the Round 1, the Medium Wind Farm category, will also be due in the spring."

Firings backfire on government

The firings, which took place in late December, were criticized publicly by outgoing Hydro Chairman Maurice Strong along with others, because of their clearly partisan nature. The directors were all appointed by the previous NDP or Liberal governments. The reinstated directors were: John Murphy, Michael Cassidy (a former NDP leader), Kealey Cummings (a retired union official), Jim MacNeill, an environmentalist, and Jim Hinds, a Liberal appointee and one of the only remaining directors from northern Ontario.

The Power Corporation Act says a Hydro director "may be removed from office before the expiration of his or her term for cause." Ontario Hydro's lawyer argued that the government could fire board members for any reason. He then argued that the clause was intended only to limit Hydro directors' ability to fire each other. The government's lawyer argued that the five directors hadn't been fired at all, but that their terms had merely been shortened. The judge disagreed, and awarded legal costs to the plaintiffs.

It appears that Hydro Chairman William Farlinger was not behind the firings. He was consulted about the move, but the government was the one who actually decided on and carried out the firings.

In addition to the five reinstated members, the Board currently consists of: Chairman Bill Farlinger; Dr. R. Mohan Mathur, Dean of Engineering at the University of Western Ontario; Alan Kupcis, Hydro President and CEO; Eleanor Clitheroe, Hydro's Executive VP, Chief Financial Officer and Managing Director; Carl Anderson, Alternating Chair of North York Hydro; businessperson Nuala Beck; Donald Fullerton of CIBC; journalist Dona Harvey; David Kerr of Noranda Inc.; former Municipal Electric Association Chair Doug McCaig; consultant Anne Noonan; Arthur Sawchuk, President and CEO of Dupont Canada Inc.; and Ontario Deputy Minister of Environment and Energy Lynda Stevens.

Hydro refuses to release nuclear safety reviews, says public would be alarmed

The documents in question are peer reviews that compare Ontario Hydro nuclear facilities to almost all other nuclear facilities in North America. Letter grades are assigned to a wide variety of operational and safety aspects that tell utilities how they fare in comparison to other utilities' reactors.

In a November 28 Globe and Mail article, a source "with knowledge of Ontario Hydro's results" said the scores were low and, as a result, Hydro doesn't want them made public. "This tells you what you need to know," the anonymous source said. "People with good grades are usually willing to talk about them."

Ontario Hydro spokesperson Terry Young defended the move, saying that releasing the information would erode the effectiveness of the peer review process and the information would likely be "taken out of context." He said that the reviews compare utilities performance against perfect standards and that, against perfect standards, Ontario Hydro has some deficiencies. "In some areas, we're not making progress toward excellence as quickly as we would like," Young said.

Ontario Hydro Senior Vice President and chief legal council Lawrence Leonoff made the decision not to release the reviews. "Plants are evaluated at the highest level of standards in the industry and consequently, criticism is offered, even in areas where a plant meets acceptable standards," he wrote in a letter to the Globe and Mail. He added that confidentiality was promised to those who took part in the review.

A senior official with the Atomic Energy Control Board (AECB), Zigmund Domaratski, said, "We believe the peer review will be more effective" if it remains confidential. He explains that Hydro would be inclined to be less critical of itself if the results were going to be made public. He says the AECB has not requested to see the reviews, but has asked that Ontario Hydro notify them if the results show the utility is in violation of the conditions of its nuclear operating license. Domaratski says he doubts Hydro would be embarrassed of the results because their operating problems are "public knowledge."

In October 1995, two of Darlington's four reactors were left without computers which normally regulate them in separate incidents four days apart. Each reactor has two computer systems monitoring them in case one fails. However, in both instances, both computer systems failed at the same time. At the Bruce Station, 10 small metal pieces, mostly bolts, were torn loose from inside a cooling system by water pressure. They were found during a maintenance shutdown.

In regard to the reviews, Energy and Environment Minister Brenda Elliott said she had been briefed about them but couldn't immediately recall their content. She said Hydro's statements that releasing the information would cause unjustified negative opinion was, "an interesting point of view."

Tom Adams, utility analyst at Energy Probe, however, says people living near the reactors and regulators have a right to know what the shortcomings of the plants are, particularly in terms of safety.

Alternative Models for restructuring Ontario's electric sector

By David Bright and Stephen Salaff, Ph.D. The creation of the Advisory Committee on Competition in Ontario's Electricity System has focused the debate on the future of Ontario Hydro and the provincial electrical sector.

Chaired by Donald S. Macdonald, the committee is scheduled to report by the end of April after consulting with stakeholders and the public. The Macdonald committee was appointed by the Progressive Conservative government of Mike Harris, which seeks to reduce the provincial deficit, increase revenue, reduce transfers to municipalities and make the province more efficient through measures such as the recently passed Bill 26 "omnibus legislation."

Public debate on new structural and ownership arrangements for Ontario Hydro had been forbidden by past administrations at recent rate hearings of the Ontario Energy Board (OEB). This has resulted in the development of many models and viewpoints on the possible future of Ontario's electrical sector announced to the public by many stakeholders, embodying varying degrees of open access, competition and privatization, or arguing for the status quo.

This wide range of viewpoints and models were recently submitted to the Macdonald committee around the end of January. Past viewpoints were updated to incorporate new developments as North America quickly moves towards open access, and wholesale and retail competition.

Regular intervenors at the OEB like the Association of Major Power Consumers of Ontario (AMPCO), the Municipal Electric Association (MEA), IPPSO and others, have articulated their views on restructuring to the committee, along with Ontario Hydro management. Another stakeholder is the Power Workers' Union (PWU), which is outspokenly opposed to privatization.

This article reviews features of views of some of the stakeholders, most of whom now endorse some degree of privatization of Ontario Hydro.

AMPCO's view

AMPCO, comprising some 100 large industrial users of electricity in Ontario, advocates the immediate breakup and privatization of Ontario Hydro, to allow direct retail access in Ontario by 1998. AMPCO's proposal is motivated by the ballooning of Ontario's electricity rates. For industrial users they are now 20 to 30 percent above jurisdictions with which they compete in Canada, the US and parts of Europe.

AMPCO supports public regulation of transmission and distribution companies by a "reconstituted" Ontario Energy Board, and endorses a merger of the assets of the Municipal Electrical Utilities with Hydroþs transmission system. This view agrees with that of the Hydro management submission to the Macdonald committee (see below).

AMPCO believes that roughly $12 billion could be realized by such a merger and privatization move. These monies would immediately reduce Ontario's debt exposure.

AMPCO proposes the transfer of Ontario Hydro's generation assets to five or more competing and commercially viable companies, with no one company having a dominant market share. AMPCO wants the sale of these companies to proceed as quickly as possible, to gain maximum income. In AMPCO's scheme, the proceeds of the sales would be applied against Hydroþs government guaranteed debt. AMPCO wants Hydro's fossil fuelled stations to be sold on a site-by-site basis, and Hydroþs seven river hydroelectric generating systems each sold separately to different private investors. The nuclear stations would be held temporarily by government.

If the proceeds of the privatization do not fully retire the debt, AMPCO endorses special charges on electricity consumers to pay down the remainder.

The MEA model

The MEA argues that generation, transmission and distribution should reside in separate entities with independent governance structures. Transmission and distribution functions currently performed by Ontario Hydro should be transferred to separate entities.

A competitive wholesale electricity market should be established, with all private and public generators having the opportunity to supply the wholesale market for power on a non- discriminatory basis. Generation currently owned by Ontario Hydro should be separated into multiple nuclear, fossil and hydraulic generating companies.

The obligation to serve and supply should be transferred from Hydro to the distributors, and the power pool concept should be retained. The power pool should be operated by the transmission company. Retail access should be rejected, in part because Hydro has "very substantial debt obligations associated particularly with its nuclear facilities."

The MEA claimed further that Ontario Hydro's adaptation of convergence models increases monopoly power for Hydro and exposes customers to unnecessary costs and risks. As such, the Ontario Hydro management's proposal (see below) should be rejected.

The MEA said that when considering ownership options, customer benefits should be the over-riding objective. "No portion of Hydro assets should be privatized unless it can be clearly demonstrated that such an action will reduce the cost of electricity in the short run and in the long run. No form of full or partial privatization should be considered until a separate transmission company and separate generating companies are created. The transmission company, which is a natural monopoly, should be publicly owned, and distribution companies should be locally owned and controlled. Privatized generation companies should be smaller rather than larger.

The privatization of Ontario Hydro requires consent "from the present owners ... including the MEUs." There should be a transition period, to the year 2000, during which time Hydro, and its descendants, prepare for competition and the distribution segment of the industry restructures to meet its new responsibilities.

The MEA has called the proposed merger of the MEUs with Hydro's transmission and distribution system, as proposed by Ontario Hydro, a "power grab."

As described elsewhere in this IPPSO FACTO, the Municipal Electric Utilities (MEUs) have been prevented from privatizing under provisions of Bill 26, the recently passed omnibus legislation.

Ontario Chamber of Commerce

The Ontario Chamber of Commerce supports the restructuring of the Province's electric power system and the privatization "of some parts" providing the new configuration is accomplished with 15 principles, including: . Generation is not a natural monopoly and should be subject to public and private ownership and competition; . Transmission and distribution are natural monopolies and should be regulated; . Any privately owned corporation with monopoly status should be regulated; . The power pool principle including uniform wholesale rates should be retained and the right of any distribution utility to self- generate and/or purchase from a private-public generator, should be subject to contractual agreements and the applicable principles espoused in the MEA/Ontario Hydro NUG agreement; . Stranded assets must be paid for by all future electric power customers; . Adequate and appropriate regulation is required.

The OCC has over 60,000 business organizations as members through 200 federated community Chambers of Commerce and Boards of Trade.

IPPSO's model

IPPSO took the opportunity of its annual conference last December to present its forecast and model for restructuring the Ontario electrical sector to replace the present monopoly dominance of Ontario Hydro (for the complete text see IPPSO FACTO, December 1995).

According to IPPSO, by the year 2020, 17,000 MW to 20,000 MW, or up to 85 percent of Hydro's current generating capacity will require replacement, allowing non-utility generation to gain an "exponentially increasing" portion of the provincial power supply. Non utility generation now accounts for less than 2,000 MW, or under 10 percent, of Ontario Hydro's grid-connected power.

IPPSO proposed a provincial electricity structure which would allow independent generation to expand as Hydro's coal and nuclear generating units are phased out, under the supervision of a newly "empowered" Ontario Energy Board with binding and effective regulatory authority over Ontario Hydro or its successors.

Such an effective regulator is essential, said IPPSO, because "the absence of a genuine regulator presents an unacceptable business risk. In the context of a $8 billion annual Ontario power sales market, and given the prospect of a capital investment exceeding $50 billion for replacement of Hydro's nuclear and coal plants during the next quarter century, it would be reckless for developers, investors and lenders to undertake major energy projects (and in many cases long-term fuel contracts) if the market operating rules could be arbitrarily imposed or changed by a public monopoly or various governments."

IPPSO also said that Ontario's electricity functions and existing infrastructure should be unbundled and restructured into a publicly managed power pool, several companies called "Gencos" to own and operate Ontario Hydro's existing generating assets "and thus ensure real competition," and a public or private transmission monopoly called "Ontario Transmission."

IPPSO wants competition in generation to begin immediately at the wholesale level. All generators would competitively bid to supply power to a single power pool, which would assess bids on the basis of price, reliability, and length and timing of contract.

IPPSO promotes renewable energy technologies, which reflect the "true, unsubsidized" cost of producing energy. Non-renewables pose intrinsic risks and pollution costs, and, in the current flawed market, benefit from the hidden subsidies of externalized costs.

IPPSO proposed that 20 percent of all new electrical energy production in Ontario be procured from renewables.

Ontario Hydro faces a massive $38 billion debt, unproductive excess generation of 5,000 MW or more, and the threat of stranded nuclear assets under an open access regime. In IPPSO's view, Hydro is thus resisting competition and taking anti-competitive actions which imperil alternative electricity supply.

IPPSO noted in its position paper that Hydro regularly abuses its market power, responding to competition "by blocking all but emergency power imports from the U.S., offering discounts to Ontario industry, banning wheeling, actively and systematically discouraging self-generation (including instituting ill-conceived back-up charges and anti-competitive load retention rates) and selling record amounts of surplus power to U.S. utilities - which in turn sell it as discount power to their industries to keep them as customers. In fact, neighbouring U.S. private utilities have attempted to lure Ontario industries to re-locate across the border with discount power rates driven by the availability of Ontario Hydro's own surplus power exports."

IPPSO emphasized that the problem will become larger during the next ten years. Because of the North American Free Trade Agreement, Ontario Hydro will be under intense pressure to either stop dumping power into the U.S. market, or open up the Ontario grid to U.S. competition. The Ontario market for power "will be subsumed within a continental electricity infrastructure."

Ontario Hydro Management view

Ontario Hydro Management's submission to the Macdonald committee postpones the onset of competition until "around the year 2000," when Hydro's monopoly on generation should end with the privatization of the public utility and all customers would be allowed to choose an electricity supplier from inside or outside of Ontario (see page 1 of this IPPSO FACTO for the IPPSO interpretation of the Hydro brief).

Hydro management states that "the year 2000 is used as the key transition date to open retail access." However, while Hydro asserts that "retail access is the most appropriate form of competition," it also says the 2000 date "should be taken as notional only."

Fundamental to Hydroþs view is that potential "stranded assets" - Hydro's debt-burdened fleet of 19 nuclear reactors - should be allowed to recover their costs through special charges ordered by the Ontario government.

The Hydro proposal would eventually bring full competition to the Ontario electrical sector by opening its transmission system to all electricity suppliers, and by allowing direct retail access. The Ontario Government would reduce Hydroþs massive debt with the proceeds from the sale of generating assets.

This proposal is driven by the desire "to give consumers more choice and all the advantages that a marketplace will bring, including competitive prices," said Hydro CEO and president Allan Kupcis.

IPPSO, AMPCO and others have criticized the rate of change in Hydro's proposal as too slow. While AMPCO advocates direct retail access by 1998, IPPSO seeks open access immediately.

The influential California Public Utilities Commission (CPUC) recently recommended that direct retail access within the state be phased in beginning January 1, 1998, well before Ontario Hydro's notional date. Other state regulators have also chosen 1998 for direct retail access. Hydro has prohibited wholesale competition, in contrast to a number of more progressive jurisdictions in the U.S., the U.K., and elsewhere, several of which have in fact already launched direct retail access.

IPPSO views the Hydro proposal as a recipe to prevent any further competition within Ontario for at least the next several years, until "about 2000" - the delay appears to weaken the competitive aspect of the Hydro brief. During the intervening years, Hydro would maintain its sales monopoly and retain full commercial freedom, while access for all others would be delayed indefinitely.

Ontario Hydro claims that it has the lowest operating costs of any North American utility (IPPSO FACTO, December 1995, p 14). If this is true, Hydro may not require the indefinite extra time in which to become commercially competitive.

The proposal sees increased competition from natural gas cogeneration, convergence of the electrical industry with other industries and increased demands for customer choice of electricity suppliers as the main factors driving a new competitive industry structure.

There are several new elements in this latest Hydro proposal for a restructured Ontario electrical sector. The Hydro management now believes that "there is no longer a strong rationale for complete public ownership of the electrical industry of Ontario...A staged transfer of ownership to the private sector of many of the functions of industry should begin with generation," to enhance competition and efficiency, with the introduction of private equity.

Hydro seeks to replace its governing Power Corporation Act by alternative legislation promoting competition and a business orientation. During the transition to full competition, Ontario Hydro would be structured as a "multi-business holding company" to facilitate future ownership transfer.

The Hydro proposal is unclear on the appropriate size and nature of the privatization of its generating assets, beyond asserting that Hydroþs generation would be sold and the resulting Gencos would be free to contract their electricity sales. Hydro insists that nuclear generation be kept intact.

While endorsing privatization of its generation assets, Hydro notes "the pressure to split up the ownership of generation solely (to reduce) Ontario market power concerns is now seen as less important, and must be weighed against retaining larger blocks of generation sized to compete effectively in a North American market" (this is also the recent view of Bill Farlinger, described elsewhere in this IPPSO FACTO).

Under the proposal, electricity prices would be determined by the market and would be unregulated (although Hydroþs electricity prices have never been regulated, since the Ontario Energy Board has only an advisory role). There would be standards for the entry of new generators and common environmental governance for all generators. Regulatory emphasis would be on "equitable and fair competition," with transmission and distribution subject to incentive regulation.

Hydro management proposes to form a "central market operator" (CMO) as a Crown entity managing a spot market for electricity, into which all generators can bid to supply electricity. The CMO would be independent of generation and transmission, and would prevent self-dealing by Hydro. The CMO would ensure overall fairness and competition, manage Ontario's financial exchange for electricity within the province, dispatch generators, ensure electrical system security, and administer settlements of market trading.

"It makes for better efficiency if the agent which dispatches generation into the wires is also the agent which has the market information on generator bids and volume," explained Hydro.

Customers unwilling to participate in direct retail access could join a not-for-profit "price averaging pool" (PAP) which would contract to obtain electricity from suppliers and the spot market on the basis of averaged costs.

Those seeking direct access could obtain electricity from licensed agents (aggregators, marketers and brokers) who act on behalf of generators and customers beginning in 2000 in competition with the PAP, much as the natural gas and long distance telephone companies now offer direct service. Price risk could be managed through hedging arrangements with suppliers.

Operation of the spot market, CMO and PAP would be overseen by government.

Central to the Hydro proposal is prevention of the stranding of uneconomic assets such as Hydroþs nuclear stations, which cannot recover their embedded costs at competitive market rates. Hydro suggests the regulator might have to determine which costs are "legitimately stranded" and impose inescapable charges on customers or suppliers; otherwise they might need to be recovered by the government through taxation.

"From an Ontario perspective, alternative mechanisms for dealing with stranded costs may apportion the burden differently between customers and the province (debt guarantor), but the total cost will be borne by the taxpayer and/or ratepayer, either directly through electricity rates or indirectly through increased taxes. It is likely that the province would not want to raise taxes in order to lower electricity rates, and therefore would seek out options that allow the recovery of stranded costs in electricity rates."

The proposal also seeks to privatize Ontario Hydro International Inc., and Ontario Hydro Technologies.

In a controversial recommendation, the proposal seeks to merge and rationalize to achieve efficiency in Hydroþs bulk electricity transmission network and its retail operations with the retail distribution systems of the MEUs of Ontario before the year 2000, in a company known as "Wiresco." This would remain a public company, and would act as a regulated "common carrier" for the electrical industry, owned "by those who have contributed its assets" in a share-capital structure, which could eventually be privatized. Wiresco could have several regional units to facilitate efficiency and administration. The MEUs would compete with PAP and other agents as buyers and sellers of electricity services to customers.

Hydro strategists are depending on a takeover of Ontario's 308 MEUs for a much needed infusion of capital. While Hydro is burdened by $38 billion of long term liabilities (including short and long term debt and provisions for decommissioning of nuclear plants and for disposal of used nuclear fuel), the MEUs are largely debt-free, and have assets worth about $4 billion.

However, the Hydro submission faces a major problem as the MEUs oppose such a forced merger (see MEA view, above).

In its rationale for choosing the year 2000 time period for direct access, one of Hydroþs analyses assumes a loss of 20 percent total load over three years starting in 1997. It forecasts a highly pessimistic financial outlook for Hydro, with net income dropping an average of about $1.6 billion per year, resulting in a net loss of $500 million by 2004, and little reduction in debt. In another analysis, assuming no competition before 2000, with reliable operation of the nuclear stations, Hydroþs financial future is more optimistic in 2004, allowing it to reduce much debt by that year. However, this scenario is contradicted by the claim of low Hydro operating costs.

Another threat to Hydroþs position is U.S. utilities marketing power in Ontario, according to the submission. "If Ontario moves quickly to open access to supply Ontario customers, without dealing with the issue of stranded costs, and before retail access is implemented in the U.S., some U.S. utilities would be able to "cherry-pick" specific customers from the Ontario Hydro public power system," worries Hydro.

Foreseeing a rise in the price of electricity, the Hydro management report says "Introducing competition in energy and capacity in about five years might allow market prices to increase as surplus capacity is absorbed, and allow Hydro to reduce its embedded costs" (stranded asset liabilities).

The Hydro management proposal was not endorsed by the Hydro board of directors, which would normally be expected to approve such a major utility document. The Ontario Government's recent firings of five Hydro board members was overturned by a provincial court after a successful lawsuit launched by four of the board members, who argued that the firings were illegal without just cause. Several of the five, including PWU president John Murphy, are dedicated foes of privatization.

The Hydro management proposal builds on the September 1995 edition of its report "Competition, convergence and customer choice" (the 4C report) but has evolved, since it now adopts the privatization of generation, Wiresco, and the CMO. The report also discusses the convergence of electricity with other services such as natural gas, telephone and cable sparked by technological change, suggesting entirely new business sectors are likely to result from the convergence.

Hydro's 4C report had earlier called for wholesale competition in generation to supply the power pool by January 1, 1997, and for direct retail open access by 2000.

It is also worthwhile to note the recommendations of a precursor to the Hydro management submission, the mid 1995 report Ontario Hydro and the electric power industry. This was known as the Farlinger Report, written by Bay Street executives Bill Farlinger, G.J.Homer and B.S.Caine, before Farlinger became Hydro chair on November 2, 1995.

Farlinger was the former CEO of Ernst & Young, and headed the transition team for Tory premier Mike Harris. The report builds on an earlier version released at the Ontario Energy Board in June 1994 entitled Challenges and choices: Ontario Hydro and the electric power industry

In the 1995 report, Farlinger insisted that some degree of privatization is necessary in order to compete with an anticipated reduction in US electricity prices. A merger of Ontario Hydro with the MEUs is said to be the primary step in restructuring, with large financial gains from reducing the number of retail utilities from 308 to 10.

The report recognizes that nuclear power presents a unique challenge to any restructuring attempt. The report suggests that the nuclear plants could be privatized, but only if purchasers of Hydro's non-nuclear generating capacity are forced to accept nuclear reactors as part of the package. The scenario of merging Ontario Hydro's nuclear capacity with Atomic Energy of Canada Limited, and other segments of the nuclear industry, is also mentioned.

Farlinger recommends either the creation of a single private generation company, or several companies, each of which would contain a mix of different types of generating capacity. However, the separating of nuclear assets is seen as problematic. Farlinger brushed aside concerns about the massive size of the privatization, which would be the largest investment offering in Canadian history.

Farlinger suggested that a new regulatory regime would have to be established, either the Ontario Energy Board or a new entity created by the province. However, while there would be regulation of bulk rates initially, this would be phased out "... once real competition is deemed to be occurring." Farlinger suggested that there would be ongoing regulation of transmission on a "rate of return" basis, and "some form of incentive regulation" for retail distribution of electricity.

The report foresaw an initial stock issue to privatize the utility reaping some $6 billion, but was vague on exactly what it would privatize.

Energy Probeþs view

The most radical privatization proposal before the Macdonald committee is that of Energy Probe, whose submission asserts that "Ontario's electricity system can be transformed into a vibrant and successful economic sector through competition and privatization. The main purpose of privatization is to create the conditions to support competition. Privatization also helps to ensure that necessary regulation of natural monopoly functions and of environmental performance is independent and not clouded by the conflicting interests when government is both the regulator and the regulated...Privatization and competition in energy and other sectors is a massive and expanding worldwide trend. Ontario's electricity sector, with its status quo frozen, is lagging. Already, market-driven power systems are operating in the U.K, Norway, Victoria (Australia), Alberta and New Zealand."

"If Ontario's electricity transformation is based on sound principles that are effectively implemented, the transformation can produce vast benefits for consumers, the economy, taxpayers, and the environment. Rapid transition should be undertaken."

Energy Probe challenged the PWU assertion that the privatization of the British electrical industry led to price rises. "U.K. electricity prices falling across the board - NDP and Power Workers Union mislead public" announced Tom Adams, Probe's director of utility research on January 25.

Information which the group obtained from the U.K. office of electricity regulation shows clearly the drop in electricity rates from the beginning of privatization in 1989/90 to 1995, after removing the effect of inflation: residential: -10.1%; small sites: -11.7%; medium sites: -17%; moderately large sites: -16.3%; and extra large sites: -6.4%.

Energy Probe director Andrew Roman of the legal firm Miller Thomson claimed in his talk at the December IPPSO conference that privatization of Ontario Hydro is certain, and its major benefit would be depoliticization of the utility.

A major error in privatizing Hydro would be to create a private monopoly or near-monopoly, which would require extensive regulation in order to avoid abuse of monopoly power for shareholder gain, according to Roman. Moreover, regulation could be less efficient than a well-operating market. Hence the generation assets should be sold to several buyers. Since post-privatization mergers would reduce competition (as illustrated by the flurry of anti-competitive mergers when deregulation created a duopoly of airlines in Canada), no purchaser should be able, for 10 years after privatization, to acquire or own, directly or indirectly, any more than 25 percent of the dollar value or generating capacity of the generating assets sold by Hydro.

Roman said that Hydro has become addicted to massive construction and massive borrowing, and "Hydro is to money what an alcoholic is to alcohol."

He suggested that "as Hydro continues to spend on capital projects and refurbishing, today's investment will include tomorrow's stranded assets...The only way to end the agony is to acknowledge the dilemma, write off the stranded assets, add their costs to the provincial debt and privatize the rest."

"Of all the wild schemes currently being touted by Hydro," a merger with the municipal electric utilities "takes the cake," said Roman. The real reasons for Hydro's "waging war" on the MEUs are fear of competition, the opportunity to download Hydro's massive debt onto the MEUs, and the growing value of MEUs' assets in an age of technology downsizing. There are no economies of scale in distribution, and "privatization should not be used as a cover for the reallocation of debt," said Roman.

The PWU view

The Power Workers' Union told the Macdonald Commission that "privatization of any part of Ontario Hydro is the wrong move because it will drive up electricity rates." The PWU claimed it is the only organization openly promoting the preservation of public power in Ontario. The 15,000 member PWU represents chiefly Ontario Hydro employees, but also a growing number of workers in municipal utilities.

The PWU reached its conclusions after months of investigation, using experts in the industry to conduct "detailed financial studies. These experts have proven what everyone knows if they use common sense - the fact that private companies have to pay taxes and a profit means rates will be higher."

According to the PWU brief, privatization of Ontario Hydro will lead to discounts so deep that the sale price won't cover the debt owed on the existing facilities. "If Hydro's assets are sold at book value, rate increases of at least 2.8 percent a year would be required to return adequate profit to investors."

Rates are said to be the single most important issue to electricity customers. Financial projections supporting the PWU argument show that there is no need for an Ontario Hydro rate increase until the year 2005. The utility could even reduce rates for all industrial customers by 20 percent and still be on "strong financial footing." Real cumulative rates will decline by 22 percent, and by 48 percent for industrial customers if Hydro remains in public hands.

"Real competition for the average consumer will not be found by splitting up Hydro's generation facilities into two or three large companies, any more that there is competition between the banks. Allowing suppliers to cherry pick Hydro's existing customers will only strand debt. That cost will be transferred to the government and paid through taxes."

The union said that Hydro's prices can be made accountable by allowing non utility generators currently selling to Hydro to sell directly to end users. This "reserve market" could help set prices in the Ontario electricity market.

The PWU claims that Hydro should prepare to compete in the northeastern United States. Hydro's cost of fuel, staff and maintenance is around one cent per kilowatt hour, making it a "competitive, low cost producer in this major market."

The PWU proposes that customer choice be implemented immediately at the retail level for distribution services between Ontario Hydro and the 300 electrical municipal utilities in Ontario.

In perhaps the main or only view the union shares with other key Ontario electricity stakeholders, the PWU advocates that the Ontario Energy Board should have binding regulatory powers over Ontario Hydro.

The PWU is interested in the "Nuclear Canada" concept being reviewed by some officials at Hydro and at Atomic Energy of Canada Ltd. The proposal is to consolidate all nuclear generators in Ontario, Quebec and New Brunswick into one public company. This proposal would centralize in one body all nuclear research and development, and marketing.

Full Cost Accounting for decision making at Ontario Hydro

Although IPPSO has adequately covered some parts of the "Full Cost Accounting Stakeholder Workshop" that was held on September 7, 1995, there are some aspects of FCA that were not explained properly in the IPPSO FACTO article. In addition, other issues were misinterpreted or incorrect inferences made. With this response, we would like to elaborate further on what is FCA, how it can be used for investment decision-making, and clarify some of the issues that Mr. Brooks raised in his report.

It should be emphasized in the outset that FCA is not an "accounting system" as it is implied in Mr. Brooks' report but rather an evaluation framework that tries to account for the internal (private) as well as the external (environment and human health) costs and benefits and integrate them into business decisions. When the external impacts cannot be monetized, qualitative evaluations are used.

Figure 1 below shows the internal as well as the external impacts and costs that FCA tries to incorporate in the decision making process. The two inner boxes represent internal costs and can be thought of as the costs Ontario Hydro incurs in doing business. The first, or innermost box, represents traditional business costs, such as equipment, material, fuel, labour, depreciation, etc. The second box, labelled "internal environmental costs", generally includes those costs associated with meeting environmental regulations or meeting corporate standards. However, in some corporations, including Ontario Hydro, there are often less tangible or hidden or indirect costs, which should be considered in this category of cost, but are often not identified appropriately or are misallocated to corporate overheads. Examples of these costs include contingent liability costs, community relations costs etc. If a business unit is not considering these costs, then the business may not be dealing with the true costs of its products and services, and may, as a result, be making inappropriate business decisions.

The focus of Ontario Hydro's work in internal environmental costs is to assist the business units in understanding and managing the internal environmental costs associated with their products and services. Or described in another way, to ensure that internal environmental costs are explicitly identified and allocated to the right product or service so that the business units can manage the full range of their costs and maximize the value they get for their environmental dollars.

The two outer boxes in Figure 1 refer to external impacts or externalities. These are effects on the environment and on human health which result from Ontario Hydro's activities, but are not included in the costs of its products and services. These impacts are therefore, borne by society. For example, even after Ontario Hydro meets environmental regulations to control air emissions, effluents or wastes from its generating stations, there are still residual air emissions/effluents/wastes that can potentially cause damage to the environment and human health. Ignoring these impacts underestimates the environmental damages of Ontario Hydro's activities and the resulting costs to society, and may result in inefficient resource allocation decisions. Full consideration of these impacts, and their costs, in decision-making will lead to improved environmental quality, wise management of resources and lower societal costs.

Monetized external impacts are external impacts for which Ontario Hydro has developed monetary value. To date, Ontario Hydro has developed preliminary external cost estimates for the operation of its fossil stations and external cost estimates for fuel extraction through to decommissioning for its nuclear generating stations.

Non-monetized external impacts are external impacts which can only be described qualitatively because there are scientific limitations in quantifying the full range of environmental and human health impacts. In other cases, the impact can be quantified, but there are limitations in developing appropriate monetized values (i.e. impacts on ecosystem, lifestyle, culture etc.)

Ontario Hydro's focus for dealing with the external impacts, and their costs, is to improve how externalities are integrated into business decisions. Described in our box analogy, our intent is to incorporate the external costs into our decision-making, as best as possible.

Mr. Brooks' article also indicated that "other utilities have been required to use full cost accounting to a greater extent than Ontario Hydro". This is an exaggeration. It is true that other utilities in the U.S. and to a lesser degree in Europe have been asked by their regulators (as Ontario Hydro has done for electricity exports to satisfy NEB requirements) to estimate externality adders associated with different supply options or to use adders prescribed by the regulators. Most of this information has been used for planning but not for investment decision-making purposes. To our knowledge there is no utility or private company that has developed as comprehensive FCA guidelines for decision- making as that of Ontario Hydro's. It is interesting to know that the Environmental Protection Agency (EPA) in the U.S., recognizing our work on FCA, has selected Ontario Hydro as a case study for FCA. The report will be issued by the EPA later on this year.

Mr. Brooks' article also indicated that "The last two years have presumably witnessed some internal debates within Ontario Hydro over the methodology to be employed for FCA....accounting for the delay of over two years between the announcement of the strategic principle and the first public meeting on the subject". This is incorrect. There has not been any debate inside Ontario Hydro regarding the methodology for evaluating externalities. The damage costing methodology has been used by the Corporation for more than two decades as part of the evaluation of social costs associated with electricity exports. If there was any delay in developing FCA, it was mainly due to Corporate down-sizing and the fact the Environment and Sustainable Division was created only a year ago.

Brooks' piece presents the "cost of control" approach as a valid alternative to the "damage costing" approach used by Ontario Hydro for quantifying and monetizing externalities. It should be emphasized that the "cost of control" approach cannot satisfy the information needs of FCA for decision-making. The most significant weakness of this approach is that it may bear little relation to the actual environmental damages which result from electricity generating options. Also, since the cost of control approach uses the control technology cost as the proxy for external damages, site specific impacts are not accounted for. As a result, the cost of control for two similar generation options would be the same even if one station was located close to an urban centre while the other station was in a rural area. In this case, the cost of control technology bears little relationship to the true cost of external environmental impacts.

Ontario Hydro supports the damage costing approach because it focuses on site-specific impacts and therefore provides more relevant estimates of external damages to be considered in the investment decision making-process. This approach first considers site-specific environmental and health data; then uses environmental modelling techniques which consider how emissions/effluents etc. are transported, dispersed or chemically transformed in the environment; and then considers what receptors (e.g. people, fish) are affected by these emissions. Economic valuation techniques are applied at the end to translate physical impacts into monetary terms.

Finally, it should be emphasized that FCA is not a tool to pre-program decision-making or to replace existing decision-making processes. It is an evaluation framework that provides more explicit information and transparency in the incorporation of environmental considerations in the existing decision-making process. FCA is one of the cornerstones of Ontario Hydro's sustainable development strategy. By better understanding the internal environmental costs as well as the external costs associated with its activities, we believe that Ontario Hydro will be in a better position to: - make more informed decisions - aid business units to better integrate environment into decision analyses; - improve environmental cost management - improve identification, allocation, tracking and management of environmental costs in each business unit; - avoid future costs - improve ability of business units in anticipating future environmental liabilities and costs earlier, so that corrective action can be implemented earlier; - enhance revenue - improve ability of business units in identifying revenue enhancement opportunities either through environmental technology innovations spurred by cost cutting initiatives or strategic alliances with companies that use waste products as material inputs in their own manufacturing; - improve environmental quality - by establishing an optimal level for reducing emissions/effluents/wastes which considers least cost to society; - contribute to environmental policy - provide effective contributions in the development of environmental regulations/ standards and emissions trading markets, and; - contribute to sustainable development - assist in the transition to a more sustainable energy future.

In summary, managing resources wisely and minimizing environmental damage will also contribute to Ontario Hydro's competitiveness, particularly in the longer term. By better understanding the environmental impacts of its activities and by making better resource allocation decisions based on this information, Ontario Hydro can save money, become more competitive, and move towards the goal of sustainable development.

graphic

Failing to value renewables could negate benefits of competition

While the financial costs of renewable energy technologies (RETs) are gradually lowering, they are still generally more expensive in the short term than conventional power sources. Therefore, unless measures are taken to promote RETs, a purely market driven electrical industry will likely turn to non- renewable, more environmentally destructive, fuel sources.

This is the conclusion of energy consultant Rachel Brailove of Boston-based Resource Insight, Inc. Brailove has published her conclusions on how to promote RETs in a competitive energy industry in her paper, "Valuing the Environmental Benefits of Renewable Energy Resources in a Restructured Electric-Utility Industry."

According to Brailove, recent North American trends in the power industry have been toward integrated least-cost planning. This has meant that long term costs, including social and environmental, have been considered in decision making by utilities. RETs, she says, have benefitted from this practise as utilities "account for benefits that are not captured in their price, such as small environmental impact, modularity and fuel diversity."

This kind of decision-making has been made possible by the vertically-integrated monopoly structures of most North American jurisdictions. Since in most areas there is either no competition, or competition is strictly regulated, utilities are more free to look at long term projections. Short term added costs are more easy to justify when there are no competitors threatening to undercut your rates.

Many jurisdictions in North America, including Ontario, are currently looking at abandoning monopoly structures in favour of competition, however. Brailove says there is a danger that RETs will be abandoned in favour of the cheaper traditional sources of power as utilities seek to keep retail prices competitive. In the long-term, she believes this will actually lead to higher costs, as inevitably the environmental damage will have to be addressed and paid for.

"A competitive market may fail to account for all of the costs and benefits currently considered under integrated resource planning (IRP)," says Brailove, "including the non-price benefits of renewable resources. Failure to account for these benefits could significantly reduce any long-term efficiency gains captured by increased competition."

Currently, utilities choose to invest in renewables for several reasons, mainly regulatory. They respond to direct statutory requirements for a minimum level of renewable generation. They take advantage of tax credits and other incentives. Sometimes, particularly in remote areas such as Northern Ontario, the cost of renewables is actually lower than the cost of delivering electricity from other sources to small, isolated populations.

There are also benefits for utilities investing in RETS, according to Brailove, that go beyond regulatory or physical necessity. These benefits can also be transferrable to a new, competitive marketplace.

RETs have a generally low environmental impact as compared to traditional generation sources. This fact means that there is less likelihood that plants will have to be retrofitted to meet environmental regulations and standards that may be imposed in the future. There is also less of an impact on the environment and the health of the resident population. This is considered to be an "externality" in calculating the costs of new generation, however, there is a direct benefit to the utility in terms of public relations and the utility may be relieved from future liabilities for upgrades or damages they could otherwise have caused.

Given that many RETs are in the early development stages, there is often a good return on investments in research and development. These returns can pay off, not only within the utility, but through marketing new technologies outside the utilities' service area.

Since RETs, with the exception of hydro, currently make up an small share of generation capacity, expanding renewable generation capacity usually means diversification of fuel sources for the utility. It's considered healthy for a utility to have numerous sources of electricity generation in the event of a disruption in supply of a particular fuel source, or a significant rise in the cost of any one fuel. The oil crisis of the 70s and 80s demonstrated how over reliance on one source of energy leaves society vulnerable.

RETs also tend to be more flexible in that they often are able to reach economies of scale at a much smaller size. They can therefore be installed incrementally as demand rises. This also leaves utilities less vulnerable to stranded asset problems when future demands don't meet previous projects. Ontario Hydro's current situation with its nuclear assets demonstrates this problem. Ontario Hydro is now stuck with an excess of expensive nuclear generation and a high deficit because projections made 10 to 20 years ago on energy requirements and costs of alternative fuels did not turn out to be correct.

Another advantage of renewables is that generation can often be located closer to the point of consumption. Being less intrusive to nature and often smaller in size, they can be located closer to population centres without undue risk or damage. This reduces the costs associated with long distance transmission.

While all of these advantages will still exist in a restructured industry, whatever model is chosen, there is still a risk that the short term advantages of traditional generation will result in RETs being ignored. According to Brailove, there are five possible models that could be utilized either exclusively or in combination.

One model would have many small, unregulated generators. In this model, each generator would have to hold a small enough share of the overall market that they could not unduly influence the market as a whole.

The power pool model, such as now utilized in Alberta, has a centralized body, independent of generation, that purchases power from generators, sets retail prices and co-ordinates distribution.

A regulated transmission company or group model has a separate, regulated body responsible for delivering power from all sources to all customers. This body is also responsible for billing customers for electricity supplied either by a power pool, or directly from generators.

A regulated monopoly distribution company model could have current municipal utilities responsible for lines, transformers and power quality within their boundaries. Areas of Ontario currently served directly by Ontario Hydro would have to be serviced by a new distribution company. These distributors would purchase electricity either from a power pool, a transmission company, or directly from generators.

Competition within these models could occur at either the retail or wholesale levels. Customers could contract directly from generators, utilizing whatever transmission system exists, or the power pool or distribution company could contract with generators and sell to customers at prices based on their costs.

The most commonly stated reason for restructuring the electricity industry is to reduce costs for consumers. According to Brailove, the development of a competitive marketplace may in fact lead to lower pricing, although there is no guarantee. However, she states that unless there is a regulator for the industry, competition is "unlikely to credit renewables with reductions in environmental externalities." In an unregulated environment, environmental and health damage is unlikely to cause additional costs to the generators. They will, however, result in additional costs to society for cleanup and medical expenses.

To ensure that RETs are pursued within a competitive market, Brailove recommends that a regulating body be employed and she gives four possible methods that this body could use.

Pollution taxes "are potentially the most effective means for eliminating environmental externalities," says Brailove, "However, they are likely to be controversial and they may be beyond the legal jurisdiction of utility regulators." Taxes on pollutants from electricity generation that reflect the true costs to society would make RETs competitive with traditional power sources. They would also, however, be placed on the consumer who may be unwilling to comply. Recent polls suggest many consumers would be willing to pay a premium for cleaner power, but within limits.

Emissions caps with allowance trading is another method that can be effective and offer some flexibility to utilities who may not be able to afford the cost of implementing reductions. Overall emission limits are set for an entire industry or region. Companies or facilities that are able to reduce emissions inexpensively are encouraged to over-comply and sell their excess allowances to others for whom reductions are cost prohibitive.

"Monetized adders" are similar to pollution taxes, except they are only imaginary figures added while planning new generation. Specific dollar values are applied by a regulator for pollutants that would result from a proposed generation facility. The utility must include these figures, though they are not actually required to pay the amount, while they compare the cost of their proposed new facility to other possible sources of power. This system would make RETs more competitive as there would be fewer monetized adders applied to them.

A renewables "obligation" or "set-aside" is the fourth method Brailove listed. The regulator could require that a specific percentage of the total electricity generated by a utility, or by the sector as a whole, be from renewables. While this method can ensure the use of RETs, Brailove says it fails to cause utilities to fully analyze environmental issues, even between difference sources of renewable fuels. Utilities may tend to do the minimum required to meet regulations rather than be encouraged to actively pursue RETs.

While all of these methods have validity, Brailove believes that various jurisdictions in North America will adapt different combinations as they attempt to respond to the energy and environmental demands of their residents and industries.

photo of Rachel Brailove (her office to send)

Ontario Hydro RET Strategy: one year old

Started as a result of recommendations from the Council on Renewable Energy in Ontario in July, 1993, the strategy gained Ontario Hydro Board approval in September, 1994 and was started in November, 1994. The program focuses on the solar, wind, micro hydro, biomass, waste gas recovery, fuel cell, hydrogen and hybrid technologies industries. There are two stages of the plan, with the intention of making RETs commercial sources of energy in Ontario and giving Ontario Hydro the technology and experience to be competitive in renewable energy industries.

Stage one is a five-year plan ending in the year 2000 and costing an estimated $110 million. In this time, Ontario Hydro plans to gain RETs experience, reduce market barriers, determine prices, install 125 MW of grid-connected renewable generation, develop in-house applications, begin research and development, provide RETs to customers and develop relationships with Ontario- based suppliers.

Stage two is the "long-term vision," according to Kelly, that will take Ontario Hydro beyond the year 2000. Ontario Hydro will have a "commercially proven, competitive supply option," it will generate 20 TWh per year through renewable sources by 2020 and it will "capitalize on new technology markets and export opportunities."

The first element of stage one is research and development and is already underway. There is a $4 million per year fund in place until the year 2000 to help pay for research into targeted renewable sources. The RETs targeted for this include: advanced photovoltaic (PV) materials and power inverters, wind turbines, advanced biomass systems, micro hydro and run-of-river hydro, fuel cells, and waste heat recovery. These areas were chosen for development, Kelly said, because it was believed they show the greatest potential for use in Ontario.

The second element is the development of RETs in remote off- grid communities. Ontario Hydro currently loses $2 million a year supplying electricity, through diesel generators, to 23 isolated communities in Northern Ontario. Kelly said that Northern communities provide a good opportunity for developing renewables because, although RETs are generally more costly than grid- connected power sources, they are more competitive when compared with costs associated with remote diesel. Currently, Ontario Hydro has a remote communities strategy prepared, and has established a working group with government agencies and First Nations. Wind source mapping studies are underway; existing wind, PV and micro hydro systems are being upgraded and two new 10 kW wind turbines will be installed in 1996. There are also ongoing studies of biomass, waste heat, micro hydro and PV opportunities in the North.

One of the keys to the success of the remote communities element, according to Lionel Smith, Manager of Remote Community Electricity Systems, is the involvement of the First Nations. He, in fact, insists on Aboriginal involvement in any new renewable energy projects that his division is investigating.

Developing in-house utility applications for RETs is the third element. Ontario Hydro has implemented a "Challenge Funding" program to help business units gain experience in and utilize, technically proven RETs for internal energy needs. It funds up to 100%, to a maximum of $40,000, for feasibility studies, and will pay the difference in cost for RETs as opposed to non-renewable sources for projects providing internal energy needs, to a maximum of 50% of the total cost of the project. Under this program, the Thunder Bay Hydroelectric Service Centre is under construction using solar water heating, a PV solar wall and solar tube lighting. A 72W PV panel and a 500W wind turbine are also in place at the Nanticoke coal-fired plant. Numerous other projects are also under consideration for 1996.

The fourth element involves customer programs. In stage one, this will involve demonstration, "learning experience," projects that will provide Ontario Hydro with experience, and make customers more aware and supportive of RETs. Three such projects were launched in January, 1996 and will be evaluated at the end of the year.

The fifth element involves a request for proposals (RFP) for 125 MW of grid-connected RETs. The first stage, an RFP for 60 MW from the private sector, is underway. Bids have been shortlisted and contracts will be signed in the spring of 1996. The shortlisted proposals include individual wind turbines, small and medium wind farms, biomass, anaerobic digestion, and micro hydro. A second RFP for 65 MW will be issued in late 1996, and will include the private sector, Ontario Hydro business units and possibly municipal utilities. Kelly's message to the short-listed parties is, "Sharpen your pencils, we are expecting lower prices!"

Element six involves the inclusion of RETs in local integrated resource planning (LIRP) areas. "Renewables will be given full and appropriate consideration in LIRP studies to resolve local and transmission needs," said Kelly.

The seventh, and final, element of stage one is training and communication resource planning. This involves training, education and information about RETs for Hydro staff and customers. Under this element, Ontario Hydro has already agreed to fund the Kortright Conservation Centre's renewable energy education program after the Province cut funding (IPPSO FACTO, December 1995, p.14). They're proceeding with support for the Healthy House Project in partnership with CMHC and the City of Toronto, and they're discussing joint publications with SESCI, NRCan and the Ontario Ministry of Energy and Environment.

Specific plans for stage two are not yet developed and will depend much on the outcome of stage one. However, one proposal currently being considered, according to Kelly, is a "Green$hares" green pricing program. Under this program, Ontario Hydro customers would be able to voluntarily contribute to the development of RETs by purchasing special non-convertible shares. This program might be implemented by 1997 to run until the year 2000. They would be non- dividend paying, at least until 2000, and would be used to help create a green fund for the utility. This fund could be used to help finance future RETs R & D (IPPSO FACTO December 1995, p.8).

Customers, residential, commercial and industrial, could opt for Green$hares by checking off the option on their utility bill, through a flyer with their bill, through advertising and promotions, or through environmental organizations. Customers could receive back reports with their bills, an annual report on the fund, annual Green$hare certificates, and GHG reduction credits for commercial and industrial shareholders. Hydro will also investigate if tax credits on purchases will be possible.

Kelly believes that Green$hares could be effectively sold to its customers. Because it wouldn't require high administration costs, a large proportion of proceeds would actually be used directly in green projects. An independent board made up of Ontario Hydro, customer and RETs industry representatives could oversee the fund and make all policy decisions on how it is spent. There would be regular reporting to shareholders and only competitive, cost- effective projects would be selected. Because donations are strictly voluntary, it would not be considered a rate increase or green wheeling.

Kelly also presented statistics showing that a majority of residential customers would support paying extra for renewable energy. This could provide significant funding for RETs and make renewables more cost competitive compared to non-renewables for Ontario Hydro.

Photo of Kelly from conference chart of customer opinion statistics

No new small hydro policy for now

In preparation for the announcement, Ontario Hydro undertook an internal review of small hydro policy. IPPSO and other small hydro industry representatives are hoping to learn the outcome of that work in the next few weeks.

A review of small hydro policy became necessary last year when it became apparent that small hydro was being excluded from Ontario Hydro's RETS program (see article above). The program allows only micro hydro projects, which are usually considered to be anything less than 100 kW. Larger projects were excluded because the RETS program is intended to help Ontario Hydro gain experience with new RETs, and Ontario Hydro already has experience with small hydro.

National News

Federal green power procurement plans announced

NRCan will begin discussions with Canadian utilities, renewable energy industries and other interested federal departments aimed at establishing pilot projects to test the viability of renewable, green, power sources.

"The renewable energy industry is integral to this government's plan to address global climate change," says McLellan. "Purchasing green power will help reduce greenhouse gas emissions directly associated with the federal government's use of electricity and will help develop a strong and competitive renewables industry in Canada."

Among the energy sources that will be considered, according to NRCan, are bioenergy, wind, photovoltaics, landfill gas and small hydro (under 20 MW). Discussions will be aimed at reaching Memoranda of Understanding that will establish terms and conditions for a process to select pilot projects. Based on the success of the pilot projects, NRCan will then assess the viability of a larger scale procurement program.

This program grew out of a workshop involving NRCan and representatives from utilities and renewables industries across Canada in September 1995. This was held as an initiative under the Federal Action Program on Climate Change under which Ottawa hopes to meet its international commitment to stabilize greenhouse gas emissions to 1990 levels by the year 2000. If successful, NRCan believes that other levels of government in Canada, utilities and industry will be encouraged to "follow the federal government's lead."

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Passmore appointed to Energy Council

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EEA plans new Centre for Efficiency

The Centre expects to renovate all or part of an existing building in Toronto into a Technology Display Area, where permanent and temporary displays will be mounted. The permanent displays will include examples of energy efficient lighting, energy efficient windows, leading edge building envelope technologies, air handling systems, and control and monitoring technologies. The Centre also is considering exhibits on small-scale cogeneration and fuel cell power generation systems. Utilities such as Pacific Gas and Electric and Electricit‚ de France have put together similar centres, so the EEA expects to be able to apply what others have learned about managing such an operation.

The Centre will also provide a range of other services including Technology Transfer, Trade Promotion, Library and information services, training and technical education. For this last area, the Centre intends to work in partnership with some of the existing education and training institutions who have already developed expertise in this area, such as the Canadian Institute for Energy Training.

Although the plan is still being finalized, it already has support from some serious players, notably Ontario Hydro. A five- year budget has been developed, which envisions collecting over a million dollars in seed capital in the next two years. In fact, commitments for several components of this seed capital have already been secured, thanks to Ontario Hydro and the Toronto Atmospheric Fund, a project of Toronto City Council. The project, despite its ambitious nature, seems to be off to a quick start. Its budget anticipates self-sufficiency in the fifth year.

The EEA's members include Ontario Hydro, Consumers Gas, municipal electric utilities, major power consumers, suppliers and installers of energy efficiency technologies, environmental groups and IPPSO. The Alliance grew out of a successful 18-month multistakeholder consortium which developed 30 "Action Plans" for breaking down the barriers to energy efficiency.

A key role for the Alliance will be to facilitate coordination of energy efficiency activities across many sectors. Other priorities include promotion of efficiency codes and standards for products and buildings, development of a Home Energy Rating System, and the facilitation of trade in energy efficiency products and services.

Climate Change meeting considers strategies

The "Workshop on Canadian Strategies in Climate Change Negotiations" was organized by Environment Canada, and featured remarks from two Assistant Deputy Ministers: Anthony Clarke of Environment Canada, and Michael Cleland of Natural Resources Canada. A third Deputy Minister, from Foreign Affairs and International Trade, was scheduled to appear but was unavailable due to illness.

Kirby notes that the kind of questions the meeting asked included "Do we want a target and schedule-based approach, a harmonized policy and measure approach, or a combination of the two?" The group was looking for guidance on what kind of principles might guide the federal government "in a strategic sense."

The meeting was broadly focused with open discussions on "key issues and questions," Canada's goals and objectives, and "Issues to advance Canada's interest." Break-out groups looked at such topics as "Developed Country Commitments," "Sectoral Policies and Measures," and "Quantified Emission Limitation and Reduction Objectives." "Developing Country Commitments" were also part of the discussion.

Canada's commitments to reducing greenhouse gas emissions arise largely from its participation in the International Framework Convention on Climate Change dating back to 1990. IPPSO Directors Rob McLeese, Jeff Passmore and Bruce Ander took part in the meeting.

La Grande I goes on-line

The run-of-river project is one of the final stages of the huge Hydro Queb‚c development in the James Bay Basin and is the lowest generating station in the La Grande System. The 310 MW Laforge II station is due to go on-line in the fall of 1996. A final station originally scheduled, the 480 MW Eastmain project, is currently on hold.

La Grande I alone cost $2.5 billion dollars to build since excavations began in February, 1989. It has a rated head of 27.5 meters and had to be constructed as a "run-of-river" project due to the limited reservoir capacity available. It is located below the La Grande II and IIA plants that have a combined capacity of 7,326 MW. The maximum flow is 5,950 cms through the 12 turbines. The plant employs 12 generators producing 114 MW each. Eight of them were supplied by General Electric Canada of Montr‚al and four were built by GEC Alsthom Electromechanical of Tracy, Qu‚bec.

Other stations in the La Grande development include; La Grande II (5,328 MW), La Grande IIA (1,998 MW), La Grande III (2,304 MW), La Grande IV (2,651 MW), Laforge I (840 MW), and Brisay (1,446 MW). The combined current output of the project is 15,935 MW, with another 310 MW due on-line in the fall of '96.

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Waste-to-energy plant planned for Calgary

The company has purchased the abandoned Okotoks gas plant from Canadian Occidental Petroleum Ltd. for the project. They would use a high-tech oven, called a Kocee gas generator, to burn waste tires to produce synthetic gas and would generate electricity from the heat in an adjacent cogeneration facility. CWC has operated a smaller prototype of this kind of oven in Calgary for the past year that produces 1 MW of power.

Under an agreement with the Alberta Tire Recycling Management Board, CWC will incinerate 3 million used tires per year. They will receive a tipping fee of $2.10 per tire by the Board and raise additional revenue by selling the power into the Alberta Power Pool and the gas to industrial companies.

Although this will be the first Canadian commercial venture using this technology for CWC, they are involved in a 30 MW municipal solid waste incineration project using a Kocee oven in Guatemala City. They are also developing a $34 million similar facility in China.

Ottawa biomass firm expands to Europe

Ensyn uses biomass waste, from cardboard, sawdust, waste-wood and other sources, and subjects it to rapid heating and cooling to produce a combustible fuel oil with a little over half the heating value of petroleum-based oils. The process is called Rapid Thermal Processing (RTP). This oil can be burned or co-fired with other fuels in furnaces or boilers, and it insps currently being tested for direct use in diesel generators and gas turbines.

CANMET provided Ensyn with financial and technical assistance to develop the technology to a commercial scale. Ensyn installed the world's first commercial RTP plant in Wisconsin which processes 25 tonnes of sawdust a day.

Ensyn President Robert Graham says that with "the public and private sectors working together, our Canadian renewable energy technology has now gained a vital foothold in the European market."

The demonstration project in Italy will convert 10,000 tonnes of raw, plantation-grown wood into oil that will be co-fired with petroleum-derived oil in a 100 MW thermal generating station.

A European research group is investigating producing an activated charcoal from the char byproduct of RTP when wood is used as the feedstock, as is done in Italy. Ensyn is also entering into a partnership with a Finnish consortium to develop an engine that can burn biofuel oil.

According to Ensyn Chair Stuart Smith, "Fuel from biomass is considered to be the major non-nuclear contender to diminish the production of so-called greenhouse gases over the next few decades. With Ensyn, Canadians now have a lead in this important area."

New NOx VOC standards coming

Nitrogen oxide emissions are converted into ground-level ozone by sunlight. The ground-level ozone has a negative effect on human health and is the major cause of smog.

In addition, the group plans to respond to the CCME's new "Next Steps Smog Management Plan," or NSMP. NSMP was set in motion last November and almost half of its preventive measures are already in place. Several scientific work group reports are being prepared. The 13 eastern seaboard states of the US Ozone Transport Commission have signed a Memorandum to reduce NOx emissions from major stationary sources by 65-75%. Canada has been invited to participate in the US Ozone Transport Assessment Group as an observer. In addition to the national smog plan, there are four regional plans as well: Ontario, Quebec, Lower Fraser Valley, and Southern Atlantic Region. Work is ongoing in all areas.

Particular focus is now being paid to proposals for emission reduction trading in NOX and VOCs. An Appendix and Discussion Paper entitled "A Framework for Open Market Emission Reduction Trading in the Windsor-Quebec Corridor and Bordering Airsheds" was prepared by the Industry NOx/VOC Emission Reduction Trading Work Group. It is dated October 23, 1995, and copies are available from IPPSO or Pierre Pinault.

In a related development, Environment Canada officials are now inviting suggestions to help them formulate the "Canadian Position Regarding Upcoming UN-ECE Long-Range Transboundary Air Pollution Protocol on Nitrogen Oxides." UN-ECE is the United Nations Economic Commission for Europe. A draft paper was distributed January 18 by Wayne Draper. It will form the basis of Canada's position in negotiations on February 19 to 23 in Geneva. Canadians involved in the process plan to take part in a conference call February 7. For further information, contact Ginette Vall‚e at 819-994-9939. The standards proposed do not appear to be terribly strenuous.

"Revision of National NOx Emission Guidelines for Thermal Power Generation, Effective in the year 2000" was prepared for Environment Canada by Stone and Webster Engineering Corporation. Copies are available from Stone and Webster (Robert Baird 416-932- 4400), Environment Canada (Pierre Pinault 819-953-1143 fax 994- 0549), or IPPSO.

New Canada-China power company established

SNC Lavalin, Monenco AGRA and Acres International have created Canada-China Power Inc. to market, manage and develop hydro and thermal projects in China.

Incorporated early in 1995, George D. Fotinakis, Eng. has been appointed the first President of the company. Fotinakis has been working with Chinese government and industry for the past 15 years, promoting Canadian business partnerships in various industrial sectors. His contacts within, and understanding of, the Chinese government and business community are key assets that he brings to the position. He also brings strong administrative, management and business development skills.

New environmental protection law scheduled for summer

Her announcement came more than a month after she had originally said she would respond to a report by a standing committee on the environment chaired by former Liberal Environment Minister Charles Caccia. The government response was tabled in the House of Commons on December 14, the last day of sitting before the Christmas break and just before Copps was replaced by Sergio Marchi as Environment Minister.

According to Copps, the new Canadian Environmental Protection Act will focus on pollution prevention and eliminating the worst toxic chemicals. The present act, "remains limited in scope," she said in a speech at the University of Toronto the day after the Commons announcement. "It is geared to dealing with problems, not preventing them."

Although the government response carried much of the theme of the Caccia committee report, many of the 144 recommendations made were diluted or toned down.

On one of the key points, prosecution of offenders, the government plans to allow environmental inspectors to issue tickets to and levy fines from polluters without the need to bring them to court. Presently, inspectors must prove in court, beyond a reasonable doubt, that the environmental offense took place before the court applies a penalty. Under the new legislation, non- judicial processes including ticketing, negotiated settlements, cease and desist orders and administrative monetary penalties could be applied, with the onus now placed on the perpetrator to launch a challenge. While the Caccia Committee called for this in its report, it also called for the creation of a separate environmental law enforcement agency, which the government has rejected.

Furthermore, new legislation would allow individual citizens to sue polluters if the government fails to respond. Individuals would not be entitled to receive monetary awards as a result of suits, but they would have greater access to information on pollution and would be would be protected by law from any repercussions for filing suits. Individuals will not, however, be able to pursue criminal charges.

The legislation will identify persistent toxins which are chemicals that collect in the environment, animals and humans for great lengths of time. These toxins will be eliminated, although timetables for elimination have not yet been released. According to Copps, industries will be required to manage other toxic chemicals, "from cradle to grave," to prevent further pollution.

Many environmental groups expressed disappointment with the government response, claiming that Environment Canada caved in to industry and agricultural lobbyists who opposed changes to environmental legislation. "It's got industries' footprints all over it," said Paul Muldoon of the Canadian Environmental Law Association. "It should be Industry Canada not the environment minister up there making this announcement."

According to Gary Gallon, head of the Canadian Environment Industry Association's Ontario Branch, "It's a good document given the opposition and the desire to kill it altogether."

The Liberal Caucus itself was split with Ministers John Manley of Industry Canada, Ralph Goodale of Agriculture Canada and Anne McLellan of Natural Resources Canada fighting changes.

According to Caccia, himself a Liberal backbencher, "There are good aspects and bad aspects to it." He was most critical of the government failing to take responsibility for regulating biotechnologies, as his report called for.