OCTOBER 21, 1982
Commitments and Constraints: Ontario Hydro's Role in Today's Economy
AN ADDRESS BY Hugh L. Macaulay, CHAIRMAN, ONTARIO HYDRO
CHAIRMAN The President, Henry J. Stalder
Distinguished guests and members, ladies and gentlemen: It is a long way from Sir Adam Beck, the father of Ontario Hydro, to our guest of honour and the company which Ralph Nader once called "a government within government." Sir Adam once said that he wanted to "forge a band of iron around hydro to prevent its destruction by politicians;" we have now come to a state of affairs where the Chairman of Hydro and the Premier of Ontario have been friends for the last twenty years. The original classy coat of arms--reading Dona naturae pro populo sunt, "The gifts of nature are for the people"--has made room for the famous plug logo. The meaning is the same but, following the style of the times, it is more consumer-oriented and visual.
Ontario Hydro's new approach is personified in Hugh Macaulay. Hugh was born in Toronto in 1925 and got a B.A. in Journalism at the University of Western Ontario. During the Second World War he served in the Royal Canadian Navy. After the war he worked in public and industrial relations and for about seventeen years he was prominent in the automotive industry. In 1979 he became Chairman of Ontario Hydro.
It has been a long time since we at The Empire Club of Canada had a Chairman of Hydro speak to us. Exactly thirty-one years ago, Robert Hood Saunders, C.B.E., K.C., said to us, "Yes my friends, we are standing at the crossroads. We can provide power in abundance. But the question is--will it be low-cost power?" Today, to discuss "Commitments and Constraints: Ontario Hydro's Role in Today's Economy," please welcome our guest of honour, Hugh Macaulay, Chairman of Ontario Hydro.
Mr. Chairman, ladies and gentlemen: Just last month I was reading an article in a business publication which suggested that corporate giants tend to be less respon sive than smaller corporations to short-term trends in the economy and changes in consumer demand for products.
By any standard you and I can think of, Ontario Hydro is a large corporation: thirty-two thousand employees, $19 billion in assets, $4 billion in sales. Yet, I don't think any corporation has its finger more on the pulse of the economy than Ontario Hydro does. We sell and deliver our product to every industry and every consumer in the province, and we do so instantaneously and continuously. Our sales reflect the day-by-day, hourby-hour course of business in this province--business which, as in all the rest of North America and the western world, is not as robust as it could be, especially in the manufacturing sector.
This is particularly serious for an exporting economy such as Ontario's, which produces about one-half the country's manufactured goods. Ontario is responsible for more than 40 per cent of Canada's total exports and 77 per cent of our nation's manufactured exports. And exports account for one-third of the province's income.
If the Ontario economy is to improve its strength, the goods and services we produce must be of a quality and price competitive in the world marketplace. And Ontario Hydro--by providing a reliable and reasonably priced supply of electricity--has a major role to play in making Ontario's products competitive. Electricity prices have been more than holding the line against inflation. As a matter of fact, the real price of electricity has declined by more than 6 per cent over the last four years. That has given some relief to the beleaguered energy consumer who has seen the price of oil rise 58 per cent and that of natural gas rise 19 per cent, in real dollar terms, over the same period. So far, Hydro has been able to continue a pattern of keeping electricity rate increases at or below the rate of inflation. I say "so far" because, looking down the road, it is going to be more difficult to continue this pattern.
Right now, Hydro finds that electricity prices are in a squeeze between upward and downward pressures. Upward pressure because we went through a period of accelerated expansion during the sixties and seventies. We have, among other projects, three huge nuclear plants coming into service over the next ten years. The level of electricity sales that we anticipated when these stations were planned a dozen or so years ago has not fully materialized. And if we don't get revenues from sales, there is pressure to increase rates.
But there are downward pressures too. Slower economic growth has reduced the demand for electricity. That demand is bound to be affected by rates.
If priority is given to upward pressures, we can strengthen Ontario Hydro's financial position. If we give priority to downward pressure, we can help strengthen the Ontario economy--and that is more important.
Ontario Hydro has contributed a great deal to the Ontario economy in the last few years. I refer to the three megaprojects--the Pickering B, Bruce B, and Darlington nuclear generating stations--which we are completing at a time when similar projects around the world face cancellation. By the end of this year alone, these projects will have created about thirty-five thousand man-years of employment, supplied over one hundred companies with work, and created almost $2.5 billion of revenue for those companies. More than that, they will continue to provide long-term economic benefit to the people of
Ontario. I am referring to the reliability and efficiency of the Candu reactor design. Unlike many utilities south of the border which find themselves short of capacity to produce inexpensive power, the Bruce, Pickering, and Darlington projects will guarantee a reliable supply of economic power for years to come.
Providing economic power remains a priority with Ontario Hydro, especially in these times. So we're doing what we can to keep electricity rates attractive. That's going to be tough. We're already feeling it. But we can do it, and we're going to do it, because, in the long run, the manufacturers, the shop-keepers, the homeowners of this province will then have a better chance for economic recovery.
Just this week, Ontario Hydro's Board of Directors approved a corporate strategy which focuses on three major features--restrained spending, working with customers to get the best use out of existing facilities, and diversifying into related opportunities where it profits the economy to do so. We believe that this approach will allow us to adjust to an era of rising costs and slower growth, reduce our borrowings, and still keep the price of electricity attractive.
We are looking at two major areas of restraint--capital construction projects and operations.
Hydro is reviewing all planned capital expenditures to determine which ones can be reduced or stretched out. That will not only help reduce costs in the long run, it will also reduce Hydro's borrowing needs, reduce demand in the lending markets, and ease pressure on the supply of money available for other institutional and industrial borrowers.
Stretching out the schedules on projects can reduce costs, or at least postpone them until a time when ratepayers and the economy can better absorb them. By altering the timing of new transmission lines and planned additions to transformer stations, we are shifting the timing of a commitment of over $200 million in expenditures.
I might add that reducing inventory levels is another way of reducing costs. We are hoping to cut proposed inventory costs for 1983 to $75 million less than originally budgeted.
Operations, maintenance, and administration budgets are also being trimmed. Hydro has put in place guidelines for controlling staff growth, and although new nuclear units will be placed in service over the next few years, total staff levels in 1983 and 1984 will not be allowed to exceed the level authorized in 1982. In other words, there will be no growth in Hydro staff, even though we are adding major new facilities. Travel and overtime costs have been slashed, and a planned salary increase for our senior staff was cancelled. The corporation has also negotiated a voluntary wage-restraint program with management and professional staff.
These measures are proving effective. Our operating costs for the first eight months of 1982 were $26 million under budget.
As you can imagine, our operations cutbacks mean a considerable amount of retraining and dislocation of staff. Getting the best efficiency out of our human resources will need both imagination and sacrifice. I know Hydro staff have the capacity for both.
I've talked about cutbacks. They are essential. However, you know as well as I do that no organization can, just by controlling expenses, create employment and economic opportunities, particularly jobs for our fellow citizens who are out of work.
We in Hydro are determined to make spending cuts without seriously affecting the quality of service we deliver. To do that, both Hydro and its customers are going to have to get the best use out of the province's existing electric power facilities. What does this mean to the homeowner, to the businessman? It means two things. It means, "Don't waste energy." And it means, "Don't waste generating capacity." Let me elaborate.
Ontario Hydro and the Ontario government have for years been encouraging people to use energy carefully and use electricity wisely. The conservation campaign will have to continue because you and I still waste energy. That's a waste of money and resources. But what about wasting generating capacity?
Right now, Hydro has a bigger reserve margin of generating capacity than is needed to ensure a reliable supply of power. As demand grows, we'll need to improve our facilities for transmitting power across the province, but we'll have surplus generating capacity for quite a few years to come, especially with so many new units coming into service. We have this surplus generating capacity because designing and building generating stations requires very long lead times--twelve years or more--and the economy was expanding rapidly that long ago. Today's volatile economy makes long-range planning very difficult. But the main question is not "How come?" but "What now?"
If plants which have been built and are being paid for are not used near their optimum capacity, then the unit cost of electricity tends to rise. That's what I call wasting generating capacity. Just like wasting energy, it costs consumers money. Instead of wasting the coal or oil or uranium that make the energy, the waste is of the steel and concrete and design and electronics that went into the plant that now sits idle.
Part of Hydro's strategy is to selectively encourage the use of electricity. I say "selectively" because I mean encourage the use of electricity only where it meets customers' needs and expectations at a reasonable cost; in other words, where there is a benefit to the consumer. After all, the consumers of Ontario own Ontario Hydro and are entitled to derive from its operations what benefits are available. At the same time we can encourage use, but discriminate use, while we continue to encourage the overall conservation of energy.
A contradiction? Not at all. It's a matter of conserve and substitute. The conservation message is simple. When using electricity, or any other form of energy, use whatever is needed to get the job done. The substitution message is, use electricity in more places where the job has to be done. Use it because it's produced mostly from Ontario sources. Use it because it can break our reliance on Middle East oil--and on OPEC.
The Canada Oil Substitution Program recognizes the need for Canadian homeowners to reduce their reliance on oil because it is costly, because it is needed for other uses like transportation and chemical feedstocks, and because Canada still has to import much of it. The Program provides incentives for homeowners to convert to alternative forms of heating. Already 24,700 homes in Ontario have been converted either wholly or partially to electric heating.
The potential for electricity to displace other and costlier forms of energy in the office and in industry is just as great. Industry may be reluctant in these times to put out the money for off-oil conversions even though forecasts show future oil prices increasing faster than inflation. The wise use of energy could, in future, mean some form of incentive-pricing structure to give more industries the opportunity to get off oil by electrifying.
There is still tremendous potential for substitution. There are not many jobs traditionally performed by electricity which could be performed instead by some other form of energy. But whether you're talking lawn mowers or industrial furnaces, there are hundreds of ways in which equipment once run on wood or oil or gas can now be converted to run on electricity. Electrical energy is a displacer, not a displacee. That's why electrical power will increase its share of the energy market over the next decade.
Speaking of markets, Ontario Hydro will continue to export power to the United States. We'll be trying to find customers and sorting out delivery problems. Just last week, we reached an agreement to sell the State of Vermont up to 52,000 kilowatts of firm power and up to 252,000 kilowatts of total power a year for five years. The deal is worth about $8 million a year. Ontario Hydro has also just signed a $600-million power contract with the Niagara Mohawk Power Corporation to provide 400,000 kilowatts of electricity for the next four years.
We'd like to find customers for a million kilowatts of firm power to give us a guaranteed export base. The more power we can export to the United States, the better use we can make of Ontario's large capacity to generate electricity, and the better we can keep down electricity rates.
The third element in Ontario Hydro's strategy for the eighties is diversification. Normally, a corporation facing financial constraints does not think of diversifying, but the opportunities we will pursue are all connected to electricity production. Whether we sell process steam to industry, aquaculture, and agriculture from the Bruce Nuclear Power Development, or produce cobalt 60 for hospitals and food sterilization and preservation, or provide assistance to consultants, manufacturers, and contractors, what we're doing is exploiting expertise and facilities we have already acquired. The revenues we earn will keep our customers' hydro bills down. Our decision to pursue related business opportunities should supplement Hydro's core business and increase the value of its service to the community.
What I've outlined is not just the story of another corporation tightening its belt in response to the times. Ontario Hydro is different, not because the public owns the corporation--which it does. Not because everyone in the province uses its product--which they do. It is different because electricity users across the province have a vital hand in managing Hydro.
An electrical utility is not a master in its own house; it is not totally in charge of its own efficiency. We're not like most manufacturing plants, where managers and engineers can increase efficiency by modifying equipment and processes to squeeze out a few more units per hour or day. Our equipment and staff must respond to customer demands for power, immediately and directly. In a sense, it is you, Hydro's customers, who operate Hydro's plants. Wise use, then, becomes a cooperative effort.
We have a considerable amount of investment in the electrical generating facilities of Ontario. We have the opportunity to put that investment to use for the province's benefit. Like the servants in the parable of the talents, we should not leave idle the resources we have available to produce prosperity.
The appreciation of the audience was expressed by Ian McPhail, a Director of The Empire Club of Canada.