Future Directions for Ontario Hydro

Mark Twain once said: "Few things are harder to put up with than the annoyance of a good example."

Few have demonstrated the power of a good example better than Marc Eliesen, our speaker today.

Mr. Eliesen's appointment as Chair of Ontario Hydro is the latest in a long line of impressive personal achievements. The chronology of his appointments reads like a Who's Who in Canadian Government. Mr. Eliesen has had a nation-spanning career of senior positions in the Federal Government and in Ontario, Manitoba and British Columbia. His on-the-job training included a stint as Chairman of Manitoba Hydro from 1984 to 1988, where his support of the jumbo Limestone hydroelectric project earned him the nickname "Mega-Marc--The Limestone Cowboy."

By the time he had left Manitoba Hydro, Mr. Eliesen probably assumed that he had held every possible job in the public sector. But there were a couple he had missed. In April of 1990, he was appointed Deputy Minister of Energy for Ontario.

Then, Ontario Hydro called.

Legend has it that, when Marc Eliesen was offered the Ontario Hydro job, he was told there was good news and bad news. He would be the CEO of the largest utility in North America and the fourth largest in the world. The bad news? The bad news was that there was no more good news!

Mr. Eliesen has been quick to respond to the weighty challenges facing Ontario Hydro.

In the short-term, he has openly discussed the possibility of double-digit rate increases for the next two years. These rate increases are essential to cope with the fall in revenue caused by the recession and the high costs of rehabilitating the operating performance of Ontario Hydro's nuclear system.

Longer-term, he has addressed the 25-year demand-supply plan presently under review by the Environmental Assessment Board. Under Mr. Eliesen's guidance, the Corporation is making sure that the plan reflects growing public concern--concern that Hydro must not only supply energy, it must also reduce or "manage" demand.

As part of its conservation, or energy management campaign, Ontario Hydro is committing $6 billion over the next eight years to reduce electricity demand. The free 52-watt light bulbs recently left on your doorstep were just the beginning of that effort.

This initiative forces one to restate the age-old question: "How many Ontarians does it take to change a light bulb?"

The answer: "One committed CEO, 3.6 million receptive Ontario households, and a lot of innovative people in between."

As if the Corporation doesn't already have a full enough agenda of problems to wrestle with, Ontario Hydro's latest challenge is to deal with the infestation of the Great Lakes by the zebra mussel--dubbed the "sex maniacs of the sea" and the "cockroaches of the Great Lakes!"

Clearly, Mr. Eliesen will need all the talent and lessons from his 25-year career in government to cope with the challenges facing the utility.

Aside from his impressive credentials, there is also a very humanitarian side of Marc Eliesen.

According to an article in The Toronto Star describing the recent tribute to women victims of violence, Mr. Eliesen urged all men to take responsibility for such actions. "I believe," he said, "there are strong links between a society that degrades women and glorifies male aggression. Men must understand that there is a continuum that begins with male privilege and sexist attitudes and runs all the way through to the outright abuse of male power in harassment and domestic brutality."

Such courage and forthrightness are the signs of true leadership. The Latin motto on the Coat of Arms of Ontario Hydro reads: Dona naturae pro popular sunt. If I recall my Latin lessons correctly, that translates: Nature's gifts are for the people.

Mr. Eliesen, we look forward to the discussion today of your plans for nature's gifts on behalf of the people of Ontario.

Ladies and gentlemen, please welcome the man who turns on the switch--Marc Eliesen.

Marc Eliesen:

Thank you for those kind words of introduction. It is indeed a pleasure for me to appear today before this distinguished group.

Back at the turn of the century--when both The Empire Club and Ontario Hydro were in their infancy--the landscape of the 20th century loomed large and uncluttered.

It was a time for visionaries, and Sir Adam Beck and his fellow supporters of the concept of public power had a clear picture of where they wanted to go. The issue was simple--public versus private ownership of the province's fledgling electricity industry. The public debate surrounding it still occasionally reverberates through the boardrooms and legislative body of the province.

With all due respect, their task now seems enviable in its focus. Once over the political hurdles, the early builders of Ontario Hydro pretty well were confined to the engineering obstacles facing them as they brought the energy-saving power and convenience of electricity to Ontario--to the workplaces, factories, farms and homes.

Now, as we stare the 21st century in the face, we have much more daunting challenges to deal with. I want to tell you about those challenges and the way in which we intend to respond to them.

The challenges are considerable: our system is aging, costs are rising, and society expects more of its electrical utilities.

People today want to be part of the energy planning process. And they want us to find alternatives to building new generating stations which may affect the environment.

Before I tell you how we propose to deal with those challenges, let me tell you what I found when I came to Hydro six months ago.

The financial situation was not reassuring. Revenues were down significantly because of the recession we were all experiencing. They were also suffering because generating performance, especially in our nuclear plants, was down considerably.

Net income had dropped from about $700 million in 1989 to $129 million in 1990. This year we expect net income of only about $200 million.

This is a very slim margin when our total revenues for this year are expected to be $7.1 billion, and $8.3 billion in 1992. Net income of only $200 million could be eaten up by one unexpected event.

In order to minimize rate increases over the last two years, Hydro's board scheduled a draw down of the rate stabilization reserve account by over $500 million. Clearly, this cannot continue indefinitely. Maintaining Hydro's fiscal integrity has to be a top priority.

To totally eliminate withdrawals from the reserve account in 1992 would have required a rate increase of 15 per cent. However, we felt we had to be responsible to customers trying to recover from this major economic downturn.

Accordingly, we will draw less from reserves in 1992 and charge an average rate increase of 11.8 per cent. We know this increase is still going to have an impact on our customers and we regret it. But we have to take the necessary steps to ensure the system will be both reliable and financially sound in the future.

Hydro has had to impose even higher rate jumps before. Some of you will recall the mid-1970s. Rates jumped by 13 per cent, 22 per cent and 30 per cent in consecutive years. At that time, Hydro had to absorb the impact of new facilities going into service, and into the rate base.

This is what is happening again in 1992, with the Darlington nuclear station. Darlington will cost us at least $13.5 billion. As it starts producing electricity, it has to start coming into the rate base.

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

When Darlington is fully commissioned in 1993, it will represent 30 per cent of Hydro's assets. But it will not cause anything like the rate increases of the mid-1970s. In fact, after 1993, we can anticipate far more modest single-digit increases.

We realize the importance of keeping our rates competitive. We are still competitive. Notwithstanding our significant exchange rate appreciation from a 77-cent to an 88-cent dollar, if Ontario industries go comparison shopping for electricity rates with our direct competitors in neighbouring U.S. states, they'll still find Ontario Hydro roughly 20 to 30 per cent more favourable.

I intend Hydro to remain competitive. I also intend that cost increases will not be routinely passed on as higher rates to customers as if there were no alternative. There are alternatives. One is cost control. Another is improved productivity. Let me deal with cost control first.

One major cost-cutting measure this year was the cancellation of our expensive uranium contracts with Rio Algom and Denison in Elliot Lake. For the last 10 years, the premium Hydro had paid for uranium from the Elliot Lake mines amounted to a billion dollars.

By ending those supply contracts in 1996, Hydro will save ratepayers $1.5 billion on uranium for our nuclear generating stations.

After the assistance package of $250 million to help the community adjust, Ontario ratepayers will be saving over $1.2 billion in the next 10 years. That's the equivalent of a 1.5 to two-per-cent reduction on annual Hydro rates.

Cutting the cost of our uranium supplies was not just a first step. The salary levels of senior management have been frozen for 1992 and we are urging restraint with our collective bargaining groups.

A number of other measures are now being considered for controlling our costs without jeopardizing the reliability of the electricity system. I'm insisting that Hydro's senior management put a renewed emphasis on accountability in our planning and estimating procedures.

Let's look now at productivity improvement. Hydro has an outstanding staff, well trained and dedicated. But we can do better than we are now.

Steps have been taken to usher in a new era in management-labour relations. The results will be a more co-operative, less confrontational relationship with Hydro's union and professional society.

More specifically, better teamwork within Hydro will mean better quality control and productivity. Reliability of our service, particularly for most of our industrial customers is just as important as cost.

Ontario Hydro has a world-wide reputation for dependence and reliability. In fact, in a recent study, the North American Electric Reliability Council, rated the reliability of Ontario Hydro's system as No. 1 in Canada and No. 11 out of 152 North American utilities.

To guarantee our customers that they can continue to depend on the reliability of our system, we've embarked on the largest rehabilitation project in Hydro's history. We're going to spend $3.6 billion on our transmission system alone from now to 1994.

We're adding three new high-capacity lines in Eastern Ontario, reinforcing transmission facilities in our biggest load centre, Metro Toronto, and upgrading older lines between Burlington and London.

Our nuclear program is just as big. We have approved close to $4 billion for rehabilitation and retubing. Two reactors at the Bruce A station and one at Pickering A station will be retubed, and there will be a full station rehabilitation at Bruce A

Rehabilitation will continue at the Lakeview and Lambton coal stations, at a cost of over $1.6 billion. We plan to renew small hydraulic stations across Ontario during the 1990s to get more electricity from them, at a cost of nearly $500 million.

If you add all these rehabilitation expenditures together, we are investing close to $10 billion to extend the life, and improve the efficiency, of the existing system over the next few years.

And we're continuing to work to meet the anticipated growth in demand during the 1990s. Darlington will add 3,500 megawatts to the system by 1993. Sir Adam Beck 3 at Niagara Falls will bring in another 1,000 megawatts in 1998.

Redevelopment of our dams on the Mattagami and the new projects in the North from 1997 to the year 2000 will add another 750 megawatts. And we've started the public consultation process for the transmission line to import 1,000 megawatts of purchased power from Manitoba.

But what about the new challenges and demands on Hydro I spoke about earlier? Our society, of course, expects something different from Hydro than it did 10 or even five years ago. Our whole world has changed irrevocably, and Ontario with it.

Hydro, at its best, is a mirror image of that changing society, and therefore we too are changing from a production supply company to a service company--providing energy and energy services, ensuring Ontario is supplied with electricity and giving Ontarians incentives to use it more efficiently--or in some cases, not to use it at all.

These changes are not the product of politics, or of current ideology. They are imbedded in the larger social changes we all face. They are the clear products of the need to reduce financial risk, of limiting environmental impact, and of demand by the public to participate more fully in Hydro's decision-making.

As I indicated earlier, these pressures are not unique to Hydro, or to Ontario for that matter. We may be feeling them more acutely than other companies in other provinces, but exactly the same pressures face BC Hydro or Hydro-Quebec, and the banks, the steel companies, insurance companies and governments--all of us.

In 1989, Ontario Hydro published a 25-year plan--the Demand/Supply Plan--which is undergoing intense scrutiny at a public hearing, before the Environmental Assessment Board, where, in accordance with established provincial legislation, we've provided about $25 million to fund intervenors.

Over the past months, Hydro has been re-evaluating the load forecasts and other factors we put forward two years ago in our 25-year plan. And we hope to present the results before the Demand/Supply Hearing next month.

It is useful to note that when the Demand-Supply Plan was issued two years ago, average peak demand was at 20,700 megawatts and the median load forecast was for a 1,300 megawatt increase by 1991. Instead we are averaging 20,500 megawatts this year, actually lower than in 1989. Accordingly, our long-term forecast for the demand for electricity has been revised downwards.

What this means, from a planning point of view, is that the requirement to build major new facilities is pushed back. So we have more time than we originally thought before we have to commit ourselves to the next major supply project.

Let me emphasize. This is not a new phenomenon applicable to Ontario Hydro. We see this trend taking place in many utilities in Canada and the United States.

Change in our society is so rapid, we now see that any 25year plan--no matter how robust--is subject to considerable change.

At the same time, the cost differences between various large-scale options--whether it is a coal- or thermal-generating plant, or a nuclear station--become less distinguishable; big, central generating stations cost billions of dollars, no matter what fuel they use.

We're learning more about the true costs of making electricity. Nuclear stations, which are responsible for generating 60 per cent of Ontario's electricity needs, cost a lot of money to build, but were supposed to have significantly lower costs. It's turning out differently.

They need retubing and other equipment sooner than expected.

The cost of keeping them maintained and staffed is much higher and new standards on health and safety called for by the federal regulator, the Atomic Energy Control Board, has meant greater expenditures than have been anticipated.

We're also learning that approvals for any new stations are harder to get and, therefore, that we should concentrate, as a principle of sustainable development, on getting the most out of what we've got. This means rehabilitating older stations so that they run beyond their projected lives.

The changeability of the future suggests to us that megaprojects are becoming less of a credible answer. They are a huge capital drain and carry a great deal of financial risk.

When the future is uncertain, it's better to count on smaller increments that track growth in electricity demand more precisely, and don't pose such a rate shock when they come into service. Their environmental impacts should be smaller- or at least more localized.

That's an important reason why, by the year 2000, we expect non-utility generators will be able to meet 14 per cent of our system load requirements.

When Hydro filed our 25-year plan in 1989, we were counting on 1,000 megawatts of non-utility generation. Since then, we've announced new targets. We now expect 3,100 term. Response from the private sector has been overwhelming. We are malting deals with as many proponents as we can fit onto the transmission system.

Projects involving cogeneration are getting preference, for environmental and economic reasons. Clearly, cogeneration efficiencies of up to 80 per cent reduce overall energy use and environmental damage.

And it's clear to us at Hydro that industries that generate revenues along with energy will be able to compete better against their global competitors. And by avoiding major new investments for Hydro, they will help make our province more competitive.

We also know, better than ever before, that no means of generating electricity is environmentally benign. Hydroelectric dams can flood large areas of land and can impact aboriginal people and their lifestyles. Fossil-fuelled generation creates sulphur dioxide, nitric oxide, carbon dioxide and greenhouse gases that impact global warming and deplete the ozone layer.

Nuclear plants have nuclear waste and health and safety concerns.

One even more significant source of "supply," in one sense of the word, is demand management or energy conservation--and it has dramatically fewer or nil environmental effects.

Our energy efficiency or conservation programs are all targeted to be less than our avoided cost, so in the long run rates will be lower than if we had to supply those megawatts with new generating stations.

Our demand management target is to reach 5,200 megawatts by the year 2000. That's 5,200 megawatts of supply we don't have to build. To obtain that objective, we're investing $6 billion in energy efficiency and conservation--much of it in programs to help Ontario industries cut energy costs and become more competitive.

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

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

The idea of paying people to use less of our product has been a little tough for some people in the electricity business. But actually paying people to switch to what they've seen as the competition really makes some traditionalists unhappy.

But it makes sense. The people of Ontario want energy resources used more efficiently. Thus we will be encouraging people to substitute other forms of energy such as natural gas for home space and water heating.

Fuel substitution is a new option for cutting electric demand made available under the proposed revisions to the Power Corporation Act.

It also makes good business sense to pursue alternate energy sources. Finding alternate, cost-effective, environmentally benign fuel sources is another important utility activity that cannot be ignored or underestimated. It's another critical component of the flexibility we are trying to achieve.

Like all major utilities in North America, Europe and Japan, we are accelerating the search for these alternate energy sources. Some of the independent producers selling electricity to us are generating it from wood waste and methane gas from garbage.

Ontario Hydro's alternate energy research includes the investigation of fusion fuel technology, the development of wind and solar energy applications in Ontario and the testing of different types of fuel cells, including phosphoric acid and molten carbonate.

We are watching with particular interest the practical test of fuel cells in buildings in Japan, Europe and the United States.

In addition to environmental benefits, buildings generating their own electricity from fuel cells could help ease Ontario Hydro's strained transmission and distribution capacity.

Some of these developments are a long way off. But these are the kinds of considerations we have to keep in mind when trying to change the nature of our business into one that truly provides what our owners and shareholders, the people of Ontario, want from us today and tomorrow.

Today we can see, if we look carefully enough, many of the changes that will determine what we will be tomorrow. More environmentally conscious. More service oriented. Getting most out of our new "supply" from more efficient use, from switching to other fuels, from non-utility generators, from smaller stations, from rehabilitated older stations.

A few years ago The Globe and Mail wrote about our plans for mega-projects and accused Hydro of having an "edifice complex" Maybe we did. But if we did, so did our society as a whole in the mid-'80s. Society has changed. We need to We more lightly on the earth.

I can tell you today that Hydro is well on its way to overcoming its edifice complex. We will still need to build, but we will build less, and lighter.

We gain through lower financial risk, better matching of supply with demand, and smaller environmental impacts. Adam Beck wouldn't recognize the corporation he founded 85 years ago with the slogan: Power for the people. His Hydro was a pragmatic response to the economic and social realities of the 1900s.

So is Hydro today, and in the future. The manner and the method must change, but the job--and the slogan--never have.

Thank you very much.

The appreciation of the meeting was expressed by Roland Lutes, President of the Canadian Club of Toronto.