Opening the Electricity Market to Competition

Head Table Guests

Robert J. Dechert, Partner, Gowling LaFleur Henderson and Immediate Past President, The Empire Club of Canada; Reverend Mary Pataki, Associate Priest, Christ Church, Brampton; John C. Koopman, Partner, Heidrick & Struggles and Third Vice-President, The Empire Club of Canada; Brian Caine, Partner, Ernst & Young; Gordon Homer, Deputy Chairman, Scotia Capital; William A. Farlinger, FCA, Chairman, Ontario Power Generation; The Hon. Jim Wilson, M.P.P., Minister of Energy, Science and Technology, Province of Ontario; Douglas L. Derry, FCA, Chairman, Poplar Lanes Holdings, Chair, The Empire Club Foundation and Past President, The Empire Club of Canada; Dr. Bryne Purchase, Deputy Minister, Energy, Science and Technology, Province of Ontario; David L. Lindsay, President and CEO, Ontario SuperBuild Corporation and Director, The Empire Club of Canada; Courtney Pratt, CEO, Toronto Hydro Corporation; and John M. Beck, Chairman and CEO, BFC Construction Group Inc.

Introduction by Catherine Steele

It is my privilege to welcome our guest speaker, Ron Osborne, President and Chief Executive Officer, Ontario Power Generation. Over the past few years, Ontario's power system has been transformed from what we knew as Ontario Hydro, a power monopoly, to a combination of companies getting ready to compete in a marketplace economy. These changes have also opened new business opportunities for other energy-source companies such as natural gas and local utilities.

Some naysayers and opponents of these changes point to other jurisdictions such as Alberta and California saying that energy deregulation in Ontario will have a negative impact on consumers.

But as a consumer, all I really want is reliable, affordable energy sources, the opportunity to have a choice about where I purchase my energy and the comfort in knowing when I flick the switch, the lights will come on.

Our guest today plays an integral role in meeting the needs of his customers and supplying power to Ontarians as President and CEO of one of North America's largest electricity-generating companies. Ron Osborne was appointed President and CEO in December 1998 after holding the same position to OPG's predecessor, Ontario Hydro.

From 1995 to 1998, Mr. Osborne held various positions within the BCE Inc. group of companies including President and CEO of Bell Canada. His career also includes being President and CEO of Maclean Hunter from 1986 to 1994.

Born in England, he graduated from the University of Cambridge with a degree in French and German and is a chartered accountant by training. In 1988 he was appointed a fellow of the Institute of the Chartered Accountants of Ontario.

Mr. Osborne is also a member of the Board of Directors for Sun Life Assurance Company, Air Canada, the Shaw Festival and Roy Thomson Hall.

Ladies and gentlemen, please welcome Ron Osborne to The Empire Club of Canada.

Ronald Osborne

Thank you Catherine for that kind introduction.

It's a pleasure to be at the Empire Club, where so many important business and public-policy issues have been discussed and debated. Electricity is such an issue. A reliable supply of competitively priced electricity supports our growth and attracts investment and jobs to the province.

Usually, we take electricity for granted. It's there when we need it. But electricity has become more topical, given that the province plans to introduce competition to the electricity industry and to give customers their choice of suppliers.

On Monday, the Minister of Energy, Science and Technology, Jim Wilson, who is here with us today, stated that the electricity market will open to competition by May 2002. The government has stated that the four principles which they identified as being key to market opening will be met by that time.

These principles are:

• The protection of consumers and offering them choice;
• Creation of a strong business climate with a reliable supply of electricity;
• Protection of the environment; and
• The encouragement of new ways of doing business and support for the search for alternative sources of power.

Ontario Power Generation has been preparing for competition ever since we were created two years ago. We have put together a management team with members brought into the organisation, and promoted others from within OPG, with one purpose-to make OPG a successful competitor.

Our employees are engaged, as are the leaders of their unions, the Power Workers' Union and the Society of Energy Professionals, who are represented here today. We are not interested in remaining a monopoly. We are doing everything we can to assist in opening the market.

Today I want to address two subjects of interest to those who follow the electricity industry: market opening and what we are doing to support it; and the future electricity needs of the province and how OPG will contribute to meeting them.

I'll begin with market opening.

OPG is supporting each of the government's principles for opening the market.

The first guiding principle of the government is based on consumer protection and customer choice.

In terms of price, customers will have a measure of protection in two ways. Under a Market Power Mitigation Agreement, a cap has been placed on the revenues we can make from about 75 per cent of our generation. Any revenues beyond this cap will be distributed back to Ontario customers. The amount of generation subject to the revenue cap will be a function of the amount of electricity generation we decontrol, or put into the hands of others.

We have also developed, at the direction of the government, transitional rates for some industrial customers who received subsidised rates from Ontario Hydro and who could face significant price hikes in an open market. These transitional rates will be phased out over four years.

As for the principle of customer choice, we are advancing choice through our decontrol initiatives. The amount of electricity that OPG will supply in Ontario will decrease over time, and the amount supplied by other companies will increase. By 10 years after the market opens, we are to represent no more than 35 per cent of the electricity supply options available to the province. We will lease, sell, or swap our generation, so that others will own or have effective control over a portion of it.

Our first decontrol action is the long-term lease of our Bruce nuclear generating stations to Bruce Power, which is 80-per-cent-owned by British Energy. Cameco, the world's largest uranium supplier-based here in Canada-has a 5-per-cent ownership, and the two major employee unions hold the rest.

Bruce Power has just completed licencing hearings before the Canadian Nuclear Safety Commission. Subject to its licensing, we hope to be in a position to close the decontrol agreement within a few weeks. Bruce Power will operate the 3,000-megawatt Bruce B station, and has announced plans to return to service another two units, representing 1,500 megawatts of the laid-up Bruce A station.

It may sound odd for us to welcome a competitor to the market, but this transaction is good for the customer, the province, OPG, and the nuclear industry. It represents an important investment in the Canadian nuclear industry; in the economic health of the local communities; and in future employment for the Bruce employees. It allows OPG to concentrate resources on continuing to improve the performance of our Pickering and Darlington nuclear stations, while Bruce Power makes the necessary investments in the Bruce stations. Having what I call operational competition led by British Energy will make OPG better nuclear operators.

This transaction gives us another nuclear advocate in Ontario. It helps us get on with decontrol and competition. And, on top of this, it's a fair deal financially that has been scrutinised by a management team, a board of directors, countless investment bankers, and the province. Moreover, the economics of the deal are laid out on our website.

We are also supporting competition and choice by decontrolling our Lakeview coal-fuelled station in Mississauga and our Lennox oil- and gas-fuelled station near Kingston. We put this decontrol on hold last year at the request of the province to allow time for a review of environmental policies with respect to coal-fired generation.

The first phase of this policy review was completed in March when Environment Minister Elizabeth Witmer announced tough new emission regulations for our fossil-fuelled stations, as well as a decision that the Lakeview station cannot be operated on coal after April 2005. Earlier this week, she stated that the government would soon be in a position to consider lifting the moratorium on the sale of coal-fired stations.

The decontrol of Lakeview and Lennox will put 3,280 megawatts of generation into the hands of others.

We will also move forward with additional decontrol initiatives. When we restart the process, we will decontrol two more coal-fuelled stations--the 310-megawatt Thunder Bay station and the 215-megawatt Atikokan station. We will also decontrol our four hydroelectric stations on the Mississagi River, which have a total capacity of close to 500 megawatts.

Together with Lakeview and Lennox, this will put about 4,300 megawatts of price-setting generation into the hands of others. Add in the Bruce B station, and we will transfer almost 7,300 megawatts of total operating capacity to others. We very much hope this can all be done prior to market opening. We simply await the green light to start.

In addition, there are other sources of electricity supply available to the province that are not controlled by OPG. For example, the province can purchase more than 4,000 megawatts of electricity across the interties with other jurisdictions. There is also about 2,000 megawatts of independent generation in the province today.

As a result of our decontrol initiatives and the non-0PG sources of electricity currently available, when the new market opens, companies other than OPG will be capable of supplying more than half of the province's peak demand.

Still more non-0PG sources of supply are in the planning stages. I've already mentioned British Energy's plan to bring back 1,500 megawatts of Bruce A nuclear generation through Bruce Power. In addition, Hydro One is planning to expand the intertie capacity with Quebec by

1,200 megawatts; TransAlta is already constructing a 500megawatt gas-fired station; and Sithe Energies is in the approvals process for two gas-fired stations totalling 1,600 megawatts. There will be significant competition in the new electricity market. All this can be achieved while maintaining the fundamentals of a strong, Ontario-based electricity company that can compete in an evolving North American electricity market.

I'll turn now to the second guiding principle of the government-the creation of a strong business climate with a reliable supply of electricity and the maintenance of adequate supply reserves. We are supporting this principle through our plan to return the 2000-megawatt Pickering A station to service. Pending the achievement of all regulatory approvals, and many person-years of hard work, the four units of this station will come back into service during 2002 and 2003.

Pickering A represents a low-cost and virtually emission-free source of large-scale generation that will help create a strong business climate in the province. Others such as British Energy are supporting this principle through the initiatives I've already mentioned. In our opinion, with these projects the province will have adequate reserves for a considerable period after market opening.

The third guiding principle is protection of the environment. In support of this principle, we have made, and will continue to make, major investments in emission reductions at our fossil-fuelled stations.

Before describing our initiatives, let me put our fossil-fuelled emissions into perspective. In March, the Ontario Ministry of the Environment released a policy document which states that half of the smog in Ontario's air typically comes from sources in the U.S.-both U.S. power plants and vehicles. The other half originates in Ontario. The bulk of these Ontario-made emissions come from vehicles and transportation, a conclusion that is reached in a federal Department of the Environment paper.

Other large sources of Ontario-made emissions are offroad engines, and industrial, commercial and residential sources. OPG's fossil-fuelled stations are responsible for 15 per cent of the smog-producing emissions created in Ontario, or less than 10 per cent of all the smog in the province.

We may be a relatively small contributor to Ontario's smog, but we accept that we must do our share to protect Ontario's air quality. Since the early 1980s, we have spent $1.8 billion to reduce acid gas emissions. As a result, the acid gas emission rate per kilowatt hour of production from our fossil-fuelled stations is 60-per-cent lower than it was in the early 1980s. We produce today the same amount of fossil-fuelled electricity as in the early 1980s, but with 40 per cent of the acid gas emissions.

We continue to make major investments. Last year, we announced an additional quarter-billion-dollar investment in 2002 and 2003 in four selective catalytic reduction units at our Nanticoke and Lambton stations.

These will further reduce nitrogen oxide emissions by 80 per cent on the four of our 12 major coal-fuelled units where they are installed, representing a system-wide reduction of about 25 per cent.

We will also complete the installation of low nitrogen oxide burners at our Lakeview generating station before this summer's smog season. This will result in a 50-percent decrease in smog-producing emissions from Lakeview over the past two years.

Looking forward, we are now developing our plan to meet the recently proposed provincial emission regulations that are to be fully implemented by 2007. We will complete our strategy once the government has finalised the regulations, following a public consultation period.

These proposed regulations will match or exceed the proposed tough smog requirements of the U.S. Environmental Protection Agency. The provincial proposals will result in a reduction of nitrogen oxide emissions by 53 per cent, and sulphur dioxide by 25 per cent. To meet these new regulations we expect to invest another $500 to $750 million in clean air technologies over the next six years.

The return of the Pickering A nuclear station will also help to displace fossil station emissions. The 16-terawatl hours of electricity production from Pickering A will have the capability of displacing 16,000 tonnes of nitrogen oxide and 64,000 tonnes of sulphur dioxide emissions annually. In addition, the successful return of the two Bruce A units by Bruce Power will also contribute to a reduction in acid gas emissions.

Turning now to the fourth guiding principle, supporting the search for alternative sources of power, we have a number of programmes in place.

In March, we created Evergreen Energy, which will oversee the expansion of our green energy portfolio from 138 megawatts today to 500 megawatts-or about 2 per cent of our current generation-by 2005.

As part of this programme, last month we entered into a partnership with British Energy Canada to develop a 10megawatt wind energy farm on 100 acres of OPG-owned land adjacent to the Bruce nuclear site. We are in a partnership to build and operate the world's largest pre-commercial solid oxide fuel cell. This is a very promising technology that is environmentally friendly, can be located at the customer's site, and scaled to the customer's needs.

We also recently announced the launch of a subsidiary company, OPG Ventures Inc., which will invest up to $100 million over the next three years in new emerging energy and related energy technology companies. Many of these new energy technologies will be renewable.

At this time, alternate energies are unlikely to be significant baseload contributors to our electricity supply. Our programmes represent a good start, however, in developing new technologies that will become increasingly significant over time.

Now, let's look at the contributions that OPG's generation will make in continuing to meet the future electricity needs of the province.

First, hydroelectric generation. We will, of course, continue to operate our clean, low-cost and very reliable hydroelectric generators. But new, large-scale hydroelectric development isn't an option for the future, since all the available large sites have been developed. Small sites with very low environmental impacts will be developed by OPG and by others, but their contribution will be relatively modest.

Next, nuclear power. Nuclear power meets almost half of the province's electricity needs today. It has two major benefits-low operating costs and almost none of the emissions that lead to smog, acid rain or global warming. These benefits make nuclear a very attractive option for meeting the province's electricity needs well into the future.

The two historical barriers to new nuclear development have been concerns about safety and nuclear waste. These are the issues that are often cited by those who want us to phase out nuclear power. We have an excellent record in each area.

The nuclear industry in Canada is an extremely safe industry. One would be hard-pressed to identify another major industry that has achieved nuclear's record for public and employee safety. The operation of our nuclear stations has never put the public at risk, nor has it ever resulted in an employee fatality. This safety record leads the way for the rest of the electricity industry.

We also scrupulously manage our waste products, and there are technically sound options for the future safe, long-term management of waste products.

Just yesterday, the federal government introduced legislation to ensure the long-term management of nuclear waste in Canada. We welcome and support the principles and goals of this proposed legislation and look forward to the forthcoming parliamentary discussions. It is important to have a process which ensures not only a full public debate but also an outcome. Eventually, we must simply get on with implementation of the outcome chosen by the body politic.

On our part, we have set aside more than $900 million to date to a segregated fund to provide for long-term waste management and decommissioning of our nuclear stations and will continue to set aside funds at a rate of about $400 million per year.

Nuclear power is enjoying a renaissance, particularly in the United States. There, nuclear is responsible for more than 20 per cent of electricity usage. U.S. plants achieved a 90-per-cent-capacity factor last year-meaning they were available 90 hours out of every 100, which is excellent performance. This is up from 68 per cent in 1990 and 57 per cent in 1980. The cost of nuclear generation also decreased. In 1999, nuclear power became less costly to operate than coal-fuelled generation, and it is much less costly than oil- or gas-fuelled generation.

Several generating companies are applying for 20-year plant life extensions, to maximise these benefits. To date, five reactors have been granted life extensions by the U.S. nuclear regulator, and 33 more applications will be made by 2005. Most U.S. nuclear generators will seek these extensions.

In addition to life extensions, for the first time in a couple of decades a number of U.S. nuclear generators have started discussions with their regulator on siting new nuclear units.

A bipartisan nuclear energy bill sponsored by Senate Budget Committee Chairman Pete Domenici has recently been introduced in the U.S. Senate. One of the objectives of the bill is to encourage the construction of new plants. In introducing the bill, Domenici said: ""We cannot afford to lose the nuclear energy option until we are ready to specify with confidence how we are going to replace 22 per cent of our electricity with some other source offering comparable safety, reliability, low cost, and environmental attributes.""

Here in Ontario, we have also made major improvements at our nuclear stations. Our capacity factors are also considerably higher than they were three years ago, resulting in additional low-cost production from our stations. We still have considerable work to reach U.S. performance levels, but we are starting to close the gap.

Ontario's nuclear stations also provide important environmental benefits for the province.

Since 1971, they have helped us avoid more than a billion tonnes of greenhouse gas emissions, and millions of tonnes of the emissions that contribute to smog and acid rain, compared to the major supply alternative of the past three decades, coal-fuelled generation.

Because of these impressive results, it is my opinion that nuclear power will continue to play a major role in meeting our electricity needs, and should be considered an inevitable source of the province's future electricity supply.

Today, British Energy, through Bruce Power, and OPG are each focusing on improving our existing units. Eventually, we will need a public debate on the role of nuclear in meeting Ontario's long-term electricity needs.

Now let's look at the major fossil fuel options-coal and natural gas.

At one time across North America, the majority of new generation was based on coal. Now, a significant share of new generation is based on natural gas. At OPG, we have converted our sole oil-fired station to also run on gas, and the province has decided that the Lakeview station will be converted to gas by April 2005, if it is to continue operation beyond that date.

Fossil generation, in my view, needs to be part of Ontario's energy portfolio. It is essential to meeting the electricity demands of the province.

Some argue that the most effective way of reducing the emissions from our coal-fired stations would be to convert all of OPG's coal-fuelled stations to natural gas. This is an important business and policy question. It must be considered in the context of both customer impacts and environmental factors.

If the government directed OPG to replace all its coal-fuelled stations with combined cycle gas turbines, there would be both a significant capital cost and an additional annual fuel cost. To build the same amount of generating capacity--7,700 megawatts--at the cost of roughly $700 per kilowatt, the total capital cost would be approximately $5 billion. The extra fuel cost based on today's spot market gas price of $8 per thousand cubic feet, and generation of the same 40-terawatt hours these coal stations generated in 2000, would be about $1.5 billion a year.

The cost of gas conversion would ultimately be borne by consumers through higher electricity prices. The question for Ontario is whether this is the most effective use of such a large expenditure of money in the context of other possible environmental priorities that could be pursued.

Some argue that current high prices for gas cannot be sustained. But others predict continuing high prices.

In a recent speech to the Energy Council of Canada, James Gray, Chairman of Canadian Hunter Exploration, said that gas demand across North America is rising, and storage levels in both the U.S. and Canada are at historic lows. Gas production is getting harder to maintain, and major sources of new gas are in remote regions. These factors are putting significant pressure on gas prices.

Given the forecast for gas supply and demand, it is interesting that Mr. Gray sees additional development of nuclear power as one inevitable solution to meeting Canada's future energy needs.

Natural gas is an important option for the electricity system. New high-efficiency gas plants will make important contributions to new capacity, and Lakeview will move to gas if it is to continue operating.

But coal must remain an option for the electricity industry. A silver lining in the current high energy prices is that there is now intensified interest in clean coal technologies as a result of the spread between coal and natural gas prices.

OPG's job is to balance Ontario's need for affordable power against the equally valid imperative of protecting the environment. We believe our decision to purchase selective catalytic reduction units for our coal-fired stations achieves that balance better than would wholesale conversion to gas.

Our approach is consistent with the province's proposed emission regulations. However, this is also a public policy matter. If our shareholder believes that our approach needs to be recalibrated or changed, then OPG will do whatever is required.

In conclusion, let me summarise OPG's positions on market opening, and the continuing use of nuclear power and coal-fuelled generation to meet the province's electricity needs.

We at Ontario Power Generation look forward to the opening of a competitive electricity market. We are pleased that the province has established a deadline by which the market is to be opened.

Nuclear power is a very important element in the province's current electricity supply. It produces safe, clean, reliable power, it has very competitive costs, and its wastes are well managed. Nuclear power is an important future option for Ontario.

The province's coal-fuelled stations are also an important part of our energy mix. We are continuing to reduce their emissions. OPG will meet all emission regulations, including the proposed new regulations that will be among the toughest in North America.

At Ontario Power Generation, we want to be the supplier of choice when the new Ontario electricity market opens. We have a flexible, competitive, relatively clean portfolio of electricity generation assets.

Our responsibility is to find the appropriate balance between the province's needs for supply reliability, competitive price environmental protection, and a return to our shareholder. Going forward, we will continue to meet that responsibility.

Thank you.

The appreciation of the meeting was expressed by Douglas L. Derry, FCA, Chairman, Poplar Lanes Holdings, Chair, The Empire Club Foundation and Past President, The Empire Club of Canada.