Is Ontario Premier Ernie Eves asleep at the energy switch?

Is Ontario Premier Ernie Eves asleep at the energy switch?
OPG stokes the fires of Ontario Hydro’s runaway nuclear freight train

By Normand de la Chevrotiere

INVERHURON, Ontario – December 3, 2002

Before it was broken up in a restructuring that created a set of companies from the one former electrical monopoly, Ontario Hydro’s debt of $38 billion translated to some $3,300 for every man, woman and child in Ontario. Hydro’s power production successor, Ontario Power Generation (OPG), now threatens to resume Hydro’s unbridled spending habits in what appears to be an “at any cost” effort to get four laid-up nuclear reactors at Pickering back into service.

The perfect nuclear storm
By the time of its devolution, Ontario Hydro had accumulated a $38 billion debt, largely through aggressive expansion into nuclear powered electricity production. The power planners anticipated the new plants would achieve output levels that could lead to lucrative power exports and expansion for Ontario industry, paying back the investment.

Instead, Hydro reactors were plagued with safety and performance problems. Half of the generators at Pickering and Bruce were mothballed; the remainder were subject to costly improvement programs. The combination meant that nuclear output was drastically reduced, and expected profit turned into spiraling debt.

Debt rating agencies responded to the province’s difficulties by threatening to lower Ontario’s coveted rating unless they could rein in Hydro’s spending. A lower provincial debt rating would make borrowing to meet budget requirements more difficult and costly.

Enter the new energy era. After a prolonged period of study of the new environment and numerous false starts, the province embarked on the path to an open, competitive electricity market. The government of Ontario created successor companies to Ontario Hydro (such as Ontario Power Generation-OPG and Hydro One). $17 billion of the Hydro debt was divided up among various successor entities and the province, while the remaining $21 billion of “stranded debt” was settled into another successor company whose sole purpose was to hold and pay down this debt.

The theory was that energy customers would still be ahead in the end. Private investors would embrace the new open market by providing capital for new power plants. Increased supply would lead to lower electricity prices for the consumer. Market forces and discipline would create efficiency. And the “nuclear cult,” which had grown out of control inside the old Ontario Hydro shell, would be dismantled.

Nuclear roots run deep
But the province still can’t seem to tame the nuclear bear. As part of OPG’s “Nuclear Asset Optimization Program,” the estimated cost of refurbishing the four laid-up Pickering “A” reactors has ballooned to $2.3 billion, more than double its original estimate. The reactors, after a series of repeated delays, are now not expected to be up and running until 2006 at the earliest.

Has corporate governance really been strengthened at OPG? In the process, private investors have largely shied away from new power plant capacity, noting it would be foolhardy to compete with power generously subsidized by a seemingly bottomless public purse.

In a meltdown of Ontario’s newly framed electricity market, Premiere Ernie Eves announced last month sweeping price caps and rebates for Ontario’s battered energy consumers. In a move creating market upheaval and suggesting a reversal of policy, taxpayers were assured they wouldn’t be footing the bill. The price caps and rebates would at least in part be financed by OPG, whose assets and considerable debts are notably held in the name of the taxpayer.

Too much waste, too little money
Eves faces yet another problem, in fact, another OPG shortfall. Ontario Hydro had been collecting monies from customers from 1982-1998 in the form of a surcharge to cover the cost of disposal of nuclear waste. But Hydro spent that money to retire debt. In an attempt to play catch-up, OPG has committed to put aside some $450 million annually until 2008, with reduced amounts thereafter, to make up for the $3.4 billion shortfall in funding its assigned liability. Judged against recent international estimates of the costs of waste disposal, which run in the many tens of billions of dollars, this liability could be considerably larger.

The next question which arises in the present environment of price caps is: “where is OPG going to find all this money?”

Ironically, the province seems to be looking to OPG to solve at least some of its own problems, when Hydro was the root cause of the problems in the first place. And the federal government, accused of dragging it heels for decades in solving the question of permanent waste disposal, has now created a three year study panel solely made up of members of the very nuclear industry which created the mess and funding shortfall to begin with.

New power capacity; old reactor puzzles
One of the few new power projects to still go ahead is a 440 MW natural gas, co-generation plant in Sarnia, expected to be up and running early next year. TransAlta, headquarted in Alberta, is investing $400 million for the project, which at last count was on schedule and on budget.

Based on these representative numbers, Pickering “A’s” four reactor output of 2,000 MW could have been replaced by co-generation facilities for some $500 million less than the current reactor refurbishment estimate of $2.3 billion (which threatens to go still higher). And co-generation plants could have been built with a much more predictable and earlier time line given nuclear’s notorious cost overruns and delays.

Meanwhile, Bruce Power, majority owned by financially strapped British Energy, has stated that its plans to bring up two 750 MW reactors at Bruce “A” on the Lake Huron shoreline are ahead of schedule. The first of two reactors may be on-line as early as next April, with the second following in the summer.

Although the cost estimate has increased from $340 million to $400 million, it still seems like a bargain when compared to Pickering’s $2.3 billion tab, even considering its only two reactors instead of four.

What is a private sector company doing differently from a publicly owned company to account for these cost variances? The reactors are also roughly the same age. Are the designs and acceptability/availability of component parts that different?

Pickering “A” may very well prove to be Ernie Eve’s and his Conservative’s Waterloo. Are Ontario taxpayers throwing good money after bad? An old expression comes to mind: “Fool me once, shame on you. Fool me twice, shame on me.”

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