Drummond’s Flaws: Electricity the 3rd biggest Ontario Ministry treated as 2nd Class

The Drummond Commission Report is a 562 page tome with hundreds of recommendations on how the Liberals should change their spending habits. The main street media has generally endorsed the report in its entirety seemingly to avoid the prospect of Ontario becoming the Greece of Confederation.
The Report’s focus is on Health and Education spending which combined consumes 65.5% (Table 1.2, page 104) of Program Spending in the province. The pages devoted to those two sectors are respectively 59 and 55 whereas the pages outlining the electricity sector are lumped together with “Infrastructure and Real Estate and only two pages are focused exclusively on “Electricity”. With only two pages devoted to the Energy Ministry the Commission somehow managed to generate 10 of the 20 recommendations in this chapter and in my opinion those recommendations suggest a bias in favour of the McGuinty Green Energy and Economy Act (Act) instead of an objective review that would have highlighted the inefficiences of the Act
If the authors of the report had really thought about electricity they may have realized that Ontario can’t live without it, so perhaps it’s profile should have been higher. Electricity is as much a necessity of life as is health or education. Electricity has become a basic human right and according to a May 2011 research paper prepared by the Guelph & Wellington task force for Poverty Elimination, energy poverty (more then 10% of household income is spent on home energy) affects one in every five households in Ontario.

If the report had looked at the amount that Ontarians paid for electricity in 2010 and added the Energy Ministry budget spending they would have found that $14.3 billion (OPG & Hydro One alone had combined revenues of $10.5 billion for 2010 ) came from the taxpayers/ratepayers pockets to allow them to turn their lights on and cook their meals. It would have represented the third largest budget item after health and education. The Energy Ministry budget for 2011 was $1.446 billion and included in that was the Ontario Clean Energy Benefit (OCEB) of $1.138 billion. If the authors had looked further they would have discerned that Ontario’s conversion to the HST added 8% to all ratepayer bills which meant the Finance Minister’s coffers received an extra $1.027 billion (based on 2010 revenues) making the net cost of the OCEB $111 million which would be considered a “rounding” error to most economists reviewing Ontario’s proliferate spending habits.
The Drummond report recommended an immediate elimination of the OCEB but ignored the cash grab of the HST implementation. The authors also failed to recognize high electricity prices have cost Ontario jobs. Ignoring the effects of high electricity prices is in contrast to the Auditor General’s report which was critical of the Act. The AG’s conclusion was that jobs allegedly created by the Act had lost Ontario 2 to 4 jobs for each one created. Ontario’s industrial and residential electricity rates are presently the 2ndhighest in Canada behind only PEI and higher then most of the US states. Elimination of the OCEB would have quickly elevated Ontario to the highest in electricity rates in Canada and most of the US. Attracting jobs would be even more difficult as energy prices play a significant role in attracting new investment. McGuinty quickly killed that recommendation but that will only delay the inevitable!
The Drummond report’s outright endorsement of the badly designed Long Term Energy Plan (LTEP) put forward by former Energy Minister Duguid, in November 2010, indicates that perhaps the author(s) are believers in climate change and that may have affected their judgement. The reports recommendation that the LTEP be used as the framework for the design of a 20 year plan would indicate that the Commission is endorsing over 10,000 MW of intermittent wind and solar as part of Ontario’s energy supply. Those 10,000 MW will conservatively cost the ratepayers and taxpayer an additional $5 billion (approximately 33% of Ontario’s current budget deficit) per annum for the next 20 years. The endorsement of the LTEP flies in the face of what other countries such as Germany, Spain, the UK and others are discovering and are rethinking their energy future away from the vagaries of wind and solar generation.
The recommendations in the Drummond Commission Report on the electricity sector, if followed, will ensure Ontario will continue to lose jobs and the tax revenue those jobs would generate. Energy poverty will affect more and more households as additional wind and solar are added to the grid and electricity prices climb to reflect their costs.
Parker Gallant,
February 28, 2012

Electricity and the Liberal Hansard History: Final Chapter

This is the final chapter in the journey we started which looked at the Liberal promises made in respect to Ontario’s electricity sector early in their first election victory. The journey started in early 2004 as the Liberals aggressively attacked our electricity production and distribution system. We start this visit to Hansard on November 18, 2004, the day after an evening debate in respect to Bill 100, the Electricity Restructuring Act. This day the NDP’s Howard Hampton brought out remarks made by OPG’s Chairman, Jake Epp, a Conservative, that the McGuinty government had appointed earlier in the year raising this question for Energy Minister, Duncan.

This is what Jake Epp says: “There are a lot of issues that need to be taken care of, whether you’re talking about supply, you’re talking about the market, whether you’re talking about OPG’s role,” in the private market. But what is he saying? No direction. No five-year plan. Not even a one-year plan.”
Premier, people don’t want to debate closure. They don’t want to debate your hatchet effort at democracy. These are real issues. Why are you so afraid of debating the issues that your own chair of Ontario Power Generation has raised?”

The Energy Minister, Hon Mr Duncan, was pointed in his response as the following demonstrates
Now, this government has put a new board and chair in place at OPG. We have made decisions about the future of the company, and we’ll make them according to our timetable. Remember, when we came to office we inherited a company that was in complete disarray. We have to be deliberate and careful in the decisions we make. It would be impossible to turn OPG around in 10 months. The last thing we need to do is make knee-jerk decisions that result in flip-flops like we saw under the previous government, because it creates even further instability. I’m the first energy minister in almost a decade to give clear and consistent direction to the sector. Given the strong response we’ve received to our RFPs, I believe the industry recognizes this. We’re moving forward in a deliberate and positive fashion. When Bill 100 passes, we will have a new power authority and conservation bureau. We believe these are the right steps to ensure a reliable, affordable, safe supply of electricity for the people of Ontario.”
The comment from Duncan that stated; “I’m the first energy minister in almost a decade to give clear and consistent direction to the sector,” was no doubt sincere when given but consistencyhas not been the watchword of subsequent Energy Ministers. As just one example we would point to the “turn” around of OPG.  OPG’s 2003 year end annual report noted that they had rated capacity of 22,777 MW and produced 109.1 terawatts (TWh) of electricity. The 2010 year end annual report saw OPG’s rated capacity at 19,931 MW (down 12.5%) and 88.6 TWh (down 18.8%) of electricity produced. This quote taken from OPG’s 2003 annual report indicated that,
roughly three-quarters of our production is sold for a price that is considerably lower than the price other market participants receive, after taking into account market rebates.”
The foregoing aspect of OPG hasn’t changed but their drop in production has been taken up by more “market participants” consisting mainly of foreign based wind and solar producers who are paid from three (3) to fifteen (15) times the average price OPG receives. The “clear and consistent direction” that Minister Duncan spoke to that November day in 2004 has been effective. It has reduced OPG’s role in the province’s production of electricity, however, the costs of that direction has caused electricity rates to climb much faster then the inflation index and has driven many living on fixed incomes and others into energy poverty.
Just a couple of weeks later on December 9, 2004the Minister of Energy, Dwight Duncan presented Bill 100 to the Legislature for it’s third and final reading. The following are the highlights of his presentation:
The Minister of Energy would kick off the preparation of the plan by providing to the OPA a series of directives.” and
The ministerial directives would form the core around which the plan would be developed.” and
But consumption varies from year to year, and new technologies and upstart competitors can render expensive facilities obsolete before their usefulness expires.” and
Ontario would have a combination of regulated generation facilities providing continuous power and other facilities competing in the marketplace to provide electricity to consumers. This element of competition and risk sharing with private investors in the market would provide a higher level of discipline on all electricity suppliers and reduce the risks borne by Ontario’s ratepayers.” and
While the burning of fossil fuels is often the most visible sign of the environmental cost of our electricity system, it should also be noted that the construction of high-voltage transmission systems, often cutting through otherwise untouched parts of our province, represents a serious environmental issue.” and
Where possible and economically feasible, it is desirable that Ontario move to a more distributed system of electricity generation, where clean generation capacity is situated close to the consumers who require the power.”and
Consumers would have the benefit of stable and predictable prices and an electricity sector that emphasizes reliability, sustainability, diversity and affordability, all while being environmentally responsible.”
In retrospect all of the pronouncements uttered by Minister Duncan in seeking justification for Bill 100 have basically failed with the exception being the issuing of those “ministerial directives”.
The “plan” was produced and discarded, “consumption” has fallen as manufacturers, refiners and forest product companies have either left for other jurisdictions or gone bankrupt. The technology chosen, wind and solar is being discarded by the very countries that Ontario emulated in it’s choice of generation options.
The competition promised has turned out to be simply subsidies for wind and solar developers that have flocked to Ontario for the above market prices they are paid. The “risk sharing” envisaged was instead a provincially guaranteed return on investment (to be paid by ratepayers) whether you installed 100 megawatts of industrial wind turbines or 10 kilowatts of solar panels.
In order to hook up all the renewables to the grid “the construction of high-voltage transmission systems,” were ordered in those “ministerial directives” and those “untouched parts of our province” have become overrun with 400 foot industrial wind turbines, acres of solar panels both providing unreliable, expensive and intermittent electricity along with those “high-voltage transmission systems” that decimate the “untouched parts of our province”!
The concept of “a more distributed system of electricity generation” is still merely a concept with grid capacity stretched to avoid blackouts and the Independent Electricity System Operator (IESO) forced continually to export electricity at a loss or order hydro generators to spill or nuclear plants to steam off, all in an effort to balance supply and demand and all at considerable cost to Ontario’s ratepayers!
The promised “benefit of stable and predictable prices” for consumers was a pipe dream and the Liberal Party’s legacy in the electricity sector will stain the province for at least two decades.
Some plan, some legacy!

Parker Gallant,
February 12, 2012


Previous Chapters:

Electricity and the Liberal Hansard History, Chapter 9

This is chapter 9 in a series by Parker Gallant: Chapter 1;  Chapter 2:  Chapter 3Chapter 4Chapter 5, Chapter 6, Chapter 7, Chapter8
This chapter jumps forward to October 12, 2004which was the first sitting of the Ontario Legislature after a very long summer recess and Bill 100, the Electricity Restructuring Act, was raised by Liberal MPP, M. Jean-Marc Lalonde who posed this question to Dwight Duncan:
Bill 100, the Electricity Restructuring Act, 2004, provides the basis for achieving this by proposing sweeping legislative change. Minister, what will be the role of the Ontario Energy Board under the proposed legislation to restructure the electricity sector?”
Duncan’s response was;
Under Bill 100, the Ontario Energy Board would have a stronger role in protecting Ontario consumers through licensing and rate regulation, something the previous government rejected. They left small consumers at the will of the free market. The OEB would ensure economic efficiency, cost-effectiveness and financial viability of the elements of Ontario’s electricity system. Its mandate is to protect consumers and ensure that the industry operates efficiently and effectively. Bill 100 strengthens its role by mandating it to publicly review electricity plans prepared by the Ontario Power Authority and market rules prepared by the IESO. It’s a venue for stakeholder and public involvement in the energy sector.

With regard to electricity rates, the OEB would approve an annual rate plan for low-volume and other smaller consumers. These consumers would pay a blended price. It would be based on regulated contract and forecasted competitive prices. This will ensure that prices are fair, stable and predictable, something this province desperately needs to generate new electricity.” (writers emphasis)
Minister Duncan`s views of his authorship of Bill 100 in such an altruistic way has failed miserably to actually develop into what he expressed in the Legislature. The OEB now sets rates for the “small consumers” semi-annually” and those rates have been rising at an alarming rate (9.6% in 2011 alone) and time-of-use (TOU) rates for off-peak use have increased by over 100% since he echoed those words. Electricity costs are top of mind with not only the millions of small ratepayers but also with thousands of small businesses operating throughout the Province. The Canadian Federation of Independent Businesses (CFIB) lobbiedGeorge Smitherman in an effort to keep a lid on energy costs when he was the Minister of Energy. Their efforts were ignored and their recent “Business Barometer” for Ontario lists “fuel, energy” as their # 2 “Cost Concern” slightly behind “taxes, regulations”. The OEB no longer “balances” the needs of generators and distributors; with the impact on consumers in approving rate applications; except on very rare occasions. The “competitive prices” envisaged by Minister Duncan have not materialized as the OPA; under directives, issued by the various Energy Ministers, has been signing up wind and solar developers at fixed, above market 20 year contracted prices. The OEB is no longer a separate “regulatory” body and instead reports directly to the Minister of Energy. The OEB is still waiting to publicly review an electricity plan prepared by the Ontario Power Authority some eight (8) years later that will actually be implemented.

Minister Duncan had more to say about Bill 100 after being fed another leading question from MPP Lalonde as the following remarks about the role of the OPA denote;
Its role will be to ensure that 20 years from now this province has adequate, affordable power that will enable us to grow and prosper economically, as we have done under the first year of change in Ontario in the McGuinty government.
These changes, coupled with the economic management of this government, mean real change that means more jobs, better jobs, protection for the people of this province and ultimately better health care and better education, change that we’re delivering every day of this mandate and change that we as a government are very proud of.”

Chart Data from CANSIM table  282-0054

No doubt Minister Duncan would still brag about the “changes” his government has created but he has and will continue to take a lot of heat from many in Ontario that view the “changes” in a negative light. With 300,000 manufacturing jobs gone, electricity rates higher then only one other province (PEI) in Canada and a health system that has shown continual strain because of wrong-headed spending. Ontario has not grown or prospered economically. Those “better jobs” have not materialized as Duncan promised and Ontario has continued to suffer higher unemployment rates then the Canadian average as recently reportedwith the unemployment rate in Ontario jumping to 8.1% in January.

The following day (October 13, 2004) in the Legislature NDP MPP, Howard Hampton confronted Minister Duncan with information that came from Ron Bartholomew, vice-president of production, retired, Ontario Hydro, via an open letter published in the Globe & Mail. Mr. Hampton had this to say in his question for Minister Duncan;
Mr Hampton: They say that Premier McGuinty’s Bill 100 follows “the same old failed and discredited electricity program” as the Conservatives’. They warn that your plan “will increase consumer electricity rates dramatically, and force electricity-reliant industries to move production out of Ontario, taking good jobs with them.” And they say the best way forward is to “give Hydro One and Ontario Power Generation the mandate to provide power at cost for the people of Ontario.”
Premier, before the election you said, “Public power.” You said, “All new generation will be publicly owned and operated on a not-for-profit basis.” Now are you breaking that promise, too?”
Minister Duncan’s retort was short and to the point:
Let me be clear. This government will not go back to the old public monopoly. It was a failure. It left this province $38 billion in debt. Your government cancelled conservation programs. Their government left a mess. They’re voting against the bill because they think we’re undoing what they did. You people just aren’t consistent. This government made a commitment to change, and we’re changing for the better. I reject the old Ontario Hydro model and I reject the old Ontario Hydro vice-presidents who want to go back to it. It didn’t work. We’re fixing it. We’re cleaning up the mess that you, and the Conservatives after you, left this province in on the hydroelectric file
Now that Mr. Duncan is the Minister of Finance his remarks about the $38 billion seem like small potatoes when measured against the $250 billion of debt the Province now has and the commitment to pay wind and solar developers in excess of $100 billion over the next 20 years for the intermittent power they will deliver that must be backed up with gas fired electricity generation and hooked up to the gird at a cost of hundreds of millions. Under the Liberal government in Ontario the evisceration of OPG has been effective as both their capacity and production values have fallen while Hydro One has grown by leaps and bounds as Ministerial directives have instructed them to build new transmission systems to hook up renewables to the grid.

The rout of OPG has been effective as their place in the public sector has diminished steadily despite the crumbs thrown at them by the Liberals. The Liberals directed them (via the OPA) to spend over $4 billion to build “Big Becky” and “Mattagami” which will eventually deliver minimal new hydroelectric power to the province but will represent “major engineering accomplishments”. It is worth noting that in 2003 Ontario Power Generation (OPG) sold 113.3 terawatts (TWh) of power but in 2010 this had dropped to 88.6 TWh. Had the drop of 24.7 TWh not occurred OPG would have produced additional revenue (at OPG’s 2010 price of 4.5 cents per kWh) of $1.1 billion in 2010 which may have gone a long way to pay off some of that “stranded debt”. All that extra cash would have been generated without spending that $4billion!

If Minister Duncan was “fixing it” what exactly did he mean. That $1.1 billion (plus what was lost to OPG in the years 2004 to 2009) would have paid for a lot of those “old Ontario Hydro vice-presidents” and probably left behind a few extra billion. Those billions that OPG might have earned was instead directed to the wind and solar developers as ratepayers were obliged to kick in money through the growing Global Adjustment (GA) pot to ensure that the Liberal friends got their money. As the recent Attorney General’s report noted the GA will exceed $8.1 billion by 2014.

Some legacy!

Parker Gallant,
February 5, 2012