Sunday, 18 November 2012

Diagnosing Ontario’s Christmas Pony Syndrome




Paul McKay
November 07, 2012



The 19th Century American writer Henry James once acidly observed that many people believe they are thinking when they are in fact merely re-arranging their prejudices. He could have been talking about electric power politics in modern Ontario, where a pernicious, widely prevalent belief which defies all facts is hiding in plain sight. It is this:
For the past century, our politicians, the press, captains of industry, and the public have almost universally assumed – with the certainty of a deeply embedded prejudice – that we are entitled to cheap, reliable, abundant power that miraculously appears at the flick of a switch from some distant, benign source. By “cheap” I mean a price far below the actual cost of production and delivery.
Indeed, when Ontario’s charismatic crusader Adam Beck launched what became North America’s first public electric utility a century ago, he assured rapt audiences from Niagara Falls to northern Ontario that an “Electric Aladdin” would instantly appear to fulfil each and every consumer wish. Better still, Beck vowed, future prices would inevitably, magically descend in inverse relation to how much power consumption climbed.
Beck might as well have told his adoring audiences they could have all the cake they wanted, but eat it too, save money, and lose ten pounds in the bargain. What could be sweeter? For the next 80 years, Ontario’s power demand doubled every decade as each premier promised an electric future that looked like the electric past, except magnified in scale and minimized in price.
Huge hydro dams were constructed. Giant coal plants were commissioned, including the largest on the continent at Nanticoke. A fleet of reactors at Pickering, Bruce and Darlington was ordered at breakneck speed. But fatefully, the steeply escalating, highly debt-leveraged capital cost of each new reactor was only blended into the average system generation cost after it was built and started sending juice into the grid.
So the cost of the 20 new reactors was masked by cross-subsidies from six dozen older hydro-electric plants making penny-per kilowatt-hour power, and from cheap but filthy coal plants. And in true Ponzi scheme fashion, the day of debt interest reckoning was always pushed far into the future. All this meant the retail power “price signal” was always decades behind reality. What could be sweeter?
Ontario was still addicted to this fiscal confection when Mike Harris added another thick layer of alluring icing in 1995. He ran for premier on a public promise to freeze power rates for his entire term – without first daring to look at Hydro’s books. He won huge, and kept his word. Four years later our provincial utility effectively became bankrupt under the weight of $38 billion in publicly-owed debt.
It did not require a forensic accountant to discern that Ontario’s nuclear fleet – which then provided almost 70 per cent of grid energy – was the chief cause. Or that this vast debt grew because Ontario industries, commercial enterprises, and consumers were not being charged the actual cost of producing and delivering this new atomic power. In effect, Ontario Hydro’s business model was to lose money on every kilowatt-hour sold, then hope to make the losses up in volume.
So what was the response? The politicians, press and public simply re-arranged their prejudices. The $38 billion in Hydro debt was deftly scattered and buried in several government ledgers. For the next four years, precisely none of the stranded nuclear debt was paid down by the Harris government.
That meant cumulative debts, interest payments and peak electric demand climbed further. Worst of all, the resulting low-ball power rates postponed energy efficiency investments at heavy industries, office towers, factories, farms, hospitals and homes. At the same time, spending on transmission and distribution upgrades and maintenance was cut to the bone. That left every power user exposed to future rate hikes, and grid breakdowns.
Then the blackout of August, 2003 rocked the province. Ten lost days of productivity cost the province an estimated $6.4 billion, largely because our vaunted nuclear fleet was acutely vulnerable to a cascading series of grid failures that began in Ohio. They were among the first to fail, and the last to come back on line.
Fast forward to the 2011 election. Premier McGuinty set the bar by announcing a $1 billion per year plan to subsidize the subsidies already embedded in consumer power bills. Large industries got their own sweet $450 million “rebate” deal. But this was petty political potatoes for Tim Hudak, who vowed to return the province to the “cheap” good old days when Ontario Hydro blithely borrowed billions to build nuclear plants, and ran filthy old coal plants flat out. Andrea Horwath vowed to cut everyone’s power bills further, with a package of just-in-time promises couriered in from Never-Never Land.
I recite this brief history because in my view it shows that the biggest obstacle to attaining the 21st Century power system Ontario needs is the century-old culture of feckless flummery embedded in our political discourse, our civic mindset, our power sector bureaucracies and unions, our large industry lobby groups, and the press and pundit class.
For those wishing a rough translation of “feckless flummery” think of the “emperor has no clothes” parable. Only in this case, it is our electric empire no one wants to say is naked, or broke in every sense of the word. So here is the main political problem, plain and simple:
Ontario is addicted to being promised cheap, instantaneous, risk-free, reliable power. Despite easily available evidence proving this is akin to promising every child a pony for Christmas, virtually all our politicians cravenly comply during each election cycle. In recent times, the only honourable exception has been Green Party leader Mike Schreiner.
Yet every place in North America or Europe, with a comparable nuclear-heavy generation mix, charges far higher prices for power than Ontario. In virtually all cases, the utilities there also have high debt levels, and poor reliability records. Worse, as the reactors age these problems magnify.
Ontario is not exempt from this reality. Even the best station in our nuclear fleet, Darlington, proves the point. It was originally slated to cost $3.4 billion, but went almost $11 billion over budget and took a decade longer to build than planned. These costs were originally justified on the basis of a 30-year asset life and amortization. But remarkably that has since been stretched – just like Pinocchio’s nose – to 40, then 50, then 60 years by OPG accountants.
Nobody at the time mentioned that mid-life Darlington reactor pressure tube transplants would cost at least another $10 billion, leave four 850 Mw units comatose for several years each, and compel consumers to pay premium prices for prodigious amounts of replacement power.
Worse, no impartial authority has calculated how many billions more it will cost to de-commission 20 fiercely radioactive reactors at Pickering, Bruce and Darlington once they are retired. But Hydro-Quebec’s estimated cost of dismantling its single CANDU reactor during the next 50 years is $1.8 billion.
So just dismantling the Ontario reactors may cost almost $40 billion. It will cost untold billions more to dispose of the latently lethal nuclear wastes the Ontario reactors will produce. Meanwhile, during the past 12 years Ontario ratepayers have paid $20 billion to service the $20 billion stranded nuclear debt that was due on Mike Harris’ watch. Some $12 billion still remains owing, and likely won’t be paid down until 2018 at the earliest.
You don’t need to take my word that this has put our provincial utility, once again, at the edge of a fiscal cliff. An April, 2012  analysis by Standard and Poors concluded OPG’s bonds would be rated ‘bbb’ – that’s barely above junk status – if repayment was not guaranteed by the province. Yet the province itself has been threatened with downgrades by credit rating agencies because of a long-term debt exceeding $270 billion, and a current annual deficit of $14.4 billion.
So this is like Portugal promising to cover off the debts of Greece. Yet astoundingly, the province is on the verge of allowing OPG to borrow and spend $26 billion more on new nuclear plants, despite a baseload surplus, despite no transparent, contractually binding “all in” cost quote from sole supplier SNC-Lavalin, and despite the harrowing lesson of Fukushima.
It took such a tragic, costly event for the Japanese political system, its press, and the public to see the hidden dangers of reliance on a power technology which merely appears to be the cheaper choice. In no small irony, Japan has recently replicated Ontario’s feed-in- tariff model to help salvage its crippled power system and economy with green power. In the first few months, an estimated $2 billion was committed to build new green generation there, including 1,000 Mw of approved solar projects.
The Japanese too suffered from an addiction to unexamined prejudices, including the fiction that atomic power and its apostles could deliver cheap power. No 21st century power technology can. Every one is expensive. Some generation is expensive and safe. Some is expensive and latently lethal. Some technologies put all the costs and risks on current consumers, while others dump them on our grandchildren. Some rely on tiny but explicit subsidies, some on huge covert subsidies.
The question is: Will deception, dissembling and debt evasion remain normalized? Or will our politicians dare to start telling the truth about this in public, and thereby put a higher value on both electricity and civic honesty?
Only then will Ontario start actually thinking with clarity about how to build a sound 21st century power system, instead of re-arranging reckless prejudices falsely packaged as prudent planning.

QUOTE FROM DBRS REPORT NOV 2/2012
RISING POLITICAL PRESSURE COULD INCREASE CREDIT RISK GOING FORWARD
After years of a relatively stable political and regulatory environment, the utility sector in Ontario could face growing challenges. As generation costs potentially rise above and ultimately test the political ceiling (10% increase of the total bill annually), it may be difficult for the utilities to pass these costs onto the ratepayers. As a result, the following are possible negative outcomes: (1) a rate freeze whereby incremental costs are not recovered or (2) costs that could only be recovered over a long period of time. In either event, profitability for the regulated utilities would be impacted and could result in a negative rating action


Paul  McKay

Mr. McKay is the author of "Electric Empire: The Inside Story of Ontario Hydro" and six other books, and was the 1990 recipient of the Atkinson Fellowship in Public Policy.

He produced a Toronto Star series on national environment issues, worked as senior policy advisor to the Ontario Minister of Energy (1990-91) and was a director of IPPSO from 1992 to 1997.

He is also a green power project developer (small hydro and solar) , an award-winning investigative reporter specializing in environment and energy, the 2005 recipient of the Pierre Berton writer-in-residence program, and a past director of OSEA.

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