BUSINESS

The costs of power

Ontario Hydro customers face the consequences

BARBARA WICKENS September 21 1992
BUSINESS

The costs of power

Ontario Hydro customers face the consequences

BARBARA WICKENS September 21 1992

The costs of power

Ontario Hydro customers face the consequences

The main color scheme of the Darlington nuclear generating station provides an indication of its history: it is painted battleship grey. And indeed, the Ontario Hydro station has been a flashpoint for controversy even before construction workers began pouring concrete in 1981, when environmentalists objected to the massive project’s potential for disaster. Since then, construction delays and technical problems have rocked Darlington. With three completed reactors, and a fourth still under construction, it is now at least five years behind schedule and $11.3 billion over its original cost estimate of $2.5 billion. As a result, electricity rates in the province have soared by nearly 25 per cent since 1990—and that trend will continue as Ontario consumers and businesses pay for a generating plant that some energy experts fear may never operate properly. For some of Ontario’s largest manufacturers, the increases are critical: with power accounting for more than 50 per cent of their costs, their representatives say that each price hike seriously affects their ability to remain competitive. Ontario’s experience with Darlington, furthermore, has clearly contributed to a cooling interest in nuclear power among other provinces (page 37).

Just how much Darlington is costing Ontario consumers became clear this summer at the Ontario Energy Board hearings to determine Ontario Hydro’s rate increase for 1993. In 20 days of hearings in July, Hydro proposed to increase its rate by an average of 8.6 per cent—and attributed fully three-quarters of the increase to the costs associated with bringing Darlington on line. The energy board recommended last month that Ontario Hydro limit its rate increase to an average 7.9 per cent. Its recommendations, however, are not binding and the utility is expected to announce its 1993 rate increase later this month.

Hydro chairman Marc Eliesen, whose resignation in August becomes effective on Oct. 31, told Maclean’s that without Darlington, the utility could have held its rate increase to two to four per cent. And he added that he agrees with the New Democratic government’s ban on all future nuclear generating plants. He added that by looking for alternative supplies of power and relying more on energy conservation, Ontario will never again face huge jumps in its electricity rates.

But that is little comfort to many large users. Executives of those companies say that the utility will have to change its basic approach to providing service. Until now, Ontario Hydro representatives have maintained that the company provides an essential service. Instead, business representatives say, Hydro executives will have to acknowledge that it provides a basic commodity and price its product competitively. Otherwise, industry will look outside of Ontario for locations where power is cheaper. Said David Goldsmith, chairman of the 60member Association of Major Power Consumers in Ontario: “Ontario Hydro is putting the future of this province in peril.”

Indeed, business executives say that Ontario Hydro’s rate increases are driving up their costs—and are seriously undermining their ability to compete internationally. Ralph Powell, president of Niagara Falls, Ont.-based Washington Mills Canadian Operations, said that when his company wanted to expand, it considered building in both Ontario and New York State. Niagara Mohawk Power Corp. agreed to supply Washington Mills with lowercost electricity for five years. As a result, in January, Washington Mills, which makes such industrial abrasive products as grit for sandpaper, opened its new $6-million plant, which employs 42 workers, in Niagara Falls, N.Y. And Powell noted that his company will closely reconsider the future of its Ontario plants, which employ 230 workers, if Hydro implements a planned 9.1-per-cent increase for industrial customers on Jan. 1. “We cannot stand another increase in a recessionary period when we cannot get price increases,” Powell said.

“We compete in a global business, but we are not going to be globally competitive in ’93 because of our power costs.”

Like Powell, Goldsmith is concerned about the impact of electricity costs on his companies’ profit outlook. Goldsmith is also manager of planning and development at Ivaco Rolling Mills, located near Ottawa, a firm that uses scrap steel to produce steel wire rods, and in the process has become one of the largest power consumers in eastern Ontario. Goldsmith said that from 1980 to 1990, the price of scrap material for steel stayed flat, natural gas costs climbed by 10 per cent, operating and maintenance costs increased by 25 per cent— and electricity by 91 per cent. “We have gone to our scrap suppliers and asked for a price freeze,” Goldsmith said. “Electricity is the one and only cost we cannot control.”

Goldsmith added that he is increasingly concerned about the reliability of the power that Hydro will be able to produce. As well as the uncertainty surrounding Darlington, Goldsmith said that he has grave doubts about Hydro’s ability to predict the province's future power needs and ensure that it has adequate sources of power available. Because of the current recession, Hydro has scaled back its projections for growth in the province. But historically, Goldsmith said, demand for power tends to surge during economic recovery.

Goldsmith has a particular reason for concern. An interruption in power of even a few

milliseconds, an interruption so small that a householder might not even notice the lights flicker, sends red-hot steel spewing from its course in the rolling mills. Maintenance crews at Ivaco, which operates 24 hours a day, seven days a week, are then required to shut the mill down for up to four hours as they torch the buckled steel out of the machinery. To date, Goldsmith said, such blips in electricity have mainly been caused by the weather. But a time could arrive, he said, when Ontario’s power is unreliable simply because there is not enough of it to meet demand.

Still, even Hydro’s fiercest critics concede that the giant utility served the province well for most of its 100-year history. As one of the lowest-cost producers of power on the continent, it served as a powerful magnet in attracting industry. But according to forecasts from the Toronto-based environmental group Energy Probe, electricity rates in Ontario will surpass those in the United States by 1994. In 1985, U.S. rates were 80 per cent higher than Ontario’s. With Ontario Hydro’s economic edge rapidly disappearing, the utility’s friends and foes alike are quick to explain their theories of what went so wrong so fast. Almost inevitably, Darlington’s problems are mentioned prominently.

When Ontario Hydro first proposed the Darlington plant in the late 1960s, the province’s economy was booming and consumers’ appetite for power was voracious. A so-called megaproject such as Darlington seemed to make sense. But such large-scale construction projects, which take years to build, present forecasters with a dilemma. The further ahead they must look, the more difficult it is to accurately predict what the demand for power will be. Indeed, the oil-price shock of the early 1970s suddenly turned many consumers into avid energy conservationists—and subsequently made forecasting even more difficult. Declared Lawrence Solomon, Energy Probe’s chief economist: “Hydro should not be in the forecasting business. When you are dealing with a megaproject, it doesn’t take much to throw everything off.”

Darlington’s actual construction confirmed some of its critics’ worst fears. Preliminary estimates indicated that Hydro could build the plant for $2.5 billion. By the time Hydro began preparing the site in 1978, the estimate had risen to $7.4 billion. At its peak in 1986, it was one of the largest construction sites in North America, employing 7,000 workers.

During its protracted construction, however, unforeseen problems arose. The largest of its earlier generation of reactors, the four CANDU units at Bruce B, on the eastern shore of Lake Huron, were designed to produce 770 megawatts of power each. The engineers of Darlington, however, redesigned the heat transport system so that Darlington’s reactors would operate more efficiently and generate up to 890 megawatts of power each. But after a fuel bundle cracked and became jammed during operations of the first completed reactor, Ontario Hydro shut it down.

When similar problems showed up in the second reactor a year later, the utility shut it down as well until investigating engineers could determine the source of the problem and correct it. In January, 1991, John Skears, manager of nuclear safety analysis, and a team of more than 20 investigators began spending painstaking 12-hour shifts trying to find what caused the cracks. Said Skears: “With all the precautions you have to take, you can't do anything quickly in a nuclear reactor.”

On July 17, the Atomic Energy Control Board (AECB), the federal agency that regulates the nuclear industry in Canada, gave Ontario Hydro permission to restart Unit 1. Almost as soon as it began running, analysts examined the fuel bundles to make sure the new impellers had not cracked them. They even installed a special video camera in the channels holding the bundles, to show how they perform. After initial test results showed no new cracks, the AECB gave its permission for Unit 2 to start running at 30-per-cent capacity last week. Unit 3 is scheduled to start up later this year, and Unit 4 next spring.

By late July, Unit 1 was up to full power and feeding into the Ontario Hydro grid. The startup produced other noticeable results: smiles on the faces of many of the workers. “It sure feels good to be producing power,” said one employee as he walked briskly along the immaculately swept concrete corridors. Added Hydro spokesman Suzanne Stickley: “Morale has been so bad here. People just want to get this place operating.”

If Hydro can stick to its most recent schedule, the cost of completing Darlington will have

While Darlington remains Hydro’s major problem, there are other weaknesses in the system. In 1989, Hydro shut down its oldest reactors at Bruce and Pickering for repairs and retubing. As a result, they were generating only 57 per cent of the power they were designed to produce. Since 1989, the utility has spent $1 billion, and has set aside a further $854 million to rehabilitate Bruce over the next eight years. At the same time, maintenance and rehabilitation efforts at Hydro’s 79 thermal and hydroelectric generation plants and their transmission system have not kept pace with the effects of aging. Now, Hydro plans to increase the rate at which it will replace everything from wooden transmission poles to switching systems.

risen to $13.8 billion. That figure includes $25 million a month per reactor in carrying charges. However, as each reactor comes into service, a significant accounting change occurs: instead of a financing charge, its costs are charged to operations. That is why Hydro says that three-quarters of the proposed 8.6-per-cent increase in 1993 can be attributed to Darlington.

Still, some energy experts say that the biggest problem with Ontario Hydro is the structure of the utility itself. With $43 billion in

The energy board’s recommendations on rates are not binding, and although the Ontario Environmental Assessment Board rulings are, that organization has never made a major recommendation against Hydro’s wishes. Nor has Hydro’s own board of directors significant-

assets, it is Canada’s second-largest company after BCE Inc., Bell Canada’s Montreal-based parent at $46 billion in assets. Hydro also has more than 28,000 people on staff, each of whom, on average, will take home, $68,825, including benefits, this year. Hydro is a monopoly over which no outsiders have control and, as a result, critics say, has turned into an economic juggernaut. ly contradicted Hydro management, even though 16 of the 17 directors are appointed by the Ontario government. Even the Power Corporation Act of Ontario, which decrees that Ontario Hydro has to provide power at cost, allows Hydro itself to define what those costs are. Said Jack Shurie, a private energy consultant in Niagara Falls and a longtime Hydrowatcher: “The Power Corporation Act provides an effective shield behind which Hydro has done what it pleases.”

Critics have proposed a wide range of solutions on how to improve Hydro. Premier Bob Rae’s government passed an amendment to the Power Corporation Act, giving the government directive power over Ontario Hydro. In

particular, Bill 118, which received royal assent on June 25, makes so-called demand management, or energy efficiency and conservation, a priority for Hydro.

Business leaders campaigned against the bill, claiming that it would turn the utility into a vehicle for the NDP’s social and economic programs. But acting Energy Minister Brian Charlton said that the proposed legislation would enable the government to publicly exercise its authority over the utility, instead of providing informal direction to the utility behind closed doors, as previous governments have done. The new act allows Hydro to promote not only electricity, but also other forms of energy, such as natural gas. He added: “We have no desire to run Hydro on a day-to-day basis. Bill 118 enables us to set the policy directions, while Hydro can use its expertise to achieve those objectives.”

For their part, business executives say that the provincial government should force Ontario Hydro to accept a zero rate increase for 1993. The major power consumers association’s Goldsmith said that a rate freeze would force the utility to cuts its costs. “They must slash and cut until it hurts internally,” he said. “Business has had to do a lot of that, but Hydro has been insulated for far too long.” A spokesman for the Municipal Electric Association, which represents 311 local utilities that buy

power from Hydro, agrees that Hydro must get its costs under control. Charlie Macaluso, the association’s manager of utility practices, said that a five-per-cent cut in Hydro’s operations, maintenance and administration budget alone could save up to $115 million annually.

Some Hydro critics say that the utility should allow those who generate power for their own use to feed into the grid. Under current law, anyone may generate power, but may only sell it to Hydro and not directly to their neighbors. In 1991, Hydro bought about two million megawatt hours of energy— enough to light up Kitchener, Ont., for a year—but in December put a freeze on its so-called non-utilty generation program. For his part, Jake Brooks, executive director of the Toronto-based Independent Power Producer’s Society of Ontario, said that he was disappointed with Hydro’s move. Ending Hydro’s monopoly on the transmission system, he said, would force it to be more cost-effective. Brooks added that many of the non-utility generators use more environmentally sound technologies, such as wind turbines and solar panels. Others have recommended even more dramatic measures. Energy Probe members have claimed for more than a decade that Hydro should be privatized.

Solomon said that after the United States passed federal anti-monopoly legislation in 1978, the cost of power increased by about 11 per cent from 1985 to 1991, when inflation rose 27 per cent. In contrast, Ontario rates rose 52 per cent in the same period, while compound inflation was 35 per cent. Said Solomon: “We need a competitive system to bring down prices and prevent more mistakes like Darlington.” Whatever form Ontario Hydro takes in the future, the Darlington nuclear plant will remain a larger-than-life reminder of how even the best plans can go awry.

BARBARA WICKENS

at Darlington