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Proceedings of the Standing Senate Committee on
Energy, the Environment and Natural Resources

Issue 5 - Evidence, April 26, 2001 (afternoon)

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TORONTO, Thursday, April 26, 2001

The Standing Senate Committee on Energy, the Environment and Natural Resources, to which was referred Bill S-15, to enable and assist the Canadian tobacco industry in attaining its objective of preventing the use of tobacco products by young persons in Canada, met this day at 1:30 p.m. to give consideration to the bill and to examine such issues as may arise from time to time relating to energy, the environment and natural resources.

Senator Nicholas W. Taylor (Chairman) in the Chair.

[English]

The Chairman: I call the meeting to order. This afternoon we will have one panel on smoking and two on energy issues.

We will move now to the witnesses, Mr. Mahood and Mr. Michael Perley. Perhaps you might just wade right in, because you have been around before.

Mr. Michael Perley, Director, Ontario Campaign for Action on Tobacco: Thank you, Mr. Chairman. Mr. Chairman and honourable senators, I thank you very much for the opportunity to make a presentation in support of the Tobacco Youth Protection Act on behalf of the Ontario Campaign on Action for Tobacco, of which I am a director.

The Ontario Campaign was founded in 1992 by the Ontario Medical Association, the Canadian Cancer Society's Ontario Division, the Non-Smokers' Rights Association, and I should give a special nod to my colleague here who was one of the prime movers behind the campaign's founding, the Heart and Stroke Foundation and the Ontario Lung Association, the idea being to promote passage of the Ontario Tobacco Control Act, a provincial bill designed primarily to reduce sales to minors. The act also banned sales from pharmacies and vending machines and made a number of classes of places smoke-free.

Since proclamation of the act in 1994, we have focused our attention on two major areas: the passage of smoke-free workplace and public place by-laws in Ontario municipalities, and further strengthening and expansion of provincial tobacco control legislation and funded programs.

From the time Senator Kenny first introduced legislation placing a levy on the tobacco industry and creating an arm's length agency to manage youth tobacco reduction initiatives, our individual members have actively supported the legislation, and my purpose today is not to review their positions here.

Support from the Ontario Campaign office, my office, for the legislation, while unequivocal, has had to be more limited because of our responsibilities at the provincial and municipal level which I briefly outlined.

I would like to spend the rest of my presentation today discussing why major additional tobacco control funding is necessary in Ontario, just as it is in the rest of the country through an initiative like S-15.

To set the scene for you, let me begin by again referencing the proclamation of the Tobacco Control Act in November 1994. At that time, the act was the among the best, if not the best, pieces of provincial tobacco control legislation in the country. Funding for enforcement and other tobacco control policy initiatives by the provincial government, including a provincial media campaign aimed at young people, stood at $19 million per year at that point.

From 1995 until two years ago, tobacco control within the provincial government fell into a serious decline. One of the first acts of the current provincial government's first minister of health was to cut the province-wide media campaign, the one I referenced aimed at young people, which was funded under the provincial government's Ontario Tobacco Strategy. Further reductions in tobacco control funding followed to the point where, by 1998, annual provincial expenditure had fallen from $19 million to $4 million.

Premier Harris' second health minister, the Honourable Elizabeth Witmer, showed significantly more interest in addressing the tobacco issue. In 1998 she appointed an expert panel to study renewal of the Ontario Tobacco Strategy. The panel's 1999 report titled "Actions Will Speak Louder Than Words," recommended a comprehensive program including many of the program elements with which you are familiar from California, Massachusetts, and other U.S. jurisdictions. I gather that you heard from Mr. Wolfe from Florida.

The panel's report included a recommended annual provincial funding level of approximately $90 million per year, or about $8 per capita, which is in the lower- to mid-range of recommended per capita expenditures for effective, comprehensive tobacco control programs, according to the Centers for Disease Control in Atlanta.

Minister Witmer's two most concrete responses to the panel's report were to add $10 million to the province's annual tobacco control funding, and to launch a health care cost recovery lawsuit against the tobacco industry under the Racketeer Influenced and Corrupt Organizations Act in the U.S. This lawsuit was subsequently thrown out of court and is now under appeal.

Thus, six and a half years after passage of the act which my organization was formed to promote, while tobacco control funding with special emphasis on young people's programs has been somewhat restored, it remains inadequate to the task of addressing the tobacco epidemic. No legislative improvements have been made at the provincial level.

Regarding measures to protect our young people in the legislation, which is really the legislation centrepiece, the prohibition of sales to minors, there has, in fact, been a significant decline in the effectiveness of the act's prohibition. While sales to minors charges jumped to just over 200 in 1995-1996 to a high of about 1,000 in 1997-1998, the number of charges then began to decline again in 1998-1999 and continued downward to about 1999-2000. Inspections and other surveillance actions directed at retailers declined from 28,029 in 1997-1998 to 7,261 in 1999-2000. Compliance checks declined from 14,083 in 1998-1999 to 10,188 in 1999-2000. Educational visits to retailers went from 7,261 in 1997-1998 to 12,367 in 1998-1999, but then declined again to 6,962 in 1999-2000. The percentage of vendors who do not comply with restrictions on sales to minors, in summary, has remained essentially static from 1995-1996 to 1999-2000.

And finally through displays -

Senator Banks: It is what percentage?

Mr. Perley: The percentage, my understanding is that it is currently about 35% to 40% depending on where you are in the province. It varies, but the average is about that, who do not comply.

Senator Banks: Do not observe the law?

Mr. Perley: That is right. Again, it varies wildly. There are some health units in which the percentage of compliance is quite high, and there are others further north where there are very large health unit areas where non-compliance is very high because there is poor compliance. The message has not been well disseminated.

Finally, through displays paid for by the tobacco industry itself, tobacco products continue to occupy prominent display positions in thousands of retail outlets across the province as they do throughout the country, sending unmistakable messages to all Ontarians but particularly to our young people that whatever might be said about the negative effects of tobacco products, they are normal products to be displayed and purchased just like any others.

Another regressive step taken by the Ontario government is the provision earlier this month of a $20 million subsidy to Ontario tobacco growers to enable them to switch over to a tobacco leaf drying technology which will reduce the levels of tobacco-specific nitrosamines in the Ontario crop. This might appear to be a health-protective measure until one understands that, according to the tobacco industry's own research and statements, there is no proof that reducing nitrosamine levels reduces the toxicity of cigarettes.

The reason this has been done, incidentally, and I am sorry I did not mention this here, is that the Federal Tobacco Act's tobacco reporting regulations require that nitrosamine levels be reported to Health Canada as of this year, and the industry appears to be concerned about potential future liability.

In a February 12, 2001 story quoted in the Simcoe Reformer, a southwestern Ontario paper, then Canadian Tobacco Manufacturers' Council president Robert Parker was quoted as saying, and I quote:

There is no evidence low (nitrosamine) levels in tobacco produces less of a health risk.

This, by the way, is backed up by research from R.J. Reynolds Tobacco Company in the United States, which was reported at a conference last September, where company scientists reached exactly the same conclusion. In a nutshell, the provincial government has given $1 million more to the tobacco industry than to tobacco control.

To summarize, while we have achieved much through the passage of smoke-free bylaws like yesterday's ground-breaking bylaw passage in Ottawa, and I think you have heard about this, with respect to comprehensive tobacco control programs aimed either at the general population or with special emphasis on youth, we have made virtually no progress in initiating these kinds of programs. The only exception here could be said to be a series of relatively modest public education and cessation assistance programs funded under the $10 million allocation restored by former Minister Witmer, which I mentioned earlier.

More important, the figures I provided earlier on the decline in all indicators of sales to minors enforcement provide a clear picture of the actual decline we have lived with since 1995. To provide a full portrait of the current situation, I am tabling today, together with my remarks which you have copies of, a copy of our report card on the provincial government's action to date in response to former Minister Witmer's panel for your review. This was made public about three weeks ago.

The situation, I think, becomes even more urgent, and the funding problem, or lack thereof, becomes even more urgent in Ontario and elsewhere in Canada if we consider the number of programs now being launched by the tobacco industry, in partnership with various unsuspecting local and regional players, which are designed to present the industry as possessing a serious concern about young people's tobacco use. I am referring here in particular to "Operation ID School Zone" and "Wise Decisions." The former, "Operation ID School Zone," is a program ostensibly designed to discourage retailers from selling to young people. "Wise Decisions," if you can believe this, is a series of lesson plans and teacher materials prepared and funded by consultants to the tobacco industry for use in schools, with the alleged purpose again of discouraging young people from using tobacco industry products.

The adoption of the Tobacco Youth Protection Act by the House of Commons and full funding, as called for by the bill, would be of great assistance in off-setting the serious lack of provincial commitment and resources here in Ontario aimed at protecting our young people from the tobacco industry.

I want to thank you again for this opportunity to present to you today on this very important legislation. That concludes my formal presentation.

The Chairman: Mr. Mahood, I think the best way for us to proceed is that you each first make a presentation and then we will ask you both questions.

Mr. Garfield Mahood, Executive Director, Non-Smokers' Rights Association (NSRA): Thank you, senators, for the opportunity to appear. My name is Garfield Mahood. I run a national, non-profit health organization which is approximately, I guess, 26 years old. We have a history of being involved in some of the major issues in tobacco control at the national level. It was our tobacco tax project that, I think, played a significant role in causing taxes to rise in the decade from 1982 to 1992, and by the way, in that period we had world precedent-setting declines in tobacco consumption which were largely attributed to price.

We have played a major role in the development of Canada's world precedent-setting tobacco warning systems and passage of the two major tobacco bills, so we have some history in tobacco control. With that as background, and at the risk of being self-serving, I would just like to thank the Senate for its leadership and its persistence on this issue.

I have to tell you that, through S-13 to S-20 and S-15, the Senate has placed tobacco control on the national agenda, and you have kept it there in a way that many of us in the health community have been unable to do. I can tell you that this has been a major public health gift. The fact that you are travelling with this committee is in itself an advantage. It is sometimes not fun to go out and do a lot of travelling, but the fact is that this bill is very important to public health. I will say for the record that I do not believe the announcements that were made on April 5 would have been in the same form had the Senate not been there and done all of that work. Again, as an institution you get enough knocks. I thought it would be nice if you heard something to balance that off from time to time.

The challenge: Tobacco is very interesting. The fact that we now have 45,000 deaths per year from tobacco use, and that we have an epidemic that kills one out of two of all of the long term users of the product, frankly, is due to the fact that legislators goofed in the 1970s. We can go back and look at the cabinet documents; we can go back and see the decisions that were made, and the fact that people are dying now is because people did not do their job in the 1970s and the 1980s. Thank goodness you are trying to do a major job in the Senate, but when you have that kind of cause and effect, even though it is delayed by a couple of decades, it is certainly a sobering thought when you are looking at these decisions. That is why it is so important that you pursue this Bill S-15.

Many people, I am sure, have made comparisons or talked about Bill S-15, so I will be brief: In the minds of my organization and many of the members of the national health community, what Bill S-15 would deliver is something like $360 million, as you know, and people say how would you spend $360 million?

In the United States right now, they are spending $8 billion on the other side of the equation. Eight billion dollars per year. If you make an adjustment for population, that would be the equivalent of spending about $800 million here in Canada.Thus if it is possible to spend $800 million promoting the product, and using our American friends as an example, we think it is quite reasonable to believe and to show and to demonstrate that we can spend $360 million to reverse what the tobacco industry has spent three or four decades building up.

By the way, $360 million, as you know, works out to about $12 per capita, and again I want to stress, because the comparison is so compelling, Massachusetts is spending $15 or $16 per capita, Maine, $23 per capita, Ohio, $32 per capita, and Vermont, $21 per capita. I can tell you that nobody knows for sure at exactly what point critical mass takes place, but we are pretty sure that $250 to $350 per capita would not hit that critical mass. There is no evidence that it would.

With respect to stable funding: Bill S-15 would produce such stable funding, and I will come back and talk about that, and the outside agency is absolutely critical. What did we receive on April 5? I mean, what was in that announcement? Again, $250 to $350 per capita, again about a quarter of what we were after with Bill S-15 and thereafter, and no outside agency and no commitment to stable funding.

When you examine the fall-out from something like that, it is absolutely critical that we have a comprehensive plan. People talk about comprehensive plans, and the reason a comprehensive plan is significant is that if you do not do everything in the comprehensive plan, you do not get there. Our problem is that historically, in Canada, there has been an unwritten policy of incremental change, so that with virtually every reform that we have tried to get on the tobacco file, it takes us five or six years to get there.

Sponsorship bans have not taken us anywhere. We are not about to take sponsorship out. It was intended by Parliament that sponsorship would end in 1988. Sponsorship will not end until 2003, assuming that the government keeps its word, so it has taken 15 years to get that one reform in place.

The problem with not having a comprehensive plan is that you go into that step-by-step modus, which means we will get our comprehensive plan in about half a century, and that is simply not good enough when you have death rates of this magnitude. Therefore it is important that we proceed on a number of fronts all at one time. Thus, the total amount of funding that was proposed with the government's announcement on April 5 is inadequate, and last night Chuck Wolfe told me something that I thought was extremely compelling. We talked about what would be required to pursue campaigns in three or four different theme areas, say, for example, a youth focus, smoking cessation, an attack on environmental tobacco smoke or second-hand smoke which is so troublesome for the industry, and the problem is, as Chuck pointed out last night, with the amount of money available, with that $250 to $350 per capita, you can only do one of those things at a time. You simply do not have the funds to proceed with your entire comprehensive plan. That is absolutely critical to understand, because then we are back to waiting for half a century before we get our full, comprehensive plan implemented.

There is also the fear - and again I want to stress this, because it is so important - of discrediting what we are doing by not having enough money to make it work. I come back to that little term, the "critical mass."

With respect to the outside agency: Why is that so important, and what is our experience on this? We have been trying since the California campaign started to implement what is called a denormalization policy with Health Canada, and to get some of the hard-hitting ads that have been run in the United States and some of the effective programs that have been working there into Canada.

The term "denormalization" is not well understood, even within Health Canada, but essentially it is this: The tobacco industry has positioned itself as a responsible member of the business community, selling a legal product; it is a legal industry selling a legal product. Their response, then, is "Because we are a legal industry and we are a legal product, therefore you cannot do things that affect our marketing, and if you do, you just do them in tiny, incremental steps."

The fact is, of course, that it is only a legal industry and a legal product by historic accident. This product would never have got on the market if people had known the risks earlier on. Therefore to argue that you cannot implement these changes because it is a legal industry or a legal product is to argue that society - and this is an absurd argument - that society cannot correct its mistakes.

The policy of denormalization is a policy that was reached, and voted on, in national consultations. The entire national health community, working with the provinces, came up with denormalization as one of their major goals. What did Health Canada do? Arbitrarily, they took denormalization out of the national strategy at the time of the April 5 announcement. Yet that is precisely what the major advertising campaigns in the United States are based on. That is one of the reasons why the outside agency is so critical.

With reference to what I call the "justice block," every time we try to do something serious on the tobacco file, because the industry is in a constant state of litigation with the tobacco industry, we call the justice block that process whereby the lawyers say "Do not do anything hard-hitting, because if you do, the lawyers for the industry will argue in court that we are trying to colour the eyes of the court, therefore you cannot do that." The justice block has slowed down even things like public education campaigns. The way you get around that is with the outside agency.

I refer now to the job-over-lives issue: Every time we try to do something within Health Canada we hear the comment that we cannot end jobs. This would be akin to people coming forward at the end of the Second World War, and saying "We must continue the war because what will we do about that nice armaments industry?" The fact is that you cannot have an epidemic and a tobacco industry co-existing - or, rather, not co-existing - at the same time. In other words, you cannot end the epidemic and maintain the tobacco industry. However, that is the bind we are caught in every time. The outside agency would solve that problem. Of course, there is political interference, but you know all about that.

I return now to the subject of stable funding. You know all about how the tobacco demand reduction strategy was rated in 1995 and 1996. Florida, California, Massachusetts - they have all had problems with their funds, with attempts to take the money away from those funds and to emasculate the programs. We cannot rely on having the right health minister and the right deputy minister, and if we get the wrong one, the war against tobacco is brought to a halt.

The outside agency solves a lot of those problems, and so we are here to say in the strongest possible way that we encourage you to keep going on this campaign for Bill S-15. We commend what you have done. What was announced on April 5 is not adequate. It was not even close, in many respects. There were one or two things that were good but overall it was not close, and we think that we can do much better.

The Chairman: Thank you, Mr. Perley and Mr. Mahood. The right of first questioning goes to the deputy chair, Senator Spivak.

Senator Spivak: First of all, I like the logic of your argument because there is no question that this should be a sunset industry. When cars came out, the horse and buggy industry went down the drain. This is not exactly an analogy; all we are trying to do is go around it.

I want to ask you if you recall Lynn MacDonald who, years ago, had this bill to put tobacco on the Hazardous Products Act.

Mr. Perley: The Non-Smokers' Health Act.

Senator Spivak: Is that not it?

Mr. Perley: Putting tobacco under the Hazardous Products Act was the second part of that legislation.

Senator Spivak: I was in the Senate by then, and I remember speaking to that bill and supporting it. What do you think of that idea, in the sense of what extra instruments, what extra tools that would give the government in combination with this Bill S-15, and do you think it is still a good idea?

Mr. Perley: Senator, through the chair, we have world precedent-setting tobacco legislation in the Tobacco Act right now. That gives the government the same adequate powers to deal with this product as would take place if it were, indeed, under the Hazardous Products Act. In other words, we have the legislation. The trick is in developing the political will to encourage the government to actually use the act in the way that it could be used. Part of the value of the massive public education campaign that would be permitted by something like Bill S-15 is that you can, in fact, change public opinion. That will enable governments to bring forward hard-hitting measures to deal with the epidemic.

Let me use one quick example: The terms "light" and "mild" on cigarettes. The evidence now is that there are no health benefits that accrue from using "light" and "mild" cigarettes, given the way that the industry has designed the cigarette, and given the way that the industry knows its customers use the product, and yet "light" and "mild" are descriptors on the cigarette package that mislead the public with respect to the contents of that product. Indeed, the industry knows very well that its customers are being misled.

The powers are there in the existing legislation that would enable the government to deal with the "light" and "mild" consumer fraud right now. It has all the power in the world that it needs to take those descriptors off cigarette packages, and that would be a major public health benefit. We simply must develop the resolve within government to take these opportunities to improve public health and do something, but we do not lack for legislation.

Senator Spivak: Very well. The other question I want to ask you concerns your approach to what some people view as a trampling on their rights. They say if people want to smoke, they have the right to smoke since tobacco is a legal product. How do you deal with that argument in terms of the rights of the corporation versus the rights of the individual? You have just mentioned one, the misleading advertising; those laws are just not enforced well enough. I want to hear how you approach that on an intellectual level.

Mr. Mahood: One of the ways you do it is you have a public education campaign that I am sure Chuck Wolfe could design; you have a public education campaign that tells the public the truth about the product.

If the public finds out that tobacco addicts children, kills one out of two of its long term users, is the cause of death in 30 per cent of all cancer deaths, 30 per cent of all heart disease deaths and 90 per cent of all chronic obstructive lung disease deaths. If the public finds out that the industry has lied about the risks, lied about addiction, lied about manipulation of nicotine levels, lied about its predatory marketing directed at kids - and some of Chuck Wolfe's brilliant advertising addresses this, in effect - if the public understands that this is the industry that we are dealing with, when the public finds that out, the public will not be running up to defend the industry from intrusions on its marketing. At that point, the fact is that the support will not be there, and legislators will be able to act. However, the key is for the public to understand just what this industry has done in order to cause 45,000 deaths a year by 2001.

Mr. Perley: Senator, might I add a couple of comments to that? We have done some recent polling wherein we see very high levels of support for pretty dramatic interventions like smoke-free workplaces of 80 per cent to 90 per cent across Ontario, involving all groups, all age groups; smokers and non-smokers alike. In this polling, we also discovered that there were very major gaps in people's knowledge. There is a general understanding, or belief, out there that everyone understands how bad tobacco is.

In fact, we found that many people thought more women died of breast cancer than lung cancer, when the reverse is true. We found a significant minority thought more people died from AIDS than from tobacco use. We found only, I believe it was, 4 per cent of people who, when asked unprompted, "What are the major risk factors of tobacco use?" only 4 per cent mentioned strokes. Stroke is one of the major factors deriving from tobacco use. We also found in the high single digits the number of people who thought "mild" and "light" meant cigarettes were safer.

Senator Banks: High single digits?

Mr. Perley: Yes, it was 6 or 7 per cent who said that this meant they were actually safer.

Senator Banks: The corollary is that 96 per cent or 97 per cent understand it does not mean anything.

Mr. Perley: There was a group that said specifically that it does not mean anything. I think it was in the 20 to 30 per cent range, senator. Some of the others said things like "They are not as irritating," so responses were not related to either safety or lack of safety, but irritation or lack of convenience or, in this case, 20 to 30 per cent, no difference.

On the rights and freedoms argument, I appear regularly at bylaw consultation hearings across the province. The rights and freedoms argument comes up all the time. It is, together with the economic damage to the hospitality industry, one of the two major arguments.

This was, in fact, litigated in Toronto at the time of the first attempt to pass a smoke-free bylaw there in 1996, and at the Ontario Divisional Court level the Ontario Restaurant Association challenged the city on the grounds that this infringed on their rights and freedoms to operate their businesses. Mr. Justice Borins threw out this action on the ground that there was no charter argument establishing a right, a commercial right, to maintain a situation in which people were being exposed to a health risk, and that the city had every right to regulate, given the identification of second-hand smoke exposure as a health risk. Thus the freedom of choice and the rights argument has, to some extent, already been litigated in the context of smoke-free bylaws.

Senator Banks: Mr. Mahood, notwithstanding what I may think, or you may think, or any member of the committee may think, it is not the object of this committee at the moment, or this bill, to destroy the tobacco industry. The purpose of this bill is to reduce smoking, as I understand, among young people.

You said, though, that that is not possible; that it is sort of oxymoronic to talk about ending the epidemic and maintaining the industry. Given that we have to get off the horse, are you in favour of destroying the tobacco industry?

Mr. Mahood: No. Do you mean would I be the first person to rush to the barricades to defend an industry that the World Health Organization predicts will kill 500 million people presently alive? I am about to rush forward to help an industry like that?

Senator Kenny: Is that for the record?

The Chairman: Just take note that stenography is not able to distinguish sarcasm.

Mr. Mahood: The fact is that my job is to deal with the tobacco epidemic. The reality is that a small epidemic is not any more attractive than a large epidemic. It is just that one is bigger than the other.

The Chairman: You are just as dead.

Mr. Mahood: You are just as dead if you happen to be in one of those epidemics. Our job in the public health community is to bring the epidemics or the epidemic to a conclusion, and it is an epidemic by the classic definition that any physician or epidemiologist would use. Our job is to bring the epidemic to a conclusion.

Your job, through this legislation, is to prevent child starters from coming on to the market. The reality is that if child starters do not come on to the market, there will be an end to the tobacco industry. There is no difference between the intent of the legislation here and my intention. My intention is to end the epidemic; you are just a little more focussed. When the epidemic is over, there will not be any tobacco industry as we know it, and that is the reality of public health. They cannot co-exist.

Senator Banks: One more question. Mr. Perley, when you were referring to the bylaw in the city of Ottawa, you said that it was ground-breaking. In what sense was it ground-breaking?

Mr. Perley: It is the most comprehensive in the country at the moment in the sense that it covers all work sites and also taxis and private clubs, and taxis are an area that a lot of municipalities have grappled with unsuccessfully, with the exception of Windsor and perhaps one or two others. Private clubs are a also constant bugbear because, generally speaking, municipal bylaws do not regulate in private club settings, on the one hand. On the other hand, they have workers just like a public restaurant has, or whatever other kind of workplace you want to mention. The dilemma has been for public health, how do you deal with these facilities that traditionally are not regulated while, at the same time, recognizing that they have the same types of workers with the same type of exposure that a public place has that is normally regulated?

By the way, I have not seen the draft of what Ottawa has finally approved, but my understanding is that anywhere there are workers is regulated, whether it be a private club - with some of the classic definitions around a private club, such as a board of directors and a period of application for membership and significant fees and non-profit status. If you have those indicators and you have workers, you are regulated because the municipality has, in fact, the authority under the Municipal Act to regulate any worksite.

Senator Kenny: Do not forget bingo halls.

Mr. Perley: Bingo halls, bowling, billiards - the "killer Bs," as we call them - bars are another - are all regulated under the city of Ottawa. Therefore, prior to yesterday's vote, the most stringent bylaw was in Waterloo region, which did not cover office and industrial worksites, nor did it cover taxis or private clubs. Therefore, Ottawa's is the toughest bylaw in Canada at the present time, and I would wager in the vast majority of jurisdictions in the United States. I do not think there is anything tougher.

Senator Banks: The Rideau Club?

Mr. Perley: That could be, senator, if there are workers there.

Senator Banks: Mr. Mahood, you obliquely applauded the announcement on April 5 of $98 million. One assumes that there will be more, later, for the effort directed by the Department of Health - but, as I say, your applause was oblique. Some people have expressed to us a concern that $98 million is a lot of money to the average person to spend on marketing or growing anything. As an informed casual observer, it strikes me that if that $98 million does not work and does not result in a significant reduction in smoking amongst Canadians, there is obviously nothing further we can do.

We have heard from other people who say that that amount is simply not enough, and they refer to the Centres for Disease Control studies that demonstrate what does work, in terms of the critical mass of funding.

Do you have a concern that the $98 million, if it does not quite succeed - and we have heard people suggest that it will not - may actually be harmful to your efforts and to your interests?

Mr. Mahood: I referred to that briefly in my remarks. We are worried about the campaign being discredited because there are not enough resources there to ensure that it does work. When someone of the stature and experience of Chuck Wolfe tells me that that might be enough money to focus on one area of our campaign but certainly not for the comprehensive plan, anyone would be nervous about that. It puts the health community in a delicate position because we must try to show some results. We do not want people to come back and say, "What did we get for our $100 million?"

Senator Banks: Is the health community saying that sufficiently strongly? I know you are between a rock and a hard place because when the Minister of Health says that the government is putting $98 million into smoking reduction, it is pretty hard, if you are on the receiving end of some other things that he does, to dump all over that. How strongly is the health community saying not only is that amount not enough to do the job but that it might actually be harmful in the long run? Is the health community prepared to say that? Are you prepared to stuff it up the minister's nose?

Mr. Mahood: If I purported to speak for my colleagues in the national health community, they would probably bomb my offices. The fact is that I can only speak for my organization.

Senator Banks: I am asking for your opinion.

Mr. Mahood: My opinion is that I think you get sober second thought, and I think senators have heard that expression before. With sober second thought, I think more and more people in the health community will recognize just how large the gap is between what we would have received under Bill S-15 and what we actually received.

Does that mean that people must go out and dump all over the announcement? I think people can get the message while we still do our best. We have a responsibility. As you know, with any piece of legislation, there is no absolute certainty that it will be passed.

We have a responsibility in the health community to make sure that the $100 million is used effectively so that people with confidence will understand that $360 million could also be used effectively in the interests of public health. Frankly, I am unhappy that we did not come much closer, but I am perfectly happy and perfectly confident that the public will understand and even the people in government will understand when we push for Bill S-15 aggressively.

Senator Banks: Will $100 million do a third of the good that $300 million would do?

Mr. Mahood: I am not sure. I do not know.

Senator Spivak: It is a bit like the national debt. The debt is a huge figure, but it goes down relative to GDP. It seems to me that the $100 million is relative to the costs incurred through smoking. We should always lump those two figures together because that will give us a good argument. It is exactly the same argument viewed as a percentage of GDP. Therefore, I do not think we should be bothered by that.

Mr. Perley: Would a third of the total amount required do a third of the job? I think it depends entirely on the type of intervention. If we examine the results of the California comprehensive program, there are three major pieces: price increase, the smoke-free restaurant and bar policy coming in between 1995 and 1998, and the mass media-based public education at the local and regional levels. I think the latest evaluations indicate that the price increase was by far the major factor associated with the decline in youth smoking to 7 per cent for the ages 12 to 17, which is a figure we can only dream about here in Canada. In other words, if we were to devote all of our money, or the entire $98 million, primarily to mass media based education and some local and regional community programming, would we get the same effect as if we had devoted that amount of money to greatly intensified enforcement and related measures designed to physically prevent kids from getting their hands on cigarettes?

There might be an argument that the former would be more effective than the latter because we know from research that it takes up to 95 per cent compliance with restrictions of sales to minors before there is an actual effect on youth prevalence; whereas, we know from results in the United States and from some experience that we now have in Ontario with the recent mass media pilot campaign last year that we can achieve very high retention rates and some attitudinal shift with a relatively modest expenditure. That expenditure last year in Ontario was $3 million. If you extrapolate that Canada-wide, chances are you could, by the looks of the research, get a very high attitudinal shift. Further, if the program were focused on kids, and using the best not-blame-the-victim kind of strategies, but messaging along the lines of denormalization, that the tobacco industry is not your friend and what the real impacts are, and all the research into advertising that has worked effectively, I think you could get a very significant reduction.

The problem will be not so much that we might get this percentage of result or that percentage of result, but that we will have continuing maintenance of the mixed message problem, which is the nightmare for me personally. In other words, the nightmare of the tobacco problem is the mixed message problem.

Let's say we launch a $98 million, very effective mass media campaign. At the same time, let's say we have cigarettes being sold in every retail outlet across the country with very mixed levels of retailer no-sales-to-minors compliance; we have smoking in restaurants; we have smoking in bars; we have smoking in arenas, shopping malls, and any number of other public places. If we know anything at all about the attitudes of young people to tobacco, we know that they are very perceptive of adult hypocrisy on the subject. On the one hand, we have a strong message through the media that this is terrible. On the other hand, we have a very strong message through day-to-day practical aspects of living that tobacco is a normal, legal product, as Mr. Mahood so eloquently described it; that it is available whenever someone wants it and wherever they want it; that adults use it every day; that you are bad if you use it but that you can use it. As long as we maintain that hypocrisy, any intervention we use will be significantly undermined.

The Chairman: Mentioning hypocrisy, you said that tobacco companies spend approximately $800 million on advertising. When you stop to think about it, that is a write-off against their taxable incomes. In other words, they get 50 per cent back from our own government; we give them back $400 million. Spending $100 million shows you the hypocrisy when we give four times as much back to the tobacco companies as we are suggesting we use in the anti-tobacco campaign. That is enough.

Senator Adams: Let me put it a different way. We have 40,000 people dying every year. Most of them have health cards, which means that every time they have an illness, they go to see a doctor. Therefore, there is a cost to the health care system, especially before they die. Is that true?

Mr. Mahood: There is a significant cost, for sure.

Mr. Perley: A little over $1 billion to the health care system in Ontario each year.

Senator Adams: If we reduce the number of people who start smoking, we do not have to worry about that $100 million a year to advertise if people have stopped smoking.

Mr. Mahood: Senator, as Chuck Wolfe would tell you and all of our American experts, the benefits on the health cost side with the reduction of tobacco use is very quick in some cases and very traumatic. If you really are concerned about health care costs, there is no question that this is the way to proceed at the macro level; this is the way to cut a major chunk of those health care costs down. Therefore, there is no question that it would be useful.

However, I do not want to leave the impression with the committee that the industry spends $800 million here in Canada presently on promoting tobacco use. I do not think we really know how much the industry has spent for quite some time. What I said was, just in terms of what the capacity is to spend to promote tobacco use, that the United States has shown that the market can absorb $800 million or $8 billion in tobacco promotion dollars. It is out there and in the system. I simply said that if that is the capacity to spend in the United States, we would have that capacity to spend here if the industry could get away with it. In comparison, if we have that capacity to spend on the promotion of death and disease, surely to goodness we have the capacity to spend, in an intelligent way, $360 million a year to reverse that process.

Senator Adams: If a person smokes a pack per day, the costs are different here in Ontario and Quebec. Where I come from in Nunavut, cigarettes cost about $9 a pack right now. If a person smoked a pack per day, that would cost him about $63 a week for cigarettes and somewhere around $252 a month.

The health department is advertising that if people smoke cigarettes, they risk getting sick with cancer and dying. There are pictures with written warnings, for instance, that if women smoke when they are pregnant, their children may have birth defects. The government has tried everything and none of it works. If there are regulations, and if a person spends this much per year on a pack-a-day habit, that person might say, "What am I smoking for? I could save $3,000 a year." How would that sort of thing work? The other thing, the pictures of diseases, did not work.

Mr. Perley: One of the advertisements that I thought was useful in the cancelled Ontario campaign was where a guy gets out of a Porche, walks away from it, lights a cigarette, throws his lighter over his shoulder and the Porche blows up. It does not say that he loses the equivalent of $75,000 over a lifetime of smoking. However, the calculation you just made, senator, would mean that someone smoking a pack a day in Rankin Inlet for a year would spend about $3,300 a year over a 30- or 40-year lifetime of smoking. That is $100,000-plus, easily.

Another element of the cost equation is that we tend to focus on health care costs lost. What we do not focus on often enough is the foregone income and the lost productivity in Ontario. The health care cost directly each year is about $1.1 billion in 1992 dollars, so it is closer to $1.5 billion or a little over now. However, the cost to the larger economy in foregone income and lost productivity is in the order of $2.6 billion. When we add it all up, there is more than $4 billion annually in Ontario from direct and indirect costs. That is the magnitude we are talking about.

Senator Eyton: We all seem agreed that Bill S-15 is a good bill, and I have not heard any criticism at all of the foundation of its objects or its powers, which seem very broad indeed. This is really the reverse side of a discussion we have just had about $100 million as opposed to $300 million, how it can be spent and whether the first $100 million would render half the benefit of $300 million.

On the reverse side of that, we now have the foundation, assuming that this bill passes. The foundation is there; the board is working; the youth advisory committees are there; the presence is there. Suddenly, they are deriving significant income from the foundation. Clause 31 talks about the foundation funding a program, project or activity which would have been proposed and then approved in that process.

Let's say that either one of you is the president and is part of this process. You have $100 million. Do you intend to spend it in the more traditional ways or are you looking for more innovation and more bang for the buck out of the foundation? Will it not simply be a counterpoint to the industry talking about, through marketing or distribution, selling cigarettes? Will you be a counterpoint to that, or will there be some more imaginative, innovative way of using that money to combat this habit?

Mr. Perley: I do not think Mr. Mahood nor I, nor anyone I work with, would simply want to use the same old approaches that have worked - or not worked, rather - in the past. The classic example is the "Break Free" campaign that Health Canada ran a few years ago.

One of the advertisements that sticks in my mind that people have expressed concern about to me is the one where there are two girls, and one of the girls, who is smoking, morphs into a cigarette. The message is that "you are the one at fault, young lady; it is your responsibility." We call it blame-the-victim in our shorthand, and that is too often a characteristic of these campaigns: that smoking is the problem and therefore the person who smokes is the problem.

I think you have heard the reverse of that from Mr. Mahood and I today. The denormalization strategy says turn that on its head. The victim of the tobacco industry's various ways of insinuating its products into people's lives should not be the target of these campaigns; the industry and its behaviour in doing this needs to be the target.

How do we do this most effectively? One school of thought says go right after the industry. The classic commercial in this regard is the boardroom commercial from California showing a group of so-called tobacco executives sitting around smoking and laughing about needing more smokers to replace their revenues; and, after all, they are not in this business for their health. They all laugh.

This was a very hard-hitting commercial produced at a time in California when there was no such messaging of this type against the industry. The commercial was absolutely revolutionary. It caused a huge uproar politically in the state legislature and began actually to change attitudes. California built on that success.

I think we need the same kind of messaging - perhaps not that precise message but the same kind of idea - which is to look at ways to present the issues that relate the use of tobacco and its damage to the people who make it, how they make it and how they insinuate it into our lives, from Internet marketing to movies to sponsorship advertising to displays at retail outlets. There are plenty of ways the industry represents itself.

Rather than the classic finger-wagging, blame-the-victim strategy, I think we need to have much cleverer ways of presenting to young people the fact that the industry does what it does. Young people these days are a lot smarter consumers than we were. We believed in brands having integrity, believability and substance, and producing good quality goods. Today, kids are a lot smarter consumers. I think when they are presented with information about the way in which the industry has actually functioned, it will have some impact.

I always think of the document that referenced the tobacco industry study where they measured the brainwaves of ten-year-olds and eleven-year-olds to determine how they functioned in response to various product presentations. Kids should know that this industry has done that kind of work on them and studied them - Project 16 by Imperial Tobacco is one example.There are a number of these projects. That kind of information to a market savvy and media savvy group of kids, telling them about what this industry has been doing to try and get them hooked on a product that will kill them, is certainly one approach. It is part of the denormalization strategy that we really need to work with. We do not have any of that out there now, or very little of it.

Senator Eyton: My underlying point is that the approach should be innovative and different, or we will simply spend and waste more money.

Mr. Perley: That is right. It feeds into the numbness a lot of people experience when they think of tobacco. They think "Oh well, we know that." Smoking causes damage. Beyond that, people are not too well informed about it.

Mr. Mahood: Historically, Health Canada's approach - with the exception of the last three or four years in British Columbia - has been what Mr. Perley described as the blame-the-victim approach. We must underline the point about the importance of being innovative, just as we do when we focus on the mosquito in dealing with a malaria epidemic; when we focus on an infected water supply in dealing with a cholera epidemic; and when we focus on rats in dealing with the bubonic plague. Similarly, if you have an epidemic from tobacco, you need to focus on the tobacco industry.

Health Canada has consistently refused to do that at every opportunity for over a decade. This issue has been on the agenda with Health Canada for over a decade, and so we need to have a fresh approach. The fact is that we know that that can happen, but it is just going to happen a lot faster if we have an outside agency able to look at the evidence and make the decisions and change the policy.

The Chairman: Thank you very much for your presentation, Mr. Mahood and Mr. Perley. As always, you are most informative and you add a new twist each time you appear before a Senate committee.

There is a request that the restriction on holding meetings to receive and present evidence without a quorum, as set out in the committee's decision dated February 21, 2001, be suspended for Friday, which is tomorrow.

Senator Spivak: I so move, Mr. Chairman.

The Chairman: Seconded by Senator Adams.

Is it agreed, honourable senators?

Hon. Senators: Agreed.

The Chairman: There is no need for a quorum for tomorrow.

We will now move to the second part of our agenda. The first energy panel this afternoon is the Stakeholders Alliance for Electricity Competition and Customer Choice. David J. McFadden is the chairman and is here with Bernard Jones and Arthur Dickinson.

Please proceed, Mr. McFadden.

Mr. David J. McFadden, Chairman, Stakeholders Alliance for Electricity Competition and Customer Choice (SAC): Mr. Chairman, what I thought I might do is make some opening remarks to get everybody thinking about the subject, and then we would be happy to entertain questions.

My name is David McFadden, Chairman of the Stakeholders' Alliance for Electricity Competition and Customer Choice. With me today is Arthur Dickinson, who is President of the Association of Major Power Consumers in Ontario.

The Chairman: Perhaps, for the record, you might tell us whether SAC represents the consumers or producers in this case.

Mr. McFadden: I will go into that in a minute, Mr. Chairman.

Stakeholders Alliance takes in virtually every consumer in Ontario of small generators, but not Ontario Power Generation, for example.

The Chairman: That answers my question.

Mr. McFadden: Also with me today is Bernie Jones, President of the Ontario Natural Gas Association. In addition, both Bernie and Arthur are members of the executive of Stakeholders Alliance.

We are very pleased to have the opportunity to appear before you today to speak on this matter this afternoon. What we want to share with you is the situation as we see it happening in Ontario, and we would like to comment on restructuring in the different parts of Canada.

I thought what we would do is start off answering the question you raised, Mr. Chairman: who exactly or what exactly is the Stakeholders Alliance?

The Stakeholders Alliance was founded in October 1996. The alliance is a broad coalition of former Ontario Hydro customers, representing virtually every sector of the province's economy. The alliance membership includes the automobile industry, the steel industry, the chemical industry, forest products, mining, equipment, and hotel and motel associations. Our membership includes the Municipal Electric Association, the Canadian Federation of Independent Business, the Ontario Chamber of Commerce, the Canadian Manufacturers and Exporters, the Association of Major Power Consumers, the Ontario Natural Gas Association, which Arthur and Bernie respectively represent, and the Independent Power Producers Society of Ontario.

I think it is probably safe to say that the Stakeholders Alliance is the broadest coalition ever assembled in Canada to advocate for electricity reform. In fact, it may be the largest single consumer alliance ever put together on any issue in Canada.

In 1996, the funding members of Stakeholders Alliance were concerned that the momentum for constructive change created by the Macdonald Committee, which reported to the Ontario Government in the spring of 1995, could be lost and that Ontario would fall even further behind in the rapid shift to competitive markets throughout North America.

The Stakeholders Alliance believed that the recommendations in the Macdonald Committee Report, entitled "A Framework for Competition," provided a reasonable blueprint for an orderly transition to a competitive market.

I should point out, by the way, that the Mcdonald referred to in the Macdonald Committee Report is the Honourable Donald Macdonald, who is a former Minister of Energy and, of course, a distinguished member of Parliament before he came back to Toronto to practice law.

It was clear that the electricity industry in Ontario had to change and that the status quo was unacceptable. The availability of a reliable supply of power at competitive prices had been vital to Ontario's economic development from the early years of the 20th century. It is safe to say we likely would not, for example, have had a steel industry in Hamilton if it were not for the development of Niagara Falls.

By the mid-1990s, this competitive advantage had been seriously eroded. In the year following its founding, the Stakeholders Alliance played a leading role in the campaign to convince the Ontario government to move ahead with the introduction of a competitive electricity market. After countless meetings, briefings, seminars and conferences, the Stakeholders Alliance was very pleased with the policy direction established in the White Paper issued by Ontario's Minister of Energy, Science and Technology in November of 1997.

A reading of the government's White Paper is perhaps the best place to look for the reasons the province decided to move ahead with a restructuring of the electricity sector. The White Paper enumerates a variety of financial, operational and technical problems confronted by Ontario Hydro.

The White Paper cited the disturbing jump in Ontario Hydro's debt from $12 billion in 1980 to over $30 billion in 1996. The White Paper highlighted the serious operational difficulties that Ontario Hydro faced which led to a write-off of $7 billion arising from non-performing assets between 1993 and 1997. I should point out that the write-off in one year that Ontario Hydro had to undergo was the largest single corporate write-down in Ontario business history.

In addition, the White Paper also highlighted the dramatic increase in electricity prices that went up by 60 per cent from the years 1986 to 1994. The White Paper introduced by the government validated the concerns raised by the Stakeholders Alliance and it committed the government to the introduction of a competitive electricity market.

The provincial government met the White Paper's commitment for fast action with the introduction of the Energy Competition Act, which was given first reading in 1998. The act, in fact, was given third and final reading and then Royal Assent in October of that year.

Industry stakeholders had been generally very pleased with the level of stakeholder involvement in the structuring process. Since early 1999, I have had the opportunity to serve as Co-chair of the Electricity Transition Committee, which was appointed by the Minister of Energy, Science and Technology.

The Transition Committee consists of a large number of major industry participants. The Market Design Committee, chaired by the Dean of the University of Toronto Law School, Ron Daniels, had a broad representation of industry stakeholders. Stakeholders were also represented on both the board of directors and the various committees of the independent electricity market operator. The Ontario Energy Board consulted extensively with stakeholders in the development of its various rules and codes, and finally the Minister of Energy, Science and Technology has continuously consulted with the Stakeholders Alliance and its individual members throughout this process.

One misconception in the news media as well as among conference organizers and others is that they constantly refer to what we are doing in Ontario as "deregulation." This is simply not the case. You could say that Ontario is restructuring its electricity market. You could say that the province is re-regulating the electricity market. However, it would be inaccurate to say that deregulation is being implemented in this province.

Once the electricity market is open, Ontario will have more regulation than it had under the old system. Under the old system, Ontario Hydro was unregulated. It was a publicly owned monopoly that supplied virtually all of Ontario's power, owned and operated the province's transmission system and either owned or supervised the distribution sector.

In the new competitive market, the Ontario Energy Board will be an independent regulator with broad powers to licence and discipline market participants, including generators, retailers, transmitters and distributors.

The independent electricity market operator will manage the market, and there has been established very comprehensive market rules to govern all market participants. As a consequence, there will be a very broad regulation of the new marketplace, but this regulation will be done by independent regulatory agencies.

The Energy Competition Act promises to provide what the Stakeholders Alliance had set as its fundamental goal: the creation of a competitive electricity market in which customers will enjoy both choice and competitive pricing. However, the Stakeholders Alliance has identified a number of concerns about the implementation of the restructured electricity market which we believe must be addressed.

First, the benefits of competition will only be felt if there is real competition in the electricity market. This is why the Stakeholders Alliance has urged the government to accelerate the decontrol of the assets of Ontario Power Generation in order to ensure that consumers will have true choice when the market opens.

The Market Mitigation Agreement negotiated by the Market Design Committee has given OPG 10 years to reduce its market share to 35 per cent. I should mention that the 35 per cent standard is established because that is the normal percentage that the Competition Bureau looks at in deciding whether there is unhealthy concentration.

The Chairman: Reduce?

Mr. McFadden: Reduce it from 95 per cent to 35 per cent of the generating capacity. Such a lengthy phase-in, 10 years from market opening, in our view will threaten the effectiveness and the credibility of the competitive market. Our position is simply summarized in a brief submitted to Ontario's Minister of Energy, Science and Technology in November 1998 when we stated:

These lengthy timelines send the wrong signals to potential market participants and if not addressed will seriously impair participant willingness to plan projects, invest risk capital and create customer choice.

The Stakeholders Alliance has advocated that a reduction of OPG's total share of Ontario generation's capacity be reduced to 35 per cent on an accelerated basis by December 31, 2004.

We were very pleased when Ontario's Energy Minister, Jim Wilson, announced in late 1999 his intention to accelerate the divestiture of OPG's assets, following which OPG President Ron Osborne announced in February 2000 OPG's intention to divest itself of the Lennox and Lakeview generating plants.

Unfortunately, this policy direction, with one exception, was put on hold last spring pending the development and release of the environmental guidelines to govern the operation of Ontario's fossil fuel plants. The release of the environmental guidelines a couple of weeks ago were very welcome. It is hoped that once the public comment period is over, the guidelines can be rapidly finalized and OPG can move ahead with the proposed divestitures sometime this summer.

Mr. Wilson's announcement at the Municipal Electric Association's annual meeting last month that the government will be moving ahead with an accelerated decontrol program of OPG was also a welcomed development. I understand Mr. Osborne in his speech today at the Empire Club recommitted OPG to move ahead more rapidly with decontrol and has identified even more potential generating assets to come on the market in addition to Lennox and Lakeview.

The Stakeholders Alliance will continue to press the government to ensure that additional competition will be in place at the time of market opening.

One positive development, it should be noted, has been the divestiture by OPG of the Bruce Nuclear Plant to Bruce Power, a company controlled by British Energy PLC, with minority equity interests held by Camico, the Power Workers' Union and the Professional Society. When the Bruce transaction closes sometime in the spring, it will be an historic development since it represents the first time OPG has ever given up control of significant generating assets. It also represents the first time in 90 years that Ontario will have a significant competitive player in the electricity market.

From the federal government's perspective in its role as the regulator of nuclear power, the Bruce transaction serves as the first example of a private sector operator assuming control of a nuclear power plant. We hope that this transaction will be a harbinger of good things to come.

The second thing we would like to raise today is the need to encourage new investment in generation. While there are many reasons why blackouts have developed in California, undoubtedly the major single reason has been the lack of generating capacity in the state.

It is vital that both the federal and provincial governments pursue policies that encourage investment in power generation of all types. One sure way to discourage investment is to create an air of uncertainty about government intentions. This is why the Stakeholders Alliance has pressed the Ontario government to announce the new marketing date as soon as possible. Consequently, we were very pleased when Energy Minister Jim Wilson announced earlier this week that the market opening would take place by May 2002. The members of the alliance would like to see the market opening as soon as November, but we are happy that we will have market opening by May of next year at the latest.

We are hopeful that investors will now feel comfortable to move ahead expeditiously with plans for new electricity generation in Ontario. That will be the surest way to avoid the kind of chaos that developed in California.

The final concern I would touch on is the burden of stranded debt left behind as a form of legacy by Ontario Hydro. Stranded debt has been an issue faced by other jurisdictions that have introduced competitive electricity markets. The restructuring of the Ontario electricity market has resulted in a stranded debt of over $20 billion.

The Stakeholders Alliance strongly believes that over the next several years the Ontario government should move ahead expeditiously with the divestiture of OPG and its assets together with Hydro One on the understanding that the proceeds will go first to the reducing of stranded debt. This is essential since the debt retirement charge that will be imposed on all consumers will prove to be an economic drag on the province. The faster the stranded debt can be paid off and the debt retirement charge eliminated, the better it will be for Ontario as well as the Canadian economy.

The members of the Stakeholders Alliance believe strongly in the principle that a competitive electricity market will be vital to keep the Ontario economy competitive in the years to come. We think that this principle would apply to other provinces in Canada as well. Providing consumers with choice in a truly contestable market, where openness and transparency are the rule, will make a positive contribution to the economic vitality of the country.

Honourable senators, we would encourage the committee to support the development of a competitive electricity market in which consumers have true power of choice.

Senator Banks: Mr. Jones, how is competition going in the gas business?

Mr. Bernie Jones, President, Ontario Natural Gas Association: Competition is vigorous in the gas business. I think that is one of the positive features of natural gas restructuring that the government took into account when it looked at the possibilities on electricity. With respect to the commodity markets in gas, there are literally hubs of producers competing to supply the marketplace, and that is where you look for competition in the commodity.

As you know, the transition and distribution of the utilities is regulated. They are natural monopolies. We also succeeded in the gas industry at getting competition at the retail level where we have the majority of volume of gas and also the majority of the number of customers who were taking the supply from other than the gas utility. They are going with other marketers, such as Direct Energy, so competition has been quite successful in the gas industry. We are looking for the same kind of experience with electricity.

Senator Banks: Is there meaningful competition in the distribution, retail end of the gas business?

Mr. Jones: Yes, there is. Although the price of natural gas has escalated quite sharply in the past year, a number of customers have benefited from the fact that they signed three- and five-year contracts. They are doing quite well, so we think it has been beneficial.

Senator Banks: Mr. McFadden, when you refer to the decontrol of OPG, do you mean the capacity, the ability and the unrestricted right to sell stuff? Is that what it boils down to?

Mr. McFadden: "Decontrol" is a term that I guess most people would not normally use in referring to getting the guidelines out. At least now a potential acquirer would know what kind of a playing field they are going to be playing on.

Senator Banks: There is one in place, a potential acquirer, is there not? Did I misunderstand that?

Mr. McFadden: The only one is the Bruce nuclear plant. Yes, in that case, there is a signed agreement.

Senator Banks: Lennox can be shopped, in effect.

The Chairman: I think he is correct. OPG has a number of plants on the front.

Mr. McFadden: As of noon today, Mr. Osborne confirmed at the Empire Club a previous announcement that was made last year and added some additional assets to the list.

Senator Banks: Do any of your constituent members have any concerns, rational or otherwise, about the fact that we are about to have a private operator of a nuclear plant?

Mr. McFadden: We discussed that at our executive.

Senator Banks: I bet you discussed it a lot.

Mr. McFadden: The Stakeholders Alliance supported the decision to decontrol the Bruce nuclear plant. We felt that the operator chosen by Ontario Power Generation has a very good history of operating plants. We think that it is been very valuable to have a competitor come into the market with experience, not just here in Ontario, but elsewhere in the world as well. They bring new management techniques and understanding of competitive electricity markets, the alliance executive was very supportive of the proposed decontrol of the Bruce plant by OPG.

Senator Banks: You talked about the independent regulating agencies, plural. Can you describe what kind of analysts they will be? How will they be constituted? How will they be manned? To whom will they report?

Mr. McFadden: The Ontario Energy Board has been in existence for many years, but it did not really have effective jurisdiction in the electricity system. It was an effective regulator of the gas industry, but it did not regulate effectively the electricity area. It would review rates but had no real power to set rates. Rate-setting under the old system was a responsibility of the board of Ontario Hydro, in effect.

The Ontario Energy Board is a continuation. It was given additional powers under the Energy Competition Act. The membership of the board is made up of people appointed by the provincial government for fixed terms similar to other energy boards across Canada. That board is responsible for licensing virtually every body that does anything in the electricity area, whether it be a retailer or a generator. If a company wants to be a transmitter of power, it has to get a licence from the OEB. The board also has the power to discipline a market participant who gets out of line if they violate their licence or violate any of the terms of the codes.

With respect to the independent market operator, its board is also appointed by the provincial government, but the membership of that board is different. It consists of a mixture of stakeholder representatives combined with independent directors who have no involvement whatsoever in the power industry.

So, there is a balance. The IMO, in turn, has a number of committees that work at developing different aspects of the rules. Here again we have a large number of stakeholders directly involved in working with the IMO.

Generally, we found this to be an extremely good process. It has given stakeholders, including the two organizations with me today plus all the other members of the Stakeholders Alliance, direct involvement in what is going on both in the development of the market rules and at the IMO. Those are the two lead agencies.

The Electrical Safety Authority, which I did not enumerate, deals with the area of safety reviews and certifications that were formerly a part of Ontario Hydro. It was spun off as a non-profit corporation. Here again we have stakeholders involved.

There was a broad stakeholder involvement in all of these various agencies, but no one group has control. There are checks and balances through the system.

Senator Banks: So in all means and methods of the production and distribution of electrical energy, there is a degree that sounds like it is about even of provincial regulatory control; is that correct?

Mr. McFadden: In terms of what?

Senator Banks: Regulating the industry.

The Chairman: I think that safety and transport are regulated, but you want to deregulate the generation aspect.

Mr. McFadden: No. As Mr. Jones has said, the section of the industry where we have monopoly suppliers is near the distribution transmission. We do not have, for example, three and four sets of competitive supply wires in towns. There are natural monopolies near transition distribution. They are licensed by the OEB. They get an exclusive licence and their rates are set. Their rates of return must be approved. It is quite a complicated process.

There is no monopoly for the unregulated area - generation and retailing. They are licensed to act. They must meet certain standards in terms of their licence, such as safety and things of that nature, but they operate in a competitive situation and do not have the kind of standards and regulation that a monopoly supplier has.

Senator Banks: Does the province exercise the same level regulatory control relating to safety over nuclear plants as it does over fossil fuel plants and over gas transmission?

Mr. McFadden: The federal government basically governs nuclear safety.

Senator Banks: The provincial government does not have a safety regulatory role with respect to nuclear power generation, then?

Mr. McFadden: Safety is an issue of the Canadian Nuclear Safety Commission. There is provincial involvement on certain environmental aspects around the plants, but fundamentally the safety of nuclear facilities is in the jurisdiction of the federal government.

With respect to other means of power generation, such as hydro, fossil and so on, it is fundamentally a provincial jurisdiction.

Senator Kelleher: I will address my questions to Mr. McFadden. I would like to say that I share his concern with respect to the stranded debt. Am I correct in assuming that the stranded debt is guaranteed by the Province of Ontario?

Mr. McFadden: That is true. The stranded debt is basically guaranteed by the bonds that Ontario Hydro issues; and, yes, they are supported by the people of Ontario. Any new debt that OPG, Hydro One or the other entities might contract, they are on their own hook. There is no provincial guarantee for those.

Senator Kelleher: That is why I said "the stranded debt."

Mr. McFadden: Yes, it is guaranteed.

Senator Kelleher: I am sure you are pursuing the question of the stranded debt in whatever form with the government. Have you gleaned from your discussions, and if you can reveal it, any indications of the direction the government is taking with respect to the stranded debt?

Mr. McFadden: Right now, I guess the concern the province has is to ensure that they have in place adequate streams of money, not just to service the debt but to pay it off in a fairly expeditious way. Until the market opens, the various revenue streams will not come on as envisaged by the Energy Competition Act.

The concern the Stakeholders Alliance has is that over the last couple of years, since the restructuring was launched under the Energy Competition Act, the stranded debt has actually gone up. The provincial auditor has pointed that out in his report. Therefore, the sooner we can get market opening so that the various revenue streams can be applied toward servicing the debt, the more quickly we can pay down the debt.

Senator Kelleher: Knowing a little bit about the way your committee operates, I think it is been relatively aggressive, which is to be commended. However, have you suggested guidelines to the government as to how it should deal with the stranded debt? If so, are you in a position to reveal that to us?

Mr. McFadden: Perhaps I should let Mr. Dickinson talk on behalf of the large consumers. They are particularly exercised about this matter.

We have advocated from the start that the debt should be assumed by the consumers, not by the taxpayers. It should be an industry issue. We are strongly in favour of paying it down in an orderly fashion, but we have suggested to the province that they move ahead more rapidly with the divestitures so that the funding from that can be applied against stranded debt.

These issues are extremely complicated in terms of the application of funds from divestitures, how that can be applied specifically against stranded debt and how that would reduce stranded debt. There is a fair amount of complex financial engineering in that regard.

Our concern, though, is that we should be moving ahead as quickly as possible to a divestiture program in order pay down debt, if possible, and eliminate, if possible, the debt retirement charge. Right now the debt retirement charge would be 0.7 cents per kilowatt hour, and it would be better in the long run off to have that paid off. That would tend to reduce power prices in general and might leave some additional room for power generators as well. However, right now, until the stranded debt is paid off, that charge is going to be there.

That is why we have encouraged a more rapid divestiture program. In addition to competition in the market, we have suggested that more a rapid divestiture program would be useful in terms of paying down debt on an accelerated basis.

Mr. Arthur Dickinson, President, Association of Major Power Consumers: Yes, Mr. McFadden is quite right. I think there is a second aspect to divestiture, and that is that it creates new competitors in the marketplace. The whole essence of restructuring is to get the benefits of a competitive market, and initially there will be very little competition in this market. OPG will remain a dominant factor. Even when we get the sale of the fossil plant and hopefully one of the hydraulic plants that was announced today, I believe, by Mr. Osborne, then we are really only dealing with the day-to-day spot market. The contract market is still very much a dead issue. The large industrial customers, and probably some large commercial customers as well, would want to contract for their electricity for more than a day ahead. They want to contract for one month, three years, who knows. It depends on the style of management and their corporate objectives. At the moment, there is little prospect of that because we do not have enough competitors in this marketplace.

The other issue regarding the payment of debt is that the management of this matter is being handled by the Ontario Electricity Financial Corporation, which is another "successor company," if you will, managing the total debt of the former Ontario Hydro. The difficulty is that while the successor companies - that is, Ontario Power Generation and Hydro One - report on a quarterly basis so we can see pretty well what is going on, at least as much as they will let us, the Ontario Electricity Financial Corporation has a different financial year. It only reports once a year, and then, of course, several months late. Hence, it is very difficult to track what is going on with the debt, and this is one of the issues that we have raised with the government: the need for more transparency in the process of paying down the debt so we can be reassured that the process is going along as intended.

Mr. Jones: The stranded debt, which was in the region of $20 billion to $21 billion, has two components. One is that portion of debt which is felt can reasonably be paid off over time through the earnings of the new companies and through taxation in the new competitive sector. In the case of public companies, of course, that is payment in lieu of taxes. That would account for roughly $12 billion.

The balance is called residual stranded debt. That is the $7 billion to $8 billion that David referred to as being the debt that would have to be addressed through a charge on customers, which they would see on their final bill.

We have another concern in respect of the $12 billion and this payment of taxes. We have not really seen information that would allow us to determine whether proxy taxation systems are fair and reasonable.

Senator Kelleher: Has any economist been so bold as to quantify the extent or the amount of the drag of this stranded debt on Ontario's economy? How serious a problem is this or will it be?

Mr. McFadden: I should direct this question to Mr. Jones. He is an economist and used to work with the Ministry of Finance in Ontario.

Senator Kelleher: Only an economist would try. They are like weathermen.

Mr. Jones: I think that is about the right answer. The fact is that the debt was being paid in any event and has to be paid. I am not sure that an analysis of what the burden is would be terribly fruitful. I mean it has happened. It is history and we have to deal with the problem.

There is no question that if the 0.7 cents a kilowatt hour did not have to be paid, consumers would have money for other purposes. However, it does have to be paid and that is a simple fact of life.

Senator Kelleher: Yes, but the reason I asked the question is because Mr. McFadden rightly alluded to this as possibly a drag on the province or a concern for the Province of Ontario. I am trying to see if we can get any kind of a handle on the extent of this problem.

Mr. Jones: It has pushed up the electricity rates. That is one factor.

Mr. McFadden: I think it is like any government debt. The federal government has been fighting it for years and has eliminated it. Now the taxpayers are starting to see the benefit of having more money in their pockets by way of tax cuts.

I think the same rule would apply to hydro rates. If people pay less on their hydro rates, they will have more money to spend on consumer items for their homes or apartments.

However, power generation is a major concern for industrial consumers. Ontario is a much more attractive place to locate a plant or to keep production here if electricity prices are low. It is not just a matter of John and Jane Q. Public having more money in their purses or wallets; it is also a real consideration for large industrial plants.

Mr. Dickinson: In Ontario, we have a lot of resource industries that are under pressure these days. They operate in a global market; they do not operate in a North American market. Electrical energy is a substantial component for them in terms of their operating costs.

For example, electrical energy accounts for 30 per cent to 35 per cent of the operating costs at INCO or Falconbridge. The amount of energy used for mining operations depends on the depth of the mine. If electrical energy can be used for the mining process itself, the percentage is much lower, between 12 per cent and 16 per cent, as I recall. Electrical energy is a big component for the steel industry depending on how they operate their plants and what type of energy they use. Of course, any increase in costs has a direct economic impact on their international competitiveness, so the cost of energy is clearly a concern to the members of the Association of Major Power Consumers.

In terms of the impact on the economy overall, that is very hard to assess. I think all I can do is give you some sense of what happened in the past.

Ontario Hydro was running the electricity system in the mid-nineties. Ford Motor Company analyzed its own electricity costs for the previous 10 years. Incidentally, their electricity costs directly are only about 6 per cent to 8 per cent of their operating costs. They ranked their plants around North America, including Ontario, and found that Ontario was the lowest-cost location in the mid-eighties. By the early nineties, Ontario had gone from number one to number fourteen out of 17 locations. The costs had risen substantially.

Now, a lot of things are happening in North America. That is history and I cannot give you today's numbers because I am not sure anyone knows them. Prices have risen across the board, and the other problem is that we have seen the Canadian dollar deteriorate in terms of exchange value.

All of that adds pressure on prices south of the border and does help our Ontario industry to some extent. Again, it is a very complex issue, so I am afraid there is no simple answer.

The Chairman: A couple of years ago, the committee visited California. They were struggling with their stranded debt then and have been struggling the last while with a shortage of power lines. We have had witnesses say it was not a shortage of power generation; it was a shortage of the power lines that caused the problems down there. They have plenty of generation capacity, but they could not get it through the lines.

With respect to stranded debt, California and Alberta offer some lessons. Have you looked at those them? In each case when they went to auction off their power blocks, they got a lot less than they thought they would, which is usually an off-set against the stranded debt.

Have you any comments at all in that regard? I take it that Alberta did everything wrong. They auctioned off their power just before prices took off, so they did not get much money out of it. However, now that the power rates are up as high as they are, when you go to auction, my understanding is that the stranded debt may be off-set.

Mr. McFadden: I will ask Mr. Dickinson to respond to that question. He and the Alberta's major industrial consumers have close ties.

Mr. Dickinson: The auction went very badly in Alberta, no question about it. They got poor value and the approach was just wrong. They are paying a price for it now. The real problem is that they still do not have adequate generating capacity.

The Chairman: Would Ontario do better at auction?

Mr. Dickinson: I do not like the auction approach at all. I think what you have to do is create real competition, and the auction was a way around the control of plants by the then owner. The owners still own those plants, but they are generating cash for providing the auction. They own the hardware, but they do not control it. The auction was all about controlling the hardware. Therein lies the problem.

The essence of competition is getting enough people into the marketplace to drive down costs. That did not happen in Alberta. As well, they have had a substantial rise in demand. There was inadequate incentive to build a new plant. In California, there was a similar problem.

I disagree with the individual who earlier mentioned that it was the oil transmission problems. Transmission is only part of it. The real problem was that they had enormous handicaps in getting approvals to build a new plant. When you have the growth that they had in California, you are inevitably going to get into a supply-demand problem.

It is a little confusing to talk about one issue or the other. It was a combination of factors. Here in Ontario, we do not have the same problem at the moment. Hopefully, when the Pickering unit comes on stream, we will have a bit of extra reserve in our back pockets.

In my view, the problems suffered by Alberta and California will not manifest themselves initially in Ontario, providing we encourage people to build new generation. If we do not, we will get into the same jam as they have in Alberta and in California. There is no reason for that to happen.

The Chairman: If you do not want to give them tax advantages or give them a free, exclusive run of downtown Toronto, just open the market.

Senator Kenny: I would like some help from the panel with a little Utilities 101. The concept of competition leaves me troubled. I have difficulty when you talk about competition. I hear the rationale that it is going to drive down the prices. However, when you start talking about competition, I also see risk. Does the market send off signals in time so that we have adequate supplies and so that we will be protected?

I understand folks who want to have cheaper power. If you see the route to that through competition, I would like to know where the protection is for the consumer if you start having failures, because implicit in competition is failures. That is part of the deal. If you are going to get out and compete in a free market system, there are going to be winners and losers; and when you have some losers, that to me leads to brown-outs, black-outs and problems for the average Joe. Could you please comment? Am I missing something in Utilities 101?

Mr. McFadden: I cannot think of a single example where a black-out or a brown-out has ever been caused by a generator going bankrupt. To my knowledge it has never happened.

Senator Spivak: It is about to happen in California.

Mr. McFadden: Not because of the power generators. Their problem is related to the number of wires supplying the electricity. It is the monopoly suppliers that are going bankrupt. The state government said that it would protect consumers by saying that distribution utilities could only charge, let us say, $1. In fact, they went even further. They said, "You are now paying $1, but from now on you will only pay 90 cents." The generators could sell the product for whatever the market would bear, obviously, so these utilities were buying the product for $2 and $3 and selling it for 90 cents. You tell me how long companies will stay in business.

The Chairman: That is the way I play the stock market. Buy low, sell high and make a bit of money.

Mr. McFadden: If you had a few dot-com stocks, you saw it happen. What I am getting at is the frustration. We could go on at some length.

One of the things that we think is useful in the competitive market is that Energy Probe, the Sierra Club and many other clubs supported and continue to support Ontario heading into an open market. An open market encourages innovative solutions to problems, be it a new way of generating, which a large municipal supplier would not even consider because the new solution is too small to worry about. That is why Energy Probe supports an open market. Their view is that we will get into alternative energy faster.

Senator Kenny: Address my question about market signals, please, and whether you can respond quickly enough to changes in the market. How long does it take to build a power plant and are you going to get the signals in time?

Mr. McFadden: That depends on the kind of plant you are talking about. Some plants can go on line within one to two years. Our experience indicates that it is a considerably longer period for a big nuclear plant. In general, you are not going to see a lot of nuclear plants; you are going to see the smaller kind of alternative plants that distribute generation by mass. Various types of combined cycle co-generation plants can go up very rapidly.

Senator Kenny: There are a lot of car manufacturers out there. If they want to mess around with a different type of car, I do not have a problem. If a couple of them go under, I could care less. They are entrepreneurs; they are taking their chances.

When it comes to electricity, we all need it. We need it when we turn on the switch and we want it when we turn on the switch. If we do not have it when we turn on the switch, we have a problem.

Where is the assurance for the consumer when you bring competition into the mix? Because implicit in competition is risk and risk of failure. Where is the assurance to the consumer they are going to get the electricity when they need it?

Mr. Dickinson: Let me refer you, senator, to what happened in the British Isles. They have operated a competitive market since 1989, or for 12 years. They have not had a failure that has affected anyone because the market signals work through the spot market.

Now, the spot market can be abused, no question about it. One of the difficulties is ensuring that the rules are adapted as the generators learn how to manipulate the rules to their advantage. They are out there to make money. That is a risk, and you have to get smart at managing that risk. It has been a problem in some locations. However, there is a learning curving, and people are doing much better at managing that these days.

I think the lesson is one of history: it has not happened. Frankly, the right pricing is important. You tell me when it happens, and we can discuss this issue again. All I can do is point to history.

Senator Kenny: When it does happen, sir, it will be too late.

Mr. Dickinson: The point is that it has not happened, and I think that sort of fear is inappropriate. There is no evidence that it will happen.

Senator Kenny: Well, companies that compete do fail, do they not?

Mr. Dickinson: They do, but this does not mean to say that we will be short of supply. They are the ones that cannot compete on a cost basis.

Senator Kenny: Walk me through where the protections are. Explain why this is. I am just an ordinary Joe here. Tell an ordinary Joe where the protections are.

Mr. Jones: The short answer is this - in competition.

The Chairman: There are a number of blends out there.

Mr. Jones: A number of generators competing with each other is sufficient incentive, provided the demand is there, to meet that demand. They will compete to meet with that demand. There is no shortage of automobiles.

Senator Kenny: There are a number of folks out there. Between them, they have an excessive supply, far more than is necessary. If one of them goes down, the remaining ones still have enough capacity to provide the market. Are you with me?

Mr. McFadden: What is the basis on which that one plant goes down? You said someone is going down.

Senator Kenny: There is competition. Sooner or later, the weak guy falls off.

Mr. McFadden: Presumably the receiver would take it over, sell it or do something with it, would they not? It does not disappear. That is all I am getting at. The ordinary course of how markets develop does not mean that production disappears. We may see a restructuring, but the investors will go with their markets. If there is a viable market, people do not withdraw from it. If a company has been poorly run and goes bankrupt, an investor will walk in and turn it around, just as they would a car plant or any other kind of facility.

Look at the gas industry. The sources of supply are privately owned, yet we do not have a gas shortage. Gas companies are not in the habit of going bankrupt. The fact is that the industry moves on. There is a restructuring and there are changes in ownership, but, ultimately, they do not go bankrupt unless the demand for gas disappears.

Senator Kenny: In fairness, there was a lot of concern about gas supplies over the last winter; yes or no?

Mr. Jones: No. There was not a concern that gas companies would not be able to actually serve the customer. There were price concerns, but that is how the market works. The market is working when prices go up and down. The price signals when producers should bring on more supply. The capacity is there. A sufficiently high price brings on more capacity over a period of time.

Mr. Dickinson: There is another aspect that we have not touched upon, which is that the independent electricity market operator has a responsibility to look down the road to examine future supply-demand issues and to identify when there is likely to be a tight supply. That tight supply starts to rise when reserve margins begin to disappear, so there is plenty of warning about reserve margins being constrained.

Mr. McFadden: There also is a system - and I am trying to remember the name of it - where a charge is built in to subsidize generators to keep a certain amount of production in reserve. There are other financial mechanisms, but again, the consumer pays for that. However, if it is felt to be necessary, there are ways the regulator or the government can intervene to encourage more production.

Mr. Dickinson: That is part of the capacity operation the independent electricity market operator will put in place if it sees a problem.

Senator Spivak: I was in California. I can understand Ontario Hydro's past errors in judgment. The status quo is unacceptable, but surely that is not an ideological position to say that only competition works.

I come from Manitoba. We had the cheapest rates in the world until the gas market was deregulated, which sent prices up ten-fold and made gas rates unacceptable. However, electricity is quite inexpensive and it is a monopoly. I just wonder about your faith in competition in view of what happened in California and Alberta. Certain businesses in Alberta say that they cannot stay there because the Alberta advantage is no longer there.

What new forms of generating capacity do you think will come on stream? What are the incentives? Many industries in Canada have been given competitive advantages. They are given government subsidies to begin to grow.

When we were in Alberta, we looked at low-impact hydro, which does not receive a tax advantage. One was wind power. Others did not get the tax advantages that, of course, the fossil fuel industry got.

I have outlined two questions. One concerns ideology. The second concerns the sorts of generating power you are looking forward to. Would you favour government subsidies, just as Ontario taxpayers had to subsidize Ontario Hydro for years and still have to do?

Mr. Jones: We will be addressing this question tomorrow.

Senator Spivak: I will not be here.

Mr. Jones: Ideologically, technology has changed the configuration of power markets. There is the old idea of the large monopoly, particularly with respect to nuclear and fossil-fuel technology, not really related to hydraulic technology because hydraulic is usually highly competitive. It is the lowest-cost form of power. Technology, particularly gas technology, has changed the situation so much so that the old low-cost, low-power monopoly model is obsolete. It always carried great risks in terms of long-term, expensive capital commitments; that is why we are stranded in debt.

We now have a future of distributed generation where generation projects around the province should improve the diversity of supply and also the reliability and quality of supply.

Therefore, I think the ideological question has been carefully looked at in Ontario. We have been reviewing this issue for over four years. All stakeholders have been involved in this review and have come to a consensus that this is something we need to do.

Senator Banks: That is a very good answer.

The Chairman: Thank you very much for your assistance. You may want to stay around to hear the next panel of witnesses since Mr. Osborne and Mr. Brown may say things that will be advantageous for you to hear.

Mr. Ron Osborne, President and Chief Executive Officer, Ontario Power Generation: We are at your disposal and if you want to interrupt us, feel free to do so. We have a few brief opening remarks and then we will be pleased to respond to any questions you may have. I might even respond to one or two I heard earlier.

The first slide deals with the benefits of competition. If you want to know what happened in the United Kingdom, Graham Brown, our chief operating officer, was one of those who ensured competition worked in Great Britain, and he would be pleased to tell you how it unfolded.

The Chairman: I thought Maggie Thatcher did it all.

Mr. Osborne: She needed lieutenants to implement her policy. She was able to mandate and dictate, and she did that very well but, at the end of the day, it was the foot soldier who made it happen. Graham was one of those foot soldiers.

The issue of competition boils down to whether you believe that central planning is, in the long run, better, more cost effective, and more reliable than a market plan which is, essentially, a non-plan except through the competitive forces and the competitive juices of the market. You have seen what has happened.

Senator Spivak: It all depends on the product. What about health care, for example?

Mr. Osborne: You can certainly make a determination on that product-by-product. There are many products that are just as complicated as electricity, and which are equally vital to our well-being, that are managed through a competitive construct: gasoline, natural gas, the food we eat. There is nothing more complicated than the food chain, and I do not believe that marketing boards help in the overall control and availability of cheap food to Canadians on a reliable basis.

I agree that you must look at it asset-by-asset, product-by- product. The reality is that electricity is essentially a capital intensive business where we believe and others believe - and other jurisdictions such as the U.K. have demonstrated - that market forces do indeed work if market forces are allowed to work.

If I could turn to Senator Kenny's question, I would rephrase David McFadden's answer very simply this way: investors go broke; assets do not go broke.

Senator Kenny: Do you mean assets do not disappear?

Mr. Osborne: Yes. Investors go broke, people lose money.

The third item on this slide is environmental protection. I will come back to that. The fourth notation is what I will call green power for want of a better word. We will address both of those.

I do not propose to dwell on slide three because by now you must all be convinced that Ontario is not California. If you would like us to elaborate on that, I would just say that that is a growth industry, which explains why California is not Ontario and vice versa. We are happy that Ontario is Ontario and we think we are in pretty good shape. Not all Ontarians are necessarily convinced the that odd day of black-out is not a good thing to pay for a good winter.

As to consumer protection and the price issue related to the opening of the market, I would make two or three points. As previous speakers have said, we are, by far, the largest generator in this province today. We will be the largest generator in the open provincial market, but not by as far because we are in the process of decontrolling - a term you discussed with Mr. McFadden earlier - significant amounts of generation.

With respect to that which we will retain, we will be subject to a price cap on a very large portion of our generation. Roughly 70 per cent of what we generate will be subject to a 3.8 cents per-kilowatt-hour cap until the OEB is satisfied there is genuine competition in this market. Others around us may have price signals legitimately established above 3.8 cents, but we are required to rebate back to 3.8 cents on roughly 70 per cent of the generation in this province.

The Chairman: Are part of the stranded costs to be absorbed in that then?

Mr. Osborne: To the extent that electricity is undervalued because of the 3.8 cent cap, obviously we will not be able to pay as many dividends to the province which will go towards stranded debt. In a sense, it has a bilateral effect on stranded debt. On the other side of the equation, taxpayers in Ontario that are businesses, such as Mr. Dickinson's customers, will have higher profits. Presumably they will remit taxes to the province that will go to the general revenue pool. It is hard to slice the salami and identify specific pieces of debt and specific pieces of funding for debt.

One of the previous speakers did a very good job of explaining the stranded debt: the breakdown between that which is supported by the electricity system, roughly $12 billion, and that which is not, the $8 billion left over which will be covered by the 7 cent levy on all electricity once the market opens.

Coming back to customer price protection for a moment, we are required to provide a high level of assurance, through that 3.8 cents, that there will not be sticker shock once the market opens.

With respect to Mr. Dickinson's customers, a number of whom had beneficial rates from a specific rate structure from Ontario Hydro, they will have transitional rates phased out over a period of roughly four years with respect to those beneficial rates to ensure they do not have a sticker shock during that period. We will be decontrolling plants which will ensure that we are not the only ones setting the price of electricity in this province.

In terms of stability or adequacy of reserves, we are doing our bit to ensure adequacy of reserves. We had a lengthy discussion in Ottawa with Senator Spivak around the Pickering A restart. You heard subsequently about British Energy's plans to restart two units at the Bruce that have been laid up for a number of years.

With those initiatives and other initiatives such as the TransAlta 500 megawatt plant being constructed as we speak in Sarnia, there should be more than adequate additional reserve brought on stream over the next couple of years to ensure adequacy of reserves after the market opens and before the market has had a chance to kick in and respond to the price signals. Senator Kenny asked about that. We believe that reserve issues are adequately dealt with.

I will not dwell on Pickering A, because I think you are familiar with that.

With respect to environmental protection, I would make two comments. In the Province of Ontario, roughly 75 per cent of our electricity is generated either through nuclear or hydro-electric. Nuclear is about 50 per cent, and hydro-electric is about 25 per cent. Those are obviously the most environmentally friendly in the sense that they do not emit CO2, nitrous oxides or sulphur dioxides.

Senator Spivak raised issues around waste management and waste disposal with respect to nuclear. They are manageable. In environmental terms, we consider nuclear or hydro-electric to be as good as it gets.

The other 25 per cent of our electricity is produced by fossil fuel, largely coal. It behoves us to ensure that that 25 per cent is as clean as it can be, and all I would do is put it in context. We generated roughly 40 terawatt hours in the early 1980s with coal-fired generating plants. Today we generate roughly 40 terawatt hours with coal-fired plants, but we do it with only 40 per cent of the acid gas emissions that we created in the early 1980s. That is a function of advances in technology. It is a function of using more environmentally friendly coal and a variety of other factors, but essentially it is a function of technology and cleaner coal.

We are continuing to invest to ensure that environmental impacts continue to be reduced. We will be spending roughly $250 to $300 million over the next two years on two coal plants in Southern Ontario to put in additional emission control equipment, and assuming that the province's recently announced regulations on emission caps for fossil-fired generating stations are promulgated in the next few months, we will need to develop plans for roughly another $500 to $750 million of additional environmental equipment to be added to our coal-fired plant. That will put us at the forefront of environmental cleanliness with respect to coal generation in the air shed and across North America.

We believe that we are behaving responsibly and promptly to reduce the environmental impact of all of the generating sources we use, including coal.

If I can turn quickly to alternate energy sources, today we have 130 megawatts of what is known as green power as per the formal definition of green power, largely small hydro plants and methane consumed at landfill sites. We have a game plan to increase that to 500 megawatts over the next few years. That is small in the overall scheme of things, but believe me, in green energy terms, that is a huge amount of investment and a huge amount of product that needs to be sourced.

We have announced a windmill farm in conjunction with British Energy. Roughly 100 acres of land in the Bruce Peninsula will be set aside by us to build 10 megawatts' worth of wind power. There is not a better site for wind power in Southern Ontario that we are aware of, and it will give us a good opportunity to see just how wind power will develop in the future.

We also are working on leading edge technologies such as fuel cells, and we have recently announced the creation of a venture capital fund which, over the next three years, will invest roughly $100 million in entrepreneurial projects brought to us by the kinds of people who have bright ideas as to how electricity can be distributed and measured in the future, all of which speaks to alternate energy sources and environmental friendliness.

On all four counts, price protection, supply protection, environmental protection and alternate energy, we believe at OPG that we are indeed doing our bit to help the province come to the conclusion that the time will be right to open this market by next May.

The province has indicated that it believes all of its conditions will have been met by next May and has set that as an outside limit for opening the market.

If we are able to satisfy the province that all the conditions are met earlier than that, we would be very happy, because we have been at this now for a number of years and we are ready to go. We were hired to run a competitive generating company; we want to get on with it. We are obviously very anxious to get into the fray. At the moment it is something of a phoney war as you can imagine, as we all do dress rehearsals and mock-ups and pretend.

I would just simply close on the decontrol note because people rightly point out that we are the elephant - as the minister said last week in Maclean's Magazine - of electricity in this province. We are the 800 pound gorilla. We would always like to be the gorilla. I think it is fair to say any competitor wants to be the gorilla. There is little advantage in being the chimpanzee in a jungle of gorillas. We intend to remain the gorilla in competitive terms. However, we equally intend to create the wherewithal for other people to become gorillas in electricity terms.

I disagree with Mr. Dickinson when he refers to the lack of base load or contractual load in the market. We are close to closing a transaction with British Energy that will put 22 terawatt hours of base load into third party hands. His customers have been approached already with respect to that load I know, at least they tell me they have been, and they are keeping us honest in that regard through the British Energy deal.

Today we announced that, as soon as the moratorium on fossil decontrol is lifted by the province - and we hope that will be some time this summer - we will again start a process we announced a year ago of decontrolling price-setting peaking plant on the margin. That price-setting peaking plant will be roughly 4,300 megawatts. It will include Lakeview and Lennox that you were asking about earlier. It will also include two in fossil plants in northwestern Ontario, Thunder Bay and Atikokan, because that is a semi-constrained market and needs competition within the constraint behind the intertype.

We are also announcing decontrol of some hydro-electric in an area that Senator Kelleher will be familiar with, the Mississagi River. We have four plants on the Mississagi River. I do not know if it was ever included in any of your ridings, but it certainly is your home territory.

We have announced we want to restart that process. It will be a normal investment banker driven process to ensure that everybody, Great Lakes Power and everybody else, has a kick at it, and that the shareholder, the consumer in the Province of Ontario, will get a fair deal on all those assets as it did on Bruce.

The Chairman: Thank you very much. I am sure you will entertain some questions.

Senator Spivak: Mr. Chairman, I want to ask all my questions at once because I understand it is late and that will give other people an opportunity to also post some questions. I have three questions. One concerns the reduced rates that you have for some industrial customers. I would like to hear the rationale for that, why those rates are reduced and to what extent? What did that cost Ontario?

My second question concerns the three plants which the ministers, the people from New York and Boston, wrote about, saying that the coal-fired plants have to be converted to gasoline plants. Perhaps I did not understand your closing remarks about decontrol. Did your comments mean that you are going to immediately take those coal-fired plants and change them to something better?

The third question I have relates to green power. You now produce 130 megawatts of green power. Are you looking at 500 megawatts of green power by 2005?

Mr. Osborne: Yes.

Senator Spivak: What percentage is that of the total production of not only yours, but since you are the gorilla, Ontario?

Mr. Osborne: Friendly gorilla.

Senator Spivak: Perhaps you might tell us about the solid oxide fuel cell and why you think that is promising.

Mr. Osborne: To be honest, that sounded like more than three questions.

Let me deal with them in reverse order. The solid oxide fuel cell experiment or prototype that we are developing is utilizing intellectual property owned by Siemens Westinghouse. It is a tripartite or really four party, whatever that is in Latin, quadpartite project, with the Government of Canada putting in some money, the Department of Energy for the United States putting in some money, us at OPG putting in some money, and Siemens Westinghouse putting in some money. I do not recall the proportions, but it adds up to roughly $20 million.

Senator Spivak: The Department of Energy in the United States is funding a project in Canada?

Mr. Osborne: Yes.

Using facilities that are controlled by Ontario Power Generation at a plant called Kinetrics, which is in Kipling. We have been working with Siemens Westinghouse on helping them develop their intellectual property and solid oxide fuel cells for about a decade. We were chosen to help them put together a prototypical plant for a commercial installation. It is the size of installation that could potentially be put into a small commercial project or a residential complex or what have you.

While we do not own that intellectual property, we obviously are gaining the expertise that comes with building the prototype and, as I say, the Federal Government of Canada is involved, the Department of Energy is involved and we are also putting in some money along with Siemens.

Solid oxide fuel cells are a fair way off from being a major supplier of bulk electricity to the province, but if you do not start somewhere, you are never going to get there, and we do believe that, over the next decade, there is significant potential for what is known as distributed generation to occur, where generation is brought closer to the load, whether it is in the basement of this hotel or in a large downtown complex, and fed out through underground pipes, or whatever.

We intend to be a supplier in that from a marketing standpoint. There will be many other players in that arena over the next 10 years.

What I often like to say is the distributor generation may be the electricity equivalent of the Internet, just as deregulating telecom led to all of the proliferation of services that you enjoy today in media, whether it is broad band or wireless or Internet related. Distributed generation is probably the Internet of electricity deregulation.

You asked about the 500 megawatts. My mental arithmetic is not as good as Graham's - by now he would have figured out the percentages but it is 500 megawatts of what will be in the province available from a capacity of 30,000 megawatts, so it is small potatoes at this point, but it is significant in that, if we do not start, we will not know what we should be pursuing down the road.

The Chairman: One and a half per cent?

Mr. Osborne: Thank you. Graham will correct that if it is wrong.

You asked about the Nanticoke and Lambton plants which are coal fire plants, one on Lake Erie, one on the St. Clair River or Lake St. Clair - whatever it is between Windsor and Detroit.

Senator Spivak: Are there not three plants?

Mr. Osborne: They are talking about three, but the two they are focusing on are Lambton and Nanticoke. They would focus more on Lakeview except we have already announced, and the province has already announced that that plant, which is at the end of its useful life in any event, will not be permitted to operate on coal beyond spring of 2005. If Lakeview is to run after the spring of 2005, it will have to be on gas; and the market will make that determination, we will not make that determination.

Nanticoke and Lambton are large coal-fired plants that are anywhere from 20 to 30 years old. They are nowhere near the end of their useful lives. They are the plants which have borne the bulk of the improvements in environmental quality that are referred to earlier in my comments. They are the plants where we will be spending somewhere between $750 million and $1 billion over the next five years to continue the environmental improvements.

You made reference to New York, Connecticut and so on. Yes, you are right. The states of New York and Connecticut have made overtures towards the federal government and elsewhere about the need for Ontario to change the fuel source for those plants to natural gas. New York and Connecticut are making the same overtures to Ohio, Indiana, Illinois, Pennsylvania, Michigan and Kentucky, which are equally part of the air shed and, in the scheme of things, we are a bit player, frankly.

Ohio has in excess of 90 per cent of its generation coal driven. I do not know the exact percentage from Michigan, but it is in the same order of magnitude. The same is true of Indiana and Illinois. When you look at all of the emissions that the East Coast of the United States picks up through the air shed, because the air shed comes up through Ontario and back down through the Eastern Seaboard, we are a bit player but we are caught in the draught, if you like, of that action by New York and Connecticut against their brethren to the west of those states, in the upper Midwest.

Senator Kenny: Excuse me, sir, could I just interrupt for a moment? People communicate in a lot of ways and it does not always get picked up on the record. I hear you speak, but I am watching your colleague, Mr. DiCerni, shake his head.

Mr. Osborne: I would be happy to let him correct me if I am wrong.

Senator Kenny: I was getting body language different from the verbal language.

Mr. Osborne: I appreciate you giving me the signal.

Senator Kenny: I am trying to decode here.

Mr. Osborne: You can believe my words, or you can believe his body language.

Mr. Richard Dicerni, Executive Vice-President and Corporate Secretary, Ontario Power Generation: I was obviously undertaking a career-limiting move.

Mr. Osborne: There is a difference between a CTM and a CLM.

Mr. Dicerni: I was thinking that the advice proffered by the Attorney General from New York was not as specific by his colleagues in Ohio, Michigan, and so forth, in regard to converting all of their coal plants to gas. The advice that the province, and the federal government has benefited from, has been very specific in terms of what we should do at our plants. I do not believe I have seen anywhere where they have advocated conversion of all of their plants to gas. My reference that you picked up was in regards to that.

Mr. Osborne: In terms of conversion itself, just to give you some sense of the scope, the capital cost to replace the capacity as built into Nanticoke and Lambton is of the order of Can. $5 billion. The additional fuel costs, being the difference between gas and coal to create the same amount of energy that would be required to replace coal-fired generation, is of the order of magnitude, in today's gas price, and I emphasize today's gas price, of about a $1.5 billion a year. It is no light decision to be taken. I do not know the future of gas prices, nobody did two years ago, not even the producers. If they did know two years ago, they were crazy to be selling it two years ago. They should have been shutting it in.

Senator Spivak: Do I take it that you are not contemplating doing that?

Mr. Osborne: That is correct. We are not. Rather, we are going to retrofit that plant to ensure that it is as environmentally friendly as it can reasonably be, and we are spending money, serious money, to bring back the Pickering A units which are 2,000 megawatts of capacity, which will reduce the province's reliance on coal-driven generation.

Mr. Dicerni: It is important to note that the draft regulations that the province has put forth are much more rigorous than those that the United States Environmental Protection Agency has put forth for the various states which are operating within the air shed.

Senator Spivak: Under the Clean Air Act?

Mr. Dicerni: Yes, senator.

Mr. Osborne: Yes.

Senator Spivak: I am very disappointed to hear that.

Mr. Dicerni: This province has gone further in terms of NOx and SOx.

Senator Adams: My concern is how this change, from coal-fired plants to natural gas plants, will impact on the people who work in your generating plants. Will the unions be consulted before this is done? Will the coal miners be out of work?

Mr. Osborne: Our plant is certified under two unions, the Power Workers' Union and SOEP, which is the society which covers electricity engineers. Those are the two unions that we work with to operate our plant. If the plant were to be converted to gas at some point, we would continue to work with those same unions. They have jurisdictional rights under Ontario labour legislation that would not be affected by that.

It is a fact that one needs considerably less manpower, person power, for a gas-fired plant than for a coal-fired plant. That is a fact. However, that is only one of the factors that goes in to determining whether a plant should be converted from coal to gas. The major considerations are obviously weighing the economic costs of conversion against the environmental benefits, and it is my belief, and it is the belief of most of my colleagues within Ontario Power Generation who want to be employed for a while - I cannot see if Mr. Dicerni is nodding his head or not - that we really do, as a province, wish to make that kind of investment.

I am not the one to say we should not make that kind of investment. That is not for me to say. That is for the body politic to say. You are part of that body politic, and the provincial government is part of that body politic. If we do have that kind of financial capability to address these issues, there may well be better ways to spend it than to retrofit coal-fired plants for relatively small environmental benefit.

Senator Adams: What about the pipeline? Do you have tanker trucks available to do the work the pipeline will create?

Mr. Osborne: There is pipeline capacity that goes close to most of our generating sites, so existing pipeline capacity exists. Having said that, conversion of all of our coal-fired plants to natural gas would require, over time, an increase of gas capacity in the province, I believe, of roughly 40 per cent. You might want to check that with the Canadian natural gas folks. I am not sure if they are still here. It would require a major upgrade of overall capacity. How they would go about that, I do not know. That is for them, obviously.

Senator Kenny: Is coal a more stable commodity than natural gas?

Mr. Osborne: Historically, it has been, yes, because there are hundreds of millions of tons of coal available relatively, it is easily mined, and extensions are relatively easily to effect compared to building pipelines. The infrastructure for delivering coal is pretty much in place. It is largely rail and, in our case, rail and ship, so it has been traditionally more stable than natural gas.

Again, I would invite you to check that with the Canadian natural gas folks you are meeting with tomorrow morning, but that is my understanding.

Senator Adams: I recognize that wind power is environmentally clean. I would assume that you be required to have some kind of back-up equipment in the event that the wind did not co-operate, that is, there was no wind to generate power.

Mr. Osborne: That is correct.

Senator Adams: Alberta and California have invested heavily in windmills. What investment has there been in Ontario in wind generation? Has the investment been by government or by private sources?

Mr. Osborne: Most wind generation created so far has been as a result of the investment of private capital. For example, there is a Mr. Probin in Ontario who is a well-known Canadian expert on the funding of such projects. He is privately funding a project in the Gaspé Peninsula as we speak.

The windmills in California that you refer to happen to be in an extremely beneficial location because it is where the mountains come down to a funnel and the winds come in off the Pacific. I believe there are about 4,000 windmills there. That is not to say there are not environmental issues attached to it: visual, audio and in terms of natural habitat. They can be very damaging to birds, particularly migrating birds.

You started, senator, by pointing out that, if you rely on windmills you have to have back-up. This is certainly true. We have a windmill now on the Bruce Peninsula which was designed to get us into the game and start figuring it out, and that runs effectively about 20 per cent of the time. For the other 80 per cent of the time there is insufficient wind to make it reliable, which means you either need a lot of diversity of locations to have back-up, or you need other forms of back-up. That, of course, is the big issue with respect to wind power - that you cannot just have a single source, you have to have the diversity of back-up.

Graham might want to talk briefly about wind power in the United Kingdom where it is much more developed than it is in Canada.

Mr. Graham Brown, Chief Operating Officer, Ontario Power Generation: There is certainly an issue regarding energy storage and reliability in respect of wind power. The fact is that wind power is a very small part of the total generation portfolio in most countries at the moment, and so the unreliability of it as a source of supply is compensated for by the vast excess of capacity in other parts of the system.

That has also been true in the U.K., where governments of both colours have pushed hard to increase the amount of wind power available in the system. There has been a lot of enthusiasm to develop the business in the U.K. and, addressing your point about economics, the government has, in various ways, chosen to subsidize the development of wind power to encourage its early adoption, and they have used different mechanisms at different times.

They have just launched a new mechanism to effectively subsidize wind power in an effort to encourage off-shore development in the U.K., which is now beginning to take root. The problem with on-shore development in the U.K. has not been a shortage of sites. The U.K. is actually very windy. The problem has been a lengthy and complex planning process. Lots of people like the idea of wind power, but not very many people want wind farms near their own backyard. It has been exceedingly difficult for developers, who actually have got licences from the government, to move the process on to actually get through the planning process and get a site built.

Senator Adams: You mentioned the possibility of distributed generation. I know you will not tell us how much it now costs per kilowatt to produce energy from such generators, but once these generators become more popular, will they become less costly to operate?

Mr. Brown: I think most observers believe that distributed generation of the kind you have described will have an important role going forward.

Two factors drive that. One is the cost, the economics, of the unit that you are putting in place itself, be it a micro turbine in a commercial location, or a co-gen scheme which actually produces steam and electricity, in an industrial site.

The other factor is the cost of the raw material in most cases. Gas is a big issue. What is also an issue is the physical cost of distribution of mainline power, and I am referring to big Lambton-Nanticoke-type systems. As the load on the systems get bigger and bigger and more complex, the costs of getting it to the consumer will increase.

Although these small units might be less economic on a unit basis than a very large unit because they are installed right next to the consumer, if the cost of getting power to the consumer through some other route becomes excessive, they will become more attractive.

The technology is getting cheaper all the time, and that brings this technology closer to market. Distribution, generally, as demand rises, has not been falling sharply in real terms. What has been going the wrong way of late is that the primary source of energy has been gas, and at the moment gas prices are not moving in the right direction.

Nonetheless, overall, over a period of time, most of the factors point to the economics getting more attractive in the medium term.

Senator Spivak: If I had time I would ask you about efficiency and about how a fuel cell would work relative to gas, or whatever.

That being so, what I am really interested in is your response to the question that you did not answer, Mr. Osborne, which was on the reduced rates to your industrial customers in the past. I would like to know - and you may not be able to answer this today - what the cost of that was to Ontario Hydro during the time that practice was employed, because it may very well add up to the same kind of money that you are now going to spend on Lambton and Nanticoke.

Mr. Osborne: One would have to be more of an economist to figure out, with the benefit of hindsight, what these industrial rate structures, quotes, cost the province in theoretical terms. I would simply make the argument that, given that over the past 15 years at least, Ontario had significant excess capacity driven by a central-planning model as opposed to a market-driven model, the old Ontario Hydro had a vision of grandeur that was realized, and we ended up with significant excess capacity within this province. One could argue, on the margin, that there was very little subsidy in a true economic sense because the plant would have sat idle otherwise. There were, of course, incremental costs to run that excess capacity, and industrial customers paid those rates.

Now that that capacity is being consumed and demand is starting to catch up, we need a proper economic competitive model going forward. All customers will pay the fair value of electricity as driven by market conditions.

Senator Spivak: I was looking for the rationale. Of course if you subsidize, if you reduce rates to huge customers, you are obviously not interested in conservation.

Mr. Osborne: I am not sure that necessarily follows, but obviously what you are interested in is economic development for the province and ensuring that jobs are maintained within the province as well as manufacturing capacity.

The Chairman: Perhaps I can add one comment in closing. Your accountants would be familiar with tax administration. We heard in evidence that the easiest way to get clean energy to the consumer would be to give the consumer a tax rebate. In other words, issue a T-7 to the consumer indicating that he or she purchased so many units of wind or solar energy. We were told that that would be the best way to subsidize, if we are going to subsidize at all.

Mr. Osborne: That is a public policy issue, senator, as opposed to, if you like, a market-driven issue.

The Chairman: That is good enough.

Mr. Osborne: Similar techniques have been used in other areas. I am sure you remember the CHIP program for home insulation. Frankly, I do not know whether it was deemed to have worked or not, since I have never studied it. Clearly, there are ways, as Graham has indicated, of encouraging people to consume green power.

The Chairman: Thank you very much for your very interesting presentation.

Senator Banks: Before closing, for the record, I would thank you for sending me a copy of the letter with respect to the safety measures. It was very good of you to do so. It is quite explanatory and helpful.

The committee adjourned.

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