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

Issue 6 - Evidence, April 27, 2001 (morning)

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TORONTO, Friday, April 27, 2001

The Standing Senate Committee on Energy, the Environment and Natural Resources met this day at 9:02 a.m. 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: This morning, honourable senators, our focus will be on the energy study. Before hearing from our witnesses, I would point out that the study is aimed at letting the committee develop a better sense of the views and concerns that Canadians have about the rapid and significant changes that are occurring in the Canadian energy sector. Once it has gathered the necessary evidence to do so, the committee will prepare a report to the Senate with some recommendations.

During the course of the week, the committee has heard from witnesses in Vancouver, Calgary, Edmonton and Toronto. We will be going to Montreal for hearings next week.

Honourable senators, we have before us this morning representatives of the Canadian Vehicle Manufacturers' Association.

Welcome, gentlemen. Could you just inform the committee, please, what companies you are with, giving us an idea of the broadness of your expertise, and then in a word or two say what you do.

Mr. Larry A. Robertson, Manager, Vehicle, Environmental and Energy Programs, DaimlerChrysler Canada Inc.: My name is Larry Robertson. I am with DaimlerChrysler in Canada. I am Manager for Vehicle, Environmental and Energy Programs.

Mr. Mark A. Nantais, President, Canadian Vehicle Manufacturers' Association: Mr. Chairman, I am Mark Nantais. I am the President of the Canadian Vehicle Manufacturers' Association. I oversee all the activities of the Association on behalf of our members.

Mr. C.B. (Blake) Smith, Director, Environment, Energy & Vehicle Safety, Ford of Canada: I am Blake Smith and I am the Director of Environment, Energy & Vehicle Safety for Ford of Canada.

Mr. Michael G. Ford, General Motors of Canada, Manager of Facilities Engineering and Utilities: I am Mike Ford with General Motors of Canada. I am the Manager of Facilities Engineering and Utilities.

The Chairman: Go ahead with your presentation, gentlemen.

Mr. Nantais: I will say good morning and express our appreciation for the opportunity to present to you today and discuss what I think is a very exciting time in the automobile industry.

In talking about advancements in vehicle technology, we of course are energy users in the context of our products and we are making great advances in technology. As you will see later in our presentation, we cannot talk about the vehicle and technology alone; we must also talk about the fuels that go into that vehicle.

We are entering into a new era of research and development of highly advanced technologies. I think it is easily said that many of these technologies show great promise for further reducing emissions, reducing smog-related emissions, and also improving fuel economy. Even from conventional spark ignition gasoline engines, you will see that great advances have been and will continue to be made.

We have enjoyed a great deal of success. We want to talk to you briefly about that today, in order to set the proper context, and show you the context in which we want to move forward.

With your permission, Mr. Chairman, being mindful of the shortage of time in your schedule, we thought a fruitful way of advancing and guiding the discussion would be to refer to a deck of slides.

I would ask you to turn to a slide which I call the puzzle slide. It is entitled Fuel Consumption Improvements: Technology Cannot Do It Alone. In the Canadian context, reducing our consumption on carbon-based fuels, and therefore CO2 emissions and, I might add, other greenhouse gas emissions in the transportation sector generally, will not be an easy task. Transportation, as you know, involves more than just cars and trucks on our roads.

Auto makers acknowledge their role in this, but technology simply cannot do it alone. What we require is a balanced systems approach with various strategies that address numerous things, such as consumer behaviour; vehicle fuel efficiency, which is the technology we are here to talk about; new vehicle technology in other areas such as safety and emissions; vehicle kilometres travelled, meaning the distance people drive each and every day; and transportation infrastructure as well as traffic management techniques.

We also have to talk about alternative modes - in other words, public transit. We have to talk about fuel costs. The cost of fuel figures prominently in people's decisions to purchase new vehicles and in how they use their vehicles.

Really quite important also is the need for appropriate fuel formulations - the quality of the fuel that is required as well as the supply, broadly, across Canada.

Obviously, there is a need for inspection and maintenance programs to address the in-use fleet from an emissions standpoint.

The next slide is Auto Industry Leadership in Technology Innovation. Auto companies compete on innovation and environmental performance. That is a phenomenon that is becoming even more prevalent as we move forward. In fact, all auto makers have invested, and continue to invest, billions of dollars on advanced emission and fuel economy technologies, and, as I said, these have great promise.

We are not talking about a couple of billion dollars as an industry. What we are talking about here are many billions of dollars by each individual, major car company.

The Chairman: Before you go on, you mention North America and I look at the front here. Volvo seems to be the only car made outside North America. Are all the Japanese cars and German cars considered to be part of your CVMA?

Mr. Nantais: No. We represent the companies you see there. The Japanese automobile manufacturers and Europeans are represented by another association. It is called the Association of International Automobile Manufacturers.

The Chairman: And Mercedes would not be represented, or would it, under DaimlerChrysler?

Mr. Robertson: It would be under the AIAMC group at this time.

The Chairman: Please go ahead with your presentation. I just wanted to know how many you were representing.

Mr. Nantais: The industry has introduced several generations of new technology. In many instances that technology has been introduced voluntarily. In other instances, it has been introduced in response to regulation.

There have been several generations of new technology: in the area of safety, i.e., occupant protection and crash avoidance; the area of emissions, and I am talking about smog-related emissions; and the area of fuel efficiency. In order to maintain their competitive edge, auto makers must be responsive to quickly evolving consumer demand. That is why they are strong supporters of what we call the principle of technical preparedness; in other words, they must evolve and must respond quickly to that ever-changing market.

They also utilize the larger North American market to drive technology faster and more broadly at the least cost. This is the harmonized approach that we often talk about; that is, developing products to one standard, tested once, for all of North America.

I would like to turn briefly to a couple of our successes. If you would turn to the next slide entitled, The Success: Light-Duty Gasoline Vehicles in Canada. I think it is important to note that we have made tremendous progress in reducing emissions from our vehicles. We are now at a point where we are reducing low emission vehicles across Canada in the 2001 model year. These vehicles are actually capable of reducing emissions by 99 plus per cent for hydrocarbons, for instance, and 96 per cent on oxides of nitrogen. These are extremely clean vehicles when they run on the appropriate low sulphur gasoline.

We are not stopping there. The slide also depicts what we will do in the 2004 model year. Again, we will meet even more stringent standards at that point in time, and they are listed there; clearly a success over time.

Also in the success area is the whole idea of fuel consumption as it relates to our vehicles. The slide attempts to illustrate the fact that new vehicles versus older vehicles on the road consume less fuel. Significant progress has been made in reducing the on-road average fuel consumption. Reductions have been achieved over time despite the addition of safety and emissions equipment as well as customer preference options that significantly increase the weight of the vehicle, thus adding a commensurate fuel economy penalty. In other words, the more weight you add to the vehicle, the more it works against your ability to achieve fuel economy improvements.

Senator Banks: I gather from the numbers across the top of the slide, that 32 per cent of the vehicles that are available operate at this level, but that, therefore, 68 per cent do not have this efficiency.

Mr. Nantais: Essentially, Senator, that is correct. What we are saying here is that 32 per cent of the on-road fleet would be comprised of vehicles achieving better fuel economy than the rest of the fleet, which is 68 per cent.

Senator Banks: Does "on-road fleet" mean those vehicles that were manufactured in the last period there between 1993 and 1999? I am presuming that you do not include in that a 1968 muscle car that some guy is driving down the road. It would not be vehicles of that age.

Mr. Nantais: No. There is a pre-1980 category on the left side of that chart. That is where those vehicles would lie. We are talking of model years.

Senator Banks: Right. In figuring the average in the last third there, you are not including, for example, 1981 vehicles which might still be on the road? Is the on-road fleet comprised of vehicles of that age? Am I right?

Mr. Nantais: This shows the distribution of the entire on-road fleet.

Senator Banks: So it does include older cars?

Mr. Nantais: Yes. They would be included in that 22 per cent category, the pre-1980 category which comprises part of that 22 per cent. The overall average factors in all of them, yes.

Senator Banks: All cars that are on the road?

Mr. Nantais: Yes.

Senator Banks: So the average, which goes from 1993 to 1999, for example, includes those cars that were manufactured from 1987 to 1993. Are the years along the bottom the years in which the fleet was measured that way or does it designate the model years of the cars that are being measured that way?

Mr. Nantais: It designates the model years of the cars being measured that way.

Senator Banks: Thank you.

Mr. Nantais: The step reduction down there is the average of the entire fleet.

The Chairman: That is very confusing. You have 32 per cent at the top. Does that mean that 32 per cent of the cars now on the road are 1993 or 2000 models, or does that mean that you select the 32 per cent, which could have been the small cars that you put out?

Really, I think the graph doesn't tell me a lot unless you can tell me what fuel a 120 horsepower motor or an 80 horsepower motor used in 1980 and what an 80 horsepower motor uses now. Then I would know how much fuel economy you are really achieving. Giving us smaller cars and newer cars and telling us that you are using less fuel may be an indication of how much pollution goes into the atmosphere, but it does not tell us how efficient your cars have become, if they have changed at all.

Mr. Robertson: Maybe I can do a quick walk-through. This slide is a representation of a snapshot of one calendar year, the 1999 calendar year. These are all the vehicles by model year on the road.

The Chairman: I see.

Mr. Robertson: So that 1981 vehicle is achieving an average. This was taken from Natural Resources Canada's National Private Use Vehicle Data Survey. These were averages by model year of each model on the road.

The Chairman: The only thing that would vary off the norm would be the size of the automobile?

Mr. Robertson: Right. So it is the average of the fleet.

The Chairman: Because there are a lot more small cars out today than there used to be in 1980?

Mr. Robertson: The numbers on the top, the 22, 46 and 32, those are the slots in time for the three significant emissions standards that we have had in Canada.

The Chairman: Okay.

Mr. Nantais: The standoff point there I think is the simple point that we have made significant progress and our data would show that.

Let us turn then just to the whole issue of why we are here, which is advanced vehicle technology. We are at a point in time where we have a number of alternative fuel offerings that are already available to the public. We have vehicles that utilize propane and compressed natural gas; we have flex fuel vehicles that run on ethanol, for instance, and methanol; we also have a smattering of electric vehicle offerings as well.

We have in our industry an ongoing effort to further advance technology in the areas of direct injection gasoline engines, for instance, that are cleaner and more fuel efficient. We will have hybrid vehicles. We will have fuel cell vehicles, albeit the fuel cell technology is somewhat more exotic.

In addition, we have a suite of other supporting technologies and we continually look at reducing the weight of our vehicles through what we call light weighting of the vehicles by using light weight materials.

We have centres of excellence in Canada that are actually looking at those things. We look at other electronic controls, computer controls of the vehicle and we continue to look for opportunities in the whole area of vehicle aerodynamics.

The next slide is called a Comparison of Well-to-Wheel Studies. These studies look at the life cycle of various technology configurations, "life cycle" meaning the fuel and the technology right from the wellhead to the vehicle itself and its operation. This slide provides a comparison to the base vehicle, which is a conventional gasoline vehicle. These studies were conducted by various agencies, such as the Argonne National Laboratory, which does research for the U.S. Department of Energy, the Massachusetts Institute of Technology, and Canada's Pembina Institute, just to give you some examples.

The point of the slide is that it shows that we have competing technologies that are capable of reducing CO2 emissions percentage-wise compared to a conventional gasoline engine. For instance, if you consider a diesel hybrid or a diesel vehicle, you will find that it is really quite efficient, really quite good in terms of reducing CO2 emissions. There is also, apart from the diesel hybrid, a gasoline hybrid, and there is a methanol fuel cell electric vehicle for comparison purposes as well.

Generally speaking, various technology configurations will be capable of making certain percentage reductions of CO2, and the point is that we are pursuing essentially all of these categories of technology.

The Chairman: What do the letters UBA, FW, DTI and DoE stand for?

Mr. Nantais: These are the independent agencies.

The Chairman: Would UBA be connected to the University of British Columbia?

Mr. Nantais: That is something which we would have to look up for you, Senator.

The Chairman: FW. Do you know what that stands for?

Mr. Nantais: For the first three, we would have to get you the information. DoE/Argonne is the U.S. Department of Energy and Argonne National Laboratory; PNGV is the Partnership of New Generation Vehicles, which involves the big three auto makers in the United States. MIT is, of course, the Massachusetts Institute of Technology.

Methanex we know by virtue of its being a producer of methanol, and the Pembina Institute, which is in Calgary, is, I believe, well known to you. If you wish more information on any of those, particularly the first three organizations, we can get that for you.

The Chairman: Maybe you could send us a note on the organizations, but not all of them; we know Methanex and Pembina and MIT, but what is PNGV?

Mr. Nantais: Certainly, senator, we will send you a note. PNGV is the Partnership of New Generation Vehicles.

The Chairman: Everything to the left, up to that inclusively, you could send us a bit of a note on.

Mr. Nantais: We would be glad to do that.

Mr. Smith: Mr. Chairman, the point here is that there is significant improvement opportunity with a variety of technologies, and one thing that comes out here is that even conventional gasoline powered engines may well be a technology that wins the day. It is on the left side. It is still very much in the game.

Mr. Nantais: Turning then to the next slide, Vehicle Fuel Efficiency, New Vehicles. I think it is also important to talk about the rate of fleet turnover and where, quite frankly, the best and most immediate opportunities lie for reducing fuel consumption and therefore CO2 emissions.

Essentially we have a situation in which new vehicles replace older on-road vehicles at a rate of about 8 per cent per year. That 8 per cent is divided into 1 per cent, 2 per cent and 5 per cent. The 1 per cent is new vehicles with major changes. These would be significant engineering design changes - drive train changes, for instance. The 2 per cent would be new vehicles, with minor changes. These would be in the area of slight tweaks, if you will, to the vehicle in order to improve its performance, addressing other sort of in-field issues. The 5 per cent of that 8 per cent really represents those vehicles that are simply carryover vehicles, year over year, as part of the vehicles' product life.

The remaining 92 per cent represents the best opportunity for those immediate reductions of CO2, and we see consumer behaviour actually responding more quickly to that than to some of these other design changes that I have referenced. So what we have to do is turn our attention to what provides those most immediate benefits or opportunities, and that is addressing the on-road fleet through consumer behaviour - things like inspection maintenance programs, which is where we will get the biggest bang for our buck, and where we will get the biggest environmental impact.

Senator Kenny: Will you get a bigger bang for your buck doing that than by getting some of those vehicles off the road?

Mr. Nantais: Getting the older vehicles off the road is part of the big bang for the buck. We need to get the fleet turned over and one way to do that of course is to find a way to review those older, higher polluting, higher fuel consuming vehicles and remove them from the fleet.

Senator Kenny: Well, in some jurisdictions they buy them.

Mr. Nantais: That is correct. There are various programs out there, scrappage programs, if you will, that are designed to address the percentage of the fleet comprised of older, higher polluting vehicles.

Senator Banks: You are not talking about retrofit, are you? Are you saying, for instance, that a guy driving a 1988 muscle car might be convinced to put cleaner gasoline in his car than would otherwise be the case? Is that the kind of thing we are talking about?

Mr. Nantais: We are not talking about retrofit at all. You do raise an interesting point, however, that there are cleaner gasolines available. There is a big environmental impact with a cleaner gasoline such as a low sulphur gasoline, and we are introducing AutoMakers Choice gasoline, where auto-makers are actually endorsing the formulation and actually promoting those refineries who are willing to put it in the marketplace.

The fact is that every vehicle on the road would benefit from a cleaner gasoline. That is where you get the big environmental benefits. So you raise a very good point.

Senator Banks: Otherwise, in 100 years we might fix everything. If you had a "magic bullet" car right now, it would take 100 years for it to replace these others.

Mr. Nantais: We will talk about that, Senator. In fact, it is the very next slide.

I mentioned briefly the Partnership of New Generation Vehicles. Let me give you a little background on that. Commencing in 1996, the big three auto makers, DaimlerChrysler, Ford and General Motors, became part of a program involving the U.S. government and various research laboratories in the United States, with the objective of actually developing a vehicle, an affordable vehicle based on an average current day sedan, that was capable of improving fuel economy threefold, kind of in the area of 80 miles per gallon. That project has actually yielded some good results; many of those ideas and much of the research conducted in that program will find their way into hybrid vehicles and fuel cell vehicles and even conventional gasoline vehicles, as we move forward. You are quite right, however, that the rate of fleet turnover plays a very big role.

Of course, when you look at various studies, you find that the introduction of any new technology takes time. Take, for instance, the VCR. Studies show that after the VCR was introduced, it took about 30 years for it to achieve its current level of market penetration. The same holds true for new vehicles.

This next slide entitled Partnership of New Generation Vehicles, Timing Estimates, basically shows you that a PNGV-type vehicle, prototype vehicle introduced in 2004, is not likely to reach high volume sales until around 2009. Once we achieve those high volume sales, we are looking at a market absorption period of about 15 to 20 years, so that by 2030 we will have a complete replacement of the current fleet with these much more fuel efficient PNGV-type vehicles.

So, yes, Senator, we are looking at a period of time of about 25 to 30 years.

Senator Kenny: Mr. Nantais, could you help the committee? The figure of the 8 per cent turnover is a difficult one for me to understand. How does that change, with the economy improving or getting worse? When the economy gets stronger, one presumes more cars come on the road. Do more cars also go off the road? As we see changes in the economy, what happens to this average number you have here?

Mr. Nantais: Generally speaking, when our industry enters into a period of contraction - and quite frankly we are entering such a period right now - car companies will try to respond with vehicle incentives. They want to maintain the sales that they have. As a result, we find that we are building better vehicles.

We do have an affordability crisis in our country right now in terms of new vehicles. That affordability crisis does tend to delay the consumer from purchasing a new vehicle. However, one thing is certain: a consumer's decision to purchase a new vehicle is, in fact, a decision that can be deferred. If the consumer cannot afford the vehicle or, for instance, lacks the confidence in the economy to purchase any large item, then it is conceivable, perhaps inevitable, that the sales will slide. Generally speaking, though, about 8 per cent a year is kind of the average that we see.

Senator Kenny: Do we see households going from one and a half to two vehicles? Do we see people keeping their vehicles longer? Do we ever get to a point where there is an actual decrease in the number of vehicles?

Mr. Smith: Two things are involved here. Because vehicles are lasting longer, the average age of the vehicle on the road is getting higher and higher. Through the 1990s, the fleet average age in Canada has been about eight years old. People are just keeping their vehicles longer. The number of vehicles that are scrapped in a year doesn't change much with the economy. The number of new vehicles sold swings above the average a little bit. But the number of vehicles scrapped, as I say, is fairly steady.

Senator Kenny: What about the ages of new purchasers? Have there been changes there over time? Are people buying cars at a younger age or at an older age?

Mr. Smith: I believe the demographics of purchasers show that purchasers of new vehicles are getting older. Whether that is just general demographics or whether that is affordability, I am not aware, but the affordability of vehicles in Canada has deteriorated quite significantly.

Senator Kenny: Anecdotally, my impression is that kids do not get wheels in a hurry.

Mr. Smith: They cannot afford them.

The Chairman: You have to look at their insurance bill.

Senator Kenny: I do not know whether it is because they have access to mass transit more or whether they are car-pooling.

Mr. Smith: The disposable income in Canada has fallen. So they cannot afford them.

Senator Kenny: Are there other psychological factors, or do you know?

Mr. Smith: Our studies show that people certainly want vehicles; they just cannot afford them.

The Chairman: Let's move on a bit then. I notice you have quite a pile to go through here yet.

Mr. Nantais: Well, sir, do not be alarmed by the number of slides. Many of them are background slides.

The Chairman: We like to ask questions as you go through a graph because at the end it helps us to understand what we were following, but perhaps we could hold the questions for the moment and just try to go on.

Mr. Nantais: Perhaps I could carry forward the discussion on retired fleet turnover and some of the challenges we face in trying to introduce more advanced technologies.

As an industry we have to face several conflicting objectives. The emissions standards themselves pose a difficulty. We are in some jurisdictions now looking at emissions standards that would prevent, for instance, the introduction of very efficient diesel-type technology that we planned to use for hybrid configurations. That is just one example.

Vehicle safety is another. Every time we add new vehicle safety equipment, it tends, as I mentioned earlier, to add weight to the vehicle, and that works against you in trying to achieve fuel economy improvements.

We are also having to face the whole issue of greenhouse gas reductions. We are moving forward with that and are confident that we will meet that challenge.

There is also, as I mentioned, the whole issue of affordability and cost effectiveness to consumers. Advanced technology vehicles must meet consumers' needs at prices comparable to the prices of today's vehicles. Moreover, when you consider the demographics, it is obvious that the size of families dictates their needs in terms of utility, carrying capacity and interior space. Also, in many cases, affluent consumers need the ability to tow boats or trailers, and are very big on performance. So that towing capability and performance factor have to be present along with these other improvements.

Another area is the whole issue of appropriate fuel formulations. They must be available not just for the new vehicles, but for the entire existing fleet, because the operation of all vehicles will be cleaner if they use the appropriate fuels.

That of course involves addressing the fuel infrastructure. If, for instance, we get into an E85 fuel, an ethanol fuel which would be a dedicated type of fuel, there are certain infrastructure issues that need to be dealt with.

I mentioned also that we develop vehicles for the entire North American market, where we test them once, but what we are able to do is provide that technology, use the market to get the appropriate leverage and lower the costs so that we can get maximum environmental benefit and safety benefit at least cost to Canadians.

You have heard me mention electric vehicles and fuel cell vehicles. Any consideration of such vehicles brings into question, of course, the whole issue of Canadian climatic conditions. Cold weather is not really conducive to the operation of electric vehicles and fuel cell vehicles. Nevertheless, there have been several recent announcements by vehicle manufacturers on advanced technology vehicles.

General Motors, for instance, has a program called ParadiGM: GM's Hybrid Powertrain. This is a series of powertrain technologies. It is what we call a portfolio approach, looking at high volume applications on a global platform. They are looking primarily at delivering much lower fuel consumption while delivering what people require in terms of utility, and they expect to achieve high volume, perhaps 100,000 units by the end of this decade.

Blake can probably talk to this much more eloquently than I, but the Ford Escape is a small SUV that will be available in a hybrid configuration on a limited basis in 2003; beyond that, a Ford fuel cell-type vehicle will be available in 2004.

DaimlerChrysler, on the other hand, is already committed to delivering fuel cell powered buses beginning in 2002 and fuel cell powered passenger cars in 2004.

In addition to that, obviously when we talk about fuels, we need partnerships. There have been a number of discussions and partnerships are now established with various oil companies in the United States that will pursue alternatives, including practical solutions to utilizing existing fuel infrastructure and putting new technology vehicles into the market faster.

Further on the issue of clean fuels, turning to the next slide, Canadians' Need for Clean Fuels, the technology that we are talking about is, quite frankly in terms of its optimum performance, entirely dependent on the appropriate fuels. In fact, many of the fuel qualities and fuel characteristics affect emissions, whether it be sulphur or metal additives or lack of combustion chamber deposit controls. All of these factors will have some impact on our ability to meet emissions standards and ensure that Canadians are getting the benefit of the technology they are paying for. Again, the entire fleet will benefit.

What we need then for Canada is a national clean fuel strategy; what we are suggesting is that that strategy be based on the Worldwide Fuel Charter in terms of achieving our clean air agenda. Perhaps the Worldwide Fuel Charter is a document you are not aware of. The Charter represents the recommendations of virtually all vehicle manufacturers around the world in terms of what is required for optimum performance and emissions performance of the various categories of emission control technology. That is something that we and the Canadian government should be looking at as the benchmark for establishing our national fuel strategy.

The next slide is Future Potential Vehicle-Related Energy Requirements, and we thought it would be best to give you some indication of what the potential is for moving forward.

Clean gasoline and clean diesel are two fuels that will probably be the most prominent for the foreseeable future. When I say clean fuels, we are talking about fuels that have virtually zero sulphur levels. Sulphur seems to be the ultimate poison, if you will, the ultimate contaminant in terms of reducing the efficiency of our catalyst in some of the technology that is absolutely key to achieving environmental performance in the vehicle. On the other hand, natural gas vehicles are available, but the potential is limited, because we are still faced with infrastructure requirements; in other words, we do not have many stations out there that can deliver that fuel.

Senator Kenny: Propane is not on your list, and yet it has an infrastructure that is about five times the size of that of natural gas, maybe even ten times.

Mr. Nantais: You are right, Senator. Propane is a very good fuel. We perhaps should have put that on here, but we still see it having a low to medium application; we do not see the uptake in the market.

Senator Kenny: Because of price?

Mr. Nantais: Price primarily. As to infrastructure, you are right; it is much better established than natural gas.

Senator Kenny: It is better established than diesel. There are more propane stations in Canada, over 5,000 in Canada, which is better than diesel.

Mr. Nantais: True. I think when we talk about diesel, we are talking about future technologies as well as sort of existing diesel engine technologies.

Senator Kenny: It is not on the list and you are telling me it is not on the list because of price.

The Chairman: One thing you should know about propane is that it is a by-product. Being in the oil and gas business myself, I am aware that there is only so much propane per cubic foot of gas that you can get out of a well. Consequently, there is a limit on the market. You do not make propane and get greater by-products; propane itself is a by-product, so it is hard to penetrate the whole North American market with it. It is good in Canada because we are great gas producers.

Senator Kenny: We have 5,000 stations in Canada; it costs $25,000 to put in as opposed to a quarter of a million for natural gas.

Mr. Smith: One of the challenges that we are facing now as an auto industry with propane is that emissions standards have gotten so stringent that propane's quality is becoming an issue. Propane is a by-product and the quality of propane now is a relatively significant issue.

Senator Kenny: Is the fact that we virtually have a monopoly situation in Canada impacting?

Mr. Smith: Historically, propane has been used primarily for barbecues, furnaces and so on, where there is not so much fuss made about fuel quality. As a country, we have not made propane a priority as an automotive fuel. We have not spent time on ensuring it is of the quality required for that application. This is also an issue in the U.S.

Senator Kenny: Lots of fleets run on propane. Since IGC and Superior have become one, has there been a change, or has there always been a problem?

Mr. Smith: I certainly cannot speak to that. Emissions standards have gotten significantly more stringent in the past few years and will get much more stringent over the next five or so. Now there is a new emphasis on propane quality. In all fuels, with the kind of emissions standards we have, quality is critical.

The Chairman: Perhaps we can leave that discussion on fuel until later. He has made a very good point with respect to propane.

Mr. Nantais: We would be glad to discuss it further.

In concluding my discussion on this slide, I will just touch on electric vehicles, electricity. Electric vehicles continue to have only a niche market application. Technology challenges with regard to batteries continue, particularly in Canada and in any cold weather climate. We also have the issue of infrastructure.

I included the category "Other" because it is quite conceivable, whether it be fuel cell application or some other source, that we will have something entirely different. We might have an entirely different molecule, if you will, at some point in the future. That is only to indicate that a lot of research is being done in fuels, and it is conceivable that it will not be a conventional-type fuel.

I turn to the last slide. To summarize, Mr. Chairman, I would emphasize that all auto makers are working very aggressively on an entire suite of advanced vehicle technologies.

Actions for fuel economy improvement must be consumer driven.

Whether it be hybrid, fuel cell or other technology development, there is an increased need for appropriate fuels in order to benefit from the fuel and technology synergies that are evident.

Appropriate fuels will indeed maximize the designed environmental benefit.

In succinct terms, the appropriate fuels and the associated infrastructure are, in fact, technology enablers for the future. If we do not address these issues immediately, Canadians and any other market that does not address those issues may well find themselves being deprived of some of this technology.

Mr. Chairman, I will conclude on that point. Thank you.

Senator Kenny: If we are really striving for environmental effectiveness, the first step is to get cars off the road, is it not?

Mr. Nantais: I am not sure whether you are looking for confirmation or posing a question.

Senator Kenny: It is a question.

Mr. Nantais: People are very reluctant to give up their cars. We see no decline in the interest of purchasing cars for personal transportation needs. In fact, this is why auto companies are investing many billions of dollars. That is the price of staying in the game of personal transportation.

What we do need to do is remove those older, less fuel efficient, higher polluting vehicles faster. The faster we do that, the faster the benefits of the advanced technologies will be realized.

Senator Kenny: I understand your point about getting old vehicles off the road. I do not really expect you folks, given who you work for, to come here and make a pitch to this committee or to anyone, that you want to see fewer cars sold. However, that does not alter the fact that, if you can have a smaller fleet or you do not buy the car in the first place, you will not have the pollution. In assessing the federal fleet it was found that we had a lot of vehicles that we did not need. It got smaller over a period of time. We gained real environmental improvements just by not having the car in the first place.

Mr. Nantais: When you look at the total Canadian greenhouse gas emissions, only about 12 per cent of the total pie is related to cars and trucks on our roads.

Senator Kenny: That is a fair point.

Mr. Nantais: That is not to say that it is not significant. It is, and that is why we are addressing it.

Senator Kenny: I give you full credit for much cleaner vehicles and for the fact that I suspect you are a smaller part of the pie.

Mr. Nantais: If we were, for instance, to look forward to the transition out of vehicles, then one would have to consider the economic impact in Canada. In Canada, at present, one in seven jobs is related to the automobile industry. Approximately 12 per cent of Canada's manufacturing GDP is related to the auto industry. It provides 540,000 direct and indirect jobs.

Senator Kenny: But that money will be spent some place else. Let us not go down that road.

Mr. Nantais: Needless to say, it is a major employer.

Senator Kenny: If we add up the numbers every industry association gives us on employment, we end up with about three times the population of the country.

Mr. Nantais: I believe these figures are accurate.

The Chairman: Let's keep our focus.

Senator Kenny: I have a question on the infrastructure related to natural gas and electricity. There are a limited number of natural gas refuelling stations. Have we seen progress in terms of folks that have natural gas at home, having access to equipment that can refuel vehicles overnight?

Mr. Smith: Personal home compression devices are available. However, that fact does not translate, unfortunately, into a storm of people knocking on our door to buy the vehicles.

Senator Kenny: In the long-term, do you believe that, if that market is going to grow, it is going to do so because people find it attractive to be able to refuel in their garage rather than having to go to a station?

Mr. Smith: It is certainly our view that the biggest opportunities remain with fleets. As you are aware, government fleets are the largest in Canada and represent the best opportunity to show some leadership.

Senator Kenny: Would that not also be the case with respect to electric vehicles?

Mr. Smith: For all the effort that has gone into them, we been unable to overcome the range of challenges respecting electric vehicles.

Ford is actually marketing electric vehicles in Canada now. We have learned, however, that they do not like the cold. You may have a published range of, say, 80 miles, but on a minus 20 degree day on the highway, that drops. Even if the vehicles are stored in the warmth, as soon as they are taken outside the range slips drastically.

The Chairman: Do you know what it costs to install a home compressor that would refuel your car at the end of the day?

Mr. Smith: I think a home compressor is about $2,000. I would have to double check that.

The Chairman: The government might give us $1,500 towards that?

Mr. Smith: You have to keep in mind that there is a significant premium on the vehicle because of the special storage tanks and so on. Natural gas on a vehicle has to be stored at very high pressures. Significant engineering modification to the vehicle are also required. We do not use the same engine in a dedicated vehicle that we would use in a conventional gasoline vehicle.

Mr. Robertson: When it comes to fleets, commercial and government alike, the industry focuses on and dedicates resources to those niche vehicles. With regard to the public fleet, the preferences in vehicles are very different from those of the fleet market. It is a matter of finding the resources to build up natural gas vehicles for the public. That is a horrendous task for the industry, and that is why we concentrate on fleets.

Senator Eyton: What you are talking about here is quite a complex mix of alternatives and possibilities. You start off with knowing for certain that the manufacturers of motor vehicles are themselves competing and taking different initiatives. Then you superimpose on that the fuel providers, whatever it may be, largely oil and gas now but changing, and then you superimpose on that consumers and their needs, and those are very difficult to corral. I recognize some of the marketing difficulties, some of the alternatives. Finally, you have to superimpose the geography.

We talk bravely about Canadian standards, but all of that is contained in the mix that I have tried to describe. We all know that, in particular on the manufacturing side, that it is truly a global business. The wheels come from somewhere; the engines come from somewhere; and the electronics come from somewhere.

It is my sense that the manufacturers here in Canada, on occasion, have had adversarial relationships with the fuel providers. The oil and gas companies are reluctant to make some investments that the manufacturers think are appropriate to improve the efficiency of cars. There is a strong resistance. Where does all that mix fit within the alternatives that you put forward? Is there some reasonable cooperation at some levels between the oil and gas companies and the manufacturers? I know it has been a problem in the past. While you are driving for alternatives, it seems to me people should be at least doing their best to work together, to cooperate, and then produce some product out of this mix that represents the ultimate or best answer that you can bring about.

Mr. Smith: There is a level of cooperation with the oil industry. I think there will always be debate about what is required to be done. Because we are, at this stage, dealing with global challenges, we will require global solutions. What you are seeing now is cooperation, for example, in the California fuel cell partnership between global oil companies and global automotive manufacturers. This is no longer a Canadian issue.

The issues surround fuel cell technology are a global problem, although we do have unique Canadian issues, largely because of our geography and our weather. It is a little different to try to run a water-based fuel cell in California than it is in Edmonton in the middle of the winter. There are just different technological challenges. There is a degree of cooperation on that future technology that I view with some optimism.

Senator Eyton: I have the sense that the manufacturers are working away almost entirely on their own, but you tell me that is wrong, that there is good cooperation here in Canada with the oil and gas companies.

Mr. Smith: I would not go that far. That is why I was very careful to say that with regard to the challenges of future very advanced technologies, there is a fairly high degree of cooperation on an international basis. Under current circumstances, there is still some resistance.

The Chairman: There is also the additional problem that our refineries in Canada are mostly "old junk" compared to the new ones around the world, especially in the refinery of high formulated gasoline. We only have one or two of those.

The high formulated gasoline refinery at Come By Chance was sold under the warranty that they would not try to sell their gasoline into Canada. It has to go to the east. We are protecting a very small group of refiners that are taking a long time to get their high formulated gasoline out.

Mr. Nantais: With the most recent court decision as it relates to the Come By Chance Refinery and the North Atlantic Refinery, we welcome the fact that that agreement has been loosened, if you will; and that they now have been given some limited authority to sell into the Canadian mainland. They are selling very clean gasoline, and we welcome that. We welcome them as a member of our AutoMakers Choice program.

If I can just further continue with Senator Eyton's questioning. There have been some positive developments in Canada such as the fact that Environment Canada has now responded to a problem. The problem that existed was that they were regulating the vehicle without regulating the fuel. We had a situation where the technology was in the market but the fuel was not in the market. We could not benefit from the synergies that were derived from that relationship.

Environment Canada, like the State of California and other jurisdictions around the world, has recognized that opportunity where you will get much more from the synergies derived between the technology and the fuel, and they are going to treat them as one.

The most recent low sulphur regulation for gasoline, for instance, is the first step into that area where they recognize that the fuel must support the technology. I think that, when we move forward with low-sulphur diesel gasoline, which is the next round of regulatory action on fuels, that we will have an opportunity to get the timing right so that the technology and the fuels will be in the marketplace at the same time.

I consider that to be another positive development. We just hope that the oil industry will respond as well.

Senator Eyton: I am pleased to hear that response. However are these Canadian efforts that seem to be positive, fitting within the global context? You referred to the Worldwide Fuel Charter which I assume is some kind of uniform standard that countries can adhere to or conform with. Are the Canadian efforts headed in that direction, because it seems to me, in the global industry we are talking about, that unless we come together in standards and innovation, you will get nowhere.

Mr. Nantais: We have not come together yet. From what I can determine, the Canadian Petroleum Institute or the industry seem to resist the whole idea of the Worldwide Fuel Charter. All oil industries around the world were given the opportunity to comment. The charter is a series of recommendations for appropriate fuel quality as it relates to various categories of emission controls.

We were asked by the oil industry what we needed for optimum performance. The Worldwide Fuel Charter represents exactly that. It tells them what we require as we move forward.

We have not seen it yet, but we are hopeful that Environment Canada will look to the Worldwide Fuel Charter as kind of the benchmark, a target to pursue. We hope that the discussions they have with our industry and with other stakeholders will, indeed, be the basis for moving forward.

Low-sulphur diesel has already been announced in the United States. That level of sulphur, 15 parts per million, is that which we are pursuing in Canada as well. We are at least adopting now, or seemingly adopting, a North American approach. You are quite right, we will have to look towards the global scene to a greater extent.

Senator Eyton: How are you going to persuade consumers that this is the right direction, so that they are prepared to drive used hybrid cars and higher efficiency cars, often with less power, less muscle? I do not sense that you have had a great deal of success in Canada in doing that.

I know in California, where they have tended to be a little further ahead in terms of requirements for their vehicles on the road, that these cars have not met with a great deal of success with consumers. How do we persuade consumers that, in fact, they need a different kind of car?

Mr. Smith: At this stage, the U.S. federal emissions standards are the most sophisticated in the world, so they will require the most sophisticated fuel in North America because we operate as a single market. The leadership that California once had has sort of passed.

Senator Banks: Passed to where?

Mr. Smith: The U.S. federal requirements are now the most sophisticated.

Senator Banks: Have they overtaken California?

Mr. Smith: Yes, so much so that California has had to make some changes to keep up.

If I were to try to put the customer "wants" into a single phrase, it would be "no compromise." They want more power. They want more luxury, but no higher costs, and they do not care a whole lot about the technology. They want it to be invisible, seamless. Unless we can deliver that, they will not buy it.

Senator Banks: You are adopting a kind of evangelical role - in order to achieve what you need to do, you would have to somehow convince people that driving an upholstered roller skate is better than driving an SUV with, say, a 300-inch wheel base.

Mr. Ford: On a personal level, I am convinced that people's choices will change over time, particularly if you consider other issues where education and awareness have changed people's habits. For example, people's attitudes have changed towards exercise. I think environmental issues are the same. However, it is not going to be easy.

Senator Banks: From all that you have said and from Senator Eyton's line of questioning, what is in the way of nailing down the biggest improvements or the stance that is an impediment to getting where you want to go - where the side of the angels wants to go anyway - is the convergence of technology. You talked about how long it took VHS to penetrate the market. It took that long because there were competing technologies. If VHS had been the first VCR that came into the market, VHS would have penetrated a larger part of the market much sooner than it did. However, there were competing technologies between Beta, which was technologically a superior system on the one hand, and VHS which made a technologically inferior system on the other hand but was available faster and cheaper. While those two were there, they created an impediment to market penetration which, of course, means an impediment to cost reduction.

The Chairman: How do you tie this to cars?

Senator Banks: Is there some overall umbrella organization - it may be yours - that is working towards getting all of the players involved to agree at some point down the line on a convergence of the technologies, that is: What is it going to be? In order to solve the emission problems and the efficiency problems and the safety problems, and I understand how complicated those things are, but somewhere down the line it is all going to have to come together. Instead of being in 25 different boats, everybody is going to have to get into six different boats. Is there somebody working towards realizing those synergies that Mr. Nantais talked about?

Mr. Smith: I will try to answer this in several different ways, but the short answer is no.

Senator Banks: There is the problem.

Mr. Smith: Remember that this is not an independent discussion about picking a technology and sticking with it. It is very dependent on what fuel or fuels become the "winners." We live in a world where ultimately fossil fuels will leave us. The big discussion is when. It is a finite resource. Then we are going to have to move to something renewable.

There are renewable options today. Ethanol from biomass, for example, is very positive from a greenhouse reduction perspective. All of us manufacture vehicles that are capable of running on ethanol. However, there is no ethanol E85 infrastructure in Canada. None. Currently, there does not seem to be a high level of public policy interest in that particular avenue.

Even with natural gas and propane, the oil industry will tell you that they would prefer to see those used in other applications, that they represent a greenhouse gas opportunity more in stationary applications, and they would prefer to see it go that way.

Senator Banks: We are still going to have a situation where we are running off madly in all directions; is that so?

Mr. Smith: My point is that this is not a decision that the auto industry is in any position to make. In many ways, it is a global situation; or certainly at a minimum, a multinational situation, because of the cost of technology and vehicle development. We in Canada cannot make a decision independently of our trading partners and have vehicle technology that is affordable for the public. We are too small a market.

Senator Banks: We are a long way from any solution.

Senator Adams: I remember, in the 1980s, manufacturers were concerned with CO2 emissions and about introducing non-polluting cars.

The biggest change I can see between now and then relates only to the price of gasoline. Every week the price of gas goes either up or down. In 1980, over 15 years ago, we heard from witnesses who told us that some of the gas companies were refusing to sell gas because prices were down. Today, it appears, that prices only vary by about one cent a litre. Is this the result of some government policy, provincial and/or federal?

The similarity between the sale of cigarettes and gasoline is that it is very easy to increases the taxes. The people who sell gasoline can do what they want. If I want an increase in salary next week, that will just not happen.

Mr. Nantais: The whole issue of gasoline pricing is something which we stay away from as an industry. The data indicates that consumers, over time, will respond to the cost of fuel. They have a fixed transportation budget. If the price of the fuel is high on a sustained basis, then ultimately it will have some impact.

We have seen this happen in other countries around the world. Italy, for instance, which has some of the highest gasoline prices in the world, has a very small-size vehicle, highly fuel efficient fleet.

If we continue to see high prices in Canada, the question is to what degree will we see that translate into a change in vehicle sales. It ties into the other issues of vehicle affordability, disposable income and, again, this fixed transportation budget that all households seem to have. Once you go beyond that fixed budget, that is when the impact on thinking and behaviour occurs. Does that respond to your question?

Mr. Smith: Gasoline prices in North America, and Canada specifically, are still relatively low. One of the favourite comments is that a litre of gasoline costs more than a bottle of water.

Consumers operate on what they perceive to be the long-term direction of pricing. One of the things that obviously people get frustrated with is short-term volatility.

Senator Adams: A major difference between Canada and Europe, is that the temperature in Canada is much more severe. I live in the Arctic. Before I get into my car, I have to run the car 15, 20 minutes to warm up the engine. Gasoline prices may be higher in Europe, but as soon as they turn the ignition on, they can be on the highway. We have spent money before we get into our cars.

Mr. Nantais: You do touch on an interesting point. Many people turn to other jurisdictions like Europe and try to simply adapt their situation or apply it to Canada. We are a very different country in many respects. One cannot simply lift and adapt or lift and apply because we are different, and we have to be cognizant of that.

The Chairman: I would thank the representatives of the Canadian Vehicle Manufacturers' Association for coming to speak to our committee on energy-related issues.

Our next witness is Professor Donald Dewees from the University of Toronto.

This afternoon we will be continuing our hearings into the proposed Tobacco Youth Protection Act. For the remainder of the morning we will continue our study on energy-related issues. The goal of this study is to allow the committee to develop a better sense of views and concerns that Canadians have about the rapid and significant changes that are occurring in the country's energy sector. Once we have gathered the necessary evidence, the committee will prepare a report, with recommendations, and present it to the Senate.

Professor Donald N. Dewees, Department of Economics, Faculty of Law, University of Toronto: Thank you, Mr. Chairman.

I am a Professor of Economics and a Professor of Law at the University of Toronto. During 1998, I served on the Ontario Market Design Committee as one of two vice-chairs. We provided advice to the Government of Ontario regarding the rules for electricity restructuring in Ontario.

I propose to speak about the restructuring in general and its implications for both the environment and for nuclear power, which was not looked at much by that committee, but which I investigated a bit subsequently.

I will give a brief overview on electricity restructuring itself, talk about the implications of a restructured electricity market for investment in new generation and the implications of environmental regulation for the price of electricity, say something about the cost structure of nuclear power and how it may fit into a restructured electricity market, say something about future electricity prices, and then wrap up with a few implications of all of that for the role of nuclear power in Ontario at least for the near future.

The principal goal of electricity restructuring is generally said to be to improve the efficiency of electricity generation. There are two parts to that: one, to get existing generating plants operating more efficiently; and, two, to encourage better decisions about new generation investment. We have seen examples in other jurisdictions where both of these promises have come to fruition. I think those are an important source of enthusiasm for restructuring in North America today.

The Chairman: I thought the principal goal included not only efficiency, better operations, better investment and more efficiency, but also the question of pollution. Because of the huge size of electrical generation plants, I thought pollution was very much in the public decision as to whether they go ahead or not.

Mr. Dewees: In terms of the nuclear plants?

The Chairman: Well, no, in any area of the world. For instance, I just returned from China. They have very efficient coal plants there, but they are a source of pollution, and they are converting them to nuclear.

If I wanted to build a large plant to supply electricity in Ontario and I told them that I have a cheap method, that it did not involve coal but that tons of sulphur would be emitted into the air, I would not get to first base. There is more involved than plant efficiency.

Mr. Dewees: Absolutely; you are quite right. All of this is in the shadow of existing environmental regulations.

The Chairman: I see. We are supposed to understand that it is in the shadow of environmental issues, okay.

Mr. Dewees: Yes. We have had both environmental assessment regulations and regulations on emissions.

The Chairman: I did not see the environment in here.

Mr. Dewees: It is going to come. I will get to that.

Another goal of restructuring has been the establishment of a competitive wholesale market. The purpose of that is to discipline investment in new generation. If the wholesale market is competitive, then firms wanting to invest in new generation have to believe they will succeed in that competitive marketplace in order to make a new investment.

A third goal of restructuring of course is to pass on the benefits of these sorts of cost savings to consumers. If consumers are not going to see the benefits of this, there is not going to be much political support for it.

One of the crucial consequences of electricity restructuring in many places has been a change in pricing regime. Typically, under a regulated electric utility, which is what we have had throughout most of North America in the past, the price is set equal to average cost. The price covers all the costs of operation and investment.

Most competitive markets generate a spot price, a market price, which is driven, if the competition is successful, by marginal cost - that is, the cost of generating another unit of electricity at the present time.

The consequence of this change in pricing regime is that electricity prices better reflect actual costs. They can fluctuate during the day, between the weekday and weekend, and by season. So customers, consumers, can see from their electricity price what the actual cost of generation is. Economists believe that is a plus.

The downside is that prices become more volatile. That, of course, is a matter of concern that has attracted a great deal of attention in both Alberta and California in the last year or so.

If we turn to the decision about new investment in generation, what has happened in the past with a monopoly generator, whether it is Ontario Hydro or any one of the regulated U.S. utilities, is that investment is planned to meet demand. The utility does a forecast of anticipated demand in its service area and it builds or tries to build the capacity necessary to meet that demand. In return, the regulatory agency allows the generator to recover reasonable costs.

An example of this was the construction of the Darlington Nuclear Power Station in Ontario in the late 1980s and early 1990s. That plant, as it turned out, by the time it was finished, was vastly over original projected cost. However, Ontario Hydro was allowed to recover that cost in its rates, or most of it. Hence, rates went up by 28 per cent over a three- or four-year period in the early 1990s because this new plant had rolled on stream.

Had there been a competitive market in 1990 and afterwards when that plant came on stream, the excess capacity would have resulted in decreased prices, not increased. Investors would have taken a bath rather than the electricity users paying for the high cost of that.

Senator Banks: Are you saying that they would have gone down because of a regulatory agency that determines the amount of profit that is allowable? Is that why prices would have gone down?

Mr. Dewees: No. Under a competitive market, the price is whatever the forces of competition need it to be. The wholesale price is not regulated in a competitive market. The price would have gone down because of an increase in supply and unchanged demand. Since price is set by supply and demand, a big increase in supply, which Darlington represented, without the anticipated demand increase that was the motive for it but had not shown up, would have led to a decrease in price, just through market forces.

That is the major difference between the regulated mode, where the regulator allowed them to roll in those costs, and the unregulated competitive market, where supply and demand will set the price.

People worry about investment in restructured markets, but, in general, those markets have stimulated sufficient investment. While there is clearly a crunch going on in Alberta now, there is also quite a bit of capacity under construction. There is capacity under construction in California.

The dearth of construction in California was during the regulated period, from 1990 to 1999. The fact that they do not have sufficient capacity now has almost nothing to do with restructuring and a lot to do with very strict environmental regulations and quite a bit of "NIMBY," the not-in-my-back-yard syndrome. A crucial point, though, in a restructured market is that investment will only occur when the price is high enough to make it profitable. So, the need for generators to earn a reasonable rate of return on their new plant will determine when the new plant is built. If at some point the price is low because there is lots of supply, no new capacity will be built, and it will not be built until the price rises, until investors say, "I can make money by putting a new plant in here."

A final point on investment. Uncertainty in restructuring can delay or hinder investment. Designing electricity restructuring takes a long time. You cannot simply take what was done somewhere else and apply it here. Every situation is different. It takes years to work through the set of market rules. From the time the restructuring process begins until all the rules are in place, investors are likely to sit on their hands and their money. They are not interested in investing until such time as regulations could add a few dollars a megawatt hour to the price of electricity. That is starting from a base of $35.00 or $40.00 a megawatt hour, that is three or four cents a kilowatt hour for a wholesale electricity price. A dollar or two is not an unreasonable price to pay for reasonable environmental regulations.

I note here in the fourth bullet that, in California, during the summer of 2000, the very strict NOx emissions in Southern California, combined with generators running flat out to meet very big demand, led to a high demand for NOx emission rights, which added $50.00 a megawatt hour to the price of electricity in California. That is more than the wholesale price of electricity in California two years earlier, just from one air pollution regulation.

So while on average we would expect environmental regulations to have little effect on the price of electricity, they can have a very big effect. What happened in California should lead California to rethink some details of their environmental regulations, not give up on them, but think about exactly how they implement them.

Senator Banks: Does that mean compromises?

Mr. Dewees: I do not believe it does. Well, it depends on what you mean by compromise. For one thing, you could have the flexibility of trading between seasons, as they do in the U.S. with the sulphur dioxide emissions. If a utility does not use all its emission rights in one season, it can put them in the bank and use them in another season. A prudent utility will keep some in the bank. In that way, in a summer when everything is running flat out, the utility can draw down its bank deposit. Of course, that would mean more pollution in that summer, and the only way that would be possible is to have had less pollution in a previous summer. My guess is that Californians faced either with the lights going out or some trading back and forth between years would probably support some trading back and forth between seasons.

I say a little bit here about carbon dioxide. Serious efforts to control carbon dioxide will seriously increase the price of electricity, at least if you are burning coal.

Senator Kenny: Is that the choice, trading between brownouts and different emission standards?

Mr. Dewees: In the short run, in California last summer, it came down to that. In a well functioning system, that is, one in which there are not big surprises - and there were big surprises in California last summer - or a system with more flexibility than the California system had in it that should not be the choice.

If you know what the rules are going to be and you forecast with some accuracy what your generation is going to look like, then you can say: "We need to put in better controls. We need to repower this unit to make it more efficient. We need to switch from coal to gas, so that by the time the crunch comes, we are ready for it." Hence, we would not expect to have to make a choice between brownouts and the environment. However, when several things go wrong at once, as they did in California, that choice can come up on the screen.

That means Ontario, in making its plans, ought to keep in mind the California experience and ask: do we have a design for generation and for environmental regulation that will avoid facing that terrible choice at some time in the future? I think it is possible to design around it, but it can happen.

With respect to carbon dioxide, if you imposed a tax of $10.00 per ton of CO2, which is $37.00 per ton of carbon, that would raise the price of electricity for a coal-fired power plant by $10.00 a megawatt hour. I do not know anybody in Canada or the U.S. that is planning, with great respect, any serious controls on carbon dioxide emissions, so I do not expect that to have any impact on electricity price in the foreseeable future.

What does all of this have to do with nuclear? Nuclear technology involves a high capital cost and a low operating cost. It has long lead times, and this adds uncertainty to the capital cost. The cost of renovation, experience shows, is high. If a utility has to take its plant down and do serious rebuilding, that tends to be costly.

Because of this cost structure, in a competitive market, nuclear plants are likely to bid low and run continuously. They do not want to turn their plants on and off. They want to run their plants continuously because their operating costs are pretty low. We would expect, as in a monopoly market, the nuclear plants to be running whenever they are available.

In terms of new construction, even if nuclear costs came down, they still have to catch the costs of thermal, which have been coming down over the years. I think it is going to be very hard.

The Chairman: I notice you said that declining fossil fuel costs must remove the efficiency of the machine. The Alberta government is proof positive that the price of hydrocarbon has not been coming down.

Mr. Dewees: That is right. This is something that Ralph Klein cannot take credit for.

The Chairman: You do not understand us Albertans. We know that God put it in the ground, but He did not choose to reveal it until we put a Tory government in.

Mr. Dewees: Yes, sir. There has been a decade-long downward trend in the cost of electricity generation because of continual technological improvement in generation over the years. While we have had rising prices recently, the general expectation is that in the long run technological progress will continue, and so those who would like to build more nuclear plants are chasing a fast-running target.

What is the future electricity price going to look like? If I knew that for certain, of course, I would not be here; I would be out sailing my yacht and enjoying my riches. However, I can make some comments about that.

The first bullet just repeats the point I have just made, that generation costs have declined. That is a background that we might expect.

If competition improves efficiency in generation, that should tend to reduce electricity prices. But today's electricity price, particularly in Ontario, is, I say cautiously, unrealistically low. The price has been frozen for a number of years. It is not allowing us to repay the very substantial debt that Ontario Hydro has built up.

So in historic terms, one would expect the price to go up. During the work of the Market Design Committee in 1998, we were repeatedly told that the current Ontario price was not high enough to induce new generation. Unless that has changed dramatically, and with the higher price of natural gas today, I do not think it has, I would expect, restructuring or no restructuring, electricity prices in Ontario are going to go up some. I think that is a background against which we are working.

So the question is not, "Will competition lower prices?" The question is, "What will competition do to prices as compared to what would have happened if we had not had competition?"

Natural gas is the fuel of choice for almost all new generation that is going in. So natural gas prices are going to substantially affect electricity prices. That is the fuel that is going to be on the margin. So in a competitive market, as natural gas goes so will go the spot price of electricity.

In the short run, the competitive price of electricity is going to depend on supply and demand. In Ontario, that depends on how well the nuclear rehabilitation program goes, NAOP, as it is referred to, how many of the seven laid up nuclear plants are going to come on line in the next three or four years. The more that come on line, the greater the supply and therefore the lower the price is likely to be. It will depend on the demand growth obviously and on the price of natural gas, to the extent that gas becomes a more important fuel in Ontario.

Trade with the United States and Quebec will affect the price in Ontario in a competitive market. The Quebec price tends to be somewhat lower. The U.S. price in our adjoining states tends to be somewhat higher. Ontario is likely to be in between, assuming we are trading freely with both Quebec and the United States.

Overall, I think it is likely that there will be some price increases, whatever happens to restructuring in the Province of Ontario.

What are the implications for nuclear power? With competition, investment depends on expected profits. CCGT - that is, combined cycle gas turbine, which is the technology that is most often going in for new electricity generation - and CCGT co-generation - where you take the last of the heat that comes out and use it to make some steam to make pulp or to help your refinery, or use it in some industrial process - are the leading competitors for new investment. That is the target that any other new plant has to beat.

Today's high natural gas prices help other fuels. If we think gas prices are going to stay up, it makes life a little easier for those who would market something else. Frankly, however, there are very few plans for new coal plants in North America. I think Alberta is one of the places where they are contemplating and perhaps building new coal plants, but there is not much else going on, in my understanding.

I am not aware of any plans for new nuclear plants in North America right now. They appear to be uneconomic in today's climate.

Attempts to keep prices down by having a more vigorous competitive market by any other devices that governments may use to try to restrain price increases that might occur will obviously make it harder for higher-cost fuels to make inroads. I do not see much prospect for nuclear competing in the foreseeable future.

Existing nuclear plants should continue to be valuable so long as you can keep them running.

Senator Banks: Are you including the ones that are being brought back on line? You are saying that they are not building any new ones, but they are certainly talking about rejuvenating, reactivating a significant number, as we understand it, of nuclear generators. Pickering is being sold and brought back on, and some others are being looked at.

Mr. Dewees: That is right. I think Ontario Hydro is working on Pickering and is in the process, I believe, of selling Bruce, including both A and B. The A is entirely laid up, whereas B is operating. I expect the buyer will work hard to get some of those laid up Bruce A plants back on line.

Senator Banks: My question is almost parenthetical. There will be more nuclear-generated power coming into the market, notwithstanding that they are not building new plants; correct?

Mr. Dewees: That is my understanding as well. And my expectation is that new nuclear units will come on, will be brought back. Certainly, the buyer of Bruce will bring back nuclear plants only if it pays him, if the cost of rehabilitating those units is less than the cost of providing that capacity by some other means - and I would hope that they will be successful in doing that.

I am not sure whether the rehabilitation of the Pickering units is meeting the same market test that is being done before the market opens. Therefore, I cannot comment on the economics of that.

But after market open, one of the advantages is that if someone invested in rehabilitating a nuclear unit the person has money on the line and as such believes that it will be a profitable investment for them. I would expect that at least a number of those plants will be back on line and will enhance our supply. So those nuclear units should continue to be valuable so long as they can be kept operating at a reasonable cost.

That concludes my presentation. I would be happy to answer any questions.

Senator Adams: There has been reference by witnesses to Ontario Power Generation having a monopoly. They have said that it is difficult for private companies to get into power generation. We know that Ontario Hydro still has a $20billion deficit. We want to get new people in, but there is still a monopoly. How does that work?

Mr. Dewees: I think there are several points there. You are right that Ontario Power Generation is still close to a monopoly generator in Ontario, and we will have a successful competitive market in Ontario only when OPG has divested itself of a substantial fraction of its existing generating capacity.

When the sale of the Bruce unit goes through, it will be an important step in that direction. I understand also that OPG announced yesterday their intention to sell several of their thermal plants, and that will be another big step in that direction.

But we should only believe that we have a competitive market in Ontario when we have a competitive market structure, when no one firm dominates the generating scene. At the present time, we are a long way away from that.

Ontario Power Generation's intention is, I am sure, to manage its costs. As competition emerges, it will be forced to manage its costs and try to drive them down. If it is successful, that will in itself make it more difficult for other firms to come in and build new generation. If they are successful in keeping the price low for awhile, that is fine also; we will enjoy the low price. As demand grows over time, as excess capacity is used up, we will reach the point where the price rises. Supply and demand will raise the price, and it will go up until investors say, "I think I can now make money from investing in a new plant."

I am not a soothsayer, so I cannot tell you at what price that new generation will be built. There is some new generation planned in Ontario right now. However, we will have to see how that all plays out.

However, you are right. There are two steps. One is competitive structure, and then let the market evolve a price that is competitive and that, in the long run, will induce new investment.

Senator Adams: If I wanted to build a power generating plant, what would be involved in that? Would I have to get approval at the provincial level? How does that work?

Mr. Dewees: Let us fast forward to, say, next year, once the market is open, and so we have a fully competitive structure in place. If you wish to build a power plant, you need an environmental approval. If you are building a combined cycle gas turbine, it is possible that they will have a class approval or a fast track for that type of station. Then you need some investors. If you have the money and you have a site, you can build and hook up.

So, it will be relatively straightforward. You will not need permission from a regulatory authority that says we need your power. You will build it, you will put your money on the line, and if you are wrong you will lose your shirt.

The Chairman: I have a supplementary to Senator Adams' question. OPG owns all the transmission lines. There is not much use building a power plant, if you can't get your power to the consumer. Will those lines, under your idea of restructuring, be cooperatively owned, or will they be owned under regulation stipulating that other carriers must have access?

You have got to get the electricity out those lines.

Mr. Dewees: I think there are two important points there. Ontario Hydro has already been divided into several corporations. Ontario Power Generation owns the generating units and Hydro One owns the transmission lines. Already there is, in fact, separation between the ownership of the generation and the ownership of the transmission.

The Chairman: Will the transmission line be controlled by regulation, like a common carrier?

Mr. Dewees: Absolutely. While generation is competitive in a restructured market, transmission remains essentially a natural monopoly. You do not have duplicated lines.

Senator Adams: I am interested to know how the system works in terms of selling my power, if I were to build a power plant. Obviously, the costs involved in building a power plant are enormous. Will I be able to sell that power, and for how much? Suppose the buyer tells me that they can only afford 3 or 4 cents a kilowatt. How does it work?

Mr. Dewees: If you were an investor in a new power plant, you would have really two choices. You can build it as a merchant plant with no purchase contracts in place and then simply bid that plant into the spot market. You will have consultants who do a forecast for you of what they expect the spot price to be over the 10 or 20 or 30 year life of your plant, and you will make the investment only if you believe that the future spot price will earn your desired rate of return.

The alternative is that, before you put a spade in the ground, you go around and sign up buyers for your power. I would to, say, General Motors and other large industrial customers and try to make a deal with them, see if you can enter into a contract with them at a price that they find more attractive than prices offered by OPG or the spot price or whatever they feel is their alternative.

Some investors will not go forward until they have signed up customers, but I understand that a couple of the plants that are under discussion now propose to be built as merchant plants, anticipating that the price will be sufficient to repay their investment.

Senator Adams: In terms of a car manufacturer, say, will the transmission to that plant be owned by Ontario?

Mr. Dewees: Transmission is a common carrier. They have to carry your power. The transmission network would have to be sorted out, to ensure it has capacity enough to take your generation. You may have to build a line from your power plant to the grid. The Ontario Energy Board will regulate Hydro One and its operation of the transmission system so that you as a generator are fairly treated as all other generators are.

Senator Kenny: Professor, if we were having this discussion in the United States, there would probably be a second page here that talked about political risk?

Mr. Dewees: I am not sure that political risks are different. You are talking about risks for investors?

Senator Kenny: Well, I am really talking about the likelihood that in the foreseeable future we are not going to see another nuclear plant in the United States.

Mr. Dewees: Because of economics or because of political risks?

Senator Kenny: Right. Not because of economics, because of political risks.

The Chairman: If you want to drive the public nuts, you just have to mention nuclear power.

Mr. Dewees: I think it would be a brave investor in the United States who proposes to build a nuclear plant, even putting their own money at risk rather than anybody else's money.

Senator Kenny: Really, what I was building you to was to ask you to comment on the differences that you see on the two sides of the border. I just do not think this conversation would be on if we were in Buffalo right now.

Why do you think there is greater acceptance for nuclear generation in Canada than south of the border?

Mr. Dewees: I have not myself tried to test public opinion on new nuclear construction in Ontario or anywhere in Canada. I am not confident that public acceptance would be greater here than in the U.S.

My sense is that there has been better acceptance in Ontario of nuclear power than there has been in the U.S. Many people believe that the Candu system is inherently somewhat safer than the U.S.-style reactors. I am not before you today arguing that there is no political risk. I agree that the proposal to build a new nuclear plant would be a substantial political risk, even in Ontario or anywhere in Canada.

There has been, I think, only modest concern expressed over the rehabilitation of the existing nuclear plants, in contrast to Europe, just to take another case, where in Scandinavia, I believe, they are proposing to close down nuclear plants that are running perfectly well. We are not there.

Senator Kenny: But contrast that with the French, who seem to have a much higher acceptance of nuclear power.

Mr. Dewees: We are somewhere in between, but I am not really in a position to comment on that.

Senator Banks: We have heard a lot of cynicism. There is a lot of public cynicism in Alberta about the new generation facilities. It is all well and good to consider something, but there is a wide gap between considering something and then committing to it and getting it brought on line.

I would like to hear your personal opinion, since you have looked at this so closely, about the genuine likelihood, all things considered, of investors actually committing to building new generating plants as against thinking about it, because so far no one has put a spade in the ground.

Mr. Dewees: I think economics in general suggest that if there is money to be made, investors will make it.

Senator Banks: But they are not building any new plants in California yet?

Mr. Dewees: They are.

Senator Banks: Under construction?

Mr. Dewees: Plants have been built in California during the 1990s, not many.

Senator Banks: Right now?

Mr. Dewees: They are building plants right now, yes. And California is very complicated. In addition to the three big utilities that are on the verge of going bankrupt because of the bizarre rules that were put in place in the California market, there are a number of municipal electric utilities, for example, Los Angeles, that generate their own power. There are some municipalities that built power plants during the 1990s.

I have not actually gone out to look at whether there is a spade in the ground, but my understanding is that power plants are under construction and committed in California and in areas that will serve California, so that new capacity will be coming on line. However, I do not think anything is going to help for this summer. I think this summer is going to be another nightmare in California. However, I believe that in a year from now there will be some additions to new capacity and that more will roll on.

California is not the first jurisdiction to have had problems; in fact, it is one of the last jurisdictions to restructure. It is in everybody's minds only because they have had such a colossal disaster.

PJM, Pennsylvania-New Jersey-Maryland, has restructured. They have had a competitive market since 1998, and you never hear about PJM. Nobody hears anything about it because it is working just fine. They have got capacity. They have got reasonable prices. My sense is, there is much satisfaction with that.

The restructuring process took over a decade in Britain. And while they were doing it, there was a dash for gas. They built a lot of new gas-fired and co-generation plants, substantially increasing their capacity.

A number of other jurisdictions around the world that have restructured have found new capacity actually being built. Since restructuring, plants have built, opened, made money, lost money. So the track record there, I think, is reassuring.

Look at prices in California. If the government does not step in and say, "forget it, we are going back to a fixed price," you would be crazy not to build a power plant in California. The problem there is not that investors did not want to build; the problem was that environmental regulations and local opposition prevented construction.

Senator Banks: And the uncertainties that attend to all of those things?

Mr. Dewees: That is right. Alberta, I think, suffered from the period of uncertainty. As the rumours were being designed, investors did not want to commission new plants, to commit to new plants.

The Chairman: Also, they dithered for six years, we are talking about decontrolling, so nobody would put any money into a plant. If they had set a definite date, then, I think, some plants would have been built.

Mr. Dewees: Yes. Until the rules are clear, I would not expect new investment. Once the rules are clear, as long as they are reasonable, I am reasonably confident that new capacity, in jurisdictions where capacity is not blocked for environmental reasons, will be built.

Will the price rise before that capacity comes on-line? Yes. That is exactly what I would expect. But it does not have to rise to California or even Alberta levels for investors to be able to forecast a reasonable rate of return on investment with sufficient surety that they are prepared to put their money and the shovel into the ground.

The Chairman: Senator Banks has uncovered an area that has been mentioned a couple times here, and that is the cost to the public of stranded assets and how it should be handled. If we move into decontrol, there will be lot of stranded assets out there. How would you recommend that that be handled?

Mr. Dewees: I can tell you what Ontario is doing - which I think is a reasonable way to do it. I will also mention briefly the California approach, which turned out to be part of their disaster.

In California, the principal objective of the utilities in going along with restructuring was to pay for their stranded debt. They agreed to a plan where there would be a price ceiling. They expected the competitive price to be below that ceiling. The plan would see the utilities pocketing the difference between the ceiling and the competitive price through what they called a competition transition charge, a CTC. The agreement set out that if the competitive price exceeded the set price, the CTC would work the other way, and customers would get a rebate.

For a while, it worked just fine, and the utilities were repaying their stranded debt. Bad luck intervened. Gas prices were high, there was no rainfall, no water, thus, lower Hydro availability; the summer was hot and demand was high. That confluence of prices, of events drove the market price above the price they were expecting, and instead of recovering stranded debt they added to it and went to the verge of bankruptcy.

Senator Banks: Is that not an oxymoron? If the debt is stranded, they should not be able to add to it.

Mr. Dewees: Well, I am telling you what they did in California, and I will not comment on the moronic part of the oxymoron.

In Ontario, the portion of the Ontario Hydro debt that the government concluded could not be paid for in a competitive market was assigned to a financial corporation. The plan is that, when the market becomes competitive, there will be a - I forget what the name of it is now - transition charge, which will essentially retire that debt over time.

Senator Banks: That stranded debt has also risen. How is that possible if it is, in fact, stranded? OPG took over the assets, and they were divided up differently. The reason for the stranded debt is that OPG said, "We are not going to assume those kinds of debts." So how, in the absence of default of payments, maybe that is the answer, could the stranded debt rise in Ontario, which it has?

Mr. Dewees: I have not followed the details of that, but part of the problem is that we have been in a transition period, where OPG was restructured but the competitive market has not opened. One thing that I believe has happened is that as OPG has made investments during this interim period some of that has gone against the stranded debt. I am not absolutely certain about that, but I believe that is one mechanism that is in operation.

Once the market opens, the debt is then locked, and all that can happen is repayment. The scheme that we have in place ensures repayment regardless of what the competitive price turns out to be. This is a much more cautious, more sensible strategy, both for Ontario consumers and for the generators, than the scheme they put in place in California.

But you are right, we have not yet begun to reduce that debt.

The Chairman: So it is a little bit iffy, I hear?

Mr. Dewees: It is iffy, but without the risks that California showed.

The Chairman: There will be a surcharge down the road somewhere.

Mr. Dewees: Yes, there will be a surcharge, absolutely.

Senator Banks: Do you think most folks understand that the extent of that debt is in excess of $20 billion?

Mr. Dewees: I do not know what the public understanding of that is. I would not assume that they are very well-informed about that.

The Chairman: I have an observation, and I would like the panel to comment on it.

Jim Gray, a natural gas guru in Canada, said in Calgary that the price of natural gas in the future, whatever it will rise to, will be controlled by what nuclear power costs are. Conversely, you have just told us that nuclear power, when it comes on or not, will be controlled by natural gas. It seems to me that the consumer will be the big loser, somewhere along the line here, if each is dependent on the other.

Mr. Dewees: In a competitive market, the price depends on the cost of all the competitors. So in a sense, I think, we are both right.

The Chairman: That is what I was afraid of.

Mr. Dewees: I do not expect, as I have said, new nuclear construction in the near future. It is clear that natural gas units, in most places, will be the unit of choice for new construction. So I think the gas price is going to be crucial in setting market prices.

Perhaps he was referring to Senator Banks' earlier comment on nuclear units coming back. Or perhaps it was your comments, Mr. Chairman, about nuclear units coming back on stream, the pace at which that will happen and it will affect the supply and demand balance, and therefore the market price.

The Chairman: We could easily spend more time with you, but we have other witnesses waiting. We attempt to hear a number of viewpoints. Your testimony was most interesting and refreshing. Thank you very much for your attendance here.

You may wish to hear the testimony of the next witnesses. They are from the Independent Power Producers' Society of Ontario. With us are Jake Brooks, the Executive Director, and Robert Cary, from Robert Cary & Associates.

Mr. Dewees: I look forward to hearing from them what the price will actually be.

The Chairman: Welcome. Before you begin your presentation, I would ask you to provide us with some information about your society. We have run into a number of independent producers in different provinces, and one thing we can say for certain is that they are independent. In one place, their dominate will be wind energy, in another, low impact hydro, and in another, biomass. What do you two consider independent power producers to be?

Mr. Jake Brooks, Executive Director, Independent Power Producers' Society of Ontario: In Ontario, the primary form of independent power in terms of the megawatts installed is co-generation. Most of that is natural gas co-generation. The Ontario market is quite diversified in general, and in the independent power business. The original independent power in Ontario was small hydro. In fact, prior to the provincial grid, we were mainly dealing with a lot of independent small hydro generating plants.

The Chairman: So wind producers or biomass producers or alternate things are not part of your association?

Mr. Brooks: In order of megawatts produced, co-generation with natural gas is the largest; small hydro as a group comes second in scale. We are talking about maybe 1,400 to 1,500 megawatts of natural gas co-generation in operation independently owned in Ontario, 200 or 300 megawatts of small hydro, and I do not have an exact figure, but more than 100 megawatts in biomass-fired co-generation. These are the two categories. It is co-generation, but it is also biomass renewable energy fuel.

The Chairman: And no wind yet?

Mr. Brooks: To date, there has been very small commercial wind development in Ontario. However, just in the last month, there were two significant announcements of commercial wind projects.

The Chairman: I just wanted to know what independent meant.

Senator Kenny: On small hydro, are we talking about places like Gananoque?

Mr. Brooks: Sure. They are quite diverse, distributed across the province in all scales. Some are dams, in the conventional form of hydroelectric you may have seen, although they tend to be smaller; others are the most recent kind of run-of-river projects, and they tend to be smaller.

The Chairman: As we travelled across Canada with this committee, we learned about low-impact hydro. I do not know if you are aware of it here - it is hydro without a dam.

Mr. Robert Cary, Director and Member, Independent Market Operator (IMO) Technical Panel, Independent Power Producers' Society of Ontario: There are a number of hydro plants here. I think the largest of the independent hydro plants is under 20 megawatts. There are a number in the range of 10 to 20 megawatts: Valerie Falls, Long Sioux, places like that. There are about 1,700 megawatts of independent power production under contract with Ontario Hydro, the so-called non-utility generators here.

Because those are all fairly high capacity factor plants, that represents about 9 per cent of the total provincial energy demand put into the grid.

The Chairman: Keep rolling.

Senator Banks: Nine per cent?

Mr. Cary: Nine per cent, roughly. It is a significant chunk as a starting point. It is not a significant competitive element when you throw the whole market open. Obviously, there is a bunch of issues.

The Chairman: Please proceed with your presentation. We threw you off a bit.

Mr. Cary: I would just like to run through our proposed agenda. We have not produced any overheads. We have a written brief, which we will leave with you.

Senator Banks: Good.

Mr. Cary: We will speak loosely to that text, rather than trying to go word for word through it, in order to answer questions and cover the points of interest.

We wanted to address some background on IPPSO. We have started to do that, and I will ask Mr. Brooks to do that further in a minute. We want to talk about the Ontario restructuring, our perception of it, and then focus a bit more on the things that we see as being federal jurisdictional issues. Environmental is a key one, and related to environmental is the tax question. When we look at the investment that has taken place in Ontario in co-generation, a lot of it is driven by the tax incentives provided at the federal level. To give the equivalent encouragement to things like wind, we think there are issues to be addressed there.

Then we want to touch on international trade and investment issues. We are in a competitive market for investment. I want to talk about our focus and our concerns to get things on the agenda at the federal level.

Senator Banks: You did not say the word "tax."

Mr. Cary: I said that. You may tire of us saying it in a bit.

I will pass it over to Mr. Brooks, who will talk about IPPSO.

Mr. Brooks: I will just add a little background on what IPPSO is and what we do. We are a non-profit organization, just over 15 years old.

In the early 1980s, there was almost no independent power production and quite a dominant central utility in Ontario. We set out to try and open the market at that point. For the better part of 15 years, we have been working at this. I will not say that the end is in sight, but a major step towards opening the market is certainly close at hand.

Opening the market is somewhat different from actually having a competitive market. We expect that it will take a few years before the market is truly competitive.

Many people would ask, "What is an independent power producer now that Ontario Power Generation has been separated from the transmission company?" The formal definition of an independent power producer is someone who does not own transmission. Originally, that was all that was needed to distinguish the independents from the utilities.

Now that we have a separated provincial utility with transmission and generation components, the distinction between independents and what you might call the incumbent generator is a little more subtle. Ontario Power Generation does not own transmission any longer but is still quite distinct from the independent producers, in that it has position of market power. It has enough generation capacity to affect prices. Perhaps that is the more relevant distinction between the independent producers and the incumbent utilities.

Our main objective is to promote independent generation because of the competitive benefits that become available with a market that is truly competitive.

That summarizes the objectives of IPPSO, just to give you a sense of the membership and the operation of the organization.

Co-generation, as we mentioned, is the major component of our membership. Small hydro, biomass and a variety of other fuels, many of which would fall into the general category of waste fuels or by-products, are also used by our members to make electricity.

The industry is substantial, representing more than 1,500 megawatts, enough generation capacity to supply the electricity needs of some of Canada's smaller provinces, for example, all here in Ontario.

As an organization, we spend a fair bit of our internal efforts publishing a magazine, running conferences and trying to promote the ideas of competition and innovation in technology deployment.

Mr. Cary: We have really been involved in the restructuring process from the very beginning, strong proponents of it, believing that risk-bearing investment is the way to go in the market. We have seen Ontario Hydro's central planning models and the consequences of the Darlington cost overruns. We believe that competition provides the discipline that the market needs as well as bringing private capital to the market.

We are encouraged about recent announcements about putting a "no later than" date on the Ontario market opening. We would be more encouraged if it were a definitive date, and we would be more encouraged still if it were a definitive date this year.

Senator Banks: Will you accept a "best before?"

Mr. Cary: Having said that, my concern is that that is what we might have, a "best before," and then gear up for a provincial election immediately after, which will give people a lot of concern about risk. We have at least nominally removed one of the obstacles to investment once we have the definitive market opening date. I do not know that people see recent announcements as being sufficiently definitive to do that.

The other long-term concern for people is OPGI's market power going forward, the whole competition issue. When do we have competition? How is OPGI going to be motivated to behave in the market going forward, and what is that going to do? It is acknowledged that they have the power, the authority and the licence to manipulate prices. How will they use this authority? That is obviously a risk.

Someone made the comment that we are nearly there, at the opening of the market. I think we perceive the market opening as a major step but recognize that markets will continue to evolve. It is almost the beginning of a process or the end of the beginning.

Senator Banks: But that manipulation is still subject to profit regulation, is it not?

Mr. Cary: It is subject to a rebate mechanism, but the license explicitly says that OPGI may manipulate prices so long as it does not collude to do it. It is, in doing that, outside the IMO's jurisdiction to monitor, or at least to police.

At any rate, the two key issues that we wanted to address were the environmental side and the international trade and investment issues. Jake is the better speaker on the environmental aspect of what we do.

IPPSO has always had a very strong environmental bent. There have been many people trying to promote many of the alternative generation projects historically, and continue to do that. It is seen as an area of growth. It has been frustrating to some people that we have not been able to get more such projects created in the past.

Mr. Brooks: Just briefly, I think the central message of our organization in this front is that there is no need to make a stark choice between environmental responsibility and economically attractive power generation. There are solutions and development options that will allow us to do both at the same time - in other words, saving money while producing power in a more environmentally friendly way than we have in the past.

Of course, the past has not been a terrific example of either environmental responsibility or financial management in Ontario, given what we have seen in terms of stranded debt.

There are several areas, tax reform and institutional reform, that would allow for new generation to come online, in a competitive market on a level playing field with existing generation, fossil fuel-fired or other, and have access to consumers providing power at reasonable prices. However, the market is highly structured. It is not simple getting around some of the existing institutions, largely in the federal area. It is necessary to look at tax systems.

We have, over the years, instituted a whole range of incentives to encourage the expansion of the energy industry. These have wound up in a system that reduces the apparent price of energy for the ordinary consumer but, in fact, ends up subsidizing the existing forms of technology.

Nuclear is one example of that. There have been so many years of subsidies there, but there certainly are subsidies to the other conventional industries as well.

It is interesting that the newer technologies are essentially expected to compete on a market basis where many of the existing technologies have had so many years of support from government in one form or another.

Perhaps the most fundamental form of subsidy has to do with the environmental costs. We know that there are costs associated with emissions, and they are not always quantified, much less recognized, in the market.

One of the most effective methods used by other jurisdictions to deal with these costs is to let the market find the best compromises between environmental improvements and financial savings through what is called a renewable portfolio standard. That standard, much like the standards for gasoline lead content, requires a certain amount of environmentally preferable energy in every purchase or every sale of electricity.

Many jurisdictions in the United States have followed the national standard, which I think is part of the previous administration's energy plan, to require an increasing percentage of renewable energy in their electricity mixes. This allows for competition in the supply of energy, even in the environmentally preferred sectors of the market, so that the consumer is still able to get a reasonably good deal while meeting some improving environmental standards.

Other mechanisms in place in other jurisdictions include the production tax credit or the consumer tax credit. These are measures used directly in other jurisdictions to encourage the development of the preferable energy technologies. They are not subsidies when they are compared to the incentives that are in place to the competing generation options. They are merely a modest attempt to redress the imbalance that is created by the existing system.

So, many options are available, and some of them are not terribly complicated. The renewable portfolio standard is straight forward and has found wide public acceptance in other jurisdictions. It is reasonably easy to administer.

In the longer term, most likely one of the most robust mechanisms will be emission reduction trading. This process will allow those who reduce environmental emissions to go beyond the required reductions at the behest of someone else who is having a harder time meeting the standards, and receive payment for doing so. This allows the economy to seek out the lowest-cost forms of environmental emission reductions and to encourage development of new technology.

So with that summary, I will hand it back to Rob, who will talk further about trade and investment issues.

Mr. Cary: I want to just pick up on one point that Jake made, which is the trading of environmental reduction credits, emission reduction credits. This is a fairly fundamental issue. If an individual puts in a wind farm, thereby reducing the need for coal-fired generation from OPGI or from anybody else, who should get the benefit of the emission reduction credit? It is a highly contentious issue. There are two very different camps there.

Present Ontario regulations tend to prevent the builder of the wind farm from getting any benefit from that. Their argument is this: it is the coal-fired generator who was making the emissions; he has reduced his emissions and as such he gets the benefit, a credit that he can now sell to someone. We obviously have concerns about that.

Looking at the international trade issue, electricity - certainly from Ontario - is mostly a north-south business. The connections with Michigan and with New York are much stronger than with anyone else. While there is some strengthening taking place with respect to the tie-in to Quebec, that will still be smaller than the north-south interconnections. Also, the Quebec market is not an open competitive market in any meaningful sense at this stage.

Distance really precludes massive east-west trade across Canada, distance and the efficiency of carrying electricity.

In the context of north-south trade, we have to preserve reliability in Ontario. Reliability in any jurisdiction really requires that there be sufficient generation within that jurisdiction to supply that jurisdiction. In the short term, trade is very beneficial. It allows for maximized economic benefits. You use the cheapest resource at any time to do it. Ontario cannot rely on resources in New York to supply it in event of any major system problems. There could be problems on the transmission. There could be shortages in New York as well as here. It would be imprudent for any jurisdiction to rely on resources outside, in terms of reliability.

There have to be market mechanisms in place to ensure sufficient investment, for reliability purposes. The investment climate must be attractive, to ensure reliability. We are not sure that the present market design in Ontario does that. It is not something that the market design on its own is able to do.

Part of that can be redressed in the market, through things like a capacity market, where you do provide payment to people for having the capacity available within Ontario. That is a provision that is not yet activated in the market.

The other half of it is to ensure that investment is attractive from an economic perspective, part of which is tax and part of which is trade. If the boundaries between Ontario and the other provinces and the States are shut, first of all, there is a barrier to imports, which may be cheaper than Ontario resources at some times. So, from a consumer perspective, you want to allow free imports.

In order to ensure that you have the investment to provide reliability long term, people need access to export markets. If I am a U.S. investor and am looking at places to generate, if I put a plant in Ontario I need to be able to use the export market as a means of mitigating risk within the Ontario market.

Any individual market is becoming a much higher risk investment if you are subject to the regulation of that one market alone. Regulatory risk is the big risk in the market going forward. Things will change. We do not have a fixed market. So you have to allow people the mitigation of being able to export at the same time if you want to get investment coming in to the province.

Obviously, that is true across the border, across the country, as other provinces become open market.

You asked me not to mention tax too often, so I will not say the word, but obviously there is a significant issue there.

The next issue is what I call the jurisdictional issue. Following the massive northeastern North American blackouts in 1965, the North American Electric Reliability Council was formed, NERC as it is normally known, as a cooperative between the different utilities within the area to ensure reliability, to provide mutual support and to provide a consistent set of standards.

Utilities signed up to that voluntarily. They essentially made a contract when they became members of NERC that they would maintain the prescribed standards. That has worked very well for the last 30 years.

With competition coming in the U.S. market, with FERC mandating competitive changes there, there starts to be more conflict between the reliability motivators and the competitive market motivators. You are dividing up between the transmitters and the generators in the U.S. market. There is FERC, which is a statutory jurisdiction there, and there is NERC, which is not a statutory jurisdiction in the U.S.

There are moves afoot to give NERC or its successor some sort of statutory authority within the States. It causes serious questions as to how that fits into the Canadian context? Where does it leave Canadian utilities? Would we suddenly become subject to U.S. jurisdiction if we decided we wanted to sign up to this organization?

This strikes me as being a government-to-government issue. There needs to be a joint jurisdiction under which NERC or its successor can continue to operate, or a regime with parallel organizations, without creating a barrier at the border. It is essential to continue to benefit vis-à-vis the border, not to create the barriers on the boundary. We do not have a quick answer on that one, but we would like to see it put on the agenda as a significant issue going forward.

Related to that is the role of the National Energy Board. The NEB's role in electricity in granting licenses has been to ensure that supplies were not exported when there was someone in Canada who was willing to pay for them and basically match the price. The market mechanisms that are set here provide automatic access to markets at a competitive price, non-discriminatory treatment for people outside the country and people inside the country. Given that, what is the role of NEB licensing in that context of individual exports?

There are other issues. I think the NEB's role vis-à-vis interprovincial trade should be put into question. Again, no definitive answers at this stage, but obviously a concern that should be put on the agenda.

In terms of moving forward, we believe the Government of Canada has some significant roles in the electricity business. We focused on the environmental aspects of it: providing a level playing field and a framework for emission reduction credit trading; providing a framework for renewable energy through tax and/or other incentives; and the generic issue of Kyoto and the policy for implementation of Kyoto accords.

Predictability: The last thing investors want is uncertainty and unpredictability.

On the international trade side, the issues for the government include commitment to remove impediments to trade, import and export, the development of tax and environmental policies that provide a climate here no less favourable than U.S. jurisdictions with whom we compete for investment, development of coordinated government structures for the reliability organization, and some consideration to how we move forward into more integrated markets.

A study has just been completed on a combined electricity market throughout the whole of the northeast, that is Ontario, New York, New England. There was a meeting yesterday, which I was not able to attend, at which the study report was presented and discussed. Essentially, the report said that there could be a common market over that area from an electricity perspective, and that that would bring certain advantages.

The Chairman: What area?

Mr. Cary: Ontario, New York and all of New England.

The Chairman: You are leaving Quebec Hydro out?

Mr. Cary: This was a study commissioned by the Independent Systems Operators in those three jurisdictions, those being competitive markets existing, and Ontario short-term future.

The PJM market was invited to participate but decided not to; however, they have kept closely in touch with it.

I do not know if Quebec was invited to participate, but obviously there is a lot of interest and over what Quebec's role will be in integrating into any sort of competitive northeastern system. That is the end of my presentation.

The Chairman: That was very comprehensive. I think we will have many questions for you.

Before I ask Senator Banks to begin, I would ask you to speak to our researcher, Ms Lynn Meyers, following the meeting. You mentioned a renewable energy program comparable with that in the U.S., so maybe you could send us something on that.

You also referred to a commitment to removing impediments to trade and electricity, explicit and implicit. What are those particular lists? I do not want to get into the discussion here because these are technical things, I am sure.

Mr. Cary: Surely.

The Chairman: As well, you mentioned the development of a tax and environmental policy to ensure that Canadian investment is no less favourable than in U.S. jurisdictions. I would appreciate it if you could tell us what the U.S. laws are on those areas and send us the information.

Mr. Brooks: We would be happy to do that. Just to give you a sense of it, there are Canadian developers of renewable energy based here in Toronto who are doing all their work south of the border.

The Chairman: That makes it interesting.

Senator Banks: We would very much like to hear about those things. Since the market becomes integrated, so must the opportunities.

Could you also just talk for a second about, to use your phrase, reducing existing disincentives to entry of new players in the game. Are we talking about tax credits here? Are we talking about environmental impediments, complicated applications to build new plants? What are the disincentives to which you refer there?

Mr. Brooks: There are many, and I hesitate to even summarize. However, the market power of incumbent utilities is probably the first and most long-term issue to deal with. Any new entrant into a market will have to face a company that has long-term relationships with suppliers, with customers.

Senator Banks: So new guys are going to be selling to the spot market, for all intents and purposes?

Mr. Brooks: Not necessarily to the spot market, but to whoever a new generator or new entrant would like to sell, they are going to have to work against the entrenched position of a much stronger company.

Senator Banks: But we know what that is going to be. As they referred to themselves yesterday, they are the 800-pound gorilla right now. They are going to continue, they said, to be a gorilla, but they will not be the only gorilla, and they expect that there may be other gorillas, so block that metaphor.

The Chairman: They did mention a choice between a gorilla and a chimpanzee.

Senator Banks: They will stay a gorilla.

Mr. Cary: This was on the record, was it?

The Chairman: Yes.

Senator Banks: A prospective investor knows pretty well now what the new regime is going to be. There will be a substantial change in the regime. However, even after the change and even after the new regime applies fully with deregulation, to the extent that it is deregulation, and all of those things, if I were looking at investing in a new generation plant now I would know what five years into the future will look like, assuming that everything proceeds ahead and there is no glitches.

What can be done to reduce that particular disincentive? OPG is going to be the 800-pound gorilla for a long time unless somebody is prepared to build a big enough capacity of generation to go toe to toe with them, which would be really stupid.

Mr. Cary: Yes. There is a certain demand in the market and that will limit the room for new capacity to come in. For someone who is looking at putting in an 800-megawatt gas-fired plant, that is a very clear position. When you get down to distributed generation, smaller facilities, the issues become different, and some of these are embedded at the provincial level, in the provincial regulations.

For instance, the way the distribution tariff structure has been set up does not allow a generator embedded in the distribution system to benefit from savings that he creates for that distributor. So if I put up generation with a distributor within Toronto, within Mississauga, I will reduce that distributor's transmission costs but I do not benefit. That is a provincial-level issue, and so there are obstacles there.

There are also issues at the federal level, issues of tax, making sure you have the right framework for environmental, emissions reduction, credit trading.

Senator Banks: Is there not also a threshold in terms of the overall tax benefit, which has to do with the amount of power a plant generates or a generator generates, 15 megawatts?

The Chairman: That was a flow-through share tax.

Mr. Brooks: There are some limits to the applicability of Class 43.1.

The Chairman: That is what I wanted to know more about. We have a fair to medium amount of information vis-à-vis the flow-through shares with the qualifier, because there is also a problem on the side of wind generation as well.

Senator Banks: If I were a prospective investor, though, I would not necessarily have to hook into an existing distribution system. Could I visit prospective clients and say to them, "You do not have to be in the big system. I will design a system and build you a distributive generation plant that is so close that we will not have to worry about the other transmission lines?" Is that even hypothetically possible?

Mr. Cary: It is very expensive to build a completely stand-alone system with sufficient reliability.

Senator Adams: If you were building a power generating plant, how would you go about getting customers? Before the process began, would you go to the car manufacturers, say, and other large industries to try to get a promise from them to buy your power once you are up and running?

Mr. Cary: Let me give you an examples of a project that is fairly advanced at this stage in terms of either commitment or consideration. TransAlta has committed to build a 440-megawatt plant in Sarnia. It is located within one industrial facility. It will provide electricity under contract to two or three facilities close by there at a fixed rate.

Of the 440 megawatts that they will be generating, just under half is going to be pre-sold to those industries locally. The rest of that will be sold in the IMO spot market onto the grid, unless they find other customers elsewhere to do that. My understanding, however, is that the launch for the project is based on commitments from the local hosts and then market sales for the rest of it.

Senator Banks: Is TransAlta a member of IPPSO?

Mr. Cary: Yes. There is TransAlta, Northland Power, TransCanada Energy, Westcoast Power, and then you have TractaBell, AES and Sythe from the U.S.

The Chairman: All the western gorillas by the sound of it.

Mr. Cary: Well, external gorillas, yes, who are so far playing here. Sythe is the other one who has announced 1,600 megawatts of plants that are at this stage, I believe, purely intended as merchant plants. I do not believe that they have any contractual commitments for energy sales in advance of the launch. But they have not put a shovel in the ground yet.

TransAlta is the one plant that is well committed, and I think they have actually started digging on that one now.

Senator Adams: If you build a power plant X-number kilometres from a transmission line, are you responsible for the costs of hooking up to the transmission line, which will in turn supply you the power to hook on to your generating plant. How does that work?

Mr. Cary: If you look at the Sythe plants, for instance, they are, each of them, about 1.5 kilometres from the transmission line. The generator will have to either construct or pay Hydro One to construct the transmission line from the plant to the existing transmission line and will also have to pay Hydro One to make any improvements in the system elsewhere, necessitated by that.

Sometimes technically you have to modify other equipment to incorporate having generation on the line. The new generator has to do that. That is fairly standard. I do not think people object to that. There is some question about the openness sometimes of estimates of how that is done.

Senator Adams: Would an environmental assessment have to be done? How does that work? Environmental issues are very important. I would imagine that an assessment would have to be done prior to anything else. Whose responsibility is it to do an environmental assessment of the transmission line?

Mr. Cary: The developer of the facility has to do an environmental assessment. The Ontario government has specified different levels of assessment, according to the scale of the plant.

In fact, Sythe has done the assessment based on the draft regulations. The final regulations were not in place but they assumed they would come into place. So that short length of transmission line is treated as part of the overall plant environmental assessment.

Senator Adams: This question is for Mr. Brooks. You said your organization is a non-profit organization; is that correct?

Mr. Brooks: Yes.

Senator Adams: How are you able to build if you are a non-profit organization? You do not set the price per kilowatt that you are going to sell at, correct? How does that work?

Mr. Brooks: Well, IPPSO is an advocacy organization, an industry association. We do not develop projects or take an interest in projects ourselves. We are there to promote the development of beneficial forms of generation.

We are putting forward the idea of how best to focus development in the future. Many of our members are non-profits, in fact. There is no necessary reason why it needs to be exclusively private sector. IPPSO has not advocated an exclusively private-sector generation.

There are many municipally owned entities that either have or could have electric power generation and have managed that effectively in the past. There are third-sector organizations, in fact, that are neither government nor private sector; non-profit organizations, for example, do own generation.

Senator Banks: Like what?

Mr. Brooks: Well, a hospital or a school, or something along those lines.

Senator Adams: If you were to make a profit, where would the money go? Would you put it in the bank, let it grow? What would you do with that money? Would you have to pay more taxes on it?

Mr. Brooks: Non-profit organizations have objectives of public education or promotion of certain kinds of development, that sort of thing, and that is where the money goes.

The Chairman: Actually, you might remember EPCOR coming before us. It is a non-profit organization, owned by the City of Edmonton. Their profit is used to reduce the taxpayers' costs. There as dozens of ways for non-profits to use their profits.

On your written presentation, at the top of page 2, you say the following:

Institute a long-standing system of production tax credits which has facilitated the massive growth recently observed in their renewable energy industry.

In Canada, you wanted something similar to that of the U.S. There again, could you send us some information about what the U.S. does vis-à-vis production tax credits?

Mr. Brooks: Sure.

The Chairman: Can you take two minutes to explain them. They must be complicated.

Mr. Brooks: The basic concept is straightforward. Instead of the tax credits that are available in the conventional electricity industry, renewable energy that meets certain qualifying characteristics in the U.S. is eligible to receive a tax credit based on the production, the kilowatt hours produced in a year.

The Chairman: Can you send us the details of that, please?

Mr. Brooks: Sure.

The Chairman: In our hearings, one or two people have said that the wrong way to prime the pump of clean energy is in the production's eye. They have said that right way would be to issue a tax credit to a consumer, a T-7 type of form that would indicate that a consumer bought so many MCF or so many kilowatts that were wind-generated or solar-generated, or something along those lines. A consumer who spent, say $5,000, could apply for a $1,000 income tax deduction, or $500, or something like that.

Have you looked at that, which is priming the clean pump at the end rather than at the beginning?

Mr. Brooks: Yes, using the demand from consumers to pull new generation. There is a lot of merit to that, and if it were formulated to be equivalent in scale to the production tax credit, it would probably do as well or better and remain market responsive.

The Chairman: However, we have to compete with the U.S., so you would possibly want the U.S. tax system.

Mr. Brooks: There are certain advantages in being comparable with the U.S..

The Chairman: Not only that, we cannot issue a T-7 form or whatever it is. Any more questions?

Mr. Cary: The other half of that is that in order to implement a consumer pull, there has to be a tracking mechanism set up through the system.

The Chairman: That is why I said a T-7. It would be similar to an interest-earned form that banks send out, or the T-4s we get from our employer. I just threw the T-7 form out there.

In any event, if a consumer bought power from a clean technology, it would have to be tracked to that consumer, yes. I would expect that a utility tracks its customers in any event.

Mr. Cary: Yes. The question becomes one of whether you track energy through the system, a physical tracking, or whether it becomes a financial tracking.

The Chairman: Given how often I am asked to switch energy suppliers, I think they are tracking too well.

Mr. Brooks: Rob raises a good point, because it is technically complicated enough that federal government input could be very helpful.

Senator Banks: No, you do not want to get the federal government involved.

Mr. Brooks: Maybe I do not know enough about this yet, but making sure that there are clearly set out definitions of what is green or what constitutes a category, so that the consumer is getting what he is paying for, which is not an obvious process with electricity.

The Chairman: Well, it would put a lot of the driving mechanism on the consumer to get clean power, but I think he would.

Your brief is very thorough. We will study it more completely when the committee is back in Ottawa.

Thank you very much for your attendance here and for sharing your knowledge with us.

Mr. Brooks: We will follow up.

The Chairman: Thank you.

The committee adjourned.

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