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Here from Ottawa economist Bob Lyman, who specializes in energy issues, is what you need to know about the Auditor General’s report, and why the losses mounted up to over $1 billion for both the Oakville and Mississauga gas plants.

ONTARIO AUDITOR GENERAL’S REPORT  ON OAKVILLE POWER PLANT CANCELLATION COSTS:  SUMMARY AND BRIEF COMMENTARY

Introduction

On October 8, 2013, Bonnie Lysyk, Auditor General of Ontario, released a Special Report on the costs that have been incurred and are likely to be incurred by the public as a result of the cancellation of a natural gas-fired electricity generation plant in Oakville Ontario. In the period leading up to a provincial election, the Liberal government announced the cancellation of this plant on October 7, 2010. As a result of the cancellation, the Ontario Power Authority (OPA) was required to negotiate arrangements for the construction of alternative power generation facilities in Napanee, Ontario. Thus, the objective of the Auditor General Office’s review was to determine the costs of both the cancellation of the Oakville plant and the relocation of the power generation facilities to Napanee.

Background

The need for a natural gas electricity generation plant in the Southwest Greater Toronto Area was first identified by the OPA in its 2007 Integrated Power System Plan. In response to the plan, the Minister of Energy and Infrastructure directed the OPA in 2008 to procure a combined–cycle natural gas generation facility in the area with a capacity of up to 850 megawatts (MWs), to begin operating no later than December 31, 2013.

In September, 2009, the OPA awarded a contract to TransCanada Energy Ltd. (TCE) to build the facility in Oakville. There followed significant local opposition from groups in the Oakville area, including the Town of Oakville. The government cancelled the project. Soon after, OPA and TCE began to negotiate a settlement on a replacement project. TCE had already incurred significant costs and was facing the loss of revenues it would have received if the original contract had been honoured. The negotiations were difficult. The Premier’s Office intervened, without consulting OPA, to assure TCE that it would be compensated for the financial value of its contract for the Oakville plant. The Minister of Energy instructed OPA to contract with TCE to build a new plant in Napanee. Finally, the Province and OPA agreed to an arbitration framework (for determining damages to be paid to TCE if no settlement was reached) that favoured TCE and waived the protections that OPA had under the original Oakville contract. In December, a deal was reached to relocate the plant to Napanee.

Cancellation Costs

 The Special Report lists two types of costs that resulted from the plant cancellation -the costs already incurred and the estimated future costs.

The costs already incurred include reimbursing TCE for its initial purchases of gas turbines for the Oakville plant and the modifications made to them ($210 million), sunk operating costs relating to the Oakville plant ($40 million) and legal fees ($3 million).

The estimated future costs essentially relate to the cost of constructing the Napanee plant, of increased gas connections to get natural gas to the Napanee plant, the costs of new gas pipelines to move gas to Napanee and new electricity lines to move electricity from Napanee to the GTA, the penalty associated with the use of less efficient gas turbines, and the cost of replacement power to make up for the non-availability of the Oakville plant’s power for some time. The Auditor General’s Office estimates these costs to be $859 million.

The total costs incurred plus estimated future costs are thus $1,112 million (i.e. $1.1 billion).

Estimated Future Savings

 In return for taking on a portion of the costs that TCE would have incurred, OPA was able to negotiate a lower price for the power from the Napanee plant than it would have had to pay for the power from the Oakville plant. This results in an expected savings of $275 million. There is also a delay in the commencement of payments to TCE compared to what would have occurred under the Oakville contract because the Napanee plant will come into operation later. The OPA and Auditor General disagree on both the dates when the Oakville plant would have come into operation and when the Napanee plant will come into production. As a result of these disagreements, the Auditor General estimates the present value of the savings to be $162 million, and OPA estimates it to be $539 million.

Using the Auditor General’s figures, the net cost to the public will be $675 million.

Impact of Potential Toll Increase

 TCE’s parent company will also benefit from the fact that under the Napanee agreement a section of the pipeline route owned by TransCanada Pipelines Limited (TCPL) effectively must be used to transport gas to Napanee. This section does not now have the capacity to transport the amount of gas that will be needed by the Napanee plant. Accordingly, TCPL will need to make additional capital investments and recover these costs through increased toll charges, which will get passed on to electricity ratepayers. Tolls could increase by up to 50% in the first three years; if so, over the 20-year term of the contract for the Napanee plant, the cost of gas delivery would increase by $140 million.

Special Observations

The Special Report makes some observations that raise concerns about the way the Ontario government managed this issue.

  • Throughout the initial procurement process for the Oakville plant, including prior to the awarding the contract to TCE in September 2009, OPA provided the government with “off ramps” not to proceed. Despite the public controversy and the firm opposition of the Town of Oakville, the government declined to take any of these off ramps.
  • The contract for the Oakville plant contained protection to relieve both TCE and OPA of any financial obligation if events beyond their control (force majeure events) caused the plant’s commercial operation date to be delayed by more than 24 months. Given Oakville’s strong opposition to the plant, including Oakville’s stated intention to fight the matter all the way to the Supreme Court of necessary, it may well have been possible for the OPA to wait it out, with no penalty and at no cost. In other words, if the Premier’s Office had not intervened to guarantee TCE compensation, there might have been no cost to the Crown.
  • The Minister of Energy agreed to locate the new plant in Napanee, hundreds of miles from the market for the power, and with no consideration of the potential opposition of people in Napanee.

I would also observe that the need for additional natural gas generating plants is closely linked with the Ontario government’s commitment to add significant additional generating capacity from “green” energy sources, mainly wind turbines and solar power equipment. These intermittent sources of power require much more conventional energy sources to back them up for periods when they produce little or no electricity.

In reality, Ontario already has significant surplus electrical generating capacity, a situation that seems likely to continue until 2018 at the earliest. The problem seems to be one that is entirely of the government’s own making.

Robert Lyman

Ottawa

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