1. ELECTRICITY SECTOR REFORM IN ONTARIO Presentation by: Garry McKeever, Senior Policy Advisor Office of Energy Supply and Conservation Ontario Ministry of Energy Energy and Environmental Innovations Kleinburg Tuesday, November 16, 2004

2. 2 Overview of Presentation  Ontario’s Supply/Demand Challenge  Replacing Coal-Fired Generation  Electricity Sector Reform Strategy  Results and Next Steps

3. 3 Ontario’s Supply/Demand Situation: Short-Term  Recent IMO supply adequacy reports show that short-term reserve margins in 2004 are higher than they were in 2003. These improved reserve margins are driven by the return to service of some nuclear units, as well as recent and planned capacity additions.  Recent or soon to be completed resource additions include:  TransAlta (Sarnia) – 510 MW In-Service: March 2003  Pickering A Unit 4 – 515 MW In-Service: September 2003  Bruce A Unit 4 – 770 MW In-Service: November 2003  Bruce A Unit 3 – 770 MW In-Service: January 2004  Imperial Oil (Sarnia) – 98 MW In-Service: June 2004  Brighton Beach (Windsor) – 578 MW In-Service: July 2004  Pickering A Unit 1 – 515 MW In-Service: Expected September 2005  Total Resource Additions (30-Month Tracking): 3,756 MW

4. 4 Ontario’s Supply/Demand Situation: Long-Term  Lenders have clearly become unwilling to finance expansion of generation companies selling into the spot market. Many lenders are now requiring that a large percentage (more than 50% or even all) of a project’s output must be sold in advance on contract.  The increasing age of Ontario’s generation infrastructure is also emerging as a potential issue as much of the existing capacity reaches or exceeds its nominal life.  Rising energy prices are a challenge facing all jurisdictions, and all “consumers” will need to adapt and reposition themselves within this new environment.  How to use less energy?  How to use energy more wisely?

5. 5 Comparison of Electricity Cost for Residential Customers Using 1000 kWh per Month

6. 6 Comparison of Electricity Cost for Small Business Customers Using 10,000 kWh per Month

7. 7 Supply and Conservation Challenges  Enormous investments required in generation to the year 2020:  The replacement of coal plants (7,500 MW)  Potential retirement of nuclear plants (up to 10,000 MW)  Load growth (6,500 MW) The Challenge: 24,000 MW / $25-$40 billion  Key Drivers:  Task Force on Electricity Conservation and Supply  OPG Review Committee  Ontario Energy Board’s “Smart Metering” Review

8. Projected Demand Growth and Baseline Generation Capacity

9. Ontario’s Current Generation Mix Oil 1% Biomass/Other 1% Natural Gas 8% Coal 25% Hydro 25% Nuclear 40% Total: 154 TWh

10. Tx- Interconnections Minnesota ~ 90 MW in ~ 140 MW out Michigan ~ 1700 MW in ~ 2100 MW out New York ~ 1700 MW in ~ 2200 MW out Québec ~1450 MW in ~ 825 MW out Ontario’s Peak Load ~ 25,600 MW Manitoba ~325 MW in ~275 MW out 10 Source: Hydro One

11. 11 Government Commitments  Coal replacement by 2007 (7,500 MW)  Renewable Portfolio Standard  5% by 2007 (1,350 MW)  10% by 2010 (2,700 MW)  Economy-wide conservation target  5% by 2007 (1,350 MW)  Government-wide conservation target  At least 10% from provincial operations

12. 12 Coal and Air Pollution  Coal-fired generation influences overall electricity prices, which in turn affect industrial cost structures, but it also affects human health and the environment. It is important not to overlook the broader “externalities” associated with all air emissions.  Based on an Ontario Medical Association study of total air pollution impacts, it is estimated that in 2007 Ontario will suffer an additional:  2,250 premature deaths, and another 11,430 hospital admissions  15,870 emergency room visits, and close to 50 million minor illnesses  $1.2 billion of health care costs and lost productivity  the monetary value total air pollution impacts in Ontario is estimated at about $11 billion a year  The Government remains committed to replacing coal-fired generation with the cleanest, most competitive generation sources available.

13. 13

14. 14 Major Contributors to Ontario’s Emissions Ontario's SO2 - 2001 USA 50% Transportation 2.5% Electricity 12.5% Miscellaneous 0.5% Residential / Commercial 1.0% Industry 33.5% Ontario's Nox - 2001 Transportation 31.5% Electricity 7.5% Miscellaneous 1.5% Residential / Commercial 2.5% Industry 7.0% USA 50%

15. 15 Sector Reform Legislation: Timing and Process  Interim pricing legislation (4.7 ¢/kWh and 5.5 ¢/kWh) – Fall 2003.  Sector reform legislation to establish a new electricity sector structure, introduced June 15, 2004.  Standing Committee on Social Policy held consultations over the summer.  Intent is that legislation will be passed this Fall.  Intent is also that the new sector structure would be in place and operational by early/mid-2005.

16. Electricity Sector Reform: Institutional Structure Competitive Generators Large Consumers Small Consumers Fixed-Price Generators (e.g., OPG Nuclear and Baseload Hydro) Independent Electricity System Operator (IESO) Annual Rate Plan Ontario Power Authority Prepares system plan Contracts for new supply and DSM Manages annual rate plan Houses Conservation Bureau Ontario Energy Board Guarantees public input/fairness Approves prices for price regulated generators; oversees contracts for new supply Ministry of Energy Determines technology mix/goals Sets targets for conservation; renewables Energy Retailers All consumers would benefit from the increased stability that this blended supply mix would provide. Fixed prices for a large part of the energy consumed in the province would keep overall prices stable.

17. 17 Short- and Medium-Term Results Rate Cap Exit Strategy Independent Price-Setting Mechanism Pickering “A” Review Panel Report Public Sector Salary Disclosure and FOI (H1/OPG) Conservation Action Team OPG Financial/Operational Audit OPG Review Committee (Manley/Epp/Godsoe) Electricity Sector Reform – Bill 100 (Ontario Power Authority)

18. 18 Supply, Supply, Supply  Two interim RFPs for new supply and demand management:  300 MW Renewables RFP ($500-$700 million)  2,500 MW Supply/Demand Management RFP ($2.5-$2.8 billion)  Niagara tunnel project to expand generation capacity at Sir Adam Beck Generating Station ($600 million) –Increase of 1.6 TWh of clean electricity per year –Estimated 4.5 years for construction; possible in-service date 2009  Pickering A, Unit 1 Refurbishment ($975 million - $1billion)  Potential restart of Bruce Units 1 and 2 (1,540 MW)  Manitoba/Ontario Clean Energy Transfer Initiative ($5.5 billion)  Interprovincial/US Interties and Reliability  Future Generation Portfolio Mix/Balance