Industry Committee on Oct. 3rd, 2006

[Hans Konow]

Yes, fundamentally the steps that have been taken have certainly been helpful in addressing the investment climate, and that's what we've been on about at some length. But there's always room for improvement. That's why the CCA rate discussion is important in terms of incenting specific investment.

The largest impact will come from having a clear policy sense with respect to what Canada desires to have happen in terms of energy investment, if the policy world is clear. Most of our sectors invest in big blocks of capital for a long period of time, so it isn't today that they're worried about as much as what the consistency is over the next twenty or forty years. If I put $1 billion in the ground today, is it suddenly placed at risk through policy gyrations that might be anticipated? If so, then they won't make that initial investment.

That's why we talk about a policy framework that's explicit, so that people can look at what governments are committed to. As future governments consider the policy framework, they too can see what we said about it and where we thought we were going. Nothing is forever. There will always be changes, but at least there's a greater sense of stability in terms of a policy framework.

And then one step down, the regulatory compact also has to be one whereby investors can say that if they want to put $1 billion, $2 billion, or $3 billion into the ground for some infrastructure, they will know how long it takes before they get their permits. Can they say they can put $100 million into proving out this investment and have some certainty that in two years they will get a yes or a no? If it's a no, that's okay too, because they're big boys. If we know we can't do that, then we'll look at this. There are always options.

So it's trying to have a degree of predictability and consistency and coherence over time that is probably the most important set of elements, as opposed to specific fiscal adjustments—not that they're not helpful or necessary, but they're the next order down. On getting that fiscal framework right, you've made steps in the right direction and we commend you for that, but the big picture has to be right as well.

[Colin Carrie, Conservative, Oshawa, ON]

If we continue further on the road and, as you said, even look into more friendly regulations, my question is whether you think it would make a significant difference in energy prices for the manufacturing sector if we continue along this path.

[Hans Konow]

I think it's about expectations. When the industry was faced with the possibility of electricity deregulation, the question was why we would want to do that. If you couldn't tell people that it was because the price was going to come down, it didn't fly. We had relatively low prices, so why would we experiment in Canada? Well, where we did experiment was where prices were high, with mixed results.

I think it's the same thing. What we're asking for is a world in which prices will be lower than they would otherwise be if we did not have coherence, if we did not have timely investment, but that's hard to prove. It's not whether prices will come down for the industrial sector if you do all the right things, not necessarily. We've already tried to explain that the underlying fundamentals show a rising cost curve for energy across the board. The question is, can we make it lower than it would otherwise be if we do it badly? I feel very confident in saying that's the case, but it's a tough case to prove to skeptical people, let's face it.

[Michael Cleland]

Can we ensure that we don't create conditions that are less favourable than our competitors, so we don't get out of sync? But with oil and natural gas becoming a world market and electricity being increasingly tied into those other markets, they will tend to equilibrate. If we don't get it right, there are barriers we could put in place that would make us slightly worse off. But I agree with Mr. Konow--certainly not lower than today's natural gas prices.

[The Chair, Conservative, James Rajotte]

Mr. Vincent.

[Robert Vincent, Bloc, Shefford, QC]

Thank you, Mr. Chairman.

I have a table in front of me entitled “Canada's Energy Mix”. There is something in here that bothers me. You told me earlier that in any sector, whether we're talking about natural gas, electricity or oil, the price is set according to supply and demand.

However, on this graph, for all production sectors, including natural gas, oil, electricity and cold, total production amounts to 16,705 petajoules. We import 3,144 petajoules, and primary sources amount to 19,849 petajoules. As for final demand, either residential, commercial, industrial, transportation, or agricultural-related, usage amounts to 8,457 petajoules.

If we are producing 19,000 petajoules and using only 8,000, that means there is a surplus. Why are we not seeing lower rates for electricity, natural gas or oil? In the case of oil, I understand; it's because there is a world price. But why are we not seeing better prices for our resources, if we produce more than the current demand?

[Hans Konow]

Electricity is not set by supply and demand per se. The prices are generally set by provincial regulatory bodies in virtually all provinces except Alberta. Ontario is a hybrid market, but certainly in Quebec, New Brunswick, Nova Scotia, Saskatchewan, etc., all of the electricity prices are set by regulators. They look at the cost structure brought forward by the industry, test against their ask in terms of increase in price, and come out with some judgment that allows a rate of return generally lower than the cost of equivalent service in the United States. So electricity is somewhat different from oil and gas.

I'll let Mr. Cleland talk to that situation.

[Michael Cleland]

We have a considerable surplus of natural gas relative to the amount we use in Canada. Until the mid-1980s, we regulated natural gas prices and very closely regulated the amount of natural gas that could be exported. We had a much higher price at that time than we enjoyed throughout the rest of the 1980s and the 1990s because we were sustaining an inefficient industry.

Since deregulation, we've considerably more than doubled our natural gas production. We've attracted investment into the industry, and Canadian consumers have done very well as a consequence.

Looking forward, it's not a question of whether we have an apparent surplus or not; it's a question of what it costs to get it out of the ground. We know that in order to bring northern gas into the picture and bring LNG into eastern Canada, we're going to need the kinds of prices we've been talking about. It will be very difficult to see how you could get prices down much from them.

[Robert Vincent, Bloc, Shefford, QC]

I have another table in front of me showing that from 1978 to 2002, the price of natural gas remained stable. There were slight increases and decreases, but from 2002 up until now, prices have increased exponentially.

What happened in the last four years for there to be this kind of price explosion in the price of natural gas, when prices remained stable for almost 20 years?

[Michael Cleland]

Going back a few years, we in fact had a big inventory of natural gas in North America, and particularly in Canada. Until deregulation, Canada required a thirty-year surplus of natural gas in order to allow exports. With deregulation, that was relieved. The reserve-to-production ratio in North America has now come down to around nine or ten years; in Canada, it's actually a little lower than that right now.

What happened in 2000--and again, you could probably spend two hours just on what happened in 2000--was that it caught a lot of people by surprise, probably a lot of people who should not have been caught by surprise. I suspect there was a lot of over-optimism as to the amount of gas that was available in the western Canada sedimentary basin and in the Gulf of Mexico. In a very short period of time, people found that well productivity was dropping, that new wells were not producing flows as they were expecting, and there was a fairly dramatic change in expectations in terms of the availability of gas in North America.

The gas is there--there is lots of it--but it's quite clear now that we're going after much more expensive supplies.

[The Chair, Conservative, James Rajotte]

Time is up.

Mr. Masse, I have you on the list. Is that correct?

[Brian Masse, NDP, Windsor West, ON]

Yes.

[The Chair, Conservative, James Rajotte]

Okay, we've got about three minutes.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chair.

I just have one question. With regard to the blackouts we had in Ontario and an update in terms of the U.S. side, how confident are we that we're not going to have a similar problem, or another one?

What that did on that day was significant to the economy, not just in terms of the immediacy but also to the confidence of investment in Ontario, for the region supplying manufacturers and so on. Is there a comfort zone there now and a backup plan?

[Hans Konow]

That's a good question. I think the story is actually a very positive one in terms of what has been accomplished. To begin with, the entire incident was taken apart in great detail and lessons were learned from it.

Ironically, some very simple things were found--things like tree trimming. Everybody thought people would take care of rights-of-way, but what they found was that notwithstanding the requirements of a voluntary reliability organization to maintain lines, the first thing that generally was cut when there was financial pressure were discretionary things such as tree trimming. It was not done well enough, and all it took was one branch at the wrong time to contact a line and take it out.

They're much more aggressive about that. The voluntary system of compliance with reliability requirements has been replaced by a mandatory one. It's in the process of transition, but it is being implemented. In Ontario, for instance, it is mandatory to conform with these international reliability requirements.

The coordinating, on a regional basis, so that U.S. and Canadian practices are on a par--and quite frankly, the investigation showed that our practices were superior to those of a number of entities in the United States--is becoming much more homogenous in terms of performance.

I think the root causes were determined, and a massive plan was developed to address them. That plan is rolling out. There is an international reliability organization empowered by legislation in the United States and by regulation in certain jurisdictions in Canada. Hopefully, one day, all will make them mandatory.

Those are the steps that have been taken, together with audits that look at performance in advance of incidents rather than after-the-fact analysis, to try to ensure there will not be a recurrence of it. A great deal of effort has gone into it.

There is a binational report--Canada and the United States--that addresses the recommendations. Those recommendations are now being deployed by regulatory fiat.

[Brian Masse, NDP, Windsor West, ON]

Some of those things were outright negligence. I'm just wondering, because there are several providers that go through the circuit grid that affect each other, is there a penalty system in place if that negligence continues?

[Hans Konow]

The answer is yes, there will be a schedule of financial penalties, and there are other mechanisms that are also being used.

[Brian Masse, NDP, Windsor West, ON]

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Masse.

Thank you very much for coming in today.

I want to reiterate that if you have any further specific information regarding any of the questions you've been asked today, or if you have any further specific recommendations, such as on the capital cost allowance, that you want us to consider as recommendations, please forward them to the clerk. Or if any of your other associations...in the Energy Dialogue Group I believe nineteen associations are members. If any other associations within that group wish to submit anything, we'd certainly encourage them to do so.

Thank you very much for your time today.

Members, thank you very much for trying to keep on time with your questions and comments. We'll see you Thursday afternoon.

The meeting is adjourned.