Transport Committee on April 9th, 2024

[The Chair, Liberal, Peter Schiefke]

I call this meeting to order.

Welcome to meeting number 107 of the House of Commons Standing Committee on Transport, Infrastructure and Communities.

Pursuant to Standing Order 108(2) and the motion adopted by the committee on Thursday, February 1, 2024, the committee is meeting to start it study on the Canada Infrastructure Bank’s involvement in the Lake Erie connector project.

Today’s meeting is taking place in hybrid format, pursuant to the House of Commons Standing Orders. Members may participate in person in the room or remotely by using the Zoom application.

Although this room is equipped with a sophisticated audio system, feedback events can occur. These can be extremely harmful to our interpreters and cause serious injuries. The most common cause of sound feedback is an earpiece worn too closely to a microphone. We therefore ask all participants to exercise a high degree of caution when handling the earpieces, especially when your microphone or your neighbour's microphone is turned on. In order to prevent incidents and safeguard the hearing health of our interpreters, I invite all participants to ensure that they speak into the microphone into which their headset is plugged and to avoid manipulating the earbuds by placing them on the table away from the microphone when they are not in use.

Colleagues, I welcome our witnesses for today. Appearing before us by video conference is Mr. Mark Winfield, professor, faculty of environment and urban change, York University. Welcome to you, sir. From the Canada Infrastructure Bank, we have Ehren Cory, chief executive officer; Sashen Guneratna, managing director, investments; and Frédéric Duguay, general counsel and corporate secretary.

We begin with our opening remarks, and for that I will turn the floor over to you, Mr. Winfield. You have five minutes, sir.

[Dr. Mark Winfield, Professor, Faculty of Environmental and Urban Change, York University, As an Individual]

Thank you, Mr. Chair.

My name is Mark Winfield. I'm a professor of environmental and urban change at York University in Toronto. I'm also coordinator of the master of environmental studies/juris doctor programs, a member of the university senate and co-chair of the sustainable energy initiative at the university, although I am speaking today in my capacity as an individual and not on behalf of York University as an institution.

I've written extensively on energy, electricity, environment and climate change issues in Canada, particularly Ontario. I've been a member of NSERC and SSHRC funded research networks and energy storage, smart grids, clean energy planning and transportation and climate change. I'm a founding advisory member of the Energy Modelling Hub. Most recently, I was co-editor of Sustainable Energy Transitions in Canada, which was published by UBC Press last fall.

With respect to the Lake Erie connector, this project was first brought to my attention via media inquiries about three years ago now, I guess. I must admit, my first reaction was that it just didn't make a lot of sense, given what was happening with electricity in Ontario. The notion that the province was going to be in a position to export clean electricity to the U.S. markets simply did not accord with the generally accepted situation on the ground in the province.

Put bluntly, there is no clean electricity to export, and we don't foresee any, probably out into the 2040s at best. The province's nuclear fleet is at end of life, with all three plants scheduled to have units going off-line for refurbishment or retirement. The procurement of renewable energy was formally terminated in 2018, although, in fact, that had stopped earlier, around 2014. The province's energy efficiency strategy was terminated in 2019.

The current government had declined to engage with Quebec around the possibility of interjurisdictional exports and imports despite repeated offers from the Quebec side to do so. The province is actually now projecting and seeing a major increase in greenhouse gas emissions and nitrous oxide emissions from gas-fired generation. That's now up by a factor of three, relative to the low point in 2017 in the aftermath of the coal phase-out. It is now almost on a vertical growth curve, looking at a five time increase by the late 2020s, and that will continue through the 2030s.

There are IESO projections which, indeed, saw ongoing growth in natural gas generation and related emissions through the 2040s. The implication here is that the marginal fuel in Ontario for the foreseeable future will be fossil gas-fired and therefore not clean, as has been generally understood. The situation did beg the question about what level of understanding of the situation on the ground in Ontario was informing the decision-making and the level of due diligence in financing the project. I understand that is now on a definite hold.

I also have to note that similar questions have arisen around the Canada Infrastructure Bank's role at the moment as the only significant investor in the proposed nuclear reactor at the OPG Darlington site. Again, there are lots of questions. This is technology that does not exist, even as a prototype. There is no construction licence. The technology is different from anything the CNSC, the nuclear regulator, has seen before. There are debates within the CNSC itself about how it should even approach the review and approval of the project. There are many serious technical and economic questions about the technology reinforced by the failure of the flagship NuScale SMR initiative at the end of last year.

Just to finish up, regarding the implications here, it does seem there needs to be a higher level of due diligence on the Infrastructure Bank's part in making investment decisions that could be helped by informing and engaging with not just the relevant proponents and authorities, but also making sure there are discussions with people with knowledge and understanding of the local systems and issues within the academy and civil society.

There is a very definite need to reach beyond proponents and their lobbyists. I've been an external adviser on audits for the Auditor General and the commissioner of the environment and sustainable development. This is part of the audit practice. It's a way of ground truthing to indicate where they're going with their audit findings in terms of people with an understanding of the situation on the ground. This is very relevant in this case because I think there is a very serious need to separate the sales pitches around what's being portrayed as clean or green technology from the realities of their technical and economic status and viability.

I think I'll end there. I will be happy to take any questions.

Thank you.

[The Chair, Liberal, Peter Schiefke]

Thank you very much, Professor Winfield.

We'll now turn the floor over to Mr. Cory.

You have five minutes for your opening remarks, sir.

[Ehren Cory, Chief Executive Officer, Canada Infrastructure Bank]

Thank you, Mr. Chair.

Thank you, ladies and gentlemen of the committee.

My name is Ehren Cory and I am the CEO of the Canada Infrastructure Bank, or CIB. To answer the committee’s questions, I’m joined by Frédéric Duguay, our general counsel and corporate secretary, and by Sashen Guneratna, who leads investments in the clean power sector. We are pleased to accept the invitation to testify before you today as part of your study of the CIB’s participation in the Lake Erie connector project.

Canada needs more infrastructure. It's a fact that's widely accepted and understood. Whether that's transmission lines like the Lake Erie connector that allow Canadian energy to move between markets across our country and to other jurisdictions, ports and airports that help Canadians export more and get to new markets, or projects like water and waste-water systems that enable more housing stock, we need more investment in infrastructure.

Government alone can't pay for all this infrastructure. Tax dollars are finite. We need the private sector to do its part as well.

Too often, we hear from infrastructure owners that their projects are sitting on the sidelines as they struggle to address the barriers to getting shovels in the ground. That's where the CIB comes in. We use innovative financing tools to de-risk investment and incentivize the private sector to spend on the infrastructure that, without the CIB, might not get built. We deliver value for taxpayers by making loans that get paid back with interest. It is this flywheel of investment that makes the CIB unique relative to other forms of government support for infrastructure projects.

Before I talk about the Lake Erie connector, I'll just talk for another moment about the CIB and our progress.

Over the last three years, the CIB has really hit its stride. We have now made more than 70 investments that have reached financial close, investing nearly $13 billion of taxpayer money in projects in every region of Canada. These projects have a total capital cost of nearly $35 billion. Each of them is real investment in real projects that address Canada's infrastructure gap.

The projects include an essential passenger and cargo airport in Thompson, Manitoba, that delivers critical service to 37 northern, remote and indigenous communities in the north; investments that support cities, such as Brandon, Manitoba, with water and waste-water treatment facilities, without which new housing can't get built; and battery storage facilities in partnership with Nova Scotia Power and the WMA, which is an economic development corporation owned by the 13 Mi'kmaq nations in the province, that will help decarbonize the Nova Scotia grid.

Two of the projects we've invested in are now completed. Another, the first phase of the REM transit system in Montreal, is also now operational. We are seeing the results of these investments.

Now let me speak to the Lake Erie connector, which is the focus of today's discussion.

The Lake Erie connector is a prime example of an infrastructure project that could potentially deliver public good outcomes, yet it has been stuck on the sidelines for a decade. The project is a cross-border transmission line that will reduce GHGs on both sides of the border, provide a more resilient power grid and drive positive GDP for Ontario by connecting to the largest wholesale electricity market in the world. However, like many other projects, it has been sidelined due to an affordability gap.

The project was initially proposed in 2014. Despite a strong rationale for the investment and public support from the Government of Ontario and the Independent Electricity System Operator, the project was stuck due to high costs that would have had a significant impact on Ontario ratepayers.

The CIB became involved in 2019. After analyzing both the expected cost of the project and GHG and economic benefits, we agreed to make a $655-million loan that would reduce the project's total cost and minimize impacts to ratepayers. However, COVID and inflation then took hold. In the face of rapid cost escalation, Fortis, the owner of the project at the time, suspended the project. As a result, the $655-million investment commitment from the CIB did not proceed to close and the funds were never spent.

For every one of the investments we've made to date and will make, we undertake a rigorous risk-benefit analysis to determine if the project is in the best interest of Canadians. This due diligence is a normal part of making responsible investments.

In the case of Lake Erie, we sought expert advice to help us understand and ensure the value for taxpayers through due diligence. The total cost related to all the due diligence on this project was about $900,000, which represents less than 0.14% of the total investment size.

It is, of course, possible, even likely, that there will be projects like the Lake Erie connector that will be paused, delayed or cancelled due to external factors. This is a natural part of the investment cycle. However, as we often experience with large infrastructure projects, they often return, as is the case with the Lake Erie connector.

I'm pleased to share that discussions on this project have recently resumed under the leadership of NextEra, which acquired Fortis' rights to the project, as well as the IESO. The CIB has been engaged in several recent meetings on the project.

Thank you.

I look forward to the members' questions and the dialogue over the next few hours.

[The Chair, Liberal, Peter Schiefke]

Thank you very much, Mr. Cory.

We'll begin our line of questioning today with Dr. Lewis.

Dr. Lewis, the floor is yours. You have six minutes, please.

[Leslyn Lewis, Conservative, Haldimand—Norfolk, ON]

Thank you for coming again, Mr. Cory. It's nice to see you again. You're becoming a permanent fixture here; it's good to have you back.

I want to ask you a few questions that are related specifically to the Lake Erie connector project. By way of background, we know that, in April 2021, the Liberal government and the Canada Infrastructure Bank announced their partnership with Fortis, a private company that makes billions of dollars in revenues every year. The plan was to build a new underwater transmission line, promising tonnes of low-carbon energy, billions in GDP and hundreds of jobs for Canadians. Had the project been viable, it would have brought jobs even to my community of Haldimand—Norfolk.

The bank offered Fortis, through its subsidiary, a $655-million investment loan, and I understand that the project was cancelled or has been suspended. Even though no official work began on the project, the CIB managed to spend close to a million dollars on bonuses, and that was largely spent on consultants and lawyers.

My first question for you, Mr. Cory, is this: Where did the $900,000 of taxpayers' money go?

[Ehren Cory]

In each of our investments, when it reaches the stage of an investment commitment, as this project did, we undertake due diligence. In this case, the due diligence really had two forms.

First, you can imagine in a loan of this size that there's a decent amount of legal work to structure the investment. This is particularly true in a transmission line that goes across international borders. Therefore, we had legal counsel in Canada who were our main counterparts helping us to structure the deal, write the loan agreements, etc., as well as in the U.S. to help us understand how interjurisdictional rules work, tax treatment and that sort of thing. That's the legal support we had, and that's the majority of the due diligence.

The other kind, which is very relevant to Dr. Winfield's comments, was technical due diligence: understanding the impact of the line and the projected flow of electricity in both directions on the line. Now, I will say that the independent system operator did the first and most important part of this work; that is its role. However, we wanted to have an independent view, so we hired consultants, technical advisers who understand electricity markets and have detailed models. They helped model for us how electricity would flow over the line, both trade from Ontario to the U.S. and trade at times when Ontario would need to import, because over the course of the year, electricity would flow both ways on this line. We were modelling those flows.

That's where we spent the due-diligence money. As in any large transaction, I think that's money well spent and taxpayer money well used.

[Leslyn Lewis, Conservative, Haldimand—Norfolk, ON]

Okay, well, that money well spent is of no value now because the project is cancelled. You're confirming that $900,000 of taxpayers' money has now been wasted because the project is now cancelled, and you can't use that information from consultants because the project doesn't exist anymore. It's suspended.

[Ehren Cory]

It's quite the contrary. The project actually.... Your last statement is absolutely correct; the project was suspended. Let's go back. This is 2021-22. Ontario determined the price it was willing to pay for this line. It was a fixed price offered by the independent system operator, by the Province of Ontario, to Fortis at the time.

Cost escalation in construction.... I don't have to tell committee members here what was happening in our construction markets.

[Leslyn Lewis, Conservative, Haldimand—Norfolk, ON]

Mr. Cory, my question is very simple. The project is suspended, so the $900,000 is basically wasted money. It's gone.

[Ehren Cory]

Not at all. The project is live. The new owner of the project, NextEra, a large transmission operator, has restarted the work. Like many infrastructure projects.... One of the first things someone taught me in this industry is that every project dies a few times before it really lives. This project was suspended, but it continues apace. It is a necessary part of the transmission grid in North America, and we still think it'll get built.

[Leslyn Lewis, Conservative, Haldimand—Norfolk, ON]

Let me ask you something about the viability of projects.

Organizations like, say, the United Nations often fund projects. When the projects fail, the company pays for it, not the organization. It's the company that had the contract that eats those costs. Why doesn't the CIB have a policy like that?

[Ehren Cory]

Well, the CIB is an investor. Different from other forms of government, we invest our money, and we charge interest. The way we get paid back is that we get our money back with interest. Across all of our portfolio of investments, we size our loans to get projects to happen, to make them affordable to rate payers, and to get paid back. When we get paid back in our projects across our portfolio, that more than covers our due-diligence costs. We will be repaid across the portfolio.

Now—

[Leslyn Lewis, Conservative, Haldimand—Norfolk, ON]

Why don't you hedge your risk? Why don't you, as an investor, decide that you will invest after the viability of the project? Did Fortis not announce that they had sought all the permits and were ready to go before you invested?

[Ehren Cory]

Absolutely, and as part of of our natural due diligence, we always ensure that permits are received.

[Leslyn Lewis, Conservative, Haldimand—Norfolk, ON]

What did you spend on lawyers—a million dollars—for? Some of the lawyers referenced permits. If the permits were already confirmed, why are you wasting additional money on lawyers for permits that were already confirmed?

[Ehren Cory]

To be very clear, the achievement of permits is the problem of the project proponent, in this case, Fortis. We did not pay for them to get permits. We paid to do our due diligence to make sure that all permits were received and in good order, and that the project was investable.

The only thing that changed in the project was significant cost escalation. This is a highly technical project. They're burying a cable under the lake. In 2021-22, costs of projects went up dramatically. Ontario had offered a fixed price. Fortis could no longer make the project work even with our investment.

[The Chair, Liberal, Peter Schiefke]

Thank you very much, Mr. Cory.

Next we go to Ms. Murray.

Ms. Murray, the floor is yours. You have six minutes, please.

[Joyce Murray, Liberal, Vancouver Quadra, BC]

Thanks for the information that you, as well as Professor Winfield, have provided.

I'm going to follow up on the conversation about due diligence.

Mr. Winfield suggested that further due diligence might be required. Can you tell us whether and how you plan to increase the due diligence on this project?

[Ehren Cory]

I'll be brief. I'll start, if I may, by recapping the due diligence around the project. It's really important. Of course, Dr. Winfield is an expert on this subject, but I just want to talk about our due diligence and the due diligence that came from the independent system operator, who committee members may have a chance to speak to. I don't know the other witnesses, but I would recommend it.

Remember that power systems work through the 8,760 hours in a year, and there are some hours of the day when Ontario has long, clean power. It might be the middle of the night, the wind is blowing and demand in Ontario is low, or the nuclear plants may be running, etc. Our due diligence showed that, in those moments, there were opportunities for Ontario to economically benefit from exporting clean power to the U.S., to the largest wholesale market in the world, called PJM, the Pennsylvania-Jersey-Maryland market. That equated to, over the first decade of this line, seven million tonnes of GHG savings from Ontario power going to the U.S.

There are also times in the year when Ontario imports power over the line. That might be when the nuclear plants need to shut down for maintenance, when it's not windy, or when it's a particularly hot or cold day in Ontario and you need to bring power in. The IESO's modelling suggested that they would be able to buy that power from PJM in those moments and avoid turning on gas plants in those peak moments in Ontario, so there were, over that same period, the first decade of the line, four million tonnes of GHG savings in Ontario.

I take my time on that because it's important. Some people say, “Well, how can there be savings on both sides of the border?” The answer is that there are a lot of hours in a year, and sometimes the electrons are flowing one way and some the other.

However, I'm not a power market expert, and so the IESO, the Independent Electricity System Operator, that's their job. They have a pretty complicated hour-by-hour model of the Ontario power grid. That's their modelling. We hired PA Consulting, which understands power markets very well, to do due diligence on that, to scrutinize and to make sure that was in the interest of the taxpayers, and it verified that it made sense.

To answer your question, as the project restarts—and as I was saying to Dr. Lewis, this project was, yes, suspended, given costs, but it is still a very viable project over the long term—we will update that forecasting. We will again scrutinize the independent system operator's view. Certainly, as a lender to a project, it's our duty to make sure that's true. However, we are not also the power market experts, so we would hire more due diligence to do that. We would also have legal fees to finalize the contracts with whoever is the new borrower, but we would really be building on the due diligence done to date.

[Joyce Murray, Liberal, Vancouver Quadra, BC]

Mr. Winfield, the implication that we heard from a previous speaker was that due diligence could be wasted money, but I would like to hear your view on the role of due diligence, given that some projects won't go ahead and some will go ahead. With this one, it seems like there is a new owner and it will go ahead, but is due diligence not, really, partly the price of exploring whether a project is viable or not?

[Dr. Mark Winfield]

I would say precisely that. Yes, these things need to be subject to substantial scrutiny to see if they make sense, both in economic terms and in environmental terms.

The problem here is that this project was conceptualized at a different stage in the evolution of Ontario's electricity system. At that point, we were suffering from a condition called surplus baseload generation, which basically meant that the electricity demand went below the minimum amount put out from the system, principally from the nuclear plants, because you can't turn them down. In those circumstances, Ontario was having to export electricity at a negative price. We were literally paying other people to take it off our hands.

In my view, that problem no longer exists, because we have the entire nuclear fleet in various stages of being refurbished, with units coming off-line. What is very clearly happening, and projected to continue happening through the 2030s, is that the marginal fuel in Ontario is natural gas—fossil gas—so there won't be any surpluses. This is because whatever capacity we have is going to be needed to meet the demand in Ontario, and any surplus we generate would be from gas-fired generation.

[Joyce Murray, Liberal, Vancouver Quadra, BC]

Thank you.

I have a question for Mr. Cory.

It's about the model the CIB is based on. I understand Norway has extensively used public-private partnerships, or P3s. How is our P3 structure in Canada set up compared to Norway's or a norm elsewhere?

[Ehren Cory]

Thank you for the question. It is interesting, isn't it?

I think the CIB is an innovative tool, but we are far from the only one. The Nordic countries have partnered together in a very long history around a Nordic bank, and Germany has the KfW with a similar structure.

Since the CIB was launched, the U.K. has announced an infrastructure bank modelled on this one. If you read their legislation, it will be very similar. Of course, most recently, Ontario announced plans to create something similar, so even here....

[The Chair, Liberal, Peter Schiefke]

Thank you very much, Mr. Cory.

I now give the floor to Mr. Barsalou‑Duval for six minutes.