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Disclaimer
This case study describes Ontario Hydro's approach to environmental accounting, which
Ontario Hydro terms "full cost accounting," and implementation activities through February, 1996.
The case study focusses on the use of "full cost accounting" in planning and decision-making; it does
not address external financial reporting issues. The case study intentionally uses Ontario Hydro's
language and definitions in explaining its activities to incorporate environmental costs and impacts into
its planning and decision-making. For example, Ontario Hydro uses the term "monetize" to refer to
the process of developing appropriate monetary (i.e. dollar) values for the impacts of
emissions/pollutants on the environment. The concepts, terms, and approach presented in this case
study represent Ontario Hydro's view and not necessarily the position or views of the U.S.
Environmental Protection Agency (EPA). By publication of this case study, the EPA is not specifically
endorsing Ontario Hydro's definitions or approach, but is offering this case study as an example of an
approach to accounting for environmental costs and impacts. Readers may also want to consult ^4«
Introduction to Environmental Accounting as a Business Management Tool: Key Concepts and Terms,
EPA 742-R-95-001 (June 1995) for more general information about environmental accounting.
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Acknowledgements
The United States Environmental Protection Agency (EPA) wishes to acknowledge the
cooperation and input of Ontario Hydro which generously allowed access to its people and materials for
preparation of this case study. In particular, Corinne Boone, Full Cost Accounting Advisor in the
Business/Environment Integration Department of Ontario Hydro's Environment and Sustainable
Development Division, repeatedly made time in her busy schedule to answer questions, provide
information, and collaborate in the development of this case study. In addition, Helen Howes, Takis
Plagiannakos, Ali Khan, Barbara Reuber, and Larry Onisto of the Business/Environment Integration
Department reviewed later drafts and provided helpful comments. John Cross and Susan McLaughlin
of the EPA's Pollution Prevention Division also contributed valuable comments. EPA hopes the
documentation of Ontario Hydro's approach will help other companies begin to use environmental
accounting and appreciates the cooperation of Ontario Hydro in telling its story.
This case study was prepared for the EPA's Environmental Accounting Project. Through the
Environmental Accounting project,1 EPA has been working with stakeholders for the past three years to
encourage and motivate businesses to understand the full spectrum of their environmental costs and
integrate these costs into their decision-making.
1 In December 1993, a national workshop of experts drawn from business, professional groups, government,
nonprofits, and academia produced an Action Agenda which identifies four overarching issue areas that require
attention to advance environmental accounting: (1) better understanding of terms and concepts, (2) creation of
internal and external management incentives, (3) education, guidance, and outreach, and (4) development and
dissemination of analytical tools, methods, and systems. The purpose of this document is to help address the third
recommendation, which includes the preparation and dissemination of case studies. The U.S. Chamber of
Commerce, the Business Roundtable, the American Institute of Certified Public Accountants, the Institute of
Management Accountants, A ACE International (the Society of Total Cost Management), and the U.S. EPA co-
sponsored the Workshop. For more information, please see the Stakeholder's Action Agenda: A Report of the
Workshop on Accounting and Capital Budgeting for Environmental Costs, December 5-7, 1993; EPA 742-R-94-
003 (May 1994).
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Acknowledgements (continued)
As a product of this effort, EPA has commissioned case studies documenting companies' efforts
to address environmental accounting issues. For more information on EPA's activities in this area or
for copies of additional case studies, please contact the EPA's Pollution Prevention Information
Clearinghouse at (202) 260-1023. Holly Elwood, Co-Manager of EPA's Environmental Accounting
Project, would like to hear about companies beginning to implement environmental accounting. She
can be reached at (202) 260-4362.
This case study was prepared by ICF Incorporated under EPA Contract No. 68-W2-0008,
Work Assignments 82 and 109. The EPA Work Assignment Managers were Holly Elwood and Marty
Spitzer. Carlos Lago served as the EPA Project Officer. The ICF principal author was Paul Bailey.
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TABLE OF CONTENTS
Page
Purpose of Case Study 2
Organization of Case Study 3
1.
2.
3.
Background 4
t
How Does Ontario Hydro Define Full Cost Accounting? 6
How Did Ontario Hydro Account for Environmental Costs Before Committing to
Full Cost Accounting?
10
3.1 Process for Measuring Internal Environmental Expenditures 10
3.2 Externalities Research ............: '. . 11
4. Why Did Ontario Hydro Address Full Cost Accounting? 13
4.1 Commitment to Sustainable Development , 14
4.2 Relationship Between Sustainable Energy Development and Full Cost Accounting . . 16
5. How Did Ontario Hydro Address Full Cost Accounting? 17
5.1 Established Sustainable Energy Development Task Force 17
5.2 Established Full Cost Accounting Team 18
6. What Did Ontario Hydro's Full Cost Accounting Team Recommend? 19
7. What Has Ontario Hydro Done To Implement Full Cost Accounting? 19
7.1 Established FCA Corporate Guidelines 20
7.2 Applied Full Cost Accounting to Decision-Making 22
7.3 Applied Full Cost Accounting to Planning .25
7.4 Undertook Full Cost Accounting Research 26
7.3 Executed FCA Communication and Education Programs 36
7.4 Conducted Outreach Beyond Ontario Hydro 37
7.5 Addressed Accounting Processes and Issues 38
8. What Has Ontario Hydro Learned About Full Cost Accounting? 38
9. Looking Ahead 41
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ATTACHMENTS
Attachment A: Ontario Hydro Full Cost Accounting Guidelines
Attachment B: Ontario Hydro Environmental Spending Guidelines
Attachment C: Ontario Hydro Full Cost Accounting Bibliography
Attachment D: Ontario Hydro Full Cost Accounting Team Recommendations
Attachment E: Draft External Cost Estimates for Ontario Hydro's Fossil Fuel and
Nuclear Stations
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TABLE OF ACRONYMS
FCA
MCA
SED
DSM
ESDD
CIRP
LIRP
BEI
RET applications
Full Cost Accounting
Multicriteria Analysis
Sustainable Energy Development
Demand Side Management
Energy and Sustainable Development Division
Central Integrated Resource Plan
Local Integrated Resource Plan
Business Environmental Integration Department
Renewable Energy Technology applications
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-2-
"FULL COST ACCOUNTING"
for Decision-Making at
Ontario Hydro: A Case Study
Purpose of Case Study
This case study illustrates how Ontario Hydro, the biggest power utility in North America in
terms of installed generating capacity, is developing and implementing what it terms "Full Cost
Accounting" (FCA). EPA believes that Ontario Hydro represents an informative case study because
the company is well along in the process of incorporating environmental costs into planning and
decision-making. The document relies heavily on Ontario Hydro documents (listed in Attachment C)
and input from Ontario Hydro staff.
Even with increased competition and deregulation of the energy generation industry in the U.S.
and Canada, power companies will find full cost accounting approaches like those described here
increasingly relevant. For example, one impetus to the development of full cost accounting at Ontario
Hydro was a requirement to document the environmental and health impacts incurred by Canada from
electricity generated in Canada and then exported to the United States. These and other potential
environmental implications of deregulation of this industry, are also matters of concern in the United
States. This case study demonstrates that full cost accounting will help power companies respond to
these types of concerns, and will also assist in making more informed choices on balancing the use of
demand side management, conventional, and alternative supply options. EPA believes this case study
should also aid a wide range of companies who are interested in incorporating environmental concerns
into planning and decision-making.
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Organization of Case Study
The presentation of the case study is largely chronological and is organized as follows:
Background. This section introduces Ontario Hydro and presents a
chronology of key events in its development and implementation of FCA.
How Does Ontario Hydro Define Full Cost Accounting? This section
explains how Ontario Hydro defines FCA and key related terms such as
internal costs, external impacts, monetized external impacts, and non-
monetized external impacts.
How Did Ontario Hydro Account for Environmental Costs Before
Committing to Full Cost Accounting? This section reviews Ontario Hydro's
past activities in estimating its environmental expenditures, quantifying external
impacts, and monetizing those impacts using the damage function approach.
Why Did Ontario Hydro Address Full Cost Accounting? This section
describes why Ontario Hydro's commitment to sustainable development in
1993 led to a focus on FCA and what benefits Ontario Hydro anticipated from
full cost accounting.
How Did Ontario Hydro Address Full Cost Accounting? This section
describes the team Ontario Hydro formed in 1993, and the process used to
develop an initial set of FCA recommendations.
What Did Ontario Hydro's Full Cost Accounting Team Recommend? This
section lists the six major FCA recommendations developed in 1993.
What Has Ontario Hydro Done To Implement Full Cost Accounting? This
section discusses what Ontario Hydro has done to develop and implement FCA,
including the establishment of an institutional foundation, development and
application of decision criteria and multi-criteria analysis in planning and
decision-making, and development of monetized external impacts of fossil-fired
generation.
Lessons Learned and Looking Ahead. These sections illustrate Ontario
Hydro's findings to date and its agenda for future FCA activities.
Exhibit 1 lists some of Ontario Hydro's key accomplishments in developing and implementing
Full Cost Accounting, all of which are covered in this case study.
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Exhibit 1: Key Accomplishments
Calculated externality data to support exports of electrical power
Estimated annual environmental spending using guidelines containing over 130 environmental
spending categories , .'
Adopted approach for assessing external impacts and costs
Established internal team to assess status of full cost accounting and develop recommendations
Clearly defined the corporate definition of full cost accounting (FCA)
Reviewed literature on external environmental costs of energy production
Developed preliminary values for some externalities associated with Ontario Hydro activities
Prepared corporate guidelines for FCA
Top management made commitment to FCA
Developed research program on internal and external environmental costs
Developed sustainable energy development (SED) criteria for incorporation of environmental
considerations in financial evaluation and investment decisions
Presented seminars and training on FCA
Conducted outreach activities beyond Ontario Hydro to foster widespread adoption of FCA
Applied FCA in planning at the corporate and local levels
1. Background
Ontario Hydro is the largest utility in North America in terms of installed generating capacity
and employs over 21,000 people.1 It was created in 1906 by provincial statute and operates today
under the power corporation of Ontario. Its customers include 307 municipal electric utilities serving
more than 2,800,000 customers, 103 large industrial customers serviced directly by Ontario Hydro,
and almost 1 million rural customers serviced by 13 Ontario Hydro wholly owned retail utilities. Its
revenue for 1994 was approximately $8.7 billion with a net income of C$587 million.2 Ontario
Ontario Hydro 1994 Annual Report [latest available].
2 As of March 27, 1996, the official exchange rate was one U.S. dollar = .73427 cents of one Canadian
Dollar.
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Hydro's supply system includes five nuclear, eight3 fossil-fueled, and 69 hydroelectric energy stations.
Total system capacity is approximately 34,000 megawatts transmitted across 29,000 kilometers of
transmission lines and 109,000 kilometers of distribution line. Ontario Hydro is a self-sustaining,
government-owned utility without share capital, whose bonds and notes are guaranteed by the Province
of Ontario.
Ontario Hydro is in a period of great change. As is true for many utilities, since 1990 Ontario
Hydro has faced declining load demand due to economic conditions and has excess generating capacity.
With an estimated 92% market share, Ontario Hydro traditionally has not been subject to competitive
pressures. However, throughout North America the energy business is being redefined and
competition is increasing. Accordingly, Ontario Hydro is preparing itself to face the challenges of
open access. A new chairperson, Maurice Strong, was appointed in November 1992 to restructure
Ontario Hydro and make it more competitive and customer-oriented. In 1993, Ontario Hydro
underwent major restructuring to better meet the competitive challenges of the 1990s and beyond.
Much of the restructuring was designed to contain costs, stabilize electricity rates, and gain greater
efficiency. The changes also involved dividing the company into separate business units, each with
clear accountability for its activities, costs, and environmental performance.
As this case study documents, Ontario Hydro has been considering internal and external
environmental costs and impacts for many years. Ontario Hydro was the first Canadian company to
publish an annual environmental performance report. This case study fpcusses on its more recent
commitment to FCA and extensive efforts to develop and apply environmental accounting under the
FCA framework. Exhibit 2 below illustrates this point.
In 1995, 6 of the fossil-fueled stations were operating.
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1994-Ongoing
1994
1995
1995-Ongoing
Exhibit 2: Chronology of FCA at Ontario Hydro
Evaluation of external costs began for export sales
Estimation of environmental expenditures began
Continued research on externalities/social cost issues
New Chairperson supports sustainable development and FCA
Sustainable Energy Development (SED) Task Force appointed and prepares report
Full Cost Accounting Team develops recommendations and issues report
Work towards development and use of FCA
Development and adoption of SED criteria for use in evaluating investment
proposals until FCA is more fully developed
Development and adoption of SED Policy and Principles which refer to FCA
Development of FCA Corporate Guidelines
Stakeholdering* of FCA Corporate Guidelines
Development and implementation of FCA research program for internal and
external costs
Work on development of Business Partnerships to Promote FCA
Communication of FCA Beyond Ontario Hydro
"Stakeholdering" is the term Ontario Hydro uses to describe the process of consulting and seeking input
from interested parties in the business, government, and environmental communities.
2. How Does Ontario Hydro Define Full Cost Accounting?
Ontario Hydro calls its approach to integrating environmental considerations into business
decisions "full cost accounting" (FCA). Ontario Hydro defines FCA as follows:
Full Cost Accounting (FCA) is a means by which environmental considerations can be
integrated into business decisions. FCA incorporates environmental and other internal
costs, with external impacts and costs/benefits of Ontario Hydro's activities on the
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environment and on human health. In cases where the external impacts cannot be
monetized, qualitative evaluations are used.4
Ontario Hydro recognizes that some definitions of full cost accounting include only "internal
costs" (also termed "private costs"), which are the costs that affect a firm's bottom line, and exclude
"external costs" (also termed "societal costs") which is a term used to describe monetized impacts on
human health and the environment that currently are not reflected in a firm's bottom line.5 Ontario
Hydro's approach explicitly encompasses both internal costs and external impacts (both positive and
i
adverse), even if the latter cannot be quantified or expressed as external costs (i.e., fully monetized in
dollars). In developing their FCA Corporate Guidelines,6 Ontario Hydro defined the following key
terms:
Internal costs can be thought of as the costs Ontario Hydro incurs in doing
business. However, in some corporations, including Ontario Hydro, there are
often less tangible, hidden, or indirect internal costs, including environmental
costs, that often are not identified separately or are misallocated to corporate or
business unit overheads (e.g., contingent costs, community relations costs). If
a business unit is not considering these costs, then the business may not
understand the true costs of its products and services, and may, as a result, be
making inappropriate business decisions.
External impacts or externalities are effects on the environment and on human
health that result from Ontario Hydro's activities, but are not included in the
costs of its products and services. These impacts are therefore borne by
society.
Monetized external impacts are external impacts for which Ontario Hydro has
developed monetary values. To date, Ontario Hydro has developed
preliminary external cost estimates for the operation of its fossil stations and
4 Ontario Hydro's Corporate Guidelines for Full Cost Accounting (September 1995). The Guidelines appear in
full in Attachment A of this case study. They have been endorsed by Ontario Hydro's Management Committee
and discussed at Ontario Hydro's Board of Directors in October, 1995, by the Sustainable Development
Committee. These guidelines were tested with a number of stakeholders, including environmental, financial
institutions, customers, and government representatives.
s See An Introduction to Environmental Accounting As A Business Management Tool: Key Concepts and
Terms, EPA 742-R-95-001 (May 1995) and Finding Cost-Effective Pollution Prevention Initiatives: Incorporating
Environmental Costs into Business Decision-Making (1994, Global Environmental Management Initiative
(GEMI)).
6 Ontario Hydro's Corporate Guidelines for Full Cost Accounting (1995). See Attachment A.
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external cost estimates for fuel extraction through to decommissioning for its
nuclear generating stations.
Non-monetized external impacts are external impacts which can be described
only qualitatively because there are scientific limitations in describing the full
range of environmental and human health impacts. In other cases, the impact
can be quantified (in physical units) but there are limitations in developing
appropriate monetized values.
Exhibit 3 illustrates how these concepts relate to each other. Ontario Hydro has explicitly
acknowledged that the dividing line between internal and external costs is not static. For example, a
cost that Ontario Hydro considers external today may be internalized tomorrow because of new
environmental regulations or corporate standards. Ontario Hydro's long-term goal is to better
incorporate environmental impacts and costs into planning and decision-making.
For Ontario Hydro, FCA is
not THE decision-making process,,
not full cost pricing,
not an accounting system, and .
does not require absolute or complete monetization of all internal and external
impacts.
All four points are important. Ontario Hydro sees FCA as providing information necessary but not
sufficient for decision-making. Ontario Hydro uses full cost information as an input to its decision-
making, not as the sole basis for making decisions. At this time, Ontario Hydro has no plans to include
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Exhibit 3
ONTARIO'S HYDRO'S APPROACH TO
FULL COST ACCOUNTING
Non-Monetized External Impacts
Monetized External Impacts S5plSl?l|li|
Internal Environmental Costs
Internal Costs
Excluding Environmental
J;:i !_'..,' i .^jtlJltttei^isiS&aJlj S'fc*«8iS;fe^!!lfci
Long term goal is to internalize external impacts
into Ontario Hydro's planning & decision making
external costs in electricity prices; FCA does not require the corporation to adopt full cost pricing.
Because Ontario Hydro's goal is to use FCA in planning and decision-making, its focus is on changing
management behavior, not accounting systems. Ontario Hydro feels that their information systems are
only as good as the information put into them. They note that internal and external environmental costs
must be calculated before they can be put into an accounting system. (For example, an accounting
system will not have the capability to quantify and monetize externalities). Finally, while quantification
and monetization of externalities is desirable whenever possible, the key for FCA at Ontario Hydro is
that environmental impacts be considered hi planning and decision-making whether or not the impacts
can be quantified or monetized.
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3. How Did Ontario Hydro Account for Environmental Costs Before
Committing to Full Cost Accounting?
This section describes how Ontario Hydro approached internal and external costs in the years
prior to 1993. ,
3.1 Process for Measuring Internal Environmental Expenditures
Although most major companies in Canada,
including utilities, do not collect and report overall
environmental spending data, Ontario Hydro has
been estimating its environmental expenditures since
1.989. Revised in 1991, the guidelines developed by
Ontario Hydro's environmental staff and business
managers, entitled "Environmental Cost Concepts,
Principles and Accounting Guidelines", serve as the
Environmental Spending is any monetary
expenditure, revenue, or revenue foregone,
whether capitalized or charged to current
operating expenses, made by Ontario Hydro
for the primary reason of sustaining or
protecting the environment. This definition
includes any cost incurred for control,
reduction, prevention, or abatement of
discharges or releases to the environment of
gaseous, liquid, or solid substances, heat,
noise, or unacceptable appearance.
1993 Environmental Performance Report
basis for identifying environmental outlays and estimating environmental spending levels that indicate
the environmental component of over 130 individual spending categories7. For example, outlays
associated with monitoring ground water conditions at ash and solid waste disposal sites are considered
100 % environmental, while solid waste disposal site preparation expenses associated with construction
activities are considered only 25 % environmental. For some activities, incremental expenditures
incurred to reduce environmental impacts are treated as environmental spending; for example, the
incremental cost of right-of-way maintenance to reduce herbicide use is considered 100 %
environmental.8
7 The Environmental Spending Guidelines were originally developed in 1982 and were up-dated hi 1991. See
Attachment B for Ontario Hydro's Environmental Spending Guidelines.
1 Attachment B offers more examples of environmental expenses identified by Ontario Hydro.
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Ontario Hydro's estimates of environmental spending are compiled in a couple of ways:
(1) Environmental spending is estimated by each business unit in terms of
operations, maintenance, and administration (OM&A); major capital initiatives;
and fuel and related;
(2) Environmental spending is categorized by: material and waste management,
water management, air management, land use management, environmental
approvals, and energy efficiency.
Because Ontario Hydro's environmental expenditures have not routinely been identified
through its accounting system, the data have been manually collected and judgement applied to define
the percentage of expenditures classified as environmental. As a result, the spending estimates
represent a "best judgement" and are considered gross estimates at best. Moreover, Ontario Hydro
notes that the figures for capital expenditures include only major project initiatives and may not
represent all outlays on capital. Since 1989, the results have been provided to Ontario Hydro's Board
of Directors and summarized in the company's Annual Sustainable Development and Environmental
Performance Report. One of Ontario Hydro's goals is to better define and allocate internal
environmental costs to enable it to make better decisions and ensure value from environmental
expenditures.
3.2 Externalities Research
This section describes the history and status of externality research at Ontario Hydro prior to
1993 and explains Ontario Hydro's approach to quantifying and monetizing externalities.
Ontario Hydro has been investigating externalities for many years. For the past twenty years,
as part of its license application process to export electrical energy to the United States, Ontario Hydro
has been required to submit external cost studies to the National Energy Board of Canada to
demonstrate that Ontarians are not being adversely affected by incremental generation for such sales.
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This led Ontario Hydro to the development of a methodology for identifying, quantifying and
monetizing external impacts and costs for its fossil and nuclear electricity generation system.
In 1991, Ontario Hydro established a Steering Committee on Environmental Costs (SCEC) with
a mandate to coordinate and oversee all of Ontario Hydro's work on external environmental costs and
benefits. In 1992, Ontario Hydro adopted a corporate position to adopt the damage function approach
for quantification and monetization9 of external environmental impacts.
Ontario Hydro's Approach for Quantifying and Monetizing Externalities. There are two main
approaches currently being used by industry and government to place monetary value on externalities:
(1) the cost of control approach, and (2) the damage function approach. The cost of control approach
uses the cost of installing and operating environmental control technologies as a proxy for the dollar
value of actual damages. The damage function approach uses site-specific data and modelling
techniques combined with economic methods to estimate external impacts and costs.
Ontario Hydro supports the damage function approach to quantifying and monetizing
externalities and has used this approach since 1974. Although the cost of control approach is the
simpler of the two approaches to calculate, Ontario Hydro does not support its use because it bears
little relationship to environmental impacts and costs. Because the cost of control approach does not
account for site-specific environmental factors or impacts, the external cost estimates derived for two
similar power stations would be the same even if one station was located close to an urban center while
the other station was in a rural area. The cost of control approach also is limited to pollutants for
which control technology is available. The damage function approach, on the other hand, attempts to
place a dollar value on the actual impacts to human health and the environment by considering site-
9Ontario Hydro defines monetization to mean the process of developing appropriate monetary (i.e., dollar)
values for the impacts of emissions/pollutants on the environment.
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specific impacts. Ontario Hydro advocates using market prices to estimate monetary values for those
impacts (e.g., crop losses) that are traded in the market. For impacts that are not explicitly traded in
markets (e.g., human health and mortality), Ontario Hydro believes that a number of valuation
techniques can be used to derive estimates of willingness to pay (WTP) or willingness to accept (WTA)
for changes in environmental quality10.
Ontario Hydro has acknowledged that even the most accurate externality estimates can be
extremely sensitive to site-specific factors. For example, some pollutants create problems only when
combined with other pollutants whose presence varies considerably from site to site. As a result,
transferring damage cost estimates from one site to another can be very controversial. In addition,
because damage estimates are based on scientific evidence regarding the relationship between pollution
and human health, crop production, natural resources, materials, visibility, etc., impact estimates are
limited by the nature of the scientific data available. Acknowledging these uncertainties, Ontario
Hydro believes mat the real benefit of the damage function approach is its focus on potential site-
specific damages to receptors.
4. Why Did Ontario Hydro Address Full Cost Accounting?
The activities described in the previous section were brought under the FCA framework in
1993 as part of Ontario Hydro's Task Force on Sustainable Energy Development initiative. This
section describes the context for FCA as a key component of Ontario Hydro's committment to
sustainable development.
10 For more information, see Attachment C.
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4.1 Commitment to Sustainable Development
One of the major catalysts for Ontario Hydro's committment to sustainable development was
the appointment of a new Chairman, Maurice Strong, in late 1992, who in addition to his mandate to
re-structure the corporation, also had a strong sustainable development focus.
Chairperson Maurice Strong came to Ontario Hydro with a personal commitment to sustainable
development11; he recognized that movement towards sustainable energy development (SED) would be
a key priority for the future. As a result, in 1993, Ontario Hydro incorporated sustainable development
into its mission statement as follows: ,
Ontario Hydro's mission is "to make Ontario Hydro a leader in energy
efficiency and sustainable development, and to provide its customers
with safe and reliable energy services at competitive prices."
- Ontario Hydro
Ontario Hydro views sustainable
development as a long-term strategy for achieving
business success within environmental limits.
Ontario Hydro defines sustainable development as
"development which meets the needs of present
generations without compromising the ability of
future generations to meet their own needs12".
Ontario Hydro believes that moving towards
sustainable development will enable it to
Sustainable development is a matter of
economic survival in a world of finite
resources and unlimited desire for growth.
For present and future generations to enjoy a
good quality of life, government, industry, and
individuals need to become ever more efficient
in the use of materials and energy, minimize
wastes through recycling and reuse, and
develop new disposal methods.
Maurice F. Strong, Chairperson
" Prior to coming to Ontario Hydro, Maurice Strong played a major role in the United Nations Conference on
Environmental and Sustainable Development in Rio de Janeiro hi June 1992.
12 World Commission on! Environment and Development, 1987.
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simultaneously make progress on environmental goals and cost reduction, job creation, and
competitiveness. It also believes that business competitiveness cannot be achieved separately from
environmental sustainability.
The SED concept applies the principles of sustainable development to the energy sector. A
fundamental tenet of SED is the efficient use of energy, human, financial, and natural resources. In
tills view, business success, ecological limits, and inter-generational equity are related and should be
managed together to drive decisions which are "ecologically efficient" under the framework of SED.
To emphasize that SED should not be seen as an add-on, Dr. Al Kupcis, President and CEO of Ontario
Hydro, indicated to business unit leaders that he did not expect to see specific SED action plans, but
rather, wanted SED to become the business norm throughout business units' planning processes.
Ontario Hydro acknowledges SED as a long-term goal. To move towards this goal, Ontario
Hydro recognizes that its economic activities must be balanced with the capability of the Earth's
ecosystems to respond to the stresses or changes caused by those activities. To do this, Ontario Hydro
may need to make investments in the near term that do not meet its normal "payback period"
requirement. The evaluation of such investments will need to take into consideration the possibility for
longer term benefits for both the environment and business. Ontario Hydro believes that by taking
some actions now in order to reduce resource consumption, promote pollution prevention, and
minimize wastes, and reduce environmental damage, it can contribute to the long term objective of
creating a healthier environment and saving resources available for future use.
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4.2 Relationship Between Sustainable Energy Development and Full Cost Accounting
What is the relationship between Ontario Hydro's commitment to SED and its sponsorship of
PC A? Ontario Hydro sees FCA as one of the cornerstones of its sustainable development strategy. Of
the ten central elements Ontario Hydro identified for SED actions, two were as follows:
integrate environment and economics in decision-making, and
adopt full cost accounting (FCA).
FCA can support sustainable development by helping to ensure that internal and external
environmental impacts and costs are factored into business decisions. By better understanding the
internal and external environmental costs associated with its activities, including quantifying, and where
possible, monetizing externalities, and incorporating this information into planning and decision-
making, Ontario Hydro expects to be in a better position to fulfill its sustainable development mission
and enhance its competitiveness. Ontario Hydro articulated in 1993 the.following expected benefits
from introducing FCA:
provides a powerful incentive to search for the most economic ways of
reducing environmental damage
leads to choices that include explicit consideration of the present and
future environmental impacts of alternative options
should lead to a more efficient and effective use of resources
should help in "leveling the playing field" when evaluating demand and
supply1 options (e.g., demand side management, alternative power
generation technologies, conventional supply options)*
* Energy utilities can meet their mandates to serve the needs of their customers by using a
combination of two different strategies: (1) delivering power to meet energy requirements through
various conventional and alternative supply options, and (2) helping customers use energy more
efficiently, termed "demand side management" or "demand management."
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Notably, the FCA framework encompasses Ontario Hydro's ongoing efforts to estimate both
internal environmental spending and external environmental impacts and costs.
5. How Did Ontario Hydro Address Full Cost Accounting?
In 1993 two important and related events occurred at Ontario Hydro that catalyzed its
commitment to FCA and have served as an impetus for action in 1994 and beyond. These events
included:
(1) The formation of the Sustainable Energy Development (SED) Task Force and
the completion of its report A Strategy for Sustainable Energy Development and
Use for Ontario Hydro (October, 1993), and, in conjunction with the SED Task
Force,
(2) The establishment of a Full Cost Accounting (FCA) Team (as part of the SED
Task Force, initiative) and the completion of its report Full-Cost Accounting for
Decision-Making (December, 1993)
The FCA Team Report served as the background document for the SED Task Force
recommendations on FCA discussed below.
5.1 Established SED Task Force
In June 1993, Chairperson Maurice
Strong commissioned a special Task Force to
develop a strategy for Sustainable Energy
Development (SED). In launching the Task
Force, Chairperson Strong stated, "We must
"The Sustainable Energy Development (SED)
Strategy developed in 1993 reinforced and will
build on many effective environmental initiatives
already in place, but more than this, it provides
the strategic vision and direction for further
progress and new initiatives."
Maurice F. Strong, Chairperson
examine ways and means to incorporate full cost accounting in our financial planning and controls and
to monetize externalities and incorporate them in our planning." On June 3, 1993, the 12-member
Task Force (assisted by over 150 Ontario Hydro staff members) held its first meeting, organizing itself
into ten teams for gathering data, identifying and analyzing issues, and formulating recommendations.
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In September, the Task Force met to review and finalize its report and recommendations. The
Strategy, including PC A recommendations, was formally submitted to the Board in October, 1993.
5.2 Established Full Cost Accounting Team
The FCA Team was one of the ten teams formed by the SED Task Force. The team consisted
of eight members representing environmental economics, corporate finance, management, financial
accounting, environmental, and planning functions. When necessary, other contributors were called on
for expertise in environmental science, engineering, and strategic planning. The Team's mandate was
to:
Define full cost accounting and examine how it relates to Ontario Hydro's
internal accounting and decision-making systems.
Based on availability of data, provide estimates of internal and external costs of
Ontario Hydro activities where possible. Identify data requirements and
propose a research program to expand upon existing estimates of internal and
external costs and develop external environmental cost estimates of the full
range of Ontario Hydro's activities.
Determine how internal and external costs can be integrated into a full cost
accounting framework for Ontario Hydro.
Examine the potential applications of full cost accounting and assess the
implications of its implementation at Ontario Hydro.
Building on past research, the FCA Team worked on an accelerated schedule established by the
SED Task Force to analyze issues and develop recommendations. Team efforts entailed conducting
substantial research and discussion to explore internal costs and externality quantification and
monetization. The FCA Team held a "Full Cost Accounting Workshop" in June of 1993 and invited
other Canadian and U.S. environmental economists and accountants to share their knowledge of FCA,
comment on Ontario Hydro's work, and offer guidance on next steps. The FCA Team presented its
recommendations to the SED Task Force and later issued a detailed report entitled Full Cost
Accounting for Decision-Making (December, 1993). The report defined the concept of FCA, discussed
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the incorporation of full costs into Ontario Hydro's accounting and decision-making frameworks,
presented a preliminary and partial assessment of external impacts and costs associated with Ontario
Hydro's activities, and documented the FCA Team's recommendations for developing and
implementing FCA.
6. What Did Ontario Hydro's Full Cost Accounting Team Recommend?
The following recommendations were created by the FCA Team and represent a detailed set of
suggested next steps that were grouped into these umbrella recommendations:
Ontario Hydro 1993 Full Cost Accounting
Recommendations
(1) Modify the current accounting system into a full cost accounting system
(2) Augment the current financial evaluation framework
(3) Support a research program on full cost accounting
(4) Initiate a training program on full cost accounting
(5) Take full cost accounting beyond Ontario Hydro
(6) Establish a fund for decommissioning, waste disposal, etc.
More detailed information on the FCA Report, these recommendations, and the reasons the
team made these recommendations are available in Attachment D. Section 7 summarizes Ontario
Hydro's implementation activities in response to these recommendations.
7. What Has Ontario Hydro Done To Implement Full Cost Accounting?
The 1993 FCA report represented a "wish list" for FCA at Ontario Hydro. In moving ahead,
Ontario Hydro has taken a more practical approach, and, in doing so, can report many concrete
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accomplishments. This section describes the many initiatives undertaken by Ontario Hydro to develop
and implement FCA since 1993.
The first step was to establish an institutional foundation responsible for managing the
implementation of the SED Strategy. To do this, Ontario Hydro created division called the
Environment and Sustainable Development Division (ESDD). As part of ESDD, the Business/
Environment Integration (BEI) Department was established, which is responsible for FCA. The
mandate of this department is to identify and implement means to better integrate environmental
considerations into business decisions. Seven full-time staff are involved in these activities; developing
and implementing FCA is a significant part of this work.
7.1 Established FCA Corporate Guidelines
In 1995, ESDD developed Corporate Guidelines for FCA. The Guidelines define key terms,
state the goal of FCA at Ontario Hydro, articulate Ontario Hydro's rationale for FCA, describe how
Ontario Hydro plans to use FCA, delineate roles and responsibilities, and lays out an implementation
plan through 19971?. ,; ; . ,- , -,',,-
Ontario Hydro's Corporate Guidelines articulate several reasons for supporting FCA:
Improved environmental cost management - improve identification,
allocation, tracking, and management of environmental costs in each business
unit;
Cost avoidance - improve ability of business units to anticipate future
environmental liabilities and costs, so that corrective action can be implemented
earlier;
Revenue enhancement - improve ability of business units to identify revenue
enhancement opportunities either through environmental technology
innovations spurred by cost cutting initiatives or by strategic alliances with
companies that use waste products as material inputs in their own
manufacturing;
13 These Guidelines appear in full as Attachment A of this case study.
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Improved decision-making - aid business units to better integrate environment
into decision analyses;
Environmental quality improvement - establish an optimal level for reducing
emissions/effluents/wastes with consideration for least cost to society;
Contribution to environmental policy - contribute effectively to the
development of environmental regulations/standards and emissions trading
markets, and
Sustainable development - assist in the transition to a more sustainable energy
future.
Ontario Hydro's adoption of FCA guidelines
represents a fundamental change in the way it
expects to do business.
Managing resources wisely and minimizing
environmental damage will also contribute to
Ontario Hydro's competitiveness, particularly
in the longer term. By better understanding
the environmental impacts of its activities and
by making better resource allocation decisions
based on this information, Ontario Hydro can
save money, become more competitive, and
move towards the goal of sustainable develop-
ment.
Ontario Hydro Corporate
Guidelines for FCA
(September 1995)
Ontario Hydro has conducted stakeholdering
of its corporate FCA guidelines hi order to
communicate its approach to interested parties and
respond to their questions and comments. As part
of this process Ontario Hydro convened a full day,
professionally-facilitated workshop in September 1995. Participants included representatives of the
energy sector, consumers, environmentalists, university researchers, and government agencies.
Stakeholders were encouraged to raise issues and air any concerns. The facilitator sought their
perceptions of the merits and constraints of the draft Corporate Guidelines and the proposed FCA
Research Programme. Overall, the majority of workshop participants supported Ontario Hydro's
efforts to develop and implement FCA and viewed the Corporate Guidelines as a reasonable step in that
process.
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7.2 Applied FCA to Decision-Making
Ontario Hydro anticipates that FCA will evolve over time. Incorporating FCA into decision-
making will take place on a step-by-step, pragmatic basis. In response to the FCA recommendations,
Ontario Hydro has already taken concrete steps such as adding environmental considerations into
investment decisions by implementing SED decision criteria in 1994, as described below.
Traditionally, environmental analysis and evaluation at Ontario Hydro have focussed on
compliance with environmental regulations. In the past, a generic set of questions was used to ensure
consideration of the environmental implications of proposed projects or plans going to the Board of
Directors for approval. These questions were:
What are the environmental implications of this proposal? What environmental
approvals are required?
Does this proposal comply with existing environmental regulations? Is there
sufficient flexibility to respond to more stringent, future environmental
regulations?
Is this proposal consistent with existing corporate environmental initiatives?
Will this proposal contribute to a policy of sustainable development; for
example: will waste products be recycled? Has energy efficient equipment
been incorporated?
Will this proposal create a significant public concern - real or perceived? If
so, then what measures are being considered to offset this effect?
What are the environmental alternatives for/to this proposal? What are the
relative merits of these alternatives?
Although this checklist of environmental considerations may have been effective in eliciting the general
environmental implications of a proposal, this approach was quite limited. It relied mainly on
qualitative and often subjective data. Because information on environmental impacts was not explicitly
incorporated and monetized into cost information, Ontario Hydro had limited ability to rank investment
alternatives using a common denominator.
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SED Decision Criteria. Effective September 1994, Ontario Hydro introduced new SED
Decision Criteria as part of its Business Case Analysis Guidelines for evaluating investment decisions
requiring senior management approval. The SED criteria represent a framework for Ontario Hydro to
integrate environmental and economic information into decision making. In addition, the SED criteria,
notably the environmental impact subcriterion, reflect an FCA approach. The SED criteria are
intended to help Ontario Hydro's business units describe and evaluate the SED implications of
expenditure decisions going to senior management or the Board of Directors for approval. Ontario
Hydro believes that the SED decision criteria reflect its commitment to sustainable energy development
and the movement towards FCA.
The SED criteria require that Ontario Hydro
consider a project's (1) resource and energy use
efficiencies, (2) environmental impacts, (3) social
impacts, (4) employment of renewable energy
sources, and (5) financial integrity. The five criteria
were chosen because they are the macro SED
indicators that Ontario Hydro uses to gauge its SED
performance. According to the criteria, the
evaluation should consider:
Life Cycle Costing and FCA
Ontario Hydro has considered concepts of
life cycle costing (LCC) in developing its
strategy for FCA. For internal costs, Ontario
Hydro considers the full fuel cycle,
inventorying energy requirements and
generation of wastes/pollution. For external
costs, involving the consideration of damages
to human health and the environment, Ontario
Hydro aims to consider the full life cycle but
expects to emphasize at a minimum the stages
of the life cycle over which Ontario Hydro has
direct control and responsibility: design,
construction, operation and maintenance, and
decommissioning/disposal.
full life cycle impacts, where possible, but at a minimum, design, construction,
operation, maintenance, decommissioning, and disposal;
expected damage to ecosystems, community, and human health (i.e., versus
ability to meet existing or proposed environmental regulations);
potential positive and negative environmental impacts, including impacts that may be
common to all the project alternatives being compared
quantification and monetization of the potential impacts, where possible; but at a
minimum a qualitative description; and
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tmde-offs made in selecting the preferred alternative.
Ontario Hydro expects that this analysis will uncover relationships between competitiveness and
sustainability that might otherwise go unnoticed and, as a result, lead to better investment decisions.
President and CEO Al Kupcis has charged Ontario Hydro's ESDD staff with providing senior
management with an independent review of the SED component of business case summaries. ESDD
staff also are available to work with the business units to advise on SED during the development of
business case summaries. Since the SED criteria were implemented in 1994, 19 BCAs have been
reviewed. The majority of these BCAs addressed the criteria appropriately and were recommended for
senor management approval. In some cases, the SED implications analysis was effective in the
development of alternatives that incorporated the principles of sustainable development. The SED
analysis also exposed business unit staff outside of the environmental functions (ie., financial staff) to
sustainable development issues.
As an example, in one case, a proposed investment decision for a $24 million transmission line
refurbishment, the SED implications were:
20% reduction in energy loss in transmission lines through the use of energy
efficient conductors;
$.5 million annual increase in revenues through the re-use and recycling of
removed line components;
initiation of a program to improve the biodiversity of rights-of-way by restoring
and replacing natural habitats; and
provision of employment and economic benefits to local communities.
This investment decision was approved.
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7.3 Applied FCA to Planning
In addition to major investment decisions, Ontario Hydro has used FCA for such planning
activities as the following:
Corporate Integrated Resource Plan (CIRP)14 is a business-wide, strategic
exercise to evaluate different supply generation and demand management plans
for the future. One of the criteria used to assess the plans was environmental
impact. The assessment was performed on an environmental damage basis
(using the damage function approach), consistent with Ontario Hydro's
corporate guidelines for FCA. Impacts were either quantified, and monetized
where possible, or qualitatively described, depending on the data available.
Additional SED considerations were included in the form of "committed
impacts," that is, impacts that would have to be managed by future generations
(e.g., used nuclear fuel in storage; consumption of non-renewable resources;
greenhouse gas emissions). The analysis was performed on a life-cycle basis.
Local Integrated Resource Plans (LIRPs) address tradeoffs in supply and
demand management options for specific geographic areas with potential supply
shortfalls. Ontario Hydro initiated six LIRP studies in 1993 and carried out
nine LIRP studies in 1994. LIRP studies examine a wide range of options,
including demand side management (DSM) strategies, to meet customer needs.
These studies offer customer participation in decision-making and aim to
provide solutions that harmonize with environmental and social objectives. In
1994, Ontario Hydro evaluated environmental and other plan attributes such as
cost and reliability within one LIRP Process. Other LIRP studies have shown
mat DSM programs could defer the need for constructing major new capacity.
In time, Ontario Hydro also plans to incorporate FCA into procurement decisions; Ontario Hydro
procures about $1 billion each year in goods and services.
Use of Multi-Criteria Analysis in Planning. Because Ontario Hydro has not yet developed
monetized environmental impact estimates for all available supply, demand side management, and
transmission options, an evaluation method is required to facilitate comparison of environmental impact
information expressed in different units (qualitative, quantitative/and where available, monetized) and
to integrate such data into Ontario Hydro's decision-making and planning processes. A similar
14 "The objective of integrated resource planning is to ensure that all available options are considered in
determining how best to meet customer energy needs." Ontario Hydro 1994 Sustainable Development/
Environmental Performance Report.
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evaluation method is also required to compare and make trade-offs between environmental and other
plan attributes (cost, reliability, risk, etc.) in the planning process. Ontario Hydro uses Multi-Criteria
Analysis (MCA) for these purposes.
MCA has been used in both Ontario Hydro's CIRP and LIRP processes to evaluate and
compare these environmental "unlikes," evaluate and compare environmental and other (e.g., cost,
reliability) plan attributes, and make trade-offs. In 1995, MCA was used to select the key
environmental indicators for evaluating the CIRP plans. In addition, Ontario Hydro is currently using
MCA to evaluate plan attributes within its ongoing LIRP processes. Ontario Hydro believes that
approaches such as MCA, combined with FCA, are necessary to evaluate trade-offs in decision-making
and planning.15
7.4 Undertook Full Cost Accounting Research
Ontario Hydro has undertaken recent research on internal environmental cost accounting and
external impact and costs issues. The following is a brief description of the results.
Internal Environmental Cost Research
Environmental Expenditures and Overhead Accounts. Ontario Hydro believes that to
implement full cost accounting, it must be able to isolate (i.e., distinguish from other types of
expenditures) environmental expenditures, particularly from overhead accounts. For example,
payments pursuant to compensation agreements with aboriginal peoples have traditionally been
allocated to corporate overhead rather than to a business unit. Ontario Hydro is minimizing the
15Ontario Hydro's application of MCA is described in: Boone, C., Howes, H. & Reuber, B.. "A Canadian
Utility's Experience in Linking'Sustainable Development, Full Cost Accounting and Environmental Impact
Assessment", Toronto: Ontario'Hydro, June 1995.
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practice of charging expenses to overhead accounts, and has implemented the following procedures to
ensure that each business unit is accountable for its own costs:
All costs are incurred by or allocated to business units;
Overhead charges for corporate services are limited only to those costs for
which fees cannot be reasonably charged.
Making each business unit responsible for its own expenditures and costs helps Ontario Hydro
achieve better internal environmental cost information, thereby minimizing cross business unit
subsidization and the amount of money charged to general overhead accounts. Some business units are
in the process of evaluating and implementing activity-based costing (ABC) systems, which will further
aid Ontario Hydro in identifying and managing environmental costs.
Allocation of Energy Efficiency Expenditures as Internal Environmental Costs. In 1994,
Ontario Hydro expanded its definition of environmental expenditures to include costs associated with
improving internal and customer energy efficiency'. Exhibit 4 presents Ontario Hydro's estimated
environmental expenditures for 199416. Ontario Hydro's annual environmental report for 1994 presents
the totals shown in the last column.
16 All sums are in Canadian dollars and may not add due to rounding.
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Exhibit 4: Ontario Hydro Estimates of Environmental Spending (1994)
($M)*
Material & Waste Management
Environmental Approvals
As of March 27, 1996, the official exchange rate was one U.S. dollar = .73427 cents of one
Canadian dollar.
Ontario Hydro is currently investigating methods to obtain more precise information on its
internal environmental expenditures at the project/process level, to track and allocate these expenses on
a life-cycle basis, and to accomplish this more explicitly than in the past. As the first step in this
process, Ontario Hydro is undertaking a pilot study within one of its Retail Utilities. The pilot project
is described below.
Internal Environmental Cost Pilot. This pilot project is currently underway at
Southwest Hydro, one of the thirteen retail utilities owned and operated by Ontario Hydro, and
located in Southwestern Ontario. The Southwest Hydro Utility territory includes
approximately 75,000 customers and had a net income of $19 million in 1995. The goal of the
pilot project is to identify and collect all internal environmental costs associated with
Southwest Hydro's activities, identify and prioritize processes or products having higher
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environmental costs and liabilities, and develop recommendations leading to cost savings, cost
avoidance, revenue generation, waste reduction and improved image in the community for the
Utility. Results from the pilot project are expected to benefit other management of the
business.
Since environmental expenditures at present are not identified and recorded separately
throughout Ontario Hydro's accounting system, the process of collecting environmental costs
involved estimation based on physical data available or obtained through interviews with
Utility personnel, use of data from other Utilities as proxy, and various other sources of
information. A list of all major environmental activities and associated costs was then
prepared by manually collecting data by separating environmental costs from other operating
and capital costs, using environmental expenditure guidelines and allocation methods based on
work practices and employees' experiences. Costs that were incurred and recorded as a one
time expenditure were annualized.17
Internal environmental costs were defined as expenditures on both external and social
environmental initiatives, whether capitalized or charged to operations for equipment, labour,
fuel and program to protect and restore the environment. The scope of this project covered
costs incurred by the utility and did not include estimation of external costs relating to
environmental impacts from its operations.
17 spread over frequency of occurrence, i.e., incurring every 4-5 years.
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- The total environmental costs were approximately 15% of the Utility's Operating,
Maintenance, and Administrative (OM&A) costs and 8% of the total annual expenditures. The
top five environmental activities and associated costs were related to fuel consumption,
transformer management, Polychlorinated Biphenyls (PCBs), energy efficiency, and forestry
work. While PCBs and energy efficiency enhancement related expenditures were classified as
being 100% environmental, other like fuel consumption, transformer management, and
forestry did not attribute entirely to environmental costs, as they were incurred to meet
operating requirements.
It is expected that the analysis of the results will lead to identification of cost drivers,
fixed vs variable costs, regulatory vs non-regulatory costs, high risk vs low risk costs and
future liabilities. Opportunities for managing these environmental costs and risks will also be
identified for further analyses, such as evaluation of low cost wast management/recycling
options, green procurement (steel poles and pole extensions), alternate fuels for fleet (ethanol,
gas), moving to PCB free operations, adopting natural landscaping, investigating line loss
reduction options (shunt capacitators and transformer sizing), possible out-sourcing of fueling'
to reduce risk from underground tank leakages, optimizing of tree trimming cycles, future
partnerships with other service providers (Bell, Cable TV, Parks for RET applications). The
results from the pilot study are also expected to help in benchmarking environmental
expenditures and in the Utility's business planning and budgeting activities. The pilot project
is expected to be completed by 1Q/96.
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Externalities Research
As mentioned in the definition of externalities contained at the beginning of this case
study, even after existing environmental regulations have been met, there are still residual
emissions with associated environmental damage. It is Ontario Hydro's view that by better
understanding these "residual" environmental impacts that the corporation will be in a better
position to reduce future environmental liabilities and enhance its competitive position in the
future. It is for this reason that Ontario Hydro is pursuing research on its external impacts and
their associated costs. By understanding the external impacts and costs of its operations,
Ontario Hydro can be better positioned to respond to tighter future regulations by developing
process changes now to reduce its externalities, as well as better managing future
environmental liabilities.
Quantification and Monetization of Externalities. Ontario Hydro has developed
monetized externality estimates for the operation of Ontario Hydro's fossil stations located in
southern Ontario and for the full life-cycle of its nuclear stations (Attachment E). These are
preliminary estimates and certainly hi the case of fossil, underestimate the health impacts
associated with the operation of the fossil stations. Monetized externality estimates have yet
not been developed for Ontario Hydro's hydroelectric stations, transmission or distribution
line systems, renewable energy technologies or demand side management initiatives.
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In the summer of 1993, the FCA
Working Group expanded upon previous work
completed within the Corporation to identify,
quantify and monetize external impacts and
costs associated with Ontario Hydro's activities.
Preliminary estimates were derived for external
Ontario Hydro supports the Damage Function
Approach, rather than the Cost of Control
Approach, to identify, quantify, and where
possible, monetize, the external impacts of the |
full life-cycle of its activities. This approach
first considers site-specific environmental and
health data; then uses environmental'modelling
techniques which consider how
emissions/effluents etc. are transported, I
dispersed or chemically transformed hi the
environment; and then considers what
receptors (e.g., people, fish) are affected by
these emissions. Finally economic valuation
techniques are applied to translate physical
impacts into monetary terms.
Ontario Hydro's Corporate Guide-
lines for FCA (September 1995)
impacts associated with the operation of Ontario
Hydro's fossil stations located in southern
Ontario. Estimates were also also developed
for the nuclear system on a full life-cycle basis.18 Monetized estimates of physical impacts
(i.e., statistically estimated impacts in terms of human mortality, morbidity, crop losses, and
building material damages) were developed based on the use of per unit dollar values it had
previously developed. The estimates are provided in Attachment E. As an example, Exhibit 7
presents one of the resulting tables; it summarizes the FCA Team's preliminary estimates of
the system's average external costs due to the generation of electricity in Ontario using fossil
fuels.19 As shown, the external costs associated with statistical premature mortality were
estimated to be about $21.4 million (in 1992 Canadian dollars) or 0-.088 cents per kilowatt.
For all the impacts considered, the average monetized estimate was $95.79 million or 0.395
cents per kilowatt.
18 These preliminary externality estimates are contained in the FCA Team's Report (December 1993) and are
expected to change as research progresses.
19 These monetized impacts are based on the use of a specific methodology -- termed the "damage function
approach" that was described in Section 3 above.
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Exhibit?: Monetized
Receptor
Mortality: (Statistical Deaths)
Morbidity: (Admissions)
Cancer Cases
Crops
Building Materials
TOTAL
External Impacts of Fos
Pollutants of Concern
SO2, SO4,
S02) S04)
O3, NO3
O3, NO3, TSP
Trace Metals
03
SO2
sil Generatio
Unit
Values
$4,725,600
$44,700
$408,397
N/A
N/A
n in Ontario*
Monetized Impacts
$M 1992
21.40
50.83
9.53
8.32
5.7
95.79
C/kW
0.088
0.210
0.039
0.034
0.024
0.395
* As of March 27, 1996, the official exchange rate was one U.S. dollar = .73427 cents of one Canadian
dollar.
Since December 1993, ESDD has focussed on developing research priorities to
improve its externality impact and cost estimates and to broaden the range of environmental
impacts for which externality cost estimates are developed. This is being done by working
with the business units to better define and understand their external impacts and costs.
Working Groups. During the period from 1994-1995, a number of "Externalities
Working Groups" were established at the business unit level to address issues relating to the
development and implementation of FCA within Ontario Hydro and to define and where
possible monetize external impacts. The working groups were initatied by the business units
to examine externalities and assess how business case analysis could be undertaken with full
cost accounting-based information. Examples of three such working groups include:
(1) Energy Services Working Group. This working group involved
examining the implications of FCA for the evaluation of demand side
management technologies and programs. The group examined
environmental impact issues associated with demand side management
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(DSM) technologies and programs and provided recommendations on
how to incorporate environmental externalities into future decisions.
(2) Ontario Hydro Nuclear Working Group. This working group examined
the implications of FCA on business decisions relating to nuclear
generation of electricity, focussing on environmental impacts and costs
(i.e., external costs). The study revisited several recently approved
projects and attempted to include FCA considerations. The study
identified many items that should be included for a proper treatment of
FCA; only some of these items could be included with information
currently available. In some cases, FCA would not change the decision;
in others, environmental impacts could be the deciding factor. The
study addressed such issues as how to supply data, data consistency,
cost-effectiveness of using FCA, necessary infrastructure, training
needs, and required corporate guidelines.
(3) Transmission Working Group. A GRID Externalities Team was
established to undertake an examination of potential externalities due to
activities associated with the transmission and distribution of electricity.
The team consists of members from Grid System Strategies and Plans,
Grid,Operations, Grid Transmission Projects (Environment), Corporate
Health & Safety, Corporate Strategic Planning, Aboriginal and Northern
Affairs, and ESDD.
The following are examples of GRID group activities:
identified the life-cycle phases of Grid facilities and activities
and, in general terms, activities in each phase of the life-cycle;
identified potential human health, natural (including ecosystems),
and social environmental effects for activities in each phase and
categorized them into impact areas. The impact areas were
terrestrial and aquatic ecosystems, socioeconomic, human health,
and visibility;
classified the environmental effects either as potential
externalities, internal, or internalized costs;20
assigned the potential externalities a high, medium, or low
priority; The most significant potential grid-related externalities
were identified to be the human health effects of electric and
magnetic fields, the effects on ecosystems of transmission
20 "Internalized costs" was used to distinguish what would have been externalities if mitigation had not been
undertaken.
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corridors, waste disposal issues, and the impact of transmission
facilities on property values, recreation, and tourism.
identified relevant issues for examination; and
recommended how efforts should proceed towards quantification
and, where possible, monetization of the potential externalities
through the use of the damage function approach.
In 1995, ESDD developed its FCA research program in consultation with each of the
business units and with review and input from stakeholders. The research program is
undergoing review by Ontario Hydro's Business Planning process, as of February 1996.
Currently identified priorities are listed on p.43 below.
Ontario Hydro is also monitoring trends in externality-related research in North
America and Europe. For example, ESDD participated in an international conference held in
Brussels to review research on the social costs of energy. The objective of the Brussels
conference was to discuss the state-of-the-art in calculating externalities/impacts of major fuels
and review the results of several new studies. Ontario Hydro concluded that the
methodologies used, the issues identified,, and the estimates of external costs produced by
recent studies supported by The European Commission and the U.S. Department of Energy
were consistent with those produced by Ontario Hydro. In developing its research program,
Ontario Hydro hopes to address some of the issues raised at the conference by other
researchers.
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7.5 Executed FCA Communication and Education Programs
In 1994, ESDD gave a number of presentations to its Business Leaders (senior managers), line
managers, and key support staff. Topics covered included:
The concept of FCA
Uses and implications of FCA
Its implications for planning processes, and
Tools and techniques for incorporating FCA into decision-making processes.
InMarch 1994, ESDD delivered a one-day seminar focussing on the externalities component of
FCA to sixty (60) environmental and financial staff with representation from all business units. The
objectives of the "Externalities Seminar" were to:
Explain the concept of FCA, focussing on externalities,
Introduce the economic theory of externalities and describe approaches for their
quantification and monetization,
Describe externalities research,
Differentiate between environmental and socio-economic externalities, and
Discuss issues associated with incorporating externalities into planning and
decision-making.
ESDD also has developed and delivered shorter presentations to senior level management
covering the concept of FCA, its uses .and implications, and the status of its development at Ontario
Hydro. ESDD prepared similar presentations tailored to specific business unit needs for line managers
and working level staff. In addition, ESDD wrote an FCA Backgrounder (1995) for internal use. The
Backgrounder defines FCA, reviews how FCA builds on prior work at Ontario Hydro to incorporate
environmental impacts into decision-making, summarizes the status of quantification and monetization
of externalities at Ontario Hydro, and identifies next steps for FCA research.
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In addition, in 1995, ESDD conducted training seminars on applying the SED Decision
Criteria, at the request of the GRID business unit planning function.
7.6 Conducted Outreach Beyond Ontario Hydro
Ontario Hydro has taken a leadership role in fostering broader use of FCA. For example,
since the December 1993 completion of the FCA Team Report, Ontario Hydro:
Began work towards development of business partnerships to promote
education on FCA in Ontario and across Canada, develop a network of
academic, research, and professional organizations active in this area; and co-
sponsor and promote FCA research that will produce practical results.
Participated in an FCA study sponsored by the Canadian Institute of Chartered
Accountants (CICA) to examine Full Cost-Accounting issues. The project is
examining what FCA means, the usefulness of internal and external
environmental cost information, primary users of the information, the
practicality of implementing FCA, and potential problems and solutions.
Provided input to the Business Council on Sustainable Development (BCSD)
report Internalizing Environmental Costs to Promote Eco-Efflciency.
Participated and presented materials in a workshop on "Accounting for Capital
Budgeting and Environmental Costs" (co-sponsored by the U.S. EPA) and
contributed to the workshop's development of a set of Action Agendas.21
Hosted a two-day meeting on FCA with Dupont, U.S.A. to exchange
information and share perspectives on FCA. The meeting facilitated discussion
about FCA and other efforts underway at each company relating to sustainable
development and environmental accounting. Participants also identified
potential areas for future collaboration.
Participated in a review panel for environmental accounting guidelines for
management accountants.
Collaborated with the U.S. EPA on this case study detailing Ontario Hydro's
experience with FCA.
2> See Stakeholders' Action Agenda; A Report of the Workshop on Accounting and Capital Budgeting for
Environmental Costs (December 5-7, 1993), U.S. EPA, Office of Pollution Prevention and Toxics (EPA 742-R-
94-003, May 1994).
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Reviewed the World Resources Institute environmental accounting case
studies.22
Participated in Government of Ontario Economists working group to promote
awareness of the current status of economic assessment in public policy
development and to provide a forum for discussing economic issues, sharing
information and expertise, and improving the quantity and quality of economic
assessment in Ontario Ministries.
Conducted FCA stakeholdering as described in this case study.
Participated in Environmental Accounting Conference in Houston, Texas held by the
University of Houston, the World Resources Institute, and the Business Council for
Sustainable Development.
7.7 Addressing FCA Accounting Processes and Issues
FCA and GAAP. Ontario Hydro is currently co-authoring a discussion paper to explore issues
relating to FCA and Generally Accepted Accounting Principles (GAAP). Ontario Hydro wanted to
clarify its understanding that GAAP does not necessarily pose a barrier to FCA; rather, that
?
accountants and managers need to understand how each group defines terms such as "cost" and
"liability" differently.23
8. What Has Ontario Hydro Learned About Full Cost Accounting?
Below are some of the lessons learned by Ontario Hydro to date, in its effort to develop and
implement FCA24. Ontario Hydro hopes that this information can be useful for other companies
interested in, or working on FCA issues.
22 See Green Ledgers: Case Studies in Corporate Environmental Accounting, edited by Daryl Ditz, Janet
Ranganathan, and Daryl Banks (World Resources Institute, 1995).
23 It is anticipated that this paper will be completed in Q2/96.
24 Boone, C. and H. Howes. "FCA: Barriers and Opportunities - Ontario Hydro's Experience", Toronto:
Ontario Hydro, March 1996.
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Ontario Hydro has learned that:
Full Cost Accounting (FCA) must be positioned as an approach which makes "good business
sense" in order to promote integration of environment and business issues. Steps must be taken
to demonstrate the benefits of understanding the environmental impacts and costs (internal and
external) associated with business activities (i.e. the potential for reductions in future
environmental costs and liabilities). If this is done, FCA will be considered to make "good
business sense"25.
Case studies and projects where FCA has been applied and have contributed to a better
business decision provide concrete examples that may facilitate change in acceptance.
FCA, for internal environmental costs and externalities, is not yet mainstream thinking. It is
often difficult to get a "foot in the door". A way to overcome this barrier is to highlight the
potential to avoid potential future environmental liabilities. In addition, if a company
understands the environmental implications of its business activities, it can sometimes influence
regulation.
FCA needs an executive member of the organization to champion its value and use for business
decisions.
FCA should be developed and implemented as part of a larger context; for Ontario Hydro,
sustainable development is that context.
FCA is only one of the elements that go into making business decisions, it is not the decision
making process. It is very important to communicate this point. Building on this, it is
important to highlight that FCA can contribute to more informed decision-making which
highlights a greater variety of the trade-offs involved in all decisions Ontario Hydro has
found that its approach to FCA, which includes Multi Criteria Assessment, provides an
effective tool for this.
It is important to implement FCA as a central component of a corporation's overall
Environmental Management System (EMS). In this regard, it is important to develop some
high level FCA Guidelines and link them to the EMS26.
25 This finding is consistent across a number of corporations as reported in a recent Arthur D. Little
survey, and points to the "lack of integration between environmental and business issues in
companies...and the failure to convince management that environment is an important business issue"
26 According to Ontario Hydro, an Environmental Management System (EMS) is a management
system designed to achieve organizational directives and policies regarding environmental impacts of an
organization's activities. Key issues include: full cost accounting, sensitivity to issues of due diligence,
an ability to monitor and respond to effects of ongoing activities and a commitment to continuous
improvement through self evaluation, correction and a capacity for learning and creation of economic
incentives and instruments. ISO 14000 will provide a framework for EMSs and will be released as
guidelines in 1996.
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Ontario Hydro also stresses that FCA does not mean "full blown monetization" of all internal
environmental costs and external impacts and costs. In this regard, Ontario Hydro stresses that
it is essential to have a methodology for considering externalities which allows for the
consideration of monetized (economic value of environmental damages) and non-monetized
(i.e., qualitative description of damages or emission levels) environmental information.
Ontario Hydro's use of the damage function approach to consider externalities and its use of
Multi Criteria Assessment have facilitated this.
Developing and implementing FCA is a gradual process (for internal environmental costs and
external costs). It will not happen overnight. However, just because it takes time and may be
difficult does not mean that it should not be done. It is best to focus on those areas where it is
possible to exert the most influence and obtain positive results. There are many environmental,
economic and competitiveness benefits that will be realized by those companies that explicitly
integrate externality concerns into the way they do business now. Ontario Hydro believes that *
it will become more competitive by knowing and integrating these considerations into its
business practices through methods such as FCA27.
The process of changing corporate culture and attitudes are key to fostering support and
commitment to FCA; however, this is often a long, slow process. The challenge is to develop
an appreciation for the business case for FCA and sustainable development.
FCA is multi-disciplinary by its very nature. The successful development and implementation
of FCA requires a team approach with input from a wide variety of professionals in the
organization such as: scientists and planners, environmental economists, and accounting-based
disciplines. Full Cost Accounting is not solely an accounting system issue. Rather it is a
framework that can be used to consider the broader financial and environmental implications of
doing business. - . .
Terminology causes many problems, in part, because of the multi-disciplinary nature of FCA.
There is a need to develop an agreed upon set of terminology to address FCA. For example,
terminology such as environmental cost accounting, full cost accounting, total cost assessment,
true cost accounting, total social costing and full cost pricing, are often used inter-changeably
and are sometimes assumed to mean different things. In addition, some practitioners use FCA
to describe only internal environmental costs, others refer to it when discussing externalities.
There is a need to draw the links between internal and external environmental costs. See
Exhibit 3. It is important to understand that the boundaries between internal and external
environmental costs are not static, but rather are dynamic because both regulations and
company policies change over time. For example, a system-wide cap on greenhouse gas
emissions, or new regulations on air toxins which may be either certain or possible, would
lead to an expansion of the internal environmental cost domain and a reduction of the external
cost domain. Whether voluntary or mandatory, it is certain that the external cost domain will
contract over time. Corporations with a serious commitment to sustainable development will
be at the forefront of this evolution.
27In a recent survey of Ontario electricity customers, environmental performance and environmental
leadership were considered to be important by over 90 per cent of respondents, in their potential future
selection of supplier. Ontario Hydro believes that it can strengthen its environmental performance and
environmental leadership through initiatives such as FCA.
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The process of identifying, quantifying and where possible, monetizing environmental impacts
and costs (internal environmental costs and externalities) and integrating information into
decision-making processes is data-intensive. Data must be analyzed consistently if it is to be
meaningful in decision-making and the promotion of sustainable development.
Training and communication on what FCA means, the rationale for, the benefits of and the
methods for implementation, should be a priority in order to drive the right behavior of
managers and decision-makers. However, it is sometimes difficult to provide broad-based
training in and era of corporate "right-sizing" because individuals and departments are usually
only interested in training that is "directly" relevant to their job. This is a barrier that must be
overcome.
There is a need to build bridges between environmental and financial staff in the organization.
Many of the capital investment decisions are made within the financial area of the organization.
If investment proposals are to be considered on more than just private costs, there must be
communication and collaboration between the financial and environmental decision-makers in
the organization.
Hydro clearly distinguishes between Full Cost Accounting for Decision Making and Full Cost
Pricing. As stated throughout this document, Ontario Hydro's approach to Full Cost
Accounting focusses on planning and decision making, not pricing. Full Cost Pricing (FCP)
occurs when external costs are incorporated into the price of the product or service (i.e., they
are explicitly accounted for in market transactions). It is important to recognize that
consideration of internal environmental costs and external environmental impacts and costs in
decision-making can facilitate better decisions without being explicitly incorporated into the
price of a given product or service. While Ontario Hydro believes that, theoretically, prices
should reflect all internal and external costs and benefits associated with production and
consumption, the corporation does not intend to pursue Full Cost Pricing at this time due to
competitiveness reasons and other issues. However, the development and use of FCA (internal
environmental costs and externalities) in business decisions can help to move in a direction in
which corporations make decisions that are least cost to society.
9. Looking Ahead
In looking ahead, Ontario Hydro has identified several important challenges. For example,
Ontario Hydro believes that there should be greater support for its definition of FCA in its business
sector. Ontario Hydro has also found that some of their business sector's major customer groups are
questioning the need for FCA. While believing that the practice of SED can enhance its
competitiveness, Ontario Hydro has recognized a need to demonstrate results. Ontario Hydro plans to
address these challenges through better defining its externalities and costs, and through further
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communication, education, and training. This section lists the major elements of the FCA corporate
program which Ontario Hydro is in the process of implementing.
Use of FCA in Operating. Planning, and Decision-Making Processes. Ontario
Hydro plans to incorporate FCA into evaluations of:
Major Local Integrated Resource Plans;
Operation and dispatch of Ontario Hydro's system;
Investment decisions;
Environmental externalities associated with imports and exports of electricity
Contribute to decisions about retiring or rehabilitating existing stations;
Procurement decisions.
Evaluate benefits and costs of additional pollution control equipment
Monitor environmental performance improvements
Ontario Hydro also believes that FCA will assist the corporation to:
Provide input to the establishment of reference starting points for emission
reduction trading
Evaluate benefits and costs of new proposed environmental regulations
Evaluate environmental externalities associated with private generation
Contribute to decisions about DSM programmes to address societal issues (i.e.,
greenhouse gas reduction)
Research Program on FCA.
Ontario Hydro has designed its research program to focus on:
Internal Environmental Costs. To better understand its internal environmental costs and to
determine if Ontario Hydro is getting value for its environmental dollars, this program element will
focus on:
Continuing to estimate environmental expenditure for reporting in
annual Environment and Sustainable Development Reports
Developing methods to track, allocate, and report on internal
environmental costs
Linking pollution prevention initiatives and internal environmental cost
accounting to drive better pollution management decisions
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Completing the GRID and retail pilot studies. Initiate pilot studies in Fossil,
Nuclear, and other Business Units.
External Environmental Costs:
Enhancing evaluation methods to ensure that qualitative, quantitative,
and where possible, monetized environmental impact data are
appropriately considered and integrated into decisions.
Developing ecosystem approaches to assess environmental impacts.
Improving the current externality impact and cost data for the full life-
cycle of fossil-fired stations and nuclear stations.
Developing full life-cycle externality impact and cost data for
transmission and distribution systems, hydroelectric stations, renewable
energy technologies, and demand management;
Working with Canadian and Provincial governments, academics,
businesses, professional associations, and stakeholders to undertake
research on environmental externalities.
Considering the development of an integrated externality impact and cost
computer framework.
Expand FCA Communication/Education Program. In order to develop internal awareness
and understanding of FCA, this program element focusses on:
Developing communication materials on Ontario Hydro's approach to
FCA
Designing and delivering internal training programs/workshops on
FCA
Promote FCA Beyond Ontario Hydro. To promote the understanding and application of
FCA beyond Ontario Hydro, this program element focusses on:
Working with the government, academics, businesses, professional
associations, and stakeholders to promote a better understanding and
application of FCA.
Establishing Business Partnerships for Environmental Costing to
identify and establish a network of Canadian and other experts engaged
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in FCA work, to educate, others about PC A, and to identify
opportunities to initiate or collaborate on FCA research.
Seeking opportunities to present papers on FCA.
The development and implementation of FCA at Ontario Hydro is an ongoing process. While
much progress has been made and much has been learned, Ontario Hydro looks forward to the next
several years as it advances its research and use of this important management tool. .
Ontario Hydro is facing some significant changes as the electricity sector moves forward with
restructuring, which in turn facilitate movement towards a more competitive electric utility industry.
One of the key challenges for Ontario Hydro relates to ensuring that key elements of sustainability are
maintained in a more competitive electricity sector. The corporation believes that the electricity
sector's move to an increasingly completive market highlights the need for a regulatory framework that
will promote sustainability in the energy sector in Ontario. In addition, Ontario Hydro believes that
mechanisms/options will be required to ensure that environment/sustainability are addressed in a
restructured and competitive electrical utility industry in North America.
Ontario Hydro firmly believes that FCA has a key role in enhancing the corporation's
competitive position in a new open electricity market. Ontario Hydro also firmly believes that the
energy utilities that prosper in the 21st century competitive marketplace will be those that exhibit strong
environmental leadership and sustainability qualities. Ontario Hydro realizes that most companies
already operate in a competitive market place and believes that the future for such companies will be
equally linked to environmental leadership.and sustainability.
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For additional information on Ontario Hydro's implementation of Full Cost Accounting, contact
Corinne Boone
Advisor: Business/Environment Integration Department
Environment and Sustainable Development Division
Phone 416/592-5988, FAX 416/592-7097
Internet corinne.boone@hydro.on.ca
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Attachment A
Ontario Hydro Full Cost Accounting Guidelines
ONTARIO HYDRO'S CORPORATE GUIDELINES FOR FULL COST ACCOUNTING
ENVIRONMENT AND SUSTAINABLE DEVELOPMENT DIVISION
September 11, 1995
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September 11, 1995
TABLE OF CONTENTS
Page
1.0 Introduction 1
2.0 Goal Statement 1
3.0 Rationale for FCA 1
4.0 Implementation Plan (1995-1997) 2
4.1 Internal Environmental Costs 3
4.2 Research Programme on Externalities
and their Costs 3
4.3 FCA in Operating, Planning and Decision-Making 4
4.4 FCA Communication/Education Programme 4
4.5 FCA Beyond Ontario Hydro 4
5.0 Roles and Responsibilities 5
5.1 ESDD's;Responsibilities 5
5.2 Responsibilities of Business Units 6
6.0 Background 6
7.0 Definition of FCA 7
7.1 Internal Environmental Costs 7
7.2 External Environmental Costs 8
Figure 1
Ontario Hydro's Approach to Full Cost Accounting 10
Figure 2
Use of Full Cost Accounting in Decision-Making
at Ontario Hydro 11
Appendix I 12
Preliminary External Cost Estimates for Ontario
Hydro's Fossil and Nuclear Generation
Appendix II 14
External Cost Estimates from other Studies
Appendix III 16
The Damage Function Approach
Glossary 19
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September 11, 1995
ONTARIO HYDRO'S CORPORATE GUIDELINES FOR FULL COST ACCOUNTING
1.0 INTRODUCTION
This document describes Ontario Hydro's corporate guidelines
for Full Cost Accounting (FCA).
FCA is a means by which environmental considerations can be
integrated into business decisions. It is one of a number of
inputs to decision-making.
FCA incorporates environmental and other internal costs, with
external impacts and costs/benefits of Ontario Hydro's
activities on the environment and on human health. In cases
where the external impacts cannot be monetized, quantitative
and qualitative evaluations are used.
Environment encompasses both natural and social aspects.
Natural environment impacts include implications of resource
use activities (i.e. impacts on crops, forests, buildings
etc.), as well as issues of ecosystem health and integrity.
Social environment impacts include changes to local community,
lifestyle and culture, resource use effects, etc..
The remainder of this document outlines the goal and the
rationale for Ontario Hydro's support for FCA, presents an
implementation plan for FCA, and outlines the roles and the
responsibilities of the Environment and Sustainable
Development Division (ESDD) and the Business Units. The
report concludes with background information on the
development of FCA at Ontario Hydro and provides further
explanation of the incorporation of external impacts
(externalities) in the decision-making process.
2.0 GOAL STATEMENT
Ontario Hydro will use FCA to assist in integrating
environmental considerations into planning and investment
decisions. This will be done on a step-by-step, pragmatic
basis. It is acknowledged that until a full range of
externality impact and cost data are developed, qualitative
evaluations will be used.
3.0 RATIONALE FOR FCA
The rationale for Ontario Hydro's support for FCA is based on
the following:
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September 11, 1995
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. more informed decision making - aid business units to
better identify and integrate environment into decision
analyses;
. improved environmental cost management - improve
identification, allocation, tracking and management of
environmental expenditures in each business unit;
. cost avoidance - improve ability of business units in
anticipating future environmental liabilities and costs
earlier, so that corrective action can be implemented
earlier;
. revenue enhancement - improve ability of business units
to identify revenue enhancement opportunities either
through environmental technology innovations spurred by
cost cutting initiatives or strategic.alliances with
companies that use waste products as material inputs in
their own manufacturing;
. environmental quality improvement - by establishing an
optimal level for reducing emissions/effluents/wastes
which considers least cost to society;
. contribution to environmental policy - provide effective
contribution in the development of environmental
regulations/ standards and emissions trading markets, and
. contribution to sustainable development - assist in the
transition to a more sustainable energy future.
In summary, managing resources wisely and minimizing
environmental damage will contribute to Ontario Hydro's
competitiveness, particularly in the longer term. By better
understanding the environmental impacts of its activities and
by making better resource allocation decisions based on this
information, Ontario Hydro can save money, become more
competitive, and move towards the goal of sustainable
development.
4.0 IMPLEMENTATION PLAN (1995-1997)
This section lists the major elements of the FCA corporate
programme which will be implemented over the next three years.
Business units will identify how they will be implementing
these corporate guidelines as part of their business planning
process.
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4.1 Internal Environmental Costs
To better understand its internal environmental costs and
to determine if Ontario Hydro is getting value for its
environmental dollars, this programme element will focus
on: ,
. continuing to estimate environmental expenditures for
reporting in annual Environment and Sustainable
Development Report;
. developing methods to identify, track, allocate, and
report on internal environmental expenditures; and
. linking, pollution prevention initiatives and internal
environmental cost accounting to drive better
pollution management decisions.
4.2 Research Programme on Externalities and their Costs
Ontario Hydro has developed preliminary external cost
estimates for the operation of its fossil stations and
preliminary external cost estimates for the full life-
cycle of its nuclear stations. These estimates are
provided in Appendix !... Provided in Appendix II are
externality values developed in other jurisdictions.
Externality values developed before 1992 are based on
secondary research and are the synthesis of results from
different studies. These values also include estimates
of impacts of CO2 emissions. Studies conducted after
1992 are based on primary research and do not include
impacts associated with CO2 emissions.
Caution should be used in comparing external costs as
they reflect site-specific conditions and contain many
assumptions.
This programme element focuses on:
. improving the current externality impact and cost
data for the full life-cycle of fossil and nuclear
stations;
. developing full life-cycle externality impact and
cost data for transmission and distribution systems,
hydroelectric stations, renewable energy
technologies, and demand management;
. working with the Federal and Provincial governments,
academics, businesses, professional associations, and
stakeholders to undertake research on environmental
externalities;
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. developing evaluation methods (e.g. multi-criteria
analysis) to ensure that qualitative, quantitative,
and where possible, monetized environmental impact
data are appropriately considered and integrated into
decisions; and
. developing ecosystem approaches to assess
environmental impacts.
4.3 FCA in Operating, Planning and Decision-Making
This programme element focuses on integrating FCA into
evaluations of plans and decisions:
. Corporate Integrated Resource Plan;
. Local Integrated Resource Plans;
. implications on operation and dispatch of Ontario
Hydro's system;
. investment decisions;
. procurement decisions;
. end-use applications of electricity and other
forms of energy; and
. emission trading programmes and other economic
instruments/regulations proposed by the government.
4.4 FCA Communication/Education Programme
In order to develop internal awareness and understanding
of FCA, this programme element focuses on:
. developing communication material on Ontario Hydro's
approach to FCA; and
. designing and delivering internal training
programmes/workshops on FCA.
4.5 FCA Beyond Ontario Hydro
To promote the understanding and application of FCA
beyond Ontario Hydro, this programme element focuses on:
. working with the Federal and Provincial governments,
MEA, academics, businesses, professional
associations, and stakeholders to promote a better
understanding and application of FCA; and
. establishing a Centre for Environmental Costing to
identify and establish a network of Canadian, and
other expertise, engaged in FCA work; to educate on
FCA; and to identify opportunities to initiate or
collaborate on FCA research.
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5.O ROLES AND RESPONSIBILITIES
Environment and Sustainable Development Division (ESDD) has
the accountability for developing and promoting the use of FCA
across the corporation, as well as providing consulting
support to the business units in identifying, quantifying and
monetizing environmental externalities. ESDD is not only a
technical resource but also has an advocacy role.
5.1 ESDD's Responsibilities
Specifically, ESDD is responsible for:
. in co-operation with business units, develop
corporate guidelines and work programme for the
development and implementation of FCA;
. communicating, coordinating and monitoring the
application of FCA across the business units;
. promoting the use of an ecosystem
approach to identifying environmental
impacts of our activities;
. in co-operation with business units,
establishing a framework for the
incorporation of FCA in plans and
decisions;
. advise on the application of FCA in investment
decisions going to senior management or the Board for
approval;
. promote the consistent implementation of
FCA across the business units;
. in co-operation with business units,
identifying externality research needs
and undertaking appropriate research;
. in co-operation with business units,
monetizing externalities to ensure
consistency in the calculation and
application of these values;
.in co-operation with the business units,
develop a framework for identifying,
allocating, and tracking internal
environmental costs;
. in co-operation with the business units,
providing education and training on FCA;
and
. monitoring FCA initiatives in other
jurisdictions and promoting FCA beyond
Ontario Hydro.
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5.2 Responsibilities of Business Units
Business units have direct responsibility for the
internal environmental costs and the externalities
associated with their lines of business. Their
responsibilities include:
. identifying, tracking and managing their
internal environmental costs;
. in co-operation with ESDD, identifying
and quantifying the externalities
associated with their business
activities;
. in co-operation with ESDD and possibly
other funding agencies, identifying
research needs and undertaking
appropriate externality research; and
. incorporating FCA into business unit
plans and decisions, consistent with
corporate strategy.
6.0 BACKGROUND
Over the last few years, the quantification and monetization
of environmental externalities have received considerable
attention in the public policy debates at all three levels of
government and regulatory bodies in Canada and around the
world.
At Ontario Hydro, the Task Force on Sustainable Energy
Development recommended in 1993 the introduction of FCA and
the incorporation of environmental impacts and costs/benefits
in decision-making.
In the Fall of 1994, interim Sustainable Energy Development
(SED) decision criteria were issued for use by the Business
Units to evaluate the sustainable energy development
implications of their investment proposals. These decision
criteria are interim until FCA is fully developed.
The Board of Directors approved the SED Policy and Principles
in April 1995. One of the corporate guidelines approved was
"to integrate environment and economics in decision-making by
identifying and integrating ecosystem and social costs into
decision-making, through methods such as full cost
accounting."
Significant research has been done at Ontario Hydro and in
other jurisdictions to improve internal environmental cost
reporting; and to identify, quantify and where possible,
monetize, the external impacts associated with electricity
generation.
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7-.0 DEFINITION OF FCA
Ontario Hydro is developing and implementing Full Cost
Accounting to enable decisions to be made on the basis of
least cost to society. For example, even after Ontario Hydro
meets environmental regulations to control air emissions,
effluents or wastes from its generating stations, there are
still _ residual air emissions/effluents/wastes that can
potentially cause damage to the environment and human health.
ignoring these impacts underestimates the environmental
damages of Ontario Hydro's activities and the resulting costs
to society, and may result in inefficient resource allocation
decisions. Full consideration of these impacts, and their
costs/benefits, in decision-making will lead to improved
environmental quality, wise management of resources and lower
societal costs.
It should be noted that FCA does not lead to zero emissions or
environmental damages. The objective is to maximize social
welfare by investing in environmental management practices up
to the point where the marginal cost of management is equal to
the marginal social benefits associated with improving
environmental quality.
Ontario Hydro's approach to FCA is illustrated in Figures 1
and 2.
7.1 Internal Environmental Costs
Figure 1 illustrates the difference between internal and
external impacts and costs. The two inner boxes
represent internal costs and can be thought of as the
costs Ontario Hydro incurs in doing business. The first,
or innermost box, represents traditional business costs,
such as equipment, material, fuel, labour, depreciation,
etc. The second box, labelled "internal environmental
costs", generally includes those costs associated with
meeting environmental regulations or meeting corporate
standards. However, in some corporations, including
v Ontario Hydro, there are often less tangible or hidden or
indirect costs, which should be considered in this
category of cost, but are often not identified
appropriately or are misallocated to corporate overheads.
Examples of these costs include contingent liability
costs, community relations costs etc. If a business unit
is not considering these costs, then the business may not
be dealing with the true costs of its products and
services, and may, as a result, be making inappropriate
business decisions.
The focus of Ontario Hydro's work in internal
environmental costs is to better understand and manage
the internal environmental costs associated with it's
products and services. Or described in another way, to
ensure that internal environmental costs are explicitly
identified and allocated to the right product or service
so that the business units can manage the full range of
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their costs and maximize the value they get for their
environmental dollars.
7.2 External Environmental Costs
The two outer boxes refer to external impacts or
externalities. These are effects on the environment and
on human health which result from Ontario Hydro's
activities, but are not included in the costs of its
products and services. These impacts are therefore,
borne by society.
Monetized external impacts are external impacts for which
Ontario Hydro has developed monetary value. To date,
Ontario Hydro has developed preliminary external cost
estimates for the operation of its fossil stations and
external cost estimates for fuel extraction through to
decommissioning for its nuclear generating stations.
Ontario Hydro supports the Damage Function Approach
(Appendix III), rather than the Cost of Control Approach,
to identify, quantify and, where possible monetize, the
external impacts of the full life-cycle of its
activities. This approach first considers site-specific
environmental and health data; then uses environmental
modelling techniques which consider how
emissions/effluents etc. are transported, dispersed or
chemically transformed in the environment; and then
considers what receptors (e.g., people, fish) are
affected by these emissions. Finally economic valuation
techniques are applied to translate physical impacts into
monetary terms.
It should be noted that there is a degree of uncertainty
associated with the quantification and monetization of
externalities, whether a damage function or cost of
control approach is used. This uncertainty, however,
should be treated in the context of other uncertainties
(e.g., load growth, fuel prices, new technologies) that
are considered in the decision-making process.
Non-monetized external impacts are external impacts which
can only be described qualitatively because there are
scientific limitations in describing the full range of
environmental and human health impacts. In other cases,
the impact can be quantified, but there are limitations
in developing appropriate monetized values (i.e. impacts
on ecosystem, lifestyle, culture etc.)
Ontario Hydro's focus for dealing with the external
impacts, and their costs, is to improve how externalities
are integrated into business decisions. Described in our
box analogy, our intent is to incorporate the external
costs into our decision-making, as best as possible.
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8
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Figure 2 illustrates the use of FCA in decision-maJcing at
Ontario Hydro. It also illustrates how other factors in
addition to internal and external costs estimates
provided by FCA are taken into consideration in the
decision-making process. Some of these factors include:
impacts on the electricity rates, impacts on the
financial integrity of the Corporation, impacts on the
reliability of the electricity system, etc.
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APPENDIX I
PRELIMINARY EXTERNAL COST ESTIMATES FOR ONTARIO HYDRO'S
FOSSIL AND NUCLEAR GENERATION
k:\beimgr\fca\fcarev8.S11
September 11, 1995
12
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APPENDIX I
PRELIMINARY EXTERNAL COST ESTIMATES FOR ONTARIO HYDRO'S FOSSIL
GENERATION BY STATION*
Fossil Stations
(Unit)
Lakeview (1,2,5,6)
Lambton (1,2)
Lambton (3,4)
Lennox
Nanticoke
Average
Externality Costs**
(1992 cents/kwh)
1.66
0.31
0.13
0.06
0.46
0.40
* Cost estimates include externalities associated only with the
operation of fossil stations. Further research is required to
estimate the life-cycle impacts of fossil generation.
** Potential impacts due to C02 emissions are not included in the
above estimates. In addition, factors for which impacts were
not monetized include lake acidity, mercury deposition in lakes,
forest biomass and wild life.
PRELIMINARY EXTERNAL COST ESTIMATES FOR
NUCLEAR GENERATION BY STATION*
(1992 cents/kW.h)
Station
Pickering A
Pickering B
Bruce A
Bruce B
Parlington
Low
0.005545
0,004298
0.001826
0.001549
0.004604
Nominal
0.010001
0.007232
0.002198
0.001863
0.006135
High
0.119012
0.096800
0.006393
0.005503
0.040101
Cost estimates include full life-cycle impacts i.e. Upstream
Fuel, Routine Operations, Accidents, Decommissioning, Low-level
Wastes and Used Fuel.
k;\beiuigr\f ca\f carevS.Sl 1
September 11, 1995
13
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APPENDIX II
EXTERNAL COSTS ESTIMATES FROM OTHER STUDIES
k:\beimgr\fca\fcarev8.S11
September 11, 1995
14
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APPENDIX II
EXTERNAL COST ESTIMATES FROM OTHER STUDIES21
(1994 U.S. cents/kWh)
Generation
Type
Coat
Nuclear
OH
Gas
Hydro
Biomass
Wind
Studies conducted before 1 992
Pace1
6.74
3.37
3.14 to
7.79
1.4
no
estimate
0 to
0.814
0 to
0.116
Hohmeyer2
3.96 to
9.03
9.96 to
21.3
3.96 to
9.03
3.96 to
9.03
no
estimate
no
estimate
+ 5,74
+ 12.67
Pearce3
1.98
8.398
0.0839
0.5039
9.32
0.637
0.0671
no
estimate
0.0671
Studies conducted after 1 992
Common
Market4
0.88610
2.1711
0.014312
0.35713
1.71
0.104
0.32914
no
estimate
0.157
0.32915
US DOE5
0.058516
0.128
0.0219
0.0332
0.0174
0.0232
0.00128
0.0232
O17
0.01 6318
0.186
no
estimate
N.Y.
State6
0.027619
0.01 1720
0.01471
0.0219
no
estimate
0.320
0.00104
Sources and notes:
Caution should be used in comparing external costs as they reflect site-specific conditions and contain many
assumptions. Studies conducted after 1992 do not include CO2 impacts:
1. Ottinger, et al. (1990). Environmental Costs of Electricity, prepared by Pace University Center for Environmental
Legal Studies, New York.
2. Hohmeyer, O. (1 988) Social Costs of Energy Consumption, Berlin
3. Pearce, D. (1995) The development of externality adders in the UK, paper presented in the workshop on "The
External Costs of Energy" Brussels, Belgium, January, 1995. This paper reviewed results from studies conducted
before 1992.
4. Energy Technology Support Unit (ETSU), Harwell 1994. Externalities of Fuel Cycles ExternE Project, Reports
Number 1, 2 and 5 prepared for the Commission of the European Communities, Oxfordshire, UK
5. Oak Ridge National Laboratory and Resources for the Future (1 995). Estimating Externalities of Coal, Nuclear,
Natural Gas, Oil, Hydro and Biomaes. Reports no., 3 to 8. Washington. D.C.
6. New York State Environmental Externalities Cost Study, Research report EP 91-50 prepared by RCG/Hagller, Baily
Inc. and Tellus Institute.
7. + denotes a benefit
8. Estimates are for a "new" and an "old" coal plant, respectively
9. High estimate of number of health effects from nuclear disaster
10. Estimates based on West Burton, UK site for power plant
11. Estimates based on Lauffen, Germany site for power plant
12. 3% discount rate used. Assumes nuclear plant is located at Tricastin, France
13. 0% discount rate used. Assumes nuclear plant is located at Tricastin, France
14. All but 0.0067 c/kWh due to aesthetic value of waterfall, estimated in contingent valuation study
1 5. Range for three sites in the UK
1 6. Estimates are for two power plants; one in the rural southwest U.S. and the other in the rural southeast U.S.,
respectively
17. Retrofit project involving existing dams in Kentucky
18. Diversion project in Washington State
19. Estimates are for the Sterling site in New York State
20. For boiling water reactor, rather than pressurized water reactor
21. Lee, R. (1995). "Externality Studies: Why are the Numbers Different?" Oak Ridge National Laboratory. Paper
prepared for the Third International Workshop on Externality Costs, Ladenburg, Germany, May 27-30, 1995.
k:\beimgr\fca\fcarev8.S11
September 11, 1995
15
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Attachment B
Ontario Hydro Environmental Spending Guidelines
(Last Revised 1995)
MATERIEL AND WASTE MANAGEMENT
1.1 Used fuel (nuclear management)
1.2 Radioactive waste management
1.3 Ash management
1.4 Scrubber waste management
1.5 PCB (Polychlorinated bipheriyl) management
1.6 Chemicals, oil and toxic substance management
1.7 Research and Development
1.8 Other
WATER MANAGEMENT
2.1 Chemical emissions management including MIS A
2.2 Radioactive emissions management
2.3 Thermal emissions management
2.4 Fish/zebra mussel management
2.5 Water level/flood management
2.6 Research and Development
2.7 Other
AIR MANAGEMENT
3.1 Acid Gas(S02 and NOX as NO) management
3.2 Radioactive emissions management
3.3 Particulate emissions management (fugitive & opacity)
3.4 Chemical emissions management (including CFC, C02)
3.5 Research and Development
3.6 Other
LAND USE MANAGEMENT
4.1 Right-of-way management
4.2 Soil damage prevention (construction)
4.3 Aesthetics (landscaping etc)
4.4 Secondary land use including heritage resources
4.5 Electric and magnetic effect studies
4.6 Habitat and Wetland Protection
4.7 Community impact management including agreements
4.8 Research and Development
4.9 Other
April 29, 1996
-------
ONTARIO HYDRO ENVIRONMENTAL SPENDING GUIDELINES, CONTINUED
5. ENVIRONMENTAL APPROVALS
5.1 Env Assessments/studies/and approvals
5.2 Social Cost Studies
5.3 Environmental Hearings
5.4 Alternate Technologies
5.5 Audits
5.6 Environmental Communications
5.7 Corporate Environmental initiatives
5.8 Other
6. ENERGY EFFICIENCY & RENEWABLE ENERGY TECHNOLOGY
April 29, 1995
-------
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Attachment C
Ontario Hydro Full Cost Accounting Bibliography
Boone, C., H. Howes and B. Reuber. "A Canadian Utility's Experience in Linking Sustainable
Development, Full Cost Accounting and Environmental Assessment". Toronto: Ontario Hydro June
1995. '
Ontario Hydro. "Full Cost Accounting Workshop: Proceedings". Toronto: Ontario Hydro, June 1993.
Ontario Hydro. A Strategy for Sustainable Energy Development for Ontario Hydro. Toronto: Ontario
Hydro, December, 1993.
Ontario Hydro. Full Cost Accounting for Decision Making. Toront: Ontario Hydro, Dec. 1993.
Ontario Hydro. "Sustainable Energy Development: Interim Decision Criteria". Toronto: Ontario
Hydro, September, 1994.
Ontario Hydro. Sustainable Energy Development: Policy and Principles, Toronto: Ontario Hydro
April 1995. '
Ontario Hydro. Full Cost Accounting Corporate Guidelines. Toronto: Ontario Hydro, Sept. 1995.
-------
-------
Attachment D
Details on FCA Team Recommendations
Recommendation #1
Modify the Current Accounting System Into A Full Cost
Accounting System
Although Ontario Hydro has used its
environmental spending guidelines to
generate estimates of environmental
spending, the FCA Team noted that in some
instances Ontario Hydro's accounting
system28 does not itself identify
environmental expenditures or assign them
to responsible corporate entities (e.g.,
Ontario Hydro traditionally treated many
internal environmental expenses as
overhead). Ontario Hydro's accounting
system similarly does not include external
costs. The FCA Team also recognized that
an accounting system that focusses on cash
expenditures alone can mask or distort true
economic costs.29 For example, Ontario
Hydro's internal use of electricity was
considered a free good; under FCA, this would be explicitly recognized as a cost. Similarly,
under conventional accounting, a research grant to study nuclear waste management
technologies would appear to reduce nuclear waste management costs by reducing total waste
management outlays; under a full cost accounting framework, a corresponding adjustment
would be made in the accounting system to show full costs. Ontario Hydro's SED Task Force
and the FCA Team recommended that Ontario Hydro modify its current accounting system
into a full cost accounting system. To do this, they recommended that Ontario Hydro:
Modify the current accounting system to record, classify, and allocate the
external costs and benefits and the internal environmental expenditures and costs
The FCA Team also recommended that the
management accounting system be modified to
track other related environmental data. As an
example, the Team pointed to Ontario Hydro's
accounting practices related to coal purchasing and
consumption. Currently, coal purchase and use
are distinguished hi the corporate accounting
system only according to whether the coal is U.S.
or Canadian in origin. However, individual power
stations maintain records of the sulfur content of
the coal they use. Because low-sulfur coal is
environmentally advantageous, the FCA Team
believed that Ontario Hydro should keep track of
this aspect of its physical inventories in its
accounting system.
28 At Ontario Hydro, the major accounting information system is known as the Financial Management System
(FMS), which serves both management and financial accounting purposes. Although the FMS has the capability
to record budgeted future costs, its primary use is the recording of transactions as they occur. As such, it is the
heart of the information used in financial accounting reports. Although the FCA Team looked at the connection
between financial reporting issues and FCA, the focus of this case study is on the use of FCA in management
accounting and related internal decision-making.
29 '
In accounting terms, expenditures and costs are different concepts. The former refers to cash outlays during
an accounting period, while the latter makes appropriate adjustments (e.g., through depreciation or amortization)
to cash flows to provide a picture of the consumption (or commitment) of economic resources during an
accounting period. Identifying and tracking environmental expenditures is a necessary step for determining
environmental costs.
-------
associated with each business unit, generating station, and the transmission
system.
Improve accounting guidelines, policies, and procedures for reporting the
internal as well as the external costs of Ontario Hydro's activities.
Prepare budgets, business plans, financial plans, annual reports, and financial
statements on the basis of both internal and external costs.
Develop financial and environmental performance indicators for use in
measuring Ontario Hydro's performance in the future.
Modify monthly variance reports to show how actual internal and
external costs and environmental performance indicators compared to
plans.
Ensure compliance with PC A guidelines, policies, and procedures.
Implementing all of these recommendations would require extensive data, much of
which is not currently available. As a result, rather than move forward on all of these
recommendations, Ontario Hydro has focussed on selected FCA accounting issues, as
described in Section 7.5.
Recommendation #2
Augment the Current Financial Evaluation Framework
The second major issue identified by the SED Task Force and the FCA Team v/as the
need to augment Ontario Hydro's approach to financial evaluations and decision-making in
order to make environmental considerations more explicit. Ontario Hydro performs financial
evaluations and makes many types of decisions for different purposes (e.g., planning,
budgeting, expenditures, investments), at different levels of scale (e.g., relating to specific
customer locations, to specific power production and transmission facilities, or the company as
a whole), and for varying time frames. Management's job is to ensure that these decisions and
resulting actions are reasonably consistent over time and reflect strategic objectives.
The FCA Team documented Ontario Hydro's then current approach and found that
Ontario Hydro weighed a variety of considerations, some qualitative, when making investment
decisions about capital projects.30 Before decisions were made about a project, Ontario Hydro
gathered and analyzed data on the following key factors:
Cash flows resulting from the decision;
30 These projects are of two types: (1) projects driven by regulation or statute (e.g., new customer hookup,
reliability maintenance, safety standards, environmental requirements), and (2) discretionary cost reduction or
revenue producing projects. Subject to meeting other constraints or strategic objectives, projects of the first type
tended to be chosen on the basis of least (internal) cost and projects of the latter type tended to be chosen on the
basis of greatest net present value.
-------
Impact on Ontario Hydro's financial situation (for projects over $100
million);
Technical capability, performance and reliability;
Impact on customer electricity rates;
Economy-wide impact including economic development, job creation,
and extra-provincial sourcing; and
Information on environmental and social implications of proposed projects.
Net present value (NPV)31 of future cash flows generally was the main financial test
(i.e., metric) for measuring and ranking alternative investments. Other factors such as social
and environmental impacts on local communities and impacts on air, land, and water resources
usually were secondary. In limited instances, capital expenditures were justified by
noneconomic criteria such as environmental leadership and program momentum.
The FCA Team concluded that making decisions based on full costs would require
modifications to Ontario Hydro's decision-making process. Established financial evaluation
processes usually weighed only the internal financial implications of a particular investment
alternative, and often incompletely. In other words, internal environmental costs could be
totally overlooked, and externalities were not usually considered explicitly. The FCA Team's
proposed full cost approach, however, would attempt to include both internal costs and, where
available, monetized values for externalities to capture the positive and negative environmental
and social impacts of an investment option. It recognized that it is possible for Ontario Hydro
to make investment decisions which include consideration of externalities that are not explicitly
valued. The Team emphasized that explicit consideration and consistent inclusion of
environmental and social impacts and costs is essential for minimizing arbitrariness hi
investment decisions.
The FCA Team recommended the following actions for modifying Ontario Hydro's
existing process and criteria for financial evaluations and capital budgeting:
Augment the current financial evaluation framework used in all types of
expenditure decisions. In evaluating competing projects, the new
framework should incorporate internal environmental and other private
costs, including liability, taxes, subsidies, and other contingent costs, as
well as social external costs and benefits.
Modify the corporate capital allocation process to introduce strategic
criteria to reflect sustainable development objectives and externalities.
Launch pilots to conduct full cost financial evaluations based on interim
guidelines for major capital expenditures, including major
31 Calculating NPV involves the application of a discount rate (often the firm's cost of capital) to future cash
flows, thus adjusting for the time value of money and producing a number that can easily be compared to the NPV
of other projects with different cash flows.
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rehabilitations, demand side management, and non-utility generation
expenditures.
Define roles and accountabilities for conducting and supporting the
process for financial evaluations and capital budgeting based on full cost
accounting.
Develop tools and guidelines to support financial evaluations based on
full cost accounting principles, including guidelines for incorporating
uncertainty associated with external cost estimates.
Section 7.1 of this case study describes relevant Ontario Hydro implementation activities since
the FCA Team developed the recommendations presented above and concluded its report.
Recommendation #3
Support A Research Program on External Environmental
Impacts and Costs
Ontario Hydro is one of a small, but growing, number of companies actively engaged
in assessing the externalities associated with their activities and considering that information in
decision-making. Shortly after forming, the Ontario Hydro FCA Team invited U.S. and
Canadian experts to discuss research methods for external costs at a June 1993 workshop, at
which the invited experts proclaimed Ontario Hydro's externality research efforts state-of-the-
art. As part of the FCA Team work program, Ontario Hydro also expanded its review of the
literature on the environmental impacts of electricity generation technologies including fossil-
fired, nuclear, hydroelectric, and alternative technologies32. Attachment C contains the full
cost accounting bibliography that resulted from the Team's literature review. The Team
determined that the available literature usually did not cover the full fuel cycle and provided
limited information about the dollar value of impacts of non-conventional air pollutants, water
pollutants, and solid waste. The FCA Team discovered that far fewer studies were available
on the environmental impacts of nuclear power, and even less data existed on environmental
costs and benefits associated with alternative energy technologies, such as geothermal or solar
power. The FCA Team engaged consultants to conduct a literature review and to work with
Ontario Hydro staff to develop estimates for externalities associated with Ontario Hydro's
nuclear system.
The SED Task Force and the FCA Team recommended that Ontario Hydro continue
and expand its research program for (1) identifying, (2) quantifying, and (3) monetizing
external impacts and costs. The FCA Team recommended that additional work be undertaken
to refine the existing models and to assess impacts associated with Ontario Hydro's facilities.33
31 Attachment C contains the full cost accounting bibiography that resulted from the Team's literature
review.
" The FCA Team also identified the' following issues that Ontario Hydro should consider as part of its analysis
when assessing externalities: external benefits, resource depletion, discounting, equity, competitiveness, scope,
risk, and potential liability. These issues are described hi the FCA Team's 1993 report.
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The FCA Team's general recommendations to Ontario Hydro for externalities research
associated with electricity generation were the following:
Research and develop Ontario-specific databases and models that will
include site and route-specific external impacts and cost/benefit estimates
for all demand and supply options available.
Estimate environmental characteristics and resource use, air emissions,
and waste/effluent for fossil fuels, nuclear plants, hydraulic energy,
demand side management, alternative technologies, and transmission.
Develop new, and improve existing, computer programs to model
dispersion of emissions and wastes/effluent for all fossil, nuclear, and
hydro-electric stations.
Develop Ontario-specific dose-response functions to assess the impacts
of all demand side management and supply options on human health,
water quality, forests, fisheries and wildlife, visibility, structural
materials, and other receptors.
Where possible, use the damage function approach to monetize external
environmental costs of alternative demand side management and supply
options. ;
Develop a workgroup with representatives of Ontario government, other
power generators, and other parties that generate significant externalities
(e.g., chemical manufacturers, petroleum refineries) to develop a
common framework for estimating external costs and incorporating them
into decision-making processes and accounting systems.
Assess the potential cost and rate impacts of incorporating external costs
in decision-making.
Section 7.2 of this case study describes Ontario Hydro's implementation activities since the
FCA Team developed the recommendations presented above and concluded its report.
Recommendation #4
Initiate A Communication and Training Program on Full Cost
Accounting
The Ontario Hydro SED Task Force and FCA Team recognized the importance of
training and communication on full cost accounting. Some Ontario Hydro employees had
expressed their concerns that FCA could have a negative impact on the company's bottom line
and on employment. Ontario Hydro believes that the success of its sustainable development
strategy depends on the awareness, understanding, participation, and commitment of all
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company employees. It identified several key audiences for internal education and training.
To make FCA work, Ontario Hydro concluded that FCA must be understood by all managers
and staff. Initially, FCA must be understood by those staff members who have some
responsibility for implementing it. The FCA Team made the following recommendations for
internal education and communication:
Communicate the concept, uses, and implications of full cost accounting
to all decision-makers and ensure formal training is provided for the
implementation of all recommendations.
Develop and implement communication and training programs for
business leaders, line managers, and key support staff. The training
programs should deal with decision, planning, and control processes,
tools and techniques for incorporating internal environmental costs as
well as external impacts and costs in the decision-making process.
Section 7.3 of this case study describes relevant Ontario Hydro implementation
activities since the FCA Team developed the recommendations presented above and concluded
its report.
Recommendation #5
Take Full Cost Accounting Beyond Ontario Hydro
The SED Task Force recommended that FCA be taken beyond Ontario Hydro and
encouraged a joint effort to develop a common system for Ontario energy producers. Section
7.4 of the case study describes Ontario Hydro's activities to promote and take FCA beyond
Ontario.
Recommendation #6 Establish a Fund for Decommissioning, Waste Disposal, etc.
The SED Task Force recommended that Ontario Hydro:
Establish a "liability fund" for all the monies collected [past and future]
from customers (including interest) for asset removal, decommissioning,
irradiated fuel disposal, and low and intermediate radioactive waste
disposal.
Deposit hi the liability fund an amount equal to revenues collected for
decommissioning in prior years, including interest, either immediately or
within a reasonable timeframe.
Consider establishing funds for other accrued liabilities of a similar
nature.
Cover the costs of siting and developing facilities for the permanent
storage of dismantled plants, used fuel, and other high level wastes
under environmentally safe conditions.
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Attachment E
Draft External Cost Estimates
For Ontario Hydro's Fossil Stations
Fossil Stations
(Site Location & Unit)
Lakeview (1,2,5,6)
Lambton(l,2)
Lambton (3,4)
Lennox
Nanticoke
System Average
Externality Costs*
(1992 cents/kWh)
1.66
0.31
0.13
0.06
0.46
0.40
* Cost estimates include externalities associated only with the operation stage of the fuel cycle.
* Potential impacts due to CO2 emissions are not included in the above estimates.
NUCLEAR STATION EXTERNAL ENVIRONMENTAL COSTS
(1992 cents/kWh)
Station
Pickering A
Pickering B
Bruce A
Bruce B
Darlington
Low
0,005545
0.004298
0.001826
0.001549
0.004604
Nominal
0.010001
0.007232
0.002198
0.001863
0.006135
High
0.119012
0.096800
0.006393
0.005503
0.040101
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