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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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                                            -3-
 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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                                                -4-
                           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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                                              -5-






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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                                               -6-
   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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                                               -7-


        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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                                              -8-
               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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                                       -9-
                                       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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                                             -10-


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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                                             -11-
        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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                                             -12-


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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                                             -13-






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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                                              -14-


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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                                             -15-






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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                                              -16-


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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                                             - 17-


        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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                                             -18-


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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                                           -19-


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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                                             -20-


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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                                              -21-
               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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                                              -22-


 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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                                             -23-


       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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                                              -24-


               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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                                             -25-


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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                                               - 26 -


  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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                                             -27-


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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                                             -28-
           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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                                          -29-





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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                                          -30-






     -  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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                                           -31-






       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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                                             -32-
       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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                                         -33-
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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                                           -34-
              (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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                                          -35-
                    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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                                            -36-


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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                                            -37-


        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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                                            -38-
              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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                                             -39-
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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                                             -40-
        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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                                             -41-
       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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                                             -42-


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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                                            -43-
                      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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                                              -44-
                       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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                                      -45-
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.
k:\beimgr\fca\fcarev8.S11
September 11, 1995

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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.
k:\beimgr\fca\fcarev8.S11
September 11, 1995

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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

k:\beimgr\fca\fcarev8.S11
September 11, 1995                     7

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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.
k:\beimgr\fca\fcarev8.sl1
September 11, 1995
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.
k:\beimgr\fca\fcarev8.S11
September 11, 1995

-------

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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

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    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.

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                                  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.

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              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.

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               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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