Eric Reguly
Globe and Mail
November 17, 2001

The Ontario government’s moment of clarity on electricity deregulation was certainly brief. This week, Ontario taxpayers and ratepayers learned that Premier Mike Harris is in a panic about deregulation. How else to explain the surprising development — kept secret for months by the Tories — that Hydro One could very well be turned into a not-for-profit entity, with no shareholders, no ability to compete with commercial rivals and a board a directors stuffed with the province’s top industrial power users?

In the late 1990s, when Ontario put the machinery in place to bury old Ontario Hydro’s gory legacy of overbuilding, useless make-work projects, nukes that didn’t work, laughable inefficiencies and $21-billion of stranded debt, there was a vision: A fully deregulated market, where buyers and sellers could negotiate prices, and where Hydro’s successor companies — Ontario Power Generation and Hydro One, the transmission business — would be accountable to shareholders. Taxpayers would no longer be on the hook for dumb decisions. Ontario Power Generation and Hydro One would eventually become commercial companies that would strive to build efficiencies and a competitive, North American business that paid dividends and taxes and, most importantly, faced the discipline of the market. Value-destroying monster projects, like the Darlington nuclear plant, would never happen again.

Now this: The government is giving serious consideration to converting Hydro One into a not-for-profit organization, with no share capital. The new entity would issue about $10-billion in bonds, roughly equivalent to its asset value, with the money going to pay down the $21-billion of stranded debt. This structure is the antithesis of a commercial company. In effect, it would be a co-operative. With no shareholders, it would be accountable to no one.

Three forces appear to be at play here. The first comes from RBC Dominion Securities. Bay Street’s biggest dealer, led by Tony Fell, desperately wants a piece of the action, but is neither an adviser to Hydro One nor Ontario Superbuild, the province’s infrastructure arm whose mandate includes evaluating the ownership and control options for Hydro One. In investment banking, he who invents the idea gets the deal. It was Mr. Fell’s idea to turn Hydro One into a not-for-profit entity, and Premier Harris has ordered the concept to be studied. Presumably, if Hydro One goes that route, RBC Dominion will be hired to flog the bonds, a nice little assignment that could net it as much as $40-million.

The second force is the big power consumers — Dofasco, General Motors and Imperial Oil, among them — who are apparently terrified by the notion that deregulation, as it did in California’s botched example, will result in higher prices; historically, Ontario’s energy-intensive industries have paid much lower prices than other consumers and, no surprise, they want to keep it that way. Now along comes a golden opportunity, in effect, to keep Hydro One from playing the deregulation game. The big power consumers would probably receive disproportionately large representation on Hydro One’s board, increasing the likelihood that any notion of higher transmission charges would get shunted off the agenda.

The not-for-profit structure would prevent Hydro One from raising enough capital to build transmission corridors to the United States, boxing Ontario’s electricity in Ontario. This would help preserve the made-in-Ontario price — now lower than those found in neighbouring American states — which would suit the big industrial consumers just fine. This is dangerous short-term thinking. A lack of investment could create more bottlenecks that could raise prices down the road. Suppose, for example, that an Ontario nuke went down, forcing the province to beg Quebec or Michigan for surplus electricity. With little transborder transmission capability, Ontario might freeze in the dark.

The third, and perhaps greatest, force is political fear. Deregulation in California created nasty headlines and moving cautiously on the home front by preventing Hydro One’s privatization might buy the Tories some votes. Optically, the not-for-profit structure preserves the status quo, with the added bonus of ensuring that Hydro One managers can never use share options to transform themselves from bureaucrats to greedheads — another sight that wouldn’t play well with the public. Mr. Harris’s Common Sense Revolution is ending with a whimper.