Paul Waldie and Andrew Willis
Globe and Mail
June 13, 2002

 The Ontario government’s plan to privatize only half of Hydro One will be a tough sell on Bay Street because investors are worried about political interference in the new company, investors and investment bankers said yesterday.

"If they provide full freedom to private partners this will work," said one large institutional investor. "If they are not willing to do that, we wouldn’t be interested."

Added an investment banker working on the original IPO: "This whole political mess makes Ontario, and Canada, look like some kind of banana republic. The government can’t seem to make up its mind."

Yesterday Premier Ernie Eves scrapped an initial public offering for Hydro One that could have topped $5-billion and said the government will keep majority ownership of the utility.

He said the government is considering privatizing 49 per cent of the company through an IPO, an income trust or an asset sale.

Some investors are leery about investing in a government-controlled Hydro One, especially given the government’s recent move to fire Hydro One’s board over a dispute about executive compensation. The directors resigned last week and several said the government acted improperly. On Tuesday, Mr. Eves appointed a new 11-member board that includes three former politicians and a political strategist for the Conservatives.

"I don’t imagine, given all the recent history, that [the new proposal] will be all that attractive," Radcliffe Latimer, one of the former directors, said yesterday.

The government is "defeating their own original arguments," said Douglas McCaig, another former director. "They said they were going to pay down [Ontario Hydro’s $38-billion] debt, it was imperative. Now they are backing away from that."

However, Adam Zimmerman, one of Hydro One’s new directors, said privatizing the utility isn’t necessary.

"I have never really understood the strength of this argument for privatization," Mr. Zimmerman said yesterday. "If I were a politician, I would be pretty wary of this, because you are turning a public asset loose on the general public."

A veteran financier working with Hydro One said the government’s continued involvement will weigh on the price of either common stock or an income trust, and may cost it institutional shareholders. But he added: "At the end of the day, this utility gets sold on its dividend yield, and if that’s in place, either a trust or a stock will sell."

Leo de Bever, senior vice-president of the Ontario Teachers Pension Plan Board, said the idea of privatizing half of the utility has been discussed before.

He added that contrary to published reports, the $70-billion pension fund is not wedded to an income trust for the utility, but wants to see what the government proposes.

Opponents of the privatization said Mr. Eves’s announcement is a big boost, and they plan to continue fighting any privatization.

"The people of Ontario are going to feel that we are on a roll," said Judy Darcy, head of the Canadian Union of Public Employees. The union won a legal challenge to the Hydro One privatization in April that initially derailed the IPO.

Tom Adams, who heads Energy Probe, an environmental group that supports the IPO, said the announcement was "terrible."

"It locks us into a politicized Hydro One until new thinking comes along," Mr. Adams said yesterday. "This is short-term political expediency."