Caroline Mallan
Toronto Star
June 13, 2002

 The Ontario government has zapped plans for what was set to be the largest privatization in Canadian history.

Premier Ernie Eves has decided to keep controlling interest in Hydro One, the provincially owned electricity transmission company that has been the centre of a political storm for weeks.

"The government has decided it’s not going to part with control of Hydro One," Eves told reporters after a three-hour cabinet meeting yesterday.

"It’s important for governments to listen to their constituency. It is an asset that’s owned by the people of Ontario, we do have to do what we think is right with respect to the people of Ontario."

Eves said the government will now have to choose between three options for the company:

• Find a "strategic partner" to buy less than half the company and help manage it. Possible contenders include multi-billion dollar pension funds owned by either teachers or municipal employees;

• Create an income trust, again likely involving the province’s biggest pension funds. Units of the company are sold off that entitle the "unit owners" to a share of the profit, but they never actually own a piece of the firm. Critics have charged this method will not raise the capital required to expand Hydro One’s transmission grid;

• Sell 49 per cent of Hydro One in an initial public offering or IPO. This is viewed as the least likely option, given all the turmoil surrounding the abandoned IPO of the entire company.

It is expected that the Tories will make their decision before the end of the month and take the summer to work out the details.

Eves said former premier Mike Harris’ decision to go ahead with the IPO of Hydro One virtually at the same time as the electricity generation market was being opened up to competition on May 1 was a mistake.

"If it had been my decision originally and assuming, even assuming that you wanted to go the IPO route, I don’t think it was the most appropriate (route) quite frankly to go ahead with the IPO at the exact same moment that you were opening up the market."

The Premier said the status quo is unacceptable at Hydro One and "private sector discipline" must be brought to bear at the company.

A recent controversy over the multi-million dollar salary and benefit packages awarded to five top executives culminated in the government introducing a bill last week that would fire the board of directors of Hydro One.

The board responded by resigning en masse claiming political interference and a new board, headed by Tory loyalist Glen Wright, was named on Tuesday.

Former NDP premier Bob Rae and former Liberal cabinet minister Murray Elston were also named to the new board.

President and CEO Eleanor Clitheroe, the woman at the centre of the salary controversy, earned $2.2 million last year and would have received $6 million if she quit or was fired in addition to a pension of almost $1 million a year for life.

In a speech to a Toronto luncheon audience yesterday, Clitheroe wouldn’t talk about either on her own position or the company’s.

Hydro One spokesperson Terry Young said the company’s future is to be determined by the provincial government – not the board of directors or senior management of the company.

The plan to sell the company to investors for an estimated $5.5 billion was announced by Harris last December and was set to proceed this spring before Mr. Justice Arthur Gans of the Ontario Superior Court ruled the province did not have the authority to sell the utility.

The ruling was in response to a court challenge filed in April by two national unions, the Communications, Energy and Paperworkers and the Canadian Union of Public Employees.

The government had said that proceeds from the sale would be used to pay down the $38 billion debt left by Ontario Hydro.

Ontario Hydro was replaced in 1999 by three private corporations owned by the province: the Ontario Electricity Financial Corporation (OEFC), Ontario Power Generation (OPG) and Hydro One.

Liberal Leader Dalton McGuinty accused the government of mismanaging the Hydro One issue from the onset.

"As a result of your complete lack of leadership on this file, as a result of your dithering and fiddling, you have introduced uncertainty into the Ontario economy like never before. The Premier may laugh at this, but you have somehow managed, at one and the same time, to alienate both Bay Street and Main Street when it comes to your handling of the hydro file," McGuinty told Eves in the Legislature.

NDP Leader Howard Hampton said the Tories’ quest for private sector discipline has thus far cost ratepayers and taxpayers money.

"The only private sector discipline we’ve witnessed at Hydro One was the desire to push the salaries, bonuses and expense accounts up to the private sector level," Hampton told Eves.

"That is exactly the so-called private sector discipline that the people of Ontario are opposed to."

On the investment side of the decision, one executive, who does not work at a firm that does investment banking, said he would avoid buying shares in a Hydro One still controlled by the Ontario government.

That’s because the ownership structure would create a hybrid company that is subject to the forces of politics, which don’t always mix well with the forces of business.

"These crown corporations only seem to do well if they get out from government control," said Brendan Caldwell, president and chief executive of Caldwell Securities Ltd.

"I don’t know that I would be wild about buying into a company whose board is political appointees and whose controlling shareholder is the Ontario government."

However, Caldwell said the big Bay Street investment dealers, which have been relatively starved for investment banking business like new stock offerings, would likely jump at the chance to underwrite the deal.

"I have absolutely no doubt they would – they’ll be able to sell it.”

The commissions on such a deal could be between 3 per cent and 5 per cent – a substantial amount if the stock offering was worth even half the $5 billion originally envisioned for a full privatization.

On news of Eves’ decision yesterday, Hydro One bonds increased in value as investors viewed them as more of a government backed bond than a corporate bond.

With files from John Spears and Rob Ferguson