Eric Reguly
The Globe and Mail
December 18, 2003

Eleanor Clitheroe, the disgraced former CEO of Hydro One, the sister company to Ontario Power Generation, must be smiling. The reason: It looks like the provincial government whacked the wrong board. While it is unfashionable to say anything nice about poor Eleanor, she can claim Hydro One hit its financial forecasts when she was running the show (pity she allowed excessive limo service and other goodies to blow away her own financial forecasts). Still, the Ontario government sacked her and the other directors.

Meanwhile, down the road at OPG, the generating boys were having a merry time blowing obscene amounts of money on the Pickering A nuclear plant overhaul. But that didn’t matter, because OPG was profitable and was more or less meeting its (diminished) financial targets. Or so we thought until Tuesday, when Ontario Energy Minister Dwight Duncan dropped a bombshell. OPG, he said, expects a cash shortfall this year of $350-million. Next year, the shortfall will range between $300-million and $750-million, raising the after-tax loss to about $250-million. That’s $850-million worse than the projection contained in OPG’s 1999 Corporate Financial Restructuring Plan.

Things are so bad that OPG is selling receivables, that is, future income streams, at a discount to help cover the cash shortfall. Desperation tactics like this are normally associated with companies facing insolvency, a scenario not ruled out by the Liberals. "The future viability of the company is at stake," said Mr. Duncan, who launched a review of OPG and promised to appoint new board members (CEO Ron Osborne and chairman Bill Farlinger were ousted earlier this month).

OPG has been the bearer of grim news for some time. Nonetheless, the cash shortfalls ranked as a true shocker, even more so than the multibillion-dollar cost overrun at Pickering A; it was apparent as early as 2000 that the nuke plant’s original $780-million overhaul estimate was sheer fantasy.

How did OPG find yet another hole to fall into? The government couldn’t readily explain the horrendous cash shortfall, but hinted that OPG couldn’t take all the blame. "As we drill down into the operations at OPG," Mr. Duncan said, "we’re finding out more and more about the astounding magnitude of the problems left by the Tory government."

One credible explanation is that OPG was the victim of blatant and cynical political interference. Tom Adams of Energy Probe, an early and accurate forecaster of Ontario’s energy meltdown, believes this, as do energy executives who recently left the industry. Sources said Premier Dalton McGuinty’s energy team has been told by OPG officials that this was indeed the case – OPG was urged to sell electricity at less than the market could bear, leaving a gaping hole in the cash account. If this is true, the former Tory government is guilty of taxpayer sabotage on a grand scale.

We know the Tories were absolutely freaked out by high electricity prices, thanks to extreme temperatures and a shortage of generating capacity, in the months after the spring, 2002, opening of the electricity market. Their solution was, in effect, to close the market by fixing electricity prices at 4.3 cents a kilowatt hour for the residential and small business market, equivalent to roughly half of the overall market. The problem was that wholesale prices were consistently higher than 4.3 cents. The difference between the (high) wholesale price and the (low) retail price – hundreds of millions of dollars in a relatively short period of time – was subsidized by the government, which meant it was slathered onto the public debt. Taxpayers were being bribed with their own money and the headlines about the blatant rip-off made Ernie Eves and his election-bound Tory buccaneers distinctly uncomfortable.

In other words, it was in the Tories’ best political interests to make sure the price subsidy was as small as possible. Sources said OPG was encouraged to do its bit to make this possible. How exactly this was done, and who was approached, isn’t known, but it looks like OPG’s so-called market power mitigation agreement might have been at the centre of any effort.

The agreement was designed to give all electricity users some degree of protection from price spikes once the market opened. If the price was higher than 3.8 cents a kilowatt hour, OPG, as the dominate generating company, was obliged to rebate a portion of the excess revenue to consumers (in the first three quarters of 2003, the rebate came to $1.27-billion). The wrinkle in the equation was that, as OPG’s market share came down – it was required to fall from about 80 per cent to one-third of the market within 10 years – the company could sell more and more power at prevailing, and presumably higher, market rates than 3.8 cents. This was designed to give OPG an incentive to shed market share.

Often in the past year and a half or so, the wholesale price was 6 cents. The question is whether OPG was getting that much for the juice, or was it taking less in an effort to appease its political masters? This is what the Liberals are trying to determine. Certainly, that’s what the hole in the OPG accounts suggests.

Selling below market prices would take one mistake – the fixed retail price – and double it. It would wreck OPG’s finances, if it hasn’t already done so, and damage the taxpayer in the process. OPG is 100 per cent Crown owned, which means it’s the taxpayers’ baby. If the government has to pump money into it to keep it alive, that cost is ultimately borne by the unwashed masses. Furthermore, the sale of electricity at artificially low rates would scare off independent generating companies, delaying the transition to a competitive market.

If ever there was an argument to remove electricity from government ownership, this is it. The Tories were not above gaming the electricity market for political gain. Ms. Clitheroe was fired, Hydro One’s privatization was reversed, the 4.3-cent fixed retail price was put into place. And now we learn about OPG’s potential collapse amid allegations of price manipulation. The only way to end the political risk is to remove politicians from the market.