Paul Vieira
National Post
May 6, 2002

A "cloud of uncertainty" is hanging over Hydro One Inc. and the on-again, off-again privatization threatens to undermine the goals of restructuring Ontario’s $10-billion electricity market, say industry insiders and analysts.

"Hydro One is a bit frozen. They couldn’t even go to the bond market to get financing, at this point, because the market is wondering, ‘What are you now?’" said a Bay Street insider with knowledge of the Crown-owned transmitter’s operations. "There’s a huge cloud of uncertainty over Hydro One … and it needs to be removed for the credibility of the whole restructuring exercise."

Another company watcher said the waffling by the Ontario government could affect Hydro One’s cost of raising capital.

"There are ratings implications," said the source, who did not want to be identified. "What route are they going to go? How are they going to carry on? Going forward, what kind of strategy can they undertake? Right now, we don’t know."

The market may get a better picture on Thursday, when the Ontario government, under its new Premier, Ernie Eves, delivers a Throne Speech. Sources close to Mr. Eves say the speech will likely address the Hydro One situation.

The much-anticipated sale of the province’s electricity transmission and distribution company through an initial public offering – expected to raise a record $5.5-billion – was cast in doubt after the Ontario Superior Court ruled last month the government lacked the legal authority to privatize the utility.

A week later, Mr. Eves said the government would appeal the ruling, amend the legislation to allow the sale and hold public hearings on the issue.

But since that announcement, Mr. Eves has backtracked, saying privatization is now only one option.

Moreover, Chris Stockwell, the Minister of Energy, said the government was toying with the idea of converting Hydro One into an income trust.

In this case, the province would retain ownership of the transmitter but issue trust units to investors to raise money to help pay down the $21-billion of "stranded" debt accumulated by the old Ontario Hydro. (Stranded debt refers to total debt minus assets of Hydro One and Ontario Power Generation Inc.)

However, financiers and industry observers have criticized the scheme, saying it seriously hampers the utility’s ability to raise cash for much-needed infrastructure maintenance. That’s because trusts must pay out the bulk of their cash flow to unitholders, as opposed to reinvesting in company operations. Moreover, insiders say the government, under former premier Mike Harris, rejected the trust proposal about five years ago.

In the prospectus filed with the proposed IPO, Hydro One set out an aggressive growth strategy it would undertake as a publicly traded company. Among the goals is to expand its infrastructure, seek strategic acquisitions of transmission and distribution assets in the United States, and continue to consolidate in the local power distribution business.

The company also warned it needs to set aside significant amounts of cash in order to maintain and improve parts of its aging grid – investments that were neglected by Ontario Hydro. The prospectus, filed in March, said Hydro One would spend close to $600-million this year on capital expenditures.

"We are at a very serious point," warned Tom Adams, executive director of Energy Probe, an industry watchdog and privatization proponent. "There are a lot of projects that [Hydro One] has to get on with – and every one of those projects is behind schedule. And this uncertainty over where they are going to be is making a bad situation worse."

Those projects include: construction of a transmission link between Ontario and Quebec, which would boost capacity by 1,250 megawatts (enough power for a city of 1.25 million) and cost $100-million; upgrade of current links with Michigan, at a cost of $40-million; a joint-venture with Hydro-Québec to build a link under Lake Erie that would connect Ontario to the U.S. mid-Atlantic, home to some of the cheapest electricity in North America; and upgrading "inadequate" transmission capacity in northwestern and central Ontario.

But these initiatives are in jeopardy should the privatization be scrapped for the income trust.

"It goes to the very heart of what kind of company you are going to create," the insider said of the IPO v. income trust debate. "Income funds don’t build cables under Lake Erie and take risk."

Mr. Adams said Hydro One’s current projects are crucial if Ontario’s opening of its electricity market is going to work, noting that links: will protect against sudden price hikes because there’s access to import from the U.S. market; ensures reliability of power; and will encourage generators to build in the province.

TransAlta Corp.’s chief executive, Steve Snyder, said his utility will not consider further investments in the province until the Hydro One debate is settled.

Opponents of the Hydro One privatization say the transmission grid is a crucial asset that should remain in public hands and fear rates will skyrocket because of the sale.

In hearings held in North Bay, Mr. Stockwell said the only way to keep public ownership and still maintain Hydro One would be to significantly raise rates, go deeper into debt or take money from other programs such as health care and education.