Paul Vieira
National Post
May 8, 2002

Donald Macdonald, the former federal finance minister and one of the architects of Ontario’s newly restructured electricity market, says the province should privatize Hydro One Inc. and do it through a public stock offering.

"I think it should be sold for the best possible return," Mr. Macdonald said yesterday at public hearings commissioned by the Ontario government to examine the future of the electricity transmitter. "And an initial public offering is the best course of action to be taken."

Mr. Macdonald’s candour carries a lot of weight, as he wrote the 1996 report [which bears his name] that called for the breakup of the old Ontario Hydro monopoly and the opening of the province’s $10-billion electricity market to competition. The Conservative government, under former premier Mike Harris, used the report as the template for its power reforms, most of which were implemented last week.

In that report, he was ambivalent about ownership of the transmission operations, saying they could remain either in public hands or be run by the private sector, as has been the case elsewhere.

He has remained largely silent, sources say, because he is employed by UBS Warburg, which has acted as a financial advisor to Ontario SuperBuild Corp., the agency supervising the Hydro One offering. Some are worried his connection to Bay Street will give privatization opponents a reason to dismiss his opinion.

Nevertheless, he was clear the IPO – expected to fetch a record $5.5-billion – was his preferred route, saying it would raise the most money for the province and go a long way to help pay down the $38-billion debt accumulated by the old monopoly structure.

"It could operate equally well under private or public hands," Mr. Macdonald told reporters after his presentation. "But we have enormous debt. Either we pay it off by getting the best return by putting these assets into the private market, or wind up paying for them as taxpayers. And under those circumstances, go ahead with the IPO and get the maximum return to pay down that debt."

Ernie Eves, the Premier, said Mr. Macdonald’s opinion is one of many the government has heard as part of its consultation process.

"I certainly respect Donald Macdonald’s opinion, I have on other issues in the past, and that’s what the process is all about – getting input. And there are certainly conflicting points of view," Mr. Eves told reporters yesterday.

Bay Street and industry observers were delighted with Mr. Macdonald’s public support.

"Ignoring his advice now would be pretty irresponsible," said Tom Adams, executive director of Energy Probe, an industry watchdog and privatization supporter. "He’s someone who needs to be carefully listened to."

Also yesterday, the chairman of the Independent Electricity Market Operator, the agency that runs the wholesale electricity market, warned Mr. Eves about the possible repercussions of not privatizing Hydro One.

James Baillie said whatever option the government chooses, it must ensure Hydro One becomes a "well-capitalized corporation, with the capability and the motivation to make the capital expenditures needed for enhancement and expansion of the Ontario [transmission] grid."

The government announced last December it would privatize Hydro One in what’s expected to be the largest privatization and IPO in Canadian history. The IPO process was moving along until last month, when the Ontario Superior Court ruled the government lacked the legal authority, under the province’s Electricity Act, to sell the transmission and distribution company.

Mr. Eves said his government would appeal the ruling, amend the law to allow the sale and hold public hearings. However, he has since backtracked, saying privatization is only one option.

The Energy Minister, Chris Stockwell, floated the idea of an income trust, although that has been roundly criticized – including by Mr. Macdonald, who said yesterday that a trust would hamper Hydro One’s ability to spend on infrastructure and "wouldn’t yield [the government] $5.5-billion."

Other options the government says it is examining include a leasing arrangement and a not-for-profit entity.