Paul Waldie and Sinclair Stewart
Globe and Mail
January 21, 2003

A decision by Ontario Premier Ernie Eves to scrap a partial sale of Hydro One Inc. has raised more uncertainty about the future of the utility and the province’s energy policy, industry observers said yesterday.

"It is possible that some of these people [bidding on the stake] will still come back for other investments of the same type in Ontario," said one investment banker advising on a bid.

"But I can tell you that, generally speaking, the investment community, the intermediaries and at least some of the principals are going to say, ‘Why spend the time?’"

Peter Budd, chairman of the Ontario Energy Association, which represents utilities and energy producers, said Hydro One would have benefited from some private sector input.

"It’s clear transmission in Ontario could have probably benefited from a movement toward privatization and market discipline and so on," Mr. Budd said.

Yesterday’s announcement "probably leaves Hydro One just sort of in a hold mode. It’s not going to have a huge infusion of new ideas; frankly, it’s going to be pretty low key," he added.

Ontario’s energy policy has been in turmoil since last spring when Mr. Eves backed off a move by former premier Mike Harris to sell Hydro One through a public offering worth around $5-billion. At that time, Mr. Eves said the government would consider selling up to 49 per cent of the utility. Yesterday, he said there would be no sale.

Hydro One is one of the largest electricity transmission companies in North America.

Industry sources say the government had received several bids for the stake, including one worth more than $2.5-billion.

However, some bidders, including a pension fund consortium made up of the Ontario Teachers Pension Plan Board and Borealis Capital Corp., an infrastructure and equity investor backed by the Ontario Municipal Employees Retirement Board (OMERS), privately raised concerns about the level of input they would have in Hydro One.

Sources said the pension funds were asking the Ontario government for guarantees about corporate governance and rates of return, and assurances that they would be able to exercise some influence over operational decisions.

The consortium was expected to approach SNC-Lavalin Group Inc., a Montreal engineering company, as a possible partner in the Hydro One bid. SNC-Lavalin confirmed last fall that it was interested in acquiring the minority stake and had been in talks with the province. SNC declined comment yesterday.

David Lindsay, chief executive officer of Ontario Superbuild Corp., the government agency co-ordinating the sale, said the province was unwilling to cede too much control to a private sector partner. "A couple of bidders had some different suggestions on how they would see [Hydro One] going forward. They wanted control over various operational aspects and the government . . . decided no, that’s not where they wanted to go."

Adam Zimmerman, a Hydro One director, said Mr. Eves’ decision to call off the sale was the right move.

"The sale could not happen satisfactorily to the shareholder, in my opinion, and I think that Ontarians are best served by having the company stay the way it is now and let us work our way out of it," Mr. Zimmerman said. "Who is going to pay a premium price for a minority position?"

Tom Adams, who runs Energy Probe, a Toronto-based group that studies energy policy, said the announcement leaves Hydro One facing huge challenges.

"Having lit fire to this asset, Eves is calling off the fire sale," Mr. Adams said. "It’s probably the right thing to do given that the utility has been hit with such drastic erosion because of the chaos coming out of the Premier’s office, but it does beg the question, ‘What next?’

"I think the outlook is for continued Crown ownership of Hydro One. That’s likely to leave the existing frightening problems on both the financial performance and some of the operational issues unresolved."

Mr. Adams noted that Hydro One is already behind on two key interconnection projects with Quebec and the United States. Those projects are badly needed to ensure the province can meet its power demands, he said. Hydro One is also facing financial pressure because of a government announcement last November to freeze retail electricity prices. Dominion Bond Rating Service has put the utility on a negative trend because of the freeze announcement.

Several Hydro One executives have also quit in recent months, and chief executive officer Eleanor Clitheroe was fired last summer and is suing the company. The board also quit last summer in a dispute with the government.