Eric Reguly
The Globe and Mail
November 29, 2001

As press releases go, it was one of the duller offerings. Hydro One, Ontario’s electricity transmission company, and Hydro-Québec revealed plans this week to sink a line under Lake Erie.

Imagine a huge extension cord carrying power from Canada to the U.S. Northeast.

But in the context of the behind-the-scenes effort to turn Hydro One into a not-for-profit entity, the press release takes on new meaning. If the effort succeeds, Hydro One probably won’t be building transmission lines to the United States. It and its transmission network would be boxed into Ontario, turning Canada’s economic heartland into an energy island. The concept fills the province’s biggest electricity eaters, such as Dofasco, with delight; since Ontario’s electricity rates are lower than those in the U.S. Northeast, they apparently believe that the island approach will guarantee the status quo.

The poor deluded souls don’t realize that precisely the opposite is more likely to happen.

First, some background. Ontario electricity deregulation, put on hold by politicians who lost their nerve when they saw the lights go out in California (they’re back on, by the way), is supposed to be coming sometime next year. In anticipation of this event, the government’s 1997 White Paper on electricity proposed giving Ontario Hydro’s successor companies – Ontario Power Generation and Hydro One – "clear business mandates, consistent with the Ontario Business Corporations Act." The assumption was that Hydro One would become a fully commercial company by way of an initial public offering or outright sale to a competitor.

So far, so good. Then along came Tony Fell and Duncan McCallum, two heavy-hitters at Royal Bank of Canada’s Bay Street shop. Assuming they wouldn’t get a juicy chunk of the IPO action, the lads invented their own deal: Scrap the IPO and turn Hydro One into a not-for-profit entity with no share capital. This non-company would issue $10-billion or more of bonds, which would be applied to the $21-billion of stranded debt piled up by the old Ontario Hydro. And, by the way, Messrs. Fell and McCallum would be happy to take a small fee – up to $40-million – to flog the bonds. Premier Mike Harris, government insiders say, is taking the not-for-profit concept seriously and will determine Hydro One’s fate by Christmas.

The only groups to have come out in favour of the idea are Tony Fell and company, and the Association of Major Power Consumers of Ontario (AMPCO). Hydro One hates it; British Energy, the biggest foreign electricity generator in the province, hates it. Energy Probe hates it. RBC apart, all of Bay Street hates it. Ontario Power Generation is officially sitting on the fence (which tells you something). The latest non-fan is Jim Baillie, the Torys lawyer and chairman of the Independent Electricity Market Operator, the body that oversees the bulk supply of electricity. In a speech this week to the Independent Power Producers’ Society, he said the not-for-profit model "horrifies me" and that it would become a "self-defeating prophecy."

Let’s go back to the press release. Hydro One wants to play the deregulation game. That means exporting electricity when Ontario has a surplus, and importing it when it doesn’t. In preparation, it’s willing to take on the risk of building transmission lines, like the Lake Erie one, which would be rented by generating companies to get the juice to market. Now suppose Hydro One becomes a non-commercial entity. It couldn’t raise money from shareholders to fund development because shareholders wouldn’t exist. It wouldn’t have a commercial company’s market discipline or incentives, meaning it would be more inclined to sit still than innovate, expand and become efficient. Its cash flow would be devoted almost entirely to debt service, leaving little for capital expenditures. With an inert business strategy, its network would truly become an island. Generating companies would stop investing in Ontario because they wouldn’t be able to get their electricity out. In fact, TransAlta, the Alberta energy company, has already said it might bail out of Ontario if Hydro One takes the not-for-profit route.

Guess what happens when there’s not enough electricity generation and transmission capability to meet rising demand? Prices rise. Guess what happens when demands soars during a heat wave? Again, prices rise, because the shortage of wires constrains imports. Given these risks, it’s extraordinary that Dofasco and the other big energy consumers support Mr. Fell’s loony idea.