Eric Reguly
Globe and Mail
May 2, 2002

Imagine this: A CEO announces that his company will join the stock market. The machinery – the underwriting syndicate, retail sales strategy, legal work – is put in place to ensure the deal is completed. Then, months later, the CEO’s second-in-command comes along and says, hold it everyone, we may not do this after all. Is this any way to run a company?

This is precisely the scenario that’s playing out with the privatization of Hydro One,the Ontario government-owned electricity transmission company. Late last year, then-premier Mike Harris announced that Hydro One would join the stock market in a $5-billion initial public offering. His successor, Ernie Eves, said he’s committed to the same sale. Then, two days ago, Chris Stockwell, the greenhorn Energy Minister, said essentially the opposite: Hydro One may, in fact, be kept in government hands. His new idea is to turn the company into something akin to an income trust. "It would mean that rather than actually selling the asset, you would sell the future profits of the asset but retain Hydro One in the public ownership," he said.

Today, in spite of what looks to be bumbling on his part, Mr. Stockwell still has his job.

What is even more extraordinary is that Mr. Stockwell appears to be inventing industrial policy on the fly. And just about anyone’s policy will do. As far as we can tell, at a public hearing into the privatization in London, Ont., on Tuesday that descended into chaos, an investor mentioned the non-sale option to the minister. All of a sudden, the IPO was in doubt and Mr. Stockwell was babbling about the income trust scenario.

No wonder Howard Hampton, the Ontario NDP Leader, has been able to inflict such damage on Mr. Stockwell and the rest of the Tories on the most important privatization in the government’s history. It was Mr. Hampton who stacked the London hearings with anti-IPO hecklers. The flustered minister couldn’t take the heat and bolted for the door. No one, including Energy Probe, one of the few voices of reason on the merits of privatizing the electricity sector, got a chance to make submissions that would have shed light on the issue.

The Tories’ mistake was not sticking to its convictions about the sale’s economic and industrial sense. Now, having been exposed as non-believers by the Opposition, the Hydro One privatization is in limbo. Mr. Hampton smells blood and is attacking the sale on all fronts. Cleverly, he has managed to link the IPO with yesterday’s opening of Ontario’s electricity market. The two are not related, but Mr. Hampton is making sure they are one and the same in the minds of frightened consumers.

Opening the electricity market to competition, he has said, could double electricity prices. Hydro One is half of the electricity market; therefore, its sale is evil too. The message he is trying to deliver is that, in the hands of greedy shareholders, Hydro One will make price gouging a way of life. Keep it in government hands and the public good will be protected.

It’s amazing how fast the Hydro One sale hit the skids. Only two weeks ago, it was proceeding apace. The underwriting syndicate had been formed, the prospectus was out and complicated issues, such as the instalment purchase plan for Ontario residents (who, as taxpayers, own Hydro One), had been sorted out. Only one hurdle of any size – the prospectus’s approval by the U.S. Securities and Exchange Commission – had to be overcome.

The first blow came when a judge ruled that the 1998 overhaul of the Ontario Electricity Act did not specifically state that Hydro One could be sold. Curiously, the Tories didn’t come out swinging the moment the ruling came down. It took them several days to announce that they would appeal the ruling and rewrite the legislation to allow the sale to proceed. The delay was enough to convince the Opposition that the Tories, under Mr. Eves, were losing the faith. Their first victory was hijacking the public hearings in London and exposing Mr. Stockwell as someone who could be easily scared.

If the Tories want to save the IPO – and it’s not 100 per cent certain that they do – they will have to move with alacrity to defend its merits. Privatizing Hydro One, the wires business of the disastrous old Ontario Hydro, is all about converting a flabby, inefficient operation into a market player with some bracing entrepreneurial flair and discipline. Under government ownership, the company did little to upgrade and reinforce its network or build links to allow the easy export and import of electricity. It went on a dubious acquisition spree that saw it buy dozens of local distribution networks.

As a stock market company, Hydro One would be free to expand its network, install efficient, computerized switching technology, and buy assets in the U.S. Northeast in an effort to create an integrated, transborder network. Installing more capacity would attract new generation capacity; new generating companies won’t come now because they’re not assured of getting their electricity to market. As more plants are built, electricity prices will come down.

What’s more important, a disastrous strategic decision would penalize shareholders, not the taxpayers of Ontario. With a privatized Hydro One, followed by a privatized Ontario Power Generation (the other half of the old Ontario Hydro), the province has a fighting chance to create a regional electricity hub, with all its jobs and value-building potential.

Mr. Stockwell’s income trust idea would accomplish none of the above. Income trusts pay out almost all their free cash flow to investors, leaving little for capital expenditures. If the Tories want to save the IPO, they will have to explain why they wanted the deal in the first place. What made sense a few months ago still makes sense now.