Andrew Coyne
The Globe and Mail
November 1, 1994

The citizens of Ontario have grown used to puzzling advertisements from the state electrical monopoly, Ontario Hydro. In the recent past, the utility’s taste has run to pictures of small children holding giant models of the Earth, with accompanying text that calls to mind early experiments in writing poetry by computer: "Walk far from cynics and whiners, they don’t believe, they never have. Uphold those who care, who share." "Hold out the hand to those who yearn and work to build. Welcome those who have the fire." Yes, but how do I get the lights back on?

Lest these opaque bits of sentiment lead the unsuspecting to think well of the corporation, Ontario Hydro’s workers have periodically taken out ads of their own, roundly denouncing the utility and its chairman, Maurice Strong.

But for veteran puzzle enthusiasts, Ontario Hydro’s latest ad is the most challenging yet. Pictured are the utility’s president and chief executive officer, Allan Kupcis (Mr. Strong having semi-retired to a role approximating that of Deng Xiapping in China), and John Murphy, president of the Power Workers’ Union. The two have joined hands to brag that Ontario Hydro is "holding the line" on the rates it will charge municipal utilities and rural customers in 1995, the second straight year they have been frozen.

Indeed, the ad says, industrial customers will see their rates fall slightly, "the first time that has happened in almost 30 years." It closes with two of those non-sentences advertising copywriters favour: "Keeping your power costs down. Ontario Hydro and the Power Workers’ Union."

Keeping your power costs level, maybe. But down? What the ad doesn’t say is that in the four years before rates were frozen, Ontario Hydro’s rates jumped by an average of almost 40 per cent, more than four times as fast as inflation. Average revenue from primary power customers rose from 4.7 cents per kilowatt-hour in 1989 to 6.5 cents in 1993. Having launched rates from the merely alpine to the stratospheric, Ontario Hydro now proposes to keep them there. This is not most people’s definition of "down."

Yet, as everyone in Ontario knows, the utility has also been through a major restructuring in the past two years, including the reduction of its regular work force from about 29,000 to its present 22,500. Mind you, the workers didn’t go cheaply: The cost of the buyouts and early retirement packages needed to persuade 5,000 of them to leave last year ran to $624-million, not counting relocation charges, or about $124,000 each. But still, as the ad notes, operating costs have been reduced by 25 per cent. So we are left to wonder: How come the corporation is still charging the same rates as it did two years ago, with only three-quarters of the staff? Freeze, shmeeze: Why can’t it cut rates?

One reason is that Ontario Hydro’s sales have been in decline since 1989 — largely because of the increase in rates. At larger volumes, the corporation spreads its heavy fixed costs over more customers. But with dwindling demand, average costs rise.

Two, other costs have risen — notably the cost of interest on Ontario Hydro’s $34-billion long-term debt. In Hydro’s accounting system, interest on debt incurred to finance capital investment is built into rates only when the projects are put into use. That meant taking a big whack in the past year, when the last two units in the long-delayed Darlington nuclear plant (total cost: $14-billion) finally went into service. There is a certain pathos in seeing Hydro’s workers lose their jobs to pay for Darlington, says analyst Tom Adams of Energy Probe, since they were among the project’s biggest backers. But that was in the days when costs could always be loaded onto consumers.

In fact, high as they are, Ontario Hydro’s rates may still not reflect its true costs. The corporation still does not pay anything like the real economic price of the water it uses in its hydro-electric plants. Nor is the 50-basis-point fee it pays the province to guarantee its debt more than a token of the benefit it receives, given that the corporation is arguably insolvent. Indeed, the $3.6-billion "restructuring charge" Ontario Hydro took on its books last year leaves it with a debt-to-equity ratio of more than 10:1, even on Ontario Hydro’s numbers. Some of that charge was to write off costs that would otherwise have later passed through into rates. So the freeze of which the corporation is so proud may be at the expense of a further weakening of its financial position.

On the other hand, Hydro also wants to keep rates high in order to finance more of its capital investment out of cash flow, and less from borrowing. The advertisement notes that the corporation has reduced planned capital expenditures by $24-billion over the next 10 years: "aggressive numbers, to be sure."

Aggressive, and misleading. It is true that Ontario Hydro has scaled back its ambitious expansion plans, from $40-billion down to $16-billion. But a critic might ask why, given the present overcapacity, Hydro should be building any new plant, let alone spending almost $2-billion a year. It may be that more capacity will be needed in the future, but Ontario Hydro’s spending plans presume it will be the one to fill it. Given its price and cost performance, that may no longer be a safe assumption.

Andrew Coyne is a writer with The Globe and Mail.