James Rusk and Martin Mittelstaedt
The Globe and Mail
June 10, 1998

TORONTO — The chairman of Ontario Hydro has almost doubled the amount of debt that he says the utility must get rid of to be able to operate like a private company.

The comments by William Farlinger come as the Ontario Government tabled legislation yesterday to split the huge utility into four parts.

Two will generate and distribute electricity and they will be required to take on only the part of the debt that they can be expected to carry when they have to operate as private businesses.

The debt they cannot afford to carry, which is called stranded debt, will be taken on by a new Crown corporation. Last year, Hydro estimated that the stranded debt would be $16-billion; yesterday, Mr. Farlinger said it could be as much as $30-billion.

Later yesterday, Energy Minister Jim Wilson introduced legislation to create a new market structure allowing open competition in 2000, ending nearly a century of monopoly for one of the continent’s largest electrical utilities.

"All over the world, the trend is towards competition and open markets and away from monopoly state control," Mr. Wilson told reporters. "Until the 1980s, Ontario enjoyed electricity rates that were very attractive to industry; they made this province the economic engine of Canada. That advantage has eroded."

Mr. Wilson said that Ontario’s electricity costs are now the third highest in Canada, behind only Nova Scotia and Prince Edward Island, and that this has to change if the province is to regain its competitive advantage and create employment.

Thomas Adams of Energy Probe, one of Hydro’s most trenchant critics in recent years, said that "this is a historic day." "This marks the end of Hydro’s 92-year reign as the controller of everything electrical in Ontario," he said.

"This is a totally different electricity system. This is one where there are not going to be captive customers like we used to have, where the power producers are going to be accountable to their consumers. They are not ratepayers any more, they are customers."

Under the proposed law, four new companies will be created out of Ontario Hydro: two operating companies and two Crown agencies. The two operating companies will be owned by the government but will not be Crown corporations, as Hydro is, with the protection of a financial guarantee on their debt.

One of these companies will take over Hydro’s electricity-generating business, including the nuclear, hydro-electric and fossil-fuel plants. The other will take over its transmission and distribution system and its retail electrical business in rural and Northern Ontario.

The government will also create a small Crown corporation, called the Independent Electricity Market Operator, which will supervise the operation of the electrical-distribution system so that customers, distributors and generators all have fair access.

Hydro’s $32-billion in provincially guaranteed debt — or about $2,900 for each of the province’s 11 million residents — will be held by a Crown agency, the Ontario Hydro Financial Corp.

But the estimates provided yesterday by Mr. Farlinger indicate that the stranded-debt problem may be more serious than previously thought.

In addition to the provincially guaranteed debt, Mr. Farlinger said, other amounts Ontario Hydro must pay off, including costs for decommissioning nuclear stations and disposing of their atomic wastes, raise its liabilities to about $47-billion.

Using Mr. Farlinger’s estimates, there is a possibility that more than half of this total isn’t economically viable.

"I think the calculation will be between $20-billion and $30-billion," Mr. Farlinger said, referring to the amount of stranded debt.

He did not offer an explanation for his stranded-debt figures, which exceeded the corporation’s previous estimate of $16-billion. His liability figure also exceeded the amount the company used in its latest audited financial statement.

Mr. Farlinger’s estimates may reflect a view that the financial problems at Hydro are worse than is commonly thought, but it is also possible that the chairman is trying to reduce the debt levels that the utility will take into a competitive market.

Although the proposed law would give the government the authority to impose a debt-repayment charge on all electricity used in the province, the government did not spell out how this would be managed, other than to say that the municipal and provincial electricity companies would pay grants in lieu of taxes to pay down the debt.

Mr. Farlinger favoured Hydro or its successor companies using future profits to pay down the stranded debt. Currently, Crown corporations do not pay income tax and Mr. Farlinger said this type of repayment approach would put both private and public utilities in Ontario on a more equitable footing in a competitive market.

Mr. Wilson said that the Finance Ministry will issue a discussion paper early in July that will make proposals for dealing with stranded debt and that will detail how much of Hydro’s existing debt will be taken on by the new commercial companies.

The level of stranded debt has another important consequence. The higher the figure, the lower the amount of indebtedness that will be carried by Hydro in the new market structure. This would be something of a windfall for the utility because a low debt level would make it more competitive against others hoping to sell power in the Ontario market.

Battles over stranded debt have broken out in the United States, where many utilities that once had a monopoly find they cannot compete effectively with their existing debt burdens.

Turning to electricity rates, Mr. Farlinger said he expected open competition to lead to lower prices.

"Nobody really knows what the price of power is going to be when competition comes in," he said. "History would tell us the prices go down, but that’s a leap of faith."

Mr. Wilson’s legislation also would strengthen the Ontario Energy Board, which would regulate both the new electrical system and, as it does now, the natural-gas business in the province

.

The proposed law also would require a shakeup of municipally owned electrical-distribution utilities over the next two years, as they are commercialized in a manner similar to Hydro.

The law also would allow the government to define pollution-disclosure standards for electricity, so customers could choose a greener supplier, and to define the emissions standards that generators would have to meet to sell in Ontario.