Jennifer Wells
ROB Magazine
June 1, 1999

When Mike Harris strode to the apex of Ontario political power that summer of 1995, the agenda, as it was, was crystal clear. Centrally directed economies: bad. Turbo capitalism: good. The ideology was textbook – an affectless pursuit of deficit-slashing and ledger-balancing; the reduction of the high cost of government not just by paring services, but by swapping public debt for private equity.

There were targets eyed and pledges made. Example: In the Common Sense Revolution, his no-nonsense campaign platform, Harris plainly stated that the province’s Liquor Control Board would be privatized. End of story.

The privatization agenda would bring benefits in more ways than one. Reduced debt would mean, ultimately, taxpayer relief. Opening up public industry to private competition, creating what economists call an atomistic marketplace, would herald increased consumer choice and, perforce, lower prices. Win-win.

On the list of privatization candidates, there was none bigger, none mightier, than Ontario Hydro. The largest electrical utility in the country. The largest industrial in the country. A company with $44 billion in assets. Total revenues in fiscal ’94: $8.7 billion. Cash flow: $2.2 billion, which sounds rich, if only it weren’t for the $33 billion in government-guaranteed debt, which was costing the utility, let’s see, roughly $404,566 an hour to service.

In his pre-electioneering days, Harris had given a speech to the Independent Power Producers’ Society of Ontario. He pledged "expanded opportunities for private-sector co-generation along with open competition in power generation, transmission and retailing." Privatization was, as far as the business community was concerned, part of the mandate. A "fundamental restructuring," said Harris, was on its way. Bonus: The beginnings of an intense shakeup of the 90-year-old monopoly, including the reduction of staffing levels by more than 8,000 or so bodies and a $3.6-billion restructuring charge, had already been commenced by the predecessor NDP government under Hydro chairman Maurice Strong, who himself had said the utility must privatize or sink.

So, here we sit four years later, Harris having been given every opportunity to haul government out of Hydro. Instead, he took a pass. How come? Why did he fail the free-enterprise test?

The beginnings were so propitious. A mere month after Harris moved into the Premier’s office, his very good friend Bill Farlinger, the former chairman of accounting firm Ernst & Young and one of the key power brokers behind the Harris ascension, submitted a report that concluded Hydro should be privatized – fast. The report, commissioned by Strong, advocated not only privatization, but privatization of all Hydro’s assets, including nuclear. In the Common Sense Revolution, Harris had excluded nuclear from his privatization thinking. Now Farlinger was saying the "investment fraternity" was giving the green light to the entire slate of Hydro assets. Farlinger warned that if the government failed to move quickly, industrial electricity users, who had seen prices rise by 40% from the start of the decade, could either decamp or self-generate using nifty, relatively new gas turbine technology. The status quo, in which Hydro serviced 86% of the province’s electricity needs, would have to be broken.

In early November, now five months into the job, Harris did two things. He appointed Farlinger Hydro’s chairman, which, optically, ensured that privatization was in Hydro’s future, and he commissioned former federal Liberal energy minister Donald Macdonald to lead the Advisory Committee on Competition in Ontario’s Electricity System. The government wanted competition, it said, it just wasn’t sure how to get there. In working up a recipe, Harris asked the committee to keep an eye on the obvious: financial soundness and affordable electricity rates.

Macdonald and his six-member committee produced their 162-page report, A Framework for Competition, in May, 1996, which they promptly put before the province’s Ministry of Environment and Energy. The committee was precise in its recommendations: that the utility’s monopoly in electricity generation be eliminated, and that non-nuclear generating assets be separated into distinct operating entities and opened up to private equity investment. The committee advised that Hydro’s Niagara River assets, the hydroelectric beginnings of the company, be excluded, a prudent view given the thunderous historic significance of the Falls. As for nuclear, the Macdonald committee veered from Farlinger’s position in recommending that these generating assets be hived off into four companies, but maintained under public ownership.

The report’s main message was not open to interpretation. The generating facilities must, it said, "be sufficiently separated to prevent any one company, or any group of companies acting together, from being able to exercise undue market power."

Months passed. So many months passed after the Macdonald submission that a number of interest groups, including the Association of Major Power Consumers in Ontario (AMPCO) and the Alliance of Manufacturers & Exporters Canada, came together to form a stakeholders’ alliance to address what appeared to be an unseemly delay in the formulation of a government response. "We were concerned that an opportunity was going to be missed," says AMPCO president Arthur Dickinson. AMPCO’s membership – big industrial users such as Stelco and Falconbridge – takes up roughly 15% of Hydro’s annual electricity load, for which members pay more than $1 billion in total. "We felt it [the report] was very much along the lines of our own views as to how the restructuring of Hydro should proceed," says Dickinson. Bottom line, he says, is that his members anticipated that the private sector moving in would see electricity prices moving down by 10% or more.

It was, however, yet another report, this one by U.S. nuclear expert Carl Andognini, that caught the public’s attention in the summer of 1997. Andognini had been retained to provide a "brutally honest" assessment of Ontario Hydro Nuclear. In volume after volume, the woes of the province’s nuclear program were grimly documented. The reactors were chronic underperformers, everyone knew that, and it had long been suspected that the Candus couldn’t hope to achieve their 40-year life expectancy.

Now taxpayers heard how safety standards had been compromised and of managers who lacked "basic management and leadership skills." The report was littered with such hot-button phrases as "uncontrolled contaminated material" and "excessive human error rate." Bill Farlinger said that when he looked inside Nuclear he saw "some sort of special nuclear cult." Seven of the province’s 19 Candu reactors would be laid up as a result of the investigation, said Farlinger. And the problems that could be fixed would, he said, cost somewhere between $5 billion and $8 billion. There was no longer even the slightest hope that Hydro had an ounce of political capital left.

It would have seemed an opportune time for the government to make its intentions for Hydro known. Yet it wasn’t until November, 1997, that the government’s formal response to Macdonald’s efforts came clear when it tabled its white paper, the next big step toward competition and a precursor to Bill 35, the province’s new Energy Competition Act. The white paper veered from the Macdonald committee’s recommendations in just a couple of areas. But one was a whopper. While the monopoly’s generating assets would be separated from transmission and distribution – a move that was favoured by Macdonald et al. – it also said there would be no breakup within generation. The core of the company would remain, instead, a single, Crown-owned entity – nuclear, fossil, hydroelectric, the works.

Some observers were surprised, including, particularly, Donald Macdonald. Whatever happened? He posits the "demon in the works theory," that Hydro is so big, so self-perpetuating, so bureaucratic that the forces for progress were utterly co-opted. Still, he’s puzzled, he says, that a government that could have achieved the dual objectives of debt reduction and competition would just drive off the road the way it did. "What I don’t understand ideologically is why Harris wasn’t prepared to go for sale," he says. At a minimum, he says, the government could have put some assets – the Ottawa River dams, for example – on the market.

Instead, the government left the task of figuring out how to inject competition into an uncompetitive model to yet another group, this one called the Market Design Committee (MDC), a 14-member stakeholder panel appointed by the provincial Ministry of Energy. "One of the walls we came up against," says Tom Adams, executive director of Energy Probe, who sat on the MDC, "was it’s hard to make competition when one party, one player, will have about 80% of the market….The MDC found itself unable to fully develop competition and the rules for competition because of this structural problem."

The committee complained. The committee whined. It sought alternative policy wording. "The government," says Adams, "was just not going to be finessed on this thing. They were committed to the white paper." Why? "That," says Adams, "is one of the riddles in all of this." Was it the impenetrability of the Hydro bureaucracy, as Macdonald would have it? Was the Harris team taken off the free-enterprise path by a small, impermeable cluster of insiders?