Deirdre McMurdy
Maclean’s
March 26, 1993

The two buildings are only 12 blocks apart. But in every other respect, the modernistic headquarters of Ontario Hydro and the cluttered brick house of Energy Probe in Toronto are light years apart. Since several environmentalists formed the aggressive lobby group in 1974, it has waged war against Canada’s largest electric power utility and its operations. Although the group has most frequently focused on Hydro’s extensive nuclear power program, it has also attacked its monolithic structure and its bureaucratic corporate culture. For their part, senior utility executives have tended to dismiss the Energy Probe workers as misguided zealots. But early this week, that adversarial relationship was due to take a sudden turn: Maurice Strong invited himself to a meeting at Energy Probe and was set to become the first Ontario Hydro chairman to visit the group’s offices. Said Norman Rubin, director of nuclear research at Energy Probe: “This is the first time that they have ventured onto our turf. It’s a real departure.”

The initiation of any dialogue between Ontario Hydro’s management and its most vociferous critics is the latest sign that the troubled utility is in the throes of a profound transition. Just four days before his meeting with Energy Probe officials, Strong announced that Ontario Hydro was following the example of hundreds of recession-battered private-sector companies by restructuring into three smaller, semi-autonomous units and eliminating 4,500 employees–including eight of the utility’s 14 vice-presidents. He even invoked the ultimate “New Economy” notion of spreading decision-making responsibility throughout the ranks.

At the same time, Strong said that the debt-encumbered utility will take a $1.3-billion “hit” this year to write off restructuring and other operating charges, including the $150 million penalty for cancelling a $13.5-billion supply contract with Manitoba Hydro. Speaking at a Toronto news conference, Strong noted that “to surmount the present crisis afflicting the organization,” flexible, responsive business units had to be created. He added: “You can’t have an efficient system that isn’t broken down into manageable units.”

However radical was Strong’s rhetoric, especially for the head of a moribund Crown corporation, the success of his bold strategy remains largely beyond his control. The utility is not only saddled with $34 billion in debt, but its future has been permanently linked to a costly and increasingly unreliable nuclear power program. The protracted construction of the $14-billion Darlington nuclear station east of Toronto and the maintenance problems at the 26-year-old Bruce nuclear facility on the shore of Lake Huron, have largely contributed to the utility’s financial burden.

Now, as the financially troubled provincial government looks for ways to separate itself from that debt, which it has guaranteed, the option of privatization is under increasing debate. But the immeasurable environmental risk and the rigorous federal licensing requirements attached to nuclear facilities ensure that those capital-intensive units cannot be easily transferred to any other owner. Said David Brown, an economist with the Toronto-based C. D. Howe Institute: “Nuclear assets are uninsurable. No private market could–or would–handle the inherent risk.”

While Strong has made it clear that Ontario Hydro must reorganize to address such short-term problems as increasingly uncompetitive rates and corrosive interest charges, the ensuing process will inevitably fuel the discussion of privatization. The division of the utility into three separate units (international and new technology, generation and distribution, and conservation and service), each with responsibility for individual profit targets, is one of the first measures required to transform Hydro’s capital structure. With the distinct operating units in place, it will finally be possible to monitor specific operations as in a private-sector company. As part of that exercise, Ontario Hydro also will revalue its assets to determine what they are currently worth.

Although Strong has initiated an internal Hydro review of the privatization issue, last week he remained reticent about that prospect. “Privatization is part of the public dialogue and it is not decided by me,” he said. But he added, “We expect that dialogue to continue.” For the Ontario government, which this week was scheduled to sit down with public-sector unions in an attempt to contain a deficit that could soar as high as $17 billion this year, the option of limiting its responsibility for Hydro must be compelling. Because Hydro is a Crown corporation, the province is directly responsible for its entire debt.

According to Yves Lemay, assistant vice-president at Moody’s Investor Service, a New York City-based credit rating agency, even if Hydro goes private, Ontario will still be liable for all debts incurred while it was a Crown corporation. Of even greater significance, however, is that credit agencies include Hydro’s debts in the overall Ontario debt because the province is Hydro’s guarantor. That liability is now of special concern because Ontario’s debt crisis already is jeopardizing the province’s fragile credit rating.

To separate itself from a similar utility debt problem, the government of Nova Scotia successfully privatized its power utility with the issue of 85 million shares at $10 each last August. But equity underwriters involved in that transaction emphasize that the case of Nova Scotia Power is radically different from Ontario Hydro. Although Nova Scotia Power Corp. also had a relatively high debt load, it had a strong political directive to keep its rates low through efficient operation. As well, Nova Scotia Power had already issued savings bonds directly to the public rather than just to international capital markets, as Ontario Hydro has done.

But by far the most critical distinction between the two utilities is nuclear. Nova Scotia has no nuclear power facilities–a fact that makes it attractive to potential investors. Even Strong acknowledged last week that as debt is allocated against assets in Hydro’s restructuring, the nuclear power unit could end up shouldering much of the burden. In Britain, the Conservative government of Margaret Thatcher set about privatizing its electric power system in 1988 in a bid to introduce free-market competition to the sector. Ultimately, however, the government discovered that there was no market for the nuclear assets and, as a result, had to separate them out and retain responsibility for them.

If the Ontario government does opt to privatize Hydro, it could sell shares, as Nova Scotia did, or it could sell assets outright. But, as Maurice Strong and Energy Probe’s Norman Rubin are clearly aware, it is unlikely to be able to sell the nuclear assets that have contributed so much to the overall problem.