Parker Gallant: Hydro One’s free pass

(August 17, 2011) Hydro One’s financial statements are out, yet despite all of the media attention about the electricity sector in Ontario, the financial results of the publicly owned power utilities attract no attention. Odd, since they are the instruments that the government uses to execute its controversial policies under the Green Energy Act.

The press release disclosed that Hydro One, for the 6 months ended June 30, 2011, increased revenue by $244 million, or 10%, and net income by $80 million (29%) to $354 million. Both the distribution and transmission sides of their business were up which the press release attributed to the rate increases (both segments) that the Ontario Energy Board granted. Actual distribution of power was up only 1.5% but they billed their ratepayers 10% more thanks to the OEB rate increase approvals. If you remove the cost of purchased power (a pass through to the consumer and up by 9% year over year, reflecting the increasing costs of renewable energy entering the grid), Hydro One generated an after-tax return on revenue of almost 25%, which most private and public companies would be envious of.

Examining the financial information closer, it is surprising to find that capital expenditures were down by $65 million and are attributed to less monies being spent on smart meters and the transmission system. That these were down is a bigger surprise when you look at Note 5 to the financial statements, where it is disclosed that $52 million of Employee Future Benefits were allocated “to labour and capitalized as part of the cost of fixed assets.” What this does is reduce the amount of contributions that Hydro One must allocate to the pension and benefit programs and place the burden of the contribution directly on the ratepayers backs. So the ratepayers and taxpayers of Ontario are not only guaranteeing the pensions and benefits of Hydro One employees but are also providing direct contributions through this creative accounting. That Hydro One has the most generous pension plan is well known (best 3 years, indexed to inflation and early retirement-years of service+age= 82) and the best 3 years can be augmented by overtime earnings.

It is understandable that Hydro One also reported in this press release that it went directly to the Ontario Securities Commission with a request for “exemptive relief from reporting under International Financial Reporting Standards” for this and the next three years and that it was granted that relief.

One of the Hydro One rate submissions to the OEB contained a document that indicated it had 5427 employees in 2009 who earned an average of $114,830 each. Between the Power Workers Union and the Society of Energy Professionals approximately 90% of Hydro One employees are members of collective agreements. Hydro One uses independent studies for peer comparisons of salaries for both their executives and employees. These studies almost always reflect the fact its employees are paid well over the comparable median. As an example, a Mercer Compensation Study at Hydro One showed PWU members were paid “21 % above market median” and “Hydro One in total was said to be 17% above market median.” Hydro One is the most expensive of the 80 local distribution companies in the province but this is unremarked on by the OEB, yet it maintains the proof on its website http://www.ontarioenergyboard.ca/OEB/_Documents/Documents/2009_electricity_yearbook.pdf.

Upper management at Hydro One is rewarded with both salaries and incentive pay and the latter is based on criteria defined by their Board of Directors. Reviewing the “Annual Information Form” (http://www.hydroone.com/InvestorRelations/Documents/Annual_Information_Forms/Hydro_One_Annual_Information_Form_2010_ENG.pdf) lists 9 Corporate Performance Measures and Targets for the Hydro One Executives of which two were:

Strategic Objective Performance Measure

Protecting Environment

Greenhouse Gas Reductions ACTUAL TARGET

(# Metric Tonnes of Greenhouse Gas Removed) 2595 8400

Satisfying our Customers

Distribution Customer Satisfaction 89% 81%

Despite the almost daily rhetoric from the Minister of Energy’s office that greenhouse gases are being reduced, one of its crown corporations could only achieve 31% of their target. On the Customer satisfaction objective, the Ombudsman’s 2010/2011 report (http://www.ombudsman.on.ca/Files/sitemedia/Documents/Resources/Reports/Annual/2011OmbudsmanAR_E.pdf) showed the 306 complaints about Hydro One put them in the #3 spot. How H1 can claim it overachieved on the target set is baffling but considering that it outsourced this service years ago, you have to wonder just who it perceives as its customer. If the top five senior executives were let go from Hydro One at the end of 2010, they would be entitled to an average of $1 million each as a settlement on top of their locked-in pension benefits.

The Hydro One press release also takes bragging rights to a new high, proclaiming that “Corporate Knights Magazine” again picked Hydro One as one of Canada’s Top 50 Corporate Citizens, the Canadian Electricity Association recognizing Hydro One with its 2010 “Social Responsibility Award” and the “Utilities Telecom Council Apex Award” for demonstrating excellence and innovation in developing telecommunications solutions for their rural utility Smart Grid Project.

The burden that the ratepayers and taxpayers face to support Hydro One’s exorbitant claims for salaries, pensions and benefits is becoming unwieldy and it is time to split it up and at the very least privatize the transmission business. The growth in costs to support Hydro One and its sister companies has played a major role in driving up the price of electricity in Ontario. Couple that with the high energy prices paid for wind and solar generation and rate increases will be well above those 46% estimates coming from the current Minister of Energy, Brad Duguid.

It’s time for the elected representatives to tackle the entitlements of the unions and the executive within Hydro One or sell it off!

Parker Gallant is a retired banker and a member of the board of Energy Probe.

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Gallery | This entry was posted in Reforming Ontario's Local Electrical Distribution Sector, Reforming Ontario's Local Electrical Distribution Sector, Uncategorized, Utility Reform and tagged , , . Bookmark the permalink.

3 Responses to Parker Gallant: Hydro One’s free pass

  1. Incensed rate payer says:

    I can’t believe what a big mess this is. I feel sorry for anyone trying to fix this situation. The weird thing is that when most companies go bankrupt they don’t make their customers pay for it. Class action lawsuit anybody? Similarly if there was actual competition no one would be paying anyone 80 cents per kwh. When real companies restructure jobs and salaries get chopped and yet that never happened here, in fact they just got bigger and gave themselves big raises and bonuses while we lose our jobs. Are we living in a dream world or are they?

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