Hydro One CEO salary peanuts compared to overspending and waste in electricity sector

(April 25, 2018) So, you want to be Ontario’s next Premier and you’re looking to lower hydro bills? Here’s where you should be looking.

Ontario conservative candidate Doug Ford is right to look for ways to lower hydro bills for ratepayers across the province, but his proposal to fire Hydro One’s CEO over his reported $6.2 million salary would do next-to-nothing to lower rates, while continuing a more than decade-long trend of growing political interference in the sector. Luckily for Mr. Ford and other candidates running in the upcoming provincial election, there are multiple opportunities to lower costs in the sector and potentially save customers hundreds of millions – possibly billions – of dollars in the decades to come.

Here’s where to start.

First, if salaries are a concern, the next premier can take aim at the excessive compensation and benefits afforded to employees at the provincially owned Ontario Power Generation (OPG), which owns and operates the Pickering and Darlington nuclear plants, as well as hydro dams across the province. The province’s energy regulator, the Ontario Energy Board (OEB), has repeatedly taken the utility to task for its generous pensions, benefits and high staffing levels. While OPG has made some progress in recent years, there’s potentially tens of millions of dollars more of savings.

For starters, the cost of OPG’s pension benefits continue to be excessive, according to the OEB, Ontario’s Auditor General, a provincially appointed advisory group and OPG’s own evidence submitted as part of its most recent rate application. The dollars at stake dwarf the annual salary of Hydro One’s CEO. OPG is expected to spend more than $400 million annually until 2021 to cover the cost of its generous pension and benefits plan – or more than $2 billion in total over the next five years.

Unlike other most other public sector employees in Ontario, where employees and employers split the cost of their pension contributions – known as a 1:1 ratio – OPG continues to pay a greater share of pension costs than its employees. OPG says that ratio is currently 2:1 – where OPG (i.e. ratepayers across Ontario) pay two dollars for every dollar contributed by its employees – but the OEB and its staff have both noted that, if certain other one-time pension payments OPG is expected to make are included, that ratio could be closer to 4:1.

Even OPG’s own studies show that its pension and benefits are rich when compared to similar companies. One study showed that pensions and benefits for both current and retired employees are 32% more generous than the market median. Another study found that OPG’s benefits were among the second and third most expensive on the list of companies surveyed and are 11% over market median.

More alarming is that OPG adamantly defends its practice of compensating its nuclear employees 25% more than the market median for workers at nuclear plants. It was the OEB – not OPG’s shareholder, the province – that pushed back against this argument and noted that the utility didn’t provide a “convincing rationale” for why its nuclear workers were paid more than those at other utilities.

Even when OPG and the province do negotiate more reasonable pay packets with the utility’s unionized staff, they provide other financial goodies to partially offset those gains. In order to receive concessions from its unionized employees in the most recent round of bargaining, OPG made a lump sum payment and provided a share purchase plan that added up to $92 million in costs – or nearly 15 years worth of Hydro One’s CEO salary. Those costs are, like all of OPG’s costs, borne by Ontario’s electricity customers.

Compensation and benefit packages at OPG are just one area ripe for savings.

The decision to keep the Pickering nuclear plant operating until 2024 could also cost ratepayers hundreds of millions of dollars in unneeded costs. According to a cost-benefit analysis done by the province’s market operator, the Independent Electricity System Operator (IESO), continued low natural gas prices mean that ratepayers may be paying more than $500 million in unnecessary costs to purchase power from the Pickering nuclear plant until 2024.

IESO also admits that most power from the Pickering plants will be needed – if it’s needed at all given the continued decline in electricity demand in Ontario – only for a few hours of peak demand each year. The rest of the time the power will contribute to the ongoing surplus of power that is exported below cost to neighbouring markets like Quebec and New York, with Ontario ratepayers paying the difference.

And finally, the next Premier of Ontario needs to be straight with electricity customers about the long-term cost of both the recently enacted Fair Hydro legislation, as well as the legislatively mandated “rate smoothing” of OPG’s nuclear rates. While both of those policies propose to “lower” rates in the near term, they do so at a significant long-term cost to electricity customers in decades to come.

The Fair Hydro Plan is expected to cost electricity customers an additional $21 billion in interest costs by the time today’s cost deferral is fully paid off. The nuclear rate smoothing plan is expected to cost customers an additional $500 million in interest costs by the time the “rate smoothing” deferral is completely paid off. The nuclear rate smoothing costs will likely increase if the Darlington Refurbishment Project – the $12.8 billion refurbishment of Darlington’s four reactors – goes over budget or is delayed, as has happened at every nuclear project in Ontario to date.

Doug Ford and other potential Premiers are right in their desire to lower hydro bills. But the salary of the CEO of the now partially privatized – and increasingly better-run – Hydro One makes for strong headlines, but weak results.

Brady Yauch is an economist and Executive Director of the Consumer Policy Institute (CPI). You can reach Brady by email at: bradyyauch (at) consumerpolicyinstitute.org or by phone at (416) 964-9223 ext 236

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2 Responses to Hydro One CEO salary peanuts compared to overspending and waste in electricity sector

  1. They could also close the Lennox Generating station and Thunder Bay where if they dared to generate electricity it would be at a cost of $1.50/kWh

    • consumerpolicyinstitute says:

      Definitely. This is just a starting point. There are lots of areas where significant savings could be found.

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