Energy Probe

Paul Vieira
National Post
May 6, 2002

Ontario Power Generation Inc. (OPG) has yet to cut deals for four assets it put on the block almost a year ago even though there are parties willing to fork over cash for the Crown-owned plants.

"We have had interest expressed in those plants," said John Earl, a spokesman for the electricity producer. "We still hope to move forward quickly with our [sale] efforts, but at the same time we want to make sure we protect the interests of the shareholder [the Ontario government].

"We want to make sure we get best value for these plants. And we are still in the process of finding best value," he added.

But one industry observer said this will be a difficult task.

"The bids are coming in very very low," said Tom Adams, executive director of Energy Probe.

He added the assets have a number of factors working against them – most notably, environmental concerns because all four plants are powered by fossil fuels (three of them coal, one of them coal and natural gas).

"The market evidence is that they are damaged goods," Mr. Adams added.

The four plants are part of a package of assets the Crown-owned utility – a successor company of the old Ontario Hydro monopoly that controls about 75% of the power production market – must shed as required by reforms in the province’s $10-billion electricity market, most of which took effect on May 1. They were put on the block last July and OPG entertained bids through an auction process, hoping to announce sales prior to May 1. Most of the sales proceeds would go toward paying down the $21-billion "stranded" debt accumulated by Ontario Hydro.

However, OPG has said the power production market has softened, largely because of low electricity prices and fallout from the Enron collapse, so the sale will take longer than expected. Also, Ron Osborne, OPG’s chief executive, has vowed there will be no "fire sale" of the company’s assets.

Nevertheless, that doesn’t hold water with one industry insider, who’s familiar with the bidding process.

"The whole process seems to have gone on hold," said the source, who did not want to be identified. "You put it out on the market and the market bids for it. You can’t then turnaround and say this is all post-Enron and it will get better or it will be much better when we get Kyoto settled. You’re always going to have these question marks. So you have an auction and you carry on."

The source added he had concerns about OPG’s thinking, because it reminded him of how Ontario Hydro used to operate. "This whole command and control philosophy, that we know better than the market, we’ll take those units off the market and we’re sure the market will be better a year from now. Since when are [these] guys God. Most times you do stuff like this, [market conditions] get worse."

Under Ontario’s restructured electricity regime, OPG must shed 4,000 megawatts (enough power for a city of four million) of so-called "price-setting" generation, or electricity tapped at times of high demand, by November, 2005. The four plants for sale – Lennox, Lakeview, Atikokan and Thunder Bay – are considered price-setting plants and combine for 3,800 MW of capacity.

OPG has sold one of these assets, the 490 MW Mississagi hydroelectric complex near Sault Ste. Marie, to conglomerate Brascan Corp. for $340-million. That deal will close sometime this month.

Paul Vieira
National Post
May 6, 2002

A "cloud of uncertainty" is hanging over Hydro One Inc. and the on-again, off-again privatization threatens to undermine the goals of restructuring Ontario’s $10-billion electricity market, say industry insiders and analysts.

"Hydro One is a bit frozen. They couldn’t even go to the bond market to get financing, at this point, because the market is wondering, ‘What are you now?’" said a Bay Street insider with knowledge of the Crown-owned transmitter’s operations. "There’s a huge cloud of uncertainty over Hydro One … and it needs to be removed for the credibility of the whole restructuring exercise."

Another company watcher said the waffling by the Ontario government could affect Hydro One’s cost of raising capital.

"There are ratings implications," said the source, who did not want to be identified. "What route are they going to go? How are they going to carry on? Going forward, what kind of strategy can they undertake? Right now, we don’t know."

The market may get a better picture on Thursday, when the Ontario government, under its new Premier, Ernie Eves, delivers a Throne Speech. Sources close to Mr. Eves say the speech will likely address the Hydro One situation.

The much-anticipated sale of the province’s electricity transmission and distribution company through an initial public offering – expected to raise a record $5.5-billion – was cast in doubt after the Ontario Superior Court ruled last month the government lacked the legal authority to privatize the utility.

A week later, Mr. Eves said the government would appeal the ruling, amend the legislation to allow the sale and hold public hearings on the issue.

But since that announcement, Mr. Eves has backtracked, saying privatization is now only one option.

Moreover, Chris Stockwell, the Minister of Energy, said the government was toying with the idea of converting Hydro One into an income trust.

In this case, the province would retain ownership of the transmitter but issue trust units to investors to raise money to help pay down the $21-billion of "stranded" debt accumulated by the old Ontario Hydro. (Stranded debt refers to total debt minus assets of Hydro One and Ontario Power Generation Inc.)

However, financiers and industry observers have criticized the scheme, saying it seriously hampers the utility’s ability to raise cash for much-needed infrastructure maintenance. That’s because trusts must pay out the bulk of their cash flow to unitholders, as opposed to reinvesting in company operations. Moreover, insiders say the government, under former premier Mike Harris, rejected the trust proposal about five years ago.

In the prospectus filed with the proposed IPO, Hydro One set out an aggressive growth strategy it would undertake as a publicly traded company. Among the goals is to expand its infrastructure, seek strategic acquisitions of transmission and distribution assets in the United States, and continue to consolidate in the local power distribution business.

The company also warned it needs to set aside significant amounts of cash in order to maintain and improve parts of its aging grid – investments that were neglected by Ontario Hydro. The prospectus, filed in March, said Hydro One would spend close to $600-million this year on capital expenditures.

"We are at a very serious point," warned Tom Adams, executive director of Energy Probe, an industry watchdog and privatization proponent. "There are a lot of projects that [Hydro One] has to get on with – and every one of those projects is behind schedule. And this uncertainty over where they are going to be is making a bad situation worse."

Those projects include: construction of a transmission link between Ontario and Quebec, which would boost capacity by 1,250 megawatts (enough power for a city of 1.25 million) and cost $100-million; upgrade of current links with Michigan, at a cost of $40-million; a joint-venture with Hydro-Québec to build a link under Lake Erie that would connect Ontario to the U.S. mid-Atlantic, home to some of the cheapest electricity in North America; and upgrading "inadequate" transmission capacity in northwestern and central Ontario.

But these initiatives are in jeopardy should the privatization be scrapped for the income trust.

"It goes to the very heart of what kind of company you are going to create," the insider said of the IPO v. income trust debate. "Income funds don’t build cables under Lake Erie and take risk."

Mr. Adams said Hydro One’s current projects are crucial if Ontario’s opening of its electricity market is going to work, noting that links: will protect against sudden price hikes because there’s access to import from the U.S. market; ensures reliability of power; and will encourage generators to build in the province.

TransAlta Corp.’s chief executive, Steve Snyder, said his utility will not consider further investments in the province until the Hydro One debate is settled.

Opponents of the Hydro One privatization say the transmission grid is a crucial asset that should remain in public hands and fear rates will skyrocket because of the sale.

In hearings held in North Bay, Mr. Stockwell said the only way to keep public ownership and still maintain Hydro One would be to significantly raise rates, go deeper into debt or take money from other programs such as health care and education.

Terence Corcoran
National Post
May 7, 2002

The new Ernie Eves government in Ontario appears to be scoring big with those deep-blue Tory backers from the hinterland, organized labour. On the day Mr. Eves won a by-election last week, the Ontario government ended an eight-week strike by 45,000 members of the Ontario Public Service Employees Union, mostly by giving into union demands and expanding the union’s influence over the province’s civil servants. The union got three-year wage increases between 9% and 14%, more sway over contract workers and control over a big wad of pension cash. On with the revolution!

The post-deal congratulatory love-in between Eves’ Cabinet ministers and the union’s leader, Leah Casselman, was a little hard for even the reddest Tory to swallow. No less gag-inducing was to watch the government allow another union group, Judy Darcy’s Canadian Union of Public Employees, take control of the government’s electricity restructuring agenda. Over the last two weeks, Mr. Eves has offered not a word of support for the sale of Hydro One, the province’s power distribution grid. Not only has the government failed to defend the $5.5-billion privatization plan, it has deliberately floated an alternative scheme known as an income trust.

Even in its most creative form, the income trust solution looks more like an apparition from Ontario Hydro’s bankrupt past than a bold step into a market-driven future. The idea also may have been orchestrated onto the stage by some of Mr. Eves’s financial backers. Wherever it came from, now is not the time for Ontario to be flirting with half-baked schemes to reform the most important industry in the province and the biggest utility system in the country.

If the government won’t support privatization of Hydro One and explain the plans to the people, that leaves few people to stand up and be counted. Energy Probe‘s Tom Adams has been out there all alone for days now, trying to support the principles of market competition and privatization. Most other players, for fear of one form of retribution or another, have been under gag orders.

Today, at least some of the players are starting to come forward. In an op-ed on this page today, Peter Budd, as chairman of the Ontario Energy Association, urges the government to get back to its privatization principles. The association’s members include the province’s gas companies, many local electricity distribution operations, and Hydro One. "The time has come," writes Mr. Budd, "for the government to make the next decision and follow through on its promises and commitments."

Mr. Budd, as a member of the original 1998 market design group, was there at the beginning. He watched the plan evolve and the government’s growing commitment to a privatized, competitive power industry that would also reduce the great $21-billion wad of debt left behind by the bankruptcy of Ontario Hydro. To back down on those plans now is an abandonment of responsibility.

And now, too, we have an intervention from the Power Workers Union, the union that actually represents the workers at Hydro One rather than the scheming union bosses at Judy Darcy’s CUPE. In newspaper advertisements today, Don MacKinnon, president of the Power Workers Union, also calls on the government to get on with the Hydro One privatization as planned.

It’s about investment and its about jobs, says Mr. MacKinnon. "Unfortunately, much of the debate about the government’s plans to seek equity for Hydro One is dominated by political rhetoric. This is both dangerous and foolish," the ad says, "given that significant investment is required to ensure continuing reliability and safety of the Hydro One system." Without private investment in the utility under private ownership, no government will be able to pick up the investment burden.

It’s a sad day in Ontario when a union leader is championing privatization and the reigning Tory government is on the defensive and promoting an alternative. Instead of capitulating to the old-line government unions, OPSEU and CUPE, and the demagogic New Democrats, the government should be out front and centre defending the electricity agenda that it put in place. Mr. Eves may think it’s cool to have the unions and The Toronto Star rooting mildly in his corner, but that support is about half an inch deep. They will all turn against the Tories in the end, and the government will need all the support it can get from the people who are its true backers

Paul Vieira
National Post
May 8, 2002

Donald Macdonald, the former federal finance minister and one of the architects of Ontario’s newly restructured electricity market, says the province should privatize Hydro One Inc. and do it through a public stock offering.

"I think it should be sold for the best possible return," Mr. Macdonald said yesterday at public hearings commissioned by the Ontario government to examine the future of the electricity transmitter. "And an initial public offering is the best course of action to be taken."

Mr. Macdonald’s candour carries a lot of weight, as he wrote the 1996 report [which bears his name] that called for the breakup of the old Ontario Hydro monopoly and the opening of the province’s $10-billion electricity market to competition. The Conservative government, under former premier Mike Harris, used the report as the template for its power reforms, most of which were implemented last week.

In that report, he was ambivalent about ownership of the transmission operations, saying they could remain either in public hands or be run by the private sector, as has been the case elsewhere.

He has remained largely silent, sources say, because he is employed by UBS Warburg, which has acted as a financial advisor to Ontario SuperBuild Corp., the agency supervising the Hydro One offering. Some are worried his connection to Bay Street will give privatization opponents a reason to dismiss his opinion.

Nevertheless, he was clear the IPO – expected to fetch a record $5.5-billion – was his preferred route, saying it would raise the most money for the province and go a long way to help pay down the $38-billion debt accumulated by the old monopoly structure.

"It could operate equally well under private or public hands," Mr. Macdonald told reporters after his presentation. "But we have enormous debt. Either we pay it off by getting the best return by putting these assets into the private market, or wind up paying for them as taxpayers. And under those circumstances, go ahead with the IPO and get the maximum return to pay down that debt."

Ernie Eves, the Premier, said Mr. Macdonald’s opinion is one of many the government has heard as part of its consultation process.

"I certainly respect Donald Macdonald’s opinion, I have on other issues in the past, and that’s what the process is all about – getting input. And there are certainly conflicting points of view," Mr. Eves told reporters yesterday.

Bay Street and industry observers were delighted with Mr. Macdonald’s public support.

"Ignoring his advice now would be pretty irresponsible," said Tom Adams, executive director of Energy Probe, an industry watchdog and privatization supporter. "He’s someone who needs to be carefully listened to."

Also yesterday, the chairman of the Independent Electricity Market Operator, the agency that runs the wholesale electricity market, warned Mr. Eves about the possible repercussions of not privatizing Hydro One.

James Baillie said whatever option the government chooses, it must ensure Hydro One becomes a "well-capitalized corporation, with the capability and the motivation to make the capital expenditures needed for enhancement and expansion of the Ontario [transmission] grid."

The government announced last December it would privatize Hydro One in what’s expected to be the largest privatization and IPO in Canadian history. The IPO process was moving along until last month, when the Ontario Superior Court ruled the government lacked the legal authority, under the province’s Electricity Act, to sell the transmission and distribution company.

Mr. Eves said his government would appeal the ruling, amend the law to allow the sale and hold public hearings. However, he has since backtracked, saying privatization is only one option.

The Energy Minister, Chris Stockwell, floated the idea of an income trust, although that has been roundly criticized – including by Mr. Macdonald, who said yesterday that a trust would hamper Hydro One’s ability to spend on infrastructure and "wouldn’t yield [the government] $5.5-billion."

Other options the government says it is examining include a leasing arrangement and a not-for-profit entity.

Paul Vieira
National Post
May 9, 2002

A group representing Ontario’s local electricity utilities is recommending the provincial government spin off Hydro One Inc.’s distribution business because the company’s current structure does not promote competition and may lead to higher power bills for households.

The report, from the Electricity Distributors Association (which counts Hydro One as a member), says that allowing the Crown-owned utility to continue operating in both the transmission and distribution fields will likely result in higher costs and significant disadvantages with regard to price, regulation and competition in Ontario’s electricity sector.

"If you have a transmission, plus a big chunk of [local] distribution, there’s substantial risk for price distortion," said Adonis Yatchew, a University of Toronto economics professor and a study co-author.

As a result, "certain prices are going to get driven up, like generation prices, and that will be reflected in your bottom line bill," Mr. Yatchew added.

The EDA report echoes recommendations made by other industry observers, including Tom Adams, executive director of Energy Probe, and Donald Macdonald, one of the architect’s of Ontario’s restructured power market.

However, Eleanor Clitheroe, Hydro One’s chief executive, disagreed with the study’s findings.

In a letter to Charlie Macaluso, EDA’s CEO, Ms. Clitheroe said the report had the "interests of small distribution utilities in mind – not their customers." She added there are savings to be had for ratepayers by running transmission and distribution. Hence, splitting the operations "is a step backwards and would serve only to add costs to consumers at a time when they can ill afford them."

The Crown-owned utility operates Ontario’s high-voltage transmission grid. And over the past few years, it has acquired 88 local utilities, or distributors. In a preliminary prospectus filed in connection to its planned initial public offering (now on hold because of a court ruling), Hydro One said it wants to be a consolidator in the local distribution sector.

The EDA represents 90 local distributors, which own and operate the low-voltage wires that distribute electricity to homes, businesses and public institutions in their respective municipalities.

Fred Vallance-Jones
Hamilton Spectator
May 11, 2002

The head of the body that runs Ontario’s new competitive electricity market has waded into the politically charged debate over the future of Hydro One.

And the NDP opposition at Queen’s Park says that’s not something James Baillie should be doing.

The chairman of the Independent Electricity Market Operator, or IMO, says in a letter to Premier Ernie Eves that Hydro One must be "well capitalized." He says that’s important so it can make substantial investments in Ontario’s electricity grid, which it owns.

Baillie doesn’t say exactly what the government should do, and he wasn’t available yesterday to explain further.

But his letter is predicated on the government choosing some form of privatization. And Baillie speaks of the need for Hydro One to have an "entrepreneurial motivation."

His missive to Eves came to light the same day an association representing major electricity industry players, including Hydro One, published a full page newspaper ad. It appeals for the privatization of Hydro One to go ahead as originally planned.

Some members of the Ontario Energy Association, including its chairman Peter Budd, have been donors to the Ontario Progressive Conservative Party.

Budd, a prominent Toronto energy lawyer, says the group bought the advertisement to appeal both to the public and to Ernie Eves and his cabinet.

Of note, Budd sits on the IMO board representing consumers, but he says he hasn’t read Baillie’s letter to the premier nor has he spoken with him about it.

That said, Budd argues the best way to achieve what Baillie wants is to go ahead with the planned privatization.

"When someone says a utility should be well capitalized, to me what they’re saying is they have to have enough money and they have to be able to have the profile in the capital markets to raise new money and replace revolving and old debt," Budd said. "That means you have to have a really good relationship and a trusted one . . . with the capital markets."

The NDP interprets Baillie’s words as an oblique call on the government to indeed go ahead with the planned public sale of shares in Hydro One.

NDP Leader Howard Hampton believes that, reading between the lines, Baillie is really arguing against ideas such as leasing out Hydro One’s transmission network.

"What he’s saying is they want a full privatization," Hampton suggested.

As well as heading the IMO, Baillie is a corporate lawyer with the well-heeled Bay Street firm Torys.

Whatever the precise interpretation of the letter, Hampton argues it is inappropriate for Baillie to comment at all because of his independent role in the electricity system. The IMO both oversees the wholesale market in electricity and operates the transmission grid.

"He’s supposed to be neutral in all this," Hampton said. "So clearly he has stepped outside of his boundaries."

Baillie said his main concern is the reliability of the electricity supply.

The planned sale of Hydro One shares was derailed by a court decision last month that said the government had no authority to sell the company.

The new Eves government has said it will introduce legislation this spring to allow the privatization to proceed, but has at the same time launched a full-scale review of the plan.

In yesterday’s speech from the throne, the government promised to bring market discipline to Hydro One and to "ensure the necessary capital is provided to rebuild and modernize the transmission and distribution of power in Ontario."

Beyond that, the speech gave away nothing about the government’s plans.

Tom Adams

May 13, 2002

Letter to the Editor of the Hamilton Spectator

Re: IMO Chairman wades into Hydro One debate (May 11)

NDP leader Howard Hampton has criticized the Independent Electricity Market Operator (IMO), one of Ontario’s electricity regulators, for advising Premier Eves about reliability problems that could result from a financial proposal the government is considering for Ontario’s transmission grid.

The IMO warns that the income trust proposal Eves is currently considering could starve the transmission grid of investment needed to maintain the reliability of our power system. Hampton, perhaps unaware of the IMO’s statutory duty to protect reliability, claims that the warning it issued is not a warning but a coded promotion of privatization. Ontario’s power system is in danger when one of our political leaders would place political gain ahead of power system reliability by demanding the muzzling of a regulator trying to do its job.

Tom Adams
Executive Director, Energy Probe

cc.
Howard Hampton, MPP
James Baillie, IMO Chair

Click here to read the original article " IMO Chairman wades into Hydro One debate," published by the Hamilton Spectator on May 11, 2002.

Maurice Strong
Toronto Star
May 13, 2002

The future of Hydro One, one of Ontario’s largest and arguably most important companies, has become a major topic of debate and discussion. At stake is whether Ontario creates a financially sound backbone for the future of the province’s electricity industry and, by extension, its economy. Or whether Ontario chooses an unworkable or restrictive business model harking back to the intrusive government controls that led to spiralling rates and the $38 billion in debt. The choice is stark and the stakes are high.

As Premier Ernie Eves pointed out last week, a great deal of confusion has engulfed the entire debate about the future of Hydro One. Much is due to the concerns raised over simultaneously opening the competitive energy marketplace and discussing Hydro One’s future. Now that the market is open, without the rate shocks predicted by some and feared by many, some reasoned discussion of the options facing Hydro One is in order.

Hydro One is in the business of transmitting and distributing electricity. That’s it. It builds and maintains the transmission stations, as well as the power lines that criss-cross Ontario. As a natural monopoly, Hydro One’s rates are tightly controlled and can only be changed by a decision of the Ontario Energy Board. And Hydro One needs access to new capital to continue to do its indispensable work for Ontario.

This is why a public share offer for Hydro One makes so much sense. It provides the best business model to achieve the most for the province without affecting what consumers will have to pay. The same can’t be said for other options being looked at. Lease agreements can constrain the regulator, not-for-profit structures undermine accountability, and an income trust bleeds off the revenue needed to invest in the future.

A public share offering will help pay down the $38 billion debt, raise funds to restore aging infrastructure, and reduce the burden on the public coffers. A widely held, publicly owned Hydro One could pursue a growth strategy that transfers risks from ratepayers and taxpayers to where it belongs, shareholders. Government can concentrate on investing in high priority areas like health and education and not have to worry about running a power transmission and distribution business.

Finally, a public offering, more than any other option, gives Ontarians a say in the future of this great company. It is a simple, flexible financing structure that the public and markets can understand. Complex, restrictive, Enron-like financial structures like income trusts may appeal to Bay Street. But they make no sense to Main Street, and they make no sense for Hydro One.

It has been almost a decade since I accepted Premier Bob Rae’s invitation to become chair of Ontario Hydro. To meet the immediate crisis, we undertook radical change to freeze rates and bring the debt down. In addition, I asked Bill Farlinger, now chair of Ontario Power Generation, to lead an examination of longer term options for financially restructuring Ontario’s power sector, including privatization.

I believe today we are at a critical juncture. Decisions made in the coming days will set the course for Hydro One and Ontario for decades to come. But after years of experience, study and debate, there is really only one choice. Only a public share offering delivers the financial benefits, access to capital, and accountability necessary for Hydro One to thrive and succeed in a competitive North American energy marketplace. The stakes are high. But the choice is clear.

Maurice Strong is former chairman of Ontario Hydro and is currently chairman, Earth Council, and special adviser to the United Nations Secretary-General.

Paul Vieira
National Post
May 17, 2002

Turning Hydro One Inc. into an income trust or not-for-profit corporation could force the Ontario government to pay out at least $13.5-million in buyout fees for four of the transmitter’s senior managers, including Eleanor Clitheroe, the chief executive.

Ms. Clitheroe and three senior executives have escape clauses in their contracts that they could exercise should the province embark upon a "fundamental change" of policy for the company, according to the prospectus filed in connection with Hydro One’s initial public offering.

"There may be certain things the province could do that would trigger that," the source said, citing the following: putting Hydro One into an income trust; turning it into a not-for-profit entity; or splitting its transmission and distribution businesses.

In Ms. Clitheroe’s case, that could mean a payment of roughly $6-million. Moreover, she would be entitled to pocket rewards under the company’s long-term incentive plan. Under the scheme, she could earn between $600,000 and $833,490 should the company meet certain financial targets.

Last year, Ms. Clitheroe earned $2.18-million in total compensation, including a salary of $750,000, a bonus of $806,250 and other benefits totalling $625,930.

For the three most-senior executives after Ms. Clitheroe, they would pocket a combined $7.5-million, plus money they’re entitled to under the long-term incentive plan (between $225,000 and $312,559 apiece).

"Think about it. Hydro One has a board of directors that’s a private sector group of people and a management team in place with the idea of running a major growth-oriented company. If the government decided to do something quite radically different with Hydro One, you wonder if any of that management team would be around," the source said.

Industry observers say the income trust and not-for-profit structures being recommended restrict the utility’s ability to expand and invest in its ageing infrastructure. For example, in an income trust, the bulk of the cash flow must be distributed to unitholders.

This would contradict the business strategy outlined in the Hydro One prospectus, which says it wants to become a North American player in the electricity sector by, among other things, acquiring transmission assets in the United States.

Ernie Eves, the Ontario Premier, said the government would review the contracts after he was questioned by opposition politicians in the legislature.

Hydro One issued a statement, saying its compensation package is competitive with other comparable companies in Canada and the termination clauses are similar to other commercial enterprises.

Management at Hydro One have remained silent through the privatization debate. However, sources close to the company say frustration is setting in. "Hydro One is very unhappy, but I mean there’s nothing they can do about it," an insider said.

Ontario had planned to sell the utility through an IPO – the largest in Canadian history – but that’s been thrown into doubt after a court ruling blocked the sale.

In the three weeks since the ruling from Ontario Superior Court, Mr. Eves has gone from backing an IPO to indicating privatization was only one option to saying the transmitter could remain a Crown corporation. His latest pronouncement is that the utility could be sold in chunks to major institutional investors.

"A terrible muddle has descended on this whole debate," said Tom Adams, executive director of Energy Probe, a power industry watchdog. "It’s clear the government doesn’t understand the changes that they’ve been undertaking [with electricity]. I’m so surprised by them everyday, I just don’t know what’s coming next."

John Spears
Toronto Star
May 18, 2002

Subsidies to big power users and zooming costs for restarting the Pickering A nuclear generator have helped to turn last year’s profit into this year’s loss at Ontario Power Generation Inc.

The giant generator, owned by the province, reported a loss of $217 million for the three months ended March 31, compared with a profit of $102 million a year earlier.

In releasing the earnings, OPG’s chief executive Ron Osborne insisted that last year’s and this year’s performances aren’t comparable because of one-time expenses and the lease of the Bruce nuclear station.

Revenue was almost the same for each quarter: $1.56 billion in the latest quarter compared with $1.54 billion a year earlier. This year’s performance, however, was weighed down by some heavy expenses. Among them:

An after-tax expense of $134 million for staff reduction.

An after-tax loss of $137 million on a program that for years has provided subsidized power rates to a number of industries using a lot of electricity. The special rates are being phased out over the next two to four years; OPG has calculated the cost and entered a one-time lump sum expense on this quarter’s earnings.

An extra $37 million on restarting the Pickering A nuclear station.

That’s only the start of the bad news on the Pickering A costs.

In 1998, the cost of getting the four reactors back in service had been pegged at $800 million.

By last year, the estimate was up to $1.5 billion. Now, OPG says the restart will cost as much as $2.16 billion. The company will spend $960 million on the first reactor, with the three others costing a total of $900 million to $1.2 billion.

"A lot of private-sector parties were not keen on going head to head against the publicly financed restart of the Pickering A power-generating station."
– Energy Probe executive director Tom Adams

OPG spokesperson John Earl said the company has not considered cancelling the restart. The company has described the much-delayed project as a source of "reliable, low-cost electricity."

Earl said part of the cost escalation stems from unforeseen factors such as the environmental assessment, which was supposed to last eight months but stretched to 20 and resulted in requirements for more costly procedures. New security procedures since Sept. 11 have also driven costs higher, he said.

Tom Adams, executive director of Energy Probe and a fierce critic of nuclear power, said in an interview the Pickering A troubles have created a double problem.

First, more than 2,000 megawatts of power that were supposed to be available to the grid have been delayed. And projections by the Independent Electricity Market Operator show that prolonged hot weather could strain the power grid’s capacity. The first reactor won’t be in service until the end of the year.

Second, continuing with the publicly financed restart despite massive cost escalation has discouraged private investors from building competing generation.

"A lot of private-sector parties were not keen on going head to head against that kind of a problem," Adams said. "Who could blame them?"

OPG also said it has deferred payment until 2004 on $200 million worth of long-term debt due this year to Ontario Electricity Financial Corp.

OPG’s report for the latest quarter for the first time excludes items relating to the Bruce nuclear station, which has been leased to a private group led by British Energy PLC. OPG bought all of Bruce Power’s output for the period, but that arrangement ended May 1 when the competitive electricity market opened.

In other news yesterday, Great Lakes Hydro Income Fund said it has completed a deal to buy four hydroelectric generating stations and related water-storage facilities from OPG for $340 million, Canadian Press reports.

The 490 megawatts produced by the facilities on the Mississagi River, east of Sault Ste. Marie, will be sold under a 20-year agreement to Brascan Power Corp., which owns 50 per cent of the fund.