Energy Probe

Globe and Mail
Globe and Mail
May 2, 2002

Ontario’s electricity market opened for trading without a hitch yesterday, and the new spot price of electricity stayed within the anticipated range for an average spring day.

Some critics of the Ontario government’s deregulation plan had predicted immediate and drastic price spikes, and were proved wrong. But experts warned yesterday that no simple lessons about deregulation can be extracted from one calm day of trading.

"You can’t draw a conclusion from it; you need some history," said Michael Morrison, director of the Canadian Energy Solutions group at Fujitsu Consulting in Toronto.

Mr. Morrison said the reasonable trading price yesterday should allay the most extreme fears of soaring prices. But he said that it will take months and years of data to determine whether prices are rising or falling under a deregulated system.

Until yesterday, Ontario consumers had paid a regulated and fixed commodity price of 4.3 cents per kilowatt-hour for their electricity. (A kilowatt-hour is the amount of electricity needed to power a 100-watt light bulb for 10 hours.)

Under the new system, electricity prices are set every five minutes based on bidding in a open trading system, changing as demand fluctuates. Prices are typically low in overnight hours and rise during the day, then fall off again later each evening.

Trading opened yesterday at 1:01 a.m. EDT with an initial commodity price of 2.54 cents per kilowatt-hour, then rose through the day to 3 cents at 9 a. m., 2.98 cents at noon, 3.04 cents at 3 p.m., and 3.07 cents at 5 p.m.

The old rate of 4.3 cents was set by the Ontario Energy Board (OEB), so did not reflect an actual market trading price. It was also a long-term price, so is not directly comparable to yesterday’s trading price. That’s because electricity prices are expected to be lower on a spring day when neither heating nor air conditioning demands are high.

"This is a shoulder season," said Kevin Dove, spokesman for the Independent Electricity Market Operator (IMO). "Generally, demand is not high in the spring and the fall, so it is a lower demand season, and therefore pressure on prices should be less."

Dave Goulding, chief executive officer of the IMO, was pleased that the market began operating yesterday without any glitches. The IMO was created from the breakup of the old Ontario Hydro, and is responsible for operating and regulating the new trading system.

"I had every confidence that it would work," Mr. Goulding said early yesterday morning.

He attributed the flawless start to the months of preparation that the IMO had performed, including a trial run for the past month.

Blair Peberdy, spokesman for Toronto Hydro, said the launch was smooth for his utility, which is one of the 239 participants in the new computerized trading system.

He said the bigger technical challenge has been transforming the utility’s billing system to handle the one-third of its customers who have signed fixed-price supply contracts with electricity retailers.

Customers with fixed-price contracts will not be affected by the fluctuating trading price of electricity. And those who have opted to stay with the standard service provided by Toronto Hydro will not immediately see the impact of market prices, Mr. Peberdy said.

That’s because Toronto Hydro will initially calculate bills based on the old 4.3 cents/kwh price, and will adjust bills a number of months from now to reflect the actual average market price. He said the adjustment may be done sooner if the market price varies greatly from 4.3 cents.

"If it’s way off, we may do it earlier so the customer isn’t looking at a big refund or a big catch-up bill," he said. "We’re waiting for the OEB to advise us as to when that [adjustment] should take place, and I believe they’re waiting to see just how the market price moves."

Tom Adams, executive director of Energy Probe in Toronto, said one of the first lessons of yesterday’s trading is that prices seem to move in "lock step" with nearby U.S. markets. He said it is an indication of smooth trading across Ontario’s borders.

"It’s a good thing, not a bad thing, that we’re exchanging with our neighbouring utilities," he said.

Mr. Adams said consumers should not expect electricity prices to remain as stable as yesterday. During peak demand in the summer, prices can soar. On one large U.S. electricity trading hub, prices peaked at 91 cents per kilowatt-hour last Aug. 8, he said.

Consumers will not see those brief peaks on their bills, which will reflect average prices over the billing period.

Consumers can follow the market price of electricity on the IMO’s Web site at http://www.theimo.com, under "Today’s Market."

Andrew Willis and Paul Waldie
Toronto Star
May 2, 2002

Ontario Premier Ernie Eves, under pressure to alter the controversial Hydro One initial public offering, is already working with Bay Street on a possible alternative that could result in an income trust.

Comments by Ontario Energy Minister Chris Stockwell, who raised the possibility Tuesday of revising the Hydro One plan, were dismissed in some quarters. But sources said yesterday Mr. Eves is seriously considering scrapping the IPO and opting instead for an income trust model.

Indeed, Ontario provincial government officials have been working for days on an alternative, the sources said.

"The Premier wants to show a different approach, to show that he’s listening, then acting on what he hears," said a financier working with Mr. Eves.

"Here, there’s now heightened public sensitivity to the possibility of rate increases, to the ownership of Hydro One and to the issue of funding the company in the future."

"An income trust could be a really good structure, and [provincial Energy Minister] Chris Stockwell really likes the idea," the source said.

Under an income trust, the government would continue to own Hydro One but would sell units to investors who would receive a portion of the company’s cash flow. The units would trade on the Toronto Stock Exchange. The trust would likely have a defined lifetime of between 25 and 40 years, after which the cash would flow to the government.

The idea has been under consideration for several days and was first raised in a recent letter to Mr. Stockwell from Calvin Stiller, head of Canadian Medical Discoveries Fund Inc., who is a director of several real estate investment trusts.

Mr. Stiller is also chairman of the Ontario Research and Development Fund, which the province created in 1997 to invest $500-million in research projects.

Mr. Eves himself yesterday said he would rethink the future of Hydro One.

"I’m not doing this [selling Hydro One] so some guy on Bay Street can get a bonus before he goes on summer vacation," he told reporters.

Mr. Eves has been under pressure to revise the Hydro One privatization ever since an Ontario court ruled last month that the government did not have the authority to sell the utility. Shares in Hydro One were expected to go on sale in June in the largest initial public offering in Canadian history.

The government is appealing the ruling and plans to change the privatization legislation.

Last week, Mr. Eves said he was committed to the Hydro privatization and promised to hold public hearings on the issue. Those hearings began Tuesday in London, Ont., but Mr. Stockwell cancelled the meeting before it began when the crowd became unruly.

Mr. Stiller was supposed to discuss the income trust idea at the hearing.

Dozens of companies have created income trusts or investment trusts, including TrizecHahn Corp., which is about to reorganize itself into two investment trust. BCE Inc. also spun out a $385-million trust that contains stakes in Bell Canada’s local phone networks.

Government advisers are working from the notion that Hydro One might generate $500-million to $600-million annually.

If the income trust was structured to offer investors a 7.5- to 10-per-cent annual yield, a financier working on the concept projects raising $6-billion or more through an income trust offering. The Hydro One IPO was expected to raise between $5-billion and $5.5-billion.

Sources familiar with the project said an income trust would also impose financial discipline on Hydro One’s management.

Tom Adams of Energy Probe, an environmental group that supports Hydro One’s privatization, says the income trust idea hasn’t been thoroughly discussed.

Robert Benzie and Paul Vieira – with files from Tony Seskus
National Post
May 3, 2002

TORONTO – The largest privatization in Canadian history is in jeopardy after Ernie Eves, the Ontario Premier, said yesterday the $5.5-billion sale of Hydro One is "off the table for [the] immediate time being."

Signalling a major policy shift from his predecessor, Mike Harris, who announced the selloff of the transmission grid in December, Mr. Eves said he will await the outcome of public and legislative hearings before determining how to proceed, emphasizing that privatizing the utility is now just one of several options.

"I’m not doing this so some guy on Bay Street can get a bonus before he goes on summer vacation. I’m doing this to protect future generations of Ontarians for many, many decades to come. It’s an important matter and we will take time and we will do it right," said Mr. Eves, who during his sojourn from politics worked as a Bay Street executive.

Asked whether the initial public offering, by far Canada’s biggest ever, is dead, he replied: "I wouldn’t say it’s dead. It’s one of the … options [for Hydro One]. Is it dead for going out the door on May 6? Absolutely. We’re going to take the necessary time to make the appropriate decision."

He said that if privatization "is the vehicle we should be choosing, then that will be that. I wouldn’t say it [the IPO] is off the table. It’s off the table for this immediate time being."

The goal, Mr. Eves said, is to provide a "private-sector-disciplined" power grid that will protect consumers from high prices, be competitive internationally and not amass a huge debt like the old Ontario Hydro did.

The comments sent shock waves through the financial community, with one analyst calling the Tories’ turnabouts "bizarre."

Mr. Eves’s latest remarks came one day after Chris Stockwell, the Minister of Environment and Energy, proposed turning Hydro One into an income-trust and six days after the Premier expressed support for privatization.

"This is just getting more and more bizarre," said one analyst, who did not want to be named.

"Why create more uncertainty? Why would anyone come into Ontario and buy distributors or build power stations when they see all this political interference and waffling? Business doesn’t like uncertainty, and if the Ontario government keeps changing the rules, investors are not going to stick their neck out," he said.

The uncertainty surrounding Hydro One has prompted one leading utility executive to back off from investing in Ontario.

Steve Snyder, chief executive of Alberta’s TransAlta Corp., said at the company’s annual meeting that it has no plans to expand its presence in Ontario’s deregulated electricity market until the Hydro One issue is resolved.

"Right now, we are more wait and see," said Mr. Snyder, whose company has three plants in Ontario and a $500-million station under construction near Sarnia. "We want to see how … this Hydro One plays out, not so much who owns it, but how much impact it will have on transmission rates and transmission rules. Then, I think we’ll reassess."

Mr. Eves’s announcement on Hydro One came on the same day the province’s $10-billion electricity market officially opened its borders to competition. Under the new regime, homeowners and businesses can purchase their power from whomever they choose and the price of electricity will be set in the open market.

Confusion over the status of the Hydro One sale overshadowed the market opening.

Tom Adams, executive director of Energy Probe and a proponent of privatization and deregulation, said Mr. Eves’s fledgling administration is doing little to allay fears about the changes to the electricity sector.

"The downside is that the public and investors don’t know what’s going on. The government doesn’t know what’s going on. People don’t know how to plan or what to do. It just creates a high degree of confusion and lack of confidence in the government," Mr. Adams said.

Dalton McGuinty, the Ontario Liberal leader, said he was astonished by Mr. Eves’s "bungling" of such an important issue.

"[The Premier has been] flipping and flopping like a freshly landed fish on a hot July day on a Nipissing dock," said Mr. McGuinty, who favours market competition, but not the sale of Hydro One.

"In short order, we’ve gone from a full-fledged commitment to privatization to yesterday a consideration of a long-term lease and today apparently to the point where Ernie is saying everything is on the table," he said.

"To think that this is part of some cunning political strategy would be to flatter Mr. Eves and this government. The fact of the matter is they don’t have a plan, they don’t know what they are doing and they are in panic mode," he said.

Howard Hampton, leader of Ontario’s New Democratic Party, said he was unimpressed by Mr. Stockwell’s musings about an income trust, an idea first presented to the government by a private investor on Tuesday.

"Let’s cut through the charade: This government is going to privatize Hydro One. The Minister was trying to create a bit of diversion yesterday and he got caught promoting a stupid idea," Mr. Hampton said.

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.