Paul McKay
Ottawa Citizen
December 13, 2002
The largest corporate donor to Premier Ernie Eves’ leadership campaign bought the first privatized Ontario Hydro plants eight weeks after his March victory, then enjoyed soaring revenues when Ontarians were hit with the highest power rates in history.
Last summer, the private power company drained consumer pocketbooks – and a watershed – in the bargain.
Brascan, an $11-billion conglomerate, donated $150,000 to Eves’ leadership bid through six corporate arms – Brascan Corp., Brascade Resources Inc., Trilon Financial Corporation, Noranda, Great Lakes Power Inc., and Brookfield Properties Corp.
Each of the six Brascan affiliates donated $25,000, according to financial statements filed to Elections Ontario. The next largest corporate donation was $45,434.
Brascan vice-president Katherine Vyse declined to discuss details of the $150,000 donation, saying: "Our comment is that we support the communities in which we operate charitably, culturally and politically, and Ontario is one of them."
The deal to buy the hydro plants was cemented while the Tory leadership contest was in the final stretch, though there is no indication that the sale was linked in any way to Brascan’s donation. Four hydroelectric stations on the Mississagi River, northeast of Sault Ste. Marie, were put on the block by publicly owned Ontario Power Generation (OPG).
The sale was spearheaded by OPG chairman William Farlinger, a former fundraiser and chief election strategist for the Ontario Tories. Farlinger had advocated the sale of Ontario Hydro assets prior to Mike Harris’s re-election in 1999, and during the period Eves was finance minister.
Eves became Tory leader on March 23 after raising $2.8 million in donations for his $3-million campaign. On May 1, Ontario’s experiment in power deregulation began.
It created a new market to buy and sell power based on supply and demand. Because OPG owned almost 80 per cent of power production in Ontario, its average revenues on power sold in Ontario were capped at 3.8 cents per kilowatt hour, and OPG was ordered to gradually sell off assets to reduce its monopoly position.
Under the plan, private power producers in Ontario and utilities in surrounding regions were allowed to sell to any customer in the province at any price, or export power if they chose. In effect, they could compete for power demand OPG could not supply.
On May 17, less than three weeks after Ontario’s deregulated market opened, OPG and a Brascan subsidiary closed their deal. Great Lakes Hydro Income Fund paid OPG $342 million for the four hydro plants, with Brascan providing $150 million in bridge financing. Another Brascan subsidiary, Great Lakes Power, operationally merged the hydro plants with others it owned in the Algoma region.
Days later, a record hot, muggy summer began. It lasted into late September, causing power demand to soar to an all-time high. By July, peak power prices had climbed to 47 cents per kilowatt hour, compared to the average of 5.2 cents. In September, the peak price spiked up to $1.03 per kilowatt hour.
With nine OPG nuclear reactors either mothballed or out of service for extensive overhauls, the province was forced to import record amounts of emergency power to avoid blackouts. Much of it came from U.S. coal plants.
That left Great Lakes Power free to sell power into the Ontario grid at premium prices – from four hydro plants that had just been transferred from public ownership.
The plants were especially valuable because they had very low operating costs, but could provide up to 488 megawatts of output timed to coincide with peak power demand, thus obtaining premium prices for all power produced. By storing water behind dams, then running the turbines when demand and prices were highest, Brascan could in effect use the river as a cash machine.
"Those plants put Brascan in a very special situation," says Tom Adams, a power industry analyst with the watchdog group Energy Probe. "They are the only non-OPG producer positioned to set power prices at times of peak demand in Ontario. They can hold power back, let the price climb, then let ‘er rip."
In doing just that, Great Lakes Power drained the upper Mississagi watershed – to the point that it virtually emptied a cottager’s recreational haven and forced tourist lodges and outfitters to temporarily close.
"It was not a pretty sight," says Mike Brown, the Liberal MPP for Algoma-Manitoulin. "There were beaches where water used to be, and fish trapped in small pools. Rocky Island Lake turned into a desert. Cottagers on Tunnel Lake went to bed and woke up the next morning to see their boats beached, sometimes hundreds of feet from shore.
"The government knew those plants would be a profit-making machine when they sold them. But there was no watershed management plan. There’s no question the public paid a huge premium for the power that was sold last summer."
Great Lakes Power operations manager Andy McPhee said the hydro plants abided by all legal requirements, and provided much-needed power to the Ontario grid.
"We sold power when Ontario needed it most," said McPhee. "We were paid the same amount of money as any other generator was paid for electricity during that time. Next summer, we will again be operating our system within the legal limits, as we did this past year.
"We are working with local stakeholders to understand their concerns and consider their interests in our operations. But if energy conditions are again tight next summer, then we may need to draw down the reservoirs again to help meet the needs of Ontario."
McPhee declined to say how much power his company sold during the summer period, and what price the Brascan affiliates received for it. He said Great Lakes Power sold all the power from the four hydro plants into the Ontario grid, and achieved the "market clearing price" for electricity sales. That is the highest price paid hourly or in five-minute increments.
This fall, the Great Lakes Power Income Fund reported a 42- per-cent revenue increase over the same period a year ago. (Some of this increase is due to revenues from new power plants not in the company asset portfolio the previous year.)
Brascan asserts it is one of the lowest cost producers of power in North America. OPG hydro-electric plants typically produce power for less than two cents per kilowatt hour.
An OPG spokesman said the Brascan sale followed a bid selection process that was reviewed by financial adviser Merrill Lynch and analysts at the provincial agency, Superbuild. He would not identify the number of bidders for the Mississagi hydro plant package.
"That is a confidential pro-cess. But as the sole shareholder, the (Ontario) government has Superbuild review all OPG de-control proposals (asset sales) to ensure that fair value is being obtained."
He said OPG reported only a $99-million pre-tax gain on the Brascan sale because that was the difference between its book value and the sale price of $342 million.
There is no evidence Brascan used improper influence to obtain the OPG assets. But there are questions about how the sale proceeds were spent by OPG.
"The funds from that sale were almost certainly consumed by OPG’s capital program, because we know they didn’t pay dividends or pay down its debt," says Adams of Energy Probe. "That means we liquidated those hydroelectric assets for the benefit of the black hole (costly reactor repairs) of Pickering A."
A spokesman for Eves said the Brascan donation of $150,000 was routine, and the OPG sale to Brascan was government-approved and completed without his involvement.
"A number of corporations have made donations to Eves and his campaigns, and corporations make donations of this kind to politicians of all stripes," says the premier’s press secretary, Derek Tupling. "The premier had no involvement whatsoever in this deal because this deal was completed before he was elected premier."
"When the Conservatives privatized those four plants, they gave no thought to the water flow and watershed management issues," counters NDP environment critic Marilyn Churley.
"What is really shocking is the greed. Ernie Eves does not give a darn because that gouging was done by a company that helped finance his leadership campaign."
The wheeling and dealing that occurred last summer might become a routine feature of Ontario’s future power system.
Government company registration records show that OPG has prepared to privatize other power plants, including those on the Ottawa, St. Lawrence and Madawaska rivers in Eastern Ontario. On a single day in March 1999, OPG created 31 legal subsidiaries similar to the four-plant package sold to Brascan. They comprise all the former Ontario Hydro hydro, nuclear and fossil fuel plants.
One nuclear package, OPG Bruce B Inc., has been leased to a consortium 83-per-cent owned by a private British company now facing bankruptcy. Several OPG coal plants have been put on the sales block, with no buyers to date.
The hydro asset packages include OPG Ottawa River Inc., OPG Madawaska Inc., OPG Niagara Inc., OPG St. Lawrence Inc. – and all the other hydro plants the former Ontario Hydro built over nearly a century.
The provincially owned sister company to OPG, Hydro One, has set up 13 separate companies in preparation for the privatization of its transmission and related assets. This occurred under the direction of former Hydro One CEO Eleanor Clitheroe, who was fired in July after allegations she racked up unauthorized expenses for yacht sponsorships, limo services and house renovations. She has denied all allegations, and filed civil lawsuits against Hydro One for wrongful dismissal and slander.
While she was the CEO of Hydro One, Clitheroe helped solicit corporate donations for Eves’ leadership bid. Her husband, Randy Bell, donated $10,000 to the Eves leadership bid.
Another Hydro One executive, Rod Taylor, donated $5,000 to Eves’ campaign, according to Elections Ontario filings. Brascan also donated $20,000 to the leadership bid of current health minister Tony Clement, while another Brascan affiliate donated $3,000 to the campaign of Education Minister Elizabeth Witmer.
Energy Probe 