Energy Probe

Thomas Adams
Energy Analects
July 31, 1998

Ontario’s new energy legislation, now through second reading in the house, sets the stage for competition in electricity production and marketing, expansion of gas trading in Ontario, separation of competitive and monopoly activities, and strong public regulation of energy monopolies. While the legislative program is strong, the government’s financial analysis of Ontario Hydro’s liabilities and its plan for discharging those liabilities is weak.

There is much to praise in Ontario’s new energy legislation:

The legislative package gives rise to a number of issues that hold the potential for good or bad outcomes, depending on how they are managed.

A particularly serious concern is potentially conflicted roles for the OEB. The legislation would empower the OEB to create rules governing the conduct of parties it regulates, grant the board licensing authority over parties, and allow it to adjudicate rates and other matters. Potential conflicts between these different functions need to be considered.

To receive a licence to trade gas or electricity, a commercial party might be required to reveal to the OEB’s licensing director details about its company’s capabilities and intentions. If this same commercial party were to intervene on some regulatory matter before the board, it might be concerned about the adjudicator’s independence if confidential business information became known to the panel hearing the case.

To prevent conflicts from impairing the functioning of regulation, roles should be clearly demarcated. Separation within the OEB between the director of licensing and the rule makers from the rest of the adjudicators might be necessary.

Another potential stumbling point relates to the Independent Market Operator. The composition of the IMO’s board of directors is not specified in the legislation. The MDC has recommended an interested, "stakeholder" board. This approach is not specified in the legislation, but if it is adopted the IMO may be weakened.

The IMO will have regulatory powers, including the power to make rules and impose financial penalties on market participants, which runs contrary to the belief that regulatory bodies composed of parties with financial interests in the outcome of decisions can not be independent. A potential saving grace is that the decisions of the IMO are generally subject to OEB oversight, but this is a thin thread to rely on. A better solution would be for the minister to appoint to the IMO only those who do not have commercial interests in the outcomes of their decisions.

Another delicate area relates to the extinguishment of contracts with customers to which either Ontario Hydro or the municipal utilities areparties. These contracts include cogeneration avoidance agreements, contracts for subsidized power, and other such tools of the monopolists. If the contracting parties other than Ontario Hydro or the municipal utilities want out of these contracts then it is perfectly acceptable for government to extinguish the deals. Government has the right, like any owner, to direct the companies it has created and effectively owns in the manner it wishes. Getting rid of the deals in question will help advance the cause of competition. Except for cases where the non-governmental party is happy to terminate the arrangement, out of respect for the law, government should not be abrogating contracts, even if the circumstances under which the contracts were signed have changed. It may be necessary to compensate injured contracting parties to obtain their consent to collapse the deals.

There are also some areas where the approach adopted in the legislation is either wrong or does not go far enough.

The legislation does not grant the OEB the power to order divestiture of non-monopoly enterprises and functions. The OEB would be better able to police market power and intra-corporate transfers of costs if it had the power to order divestiture. Particular generating facilities that might play a key role in price formation might be candidates for divestiture, as would gas or electric utility affiliates operating in non-monopoly businesses, if necessary to promote competition and to prevent cross-subsidies. The Board may not have to exercise this power often, but having it may improve the Board’s ability to influence utilities in the public interest.

The ownership structure set out for the IMO is for it to be a non-share capital corporation, a surprising choice given the government’s unhappy experience with the Toronto District Heating Corporation. TDHC is deeply encumbered in debt with little prospect for returning the principle, is not renewing its physical plant, has not been able to modernize its system to incorporate cogeneration, and has been wracked by failed privatization efforts. The accountability problem resulting from no clear ownership structure has contributed to all of these problems. The IMO should have a clear ownership structure to encourage accountability.

Weak Stranded Cost Analysis

In early July, the Ontario Ministry of Finance released the long awaited results of a study it has done on financial issues associated with the electricity reform process, particularly stranded liabilities. The study is based on extensive consultation with stakeholders as well as expert advice from Queen’s University economist Bryne Purchase, and the firms Goldman Sachs, CIBC Wood Gundy, and Midland Walwyn. The performance of the Ministry of Finance so far suggests that management of financial issues may prove to be a bruise on the electricity reform peach.

The study itself, however, is blemished by factual problems that indicate careless work. For example, in a discussion of vesting contracts, the study incorrectly asserts that vesting contracts were used to protect the UK coal industry during electricity restructuring.

Ontario Hydro reports, and Ministry of Finance’s stranded cost paper accepts without comment, a current radioactive waste disposal and decommissioning liability of $2.8 billion, a figure predicated on the ability of the nuclear fleet to operate for 40 years at high capacity factors. In fact, realistic estimates of the remaining life of Hydro’s 12 active reactors suggests a current liability perhaps twice or three times higher. Annual contributions, reflecting the remaining service life, require drastic adjustment, yet the Ministry of Finance accepts the current contributions as appropriate.

A compounding problem not even addressed in the study is that the "provision" on Hydro’s books for radioactive waste disposal and decommissioning is an accounting line item only with no cash to show for it. The fact is that the cash collected for disposal and decommissioning was consumed by Ontario Hydro, and replenishing the reserve will be costly.

The Ministry’s plan for a volumetric stranded cost recovery charge has several flaws, not least of which is its name – the "Competitive Transition Charge" – which suggests that competition caused these costs, rather than simply revealed them. The charge is to be payable by all users, which is fine in principle but problematic in the case of customers of Cornwall Electric who were never a part of the Ontario Hydro system. The most basic problem with the volumetric charge proposal is that it is inefficient because it distorts the marginal price paid by consumers.

The Ministry of Finance expects its administratively determined, official stranded cost will be announced in December. It is hard to imagine how the current process of behind-closed-doors discussions and desk studies can, in the absence of privatization, arrive at a figure that will prove realistic and reliable.

According to the Ministry of Finance, valuation of the new commercialcompanies created out of Hydro, Genco and Servco, will be made based in part on the business plans of those organizations. Even a casual survey of Ontario Hydro’s past business plans compared to actual results reveals such a vast chasm between plan and practice that one can only be very concerned about continued reliance on this source.

The Ministry of Finance study skirts the subject but the likelihood is that taxpayers will get stung for Ontario Hydro’s past mistakes. The new legislation specifically envisions the Ontario government taking on some of Ontario Hydro’s obligations. The new Ontario Hydro Financial Corporation will borrow under the direction of the cabinet, raising the possibility of future claims by creditors against the public purse even where borrowings are not specifically guaranteed by the province.

(Mr. Adams is a consultant with Borealis Energy Research Associates, a principal client of which is the environmental organization Energy Probe, which he represents as executive director.)

Thomas Adams
Energy Probe
August 19, 1998

 Good afternoon. I am Tom Adams, Executive Director of Energy Probe. I am joined today by Mark Mattson, counsel to Energy Probe, and Norm Rubin, Energy Probe’s Director of Nuclear Research.

The theme of Energy Probe’s oral presentation to the committee today is this: On the one hand, there is no serious alternative to Bill 35 as it applies to electricity. On the other hand, changes are required to Bill 35, to ensure regulatory due process in gas and electricity.

We have also made recommendations about environmental protection, financial protection for taxpayers, auditing requirements, and the creation of the IMO. These are set out in our written materials. Although time does not permit us to cover them in our oral presentation, we urge the committee to carefully review these recommendations, and we invite questions on these matters. We have also circulated a recent article I wrote, discussing Bill 35.

Energy Probe is a national environmental and consumer advocacy organization with over 10,000 supporters, more than half of them in Ontario. We have been actively representing the public interest in regulatory hearings, in the press, and before government committees like this, for over 20 years. Since 1982, with the publication of the book Breaking Up Ontario Hydro’s Monopoly. by Lawrence Solomon, Energy Probe has actively advocated a competitive restructuring of the electricity system. In 1984, the book was expanded, updated and published as Power at What Cost?. Through the 1980s and 1990s, we battled Ontario Hydro and its allies at the OEB, at various environmental assessment processes including the Demand/Supply Plan hearing, and in the courts on competition and environmental issues.

The main theme of Bill 35 – separating competitive functions from natural monopoly functions, and empowering consumers to shop for power – matches the approach advocated by Energy Probe since 1982.

In our view, there is no serious alternative to Bill 35 as it applies to electricity. The legislative and institutional status quo is not in the public interest. Ontario’s electricity system is suffering from a long list of problems: monopoly, unaccountability, inefficiency, environmental liabilities, a long history of politicized decision making, and an absence of public regulation with due process.

On the other hand, Ontario’s natural gas system is sound and successful – although its regulation could stand some fine tuning. If I could leave you with one guiding principle, it would be this: Ontario’s marketplace in natural gas, including the regulatory role of the Ontario Energy Board, is a jewel that must be protected. Moreover, that successful example must be the model we use in creating a marketplace in electricity.

The main problem with Bill 35 is that it introduces serious flaws into the jewel that is the gas marketplace, and it duplicates those flaws in the new electricity marketplace. Both of these problems result from the Bill’s weakening of due process in Ontario Energy Board regulation.

For example, Bill 35, as drafted, eliminates the requirement for the OEB to conduct open public hearings and the requirement for the OEB to support its decisions with written reasons.

While some believe that due process by a quasi-judicial regulatory agency is impossible in a marketplace with publicly owned entities like GENCO and SERVCO, we believe that due process can be achieved. (In the private-sector marketplace of natural gas, it not only can be achieved, it is already being achieved.) Without due process, the regulatory process risks losing its independence, authority, and respect, and the marketplace itself risks losing legitimacy.

I will now turn to our specific recommendations.

Energy Probe’s Recommendations on Bill 35

Clauses from the existing OEB Act whose exact wording or spirit must be included in Bill 35 to ensure due process:

14. The Board for the due exercise of its jurisdiction and power and otherwise for carrying into effect this or any other Act has all such powers, rights and privileges as are vested in the Supreme Court with respect to the amendment of proceedings, addition or substitution of parties, attendance and examination of witnesses, production and inspection of documents, entry on and inspection of property, enforcement or its orders and all other matters necessary or proper therefor. R.S.O. 1980, c. 332, s. 14.

Discussion:

These formal adjudicative powers are necessary to ensure the legitimacy, authority, and independence of the OEB. Procedural order, clarity, and fairness benefits all parties to Board proceedings.

15 (3) Subject to subsections (1) and (2) of this section, subsection 19 (11), subsection 22 (2), section 23 and subsection 46 (3) or this Act and to the Energy Act and any predecessor thereof, the Board shall not make any order or proceed in accordance with any reference or order in council under this or any other Act until it has held a hearing upon notice in such manner and to such persons as the Board may direct.

Discussion:

Hearings provide an essential opportunity for evidence to be properly tested. References from the Minister are properly subject to public review – both so that their implications can be fully understood, and so that the Minister is disciplined by the prospect of this review. In contrast to the review of references required in the existing OEB Act, the proposed Act contains Section 26 that allows the minister to issue dictates by fiat. As noted later, Section 26 should be deleted from the bill, on the grounds that it undermines the authority and independence of the OEB.

15 (4) Every proceeding before the Board shall be open to the public.

Discussion:

Bill 35 does not currently contain a guarantee that members of the public can observe or participate in regulatory processes. Public utilities should be open to public scrutiny. Methods of regulation or self-regulation, behind closed doors, that might be suitable for private markets (such as those used by the OSC) are not appropriate for application to the OEB. Without a clause matching Section 15 (4) of the existing OEB Act, proceedings dealing with public interest matters might occur in secret.

17 (1) Where an application has been opposed, the Board shall prepare written reasons for its decision.

Discussion

Written reasons for decisions are the most effective method available to keep the regulator accountable and the process efficient. Proponents and intervenors are entitled to know how their evidence and submissions were considered. Just as the common law builds up a literature of reasoned precedents, so too should regulatory decision-making create a documented record of deliberation, to create continuity, order, and discipline.

26 (4) An application for leave under this section shall be made to the Board, which shall hold a public hearing and submit its report and opinion to the Lieutenant Governor in Council. R. S. O. 1980, c. 332, s. 26 (1-4).

Discussion:

Under the corresponding Section 42 of the proposed OEB Act, no hearing is required for public review of changes in ownership. Without requiring hearings for changes in ownership, Bill 35 will fundamentally weaken due process. Section 26 (4) played a key role in ensuring that the public interest was protected during the sale of Consumers Gas to British Gas and during the takeover, and later during the merger, of Union Gas and Centra Gas.

In addition to the foregoing recommended additions, the general scheme of Section 37 of the existing OEB Act, which required hearings for rate changes proposed by Ontario Hydro, should be followed under Bill 35. Bill 35 should be amended to ensure that applications for rate changes, or changes to conditions of service, or changes to formulae used to calculate rates that are proposed by monopolies under the OEB’s supervision are reviewed by the Board in public hearings.

Clarification and Separation of OEB Functions

The two executive functions of the new OEB – rule making and licensing, which can be considered a subsidiary rule making function – should be structurally separated from the Board’s core adjudicative function, with which they naturally conflict. Whereas rule makers properly ought to consult with affected parties, circulate draft decisions, and undertake other activities suited to policy development, quasi-judicial adjudicators would undermine their authority by engaging in such activities. The new OEB Act should make it very clear that OEB adjudicators are not appropriate targets for lobbyists. The Act should direct the members of the adjudicative tribunal part of the Board to base decisions only on tested evidence, and not on informally gained information. Secrecy, which is often required in policy development processes, is total inappropriate for arriving at regulatory decisions on public utilities.

Depoliticization of Regulatory Decision Making

OEB Act 1998 Section 25 (6) and Section 26 should be eliminated. Both empower cabinet to interfere in the regulatory process in ways that undermine the authority and independence of the OEB. Gas regulation has succeeded, in large measure because it was insulated from political intervention. The contrast between gas and electricity in terms of environmental liabilities, investment liabilities, and value for customers could not be more stark. Why in the world would we perpetuate the failed model, when there is a successful one so handy?

Strengthening Environmental Protection Rules

The general approach that Energy Probe recommends for environmental protection is based on the "polluter pays" principle.

The Committee should recommend that the Ontario Government begin a transition to a world of full nuclear accident liability. The Ontario Government should add an amendment to the Environmental Protection Act (in Section 10, Schedule D of Bill 35) requiring that as of a date certain in the near future (perhaps 2005) no nuclear reactor will be permitted to operate in Ontario unless its owners and operators are liable without limit for the off-site consequences of a reactor accident, and have demonstrated the capability of discharging that liability up to some appropriate level (perhaps $10 billion).

A segregated, funded, arms-length nuclear waste disposal and decommissioning fund should be required by law, and sustained by nuclear waste generators. The provision and its management should be subject to periodic review by the Ontario Energy Board in a public hearing.

No Access of Operating Companies to Provincial Financial Guarantees

The provincial government’s White Paper supported the financially responsible position that taxpayer-back loan guarantees should not support the electricity sector. Bill 35 waters this position down substantially.

The new Ontario Hydro Financial Corporation ("Finco") will borrow under the direction of the cabinet (Electricity Act, Section 61), raising the possibility of future claims by creditors against the public purse even where borrowings are not specifically guaranteed by the province. Under Sections 63 and 64, government loan guarantees may be provided to the Financial Corporation directly or indirectly. Energy Probe urges the Committee to eliminate these potential taxpayer risks by ensuring that no future borrowings by participants in the electricity sector are guaranteed by the province and that existing guaranteed obligations are treated as preferred, while future, unguaranteed obligations are treated as subordinate to them (as a second mortgage is subordinate to a first).

Even if this approach is rejected, the Financial Corporation should be specifically enjoined from lending funds to Genco or Servco, so as to ensure that those two entities do not indirectly gain access to the provincial loan guarantees supporting the Financial Corporation.

Formation, composition and regulation of the IMO

The Electricity Act Section 3 (1) should be amended so that the ownership of the IMO is clear in a way that allows the IMO or its property to be alienated.

The Electricity Act Section 2 (b) should clearly indicate that members of the IMO board not have a commercial interest in the matters they are responsible for. Since the IMO will have regulatory powers, including the power to make market rules, oversee market power issues, and administer fines, it would be inappropriate for any member of the IMO board of directors to have a commercial interest in the electricity sector.

Electricity Act Section 18 (4) should be amended to indicate that the OEB shall hold a hearing on changes to the IMO’s requirements and fees.

Auditing

Under the Electricity Act Section 74, the books of the Financial Corporation shall be subject to an annual audit by the Provincial Auditor. This same audit requirement should exist for Genco and Servco so long as they remain publicly owned.

Also see: Followup letter to EP’s presentation to Ontario Standing Committee on Resources Development Regarding Bill 35

Thomas Adams
Toronto Star
August 24, 1998

This letter by Thomas Adams was in response to an article "Province’s Power Exchange is a wolf in sheep’s clothing" by Robert Blohm.

Ontarians have a major advantage to draw on in the effort to restructure our debt-laden electricity system – many other jurisdictions have gone before. Key lessons from the international experience contradict the advice of your author Robert Blohm.

The leading jurisdictions to install power exchanges like that proposed for Ontario — but opposed by Blohm — include the U.K., the state of Victoria (Australia), Alberta, and Argentina. Power rates have declined in all of these cases. In the U.K. for example, rates for homeowners have dropped 23% since competition was introduced and their power exchange started in 1989.

Efficient power exchanges have favoured not just consumers but the development of low emission, high efficiency cogeneration favoured by environmentalists. In Alberta for example, the introduction of competition and a power exchange has led to a explosion of cogeneration investment, sufficient to meet more than 10% of the province’s electricity demand. Alberta is also Canada’s leader in wind power, some of whose product is sold through the power exchange to consumers who want clean power.

Given Ontario’s dependence on highly polluting coal plants, Blohm’s opposition to legislated environmental requirements should concern everyone from asthmatics to bird watchers.

Sincerely,

Thomas Adams
Executive Director, Energy Probe

Thomas Adams
Energy Probe
August 27, 1998

Mrs. Brenda Elliott, M.P.P.
Chair, Standing Committee on Resources Development
c/o Committee Office
Room 1405, Whitney Block

Dear Mrs. Elliott:

I write to you and through you to the committee members to address two issues–procedural rights and financial guarantee–in response to requests for additional information from committee members during Energy Probe’s appearance before your committee Wednesday August 19.

Procedural Rights

In response to a question from Ms. Johns, we have examined further whether the Statutory Powers and Procedures Act ("SPPA") guarantees the procedural rights contained in the existing Ontario Energy Board Act at sections 15(3), 15(4) and 17 but not proposed for the new Act.

Upon review we remain concerned that under the current formulation of Bill 35, the SPPA will not always apply. Unless the Bill is amended, the procedural rights now available to protect the interests of gas customers will be lost and existing procedural rights will not be extended to electricity customers.

The SPPA only guarantees the procedural rights to an open, public hearing, if the OEB Act itself requires that a hearing be afforded to the parties. The proposed OEB Act does not guarantee that a hearing be held in order to set gas rates or to proceed with a reference or an order in council. The old Act guaranteed the right to a hearing in s.15 (3). Further, s. 21(3) of the proposed Act specifically exempts the Board from s.5.1 (2) of the SPPA which requires an oral hearing if one party objects to a written hearing.

Financial Guarantees

We were also asked for additional comments on the issue of debt guarantees. In our submission, we made the following comment on guarantees:

Energy Probe urges the Committee to eliminate these potential taxpayer risks by ensuring that no future borrowings by participants in the electricity sector are guaranteed by the province and that existing guaranteed obligations are treated as preferred, while future, unguaranteed obligations are treated as subordinate to them (as a second mortgage is subordinate to a first). (p. 6)

For clarity, we should probably have separated the two parts of this sentence into two recommendations

The first recommendation of the two would read as follows:

1. Energy Probe urges the Committee to eliminate taxpayer risks by ensuring that no future borrowings by participants in the electricity sector are guaranteed by the province.

Our recommendation here is that, in future, when Ontario Hydro’s current debt is "rolled over" — i.e., when Ontario Hydro’s bonds mature before the corresponding assets have been fully depreciated, necessitating the reissuance of bonds by "Finco" — these new bonds not bear the provincial loan guarantee. The effect would be to gradually extricate the taxpayers of Ontario from responsibility for these bonds in the case of a default by Genco and Servco. While the effect may be to raise the cost of Finco borrowing, the effect should be slight: Finco should have a good commercial credit rating, since it will have a reliable income stream, from Genco and Servco, sufficient to meet its financial obligations. Continuing to guarantee new bond issues of Finco, as envisioned directly in section 64, would represent a subsidy to the electricity sector. As mentioned orally, we are also concerned that any Finco-issued bonds may be covered by an implicit guarantee as well by virtue of section 61.

Our second recommendation would read as follows:

2. Energy Probe urges the Committee to eliminate these potential taxpayer risks by ensuring that Genco and Servco’s obligations to Finco legally take priority over its other liabilities, including its obligations to lenders of newer, "commercial" debt. Obligations to Finco should be treated as preferred, while future, unguaranteed obligations of Genco and Servco should be treated as subordinate (as a second mortgage is subordinate to a first).

This recommendation, as we indicated orally, concerns new borrowings by Genco and Servco to finance new commercial expenditures — not "rollovers" of old debt. Since our discussion with your Committee, and with government officials who were present during our testimony, we have slightly amended this second recommendation.

Our concern, as we indicated, is to ensure that the government’s stated intentions are met — that "Ontario’s debt guarantee on new debt would be phased out by the year 2000." Furthermore,

In restructuring the Ontario electricity system, the Government cannot overlook the very high debt of the province’s largest firm. Ontario Hydro must be reorganized. Its successors need to be given clear business mandates, and be put on a competitive commercial footing. The new companies must be accountable in financial matters, and operate with prudent and cautious financial assumptions. (White Paper, p. 14)

While we understand that new bonds issued by Genco and Servco would nominally not be taxpayer guaranteed, we are concerned that they will continue to be largely guaranteed by Ontario taxpayers by indirect effect, if Bill 35 is passed into law unamended. After being relieved of "stranded debt" — and while burdened with obligations to Finco — Genco and/or Servco may incur other new non-Finco obligations. We are urging the Committee to amend the legislation as suggested above so that in the event of a future Genco or Servco default, that company’s obligations to Finco legally take priority over its obligations to purchasers of newer, non-guaranteed bonds. Unless this recommendation is adopted, the loss from a default — even if totally caused by the failure of a "new" investment, financed by "new" debt — would be borne by both the new bondholders and Finco (the latter guaranteed by taxpayers), in proportion to the company’s obligations to each. Since Genco and Servco will likely have larger obligations to Finco than to new lenders, Finco will bear a larger loss in the event of a default.

In our view, Bill 35’s extension of the historical government loan guarantee under section 64 violates two of the government’s stated goals: (1) it is unfair to future Ontario taxpayers, and (2) it does not ensure that Genco and Servco "must be accountable in financial matters, and operate with prudent and cautious financial assumptions". In the first instance, it holds future Ontario taxpayers liable for the failure of commercial investments apparently financed with commercial bonds. In the second, it shields Genco’s and Servco’s future lenders from bearing the full risks of their lendings, diminishing the incentive for lenders, bond dealers, and bond rating agencies to examine Genco’s and Servco’s financial assumptions critically, and to hold those companies accountable to justify them.

Finally, in response to Mr. Baird’s question during our presentation, we can see nothing in Section 52 (or elsewhere in Bill 35) that either addresses or limits this concern.

I hope this clarifies our submissions on these matters.

Sincerely yours,

Thomas Adams
Executive Director

Robert Benzie and Paul Vieira
National Post
May 30, 2002

 The Ontario government tabled legislation yesterday giving it the power to sell Hydro One Inc. – but the future of the largest privatization and public stock offering in Canadian history remains uncertain as Ernie Eves, the Premier, maintained that a final decision on the transmitter’s future has not been made.

Mr. Eves said the Reliable Energy and Consumer Protection Act was made necessary by last month’s Ontario Superior Court ruling that said the government lacked the legal authority to sell the company.

"All the legislation today does, quite frankly, is provide the government with the ability to choose options as to the future of Hydro One," Mr. Eves said.

The Premier acknowledged that his administration, which is also appealing the court decision, is undecided on what it is going to do with Hydro One – even though his predecessor, Mike Harris, said the utility would be sold through an initial public offering. Financiers estimated that the IPO, which Mr. Eves supported as recently as April 25, would have fetched as much as $5.5-billion.

"Who said we were selling Hydro One? There is no specific sale of Hydro One; there is no specific IPO of 100% of the shares of Hydro One; there is no specific thing that we are proposing in this legislation," Mr. Eves told the legislature during Question Period.

Speaking to reporters outside the legislative chamber, the Premier emphasized that an IPO was no longer off the table – as he had suggested on May 1, the day before two provincial by-elections in which the Hydro One issue appeared to be hurting the Conservatives.

Mr. Eves said the IPO is still an option for dealing with the utility. Others options include transforming the transmitter into an income trust, making it a not-for-profit entity, such as Nav Canada, or leasing it to the private sector.

Bay Street financiers were cautious about the prospects for a Hydro One IPO.

"Hopefully, it will happen, but who knows," a Bay Street source said. "The process forward isn’t clear. . . . But at least it leaves them with an open playing field to figure out how they want to get to the end zone."

"I’d call it a facilitation bill, that’s all," he added. "This just keeps all the government’s options open."

"I’m kind of at my wit’s end," said another Street insider familiar with the Hydro One file. "I believe the government should privatize Hydro One. I believe it should do it by an IPO. I believe the government should do this soon, and stop crapping around and get on with it."

Tom Adams, executive director of Energy Probe, said the legislation is a disappointment because the government has failed to set a path for Hydro One.

"The government has provided no additional clarity on where they intend to go. The government has spoken before they really know what to say. We are no closer to knowing where they want to go," said Mr. Adams, an advocate of privatizing Hydro One.

While he applauded some of the elements of the legislation, such as its strengthening of the regulatory agencies, he remained critical. "This business of, ‘We don’t know what we want to do, but we are going to leave our options open, so this just gives us carte blanche,’ is no contribution at all."

Advocates of privatizing Hydro One say the utility needs to be privatized so it can get access to cash through the capital markets. It needs that cash because it needs to upgrade its ageing infrastructure, complete interconnections among its neighbouring jurisdictions, such as Quebec, New York and Michigan, and make acquisitions in the United States so it can becomea North American transmission player.

Industry observers suggest that the income trust and not-for-profit structures being recommended restrict the utility’s ability to execute its strategy. For example, in an income trust, the bulk of the cash flow must be distributed to unitholders.

Robert Benzie and Paul Vieira
National Post
May 30, 2002

 Faced with embarrassing revelations about Hydro One’s lucrative executive compensation and its sponsorship of a racing yacht, the province yesterday scrambled to rein in the utility’s directors with an ultimatum to reduce salaries and benefits.

Chris Stockwell, the Minister of Environment and Energy, said the board of Hydro One – which sponsors Team Defiant’s 40-foot Canada’s Cup champion for $360,000 in a three-year deal – must shape up or ship out.

"I’ve written a letter to them saying that they have to agree to reduce their respective salaries, benefits and compensation. They will have to get back to me by 5 p.m. [today] to agree to . . . do that and give me timelines on when they’re going to be done. That’s it. If they don’t – watch me."

"I’m prepared to take the necessary action. They understand what the necessary action is. It’s not a threat, because a threat implies that you may not carry forward with something. This is more of a promise," he said, adding that sponsoring a boat was "completely unacceptable."

Terry Young, a spokesman for Hydro One, defended the yacht sponsorship, saying it "promotes awareness" of the company, but he declined comment on Mr. Stockwell’s demands regarding executive compensation.

The Tories have been considering privatizing Hydro One, the power transmission grid that is worth up to $5.5-billion. But an Ontario Superior Court ruling last month blocked the sale, sparking a political crisis for the new government of Ernie Eves, the Premier.

Lucrative perks awarded to senior executives at the utility have only served to fuel the furor swirling around the provincially owned grid.

In the eye of the storm is Hydro One president and CEO Eleanor Clitheroe, a Royal Canadian Yacht Club member, who describes sailing as her "passion." Along with her boat-builder husband, Randy Bell, Ms. Clitheroe races around the world and had plans this summer to sail the couple’s own 40-foot cutter, Endeavor III, in a 1,020 kilometre race from Newport, R.I., to Bermuda.

Last year, Ms. Clitheroe earned total compensation of $2.18-million, which was made up of: $750,000 in base salary; a $806,250 bonus; and $625,930 in "other" compensation, which included $174,644 for her car and $172,484 in vacation pay.

After her, the four most senior executives were paid total annual compensation of $3.13-million. There are escape clauses in their contracts that could be exercised should the province decide on a different corporate structure for Hydro One, such as a not-for-profit entity or income trust. Those clauses would trigger $13.5-million in buyout fees – including about $6-million for Ms. Clitheroe, who would also be eligible for a pension of up to $1-million.

The escape clauses were amended by the board earlier this month after the government signalled it was reviewing its options regarding the privatization of Hydro One.

While Bay Street insiders maintain the compensation terms are in line with private-sector companies – walkout rights are common in the contracts of corporate executives – Ontario’s two opposition parties have forced the Conservatives to intervene.

"Not only does Captain Clitheroe have a golden parachute, but apparently she’s got a yacht to land on," said Michael Bryant, a Toronto Liberal MPP, brandishing a poster of the Farr 40 racer.

"You can’t control Hydro One as a public company – how on Earth are you going to control it as a private company?" Mr. Bryant said, mocking Mr. Stockwell.

Howard Hampton, the NDP leader, blamed the Conservatives for what he described as the "excesses" of Hydro One brass.

"It’s just another example of the sort of bloated, greed, gross misuse [of funds] that’s going on at Hydro One under this government. Six months ago, I said there are real problems over at Hydro One. There are reportedly million-dollar salaries and expense accounts and I said to the government: ‘You owe it to the public to check into this.’ This government did nothing," said Mr. Hampton.

Tom Adams, executive director of Energy Probe, an industry watchdog, said this latest imbroglio just feeds into the confusion surrounding the electricity sector.

"What an awful situation. Now we’ve got politics thoroughly at work in the future of our transmission system…. and it’s hard to see how we are going to get ourselves out of this one," said Mr. Adams.

"But at the same time, Stockwell has a problem he has got to solve. Hydro One has been exploiting this partly private, partly public company model and [the Minister] has to do something to rein in this out-of-control board of directors," he said.

"I can’t criticize him for standing up for this thing, but if one of the outcomes here is that the board is removed, there could be legal consequences [wrongful dismissal suits]. An atmosphere has developed around this company that is highly charged, highly politicized and is definitely not in the best interest of the power system."

Paul Vieira
National Post
June 5, 2002

 The long-awaited privatization of Hydro One Inc. is dead, the company is "rudderless" and the province’s power industry in peril after the utility’s board of directors resigned last night following a protracted fight over compensation for the utility’s executive, according to senior Bay Street financiers and industry observers.

"It’s the end of the world. There’s not a soul on the face of this Earth who would buy shares in this company," said a Bay Street source, who asked not to be named.

"The company will be rudderless. Absolutely rudderless . . . There is not an income trust, not-for-profit entity or privatized company you can run in this world without a board of directors."

The source, along with other observers, believes the senior management team, including chief executive Eleanor Clitheroe, will follow shortly.

Ms. Clitheroe is the only board member who will remain at Hydro One.

"She’s definitely gone," said another Bay Street insider with ties to the industry and the government.

The government’s move yesterday to table a bill that would fire the 12-member Hydro One board, and the board’s later en masse resignation, is the latest chapter in the trials and tribulations of the transmission company.

What was supposed to be the largest privatization and initial public offering in Canadian corporate history has turned into a corporate soap opera since an Ontario Superior Court blocked the sale in an April ruling and the government said it was re-examining its options regarding Hydro One.

On top of that, controversy regarding the compensation packages of Hydro One’s senior executives and escape clauses built into their contracts – that were later amended – led the government to introduce legislation to remove the board.

"It’s a mess, and it’s becoming a bigger mess and huge distraction for the electricity industry," said an executive with a power generation company.

The privatization, estimated to fetch $5.5-billion, was designed to raise money for the government to pay down the $21-billion in stranded debt accumulated by the old Ontario Hydro monopoly.

Also, Hydro One would get access to the capital markets to raise money for much-needed infrastructure upgrades, the construction of interconnection projects with neighbouring jurisdictions and possible expansion in the United States.

The sale was one element in Ontario’s restructuring of its $10-billion electricity industry. But now, those reforms – an attempt to attract private-sector investment in the province – are in question.

"What the government has attempted to do is abrogate contracts," said Tom Adams, executive director of Energy Probe, an industry watchdog.

"In the context of attracting investment and, down the road, privatizing other assets, the abrogation of contracts is a draconian measure that’s just got to hurt the overall investment climate.

"If you can squelch one deal, why not squelch other deals?"

Industry watchers say other key issues in terms of Ontario’s electricity industry are being ignored, such as the sale of assets at Ontario Power Generation Inc., the attempt to bring the Pickering A nuclear facility on stream and issues surrounding market regulation.

"Instead, they are focusing on governance issues," the insider said.

Also, the move by Ontario will leave it with a black eye among business leaders.

"These [Hydro One] directors have credibility in the investment community worldwide," said one corporate watcher, citing the board chairman, Sir Graham Day, Robert Gillespie, chief executive of General Electric Canada Ltd., Allister Graham, former chief executive of the Oshawa Group Ltd., and Richard Auchinleck, former chief executive of Gulf Canada Ltd.

"Business people will have a hard time understanding what’s going on here."

However, some Hydro One watchers said the government’s move was a step in the right direction.

"I think they have to resolve these major issues here," said an analyst.

"How do you do an IPO and ask the public to buy these shares? The institutional guys wouldn’t even touch it unless it was really cheap. So I think the government is doing the right thing by cleaning up the problem and taking harsh action – which they need to do."

HYDRO ONE RESIGNATIONS:

The directors of Hydro One Inc. who resigned yesterday:

– Sir Graham Day, chairman

– Richard Auchinleck, former CEO of Gulf Canada

– Allister Graham, former CEO of Oshawa Group Ltd.

– Robert Gillespie, CEO of General Electric Canada Ltd.

– Dona Harvey, management consultant

– Stephanie Kushner, chief financial officer of Chicago-based Federal Signal Corp.

– Radcliffe Latimer, former CEO of TransCanada PipeLines

– Doug McCaig, chairman of the Fort Frances, Ont. utility

– Gedas Sakus, former senior executive at Nortel Networks

– Martin Syron, chairman of Cara Operations

– Roslyn Watson, real estate investor

Robert Benzie and Paul Vieira
National Post
June 5, 2002

 TORONTO – The board of Hydro One resigned en masse yesterday hours after Ontario’s Conservative government introduced legislation to fire the directors and reduce the salaries and benefits of the utility’s senior executives.

But the multimillion-dollar management team remains at the Crown-owned electricity transmitter for the time being.

"Given the turn of events and lack of confidence of the government, we feel we have no option but to resign," said Sir Graham Day, departing chairman of the 12-member board.

He expressed surprise at the Conservatives’ recent outrage over the seven-figure compensation packages for Hydro One’s five-member executive team, because the government has been aware of the salaries since it created the company in 1999 out of the old Ontario Hydro monopoly.

"The board felt the compensation packages were fair and reasonable for a major Canadian company."

"We didn’t pull these figures out of a hat. We systematically benchmarked the cash compensation against other comparable public companies — including those that were trying to hire away our top management because they are so good at what they do," Mr. Day said.

Chris Stockwell, the Minister of Environment and Energy, said the Conservatives were forced to act after Hydro One’s board declined to make the significant reductions the government ordered following days of Liberal and NDP attacks on the lucrative packages.

"A new board of directors will be put in place and they will be directed as their first order to renegotiate the compensation packages of senior executive staff at Hydro One," said Mr. Stockwell, adding the members should be named today.

While the Liberals and New Democrats refused to give unanimous consent to the Hydro One Inc. Directors and Officers Act – which rolls back salaries and severance payouts and bars executives from suing the government – the Conservatives’ majority will ensure its passage within the next few weeks, the Minister said.

Mr. Stockwell insisted the tumult will not have any impact on the value of Hydro One, which the government had been considering privatizing for up to $5.5-billion, in what would have been the largest initial public offering (IPO) in Canadian history.

Ernie Eves, the Premier, said he was confident the legislation would protect the government from any lawsuits. "I’m telling you, this bill will not cost the taxpayers of Ontario one red cent," Mr. Eves told the legislature.

At the centre of the furor is Hydro One president and CEO Eleanor Clitheroe, who resigned her seat on the board, but is still in charge of the utility.

Last year, Ms. Clitheroe – a Royal Canadian Yacht Club member who approved Hydro One’s controversial $360,000 sponsorship of an elite racing boat – earned total compensation of $2.18-million, which was made up of: $750,000 in base salary; a $806,250 bonus; and $625,930 in "other" compensation, including $174,644 for her car and $172,484 in vacation pay.

After her, the four other senior executives were paid total annual compensation of $3.13-million. There are escape clauses in their contracts that could be exercised if the government decides on a different corporate structure for Hydro One, such as a not-for-profit entity or income trust.

Those clauses would trigger $13.5-million in buyout fees – including about $6-million for Ms. Clitheroe, who would also be eligible for a pension of up to $1-million. The escape clauses were amended May 17 after the government signalled it was reviewing its options regarding privatization.

Mr. Stockwell said the board’s move three weeks ago was "the straw that broke the camel’s back" for the government.

He said the legislation introduced yesterday nullifies the previous contracts, but Dalton McGuinty, the Liberal leader, warned that the Conservatives have left taxpayers on the hook for millions of dollars in wrongful dismissal and breach-of-contract suits.

"We are going to be caught up in very costly litigation for a lengthy period of time and I think ratepayers are going to be burned because of this government’s incompetence or negligence," said Mr. McGuinty, whose party is now demanding that a review of compensation at Ontario Power Generation (OPG), a sister company of Hydro One.

The Liberal leader said Ron Osborne, the president and CEO of OPG, makes $2.3-million a year, about $100,000 more than Ms. Clitheroe.

But the Conservatives defended Mr. Osborne’s compensation.

Howard Hampton, the NDP leader, meanwhile, urged the government to cap salaries at $500,000 as they are at Hydro-Québec and BC Hydro.

Yesterday’s events sent shockwaves through the financial community. "This is destructive. The government is trying to do something that is populist, but it is illegal," said one Bay Street financier.

Another senior executive said it is now impossible for Hydro One to be sold. "Not for a few months, anyway." The executive added Mr. Eves might using compensation as a "pretext" to delay or cancel the IPO because of his party’s poor standing in the polls. "Maybe [replacing the board] becomes a convenient excuse not to do it," he said of the sale.

Margaret Wente
Globe and Mail
June 6, 2002

 Was it low political opportunism, or was management out of control?

Yes.

Ernie Eves is staking his career on convincing us that he’s the anti-Mike.

Eleanor Clitheroe, the CEO of Hydro One, staked hers on playing the business game like a guy.

Ernie may be winning this one with the public. They’re shocked by Ms. Clitheroe’s $6-million pension package. Even the old boys on Bay Street are offended by it. But the biggest loser in this power struggle isn’t her. It’s you, dear ratepayer.

Naturally, you won’t hear this from Mr. Eves. Or from the former board of directors, who claim it’s the government, not them, that’s out of control. Both sides prefer to keep you in the dark.

"The land mines in this enterprise were strewn in so many different places, it was almost bound to blow up," says someone who knows that it took years of folly to make a mess as big as this one.

Ms. Clitheroe, the woman with the $174,000 car, got the top job at Hydro One in 1999. She had been CFO of the big old Hydro, before it was broken up, and deputy minister of finance before that, and a banker before that. One key to her success, she explained recently, was "understanding the relationship between the public and private sectors." Her mandate was to prep up Hydro One, the giant transmission and distribution arm, for the biggest public share offering in Canadian history. Everyone knew about this except the public, because the government didn’t bother to try to sell us on the idea.

The bad old Tory regime, led by Mike Harris and Ernie Eves (not to be confused with the good new Tory regime, led by the anti-Mike) appointed a new high-wattage board for Hydro One and told it to proceed full speed ahead. The bad old energy minister, Jim Wilson, smiled on all the compensation deals and proceeded to meddle unforgivably in the rate structures. Any resemblance between him and the Jim Wilson who said last week that "they should fire the whole lot of them" is purely coincidental.

Although you wouldn’t know it from the anti-Mike’s behaviour, privatization is a really good idea. One person who says so is Tom Adams, the head of Energy Probe. He appears to be the only guy who’s on the customers’ side. He’ll remind you that the old Hydro was a bloated, arrogant behemoth that dug itself $38-billion into debt because of its misadventures in nuclear power. Privatizing its operations will inject large doses of accountability, transparency, market discipline, new capital, and rational decision-making. And rates will still be regulated, just like phone rates.

Ms. Clitheroe has a reputation as an intelligent and aggressive manager. At 47, lean and coiffed and with a power hobby (ocean-boat racing), she is the very model of the modern female CEO. She didn’t want to run a boring local monopoly utility. She wanted to turn Hydro into a gung-ho growth company and a major North American player.

That’s how it was in the late ’90s. Everyone believed in gung-ho growth and synergy back then. She secured a favourable tax ruling from the province and set out on an acquisition spree, snapping up small utilities everywhere. Unfortunately, she overpaid.

"The acquisitions substantially reduced the value of the company," says Mr. Adams. Hydro One also has three big new transmission projects to interconnect with other markets, and all three are behind schedule. Never mind the vision thing. What it needs right now is the operations thing, to get the projects fixed. "I think Hydro One’s performance has been very poor," he says. "It has behaved a lot like the old Hydro."

In his view, Ms. Clitheroe didn’t deserve her big performance bonuses. Nor did she deserve a private-sector paycheque before the company was actually privatized. (Paul Tellier, her hero, only made $351,000 in 1995, the last year he was on the public payroll at CN.) In any case, her $2.2-million compensation package is way off the charts, despite what the former board members claim. Did she hypnotize them? It was also tacky to tack on that $6-million golden parachute after a court ruled the IPO out of order. Don’t they know corporate greed is a sensitive issue these days? Doesn’t the name Enron ring a bell?

Needless to say, the anti-Mike was quick to take advantage of these awful optics. He’d like you to forget that the government that’s so shocked by these excesses is the same one that, as the sole shareholder, benignly said nothing all this time. He hopes you’ll blame Ms. Clitheroe, instead, for the mess that Hydro’s in.

But the truth is that his squeamishness and ambivalence and political cowardice over privatizing Hydro are going to cost you and me a whole lot more than Ms. Clitheroe’s yacht sponsorship. The province’s biggest asset is lost in space.

Oh, by the way, your rates are going way up. Start praying for a cool summer.