Energy Probe

Paul Waldie
Globe and Mail
June 7, 2002

 Six weeks ago, Ontario’s massive electricity restructuring was moving into its final stages without a ripple.

After four years of preparation, the province was just about to open the wholesale market for power. A plan to sell $5-billion worth of shares in Hydro One Inc., the transmission utility, was well under way. And, around 860,000 consumers, or 20 per cent of total households, had signed contracts with private electricity companies.

Things were going so smoothly that Ernie Eves, who replaced Mike Harris as Premier on April 15, gave the restructuring little thought as he campaigned in a byelection.

Everything changed on the morning of Friday, April 19, when Mr. Justice Arthur Gans walked into a downtown Toronto courtroom to issue a ruling on a lawsuit by two unions challenging the Hydro One sale.

Few people, including some of the union’s own lawyers, thought the lawsuit had a chance of succeeding. But Judge Gans ruled the province did not have the legislative authority to sell the utility.

Suddenly, the process that looked so smooth in April stumbled, and some say it may not recover.

The future of Hydro One remains uncertain and Mr. Eves is scrambling to come up with an alternative to the initial public offering. Compounding matters, the company’s board quit this week after the government introduced legislation to fire all directors because of a dispute about executive compensation.

The court ruling has also emboldened opponents of the energy restructuring, who are now vowing to launch additional legal challenges. They got more ammunition yesterday when the provincial auditor questioned terms of a lease the government signed with British Energy PLC for a nuclear station and said consumers could face higher electricity prices because of cost overruns at the Pickering, Ont., nuclear plant.

"We are going to close the market and put it back in the public’s hands," said Paul Kahnert, head of the Ontario Energy Coalition, a group of unions and other associations opposed to the restructuring.

The coalition is planning more lawsuits and encouraging consumers who signed long-term contracts with private suppliers to take them to court.

"The idea that you can add in profit into a non-profit system and have cheaper prices for consumers is wrong," Mr. Kahnert added.

The government is also facing fierce criticism from some members of the financial community who are upset at Mr. Eves’ indecision over the IPO.

"Ernie has got to come to grips with what he is doing," said Bernard Syron, one of the Hydro One directors who resigned.

"I don’t know what has happened to Ernie. He blinked over the IPO. He isn’t half the man as his predecessor was," added Mr. Syron, chairman of Cara Operations Ltd.

This isn’t the first time Ontario’s electricity system has seen turmoil. In fact, the current restructuring was largely born of a crisis five years ago when the old Ontario Hydro announced that its nuclear program, one of the largest in the world, was a mess.

In August, 1997, the utility said it was closing seven of its 19 reactors because they were unsafe and needed $8-billion in repairs. Allan Kupcis, the chief executive officer, resigned and the government was forced to act.

A year later, the province passed legislation to split Ontario Hydro into five entities – Hydro One, the transmission company; Ontario Power Generation (OPG), the power generator; the Independent Electricity Market Operator (IMO), a non-profit division to co-ordinate the open market; Ontario Electricity Financial Corp., which held the utility’s $38-billion debt; and the Electrical Safety Authority.

Hydro One and OPG began operating in April, 1999, and last December the government announced plans for the Hydro One IPO.

After two delays, the IMO opened the province’s power market on May 1, 2002. So far, that market has worked well, expert say. It connects wholesale buyers to sellers and sets a spot price every few minutes. The price set by the market will ultimately be used by power sellers to establish retail prices. Before May 1, the Ontario Energy Board set all power prices.

The average price in May was 2.9 cents per kilowatt-hour, well off the 4.3 cents in place before the open market. However, experts caution that prices will begin to rise once the summer heats up.

"I’m expecting things to go pretty crazy," said Tom Adams of Energy Probe, a Toronto-based environmental group.

"Shortages, price hikes and great difficulty making tough choices. But that’s why we need a market."

He and other experts don’t expect Ontario to face the same kind of problems that plagued California, such as chronic supply shortages and soaring prices. Unlike California, which kept retail prices regulated, Ontario’s retail price will be driven by the wholesale market. Ontario also has access to more generating capacity in the face of supply shortages than California. And, unlike California, Ontario can mandate when generators are allowed to go down for maintenance, so that enough plants are on stream at all times.

"We are not going to have a California here in Ontario," said Michael Morrison, director of the Canadian Energy Solutions group at Fujitsu Consulting in Toronto. "We looked at the market and we learned the lessons well."

But others say Ontario still faces significant problems. For example, despite a drop in the spot price for power, consumers have seen their electricity bills rise because the regulated portion has jumped by more than 10 per cent in recent weeks. That portion represents about half the total bill and it consists of charges for transmission, distribution, debt payments and fees to run the IMO.

The OPG is also far too large, experts say. The power generation company accounts for 85 per cent of the province’s supply and dominates the new open market. The province has ordered OPG to reduce its proportion of total generating capacity to less than 35 per cent within 10 years.

In March, OPG sold four hydroelectric plants to Brascan Corp. for $340-million. The plants represent about 1.5 per cent of total capacity. Last year, OPG finalized a lease for the Bruce nuclear station, which has eight reactors, with British Energy. But the lease is now being questioned by the provincial auditor who says the government earned $200-million less from British Energy last year than in 2000.

Some business groups say OPG is not moving fast enough to sell capacity and that it has a vested interest in keeping the best assets.

"Until we have their breakup, so that we have distinct entities operating in this market, we are not going to get real competition," said Arthur Dickinson, head of the Association of Major Power Consumers in Ontario, which represents 66 large companies.

The government has put a mechanism in place (called the Market Power Mitigation Agreement) to control prices if they get too high, but Mr. Dickinson says that is an insufficient check.

"There is nothing really to prevent OPG from ramping up prices dramatically if they want to," he said, adding that the company can still keep a large share of the increased revenue.

The Hydro One IPO is also unnecessary, says Mark Jaccard, a resource management professor at Simon Fraser University in Burnaby, B.C., and former chairman of the B.C. Utilities Commission.

"I don’t see the point of it ever," Mr. Jaccard said.

He added that while he supports a competitive market for electricity, privatizing the transmission entity doesn’t have to be part of the process. In fact, he said, most countries that have deregulated their power systems have not privatized their transmission companies. New Brunswick recently said it will not privatize its utility and B.C. is expected to make a similar decision.

Other experts worry that Ontario could soon face supply shortages. The reopening of the Pickering nuclear station, closed since 1997, has been delayed again until this winter and the costs of repairing the four reactors has nearly doubled to $2.2-billion. The existing plants are aging and there is little new generation capacity under construction. Hydro One is also behind in developing interconnections with neighbouring markets.

"That all translates into a big hole in the system," said Tom Adams of Energy Probe.

Britain developed a reserve system by paying energy suppliers to keep plants ready if needed. The fee they received was inversely related to the energy surplus. If the surplus narrowed, the fee increased. If it widened, the fee dropped. Mr. Jaccard said Ontario should consider a similar fee.

Jan Carr, an energy consultant with Barker Dunn & Rossi in Toronto, says Ontario’s restructuring has worked well. And he shuddered when asked what would happen if opponents succeeded in undoing the process because of the current trouble over Hydro One.

"You’re talking about unscrambling an egg," he said. "When you start getting down to the cost and disruption that would cause, I would think anyone doing a cost/benefit analysis would say, ‘Why are we doing this?’"

He and other experts say it is unlikely the entire process will be unwound. But given the impact of the April 19 court ruling, Mr. Carr doesn’t rule out anything. "Politics is politics," he said.

Paul Vieira and Robert Benzie
National Post
June 8, 2002

 Two major credit rating agencies said yesterday that the uncertainty surrounding Hydro One Inc. – particularly the future of its executive team and possible erosion of investor confidence – could threaten the utility’s financial health and increase its cost of raising money in the markets.

Moody’s Investors Service said it will review the transmitter’s debt rating after the board of directors quit en masse this week following a showdown with the Ontario government over executive compensation.

The New York-based agency said the province’s attempt to resolve the matter could lead to "attrition among the company’s senior management team, the erosion of investor confidence and uncertainty surrounding the government’s intention to proceed with the privatization of Hydro One."

Moody’s said it could not speculate on the results of its review, but a downgrade would add to the utility’s cost of raising money in the capital markets – and that extra cost would likely be passed on to Ontario electricity consumers, according to one industry observer.

"This is a danger sign for high distribution and transmission rates," said Tom Adams, executive director of Energy Probe. "This reveals the seriousness of the situation. The chaos around Hydro One is not just political – it will have implications for ratepayers."

Meanwhile, Dominion Bond Rating Service, while confirming its rating on Hydro One’s bonds, lowered the trend for the utility to "stable" from "positive."

The move was necessary, DBRS said, because of Hydro One’s stalled privatization and legislation allowing the province to fire the board and roll back the wages of senior executives. "This created significant uncertainty with respect to Hydro One’s future direction," DBRS said.

The statements from Moody’s and DBRS are yet another setback for the provincially owned transmitter. A planned initial public offering, which would have raised $5.5-billion, was derailed in April by an Ontario Superior Court ruling, and the company still has no board of directors. This has sparked severe criticism on Bay Street.

"What’s amazing me is that we still have this problem of the governance. Who’s managing this company and who are the board of directors going to be?," said one Bay Street insider. "I don’t think the government has thought this through. These guys are developing policy on an ad hoc basis in front of the media – on a daily basis."

However, Ernie Eves, Ontario’s Premier, appeared nonplussed yesterday about Hydro One.

"The organization . . . is in good shape and it will continue to go forward under new direction with the new board," Mr. Eves said.

He warned he will not be pushed into deciding whether the utility should be privatized through an initial public offering or set up as an income trust, which sources say is now most likely. "The IPO option is still an option but there are many options that are competing . . . including an income trust."

Mr. Eves said he expected a new board to be named on Monday. The premier made his comments at a media conference promoting biotechnology investment, which, by coincidence, was hosted by Cal Stiller, the financier who first broached the income trust scheme with the provincial government.

The income trust scheme has gathered steam this week after the Financial Post reported that the Ontario Teachers’ Pension Plan Board told the government it was willing to invest up to $2-billion in Hydro One if it was converted into an income trust. Also, meetings are scheduled between Hydro One representatives and institutional investors to assess interest in the utility, and gauge which corporate structure the funds prefer.

The Premier said he would not discourage such meetings. "It’s a free country. People are free to associate and discuss and exchange ideas, I think that’s a healthy thing."

Jim Flaherty, the Minister of Enterprise, Opportunity and Innovation and a backer of a Hydro One IPO, said he believes the transmitter’s uncertain future was having little impact on the province’s economy. "The atmosphere, the attitude toward Ontario, is very positive."

However, sources close to the Minister expressed dismay at the "lack of clarity on the hydro file because it distracts attention from other important government initiatives."

Fred Vallance-Jones
Hamilton Spectator
June 12, 2002

 The price of electricity reached unprecedented heights yesterday as unexpectedly hot and sticky weather in southern Ontario boosted demand for air conditioning. For an hour late yesterday morning, the provincial power price hit 70 cents a kilowatt hour, more than 20 times the averages seen until then.

While the spike will end up buried in the average price that consumers not on fixed price contracts pay, experts say it is an important sign of how the new Ontario power market works. When demand is up, you pay more.

In this case, the hot weather combined with losses of expected generation capacity.

Under Ontario’s pricing system, generators make offers to sell power, and the Independent Electricity Market Operator accepts them, starting with the lowest-priced offer. The IMO continues to accept offers until the demand has been satisfied. All generators are then paid the highest, or last, price accepted, no matter what price they initially offered.

The cycle repeats every five minutes and the price is averaged every hour.

Ted Gruetzner, a spokesman for the IMO, says yesterday’s spike happened after the agency temporarily exhausted its pool of reserve power.

The IMO then had to go back out into the open market, and accept some sky-high offers. They pushed the hourly average up to 70 cents a kilowatt hour between 10 and 11 a.m.

The IMO says the peak is exactly what consumers should expect when demand for air-conditioned relief starts pushing demand toward seasonal peaks. Provincewide demand peaked at a little more than 22,600 megawatts yesterday. The record peak, last August, exceeded 25,000 megawatts.

Nonetheless, the price spike became fodder for the NDP during question period at Queen’s Park.

NDP leader Howard Hampton has been warning for months of higher prices and, potentially, blackouts in the new competitive market that debuted May 1. Again yesterday he warned of business and school shutdowns, and midnight surgery, as large power consumers try to avoid daytime price peaks.

Premier Ernie Eves dismissed the criticism, pointing out that ordinary consumers pay an average price, and that Ontario Power Generation (OPG) will pay rebates on its share of generation capacity when the average price rises about 3.8 cents a kilowatt hour.

At the end of the day, the exact amount that consumers pay will depend on whether the price moves into a higher zone on a sustained basis. After yesterday’s peak, the power price settled into the six- to eight-cent range for the rest of the day, well above typical levels until then.

Tom Adams, head of the lobby and watchdog group Energy Probe, says consumers could see average prices of eight to 10 cents a kilowatt hour this summer because of continued delays in the restart of the mothballed Pickering A nuclear reactor. It’s not expected back in service until the end of the year at least, leaving a big hole in OPG’s generation capacity just when it is needed.

IMO says consumers can help themselves by switching off fans, and turning up the thermostat on their air conditioners during high demand periods.

Richard Mackie
Globe and Mail
June 12, 2002

 The Ontario government will retain control of Hydro One, Premier Ernie Eves announced Wednesday in reversing one of the major policies of former premier Mike Harris.

Mr. Eves told reporters at Queen’s Park after a Wednesday cabinet meeting that the government will hold on to at least 51 per cent of the $5-billion electricity-transmission utility.

"Having met with caucus yesterday and having met with cabinet this morning at some length, and having listened to the people of the province of Ontario, the government has decided that it is not going to part with control of Hydro One," he said.

The government will look at different forms of bringing in private-sector investment and participation in the management of the controversial utility.

The options include a strategic sale of shares to one or more partners, the establishment of an income trust or a general sale of up to 49 per cent of the shares to private investors, Mr. Eves said.

Other options

"We still believe that there are ways to bring private-sector discipline to the corporation without parting with more than 50 per cent of the entity," he said.

In the legislature, Liberal Leader Dalton McGuinty accused Mr. Eves of "dithering and fiddling" in his handling of Hydro One, saying he had "introduced uncertainty into the Ontario economy like never before.

"You have somehow managed to alienate both Bay Street and Main Street when it comes to your handling of the hydro file. The responsible thing to do is take your hydro bill off the table," Mr. McGuinty said about the government’s legislation that would give it the power to sell Hydro One.

New Democrat Leader Howard Hampton said Mr. Eves was pulling "another 407" by selling off another valuable public asset, refering to sale of Toronto-area Highway 407.

On Dec. 12, Mr. Harris had announced that the government would sell shares in Hydro One to private investors in what would have been the largest initial public offering in Canadian history.

The government, working with a syndicate of major invstment houses on Bay Street, on March 28 produced a prospectus for the sale and shares were expected to hit the market early this month.

But on April 19, Mr. Justice Arthur Gans ruled that the government did not have the power to sell the shares in Hydro One. Mr. Eves responded that the government would pursue the planned sale by giving itself the power to dispose of the shares and by appealing the court ruling.

Sources close to the Premier said that the delay gave him time to reconsider the sale, which he had considered inadvisable when it was announced. Mr. Eves was also hit by the strong public opposition to the sale of one of the province’s major assets.

‘Confusion’ among public

"There is a lot of confusion, I believe, among the public about the two issues of opening up of the [electricity] market to compensation [on May 1] and parting with the ownership of an asset that the public regards as being very important."

Early in May he announced that the initial public offering had been shelved while the government looked at other options for restructuring Hydro One.

His announcement that the government will retain control of the utility is his attempt to show that his government has taken command of the issue.

The decision on the future structure of Hydro One will be made after several months of public and private consultations and will be revealed before the next election, expected next spring.

With a report from Roma Luciw

Caroline Mallan
Toronto Star
June 13, 2002

 The Ontario government has zapped plans for what was set to be the largest privatization in Canadian history.

Premier Ernie Eves has decided to keep controlling interest in Hydro One, the provincially owned electricity transmission company that has been the centre of a political storm for weeks.

"The government has decided it’s not going to part with control of Hydro One," Eves told reporters after a three-hour cabinet meeting yesterday.

"It’s important for governments to listen to their constituency. It is an asset that’s owned by the people of Ontario, we do have to do what we think is right with respect to the people of Ontario."

Eves said the government will now have to choose between three options for the company:

• Find a "strategic partner" to buy less than half the company and help manage it. Possible contenders include multi-billion dollar pension funds owned by either teachers or municipal employees;

• Create an income trust, again likely involving the province’s biggest pension funds. Units of the company are sold off that entitle the "unit owners" to a share of the profit, but they never actually own a piece of the firm. Critics have charged this method will not raise the capital required to expand Hydro One’s transmission grid;

• Sell 49 per cent of Hydro One in an initial public offering or IPO. This is viewed as the least likely option, given all the turmoil surrounding the abandoned IPO of the entire company.

It is expected that the Tories will make their decision before the end of the month and take the summer to work out the details.

Eves said former premier Mike Harris’ decision to go ahead with the IPO of Hydro One virtually at the same time as the electricity generation market was being opened up to competition on May 1 was a mistake.

"If it had been my decision originally and assuming, even assuming that you wanted to go the IPO route, I don’t think it was the most appropriate (route) quite frankly to go ahead with the IPO at the exact same moment that you were opening up the market."

The Premier said the status quo is unacceptable at Hydro One and "private sector discipline" must be brought to bear at the company.

A recent controversy over the multi-million dollar salary and benefit packages awarded to five top executives culminated in the government introducing a bill last week that would fire the board of directors of Hydro One.

The board responded by resigning en masse claiming political interference and a new board, headed by Tory loyalist Glen Wright, was named on Tuesday.

Former NDP premier Bob Rae and former Liberal cabinet minister Murray Elston were also named to the new board.

President and CEO Eleanor Clitheroe, the woman at the centre of the salary controversy, earned $2.2 million last year and would have received $6 million if she quit or was fired in addition to a pension of almost $1 million a year for life.

In a speech to a Toronto luncheon audience yesterday, Clitheroe wouldn’t talk about either on her own position or the company’s.

Hydro One spokesperson Terry Young said the company’s future is to be determined by the provincial government – not the board of directors or senior management of the company.

The plan to sell the company to investors for an estimated $5.5 billion was announced by Harris last December and was set to proceed this spring before Mr. Justice Arthur Gans of the Ontario Superior Court ruled the province did not have the authority to sell the utility.

The ruling was in response to a court challenge filed in April by two national unions, the Communications, Energy and Paperworkers and the Canadian Union of Public Employees.

The government had said that proceeds from the sale would be used to pay down the $38 billion debt left by Ontario Hydro.

Ontario Hydro was replaced in 1999 by three private corporations owned by the province: the Ontario Electricity Financial Corporation (OEFC), Ontario Power Generation (OPG) and Hydro One.

Liberal Leader Dalton McGuinty accused the government of mismanaging the Hydro One issue from the onset.

"As a result of your complete lack of leadership on this file, as a result of your dithering and fiddling, you have introduced uncertainty into the Ontario economy like never before. The Premier may laugh at this, but you have somehow managed, at one and the same time, to alienate both Bay Street and Main Street when it comes to your handling of the hydro file," McGuinty told Eves in the Legislature.

NDP Leader Howard Hampton said the Tories’ quest for private sector discipline has thus far cost ratepayers and taxpayers money.

"The only private sector discipline we’ve witnessed at Hydro One was the desire to push the salaries, bonuses and expense accounts up to the private sector level," Hampton told Eves.

"That is exactly the so-called private sector discipline that the people of Ontario are opposed to."

On the investment side of the decision, one executive, who does not work at a firm that does investment banking, said he would avoid buying shares in a Hydro One still controlled by the Ontario government.

That’s because the ownership structure would create a hybrid company that is subject to the forces of politics, which don’t always mix well with the forces of business.

"These crown corporations only seem to do well if they get out from government control," said Brendan Caldwell, president and chief executive of Caldwell Securities Ltd.

"I don’t know that I would be wild about buying into a company whose board is political appointees and whose controlling shareholder is the Ontario government."

However, Caldwell said the big Bay Street investment dealers, which have been relatively starved for investment banking business like new stock offerings, would likely jump at the chance to underwrite the deal.

"I have absolutely no doubt they would – they’ll be able to sell it.”

The commissions on such a deal could be between 3 per cent and 5 per cent – a substantial amount if the stock offering was worth even half the $5 billion originally envisioned for a full privatization.

On news of Eves’ decision yesterday, Hydro One bonds increased in value as investors viewed them as more of a government backed bond than a corporate bond.

With files from John Spears and Rob Ferguson

Chinta Puxley
Hamilton Spectator
June 13, 2002

 Ontario Premier Ernie Eves bowed to public pressure yesterday and will keep Hydro One in public hands. Eves said the province will either sell some of the utility’s shares, establish a public-private partnership, or set up an income trust to bring "private-sector discipline" to the utility. He said a decision will be made by the next election.

But, unlike a month ago, Eves said the total $5.5 billion sale of Hydro One isn’t an option anymore.

"The government has decided that it is not going to part with control of Hydro One," Eves said as he emerged from a cabinet meeting yesterday.

"We still believe that there are ways to bring private-sector discipline to the corporation without parting with more than 50 per cent of the entity."

The decision kills what would have been the largest public offering of shares in Canadian history. The reversal is also part of a concerted effort that distances Eves from the Mike Harris regime.

"We may have the odd detractor on Bay Street but I believe we have none on Main Street as a result of this decision," Eves told a raucous legislature during question period.

But the compromise doesn’t seem to have satisfied anyone. The opposition says Eves should commit to keeping all of Hydro One in public hands while proponents of the sale say Eves is choosing political expediency over what’s best for the consumer.

Brad Clark, Stoney Creek MPP and the minister of labour, was one of many cabinet ministers who shared constituents’ concerns about the sale with the premier. He said yesterday’s decision shows Eves was listening.

Although the Conservatives recently argued that selling Hydro One was the only way to reduce its ballooning debt and improve infrastructure, Clark said retaining control of the public utility means people will "sleep well at night knowing that we did the right thing.

"We’ll be protecting the public interest . . . because the government, at the end of the day, has control of the grid," Clark said.

But opposition politicians say they didn’t hear anything yesterday guaranteeing the utility will remain in public hands.

The government is still going ahead with legislation allowing it to sell Hydro One. The bill was necessary after a judge ruled in April that current legislation doesn’t give the government the authority to sell the utility.

Dominic Agostino, Liberal MPP for Hamilton East, said when the Conservatives pass the legislation, the utility can still be sold.

"This is about the fourth position Ernie Eves has taken on Hydro One," Agostino said. "Ernie Eves can change his mind when the House isn’t sitting during the summer. Then he can do whatever he wants with Hydro One."

Other opposition politicians said they don’t understand why Eves wants to involve the private sector at all. David Christopherson, NDP MPP for Hamilton West, said the private sector would only want to get involved with Hydro One if they could make a profit.

"Why not have the public make that profit?" he said. "If (the government) sold a significant part to one private entity, they would have a huge influence on the government."

Christopherson scoffed at the notion of "private-sector discipline," saying that mentality caused the recent furor over exorbitant executive salaries and severance packages at the utility.

"As soon as you bring the private sector in, they’re going to want their pound of flesh," he said.

But some say taking the utility out of government hands is the only way to protect consumers. Tom Adams, head of the watchdog group Energy Probe, said governments are much more easily influenced by big-business interests than they are by little consumers.

Having the utility in private hands levels the playing field, Adams said.

"(Eves’) announcement is a long-term threat to the interests of ordinary consumers," Adams said.

"I’m very disappointed but I’m not surprised. It signals that Ontario’s transmission and distribution utility will remain under political control until there is a change in thinking."

With files from Spectator wire services

April Lindgren
Ottawa Citizen
June 13, 2002

 TORONTO — Ontario Premier Ernie Eves killed a key initiative of his predecessor Mike Harris with the announcement yesterday that the Tories would not turn over control of Hydro One to the private sector through a share offering on the stock market.

In a flat rejection of Mr. Harris’s commitment last December to privatize the electricity distribution and transmission company through an initial public offering, Mr. Eves said that having "listened to the people of the province of Ontario, the government has decided that it is not going to part with control of Hydro One."

Mr. Eves told reporters the government believes it can still bring "private-sector discipline to the corporation without parting with more than 50 per cent of the entity."

Three options highlighted by the premier include some form of strategic partnership with a private sector firm, an income trust arrangement, or selling less than 50 per cent of the company shares on the stock market so the government retains control.

"We’ve taken a different position than Mike Harris did," Environment Minister Chris Stockwell told reporters. "I don’t know if I want to use the word ‘wrong,’ but certainly our . . . decision today is different than the one he took."

Mr. Eves and Mr. Stockwell, who have been dithering over the fate of Hydro One ever since a court decision in April put the initial public share offering on hold, insisted that bringing in private-sector partners will improve the performance of the provincially owned enterprise even though the government will remain the principal shareholder.

"It means we are going to have the private sector involved in an ongoing day-to-day basis to put some discipline in place that we couldn’t do as politicians," Mr. Stockwell said.

"We ran up a $38-billion debt with $17 billion in assets. We clearly mismanaged it. We need some discipline out there from the private sector to ensure affordable (electricity) rates, but not huge debt."

Some critics, however, questioned whether the government will be able to resist using its majority-shareholder status to meddle for political reasons in the company’s future.

"What Eves has signalled is that a key piece of Ontario’s power system will remain under political control for the foreseeable future," said Tom Adams, executive director of Energy Probe, an energy sector watchdog group.

Mr. Adams noted that in the past two years, the government meddled twice with Ontario Energy Board rulings that would have boosted the company’s revenues. In one case, he said, the Tories intervened to ensure some major industrial customers would receive transmission service at a discount and on another, the government insisted that rate increases approved by the board be implemented over a longer period.

"Why would investors want to jump in when they would be second fiddle to a controlling government shareholder that has proven it will put short-term political considerations ahead of the well-being of the firm?" Mr. Adams said.

In a further illustration of its willingness to flex its shareholder muscles, the government last week introduced legislation that would allow it to fire Hydro One’s board of directors after members were reluctant to reduce lavish pay and perks for senior company executives.

Just hours after the legislation was presented, the board resigned en masse and was replaced earlier this week by directors much more closely tied to the political process.

Bay Street sources immediately suggested the new board, chaired by Tory insider Glen Wright, lacked autonomy from the provincial government.

Mr. Eves’s announcement yesterday did little to allay those fears. "If they try to do an IPO selling 49 per cent, I wouldn’t be thinking of investing because you are going to have potentially thousands of investors none of whom will be able to influence the board," one Bay Street banker said. "So you have the status quo more or less, which is public ownership of the utility.

"If they want the private sector to put the money in, then they have to make sure they don’t meddle in the affairs of Hydro One."

Mr. Stockwell himself did little to quell such fears when he said it was "possible" the government would intervene again in the future if it felt Hydro One executives were being compensated too generously.

Opposition leader Dalton McGuinty, who has fought the privatization of Hydro One, said the government’s refusal to make a final decision on the utility’s fate has been "very effective in introducing uncertainty and unpredictability in terms of what this government plans to do with the single biggest public asset that we have here in Ontario."

Paul Waldie and Andrew Willis
Globe and Mail
June 13, 2002

 The Ontario government’s plan to privatize only half of Hydro One will be a tough sell on Bay Street because investors are worried about political interference in the new company, investors and investment bankers said yesterday.

"If they provide full freedom to private partners this will work," said one large institutional investor. "If they are not willing to do that, we wouldn’t be interested."

Added an investment banker working on the original IPO: "This whole political mess makes Ontario, and Canada, look like some kind of banana republic. The government can’t seem to make up its mind."

Yesterday Premier Ernie Eves scrapped an initial public offering for Hydro One that could have topped $5-billion and said the government will keep majority ownership of the utility.

He said the government is considering privatizing 49 per cent of the company through an IPO, an income trust or an asset sale.

Some investors are leery about investing in a government-controlled Hydro One, especially given the government’s recent move to fire Hydro One’s board over a dispute about executive compensation. The directors resigned last week and several said the government acted improperly. On Tuesday, Mr. Eves appointed a new 11-member board that includes three former politicians and a political strategist for the Conservatives.

"I don’t imagine, given all the recent history, that [the new proposal] will be all that attractive," Radcliffe Latimer, one of the former directors, said yesterday.

The government is "defeating their own original arguments," said Douglas McCaig, another former director. "They said they were going to pay down [Ontario Hydro’s $38-billion] debt, it was imperative. Now they are backing away from that."

However, Adam Zimmerman, one of Hydro One’s new directors, said privatizing the utility isn’t necessary.

"I have never really understood the strength of this argument for privatization," Mr. Zimmerman said yesterday. "If I were a politician, I would be pretty wary of this, because you are turning a public asset loose on the general public."

A veteran financier working with Hydro One said the government’s continued involvement will weigh on the price of either common stock or an income trust, and may cost it institutional shareholders. But he added: "At the end of the day, this utility gets sold on its dividend yield, and if that’s in place, either a trust or a stock will sell."

Leo de Bever, senior vice-president of the Ontario Teachers Pension Plan Board, said the idea of privatizing half of the utility has been discussed before.

He added that contrary to published reports, the $70-billion pension fund is not wedded to an income trust for the utility, but wants to see what the government proposes.

Opponents of the privatization said Mr. Eves’s announcement is a big boost, and they plan to continue fighting any privatization.

"The people of Ontario are going to feel that we are on a roll," said Judy Darcy, head of the Canadian Union of Public Employees. The union won a legal challenge to the Hydro One privatization in April that initially derailed the IPO.

Tom Adams, who heads Energy Probe, an environmental group that supports the IPO, said the announcement was "terrible."

"It locks us into a politicized Hydro One until new thinking comes along," Mr. Adams said yesterday. "This is short-term political expediency."

Richard Brennan and John Spears
Toronto Star
July 4, 2002

 Many Ontario businesses will be hit with an extra charge for electricity that will effectively double the posted market price for power during peak demand periods, says the agency that runs Ontario’s new electricity market.

The information came to light as Ontario set a new record for electricity demand yesterday, brought on by the summer heat.

To cope with the heavy demand, Ontario had to import 10 per cent of its electricity needs at prices up to 50 times the price consumers were accustomed to paying under the old regulated market system.

But the high price of the imported power is not reflected in the market prices posted by the Independent Electricity Market Operator (IMO), which runs the province’s power market.

Instead, it will be factored in and added to the invoices businesses receive in their regular billing period. The IMO says the extra charge for peak periods Tuesday amounts to 8 cents a kilowatt hour — or roughly double the average price for the day.

Since the demand for power was even higher yesterday, it’s likely extra charges will result for yesterday’s power use.

Businesses that have fixed price contracts with suppliers won’t pay the extra fee.

Householders, who are billed under a different system, may have a cushion against high-priced imports built into their current rate. But the IMO says those rates "will be reviewed as the market unfolds."

Yesterday’s disclosure that posted prices might not be what they seem even caught experts off guard.

Energy consultant Jan Carr of Barker, Dunn and Rossi sat on the advisory committee that was instrumental in establishing the new electricity market. Carr said he assumed prices posted hourly on the IMO Web site reflected the market.

"What is a surprise to me is that what they show on the screen is apparently not relevant," Carr said.

He compared it to seeing a share price quoted on the Toronto Stock Exchange, then discovering there were additional charges added to the price.

Carr said it’s reasonable to factor in the cost of imported power – and said that importing 10 per cent of the supply during periods of peak demand is probably sensible, and in line with past practise.

But he said he’s surprised that the price with imports factored in isn’t easily accessible.

The IMO prepares price projections a day ahead of time, then plots actual prices established as buyers and sellers trade power on its marketplace.

Observers have wondered why the price projections were showing sky-high prices, in the $2 a kilowatt hour range on Tuesday, for example, while the actual price averaged just 8.4 cents.

Yesterday, the IMO explained that suppliers outside the province are bidding for and receiving prices close to the projected price.

Electricity generators inside Ontario bid according to different rules, and are getting the much lower price posted as the market price. That’s the rate paid by electricity customers who haven’t signed fixed-price contracts.

What wasn’t clear until yesterday is that business customers will get hit with a surcharge later on for the high-priced imports.

IMO spokesman Ted Gruetzner said householders are already paying a charge of 0.62 cents a kilowatt hour, which will be used in part to cover the cost of importing high-priced power during peak periods.

But that built-in fee "will be reviewed as the market unfolds," according to the IMO statement on the IMO Web site at http://www.iemo.com. Click on "Understanding the role of import prices during high demand periods." Be warned, it’s not easy to read.

The surprisingly low posted prices of electricity, despite soaring demand, has puzzled some players over the past few days.

The IMO and energy minister Chris Stockwell have urged consumers to cut back on power use, warning the system is stressed and could be subject to brownouts.

But the relatively low posted prices haven’t punished those who ignored their advice.

For example, the energy ministry estimates a typical central air conditioner uses about 50 kilowatt hours of power a day. When the price jumped to 8.4 cents – Tuesday’s average – the added cost of keeping cool was just $2 per day higher than it was a year ago, when the energy price was 4.3 cents a kilowatt hour.

Tom Adams, executive director of Energy Probe, said the low posted prices don’t do enough to discourage people from high energy use.

"There are some questions about why the price is so low when we are clearly in some danger" of brownouts or blackouts, he said.

"The price should be out there disciplining people," he said in an interview Tuesday. "But leaving the air conditioning on appears to be a relatively cheap option. That’s not right."

Yesterday’s demand for power in Ontario hit 25,318 megawatts, erasing the old standard of 25,269 megawatts set last August. The IMO issued a blunt statement acknowledging that for much of Tuesday "the extreme heat caused Ontario electricity demand to exceed the supply capability of the generation available within Ontario."

Stockwell couldn’t be reached for comment, but press secretary Diana Arajs said there was "no cause for alarm" with the level of imports. "It was the highest single day of consumption in the history of the province, so when we are in a situation like that we would import power from outside the province," she said. "It’s not uncommon."

Robert Benzie and Paul Vieira
National Post
July 20, 2002

 Eleanor Clitheroe [left] was fired as president and chief executive of Hydro One Inc. yesterday for alleged abuse of executive perks that included spending $330,000 of company funds on limousines for her nanny and children, according to Glen Wright, the utility’s interim chairman.

"You have a governance culture here that has spun out of control," said Mr. Wright, who took over the electricity grid’s board June 11. The former board members had resigned en-masse before the Conservative government could fire them for refusing to reduce the compensation of Ms. Clitheroe and other Hydro One executives.

"When I arrived here I thought that this would be a challenge to bring into alignment people’s view of correct compensation.

I did not expect to be dealing with these types of issues," he said.

"She was fired for . . . [a] pattern of behaviour and activity in the use of Hydro One expense accounts and assets and other things. Enough is enough."

In a prepared statement at a 90-second news conference, an angry Ms. Clitheroe, who is ineligible for her $6-million severance package because she was dismissed for cause but will still receive an annual pension of $150,000, denied wrongdoing and said she is suing Hydro One.

"I conducted myself in an honest and transparent fashion, a fashion that fully respected all of the agreements I had with the company’s board of directors," she said. Ms. Clitheroe refused to answer questions at the brief press conference.

"Every single benefit I received from Hydro One was agreed to with the full knowledge of either the board’s chairman and human resources committee. To suggest otherwise is simply not true. That’s why I am so disappointed in the actions taken by the interim board," said Ms. Clitheroe, 47. "I have asked my lawyers to begin the process of clearing my name."

The former president last year earned $2.18-million ($750,000 base salary, an $806,250 bonus and $625,930 in other compensation, including $172,484 vacation pay).

Mr. Wright said he was unhappy to learn that in addition to her $174,644 annual car allowance, Ms. Clitheroe received a $40,000 "executive car allowance" as well as "a limousine service and the total bill for three years was $330,000, including 1,100 trips for her family, her nanny and her children."

As well, Hydro One spent hundreds of thousands of dollars annually for Ms. Clitheroe’s memberships at clubs, including the Royal Canadian Yacht Club, the Granite Club, the Rosedale Golf Club, the Toronto Club, the North York Hunt Club, the Caledon Ski Club and Osler Bluffs Ski Club.

Mr. Wright alleged she spent $40,000 of Hydro funds to renovate her home between 1999 and 2001 but did not repay the money until last month. In an unusual arrangement, contractors used by Hydro One for corporate work were retained for Ms. Clitheroe’s personal use. He further alleged she had used the corporate credit card for personal charges, which is contrary to company policy.

Ms. Clitheroe’s dismissal comes as the province is looking to sell a minority stake of up to 49% of the utility to a private-sector partner.

No replacement was named for Ms. Clitheroe, although Mr. Wright said he would share the duties with Tom Parkinson, former president of Hydro One Networks Inc., who was promoted yesterday to be the utility’s president and chief operating officer. The utility will not not conduct a search for a new CEO until a minority partner is found.

A spokeswoman for Chris Stockwell, the Minister of Environment and Energy, said the government endorsed Mr. Wright’s decision. "We believe the board is acting in the best interest of the shareholder," said Diana Arajs, referring to the Ontario government.

But Michael Bryant, the Liberal energy and environment critic, said the Conservatives are to blame for the debacle.

"The public has got to ask themselves a question: Who was the genius who hired her in the first place? Answer: Mike Harris, Ernie Eves and the Tory government," said Mr. Bryant.

Howard Hampton, the NDP leader, said the allegations against Ms. Clitheroe illustrate "a culture of greed" and are proof Hydro One should remain in public hands.

Tom Adams, executive director of Energy Probe, said the firing is bad news for Ontario’s electricity market: "The company was proceeding with its activities as if the purpose of it was the aggrandizement of the senior executive," he said. "It’s a disgraceful performance. It’s harmful to the overall power system and it’s a distraction for the needs that the transmission system has. We’ve got transformers blowing up and all kinds of things we have to do to strengthen our power system and clearly the former CEO was not up to it – her intentions were directed somewhere else."