April 23 Ontario Budget to Feature Majority Hydro One Privatization

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hydro One ontario budget

Taking the advice of former TD Bank head Ed Clark, Ontario’s Liberal government will sell off government-owned Hydro One in two separate initiatives.

Taking the advice of former TD Bank head Ed Clark and other Bay St. interests, Ontario’s Liberal government will sell off Hydro One in two separate initiatives.

The details were announced yesterday and will be further fleshed out in upcoming legislation.

Hydro One is the government-owned transmission company responsible for operating the Ontario electricity grid. It also operates a separate distribution business – the local wires that connect hydro users to the grid.

In the first privatization initiative, the government will sell off 60 per cent of the province’s $15-billion Hydro One transmission utility.

In the second initiative, Hydro One’s Brampton distribution operations will be sold off to neighbouring local utilities.

The sell-off will start with an  initial public offering of 15 per cent on the stock market. Over time, the government will sell off 60 per cent of the company. Private shareholders would be limited to 10 per cent of stock apiece, allowing the government to keep the largest single share.

With a valuation of up to $15-billion, selling 60 per cent of Hydro One would raise $9-billion, $5 billion of which would be used to pay off internal Hydro One debt and $4-billion of which would be put into the Trillium Trust for transit.

The Trillium Trust is a dedicated provincial fund created to hold the proceeds from the sale of government assets such as Hydro One.

Canada’s banks, public pension funds, and private equity firms are very interested in purchasing chunks of Hydro One and are believed to be the major drivers of the 60% sell-off.

David Denison, former president and CEO of the Canada Pension Plan Investment Board – the entity that oversees the investment of hundreds of billions of dollars that will fund future CPP benefits – is taking over as head of Hydro One and will oversee the privatization.

Hydro One had a net income last year of $749 million on revenues of $6.5 billion, resulting in $287-million for the provincial treasury.

The government also says a new Hydro One ombudsman will be created and the Ontario Energy Board’s ability to set and hold electricity rates will be strengthened.

Bay St. flexes its muscle and wins a 60% sell-off

A parade of Bay Street players over the past year has urged the government to sell off a majority interest in the Hydro One transmission assets. A much more politically palatable minority sell-off appeared to be on the table but private financial interests are notoriously hostile to taking a minority stake in a privatization initiative fearing continued government meddling.

These powerful financial interests appear to have gotten their way with the 60% sell-off to the private sector.

And while Premier Wynne continually alludes to the need to use the proceeds of the 60% sale to fund transit, what neither the government nor the Bay St. players will mention publicly is that for Bay St. underwriters, a Hydro One IPO will represent a chance to earn tens of millions of dollars in fees by selling a piece of the huge hydro asset.

Hydro One Brampton to be sold to neighbouring utilities

The second  part of the Hydro One privatization will see Hydro One Brampton sold.

GTA utilities Enersource Corp., PowerStream Inc., and Horizon Utilities Corp. are in talks with the provincial government  to merge with Hydro One Brampton creating a huge GTA hydro distribution company. The government will receive either $607-million in cash or a 17 per cent stake in the new company.

Enersource is 90 per cent owned by the city of Mississauga while PowerStream is jointly owned by the municipalities of Barrie, Markham and Vaughan.

Horizon Utilities Corp.is owned  by Horizon Holdings Inc., which is jointly owned by Hamilton Utilities Corporation and St. Catharines Hydro Inc. The latter two companies are respectively owned by the City of Hamilton and the City of St. Catharines.

Local utility association proposal rejected

In a separate proposal, the Electricity Distributors Association (EDA), the association representing more than 70 local electricity distribution companies in Ontario, had proposed to hive off the rest of Hydro One’s distribution business through a purchase by its municipally-owned members.

The government appears to have rejected this proposal.

Ontario Energy Minister Bob Chiarelli, in a letter to the EDA in late February, said the idea “does not appear to completely align with the objectives of the province.” Mr. Chiarelli wrote in the letter that the proposal does not “ensure maximum return for the government or minimize potential impacts on customers’ electricity rates.”

Ontario’s electricity distribution industry is a patchwork consisting of some 70 mostly municipally-owned distribution companies plus Hydro One. Hydro One’s distribution business serves 1.4 million mostly rural customers.

The argument that the system is inefficient and in need of consolidation is rooted in the fact that dozens of these local distributors serve less than 20,000 customers each. Critics of the present system argue that these smaller utilities lack the scale to invest in modernizing the infrastructure.

In 2012, the Ontario Distribution Sector Review Panel, headed by former Liberal Energy Minister Murray Elston, proposed that 73 of Ontario’s LDCs should be consolidated by the provincial government into 8 to 12 regional entities. These larger regional entities, they argued, would be better suited to lowering costs and attracting private sector capital.  The report suggested a net benefit of $1.2 billion in present terms over the first 10 years of such a consolidation.

That report was never acted upon.

The Clark report does suggest that the government will support efforts by Ontario’s local LDCs to consolidate, and the government appears to be willing to implement  time-limited changes to transfer tax rules to encourage the consolidation process.

Unions and NDP to oppose

The Ontario NDP and unions such as CUPE will vigorously oppose any form of Hydro One privatization.

However, unions directly impacted by the privatization, such as the Energy Professionals Union and the Powerworkers Union, while clearly preferring the status quo, may put most of their resources into opposing the local utility sell-off. This is because an IPO of the larger company would likely only have a very long-term impact on the existing workforce while the distribution assets sell off could result in considerable labour restructuring and union jurisdictional disputes shorter-term.

 

One thought on “April 23 Ontario Budget to Feature Majority Hydro One Privatization

  1. Doug

    Ya right Kathleen is going to strengthen the Ontario Energy Board to protect the consumer. People wake up we had the one of the lowest rates in the world and since this Liberal Government has taken over in 2003 we now have the most expensive. She will say that the system was in disrepair from the Conservative Government but that is an outright LIE, she and Dalton McGinty should be held for Breach of Duty to the Taxpayer. Also the Rules and Regulations stipulate that any profit derived from the sell off is to go directly to the Debt of the Public Utility not Infastructure which is her Plan.

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