Hydro One is the government-owned transmission company responsible for operating the Ontario electricity grid. However, it also operates a large distribution business – the local wires that connect hydro users to the grid.
The first privatization option, unveiled by Mr. Clark last fall, would see Hydro One’s local distribution networks sold while its transmission business remains under provincial government ownership. This option is thought to offer the best opportunity for the long sought after consolidation of Ontario’s fragmented distribution sector.
The second privatization option would keep Hydro One intact and sell an equity stake on the stock market, starting with a 10-to 15-per-cent initial public offering (IPO).
However, what the Liberal government doesn’t want to talk about is that both options will likely result in higher hydro rates for Ontario electricity users already paying the highest rates in the country.
Here are the key players in a deal that could represent the biggest shake-up in Ontario’s electricity sector since former premier Mike Harris de-regulated the sector and broke up the old Ontario Hydro.
Option 1: The local utility option
Several locally-owned distribution companies along with the association representing these and other local electricity utilities, are interested in taking part in the privatization if the province is willing to separate Hydro One’s distribution business from the transmission business.
The Electricity Distributors Association (EDA), the association representing more than 70 local electricity distribution companies in Ontario, is proposing to hive off Hydro One’s distribution business through a purchase by its municipally-owned members (e.g. Toronto Hydro). This proposal would leave Hydro One’s transmission assets with the Ontario government.
However, Ontario Energy Minister Bob Chiarelli, in a recent 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.”
Published reports also indicate that two of the largest local distribution companies in the province – Enersource and PowerStream – are interested in distributor Brampton Hydro One, a wholly owned subsidiary of Hydro One. Mr. Clark recommended selling off Brampton Hydro One last fall.
Enersource is 90 per cent owned by the city of Mississauga while PowerStream is jointly owned by the municipalities of Barrie, Markham and Vaughan.
The OMERS pension fund also appears to be involved in this option. OMERS manages the pensions of 450,000 Ontario municipal employees and retirees. It holds $72-billion in assets, including 10 per cent of Enersource and majority control of Bruce Power nuclear, through its Borealis arm.
Insiders suggest that the two utilities could be looking at a deal that would merge Enersource, PowerStream and Brampton Hydro One – possibly with involvement from OMERS – to establish an electricity utility with 720,000 customers covering Toronto’s northern and western suburbs.
In his interim report last fall, Mr. Clark encouraged this sort of electricity distribution consolidation, something that would offer economies of scale and other efficiencies, as well as bringing more private capital into the largely publicly-owned sector.
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 said, it is unclear why a simple sell-off of Hydro One’s distribution assets to local utilities would result in existing utilities consolidating amongst themselves. And without a consolidation resulting in a significant reduction in the number of local utilities, there will be little in the way of savings and a likelihood that rates will go up.
Option 2: The Bay St. IPO option
With an estimated value between $15-billion and $16-billion, Hydro One is an attractive target for a partial privatization – the Bay St., IPO option.
A parade of Bay Street investment bankers over the past year has told the government that a 10-15% Hydro One IPO could raise upward of $1-billion for the government.
But what neither the government nor the Bay St. players will mention publicly is that for Bay St. underwriters, a Hydro One IPO would represent a chance to earn tens of millions of dollars in fees by selling a piece of this huge infrastructure asset.
The possible fly in the ointment for the IPO option? The pension obligations of hydro workers.
“The pension plan has significant challenges. It is expensive and generous [and] is not sustainable for both the employees and the employer”, said former Ontario Teachers’ Pension Plan Board CEO Jim Leech, who led a review of Hydro pensions in Ontario last year.
One senior Bay Street source cautioned that these pension obligations, combined with the fact that the government is looking to sell only a small stake in the IPO, could mean the province does not raise as much money as it would like. Many investors, the source said, would be wary of buying into a company still controlled by government.
The Ontario NDP and unions such as CUPE are likely to loudly 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 only go all out in opposition to the local utility option. This is because an IPO of only 10-15% would likely not have a huge impact on the existing workforce while the local utility option could result in considerable labour restructuring and union jurisdictional disputes.
The Liberal government has yet to decide what form the Hydro One privatization will take. The final recommendation will be brought to cabinet in the coming weeks and the government is expected to unveil the result when it tables its next budget – likely in early May.