Ontario Liberal Government to Privatize Hydro One

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Hydro One Privatization

Ontario Liberal Government to privatize Hydro One resulting in higher rates for Ontarians.

The Ontario Liberal government, taking the advice of a council led by former TD Bank head Ed Clark, is examining at least two privatization options for Hydro One.

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 unions

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.




13 thoughts on “Ontario Liberal Government to Privatize Hydro One

  1. James Carey

    This should not be allowed . If push comes to shove then it should be a voted issue by the public . It has already be proven that deregulating cause higher costs. Private sectors work strictly for profit. Eh. Gasoline prices. Mergers of form counties and towns, cities that were forced to merged they predicted it would lower cost to the public, but in fact , it has grossly increased it ! It’s another poorly thought out decision by this provincial government and its so call retired T D bank adviser ( who oviously knows nothing other than most likely taken bribes to recommend it by a wealthy company that wants to bennifits from it ).
    STOP SCREWING UP THIS PROVINCE!

    Reply
  2. Keith

    Yes, the sooner the better. Private operated for profit business is for more competent than anything government can do. They will get rid of all the dead wood useless employees and all the high paid managers that do nothing.

    Reply
    1. Anonymous

      Corporate CEOs make millions in the private sector. I don’t know any government managers or even directors or ministers that make millions.
      Government runs things more fairly and more cost efficient. Unfortunately, many ministries are under staffed so that leads to delays, and the perception of inefficiency.

      Reply
    2. John Vincet

      You obviously have no idea what you’re talking about. I assume you must be dead wood where you work.
      Why would you think privatisation would be any better? Private is all about profits to the share holders and the customers be damned. You will have no control over its service or rates ( and don’t think they’re going to go down). Seems to me every one thought that would happen at the chop up of Ontario Hydro in the ninties. Where’d that get you?
      Its time for the public to realize, the provincial government in power is the group reasponsible for this debacle. They are the bunch who micro manage your deliver and production system, no one else. That is not going to change by going private. Wynne has already said so. Get with the program and learn how it really works.
      Further example of privatisation : 407..that got cheaper by privatising didn’t it?

      Reply
      1. Mark

        Do people forget so quickly that it was the PC’s specifically Harris with his “Common Sense Repulsion” that force fed the privatization BS to all….especially the break up of Ontario Hydro!!!!
        The privatization of 407 again Mike Harris. Unfortunately Ontarian’s seem to have very short memory. What I hold the Liberals accountable is not reversing all the wrong’s Mr Harris and his cronies did……..and now they all work for Harper at the federal level. They crewed the province…..now they are working on screwing the country!!!!

        Time for the whole country to WAKE UP!!!!!!!!!!!

        Reply
  3. Michael Hall

    Has it occurred to anyone that maybe Katherine Wynne’s private agenda is to run this province into the ground and make life tougher for its citizens? Why else would she screw up everything she comes in contact with? Hell, even adolescence school children are not exempt from her gross incompetence. She’s going to screw them up with her sex education program. This woman will not stop until she is run out of the province.

    Reply
  4. Anonymous

    Mr . Hall is right Whynne the poo has to go. She is poison to Ontario . Nothing but a bunch of Liberal crooks

    Reply
  5. Kim L

    Just one question. Why is Saskatchewan’s hydro rates almost 50% lower when the do not generate as much hydro as Ontario? In fact Ontario exports hydro at a loss. Why/

    Reply
    1. John Vincet

      You probably do’t have vast amounts ( and growing amounts) of wind and solar that is extrememly heavily subsidised with power we don’t need or want that we are obligated to take now matter what. This leads us to paying our neighbouring cusomers to take it off our hands at huge amounts because it is non dispatchable unreliable power. Because of these traits, we have to back itup with numerous gas fired power plants.
      that’s it for a quick start.

      Reply
  6. John Q

    First off: private power was determined by the Harrisites. They divided the old public utility (Ontario Hydro) into Hydro One (delivery),and OPG (generating) ; doubling the executive class of each (and matching private sector pay), while reducing union employees through attrition and increasing outsourced contract work (and in-sourced foreign companies). They sold the Bruce nuclear facility to a private buyer to help balance the provincial budget, while guaranteeing a higher per/kw rate than the public generators charge AND guaranteeing the purchase 100% of the energy produced. (Unlike other ways of generating energy, nuclear must run full tilt: it’s on or it’s off. It can’t run at half. ) Factoring this cost to consumers across the entire grid of generators created a modest increase. But then industry failed. Stelco and GM stand out as massive energy consumers that are now gone, but as the base of buyers shrinks, and the energy available exceeds demand (increasing costs again with ‘dumping’ fees), the cost is being carried by fewer and fewer, resulting in much higher power bills. (Small scale power generators, BTW, do not have the 100% sale guarantee. The subsidies are largely rebated on the owners power bills but do reduce the overall number of paying customers.)
    So.. why don’t we just stop the madness? Because it’s an iron-clad contract. If we end the contract, we still have to pay the private power generator what it would have earned otherwise. ( Remember how excited every got about the cancelled gas plants?)
    Like many Conservative schemes, there was no worst-case-scenario provisions. Or maybe they figured the worst-case wouldn’t be their problem anyway. (Kind of like the great job they’ve done federally with the petro-economy.)
    Moral of the story: this is a bad ride regardless of what political party is running the show. There is no easy fix and the best fix is to keep on dispersing power generation to smaller facilities; ideally making each customer self-sufficient. Get demand for privately owned nuclear power to zero and they’ll have to turn it off.

    Reply
  7. Fraser bouke

    private profits public pays, this idea will eventually result in foreign companies owning this in end and be subjected to those nasty trade deals that if any unfriendly environmental issue comes up that interferes with their profits our children will be paying for this

    Reply
  8. Jason

    you better do something about the ridiculous hydro one rates! you politicians are the ONLY share holders in it, and the rates are stupid! i just moved into my home in country and my first bill is for 12 days..it is OVER $300.00!! you are RIPPING off the people and it HAS to STOP!

    Reply

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