- Mark Poweska was named Hydro One’s president and CEO on March 28
- Mr. Poweska will start in early May. His appointment follows a protracted battle between the utility and Province of Ontario over executive compensation
How Hydro One went public
Ontario once had full ownership of Hydro One, a utility involved in electricity transmission and distribution in the province. The previous Liberal government, under former premier Kathleen Wynne, decided to sell the majority of Hydro One to public investors in order to raise money for infrastructure investments. To start, 15 per cent of the utility was sold via an initial public offering. The IPO was priced at $20.50 a share, and Hydro One started trading in November, 2015. It was the largest IPO on Canadian markets since 2000, according to Bloomberg.
The government raised about $1.8-billion from the IPO. Less than two years later, it raised an additional $2.8-billion in a secondary share offering, and kept selling until it only had a minority stake. The government’s initial plan was to part ways with 60 per cent of the utility, though it has offloaded roughly 53 per cent to date.
The Ontario Liberals came under fire for the plan, largely by the provincial NDP, who criticized the Liberals for privatizing a government asset. But the Progressive Conservative Party of Ontario also piled on, even though they initially tried to take Hydro One public in 2002.
Rising hydro rates
Ontario’s electricity rates have sky-rocketed.
Over the decade that ended in November, 2016, off-peak electricity rates surged by 156 per cent, and both mid-peak and on-peak rates climbed by 86 per cent. Ontario’s rate of inflation was considerably smaller over the same span.
The increases are largely tied to policy decisions made by the former Liberal government – notably, upgrading aging infrastructure and signing fixed 20-year deals with private companies to build and run new power plants. The province has a large surplus of generating capacity, but because of the long-term contracts, Ontarians are forced to pay for electricity they don’t use.
In turn, hydro rates became a signature political issue in the province. A poll from Nanos Research in November, 2016, found that voters named electricity as their top issue – more than health care, the economy and high taxes.
The Liberals unveiled their Fair Hydro Plan in 2017, reducing electricity bills by about 25 per cent. To facilitate this plan, the government had to take on debt, but the impact of that borrowing was obfuscated in the province’s public accounts, helping the Liberals report a balanced budget as the 2018 election approached. Ontario Auditor-General Bonnie Lysyk slammed the government’s accounting methods as “bogus.”
Ford vs. Hydro One
Seizing on public anger, Ontario PC Leader Doug Ford took direct aim at Hydro One during the 2018 provincial election campaign, linking the company to rising electricity rates. (Hydro One, one of several utilities that delivers electricity to Ontarians, does not set electricity rates; that responsibility falls to the Ontario Energy Board.) He dubbed then-CEO Mayo Schmidt the “$6-million man,” owing to his annual compensation, and vowed to turf the company’s leader and the board upon taking office. Mr. Ford also promised to lower hydro prices by 12 per cent.
As Mr. Ford attacked Hydro One, the company defended its pay practices. In a statement, it said Mr. Schmidt’s compensation costs each of its customers 2 cents on their monthly bills.
Comments from Hydro One also suggested it expected the political strife to die down.
“Our view would be once we clear [the election] and the hydro or electricity becomes less of let’s say a lightning rod, that things will smooth out, but we’re not losing our focus as an organization in the meantime,” Mr. Schmidt said on a conference call with investors in May, 2018.
Mr. Ford and his Ontario PCs won a resounding majority in the June election. But that did not take the spotlight off Hydro One.
Following Mr. Ford’s successful bid for office, Mr. Schmidt retired in July and Hydro One’s board of directors resigned en masse, bowing to political pressure.
“I’m happy to say today, the CEO and the board of Hydro One, they’re gone, they’re done. We’re going to turn a new corner,” Mr. Ford said shortly after the exits were announced. “I’m proud to announce . . . that the severance for the CEO was zero, absolutely zero.”
However, Mr. Schmidt did not walk away empty-handed. The Globe reported in July that in addition to a $400,000 lump-sum payment in lieu of post-retirement benefits, Mr. Schmidt was entitled to cash payments of about $9-million for his stock, bonuses and other compensation. Likewise, the 14 departing directors would be paid about $4.9-million for their stock holdings.
A new board was appointed in August, 2018. Four of the 10 appointments came from the provincial government, with the remainder from the utility’s institutional investors.
Looking to transform Hydro One into a major North American utility, Mr. Schmidt struck a $4.4-billion deal to acquire U.S.-based Avista Corp. in July, 2017.
Avista sells electricity and gas to hundreds of thousands of customers in Washington, Oregon, Idaho, Montana and Alaska. Accordingly, the deal needed approval from state regulators.
That’s where the deal ran into trouble.
The Washington Utilities and Transportation Commission was first to turn down the takeover in December, 2018. In explaining its decision, it said: “Provincial government interference in Hydro One’s affairs, the risk of which has been shown by events to be significant, could result in direct or indirect harm to Avista if it were acquired by Hydro One.”
The Idaho Public Utilities Commission nixed the deal in January, echoing Washington’s concerns: “It is abundantly clear that the province does not have to own 51 per cent of Hydro One in order to effectively control the company. Based on the recent events surrounding the province’s intrusions into Hydro One corporate affairs, any other conclusion would be unreasonable and ignorant in light of the uncontested facts and evidence.”
Shortly after Idaho’s move, Hydro One called off its takeover efforts. Its decision came with a US$103-million termination fee, payable to Avista.
Hydro One squabbled with the provincial government over CEO compensation.
In February, Hydro One’s board proposed to slash CEO pay by nearly 60 per cent and cut directors’ compensation by 47 per cent. Under the plan, the company would target $2.475-million in total annual CEO compensation, going as high as $2.775-million if certain performance metrics are met. The board insisted such compensation is necessary to attract a top-quality executive.
The government responded by saying it would impose a $1.5-million cap. Its directive also reduced compensation paid to board members and senior executives.
Hydro One announced on March 8 a “revised” compensation plan that followed the government’s directive.
As part of its Hydro One Accountability Act, passed last August, the provincial government must approve the utility’s compensation plan.
“From a broader perspective, restricted compensation could be a roadblock to hiring and retaining experienced senior executives, which is in turn a headwind to the development of a new growth strategy for Hydro One going forward,” wrote Jeremy Rosenfield, analyst at iA Financial Group in Montreal, in a research note.
Here is how much CEOs are paid at some peer companies, as Hydro One recently outlined:
The new CEO
Hydro One announced on March 28 that Mark Poweska would become its next president and CEO.
Mr. Poweska is currently executive vice-president, operations, at BC Hydro. He’s spent about 25 years at the utility, Hydro One said in a press release.
“Building on 100 years of proudly powering homes and businesses in Ontario, we believe Mark is the right person to focus on what matters most to our customers, employees, investors and all stakeholders,” said Tom Woods, chair of Hydro One’s board, in the release. “Mark’s proven record in building a strong safety culture, exceeding customer expectations and improving operational performance will help to ensure that Hydro One is strong now and into the future.”
Mr. Poweska will join Hydro One in early May.
“My immediate priorities include getting to know the Hydro One team, establishing a positive working relationship with all of our key stakeholders, Indigenous communities and the Government of Ontario, and working to earn the ongoing trust and confidence of the investment community," Mr. Poweska said in the release.
Hydro One’s shares have been in a rough patch for some time, partly because of the political turmoil encircling the company.
Several equity analysts downgraded the stock after the announcement of Mr. Schmidt’s retirement and the board’s resignation.
“While the transition will occur through a more orderly process than we had feared, it indicates the government is willing to meddle. Just as worrisome is the possibility that the government meddles with the company’s rates [what it charges consumers for electricity] in some form, potentially impacting earnings,” Robert Catellier, an analyst at CIBC World Markets, said in a note.
As of Feb. 26, analysts have a 12-month target price of $20.71 for Hydro One shares, according to Bloomberg data.
With files from Globe staff