Welcome to the new Hydro One Ltd., a massive utility soon to be run by a second-rate CEO and a board of directors that is under the thumb of the Ontario government.
That’s the future of the province’s electrical transmission network, as Premier Doug Ford’s election promise to replace the Hydro One board triggered the resignation of all 14 directors and the “retirement” of chief executive Mayo Schmidt on Wednesday.
Welcome to a province where politicians cannot resist tinkering in partly-privatized companies, in a country that has an extraordinarily difficult time getting pipelines and other critical energy infrastructure built.
What did Premier Ford just accomplish at Hydro One? He threw a wrench into the workings of a utility with a $12-billion market capitalization, a strong board and a proven CEO in Mr. Schmidt, who turned the nearly-bankrupt Saskatchewan Wheat Pool into a successful global agribusiness before joining the electrical utility.
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You can accuse Hydro One directors of being tone-deaf when it comes to compensation – the board gave themselves and the CEO a hefty raise in the run-up to an Ontario election, pay hikes they should have known would generate political sparks. But otherwise, this was an experienced leadership team.
So the Premier has, in essence, pushed out the board and the CEO. Who will he recruit to replace them? He’s likely to get second-tier talent.
The new directors will have to be willing to bow to the wishes of a minority shareholder in Queen’s Park. After taking the company public in 2015, the Ontario government owns only 47 per cent of Hydro One. That means a public company carrying power to Canada’s industrial heartland may wind up stuffed with political hacks, picked for their Conservative pedigrees rather than their business skills.
The next Hydro One boss gets the job only if he or she is willing to work for significantly less than market rates.
At $6.2-million annually, Mr. Schmidt made far more last year than most voters in Ontario. At a time when provincial electricity rates were soaring, Mr. Ford turned Hydro One’s ”$6-million man” into a political punch line that he rode right into the Premier’s office. It was clever politics.
Lost in the election campaign was the fact that executive pay at Hydro One has next-to-no impact on electricity rates. The price of power reflects years of policy decisions about nuclear and renewable generation facilities.
There was also scant attention paid to compensation for CEOs at comparable Canadian utilities, such as Emera Inc. and Fortis Inc. They made considerably more than Mr. Schmidt last year.
Hydro One shareholders understood that Mr. Schmidt’s compensation was a non-issue. At the annual meeting this spring, after the Ontario government decided to abstain from voting in Hydro One’s annual say-on-pay referendum, the rest of the utility’s owners voted 92 per cent in favour of the company’s executive-compensation plan.
In a move that speaks to his character, or a wish to avoid further mud-slinging from Premier, Mr. Schmidt departs Hydro One with a $400,000 lump-sum payment. He chose to forgo a severance payment that could have run to more than $10-million, although it appears he does get to keep millions of dollars in restricted shares.
At no point in the Ontario election campaign, or since taking office, has Premier Ford articulated a coherent strategy for lowering electricity rates in Ontario. His predecessors − of all political stripes − have consistently bungled the energy portfolio, then opted to kick the problem down the road by borrowing money and artificially lowering the cost of power for consumers.
A Hydro One board stuffed with Premier Ford’s apologists and a CEO plucked from the bargain bin are not going to solve Ontario’s woes, nor drive better performance at the utility. Institutional investors have already figured this out – Hydro One shares started selling off when the political uncertainty set in.
The people of Ontario, the folks that Mr. Ford says drive his decisions, are going to realize that new, weaker leaders at Hydro One are no cure for what ails the province. They’ll know it because their monthly electricity bills are going to remain stubbornly high until political leaders take real action on problems that were decades in the making.