The mandate Ontario's Liberal government handed former TD Bank chief Ed Clark was flawed from the outset. Selling off prized electricity assets to pay for transit projects smacked more of a cash grab than a considered approach to maximizing value and making sound energy policy.
In the end, Mr. Clark's panel recommended last fall that Ontario maintain full ownership of Hydro One's transmission assets, made up of 30,000 kilometres of high-voltage lines across the province, and privatize the utility's distribution arm, which serves 1.4 million Ontarians. "There is far less reason to regard distribution as a core strategic asset than transmission," the panel said.
As The Globe and Mail revealed last week, however, Premier Kathleen Wynne's government is now thinking of both selling up to 60 per cent of the transmission business to investors and privatizing the distribution arm in order to spur a sector-wide consolidation among the spate of "local distribution companies" that interface with electricity customers across the province.
Both are interesting ideas. But the devil is in the details. And when it comes to Ontario governments meddling in the electricity sector, the details always seem to ruin everything.
On what grounds can the provincial government justify using proceeds from selling electricity assets to fund transit? Ontario consumers have borne above-average, escalating electricity rates for years because Hydro One and Ontario Power Generation have unmanageable cost structures. About 11,500 employees at the two Crown-owned companies, 75 per cent of their work forces, earned more than $100,000 in 2013. Name another business with such lopsided labour costs.
About 90 per cent of the workers at both companies are unionized. The Clark panel tiptoed around this issue, no doubt on instructions from the government not to antagonize a critical political constituency. The panel's review of labour costs, it said, was "not intended as a criticism of the collective bargaining process." Nevertheless, it found that Hydro One's distribution business has a labour cost structure "well above" that of other public utilities.
"Because these costs are passed on to ratepayers, the rates paid by those customers served by Hydro One are higher than rates charged by other [publicly owned distribution] utilities," the Clark report concluded. "[T]he result of comparatively higher labour costs and underperforming business operations may be detrimental to future growth and performance."
As a result, the aim of selling off the distribution business should not mainly be about raising cash for the province. The objective should be to achieve operational efficiencies, introduce sustainable wage and pension costs and implement a culture of customer service that is now sadly lacking – as evidenced by the Ontario Ombudsman's damning investigation into Hydro One's "egregious" billing errors.
Any windfall from privatization should benefit ratepayers. They've earned it.
Ask the widow in Renfrew County who signed up for preauthorized payments in June. Hydro One withdrew $5,500 from her account all at once, leaving her with a negative bank balance. Hydro One told the Ombudsman, who has received more than 10,000 complaints about the company's billing practices, that "the woman's smart meter was not communicating properly and had been underestimating the power use on her property for two years." Whose fault was that?
Similarly, it's hard to see any logic or fairness in using proceeds from the partial sale of Hydro One's transmission assets to finance politicians' pet transit projects. The transmission business is a regulated monopoly with a guaranteed return on equity under rates set by the Ontario Energy Board. As such, it would be an attractive investment for pension funds and other institutional investors seeking a dependable, above-average revenue stream.
But while selling part of the transmission business would generate a one-time cash haul for the government, it would dilute its share of Hydro One's profits in the future. To justify that tradeoff, any proceeds from the sale should be reinvested in Ontario's electricity sector. The needs are gaping. For starters, Ontario Power Generation faces a $10-billion tab (before interest, inflation and inevitable cost overruns) to refurbish its Darlington nuclear station, beginning next year.
Ontario consumers face some of the highest electricity rates on the continent as a result of bad decisions (see Green Energy Act), bad management (see 2013 Auditor General report) and bad luck (see stranded nuclear assets). The provincial government should not add insult to injury by skimming off the cream from Hydro One to build subways in Scarborough, or anywhere else the Premier fancies.