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Report On Business Hydro One sale: Short-term budget relief, long-term energy pain

Selling all or part of Hydro One – Ontario's electricity transmission and distribution company – would fetch piles of cash for the government.

But it won't fix the province's badly broken electricity market.

It would also be a missed opportunity for much-needed energy reform.

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The clue that something is terribly wrong is most evident the growing divergence between what Ontarians and their neighbours pay for electricity. As recently as 2006, rates in the province were pretty comparable to those in other provinces and nearby U.S. states.

Now, rates are often two to three times higher here, with the gap most pronounced for major industrial users.

Large power customers paid more than 11 cents a kilowatt-hour in Toronto last year, compared with 8 cents in Detroit, 10 cents in Chicago, 4.5 cents in Winnipeg and 5 cents in Montreal, according to a recent survey by Hydro-Québec.

A sharp drop in the price of natural gas has made electricity cheaper across much of North America, but not in Ontario. And the pressures that have led to higher prices in the province are expected to intensify in the next few years as ratepayers bear costs for such things as refurbishing the province's two aging nuclear plants.

The main cause is the roughly 6-cent rate surcharge, or "global adjustment," which compensates for everything from high-priced wind energy contracts and excess generating capacity to the closure of coal-fired power plants.

The fundamental problem with the Kathleen Wynne's privatization musings is that selling Hydro One – one of three entities created in the late 1990s break-up of Ontario Hydro – won't unwind decades of bad policy and botched deregulation.

"Ontario's electricity system operates on a framework constructed haphazardly to satisfy often contradictory public policy goals," according to a 2013 C.D. Howe Institute report by A.J. Goulding.

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"The result is a litany of inefficiencies."

Among other things, the report faults Ontario's mish-mash of planned and market-based long-term power purchases and ill-conceived green energy policies, which have proven hugely costly to consumers.

"The government is using the electricity sector to support a range of shifting policy objectives, including job creation, sector-specific economic growth and emissions reductions, without a credible examination of whether burdening the electricity ratepayer with the cost … is economically efficient," according to the report.

Now Ms. Wynne appears ready to add another conflicting policy imperative: alleviating the budget squeeze.

The litmus test for the government should be whether selling Hydro One will do anything to keep a lid on rates.

Former banker Ed Clark's recent Advisory Council report on Government Assets specifically urged the province to hang on to most of Hydro One and sister company Ontario Power Generation, which owns and operates the bulk of electricity generating capacity in the province.

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Hydro One, including its profitable wholesale transmission business, could prove to be a crucial player in guiding electricity policy reform going forward, particularly if the province wants to buy power outside the province rather than building the capacity itself.

"While selling all or part of the transmission business would be attractive to the capital market, we believe this is an asset that, if retained in public ownership, can play a positive role in many aspects of electricity policy, including ongoing energy sharing discussions with Quebec," the panel said.

Mr. Clark acknowledged there are savings to be gained – most notably, by consolidating the "hodge-podge" of 70 mostly small electricity distributors and by reining in sometimes excessive wages and pensions.

He suggested that Hydro One should split its wholesale transmission operations from the retail distribution business, and then consider privatizing a majority stake in the distribution arm.

The message of the Clark panel is that the province should get its policy right first, then worry about privatization.

The problem that should preoccupy Ms. Wynne is restoring competitive electricity rates to the province. High rates are helping to chase away industry and generally making the province a high-cost place to do business.

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A quick gain of a few billion dollars might seem highly attractive.

But without sound policy in place, the province will wind up paying far more because its economy is less competitive.

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