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Ontario Hydro’s Path to Privatization

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Previous articles have focused on other aspects of the Harris PC’s role in contributing to Ontario’s status as a ‘Have Not’ province.

Today we examine the (partial) privatization of Ontario Hydro and its impact contributing to the fiscal decline of the province.

Ontario Hydro –  The Beginning

Ontario Hydro Electric Generator

Ontario Hydro

In 1905 Adam Beck, widely credited as being the founder of the electric power system in Ontario, displayed immense vision. A vision that would transfer the nature of electrical power generation in Ontario for the next century. Beck sought for “power at cost” and would sell electricity at an affordable cost to everyone in the province. If a surplus of revenue had been available, then it would have been used to improve the system or reduce rates.

Provincial government officials at the time had established the Ontario Power Commission in response to a coordinated decision, that the Niagara Falls project required organization at a higher level. This was later renamed to the Ontario Hydro Commission in 1906.

The Ontario Hydro Commission became the first publicly owned electric utility company in the world, and took responsibility for the generation of power for all of Niagara Falls, its transmission to the 16 municipalities, and ultimately, throughout the province as well.

Throughout the century Ontario Hydro dominated the province’s electricity industry.  One of it’s first structural changes occurred in 1972, the year the Power Corporation Act had been introduced, effectively converting Ontario Hydro into a Crown corporation.

This act officially formalized Ontario Hydro’s role as a profit driven entity rather than a mechanism used solely for the public good.

By the 1990’s, Ontario Hydro’s duties under the Power Corporation Act included the following:

  •  Generation, transmission, distribution, supply, and sale of power in Ontario
  •  Provision of energy conservation programs
  •  Encouragement of parallel energy generation

Unfortunately, these goals conflicted with each other and undercut the corporation’s profit maximization mandate.

Ontario Hydro had been simultaneously responsible for not only delivering good economic results, but also had to undermine them with its own energy efficiency programs and support of competitors.

Power was then distributed by municipally owned utility companies to consumers at a fixed price that bundled together generation, transmission, and distribution costs.

1990 also brought with it a severe recession to Ontario, and all throughout, Ontario Hydro incurred large financial expenses  The nuclear program that saw the development of the Darlington nuclear station made matters worse by being built at a cost far exceeding projections.

The nuclear program, while successful in generating over 30% of the province’s electricity needs, created an enormous debt for Ontario Hydro that had been well beyond what could be supported by electricity revenues. As a result, none of the nuclear plants had been viable on an economic basis.

This led to price increases of more than 30% in 3 years.

In a last ditch effort to protect it’s business, Ontario Hydro raised electricity rates by 40% from 1990 to 1994, yet still lost $3.6 billion in 1993. Since the crown corporation retained a natural monopoly, it lacked the competitive pressures necessary to reform itself. The chart below depicts the generating capacity of the province.

And in responding to consumer criticism over Hydro’s pricing, Rae’s NDP government implemented a price freeze in 1993, leaving prices below actual costs, a situation that continued until restructuring in 2002.

Over the years, Ontario Hydro had managed to mount a $38.5 billion dollar debt. $22 billion of this had been above and beyond the value of its assets. Most of this had been created by the massive cost overruns at Hydro’s nuclear power plants.

At the time, Tom Adams, Executive Director of Energy Probe said, 

They thought they were building assets and they were building liabilities.

Ontario Hydro’s debt also eventually threatened the bankruptcy of the province. Coupled with troubles that occurred at the Pickering and Bruce nuclear generating stations that had forced the province to shut down 8 of it’s 20 reactors, Ontario Hydro was in desperate need of attention.

Adam remarked, 

If Hydro had been left alone, it was going to lose its ability to maintain a reliable system.

The red ink contained with the fiscal budget had motivated opposition MPs in other political parties to campaign for change by the next election set to occur in a couple more years.

The Progressive Conservatives, led by Mike Harris made reforming Ontario Hydro as part of their mandate when campaigning during the election.

And in 1995, the Harris PC’s were successful, and the “power at cost” principle which lasted for almost a 100 years, had come under threat.

It would take the PC’s more than 3 years to set in motion the privatization process that would lead to the break up of Ontario Hydro.

In fact, in 1998, Minister of Energy, Jim Wilson officially declared,

The Adam Beck vision is over, a new vision for Hydro has arrived.

Indeed a new vision had certainly arrived and Mike Harris and his team would play a key role in its execution.

 

Technological Restructuring

Since the 1990’s, the structure of the electricity sector has shifted to varying degrees of privatization because policymakers have recognized that technological changes, such as small-scale electricity generation, have meant that a privatized electricity industry could become realistic and desirable because a market-driven structure would produce more efficient pricing and better-informed consumption and investment decisions.

The introduction of privatization into this sector has been quite challenging because the electricity sector has unique elements which have made reform and deregulation complex.

The complexities include the following:

  • The whole transmission grid can be affected by failing to balance supply with demand continuously, with the potential for widespread service interruptions if this balance is not achieved. The best example of this had been seen in the August 2003 blackout that affected parts of the Northeastern United States and Ontario.
  • Both supply and demand are very in-elastic, thus at peak demand times, small changes in supply or demand can result in very large price increases. This has been most apparent in the summer of 2002 when electricity had been privatized for a brief window of time under the
  • Restructuring the electricity sector has presented major challenges due to its complexity, political risk-aversion, consumer reactions, and unexpected external events.
  • The Power Corporation Act required Ontario Hydro to provide “power at cost”
  • Rates were set by Ontario Hydro and were reviewed but could not be amended by the Ontario Energy Board, an independent, self-financing Crown corporation.

A Framework for Competition

To facilite the reform of Ontario Hydro, in late 1995 the Harris PC’s authorized the appointment of an advisory committee to study and assess options for phasing competition in Ontario’s electricity system.

On June 7, 1996 Ontario’s Advisory Committee on Competition in Ontario’s Electricity System delivered its findings to the public in a report titled: A Framework for Competition.

The report included recommendations that affected the provincial electricity system which is composed of Ontario Hydro, electric distribution utilities, power producers, energy marketers, energy service providers, and customers.

The Committee Chairman Donald Macdonald, said,

As a committee, we recognized Ontario Hydro’s historic importance to Ontario but we also believe that the province’s existing electrical system is no longer compatible within the economic context in which Ontario operates today. There is no longer a sound economic rationale for allowing a large monopoly to dominate the electricity system.

The committee included in it’s recommendations a call for the province to sell it’s 69 hydro electric plants and nine fossil fuel plants to private hands.

They also noted, that because of “heritage concerns”, generating stations along the Niagara River and the province’s 20 nuclear reactors, would remain in the public domain because of the debt load associated with them. They would be treated as separate entities competing with each other in an open market.

The recommendations from the report included the following:

  • Changes to Wholesale competition. The report argued that electricity generators should compete to supply power to electricity distributors and other large customers that demand 5 MW of power or more at one site. After a competitive wholesale power market is established and reliability is ensured, they recommended moving on to retail competition, where electricity suppliers would compete to supply power to all customers, including residential users
  •  Changes to the Transmission of Electricity. The report argued that the provincial transmission system must be open to all suppliers. The only control on access to the system should be technical and financial competence and the market. Thus they argued that the system operator would ensure non-discriminatory access.
  •  Changes to Electricity Generation. On this point the report stated, “we feel strongly that Ontario Hydro’s monopoly in generation should be dissolved. Competition should be introduced into the generation sector as soon as possible.
  • The commission also suggested the creation of neutral institutions such as a systems operator, an electricity exchange, and a transmission company, which would all be independent from the other parts of the system, and would oversee the competitive market. In this sense, the electricity exchange would be a non-profit entity with a member made of those who supply or purchase power through the system such as generators, energy service companies, specified purchasers, agents, brokers, and marketers. Also, the report argued that the use of bilateral financial contracts would establish a futures market for electricity.

The report called for replacing the current governance structure of the electricity system. This had been clear when the report claimed, “the main legislative undertaking will be replacing the Power Corporation Act.”

Then, a damning report had been released in August 1997 by Ontario Hydro chief nuclear Officer Carl Andognini that shed light on the poor management and labour practices at the nuclear power plants.

The Break Up

In 1998 the Harris PC’s put a plan in place to privatize Ontario Hydro by making municipal utilities “for profit” corporations under the Ontario Business Corporations Act.

This bill legislated the break up of Ontario Hydro into 5 distinct corporations that were still largely publicly owned, all with the purpose to enable an easier transition into privatization that the PC’s would eventually hope to accomplish, and the sell off of Ontario Hydro to the highest bidders in order to open the market up so that private companies could charge the purely market driven electricity rates.

The bill came into law in April of 1999 and under the Energy Competition Act, Ontario Hydro had been re-structured into 5 main components:

  • Ontario Power Generation  (OPG) which would focus on power generation, and continue to provide 90% of the province’s electricity;
  • Hydro One Inc., which would inherit the transmission and distribution of power, as well as the obligation to serve remote communities.
  • Ontario Hydro Services Company (OHSC), a regulated transmission and distribution business, and would operate certain energy service businesses in an unregulated business environment while also operating the province-wide grid ;
  • The Independent Electricity Market Operator (IEO), the independent system co-ordinator/dispatch that would be responsible for directing system operations and operating the electricity market by controlling the electricity flow
  • Ontario Hydro Financial Corporation which would manage Hydro’s outstanding debt.

Each of these entities were expected to compete in a deregulated market with other players, including U.S. companies.

Also, local distribution companies (LDC’s) had been greatly reduced in number (from about 300 to 90 after the restructuring). During this time Hydro One acquired a large number of the local distribution companies and became the largest LDC in Ontario, serving primarily rural areas of the province.

The remaining local distribution companies were owned by municipalities.

The Energy Competition Act created several other acts such as the Electricity Act, and the OEB Act. The Electricity Act guaranteed an open wholesale electricity market, retail choice at the consumer level offered by retailers such as Canada Energy Wholesalers Ltd, and access to the power transmission grid for new competitors in generation.

This led to the creation of Bruce Power, which leased the Bruce nuclear facilities from OPG in 2001.

The OEB Act led to the creation of the Ontario Energy Board (OEB) as the prime regulator of the new electricity marketplace. The OEB’s functions included regulating prices in the non-competitive sections of the market (such as transmission & distribution) and overseeing the wholesale and retail markets to protect the public from uncompetitive practices.

Interestingly, even with the adoption of Bill 35, Ontario Hydro’s successor companies had been free once again to start running up new debts. This had been possible due to the fact that the old debt had been reshuffled and kept hidden in the utility bills of the new companies customers and the credit lines of the new companies were no longer maxed out.

Before Bill 35, municipal utilities charged customers on a “power at cost” (or not-for-profit) basis. Under the new Act, they would show a “Business rate of return” (profit), which is a reason why consumers began to face a rate increase.

The move to break up Ontario Hydro and partially privatize the electricity system saddled Ontario with a stranded debt of over $20 billion.

 

Ontario Hydro Concerns

The selling of Ontario Hydro’s generating stations had been rejected by Ontario’s 15,000 member Power Workers Union.

The President of the Union, John Murphy, had questioned why any company would consider selling off what he called its most valuable asset. He said,

I can’t imagine, if you have a private sector company and you set up a committee to look at restructuring and it came back to the shareholders…saying we’re going to sell off the most valuable assets which are the 69 hydro electric plants.

Myron Gordon, a University of Toronto finance professor had advised the Power Workers Union when it was trying to save Ontario Hydro, that while deregulation may have made sense in telecommunications because it encourages the development of new technologies, electrical power was an industry where little innovation was occurring.

As such, he stated that

People in the union are not exactly working the minimum wage. They are more like doctors than orderlies.

Gordon also stated that deregulation and privatization would mean higher electricity bills for Ontario consumers, with billions going into the pockets of foreign companies and a less secure provincial economy, that had traditionally been reliant on cheap electrical power.

The Canadian Union of Public Employees Union (CUPE) were also opposed to the privatization plans for Ontario Hydro and had called for the following demands:

  • Returning all generating stations sold and leased by the Conservatives to public ownership
  • Protecting the environment through aggressive conservation legislation
  • Keeping new energy generation within the public sector
  • Restoring at-cost electricity pricing since removing the cap would increase electricity rates for consumers allowing profits to flow to private producers

On April 11, 1999 the Harris PC’s removed Ontario Hydro from the Freedom of Information Act.

 

Road Blocks

On April 19, 2002 the Ontario Superior Court of Justice ruled that it was illegal to sell off Ontario’s hydro grid.

Eves fought to appeal the decision On May 7, 2002 Eves told the province that privatization was back on the agenda and swiftly deregulated and removed the price caps Harris had previous implemented on Hydro rates.

At this time the electricity market had opened and Ontario bundled electricity prices into separate generation, transmission, and distribution components. In addition, in order to finance the stranded debt of Ontario Hydro (totalling about 200$ billion), a stranded debt charge of 0.7 cents per kWh had been added to the market price.

With the hot summer months ahead, electricity prices increased quite rapidly and energy consumption soared leading to a shortage of domestic generation capacity, an increasing reliance on importers, and limited import capacity.

With consumption high, Hydro rates went through the roof overnight, and the taxpayers of Ontario took the bills for it. Electricity prices spiked an average of over 30% in just seven months.

The IESO issued power warnings and advisories for consumers to conserve energy since power supplies were struggling to keep up with demand

Faced with public outrage and anger, the Ernie Eves PC’s were forced to freeze prices for residential and small business owners — an unsustainable economic policy. This was legislated under the Electricity Pricing, Conservation, and Supply Act in 2002.

Retroactive to May 2002, the Act effectively allowed for the freeze of retail prices for low volume consumers, who accounted for half of the electricity consumed in the province.

The cap just masked the underlying problem of rising cost pressures in an electricity system in need of renewal and additional supply.

Ontario had also become heavily reliant on coal-fired generation. About 25 per cent of electricity generation came from polluting coal-fired plants. In addition, Ontario imported coal power from neighbouring American states.

As a result, Ontario, a province with a historic capability to provide ample power resources, had become a net importer of power.

Timeline of Events

In 2002, the Court ruled against the privatization. A few months after this time, the Harris PC’s scrapped their plan to privatize Hydro One.

In August 2003 Ontario and the northeastern US experienced a major blackout. Deregulation of electricity had been a major cause of this crisis. Although privatization of Hydro One had stopped, deregulation of the price paid to private producers was firmly in place.

Back in 2004, Globe and Mail documented $5.6 million in untendered contracts handed over to four top PC in Ontario by the utility in a secret program to lobby the government to sell Ontario Hydro to investors.

In 2004, Hydro One had admitted that Mike Harris had been paid $18, 591 for advice after he left the premier’s office. Harris had received the money as part of a Hydro One contract that was granted to former Quebec premier Pierre-Marc Johnson in 2002.

Harris was never paid directly by Hydro One, but was hired instead by Johnson as part of his $115,807 contract with the publicly owned utility.

 

Ontario Hydro – The aftereffects

Keith Rattai , who was representing The Society of Energy Professionals (a union representing more than 8500 professionals in the Ontario electricity sector) said a very important point regarding the privatization that has affected Ontarians. He said,

The truth is that assets get privatized, liabilities get socialized, the public gets gouged and workers get forced into a race to the bottom driven by multinational profit driven companies.

The restructuring of Ontario’s electricity market had been seen as disappointing since it had been designed to reduce electricity debt and encourage private sector investment in generation. It failed on both fronts and in fact, the debt grew further, and requests to reduce usage had to be issued. Private investors also demanded consumer/taxpayer backed contracts to build new electricity generation.

The reasons for the restructuring’s failure were:

-Private investors were unsettled by the constant delays and uncertainty regarding the market opening. This is because the market was originally expected to open in November 2000, however this was delayed first to May 2001, and then to May 2002 in order to ensure system reliability.

-Ontario market was seen as too risky for investment and new generation capacity lagged for lack of sufficient capital when the market finally opened. (add to point above above)In that time, investors lost confidence thanks to the California electricity crisis, and the Enron collapse that had occurred

-Investor expressed concerns relating to OPG dominance and uncertainty surrounding the planned reduction of its market share, and related to lack of LDC consolidation

-Investor concerns were heightened even further due to the uncertainty surrounding the proposed privatization of Hydro One. The Harris PC’s announced its plan in December 2001 to sell Hydro One through an initial public offering (IPO), one year before market opening. This plan failed after two unions had effectively argued in court that the Electricity Act did not authorize the provincial government to sell its assets.

-The government later announced plans that it would instead sell a minority stake in the company, which would have been allowed under the legislation. Before this could happen, a scandal erupted out in summer of 2002, of the company due to claims of excessive compensation packages being given to senior executives. This led to the resignation of the board of directors of Hydro One and the termination of its CEO.

-The concept of privatization had been abandoned in 2003 when the government announced it would retain 100% ownership of Hydro One.

-Political difficulties stood in the way of promoting an efficient electricity sector. Efficiency could not be promoted if the measure required an increase in prices, thus the price freeze prior to the restructuring had the effect of “acclimatizing” Ontario consumers to low and stable prices and this made consmers resistant to price increases.

 

A Raw Deal

The case to privatize public hydro utilities also extended to Manitoba’s own Hydro corporation.

In 2011, the PC Candidate running for Manitoba’s premier stated, that his party would not be aiming to privatize Manitoba Hydro because of what he stated as “better rates.

When questioned by journalists in 2011, he stated,

[the privatization] is off the table. It’s clear you get better rates borrowing as a Crown corporation. We are committed to public ownership and control of a reliable Manitoba Hydro.

Tory appointed chairman of Manitoba Hydro’s board, John McCallum, also stated that no government “in its right mind”, even with an ideological belief favouring the free market and limited government would sell Manitoba Hydro because the business case to do so just doesn’t exist.

Mike Harris hired Ontario political consulting firm Navigator in order to manage the tumultuous deregulation of Ontario’s Hydro.

 

Conclusion

For 90 years previous, local municipal utilities ran at cost and returned profits to residents in the form of lower and stable rates. The debts that were created by cost overruns at Ontario Hydro’s nuclear power stations were no worse than the privately-owned nuclear power stations everywhere else. The debt level of Ontario Hydro opened the flood gates for the Harris PC’s to implement a plan to deregulate and privatize Ontario’s power system.

This critical decision could have snowballed into bigger implications had the court not intervened and restricted the complete privatization of Ontario Hydro.

After taking office in 2003, McGuinty Liberal government faced a number of challenges including: a shortfall in supply, a system reliant on dirty coal-fired generation, a lack of energy conservation programs, an unsustainable pricing regime and little long-term planning.

The shortfall in supply was restored with investments of over $10 billion to keep the lights on in the province’s homes and businesses. Since 2003, about 8,400 megawatts (MW) of new cleaner power have come on line — over 20 per cent of current capacity.

In 2004, the government introduced a stable pricing regime that better reflected the true cost of electricity in Ontario. As a result, in 2005 the Ontario Energy Board (OEB) released a Regulated Price Plan, which brought predictability to electricity

prices for residential and small business consumers. The OEB updates rates and adjusts prices every six months to reflect the costs of supply for that period. Ontario has also taken steps to lower the stranded debt left by the previous government. Since 2003, Ontario has decreased the stranded debt by $5.7 billion.

In 2004, the government established the Ontario Power Authority (OPA) as the province’s long-term energy planner. That set into motion a planning process that would ensure that Ontario’s energy infrastructure would continue to be modernized.  In 2007, the OPA prepared a 20-year energy plan (formally known as the Integrated Power System Plan or IPSP).

The 2007 Plan focused on creating a sustainable energy supply, targeted to improving current natural gas and renewable assets at a sustainable and realistic cost. The government has made significant progress on the items outlined in the 2007 Plan.

Over $7 billion in investments since 2003 — upgrades to more than 5,000 kilometres of wires Moved forward on transmission projects to enable additional renewables; import potential; and refurbished nuclear generation

Ensure stable energy prices for Ontarians The Regulated Price Plan introduced in 2005 has provided predictability Electricity prices have increased on average by about 4.5 percent per year over the past seven years  Introduced energy tax credits to help residential and small business consumers with electricity costs

In government committee transcripts from November 24, 1997 titled: Select Committee on Hydro Nuclear Affairs

The next article discusses the impact of Harris’s other policies that still have a lasting impact on the economy today.

Contents:

Rainy Rae Days – Pt1

The Mike Harris Revolution – Pt2

Provincial Downloading – Pt3

Tax Cuts: On Borrowed Money and Time – Pt4

The Highway 407 Hijack – Pt5

Comments (1)

  1. The history of power generation is interesting within itself. I do not understand why WIND TURBINES are considered as a reliable source of generation. If it was, it would stand on its own WITHOUT SUBSIDIES, the only reason that investors are interested is only for their own gain.
    Having said that! why the population of Ontario should be expected to satisfy this avarice is beyond my comprehension. Where are the politicians when it comes time to do something that does not include depriving the peoples of Ontario.?
    There are serious consequences, food or shelter are the main ones, clothing that helps, scaring away future manufacturing does not help.
    Ontario was once a leader, Ontario needs to be one again.
    I challenge the politicians to stand up and fight for the rights of ALL ONTARIAN’S, not just the chosen few.

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