A friend of mine pointed me to an opinion article in the Star by Jennifer Wells from Tuesday June 12, 2018 titled Ford’s anger at CEO pay sparks talk of selling off Hydro One.
While I have no idea who is doing the talking about this, it does stir up the debate about the benefit to the public.
There is a history of selling off public assets that should leave a bad taste in everyone’s mouths
For anyone that lives in the Greater Toronto Area you may recall the sale of highway 407. Every day you spend grid locked on the 401 for hours you should think about the private Spanish company that operates the 407 and charges toll rates more than 10 times what it costs across the border in New York State. On top of that, the government provides free enforcement services for toll collection by the private company.
In 2002 four hydroelectric stations on the Mississagi River in northeastern Ontario were sold to Brascan Corp. for $340-million. There was no shortage of criticism that the price was low and the legacy of renewable energy was lost to the public in exchange for decades of profit for private off-shore owners. Hydroelectric stations can run profitably for over 100 years.
It makes you wonder what goes on behind the scenes when these big deals are being spun?
In the case of Hydro One, successive governments have wanted to cash in on the value of the transmission and distribution company, however it was the Liberals that made it happen. The transaction was not the lowest cost alternative as pointed out by the Financial Accountability Office of Ontario in their February 2018 report ‘Updated Financial Analysis of the Partial Sale of Hydro One’. The report claims that it would have been $1,8 billion cheaper to have explored the option of financing the equivalent amount by issuing provincial debit.
For 2018 the provincial debt is estimated at $312 billion dollars. The sale of 53% of Hydro One generated $9.2 billion dollars. It is estimated that the government could grab another $7 billion to sell out. Hydro One earned $512 million toward dividends last year. Ontario taxpayers missed out on $260 million in revenue in 2017 alone as a result of decreased ownership.
The government debt is growing each year and we have now lost a reliable, secure source of revenue – forever. Is there someone who thinks this is a good idea? Apparently Ben Dachis, associate director of research at the C. D. Howe Institute says we should cash in while the going is good.
I find the argument of cashing out to be seriously flawed. With the simplest view, electricity transmission and distribution has been a successful business for over 100 years. It isn’t about to tank any time soon. It requires care and feeding but it isn’t rocket science nor is it risky business. It generates a steady revenue that benefits taxpayers.
Why would Ontario sell out?
Selling is a short-term gain, but long-term pain for the public.
There is something much bigger at stake here. The elephant in the room. Some businesses stand to make a substantial amount of money.
I think of it as greasing the wheels of the economy. Maybe it’s better to be driven over by greased wheels than rusty ones.
Why selling out doesn’t make sense
In the case of Hydro One, we have a true monopoly. Your electrons are going to flow through the Hydro One transmission grid whether you like it or not. If you happen to be a Hydro One distribution customer, it will be their wires that connect you to the grid. It is simply the hardware that enables delivery of electrons to your door. You have a single supplier. Private and monopoly are terms that do not go well together.
This isn’t like the telecommunication industry.
The province needs sources of income. Hydro One provides secure and reliable revenue.
Hydro One services remote communities. There is no profit in servicing remote communities. Does this mean that they will be excluded from privatization?
There is a very fundamental problem with the practice of selling off public assets to reduce the debit or – if you like – fund infrastructure projects. It doesn’t deal with the real problem.
The root cause of our financial situation is that we are spending more than we earn. A one-time influx of cash doesn’t solve our problem. We need to spend less and/or earn more. The utility business benefits the latter. Selling it off is just shooting yourself in the foot.
So what?
Managing a privately owned monopoly is like trying to wrestle a greased pig.
Just when you think you’ve got it under control, it slips away. No matter how you approach it, you know it will be dirty.
While we currently have the Ontario Energy Board with regulatory authority over Hydro One, it will become increasingly difficult to manage their business as it moves forward. In general, privately owned monopolies don’t work very well. Private sector needs competition to succeed.
You could argue that distribution was privatized back in 1998 when the former Ontario Hydro was split up, however transmission has always been publicly owned and influenced by government policy.
There are examples of private utilities in jurisdictions such as Alberta and many American states, however that subject needs a separate discussion.
The 2003 blackout was caused by a privately-owned American utility
Gaming the system
Following the initial public offering in 2015 Hydro One attempted to recover those expenses from ratepayers. It was the OEB that picked up on this and said – no way, shareholders must pay for that.
With the Hydro One purchase of the US utility Avista, it will become increasingly difficult to distinguish between what costs Ontario ratepayers cover vs what comes out of the shareholders dividends. Is that where you want to focus your regulatory dollars?
All of this is way to complicated for me. I just want to know that I get value for the money I pay for electricity. If I don’t have any choice in my service I don’t want a private company with a monopoly providing it.
What will the PC government actually do?
I suspect that there are a number of lobby groups clamoring to get some face-time with the new government to pitch their case. What actually happens will have more to do with salesmanship and money than logic and reason. That’s what history tells us.
The takeaway
I am reminded of playing the Parker Brothers board game – Monopoly – as a child. The utility squares weren’t as exciting to own as Boardwalk, but they don’t cost much and pay back over the course of the game. Definitely worth buying and hanging onto.
So what does Parker Brothers know about utilities that the Ontario government doesn’t?
How to be successful.
Always be careful not to bite off more than you can chew
Derek
