The Progressive Conservative Party under Doug Ford have been moving aggressively to fulfill some of their election promises. To their credit, they are getting things done, however the negative impact of their actions seem to be getting less attention. Let’s have a wake-up call.
Removing the CEO and Board of Hydro One
Doug Ford referred to Mayo Schmidt the Hydro One CEO as the “6 Million Dollar Man” in his efforts to stir up voter interest in the lead-up to the election. With the PC party having secured a majority in the election, they proceeded to facilitate the removal of the Hydro One CEO and board of directors. The cost for doing so amounts to approximately $600 million.
That’s 100 times what Hydro One paid their CEO last year.
Why would anyone choose to take an action that would result in a $600 million impact?
An informed person or persons surely would not do something like that – you would think?
How can it cost $600 million?
The majority of the cost comes from the decline of Hydro One stocks which coincided with the chaos created by the exodus of the board and CEO. As of this writing, the stock dropped from $20.17 on the day before the announcement to $19.21 on the close of markets August 3rd. That is a bit of a rebound from a low of $18.84 per share the week before and in the ballpark of a $570 million dollar market capital loss. Is that cause and effect? A coincidence? Bad luck? That remains subject to speculation.
If the Hydro One stock loss was a result of the executive exodus and you
- add the cost to retire the CEO which is over $10 million.
- add a contingency of 3% for market fluctuation and liability for following a course that negatively impacts a large number of investors.
There you have it.
$600 million. Well done!
I bring attention to this because there was a much lower cost solution available by using the shareholder’s business process to wrap up the CEO’s term, legislate new salary oversight and find a new CEO candidate that the government could use to do their bidding. It could have been done quietly and efficiently.
But it wouldn’t have gotten as many votes for the PC’s.
Most of the loss is just funny money anyway
While it may be funny to some, investors who took a loss in the days following the ousting of executives would have seen it otherwise. On day one after the public announcement, July 12th, 2018 trading volume was 3.36 million shares as investors dumped the stock at a loss. On day two, another 2.75 million shares got dumped for another loss. For those investors it represents approximately $3 million in losses in two days (plus broker’s fees). If those investors had originally bought their Hydro One stocks a year ago, their losses would be more like $20 million!
Hopefully they were needing a tax write-off anyway.
While the stock is rebounding slightly it is trading at very low volumes as investors no doubt are waiting for things to settle down.
The only people making money are the stock brokers.
It only gets worse in the short-term
The strategy of the new investor-owned Hydro One was to diversify their business through acquisitions and other non-regulated business ventures. That’s where the growth opportunities are. It would be following a similar path as other successful energy companies like Fortis and Emera.
Hydro One is in the process of acquiring the US utility Avista Corp as a part of the new strategy. As a result of the corporate turmoil at Hydro One, the US regulatory review has been delayed while a reassessment of the transaction takes place. It would have concluded in September without the executive drama. Should this transaction now fail, it will represent a multi-million dollar loss to Hydro One because of what has already been spent in the pursuit of the deal. In the July 24th parliamentary debate at Queens Park, reference was made to a loss in excess of $100 million if the Avista deal fails. That is a very big business risk and totally unnecessary.
None of this gets us any closer to the objective of lowering electricity rates. It does the opposite.
The takeaway
If you ignore the distractions and shut out the noise, the Ontario ratepayers are expecting Doug Ford and the PC government to deliver on their 12% hydro bill reduction promise. The electricity sector costs are in the vicinity of $20 billion a year. That means the government is looking to reduce approximately $2.4 billion in costs for the reduction to trickle down equally to every rate payer.
That won’t happen.
Residential customers are paying 13.2 cents per kWh during peak times. I’m sure they could use some rate relief.
We have yet to see anything material that will reduce our costs by the amount needed to reduce electricity bills. The actions taken so far may avoid future costs, but have added to our current costs. They aren’t helping Ontario residents any time soon.
So far, the government gets an ‘A’ for effort, an ‘F’ for business etiquette and an ‘F’ for the bill reduction we are all anticipating.
If this is any indication of what the future holds for the electricity sector, we are in big trouble.
Derek
