Hydro One: Ontario s privatization plan explained

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1 Hydro One: Ontario s privatization plan explained Ontario Premier Kathleen Wynne has unveiled a plan to privatize Hydro One, a major government-owned electricity agency. If it goes through, it will be one of the largest privatizations of a government asset in a generation in Canada. The current valuation of Hydro One is about $15-billion to $16- billion. The privatisation will take a big step forward Wednesday when the government s omnibus budget bill laying the groundwork for the sale is expected to pass a final vote in the legislature. The plan has whipped up opposition from unions and the opposition parties, with the NDP launching a province-wide anti-privatization campaign. Here are the basics on what is happening, and why it matters. Power lines run out of a Hydro One transfer station in Vaughan, Ont. (Tim Fraser for The Globe and Mail) What is Hydro One, and how does it fit in with Ontario s electricity system? Hydro One is a Crown corporation (a government-owned company) that handles nearly all the transmission of electricity in Ontario, as well as local distribution to 1.4 million customers. Other provincially owned electricity companies include Ontario Power Generation, which runs nuclear and hydroelectric power plants, and the Ontario Energy Board, which sets electricity rates.

2 Local distribution is run by different companies in different parts of the province. In some places, it is Hydro One; in others, such as Toronto, the city owns a distribution utility of its own; and in other places, distribution is handled by a private company. (Watch: Ed Clark on the strategy behind selling Hydro One) Why are the Liberals privatizing Hydro One? Premier Kathleen Wynne wants to build $29-billion worth of new transit, roads and bridges over the next 10 years, and needs a way to pay for it. She has already raised income taxes on people making more than $150,000 per year and redirected part of the gas tax to transit construction. In order to find more money, she has decided to sell off government assets. These include the province s shares in General Motors and pieces of land (including the LCBO headquarters building and OPG s headquarters). Selling stock in Hydro One to private investors is the largest, and potentially most lucrative, part of this money-raising plan. The privatization plan was crafted in part by a panel led by Ed Clark, a former TD Bank CEO hired by Ms. Wynne to advise her government on how to get money from its assets. (The panel: Read their recommendations for Hydro One here) How will privatization work? The government will start by selling 15 per cent of Hydro One on the stock market, likely before the end of the year. Then, it will sell several more tranches of stock until 60 per cent of Hydro One has been sold off. The government has promised to hold on to 40 per cent of the shares itself so that it still has some say in how the company is run. The government believes it will get $9-billion total for 60 per cent of the shares. Of this, $5-billion will be used to pay down Hydro One s debt, while the other $4-billion will go towards transit and transportation. In a separate transaction, the government has decided to hive off a small part of Hydro One the part that runs the distribution system in Brampton, Ont. and merge it with three other municipally-owned local distributors in Mississauga, York Region and Hamilton, a deal that should net more than $600-million for the province.

3 Top three Ontario power utilities, ,400,000 Customers 1,200,000 1,000, , , , ,000 0 Hydro One Toronto Hydro PowerStream THE GLOBE AND MAIL» SOURCE: 2013 YEARBOOK OF ELECTRICITY DISTRIBUTORS

4 Top utilities after proposed merger of Hydro One Brampton, PowerStream, Horizon Utilities and Enersource Hydro Mississauga 1,400,000 Customers 1,200,000 1,000, , , , ,000 0 Hydro One Merged co. Toronto Hydro THE GLOBE AND MAIL» SOURCE: 2013 YEARBOOK OF ELECTRICITY DISTRIBUTORS What are the arguments against privatization? There are, roughly, three lines of argument against the sale. The first is that electricity prices could increase under a privatized system. The assumption is that private investors would demand a higher rate of return and would be more aggressive with the OEB in demanding rate increases. The second is that a privatized company would lead to worse service. As it currently stands, Hydro One has a motivation to keep its service at a certain level whether that means quickly restoring power after outages or replacing worn-out equipment because any failure reflects badly on government. Privatization opponents argue that a private company would have less motivation to do this, particularly if it hurts the bottom line. Such concerns are particularly acute in the many costly and difficult-to-service rural areas where Hydro One is the local distributor. The final reason is the lack of oversight. When Hydro One is privatized, electricity customers who have problems with it will no longer be able to complain to the auditor-

5 general, the ombudsman or other government accountability watchdogs. The province has promised to create a new ombudsman solely to oversee Hydro One, but it remains to be seen if this official will actually have any real power. The primary opposition to privatization has come from the Canadian Union of Public Employees and the NDP. CUPE has launched an anti-privatization ad campaign, while NDP Leader Andrea Horwath has started a provincewide tour and petition calling for the privatization to be scrapped. Even the Progressive Conservatives, usually fans of the private sector, are against the selloff. Ontario s Premier Kathleen Wynne. (Mathieu Belanger/Reuters) Why do the Liberals support privatization? Supporters of privatization, including Mr. Clark, argue that private companies will make Hydro One a more efficient company in pursuit of higher profit. They argue that private investors have more motive to cut costs than government does. Whether the Liberals themselves actually believe this is an open question. Mr. Clark has suggested the only reason Ms. Wynne is privatizing the company is because her government wants the money. And there are a long list of quotes from Liberals in the past everyone from Education Minister Liz Sandals to former premier Dalton McGuinty that suggest they do not actually think privatization is good policy. (Politics: Hydro One privatization was not natural for Liberals, Clark says)

6 Queen s Park. (Darren Calabrese/The Canadian Press) What happens next? The first step is for the government to pass the budget implementation bill, which gives them the power to sell the company. As the Liberals have a majority of seats in the legislature, this is expected to happen by early June. Then, the government has to set up the initial public offering. They have set themselves a deadline of the end of 2015 to make this happen. That will see the first 15 per cent of the company sold. After that, it is not clear how quickly the rest of the stock will be sold off. Estimates range from 18 months to five years.