Report suggesting selling portions of Hydro One gets mixed review

TORONTO­––The preliminary report of the Premier’s Advisory Council on Government Assets set off a hailstorm of commentary and opposition reaction when it recommended selling off a number of provincial assets while retaining several others. The Ed Clark Panel, so named in honour of its chair, last year’s Canadian Business CEO of the Year and outgoing CEO of TD Canada Trust, was charged with examining the relevance and future of key provincial assets, including the LCBO, Hydro One and Ontario Power Generation.

While recommending some fairly radical changes to the province’s energy sector, the panel tempered its recommendations with a clear intent to incremental change rather than revolution.

“Our bias was clearly towards the doable,” said Mr. Clark in his speech unveiling the report. “It is easy to imagine dramatic shifts in strategy-but such shifts would require deep cultural changes in the organizations and broad societal support to make them happen. We prefer a more measured approach-each step of which improves what we have and actually gets things done rather than adds to the list of reports never implemented.”

The report was to provide initial recommendations on “ways to improve customer service and increase efficiencies at those government businesses in order to maximize their value and to generate better returns for the people of Ontario.”

The report noted that Hydro One’s distribution business, whose electricity is sold directly to 1.3 million homes and businesses covering much of rural Ontario and even some larger centres, delivers some shocking therapy suggestions. It notes that electricity sales account for 75 percent of Hydro One’s revenue and 36 percent of its profits.

The panel recommended that Hydro One should keep the long-distance, high-voltage network that transmits electricity from generating stations to local hydro networks and then spinoff and partially privatize the distribution business through a two-pronged strategy.

According to the report, Hydro One’s latest annual report shows its distribution sector had revenue of $4.484 billion last year and delivered $452 million in pre-tax profit to the provincial coffers through assets with a book value of $8.8 billion.

Mr. Clark spoke of the philosophy of the panels’ approach to dealing with the size of the task facing the province in rationalizing and improving its consumer services sector.

“First, as mentioned, government’s preference is to retain ownership of core assets,” he said. “The Council also believes you should not rush to sell assets. Rushed sales are not in the public interest. Any sale must be a carefully staged and competitive process.”

“Second,” he continued, “we asked whether the government is, indeed, the best owner of these assets and the purpose served by government ownership. Would a company in private hands be better able to serve the consumer or ratepayer? Would bringing in the private sector unlock a company that could grow and create jobs?”

“Third,” said Mr. Clark, “these assets all earn income for the Ontario government, income which is important given its deficit position. But the proceeds of any divestiture aren’t likely to be reinvested into new income-generating assets. The new infrastructure assets may add enormous value to the province and in turn, create income for the province in the medium-term. But in the short-term, there is likely to be an income loss. The Council was very mindful of that impact. So, in order to offset any loss of income, it became all the more critical to improve the performance of the assets retained by the government.”

Mr. Clark concluded his synopsis of the panel’s approach by relaying that “the council members agreed that swapping ownership in infrastructure assets can make sense. But it is important that the funds raised are used to invest in assets that deliver high societal or economic returns to the Province. The government has made clear that funds raised in this process will be used to invest in transit and transportation infrastructure. Improved infrastructure will allow the economy to grow faster, create more jobs and increase both competitiveness and productivity. In addition, of course, there are jobs directly created by undertaking the investments.”

Mr. Clark noted that having come to various recommendations that the panel believes can benefit both the consumer and the provincial coffers, the next step will prove even more difficult and fraught with potential missteps, but he affirmed that the panel’s report provides a sound basis for moving forward to those steps.

“By putting out a broad framework of our direction, we are now in a position to have more detailed discussions with the various stakeholders about implementation and execution,” he said. “The devil is often in the details.”