New Hydro One ‘worse for customers’
Bay Street not impressed with Ford move
For a party that campaigned on making the province open for business, Ontario’s recently elected Progressive Conservative government has an unusual way of implementing that pledge.
Consider Bill 2, the Urgent Priorities Act, 2018, and what’s planned for Hydro One, a publicly listed company in which the government is the largest shareholder. The former sold part of its stake in late 2015, which made the province’s transmission and distribution utility a public company with a separate board of directors and charged with all the responsibilities that come with such a status.
“Simply put, the Ford government’s actions with respect to Hydro One represent an unprecedented intrusion into the private capital markets,” noted one senior Bay Street banker. “This is the act of a leftist South American dictator, not a new Progressive Conservative government that professes to be ‘open for business.’ Shameful.”
Under Schedule 1 of the priorities Act, “constraints are placed on the compensation for the directors, chief executive officer and executives of Hydro One and its subsidiaries.” Hydro One is also required annually to “make public the salaries paid to certain executives.” (The current requirement is only that the salaries of the top five executives be disclosed.)
As well, the new government is planning to amend the Ontario Energy Board Act to provide that the rates charged by Hydro One “shall not reflect amounts paid for executive compensation.” And as a further sign that the government is fully in change, it has granted itself “immunity from litigation arising from this legislation.”
“It’s extraordinary,” noted another senior banker, “for a government to include a provision in the Act where it cannot be sued by shareholders.”
Accordingly, the government will not only limit what Hydro One can pay its executives, which could reduce the company’s ability to attract talent, but it will also the limit its ability to pass on compensation costs through its rate base, a plan that will affect its revenue. As well, when Hydro One does develop a new compensation plan (in which compensation will definitely be lower), the Management Board of cabinet has the final say.
If nothing else, the changes represent a massive encroachment into the affairs of a publicly listed company that has raised equity capital from the market at least three times.
As a result, Hydro One’s mandate will change from “an independent, commercially-oriented public company,” with a “new direction” to something completely different. It’s not a stretch to argue that the “new” Hydro One will become an arm of the provincial government.
“It transforms a growthoriented company that shareholders bought, into basically a Crown corporation,” noted the banker.
From now on, “it will only be able to attract people who are comfortable working in a Crown corporation. It’s the wrong way to do it,” the executive added, noting the publicly listed electric companies (Fortis, Emera and AltaGas) have all made transformative acquisitions outside of Canada. Hydro One announced one last year.
Brady Yauch, an economist with the Consumer Policy Institute, an entity that focuses on public monopolies, says consumers will be the losers. The public Hydro One made some “positive operational changes including service guarantees,” but the new Hydro One “will be less commercially oriented, more focused on the political environment, and ultimately worse for customers.”
More fundamentally, Ontario’s plans are an aboutface from what shareholders were promised when Hydro One was taken public in November 2015. Back then under the governance agreement, potential investors were told that “as a shareholder,” the province “will engage in the business and affairs of Hydro One as an investor and not as a manager.” To ensure Hydro One’s independence, David Denison, the former chief executive of the CPP Investment Board, was made chairman. Now, like the rest of the board, he is gone.
“The government has breached this trust, (to act as an investor and not as a manager) by sending a stunning ‘anti-business’ message to global investors,” says the Bay Street executive. “One wonders how investors could ever trust Ontario as a counterparty given how the carpet has been pulled and billions of dollars lost.”
In that regard, as the largest shareholder, the province is the biggest loser on its investment. Since the shares reached a recent high of $22.26 on Jan 26, the value of government’s stake has fallen by about $900 million, considerably more than what the company will save from ousting the board and the chief executive.
With the “new” Hydro One the province will nominate four directors with the other six being nominated by the remaining largest shareholders. In the “old” Hydro One, the province, along with three board committees met and put forward names. There were no quotas.
What does the government say? When the legislation was introduced, it noted the changes would “improve transparency and accountability.”
By press time, the Ministry of Energy, which oversees Hydro One, had not responded to a series of questions about the recent changes.
A STUNNING ‘ANTI-BUSINESS’ MESSAGE TO ... INVESTORS.