On April 8, 2002, CEP Canada and CUPE initiated legal proceedings concerning the privatization of Hydro One Inc. The case is now being argued before Mr. Justice Gans of the Ontario Court of Justice and seeks a ruling that the provincial government has no legal authority to sell its shares in Hydro One – the second largest transmission company in North America.
The Unions argue that under The Electricity Act of Ontario, the province as the sole shareholder in Hydro One, has no authority to relinquish public control of Hydro One by offering its shares for sale to private investors.
The Unions also argue, that even if this is wrong, the approval of the Ontario Energy Board must be obtained before any sale of Hydro One.
Nevertheless, on the last day of the legislative session in mid-December last year, Mike Harris announced his government’s plans to put Hydro One up for sale. According to the government, the privatization would be the biggest in Canadian History.
Yet until that announcement the government had repeatedly assured the people of Ontario that it had no intention of relinquishing public control of this natural monopoly.
For example, speaking in the provincial Legislature on June 17, 1998, the Minister of Energy Jim Wilson explained the Bill 35 that would break up Ontario Hydro and create Hydro One Inc., this way:
But one of the reasons we’re not talking about privatization is my dream for Ontario Hydro is that, once again, it will begin to return a healthy profit back to the shareholder - and the shareholder is the people of Ontario - that money in the future could be used to either lower electricity rates again or, once the debt is paid off, clearly that’s money that could go into general revenues that can support health care and education and other priorities that the government of the day might have. That’s one vision of where the money should go once Ontario Hydro is again a major player in the North American market. [Emphasis added]
Later that year, the Minister reiterated this point in a letter to the Financial Post on December 3, 1998 under the title “Ontario’s Plan is not to Privatize Power”. In this letter, Mr. Wilson wrote:
Hello! Is anybody listening? … The Mike Harris Government introduced the Energy Competition Act to bring it at customer choice, lowest possible prices and investment for Ontario - not privatize the utility. [Emphasis added]
The Minister’s remarks confirmed the government policy laid out in the 1997 White Paper - Direction for Change - Charting a Course for Competitive Electricity and Jobs in Ontario, which set out the government’s agenda to de-regulate and restructure the electricity sector.
Referring to the province’s ownership of the corporations that became Ontario Power Generation Inc. and Hydro One Inc., the White Paper repeatedly stresses the importance of maintaining public control. Here are some samples taken from the report:
New governance structures would be created. The Government would exercise control through its role as owner and shareholder, focusing its attention on general policy directions and bottom line financial results. ….. As a responsible shareholder, the Government would establish expectations for performance, using such industry benchmarks as dividend yields, return on equity, interest coverage, capital ratios, and so forth. …… First, the Government, as shareholder of the new companies, would ensure that they operate as efficiently as possible, and that the potential stranding problem is dealt with in the first instance through cost savings. ….. The Government, on behalf of taxpayers, would insist that prudent assumptions are used in investment planning and budgeting, and that tough performance targets are met. ….The sixth action step would be to establish commercially acceptable capital structures for the new commercial companies. … The Province will then receive dividends in line with private sector norms. [Emphasis added]
Nevertheless, just before midnight on the eve of the Easter long weekend, an Initial Public Offering was posted on the internet, offering for sale all of the province’s shares in Hydro One. While the preliminary prospectus indicated that no single shareholder would be entitled to acquire more than a 15 per cent interest in the company, no restrictions were otherwise placed on the right of investors, including foreign investors, to purchase shares in the transmission utility.
It is now very clear that the government has no intention of returning to the legislature for a mandate to sell this essential public infrastructure or of seeking approval for the sale from the Ontario Energy Board.
The Unions responded by writing to Ontario Securities Commission raising several concerns about the preliminary prospectus and urging the Commission to refuse its approval for the IPO on public interest grounds.
On April 8, they initiated legal proceedings to stop the sale, or alternatively, to require approval of the Ontario Energy Board before it could proceed. The following briefly summarizes the two arguments their application makes:
Section 48 of the Electricity Act
Section 48 of the Electricity provides the designation of two successor corporations to Ontario Hydro, which were to become OPG and Hydro One. The section stipulates that shares in both corporations may be acquired and held in the name of Her Majesty in right of Ontario by a member of the Executive Council designated by the Lieutenant Governor in Council. Jim Wilson was subsequently designated the Minister as the shareholder.
The Unions will argue that under the Act the Minister has been given no authority to sell or otherwise divest the Crown of its shares in these corporations, or otherwise relinquish its control of them. If the legislation intended to give the government this authority, it would have to say so.
In fact, when governments do intend to privatize public assets, from Air Canada to Highway 407, they pass legislation explicitly for that purpose, leaving no doubt about the intent of the legislature. The practice of providing clear authority for a decision as momentous as the sale of large publicly controlled corporations has been followed consistently not only in Canada but in other jurisdictions as well. Indeed legislation providing a clear mandate for the privatization Highway 407 was passed in the same session as the Electricity Act. Yet this government is seeking to carry out the largest privatization in Canadian history relying upon statutory authority that is ambiguous at best, and housed in legislation the Minister repeatedly said was not about privatization.
After hearing the Unions’ submissions on this point, Mr. Justice Gans wondered aloud whether the people of Ontario were being “sandbagged” by their government.
Section 86 of the Ontario Energy Board Act
The Unions will also argue that even if the court finds the Minister does have authority to sell the government’s shares in Hydro One, this can only occur if the sale is approved by the Ontario Energy Board. Prior to the release of the IPO, CEP Canada had written to the Board urging it to require the Province and Hydro One to submit an application for approval under the Act. The Board responded that its lawyers did not think a hearing was required.
In the affidavits filed in support of their application, the Unions refer to dozens of applications that have been submitted to the Board concerning the sale of transmission and distribution systems, including for example systems as small as that which formerly belonged to the Town of Picton, the former Village of Bloomfield and the former Village of Wellington. In each case the Board required that the vendor or purchaser demonstrate how the transaction would serve the public purposes of the Act.
The Unions will argue that the same rules apply to what is the largest privatization in Canadian history.