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By Judy Darcy

The Ontario government claims that privatizing the province’s electrical utility is necessary to pay down the debt that Ontario Hydro has accumulated over the course of the past several decades. Nothing could be further from the truth. Indeed the government’s hydro selloff will yield a significant payoff – but it won’t be of the utility’s debt. Electricity users, the people of Ontario, won’t reap the rewards either – they’ll be stuck paying the mortgage on property they no longer own.

Brokers of the initial public offering (IPO) of Hydro One, the province’s transmission grid, will pocket a tidy chunk, while any proceeds from the sale will flow into the province’s coffers with no guarantee – and little hope – they will be redirected to pay down the debt. Meanwhile, a natural monopoly will fall into the invisible hands of the marketplace, which are trembling in anticipation at the profits they stand to reap.

Shocked at the underhanded way the government was attempting to ram through what it boasted was the biggest privatization in Canadian history, our union joined forces with the Communication, Energy and Paperworkers’ union to launch a legal challenge of the IPO. While the courts have declared the sale illegal, the government juggernaut plows ahead, rewriting the laws to make the privatization legal and appealing the court decision.

The Tories are proceeding without producing a shred of evidence or a single convincing argument about the merits of selling one of the province’s crown jewels. The Hydro One scheme along with its companions – deregulation of the electricity market and privatization of electricity generation – fly in the face of the facts, and will create enormous problems for Ontario. The coming fallout includes higher costs, reduced efficiency and reliability, loss of local control and environmental degradation.

The debt argument is as hollow as the shell game the government is playing. The truth is, Ontario Hydro’s debt was well under control before the Conservative government embarked on its dismemberment. Far from being a burden, the utility’s $38 billion in assets offset the debt, with operating revenues covering debt servicing costs. When the government carved the utility into separate government-owned private corporations, that all changed.

Hydro One was created amid repeated pledges that the grid would remain public, and that the government had no intention to privatize it. In creating the newly-separated generation and distribution corporations (Ontario Power Generation and Hydro One), the government carved up the utility’s debt, disrupting a steady repayment plan. OPG and Hydro One divided $17 billion in debt between them, leaving $21 billion in ‘stranded’ debt no longer covered by the utility’s ample assets. The move was part of a massive undervaluation of the utilities.

Economist and utility expert Professor Myron Gordon has scrutinized the sale of Hydro One and other aspects of the deregulation and privatization plan. By his calculations, the Hydro One IPO is a steal of a deal. Investors will walk away with a transmission grid for between $4 and $5.5 billion – a far cry from the $9.4 billion to $10.7 billion Gordon estimates the utility is worth under continued provincial ownership.

There is absolutely no guarantee the proceeds of Hydro One’s sale will go towards paying down the stranded debt. The likely scenario sees the government funneling any proceeds into general revenues to mask the impact of deep tax cuts. And, if the IPO only nets $4 billion – the book value of the shares – there won’t be a single penny to put toward the debt – or anything else. Gordon points out the sale short circuits the province’s plan to pay down a substantial portion of the $21 billion through cash flow from utilities including Hydro One. In a recent forum, Gordon told the Energy and Environment Minister that “keeping Hydro One generates an annual contribution of $750 million or more year after year, without killing the goose that lays these golden eggs.”

The original plan saw ratepayers directly funding $8 billion of the $21 billion stranded debt, through a surcharge on electricity consumption. With the possible sale of Hydro One and the forced divestment of the majority of OPG, that surcharge will have to rise substantially, further jolting electricity users already battening down the hatches in anticipation of rising prices on the newly-deregulated market.

While the assets have been underpriced, the result of their sale will inevitably be price hikes.

Ontario’s generating rates, the bulk of an electricity bill, will rise to meet the higher prices of neighbouring American states as the Energy Competition Act teams up with North American Free Trade Agreement (NAFTA) to forcibly integrate the Ontario and American markets. Gordon and John Wilson, an engineer and former Hydro One board member, warn, “[I]ntegration will force Ontarians to bid against wealthy, electricity-hungry Americans to buy their own Ontario-produced electricity,” adding Michigan’s electricity prices are 50 per cent higher than Ontario rates, and New York City’s are four times higher.

The forced sell-off of the provinces’ generation assets (a building block of California’s house of cards) means OPG must sell 65 per cent of its capacity over the next decade – a move Gordon and Wilson say will “reduce OPG from a powerhouse to an empty shell”. They fear that OPG is being set up to fail even as it dwindles away.

The government requires OPG to hand over any revenues it generates above the previously-regulated market price of 3.8 cents per kilowatt hour. That’s not the only way that OPG will “bleed,” according to Wilson and Gordon. “To gain the support of big electricity users in the steel, auto and other industries, OPG is obliged to sell them power at a secret but reputedly large discount from the 3.8 cent price. As OPG disposes of capacity at giveaway prices, it will become smaller and less able to support these subsidies to big users, as well as the other burdens imposed on it by government,” pumping steroids into the Conservatives’ self-fulfilling prophecy that “government enterprises can’t make a profit.”

Arguments that Hydro One must be sold to raise capital for expansion don’t hold water. In Hydro One’s annual report last year, CEO Eleanor Clitheroe reported that the public utility could easily raise funds, saying the utility “completed one of the most successful bond financings in Canadian history…We have earned superior credit ratings from agencies in the United States and Canada.” Hydro One raised $250 million more than its $750 million bond issue target. Clearly, whatever money Hydro One needs to serve the public interest – and Ontario residents aren’t interested in financing expansion of the transmission system into US markets – is readily available, and cheaper than it will be to borrow as a privatized entity.

Lurching from disaster to devastation

Gordon says selling Hydro One could be an “economic disaster” for the province. But he says an even greater disaster could come from the opening of our transmission and generation capacity to US influence and control. Privatization will flip the switch on key provisions of the North American Free Trade Agreement. Provincial ownership exempts electricity from NAFTA, sheltering Ontario residents from the devastating effects of foreign control of this vital industry. As Gordon and Wilson warn, it will become “illegal both to deny US consumers the right to compete for our electricity and to deny foreign corporations the right to own our industry.”

NAFTA locks in higher prices, according to the Ontario Electricity Coalition, which has played a key role in sparking province-wide opposition. “NAFTA mandates that we move to high US rates and not use our electricity system to benefit Ontarians. The Ontario government would not be able to maintain a low rate for Ontarians and sell at a higher rate to Americans as it does now.” Ontario will be required to export electricity to the US, even when shortages arise in the province. Eager to cash in on higher US rates, corporations will increase power generation, compounding environmental problems in the most smog-laden region of the country.

In addition to international trade risks, the government’s move creates new domestic risks, as electricity prices ride the deregulated market’s roller coaster. The result has been a plague of peddlers selling flat-rate contracts door-to-door. The “retail rip-off” has meant “one in four Ontario households has signed a contract to buy their electricity for almost 40 per cent more than they are currently paying,” according to Gordon and Wilson.

In addition, transmission rates will likely rise to cover shareholder profits and taxes the public corporation didn’t have to pay. Opening up markets to the south will also shift Hydro One’s focus to increasing transmission capacity to the United States. “[T]he price Ontarians pay for their electricity will rise correspondingly,” according to Gordon.

The government’s shameful performance – from a botched attempt to sneak through a back-door Hydro One IPO to its sham public ‘consultations’ with a pre-determined outcome – fly in the face of democratic principles that are the bedrock of Canadian society. The government’s unwillingness to engage in a proper debate – or put the policy to the test in a general election – is an indication of the shaky foundation they are all-too aware their scheme rests on.

There are many powerful roadblocks to the government’s plan. As the Conservatives behave with contempt and disregard for the public, anger and opposition grows. Municipalities representing more than five million Ontarians – nearly half the province’s population – have passed resolutions opposing the deregulation and privatization debacle. The discrediting of deregulation architects Enron further weaken pro-deregulation arguments. The government has no public mandate to proceed, and is hemorrhaging credibility. Proceeding with privatization and deregulation, including the sale of Hydro One, will saddle Ontario residents with new economic and environmental debts while doing nothing to pay off the existing debt.

Judy Darcy is National President of the Canadian Union of Public Employees, representing one half-million women and men who work in health care, education, municipalities, utilities, libraries, social services, transportation, communications, airlines and emergency services.