Former Ontario premier Dalton McGuinty’s reputation was tarnished by his government’s mishandling of the province’s electricity market. His politically motivated decision to cancel development of two gas-fired power plants turned into a $1.1-billion boondoggle.
You can draw a straight line from that debacle to Mr. McGuinty’s exit from politics to the political problems of Premier Doug Ford.
Mr. Ford’s government is throwing away money by meddling in publicly traded Hydro One Ltd. to score political points and fuel fundraising campaigns. Bay Street is already questioning his judgment. That’s bad, but no real danger to a populist premier. Mr. Ford works hard at cultivating an outsider image.
However, Mr. Ford and the Ontario Progressive Conservatives risk doing gas-plant-scale damage to their reputations if the financial damage from their political interference in Hydro One continues to rise, while at the same time the government makes zero progress on an election promise to cut power prices by 12 per cent.
Mr. McGuinty’s credibility crumbled because he initially announced the cost of gas plant cancellations would be relatively modest – $230-million – and the numbers kept getting bigger.
Mr. Ford’s credibility problem also starts with an insignificant sum of money. He rode to office last spring in part by promising to lower power prices by getting rid of Hydro One’s $6-million man, former CEO Mayo Schmidt, who was paid $6.2-million the previous year.
Once in office, the PC’s delivered on the pledge by pushing out Mr. Schmidt and the board. The government then continued to meddle with Hydro One’s compensation plans. The PC party featured Mr. Ford’s campaign against Hydro One pay packages last month in fundraising e-mails to members.
Doug Ford vs. Hydro One: A guide to the ongoing corporate dispute
The price tag on Mr. Ford’s bull-in-a-china-shop approach is spelled out in the Hydro One’s latest financial results, released last month. U.S. regulators blocked the planned US$4.4-billion takeover of U.S. utility Avista over concerns about political interference in Ontario.
As a result, Hydro One paid a $138-million termination fee to Avista and took a $46-million hit on a variety of financing charges that stem from the deal. It also paid $7-million in interest during the quarter on debentures the company sold to pay for the takeover, then redeemed. Add it up, and Hydro One dropped $191-million to allow Mr. Ford to keep his promise on a $6-million CEO.
Beyond all that cash going down the drain, Hydro One stock now trades at a discount to other utilities due to political interference, according to every analyst following the company. Call it the Ford factor.
UBS Group AG, for example, estimates there is a 12-per-cent gap between Hydro One’s share price and that of comparable utilities. Hydro One’s market capitalization is $12-billion, so the discount represents $1.4-billion in lost valuation for shareholders. Or $300-million more than Mr. McGuinty spent on gas plants.
Who’s the biggest loser because of that valuation gap? The Ontario government – because it owns 47 per cent of Hydro One.
“We view the cap the Ontario government is forcing on Hydro One’s executive compensation negatively,” Robert Hope, an analyst in Bank of Nova Scotia’s capital markets unit, said in a report that came out on the heels of the government’s announcement of a pay scheme that limits the CEO’s pay package to $1.5-million. “We remain cautious until there is greater clarity on Hydro One’s pending rate decisions and how Premier Ford intends to reduce Ontario electricity pricing by 12 per cent.”
The Ford factor also shows up in credit rating agency reviews on Hydro One, which has $10-billion in long-term debt. In December, Standard & Poor’s said it could downgrade the company “if the Ontario government intervenes further in [Hydro One’s] business or operating decisions, resulting in additional governance deficiencies that we consider severe.”
Since that warning, the Ford government has fought public battles with the utility’s board over executive compensation. If S&P does cut Hydro One’s single-A rating, the company’s borrowing costs will jump.
What baffles Bay Street, but hasn’t yet registered with the general public, are continuing government decisions that hobble Hydro One. Last month, the Tories stepped into the contest for the right to build and operate a 450-kilometre network out of Thunder Bay, known as the East-West Tie. In bidding for the project, Hydro One faced off against a consortium controlled by Florida-based NextEra Energy. The provincial regulator, the Ontario Energy Board, was expected to choose a winner this month.
Despite Hydro One’s bid being $100-million below its rival’s offer, the PCs stepped in ahead of a decision from the regulator and awarded the project to the NextEra consortium. Energy Minister Greg Rickford cited the winning bidder’s strong ties to First Nations groups in announcing the decision.
In a report, Industrial Alliance analyst Jeremy Rosenfield said the decision was a serious setback, “effectively removing one potential longer-term investment for Hydro One, and further illustrating the political/regulatory risk in Hydro One at this time.”
Voter anger at Ontario’s last Liberal government carried Mr. Ford into office, outrage driven in large part by the previous premiers’ perceived mistakes on energy policy. By some measures, the cost of this government’s interference in Hydro One already exceeds what the Liberals spent on gas plants. And there’s no sign yet of the promised 12-per-cent reduction in electricity rates.
Like his predecessors, Mr. Ford is finding out there are no easy fixes to Ontario’s energy market and little tolerance for politicians who underplay the cost of keeping the lights on.
Andrew Willis