Ontario Premier Doug Ford promised to get rid of the $6-million man running utility Hydro One Ltd. during his successful election campaign last spring.
Keeping that promise appears to have cost Hydro One at least $185-million, killed plans to create a market-leading company and sullied the province’s reputation as a place to do business.
Mr. Ford forced the retirement of Hydro One chief executive Mayo Schmidt, who earned $6.2-million last year, and the resignation of the entire board of directors in July. He triggered the departures knowing full well the Toronto-based company was in the midst of its first foreign foray, a $4.4-billion takeover of Avista Corp., which runs natural gas and electrical transmission networks in five western U.S. states. The Progressive Conservative Premier took these steps while owning a minority 47-per-cent stake in the partly privatized utility.
On Wednesday, regulators in Washington State rejected the Hydro One takeover over concerns Mr. Ford will be calling the shots at the combined companies. Avista is based in Spokane, Wash., and approximately 60 per cent of its operations are in the state. The two utilities can appeal the decision, but how can they refute this statement from the Washington Utilities and Transportation Commission: “Provincial government interference in Hydro One’s affairs, the risk of which has been shown by events to be significant, could result in direct or indirect harm to Avista.“
Right now, the deal is dead and Hydro One is on the hook for a US$103-million termination fee owed to Avista. In addition, Hydro One will have to eat at least $49-million in commissions to investment banks that lined up $1.4-billion in financing for a takeover that’s not going to happen. And the utility must pay millions in legal bills. It all adds up to a significant financial setback for Hydro One, which posted a $227-million profit in the most recent quarter.
With Hydro One’s growth strategy now toasted, what has Mr. Ford’s government actually achieved for customers of Ontario’s electrical transmission system? Next to nothing, when you consider that in recent testimony to the Washington State regulator, Hydro One chairman Tom Woods said the company planned to pay its next CEO up to $4-million. Mr. Woods was appointed in August by the Progressive Conservatives.
More importantly, Mr. Ford is reinforcing Canada’s international image as a country that doesn’t quite work. In Canada, governments of all stripes are prone to making up rules as they go and interfering in private-sector deals negotiated in good faith.
Those billboards that Mr. Ford put up saying “Welcome to Ontario, Open for Business” look ridiculous when the government can’t get out of its own way during Hydro One’s bid to establish itself as a leading North American utility.
This is not the first time Ontario’s Progressive Conservatives have fumbled a public market deal for an energy company. In 2002, then-premier Ernie Eves was forced to cancel what would have been the largest initial public offering in Canadian history at Hydro One after unions successfully argued the government didn’t have the authority to cut a deal. It was amateur hour then at Queen’s Park, and it is amateur hour now.
Mr. Ford may be content to be a minority shareholder in a utility with far more modest ambitions than its previous leaders envisioned. The Premier’s political interests stop at the U.S., Quebec and Manitoba borders. He can take comfort in a Hydro One commentary late Wednesday from BMO Financial Group analyst Ben Pham, who said: “While this may sound odd … not acquiring Avista and refocusing its attention on its core Ontario franchise would likely be viewed positively if the deal ultimately breaks.”
But the future of Ontario and Canada depends in large part on building local champions – domestic businesses that successfully compete on a global stage. In a relatively small economy, with limited domestic markets, it’s essential for Canadian companies to tap foreign markets for growth. That’s no longer an option for Hydro One. CIBC World Markets analyst Robert Catellier said: “While some shareholders may be relieved if the Avista merger does not proceed, the reasons cite in the order are damning, making it hard to conceive the company could meaningfully expand beyond Ontario.”
U.S. expansion has been the path forward for most of Canada’s large utilities, including Alberta-based Enbridge Inc. and TransCanada Corp., and Newfoundland’s Fortis Inc. Buying Avista would have allowed Hydro One to keep pace by moving into the front ranks of North American players. A grandstanding politician just scuppered that plan.
Andrew Willis