Ian A. Mondrow
Partner
Energy Regulation and Policy
Article
11
On April 16th, the Ontario Government released what may be the most public "unreleased" government report in recent times. Various details of the sell-down of Hydro One, and the merger of Hydro One Brampton with other GTA area electricity distributors, had already been well reported by the press when the Premier's Advisory Council on Government Assets report on unlocking the value of Hydro One was published. Aptly named "Striking the Right Balance," the report describes a very thoughtful assessment of how to balance the commercial drivers and public policy concerns associated with the future of Hydro One.
At the same time as Striking the Right Balance was released, the Ministry posted an information release on Hydro One Oversight.
The Advisory Council suggests in its report that its recommendation that the government sell its interest in Hydro One down to 40% as a combined electricity distributor and transmitter, together with its recommendations on governance of the new Hydro One, will strike an appropriate balance between the "policy objectives" of continued government ownership of Hydro One and the imperative given to the Advisory Council to monetize the value of the business. (The Advisory Council's initial, interim view was that Hydro One should be split into its transmission and distribution components, the latter sold off and the former held. The Council's thinking has evolved to a sensible conclusion that the enterprise has more value, and that this value will be easier to monetize, if these two businesses are held together.)
Governance of the new Hydro One is an important issue, not just for regulatory geeks, but for the financial markets as well. As already noted in some of the post-release press reports, and as discussed in the press and financial circles following the release of the Advisory Council's initial report in November 2014, one of the problems inherent in the "balance" which the Council is hoping to strike is the reticence of investors to commit to a business where control remains with the government. Particularly in the electricity sector, and in no place more than in Ontario, government management of the electricity file, often through government-owned electricity companies, has been characterized by an intense focus on public policy and political agendas, with less attention paid to commercial considerations and the efficient operation of a large "essential service" utility.
From a governance perspective, one of the most important passages in Striking the Right Balance is recommendation that: "The Province, in its capacity as a shareholder, should engage in the business and affairs of the company only as an investor, and not as a manager". The Council aptly observes that the government will have to adjust its approach to Hydro One in order to "provid[e] assurance to investors that the new company will have sufficient autonomy and flexibility to operate effectively in the private sector".
Some of the Council's recommendations should assist in this respect:
So far so good, but there are some recommendations which could be perceived as compromising the general principle that the government should get out of the way and let this new, recapitalized company get on with the business of running and growing the utility. For example, the Council has included recommendations that:
Review of the Government's companion Hydro One Oversight information release does nothing to allay creeping concerns regarding these notable departures by the Council from otherwise sound commercial governance recommendations. In particular, the Government's release:
The Government's "de facto control" over the new Hydro One is also emphasized in the information release.
Neither these reserved powers nor the Government's emphasis on its ongoing control will add any comfort that the Government will be disciplined enough to act as an owner rather than a manager going forward.
Beyond corporate governance, both the Advisory Council's report and the Government's information release refer to other governance changes that will attend the transition of Hydro One to a broadly publicly held company:
The Advisory Committee report also refers to enhancements of OEB oversight of the new Hydro One. The Government's information circular provides a bit more information regarding legislative changes to enhance the OEB's ability to:
Finally, the Government's information release refers to an OEB initiative "to increase consumer advocacy by giving consumers a direct voice in OEB hearings and proceedings". Right on cue, the OEB then released a letter indicating that it is proceeding with a second phase of a policy review of the role of intervenors that it began last year. This new phase of the policy review will focus specifically on alternatives for the funded consumer group regulatory intervention structure currently in place in Ontario. This is properly the topic of a separate comment. Suffice it to say for now that in Striking the Right Balance the Advisory Council recognized that rate applications to the OEB are already public, and consumer and industrial groups already have an opportunity to review costs and question rates being requested by regulated distribution and transmission companies (like the new Hydro One). These intervenors are sophisticated, broadly representative of ratepayer concerns, properly funded through an OEB-controlled cost eligibility system, and have a very "direct voice" in OEB hearings and proceedings. There is nothing apparent here that needs fixing, either generally or in the particular context of governance of the new Hydro One.
We will see whether the foregoing set of recommended and proposed measures will, in fact "strike the right balance" with investors who will be looking for a commercially oriented company rather than a vehicle for execution of the government policy of the day. We are encouraged by the balanced report of the Advisory Council. We are hopeful that the Government will take a commercial view of the path towards monetization of the value of Hydro One. We are somwhat concerned with the political statements indicating the Government's intention to retain authority to nullify a functioning board of directors and replace the CEO at will, and signalling that the government will retain de facto control of the new Hydro One.
Private investment and government control do not often mesh easily, and a perception of continued government management of the business of Hydro One could reduce the value of the upcoming public offering.
The market will ultimately determine whether the right balance has been struck.
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