End of an era – the split-up of Ontario Hydro29 April 1999
On the first of April, after 93 years of service, Ontario Hydro ceased to exist and was replaced by four successor entities.
Under new legislation, Ontario’s powerful electric utility, one the the largest in the world, was replaced by the following organisations:
•Ontario Power Generation Inc (OPG).
•Ontario Electric Services Company Inc (OESC).
•Ontario Electricity Financial Corporation (OEFC). And,
•Independent Electricity Market Operator (IMO).
OPG (sometimes referred to as Genco) becomes the owner and operator of all of Ontario Hydro’s existing electricity generating facilities.
OESC (sometimes referred to as Servco) will set up one or more subsidiaries to own and operate the transmission systems. OEFC will continue to hold and service all of Ontario Hydro’s existing debt instruments, and will receive payments from the two operating companies (see below). The IMO is a separate not-for-profit organisation which will enable consumers to contract with generators for the supply of electricity. The Ontario government also decided to establish a fifth small entity, the Electrical Safety Authority, which will take over Ontario Hydro’s former role in the inspection of residential and commercial electrical equipment installations.
This marks the most major restructuring of an organisation setup over 90 years ago when, in 1906, the Ontario government formed the Hydro-Electric Power Commission of Ontario (HEPCO). Initially it built transmission lines, buying power from small independent producers. Over time it purchased most of the small hydro-electric generating stations and built others. The Sir Adam Beck power station at Niagara Falls (named after HEPCO’s founding Chairman) began service in 1921, and continues in operation today.
By the late 1940s, the availability of suitable hydro-electric sites had diminished and HEPCO began building fossil-fired thermal plants to meet the growing demand for electricity. Early in the 1960s, HEPCO decided to embrace nuclear power, and its first unit at Pickering went into service in 1971.
Throughout the first fifty years of its history, virtually all of the electricity in Ontario came from hydro-electric stations. HEPCO became affectionately known as “The Hydro”, and people in Ontario used the term “hydro” to mean electricity (much to the puzzlement of people from some of the other provinces). By 1972, HEPCO’s electric generating capacity was no longer predominantly hydraulic. Nevertheless, the Ontario government reinforced the misnomer in 1972 with the passage of the Power Corporation Act, which provided HEPCO with a more modern corporate structure and renamed it Ontario Hydro.
DEALING WITH THE DEBT
One of the major issues which was addressed by the Ontario government is the question of how much debt should be assigned to each of the two operating corporations. Last fall, the Ontario Ministry of Finance issued a bulletin which provided a preliminary estimate of the value and assigned debt for each of the three operating corporations. The following table shows the updated debt position.
The assessed value of OPG was increased from the Can$5.0 billion estimate last October to the Can$8.5 billion figure shown, whereas the value of OESC was reduced from Can$10.5 to 8.6 billion. The total debt of Ontario Hydro at the end of March is reported as Can$38.1 billion. The difference between the total value of the new companies (Can$17.2 billion) and the total existing debt (Can$38.1 billion) is the stranded debt (Can$20.9 billion).
The two operating companies will make debt payments to the Ontario Electricity Financial Corporation (via their shareholder, the provincial government). In addition, they will make payments in lieu of federal and provincial business taxes and property taxes. These dedicated revenue streams, plus the net income after financing charges, will be used to pay down a portion of the stranded debt held by the OEFC. The value of these payments has been estimated at Can$13.1 billion. This leaves a “residual” stranded debt of Can$7.8 billion. The Ministry of Finance has indicated that the level of the anticipated interim “transition charge”, which will be included in the price of electricity to pay down the residual stranded debt, will be determined later and will be adjustable.
NEW POWER MARKET
Meanwhile, the independent Market Design Committee (MDC), which was appointed by the Ontario government to make recommendations on the implementation of a competitive electricity market in Ontario, has released its fourth and final report. Much of the work of the MDC related to the operation of the Independent Market Operator. However, the MDC also addressed the issue of market power (ie the potential for the new OPG to control the market price of electricity).
The two key recommendations of the MDC, which were previously accepted by the Ministry of Finance, are that:
• Within 3 years from the opening of the competitive market (in January 2000), OPG will be required to transfer marketing control of 65% of its generating capacity from fossil and hydraulic facilities and firm long-term imports. This can be done by means of “vesting” contracts (ie bulk sales of electricity to other companies at a fixed price).
• Within 10 years from the opening of the competitive market, OPG will be required to relinquish marketing control of 65% of its total generating capacity, by the same means as noted above. (There is no requirement that OPG divest itself of ownership of its generating facilities.)