Chapter 5
Ontario Hydro
Power to the People
In public sector America things just get better and better. The common presumption is that public servants forgo high wages in exchange for safe jobs and benefits. The reality is they get all three.
Stephane Fitch, Forbes, “Gilt-Edged Pensions”
If you are looking for a poster child for government interference, manipulation, error, and overpayment, you could find none better than the multiple-headed offspring of the former Ontario Hydro. Once lauded as a prime example of everything that is good about modern government, Ontario's convoluted electricity agencies now represent everything that has gone wrong in our country in the past 30 years. From massive cost overruns on capital projects and wildly-escalating consumer bills, to excessive salary and pension costs, huge payouts for disgraced former employees, to taxpayer subsidies for foreign companies and guaranteed power purchases at many times market value, this one has it all. Where to start?
Niagara Falls has been used for power generation since the 1880s. Serbian inventor Nikola Tesla had used hydro power to illuminate the Falls in 1883, then built the first significant hydroelectric system at Niagara Falls for the Westinghouse Electric Company in 1895. It was operated by the privately-owned Niagara Falls Power Company. Tesla invented alternating current, known as AC, which is used around the world today. His American rival Thomas Edison invented DC, or direct current, a competing technology that lost out to Tesla in a protracted and bitter business battle. In one famous confrontation, Edison publicly electrocuted an elephant using Tesla's invention, to show the dangers of alternating current. But we digress.
In the first years of electricity generation, power was privately owned, but in 1905 Ontario was given rights to the Canadian hydro flow at Niagara Falls. In effect this gave the province control over electricity, a monopoly which it still largely enjoys today, although the deregulation of the electrical system in 1998 has allowed private operators a role. In 1906 the Ontario Power Commission was formed, renamed the Ontario Hydro Commission, and eventually became known as Ontario Hydro.1
The move to take public control of the power generated by Niagara Falls was spearheaded by Adam Beck, later knighted for his achievements. Beck was a Conservative member of the Ontario Legislature at that time, while also serving as the mayor of London, Ontario for three years. Despite being a Conservative he was opposed to private ownership of the power industry. He successfully established Ontario Hydro as a government department with a mandate to provide power at cost. In 1906 he was appointed the first chairman of the Commission. Beck, by the way, was a self-made businessman who donated his public salary to charity.
By 1925 Ontario Hydro had created the world's largest hydroelectric plant at Niagara Falls. In the 1950s Ontario Hydro built coal-fired generating stations, and in the 1960s began the development of nuclear power. Up until that point Ontario had benefited from some of the cheapest and most reliable power in the world. With the advent of nuclear power, however, all of that began to change, as did the company's mandate. In 1972, the Power Corporation Act converted Ontario Hydro into a Crown corporation. This changed Ontario Hydro's role from providing “power at cost” to providing power at a profit. Since profits would go to the Ontario government, this seemed to be largely a bookkeeping change, but as we will see, this program went wildly off the tracks.
Nuclear energy was promoted as a non-polluting energy source for the future, except of course, for the minor inconvenience of having to dispose of spent uranium and the minor risk of exposure to contamination should anything go wrong with the plant (see: Chernobyl; Japan tsunami). As it turns out, nuclear plants are not profitable, and by 1998 Ontario Hydro was holding $38.1 billion of debt.2 So much for providing power at a profit. Sir Adam Beck would have been spinning in his grave.
In 1998, the Conservative government of Premier Mike Harris passed the Energy Competition Act, allowing private companies to enter the hydro market. At the same time, the province split Ontario Hydro into five separate Crown corporations. These are Ontario Power Generation (OPG), which focuses on the generation of power; Hydro One, which handles transmission and distribution of power; the Independent Electricity System Operator (IESO), which controls the flow of electricity, balancing it according to supply and demand; the Electrical Safety Association (ESA), which focuses on safety; and the Ontario Electricity Financial Corporation (OEFC), which inherited $30.3 billion of Ontario Hydro's debt (leaving $7.8 billion as “stranded debt,”3 which shows up on your monthly bill as a “debt reduction charge”), and is tasked with eliminating it.
If that isn't confusing enough, we now also have the Ontario Energy Board (OEB), which regulates the province's private electricity and natural gas providers and sets prices for everyone. We also have the Ontario Power Authority (OPA), which is positioned between the OEB and five partners listed above. A quick surf of OPA's website turns up no specific information about what it does, but yields this vision statement: “Leading Ontario in the development of North America's most reliable, cost-effective, and sustainable electricity system.” If you have been following the news about Ontario's hydro prices in the last few years, you will know OPA is not doing a very good job in terms of fulfilling this vision.
Below this provincial government hierarchy are the 90 or so municipal utility companies that divert electricity to your home (Hydro One services most of rural Ontario directly). And then there are the private companies, the most significant of these being Bruce Power, a private corporation that produces approximately 20 per cent of Ontario's electricity. Bruce Power leases its main generation assets—the Bruce nuclear facilities—from OPG. Setting policy for all of these entities is the provincial Ministry of Energy.
Problems Times 5 or 7 or 90 . . .
If you've been following our story so far, you'll know that government agencies are not particularly efficient. So you will recognize that during the first 70 years of generating electricity, when there was only one Ontario Hydro, the company was a spectacular success story. Ontario was the envy of the world. With one of the cheapest energy sources in the world, Ontario was able to attract the lion's share of the country's heavy industry, offering high-paying and stable jobs in the automobile and steel industries and other areas of manufacturing. Southern Ontario became the engine of the nation's economy, and supported most of the other provinces through transfer payments.
Let's look at the cost of human resources involved in the new, no longer–streamlined structure of Ontario Hydro. As you know, every government-run enterprise requires a management team and a board of directors to supervise it, as well as a legion of office workers, accountants, various specialists, and other support staff. Whereas once it was only Ontario Hydro (OH), we now have OH (recently renamed Hydro One) plus OPG, the IESO, the ESA, the OEFC, the OEB, and the OPA. Naturally all of these need a CEO and a BOD (board of directors). So by splitting one organization into seven, the province increased the management cost of our hydro system sevenfold. You may have heard the expression that “a camel is a horse designed by a committee,” Wikipedia explains this as a group of entities coming together to produce something in the presence of poor leadership. The defining characteristics of “design by committee” are needless complexity, internal inconsistency, logical flaws, banality, and the lack of a unifying vision. In this case, the committee took the horse—an entity that was well designed and operating efficiently—and turned it into a camel, ill suited for the task. (No offence to the camel.)
Just consider the bookkeeping and communication costs involved. These entities must all interact with each other, in many cases with one selling the other its service. So whereas one bookkeeping department used to look after all of the accounting, we now have Hydro One billing OPG, which is billing the OEFC, which is reporting back to the OPA, and so on. This kind of duplication at every level has driven up operating costs in ways that are totally unrelated to the cost of physically producing and distributing energy. Of course the story gets worse as we delve further into the details.
Once built, hydro-generating plants are designed to run without hands-on human input literally for generations, so you would think that there would be little requirement for highly-paid employees except, perhaps, in the supervision of the construction of these plants. How would you explain this, then? Each year the Ontario government publishes the so-called Sunshine List of every Ontario government worker paid more than $100,000 in salary. In 2009, more than 10,000 Hydro One and OPG workers made the list. That is more than $1 billion in salary costs for those employees alone. Insiders tell us that there are security guards making over $100,000. Hard to believe that this job couldn't be outsourced to a private company for less. These two companies had 17,517 employees at the end of 2009, so 57 per cent of the employees had a base salary higher than $100,000. Factor in the benefits package for health care, vacation pay, sick pay, the government's contribution to the pension plan, and the government guarantee of that plan—Hydro One's pension plan is underfunded to the tune of $300 million—and you have a perfect storm of unsustainable costs. Some 90 per cent of Hydro employees are covered by collective bargaining agreements. Even the OEB considers salary costs to be too high.4 Before we go there though, let's look at the actual numbers of the Ontario Hydro pension plan. As you know, provincial pension funding claims to be a fifty-fifty split, with employees contributing 50 per cent from their lucrative compensation packages and taxpayers chipping in the other 50 per cent. Here are the actual numbers from recent years:
Ontario's Hydro One pension contributions (all amounts in millions of dollars)5
Clearly this is not fifty-fifty. As you can see from the escalation in taxpayer contributions, this underfunding is heading for the moon as more and more of those $100,000-per-year employees retire with their $70,000-plus pensions and benefits, and are replaced with new employees who will also get pension funding.
Even insiders believe that OPG is overstaffed and overpaid and the utility has “largely failed to deliver” in keeping costs down. In a report on the nuclear division in March 2011,6 the Ontario Energy Board said OPG had failed to deliver the savings requested by Ontario's Energy Minister and recommended a $145 million payroll deduction.
“The board is concerned with both the number of staff and the level of compensation paid in light of the overall performance of the nuclear business,” the report said.
“For the nuclear business the evidence is clear that overall performance is poor in comparison to its peers and the staffing levels and compensation exceed the comparators. On this basis an adjustment is necessary to ensure the payment amounts are just and reasonable.”
Don't expect that $145-million reduction any time soon, though. The staff is virtually all unionized and will never accept a pay cut without a lengthy fight. And the Liberal government has no interest in the issue because it is too busy investing in its latest vision, committing $7 billion of your money to the Korean company Samsung to harness the wind. No comments about hot air at Queen's Park, please. More likely the Liberals will fire a few OEB board members for bringing it to our attention.
Criticism and mismanagement is nothing new at OPG. In late 2003, the incoming Liberal government fired the three most senior executives at OPG on the heels of a report that the retrofit of a single reactor at the Pickering nuclear plant had come in $900 million over budget and three years behind schedule. The government also accepted the resignation of all remaining board members.7
In early 2011 most electrical providers in the provinces were found guilty by the OEB of overcharging their customers. The companies were fined some $18 million in costs and damages. They were then given permission by the OEB to overcharge these same customers again to recover the $18-million fine.8 And the point of the fine was?
With today's muddled corporate structure, it's virtually impossible to know if Ontario's hydro system is operating at a profit or not. According to an article in the Financial Post, the combination of inside lending at artificially-low rates, stock market gains from investments, unfunded pension and benefits liabilities, and depreciating assets make it almost impossible to determine if OPG is profitable. The writer of the article, retired Canadian banker Parker Gallant, suggests that OPG actually lost $60 million on revenue of $5.6 billion.9 He also notes that combined debt has reached $13 billion, up 10.4 per cent in one year, with OPG's debt at $4.1 billion as of December 31, 2009.10 This debt compares to $53 million in March 2003, shortly after the company's previous debt load was moved to the Ontario Electricity Financial Corporation. So despite, or perhaps more realistically because of, the reorganization of Ontario Hydro, everything is going in the wrong direction.
Hydro One claimed record profits in 2010. As is usually the case when a government department turns a profit, it quickly invested the money in new capital spending and more employees, adding 300 new positions. Operating costs jumped 4 per cent and HO has unfunded pension liabilities of almost $300 million, resulting in a need to increase rates for both its transmission and distribution businesses.11
A final word from Mr. Gallant points out that OPG's “profit” in 2009 came from growth in the value of its nuclear waste management fund. Its what? Yes, each year money has to be set aside to pay for the eventual decommissioning of these nuclear plants and the disposal of spent fuel rods. This fund is invested and was valued at $10.2 billion on December 31, 2009, but this amount is offset by the projected decommissioning cost of $11.9 billion, or almost double the non-depreciated value ($6.7 billion) of the nuclear assets.12 Interpretation: It costs more to get rid of a nuclear power plant than it does to build one, all the while running it at a deficit. Is this anyone's idea of good planning? These are the same people who are planning Ontario's entry into wind and solar power. Keep your fingers crossed.
So there you have a quick introduction to how a government can screw up even a monopoly and turn the ever-flowing waters of Niagara Falls into a deficit. But surely with all the bad news, and the massive $19-billion deficit of the provincial government, and the $200-billion provincial debt, those $100,000-plus employees would be willing to pitch in for the rest of us and accept McGuinty's proposed wage freeze for two years, don't you think? You are so naïve. Here is an excerpt from the February 2011 newsletter of the Society of Energy Professionals, the union that represents many of the OPG workers.
Arbitrator critiques govt policy, awards OPG raises
The Society of Energy Professionals/IFPTE Local 160, February 4, 2011
Against the will of the McGuinty government and its wage restraint policy, an arbitrator has awarded members of the Society's OPG Local a two-year collective agreement with salary increases totaling 6 per cent. The award also includes a break-through improvement to benefits—coverage for dental implants.
“Government wage-restraint pronouncements are of no binding force or effect and, given the specific factors under Article 15 that must govern my deliberation, they can be of no practical effect either,” ruled arbitrator Kevin Burkett in a 26-page interest arbitration award. “There is no basis upon which to conclude that the members of this bargaining unit enjoy an absolute salary advantage that should act to moderate future salary increases.”
“All the hard work we put into bargaining has really paid off,” said Local VP Joseph Fierro. “This is a very good result for the employees we represent, and sets a terrific precedent for the Bruce Power and Nuclear Waste Management Organization Locals, who will be in arbitration later this year.”
Last year, the Ontario Legislature approved the Public Sector Compensation Restraint to Protect Public Services Act, the flagship of its response to the economic downturn and the resulting ballooning government deficit. It froze the wages of non-union employees in both the public and wider public services, and set out that no money would be forthcoming for future wage increases for unionized employees. Strangely, though OPG and Hydro One revenues and rates have absolutely nothing to do with government spending deficits, both utilities were included in the ambit of the Act.
Arbitrator Burkett found the context in which the two parties were bargaining to be most unhelpful for the resolution of differences: “It should come as no surprise that the parties made very little progress in direct two-party negotiation. Once OPG made it known that it was seeking a zero net compensation agreement and that it would be maintaining that position throughout, there was no reason for the Society to moderate its position or to seriously consider the OPG demands designed to improve the efficiency of its operations. The effect of the government pronouncement and its direction to OPG was to ‘freeze’ the bargaining and thereby to prevent the parties from either moving to an agreement or at least prioritizing their respective bargaining positions.”13
Take note of the disconnect between the union's position and the financial reality of the corporation for which its members work. The union says: “Strangely, though OPG and Hydro One revenues and rates have absolutely nothing to do with government spending deficits, both utilities were included in the ambit of the Act.” The union members actually seem to have no understanding that their salaries, benefits, and pensions, which are guaranteed by the taxpayer, contribute to government-spending deficits. They have no understanding that a $300-million funding shortfall in their pension fund is part of the government deficit. This is not unusual. We constantly hear public sector union officials and public sector employees state, “We did not create the deficit, and therefore it should not be on our backs to repay it.” This delusion is not limited to unionized public sector workers trying to defend their position. The vast majority of Canadians believe that government debt is the responsibility of the government and not their responsibility. In reality, of course, more than 50 per cent of all government expense is public sector compensation, so therefore it is the debt! And we will all be repaying it sooner or later.
Note also the arbitrator's position here. He can't see how employees making $100,000 plus benefits have an “absolute salary advantage,” and he accepts the position that if the union is not going to get any more money it doesn't have to “seriously consider the OPG demands to improve efficiency.” Shouldn't “improving efficiency” be part of everyone's job description? Did we mention that you're paying his salary, too?
The union newsletter also quoted Burkett as saying that OPG is “being forced to operate with one arm tied behind its back,” because of government policies and practices in regard to the electricity industry. He noted that the Green Energy Act offers competing producers unfair advantages such as guaranteed contracts at significantly higher rates for their production than OPG gets. Apparently unaware that OPG is accumulating huge debts of its own, he noted that OPG “will remain a profitable enterprise capable of maintaining the relative compensation position of its employees.”
The union newsletter mentions the Public Sector Compensation Restraint to Protect Public Services Act, passed in 2010. Let's take a look at that and see if it's the solution we are all seeking. This is from the Ontario government website:
Public Sector Compensation Restraint
Ontario has felt the effects of the global recession and is running a deficit in order to create jobs and protect our public services.
The McGuinty government is managing responsibly by controlling costs in one of its largest spending lines—compensation of public sector employees.
Everyone who is paid through taxpayer dollars is being asked to do their part. MPPs will lead by example with a three-year salary freeze.
The government has passed legislation that will freeze the compensation structures of non-bargaining political and Legislative Assembly staff for two years.
It will also freeze compensation plans for all non-bargaining employees in the broader public sector, including the Ontario Public Service, for two years. This will help redirect up to $750 million toward sustaining schools, hospitals and other public services.
For employees who bargain collectively, the government will respect all current collective agreements. When these agreements expire and new contracts are negotiated, the government will work with transfer payment partners and bargaining agents to seek agreements of at least two years' duration that do not include net compensation increases.
The fiscal plan provides no funding for compensation increases for future collective agreements.
It doesn't matter whether contracts expire next month, next year or the year after that—all employers and employee groups will be expected to do their part.
This is a balanced and responsible plan that requires employers and employee groups in the public sector to work together and do their part to sustain public services.14
We could have some fun questioning how a $19-billion deficit is “managing responsibly,” but let's stay on topic. Non-unionized employees of the government were given an immediate wage freeze for two years. Unionized employees were asked to follow suit. As of this writing not a single union has picked up on the hint, and as we can see from the arbitration award for OPG workers, the province's arbitrators are not going along for the ride either. To be honest, $750 million out of a $19-billion deficit really wouldn't accomplish much anyway. What is clearly needed is a massive downsizing of government staff or a major cutback of programs, or both. Since 80 per cent of government employees are unionized, this wage freeze is mere window dressing.
Notice also the two caveats in the press release. It says that the Liberals' “balanced and responsible plan” requires employee groups to “work together” with employers, which they are clearly not doing. It also says that “the fiscal plan provides no funding for compensation increases,” meaning such increases are not covered in the $19-billion deficit. So any contract negotiations that result in an increase will add to the budget deficit. Certainly Mr. McGuinty is accurate in the first sentence when he says Ontario is “running a deficit to protect our public services.”
It's Better to be in Management
Is that the whole story? No, it is not. We haven't looked at management yet. All right, so you are paying the salaries of the people that are managing this mess, the ones who have managed to screw up a monopoly, run up continuous deficits of billions of dollars, and build dysfunctional nuclear power plants while committing you to overpay for energy from wind and solar plants for the rest of your life. What are they worth? How about the highest salaries for public sector employees in the entire country? That's right, now-retired OPG president Jim Hankinson was paid $2.15 million in 2009. Of course that was just salary, bonus, and other compensation. When we add in the pension benefit on that huge salary, the total is $3.45 million.15 By comparison, Premier Dalton McGuinty took home only $208,974.
The 2009 annual executive compensation report for the OPG reveals how even when we think we are getting the whole story, we're not. The 2009 Sunshine List discloses the president and CEO's compensation as $2,150,115.69, with $2,632 in taxable benefits, but in reality, the tax hit is almost $3.5 million. Here is what Hankinson actually received in compensation:
Ontario Power Generation—Executive Compensation Report President and CEO—(2008 earnings)16
| Salary | $ 860,000 |
| Bonus | $ 898,700 |
| Pension value | $1,010,000 |
| All other | $ 683,246 |
| Total | $3,451,946 |
This exorbitant reward for incompetence won't happen again in the future, though. Former Energy Minister Dwight Duncan set up an expert panel to recommend a new method of determining the pay levels of public sector executives in the energy sector because the OPG compensation packages are too high. Whoops, our mistake. The panel was set up in 2006, so we guess Hankinson's “low” compensation was a recommendation of Duncan's experts. We wonder what his predecessors were paid.
Then again, there's no need to wonder. It's all public information, so we can just look it up; after all, it's your money they are being paid with. According to a Canadian Press article from June 26, 2007,17 Hankinson's equal at Hydro One, CEO Tom Parkinson, was being paid an annual salary of $1.6 million plus expenses until he quit in in 2006 amid criticism of expense account “irregularities.” To help ease the suffering and humiliation, Parkinson was given $3 million in severance pay. Prior to that, Parkinson's predecessor as Hydro One CEO, Eleanor Clitheroe, was fired in 2002 for what was described as “lavish spending” on top of her $2.2 million annual compensation.
So there you have it. Former Hydro One CEO Tom Parkinson was criticized for his expense account irregularities and accepted $3 million in severance when he “resigned.” (See Chapter 4's section on David Dingwall and Christiane Ouimet for the public sector definition of “resigned.”) Ontario Power Generation CEO Hankinson saw his income grow from $1.6 million a year in 2006 to $2.1 million in 2009, a 31 per cent raise over three years. No wonder the union employees are squawking about 6 per cent over two years.
Oh yes, and former Energy Minister Dwight Duncan? We guess he did such a great job on the finances of Ontario's Ministry of Energy that the Liberals made him finance minister for the whole province. In November 2010 he announced a 10 per cent cut in hydro bills, a move that will cost the government $1 billion each year for the next five years. That would be taking $1 billion out of your left pocket and putting it into your right pocket. After borrowing it from someone else, of course, since Ontario has a $200-billion debt already. Did we mention that somewhere?
And this brings us to Eleanor Clitheroe, one of history's great examples of abuse of entitlement. Clitheroe, like so many of our government appointees to juicy jobs, came to her public sector career opportunity by way of politics. She was Ontario's Deputy Minister of Finance from 1990 to1993 under the NDP government of Bob Rae. She then became a vice-president at Ontario Hydro, and served as president and CEO when the corporation's name was changed to Hydro One. In 2002 she was named Business Woman of the Year by the National Post, but soon afterward was fired as Hydro One's CEO after a public controversy arose regarding her substantial salary and benefits, including allegations that Hydro One paid $40,000 for renovations to Clitheroe's Toronto home, and that her children were shuttled about by limousine at taxpayers' expense.18 Clitheroe earned a base salary of $741,000 in 1999, $1.4 million in 2000, $1.7 million in 2001, and $1.5 million in 2002. In 2001, her last full year of work at Hydro One, she took home more than $2.2 million, including $174,000 for a car and $172,000 for vacations.19 This takes the terms “vacation pay” and “company car” to a whole new level.
You might think that if you're making $2 million in salary you could pay for your own home renovations and child care, but that's the whole problem of trying to run the public sector like a business. Business people are notorious for trying to maximize their wealth. That's why they go into business—because it offers the opportunity for unlimited wealth should they be successful. In business there are checks and balances to channel that greed into productive work and protect shareholders. In the public sector, by the time the auditors or the media or the public discovers how they've been ripped off, the deed is done. In business, if you get caught stealing from the company you are either forced to make restitution, you are fired, or you go to jail. In the public sector, if you get caught with your hand in the cookie jar—no, make that your wheelbarrow in the vault—you get a massive severance package and a fat pension for life. And then you are replaced by somebody with equally questionable ethics.
Clitheroe takes the cake, though. After being fired she was given a pension of $25,637.08 a month (yes, a month). She then sued the government and requested that her pension be raised to $33,644.2120 a month—slightly more than the average Hydro One pensioner gets annually, and almost five times the average annual CPP payment.
In the lawsuit, which was finally dismissed by the Ontario Court of Appeal in 2011, her lawyer noted that Clitheroe is the “sole breadwinner” for a family of four, and that she was supporting an ailing relative. Aren't we all sister, aren't we all. Clitheroe was indeed scheduled to receive the higher pension amount based on her negotiated contract with the government, which gave her two years of pension accrual for every one year that she actually worked. We're not making this up! This arrangement started when she was the deputy finance minister in 1992, and she negotiated the same deal with Hydro in 1993 as its chief financial officer. That's on top of payments Hydro employees receive through their registered pension plan, and in addition to supplementary top-up payments. In 2002, before Clitheroe was fired, the Ontario government passed legislation limiting the pension plans of its executive employees. Before the pension lawsuit, she had lost a $30-million suit against the government for slander and false dismissal, and before that was denied a $6-million severance that she was originally due to receive. Today she can be found working as an Anglican priest and assistant curate at St. Cuthbert's, a church in Oakville, Ontario. She is known to her parishioners as “Reverend Ellie.”