Ontario Hydro Services Company

1895–2000

Ontario Hydro Services Company (OHSC) is a government-owned energy services provider based in Ontario, Canada. Spun off from utilities giant Ontario Hydro in April 1999 in preparation for privatization of the electric utility industry in 2000, OHSC handles distribution of electricity and retail operations. The firm provides electricity to three types of customers: industrial; retail, including residential customers, farms, and small businesses; and municipalities. The more than 250 municipalities served by OHSC in turn supply electricity to more than 2.7 million consumers. Serving nearly a million customers, OHSC has more than $9 billion in assets and operates one of the most extensive transmission and distribution systems in North America.

Early History: 1895-1950

The powerful Niagara Falls is located in Ontario, in an area that was populated by the majority of the province's citizens in the late 19th century. In 1895 the first major generating station was built, harnessing the power of the Niagara Falls, which was for many years the province's most vital source of electricity. Still, only local areas were able to take advantage of the power provided by a number of private companies given waterpower leases on the falls.

At the turn of the century, a group of prominent Ontario citizens began to advocate public ownership of the hydroelectric industry. Foremost among the proponents was Adam Beck, the mayor of London, Ontario. A vociferous, energetic supporter of public ownership of electric power, he threw the entire weight of his office and his powerful connections behind lobbying the Ontario legislature in favor of the idea, arguing that the thinly populated province would benefit from having a one-company monopoly rather than rival private competitors. Before approval could be given, however, legal battles had to be fought with the United States to regain control of parcels of the Canadian Niagara Falls that had been purchased by U.S. companies. In addition, the public had to be won over to the idea of a government monopoly of electric power.

Finally in 1906 the Ontario legislature passed a statute creating the Hydro Electric Power Commission of Ontario, headed by Sir Adam Beck, as he later became. The commission was given a mandate to provide all citizens with electricity at the lowest possible cost. This 'socialist' measure, although viewed with alarm in the United States and Great Britain, achieved its desired results.

Initially Hydro purchased electric power from private entrepreneurs for distribution to those municipalities that had contracts with the commission. However, the utility gradually began to purchase and, much later, to build its own hydroelectric generators, in addition to transmission systems.

It signed 76 new contracts to provide its services abroad in 1991, for example, and managed to boost revenues ten percent to about $7.14 billion.

1914–1971

World War I enormously expanded the need for electricity. The demand for electric power in Ontario tripled during the war and continued at the higher rate even after the war's end. In 1914 Hydro purchased its first generating station, and later the same year construction was completed on the first generating station to be built by the commission. Thus began an aggressive purchasing and building campaign, necessary to meet the increased demand, due in part to the soaring popularity of such electric appliances as irons, vacuum cleaners, and washing machines.

By 1922 Hydro was the largest, most powerful utility in the world, with a demand for electricity of 496,000 kilowatts, up from 4,000 kilowatts just 12 years before. To help meet the growing demand, in 1922 Hydro completed construction of its first major power station, Queenston-Chippawa, later renamed the Sir Adam Beck-Niagara Generating Station No. 1. It had taken 2,000 men to build and was the largest power generator in the world.

In the 1930s the commission took over administration of a series of small northern systems--later to be known as the Northern Ontario Properties--that primarily provided service to the paper and mining industries in that region. Three systems, serving the southern, more populated, area of Ontario, were consolidated into the Southern Ontario System in 1944. These two systems were eventually combined into one in 1962, although two others, divided at Sault Ste. Marie into the East System and West System, remained separate. In 1970 all of them were finally merged into one province-wide integrated system, with enough capacity to supply electricity to the United States at a handsome profit.

Diversification and Expansion: 1950s-Early 1990s

The years after World War II saw a huge expansion of utility companies, including the Hydro Electric Power Commission of Ontario. Immediately after the war, Hydro began construction of eight additional hydroelectric stations. In the late 1950s--with demand for electricity still unsatisfied--the commission decided to harness the St. Lawrence River, Ontario's last major undeveloped hydraulic site. The St. Lawrence project was undertaken jointly with the State of New York, and, when completed, added an extra one million kilowatts to the Hydro system, which, at the time, included 65 hydro stations and two fossil-fueled plants.

With the completion of the St. Lawrence project in 1958, Ontario had only minor waterways available for hydroelectric development. While thermal-electric plants were efficient generators during peak usage periods, these did not provide a viable alternative to meeting the spiraling demand for electricity, due to the expense of importing the fossil fuels necessary to run the plants. Nuclear power seemed to be the answer, and Ontario was richly endowed with the uranium that was used in the nuclear reactors. As early as 1951 Hydro had begun to experiment with nuclear power for commercial use, completing its first experimental nuclear power plant in 1962, followed in 1967 by a much larger one. While nuclear power was clean and efficient, it was also costly. Hydro engineers began experimenting successfully with increasing the size of nuclear power generators, developing the CANDU, or Canadian-type reactor, later used by all nuclear power stations in Canada. CANDU reactors were successfully installed in the Pickering A generating station, Canada's first major nuclear power facility, completed in 1971.

1906–1995

Diminishing natural resources, soaring costs, growing environmental consciousness, and the rise of aboriginal movements in Canada signaled that it was time for the Hydro Electric Power Commission to evaluate its direction for the future. An Ontario legislative task force was established in 1971 to examine these changes and to determine how Hydro could best meet them. The result was a major reorganization that enabled the company to better respond to the social and economic complexities of the late 20th century. Hydro ceased being a commission and became incorporated as a crown corporation in 1974, adopting the name Ontario Hydro. While still a government monopoly, the company became financially independent and was expected to turn a profit. The new Hydro was managed by a 17-member board of directors, 16 of which, including the chair, were appointed by the provincial lieutenant governor, while the president was appointed by the board itself. Although the newly reorganized company began to focus on social and environmental issues in addition to producing electricity, Ontario Hydro's mandate remained as it was in 1906, although expanded: not only electricity, but also electrical services including inspection and repair of electrical wiring and equipment, would be provided to Ontario citizens.

Throughout the 1970s and 1980s Ontario Hydro faced the public's growing concern about the world's shortage of fossil fuels and mounting damage to the environment. In an effort to deal with these problems, as well as keep costs down and moderate demand, conservation became an important company initiative. By late 1991 Ontario Hydro had invested nearly $179 million in energy conservation, which produced a reduction in demand, in that year, of 250 megawatts and resulted in a savings to customers of $28 million. Other measures undertaken to aid the environment included companywide recycling and the installation of scrubbers in many of the hydroelectric plants.

Although Ontario Hydro continued to show a modest profit, it found it necessary to reduce its workforce and restructure its operations in response to the recession of the early 1990s. Throughout the early 1990s Ontario Hydro executives worked to streamline the organization. The company was praised, however, for its humane downsizing, in which employees whose jobs were targeted for elimination were given the option of assessing their abilities and determining how and where they could best fit into other areas of the company. Those employees who left the company received generous severance packages. Salary freezes were approved for senior management for the foreseeable future. To further offset increased costs and the effects of the recession, the Ontario Energy Board gave its approval for a sizable rate hike of 11.8 percent.

Ontario Hydro continued to generate profits and increase its exports during the early 1990s. It signed 76 new contracts to provide its services abroad in 1991, for example, and managed to boost revenues ten percent to about $7.14 billion. Sales grew similarly in 1992 and net income increased to a healthy $312 million. Throughout the period, Ontario Hydro managers worked to cut costs and improve efficiency. In 1993 Ontario Hydro appointed Allan Kupcis CEO.

Under Kupcis's direction Ontario Hydro continued to cut costs, reduce the size of its workforce, and reposition itself for future gains. Restructuring efforts showed up on the bottom line in 1994 when the company recorded net income of $855 million. Although its debt was still more than $34 billion going into 1995, the company's liabilities had been significantly reduced since the late 1980s. Furthermore, Ontario Hydro had reduced its workforce to less than 21,000 from more than 32,000 just a few years earlier. Although Ontario Hydro's competitive stance was improved over the early 1990s, its long-term success was contingent on some factors outside its control--including the possibility of deregulation, or 'open access,' in the Ontario electricity supply market.

Moving Toward a Free Market in the Late 1990s

1992–2000

In 1995, following in the footsteps of electric industry trends in the United States, Ontario began a process to restructure its electricity industry. The deregulation of Ontario Hydro was a major campaign issue in the June provincial election in Ontario, and the winner, Mike Harris of the Ontario Progressive Conservative Party, had spoken in favor of privatization of Ontario Hydro's non-nuclear assets. Harris had stated that privatization earnings would be used to reduce the monopoly's significant debt. Ontario Hydro, too, welcomed deregulation. Maurice Strong, Ontario Hydro's chairman since 1992, had been lobbying for privatization since he joined the firm, only to face opposition from the government. With a new premier in office, however, Ontario Hydro once again began to vocalize its opinions. CEO Strong stated in a speech to the Canadian Electrical Association in mid-1995: 'In the election campaign ... Premier Harris indicated that his government would consider major changes in Ontario Hydro, including at least some degree of privatization. We welcome--and we need--his leadership in effecting changes. Ontario Hydro is ready.' Harris appointed William Farlinger, former chairman and CEO of accounting firm Ernst & Young, as chairman of Ontario Hydro, and Farlinger also agreed that the firm needed to be privatized quickly. With Ontario Hydro's debt mounting and retail prices rising, fear that consumers would switch to alternative power sources, such as the new gas turbine technology, was warranted.

The road to privatization was not a smooth one, however, and the call for timely deregulation was left unanswered for several years as the government pondered how best to restructure the electricity industry. By late 1998 Ontario Hydro had C$23.3 billion in stranded debts--money borrowed for projects not expected to be financially viable after the privatization process. A significant portion of the stranded debts was a result of the billions Ontario Hydro had invested in building a nuclear power generating network, a network deemed to be nearly worthless on the retail market. The firm reported a net loss of C$6.3 billion for fiscal 1997, the largest net loss ever recorded in Canadian corporate history. The unusually high loss was due to C$6.7 billion worth of write-offs and charges.

The Electricity Act of 1998 succeeded in pushing forward the breakup of Ontario Hydro. The Act called for Ontario Hydro to be split into five entities, the two most prominent being Ontario Hydro Services Company, which would handle electricity transmission, distribution, and retail operations; and Ontario Power Generation, to operate hydroelectric, nuclear, and fossil fuel generating stations. The three remaining groups were Electrical Safety Authority, to perform electric installation inspection operations; Independent Electricity Market Operator, to oversee the system and make sure electricity is distributed to all customers; and Ontario Electricity Financial Corp., to manage Ontario Hydro's debt that would not be taken over by the new companies. The debt, estimated to be around $20.9 billion, was to be pared down through a surcharge billed to electricity customers. The restructuring into five groups was the first stage toward an open market for electricity in 2000.

Ontario Hydro Services Company was born on April 1, 1999, when Ontario Hydro was officially broken up. OHSC was to function as it had prior to restructuring until sometime in 2000, when access to the market opened to outside entities. The new CEO and president of OHSC was Eleanor Clitheroe, and William Farlinger remained chairman. OHSC's worth was estimated by the province to be C$8.6 billion.

The new entity wasted no time getting started on its mission to expand its energy network and to prepare for the impending free market. OHSC acquired the electricity distribution assets of Artemesia Township for C$600,000, its first purchase under Bill 35, also known as the Energy Competition Act. Bill 35, which passed in November 1998, was designed to stimulate competition and lower utility prices. Several months after the Artemesia deal, in July, OHSC acquired six municipal utilities in southwestern Ontario for about C$11.5 million. The municipalities served nearly 9,000 customers. Because OHSC already served more than 12,000 customers in the same county, the acquisition was considered to be ideal. The company unveiled its new diesel generating station in Armstrong, located in northwestern Ontario, in August. Because of Armstrong's remote location, customers in those communities were unable to be serviced through OHSC's existing power grid; rather, local generation was required. The estimated C$3.5 million project used new technologies intended to reduce environmental hazards and increase safety.

OHSC, though a young company, exuded confidence and made preparations as it grew closer to an open utilities market. The prospects of new competitors and customers being able to freely select their utilities providers were viewed as opportunities rather than hindrances. OHSC looked forward to being able to expand and seek new customers in Ontario and beyond, and also to offering a wide array of new products and services. The company planned to leverage its existing fiber-optics system, used to transmit information regarding its power grid, to expand into the communications sector. OHSC also planned to enter such service arenas as gas and water distribution. CEO Clitheroe commented on the future in a speech made at the Canadian Transmission Restructuring Conference in June 1999: 'We feel a deep connection with those pioneers, led by Sir Adam Beck, who at the beginning of this century took up the challenge of bringing abundant, affordable energy to every corner of this vast province. We've not only inherited their success ... we've also held on to the values behind that success, which are timeless. These are the lighthouses, so to speak, that will guide us through the uncertain waters of the first few years of an open marketplace in which we--and everyone else in the industry today&mdashe the new generation of pioneers.'