Ontario Hydro to be PrivatizedBill Farlinger glanced out of the wrap-around window of his 19th-floor office with proprietary relief. Below, the stolid, Victorian-style provincial legislature looked dwarfed, not to mention uncharacteristically quiet. Only the day before, demonstrators had descended on its grounds in a last futile protest against the omnibus bill that Ontario Premier Mike Harris pushed through last week. "We had quite a few people out there yesterday," Farlinger noted. "But then," he smiled, "it snowed." At 66, the lanky new chairman of Ontario Hydro and former head of accounting giant Ernst & Young has become one of the most powerful figures in Harris's tight-knit inner circle. As the leading voice to command the premier's ear on economic issues, he has emerged as the éminence grise behind the Tory revolution currently slicing its way through the province's spending and services. Or, as one Queen's Park veteran put it: "Farlinger is the guy who sharpens the blade for Mike the Knife."
Still, the two-month public uproar over Harris's omnibus bill may prove political child's play compared with the firestorm looming over Farlinger's current task: overseeing the breakup and sale of Ontario Hydro, the venerable $40-billion Crown corporation that ranks as North America's largest electric utility. Already, that battle has pitted the 15,000-member Power Workers' Union (PWU) and the province's 306 municipal utilities against the government's chief corporate backers - many of whom are jostling for a piece of the action in what is likely to become the country's largest privatization. "I can guarantee you that every single investment bank is looking at it," said Toronto venture capitalist Andy Sarlos, a former member of Hydro's board, "and lining up their clients."
For Harris, the fight over Hydro's future could not have come at a more inopportune time. As an Angus Reid Group poll last week reported that his government's popularity had plummeted sharply by nine points to 44 per cent, his aides worried about trying to sell a notion that, according to their own confidential surveys, has virtually no support among voters. "You tell me what the bumper sticker is for the privatization of Ontario Hydro," puzzled one strategist. "I understand welfare cuts. But I haven't figured out how you tell people what the benefits are of selling a public utility."
Ironically, the push for privatization began under Harris's socialist predecessor. In 1992, NDP premier Bob Rae hired former Petro-Canada chairman Maurice Strong to overhaul the bloated provincial utility, which was hemorrhaging from a $34-billion debt load - largely the result of overbuilding costly nuclear plants. Putting the brakes on construction, Strong also cut about 7,000 staff and restructured the organization in what he now admits was a move to pave the way for its eventual breakup and sale to private interests. In fact, it was Strong who hired Farlinger to head a committee to look into the prospects for privatization. He says he wanted a candidate who had the confidence of the Conservative leader, and on that count Farlinger more than qualified. In 1990, he had headed up the fund-raising effort for Harris's long-shot leadership campaign, joining five other business supporters in personally guaranteeing Harris's campaign debts. But Farlinger had even more solid credentials for earning the untried Tory leader's trust: his nephew, Bill King, a native of North Bay, has been Harris's executive assistant ever since his election to the legislature in 1981.
Farlinger insists that when he first took up Strong's offer to look at Hydro, he had no preconceived ideas. But by the time he presented his report last summer, there was no doubt about his sentiments. In fact, when Harris named him to the chairmanship in November, insiders took it as an unmistakable signal that the utility was headed for the auction block. While Farlinger swears that he has never heard Harris "express a bottom-line view on Ontario Hydro," he makes no attempt to hide his own enthusiasm for dividing up its generation, transmission and distribution arms and selling them all off over a five-year period. Asked if he considers privatization inevitable, he merely shrugs. "I don't know why this should be the last publicly owned company in the country," he says. "They're out of date."
Still, Harris has gone to considerable lengths to show that his mind is not made up. On the same day that he appointed Farlinger, his government announced a seven-member Advisory Committee on Competition in Ontario's Electricity System under former federal energy minister Donald Macdonald, a well-known Liberal and respected Bay Street corporate lawyer, who will submit a report by the end of April. But Macdonald also happens to be Farlinger's longtime friend and former squash partner. And as he recalls, the sight of the two six-foot, five-inch players together in the University Club locker room once prompted a fellow athlete to joke: "When Farlinger and Macdonald get in the court, is there any room for the ball?"
Over recent weeks, the Power Workers' Union has been posing similar questions in a less humorous vein. Indeed, PWU president John Murphy noted that, as the Liberal-appointed chairman of a royal commission into the prospects for Canadian-American free trade in the early 1980s, Macdonald had pre-empted his own inquiry, coming out squarely for "a leap of faith" in the fall of 1984 - a year before issuing his final report. And he accused Macdonald of repeating that "pre-emptive strike" last month: even before the opening of public meetings on Feb. 19, the committee chairman observed to a Globe and Mail reporter that he did not "feel that inevitably there has to be government ownership" of Ontario Hydro. In an interview with Maclean's last week, Macdonald was more circumspect, declaring that he was still "an agnostic" on the subject. But he said he was convinced of the need for competition in provincial power generation.
Equally disturbing for many critics is Macdonald's seat on the boards of at least three corporations that stand to benefit should he call for opening the provincial electricity market. Macdonald is chairman of Siemens Electric Ltd., the Mississauga, Ont.-based subsidiary of Germany's Siemens ag, a major equipment manufacturer that has sold more than 50 gas turbines to utilities around the world. He also serves as a director of Banister Foundation Inc. - a civil engineering firm with a subsidiary that specializes in hydroelectric plants - and TransCanada PipeLines Ltd., one of the country's major gas suppliers that would profit from a deregulated utility market. Murphy has charged that Macdonald "has a huge conflict of interest." But provincial Environment and Energy Minister Brenda Elliott dismissed that charge, as did Macdonald himself. "My answer was: 'If it's a problem, I'll resign,' " he told Maclean's.
Still, those accusations have left a cloud over the contentious question of Ontario Hydro's fate - as has the government's inept attempt to fire five of the 22 board members in a gesture that seemed clearly partisan. Its targets: Murphy and two other labor-affiliated representatives, environmentalist Jim MacNeill and Sudbury lawyer Jim Hinds, a longtime Liberal fund-raiser. In fact, despite a court ruling that ordered their reinstatement on the grounds that the move was illegal, Hinds handed in his resignation anyway last week, branding the attempt vindictive and cowardly. But Farlinger admits that he personally recommended the cutbacks to cabinet and is unrepentant about trying to oust Murphy before the labor leader's term legally expired. "I don't think union members should be on the board," he said.
Still another consideration threatens to spark emotions even among Canadians outside the province: the spectre of an American company buying the cornerstone of the public utility first organized by Sir Adam Beck in 1906 - the vast generating station at Niagara Falls. Nor is that scenario far-fetched. Almost 180 briefs had been filed with Macdonald's committee by last week; one of the largest came from the Southern Co., a mammoth Atlanta-based firm, which, like its U.S. rivals, has been on a three-year shopping spree for foreign utilities. "We're looking for opportunities to grow outside the United States," confirmed Marce Fuller, vice-president of Southern Electric International, a subsidiary with both domestic and international interests. "And we'd be very interested to invest up there."
But the most controversial U.S. firm currently courting Ontario Hydro is one with a high-powered link to Harris himself: Houston's Enron Corp., the largest U.S. natural gas company, which has struck electrical utility deals in the Philippines, India and Kuwait. Enron's chairman, Kenneth Lay, is also a former fund-raiser for his longtime pal, former president George Bush - who turned up on a fishing trip to the Northwest Territories with Harris last July. "They're eager beavers," said Farlinger, who visited Enron's Houston headquarters two years ago. "And I believe they have made their interests known to Ontario Hydro." Given those stakes, Macdonald faces no mean task as he deliberates the utility's fate - a decision that will be scrutinized as a clue to Harris's other privatization schemes. As he and Farlinger are only too well aware, whoever holds the key to the province's electric wires has power indeed.
Maclean's February 12, 1996