by Gordon Pitts
But it was clear that Ontario’s vast electricity system needed a new idea. It was groaning under the weight of high costs, inefficiencies, and huge debt after a binge of nuclear power investment. Consumers were angry over hefty rate increases. But for all of Hydro’s sins, privatization would meet strong headwinds. The utility was founded in the early years of the twentieth century by entrepreneur-turned-politician Sir Adam Beck, who left a legacy of faith in publicly owned power. Beck, a sharp-tongued autocrat from London, Ontario, was the closest thing to a saint in the province’s pantheon of public service. But by the early 1990s, the Beck model was under pressure. Bob Rae’s embattled NDP government, reeling from an economic recession, reached out to Maurice Strong, environmentalist, wealthy capitalist, and big idea man, as Hydro’s new chairman and CEO. Strong became an advocate of a new Ontario Hydro, privatized and engaged in competition, both in Ontario and on the global scene. Strong’s financial advisors suggested a model that would break up the monolith into two or more pieces, separating the generation side from the transmission grid and the distribution businesses. “Restructuring of the industry on this basis would be clearly conducive to privatization,” Strong said.
With the PCs rising to power under Harris, Strong departed and Farlinger became Ontario Hydro’s chairman. When Day came on board, people inside Ontario Hydro knew what that meant: Day was a brand, and it stood for privatization.
As a Hydro board member, Day began to work with the utility’s finance chief, Eleanor Clitheroe, a star in the Ontario public service. The holder of both an MBA and a law degree, she had been a banker and had gained expertise with bond markets. She joined the Ontario government and had risen to deputy minister of finance in the darkest hours of the early 1990s recession. Working with the Rae government, she won admiration for trying to keep the province financially afloat. Some observers, including Day’s friends, suggest he was intellectually smitten by the idea of Eleanor Clitheroe. He had made a career of championing bright people, and he was famously gender blind. He was impressed by talented women such as Clitheroe, Frances Elliott, and Lydia Bugden because they typically possessed a stronger work ethic than their male peers and yet faced such formidable obstacles.
In the plan to split Hydro into a generation and a transmission company, Clitheroe was chosen to lead the transmission entity that would become Hydro One. Despite his deeper experience in generation, Day wanted to work with Clitheroe, and became chair of the transmission company. Farlinger would be chair of the generation side, which would become Ontario Power Generation (OPG). The transmission company would be the first to come to market through an IPO, potentially the biggest in Canadian history. To prepare the offering, Day and Clitheroe became a team. The goal was to mould a business that could operate in a competitive power market. The final result would be the end of monopoly and, according to their thinking, a path to lower rates. As the Day-Farlinger team saw it, Hydro One would assume some of the staggering debt of OPG, an amount which Hydro One could carry comfortably. So when the proceeds of the IPO came in, the government could apply a sizable chunk to improving OPG’s generating operations, which should create a more stable power system for consumers—for generations, Day believed.
Clitheroe and Day looked at a range of things—the transmission grid, the retail system, the relationship between municipal and Hydro One systems—and which elements would come over to Hydro One and which would stay with OPG. Then began the process of selecting investment firms. “By the time Hydro One was actually established, we knew each other very well,” Clitheroe says. “We worked together constantly and on a daily basis.”
Day was reliving his British experiences, although this time he was only the chair, not the CEO. But he was an active chair. He was in Toronto a few days every week, doing what he does best: building a team. Once he had signalled his desire to join Hydro One, others wanted to follow. There was a feeling that this was the right side of the business to be on because Graham Day was involved. “He became a big draw for a lot of people,” says Joan Prior, who joined as the chief counsel for the new company. Malen Ng felt the same way; she ran the financial side of the “de-merger” of Ontario Hydro, and became the chief financial officer of Hydro One.
Another close colleague was a bright assistant general counsel, Laura Formusa. Her story was impressive. She had come out of law school in the early 1980s recession looking for a legal job and found nothing. She became the lowliest typist in the secretarial pool, and rose through the ranks. Hydro was a male-dominated, engineer-run company, but she was able to climb the ladder. Under Day, the opportunities for women in leadership advanced dramatically. Formusa became one of his team, and he became her mentor. She says he inspired her to be all that she could be. Formusa was not in Day’s direct reporting circle, but she saw him at work as a chair. Beyond the intensity of the company-design period, he maintained the proper balance of oversight. He was generally not an in-your-face chair, she says—he was “nose-in, fingers-off.” Under his guidance, says Formusa, “we built a strong regulatory framework, made acquisitions, and integrated them.” The company bought a bunch of small municipal systems, and it was well set up to make more capital investments, including a line into the United States.
Meanwhile, the premier was eager to accelerate the timetable. As Day recalls, “We pressed on—we were within just weeks [of going public]. Everything was go, go, go.” But one thing Day did not see coming: “The Hydro One thing was all right up to the point the premier decided he didn’t want to be premier anymore.”
Harris’s Common Sense Revolution had taken aim at the foundations of big government Ontario, including many institutions built by previous Progressive Conservative governments. It faced huge resistance from the people who felt targeted by its policies: welfare recipients, teachers, unions. With this constant upheaval, Ontario seemed to be a province in chaos. Like Thatcher, Harris was viewed in stark extremes: Mike Harris, revolutionary and liberator of Ontario; Mike Harris, bully and ideologue. But neither the Liberals nor the NDP were able to consolidate the considerable opposition. The PCs were re-elected in 1999, and the revolution seemed to roll on.
Then, on October 16, 2001, six years and two elections into his mandate, Harris unleashed a thunderbolt: he was resigning. He said the decision came while flying home to northern Ontario for Thanksgiving, during a period of calm reflection. He was quoted in the Globe and Mail: “I saw the leaves. I saw the land like I really had never seen it before. And I had the time on that flight and I had time over Thanksgiving weekend to stop and to reflect.” That, of course, was not the whole story. Harris had been having a now highly publicized affair, and his marriage was in trouble. The government faced the prospect of more scandal, as well as increasing strife. And it was possible that he was just tired.
This is when the privatization of Hydro One ended, not with the court challenge, not with the compensation scandal that followed, not with the union and public relations battle. It ended with the departure of the political champion of privatization. In the ensuing leadership campaign, Harris’s friend and former cabinet ally Ernie Eves was elected leader.
The IPO seemed, at first, to be still on track. The investment banking team, which included an impressive young Mark Carney at Goldman Sachs, had done its work. As spring proceeded, the initial public offering could be done any day, given the right timing in the markets. But the coalition against privatization was gaining force, and key players were members of the labour movement. Two unions, which actually did not represent Hydro workers, the Canadian Union of Public Employees and the Communications, Energy and Paperworkers Union of Canada, launched a legal challenge against selling the utility under the terms of the province’s power legislation.
On April 19, 2002, Laura Formusa was sitting in a courtroom on Toronto’s University Avenue to hear the judgment in the Ontario Superior Court proceeding. Mr. Justice Arthur Gans started by invoking Sir Adam Beck, the father of publi
c power: “Ontario Hydro was one of the defining characteristics of the Province, one with which its residents could identify. Its creation and basic foundation was the primary reason a knighthood was bestowed upon Sir Adam Beck in 1914. His sculpted image stands watch over University Avenue.” Formusa knew what was happening, and she began to tap a message on her BlackBerry: “This judge is going to pull a Sir Adam Beck on us.” At that point, “I knew we were toast.” The decision stated the province did not have the authority under legislation to carry out the sale.
The momentum was clearly shifting. The Eves government no longer saw privatization of Hydro One as a cause to die for. It was watching the escalation of power rates, and was wary of any political risk. The government signalled it was looking at other options, possibly an income trust, a non-profit corporation, or a lease of assets to private companies. “Everything is on the table,” Eves-appointed energy minister Chris Stockwell said. Eleanor Clitheroe, too, sensed the mood had changed. Mike Harris had been actively engaged, and she and Day had briefed him regularly. But after he left, “I spent very little, if any, time with the new premier, so I’m assuming that he was briefed by his advisors, not as much by the board or by the executive.” Graham Day later said he or the board never met with Eves after he became premier.
And Clitheroe’s compensation was about to grab centre stage. It proved to be a handy smokescreen for the wavering government. Some observers say her major flaw was that she was acting as if the IPO had already occurred, while in fact the utility was still in government hands. She had become the focus of a media campaign, she was the face of the IPO, and when her pay package became a cause célèbre, she was an easy target.
Compensation is a thorny issue in a privatization through the IPO process. As the offering approaches, the company is in a kind of limbo, still part of the public sector but preparing to act like a listed company on the stock market. It wants to retain its team, especially through the offering process. It was felt the Hydro One compensation packages had to be comparable to that of similar private sector organizations—and in Hydro One’s case, to that of OPG’s leader, Ron Osborne. When the compensation of the senior team was disclosed, it was high for public servants, but not for private power executives. But optics are important, and the optics were not good. Clitheroe was being paid $2.2 million a year, and if she lost her job she would qualify for a severance package of more than $6 million, as well as a pension of more than $700,000 a year. (Of course, the public would never have had to pay the severance—it would be the responsibility of the privatized company.) Other executives were well paid by public sector standards: more than $800,000 for some members of the leadership team.
Day had been there before. As chairman of Britain’s PowerGen, the big privatized utility, he had faced withering criticism about compensation packages and accusations of greed. He defended the near-tripling of the salary of PowerGen’s chief executive to £200,000 ($375,000 at the time)—small change compared with Clitheroe’s haul. Then, as now, Day held firm, saying, “He is worth every penny we pay him.” This time, the pay packages, while explained in the preliminary prospectus, seemed to be news to energy minister Chris Stockwell: “The compensation numbers we are seeing are outrageous.” This statement, and others by the Eves government, violated Graham Day’s privatization principle: the owner does not publicly criticize the board and the company, thus undermining the trust of employees and the public and the value of the company.
He absolves Clitheroe of any blame in the compensation affair. “I know that, in salary and allowances and everything, she had never asked for anything,” he maintains. The board had taken advice on the pay packages from compensation consultants and investment advisors. It told the government that, as it prepared to go public, it would move salaries up to the bottom end of what was paid by comparable employers. The message to the government, Day says, was that the company was not going to wait till after the IPO to disclose pay. “It’ll be revealed on the offering documents so everybody will know.”
But public opinion had made its judgment: Clitheroe was a symbol of corporate greed. The outrage grew as details became public about some of her expenses: $40,000 in house renovations had been temporarily billed to the province, as well as a bunch of club memberships. The company’s sponsorship of a racing yacht was seen as sinister—after all, Clitheroe was a weekend sailor, back when she had the time. The government seized on the fact that, as it mulled over whether it might undertake a trust or a non-profit solution, the board widened the severance terms to allow it to be paid in those circumstances as well. When Queen’s Park voiced its disapproval, the company indicated it was willing to compromise, but there was no response from the politicians.
All of which led to that June day in 2002 when the board decided it had no choice but to resign. By then, the government was preparing to fire the directors and roll back compensation of the top executives. A month later Clitheroe, who had already quit as a director in the mass exit, would be fired with cause as CEO. The expenses became a club with which to beat her up. One detail stuck out: $330,000 in limousine charges billed to Hydro One by Clitheroe, who was already provided with a rich automobile allowance for a new car every twelve months. It was later revealed that the bill included eleven hundred trips during a three-year period for Clitheroe’s family, her children, and her nanny.
In the aftermath of the board’s exit, those expenses would later be explained by Dona Harvey, who had headed the human resources committee. It was a rare look into the harried life of a female executive who was trying to balance motherhood and executive duties. In a private company, it would be a footnote; in Hydro One it was a front-page headline. Harvey explained to the Globe and Mail that Clitheroe had used the limo as a way of avoiding maternity leave. It was usually a Dodge minivan, and many of the trips were intended to let Clitheroe work in the passenger seat, rather than drive the Mercedes-Benz station wagon she had bought with part of her $214,000 annual car allowance. Harvey told the newspaper that Clitheroe and her husband had become parents by adopting a son and daughter. The first adoption came in the fall of 1999, just as her first real vacation was beginning. Clitherone learned she could fly to Vancouver the next day and pick up a baby boy. As a new mother, she returned to work about two weeks later.
According to Harvey’s account, the HR committee felt she was entitled to maternity leave. But Clitheroe indicated she would stay on the job—there was too much happening, and she feared her unplanned leave would be harmful to the company at that moment. So, the story goes, Day and Clitheroe worked out the limo arrangement to allow her to juggle her two roles, and in lieu of maternity leave. Most women can’t avail themselves of such treatment, but Clitheroe had an understanding board—and a chairman sympathetic to the extra burden shouldered by working women in a marriage. Was that so terribly wrong?
After the board’s mass exit, Day went home to Hantsport to lick his wounds. He stayed loyal to Clitheroe and quiet about the government that had hired him and then forced him out. As a reporter then for the Globe and Mail, I called him at home, and he expressed confidence that he would be vindicated: “All my life, I have endeavoured—and I believe with some success—to behave properly, honourably, to discharge my duties, and I’m confident nothing has changed.” Only later, in an interview with Canadian Business magazine, did his anger come bubbling to the surface: “Clitheroe was screwed. And ratepayers and taxpayers were screwed, and screwed roundly, with her.”
Whatever one’s opinion of Eleanor Clitheroe, the incident affirmed Day’s reputation as a chairman who could be counted on through thick and thin. “It was a dirty game,” Peter Godsoe says, and, through all the controversy, “he never blinked.” The famous Day technique—that blend of charm and firmness—had been effective in disarming politicians and civil servants in Thatcher’s Britain, but it seemed to fail him in Ontario. Perhaps Canada’s largest province was more alien to him as a Maritimer than the so-call
ed foreign country across the ocean. Of course, in Britain, he had a leader who was secure in power and provided the necessary political cover. A senior executive at an Ontario Crown agency who knew Day told me at the time that he had a reputation as a fiercely independent and upright chairman: “His view was that he had been hired to run Hydro One, and he had no tolerance for interference from the government or politicians.” As a result, the official said, “he didn’t have many allies at Queen’s Park.”
Day believed in promoting women, but had he been too dazzled by Eleanor Clitheroe? If he had, so had the whole board and the government, which promoted her and built the IPO around her. In the midst of an IPO, when expenses were flying around, her people should have been more careful with receipts. The limo service perhaps should have been subject to second thoughts. The board should have paid more attention to optics, but, in a $5.5 billion privatization, the sums were a piffle. One can’t help but note that the same level of scrutiny and outrage did not fall on Ron Osborne, the respected veteran male executive who headed OPG and who would make $2.3 million in the same year Clitheroe’s $2.2 million pay package caused such an uproar.
The real issue was Ernie Eves’s political calculation. But he got defeated anyway in the 2003 election, giving way to Dalton McGuinty, thus starting a long Liberal run in power in Ontario.
The Day team scattered and pursued new roles. At Hydro One, Day had sent Joan Prior to Harvard for an executive training program, because he knew the value of general business expertise beyond the legal area. Prior briefly ran an operating unit of the utility. After leaving Hydro One, it took her some time to find a new role that suited her, until she was hired as a lawyer with Bank of Nova Scotia. Malen Ng, the finance chief, was also nudged by Day into operating roles, and she too thrived. She left Hydro One to be the chief financial officer at Ontario’s Workplace Safety and Insurance Board for six years. She also found a career as a director, taking roles on the boards of companies such as Sobeys, Empire, and Extendicare. Both Prior and Ng could see the invisible, and often visible, hand of Graham Day in their later careers.