Governor's greased lighting 
Davis criticized for accepting money from power companies
SF Gate News
November 16, 2001
 
 
India Dabhol Project Due Diligence To Start Next Week
Dow Jones Interactive
November 16, 2001
 
 
Ontario mulls alternative to Hydro deregulation
Dow Jones Interactive
November 16, 2001
 
 
 
 
 
 
 
 
 
 
Governor's greased lighting 
Davis criticized for accepting money from power companies
 
Sacramento -- After having sworn off campaign contributions from energy companies, Gov. Gray Davis has started taking money from power providers seeking to do business with the state. 

The two $25,000 contributions came during a series of fund-raisers the governor held when he made a trip last month to the East Coast to view the damage at the World Trade Center and Pentagon. 

The Democratic governor, who has raised more than $30 million for his re- election campaign, has been criticized for taking money from groups that have interests before the administration. 

Yesterday, Davis defended the decision to take the money, saying the worst of the energy crisis is behind us. 

"My concern was in not taking money from people who were actively selling us power during the difficult early months in 2001," he said of his decision in January to stop taking contributions from utilities and power companies. "To my knowledge neither of those companies are active players in that process. " 

But consumer advocate Harvey Rosenfield blasted Davis for accepting the money and said it should be returned. 

"If it was dirty money before, it is even dirtier now," said Rosenfield, who heads the Foundation for Taxpayer and Consumer Rights. Davis is mistaken to think that the energy crisis is over, Rosenfield said. 

"Tell that to the 20 million Californians who have seen their rates increase an average of 50 percent," he said. 

The two companies -- FPL Energy LLC and Caithness Energy LLC -- each gave $25,000 to Davis' campaign fund. 

Both contributors have proposed projects pending in California. 

Caithness Energy, a New York-based generator, is expected to file plans to build a power plant with the California Energy Commission later this month. The company wants to build a 560-megawatt natural gas fired plant in Riverside County. 

And subsidiaries of FPL Energy, a Florida generator that operates power plants across the country, are in negotiations with the state's new Power Authority to construct wind turbines in Southern California. The state would buy energy from the turbines and have the option to own them. 

In addition, Caithness and FPL are working together to building another power plant in Riverside County. That project was approved by the state's Energy Commission in March. 

Garry South, Davis' political adviser, said the campaign's position had not changed with regard to collecting money from energy interests. 

South said that the two companies had not been gouging the state and that the fact they had business pending with the state was irrelevant. 

"It is not against the law to take money from a company that does business with the state," he said. South said the contributions had no bearing on any decisions made. 

 
 
India Dabhol Project Due Diligence To Start Next Week
 
NEW DELHI -(Dow Jones)- Prospective buyers of the 85% foreign equity in India's 2,184-megawatt Dabhol Power Co. will start due diligence of the project next week, A.K. Doda, executive director of Industrial Development Bank of India (P.IDB), told Dow Jones Newswires Friday. 

The possible buyers are Tata Power Co. Ltd. (P.TPW) and BSES Ltd. (P.BSX) 

"After the due diligence is completed, price negotiations will start and thereafter, the transfer of shares and transfer of ownership will take place," Doda said. 

U.S. energy company Enron Corp. (ENE) has a controlling 65% equity stake in Dabhol and wants to sell it because of payment defaults by the plant's sole customer - the Maharashtra State Electricity Board - and the Indian federal government's failure to honor payment guarantees. In August the U.S. company said it was willing to sell its equity at cost. 

Dabhol is India's largest single foreign investment to date. MSEB has 15%, while U.S.-based companies General Electric Co. (GE) and Bechtel (X.BTL) own 10% each in DPC. 

"The share price of the shareholding of Enron and its associates in DPC would be decided by the concerned parties, through mutual negotiations. Indian financial institutions propose to continue their efforts to ensure quick resolution of all issues at the earliest," Doda said. 

Doda denied local media reports saying that India's state-owned firm National Thermal Power Corp. (P.NTP) was also a potential buyer of the foreign equity in Dabhol. 

"So far, I am aware of only two companies - Tata Power and BSES. NTPC haven't sent us any expression of interest yet for the Dabhol project," he said. 


Ontario mulls alternative to Hydro deregulation
 
The planned deregulation of the $35-billion Ontario electricity sector has been thrown in doubt by a radical proposal that would shackle the province's electricity transmission company, preventing it from becoming a significant player in an open North American power market. 

The plan, known only to Ontario Premier Mike Harris and a few government and Bay Street insiders, would turn Hydro One into a not-for-profit entity instead of a fully commercial, privatized company. If this happens, Hydro One would lack the flexibility to raise equity capital, make acquisitions and form partnerships in an effort to become one of continent's premier transmission companies -- a goal plainly set out by chief executive officer Eleanor Clitheroe. 

David Lindsay, the president and chief executive officer of Ontario SuperBuild Corp., the government's privatization adviser, confirmed that turning Hydro One into a not-for-profit organization, similar to Nav Canada, the civil air navigation service, is under serious consideration. 

"We've been asked to evaluate all options for Hydro One's future, including this one," he said yesterday. 

He would not provide details, though it is thought that the government wants to make a decision on Hydro One's future ownership structure by the conclusion of the year. 

A senior official in the Ontario government, who did not want to be identified, said the proposal "is a step backward to the old days of Ontario Hydro." He was referring to the debt-laden utility that was split into Ontario Power Generation, the electricity generating arm, and Hydro One, whose network of high-voltage transmission lines spans 30,000 kilometres. 

The Premier's office would not comment. A spokeswoman for Energy Minister Jim Wilson would say only that "there are a number of options on the table." 

Sources on Bay Street and at Queen's Park said the idea of turning Hydro One into a not-for-profit entity is being propelled by Anthony Fell, the chairman of Royal Bank-owned RBC Dominion Securities, Bay Street's largest dealer. If the new Hydro One took this shape, it would raise about $10-billion through the sale of bonds to investors. 

The dealers' commission on the sale of the bonds, which would rank among the biggest debt issues in history, would range from $25-million to $40-million, one Bay Street executive said. 

Mr. Harris is said to be keen on the concept partly because all the money would go back to the government to help pay down the $21-billion in "stranded debt" racked up by the old Ontario Hydro. The generating and transmission giant's decades-long spending spree on nuclear plants and other assets tore a huge hole in the province's balance sheet. 

Hydro One's cash flow, derived from sales to electricity users, would be used to pay the interest on the $10-billion of bonds. Presumably, consumers would face higher electricity charges if Hydro One lacked sufficient cash to pay the interest. If Hydro One were a private company instead, its financial risk would be borne by shareholders, not ratepayers. The United States has embraced deregulation partly because it shifts the financial risk of the electricity market from taxpayers to shareholders. 

Executives at RBC Dominion declined to comment on the plan, citing client confidentiality concerns. Mr. Fell first proposed it to the government in the spring. 

The government wants to open up the Ontario electricity market, in which buyers and sellers can negotiate prices, by next spring. The market overhaul contemplated turning Ontario Power Generation and Hydro One, both of which are 100 per cent owned by the government, into commercial companies. In Hydro One's case, the leading options were thought to be an outright sale, in which the utility would be bought by another company (presumably a rival utility), or an initial public offering, where the shares would be owned by private investors and traded on the stock exchange. 

The third option -- converting Hydro One into a not-for-profit organization -- has come as a surprise. There has been no debate on this option, though rumours of its existence have jolted Bay Street and Hydro One, both of which were working on the assumption that the transmission business would eventually become a commercial enterprise. 

Sources said that Hydro One management opposes the not-for-profit structure because it would deny Hydro One the flexibility and discipline of a typical commercial business. The not-for-profit structure would mean it would not have to pay taxes, which raises potential trade issues with the United States. American transmission companies might argue that Hydro One's non-taxable status gives it an unfair competitive advantage. 

It would also deny Hydro One management the benefit of potentially lucrative share options. 

Rod Taylor, Hydro One's executive vice-president, would not comment on the not-for-profit option being contemplated by the government. He said, however, that the company's strategy hinges on its ability to become a major player in the deregulated North American electricity market. "Our vision of the company is to become a fully commercial entity, and become in the transmission sector what Canadian National is to the rail sector," he said in a phone interview. 

Stanley Hartt, the chairman of the Canadian office of Wall Street's Salomon Smith Barney, is among the Bay Street executives who opposes a not-for-profit structure for Hydro One (Salomon has a small role as an adviser to Hydro One's strategic business plan). 

In a three-page letter sent this week to the top executives of several large power-using Ontario companies, he said that "this idea is short-sighted and bad for Ontario." 

He argued that "the absence of an equity component in the capital structure of the not-for-profit corporation essentially transfers the equity risk to the ratepayers." He also said that, without financial flexibility, Hydro One would lack the resources to invest in "new bottleneck-eliminating connections" that would allow the company to become a significant electricity exporter. "Ontario would lose the prospect of becoming a true hub for North American Energy transmission," he said. 

In a recent report on the power industry, TD Newcrest analyst David McCracken wrote, "With its operating expertise and strong balance sheet, Hydro One is well positioned to act as a consolidator of transmission grids in the northern United States, where ownership tends to be fragmented." 

He noted that Hydro One is expected to be privatized in the next few years, and he said the utility has "the opportunity to lever strengths from traditional wires businesses into competitive high-growth initiatives." 

According to sources familiar with the not-for-profit proposal, Hydro One would be governed in the best interests of all electricity users by stocking the board of directors with appointees from corporations that are heavy power users, such as auto and steel makers and paper companies. Such a structure exists at Nav Canada, with airline executives on the board, and the company has been able to cut the fees it charges customers. 

Restructuring Hydro One with debt, rather than equity, is also presented as the most efficient way to capitalize the company. 

"The problem with a Canadian National Rail-style IPO is that equity is much more expensive than debt," said one financier familiar with the proposal. "With a debt-based structure, every dollar earned is available to pay interest, while an equity-based structure means you pay federal taxes, provide a return to shareholders and make debt payments." 

Dofasco Inc., the big Ontario steel producer that consumes about $100-million of electricity a year, supports the not-for-profit proposal. Gord Forstner, head of communications, said a bond sale would reduce Ontario Hydro's stranded debt by $10-billion immediately, paving the way for lower electricity charges. Currently, a special levy on all electricity bills is being used to whittle down the debt. The charge costs Dofasco alone about $15-million a year. 

"We want to see the stranded debt paid down first," Mr. Forstner said. "Until that happens, we don't favour Hydro One going to the expense of expanding outside of Ontario's boundaries." Hydro One at a glance 

Ontario's electricity transmission system split off from the former Ontario Hydro in May, 2000. It is the largest power distribution network in Canada and serves 1.2 million people. 

Revenues: $3-billion in 2000, $2.4-billion through first nine months of 2001. 

Total assets: $10-billion, including 141,000 kilometres of wire, 1,200 stations and sub-stations and connection facilities to New York, Michigan, Manitoba and Quebec. 

EBITDA (earnings before interest, tax, depreciation and amortization): $1.3-billion in 2000. 

Net earnings: $378-million in 2000, $351-million through first nine months of 2001. 

Common equity: $3.7-billion (owned by the Province of Ontario) 

Employees: 4,500 

Source: Hydro One