Compensation Pain (podcast)

One of the general themes of this website is to document how public policy debates over energy in Ontario don’t obviously display the collective wisdom to correctly identify even short-run cause and effect relationships. One example of this deficiency relates to labour compensation rates in the utility sector. Is executive compensation at OPG and Hydro One causing rates in Ontario to soar (or is executive compensation there generally a good deal for ratepayers?) Here is a discussion I had with radio host Tom McConnell on February 2 starting at about 10 minutes after 10am. A short summary with time stamps follows.

Introduction: 9:00-10:15

10:15 Widespread public perception holds that executive comp is responsible for rising Ontario power rates. Not true. In context of the overall revenue requirement for the power system, executive compensation is a trivial component. The executive compensation issue that should be our focus of attention is whether we are getting value for money. High performance leadership is worth top dollar. When benchmarking executive compensation, the key question is what comparator group to use. Comparing executive compensation of Ontario’s crown corporation electricity enterprises vs. other crown corps electricity enterprises in other provinces shows that Ontario pays too much. But compared to most commercial energy companies in the real world, particularly utilities with nuclear operations, Ontario pays its execs way below market price.

13:25 OPG is very large, producing in the order of half of Ontario’s power supply. OPG’s large nuclear fleet makes for massive complexity. The importance of OPG’s success or failure to Ontario’s well-being is profound. The energy minister has argued that OPG needs to be able to attract and retain top executive talent. I agree with the minister on this point.

16:20 Benchmarking compensation needs to look through the entire payroll of the Ontario Hydro successor companies. There is a serious excess compensation problem within the Ontario Hydro successor companies, but the problem is not at the executive level. Excess compensation is not at the exec level but at the lower ranks of the Hydro successors. While executive compensation is below market value, the numbers of executives are so small that the ratepayer benefits are trivial. However, because the ranks of the overcompensated non-executive staff are so numerous, the ratepayer harm from that portion of the payroll is very significant.

22:00 reintroduction

22:30 Since the insolvency of the old Ontario Hydro, there have been sporadic efforts to bring overall compensation practices into line with market values for labour, but those efforts have all founder. The old Ontario Hydro’s legacy lives on. Sadly for ratepayers, it appears that market-based compensation in the power sector is not coming anytime soon.

24:10 Regarding the high cost of rural power delivery, urban Ontario consumers have paid a small tax to subsidize rural delivery for generations. This little tax was never particularly controversial. However, in the last 2 years, these hidden taxes have changed form and have tripled to about $29/household/year. Commercial and industrial customers pay this dramatically ramped up tax too.

25:55 The flush of cash coming in from the hidden taxes make it appear that Hydro One’s low-density rural rates have declined. That is just a smoke screen. The underlying rural rate — and therefore revenues coming in to Hydro One’s shareholders — has increased substantially, hidden beneath the fog of subsidies.

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