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The thin edge of competitiveness (18 May 1993)



We've had to have a complete change of mindset and say that the need to be competitive, the need to enable our customers to be competitive, must now set a limit on our costs and rates... and work back from that. So we simply said, "We've got to do it." Not, "Can we do it? .. We've got to do it!" And when we looked at it, it was clear that despite the difficulties of doing it, it was do-able.

Transcript of remarks by Maurice Strong, Chairman and Chief Executive Officer, Ontario Hydro to the Annual Meeting of the Canadian Manufacturers Assocation - Ontario Chapter, which was held at the Bristol Palace Hotel, Toronto, Ontario, on 18 May 1993.

I take it as a very special privilege today to be the luncheon event at your annual meeting. And I do so particularly because I think I would be correct in suggesting that this is the most important single group of customers with which I have met since taking on my job. And I have met a great many customers, including some of you, or your colleagues. That is only natural, because one of my jobs is clearly to align the interests of Ontario Hydro and the performance of Ontario Hydro with the needs and interests of our customers.

And as you remarked in your introduction, after a long history of doing a very fine job of serving the needs of Ontario and of U.S. customers, something did happen in the late '80s, and I'm not going to go into that, except to remind you of the context in which some of the decisions were taken.

Those changes gave rise to the increases in rates that you have experienced, at what for all of you, and indeed for our economy, is perhaps one of the worst possible times. I look at the editorials, and the speeches in our legislature from political leaders, that influenced my predecessors in Ontario Hydro and on the Board of Ontario Hydro during the '80s. I see the file replete with exhortations to Ontario Hydro that it must expand - must ensure that the power that industry is going to need in Ontario is going to be available - with concerns expressed editorially about the prospect of brownouts, the prospect that shortages of power might indeed provide a constraint on the growth of the Ontario economy.

I say that not to excuse the condition in which we now find ourselves, but rather to illustrate how easy it is to point the finger at those who made decisions in the past. But I don't recall many instances -in reviewing the record of that period -in which there were tremendous differences of opinion expressed by customers, or by the public, or the media. The conventional wisdom may not have been correct, but by and large, the Board and management of Ontario Hydro acted very much in line with the conventional wisdom of the time. There are few people who predicted the nature and the depth of the economic recession with which all of you have had to contend.

Now, having said that, there is no way in which a company as important to the economy of Ontario as Ontario Hydro -and a central actor, indeed, in that economy - could possibly be exempt from the traumatic changes that have been taking place in our economy. You, our customers, know them very well. Long before we took the measures that we have recently taken to deal with the realities of that economy as they affect us, you were already well along in doing something.

I have learned a great deal from the difficult downsizing measures that so many of you have taken. You've become in the process a great deal more competitive. Those who have survived, in doing so, have made our economy a good deal more competitive. But you also know that that process has just begun.

I think all of you know that, in the context of a global economy, Ontario no longer can assumethat it has it made. That assumption was a very comfortable one for much of the working lives of those of us in this room who grew up in a growth economy. It was an assumption we could almost take for granted. Perhaps it would have been wise too, to realize that success and progress can never be taken for granted. We've all been reminded of that in spades.

It didn't take a genius, or a magician, to understand the situation when I moved into my job last December. I think any of you sitting in that chair would have come to the same conclusions. Indeed, many of you had been very vigorously exhorting Ontario Hydro to do the very kinds of things that, in fact, we have been doing. For most of our history, Ontario Hydro has done a superb job of providing reliable supplies of power at cost. But, there did develop a culture and an approach which put a premium upon that reliability - which is something we will never sacrifice, incidentally - without being as conscious as perhaps we should have been of the effects of the cost on the economy.

And that was all very well when our rates were quite competitive. There was very little concern for much of this period about the level of our rates -a little here and there, but on the whole our rates made you competitive here in Ontario.

But, the very, very substantial increases that occurred, in the last three years particularly, really have brought the water to the top of the bathtub... to the point where in fact we are now on the thin edge of competitiveness. We have lost the primary competitive advantage that Ontario manufacturing enjoyed... principally because of electric power rates.

Now, I've just come back from a meeting of what they call the E-7, the seven largest utilities in the world. And I might sound a little positive note here, that when we compare our rates to theirs... I have to say that on a global basis, Ontario still is amongst the more competitive. That should not, however, make us complacent, and I am not going to use it as a justification for sitting back. Because I believe we still have a very significant job to do in ensuring that our rates are competitive in the period ahead. And that indeed we cannot for one moment relax our concern for long term supply -and for the reliability of the service on which you have come to depend.

You know basically what we have done. Let me just quickly summarize it. First, we have had to stabilize our rates. This, you told us loud and clear, was extremely important to you not only in terms of planning your own organizations, but in terms of investors who were considering new investments in Ontario. It was very important that they have a signal as to what they could expect by way of power rates in the future.

That's why - when I said the water had got to the top of the bathtub - it was clear to us that we simply could not let our rates go up anymore. It was not a question of options... it was not a question of finding some easy way to keep them down - it's been very tough - but of recognizing that we had to change our mindset from simply saying: "What do we need to continue to supply Ontario? What do we need and how much does it cost? And those costs will determine our rates."

 We've had to have a complete change of mindset and say that the need to be competitive, the need to enable our customers to be competitive, must now set a limit on our costs and rates... and work back from that. So we simply said, "We've got to do it." Not, "Can we do it? .. We've got to do it!" And when we looked at it, it was clear that despite the difficulties of doing it, it was do-able.

As you know, we have frozen our rates in real terms for the rest of this decade, and hopefully, well beyond that. This means that we have agreed to keep any increases at a level of inflation or below, for the balance of this decade at least. And for the next year, to ensure that there be no increase. We have not applied, as you know, for an increase this year. This will be the first time for many years there has not been a hearing of the Ontario Energy Board.

It enables us to get some time to do some of the other things that we have to do. Hearings are very, very important. They give us an awful lot of information. But I can tell you, when I arrived in the job, I had millions of dollars of advice... sitting... piles of it, tons of it, accumulated at great cost through long hearings in which we got advice from you, yes... but also from every possible spectrum of the community. Lots of it was very good, but we do need a little bit of time to absorb that advice and to take it.

So those who say we've taken these actions without advice, without hearings, really have to understand that, in fact, we are responding to the advice we have been given in so many hearings of the Ontario Energy Board and the Environmental Assessment Board. We don't want to operate without that advice, but we do need a little interlude in which to absorb and to apply the advice that we have had. So I hope you will look at it in that context, and not in the sense that we are trying to avoid these hearings.

But, bringing our rates down meant bringing our costs down. And this has meant very tough decisions to cancel projects - some twenty-four billion dollars worth of capital commitments. Over a billion dollars a year of overhead, averaged over the next three years and beyond. That means of course, amongst other things, cutting staff - some six thousand, in all to date - bringing our regular staff down to some twenty-three thousand by next November, when we expect to have the process complete.

And that will not be all. While any organization can only absorb change at a certain rate without destabilizing - and I think we've absorbed as much as we can in one big leap - the process is going to continue. And the process of becoming leaner, more customer-responsive, more market-oriented, more decentralized so people can take decisions without going through echelon after echelon of consideration and be held accountable for those decisions... that process will continue.

I don't want to see Ontario Hydro go through another period in which it resists change in the hope that the changes are just cyclical... and then in another ten or fifteen years has to go through another traumatic change. Rather, I want to see us at the leading edge of that change... anticipating it, even helping to make it happen. So, in the process of making those changes, we are trying to make Ontario Hydro into an agent of continuing change, so we can work with you in helping to refashion this economy.

I came back to Ontario after a lot of intemational life. I came back to it because I really am persuaded that it is one of the finest places on Earth. But, at the same time, I've seen enough of what's happening in the global economy to realize that what we do, or fail to do, in these next few years... in the rest of this decade in Ontario... will determine the degree to which future generations of Ontarians will be able to have the jobs, the creative futures, the opportunities, and the quality of life that they've come to take for granted in this place.

We have to make that happen. And we have to make it happen in a very much more competitive world. But it's also a world of opportunity. Many of you whose companies have survived this traumatic process of change, have also, in the process, positioned yourselves well to move in the global economy. There's some very, very fine examples that I know won't attempt to give them all to you because we don't have a lot of time - but I do know, and I'm very impressed by some of the examples... not only in the manufacturing industry, but in the resource industry. For example, International Nickel produces nickel now at a lower use of energy than any other similar producer around the world. And there are a number of other examples, and a good many of them in your manufacturing fields.

Now, these changes are traumatic. We've also restructured. I won't go into it in great detail, but we've divided our business within the corporate framework into lines of business. So hydro-electric power, nuclear generation, fossil fuels generation, are all separate but closelyrelated businesses. So they can be seen as businesses. They can be accountable as businesses. They can have the amount of debt that is attributable to their assets assigned to their business. And they'll have to earn a return on that. They will contract with each other. And we'll be able to see where the performance is and where it isn't.

And people in our company are responding quite enthusiastically. You know, every directorlevel job was up for grabs. When I go out of here this afternoon, I'm going back to the office to review all the director and senior-level posts - reduced in number, incidentally - but every single one was put up for grabs. Everyone had to reapply for their own position, and every position was open for application to anyone else. And there's been a tremendous response to that.

It's not just a question of taking decisions - we've taken some tough decisions - but taking decisions, as you know who've been through this process, is just a first step. Implementing those decisions is extremely important, and I can tell you that I've found a great spirit there. There are a lot of fine people in Ontario Hydro. After all, Ontario Hydro for many years was able to attract the best. And the best, in many respects, are still there. Believe me, I'm impressed by the way they're rising to this.

Now, one other thing. In the course of this, something very little noticed occurred at our last board meeting. Our Board of Directors accepted a new goal for the new Ontario Hydro. Remember when it was: "Live better electrically?" Use more electricity? Well, our corporate goal - which I believe is in keeping with the need to rebuild the Ontario, revitalize the Ontario economy - is to help make Ontario the most energy-efficient and competitive economy in the world... and the leading example of sustainable development.

Energy is at the very heart of our economy, as you know, and energy-efficiency is one of the prime factors in terms of global competitiveness. Japan has made that clear in spades. Japan now produces a unit of GDP using half as much energy as we use. That's not only good for the environment, it's very good for their competitiveness. We've done some of that too. We're doing it. We're there but we're not as far along. And believe me, if we can help, with you, make Ontario an energy-efficient economy, it will be a better place economically, competitively, and certainly, in terms of environment and quality of life.

We've got a greater surplus than we've ever had in our history in Ontario Hydro. But that's not making us complacent. We're looking at new ways of dealing with that surplus. Of making sure that when that surplus recedes, we've got lots of alternatives. We're freeing up our research and development capability - which is one of the biggest and, I think, best in Canada - putting it into a separate corporation, to work with the private sector, in trying to translate our research and development capability into better performance for us... for our
customers... and into more commercial opportunities.

We're not going to expand into every other field. But we are going to work with you, and with other sectors of the Ontario economy, to try and make sure that in every single area where our activities... where our know-how... where our initiative can help to make a difference in the Ontario economy... can help to add value... we're going to be there working with you.

We're going to be seeking your advice. We're going to go into joint venture partnerships with you. We're going to make our research and development capacity the asset it should be, in terms of revitalizing the economy.

Internationally, we're moving out. Electricite de France is one of the most conservative, traditional utilities in the world. I met with their leader, as one of the E-7, last week in Florence, Italy. And there are some things going on internationally. In the English version of their annual report, EDF says, "We are a utility that has no boundaries. We are a global utility. We are not attached to any particular territory."

Well that's something, coming from one of the most traditional utilities. The utility industry is changing. It's becoming much less monolithic, much more competitive, much more decentralized, unbundled, and we're going to face that. I'm simply going to say that that's the range of challenges we must yet confront. All the things that we have done to try and remake Ontario Hydro have been addressing the primary, here-and-now problem of getting our rates down and making sure they're going to stay stable and competitive. Getting our whole organization to work more closely with the customer, to be more sensitive to customers' needs and interests.

Now, there's a whole lot of other things that need to be done that require government action. For example, should we be privatizing? There's some strong reasons why it should be at least considered. I don't believe it's practical to privatize the whole of Ontario Hydro. You've got to fix the car before you sell it. But there are pieces of Hydro, particularly in the generating area, where it might well be wise to consider some degree of privatization. I won't say anymore than that. It's not a decision I'll make, it's a decision only the government will make after, I'm sure, a very intense political dialogue.

Should we be the regulator? It's a bit of an anomaly. We're self-regulating. We have the Ontario Energy Board, of course... but in the final analysis, what they do is give us advice. And we regulate our partners, the municipal electric utilities. They're the other part of our system. They're the partners in the system at the delivery end... seventy-five percent of the end-use customers. Is that right? Should we be doing that?

How close should we be to government? Should we need an Order-In-Council every time we want to make an investment? There are a whole series of questions. What about the nonutility generators? I'm very much in favour of them. We've had to be tough on them recently... because any unnecessary purchases of electricity during this period is simply going to put the rates up. So we've had to strike a tough balance between trying to honour the encouragement we've given to many of the non-utility generators. We are trying to keep them healthy. Because we're going to need them in the future, we need to keep an important place for them.

So there's been some very tough decisions. But I believe we now must look at the larger issues. About the real position of Ontario Hydro in this province. Let me finally say, the province of Ontario, and all of the customers and the rate payers have a tremendous investment in Ontario Hydro. It's worth a lot to this economy. So that however much we may see an evolution towards a much more open, competitive system - and that is the way I believe we are going, and we must go, in our business - we've got to do it in a way that does not squander the very important investment that Ontario has made in Ontario Hydro.

We've got to make these changes over time, and in a manner in which we can maintain the kind of financial integrity and capability that will enable us to continue to serve you.

So yes, I see a much more competitive future... a different future, a very exciting future... one in which we'll be working far more closely with each of you... far more sensitive to your plans and needs... And trying to construct, in Ontario, a new economy that will be competitive and exciting, that will provide the opportunities for all my children and grandchildren who live here in Ontario.

That's really why I'm doing it. But also we're going to be one of the fine, competitive energy organizations in the world. We're already one of the largest... and we can be at the leading edge of these changes... and that can, again, make a significant contribution to the growth and revitalization of our economy.

Finally, as you would perhaps guess, I've spent a lot of my time in the environmental field. My central theme - and the central theme for the Earth Summit at Rio De Janiero - was the need to integrate the economy and the environment. There's nowhere that this is more necessary, in both economic terms and environmental terms, than the energy business.

That's why Premier Rae was finally able to get me to set aside plans I had already made, and come and take on this exciting challenge. And I'm delighted it gives me an opportunity to create a continuing working partnership with your members. I very much look forward to that, and I hope that you will be able to see in the future that we will be good partners for you... in the task of building the economic future of Ontario.