Parkinson’s Flaw

Energy, Regulation, Role of Government, Tom Adams, Uncategorized, Worth A Look

On Dec. 8, Tom Parkinson, CEO of the Ontario government- owned power utility Hydro One, with $11.7-billion in assets and $4.4-billion in revenue, left his job under a deluge of condemnation from politicians, the media and the public. The government said he resigned. Here is what really happened.

At home one weekend earlier this year, Parkinson received a dreaded call from his brother – their mother was about to lose her battle with cancer. To see her alive, he had to get to Australia immediately. Hydro One’s CEO could not have anticipated that his next two calls would precipitate his political electrocution, and a new politicization of Ontario’s power system.

Hydro One’s chair, Rita Burak, got the first call. A former top bureaucrat often decorated for her service in Ontario, she expected the call too. Take as much family time as necessary, she told him. Parkinson’s employment contract provided an allowance for a set number of flights home. Burak agreed that Hydro One would buy the ticket.

Parkinson’s second call went to his secretary, for help arranging the tickets. The secretary used her corporate charge card, rather than his, to buy the ticket. That was Parkinson’s first mistake.

His second mistake came later this year, during the August long weekend, when he was alone at his cottage with his 10-year old son. A massive summer storm had demolished hundreds of kilometres of power lines. Nearby, in roadless terrain near Massasauga Park, work crews were dealing with two high-voltage towers on the vital Sudbury to Toronto circuit. Emergency work was wrapping up.

The superintendent tackling the storm damage to the power system, knowing Parkinson was nearby, sent him an e-mail. A chopper was in the air in his area. Would Parkinson join the exhausted guys for a BBQ on the right-of-way, and then join the helicopter search for storm damage south toward Toronto? In Ontario’s entire power history, few line crews have celebrated a completed storm repair by lunching with their CEO under newly restored wires. Parkinson wanted to be with his crew but initially resisted – he couldn’t leave his son alone. The superintendent countered by saying there was a spare seat in the chopper. Parkinson decided to join his crew for the BBQ, son in tow.

These two offences – widely characterized as scandalous perks taken at taxpayer expense – would lead to Parkinson’s firing. In fact, the motivation for his firing had nothing to do with these “offences” – conduct that would have been laudable in many people’s minds had they understood. Parkinson’s real offence came from his no-nonsense management style, which the unions resented and his political masters found embarrassing.

Parkinson had sought to control bloated industry-wide pay scales left over from Ontario Hydro. In 2005 Parkinson, challenged the inflated compensation demands of Hydro One’s management union. With his board’s support, Parkinson drew his line – existing entitlements would remain but new staff would only get market rates. Parkinson’s prepared so well for the negotiations that when the union struck for 105 days and consumer demands hit records, the lights stayed on. Unable to take the heat as the strike worn on, Premier Dalton McGuinty caved to the union, thereby saddling consumers with excess costs more than $100-million per year.

In March, speaking to a trade association, Parkinson let fly. Government had mired critical projects in duplicated bureaucracy and indecision. New transmission to accommodate the government’s nuclear and wind power purchases in Bruce area are so stalled that massive amounts of power, already paid for, will stay locked in and wasted.

The more Parkinson became critical of government interference, the more the government resolved he had to go. To eject Parkinson, the government had three aces.

It could cultivate whining about Parkinson’s compensation, which originated with the Harris government’s original privatization strategy, conceived when Ontario Hydro collapsed into insolvency in 1998. Parkinson, a privatization-savvy grid expert with a record of success in Australia’s power privatization, agreed to uproot his family and come to Ontario because of the opportunity that lay in a privatized Ontario Hydro. The deal: relatively low base pay, incentives to maximize the company’s value to taxpayers, limited ex patriot travel, a car allowance, and an opportunity that the next owners might keep him on. In 2001, Parkinson joined as head of a subsidiary.

As Parkinson moved up the ladder, the components remained but his compensation shrank as Hydro One’s drifted back towards a Crown corporation. In 2005, under Energy Minister Dwight Duncan’s scrutiny, a five-year contract was negotiated with much of the payment geared to results. The contract also contained a $3- million penalty clause should Parkinson be fired without cause.
The government could also count on the public’s memory of the last Hydro One CEO, Eleanor Clitheroe, who left amid scandal. Complaints against her focused on her compensation, perks, and glamorous image.

The government also knew it had the upper hand with directors on Hydro One’s board – they require reappointment every January.

One option the government did not have was firing Parkinson for cause. When he took the helm, he refocused the company on its core wires business. As a result, Hydro’s performance is way up. Serious accidents dropped from 95 to 68 per year. High-voltage customer satisfaction more than doubled to 91% in 2006. Interruptions at key delivery points dropped from 0.8 to 0.6 events per year. The grid around Toronto was reconfigured on time and budget, including a completely new high-voltage transformer station. Hydro One finally got around to cleaning up dangerously overgrown rural lines neglected by the old Ontario Hydro. A new Grid Control Centre was completed in Barrie on time and budget in 2004. Two months ago, it was certified by the continental power reliability regulator as best in class in North America. Hydro One’s credit rating also improved; progress that will directly save consumers tens of millions.

Then came the annual report of the Provincial Auditor. The report was issued Dec. 5. Hydro One endorsed its recommendations. Notwithstanding the fact that the report found no wasted funds, the adjective- of-the-week the media used when referring to the report was “scathing” due to an incidental observation made in the report, unrelated to any recommendation: “In one case, a senior executive’s secretary charged over $50,000 to her charge card for goods and services, a significant portion of which was for the person to whom she reported. The senior executive then approved the purchases, whereas Hydro One’s policies require that the executive’s superior approve the expenses. This practice also exempts these expenditures from an annual review of senior executive expenses conducted by the corporation’s external auditor.”

The report’s criticism, in fact, was aimed not at Parkinson – who had merely followed company procedures – but at what the auditor viewed as a poor management procedure. The press also misread the report by thinking that most of the $50,000 involved personal expenses. In fact, most related to office moving and furniture due to relocation, office supplies, business meeting expenses, and cell phone bills – the only personal item was $11,000 for Parkinson’s last ticket to see his mother. That $11,000, moreover, was taxable and tracked routinely by the payroll process to include on Parkinson’s T4.

According to Hydro One vice-president Peter Gregg – confirmed by several direct sources – the ticket was approved in advance by the board chair as per Hydro One’s reporting rules. The expense was properly payable by Hydro One. Gregg and all sources I interviewed for this story noted that, in addition, the internal audit staff of Hydro One had flagged the expenditures, and the chair signed off a second time on the cost of the ticket, this time formally. The approval procedures used and the purpose of the spending were appropriate.

Both the chair’s prior approval and the employment contract were directly brought to the attention of the auditor by senior Hydro One people during the audit review and upon review of the draft report in October. A senior audit staffer read Parkinson’s employment contract in the presence of Hydro One’s former general counsel, now acting CEO, Laura Formusa, who pointed out the provision for flights.

Neither the auditor nor his staff interviewed Parkinson on the secretary’s charge-card items, although Parkinson attended meetings with the auditor, consistent with the auditor finding no fault with Parkinson’s conduct.

Yet the NDP leader stated: “Parkinson spent $45,000 of public money on personal expenses and tried to hide it on his secretary’s credit card. Now we find out that these so-called personal expenses include vacation flights to Australia.” Sheltered by parliamentary privilege, the NDP’s Peter Kormos screamed, “Hell, he shouldn’t just be losing his job; he should be going to jail.”

McGuinty agreed with the NDP leader, saying “things that have happened there which are unacceptable, to reduce it to one word.”

John Tory came closest to the truth, demanding to know why $3-million in severance was paid since the government claims that Parkinson resigned.

The government’s claim of resignation is a deliberate half truth. Hydro One’s board of directors remained united in their support for their embattled CEO to the end. On Dec. 7, under direct political pressure and Question Period in high rant, Hydro One’s board held an emergency meeting. All in attendance realized the board member’s jobs were at risk.

A deal was stuck. In a tacit admission that there never was cause for firing, the government accepted the contractual severance in return for a resignation. To make its views clear, the board issued a public statement announcing Parkinson’s departure, heaping praise on his contribution.

Parkinson also accepted the deal. “I had no effective alternative. This was an abusive relationship and I’m glad it’s over,” he said in an interview. “This was about commercial compensation in a business that is about to lose the commercial mandate and become a Crown corporation. The writing is on the wall for others.”

What can we expect? Parkinson again. “H1 is too complex, too valuable and too important to the Ontario economy to be in government hands. Career politicians and mediocre ex-CEOs are not up to the complex challenge of running companies like these. The price of chronic government interference is enormous.”

When he came to power, McGuinty promised to depoliticize the power system, to give Hydro One a commercial mandate, and let it operate like a business. McGuinty executed not just Parkinson, but also a 180-degree flip-flop. “We will work more closely with the board,” says McGuinty now.

Ontario’s power system now has all the stability, foresight and focus that Question Period affords.