September 9, 2002
Ontario Electricity Financial Corporation (OEFC), the legal continuation of Ontario Hydro, released its 2001-2002 financial results on Aug. 29, two months behind the schedule required by law, but a marked improvement over its first two years of operations – which commenced with the breakup of Ontario Hydro in April 1999.
In its latest report, OEFC declares a loss of $69 million compared with a restated net income of $18 million last year. Prior to restatement, OEFC had claimed a net income of $244 million last year. OEFC’s reported “unfunded liability” rose to $20.085 billion this year from $20.016 billion in 2001 – an increase from $19.433 billion in April 1999.
OEFC’s statement of “unfunded liability” should be treated as an estimate. The “unfunded liability” represents the net figure of OEFC’s total liabilities: mostly Ontario Hydro bond obligations, and its estimated costs for dealing with nuclear waste and getting out of high-priced power purchase contracts, some of which extend until 2042 – offset by notes receivable from the Province, Ontario Power Generation, Hydro One, and a small amount from the Independent Market Operator. Although, both OPG and Hydro One have seen their financial positions decline, the impact of these declines on the notes held by OEFC is difficult to judge.
OEFC’s financial losses were sustained despite the Ontario government’s decision last year to break one of its promises to ratepayers by accelerating the implementation of a special electricity tax earmarked for OEFC debt repayment to start collection prior to Market Opening. The Debt Reduction Charge (DRC) was first implemented on June 1, 2001, but renamed as the Wholesale Market Surcharge.
OEFC reports $524 million in accounts receivable from OPG and Hydro One as assets offsetting some of OEFC’s liabilities. These accounts receivable correspond to the retained earnings of OPG and Hydro One accumulated since their creation in April 1999. OPG has invested more than its total retained earning in the restart of the Pickering A nuclear station, a project now three years late and about 175% over budget. Additional funds for the Pickering A project appear to have come from the liquidation of Mississaugi hydro-electric assets, lease payments from Bruce Power, and deferring debt payments to OEFC. Hydro One has invested more than its retained earnings in the acquisition of municipal distribution utilities, where it bought assets worth $385 million for regulated cost recovery purposes at a price of $555 million. Additional funds for the acquisitions appear to have come from the issuance of new debt, which has diluted the Province’s interest in Hydro One. This year, OEFC’s accounts receivable were adjusted downward by $122 million relative to last year. Further downward adjustment of OEFC’s accounts receivable cannot be ruled out.
Consumers were promised that the DRC would be temporary, in place long enough to recover Ontario Hydro’s unfunded liabilities. Since the unfunded liabilities are growing, the outlook for the DRC is that it will become a larger, longer lasting or permanent tax. In future, the rate charged for the Debt Reduction Charge is likely to increase from 0.7 cents/kWh to at least 1 cent/kWh.
OEFC has claimed since its first annual report to have a plan that shows the unfunded liability being eliminated. The plan is secret. In 2000, the Provincial Auditor asked that the plan be subject to independent review. The reviewer retained was Ernst & Young, the same company that signed off on Ontario Hydro’s financial statements, statements we now know were materially inaccurate. This year, OEFC claims that the date at which its unfunded liabilities are defeased has slipped from 2010 until 2012, but no supporting explanation is provided.
OEFC’s financial statements raise a number of questions:
• How high will the unfunded liabilities rise to before they start declining?
• With OEFC failing dramatically to live up to its original debt reduction mandate, why was the consultant Michael Gourley, who played a key role in setting up OEFC as a former Deputy Minister of Finance under Eves, now vice-chair of OEFC?
• Will the full impact of the deteriorating financial position of OPG, Hydro One and OEFC be reflected in the province’s financial statements, expected later this fall?