Thomas Adams
Energy Probe
August 27, 1998

Mrs. Brenda Elliott, M.P.P.
Chair, Standing Committee on Resources Development
c/o Committee Office
Room 1405, Whitney Block

 

Dear Mrs. Elliott:

 

I write to you and through you to the committee members to address two issues–procedural rights and financial guarantee–in response to requests for additional information from committee members during Energy Probe’s appearance before your committee Wednesday August 19.

 

Procedural Rights

 

In response to a question from Ms. Johns, we have examined further whether the Statutory Powers and Procedures Act ("SPPA") guarantees the procedural rights contained in the existing Ontario Energy Board Act at sections 15(3), 15(4) and 17 but not proposed for the new Act.

 

Upon review we remain concerned that under the current formulation of Bill 35, the SPPA will not always apply. Unless the Bill is amended, the procedural rights now available to protect the interests of gas customers will be lost and existing procedural rights will not be extended to electricity customers.

The SPPA only guarantees the procedural rights to an open, public hearing, if the OEB Act itself requires that a hearing be afforded to the parties. The proposed OEB Act does not guarantee that a hearing be held in order to set gas rates or to proceed with a reference or an order in council. The old Act guaranteed the right to a hearing in s.15 (3). Further, s. 21(3) of the proposed Act specifically exempts the Board from s.5.1 (2) of the SPPA which requires an oral hearing if one party objects to a written hearing.

 

Financial Guarantees

 

We were also asked for additional comments on the issue of debt guarantees. In our submission, we made the following comment on guarantees:

 

Energy Probe urges the Committee to eliminate these potential taxpayer risks by ensuring that no future borrowings by participants in the electricity sector are guaranteed by the province and that existing guaranteed obligations are treated as preferred, while future, unguaranteed obligations are treated as subordinate to them (as a second mortgage is subordinate to a first). (p. 6)

 

For clarity, we should probably have separated the two parts of this sentence into two recommendations

 

The first recommendation of the two would read as follows:

 

1. Energy Probe urges the Committee to eliminate taxpayer risks by ensuring that no future borrowings by participants in the electricity sector are guaranteed by the province.

Our recommendation here is that, in future, when Ontario Hydro’s current debt is "rolled over" — i.e., when Ontario Hydro’s bonds mature before the corresponding assets have been fully depreciated, necessitating the reissuance of bonds by "Finco" — these new bonds not bear the provincial loan guarantee. The effect would be to gradually extricate the taxpayers of Ontario from responsibility for these bonds in the case of a default by Genco and Servco. While the effect may be to raise the cost of Finco borrowing, the effect should be slight: Finco should have a good commercial credit rating, since it will have a reliable income stream, from Genco and Servco, sufficient to meet its financial obligations. Continuing to guarantee new bond issues of Finco, as envisioned directly in section 64, would represent a subsidy to the electricity sector. As mentioned orally, we are also concerned that any Finco-issued bonds may be covered by an implicit guarantee as well by virtue of section 61.

 

Our second recommendation would read as follows:

 

2. Energy Probe urges the Committee to eliminate these potential taxpayer risks by ensuring that Genco and Servco’s obligations to Finco legally take priority over its other liabilities, including its obligations to lenders of newer, "commercial" debt. Obligations to Finco should be treated as preferred, while future, unguaranteed obligations of Genco and Servco should be treated as subordinate (as a second mortgage is subordinate to a first).

 

This recommendation, as we indicated orally, concerns new borrowings by Genco and Servco to finance new commercial expenditures — not "rollovers" of old debt. Since our discussion with your Committee, and with government officials who were present during our testimony, we have slightly amended this second recommendation.

 

Our concern, as we indicated, is to ensure that the government’s stated intentions are met — that "Ontario’s debt guarantee on new debt would be phased out by the year 2000." Furthermore,

 

In restructuring the Ontario electricity system, the Government cannot overlook the very high debt of the province’s largest firm. Ontario Hydro must be reorganized. Its successors need to be given clear business mandates, and be put on a competitive commercial footing. The new companies must be accountable in financial matters, and operate with prudent and cautious financial assumptions. (White Paper, p. 14)

 

While we understand that new bonds issued by Genco and Servco would nominally not be taxpayer guaranteed, we are concerned that they will continue to be largely guaranteed by Ontario taxpayers by indirect effect, if Bill 35 is passed into law unamended. After being relieved of "stranded debt" — and while burdened with obligations to Finco — Genco and/or Servco may incur other new non-Finco obligations. We are urging the Committee to amend the legislation as suggested above so that in the event of a future Genco or Servco default, that company’s obligations to Finco legally take priority over its obligations to purchasers of newer, non-guaranteed bonds. Unless this recommendation is adopted, the loss from a default — even if totally caused by the failure of a "new" investment, financed by "new" debt — would be borne by both the new bondholders and Finco (the latter guaranteed by taxpayers), in proportion to the company’s obligations to each. Since Genco and Servco will likely have larger obligations to Finco than to new lenders, Finco will bear a larger loss in the event of a default.

 

In our view, Bill 35’s extension of the historical government loan guarantee under section 64 violates two of the government’s stated goals: (1) it is unfair to future Ontario taxpayers, and (2) it does not ensure that Genco and Servco "must be accountable in financial matters, and operate with prudent and cautious financial assumptions". In the first instance, it holds future Ontario taxpayers liable for the failure of commercial investments apparently financed with commercial bonds. In the second, it shields Genco’s and Servco’s future lenders from bearing the full risks of their lendings, diminishing the incentive for lenders, bond dealers, and bond rating agencies to examine Genco’s and Servco’s financial assumptions critically, and to hold those companies accountable to justify them.

 

Finally, in response to Mr. Baird’s question during our presentation, we can see nothing in Section 52 (or elsewhere in Bill 35) that either addresses or limits this concern.

 

I hope this clarifies our submissions on these matters.

 

Sincerely yours,

Thomas Adams
Executive Director