Tom Adams
Financial Post
December 20, 2003

Ontario Premier Dalton McGuinty, alarmed at the $1-billion-plus deficit facing government-owned Ontario Power Generation, has appointed former federal finance minister John Manley to get to the bottom of the crisis.

If $1-billion alarms Mr. McGuinty, he should ask Mr. Manley to check out the rest of Ontario’s crisis-wracked power system, starting with Ontario Electricity Financial Corp., a Crown agency created, in part, to track the province’s power-related liabilities.

OEFC claims Ontario’s taxpayer-backed electricity debt fell by almost $4-billion: from $30.5-billion in 1999, when Ontario Hydro was wound up, to $26.8-billion in March, 2003. In fact, the taxpayer-backed electricity debt has been rising, and hit $32-billion last March. OEFC arrived at its $26.8-billion figure by shifting almost $5-billion in liabilities off its books and on to those of other publicly owned agencies, primarily Hydro One.

About two-thirds of OEFC’s debt represents electricity liabilities not backed by assets — the so-called "stranded debt" left over from Ontario Hydro’s de facto bankruptcy. OEFC reassures us that it will eliminate all of this stranded debt by 2012. To accomplish this, it has been touting a business plan — albeit a secret one — blessed annually by the provincial auditor, Erik Peters, and in 2000 by auditor Ernst & Young. OEFC’s business plan incorporated the business plan of OPG, which was also kept secret. Year after year, auditors bought into an implausible business plan of fictional numbers based on wild-eyed forecasts.

The facts tell a sobering story. Taxpayer exposure to stranded debt is rising. Even in OEFC’s own version of the story, stranded debt rose from the $19.4-billion inherited from Ontario Hydro to $20.2-billion in March, 2003. But the real story is much worse.

OEFC’s chief assets are IOUs, some from a troubled Hydro One, more than one-quarter from a near-destitute OPG. Any prudent auditor would consider these assets impaired: The Energy Minister himself now recognizes that OPG risks bankruptcy.

OPG’s collapse is all the more remarkable considering that it has had unexpected cash to burn. For example, during the last 18 months, power prices have been far above those forecast when OPG took on its debts. OPG’s voracious expenses have eaten up this windfall and more, so much so that it has been forced to sell accounts receivable to pay its bills. To boot, OPG liquidated $342-million in assets at the Mississauga hydroelectric stations. But instead of putting the cash toward cutting its debt, and making good on its promise, the money was lost on the unlikely gamble that the Pickering A nuclear plant could be successfully renovated.

Hydro One, meanwhile, also burned up provincial resources in empire building. During its heyday under Eleanor Clitheroe, Hydro One bought 95 municipal distribution utilities at prices far above those private sector competitors were prepared to pay.

Although Hydro One’s profits have been falling since it was created while its debt has been rising, OEFC’s accounts do not reflect Hydro One’s decline in value. On the contrary, when Hydro One issued fresh debt and used a portion of the proceeds to repay OEFC, OEFC reported that as a "highlight" for the year, implying that taxpayer liabilities were reduced. In fact, debt issued by Hydro One impairs the taxpayer’s claim on Hydro One’s assets and cannot therefore be ignored.

Ontario taxpayers are paying another way, too. To keep OEFC afloat, the province has committed to provide it with $520-million a year from general tax revenues. OPG and Hydro One, in turn, were to reimburse the province with $520-million in annual dividend payments. In 2002, the dividends fell short by $362-million, forcing taxpayers to directly pay a portion of the consumer’s power bill. The dividend shortfall is all but certain to rise in future. In fact, the province is considering a $1-billion cash injection in the coming year.

Transparency for Crown operations ought to be a basic taxpayer right. Every year since it was created, OEFC has failed to release its annual report on the schedule required in the Electricity Act. Its failure to comply with the law is never noted in the auditor’s report.

Perplexingly, the audit opinion is always issued months prior to the actual release of the report. In one case, the opinion was signed more than six months prior to the release, raising a question about what happens during the intervening period. By rights, OEFC’s financial reports should be issued promptly after the close of each quarter and its financial plans should be published annually.

But transparency will not solve the structural flaw that fuels this covert money bonfire. For that, privatization and competition are needed. Some jurisdictions, such as California, have botched their deregulation efforts. The great majority have not — the United States, in fact, now has an immense surplus of power while Ontario has been unable to build the power plants it desperately needs.

The only way to freeze taxpayer liabilities is to privatize the government’s power businesses. Had the province done this when Ontario Hydro suffered its de facto bankruptcy in 1997, it would today be billions of dollars — and dozens of power plants — ahead.