Tom Adams
Property Management Report
November 30, 2002

Taxpayer-backed electricity liabilities, which the government promised would begin shrinking and would soon disappear, are rising. The basic facts of this issue and the underlying problems related to taxpayer electricity debt are not widely enough understood.

Ontario Electricity Financial Corporation (OEFC), the legal continuation of Ontario Hydro, released its 2001-2002 financial results on Aug. 29. The financial results were released two months behind the schedule required by law, but this delay was much less that the delay in reporting during its first two years of operations. OEFC commenced with the break-up 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. Additional funds for the Pickering A project appear to have come from the liquidation of Mississauga 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. Additional funds for Hydro One’s acquisitions appear to have come from the issuance of new debt, which has diluted the taxpayer’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.

OEFC has claimed since its first annual report to have a plan that shows the unfunded liability being eliminated. The plan is secret. The continuing slide of OEFC’s financial performance represents a major threat to Ontario’s power market. The longer OEFC is allowed to ramp up debt, the higher rates will ultimately have to go for consumers.

Ontario’s electricity restructuring will not succeed unless it enhances the public interest. Among the necessary steps to enhancing the public interest are depoliticization of the power system, restoring the credibility of retail marketing, modernizing electricity metering in Ontario, achieving higher standards of independence and effectiveness in regulation, and cutting the Ontario taxpayer’s electricity liabilities.

Tom Adams is the Executive Director of the public interest and advocacy group, Energy Probe, and a former member of the Independent Electricity Market Operator’s (IMO) Board of Directors. The preceding article is an excerpt from a speech to the Canadian Competitive Energy Summit in September 2002.