Tom Adams and Michael Hilson
November 17, 2000
Two weeks ago, and four months late, Ontario Electricity Financial Corp. (OEFC) — the bailout agency for the old Ontario Hydro — released its first annual report. Despite government pledges to restore financial responsibility to the revamped power sector, the flood of red ink pouring from Ontario’s electricity system is rising. Although OEFC’s mandate is to service and retire the former Ontario Hydro’s liabilities, the liabilities are mushrooming. The new Hydro is running amok, and taxpayers are worse off by more than $1-billion.
Until it collapsed in 1998 under the weight of its financial woes, Ontario Hydro was the most powerful Crown corporation in Canada. Believing that demand for power would rise, rates would fall, and nuclear reactors could produce cheap power, Hydro persisted in its nuclear expansion program long after all other power utilities in North America abandoned theirs.
The reality was dramatically different. Darlington, Hydro’s last nuclear station, came in at $14.4-billion (about 3.7 times the original estimate, after correcting for inflation). Hydro had signed deals to buy overpriced power from private generators for up to 50 years. And it had signed other deals to sell discounted power to major corporations, especially big power users. Rates soared 20%, demand for power fell, and Hydro’s pretence of being a well-run corporation was shattered.
Three key factors allowed these disasters to occur. Inaccurate accounting allowed the company to pretend it was profitable. Parliament provided loan guarantees that relieved lenders of the need to be diligent. And Hydro claimed commercial confidentiality to avoid releasing details. The public was kept in the dark about Hydro’s irresponsible management and precarious finances, and the result was bankruptcy. The Ontario government now estimates that Hydro’s net value when it was wound up was negative $20.9-billion.
The Ontario government claims the power sector could never again run out of control. Ontario Hydro was reborn as two commercial Crown-owned companies, Ontario Power Generation (OPG), which owns the generating stations, and Hydro One (H1), which owns the transmission lines. Energy Minister James Wilson claimed this would provide "greater accountability to taxpayers and ratepayers." The Harris government’s restructuring plan assumed that the debts of the old Ontario Hydro could be paid down with payments to OEFC from OPG and H1, the new, presumably financially prudent, commercial companies. The plan also assumed that future asset sales would help pay down the debt.
Instead, the new Hydro companies are less prudent than the old one. Rather than paying down their debt expeditiously, the new companies are keeping most of their profits for themselves: Of the $903-million they made in their first year, the companies released only $285-million to pay down the debt.
Rather than slimming down by selling off unneeded assets, these companies are acquiring new assets feverishly, and financing them with $1.6-billion in new borrowing. The old Hydro managed to cut its debt by $5.4-billion between 1994 and 1998 — more than $1-billion per year. In their first year, the new Hydro companies needed an additional $834-million in taxpayer-backed debt, which now sits on OEFC’s books, pushing its debt above $32-billion. OEFC’s assets? Debt from OPG, H1 and the Ontario government.
OEFC’s accounts are even less transparent than Ontario Hydro’s. Although it’s not disclosed anywhere in OEFC’s books, officials in the provincial auditor’s office reveal that the new power system is not recovering its costs from power consumers: In addition to providing loan guarantees, taxpayers directly contributed $235-million to cover its debts last year.
Whereas the old Hydro’s books report in some detail the assumptions behind its multi-billion-dollar nuclear waste disposal and decommissioning liabilities, OEFC’s books contain none of this information.
All told, taxpayers face a new $1-billion-plus liability earmarked for ill-advised projects by OPG and H1.
With the public writing the cheques, H1 is buying 88 municipal distribution utilities at premium prices — twice their value, according to industry analysts.
Meanwhile, OPG’s main investment activity is refurbishing the laid-up Pickering-A nuclear station. The old Hydro also refurbished that station in the 1980s, and lost approximately $2-billion for its effort. But even if the new Hydro’s nuclear engineers are more capable than the old Hydro’s — an unlikely prospect — and even if the new Hydro escapes without cost overruns — also unlikely — the venture makes no economic sense. Used nuclear capacity in working order is available in the United States for less than half the price OPG plans to pay to refurbish Pickering-A.
OPG’s investments make even less sense for society. Ontario has not learned from California and Alberta, where governments have discouraged investment in new power plants, leading to widespread power outages. The prospect of competing against an expansionist public-sector near- monopoly with access to public funds has driven most private generation investment from the province.
OEFC — the legal successor to Ontario Hydro — was created to be the agent through which the irresponsible legacy of Ontario Hydro was finally put to rest. Instead, it has become an agent to give the new Hydro unprecedented access to the public purse, setting the stage for a new and unprecedented experiment in electric monopoly empire- building.
Ontario’s budget balancing act
"Mr. Speaker, the budget is balanced," Ontario Finance Minister Ernie Eves said triumphantly in bringing down his budget at the Ontario legislature in March. "Never in the history of this province has a government at the end of five years in office been able to say that everything was paid for and that the net debt had been reduced," he said, quoting Ontario Premier Leslie Frost in his balanced-budget address of 1948. "As we approach our government’s fifth anniversary, I am proud to stand before you and say that, once again, the budget is balanced and the net debt has been reduced."
Not quite. Although Mr. Eves reported that day that Ontario had generated a surplus for the 1999-2000 year, the figures weren’t all in. Behind the scenes, the successor to Ontario Hydro, Ontario Electricity Finance Corp., was making mockery of the provincial accounts and proving as unreceptive to fiscal discipline as its predecessor. Ignoring its legal requirement, OEFC would not report for months.
On June 27, the provincial auditor met with OEFC’s government-dominated board to discuss the corporation’s financial position for the year ended March 31, 2000. The auditor recommended that the loss be rolled in to the province’s consolidated statements for the year ended March 31. Doing so would have resulted in the province reporting a $47-million deficit for the year, making a liar of Mr. Eves.
OEFC’s board and the Ontario government refused to accept the auditor’s recommendations. Instead the numbers were massaged: When the audited statements were finally released on Nov. 1, the provincial auditor’s report showed a much smaller loss. As a consequence, the government was spared the embarrassment of retracting its claim that the budget had been balanced.
by: Michael Hilson and Tom Adams
November 17, 2000
The raw financial data reported in the article and this note are draw from "1999-00 Ontario Public Accounts (November 1, 2000)", found at 1999-2000 PUBLIC ACCOUNTS OF ONTARIO.
This note addresses two areas of the column. First, the details of the difference between the Province’s recognition of a $354 million electricity sector loss and our contention that taxpayers are now $1.069 billion worse off, and the resulting difference between the Province’s reported budget surplus of $668 million and our calculation of a $47 million deficit. All figures below are in millions.
Second, it details the items in the Province’s and OEFC’s accounts, eventually accepted by the Provincial Auditor, with which we disagree.
1. Reconciliation of Electricity Loss
|1. Income From Investment in Government Business Enterprises (Revenue)||3,090||3,708||– 618|
|2. Provision for Electricity Sector (Expenditure)||0||383||+ 383|
|3. Net Impact of Electricity Restructuring to be Recovered From Ratepayers||834||354||-480|
1. The Province has included the net income of OPG and H1 ($512 and $391 respectively) in its consolidated revenues. We argue that only the cash dividends paid of $285 ($114 and $171 respectively, Ontario Public Accounts Vol. 2 Schedule 7) should be included.
2. The Province has accrued $383 (which is the above net income in excess of its $520 interest cost on notes payable to OEFC) as a payable to OEFC. If the Province reported income on a cash basis this would be unnecessary. See 3.
3. OEFC reported a net loss of $554. This reflects $383 in OPG and H1 profits to be forwarded from the Province (See 2.). In arriving at the "Net Impact of Electricity Restructuring to Be Recovered from Ratepayers" which is reflected in the budget surplus/deficit, the Province has added back $200 in deferred taxes which were recorded by OPG and H1 in arriving at their above net incomes. Apparently, their position is that the amounts are ultimately recoverable by the province. Our measure of the electricity sector "net impact" reflects the net increase in the government-guaranteed debt of OEFC from $31,230 to $32,064, or $834.
The net impact on taxpayers, in our view, is the $235 in cash ($520 interest paid to OEFC less $285 in OPG and H1 dividends) plus the $834 in new guaranteed debt totalling $1,069. Of this, the Province has reported only $354 for a difference of $715, which exceeds the reported budget surplus of $668, leaving a net deficit of $47.
2. Accounting Treatment by Province
The Province has excluded the guaranteed Hydro debt from its accounts. The "Public Accounts" document explains accounting treatment for OEFC as follows :
- revenues are derived strictly from the electricity sector and not the taxpayer;
- these revenues can only be used to service and retire OEFC debt and liabilities;
- under the Act, the dedicated revenue sources to the OEFC continue until debt is defeased, at which point, a decision to dissolve the OEFC may be made;
- the financial statements of the Province have reflected the impact of the electricity restructuring as a $354 million charge to be recovered from ratepayers. The stranded debt from electricity restructuring to be recovered from ratepayers of $19,787 million is shown after net provincial debt. This disclosure recognizes the fact that ratepayers, not taxpayers, are responsible for the stranded debt of the former Ontario Hydro.
In other words the Province’s position, which was, after reversal of its original position, approved by the Provincial Auditor, is that notwithstanding the guarantees, and the fact that the debt has resumed growing, electricity ratepayers are legally responsible for the debt and therefore its potential impact on taxpayers can be disregarded. As noted above, the claim that OEFC’s revenues are derived strictly from the electricity sector and not taxpayers is falsified by OEFC’s actual experience in 1999-2000.
The Province has a secret plan to ensure that the debt is repaid by ratepayers between 2010 and 2017. Development of the plan appears to have been a qui pro quo to get the Provincial Auditor to reverse the position it held at the June 27th meeting of OEFC’s Board. Oversight of the plan was provided by Ernst & Young, the same firm that had oked Ontario Hydro’s books for decades.
This plan covers all of the guaranteed bonds, net obligations on NUG contracts and nuclear liabilities. Only the cash flows required to extinguish the bonds can be quantified exactly. The cash flows come from the following sources: interest on debt carried by OPG, H1, and the Province, proxy taxes from OPG, H1, and MEU’s, earnings in excess of the province’s interest costs, a debt retirement charge (tax) on electricity consumption, and the market values of OPG and H1 themselves (they could either be sold or would provide their own security for financing). Some of these cash flows can be forecast and controlled by the Province. However, the market values of OPG and H1 are a variable component. If they are allowed to retain and reinvest money earmarked for debt repayment, the plan loses precision and the amount of stranded debt becomes less predictable.
The plan may provide for higher power prices, whether by ratcheting up the Debt Retirement Charge or higher regulated transmission revenues for H1, should the other cash flows be insufficient. For taxpayers to have been saved harmless in 1999-2000, power prices would have had to been raised by 10%.
By allowing OPG and H1 to expand and gamble, the government is betting that OPG and H1 will earn a good return on these investments, and even if they don’t, ratepayers will be able to absorb more increases without a death spiral. The history of Crown power sector investing through Ontario Hydro does not support the government’s approach.