Ontario Hydro goes for broke

Daniel Leblanc
The Ottawa Citizen
May 7, 1998

Less than two years before the breakup of its monopoly on the electricity market, Ontario Hydro is still using the provincial government’s signature to borrow billions — money Ontarians could have to pay back.

It’s a spending strategy that critics say may be aimed at helping Hydro maintain a virtual lock on the industry, even after private power companies are allowed into the market in 2000.

And here’s the shocker for Ontario’s energy consumers: Analysts estimate that more than half of Hydro’s $32-billion debt — likely to balloon if new loans are approved — could soon be transferred to Ontarians through increases to hydro bills or income tax.

Don Macdonald, a former federal finance minister who chaired a committee in 1996 on the introduction of competition into Ontario’s electricity market, says Hydro should stop spending public money now.

"The Hydro management is trying to run (the company) in such a way that it’ll continue to have the same dominating position in the market that it has now. I don’t think that’s acceptable from Ontario’s standpoint.

"These people are not competent to run a hydro system. We know that," he says. "They should only be getting enough money to prevent the system from breaking down."

Ontario Hydro is planning to borrow $10 billion in the next three years — or more than $3,000 per bill-payer — yet it will build nothing new. Even though $10 billion is roughly the price of a new nuclear generating station, the money is to be used largely for debt-refinancing.

And a huge portion of Hydro’s debt will likely be "stranded" before the opening of the free market — meaning up to $20 billion would be written off its books and transferred to others.

The move would be used to prevent Hydro from going bankrupt in a free market because its prices are uncompetitive.

And the probable victims of this "stranding" would be all Ontarians, who could end up paying $10 billion to $20 billion of Hydro’s debt through their income tax or a special tax on electricity.

As a result, consumers would reap little immediate benefits from the breakup of Ontario Hydro’s monopoly. Experts say that in order to pay for Hydro’s debt, electricity prices in the province won’t soon drop and may actually rise.

They also claim that Ontario Hydro, with the help of borrowed money, is angling to secure a dominant position in the province’s $10-billion-a-year electricity market, aiming to beat the newcomers that will appear in 2000.

Groups such as the Municipal Electric Association and the Independent Power Producers’ Society of Ontario have asked the Ontario government to immediately stop guaranteeing, or co-signing, Ontario Hydro’s loans.

In November 1997, the Ontario government announced the introduction of retail competition in the province’s electricity market in 2000 and the separation of Ontario Hydro’s electricity production and transmission systems. It said Hydro’s debt guarantee would end in 2000.

In the meantime, Ontario Hydro is planning to borrow $4.7 billion in 1998, $3 billion in 1999 and $2.5 billion in 2000.

Some of the money will be used to refinance maturing debt, but some money could be used to prepare the utility for competition. In order to compete, Ontario Hydro’s facilities, especially its nuclear plants, need massive investments.

The public utility also took a $6.6-billion writeoff last year, almost all of it to clear the way for future expenditures. In a sense, says Energy Probe’s Tom Adams, Ontario Hydro is putting money in its 1997 books that it will only spend later.

The $4.6 billion it set aside in 1997 for the Nuclear Assets Optimization Plan will be spent from 1998 to 2001 — two years after private companies will have been allowed to compete with it.

For example, some of the coal that will be used to produce power in 2001 has already been paid for. When Ontario Hydro starts competing against private plants, from large American utilities to local co-generating companies, it will be benefitting from subsidized energy, Mr. Adams said.

With the publication of its 1997 annual report yesterday, it is clear that Ontario Hydro is facing a debt nightmare unprecedented in Canadian business history:

– Its 1997 net losses were $6.3 billion;

– It incurred a $6.58-billion writeoff last year;

– Its debt and liabilities, at $45 billion according to the Ministry of Finance, are almost half the size of the Ontario government’s own debt;

– It has $4.5 billion in negative equity (it owes more that it’s worth).

Another problem is that Ontario Hydro’s accounting rules overestimate by almost 200 per cent the lifespan of nuclear generators. Hydro had long suggested that they would last 40 years, and used this figure to calculate the depreciation of nuclear assets such as heavy water.

However, the average age of the nuclear units mothballed last August, as a result of a scathing report on their performance, was more like 22 years, said the Independent Power Producers’ Society.

If Hydro changed its accounting practices, it could end up with even more liabilities.

Jake Brooks, executive director of for the independent producers’ society, says Hydro is using public money to finance its way out of its problems. Since the debt is co-signed by the government, he says, Hydro has access to easy capital and doesn’t have to get the market’s approval for its plans.

"This is being treated as the last hurrah with the public’s money. The public won’t be pleased to see the results, given what has happened with the last few billions."

Mr. Brooks and others fear that the Nuclear Assets Optimization Plan, which was put in place to restore underperforming nuclear plants, won’t solve ongoing problems at Bruce, Pickering and Darlington.

The plan "didn’t have detailed development of numbers and, what’s worse, didn’t offer any guarantees in term of power output or financial results," Mr. Brooks said.

The plan, which was set out by American nuclear expert Carl Andognini, is drastic: shutting down seven reactors and repairing 12 others, as well as a massive retraining and redeploying of employees.

But economist David Argue, who has studied Ontario Hydro for 15 years, says it’s only "more money down the black hole.

"The philosophy behind Andognini’s plan is: ‘We know it’s broken, but we can fix it.’ That’s always been the philosophy at Ontario Hydro: ‘We know we’ve made mistakes in the past, but next time we’ll do it right.’ "

In fact, Mr. Andognini said in the 1997 annual report that last year, "We learned there was nothing wrong that could not be fixed."

Mr. Argue pointed to Hydro’s past nuclear blunders to illustrate the difficulties ahead, but also to warn that the cost of the plan could end up being substantially higher.

The Darlington plant was to be completed in 1983 at a cost of $2.5 billion. Instead, it was finished 10 years later at a cost of $14.4 billion.

"It’s certain that the amount of money spent on the (plan) will be above what they predicted," Mr. Argue said. "As they work on the plants, more problems will be uncovered. Once they get into it, we’ll see costs well above what Andognini said was needed to get the plants back to world standards."

Analysts such as Mr. Argue and Mr. Adams also point out Hydro’s long-standing habit of underestimating costs and overestimating benefits.

As late as its November 1997 third-quarter report, Ontario Hydro was forecasting a potential writeoff of $475 million. Three months later, a writeoff of $6.58 billion was announced.

In its 1996-1999 corporate business plan, Ontario Hydro forecast nuclear production of 91.6 terawatt/hour for 1999. In this year’s plan, the forecast is 59 terawatt/hour.

In 1993, it was predicted that Ontario Hydro’s debt-to-equity ratio for 1997 would be below 80 per cent. It is, in fact, 115 per cent (for every $1 in equity, there is $1.15 in debt).

"Either they don’t know what they are doing, or they are misleading decision makers," Mr. Argue contended.

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