Ontario’s public power failure redux

(June 22, 2017) Ontario is repeating its failed public power experiment.

This article first appeared in QP Briefing.

When Ontario Hydro – at one point the largest public utility in North America – went bankrupt in the 1990s, it was clear that public power failed as an energy policy. Public ownership led to ballooning construction costs, soaring rates and an unaccountable utility that put consumer interests last.

Yet, nearly two decades later, Ontario consumers are suffering from the same consequences of public ownership at the province’s largest power generator, Ontario Power Generation (OPG). OPG’s credit rating would be rated just slightly better than “junk” if it weren’t for the implicit backing of Ontario taxpayers, it compares poorly to other nuclear operators, pays its workers a premium, charges ratepayers hundreds of millions of dollars to cover generous pension payouts that have repeatedly been called “unsustainable” and is now a financing vehicle for the province to hide the real cost of electricity policies that have driven up rates.

In short, public power in Ontario continues to fail both ratepayers and taxpayers alike.

OPG wouldn’t be able to stand on its own two feet without the backing of taxpayers. The credit rating agencies admit that if OPG were considered a “stand alone” company – meaning it wouldn’t benefit from provincial (taxpayer) financial support – it would sit just slightly above the threshold investors typically refer to as “junk”. In its recent application before the Ontario Energy Board (OEB), OPG’s expert admitted that the company would “struggle” to issue debt and finance its capital projects – the cost of which are currently in the billions of dollars – if it weren’t for the “implicit” backing of taxpayers.

Another expert concluded that without provincial support, OPG would pay much higher interest rates and would require a higher return than the OEB allows for other utilities. OPG would, essentially, need to be treated differently to remain financially solvent.

Yet, for all the support that the taxpayers provide OPG, the province seems uninterested in ensuring the company is a best-in-class generator. In fact, Queen’s Park has explicitly moved away from that principle by removing the clause from its Memorandum of Agreement with OPG requiring the company to benchmark itself against the top-performing operators across North America.

The studies that OPG has undertaken to compare itself to other nuclear operators across North America make for dismal reading. On nearly every measure OPG’s performance is either one of the worst in North America or has declined in recent years. On what is probably the most important metric – the cost of power – OPG is currently second to last and has seen its cost of producing power blow past inflationary increases over the last two years of benchmarking studies.

Future rate hikes will be far more severe, according to the company’s own forecasts.

OPG employees continue to earn wages well above their peers in both the utility and industrial sectors – even though the OEB has repeatedly told the company its compensation packages are too generous. OPG’s expert concluded its unionized workers earn about 8% more than other utility workers and 27% more than workers in the industrial sector overall. Yet, even those figures are understated. In order to make its compensation metrics look better than they truly are, OPG’s expert excluded more than $500 million in overtime costs and $92 million in Hydro One shares the company promised its unionized employees. The study also didn’t account for the fact that many OPG employees work a 35-hour work week, while most of their peers complete a 40-hour work week.

The percentage of OPG employees earning more than $200K and $300K annually has also been increasing once again after declining in the wake of the Auditor General’s scathing 2013 report on the company’s high compensation levels.

On nearly every front, OPG’s shareholder – the province – simply seems unable to control the company’s wage bill.

OPG performs no better when it comes to pensions. OPG’s own study showed that its pension and benefit payouts are about 30% more generous than comparator companies. And unlike other public sector employees that maintain a 1:1 ratio – where the employer and employee contribute the same amount to the pension fund – OPG employees pay far less than that. OPG simply passes those high costs on to ratepayers who pick up the majority of the pension tab.

And finally, Queen’s Park, realizing that its electricity policies are creating an unsustainable series of rate hikes, has made OPG issue tens of billions of dollars in debt to artificially lower hydro bills for customers across the province. The reason for putting that debt on OPG’s books rather than its own is obvious – it makes the province’s finances look better than they are, while turning OPG into a highly leveraged financing vehicle for the sole reason of shielding the province from the public backlash of its energy policy.

Ontario never fully moved on from the failed policy of public ownership of the electricity sector. The province’s ownership of OPG clearly shows that we’re making the same mistakes all over again. And just like before with the debt retirement charge, consumers will be left to foot the bill.

Brady Yauch is an economist and the executive director of Consumer Policy Institute.

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