(This posting contains both our speaking notes, posted about 20 minutes after presentation, and the official Hansard transcript. Following our presentation, Ed Clark made a presentation to the Finance Committee and made comments to the press. His comments and my reaction to his comments are ably reported here by Antonella Artuso for Sun Media. Our bottom line is that the ON government’s plan to sell Hydro One is a shell game to grab $4 billion from electricity ratepayers.)
Madam chair and members. We are here today to address amendments to the Electricity Act contained in the budget act, Bill 91.
I am joined today by Michael Hilson. In 2001, Mr. Hilson and I wrote in the National Post that then Auditor General Erik Peters mistakenly accepted the Harris Government’s balanced budget claim. His specific error was not understanding the impact of Ontario Electricity Financial Corporation on the government’s books. In 2005, Mr. Peters, then working for Dalton McGuinty, reversed his view to agree with us.
In 1999, I was appointed to the Ontario Market Design Committee helping the government implement its privatization and market plans. One duty of that committee was to develop an agreement balancing ratepayers interests with OPG’s responsibility to repay its portion of the stranded debt held by OEFC. Hydro One was responsible for another large portion of that debt, and the rest was to come from the Debt Reduction Charge, with a small amount from payments in lieu of tax from distribution utilities. At the time, OEFC’s total interest bearing debt was $31 billion, then considered a measure of failure not to be repeated.
After 16 years, during which the DRC was over-collected and the Bruce capacity sold, where are we now? OEFC’s interest bearing debt is $26 billion before taking into account $9 billion interest bearing debt owed by Hydro One. The people of Ontario are now worse off by $4 billion of fresh debt but we have fewer assets to back that debt. The 1999 plan to pay off the $31 billion failed disastrously.
The reason we are here is not to discuss changes in accountability to watchdog officials. We are not here to contest the government’s estimate that it will be able to sell 60% of Hydro One for $9 billion. Taxpayers should feel relieved if this can be realized.
The reason we are here is to seek accountability for the money the government intends to withdraw from the already 100% mortgaged power system.
The original legislation earmarked any privatization proceeds were for debt repayment.
Now the government contends that any proceeds in excess of book value is a windfall available to fund other initiatives. What the government ignores is that the book values of OPG and Hydro One are $9 billion less than the debt outstanding at OEFC. There is a shortfall to declare, not a windfall to spend.
The lion’s share of the work of servicing OEFC’s debt fell to Hydro One. OPG can’t even finance its own operations, let alone generate dividends. It is telling that the government’s review of assets uncovered no opportunities to realize value there.
Under the government’s current plan for OEFC, $5 billion from the Hydro One sale will go to OEFC but the burden for repaying OEFC’s remaining $21 billion will fall mostly on OPG and the government promises there will be no impact on rates due to the sale. We say, selling wires to fund subways will require a transit tax on ratepayers or taxpayers.
Under Bill 91, $4 billion is about to be taken away from the power system for political reasons with the Ontario public holding the bag. The Auditor General seems focused on watching Hydro One but the central problem for taxpayers and ratepayers is the $26 billion problem at OEFC.
Mr. Tom Adams Mr. Michael Hilson
The Chair (Ms. Soo Wong): The next presenter is Tom Adams. Mr. Adams, welcome. As you heard earlier, you have five minutes for your presentation, followed by three minutes of questions from each caucus. You may begin any time. Please identify yourself for the purpose of Hansard.
Mr. Tom Adams: Madam Chair and members of the committee, my name is Tom Adams. I’m joined here by Mr. Michael Hilson. We’re here to address amendments to the Electricity Act.
In 2001, Mr. Hilson and I wrote in the National Post that then-Auditor General Erik Peters mistakenly accepted the Harris government’s balanced budget claim in that year. His specific error was to not understand the impact of the Ontario Electricity Financial Corp. on the government’s books.
In 2005, Mr. Peters, then working for Mr. McGuinty’s newly elected government, reversed his view of this relationship and agreed with us.
In 1999, I was appointed to the Ontario Market Design Committee, helping the Ontario government implement its privatization and market plans. One duty of that committee was to develop an agreement balancing the interests of ratepayers with Ontario Power Generation’s responsibility to repay its portion of the stranded debt held by OEFC. Hydro One was another key element of that plan to repay debt, as were portions to come from the debt reduction charge and a small amount of payments in lieu of taxes from distribution utilities. At the time, Ontario Electricity Financial Corp.’s total interest-bearing debt was $31 billion, then considered to be a measure of failure not to be repeated.
After 16 years, during which the debt reduction charge has been over-collected and the Bruce capacity sold, where are we now? OEFC’s interest-bearing debt today is $26 billion, before taking into account $9 billion of interest-bearing debt owed over at Hydro One. The people of Ontario are now worse off by $4 billion of fresh debt, but we have fewer assets to back that debt. The 1999 plan to pay off the $31 billion was an obvious and disastrous failure.
The reason Mr. Hilson and I are here today is not to discuss changes in accountability to watchdog organizations for Hydro One. We are not here to contest the government’s estimate that it will be able to sell 60% of Hydro One for $9 billion. On the contrary, we feel that taxpayers should feel relieved if this was actually to be realized. No; the reason we are here is to seek accountability for the money the government intends to withdraw from the already 100% mortgaged Ontario power system.
The original legislation earmarked any privatization proceeds for debt repayment. Now the government contends that any proceeds in excess of book value are a windfall available to fund other initiatives. What the government ignores is that the book value of OPG and Hydro One is today $9 billion less than the outstanding debt held by OEFC. There is a shortfall to declare, not a windfall to spend.
The lion’s share of the work servicing OEFC’s debt over the last 16 years has fallen on Hydro One. OPG cannot even finance its own operations, let alone generate dividends. It is telling that the government’s review of assets uncovered no opportunities to realize value from that institution.
Under the government’s current plan for OEFC, $5 billion from the Hydro One sale will go to OEFC, but the burden of repaying the remaining $21 billion will fall mostly on OPG. The government also promises no impact on rates due to the sale. We say that selling wires to fund subways will require a new transit tax, either on ratepayers, taxpayers or some combination thereof.
Under Bill 91, $4 billion is about to be taken out of the power system for political reasons, with the Ontario public holding the bag. The Auditor General seems focused on watching Hydro One, but the central problem for taxpayers and ratepayers is the $26-billion problem left at Ontario Electricity Financial Corp.
The Chair (Ms. Soo Wong): All right. Ms. Fife?
Ms. Catherine Fife: Thank you very much, Tom and Mr. Hilson, for being here. I’d like to get a hard copy of your presentation, please, at some point.
Mr. Tom Adams: We’ll post it on the Internet this afternoon.
Ms. Catherine Fife: Thank you. Under the current Electricity Act, all proceeds from selling Hydro One must flow directly to the OEFC to pay for the huge debt left over by Ontario Hydro, which you’ve just pointed out. Bill 91, however, rewrites the law to allow the money to flow into general government revenues instead. I’d like your opinion on what this might mean for hydro debt going forward.
Mr. Tom Adams: The government has the power to rewrite section 50.3 of the Electricity Act, giving them flexibility in disposition of assets, but whatever the act says, the debt at OEFC remains. That’s the ball to keep your eye on.
Ms. Catherine Fife: Do you think it is possible that the government might assume new debt in order to pay OEFC, just to get you on the record?
Mr. Michael Hilson: From the government—
Ms. Catherine Fife: When the whole point of selling Hydro One, according to the government, is to avoid new debt, is there a risk in assuming new debt?
Mr. Tom Adams: They haven’t explained what the plan is.
Ms. Catherine Fife: I know. Thank you for saying that in public.
You’ve also said before that the privatization of Hydro One will lead to a new electricity tax that the government hasn’t been forthcoming about. Can you expand a little bit more than what you’ve already done in your presentation for us today?
Mr. Tom Adams: We take the view that the power system is at least 100% mortgaged. If you intend to take money out, there’s going to be some new liability someplace in the system that will have to be serviced. Ontario Electricity Financial Corp.’s debt repayment plans have been secret for 16 years, and they’re still secret. We think that plan should be on the record so that we can have a substantive conversation.
Ms. Catherine Fife: Which, of course, leads to decreased oversight by all the independent officers of this Legislature around Hydro One. It is public money, and people should have access to that information.
Mr. Tom Adams: You say decreased oversight—
Ms. Catherine Fife: Decreased.
Mr. Tom Adams: —decreased—but for 16 years, the Auditor General has had authority to investigate OEFC and its debt repayment plans but has declined to exercise that responsibility.
Ms. Catherine Fife: She has declined? Or they have declined? Please be clear.
Mr. Tom Adams: Successive officers of the Auditor General’s office have not investigated what’s been going on with the debt over at OEFC.
Ms. Catherine Fife: And you feel that that’s a thing that needs to happen. Okay. Thank you.
The Chair (Ms. Soo Wong): Okay. Mr. Adams, your questions are up. This round, Mr. Potts.
Mr. Arthur Potts: Thank you, Chair, and thank you, Mr. Adams. I appreciate you coming, Mr. Hilson. You’ve done extensive research in the area of energy over the years. I’ve had the pleasure of reading you in many publications over the years, even before I had an opportunity to be here in this House; you’ve been very thoughtful in your investigations and your approach.
I also know, of course, that you’ve assisted the party opposite, the PCs, in the development of their white paper. I don’t mean that in any way as a political slight, but to say I know that’s flavoured the kind of approach you’ve taken to it and the advice you’re giving them on how to run the electrical system.
I’ve got to commend you on validating the capital assessment that we’re making on Hydro One—the book value, as you suggest. You’re not here to be critical of that, and we appreciate that, because I think our estimations are in the ballpark, in the right area, depending on whether investors are going to be satisfied with a 5% type of return. If that should be a 4% return, the corporate capital value of that asset could be a lot higher, and the amount of money that could be freed up in order to go forward with our plan could be significantly greater.
You talk about us not having explained the plan. I see the explanation on a daily basis, so it may be that you don’t agree with the explanation, but clearly we’re opening up the asset in order to free up money. You’ve agreed that the stranded debt associated with that asset is about right, and then we’re going to utilize the additional, the net savings or the net gains from that, to put into new infrastructure. We’ve been very clear, I believe, on that additional—whether it’s $4 billion or more, if the asset is worth more—as we go through with a 15% tranche and another 15% tranche.
First off, I think you must be very supportive of the idea of putting private sector oversight into Hydro One by selling off a sizable portion of the equity shares and moving it from a crown corporation to the oversight of a private body like the Ontario Securities Commission. Would you be supportive of that basic move, and particularly trying to reallocate those assets for a more productive purpose like building infrastructure?
Mr. Tom Adams: We’re supportive of privatization of Hydro One. Our concern with respect to transparency is the lack of transparency about the debt repayment plan at OEFC. You’ve concentrated your remarks with regard to Hydro One; that’s fair, but there’s another story, which we think is the central story of this element of the legislation, which is the debt repayment plan for OEFC. That has not been explained.
Mr. Arthur Potts: We know where that initial debt—and how it became stranded. It is an elephant that needs to be wrestled with. I believe, as you point out, it has come down some $5 billion since 1999—
The Chair (Ms. Soo Wong): Mr. Potts, your time is up. I’m going to go to Mr. McNaughton.
Mr. Monte McNaughton: Tom, thank you very much. That was a great presentation. I wondered if you could maybe put into perspective the potential for rates to go up in Ontario. This decision by the government—how will that impact consumers? At some point, this $35-billion debt has to be managed. Can you give any indication as to where hydro rates are going to go?
Mr. Tom Adams: We believe that the ratepayer-backed electricity debt has risen since 1999. It has gone from $31 billion to $35 billion. We don’t believe that there’s any windfall here. Any attempt to extract cash out of this already debt-increasing situation is going to drive the debt higher in some respect, but we’re not sure where it’s going to appear.
Mr. Monte McNaughton: What is the risk of this debt to the overall energy system in Ontario? I mean, at some point, this is going to be unsustainable.
Mr. Tom Adams: It already is. Electricity consumption in Ontario peaked in 2005; it’s been declining ever since. Customers can’t pay their bills. Many large consumers are simply exiting the province to escape from this.
The debt represents future locked-in rate increases. We have many other factors that are also driving up electricity prices, irrespective of the situation at OPG and Hydro One. All of this is just making the situation from bad to worse for electricity consumers. They’re fundamentally the value underneath this—you know, they’re the source of all the funds for all of this, and we just don’t see the plan.
Mr. Monte McNaughton: Okay. Thank you very much.
The Chair (Ms. Soo Wong): Thank you, Mr. Adams. Thank you, Mr. Hilson.