Amidst a storm of controversy yesterday at Queen’s Park surrounding a damning report from the new Financial Accountability Officer, the government yesterday reaffirmed that it is going to extract $4 billion from the proceeds of the Hydro One sale to spend on other government programs. Ontario Premier Wynne’s damn-the-torpedoes implementation of her plan for Hydro One suggests that to the extent that she has a long term plan for electricity, it is to add a transit tax on top of existing charges.
Ontario ratepayers, many of whom are now paying the highest rates in Canada, might be surprised to find that their existing rates are not high enough to cover the power system’s existing full costs, let alone the higher costs coming soon. Consider that other than Hydro One, the Ontario government has two major electricity agencies, OPG and Ontario Electricity Financial Corporation (OEFC). OPG has been cash flow negative since it was created and shows no sign of turning that around. OPG’s bloated but non-performing $17.6 billion investment in property, plant and equipment gets worse by the year. OEFC started life in 2000 with overall liabilities valued at $38.1 billion, of which $4.3 billion was expected losses on the old Ontario Hydro non-utility generation (NUG) contracts. Net of the NUGs, OEFC’s opening liabilities were therefore $33.8 billion. As of March 31, 2015, the fair value of OEFC’s liabilities (which no longer include NUGs) amounted to $31.1 billion (See the Ontario Public Accounts p. 1-118.) While the nominal value of OEFC’s liabilities has barely budged in 15 years, the underlying value of OEFC’s assets, particularly in OPG, has declined substantially.
The notion that a $4 billion so-called “windfall” can be extracted from Ontario’s liability-laden power system without punishing consumers is nonsense. As Mike Hilson and I have previously argued, all of Hydro One’s value (and more) is spoken for. Any proceeds of the Hydro One sale shifted from the power system to other government spending (and more) will have to be replaced by new charges on consumers and/or taxpayers.
Yesterday, Ontario’s new Financial Accountability Officer reported on the government’s Hydro One sale, finding that while the province will get some quick cash, it will lose money in the long run. Central to the financial engineering of the transaction, much of the value above repaying the government’s debt originating from acquiring Hydro One from the insolvent Ontario Hydro, comes in the form of a deferred tax liability. The government’s claim that creating a deferred tax liability — which means lower tax revenue to government for years into the future — as an asset it can borrow against to fund current government spending wishes seems pretty zany to my simple mind. Similarly, the notion that the government’s 10 year infrastructure spending spree can be funded by asset sales that start to deliver negative overall cash flow within 10 years demonstrates grave cynicism by Wynne.
For all its strengths, the FAO report contains important mistakes that have the effect of understating the negative future impacts on taxpayers and/or ratepayers of the Hydro One sale. The logic that the FAO report is based on assumes that there is a meaningful difference between two different categories of electricity debt held by Ontario Electricity Financial — the Stranded Debt and the Residual Stranded Debt. The official blah blah blah is that the Residual Stranded Debt is being paid down through the Debt Reduction Charge and that when the Residual Stranded Debt gets to zero, the Debt Reduction Charge will no longer be needed. All of the government’s electricity accounts, signed off by the Auditor General, assume this is true and that the distinction between Stranded Debt and Residual Stranded Debt is meaningful. However, if anyone retraces the history of OEFC’s Stranded Debt and the Residual Stranded Debt, they will discover that the allocation between the two types of debt is whatever the Finance Minister wants it to be. When Residual Stranded Debt goes up, Stranded Debt magically goes down. In the real but shadowy world of Ontario electricity finances, the Debt Reduction Charge is a slush fund the government can allocate as it wishes. The FAO thinks there is a scenario where the proceeds of sale eliminate the Residual Stranded Debt and therefore the Debt Reduction Charge. What the report ignores is that if the Debt Reduction Charge disappeared, OEFC is sunk. In January 2016, the residential DRC will disappear. Expect it to reappear in another form soon.
The government’s primary wall of defence to criticism of its Hydro One sale is to confuse the issues by comingling the Hydro One sale with infrastructure investment, as if there is some necessary connection. I believe that the clearest way to understand what is going is on to analyze the two issues separately. As I have noted several times in public statements, it seems to me telling that no independent authority with expertise in electricity matters has defended the government’s actions with respect to Hydro One.
Yesterday, in an interview with Scott Thompson on CHML AM900 in Hamilton and today with Devon Peacock on AM980 in London, I tried to make the point that done right, Hydro One could be privatized in a way that benefits the public interest. One of the main challenges Hydro One faces is out of control compensation and benefits costs, mostly at the non-executive level. There appears to be no realistic prospects of a government agency in today’s Ontario dealing effectively with that problem. The necessary ingredients for successful privatization should have included: using all of the proceeds of the sale to pay down existing electricity debts (as the Harris era electricity legislation required), independent and effective public utility regulation of the privatized utility, and depolitization of the newly private utility. Instead, ratepayer funds are being syphoned off to fund government adventures, the OEB has become a toady organization lead around by Ministerial directives, and the government is passing legislation in the form of Bill 112 to enshine its right to micro manage the capital spending of Hydro One in the future.
Notwithstanding official denials, it appears that Wynne’s office may have been responsible for leaking the FAO report to the Toronto Star the night before the report was scheduled to be released. There was a fascinating exchange on Twitter yesterday between the CBC’s Mike Crawley and Scott Luft that alerted me to that connection. If true, the Premier’s Office’s intention might have been a combination of damage control, a chance to undermine the authority of the FAO, and also an effort to distract attention from the real action over at RBC and Scotiabank where the initial transaction actually transpired yesterday.