Hide and Seek with ‘Fair’ Hydro Plan Costs

At the Ontario legislature’s Estimates Committee last week on Wednesday, NDP Energy Critic Peter Tabuns asked the Energy minister, the deputy minister, and OPG officials to explain an amount of $4 billion in extra financing costs that the Financial Accountability Officer attributed solely to the government’s choice of an “alternative” financing model. The fumbling responses to Tabuns from these officials contain traces of the government’s ultimate purposes behind its scheme — pretending to be lowering hydro bills prior to the next election without the new liability appearing in the government’s deficit.

The chart presented below from the Financial Accountability Officer’s report on the scam illustrates the government’s attempt to convert a true liability — unpaid bills — into an asset that it can borrow against.

The whole transcript of the Estimates Committee is here. At the end of this post, I’ve included in an appendix the key exchange Tabuns has with the witnesses. The most informative bits for me are the following.

Here’s the Deputy Minister of Energy trying to justify the scam as having “benefits”:

I think you have to look at what kind of risk mitigation you get, so what kind of transfer of risk you get from having the private sector provide financing into an OPG entity rather than doing it all through the province…I think there are a number of reasons, a number of benefits, for having OPG provide that support.

Here is an incredible section where the OPG representative tries to dance away from the heart of Tabuns’s questioning over the extra costs of the alternative financing model by relying on pure bafflegab:

I think a lot of it is reflected, in terms of your point—it is going to be a securitization structure. What’s happening in this case is by—part of the overall objective is actually to spread the costs out. You have to actually link it in terms of the overall payment scheme going forward, hence the overall needs and the alignment of what the benefits are. The financing to meet that actually lends itself toward a securitization structure.

That’s why in this case here, as Kim Marshall had mentioned before, is it a deferred asset? Under “deferred asset,” there are certain cash-flow payment streams that come back. Under that, when you look at it, it actually fits into the securitization margin, so I would actually argue that the comparison between the two structures is actually not an appropriate comparison. What you’re comparing is really the province’s financing scheme, which is more on a bullet basis. Here you’re looking at a cash-flow stream, which is going to be matched to specific benefits. So a lot of it is actually reflected in terms of the cash-flow patterns and the fact that there is a different risk profile to it.

I think, as the deputy minister had mentioned, there is a risk transfer that occurs as well, because right now what is happening is any potential lenders who are looking at that specific structure or are facing that separate entity—which is not guaranteed by the province. It is actually tied to the specific asset. So there are different elements of that that I guess help rationalize why there is a difference in specific costs, because I think the comparison between the two numbers is actually almost a bit like apples and oranges, right?

So, hopefully, that kind of gives you some perspective as to why there’s a difference, because I think that the basis of the two numbers is not the right basis to actually do that specific comparison.

As I explain in my previous post on the site, I think the borrowing structure elements of the FHP Act were drafted by the banks — a poisonous form of public-private partnership. The IESO’s goto financial engineers for ‘Fair” Hydro scam — Deloitte — has recently teamed up with the former deputy minister of energy, Saad Rafi, so there is plenty of accounting muscle assisting the government in keeping the financial shell game fast and furious.

The new fake asset created by the Fair Hydro Plan Act will attract a return on equity. When calculating the rate of return, the banks will argue that they are at risk. That sales pitch is presented here by the OPG guy, who says there is no guarantee. If the risk ever materializes, I expect that they will demand the guarantee. To strengthen the tacit guarantee, the government has bundled the ‘Fair’ Hydro scam liabilities in with the largest supply of electricity for the people of Ontario.

One can only hope that the Auditor General is watching this frightful scam carefully. If the government can create assets out of unpaid bills then the entire structure of government accountability in Ontario will be weakened.

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Appendix: NDP MPP’s Peter Tabuns (who was also particularly impressive during the gas scandal hearings) impressively getting the heart of the ‘Fair’ Hydro scam at Estimates.

Mr. Peter Tabuns: The FAO, when he did his assessment of your fair hydro plan, pointed out that the debt is more expensive than it needs to be. As things stand, 55% of the debt will be privately financed, via a complicated alternative financing scheme. The FAO pointed out the government could finance 100% of this borrowing scheme using normal public financing to accomplish the exact same policy goal. He says that if it did so, ratepayers would be spared $4 billion in additional costs. Why is the government imposing $4 billion in additional costs on to ratepayers by going through a more expensive financing scheme?

Hon. Glenn Thibeault: Deputy?

Mr. Serge Imbrogno: Just a couple of points I can talk to, and we have representatives from OPG here who could provide a bit more detail on OPG’s financing plan.

The numbers in the FAO report were correct at the time in terms of the analysis, but there have been updates, changes, as we go through the long-term energy plan, so the amount of borrowing overall for GA financing is going to be less than what the FAO was looking at. We’ll provide that update as part of the long-term energy plan release. So that $4-billion number will be reduced.

In terms of whether there are additional borrowing costs, I think you have to look at who was best placed to do the borrowing, what skill sets they have, and why we picked OPG to be the entity to do that borrowing. OPG has a lot of experience in the market. They understand rate-regulated assets. They do project financing right now. They deal with credit-rating agencies. So in terms of the structure of having OPG, we think it brings a lot of benefit to financing the securitization.

Mr. Peter Tabuns: Are you suggesting—

Mr. Serge Imbrogno: If you allow us to bring OPG up they could give you a sense of where they see their costs going, where they see their financing going, and what the benefit is of having OPG provide that service.

Mr. Peter Tabuns: Can I suggest, though, that the Ministry of Finance and the associated infrastructure around the Ministry of Finance probably has some expertise with borrowing money, has some expertise in dealing with capital markets? I’m sure that they could bring in OPG to discuss rate-regulated entities whenever necessary.

What the FAO said was that you’d picked a very expensive way to borrow this money. Why did you do that when we could have saved—maybe it wasn’t $4 billion. Maybe you’ve been able to find some savings; that would be a wonderful thing. So maybe we’re losing $2 billion on the deal instead of $4 billion. Why did you pick a more expensive financing option, and thus impact the people of this province?

Mr. Serge Imbrogno: Part of it is looking at the whole package of what you’re getting from having a private financing come in, what the discipline is on the province from having that.

I think in terms of the additional costs, the $4 billion isn’t the number. I think you have to look at what kind of risk mitigation you get, so what kind of transfer of risk you get from having the private sector provide financing into an OPG entity rather than doing it all through the province.

Mr. Peter Tabuns: So you’re saying to me the province doesn’t have the capacity—the intellectual capacity, the administrative capacity—to borrow large sums of money?

Mr. Serge Imbrogno: This is more of a securitization. It’s not what the OFA does all the time. You need a particular skill set to do that, and I think OPG has that skill set that we’re looking for.

Mr. Peter Tabuns: But the FAO has pointed out that the method that you chose is far more expensive in terms of interest costs than going down—sorry, the FAO has said that if you borrowed as Ontario normally borrows, rather than securitizing, you would have saved substantial amounts. He said $4 billion at the time; you suggest it may be somewhat smaller. We’ll find out what the exact amount is at a later point.

Why are we spending more on this than we need to? Tell me, what’s worth $2 billion or $4 billion in added value from following the financing method that you, in fact, put in place.

Mr. Serge Imbrogno: I think it would be helpful if we had OPG come up and describe a bit of their expertise—what they would bring to the securitization and why that would be of benefit to the province.

Mr. Peter Tabuns: But the question is not that. Securitization is one method that you can use to borrow this money. We could have used the Ontario Financing Authority, I think—the OFA—to borrow the money. The FAO says that if we’d used the Ontario Financing Authority, we would have saved billions of dollars in costs that are not going to be borne by taxpayers or ratepayers. Why did you pick a more expensive approach, notwithstanding the virtues of the folks who are at OPG?

Mr. Serge Imbrogno: I think you have to look at the whole structure in the global adjustment financing—what benefit each player brings to that and what benefit OPG brings to being the entity that would do the financing.

Mr. Peter Tabuns: In my eyes, the big advantage to you was that it gets it off the province’s books and hides it in OPG’s books, so that you can say, “No, it’s not our debt, it’s not our responsibility”—although I would think that most financial markets think that the government of Ontario would back up OPG if it got into any financial trouble, so it’s a liability if there’s any trouble down the road.

Mr. Serge Imbrogno: When OPG does the borrowing, all that will be public, so that there’s not going to be anything hidden from the public. It will be very transparent. Having credit-rating agencies looking at what OPG is doing would provide even more transparency.

I’m still offering OPG to give you a bit more detail, but—

Mr. Peter Tabuns: Yes, I don’t see where I get $4 billion worth of value, having OPG borrow money that you could have borrowed far more cheaply, going through the province directly. And you haven’t told me that the FAO was wrong. You haven’t told me the FAO overstated the potential for savings. You’ve said there might be some lower costs because of some savings from a long-term energy plan that has not yet been released, so one that we can’t assess and question you about.

What was worth $4 billion?

Mr. Serge Imbrogno: I’m saying the $4-billion number was based on particular numbers, and those numbers will change.

Mr. Peter Tabuns: How far will they change?

Mr. Serge Imbrogno: Well, I can’t provide those numbers to you today, but when we release the long-term energy plan, there will be an update. The benefit of OPG is there regardless of what that number is, so I’ve tried to articulate why OPG is well positioned to provide that kind of securitization service, why they have the expertise; why credit-rating agencies will make what they’re doing more transparent; why there’s more private-sector discipline on that entity.

I think there are a number of reasons, a number of benefits, for having OPG provide that support.

Mr. Peter Tabuns: So notwithstanding the changes that you say will come with the long-term energy plan, you accepted the initial number from the FAO, that the plan that you brought forward was going to cost $4 billion more than simply having the province of Ontario borrow the funds.

Mr. Serge Imbrogno: I would have to look and see what the response was to the FAO on that particular item. We may have provided comments that questioned that; I just don’t recall off the top of my head.

Mr. Peter Tabuns: Well, I’d like to ask—because we have seven hours of quality time to spend together—that you bring that another day, because if, in fact, he’s correct and you have stuck the people of Ontario with another $4 billion in costs that were unnecessary, I think you have to explain why.

Mr. Serge Imbrogno: Yes. I’m attempting to explain why and give you a rationale for why OPG brings a lot of expertise and transparency to the process and how they will minimize costs going forward. I’m still offering up OPG as—

Mr. Peter Tabuns: I’m still interested—if you think that the FAO was wrong, I’d like you to produce the evidence, and so I would ask you—

Hon. Glenn Thibeault: Part of that is bringing up OPG to explain that process and to explain the securitization benefits that they bring. By not having OPG present—I think they would be able to explain that, with all due respect, in a little bit of further detail.

If you’re really interested in getting this, I think both myself and the deputy would be happy to have OPG come up and give you those details.

Mr. Peter Tabuns: I think I will have OPG come up, but beforehand, I would like you to come back to this committee showing why you disagree with the FAO. If you did not reject this $4-billion differential, I’d like an explanation as to why we’re spending an extra four billion bucks on interest costs that we didn’t have to spend. If you want to bring up a witness from OPG, we can ask them to explain why their services are worth $4 billion—whichever person you want to pick.

The Chair (Ms. Cheri DiNovo): Mr. Tabuns, you have just over two minutes left, just to let you know.

Mr. Peter Tabuns: Well, why don’t we identify—Sir?

Mr. John Lee: It’s John Lee, vice-president, treasurer, of OPG.

The question you’re asking specifically is—

Mr. Peter Tabuns: Why is OPG’s service worth $4 billion more than having the province of Ontario borrow the money outright to reduce hydro rates?

Mr. John Lee: Just to clarify, OPG’s services—we’re not getting paid $4 billion to provide the specific service.

Mr. Peter Tabuns: No, you’re not. It’s the difference in costs—the interest cost—between borrowing outright and using the mechanism that the province has set up.

What value do you bring that’s worth $4 billion that the people of this province are having to absorb?

Mr. John Lee: I don’t necessarily have the underlying analysis in terms of what was in that specific report. It does identify some numbers there; I’ve seen the report—but I think the comparison between what’s there—if you look at it, if the province was to do it, and it was done as a securitization structure, one might argue as to what that pricing might look like.

I think a lot of it is reflected, in terms of your point—it is going to be a securitization structure. What’s happening in this case is by—part of the overall objective is actually to spread the costs out. You have to actually link it in terms of the overall payment scheme going forward, hence the overall needs and the alignment of what the benefits are. The financing to meet that actually lends itself toward a securitization structure.

That’s why in this case here, as Kim Marshall had mentioned before, is it a deferred asset? Under “deferred asset,” there are certain cash-flow payment streams that come back. Under that, when you look at it, it actually fits into the securitization margin, so I would actually argue that the comparison between the two structures is actually not an appropriate comparison. What you’re comparing is really the province’s financing scheme, which is more on a bullet basis. Here you’re looking at a cash-flow stream, which is going to be matched to specific benefits. So a lot of it is actually reflected in terms of the cash-flow patterns and the fact that there is a different risk profile to it.

I think, as the deputy minister had mentioned, there is a risk transfer that occurs as well, because right now what is happening is any potential lenders who are looking at that specific structure or are facing that separate entity—which is not guaranteed by the province. It is actually tied to the specific asset. So there are different elements of that that I guess help rationalize why there is a difference in specific costs, because I think the comparison between the two numbers is actually almost a bit like apples and oranges, right?

So, hopefully, that kind of gives you some perspective as to why there’s a difference, because I think that the basis of the two numbers is not the right basis to actually do that specific comparison.

Mr. Peter Tabuns: Are you familiar with the FAO’s critique?

Mr. John Lee: I’ve seen the FAO report.

Mr. Peter Tabuns: Do you disagree with him that we could have spent $4 billion less if we had borrowed it outright as opposed to securitizing it through OPG?

Mr. John Lee: I think there are some different elements in terms of that, because like I said you’re comparing two—

The Chair (Ms. Cheri DiNovo): I am afraid that is it. Thank you.

One Comment

  1. Good for Tabuns for bringing this up. Using OPG for the partial refinancing, Wynne’s FHA turned the amortization of assets in the electricity sector on its head. I can only assume OPG would have had to clear a ten year extension with their auditors (Ernst & Young) ahead of the announcement to use them as the vehicle for the securitization refinancing. So Beck, Big Becky, Mattagami et al (my assumption) will have a 60 year amortization instead of 50. For OPG what that will mean is lower amortization expenses and higher profits (assuming they get rate increases via the OEB to cover the excess interest carrying costs). Sure looks like a calculated scam that will allow Wynne et al to say they were right to push the rate increases forward. As the FAO noted the interest rate paid by OPG will indeed cost more than if the borrowing was done by the province but that would render the Wynne/Thibeault BS claim bogus. The dancing by the Minister and his Deputy was incredible. The OPG Treasurer seemed to be trying to justify what they were planning and/or were told to do. I couldn’t find a shareholder directive instructing them to refinance certain assets so perhaps Thibeault has written it yet!

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