Ontario’s Electricity Debt Disclosure: Opaque Transparency

Responding to two recent recommendations of the Ontario Auditor General (AG), the provincial Finance Minister Dwight Duncan released a summary yesterday of what he would have us believe is the debt left over from the old Ontario Hydro. He also issued a regulation defining some of the idiosyncratic terms used in Ontario’s electricity legislation since 1998.

The government’s announcements continue to leave the public in the dark as to how large blocks of our electricity dollars are being spent and who to hold to account for the use of those funds.

The AG’s December 2011 report contains a useful summary of the electricity debts left over from the old Ontario Hydro in 1998.

Here is a thumbnail summary of the relevant history. The value of Ontario Hydro’s debts, nuclear waste liabilities, and above-market power purchase contracts were estimated at the time the utility was broken up and compared with the estimated value of its assets. The net value assigned to the overall portfolio was pegged by the government of the day (Premier Harris) at negative $20.9 billion. That figure became known as the “stranded debt”. The government then claimed it had identified revenue streams that would discharge $13.1 billion, with the remaining $7.8 billion identified as the “residual stranded debt”. Since 2002, the government has collected a 0.7 cents/kWh tax on all grid electricity sold to Ontario consumers called the Debt Reduction Charge (DRC), assuring the public all along that the tax would only be collected until it had discharged the “residual stranded debt” where upon the DRC would be abolished. The administration of liability management and revenue collection rests with a Crown agency called Ontario Electricity Financial Corporation (OEFC) whose mandate and administration are entirely controlled by the government of the day.

The value of the stranded debt was never determined objectively at the point of Ontario Hydro’s break-up. Since the value of the stranded debt over time hangs on the values of the Crown corporations Ontario Power Generation and Hydro One, whose values are indeterminable, the real value of the stranded debt today can only be guessed at. The uncertainties that plague any attempt to value the stranded debt are compounded when attempting to estimate the residual stranded debt because the revenue streams to service the stranded debt are also uncertain. The uniqueness of the assets and liabilities underpinning OPG and the lack of markets to value the liabilities and the services rendered exacerbate the stranded debt valuation problem.

Any estimate of the stranded debt is a guess and any estimate of the residual stranded debt is a wild guess.

The only thing that is clear is that billions of consumer dollars of flow into OEFC every year. Last year, OEFC claimed revenues of $4.413 billion. These funds discharge OEFC’s obligations, but those obligations are not fixed. The government of the day can and has ordered OEFC to take on projects far beyond its original mandate. For example, Premier Eves used OEFC to rent generators to meet projected peak summer demands and fund his rate freeze.

The revenue streams that service those obligations are mostly untraceable once the money gets into OEFC’s hands. A key finding of the Auditor General in the December 2011 report was to determined that DRC funds — paid by consumers to the tune of over $900 million per year — do not have to be applied to the residual stranded debt but can be used for any purpose that is in accordance with the objectives and purposes of OEFC. The kicker is that the government controls objectives and purposes of OEFC.

Right now, the DRC could be around for many years if the government wants it to be. On the other hand, government could abolish the DRC immediately only to discover a few years hence that a new electricity deficit has been discovered.

The root problems are lack of transparency and a lack of objective information. Many of the basics of OEFC’s operations are not disclosed. For example, OEFC’s power purchase costs are known by year but not the volumes purchased. OEFC issues no quarterly statements.

Privatization of OPG and Hydro One would really help the public by nailing down some of OEFC’s real assets and liabilities.

The AG’s recommendations that the government’s most recent announcements respond to are excerpted here:

“Given that the DRC has been collected from electricity consumers for almost a decade and that more than $8 billion in DRC revenue has been collected during that time, our view is that the Minister should make a formal determination of the outstanding amount of the residual stranded debt in the near future and make this determination public. Consideration should also be given to that part of section 85 that allows the government to establish and clarify, by regulation, when such a determination will be made and how the amount of the outstanding residual stranded debt is to be calculated.”

To understand how feeble these recommendations are, consider the government’s response.

Finance Minister Duncan reported yesterday that the residual stranded debt is $5.8 billion as of March 31, 2011. Although responsive to the AG, there is no way to independently confirm the government’s figure.

The new regulations say that the residual stranded debt is the difference between the stranded debt and the present value of the revenues that service the stranded debt. Again, although responsive to the AG, the answer provides future governments all the room they need to cook up any value of the residual stranded debt that suits their needs best that particular year.

Yesterday’s announcements from Duncan were utterly vacuous, but the McGuinty government can fairly claim to have complied with both recommendations of the AG.

Here are some recent examples where government has manipulated the stranded debt and residual stranded debt estimates. Remember that anything suppressing OPG’s net income increases stranded debt. Recent decisions suppressing OPG’s net income include ordering OPG to undertake poor investments like the Lower Mattagami redevelopment (which delivers its new energy mostly during spring run-off when the power will often be useless), suppressing OPG’s rates (such as the government’s order in April 2010 that OPG cut its requested 9.6% rate application for 2011-12 then before the OEB to 6.2%, subsequently reduced by the OEB to 1%), and flooding the spot market with intermittent generation operating under take-or-pay contracts (which kills the value of OPG’s large unregulated hydro-electric output).

Every year in OEFC’s annual statement, we are given an updated date by which the stranded debt will be “defeased” — that is when the debt will be low enough that the remaining revenue streams without the DRC are sufficient to service it. The current date range is 2015-2018 but the dates have been as early as 2010 and as late as 2020.

If the AG had been paying attention, the black box at OEFC would have been exposed to sunshine long ago.

The missing piece that would bring transparency and some possibility of accountability to this issue is the simplest administrative measure that could be imagined.

All we need is  for the government to release its financial plans for OEFC future every time it releases OEFC’s annual statements. That plan is the basis for the annual update statement about the defeasance date. Only by comparing OEFC’s actual revenues and costs over time relative to previous plans can the public see what is really going on.

Since the break-up of Ontario Hydro, the Auditor General has addressed electricity issues several times. The AG’s failure to identify the information the public needs to be able to see what is really going on with the stranded debt joins a list of failures by the AG’s office on electricity matters. Other examples include a failure to adequately document how consumers are being harmed by green energy policies and the AG’s failure in 2000 to understand the impact of electricity losses on the provincial deficit.

The AG’s office is one of our society’s most important guardians. If anyone has any suggestions on how to get the AG to pay closer attention to our building electricity crisis, please share it.



  1. Mixing the volatility of the market with the nuclear decommissioning fund ($11.9 billion) representing 37% of OPG’s assets and 142% of their net worth (December 31, 2011 year end) puts OPG in a position of not focusing on whether they actually make money on their business-generating electricity. A 5% swing in the market either finds them losing $600 million or making $600 million and the market hasn’t been very good over the past decade which affects their ability to generate a profit and make those PIL contributions. The net result is they have not pulled their weight in paying down the “stranded” or “residual” debt! By leaving this asset on their books instead of placing it with a fund manager the governments of past and present have simply ignored the elephant in the room.

    Throw the foregoing into the pot with spilling cheap unregulated hydro in the face of declining demand, government decrees on building the biggest tunnel in the world (for bragging rights), Mattagami (most expensive public sector project in Canada) which will produce power exactly when we don’t need it and you destroy the value of the entity. OPG is certainly worth less now then it was after the split because of inane political interference. So OPGs value has shrunk along with its ability to make a reasonable return on the shareholders (taxpayers) equity but it has nothing to do with whether it is well managed, it is because the politicians have constantly stuck their hands in the pot instead of acting as the overseer. An election to the legislature sure doesn’t make you an expert in managing the electricity system; as the ratepayers of Ontario have discovered over the past decade.

  2. Great article Tom.

    You’ve zeroed in on the action required going forward (coherent, timely reporting from the OEFC), but I do think the summary released by the government, with over a decade of retroactive calculations, allows for some statements of fact.
    The residual stranded debt, as it existed when the Harris government created the DRC to dispose of it, is fully paid off.
    The residual stranded debt has grown a couple of times – most notably between April 1st 2003 and March 31, 2004 – presumably this being due to the hit on OPG earnings from Ernie Eves’ method of reducing prices. It’s unclear how much corporate tax reductions reduced the PIL expectations during that same period. It’s also unclear if any of this increase was due to writing off coal generation assets which were to be idled by 2007 (lest we forget).
    As the residual stranded debt is now shown by the government as $4.5 billion, and it rose $4.4 billion from 1/4/2003 to 31/3/2004, it would be most fascinating to see a full accounting of, particularly, that year.

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