Ontario’s “Debt Reduction Charge” is Eternal

The much-hated Debt Reduction Charge (DRC) appears on almost every Ontarian’s electricity bill (customers in Cornwall are off the hook). It adds 0.7 cents/kWh to the cost of all power sold through the IESO market and even applies to all self-generation for customers historically served by the former Ontario Hydro.

The DRC, which is really an electricity tax, was originally justified as a way of collecting a portion of the net liabilities left over from the insolvency of the old Hydro. The government calls the old Ontario Hydro’s net liabilities “stranded debt”. The portion of the “stranded debt” to be serviced by the DRC was given a fancy but meaningless title — the “residual stranded debt”.

The “residual stranded debt” was originally little more than a marketing tool to legitimize the DRC electricity tax, but it also created an open-ended account where governments could build up new electricity liabilities.

I have previously argued that the current value of the “stranded debt” is a guess and any that estimate of the value of residual stranded debt is a wild guess.

Taking into account the interest costs OEFC has paid, the DRC revenues have now more than collected the original “residual stranded debt”.

As the Auditor General complained in a December 2011 report, the government has not been particularly good at keeping its accounts of the “residual stranded debt” up to date. The reporting deficiencies continue. The agency responsible for reporting on the old Hydro liabilities — Ontario Electricity Financial Corporation (OEFC) — is not keeping its annual reports up to date.

Scott Luft has helpfully pointed out that updated financial figures for OEFC are buried in the Province’s accounts here.

OEFC’s update for 2012-13 claims that what it calls its “unfunded liability” is going down. To pick a recent time period, in 2010 the unfunded liability is reported as $14,810 million whereas in 2013 the unfunded liability has dropped to $11,257.

15 years after the demise of the old Hydro, it is bracing to think that the official tally is still more than $11 billion to the bad but declining unfunded liabilities would be good if true.

I don’t trust OEFC’s unfunded liability figures.

The government’s accounts of unfunded liabilities depend on forecasts of future cash flows and valuations of OEFC’s assets, which are all tangled up in Crown corps and government directives. Bad things have been known to happen with all of that.

What we do know with assurance is that OEFC’s actual debt is rising. In 2010, long term debt was $24,913 million. In 2013, long term debt had risen to $27,336 million.

We don’t know for sure if the future cash flows that OEFC uses to calculate today’s net unfunded liabilities are real, but we know for certain that OEFC’s long term debt is real and rising.

The DRC generated $939 million last year, every penny of which was used to service OEFC’s debts. Until the government’s electricity liabilities, whether accounted for by OEFC or otherwise, are well and truly gone, some kind of DRC will exist in one form or another. If the DRC for some customers is eliminated in the upcoming budget, look for the revenue losses to OEFC to be made up from other ratepayers or taxpayers, whether now or in the future.


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