If there is anyone left in Ontario who thinks that the Ontario Liberals have the slightest clue as to the simplest facts of life about the province’s power system, Premier Wynne’s psychodelic impression that there is a vast stash of gold over at Hydro One should be the last straw.

In today’s National Post, Mike Hilson and I set out why Wynne’s sale-for-subways plan is a road to nowhere. The Post’s on-line edition does not include the column. While we encourage everyone to buy a copy of the National Post to support great journalism, we are also mindful that there may still be a few folks not getting home delivery. Attached below is the approximate text.

Regular readers on this site will have seen some of Mike’s work, but some of his history in electricity analysis is worth recalling. In 2001, Mike and I called a foul on the then Auditor General’s reporting on electricity issues in a column for Terence Corcoran’s page in the National Post. We complained that electricity losses were not properly carried forward to the province’s accounts. Doing so would have disqualified Mike Harris’s balanced budget claim for the previous fiscal year. The AG, Erik Peters, fired back with a harsh letter to the editor claiming Hilson and Adams had no idea how to add numbers. However, in 2003 Peters issued a review of the province’s books for the incoming McGuinty government (back when the Libs cared about deficits). Peters found that electricity losses were not properly carried forward to the province’s accounts. Corcoran published a column called something like “Erik Peters Then and Now”. It was the height of audit humour for everyone except Peters (and taxpayers).

The column includes a hat tip to Scott Luft for this analysis of the Electricity Act,

The column also obliquely references this column by Konrad Yakabuski in the Globe and Mail, which offers several thoughtful observation but also claims there is a “one-time cash haul” to be had.

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What Windfall?

A proposal leaked out from Ontario Premier Kathleen Wynne’s government to privatize a portion of Hydro One, the Crown-owned electricity transmission and distribution company. Although the Premier stressed that the decision wasn’t final and that it will remain regulated to protect ratepayers, she has been clear about her motivation. Referring to the ongoing Advisory Council on Government Assets headed by former TD Bank CEO Ed Clark, she stated that the reason for the asset review is to leverage dollars to invest in transit and transportation infrastructure across the province.

The prospect of an IPO for Hydro One had commentators, opponents and supporters debating whether to cash in on the “windfall” and how much the haul might be. Generally agreed is the proposition that a sale would, as one columnist wrote, “generate a one-time cash haul for the government”.

The government’s proposal and the discussion around it has so far almost completely ignored the basic facts of financial life underpinning Ontario’s electricity system.

Hydro One’s numbers seem impressive — it claims $22.55 billion total assets and net equity of $7.93 billion — but there is a catch. Hydro One’s entire value is already spoken for. Taking into account bloated and growing taxpayer-backed electricity debt lurking at the shadowy Crown corporation called Ontario Electricity Financial Corporation (OEFC) along with Hydro One’s $3.2 billion in regulatory assets, half of which are pension liabilities not yet funded, it is likely that Hydro One is today more than 100% mortgaged. There is no value to be extracted, unless new burdens are foisted onto ratepayers and taxpayers.

While many benefits could flow from full or even partial privatization of parts of Ontario’s electricity system, the hard financial fact of life is that there is no windfall available.

As set out in the applicable legislation and its successive annual reports, OEFC is the legal continuation of the former Ontario Hydro, which collapsed in 1998. The original purpose of OEFC was to pay down the old Hydro’s debts, which far outweighed the value of its assets. OEFC refers to its net debt as the so-called “stranded debt”. Ratepayers are still on the hook for the outstanding stranded debt.

From the beginning, one of the cornerstones of OEFC’s wind down plan for the stranded debt has been to depend on all the profits generated by Hydro One. All of Hydro One’s profits have been earmarked for OEFC debt reduction from the beginning, and as it has evolved, OEFC has grown more dependent on Hydro One.

Consistent with the purpose of the Ontario Hydro restructuring, the legislation stipulates that all of the proceeds of any sale of assets or shares of Hydro One are payable to OEFC to defray the debts it holds. Ontario electricity blogger Scott Luft is the only public commentator we have found to have noticed.

Even if the legislation was silent on the disposition of sale of Hydro One assets or if that legislation was repealed, the taxpayers would still be on the hook for all of OEFC’s liabilities.

Today, the book value of Hydro One is included as a financial asset in the government accounts. Any dilution of this interest would decrease the value of the investment. To avoid increasing the Province’s net debt, the proceeds of any sale would have to discharge existing debt. Only any premium over book value could be claimed as a gain, but the prospects for such a premium don’t look promising.

OEFC’s debt reduction program is not going well. OEFC’s long term debt has been rising in recent years, hitting $26 billion in March 2014, all of it owing to independent bondholders. OEFC also claims an account receivable from the province of Ontario for almost $4 billion that is supposed to be be repaid largely out of profits from Hydro One. How solid is that account receivable with the province saying that the proceeds of a sale will fund subway construction?

Similar questions arise with respect to Hydro One’s regulatory assets. Former teacher’s pension fund manager Jim Leech in his August report found the pension to be under water but all that is treated as an asset to be recovered in future rate increases. With power demand already retreating in the face of punishing rates, how solid are assumptions about future regulatory decisions to recover costs incurred to date but left for later recovery?

One of the challenges in analyzing OEFC is that since 2012, that agency has stopped issuing annual reports. The Minister of Finance is also not complying with the regulation requiring annual updates on the status of a key element of OEFC’s stranded debt called the residual stranded debt. The Minister of Finance is reportedly supportive of the sale-for-subways proposal, which is inconsistent with his statutory responsibilities to monitor and manage the existing electricity debts.

Just discussing selling some of Hydro One is helping to shine light on the financial problems in the electricity file that have been shoved under the carpet so far. Premier Wynne will discover that there is no juice to be squeezed from Hydro One. Any attempt will necessarily hit Ontario electricity consumers and taxpayers. She’ll have to look elsewhere for subway cash.

Mike Hilson is a Chartered Accountant and Tom Adams is an independent energy consultant.