One of the issues that came up during last week’s cross-Province hydro bill protest was the debt retirement charge and why, like Ontario’s own version of Bleak House, it just goes on and on and on, and never seems to get paid off in full?
Parker Gallant has examined the books, the news releases, the ministerial pronouncements and more, and has the answer for you.
The Auditor General’s (AG) report released December 10, 2013 highlighted some of the problems inherent with taxpayer owned Ontario Power Generation Inc. (OPG), particularly its above market human resource costs.
Unfortunately the report didn’t ascribe specific costs to Ontario ratepayers. The report noted power generation levels had fallen considerably over the past decade but again failed to cite the reasons. Despite those human resource costs, OPG is still Ontario’s low cost electricity generator as noted in their press release of March 6, 2014 wherein they state their average revenue per kilowatt (kWh) in 2013 was 5.7 cents versus 9.9 cents per kWh for private sector generators.
The $6.2 billion “Revenue Tool”
The AG’s report had a follow-up to a 2011 audit report on Ontario Electricity Financial Corp. (OEFC) which noted Minister of Finance, Duncan, should update the “residual stranded debt” (RSD) and asked “when electricity ratepayers might expect to see the DRC [Debt Retirement Charge] fully eliminated.”
Collection of the DRC from ratepayers commenced after Ontario Hydro was restructured (1999) and the first Annual Report from OEFC described stranded debt and RSD as follows:
“As at April 1, 1999, the present value of these revenue streams1. was estimated at $13.1 billion, resulting in an estimated $7.8 billion of residual stranded debt.”
- Those “revenue streams” were described as “dedicated electricity revenues” and included anticipated future income and future “payments in lieu” of taxes to be paid by successor companies and the local, municipally owned, electricity distributors.
The statement from 1999 said “stranded debt” was $20.9 billion but future revenue from OPG and Hydro One plus PIL (payments in lieu of taxes) from OPG and Hydro One and municipal electricity distributors would generate $13.1 billion in the future 8/9 years and the DRC from ratepayers would eliminate the RSD of $7.8 billion. The “stranded debt” was subsequently reduced to $19.4 billion as it was adjusted for $1.5 billion of additional assets transferred to OEFC. The latter did not alter the RSD as it remained at $7.8 billion.
Total Stranded Debt $ 20.9 billion
Less: Additional Assets $ 1.5 billion
Net Stranded Debt $ 19.4 billion
Less: Future earnings & PIL2. $ 11.6 billion
Residual Stranded Debt3. $ 7.8 billion
Add: 2012 ADJUSTMENT $ 6.2 billion
Revised Residual Stranded Debt $14.0 billion
The action taken by the Finance Minister as a response to the AG’s 2011 “audit” was to arbitrarily backdate and revise the “revenue streams”, reducing them by $4.4 billion for the year ended March 31, 2004 and $1.8 billion for the year ended March 31, 2011 increasing the “RSD” by $6.2 billion thus extending the period the DRC would remain on ratepayers bills. Those adjustments were made in Finance Minister Dwight Duncan’s 2012 budget as he rewrote the Province’s financial history!
Since the OEFC’s year-end of March 31, 1999 future earnings and PIL have generated “Excess Revenue” of $10.9 billion. The $10.9 billion in revenue is “excess” to the $520 million in annual interest ($6.8 billion since 2000) costs on the $8.9 billion that the Province owes OEFC for the price of acquisition of OPG and Hydro One.
- OEFC via its annual reports has indicated that up to the March 31, 2012 year-end they have collected $12.8 billion as a result of the “Debt Retirement Charge” (DRC). The writer estimates that another $950 million has been collected up to the end of March 31, 2014 meaning $13.8 billion has failed to pay off the original $7.8 billion of “Residual Stranded Debt” due to Minister Duncan’s $6.2 billion adjustment.
What Minister Duncan did was burden each of the 4.5 million ratepayers with $1,400. of new debt that could extend the appearance of the DRC on our electricity bill for another 6 or 7 years!
The original “Stranded Debt” of $19.4 billion made up of the two subsets: $11.6 billion to be repaid from “Future earnings and PIL” plus the $7.8 billion of “Residual Stranded Debt” to be repaid from the DRC, has generated revenues of $24.7 billion (see 2. and 3. above) yet has only reduced the $19.4 billion to $11.3 billion as noted in Finance Minister Sousa’s 2013 Fall update. Put another way, it has taken $3.00 of ratepayer funds to repay each $1.00 of debt or $24.7 billion to repay $8.1 billion!
Connecting the dots:
From all appearances it seems that the Finance Ministry ignored the requirements of the “Electricity Act, 1998” (Act) which, under part 62, “Use of revenues,” states:
“Despite the Financial Administration Act, the revenues received by the Financial Corporation [OEFC] do not form part of the Consolidated Revenue Fund and shall be used by the Corporation for the purpose of carrying out its objects. 1998, c.15, Sched. A, s. 62.” Well, they weren’t!
As one example the OEFC March 31, 2012 financial statement under assets lists the following: “Due from Province of Ontario $2,750 [million]”. This asset is listed as a “current” asset but it has been growing since 2008 at a rate of over $500 million annually and should be classified as “past due”. It represents a large part of the “Excess Revenue” (2. above) that the province should have paid to OFEC in compliance with the Act. Carrying that receivable on their books requires OEFC to finance it at an average borrowing cost of 5.86% and an annual interest expense of $161 million. Both the interest and the excess revenue should have been paid to OEFC by the Ministry instead of by the ratepayers. Coincidentally, Hydro One has paid $1.2 billion in dividends to the province since 2008 but it would appear that instead of passing those to the OEFC they simply used them as part of the Consolidated Revenue Fund. Why has the Finance Ministry ignored the Act that created the OEFC?
Another example is the “Guarantee Fee” levied by the Province on OEFC’s debt and “guaranteed” by the Province. From year end, March 31, 2000 until year end March 31, 2012, guarantee fees were $1.9 billion. Based on the debt “guaranteed” by the province in 2000 ($21.7 billion) it appears the “guarantee fee” escalated from less than 1/10th of 1% in 2000 to 1.75% based on the much lower amount ($7.9 billion) “guaranteed” by the province in 2012! Why?
As an aside to the above, the amount of debt outstanding and owing by OEFC has increased from 2003 (when the Liberals assumed power) when it was $26.8 billion to 2012 when it was $26.9 billion and while the province benefited from reduced borrowing rates (currently averaging 4%) the effect on OEFC’s debt has shown only a modest reduction from 6.78% in 2003 to 5.86% in 2012! Why?
It is worth noting that the Province owes OEFC $8.9 billion for the purchase of OPG and Hydro One after the breakup of Ontario Hydro (acquired in 1999 for that debt) at book value. As of December 31, 2013 their combined “Shareholder Equity” was $15.4 billion for a gain of $6.5 billion. To put that in perspective the Province has earned .67 cents for every dollar they borrowed (to acquire OPG and Hydro One) while sticking ratepayers with the interest carrying costs. Ratepayers on the other hand pay $3.00 for every $1.00 of the “stranded debt reduction they didn’t play any role in creating! Why doesn’t the Finance Ministry execute a debt swap for that $8.9 billion and save ratepayers $520 million in interest carrying costs?
In the $6.2 billion of adjustments to the “RSD” the Minister ignored Liberal policy changes affecting OPG’s ability to generate revenue and PIL. Ignored were: directives to OPG to build “Big Becky” ($1.5 billion), convert Atikokan to biomass ($170 million), proceed with the $2.6 billion Mattagami project, etc. Those projects will impact ratepayers producing expensive power only occasionally needed. The Liberal policies ignored the financial impacts! Why?
The “greening” of Ontario’s generation via the GEA meant OPG was forced to close coal plants (negative impact $473 million) and as renewable energy (wind and solar) entered the grid, OPG were forced to spill hydro–without compensation. Increased capacity and falling demand had a negative effect on the wholesale price (HOEP) of electricity. OPG’s unregulated generation, (coal and 3,700 megawatts of hydro) were affected. Tracking OPG’s unregulated coal and hydro generation from Jan. 2009 to Sept. 2013 discloses production of 95.9 terawatts (TWh). Had OPG received the average cost of production (HOEP + Global Adjustment) instead of HOEP, their revenue would have been $3.6 billion higher and those dollars would have reduced the stranded debt. Why choose OPG as the whipping boy?
The AG should not have lauded the Finance Minister for adjusting OEFC’s books in her review and instead should have castigated him for hiding a huge dollar grab from ratepayers. The Liberals found a “Revenue Tool” of $6.2 Billion and hid it from Ontario’s ratepayers!
That $6.2 billion “sleight of hand” took care of: the gas plant moves, the ORNGE scandal, the Toronto subway funding, the PRESTO/MetroLinx mess and a big chunk of the PanAm Game’s cost all on the backs of Ontario ratepayers. Where would the Provincial deficit be today and in the future without the planned $6.2 billion in future revenue generated by the “Debt Retirement Charge”?
Ontario’s ratepayers and taxpayers should hope the upcoming Spring budget from Minister Sousa is examined closely by the opposition parties to ensure the Liberals don’t pull another “sleight of hand” and another “revenue tool” grab!
April 10, 2014
P.S. The March 31, 2013 OEFC annual report has still not been released by the Liberal Minister of Energy, Bob Chiarelli.