Still loaded with debt, Ontario’s electricity sector is headed for another meltdown
By Tom Adams
Wednesday’s article on this page by Parker Gallant, “Still stranded after all these years,” shines much-needed light on the finances of Ontario’s power system. With the McGuinty government outdoing the causes of Ontario Hydro’s bankruptcy in 1998 — it is investing heavily again in CANDU nuclear power and signing 20-year power purchase deals at up to 12 times current consumer cost — reviewing the last bankruptcy is timely.
When Ontario Hydro collapsed, a major concern was its liability legacy — bonds, nuclear wastes and costly power purchase deals. In 2001, Mike Harris’s Conservative government promised to wipe out the debt within 10 years.
With 10 years of results reported for the debt reduction program, how is it working?
Let’s examine the special electricity tax on the power bills of Ontario consumers, called the Debt Reduction Charge (DRC), created to eliminate the most troublesome subset of Ontario Hydro’s liabilities, called the residual stranded debt.
Ontario Electricity Financial Corporation (OEFC) was created out of Hydro’s ashes with $38.1-billion in total debt and other liabilities. A portion of the $38.1-billion was supported by the assets of Ontario Hydro’s successor companies. Officially $20.9-billion was not supported by any assets, or stranded. With new special taxes on electricity distributors and by earmarking future profits of Crown-owned Ontario Power Generation and Hydro One, most of the “stranded debt” (about $13-billion) was considered serviceable. The “residual stranded debt” was left over and pegged at $7.8-billion.
Under the plan, this residual debt would be paid down by the DRC tax on electricity consumers, pegged at 0.7¢ per kilowatt-hour. Target pay down was 2010.
OEFC’s annual reports reveal how cost growth has overwhelmed the original debt elimination plan, slowing debt repayment to a trickle. The officially estimated date for retiring the electricity debt has been skidding — now OEFC says 2014-2018. Worryingly, the Ontario government’s electricity planning authority’s only public statement on the subject forecasts that the DRC will continue to be collected until 2020.
Since it started, OEFC has collected $36.3-billion from rate payers through various channels, including $6.85-billion from the DRC. However, OEFC reports that the initial unfunded liability — all the stranded debt including residual stranded debt — has declined by only $3.2-billion (see graph above).
Even the modest actual progress exaggerates the gains attributable to DRC proceeds. In 2005, the McGuinty government increased power rates, in part by allowing OEFC to flow through directly to consumers the full extent of the bloated costs of old money-losing non-utility generators (NUG) costs. From the time of market opening until the end of 2004, the average losses to OEFC on the NUG contracts (awarded to private firms at inflated electricity prices) were about $220-million per year.
Notwithstanding many revenue streams earmarked to pay down the stranded debt, an amount less than the DRC revenue has been applied against Hydro’s legacy. Even new revenue streams, such as the NUG flow-through, have had little effect on the outstanding balance.
The stranded debt has dropped so little largely because the overall debt plan depends heavily on profitibility at OPG’, the giant generating complex left over following the failure of the old Ontario Hydro. OPG agreed as a condition of its debt bailout when it was created in 1999 to pay off its portion of the “stranded debt” while subject to something called a Market Power Mitigation Agreement (MPMA). The MPMA , supposedly to offset the great cost advantages of OPG, limited OPG’s revenue to 3.8¢ per kilowatt hour. Instead of market power, however, OPG produced market losses. It has enjoyed several major revenue bailouts. In 2005, with OPG facing insolvency, the McGuinty government relieved the big generator of having to refund MPMA rebates to consumers, effectively undoing OPG’s half of the quid pro quo that was the basis for having almost all of its debt eliminated in 1999. Also in 2005, OPG’s nuclear and some of its hydro-electric capacity became regulated, relaxing revenue controls further.
In 2009, OPG’s average revenue was 6.07¢ per kWh. Notwithstanding a 60% revenue increase since the days of the MPMA, OPG’s net income still lags. No matter what its revenues, OPG costs have risen to match them and then some.
In addition to OPG’s weakness, another factor draining OEFC revenues is the government’s repeated use of OEFC to fund policy initiatives. OEFC now funds OPG’s coal phase-out costs with “contingent support” payments.
Coal-related payments to OPG are just one portion of the huge growth in the various new charges to Ontario electricity consumers beginning in mid 2008. Premier Dalton McGuinty is now using one of those charges, called the Global Adjustment Charge, to move costly government policy initiatives, including direct Ministry of Energy operations, onto consumer power bills.
OEFC’s annual statements refer to its debt reduction plan, its revisions, and the range of dates for paying down the stranded debt or the residual stranded debt. However, no iteration of that plan or its successors has ever been made public. Without the debt plan and the details of Global Adjustment being publicly available, there is no hope of keeping the government agencies accountable. Ontario’s electricity system is essentially moving back to where it was in 1998 — rolling in debt, facing rising costs, and funding electricity projects that are designed to lose money.
Tom Adams is an energy consultant based in Toronto.
Read more: http://opinion.financialpost.com/2010/05/13/power-burnout/#ixzz0o6sbvZBS