This Week: Idiots in Training

The government issued a news release on Thursday, as Hydro One was being sold, about it’s next great idea.

Ontario has appointed the Honourable David Collenette as a special advisor to assist the province in bringing high-speed rail to the Windsor, London, Kitchener-Waterloo, and Toronto corridor…

High-speed rail will improve travel options, reduce travel times and support economic development throughout the southwest corridor and across the province. It will also provide an opportunity to explore new partnerships between business and government, as well as new technologies.

Serving in the 3 consecutive mandates of the Chretien years, Mr. Collenette has experience in passing Clarity Act.

I can’t think of other definite achievements of those governments, but signing of the Kyoto accord to reduce emissions of greenhouse gases, but then increasing them instead, was really quite something.

Presumably this high-speed rail “corridor” goes from Toronto to Windsor.

The last time I was in Toronto’s Undone Station (its main train station) was two years ago. The experience was such that I’m unlikely to return.

I am from Mississauga, so I’ll try to think of the corridor as running from Mississauga to Windsor.

Being from Mississauga, I’m pretty sure not many there are looking to go to Windsor.

and

Being from Mississauga, I’m extremely confident not many from anywhere else in the province want to go to Mississauga.

The extraordinarily ridiculous thing is the belligerent ignorance, and/or outright cowardice, in considering this route a priority.

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Ontario’s financial accountability officer confirms Ontario will be worse off financially following Hydro One sale

The Toronto Star’s Robert Benzie is reporting the Toronto Star has seen a report on the sale of Hydro One concluding:

“In the years following the sale of 60 per cent of Hydro One, the province’s budget balance would be worse than it would have been without the sale…”

I would have been surprised had he concluded anything other than that.

I’ve written extensively on the sale, recently stating this regarding the financial shenanigans driven by the head of the unelected Premier’s Advisory Council on Government Assets:

It seems the only value Ed Clark’s team has added to Hydro One has come at the expense of future government tax revenues.

The money in, money out, scheming with Hydro One is intended to provide “Deferred Tax Benefit”, and the government has stated it’s grabbing the entire “Deferred Tax Benefit” gained to pay into the Trillium Trust, which is the provincial government’s fund for The Greater Toronto Area’s transit.

From the October 9 Ministry of Energy news release accompanying the release of an updated Hydro One Prospectus:

Based on the [proforma financial statement in Hydro One’s updated prospectus], an estimated deferred tax benefit of $2.6 billion would result in a benefit to the Province, at consolidation, of about $2.2 billion, based on the Province having about an 85 per cent share of Hydro One following the IPO….
As this deferred tax benefit results in a net fiscal gain, the Province proposes to credit it, along with other net fiscal gains, into the Trillium Trust.

The province intends on spending what Hydro One will save from reducing future taxes – ie. avoidance of providing the government with taxation revenue.

Wynne government reneges on the promise of the electricity act

Ontario Premier Kathleen Wynne’s government has betrayed 15 years of debt collection from Ontario ratepayers in completely perverting the Electricity Act to increase efforts, begun with Premier McGuinty, to turn the sector into a net subsidizer of government spending.

In the 1999-2000 Annual Report of the Province of Ontario the government of the day laid out the basic principles behind electricity restructuring:

• Keeping electricity prices in Ontario as low as possible
• Recovering any stranded debt identified as a result of the restructuring from the electricity sector, and not from taxpayers
• Maintaining maximum value in the electricity sector until stranded debt is retired or defeased; and
• Creating a structure where investments are undertaken on a sound commercial basis.

The government of today is carrying on the tradition started by the McGuinty government before it. Rates for winter electricity were announced yesterday and the increase over the previous winter is the highest ever. At over 12.6%, it’s only a little higher than the average of 9% over the past 8 years. While the public generator, Ontario Power Generation, has been a significant contributor to recent price increases, most of the increases came from the contracting of private supply after an Ontario Minister of Finance, Dwight Duncan, specifically planned for using OPG’s largest assets to level pricing: “Fixed prices for a large part of the energy consumed in the province would keep the overall blended price for electricity relatively stable.”

Giving government the ability to contract regardless of cost did not keep prices stable, as subsequent years displayed.

The most recently announced contract may be the most irresponsible yet (it’s one helluva competition). The abandonment of any intent to undertake investments “on a sound commercial basis” is clear in the contracting of 28 megawatts of hydro capacity to be constructed on New Post Creek. Whatever the hidden contracted cost is, it’s enough to justify spending $300 million for 28 MW of capacity. At that price the Darlington refurbishment would justify $41 billion in spending, and the public generators on the Niagara river system would be valued at $26 billion.

Tabuns extracts unsatisfying answers on Hydro One sale

NDP MPP and Energy Critic Peter Tabuns has been asking some very pertinent questions on the sale of Hydro One, particularly the $2.6 billion the government has given Hydro One which matches a $2.6 billion “Departure tax” that will be due when the company ceases to have an ownership that is greater than 90% public.

From October 6:

Mr. Peter Tabuns: I’m going to go back to the $2.6-billion payment that Ontario makes to Hydro One for their departure tax.

Supplementary estimates show that $2.6 billion is coming from the Ministry of Energy and will go to Hydro One. Is that correct?

and so on, until this one passage I will interpret – by highlighting the key words and adding my commentary:

Mr. Serge Imbrogno: I’ll just say that the $2.6 billion goes towards paying down the stranded debt, so that transaction is targeted towards stranded debt. Putting in the additional capital increases our value, and then when we sell the portion of Hydro One, that’s what we’re using to put towards infrastructure. That’s maximizing the amount we can get for infrastructure from that transaction.

The “stranded debt” is not a line item that can be paid down. It is a calculation made by subtracting the assets of the Ontario Electricity Financial Corporation (OEFC) from the liabilities.

Current assets of the OEFC include a note from the government representing, in part the original owner’s equity in Hydro One, and ~$5 billion due from the province of Ontario.

due to confusion between “stranded debt” and “residual stranded debt”, I prefer to use the term “unfunded liability” instead of stranded debt, which matches its appearance on the OEFC balance sheet.

Mr. Peter Tabuns: In part you’re maximizing it

Mr. Serge Imbrogno: So we’ll be paying down the stranded debt and we’ll be reinvesting the proceeds in infrastructure

Mr. Peter Tabuns: But you’re maximizing by reducing the cash that we have available. You’re not going to be paying down more debt than you would have otherwise. Your goal, as stated previously, is $5 billion for debt reduction. Correct?

Mr. Serge Imbrogno: That’s not changing. The $2.6 billion is separate from paying down the debt related to the transaction

Mr. Peter Tabuns: So actually $7.6 billion will be plowed into debt reduction in the aggregate. Correct?

The Unfunded Liability was reported as $8.185 billion as of March 31, 2015 – since which time another ~.5 billion of debt retirement charges were collected. If this were true, there is no unfunded liability

2015 Nobel laureate Angus Deaton

A nice summary on this year’s recipient of Nobel Prize in Economics, Angus Deaton.

The press release on “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2015”

To design economic policy that promotes welfare and reduces poverty, we must first understand individual consumption choices. More than anyone else, Angus Deaton has enhanced this understanding. By linking detailed individual choices and aggregate outcomes, his research has helped transform the fields of microeconomics, macroeconomics, and development economics.

The work for which Deaton is now being honored revolves around three central questions:

• How do consumers distribute their spending among different goods?…
• How much of society’s income is spent and how much is saved?…
• How do we best measure and analyze welfare and poverty?…

 

I follow the Knowledge Problem blog which has  nice short article recommending Deaton’s accessible work, The Great Escape as well as links to podcasts with Deaton.

For videos…

…Deaton’s work sits with the demographic analyses and data visualization of Hans Rosling (if you haven’t seen his 200 countries in 200 yearsvideo, put down everything right now and watch it; his TED talk about the impact of the washing machine is guaranteed to bring tears to the eyes of at least this unsentimental economist). It also complements Joel Mokyr’s economic history of innovation and technological change as factors enabling economic growth.

 

2015 Nobel laureate Angus Deaton | Knowledge Problem

Wynne’s still stranding: changing laws to allow irresponsible plunder of Hydro One

In the past 6 months the government has gutted the intent of the Electricity Act’s financial requirements and now promises to abolish recognizing the value of electricity sector assets in retiring debt claimed to arise from building Ontario’s public electricity infrastructure.

Background:

• I covered the development of the current financial structures in Stranded Debt – Abandoned responsibilities, and
• I covered the illegality of the plan to swap profitable Ontario power for subsidized Toronto transit in Ontario’s Outlaw Premier Plots to plunder Hydro One

The government did, in fact, revise the Electricity Act to facilitate their desires, and they intend on once again changing law to ensure no profits from the sale of Hydro One go to pay down debt allegedly due to Hydro One and other public electricity sector assets.

Another perspective on Ontario’s immortal stranded electricity sector debt

In the beginning, there was the unfunded liability…

Stay with me – I promise I’ll try to keep it short.

If you follow me at all you probably have some familiarity that I’ve written on Ontario’s alleged electricity sector debt, as have an auditor general and others.

Myself, and others, have usually looked at the debt issue as if there are multiple tools to specifically pay down the debt, but after looking at just a couple of things, that’s not been true

When Ontario Hydro was broken up it was claimed a $20.9 billion “unfunded liability” existed because $38.1 billion of liabilities was backed by only the $17.2 billion “Value of New generation and service companies.”[1]

October 12 supplement

The $17.2 billion is described in the 1999-200 Annual Report of the Province of Ontario as:

Notes receivable from the Province of $8.9 billion, OPG of $3.4 billion, HOI of $4.8 billion and IMO of $0.1 billion for a total of $17.2 billion…

The “notes receivable from the Province” reflect the provinces equity:

In order for OPG and HOI to have capital structures competitive with those of other industry participants, the two companies entered into a debt-for-equity swap with the Province. In exchange for $3.8 billion in equity ($3.4 billion common, $323 million cumulative preferred) in HOI and $5.1 billion of common equity in OPG, the Province assumed $8.9 billion of the debt issued by the two corporations to the OEFC.

Included in the $38.1 billion of liabilities was $5.2 billion $4.286 billion from power purchase agreements (PPA). These functionally ceased to be a negative with the introduction of the global adjustment.[2] The $5.2 billion liability was largely comprised of NUG (non-utility generator) contacts made primarily by the anti-nuclear government of Bob Rae. Put bluntly, that portion of the liability was not due to Ontario Hydro and public power but to a government attempting to find a better value than the one provided by public power.

October 12 supplement

The “nuclear risk” liability was eliminated during the 2005-06 financial year. Since that time the province (not the OEFC) has booked $3.5 billion of reductions to provincial debt due reflecting gains in the “fair value” in the related nuclear (“OFNA”) funds. [5]

Lessons weren’t learned very well from the NUG debacle; just the portion of a “Samsung” deal contracted by the end of 2014 would have added $9 billion to electricity sector debt were it similarly accounted for. [3]

During the first year of the breakup some other value was found and the initial “unfunded liability” was reduced $1.7 billion to $19.2 billion.

The Residual Stranded Debt charge, introduced allegedly to address a subset of the “unfunded liability” had collected  $12.7 billion by March 31, 2015.

Subtracting from the $20.9 planned “unfunded liability” the first year adjustments, the liability for the NUG contracts, and debt retirement charge payments leaves only $1.3 billion and the discharges nuclear risk funding liability, $200 million too much has been reduced. That as of 6 months ago with the unfunded liability recently dropping $1.6 billion a year. Accounting for both the $479 million of irrational liability remaining for the Power Purchase Agreement and the $3.5 billon of the provincial deficit reduced by the treatment of nuclear funds, $3.2 billion more than the stranded debt has been collected by the limited set of tools examined above.

The stranded debt should be nearly done, but it’s not showing like that.