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.

The entity existing based on the premise of the electricity sector stranded debt is the Ontario Electricity Financial Corporation (OEFC). Their financials for the year ended March 31, 2015 [4] show the unfunded liability at $8,185.

This little exercise raises some questions

What happened to paying down the “unfunded liability” with sector profits (from Hydro One and OPG) as well as payments made in lieu of taxes (PIL)?

It doesn’t work like that. The unfunded liability is simply a line on a balance sheet (where liabilities are greater than assets) and it grows or shrinks based on annual revenues (including PIL, profits from public entities, and the debt retirement charge) and annual expenses.

The good news is that over the past 6 years the unfunded liability was cut in half, and every year it was reduced by more than the revenue collected from the debt retirement charge.

The better news is some of the $8.1 billion is silly accounting on the NUGs, which weren’t simply adjusted out of the equation in 2006.

The best news is it’s all just accounting nonsense – all the debt is either held or guaranteed by the province of Ontario, and the value of Hydro One is reportedly $9 billion more than government carries it on the books.

Whatever happens with Hydro One, any claims of an Ontario Electricity Financial Corporation debt are due to the current government seeing political value in a debt attributed to 1998 and then Premier Mike Harris, combined with an addiction to the debt retirement charge revenue.


1, as displayed in the 1998-1999 Public Accounts of the province

2. see note 9 from the 2006 Annual Report of the Ontario Electricity Financial Authority (OEFC). (edit Oct. 12, 2015): The 2006 report includes:

Under legislated reforms to the electricity market, OEFC began receiving actual contract prices for power from ratepayers, effective January 1, 2005, and will no longer incur losses on these power purchase contracts.

The Ontario Financials for 2014-2015 show the liabilty reduced to $479 million. Each year the OEFC’s revenue statement showed the reduction in the liability in a manner the seems consistent with the accounting prior to the introduction of the global adjustment.

3. At the end of 2014, 300 megawatts (MW) of solar and 969 megawatts (MW) of wind were contracted (just over half of the initially planned 2500 WM). My estimate is based on:

  • solar capacity factor of 16% but with a DC overbuild of 40% with an assumption 85% of the additional generation is utilized on the AC connection
  • wind capacity factor of 30%
  • solar contracted at $400/megawatt-hour, wind at $135: market value of $40/MWh is twice what it’s been in the past year, but assumes longer term pricing for gas moves to about $5/MMBtu.

4.  page 1-109 of Volume 2b of the 2014-2015 Public Accounts

5. Described by Ontario Power Generation:

Pursuant to the Ontario Nuclear Funds Agreement (“ONFA”) between OPG and the Province, OPG established a Used Fuel Segregated Fund (“Used Fuel Fund”) and a Decommissioning Segregated Fund (“Decommissioning Fund”) (together the “Nuclear Funds”).

If you want numbers… spreadsheet of Annual OEFC revenues and expense

2 thoughts on “Another perspective on Ontario’s immortal stranded electricity sector debt

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