Sousa Debt and the DRC

Ontario’s finance minister, Charles Sousa, delivered a budget yesterday, and within that document described the current electricity sector debt situation:

Ontario Electricity Financial Corporation (OEFC) estimated results for 2015–16 show an estimated excess of revenue over expense of more than $3 billion, which would reduce OEFC’s unfunded liability (or “stranded debt of the electricity sector”) from $8.2 billion as of March 31, 2015, to below $5 billion as of March 31, 2016. This would be the twelfth consecutive year of stranded debt reduction.

For those that haven’t been following the Wynne government’s raid of electricity assets, a quick refresher is in order.

Ancient history: Ontario broke up it’s “power at cost” utility in 1998, revaluing assets and creating a “stranded debt” along with a corporation to oversee them with tools developed specifically to address the RSD. These tools included payments in lieu of taxes (PIL) from the electricity sector, the profits of the successor companies, and prospective revenues from the sale of those companies. All of those tools were not expected to address the stranded debt – the portion they could not address was called the residual stranded debt (RSD), and it was to be paid off with a debt retirement charge of 0.7 cents/kilowatt-hour on all Ontario bills. (see Stranded Debt – Abandoned Responsibility)

Recent History:

  1. Wynne listens to Bay Street advisors on selling off the public utility, without regard to the law’s stipulation, “All proceeds… in respect of the disposition of any securities or debt obligations of, or any other interest in, Hydro One Inc… shall be paid to the Financial Corporation [OEFC]
  2. The government decides to proceed with that asset sale, promising in last year’s budget, “to sell off a 60 per cent stake in Hydro One to raise $4 billion, which will then be spent on building public transit.”
  3. The government rewrites the electricity act and Finance Minister Sousa layers nonsense upon nonsense to hide the obvious – that he is raiding hydro (summarized in Wynne deserves no credit for dumbly selling Hydro One)
  4. The province’s new financial accountability officer shows the province could be worse off for disposing of shares in Hydro one – I write that if the officer had used the most recent figures, he’d not show a remaining “residual stranded debt”
  5. The government’s bill 144 eliminates the concept of a “Residual Stranded Debt” to allow it to continue to charge business 0.7 cents per kilowatt-hour, and the Minister of Finance is freed of the bothersome need to justify the charge (described here)
  6. The government’s fall financial statement advises the government will renege on amounts due to the OEFC (sector profits since 2005) – while claiming proceeds from the disposition of the public utility are used to pay down sector debt, it is deceitfully removing sector assets

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Sousa returns to Duncan’s lying ways in raiding electricity debt charge revenue

Today’s economic statement from Ontario Finance Minister Sousa should be the last time we get data to demonstrate his theft of residual stranded debt charge revenue. I’ve written on this many times, so in this post I just want to cover the latest farcical accounting, but I’ll provide one more overview of what the “residual stranded debt” was meant to be, and how a charge of $7/MWh (0.7 cents/kilowatt-hour) ended up on electricity bills to address it.

Ontario Hydro was broken up with the electricity act of 1998, and the successor company left with the financial burdens was the Ontario Electricity Finance Corporation (OEFC). It’s a shell company that held about $20 billion more in liabilities than it had in assets (this is known as the OEFC Unfunded Liability). In order to pay the liabilities the OEFC was provided revenue tools; specifically payments in lieu of taxes (PIL) from sector businesses, and profits (above a certain number) from Hydro One and OPG – two successor companies of Ontario Hydro.

The Unfunded Liability that was not capable of being retired through PIL and sector revenues was called the “Residual Stranded Debt”, and to address that debt the residual stranded debt charge was added to our bills.

I was anticipating today’s lie, and here’s how it was pictured:


Let me explain how this is a lie.Read More »

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 liabilityRead More »

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.
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Ontario’s Outlaw Premier Plots to plunder Hydro One

The Globe and Mail reported early March 10th that Premier Wynne’s Ontario government is looking carefully at selling off a portion of Hydro One.

The government has not yet decided exactly how much of the company to sell off beyond the initial IPO proposal, or whether the private sector would ultimately own a majority of the company’s equity, sources said. Much of that would depend on how the initial sale goes.

…The developing proposal is said to have the blessing of Ms. Wynne’s powerful lieutenants: Deputy Premier Deb Matthews, Finance Minister Charles Sousa, Energy Minister Bob Chiarelli and Infrastructure Minister Brad Duguid.

By the afternoon of the 10th the Globe was adding to the tale:

The Premier said Tuesday that word of the IPO plan “has gotten into the public realm prematurely” and she has not made a “final decision” on whether to pursue it.

“Whatever we do, we are going to control prices. We are going to make sure that the regulatory regimes that will protect people in this province stay in place,”

CTV reported the Premier “said no final decision has yet been made.”

The Premier is shown saying,

“We are going to be able to track the projects that we are building. People are going to be able to look at how much money is coming in and where that money is going to be sent.”

If that doesn’t get a “bullshit” from you, you’ve been asleep for years.Read More »