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Ontario's Hydro Debt Retirement - a Case for Transparent Governance
August 5, 2015

Trevor Shaw Trevor Shaw CPA, CA, CMC, CQA
Senior Consultant,
Legislative Auditor
Introduction

Have you ever noticed the line item on your monthly Ontario hydro bill called the “Debt Retirement Charge”?  This charge is not large- perhaps $2 to $15 a month - so who cares? - We can spend that on lunch and the bill has to get paid anyway if you want to keep the lights on.  Well, it is not exactly as advertised and adds up to billions of dollars for the Provincial treasury.

We returned to Ontario in 2002 after six years in Alberta.  The world in Ottawa had changed; cities had merged, Ontario Hydro ceased to exist and Hydro Ottawa was newly created.  Recall viewing our first hydro bill and noting the “Debt Retirement Charge” and thinking - what debt - whose debt – what’s that all about?  The questions remained parked until now.

With retirement time on my hands I explored hydro debt retirement. The journey has not been unlike Alice in Wonderland and a little like visiting the Land of Oz.

Like many things government, it’s complicated.  So apologies in advance.  This is a little long involving language all its own.  If you want the short story go to the end.  Here is what I found. 

Why the Debt Retirement Charge?

One has to go back to the future to understand the “Debt Retirement Charge” (DRC). The journey begins in 1997 and the last days of Ontario Hydro.  After study by experts, restructuring of the hydro system was set in motion through provincial law – Energy Competition Act which included the Ontario Energy Board Act and the Electricity Act, 1998.  Two significant aspects of restructuring were:
  • The creation of competitive wholesale and retail markets for electricity that opened May 2002; and

  • The breakup of Ontario Hydro into five successor entities (companies) on April 1, 1999; namely:

    • Ontario Power Generation (OPG) Inc. for electricity generation (wholly owned by the Province);

    • Hydro One for wholesale power transmission and retail distribution (owned by the Province);

    • The Electrical Safety Authority (ESA) for electrical inspection (agency of the Province)

    • The Independent Electricity System Operator (agency of the Province) to manage the power grid and the wholesale electricity market.  IESO** is a not-for-profit, non-taxable corporation that in 2007 was also designated by regulation as the Smart Metering Entity (SME) pursuant to the Electricity Act, 1998; and

    • The Ontario Electricity Financial Corporation (agency of the Province) to manage the legacy debt and other liabilities not transferred from Ontario Hydro to successor companies.  This entity and the matter of stranded debt is the focus of this article.

**Foot note: Pursuant to provincial legislation in July 2014 amending the Electricity Act, 1998, the IESO and the Ontario Power Authority (OPA) were amalgamated and continue as the IESO effective January 1, 2015.  Among the objectives of the OPA was (is) to forecast electricity demand and adequacy & reliability of electricity resources, planning for electricity generation, and promoting the use of cleaner energy sources and electricity conservation. The OPA was first established 10 years earlier pursuant to the Electricity Restructuring Act, 2004.  All to say, the hydro system has been undergoing a series of changes over the past 15 years.

The intent of restructuring in 1999 was to have the new entities operate in a commercial manner, with a strong financial footing that would make them more efficient and effective and lead to prices that were as low as possible for consumers.  Successor companies would not be burdened with all the debt of Ontario Hydro that tried to set prices that ensured all costs, including principal and interest payments on debt, were eventually recovered from customers.

In short, the DRC is one consequence of a public policy decision to restructure the hydro industry and promote a competitive market place.  In the process, liabilities of old Ontario Hydro were “stranded” and to be paid off and not written off.  For this purpose, as of 1 April 1999, Ontario Hydro continued as the Ontario Electricity Financial Corporation (OEFC).  OEFC is an agent of the Province - a statutory, non-share capital company for servicing and retiring Ontario Hydro’s debt and managing certain other assets and liabilities emerging out of restructuring.  We are now fifteen years down the road.

It is worth clarifying that the restructuring was something done on paper – new organizational structures and means for paying debt.  It had nothing to do with re-engineering or changing hydro infrastructure itself – just the entities that own and run various parts of the system and allowing free or competitive market.  With the “demerger” of Ontario Hydro, players are more numerous but are all still within the government house or sphere of influence. 

Creation of “Stranded Debt” 

Ontario Hydro created a Demerger Project Office with some 800 separate project activities involving thousands of employees to manage a seamless transition to a new order with no disruption of service.  One of the key considerations was “optimizing the repayment of the provincially backed Ontario Hydro debt.

As a part of restructuring, the Ontario Electricity Financial Corporation (OEFC) was created and given the responsibility to manage the legacy debt of the old Ontario Hydro (OH), along with certain other liabilities not transferred to Hydro One and the Ontario Power Group (OPG). 

The Electricity Act, 1998 defines stranded debt as the debts and other liabilities of the Financial Corporation (OEFC) that, in the opinion of the Minister of Finance, cannot be reasonably be serviced and retired in a competitive electricity market (“dette unsurmontable”).  So in a way, the stranded debt is whatever the Minister says it was or is in relation to whether it can be paid or not. Table 1 shows how “stranded debt’ was calculated and created at the dawn of a new century.

Table 1 – Financial impact of restructuring - stranded debt ($ billion)

Sources:  2014 OEFC Annual Report, 2011 Report of the Auditor General of Ontario as based on Ministry of Finance data.

Former Ontario Hydro total debt

30.5

add

 

Former Ontario Hydro other liabilities

7.6

equals

 

Former Ontario Hydro total debt & other liabilities

38.1

less

 

Fair market value of successor companies

17.2

equals

 

Initial stranded debt

20.9

less

 

Subsequent adjustment for additional assets

1.5

equals

 

Adjusted stranded debt of OEFC – April 1, 1999

19.4



The OEFC inherited approximately $38.1 billion in total debt and other liabilities of Ontario Hydro (OH).  Less than half of this was supported by the “fair market value” of OH assets transferred to successor companies.  It appears successor companies did not pay for the assets transferred to them.  On April 1, 1999 the OEFC took back $17.4 billion in interest bearing notes and loans receivable (assets) in exchange. This arrangement for stranded debt gave successor companies a fresh start so they might compete in a free market where apparently Ontario Hydro, as a monopoly, could not.

Interestingly, in its final Annual Report of March 1999, Ontario Hydro stressed its focus had always been on safety, reliability, service and competitive prices.  It had a closing accumulated deficit of $2.7 billion after corporate write offs in 1997 of $6.6 billion, weathering additional costs of the once in a hundred years ice storm, and providing $4.5 billion in future costs (among its liabilities).  Its assets were $39.6 billion with total liabilities of $42.3 billion including long term debt of $27.7 billion.  So Ontario Hydro did not seem to be doing too bad overall.  However, I digress - back to stranded debt.

The remaining $20.9 billion not supported by the fair value of Ontario Hydro assets of Ontario Hydro.  Additional assets of $1.5 billion came along and reduced the stranded debt to $19.4 billion.

In short, the DRC is a consequence of a public policy decision to restructure the hydro industry and promote a competitive market place.  In the process, liabilities of old Ontario Hydro were “stranded” by about $20 billion. This was to be “retired” and not written off.  This is where the debt retirement charge comes in.  
 
The Provincial Plan to Retire Stranded Debt

The Provincial government put in place a long-term plan (now 15 years down the road) to service and retire stranded debt. The plan was to eliminate the stranded debt by sharing the burden between the electricity sector and electricity consumers. The plan included three dedicated revenue streams to OEFC for paying down the stranded debt:
  1. The estimated present value of future “payments in lieu of taxes” (PIL) from electricity sector companies (OPG and Hydro One and municipal electrical utilities);

  2. The estimated present value of “cumulative annual combined profits” of OPG and Hydro One (owned by the Province) in excess of $520 million a year (being the then annual interest cost of the government’s  investment in the two companies); and

  3. The Debt Retirement Charge to cover the “residual stranded debt” – being the initial stranded debt remaining after deducting the total estimated value of the two above future revenue streams (i.e. $20.9B minus $13.1B = $7.8B starting residual stranded debt).  More on this later.

The first two represent revenue streams otherwise flowing to the Province (but diverted to its agency the OEFC).  The Province’s investment return was shielded from paying stranded debt. The Debt Retirement Charge (DRC) is revenue coming from hydro consumers (external to government) in hard currency in real time.  The other two revenue streams are in the government house sort of speak.

I was unable to determine if the plan had a target for when the stranded debt would be gone.  Now a closer look at the DRC and something called “Residual Stranded Debt”. 

What is the Debt Retirement Charge?  

The Debt Retirement Charge (DRC) is a charge payable on electricity consumed in Ontario. That means most anyone using electricity (residences, business, hospitals, schools).  DRC is authorized by Provincial law and began in 2002. 

According to an Ontario Guide, DRC is to replace a portion of debt servicing costs previously included as part of electricity bills prior to restructuring of the former Ontario Hydro.  DRC is to end when the “residual stranded debt” of the former Ontario Hydro is “defeased”.

Defeased is a word I had to look up.  It does not check out on Microsoft Thesaurus.  The word “defeasible” is in the Oxford Dictionary (but not defeased) and means open to revision, valid objection, forfeiture or annulment.  As far as I can tell, no debt is objected or forfeited. 

According to google defeased (defeasance/ defeasement) is a commercial or legal term with various meanings.  One meaning is a provision that voids a bond or loan when the borrower sets aside cash or bonds sufficient to service the borrower’s debt.  This sounds like paying interest only and not retiring a debt.  There are other descriptions of “defeased” but none reflect an ordinary understanding of paying a debt i.e. paying principal and interest.  Residual stranded debt is explained later.  It’s a mind bender too.

Am now beginning to wonder if DRC is a misnomer.  Maybe it is more accurately called the “Liability Defeasement Charge”.   But imagine that appearing on a hydro bill and people not scratching their heads (if they notice the DRC at all).

DRC is paid by almost all electricity users in Ontario. There are exceptions such as Status Indians and Indian bands purchasing electricity consumed on a reserve and self-generating users eligible for station service exemption or an annual exemption by the Province.

DRC is applied at a rate of 0.7 cents per kilowatt hour (KWH) with the exception of reduced rates in certain listed service areas of local utilities as existed on October 30, 1998.  There are 19 areas paying lower DRC rates from 0.0 cents to 0.69 cents per KWH.  No comment.

All distributors and retailers required to be licensed by the Ontario Energy Board (OEB) must register as DRC collectors.  The money is sent by collectors to the OEFC and not the OEB. The OEB is the regulator of Ontario’s natural gas and electricity industries and provides advice on energy matters referred to it by the Minister of Energy and the Minister of Natural Resources.  Like the OEFC, the OEB is an agent of Her Majesty in right of Ontario and exempted from federal and provincial income taxes.

What is Residual Stranded Debt?

Residual Stranded Debt (RSD) is important because the DRC remains until that is gone.  RSD is the amount remaining in stranded debt after estimating future revenue streams other than the DRC for paying the stranded debt.  Said another way, the RSD is the estimated portion of the stranded debt that could not be supported by expected future revenue from electricity companies.  The DRC will cease at some point provided electricity companies do their part and the RSD does not increase.  

At the beginning, the initial RSD was estimated at $7.8 billion. This is what hydro consumers were expected to pay for.  But the RSD is not a fixed amount or sum certain.  It varies in value – a moving target. The RSD estimate changes each year as determined by the Minister of Finance.  The important thing to recognize is that if the other two revenue streams happen to fail or fall short….then hydro consumers continue paying the stranded debt.    

In response to observation by the Province’s Auditor General in 2011, the government made the RSD more transparent by introducing in 2012 a new regulation formally establishing how the RSD is to be calculated and requiring annual reporting of the amount in The Ontario Gazette.  Most Ontarians are likely not even aware of this service and I doubt if many look up regulations. Not exactly transparent, but its’ there if you care to look.  I did not attempt to find out who (if anyone) checks RSD calculations.  

The “retirement” of RSD is subject to uncertainty in forecasting the future of OEFC, which depends on the financial performance of OPG, Hydro One, and municipal electric utilities, as well as other factors such as interest rates and electricity consumption.  Which are all, in turn, dependent on the state of economies and decisions of others.  The RSD and the fate of the DRC are kind of floating in the air - subject to the winds of fortune.  

Chart1 below shows the history of the RSD relative to the “unfunded liability” of the OEFC. 

Now what is unfunded liability?   OEFC considers stranded debt and its unfunded liabilities (difference between total assets and all liabilities including debt) to be one and the same and therefore sees stranded debt as reduced by half over 15 years; $9.8 billion as at March 31, 2014 compared to $19.4 billion at March 31, 2000 (end of the first fiscal year of OEFC).  This is probably technically correct but have not examined the details of governing legislation and OEFC conformance therewith.  

So now I am wondering if the stranded debt should have been called “Hydro Unfunded Liability” and the DRC called the “Government Unfunded Liability Payment” or GULP for short.  Sorry, I could not resist.  Back to the subject of Residual Stranded Debt and Chart 1.

Chart 1- History of Residual Stranded Debt & Unfunded Liability of OEFC

Source:  OEFC data and annual reports

Note that what is called initial stranded debt ($20.9B) at April 1, 1999 becomes “unfunded liability” at March 31, 2000 as reported by the OEFC.  


The RSD has been reducing each year since 2004 when it spiked to $11.9 billion from the initial estimate of $7.8 billion. Things were not going in the best direction for ending the DRC.  Fortunately for hydro customers the RSD has since trended downward to $2.6 billion as of March 31, 2014.  Remember though, the RSD is not a function of the DRC except an RSD of $0 is the finish line for DRC (unless a government of the day rules otherwise).

How much has OEFC collected in Debt Retirement Charge? 

Dollars a month become billions.  A total of $11.5 billion in DRC revenue has been taken in by the OEFC to March 31, 2014; between $800 million and $1 B each year for 12 years.  Simple enough. A breakdown between residential and non-residential is not available (at least not publicly).   

However, the OEFC notes in its financial statements that the residential rate class accounts for about a third of electricity load subject to the DRC with the remainder of electricity load used by commercial, institutional and industrial consumers.  That being so and assuming the DRC rate is constant across all classes, residences paid about $4 billion in DRC and all others about $7.5 billion.  Of course, the DRC paid by non-residential hydro users would either be absorbed or recovered from consumers in the pricing of their goods and services.  There is no free lunch.  

The harder questions are what has DRC money been used for and has its purpose been achieved?  These questions are examined in terms of how much debt has been “retired” and remains as well as what the OEFC spent revenues on, including the DRC.    

What progress has been made in paying stranded debt?  

In writing this article I should hasten to say I take the words “debt retirement” on face.  I stick with that at the risk of being seen as too literal or na´ve.  After all, a debt is a liability.  And, a liability of one is an asset of another.  Such is the power of double entry bookkeeping (debits & credits) as invented by an Italian monk in the 17th century.  

Table 2 shows what OEFC started with compared to what it held on March 31, 2014.  The difference between the two gives an idea of what changed over 15 years.

Table 2:  Changes in OEFC liabilities from March 2000 to 2014    In $ billion

Source:  OEFC financial statements

Balance sheet items of OEFC

2000

2014

Change

LIABILITIES

 

 

 

Debt held by the Province (owed to the Province)

9.6

19.1

+ 9.5

Debt held by others - guaranteed by the Province

21.7

7.0

- 14.7

Total debt

31.3

26.1

- 5.2

Power purchase contracts (note 2)

4.3

.7

-  3.6

Nuclear risk funding (note 3)

2.5

0

-  2.5

Current liabilities (accounts payable etc.)

.8

.6

- 0.2

 

 

 

 

Total debt and other liabilities

38.9

27.4

- 11.5

 

 

 

 

ASSETS

 

 

 

Notes & loans receivable from the Province

8.9

8.9

0.0

Nots & loans receivable from Ontario Power Group

3.4

3.9

+ 0.4

Notes & loans receivable from Hydro One

4.8

0

- 4.8

Notes & loans receivable from others

.3

.2

 - 0.1

Total notes & loans receivable (note 4)

17.4

13.0

- 4.4

 

 

 

 

Electricity sector income due from Province (see note 5)

.3

3.9

+ 3.6

Deferred debt costs

.9

 

- 0.9

Current assets (cash, accounts receivable etc.)

.3

.7

-0.4

 

 

 

 

Total Assets

18.9

17.6

- 1.3

 

 

 

 

Unfunded Liability (total liabilities minus total assets)

20.0

9.8

- 10.2

 

Notes:

  1. Debt is comprised of amounts maturing anywhere from 1 to 50 years out and are repayable in various currencies.  In 2014 the effective rate of interest on the debt was 5.47% (compared to 8.29% in 2000).

  2. Power purchase contracts and support agreements were inherited by OEFC from Ontario Hydro as were entered into with Non-Utility Generators (NUGs).  Contracts provide for the purchase of power from NUGs in excess of future market price.  The contracts expire on various dates out to 2048.  Accordingly, a liability was recorded on April 1, 1999 of $4.3 billion on a discounted cash-flow basis when the former Ontario Hydro continued as the OEFC.  Subsequently, under the Electricity Restructuring Ac, 2004, the OEFC began receiving actual contract prices for power from electricity consumers and no longer incurs losses on these contracts.  As a result, the bulk of the liability would be eliminated  and is being amortized to revenue over 12 years (see Table 3 and subsequent analysis).

  3. Nuclear risk funding represent a liability arising from nuclear waste management and asset removal.

  4. As established by the stranded debt retirement plan, the Province committed to dedicate the cumulative combined income of OPG and Hydro One in excess of the Province’s interest cost of its investment in its electricity subsidiaries.  The Province recoups all interest on its investments before any income can be recognized by OEFC. The $3.9 billion represents the cumulative amount due from the Province each year after deducting the Province’s $520 million interest cost of its investment in OPG and Hydro One.

  5. Readers are encouraged to view OEFC annual reports (available on line) to get more information.

Some things to observe from Table 2:

  • Who holds the stranded debt has shifted.  Most of the stranded debt is now held by – owed to - the Province. The Province holds about $19.1 billion in debt instruments or about 70% of total OEFC liabilities. The rest ($7 billion) is guaranteed by the Province.

  • There has been more in debt turnover than retirement – unless you consider replacement of debt to be a retirement. The Province has, in effect, replaced half the debt held by others.  In 2000, Provincial debt represented 1/3 of total stranded debt.  In 2014 it accounted for over 2/3 and the Province still guarantees the debt held by others.  More interest revenue for the Province.

  • Total debt is reduced by a reported $5.2 billion over fifteen years with a further reduction in other liabilities of $6.3 billion coming from reduction in power purchase contract liabilities and the nuclear risk funding liability.  The reduction in power purchase contract liabilities arises from changes in legislation (as per note 2 above) and not from debt payment as such.

In conjunction with the Ontario Financing Authority (OFA), the OEFC has renewed/replaced debt as they came due.  Total debt as such has not reduced substantially over the past fifteen years.  Interestingly, the total long term debt of the OEFC of $26.1 billion as of March 2014 is almost the same as the long term debt of the old Ontario Hydro as it was in March 1999 ($27.7 billion).  Seems not much is retired in regard to “debt” per se.  See next section on where the money went.

However, the unfunded liability of OEFC has dropped by half (from about $20 billion to $10 billion).  On one hand this is good news, on the other maybe another 15 years to go – making a 30 year time horizon for dealing with the financial fall out of hydro restructuring.  

The OFA (also an agency of the Province) manages the Province’s debt and borrowing program.  The total debt portfolio of the Province is in the order of $314.5 billion.  The OEFC has no employees. It is OFA staff doing the work. The Chief Executive Officer (CEO) of OFA and OEFC are one and the same person for the past fifteen years. The Chairmen of the Board of Directors of both entities is currently also one and the same, but other members of each of the two governing Boards differ as between the OFA and the OEFC.  

What happens in the end – what is the bottom line?  Well it depends on how you look at it and how far you track the numbers.    

Each year, OEFC financial results are assimilated into provincial accounts on a line by line basis when the OEFC accounts are consolidated into Provincial financial statements (Public Accounts).  So it all comes out in the wash when reporting Provincial annual deficit and accumulated deficit.  At the end of the process DRC pops out as “non-tax revenue” for the Province.    

I do not know what happens to the rest of the numbers. Wouldn’t it be magic though if amounts offset each other and the net effect on the accumulated deficit of the Province is a virtual zero—except for debt owed to external parties.  But, I speculate.

How has Debt Retirement Charge money been used?  

To get at this question, one has to appreciate that the OEFC engages in a number of activities beyond retiring stranded debt.  Its mandate and activities include:   

  • Managing the stranded debt portfolio.

  • Managing power supply contracts and related loan agreements.

  • Risk managing debt and derivative financial instruments.

  • Supporting the implementation of the Government’s electricity policies.  The OEFC supports the Industrial Electricity Incentive (IEI) program by providing payments to the Ontario Power Authority (OPA) to offset the cost of the DRC portion of the electricity bill paid to OEFC on IEI-eligible incremental consumption by IEI participants.  This is designed to be cost-neutral for the OEFC.  So the DRC is being compensated for some power users.  It is not clear just how this works and how much is relieved to IEI participants.

  • Providing financial assistance to successor corporations and supporting new electricity supply projects.  For example, providing the Ontario Power Generation (OPG) with financing for new generation project developments in the form of 10-year and 30 year notes, providing for up to $1.6 billion in loans for the Niagara tunnel project, providing up to $700 million in support of OPG’s investment in the Lower Mattagami project, and providing OPG a credit facility for up to $500 million expiring on December 31, 2014 for general corporate requirements including the Darlington refurbishment project.

  • Refinancing and sometimes increasing notes receivable including, for example, those with the Independent Electricity System Operator (IESO).

In an attempt to show how the DRC has been used, Table 3 shows the total revenues and expenses of the OEFC over the same fifteen year period as Table 2.

Table 3 –A summary of OEFC Revenues & Expenses – 2000 to 2014 in $ million

Source:  OEFC table - not audited

REVENUE

$ million

Debt Retirement Charge

11,546

Payments-in-lieu of tax

9,185

Electricity sector dedicated income

4,357

Sub - total of planned revenues for retiring stranded debt

25,088

Power supply contract recoveries

14,224

Net reduction of power purchase contracts (see note 2 of Table 2)

3,590

Interest

12,385

Revenue pool residual (ending in 2002-03)

2,240

Gain on sale of Hydro One notes (2002-03)

206

All other revenue

250

Total revenues from fiscal year 1999-00 to 2013-14

57,983

 

 

EXPENSES

 

Debt interest

28,227

Debt guarantee fee (presume paid to the Province)

2,125

Interest on nuclear funding liability (for eight years ending in 2006-07)

925

Electricity Consumer Price Protection Fund (2003 & 2004 only)

918

Power supply contract costs

14,921

Temporary generation supply (2003-04 only)

70

Amortization of deferred charges (ending in 2011-12)

1,026

Operating

182

Total expenses from fiscal year 1999-00 to 2013-14

48,394

 

 

Excess of Revenues over Expenses

9,589

Unfunded liability of OEFC beginning

19,433

Net adjustments to unfunded liability (increase)

63

Unfunded liability of OEFC as at March 31, 2014

9,781

 

A few things to note from Table 3 along with other information: 

  • DRC revenue is comingled with other revenues for the OEFC to use in meeting all its mandate.  As with other revenue streams, the DRC is not set aside to service or pay any debt in particular.  The DRC is a contribution to a pot.

  • Debt retirement related revenue has not kept pace with debt related servicing costs. The DRC revenue ($11.5 billion) plus other dedicated revenue ($13.5 billion) intended for retiring stranded debt total $25 billion.  This does not cover debt interest expense ($28.2 billion) plus debt guarantee fee ($2.1 billion) and the nuclear liability interest ($0.9 billion) – expenses totalling $31 billion for servicing debt.  So if we were speaking debt repayment in ordinary terms (principal and interest), no amount of principal would be paid down. If not for other revenues there would be no reduction in the unfunded liability of the OEFC.

  • There is money moving from left to right pockets in terms of the Province both receiving and paying interest on amounts due from and to itself.

  • As the result of legislative reform in 2004 to the electricity market, the liability for estimated future losses ($4.3 billion) on power purchase contracts as inherited from old Ontario Hydro is now being amortized by the OEFC as revenue over a 12 year period since losses are no longer incurred on power purchase contracts.  This is reflected in the $3.6 billion of net reduction in power purchase contracts as reported as revenue by the OEFC.

  • In regard to power supply contract costs ($14.9 billion) and recoveries ($14.2 billion) since 2000.  The 2004 legislation (Electricity Restructuring Act) shifted the burden of power purchase contract losses from the OEFC to hydro ratepayers.  Previously, the OEFC purchased power from the NUGs and sold the power at market prices lower than cost, thus incurring losses.  Starting in January 2005, the OEFC began receiving actual contract prices for power from ratepayers thus eliminating losses going forward on power purchase contracts.  Power supply contract recoveries have doubled for the OEFC when they averaged about $600 million a year to 2005 and now at about $1.3 billion a year.

  • The same Act also resulted in a combination of regulated and competitive electricity sector pricing with different generators receiving prices set through a variety of mechanisms.  Electricity pricing is complicated with consumers paying a blend of costs including pass-through of regulated prices for OPG’s regulated plants, the full costs for existing and new contracts for generation, and spot market prices for other generation facilities.  This no doubt a complex a variable pricing structure.

Considering the foregoing and seeing the total long term debt of OEFC is almost the same as it was for the old Ontario Hydro fifteen years ago….it seems not much has changed regarding debt proper.  Debt as such is still largely with us.  The change is more about other liabilities and other revenue and expense streams – in particular regarding power purchase contract obligations and the flow of interest in and out.  

Coincidently, it is interesting to note that in its final report of 1999 the old Ontario Hydro commented (on page 42) that estimates of stranded debt were “preliminary” and the actual stranded debt would be known once a final determination can be made for other items; principally valuing power purchase obligations”.  Whether such a final determination was made I am not certain.  What is clear is that subsequent legislative changes in 2004 began eliminating losses on power purchase contracts and the burden going forward shifted to ratepayers. Some other form of liability reduction charge has been instituted.  Just how this works I do not know.  

In the end analysis, there is no clear answer as to where DRC money went in particular. DRC is revenue for the Province and no particular or specific debt repayment is obvious except to say in “Toto” debt proper of the OEFC has reduced by about $5 billion since 1999 and its net unfunded liability (including debt) reduced by $10 billion (about half).  

Interestingly, while there is regulation setting out how residual stranded debt (RSD) is to be calculated and how the RSD value is to be published each year, there appears to be nothing requiring the Minister to periodically state publicly what the value of the stranded debt is at any particular time.  One could presume or assume this would be the “unfunded liability” of the OEFC as shown in Tables 2 and 3 previous.  

Permanently retiring outstanding stranded debt of $26 billion would entail liquidating assets of the OEFC and covering any shortfall.  Doing so would be a major policy decision and no doubt not a simple endeavour.  I wonder if anyone has assessed the option of “calling it a day” on stranded debt?  

The DRC helps defray costs and reduce unfunded liabilities of the OEFC – much of which is debt owed to the Province.  One could view this as debt owed to the people of Ontario in common that is being paid back or carried by the people of Ontario as hydro users directly or indirectly as consumers of goods and services or as investors in business.  

There is good news.  As proposed in the May 2014 Provincial budget the DRC may come to an end for residential hydro users after December 2015 – saving a typical homeowner about $70 a year.  However, it is expected to continue for non-residential users until the end of 2018 when the RSD is anticipated to be “retired” in full.  This could change if the RSD spikes north as it did in 2004, especially if the economy goes south.  Stay tuned and keep your fingers crossed especially since the latest news is about economic downturn.  

All so far illustrates the consequences of government decisions are often not known until long after the decisions are made and those who made them are long gone.  At the same time we live the consequences of past decisions and need to learn from the past.

Why HST on DRC?   

A final question.  Ok, if debt is being paid, why do we pay HST on the DRC?   By rough estimation, hydro consumers have paid about $1.5 billion in sales taxes on top of $11.5 billion in DRC; a total of $13 billion.  

The Canadian Revenue Agency sent information to explain.  Apparently I am the first person in ten years to ask. It comes down to “based on the application of subsection 154(2) of the Excise Tax Act (ETA), the DRC forms part of the consideration for the supply of electricity”.  As the DRC has not been prescribed in regulations as an exclusion and as the supply of electricity is a taxable supply, GST applies to the value of the consideration, including the DRC, for the supply of electricity pursuant to subsection 165 (1) of the ETA.     

Translation - from the federal perspective, the DRC is revenue in exchange for services.  It’s not debt payment but a charge for services - as it was under old Ontario Hydro that sought to cover all costs in its pricing for electricity, including paying debt principal and interest.  We are now back to where this all began.

In Closing  

It seems nothing changed in substance for paying hydro debt – just the players and method of payment.  From this author’s perspective, people and enterprises of Ontario are, for the most part, paying a debt owed to their own government (i.e. to themselves) and paid $11.5 billion plus HST in doing so.     

The DRC has helped fund various activities of the Ontario Electricity Financial Corporation (OEFC) in carrying out its mandate.  Money to retire debt is comingled with other revenues to service debt and other liabilities left behind by the former Ontario Hydro.  

While difficult to comprehend and follow, the DRC is not necessarily a bad thing and may have helped produce positive results for the people of Ontario.  It is part of a big picture of “hydro reform” that deserves clear accountability and transparency by the Government of Ontario including whether reform has been worthwhile especially in terms of low as possible hydro rates and debt retirement.  A comprehensive evaluation of results (intended and unintended) could reveal lessons learned that may inform future public policy decisions.   

The DRC is not what was first expected and old hydro debt per se is not significantly retired after 15 years.  However, there has been progress reducing the combination of debt and other liabilities of the OEFC.  

The deeper question is – has reform of the hydro system been successful?  What has been achieved for the public good and are lessons learned?   Have debt retirement dollars been worthwhile?  

In doing this article I learned more about the hydro system and kind of understand the DRC - but then again not.  I empathize with Alice and Dorothy and look forward to a happy ending.  

The OEFC was given the opportunity to comment on a draft of this article but did not respond.  A big thank you to Doug, Neil, Roseann, Sam, and Phyllis for their encouragement and review comments.    

Disclaimer:  The information used in this article comes from publicly available sources.  The analysis and conclusions are those of the author and do not represent the views of any organization the author may be associated with.

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