Monday, April 27, 2015

Selling Hydro One and rate hike threats for Ontario

The government of Ontario recently announced it would try to sell off it's public transmission company, Hydro One. The rumours became fact as a Premier’s Advisory Council on Government Assets released its final report on this topic, which was quickly accepted verbally and is formally now recognized in the Ontario's 2015 Budget.

One of the concerns with the government's plans to sell off part of Hydro One is the impact on rates. I tend to think the pressure on rates will be slightly up, only initially, for Hydro One distribution customers, but actually downward for customers of Ontario's other local distribution companies. That will require some work to explain in a separate post, but I'll note the existing cost concerns with a list as I had been collecting stories on rate impacts prior to the announced plan to sell of 60% of the transmission and distribution assets:

Rates in Ontario are going up, and up.

Onto the debt.

When the disposition of Hydro One asset was a rumour I wrote Ontario’s Outlaw Premier Plots to plunder Hydro One, which sets out my argument that proceeds from the sale were legislated to pay down electricity sector debt.[1] This argument got picked up on by both politicians and the Canadian Union of Public Employees (CUPE), who solicited a legal opinion which was supportive of the position on the legal necessity to use the funds to pay down electricity sector debt.

A Canadian Press Report carried on CTV pointed out how vague the accounting of one aspect of debt payments has been, and The Toronto Star carried the same article but the ending is massaged.

Energy analyst Tom Adams noted, back at the rumour stage, that regardless of legalities, "Hydro One’s income stream is already spent and you can’t spend a dollar twice."
This point was also noted by the lawyer from CUPE's analysis, Steveen Shrybman:
“They can change the act by stating clearly that [Ontario] can sell electricity sector assets in order to generate money to invest in projects that have nothing to do with the electricity sector whatsoever, even while ratepayers are on the hook for the stranded debt,” Shrybman said. “They’ll have to explain why that makes sense, but they can definitely do it.”
Sheila Block noted, "The province’s finances will suffer if it privatizes Hydro One."
Terence Corcoran noted"The very government that orchestrated the current soaring power rates intends to maintain strict oversight over Hydro One to make sure rates do not go higher still."

Some, picking up on Corcoran's point were suspecting Hydro One might not be a great deal for purchasers.
Jack M. Mintz warned the new company, "will not be necessarily operating in accordance to commercial objectives as Ontario will have non-profit goals that will ultimately affect profitability." He opined, "Either Hydro One will eventually be fully privatized or investors will be so disgruntled with government intervention that the company will be renationalized."

Bloomberg reported that "bond investors are growing wary about the $9 billion lent to the utility when they assumed it would have 100 per cent government backing." 
However, the first bond offer after the news didn't display any negative impacts.

Perhaps it didn't show any impacts because the banks didn't want it to, because one big question-mark I have is why the government would dispose of a revenue generating asset to avoid borrowing money at today's very low rate - unless former TD Chair Clark's fellow club members are propping up those raids as leverage.

The Toronto Star ran a very good column by Edward Keenan:
At the centerpiece of this week’s provincial budget is a plan to sell off a 60 per cent stake in Hydro One to raise $4 billion, which will then be spent on building public transit. The rationale for this in the advisory council report that recommended it is pretty straightforward: “It is clear that Ontario does have a limit on how much it can borrow.”

Otherwise, it makes no sense: the government earns roughly 10 per cent per year on its equity in Hydro, while it can borrow money at 3 per cent per year. With a spread like that between interest and profits, you’d earn a 7 per cent profit if you borrowed the money to buy the Hydro shares.
The Globe and Mail's editors also noted the government's plan to sell a revenue generating asset for something entirely different in Where’s that $9-billion for Hydro One coming from – and where’s it going? is going to unlock value from one money-making public enterprise and put it into public transit – a non-business run on vote-buying rather than business principles. 
On Friday, the government announced it would be spending $13.5-billion on a massive expansion of GO Transit. Serving the 905 belt around Toronto, and beyond, the program should leave Liberal politicians smiling. It also appears to use up nearly all of the money the Wynne government earmarked for transit projects. That’s likely to leave many more necessary and cost-effective, but less politically favoured, transit improvements high and dry. Which brings us back to Indisputable Principle No. 1: Governments have a terrible history when it comes to making good business decisions.
Not everybody saw this as a bad news story all around.

Brady Yauch was featured in a CBC article
"Whether it's ratepayers or taxpayers, someone is eventually going to have to pay for it," said Energy Probe economist Brady Yauch of the approximately $27 billion that hydro ratepayers currently owe the Ontario Electricity Financial Corp. after Hydro One's giant parent, Ontario Hydro, was broken up in the late 1990s.
"Basically, the government is doing whatever it wants with the money" from the proposed sale, says Yauch. "But this idea that because it's private rates will go up is a straw man."
Maybe your taxes will go up instead - or maybe interest payments will grow for the government as debt ratings drop.
In a separate article, Yauch notes that due to the privatization process,"Much needed reforms could focus on Hydro One employees' pensions." Ed Clark's report says that should happen prior to the first share offer, which the recent budget scheduled for the next fiscal year, 2015-16.

So there's that.

Benjamin Dacchis felt Now’s the time for Ontario’s cities to quit the electricity business.

I think there's some truth in all the perspectives I covered here.
And I think truth is good.

When I write on this, it will be about the lack of truth in the claimed hydro debt (which I've written on before), and how the Wynne government has now positioned itself such that it will need to extend that lie indefinitely.


1. For a broader overview of the debt topic, read my Stranded Debt - Abandoned Responsibility.

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