Selling the furniture: what’s behind the Wynne government sell-off

SOLD! OPG HQ sale makes the profit report look good, but …

Back in April 2015, the Wynne-led Ontario Liberal government announced they had created the Trillium Trust and would be selling off assets to generate $130 billion dollars that would be allocated “across the province over 10 years to fund projects in public transit”.

The news release for the announcement stated an additional $200 million generated from the sale of the GM shares would be placed in the trust; it also announced plans to sell off Hydro One.

OPG’s 2nd Quarter report was released August 11, 2017. The media paid no attention despite a very successful quarter, reporting an after-tax profit of $307 million — well up from $132 million of the comparable 2016 quarter.

But if you look deeper into their results, you learn $283 million of the reported profit came from the sale of their head office.

What the OPG results signify is that profitability from their share of total Ontario power generation (52.2% or 18 TWh/terawatt hours out of the total 34.5 TWh) for those three months in that quarter produced only $24 million in after-tax profit. OPG blamed the reduced income on lower nuclear power generation.

I think there is much more to the story.

OPG, as I have said before, has become the “whipping boy” for the Ontario Liberal government and apparently it still is, as observations will confirm comparing their 2017 quarterly results with those of the same quarter in 2007. Here’s proof.

Renewables and Conservation
It would be remiss to not mention first that both the addition of renewable energy such as wind and solar (in excess of 6,700 MW) were granted “first to the grid” rights thereby superseding much of OPG’s (previously called “unregulated”) hydro (3,629 MW as of December 31, 2007) as well as other generation such as Lennox, an oil/gas fueled generating station with a capacity of 2,100 MW which is seldom called on to produce electricity. Likewise, biomass-converted coal plants in Atitikokan (180 MW) and Thunder Bay (165 MW) are idle most of the time. The other issue is the fact that consumption in 2007 was reported by IESO as 152 TWh; by 2016 that had dropped by 15 TWh (enough to supply about 1.7 million average households for a full year) supposedly due to conservation, but more likely due to the high prices.

Ten years later
Now let’s look at the ten-year comparisons for the 2nd Quarter.

  • Gross revenue in 2007 for the quarter was $1,393 million versus $1,146 million in 2017; a drop of $247 million or 17.7% and for the first six month (2017 versus 2007) was $691 million lower (-22.9%)
  • Spilled hydro generation in the 2nd Quarter of 2017 was 2.6 TWh (enough to power about 290,000 average households for a year) but not mentioned in 2007
  • Water fuel taxes in the 2nd Quarter of 2017 were $97 million to generate 8.2 TWh whereas in 2007 the 9.3 TWh generated resulted in water fuel taxes of only $67 million
  • Electricity generated in the 2nd Quarter of 2017 was 18 TWh (-25.4%) versus 25.4 TWh in the same quarter of 2007 and for the comparable six months generation was down from 54.2 TWh to
    36.6 TWh a drop of 17.6 TWh or more than the 2007/2016 consumption decline of 15 TWh
  • Payments in Lieu of Taxes (PIL) in the 2nd Quarter of 2017 were $97 million versus $29 million in the comparable 2007 Quarter.
  • Operations, maintenance and administration costs dropped from $776 million in the 2nd Quarter of 2007 to $711 million (-8.4%) in the comparable 2017 Quarter however the average costs of generation per kWh (kilowatt hour) increased from 4.6 cents/kWh to 4.83 cents/kWh
  • OPG were also listed as a participant in the recent “cap and trade” auction of “Greenhouse Gas Allowances” but their purchase or cost of allowances was not disclosed

All this suggests only a few ways the Ontario Liberal government and the Energy Ministry are removing money from ratepayers’ pockets to fund the Consolidated Revenue Fund, etc.

The sale of OPG’s head office is another. The fact that OPG produced an after-tax profit of $283 million by the sale of its head office will do nothing to reduce electricity rates as the following note from the 2nd Quarter 2017 report states:

“Pursuant to the Shareholder Declaration and Shareholder Resolution, and as prescribed in the Trillium Trust Act, 2014, OPG is required to transfer the proceeds from this disposition, net of prescribed deductions under the Act, into the Province’s Consolidated Revenue Fund.”

What that means is, the pre-tax profit on the sale of OPG’s head office of $378 million (including the PIL or payment in lieu of taxes) will do nothing to reduce electricity rates and instead will be applied to the budgetary deficit. Perhaps some of it will be spent on transit projects or even to pave a road in a (Liberal) riding.

The profit on the sale of OPG’s head office plus all the other payments extracted from them could have gone a long way to defray the costs that the Fair Hydro Plan will accumulate and which we will have to pay for in the near future.

Next up for OPG to sell off: per the Shareholder declaration from former Energy Minister, Bob Chiarelli is “the Lakeview Site”, comprised of an approximately 67-acre portion running along the shoreline and along the southwesterly portion of the Lakeview Site and the adjacent water lots, more particularly identified” and “the remaining approximately 110 acres of the Lakeview Site”.

The Wynne-led government is doing its best to sell off any remaining assets owned by Ontario’s taxpayers to the detriment of ratepayers.

Parker Gallant,
September 18, 2017

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Letter to Energy Minister Thibeault on rate increase application

 To: The Honourable Glenn Thibeault, Minister of Energy, Ontario

EB-2017-0049  Hydro One Rate Increase application

My views/thoughts and “What the OEB needs to consider”

  1. The OEB must consider the fact Hydro One has publicly declared1(a) their intent to pay 70% to 80% of their net income after taxes as dividends to shareholders.  No other publicly owned LDC pays out at that level.   Toronto Hydro has recently informed the City of Toronto they will reduce their dividend.(b)  It should be a point of the review by the OEB to limit the payout dividend rate by Hydro One to no more than the average of all of the other LDC dividend payout rates as the higher payout rate increases borrowing needs and resulting interest payments thereby increasing the need for the raising of distribution rates!
  2. The OEB is currently in the process of endeavouring to have the distribution rates become more of a “fixed” cost moving away from variable rates currently embedded within the rate application system. Hydro One’s application ventures away from that path even though they cite the move to fixed rates on their website!(a)  The OEB needs to re-establish their regulatory purpose.
  3. A review of the Yearbook of Distributors(a) filings on the OEB website comparing Hydro One’s filings for 2014 with 2015 (2016 filings not posted yet) indicates OMA costs fell by $103 million from 2014 to 2015 while depreciation increased by $14 million. One would suspect the reported drop in OMA costs would have caused a drop in Hydro One’s distribution costs but no reduction was forthcoming.  One must assume the increased depreciation was due to the OEB approving the completion of capital spending moving previously approved spending within a variance account to current rate recovery status.  Presumably due to the drop in OMA costs; Hydro One reported an after-tax profit in their distribution business of $257.3 million an increase of $68,1 million in fiscal 2015.
  4. We would note either Hydro One has been effective at getting ratepayers to conserve OR their out of line distribution rates have driven ratepaying households into “energy poverty”. The foregoing is evident in comparing the year ended December 31, 2015 with the comparable year ended December 31, 2016.  Distribution volumes fell 8.6% whereas Transmission volumes increased 1.7% signaling distribution rates are out of line with other LDC!  A further 1.1% reduction in distributed electricity is evident in reviewing the 1st Quarter of 2017 as compared to the 1st Quarter of 2016! NB:
  5. We would note that asset classifications of: “Goodwill” and “Intangible Assets” now cumulatively represent $676 million having increased from $400 million in 2012.  Those assets now represent 6.7% of Hydro One’s equity base and in line with the OEB’s annual setting of the ROE allowed by the LDC has the effect of inflation of Hydro One’s rate increases.  It is time to discount the $676 million when considering the current application.  Hydro One has inflated the goodwill (in particular) by enticing local councils to sell their LDC to Hydro One at prices that exceed normal acquisition activities in the private market.  That in turn impacts not only the ratepayers of the acquired LDC but also (via the inclusion of the goodwill) impact all other Hydro One ratepayers.
  6. Of note in respect to the OEB’s responsibility is the January 14, 2016 “Review of the Cost of Capital for Ontario’s Regulated Utilities”(a) wherein we find the following under the heading “Electricity Distributors” and labeled # 4) under “The differences between the OEB approved and the actual results can be attributed to the following:”: is the following: “4) The utility’s ability to manage its costs leading to under or over spending, and demand pressures! Ontario’s ratepayers should rightly expect the OEB to not only “attribute” differences between “approved and the actual results” for the foregoing reason but to also bear that in mind on a comparative basis with all LDC ensuring that “over spending” is not granted the freedom given to Hydro One in the past and in the future!  Costs for the same relative activities should be similar for all LDC!

 Parker Gallant

NB:  What that suggests is having the highest distribution rates during a time when the grid has a large surplus of electricity has two negative effects on ratepayers.  The first is that reducing consumption will have a detrimental impact on the HOEP driving it down further particularly during the shoulder seasons when demand is low and secondly the reduced revenue to Hydro One will cause them to apply for rate increases associated with the revenue drop thereby increasing distribution rates.  It is a downward spiral for ratepayers!  We would also point out that while Hydro One experienced an 8.6% drop in consumption the IESO report that consumption from 2015 to 2016 remained flat at 137 TWh.

 

 

1.(a) https://www.theglobeandmail.com/globe-investor/investment-ideas/research-reports/hydro-one-will-be-a-dividend-stock-worth-considering/article26829880/

(b) https://ca.news.yahoo.com/toronto-hydro-cuts-citys-dividend-172637812.html

2.(a) http://www.hydroone.com/Norfolk/Pages/MovingtoFixedDistributionRates.aspx

3.(a) https://www.oeb.ca/utility-performance-and-monitoring/natural-gas-and-electricity-utility-yearbooks

6.(a)https://www.oeb.ca/oeb/_Documents/EB-2009-0084/OEB_Staff_Report_CostofCapital_Review_20160114.pdf