Parker Gallant: New Ontario Council told to boost value of OPG and Hydro One

Are 11 years of active depressing value to end?

What spurred the decision by Ontario’s Finance Minister, Charles Sousa to announce on April 11, 2014 that the Ontario Government is appointing a council to recommend ways to improve the efficiency and optimize the full value of Hydro One, Ontario Power Generation (OPG) and the Liquor Control Board of Ontario (LCBO”? Was it a sudden realization that Ontario had undervalued assets? Or, was it an attempt to deflect attention from the gas plant scandal?

I’m betting the latter. Why? The shareholder value of the first two Crown corporations listed have been continually interfered with by this government.  Everything from “smart meters” to coal plant closures, multi-billion dollar tunnels, run-of river hydro and coal plant conversions (to biomass) have played a big role in the current value of both OPG and Hydro One.  Add that to above-market rates for wind and solar developments, and billion dollar transmission spending to hook them to the grid—the only reason OPG and Hydro One have any value is that electricity rates in the monopolistic electricity sector have been allowed to rise by over 100%.  Four Long-term Energy Plans in 11 years and several dozen “directives” on how the businesses should operate have done nothing to enhance the value of those two entities.

Under the benign governance of the Ontario Energy Board (whose role was eviscerated by the government),  electricity prices have increased at an average annual rate over 10%  and driven well paying jobs from the province, as a result.  Creating value seems to have been overlooked in the process. Is this another “Council” that will present a report that will simply be ignored as in the past?

What does Sousa expect?

Already, I see problems: Minister Sousa seems unaware the Auditor General in his 2011 report noted that  Ministerial (Energy) directives to contract for above market priced wind and solar generation were executed without a cost benefit analysis.

He is also either unaware or in direct conflict with his party’s Energy Minister, Bob Chiarelli, who, just two days before Sousa’s announcement said, “The government is not currently looking at the disposing of any of our energy companies.”  So, why “enhance value” if there is no plan to sell? Was Premier Wynne aware of this conflict or did she endorse both positions hoping that the new council would confuse the issue, and the electorate?   Perhaps the gambit is to gain credibility to reduce or freeze energy sector salaries, or force a change in the way pensions and benefits are paid, to enhance value?

As recently noted OPG, had 77% of their employees on the “2013 Sunshine list” and Hydro One 67%; both have unfunded positions in the pension and benefits programs.  A council isn’t necessary to figure that out!

So exactly what is Minister Sousa expecting from the council?  OPG and Hydro One are both taxpayer owned institutions with one (Hydro One) holding a monopoly on the transmission business and on distribution of electricity to one quarter of Ontario’s ratepayers.  OPG on the other hand has seen its share of the generation market fall since the PC government split old Ontario Hydro into five entities.

The final annual report of Ontario Hydro had this to say about their contribution to Ontario’s electricity supply: “ OPG facilities now supply about 85% of the province’s electricity demand. Under an agreement with the provincial government, that proportion will be gradually reduced so that by about 2010, OPG will control no more than 35% of the province’s total supply options.”

By the end of 2013 (three years later than planned) OPG had come close to achieving the “agreement” with 16,229 MW of installed capacity compared to total Ontario capacity (per recently “revised” Long-Term Energy Plan) reported as 38,374 MW giving OPG about 42% “of the province’s total supply.”   That OPG capacity of 42% produced 80.3 terawatts (TWh), equal to 57 % of Ontario’s demand in 2013 and in 1999 had produced 136.2 TWh equal to 85% of demand.

The bottom line

On the financial side, OPG’s first full year of operation (2000) generated a profit, net of PIL (payments in lieu of taxes), of $605 million; by 2013 their profit had fallen to $135 million.  So, OPG, based on history reflects itself as a business in decline.  OPG are also about to undergo costly retrofits of their nuclear plants which have traditionally gone over budget.  If Ontario sold OPG at, say, a 12 times multiple on earnings, it would net them only $1.4 billion.  The best the province could hope to generate in a sale of OPG would be its current book value of $8.3 billion, but any buyer would demand guarantees on pricing of generation of all capacity and a guarantee of grid rights to ensure production is purchased.  What is good for wind, solar and gas plant generators would be demanded by any new private sector owners of OPG!  One also suspects a buyer would seek to cover any anticipated cost overruns on existing projects including nuclear refurbishments, biomass conversions, etc.  In other words, it is likely the “Council” will recommend keeping OPG—it may not be sellable!

Hydro One, on the other hand looks like the star with Net Profit (after PIL) of $803 million for 2013 up from $378 million in 2000 (+112%), while Gross Revenue (net of Power Purchased) increased from $1,728 million in 2000 to $3,054 million in 2013 (+77%), despite a drop in terawatts (TWh) transmitted.  An increase in employees of 1,173 however is cause for concern in respect to the transmission and distribution businesses.   If, as suggested by Jan Carr in an article in the Toronto Star, Hydro One gets split into two entities—transmission and distribution—the breakout (2012 year-end) in Net Profit for the “transmission” business is $488 million and for “distribution,” $258 million providing a Return on Equity (ROE) on the former of 18.1% and 12.5% on the latter.  The Return on Revenue (RoR) would be 32.9% and 25.8% respectively and above the comparable at, say, Enbridge with an ROE of 12.8% and an RoR of 18.8%.

Assuming the Council will suggest the two Hydro One businesses be split and could generate say 12 times their earnings in a sale, Ontario might generate $9 billion.  That would come from approximately $3 billion for the distribution side and $6 billion for the transmission business.  The sale would generate a one-time gain of about $2.5 billion for the province, or less than 25% of the current budget deficit.  The sale would cause grief for the Liberal Party from the unions within the Hydro One family and so might prove unpalatable.

I am betting the Finance Minister’s appointed “Council” will deliver bad news but probably not until after an election. This is simply another exercise to deflect from the numerous scandals and the mismanagement of the energy file overall  that are sure to be the message from opposition parties in a provincial election campaign.

©Parker Gallant,

April 14, 2014

The views expressed here are those of the author and not Wind Concerns Ontario policy.

WHY isn’t that debt paid off? Parker Gallant tells you why

money1

One of the issues that came up during last week’s cross-Province hydro bill protest was the debt retirement charge and why, like Ontario’s own version of Bleak House, it just goes on and on and on, and never seems to get paid off in full?

Parker Gallant has examined the books, the news releases, the ministerial pronouncements and more, and has the answer for you.

The Debt Retirement Charge Premier Wynne’s $6.2 billion _Revenue Tool_

Institute for Energy Research: Germany’s green energy experiment a failure

germany-flag

The Washington D.C.-based energy policy “think tank” the Institute for Energy Research (which receives no funding from either government or industry) has reported that Germany’s experience with “green” energy has been an economic failure.

The Institute reports higher energy prices, energy poverty for Germany’s citizens, and “lavish subsidies” for renewable power generators.

North America (including Ontario) has looked to Germany as an example of green power generation; we can only hope they now heed these lessons.

See the news story and report, here.

Economist Jack Mintz on Ontario: cancel FIT

Jack Mintz
Special to The Financial Post
April 8, 2014

Canada’s ‘sagging middle’ hurting the rest of Canada

With Quebec’s election over, we can turn to Ontario where a scandal-plagued Liberal government will soon present its 2014 budget – and possibly trigger a spring election. Ontario is sagging under the weight of monstrous public debt, uncompetitive energy prices and rising taxes. Given Ontario’s size, other regions of Canada are being hurt.

Ontario has only one way out: economic growth. Luckily, the American economic recovery will significantly benefit Ontario. However, it won’t be enough. The government needs to get its house in order.

Pushing aggregate demand with deficit spending won’t achieve growth. Economic stimulus might provide some short-term relief but won’t generate sustained expansion. Instead, growth will be attained with supply-side policies by reducing onerous regulations, providing some smart tax reforms and shifting to growth-oriented spending, especially to address the notorious Greater Toronto Area infrastructure problem.

Nor will growth come from expansionary public programs like the proposed Ontario pension plan. Forcing people to hold assets in a government-sponsored plan might be helpful to some but it will be just another form of new taxation for others, who are already have adequate savings for retirement.

Ontario’s growth has lagged the rest of Canada, averaging less than 1% annually since 2009. Employment since 2009 has increased by 375,000 but the employment rate has fallen to U.S.-levels of 61.4% as of March 2014, far less than Alberta’s at almost 70%.

Ontario‘s fiscal picture is also not pretty, with gross debt over $290-billion (net debt is $272-billion), requiring $10.6-billion in taxes to cover interest charges. This expense is enormous, about one-half of education expenditures.

The average Ontario debt interest rate is only 4% but interest rates are expected to rise within the next few years. Each point increase in interest rates will add at least another $3-billion in annual interest expense.

Ontario’s energy prices are soaring….

Read the full article here.

High gas prices work their way onto your electricity bill

Cold will mean higher gas and hydro costs

Cold temperatures, long winter will lead to bigger bills this year.

This winter’s brutal weather has savaged your budget if you use electricity, or heat with natural gas.
The high demand for energy has pushed up prices for both forms of energy — some of which consumers will continue to pay even after the warm weather arrives.
Natural gas prices
Consumers saw the result of the higher demand for gas last week, when Enbridge announced its new rates for households who buy their gas directly from the utility.
Rates will jump 40 per cent on April 1, Enbridge announced. A typical household that now pays $1,000 a year for natural gas will pay about $1,400 annually under the new rates.
The increase reflects the higher price that natural gas producers are receiving because of the soaring demand.
After languishing below the 10-year average for the past four years, Alberta gas prices shot above that level early this winter.
Ontario gas utilities can draw on gas stored at the Dawn terminal near Sarnia, Ont., which was purchased earlier at lower prices. But those reserves were drawn down because of the high demand.
“This winter was so cold and so long that we have used much of the cheaper gas we purchased and have recently been buying more gas than normal at higher market prices,” said Enbridge’s Chris Meyer.
She said in recent years, Enbridge has bought gas for $4 to $5 (U.S.) per million British thermal units (BTU, a common method of pricing gas on commodity markets).
With stored gas running short, Enbridge had to buy more on the market, she said. “It typically cost about $20 (U.S.) per million BTU.”
Electricity prices
High gas prices work their way through to your electricity bill as well, since natural gas-fired generators deliver an increasing proportion of Ontario’s electricity.
Gas-fired generation is more expensive than nuclear or hydro-electric power — and more expensive than the coal plants, now closed, that used to supply a significant portion of the province’s power….

Read the full article here

“…natural gas-fired generators deliver an increasing proportion of Ontario’s electricity.”

Ontario power bills spur US to try to lure companies stateside

Go to the Globe and Mail homepage

Soaring energy prices making Ontario look dim for manufacturers

The Globe and Mail
Published
Last updated

For businesses in Brockville, the attempt to lure them over the border wasn’t new. But the pitch was.
Earlier this winter, manufacturers in the Eastern Ontario community received a letter reminding them that their province’s industrial electricity rates were projected to rise by 33 per cent over the next five years, and 55 per cent by 2032.

“As a hedge against these increases,” it suggested, “setting up an operation just across the border in St. Lawrence County, New York, may be a competitive strategy you should consider.”
Such overtures, if not in written form then made more casually, are becoming increasingly common in Ontario. While they may not find immediate takers, they are emblematic of the mounting economic threat from an energy-cost trajectory that – following a series of questionable policy decisions – the province now seems powerless to do much about.
Owing mostly to a combination of overdue investments in infrastructure, phasing out coal and an ill-fated gamble on green energy, soaring power rates have already greatly increased the cost of doing business in Ontario. That’s particularly true for those in the troubled manufacturing sector. In a report last month, the Association of Major Power Consumers of Ontario (AMPCO) alleged that the province now has “the highest industrial rates in North America”; per that report, prices are currently 37 per cent higher than in neighbouring New York for the province’s biggest industrial users, and 68 per cent higher for smaller ones.
Adding insult to injury is that, because an excess of energy supply has come online at a time of decreased demand, Ontario is currently selling surplus power to New York and other neighbours at a steeply discounted rate….
Read the full story here.

PCs reaffirm vow to scrap Green Energy Act

An open letter from Tim Hudak today to Energy Minister Bob Chiarelli demands a halt to wind power approvals in Ontario, and a news release reaffirms the PC Party’s commitment to end the Green Energy Act.

PC-Caucus-News-Release
For Immediate Release
February 19, 2014

ONTARIO PC’S RE-AFFIRM COMMITMENT TO SCRAP GREEN ENERGY ACT

(Queen’s Park)- Ontario PC MPPs Lisa MacLeod (Nepean-Carleton) and Lisa Thompson (Huron Bruce) offered the following statement on the PC Plan to scrap the Green Energy Act:
“Ontario PC Party under Tim Hudak maintains its commitment to scrap the Green Energy Act.
“That means we would remove subsidies on wind and solar, we would restore locally based decision making and we would implement a moratorium on developments until health and environmental impacts are assessed.  
“The Green Energy Act is disastrous for rural Ontarians who live near these intrusive developments and anyone paying a Hydro bill in Ontario is paying this $22 B boondoggle on their bills. 
“Many people like Esther Wrightman of Middlesex County are relying on us to form a government and end this bad plan. 
“The PC Party stands with Esther and everyone else negatively impacted by this disastrous plan.
“We stand with ratepayers.
“And we stand for a province that doesn’t subsidize expensive and unreliable power we don’t need at the expense of a prosperous Ontario. 
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For more information contact Lisa MacLeod, 613-823-2116 or Lisa Thompson 416-325-3467

“Hydro Creep”: what Ontario’s rising electricity bills are doing

Ottawa Morning

Here from CBC Ottawa’s morning show, is a panel discussion on Ontario’s electricity bills, featuring an Ottawa area dairy farmer, the head of a business improvement association, and the head of an agency trying to help people in need.
The story is very serious and the message is clear: Ontario’s power policy is costing everyone, and the rises will keep on. Food costs, job losses, more.
Listen here:
http://www.cbc.ca/ottawamorning/2014/01/13/hydro-creep-the-rising-cost-of-electricity/

Hydro bills draining rural institutions dry: Ottawa Citizen

St Alexander’s in Lochiel

Kelly Egan: Hydro is draining rural institutions dry

 

From churches to curling clubs to pools and small business, all feel the squeeze

By Kelly Egan, OTTAWA CITIZENJanuary 7 2014
 

Where we stay, where we play, where we pray — there’s no hiding. Hydro shocks everywhere wires flow.
Electricity costs are to rise about 42 per cent over the next five years. As this is a government guess, expect things to be worse.
We have heard how this is bad for you and me and Main Street. But what of the little churches, the seasonal curling rinks, the homeless shelters, the non-profits getting by on duct tape and donations?
In the hamlet of Lochiel, just north of Alexandria, there is a lovely old Catholic church, St. Alexandre, in a parish founded in 1851.
It is on the verge of closing, with only 30 or 40 congregants left. It has one mass per week and shares a priest with a neighbouring parish. In the winter, it is heated for about three hours a week, using a combination of electricity and gas.
In November, it paid $102 in hydro costs. In December, the bill was $221. And, just to repeat: It is open about two or three hours a week; locked up tight the rest of the time.
“I’m sure we’re double what we used to pay,” said volunteer treasurer Madeleine Theoret, also a longtime parishioner. The collection plate is not being used to save souls but to buy electrons, which is probably not the Vatican’s vision.
When you throw in the cost of heating fuel, it costs an average of roughly $50 an hour to open the old doors.
“Utilities are the lion’s share of expenses at these small churches,” said Alexandria-Cornwall diocesan accountant Tracy Cameron. “It’s what makes all the little bookkeepers cry.”
Churches with rectories have an extra problem, she said, since they were built for many clerics but now usually house only one and, old and drafty, still need to be lit and heated.
Take the Alexandria Curling Club, home to sheets and sweeps for 130 years. The hydro bill in November 2012 was $3,200. In 2013, it topped $4,000 for the same consumption.
President Ian McKay predicts the hydro bill for the next year will be about $11,000 higher than the $28,000 in the previous 12 months.

Read the full story here.