Terence Corcoran: As Ontario power consumers get poorer, politicians and First Nations cash in
One of the challenges facing residents of Ontario is keeping up with the province’s abuse of the electricity system. The work was rough enough when previous Liberal regimes imposed feed-in tariffs and spent almost a decade trying to turn Ontario’s power system into the world’s greenest. The annual cost to consumers of that operation has been electricity prices doubling since 2009. Now the province is hell-bent on extracting vast amounts of new cash out of ratepayers.
It was once thought that government ownership and/or control of public utilities would provide services at as low a cost as possible. Not anymore — at least not in Ontario. The new business plan is to manage the utilities as cash machines for government. In the words of a government-appointed panel, headed by former TD Bank executive Ed Clark, the new objective of government utility management is “unlocking value” and to “maximize the value” of electricity monopolies for the benefit of the politicians.
A prime example of such value maximization is the Ontario government’s convoluted scheme to maximize the value of a company called Hydro One Brampton, a local distribution company outside Toronto. As Parker Gallant reports in a commentaryelsewhere in today’s FP Comment, Ontario is attempting to orchestrate a giant leveraged buyout of Hydro One Brampton, with electricity ratepayers taking on $607 million in new debt that will allow the government to pocket at least $400 million in cash.
Taxpayers could be on the hook as well. The deal, as currently structured by a cabal of lawyers, consultants, financial whizbangs and political operators, will see six local municipalities take on $182 million in debt to buy equity in a new company that will merge Hydro One Brampton with three other local distribution companies. That $182 million in new debt will be backed by the province. At the same time, the new merged utility will be saddled with $425 million in even more new debt.
As Gallant outlines, the only immediate beneficiary of all this finagling will be Ontario’s Liberals, who will collect a load of new cash to spend on infrastructure and other government schemes.
Another backroom mystery deal surfaced last week when the government announced it had signed an “Agreement-in-Principle for Sale of Hydro One Shares” to local First Nations. Judging by the terms of the deal, one can only assume First Nations’ negotiators had the Wynne government over a barrel.
As announced, the province will sell 15 million shares of Hydro One to a First Nations Investment Vehicle at $18 a share, at about $270 million. The market value of the Hydro One shares is $26 a share, or $390 million, which means Ontario is selling the shares at a 30 per cent discount. At the same time, the government will lend the $268 million purchase price to the First Nations fund “at the province’s relevant borrowing rate.” As an additional perk, the government will provide $45 million in “seed capital” to boost the investment vehicle’s balance sheet.
At current prices, therefore, the start-up balance sheet of the First Nations Investment Vehicle would show assets of $390 million in Hydro One shares and $45 million in cash, for a total $435 million. Liabilities of $270 billion — debt to the province — would leave total equity of $165 billion.
Not bad for a startup. But there’s another bonus. The 15 million Hydro One shares currently produce an annual dividend of 3.23 per cent a share, or about $13 million a year in fresh cash for the First Nations fund. If the government were to lend to the fund at current rock-bottom government borrowing rates of about 2.5 per cent, the annual interest paid would be $6.75 million, providing net annual cash flow of about $6 million.
Why would the province give away all this money? Hydro One’s 2015 prospectus provides a clue. It notes that First Nations pose a variety of territorial risks to Hydro One, which operates transmission lines and other facilities on native lands. Would this be a payoff to avoid future suits and claims? First Nations, after all, managed to halt completion of a $100 million transmission line from New York to Ontario, forcing Hydro One to write off the investment.
The agreement-in-principle announced last week is subject to approval of 80 per cent of Ontario First Nations and may take a couple of years to complete.
Meantime, the privatized shares of Hydro One are a big market performer. Some analysts see shares rising higher as the company increases profits and dividends on the backs of ratepayers, with some analysts expecting $28 a share (the initial price was $20.50 in 2015). The government has sold 30 per cent of the company, for a total take of $3.7 billion. Another 30 per cent is to be sold in future.
To boost future sales and profits, Hydro One has applied to the Ontario Energy Board for rate increases of 2.5 per cent next year and 5.2 per cent in 2018. The official objective is to secure Hydro One’s “revenue requirements” in coming years.
Looks like a lot of people are getting rich, on Bay Street and in government, off the backs of ratepayers.
Terence Corcoran is a National Post columnist and one of Canada's leading business writers and editors.
Story: Financial Post