Why Politicians Should Never Run Anything–Part 23457A

 

https://grantcoulson.files.wordpress.com/2014/04/incentiveseverywherepicturecorrect1.jpg?w=444&h=288

   Do not think about, write about or deal with  human behavior without determining the effects of incentives. It’s not their money, of course they’ll waste it.

   Wherein we see an organization with a typical past for a “public utility.” In the early days of electricity generation in Ontario, private generation companies were run out of business so that the government could create a monopoly. Governments cannot tolerate private monopolies, but pursue their own monopolies with amazing zeal. Now there is talk of “privatizing” some of this. Those who take on this task must be saddled with debt, high salaries and allegiance to wind and solar. In other words, what happened it another example of what happens when governments pretend to do business things.

    National Post – (Latest Edition)
    Parker Gallant Parker Gallant is a retired Canadian banker who tracks Ontario’s electricity industry.
Future ratepayer liabilities

Ontario plans to sell Hydro One unlikely to generate benefits to shareholders or ratepayers without major reform

On the surface, the Ontario government’s plan to monetize hidden value buried in the province’s massive state-owned electricity monopolies seems like a good one. After all, the province’s two giant power generating and transmission monopolies generate a lot of annual profits. In its 2014 annual report, Hydro One reported $749 million profit on revenues of $6.5 billion. In December, Ontario Power Generation (OPG) reported earnings of $811 million on revenues of $5 billion.

Combined, that adds up to $1.6 billion in profits. Let’s see, at 12 times earnings, that works out to $18 billion. Hydro One, the transmission/ distribution, would be worth $9 billion.

Just don’t scratch the surface of those numbers too much.

Further examination of the balance sheet and accompanying notes shows that Hydro One’s unfunded pension and benefit shortfalls increased $442 million to $2.8 billion, despite having put $564 million in the “regulatory asset” allocation during the year. What that means is that $564 billion is to be collected from ratepayers in future years. Regulatory assets at year-end stood at $3.2 billion. Any buyer of Hydro One will want some government assurances that ratepayers, and not shareholders, will be on the hook for that money.

Hydro One has also been building up low-value assets at high cost. It acquired Norfolk Power in 2014 for well over book value. The balance sheet now shows goodwill of $173 million. Goodwill will increase further in the current year as the provincial regulator recently approved the acquisition of Haldimand Utilities and will, no doubt, bless the acquisition of Woodstock Power. All of these “inflated” assets, pension/benefit shortfalls and billing problems won’t sit well with the investment bankers the Ontario government believes will line up to buy a minority share in Hydro One.

OPG has an even bigger pile of “regulatory assets,” including $243 million in an item called recovery of deferred income taxes — a large part of the company’s 2014 profits. Actually, the money hasn’t been recovered yet. “The increase in the regulatory asset related to deferred income taxes resulted in a net extraordinary gain of $243 million in the consolidated statement of income for 2014.” Who will pay for that gain? OPG is expecting the gain “to be recovered from customers through regulated prices.” Thank god for ratepayers Those taxes, moreover, are not taxes in the true sense of the word. They are mandated payments to the OEFC (Ontario Electricity Finance Corp) as required under the 1998 Electricity Act that split Ontario Hydro into five entities.

OPG’s unfunded liabilities for pension and future benefits increased $1.2 billion from $5.2 to $6.4 billion. The bulk of those liabilities are captured in OPG’s regulatory assets (future allocations to ratepayers) which increased $1.8 billion to $7.2 billion from 2013.

Privatization might help in one area. It is a relatively easy task to determine the cost of producing a kilowatt hour (kWh) from the annual reports. OPG’s cost of production is 6.04¢ per kW/k, and Hydro One’s transmission and distribution costs total 6.12, for a combined total of 12.16¢ per kW/h. Meanwhile, the cost of a kW/h from wind turbines is 18.5¢ and 55.9¢ from solar panels.

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   Even a child can see that wind and solar are a bad idea and these much higher costs are shown the government has massaged them by massively understating the real costs.

Hydro One and OPG — despite high wages and benefits and a major billing system mess, still deliver a kWh well below costs from wind turbines (56% higher) and solar panels (276% higher). Note that all of the above kWh costs do not include the “Debt Retirement Charge,” “Regulatory Charge” or “HST.”

What the foregoing short analysis should tell Ontario’s ratepayers and investment bankers is there are a lot of costs in these public institutions that could be reduced. It suggests privatization would deliver cost reductions, and in the end deliver cheaper electricity, but only if the government stopped interfering directly and restricted itself to “regulatory oversight” as is done with natural gas utilities.

A sale of a minority share in either Hydro One or OPG will deliver nothing of benefit to ratepayers or taxpayers, and an outright sale might leave taxpayers burdened with stranded debt and unfunded pension and benefit liabilities that, as of Dec. 31, 2014, sit at $9.2 billion in “regulatory assets.” Or, as they should be better known, “future ratepayers’ liabilities.”

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    When these deals are made, they will be at the expense of taxpayers. We can’t slay this monster, but we will pay out a lot of money to make it seem unmonsterlike. These “assets” will be sold at a loss that will be massaged to make a “profits” appear.

Government Job or Respect–Which’ll It Be?
Cheerio and ttfn,
Grant Coulson, Ph.D.
Author, “Days of Songs and Mirrors: A Jacobite in the ‘45.”
Cui Bono–Cherchez les Contingencies

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