Tuesday, May 22, 2012

A Pale Blue Imitation of Ernie Eves

Tuesday, May 15th, 2012 saw 3 related events:
"Those who don't know history are destined to repeat it."
-Edmund Burke
Ernie Eves became Premier April 15, 2002, after winning the leadership of the PC Party of Ontario; some weeks later he'd win a by-election to gain a seat in the legislature.  The PC leadership campaign was quite divisive - with Eves running against Jim Flaherty (now Finance Minister federally); Flaherty referred to Eves as "a pale pink imitation of Dalton McGuinty," during that campaign.  The only general election contested with Eves leading the party was lost to current Premier McGuinty's Liberals.  Federally Ontario's PC Party would soon disappear, with it's membership primarily moving to the right with the new Conservative Party of Canada.

Between his swearing in April 2002 and the electoral loss October 2, 2003, Premier Eves would deal with the Walkerton crisis, the summer of SARS, and rising hydro rates - but not all his troubles were inflicted by the actions of others.  The 2003 budget was delivered outside of the legislature, at Magna International (coincidentally - or not - where Eves' predecessor would become Chairman of the Board).  The 2003 budget connected job growth with tax cuts - particularly corporate tax cuts.

The summer of 2002 had seen high demand and low supply drive up pricing in Ontario's new wholesale market for electricity:  Eves would take control of the electricity file, freezing rates in December 2002 (retroactive to the start of the market in May 2002), and appearing regularly during the summer of 2003 to update Ontarians on the situation with supply.  During that time he allowed the privatization of Hydro One to die.  

On May 15th, as Eves's image was being hanged, the current government released retroactive calculations indicating Ontario’s Residual Stranded Debt (RSD); a release that featured an enormous $4.4 billion spike between April Fools’ Day 2003 and March 31, 2004.  The actual accounting details were not shared, but they should relate to reduced expectations, during that period, of financial performance at Hydro One and Ontario Power Generation (OPG), or reduced expectations of taxation revenues (I wrote "Retire the Debt Retirement Charge" (DRC) in August 2011, which described revenue streams to retire stranded debt).  

Eves' sole budget, as Premier, did reduce corporate tax rates (presumably reducing PIL expectations), yet it's likely the big jump had more to do with revenues expected from, particularly, OPG.

The introduction of a competitive market, in May 2002, had featured a "Market Power Mitigation Agreement" (MPMA) limiting OPG's rate - and therefore it's market control (in 2001 OPG had generated over 140TWh - which is about our annual consumption now - so there was a control put on their market pricing power) .   The commodity price of electricity is the last price accepted in a reverse auction (IESO description of the process).  Functionally, OPG would not set rates when the price was above levels set in the MPMA agreement - the smaller market participants would.  As rates went up after the market began in May 2002, OPG would get the higher wholesale rate, but be required to rescind that MPMA amount; OPG's 2005 annual report indicates that over the first 36 months of the market:
"earnings and liquidity were severely impacted by the requirement to rebate a significant portion of its revenues under the Market Power Mitigation Agreement. In total, the Market Power Mitigation Agreement rebate amounted to $4 billion over this period.
This is where Eves' rate freeze enters the picture - about 6 months into the competitive market smaller consumers were guaranteed lower rates to appease their anger over what were, in hindsight, normalized rates.  The average wholesale market price for May-Dec 2002 was $55.92/MWh.  For 2011 it was $71.95/MWh (including the global adjustment).  That increase, of about 30%, is about average in US states.  But 5.6 cents/kWh was judged, by the Eves regime, as too rich for Ontario's voters.  The solution was to abandon the market at the consumer level by setting rates as low as 4.4 cents/kWh .  The difference between the wholesale market cost, and the consumer's lowered payments, became the responsibility of the Ontario Electricity Financial Corporation (OEFC).  The OEFC 2004 Annual Report noted figures for the program designed to handle the financing of the price freeze:
Expenditures from the Fund during the year amounting to $643 million (March 2003 - $1,461 million) have been reduced by a portion of the rebate from OPG due under the Market Power Mitigation Agreement (MPMA) in the amount of $390 million (March 2003 - $796 million) leaving a net cost in OEFC of $253 million (March 2003 - $665 million).
What Eves did was to rescind to taxpayers all of the MPMA pot, plus another $918 million of debt.     When the MPMA collections exceeded the OEFC's obligations the following year, the moneys were rebated to consumers, instead of paying down portions of the debt created by the program!

While the residual stranded debt accounting could be distrusted, as it comes 8 years late, it seems plausible in less than 1.5 years in office, Premier Eves did burden Ontario with billions of additional debt in pandering to consumers.

The Premier presiding over the hanging ceremony, of the Eves portrait, has done the same; with the new accounting showing the residual stranded debt rising from April 1, 2009 to March 31, 2011.  Eves' corporate tax cuts were brought back in McGuinty's 2009 budget with a coincidental increase in residual stranded debt for the same period now being indicated (presumably reducing PIL expectations).    Now, as then, OPG is funding others, as it's production is resold for far more than it receives for it.  The main difference is that whereas the early years of the market saw the difference go to the smallest consumers, the difference now goes, via the Global Adjustment mechanism, to pay far higher contracted rates with private producers (see Duncan's Grow-Op is Stealing Hydro).  Aside from the corporatist's twist on redistributing wealth from pubic OPG to private producers, Premier McGuinty's introduction of a 10% discount through a deceptively named "Ontario Clean Energy Benefit" (OCEB) takes approximately $1 billion a year from the treasury to discount residential and small  business electricity bills - eliminating the pay-as-you-go electricity principle with taxpayer subsidized usage.   The forward forecast for the reduction in the residual stranded debt is similar to the expected costs, to the treasury, of the OCEB.

The third event on May 15the was the release of the PC's white paper on Affordable Energy.  The paper is not comprehensive, and the headline associated in the reports it did receive was on the partial privatization of Hydro One and Ontario Power Generation - described in the paper as a path to "monetize OPG and Hydro One."  I'd suggest selling public assets is not necessary to realize monetary value from them; the first step would be not to intentionally devalue them - as Eves and Mcguinty have been doing to OPG for the past decade.

There wasn't a lot of detail in the white paper, there was enough to indicate PC leader Hudak remembers back a decade, to his days flipping pink waffles in supporting Mr. Flaherty's campaign to lead a conservative party.

Before a pale pink premier ... succeeded by a pale blue one.


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