Wednesday, December 11, 2013

The troubling in Auditor's Report on OPG

The Auditor General of Ontario released an annual report and, as a result, it's open season on publicly owned Ontario Power Generation.  Much of the criticism is misplaced, and what criticism is well-placed is illogically morphing into recreating the worst decisions made about Ontario's electricity sector in the 1990's.

As I write this I'm hearing CBC Metro Morning's Matt Galloway repeatedly cite OPG as being responsible for increasing rates. It's a ridiculous implication. In 2013, the total cost of all electricity generation in Ontario will be $1-1.25 billion over what was paid in 2012.  Very little of that increase could be attributed to OPG.

Some of the report's implied criticisms are not only applicable to OPG.
The number of OPG staff on the Sunshine List has grown steadily since the organization was
created in 1999, albeit at a slower pace after the 2010 pay freeze legislation. Over the last 10 years, Ontario Power Generation Human Resources the number has doubled, from 3,980 employees in 2003 to 7,960 in 2012, representing about 62% of the employees on OPG’s payroll; the corresponding increases in total salaries and taxable benefits paid to those on the list were $513 million for 2003 and $1.11 billion for 2012.
Big numbers to be sure, but in percentage terms far beneath the growth in the numbers at the Office of the Auditor General of Ontario, which has more than tripled both the number of people it has on the Sunshine list and their total salaries and benefits - and those people just get your blood to boil, whereas OPG's people get your kettle to boil.

Big numbers look bad to little people, but the $1.7 billion in labour costs noted by the auditor translates into approximately 2 cents/kWh on the power OPG sold; OPG claims their average revenue of 5.1 cents/kWh in 2012 was 3.5 cents below the "Average revenue for all electricity generators, excluding OPG." [page 13 of 2012 annual report].  Take Bruce Power (nuclear) out of the calculation and OPG's rates are well under half the average rate paid to private producers in the province.  [OPG 3rd quarter YTD states 5.7 cents/kWh; my estimates for 2013 are 6.1 for Bruce, and 13 cents/kWh for others]

The auditor's report doesn't provide many performance metrics along those lines, and some numbers they feel are relevant are not as pertinent as they appear.
...the amount of power that OPG produces has decreased by 23% over the last decade (from 109 terawatt hours in 2003 to 84 terawatt hours in 2012), with the reduction in demand for electricity, closure of coal plants and more private-sector involvement in new power generation.
This is true, but OPG was not allowed to shutter it's uneconomical plants: first Lennox (in 2005) was provided an agreement to keep it's 2000+ MW capacity available to the system, and once the recession gutted demand (2009), it's coal units were also paid to remain available.  There were reductions in staff, and they were not proportionate to the reduction in generation because they should not have been.

The statement, from the report, the less sharp members of the mainstream media are interpreting as stating OPG is significantly responsible for recent rate hikes is:
Given that OPG still generates about 60% of Ontario’s electricity, its operating costs have a significant impact on the cost of electricity, as well as on OPG’s profitability, which in turn affects how quickly the legacy debt of the former Ontario Hydro can be paid off.
This implies there is an intention to pay off the debt.  The Office of the Auditor General should know this to be false - as they've been the auditor of the Ontario Electricity Financial Corporation, which is responsible for electricity sector debt.  The OEFC's Annual Report for 2011-2012 was over a year late in being made publicly available, and the 2012-2013 Report is now several months late too.  One can see why they don't acknowledge their role in that; what they do provide, in the 2013 Annual Report is a follow-up to their 2011 Annual Report's section on the "Stranded Debt".  [if you aren't aware of what this refers to you should read "Stranded Debt - Abandoned Responsibility"]
Graphic from Fall Economic Statement

While the Auditor's 2011 report liberally lifted content from my writings on the stranded debt (here and then here), the follow-up does not - it doesn't even report on the latest accounting of the debt (which appeared in the Ontario government's Fall Economic Outlook and Fiscal Review).

A very quick review: the debt retirement charge was meant to pay off a portion of the "unfunded liability" set at the creation of the OEFC.  One might assume that as the unfunded liability reduced there would be some proportional reduction in the "residual stranded debt", which your debt retirement charges were allegedly intended to service.

  • In 2008-09 the unfunded liability was reduced by $1 billion, the residual stranded debt by $0.2 billion
  • In 2009-10 the unfunded liability was reduced by $1.4 billion, the residual stranded debt rose $0.4 billion
  • In 2010-11 the unfunded liability was reduced by $1.4 billion, the residual stranded debt was unchanged
  • In 2011-12 the unfunded liability was reduced by $1.1 billion, the residual stranded debt by $1.3 billion
  • In 2012-13 the unfunded liability was reduced by $1 billion, the residual stranded debt by $0.6 billion
So, pretty clearly, they just make this shit up.

Furthermore, the Liberal government introduced an Ontario Clean Energy Benefit that drains as much from taxpayers as the Debt Retirement Charge collects from ratepayers.
There is no explanations for the debt retirement charge aside from it can be blamed on the past Progressive Conservative government that introduced it, and/or and stupidly labelled a nuclear debt retirement charge.

Stupidly because the residual stranded debt is now said to be $3.9 billion, far less than the $4.4 billion it shows as being inflated in the 2003-04 OEFC year.  The explanation for that hike relates to how successive governments have viewed Ontario Power Generation:
... the estimated residual stranded debt increased to a peak of $11.9 billion, due to the electricity price freeze and a reduction in the estimated present value of future dedicated revenues to OEFC, mainly reflecting the revised lower projected financial performance of Ontario Power Generation (OPG) and lower tax rates.
Profits in recent years have come primarily from Hydro One (the public transmission and distribution entity).  Parker Gallant (who pointed out the news release containing the preceding quote) has written on how excessive pensions in Ontario's public sector energy companies are being capitalized to elevate equity.  This may have inspired the Office of the Auditor to review OPG's pensions - but I don't think they caught the full game being played (an audit of Hydro One might put more light on it).

OPG has been disliked by governments since before it existed.  Bill Davis ordered many new builds for the 1980's which, partially due to lower growth in demand than expected, the Peterson governments delayed, causing capital costs to escalate and escalate.  Bob Rae was in power when Darlington was completed, but brought in Maurice Strong to knee-cap Ontario Hydro;  Harris then dismantled it, creating 5 successor entities (including OPG, Hydro One, and the OEFC).  Harris' successor, Eves, ordered a rate freeze and paid for it by clawing back the receipts of market-value sales from OPG and then the McGuinty/Duncan tandem permanently hindered OPG by locking down their rates through regulation with the deliberate intent of masking higher prices to be paid to private suppliers.

The Wynne government of 2012 is sounding almost exactly like the Rae government two decades earlier - which launched cost cutting at OPG that was shortly followed by declining nuclear performance and skyrocketing emissions.

The auditor should not be surprised to find a culture at OPG which doesn't respect the fickle wills of governments.   
The silo has been built over a very long time.
Perhaps that's not a bad thing.

After 25 years of governments that would prefer to see it fail, OPG currently delivers value superior to other generators in the province.

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