Wednesday, April 29, 2015

Ontario government seeks a creative lie to justify raiding Hydro One riches

The plan is to sell Hydro One for far more than its book value and use the unlocked additional value to fund a build-out of transit in the Toronto ecosystem.
That's the plan as presented for public consumption.

The plan might not do much damage to Ontario's electricity sector, but it's not likely to do anything beneficial for transit or provincial finances either. Mostly it's more deceptive spectacle from a government that's been spectacularly inept money managers. This post will primarily discuss two issues: the impact of the sale on the perceived electricity sector debt, and the role of the Ontario Energy Board (OEB) in not only consumer pricing - which it's being claimed it regulates responsibly - but the pricing of the share sale.

The plan to sell shares in Hydro One is part of the recommendations in a report from the Premier's Advisory Council on Government Assets. I'll call this the Clark Report as that body is chaired by the architect of Pierre Trudeau's National Energy Plan in the 1980's, Ed Clark - he is also known as a banker.

Hydro One's 2014 Financial reporting indicates total equity of $7.6 billion.
The Clark Report values Hydro One much higher than that:
The Council’s analysis indicates that, in today’s markets, the integrated Hydro One transmission and distribution business would likely command a fully distributed equity valuation of between $13.5 billion and $15 billion in a public offering, excluding Hydro One Brampton. We believe this valuation is a conservative range in the context of today’s market:
Call it $15 billion, which is $7.4 billion higher than the total equity reported by Hydro One.

$7.4 billion. Remember this number.

Tuesday, April 21, 2015

Behind the OEB's latest rate hike

Yesterday the Ontario Energy Board (OEB) announced rates for the May 1- Oct 31, 2015 period. The rates are going up, on average, around 10.3% over last summer - as is the trend. Since 2007 summer rates have averaged 9.4% a year. 10.3% is a weighted average increase as each time-of-use (TOU) period is going up differently. The difference in TOU increases exhibits an ignorance about the factors driving pricing in Ontario's market, and the consistency of the increases over the past 7 years eliminates the uncertainty about why rates are going up.

There are few more capable of breaking down cost components that I. Last summer's rate hikes were all due to renewables. This year much of the boost is due to some of the delayed costs OPG has now applied for (see Bruce Sharp's Invisible Gorilla).
I suspect that when the government contracts of unnecessary supply drive the price up more than 10%, OPG is strangled; when there might be a brief pause in those costs, OPG gets some funding for it's variance accounts. Always, however, the costs are being driven by policy. Rates are going up because the powers that be want them to. They go up 10% because that's what they figure people will tolerate.  
We are closer to paying the real cost of energy than we have been in the past. 
This isn't an educated opinion, but a statement to identify one's tribe.

Rates are going up because in this instance the quote comes from the Premier and she wants the rates to go up.

Whatever the people are paying it isn't the real cost.

This is a first principle of the tribe including Ontario's Wynne - and McGuinty.    

The unique stupidity in this latest rate hike is the distribution of the increase across time-of-use periods.