By selling the utility, Ontario taxpayers, in essence, locked in tomorrow’s future profits today.
This article first appeared in the Financial Post.
Ontarians have many reasons to be upset with the provincial Liberal government’s handling of the electricity file, but Premier Kathleen Wynne’s decision to sell off part of Hydro One isn’t one of them. The province’s Financial Accountability Office (FAO), which recently panned the sale for its “long-term” impacts, is way off the mark, as are Hydro One’s other critics.
For starters, using the FAO’s own figures, Ontario taxpayers will be “in the black” from the sale from Hydro One until at least 2028. Money from the sale of Hydro One will increase Ontario’s budget surplus — or reduce its deficit, depending on how Queen’s Park manages its budget in the coming years — to the tune of $3.8 billion between 2015 and 2018. Then, between 2018 and 2024, the sale will reduce that surplus (or increase the deficit) by nearly $2.7 billion — meaning taxpayers are still ahead by nearly $1.1 billion by 2024. Based on the FAO’s projections, it will take another four years, at least, for the initial money from the sale to be overtaken by “lost” revenue from no longer owning the utility.
In short, the FAO projects that taxpayers come out ahead for at least 13 years.
But those figures from the FAO are themselves speculative and already out of date. Recent data indicate the sale could benefit taxpayers for many years beyond 2028. For example, the FAO optimistically assumes that Hydro One’s net income will increase from $346 million this year to more than $530 million in 2024. Yet, the company’s most recent annual report showed that net income was down by nearly nine per cent in 2017 compared with a year earlier. If the FAO’s forecasts for profit growth turn out to be rose-coloured, taxpayers come out ahead well into the 2030s and beyond, thanks to having sold Hydro One while the selling was good.
By selling Hydro One, Ontario taxpayers, in essence, locked in tomorrow’s future profits today. If those profits never come to fruition — or are lower than the FAO and other critics are forecasting — the province made a profitable choice.
The FAO made another questionable assumption, too. It assumed that the province’s decision to scrap the Debt Retirement Charge (DRC) from non-residential bills nine months early was predominantly due to the sale of Hydro One (the province had already removed the charge from residential bills). As a result, the FAO included $465 million of “lost” DRC money that Ontario was slated to collect over that time period as a “cost” of the Hydro One sale, even though the province didn’t specifically highlight the Hydro One sale as the sole reason for removing the DRC early. Take that cost out of the equation — the province likely would have done it anyways given the angst over soaring hydro bills — and the taxpayers are ahead, or in the black, for nearly an additional two years from the Hydro One sale.
But costs aside, the new Hydro One is increasingly providing higher standards for its customers, something the old Hydro One (and its government shareholder) resisted when it was in government hands. For example, in the past, Hydro One vehemently argued against penalties for missed appointments. The new Hydro One is offering customers a $75 credit if it misses an appointment — the first utility in Ontario to offer such a credit. It also has decided to return $12 million of unnecessary security deposits to customers, amounting to, according to the utility’s calculations, $1,700 for the average small-business customer. The old Hydro One never showed a similar concern for its customers.
The new Hydro One has also proposed a generous earnings-sharing mechanism in its local distribution business. If its profits are better than expected, it will share them 50-50 with ratepayers.
The new Hydro One has also promised to actually meet its capital-spending budgets. In the past, Hydro One often under-spent ratepayer money that the Ontario Energy Board designated for specific capital upgrades. And the new Hydro One has promised to return any unspent funds to ratepayers, rather than keep the money for other projects that either weren’t approved or went over budget.
All told, Ontario taxpayers are getting nearly 15 years’ worth of future profits from Hydro One today — and eliminating the risk that those profits disappoint — while at the same time getting better customer service and benefiting from lower rates if the utility performs better than expected. Hydro One’s partial privatization has served Ontarians well.
Brady Yauch is the executive director and an economist at the Consumer Policy Institute.