Ontario government makes accounting decision on non-utility electricity generator contracts

Archived Release

Ontario government makes accounting decision on non-utility electricity generator contracts

Ministry of Finance

$3.9 billion liability to be eliminated over time TORONTO, March 18 - After careful review of the impacts of significant reforms in the electricity sector, the government has made a final decision regarding its treatment of the liability for certain long-term power purchase agreements. The government has determined that the most cautious and prudent accounting decision is to eliminate the $3.9 billion liability over time, instead of recording the gain in 2004-05, Finance Minister Greg Sorbara said today. The Auditor General agrees with this proposed accounting treatment. "We have consistently published our fiscal projections in a straightforward and transparent manner, demonstrating 2004-05 deficit projections at $2.2 billion with the $3.9 billion one-time revenue gain and $6.0 billion without," Sorbara said. "Having assessed the impact of the now- implemented electricity regulations and legislation, we have determined that the liability should be eliminated over a longer period of time." Since the 2004 Budget, new decisions have been made with respect to Ontario's energy policy because of changing economic circumstances. These decisions: - Better reflect the true cost of electricity while protecting Ontario's medium and large businesses with rates that are stable and competitive. - Allow OPG to better service its debt while earning a rate of return that balances the needs of consumers and ensures a fair return for taxpayers. Third Quarter projections at December 31, 2004, showed a deficit of $6 billion, without the one-time accounting gain. In subsequent years there will be a modest non-cash impact on revenues and this will be reflected within updated projections in the 2005-06 Budget. The Ministry of Finance estimates that the bulk of the liability will be eliminated over 12 years as existing electricity contracts expire. "This is an accounting decision. It has nothing to do with the cash resources of the province and does not reduce substantial spending pressures in key areas - particularly in the areas of health care, post-secondary education and infrastructure," Sorbara said. Backgrounder ------------------------------------------------------------------------- Power purchase agreements In the late 1980s and early 1990s, the former Ontario Hydro entered into approximately 90 power purchase agreements with non-utility generators (NUGs) located in Ontario. Non-utility generators are electricity generation facilities not owned by a public utility. A typical power purchase agreement was for 20 years, however one out of four agreements had terms of 25 to 50 years with the last expiring in 2048. These contracts account for approximately 1,700 megawatts or six per cent of generating capacity in Ontario. With the restructuring of the old Ontario Hydro on April 1, 1999, the Ontario Electricity Financial Corporation (OEFC) became the legal continuation of the old Ontario Hydro. Since the market opened on May 1, 2002, the cost of purchasing power under these contracts to the OEFC was higher than the market price at which it was able to resell the electricity. For example, in 2003-04, the OEFC paid $289 million more to purchase power under these contracts than it was able to recover from the sale of this power in the market. In 2004, the average price that OEFC paid for power produced under the power purchase agreements was approximately 8.0 cents per kilowatt hour, well above the regulated price of 4.3 cents per kilowatt hour. Production from the NUGs varies from year to year and within the year. The future expected costs over time to OEFC of having to purchase electricity at higher than projected future market prices was reflected as a liability of $4.3 billion on OEFC's opening financial statements in 1999. Under the electricity-sector reforms introduced by the government in 2004, restructured costs of electricity were to be passed on to the consumer over the life of the contracts. The projected impact of these reforms on the fiscal plan was that sufficient revenues would be received from the electricity sector to pay for the interest on the Province's investment in Ontario Power Generation (OPG) and Hydro One (two other successor companies from the former Ontario Hydro) and to ensure that the debt and other liabilities of the old Ontario Hydro were serviced and retired by the electricity consumer, not the taxpayer. One of the fiscal impacts of these reforms was to be a one-time revenue gain of $3.9 billion in the year the proposed legislation was implemented, via the elimination of the Province's and OEFC's liability for the above-market portion for the approximately 90 existing power purchase agreements. The 2004-05 Ontario Budget therefore included a one-time revenue gain of $3.9 billion related to the projected elimination of the liability for non- utility generator power purchase agreements. The Government's fiscal projections have been clear and transparent in several Ministry of Finance documents. The potential impact on the projected 2004-05 deficit of the $3.9 billion one-time revenue gain was consistently demonstrated. In both graphic and written forms, the 2004-05 deficit was projected at $2.2 billion with the gain, and $6.0 billion without the gain. These documents include: 2004 Budget Papers, page 10: "In 2004-05, the deficit target of $2.2 billion includes a one-time revenue gain of $3.9 billion related to the projected elimination of the liability for power purchase agreements with non- utility generators, if the proposed new electricity market structure is passed by the Legislature and in place." 2004 Budget Papers, page 31 (Fiscal Implications of Electricity Sector Reform): "Consumers would be responsible for paying the full cost of existing and any new contracts for generation. This would eliminate the Province's and OEFC's liability for the above-market portion for about 90 existing power purchase agreements. The fiscal impact would be a one-time revenue gain of $3.9 billion in the year the proposed legislation is implemented." 2004 Fall Economic Statement, page 45: "The deficit target of $2.2 billion includes a one-time revenue gain of $3.9 billion related to the projected elimination of the above-market liability for power purchase agreements with non-utility generators, if the proposed new legislation is passed, and the electricity market structure is in place in this fiscal year." 2004 3rd Quarter Ontario Finances: "The deficit outlook of $2.2 billion includes a one-time revenue gain of $3.9 billion related to the projected elimination of the above-market liability for power purchase agreements with non-utility generators, based on a reformed electricity market structure being in place this fiscal year, and sufficient and appropriate evidence that the liability has been eliminated... The outlook for 2004-05, excluding this one- time gain, is a deficit of $6.0 billion (including a reserve of $1.0 billion)." Government Energy Policy In June 2004, the government introduced legislation to implement its vision for reforming the electricity sector and put in place a new market structure. This reorganization included: - the creation of an Ontario Power Authority, responsible for ensuring long-term supply adequacy in Ontario and encouraging conservation and renewable energy - the implementation of a new pricing system combining a fully regulated and competitive electricity sector, with different electricity generators receiving prices set through a variety of mechanisms. Since the 2004 Budget, new decisions have been made with respect to Ontario's energy policy because of changing economic circumstances. These decisions: - better reflect the true cost of electricity while protecting Ontario's medium and large businesses with rates that are stable and competitive - allow OPG to better service its debt while earning a rate of return that balances the needs of consumers and ensures a fair return for taxpayers. Having assessed the impact of the recently-implemented electricity regulations and legislation, the government has determined that the $3.9- billion liability should be eliminated over a longer period of time. Disponible en fran├žais For more information visit www.gov.on.ca/finFor further information: Diane Flanagan, Minister's Office, (416) 212-0634; Manuel Alas-Sevillano, Ministry of Finance, (416) 212-2155