Government broke rules on purpose

Ontario's Auditor General issued a damning report on the government's Fair Hydro Plan Tuesday.

On Tuesday, Ontario's Auditor General issued a damning indictment of the government's Fair Hydro Plan. You can read the entire document here. Or, you can read some key passages in the original wording extracted below.

It’s not about the policy… it’s about hiding the impact of the policy

“Our Office does not question the government’s Policy Decision to reduce Ontarians’ electricity bills, as such policy decisions are a government’s prerogative. Our concerns are that the planned accounting for the government’s budgets and consolidated financial statements is incorrect, and that it was known that the planned financing structure could result in significant unnecessary costs for Ontarians.”

What the policy does

“The 25% reduction in ratepayers’ electricity bills has three parts:

  • an HST rebate, effective January 1, 2017;
  • a transfer of certain electricity relief programs (the Ontario Electricity Support Program and the Rural or Remote Rate Protection program) from electricity ratepayers to taxpayers, effective July 1, 2017; and
  • a further 16% reduction for a period of four years, effective July 1, 2017, for which the government plans to borrow cash to pay electricity generators.”

“The substance of the issue is straightforward. Ratepayers’ hydro bills will be lower than the cost of the electricity used as a result of the electricity rate reduction. However, power generators will still be owed the full cost of the electricity they supply, so the government needs to borrow cash to cover the shortfall to pay them.”

How much it will cost

“The 16% reduction is estimated to cost an average of $2.5 billion per year over 10.5 years through to 2027. The government indicated it will likely have to borrow this money each year.”

“As of 2028, ratepayers’ electricity bills are expected to have risen back up (with the exception of the 9% reduction from the HST rebate and other programs) and then increase even further to pay back all the borrowings.”

The problem

“The effects of the additional debt required to fund the generators need to be accounted for as part of the annual deficit and net debt of the Province. However, the government did not properly account for this debt impact from the electricity rate reduction in its 2017/18 budget and is not planning to account for it properly in its future consolidated financial statements. In essence, the government is making up its own accounting rules.”

Trying to hide the impact is costly  

“This Special Report highlights the following key concerns:

  • Through the Fair Hydro Act, the government created a needlessly complex accounting/financing structure for the electricity rate reduction in order to avoid showing a deficit or an increase in net debt in its budgets and in the Province’s consolidated financial statements.
  • According to the government’s current plan, the only electricity rate reduction lasting beyond 2027 will be a 9% reduction mainly from the HST rebate and other taxpayer-funded programs. From 2028 on, ratepayers will be charged more than the actual cost of the electricity being produced in order to pay back the borrowings. The total borrowings to be repaid will be an estimated $39.4 billion, made up of $18.4 billion borrowed to cover the current rate reduction shortfall and $21 billion in accumulated interested over the term of the borrowings.
  • Applying the government’s complex accounting/financing structure could result in Ontarians incurring extra interest costs over 30 years that could total up to $4 billion more than necessary.”

They broke the rules

“This is particularly concerning when a government states that it follows Canadian Public Sector Accounting Standards (PSAS) when in fact, the accounting rules being applied are not in accordance with Canadian PSAS.”

“The IESO is the only ‘other government organization’ or ‘non-government business enterprise’ in Canada that applies Canadian PSAS to have a regulatory asset on its financial statements.”

“The ‘asset’ being legislated into existence does not meet the accounting requirements for an asset on the Province’s consolidated financial statements, which are prepared following Canadian PSAS.”

The intended to hide the impact of what they were doing

“The government made a critical decision early in the process of setting out the details of the Fair Hydro Plan: the accounting treatment for the 16% rate reduction should not ‘affect the fiscal plan’ – that is, it should not show any deficit incurred from this required borrowing, nor should it add to the amount the government would report as Ontario’s net debt. The government set this as the mandate to the senior officials and private-sector external advisors designing the accounting and financing for the rate reduction.”

“Senior officials and staff from several departments and agencies, led by the Ministry of Energy, came together to plan an accounting/financing structure, identify risks, make decisions and take other actions to meet the mandate.”

“The government decided on a very complex form, where the transactions are driven by the mandate to avoid recording an annual deficit and an annual increase in net debt from borrowings.”

“Working through and around the recognized risks to achieve the desired accounting results took considerable time and effort.”

“Senior officials and their advisors working on the Fair Hydro Plan decided that the IESO’s December 31, 2016 financial statements needed to show a regulatory asset and to include the IESO’s market accounts as assets/liabilities. Changing the IESO’s statements to show this would signal the IESO’s adoption of rate-regulated accounting in 2016. Neither of these changes had been made when the financial statements were initially submitted to the IESO’s Board for approval in February 2017… Approval of these financial statements was deferred so that they could be changed. The prior five years of financial results on the IESO’s December 31, 2016 financial statements were restated to include regulatory assets and market accounts.”

You will pay more because they broke the rules

“Because the Province does not borrow all funds directly, Ontarians may pay up to $4 billion more in interest expense. This cost stems from the fact that OPG/OPG Trust must pay a higher interest rate on borrowings than the Province would if it were to borrow in the normal manner.”

“One senior official commented in an email: ‘Hopefully they’ll come to the conclusion that it can be financed by the province… rather than externally, as that would be a lot simpler and cheaper.’ But the much more complicated and costly route was chosen in order to keep deficits and an increase in net debt from showing up on the Province’s books.”

They knew it was wrong

“Senior officials and government recognized in their written material that the Office of the Auditor General ‘could qualify Ontario’s books or issue an adverse opinion.’ The significance of intentionally accepting a potential qualified or adverse audit opinion should not be downplayed. This would be unacceptable in the private sector, and we maintain that this is also unacceptable in the public sector. If the consolidated financial statements are so unreliable that an adverse opinion is warranted, terms like ‘balanced budget,’ ‘deficit,’ ‘asset’ and ‘net debt’ will be meaningless.”

“It is concerning that the government entertained the risk of a qualified audit opinion, and in doing so demonstrated a lack of commitment to transparent, fair and accurate reporting of the Province’s financial performance and health to the taxpayers of Ontario.”

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