This week the CEO of the Ontario Finance Authority Gadi Mayman told MPPs of the select committee on financial transparency that the former Wynne government stipulated that the hydro rate reduction be financed in such a way that it would not register on the public deficit, even though the government was advised it would cost hydro ratepayers upwards of an additional $4 billion in interest payments down the road.
“We were proposing the [Ontario Electricity Financial Corporation] provide the financing, the government provide the financing, because the government can borrow at lower costs than the trust could…” said Gadi. “So even though it was cheaper, the government ultimately decided … to go forward with the structure that then became the Fair Hydro Plan.”
Gadi was involved in giving financial advice when the government began brainstorming ways to reduce skyrocketing hydro rates, and had his first meeting with the government at the beginning of 2017 at Wynne’s cabinet secretary’s boardroom with the three deputies involved, Energy, Finance, and Treasury Board. Premier Wynne’s business adviser Ed Clark was also at that meeting.
“Mr. Clark’s view as I recall from that meeting was that any structure that we were trying to do in this way was going to be too complicated and would be treated with mistrust from the public, so I think he was prescient on that,” said Mayman at the committee meeting on Tuesday. “But what we understood at that meeting, and what we found out later, and what was repeated to us on a regular basis later through fiscal prep and other meetings was that the premier’s office had a different view on that.”
Gadi told the committee he also had “some discomfort” with the government’s plan.
The final decision, in spite of advisers advising other cheaper alternatives, was a complicated financing structure which involved Ontario Power Generation borrowing billions through Goldman Sachs, RBC and CIBC.
“The banks, the dealers that were going to be selling this debt — so Goldman Sachs, RBC and CIBC — wanted to have as secure a guarantee as they possibly could. They wanted it legislated, they wanted a full guarantee that no matter what happened the province was going to pay. So we at the OFA objected quite strenuously to this because the concept was there was going to be no risk transfer to the bond holders, there was going to be no risk transfer to the dealers representing the bond holders, that all the risk was going to fall back on the province but the the benefits would be with the bond holders. So for that reason it was determined that the legislation would not talk about the guarantee, that the guarantee would be a negotiated one. And so we spent many, many hours working on that.”
“I think we were successful in limiting that guarantee to basically two possible issues. One was that a future government, because this program was to be in place for 30 years which would be seven elections, that if a future government were to unwind this that the province would step in and ensure that the bond holders receive their interest payments and principal payments. Or the second one was if a court, and I would assume this would have worked its way all the way up to the supreme court, had determined this law was …. not constitutional.”
Another debt financing arrangement the Liberal government was looking into was the OEFC borrowing the billions needed and then lending it out to the OPG. But ultimately it was decided this arrangement wouldn’t pass accounting standards of the OPG being classified as an independent entity of the government.
The global adjustment financing chosen by the Wynne government involved using an accounting practice — rate-regulated accounting — not yet used by a Canadian government, which Auditor General Bonnie Lysyk strongly objected to because she said it violates government accounting practices.
Premier Doug Ford and Finance Minister Vic Fedeli have since described the Fair Hydro Plan as a cover-up.
The Ford government is unwinding the plan, opting to service the debt for the hydro rate reduction from the government at a lower interest rate. But the Fair Hydro trust will still remain in place.
“All other things being equal, yes, there will be savings because we’re doing the borrowing now and we’re doing it at the province’s cost,” says Gadi.
“The bond dealers and investors through them did pretty well out of this,” said Gadi. “As it turned out, with hindsight, it’s easy. What they’ve got now effectively is provincial debt at an interest rate that’s higher than if they had just gone out and bought Ontario bonds.”
“The goal [of this committee] is to see if we can actually prevent a decision like this from happening again because the so-called Fair Hydro Plan was, I think, pretty unfair to the citizens of this province given the debt that’s going to be accrued and the fact the province borrowed the money and it cost $4 billion extra than it should have,” said Waterloo NDP MPP Catherine Fife.
Some Stark Numbers
At the committee meeting Gadi also gave a bleak forecast of Ontario’s fiscal health.
“The net debt-to-GDP ratio is currently forecast at 40.5 per cent for 2018-19, slightly below the committees estimate of 40.8 per cent. Interest on debt is forecast to be $12.5 billion in 2018-19 or almost $900 for every Ontarian this fiscal year. Servicing this debt is Ontario’s fourth largest line item after health care, education, and social services.
“Ontario’s net debt is projected to be $347 billion in 2018-19, having more than doubled in the last ten years, from a $170 billion when we entered the financial crisis and global recession in 2008 and 2009.”