XYLENE POWER LTD.

STRANDED ELECTRICITY DEBT RETIREMENT

By C. Rhodes

INTRODUCTION:
This web page addresses stranded electricity debt retirement costs that must be re-apportioned to effectively implement private sector distributed electricity generation within the Province of Ontario.

STRANDED ELECTRICITY DEBT RETIREMENT:
In 1992 and successive years the Ontario Energy Board (OEB) failed to insist to the government of Ontario that the electricity rate be increased sufficiently to repay the debt principal within the operating life of the fixed assets. In 1992 this author, then representing the Urban Development Institute, pointed out to the OEB that Ontario Hydro needed a revenue of about $.10 / kWh to meet its on-going expenses and debt obligations. Unfortunately, at that time the OEB did not heed this author's advice. The OEB recommended only a modest rate increase. Then for five subsequent years the Ontario Hydro rate was held constant by the government of Ontario. During this period Ontario Hydro's expenses greatly exceeded its income. The extent of its ongoing financial losses were concealed by use of various accounting devices not in accordance with generally accepted accounting principles.

According to the 2007 report of the Ontario Electricity Financial Corporation, effective April 1, 1999 it absorbed $30.5 billion in stranded electricity debt. This was debt that Ontario Hydro could not reasonably meet from its government approved electricity rates. As of March 31, 2007 this debt had diminished to $27.9 billion. The stranded electricity debt principal reduction during the period April 1, 2006 to March 31, 2007 was only $0.1 billion. The outstanding stranded electricity debt principal of $27.9 billion is over $2000 per person for every man, woman and child in Ontario. The moral crime here is that this debt is being passed to our children with no corresponding asset value.

The existence of this $27.9 billion in stranded electricity debt, that is not supported by real physical assets, effectively prevents the Province of Ontario acting as guarantor for further major electricity projects. Major non-fossil fuel electricity projects, be they hydro-electric dams, transmission lines or nuclear power plants, require government guarantees to minimize their cost of fixed asset financing. Hence it is crucial that the stranded electricity debt principal be reduced as rapidly as possible in order to enable the government of Ontario to provide debt guarantees for financing future major electricity projects.

For six years (2001 to 2007) the people of Ontario have paid a "stranded debt retirement charge" of $.007 per kWh on every electricity kWh consumed in the province. The blunt reality is that this assessment of $.007 / kWh has paid only interest on the stranded electricity debt. This payment of $.007 / kWh has not significantly reduced the stranded electricity debt principal. In order to reasonably discharge the stranded electricity debt from a surcharge on kWh consumed it is necessary to triple the debt retirement charge from $.007 per kWh to $.021 per kWh. From a practical finance point of view it is essential to quickly reduce this stranded electricity debt principal in order to allow new debt related to new nuclear generation and new transmission to be booked by the Province of Ontario without further diminishing the province's credit rating and thus increasing borrowing costs.

However, a surcharge on all electricity consumed amounts to a subsidy for nuclear generation at the expense of other non-fossil fuel generation. Since nuclear generation accounts for about half of the electricity generated in Ontario, a much better accounting treatment is to charge the entire stranded electricity debt retirement amount to existing nuclear generation. Thus the nuclear generation component of the Hourly Ontario Electricity Price (HOEP) would increase by:
2 X $.021 / kWh = $.042 / kWh
and the average HOEP would increase by about $.021 / kWh just due to proper accounting for the nuclear debt. The existing debt reduction charge of $.007 / kWh on all electricity consumed would be cancelled.

From the point of view of the load customer the net increase in electricity costs related to stranded electricity debt retirement would be:
$.021 / kWh - $.007 / kWh = $.014 / kWh

From the point of view of the distributed non-fossil fuel generator the increase in revenue related to proper allocation of the stranded electricity debt retirement costs would be:
$.021 / kWh

This author proposes that the stranded electricity debt principal be repaid within about a five year period, in order to allow new transmission and nuclear projects to proceed. The repayment mechanism would be an increase in the Hourly Ontario Electricity Price (HOEP) due to debt repayment by existing nuclear generators at $.042 / kWh and a fossil carbon emissions tax of $200 / emitted CO2 tonne on all fossil fuel generators. Note that the fossil carbon emissions tax revenue will rapidly decline as fossil fuels are taken out of service. In the first year the increase in the electricity revenue that should be available for stranded debt principal reduction would be about:
$.054 / kWh (fossil carbon tax) + $.021 / kWh (stranded debt service) - $.007 / kWh (stranded debt interest) - $.007 / kWh (cancellation of existing debt reduction charge)
= $.061 / kWh

Data from the Ontario Electricity Financial Corporation indicates that each increment of $.007 / kWh recovers rate revenue of about $1.0 billion per annum. Hence initially the debt principal reduction would be about:
(.061 / .007) X $1 billion / year = $8.7 billion / year.
In the final year there would be almost no fossil carbon emissions tax revenue and little stranded debt interest so about:
((.021 - .007) / .007) X $1 billion = $2 billion
of debt principal would be repaid.

The net electricity price increase to the end user would be:
$.054 / kWh (fossil carbon tax) + $.021 / kWh (debt repayment) - $.007 / kWh (existing debt reduction charge)
= $.068 / kWe-h
This electricity price increase would provide a major incentive for construction of distributed non-fossil fuel electricity generation.

As the revenue from fossil carbon emissions tax decreases due to phase out of fossil fuelled electricity generation the Hourly Ontario Electricity Price (HOEP) will increase due to HOEP containing a larger fraction of new and more expensive non-fossil fuel electricity generation. In terms of replacing existing coal fuelled generation these two effects will cancel each other out, so that the end user electricity rate will remain relatively stable, while still providing about:
(.021 / .007) X $1 billion / year = $3 billion / year
to fund the existing OPA IPSP after the stranded debt is discharged. However, funding the additional electricity generation that is required to reduce CO2 emissions in the transportation and heating sectors, but which is not presently contemplated in the OPA IPSP, will require a further substantial end user electricity rate increase. This author reasonably contemplates that the end user electricity rate in Ontario will have to approximately double in the near term in order for Ontario to meet its fair share of CO2 emission reductions.

This web page last updated July 6, 2009.