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Ontario Hydro has adopted a "1995 transfer pricing scheme" to continue the massive internal subsidies for its nuclear power. The public utility will pay the huge depreciation and interest charges of its nuclear business, Ontario Hydro Nuclear (OHN), from revenues earned by its hydroelectric and fossil units. A novel feature of the new scheme is to make "allocations" of OHN's long term debt (about $12.5 billion) to these units; hydroelectric is being allocated $10 billion and the fossil unit $700 million. These units must now pay off the debt, originally incurred to build OHN's nuclear stations. Unlike the debt burdened nuclear stations, the hydroelectric stations are fully depreciated and profitable.

OHN was projected to have a net income loss of about $1 billion in 1995, rising to $2 billion in 2005, without a continuation of the internal revenue transfers which have historically kept OHN afloat. It "would not be a viable business" otherwise, indicated a November 1994 utility report.

The 1995 transfer pricing scheme (TP 95) also revalues the assets of Hydro's nuclear, hydroelectric, and coal generating business units after they were separated in Hydro's 1993 corporate restructuring. The individual balance sheets reveal just how uneconomic nuclear is. Concurrent with the debt allocation, the asset values at OHN were cut to $15.3 billion, from $26.1 billion; cumulative discounted cash flow earnings expected over the remaining nuclear plant life were found to be only $15.7 billion. This sum could not pay the debt charges. In sharp contrast, the hydroelectric business unit, with a discounted cash flow forecast of $12.4 billion, sees its asset value rise from $1.9 billion to $12 billion, while the fossil unit, with a discounted cash flow of $4.6 billion, sees its assets rise to $4.5 billion from $3.8 billion.

TP 95 also pegs prices for energy and capacity to the costs of competitive, new market entry generators: combustion turbine units and combined cycle plants, which could be built by non utility generators. In addition, TP 95 includes long term capacity and energy contracts for baseload and dispatchable electricity supply, options contracts and a new internal competitive, day-ahead spot market.

The new system effectively levels the playing field for Hydro's generating business units, "emulates a free market and prepares them ultimately for open market competition," says Dave Goulding of Hydro.

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