The nasty effects of shaky markets are spreading. The latest victim: Ontario Power Generation.
In the third quarter of 2010, the Crown corporation posted a profit of $333-million. This year, it posted a loss of $96-million. Although revenue did decline and costs went up, the main culprit was volatile equity markets.
Much like life insurers, who must set aside money when markets underperform to ensure that future liabilities can be paid out, OPG has allocated money to be used for nuclear waste management liabilities and nuclear decommissioning. That money has been invested, and when markets drop like they did in the third quarter, OPG must record losses just like the insurers do.
That means that OPG's $96-million quarterly loss isn’t totally from cash operations. Mark-to-market market accounting rules simply force it to document a potential shortfall now.
The money set aside has been dubbed the Nuclear Funds, and these are designed to achieve a required rate of return over a long-term horizon. If markets take a long time to recover and OPG faces a temporary shortfall, the Ontario Nuclear Funds Agreement stipulates that the province must step in and backstop the funds. That would put taxpayers on the hook, and the accounting rules have been designed to show the probability of that happening.