Cash-strapped Ontario will be in even “worse” financial shape after the controversial sale of Hydro One, warns the province’s new budget watchdog in an explosive report obtained by the Star.

Hitting the Liberal government with the strongest argument yet against the sell-off of the Crown agency, Stephen LeClair, the recently appointed financial accountability officer, said it would hike the already massive provincial debt by slashing revenue.

“In the years following the sale of 60 per cent of Hydro One, the province’s budget balance would be worse than it would have been without the sale,” LeClair writes in his first-ever report to the legislature.

“The province’s net debt would initially be reduced, but will eventually be higher than it would have been without the sale,” he continues in his searing 41-page review dryly entitled, “An Assessment of the Financial Impact of the Partial Sale of Hydro One.”

“Assuming the province sells 15 per cent of Hydro One in 2015-16, Ontario’s net debt would initially be reduced by $2.4 billion to $3.9 billion. However, net debt would eventually increase as a result of the partial sale as the costs of forgone revenues from Hydro One begin to exceed the initial fiscal benefits.”

That’s in part because Hydro One is a cash cow that brings in around $750 million to the treasury annually.

The damning report, which will be formally tabled in the house on Thursday, said the “uncertainty” means Liberals might be wiser to retain the distribution and transmission company that runs 97 per cent of the electricity grid.

But Premier Kathleen Wynne maintains the sale is essential to provide $4 billion for her 10-year $30.5 billion push to build transit, roads, and bridges.

LeClair agrees with her that Hydro One is worth between $11 billion and $14.3 billion and that the net proceeds to fund infrastructure would be between $3.3 billion and $5.8 billion after the transmitter’s debt is repaid.

That’s the only good news for Wynne in a report he insists “does not seek to assess the merits of the decision to sell Hydro One” or “assess the financial impact of any government spending financed by the sale.”

Still, LeClair predicts “the partial sale of Hydro One could have important direct implications” for ratepayers.

“They pay a debt retirement charge (DRC), which is levied on electricity consumption to help pay down the debt of the former Ontario Hydro, the predecessor to Hydro One,” he writes.

“The DRC is not only an additional charge for electricity consumers, but also a significant source of revenue for the province.”

Modelled after the Parliamentary Budget Office in Ottawa, the new Financial Accountability Office (FAO) was created in 2013 by Wynne’s then-minority Liberal government in order to gain NDP support to survive a confidence vote on that year’s spending plan.

But the appointment of LeClair — a career bureaucrat with experience in Ontario, the Yukon, and Alberta — was not made official until last February, well after her Grits won a majority in June 2014.

Last summer, he complained he was being stonewalled by the government in his pursuit of data.

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In his report, LeClair notes one document he sought was withheld from him because Wynne’s administration deemed it to be a “cabinet record and has chosen not to release it.”

New Democrat MPP Jagmeet Singh (Bramalea-Gore-Malton) chided Wynne because she “has failed to follow through on her promise of openness and transparency by refusing to provide all of the necessary documents requested by his office.”

“However, after months of hiding this wrongheaded sell-off from the public, the people of Ontario will finally get a glimpse into the impacts of this sell-off,” Singh said in the legislature Wednesday.

“If the FAO finds that this deal . . . will hurt families and business, will the premier do the right thing and stop the sell-off of Hydro One?

Wynne, whose government has an $8.5-billion deficit and a more than $290-billion debt, countered that she has “not seen the report.”

“I look forward to seeing . . . what his recommendations are,” the premier said, adding she was not going to back off on the sale.

“We must make investments in infrastructure and that people’s quality of life depends on our ability to make those investments that will allow them to move more freely, whether it’s in the GTHA (Greater Toronto and Hamilton Area) or whether it’s in smaller and more rural communities, so that in northwestern Ontario, bridges won’t have to be closed because they’re in disrepair,” she said.

“Will we continue to invest in infrastructure? Absolutely, we will.”

Like the New Democrats, the Progressive Conservatives oppose the sale of Hydro One, predicting it will mean higher rates for customers even though those will continue to be set and regulated by the Ontario Energy Board.

The Hydro One initial public offering — the largest in Canada this year — will begin within days with shares pegged to sell for between $19 and $21 each.

Wynne was advised to sell it by her privatization guru Ed Clark, the former TD Bank chair who is also the government’s architect of the expansion of beer sales in supermarkets.

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