TORONTO -- Taxpayers would have saved $1.8 billion if the Ontario government had taken on traditional debt to fund infrastructure projects instead of partially privatizing Hydro One to pay for the work, the province's fiscal watchdog said Monday.

In a report that examined the Liberal government's sale of shares in the utility, the Financial Accountability Office examined both scenarios and found the cost implications were clear.

"Over the long term, the FAO estimates that the province's net debt will be higher as a result of the partial sale of Hydro One when compared to an alternative of borrowing to finance an equivalent amount of infrastructure investment," said Jeffrey Novak, chief financial analyst for the FAO.

Hydro One went public in November 2015, with the province saying it planned to use the sale of shares to fund transit and infrastructure projects. By December 2017, the province had sold off 53 per cent of its stake in the company.

The FAO analysis said that in the first three years after the partial privatization, the province saw a total profit of $3.8 billion on the deal.

But by 2018-2019, the FAO forecasts a loss of $1.1 billion because of one-time charges and fewer dividends as a result of the province's smaller stake in the company.

The FAO report also warns that Hydro One's $4.4 billion deal to buy U.S. energy firm Avista will "dilute" Ontario's shares of Hydro One ownership from 47 per cent to 42 per cent.

"To purchase Avista Hydro One is issuing convertible debt to the folks who own Avista," Novak said. "When the purchase is completed that convertible debt will be transformed into shares of Hydro One. The province will just have less of a percentage of overall shares outstanding in the company."

The Electricity Act, which regulated the sale of Hydro One shares, requires the province to take steps to ensure that its ownership stake remain no lower than 40 per cent. That means if further purchases shrink Ontario's ownership of the company it will have to buy back shares.

Energy Minister Glenn Thibeault said the government remains the largest single Hydro One shareholder and the company continues to be subject to provincial oversight.

"Hydro One's rates will continue to be regulated by the Ontario Energy Board -- the province's independent energy sector regulator," he said. "In fact, our government passed legislation that has further strengthened the board's oversight.

As of December 2017, the province had raised an estimated $9.2 billion by selling Hydro One shares, the FAO said. The Liberal government has said they plan to use $5 billion to pay down leftover debt, while the remaining $4 billion would fund transit and infrastructure projects.

NDP energy critic Peter Tabuns said the FAO's analysis backs up his party's argument that the utility's partial privatization is bad for Ontarians. The NDP have promised to buy back shares of Hydro One and return it to public ownership if elected in the spring election.

"We're going to have less revenue in the future (from Hydro One)," he said. "That means less money for schools and hospitals. We're going to have higher debt charges than we would have had if we'd simply borrowed the money ... In every aspect, this has been a bad deal for Ontarians."

PC finance critic Lisa MacLeod said the Hydro One share selloff has helped the government balance its budget before the election but will have consequences down the road.

"This was short-term gain for very long-term pain," she said. "This is not a good deal for Ontarians."