Who Owns the Power: Governance Issues for Electricity Distribution Utilities

Katelyn Margerm

“To own or not to own?” The question was the topic of conversation at last week’s conference on the governance of municipally-owned electricity distribution utilities hosted by the Council for Clean and Reliable Electricity in Markham.

The question was timely, as days earlier Toronto mayoral hopeful Karen Stintz revealed her pitch to sell or lease 10% of Canada’s largest municipal electric distribution utility, Toronto Hydro, and devote the proceeds to transit expansion. Stintz’s proposition sparked a controversial debate in a city full of divided perspectives on the importance of public ownership of utilities and municipal services.

Toronto is not alone in this debate. Whether to merge or sell municipally-owned utilities is an issue that local governments across Ontario are increasingly facing. The province-wide push toward sector consolidation has left utilities dancing around like university students at a local bar, propositioning each other to merge their ‘assets,’ with some pairing up and others holding out for better prospects.

Utility amalgamation was initially floated by the Province back in 2012, with the Ontario Distribution Sector Review Panel recommending consolidation of Ontario’s nearly 80 licensed electricity distributers into 8 to 12 regional distributors that are large enough to deliver improved efficiency and enhanced customer focus.

However, this initiative lost steam as the Province neglected to legislate amalgamation, or eliminate the tax penalty that discourages private ownership of hydro utilities. Some speculate that the delay has been out of fear of upsetting smaller municipalities and that the Province is instead indirectly accomplishing its goal by using the provincially-owned Hydro One to buy up the smaller utilities, like Norfolk Hydro.

Political Interference vs. Utility Performance

Within this context, conference participants set about identifying principles of good governance that can help utilities operate most effectively in their unusual circumstances. While most Ontario utilities are publicly owned, they are also required to be incorporated as share ownership companies under the Ontario Business Corporations Act. Unlike fully private firms, who are principally responsible for maximizing returns to their shareholders, municipally-owned utilities are also accountable to residents, who are represented by municipal elected officials who sit on utility boards.

According to Guy Holburn, Director of the Ivey Energy Policy and Management Centre at the University of Western Ontario, the presence of municipal politicians on utility boards and the resulting tension between business and public interests tends to impair utility performance. At the conference, Holburn presented a case study of EPCOR, Edmonton’s municipally-owned electricity and water utility, which experienced 187% growth in revenue and 98% dividend growth in the last 20 years, as well as returning seven times greater revenue per year to municipal coffers as a percentage of total revenues than Ontario utilities.

So what is the difference between EPCOR and the average, underperforming Ontario utility? According to Holburn, a lack of market discipline among political board members and the distraction of short-term political interventions (such as political board members wanting unsightly hydro infrastructure kept out of their wards) tend to drag down efficiency and raise hydro rates for our utility customers.

EPCOR’s independent, business-oriented board and corporate governance structures insulate the board and management against short-term political intervention, while remaining municipally owned.

Escape from Purgatory

While the EPCOR case study offered a promising solution for effective utility governance for some conference attendees, others argued that municipalities shouldn’t be in the utility business at all. Following the conference, Robert Warren, one of the Province’s top energy lawyers, said,“I don’t think municipal ownership works as a general proposition.” He later elaborated: “My skepticism about whether municipalities should own utilities is based on my view that, in most cases, municipalities cannot resist the temptation to interfere, for local political reasons, in the operations of utilities.”

Warren’s comments echoed a discussion raised earlier at the conference regarding the history of municipal ownership of hydro utility in Ontario. As he noted, “The reason municipalities own these corporations is that [former Ontario Premier Mike Harris] said we are going to download costs and in compensation we will give you a cash cow, which will generate a return for you each year.” Harris’ idea was that by requiring all municipally-owned hydro utilities to be incorporated under the Ontario Business Corporations Act, they would run more efficiently and create greater revenues for their municipal shareholders to cover the cost of operating downloaded provincial services including child care, transit, housing, and public health.

Unfortunately, things did not quite work out as planned. Municipalities remain strapped for cash with limited tools for raising revenue in Ontario, and municipally-owned and politically-governed utilities are under-performing compared to their potential.

Politics vs. Business

Oakville  Mayor Rob Burton, the lone municipal official represented on the conference’s three panels, was quick to express his concern over the conference’s developing narrative saying he found the positioning of politics against business as creating a “false dichotomy.”

Burton presented his experience working with the Oakville Hydro board, on which both he and the Oakville’s City Manager sit. According to the Burton, Oakville Hydro achieves comparable stats, contributing 5.5 to 6% to the City of Oakville’s revenue as compared to the 7% EPCOR contributes to the City of Edmonton. He attributed the utility’s success to the board’s “policy governance” approach, which involves setting clear objectives and then providing the utility’s management team the space to implement them.

According to Warren, however, there is no magic formula that distinguishes utilities that are able to function as effective businesses while maintaining municipal governance from those who experience political meddling on a daily basis. “Some, like Oakville and the PowerStream group, have the right governance principles and structures in place,” Warren said. “Others do not.” The conditions that allow the successful implementation of these principles can be difficult to pin point and replicate.

To communicate the importance of measuring utility performance against a set of established metrics, Mayor Burton offered up as inspirational fodder a quote from Thomas Jefferson: “Eternal vigilance is the price of liberty.” However, due to the absence of strong leaders trained in business management within municipal government, champions for municipal ownership of hydro utilities may find themselves on the losing end of this battle for independence.

Katelyn Margerm is a 2015 Master of Public Policy Candidate at the University of Toronto. She holds a BSc in Civil Engineering and has worked for the last six years in the private and non-profit sectors promoting green building design, conservation, distributed energy generation, and community energy planning and mapping.

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