April 2, 1998
Executive Director, Energy Probe Senior Consultant, Borealis Energy Research Association For the Canadian Urban Institute Conference “Restructuring Ontario’s Electricity Industry: What Muncipal Decision Makes Need to Know”
April 2, 1998
Instead of planning cutbacks and struggling to avoid tax increases, municipalities could be planning to use the funds from a perpetual, income generating endowment and preparing to issue a special dividend payment to taxpayers. This happy reversal of fortune can be realized by converting an asset that today generates no revenue for its municipal owners-its electric distribution utility-into the social services and other goods that only governments can provide.
There are probably very few municipalities in Ontario whose electric utility is not their single-biggest asset. Responsible management of the public’s assets should include a running assessment of the choice of selling versus holding. Prevailing low interest rates, ongoing changes in the energy industry, and current market valuations in Canada and abroad, to say nothing of the new pressures on municipalities due to provincial downloading, all suggest that now is a good time to sell.
The new Toronto Hydro is likely to attract the strongest interest from the market as a privatization prospect due to its large size and the unique market it serves. What might the new Toronto Hydro be worth? Cornwall Electric was sold at a price to earnings multiple of approximately 27 times. By this measure, the new Toronto Hydro might be worth $1.9 billion. Making a similar valuation comparison between Cornwall Electric and Toronto Hydro based on power delivered puts the value of Toronto Hydro at about $1.4 billion. The five distribution utilities in the State of Victoria, Australia were sold in the latter half of 1995 for $8.3 billion Australian or $8.8 billion Canadian at the current relative currency value. Valued on the basis of Victoria’s revealed valuation per person served, the new Toronto Hydro might be worth as much as $4.4 billion. The new Toronto Hydro’s book equity is $1.5 billion.
Distribution utility privatization can be conducted in a manner that guarantees a good deal for electricity rate payers and responsible treatment of workers. The privatization of Cornwall Electric resulted in long term guarantees that rates will be lower than those of comparable utilities and employment guarantees for incumbent workers.
The Ontario government’s White Paper clearly indicates that all utilities in the future, whether public or private, will be on the same footing with regard to taxation and access to the other special favours historically associated with public ownership. The new energy policy environment that the White Paper sketches out is likely to be fraught with significant commercial risks for distribution utilities and rapid changes in both technology and markets. Old style municipally-owned utilities, accustomed an environment with slow rates of change, limited scope for decision making, and lack of commercial risk, are likely to be tested mightily in the new world. A key milestone in Ontario’s electricity industry reform will be bringing municipal utilities under the Ontario Business Corporations Act.
If a privatization course is charted by municipal leaders, an important decision is likely to be how to deal with the proceeds. In Cornwall, Sixty percent of the proceeds of the sale were used to eliminate the municipal debt, an action that will benefit the community at for many years into the future. A portion of the funds could also be reserved for an instrument like the Toronto Atmospheric Fund, dedicated to doing good works for the environment in perpetuity. Since municipal utilities were created to serve their customers, citizens have strong claim to at least a portion of the proceeds. A special dividend could be declared for each household. Toronto Hydro is likely to be worth at least $2 billion and if we assume half that split evenly among customers, each cheque would be made out for over $1,500. When was the last time municipal leaders had such good news for their constituents?