Fred Vallance-Jones
The Hamilton Spectator
April 2, 2002

Hamilton electricity customers will pay what amounts to a hidden hydro tax for years to come to give city council $137 million to play with now. Councillors have been debating what to do with the “windfall” coming from municipally-owned Hamilton Hydro, and earlier this week came up with a plan to invest and spend.

It’s the culmination of a campaign promise by Mayor Bob Wade to create a community investment fund using Hydro cash. But what hasn’t been talked about much is where the money is really coming from.

In truth, this is no windfall.

Hydro will borrow the money to give to the city, and Hydro customers will pay the interest.

By next march, about $3.20 in every $100 in Hydro billings will go to cover the debt charges.

To understand why this is happening and why yet another surcharge is being added to hydro bills, one has to go back to the complicated financial arrangements put in place when the new Hamilton Hydro was created two years ago.

The Hamilton Transition Board was in the midst of establishing the new megacity, and one of its tasks was to combine the area hydro utilities into a new, profit-making company. A provincial law mandated the change.

The same law also allowed the utility to take on debt for the first time.

The new utility was born with $328 million in assets, built up over a hundred years by the old hydros. In what was effectively a paper transaction, $137 million of those assets were declared to be debt owed to the new city of Hamilton.

Under the arrangement, Hydro was to make payments on that debt, creating an annual revenue flow to the megacity of about $10 million.

Electricity customers were to cover the interest cost through higher hydro bills.

The arrangement attracted little attention at the time, but it was a sleight of hand way of giving the new city extra income without having to raise property taxes. In effect, it was a new tax on hydro customers.

What’s happening now is that the city and Hamilton Hydro have decided to change the arrangement.

In effect, the $137 million “debt” to the city will be paid off in a lump sum, and Hydro will in turn take on about the same amount of real debt in the private capital markets.

The city will lose it’s annual $10 million payments, but will gain a pot of money to use as it pleases.

Hydro customers will continue to pay their hydro tax, but instead of the money coming back to the city, it will go to cover interest owed to private money lenders.

For now, at least, the city plans to put $100 million of the money in the bank, effectively using borrowed money to invest.

The remaining $37 million will be spent on priority projects over the same period. Some councillors want to spend some of it to provide immediate tax relief.

Marvin Ryder, who chaired the transition board, says the board was always nervous about any arrangement that would give the city the cash in one lump sum.

“It took 100 or so odd years to build up that $137 million (of equity). You really want to think carefully before you spend it all.”

It was that concern that led the board to set up the original arrangement, with the paper debt and the annual $10 million payments. Since the principal would never be paid off, it was essentially a guaranteed, perpetual payment.

But the chief financial officer of Hamilton Utilities Corporation, the city-owned holding company that controls Hydro, says there are real advantages for the utility in moving its borrowing to the private markets.

“(It gives) the sort of financial flexibility to borrow large amounts of money to finance the growth of Hamilton Utilities Corporation,” John Basilio said.

The utility may need money to expand its other businesses, which include a fibre optics company and a community energy system, he added.

One thing that is absolutely clear, is that the complex financing of the new Hamilton Hydro is yet another factor that is driving up electricity rates in the new competitive market being established by the province.

By next March, customers will also pay about $2 of every $100 in hydro billings to cover the profit that Hamilton Hydro is now allowed to earn. Hydro has chosen to earn the maximum allowable profit of 9.88 per cent by next March.

Basilio says that move actually helps lower the utility’s cost of borrowing.

“It’s a delicate balancing act,” he said.

Customers will also pay $2.80 per $100 in billings to help pay off the multi-billion dollar debt of the old Ontario Hydro.

Other municipalities across Ontario are also making moves to cash in on the value long tied up in their formerly not-for-profit hydro utilities.

Lobby group Energy Probe estimated last year municipalities would suck as much as $7 billion out of their utilities, increasing average residential bills by $100 a year.

The City of Brampton went furthest of all, deciding to sell Brampton Hydro to the soon-to-be-privatized Hydro One for $260.2 million. Brampton put most of the proceeds into three special funds to generate interest to pay for infrastructure and other priority projects.

Neighbouring Burlington Hydro Inc. owes $40 million to the city. Mayor Rob MacIsaac says Burlington believes it can earn a better return by leaving the debt as is, rather than taking the money in a lump sum as Hamilton is doing.

As in Hamilton, Burlington Hydro customers cover the interest on the debt owed to the city.

MacIsaac says taking on debt helps maximize profits for the hydro utilities, something municipalities have little choice but to do.

He says Burlington studied the possibility of establishing the utility on a not for profit basis, but found it wasn’t practical.

“The rules (established by the province) are set up in such a way as to assume you are going to try to maximize your profit,” he said. “You have to earn a profit in the utility in order to renew the utility and so on.”