Could city council afford privatization?

John Spears
Toronto Star
March 16, 2006

The citizens of Toronto are owners of the biggest electricity distribution utility in Ontario.

They’ve embarked on a so-called WiFi venture to turn the city’s downtown into a giant wireless hot spot.

They’re major shareholders in a company that heats and cools millions of square feet of office space in downtown Toronto.

They own the city’s biggest parking company.

The question is: Why? Do the companies churn out money for the city and ease the burden on taxpayers? Or do they generate low returns and expose taxpayers to unacceptable business risks? Should the city take the money now invested in those companies and pay down debt, say, or build roads?

Here are the biggest enterprises that city taxpayers own in whole or in part:

Toronto Hydro Corp., which owns the biggest electricity distribution utility in Ontario. Through the utility’s holding company, Toronto Hydro Corp., they’re also involved in telecommunications – including the WiFi initiative just announced.

In 2005, Toronto Hydro funnelled $134.7 million into city coffers.

A 43 per cent stake in Enwave Energy Corp., a firm that provides heating and cooling to dozens of downtown office buildings, with assets of $251.7 million, revenue of $58.9 million and profit of $2.85 million for the year ended Oct. 31, 2005.

Toronto Parking Authority; it paid $36.3 million to the city in its latest year.

City budget chief David Soknacki says ideology tells him to privatize the city’s ventures. But when he comes to balance the city’s books, he says the returns the city is earning on its big investments are too attractive.

The city is paying an average of about 6.5 per cent on its total debt, and borrows new 10-year money at 4.5 per cent. Cashing in investments that are paying a higher return than the city is paying out doesn’t make sense, says Soknacki.

The biggest investment – the $980 million in debt that Toronto Hydro owes the city, its sole shareholder – " has kept a good chunk of the city afloat for some time now," he says. "It pays 6.8 per cent. It pays enough to pay for all the city’s ambulance service for a year. It doesn’t make sense for us to cash that bond unless the city absolutely has to, or has a better investment."

The parking authority pays an even higher return – either 10 per cent or 28 per cent, depending on how it’s calculated.

The bulk of Toronto Hydro is in its regulated electricity business, but it’s branching into unregulated businesses like its WiFi venture. Is that appropriate? Doug Peters, former chief economist of the TD bank, argues that it’s not a bad thing.

The private sector hasn’t yet provided the service, he notes, and it’s something that will benefit all the city by making it more attractive for business. Peters also dismisses the argument that a city shouldn’t assume the risk of owning an enterprise like Toronto Hydro. If a private electricity system were to meet with catastrophe, the public sector would inevitably step in to provide the vital service.

At the behest of city council, Toronto Hydro has increased electricity rates to generate profits, to ease the tax burden. Critics such as Tom Adams of Energy Probe have argued the practice blurs accountability: Politicians don’t have to answer to constituents for higher electricity bills the same way they must justify tax increases.