(March 12, 2012) “The aggregate total of incentive payments to the top five active executives in the five years ending 2010 was $2.9 million!” That sentence caught my eye in an article that appeared in the January 27, 2012 Toronto Star.
The article was in response to rhetoric emanating from both the Chairman of Toronto Hydro’s Board of Directors, Clare Copeland and Anthony Haines, the CEO. They were upset by the rejection to an application for a rate increase by the OEB that would labour each of the 700,000 Toronto ratepayers with the commitment to pay an additional $180.00 per year for the delivery of electricity. Toronto Hydro were seeking approval to bill ratepayers an extra $1.3 billion annually by 2014.
The hype from Toronto Hydro since the OEB’s decline of the rate increase has resulted in a constant flow of press releases from Toronto Hydro, having little to do with the turn down by the OEB and in the writers opinion, lots to do with the ego of the CEO. Since the OEB rejection Toronto Hydro have cancelled private sector contracts, fired/dismissed key employees, offered early retirement packages to experienced CUPE 1 employees and issued scary press reports that inferred ratepayers would experience more blackouts, more brownouts and safety issues. This was all based on the premise that Toronto Hydro needed to refurbish and replace ageing infrastructure.
The latter may well be true but despite that Toronto Hydro achieved a record operating profit as noted in the announcement of March 2, 2012, and had this to say about their capital spending in 2011; “The Corporation performed very well in 2011 completing the OEB-approved most successful capital construction program in its 100 year history.” Apparently this is a continuing theme as the press release associated with their 2010 results carried a similar message; “while completing our largest capital construction program to date, fulfilling our commitment to the Ontario Energy Board that we would deliver the capital programs approved by the Board,” said Anthony Haines”. So despite two years of record capital spending that totalled $828 million the ratepayers of Toronto Hydro are told they must spend billions more to upgrade their capital assets. Those assets show an acquired value of $4.7 billion and a 2011 year-end depreciated value of $2.4 billion.
Mayor Ford and the council members that sit on Toronto Hydro’s Board have said nothing about what is happening at Toronto Hydro because it is a “gravy train” that benefits the City at the expense of the ratepayers. The potential for law suits on cancelled contracts and fired employees will weigh heavily on Toronto’s ratepayers for many years in order to satisfy the whims of the CEO and the blind acquiesce of our city leaders.
For the year ended December 31, 2011 net income; after payments in lieu of taxes (PILT), came in at $95.9 million, a 30% increase over 2010. Capital spending was a reported $437.1 million, an 11.9% increase over 2010. What is not mentioned about those capital expenditures however is that they include a huge portion (47% according to the Ontario Energy Board filings) of employee compensation. In 2010, $97 million was capitalized and for 2011 it was forecast to be $117 million. This level of capitalization of compensation appears to be one of the highest (if not the highest) of all of the local distribution companies (LDC) in the Province and is a good reason for those record profits. By capitalizing compensation Toronto Hydro has been able to apply for rate increases well in excess of actual capital asset spending and ensure profits continue to climb. This allows Toronto Hydro to; pay increasing dividends to the City of Toronto, their sole shareholder, while continuing to bulk up salaries and bonuses. Dividends paid to the City of Toronto were $33 million, an increase of 32% over 2010 with a further $23 million of 2011 earnings slated to be paid in the current year. Higher profits also benefit the Provincial Treasury who gain higher PILT payments.
Executive compensation for 2011 has not yet been released but we should expect that it will be up from 2010. Toronto Hydro’s Chairman, Clare Copeland in the Toronto Star article had this to say; “And the hydro executives’ compensation – including an array of high-end cars – are in the lower half of pay scale for comparable companies, he said.”
Profit generated by Toronto Hydro appears in line when measured against US private sector electric utilities. Toronto Hydro generated an ROE of 9.22 % versus the US average of 7.1% for electric utilities. The Dividend Yield was 3.2% whereas the US average is currently sitting at 3.93%. Toronto Hydro also had a lower Debt to Equity Ratio of 1.24:1 then the US average of 1.35:1. What this seems to point out is that by capitalizing a large portion of compensation you can beat or match key measurements of US private sector utilities. Allocate an increasing amount of salaries to capital and the scheme can continue; keeping the City happy with increasing dividends, the executives happy with rising compensation and the Province happy with higher PILT payments while ratepayers pick up the tab. Its a win for the employees and executives, a win for the City of Toronto and a win for the Province but at a big cost to ratepayers.
The OEB sets only the guiding principal behind the ROE and their formulae (9.12% for 2012) sets them higher then US electric utility companies. Toronto Hydro and other LDCs in the province are allowed to do things that US utilities are not allowed to do or they would risk not meeting US GAPP accounting standards and raise the ire of the SEC and their shareholders. In Ontario that does not appear to be a concern nor does it appear to concern the rating agencies such as DBRS who just confirmed their ratings for Toronto Hydro’s debt!
Its time for the OEB to set standards based on, “comparable markets,” on appropriate “compensation capitalization,” and “dividend yields” that have some actual bearing to what publicly traded companies endure elsewhere in Canada and in the US regulated market. This may serve to contain salaries (now bench marked principally against non publicly owned energy companies or much larger public sector companies; eg; Copeland compares Haines against the CEO of Duke Energy-revenue of over $14 billion per annum) and reduce dividend payments which could be earmarked for infrastructure improvements. This would have the effect of reducing the size of annual rate increases that ratepayers throughout the province are experiencing for their delivery costs.
It is clearly time for the regulator to regulate!