(January 14, 2014) Recently I stumbled upon a 2003 Toronto Hydro bill in my effort to rid the office space of paper piles.
The bill disclosed electricity costs in 2003 were 4.3 cents a kilowatt hour (kWh) and delivery costs 2.2 cents per kWh as compared to a 2013 bill (prior to the recent rate increase) which priced electricity at an average of 8.52 cents per kWh and delivery costs at 5.73 cents per kWh. Electricity costs were almost 100% higher and delivery costs were up by 160% in 10 years.
Shocked by the latter discovery called for a visit to the Ontario Energy Board’s “Yearbook of Distributors” where one can find an abundance of information on a collective and individual basis for all local distribution companies (LDCs) going back to 2005. Gathering numbers for Toronto Hydro for the year end 2005 and comparing them to the 2012 report was revealing. To start with, the average Toronto Hydro customer in 2012 consumed 5,100 fewer kWh (a 12.8% drop) than 2005. I suspect the “brass” at Toronto Hydro would count that as “conservation” but it’s probably a reflection of condominium growth where fewer kWh are consumed and new condo owners are individually metered.
Normally when a company sells less of their product their gross margins fall along with their net income (after taxes) but in the case of Toronto Hydro their gross margin (revenue less power purchases) increased by $62.7 million or 13% and net income (after tax) jumped $18.5 million or 28.3%.
With that basic information staring you in the face one would conclude Toronto Hydro must have increased their delivery price and reduced their operating costs!
With LDCs, operating costs are defined as: “operations, maintenance and administration” (OMA) and represent the bulk of expenses. A review of those numbers disclosed that Toronto Hydro’s OMA jumped $96.8 million (63.7%) from 2005 to 2012 and administration costs alone were up $70.6 million or 104%. In a normal business environment, lower sales result in shrinking administration costs not the reverse!
To put further context to the above, OMA growth from the 2006 Toronto Hydro numbers compared to 2012 indicates a growth of $83.9 million in OMA or 52.6% higher over the 6 years. That year was the year that the current President, Anthony Haines was hired. Since then Mr. Haines has seen his personal compensation grow by $483,000 or 107% to $935,000 which reflects itself in the growth of the “administration” part of the OMA costs. Those increased $55.7 million or 72% in just 6 years or 12% annually. Pre-tax income fell from $130 million in 2006 to $87 million in 2012. Additionally in the 6 years since Haines joined Toronto Hydro, capital spending has totaled almost $2 billion ($1.989) yet Haines continues to press for more spending and insists the company’s infrastructure is past its prime (see Tom Adams Energy), perhaps because part of his compensation is a product of capital spending?
So if costs were way up while gross margins increased where did the money come from? As it turns out rate increases granted to Toronto Hydro during those past seven years generated the additional revenue along with growth in the customer base-perhaps driven by those metered condominiums. Also in 2005 Toronto Hydro paid $76.2 million in PIL (payments in lieu of taxes) on pre-PIL income of $141.6 million (an effective tax rate of 53.8%) whereas in 2012 they allocated $3.1 million (a tax rate of 3.7%)NB: for PIL on pre-PIL income of $87 million. PIL of taxes is directed to the Ontario Electricity Financial Corp (OEFC) for repayment of the stranded debt so Ontario’s other ratepayers also suffer from reduced payments to OEFC and the extension of the Debt Retirement Charge (DRC). Toronto Hydro actually generated less pre-PIL income in 2012 but reported a profit $18 million higher than 2005. NB: In the first 9 months of 2013 the indicated tax rate has fallen further to 1.9%.
The foregoing is what bankers call “creative accounting” and hides the dismal record of management allowing them to continue making dividend payments to the City of Toronto ($38 million for the first 9 months of 2013 versus $39 million in 2006).
The additional revenue garnered from ratepayers coupled with the huge drop in PIL of $73 million was the only reason that Toronto Hydro produced higher net income. Perhaps it is time for Toronto City Council to send in the clean up crew when they are finished picking up the debris after the ice storm and for the OEB to set standards for all LDCs that amongst other rules include maximum dividend payouts and minimum PIL payments!
Parker Gallant is a retired bank executive and a former director of Energy Probe Research Foundation. As with all independent bloggers on this site, Parker’s views do not necessarily reflect those of Energy Probe.