(January 15, 2016) Toronto Hydro’s inefficiencies cost the city tens of millions of dollars annually in unnecessarily high hydro rates.
A publicly owned Toronto Hydro costs households and businesses across the city tens of millions of dollars a year in unnecessarily high hydro rates. While many critics of a partial sale of Toronto Hydro refer to it as the city’s “cash cow” and fear that any sale will hurt the city’s finances, the real concern is that the public monopoly continues to treat its customers to faster-than-inflation rate increases that siphon money from more productive areas of the economy.
Already, Toronto Hydro is a high cost company compared to public monopolies in Ontario and investor-owned utilities across the United States.
Toronto Hydro’s cost per customer is currently 50% higher than the average for electricity distributors around the province. It currently sits third on the list of 72 electricity distributors in terms of cost per customer – bested only by the admittedly inefficient Hydro One and another tiny distributor in the north of the province. Utilities in towns and cities, such as Ottawa and Mississauga, keep costs nearly 40% lower per customer than Toronto Hydro.
And while the cost per customer for Ontario utilities across the province increased by, on average, 1.7% between 2013 and 2014, it jumped by more than twice that rate – 4.7% – at Toronto Hydro.
Toronto Hydro isn’t just a poor performer compared to Ontario utilities. The monopoly’s costs are increasing significantly faster than its American counterparts and will continue to do so over the next five years. After much debate in its recent rate application, the Ontario Energy Board (OEB) sided with its own staff and other experts that argued the utility’s costs are already higher compared to similar utilities and will continue to grow at a faster rate in the coming years. One expert warned that the company’s costs could be as much as 72% higher than comparable U.S. utilities by 2019.
The company’s customers are already too aware of its poor track record, as the distribution line on their hydro bills – which represents Toronto Hydro’s costs – has increased by about 2.5 times the rate of inflation in recent years. The commodity portion of the bill – controlled by the province, which last month was forcefully criticized by the auditor general for its handling of the energy sector – has increased at an even faster pace.
Yet, rather than looking for ways to become more productive over the next five years and lower costs for ratepayers, Toronto Hydro tabled an application at the OEB asking for an increase to household rates of, on average, nearly 8% annually over the next five years. Looking at all rate classes, including small and large businesses, the monopoly wanted to increase its revenue requirement – the amount of money it collects each year from customers – by 10% annually over the next five years. The biggest driver of the company’s rate increase was its plan to spend a record $500 million annually on capital projects over the next five years – nearly 2.5 times the amount of money it spent on capital projects in 2006.
Toronto Hydro spent very little time before the regulator presenting its plan to control already high costs and reign in billing increases to a manageable level – instead, experts were hired to help it argue costs weren’t really that high. The company repeatedly argued that it needed more money.
It’s easy to see how new ownership at Toronto Hydro would be beneficial to both Toronto’s economy and its customers.
Using its most recent application as example, new owners could have addressed Toronto Hydro’s costs, brought them more in line with other utilities and applied to the OEB for rate increases of 5% annually over the next five years, rather than the 10% the company wanted. In the first year alone, that lower rate increase would save ratepayers $71 million and bring in $11 million more than the company’s entire dividend to the city in 2014. Over the next four years, Toronto Hydro ratepayers would save an additional $417 million in lower rates – or $488 million over five years– if a private company were capable of running the company on 5% annual revenue requirement increases.
On an annual basis, that saves ratepayers nearly $100 million over the next five years – money that ratepayers, whether they are households or businesses, can then spend or invest in the city’s economy. And it still provides the company with ample new money to invest in ensuring the grid is safe and reliable. While elected officials will focus on the impact of a smaller dividend once a partial sale of Toronto Hydro goes ahead, the economic benefit to the city of a well-run Toronto Hydro, and the lower rates it would offer, is significantly larger.
Toronto Hydro’s dividend to the city was $60 million in 2014, compared to the city’s operating budget of $9.6 billion for that year – accounting for about 0.6% of spending. Selling Toronto Hydro won’t create a massive hole in the city’s finances nor is it in any way equivalent to selling off the crown jewels. Furthermore, the city could retain a significant stake in the company, ensuring it will still receive a dividend (though smaller), while also enjoying the increased value of its investment without having to do any work.
Toronto isn’t selling a cash cow or a crown jewel. It’s selling a high-cost utility that, rather than looking at ways to improve its operations and pass those savings on, treats its ratepayers as a never-ending source of more money.
Brady Yauch is an economist and Executive Director of the Consumer Policy Institute (CPI). You can reach Brady by email at: bradyyauch (at) consumerpolicyinstitute.org or by phone at (416) 964-9223 ext 236