The future of our electric utility.
In June, I attended the public hearing on the proposed municipally controlled corporation (MCC). I spoke in favor of transitioning to an MCC. I also stayed and listened to the concerns of those opposed. There are creative ways to bridge the two sides without losing sight of the main goal—to provide effective oversight for our public utilities while keeping them under community ownership.
If we value our electric utility, we want the company to last long term. That requires governance to take a long term view. Council members are naturally short sighted because they’re more responsive to the needs of right now—that’s how we get elected and re-elected. The decisions required to keep this publicly owned utility viable long term are not aligned with this short term thinking.
Medicine Hat’s Twin Companies
Our electric generation company has a twin—our oil and natural gas company. We went through the same discussions with our natural gas company. Residents wanted below market pricing. They got it. Between 1996 and 2006 the city sold natural gas to residents at 75-200% below market rates. Residents didn’t want the city to sit on reserves when people were struggling. They got it. Between 1999-2014 the natural gas division gave the city $550 million to subsidize natural gas rates and taxes. That’s money left in your pocket. Medicine Hat should be grateful for those good times, but there are lessons for today.
As massive as our natural gas resource was, we knew it was finite and would eventually run out. When the end came in 2015 we were not prepared.
The solution isn’t necessarily the opposite—to charge market pricing and to have massive reserves (current city reserves are not as big as residents think). But if we’re repeating the same choices, we might end up with the same result.
The future of electric generation
Our natural gas company had its peak in 2008—valued then as an $800 million company. By 2012 natural gas prices had crashed. Things change quickly.
Yes, the electric generation company is making money now, but prices go up and down. Pretty recently there have been periods when our electric utility was losing money. Companies are supposed to save money from the good times to carry through the bad times.
Electric production is different. It’s not a non-renewable resource, but the future of this company is not guaranteed.
Regulatory risk
Whether you agree with climate change or the proposed ways to address it, the reality is fossil fueled generation is under increasing scrutiny. It is possible sometime in the future the federal government will decide to ban natural gas electric generation. In that case, the city would be left with a fleet of generators, worth tens of millions, with no use. It’s unlikely the city would have the money to build up alternative generation at that point.
All our eggs are in one basket.
Technological risk
Current technology isn’t ready to replace natural gas generated electricity. However, technology keeps improving. One day our natural gas generated electricity might not be competitive.
When market prices are higher than our production costs, Hatters ask why we’re being gouged. Let’s just pay production costs. Fair point. But what happens when our production costs are higher than market prices?
This situation happened with our gas wells. When market prices were high residents wanted (and got) below market pricing for natural gas. When fracking suddenly flooded the market with cheap natural gas, Medicine Hat’s gas production costs were no longer competitive. Residents were mad they were now paying more than market. When that happens people complain of inefficient government companies and want to be free to be served by other external companies. You can’t have it both ways.
Finding a compromise
This is where it gets interesting!
The goal of the proposed municipally controlled corporation is to give this company the best chance of providing the community with stable electricity. This is best accomplished by:
Creating a skills based board to provide effective oversight.
Creating a rate review board to balance the political and practical aspects of electricity rates.
Separating this company from a municipality because both types of organizations have very different needs. The city still maintains ownership and ultimate control.
If the community doesn’t like the idea of a board made up of out-of-towners
We can stipulate board members must live in Medicine Hat. The community obviously values local ownership. It makes sense we also value local governance. There are plenty of business people in town with relevant experience. I’m happy to turn over the governance of the electric utility to them. Council has plenty of other challenges to focus on. Everything doesn’t have to be on council to solve—they need help.
If the community doesn’t want to pay board members for this work
We can ask Medicine Hat business people to donate their time. Rich people who don’t need money are the only people with that much time to burn. If this doesn’t work, we need to talk about what fair compensation looks like.
If the community wants this company to remain sensitive to public opinion
Board terms can be structured shorter or longer or staggered depending on how sensitive to public opinion we want the board to be. Council can make, retract and revise all the board appointments at their discretion:
Setting four year board terms with all board directors expiring at the same time would make the MCC highly sensitive to public opinion (through council). You’d have the same issues of getting potentially an entirely new board up to speed at the same time. Governance continuity through election cycles is one of the issues an MCC is meant to solve.
We can stagger board appointments so each council can only renew/replace only half or a third or a quarter of the board at a time.
We can set board appointments for 6 or 8 years to insulate the board from the roller coaster of council elections.
If the community doesn’t like the concept of a ‘corporation’
Corporate greed is everywhere. Corporate trust is at an all time low. We’re in the most conservative corner of the province and even the most conservative mayoral candidate supports public ownership of this company. That’s an indication how much we’re losing faith in markets and corporations.
Part of the rationale for restructuring the electricity utility as an arms length corporation is the different financing available to corporations versus municipalities. I’m not sure if structuring this company as a co-operative or a social enterprise would negate these financial options. But there might be alternative options if ‘corporation’ is what some residents object to.
If the community wants below market rates
The upside for below market rates is we make the cost of living as cheap as possible. But when we aren’t paying the real cost for something we don’t use it carefully. Additionally, if we’re not adequately recovering costs for proper asset management, if we don’t keep adequate reserves below market rates won’t be sustainable in the long term. This is what killed our natural gas company.
Is there a sustainable way to provide below market rates?
Equipment and natural gas feed stock
We no longer have our own natural gas to supply this company. We pay market rates for gas. Natural gas generators are highly sophisticated equipment. We pay market rates for equipment. We can’t save money with either.
Board representation for labour
Are we asking labour (union employees with sophisticated skills—natural gas generators are basically jet engines) to take less money than what similar workers elsewhere receive? Unions have leverage we must recognize so what might we offer in return?
Perhaps they’ll accept less money if labour gets board representation. Perhaps a four day work week—less money, but a better work environment?
Dividend to the city
Right now any profits are returned to the city through a dividend from the company. This year we used $11 million to offset our operating costs and keep taxes lower. We could forgo this dividend or compromise on a lower dividend. If those funds stay with the company, it could be used to decrease prices.
Before we do this we would need to either cut $11 million, increase taxes commensurately or some option in between.
Municipal Consent and Access Fee (MCAF)
Most municipalities don’t own their own electric generation and transmission companies. Those companies are charged a fee for municipal land used for this equipment. Land that would be otherwise used by the community. Even though we own both sides of this fee, it’s not out of step with how city departments charge each other when trading work.
I was part of the council who first passed the MCAF. At the time, the city was facing an extremely serious financial situation with the collapse of the natural gas company. Our council couldn't agree on tax cuts so we needed to raise revenue. I would have preferred to raise taxes instead of charging an MCAF. The MCAF was a compromise. At the end of the day what’s important to me is a balanced budget.
In an ideal world we wouldn’t charge an MCAF, but my priority is to lower our reliance on the dividend before we tackle the MCAF. Even with the MCAF Medicine Hat has the lowest utilities by a wide margin.
How much reserves does this company need to ride the ups and downs of Alberta’s unregulated electricity market?
The city has roughly $700 million in reserve.
At minimum $200 million is required for our natural gas abandonment liabilities. The abandonment process is not a straight line and it’s conceivable we’d need more money than projected.
$200 million is in savings.
$300 million is what municipalities of our size typically need for operating reserves for payroll and large scale infrastructure projects.
The electric utility needs $500 million in capital asset replacement over the next decade, even without Saamis Solar.
$700 million sounds like a lot, but not in light of our current and future needs.
Saamis Solar
The decision around Saamis Solar is exactly why we need a skills based board to take this responsibility from council.
One of the arguments against an MCC is we don't need another expensive layer of bureaucracy. That it’s staff’s job to run this company. Well, staff have recommended Saamis Solar. We either listen to them or not, but we can’t have it both ways.
Renewables are not intended to replace our natural gas generation, but to complement them. Peak periods of solar power overlap nicely with peaks in energy demand due to things like air conditioners.
Saamis Solar is sometimes compared to Medicine Hat’s joint project (with the Feds and the Province), the Solar Thermal Concentrator in 2015. That technology is completely different to Saamis Solar, but there are some lessons to be learned from the Solar Thermal Concentrator (STC). The STC technology is economical in warmer parts of the world. Medicine Hat’s STC was meant to be an experiment to see if it could work up north. It couldn’t.
Not every experiment and innovation will work. People talk about municipalities and innovation. There are good reasons why municipalities should be risk averse with expensive experiments. The lesson is the city shouldn’t make big risky bets.
Saamis Solar uses proven technology and builds out in stages to minimize risk. Of course the risk is not zero, but keeping an entire fleet of natural gas generation also comes with risk.
Conclusion
The goal of government is not to make money. It’s not bad when our electric utility makes money, but profit is not the goal. The goal of our electricity utility is to provide stable, long term, production for residents. Sometimes the utility will make money, sometimes it won’t make money. The question we’re facing is how to manage those ups and downs when your goal is not to maximize profits, but provide a service to our community over the long term.
This discussion on governance structures for our electric utility is about aligning the incentives of the decision makers with those long term goals. Council members are naturally more responsive to the needs of right now—that’s how we get elected and re-elected. That short term thinking is not aligned with the long term thinking required to keep this publicly owned utility viable long term.
The positive news is that we used up a billion dollars of natural gas over 100 years to help our city. We drove a company into the ground and we’re still here. Even if we ruin another company, the city will still be here.
