"This is a city where people make things happen."

EPCOR

Read some of Don's previous blog posts on this topic:


Selling EPCOR water or wires would come to Council posted October 1st, 2009 in 2007-2010 Term, EPCOR, Taxation

A report arrived at Council today on how any future decisions would be made regarding the sale or transfer of major assets still in EPCOR that Edmontonians depend on. The report responded to a motion I put forward in the summer asking for this information. [Download the report here.]

[Clarification added Oct 3: Just to be clear, I asked these questions as a hypothetical. There are no proposals that I'm aware of to sell EPCOR as a whole or any part of the Water, Wastewater or Electricity Distribution & Transmission assets in Edmonton. The Capital Power spin-off was it.]

In a nutshell, the city regulates water and wastewater, and as regulator approval would be required if ownership of the potable water plants, the water pipes, or the wastewater plant were proposed to change. This decision would come to a council meeting.

Furthermore, even though Electricity distribution is regulated by the province, there is a franchise agreement in place for the use of right of way for power lines and any change to this agreement would also have to come to council for approval. Electricity transmission assets (high voltage) are treated differently in terms of regulation and other legalities, so the sale of such might not come to a Council meeting.

The report indicates that EPCOR would also need to seek approval from its shareholder (also the City), which it normally would do at a closed meeting, to sell any major assets.

So what we’ve learned is that the process might start behind closed doors between company and shareholder, but in the case of the utilities that people have expressed concern to me about losing (namely, water, wastewater and power distribution) there would be a Council debate on the matter – one would hope that this would not occur in private.

Councillor Henderson proposed a motion aimed at changing some of the governing documents to explicitly require that there be a Council meeting to consider any proposed sale of major assets in Edmonton, but it was defeated 7 to 5. I supported his motion.

In fairness, there was disagreement among councillors about the practical realities of owning a competitive business, and how this conflicts with our desire for transparency as elected officials. In this instance I leaned toward transparency going forward, having learned a valuable lesson about what a relative lack of transparency in the Capital Power decision process led to in terms of confusion and angst among the public.

EPCOR: Risk and the Best Interests of the City posted July 20th, 2009 in 2007-2010 Term, Environment, EPCOR

This post is a follow up to a previous post on the decision to spin off the power generating wing of EPCOR as the new Capital Power Corporation, and to authorize the sale of shares in that new company to the market. The proceeds of this sale of shares will be used by EPCOR to build the water, wastewater and electricity distribution and transmission businesses.

It’s now possible for me to say more about the rationale for the decision since the Initial Public Offering (IPO) of shares is complete. During that 90-day period it was critical that the City not act as a ‘promoter’ of the IPO, so we couldn’t talk plainly about the risks and strategic assumptions. Remaining neutral on the promotion of the IPO was part of the motivation for taking the decision in private – becoming a promoter has legal risk attached to it, and the City could be an attractive target for shareholder litigation.

It has been argued by critics of the decision that the dividend (which is forecast by the city to be $133 million this year) will fall because of this sale. This argument makes an assumption that the dividend would have continued to grow steadily as it has for many years, or at least remain constant. This should not be assumed. The first bit of fine print on every risk-bearing investment is ‘past performance does not guarantee future results’.

There is also regulatory risk to consider: if and when stronger environmental regulations & pollution pricing come to bear on high emissions industries, the power business could change significantly – and the kinds of strong, growing returns EPCOR has seen from that line of business could at the very least become more volatile, which would not be in the city’s interest.[I've quoted the relevant paragraphs from the prospectus below.]

The investment risk is lower in the water, wastewater and electricity distribution and transmission businesses, all of which are regulated and provide a stable return. Truthfully, EPCOR was becoming generating-heavy and as an investment, EPCOR needed to be rebalanced toward lower risk. This decision, I think, was in the best interests of the city from a risk management perspective.

I believe the main concern, however, is the way in which the decision was made. The legality of the process in the Capital Power decision is now before the courts. In ruling on an application for interim injunction to stop the IPO, Justice Hawco’s of the Court of Queen’s Bench made some widely reported remarks to the effect that some of the reasons for privacy displayed ‘a lack of faith in the intelligence or common sense of the citizens’, (as reported, p11-12 of the ruling) but he also ruled that there did appear to be “valid concerns by EPCOR about going public before the prospectus was filed.” Justice Hawco also indicated, and this also was not widely reported, that “The sale of the electrical business of the city as managed by EPCOR could have been more transparent, but the sale was made in the best interests of EPCOR and the best interests of the citizens of Edmonton.” [I've uploaded a PDF of the full ruling here: CQB decision Pidruchney vs. COE et al.] I understand this litigation is continuing.

I am on record saying that that I reluctantly supported taking the decision in private. I am also bringing a motion to Council on the 22nd of July designed to ensure that any decision to sell any former city-owned assets, or EPCOR asset that directly serves Edmontonians (i.e. the water and wastewater plants, water pipes and electrical distribution and transmission infrastructure) cannot be sold using the same process. I’ve been accused of inconsistency in pushing for this but supporting, albeit reluctantly, the behind-closed-doors process for the Capital Power decision. However, the complications I described in my previous post do not apply with the regulated parts of EPCOR. I hope my motion will pass and provide reassurance that these municipal services will remain with EPCOR.

The Capital Power prospectus includes the following about environmental risks:

“Many of the Company’s operations are subject to extensive environmental laws, regulations and guidelines relating to the generation and transmission of electricity, pollution and protection of the environment, health and safety, GHG and other air emissions, water usage, wastewater discharges, hazardous material handling, storage, treatment and disposal of waste and other materials and remediation of sites and land-use responsibility. These regulations can impose liability for costs to investigate and remediate contamination without regard to fault and under certain circumstances, liability may be joint and several resulting in one contributing party being held responsible for the entire obligation.

“On April 29, 2009, the Canadian Environment Minister announced in a media interview that the Canadian Federal Government is planning new climate change regulations aimed at coal-fired power in Canada’s electricity sector. The regulations would purportedly require all newly constructed coal generation plants to use technology to capture GHG and inject it underground for permanent storage. Compliance with this and other known and unknown environmental regulations may require material capital and operating expenditures and failure to comply with such regulations could result in fines, penalties or the forced curtailment of operations. Further, there can be no assurances that compliance with and/or changes to environmental regulations will not materially adversely impact the Company’s business, prospects, financial conditions, operations or cash flow.

“The Company’s business is a significant emitter of CO2, NOx, SO2 and mercury and is required to comply with all licenses and permits and existing and emerging federal, provincial and state requirements, including programs to reduce or offset GHG emissions.

“EPLP’s wood waste plants may also be subject to SO2 and mercury reduction requirements within the next five to seven years. In addition, the decreased availability in waste heat used by EPLP’s Ontario plants may lead to increased emissions and decreased allowances being allocated with respect to these facilities. There are a number of uncertainties associated with the estimated cost of compliance with these existing and emerging requirements. It is not yet clear as to the form in which the new carbon and GHG regulations will be implemented or whether such regulations, when implemented, will reflect the proposed regulatory aims. In addition, the Company is not able to determine the extent to which future compliance costs will be recoverable from customers or whether such costs may be shared among emitters, customers and stakeholders. Other unknown factors include the future composition of the Company’s generation assets, the future production of electricity from the Company’s generation assets, the extent and timing of the development of carbon offset markets, whether economically feasible emission-reducing technology will emerge, the market price for carbon offset credits and other measures that the Company might undertake to reduce its emissions. Compliance with new regulatory requirements may require EPLP to incur significant capital expenditures and/or additional operating expenses.”

What can happen when you semi-privatize things: posted May 15th, 2009 in 2007-2010 Term, EPCOR

[Revised for clarity at 8:28pm same day]

I’m limited in the aspects of the recent EPCOR restructuring decision I can discuss, which — let me tell you — is an incredibly frustrating position for a public official to find himself in.

I can say that I supported the decision and that I think it’s the right move for EPCOR, and by extension for the city. I might not have supported privatizing the assets back in 1996, but with that decision long behind us, this was the right move now given the context.

Now, By way of background to the decision making process, the first thing to understand about the relationship between the Municipal Corporation of the City of Edmonton (the City) and EPCOR Utilities Inc. is that the latter is an incorporated private for-profit business that happens to be owned by the City, and operates as such with some specific conditions that were imposed when the city transferred the assets over to EPCOR in 1996. Some of these conditions, which also limit the City’s powers, are found in a contract called the Unanimous Shareholder Agreement, which the City Council of the day agreed to; in it the Shareholder (the City) grants control of the company to the Board of Directors (which the City also appoints) to direct the company – and reserves powers related to, among other things, authorization of any restructuring, major purchases and/or divestitures (sales). 

Since 1996, several significant things occurred that ultimately shaped our decision to authorize the restructuring of the company and permit a spinoff of the electricity generating component:

  1. The province deregulated electricity generation in 2000, which changed the risk profile of that part of EPCOR’s business. 
  2. In 2005 EPCOR, with the approval of the shareholder (i.e. the City) authorized the sale of units in the EPCOR Power LP (Limited Partnership) which is an income trust. Units of the trust are traded in US and Canada making all decisions and communication regarding decisions subject to securities law (including minority shareholder protection) in both  countries — which regiments disclosure of decisions affecting the business.
  3. The federal  government announced changes to tax law in 2006 to tax income trusts, impairing some of the advantage of the trust model for raising money to invest in the growth of all parts of the company.

In other words, a series of Council decisions stretching back to 1996 created the room, then closed the door behind which my colleagues and I, acting as EPCOR Shareholder representatives, came to the decision to authorize the restructuring. Changes in the regulatory and tax environment initiated by other governments also contributed to the situation.

Scott McKeen wrote an interesting piece in the Journal about the peculiar duality of our duties as a Council and as EPCOR’s Shareholder, which you can find here.

If you want to know more about how Capital Power will operate, and what EPCOR – as the majority owner – expects of it, please refer to the prospectus for the Initial Public Offering (IPO) of shares, which can be accessed here.

As an appendix, I’d like to set some myths to rest that I’ve encountered:

  1. Absolutely nothing is being “given away,” proceeds from the sale of shares of Capital Power will be used by EPCOR to expand the potable water, waste water treatment and power transmission businesses.
  2. Payments from Capital Power to EPCOR will allow EPCOR to continue to furnish the City with a dividend.   
  3. This decision was not connected to the Gold Bar Waste Water Treatment Plant transfer to EPCOR earlier this year, and neither move was conditional on the other.
  4. Contrary to some reports, the mechanisms for ensuring the head office of Capital Power remains in Edmonton are much stronger than the provisions that failed to keep Telus here after EdTel was privatized.