What can happen when you semi-privatize things:

[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.