Power sale could mean stable endowment fund

By COLLIN GALLANT on January 30, 2021.

cgallant@medicinehatnews.com@CollinGallant

Local administrators and elected officials say proceeds from any potential sale of the power plant could lead to an endowment fund providing more stable income and less risk to the city.

That’s led to questions about what such a fund would look like, how it would operate and how it could be safeguarded to provide stable income far into the future.

Some opponents have expressed doubts, stating forgone operating revenue in the sale-fund model makes it less attractive.

From the general public, local lawyer Matt Lofgren told the News he supports exploring the idea.

“If there is a way to make a large profit that is invested properly and protected from being pilfered by future politicians, let’s take a peek,” he said.

That sentiment is common among a majority of council.

Utility officials reported the annual dividend since 2010 was $27 million annually in an information bulletin this week.

To fully replace that amount in a stable index-adjusted fund would require more than $500 million from a sale, well above what most observers contacted by the News say it could produce.

However, utility chair Coun. Phil Turnbull said a “substantial dividend” without exposing the city to risk of continuing to operate in the sector that faces sea-change from improving renewable power technology, is worth examining.

“It’s a risk management exercise,” he said, adding that a fund’s income could be designated to address capital spending for a long-term infrastructure renewal program or new capital projects.

Most vocal over the years is Coun. Darren Hirsch, who has often brought up the idea of a fund during budget discussions as a way to remove commodity-based revenue from power and gas sales from municipal operations.

Some view of what a fund would look like comes from the an existing three-year old Heritage Savings reserve, but finance officials said Friday any new reserve or major alteration would likely require developing new parameters.

Speaking generally, city corporate services director Dennis Egert said all delineated reserve funds are approved by council.

“The creation of any fund involves certain foundation work (by staff),” said Egert, citing the purpose of the fund, how money flows in and out, and for what the proceeds can be used.

The Heritage Savings Reserve Fund was created with a $1-million initial deposit in 2018, but grew quickly from new deposits. It captured half the power pant profits – something councillors argued overshadowed other needs – before the formula was changed last month.

Power profits are now pooled with losses in gas production to balance accounts before dividends are paid. Since some gas losses are unavoidable until wells are fully reclaimed in five to seven years, a power plant sale would likely mean more dividend policy changes.

Egert reported that the now $44-million Heritage Reserve fund met a city benchmark of four cents above the rate of inflation, and administrators expect to withdraw $1.8 million in 2021 for general municipal purposes.

Budgeters can’t access more than the annual return once inflation is factored in during any given year, and, if there is a loss, they must wait until future returns make up the difference.

Typically, council approves withdrawals or deposits not on a line-by-line basis, but when it approves the overall annual budget.

Any special or emergent changes come before council inter-year in the form of budget amendments, said Egert.

When work began on the Heritage reserve four years ago, local officials engaged the City of Edmonton’s fund manager, who oversees the Ed Tel Fund.

That was created after the sale of the civic telephone company in 1995, and involves a set formula for annual payouts. Since the initial $470 million was deposited, it has grown to $863 million over 14 years.

It paid a regular dividend of $38.8 million in 2019, plus a $9.7 million special dividend.

The bylaw that governs any change to the bylaw or unusual deposit requires a public hearing to be held before councillors vote.

That is seen as a partial safeguard against councillors altering the original vision of the fund. Councils have the legal ability to change any and all decisions by a previous council.

After initial consideration the Medicine Hat fund doesn’t include such provisions.

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