Preserve ownership but make a change: City energy review

By Collin Gallant on November 26, 2024.

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There is value in maintaining public ownership of the city’s power plant, electric and gas distribution networks and maintaining a municipal franchise area, according to a report into Medicine Hat’s energy business presented Monday at a special meeting of city council.

But, they will be challenged and may be better managed and able to meet coming environmental and market pressures by adding an independent rate review panel, or by putting the power plant and delivery business into a separate council-controlled corporation.

“It’s a concept for council to consider,” states the report, written by global business consultancy firm KPMG.

It concludes council is strained to be regulator, rate setter and the board of directors. An arm’s length corporation could add expertise, different debt financing and apolitical rates to strengthen the business, potentially to deliver more steady dividends.

No matter what, it recommends speeding up the closure or sale of remaining natural gas wells, which it says will drain resources needed to modernize other units. Otherwise, an outright sale or privatization is not recommended.

“The city’s energy business, which has long been a valuable asset, is facing challenges that may impact its financial performance,” including abandonment obligations, demand for net-zero carbon power and power price collapse on the Alberta export market, it states.

“Certain scenarios challenge its long-term viability,” it concludes.

City staffers have said much of the same thing this fall in budget meetings and a presentation on how it plans to address low-carbon regulations that expected to ramp up over the next decade.

No decisions were made Monday; council only received the report, then offered general questions about potential costs and benefits.

Mayor Linnsie Clark questioned the financing potential, which KPMG said would be expanded at a time when major spending is required.

“It’s all the same isn’t it,” she challenged presenters at the end of the near two-hour presentation. “Council will have to make a capital decision and an MCC would make a decision, but we’d give up revenue and instead get a dividend.”

Capital requirements is only one potential conflicts between the municipality and its power production and distribution company.

The report suggests the challenges could be better managed by an arm’s length MCC – like Enmax or Epcor, owned by the cities of Calgary and Edmonton, respectively – and would separate the political football of rates from council.

Coun. Darren Hirsch said a board could provide more sector-specific governance.

“It tells me more work needs to be done,” he said.

The entire review was ordered after prices spiked in the summer of 2023, and public backlash that called for transparency in rate setting, especially after the city posted a $134-million dividend.

This year, that profit is excepted to fall by 90 per cent as export prices have crashed.

The report states the 120-year-old business is set to produce “sub-optimal results” in a near-record low rate environment over the next several years due to governance issues.

Three options offered are not ranked by the report authors:

– Status quo of energy division as a city department;

– City department with a rate review committee of outside “experts” to recommend charges to franchise customers;

– A rate committee, plus the creation a Municipally Controlled Corporation (MCC), to run and plan for the business, maintaining the city’s franchise exemption to market power locally.

“These strategic actions … have the potential to provide added checks and balances … from an independent board … (allowing) Medicine Hat to keep local control over its energy future while keeping (the franchise exemption) and also mitigating risks.”

Energy division head Rochelle Pancoast told the News the department has only now been given access to the report and will provide analysis as directed by council.

If approved, KPMG suggests the creation of an MCC commence in 2025, including a shared services agreement with the city, like payroll and billing.

A dividend agreement would give council some budget control and decide how to best use much needed energy profits in other parts of the mostly tax supported organization. It could provide more reliable amounts to city coffers on a three- or five-year cycle.

The report states its authors considered the desired outcomes of city hall, ratepayers and taxpayers, and found the division works on three fundamental principles: to provide competitive rates, reliable service and financial benefit to the municipality.

However, all could be strained in the near future as the utility sector grapples with decarbonization targets and an Alberta power market change to design and technology. Low profits are now forecast locally in the mid-term.

A dividend agreement would govern council’s expectations from the business, and in theory could provide more predictable year-to-year revenue for budgeting on the municipal side, according to KPMG.

“(The city power plant) could be stressed to provide power as cheaply to customers as the rest of the province during non-peak hours,” over the next several years, the report reads. A municipally controlled corporation could more easily add trading expertise, or explore alternate financing through public bonds to offset lost profits by reducing costs through advantageous imports, KPMG suggests, while still shielding customers from grid distribution charges.

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