Can municipalities afford to sell electric utilities?
Revenue flow and control over core city function are lost.
by John Wilson, Power Matters
April 27, 2008 — Ontario municipalities are struggling to keep their financial heads above water. They are coping with services downloaded by the former Harris government, a federal government that ignores their needs, crumbling infrastructure and a US recession that is wounding the provincial economy. It's no wonder that several of them are looking at selling their municipal electric utilities. But can they really afford to sell?
There is no doubt that the money from such sales would be welcome but what would be lost? Aside from the steady yearly flow of revenue that electricity utilities provide to their municipal owners, the answer is control over a core city function.
Like water, electricity delivery is integral to municipalities. Without sufficient control over their electricity utilities, cities won't be able to adequately manage land development, electricity conservation, demand-management programs, air quality measures or greenhouse-gas emissions. Utilities coordinate closely with their municipal owners on projects involving land use, electricity cogeneration, landfill biogas, renewable generation, air-conditioning load shedding and the like.
Cities control their utilities by appointing members to the utilities' boards of directors and by advising them of decisions by city councils — the utilities' primary and typically only shareholder. If a utility is sold the municipality becomes just another electricity consumer and loses its control to the new owner because under law the utility has a primary responsibility to its shareholders.
Once a utility is privatized there is no way to know who may eventually become the owner. The municipality of Hamilton turned its water distribution and sewage system over to a local company only to find it quickly change ownership four times; one owner was a subsidiary of the infamous and now defunct Enron. After 10 years of problems, including a major sewage spill into Hamilton harbour that the city had to pay to clean up, the municipality was able to regain control of its water distribution and sewage system.
However, if a municipality sells its electricity utility, the chances that it would ever be able to regain ownership are extremely slim. Governments at any level in Canada don't readily overturn contracts with the private sector, and the money required to reverse such a sale would most likely be prohibitive.
Municipalities are on a rocky road, and they are looking head at an even rockier one. Money will be scarcer and more control of development and the environment will be essential. How should these competing needs be balanced?
Across Ontario, municipalities need to ask themselves two questions. First, is the one-time lump-sum of money from a utility sale of greater value than the loss of annual utility payments to the city and the loss of control over electricity delivery? If we can't operate effectively with a child of Enron negotiating with us over land development, electricity conservation, air quality measures and greenhouse gas emissions, then perhaps we shouldn't sell.
The second question our municipal representatives need to answer is whether municipal voters should have a say in sale of their electricity utility with a referendum or vote in the next municipal election. Without a mandate it's difficult to understand how our elected representatives could sell one of the largest assets held by most municipalities.
John Wilson is an energy consultant, Ontario Electricity Coalition member and engineer. In 2005 he was one of 10 experts invited by Natural Resources Canada and the US Department of Energy to write papers on and discuss the relationship between unregulated electricity prices and blackout risk.
Links and sources
Can we live with a child of Enron? by John Wilson, Power Matters #24, Ontario Electricity Coalition, April 27, 2008
Contact Power Matters by email
Posted: April 30, 2008
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