Ontario Distribution Consolidation: What is Missing? How can the Ministry of Finance Help?
Ontario Distribution Consolidation: What is Missing?
How can the Ministry of Finance Help?
Respectfully Submitted by Ray Tracey, President & C.E.O, Essex Power Corp.
Minister of Finance
Waterfront Hotel Downtown Windsor, Ontario Room
277 Riverside Drive West, Windsor
January 16, 2014, 11:00 a.m. – 1:00 p.m.
Preface to the current LDC Sector status as it relates to Consolidation:
The Sector review panel issued on Dec. 12, 2013, clearly had one main theme. More rationalization through consolidation was required in the Distribution Sector with a vision of 6- 8 regional LDCs to replace the current 70 plus that exist in the Province today.
Even though many proponents that participated in the Sector Review data collection and market outreach processes presented a number of quantifiable “value” opportunities to lower electricity costs and increase efficiencies in the sector, all seemed to have been ignored except for the main focus on consolidation. It is important to remember that savings that occur across the distribution sector affect only 20% of the average electricity ratepayer’s monthly bill. The graph below demonstrates that Essex Powerlines’ distribution rates have kept in line with inflation while Provincial costs have skyrocketed more than 120% since 2005.
A consistent concern expressed by many on the report’s findings and its credibleness was the “pick and choose” data comparisons it used to defend its position that the small the medium size LDCs were less efficient from large ones as it ignored the inclusion of data for Hydro One and Toronto in those comparisons. Interesting that these two LDCs benchmarked below most small and medium sized LDCs with regard to LDC efficiency and as such the data would have clearly contradicted the panel recommendation that “bigger will be better”.
To move away from the contentious recommendations of the report and focus on what is needed to support sector rationalization requires a clear answer from the “Government of Ontario”: What are you willing to do to support Distribution rationalization and a “fair market” for ALL to participate in?
Up to now all we have is a letter issued by Minister of Energy, Bob Chiarelli stating that the government supports a volunteer process towards consolidation and that it would like to see market activity happen sooner versus later. Additionally it seems to indicate that if market activity towards rationalization was slow than it may need to revisit its position regarding a “voluntary” process.
What the government failed to do since issuing this letter, is provide any tools and incentives for these 70 plus LDCs to establish sound investment and business plans to move forward to facilitate rationalization through consolidation. Remember the mandate is to eliminate 9 out of every 10 LDC entities that exist today through some type of Win-Win scenario that respects the rights of the corporations, their Shareholders and most importantly customer rate interests.
In this process of consolidation there will be buyers, sellers and new partners. Since the industry had already experienced massive rationalization from 300 plus when the market was restructured in early 2000, it is safe to assume that most remaining LDC market participants exist today for good reasons. They have satisfied owners, customers and provided solid business plan to support their existence. Clearly incentives and tools will be needed to convince a viable LDC and its Shareholders to join a “massive” rationalization desire of the Government when their current business plans don’t have that as a mandate or objective.
Do we have a current market construct for rationalization that even allows most of the LDCs to participate other than to become a SELLER? Market premiums have already jumped to the highest levels seen in the market place since the unregulated market was established. LDCs are significantly restricted from raising new Capital that would be required to establish regional entities. Our current municipal Shareholders are not permitted to insert new equity and we have severe limitations restricting the opportunity for private sector involvement as potential partners.
Only the largest of the large LDCs in Ontario has the real access to the capital needed to result in massive rationalization. Today’s market is totally superficial; there are NO real competitors when it comes to a Buy/Sell marketplace. Market values and purchasing premiums are being established by only ONE buyer. Partnership unless done at scale level that involves hundreds of thousands of customers is being viewed as avoidance to the Sell option rather than as progressive.
Are Ontarians being well served when provincially controlled agencies under the Government’s authorization enter into significant transactions within any given sector that will amount to billions of dollars spent in acquisitions and do so without real competition and the discipline of private sector is left out of the Market construct?
Specifically, are Ontarians and Electricity rate payers being well served when provincially controlled electricity agencies that time after time are being publicly audited and then chastised from the findings for over spending and generous employee compensation packages are given preferential treatment in a marketplace? Is this prudent provincial financial policy?
How can the Minister of Finance help towards Distribution Rationalization desired by this Government for the Sector?
Lessen restrictions on private sector investment in distribution sector to 49% (minority share);
- Allows all distributors to gain access to new capital
- Levels playing field between large and small distributors
- Premiums paid for sale/transfer of assets would be driven by prudent, private sector investment and not borne by Provincial taxpayers/Ontario electricity ratepayers
- Distributors would not need to carry large consolidation premiums which frees up capital to respond to emergency situations (ie Toronto Ice Storm)
Facilitate the fair sale of Hydro One distribution assets where such sale will create shoulder to shoulder, regional distributors
- Encourages consolidation/collaboration to occur across multiple distributors;
- Does not force Municipal shareholders/stakeholders out of LDCs
- Accountability of LDC kept local/regionalized