Hydro Ottawa's CEO says she has the solution after falling short on promised dividend payments to the city

Ottawa Hydro's future can go one of three ways, sources close to the matter say, and it all comes down to risk versus reward.

The stars have aligned for a change at the publicly owned utility. A cash-starved municipality in the midst of another budget battle, a mayor who's expressed a willingness to sell, and dividend payments short of targets, have all contributed to a rare opportunity for a private sector distributor to snag a profitable company.

Sources close to the matter say Hydro Ottawa has brought the pressure onto itself. Disappointing dividends haven't won it any allies. Add to that lowered forecasted profits over the next few years and recently revealed closed-door negotiations to integrate forces with Hydro One, and it's suddenly become easier for council to embrace the idea of changing the utility's ownership structure.

The three most likely scenarios for Hydro Ottawa are: the status quo; an "integration" with provincially owned Hydro One involving customers within and close to the city limits; or a sale, either outright or through a lease-to-buy arrangement.

It's an important issue, and one that must involve the public, Hydro Ottawa CEO Rosemarie Leclair told the media following a breakfast event Nov. 7 at which Mayor Larry O'Brien declared it was time to sell the utility.

"Do we think the company is a community asset and a good solid investment? Yes we do," said Ms. Leclair, who advocated against its sale.

The status quo, though, is arguably what got the debate started in the first place. Some perceptions exist that Ms. Leclair's management team has become far too costly and bureaucratic, driving inefficiencies that have led the utility to come up short on its promised dividend payments ($12 million instead of $14 million) to a city in a budget crunch. That perception has increased calls for change, at least from the mayor and some council members.

Ms. Leclair last month proposed an integration between Hydro Ottawa and energy behemoth Hydro One, creating a new super-utility for Ottawa and the surrounding area. It promised both to provide higher yearly dividends to the city, perhaps as much as $20 million, in exchange for assuming care for additional (but more expensive to serve) rural customers and a loss of management control over the new entity.

But advocates of a sale face one key hurdle — a provincial stipulation that one-third of the purchase price of a municipally owned utility go to Queen's Park.

This transfer tax was enacted to slow down the pace of privatizations after the province relaxed the rules in the late '90s. However, a suggestion from Finance Minister Dwight Duncan that it will be dropped in the near future has increased the chances that a profitable sale to a private company might be in the cards. The other way around the transfer tax is if the utility were sold in a lease-to-buy arrangement. Spread over a decade, the transfer tax would not have to be paid until the end of that 10-year term. Of course, the transfer tax could be eliminated by the province by then.

One company that's declared its interest in Hydro Ottawa is FortisOntario, a subsidiary of Newfoundland-based Fortis Inc., which has some two million power customers in five provinces.

"Fortis is active, certainly in Ottawa, and throughout Ontario," said FortisOntario president and CEO Bill Daley. "A big part of our business strategy is growth of our core business, which is regulated distribution utilities."

Another company rumoured to be interested is U.K.-based National Grid, which just recently completed the purchase of the grids in Brooklyn and Long Island, N.Y., but it's not saying anything publicly.

"We don't comment on speculations of mergers," said Chris Mostyn, a media relations officer for National Grid. "(However), we do have a business development team that looks into (such possibilities)."

Private-sector buyers insist that ratepayers have nothing to fear in a sale, since the electricity sector is one of the most regulated in the province. Hydro rates are set annually according to strict criteria from the Ontario Energy Board (OEB), and minimum services standards are required.

Currently, the OEB allows hydro companies a rate of return of 8.9 per cent. The only way private companies can increase the return, according to the OEB, is in finding efficiencies, not by increasing rates or dropping services.

"As a regulated operator, (profit is found) the same way anyone else in Ontario would have to," said Mr. Daley. "As a licensed regulated utility, we're allowed to earn a rate of return on our invested capital. The OEB regulates the rate of return, so Fortis is no different. It comes down to execution, and what competitive advantages a rate operator brings to the table."

Finding efficiencies, Fortis said, is something the private sector specializes in, and can do much better than Hydro Ottawa's current management team. The city should look at "alternatives," he said, such as the private-public partnership his company has already entered into with the municipality of Port Colborne.

Six years ago, Port Colborne was facing shortfalls and higher property taxes, but had concerns about keeping its hydro utility "local."

As well, the small, 9,000-customer utility could not comfortably provide for its residents in a deregulated energy market, Mayor Vance Badeway told the OBJ last week.

"We did the economic analysis, we worked closely with our adviser," the mayor said. "When we embarked on negotiations with Fortis, we already knew they were the provider of electricity for Fort Erie, pretty much the same size (as us), here in the Niagara Region."

Fortis agreed to lease the hydro company for a 10-year period. Monthly, Fortis contributes lease payments directly to Port Colborne's municipal coffers, and keeps up with all operational and capital expenditures. Meanwhile, the municipality retains overall ownership throughout the lease and retains representation on the hydro facility's board.

At the end of a decade, Fortis has the option to buy out the utility at an agreed-upon price.

"The best part for the city of Port Colborne is the hydro company on a biannual basis makes a substantial dividend payment to the city," said Mr. Daley. "It's a net payment that is paid out . . . You can imagine a utility the size of Hydro Ottawa would have substantial (dividends)."

Port Colborne's agreement with Fortis will result in $17 million in dividend payments over a decade, and 10 years' worth of capital construction completed in four years.

"My council didn't see the dollar size, although it was a residual benefit," said Mr. Badeway. "We had more in mind the customers, our ratepayers, having our capital worked on in four years instead of 10 years. The Welland Canal splits us into a west side and an east side. We wanted to bring in a major line under the canal. It probably would have taken us seven or 10 years. It took them one year."

He said he would do it all again, and offered to speak with Ottawa councillors if they had questions.

Once such a lease is up, however, the dividends dry up, Ms. Leclair pointed out, and the city would lose whatever membership it had on a hydro company's board.

"You sell it, you've gotten your investment out, so that's it," she said. "That's the one time."

Afterwards, "a private company is going to look at a financial bottom line, and that's it," she added.

"(Mayor Larry O'Brien) is right, the OEB protects the consumers . . . but there's a whole lot more that the community gets than just that."

Mr. O'Brien has stipulated that any decision to sell the Hydro Ottawa will be debated, and made, by full council.