The
news that the householders of Port Hope, a small town of 12,000 in Ontario,
are to be hit with a 6.4% increase in their hydro rates came shortly after
the sale of the Port Hope Public Utilities to a consortium based in Pickering,
Ontario.
However
the reasons for the increase must be examined because they reflect the
impact of "market forces" on the previously regulated market. In defending
the increase James Wiersma, the president of Veridian is quoted as "The
historical rate of return of 5% has to be increased to the commercial rate
of 9.8%. That rate is necessary to meet the goals of the shareholders."
The reason that the usual rate of return for the utility had to double
is because in the legislation that deregulate hydro also laid out the rules
that utility companies had to play by. One of the rules states that a tax
has to be paid to the Province. This tax, of approximately 50%, has to
be paid from the profit that utilities are allowed to make. Thus if the
owners want to make their traditional rate of return, 5%, the real increase
has to be 10% because the province has to be paid.
The
real impact has not been felt yet, as this increase is only good until
May of 2000. Utilities have to submit their applications for next rate
increases to the Ontario Energy Board by that date. Presumably that increase
application will be for much more so that the commercial rate of return,
(9.8%), can be maintained.
The
consumers of Port Hope are yet to be presented with their newly designed
hydro bills: when they look at the bottom line they will see an amount
larger than the 6.8% increase. This will be due to a levy (the rate is
unknown as yet) that has also been established by the province. This levy;
called the "Competition Transition Charge" (CTC) is being used by the Province
to pay off $7 Billion of the "Stranded Debt" (set at a total of $34 Billion)
and every consumer has to pay a monthly.levy.
These
rate increases are annoying the Minister of Energy, Mr. Jim Wilson, as
he is touting the idea of deregulation as a means to effect competition
that will bring lower rates. But as Municipalities are choosing the option
to convert their utilities to commercial enterprises he sees the dream
of lower rates disappearing. In a public spat he warned Municipalities
not to grab the cash that can be obtained by 'recapitalization'. Speaking
in February he stated "That money should be kept in the electricity systems.
It shouldn't be used by municipal politicians …. so they can build an arena
or build a new city hall."
It
appears that Mr Wilson is reaping what he sowed. His legislation gave municipalities
five conversion options. One option was to convert to a non-profit enterprise.
In examining the options municipalities were advised by consultants and
city hall staffs to go with the commercial option. Because this option
promised cash in the form of dividends to the shareholder (the municipality)
nearly all the municipalities in Ontario have universally embraced it.
When embracing this option the first action most municipalities take is
to load up on debt by borrowing up to 50% of the value of the utility,
this debt is used to offset taxes. However municipalities now have a pocket
full of cash to be used indiscriminately and and obligation to pay debt
charges. Mr. Wilson thinks that paying the debt charges and frittering
away the cash will lead to higher rates. Hazel McCallion, Mayor of Mississauga,
retorted to Mr. Wilson "What Mr. Wilson doesn't realise is that there is
no difference between a taxpayer and a hydro user. Obviously it (the money)
will be used to keep taxes in line!" Mr. Wilson now finds that someone
is going to get blamed for higher rates (and he suspects that the province
will get the blame) and is suggesting that in order to keep rates down
municipalities should be converting to non-profits. However non-profits
do not generate cash for their owner, they only reduce rates for customers,
so that option is a non-starter for cash strapped municipalities.
To
sum up; this first experience in Port Hope has illustrated why rates can
only go up for consumers. Cash strapped municipalities have decided to
cash in some of their equity for an annual rate of return and also to minimize
taxes and maintain a guaranteed cash flow in the form of dividend. This
dividend has been split 50 -50 between the province and municipalities
demonstrating that everybody has a piece of the consumer. So the combination
of higher returns and the CTC levy can only mean one thing - higher rates.
Just remember that this part of the hydro bill, the local retail/delivery
portion only accounts for the companies delivering the hydro and accounts
for 10 - 15% of the total power bill.
Personally
I can't wait to see the other shoe drop!
What
a ripoff!!