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HomeMy WebLinkAboutADMIN-11-99 THE CORPORATION OF THE MUNICIPALITY OF CLARINGTON REPORT Meeting: File # General Purpose and Administration Committee Date: April 19 1999 Res. # Report #: FILE #: By-law # ADMIN.11-99 Subject Energy Competition Act (Bill 35) Recommendations: It is respectfully recommended that the General Purpose and Administration Committee recommend to Council the following: 1. THAT Report ADMIN.11-99 be received; 2. THAT Council endorse the principle of amalgamation of the five municipal utilities of Pickering, Ajax,Uxbridge, Brock and Clarington; 3. THAT the Chief Administrative Officer and appropriate staff be authorized to undertake all necessary action to finalize the amalgamation and the shareholder agreement; and 4. THAT Clarington Hydro Electric Commission,the Town of Ajax, Pickering, Brock and Uxbridge, and their respective Hydro Electric Commissions be advised of Council's decision. REPORT 1. BACKGROUND 1.1 The new competitive structure for Ontario's electric utilities has been created by the Energy Competition Act(Bill 35) passed in October 1998. Bill 35 contains numerous new rules and regulations governing the entire electricity business operation, including changes to Ontario Hydro and Municipal Electric Utilities. 1201 ADMIN.11-99 2 This restructuring of Ontario's electricity industry and deregulation to allow open competition in the generation and sales of electricity are causes of concern to all local municipal utilities and municipalities. 1.2 In Clarington, our local utility has joined force with the hydro commissions of Ajax, Pickering, Uxbridge and Brock to jointly examine the ramifications of Bill 35 and to explore and assess options available to deal with the massive changes in the electricity business. A Hydro Commission Steering Committee was formed for this purpose and a Report entitled "Bill 35 —Strategic Option Assessment for Municipal Utilities"was presented to municipal staff and councillors in December 1998. 1.3 The Steering Committee recommended that the five utilities be merged and be incorporated as a new company to continue the electricity business, and requested the five municipal councils to endorse the merger. 1.4 In January 1999, a shareholder agreement was drafted by the law firm of Borden & Elliot on behalf of the Steering Committee, and was submitted to the five local municipalities for comment. The Chief Administrative Officer, the Treasurer and the municipal solicitor have been involved in the review and comment on the draft shareholder agreement. The highlights of the shareholder agreement will be elaborated on later in this report. 2. PURPOSE The purpose of this report is: a) to assist Council to understand the ramifications of Bill 3 5 as it pertains to the Municipality of Clarington, and to b) to evaluate the options available to Council, including the merger option as proposed by the Hydro Commission Steering Committee. 3. HIGHLIGHTS OF BILL 35 (ENERGY COMPETITION ACT) 3.1 Bill 35 (Energy Competition Act) contains many changes, including: • The"break-up" of Ontario Hydro • A new mandate and expanded power for the Ontario Energy Board • Repayment of Ontario Hydro's debt • Restructuring of local electrical utilities. 3.2 The purpose here is not to elaborate on all the changes made under Bill 35 but to focus on the implications resulting from the changes arising from the restructuring of local electricity utilities. To assist in the understanding of the changes, the 1 'M ADMIN.11-99 4 4.1 Decision point#1 —should the Municipality of Clarington continue to be in the electricity business? Many municipalities are currently struggling with this major decision step. On one hand, continuing operations, at least as a"pole and wire" distributor of electricity, will likely seem to be the most natural resolution of our current operation. After all, Clarington Hydro already owns the distribution system infrastructure and since this part of electric business will remain a monopoly, it might be expected to face fewer changes. However, in the retail end of business, stiff competition is expected from GenCo (previously Ontario Hydro), other big energy suppliers such as Enbridge Corp. or even a neighbouring municipal utility company. This new competitive environment may prove to be unfeasible for smaller municipal utility companies that don't have the necessary volume to operate profitably or the expertise in marketing and retailing to compete against the established and proven record of the bigger companies for market share customers. If the Municipality chooses to sell its electricity business, Council must carefully weigh the implications of such a move. Particularly, many existing customers may wish to continue to rely on the municipality to supply them electricity despite the fact that they have the option to sign up with new suppliers. Their choice to stay with the municipal utility company could be motivated by many factors such as reliability of services, customer service or simply loyalty. Clarington Hydro runs a very successful operation that many local customers rely on and will continue to reply on for electricity services. Abandoning these customers by selling may not be advisable at this time. Should the municipality decide to sell,there is a concern that it may not be getting value for its assets, since no one at this time really knows what the market value of these new municipal utility companies are. In this case, a more cautious approach is preferred by taking a wait-and-see attitude to find out what other municipal utilities are getting for their assets. In addition,the Ministry of Finance has indicated that the sale of the municipal utility to another corporation is subject to a 33%transfer tax. This is a major disincentive for Clarington to consider the sell option at this time. Based on the above observations, it appears advisable for the Municipality to stay in the electricity business, at least for now, to enable us to go to the next decision point of whether amalgamation is a viable option. 4.2.1 Decision Point#2— Should we merge with other municipal utilities? Many municipalities,particularly the larger ones, have retained consultants to advise them on those issues arising out of Bill 35. Clarington Hydro Commission, in conjunction with the utilities of Ajax, Pickering, Brock and Uxbridge, have retained Price Waterhouse Coopers, which released its Report in December 1998. LiJ � ADMIN.11-99 5 The Report examined various alternate electric distribution utility strategies, and assessment of value and risk related thereto. Although the Report made no specific recommendations, but it concluded that amalgamation appears to be a preferred alternative, given the fact that new competitive environment in the electricity marketplace would place all small municipal utilities in a substantially disadvantaged position. Staff is cognizant of the fact that Clarington will be a minority shareholder of the proposed amalgamation and would have to solely rely on the Board of Directors of the new amalgamated utility company to look after its financial interest. This fear of losing control is not unjustified. However,to "go it alone" and to compete with large corporations could run the risk of losing customers, inability to absorb price fluctuation from suppliers, etc. This could very well be a recipe of subsequent business failure. Therefore, it is staff's opinion that we should at least give amalgamation a serious look. 4. SHAREHOLDERS AGREEMENT In order to allow municipal staff to assess the implications of the amalgamation option, a shareholder agreement of the five partner municipalities was drafted by the law firm of Borden &Elliott under the auspice of the Utility Steering Committee. During the last few months, municipal staff and solicitor have participated with our partners in working out the details of the shareholder agreement. Highlights of the draft shareholders agreement including the latest revisions thereto are: • Clarington will be a shareholder of the new"HoldCo." company, holding approximately 15% of the total share. • The business of"HOLDCO" will include distributing, and retailing of electricity and include distributing and retailing gas or other energy product. Business could include generation, other services and products related to energy and telecommunication areas. • Service level to be at least equivalent to the existing levels in each of the predecessor utility service area. • The initial Board of Directors shall consist of 25 directors, all from the existing Commissioners of the predecessor utilities with the term of office ending December 31 2000. • After December 31, 2000, the new Board will consist of 14 Directors with 3 Directors from Clarington to be nominated by Council. The qualifications of the new Board members are spelled out in the Agreement, and carry a 3-year term of office. • The Board of Directors will manage and supervise the business affairs of the HOLDCO to be guided by simple majority vote. • Decisions of the shareholders will be based on two-thirds of the votes cast in respect of any issue with the number of votes reflective of the equity interest of each shareholder. ADMIN. 1199 6 • A"hold"period of two years to prevent any shareholder from selling its share in order to allow the new business to establish. • No one shareholder can sell its share to a competitor to ensure sensitive business information stay within the company. Each shareholder can sell its share to other shareholders, subject to certain conditions including the two- year"hold"restriction. The above represents the highlights of the draft shareholder agreement. For details of the draft agreement, Council should refer to copy of the draft agreement, which was forwarded to each member previously. The Municipal solicitor and staff have reviewed the draft shareholder's agreement and are satisfied that the Municipality of Clarington's interests are accounted for. 5. CONCLUSION At the time of writing of this report, it is not clear if and when the other partner municipalities will endorse the merger. Should any one of the larger partners decide not to merge, the option is always available to the Municipality of Clarington to "go it alone"by incorporating its own electricity company. In that case,the Municipality will become the sole shareholder of the new company and can decide at some future date either to sell or to stay in the electricity business. In the meantime, staff will work towards finalizing the amalgamation in consultation with the Clarington utility staff and we will report back should the merger fail to materialize. Respectfully submitted, �) P, 0-4—zk - Franklin Wu, Chief Administrative Officer Att. FW:nof 1206 A Decision Roadmap for the Municipality of Clarington To Continue Yes To Provide No Electricity ? Option 1 Option 2 Option 3 Merge with Other Do it Alone, Get Out of Municipalities Distribution Electric Business and Retail Share Holder Pre—Incorporation Assets Agreement —Conduct name searches —Appoint Directors —Determine Value of Assets Pre—Incorporation Assets Incorporate and —Conduct name searches Transfer By—laws Before —Appoint Directors November 7, 2000 —Determine Value of Assets Incorporate and T Negotiations With Buyers Transfer By—laws Before November 7, 2000 [Eeive:Approval From OEB Obtain Licence for Retail Sell Distribution Assets Distribute Electricity and Provide Service 1207