Recommendations to Public Consultation on London Hydro

18 Sep 2008

Gerry Macartney, CEO of The London Chamber of Commerce, presented the recommendations regarding the future of London Hydro that were put forth by the Chamber's Municipal Affairs Committee and Board of Directors.

The recommendations that were presented in the public consultation are below.

Presentation by: Gerry Macartney, CEO London Chamber of Commerce

The London Chamber of Commerce recently celebrated its 150th year as the Voice of Business in London. As the most representative business organization in London, our 1,000 plus member businesses represent over 56,000 workers in London and area. As such, they have a collective and ongoing interest in the effective and efficient deliver of electrical power in our City. In fact, we believe there is a direct correlation between the effective management and delivery of that power and a healthy competitive economy.

You may recall that I authored a Board-approved op/ed piece in the Free Press this past June that referred to the limited options that would be available to London Hydro going forward. My presentation today will be based largely on that article.

Three years ago there were likely four options for the utility - to merge, to acquire, to sell or do nothing.

Today, the options are fewer and in many ways more urgent. As you know, provincial regulators are pushing hard for consolidation of the now 84 distribution entities in the province towards a number some say will soon be as low as 7 or 8 of these entities. Not to belabor the point but, there were 300 prior to the Provincial Government's electricity market reforms.

And the urgency has less to do with the temporary 33 per-cent waiving of the transfer tax on the sales of utilities in fact, it has more to do with simple business practices. Larger, more regionalized utilities will have a far greater chance of achieving economies of scale allowing them to produce lower tariffs for their ratepayers.

Furthermore, the greater the cost efficiencies, the better a utility can take advantage of new technologies that will be in increasingly greater demand as the province and the country go greener and greener. (e.g. smart meters etc.)

Presently London Hydro is the 7th largest distribution company in Ontario with over 265 employees serving 142,000 customers. Coupled with competitive rates and reliability of source, it becomes a key weapon in the economic development arsenal of London and region. It can also be turned against us if we don't plan carefully.

London Hydro is also well managed, efficient, and one of the highest performing distribution companies in Ontario. They have one of the lowest average cost-per-customer ratings within their peer group, maintain the highest customer satisfaction ratings and boast one of the lowest distribution rates in the province.

It's not hard to understand why Londoners (and Council) have such an emotional attachment to their utility. Who wouldn't?

But emotions aside it's clear that the “Do Nothing Option” is really no option at all. That leaves the “Acquire” or “Merge” options if there is any hope of London Hydro being competitive in the decades ahead much less the notion of playing host to the central HQ for electrical distribution facilities in Southwestern Ontario.

Acquiring can be a little sketchy because so much is dependant on the willingness and co-operation of the other utilities that you covet - and to be sure, they (the other utilities in the region) are not all co-operative much less willing. It's estimated that a properly managed acquisition could increase shareholder returns but it comes with increased risk. Should the savings that are supposed to accrue to the new, larger entity fail to materialize, the utility could be worse off than before the acquisition.

What's left then is merging or “Amalgamation” which may, for London Hydro's purposes, be the best of all options. Typically an amalgamation provides a lower risk opportunity for shareholder return. It could also let London Hydro increase its financial leverage allowing for things like decreased rates and/or more of a dividend back to the shareholder. There is a lot at stake here so we'll have to be very cautious with whom we choose to amalgamate with. London Hydro will need to be careful that any partner it courts doesn't bring with them a lot of excess baggage such as labour issues, or aging and over valued assets.

In the end, for this scenario to pass the acid test for London's ratepayers and for City Council, there must be some minimum requirements. From the Chamber's perspective any new entity must be able to demonstrate increased returns for the City. This can be accomplished by:

1. Ensuring that the new entity is located in London and must remain here for a guaranteed period of time – say 10 or 20 years.
2. Ensuring that it must be deemed a Regional Head Office for Southwest Ontario.
3. Guaranteeing that it employs no less than the full compliment of employees currently working with London Hydro.
4. Ensuring that the end result provides Londoners with competitive rates (in other words rate-neutrality).
5. Providing some demonstrable evidence that the value of the new asset would grow over time giving the shareholder (City of London) a greater rate of return on investment and;
6. That the new entity has the potential to add value to the City by virtue of new or expanded product lines or services.

We would all like the luxury of having lots of time to mull over our options and consider every possible alternative. The problem is we are not the only game in town nor are we the only player. The market is contracting rapidly and only those that move to capitalize on it will be around to reap the rewards. Not to put too fine a point on it, but the clock or rather the meter is ticking.

As for the leveraging of London Hydro's equity that would see the potential for some $60 million going to City coffers – it's been the Chamber's constant view that as long as the money was deployed in such a way as to lower debt, reduce the amount the City might borrow in the future or be invested in our infrastructure-life-cycle maintenance needs – then long-term tax relief would accrue to all Londoners.

Thank you for your time and attention, and I would be pleased to take any questions that you might have.

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