Note: The following is an unbiased assessment of the merger proposal between Guelph Hydro and Alectra Inc. It is written by Energy Lawyer Jay Shepherd whose experience and expertise of energy operations in Ontario, gives Guelph’s 55,000 Hydro customers a true picture of what’s at stake. This is a lengthy overview but the evidence is there that this proposal may not be right for Guelph. Guelphspeaks.ca, feels that it is important for all citizens to familiarize themselves with the effect to them if city council approves the proposal December 13, 2017. The piece has been lighty edited for emphasis. GB
Posted on November 5, 2017
by Jay Shepherd
Alectra Utilities and Guelph Hydro are discussing a merger, the headlines say.
Already there is a flurry of information available to local Guelph residents about those discussions, and the many benefits of joining the Alectra fold. For the most part, that information is carefully crafted by Alectra, or other merger proponents, to show the transaction and its aftermath in a positive light.
I don’t have a view one way or another on the proposed merger. Although in my day job (energy regulation lawyer representing customers) I have learned a great deal about both utilities, I think it’s premature to express an opinion until the details of the actual deal are known. Even then, it is the opinion of Guelph residents that really matters. Mine, not so much.
I do, though, have a view about the information that is provided to local residents so that they can form their own opinion. Guelph residents should have all the facts, not just a sales pitch.
To that end, this article tries to provide a dispassionate take on some of the issues that could inform local opinion.
What’s at stake?
The customer-related benefits of a merger between Guelph Hydro and Alectra Utilities will generally be characterized as follows:
- Lower Rates. There will be scale and other economies as a result of the merger that will translate into lower rates for customers.
- Better Service. A larger organization will be better run, with the result that reliability, customer service, and other customer priorities will improve.
- It’s Inevitable. Guelph Hydro has to merge with someone, or it will be unable to meet future regulatory requirements for local utilities. Alectra is their natural partner.
All three benefits seem intuitive, and are cited in most utility mergers, but in each case the devil is actually in the details. None is actually true in every merger, and it is not obvious that they will be true for Guelph Hydro customers.
There are really three questions associated with the “lower rates” argument:
- Will there be cost efficiencies?
- When will customers get the benefit of cost efficiencies?
- Will the cost efficiencies actually translate into lower rates for all customers?
The most useful data is the history of rate increases for Guelph and for the Alectra predecessors. Two of those Alectra companies, Powerstream and Horizon, were formed from mergers. Powerstream is made up of five companies, formed in three merger transactions. Horizon is made up of two companies.
If you use Guelph Hydro as the baseline, residential annual distribution bills went up 20.6% from 2005 (the first year we have comparable actual rates) to 2018 (current proposed rate in their rate application). That is an annual rate of 1.57%, or just under the rate of inflation.
Guelph Hydro small business and commercial/industrial customers did much better, showing 12-year decreases of 16.5% and 5.9% respectively.
For the Horizon residential customers, they did better than Guelph Hydro. Customers in St. Catharines had increases of 15.6% over that period, which works out to 1.21% annually. Customers in Hamilton had increases of 9.8% over that period – less than 1% per year.
By contrast, the Horizon small business and commercial/industrial customer did poorly. Small business customers from both merged areas had increases of over 60%. Commercial/industrial customers had increases of 84% in Hamilton, and 102% in St. Catharines.
The Powerstream residential customers did not fare well. Customers in Richmond Hill and Aurora did fine, at less than 1% per year. Customers in Barrie ended up at about 1.09% per year. Customers in Markham, though, have done worse than Guelph – 22.8%, or 1.72% per year. And for those residential customers in Vaughan, their rates have increased more than 49%, a rate of 3.39% per year.
By contrast, the Vaughan small business and commercial/industrial customers did a little better, with increases of 22.5% and 27.4%, but still much worse than Guelph Hydro, or inflation. Richmond Hill and Aurora small business and commercial/industrial customers had increases of less than 1% per year, while Markham customers had increases of more than 40%, and Barrie had 33% for small business, and just about inflation for commercial/industrial.
For those who like spreadsheets (like I do), here is the table of the results:
|Distribution Rate Increases 2005-2018|
|Utility||Rate Zone||Residential||Small Business||Comm/Ind|
The various differences are a function of initial rate levels (see below). What the overall figures show is that, for some of the merged residential customers in the two Alectra companies with a merger history, there have been some reductions in rates, but they have not been substantial. On a weighted average basis, Powerstream and Horizon residential customers have rates today that are $6 a month lower than they would have been on a standalone basis (that is, compared to Guelph). That is the twelve-year impact of the mergers for those customers. For small business and commercial/industrial customers, on the other hand, they had net increases in rates as a result of the merger activity.
Will this history translate into rate savings for Guelph Hydro customers? It may, but Guelph will only be about 5% of the merged company. Its impact on costs will therefore be muted. Even if there are substantial operational cost savings, only 5% of those savings will ultimately benefit some of the Guelph customers. The other 95% will go to the rest of the Alectra customers.
Timing of customer benefit.
The rules of the utility merger game have recently changed. In the past, merged distributors implemented a five year rate freeze, providing immediate benefits for customers while the cost efficiencies were being realized. The Powerstream and Horizon transactions all happened under that rule.
The new rule, starting in 2016, is that any savings from a merger go to the shareholders of the merging companies for the first ten years. The customers get their regular rate increases, and the merged company can ask for more, even if it doesn’t really need the money. (Alectra expects to get extra shareholder benefits of more than $425 million over the ten years from their recent merger, over and above normal profit levels.)
Alectra has already announced that they plan to seek rate increases in excess of inflation for the next ten years. Will that apply to Guelph customers? They haven’t said.
If Alectra seeks rate increases in excess of inflation for Guelph customers as well, that would make them higher than Guelph Hydro rate increases have been for the last decade. It is therefore not clear that, during this upcoming ten-year period, Guelph rates after an Alectra merger will be better than had Guelph Hydro remained independent.
Will All Customers Actually Benefit? If there are cost efficiencies, and if customers have the patience to wait the ten years, will all customers benefit. The answer is, some will and some will not. The main driver of that result will be the rates for customers today.
Start with residential. The average residential distribution rates for Alectra customers are 9.9% lower than Guelph Hydro customers. Each month a Guelph Hydro customer pays about $2.86 more than an Alectra customer with the same electricity use. (Guelph Hydro customers actually use about 11% less electricity, so their distribution bills are about the same, but this will matter less and less over time.)
Eventually, the residential rates will have to be harmonized. Given the small size of Guelph relative to the rest of Alectra, the average residential customer could see a reduction of up to $2.72 per month in ten years, when their rates are harmonized with other Alectra customers.
As noted above, this may be wholly or partially offset by higher spending in the meantime but it is not really possible to predict that. What would Guelph Hydro spend in the next ten years on a standalone basis? We have no way of knowing.
If residential customers may eventually get a small benefit after ten years, the same is not true of commercial/industrial and small business customers.
A typical commercial or industrial customer in Guelph currently pays on average about $160 a month less than an equivalent customer in Alectra (despite the substantial past rate increases for these customers in the Alectra areas). This could be a factory, or a small plaza, or an office building, or – close to my heart – a high school. Sooner or later, their rates have to be harmonized with the Alectra levels, and they will get an extra increase of $152 per month, or just over $1800 per year. This is on top of all the normal increases for the next ten years.
Small business customers are in the worst position. Guelph small businesses currently pay about 39% less than Alectra small businesses for electricity distribution. That difference, $23.13 per month, will have to be corrected at the end of year ten. As with commercial/industrial customers, they will bear the hit of rate harmonization, to the tune of a $264 per year permanent upward adjustment.
The simple answer, therefore, is that even if there are cost efficiencies, the proportion of those cost efficiencies that benefit Guelph Hydro, if any, will not benefit everyone. Residential customers may have a small benefit. Small business, commercial and industrial customers likely will not.
Rate Conclusion: Will there be lower rates for Guelph Hydro customers? There is no clear answer. What we do know, based on past history and current forecasts, is that any rate reductions from the merger will be limited, deferred, and available only to some customers.
The prospect of better service for Guelph Hydro customers as a result of the merger is less complicated than the rate issue. The Ontario Energy Board publishes scorecards for every electricity distributor, showing how they are doing on the key measurements of things important to customers, such as reliability and service quality.
We can compare scorecards. It’s easy. 2016 Scorecards have recently been published.
Reliability. There are two reliability metrics: how often is the average customer interrupted (frequency), and how many minutes each year are you without power (duration)?
On frequency, Alectra customers average 1.05 interruptions per year. This mainly measures the physical quality of the system. Guelph Hydro customers are slightly worse, at an average of 1.34 interruptions per year. The industry average is 1.00, so both could improve, but Guelph needs more improvement. Guelph ranks 48th out of 65 electricity distributors in the province; Alectra ranks 37th .
The results are the opposite when it comes to duration. This mainly measures repair response times. Alectra customers average 47.4 minutes each year without power. Guelph Hydro customers average 42.6 minutes per year. The industry average is 73.2 minutes per year, so both are very good performers, but Guelph is slightly better. In rankings, Guelph is 25th and Alectra is 28th.
On customer service, there are five metrics: Connecting new customers, on time appointments, answering phone calls, accuracy of bills, and resolving issues with customers on the first try (called “first contact resolution”)
On connecting new customers, both Alectra and Guelph Hydro do that very well: 99.6% and 99.5% of the time, respectively, they connect customers when they say they will. Compare that to 98.3%, which is the overall industry average.
Similarly, both are good at showing up for appointments: 99.58% for Alectra, and 99.7% for Guelph Hydro. Once again, both above the 98.99% level for the industry.
When it comes to their call centres, though, Guelph does quite a bit better, answering 86.7% of customer phone calls within a reasonable time. This compares to the Alectra average of 80.95%. The industry average is 84.67%.
The difference between their telephone accessibility performance is fairly large. To give you an idea of the impact, Guelph Hydro handles about 45,000 telephone calls per year. At the lower Alectra performance level for call answering, an incremental 2600 customer calls each year in Guelph would not get answered within a reasonable time, i.e. about ten every business day.
Both utilities have excellent billing accuracy: 99.95% for Guelph, and 99.58% for Alectra. The industry average is 99.41%.
Finally, on first contact resolution, Guelph Hydro has one of the best records in the province, 99.98%. Of their 45,000 calls each year, all but ten or less have their problem resolved in that call. The Alectra first contact resolution average is only 82.27%, which would translate in Guelph into almost 8,000 customers each year having to call back or wait for further clarification on their query.
Conclusion on “Better Service.”
The scorecard comparison, therefore, does not indicate that Alectra provides better service than Guelph Hydro. Both provide generally excellent service, but if there’s an edge, it goes to Guelph Hydro. The evidence doesn’t indicate that a merger will result in better service for Guelph Hydro customers.
Guelph Hydro is generally known to be a well-run utility. It serves its customers well, it maintains and operates its system to high standards, and it delivers a very good return to its shareholder, the City of Guelph. In fact, on that scorecard measure, Guelph Hydro does much better than Alectra. Guelph Hydro’s most recent profit level was 10.58%; Alectra’s profit averaged 7.79%.
Sooner or later, Guelph Hydro will probably become part of a larger electricity distributor. It could be a small addition to a much larger entity, like Alectra or Hydro One. It could be a main partner in a merger of similar-sized utilities.
It is not likely to stay independent forever. The pressure in the industry is towards consolidation.
On the other hand, Guelph Hydro is not in a position where it must move quickly. The healthy profit level allows dividends of $3 million per year to the City (at the current standard level of 50% of earnings). By contrast, at the Alectra profit level the near term dividends would be more like $2.2 million, so there is not likely to be an immediate benefit to the City from the merger. Of course, in the longer term growth may be greater in the other areas of Alectra, compared to Guelph, creating additional opportunities for the City to profit through growing dividends.
It is also not self-evident that Alectra is the “natural suitor” for Guelph Hydro. The previous approach to Guelph Hydro from Horizon (before it became part of Alectra) had the advantage that there was potential for geographic consolidation over time of the area in between them. Some of that is still the case, but the centre of gravity (and focus) of Alectra is still more north of Toronto, not west.
The more logical consolidation for Guelph has always been Cambridge, Kitchener, Waterloo, Milton, Halton Hills and Guelph. The problem with that potential merger has for years been local personalities and demands by individual cities to have control. While that situation may not last forever, past attempts at partnership, even on smaller aspects of the business, have not always been successful.
The alternative “natural” merger for Guelph is Burlington, Oakville, Milton, Halton Hills and Guelph. Personalities may impede that as well, but it is still a good fit from a geographic and demographic point of view.
So, is a merger with someone inevitable? Probably the answer is yes. Is a merger with Alectra inevitable? The fair answer to that is probably no.
Guelph residents are going to hear a lot of things over the coming weeks about the proposed merger between Guelph Hydro and Alectra. There will be pros and cons to the deal, once the terms have been finalized.
When Guelph residents are asked their opinion – as they should be – they will need to know all the facts. This summary is intended to provide some of those facts.
- Jay Shepherd, November 5, 2017
Note – If you feel that this merger proposal between Guelph Hydro and Alectea Utilities is not for Guelph and its citizens, send your name, address and Ward to email@example.com and your voice will be heard. You’ll be joining many citizens who have already signed the petition.