By Gerry Barker
July 18, 2016
Tonight, city council will discuss a thorough and damning city staff report detailing the history of the Community Energy Initiative (CEI) that was the heart and soul of the former mayor’s administration.
This was a master plan to develop District Energy Nodes that were linked to an underground network of insulated pipes to deliver hot and cold water to nearby buildings. The Nodes also were designed to generate electricity. These Node sites include the Sleeman Centre where the natural gas-fired pumping system was located; the RiverRun theatre across the street; St. Marks Church located nearby and the two Tricar high-rise condo buildings south of the Sleeman Centre.
The staff report also detailed the operation of the District Energy Node built in the Hanlon Business Park. That only had two customers plus the head office of Fusion Homes. The report said that both the Hanlon and Downtown district energy Nodes cost $8.7 million.
Ms. Farbridge acted as chairperson of a corporation, formed in 2010, known as Guelph Municipal Holdings Inc. Also serving on the board were Councillors Karl Wettstein, Lise Burcher, June Hofland and Todd Dennis. Burcher did not run in 2014 and Dennis and Ms. Farbridge were defeated in the civic election.
That meant that Councillors Hofland and Wettstein served on the GMHI board for five years or more in Wettstein’s case. They were present when the original business plan was developed, yet they never revealed details. They were present when the board meetings were held in closed session for five years, but never said a word about what was happening at GMHI and the Byzantine collection of various companies involved.
Tonight as city councillors, Wettstein and Hofland will be able to vote on the future of the CEI. If they were part of the problem for five years of closed session meetings of GMHI, they should resign or at least recuse themselves from participating in tonight’s meeting.
Oh! What a tangled web we weave
The former mayor did know what was going on and who pushed the failing CEI. She also said little about the role played by GMHI and ultimately Guelph Hydro, plus its subsidiaries, Envida Community Energy Corporation and Guelph Hydro Electric Services Inc
Now Mr. Wettstein says he will not be a candidate for council in 2018. Ms. Hofland tells people that she didn’t understand what was going on.
In 2015, it was reported that GMHI lost $9.4 million. At the same time, Envida owes $11.8 million to GMHI.
Then the staff report says that GMHI does not have the financial capacity to underwrite an expansion of the downtown Node to meet the Combined Heat and Power Standing Offer Program (CHPSOP). To meet that requirement standard, the reports says will cost $29 million.
Are you beginning to believe that this wasn’t such a good idea in the first place? You are not alone.
In the case of the Hanlon District Energy Node, the cost to meet the CHPSOP contract power requirements will be $31 million. That’s a total capital cost of $60 million including the two units already installed, and hooked up to the underground thermal heating and cooling system.
According to the staff report, GMHI has admitted that the two Nodes “will not generate sufficient cash flows over their useful lives to fully recover the costs of installing these assets.” GMHI has already stated it does not have the financial capacity to expand the two Nodes.
Up until this year, the city’s Capital Asset Renewal Reserve (CARR) fund financed the retrofits. Repayment to the reserve will come from cost savings from reduced electricity bills on public buildings with solar panels installed. The repayment is estimated to be completed in ten years. The report did not say how much was taken from the CARR reserve.
Exactly how these power savings will be transferred to the CARR is not explained.
Then there is the item carried on the city books of $68.6 million as an investment in GMHI on our balance sheet. But the so-called investment is already impaired and, over time, this will reduce the value of the investment that will become an expense on the city income statement.
Translation: Citizens could be paying this off over the next 10 to 15 years.
Another wrinkle in this maze of duplicity is the so-called dividends paid to the city by GMHI each year that totaled some $9 million up to 2014. This smells like it was a book entry without actual cash changing hands. If this is true, then it is gross misrepresentation and borders on being criminal.
Now we know why our former Chief Financial Officer, Al Horsman, left the city last August. His successor, General Manager of Finance and city Treasurer, Janice Sheehy, resigned in March after one year on the job. The city finances have been under the supervision of Deputy Chief Administrative Officer, Mark Amorosi for the past 19 months.
This secret scheme is so financially convoluted that we may only get to the bottom of it when the results of an audit are announced in September.
The three options recommended by the consultants and the staff:
In the meantime, this extensive staff report is offering three potential options:
- Exit Option: Exit the District Energy business and specifically shut down both Nodes.
Number One includes paying off agreements with customers using the heating and cooling system. Price tag is estimated to be more than $10 million to exit agreements with customers connected to the two Nodes.
- Operate As-is “Stabilize” the current investments in both systems and continue operations under current contractual agreements, without investing significant capital or infrastructure expansion or spending on business development activities.
Number Two is to keep it going until next March and evaluate the outcome of another nine months of losing money. It not hard to figure out that this is the salvage option to save some reputations and bump the mess into the 2018 budget.
- Preserve opportunity for growth: Continue to operate the current investments within both Nodes and actively assess our position for future investment opportunities.
Number Three represents insanity. We own a system that is losing money at warp speed and it will cost another $59.7 million to fulfill the Farbridge dream.
If you’ve made it this far, you are probably scratching your head over how could this have happened? How could reasonable and experienced people create such a mess and there was no critical comment or explanation for five years?
We now know it happened right under our noses by a small group of people who held absolute power over the city government for nine years.
We may never know the real costs of this failed project, masquerading under the guise of a Community Energy Initiative.
Did you benefit from this? It was a total abuse of the public trust that was a corruptive attempt to inflict a multi-million dollar energy plan on the citizens who had only one recourse every four years: Vote them out of office.
Let’s total up the costs of what is known so far
Cost of installing the Node pumps in the Sleeman Centre and Hanlon Creek Business Park – $8.7 million;
Tax loss costs for GMHI and Envida – $18 million
GMHI loss in 2015 – $9.4 million
Finally there is the $68.6 million investment by GMHI sitting on the city books. The trouble is the investment is impaired because its value declines as servicing the debt costs exceed the value. Over time, the GMHI investment becomes an expense on the City of Guelph’s income statement.
Other charges include $267,000 per year for GMHI Staff. There is a $612,000 break-up fee for contracts with the Independent Electric Service Organization. Add in the cost of consultants including Deloitte.
It appears that the losses so far amount to $37.1 million excluding the $68.6 million listed as an asset on the city financial accounts for GMHI. Also not included are the asset write-downs and write-offs or the so-called $9 million in dividends GMHI alleges it sent to the city.
Annual net income of both Nodes is $123,230. It will take more than 70 years to recoup the $8.7 installation costs. The Hanlon Node is losing $51,193 a year.
The problem lies in the five-year failure of Envida and GMHI to develop a customer base for each Node that would make the District Energy plan and thermal heating and cooling system successful. It was pointed out May 16 by GMHI Chief Executive Officer, Pankaj Sardana, that each Node should have a customer base in buildings of between three and four million square feet in order to meet operating expenses.
In the original business plan of GMHI and Envida it is now apparent that this vital component of the District Energy installations failed to factor in the customer base needed to support the two Nodes.
Here’s what should occur at tonight’s meeting.
The CEI should be scrapped and be reconsidered once the audit of the GMHI operations is completed. The “As-is” District Energy Nodes option proposed by the Deloitte consultants should exist until November 30th. At that time the two Nodes need to be closed down and mothballed until all agreements and associated costs have been settled. Current estimated liability to exit the District Energy system is $10 million.
It is up to our council representatives to consider the stakeholders who they represent and stop the bleeding of city funds supporting this failed attempt to satisfy the ego of a defeated mayor.
I urge Mayor Guthrie to call a recorded vote on each motion and amendment.
It is anticipated there will be arguments made to keep the CEI on track. The more people who attend the meeting, creates the greater opportunity to end this failed project.
Let’s show up and wrap it up.