Power sale would have to create legacy fund, energy chair says
The Medicine Hat city councillor pressing for utility officials to explore potential offers on the city’s municipal power plant says he’s prepared to reject ones that don’t provide enough cash to create a “substantial legacy” fund.
Phil Turnbull told the News that there are commercial sensitivities surrounding the effort announced last week, but there has been “strong interest” since the city announced it would embark on a “strategic review” that could include a sale of the 110-year-old generation business.
“If we couldn’t get enough for a substantial investment fund that would provide a substantial return, I’d stay with it,” Turnbull, chair of council’s utility committee, said Thursday.
That division announced last week it was exploring alternatives to maintaining the city’s power generating plants, and outlines potential sale and partnership options with the private sector.
Turnbull, most councillors and Mayor Ted Clugston have said they are currently determining whether the risks of a technological shift to lower cost green power production.
An alternative could be to sell the power plant before the business is potentially impaired and reinvest the money in an interestbearing fund.
The power plant produced more than a $30-million dividend in 2018 and 2019.
While Turnbull wouldn’t estimate on funds required or what a substantial return would be, he said that’s being considered alongside the value of the power plant.
Sell too soon, or too late, he said, and the city loses value.
“That’s why we’ve got to study the issues,” said Turnbull.
The energy and utility division has not put a timeline on the review or released forecasting to the public, which is not uncommon, said analysts contacted by the News.
“It comes down to fundamental economics, and how do you decide whether it is greater return to sell an asset and reinvest somewhere else,” said Mark Kolesar, a former Alberta Utilities Commission chair who is now a private consultant.
“There is a very complex modelling and forecasting there, and part of the challenge (with public utilities) is there is a political consideration involved in the decision.”
Other independent utility sector observers tell the News it is hard to estimate a range for the offers considering several factors, not just the long-term power price or the effect of new gas and renewable supply renewable.
Administrators and elected officials have said the distribution network, on which the city earns a stable, regulated rate of return, would not be part of any sales offer.
“It’s the last regulated utility (area in Alberta, and there’s worth to that (supply contract),” said Ben Thibault, a private-sector analyst and former energy policy adviser for the Alberta government.
If brand new, the cost to bring on the city’s 250-megawatt production, which will rise to 300 in two years thanks to ongoing expansion, could be above $300 million, said one analyst.
However the current condition of the plant must be considered, along with existing contracts and the value of the city’s monopoly franchise to sell local power in the city, Redcliff and parts of Cypress County.
It is difficult to determine the amount of debt attributed to the power plant in city financial statements, but the business unit borrowed $55 million in 2017 to complete an expansion, and could borrow up to another $60 million for a planned expansion by 2023.
Most other projects have been covered out of equipment reserves, and all generation capital work and debt repayment are covered out of operating income, not through fees on utility bills.
The city’s current heritage savings reserve policy allows withdrawals only when returns exceed a rolling rate of return that is tied to inflation.