City Hall had a bit of everything at their open house. Complexity,ambiguity and some frank discussion mixed as City Hall genuinely reached out to voters for feedback and questions on the future of the Gas Production Company in Medicine Hat. I take a moment to acknowledge that on this important issue the city has been open to hearing from its citizens……..and done.
I would summarize the two main viewpoints presented as follows.
Part time politicians make poor energy company directors. E&Y recommends running the gas production company as a company and hiring qualified people to make decisions. (as we blogged back in January) It is clear, that in the highly competitive energy business Medicine Hat’s current model is floundering. Alderman in moments of candor will admit that they are pretty unqualified to attempt to run a billion dollar energy business – and I for one agree that the structure of how the production company is managed likely makes competing with companies like Encana for production pretty risky if not suicidal in the long run.
Citizens of Medicine Hat did take the time to review the recommendations and asked some tough but fair questions regarding the political accountability of such a board – and even chasing the Mayor into saying he wasn’t so sure about the new structure model either.
Personally I think if you drilled down to the root concern for the people in attendance it would be this –
1) will making a private gas production company make our utility bills go higher
2) Is the city planning on selling off the gas company
3) What is the future of our resource
Frankly those are some fair and legitimate questions.
People in Alberta are well aware of how badly privatization and deregulation of the energy business failed the citizens in other communities. People may recall that back in 1993 Albertans owned 50% of what is now Encana and sold off the asset for a paltry $19 / share. Other than the staggering loss of equity Albertans also lost major management over their own resource – as it is now exploited by many interests that have no connection back to the people of this Province.
In addition – the policy of adding private for profit companies in energy deregulation badly hurt small business and home owners in communities all over Alberta. The University of Alberta’s Parkland Institute reported in 2001:
The first lesson taken from this research is that Albertans have not experienced lower prices, or a more stable supply of electricity under a deregulated electricity regime. In contrast, Albertans are paying a premium price for their deregulated electricity. Between June and October of 2000, the price of electricity rose from 5 cents to 25 cents per kWh (kilo watt hour). Without the $2.3 billion rebate program for households and businesses, Albertans would have seen their residential electric bills go up by 500% in this same period
To counter vocal criticism of rising electricity prices, the Alberta government claimed that rising electricity prices simply reflected the higher price of natural gas and the correspondingly higher cost of producing electricity. To evaluate these claims we calculated the cost of producing power in Alberta, compared it to the selling price, and found that higher production costs cannot explain skyrocketing electricity prices. Taking into account increases in natural gas prices, the average cost of generating electricity should not have gone over 6.38 cents per kWh in December 2000, yet the average pool price was 18.99 cents - almost three times the estimated cost. Contrary to the government’s optimistic claims about ‘competition’ and market efficiency, deregulation has introduced a complex system of buying and selling that can allow collusion between sellers, and enables producers to sell electricity at prices well above the cost of production.
Even though the topic is complex, the working Joe Medicine Hatter is well aware of the fact that as Provincial citizens Hatters were substantially insulated from the experience of the rest of Alberta. While Calgary and Red Deer were paying more for utilities than their mortgages we had a very smooth and advantageous ride. Medicine Hat owns it own Utility, its own electrical grid, its own distribution company and its own Oil and Gas Production company. The question becomes - Does the proposed solution from E&Y and the decision city council is facing, potentially put Medicine Hat is the same marketplace that sees the fox eating the hens everywhere else?
The answer since its complex in my view is:- no, maybe and kinda.
First – unlike Ralph Klein’s disastrous policy of selling off the AEC (Encana) Assets – Medicine Hat is NOT CONSIDERING SELLING our gas production assets (valued at somewhere near a billion dollars …not too bad for a city of 60,000 people) - The key understanding is that the private company is really a reorganization of how the company will operate – not of who owns it. E&Y’s recommendation is that the city (us taxpayers) own 100% of the shares of the proposed company.
Second: In a lot of ways maintaining that ownership is a very visionary and forward thinking idea. Similar to when Peter Laughheed had the province start AEC as an energy company in the first place. The Natural Gas is our resource – and in my view it is an important to secure for our community the energy we will need as a city for generations to come. Even setting aside discussion on profits and the legacy fund for a moment it is essential that Hatters own and secure that resource for ourselves…its pretty cold some winters. E&Y is just pointing out that private companies run by experts would be better at securing that future than local alderman …and I agree - It would be a terrible mis management of our resource if future generations of Hatters had to buy their energy back from the USA after we sold our natural gas in a massive rush at what is now a pretty low price.
Third: Our Utility Rates – Are we vulnerable to Calgary type utility increases like other communities went through during privatization. The answer to that may well be NO, but I caution there is still room for concern. The Mayor was quick to point out that they are not considering running our utilities as a private company – only the gas production company. So council will still be setting your utility rate increases.
However, lets be realistic the City will be buying its Gas from the production company that we create – and are we not at their mercy then for a generous price? As taxpayers we are not the main customer of City of Medicine Hat’s gas production. 80% of it we sell to other people and the tax payer would want to get top dollar for that and create a tidy dividend for Medicine Hat.
The Key Question unanswered is – Will the new private company have the same motivation to offer us the Gas users in Medicine Hat an advantageous rate? The answer is that under this model IT COULD. City Council COULD opt to subsidize the utility rate as they have in the past. Under the E&Y model the new board of qualified directors still gets it agenda from the shareholders (us through our city council). So the City could direct the new production company to make pay a dividend of X amount of dollars – and ensure that gas for our own use is sold to us at 15% less than market rate or whatever – We could do that.
The model suggested by E&Y could have the political accountability that I believe my fellow citizens are asking about when they are concerned with the structure of the new board. It is a fair and reasonable concern going forward though – because the E&Y recommendations do not say what the corporate mission of this new company will be – only that council would get to set that.
So does this new business model leave us open to 1999-esque Calgary type price increases? – The answer is that the model itself does not, but the concern overall is still one Hatters need to communicate to council if we are to safeguard the Medicine Hat advantage.
…Just one little mouse’s viewpoint anyways
My first reaction:
Set up a monopoly to sell our gas back to us at a profit?
If as you suggest DM the new structure can still support the political arena setting the mandate for the new company then I might be able to support it. It is hard to support something that you know is really complex, but also very important.
great post again DM. This is a pretty big deal. How many municipalities are entering the highly competitive energy business? We should have an alderman on the board, and this should be a full time position.
Now, whether we pay all of our alderman a full-time salary, or we just vote specifically for one alderman who sits on this board and it is a full time job…I dont know what is the best solution.
For some reason, I dont think the citizens of MH would agree to Alderman getting paid a full salary, but that is another post.
So making a qualified and seperate board manage the gas production company would solve the problem of inept alderman running the big energy company. I get that.
But DM is right that we should be cautious of a host of new problems that doing that might create that council may not be considering. It is important for the city to communicate clear goals and clear intentions to alleviate the mis trust on this issue.
Skeet:
Enmax in Calgary sits 2 Alderman on their board and the company is 100% owned by the people of Calgary
E&Y claims its not necessary though - and they may be right. The board in the end answers to council and has a business shareholders mandate. If they are given a task and they do not perform then council theoretically could remove them (fire them) - I just doubt this would actually happen…if you have a board of people with knowledge …reporting to a council who does not, we have the same problem as we have now. At the end of the day leadership power or a mandate still comes from taxpayer through our votes - so even under this new model we still get the leadership we deserve.
realistically though it is a concern. North America has seen some pretty awful behaviour from companies whose board acts not in the best interest of shareholders and accountability is pretty tricky. From Enron to the banking industry it is legit for people to have concerns with the oversight of a private board of directors.
It should be noted though that a private company has more rules of reporting and transparency than the city currently displays with its energy business.
The analysis done is flawed as well. The city directed E&Y to analyze the gas production company in isolation of the rest of the process. There is real synergy in Medicine Hat owning all 4 company’s - why did they not consider the best scenarios for taking advantage of the unique position we have? How about making recommendations that utilize our unique position?
Calgary and Edmonton and other places are not ideal models for how to run a city utility - Medicine Hat is - we are the envy of every municipality in the west. They should want to be more like us…not us trying to match what they have done.
I agree with Electro in that the report does not include the full utility production and fails to include even more confusion. As stated before Consultants give you what you ask for in their recommendations. Whats wrong with hiring the expertise as a city employee or two or three. Guarantee it would be cheaper than an independent board. Information provided for this opinion by K Consulting.
That is an interesting point Electro - it is interesting that there is no study done on the synergy of owning all the different energy businesses.
I have not heard WHY council chose to frame the report objectives and review the production business in isolation of all the others. I do think that council is probably right in identifying production as being the one company that is most disadvantaged by being tied to alderman.
Citizen K,
I like a conspiracy theory as much as the next person, and I do agree to a point that the E&Y study was probably sought to support the viewpoint of changing the management structure of the production company - In my view in many ways that particular aspect of the discussion is a no brainer - how can 8 part time alderman with no energy experience be the final decision on running a billion dollar company to compete with Encana. As we use up our gas reserves they would get creamed trying to compete on the market for new ones.
I guess for me - whether or not you question the motives that E&Y were hired under …they still make a pretty compelling argument for having a separate board of directors for Prodco.
If your counter argument to that is the price of having a qualified energy company board - I would counter by saying the price of having the alderman who are simply not qualified to do it - continue as they are, would be much more costly.
DM, all I am saying is that the expertise could be found in hiring the right city employee,s. Council does not run Prodco they have staff that they should be listening to. Having been in management for many years and making decisions on various matters beyond my knowledge base was not difficult. All I had to do was hire the best staff available with the expertise required. The board of directors for Encana are not O&G experts,they are good managers and employ the expertise required. When we elect council, we are electing the management structure for our city and I expect them to be competent or we toss them at the next election.
All board of directors are tasked with hiring qualified individuals - they are also the ultimate place of responsibility and accountability. How can we possibly demand they make quality decisions on a topic they know mostly nothing about …and worse have to compete head to head against people who very much DO know what they are doing, and hire quality staff as well. Our Prodco company is to compete head to head with the Encana, the most succesful company in Canadian business hisotry against their board of directors for making quality decisions.
This is the type of qualifications an Encana board member has…
That is a board member.
With due respect - John Hamil’s expertise on morning talk radio doesn’t put him in anywhere near the same level of expertise to be running a billion dollar energy company. City Council members do not have this expertise, ask any of them, they dont deny it - its easy to say we can just vote them out I guess but there some key problems with that.
1) we need qualified people to make timely and informed decisions on a regular basis - this cant be done on the same schedule as public office.
2) The qualifications to be a successful politician are likely quite different from the ones required to be a successful Oil and Gas production company director.
3) Governments have a pretty long history of being not very good at running competitive companies.
Remember that historically Medicine Hat already HAD the gas fields to exploit, but when we are talking about sustainability and BUYING new fields, selling the excess gas on the market to subsidize etc etc - we need people with actual skill in that industry or they will get crushed.
That doesn’t mean that you and I are too far off on our expectations of prodco, but the operational model to be successful simply has to be directed by a competent and accountable board….in the past we have only had accountable - but since they were managing a resource that we already discovered it wasn’t as critical (though in spite of our good position it is a reasonable question to wonder how much MORE Hatters could have if the company had been operated by professionals) …but 2009 is a new ballgame.
1) Gas is NOT as easy to go and find …much higher risk
2) Exploration and production is substantially more competitive.
So much for having the lowest utility rates anywhere in the province.
People here should read about the experience in Edmonton. Their city council created Epcor about 11 or 12 years ago with the same rationale as is being used by our council. Now Epcor is selling the power distribution to a private company and council can’t do anything to stop it. This recommendation is privatization by the back door even if that is not the immediate intention. We must say no to this. We have a board and it’s called city council. If the current council members do not feel qualified they should resign. We have hired people to be the “experts” and if the proper questions are asked then council members should be able to make decisions. It makes me wonder what other issues council members don’t feel qualified to make.