Energy #22 – Electricity Distribution: A Radical Proposal

This is a proposal to alter, in a fairly radical way, how electricity distribution rates are set in the province of Ontario.

The proposal is to shift to postage-stamp rates, i.e. everyone in the province with similar distribution requirements pays the same for their electricity distribution.  We essentially socialize the costs of electricity distribution, the same as we socialize many other costs that have a broad societal benefit (including electricity transmission and generation).

Benefits.  The goals are three-fold.

First, postage-stamp rates will change the equation for consolidation within the industry.  A merger or acquisition will not affect local rates.  Improvements in cost-effectiveness will benefit everyone in the province, whether directly involved or not.  Acquirors with high rates (hello, Hydro One) will no longer face a rate harmonization barrier, because no-one will have high rates.  Everyone will have the same rates.  Acquirors will have to demonstrate that they can control costs going forward, so that everyone benefits.

Second, this approach will change how individual distributors approach requests for budget increases.  Under this new paradigm, individual distributors will be asking for a bigger piece of a common pie.  The focus of their applications will have to be how they are improving outcomes for customers, relative not just to their own past history, but also to the rest of the industry.  Cost-benefit analysis will become more important, as will benchmarking to peers.  The available funds are no longer open-ended.  You get more only if you deserve more relative to your peers.

Third, the risk of the death spiral would be spread across the industry, instead of being borne by individual distributors.  Not only does this manage the risk, but it also strongly promotes joint action between distributions to counter this risk.  There is a lot to be said for a feeling of “we’re all in this together”.

In all respects, this is a fundamentally more customer-focused paradigm than the current system, although it is also intended to protect the utilities.

But how do you actually achieve this result?

My plan is to deal with this proposal in two steps, i.e. two articles.  This article sets out the basic approach being proposed.  Then, assuming there is feedback (I can only hope!), the second article a couple of months later will talk about how to overcome the many barriers to this kind of change.

The New System

There are two basic parts to this:  where do we want to end up, and what transitional steps are required to get there?

Let’s start with where we want to end up.

Under this proposal, the rates for each electricity distributor are the same.  That doesn’t mean that their net revenue is the same.  There are legitimate reasons why some distributors need more money than others to provide the same service.  We can’t just ignore that reality.

The postage-stamp system of ratemaking shifts the paradigm.  What individual distributors seek from the Ontario Energy Board is no longer rate approval.  Their rates will be the same as everyone else.  A “rate” application will become a revenue requirement application.

Standardized, Industry-Wide Rate Increase.  To get to this state, it is proposed that the OEB start each year (probably several months prior) by determining a percentage increase in distribution rates, and determining the industry-wide revenue requirement that results from that percentage increase.

The OEB would therefore have to figure out a reasonable increase in overall industry costs, and the changes in load that can be expected.  These two results would then determine the industry-wide revenue requirement.

Done properly, this comes about through a joint/generic hearing process each year, in which evidence is led by utilities and customer groups as to inflation and other cost pressures common across the sector, and special needs that may need to be addressed (a common cause problem with a particular kind of wire, for example). Load forecasts must also be debated, presumably with utilities going low and others forecasting much higher.

The first time this all happens, it will be a zoo.  After the second time, it will be less controversial.  Everyone will understand the parameters, and the Board will have little patience with those who want to re-argue the same points every year.  In the long run, dealing with these issues in a common proceeding is almost certainly a saving in regulatory costs, and an improvement in the quality of the results.

If I had to guess, I would say that the result will be a distribution-specific inflation/productivity (I minus X, for the cognoscenti) factor that is adjusted annually based on known external parameters, and becomes the expected increase in rates each year.  Similarly, a load forecast methodology will be agreed (or imposed), and applied by independent experts that the utilities and customer groups oppose at their peril.

Individual Distributor Applications – Cost of Service.  Suppose that the Board establishes a rate increase across the province of 2%, and determines that based on the expected load that means $3.5 billion is available for distributors.  Who gets that money?

My proposal is that we continue with a kind of IRM, but using revenue requirement rather than price cap.  Every five years, a distributor will come in for cost of service, with their share of the total pie based on their costs, and their performance.  For other years, they will have their share of the total pie determined based on a revenue cap IRM, either based on a formula (e.g. 70% of the approved annual increase) or based on a type of Custom IR approach.

Thus, Distributor A, in their cost of service year, will file an application saying that their share of the overall pie should not increase by 2% – the overall increase – but by 6%, because they have special cost pressures blah blah blah.

The Board will then look at their application, and ask the question:  “What are you doing for your customers that justifies more than 2%?”

In this environment, Distributor A understands that, to get more than 2%, they have to show that they are delivering more for their customers than their peers.  They have to show that their customer service is above average, and/or their reliability is above average, etc.  This is not about costs.  The Board will have already determined the reasonable cost increases across the industry.  Unless Distributor A can show that the cost pressures affect them differently than their peers (an uphill battle in most cases), or they are delivering better outcomes, they get 2%.

Let’s say Distributor A proves they are above average, so they get 4%.  Someone else has to be below average, and get less than 2% to balance out that extra money for Distributor A.  It is a zero-sum process, in which distributors are constantly vying to be the best (or not the worst) performers relative to their peers.

Revenues Do Not Equal Revenue Requirement.  Distributor A then has authority to get $100 million a year, but the standard rates for customers will produce revenue in their service territory of $120 million.  Distributor A has to pay $20 million (to be paid monthly) into the common pool so that the distributor nets $100 million after collecting rates and paying to the pool.  Conversely, Distributor B has authority to get $100 million a year in revenue requirement, but will recover from customers only $80 million.  Distributor B gets recovery of that shortfall from the pool, also monthly.

IRM Distributors.  For most distributors, of course, this year will not be a cost of service year.  For those distributors, their share of the common distribution rates pool will be their last approved revenue requirement, increased by a revenue cap percentage, and by that distributor’s share of the increase or decrease in load.

Distributor C, for example, is in an IRM year.  Their load (billing determinants) is expected to increase by a weighted average of 1% (which has been factored into the industry-wide load forecast by the Board), and their previously approved revenue requirement is $100 million.  Their share of the pool this year will be $102.4 million (1% increase for load, plus 70% of 2% for cost pressures).

Regulator Responsible for Total Approved Revenue Requirement.  For the regulator, this all means that there is a target total of revenue requirement increases across the industry.  As the applications come in, the Board will have to keep a running count of how much of the pool it is “spending” by authorizing revenue requirement applications.  If it allows too many distributors to get more than the amount of the rate increase plus load increase, it will find that it overspends the pool, and the industry-wide rates will not recover all of the costs.  While this can be adjusted in a subsequent year, there will be constant pressure on the regulator to keep cumulative revenue requirement increases in line with the objectively-determined overall increase.

If the OEB says that $3.5 billion of distribution rates is the right number, it will look bad if it authorizes $3.8 billion of actual distribution spending through the combined total of individual applications.

Impacts.  What are the effects of this equalized system?

One obvious result is that people and businesses are no longer penalized in distribution rates because of where they are located.  That high school in Ancaster that I have been going on about for more than a decade (some people say too much) will pay the same as the high school down the road in Hamilton.  More important, customers in low density areas like Innisfil will pay the same as those in Kingston, and when Innisfil density improves due to their known demographic trends, that will affect not just Innisfil rates.  Everyone will benefit.  Innisfil will effectively be subsidized, but over time that subsidy will decline.

Electricity will be treated, in this model, as a public service for which everyone has the same right, and the same cost.  The cost of the commodity, and the cost of transmission, are already the same.  Why not distribution?  In many respects, this follows on the Fair Hydro plan, although it takes it a step further.

Another result is that the biggest barrier to consolidation – rate disparities – is removed.  “No harm” will no longer include rates.  Customers in a local area cannot be harmed by the higher rates of an acquiror, because there will be no need for a future rate harmonization.  They already pay the same rates.

Costs will matter, of course, but only the net improvement as a result of a transaction.  This is consistent with the Board’s policy.  It has just never been able to get there, because rates are different around the province.

In this system, the costs and benefits of a merger are not a customer problem.  They are a shareholder problem…and opportunity.  What is important on consolidation will be whether the new entity will be more efficient relative to its peers.  Consolidation is a shareholder activity, so it is a shareholder result as well.  Good consolidations will result in more ability to get increased budgets, and thus grow the business.  Bad consolidations will diminish available funds.  In each case, it will be the shareholders that are impacted.

Of most importance, though, every cost of service rate application will be about why this particular distributor should get a disproportionate share of the common pool.  Today, a rate application is about how much the local customers should pay.  The available funds are largely open-ended, despite the Board’s attempts to keep them under control.

Under this new system, the available funds are not open-ended.  There is a fixed pool.  If a distributor asks for more than their proportionate share, someone has to get less.  Which distributor is more deserving?  That is a new question, never asked before.

(Is there a role in this system for variable ROE based on outcomes, as I have speculated previously?  I think that in this system, allowed ROE can be variable around a predetermined standard, depending on what is delivered to customers.  However, that may not be implementable in the first phase.  It is, however, probably worth considering as the system evolves.)

Conclusion.  This new system is therefore at its roots a customer-centric system.  What the customer across the province pays is determined objectively.  What any given distributor receives is based on their performance relative to their peers.  Their revenue is not driven by what their customers pay, but by how well they perform.

How To Transition to This System?

Let’s not fool ourselves.  Moving from geographically-derived distribution rates to postage stamp (socialized) rates means there will be winners and losers.

Who Benefits?  Objectively, for residential customers it would mean that 3.4 million customers get a rate increase, and 1.2 million customers get a rate decrease.  However, this is largely because of the move to all fixed charges.  When that impact is removed, the distribution of increases and decreases is more balanced, and the impacts on individual customers are small.

The imbalance is also true for small business customers, where 55% would have a decrease, and 45% would have an increase.  Again, the impacts on most individual customers are small.

What is perhaps more worrisome is that the main beneficiaries of this new system are the customers of Toronto Hydro and Hydro One (at least, some of them), because they have high rates today relative to their peers.  For the most part, the customers of utilities that have been able to distribute electricity at lower costs – small and medium sized municipalities – will be the ones that have rate increases.

Impacts of Harmonization.  On the other hand, in the longer term the effect of the system should be to reduce rates across the province by inter-utility competition for the rate pool.  Further, by making consolidation easier, this effect should be enhanced.

The OEB has had to deal with harmonization in the past.  As long as the differences are not too substantial (and they aren’t here, except in some unusual cases), this is something that can be phased in over a few years with no noticeable impact.

One thing that is worth noting is that the Fair Hydro Plan makes this an opportune time to implement such a system.  Fair Hydro mutes the differences in rates between distributors for many customers.  A transition in that context has less impact.

The Common Pool

The one thing that is left is the structure of the common pool.  Transmission has postage-stamp rates, but transmission charges are collected by IESO and distributed to the transmission companies.  There is a built-in mechanism to collect and distribute between the claimants on the pool.

Not so with distribution.  They are in the front lines, so they have in the past collected money on their own behalf, then kept it.

Obviously one way to create a common pool is to have distribution revenues go through IESO, as with transmission.  This has the advantage of simplicity, but it would require changes to the legislation.

Another option is to create deferral accounts for approved revenue greater or lesser than the revenue generated from rates (this probably has to be done in any case).  The balances in the deferral accounts could then be paid to or received from a common pool established by the OEB.  Would this require changes to the legislation?  Most likely, but it is less certain than if IESO is the intermediary.

Having said that, in my view this is not a change that the OEB should implement without government approval and legislative guidance.

There is a lot to be said for the OEB coming up with a policy alternative like this, and presenting it to government.  That is different from implementing this approach without government approval.  The role of the OEB is to implement its government-approved mandate.  That mandate does not include postage-stamp distribution rates.

If “just and reasonable rates”, and other policy goals, are best achieved by postage-stamp rates, the government should be told, even convinced, but in the end it is a legislative decision, not a regulatory decision.


In Ontario we have issues with barriers to consolidation of the distribution sector, and we have challenges getting electricity distributors to adopt a customer-focused, outcomes-based relationship with their customers.  We also have social and economic problems because of the large differences between distribution rates from one location to another.

If distributors all had the same rates, the last problem would be moot; consolidation would have one less barrier; and the customer-focused approach would be enhanced and encouraged.

This is therefore a proposal to implement postage-stamp distribution rates in the province of Ontario.

  –  Jay Shepherd, February 20, 2018

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I’m thirty years removed from being the smallest guy on my varsity hockey team.  My teenagers call me “old man”.

The kid was more like a linebacker.  He was maybe seventeen, too young to be in the bar, drunk and belligerent.

He towered over me, screaming in my face.  When I tried to stand up, he jammed me back down.  Typical bully.

I put not just anger, but also all of my frustrations and fears, into that one vicious uppercut to his balls.

As he lay on the ground, writhing in pain, he looked smaller, more like a kid.

     –   Jay Shepherd, February 11, 2018

Posted in Short Stories | Tagged , , , | 1 Comment

Lives #13 – #MeToo?

[This is the thirteenth in a series of stories about interesting people I’ve known, called “Lives”.  I don’t know whether you would call it non-fiction, or fiction.  I’ve changed the names, and some of the details, so that the individuals are not identifiable.  However, I think I’ve stayed true to the essence of what really happened.  The point is what can be drawn from the story, and at least that part is 100% true.]

My friend Lisa just celebrated her 30th birthday.  I was not there (she lives in Calgary), but she tells me that she and Larry, her fiancée (and boss), had a quiet dinner, then went to what turned out to be a surprise party thrown by some of her friends and co-workers.

Given the conflicts circling around her relationship with Larry, the party must have been a welcome respite.

Lisa grew up in Toronto, in a middle class Italian family still living, then and now, in the Via Italia neighbourhood.  After high school, she decided to take a “gap year”, and basically backpacked through southeast Asia.  Her trip kept being extended, though, as she added travel in China, Japan, and Australia.

Then, she decided not to come back at all.

It wasn’t anything dramatic.  She just enjoyed not being in school, and she found she could get jobs, and look after herself, no matter where she was living.

So, she went to London (England) and worked in an office, answering phones and getting paid under the table.   She was great with the customers, and her fluency in both English and French was an asset.  She even spoke a bit of Chinese by then, which helped even more.  Her big disadvantages were her lack of a college education, and her illegal status.

After a couple of years, she got tired of it, and came back to Canada.  A visit to her parents ended up being shorter than planned, because she was unwilling to endure the constant refrain of “go to university”.  She got a job in a restaurant, worked three weeks, and with those small savings decamped immediately to Calgary.

With $600 and no place to stay, Lisa was highly motivated to find a job in Calgary as soon as possible, and she did.  It took her three days (!) to find a customer service job in a small company.

Lisa didn’t meet Larry, the owner of the company, when she joined his company.  Lisa was hired by a manager, and reported to the supervisor of a small group of customer service representatives.  Mainly, the job was to handle complaints, and make changes to the services customers were buying.

Larry was then 29 (now 38), and he didn’t become the owner of the company because he was some kind of gifted entrepreneur.  Larry got his BSc in microbiology, then went on to get a masters, but by then it was clear that he was not going to end up in academia or government.  His only option, to stay in the field, was to make lots of money working for a large company doing what he was told, or to make very little money working for a non-profit.

Luckily for Larry, his parents are pretty well off.   When Larry found a small Calgary company in financial difficulty, his parents bought a majority interest in Larry’s name.  He became, at the age of 25, the owner of a company with $8 million in revenues, but losing money.

Now, before you go jumping to conclusions, the company was in need of a turnaround, and Larry did just that.  He may not have been a world class scientist, but he isn’t an idiot, and he certainly isn’t afraid of hard work.  After all, he got his MSc primarily through hard work.  It took him a couple of years, and for sure the strong financial backing from his family helped a lot.  Still, it was Larry who turned the company around.  No-one else.

When Lisa joined the company two years after that, it was ticking along smoothly, making money and keeping its customers happy.  Lisa, though, made it better.  As everyone around her quickly realized, she was just a genius with customers.  Her co-workers also liked her, and she was enjoying herself.

Lisa worked in the customer service department for three years before Larry even noticed her.  She was getting good performance reviews from her manager and supervisor, and increases in pay, but she rarely had any reason to be in contact with the company’s president.

That changed in 2012, when she solved a problem for a long-time customer who happened to know Larry’s family.  (Calgary is sometimes smaller than you think.)  The customer went over the top talking to Larry’s parents, and then Larry, about this particular employee.  When Larry brought her into his office to congratulate her, it was their first conversation of more than two sentences.

A week later, the still-single Larry asked her out on a “date”.  Lisa was nervous about dating the boss, eight years her senior, but with some hesitation she went, and she had a good time.  That led to two more dates, both very positive.  Lisa is a reasonably attractive and intelligent woman, and Larry is a reasonably attractive and intelligent guy.  They had many other things in common, and the relationship looked, to Lisa, like it might have some real potential.

Within a month of their first date, Lisa was given a promotion to supervisor of a small team of customer service representatives.  She didn’t ask for it.   In fact, it was a surprise.  And, although there was no doubt she deserved the promotion, she didn’t really like it.  It seemed to her like it might be tainted, and she wasn’t comfortable.

Nor were her co-workers.  As soon as they realized she had been dating the boss, and then got a promotion, they turned on her despite her previous popularity.

Lisa didn’t hesitate in her decision.  Right away, she quit the job, and two weeks after that she was back living in Toronto.  She refused to talk to Larry.  This was not what she wanted.

That’s the end of the story, right?


From 2012 to 2015, Lisa lived mostly in Toronto.  She worked in small and large companies, took courses on information technology (not in her wheelhouse, but she enjoyed them), started her own small business (it failed), and ended up working in customer service at a large utility.  That’s where she was when Larry, in town for some other reason – he says –, decided to look her up.  They went out, found that they still had lots in common, and enjoyed themselves.

Over the next two months, Larry found several reasons to be back in Toronto, and each trip ended up being focused on Lisa.  In the second month, he stopped getting a hotel room, instead staying in Lisa’s apartment.

They never talked about their history, but they did talk about their future.  Larry, a traditionalist, asked Lisa to marry him by getting down on one knee in front of her entire family on Christmas Eve 2015.  She said yes.

It was during the period when they were making arrangements for her to move to Calgary that Larry broached the subject of coming back to work for his company.  Larry told her she was the best employee the company had ever had (probably true), and he wanted her to be Manager of Customer Relations, one of the three jobs reporting directly to Larry.  She would be in charge of a dozen CSRs and their supervisors, as well as the IT department and the marketing department.  It was a great job, perfect for Lisa.

The offer almost knocked their relationship off the rails again, but in the end she said yes to the job despite her misgivings.  In the middle of 2016, when she returned to Calgary, it was to a new apartment (she wasn’t yet ready to live in Larry’s somewhat gaudy house), and a new job.

She’s still in that job, and as expected she’s very good at it.  It turns out she isn’t just good with customers.  She is also good with staff.

But Lisa’s decision to work for Larry has their families, friends and co-workers deeply divided.

A case in point is Lisa’s older brother Mike.  As far as Mike is concerned, Lisa got her good job by finally agreeing to sleep with the boss.  Larry, in Mike’s view, is just a sexual predator using his power to get what he wants.  Mike refuses to speak to Larry at all.

Mike is not alone, although he is at the extreme end of the spectrum.  Lisa’s sister Mary has agreed to be maid of honour at the upcoming (2019, they say) wedding, but also expresses concern about the dual relationship.  “Why did you leave Calgary the first time?” she asked Lisa recently.

At the other extreme, Lisa’s best friend at the utility, Norma, is vigorous in her defence of the relationship.  “They fell in love.  They’re going to get married.  They’ll both work in the family company, as many couples do.  How is there anything bad there?”

Lisa tells me that, at a recent Thanksgiving dinner at Larry’s parents’ home, this debate spilled into the open.  Larry’s sister has secretly been expressing the same view as Lisa’s brother, and after a few drinks pointedly asked Lisa in front of Larry’s family whether it was time for her to say #MeToo.  Before Lisa could respond, Larry’s mother went ballistic, saying things to her daughter that perhaps should not have been said.

It was not pretty.

I’ve talked to both Lisa and Larry since then.  Both are adamant that their personal relationship and business relationship are completely separate, despite the apparent evidence to the contrary.  However, both recognize that what they present to their family and friends has many people confused, even upset.

Now they plan to move in together.  At Lisa’s insistence it is to a new house that they both will choose and pay for, and is theirs, not Larry’s.  When they do, tongues will wag even more.

Lisa said to me the other day:  “Larry’s focused right now on whether some people will refuse to come to the wedding, which is why he wanted a delay.  For me, that’s just bullshit.  The only thing that matters is that our relationship will last for a long time, and will make us happy.  When that happens, we will be right, and they will be wrong.  End of story.”

Frankly, I don’t know what to think.

If anything.

  • Jay Shepherd, January 3, 2018
Posted in Lives | Tagged , , , , | 1 Comment

Energy #21 – Guelph Hydro: Fifteen Claims

Since my article on November 5th analysing aspects of the Guelph Hydro Alectra merger, a number of readers in Guelph have asked me to look at the transaction further, particularly in light of the lengthy report tabled December 1st to Guelph City Council.

The best way to do that is to look at the actual agreements.  That way the information is clear and precise, and is not filtered by the perspectives of those providing the information.

I asked the Mayor, the CAO, Guelph Hydro and Alectra for the agreements, but was told by Guelph Hydro CEO Pankaj Sardana (who was apparently designated to respond on everyone’s behalf) that the agreements are not final, and so cannot be shared.  I believe they have, however, been circulated to the Guelph Hydro and Alectra boards of directors, to City Council, and others, so they can’t be that confidential (40-60 people have probably seen them by now).

Further, under OEB rules they will have to be made public when OEB approval is sought, although of course by then they will be signed, and Guelph will be legally obligated to complete the deal.  Public disclosure at that point doesn’t really help anyone.

It thus appears that the primary reason to withhold public disclosure now must be so that the public doesn’t have all of the details of the transaction.

That is unfortunate, but it is what it is.  I will have to provide my commentary based on the report to City Council.

That report comes from a specific, pro-merger perspective.  For example, the Guelph Hydro lawyers providing the legal analysis are the same firm that represented Alectra in their merger application before the Ontario Energy Board.  While I’m sure they are trying to be objective (and they are a good firm that I know well), they have an obvious point of view.  No matter how well they may eliminate their bias in fact, it is pretty difficult for them to remove the perception of non-objectivity.

The commentary below takes several of the claims in the report to City Council, fifteen in all, and assesses how they match up with the facts.

I repeat my earlier comment that I do not have an opinion on this transaction.  This article is intended to provide information and analysis, but any interpretation that suggests I think the transaction is good, or not good, would be incorrect.  I strongly believe that it is the residents of Guelph whose opinion matters.  My opinion – even if I had one – does not.

Claim #1:  A merger between Guelph Hydro and Alectra is better for Guelph residents in the long term than Guelph Hydro remaining a standalone utility.

This claim is likely to be correct.

However, it is also highly problematic, because this comparison asks the wrong question.

Guelph Hydro as a standalone utility is probably not a viable long-term option.  As the electricity distribution sector expands and becomes more complex, smaller distributors will have a hard time keeping up.  Further, they will have a hard time recruiting the best people, which will put them even more behind the curve. In these respects, the discussion of “Utility 2.0” in the report and attachments is largely accurate.  We are entering a period of change.

Guelph Hydro is big enough to be a very good utility today.  As expectations on, and challenges facing, distributors increase in the next decade or so, Guelph Hydro will probably be at a disadvantage unless it increases in size through merger or acquisition.

This means that comparing any merger proposal to the standalone option starts out stacked in favour of the merger.  Size is going to matter.  Standalone is effectively a straw man.  It is not going to happen.

The fair comparison would be a merger with Alectra vs. a merger with Cambridge or Kitchener or Waterloo or Milton or Halton Hills or Oakville or Burlington, or even several of them.  The problem is that the residents of Guelph don’t know whether those possibilities were considered and, if so, what stood in the way of reaching agreement on any of those potential merger directions.

Without that information, it is impossible to know whether the Alectra merger is better than other  viable alternatives.  The public doesn’t know what other alternatives were available, and/or considered.  (It’s a secret.  Largely for legitimate reasons, but it’s still a secret.)

The only comparison given is to an option that is not viable.  Take this deal, or die.  That is not really useful.

Claim #2:  “Guelph Hydro will pay the City a special dividend of $18.5 million immediately prior to closing, without adversely affecting its regular annual dividend.”

The implication is that this is a benefit from the transaction.  It is not.

The “special dividend” has to be paid to adjust the debt equity ratio of Guelph Hydro to roughly 60/40, the standard for Ontario distributors.  Guelph Hydro is currently managed conservatively, and so is underleveraged.  It doesn’t need a merger to pay $18.5 million out to the City, thus increasing Guelph Hydro debt and decreasing equity.  It could do that today.  The effect would in all respects be exactly the same.

It is called a dividend only because that is the legal form that is used to effect the change.  It is not like a normal annual share of profits.  It is a catch up of prior year profits that have been left in the company and accumulated as equity.  It is not coming from Alectra.  It is coming from Guelph Hydro’ cash on hand, which at the end of 2016 was $22 million.

Where the analysis by the advisors says “Guelph is better off financially under a merger with Alectra  than on a standalone basis with ~$29 in additional cash through closing adjustments and dividends”, that is just bad math.  The $18.5 million dividend is not an improvement in the City’s financial position, and the $10.1 million in extra future dividends (see below) is speculative at best.

The City is not better off initially under this transaction.  That is just not correct.

Claim #3:  “Dividends are projected to exceed dividends under the “maintain full ownership” option by $10.1 million.”

It is not possible to confirm this.

Past dividends by Guelph Hydro to the City have been $3 million per year, and there is no reason to think that would end.  Based on current estimates of Alectra combined income, a 4.63% ownership by Guelph, and 60% payout, dividends look to be about $2.2 million per year to Guelph in the short run.

Without the backup calculations for the $10.1 million figure, it is not really possible to get to anything like that on the basis of public information.

Claim #4:  “GMHI will receive one permanent seat on Alectra’s board, and will have the right to appoint an independent director.”

This is correct, but it is important to understand what it means.  It is one, not two.

Guelph will appoint one member on the 13-member Alectra board.  It cannot be a councillor or the Mayor.  It must be an independent, and it is one person.

Further, it is important to note that the Alectra board doesn’t have the same close oversight of management as is currently the case with the Guelph Hydro board.  For example, Alectra is right now before the Ontario Energy Board seeking a 2018 rate increase of 1.3% to 4.2%, depending on rate class.  That request was not approved by the Alectra board.  That decision – what rates to request – has been delegated to Alectra management.

There is no information on whether the executive management team of Alectra will include anyone from Guelph.  I suspect it will not.

Claim #5:  “There are important restrictions on transferring shares, and therefore indirectly on privatization, in the USA.”

Assuming the new USA (unanimous shareholders’ agreement) is substantially the same as the existing one, this statement is correct.  Any significant minority of shareholders can block or slow down any process of privatization of Alectra.  (Some of the details of this agreement remain confidential, even today, but for good reasons.)

It is also true that some of the municipalities that own shares of Alectra are currently opposed to selling shares to the private sector.  Alectra has a small percentage of shares already held by an investment bank, for the OMERS pension plan, and some shareholders don’t want that non-municipal ownership increased.

There will, however, be strong pressure to privatize or partially privatize in order to monetize the value of the shares of Alectra.  At some point, high priced offers will be made by companies like Enbridge, and EPCOR, and others.  It is not reasonable to expect that Alectra – or any other distributor, merged or standalone – will remain municipally-controlled forever.

Claim #6:  “Rate increases are projected to be more moderate than they would be under the “maintain full ownership” scenario.”

This is probably not true.

As I have noted in my previous article, Guelph Hydro has a better record of controlling rate increases than Alectra does, and that goes back many years.

That is likely to continue into the future.  In their merger application, Alectra filed a forecast showing expected rate increases over the ten year “sitout” period of an average 1.74% per year (Exhibit JTC1.3 in that proceeding, for those keeping score).  That included a first year increase of 2.79%.

Alectra’s actual application for their first year rate increase is now in, and it is very close to that, an average of 2.84% for the three general service classes (residential, small business, and commercial/industrial).  Some of this is based on a predetermined formula which they can’t change, and the rest is extra money they have requested for additional spending they want approved. These new rates are not yet approved, but Alectra is pressing hard.

(I have excluded Horizon, because they are required to reduce their rates in 2018 due to an agreement reached with customers in 2014).

Guelph Hydro has also applied for 2018 rates, using the same formula.  Their average distribution rate increase will be 0.23%.  The reason is that, while they used the same formula as Alectra, they didn’t ask for any extra money.  Guelph Hydro has historically been able to live within its regular budget, without extras, and still make a good profit.

Alectra has made clear that they expect to seek extra money for additional spending each and every year during their ten year sitout period.  In total, they forecast that they will want approval for $500 million or so of incremental capital spending during that period, although that will change as circumstances dictate.

They don’t actually need the money, because they will have more than enough from the savings arising out of their merger.  Under the rules, though, they can keep the merger savings, and ask for extra rate increases to spend more as well.  There is no reason to think their tactics will change after bringing Guelph into the fold.

The graph at page 25 of the advisors’ report, which shows lower distribution revenue per customer under the merger scenario, appears to be based on inappropriate assumptions.  The basis of those assumptions has not been made public.  Where in that report at page 28 the advisors say Guelph customers can expect “Rate Increases Below Inflation”, that statement is inconsistent with the evidence of Alectra in their own merger application.

It is therefore more likely that rate increases will be higher under a merged utility than under a standalone utility, but it is really difficult to forecast the amounts with any level of accuracy.

Claim #7:  “A Southwest Operations Centre will be preserved at the location of Guelph Hydro’s current offices with a minimum commitment of 10 years.”  

This is almost certainly true.

The standard approach to mergers in Ontario, which Alectra uses well, is to promise a strong presence in the acquired area for a period of time.  This reduces the feeling that the local community will be served by outsiders.  This approach has been central to every past merger application I’ve seen.

On the other hand, in the longer term it will not make sense to keep a major operations centre in every Alectra community.  Some will have to eventually lose their local operations for Alectra to operate efficiently.  Ask the City of Markham, one of the original merger partners that formed Powerstream, how many Alectra employees are still based there.

Claim #8:  “Guelph Hydro employs about 130 people. About 70 of those existing positions have been identified as needing to remain in Guelph. About half of the remaining positions would be offered relocation opportunities starting in 2019, with the majority of moves happening between 2020 and 2022. The other positions are expected to be addressed through attrition, voluntary retirement, or voluntary separation wherever possible.”

These ratios are consistent with Alectra’s past approach, and so are likely to be correct.

Of the current 130 employees, 70 (mostly tool in hand employees) will remain in Guelph, which minimizes travel time to job sites.  30 others will be offered jobs within Alectra, but only if they are willing to work in Hamilton or Mississauga or Vaughan.  The other 30 will be without a job.

Claim #9:  “Alectra will establish the GRE&T Centre in Guelph as a platform for supporting transformation in the electricity industry by accelerating integrated energy solutions. The GRE&T Centre will have eight to ten new full-time positions, with $5 million of capital spending in the first three to five years of the merger, and $3 million in annual operating spending within two years of the merger.”

This is true, but it may look better than it actually is.

First, it is a relatively small commitment, $3 million a year for a utility with +$600 million in annual revenue, i.e. under ½ of 1%.

Second, and perhaps more important, the former Powerstream Head Office was, in the Alectra merger, renamed the “Sustainability and Innovation Office”.  This large (92,000 square feet) office building near Highway 400 in Vaughan, which can house 270 people, will clearly be the centre for most sustainability and innovation activities.  Decision-making, of course, will be centralized in the Alectra Corporate Office in Mississauga, which is also a large (79,000 square feet) office building that can house 200 people or more.

There is little doubt that some initiatives will be carried out in Guelph, if for no other reason than Alectra promised that.  If Guelph thinks that it will be the centre of a major hub of innovation and other green activity, that may be wishful thinking.  The GRE&T Centre (“great”, get it?) has a very pretty (green) business plan, but its substance may be substantially less than the hype suggests.

Claim #10:  “Alectra will meet or exceed service standards and reliability for electricity distribution customers in Guelph Hydro’s current service territory.”

This is also true.

As noted in my previous article, both Alectra and Guelph Hydro are well run utilities.  On both reliability and customer service, Guelph has generally been better, but both are good.  For example, Guelph currently gets about 200 phone calls on the average day, and about 5 of those have to make a second or third call to get their problem resolved.  At the Alectra service levels, about 35 would have to make that second or third call.

Claim #11:  Guelph customers will share in the $32.3 million OM&A and capital savings from the merger, as well as in the $426 million in savings from the original Alectra merger. (See Att-2, page 5).

This does not appear to be true.

Under the rules of the Ontario Energy Board, all savings for the “sitout” period go only to the shareholders.  That includes the savings for the original Alectra sitout period.  None of these savings go to the customers.  There does not appear to be any basis for saying that they will, and the report is almost certainly wrong on this point.

Claim #12:  From 2026-2041, customers will receive $73.7 million in savings from the merger. (See Att-2, p. 5).

This may or may not be true.

First, it is too far in the future to project, and second, the basis of the calculation has not been made public.

In the past, the customers of the Powerstream merger partners do not appear to have benefitted from the mergers, since their average rate increases were higher than those of Guelph, which did not have any mergers.  Horizon customers, on the other hand, did apparently benefit from the merger between Hamilton and St. Catharines.

Thus, the jury is out on this one.

Claim #13:  GMHI will benefit from greater growth in the value of its investment due to the scale of Alectra and its focus leading industry change.

There is no reason to believe this is true.

It is true that, compared to standalone, growth in value is likely to be better with a merged entity.  There is no evidence to suggest that merger with Alectra, as opposed to merger with someone else, will produce better growth in value.  Generally speaking, growth in value of a wires company is driven by demographics.  Some of Alectra has reached lower rates of customer and business growth, while Guelph and other municipalities that are not part of Alectra can look forward to quite high future growth.  Which will grow more:  Hamilton and Mississauga, or Guelph and Milton?

Whether Alectra is “leading industry change” is a matter of opinion.  Alectra is certainly active in the corridors of power, and has some influence.  Many others in the Guelph-centred region are also active and influential.  It would not be fair to say Alectra is the “leader”.  It might be fairer to say they are an important player.

Claim #14:  “All customers of a consolidated utility are expected to benefit from lower distribution rates than what they would have to pay as customers of their respective utilities.”

This is probably not true.

As I demonstrated in my previous piece, at the time rates are harmonized, the Guelph small business and commercial/industrial customers are likely to experience high rate increases, since their rates are quite low right now.  Where Alectra says that it will not harmonize rates if this is the impact, that is not consistent with their past history.

Because we can’t see the agreements, we don’t know if the City of Guelph has any veto over large increases to customers in Guelph.

Claim #15:  Guelph customers will experience a lengthy list of customer service and other improvements, shown at page 29-30 of Att-2, the advisors report.

This seems to be somewhat oversold.

When you go down the list of supposed benefits from the merged utility, it would appear that virtually all of them are already in place at Guelph Hydro.  It is not clear where actual improvements are being proposed.  Are there any?


As is so often the case when companies that have a business goal are trying to get the public onside, a picture is painted that is the prettiest version of the transaction.  Claims are made, rosy forecasts are delivered as if factual, small things are treated as big, and any details that could undermine the narrative are either not made public, or glossed over.

That appears to be the case here.  This may be a good deal.  There are arguments on both sides.  However, it is important that those assessing the situation start with the actual facts, not hopes and dreams and maybes.

Or sales pitches.

  • Jay Shepherd, December 9, 2017
Posted in Energy | Tagged , , , , | 3 Comments

Lives #4 Update – Susan Grows Up

[This is a follow-up to the fourth in my “Lives” series, “Anne’s Secret”, published three years ago.  As with all of this series, the basic story is true.  I’ve changed the names, and some of the details, so that the individuals are not easily identifiable.  However, I’ve stayed true to the essence of what happened.  The point is what can be drawn from the story, and that part is 100% true.]

“I figured it out when it struck me that you can’t speak Mandarin worth shit, mom”.  It was summer time.  Susan had only turned eighteen three days before.  Danielle was home from law school, trying to find a position with a law firm on graduation, and getting ready for her final year.  She and Susan were spending a lot of time in heated debates about the problems of the world.

Anne had no idea that Susan had also been thinking about other things.

Susan went on.  “I did the math,” she said.  “When you were supposedly on the Chinese Olympic team, your native language in China – at least, the one a state-run athletics academy would have used – was Mandarin.  Your Mandarin is worse than my Cantonese, mom.  And you know how bad that is.”

She paused.  “On the other hand, you speak excellent Cantonese.  That could only happen if you grew up Hong Kong.  But, at that time, if you lived in Hong Kong, you couldn’t be on a Chinese Olympic team.”

“There’s only one conclusion.  You were never in the Olympics, were you?  It was a lie.  All of it, completely made up.”

Susan, just about to head off to university herself, had the advantage of two highly intelligent parents.  Her scholarship to study sciences at University of Toronto was not really a surprise.  Even her older sister admitted Susan was the smartest one in the family.

So, the next step in her logic was also not a surprise.  “I think it’s time you told me the rest of the story, mom.  I already figured out the first part for myself.  I know there must be more.  What is the truth that your Olympics story has been hiding?”

When Anne and Ron took me out to dinner a couple of weeks ago, it was Anne who repeated this conversation, essentially verbatim.  Ron sat quietly, as Anne spoke about these things to me for the first time in almost thirty years.

They knew, of course, that I had written an article on their dilemma with their kids (and each other).  In it, I described the lie Anne had been living for all of her decades in Canada, claiming to have been an Olympic gold medalist from China in the eighties, when in fact she had been a high class Hong Kong prostitute.  When their teenage daughter started to ask questions about Anne’s Olympic experience, Anne confessed the truth to her husband, Ron, for the first time after twenty-five years of marriage.  But, on the advice of their older daughter Danielle, they decided not to tell the then fifteen year old Susan until she was older.  That meant they didn’t tell Danielle either.  The secret remained between Anne, Ron…and me.

Three years later, and the question was put again.  Was it time to tell their kids about Anne’s real past?

As Anne told me the story over dinner, the silent Ron looking on, they went back to Danielle and reminded her that there was a secret still untold.  Although Danielle – soon to be a lawyer like her father – already knew that Susan was hot on the trail of the truth, she continued to believe that Ron and Anne should keep quiet.

“Don’t rock the boat,” she told her parents.  “So Susie is curious.  Let her be.  No good can come of this.  Trust me.”

“And frankly,” she added, “I for one don’t ever want to know.  Not now.  Not later.  Have you ever thought that, at some point, Susie and I will have to decide whether to tell your horrible secret – whatever it is – to our own kids?  The awful truth about their grandmother?  Better we don’t know.”

They had a long talk with Danielle, not just that day but over multiple days.  Danielle kept coming back to her “perfect family” mantra.  “Don’t screw up a good thing,” she said over and over again.

As the uncharacteristically quiet Ron looked on, Anne described to me their back and forth between each other about whether to tell Susan.

“Ron hates even thinking about this,” said Anne, “let alone talking about it with me.  The thought of opening up to our little girls about my life – my real life – made both of us very unhappy, to say the least.  Ron, maybe even more than me.

“But the more I thought about it, the more my secret history was weighing me down.  I was tired of lying.  And – well, you’ve known Ron longer than I have.  He believes in the truth.  ‘When in doubt, just tell the truth’, he always says.”

While Anne and Ron were struggling over whether it was time to tell the truth, Susan was still asking questions.  Three years earlier, she had agreed to hold off, to wait for her parents to decide it was time.  Now, she was less willing to wait.

Now, she felt she had earned the right to hear the truth.

So they told her.

It turned out to be a family meeting, with Danielle relenting and deciding to hear the story after all.  Anne describes the atmosphere is “very tense”.  She and Ron had talked at length about how to tell the story.

In the end, she went with her instincts.

“I was never in the Olympics.  Susie, you were right.  It was a lie.”  She paused, then got to the punch line:  “All those years, when I said I was an Olympic athlete, I actually lived in Hong Kong.  I was a prostitute.”

Anne describes how she stopped, and let it sink in.  She looked at Ron, but he was looking down at the floor, not at either Anne or the kids.  She knew he wanted to speak, but was fighting it.

“You know, Mom,”  said Susan, “you can’t just leave it at that.  You have to tell us about it.  You have to tell us your story.”

Danielle nodded in agreement.  “I hate to say it, but Susie’s right.  Once you start to tell us, you have to tell us all of it.”  Ron looked up at that, and Anne says she knew he wanted to stop her.  He didn’t want to know the whole story.

But it came out, in part through Anne’s willingness to unburden, and in part through questioning and prodding by Susan and Danielle.

That first discussion only lasted an hour, but it seemed much longer.  She talked about growing up poor in Hong Kong, her father a waiter, her mother trying to raise six kids.  Paying for school was a challenge, sometimes even providing a good meal for the family was a challenge.  Sometimes they had scraps from the restaurant.  Her father worked sixty or seventy hours a week.  Her mother, even more.  Life was hard.  There were few ways out.  Even for a pretty girl like Anne.

Anne didn’t try to make excuses, but she did tell what it was like to grow up poor, back then.

The real discussions came the next day.  Susan and Danielle had talked about it for hours the night before, and they had questions.

They found Anne “hiding”, as they put it, in the backyard.  For hours they peppered her with questions, wanting details, wanting to understand better their mother’s life.  Ron sat in for some of it, but he said he couldn’t take so much, and anyway it turned out to be what Anne describes as “more of a mother-daughter conversation”.

Anne was relieved that the tone was neither accusatory, nor shocked, nor disapproving.  Danielle and Susan, now 25 and 18, were asking about the story of a young woman who, then, was the same age they are today.   A woman who, in her later life, they had come to admire.

They were asking questions about being a young woman in the world.  They were asking about predation by men, about female empowerment, about the tradeoffs you make in life, about making hard decisions.  They wanted to know details:  about pimps and “managers”, about the different types of customers.  About birth control, and abortion.  Are rich men and poor men so different, they asked.  What is the line between sexual harassment and sexual aggressiveness and sexual relationships?  How is sex with love different from sex without love?  What about violence?

How did you feel, mom, they asked again and again.

At one point, Anne asked them “Are you trying to learn enough to become successful prostitutes?”  To which Susan replied “Well, who better?  You were an Olympic-level hooker, right mom?”  As Anne retold it later, it didn’t seem funny to Ron and I, but she says it threw the three of them into an uncontrolled laughing attack.

Once the floodgates opened, some of the questions cut close to home.  Danielle asked – bluntly – how much marrying Ron was about coming to Canada and having a better life.  In that private moment with her daughters, Anne tried to explain how you can be pragmatic, and still be in love.  As she said it to Ron and I at dinner, it sounded even to her like she was rationalizing, but it was how she felt, then and now.  To her surprise, both daughters understood immediately, and didn’t think she was rationalizing at all.

“Everyone knows how much you love Dad,” said Danielle.  “Who could miss it?  It’s obvious.”

They also asked hard questions about the lessons they could take for their own lives.  Have times changed, they asked?  Are men different now, here in Canada, or are we going to be faced with the same issues that you had as a teenager in Hong Kong?   Can we really have independent careers, as we plan, or will society and child-rearing still require us to hitch our economic stars to successful men?  Is anything really different today?

Danielle is now back for her last year of law school.  Next summer she will start working for one of the multinational law firms.  Susan is now in residence at University of Toronto, and complaining weekly about how much better the food is at home than at school.  She plans to be a biochemist.

Ron will turn sixty in a few months.  He tells me that, overall, he’s pretty happy about his life.

I asked him only once – at least recently – how he feels about Anne’s past.  His answer has changed.  “Three years ago, I was pretty upset – with Anne, with you, with the world.  You know what?  All that stuff that happened before I knew Anne – sure, I would have liked her to have trusted me with the truth.  On the other hand, we’ll never lie to each other again, will we?  And, really?  Would my life be any better if I had known back then?  I doubt it.”

Anne is still living a lie, of course.  Now five people know the truth – Ron, Anne, Danielle, Susan, and I.  Everyone else still believes she was in the Olympics, although she doesn’t talk about it any more.

All four of them have moved on to focus on the part of their lives that really matters – the present, and then the future.   They have accepted the truth of history, but in their minds it is now truly history.

Life has its little coincidences, too.  Ten years ago, when Danielle was still a teenager, and had no inkling that there might be a secret in her mother’s past, she described to me how she thought about her future:

“The past is important, for sure.  But it’s not life.”

  • Jay Shepherd, November 18, 2017
Posted in Life Lessons, Lives, Uncategorized | Tagged , , , , | Leave a comment

Energy #20 – An Open Letter to Guelph Hydro Customers

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 curated 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 Are the Issues?

The customer-related benefits of a merger between Guelph Hydro and Alectra Utilities will generally be characterized as follows:

  1. Lower Rates.  There will be scale and other economies as a result of the merger that will translate into lower rates for customers.
  2. Better Service.  A larger organization will be better run, with the result that reliability, customer service, and other customer priorities will improve.
  3. 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.

Lower Rates

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?

Cost Efficiencies.  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


Rate Zone


Small Business


Guelph All




Horizon Hamilton




  St. Catharines




Enersource All




Powerstream Richmond Hill




















Brampton All




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.

Better Service

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 .

Customer Service.  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%.

It’s Inevitable

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
Posted in Energy | Tagged , , , , | 8 Comments

The Scalable Universe

There are some subjects that tend to make you feel stupid.  Cosmology is one of those subjects.  And, as I have found out, at cosmology’s limits, the philosophy of cosmology is even more difficult still.

It doesn’t matter how smart you are.  You could have the maximum luck from the genetic lottery.  Your mother and father could both be highly intelligent, for generations back.  Instead of being from tall people, and maybe being in the NBA, you are from smart people, so you’re smart.  Great luck for you.

Cosmology will still make your mind go numb.  Unless you’re one of the select few that understand that kind of stuff, you’re toast.

It doesn’t mean you stop trying.  Many people who enjoy intellectual pursuits try to understand that difficult area.  Alas, it is very hard.

But one of my hobbies is reading about science:  Discover, Scientific American, American Scientist, and so on, plus books, journal articles, the works.  I enjoy it, like surfing or mountain climbing, but for the brain.  (I admit I participate in surfing and mountain climbing somewhat less than reading science.)

I have no training in science (or most anything else, as my kids will be quick to point out), but generally I can understand the stuff I read on scientific topics.  In large part, it is either intuitive, or you can figure it out if you’re willing to spend the time.  I don’t need to know the details of how to do a dig, for example, to understand the richness of archeological finds, and at least some of what they tell us about humanity.  When I read about the evolution of marine mammals, it doesn’t take a marine biologist to map that knowledge to the day to day life we face right now.  And climate change?  Sure, some of it is complicated, but the basic concepts are both simple and understandable.  In none of those cases do I understand them like an expert does, but given a good explanation, I can understand them well enough.

And then I come up against cosmology, and the physics on which it is based.  Cosmology is just really, really hard.  M-theory? (My son understands it, and tried to explain it to me once, but it leaves me floundering.)  Observing – today – events that happened billions of years ago, due to the speed of light?  (Yes, I get the concept.  It is just not part of my normal reality.)

I read A Brief History of Time, Stephen Hawking’s most famous book, and I can’t tell you the number of times I scratched my head and said “What on earth is he talking about?”  Of course, maybe my problem was the “on earth” in my question.  It was still…well, you get the idea.

And every time I read about cosmology, at least for the last ten years or more, I have had the same set of questions.

Before I pose those questions – hopefully for some real scientists to answer – I want to give a clear disclaimer.

Lots of time, over my life, I have looked at fact situations or concepts and had a moment in which I thought I saw an answer no-one else saw.  This happened more often when I was younger, of course, but it still happens today.

Now, when I think I see something “new”, I have learned to first ask some questions.  The immediate, most important question is:  Am I an expert in this field?  If I am – energy regulation, perhaps – there is at least some possibility that I have spotted something no-one else has seen.  I may have a new insight.  Great.  (Not as often as I tend to think, of course, but at least sometimes.  Not never.)

But if I am not an expert in a field, the odds that I have an insight that is truly “new” go way down.  The odds are not zero.  It happens.  It is, however, a surprise when it does. (Calculus has the concept “the limit as x approaches zero”, which is used as a proxy for zero in some equations.  The probability of me having a new insight outside of my areas of expertise is somewhere near that number.)

When I read expositions of the physics of the universe, or cosmological analyses, I often have the same thought.  That is:  Why are you (i.e. scientist, author) not thinking of these questions in a different dimension, in which the universe is not only infinitely large in our normal three dimensions, but also infinitely scalable?  (Most recently, this question popped up when I read the very readable book Astrophysics for People in a Hurry, by Neil de Grasse Tyson.)

Why can’t that muon you are studying, which has many attributes you understand, but many you don’t, be itself an entire universe?  Why can’t our universe, with all of its open questions, be a muon in another, infinitely larger universe?  Why aren’t we looking for the answers to the uncertainties of our universe – the singularity and where it came from, dark matter and energy, strings – by reference to universes infinitely larger and smaller than ours, of which we are a part, or which are a part of ours?  Why isn’t Einstein’s “spooky action at a distance” (entanglement) not explained by the fact that, in a larger universe, the distance between those same things – far away in our universe – is negligible?

Yes, yes, I know.  I’m not the first to think of this.  I have read concepts such as these in science fiction novels, some fifty years old or more.  They are not new.  In a very real sense, they are the type of creative ideas that teenagers will have.  (What do you mean, I never grew up?!)

But that doesn’t really answer my question.  I have read hundreds of articles and books about the physical structure of the universe, and not once have I read a serious analysis explaining why larger and smaller scales cannot be an answer to the questions we have.

Whenever I read about quantum mechanics, for example, no-one ever talks about how it is anomalous, even counter-intuitive, at the scale of our universe, but may well be quite sensible at the scale of a universe within a muon.  Nor do I ever hear of anyone speculating that the questions in the physics of the cosmos could be conceptually similar to the questions that would arise if our universe is a small part of a much larger universe.

I’ll give you an example.  In his truly wonderful Massey Lectures, published as the book The Universe Within, Professor Neil Turok says

“The competition between the cyclic and the inflationary universe models highlights one of the most basic questions in cosmology:  did the universe begin?  There are only two possible answers: yes or no.”

When I read this, my mind was immediately screaming:  Neither!

Maybe the real answer is “sort of”.  If our universe is really part of an infinitely larger universe (or a nest of universes, each infinitely larger or smaller than the other), then the implications of the question change.

The question implies:  did we start out of nothing, or something?  The answer could be neither.  Our universe exists because of something that took place in a larger universe.  In that universe, that event, and our universe, are insignificant to the point of being almost non-existent.  In ours, it is the entire beginning.  Our universe in turn is, quite unknowingly, creating much smaller universes that to us would be insignificant.

If we can really imagine the concept of the multiverse, in which our universe is one of an infinite number of parallel universes, existing side by side but distinguished by different paths taken an infinite number of times, why can we not also imagine an infinity of universes larger and smaller than ours?  This, indeed, would be the logical conclusion of the concept of infinity.  There is no reason to think it is limited to a parallel plane.  If universes can diverge over the fourth dimension – time – why can’t they diverge over the first three dimensions as well?  (Or any additional dimensions after four, but don’t get me started.)

I want to be very clear about this.  I have no expertise whatsoever about cosmology, so any ideas I have run a 99% chance of being wrong (I rounded down, not up).

That having been said, this constant anomaly that I “see” in everything written in the field is bugging me no end.  What am I missing?  Why is this explanation not at least as good as M-theory, for example, a theory so inelegant it appears almost artificial?

Of course, I didn’t stop with the question.  I have tried to do some research, non-scientist though I am.  I have looked at many sources that do deal with the possibility of scalable universes, but not one of them takes the idea seriously.

In virtually every case, they come to the conclusion that this is not a question that can be studied by scientists, because there is no empirical data against which to test the hypothesis.  They say it could indeed be true, but so what?  If it is true, we have no way of knowing that it is true, and we are equally unable to disprove that it is true.  Scientists only deal with empirical reality.  Something that can be neither proved nor disproved cannot be part of the scientist’s reality.

At the beginning of this article, I talked about the philosophy of cosmology.  Scientists – at least the ones I have read – say that this question of the scalable universe is a question for philosophers, not scientists.  It is like trying to decide if there is a god.  Scientists don’t do that for a living.  They are not philosophers.  They only deal with things that can be proved.

In some respects, I understand that answer completely.  However, I think I have to reject it.

Essentially every part of what we today call science – biology, chemistry, physics, everything, including all of their most mundane components – has at one time or another in the past been the purview of philosophers rather than scientists.

It was philosophers who first speculated on how the human body works.  Then, as methods were developed to test ideas of biology, a science was born.  Things as simple as mechanics – forces, and how things move – started in the minds of philosophers, and were only handed over to the scientists when there were experiments to run, empirical analysis to do.  The history of philosophy is a history of people grappling with difficult concepts, and ultimately figuring out how to test their thinking in the real world.  Philosophers handing off to scientists.

Or, perhaps more correctly, conceptual scientists handing off to empirical scientists.

Many parts of physics existed only as untestable concepts, until philosophers or scientists developed ways to test them.   They weren’t rejected by everyone because there were no tests to see if they were true.  The nascent concepts were each treated as something for which a test had not yet been found.

Some scientists will argue that, for example, the existence of planets around other stars was, until relatively recently, not part of science.  It was a matter of speculation, by philosophers, writers of science fiction, and other non-scientists, but it was not part of science.  We had no way of determining whether it was true or not, so why would a scientist waste their time on it?

In reality, some scientists made it their goal to find a way of discovering planets around other stars, and through creativity, insight, and then experimentation, they found those planets.

I don’t understand why there are not scientists, right now, trying to bring the scalable universe from philosophy to science, conceptualizing and then testing ways of determining if that might explain some aspects of our universe.  Is it too hard?  Is it too far out there, or too far into the future of cosmology?  Do we already know that it will be a long time before we can pursue this question?

This article is therefore a plea to the real scientists out there.  I’ve tried to learn enough to figure this out.  I don’t have enough grounding in math to figure it out that way.  (I understand some algebra, and even a few of the concepts in calculus.  However, every Greek symbol after Pi and Delta just makes me gag.)  I’ve tried to stretch my mind to accommodate the non-mathematical concepts.  Every time I do, I run into this conundrum.  Where is the barrier to solutions based on scale?  How is it different from any of the other big questions on the edges of cosmology or physics?  Why aren’t we even asking the question?

Or, have we asked it and answered it, and I just didn’t notice?

Please help.

  • Jay Shepherd, October 14, 2017
Posted in Uncategorized | Leave a comment