Kelowna's power sale power-play

If all goes well the City of Kelowna will go from being a utility owner to a utility investor by March, 2013..

City Council Monday endorsed a recommendation to enter into a Memorandum of Understanding between the city and FortisBC.

The plan would see the city turn over control of its power utility to FortisBC for more than $50M.

The city, over time, would in turn invest those funds in long-term debt of FortisBC.

Along with funds from a natural gas deal with Teresan Gas and other surpluses, the city also expects the near term investment to be somewhere in the range of $85M to $100M.

Community Services General Manager, John Vos, says there is some risk in becomming a long-term debt investor, however, he says there is also risk in continuing to operate the utility which services about 15,000 commercial and residential customers within what were the original Kelowna boundaries.

Vos says says a comprehensive review shows the utility requires a large capital investment over the next 20 years.

"We have a lot of aging infrastructure, a lot of aging poles and wires that need to be replaced over the coming years. We also need to make the system more robust," says Vos.

We've been making improvements to the system and there is a significant need for more improvements to the system to make it more robust and more reliable for the future."

At the same time, Vos says contractor costs and costs within the electrical industry are going up significantly.

Vos says the margin between the wholesale and retail price of electricity is also shrinking.

"That puts the utility at some challenge because it has less money to work with whether it's for capital improvements, operating costs or the dividends to our residents."

At the present time, the utility brings in approximately $2.1M yearly with a further $370,000 taken from the utility to cover administrative overheads throughout City Hall.

Strategic land Development Manager, Derek Edstrom, who heads the city negotiating team, agrees there is a risk in becoming a debt investor of FortisBC.

"Obviously the on-going risk would be the going concern of FortisBC. We feel this is mitigated by the fact they are a BC Utilities Commission regulated utility which sets their debt equity ratios at 60-40," says Edstrom.

"Secondly is the utility business in general. That's the same whether we operate the utility or we invest in somebody that operates it for us."

Edstrom says the city will take on a staggered investment strategy to ensure investments are made at an opportune time.

"It may be that we wait a year or two or stagger investment over a period of time to ride a rising yield curve. We are going to be prudent with our investments and look for higher earnings," says Edstrom.

Councillor Andre Blanleil endorsed the MOU suggesting the utility business is getting more specialized.

"It's not something we have a lot of expertise in or have the ability to hire the expertise in," says Blanleil.

"This is a long term investment for the community and I think that;s what is more important. Going in this direction is the right move."

Councillor Robert Hobson called the proposal interesting and complex.

Hobson says Edstrom and his team have done a good job outlining the changing nature and risks of being a utility operator in the modern world.

He also voiced concerns as to what guarantees would be in place to ensure the city gets the same rate of return.

"The public is going to ask us how do we ensure we get the same level of return being an investor in FortisBC," asked Hobson.

"What happens if the nature of FortisBC debt changes in the future? Will we be protected? Will we have preferred shares versus common shares? What happens if their stock splits?"

Monday was the first of what Edstrom terms a multi-step process.

He says the city will undertake a public consultation process in the fall with key stakeholders and large power users.

A public information process will also occur beginning in September.

"During that time we will look for the appropriate approvals in the fall of 2012 which will include an Alternative Approval Process for the transfer of the utility," says Edstrom.

"If approved, the transfer of the utility to Fortis would go to the BCUC starting in the winter of 2012. We expect that to conclude before the end of March, 2013 and, during that time we would set up whatever investment structures and holding companies are required."