On Monday, St. Albert city council will debate taking the first step toward fundamentally changing how utilities are handled in the city.
In 2018, Mayor Cathy Heron floated the idea of establishing a utility corporation. An essential part of that process is putting a bylaw in place to give the city a monopoly over utilities, prohibiting companies from offering similar services.
During their governance, priorities and finance committee meeting on Monday, councillors will debate the bylaw, which passed first reading July 8. Second and third reading would need to be scheduled for a future council meeting.
Heron has said the bylaw would be a “foundational piece” in creating a utility corporation – which administration is currently drafting a business case for, to be presented before council this fall – but that the bylaw would be useful with or without a corporation.
In April, administration told council the city’s utility division is basically already a utility corporation, as far as cost recovery. Formalizing a utility corporation would be about finding new revenue opportunities outside of what a traditional utility does, and could support the city’s waste-to-energy initiative, should council decide to pursue that path.
It would be the “utility of the future,” according to city manager Kevin Scoble.
In light of this step toward formalizing a utility corporation, the Gazette took a closer look at what exactly municipal utility corporations do and how well they have functioned in other Alberta communities. We are taking a deeper dive into utility corporations run by the cities of Chestermere, Grande Prairie and Medicine Hat, each of which have greatly varying governance structures, rates and levels of success.
Grande Prairie: regional collaboration and “middle of the road” rates
Aquatera’s story began in 2003, when a group of municipalities in the Grande Prairie region decided to work together to form a utility corporation, with a goal of providing urban style water services to regions outside the city.
Since Aquatera’s formation, the corporation has returned $6.5 million in dividends back to the City of Grande Prairie, a city nearly equal in size to St. Albert at 69,088 people.
The corporation is formed by four shareholder communities, including the city and county of Grande Prairie, and Sexsmith. The Town of Wembley joined just last week.
According to Grande Prairie Mayor Bill Given, in addition to serving communities outside of city limits, the corporation was set up to carry self-supported utility debt.
Municipalities typically front-end large infrastructure projects that support municipal growth, and then recoup costs through off-site levies. But they also have to keep in mind provincially mandated debt limits, so sometimes communities may have to choose between front-ending a costly sewer line or putting in a new skating rink.
By designating the utility corporation to carry that debt, the city would have more flexibility with its dollars.
Additionally, Given said the corporation was formed under a user pay model (meaning you pay for exactly what you consume) and full cost accounting. That would mean property taxes are not used to subsidize utility rates.
“They (the board) want to be right smack dab in the middle (for rates), not on the highest or the lowest, and they’ve been able to achieve that while returning a profit ... back to our shareholders.”
In terms of how those rates are set, Given said Aquatera's independent board shares its business and capital plans annually with shareholders and lays out how much operations will cost that year. From there, municipalities determine their own rates and can choose whether or not to subsidize utilities, which Grande Prairie chose not to do.
Aquatera’s governance structure has evolved over the years. Given said it has shifted from being municipally run to an external operation largely influenced by councils, and now to an independent board which reports back on a strictly corporate basis.
“As we developed trust and a better understanding of how it was operating, we felt confident moving to a fully independent board,” Given said.
However, having an independent board also has its complications. Given said now the city is trying to make sure councils have the right amount of influence and the independent board is listening to its shareholders.
“In our case, it’s a bit more complicated because we now have four shareholder communities who all may have different opinions about what we want our board to do,” Given said.
Outside of offering traditional utilities, Aquatera has a variety of revenue streams, including the lucrative business of selling industrial water and offering technical expertise to other communities.
The corporation also started a gas-to-energy project in its landfill, which collects gas from decomposing garbage and turns it into energy that powers the water and wastewater treatment plants.
“It’s a pretty dynamic organization and it’s been able to achieve all these things,” Given said.
For other communities weighing the benefits and drawbacks of forming a utility corporation, Given said a key point is making sure residents understand what it means to switch models, especially when it comes to rate changes.
A utility corporation can't be set up overnight, he said.
“I think the advice I would give is to expect it will be an evolution over time. Don’t expect it will be a ‘set it, forget it’ kind of model,” Given said.
Chestermere: new council seizes control of spiraling corporation
Chestermere is a young, rapidly growing city with a population of nearly 21,000 that nudges up against Calgary's eastern boundary.
Last year, the city’s brand-new council decided the status quo was no longer acceptable for its arms-length utility corporation and moved to take back control of Chestermere Utilities Inc. (CUI). The corporation had accumulated nearly $35 million in debt over its seven years in operation.
The move came after years of frustration from residents, who complained of soaring utility rates and a lack of transparency. A 2016 petition saw about 5,500 residents demand the provincial government step in and do something, which it declined to do.
During the 2017 municipal election, not one councillor sought re-election.
Utility rates had jumped in 2016 after then-CUI chief executive officer Leigh-Anne Palter was hired and realized a grave mistake: CUI had been undercharging its customers.
As a result, Palter said she would need an extra $30 per month from each customer to achieve cost recovery.
Current Mayor Marshall Chalmers said while he was on the campaign trail, residents were crying at the doorstep, begging for help to address the high utility rates and overinflated property taxes.
“They were having these rate shocks and it was getting quite unbearable for them at that time,” he said.
One of his council’s first priorities following the election was to take action, and last month they slashed utility rates by eight per cent and property taxes by two per cent.
Chestermere chief administrative officer Bernie Morton was hired last August and said his first order of business was to go on a listening tour and determine why such a young city with new infrastructure – and no water treatment plants to operate – would have such high utility rates.
“It was a head-scratcher to determine why were the rates so high when we have fairly new infrastructure,” Morton said.
He narrowed down the main issues to governance – a board majority filled with people who were foreign to Chestermere – and operations.
“The pain that was being felt by the community was not one that was really witnessed, shared or experienced by the members of the board,” Morton said.
He added another issue with CUI was a lack of diversity in revenue streams.
“They really only had one line of business,” Morton said. “When you only have a single stream of revenue – that’s the utility ratepayer – when you need more money, those are the people you go back to.”
Now, Chestermere is looking at ways to increase revenue through creative business ventures. Morton said that may include utilizing the heavy volumes of water it sees from the Bow River feeding Chestermere Lake to generate electricity.
For now, CUI will continue to operate as a shell company with a single employee, for the sole purpose of holding the debt it accrued, which could take up to 12 years to pay off. While the city could have dissolved the company entirely, taking on CUI’s debt would have pushed Chestermere dangerously close to its municipal debt limit.
Former mayor Patricia Matthews said one reason CUI was formed was to strategically hold self-supported utility debt, similar to Grande Prairie.
Rather than front-ending money for items like storm systems and sewers while tying up city coffers – and gradually recouping the cost from developers – she said CUI would hold that debt, freeing up money for other projects in the city.
“The intent for CUI was to take on developer debt, and that’s exactly what they did,” Matthews said.
She also disputed that operations went awry at CUI, saying the average households “didn’t see huge shocks.”
“There just was a lot of concern at the time we had announced CUI had been undercharging, but in the end, it really wasn’t that massive of an impact.”
On average, a Chestermere household was seeing a monthly utility bill – not including gas or electricity – of $162.05 in 2017. After city council slashed rates, that went down to $147.92 in 2019.
Morton said the fact Chestermere managed to cut its rates in one fell swoop by eight per cent shows something was “dramatically wrong.”
Medicine Hat: a 110-year-old tradition
Publicly owned and operated utilities are a long-standing tradition in Medicine Hat, which has proven profitable for 110 years.
The city's story differs greatly from other municipalities in that Medicine Hat sits on a huge gas well that contained 20.5 billion cubic metres of natural gas deposits when it was first discovered.
“Medicine Hat is the most unique municipality in the entire country when it comes to this, so we do have 110 years’ experience,” said Medicine Hat Mayor Ted Clugston.
Between 1999 and 2014, the city has received $268 million in dividends from its utility divisions, which has allowed the municipality to keep taxes low and build parks, pools and playgrounds.
Being a player in the gas industry has inherent risk, especially when the price of gas is “in the tank.” Clugston said for the past few years the city has been losing $30 to 40 million per year on gas assets.
However, the city does have a natural hedge, in that it burns gas to make electricity. When gas prices are low, it costs less to make electricity, so higher profits on electricity are realized.
While Medicine Hat is unique from other municipalities in many ways, some lessons can still be gleaned about public utilities.
Some communities may choose to set up an independent, arms-length board to run its utility corporation. However, Medicine Hat city council chose to retain full control of the corporation. That means each utility has its own division in the city and don't subsidize each other.
Clugston said he thinks a council-run corporation is more transparent than independently run ones, because all decisions are made in full view of the public. He admitted not everyone on city council may have the expertise necessary to run a utility corporation, but the city hires private sector experts to run each division.
As far as the public is concerned, Clugston said there have been no drawbacks to running a municipal utility corporation. He added Medicine Hat has enjoyed lower than average utility rates and dividends that would have otherwise gone into private sector pockets.
What's next for St. Albert?
There are a number of steps municipalities have to take before formalizing a utility corporation, including seeking public feedback.
Municipalities have the right to form utility corporations under the Municipal Government Act.
Before a resolution is even passed to create a utility corporation, city council would be required to consider a business plan that addresses costs, value of assets and cash flow projections. St. Albert is expected to have a business case come forward before the end of the third quarter of 2019.
After this, information in the business case would be advertised with a notice for public hearing 30 days prior to that hearing taking place.
Only then could council pass a resolution of intent to create a utility corporation, if they are satisfied it would provide a service that is beneficial to residents and the shareholders would profit from dividends produced by the corporation.
