Kelowna Electrical Utility Restructuring Opportunity
On Monday, City Council will consider a Memorandum of Understanding (MOU) with FortisBC to address the future structure of the City's electrical utility. The MOU outlines the Kelowna Electrical Utility Restructuring Opportunity, a joint initiative that would see the City take on the role of electrical utility investor in place of its current status as electrical utility owner.
“The City's ability to function optimally under its current utility model will be tested in the coming years. Future long-term infrastructure needs, estimated at $70 million, combined with upward pressure on wholesale electricity prices, will continue to challenge the utility's annual earnings of $2.1 million,” says John Vos, General Manager of Community Services. “The Electrical Utility Restructuring Opportunity is being designed to achieve secure, long-term, financial returns that would be equal or greater to the City’s current return to maximize the benefit to citizens.”
Under the terms of the Restructuring Opportunity:
The City of Kelowna would transfer ownership of its electrical utility assets to FortisBC. FortisBC would incorporate the assets into the company's existing operations, and would become responsible for providing electricity throughout the entire community. FortisBC currently provides electrical services to two-thirds of Kelowna through its own utility and is contracted by the City to operate and maintain the City’s utility which serves the other one-third of Kelowna.
The City would invest the proceeds from its asset transfer — estimated at this point to be over $50 million —into a future FortisBC publicly traded debt issuance. The City's investment would be structured to provide taxpayers with secure, annual financial returns over an extended period of time. Annual returns would be equal to or greater than the earnings the City could generate through continued municipal ownership of the utility. Today the City earns about $2.1 million per year from the utility, after all expenses and contributions to electricity capital reserves have been deducted.
The City of Kelowna and FortisBC would identify and pursue new joint initiatives dealing with such projects as energy conservation and alternative energy projects. These initiatives would support the community's efforts to achieve energy sustainability, and would promote Kelowna as a leader in energy innovation.
The Restructuring Opportunity is a prudent endeavour that is being designed to build on the City's success with other energy initiatives developed in recent years. One such initiative is the 2001 partnership agreement with BC Gas (now FortisBC Energy Inc.) that, at maturity, will result in a significant legacy fund for the community.
FortisBC is an experienced owner and operator of electrical utilities in BC's Southern Interior and Kootenays. Since 2000, FortisBC has served as the City's electrical utility contractor, responsible for planning, operating and maintaining Kelowna's electrical utility on behalf of the City. FortisBC is also the electricity provider through its own utility to the two-thirds of the community not served by the City's system, and maintains its electricity operations headquarters in Kelowna. The transfer would bring the City’s approximate 15,000 electricity customers under regulation of the British Columbia Utilities Commission.
FortisBC runs its electrical utility using a regulated utility business model that is not available to the municipality. Under this model, expenditures on system infrastructure, once approved by the British Columbia Utilities Commission, are treated as investments on which the company earns a regulated rate of return. This feature of the model supports new capital investment required to meet the needs of future customers, and helps to make FortisBC ideally suited to take responsibility for the City's system.
The MOU signals the parties' strong mutual desire to bring the Electrical Utility Restructuring Opportunity to fruition. Before any changes are implemented, however, several steps must be taken. Pending Council endorsement on Monday, the parties must finalize the details of the Opportunity and complete their respective due diligence efforts. For the City, due diligence will involve working with the provincial government to ensure that all necessary authorities are in place. Due diligence will also involve submitting the Opportunity to an independent third party for review. The City must then seek approval of the electors for the Opportunity through an alternative approval process. This process will be accompanied by an extensive public information program, and will take place in the fall of 2012. Full details will be provided closer to the date. Pending approval from the electors, FortisBC would make an application to the British Columbia Utilities Commission to approve the transfer.
The Council Report for the Kelowna Electrical Utility Restructuring Opportunity is available at kelowna.ca/council. Further information is also available at kelowna.ca/cityprojects. The web page will be updated as information becomes available.
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