Toronto Hydro has been owned cooperatively by the people of Toronto through the City of Toronto. Furthermore, they own Toronto Hydro practically free of debt, having paid for electricity over the years at rates which covered both the cost of producing and delivering the electricity, and the cost of building its magnificent distribution system.
As of December 31, 1998, the people of Toronto had an investment of $1,675 million in Toronto Hydro, of which $1,510 million was invested in physical plant net of depreciation and $165 million was represented by other assets, largely current assets, net of various liabilities.(2) Toronto Hydro, and, I believe, other municipal utilities in Ontario, are quite unique among electric power companies in being practically free of debt.
In 1998, Toronto Hydro delivered 24.7 billion kWh of power to the people and businesses of Toronto. As shown in Table I, its cost for delivering that power, including the various supporting activities such as maintaining the delivery system, reading meters, invoicing customers and other clerical activities, but excluding depreciation on its fixed assets was only $159 million . That is much less than one cent per kWh. It was only 0.644¢, to be exact. In addition, the depreciation on (use of) plant and equipment cost $99 million. Adding together the total operating costs and depreciation expense, we get just 1.046¢ as the total cost per kWh of delivering power to the homes and businesses of Toronto. The data Toronto Hydro has provided for previous years suggest that the cost per kWh in these years was comparable to the figure for 1998. This is a remarkably low figure.(3)
Actually, Toronto Hydro did not simply charge 1.046¢ per kWh. It had a complicated rate design that involved an access or fixed charge and a charge per kWh used, with both charges varying among classes of customers, volume of access or use and perhaps also time of use. Toronto Hydro was charged for power by Ontario Hydro according to this rate design and its rates were minimally higher to recover its distribution costs as well as its cost of power from Ontario Hydro. Averaged over all Toronto Hydro customers, it charged 7.5¢ per kWh, of which 6.34¢ was the price per kWh paid to Ontario Hydro for the power it delivered to Toronto Hydro, and 1.155¢ was the price Toronto Hydro charged for its distribution services. The excess of 1.155¢ over the cost of 1.046¢ per kWh resulted in an operating profit of $26.9 million.(4) The addition of other income and expenses, plus a charge of $38.7 million to cover the cost of separation or early retirement of 22% of the labour force, resulted in a net profit of $10.4 million, as shown in Table I.
Toronto Hydro’s operating costs and depreciation expense in 2000 are estimated in Table I by making use of the information in the annual report for 1998. The consolidation of the six municipal utilities in Toronto into Toronto Hydro, and other developments, have made possible a substantially smaller workforce in 1999 than in 1998. Voluntary separation and retirement programs reduced employment by 22% in 1998. I estimate that the savings from these programs less the increased costs due to higher wage rates and prices will reduce operating costs by about $20 million from $159 million in 1998 to about $139 million in 2000.(5) Thereafter, costs are likely to rise at an annual rate of about 2 per cent. Additional costs involved in power generation activities that may be undertaken by Toronto Hydro should be treated as part of its power purchase costs.
Expenditures on capital equipment for its construction activities in 1998 were low compared with previous years, and I estimate that these expenditures will be about $145 million in 2000, and they also are estimated to increase at an annual rate of about 2 per cent thereafter.(6)
If the above estimates are correct and if power consumption rises at an annual rate of 1.5 per cent to 25,465 million kWh in 2000, operating costs will fall to 0.546¢ per kWh, and depreciation expense will rise to 0.428¢ per kWh. Capital expenditures will rise to 0.569¢. The estimated total charge of 1.115¢ per kWh, which covers capital expenditures, will be somewhat lower than the 1.155¢ actual price charged in 1998.
Toronto Hydro’s profit in 2000 will be about $36 million if the price charged for its distribution services is the above 1.115¢ per kWh. This profit is the excess of the capital expenditures estimate of $145 million over depreciation expense of about $109 million in 2000. A price of 1.115¢ per kWh is exceptionally low, as indicated earlier, particularly when the quality of service is kept in mind. Also true, a profit of $36 million would provide the people of Toronto, as owners of Toronto Hydro, with a return of 2.1 per cent on their investment of about $1,700 million in the corporation in 2000. As will be seen shortly, this is far less than a fair return on their investment, so that the people of Toronto as consumers of electricity are benefiting from their own generosity as owners of Toronto Hydro.
The freeze on rates for generation and transmission established by Ontario Hydro will still be in effect in 2000, so that the average cost of power purchased by Toronto Hydro is not likely to be far different than the 6.34¢ per kWh paid in 1998. In that case, the average price paid for electricity in Toronto in 2000 will be about 7.46¢ per kWh. That is slightly less than the 7.5¢ paid in 1998.(7)
Notes
- The financial statements for the year ending December 31, 1999 were made available to me when this study was substantially completed. Hence, this study will rely primarily on the data in the statements for 1998. The other assets on December 31, 1998 included $175 million in cash, of which $100 million was later paid out to the city as a dividend, because it was in excess of Toronto Hydro’s need for cash. The other assets and liabilities of Toronto Hydro for the most part arose as a consequence of its operation. It had long term debt of only $79 million and it owned long-term liquid bonds of $46 million.
- Based on data collected by the U.S. Department of Energy, the American Public Power Association calculated the kWh of distribution cost for public power systems that serve large cities. The cost in $U.S. for Seattle was 1.1¢ /kWh and for Los Angeles was 1.6¢ /kWh. This large difference between Toronto and U.S. cities was in part due to the fact that Toronto is not spread out in suburbia to the same degree. Distribution cost for investor-owned utilities in the U.S. is even higher than it is for the municipally owned ones.
- The operating profit was just about equal to the excess of the cost of the expenditures on new plant and equipment over the depreciation expense. This made it unnecessary to borrow to finance such expenditures.
- This figure excludes the additional costs Toronto Hydro may incur to comply with the Energy Competition Act. It appears that they are quite large. Operating costs in 1999 were $181 million, 13.6% higher than the 1998 figure. Unless the additional expenses were temporary, operating costs in 2000 will be well above my estimate. The annual report for 1999 provides no explanation why the substantial reduction in the work force did not reduce operating expenses.
- Investment in projects to generate power that Toronto Hydro is undertaking are not included in this figure. Their cost should be included in the cost of purchased power.
- In a submission to the Ontario Energy Board dated April 14, 2000, and made available to me when this study was almost completed, Toronto Hydro requested an increase in rates effective July 1, 2000 that would allow it to move toward a fair return on its capital. The request is complicated by a number of considerations. Over a short period of time, the existing comparatively simple rate structure will be changed in a number of ways. There will be separate charges for power and for distribution; each will have its own rate design; rates for the six companies combined in Toronto Hydro must be harmonized; many of these changes take place at different times; and Toronto Hydro does not want to raise electric rates sharply and change its rates every few months. To simplify my analysis, I assume that distribution rates are raised on January 1, 2001 to provide a fair return on capital, and I ignore power rates.