If we keep it; we must lose.
The energy business is complicated. I was very sympathetic to Council in the summer of 2023 when our utility bills suddenly more than doubled and no one could explain why - it was too complicated.
Residents demanded to know what the cost of producing electricity was. Of course there was no answer. I can sympathize. I don’t know what it costs to produce a chocolate chip cookie. I could hire five chartered accountants to calculate the cost, and they’d give me five different answers, and they’d all be right, depending on how they defined their numbers.
I don’t expect council members to become experts on running a multimillion dollar energy enterprise, and I didn’t blame them for floundering a bit that summer. What we elect council to do is take high-level governance decisions, weigh competing interests, set priorities, and make the best decisions they can on our behalf.
As Kris Samraj has detailed so beautifully on his blog (samraj.ca), the usual thing when council makes decisions is just to do whatever the city administration recommends. In the case of forming an MCC (Municipally Controlled Corporation) out of our energy division, which is what administration is recommending, I have deep concerns.
Who am I to say so? I’m not competent to make strategic decisions on a multimillion dollar energy generation and distribution business. This is all I think I can do: Admin is suggesting a major change to our Energy Division. They are making a case for why they think this is a good idea. I’m judging their case for myself, and I am not convinced it’s a good idea. If you want that ride: here we go:
Administration (that’s Ann Mitchell, ultimately), says that Medicine Hat used to rake in tons of money from its energy properties. That money funded the fabled “Medicine Hat Advantage”. Admin says those days are over. The outlook now is bleak: our energy division will need $500 million in capital investment over the next 10 years, and earnings from gas and electricity sales are projected to slide into an ever-deepening pool of red ink. Medicine Hat, in short, is screwed and there is no energy fairy coming to our rescue.
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But what if there is?
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Admin says the solution to the problem is to separate out our energy division as an MCC (Municipally Controlled Corporation). It will be a private corporation, and its only owner will be the City of Medicine Hat. The MCC will have a Board of nine people. Two of them will be City Councillors, one will be a member of the public, and the other six will be experts in energy and business.
The Board, it is claimed, will be magical. Because what will happen, says Administration, is that the Board will make great decisions, and the MCC will turn profit. Remember the $500 million in losses for the City? It’s gone. That money will turn into profitable investment decisions by the Board.
This thinking is purely ideological.
At no time does Admin say HOW the Board turns losses into profits - they think that just by existing the Board automatically makes money.
In making their case Admin uses fantasy logic throughout. Here’s the plan:
For a total cost of $3 or $4 million, the entire legal transition will take place, a Board will be recruited, a Universal agreement will be adopted, shareholders consulted and mollified, compensation negotiated and operations commenced as an independent entity.
The City will surrender the right to set rates.
The City will transfer all power generation assets (turbines, power station, etc) to the MCC, along with tens of millions in startup cash. This is essentially a gift to the MCC.
The MCC will control its own finances and borrow as it sees fit. It can borrow money against the assets we gave it. It will probably ask us to guarantee its loans.
The MCC will operate to maximize its own value. The profits it earns, if it earns any, will go to the City.
In the process, Admin expects our rates to rise a bit, but that these short term rises will be made up for by the improved efficiency the Board will create - again, just by existing.
Because the MCC will need time to get on its feet, we should not expect the City to see any financial benefit for several years - but don’t worry, the Board is sure to make money eventually. Remember, Admin says there is no possible way we could make money from our Energy Division.
I acknowledge the sarcasm. What I’m getting at is the essential nature of what a Business Case is: the Business Case must give compelling reasons why Change Is Necessary, and this one misses by a long shot.
Maybe we are screwed, maybe there is no reasonable hope that our energy division will return us to the glory days. I’m not saying we should do nothing, I’m saying that Admin has failed to make the case for why the MCC is the way to go:
No explanation is given at all, NONE, as to why a money-losing division will necessarily be a money maker under the Board structure. They ask us to believe it as a leap of faith.
They ask that the City transfer all capital assets to the MCC with no explanation. Why, I would ask, don’t we keep all the equipment and RENT it to the MCC? Why give it away?
No examples are given of the magical decisions the Board might be expected to make.
How about this: we keep the division, fund the $500 million over the next 10 years ourselves (maybe finding out it was really only $300 million), then sit back and reap the profits from our awesome energy business for the next 50+ years? Cities have very long-term time horizons.
No one at Admin has looked at the downside of an incompetent Board, or a Board with awful incentives. How is the Board compensated? What’s to stop them from piling on millions in debt and walking away leaving us holding the bag? What’s to stop them from Mitchell-style cronyism and hiring dozens of buddies and paying them millions? Without suggesting a single candidate Admin assumes this Board will appear from nowhere. They say the Board members might be anyone from anywhere, able to govern by Zoom meeting a few times a year, no problem!
Realize this: if we create the Municipally Controlled Corporation and it operates for a few years with its own books, its own income statement of Profit and Loss, then it becomes a natural takeover target. As soon as the corporation is created and has its own financial history, it will invite offers, and it will always and forever be a possibility for some City Council to accept one of those offers and sell the corporation to a hedge fund, take the money, build something dumb with it, and then we’ll be left with nothing, again. That scenario will never go away until it inevitably comes true. Read my lips: if we do this, it will end in the sale of the MCC.
The eventual and inevitable sale of the MCC is something the Board members will know immediately. Whatever their contract might say about long-term value, they will know that the greatest value of the MCC comes from its sale, not its service to us.
KPMG took the chicken exit, here. OF COURSE they recommended creation of a corporation! They’re accountants, they’re not equipped to handle anything else. We hired accountants to come in and analyze our energy business, and they couldn’t: it’s too complicated.
They recommended we make an MCC because that’s the only thing they CAN recommend - they don’t have the toolkit to untangle Energy from the City. And I’m saying that complexity can be a good thing. That complexity protects our Energy Division from predators.
this saddles us with the problem of trying to run such a difficult thing ourselves.
I do not envy Council members facing months of angry demands for straight, simple answers to questions that take weeks and months to understand. I think that’s too much to ask. I think we should make Energy create its own set of financial records. I think we should hire some excellent long-term managers and pay them well. I think those managers should live here. I think Council should be getting good, regular, useful numbers from the Energy Division, and sharing those numbers with us. I think we shouldn’t expect perfection, or be too quick to criticize. It’s gonna be messy, but messy can be fun.
And I sure as hell think we shouldn’t be too quick to privatize.
Because what Admin is saying, is this: We have an ENERGY COMPANY. In ALBERTA, for heaven’s sake. And IT CAN ONLY LOSE.
That’s the message. We own an energy company IN ALBERTA, and it is a GUARANTEED loser. Think about that.
Are we saying Energy companies in Alberta are guaranteed losers? Of course not. So it must be us, Admin is saying. That Energy company is a loser because of us. So hand it over, they’re saying, let the market have it. This is the Way.
I think we should try to do better.
I think this current council shouldn’t even be thinking about this.
I think Ann Mitchell should be run out of town on a rail.
I think this whole thing should go on ice until the next council comes in.
There will be another public hearing / online “Q&A info session” with the city online tomorrow:
COMH Website
Wednesday, June 11, 2025
5 p.m. to 6 p.m.
Click here to join / bookmark the online event. {link insert>
Also
a public hearing will be held on:
Tuesday, June 24, 2025 at 4:00 p.m. in City Hall Council Chambers (580 First Street SE, Medicine Hat, Alberta).
Here’s relevant video.