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Toronto's out-of-sight Hydro kitty

Toronto Star - March 30, 2002
by John Spears


What's a billion? Toronto City Council doesn't seem to care. Just before they launched into an acrimonious budget debate earlier this month, Toronto city councillors had close to $1 billion dumped in their laps. With one exception, they ignored it.

As they scrapped over nickels and dimes and cried poverty, councillors didn't even ask for a report from city staff on the implications of the huge bonus that had just been handed to them via the city's electric company, Toronto Hydro. The fact that the bonus was in a sense handed to the city by the reviled Conservatives at Queen's Park adds to the irony.

Here's what city council didn't want to hear about as it set the 2002 budget:

A little-known asset of the city is a loan of $980 million owed to it by Toronto Hydro. The city set up the loan, it never actually advanced Hydro any cash, when the province handed direct ownership of Hydro to the city in 1999. Prior to that, Toronto Hydro had been something like a co-op, effectively owned by its customers. Toronto Hydro was worth almost $1.6 billion when Queen's Park presented the gift. The city chose to structure its holding as $568 million in shares and $980 million as debt, owed by Hydro to the city. The debt bears interest of 6.8 per cent.

Realistically, the city was not in a position to cash in on the money suddenly owed to it by Hydro because Hydro had no way of raising the cash to pay off the debt. But that changed Feb. 21. Toronto Hydro was granted an independent credit rating by two well-known rating agencies. That gave Hydro the means to raise money independently. It could sell bonds, and use the money raised from private investors to pay back all or part of the $980 million it owes the city.

The city could use the money to retire a good portion of the city's net debt, which currently stands at $1.1 billion. That debt is costing the city $243 million a year to service, in interest and principal payments.

City officials have argued that the 6.8 per cent they are earning on the Hydro loan is a great deal during these times of low interest rates.

Let's ignore for the moment the fact that Hydro is raising the money to pay the city's interest by aggressively pushing up hydro rates. Your new, higher electricity bills are in effect a disguised tax paid to the city.

Let's also, for the sake of argument, ignore the fact that the city is paying interest averaging 7.5 per cent on its own debts. Borrowing at 7.5 per cent and investing at 6.8 per cent isn't brilliant financing.

Let's even ignore the fact that Hydro could probably reduce its interest costs through a bond issue, and therefore reduce the need to increase electricity prices. More important is the fact that about half of the $243 million the city is shelling out in debt servicing costs this year consists of principal repayment, not interest.

The city made $118 million in principal payments in 2000, according to its audited statements. (The statements for 2001 won't be ready until autumn, but that's another story.) That's a huge chunk of money coming out of current income. If it could be reduced by retiring some of the city's debt, millions would be freed up for other purposes.

Retiring one-quarter of the debt would free up close to $30 million a year, now draining out of the city's coffers in principal payments, for other uses. Keeping swimming pools open, for example. Or moderating yet another TTC fare increase.

Making those choices is the reason why we elect politicians. They're tough choices, but councillors can't make them if they ignore the financing options before them.

That's the route this council took. A billion-dollar asset suddenly became liquid on the eve of a crucial budget debate, and they didn't ask for a report on the implications. Councillor Jane Pitfield attempted to raise the issue, but was shunted aside. Other councillors weren't interested. No doubt they will discover some uses for it next year, when they'll all be running for re-election.



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