At a Council Committee of the Whole meeting on September 23, Ken Strauss represented the Cobourg Taxpayers Association (CTA) and criticized what he called Stealth taxes imposed by LUI (Lakeshore Utilities). LUI is owned by Holdco which in turn is majority owned by the Town and pays both an annual dividend and interest on a loan to the Town set up in 2000. The loan is for $7M at 7.25% ($507K/year) and so far no payments have been made on the principal. Because of these payments by Holdco, Ken said that without them, electricity rates could be lower so in effect, the Town is taxing us via our LUI bills. But the interest rate is higher than it need be (as set by the OEB) and Director of Finance Ian Davey proposed that the rate be lowered to 3.72%. He said that the payment to the Town would remain at $507K per year but would now include some repayment of principal although this is subject to approval by the LUI board.
But the issue was not addressed in the meeting on September 23 but was instead referred to a “special Committee of the Whole Meeting” to be held at 5:00 pm on October 15. LUI will present their case to Council who will also hear another presentation from CTA. Two citizens will also present their opinions.
To a non-Financial person like me and most Municipal taxpayers, it’s hard to understand what this is about. But let me try to explain (I’m sure any errors will be pointed out by readers):
Briefly, to comply with direction from the province, in 2000, the Town owned Hydro Utility was transferred to a for-profit corporation for $14M – half to be a loan (as documented with a promissory note) and the other half shares (equity). Holdco was formed with LUI and LUSI as subsidiaries. LUI is regulated and provides Electricity to the Town, and pays the town loan interest and a dividend. Regulation is by the Ontario Energy Board (OEB) which sets the interest rate allowed. This was originally 7.25% but is now 3.72% and they further stipulated that although the actual interest rate is a management decision, Hydro customers should not be penalized – that is, Hydro rates should not be higher because the interest rate is higher. Instead shareholders (in this case the Town) should bear the cost with reduced profit. (You’d think this would mean a higher dividend if the interest rate was reduced but this was not mentioned). It seems that LUI is also implying that if the interest rate is not reduced, it will refinance elsewhere at the lower rate (see LUI presentation in Links below).
What this is about
So this issue is not about Hydro rates – they are mandated to be not affected – it’s about the relationship between an arms-length corporation (Holdco) and its owner (the Town) and what the corporation pays to the Town. Currently it gets about $400K per year as a dividend because of the equity ownership and $507K per year because of the loan interest. The proposal is to reduce the interest to $260.4K but pay another $300.6K in principal repayment. (The principal repayment would be at the discretion of the LUI board).
This is an esoteric Financial issue and at the Special COW meeting, three citizens will be presenting: Ken Straus representing the CTA, and Cobourg residents Bryan Lambert and Paul Pagnuelo.
In the end, citizens only care about two things:
- Hydro rates (supposedly not affected)
- Town taxes that can be held lower by getting payments from LUI.
I can’t be at the special COW meeting but I’ll report here on any decisions made although since it’s a Committee of the Whole meeting, any decision must be ratified at the next regular Council meeting.
- Lakefront Presentation re Promissory Note Oct 3, 2019
- Staff report re Amendment to Promissory Note – Lakefront Utilities
- Summary of Marathon Council Meeting – Includes paragraph summarizing CTA presentation – 24 September 2019
- CTA presentation to Council on September 23, 2019
Update October 16
At the meeting on October 15, four citizens provided input to Council:
- Ken Strauss representing the CTA (Cobourg Taxpayers Association).
- Bryan Lambert – member of the CTA but presenting as a resident.
- Trish Whitney who read a letter from resident Paul Pagnuelo because Paul had a health absence.
- Ben Burd as a resident.
See Links below for copies of the first three presentations.
Their message was that Holdco/Lui’s interest payments to Cobourg are a ‘stealth tax’ resulting in “lose-lose – higher taxes (hidden) and higher utility prices”.
They also complained of a general lack of transparency and lost opportunity to take the $7 million equity or debt in LUI and fix the E-pier or pay off CCC debt.
Ben was very positive about Lakefront/LUI generally, but felt the Town is not transparent in letting the public know how they intend to use the reserve/income from Holdco.
Barry Gutteridge, Chair of the Holdco board presented on behalf of Lakefront – see his presentation in the links above – and his photo above-right. He expressed frustration with the CTA accusations and did a long credible defense of how good a job Holdco is doing in a complex regulated environment. He indicated the CTA is confused on several things.
Councillor Brian Darling asked several questions that indicated he is a Holdco fan, including asking if the CTA had tried to meet with Holdco/LUI to understand things and talk – Barry answered “No”.
Deputy Mayor Suzanne Séguin made a motion to revise the new interest rate to 5% but after seeing no support from other councillors, withdrew her motion.
Adam Bureau was very positive re Holdco/LUI and the relationship with the Town. Mayor John Henderson and Councillors Darling and Burchat agreed.
Treasurer Ian Davey said in response to a question that the reason Holdco dollars were kept separate was that the Town never relied on this income until it was received. This also means that the Holdco money or changes in it will not affect taxes.
The motion as originally proposed was then passed – that is:
THAT effective January 1, 2020, the terms of the promissory note in the amount of $7,000,000 be amended as follows:
- The interest rate be adjusted from 7.25% to 3.72% per annum and this rate remain fixed until each approved Cost of Service (COS) rate application, at which time it will be adjusted to the Ontario Energy Board’s (OEB) approved long-term interest rate for affiliate debt.
- In addition to the required interest payments, annual principal payments may be made at the discretion of the Lakefront Utilities Inc. Board of Directors after retaining sufficient funding to support their infrastructure requirements.
Photo and assistance in reporting by Warren McCarthy.
Update Council Meeting October 21
The motion above (para-phrased a bit) was passed with no further debate.
- Presentation by Ken Strauss
- Presentation by Paul Pagnuelo (read by Trish Whitney)
- Presentation by Bryan Lambert