Ten years ago this month, Edmonton City Council came within a hair of making the biggest business mistake of its history: selling Epcor. Convinced by Epcor’s senior management and a team of high-priced consultants, six councillors voted at a public meeting to sell the company, but in a hair-raising vote councillor Larry Langley cast the deciding vote against the sale. That decision has proved to be worth billions of extra dollars to the people of Edmonton, which no one except the hard-core privatizers has ever regretted. At that decisive meeting I happened to sit beside a big investor from the U.S. who wanted to buy a chunk of Epcor. When the decision went against the sale he stormed out to catch the next flight from town.
This summer, a different City Council is faced with a similar decision. Once again, Epcor senior management has convinced them to sell a big chunk of the company. But this time, with the entire decision held behind closed doors, there is no sober second thought, apparently no independent analysis, and no chance for public review. Poor process usually leads to poor decisions.
I speak from first-hand experience, because I helped provide some of the independent analysis that showed basic flaws in the case to sell Epcor in 1999. I worked with an arms-length team with no vested interested in the sale: Myron Gordon, a widely-respected expert on utility finance from the University of Toronto, and David Cooper, an internationally-recognized accounting expert at the University of Alberta. The studies were supported by a small budget from the Parkland Institute.
In contrast, Epcor and the City paid over $500,000 to RBC-Dominion Securities to advice them on the sale. RBC-Dominion recommended to sell, perhaps not surprising since they then planned to be a broker for the sale. What surprised me more is that while they were telling City Council that Epcor was an unacceptably high risk, they were reassuring potential investors through a prospectus that Epcor was a low-risk blue-chip company. A mixed message if there ever was one.
The case came down to this: those promoting the sale said Epcor’s entire electrical assets could be sold for $1.3 billion, which should then be invested in a portfolio of stocks and bonds. They claimed this portfolio would pay an average annual return of 7.4% to the City, which would equal the lost revenue the City had received from owning Epcor.
Our analysis showed that a 7.4% rate of return, especially after inflation, was unrealistic. The only way to pay that was to slowly draw down the principal of the stock portfolio, which would eventually be reduced to zero. In the long run the citizens of Edmonton would have nothing to show for having sold Epcor.
Just as importantly, our analysis showed that if the City kept Epcor it would share in Epcor’s profits every year, and in addition Epcor would grow into a much larger asset. In 2008, Epcor paid $171.9 million to the City in dividends and fees. We forecast that Epcor would be worth $2.2 billion by 2010. History has vindicated our case. At the end of 2008, the net assets of Epcor were over $2.5 billion.
I explained the case one-on-one to several City Councillors, including Larry Langley. Armed with this independent information they voted down the sale. As a result, Edmonton has been paid large dividends every year from Epcor, while at the same time watching the value of Epcor soar. It’s been a fantastic win-win for the City and its residents.
The case might be similar today, or it might be different. The world has certainly changed, and perhaps it’s a good time to sell Epcor’s power plants. But maybe, under independent scrutiny, the reasons would once again prove to be hollow and self serving.
For me, the secrecy of this decision and the history of the issue fuel serious questions. Why are we selling when stock markets seem close to the bottom? Who are the advisers, and what are their vested interests? Why were local financial firms and experts frozen out?
Perhaps most importantly, who is driving this sale? Council’s shareholder agreement with Epcor makes clear that a sale must be initiated by Council so who on Council got this started? And how do voters hold them to account?
City Councillors do not own Epcor, the people of Edmonton do. The people have a right to be involved in the biggest financial decision in the history of our City. The financial scale o this decision is many times that of the municipal airport issue.
This Council needs to do three things: 1) put the sale on hold immediately, 2) open up the information for the public to see, and 3) have an open debate and vote on the sale.
Ten years ago the Council of the day consulted the public before making a final decision, and we are billions of dollars better off because of it. Today’s Council needs to do the same.
