Today Sun Mon
It is forecast to be Chance of Rain at 11:00 PM EDT on August 23, 2014
Chance of Rain
It is forecast to be Partly Cloudy at 11:00 PM EDT on August 24, 2014
Partly Cloudy
It is forecast to be Partly Cloudy at 11:00 PM EDT on August 25, 2014
Partly Cloudy



Campaign Fact Check: Karen Stintz’s Plan to Fund the Relief Line by Selling Half of Toronto Hydro

Selling half of Toronto Hydro would get the City only a fraction of the way toward a realistic funding plan.

Photo from Karen Stintz’s Instagram account.

When mayoral candidate Karen Stintz delivered a February 26 speech at the Toronto Region Board of Trade, she told gathered business leaders how she would fund the much-needed Downtown Relief Line: “If we have priorities that require investment to be realized, like the Downtown Relief Line, we need to start thinking about how to unlock the value from other City assets. Just as we used the proceeds from the sale of Enwave to pay for our new air-conditioned streetcars, we could use the proceeds from the sale or lease of Hydro to pay for transit.” Asked about the proposal after her speech, Stintz clarified that what she meant—and what was in her script—was that due to its tax treatment only 10 per cent of Toronto Hydro should be sold, not the whole thing.

At an announcement at Gerard and Carlaw on Monday morning, Stintz modified her stance, saying that she would now like to sell a majority of Hydro in order to fund the DRL, so long as she gets provincial approval to waive the accompanying tax liabilities. However, there are a lot of question marks around this promise, and other questions that it prompts.

Two main things should be evaluated when looking at the Stintz proposal: the cost of the Downtown Relief Line and the value of Toronto Hydro. The former is relatively easy to assess. Stintz supports the eastern DRL alignment that goes through Pape station up to Don Mills. As of 2013, Metrolinx estimated [PDF] that this subway line would cost $7.4 billion, which is a substantial transit investment. For major transit projects, the funding model has often been that the City contributes one third of the cost, with the province paying either two thirds or the federal government contributing a portion when it feels like it. So it’s reasonable to assume that under a plan that is not Metrolinx’s Big Move (in which revenue tools would pay for transit expansion on an ongoing basis), the City would have to find about $2.5 billion for its plan.

Toronto Hydro is an asset wholly owned by the City, but it is not worth $2.5 billion. In 2012, the company was valued at $1.14 billion, and as a utility company, its growth and dividends are fairly predictable. So selling 51 per cent of Toronto Hydro at fair market value would net about $550 million.

But there’s a catch. Toronto Hydro currently enjoys favourable tax treatment—it pays only $26 million a year in taxes to the province. This tax treatment would change if the City sold more than 10 per cent of the company, and there would be a 33 per cent tax on the proceeds of the sale above 10 per cent. So rather than $550 million for Hydro, we’re looking at something closer to $400 million, which doesn’t include the discount that would be needed to account for the increased taxes the company would face.

This makes the sale of Toronto Hydro very difficult, and there are entirely good reasons for this. When the province decentralized hydro (in an effort to try and get more private competitors in the market and lower prices), it created several municipally managed companies (like Toronto Hydro) from Ontario Hydro. This left Ontario Hydro with an increased debt load on paper, but one that is implicitly backed by the other companies it created (after all, cities are creatures of the province). Privatizing companies like Toronto Hydro would increase the debt load of Ontario Hydro by decreasing its implied collateral, and also change tax agreements in place between the various orders of government. So there’s a good reason why the cost of changing the status quo is prohibitive when it comes to Toronto Hydro.

Stintz wants to ask the province to cut through this mess and waive the 33-per-cent penalty. Given that the City will subsequently ask the province for anywhere from $2.5 billion to $5 billion to invest in the Downtown Relief Line, it’s unlikely that the province would readily accept waiving the $150 million in taxes it is due while Ontario Hydro takes a credit hit and the same tax treatment would be expected to be maintained. However, Stintz’s policy brief [PDF] on the subject addresses what the province can get from the agreement in order to make it happen: “[We will] recognize the province foregoing the provincial transfer tax as part of the provincial capital contribution to the Toronto Relief Line.”

If the City were to accept the province’s waiving of the transfer tax as part of the province’s contribution to the DRL, then there would still be $150 million missing, because the province would consider it part of the DRL budget and the City would have to find the difference elsewhere. In other words, Stintz requests that the province waive the fee, but given the understanding above, the City would effectively be borrowing money from itself, and be obliged to solve the problem later.

This brings up another problem. The Toronto Hydro policy is to issue a dividend that is the greater of: $25 million annually, or 50 per cent of consolidated net income. (In 2013, for example, consolidated net income was $86 million, which means the dividend was $43 million.) If the City were to sell half of the company, it would also lose half of the value of this dividend, and the equivalent financial offset would be an additional 0.87-per-cent property tax increase.

Stintz refers to her plan as a “down payment” on a Downtown Relief Line, and this captures the fact that selling Hydro alone does not constitute a plan to fund the DRL. In fact, selling half of the company and introducing a 0.5-per-cent tax increase would raise only around $400 million as a ballpark estimate, given that the Stintz plan would give the province credit for waiving the transfer tax. Four hundred million is about 15 per cent of the municipal share Toronto would need to make the DRL a reality, so there would be a long way to go.

In order to fund the other 85 per cent of the DRL, the City would need to find other revenue sources, as there aren’t five more assets like Hydro to be sold. Council would need to raise almost three times the amount of property tax over 30 years (meaning a roughly 4.6-per-cent increase in property tax revenue) as it did for the Scarborough subway plan in order to fund the rest of the relief line, and would likely go over its self-imposed debt ceiling to do so.

On its own, selling Hydro does not constitute a plan to fund the Downtown Relief Line, and would have to be paired with other means of raising a great deal money for the City.

CORRECTION: March 26, 2014, 11:25 AM This post originally indicated that Toronto Hydro issues a $25 million dividend, which is equivalent to a one-per-cent property tax increase. However, the Toronto Hydro policy is, in fact, to issue a dividend that is the greater of: $25 million annually, or 50 per cent of consolidated net income. If the sale of Toronto Hydro were to go through, a property tax revenue increase of 0.87 per cent—not 0.5 as the article originally stated—would be needed to offset the income.


  • dsmithhfx

    What could possibly go wrong!

    • estta

      But sunflowers!!

      • HotDang

        Except this one does an about face every 12 hours to face votes.

  • wklis

    Selling Toronto Hydro is wrong.

  • Queen of Kickbacks

    “When the province decentralized hydro (in an effort to try and get more
    private competitors in the market and lower prices), it created several
    municipally managed companies (like Toronto Hydro) from Ontario Hydro.” Hmm, a fact-check on the fact-check? If memory serves, under the 1997 City of Toronto Act (not the 1998 Energy Competition Act that split Ontario Hydro into OPG and Hydro One), the six municipalities’ existing hydro utilities were merged into a single entity (just like the fire departments, parks departments and other agencies) called the Toronto Hydro-Electric Commission. In June 1999, the city and the THEC combined their different responsibilities to a new shell corporation, the Toronto Hydro Corp., which owns two subsidiaries: Toronto Hydro Energy Services (responsible for street lighting) and the Toronto Hydro-Electric System (which distributes power in the city). I don’t think any of this was necessarily affected by or a byproduct of the split-up of Ontario Hydro, but I may be missing something.

    • rich1299

      That bit didn’t make sense to me either, after all there have been many municipally run hydro companies for about 80-90 years or so before “the province decentralized hydro”. Ontario Hydro only provided local distribution in areas too small to effectively run their own system as well as supplying hydro to the municipal hydro agencies which it still does today. I’ve noticed no change at all in local distribution, except prices of course, between the pre-Harris years and now.

      So how could Harris’s partial privatization of hydro have created something that existed for so many decades previously?

  • scottld

    Dont worry, she will change her mind in 3 months.

    • Doug Earl

      In 7 months it won’t matter what she thinks.

  • Queen of Kickbacks

    Campaign Spell Check: Stintz’s document misspelled forgoing. But I digress. When politicians talk about selling off money-spinning public assets, voters should always back away, smiling, making no sudden moves.

  • OgtheDim

    When one of the candidates addresses operating costs as well as building new lines, then I’ll be impressed.

    • Paul Kishimoto

      “Sell Toronto Hydro to pay for operating costs!”
      “Okay, and when the money runs out?”
      “Sell it again!”

      • AlyssaMoh

        Exactly! Just like the 407. Back in the mid 90s, we knew we’d have absolutely no use for another 400 series highway that would connect major municipalities in southern Ontario.
        Boy, that Spanish consortium that own the 407 must be losing its pants /sarcasm/

        Don’t. Sell. Public. Utilities. Toronto’s prices aren’t rock bottom like, say, the public hydro in Manitoba, but they’re middle of the pack. Why swap one basic need with another basic need?

        It’s like choosing between health care, food and shelter.

  • Electrify85

    I don’t live in Toronto proper, but Stintz would have been my choice. But damn she is dropping the ball like crazy!

    • Paul Kishimoto

      Was she carrying it, at some point?

  • Torontopoly

    Yep, let’s exchange long term revenue for a short term quasi-solution. That always turns out well, right? *cough* 407 ETR *cough*

  • OpportKnocks

    Trading a predictable revenue stream (Hydro) for a predicable deficit stream (Transit) can never be a winning idea.

    Drop out Karen, it’s over.

  • Matt Mernagh

    Never sell an asset that can be leased to private sector.

    • tyrannosaurus_rek

      Never sell and asset that’s making money.

      • tomwest

        … unless the price is greater than the total future discounted cash-flow.

        • tyrannosaurus_rek

          Never buy something for more than it can earn in the future.

          It’s starting to feel like the Ferengi Rules of Acquisition in here.

          • tomwest

            All of which leads to an intersting point about a (potentially) money-making asset: if somene wants to sell at a price, why would you buy it at that price? (Or vice versa)

  • Peter Clarke

    Sell off City assets
    that produce an annual revenue of just under $50 Million is ludicrous.
    Perhaps a more serious approach to assist transit funding would be for the City
    to allocate the City’s annual dividend of approximately $50 Million solely to
    transit funding and not to the annual operating budget of the City.

  • tyrannosaurus_rek

    Are conservatives really this stupid when it comes to money, or is their true desire to gut the government of most sources of revenue, justifying major service cuts, just becoming more transparent?

    • dsmithhfx

      The timing is spectacularly poor, considering what we just went through.