Competitively priced power tips scales in favour of Algonquin
The following correspondence is in relation to the Regulatory Authority’s Invitation to Comment on the matter: a transaction concerning the proposed acquisition of control of Bermuda Electric Light Company by Algonquin Power and Utilities Corporation, issued on April 3, 2020.
This submission relates to matters in Sections 9 (i), 2, 3, and 4 as well as 10 (i) (ii) a, c, e and f of the Invitation to Comment.
There are the four reasons for supporting the acquisition of Ascendant Ltd by Algonquin.
1, Foreign exchange benefits
Bermuda has lost in 2020 at least six months’ foreign exchange revenue from tourism, and other economic activities, because of the recent coronavirus shutdown. This is massive, unprecedented and worrying.
Therefore, any mechanism that provides foreign exchange, specifically US dollars, is to be welcome. To reject or forgo such an inflow at this time would be reckless in the extreme and highly detrimental to the economy of Bermuda.
In the absence of a foreign exchange inflow of US$200 million from Algonquin, Bermuda, primarily through the Bermuda Government and its local banks, would have to borrow from foreign financial markets. As the Bermuda foreign exchange debt is now in the region of $2.8 billion, additional borrowing would swell our debt to beyond $3 billion, which puts repayment thereof in doubt and raises the spectre of default.
Foregoing an opportunity to enhance Bermuda’s foreign exchange holdings at this juncture does not make much sense.
2, Individual shareholders
Many of existing shareholders of Ascendant are employees, or former employees in receipt of a pension from Ascendant. As I understand it, there are about 200 employees and about 250 retirees who are shareholders.
Many of them are facing financial hardship because of the coronavirus emergency, and to deprive them of their proceeds from the sale of their shareholding at this time is not only foolish but callous and hard-hearted, and is likely to cause much financial anxiety to innocent people.
Selling their holdings on the current market is, of course, possible but the proceeds realised would be less than the present offer from Algonquin. To reduce the amount that could be realised would be a big financial blow to those Bermudians who have made investments for their old age.
3, Security of supply of electric power
Bermuda is exposed to at least two supply interruptions. The first is from hurricanes or other bad weather events; the other is from technical failures. Having the vast engineering resources of Algonquin available to Ascendant is a massive insurance at no cost.
While Ascendant, no doubt, has service agreements with other utilities in place, there is not the same level of security as having a technically advanced company safeguarding its own assets.
Bermuda is massively exposed to having its electrical power interrupted because of circumstances beyond its control, as was the case in Puerto Rico in 2017 when Hurricane Maria struck that island. It continues to suffer from a suspect electric grid, ruined infrastructure and financial bankruptcy three years after the storm — and not coincidentally an increase in migration. Such a risk to Bermuda can be mitigated by having a sole shareholder of Algonquin’s stature.
Algonquin has publicly committed immediately to start a process to reduce costs in the company by $5 million over two years. These will be ever-greened cost reductions. This could be the beginning of cost reductions that will lower customer rates.
As a best-in-class utility operator with more than 25 different utilities under its umbrella in Canada and the United States, Algonquin can bring to bear its operational expertise to Bermuda and Belco. They can bring valuable ideas, management discipline, economies of scale in purchasing resources and tools to the table. Belco is a tiny utility and having the support of world-class company cannot be underestimated.
4, Mercantilist fallacies
Mercantilism, which was in vogue from the 14th century to the late 18th century, was a ragbag of confused ideas about commercial regulations, taxes, tariffs, corporate ownership and state power all mixed up with incoherent ideas of national rivalry and prestige, the result of which was that the general population was kept in a state of poverty for the benefit of the ruling classes, domestic producers and the wealthy.
One important aspect was that of Crown colonies, where the colonial power believed that the subjects were too stupid and uneducated to make informed decisions about commercial matters. This is the genesis of the 60:40 rule that has dominated corporate ownership for so many years.
The inconsistencies, confusion and retrograde ideas of mercantilism were exposed by Adam Smith in 1776 with the publication of his book, The Wealth of Nations. This led, for the first time, to ordinary people being given the opportunity to make their own decisions — free from the economic fallacies imposed on them by their so-called betters.
One could make a case that the Bermuda Government intervening to prevent individuals from making a sensible commercial transaction from taking place on the grounds that it would not benefit the wider Bermuda community is a failure to appreciate that such mercantilist thinking has been refuted time after time over the past 250 years.
To argue that a Bermuda asset is being sold to a foreign institution is, and has been, retrograde thinking for centuries. After all, virtually all of Bermuda’s large hotels, as well as its petroleum suppliers, are foreign corporations and we have prospered financially.
In addition, the largest bank in Bermuda is owned by HSBC, a British company, and Butterfield Bank is quoted on the US Stock Exchange.
What is important for the wider Bermudian community is the supply of reliable and competitively priced electrical power, not the nationality of the supplier. Anything that impedes supply benefits to the Bermudian customer cannot be in the best interests of Bermuda and its people.
The compelling objective is to provide the Bermudian customer with a better, more reliable and less expensive product — not to sustain an obsolete political philosophy that the rest of the world rejected decades ago.
To argue that Ascendant will no longer be a Bermuda company is something of a false argument. Ascendant is a corporation that is a legal entity — a piece of paper, if you like. It does not carry a passport; it is simply a collection of investors, management, employees and customers seeking the best and most reliable means of supplying Bermudian customers with electrical power.
Algonquin makes these objectives even more possible and secure. That is what is important. To veto this transaction on mercantilist grounds is to ignore the advances made in financial understanding over the past 250 years.
As mentioned earlier, Algonquin is also committed to reduce costs by $5 million over two years. This is likely to result in cost reductions that will lower customer rates — an objective that is more than worthwhile. In addition, there is the benefit of valuable ideas, management discipline, economies in purchasing and other benefits.
It is not too much of an exaggeration to say that this will bring jobs and lower costs to Bermudian customers. As it is the mandate of the RA to protect the interests of consumers, this worthy objective can be achieved without the distraction of the nationality of the owner.
Finally, I would add that during the shareholder meeting in August 2019, 99 per cent of the shares voted were in favour of transaction.
• Robert Stewart is the author of two books on the Bermuda economy
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