Governance of Toronto Hydro-Electric Commission

(City Council on October 1 and 2, 1998, deferred consideration of this Clause to the next regular meeting of Council scheduled to be held on October 28, 1998.)

--------

(Clause No. 28 of Report No. 18 of The Strategic Policies and Priorities Committee)

The Strategic Policies and Priorities Committee recommends that:

(1)the current citizen members of the Toronto Hydro-Electric Commission be thanked for their service and advised that their terms of office expire on October 31, 1998, and that an appropriate reception be held to thank them for serving on the Commission;

(2)City Council at its meeting on October 1 and 2, 1998, express its intention to appoint an Interim Board consisting of five more members of Council, and that the Striking Committee be requested to report to Council on October 28, 1998, recommending the five members;

(3)the Chief Administrative Officer be requested to report appropriately on the Terms of Reference and mandate of the Interim Board until such time as a permanent Board is appointed, as early as possible in 1999;

(4)effective the date of incorporation, the Board of Directors of the incorporated successor company to the Toronto Hydro-Electric Commission be comprised of 13 citizen members, including the Chair;

(5)the selection criteria be as described in the report (September 23, 1998) from the Chief Administrative Officer;

(6)Council appoint the Chair of the new corporation from among the citizen members;

(7)a reputable search consultant be engaged by the Chief Administrative Officer to provide Council with a list of candidates qualified to serve on the Board of the new corporation;

(8)the search process begin immediately to ensure that the Board is in place when the Articles of Incorporation are finalized, following the enactment of Bill 35 and the coming into force of the applicable portions of the legislation permitting incorporation, which may be in December 1998 or January 1999;

(9)the Toronto Hydro-Electric Commission be directed to revise its By-law 98-04-01 pertaining to reimbursement of the expenses of Commissioners to rescind the $80 per diem and direct that Commissioners' expenses be monitored and reported monthly to the Chief Financial Officer and Treasurer;

(10)the Chief Administrative Officer report further on the remuneration for the new Board of Directors of the successor corporation taking into consideration the report submitted by Jalynn H. Bennett & Associates dated August 12, 1998; and

(11)the appropriate officials be authorized to take the necessary action to give effect thereto.

The Strategic Policies and Priorities Committee reports having requested the current Board of Directors of the Toronto Hydro-Electric Commission to provide directly to City Council for its meeting on October 1 and 2, 1998, a written undertaking that:

(i)it will focus its activities on the amalgamation and integration of the six former hydro utilities; and

(ii)not sell any off its assets or make any other major business decisions without approval of City Council, until the new Board is approved by City Council.

The Strategic Policies and Priorities Committee also submits the following report (September23, 1998) from the Chief Administrative Officer:

Purpose:

The purpose of this report is to address issues arising from the Works and Utilities Committee meeting of September 14, 1998 concerning the current and future governance structure of the Toronto Hydro-Electric Commission and related issues.

Funding Sources, Financial Implications and Impact Statement:

There are no financial implications.

Recommendations:

It is recommended that:

(1)effective the date of incorporation, the Board of Directors of the incorporated successor company to the Toronto Hydro-Electric Commission be comprised of 13 citizen members including the Chair;

(2)the selection criteria be as described in this report;

(3)Council appoint the Chair of the new corporation from among the citizen members;

(4)a reputable search consultant be engaged by the City Chief Administrative Officer to provide Council with a list of candidates qualified to serve on the Board of the new corporation;

(5)the search process begin immediately to ensure that the Board is in place when the Articles of Incorporation are finalized, following the enactment of Bill 35 and the coming into force of the applicable portions of the legislation permitting incorporation, which may be in December 1998 or January 1999;

(6)the existing Commission Members serve until the successor company is incorporated and the new Board of Directors is named, recognizing the short remainder of the term;

(7)Council direct that the Toronto Hydro-Electric Commission revise its By-Law 98-04-01 pertaining to reimbursement of the expenses of Commissioners to rescind the $80.00 per diem and direct that Commissioners' expenses be monitored and reported monthly to the City Commissioner of Finance and Treasurer;

(8)should Council determine that the Commissioners' expense issue is key and should Council wish to exercise its authority to replace the Commission, in the event that the Commission does not comply with recommendation (7), then Council could proceed with option 2 and authorize the Mayor to replace the existing Commission;

(9)the CAO report further on the remuneration for the new Board of Directors of the successor corporation taking into consideration the report submitted by Jalynn H. Bennett & Associates dated August 12, 1998; and

(10)the appropriate officials be authorized to take the necessary action to give effect thereto.

Council Reference:

At its meeting on September 14, 1998, the Works and Utilities Committee considered a communication from Mr. Mark S. Anshan, Chair of the Toronto Hydro-Electric Commission, concerning the proposed future governance structure of the Commission. The Committee also had before it a copy of a Notice of an Amending By-Law of the Commission concerning its policy on reimbursement of Commissioners' expenses. The Committee heard four deputations.

The Works and Utilities Committee requested the Chief Administrative Officer to report to the Strategic Policies and Priorities Committee on the communications received by the Committee, the submissions to the Committee and questions raised during the deputations. To respond to this request, the following topics are discussed in this report:

(i)the proposed board structure for the corporation to be formed to replace the Toronto Hydro-Electric Commission in accordance with Ontario Bill 35 and the process for nomination

(ii)the process for moving toward incorporation and an approximate timetable

(iii)the interim structure of the Toronto Hydro-Electric Commission prior to incorporation

Comments:

To provide some context to the discussions in this report, a brief overview of Bill 35, the Energy Competition Act is provided in Appendix A. Over the course of the next few months, Council will be presented with several comprehensive reports providing the details, the options available to Council, and seeking approval of several documents required to comply with the Bill. At some point after enactment of the Bill, possibly as early as December 1998 or January 1999, the existing Toronto Hydro-Electric Commission will cease to exist, being replaced by a business corporation with share capital. At that time, the City will be the single shareholder and as such will have more authority to give direction to the new Board of Directors than under the existing structure and reporting relationship. Appendix B outlines in simplified form the activities and documents required to implement these new structures and the possible timeframes. It is expected that portions of the Bill will become effective in stages, as yet unknown. Since the timing of the proclamations will drive the timing of the City's and Toronto Hydro's activities, the target timeframes in Appendix B are tentative.

Board of Directors of the New Corporation:

Pursuant to the provisions of the Energy Competition Act, the City will own all of the issued shares of Toronto Hydro upon its incorporation. Under the Business Corporations Act, the directors appointed by the City, as sole shareholder, will be responsible for guiding the affairs of the corporation. The City, however, may restrict the scope of power of the directors through a unanimous shareholder agreement in which specific directions may be given to directors. Such an agreement could cover matters such as financial objectives, acquisitions, divestitures or corporate structuring.

The electricity distribution business will be subject to greater regulation by the Ontario Energy Board than in the past.

The Board of Directors of a business corporation is responsible for protecting the value of the corporation as defined by the shareholder. Toronto Hydro will be operating in an aggressive competitive market. Its Board will have to be astute business people who are experienced in such an environment in order to protect the shareholder value. The new corporation will be structured and operated as a private sector business corporation, unlike any other City entity. It competes directly in the electricity retail market against other electricity retailers rather than in a monopoly competing with related, but not identical, businesses such as is the case with the TTC. This is particularly important in the quickly evolving market foreseen over the next few years.

Directing a share capital corporation also requires knowledge and experience with capital structures (the variety and number of shares); the opportunities for financing and investment in a non-government environment; and buying, selling, and trading in an open competitive wholesale market.

The Board will have to devote substantial time commitment in the early years of the new corporation to deal with the development of the plans, organizations, markets, financing and new business opportunities.

The Edmonton Power Corporation (EPCOR) is an excellent parallel to the situation facing the City of Toronto and Toronto Hydro over the next few years. Although not as large as Toronto, Edmonton is a significant market and the utility is publicly owned. It is operated as a corporation in a competitive market. Its 14-member Board of Directors is an expert board comprised of high profile people from education, human resources, consulting, engineering, law, technology research, banking, finance, and competitive business. The complete list of the newly appointed directors is attached as Appendix C. The President and CEO of EPCOR is also a director ex officio.

In a large and changing business environment, it is also important that board members understand the distinctions among the roles of the single shareholder, the Board, and the CEO. Since there are no exact comparators for this situation, a mix of experience in both private sector and public sector boards would be helpful.

(1)Selection Criteria:

Selection criteria were discussed at a workshop hosted by Toronto Hydro involving Commission members and staff, City CAO staff, selected Councillors, and consultants. In addition, Jalynn Bennett & Associates report dated August 12, 1998 listed recommended selection criteria. The Commission suggested additional criteria in its communication to the Works and Utilities Committee.

All suggestions have been taken into account in compiling the selection criteria recommended in this report. However, the residency requirement suggested by the Commission has been expanded to the Greater Toronto Area to open up the possible candidate pool to those with the necessary experience particularly in the electricity industry and to recognize that there is a possibility of competing for and expanding the business region beyond the City of Toronto. In the same vein, it is not necessary to ensure that all geographic regions within the City are represented. Given that the new corporation will serve all geographic areas in the City, the interest should be in the corporation as a whole, not the individual service areas. It is recommended that the following selection criteria be used to select members for the Board of Directors of the new Corporation:

Personal Characteristics:personal integrity

appreciation of social and environmental issues

understanding of public accountability

independent judgement

available time and dedication

commitment to reliable service at reasonable cost

Status:a Canadian citizen and resident of the Greater Toronto Area

not an employee or director of Ontario Hydro or its affiliates

not an undischarged bankrupt

not a person holding federal or provincial government office

not an employee of Toronto Hydro or its affiliates

not an employee of the City of Toronto

Mix of complementary skills and experience required of the Board as a whole:

(i)experience in company governance, corporate financial structuring, competitive market development, or large corporate structural transitions

(ii)experience in a heavily regulated environment, a competitive consumer retail environment, a monopolistic service or utility, or the public sector

(iii)skills in marketing, finance, human resources, communications, corporate law, health and safety, labour relations

(2)Board Composition:

The Bennett report advised that an expert board with broad business skills and experience would be appropriate. The report also suggested that the size should range between 11 and 15 in number, with an odd number preferred and the CEO should be a board member. The Toronto Hydro-Electric Commission endorsed the concept of an expert board and recommended a specific structure as follows:

12 members, 9 citizens which would be recommended by the outgoing Commission,

2 Councillors, and

the President and CEO (ex officio).

Except for the inclusion of 2 Council members, this structure is not dissimilar to the EPCOR structure. It is unclear, however, why in either case the President and CEO should be a member of the Board of Directors. It is the responsibility of the President and CEO to be present at board meetings and be a non-voting participant, but it may not be necessary for the position to be on the Board. This would be particularly awkward during a change in incumbents for any reason.

Under the new legislation, Council as sole shareholder will have significant influence over major business directions of the corporation and may choose to exercise its increased powers as such in important policy areas. Through a unanimous shareholder agreement, Council may give direction to the Board and require periodic reports from the Board.

It is recommended that the Board of Directors of the successor corporation to the Toronto Hydro-Electric Commission be comprised of 13 members recruited and selected to meet the criteria outlined above.

The Chair is a key position that takes responsibility for communicating with both the shareholder and the consumer. The Chair also manages the agenda of the Board and encourages all Board members to participate and keep abreast of emerging issues. The Chair is also the major point of communication between the Board and management. The Chair, above all others, must understand the requirements of the shareholder, but should not be a Member of Council. In this rather unique situation of an independent corporation wholly owned by a public sector shareholder, it is recommended that the Chair be appointed by Council, the shareholder, rather than chosen by the Board. The Chair must possess significant knowledge of the industry, have demonstrated business acumen, and have a substantial profile and reputation in the community.

(3)Nomination Process:

In a corporation with multiple shareholders, the Board of Directors normally presents a recommended slate at the shareholders' meeting and the shareholders then elect the members. It is possible, however to receive nominations beyond the recommended slate. One must be a shareholder, however, to nominate a candidate for the Board.

In a single shareholder situation, however, the shareholder may select members in whatever way it chooses. The City and its predecessors have a tradition of conducting open competitions for positions on boards of its agencies, boards, and commissions or requesting nominations from organizations which have a critical and specific interest in the business. Although the new corporation is quite different from any agency of the City, some parts of the selection process could be employed. The Board of Trade has suggested that it be given the right to nominate a member and another suggestion was that any member of the public have the right to nominate members. There are, however, far too many stakeholders to afford each an opportunity to nominate candidates. Council ultimately represents the interests of residents and businesses in Toronto in the City's business affairs.

The Bennett report recommended that the outgoing Commission nominate a slate of Board members. Since the business is radically changing and the skills and experiences required of the new Board will be different under a freely competitive environment, it may not be appropriate for the out-going Board to make the nominations. However, the Bennett report's suggestion that a search consultant be engaged to seek and screen candidates has much merit. An expert search consultant would use its own processes to seek qualified candidates, seek input from a range of sources and through advertisements.

Once candidates are identified, the search consultant would screen applicants against the selection criteria and recommend a short-list of qualified candidates. The Mayor, the Chair of the Works and Utilities Committee and one other Member of Council would work with the consultant and the Chief Administrative Officer to develop a slate for Council approval.

(4)Remuneration of new Board of Directors:

In public companies, Board remuneration is usually set by the Board itself just as City Council and the Legislature set their own remuneration. This happens because the people they represent are a large, diverse group and a debate and vote by shareholders or the general public would be logistically difficult.

However, in this case, there is a single shareholder, the City, who could determine board remuneration. The Bennett report recommended a remuneration range. Before approving a specific level of remuneration, some further investigation and opinions should be sought. The CAO will report further on this issue.

Interim Commission Membership:

Some of the debate at the Works and Utilities meeting focused on a submission concerning the Commission By-Law 98-04-01 regarding the reimbursement of Commissioners' expenses. This topic was intertwined with a suggestion that the composition of the Commission prior to incorporation be reconsidered. During the debate, the CAO was requested to report on the timeframe of this interim period and recommend a course of action in dealing with Commission membership during the interim period.

Appendix B to this report provides a brief summary of the expected timelines for the legislative changes and the major activities required to incorporate the new corporation required under the legislation and appoint new Board members. The earliest date for incorporation appears to be early December 1998, but a more likely date is January or February 1999. This means that Toronto Hydro will remain a Commission for another 3 to 5 months.

The recruitment process for the new board will take approximately 3 months. Recruiting new citizen Commissioners through the existing processes would also take at least 3 months. Efforts would more prudently be spent recruiting Board members for the new corporation. Given these time requirements and considering the cost to recruit citizens, there appear to be 3 viable options for the interim period. These are:

(1)continue the existing Commissioners for the term expiring upon incorporation;

(2)authorize the Mayor to appoint at least 3 Commissioners for the interim period to replace the existing Commission; or

(3)replace the existing Commissioners with Councillors nominated by the Striking Committee for the interim period.

During the period leading up to incorporation, the Commission is still dealing with some remaining amalgamation issues in addition to the incorporation, other concerns with Bill 35, and the amalgamated budget and strategic plan. There would be a significant learning curve for anyone newly appointed for a short period of time. The current Commission has a vast amount of experience and history in this business area and existing knowledge of the current issues.

Council Members, beyond being deeply involved with the City's own amalgamation issues and development of new policies, procedures, and structures, will have to direct their attention to establishing the high level business direction for the new Hydro Corporation, the shareholder interests, and the financial strategies involved with becoming the sole shareholder of a major business corporation. Council Members during this period will need to participate as shareholders rather than Commissioners.

Replacing the existing Commission at such a critical time may be perceived by potential candidates as a desire to control operations of the business. This may discourage highly qualified candidates from expressing interest in serving as Directors on the new Board.

It is therefore recommended that the existing Commission continue its service for the term expiring upon incorporation of the new entity.

The City Solicitor has been asked for a legal opinion regarding the authority of Council to determine or restrict amounts paid to Commissioners in carrying out their duties as Commissioners. This is the subject of a separate report before the Strategic Policies and Priorities Committee. Regardless of whether or not Council has the legal authority to place limits on such amounts, Council can direct the Commission to revise its new By-Law respecting reimbursement of Commissioners' expenses, specifically to eliminate the $80.00 per diem and to report such expenses monthly to the City Commissioner of Finance and Treasurer.

If Council believes that the expense issue is key and wishes to exercise its authority to replace the Commission if it does not comply with Council's directive, then Council could proceed with option 2 and authorize the Mayor to appoint at least 3 Commissioners for the interim period, replacing the existing commission.

Conclusions:

The Chief Administrative Officer has been requested by the Mayor to take the lead in working with the Toronto Hydro-Electric Commission to develop a process for Council to deal with issues resulting from the introduction of Bill 35, the Energy Competition Act, as well as the new board structure, the nomination process for members, and the reporting required to City Council. This report provides an initial briefing for Council on the Bill as it relates to the structure of the new corporation and its Board of Directors and recommends specific actions to move toward selecting the Board members.

--------

Appendix A

Summary of the Energy Competition Act

The Energy Competition Act, which is expected to receive third and final reading by the Ontario Legislature by the end of October, will introduce the most profound changes to the province's electricity sector since Ontario Hydro was created over 90 years ago. For most of the century, electricity generation and transmission in Ontario has been dominated by Ontario Hydro, an essentially unregulated, public monopoly. The Energy Competition Act is intended to end this monopoly and introduce a competitive electricity market, which has been advocated by a broad spectrum of stakeholders including municipal utilities.

Ontario Hydro will be broken into three entities - the Independent Electricity Market Operator (which will be responsible for managing the province's transmission grid and establishing and operating the electricity markets), the Ontario Electricity Generation Corporation ("Genco", which will own and operate Hydro's generation facilities) and the Ontario Electric Services Corporation ("Servco", which will own and operate Ontario Hydro's transmission and distribution systems). The Act will give to consumers, large and small, the right to buy power from whichever generator he or she should choose. Distributors, such as Toronto Hydro, would be required to provide consumers with "non-discriminatory access" to their systems to deliver the power purchased.

The Ontario Energy Board will become an effective regulator of the electricity system with broad licensing and rate - setting powers.

The Act will have a fundamental impact on municipal electricity utilities. It has confirmed that municipalities are the legal owners of the municipal electricity utilities operating in their boundaries. Within two years, municipalities will be required to incorporate their municipal electricity utilities under the Ontario Business Corporation Act which means that the utilities will have to be structured and operated the same way as any other business corporation. As a result, Toronto Hydro will be freed from the restrictions on its scope of activities currently imposed by provincial legislation. However, the company will be required to carry on its monopoly distribution business in a separate subsidiary from its competitive activities to prevent cross-subsidization.

Finally, the Energy Competition Act provides for the pay down of Ontario Hydro's debt. Genco and Servco, formed from Ontario Hydro, will assume a portion of this debt. However, since the debt of these companies will no longer be guaranteed by the Ontario Government, the amount of Ontario Hydro's debt assumed by the companies would have to be consistent with what a commercial company would be expected to finance. The balance of the Ontario Hydro debt, called "stranded debt", will be paid, at least in part through municipal electric utilities by means of special payments in lieu of property and school taxes, a charge on gross revenue, and a transfer tax on the sale of assets to any person or company which is not tax exempt. The City has written to the Ministry of Energy, Science and Technology urging that municipal electric utilities should be treated the same way as Genco and Servco in determining the various payments owing and eligibility for any deductions, since they will all be businesses incorporated under the Ontario Business Corporations Act.

Composition of the Board of Directors:

Toronto Hydro is the largest municipal electricity utility in Canada and the second largest in North America. It is also the fourth largest power company in Canada, after Ontario Hydro, Quebec Hydro and B.C. Hydro. By mandating incorporation under the Ontario Business Corporations Act, the Energy Competition Act frees Toronto Hydro to enter into a variety of business activities currently restricted by legislation. The new company's activities could include power generation, energy trading, the sale of electrical equipment such as meters, the rental of space in its conduits to the telecommunications industry and consulting services. Toronto Hydro could acquire or amalgamate with other municipal electric utilities. Toronto Hydro could sell its shares or other securities to the public. While this enhanced scope of activity will create a wide variety of promising opportunities, it will also create risks which will have to be carefully managed.

In this new competitive business environment, it will be vital for Toronto Hydro to have a Board of Directors with proven expertise in such areas as company governance, corporate financial structuring, competitive market development, regulatory affairs and familiarity with the power industry. Directors will be responsible for ensuring that Toronto Hydro is operated in a financially prudent fashion, taking advantage of profitable new areas of business activity while exercising judgement which will minimize the risks that may be associated with these activities. As well, directors will also be responsible for ensuring that safety and reliability are watchwords for Toronto Hydro's operations.

The Board of Directors of Toronto Hydro will be ultimately responsible for the management of one of the biggest power enterprises in Canada. The directors will have to be talented people with the necessary experience and expertise to run such an enterprise in a new and rapidly evolving marketplace.

It should be remembered that the directors of a business corporation may be held personally liable for such matters as environmental mishaps if they act negligently or fail to exercise proper diligence in carrying on their responsibilities.

Approach to Dealing with the Scope of Activities of Toronto Hydro:

The Energy Competition Act has opened up a broad scope of activities for Toronto Hydro and other municipal electric utilities. Toronto Hydro will require licensing from the Ontario Energy Board for certain activities while it can enter other activities like any other business.

Licensing from the Ontario Energy Board will be required for Toronto Hydro's distribution or "wires" business, as well as for its retailing of electricity to consumers and for any future involvement in power generation. Rates charged to consumers by the wires business will also be regulated by the Ontario Energy Board, while pricing associated with other activities will be unregulated and governed by the competitive market.

Toronto Hydro will be required to incorporate a separate subsidiary to operate its regulated wires business. Its other competitive activities would be operated by Toronto Hydro directly or through one or more subsidiaries. The precise corporate structure would depend upon the activities in which Toronto Hydro decides to become involved and the risks associated with these activities. It may be prudent, for example, to place higher risk activities, such as energy trading or generation, in one subsidiary and lower risk activities, such as consulting services or equipment sales, in another subsidiary.

Toronto Hydro is about to enter a new era with the passage of the Energy Competition Act. It will have to develop an appropriate structure consistent with the demands of a competitive market, the requirements of the legislation and the financial goals of the City. The structure should be determined by the City, as shareholder, in co-operation with the Board of Directors of the new corporation.

--------

Appendix B

Process and Timeframes

--------

Appendix C

EPCOR* Board of Directors:

Robert L. PhillipsPresident & CEO, PTI Group Inc.

Chairman of the Board of EPCOR

Dr. Michael B. PercyDean, Faculty of Business, University of Alberta

Mary J. CameronPresident and CEO, Worker's Compensation Board

Christopher J. RobbPartner, Traction Capital

J. Norman Olsen, P. Eng.former Chairman and CEO, B.C. Hydro, retired

Franklin Kobie, FCMAManaging Director, Brookview Consultants Inc.

Peter Flynn, P. Eng.Senior Process/Project Engineer, Colt Engineering Corp.

D. Mark Gunderson, Q.C.Partner, McLennan Ross Barristers & Solicitors

Janice G. Rennie, FCAPresident, Research Technology Management Inc.

Dr. Ian T. BrownlieVice President & General Manager, Celanese Canada Inc.

Larry M. PollockPresident & CEO, Canadian Western Bank

Tim MeltonChairman & CEO, Melcor Developments Ltd.

Mary Arnold, FCADirector, Arnold Consulting Group Ltd.

Donald J. LowryPresident & CEO, EPCOR (ex officio)

*EPCOR is parent to:

Edmonton Power (generation and distribution of electricity)

Aqualta (water treatment, distribution and related services)

Eltec (commercial services to industry and municipalities)

The Strategic Policies and Priorities Committee also had before it the following report (September 24, 1998) from the City Solicitor:

Subject:Toronto Hydro-Electric Commissioners - Expenses

Purpose:

The purpose of this report is to address the issue of whether City Council can impose limits on expenses of Toronto Hydro-Electric Commissioners, which issue was raised by the Works and Utilities Committee at its meeting of September 14, 1998.

Funding Sources, Financial Implications and Impact Statement:

n/a

Recommendation:

That this report be received for information.

Council Reference/Background/History:

At its meeting on September 14, 1998, the Works and Utilities Committee had before it a copy of a Notice of an Amending By-law of the Commission concerning its policy on reimbursement of Commissioners' expenses.

Comments and/or Discussion and/or Justification:

The Toronto Hydro-Electric Commission ("Toronto Hydro") is governed primarily by three pieces of legislation: the City of Toronto Act, 1997, the Public Utilities Act and the Power Corporation Act. Subsections 9(1) and (2) of the City of Toronto Act, 1997 establish a new Toronto Hydro for the amalgamated City, which is deemed to be a commission under Part III of the Public Utilities Act and a municipal commission under the Power Corporation Act.

Subsection 44(1), in Part III of the Public Utilities Act provides, in part:

"44(1) The salary, if any, of the commissioners shall from time to time be fixed by the council ...".

While subsection 44(1) of the Public Utilities Act clearly contemplates Council setting the salary level of the commissioners, no such authority appears to have been given to limit expenses. It appears that all that Toronto Hydro is required to do is to provide is an accounting of commissioners' expenses for the purposes of subsection 47(1)(c). This approach in distinguishing between remuneration, salary and expenses is comparable to the approach taken in certain Municipal Act provisions on this subject.

Conclusion:

City Council currently has no statutory authority to limit the expenses paid by the Toronto Hydro-Electric Commission to its commissioners, although Council does have the authority to fix Toronto Hydro commissioners' salaries.

This opinion is given only to the Strategic Policies and Priorities Committee and may not be relied upon by any other person except Council members, and persons who are employees, agents or offices of the City of Toronto.

Contact Name:

Lorraine Searles-Kelly (416) 392-7240

The Strategic Policies and Priorities Committee submits the following transmittal letter (September 14, 1998) from the City Clerk:

Recommendation:

The Works and Utilities Committee on September 14, 1998:

(1)referred the communication dated September 8, 1998, from Mr. Mark S. Anshan, Chair, Toronto Hydro-Electric Commission, and additional submissions respecting governance of the Toronto Hydro-Electric Commission to the Strategic Policies and Priorities Committee at its next meeting, scheduled to be held on September 24, 1998;

(2)requested the Chief Administrative Officer to submit a report to the Strategic Policies and Priorities Committee on the aforementioned communication and submissions and questions raised during the deputations; and

(3)directed that a copy of the aforementioned communication and submissions be forwarded to the Special Committee to Review the Final Report of the Toronto Transition Team for information.

Background:

The Works and Utilities Committee at a special meeting held on September 14, 1998, had before it a communication dated September 8, 1998, from Mr. Mark S.Anshan, Chair, Toronto Hydro-Electric Commission, respecting governance of the Toronto Hydro-Electric Commission.

The Works and Utilities Committee also had before it a copy of a Notice of an Amending By-Law, submitted by Councillor Betty Disero, which was before the Board of the Toronto Hydro-Electric Commission at its meeting on September 10, 1998, respecting procedures for the reimbursement of the expenses of Commissioners, together with related material.

The following persons appeared before the Works and Utilities Committee meeting in connection with the foregoing matter:

-Mr. Mark S. Anshan, Chair, Toronto Hydro-Electric Commission, and submitted a copy of his presentation;

-Mr. John Bech-Hansen, Economist, and Mr. Rob McLeese, Member, Electrical Task Force, Toronto Board of Trade;

-Mr. Jack Gibbons, Ontario Clean Air Alliance; and

-Mr. Bruno E. Silano, President, Canadian Union of Public Employees, Local One.

--------

(Communication dated September 8, 1998, addressed to the City Clerk, from

Mr. Mark S. Anshan, Chair, Toronto Hydro-Electric Commission

headed "Toronto Hydro-Electric Commission Governance

and Selection of Commissioners/Directors")

On behalf of the Toronto Hydro-Electric Commission (the "Commission"), I am pleased to forward this letter together with the attached documents. This letter and the attached documents are for circulation to Members of Council and senior staff of the City who are working on this matter, and for consideration by the Works and Utilities Committee of the City of Toronto at its special meeting called to consider this subject scheduled for Monday, September 14, 1998, at 6:30 p.m.

Background:

In earlier discussions with Councillor David Miller and City staff, it had been determined that the Commission would make recommendations regarding the future structure and governance of the Commission. Toronto Hydro is now an amalgamated utility of the former six utilities in the Metro area and the process of the utility integration is progressing well. The electrical system in Ontario is about to be restructured and deregulated pursuant to the Energy Competition Act, 1998 (Bill 35) that is presently before the legislature. In view of the rapid changes that are taking place in the utility industry and for Toronto Hydro, the Commission determined that it would be appropriate to study the question of governance and forward recommendations to City Council.

The original plan was for the research and recommendations of the Commission to be forwarded to Councillor David Miller's Committee. We now understand that this matter will be the subject of the special meeting on September 14, 1998.

The Commission retained the services of Jalynn H. Bennett & Associates Ltd. to undertake research and prepare a report on a recommended governance structure for Toronto Hydro and a process for selecting Directors. As is noted in the attached fact sheet, Toronto Hydro will be required to incorporate under the Ontario Business Corporation Act as a business corporation and a Board of Directors will need to be elected by the shareholder, the City of Toronto.

At a Special meeting of the Commission on September 4, 1998, the Commissioners reviewed the attached report prepared by Jalynn H. Bennett, entitled "Accountability Framework for the Toronto Hydro-Electric Commission".

The author of the report, Jalynn H. Bennett, has wide experience on not-for-profit and for-profit boards of directors, and is a highly regarded expert on issues of board governance, membership and selection.

The Commissioners carefully reviewed the report and recommend it to City Council as the basis for determining the question of the composition and selection process for the Commission and the Board of Directors to be established upon the enactment of Bill 35.

Documents:

The Commission is forwarding with this letter the following documents for distribution to the Members of Council and senior staff:

(a)background Fact Sheet on Toronto Hydro Amalgamation and Bill 35, prepared by the Commission and Vision 2000 (Special Integration Newsletter); and

(b)the report "Accountability Framework for the Toronto Hydro-Electric Commission" prepared by Jalynn H. Bennett & Associates Ltd.

In addition, the following document was forwarded to all Members of Council and we request that copies be made available to senior staff:

(c)Toronto Hydro presentation to the Standing Committee on Resource Development on August14, 1998 on Bill 35.

The Commission generally endorses the Bennett report with the following additional recommendations and comments:

(1)Composition:

The Commission/Board of Directors should be composed of twelve individuals made up as follows:

9Members/Directors appointed/elected by City Council as a result of the process described below;

2Members of City Council; and

1President and Chief Executive Officer (ex officio member).

(2)Selection criteria:

In addition to the criteria set out in the Bennett report, it is recommended that the following criteria should be included:

(a)all members/directors should be resident in the City of Toronto;

(b)knowledge and experience with environmental matters, labour relations and occupational health and safety issues should be added to the list of skills; and

(c)members/directors should reflect the geographic diversity of the City of Toronto.

(3)Term:

The Commission recommends that members/directors be appointed/elected for three-year terms on a staggered basis. With respect to the initial appointment/elections, the Commission recommends that three of the nine positions be filled by existing members of the Toronto Hydro-Electric Commission for a term of one year and that the remaining six positions be filled for a term of three years. This model will ensure continuity of knowledge and experience on the Commission/Board of Directors.

It is assumed that the two members/directors who are also City Councillors will be appointed/elected by City Council and serve for terms not exceeding three years and until their successors are appointed.

(4)Process:

The Commission would retain a reputable search consulting firm that would propose a list of more than nine candidates for the nine positions noted above. As well as identifying individuals through their own direct process, the search consultant would be expected to publicly advertise for interested candidates.

The recommendations of the search consultant would be reviewed by the interim Nominating Committee of the Commission described in Model B of the Bennett report. The Nominating Committee would be composed as described in the report with the President and Chief Executive Officer as a non-voting resource person.

(5)Remuneration:

As far as the remuneration of the Board Members, the Commissioners propose that City Council should establish appropriate levels of remuneration. The Bennett report has background information on this matter.

(6)Commission/Directors Meetings:

The existing Commission currently meets once a month and it is expected that initially the frequency of meetings will be more than the proposed four meetings per year.

The attached Fact Sheet and Vision 2000 are provided in order to give basic background information on the amalgamation and Bill 35 and thus provide a context for Council's deliberations.

Toronto Hydro is well positioned to meet the challenges of competition in electricity sales and related services and regulation of electricity distribution by the Ontario Energy Board.

A knowledgeable and well qualified Commission/Board of Directors will be essential to ensure the interests of the City of Toronto as shareholder and the customers of Toronto Hydro are well served in the competitive market that is about to be introduced in Ontario.

The Commission requests the opportunity to make a deputation to the special meeting of the Works and Utilities Committee on September 14, 1998.

Thank you for your attention.

--------

(Report entitled "An Accountability Framework for

The Toronto Hydro-Electric Commission",

dated August 12, 1998, submitted by

Jalynn H. Bennett, Jalynn H. Bennett & Associates Ltd.)

Overview:

The Corporation is accountable to the shareholder(s) for its performance against its mandate.

Mandate is broadly determined by Bill 35 (distribution entity and service entity. The former is a monopoly; the latter is viewed to be open to private sector competition). In addition, Toronto Hydro will be subject to the purview of the Ontario Energy Board (OEB).

Corporate accountability rests on the established principle of enhancing shareholder value.

The shareholder must determine what, in its view, constitutes the elements of value it requires. The present shareholder (City of Toronto) must determine, inter alia, its financial expectations. Does it expect to receive an excess revenue stream (i.e., returns above the operating costs of Toronto Hydro) or does it expect to allocate revenues to Toronto Hydro (i.e., subsidize it)?

If the service entity is going to operate in a competitive environment, it will have to be operated as a commercial entity. It will have few or no customers if it cannot deliver service on a cost-competitive basis. If it is not commercially viable, the shareholder will face erosion of value (no revenue stream) or, worst case scenario, no value.

Normally, a shareholder, with a proposed slate determined by the nominating committee of the Board, appoints the Board of Directors, approves the appointment of the auditor, and approves the annual financial statements. The shareholder expects to receive regular communications (quarterly reports, annual report, annual shareholder meetings, etc.) from the Board and Senior Management.

The Board is responsible for ensuring that the entity has a vision and a strategic plan in place, with operating practices consistent with the ability of the organization to meet its goals and objectives.

It hires the CEO and determines his/her compensation. It holds the CEO accountable for achieving agreed upon goals and meeting specific performance targets.

It establishes risk parameters for the organization and ensures that controls, procedures and policies are in place so that risks are managed appropriately.

In summary, the Board exercises its accountability through clearly articulated and transparent governance practices on behalf of the shareholder, with the objective of creating long-term shareholder value.

The Board delegates to the CEO and the senior administration which reports to him/her, the management of the organization, holding management accountable for achieving agreed upon objectives.

Role of the Chair:

The Chair of the Board chairs all Board meetings. In consultation with the CEO and the Corporate Secretary, he(she) sets the agendas for the Board meetings, and ensures that there is an annual work plan for the Board which enables it to fulfill its obligations. He or she chairs the annual meeting of the Corporation and ensures regular and appropriate communication with the shareholder and the broader community. The Chair ensures that meetings are conducted in an orderly fashion and that all directors are encouraged to actively participate in Board deliberations. The Chair must be balanced, exercising good judgment and common sense in moving the business of the Board forward. By nature of the position, the Chair is frequently an informal sounding board for the CEO and often transmits to the CEO, on behalf of the Board, emerging Board views or concerns so that management can address the issues in a timely fashion. The Chair is, ideally, the fulcrum upon which accountability turns. He or she must have a clear understanding of the organization's vision and mandate and a clear sense of what constitutes good governance practices in achieving the necessary accountability of management to the Board, and the Board to the shareholder.

By virtue of the demands of the role, the Chair will need to have more time available for Board business than will the other directors. It is envisioned, however, that the Chair is a non-executive position, that is, the Chair is not part of the management team. This is necessary so that no confusion arises as to the role of the Board. The Board does not manage the organization. It sets broad parameters, it ensures that the management is in place to achieve the organization's objectives, and it monitors management's performance against the established objectives.

Organization of the Board:

Because of the over-arching stewardship role of the Board, a Board may choose to delegate some of its more detailed review of activities to specific committees for informed discussion. This will be discussed below. Suffice to say here, the Board and Board Committee meeting dates should be established well in advance and must be adhered to. A generally accepted practice is to establish meeting dates, as well as an Annual Meeting date for the following year, three to four months before the existing year end. Most organizations try to schedule regular Board meetings within four to six weeks after the fiscal quarter ends. (This would allow, for example, an Audit and Finance Committee to review quarterly and annual results prior to the Board meeting.)

At a minimum, four Board meetings a year are desirable; often a fifth meeting should be scheduled for review of the organization's annual and longer term strategic plans. In this case, as the Toronto Hydro-Electric Commission faces enormous and unprecedented change in its proposed mandate and in its competitive environment, two additional meetings are advisable in order to ensure that management is responding expeditiously to the business and organization challenges it is facing. Two additional meetings would also provide management with the opportunity to draw on the collective expertise of the Board members.

Normally, materials for Board and Committee meetings should be in the hands of all members at least one week prior to the meeting date.

Size of the Board:

Much has been written about what constitutes the "right size" for a Board. There is no clear and precise answer. The general consensus is that smaller is better. However, very small boards tend to develop a level of informality in their interchange with management that can, in the author's view, lead to some confusion as to who is managing who. A suggested Board size is somewhere between eleven and fifteen. This ensures that there are enough Board members available to staff Board Committees effectively. Odd numbers are preferable, in the experience of the author, because it allows, if necessary, the Chair to cast a deciding vote. While most effective Boards try to manage on a collegial basis so that clear decisions are arrived at with something close to unanimity, upon occasion a vote may be necessary, in which case, a simple majority should prevail. The CEO should be a Board member, but the rest of the Board members should be independent, that is, drawn from outside the THEC.

Role of Committees:

Committees should act as the arms of the Board, with responsibility for monitoring assigned areas and developing policy and recommendations for the consideration of the Board as a whole. Committees should not normally be asked to act for the Board or to direct the administration.

Each Committee should develop an annual work plan which should be distributed to the whole Board. Written minutes should be kept of all Committee meetings and distributed to the whole Board. The whole Board should only deal with a report from a Committee when a specific action is proposed or if a serious problem is encountered.

Turning to the question of what Committees should be formed, it is useful to review again the nature of the Board's responsibilities:

(a)employing the CEO, delegating responsibility for the management of the THEC to the CEO, and evaluating CEO performance;

(b)with a focus on the long term, approving the mission of the THEC and ensuring that strategic directions and outcomes are consistent with the mission;

(c)monitoring the quality of the THEC, its activities and its management and ensuring that internal controls to protect and to enhance the organization are in place;

(d)monitoring the image of the THEC and advancing its objectives; and

(e)monitoring the identification and management of risks.

It is envisioned that the THEC Board would have a number of Board Committees.

(1)Audit and Finance Committee:

(a)Responsible for monitoring the financial health and viability of the THEC and for liaison between the Board and the external independent auditors.

(b)The Committee would monitor budget projections (capital and operating) and review the results of internal audits and risk assessment.

(c)It would recommend to the Board all budgets, financial statements, appointment of auditors, levels of spending authority, lines of bank credit, contracts, loans or spending requiring Board approval.

(2)Management and Human Resources Committee:

(a)Responsible for assessing annually the CEO's performance and ensuring the CEO's performance appraisal of senior management takes place on a regular basis.

(b)Responsible for determining the CEO's compensation arrangements.

(c)Ensuring that appropriate human resources policies and practices are in place throughout the organization.

(3)Nominating and Governance Committee:

(a)Monitors the Board's governance practices, structures, by-laws, regulations and performance on an annual basis.

(b)Identifies and nominates for election to the Board, individuals with requisite skill sets and time availability to serve as Board members.

(c)Recommends Committee assignments and Committee Chairs, as well as Chair of the Board, to the Board.

(d)Oversees the development of, and monitors, the orientation program for new directors.

Ability of Board to Obtain Independent Advice:

The Board of the THEC shall be authorized to obtain, as it deems necessary for the fulfillment of its duties, any independent advice it requires (for example, legal counsel, independent audit, compensation expertise etc.). This shall be on the motion of the Board as a whole.

Conflict of Interest Policy:

The Board shall have in place a clear conflict of interest policy and should ensure that such a policy is also in place for management and employees.

Remuneration of Board Members:

In order for the THEC to attract and retain directors with the requisite skills and experience, it is important that Board members be compensated in line with prevailing practices in the commercial corporate sector. This means annual retainer, or base, directors' fees, augmented with attendance fees for Board and Committee meetings. It is also envisioned that the Board Chair and the Committee Chairs would receive additional remuneration in recognition of their additional responsibilities and requisite time commitment required to fulfill these responsibilities. On the other hand, the THEC has a single public shareholder, so the range of fees should recognize this.

Proposed fee structure:

(a)Chair of the Board - annual retainer - $50,000.00 - $100,000.00;

(b)Committee Chairs - annual retainer - $4,000.00;

(c)Board Directors (ex Board Chair) - annual retainer - $12,000.00; and

(d)Board/Committee meeting attendance fees - $1,000.00 per meeting.

These fees reflect the median fees in 1997 as reported in "Corporate Board Governance and Directors Compensation in Canada: A Review of 1997" by Patrick O'Callaghan & Associates.

Nomination Process:

Once the permanent THEC Commission/Board is established, the Board, through its Nominating and Governance Committee, should bring to the Board, on an annual basis, a recommended list of candidates for election to the Board at its annual general meeting. The rationale for this is that the Board itself will have the best sense of the skills and experience that the Board as a whole will require, on an on-going basis, in order to perform its stewardship and accountability functions on behalf of the shareholder.

The shareholder will elect the directors from the Nominating Committee's slate. However, there is a growing sense that directors should be elected on a name-by-name basis (U.S. practice) rather than on a slate-only basis.

The Nominating Committee should cast a broad net. It can ask for suggested names for its consideration from many sources: from City Council, through the press for public recommendations, from existing Board members, from specialists in Board recruitment, etc. The overwhelming consideration is to craft the best Board possible to support the Board's work. A list of skill sets and experience will be a necessary component to delineate when requests for appropriate nominees are solicited.

All of the above is for tomorrow. The issue for today is how to go about forming the first permanent Board/Commission, since the interim Commission does not yet have in place a Nominating Committee.

Model A:

There has been a suggestion that one can look at quasi public sector models, for example, the model of the Greater Toronto Airport Authority. To summarize briefly, the GTAA was put in place to operate the federally owned airports in the greater Toronto region on a not-for-profit basis with a 99-year contractual arrangement and lease agreement for the airports in question. It is important to note that these airports do not face commercial competition.

The GTAA Board of 13 is comprised of two representatives from each of the five regions with lands touching on the airports' perimeters. All of the above nominees' names are taken to the Nominating Committee of the GTAA Board which ascertains whether the proposed nominees' skills and experience meet the criteria that the Board has established. In addition, there are two nominees from the Federal Government that it alone chooses (Governor-General in Council appointments) and the Province of Ontario has one nominee. The Board itself elects the Chair of the Board. Some Board members would say, on a not-for-attribution basis, that it would be preferable, on a going forward basis, that the Board's Nominating Committee should play a stronger role and that the review process of prospective candidates for the Board should be strengthened.

It is interesting, too, to note the comments of Senator Michael Kirby on the need for increased professionalism of directors (see appendix).

When one reviews the specifications of what a Board is accountable for, one can see the emergence of defined skill sets and experience requirements that the permanent THEC Commission will require. Keeping in mind the over-arching responsibility of ensuring the enhancement of long-term shareholder value, the Board will require members with financial and managerial expertise in large, complex organizations that face competitive pressures. The Board will need members who understand the difference between holding management accountable and trying to manage the organization directly. The Board will need members who understand community needs for service delivery in a responsible and responsive fashion but who also understand that the organization will be facing competitive pressure from alternative-for-profit, service providers. Management, as it faces all these challenges, will need the support of a Board that helps it reposition the THEC to perform under it new competitive mandate. Above all, the THEC and the shareholder will be best served by a Board which is comprised of individuals who will take a disciplined approach to their responsibilities as Commission members and can make the necessary time commitment to effect their obligations.

Model B:

An alternative model is to strike a small (approximately five members) Committee from within the existing Commission, comprised of Commissioners who would not envision having their names go forward as future Board/Commission members, who will be charged with the task of proposing a slate of names for consideration by the shareholder. The Committee should be chaired by someone who is external to the present organization and who brings some sensitivity to public policy dynamics as well as to governance and corporate management issues. The present CEO should be a resource to the Committee, sitting ex-officio. The interim Nominating Committee may wish to retain a consultant who specializes in the field of board director searches. Such an individual, from a firm with recognized credentials in this field, can provide the necessary perspective to enhance the Committee's deliberations and to support the Committee in its identification of appropriate candidates.

Recommendations:

(1)That the interim Commission proceed with Model B as expeditiously as possible.

(2)That the Committee retain an independent consultant as described above.

(3)It goes without saying that discussions with the shareholder should precede any formulation of such a Committee. The shareholder must understand the financial risks that the THEC is facing under Bill 35 and be attuned to the skills and experience that the permanent THEC Commission requires. These criteria include:

(a)experience on boards;

(b)exercise on collective accountability;

(c)time availability;

(d)financial skills;

(e)marketing skills;

(f)commercial sensitivity;

(g)independence of judgment; and

(h)integrity.

Of course, management at the THEC may choose to form a community/large user advisory group as it works its way through the formulation of its strategic plans. I note in passing that the THEC will also fall under the purview of the Ontario Energy Board where interveners of all persuasions can also make submissions.

In the final analysis, it is the author's view that the permanent Board/Commission must be comprised of directors with experience in the areas of relevance to the mandate of the newly reconstituted THEC.

The final test should be an assessment of the fine balance required to achieve a Board which can operate in a collegial fashion, to the end that management receives clear and unequivocal direction, and that is responsive to the long-term needs of the shareholder. A Board/Commission which is internally divisive in its directions to management will be dysfunctional in its accountability. That would be, in essence, flawed governance and flawed accountability. This is not to say that the Board/Commission will not engage in vigorous debate. A Board, properly constituted, will both simultaneously challenge and, when appropriate, support management, as a necessary approach to achieving accountability to the shareholder.

--------

(A copy of the background material respecting the foregoing was circulated to all Members of Council with the agenda of the Strategic Policies and Priorities Committee for its meeting of September 24, 1998, and a copy thereof is on file in the office of the City Clerk)