FAQs

On September 5th, 2023, Council directed administration to:

Convene an independent (third party) review of the City of Medicine Hat (CMH) COMCO business unit to confirm overall strategic approach to ensure best value for the community. 

This review will provide the information that we need to make informed decisions (regarding our energy production business units) that are in the best interest of the community now and into the future. 

On March 7, 2024, we announced that KPMG LLP was awarded the contract to conduct the independent review.

The independent reviewer will consider questions like:

• What are the key drivers to confirm asset value sustainability?
• What are the sources and uses of funds from the assets and how should that change, if at all?
• Who can and should bear the risk and value (and liability) of ownership and why?
• What is the preferred philosophy of ownership and why?  (e.g. behave like a commodity business or as a cost of service entity or other?)
• What is the best legal structure?  (e.g. separate legal entity as Municipally Controlled Corp or other, or not, and as GENCO or COMCO or more?)
• What is the appropriate governance model (e.g. status quo, board, advisory group, committee membership, other)
• How do we protect and grow our competitive advantage from asset ownership?
• What is the appropriate financial structure for the assets?  
• What changes, if any, are recommended for distributing funds from operations (e.g. existing distributable cash and dividend policy or other related policies)?
• What changes, if any, are recommended for energy rate design?
• How do regulatory constraints or flexibility impact the preferred model?
• Given broader SWOT considerations with particular assessment of energy transition requirements, what factors are most important in influencing the preferred model and what variables might signal a revisit of the model in the future? 

KMPG LLP was selected through a competitive bidding process for their combination of proven expertise across a number of the required knowledge areas including municipal government, Alberta electricity market, commodities, rate design, financial strategy, regulatory and more.

1. The City’s energy business is confronting a changing market and regulatory landscape that may challenge the long-term viability of the electricity business.
2. With regard to greenhouse gas (GHG) emission reduction, the City’s provincial TIER compliance costs are forecast to increase four-fold from $9.7M to over $42.4M annually by 2030.
3. There is an outlook for extended low power prices, where it could be less exp
4. Council is obliged to juggle three conflicting roles:
   1. Advancing the interests of the energy business of its governing body
   2. Representing City and taxpayer interests as the owner of the energy business, and
   3. Protecting ratepayers as the rate regulator
5. The natural gas production business is not expected to return to profitability.
6. Over the next 10 years, the City could require nearly $500 million to meet the needs of our existing energy business. This is before any incremental energy transition spending requirements.

There are four strategic recommendations included in the energy business review, all presented at a concept level.

1. Establish a rate review committee to support Council in its role of approving energy distribution and commodity rates.
2. Expedite the abandonment or sale of the natural gas production assets.
3. Establish an MCC to own and operate the distribution businesses (both natural gas and electricity) and electricity generation business.
4. Develop a dividend policy, and stipulate investment parameters in the unanimous shareholder agreement.

No. KPMG identified an outcome that would enable us to retain the exemption benefits.

Each of the business units (electric generation, electric distribution, natural gas production and natural gas distribution) were assessed individually and then together as a whole, using the following options:

• Remain as a City department/division (status quo)
• Operate as a Municipally Controlled Corporation (MCC)
• Explore other ownership options (divestiture)

Other options were ruled out:

• Non-profit entity (could not share dividends)
• Rural utility association (does not serve non-residential customers, or consider energy production)

City Council is not required to enact any of the recommendations. If Council would like to consider a new path for the City’s energy business, these recommendations may be considered but more work would be required to inform a plan.

KPMG did review MCCs in other municipalities.  No specifics were highlighted regarding rate increases or executive compensation but one of the option analysis criteria used to determine best option (between current state, sell, or MCC) included a criterion stating that 'Rates will not inherently and necessarily become uncompetitive'. 

KPMG did identify a study conducted by Ivey Business School which found that in Ontario, MCC boards with fewer council members provided greater dividends than MCC boards with higher council members. However, the report did not go so far as to say there was a causal relationship between the board composition and the amount of the dividends paid to the municipality.  

The independent company is majority owned by one or more Alberta municipalities.

Yes. The City would own 100% of the MCC’s shares.

The MCC would operate at arms-length from the City. The City would appoint the MCC’s board of directors and retain any specific authorities it deems important. These would be reflected in an unanimous shareholder agreement.

Yes. The MCC would own the physical assets. The MCC would, in turn, be owned by the City.

MCCs operate independently from their municipal shareholders and operate with their own executive teams and board of directors. MCCs are required to execute a unanimous shareholder agreement (even for one shareholder). The skills-based board of directors would be positioned to identify options to improve the value of the generation business as market and regulatory changes unfold.

We are proposing Council delegate the rate regulatory authority to the Rate Review Committee. The MCC would be regulated in accordance with provincial regulations and the Unanimous Shareholder Agreement with the City and other such governing documents).

Yes, the City would continue to bill for electricity and natural gas along with other municipal services. This would be determined by the terms in the unanimous shareholder agreement between the City and the MCC.

The corporation would be financed from: retained earnings; direct access to debt markets (this could impact the City’s debt capacity); and shareholder investment (City reserves, debt).

An MCC will not change the risks, but could reduce the City’s exposure in three ways:

• Provide increased governance and oversight of the energy business with the addition of a skills-based board.
• Enable greater access to capital to invest in strategies that could reduce the Energy Business’ exposure to regulatory and market changes.
• Increase the predictability of cashflow between the MCC and the City.

An MCC would not have unilateral ability to determine the rates. The rates would be approved by a regulator, which may remain City Council, or delegated to the proposed rate review committee, who are charged with the interests of the ratepayer.

The Board appointment process would consist of the compiling of necessary information about potential candidates including areas of impartiality and skills and a review to ensure it is reliable for Council to consider the candidate as a board member. There are several skills identified for the board requirements and examples of qualifications typical of some of the skills would be a lawyer, accountant or engineer registered in Alberta.  

While it is necessary to incur costs to complete the work necessary to establish the MCC it is deemed beneficial to realize the influence of a skills-based board on the future financial management of the business. While it is recognized that it is a material amount of funds it is also a minimal impact to the rates of the utility business and competitive electric generation business. 

Given the upcoming challenges of carbon regulation, market pricing and other business risks it is anticipated that this expense may be more than offset by the skills- based board’s guidance and provision of strategic direction through such challenging times. 

Significant business changes such as divestiture or major contracts with partners are identified as material changes and as such the terms of the USA would require Council approval of such changes.  

Also, prior to implementing material changes, the City would be required to comply with the public engagement process set out in the Municipal Government Act and Municipally Controlled Corporations Regulation, which would include an opportunity for residents to make representations regarding the proposed material changes.  

MCC structure is deemed to be a more focused route to strategic direction and oversight by experienced and skills based members in a strong position to lead the MCC in its electric and gas energy businesses. 

Areas of public engagement remain through elected councillors appointing and overseeing the MCC Board, council representation on the board and the RRC, public observer on the RRC and a distinct public engagement step in the rate review process.

It is recognized that the formation of an MCC is a decision that would require significant resources and time to implement. While the costs and time for implementation are able to be estimated, the benefits are more difficult to define in terms of a rate of return on such expenses. 

While projecting the MCC’s specific financial benefits of having experienced, skill based leaders as board members it is anticipated that considering the low magnitude of the start-up and ongoing costs in relation to the business’s annual operations that it will be beneficial financially particularly when navigating the business through more challenging issues and times as are forecast in the near future. 

The City is the sole shareholder and therefore still owns the entity. The pre-existing debt prior to forming the MCC will stay with the City however the MCC would be responsible for paying back this debt. A promissory  note receivable would be shown on the City's financial statement and would be reduced as the MCC makes annual debt payments to the City. 

The promissory note would be a legal binding agreement between the City and the MCC. Any new debt that is incurred by the MCC would be the responsibility of the MCC and would have to be aligned with the provisions in the Unanimous Shareholder Agreement and other governance documents for the MCC.  

For certain assets, it may be advisable for the City to retain ownership and grant a lease or other right of use to the MCC. In these situations, there would be an agreement between the City and the MCC that allocates liabilities between them relating to such assets. For assets transferred to the MCC, there would also be an agreement in place between the City and the MCC that allocates liabilities between them relating to such assets. 

While the business risks of operations and commodity prices would  not change with the formation of an MCC a key difference is that the City as the shareholder would not be liable for the MCC's debts and liabilities. This is because the MCC is a separate legal entity with its own natural person powers. The MCC would not have the power to contract in the City's name or bind the City. 

Consistent with the City's stage-gate approach to the potential establishment of the MCC, at this stage the process to apply for or get nominated to the Board of Directors has not been established. 

If Council decides to proceed with establishing the municipally controlled corporation, the process to apply for or get nominated to the Board of Directors will be established and publicly communicated at that time. 

As a municipally controlled corporation solely owned by the City, the MCC would be a subsidiary of the City.  As a result, it would be considered a municipal public utility and would be subject to the same responsibilities the City has as a municipal public utility. 

There are no specific powers the MCC would have that the City Energy Division lacks. The opportunity an MCC would have would consist of its ability to benefit from the oversight and provision of strategic direction from a skills-based, experienced board as well as different avenues for the obtaining of debt as deemed beneficial to the business needs.  

It is anticipated that a skills-based, experienced board may provide increased ability to identify and manage business risks, which is crucial in a business as complex as the energy business. 

The utility distribution portions of the MCC would continue to operate on a cost plus model and review of allowable costs would be part of the RRC role. 

While the business risks of operations and commodity prices would  not change with the formation of an MCC a key difference is that the City as the shareholder would not be liable for the MCC's debts and liabilities. This is because the MCC is a separate legal entity with its own natural person powers. 

The MCC would not have the power to contract in the City's name or bind the City. 

The MCC will be consolidated in the City's financial statements using the modified equity method. Under this method, the City will not consolidate the MCC line-by-line in its financial statements. 

The City’s investment in the MCC would be presented as a single line item on the Statement of Financial Position. Similarly, the City’s share of the MCC’s net income or loss would be reported as a single line item on the Statement of Operations. 

Dividends received from the MCC would reduce the carrying value of the investment, rather than being reported as revenue. Additional disclosure would be required on the City's financial notes regarding the MCC. 

Also, under the Business Corporations Act and the Municipal Government Act, the MCC would be required to provide annual financial statements to the City, including a supplementary disclosure of the nature and amount of any financial assistance, including transfers of money or other assets, loans, and loan guarantees provided to the MCC by any shareholder (i.e. the City), the province, or the federal government.  

In addition, the MCC would have to annually disclose the aggregate compensation paid to the directors and the five highest paid officers. Through the USA, the City would augment these statutory reporting requirement with additional reporting requirements, annual and quarterly, including reports on service performance and enterprise risk. 

The Rate Review Committee's proposed rate review process would provide opportunities for public input. It includes a step to 1) post MCC rate applications for stakeholder input review and invite written submissions; and 2) conduct public sessions for interveners and ratepayers.  

Where the Rate Review Committee considered it warranted, it would grant certain parties intervener status in the application. The Rate Review Committee's final rate decisions would be posted online. 

The MCC would have extensive record-keeping obligations under the Business Corporations Act. As sole shareholder, the City would have the right to access many of those records, including shareholder meeting minutes, shareholder resolutions, and financial statements. In addition, through the USA, the City would impose additional record-keeping and reporting obligations on the MCC, including the obligation to provide the City with quarterly enterprise risk, service performance, and financial reports.  

In addition, the MCC, as a subsidiary of the City, and the RRC, as a committee of the City, would be subject to the Freedom of Information and Protection of Privacy Act  ("FOIPP Act"). Requests for information regarding the MCC and the RRC could be made under the FOIPP Act and would be processed in accordance with that legislation. 

Yes, residents will be notified of "material" business changes before they occur and all material changes will have to be approved by Council as the sole shareholder.  

Under the Municipally Controlled Corporations Regulation, a "material change" means "(a) a change in the type of services offered by the controlled corporation, (b) the purchase, sale, transfer or issuance of any shares in the controlled corporation that would result in a change to the controlling interest, (c) a change in the geographic locations where the controlled corporation offers services, if that change was not contemplated in the business plan under section 75.1(3)(a) of the Act (i.e. Municipal Government Act), or (d) a change in the business, financing, operations or affairs of the controlled corporation that would be considered important by a reasonable person taking into account the circumstances of the controlled corporation in its entirety."  

Through the Unanimous Shareholder Agreement (USA), the City will identify additional specific transactions or activities that are considered material changes. For example, the divestiture of assets over a certain monetary threshold will be identified as a material change and as such the terms of the USA would require Council approval of such changes. 

This is even more stringent than the requirement under the Business Corporations Act for the MCC to obtain City approval as shareholder for the sale, lease, or exchange of all or substantially all of the MCC's assets. Prior to implementing material changes, the City would be required to comply with the public engagement process set out in the Municipal Government Act and Municipally Controlled Corporations Regulation, which would include advertising the proposed material change and providing an opportunity for residents to make representations regarding the proposed material change.  

The City would also have a duty to provide a report to the MCC summarizing the representations made during the engagement process. As noted, all material changes would be subject to Council approval as sole shareholder.   

The USA and the subsequent dividend policy would mandate the desired funds distribution to the City from the MCC. Consistent with the rule that municipality's cannot fetter Council discretion, the use of those funds would continue to be at the direction of Council for potential uses such as offsetting municipal operational expenses or capital expenditures.

The ability to achieve the lowest utility rates and municipal taxes in Alberta were largely driven from prior abundance of low cost natural gas production by the City and receipt of the related profits. That has since changed for the City.  

The City's gas reserves have depleted to levels that meet less than 15% of our local needs while we are also responsible for paying significant abandonment and reclamation costs for wells that have been shuttered. The City's past reliance on proceeds from the energy business (essentially using revenues to subsidize property taxes) lingers but should be revisited with or without an MCC because the remaining energy business is facing a reduced commodity outlook and increased risks related to market redesign, increasing carbon costs, and regulatory requirements to get to net zero (carbon).  

The energy risks leave the City's financial sustainability in a vulnerable position. The recommendation of an MCC is intended to improve that situation, but the vulnerability will exist with or without an MCC. The MCC is also intended to protect the electric 'exemption' which will continue to provide unique value for the City's distribution business, which will help to keep distribution based utility rates competitive relative to the rest of the province.

The City continues to try and address any future budget shortfalls through all measures available such as cost or level of service modifications, appropriate use of reserves when available, and/or proposal of corresponding tax increases.  

The formation of an MCC, or not, is not anticipated to affect the need for and the continuation of such future fiscal discipline.

KPMG's services were obtained initially with no specific related constraint on scope or options to consider other than to ensure best value to our community in light of the City's unique (regulatory and other) circumstances. Their services included preparing for and conducting the options analysis. 

Many options were reviewed in the governance models review and narrowed down to three options (Municipal Dept, MCC, or Divestiture) for analysis.  

Other options were considered, but not selected for detailed analysis as they were not deemed relevant to the City's Energy Business and/or  were considered smaller variants of the three that were selected. For example, some models, such as a Regional Services Commission, did not allow the business to earn profit and return the profits to the Medicine Hat community through the payment of dividends. 

The core purpose of an MCC is to deliver benefits to the residents of the municipality. 

This comes from the MGA, which authorizes a municipality to establish an MCC only if the municipality's council is satisfied of three things: 

1. that the corporation will carry on business for a municipal purpose, 
2. that the corporation  will provide a service or benefit to the municipality's residents, and 
3. that the corporation's profits and dividends will provide a direct benefit to the municipality's residents.  

The existing assets and liabilities associated with the MCC business units will be transferred to the MCC. With the formation of the MCC, the City as the shareholder would not be liable for the MCC's debts and liabilities. 

To ensure that the MCC has the resources to be self-sustaining (including for existing operations and for any reasonable local growth), a transfer of assets is required. 

If Council establishes the MCC and later determines that the MCC is not delivering a benefit to Medicine Hat residents, Council could to choose to replace the Board or even initiate voluntary dissolution of the corporation.    

Public hearings in Alberta municipalities are governed by the Municipal Government Act (MGA) and the City of Medicine Hat also follows the additional public hearing provisions in its Procedure Bylaw.  

The City of Medicine Hat ensures that all public hearings are physically accessible and open to all individuals. The public is invited to speak for or against the proposed decision, and their presentations may be oral or written submissions. Information resources are provided to the public in advance to ensure an opportunity to become informed on the issue prior to the public hearing.  

In this particular instance, the Shape Your City project page includes both technical documents and simplified explanations about the proposal to move to an MCC and the many factors to consider.  As a council committee, it is anticipated public hearings held by the RRC would follow a similar format and principles, with enhancements where appropriate.  

It is anticipated that the start up/transition costs, and ongoing incremental operating costs, are warranted to achieve the benefits of obtaining skills based, experienced oversight and provision of strategic direction. While it is difficult to financially quantify the benefit it is anticipated that the benefits would be sufficient to compensate for the incurred costs, particularly evidenced by the continued use of MCCs as a proven model in other jurisdictions.

The anticipated project administrative overhead salaries is to increase approximately $2-3 million per year to allow for board compensation, an MCC specific CFO, additional legal advice where conflict issues may arise, software licenses, etc.  

Over that extended period, however, it is also anticipated that the addition of a skills based MCC board and the addition of the RRC, there will be added scrutiny on both cost and revenue. Those added skills are expected to further improve spend discipline and strategic opportunities to offset these ongoing costs.

The MCC would be required to have their financial statements audited. The MCC would be reporting back to Council on performance at which time, the financial statements would be presented to City Council as the Shareholder.  

The formation of an MCC requires meeting specific public hearing requirements stipulated in the Municipal Government Act. 

In addition to meeting those minimum requirements, measures relating to the provision of information to the public through Open Council materials and presentations, virtual online tools (including a dedicated City website page and this Q&A), online and in person sessions (formal and informal) have also been implemented.  

Further, social media, newspaper and radio advertisements have been deployed to increase public awareness of the MCC exploration efforts. All of these matters have been done within the desired timeline pursuant to the direction of Council with the provision of as much notice and ensuring as much awareness as time and resources permit. A formal public hearing opportunity on the matter is available to the public on June 24, 2025 at 4:00 pm at City council in council chambers.

Full Question: If this business of highly trained professionals is being set up to manage and make wise decisions on behalf of the city of Medicine Hat why is the current management forging ahead with the Saamis Solar Park planning, the decision to hire consultants to sell off gas fields etc. Is the plan to give the MCC a mandate to function being given a very limited scope that has been mandated by current management? If that is the case then they will merely be puppets to carry out the whims of the city without any leeway to operate in the best interests of the city. Why form an MCC? 

In accordance with KPMG LLP's recommendations, the proposed municipally controlled corporation would not take over the City's natural gas production business unit, which would remain with the City. Further, KPMG LLP recommended that the City explore the potential divestiture of its remaining oil and gas production assets.  

The City already owns the Saamis Solar Park project and there are certain activities and timelines the City must be mindful of to ensure the Saamis Solar Park retains its value. The proposed municipally controlled corporation's mandate would include operation of the electric generation, electric distribution, and gas distribution business units as well as the supporting energy marketing and business analysis function.  This mandate would include any typical growth considerations including Saamis Solar or any future jurisdictional interests. 

The addition of an MCC Board would introduce a skill based layer of governance that would more appropriately add checks and balances against staff's recommendations. Business and industry skills could confirm, challenge, or even enhance the work that staff brings forward. Further, the parameters of the MCC's mandate would be decided by Council and embodied in the governance documents for the MCC (Articles of Incorporation, General Bylaw, Unanimous Shareholder Agreement), which the MCC would be bound to adhere to.   

However, the MCC must also be operationally independent, in accordance with the Municipally Controlled Corporations Regulation. So although the MCC would have to operate within the mandate set out in its governing documents, the directors and officers of the MCC would have the authority and discretion to manage the day-to-day business and affairs of the MCC in accordance with their statutory duties to act honestly and in good faith with a view to the best interests of the MCC.

It is not anticipated that the formation of an MCC would result in any new charges to the customer. Nothing is anticipated to change from the customers' perspective except for aspects such as the MCC name.

Yes, as regulator or through the delegated authority to the rate committee.

If the City operates the distribution businesses, either as a City departments or a City-owned subsidiary (e.g., an MCC), it would continue to be the rate regulator.

The rate review committee would be independent from the energy business given they would be advising or acting as the rate regulator. They would be charged with increasing transparency in the rate setting process and recommend fair and competitive rates for ratepayers.

The committee would follow industry-accepted rate design practices to recommend fair and competitive rates for ratepayers.

This committee should be made up of individuals with the technical and industry experience and expertise to evaluate commodity and distribution rates to inform decisions that protect the ratepayers’ interests on behalf of Council.

It would be comprised of individuals with relevant experience to support the rate-setting process and recommendations.

The committee would have a clear mandate with a transparent rate regulation process. Communication of the rate regulation process would be shared with ratepayers.

MCC structure is deemed to be a more financially efficient business model, but there are tools in the USA to stipulate required levels of service and a process to derive rates that ensure financial viability of the MCC and reasonable level of profits.  

The process to derive rates would include approval by a Rate Review Committee which is a City committee, appointed by Council that is not within the MCC.  

Members of the committee include 2 councillors for public input and 1 community observer for transparency.

The rates will be proposed by the MCC and submitted and approved through the Rate Review Committee (RRC). The RRC will provide oversight on operating and capital expenditures and rate calculations to ensure rates remain competitive. The RRC will also have a public engagement opportunity for rate inquiries. There would also be guard rails provided through the USA with the MCC and the City mandate to its RRC.

As proposed, the RRC would have approval/rejection authority over the MCC's rate applications. 

The inclusion of elected Council members on the boards is anticipated to ensure public perspective input and continued transparency to the extent feasible and the numbers ensure the intended skills-based, experienced perspective for business decision making are achieved. 

There would also be a non-voting community observer on the RRC, to enhance the transparency of its operations and decision-making. 

The proposed rigorous rate review process includes a step to 1) post MCC rate applications for stakeholder review and invite written submissions and 2) conduct public sessions for interveners and ratepayers.  

The RRC would be responsible for determining when a stakeholder should be granted intervener status. 

The RRC is a City committee made up of members whose mandate is to review and approve the rates based on stipluated criteria such as allowable costs, competitiveness, and ratepayer perspectives. It is anticipated committee members would be compensated in a similar manner to other City committees which is minimal compensation, if any. It is anticipated that MCC Board members will be compensated similar to other boards such as relatively minor compensation for their time to attend meetings, expenses to travel, etc.  

The reasons persons would choose to become MCC board members would be to fullfil the mandate of the MCC to oversee the management, strategy, and operation of the MCC's business and assets including the key annual task of submission of rate setting information to the RRC for approval. 

Independent oversight and regulation of rates (like the proposed RRC) is typical in the utility industry.  In the rest of the province, the Alberta Utilities Commission is the regulator for regulated rates.

A flexible dividend policy can adapt to changing market conditions to anticipate financial requirements (of the MCC) over a few years. This would help to avoid significant swings in dividends and required investment amounts.

The policy will be regularly reviewed and updated to ensure it is meeting the needs of the City to drive value for the community.

A dividend policy and unanimous shareholder agreement will support this.

City's municipal budgeting process will continue to address any future budget shortfalls through all measures available such as cost or level of service modifications, appropriate use of reserves when available, and/or proposal of corresponding tax increases. Note that this challenge will exist with or without the introduction of an MCC.