Billings council supports renewing power plant lease

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KAGAWONG – The members of Billings Township council were unanimous in their agreement to enter negotiations with Oakville Energy Company (OEC) for a lease extension on the hydro generating plant on the Billings Creek, powered by outflow from Lake Kagawong. A special council meeting was held on Tuesday of last week to discuss the matter. The issue went back to council at its next regular meeting, which was scheduled for January 17.

In his report to council, Mayor Ian Anderson explained the current power generating lease is set to expire on December 31, 2029. OEC is faced with funding significant repairs and refurbishments required by the power plant and are requesting that council consider a 10-year extension of the lease period, to December 31, 2039. “The rationale is to extend the time through which OEC might recover its investment,” Mayor Anderson said. 

In the late 1980s, Kagawong Power Incorporated (KPI) acquired a power purchase agreement under Ontario’s non-utility generators program and negotiated the right to operate the station under lease with the Township of Billings. The first lease was signed almost 35 years ago, in 1987, the mayor noted. At that time, the terms were negotiated at 15 percent of gross revenue paid to the township. In 2010, KPI renegotiated the lease for a term extending to December 31, 2029, at a rate of 23.5 percent of gross revenue.

OEC bought the business (including the lease) from KPI in 2013. The lessee (now OEC) is responsible for all aspects of operations, maintenance and repair of all structures and equipment, and is also responsible for relations with the Independent Electricity System Operators (IESO), now under a hydroelectric contract initiative, and for the operation of the power plant in accordance with the Ministry of Northern Development, Mines, Natural Resources and Forests (NDMNRF) water management plan (WMP). The WMP dictates Lake Kagawong water levels as well as the minimum year-round flow rates to be maintained at the dam for aesthetic purposes and downstream for ecological reasons (aquatic life including fish spawning habitat). 

The Kagawong generating station has the capacity of about 725 KW and produces just over 3,000 MWH annually. A megawatt hour (MWH) equals 1,000 kilowatts, KW of electricity generated per hour. It is a relatively old station; the turbine dates from the 1920s or 1930s, and has been operated in its current configuration with little in the way of refurbishment for over 35 years, Mayor Anderson explained. 

Mayor Anderson noted that Bill Touzel, a consultant to OEC, has reported the Kagawong generating station will need between $500,000 and $1 million to ensure it will be fit for continued service past 2030. OEC plans to make at least some of the investment before then.  

“Most of the major equipment components are showing obvious signs of being old,” Mayor Anderson said. “Maintenance and repair costs and downtime have risen significantly over the last few years. It was recently learned that these costs were approximately $120,000 in 2019 and approximately $200,000 in 2020.”

The plant seldom runs to the maximum level of output; it is often closer to 50 percent capacity, so the total annual generation averages roughly 3.1 million KWH per year, or roughly $260,000 per year before operating and maintenance costs. Billings Township receives 23.5 percent of the gross revenue, or an average of approximately $60,000 per year, with no exposure to operation and maintenance costs, he noted.

Mayor Anderson spoke with three individuals with experience in similar operations. He met twice with Paul Young, vice-president of generation development for Orillia Power Generation Corporation, a municipally-owned company with a handful of operating waterpower stations in central Ontario. Mr. Young confirmed that with the age of the plant infrastructure, it would be reasonable to expect major replacement or refurbishment costs of $750,000 to $1 million over the next 10 years. “Mr. Young said that this is very reasonable and that he wouldn’t be surprised if the total costs exceeded the $1 million amount, particularly if there has been no major maintenance done in a while,” Mayor Anderson told council.

Mr. Young estimated average annual maintenance and operational costs for dams, reporting, licencing and staffing would be about $70,000. Revenue charges paid to the province and insurance rates would bring that amount closer to $100,000 per year. “We have found that this method underestimates costs for smaller plants so costs would likely be higher,” he cautioned.

The 23.5 percent revenue sharing agreement and the short remaining length of the contract could be cause for concern by other potential operators, as would the possible zero terminal value at the end of the existing contract. “It is nearly impossible to attract a secured tender to a project that doesn’t have a contract,” said Mr. Young.

He told Mayor Anderson that risks for a small municipality such as Billings were high. Operating the plant themselves would require relying on outside help, particularly for maintenance activities and safety assessments. “For older plants, there is considerable structural and mechanical risk. There is also a public safety risk. The plant should be reviewed to make sure it meets current public safety guidelines as published by the Canadian Dam Association and MNRNRF,” Mr. Young said. He added that a costly dam safety assessment should be undertaken and updated every five years to look at the risk associated with dam failure.

None of the three other examples of a similar lease or profit-sharing agreement within Ontario that Mr. Young was aware of included revenue sharing in excess of 23.5 percent. “You have a very good arrangement with virtually no risk to the municipality,” he told Mayor Anderson.

The same questions were asked of Chris Handley, chair of the Fenelon Powerline Committee, and Sherri Hawthorne, chief financial officer/deputy clerk for the Village of South River. That municipality purchased a formerly private, family-owned power generating station in 2000 and has just finished repaying the loan. South River’s public works department oversees the operation of the dam and they have three contractors on call. Revenues and costs vary from year to year. 

Ms. Hawthorne told Mayor Anderson the municipality would certainly be at financial risk considering the age of the equipment. “She went on to add that global warming alone is such an unknown, making it very difficult to know what the future will bring for water supply, and the old infrastructure makes finding parts very challenging. Her last advice was to keep our current arrangement,” Mayor Anderson said.

Mr. Handley pointed out to Mayor Anderson, “the older the asset, the lower the efficiency.” He also noted that catastrophic repairs could take years to pay off, and that repairs would be more costly on Manitoulin as skilled repair technicians would not likely be local. He also was not aware of a better financial arrangement.

Following Mayor Anderson’s report, Councillor Bryan Barker initiated discussion by making it clear that the issue at hand was not a lease renewal but an extension. “We have two choices,” he said. “Either agree to extend the lease with the current vendors, or deny the request and have the old, tired generation plant paid for by the township.”

“Repairs will cost up to $1 million and could be significantly higher by 2029-2030,” Councillor Barker noted. “It seems highly unlikely that any vendor will pay costs and 23.5 percent. The township receives 23.5 percent of the gross revenues now, with no maintenance and operating costs. I have reviewed the financials of the plan. OEC has provided a substantial amount. We’re far better off with 23.5 percent of the revenues and no risks.”

Councillor Barker pointed out that with climate change, there could be droughts occurring in the future that would affect water levels and operation of the generating station. “I think the data speaks for itself,” he said. “I support entering into negotiations to extend the current lease and to have an ad hoc committee formed for that purpose.”

Other councillors agreed with Councillor Barker. Billings can’t afford not to extend the lease, said Councillor Sharon Alkenbrack. “As Bryan said, this is just a request to extend the current lease agreement. In looking at the proposal, I looked at the age of the equipment, and OEC has put money into the plant for updates over the years.” 

She added, “It would be awesome when the lease is done if we could take it over as a township, but we will see.”

Councillor Sharon Jackson agreed with Councillor Barker on an ad hoc committee as well. “I assume we are continuing the Lake Kagawong Resources committee. It’s really important to ensure we follow the MNR water management plan and work in partnership with OEC. I have had feedback from people in the municipality,” she said. “Some don’t think the amount we are receiving is good but it is, and there’s minimal risk to the township.”

“This is a 100-year-old turbine and generator; refurbishment costs are big. Updating costs are high,” said Councillor Michael Hunt. “Receiving 23.5 percent of the revenue is a good deal and OEC takes on all the risk. I’m in favour of keeping the arrangement at 23.5 percent and extending the current lease.”

Mayor Anderson said he wasn’t surprised at the thoughts expressed by council. “I’m very confident that no one I talked to was exaggerating in their responses, and am most pleased that their answers were consistent,” he said. “This issue will come back to council on January 17 and we’ll take it from there.”