When its budget fluctuates by tens of millions of dollars annually, how does a company gear up and gear down for that amount of work? At Toronto Hydro Corp., the answer has been independent contractors, reports Ivano Labricciosa, vice president of asset management.

“You can get $350 million last year and this year $240 million approved – and how do you prepare your organization for the demographic shift happening with skills and knowledge leaving the organization and not being retained?” Labricciosa asks. “The size of the workforce will have to swell in good times and shrink in bad times. Planning for that, you need a very savvy execution model and people strategy that allows you to deliver. The one thing the regulator doesn’t want is to give you the money if you can’t deliver at the end of the day. They test you not only on the prudence of your plan but that you actually do what you said you would do.”

Outsourcing is one solution, he suggests. “How do you swell or shrink from year to year by hundreds of staff?” he muses. “Outsourcing is one solution, but if everybody does that simultaneously – whether it’s people you hire or contract resources – the industry can’t absorb the uncertainty. The dilemma you create is in the good times, everybody wants to run in, and in the bad times, everybody is skeptical and moves on to another industry. Waves of people moving like this is turbulent and creates instability in planning.”

Toronto Hydro-Electric System Ltd. – Toronto Hydro for short – owns and operates the electricity distribution system that serves approximately 715,000 Toronto residents. It reportedly is the largest municipal electricity distribution company in Canada and distributes approximately 18 percent of the electricity consumed in Ontario, most of which is generated at facilities outside the city that are owned by Ontario Power Generation. Toronto Hydro also has some generating capacity from photovoltaic systems and a wind turbine.

Toronto Hydro Energy Services Inc. provides street lighting services to the city of Toronto, which unlike the electric power from Toronto Hydro-Electric System Ltd. is not regulated and is covered under a separate contract with the city.

The electrical distribution system in Toronto consists of substations and overhead and underground distribution equipment. Much of it was built between 1940 and 1980 and shows signs of wear. In fact, the utility estimates 40 percent of power outages in Toronto in 2011 were caused by defective equipment.

Funding Shortfall

That coincides with what Labricciosa says. “Our projected need in distribution is really $400 million to $500 million a year,” he estimates. “The highest numbers we’re investing are $350 million annually in the last couple years. We’re still $100 million to $150 million less than where we need to be. That’s the concern. If you don’t fund it, you are running to fail or pushing it way past its useful life. To keep rates low, they haven’t raised rates in distribution and haven’t been investing, but harvesting. The infrastructure is well past its life – you’re doing emergency repairs, reactive repairs, which are more costly in the long run. It becomes very expensive in terms of asset management to rebuild your entire asset base one emergency repair at a time. To some extent, we take the grid for granted, and as long as the lights are on, the underlying problems aren’t obvious to the public.”

Labricciosa refers to the 34-minute electrical blackout in February during the Super Bowl at the Superdome in New Orleans as an example of the public relations effect an isolated electrical failure can wreak on a city’s reputation. “The regulator is an advocate for the customer around affordability and rate increases,” he says. “If outages go up a couple points a year, the customer can afford it, regulators think. But if you are sponsoring a world-class initiative, what is the damage to the city’s image if you have a Superdome issue? Regulators have difficulty taking into account large events and the impact on brand image and global reputation. A Superdome-type outage event has a huge impact on the city, and the key discussions become focused on utility failures. If you’re hosting a significant event and you’re going to have a catastrophe like that in front of a world audience, at the end of the day, regulators have to factor that in, and there must be provisions for sufficient infrastructure support.”

In 2015, Toronto will host the Pan American Games, which requires additional electrical infrastructure at venues throughout the city and in the greater Toronto area. The athletes’ village and many of the stadiums in Toronto will require electrical infrastructure in addition to the development that is ongoing in the city.

Toronto Transformation

Besides replacing aging infrastructure, Toronto Hydro also is providing opportunities for new electrical infrastructure to serve the city’s construction boom. “What’s happening with Toronto is it is going into a transformation, when you look at the number of new high-rises and projects going in – commercial, industrial or condominium development,” Labricciosa declares. “While you’ve got an economic slump from a global perspective, locally the economy has been doing pretty good in terms of construction activity. It has not stalled. Everywhere in Toronto you’re seeing this intensification in the downtown core and beyond, which requires an upgrade or a build-out to supply it.”

Toronto Hydro’s Power Up program is designed to communicate to residents that besides providing new service, the utility also needs to expand the capabilities of its smart electrical grid and replace aging infrastructure. “Sometimes the grid is out of sight, out of mind, until we dig up roads and repair areas and do major project work,” Labricciosa points out. “We wanted to identify with a brand so if the power is off, it is infrastructure renewal.”

Customer Service

The utility industry is adapting to evolving customer service demands. No longer is a simple electric bill in the mail enough customer communication. “Customers are much more savvy and sophisticated than they were,” Labricciosa remarks. Today, Toronto Hydro interfaces with customers on its website and over customers’ mobile devices.

Communicating with customers about power outages so they can plan their activities around them is a priority. “Customers don’t necessarily know what they want until they see it,” Labricciosa maintains. “There is a new service model that requires more touchpoints with customers.”

The business now is not as much about what the utility needs as what the utility thinks the customer needs, Labricciosa says. This includes new billing and payment methods and self-service, so customers can schedule shut-offs and other electrical service changes online 24/7.

Toronto Hydro’s installation of smart meters – all the company’s customers now have them – enable customers to buy electricity at different rates by season – winter or summer – and by time of day in three tiers: on-peak, mid-peak and off-peak.

Planning for the Future

Since 2006, Toronto Hydro has invested about $1.7 billion to modernize its distribution system . Current estimates to replace the existing asset base exceed $15 billion. In 2011, it invested $431.2 million mostly in infrastructure upgrades to renew its electrical grid.

As employees retire from Toronto Hydro, plans for improvement have to be passed along. “One of the things from an engineering perspective I keep identifying is we have to get back to the long-term planning aspect of the utility,” Labricciosa says. “Many of the pressures utilities are facing are short-term. We are facing system performance issues from aging infrastructure, regulatory model changes and financial pressures with many competing investment priorities. Many consumer advocates are focused on rate affordability, given the current economy, and of course, political pressures mounting on all sides. You’ve got many things to do and little money to do it with.”

He says this drives short-term behavior. “Regulators generally set minimum thresholds, and as long as utilities perform above the minimum with prudent investments, the money becomes the optimizing variable. Everybody is living quarter-to-quarter.”

That does not allow for stable planning. “Long-term system planning has gone out the window because all the short-term issues have made the long term so unpredictable and very unattainable,” Labricciosa laments. “We’re getting a demographic shift with people leaving organizations and not transferring knowledge to people coming in. The issue I see in the industry is the people who are leaving are not giving any long-term blueprint to get to where you need to be down the road. The last group left suddenly without handing any plan off to people like myself. If we had the blueprint, we could have forecast the aging infrastructure issue ahead of today and adjusted accordingly for technology factors, such as grid modernization and the economy.

“Unfortunately, we had a limited plan and many factors to consider and balance going forward,” he continues. “So what I recognize as a planning leader is if we were going to give this next group of engineers a good start, we would at least hand them a blueprint for the destination and say they can adjust the path going forward, but now they know what they’re up against. Our approach is pushing forward beyond the short term and publishing the ‘blueprint’ in the form of the long-term asset plan, which stretches the investment timeline out one entire asset lifecycle. That means anywhere from 30 to 100 years, depending on which particular major asset class you are analyzing.”