Letter to Energy Minister Thibeault on rate increase application

 To: The Honourable Glenn Thibeault, Minister of Energy, Ontario

EB-2017-0049  Hydro One Rate Increase application

My views/thoughts and “What the OEB needs to consider”

  1. The OEB must consider the fact Hydro One has publicly declared1(a) their intent to pay 70% to 80% of their net income after taxes as dividends to shareholders.  No other publicly owned LDC pays out at that level.   Toronto Hydro has recently informed the City of Toronto they will reduce their dividend.(b)  It should be a point of the review by the OEB to limit the payout dividend rate by Hydro One to no more than the average of all of the other LDC dividend payout rates as the higher payout rate increases borrowing needs and resulting interest payments thereby increasing the need for the raising of distribution rates!
  2. The OEB is currently in the process of endeavouring to have the distribution rates become more of a “fixed” cost moving away from variable rates currently embedded within the rate application system. Hydro One’s application ventures away from that path even though they cite the move to fixed rates on their website!(a)  The OEB needs to re-establish their regulatory purpose.
  3. A review of the Yearbook of Distributors(a) filings on the OEB website comparing Hydro One’s filings for 2014 with 2015 (2016 filings not posted yet) indicates OMA costs fell by $103 million from 2014 to 2015 while depreciation increased by $14 million. One would suspect the reported drop in OMA costs would have caused a drop in Hydro One’s distribution costs but no reduction was forthcoming.  One must assume the increased depreciation was due to the OEB approving the completion of capital spending moving previously approved spending within a variance account to current rate recovery status.  Presumably due to the drop in OMA costs; Hydro One reported an after-tax profit in their distribution business of $257.3 million an increase of $68,1 million in fiscal 2015.
  4. We would note either Hydro One has been effective at getting ratepayers to conserve OR their out of line distribution rates have driven ratepaying households into “energy poverty”. The foregoing is evident in comparing the year ended December 31, 2015 with the comparable year ended December 31, 2016.  Distribution volumes fell 8.6% whereas Transmission volumes increased 1.7% signaling distribution rates are out of line with other LDC!  A further 1.1% reduction in distributed electricity is evident in reviewing the 1st Quarter of 2017 as compared to the 1st Quarter of 2016! NB:
  5. We would note that asset classifications of: “Goodwill” and “Intangible Assets” now cumulatively represent $676 million having increased from $400 million in 2012.  Those assets now represent 6.7% of Hydro One’s equity base and in line with the OEB’s annual setting of the ROE allowed by the LDC has the effect of inflation of Hydro One’s rate increases.  It is time to discount the $676 million when considering the current application.  Hydro One has inflated the goodwill (in particular) by enticing local councils to sell their LDC to Hydro One at prices that exceed normal acquisition activities in the private market.  That in turn impacts not only the ratepayers of the acquired LDC but also (via the inclusion of the goodwill) impact all other Hydro One ratepayers.
  6. Of note in respect to the OEB’s responsibility is the January 14, 2016 “Review of the Cost of Capital for Ontario’s Regulated Utilities”(a) wherein we find the following under the heading “Electricity Distributors” and labeled # 4) under “The differences between the OEB approved and the actual results can be attributed to the following:”: is the following: “4) The utility’s ability to manage its costs leading to under or over spending, and demand pressures! Ontario’s ratepayers should rightly expect the OEB to not only “attribute” differences between “approved and the actual results” for the foregoing reason but to also bear that in mind on a comparative basis with all LDC ensuring that “over spending” is not granted the freedom given to Hydro One in the past and in the future!  Costs for the same relative activities should be similar for all LDC!

 Parker Gallant

NB:  What that suggests is having the highest distribution rates during a time when the grid has a large surplus of electricity has two negative effects on ratepayers.  The first is that reducing consumption will have a detrimental impact on the HOEP driving it down further particularly during the shoulder seasons when demand is low and secondly the reduced revenue to Hydro One will cause them to apply for rate increases associated with the revenue drop thereby increasing distribution rates.  It is a downward spiral for ratepayers!  We would also point out that while Hydro One experienced an 8.6% drop in consumption the IESO report that consumption from 2015 to 2016 remained flat at 137 TWh.

 

 

1.(a) https://www.theglobeandmail.com/globe-investor/investment-ideas/research-reports/hydro-one-will-be-a-dividend-stock-worth-considering/article26829880/

(b) https://ca.news.yahoo.com/toronto-hydro-cuts-citys-dividend-172637812.html

2.(a) http://www.hydroone.com/Norfolk/Pages/MovingtoFixedDistributionRates.aspx

3.(a) https://www.oeb.ca/utility-performance-and-monitoring/natural-gas-and-electricity-utility-yearbooks

6.(a)https://www.oeb.ca/oeb/_Documents/EB-2009-0084/OEB_Staff_Report_CostofCapital_Review_20160114.pdf

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8 thoughts on “Letter to Energy Minister Thibeault on rate increase application”

  1. Amounts of goodwill that arise because of the premiums paid to purchase other LDCs are not included in capital assets for ratemaking purposes. Thus, they have no impact on rates. In theory, the acquisitions will eventualy result in lower rates for existing Hydro One customers (lower marginal costs), although obviously the acquired customers will see massive rate increases to get them up to Hydro One levels. The main reasons for increases in intangible assets are usually accounting rules. The old rules treated certain things, like software, as physical assets, but the more recent rules treat them as intangibles. Both are included in rate base in the same way.

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    1. Thanks for enlightening me Jay. I had assumed they allowed goodwill and intangibles. Despite that the fact they continue to pay dearly for acquiring those LDC spread out around the province means increased borrowing to pay for them increasing the debt equity ratio and their interest payments.

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    2. Although goodwill arising from a purchase premium in excess of the rate base of the purchased utility is not normally included in rate base, the OEB has made an exception in at least two cases that I am aware of, the purchase of the natural gas assets of the Peterborough PUC by Consumers Gas and the purchase of the Wellandport Gas Company by Enbridge. In both cases OEB relied on “benefits” to ratepayers in its decision. Therefore Parker may turn out to have been right after all.

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  2. Good digging, Parker! Nothing like having the facts to make it hard to wriggle free from.

    One has to chuckle about “good will” of Hydro One having increased by some 69% over the period of question. Yes, that certainly appears to be borne out by the considerable increase in public outpourings of good feelings towards Hydro One in the last 5 years. (cough, cough.) Or somehow have they confused the increase in outpouring of consumer money towards Hydro One in that period as being indicative of “goodwill” as opposed to an indication of something else. Please keep up the attention, as your work is effectively applying heat that is making someone start to perspire profusely.

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  3. How could Minister Glenn Thibeault be forced to respond to this so that residents of Ontario could see his justification.
    Why do we have Ministers, both provincially and federally, who are not experts in their particular portfolio?
    This needs to be an election issue, especially in the case of the energy portfolio. These decisions have a cumulative impact on the success or failure of businesses in this province and on the levels of financial distress faced by residents. Why are we leaving these decisions and this balancing act in the hands of people who are ill equipped to manage such a crucially important portfolio? Our collective future is at stake!
    Thank you Parker for another analysis. Is Jay Shepherd’s comment worth considering?

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  4. Wow….. someone has emptied out the used tire bin again….
    at the local landfill last week I saw some locals who have several turdbines situated right on top of their home loading large concrete slabs onto a trailer…. they must be going to build up a wall…. around their house….. to try to protect themselves from the infrasound…. smart people…

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