Hydro One customers take it on the chin–again

Delivery charges ballooning, according to recent financial report

Hydro One released their first Quarter results on May 9, 2019: reported revenue was up 15.4 % ($183million) compared to the first Quarter of 2018.  The higher revenues were “driven by higher distribution revenues [up 30.5% from the comparable quarter] primarily due to OEB’s decision on the 2018 and 2019 distribution rates.”

With that in mind and, as a Hydro One customer who just received the monthly bill, I checked the relative percentage costs of their “delivery” charge. It was 45% of the bill (before taxes). Another quick calculation by simply dividing the delivery costs by the monthly consumption indicated a cost of 7.31cents/kWh for Hydro One’s delivery charges.   Electricity costs were 52% of the bill (8.5cents/kWh) and “regulatory charges” represented the balance.

Intrigued with these findings, I then calculated Hydro One’s comparative delivery costs for the same quarters in 2018 and 2019 to determine how the two rate increases granted by the OEB for their distribution business affected the same calculation—cost per kilowatt hour! Hydro One’s quarterly report provides the details on both GWh (gigawatt hours) distributed and the cost of “Purchased Power” so the basic calculation is the same as that for my bill.

For the first Quarter of 2018, Hydro One reported their distribution was 7,406 GWh which produced gross revenue of $1,145 million, and the cost of Purchased Power (PP) was $751 million, meaning “Distribution Revenue” net of PP was $394 million. Dividing that $394 million by the 7,406 GWh distributed indicates the average distribution cost was 5.32 cents/kWh.

For the first Quarter of 2019, Hydro One reported their distribution was 7,738 GWh (+4.5%) producing gross revenue of $1,321 million (+15.4%) and the cost of PP was $807 million (+7.5%) producing net Distribution Revenue of $514 million (+30.5%). Dividing that $514 million by the 7,738 GWh distributed indicate the average distribution cost was 6.64 cents/kWh.

So, based on these calculations, what do we get? Average delivery costs for Hydro One customers increased from 5.32 cents/kWh in 2018 to 6.64 cents/kWh in the comparable 2019 quarter which equates to a 24.8% increase year over year. That far outpaces the cost of living increase year over year!

Despite the 15.4% ($183 million) increase in revenue compared to the first Quarter of 2018, Hydro One’s net income fell from $222 million to $171 million as operations, maintenance and administration (OMA)  costs jumped by $146 million.  Interestingly enough, of the $146 million OMA increase, the financial statements attribute $140 million of it to the cost of the failed Avista acquisition.  In an attempt perhaps to appease shareholders, the quarterly financial statements suggest “Adjusted net income attributable to common shareholders” was $311 million.  If they earned that for the ensuing three quarters, net income would be $1.244 billion.  If one measured that income on an equity base of $9,622 million (Hydro One’s year-end equity December 31, 2018) it would represent a 12.9% ROE (return on equity).

The current OEB (Ontario Energy Board) allowed ROE is 8.98% which suggests the OEB either treats Hydro One as “special” or sets the ROE without enforcement. The first point under the OEB’s “Mandate” is “Establishing rates and prices that are reasonable to consumers and that allow utilities to invest in the system.”

Perhaps it’s time for the OEB to follow their mandate, as a 12.9% ROE exceeds the current allowed ROE by a wide margin. All ratepayers should be aware Hydro One has five distribution rate applications outstanding with the OEB according to their latest quarterly report!

Let’s all hope the OEB has a serious look at those applications and actually allows rates to be set that are “reasonable to consumers”!

PARKER GALLANT

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Author: parkergallantenergyperspectivesblog

Retired international banker.

One thought on “Hydro One customers take it on the chin–again”

  1. Well done, as usual, Parker. I am not very familiar with the operations of the OEB, but other energy regulatory bodies I have studied in the past usually benefitted from having a diligent secretariat to perform the internal analysis and act as a consumer advocate, an independent and well-qualified board, and very active intervenors representing consumer interests, usually from the industries most affected but also from consumer rights organizations. What’s going on at the OEB? Are these factors not present, or are they just not working well?

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