Hydro One’s profit engineering and the Fair Hydro Plan

Who gained the most under the Fair Hydro Plan? Not you. Hydro One comes out the winner

That baby is still not happy… who comes out on top with the Fair Hydro Plan?

In the section titled ”Other Regulatory Developments” in the “Management’s Discussion and Analysis” chapter of Hydro One’s financials for the year ended December 31, 2017, is this interesting note. (The emphasis is mine.)

“In March 2017, Ontario’s Minister of Energy announced the Fair Hydro Plan, which included changes to the Global Adjustment, the Rural or Remote Electricity Rate Protection (RRRP) Program, the introduction of the First Nations rate assistance program, and improving the allocation of delivery charges across the rural and urban geographies of the province. Hydro One worked collaboratively with the OEB on the First Nations rate assistance program, and was a key stakeholder in providing solutions that address both the Global Adjustment and RRRP elements. The Fair Hydro Plan came into effect on July 1, 2017 and resulted in a reduction of approximately 25% on electricity bills for typical Ontario residential customers. The Province also launched a new Affordability Fund aimed at assisting electricity customers who cannot qualify for low-income conservation programs. Additional enhancements were also made to the existing Ontario Electricity Support Program (OESP).

Hydro One customers saw the full benefits of the Fair Hydro Plan for all electricity consumed after July 1, 2017. A typical rural residential customer using 750 kWh per month will see savings on their monthly bills of 31% on average, or approximately $600 annually. These changes did not have an impact on the net income of the Company.

Now, fast-forward to the release of Hydro One’s 2018 2nd Quarter results and there is no mention of the Fair Hydro Plan, the Global Adjustment, the RRRP or the First Nations rate assistance program!

In the recent report, Hydro One simply brags about the big jump in its net income. That jump was supposedly due to approval of a substantial transmission rate increase and favourable weather noted as “higher energy consumption resulting from colder weather in April 2018”!*

The actual growth in revenue for the six months was only $24 million; however, after-tax net income** year over year increased from $284 million to $422 million, showing an increase of $138 million or 48.6% for the comparable six months.

Dreams come true … for Hydro One

If one looks at gross revenue less the cost of “purchased power,” Hydro One’s RoR (Return on Revenue) for the six months was 25.6% (after-tax). Any other service provider or retailer could only dream about growth like that!

So, was the $138 million improvement in net profit a reflection on the now retired, six-million-dollar man’s achievements or other factors?

Let’s look at a few aspects of the results.

As it turns out, the “substantial transmission rate increase” generated additional revenue of $123 million. The transmission revenue is paid for by all local distribution companies (LDC) and included in the “delivery” line on electricity bills. The result of the $123-million increase collected by Hydro One (and all LDC) in delivery costs should have increased that line on the bills, but for Hydro One customers, it didn’t!   The “delivery” costs for Hydro One customers is estimated to have decreased from about 8.2 cents/kWh to 5.4 cents/kWh and “distribution” revenue fell by $96 million despite increased demand of 5.4% (697,000 MWh) in the comparable six months.

Another significant item affecting the positive results is related to what Hydro One paid for the cost of power which fell (despite increased demand) by $113 million from $1.538 billion to $1.425 billion and also fell for “delivery” line items previously included on hydro bills.

The kickbacks, under the Fair Hydro Plan, resulted from moving the “purchased power” costs to future ratepayers and by moving costs of issues such as the OESP*** and “conservation” spending to current taxpayers.

Those cost shifts naturally had a positive effect on Hydro One’s earnings.

In addition, and as noted in an article in the Ottawa Citizen Hydro One is responsible for monitoring “the energy production and pay thousands of FIT and MicroFit producers across the province, it is no longer able to share any information about those contracts publicly.”

Worthy of our trust?

Hydro is simply required to submit a bill to the IESO for the generation produced for all the MicroFIT contracted parties on their distribution network. Those bills are submitted monthly without scrutiny by the OEB or IESO, and IESO simply writes them a cheque the cost of which is billed to all of Ontario’s ratepayers.

Should we trust Hydro One’s billing process for those thousands of FIT and MicroFIT producers, knowing that back in 2015 Ontario’s Ombudsman reported they issued more than 100,000 faulty bills to their customers? Privatization by the former Ontario Liberal government has resulted in a monopoly, now operating without oversight.

The Ottawa Citizen article about this issue had a fitting comment from Steve Aplin, an energy environment data specialist (website Emmissiontrak): “That’s what happens when you break up this system. Now, nobody is minding the store. It’s outrageous that the IESO, they send the cheques. You don’t just blindly send a cheque off to somebody. There must be some fiduciary responsibility.”

The results of Hydro One working “collaboratively” with the OEB reduced revenue in a positive way for them, as they shifted costs to future ratepayers and current taxpayers, generating higher profits.

Additionally, despite ratepayers picking up the billions in costs for “smart meters” and the “smart grid” neither the OEB or the IESO seem able to execute their fiduciary responsibility!

From all appearances, improving results for shareholders is more important now than containing costs for ratepayers and taxpayers for Hydro One, IESO and the OEB.

© Parker Gallant

*A quick estimate of additional April demand for Hydro One suggests increased distribution revenues of $10 million at say $50/MWh for the additional (estimated) 200,000 MWh their ratepayers consumed.

**Net Income before costs attributed to the planned acquisition of Avista Corporation.

***Hydro One has consistently had the highest percentage of dollar amounts in customer arrears. In 2016 they had almost 52% of all dollar amounts of arrears of $69.7 million.

 

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