The Financial Post, August 10, 2017
Glaring omissions from the OEB about the “Fair Hydro Plan”
The June 22, 2017 news release from the Ontario Energy Board tells Ontario ratepayers about the wonders of the “Fair Hydro Plan” and how much rates would have increased without it.
But other related information on the OEB website discloses cherry-picked data and, on examination, reveals shortcomings. One small example is a chart comparing Ontario residential rates with other cities in Canada and the U.S. San Francisco is at the top; Hydro One low-density in fourth place; and Toronto Hydro is in sixth place. The lowest five cities on the chart are all Canadian cities including Montreal; comparing their cost of electricity shows Hydro One’s (low density) costs are 232% higher!
The average monthly cost for U.S. cities are converted into Canadian dollars at $1.3046, pushing them up the scale to create the impression that Ontario’s electricity rates are competitive. What isn’t disclosed is average household income and what percentage of the income is consumed by electricity bill(s) on a comparative basis. In San Francisco, 1.3% of household income (US$104,879) goes to pay for the comparable “average” electricity bill, whereas in Toronto (household income $75,270) it consumes over 2% of household income. Household incomes in rural Ontario are lower (20% or more) than large urban centres such as Toronto, etc., as Statscan noted in an extensive report. Hydro One’s billings in some cases, for their serviced areas, represents 5 to 10% of pre-tax household income.
The news release said if the Fair Hydro Plan hadn’t kicked in, rates per household were scheduled to increase 3.2% May 1st or about $33 annually for the “average” residential ratepayer. That would have increased total costs of power (COP) by almost $200 million over 12 months for just residential ratepayers, and another $3/400 million (estimated) for the rest of the Class A and Class B ratepayers. That money will now be part of the 30 year refinancing flowing from the “Fair Hydro Plan.” Many of those “refinanced” assets will have reached their best before date so ratepayers will be paying for assets with little or no value requiring replacement.
Instead of the rate increase that would have occurred, the average household will see a monthly reduction of almost $22 ($263 a year) commencing July 1, 2017. The foregoing monthly decrease reflects the reduction in time-of-use (TOU) rates taking effect on that date based on the OEB’s standards of usage calculations. The decrease includes prior announcements moving the OESP (Ontario Electricity Support Program) and the RRRP (Rural or Remote Rate Protection) allocation to the provincial treasury, instead of on the backs of ratepayers. This was contained in the directive given to the OEB by Energy Minister Glenn Thibeault April 10, 2017. The latter (OESP + RRRP) are estimated (by the writer) to have cost ratepayers about $5/600 million in 2016, and will increase as the OESP and the RRRP have both been expanded. Those costs will become the responsibility of Ontario’s taxpayers. Taxpayers will also bear the burden of the foregone revenue previously generated from the 8% provincial portion of the HST on electricity bills, removed as of January 1, 2017 the same time as “cap and trade” charges began.
More conflicting information in the OEB news release was the sentence: “With the new RPP prices that will start to apply on July 1, the total bill for the proxy customer described under the Fair Hydro Act, 2017 will be about $121. That is about $41 or 25% lower than it would have been without the following mitigation*” That suggests the “proxy customer” was paying $162 per month, yet the “chart” referenced in the second paragraph contains what is shown as a “Median Ontario Utility (OEB regulated)” with a monthly bill (as of November 2016) of $130.46. The OEB does not clarify what a “proxy customer” is and the “Fair Hydro Act 2017” contains no reference to a “proxy customer”!
With all this conflicting information from the OEB, it is hard to understand how they are fulfilling item number three in their “Mission” statement which reads: “Making the consumer’s own usage, and the broader energy issues, easier to understand”.
If the OEB was attempting to add clarity to the messages from Premier Wynne and the Minister of Energy, Glenn Thibeault about the Fair Hydro Plan, they have failed!
* “Mitigation” includes the OESP, RRRP, removal of the 8% provincial portion of the HST and the “refinancing of a portion of the costs of the Global Adjustment”
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”
- 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!
- 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.
- 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.
- 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:
- 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.
- 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!
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.
The headline on the Hydro One February 10 press release was: “Hydro One Reports Positive Fourth Quarter Revenue and Operating Cost Trends.” Annual “revenues, net of purchased power” came in at $3,125 million, an increase of $37 million (.4%) over 2015, while Net Income rose from $714 million to $746 million, and “adjusted” earnings per share increased to $1.21/share up from $1.16/share.
If you believe the reporting by Hydro One, you are led to believe a small increase in revenue translated to an almost identical increase in after-tax income.
A closer look is necessary to determine how that happened. As it turns out, transmission revenue was up $48 million and distribution revenue was down $11 million, accounting for the revenue increase. Regulatory assets1. climbed $130 million while operations, maintenance and administration (OMA) apparently fell by $66 million. It is not clear how many millions of OMA expenses were placed into “regulatory assets,” but we should assume a portion of salaries, pensions and benefits were.
As a result, it is impossible to determine whether Hydro One has become more or less efficient, despite this claim in the press release: “Our fourth quarter results demonstrate favourable revenue growth and operating cost control.” We can quickly see “favourable revenue growth” was small potatoes!
There are ways of using information in that press release and annual report to allow for calculations. One area that affects ratepayers is “delivery” costs which is reflected in Hydro One’s “distribution” business line. The annual report indicates the amount of electricity distributed to their 1.3 million residential and business customers fell 8.6% from 28,763 gigawatts (GWh) to 26,289 GWh while distribution revenue fell by $11 million from $1,499 million to $1,488 million. Using simple division one is able to calculate the cost of distribution per megawatt (MWh) increased from $52.05/MWh to $56.60/MWh for an increase of 8.7% or $4.55/MWh.
Not all of that increase was paid for by Hydro One customers, however, as Hydro One receives revenue from all of Ontario’s ratepayers via the OESP (Ontario Electricity Support Program) which presumably resulted in the year over year drop (at a minimum) of $26 million in Hydro One’s “Allowance for doubtful accounts” from $61 million to $35 million. As well, all Ontario ratepayers pick up the costs of the RRRPP (rural and remote rate protection plan) which was $125.4 million for Hydro One in 2016 and will increase in 2017 to $243.4 million. Adjusting the distribution revenue to reflect contributions to Hydro One by all Ontario ratepayers would reduce their distribution costs to about $54/MWh (5.4 cents/kWh) and bring it almost in line with the claim by Hydro One their distribution/delivery costs represent about 37% of their customer’s electricity bills before HST. If one does the calculation on the OEB’s website however the actual cost of the “delivery” line for a “medium density” Hydro One ratepayer is 43%!
Another asset that showed a big jump on Hydro One’s balance sheet in 2016 was “goodwill” which more than doubled to $327 million, despite their having recovered $60 million in goodwill from the provincial acquisition of Hydro One Brampton before Hydro One went public. This also occurred just before the arranged merger of Hydro One Brampton with PowerStream, Horizon and Enersource. Hydro One has been snapping up some of the small local distribution companies (LDC) such as Norfolk Power, Woodstock Hydro, Haldimand for the past few years and recently applied to the OEB for acquisition of Orillia Power. Hydro One also just completed acquisition of Great Lakes Transmission improving the monopolistic control they hold in this business line to over 98%. The LDC acquisitions were made well above book value and many of them had their delivery rates frozen for five years.
With Hydro One’s success at being the second most expensive hydro distributor we should expect the ratepayers in the locales of the acquired LDC will see their future delivery rates jump significantly.
On the liability side of Hydro One’s ledger, 2016 saw the acquisition of about $1.7 billion of increased and mainly long-term debt yet, their negative working capital position only improved $716 million. The additional debt raised during the year caused their Debt/Equity ratio to rise from 1.45:1 at the end of 2015 to 1.52:1 at the end of 2016 and brought with it increased interest costs. A rising D:E ratio often precedes a credit rating drop!
Dividend promise impossible, unless …
All this points to a company whose future is dependent on the OEB granting their every wish to increase delivery/distribution rates. If not, the promise to dividend out 70/80% of their annual net profits becomes impossible unless they either: forgo proper maintenance of the infrastructure, or reduce OMA costs via either staff reductions or salary cuts, or sell off assets!
Dividends paid in 2016 on the 5,623,000 common shares were $577 million representing 80% of net income attributable to common shares with just over $400 million going to the provincial treasury leaving about $150 million2. in retained earnings for future investments in infrastructure repairs and refurbishment and the building and/or improvement to the transmission grid(s) and LDC infrastructure.
Something’s got to give, or future increases to Hydro One’s ratepayers will be even worse than the past!
- Regulatory assets “represent certain amounts receivable from future customers and costs that have been deferred for accounting purposes because it is probable that they will be recovered in future rates.”
- Capital spending in 2016 was reported as $1.6 billion.
2. Ratepayer relief for Hydro One and its arrears
October 12, 2016
Yesterday, I dealt with the announcements from the Minister of Energy, Glenn Thibeault in September and the ways he promised would reduce our electricity bills. What the minister failed to explain was where the money is coming from.
Electricity ratepayers should be worried.
As Global TV began its coverage of the electricity sector in Ontario and how it affected people’s lives, many horror stories about “energy poverty” were showcased, particularly from Hydro One’s clients. We customers have become accustomed to bad news stories related to Hydro One’s “smart meters” and “over-billing” highlighted by former Ombudsman, Andre Marin. The stories Global uncovered were even more remarkable as they were able to obtain data from the OEB that disclosed the number of ratepayers in arrears as of December 31, 2015. As it turned out, Hydro One had almost 226,000 clients in arrears (20% of all their residential clients and 40% of all ratepayers in arrears in the province and 63% [$105.6 million] of the total dollar amount). Additionally Hydro One Remote (a not-for-profit subsidiary serving remote communities) had 1,147 in arrears (33.7% of all [3,400] their residential ratepayers).
In the latter case, the rest of Ontario’s ratepayers supplement (read: subsidize) the 3,400 “remote” ratepayers at an average of $9,500 each (about $32 million annually) via the RRRP (Rural or Remote Electricity Rate Protection) fund. The fund is set at $174 million annually which adds 0.13 cents/kWh to each kilowatt hour consumed in the province. The fund is also used to reduce the 329,000 Hydro One customers classified as “low-density” ratepayers. The latter bills are reportedly reduced by $31.50 per month. This eats up another $124 million of the fund.
It is my strong suspicion that it will be this fund that, using the words in Minister Thibeault’s press release of September 13th, result in: “Providing eligible rural ratepayers with additional relief, decreasing total electricity bills by an average of $540 a year or $45 each month”.
If just the 329,000 “low-density”1: Hydro One clients are the “eligible” rural ratepayers envisaged in Minister Thibeault’s press release, the cost will be an additional $150 million. What that means is that “electricity” rates will increase by an additional 0.12 cents/kWh for all the remaining Ontario ratepayers, adding about $20/25 per year to the “average” residential bill.
This also means Hydro One will be handed a guarantee they will receive the $150 million whereas they now have to be concerned with arrears and non-payment from those same clients. This in turn would favourably impact their writeoffs for bad debts which were reported as $66 million in 2014 and $61 million in 2014. It would also put Hydro One in the enviable position of knowing they could deliver zero kilowatt hours but still bill their clients for over $725 million or about 53% of their 2015 gross (net of cost of power) distribution revenue.
Hydro One, despite their smart meter and billing mess, have been on a rampage to shame their paying clients. They do this by sending a “Home Energy Report,” a printed paper report delivered to participating customers via the mail. These reports include a so-called comparison to “efficient” neighbours and other neighbours.
People living year-round in low-density rated areas are talking about these reports. The bills I have seen viewed belong to people living close to many “seasonal” residences used on weekends or for short summer periods. A couple of these homes were heated with electricity. The unsolicited Energy Reports are specific in their language with a cover letter from the “Director, Customer Strategy & Conservation Officer.” A recent letter falsely claimed “You’re among the first in Ontario to receive this innovative new report”. I wrote an article about one of those reports almost two years ago so the recent letter provided to me was hardly “among the first.” One recent letter admonished the recipient “you used 56% more electricity than your neighbours.” In fact this particular ratepayer for the January-June 2016 period used 800 kWh hours monthly which until the May 1, 2016 change announced by the OEB was an “average” ratepayer consuming 9.6 MWh annually.
The ironic issue about these “shaming letters” is if the customer consumes less, Hydro One will submit an application to increase their rates to recover lost revenue. So Hydro One not only bills us for the “shaming letter” costs (via the $400 million a year spent on conservation efforts) via the cost of the electricity we consume, but they then obtain a rate increase to recover lost distribution revenue.
NEXT: The third in this series will examine ratepayer subsidies related to another of Minister Thibeault’s announcements.
1. The following chart was provided to the writer by Hydro One who advised me that “Residential-High Density customers are now classified as “Residential-Medium Density”.
Hydro One, in keeping with the directives from former Energy Minister Bob Chiarelli and the Long Term Energy Plan, “Conservation First” tells us: use less electricity. If I were a Hydro One shareholder I would be struggling to understand why the company would want their customers (all captive) to use less of the product(s) they distribute. Wouldn’t that affect revenue and profitability?
Before privatization of Hydro One we were told by the Premier’s Advisory Council head Ed Clark that “The Council’s main preoccupation relative to unlocking value from its interest in Hydro One is how best to obtain maximum financial value from a transaction while also maximizing protection for taxpayers and ratepayers.”
So, privatization of Hydro One was undertaken because the Ontario Liberal government wanted to unlock the value of Hydro One. Ontario still holds controlling interest in Hydro One so via the Ontario Energy Board (OEB), the Wynne government can ensure revenue and bottom line profitability grow, despite instructions to tell their rate-paying clients to use less!
Hydro One is doing this in two ways.
First is to keep raising distribution rates with the full blessing of the OEB; and second is, issue “shaming letters” labeled as a Home Energy Report.
The Home Energy report tells people, “You used more than average” and then compares our power use to “Efficient Neighbours” and “All Neighbours”. The reports are sent even to people who live year-round in a tourist area where seasonal homes (cottages and weekend retreats) are located. Those permanent residents, some of whom have to heat their homes with electricity, may be suffering from “energy poverty” due to the extremely high distribution rates levied by Hydro One.
An example of climbing distribution rates can be found by reviewing the recent 2nd Quarter 2016 financial report of Hydro One. Using the information available one can calculate the “average” distribution revenue per kilowatt (kWh) versus the comparable 2nd Quarter in 2015. First, note the amount of distributed kWh dropped by 7.5% versus 2015, signaling either “shaming letters” are working or people are reducing usage because they want to buy food or pay their mortgage.
Second, you can see Distribution Revenue (net of the “Cost of Power”) is up modestly by less than 1%.
Third, by using figure for terawatts (TWh) distributed in the quarter (6.2 TWh) you can calculate the “average” distribution cost per kWh was 5.63 cents/kWh — an increase from the 2015 comparable quarter by 8.7%.
That’s not the whole story, however.
If you visit the OEB “electricity calculator” Web page you can quickly see distribution rates for the three categories of low, medium and urban “average” ratepayers are respectively: 12.5 cents/kWh, 9.3 cents/kWh and 6.6 cents/kWh. There is the promise of increased distribution revenue for Hydro One’s shareholders compared to the 2nd Quarter; the OEB approved high distribution costs for the three residential classes, driving up the revenue base to higher levels than the 2nd Quarter average of 5.63 cents.
Hydro One shouldn’t be surprised if that also drives up their “residential arrears” levels at the same time.
It is hard to see how privatization of Hydro One has fulfilled the goal of maximizing maximized “protection for taxpayers and ratepayers.”
September 7, 2016
August 17, 2016
Thanks to the persistence of Global TV it appears the Ontario Energy Board (OEB) was obligated (transparency?) to release information on rising electricity bills and how people are being driven into energy poverty.
While the information contained in the PDF file shows a variety of arrears*-related information, and covers all of the local distribution companies (LDC) in the province, the Hydro One data is particularly striking. It is also in keeping with some of the 2015 Ombudsman’s report.
It is important to realize that Hydro One claimed 1,141,369 residential ratepaying customers as of December 31, 2015, representing exactly 25% of total Ontario residential ratepayers according to the Yearbook of Electricity Distributors on the OEB website.
So, focusing on Hydro One only, here are some of the interesting statistics gleaned from the OEB “arrears” report as of December 31, 2015:
- Hydro One had 59,233 ratepayers in arrears which represented 7.1% of their residential customer base and 68.8% of all residential ratepayers in arrears (86,090) as of that date.
- Hydro One claimed just over $97 million1. of billing arrears which represented 89% of the total billing arrears reported by all LDC (just over $109 million) as of December 31, 2015.
- Hydro One’s arrears of $97 million represented 12.5% of their outstanding receivables as at the date of their year end.
- Hydro One had 17,811 canceled “arrears payment agreements” due to non-payment out of 25,670 for all LDC and that represented 69.4% of all cancellations.
- Hydro One wrote off $16,504,125.00 of receivables which represented 46.9% out of $35,172,817.00 in arrears written off by all LDC.
- Hydro One had 7,570 eligible “low-income” households out of 19,914 households for all LDC which represented only 38% of those presumably eligible for the Ontario Electricity Support Program (OESP) which came into effect January 1, 2016
Based on the above one would have to ask some pertinent questions such as:
Why did Hydro One have so many ratepayers in arrears when they identified only 7,570 customers as low-income and eligible for the OESP?
Why did Hydro One have such dominance of the number of ratepayers in arrears?
Why did Hydro One represent such a huge portion (89%) of the dollar value in arrears?
A quick glance at the second Quarter results for Hydro One shows they distributed 6.2 terawatt hours (TWh) versus 6.7 TWh in the comparable 2015 Quarter — that’s a drop of 8% — yet their distribution revenue showed a slight increase of $2 million year over year. What we can determine from those results is in 2015 the “distribution” business of Hydro One generated $51.8 million per TWh and it increased to $56.3 million/TWh in 2016 for an increase of 8.7% per TWh.
The upside-down world of Ontario
In other words, for Hydro One declining demand results in increased revenue. Thanks to their monopoly and the unique cooperation of the OEB, Hydro One has turned the economic model of “supply and demand” on its head.
One has to wonder now if the sale of shares in Hydro One was driven not only to help achieve a balanced budget in 2018, but also to rid the Ontario Liberal government of even more anticipated bad news about the electricity file and their ownership of Hydro One. Holding a minority interest at the date of the next election might have the Ontario Liberals pointing the finger at the OEB for constantly granting Hydro One’s distribution arm rate increases exceeding inflation by a wide margin. With that in mind they might just pretend they would do something to right the wrong if re-elected.
Only time will tell if Hydro One is allowed to maintain their lofty position as the generator of the highest arrears levels amongst the ratepayers of the province and continue to be granted the rate increases applied for.
- Average arrears level for Hydro One’s residential ratepayers as at December 31, 2015 was $1,638.59 and the OEB defines arrears as: “ … an account that is 30 or more days past the 16-day minimum payment period .”