Hydro One and “demonstrable consumer value”

Sorting out fact from fiction among Hydro One claims

The current media attention focusing on Hydro One and its executives is reminiscent of the not so distant past when Andre Marin was Ontario’s Ombudsman. In May 2015 an article in the Globe and Mail noted as a result of his report: “Hydro One issued faulty bills to more than 100,000 customers, lied to the government and regulators in a bid to cover up the problem, then spent $88.3-million in public funds to repair the damage.”

Hydro One installed Mayo Schmidt as CEO in 2015. Recent media reports have focused on why Mr. Schmidt was given a big raise ($1.7 million) to $6.2 million and how his termination (without cause) would cost $10.7 million. The current government signaled they were unaware of either the pay increases for the executives or the increased termination amount and the raises the Board of Directors gave themselves.

These issues were two of the items Hydro One’s Board of Directors had on the agenda for the Annual General Meeting (AGM) that required shareholder approval. As Andrew Willis of the Globe and Mail reported: “Shareholders voted 92 per cent in favour of Hydro One Ltd.’s executive compensation plan, which has faced intense scrutiny during the lead up to Ontario’s election campaign.” It appears that, of the shareholders who actually voted, only 8 per cent were against the increases.   But if the province had participated in the voting (they abstained) and used their 47 per cent shareholding, the motion could have been defeated with 55 per cent voting against it.

One wonders why they chose not to participate.

Christie Blatchford of the National Post was present at Hydro One’s AGM and took part in a short scrum after the AGM ended, with other reporters. The Chairman of the Board, David Denison, along with CEO. Mayo Schmidt represented Hydro One.  Blatchford’s article notes questioning from one aggressive reporter! Asked if he’d take a pay cut or resign, Schmidt said, “It isn’t about pay cuts.” The hellion reporter snapped, “Of course it is.” He then reminded the motley press that the company is committed to “building this high-performing champion,” that Hydro One has reduced costs by 31 per cent, and “turned the power back on for the desperate people.”

Now the only allusion Schmidt made to where those reduced costs came from at the AGM was reported by Andrew Willis who noted “management said the main drivers of earnings growth will come from consolidating local distribution companies in Ontario and cutting costs — the company got rid of 1,000 vehicles over the past year.”

While Schmidt (according to media coverage) was subdued and apolitical during the AGM, a couple of days later he lashed out as reported in the Globe and Mail’s Report on Business in an article by Tim Kiladze. Mr. Kiladze reported that “Schmidt is warning that threats from politicians in Ontario’s election campaign are weighing on the business and will have consequences.” Later in the article reporter Kiladze noted: “Speaking to Hydro One’s latest quarterly earnings, he noted that profit was up by 33 per cent from the year prior, and that Hydro One has added 400 jobs while delivering $114 million in cost savings since its IPO. “Those are remarkable statistics for a company that’s in transition,” Schmidt is reported to have said.

Despite Mr. Schmidt’s claim of improving profits and generating cost savings, the market has moved Hydro’s One’s stock price in the opposite direction. It reached a new low of $18.93 and closed the week at $19.10.   It appears investors are not impressed with either the quarterly earnings jump or the reported “cost savings.”

Examining the first Quarter report tells some of the story.

As CEO Schmidt noted, profit was up by 33 per cent or $55 million above the first quarter of 2017. It appears almost all of the increase was related to rate approvals for the transmission part of the business which increased $54 million due to rate increases approved by the regulator — the Ontario Energy Board (OEB). Electricity transmitted in the quarter was up by only one tenth of one per cent!

Go further into the quarterly report to Note 10, the possible reason for investor concern is significant and relates to the OEB’s Decision and Order in respect to the “transition from the payments in lieu of tax regime under the Electricity Act (Ontario) to tax payments under the federal and provincial tax regime”.

The following comes from that note: “On November 9, 2017, the OEB issued a Decision and Order that calculated the portion of the tax savings that should be shared with ratepayers. The OEB’s calculation would result in an impairment of Hydro One Networks’ transmission deferred income tax regulatory asset of up to approximately $515 million. If the OEB were to apply the same calculation for sharing in Hydro One Networks’ 2018-2022 distribution rates, for which a decision is currently outstanding, it would result in an additional impairment of up to approximately $370 million related to Hydro One Networks’ distribution deferred income tax regulatory asset.”

The conclusion from the OEB’s decision is that they were simply doing their job and honouring their first listed mission statement which reads: “Strengthening the focus on demonstrable consumer value during a period of sector evolution.”

The decision is being challenged by Hydro One’s executives and (presumably) their Board of Directors who are upset the $885 million may not wind up in shareholders pockets. As a result, in October 2017 the Company filed a Motion to Review and Vary (Motion) the Decision and filed an appeal with the Divisional Court of Ontario (Appeal). On December 19, 2017, the OEB granted a hearing of the merits of the Motion which was held on February 12, 2018.

In both cases, the Company’s position is that the OEB made errors of fact and law in its determination of allocation of the tax savings between the shareholders and ratepayers. To put the $885 million in context; it exceeds the annual after-tax profit of Hydro One for a full year!  The results of the OEB hearing will determine whether Hydro One proceed with the appeal to the Divisional Court of Ontario.

Perhaps Hydro One’s Board of Directors and senior executives don’t comprehend they operate a monopoly that is regulated for the express purpose of ensuring their focus is “on demonstrable consumer value during a period of sector evolution.”

As ratepayers, we should hope the OEB continues to place an emphasis on “demonstrable consumer value.” Ordinary ratepayers do not enjoy the benefits Hydro One’s executive have awarded themselves.

Parker Gallant

May 22, 2018

Who is the real hypocrite in electricity sector?

Hydro One and a little distributor in Niagara On The Lake have different ways of doing business … and serving customers

Niagara On The Lake Hydro president Tim Curtis: honest effort for customers

February 20, 2018

It is interesting to compare a relatively small Ontario-based local electricity distribution company (LDC) against a much larger one such as Hydro One. If you do, you get some idea of what’s behind rate-paying electricity customers concerns.

Niagara-on-the-Lake Hydro (NOTL) had the gall recently to brazenly ask, Are we hypocrites?  They asked that question because they installed 70 kW of solar panels on the roof of their building and it will, at 15% generation capacity, produce revenue of about $21,400 annually.  Their news release made this bold statement:

“A reasonable question to ask is whether the Board of NOTL Energy can be considered hypocrites for accepting a FIT contract while they publicly called for the cancellation of the FIT and MicroFIT programs? 

“The short answer is, yes, we are hypocrites.”

Now, contrast NOTL’s honesty with Hydro One and their efforts to convince U.S. electricity regulators they are deserving of acquiring Avista. It’s a strange path Hydro One is taking. Hydro One CEO Mayo Schmidt recently traveled to Juneau, Alaska to plea for approval in respect to Avista’s ownership of Alaska Electric Light & Power Company.  Their appeal included a 444-page submission to the Regulatory Commission of Alaska, one of several required to convince regulators in four western states that the takeover of Avista would not negatively affect customers.

So it wasn’t a private island in the Caribbean Schmidt traveled to, but hopefully Ontario ratepayers won’t be picking up the tab for Schmidt et al in their efforts to win approval for Hydro One’s Avista takeover.

But we are paying: Hydro One’s December 31, 2017 Financial Statement was released February 13, 2018 and had an unusual “after tax” income claim of $36 million on page 34 referenced as: “Costs related to acquisition of Avista Corporation”.   Accounting rules allow Hydro One to claim expenditures related to Schmidt’s travel costs along with consultant and legal fees plus prep time for submissions made to the regulators in the states where Avista operates. As a result, Hydro One reported “Adjusted Net Income” of $694 million versus $721 million in 2016. Putting aside the $36 million, net income was actually down $63 million, or 8.7%.

Also, as a result of the dividend increase announced in May 2017 (quarterly at 22 cents per share), the payout of the 4^th Quarter net income of $155 million (net of the above Avista expenditures of $36 million) resulted in a payout ratio of 89% (in excess of the maximum of 80% announced) of quarterly income — that doesn’t leave much for the oft-touted reinvestment in infrastructure.

Also evident in the Financial Statement is the fact the Ontario Provincial Government received $150 million less by way of dividend payments in 2017 compared to 2016. That $150 million could have covered interest payments on over $4 billion of the provincial debt!

An interesting feature in Hydro One’s annual report is the first 15 pages are devoted to telling the reader how wonderful the company is and how much progress has been achieved. For example is the claim of customer satisfaction climbing to 71%. It is probably fair to assume this “climb” occurred after the launch of the “Fair Hydro Plan” which kicked up to 31% of “electricity costs” down the road, but promised electricity customers a 25% chop off their bills right now.   As a de facto monopoly, perhaps 71% customer satisfaction is somehow good? Forgotten in the bragging process is the fact Hydro One are spending $15 million to give their customers prettier bills containing less information. The $15 million spend is included in one of several outstanding rate application increases filed with the Ontario Energy Board.

So brave little Niagara On the Lake Hydro will increase spending and increase revenues (slightly) meaning less pressure on increased delivery rates, but Hydro One spends on frills that will increase pressure on their clients’ delivery rates.

I will let the reader decide which of the two local distribution companies is the true hypocrite.

 

Hydro One: the news is bad, bad and even worse

Hydro One’s litany of bad news

Shortly after Hydro One’s CEO Mayo Schmidt announced in July that Hydro One would acquire Avista Corporation of Spokane, Washington, it’s been a litany of bad news for him and the shareholders.

Bad News # 1.

The worst bad news was a recent one by the OEB in respect to the allocation of a large part of Hydro One’s rate increase request, associated with deferred income tax relative to their transmission business.   The note in their recently released 3^rd Quarter report states: “On November 9, 2017, the OEB issued a Decision and Order that modified the portion of the tax savings that should be shared with ratepayers. This proposed methodology would result in an impairment of Hydro One Networks’ transmission deferred income tax regulatory asset of up to approximately $515 million. If the OEB were to apply the same methodology for sharing in Hydro One Networks’ 2018-2022 distribution rates, for which a decision is currently outstanding, it would result in an impairment of Hydro One Networks’ distribution deferred income tax regulatory asset of up to approximately $370 million.”

Hydro One was not pleased and as a result are appealing the ruling by the OEB to the Ontario Court of Appeals. They hope the decision will result in a 100% benefit for the shareholders and nothing for the ratepayers instead of the 29% allocated by the OEB.

Bad News # 2. and # 3.

Another bit of recent bad news was related to the ruling of the Alaskan regulators who  rejected the acquisition of Alaska Electric Light and Power Company (an Avista subsidiary) by Hydro One.  Interestingly enough, the rejection came even though Hydro One have guaranteed the regulators (via the Avista Corporation’s application to allow the takeover) a 10-year rate reduction which is estimated to reduce Avista’s revenue by US$31 million.

Bad News # 4.

Almost six months ago, Hydro One submitted a rate application to the OEB that, if fully granted, would increase average residential distribution rates by $141 annually. This was right in the midst of all the chatter about the Fair Hydro Plan the Ontario government was promoting.  When confronted with questions related to that application, the Premier declared to the Elliot Lake Standard: “It’s the Ontario Energy Board (OEB) that sets the rates. The Ontario Energy Board sometimes accepts increases and sometimes they don’t.”  Most ratepayers know that setting rate increases has become the purview of the Minister of Energy and the Premier who decreed rates would be reduced by 25% via the Fair Hydro Act so the claim was disingenuous.  Nevertheless, perhaps the OEB took a signal from the Premier’s message?  What they did was schedule a series of open-house meetings at nine locations in the province.  One should suspect those attending the meetings were not there to support the rate increases!  The OEB is still weighing the Hydro One submission and what they heard at the community events.

Bad News # 5.

Yet another piece of recent bad news came from Spokane, Washington when Avista announced their 3^rd Quarter earnings were down 63% from US$12.2million to US$4.5million of the comparable 2016 Quarter. (Could someone please tell me why Hydro One is buying Avista Corp. and paying [US $5.3 million] 45 times current earnings, suggesting there are synergies that will result in savings and benefits to both sets of ratepayers separated by 3,687 km of driving miles?)

Bad News # 6.

Back in August 2016 the City of Orillia agreed to sell Orillia Power Distribution for $26.3 million (30 times 2015 earnings) and Hydro One dutifully submitted the agreement to the OEB for approval. Shortly after Hydro One announced their planned purchase of Avista, the OEB stated “In an order dated July 27, the board said it had determined “that the hearing of this application will be adjourned until the OEB renders its decision on Hydro One’s distribution rate application.”  Energy board staff found that rates proposed for previously acquired utilities in Hydro One’s distribution rate application

“suggest large distribution rate increases for some customers” in future.”  Hydro One resubmitted the application and the OEB’s response was: “On October 24, 2017, the OEB issued a Procedural Order in response to Hydro One’s Motion to Review and Vary, with key dates for filing additional materials on the Motion, hearing date, and filing of reply submissions.”

 Bad News # 7

On November 10, 2017 Hydro One released their 3^rd Quarter results: they were disappointing, with distributed power dropping by 395 GWh (gigawatt hours) or 6% compared to the same quarter in 2016. That reflected itself in a revenue drop of 3.7% or $14 million (net of cost of power) despite additional revenue coming from OEB approved rate increases.  The overall drop in consumption in the province also reflected itself in a significant drop in average peak demand (down 9.3%) which would have resulted in a revenue drop if not for the OEB’s approval of transmission rate increases, pushing revenue up by $27 million.

The end result was a $15 million (-6.3%) drop in net income despite the year over year rate increases for both the distribution and transmission businesses. Interestingly Hydro One blamed “milder weather” as the cause of the consumption and peak demand drops whereas Environment Canada reported “From June 20 to July 31, Toronto hit 30 degrees just seven times, compared with 24 days in 2016” but perhaps “milder weather” insofar as Hydro One is concerned references cooler weather or simply reduced consumption due to the cost burden on ratepayers?

 Perhaps the stream of bad news that Hydro One is currently suffering from will allow the company’s executives time to reflect on the decade of bad news Ontario’s ratepayers have experienced as a result of their inability to keep our rates from climbing at a multiple of the cost of living.

Parker Gallant,

November 14, 2017

 

Hydro One: the Svengali behind the Fair Hydro Act?

If you are a Hydro One customer, when you get your bill this month it will include a letter addressed “To our valued customers” which describes the wonderful things Hydro One has supposedly done for you.  The letter, signed by CEO Mayo Schmidt, is filled with claims about actions taken and how they were all done to “serve you better.”

One of the paragraphs is particularly noteworthy. It declares:

“For our customers who are struggling with affordability, I want you to know that we are strongly advocating on your behalf. Earlier this year we urged government to make affordability a priority and we made several suggestions that resulted in the creation of the Fair Hydro Plan. The majority of our customers consuming 750 kWh a month have started to see an average reduction of 31 per cent on their monthly bill. For many of our customer, this represents a savings of $600 a year.”

So, the take-away from those words of sympathy from CEO Schmidt ($4.4 million^* in compensation in 2016) suggests it was he — not Premier Wynne or Energy Minister Thibeault — who conceived the “kick the can down the road” concept that became the Fair Hydro Act!

Look back to a recent comment from Minister Thibeault in a CBC article, he said this about the Plan:  “ ‘This is like remortgaging our house,’ Energy Minister Glenn Thibeault told reporters Monday at Queen’s Park. “I’ve always said that the Fair Hydro Plan was a fair plan; it was the best plan we could come up with when we were talking with energy experts, accounting experts, the legal experts.”

When the Fair Hydro Plan was launched back on March 2, 2017 Premier Wynne said: “I have heard from people around the province who are worried about the price they are asked to pay for electricity and the impact it has on their household budget. Electricity is a necessity. By fixing problems in the system, we will be able to provide every residential customer in Ontario with an average 25 per cent off their bills now and make rates fairer in the future.”

So the question is, does the “we” include Hydro One’s CEO Schmidt, and is he classified as one of the “energy experts” Minister Thibeault claimed they talked with?  If so, I hope Schmidt told him about the rate increases Hydro One has applied for that will increase average customer’s bills by $141 a year in 2022 (based on current Hydro One rate applications under review by the OEB).

Those rate increases are needed by Hydro One to help pay for their upcoming purchase of Avista Corp. as it will represent a revenue gain to them of close to $500 million annually.

The LDC benefiting the most from the Fair Hydro Plan was Hydro One which still has the second highest distribution rates. Before privatization, they had the highest ratepayer arrears (past due accounts), the bulk of ratepayers accessing the Ontario Electricity Support Program (OESP) and the highest level of bad debts.  A part of the rate increase they currently seek would allow them to install “pre-paid smart meters” meaning if a ratepayer couldn’t afford top up their account they would be automatically disconnected.

On October 17, 2017 ratepayers got further bad news from Bonnie Lysyk, Ontario’s Auditor General reported due to the way in which the Fair Hydro Plan is being financed, ratepayers will be required to pay an extra $4 billion in interest costs.  That $4 billion increases estimated borrowing costs by 19% to $21 billion to cover the forecast $18.4 billion cost of the Plan. The latter costs represent the bulk of the 25% reduction (16%^**), bringing total estimated costs for this portion to $39.4 billion.

The shell game of the Ontario Liberal government in Ontario’s energy portfolio continues, aided and abetted by Hydro One. If Hydro One’s rate applications are approved, their distribution rates will jump bringing more misery to their ratepayers!

 

* The CEO’s compensation is more than the total amount available annually under the LEAP (Low-income Energy Assistance Program) from the 73 local distribution companies in the province.

** The other 9% comes from removing the provincial portion of the HST (8%) and putting the OESP and RRRP (1%) as a taxpayer responsibility.

 

Hydro One claims it is enhancing consumer satisfaction (and pigs are flying)

It’s all good news! Or, is it?

Reading the news releases since Hydro One was privatized by the Wynne government one would think the company is trending up. A rate-paying customer, or even an early investor in Hydro One shares, however, might not agree, especially with some recent claims in their second quarter news release.

Right after Hydro One announced plans to spend $6.7 billion (CAD) to acquire Avista Corporation of Spokane, Washington, credit rating agencies Moody’s and Standard and Poor’s revised their outlook to “negative” from stable, citing concern about cash flow and increased debt.  Fast forward to August 8, 2017 and the second quarter results demonstrated more negative news as earnings dropped $34 million (21.7%) to $123 million or 20 cents per share.  Back on May 4, 2017 Hydro One had increased their dividend payment to 22 cents per share so they paid out $135 million in the Q2, or $12 million more than their after-tax income.

I wonder how long the credit rating agencies will allow that to happen without a downgrade.

It appears that management of Hydro One at least recognized the “outlook” downgrade as, buried in the notes in their Q2, was this :  “The change in the capital structure of Hydro One as a result of the Merger and the Debenture Offering could cause credit rating agencies which rate the outstanding debt obligations of Hydro One and Hydro One Inc. to re-evaluate and potentially downgrade their current credit ratings, which could increase the Company’s borrowing costs.”

The news release also featured this back-pat from president and CEO Mayo Schmidt, despite the bad news of the quarter and the potential of an upcoming credit downgrade: “We continued to deliver on enhancing customer satisfaction and value while implementing operational improvements and efficiency gains across the organization, despite unseasonably mild weather during the second quarter.”

Not too bright a future

So, let me get this straight: a possible credit downgrade, higher borrowing costs, declining income and lower demand — those don’t add up to “enhancing customer satisfaction and value.” And, with nine rate applications to be filed in the next four years, the future doesn’t look great for Hydro One’s customers.

Hydro One’s distribution revenues (net of purchased power) were flat at $349 million compared to the same 2016 Quarter. However, they actually delivered 4.5% (276,000 MWh) fewer MWh. What that means is Hydro One’s distribution rates for their most recent quarter were 4.5% higher than the comparable quarter in order to make up for the lower demand while maintaining revenue levels.

To make matters worse, the takeover of Avista will put Hydro One into the coal business facing a $100 million dollar cost of cleaning up a toxic waste site partially owned by Avista in Montana.

Effective management and efficiency gains, coupled with lower distribution rates should be the focus for Hydro One before they get to claim they are “enhancing customer satisfaction.”  As well, claiming that electricity rates are lower by actually deferring costs for four years via the Fair Hydro Act just proves Hydro One’s existence as a monopoly should be controlled, rather than allowed to spin tall tales.