(May 23, 2011) In November 2003 the C. D. Howe Institute released a report entitled “What will Keep the Lights on in Ontario: Responses to a Policy Short-Circuit”. 

The report was authored by Michael J. Trebilcock, Professor, Faculty of Law at University of Toronto (and now an Energy Probe director) and Roy Hrab, Research Associate, Faculty of Law; also of the University of Toronto.

One of the recommendations in the report was for consolidation of the local distribution companies (LDCs) to increase efficiencies.  Another recommendation was that Hydro One should be prevented from acquiring more LDCs and should instead spend its surplus funds improving its transmission grid and paying down the Ontario Hydro “stranded debt.”  This report cited many reasons for those recommendations.

By November 2003, Hydro One had gobbled up many LDCs at a cost of $500-million and the new provincial government, the McGuinty Liberals, had been elected.  It promised not to sell off any of the provincially owned transmission and generation facilities.  Nothing said about the LDCs!

Fast forward to the release of Hydro One’s March 31, 2011 quarterly report on May 13, 2011, which as usual, received no major media coverage. Hydro One checked in with an after-tax profit of $212-million on gross revenues of $1,460-million.   Those two numbers contain revenue and profits for the two principal businesses of Hydro One-transmission (95% market share) and distribution (28.3% market share).

Hydro One provides revenue and expense numbers for the two businesses but doesn’t provide a split in the after tax profit.  Purchased power represents almost 50% of gross revenues and is simply a pass-through to ratepayers.  If you strip out “purchased power” and measure Hydro One on the basis of Return on Revenue after tax you get an ROR of 28.6%.   The comparable number in 2009 was 19.4% which when measured against Exxon Mobil or Google for the same year beats Exxon Mobil (6.4%) but falls short of Google (27.6%).

The reason that the year 2009 was chosen is that it is the latest year that all the LDCs filed information to the Ontario Energy Board where it breaks out Hydro One’s profit for its LDC arm.  That information was also used to calculate the ROR for its transmission Alena Hydro One:  Time to break it upbusiness which in 2009 was 24%  ($300-million on gross revenue of $1.253-million).

On the distribution end, comparing Hydro One to Toronto Hydro and PowerStream, Ontario’s two largest standalone LDCs, indicates Hydro One beat its peers in 2009 with an ROR of 14.6% (PowerStream came in at 13.1% and Toronto Hydro at 8.5%).

On the transmission business (using 2009 results),  one must conclude if the combined businesses generated 28.6% in the first quarter of this year (2011) Hydro One beat Google’s numbers in the first quarter of the current year (27%) by a wide margin on its transmission business.  This shows that with a virtual monopoly and acquiescence from the regulator (OEB) on rate increases, you can achieve above-market returns.  Hydro One reflects on that in the Q1 Report – Press Release by stating it received two OEB-approved distribution rate decisions and one transmission decision that favourably impacted its 1^st quarter results. Those increases work their way onto all ratepayers’ bills.

The time has come to split Hydro One into its respective two pieces for a a few reasons. Splitting will allow unbiased peer comparisons on the distribution side, enabling the OEB to make its decision on better information. The province also should force mergers (40 LDCs have less than 15,000 customers) of some of the smaller LDCs that are geographically contiguous, as the 2003 C.D. Howe report recommended, but it should keep Hydro One out of any further acquisitions.  Mergers would reduce operations, maintenance and administration costs, slowing down the rapid rise in delivery rates that now represent 30%-35% of most ratepayers bills, up from  20%-25% only eight years ago.

Another reason is that splitting Hydro One would allow the province to immediately privatize the transmission end of their business.  That part of Hydro One should attract many suitors considering its high profitability and could generate sufficient monies to repay the “stranded debt.”  At the same time, the province should allow private competition in the transmission business.  If it works in the gas sector, it will work in the electricity sector!

Ontario needs the Green Energy Act repealed but it also needs to see meaningful reforms, with competition,  in the publicly owned electricity entities if it is to regain its position in North America with price-competitive electricity rates. Price competitive electricity rates are more fundamental to attracting new investments and creating jobs than any version of the Green Energy Act and its built-in subsidies.

Parker Gallant is an Energy Probe director.