(December 30, 2011)  Ontario Energy Board also directs utility to scrap flat fee for smart meters. Interveners — including Energy Probe and the Consumers Council of Canada — argue Hydro Ottawa dramatically overstated its 2012 expenses, and could reduce costs by $5 million or more.

By Don Butler for The Ottawa Citizen

The Ontario Energy Board has directed Hydro Ottawa to scrap plans for a flat 41-cent-a-month fee related to smart meters and substitute a charge that varies by user class. This could mean a small monthly refund for residential customers. Photograph by: Jean Levac, The Ottawa Citizen.

The Ontario Energy Board has ordered Hydro Ottawa to reduce its projected 2012 expenses by nearly $3 million, with a particular focus on reining in salary costs.

The decision, released Thursday, raises the prospect that the utility’s distribution charge, which makes up about one-quarter of the average residential hydro bill, may not rise next year.

The OEB also directed Hydro Ottawa to scrap plans for a flat 41-cent-a-month fee related to smart meters and substitute instead a charge that varies by user class — a change that could produce a small monthly refund for residential customers.

The utility had applied for a rate hike that would raise electricity costs by 0.48 per cent for typical residential customers next year, but that will have to be revised based on the changes ordered by the OEB. A rate decision is now expected in about a month, and will be retroactive to Jan. 1.

At the OEB hearing into Hydro Ottawa’s rate application, the utility had come under fire from interveners, as well as OEB staff, for projecting 2012 operating, maintenance and administration expenses of $63.9 million — an increase of nearly 20 per cent over 2010 spending. In its decision, the OEB cut that to $61.1 million, a reduction of $2.8 million.

Hydro Ottawa’s expenses have been under a microscope because the OEB “rebases” utility rates every four years, with future increases tied to the new base. Hydro Ottawa’s rates will be rebased next year, which means the regulator closely scrutinized its financial assumptions.

No one from Hydro Ottawa was available Thursday to comment on the impact of the decision. But if the utility spends less, it presumably wouldn’t need to get as much revenue from its customers, meaning rates may not have to increase — and could possibly even fall — next year.

In ordering the cut, the board zeroed in on Hydro Ottawa’s compensation costs. Wage costs for unionized staff will rise by about three per cent under a negotiated agreement next year and average compensation for non-union, management and executive staff was budgeted to rise by four-to-six per cent.

While the board recognized that rising benefit costs may not be completely controllable, “the same cannot be said for the cost increases incurred in direct salaries to the management group nor the costs that are a result of the negotiations with the unionized employee group,” it said.

“It is the board’s expectation that costs be contained as a whole and where there is little the company can do to control costs in some areas, it must make up for it in areas where it does have control,” the OEB said, adding: “There does not appear to be an attempt at this overall control approach, given the direct compensation increases that are planned.”

The OEB did not direct specific spending cuts. “These are matters for Hydro Ottawa to manage within the spending envelope approved by the board,” it said.

But the board said it expects Hydro Ottawa “will be able to priorize its business activities and implement planned projects within the envelope approved.”

Hydro Ottawa’s proposed spending had been under attack at the OEB hearing. Interveners — including Energy Probe and the Consumers Council of Canada — argued the utility was dramatically overstating its 2012 expenses, and maintained they could readily be reduced by $5 million or more.

Even OEB staff, in a written review of the utility’s rate application, said the forecast expenses are “excessive” and should be trimmed by up to $3 million.

Hydro Ottawa’s expenses jumped from $53.4 million in 2010 to an estimated $61.3 million in 2011, an increase of 15 per cent. Actual spending is closely tracking the budgeted amount, the utility told the OEB.

But OEB staff said that, based on historical experience, this year’s high costs were “atypical, and not a reasonable basis on which to forecast 2012 … expenses.”

Another part of the OEB decision addressed Hydro Ottawa’s proposal to introduce a 41-cent-a-month fee next year designed to recover about $1.5 million in deferred revenue from smart meters installed from 2006 to 2011, along with associated operating expenses.

Hydro Ottawa had wanted to impose the same fee on everyone, from residential customers to large industrial users, even though the cost of installing smart meters varies widely. For homeowners, for example, smart meters cost $145 to install. For large users, the cost is more than $2,000.

Interveners and OEB staff argued that it would be fairer to apportion fees that reflected the actual costs of different classes of users. That could produce a monthly rebate of 56 cents for residential customers, but a charge of more than $50 a month for large users.

Hydro Ottawa maintained that it did not have the data to properly allocate costs by class. But the OEB noted the utility had produced an analysis that showed residential customers had over-contributed by $2.6 million to the cost of the smart meter program. That analysis, it said, was a “sufficient proxy” and should be used to determine a class-specific smart meter fee.

During the hearing, several interveners pointed out that the utility has operated below budget in recent years while generating returns well in excess of the 8.57 per cent return on equity built into its 2008 rates.

Energy Probe said Hydro Ottawa’s return on equity was 9.5 per cent in 2008, 10.3 per cent in 2009 and 8.8 per cent in 2010. Over those three years, “this means that Hydro Ottawa has over-earned by approximately $9 million,” it said.

The original article first appeared here, in The Ottawa Citizen.