Parker Gallant: Toronto Hydro Shocked

(January 12, 2012) The Ontario Energy Board (OEB), responsible for approving rate increases for the electricity sector, did their job on a Toronto Hydro (TH) rate application.

On January 5, 2012 the OEB rejected a TH rate increase request.   The OEB told TH they “declined to hear Toronto Hydro’s Cost of Service application, filed in August 2011”.

TH was seeking approval for rate increases on delivery costs to get Toronto ratepayers to cough up $2.2 billion, over the next three years, to be used for “infrastructure renewal” (fixed asset replacement).  To put that in context, the increase they sought is more than the depreciated fixed assets reported in their December 31, 2010 annual report.  Their annual report (based on depreciation taken for 2010 of $169 million) indicates their fixed assets, as of that date, will be fully amortized in about 15 years.

The refusal by the OEB to entertain the increase  highlighted some anomalies by comparing TH to other local distribution companies (LDC) with more than 30,000 customers, noting; TH’s productivity was lower, planned capital expenditures exceeded previously approved amounts and TH ignored rules applicable to LDC rate increase applications.

TH wasted no time trying to traumatize Toronto ratepayers indicating they would soon face an apocalypse. Their press release dated the same date as the OEB’s rebuke, contained statements like, “far reaching ramifications that will impact not only customer service, safety and reliability, but employees within the utility and other industries and suppliers.”, “the asset replacement cycle has been changed to approximately 97 years from the previously OEB-approved 30 years.”, “an increase in power outages, slower call centre response times,” and  “as well as the likelihood of major workforce downsizing.”

Capital spending of TH for the past two years (2010 & 2011) was $800 million which would allow their entire depreciated asset base (assuming no price change) to be replaced in about 6 years ($2.2 billion divided by $400 million) not 97 years as the press release suggested.  Reviewing the OEB’s Yearbook of Electricity Distributors for 2010 (the last year posted) shows TH spent $601. in capital additions per customer (700,000) versus the average of $377. per customer for all of the 80 or so LDCs in the province.  Based on the information available for 2011 from TH, spending on capital additions for 2011 was about $535. per customer.

On the productivity side the OEB certainly was right in noting that TH lagged the other LDCs as the OEB Yearbook for 2010 pegged the operations, management & administration (OMA) costs of TH as leading all other LDCs with the exception of Hydro One.  No doubt labour costs played a major role as TH is consistently picked as one of Canada’s Top 100 employers.  Think of an employee perk and TH probably already supply it.  The costs for being chosen a top rated employer shows up in the productivity statistics which in the case of TH has OMA costs per customer, 77%  higher then a Kitchener-Wilmot customer or 82% higher then a Horizon Utilities ratepayer.

TH is not caught up in the “Sunshine Act” so finding salary information is not easy, however  the OEB filing required them to show total compensation information. Total compensation for 2010 was $210 million for a staff base of 1657.  That means the average annual compensation per employee was $126,683.  This report also indicates that about 47% of total compensation is capitalized.

The foregoing indicates that 47% ($99 million) of the compensation paid is allocated to “the asset replacement cycle” (fixed assets) but in reality is salaries, incentive pay and benefits.  That allocation to fixed assets helps to hide the overly generous compensation levels by capitalzing those expenses, and ensures that TH shows a profit. While some compensation should perhaps be capitalized there is no way to know if this percentage is reasonable and in keeping with industry practices.

The OEB have shown with this decision, that they will stand up for ratepayers.

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About parkergallant2

A retired International Banker
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2 Responses to Parker Gallant: Toronto Hydro Shocked

  1. Toronto Hydro acted very quickly and began showing Torontonians “who’s the boss” after being denied their rate increase by the OEB by laying off a contractor who’s 300 workers must now loom for work elsewhere. One might say this is vindictive and shows a rather immature attitude to being denied their “spot in the sandbox of ratepayers dollars”. But then that’s a school yard analogy and of course doesn’t have anything to do with a mature and professional group of managers at Toronto Hydro….or would it?
    http://thebiggreenlie.wordpress.com/2012/01/13/when-governments-pick-winners-everyone-loses-toronto-hydro-is-an-example/

  2. Grant Church says:

    Wasn’t the TH rate application just a scheme to get the money they need for their wind turbine project in Lake Ontario? Has the project been officially chopped? It should be, so that TH can concentrate on the infrastructure it’s mandated to maintain. When dogs started getting fried on man hole covers, it was a sign they weren’t looking after the shop.

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