10 things you need to know from Hydro One’s rate application

(March 17, 2015) Energy Probe breaks down 10 important parts of the OEB’s decision on Hydro One’s distribution rate application. 

The Ontario Energy Board has released its decision on Hydro One’s application for distribution rates over the next five years. Energy Probe breaks down 10 important parts of the OEB’s ruling.

  1. Hydro One’s push for a five-year rate application was denied. At the heart of Hydro One’s application was its proposal to set rates for the next five years, which, it argued, would allow it to implement long-term spending programs with certainty that it would be have the revenue to support those programs. The OEB balked at the request and, instead, allowed Hydro One to set its rates for the next three years, at which point it will have to come back to the OEB with another rate application.
  2. The OEB’s reasoning for denying Hydro One’s five year application was a crucial, yet simple point. Hydro One didn’t follow the new guidelines for rate applications. Instead, the company followed the previous method for rate applications where it would lay out its costs, present any savings or productivity savings it hoped to achieve and then turn to ratepayers to fill that gap. The OEB, instead, wants distributors to present “incentive-based” applications that include a number of programs that mimic “competitive market conditions” and, ultimately, better serve the interests of ratepayers. Hydro One, the OEB argued, failed to follow its guidelines for how to achieve that outcome.
  3. Hydro One not a lone wolf among utilities. A big problem the OEB had with Hydro One’s application was that it failed to clearly compare its spending and productivity to other distributors. By not doing so, the OEB said it didn’t have a “complete assessment of Hydro One’s cost and outcome performance.” Throughout the application hearings Hydro One repeatedly said that its geographic base and other factors make it impossible to compare itself to other distributors. The OEB didn’t buy into that argument.
  4. The OEB is not happy that Hydro One is content with last place. Hydro One’s decision not to follow the OEB’s guidelines for “incentive-based” applications and compare itself against other distributors left the Board concerned about the company’s ability to become more efficient and improve its poor ranking compared to other utilities. Hydro One currently sits in the lowest level of performance among North American utilities and said it had no plans to improve its standing amongst its peers. Furthermore, it argued that its customers weren’t interested in paying more for a better utility. The OEB called that mindset “misplaced” and said the company should, instead, be looking for “cost effective ways to improve its performance.”
  5. Hydro One employees are still overpaid. The Board highlighted that Hydro One’s employees continue to be overpaid compared to other distribution companies – 10% more, according to evidence presented during the application, though that’s an improvement from previous rate applications. The OEB noted that Hydro One failed to provide “evidence indicating that higher levels of compensation are justified” and, as a result, denied the company’s compensation levels. Instead of cutting compensation by 10% – and bring Hydro One’s compensation in line with its peers – the Board ruled that compensation costs should be 5% below what Hydro One proposed in its application.
  6. No rate smoothing allowed. The OEB won’t allow Hydro One to “smooth” rates for customers, even though a number of rate classes will experience faster than inflation rate increases, particularly in the first year of the application (2015). Hydro One proposed to smooth those increases over the five years of the application.
  7. Time to put customers in the appropriate rate class. The OEB backed Hydro One’s proposal to reclassify its 1.4 million customers and move them into the correct, density-based rate classes. Hydro One’s proposal would result in about 11% of all its customers moving to a new rate class – with some seeing significantly higher or lower bills as a result.
  8. The end of the “cottage” rate class. Hydro One initially proposed that seasonal customers – part of the seasonal rate class – that have electricity consumption patterns similar to full-time residences should be moved out of the seasonal class and into the appropriate density-based rate class. Doing so, it argued, would reduce the subsidy from high-use seasonal customers to low-volume seasonal customers. Facing opposition during its application, Hydro One dropped its proposal and asked that the status quo remain. The OEB, instead, said Hydro One should eliminate the seasonal class altogether and use the density-based cost allocation methods it applies to all of its other customers. The move will see bills for low-use cottages increase dramatically – as much as 110% for some.
  9. Lessening the urban-to-rural subsidy. Urban customers will still subsidize rural customers, but to a lesser degree. Hydro One proposed that all rate classes move to a revenue-to-cost ratio – a measure of how much a rate class pays compared to how much it costs to service them – of between 98% to 102%. Currently, urban customers pay 29% more than what it costs to service them, while customers in rural areas pay 8% less. The Board said the move was too aggressive and, instead, told the company to move to a range of 90% to 110% over the next three years, but added that Hydro One could “propose further narrowing of the range” in its next application.
  10. Fixed distribution charges will increase. The OEB approved Hydro One’s proposal to increase fixed charges so they account for 42% of revenue, up from the current level of 40%. OEB supported the company’s argument that increased fixed charges “will better reflect the actual cost to serve” customers.

Energy Probe acted as an intervenor on Hydro One’s distribution rate application.

Brady Yauch is an economist and Executive Director of the Consumer Policy Institute (CPI). You can reach Brady by email at: bradyyauch (at) consumerpolicyinstitute.org or by phone at (416) 964-9223 ext 236

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