Regulation of Local Distribution
Companies – 25% of the Customer Bill
EUCI’s The Future of Electricity Prices in Ontario
and Key Canadian Markets
Neil Freeman, Vice President, Business Development
October 23, 2014
HORIZON UTILITIES CORPORATION and horizon UTILITIES Looking beyond… & Design are registered trade-marks in Canada of Horizon Holdings Inc. and are used under license by Horizon Utilities Corporation.
Horizon Utilities – who we are
• Municipally-owned 100% – Hamilton
and St. Catharines – 7 former utilities
• 240,000 customers, 436 employees,
$566 million in assets
• Track record of low controllable costs,
low rates in all customer classes and
full returns for shareholders
• Seeking to make our communities great
places to live and work through
innovation and community sustainability
principles
• Welcome new shareholders – build a
great company on a platform large
enough to take full advantage of
combined company strengths
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First Member to Receive Designation
Local utilities’ share of bill has risen greatly
• Distribution costs have increased from 15% to 22% of the total bill
since industry restructuring in the 1990s
• Increase is actually from 15% to 25% when taxes are not included
MEA (now EDA) submission to
Macdonald Committee 1996
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Ontario Government (Elston)
Report on Local Distribution 2012
Ontario LDCs – gas and electric compared
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73 electric LDCs for 4.9 million customers
2 gas LDCs 3.4 million customers – Enbridge 2
million and Union 1.4 million + 3 small gas LDCs
Smallest electric LDC is 1,200 customers and
largest is 1.2 million – 1,000X scale difference
Only 8 > 100,000 customers
Median 15,500 – 38 smaller, 38 larger
Average 49,000 without Hydro One
LDC numbers, scale differences and fragmentation are unique to Ontario
LDC structure contributes to higher costs for customers
NB: Graph does not include Hydro One Networks. Source: 2013 OEB yearbook
Understanding Ontario’s electric LDC fabric
73 LDCs, 200 service territories
• Many non-contiguous mergers
• Current structure has extensive
duplication of effort
• Municipal LDCs generally follow
existing or former political
boundaries
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Hydro One – 1 LDC, 50 ops areas
• Dx & Tx businesses have separate
regulatory licences and rate bases,
etc.
Not all LDCs have same infrastructure roles
• Tx connected LDCs generally have more assets per customer
– Particularly distribution feeders, stations
– Result is more O&M and capital work per customer
• Dx connected LDCs generally have fewer assets per customer
– Feeders and stations, in many cases, belong to the host LDC
Tx Connected LDC
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Dx Connected (embedded) LDC
All LDCs – revenue, OM&A, NI per customer
• Wide differences on controllable cost and revenue among LDCs
• Wide differences not translated into higher net income
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Source: 2013 OEB Yearbook. NB: Data does not include Hydro One Networks or Algoma Power.
All LDCs by customer scale – revenue, OM&A and NI
• On balance, larger LDCs are more profitable, operating with much
lower costs, and a tighter band of revenue on a per customer basis
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Source: 2013 OEB Yearbook. NB: does not include Hydro One Networks or Algoma Power.
Sector OM&A, O&M, Administration cost breakdown
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Admin costs (red) are what
differentiates LDC the most
O&M (green) is relatively flat
across LDCs by comparison
Source: 2011-13 OEB Yearbooks. NB: Data does not include Hydro One Networks or Algoma Power.
Administration costs are largest part of OM&A
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Admin. is 57% of total municipal LDC OM&A costs – $568M of $1.0B
Administration is 51% of total sector OM&A – $818M of $1.6B
10 Source: 2013 OEB Yearbook.
Residential rate comparison – 800 kWh
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Source: 2014 OEB rate orders
Small commercial comparison – 13,000 kWh
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Source: 2014 OEB rate orders
Light industry rate comparison – 350 kW
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Source: 2014 OEB rate orders
Heavy industry rate comparison – 3,500 kW
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Source: 2014 OEB rate orders
Renewed Regulatory Framework
• OEB launched RRFE initiative in 2010
• Report issued in fall of 2012
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RRFE objectives for electric LDCs
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Abandon “one size fits all” with respect to rate-making policy
Shift focus from utility cost to value for customers – outcomes
Institutionalize continuous improvement and innovation
Provide for a comprehensive approach to network
investments for optimum results – enhanced distribution
planning requirements
• Better align timing and pattern of expenditures with cost
recovery
• Provide sustainable, predictable, efficient, effective regulatory
framework
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LDC rate applications – new options
• Three new options with unique rationales – significant differences:
– Monitor and measure performance against defined performance
outcomes
– Enhance asset planning oversight based on five year plans – good
planning
1. 4GIRM
– Means 4th Generation Incentive Ratemaking
– Suitable for modest, incremental capital requirements through rate cycle
– Incremental change from 3rd Generation IRM
2. Custom IR
– Suitable for large multi-year or variable investment commitments
significantly above historical levels
3. Annual IR
– Relatively predicable or sustainment levels of capital investment about
equal to inflation
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Option 1 – 4th Generation IRM
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Option 2 – Custom IR
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Option 3 – Annual IR Index
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OEB Scorecards – monitoring outcomes
• Scorecard monitors LDC’s individual performance on key metrics
• OEB posts individual and consolidated data for all LDCs
• Each LDC required to post its own on website
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OEB benchmarking and incentive regulation
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Stretch factor incentives and rankings
• 6 LDCs in OEB’s Group I (best
stretch factor) average 10K
customers in size
• Represent just 1.2% of all 4.9 million
customers
• Largest is 21K customers and
smallest being 2.7K
• Is the benchmarking missing
something and exceptions are
getting through?
• If the benchmarking is not right, are
we rewarding the right LDCs?
• Benchmarking econometric model levels LDC playing
field for scale, meaning the best performing LDCs are
not necessarily the highest ranked
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How Group I compares to LDC sector average
NFA /
Customer
Capex /
Customer
OM&A /
Customer
Admin. /
Customer
$1,794
$227
$314
$191
E.L.K Energy Inc.
$702
$26
$188
$124
Halton Hills Hydro
$2,125
$363
$241
$169
Hearst Power
$296
$21
$305
$135
Hydro Hawkesbury
$742
$187
$212
$157
$1,024
$364
$586
$397
$886
$154
$213
$152
Group I vs. Sector Average
Sector Average
(ex. Hydro One)
Northern Ontario Wires
Wasaga Distribution
• 5 of 6 Group I LDCs have very low NFA per customer – all LDCs
fully or partly embedded in Hydro One
• 2 of 6 have low NFA and very low Capex, well below replacement
• OM&A is generally low with one exception
• Halton Hills Hydro is a solid performer all around
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Source: 2013 OEB Yearbook.
Sector review recommended consolidation
• Review panel identified:
• $20.6B investment required over next
20 years for system renewal, growth
and new technology
• $1.7B in operating cost savings in
first 10 years from consolidation
• $1.3B in avoided infrastructure
investment in first 10 years from
consolidation
• Review Panel would have forced utility
consolidation
• Government looking for local utilities to
merge voluntarily
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Clark Panel on government assets
• Former TD Bank Chair Ed Clark appointed in 2014 by Premier
Wynne to review government assets
– Reviewing Hydro One, OPG, LCBO
– Mandate is to find savings – all options on the table
• Initial Hydro One findings (released October 17):
– Remarks Ontario would be better served with LDC consolidation
– Recommends separation of Hydro One transmission and
distribution
– Use Hydro One Networks Distribution and Hydro One Brampton
to stimulate consolidation and look for other incentives
• Government indicated Oct. 17 that it is prepared to moved forward
with the recommendations
• Details to be worked out in Clark final report in Spring 2015
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Horizon – bottom-line performer & industry leader
First Member to Receive Designation
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LDC PERFORMANCE EXCELLENCE AWARD – 2006
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Award of Merit – 2013
Sustainability Leadership
Award – 2013