Regulator won’t let Hydro One subsidiary pass certain expenses on to customers
Province has sold just 50% of parent company
• A provincial regulator is trying to prevent a subsidiary of Ontario’s Hydro One Ltd. from making its customers pay for some of the costs related to the utility’s privatization.
T he Ontari o Energ y Board, which regulates of the province’s electricity industry, issued a decision last week on Hydro One Net- works Inc.’ s transmission rates for 2017 and 2018. The company is a subsidiary of Hydro One Inc., which is itself a subsidiary of Toronto- based Hydro One Ltd., a publicly traded holding company.
Ontario’s Liberal government has sold off just over 50 per cent of Hydro One Ltd. to investors, a politically controversial decision that some critics claimed would lead to higher electricity costs, and the effects of which the OEB scrutinized in its transmission decision.
The regulator noted that “embedded in the appliedfor rates revenue requirements, are significant cost increases associated with the transformation of the utility’s unregulated parent company ( Hydro One Ltd.) from one wholly owned by the Province to a company whose shares are publicly traded.”
The OEB’s decision to reduce some of those costs will force Hydro One Ltd., Ontario’s largest distributor and transmitter of electricity, to either defer or figure out other ways to shoulder expenses it had tried to assign to its subsidiary and its customers. The company could also appeal the decision.
Hydro One had been seeking allowable transmission revenues of approximately $ 1.487 billion for 2017 and $1.558 billion for 2018, yearover-year increases of 0.5 per cent for this year and 4.8 per cent for next, the OEB said. This would have inflated electricity bills by between 0.1 per cent to 0.2 per cent in 2017 and 0.2 per cent to 0.4 per cent in 2018.
The regulator, though, ended up ordering a number of reductions to Hydro One’s spending plans.
According to the decision, those reductions included some of the planned increases to capital expenditures “that emerged as a result of the transformation.” The capital spending budgets were “not fully justified,” the OEB said, with a chief reason being a “lack of a comprehensive planning process.”
The regulator said it believes Hydro One “should be able to achieve its objectives of responsible asset management within the approved capital envelope.”
Also reduced were the amount of regulatory income taxes the company recovers from customers. The decision said Hydro One had wanted to give shareholders 100 per cent of approximately $ 2.6 billion in future cash tax savings connected to Hydro One Networks, savings that arose from Hydro One Ltd.'s November 2015 IPO.
The regulator cut this ratio down to 71 per cent, "to reflect the OEB’s determination that the future cash t ax savings arising from the IPO are to be allocated to shareholders and ratepayers on the basis of an OEB established allocation factor.”
The OEB also said Hydro One, before the IPO was done, shook up its leadership and brought in new hires skilled in running public companies and making acquisitions. This was “accompanied by the adoption of incentive packages for executives, directors and other management personnel that were weighted toward delivering value to shareholders,” increasing compensation costs Hydro One wanted to recover from customers.
The OEB decision reduced compensation "to eliminate transformation related amounts that are of little, if any, value to transmission services customers.”
Hydro One said in a press release that the OEB had ordered reductions of $ 126.1 million in 2017 and $ 122.2 million in 2018 for its capital spending, in addition to $15 million in cuts related to compensation for both years. Tax expenses were reduced by $ 23.8 million and $ 26 million for the two years.
The OEB also said that the costs tied to changes at a “holding company parent,” like Hydro One Ltd., should only be eligible for recovery from a regulated subsidiary ” to the extent that they produce outcomes of demonstrable value to utility customers.“
"The electricity transmission functions performed by Networks have remained essentially as they were before the transformation of the unregulated holding company to a publicly traded entity in which the Province now holds a minority inter- est,” said the OEB’s decision. “Networks’ customers do not need leaders experienced in the operation of publicly traded companies or in executing on a strategy of accretive acquisitions. They need outcomes that electricity transmission customers value.”
Hydro One said in August the delay in its transmission application had “impacted revenues” for the second quarter, but that it expected “the revised rates will be effective from Jan. 1, 2017 and as a result would book the increased revenue up to the date of the decision at that time.”
The OEB did accept several aspects of Hydro One’s application, including the effective date of rates, which is to be Jan. 1, 2017.
Hydro One said it “is reviewing the decision in detail and will determine the appropriate next steps.”
CIBC World Markets said it wouldn’t be surprised to see an appeal of the OEB’s ruling.
“The decision contains enough controversy that management may have to consider applying for a review and variance, in our opinion,” wrote CIBC analysts.
However, the CIBC analysts also said they expect Hydro One to pass on an appeal and take “the high road.” The firm added that the decision underscored the importance of branching out into new jurisdictions, which Hydro One aims to do with a proposed $ 6.7- billion acquisition of U.S. energy company Avista Corp.
An Ontario government spokesperson said in a statement that the decision was “yet another example of the OEB’s strong record of denying hydro companies all that they ask for, and reviewing rate applications with the consumer in mind first.”
The OEB said it will approve the final transmission rates later this fall, after it has reviewed a response from Hydro One calculating the total bill impact, as well as any comments on the response by the regulator’s staff or other interveners. The final rates are to be implemented retroactively, the OEB said, to Oct. 1.