On August 16 the Ontario Energy Board issued its decision on Hydro One Networks application for transmission revenues and rates for 2007 and 2008.

Hydro One originally applied for rate increases of 4.3% in 2007 and 2.7% in 2008.  As a result of the OEB decision, Hydro One’s transmission revenues will decrease, by as much as $80 million a year. While the new rates will not be published for a couple of weeks, when all the impacts of the decision have been calculated and Hydro One has produced a new tariff, we expect the savings to customers will be significant. The new rates will come into effect November 1, 2007.

AMPCO objected to several proposals in the Hydro One application, working together with other customer groups.

1.      Capital structure and return on equity

Hydro One applied for an increase in return on equity from 9.88% to 10.5% (later reduced to 10.0%) and a reduction in its deemed debt/equity ratio from 60/40 to 56/44. In its decision, the OEB found no evidence that the risks are different between the distribution business and the transmission business. The Board has ordered that Hydro One’s allowed ROE be reduced from 9.88% to 8.35% and the debt/equity ratio remain unchanged.

Hydro One applied for approval of a formulaic Revenue Requirement Adjustment Mechanism (RRAM) based on an “asset aging” factor. The Board rejected Hydro One’s proposed revenue adjustment mechanism (the RRAM) and has ordered that Hydro One undergo a full hearing for 2009-2010 rates. Additionally, Hydro One has been given six months to work with intervenors and correct the asset data issues noted by AMPCO. This should help ensure the next application will be based on better information.

2.      Rate treatment of capital projects

Hydro One asked for special accounting treatment for some large capital projects, which would have had customers paying for assets before they were in service. The Board has rejected special treatment for such projects.

3.      Forecasting

AMPCO pointed out to the Board that Hydro One’s claims of deteriorating equipment and system performance due to asset ageing were not supported by the data Hydro One provided. AMPCO showed that the “asset aging factor” was in reality an escalation factor that would reward increased spending in one year with higher rates in the next, whether or not that spending was justified.

AMPCO also argued that Hydro One’s demand forecast was flawed in the way Hydro One normalizes demand for weather effects and how it calculates the effects of conservation and demand management on system demand. Hydro One’s (lower than otherwise) forecasts have the effect of reducing its demand forecast which in turn leads to higher rates and higher overall revenues. The effect of this has been for Hydro to consistently receive excess revenue for the past eight years when actual demand turns out higher than forecast.

The Board has found (agreeing with AMPCO) that Hydro One has improperly calculated the effect of conservation on its forecast and has ordered it to adjust its forecast accordingly (approximately higher by 350MW). The Board accepted Hydro One’s weather correction and demand forecast, but has ordered Hydro One to review and report to the Board explaining the differences between its forecast and the IESO forecast, a problem that AMPCO pointed out in its submission.

Hydro One proposed applying its 2006 over-earnings (approx. $30m) to fund future projects, instead of returning the money to customers in reduced rates. The Board has ordered that these funds be returned to customers.

4.      Rate design

AMPCO proposed a change in the design of the network demand charge to remove the existing 85% monthly non-coincident peak demand factor. AMPCO also proposed basing the network charge on demand in the peak months of the year, since peak system demands are only important five or six times a year and it is difficult for customers to be constantly demand responsive. We argued that changing the charge determinant would improve incentives for those customers that can shift their consumption to avoid peak periods, benefiting all customers by reducing demand on the system during times of peak prices and improving resource utilization.

The Board did not accept AMPCO’s rate design proposal for the network charge:

“[The] Board is not convinced that AMPCO has made a compelling case either that the current Network charge determinant has significant defects or that its 5-CP proposal is superior. In reaching these conclusions, the Board is not saying that it is impossible to improve on the current methodology, nor is it saying that it is not open to considering changes in the future. As the Board knows … designing transmission rate structures requires considerable evidence and the involvement of a wide range of stakeholders. Parties that advocate changes in how customers should pay for transmission service need to submit a strong case for change, with detailed evidence and analyses showing why the status quo has undesirable effects and is inappropriate. In the Board’s view, AMPCO did not put forward that case in this proceeding.”

Unfortunately, AMPCO was opposed by Hydro One, the Electricity Distributors Association, Toronto Hydro and all other intervenors. The gist of distributors’ arguments (surprising, considering the demand response programs they themselves are promoting) was that:

“[The] AMPCO proposal would benefit only those transmission customers with the ability to shift consumption away from the peak hours. Toronto Hydro pointed out that it and other local distribution companies (LDCs) have little or no ability to shift their demand away from the peak because LDCs have little control over when their customers consume power.”

The Board’s decision, however, would seem to leave it open for AMPCO to make its case again in a future hearing.

AMPCO congratulates the team that represented its interests so capably in this case, including Mr. Wayne Clark (SanZoe Consulting), Mark Rodger and Jamie Sidlofsky (Borden Ladner Gervais), Gary Saleba (EES Consulting) and Darren MacDonald (Gerdau Ameristeel).

For more information:

Adam White (awhite@ampco.org)

Wayne Clark (wayne.clark@xplornet.com)