The top five takeaways from the Ontario Energy Board’s decision on Hydro One’s transmission rate application.
Nine months after the hearing for Hydro One’s 2017 and 2018 rates wrapped up, the Ontario Energy Board (OEB) last week finally issued its decision. We break down the top five takeaways from that decision.
Executive costs are of little value to customers
The OEB knocked back Hydro One’s proposal to have ratepayers pay for the company’s massive run-up in executive compensation packages, which are expected to grow from $5.5 million in 2014 to $22.1 million in 2017, saying those costs offered little value to customers.
The OEB ruled that while Hydro One is now a publicly traded company and, as a result, brought in a new slate of executives to transform operations and “maximize” share values, ratepayers shouldn’t be on the hook for those costs. The OEB’s reasoning is that Hydro One’s transmission business is the same “as it was before” the province sold part of the company and, as such, the “operation of publicly owned companies is not a pre-requisite for the leaders” of Hydro One’s transmission business. Rather, those executives need to be experienced in the “management and operation of electricity transmission and distribution systems” that provide essential electricity services “under the auspices of OEB regulated rates.”
In short, Hydro One’s argument that it needed to pay top dollar to attract executives with a track record of boosting stock prices was dismissed by the OEB as unnecessary.
Transmission customers, the OEB ruled, should only pay for increased management costs that “produce outcomes of demonstrable value to utility customers.” Hydro One didn’t make that case and “failed” to clearly demonstrate that the executive changes – and increase in costs those changes entailed – would “produce continuous measurable improvements in efficiency or productivity and in the safety, reliability and quality of electricity transmission services.”
Ultimately, the OEB cut $15 million in 2017 and 2018, respectively, from Hydro One’s overall compensation budget, which is more than $400 million annually, concluding that “incentive compensation weighted to deliver value to shareholders produces outcomes that are of little, if any, value to transmission services customers.”
The OEB also said it was “concerned” that Hydro One’s push to bring overall compensation costs to the market median has “reversed.”
Plan? What plan?
The OEB took a hatchet to Hydro One’s capital spending proposal, saying the company’s plan wasn’t “fully justified” and that the application lacked a “comprehensive planning process.” The OEB noted that at the time it first presented its application, the company lacked a strategic plan and didn’t formally submit a business plan until halfway through the oral hearing proceedings.
“This is a reversal of the expected planning process where a business plan leads to a Transmission System Plan (TSP) including a prioritized, optimized capital investment program,” the OEB said.
Ultimately, the OEB found many “deficiencies” in Hydro One’s capital spending plans and laid out a number of recommendations for the company’s next rate application. The OEB reduced Hydro One’s capital spending budget by $126.1 million and $122.2 million in 2017 and 2018, respectively, to $950 million and $1,000 million.
Hydro One can’t hit its own targets
The OEB also took the company to task for failing to hit its own targets on completing work on time. In its decision, the OEB said it had “concerns about Hydro One’s ability to complete the proposed capital investment program based on its historical performance.”
The OEB also told Hydro One that it would have to submit a report in its next rate application detailing its “overall performance” in hitting its own capital spending and schedule targets. The OEB noted that it doesn’t typically require this of transmission companies, but in the case of Hydro One, the regulator “needs to be assured that Hydro One’s planning process is robust and that Hydro One ensures that it has the capability to successfully execute what has been planned.”
Customer engagement evidence largely worthless
As part of its application, Hydro One made much fanfare about its “customer engagement” activities, which the company said “informed” its budgets and spending plans.
The OEB largely dismissed that argument, noting the many deficiencies in the evidence and whether that customer input led to any changes in Hydro One’s spending proposals. The OEB concluded that it “does not place significant weight on the evidence…and, therefore, will not rely on the outcome as reported by Hydro One as compelling evidence of customers support for the proposed level of capital expenditures.”
Hydro One told to share the wealth
The OEB also blocked Hydro One’s proposal to give nearly $2.6 billion of future tax savings – that are a result of Hydro One moving from a government-owned to investor-owned utility – to its shareholders, rather than its customers. The OEB ruled that only 71% of those savings should go to shareholders, with the remaining amount to be given to its customers.
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