Hydro One: Ontario’s biggest and most expensive local distribution company
As another year is almost at an end and many of Southern Ontario’s local distribution companies (LDCS) slowly bring their customers relief from being without electricity for several days due to outages caused by freezing rain damage to local grids, it is perhaps a good time to have a look at the largest LDC, Hydro One.
A few weeks ago, the Auditor General released her report which said a lot about waste at Ontario Power Generation, or OPG. Time spent on Hydro One would have produced even more evidence of waste. Measuring value for dollars, the results from an audit of Hydro One would have disclosed their relative costs of distributing electricity have risen at an alarming rate compared to the cost of power generated by OPG.
As one example, Operations, management and administration (OMA), based on filings at the Ontario Energy Board’s (OEB) Yearbook of Distributors, per customer, have gone from $120.66 in 2005 to $439.77 in 2012—an increase of 264% in seven years, or almost 38% a year. Administration costs alone represent 40% ($215 million) of their annual OMA.
Since 2005, Hydro One’s employee levels have increased from 4,189 to 5,811 (up 39%) while their client base has only increased 5% (58,000). OMA costs added $390 million annually to ratepayers’ bills on the “delivery” line of hydro bills. That’s a cost of $240,000 for each additional employee and an annual cost to the average ratepayer of $320.
Hydro One’s pension benefits are as good as those at OPG with similar contribution rates. The difference is that OPG is shrinking while Hydro One is growing! The growth in income by Hydro One has generated dividends to the Provincial Treasury of $2 billion in the past eight years and another $188 million so far in 2013. Hydro One, the LCBO and OLG are the government’s corporatecash cows; the latter two are “sin” related whereas Hydro One delivers a utility.
Here are some facts that the AG may have turned up in an audit:
§ Distribution costs of the average Hydro One ratepayer represent 38% of their electricity bill, and
§ Hydro One’s share capital of $3.3 billion is all allocated to their transmission business and none to their distribution business, whereas
§ All other local distribution companies owned by municipalities have a large percentage of their total equity in “share capital,” yet
§ Hydro One generated an ROE (Return on Equity) of 12.5% despite the OEB setting a maximum of 9.12% for all LDCs in 2012.
§ Hydro One, with only 22.9% of ratepayers as customers, generated 44.6% ($258 million) of all net income (after Payments In Lieu of Taxes) of the 73 LDCs operating in Ontario in 2012.
§ Hydro One claims in its OEB filings it has zero urban customers yet services many smaller Ontario cities and towns (e.g., Owen Sound, Trenton, Picton, etc.) of a size that exceed other LDCs who claim both urban and rural ratepayers.
§ Hydro One’s revenue (net of power purchases) increased by $422 million from 2005 for an increase of 50% or over 7% annually whereas all of the other 72 LDCs with 77.1% of the ratepayers as clients saw their revenue increase by $408 million or 25% or about 3.6% annually.
§ Hydro One’s “regulatory assets” at the end of 2012 included Pension Benefits of $1,515 million, an increase of $737 million or 95% from 2011, coincidentally the same amount as their pension fund shortfall was as reported by DBRS earlier in 2013.
§ The “regulatory” asset classification also noted Hydro One capitalized another $302 million in other “benefits” up from $123 million or 145% from the prior year.
§ Hydro One’s pension retirement benefits were (until recently; it’s now five years) based on the highest three years of earnings and include an index to inflation and
§ Hydro One in 2005 paid “payments in lieu of taxes” (PIL) of $72 million on pre-PILincome of $168 million for a tax rate of 43% but paid only $44 million in 2012 on pre-PIL earnings of $301 million a 14.5% tax rate. Note: PIL payments are directed to repay the “Stranded Debt” held by the Ontario Electricity Financial Corp.
§ Since 2005 the number of employees at Hydro One has jumped by 1,622 or 39%, but their client base has only increased by 58,000 ratepayers (5%) leading to the conclusion that many of these employees are needed to hook up FIT and MicroFIT generators to the grid.
§ Hydro One’s net income per customer in 2012 was the second highest at $211.70, exceeded only by Algoma Power Inc. (11,609 customers) granted a large increase to catch up for prior years losses.
§ Hydro One installed “smart meters” at an average cost of $700.54 per meter which is approximately $400-500 more per meter than the average costs of all other LDCs.
§ Many of Hydro One’s smart meters have required replacement due to a failure to “communicate” (full disclosure – including the author of this article) resulting in some shocking bills for many of their ratepayers. This resulted in the “new” President of Hydro One apologizing to one ratepayer and dealing with negative press where bills have suddenly arrived in thousands of dollars due to faulty meter readings. Hydro One still has 120,000 customers who do not have “smart meters” installed.
§ Hydro One’s payment of dividends to the Province in 2012 was $375 million yielding the Province an 11.3% return on their original investment of $3.3 billion; in the U.S., publicly traded electricity utilities yield a much smaller 4% return.
§ In the U.S., if a publicly traded utility loses revenue because their clients conserve, they are unable to apply for a rate increase but in Ontario Hydro One and other LDCs apply for and are granted rate increases for lost revenue.
§ In 2012 Hydro One handed out grants totaling $1.5 million to 2,628 customers under the Low-income Energy Assistance Program (LEAP) while the top five “Named Executive Officers” were paid $2.8 million or $559,200 per executive. Executive compensation to the “top 5” exceeded grants to “energy poverty” customers by 86%.
Now, Hydro One, with one of the highest OMA costs per LDC, and the second highest profit per customer, is suddenly trying to gobble up smaller local distribution companies at above market prices, almost bribing local councils? News reports indicate Hydro One is in the process of acquiring Norfolk Power, Haldimand County Hydro Inc., and Midland Power Utility Corporation. It is rumoured to be negotiating to purchase Oshawa Power & Utility Corp. owned by the City of Oshawa.
The obvious question is WHY Hydro One is so determined to expand, when they are the highest cost distributor—we’ll visit that question in the future. For now we should simply hope the next audit on the AG’s list includes Hydro One. As a New Year’s Resolution let us hope the Ontario Energy Board starts to consider the role Hydro One is playing in driving up distribution costs for all ratepayers, when considering future rate increases.
December 30, 2013
P.S. Stay tuned for more on Hydro One’s attempted acquisitions.
The opinions expressed here are those of the author and do not necessarily represent Wind Concerns Ontario policy.