Hydro One: Exploiting the Exploitable

With 25% of captive clients purchasing only 18.6% of the product sold in the market how can you increase your profits (after tax) by 135% in only 6 years, and beat your competition in gross profit by 91% in a regulated market?

For an exercise in marketing moxie and an answer to the above question one need only look at Hydro One, the Provincially owned distributor (and transmitter) of electricity in Ontario to 25% of (mainly rural) captive ratepayers. As the Sarah Vaughan song goes; “whatever Lola wants Lola gets”, except in this case it becomes whatever Laura Formosa (CEO of Hydro One) wants they get and their ratepayers pay dearly for the love that the Ontario Energy Board (OEB) has for them.

The Yearbook of Distributors for the year ended December 31, 2011 discloses the above facts and several more about Hydro One versus the other 74 municipally owned local distribution companies (LDCs) in the province. Hydro One actually pay 15.2% less for the cost of power per customer (a pass through at cost) but collect $493.00 (91%) more in gross profits and $107.00 (122%) more in after tax (payments in lieu of tax or PILT) profit per customer. The reason that extra $493.00 in Gross Profits doesn’t find its way to the bottom line is because Hydro One has much higher operations, management and administration costs (OMA) and higher amortization costs on their capital assets which are respectively $216.00 (91%) and $49.00 (73%) higher per customer.

When Hydro One apply for rate increases they inevitably use the excuse for needing higher pricing on the fact that they claim to provide service to almost all of Ontario. In their submissions to the OEB they state they provide electricity distribution to 650,000 sq km versus the 681,511 sq km encompassing the total area all distributors (including Hydro One) serve. So Hydro One claim they service 95.4% of all areas in the province that have a connection to the grid and the area is all rural!

While the above fact might be true if Hydro One were making that claim on behalf of their transmission (where they have a virtual monopoly) and distribution businesses combined, that would make sense, but this submission is only for their distribution business. In fact, putting aside their ownership of Hydro One Brampton (not included in the foregoing or below statistics or calculations) the distribution arm has many urban communities which include a number of what most would consider small cities like Belleville, Trenton, Lindsay, etc or numerous larger towns throughout Ontario. Despite that Hydro One claims all of the area they distribute to is “rural”. Many other distributors such as Oshawa Hydro, PowerStream, etc. break out the area they serve as both rural and urban. Despite the false claim by Ontario Hydro that they serve over 95% of the electrified province the OEB does not seem to challenge them on that issue and generally give them the rate increases they seek.

Yet another interesting piece of information can be gleaned with a little mathematics from the “Yearbook” relating to the percentage of “delivery” costs for the average ratepayer. For the 74 municipally owned LDCs, the delivery cost averages 20% of their ratepayers total bill (including “costs of power”) whereas the delivery cost for Hydro One ratepayers averages 36% of their ratepayers bill and they deliver an average of 580 kWh less per month. Perhaps “rural” Ontarians need to consume more power delivered by Hydro One if they want to see better economies of scale but that would mean that Hydro One would catch the ire of the OEB for not meeting their conservation targets. Is Hydro One’s conservation plan simply raise the price and they will consume less? On the latter; its not working, as the average consumption of a Hydro One customer in 2005 (1740 kWh per month) was the same as it was in 2011 (1739 kWh per month) but at that time Hydro One’s delivery costs were only 31% of their average ratepayers bill. So raising the delivery price is not achieving the desired results except for a one (1) kWh per month reduction. The OEB set the reduction target for 2011-2014 at a cumulative target that works out to 78 kWh per month for Hydro One’s average customer so we should perhaps expect to see their delivery prices rise at a faster rate over the next 2 years in the hopes they will deliver on the goal set for them.

It now appears that the Green Energy and Economy Act (Act) not only imposed giant wind turbines and acres and acres of solar panels on rural Ontario but they also got the double whammy of having all-in electricity bills that are consistently higher then the larger urban centres and likely to remain so.

So rural communities, the breadbasket of the province, not only have had their democratic voices taken away by the Act but they also pay higher prices for electricity that goes into producing the foods that people in the large urban centres consume. The next time they buy their milk, eggs or fresh produce they will hopefully blame it on the Act imposed by the Liberal Government and those Hydro One people on Bay Street in Toronto, where they whip up their rate applications to the OEB so they can impose the highest electricity costs on Ontario’s farmers.

It is time to tell Lola she won’t get what she wants and the decimation of the Liberal Party in rural Ontario in the last general election certainly conveyed part of that message.

Parker Gallant,
September 26, 2012

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