Hydro One’s expansion plans

Hydro One’s recent program to acquire some of Ontario’s smaller local distribution companies should be a concern to all ratepayers: it will surely raise delivery rates even more.
The rumour floating around the publicly owned energy sector is that Hydro One has the blessing of its Board to spend $1 billion to acquire local distribution companies (LDCs).  That rumour and Hydro One’s actions follow on the heels of the “Distribution Sector Panel Review” presented to Chris Bentley in December 2012.
“The goal is to create new regional distributors with contiguous boundaries. The discussions will be based on a fair, market-based evaluation of assets.”
 And, in respect to Hydro One, the panel stated:
“Hydro One should put all of the distribution assets of its subsidiaries on the table in order to enable transactions that can result in the shoulder-to-shoulder consolidation of the industry as envisioned in Chapter 4.71.”
Now, Hydro One’s attempts to acquire Norfolk Power, Haldimand County Hydro Inc., Midland Power Utility Corporation and Oshawa Power & Utility Corp., will result in the opposite of what the Ontario Distribution Sector Review Panel envisaged:
“…it is expected that cost savings of $1.2 billion at net present value would be achieved across the sector over the first ten years for the benefit of customers and shareholders.”
With the foregoing “goals” in mind and the rumoured $1 billion allotted to Hydro One to acquire LDCs, I asked a spokesperson at Hydro One these questions.
1. Can you either confirm or deny that Hydro One’s Board of Directors has given direction to the executive of Hydro One to spend up to $1 billion on the acquisition of LDCs?
2.a). If the aforementioned answer is “yes” can you confirm or deny if the Ministry of Energy has blessed the Board’s direction or if they were instrumental in suggesting the acquisition(s) to the Board? b). If the answer to the above is “No” can you confirm or deny that Hydro’s One’s executive approached the Ministry with the recommendation to agree to the acquisitions?
3. a).Why is Hydro One offering above market prices for these LDCs instead of suggesting local councils ask for competing bids?
 b). How will Hydro One deal with rate applications as these acquisitions will obviously have an effect on your capital (creating goodwill), reduce revenues (rate freezes for five years for the acquired LDCs) which will impact all other ratepayers negatively?
4. Why has Hydro One ignored the Distribution Panel’s recommendations which suggested that you were already large enough and that mergers/acquisitions should be contiguous? e.g., OPUC appears to be situated between Veridian and Whitby Hydro which would seem to offer a much better opportunity to reduce costs and reflect itself in the ‘delivery’ line of our bills.
Relevant parts of the response follow [bolded for emphasis]:
“In addition, the matter of the Norfolk acquisition is currently before the Ontario Energy Board. As a matter of policy, we do not comment on decisions before the Board.
In its report, the Panel indicated there are numerous advantages for customers in being served by larger utilities as they could benefit from their lower operations, maintenance and administration costs, greater capacity to introduce new technology and more efficient service.
Further, we believe that consolidation would result in immediate downward pressure on overall electricity costs, by reducing the overall cost to provide the service and by reducing the associated overhead costs to regulate and manage the distribution sector in Ontario.
On this basis, we were able to put forward a commercial bid for Norfolk Power.”
No answers, just homilies!
In 2012 Hydro One generated the second highest profit per customer of all LDCs and coincidently has one of the highest levels of costs for operations, maintenance and administration (OMA).  The latter has increased at an average of 38% annually since 2005, and cost Hydro One’s customers an additional $320 every year on the delivery line of their hydro bills.
So let’s have a look at the bids that Hydro One have submitted, along with the rumoured bids for (OPUC) Oshawa Power & Utility Company and Midland Power.  The following chart highlights the four they are chasing that will use about 25% of the rumoured $1 billion and create approximately $160million of goodwill on Hydro One’s books.
HYDRO ONE ACQUISITIONS IN PROGRESS
Source: OEB yearbook 2012
in $000s
Offers made/contemplated Haldimand Norfolk Oshawa1 Midland3
Net worth 34,470 29,437 37,742 9,646
Net income 782 1,472 3,515 490
Revenue (net power purchases) 14,470 11,850 19,265 4,158
No. of customers 21,158 19,070 53,361 6,975
OMA 2 454.76 333.43 210.65 347.28
Purchase price/offer 66,000 62,000 120,000 18,750
$ per customer 2,930.00 3,467.00 2,249.00 2,688.00
Times Book Value 1.8XBook 2.3XBook 3.2XBook 1.9XBook
Times Net Revenue 4.2XNetRev 2.3XNetRev 6.2XNetRev 4.5XNetRev
         
  1. No firm offer in public domain yet; estimates based on blend of above
  2. Hydro One’s OMA for 2012 was $439.77
  3. No firm offer in public domain yet and estimates based on blend of above

 

Energy Minister Bob Chiarelli gave a speech at the Electricity Distributors Association’s (EDA) gala dinner last March, and made the following remarks, reported in an article in the Toronto Sun:
“Let me say very clearly that our government will not legislate forced consolidation.”
“The panel had recommended merging the province’s 73 LDCs into eight to 12 regional bodies.
But the Kathleen Wynne government has promised municipalities a greater voice in regional development.”
and
“You know your own companies and customers. You’re in the best position to consider the panel’s recommendations in the context of your own operations,” Chiarelli said. “So we look to you to tell us about the incentives and changes you would like to see in the sector to create efficiencies, deliver savings to ratepayers and position your companies to meet the challenges that are to come.”
Based on Hydro One’s rush to acquire these four LDCs and perhaps many more on their “to do” list for the coming year, it would appear that once again, the Minister is doing the opposite of what he said just months before.
How does the purchase of taxpayer-owned municipal LDCs  by a taxpayer-owned provincial monopoly at prices exceeding either common sense or sane investment criteria, provide benefits to ratepayers?   It will put money in the hands of some municipal councils that will allow them to go on spending sprees or claim they won’t raise local mill rates but the truth is, rate-paying residents will ultimately be hit with huge spikes in their delivery charges for electricity.  And in the interim, the rest of Hydro One’s ratepayers will pick up the tab for the money borrowed to finance the transactions.
Hydro One’s ratepayers should pray the OEB rules against Hydro One acquisition plans. But don’t count on it, as the OEB receives directions from the Minister of Energy!
©Parker Gallant,
December 31, 2013
 The opinions expressed here are those of the author and do not necessarily represent Wind Concerns Ontario policy.