OEB Issues Report on Renewed Regulatory Framework for Electricity Distributors

November 2012

• The Ontario Energy Board has completed work on a renewed regulatory framework for electricity distributors, with the framework taking a performance-based approach to regulation.
• To achieve the performance outcomes established for the renewed approach, the OEB has developed policies in the areas of rate-setting, distribution network planning, and measuring performance. In all three areas, there is an underlying regard for customer impacts.
• Work on the implementation of the new regulatory framework for electricity distributors has begun and is expected to take until about mid-2013. The OEB anticipates that implementation will be largely complete in time for the 2014 rate year.

In October, the Ontario Energy Board released its Report of the Board - Renewed Regulatory Framework for Electricity Distributors: A Performance-Based Approach. The issuance of the report completed a stakeholder consultation that was announced in October 2010.

The OEB indicates that its examination of the regulatory framework for electricity distribution was prompted by a number of factors: government policy, aging infrastructure, the maturity of the industry, a need to harmonize and consolidate OEB policies on planning and rate-setting, and customer concerns about rate increases. The result of the examination is described in the OEB’s report, at page 2, as a framework that is “a comprehensive performance-based approach to regulation that is based on the achievement of outcomes that ensure that Ontario’s electricity system provides value for money for customers”.

The performance outcomes that the OEB has decided are appropriate for electricity distributors fall into the following categories: customer focus, operational effectiveness, public policy responsiveness, and financial performance. To assist in achieving these outcomes, the OEB has developed policies that are described in its report. The three main policy areas are: rate-setting, planning, and measuring performance. In all cases, there is an underlying regard for customer impacts in terms of total bill impacts and value for service.

Rate-setting

Under the revamped framework, there are to be three methods for incentive ratemaking, which have been constructed to provide choices to distributors depending on their capital requirements, while ensuring continuous improvement in productivity. The basic concept behind incentive ratemaking is that after establishing a set of base rates, rates for subsequent years during the incentive term are adjusted annually according to a formula that incorporates inflation and productivity improvement factors. (Incentive rate-making is not new to electricity distributors, but the revised approach described in the OEB’s report is intended to recognize the differing needs and circumstances of distributors.)

Rate mitigation has been a policy of the OEB since 2000. At that time, the OEB established a requirement that electricity distributors consider mitigation where total bill increases for any customer group exceed 10%. The OEB provided guidance to distributors for preparing rate mitigation plans. The mitigation policy was re-examined as part of the consultation to develop the renewed framework, since one of the objectives of the exercise was to ensure that distributors manage their network investments in a way that recognizes total bill impacts on customers.

The OEB has concluded that it will maintain its current policy on rate mitigation - the 10% threshold - and will evaluate mitigation mechanisms on a case-by-case basis. However, the OEB noted that implementation of the renewed framework should make the need for mitigation of large rate increases less likely since controls to address cost increases are part of the planning and rate-setting processes. In the latter case, distributors will be choosing the rate-setting method that best suits their specific investment profile.

Planning distribution network

The OEB has concluded that an integrated approach to distribution network planning is needed. This means that all types of network investments are to be considered together; namely, investments for network renewals and expansions, connection of renewable generation facilities, and smart grid development. As well, distributors (and transmitters) will be expected to demonstrate to the OEB that they have considered regional infrastructure issues in developing their network investment proposals. The OEB’s various planning-related filing requirements are to be consolidated and harmonized to facilitate the integrated approach to planning.

The OEB has also determined that a 5-year planning timeframe is appropriate. It is seen as being a suitable period of time for distributors to set priorities and timelines for infrastructure projects. Distributors will have to file 5-year capital plans in support of their rate applications. Distributors will be required to show that their plans have considered the needs of existing and future customers and the costs to meet those needs. Predictability in rates and affordability for customers are to be key considerations.

Measuring performance

Distributors will be required to report annually on performance outcomes in the areas of customer focus, operational effectiveness, public policy responsiveness and financial performance. Standards and measures are to be developed by the OEB.

A distributor’s performance will be assessed on a year-over-year basis and also in relation to the performance of other distributors. The OEB indicates that under the renewed framework, distributors will be expected to continuously improve their understanding of the needs and expectations of their customers and delivery services, noting that this could result in lower costs for customers.   

Work on the implementation of the new regulatory framework for electricity distributors has begun and is expected to take until about mid-2013. The OEB anticipates that implementation will be largely complete in time for the 2014 rate year.   

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