Will Hydro One rates be affected with broadened ownership?

August 2015

• The Ontario Government’s plans to sell up to 60% of Hydro One have been met with strong opposition from various stakeholders.
• One of the main criticisms is that with a portion of Hydro One going public the utility’s rates will inevitably increase, exacerbating the existing upward pressure on rates.
• Hydro One is currently regulated by the Ontario Energy Board. The OEB’s responsibilities of consumer protection and approving rates that are fair and reasonable will continue to apply to a publicly-traded Hydro One.

In mid-April, the Ontario Government announced its plans to sell up to 60% of Hydro One, starting with an initial public offering (IPO) of about 15%. Other public offerings are to follow in stages. The government says that selling shares in Hydro One will serve to support investments in important transit and transportation infrastructure projects in the province.

The announcement of the IPO was met immediately with strong opposition from various stakeholders, and the opposition continues. One of the main criticisms is that with a portion of Hydro One going public the utility’s rates will inevitably increase, exacerbating the existing upward pressure on rates. This criticism seems to be based on two related notions. The first is that the new owners will only be interested in maximizing profit by jacking up rates as much as they can, while compromising customer service and operational performance. The second line of thinking, which feeds into the first, is that oversight of the utility will be severely weakened and the outcome will be higher rates and poorer service.

The key point lost in this criticism is that whether investor-owned or government-owned (by the province or a municipality), electricity utilities in Ontario are regulated by the Ontario Energy Board (OEB). And regardless of ownership, the OEB’s roles and responsibilities include consumer protection, reviewing and approving distribution and transmission rates, and licensing distribution and transmission companies.

The OEB requires rate-regulated utilities to submit comprehensive rate applications for thorough review on a regular basis. Those applications are public and so are subject to review not only by the OEB but also by groups representing a broad cross-section of consumers and other interests such as environmental concerns. The OEB has final approval. The objective of its decisions is to ensure the utility costs being recovered in rates are fair and reasonable and will ensure a level of service that meets the needs of consumers reliably and safely. This objective is supported by extensive OEB requirements regarding record keeping, reporting and service quality standards with the regulator having the authority to take action in cases of non-compliance.

Hydro One is currently a regulated utility – both the transmission and distribution sides of its business. That will not change with a change in the ownership structure of the company. All OEB regulatory requirements will continue to apply to a publicly-traded Hydro One. Therefore, there should be no additional upward pressure on rates caused solely by a new ownership arrangement. In fact, the opposite may well occur. As with any company with private interests, the ‘new’ Hydro One will likely look for efficiencies and improvements in its operations, the benefits of which will ultimately go to ratepayers through rates that are lower than what they would have otherwise been.

Regulating private sector utilities is not a new activity for the OEB. It has considerable experience in that area. The two major natural gas utilities in Ontario fall into this category, with no evidence that rates and services have been compromised as a result of private ownership or a lack of OEB oversight. There are also electricity companies that are not government-owned and that are subject to the same OEB scrutiny as any other utility. FortisOntario Inc. is an electric utility that is a wholly-owned subsidiary of Fortis Inc., an international electric holding company headquartered in Newfoundland. FortisOntario owns and operates a number of electricity distributors that are regulated by the OEB.

Although the OEB’s existing mandate and regulatory regime would continue to ensure oversight of Hydro One after the IPO, the Ontario Government has taken steps designed to strengthen the OEB’s powers to protect electricity consumers.

In early June, Bill 112 – Strengthening Consumer Protection and Electricity System Oversight Act was introduced and will be addressed in the fall session of the legislature. Certain of the measures that are included in the bill and that will apply to Hydro One and others are:

• the OEB is to establish one or more processes that will allow the interests of consumers to be represented in regulatory proceedings through advocacy or any other means of representation provided for by the OEB;
• head offices for electricity distributors must be located in Ontario and substantially all of the strategic decision-making, corporate planning and finance, and other executive functions are to be carried out in Ontario;
• the threshold for obtaining OEB approval to acquire voting shares of a distributor or transmitter is reduced to 10% from 20%;
• the OEB’s emergency powers are to be expanded to include transmitters as well as distributors and enable the OEB to exercise those powers when reliability and continuity of service are considered to be in jeopardy; and
• the penalties for non-compliance with OEB rules and directions are to be increased substantially.

In addition to these measures, the Ontario Government is implementing a number of others that are specific to Hydro One, are complementary to existing oversight policies and practices, and so are designed to ensure Hydro One’s rates and services are delivered reliably, efficiently and at reasonable rates.

Setting Rates for Ontario Electricity Distributors: The Basics Read more »