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Regulation bogeyman not driving up electricity costs

By Michael Janigan
Special Counsel
Public Interest Advocacy Centre
Originally published by the Toronto Star on July 22, 2012.

Last year, amid sobering news concerning likely steep increases in provincial electricity bills, the Electricity Distributors Association (EDA) of Ontario, representing 76 municipal electricity distributors (EDCs) found a new bogeymen to blame for the gloomy prognosis.

Without a hint of embarrassment, the EDA suggested that overregulation and too many critics in the regulatory process were driving up costs and ratepayer bills.

Last week,the EDA’s claims came under empirical scrutiny, and they are suspect, to say the least.

Up until the start of this century, your local municipal EDC’s rates we reset by agreement with Ontario Hydro allowing for little more than the recovery of reasonable operating costs and funding for capital activities.

The restructuring of the industry by the Harris government brought with it the promise that the municipalities that owned these companies could now collect in their electricity bills rates a market-based return on a deemed equity level of 40 per cent of their capital investments in distribution assets.

With a provincial utility asset rate base of $14 billion, the municipal owners’ ability to collect 9- to 10-per-cent return was both a big prize, and a big ratepayer expense.

The catch was that to get the money in the new system, they had to justify their costs in a sophisticated regulatory system in the Ontario Energy Board(OEB). For many small EDCs, it was like a rural county theatre company opening on Broadway. As a result, the complexities of regulation and the hard realities of economies of scale winnowed down the 270 EDCs of the old era to today’s figure of 76.

Still, the rigorous testing and filing requirements of the OEB continued to baffle the smaller EDCs, causing them to spend on pricey external talent top rocess applications. With rates escalating as a result of increased return on equity, power demands and conservation costs, the EDA was anxious to find a way to blame the system for both for the higher costs and their failure to get all they asked for.

Thus, last year’s complaint was hatched that the problem was that interventions by other stakeholders were driving up costs by opposing reasonable EDC demands. Pint-sized distribution companies of less than 20,000 customers said they couldn’t afford the current system of regulation to get what they wanted, despite the fact that the OEB had largely streamlined the process by giving them a model to work from.

The auditor general, perhaps agog at the escalating costs elsewhere in the system appeared to give some credence to the “less opposition to rate applications means saving for ratepayers” argument. The OEB, as a consequence, has had to scurry around to once again justify its high standards for proof before natural gas and electric companies get to put their hand in your pocket.

An analysis of OEB data, made public by veteran consumer legal counsel Robert Warren, demolishes any reasonable basis for the electric distribution companies assertions.

It shows that the current OEB regulatory process has saved millions of dollars for Ontario ratepayers by making the EDCs justify their claims for operating and capital expenses. In a provincial electric distribution industry generating more than $3 billion in revenues, the average EDC rate application in 2010 and 2011 was reduced 3.8 per cent by the OEB, or about $28 per customer. If this result obtains across the entire set of EDCs, it means that regulation is saving Ontarians at least $114million a year. And what about those needless interventions getting in the way of EDC rate increase plans?

It turns out they have cost a little over 2 cents per customer on average, and that amounts to about a tenth of one percent of the average EDC revenue request.As recently as 1960 in Ontario, there were some 277 local telephone companies in operation. While many were made uneconomic by Bell Canada’s toll revenue sharing policy, most eventually were bought out because it did not make sense to have local utility service companies on that kind of scale subject to increasingly sophisticated regulation by the federal government.

In Ontario’s case, there can be no economic reason to countenance the current numbers of local electric distribution companies or to dumb down the level of regulation to accommodate them. The EDA needs fewer members, not fewer critics and less scrutiny.

This chart contains data on 2010 and 2011 cost of service applications by Ontario local distribution companies.

thumb_pdfRobert Warren analysis of OEB data
Download File: costawarddata_1.pdf [size: 0.09 mb]

It was compiled, from publicly-available information, by OEB staff. It has been reviewed to ensure, to the greatest extent possible, its accuracy. The spreadsheet containing the calculations on the cost-per-customer of intervenor cost awards, and on the savings-per-customer of revenue reductions, were made by the office of Robert Warren, counsel to the Consumers Council of Canada.
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In September Michael Janigan became PIAC’s Toronto-based Special Counsel for Consumer and Regulatory Affairs after serving as the consumer groups executive director for almost 20 years. Janigan is now representing PIAC clients before the Ontario Energy Board. In addition, he oversees PIAC’s ongoing work in the fields of airline transportation, competition law and general consumer protection. Mr. Janigan also continues in the capacity of chair of the Ontario government agency, the Travel Industry Council of Ontario (TICO), serving as an appointee of the Ontario Government.

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