Canada: LDCs Now

For more than a decade one would be hard pressed to find a slow period in the distribution sector. As we near the end of 2011, the pace continues with several key reports released in the month of November alone. The Electricity Distributors Association issued a review outlining its vision for the sector. The Ontario Energy Board (OEB) issued five discussion papers on a renewed regulatory framework with accompanying consultant reports. And additional procedural orders and sub-issues continue in the application launched by the Canadian Distributed Antenna Systems Coalition for access to electricity distributors' poles.

ELECTRICITY DISTRIBUTORS ASSOCIATION RELEASES VISION REPORT

On November 1, 2011, the Electricity Distributors Association (EDA) released its proposed vision of Ontario's electricity sector, entitled Electricity is the Answer: The EDA's Road Map for Delivering Ontario's Electric Future (the EDA Report).

The EDA Report offers 10 recommendations geared towards evolving the sector and achieving a basket of regulatory and utility objectives.

Historical Context

The EDA Report sets the backdrop for its recommendations with a succinct historical context of Ontario's electricity sector. The history in a nutshell – the old Ontario Hydro was divided into separate companies by function, regulatory treatment has been migrating from cost of service to incentive regulation and the ubiquitous Green Energy and Economy Act, 2009 was passed.

Sector Challenges

As succinctly, the EDA Report describes the challenges now facing the wires sector:

  • Aging infrastructure is driving an immediate need for refurbishment or replacement;
  • New and emerging technologies, including a smart grid and meters and electric vehicles will require ongoing resource commitments;
  • Conservation and demand management targets established by the Ontario Energy Board (OEB) for each local distribution company (LDC);
  • Distributed generation continues to increase in prevalence posing continued integration challenges;
  • Costs associated with electricity are expected to increase by almost 50% in the next five years and by 100% in the longer term;
  • Regulation and Government policy initiatives have created both uncertainty and additional burden; and
  • Shareholder objectives are overarching requirements of which LDCs must be cognizant.

Guiding Principles

Eight guiding principles shaped the recommendations ultimately put forward by the EDA:

  1. Service and reliability levels must meet customer expectations;
  2. Mergers and acquisitions should be voluntary wherever possible, and should serve the interests of customers and shareholders;
  3. The internal structure of distribution companies should be determined by individual utilities to the extent possible;
  4. Wires utilities should be run on a commercial basis and accorded a full opportunity to earn commercial rates of return;
  5. The implementation of technologically-based changes and innovations should be achieved through a consultative process and through incentive mechanisms to the extent possible;
  6. Regulation that is free of political interference should be a commonly held objective; and
  7. Correct and transparent price signals should be implemented wherever possible.

Most in the sector would agree with most of the EDA's guiding principles. Most would also agree with the description of the sector's challenges. But all of this agreement does not always translate into agreement on the tangible end result or on the path to get there. Herein a source of controversy and passion that engulfs the electricity file with increasing regularity.

The Recommendations

The EDA's recommendations, described below, reflect the EDA's guiding principles. The recommendations also closely track regulatory and utility objectives proposed for the sector by the EDA.

  1. The relationship between the Provincial Government, the electricity industry and its regulatory agencies should be reviewed. The EDA Report proposes that an arms-length relationship is best suited to promoting the most effective decision-making within the industry, long-term efficiencies and a more predictable policy, regulatory and investment environment.
  2. Major restructuring of transmission and distribution is not warranted. An evolutionary approach characterized by increased flexibility, well designed incentives, consensual change and low transition costs is the preferred model.
  3. Regulatory restrictions which limit utilities from finding cost savings through expanded economies of scope should be relaxed to the extent possible.
  4. Utilities should continue to seek improved efficiencies through improved economies of scope and through mutually beneficial consolidations which may yield additional scale and contiguity economies.
  5. A merger of the IESO and OPA or rationalization of their respective activities should be considered.
  6. Regulation of the wires portion of the electricity industry should be reviewed. Utilities should have the option of seeking multi-year capital approvals. Consideration should also be given to streamlining the regulatory process where possible and providing utilities with broader regulatory options including expedited reviews.
  7. Utilities should be given greater opportunities to design and develop their own conservation and demand management programs, eventually assuming primary responsibility for these functions. Program fund administration and research should remain with a centralized agency such as the OPA or its successor.
  8. An accurate understanding of customer response to increasingly sophisticated technology can be of great value. Further studies and analyses of advanced metering technologies and appropriate rate designs should be conducted.
  9. Utilities should continue expanding their functional capabilities to accommodate new and emerging technologies such as smart-grid systems and distributed generation. Implementation of these technologies should be achieved on a cost-effective basis as determined by individual utilities and the regulator. Incentive based approaches should be implemented where possible.
  10. The essentiality of electricity to the economy and to society mandates the continuation of the record of excellent service and reliability. This will require continuing investment in the wires networks.

The Vision: An Evolutionary Model

The EDA then considered three alternative models for the distribution segment. Presumably, the reasons for considering the models include determining the best structure from which LDCs could see its recommendations realized.

The EDA Report recommends an evolutionary model for the distribution segment of Ontario's electricity industry. The "evolutionary model" builds on the existing structure, allowing it to evolve with suitable incentives. It contemplates the occurrence of voluntary consolidations where economies might be gained, rather than mandated consolidation regardless of beneficial effect. It contrasts with the models of the status quo and of a reduced number of distribution companies.

What is quietly refreshing about the EDA Report is precisely what it is not – it is not a grand pronouncement for destabilizing change. Rather, the EDA has provided specific recommendations for a continued but gradual evolution of the sector within the existing structure of the wires industry. The EDA is by no means suggesting glacial pace. The report cautions that delaying necessary infrastructure investment for too long can lead to a greater level of investment requirement at one time. This could cause a larger than comfortable price spike, a subject increasingly on the minds of customers. And while certain of the EDA recommendations speak to change (such as consideration of the consolidation of agencies and of appropriate rate structures to effect greater differentiation in customer response), the overall objective appears to be streamlining and stability.

The evolutionary model has dual appeal in that it recognizes the need for continued development in the industry. It is not a head in the sands wish for a return to the "olden days". Nor is it an avoidance of change and the inevitable modernization (not simply refurbishment) needs of the grid. Simultaneously, it heeds the much voiced caution that repeated wholesale change in the industry causes disruption and instability, which in turn contributes to an unstable market unattractive to investors.

However, not every party with an interest in the electricity sector may agree with all of EDA's recommendations. The industry has certainly heard various groups of stakeholders call for structural changes within the wires industry, including through consolidation. Yet others would pose the view that gaining efficiencies through economies of scope, rather than economies of scale, might also result in disruptive change depending on the extent of proposed new activities (for example, certain regulatory instruments might have to be created, modified or repealed altogether).

This all said, with the tumultuousness of the past decade and the fundamental transformation expected in the coming years, it may well be that many would welcome an evolutionary approach to change whatever form that change may take.

RENEWED REGULATORY FRAMEWORK FOR ELECTRICITY: OEB CONSULTATION INITIATED (EB-2010-0377, EB-2011-0043, EB-2011-0004, EB-2010-0378 and EB-2010-0379)

By now, LDCs are well familiar with the suite of reports issued on November 8, 2011 by the OEB. The OEB released five staff discussion papers with accompanying consultant reports on the following subjects:

  1. Distribution Network Investment Planning, accompanied by

    • "Report on a Methodology to Estimate the Bill Impacts of Electricity Distributor Network Investment Plans" and "Bill Impact Model for Incremental Investments", each prepared by Power Advisory LLC;

  2. Regulatory Framework for Regional Planning for Electricity Infrastructure;
  3. Establishment, Implementation and Promotion of a Smart Grid in Ontario;
  4. Approaches to Mitigation for Electricity Transmitters and Distributors, accompanied by

    • "Transmission and Distribution Rate Mitigation Measures for Ontario", a report prepared by Navigant Consulting Ltd.; and

  5. Defining and Measuring the Performance of Electricity Transmitters and Distributors, accompanied by

    • "Defining, Measuring and Evaluating the Performance of Ontario Electricity Networks: A concept paper", prepared by Dr. Lawrence Kaufmann and Pacific Economics Group Research.

Work on the OEB's Renewed Regulatory Framework for Electricity continues with a two-day Information Session on the staff discussion papers and consultant reports to be held on December 8 and 9, 2011. Questions and answers posed will no doubt anticipate the stakeholder conference planned for February 2012 and ensuing invitation for written comments.

On April 25, 2011, the Canadian Distributed Antenna Systems Coalition (CANDAS) filed an application with the OEB on behalf of its member companies seeking, among other things, access to electricity distributor's poles for the purpose of attaching wireless equipment, including wireless components of distributed antenna systems. The latest twist in the proceeding lies in the issue of whether a conflict of interest or a reasonable apprehension of bias arises by having a member of the Market Surveillance Panel appear as an expert witness before the OEB. The oral hearing on this matter will begin December 12, 2011.

BEYOND THE WIRES ...

ONTARIO ANNOUNCES FIT REVIEW – Ontario has launched its scheduled review of the Feed-In Tariff (FIT) Program. The FIT Program, which launched in 2009, is the most comprehensive program of its kind in North America. The review will examine program rules and pricing to ensure the program remains successful and sustainable. However, more than 20,000 applications have been submitted under the FIT Program causing some speculation that price will be the key consideration. The consultation period launched on October 31 and will run until December 14, 2011. Deputy Minister Fareed Amin has been appointed to lead the review. For more information, visit http://www.energy.gov.on.ca/en/fit-and-microfit-program/2-year-fit-review.

CANADA REVENUE AGENCY TAKES HARDER LINE ON UNDER-REPORTED TAXABLE BENEFITS – The Canada Revenue Agency is increasing the level of audit scrutiny on taxable benefits received by employees. While the dollar amounts on individual items for each employee may be relatively small, the aggregate amounts for all employees of a business can be quite substantial, and the CRA is becoming increasingly active in auditing businesses to ensure that all benefits enjoyed by an employee which might potentially fall within the tax net are taxed accordingly. For more information, visit http://www.blg.com/en/home/publications/Documents/publication_2005.pdf.

About BLG

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