In a recent Decision, the Ontario Energy Board approved a
"Custom IR" (incentive regulation) ratemaking model for
Toronto Hydro. This is the culmination of a lengthy proceeding to
set Toronto Hydro's rates for the years 2015 to 2019. The Decision is important, not only because it
sets rates for the largest local distributor in Ontario (with more
than 700,000 customers), but also because it sets out some of the
OEB's expectations for future "Custom IR" rate
The "Custom IR" rate model was offered as an option in
the OEB's 2012 Renewed Regulatory Framework for Electricity (RRFE Report). It is meant to provide
distributors that have large or highly variable capital
requirements with a ratemaking model that accommodates their
circumstances. There is no prescribed form of Custom IR model
– instead, it is open to the applicant to propose a
ratemaking model that addresses its operational requirements over a
five-year term. To date, Custom IR rate models have been approved
for Enbridge Gas Distribution, Horizon Utilities, Hydro Ottawa and Oshawa PUC. Hydro One Networks'
application for a Custom IR model was denied in a March 2015 Decision.
The Toronto Hydro Decision confirms that the OEB will not
concern itself with whether an applicant has chosen the best rate
model for its circumstances. There is no threshold test as to
whether or not the applicant "qualifies" for the Custom
IR model. Instead, the OEB will look at whether the applicant's
proposal achieves the RRFE policy objectives. If the form of Custom
IR model proposed by the applicant responds to customer service
needs and other positive outcomes for customers, and also incents
continuous performance improvement by the distributor, then it will
The OEB provided a number of comments within the Toronto Hydro
Decision that will be informative to
distributors seeking approval of future Custom IR applications.
These include the following:
The OEB expects distributors to develop Custom IR plans based
on informed input from customers about the service the distributor
provides. This will involve ongoing efforts by the distributor to
engage with its customers. However, the Decision contains little guidance about how
this is to be effected, nor about what evidence will be needed to
show how customer engagement was achieved.
There is no requirement to file a five-year OM&A budget as
part of the Custom IR application, since that would result in a
five-year cost of service model. That said, the OEB will require
detailed and compelling evidence to explain why the base year
OM&A budget within the Custom IR term should be different
(higher) than the historic spending levels.
Where a "stretch factor" is to be included in a
Custom IR model's annual adjustment mechanism (price cap or
revenue cap), that "stretch factor" will apply to both
capital and OM&A budgets. Interestingly, the OEB did not agree
to any adjustment to Toronto Hydro's "stretch factor"
to account for higher costs of operations in an urban setting.
Where a distributor seeks approval of extraordinary capital
spending requirements, the burden of proof is very high. Although
the OEB found that Toronto Hydro had provided a distribution system
plan (DSP) that set out a comprehensive approach to future capital
spending requirements, and although the OEB generally accepted the
contents of the DSP, the regulator nonetheless decided to reduce
Toronto Hydro's capital budget by 10%. There were two main
reasons for this. First, the OEB noted that the DSP focused on the
age of assets, rather than their condition, and found that this
focus could lead to premature replacements of assets that are at
the end of their useful life, but are nonetheless still functional.
Second, the OEB was not convinced that Toronto Hydro has included
sufficient productivity savings or targets in the capital
Toronto Hydro's new 2016 rates are to be implemented
beginning March 1, 2016. At that time, Toronto Hydro will also
begin collecting the shortfall between the newly approved rates
versus the interim rates that have been charged from May 1, 2015 to
February 29, 2016. We will know the impact/magnitude of these new
rates once Toronto Hydro files its draft Rate Orders in late
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Canada is a constitutional monarchy, a parliamentary democracy and a federation comprised of ten provinces and three territories. Canada's judiciary is independent of the legislative and executive branches of Government.
The Government of Alberta recently announced a number of policy changes that will impact the Alberta Electricity Market, composed of its generators, transmitters, distributors, retailers, electricity consumers and wholesale electricity market.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).