On March 31 Hydro One Networks Inc. filed a Distribution Rate Application for its 2018-2022 revenue requirement and rates, using the Ontario Energy Board’s custom rate-setting methodology. If successful, this would be the first time Hydro One has been approved for a five year rate. The Company anticipated filing an update to its application on June 7.
The rates revenue requirement for 2018 is $1,452.1 million. Later year revenue requirements will be largely determined by formulaic adjustments contained in the proposed Custom IR rate model. The requested 2018 revenue requirement reflects an increase of 3.5% over OEB approved levels for 2017. Hydro One notes that “The increase is largely attributable to rate base growth including associated increases in depreciation, return on capital and income tax expenses.” In the executive summary of the application, Hydro One said the proposal is based on the expectation of a reduced overall load forecast, despite the growing rate base. Consequently, a one-time load forecast adjustment in 2018 results in an average overall rate increase of 6.5 %. The average annual rate increase over the 5-year term is 3.7%.
Hydro One acknowledges that the investment plan underlying the application is cautious: “It is designed to limit rate impacts while still addressing minimum system needs by focusing investment on deteriorated infrastructure and by managing and controlling costs through investments that maintain reliability, but are insufficient to improve the overall reliability of the aging distribution system.” It also proposes the creation of 6 new customer classes designed to accommodate customers from several newly acquired local distribution utilities.
The proposed Revenue Cap IR model has several advantages, Hydro One notes, over the Price Cap IR model, including that it:
• “Permits the continued transition to fully-fixed rates for residential customers (EB-1 2014-0416)”;
• “Provides adequate flexibility to reset customer rates should the OEB proceed with the elimination of the seasonal rate class (EB-2013/EB-2016-0315)”;
• “Provides adequate flexibility to reset customer rates as the OEB advances its initiative relating to rate design for commercial and industrial electricity customers (EB-2015-0043)”; and
• “Allows Hydro One to update its billing determinants and cost of capital parameters in 2021 to reflect estimated changes in the industry and load forecast over the Term, consistent with its proposal to integrate the Acquired Utilities.”
Prior to preparing its application, Hydro One conducted a formal customer engagement initiative in the summer of 2016, whereby it sought input from its customers, including distribution-connected generators, on their needs and preferences. Hydro One points out that its proposed custom IR components “contain both OEB-approved components and other mechanisms that are designed to align the utility’s and the customers’ interests.” One such mechanism is a proposed Earnings Sharing Mechanism whereby Hydro One proposes to share equally with its customers any overearnings that exceed a 1% ‘deadband’ above the OEB-allowed return on equity. The Company also offers to return revenues to customers in the event that it falls short of its capital program commitments.
Hydro One serves approximately 1.3 million distribution customers across a vast service area that is 99% rural and through a system that is largely radial in design.
For details of the rate application, readers may visit www.hydroone.com/RegulatoryAffairs/Pages/DxRates.aspx.