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A city tried to sell its power distribution to Hydro One. Regulators turned it down over potential 'harm' to customers

The Ontario Energy Board says the deal did not meet the 'do-no-harm' test
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ORILLIA — The Ontario Energy Board has rejected the proposed sale of Orillia Power’s distribution assets to Hydro One – the cornerstone of a large, multi-faceted, multi-million-dollar deal the two sides have been working on since 2015.

The negotiations between the City of Orillia and Hydro One formally started in September 2015. In August 2016, a final deal was reached; that deal was submitted to the OEB for approval in September 2016.

Yesterday, the OEB dropped the bombshell that the deal was off.

“It’s a decision we weren’t expecting that’s for sure,” Orillia Mayor Steve Clarke told OrilliaMatters Thursday evening. “Yes, I was surprised.”

OrilliaMatters has obtained the 23-page decision handed down yesterday by the OEB. Here is the rationale behind their decision to nix the deal. This is verbatim from their decision:

“One of the key considerations in the ‘no harm’ test is protecting customers with respect to the prices they pay for electricity service. Although The Handbook to Electricity Distributor and Transmitter Consolidations (Handbook) states that “rate setting” following a consolidation will not be considered as part of a section 86 application, that does not mean the OEB will not consider the costs that acquired customers will have to pay following an acquisition (both in the short term and the long term). Indeed the Handbook is clear that the underlying cost structures and the rate implications of those cost structures will be a key consideration.

As stated in the Handbook and confirmed in decisions made on previous Hydro One acquisitions18, the OEB does not consider temporary rate decreases to be on their own demonstrative of no harm as they are not supported by, or reflective of the underlying cost structures of the entities involved and may not be sustainable or beneficial in the long term.

The OEB’s primary concern is that there is a reasonable expectation that underlying cost structures for the acquired utility are no higher than they would have been had the consolidation not occurred. Although the OEB accepts that the acquisition will lead to some savings on account of eliminating redundancies, that does not necessarily mean that Hydro One’s overall cost structure to serve Orillia’s customers will be no higher than Orillia’s underlying cost structure would have been absent the proposed acquisition.

The experience of the three acquired utilities in Hydro One’s current distribution rates case is informative. In the MAADs proceedings in which Hydro One acquired these utilities, Hydro One pointed to savings that would be realized through the acquisition. Although these savings may well have occurred, they do not appear to have resulted in overall cost structures (and therefore rates) for customers of the acquired utilities that are no higher than they would have been, once the deferral period ended and their rates were adjusted to account for Hydro One’s overall costs to serve them. Material filed in the Hydro One current distribution rates case shows that some rate classes are expected to experience significant and material increases.

While the OEB has not approved these requested rates, this panel takes notice of the proposed rate increases which Hydro One states are reflective of the costs to service the acquired customers, and are inclusive of the “savings” that Hydro One states were realized.

The OEB recognizes that Orillia was not part of Hydro One’s distribution rates filing, and that it is not certain that its customers’ experiences would be the same. Because of this uncertainty, the OEB provided Hydro One the opportunity to file further evidence on what it expects the overall cost structure to be following the deferral period and to explain the impact on Orillia’s customers. Hydro One did not file further evidence. Hydro One’s submissions simply restated its expectation that based on the projected Hydro One cost savings forecast for the 10 year period following the transaction, the overall cost structures to serve the Orillia area will be lower following the deferred rebasing period in comparison to the status quo. The OEB is of the view that it would have been reasonable to see a forecast of costs to service Orillia customers beyond the ten year period and an explanation of the general methodology of how costs would be allocated to Orillia ratepayers after the deferral period. Hydro One takes the position that this information is not known. The OEB recognizes that any forecast of cost structures and cost allocation 10 years out would include various assumptions and could not be expected to be 100% accurate. However, the OEB has highlighted its concern and its need to better understand the implications of how Orillia customers will be impacted by the consolidation beyond the ten year period. In the absence of information to address that OEB concern, the OEB cannot reach the conclusion that there will be no harm.

As discussed above, the OEB is not satisfied that a list of forecast cost savings from the acquisition automatically results in overall cost structures for the customers of the acquired utility that are no higher than they would be without the consolidation. Hydro One has failed to make the case that the OEB can be assured that the underlying cost structures would be no greater than they would have been absent the acquisition.

The OEB is therefore not satisfied that the no harm test has been met, and on this basis the application is denied.

CONCLUSION:
"OEB is not satisfied that the no harm test has been met. Consequently, the additional related approval requests made as part of the application are also denied.

The OEB finds that the applicants bear the onus of satisfying the OEB that there will be no harm.

In reviewing a proposed consolidation transaction, the OEB examines both the short-term and the long- term effect of the consolidation on customers.

The OEB has determined that it is reasonable to expect that the underlying cost structures to serve acquired customers following a proposed consolidation will be no higher than they otherwise would have been.

It is the OEB’s expectation that future rates paid by the acquired customers will be based on the same cost structures used to project the future cost savings in support of this application.

Hydro One has not demonstrated that it is reasonable to expect that the underlying cost structures to serve the customers of Orillia Power will be no higher than they otherwise would have been, nor that they will underpin future rates paid by these customers.”

Clarke has said the city will explore its options.

“From my perspective, it’s fair to say, it’s not over,” he said. “This council ran on economic development and job creation and I believe it’s a tremendous opportunity we don’t want to miss.”

This is the original press release from the city of Orillia that outlines terms of the deal that the OEB has quashed:

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“The City of Orillia … has reached agreements with Hydro One Limited (Hydro One) to construct a state-of-the-art Advanced Technology Hub, which includes a backup Ontario grid control centre, a provincial warehouse and a regional operations centre in Orillia’s Horne Business Park and to sell the distribution assets of the Orillia Power Corporation (OPC) to Hydro One.

The City of Orillia is retaining complete ownership of the Orillia Power Generation Corporation, the jewel of OPC, whose rich heritage, innovation and success in generating electricity will continue to thrive.

“This is a tremendous day in the City of Orillia’s history. Hydro One’s Advanced Technology Hub will bring approximately $200 to $300 million in near-term economic impact, which is one of the largest ever investments in Orillia’s history,” said Mayor Steve Clarke. “The new facilities will be an industry-leading hub in North America that will create a number of high quality jobs in Orillia and contribute significant annual tax assessment to the City.”

“I’m very proud of the fact that Council and City staff were able to meet every one of the negotiating principles that were widely discussed with the public throughout this entire process. By delivering significant economic development potential, consumer price stability, preserving all Orillia Power Distribution jobs, retaining ownership of Orillia Power Generation, sustained philanthropy, and significant financial value and returns for the City, we have negotiated a deal that serves the best interests of Orillia long-term,” Mayor Clarke continued.

Highlights:

Advanced Technology Hub: With regulatory approvals, Hydro One plans to construct three new facilities on 36 acres of land within the Horne Business Park:

  • A back-up Ontario Grid Control Centre/Integrated Systems Operation Centre (ISOC)
  • Provincial Warehouse
  • Regional Operations Centre

Orillia Power Distribution Corporation (OPDC) purchased: $26.35 million cash purchase by Hydro One, which is more than twice the current book value of OPDC, and assumption of OPDC liabilities.

Horne Business Park land sale: Upon signing of the deal, Hydro One will purchase 16.41 acres of the land required for the ISOC portion of the development for approximately $3 million – validated as fair market value by a third-party valuator.

Orillia consumers protected: Distribution charges will be reduced by 1 per cent and guaranteed for five years. The distribution portion of a utility bill accounts for approximately 20 per cent of the overall bill and rates will continue to be regulated by the Ontario Energy Board (OEB).

OPDC jobs protected: All OPDC employees are moving to Hydro One with comparable pay, benefits and pension, along with a one-year location guarantee.

Orillia Power Generation Corporation: City retains complete ownership, along with annual dividend which accounts for the majority of the overall OPC annual dividend.

Orillia Legacy Fund: City to deposit all proceeds from the deal to the Fund, which will likely generate investment income in excess of the existing OPDC portion of the annual dividend.

Philanthropic investment: Hydro One will provide $250,000 towards a co-branded community project and has corporate programs in place to continue philanthropic support in the Orillia community.

“The OPC Board of Directors voted unanimously in favour of finalizing this deal with Hydro One because we recognize the very substantial economic development opportunity it presents to Orillia and we are confident that the best interests of all our employees and customers are being protected,” said Greg Gee, Chair of the OPC Board.

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— OrilliaMatters.com




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