Payment amounts for prescribed assets

1
Payment amounts for prescribed assets

• Presentation to Ontario Energy Board
• September 15, 2006

2
Summary

• Prescribed assets are heritage assets
• Essentially risk-free to operator
• Support OEB staff proposal
• Modified cost of service approach
• Reg. 53/05 as starting point
• Shareholder has established 5 percent return on
  equity
• Need to consider role and appropriateness of
  incentives
• Current incentives embedded in Reg. 53/05
• Future incentives

3
Regulatory Framework

• Position
• Support the Modified Cost-of-Service (CoS)
  process recommended by Board Staff.
• Examine possible role of incentives focused on
  efficiency improvements incentives should drive
  cost minimization.
• Rationale
• Provides continuity in pricing
• Provides more than adequate returns to OPG
• Based on procedures that are very familiar to the
  Board
• Provides an initial set of data that can act as a
  reference point
• Can be implemented relatively quickly and at
  reasonable cost
• Can be amended to include incentives as deemed
  appropriate

4
Return to Capital

• Position
• ROE established in Reg. 53/05 (5 percent) more
  than adequate
• Adopt model recommended by the ECSTF namely the
  Heritage Asset model described as Power provided
  from existing Government-owned assets which is
  sold to ratepayers at a price that reflects
  historical costs of the associated assets.
• Rationale
• Based on approaches used in B.C. and Quebec
• In those provinces power at cost conveyed an
  advantage since cost of hydro less than
  replacement cost.
• In Ontario the historical cost of the assets is
  considerably higher than their market value.

5
Return to Capital

• Rationale (continued)
• OEFC has inherited the responsibility for meeting
  the cost of these assets.
• Consumers ultimately pay all of these costs in
  prices and charges that cover
• Interest paid to OEFC by OPG and the Province
• PILs paid by OPG, Hydro One and the LDCs to the
  OEFC
• The Debt Reduction Charge
• Dedicated income paid by the Province to the OEFC
• Risks faced by the Province as owner of OPG are
  not comparable to commercial risk
• The government has indicated that all costs of
  providing electricity will be covered by
  ratepayers and not by taxpayers and it has the
  authority to ensure this is the case e.g. the
  DRC, special charge for NUG assets
• The creation of deferral and variance accounts
  under Section 5.(1) of Regulation 53/05 is
  another example of the governments intention to
  shift risk to consumers.

6
Rate Determination Process

• Position
• Regulation 53/05 establishes shareholder
  expectations about the basis for rates (5 percent
  ROE) and serves to protect the interests of
  consumers
• Future rate adjustments should be based on
  appropriate benchmarking considering appropriate
  metrics, comparators and against non-prescribed
  and non-OPG assets
• Rationale
• Current prices were based on costs submitted by
  OPG and reviewed by the Ministries of Energy and
  Finance and by an outside advisor.
• This cost base can provide a starting point and
  should be made available to interested parties
• Costs should be presented by asset class defined
  in Regulation 53/05 with a separate allocation of
  common assets.

7
Incentives

• Position
• The use of incentive regulation should be a long
  term goal and should focus on improving
  operational efficiency incentives should drive
  cost minimization.
• Rationale
• The Board staff discussion paper points out that
  CoS regulation provides the perverse incentive to
  exaggerate costs.
• Incentives should be designed to counteract this
  tendency by providing the applicant with a share
  in cost saving or by encouraging cost savings to
  avoid a reduction in ROE (or both).
• Incentives designed to encourage increased
  revenues are generally unnecessary and those in
  place should be reviewed for effectiveness.
• The Board should initially concentrate on the
  establishment of benchmarks and on the types of
  incentives that might be effective rather than on
  the correct formula to be used.

8
Questions

• Adam White Larry Murphy
• awhite_at_ampco.org l.jmurphy_at_cogeco.ca
• 416-260-0225 905-639-7233