Payment amounts for prescribed assets

							Payment amounts for prescribed assets
Presentation to Ontario Energy Board
September 15, 2006
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




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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


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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.



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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 government’s intention to shift risk to
       consumers.



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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.



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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.



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Questions
 Adam White         Larry Murphy
 awhite@ampco.org   l.jmurphy@cogeco.ca
 416-260-0225       905-639-7233




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