May 10, 2020

OEB Approves Hydro One Acquisition Of Orillia And Peterborough Electricity Distributors – Energy and Natural Resources

OEB Approves Hydro One Acquisition Of Orillia And Peterborough Electricity Distributors - Energy and Natural Resources



Canada:

OEB Approves Hydro One Acquisition Of Orillia And Peterborough Electricity Distributors


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We have written previously about a proposal by Hydro One to
acquire Orillia Power Distribution Corporation. As we explained in
a previous post, the OEB issued a decision on
April 12, 2018 in which it highlighted a concern about the impact
of Hydro One’s proposal on customers of Orillia Power beyond a
ten-year deferred rebasing period proposed by Hydro One. In the
absence of information to address that concern, the OEB was unable
to conclude that the proposal met the OEB’s “no harm”
test.

The OEB
has now approved the acquisition of Orillia Power by Hydro One
,
subject to a number of conditions, in a decision issued on April
30, 2020. In another decision issued on the same day, the OEB approved
Hydro One’s proposed acquisition of Peterborough Distribution
Inc.
 (Note that in each instance, Hydro One’s proposal
involved more steps than just an acquisition of the shares of the
electricity distributor, but we will not set out the details of
each transaction in this blog post.)

As referred to above, each of the two decisions issued on April
30 set out a number of conditions for the OEB’s approval. In
the decision approving the Orillia Power transaction, the OEB noted
that the completion of the transaction would result in the creation
of separate rate classes for Orillia Power within the post-merger
consolidated Hydro One entity. These rate classes would provide for
the continuation, during the ten-year deferred rebasing period, of
the existing rates paid by the “acquired customers” prior
to consolidation, subject to specific terms.

The OEB said that, given the robust prediction of efficiency
that will be achieved during the deferred rebasing period, and the
overarching requirement to ensure no harm to the acquired
customers, Incremental Capital Module applications directed to
capital expenditures incurred in Orillia Power’s service area
will not be considered and approved for addition to rates in the
ten-year deferred rebasing period. The OEB also approved a
guaranteed Earnings Sharing Mechanism, under which excess earnings
calculated on the basis of forecast OM&A and capital expenses
in years six through ten of the deferred rebasing period, will be
shared with Orillia Power ratepayers on a 50:50 basis. For the
purposes of this earnings sharing calculation, the OEB found that
that a “risk premium” of 10% for the forecast OM&A
should be sufficient to provide compensation for assumed risk,
given Hydro One’s confidence in its forecast and the ordinary
risks borne by all distribution utilities that customer load and
customer profiles may not materialize according to forecast.

As for rates beyond the deferred rebasing period, the OEB found
that, if the fully allocated revenue requirement for the new
year-eleven Orillia Power rate classes is higher than the
year-eleven status quo forecast of Hydro One, these excess costs
will be borne by Hydro One’s shareholder and not by the
ratepayers.

Subject to these, and other, conditions, the OEB concluded that
Hydro One’s proposed acquisition of Orillia Power met the no
harm test and it approved the transaction. Subject to a similar set
of conditions, the OEB concluded that Hydro One’s proposed
acquisition of Peterborough Distribution met the no harm test and
it approved the Peterborough Distribution transaction.

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