Buying into an LDC Merger – but who are the Buyers? Ontario Power Summit 2013 Neil Freeman, Vice President, Business Development May 29, 2013 HORIZON UTILITIES CORPORATION and horizon UTILITIES Looking beyond… & Design are registered trade-marks in Canada of Horizon Holdings Inc. and are used under license by Horizon Utilities Corporation.
Overview • What did ODSP recommend and where did its recommendations run into problems? • Where is the value opportunity in LDC consolidations? • What are the examples of successful consolidations? • Should consolidation be thought of more broadly than just regional amalgamation? • What are effective drivers for consolidation and Alternative Service Delivery? 2
Bottom-line performer and industry leader • First CEA member designated “Sustainable Electricity Company TM ” – 2013 • Hamilton-Niagara’s Top Employer – 2012 and 2013 • CEA Sustainability Company of the Year – 2011 and 2012 • ISO 14001 Environmental Management System accreditation – 2011 • ISO 26000 Social Responsibility – first utility in Canada – 2011 • Global Reporting Initiative A+ sustainable development – 2010 & 2011 • Ontario Energy Association Company of the Year – 2009 • OPG-EDA Performance Excellence Award – 2006 3 Confidential
Ontario Distribution Sector Review Panel • “Ontario’s electricity distribution sector is at an historic turning point” 4
Distribution’s share of total Bill 1996 & 2012 • Distribution costs have increased from 15% to 22% of the total bill since deregulation • Increase is from 15% to 25% when taxes are not included MEA (now EDA) submission to ODSP Report 2012 Macdonald Committee 1996 5
LDC revenue, OM&A and net income • On balance, larger LDCs are more profitable, operating with much lower costs, and a tighter band of revenue on a per customer basis 6 Source: 2011 OEB Yearbook. NB: does not include Hydro One.
Sector OM&A, O&M, Admin. cost breakdown • Admin costs (green) are what differentiates LDC the most • O&M (red) is relatively flat across LDCs by comparison 7 Source: 2011 OEB Yearbook NB: does not include Hydro One
LDC O&M and Gross Fixed Assets • Larger LDCs have more assets per customer • Smaller LDCs should have lower O&M 8 Source: 2011 OEB Yearbook NB: does not include Hydro One
How LDCs differ fundamentally on O&M costs • Transmission connected LDCs have more assets per customer – Particularly distribution feeders and stations – Result is more O&M and capital work per customer • Distribution connected LDCs have fewer assets per customer – Feeders and stations, in many cases, belong to the host LDC Tx Connected LDC Dx Connected (embedded) LDC 9
Horizon’s mergers and OM&A story • Horizon’s mergers have allowed it to outperform the LDC sector OM&A per customer per year 10 Source: 1997 Ontario Hydro MUD Bank and 2002-2011 OEB Yearbook.
Hydro Ottawa, PowerStream, Veridian mergers and OM&A • Other large LDC mergers have also outperformed the sector OM&A per customer per year 11 Source: 1997 Ontario Hydro MUD Bank and 2011 OEB Yearbook
Rate comparison: residential Source: 2012 OEB rate orders used because not all LDCs have 2013. Hydro One did not have 2012, so 2013 are 12 used. NB: Hydro One R2 customers shown with RRRP credit of $28.50 deducted.
Rate comparison: small commercial 13,000 kWh 13 Source: 2012 OEB rate orders used because not all LDCs have 2013. Hydro One did not have 2012, so 2013 are used.
Rate comparison: manufacturing 350 kW 14 Source: 2012 OEB rate orders used because not all LDCs have 2013. Hydro One did not have 2012, so 2013 are used.
Residential bill 1998 vs. 2013 – all 305 MEUs / LDCs • LDCs that sold to Hydro One ended up with much higher rates 2013 HONI R1 2013 HONI UR 2013 LDCs 1998 MEUs Residential rate comparison at 1000 kWh 15 Source: Ontario Hydro MUD Bank and OEB Rate Calculator. NB: Residential rate comparison at 1000 kWh. 2013 rates calculated in April 2013.
ODSP – quick timeframe, hint of mandatory • Minister now states there will be no mandatory mergers, but is interested in removing barriers to consolidation 16
Consolidation as Alternative Service Delivery • Institutional and cultural barriers to amalgamation are formidable in Ontario • Government needs a broader view of consolidation • Objective should be “Alternative Service Delivery” or ASD, not just amalgamation • While amalgamations are beneficial, “consolidation” should more broadly include: – Outsourcing to other LDCs and third-parties – LDC Shared Services, Cooperatives, Buying Groups, etc., and – Merger and Sale of LDCs • What is missing are effective drivers for ASD 17
Is OEB benchmarking the driver? 18
OEB benchmarking results ranking • OEB benchmarking levels the playfield for scale – Result is to neutralize any advantage for scale – Result is that framework is not a driver for LDC consolidation • Adjusting for scale should not be a consideration 19 Source: OEB, “Third Generation Incentive Regulation Stretch Factor Updates for 2013” (November 27, 2012).
Benchmarks for Admin costs – key to ASD • Total Sector OM&A = $1.41B; O&M = $0.69B; Admin = $0.72B • Administration costs are just over 50% of sector costs 20 Source:2011 OEB Yearbook NB: does not include Hydro One
Stimulate ASD thru Admin cost benchmarks • Despite Admin functions being largely the same for all LDCs, Administration costs have much wider cost range than O&M • O&M differences among LDCs will always make benchmarks open to dispute – system configuration, geography, climate, density, etc. • Outsourcing billing and collection services to lower cost providers has been rebuffed in all but some minor cases • There are no current incentives or stimuli in the LDC sector to spur on consolidation through ASD • Solution is targeted benchmarking for Admin costs – LDCs should be required to meet a benchmark for costs of Admin • Administration costs are simple to understand, easy to benchmark and a readily available as a stimulus for ASD 21
Port Dalhousie Hydro • LDC amalgamations are part of Ontario’s electricity history • Port Dalhousie Hydro merged with St. Catharines Hydro in 1960 • Part of Horizon Utilities since 2005 • LDC amalgamations have been good for customers, shareholders and communities 22 Photo Source: St. Catharines Archives S155.21.36.1
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