Buying into an LDC Merger but who are the Buyers? Ontario Power - - PowerPoint PPT Presentation

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May 29, 2013

Buying into an LDC Merger – but who are the Buyers?

Ontario Power Summit 2013

Neil Freeman, Vice President, Business Development

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• 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?

Overview

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Bottom-line performer and industry leader

• First CEA member designated “Sustainable Electricity CompanyTM” – 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

Confidential

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• “Ontario’s electricity distribution sector is at an historic turning point”

Ontario Distribution Sector Review Panel

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MEA (now EDA) submission to Macdonald Committee 1996 ODSP Report 2012

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

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LDC revenue, OM&A and net income

Source: 2011 OEB Yearbook. NB: does not include Hydro One.

• On balance, larger LDCs are more profitable, operating with much

lower costs, and a tighter band of revenue on a per customer basis

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Sector OM&A, O&M, Admin. cost breakdown

Source: 2011 OEB Yearbook NB: does not include Hydro One

• Admin costs (green) are what

differentiates LDC the most

• O&M (red) is relatively flat

across LDCs by comparison

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LDC O&M and Gross Fixed Assets

Source: 2011 OEB Yearbook NB: does not include Hydro One

• Larger LDCs have more assets per customer
• Smaller LDCs should have lower O&M

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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 Dx Connected (embedded) LDC Tx Connected LDC

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• Horizon’s mergers have allowed it to outperform the LDC sector

Horizon’s mergers and OM&A story

Source: 1997 Ontario Hydro MUD Bank and 2002-2011 OEB Yearbook.

OM&A per customer per year

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Hydro Ottawa, PowerStream, Veridian mergers and OM&A

Source: 1997 Ontario Hydro MUD Bank and 2011 OEB Yearbook

• Other large LDC mergers have also outperformed the sector

OM&A per customer per year

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Rate comparison: residential

Source: 2012 OEB rate orders used because not all LDCs have 2013. Hydro One did not have 2012, so 2013 are

• used. NB: Hydro One R2 customers shown with RRRP credit of $28.50 deducted.

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Rate comparison: small commercial 13,000 kWh

Source: 2012 OEB rate orders used because not all LDCs have 2013. Hydro One did not have 2012, so 2013 are used.

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Rate comparison: manufacturing 350 kW

Source: 2012 OEB rate orders used because not all LDCs have 2013. Hydro One did not have 2012, so 2013 are used.

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• LDCs that sold to Hydro One ended up with much higher rates

Residential bill 1998 vs. 2013 – all 305 MEUs / LDCs

Source: Ontario Hydro MUD Bank and OEB Rate Calculator. NB: Residential rate comparison at 1000 kWh. 2013 rates calculated in April 2013.

1998 MEUs 2013 HONI UR 2013 LDCs 2013 HONI R1

Residential rate comparison at 1000 kWh

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• Minister now states there will be no mandatory mergers, but is

interested in removing barriers to consolidation

ODSP – quick timeframe, hint of mandatory

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• 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

Consolidation as Alternative Service Delivery

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Is OEB benchmarking the driver?

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• 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

OEB benchmarking results ranking

Source: OEB, “Third Generation Incentive Regulation Stretch Factor Updates for 2013” (November 27, 2012).

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• Total Sector OM&A = $1.41B; O&M = $0.69B; Admin = $0.72B
• Administration costs are just over 50% of sector costs

Benchmarks for Admin costs – key to ASD

Source:2011 OEB Yearbook NB: does not include Hydro One

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• 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
• n 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

Stimulate ASD thru Admin cost benchmarks

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• 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

Port Dalhousie Hydro

Photo Source: St. Catharines Archives S155.21.36.1