Over the last two weeks, an atmosphere of crisis has descended on electric utility regulation in Ontario. This is the first edition of what I hope will be a short series of updates on developments and proposed solutions to bring this crisis to a close.
There is a severe management crisis at Toronto Hydro. By litigating its recent regulatory application in the press, management showed contempt for the Ontario Energy Board. By publishing an irresponsible, scare-mongering press release on the day the board issued its recent decision on Toronto Hydro, management showed contempt for the public. By proceeding with drastic staff cuts when other avenues were and continue to be available and without detailed explanations on the record justifying their actions, management is now risking the capacity of the organization to function. Earlier today, the management of Toronto Hydro fired the well respected Vice-President of Treasury, Rates and Regulatory Affairs — Pankaj Sardana. Taken together, these factors indicate that Toronto Hydro is in a crisis directly threatening its capacity to serve its customers in a safe and responsible fashion.
Here are two articles (Sun, Globe and Mail) published prior to the release of the Ontario Energy Board’s decision being released. These articles are clearly an effort by Toronto Hydro management to apply pressure on the regulator, an action that is directly and unambiguously contemptuous of the Ontario Energy Board.
Toronto Hydro’s press release issued just hours after the OEB’s decision contains a direct threat to public safety. According to the release, the decision “will impact …customer… safety”. This statement is irresponsible. The OEB decision does not threaten public safety but actions by Toronto Hydro could. Even if Toronto Hydro made no application to the OEB for an increase to its capital budget over that now allowed, as the Board has invited the utility to do, the incentive regulation mechanism rate formula the Board has ordered would generate a flow of capital funds equal to that invested by the utility only a few years ago. That, combined with efficiency improvements and a modest, temporary reduction in earnings would give the utility time to continue with operations and present its plans for the immediate future. It must be recognized that the above mentioned approach would not be financially sufficient to pursue all capital budget objectives previously planned.
Earlier this week, Toronto Hydro began firing contract staff and preparing to cut regular staff. This action was taken without the utility utilizing the opportunity available to it to file an application for a capital budget increase over that allowed under the Board’s incentive regulation mechanism. This action threatens the ability of the utility to meet its regulatory licence requirements.
Earlier today, Pankaj Sardana, Vice-President of Treasury, Rates and Regulatory Affairs was fired by Toronto Hydro management. I have personally worked with Mr. Sardana when we were both with the Independent Market Operator (predecessor to the IESO). I have seen Mr. Sardana working in an official capacity since. I regard him was an exceptionally knowledgeable, diligent, and responsible electricity industry employee. His departure indicates a breakdown in the effective functioning of the utility’s management team.
The application of Toronto Hydro that the OEB turned down was clearly excessive and outside of the OEB’s clearly established and reasonable rules. The utility’s proposed capital budget sought an increase in spending over the period 2012-2014 of well over $500 million more than Toronto Hydro forecast for the same period only 2 years ago. Compared to Toronto Hydro’s forecast from 2007, the requested capital budget for the period was approximately 5 times higher. The capital plan presented to the Ontario Energy Board was not credible. Toronto Hydro has been playing an irresponsible game of regulatory chicken with its unpredictable and escalating capital budgets.
Average delivery rates for Toronto Hydro customers are the highest of any distribution utility in the province serving urban communities with 30,000 customers or more. In 2011, Toronto households paid 25% more than the average for the large utilities while the largest commercial consumers paid a 64% premium over the average. The relative age, density and scale of Toronto Hydro are all factors that should give its customers some of the lowest distribution rates in the province. Notwithstanding this high base, Toronto Hydro was proposing to increase rates by over 40%. For average households, the rate impact of the utility’s plan was not $5/month as claimed by Toronto Hydro but $14.43/month or $173 per year.
Toronto Hydro’s productivity is very poor. Compared to the nine most comparable utilities in the province, Toronto Hydro’s cost per kilometer of line is 109% higher and its operating cost per customer is 60% higher.
As the shareholder’s representative, Toronto city council should step in immediately and direct the utility to publicly disclose its current business plan. Upon a prompt and public review, Toronto city council should consider what management changes are needed at Toronto Hydro.
Here is a useful backgrounder on the OEB decision. http://toronto.openfile.ca/blog/curator-blog/curated-news/2012/explainer-whats-behind-toronto-hydros-fight-ontario-energy-board
Robert Warren, a lawyer with the firm Weir Foulds and counsel for the Consumer’s Council of Canada, gave an outstanding interview on CFRB Newstalk 1010 radio in Toronto yesterday morning discussing developments at Toronto Hydro.
The Toronto Star has some helpful coverage here: http://www.thestar.com/business/article/1114903–toronto-hydro-cuts-two-executives?bn=1
There’s probably little need to preach to the converted, but … TVO still has the video for a show from a year and a half ago where the economists and other analysts (Mr. Adams) were discussing electricity issues while the public servants, including a Toronto Hydro executive, were discussing what was wrong with people, and how to fix them: http://theagenda.tvo.org/episode/137061/thursday-september-30-2010
The average compensation of the 1647 empoyees at year end December 31, 2010 was over $126,000 per employee and almost 50% of this compensation is capitalized meaning that Toronto Hydro shows a good profit and can continue to pay dividends to the City of Toronto. It seems to me that the efforts to be one of the Top 100 employers in Canada http://www.eluta.ca/top-employer-toronto-hydro helps to drive up the compensation levels so that TH can continue to get picked. This all proves that the ONLY oversight that seems to apply to them is the OEB. The ratepayers of Toronto owe them a debt of gratitude for highlighting the less then stellar management at TH that has created this mess.
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