12/16/2010

AMO’s response to the Ontario Energy Board (OEB) Review of Electricity Distributors Cost Allocation Policy (Board File EB-2010-0219) plus recommendations for some local cost avoidance measures.
According to the 2008 IESO Report - Ontario Municipalities: An Electricity Profile, the municipal sector consumes well over 6.6 billion kilowatt hours of electricity per year—approximately 14% of which is dedicated to streetlights. Given that streetlights are such a significant cost driver for the energy budget of a municipality, AMO has monitored recent and newly proposed changes to the manner in which the service rates are defined and allocated to this rate class by Ontario LDCs.

On November 28, 2007, the OEB issued its Application of Cost Allocation for Electricity Distributors (the “2007 Report”). The 2007 Report set out the OEB’s policies in relation to specific cost allocation matters for electricity distributors, and represented the culmination of a consultation process that had begun several years earlier. It addressed a number of issues, most significantly the relationship between the class revenue and the class total allocated costs (the “revenue-to-cost ratio”) as well as advice on how to determine the number of units to be assessed (connections). As a result, most municipalities were hit with significant rate increases for streetlights as the OEB determined that this rate class was historically under-assessed. However, two utilities (Kitchener-Wilmot Hydro and Kingston Utilities) implemented the changes in a way to minimize the number of connections used (which are multiplied by the rate), which served to mitigate most of the impacts of the revenue-to-cost ratio impacts. This approach utilized the daisy chain concept — which is explained in more detail below.

In its 2010-2013 Business Plan, the Ontario Energy Board (OEB) indicated that it would review its electricity distribution cost allocation policy and revise it as required. The OEB maintains that there is “potential for refinements” because most distributors now have adjusted their revenue-to-cost ratios to fall within or at the end of the current revenue-to-cost ratio target ranges. The following rate classes are targeted once more because they have the widest Target Ranges: General Service 50 to 4,999 kW, Street Lighting, and Sentinel Lighting.

Rate Application Process Overview:

All local distribution companies (LDCs) must submit rate applications to the Ontario Energy Board (OEB) using a completed cost allocation model. LDCs submit their rate applications to the OEB, which conducts a hearing on the matter to determine if rates match the objectives set out in OEB policy, and then it issues a decision. The OEB’sDirections on Cost Allocation Methodology For Electricity Distributors (Cost Allocation Review – EB 2005 0317) dictates that this Summary of the Cost Allocation Review Filing (“Filing Summary”) should include a section where the LDC adds any general comments regarding the interpretation of its filing results-- including an explanation of any results that do not reasonably portray cost causality in its specific circumstances. The 80 LDCs in the Province are divided into three groups, meaning every three years a given LDC submits to this process.

Impacts of Different Connection Allocations:

The rate adjustments that resulted from the 2007 Cost Allocation Report addressed relationships among rate classes that were largely unchanged for the past twenty years and that had some large inequities and cross-subsidization.  In the 2007 Report, the OEB concluded that the appropriate revenue-to-cost ratio for the Street Lighting Class should fall within -30% to +20% of 1.00 (i.e., 0.70 to 1.20). The result has been that the rates for streetlights have increased dramatically—204% on average for the LDCs that filed in 2008 for example. As the table below suggests, this can amount to a very substantial impact:

Table #1: Post 2007 CA Model Allocation of Streetlight Connections and Rates


LDC

# of Customers
fromCA

Street Light
Connections
from CA
% Street Light
Connections to
Customers
Street Light
R:C Ratio -
Starting Point
Atikokan Hydro Inc. 1,745 618 35.4% 22.8%
Brantford Power Inc. 36,907 10,056 27.2% 14.8%
Burlington Hydro Inc. 64,730 1,581 2.4% 15.1%
Cambridge and North Dumfries Hydro Inc. 50,553 6,613 13.1% 13.7%
Centre Wellington Hydro Ltd. 6,015 1,568 26.1% 10.6%
Chapleau Public Utilities Corp. 1,359 341 25.1% 17.4%
Collingwood Utility Services Corp. 13,614 2,715 19.9% 15.5%
Enersource Hydro Mississauga 175,316 10,240 5.8% 25.2%
Festival Hydro Inc. 18,760 1,146 6.1% 28.6%
Halton Hills Hydro Inc. 18,323 3,944 21.5% 15.1%
Hydro One Brampton 133,217 19,310 14.5% 20.1%
Hydro One Networks Inc. 1,177,552 5,561 0.5% 60.0%
Innisfil Hydro Distribution Systems Ltd. 13,689 2,309 16.9% 9.4%
Kenora Hydro Electric Corporation Ltd. 5,835 550 9.4% 56.2%
Kingston Electricity Distribution Ltd.
(Connections divided by 10)
27,142 516 1.9% 82.4%
Kitchener-Wilmot Hydro Inc. (2010 using relay/service entrance switches 27,142 1,585 5.8% 127.3%
Kitchener-Wilmot Hydro Inc. (Original) 87,448 22,777 26.0% 26.2%
Lakefront Utilities Inc. 8,605 2,693 31.3% 14.4%
Lakeland Power Distribution Ltd. 8,943 2,058 23.0% 16.9%
London Hydro Inc. 137,240 14,037 10.2% 16.9%
Midland Power Utility Corporation 6,446 1,469 22.8% 23.5%
Milton Hydro Distribution Inc. 30,459 2,895 9.5% 12.8%
Newmarket Hydro Ltd. 25,718 6,599 25.7% 9.0%
Niagara-on-the-Lake Hydro Inc. 7,312 884 12.1% 14.9%
North Bay Hydro Distribution Limited 23,820 5,459 22.9% 14.8%
Oakville Hydro Electricity Distribution Inc. 54,268 15,062 27.8% 12.0%
Orangeville Hydro Limited 11,258 1,524 13.5% 7.3%
Orillia Power Distribution Corporation 12,080 3,487 28.9% 20.8%
Oshawa PUC Networks Inc. 48,753 10,076 20.7% 23.2%
Parry Sound Power Corporation 3,404 1,061 31.2% 13.6%
PowerStream Inc. 211,423 10,690 5.1% 54.4%
Rideau St. Lawrence Distribution Inc. 5,690 1,635 28.7% 41.6%
Thunder Bay Hydro Electricity Distribution Inc. 49,152 12,769 26.0% 13.5%
Toronto Hydro-Electric System Limited 675,521 113,377 16.8% 10.4%
Wasaga Distribution Inc. 10,067 2,134 21.2% 6.0%
Welland Hydro-Electric Systems Corp. 21,003 6,495 30.9% 11.9%
Wellington North Power Inc. 3,336 942 28.2% 9.1%
West Coast Huron Energy Inc. - Goderich
Hydro
3,758 680 18.1% 27.8%
Whitby Hydro Electric Corp. 34,855 10,228 29.3% 23.7%
Woodstock Hydro Services Inc. 15,156 2,509 16.6% 24.6%


Kitchener-Wilmot Hydro and Kingston Distribution stand out for having much higher Street Light R:C Ratio - Starting Point—which is as a result of using fewer number of connections (Street Light Connections from CA).  This is a result of both utilities using relay/service entrance switches (or daisy chains) as the connection points as opposed to individual street lights.  Contrasting the Kitchener-Wilmot Hydro approaches (the utility revised their numbers after the initial Cost Allocation Study overstated the number of street light connections) reveals the daisy chain approach results in 1,585 connections versus 22,777 by counting the number of streetlights. Kitchener-Wilmot Hydro found that 99% of the municipal streetlights were group controlled, which resulted in a much lower charge to the municipal customer.

Appendix 7 in the Kitchener-Wilmot Hydro Inc. Rate Application (EB-2009-0267 Filed: August 28, 2009) explains this allocation thoroughly.

Using the daisy chain approach is an acceptable practise—but the OEB has not clarified the process to date and many have been confused by awkward, somewhat contradictory wording in OEB documentation from 2005 and 2007.

AMO’s Response: 

The OEB has initiated a consultation process and AMO has submitted the following recommendations to the OEB:

That LDCs be instructed to use the daisy chain concept (connections) in the cost allocation model for their 2012 rate applications. This will produce a favourable revenue to cost ratio for the street light class—and less costs to municipalities.
  1. That the OEB define “connections” more clearly in the Cost Allocation Model documentation. 
  2. That the OEB impose a moratorium on any further cost ratio range changes until the connections issue has been implemented equally across the Province. 
Recommended Local Actions: 

Cost allocation policies allocate the costs of providing service to various classes of consumers. Any changes to existing policy would be implemented through cost of service applications starting with the 2012 rate year. As a result, AMO recommends that municipalities work with their LDCs to ensure:
The LDC uses the Connections (Daisy Chain approach) versus Individual Lamp assessment for streetlight service cost allocation.
  1. The LDC provides a detailed breakdown of these costs in their upcoming Cost Allocation. 
As additional cost avoidance measures over the medium and long term AMO recommends that municipalities also work with their LDCs to:
  1. Request a single bill for all municipal streetlight accounts from your LDC. 
  2. Ensure that LDCs put all streetlights on a single connection in new subdivisions. 
AMO will continue to work with our members to promote energy management at the municipal level and to conduct outreach to the LDC community to reduce our collective energy use and provide maximum value to the taxpayers of Ontario.