(November 2009)Regulators are in the unenviable position of determining an allowance for ROE that’s fair to consumers and investors in a volatile economy. The cases that stand out this year...
Regulatory Reform in Ontario
Successes, shortcomings and unfinished business.
the development of first generation incentive regulation.
3. The TFP trend over the most recent 10-year period was estimated to be 0.86 percent. The TFP trend over the most recent five-year period was estimated to be 2.05 percent. The OEB believed that some recognition of the industry’s most recent productivity experienced should be reflected in the X factor. It therefore applied a two-thirds weight to the ten-year TFP trend, and a one-third weight to the five-year TFP trend. This weighted average of industry TFP trends led to a productivity factor of 1.25 percent.
4. For further details on the relationship between X factors and TFP trends, see L. Kaufmann et. al , “Calibrating Rate Indexing Mechanisms for Third Generation Incentive Regulation in Ontario: Report to the Ontario Energy Board,” February 2008.
5. Some distributors also proposed that there be an additional component of the indexing mechanism to recover the costs of incremental capital spending. In its report, “the Board concludes that there is no need for a capital investment factor in this 2nd Generation IRM plan. Those distributors with an inordinate capital spending program can be accommodated through rebasing” ( Report of the Board on Cost of Capital and 2nd Generation Incentive Regulation for Ontario’s Electricity Distributors , Dec. 20, 2006, p. 37).
6. The rate adjustments under the indexing mechanism apply to all distributors for the 2007 rate year. For 2008, index-based rate adjustments apply to those distributors that have not applied for rate rebasing. For the 2009 rate year, the mechanism applies to the remaining distributors that have not yet applied for, or been subject to, rebasing.
7. Throughout the regulatory processes for 2nd and 3rdGenIRM, Dr. Cronin advised the Power Workers’ Union.
8. Filings to utilize the capital investment module only could be submitted under certain conditions that were specified in the OEB reports. These conditions included a materiality threshold, which was designed to prevent “double counting” of capital expenditures through the core PBR rate-adjustment mechanism and the funds allowed under the module. This threshold was company-specific and depends on a formula presented in the Sept. 17, 2008 OEB report.
9. For example, I originally proposed a value of 0.88 percent for the productivity factor; the companies proposed a value of 0.55 percent for the productivity factor.
10. I was the witness testifying in support of Boston Gas’s PBR plan in 2003.
11. The article also contains other statements that are either factually inaccurate or presented in an unclear and confusing manner. For example, in the section headed, “Third Generation PBR” on p. 52, the authors mention a “second term” PBR plan, and in the next sentence say the OEB did not have appropriate capital data and so “opted for an O&M based efficiency comparison,” and in the following sentence say, “because of these shortcomings, the OEB used a literature-reviewed X factor.” As noted above, it is true that the OEB did use an X factor consistent with precedent rather than relying on any independent empirical analysis in 2ndGenIRM, but it is not true that O&M cost benchmarking played