(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.
any role in 2ndGenIRM. In addition, on p. 52 the authors assert that “subsequent research which included both O&M and monetized values of capital similar to that employed in the OEB’s first generation, found a widespread negative rate of productivity growth over the 2000 to 2006 period.” In fact, in the TFP study that was approved by the OEB, there was a small but positive rate of TFP growth for the Ontario and U.S. industries over the most recently available period, from 2002 to 2006; no study was in fact published that estimated TFP for Ontario over the 2000-2006 period using monetary capital values, since monetary-based capital input data for 2000-2001 are currently unavailable.
12. The authors note that the Federal Communications Commission (FCC) did implement a menu approach for local exchange carriers subject to their jurisdiction, but this experiment was not continued when that PBR plan ended and a new plan was established.
13. Cronin, F. and S. Motluck, “ Ontario’s Failed Experiment (Part 1) ,” Public Utilities Fortnightly , July 2009, p. 42.
14. It is true that the industry was subject to a government-imposed rate freeze for much of this period, which may be viewed as an alternative to traditional cost-of-service regulation. However, this rate freeze clearly differs from the “performance-based” or “incentive regulation” plans that the OEB has explicitly approved and which Cronin and Motluck refer to repeatedly in their articles. The 2000-2007 period was not characterized by a single regulatory approach, let alone a PBR approach like that approved in 3rdGenIRM.
15. The authors make other factually incorrect statements in their July and August articles. For example, they write that “(t)he OEB is willing to employ the 2002 and 2003 data in its (O&M) cost benchmarking that would determine each LDC’s future annual revenue. Yet, the OEB reports that it will not use this same data for its reliability-trend analysis since this data “may not have been reported consistently or calculated properly.” If the data is good enough for rate setting, it should be sufficient for trend analysis” ( August 2009 , p. 56). In fact, the O&M benchmarking models that were used to set stretch factors in 3rdGenIRM did not use the reliability metrics as independent variables in the econometric model, therefore these reliability data do not play any role in the O&M cost benchmarking used for rate setting.
16. At other points in the July and August articles, the authors also imply that a policy encouraging mergers in the province was designed to reduce O&M costs. It is true that mergers were encouraged, but it does not follow that this policy was only designed to cut O&M costs. Mergers were considered to be in the public interest because they lead to the realization of economies of scale and therefore lower unit costs. These unit cost reductions can be achieved by O&M cost-cutting, but they can also be realized by economies related to capital costs, such as more efficient planning, procurement and installation of capital goods and construction services. These capital-related economies are likely to be