Stakeholder Consultation

Distribution Custom IR Rate Application 2015-2019

Stakeholder Session #2

June 26, 2013

Agenda10:30 a.m. Registration 10:35 a.m. Welcome Susan Frank, Vice-President & Chief Regulatory Officer

Hydro One Networks

10:40 a.m. Introductions and Agenda Bob Betts, Facilitator,OPTIMUS|SBR

10:50 a.m. Progress Update on Stakeholder Session #1

Bob Betts, Facilitator,OPTIMUS|SBR

11:20 a.m. Update on Line Loss Studyand Facilitated Discussion

Stan But, Manager Economics & Load ForecastHydro One Networks

Bob Betts, Facilitator, OPTIMUS|SBR

12:00 p.m. Lunch 12:45 p.m. Update on Seasonal Rate Initiative

and Facilitated DiscussionHenry Andre, Manager Distribution PricingHydro One Networks Bob Betts, Facilitator, OPTIMUS|SBR

1:30 p.m. Overview of CIR Annual Adjustmentsand Facilitated Discussion

Susan Frank, Vice-President & Chief Regulatory Officer Hydro One Networks Bob Betts, Facilitator, OPTIMUS|SBR

2:30 p.m. Break2:40 p.m. Overview of CIR Off-Ramps/Re-Openers

and Facilitated DiscussionSusan Frank, Vice-President & Chief Regulatory Officer Hydro One Networks Bob Betts, Facilitator, OPTIMUS|SBR

3:25 p.m. Overview of CIR Annual Reporting & Performance Metrics and Facilitated Discussion

Jim Malenfant, Senior Regulatory AdvisorHydro One Networks

Bob Betts, Facilitator, OPTIMUS|SBR

4:25 p.m. Closing Remarks/Next Steps Susan Frank, Vice-President & Chief Regulatory Officer Hydro One Networks

4:30 p.m. Adjourn

2

Facilitator’s Remarks

Introductions Facilitator, Bob Betts & OPTIMUS | SBR support team

Meeting Facilities Safety Review Note taking process Participant Introductions

3

Meeting Process

Mobile phones “Off” or “Silenced”

Avoid side discussions while others speaking

All questions are good ones

All comments are appreciated

Materials and notes will be posted on Hydro One’s Regulatory Website:

www.HydroOne.com/RegulatoryAffairs

4

Progress Update on Stakeholder Session #1

Stakeholder Feedback Status

Custom IR Hydro One to review how to address updating Compensation Study over 5 year plan. Study RFP’d Hydro One to discuss off-ramps, annual adjustments, and scorecard/reporting requirements in

more detail (taking into consideration stakeholder suggestions).To be discussed at today's session

Hydro One to consider pursuing CDM as part of business and investment planning. Future Session Topic Hydro One indicated that rate smoothing would need further discussion. Future Session Topic

Customer Survey Stakeholders suggested Hydro One needs to understand what priorities are important to which

groups and do further customer research on: smaller business customers, self-generation and large customers. Hydro One advised results would be shared at another session.

Future Session Topic

Stakeholders suggested that Hydro One focus on the poorest performing areas to ensure they have the right information to support the decisions Hydro One is making in those poor performing areas as part of the regional plan.

Consideration included in Regional Planning Process

Seasonal Customer Rates Stakeholders suggested several alternatives to how Hydro One could seek seasonal customer

input (i.e. FOCA list, questionnaire insert with bill, structured survey, town council meetings). To be discussed at today's session

Hydro One to discuss the options for addressing seasonal stakeholder key issues. To be discussed at today's session

Rate Class Review

Stakeholders raised concerns about how and when customers would be informed about rate class changes. Future Session Topic

5

6

CDM Forecasting Initiative

Update on Line Loss Study

June 26, 2013 Stan But

Manager, Economics & Load Forecasting

OEB Directive

2

In its Decision with Reasons for EB-2009-0096 released on April 9, 2010, the OEB directs Hydro One to track the dollar value of variances between the Board approved losses recovered in rates, and actual line losses, commencing January 1, 2010.

The OEB also directs Hydro One to bring this analysis to its next cost of service proceeding so that this issue may be further examined.

Status of the Line Loss Study

3

To develop a well-defined and defendable methodology for the line loss study, Hydro One has recently engaged Navigant to assist in this analysis.

Hydro One plans to file the line loss analysis in the upcoming cost of service application.

BreakBreak

Lunch

21

CDM Forecasting Initiative

Update on SeasonalCustomer Initiative

June 26, 2013 Henry Andre

Manager, Pricing

Topics

2

Existing Seasonal customer feedback

Planned Seasonal customer consultation

Possible Options for Modifying Seasonal Rates

Corporate Customer Satisfaction – Seasonal

Satisfaction with how Hydro One “calculates their bill” and “fairness of charges” lower for Seasonal as compared to all respondents

Overall satisfaction with rates and charges on the bill shows a decrease with increase in consumption (other rate classes show similar trends)

The % of seasonal respondents indicating “Distribution Charge / Delivery charges” as driver for low satisfaction were higher than other classes

Two main themes in comments from customers:- high bills for times they are not using property- Estimated bills and meter reads not done monthly

“For seasonal service, it is every three

months. It is turned off, but I get delivery charges of $70”

“The cottage is not in use during the winter

time. Last month I got a bill for $23 when I did not

use power at all”

“I was trying to get my meter read rather than estimated for my seasonal residence”

3

Differences in type of rates/billing complaints based on level of energy consumption:Monthly Service Charge issues account for ~25% of complaints for low energy users but only ~2% for high energy usersRate classification issues account for ~26% of complaints for high energy usage but only ~10% for low energy users

High consumption customers generate majority of Seasonal customer complaints:

Customer Call Centre – Escalated complaints

Customer advised that he was very

concerned with his high bills the last few months as they are much higher than in

the past …

Customer is very upset that he pays higher

delivery charges as a seasonal resident in comparison to his

neighbor who is a full time resident…

Mr Y questioning delivery charges when seasonal

property isn't in use and hardly any

consumption is being used 4

Planned Seasonal Consultation

Have engaged CitizenOptimum to conduct focus groups with seasonal customers

Two focus groups in each of four regions in Ontario (North, South, East and West)

Will engage local cottagers’ associations to send one or two representatives to local focus groups of 6 to 8 participants– Provide some information on cost allocation and rate design– Get input on customer concerns– Solicit feedback on possible options for rate class changes

To be completed by mid August

5

Possible Options for Seasonal Rates

1. Status QuoOutcome of harmonization process that combined Seasonal rate classes (R3 and R4) into one class

The harmonization process adopted the lower R3 fixed charge as the “target” for the harmonized class

– shifted revenue to be collected from fixed to variable charge– revenue requirement increases since 2008 largely absorbed by

higher variable charges

Consumption (kWh)

Fixed Charge

($)

Variable Charge

($)

Total Delivery Cost ($)

TotalBill($)

100 23.42 8.12 31.54 43.20

500 23.42 40.59 64.01 119.73

1000 23.42 81.17 104.59 221.88

2013 Typical

Monthly Bill

6

Possible Options for Seasonal Rates

2. Revise revenue collected via fixed and variable rates

Increase fixed charges from current $19.50- R2 Fixed charge ($57), R1 ($20), OEB Minimum System ($24)

Current Seasonal rates recover 38% of revenue via fixed & 62% via variable charges

- Prior to harmonization revenue split was ~ 70% fixed & ~ 30% variable

Changes to Fixed charge will have significantly different impacts depending on consumption level

- e.g. increasing Fixed charge to $30/month will increase Total Bill by 8% for 200 kWh customer and decrease Total Bill by 8% for 1,000 kWh customer

7

Possible Options for Seasonal Rates

3. Revise Seasonal rate class criteria Exclude Seasonal customers with greater than 1,000 kWh avg monthly

consumption over the prior year High consuming seasonal customers move to respective residential classes Seasonal customers moving to R2 rate class not eligible for RRRP Expect small impact to residential classes Seasonal customers moving to R1 rate class would see a significant

decrease, but smaller decrease for those moving to R2 Customers remaining in Seasonal class will see an increase in rates

(@ 1000 kWh) Seasonal R2 R1

Dx Delivery Charge 104.59 97.73 57.38

Total Bill 221.58 215.44 174.17

2013 Typical

Monthly Bill

8

Possible Options for Seasonal Rates

4. Split Seasonal rate class into High and Low volume classes Where to draw the dividing line?

No impact on other residential rate classes

Expect rates to drop for High consuming customers given higher revenues currently collected

Expect rates to climb for Low consuming customers given lower revenues currently collected

9

Criteria for Evaluating Options

Delivery Charge Impacts

Total Bill Impacts

# of customers with positive and negative impacts

Consistency with rate making principles

10

31

CDM Forecasting Initiative

Overview of Custom IRAnnual AdjustmentsOff-Ramps/Re-OpenersAnnual Reporting & Performance Metrics

June 26, 2013

Susan Frank

Vice-President & Chief Regulatory Officer

Jim Malenfant

Senior Regulatory Advisor

Timeline for Custom IRStakeholdering

2

Process: Economic Outlook (Sept) Business Planning (Sept) Studies (April, June, Sept) Strategy (Sept) Knowledge of Assets -Asset Analytics (Sept) Customer Information (April, Nov)

The Cost of Service Plan: Annual Revenue Requirement (Nov) Smoothed Annual Requirement (Nov) Rate Schedules (Nov)

Adjusting/Monitoring of the Plan (over 5 year period):Annual adjustments, off-ramps/re-openers (June)Annual reporting and performance metrics (June)

Custom IR Framework

3

UKIntroduced new RIIO (Revenue using Incentives to deliver Innovation and Outputs) model in Mar 2013. Outcome focused model, distributors required to develop plans and define performance measures and outputs for a 8 year period.The model includes an Annual Iteration Process, Uncertainty Mechanisms (i.e. Off-Ramps/Re-Openers), and Incentives (i.e. rewards/penalties) based on performance. The new model is intended to mitigate concerns with the prior incentive framework; including:

- Lack of ownership of the distributor plans due to regulator driven templates- Higher long-term costs based on uneven incentives between operating and

capital costs - Lack of customer engagement

Hydro One Research for Custom IR Design

What Performance-Based or Incentive Regulation is Elsewhere?

4

Australia

Currently in the midst of major review of its regulatory policy (“Better Regulation program”).The Better Regulation program is to deliver an improved regulatory framework focused on promoting the long term interests of electricity consumers.The improved framework is intended to address concerns with the prior incentive framework; related to high capital spending.

Hydro One Research for Custom IR Design

What Performance-Based or Incentive Regulation is Elsewhere?

5

Alberta

ENMAX initiated a Formula Based Ratemaking model in Alberta which was approved in 2009. The regulator expanded this concept to all Alberta utilities (gas & electric) in 2012 with the issuance of its Performance Based Regulation framework.The model is based on a productivity-inflation rate setting mechanism for a 5 year term (including Annual Adjustment, Re-Openers, and Capital Trackers).

Hydro One Research for Custom IR Design

What Performance-Based or Incentive Regulation is Elsewhere?

6

Annual AdjustmentsAnnual AdjustmentsCriteriaCriteria

Annual Adjustment OptionsAnnual Adjustment OptionsQuestions?Questions?

Criteria:

Externally driven beyond utility’s control Ongoing / recurring changes either upward/downward Formula based

Hydro One’s Options for Annual Adjustments

7

Annual Adjustments Options:

Cost of Capital- Based on OEB issued Return On Equity and deemed Short Term debt

rate in Nov each year- Based on Hydro One’s actual long term debt issued

Working Capital- Based on change in Commodity Prices (including global adjustment)

3rd party flow-through costs- Based on change in RTSRs, WMSC, SME charge, RRRP, OEB Charges

Tax Rate ChangesCDM based on change in cost or change in loadClearing of Variance Accounts based on prior year-end audit financials (e.g. RSVAs, pension)

Hydro One’s Options for Annual Adjustments

8

Questions:

Should there be materiality thresholds? Should the annual adjustments be based on forecasts or

actuals? How to address prudency review during the annual adjustment

process?

Hydro One’s Options for Annual Adjustments

9

Facilitated Discussion

Off-Ramps and Re-OpenersOff-Ramps and Re-OpenersCriteriaCriteria

Off-Ramp OptionsOff-Ramp OptionsRe-Opener OptionsRe-Opener Options

Questions?Questions?

Criteria:

Externally driven beyond utility’s control Unexpected Very material impact

Off-ramps result in whole Custom IR plan to be examined and possibly terminated; whereas with Re-Openers only a particular component of the plan is adjusted.

Hydro One’s Options for Off-Ramps and Re-Openers

10

Off-Ramp Options:

Return on Equity (+/- 300 basis point thresholds) as per OEB’s RRFEPerformance erodes to unacceptable levels as per OEB’s RRFERestructuring of the industry

Hydro One’s Options for Off-Ramps and Re-Openers

11

Re-Opener Options:

New Government MandatesMarket Rules/Code changesEnvironmental law changesTechnical standard changesNew investments resulting from the newly developed Regional PlansMaterial unforeseen weather eventsAccounting Framework changes

Hydro One’s Options for Off-Ramps and Re-Openers

12

Questions:

What is the level of materiality to trigger a re-opener? Different levels for Capital and OM&A?How to incorporate re-openers into the plan: track in variance accounts and seek recovery in next cost of service filing period or require immediate funding thru use of rate riders?Should re-openers be combined to trigger materiality?

Hydro One’s Options for Off-Ramps and Re-Openers

13

Facilitated Discussion

Reporting & Performance MetricsReporting & Performance MetricsCriteriaCriteria

Metrics for Delivery of PlanMetrics for Delivery of PlanQuestions?Questions?

Criteria:

Outputs to allow Board and Intervenors to monitor key outcomes committed to in the plan

Metrics need to be measurable, controllable, and transparent Manageable number of metrics

Hydro One’s Options for Reporting and Performance Metrics

14

Metrics for Delivery of Plan:

Level of Spend (Capital In-Service and OM&A) Productivity/Cost Effectiveness

Forestry Brush Control & Line Clearing ($/km) Planned End of Life Wood Pole Replacements ($/pole) Cable Locates ($/locate) New Connections (S/connection)

Customer Satisfaction Metrics associated with significant change in

performance/reliability (e.g. Innovation–Smart Grid)

Hydro One’s Options for Reporting and Performance Metrics

15

Questions:

Should there be incentives (i.e. rewards/penalties) related to metrics?

How to develop the targets for each metric? Should the targets be annual or cumulative?

How to validate the accuracy of the metric’s reporting? How far off target can a utility go before the OEB intervenes?

Hydro One’s Options for Reporting and Performance Metrics

Facilitated Discussion

16

Thank you for attending!Check our website for further information:

www.HydroOne.com/RegulatoryAffairs

Any questions or comments can be directed to:Regulatory@HydroOne.com