OEB Issues Its Largest Rate Case Decision Ever

On December 28, 2017, the Ontario Energy Board (OEB) issued its Decision with Reasons in the Ontario Power Generation “Payment Amounts” case (the Decision), covering the 2017 to 2021 period. Among the notable determinations are an approval of the forecast costs of the Darlington Refurbishment Project (DRP) and reductions to the capital and operations, maintenance and administration costs (OM&A) forecast by OPG over the coming years.

The OEB’s Decision is quite lengthy (around 160 pages), which is not surprising given the amount at issue ($16.8 billion for the nuclear business alone) and the length of the process (20 months from filing to Decision). In terms of the dollars at issue and the amount of supporting evidence, this is the largest case the OEB has ever determined. Rather than summarizing all aspects of the Decision, we have focused on five interesting points.

1. Approval of a hybrid ratemaking model

   OPG proposed a Custom IR framework for 2017-2021 in respect of its nuclear business and a price cap model for its hydroelectric business. The OEB approved this approach. As a result, there will be adjustments to the hydroelectric revenue requirement over the five-year term, but the nuclear revenue requirement is set at the outset. While there was some opposition to the Custom IR proposal, the OEB found that OPG had reasonably satisfied the expectations for a Custom IR plan for setting nuclear payment amounts. The OEB confirmed that there is no threshold test for Custom IR applications and that model can be used to address the unique circumstances of an applicant, so long as the Renewed Regulatory Framework principles (such as outcomes-based approach and a focus on continuous improvement) are met.

2. Reductions to capital budgets

   In the context of the Custom IR framework for the nuclear business, OPG sought approval of an ambitious capital budget. The OEB looked at recent actual expenditures to test the request. After observing that recent actual capital spending was less than the approved amounts, the OEB concluded that it was not likely that future spending would (or should) be as high as forecast. As a result, the OEB reduced the applicant’s proposal by 10%.

3. Focus on compensation costs

   OPG’s nuclear business Custom IR plan contemplated an OM&A budget of around $1.7 billion each year. This attracted a lot of attention, particularly in relation to OPG’s compensation costs (salaries, pensions, OPEBs). This category of costs has previously been very contentious in OPG proceedings (as noted in the Decision, the OEB has made substantial disallowances related to compensation costs in three previous OPG cases). In the current proceeding, the OEB reviewed OPG’s evidence (including a number of benchmarking reports) and concluded that OPG’s compensation costs are still too high. Among other things, the OEB found that the compensation costs should be benchmarked to the 50^th percentile of comparators (not the 75^th percentile as OPG asserted for some specialized positions) and also found that OPG’s pension and benefit costs are more generous than comparators. In the result, the OEB applied a large reduction to OPG’s proposed OM&A budget ($30 million per year of compensation costs, as well as $45 million per year of corporate allocated costs, which includes a compensation component).

    

4. Approval of megaproject costs for the DRP

   In the OPG Decision, the OEB reviewed the proposed DRP, which has a budget of almost $13 billion. The need for the project was not at issue (because the government has directed that the project will proceed), but the forecast costs (additions to rate base) were examined and approved. Among the items that the OEB considered in coming to this determination were the lengthy and effective project planning process, the intensive project oversight to be implemented, and detailed cost estimates supporting the DRP. The OEB also reviewed and relied upon expert evidence filed on behalf of OPG supporting many aspects of project. The effect of the OEB’s Decision is that the costs of the DRP (inclusive of a large contingency amount) will start to be recovered over the Custom IR term, based on the cost and timing estimates presented and approved.

5. Effective date for rates

OPG filed its application approximately 8 months before the requested effective date for the rates (payment amounts). The OEB’s Decision was issued almost a full year after the requested effective date. Parties argued that the effective date should be delayed, such that OPG should not get the full first year benefit of the new rates (payment amounts). The OEB found that the case should have been filed earlier and delayed the effective date by five months (to a date approximately one year after the filing date). This is similar to the OEB’s decision in an earlier OPG case (discussed here).