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London Hydro Inc.

London Hydro Inc. Vinay Sharma Bernie Watts and Mark Rosehart Presentation to OEB RP-2004-0020 February 18, 2004. London Hydro Inc. Shareholder: The Corporation of the City of London Commercial & Industrial customers: 13,000 ( $103,000,000 in revenue)

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London Hydro Inc.

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  1. London Hydro Inc. Vinay Sharma Bernie Watts and Mark Rosehart Presentation to OEB RP-2004-0020 February 18, 2004

  2. London Hydro Inc. Shareholder: The Corporation of the City of London Commercial & Industrial customers: 13,000 ( $103,000,000 in revenue) Key Account customers: 220 ($90,000,000) Residential customers: 115,000 ($84,000,000) Embedded Cogeneration: 5 with 30 MW Registered Retailers: 9 (Associated Customers: 25,000) Summer Peak : 680 MW; Winter Peak: 635 MW; Average Annual Energy Consumption: 3,316 GWh Total number of employees at London Hydro: 264 2003 (proj.)200220012000 Energy Revenue $280 M $252 M $246 M $228 M Net Income $4.9 M $4.1 M $1.4 M ($3.8 M)

  3. Controllable Structural Efficiency Factor • OEB Staff Discussion Paper was very well put together and identified three efficiency factors: • Operation Efficiency • Controllable Structural Efficiency • Uncontrollable Structural Efficiency • In our view, addressing Controllable Structural Efficiency is fundamental to achieve optimal operational efficiencies and mitigating the impact of uncontrollable structural efficiency

  4. From local to regional distribution company (LDC to RDC) • Migrating from local to regional distribution company helps achieve optimum controllable structural efficiency • Lessons from Southwest Hydro project – an amalgamation of three LDCs • Structural savings identified: $59M in nominal dollars and about $35M in NPV over ten years • Implications are that the cost per customer would reduce from today’s average of $187 down to $167, all things remaining unchanged – these reductions in cost offer customer better rate protection as well as protected returns to shareholders than any form of regulation • LDC to RDC transformation is an enabling tool to offer increasing service levels and increasing scope of service i.e. DSM, LSE

  5. Standalone operation is successful at the expense of consumers,….

  6. otherwise corporate health declines.

  7. Controllable Structural Efficiency:LDC to RDC transformation leads to a healthy corporation with little or no customer impact

  8. Controllable Structural Efficiency:Partial cost recoveries can further enhance the financial health of corporations with min. impact to consumers

  9. LDC to RDC transformation provides increased protection to all stakeholders • Revenue streams (interest, dividends) to shareholders are fully protected or even enhanced in a regional company - as an example, in the Southwest Hydro project interest payments were maintained, and there was increased dividends stream to all shareholders. • Local control is a perceived value – ultimate responsibility and accountability of service to customers is much more important to the “RDC Inc.” and to OEB • If municipal ownership is retained in the RDC, the perceived local control remains unchanged!

  10. New paradigm in servicing customers • LDC is a “service” industry - Customers are demanding seamless solutions in real time – LDCs cannot escape from this paradigm shift “..people are beginning to expect same level of interaction they enjoy with the supermarket from their government” – MP, UK Parliament • OEB is also exploring possibilities of enhancing service levels • A critical scale of operation is required to justify relatively large investments in acquiring the enabling wherewithal to meet the new paradigm • “Corporate responsibility and accountability to customers can never be outsourced” Shared Services, Coops, ASP models offer incremental benefits; however, the ultimate benefits are realized only in corporate rationalization.

  11. Why have the shareholders not acted upon it? Barriers? • Public shareholders entrusted with the LDC assets – different decision-making criteria than private investors • Many perceived political risks and repercussions – few political champions • Bill 210 significantly impacted the corporation value – shareholders may be waiting to see if this is short-term • First generation PBR reflected more of cost of service based regulation – insufficient to motivate shareholders and managers to act!

  12. Suggestions to affect the controllable structural efficiencies – LDC to RDC • Encourage the rationalization into Regional Distribution Companies (RDCs) – (non-contiguous v/s contiguous –relatively contiguous “shoulder-to-shoulder” region will achieve greater savings) • A concerted communication plan to advise and educate municipal governments • Hydro One can participate and act as a catalyst to creation of RDCs - perhaps by taking an equity position • Clarify PBR II ASAP and expedite approval and recovery of justifiable cost for the newly created RDCs • Continuously enhance economies of scale and scope • Equitable transfer tax treatment for public and private investors

  13. London Hydro Inc. “Everyone wins through greater controllable structural efficiency” Thank you

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