The Power to Adapt Through Innovation EDIST 2018 Toronto, Ontario January 18, 2018

Transcription

1 The Power to Adapt Through Innovation EDIST 2018 Toronto, Ontario January 18, 2018 John A.D. Vellone Partner, Borden Ladner Gervais LLP

2 DOES REGULATION STIFLE INNOVATION?

3 A Short History of U.S. Freight Railroads Source: Association of American Railroads August 2017

4 The Interstate Commerce Act of 1887 Regulates the railroad industry Protects against monopolistic practices Required railroad rates to be "reasonable and just" Created the Interstate Commerce Commission (ICC)

5 Rise in Competition

6 Misguided Railroad Regulation U.S. Department of Transportation, 1978 The current system of rail-road regulation is a hodgepodge of inconsistent and often anachronistic regulations that no longer correspond to the economic condition of the railroads, the nature of intermodal competition, or the often-conflicting needs of shippers, consumers, and taxpayers.

7 Deregulation The Staggers Act of 1980 Recognized railroads faced intense competition for traffic Excessive regulation prevented them from competing effectively Allowed railroads to decide for themselves what routes to use, what services to offer, what prices to charge (Based on market demands) Surface Transportation Board now sets maximum-allowable rates, only where there is no effective competition for those services

8 Lessons Learned Price cap regulation remained in effect decades longer than it should have, to devastating effect Regulatory rationale was often inward looking, selfjustifying and self-perpetuating Rates became detached from economic reality Regulatory requirements limited, rather than encouraged, innovation

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10 Drivers of Change Drivers: 1. Technological Innovation 2. Increased Competition 3. Customer Choice 4. Government policy & regulation

11 TECHNOLOGICAL INNOVATION

12 Technological Innovation

13 INCREASED COMPETITION

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15 Unit Sub-Metering

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17 CUSTOMER CHOICE

18 Consumer Choice

19 Your service area?

20 GOVERNMENT POLICY & REGULATION

21 The utility death spiral: myth or reality? The financial risks created by disruptive challenges include declining utility revenues, increasing costs, and lower profitability potential, particularly over the long-term.

22 The OEB s Response

23 What the OEB has done well? RRFE Success Stories Allowing utilities to select a rate setting method that suits their circumstances (Annual IR, 4GIRM, Custom IR) Transition to fixed rates for residential consumers Improvements to utility system planning, pacing and prioritization (Ch. 5 Filing Requirements) General acceptance of an industry wide scorecard to measure, manage and monitor performance

24 Ongoing challenges Customer Focus In Theory: Anticipating the change to a new competitive landscape where customer choice will drive all energy decisions In Practice: Surveys done to meet evidentiary requirements No evidence seems to be enough, can always ask 1 more question Often criticized, never praised What exactly does the OEB require in evidence? Would more concrete guidance help?

25 Ongoing challenges Non-Wires Solutions E.g. Distributed Generation, CDM, Energy Storage, etc. LDC cannot, except through an affiliate, carry on a business activity other than distributing electricity (s. 71) Rate setting approach incents wires over non-wires solutions (s. 78)

26 Ongoing challenges OM&A Formulas EB CNPI March 9, 2017 EB Thunder Bay Sept 21, 2017 Assumes OM&A costs increases are capped at: Inflation less stretch factor, and increased for customer growth

27 The problem with formulas The formula is not based on empirical evidence Dec the OEB assumed productivity factor of 1% for 2GIRM Nov PEG found, based on empirical evidence, productivity factor was actually %. The assumption in the 2GIRM formula was wrong! The formulas was not subject of stakeholder consultations, expert evidence or requirements to be updated frequently Further disconnects costs (reality) from rates Creates systemic disincentive to innovate Particularly if innovation increases OM&A beyond the formula

28 The problem with formulas Rebasing applications take considerable time, money and effort to complete Proportionate review of rate applications? Utility efficiency Good governance Customer focus Only gets assessed after you apply Will not reduce the 2+ year effort that goes into producing a good quality rate application before you file Natural justice concerns

29 Dicerni

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31 Railroads are financially stronger today Avg. ROI is higher 1970s 2.0% 1980s 4.4% 1990s 7.0% % Rates are 45% lower in 2016 than in 1981 Volumes are up Productivity is up

32 Conclusions Tremendous period of change and uncertainty A focus on customer choice is crucial Regulatory changes are inevitable Opportunities abound