On January 19, 2016, the OEB issued the Handbook for Electricity Distributor and Transmitter Consolidations to provide guidance on applications for approval of electricity utility consolidations by way of mergers, acquisitions, amalgamations and divestitures (MAADs) and subsequent rate applications.
In previous posts we have discussed support for the consolidation of electricity utilities in the province from both the OEB and the government of Ontario. The handbook is intended to provide guidance on the process for review of consolidation applications by the OEB, the information needed in support of an application and the approach the OEB will take in assessing the merits of any proposed consolidation in meeting the public interest. The handbook is relatively concise. However, a few of the key topics covered in the handbook are summarized below.
The “No Harm Test”
The OEB will continue to apply the “no harm” test in reviewing consolidation applications as developed in the 2005 Combined Proceeding decision. In applying the “no harm” test, the OEB primarily focuses its review on impacts of the proposed transaction on the price and quality of service to customers, as well as, the cost effectiveness, economic efficiency and financial liability of the electricity distribution sector.
Price & Adequacy, Reliability and Quality of Service
In order to demonstrate that a proposed consolidation will have “no harm” to the price paid by customers, applicants must show that there is a reasonable expectation, based on the underlying cost structures of the utilities, that the costs to serve the acquired customers following consolidation will be no higher than they otherwise would have been, both now and in the future.
Utilities are expected to deliver continuous improvement for both reliability and service quality. Under the “no harm” test, applicants must be able to demonstrate that this continuous improvement is expected to carry on after consolidation.
Promoting Economic Efficiency and Cost Effectiveness & Financial Viability
The OEB will assess the impact of the proposed consolidation on the economic efficiency and cost effectiveness of a utility by evaluating those aspects of utility operations identified by an applicant where it is expected that consolidation will result in sustained operational efficiencies.
Improvement in financial strength is one of the expected underlying benefits of consolidation. The OEB will consider the impact of a transaction on the ongoing financial viability of the acquiring or consolidated entity. In the context of a utility purchase, the selling price of a utility is relevant under the “no harm” test only for the purpose of determining whether or not the price and any premium paid above the historic book value of the assets involved will create a financial burden on the acquiring company. Such premiums over historic value are not recoverable through distribution rates and a utility will not be permitted to earn any return on them.
The handbook incorporates rate-making policies set out in the OEB’s two-part report, Rate-making Associated with Distributor Consolidation. Incremental transaction and integration costs associated with consolidation are generally not recoverable through rates. Distributors have advised the OEB that these costs are often significant and may constitute a barrier to consolidation. In response to these concerns, the OEB allows distributors to defer rebasing for up to 10 years after consolidation so as to allow distributors to fully realize the anticipated efficiency gains and offset the costs of the transaction. Further details on the OEB’s rate-making consolidation report and policies can be found in an earlier post on the topic here.
The handbook sets out detailed filing requirements for consolidation applications, including what documents are and are not relevant to assessing whether the transaction is in the public interest. Applications filed with the OEB must include certification by a senior officer of the applicant that the evidence filed is accurate, consistent and complete to the best of his or her knowledge.