Noting that the Ontario Energy Board (OEB) has approved Hydro One Limited’s (TSX:H) application for the acquisition of Great Lakes Power Transmission LP, and that all regulatory approvals are complete, Hydro One on Oct. 13 said that it expects to close the transaction on Oct. 31.
Hydro One, which is headquartered in Toronto, Ontario, noted that it announced in late January the acquisition for C$222m in cash, subject to customary adjustments, plus the assumption of about C$151m in outstanding debt.
Hydro One also said that following the closing of the transaction, it will operate about 98% of Ontario’s transmission grid.
The Great Lakes Power Transmission business consists of 15 transmission stations, 560 kilometers of high and medium voltage 44-230-kV transmission lines, as well as related infrastructure covering an area of 12,000 square kilometers, and connects to Hydro One’s Wawa and Mississagi transmission stations, the company said.
Great Lakes Power Transmission will begin to operate under the name Hydro One Sault Ste. Marie in early 2017, and will continue to operate as a standalone licensed transmitter, Hydro One said.
"Great Lakes Transmission has a very strong team that has done a tremendous job serving their communities,” Mayo Schmidt, president and CEO of Hydro One, said in the statement. “By combining resources and best practices, we can realize operational synergies and positively impact price, reliability and quality of service over the longer term."
In its Oct. 13 decision, the OEB said that it approves the transaction as it has determined that Hydro One’s proposed share purchase transaction meets the no harm test, which considers whether the proposed transaction will have an adverse effect on the attainment of the OEB’s statutory objectives.
The OEB also said that it does not fully accept the rate-setting framework for Great Lakes Power Transmission rates, as proposed by Hydro One. The OEB said that while it is prepared to accept Hydro One’s proposal to defer the rebasing of rates for Great Lakes Power Transmission for a 10-year period as well as the proposed earning sharing mechanism, it cannot simultaneously accept the proposal that rates for Great Lakes Power Transmission must be reset at the beginning of that 10-year period. The OEB said that Great Lakes Power Transmission can continue with its existing revenue requirement and file a new rate application, proposing a revenue cap index framework for the deferral period.
Hydro One had requested that the OEB accept its proposed selection of a 10-year rate rebasing deferral period for Great Lakes Power Transmission beginning on the closing date of the transaction, currently anticipated before or during 1Q17, the OEB said, adding that the rate rebasing deferral period would end on Dec. 31, 2026.
The OEB said that Hydro One proposed an earning sharing mechanism that would take effect during the last five years of the rebasing deferral period: Great Lakes Power Transmission’s revenue requirement would be adjusted so that prior year excess earnings are shared with ratepayers on a 50:50 basis for all earnings that exceed 300 basis points above the return on equity (ROE) approved by the OEB for 2018 in Great Lakes Power Transmission’s 2017-18 rates application.
Great Lakes Power Transmission’s audited financial statements would be used to calculate any earning sharing amounts if amalgamation has not occurred during the rebasing deferral period, the OEB said, adding that if amalgamation occurs during the rebasing deferral period, Great Lakes Power Transmission’s last available audited financial statement would serve as a proxy for the achieved ROE amount for purposes of calculating shared earnings. The shared amount would be held constant and treated as an annual credit to each subsequent revenue requirement amount in the remaining rebasing deferral period, the OEB said.
After filing the consolidation application, Great Lakes Power Transmission filed a rate application for approval of its 2017 and 2018 revenue requirement. As part of the consolidation application, for 2019 and each subsequent year of the rebasing deferral period, Hydro One proposed to calculate Great Lakes Power Transmission’s annual revenue requirement by using Great Lakes Power Transmission’s prior year revenue requirement and adjusting that amount with an inflation factor, the OEB added.
Hydro One argued that it put forward that proposal on the basis that there are unique aspects of the transaction, including that Hydro One and Great Lakes Power Transmission are transmitters and, therefore have not been required to adopt an incentive regulation mechanism (IRM) method of rate regulation. The OEB also said that Hydro One suggested that the inflation adjustment proposal is akin to rate-setting proposals approved in other consolidation proceedings.
Among other things, the OEB said that its staff and intervenors in the proceeding argued that the OEB should not approve Hydro One’s rate-setting methodology, saying that the proposal concerns a revenue-setting methodology that should properly be applied for and assessed by the OEB through a rate application.