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Distribution Total Factor Productivity Preliminary Findings for Hydro One and the Ontario Industry
STEVE FENRICK
OCTOBER 5, 2016
Project Overview
Board’s March 12, 2015 Decision in EB-2013-0416, page 17:
“The OEB sees value in Hydro One measuring its own total factor productivity over time to be able to demonstrate improvement in productivity to its customers and the OEB. The OEB leaves it to Hydro One to determine its preferred total factor productivity study method. However, the period of the study should include years at least going back to 2002. The results of the study must be filed as part of Hydro One’s next rates application.”
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TFP Study Items
Three key study items:1. Hydro One 2002-2015 TFP trend using revenue-related outputs
of # of customers, kWh deliveries, and peak demand2. Adjusted Hydro One TFP trend by incorporating employee
safety and reliability (SAIFI and CAIDI)3. Updated PEG (Board Staff Consultant) Ontario industry TFP
study to 2015 Previous result was 2002-2012
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Research Item #1: Hydro One Unadjusted TFP
“Unadjusted” means the outputs are only based on revenue-related billing determinants Does not incorporate other performance-related
metrics
Outputs are # of customers, kWh’s delivered, and maximum peak demand
Outputs and output weights same as used in 4GIR OM&A expense definitions same as 4GIR Capital additions used HONI actual plant
additions rather than estimated amounts
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One Major Difference from 4GIR Study
PSE used the North Atlantic U.S. Handy-Whitman of Public Utility Construction Cost Indexes for “Total Distribution Plant” to measure capital asset price inflation PEG used the Canadian Electric Utility Construction
Price Index (EUCPI) in 4GIR study
Reasons for Using Handy-Whitman Index:1. TFP study is for distribution functions only2. EUCPI appears to contain financing costs which
skews measure of asset price inflation3. EUCPI has been discontinued after its 2014 data
release
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Hydro One Unadjusted TFP Preliminary Results
2002-2015 average annual TFP trend declining by 1.4%
Much of the decline occurred from 2005 to 2010
Since 2010 average trend is -0.4%
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Year Output Quantity Index
Input Quantity Index TFP Index
2002 1.00 1.00 1.002003 1.02 1.01 1.002004 1.02 1.00 1.022005 1.04 1.03 1.012006 1.04 1.08 0.962007 1.05 1.17 0.892008 1.06 1.17 0.902009 1.06 1.22 0.862010 1.06 1.26 0.842011 1.07 1.26 0.842012 1.07 1.26 0.852013 1.07 1.32 0.812014 1.07 1.35 0.802015 1.08 1.30 0.83
Average Annual Growth Rates2002-2015 0.6% 2.0% -1.4%2002-2010 0.7% 2.9% -2.1%2010-2015 0.4% 0.7% -0.4%
Research Item #2: Hydro One Adjusted TFP
PSE incorporated within the Output Quantity index1. 3-year rolling average of HON’s employee safety
trend (no data prior to 2004) Weight based on trackable safety costs of HON
2. 3-year rolling average of HON’s SAIFI and CAIDI trends (no data prior to 2002) Weight based on 2009 paper on reliability costs issued
by the Lawrence Berkeley National Laboratory and prepared for the U.S. Department of Energy
Makes the TFP trend more indicative of the performance trend of HON More comprehensive than unadjusted TFP but still
not fully comprehensive
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Hydro One Adjusted TFP Preliminary Results
2002-2015 average annual TFP trend declining by 0.9%
Much of the decline occurred from 2005 to 2010
Since 2010 average trend is +0.5%
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Year TFP (unadjusted)
TFP with Safety
Adjustment Only
TFP with Reliability
Adjustment Only
TFP with Safety and Reliability
Adjustment2002 1.00 1.00 1.00 1.002003 1.00 1.00 1.00 1.002004 1.02 1.02 1.02 1.022005 1.01 1.01 1.02 1.022006 0.96 0.96 0.99 0.992007 0.89 0.90 0.91 0.912008 0.90 0.90 0.92 0.922009 0.86 0.86 0.88 0.882010 0.84 0.85 0.86 0.862011 0.84 0.85 0.86 0.882012 0.85 0.88 0.87 0.902013 0.81 0.84 0.83 0.862014 0.80 0.84 0.81 0.852015 0.83 0.88 0.84 0.88
Average Annual Growth Rate2002-2015 -1.4% -1.0% -1.4% -0.9%2002-2010 -2.1% -2.0% -1.9% -1.8%2010-2015 -0.4% 0.6% -0.5% 0.5%
Research Item #3: Ontario TFP Update
Updated Ontario TFP to 2015 PEG found 2002-2012 Ontario TFP trend = -0.3%
TFP trend used as basis for X-factor
Implemented PEG methodology and data except: Escalated EUCPI in 2015 by Handy-Whitman index
due to it being discontinued
Used OEB Yearbook values for 2013, 2014, and 2015 for capital additions
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Purpose of Ontario TFP
PEG used Ontario TFP as basis for recommendation on 4GIR X-factor Purpose was not to examine individual distributors or
industry performance trend This is why revenue-related outputs are used and not
unrelated outputs PSE’s adjusted TFP is more comprehensive of
examining performance Ontario TFP update is more appropriate for X-factor
calibration given the current 4GIR construct Hydro One specific TFP should not be used for X-
factor calibration X-factor needs to be externally-driven and based on
revenue-related billing determinants
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Ontario Industry TFP Preliminary Results
2002-2015 average annual TFP trend declining by 0.9%
Much of the decline occurring from 2010
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Year Output Quantity Index
Input Quantity Index TFP Index
2002 100.0 100.0 100.0 2003 102.1 101.3 100.8 2004 104.0 101.8 102.1 2005 106.8 102.4 104.3 2006 108.2 103.5 104.5 2007 109.7 106.6 102.9 2008 110.6 108.1 102.3 2009 110.8 108.4 102.2 2010 111.8 108.6 103.0 2011 112.8 110.9 101.7 2012 114.0 116.7 97.7 2013 114.8 123.0 93.3 2014 115.6 126.5 91.4 2015 115.6 130.2 88.8
Average Annual Growth Rate2002-2015
1.1% 2.0% -0.9%2002-2010
1.4% 1.0% 0.4%2010-2015
0.7% 3.6% -3.0%
Interpretation of Negative TFP Trends
Measured outputs growing slower than measured inputs
Possible Causes:1. Declining efficiency2. Increasing of outputs not being measured within
TFP calculation (e.g., customer service, regulatory requirements, environmental stewardship, power quality)
Adjusted TFP of Hydro One partially corrects for this
3. External circumstances changing over time Slower output growth in western economies
4. Aging capital infrastructure past its useful life in need of replacement
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Steve Fenrick, M.S.
Leader, Economics & Market Research Group
608-268-3549
608-334-5994 (mobile)
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Thank You:
