Bluewater Power Distribution Corporation

2006 Rate Application

RP-2005-0020 / EB-2005-0340

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BLUEWATER POWER DISTRIBUTION CORPORATION

2006 Rate Application RP 2005-0020/EB-2005-0340

Executive Summary of the Application

Introduction

This 2006 rate application of Bluewater Power Distribution Corporation complies with the Ontario Energy Board’s 2006 Electricity Distribution Rate Handbook (the “2006 Rate Handbook”). The chapters and section numbers of this application mirror, to the extent possible, the 2006 Rate Handbook.

Components of the Application

Bluewater Power Distribution Corporation (“Bluewater Power”) is a licensed electricity distributor operating under Ontario Energy Board Electricity Distribution Licence ED-2002-0517. This licence was issued by the Ontario Energy Board on October 15, 2003 and remains valid until March 31, 2023. Bluewater Power does not have any special conditions in its licence that would affect the Board’s review of this application.

As an embedded distributor,Bluewater Power serves approximately 35,000 customers in the municipalities of the City of Sarnia, the Town of Petrolia, the Village of Point Edward, the Village of Oil Springs, the Town of Watford and the Village of Alvinstonin South-western Ontario.

Bluewater Power’s service territory is adjacent to the service territory of Hydro One Networks Incorporated (“HONI”) and consists of 51% urban and 49% rural service area.

Additional information regarding Bluewater Power is provided within Section 3 of this application entitled “Schedules” and includes the following:

A further description of Bluewater Power, mailing address and contact information are provided as Schedule 2-1;
A corporate structure chart is provided as Schedule 2-2;
Audited financial statements for the years 2002 to 2004 are provided as Schedule 2-3.
The reconciliation to RRR filings is provided as an addendum to Schedule 2-3.
A complete list of rates and charges as approved by the Board and currently in effect is provided as Schedule 2-4.

Test Year and Adjustments

Bluewater Power has prepared this application based upon a 2004 test year with all applicable Tier 1 adjustments.

The following is a summary of the Tier 1 adjustments which have been incorporated by Bluewater Power.

TIER 1 ADJUSTMENTS OVERVIEW
Distribution Expense Adjustments
i) OEB Annual Assessment Adjustment / $ 83,432
ii) Pension Adjustment / $ 15,042
iii) Insurance Adjustment / $(14,891)
iv) Hydro One Post-May 2006 Low Voltage Estimate Adjustment / $159,666
v) Conservation and Demand Management (CDM) 2006 Incremental Adjustment / $ 160,000
vi) Smart Meter Adjustment / $125,000
vi) Non-Routine Adjustment (1) Bahamas Relief Project (Net) / $(129,777)
vii) Non-Routine Adjustment (2) Performance IncentivePlan / $126,000
Rate Base Adjustments
viii) Wholesale Meter Adjustment / $ 38,273
ix) CDM 3rdTranche Adjustment / $530,000
x) CDM 2006 Incremental Adjustment / $90,000
xi) Smart Meter 2006 Adjustment / $500,000

Further details pertaining to these adjustments are as follows:

i)OEB Annual Assessment Adjustment

The adjustment of $83,432 reflects the difference between the 2004 base and the 2005 projected actual as noted in the model, sheet ADJ 3 (Distribution Expense Tier 1). The 2005 projected actual was calculated assuming that the actual costs of the first six months of 2005 are repeated for the balance of the year.

ii)Pension Adjustment

The adjustment of $15,042 reflects the difference between the 2004 base and the 2005 projected actual as noted in the model, sheet ADJ 3 (Distribution Expense Tier 1).

iii)Insurance Adjustment

The adjustment of ($14,891) reflects the difference between the 2004 base and the 2005 actual as noted in the model; sheet ADJ 3 (Distribution Expense Tier 1).The 2005 projected actual was calculated using the actual costs for the first six months and an insurance estimate of the costs for the balance of the year.

iv)Hydro One Post-May 2006 Low Voltage Estimate Adjustment

Bluewater Power has estimated the post-May 2006 Hydro One low voltage (“LV”) charges in accordance with the Handbook. Hydro One’s current approved low voltage charges effective March 1, 2003 have been applied to the 2004 consumption data as provided on the monthly invoices received by Hydro One. The amount included as a Tier 1 adjustment is $159,666 and details can be found in Schedule 3.1.A.

v)CDM 2006 Incremental Adjustment

This adjustment of $160,000 reflects 2006 proposed expense spending incremental to the third tranche amounts. This is further detailed in Tab 3, CDM Plan.

vi)Smart Meter Adjustment – Distribution Expense

This adjustment of $125,000 represents the additional expenses required to implement and operate the additional 2,500 smart meters to be installed in 2006.

As the Board is aware, there is a base cost for maintaining and operating smart meters. Bluewater Power anticipates that the operating cost per unit will decrease as the number of installed units increases (economies of scale). Based on the current information available, Bluewater Power anticipates an average monthly operating cost for the 3250 installed smart meters to be $10,425.00. This is an average unit cost of $3.21 per month. The total projection for the 2006 smart meter operating expenses will be $125,000.00.

vii)Non-Routine Adjustment (1) – Bahamas Relief Effort

This non-routine adjustment of ($129,777) reflects the net revenue received from a one-time extraordinary event in 2004. Please refer to Schedule 3-2 for details.

viii)Non-Routine Adjustment (2) - Performance IncentivePlan

Bluewater Power’sperformance incentive compensation plan was introduced in 2005 and is designed to encourage greater levels of employee performance which will result in ratepayer benefits.

Prior to any payout of incentive compensation, the Bluewater Power’s operating and maintenance spending must be within budgeted levels and all Ontario Energy Board reliability and service quality standards must be met for that period. Further detailed information regarding the employee performance incentive plan is provided in Schedule 6-5.

ix)Wholesale Meter Adjustment

A wholesale meter adjustment of $38,273 reflects the projected incremental 2005 wholesale meter costs. This includes the costs necessary to ensure Bluewater Power’s Modeland station is IMO compliant for 2005.

x)CDM 3rd Tranche Adjustment

Bluewater Power was approved in RP-2004-0203/EB-2005-0305to spend $657,093 on conservation and demand management.

The model includes $530,000 of the third tranche capital expenditures as an inclusion in rate base.

xi)CDM 2006 Incremental Adjustment

In addition, Bluewater Power has included an application for 2006 incremental capital spending for CDM of $90,000. The capital has been included as a Tier 1 rate base adjustment and is further detailed in Schedule 3-4.

xii)Smart Meter 2006 Adjustment

Bluewater Power has included $500,000 in incremental capital expenditures related to year 2006 smart meters. On December 31, 2005, Bluewater Power will have completed our Smart Meter pilot project as outlined in the approved 2005 CDM plan. This will bring Bluewater Power’s total installed Smart Meter inventory up to approximately 750. The 750 meter will be made up of a 3 different types of meters and include both residential and general service customers.

In 2006, Bluewater Power intends to install an additional 2500 smart meters. This will allow Bluewater Power to meet the Ministry of Energy stated objective of have 100% smart meter installation by 2010.

Based on the current information available Bluewater Power expects the average cost per smart meter to be $200.00 CND. This price would include system requirements common to the meter type selected (i.e. collector devices). The total capital expenditure for smart meters in 2006 will be $500,000.00 CND.

Rate Base

i)Definition of Rate Base

An overview ofthe levels of rate base of Bluewater Power follows as Chart C-1.

CHART C-1 - RATE BASE COMPARISON
1999 / 2002 / 2003 / 2004 / Proposed
2006 EDR
Total Fixed Assets / $ 56,383,346 / $ 67,114,592 / $ 69,644,626 / $ 73,725,553 / $ 72,211,164
Accumulated Depreciation / $ (24,478,458) / $ (33,160,324) / $ (35,096,476) / $ (38,165,084) / $ (37,030,097)
Net Fixed Assets / $ 31,904,888 / $ 33,954,268 / $ 34,548,150 / $ 35,560,469 / $ 35,181,066
Cost of Power / $ 62,763,255 / $ 74,709,667 / $ 67,475,675 / $ 68,494,386 / $ 68,756,970
Controllable Expenses / $ 7,670,656 / $ 8,366,008 / $ 9,053,158 / $ 8,873,798 / $ 9,427,241
Total / $ 70,433,911 / $ 83,075,675 / $ 76,528,833 / $ 77,368,184 / $ 78,184,211
Working Capital
(15% of expenses) / $ 10,565,087 / $ 12,461,351 / $ 11,479,325 / $ 11,605,228 / $ 11,727,632
Total Rate Base / $ 42,469,975 / $ 46,415,619 / $ 46,027,475 / $ 47,165,697 / $ 46,908,698

ii)Amortization Rates

The amortization rates outlined in Appendix B of the 2006 Rate Handbook have been used for the purposes of this filing.

iii)Capital Investments

Schedule 4-1 includes details on the 2004 capital projects which exceeded the materiality threshold of $75,000.

iv)Capitalization Policy

Bluewater Power records capital assets at cost in accordance with Generally Accepted Accounting Principles. The cost of an item of property, plant and equipment includes direct acquisition, construction or development costs, such as materials and labour, and overhead costs directly attributable to the acquisition, construction or development activity. Carrying costs, such as interest, that are directly attributable to the acquisition, construction, or development activity are capitalized if incurred. The costs incurred to enhance the service potential of an item of property, plant and equipment are also capitalized.

Cost of Capital

i)Return on Equity and Debt Rate

Bluewater Power has elected the maximum return on equity at 9.0%. The 7.25% debt rate for Bluewater Power reflects the actual debt rate (which equals the deemed debt rate) at the time of issuance of the corporate promissory note. This debt cost is further defined in the EDR model; sheet 3-4 entitled Weighted Debt Cost.

ii)Capital Structure

Bluewater Power’s actual capital structure for 2004 is detailed in the EDR model, sheet 3-3 entitled Capital Structure. These numbers have been taken from the audited 2004 financial statements.

Bluewater Power’s deemed debt/equity structure is 50% debt / 50% equity. Bluewater Power’s actual structure does not differ significantly from this deemed structure.

Distribution Expenses

i)Overview

Distribution expenses for the years 2002 to 2004 are detailed in Schedule 6.0.

Any variances in the level of expenses between the years deemed to be significant (i.e., greater than $150,000 or .01% of 2004 distribution expenses) are explained below:

2002 to 2003 Significant Variances

1) Outside Services Employed increased $283,830in 2003 over 2002:

To assist with the increased workload created by market opening several contract personnel were hired. Most of these positions began near the end of 2002 but remained throughout 2003. These costs were not allocated to the transition deferral account. In addition, two contract employees were hired to replace employees on short term disability. Costs returned to the normal level in 2004.

2) Employees Pensions and Benefits increased $195,000 in 2003 over 2002:

In 2002, Bluewater Power experienced an “OMERS holiday” in which no pension contributions had to be made. However, in 2003 this holiday ended and contributions to OMERS resumed.

3) Provision for Future Income Taxes decreased $980,000in 2003 over 2002:

This represents the cumulative change from 2001 to 2003 in the long-term asset balance for future payments in lieu of income taxes as determined by Bluewater Power’s external auditors KPMG LLP.

2003 to 2004 Significant Variances

4)Executive Salaries and Expenses decreased $328,166in 2004 over 2003:

This decrease was due to corporate reorganization, which has partially resulted in the positive variance in the general administrative salaries category as noted below.

5)General Administrative Salaries increased $696,861in 2004 over 2003:

The components of this variance are due to:

In 2004 several contract employees became permanent employees and as such, the outside services spending decreased, and this category increased.
A contractual cost of living salary increase of 3% in 2004.
Overtime increased in 2004, mainly due to the Bahamas relief project, which has been netted off as an adjustment.
As a result of reorganization, employees were allocated to this general administrative categorythat were previously allocated tothe executive category, as noted above.

6)Administrative Expenses Transferred (credit) decreased $522,909in 2004 over 2003:

In 2004, the capital spending was $1.675 milliongreater than 2003. As a result, a greater level of internal labour was used to complete these capital projects and this represented a greateramount of capitalized labour.

7)Outside Services Employed decreased $198,860 in 2004 over 2003:

This resulted from the hiring of several contract employees as permanent employees. This is further contributing to the positive general administrative salaries variance; this is an allocation issue only.

8)Employees Pensions and Benefits increase of $373,334in 2004 over 2003:

In 2004, OMERS increased the contribution rates by approximately 4% of employee earnings. Other employee benefits rates increased as well as a result of general health care cost increases.

9)Amortization Expense increased $172,012in 2004 over 2003:

This is a result of the additional capital projects in 2004 as compared to 2003 and thus the associated amortization expense increase.

Distribution Expenses (continued)

ii)Bad Debt Expense

Schedule 6-2 summarizes the bad debt expenses for the years 2002 to 2004. The 2004 bad debt expense included in this filing is not deemed unusual. Bluewater Power does not track bad debt by rate category thus this information is not provided.

iii)Information Technology Expenses

The model and practice for tracking Information Technology (“IT”) related expenses at Bluewater Power is one of centrality. With very little exception (detailed below), all IT related expenses are budgeted through the IT budget. This includes all IT infrastructure such as servers, network equipment, storage and backup solutions, data centre equipment, all personal computers and monitors, printers, all office equipment including mailing equipment, photocopiers, fax machines, scanners, and all print consumables. Also budgeted in IT is all software including back-office software, business applications and desktop applications such as office productivity software, email, and virus protection etc. The IT budget is also responsible for internet connectivity and web hosting services, as well as all wired telecommunications including hardware, software, telephones and telecom services. All maintenance, development and services for the above are managed within the IT budget. Finally, the IT budget includes all IT staff and technology training.

As noted, there is exception to the above, which includes cell phone usage which is managed within each department and all SCADA related expenditures which are managed through the Operations Department.

iv)Advertising, Political Contributions, Employee Dues, Charitable Donations, Meals, Travel and Business Entertainment, Research and Development

Advertising expenses of $18,327 (or 82% of the total 2004 advertising expenses) have been excluded from 2004 expenses.

Charitable donations of $14,320 (or 89% of the total 2004 charitable donations) have been excluded from 2004 expenses.Schedule 6.3 details amounts paid in charitable donations from 2002 to 2004.

Bluewater Power did not have any 2004 expenses related to political contributions, employee dues, research and development, or activities.

Significant internal controls exist to ensure proper authorization and approval of all employee expenses. Please see Schedule 6-0.B for the corporate policy regarding employee expenses.

v)Employee Total Compensation

Three years of historical data related to employee total compensation is detailed in the EDR model, sheet 2-6 (Employee Compensation).

Schedule 6-5 also includes details related to Bluewater Power’s employee incentive compensation plan which does not form any part of 2004 employee compensation as that program was introduced in 2005.

vi)Pensions and Post-Retirement Benefits

Bluewater Power’s employees are members of the Ontario Municipal Employees Retirement System (“OMERS”). Pension premiums and adjustment expenses for the years 2002 to 2004 are included in Schedule 6-6.

Post-retirement benefits are accounted for on an accrual basis and are reviewed annually. Any changes in the actuarial value in post retirement benefits are expensed. Bluewater Power’s plan adheres to current Canadian Institute of Chartered Accountants Handbook accounting rules.

vii)Distribution Expenses Paid to Affiliates

Bluewater Power does not have any distribution expenses related to affiliate transactions.

Taxes/PILS

Bluewater Power utilized the 2006 OEB tax model given its use of a historical test year as the basis of its application. The model is included under Section 2 of this application entitled Tax Model. Bluewater Power did not include any variations from the 2006 OEB tax model.

Schedules 7-1, 7-2 and 7-3 within the Tax Model provide additional information related to taxes and PILS.

Bluewater Power paid the following taxes in the years 2002 to 2004.

Comparison of Taxes
Per Corporate Tax Returns: / 2002 / 2003 / 2004
Per Ontario CT23:
Income Tax / 9,973 / 95,359 / 83,606
Capital Tax / 137,028 / 140,763 / 131,733
Large Corporations Tax / 92,304 / 92,903 / -
Total Taxes Paid: / $ 239,305 / $ 329,025 / $ 215,339
2006 Projected Taxes / $1,820,391
Projected Variance over Taxes Actually Paid / $1,605,052

The 2006 distribution rates include recovery of $1,820,391 in tax expense. The variance of $1,605,052 between this figure and the 2004 actual is detailed in the tax model sheet entitled “Test Year PILs Variance”.

All taxation work related to annual filings, regulatory requirements and in particular this rate application was completed in consultation with our independent external auditors KPMG LLP.

Revenue Requirement

Bluewater Power’s 2006 service revenue is $18,209,333. The base revenue requirement is $16,277,959. Additional details are provided in Schedules 8-1 and 8-2.

Cost Allocation

Schedules 9-1, 9-2, and 9-3 provide information related to customer classification, customer eligibility criteria and allocation factors.

As part of this application, Bluewater Power is proposing to harmonize a portion of the customers within the General Service rate category. Schedule 10-3 provides the details and justification of this proposed harmonization.

Rates and Charges

i)Fixed/Variable Split

With the exception of the sentinel lights rate class, the effective fixed/variable splits as determined by the EDR model were maintained.

The fixed/variable split for the sentinel light rate class was altered slightly for rate mitigation purposes to result in a rate increase of less than 10%. Further details are provided in Schedule 10-1.

ii)Unmetered Scattered Loads

Bluewater Power currently bills its unmetered scattered load customers as General Service <50 kW by applying the monthly service charge on a per connection point basis. As per the Board’s instructions as detailed in Section 10.2 of the 2006 Rate Handbook, Bluewater Power has set the level of the monthly service charge for unmetered scattered loads at 50% of the monthly service charge of the General Service <50 kW rate class. Schedule 10.2 provides further information regarding Unmetered scattered loads.

iii)Time of Use Distribution Rates

Bluewater Power has incorporated in this application the harmonization of Time of Use Rates in a manner that is fair and reasonable. A detailed explanation is provided in Schedule 10-3.

iv)Loss Adjustment Factor

Bluewater Power has updated its current loss adjustment factors as part of this application. Schedule 10-5 provides further information pertaining to the loss adjustment factor. The three year average loss factor of 4.4% has been utilized in this application.

v)Standby Charges

Bluewater Power has not included in this application a request for approval of standby charges. However, we anticipate a situation involving a General Service Intermediate customer in the future wherein application of standby charges would be required. Bluewater Power will make a specific application for approval of such a rate once additional customer information is available.