2006 Electricity Distribution Rate Application

October 3, 2005

Ontario Energy Board

26th Floor

2300 Yonge Street

Toronto, Ontario

M4P 1E4

ATT: Mr. John Zych, Secretary

Dear Mr. Zych,

ED-2002-0540

RP- 2005-0020

EB-2005-0388

2006 Electricity Distribution Rate Application

Lakeland Power Distribution Ltd.

In accordance with instructions released in the May 11, 2005 of the 2006 Electricity Distribution Rate Handbook, and in accordance with the July 2005 filing guidelines, application for recovery of regulatory assets for May 1, 2006 distribution rate adjustment, Lakeland Power Distribution Ltd.requests a final order for the recovery and distribution of regulatory assets.

This application contains the following parts:

• Summary of the Application,
• Completed 2006 Regulatory Asset model and Supplementary Disclosure
• Completed 2006 Tax model,
• Completed 2006 EDR model, and
• Supporting schedules.

Six (6) hard copies of this application are enclosed, together with electronic copies of the application and attachments.

This application is respectfully submitted for the Board’s consideration.

Yours truly,

Mr. Chris Litschko

President & CEO

Lakeland Power Distribution Ltd.

RP- 2005-0020

EB-2005-0388

2006 Electricity Distribution Rate Application

Lakeland Power Distribution Ltd.

SUMMARY OF APPLICATION

Regulatory Asset Recovery (RAR)

Lakeland Power Distribution Ltd.(LPDL) is filing a request for regulatory asset recovery in accordance with the regulatory asset procedural order. We have provided the requisite inputs to the regulatory asset recovery model and the outputs of that model have been transferred to the EDR 2006 rates model.

LPDLhas elected the Minimum Reviewrequirement approach in it’s filing request for regulatory asset recovery.

The Supplementary Disclosure required by the December 9, 2004 document – “Decisions with Reasons” is attached to this document.

Also note that an additional Sheet has been added to the Regulatory Asset Model. Sheet “6. Reconciliation” provides the necessary amounts and reasons for the differences between the RRR Filings and the balances used in this model.

Chapter 1

Introduction

The following summary is consistent with the procedural order and LPDL understanding of the 2006 Electricity Distribution Rate (EDR) Handbook.

The components of the application are as follows:

• Summary of the Application,
• Completed 2006 Regulatory Asset model and Supplementary Disclosure,
• Completed 2006 Tax model,
• Completed 2006 EDR model, and
• Supporting schedules.

This Summary of the Application is organized by Chapter of the 2006 EDR Handbook.

Chapter 2

2.1.1Description of the Distributor

The description of the LPDL is set out in Schedule 2.1

2.1.2Corporate Structure

Schedule 2-2 (attached) is an organization chart showing the parent and its affiliates and subsidiary companies with their relationships to the applicant.

A summary description of the LPDL’s affiliates is also included.

2.1.3Audited Financial Statements and Reconciliations

The audited statements for the applicant for 2002, 2003, 2004 are attached as Schedule 2-3.

2.1.4. Compliance with OEB License

There are no special conditions on the license.

2.1.5Complete Listing of Rates and Changes

A complete list of all current approved Rates and Charges is attached as Schedule 2-4.

This includes distribution rates as well as all other charges.

Chapter 3

Test Year and Adjustments

The applicant has chosen to file Option 2: 2004 year with all applicable Tier 1 adjustments.

The expense and net fixed asset tests are as set out in the table below:

Description / 2004 amount before adjustments / Materiality test / Material amount
Expense / $2,686,768 / 0.2 % of the total distribution expense before PILs / $5,374
Net fixed assets / $12.908,220 / 0.2% of net fixed assets before adjustments / $25,816

As required on page 11 of the Electric Distribution Rate Handbook, the distribution expenses, rate base and revenue including statistics are included as part of the Tier 1 adjustments. The applicant’s Tier 1 adjustments are set out in Schedule 3-1.

Chapter 4

Rate Base

4.2Capital Investments

Schedule 4-1 provides a breakdown of the capital expenditures for 2004.

4.3Interest on Deferral Accounts and Construction Work in Progress (CWIP)

CWIP has no direct application for this application.

4.4Capitalization Policy

LPDL has included its approved capitalization policy as an attachment to Schedule 4-1.

It is the policy of the company to maintain strong financial control over expenditures for all capital assets by evaluating and approving capital requests for projects that enhance or improve the efficiency of the Company’s assets. Any expenditure under $1,000 will not be capitalized.

It is the joint responsibility of the President and CFO to ensure all expenditures for capital assets are properly evaluated and approved.

4.6 Treatment of Capital Gains and Losses

4.6.1Assets Sold to a Non-Affiliate

N/A.

4.6.2Assets Sold to an Affiliate

N/A.

Chapter 5

Cost of Capital

5.1 Maximum allowed return on equity

LPDL is applying for the maximum allowed return on equity of 9.00 % in accordance with the 2006 Electric Distribution Rate Handbook.

5.2Debt Rate

Table 5.1Size-Related Debt Formula

The applicant’s deemed capital structure and deemed debt rate are as set out below:

Rate Base / Deemed Capital Structure / Deemed Debt Rate
Debt
(D) / Equity
(1-D)
< $100 million / 50% / 50% / 6.25%

The applicant’s weighted average debt rate is set out in Schedule 5-1 and is 4.38 %.

5.3Capital Structure

Schedule 5-2 provides the actual Capital Structure for LPDLconsistent with the 2004 audited statements. The difference between the Deemed and Actual Capital Structure is 6.4%.

5.4Working Capital Allowance

The working capital allowance used by the applicant is in accordance with the 2006 EDR Handbook and is as calculated in the model.

Chapter 6

Distribution Expenses

6.0Introduction

Distribution expenses are included in aggregate format in the EDR 2006 model as outlined in Appendix A to the 2006 EDR handbook.

Tier 1 adjustments are included.

6.1Definition of Distribution Expenses

Distribution expenses recorded by LPDL are consistent with the Accounting Procedures Handbook and have been separated into distribution and non-distribution amounts by the 2006 EDR model.

6.2Detailed Reporting for Specific Distribution Expenses

6.2.1Insurance Expense

The insurance information has been set out in Schedule 6-1. An explanation of the insurance amounts on ADJ 3 and ADJ 5 have been included as part of Schedule 3-1.

6.2.2Bad Debt Expense

Bad debt information is set out in Schedule 6-2.

6.2.3Information Technology Expenses

LPDL does not have an in-house IT Department. Hardware and software maintenance and support services are contracted to an outside supplier. All IT expenses are evaluated and approved by management and follow the organization’s capitalization guidelines when applicable.

6.2.4

Advertising Expense:

The advertising expenses for the applicant for 2004 were reviewed and there were none with the primary purposes of promoting corporate branding or image.

Political contributions:

There were no political contributions expensed by the applicant in 2004.

Employee dues:

Annual fees or dues for employee membership in organizations that are not related primarily to health and fitness were not incurred in 2004 by the applicant.

Charitable contributions:

There were no charitable contributions expensed by the applicant in 2004.

Meals / Travel and Business entertainment expenses:

The applicant applies management control consistent with the application of its corporate policy with respect to this item. All expenses are reviewed and approved by management consistent with the corporate policy governing these types of expenses.

A copy of the policy covering these types of expenses is included as an attachment to Schedule 6-4.

Research and Development:

There were no research and development expenses incurred by the applicant in 2004.

6.2.5Employee Total Compensation

Employee compensation disclosure as required is included in Schedule 6-4.

6.2.6Pension and Post-Retirement Benefits

OMERS pension expense and post-retirement benefits are described in Schedule 6-6.

6.2.7Distribution Expenses Paid to Affiliates

Distribution expenses paid to affiliates are summarized in Schedule 6-8.

Chapter 7

Taxes and PILS

7.0 Introduction

The applicant is filing on an historical test year basis and has used the 2006 OEB Tax Model.

7.1General Methodology Underlying the 2006 Tax Calculation

The applicant pays PILs under section 93 of The Electricity Act and has completed the 2006 OEB Tax Model without amendments.

The tax amount included in rates reflects taxes payable as a result of operating the distribution-only business, rather than taxes calculated for accounting purposes, and hence future/deferred taxes will not be recovered through rates as a result of this filing.

The applicant has made the adjustments described in the instructions to the OEB tax model.

Disclosure of PILs tax administration and tax rulings

The applicant has calculated the tax expense to be allowed in the 2006 revenue requirement following the OEB regulatory tax principles set out in the 2006EDR Handbook and in the 2006 OEB Tax Model.

Tax re-assessments

No amount of tax relating to any prior year arising from a reassessment has been included in rates for 2006.

7.2Principles Applicable to Specific Components of the Calculation

7.2.1 Non-recoverable and disallowed expenses

There were no expenses incurred by the applicant that are non-recoverable in the revenue requirement or disallowed for 2006 OEB regulatory purposes.

7.2.2 Capital tax exemptions

i) Federal large corporation tax exemption –LPDL shares the LCT exemption with the affiliates in the corporate group on their respective taxable capital base, and

ii) Ontario Capital Tax Exemption –LPDL shares the OCT exemption with the affiliates of the corporate group on their respective taxable capital base.

7.2.3 Loss carry-forwards

This distributor has no loss carry-forwards available on December 31, 2005

7.2.4 Un-depreciated capital cost (UCC) and capital cost allowance (CCA)

The closing year-end 2004 actual UCC balances by class from the distributor’s actual tax return have been used.

The effects of the 2001 Fair Market Value “bump” are included in the 2006

OEB regulatory tax calculations as CCA consistent with the distributor’s tax return as filed with the Ministry of Finance. See attached Schedule 7-2

7.2.5 Regulatory tax treatment of Eligible Capital Expenditures (ECE):

N/A

7.2.6 Interest deduction

This distributor has claimed interest as calculated by the 2006 rates model in the amount of $237,126 - See attached Schedule 7-3.

7.2.7 Interest capitalized for accounting, but deducted for tax purposes

This distributor did not capitalize interest for accounting purposes in 2004.

7.2.9 Estimating taxable capital

This distributor used the applied-for 2006 rate base in the application as the proxy for 2006 taxable capital for calculation of the 2006 regulatory Ontario Capital Tax and the Federal LCT.

7.2.11 Non-distribution elimination

This distributor does not have any non-distribution costs and revenues consistent with the definition of distribution-only activity contained within the 2006 EDR Handbook.

7.2.12 Tax credits

No tax credits were clamed in 2004.

7.2.15 Capital Leases

No leases were capitalized for accounting purposes.

7.3 Tax Payable Filings

7.3.1 Information to be provided with 2006 OEB Tax Model Filings

The following taxes were paid in 2002, 2003, and 2004 with respect to the distribution business.

Year / 2002 / 2003 / 2004
Taxes paid / $450,109 / $666,786 / $642,225

Taxes recovered in 2006 are $346,148 which exceeds 25% of 2004 taxes by $185,592.

Actual 2004 PILs paid was higher due to $124K of PILs proxy collected versus estimate and booked as revenue in the 2004 Adjusted Taxable Income.

Also, $364 K was booked as a reversal representing 1/3 of amounts previously written off in anticipation of not being able to recover transition and pre-market opening balances in 2002 regulatory assets. The original write-off was not booked against the regulatory asset accounts.

Chapter 8

Revenue Requirement

8.0Introduction

The applicant’s establishment of the revenue requirement is consistent with the 2006 EDR handbook requirement that double recovery of revenue is not expected as a direct result of the following:

• Adjustments to operating expenses,
• Establishment of PILs,
• Rate base and associated return, and
• Other revenue (including late payment charges and specific service charges).

8.1Service Revenue Requirement

• LPDL’sServiceRevenue requirement is established as set out in row 1 of Schedule 8-1.

8.2Service Revenue Requirement and Base Revenue Requirement

Base Revenue requirement has been established as set out in Schedule 8-1 and excludes the following:

• Revenues established for specific service charges as set out in Schedule 11-3,
• Late payment charges,
• Revenues associated with retail transmission rates, and
• Revenues from sources other than OEB-approved rates and charges.

The base revenue requirement is adjusted in accordance with the calculation in Schedule 8-2. This schedule provides adjustments to the revenue requirement. These adjustments are used to establish the base revenue requirement in Schedule 8-1 and provide for reductions to exclude the following:

• Net operating revenue,
• Other income / deductions, and
• Investment income.

8.3Revenue Requirements for CDM, Smart Meter and Regulatory Asset Recovery

Tier 1 adjustments are dealt with in Schedule 3-1.

The applicant recognizes the need for further spending, over and above the 3rd Tranche funds, on CDM and Smart Meter initiatives in order to meet the future requirements. At this time though establishing the guidelines that will ensure that all requirements are met has notbeen completed. Therefore the applicant is submitting this application without any further spending plans. As soon as the guidelines are established the applicant would plan to take the appropriate steps to meet the requirements.

In the interim the applicant will continue to gain further experience on the implementation of successful programs prior to making its’ application for additional approvals. This experience will better position the applicant to include incremental CDM expenditures, as appropriate, in future applications.

Chapter 9

Cost Allocation

With exceptions set out in Chapter 10, specifically for Unmetered Scattered Loads, the applicant’s existing classes are maintained – See Schedule 9-1. The revenue requirement share for each class is established using the data required by the 2006 EDR model.

9.3Determination of the Appropriate Share of the 2006 CDM, Smart Meter, and

Regulatory Asset Revenue Requirements

The outputs from the Regulatory Asset Model have been included in Sheet 8-4 of the 2006 EDR Model.

As mentioned earlier in the Summary of Application, LPDL is not expecting to spend dollars incremental to its 3rd tranche.

Customer Eligibility Criteria and, Allocation of Factors to Customer Classifications are included as Schedules 9-2 and 9-3 respectively.

LPDL does not intend to make changes to the default allocation methodology therefore, has not completed a Schedule 9-4.

Chapter 10

Rates and Charges

10.1Fixed/Variable Split

Schedule 10-1 sets out the fixed/variable splits established in the 2006 EDR model.

10.2Un-metered Scattered Loads

LPDL currently bills its unmetered scattered load customers as General Service <50kw by applying the monthly service charge on a per connection point basis. As a result of this method of billing, LPDL will set the level of monthly service charge at 50% of the monthly service charge of the General Service <50kW rate and continue to apply it on a per connection point basis.

10.3Time of Use Distribution Rates

LPDL does not have legacy Time of Use rates.

10.4Transformer Ownership Allowance

Schedule 10-4 is completed and provides information which is transferred to the 2006 EDR model.

10.5Update of Loss Adjustment Factor Reflecting System Losses Including

Unaccounted-for Energy

Schedule 10-5 sets out the adjustments for the loss factors, however, due to the CDM capital expenditures made in 2005 relating to system optimization, LPDL would prefer to maintain their status quo Loss Factors.

10.6Standby Charges

The applicant does not currently have load displacement generation connected to its system and therefore is not making application for standby charges.

10.7Low Voltage Charges

The applicant currently does not have embedded distributors connected to its system.

10.8Demand Determinants

The applicant currently applies the greater of kW or 90% of kVA (power factor adjustment) when kW is used as a billing determinant.

10.9Recovery of CDM, Smart Meter, and Regulatory Asset Revenue Requirements

Regulatory asset revenue requirements are as set out and allocated according to the 2006 EDR model.
Chapter 11

Specific Service Charges

Schedule 11-1 sets out the applicant’s elections regarding specific service charges.

11.8 Revenue from Specific Service Charges

The revenue from specific service charges is set out in Schedule 11-3. This total amount is included in Schedule 8-1 to avoid double charging.

Chapter 12

Other Regulated Charges

The applicant does not propose any changes in its other regulated charges as set out in this chapter and charges will be in compliance with Chapter 12 of the 2006 EDR Handbook.

Chapter 13

Mitigation

LPDL does not propose a mitigation plan because:

• The rate impacts fall within the range of the OEB’s criteria

Chapter 14

Comparators and Cohorts

To be determined based on the requirements that will be released by the OEB.

Chapter 15

Service Quality Regulation

LPDL has included its 2002 to 2004 annual Service Quality performance in Schedule 15-1 as required.

October 3, 2005

Ontario Energy Board

P.O. Box 2319

26th Floor

2300 Yonge Street

Toronto, ONM4P 1E4

To:Mr. John Zych

Board Secretary

Re:REGULATORY ASSET MINIMUM REVIEW & SUPPLEMENTARY DISCLOSURE - LAKELAND POWER DISTRIBUTION LTD.

EB-2005-0388

RP-2005-0020

Lakeland Power Distribution Ltd. has elected to submit a Minimum Review application in conjunction with our 2006 EDR application and is submitting this supplementary disclosure based on the Board’s Filing Guidelines for Final Recovery of Regulatory Assets for May 1, 2006 Distribution Rate Adjustments issued July 12, 2005.

I, Chris Litschko, President of Lakeland Power Distribution Ltd. certify that the information filed in the regulatory assets claim is consistent with the Board’s accounting requirements and procedures in the Accounting Procedures Handbook and that the filing provided is consistent with the requirements of the Board’s transition cost filling guidelines issued January 15, 2003 and the Regulatory Asset Filing Guidelines issued September 15, 2003.

The accrual accounting approach has been used by Lakeland Power Distribution Ltd. for the RSVA accounts and Account 1571, the Pre Market Energy Variance account, and has been used consistently over time and among the accounts for the applicable period.

The interest rate used to record interest is consistent with those rates prescribed by the Ontario Energy Board in the Distribution Rate Handbook for Lakeland Power Distribution Ltd.

The variance between the Board approved and actual line losses are reflected in the RSVA power (Account 1588) for the applicable period.