Summary of Application
2006 Electricity Distribution Rates Application
Oakville Hydro Electricity Distribution Inc.
Introduction
Pursuant to a notice from the Ontario Energy Board (the "OEB"), issued May 13,2005, stating thatthrough directives set out in the 2006 Electricity Distribution Rate (“EDR”) Handbook, it intended to allow utilitiesto apply for their 2006 electricity distribution rates, we are pleased to submit our Application for our 2006 electricity distribution rates. We would like to state that this application is in compliance with the directions of the EDR Handbook and that it contains the following three parts: The summary of the Application, the completed 2006 EDR Version 2 model (the "Model") and the Supporting Schedules applicable to Oakville Hydro. As requested, the application summary is organized so as to correspond to the chapters in the Handbook.
Note that for the purpose of this application, "Oakville Hydro", "we", "us" or "our" means Oakville Hydro Electricity Distribution Inc.
Oakville Hydro Electricity Distribution Inc.
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Comments regarding our application
Due to existing, known and reported problems with the model, misinterpretation, or simply at the request of the OEB, Oakville Hydro reserves the right to adjust, clarify or amend any information contained in the 2006 EDR model, the supporting schedules and the application summary.
Unless specifically required by the EDR Handbook, we have also excluded amounts from the application summary when the equivalent information is available in the supporting schedules.
In the process of applying for 2006 distribution rates, Oakville Hydro has elected not to update our retail transmission rates.
At market opening, Oakville Hydro had three large use customers ( > 5000 kW ), one of which was connected directly to the Hydro One grid and which ceased to be a customer for both energy and distribution at that time.Please see Board File No. EB-2002-0349 for further details. Up until November 2004, Oakville Hydro had the two remaining customers, with a demand greater than 5000 kW,classified as being large users. One customer changed its operations and consequently reduced its demand. This change in the consumer’s operations caused Oakville Hydro to reclassify the customer to a General Service > 1000kW class. Please see Board File No. EB-2004-0527 for further details. In order to reflect accurate consumption levels, adjustments were made in the appropriate yearsto the kW, kWh, cost of power, customer count and transformer allowance to reflect these changes.
Please note that the bill impact for the large user class does not apply to Oakville Hydro. Our large user is registered as a market participant and therefore is not billed for commodity by Oakville Hydro.
Oakville Hydro has recently completed an analysis and reclassification of it customer classes. Customers who consumption did not meet the criteria of their current bill code were moved in their appropriate classes. Details of these changes are set out in appendix G. The Customer Counts, kWh and kWsections of Sheet 6-2 of the Modelwere modified to reflect these changes.
Chapter 2 – Components of the Application and Schedules
Oakville Hydro has prepared the Supporting Schedules requested by the OEB in the EDR Handbook. Below is the listof the applicable Schedules.
Chapter 2: Components of the Application and Schedules
Schedules: 2-1 Description of the Distributor
2-2 Corporate Organization Chart
2-3 Audited Financial Statements and Reconciliations
2-4 Complete Listing of Rates and Charges
Chapter 3: Test Year and Adjustments
Schedules: 3-1: Tier 1 Adjustments
3-2: Tier 1 Non-Routine/Unusual Adjustments
Chapter 4: Rate Base
Schedule: 4-1: Capital Expenditures
Chapter 5: Cost of Capital
Schedules: 5-1: Weighted Debt Cost
5-2: Actual Capital Structure of the Distributor 2006 Electricity Distribution Rate Handbook May 11, 2005
Chapter 6: Distribution Expenses
Schedules: 6-1: Insurance Expense
6-2: Bad Debt Expense
6-3: Charitable Donations
6-4: Employee Compensation
6-5: Employee Incentive Plan Expense
6-6: OMERS Pension Expense and Post-Retirement Benefits
6-8: Distribution Expenses Paid to Affiliate(s)
6-9: Distribution Expenses Incurred Through Sharing Services with Affiliate(s)
Chapter 7: Taxes / PILs
Schedule: 7-3: Interest Expense
Chapter 8: Revenue Requirement
Schedules: 8-1: Derivation of Base Revenue Requirement
8-2: Revenue from Sources Other Than Board-Approved Rates and Charges
8-3: Regulatory Asset Recovery
Chapter 9: Cost Allocation
Schedules: 9-1: Customer Classification
9-2: Customer Eligibility Criteria
9-3: Allocation Factors to Customer Classifications
Chapter 10: Rates and Charges
Schedules: 10-2: Unmetered Scattered Loads
10-3: Time of Use Distribution Rates
10-4: Transformer Ownership Allowance
10-5: Determination of Loss Adjustment Factors
Chapter 11: Specific Service Charges
Schedules: 11-1: Specific Service Charges: Standard Amounts
11-3: Specific Service Charges: Revenue
Chapter 15: Other Regulated Charges
Schedule:15-1: Service Quality and Reliability Performance
Reconciliations
Oakville Hydro confirms that the RRR filed with the Chief Regulatory Auditor is unchanged for its use in the 2006 EDR model. Similarly, the information used in the model is consistent with our audited financial statements included as part of Schedule 2-3.
Compliance with Licence
We affirm that our licence contains neither special conditions nor exemptions.
Complete Listing of Rates and Charges
We have enclosed, inSchedule 2-4, a complete listing of rates and charges that have been approved by the OEB and that are currently in effect.
Chapter 3 – Test Year and Adjustments
Historical Test Year versus Future Test Year:
Oakville Hydroacknowledges that this 2006 EDR Application is being filed in conformity with Option 2. Oakville Hydrouses a 2004 test year, with all its applicable Tier 1 adjustments.
Tier 1 Adjustments:
Distribution Expenses
Please refer to Schedule 3-1 for actual amounts of our Tier 1 distribution expense related adjustments.
OEB annual assessment and other fees paid to energy regulators
Oakville Hydro confirms that the amount shown in both Schedules 3-1 and the model itself are OEB annual assessment fees, and also confirms that the 2005actuals were adjusted from the 2004 base.
Pensions
The 2005 expense is based on the first 6 months actuals and a projection for the remainder of the year based upon the known payroll rate increases.
Insurance
The 2005 insurance expense is based on actual invoiced cost.
Low Voltage /Wheeling adjustments
Oakville Hydro does not claim any adjustments for Low Voltage and Wheeling costs.
CDM adjustments
Oakville Hydro attests that there were no non-capital expenditures related to conservation demand management in 2004. Oakville Hydro also affirms that it is not proposing to undertake any CDM-related spending incremental to the costs set out in its CDM Plan approved by the OEB. Accordingly, no Tier 1 adjustment is necessary in this regard.
Smart Meter adjustments
No Tier 1 adjustment is being requested in this regard.
Non-Routine/Unusual adjustments for 2004
Oakville Hydro has made two adjustments to the distributions expenses. An adjustment in the amount of $129,336 was made to account for a provision for bad debts in excess of what should be considered normal. A second adjustment in the amount of $204,750 was made to exclude an inter-company expense.
Rate Base
Please refer to Schedule 3-1 for actual amounts of our Tier 1 rate base related adjustments.
New Transformer Stations
Oakville Hydro confirms that no new transformer stations are planned to come online in the year 2005 and therefore no adjustment was required for this section.
Retirements Without Replacement
Oakville Hydro does not foresee any assets being retired in 2005 that would not be replaced.
Wholesale Meters
For the purpose of this application, Oakville Hydro interpretswholesale metersas“Registered Wholesale Meter (RWM) at meter point”– described as a meter that meets the criteria set out by the IESO and that is also registered with the IESO.The forecasted expenditures for its meters, as well as the breakdown of these amounts and the relevant depreciation adjustment,are included in Schedule 3-1. Please note that thedepreciation calculations were done using the amortization rates set out in Appendix B of the EDR Handbook.
CDM adjustments
Oakville Hydro has deemed its CDM related capital expenditures to be included in the base rates. Therefore, the appropriate adjustment has beenmade. The CDM capital expenditures proposed by the Board approved plan are mainly for assets with long estimated useful lives;therefore, an amortization rate of 6.67% has been used for the adjustment in the model.
Smart Meters adjustments
No Tier 1 adjustments are being requested in this regard.
Non-Routine / Unusual adjustments
Oakville Hydro is actively involved in a plan to upgrade our Engineering, Operational, and Financial software system. The systems currently supporting the noted departments were implemented over an extended period, addressing the most pressing needs of the time. As a consequence, a variety of applications have been implemented that have been loosely and inconsistently integrated over the past years. The Request for Proposal for this upgrade to a new ERP system was first sent out to multiple software candidates back in January of 2004. Due to unforeseen issues with a preferred candidate, we were forced to extend the original implementation deadline of November 1, 2004 to the fall of 2005. An adjustment was made in that effect and details of the project are included in Schedule 3-2. The depreciation rate used for software is 25% which is consistent with the rate used in Oakville Hydro’s audited accounting policies.
Adjustment to Cost of Power as recorded in Trial Balance
Adjustment to Cost of Power
In the adjustment section of the model, Oakville Hydro has made the following adjustment related to the reclassification of one of our Large Users, which was Board approved in an earlier rate application. Oakville has reduced the existing cost of power for that particular large user and added back the forecasted cost of power base on their new consumption levels. Therefore, there has been a reduction of 14,222,378 kWh for its previous consumption level and the consumption has been replaced with an estimated cost of power at the new levels in the amount of 859,589 kWh.
Accounting Adjustment
Also, as requested by OEB staff, we have made an adjustment required to reflect the total amount paid to the IESO.
Adjustments to Worksheet 2-4
As required by the OEB, Oakville Hydro has listed explanations for the adjustments made to Worksheet 2-4 of the model. Please refer to Appendix A for the details of these adjustments.
Tier 2 Adjustments:
Oakville Hydro is not requesting Tier 2 adjustments.
Chapter 4 – Rate Base
Oakville Hydro has filed its rate base for the years 2002, 2003 and 2004, and information on its 2004 total assets, broken down into distribution and non-distribution segments, as required by the EDR Handbook. Details of the breakdown of the assets areincluded in the Model itself and therefore followed the level of detail outlined in Appendix A of the EDR Handbook.
Inclusion of Assets in Distribution Rate Base:
Oakville Hydroconfirms that it had no additional assets to include.
Removal of Assets in Distribution Rate Base:
Oakville Hydro confirms that it had no non-distribution assets to remove.
Amounts Paid to Other Distributors or Transmitters for Capital Projects
Oakville Hydro confirms that in 2004, it did not pay amounts to other distributors or transmitters for capital projects.
Amortization Rates:
Oakville Hydro acknowledges it uses all but one of the amortization rates set out in Appendix B to the EDR Handbook.Please refer to Appendix F for a comparative listing of our amortization rates. We will look to adjust our rates on a go forward basis.
Capital Investments:
Calculation on the materiality threshold is specified in the ADJ 5 worksheet of the Model. The lower of the two calculation methodology is, in our case,$150,000. Accordingly, in a summary attached to Schedule 4-1, Oakville Hydro has includeddetailed information regarding each project exceeding this amount. Please refer to Schedule 4-1 - Capital Expenditures for particulars on capital investment programs or refer to Appendix D of the application summary for a detailed summary of our capital expenditures.
Interest on Deferral Accounts and Construction Work in Progress ("CWIP"):
Oakville Hydro does not capitalize interest on construction work in progress.
Capitalization Policy:
Although Oakville Hydro does not have an official capitalization policy, we follow an internal capital expenditure process. We have attached a copy of this procedure in Appendix B of the supporting schedule.
Treatment of Capital Gains and Losses:
Oakville Hydro has not sold assets to either non-affiliates or affiliates.
Chapter 5 – Cost of Capital
Return on Equity:
Oakville Hydroconfirms that it is seeking a return on equity of 9.00%.
Debt Rate:
Based on Table 5.1 titled Size-Related Formula, our deemed debt rate was calculated at 6%.
The Oakville Hydro debt was incurred before the period between March of 2000 and May 12, 2005 (specifically February 1, 2000)and is held by the municipal shareholder. Oakville Hydro has not incurred any further debt on or after May 12, 2005. The term of the debt is for a period of 20 years and carries an interest rate of 7% in 2005. Details of this debt are included and detailed in Schedule 5-1.
Capital Structure:
Based on Oakville Hydro's rate base, its deemed debt/equity structure is 55% debt 45% equity. We confirm that the current debt/equity ratio does not deviate by more than ten percent.
Chapter 6 – Distribution Expenses
Oakville Hydro has filed its distribution expenses for the years 2002, 2003 and 2004, and information on its 2004 distribution expenses, broken down into distribution and non-distribution segments, as required by the EDR Handbook. The information on distribution expenses is included in the Model itself, and therefore followed the level of detail outlined in Appendix A of the EDR Handbook.
As requested in Chapter 6 of the EDR Handbook, Oakville Hydro has done a comparative analysis of the last three years and has found abnormalities we felt required explanation. These irregularities are listed in Appendix E of the application summary.
Insurance Expense:
Oakville Hydrohas two major types of third party insurance:
Liability Insurance
Vehicle and Property Insurance
Please refer to Schedule 6-1 for details on the insurers, description, and premiums paid in the past 3 years.
Bad Debt Expense:
Please refer to Schedule 6-2 for specific details on any adjustment related to bad debt expense.
Information Technology (IT) Expenses:
Oakville Hydro has set out below a description of its organization for IT services, including any outsourcing, and its methodology for recording its IT expenses.
Description of Oakville Hydro's Organization for IT Services:
Oakville Hydro’s IT department is a corporate function that provides services to the regulated and non-regulated affiliates. The department consists of 4 FTE employees. IT provides internal services for these affiliates. An annual fee is charged to the non-regulated affiliates for their use of these services.
Description of Oakville Hydro's Methodology for Recording IT Expenses:
IT has both capital and operating expenses. Annual budgets are prepared for this department. They are reviewed and approved by the CEO and Board of Directors. Both capital and operating expenses are reviewed by the department head of IT to ensure that the expenses are in line with the budget prepared. Any unforeseen or additional costs must follow the approval process.
Advertising, Political Contributions, Employee Dues, Charitable Donations, Meals/Travel and Business Entertainment, Research and Development:
Advertising Expenses:
Oakville Hydro did not incur, in 2004, any advertising expenses for the purpose of promoting corporate branding or image.
Political Contributions:
In 2004, Oakville Hydro did not endorse any party with political contributions.
Employee Dues:
Oakville Hydro does not pay for any employee membership fees or dues that are recreational or social in nature.
Charitable Contributions:
In 2004, Oakville Hydrodid not make contributions to programs that provide assistance to Oakville Hydro's customers in paying their electricity bills, and therefore an adjustment has been made to the model for non-recoverable contributions. Please refer to Schedule 6-3 for details of these amounts.
Meals/Travel and Business Entertainment Expenses:
Oakville Hydro confirms that it has a written policy and guidelines for management of meals, travel and business expenses. Wehave attached a copy of this policy in Appendix C of the supporting schedule.
Research and Development:
Oakville Hydroincurred expenses related to research and development intended to benefit our customers. From the late 1990s, we had experienced a series of failures of underground cable joints made with heat-shrink splice kits particularly with 750 & 100 MCM cable. We had approximately 264 splices in our underground system. Actual service life appeared to be less than 50% of what was first anticipated. In 2000 we stopped using the kits and reverted to the traditional method of hand taping joints with stress cones. We also retained the services of two specialist subcontractors to independently investigate and to identify the probable causes of the joint failures and assess the adequacy of the cable splices for their intended use. As our specialists’ investigation continues over 2001, we also examined the condition of our underground cable with PD testing and instigated a program to progressively remove all cable splices made with heat shrink kits and investigated other means of improving cable life.
Over 2002 and 2003, working with our specialist subcontractors, we conducted a series of in depth examinations and analyses of splices removed from our system. In parallel with these analyses, we continued with removal of heat shrink joints and examined their condition. We also continued to review the readily available kits on the market to evaluate whether they had the potential to replace the hand taped practice. Our specialist subcontractors also reviewed technical documentation and made electric field analyses of cable splices.
Employee Total Compensation:
Required Information Disclosure:
Please refer to Schedule 6-4 for details concerning the employee compensation information. Note that Oakville Hydro’s executive category only has 2 full time equivalent employees. In accordance with the instructions set out in the EDR Handbook, the information for these two employees was merged with the closest related category, in this case, the management category.