RP EB IN THE MATTER OF the Ontario Energy Board Act, 1998, S.O. 1998, c.15, Schedule B

Transcription

1 RP EB-00-0 IN THE MATTER OF the Ontario Energy Board Act,, S.O., c., Schedule B AND IN THE MATTER OF an Application by Welland Hydro- Electric System Corp. for an Order or Orders granting final approval of its December, 00 Regulatory Asset balances and Rate Riders for the recovery thereof, beginning on May, 00. A. Relief Sought:. The Applicant hereby applies for an Order: (a) (b) confirming the Applicant has satisfied the Ontario Energy Board (the Board ) Phase II requirements pertaining to the Regulatory Assets claimed herein; and authorizing the Applicant to recover, on a final basis, the amount of $,,.00 representing the Applicant s Regulatory Asset balances as at December, 00, by way of Rate Riders to be made in accordance with the Board s directions in this regard and to be effective commencing May, B. Method of Review. The Applicant confirms that it is seeking a total Transition Cost recovery of $. per customer and therefore is requesting a minimum review of its Phase Regulatory Asset claim. This amount represents the lesser of 0% of December, 00 recorded transition costs or $0 per customer. The Applicant has provided the Supplemental Disclosure certified by the Chief Executive Officer of Welland Hydro-Electric System Corp. as required by the June, 00 filing guidelines for transition costs claimed under $0.00, at Tab C.

2 RP /EB-00-0 September 0, 00 Page 0 C. Historical Context of Regulatory Asset Claims. On November, 00, the Province of Ontario introduced the Ontario Energy Board Amendment Act (Electricity Pricing), 00 ( Bill ). Pursuant to Bill, the. /kwh commodity price freeze for low-volume and designated consumers would be replaced with an interim, two-tiered pricing plan commencing on April, 00. In its announcement of the introduction of Bill, the Government also announced that distributors would be permitted to begin recovering Regulatory Assets in their respective distribution rates over a year period commencing March, 00.. On December, 00 the Minister of Energy sent a letter to LDCs granting his approval for LDCs to make applications to the Board to amend existing distribution rate orders, pursuant to section of the Ontario Energy Board Act, ( OEB Act ), to enable them to begin their recovery of Regulatory Assets. At that time, sixteen regulatory asset accounts were identified.. On December, 00 the Board issued its preliminary filing guidelines regarding applications for the recovery of Regulatory Assets. These preliminary filing guidelines indicated that recovery of eligible Regulatory Assets effective as at March, 00 would commence on April, 00.. On January, 00 the Board issued its final guidelines regarding applications for the recovery of Regulatory Assets for Phase (April, 00 implementation).. On February, 00 the notice informing the public of both the Phase and Phase Regulatory Assets recovery processes was published.. On April, 00, distributors began recovering % (or more if required for rate stability) of the audited December, 00 year-end balances in their regulatory asset accounts as per the January, 00 guidelines.

3 RP /EB-00-0 September 0, 00 Page 0. On May, 00, the Board issued Procedural Order No. in this proceeding concerning the second Phase of LDC recovery of Regulatory Assets. The Board indicated that in addition to making decisions on the amounts to be recovered on a final basis by the distributors identified in that Procedural Order, the process would also allow it to determine the reasonableness of Regulatory Assets claimed or to be claimed by the remaining distributors.. On December, 00 the Board issued its decision with reasons on the review and recovery of Regulatory Assets Phase (the Decision ) for Toronto Hydro, London Hydro, Enersource Hydro Mississauga and Hydro One. In chapter of the Decision, the Board outlined a Phase process for remaining distributors.. In the Decision, the Board recognized that subjecting other distributors to the same process as the four earlier applicants would be too onerous for distributors, intervenors and the Board. The Board determined that it would be effective, expedient and efficient to establish a review system, which included two types of review; a minimum review and a comprehensive review depending upon the amount of Regulatory Assets claimed.. On December 0, 00 the Board issued its 00 distribution rate adjustment filing guidelines which included the continuation of Phase with the recovery of the second tranche of regulatory asset balances on an interim basis.. On April, 00 distributors began recovering % of the audited December, 00 year-end balances (adjusted for 00 interim recoveries) in their regulatory asset accounts as part of the 00 Electricity Distribution Rate Adjustment Process and pursuant to the December 0, 00 filing guidelines.. On June, 00 and July, 00 the Board issued further filing guidelines for regulatory asset applications. It is on the basis of the Board s guidelines and the Decision that the Applicant makes this Application.

4 RP /EB-00-0 September 0, 00 Page 0 D. Establishing the context for the Board s review of prudence of Regulatory Assets.. Distributors and their respective municipal shareholders have faced many obligations, and a multitude of choices and decisions in complying with the obligations created by electricity restructuring in Ontario, from the commencement of the restructuring process to beyond market opening. The lengthy period prior to market opening (compounded by the ½ year delay in market opening between November 000 and May 00), and the numerous changes since May 00, must all be considered in any retrospective review of the costs associated with this fundamental industry change.. These changes were mandated by various sources including the enabling legislation itself, further directives from the Province of Ontario, the Board and the Independent Electricity System Operator ( IESO ) and span a series of requirements including new Market Rules, various Codes of Conduct and Electronic Business Transaction ( EBT ) standards.. To establish the context for the recovery of Regulatory Assets, the Applicant submits that it is important to recall the facts surrounding the many challenges distributors management were required to address in addition to decision-making that resulted in regulatory asset costs being incurred. The process of changing and commercializing the Ontario distribution sector by transforming it from being essentially an arm of municipal government to a commercial business operating pursuant to the Ontario Business Corporations Act initially had to be achieved by November 000, which was also the target date for the opening of the new electricity market. The Applicant incorporated July, These broader restructuring requirements and associated costs are directly relevant to the distributors prudence review insofar as they represented significant and additional layers of complexity which management had to consider in addition to the obligations and requirements whose resulting costs are the subject of this proceeding.

5 RP /EB-00-0 September 0, 00 Page 0. Furthermore, in establishing a retrospective factual context for this prudence review, the Applicant submits that the Energy Competition Act, did not provide guidelines around the processes to be followed in distributor sector restructuring and the expenditures that we now refer to as Regulatory Assets, particularly in the areas of transition costs and Z factors. The legislation, ensuing regulations, and directions from the Ministry of Energy, the Board and the Independent Electricity Market Operator (the IMO, now the Independent Electricity System Operator, or the IESO ) were focused on ensuring that distributors were ready for market opening rather than providing specific directions to distributors on the specific means of getting to that state of market readiness. For example, the Applicant had to make certain assumptions regarding what ultimate Board and IMO requirements would be in the absence of any final decisions around various matters. E. Regulatory Assets Claimed 0. The regulatory asset accounts addressed by the Board in the January, 00 guidelines for Reporting LDC Transition Costs, and the September, 00 guidelines for Reporting LDC Regulatory Assets and claimed by the Applicant are set out in the Regulatory Assets Recovery Worksheet (the Worksheet ) which accompanies this Application. The Applicant confirms that further to the June, 00 Board guidelines, Payments in Lieu of Taxes ( PILs ) are excluded from this Application as the Board has indicated that it will not be considering amounts in the PILs variance accounts for final disposition at this time. Therefore the Applicant has not included amounts from accounts and in this Application. F. Worksheet Descriptions (a) Sheet December, 00 Regulatory Assets (i) Sheet contains the relevant regulatory asset amounts for each account. The balance in account 0 shows the amount claimed. As prescribed,

6 RP /EB-00-0 September 0, 00 Page (ii) carrying charges are shown separately. Customer numbers are indicated for the purposes of allocation. The Applicant does not have any Hydro One charges that are applicable to this Application for regulatory asset recovery. (b) Sheet Rate Rider Calculation (i) Sheet contains the calculations for regulatory asset recovery over three separate periods: March, 00 March, 00 April, 00 March, 00 April, 00 April 0, 00 (ii) Sheet also shows the rate riders for the next two years. Sheet also sets out the allocator for each regulatory asset account. (c) Sheet Interim Transition Cost Recovery Period (i) (ii) Sheet shows the Applicant s reporting of its interim transition cost recoveries between March, 00 and March, 00. Based on the customer numbers, kw and kwh s provided, the spreadsheet shows principal and interest amounts to be recovered per class. (d) Sheet Interim Regulatory Asset Recovery Period 0 (i) Sheet generates the monthly amounts recovered per class including interest for the first term of regulatory asset recovery April, 00 to March, 00.

7 RP /EB-00-0 September 0, 00 Page (e) Sheet Interim Regulatory Asset Recovery Period (i) (ii) (iii) Sheet shows regulatory asset recoveries between April, 00 and April 0, 00 and the applicable interest during the period. The Applicant has based its consumption data from July 00 onward on the following principles. Consumption data for 00 was based on 00 budgeted consumption data which includes a % load growth assumption from 00 actuals. Based on the Applicant s consumption data, Sheet generates the monthly amount of recovery per class. 0. Further detail is provided below. A summary of the Applicant s regulatory asset account balances are as follows: Retail Settlement Variance Accounts (0,,,, ) Account Principal Balance as of December, 00 0 RSVA WMS $0, RSVA WMS (one-time) $, RSVA NW $, RSVA CN $, RSVA Power $0,0 Total $,,. The Applicant therefore is claiming a cumulative total of $,0, including carrying charges to April 0, 00 in Retail Settlement Variance Accounts. It has in calculating these amounts and in calculating all regulatory asset accounts used the accrual method. This method has been used consistently and the same approach has been followed for all regulatory asset deferral accounts of the distributor throughout the life of these accounts.

8 RP /EB-00-0 September 0, 00 Page 0. With respect to account number, the Applicant confirms that it has used a consistent approach to line losses. The variance between the Board-approved and actual line losses are reflected in the RSVA power Account.. RSVA balances have been allocated to customer class on basis of energy consumed in kwhs. Details of this allocation are contained on spreadsheet.. The Applicant confirms that the interest rate used on all Regulatory Asset accounts, except where otherwise stated, is that reflected in the currently-approved rates and corresponds to the utility s debt rate as approved in the initial unbundling application in 00. The Applicant s approved debt rate is.%.. Pre-Market Opening Energy Variance Account () Account Principal Balance as of December, 00 $,0 Carrying charges for Account were recorded from the period January, 00 to December 00, based on the Board s December, 00 Decision.. The Applicant is claiming inclusive of carrying charges to April 0, 00 $,,0 for Account.. The Applicant confirms that it used the accrual method for. It has used this approach consistently over time with respect to account. The method used to calculate the balance for account conforms to the methodology recommended in section.0. of the Decision.. Allocation is based on energy consumed in kwhs for non TOU customers.

9 RP /EB-00-0 September 0, 00 Page 0 0. Retail Cost Variance Accounts (, ) The Applicant is not claiming any amount in Retail Cost Variance Accounts. The Applicant has not recorded and is not claiming any carrying charges on the RCVA accounts.. Miscellaneous Deferred Debits Account () The Board s guidelines requested that distributors track costs related to rebate cheques in regulatory asset account. Rebate costs were not recorded in account until 00. They were previously expensed in prior years. Carrying charges have been calculated from the time of the expenditure on the principal amount claimed. Account Principal Balance as of December, 00 -Miscellaneous including Rebate Cheques $,. The Applicant confirms that costs contained in Account relate solely to the costs associated with the costs of issuing $ rebate cheques and that no other costs are included in this regulatory asset account. These costs are related to the issuance and distribution of the cheques.. The Board requires that Applicants justify the quantum and methodology for allocation for amounts claimed in accounts 0 and.. The method of allocation chosen by the Applicant was across customers who received the rebate cheque. This was seen to be an appropriate allocation method given the circumstances.

10 RP /EB-00-0 September 0, 00 Page 0. Other Regulatory Assets Account (0) Account Principal Balance as of December, 00 0 $, As a result of the December 0, 00 letter from the Board, electrical local distribution companies were allowed to establish a deferral account to record Board cost assessments for the Board s fiscal year 00 and subsequent fiscal year(s). The Applicant has recorded the Board cost assessment for 00 in account 0. The Applicant is applying for carrying charges to April 0, 00. The Applicant s total claim for Account 0 including carrying charges is $,.. The Applicant submits that this quantum accurately reflects Board cost assessment amounts. Allocation across distribution revenue was deemed to be an appropriate method.. Qualifying Transition Costs Account (0) Account Principal Balance as of December, 00 0 $, Carrying charges for the period January, 00 to December, 00 have been estimated based on 00 s actual carrying charges.. The Applicant is claiming a final recovery balance of $,0, including carrying charges. This balance represents 0% of the Applicant s total transition cost balance, inclusive of carrying charges. The Applicant has therefore reduced its total transition cost claim by $,.. As per the Board s guidelines, transition costs claimed do not include Electronic Business Transaction (EBT) costs or costs for settlement services.

11 RP /EB-00-0 September 0, 00 Page 0. Customer education costs included in Account 0 do not exceed $ per customer based on 00 balances.. All cost categories in the transition cost account 0 meet the materiality criterion as outlined in the filing guidelines issued January, 00. The Applicant s comments with respect to the materiality criterion is listed below. All categories meet the materiality criteria. G. Principles applicable to causation, prudence, inability of management to control and materiality.. The Applicant submits that certain principles must be considered by the Board when applying each of the tests for recovery of transition costs. (a) Causation:. Article 0 of the Accounting Procedures Handbook ( APH0 ) set out various categories of eligible transition costs. The appropriate guiding principle is whether the distributor could discharge its legal and regulatory obligations with respect to market readiness and market opening without incurring the expense. The Applicant submits that in establishing these categories, the Board itself has answered that question.. Billing activities (e.g. system modifications/ purchases to support unbundled customer billing, billing for standard supply customers and distributor billing options for retailers).. Customer education activities (e.g. billing inserts and call centres).. Wholesale market requirements (e.g. metering, settlement systems and validation, editing and estimation process).. IMO requirements (e.g. prudential requirements, registration, communication and market readiness testing).. Retailer/customer requirements (e.g. retailer registration, prudential requirements, customer/retailer information systems, and electronic business transactions system).. Staff adjustment activities (e.g. severance, counseling and retraining).. Regulatory costs (e.g. Board license fee and proceeding costs).. Taxes (payments in lieu of taxes) to the extent an allowance is not provided by the Board in base rates.. Regulatory requirements (e.g. staff contract assistance and systems to accommodate record keeping, monitoring and filing requirements).

12 RP /EB-00-0 September 0, 00 Page H. The Applicant s Submission and the Causation Test.. The Applicant notes that the Board s guidelines provide the following three conditions that are necessary to meet this criterion: (a) Outside the base upon which current rates were derived. (i) Distributors original rates were derived from their rates. In, electricity bills were bundled; there were no separate commodity charges; there was no wholesale market in which distributors were required to participate; there was no retail market that required distributors to establish systems for retail settlement; and there were fewer regulatory requirements imposed on distributors. (ii) Accordingly, the Applicant submits that its costs set out under Account 0 are outside and incremental to the (pre-restructuring) base upon which its initial rates were derived. 0 (iii) (iv) The Applicant confirms the transition costs could not be met by existing resources; the project cost to meet the new requirement; an estimate of the proportion of the project cost attributable to the new requirement; and the new system specifications and/or confirmation that the Applicant, having performed the necessary work, can meet the new requirement. The Applicant confirms that its tender and/or purchasing procedures were followed in the transactions for which recovery is claimed. (b) Directly related to operational requirements created by industry restructuring. It must be true that the cost would not have occurred if the restructuring and transition to the competitive market did not take place. January, 00, at p..

13 (i) (ii) RP /EB-00-0 September 0, 00 Page As noted above, the Applicant could not have discharged its legal and regulatory obligations with respect to market readiness and market opening without undertaking the activities and incurring the expenses set out in this submission with respect to Account 0. The Applicant further submits that it has satisfied the Board s threshold criterion with respect to costs incurred under account 0, and the Applicant is therefore asking for the requested recovery of those costs. (c) Not listed in the ineligible list in APH0. (i) The Applicant confirms that the activities that are the subject of this submission are not listed in the ineligible list in APH0. I. Principles to be considered in determining review of prudence.. The Applicant submits that the Board must consider and apply the following principles in addressing the test of prudence: (a) (b) To be prudent, a distributors decision should be reasonable under the circumstances that were known to the utility at the time the decision was made. There should be a general presumption that a distributors management made prudent decisions unless otherwise challenged on reasonable grounds. 0 (c) Distributors should be entitled to be considered to have acted prudently notwithstanding that they may have taken different approaches with respect to sector-wide common issues. Given the vast differences amongst Ontario s electricity distributors it should not be surprising that one size does not fit all with respect to decisions made which resulted in the accrual of significant transition costs and other Regulatory Asset accounts.

14 (d) RP /EB-00-0 September 0, 00 Page Prudence must be determined in a retrospective factual inquiry. The evidence need and should only be concerned with the time and context within which the decision was made and based on facts about the elements that could or did enter into the decision at the time. Hindsight is not relevant when determining whether Regulatory Assets meet the review of prudence requirements. J. The Applicant s Submission and the review of Prudence.. In addition to the comments set out above with respect to prudence, the Applicant notes that the Board s guidelines provide the following two conditions that are necessary to meet this criterion: (a) The cost could not be avoided by waiting, doing without, or in other ways. (i) As noted above, doing without the required actions was not an option available to Ontario s electricity distributors. Similarly, distributors could not simply wait. The restructuring required for the transition to market opening represented a fundamental change in the way in which distributors operated their enterprises. Regardless of the size of the Applicant, its business had not previously been carried on in the manner being mandated by the Board, the IESO and the Province of Ontario. 0 (ii) Also as noted above, timelines were not negotiable for distributors. The Board issued the Electricity Market Readiness plan in February 00, and distributors were subject to that plan, as adjusted from time to time. The schedule for market opening was imposed on distributors, and reinforced by the ongoing prospect of being found in breach of their Board Licences and subject to administrative penalties of up to $, per day, in the event that milestones we not met. These sanctions were reinforced regularly in correspondence from Board staff. The Market Readiness Plan January, 00, at p.

15 RP /EB-00-0 September 0, 00 Page imposed on distributors by the Board, the milestones contained therein, and the penalties that could flow from a failure to meet those milestones, left the Applicant no alternative but to incur the costs necessary to achieve market readiness. (b) The utility reviewed different alternatives to solve the issue and adopted a practical, cost efficient approach given the time pressures surrounding market readiness and the technologies available. (i) (ii) The Applicant submits that the transactions that it has included in Account 0 represent practical and cost efficient solutions available to the Applicant in the circumstances in existence at the time of the transaction. The Applicant confirms that alternatives were considered for each initiative, the cost was estimated and the most practical, cost efficient alternative was chosen given the time pressures surrounding market readiness and the technologies available. K. Principles to be considered in determining inability of management to control the expense.. The Applicant submits that the Board must consider and apply the following principles in addressing the test of the inability of management to control the expense: 0 (a) (b) The Applicant submits that the principles applicable to the test of causation are equally applicable to the inability of management to control the expense. The mandatory transition to a competitive electricity market imposed fundamental changes on the Applicant and its systems. Doing without the required actions was not an option for Ontario s electricity distributors. The Market Readiness Plan imposed on distributors by the Board, the milestones contained therein, and the penalties that could flow from a failure to meet those milestones, left the

16 RP /EB-00-0 September 0, 00 Page (c) Applicant no alternative but to incur the costs necessary to achieve market readiness. While there was communication and cooperation among distributors in preparing for market opening, there was no single solution prescribed by the Board for achieving market readiness. The imperative in this process was meeting the Province s market opening deadline. 0 L. Principles to be considered in determining materiality.. The Applicant acknowledges that the Board has determined that it would apply the materiality test on the basis of the overall costs incurred within each of the categories within Account 0, rather than on an annual basis. The Applicant confirms all cost categories in the transition cost account 0 meet the materiality criterion as outlined in the filing guidelines issued January, 00. M. The Applicant s Submission and the Test of Materiality.. With respect to the evidence being filed in this Application, as noted above, the Applicant submits that the material accompanying this Application satisfies the applicable regulatory tests and that it has provided the Board with sufficient evidence to enable it to review the Applicant s Regulatory Asset claim and determine its acceptability in a timely manner. N. General Principles for Transition Cost and Z factor recoveries. 0. The Applicant submits that any review by the Board of transition cost or Z factor recoveries must be subject to certain principles, or assumptions, relating to the activities undertaken by distributors in preparing for the unbundling of distribution costs from commodity and other components of the (formerly) bundled electricity bill, and for market opening:

17 (a) RP /EB-00-0 September 0, 00 Page The restructuring required for the transition to market opening represented a fundamental change in the way in which distributors operated their enterprises. Regardless of the size of the distributor, its business had not previously been carried on in the manner being mandated by the Board, the IESO and the Province of Ontario. 0 (b) (c) (d) (e) The categories of activities set out in the Board s Accounting Procedures Handbook (the APH ) and its regulatory asset filing guidelines were all essential to distributors preparation for market opening. There were no off-the-shelf solutions for Ontario distributors needing to prepare for the new market and its operating requirements. The Board, the IESO and the Minister of Energy did not mandate the solutions to be adopted by distributors in order to become market ready. Management options were limited only by the number of service providers in the market and the ability of those service providers to deliver solutions that would meet the government s and the Board s priorities and operational requirements with respect to market opening. Timelines were not negotiable for distributors. The Board issued the Electricity Market Readiness plan in February 00, and distributors were subject to that plan, as adjusted from time to time. The schedule for market opening was imposed on distributors, and reinforced by the ongoing prospect of being found in breach of their Board Licences and subject to administrative penalties of up to $, per day, incorporated into the Board s available sanctions by way of amendments in 00 to the OEB Act,.

18 RP /EB-00-0 September 0, 00 Page O. Conclusion. The Applicant confirms that it has undertaken a reconciliation of the amounts claimed to the amounts previously filed with the Board (January 00 and January 00 filing for Phase of this proceeding).. The Applicant also confirms that all Regulatory Assets claimed have been allocated to the rate classes set out as instructed by the Board in the Decision, unless otherwise indicated.. The Applicant confirms that it has provided the requisite information required by the Board in accordance with the Board s Decision and its other delineated guidelines for regulatory asset review.. The Applicant respectfully requests that its claim for relief be granted and that an order be issued: (a) confirming the Applicant has satisfied the Board s Phase II requirements pertaining to the Regulatory Assets claimed herein; and (b) authorizing the Applicant to recover, on a final basis, the amount of $,, representing the Applicant s regulatory asset balances as at December, 00, by way of Rate Riders to be made in accordance with the Board s directions in this regard and to be effective commencing May, 00. C:\DOCUME~\aclark\LOCALS~\Temp\MetaTemp\TOR0-0-v-CEL_Welland_Hydro_Manager's_summary.DOC