La\v Corporation Also of the Yukon Bar Also of the Alberta Bar

Transcription

1 Kathanna R Spotzl ' 0 D BMry K1rkham, Qc~ Robm C Mc~cfarl,m0-+- James D Burns~ Duncdn J :V1anson~ kffrey B Lightfoot-+- Dame! \V Burnett, QC ' Chnstopher P We<lfcr-.- Ronald C Paton' Mtchael P Vaughan Gregon' J Tucker' GJry M Yaffe"' Heather E \1aconachle Jonathan L \Vilhams,_!\,l!chat>! F Robson~ Scott!l Stephens"" Zachary J Ansley" James 'v\' Za1tsoff Pamela E Sht>ppard Jon?!vn!VILe Dressav Carl J Pines, Assonate Counsel_,_ Rose-~v1ary L Basham, QC, Associate Counsel< Hon \ValterSOwen, OC, QC, LLD (1981) John I Bird, "X: (2005) Douglas R Johnson-'- Alan A J-.'ryden.!und+ Harvey S Delanpy"' Paul J Brown+ Karen S Thompson+ Terence\\-' Yu+ James H McBeath- Susan C Gdchnst GcorgC' J Roper joseph me M t\!ddel" ;\!!,son R Kuchta' James L CarpKk-+ Patnrk J Haberl+ Andn J &--.aubt~u-." Harley J Harns+ Paul r\ BrackstonPr Echth A Rvan Dan1el H Coles La\v Corporation Also of the Yukon Bar Also of the Alberta Bar PO Box Three Bentall Centre Burrard Street Vancouver, BC Canada V7X 1 J5 C January 30, 2014 VIA ELECTRONIC MAIL 6th Floor, 900 Howe Street Vancouver, B.C. V6Z 2N3 Telephone Fax Website Direct Line: Direct Fax: cweafcr@owcnbird.com Our File: 23841/0092 Attention: Ms. Erica Hamilton, Commission Secretary Dear Sirs/Mesdames: Re: Re: FortisBC Inc. Application for Approval of a Multi-Year Performance Based Ratemaking Plan for 2014 through 2018 ~Project No FortisBC Energy Inc. (FEI) Application for Approval of a Multi-Year Performance Based Ratemaking Plan for 2014 through 2018 ~Project No We are counsel for the Commercial Energy Consumers Association of British Columbia (CEC). Further to our letter and the CEC's submissions of January 29, 2014, attached please find the CEC's responses to the unanswered questions of Information Request #1 ofthe British Columbia Utilities Commission pertaining to the above-noted matters. We apologize for any inconvenience caused by this delay. A copy of this letter and attached Responses has also been forwarded to FortisBC, FEI and registered interveners by . If you have any questions regarding the foregoing, please do not hesitate to contact the undersigned. Yours truly, OWEN BIRD LAW CORPORATION Christopher P. Weafer CPW/jlb cc: CEC cc: FortisBC Inc. ( O: 1 } AFFILIATED WlTH AlRD & BFRUS TORO;\;TO J~TERLAW tvh\1f1lr lli 11\H'ZI AW, AN!NHk~ATi\lNAl ASSi CJ,\TJON or I'JJ!!!'rN:1!:-"'T i AVV l-lr\~s IN MAJOR WOf/.1 il Cr~ lfi.l-,

2 January 30, 2014 Page 2 cc: FortisBC Energy Inc. cc: Registered Interveners { ;1) CPW21307

3 OF BRITISH COLUMBIA (CEC) CEC RESPONSES TO UNASWERED QUESTIONS TO INFORMATION REQUEST #1 OF BRITISH COLUMBIA UTILITIES COMMISSION FortisBC Energy Inc. (FEI) Application for Approval of a Multi-Year Performance Based Ratemaking J>lan for 2014 through 2018 Project No AND FortisBC Inc. (FBC) Application for Approval of a Multi-Year Performance Based Ratemaking Plan for 2014 through 2018 Project No Reference: CEC Evidence\ Page 3; FEI Exhibits B-1, Pages , Exhibit B-26, BCUC Revenue Decoupling & Revenue Stabilization Adjustment Mechanism (RSAM) FEI states, "The Commission first approved the RSAM in 1994; a deferral account mechanis~ that stabilizes the margins recovered from residential and commercial customers. 9 The RSAM stabilizes delivery margin received from residential and commercial customer classes on a UPC [use per customer] basis. If UPC rates vary from the forecast levels used to set the rates, whether due to weather variances or other causes, FEI records the delivery charge differences in the RSAM deferral account for refunding or recovering through a rate rider to the RSAM rate classes." (FEI Exhibit B-1, pp ) 2.1 Please compare the FEI decoupling mechanism to other decoupling mechanisms used by natural gas distribution utilities in Canada and the US. The RSAM is a fairly conventional revenue decoupling mechanism. Provisions that are common to many US RDMs include the following. Decoupling is full rather than partial. Dccoupling applies only to residential and smaller business customers. 1 References in this document to FBC's Exhibit C6-9-l and FEI's Exhibit C will be collectively referred to as the "CEC Evidence" { ;1}

4 A use per customer approach escalates revenue automatically for customer growth. Rates are adjusted for revenue variances annually. The RSAM is somewhat unusual in amortizing revenue variances over three years. 2.2 A decoupling mechanism is intended to remove the disincentive to engage in efficient energy use, but can a decoupling mechanism have the unintended consequence of encouraging the addition of low use customers? Please explain why, or why not. The marginal revenue from revenue-per-customer RAM is the average revenue, which exceeds the long-run marginal cost of customer growth. While a productivity factor can guard against overeaming, there is still an incentive at the margin to add customers. This encourages hookups to low-use customers Does the FEI RSAM decoupling mechanism have the unintended consequence of encouraging the addition of low use customers? Please explain why, or why not. It does in its current use-per-customer formulation. 4.0 Reference: CEC Evidence, Page 9; Exhibit B-1, Pages. 62-3, 103,237 Revenue Cap Indexes PEG states that "In gas and electric power distribution, the number of customers served is an especially important output variable driving cost in the short and medium term. To the extent that this is true, OutputsC can be reasonablv approximated by growth in the number of customers served and there is no need for the complication of a multidimensional output index." (CEC Evidence, p. 9) Underlined for emphasis. { ;1} 2

5 Table 86-7: PBR Growth Capital Formula Results Growth Capital ($GGQ) LESS: Capit~l Tracked Outside of the formuia: ln:n.:rj'k.e._ OPEB Growth Capit~l Applicable to PBR Formula Service Line Additions' 001 Co!l'!posJte t-filctor 2 31% :2.4::% :<:}4<:'~- :2 3>3'%.2.2 C~ 1 ';i Productiviry X-Factor 0!)i.J"% 0.SC% C. 50"!.;:. 0 5()':l;/~ J.SO~:t; 1-X Mechanism X) % '~ ~ 1Ci.86~'! 101<8{l':'t, Gross Growth Capilli Under PBR isdoo) ADD: Capital Tracked Outside of the Formula lnsuj;1:::e & O::;~EB f$00c'; s :::::.45~ s 52~ s 2.3 ~;: :~.7t0 s ::. 7? 447 $ s 2-U";r4 s 24 g:;: 433 s Total Growth Capital Under PBR (SOOO) (Exhibit B-1, p. 63) Figure C1-15: Total Customer Growth for all Rate Classes Consistent with Prior Years {(J>, <o, ' (Exhibit B-1, p. 123) Table C4-17: Historical Service Activities. Unit Costs & Expenditures Gross Customer Additio:1s Ratio or Servce Aelditions ;o Gross Customer Adds ACIUa.l ACtUal Adllat P -ection d s,5e7 0.~ : f \00 n 7') <..J.t.:.. Acti,Hies (riser or ser-,1ces) UM Costs (S per service- risen Exoerujitu;es (SOOO's) , \, ,98~! 2.16: !2,910 (Exhibit B-1, p. 237) { ;1} 3

6 4.1 PEG considers that "OutputsC can be reasonably approximated by growth in the number of customers served". For Growth Capital, FEI proposes to use the number of service line additions as the output variable driving costs, but the number of service line additions (Activities in Table C4-17) has been greater than the net customer additions from (Net Adds in Table Cl- 15). Does PEG consider FE I' s proposal to use the number of service line additions in the PBR Growth Capital Formula appropriate? Please explain why, or why not. Please see our response to BCUC-CEC (1) Reference: CEC Evidence, Page 14 Inflation Measure Issues 5.1 In the Canadian situation, what adjustment to the X factor would be warranted, and how would it be calculated? Would the X factor be larger or smaller as a result of this adjustment? Dr. Lowry raises this issue as a legitimate consideration if the Commission prefers to use a comprehensive macroeconomic index as the inflation measure in a revenue cap index. However, he is not proposing a specific adjustment to X, for several reasons. 1. Dr. Lowry's formula [15], growth GDPPI growth Input PricesEconomy ~ growth M~F'PEconomy, is true only in the long run. 2. The MFP growth of Canada's economy has been modestly negative in the last 10 years, but closer to zero over longer time frames such as 20 years. Accordingly, the trend in input prices may not be accurately measured by the formula over a period of 10 years. 3. The negative MFP growth of the Canadian economy is due chiefly to the mineral extraction industry, where it has been driven in part by the progressively greater exploitation of highcost reserves. 2 It is not clear how much impact this has on growth in the CPI or GDPPim The Commission is, in any event, likely to choose a macroeconomic inflation measure for BC and not for the Canadian economy. 5. Available data do not permit us to "complete the job" by accurately calculating the companion input price differential itemized in Dr. Lowry's formula [16]. 6.0 Reference: CEC Evidence, Page 21; Exhibit A2-13, Page 5 Data PEG also states that "The chief source of our data on the costs incurred by US gas 2 See, for example, Baldwin and Gu, "Productivity Performance in Canada, 1961 to 2008: An Update on Long-Term Trends", The Canadian Productivity Review, no. 25, Statistics Canada, August { ;1} 4

7 distributors is reports to state regulators. These reports are fairly standardized since they often use as templates the Form 2 that interstate gas pipeline companies file with the FERC. A Uniform System of Accounts is available for this form. The chief source for our data on gas utility operating scale is Form EIA 176." (CEC Evidence, p. 21) FEI states, "The FEU [consisting of FEI, F ortisbc Energy (Vancouver Island) Inc. and FortisBC Energy (Whistler) Inc.] propose to continue to use the current reporting. Under the current reporting, the FEU believe it is fully meeting the reporting requirements of the USoA [Uniform System of Accounts] except for the departure in operating and maintenance ("O&M") reporting which was approved by the BCUC [] in 2007 in Order No. G " (Exhibit A2-13, p. 5) 6.1 Does FEI's departure from the reporting requirements of the USoA for operating and maintenance expenses affect the comparability and applicability of data compiled from reports to state regulators? Please explain why, or why not. The BCUC approved the use of an alternate accounting system for O&M accounts PEG has compared the accounts to determine if there are any implications for the work done in this proceeding. We found that the differences in the accounts were on a detailed level, and the more aggregate values appeared to be unaffected. Because the total O&M cost is the sum of the relevant O&M accounts, differences within categories do not impact the analysis unless they were excluded in our calculations and there existed significant differences in the definition. For U.S. gas distributors, PEG excluded gas compression and transmission of gas by others, pensions and other benefits, and uncollectible accounts. These correspond to BCUC USoA accounts 663, 725, and 718 respectively. For account 663, the definitions are consistent, and at any rate, FEU does not have any cost in this category. For account 725, the accounts differ because the USoA account reports actual payments and the FEU account reports actuarial cost. This difference has no impact on the study because the amounts in these accounts are removed, so any differences are not reflected in the remaining included accounts. For account 718, the FEU account appears to contain some extra costs associated with the cost of shutting off customer connections not included in 718. These costs are included in the PEG productivity work. The impact of the inclusion of these costs results in a negligible downward bias to the long-run productivity trend. 8.0 Reference: CEC Evidence, Page 23; Exhibit B-1, Page 62; B-11, BCUC Output Measure PEG states that "Our output specification is intended to measure the effect of output growth on cost. The trend in the workload was measured by the number of customers served. We show in Section above that this is the output specification that is { ;1} 5

8 relevant to the design of revenue per customer or cost per customer index." (CEC Evidence, p. 23) FEI states, "In determining the Growth Capital allowed under PBR, an Average Growth Capital Cost 29 per Service Line Addition is calculated by dividing the current year's total Grovvth Capital by the current year's service line additions. This Average Growth Capital Cost per Service Line Addition is then escalated by the I-X mechanism and then multiplied by the forecasted level of service line additions for the upcoming year. FEI will recalculate the Average Growth Capital Cost per Service Line Addition yearly in the PBR Annual Review, based on the forecasted gross customer additions and resulting number of service line additions over the same period." (Exhibit B-1, p. 62) FEI also states, "At any given time, FEI does have some service lines and mains that are not in use either due to customers not yet connecting, or customers that are not currently taking service but are expected to in the future. These assets do not go through the retirement process discussed above because FEI has an expectation that the assets will be placed into service again in the future. If there is an expectation that the asset will be used in the future, the most cost-effective option is to keep the assets available for future service even though they are not currently in use." (Exhibit B-1, pp ) 8.1 Does PEG consider the proposed FEI output specification more or less appropriate than the PEG output specification? Please explain why, or why not. Dr. Lowry believes that this is a judgment call for the Commission. On the one hand, service lines are probably the more pertinent driver of gas distribution cost. On the other the number of customers served is probably a more pertinent driver of customer care expenses (metering, billing, etc.). The number of customers was used to calibrate X in the PEG analysis. It should also be noted that a service line metric may give FEI more opportunities to "game the system," such as installing service lines before they are needed. Since only one output metric is used, the question also arises (without ready answer) of which metric is better correlated with other scale-related drivers of gas utility cost such as peak delivery capacity. On balance, the number of customers served seems to win the cost/benefit calculus Reference: CEC Evidence, Pages Index Results PEG states on page 28, "These results may be more pertinent considering that Fortis proposes to exclude a sizable share of its capex costs outside of the indexing mechanisms." 10.1 How does the 10 percent of capital costs excluded from the calculations { ;1} 6

9 presented in Table 2b compare to the "sizable share" of capital costs outside offortis' proposed indexing mechanisms? Fortis apparently intends to recover, via cost trackers, the annual cost of all CPCN projects. No demonstration would apparently be required that the projects could not be funded by the revenue cap indexes. FEJ has not, to Dr. Lowry's knowledge, provided forecasts of its likely CPCN capex during the proposed PBR plan period. This complicates the design of comprehensive revenue cap indexes for two reasons. First, the residual cost subject to indexing does not include even a normal complement of capex so that MFP grows unusually rapidly. Secondly, if Fortis continues to compensate for cost bumps and the subsequent slowdown in capital (as large plant additions depreciate) it is never subject to a corresponding downward revenue adjustment, the company is essentially paid twice for a share of its capital cost. It is difficult to ascertain the appropriate increase in X that eliminates the double counting problem. However, FEI and FBC are not proposing comprehensive revenue cap indexes like those for Alberta gas utilities. They have instead proposed hybrid RAMs in which the declining cost of older plant is passed through to customers automatically. Dr. Lowry's 10% exclusion run was provided to illustrate the potential nature of the problem when designing a comprehensive revenue cap (or capital revenue cap) index Prepare a table similar to Table 2b but excluding a percentage of capital costs that is similar to the percentage of capital costs that Fortis proposes to exclude from its indexing mechanisms. In the absence of additional information on the CPCN capex of FEI, Dr. Lowry has undertaken productivity runs that exclude progressively larger shares of plant additions for all sampled gas utilities. Results are presented in Attachment BCUC CEC If 30% of capex is excluded, for example, that the average MFP trend of the sampled US gas utilities rises from 0.96% (as reported in Table 2a of Dr. Lowry's testimony) to 1.50%. This result would be pertinent for the calibration of an X factor for a comprehensive revenue cap index, assuming that CPCN costs as currently defined flow through a tracker. Note also that the partial factor productivity of capital rises from 0. 98% in the base run to 2.16%. This result would be pertinent to the calibration of an X factor for a capital revenue escalator provided that CPCN costs flow through a tracker Reference: CEC Evidence, Pages Is it the case that the cause of the difference in the calculated annual MFP growth between Table 5a and Table 5b is that in Table 5b only 90 percent of capital additions have been included while the output quantities are the same? { ;1} 7

10 Yes How does the 10 percent of capital costs excluded from the calculations presented in Table 5b compare to the percentage of capital costs outside of Fortis' proposed indexing mechanisms? Based on preliminary estimates of its CPCN project costs, FBC forecasted (in response to BCUC information request 19.3) that from 2014 to 20I9 compensation for roughly 60% of its capex would be addressed by the I-X PBR mechanism. Thus, 40% of its forecasted capex cost would be addressed by trackers. An inspection of the CPCN projects suggest they are generally routine but lumpy investments, such as the construction of a new substation. Projects of this kind are routinely made by the power distributors in our sample, and have materially slowed their capital and multifactor productivity growth. The productivity growth inherent in the residual cost of the sampled utilities if a like amount of capex were excluded is substantial. As noted in our response to BCUC-CEC ( 1) I 0.2, however, this only complicates the design of comprehensive revenue cap indexes (and capital revenue indexes), which Fortis has not proposed Prepare a table similar to Table 5b but excluding a percentage of capital costs that is similar to the percentage of capital costs that F01iis proposes to exclude from its indexing mechanisms. Attachment BCUC-CEC (1) I 0.3 presents results of runs that exclude a progressively larger share of plant from the MFP calculations for all power distributors in Dr. Lowry's sample. Results are presented in Attachment BCUC-CEC (1) I0.3. It can be seen, for example, that in the case of the 40% exclusion the average trend in the MFP of the sampled utilities rises from 0.93% in the base run (as reported in Table Sa of Dr. Lowry's testimony) to 1.98%. This result would be pertinent for the calibration of an X factor for a comprehensive revenue cap index, assuming that CPCN costs flow through a tracker. Note also that the partial factor productivity of capital rises from 0.61% in the base run to 2.51 %. This result would be pertinent to the calibration of an X factor for a capital revenue escalator, provided that CPCN costs flow through a tracker Reference: CEC Evidence, Page Why does PEG recommend a 50/50 weighting of the transmission and distribution EUCPI growth rates? Explain in detail. { ;1} 8

11 Since filing his testimony, Dr. Lowry has examined the forecasted utility plant in service and additions to same that are reported in Section E of FBC's PBR proposal. Based on this perusal, he now recommends that the growth in the inflation measure for an electric capex revenue escalator be a 67%/33% average of the growth rates in the EUCPls for total distribution systems and total transmission systems. The Commission may wish to smooth the growth rate of the resultant index with a two- or three-year moving average Reference: CEC Evidence, Page 52 PEG states, "A 55% labor price weight is certainly too high in an application to capital cost or total cost." 18.1 What does PEG recommend for a labor price weight, and to what should it be applied? Explain PEG's proposal in detail and provide justification for the weights and the inflation mechanism. Dr. Lowry is not convinced that there is sufficient need for a utility input price index of the kind proposed by Fortis in these applications. Should the Commission nonetheless desire a comprehensive revenue cap index with a utility-specific inflation measure, the weight on labor in such an index should be the share of direct labor O&M expenses in the applicable total cost of service. This is the approach that would be used to develop a rigorous utility input price index. In a recent proceeding, the Alberta Utilities Commission controversially rejected this basic principle and approved a 55% labor cost share for the inflation measure in its PBR plans for comprehensive ARMs of provincial energy distributors. Since then, however, the Ontario Energy Board has approved an inflation measure for comprehensive price cap indexes in its new PBR plan for provincial power distributors. The growth in this inflation measure is a weighted average of the growth in the A WE-All Employees Ontario and the GDPIPIFDD ontario With respect to the weights for the sub-indexes, the Board ruled that "the labour and non-labour weights that the Board will use in the 2 factor IPI are weights estimated from a review of the cost shares of medium and large distributors... Based on estimates of Ontario electricity distributor cost shares... the Board will use component weights of 30% for labour and 70% for non-labour." 3 Dr. Lowry does not possess the data to compute the appropriate cost shares accurately for FBC and FEI. 3 EB , "Rate Setting Parameters and Benchmarking Under the Renewed Regulatory Framework for Ontario's Electricity Distributors," November 2013 pp { ;1} 9

12 Response to Unanswered Questions to Information Request No. I of 22.0 Reference: CEC Evidence, Page 58, Pages 71-72; FEI Exhibit B2-8, BCUC ; FBC Exhibit B- 7, BCUC On page 58 PEG states, "The B&V study has numerous flaws that reduce its relevance in this proceeding to the vanishing point." On pages 71-72, PEG provides its recommendations for FEI and FBC For FEI and FBC, please state in a formula format the rate mechanism that PEG recommends to the Commission. Please indicate the value or the index that should be used for each general component, such as inflation and productivity. Include also an indication of any other formula components such as one for exogenous adjustments or flow-through. If such components are included in PEG's recommendation, provide a description of the component or a definition. PEG's research provides the basis for a number of different revenue cap escalators. In addition to escalators for the caps on O&M revenue and capex which Fortis proposes, PEG has developed escalators for capital and comprehensive revenue cap indexes. An adjustment to the X factor in the latter indexes may be needed replace the pass-through of the declining cost of older plant which is featured in the Fortis proposal. The Commission may also wish to raise X for the fact that, in repeated applications, the tracking of lumpy capex is likely to cause some additional double counting. The formulas below are calculated on the assumption that it is appropriate to address these considerations by excluding 10% of capex from the MFP calculations. Alternative results would apply with different capex exclusion percentages. The formulas for capex reflect new productivity research that PEG has undertaken in response to BCSEA/SCBC-CEC (1) 13. Each escalator contains conventional Y factor and Z factor provisions. Y factors are rate adjustments for costs that are scheduled for separate cost tracker recovery. Z factors are rate adjustments for unforeseen events not adequately handled by the I-X mechanism. O&M Revenue growth Revenue Gas OM = growth wgas O&M - X + growth Customers + y + z WGas O&l\1 = growt h G JDP IP I FDD nc x.55 x growt h A W E BC x grovvt h GD P IPI FDD BC. X= 0. 98% (base productivity growth target) % (Stretch Factor) = 1.18%. { ;1} 10

13 Response to Unanswered Questions to Information Request No. I of Electric growth Revenue Electric OM growth weiectric O&M - X + growth Customers + y + z W E!cctric O&M = 0.67 x growth EUCPI for Tota 1 Power D1stn "b ut10n "'.J x growt h EUCPI for Total Power Transmission X= 1.51% (base productivity growth target) (Stretch Factor) 1.71 %. Capex growth CapexGas growth wgas Capex - X + gro\vth Customers + y + z WGas Capex = EUCPI for Total Power Distribution X= 2.25% (base capex productivity growth target) (Stretch Factor) 2.45%. Electric growth CapexEiectric =growth we!cctric Capex - X + growth Customers + y + z wetcctric Capcx 0.67 X growth EUCPI for Total Power Distribution X growth EUCPI for Total Power Transmission X= 1.83% (base capex productivity growth target) (Stretch Factor) 2.03%. Capital Revenue growth Revenue Gas Capital= growth wgas Capital -X+ grovvth Customers+ y + z wgas Capital = GDPIPhnoRC X= 1.34% (base productivity growth target) (Stretch Factor) 1.54%. 4 Electric growth Revenue Electric Capital = growth weiectric Capital - X + growth Customers + y + z wetcctric Capital = GDPIPimoRC X= 1.05% (base capital productivity growth target) (Stretch Factor) 1.25%. 4 Assumes for illustrative purposes that 30% of routine capex is recovered through CPCNs. { ;1} 11

14 Response to Unanswered Questions to Information Request No. I of Total Revenue Gas growih Revenue Gas Total =growth W- X+ growth Customers+ Y + Z w BC GDPIPimo X= 1.13% (base MFP growth target)+ 0.20% (Stretch Factor) 1.33%. 5 Electric growth Revenue Electric Total = growth weiectric Capital - X + growth Customers + y + z wgas Capital GDPIPIFoDBC X= 1.18% (base MFP growth target) % (Stretch Factor) 1.38% Please explain how any adjustments to the MFP studies or to the X factors that PEG recommends in its testimony are included in the X factors recommended for FEI and FBC in this section. The X factors pertaining to a comprehensive revenue cap index or capital revenue cap index are adjusted to reflect the exclusion of 10% of plant additions in the MFP calculations How would PEG's recommended X factor change if the MFP were based on removing more than 10 percent of plant additions for FEI and FBC? The removal of more than 10% of plant additions would result in slower growth in the capital quantity. The slower growth in the capital quantity would result in slower growth in the input quantity index and more rapid measured MFP growth. Please see our response to BCUC - CEC (1) 10.3 for empirical results FEI Exhibit B2-8, BCUC shows that on average 21 percent offei's total revenue requirement during the PBR period would be subject to the I-X formula and the consequent improved incentives. FBC Exhibit B-7, BCUC , the comparable figure is 18 percent; would PEG's proposal increase these percentages? 5 Assumes for illustrative purposes that 40% of routine cap ex is recovered through CPCNs. { ;1} 12

15 No Does PEG have any recommendations that would increase the percentage of FEI's and FBC's total revenue requirement that would be subject to the I-X formula and thus subject to improved incentives for efficiency? These percentages seem quite low because they include the costs of purchased gas and electric power, hydro rights, transmission by others, and a return on and of each company's older plant. The percentages of the controllable costs of base rate inputs are much higher. The best way to increase the percentage of cost subject to the I-X formula is to narrow the eligibility guidelines for tracked capital cost. The tracking of all costs subject to CPCN proceedings is an unusual feature ofthe Fortis plans Does PEG have any recommendations that would improve incentives for that portion of FEI's and FBC's revenue requirements that cannot be included in the I-X formula? Yes. In particular, attention should be paid to the incentive properties of the cost trackers. For example, if CPCN projects require approval of a specific budget, adjustments to revenue for deviations from that budget can be limited. For example, variances from the forecast could in a certain range be subject to a deadband, and in another range could be shared 50/50 between the Company and its customers. Beyond the sharing range, cost overruns may warrant careful prudence review. Dr. Lowry recalls that the BCUC has experimented with incentivized capital cost trackers in its regulation of power transmission. Additionally, PBR provisions should be considered for DSM expenses, and it is desirable to have Z factor eligibility thresholds for individual projects and for the cumulative amount of projects Reference: CEC Evidence, Page 71 Impact of X factor On page 71 PEG states, "For FEI, our research supports X factors in the [1.16%, 1.33%] range.... For FBC, our research supports X factors in the [ 1.13 %, 1.3 8%] range." 23.1 Please provide the financial impact on FBC and FEI of the various X factors given the Earnings Sharing Mechanism. An accurate answer to this question is beyond PEG's current capabilities. { ;1} 13

16 Attachment 1 Question 10.3 Please see attached. { ;1} 14

17 Attachment BCUC-CEC (1) 10.3 Productivity Results For Sampled U.S. Utilites Using Variable 0 /o of Plant Additions (Average Growth Rates) 1 Share of Plant Additions Included Output Quantity Input Quantities Productivity O&M Capital Multifactor O&M Capital Multifactor Gas Utilities 100% (base run from testimony) 1.10% 0.12% 0.12% 0.14% 0.98% 0.98% 0.96% 90% 1.10% 0.12% -0.24% -0.03% 0.98% 1.34% 1.13% 80% 1.10% 0.12% -0.63% -0.21% 0.98% 1.73% 1.31% 70% 1.10% 0.12% -1.06% -0.40% 0.98% 2.16% 1.50% 60% 1.10% 0.12% -1.55% -0.59% 0.98% 2.65% 1.69% 50% 1.10% 0.12% -2.09% -0.80% 0.98% 3.19% 1.90% 40% 1.10% 0.12% -2.71% -1.01% 0.98% 3.81% 2.11% Power Distributors 100% (base run from testimony) 0.87% -0.64% 0.26% -0.06% 1.51% 0.61% 0.93% 90% 0.87% -0.64% -0.18% -0.31% 1.51% 1.05% 1.18% 80% 0.87% -0.64% -0.64% -0.57% 1.51% 1.51% 1.44% 70% 0.87% -0.64% -1.13% -0.84% 1.51% 1.99% 1.70% 60% 0.87% -0.64% -1.65% -1.11% 1.51% 2.51% 1.98% 50% 0.87% -0.64% -2.20% -1.39% 1.51% 3.07% 2.26% 40% 0.87% -0.64% -2.80% -1.68% 1.51% 3.67% 2.55% 1 All growth rates calculated logarthmically.