Please direct any inquiries regarding this matter to the undersigned.

Transcription

1 B- David Bennett General Counsel and Corporate Secretary Regulatory Department FortisBC Inc. 90 Esplanade Box 0 Trail BC VR L Ph: (0) Fax: David.Bennett@fortisbc.com September 8, 006 Via Original via Courier Mr. R.J. Pellatt Commission Secretary BC Utilities Commission Sixth Floor, 900 Howe Street, Box 0 Vancouver, BC V6Z N Dear Mr. Pellatt: Re: Commission Order G and an Application to Transfer Shares and Assets of Princeton Light and Power Company, Limited ( PLP ) to FortisBC Inc. ( FortisBC ) and to Wind-up PLP Please find enclosed twenty copies of materials titled Tab 9 FortisBC PLP Reorganization in respect of the Application cited above. The document forms part of FortisBC s Preliminary 007 Revenue Requirements, which will be filed on or before October, 006. The Application stated that the transaction will not harm the customers of either utility, and the financial information in the enclosed materials demonstrates that there is no negative impact on the rates of FortisBC or PLP customers. FortisBC wishes to facilitate the public review process and believes that this information will assist the BC Utilities Commission and Registered Intervenors in preparing Information Requests. Please direct any inquiries regarding this matter to the undersigned. Sincerely, David Bennett General Counsel and Corporate Secretary FortisBC Inc. cc: Registered Intervenors

2 John Hall, President and CEO, PLP

3 Preliminary 007 Revenue Requirements Tab 9 FortisBC - PLP Reorganization FortisBC Inc.

4 Table of Contents. OVERVIEW.... REVENUE REQUIREMENT OVERVIEW.... REVENUE AT APPROVED RATES...6. POWER SUPPLY...8. OPERATING EXPENSE AND CAPITALIZED OVERHEAD WHEELING OTHER INCOME TAXES FINANCING COSTS INCENTIVE ADJUSTMENTS.... RATE BASE... APPENDIX...6 September 9, 006 FortisBC Inc. Page

5 . Overview On August 8, 006, Fortis Pacific Holdings Inc. ( FPHI ), FortisBC Inc. ( FortisBC ) and Princeton Light and Power Company, Limited ( PLP ) (together as the Applicants ) jointly filed an application for the acquisition by FortisBC of a reviewable interest in PLP to be effective December, 006 and the transfer of assets and wind up of PLP to be effective January, 007 (the Consolidation Application ). The Applicants submitted that:. The consolidation of the Companies is expected to result in increased administrative and operational efficiencies over time, resulting in Operating and Maintenance ( O&M ) costs that are lower for all FortisBC and PLP customers than they would be under the current corporate structure;. Neither FortisBC customers nor PLP customers will be harmed by the reorganization;. The reorganization will result in administrative benefits to the Commission by eliminating the requirement to regulate one entity and the related utility tariff(s); regulatory applications, including cost of service applications and rate design applications; and related activities;. The reorganization will also result in similar administrative benefits to the Applicant s, and. The reorganization should result in a more efficient allocation of service crews in Oliver, Keremeos and Princeton leading to enhanced service capability. September 9, 006 FortisBC Inc. Page

6 . Revenue Requirement Overview A discussion of the impact of the amalgamation on FortisBC s 007 Revenue Requirements follows. Financial schedules supporting the Revenue Requirements calculations can be found in Appendix of this Tab. The revenue requirements of the reorganized utility are presented in Table 9.0 below, and a description of how the revenue requirements were derived follows. As noted in the Consolidation Application, the Company is of the opinion that neither FortisBC customers nor PLP customers will be harmed by the reorganization. FortisBC expects to accomplish this by recovering the one-time cost of reorganization by retaining PLP s existing (higher) rates to the current PLP customers for a period of nine months ending September 0, 007, whereby the incremental revenue requirements are offset by the incremental revenue recovered from PLP customers. September 9, 006 FortisBC Inc. Page

7 Table 9.0 Revenue Requirements Overview 007 FortisBC PLP FortisBC Stand Alone Impact Reorganzied ($000s) Sales Volume (GW.h),077 -,077 Rate Base (000s) 76,0 7,90 77,9 Return on Rate Base 7.6% - 7.6% REVENUE DEFICIENCY POWER SUPPLY Power Purchases 70,7-70,7 OPERATING 6 O&M Expense,,089, 7 Capitalized Overhead (8,67) (8) (8,8) 8 One Time Reorganization Costs - 9 Wheeling, -, 0 Other Income (,) () (,688), 968,8 TAXES Property and Capital Taxes 0,96 90,06 Water Fees 7,9 7,9 Income Taxes,90 8,8 6,7 8,9 7 FINANCING 8 Cost of Debt 9,7 7 9,69 9 Cost of Equity 7, ,89 0 Depreciation and Amortization 0,6 86,0 AFUDC (,00) - (,00) 8,7,00 8, INCENTIVE ADJUSTMENTS (,087) - (,087) 6 TOTAL REVENUE REQUIREMENT 06,78,0 08, Less: REVENUE AT APPROVED RATES 00,86,9 0, REVENUE DEFICIENCY for Rate Setting,9 (9),90 RATE INCREASE.9%.9% September 9, 006 FortisBC Inc. Page

8 Revenue at Approved Rates The impact on FortisBC s Revenue at Approved Rates for 007 is the net of sales revenue from PLP customers and the reduction of FortisBC revenue currently derived from the sale of power to PLP. As stated above, FortisBC proposes to retain current PLP Tariff rates until September 0, 007. Estimated 007 PLP Tariff revenue to September 0 was calculated by escalating PLP s 006 Sales Revenue forecast (net of disallowed salary, management fee and legal costs) per the 006 Revenue Requirements Application as approved by Commission Order G by a forecast 007 load increase of 0.8 percent on a pro rata basis for 9 months as shown below: (000's) PLP 006 Forecast Sales Revenue $,76 Disallowed Costs: Salary adjustments () Management Fee (8) Amortization Expense () Adjusted Revenue, Load Growth 6 8 PLP 007 Forecast Sales Revenue,77 9 Pro-rated 9 months $,8 Tariff revenue for October through December 007 was calculated by applying FortisBC s 007 rates (assuming a.9 percent rate increase over 006 rates) to the -month forecast sales load of 7.8 GWh which is calculated as follows: GWh PLP 006 Forecast Gross Load Load 7. Less: PLP 007 Forecast Billable Load 7. Pro-rated months September 9, 006 FortisBC Inc. Page 6

9 Sales revenue by customer class was then forecast based on the number of customers and related volume of sales by rate class as presented below: Estimated FortisBC Tariffs Revenue October - December 007 General Residential Service Industrial Street Light Irrigation Total 007 Average Number of Customers,68 97,8 % of total Forecast Volumes 6% 0% % % % 00% Forecast Volumes (MWh) ($000's) Monthly Charges Energy Charges 8 7,00 Demand Charges Total ,89 FortisBC s revenue at wholesale rates from PLP for 007 was calculated by multiplying PLP s gross load (assuming 0.8 percent load growth) and by FortisBC s 006 average Wholesale rate escalated for a forecast percent FortisBC rate increase as presented below Wholesale Billing Estimate Gross Load Average Cost Total (GWh) $/kwh Billings 7. $ 0.07 $,68 The impact of the reorganization on Revenue at Approved Rates is the difference between the forecast Sales Revenue and the foregone Wholesale revenue which yields the Gross Margin as shown below. 007 Forecast ($000's) Estimated Princeton Revenue (9 months) Jan-Sep 007,8 Estimated FortisBC Revenue ( months) Oct-Dec 007,89 FortisBC Wholesale/Princeton Revenue (,68) Gross Margin,9 September 9, 006 FortisBC Inc. Page 7

10 . Power Supply 6 7 There are no incremental power supply costs as a result of the consolidation. PLP currently purchases all of its power supply from FortisBC and that cost is already incorporated in FortisBC s power supply cost.. Operating Expense and Capitalized Overhead The FortisBC and PLP electrical systems are currently operated by separate staff. Corporate reorganization will result in some redundancies that will, so far as possible, be reduced through existing vacancies and future attrition. Gross O&M Expense PLP s 007 Gross O&M Expense was calculated as follows: ($000's) PLP 006 O&M Budget $,7 Addback PLP CapOH 60 Interest Expense (60) Depreciation and Amortization (6) Disallowed Costs (Order G-6-06) () 6 Property Taxes (88) 7 Synergies () 8 PLP 006 Gross O&M,067 9 Cost (BC CPI) 0 Forecast PLP 006 Gross O&M $,089 September 9, 006 FortisBC Inc. Page 8

11 Operational and administrative synergies are expected in the following areas:. Customer Service costs are expected to be lower by taking advantage of economies of scale; 6. Network Services expects to also be able to provide more efficient delivery of their services in the combined operation by redeploying the combined workforce; and FortisBC will be able to provide the majority of finance, administration and corporate support to the combined operation with existing FortisBC staff The delivery of these services at a lower cost will benefit the customers of both utilities. As illustrated in the table below, under the terms of the FortisBC s 006 NSA, the addition of the estimated, PLP customers would result in a Base O&M cost allowance of approximately $,,000 in 006 dollars ($8.08 X, customers = $,,000). However, on a cost of service basis, FortisBC estimates that it would have only required an incremental $,067,000 of Base O&M to operate the combined business in 006. September 9, 006 FortisBC Inc. Page 9

12 FortisBC Standalone As Filed 006 FortisBC With PLP Formula Based O&M Cost of Service Forecast With Synergies O&M Expense (000'S) FortisBC $ 8,67 $ 8,67 $ 8,67 PLP (excluding one time costs) -,,067 Base O&M 8,67 9,906 9,79 Pension and Post-Retirement Benefits,66,66,66 6 Trail Office Lease Total Operating and Maintenance Expense,908,,97 8 Capitalized Overhead (8,8) (8,68) (8,9) 9 Net Operating & Maintenance Expense $,6 $, $,80 0 Average number of Customers FortisBC 00,687 00,687 00,687 PLP,, Total Average number of Customers 00,687 0,899 0,899 6 Base O & M per customer $ 8.08 $ 8.08 $ 8.8 Accordingly, FortisBC proposes that Base O&M per customer for the purpose of calculating revenue requirements under PBR be adjusted downward effective January, 008 to $8.8. September 9, 006 FortisBC Inc. Page 0

13 Capitalized Overhead Capitalized Overhead is calculated at 0 percent of Gross O&M (net of one time costs or reorganization) according to the terms of the 006 NSA One Time Reorganization Costs FortisBC expects to incur approximately $0,000 in one-time costs as a result of the transition. As shown below, this amount includes the cost to convert existing PLP customer accounts to FortisBC s billing system, convert accounting and banking records, hearing and legal fees and severance and relocation costs. The estimated onetime costs have increased from the approximate $90,000. The increase is to account for regulatory costs associated with a written public hearing that were not contemplated in the Application, consulting costs to examine PLP Tariffs and a retention bonus for one PLP employee As stated in the original Application, the Company expects that these one-time costs in 007 will be offset by PLP higher rates from January, 007 through to September 0, 007. ($000's) Severance and Relocation $ Finance conversion costs Customer Service conversion costs Legal 0 Per Original Application $ 9 6 Additional Costs: 7 Regulatory Review 0 8 Consultant Costs - Tariff Review 0 9 Retention Bonus 0 0 Revised Total $ September 9, 006 FortisBC Inc. Page

14 6. Wheeling 6 7 There are no incremental wheeling costs as a result of the consolidation. PLP currently purchases all of its power supply from FortisBC and wheeling costs are already incorporated into the charges to PLP. 7. Other Income PLP Other Income is comprised of Connection fees, Pole contact revenue and other income. Other Income was supplied from a PLP forecast for 007 broken down as follows: 8. Taxes Facility $,600 Connections,600 Pole Conts. 96,00 Other 7,800 $, Property Tax Property tax was estimated by escalating the amount of Property Tax in PLP s 006 revenue requirements of $88,000 by percent to arrive at a 007 forecast of $90, Water Fees There are no incremental Water Fees as a result of the consolidation. PLP currently purchases all of its power supply from FortisBC and Water Fees are already incorporated into the charges to PLP. September 9, 006 FortisBC Inc. Page

15 Income Taxes Income taxes were calculated on the same basis of FortisBC s current treatment of income tax as detailed in Schedule of Appendix to this Tab. The amount of CCA deductible for tax purposes was estimated based on PLP s most recent tax filing to the Canada Customs and Revenue Agency and forecast capital expenditures in Financing Costs Cost of Debt The Cost of Debt associated with the consolidated operations was estimated by applying FortisBC s deemed debt ratio of 60 percent to PLP s average rate base to FortisBC s 007 forecast weighted average cost of short term debt of.97 percent Cost of Equity The Cost of Equity associated with the consolidated operations was estimated by applying FortisBC s deemed equity ratio of 0 percent to PLP s average rate base to FortisBC s 007 forecast allowed return on equity of 9.0 percent, shown in Tab of this Application Depreciation and Amortization Depreciation and Amortization expense consists of Depreciation on Plant and Equipment, and the amortization of Deferred Charges. Depreciation Expense for PLP in 007 has been calculated according to the rates approved by way of the 006 NSA and applied to PLP s forecast Plant in Service as at December, 006. Amortization of Deferred Charges was taken from PLP s 006 revenue requirements application and other than the disallowed amortization of deferred legal costs is not expected to change in 007. September 9, 006 FortisBC Inc. Page

16 AFUDC Based on the nature of PLP s capital expenditures, the Company has not forecast any AFUDC associated with the PLP operations in rates for Incentive Adjustments There are no incremental incentive adjustments arising from 006 operations,and the consolidated 007 operations will be subject to the incentive provisions of the PBR Plan.. Rate Base The amalgamation of PLP is forecast to increase Utility Rate Base by approximately $7. million as presented in Schedule of Appendix. 007 Net Capital additions were estimated based on PLP s five year capital plan as presented below. Capital additions of are comprised of annual capital maintenance expenditures, specific capital improvement projects, and are net of customer contributions. Retirements have been estimated a percent of gross capital additions based on historical experience yielding 007 Net Additions of approximately $,000. September 9, 006 FortisBC Inc. Page

17 007 Capital Budget Plant Programs Total Annual Misc. Urban $ 0,000 Misc. Rural,000 New Services 0,000 U/G Services 0,000 6 Street Lights,00 7 Brushing (Capital ),000 8 Mapping Program 8,000 9 PCB Testing,000 0 Cut-Out Install program 8,000 Meter Base Upgrade Program,00 Substation Maintenance,00 Annual Capital Maintenance 99,800 Pending East Prn U/G - Mill to Harkers,000 6 Harkers to J Allison shop,000 7 Allison shop to Linda Allison,000 8 Hwy0 - M. Lk. To Jura 69,000 9 Arm/String - East Circ. Kal tire to Golf,000 0 Hwy Golf Cse - Sang Ang Est. 80,000 WEYCAN Feeder,000 "C" Stock 0,000 Non Planned,000 CIAC (,000) TOTAL PROJECTS 6,800 6 Retirements (9,070) 7 Net Additions $,70 September 9, 006 FortisBC Inc. Page

18 Appendix SCHEDULE UTILITY RATE BASE 007 FortisBC PLP FortisBC Stand Alone Impact Reorganzied ($ 000s) Plant in Service, January 9,67,6 98,69 Net Additions 9,8 0,7 Plant in Service, December,0,0,78,069,00 6 Construction Work in Progress,868 -,868 7 Plant Held for Future Use Plant Acquisition Adjustment,9 -,9 9 Deferred and Preliminary Charges 9, 67 9,7 0,8,6 6,,, Less: Accumulated Depreciation and Amortization 9,07 6,87,97 Contributions in Aid of Construction 69,0,9 7, ,9 9,09 7, Depreciated Rate Base 809,7 7,0 86, Prior Year Depreciated Utility Rate Base 707,0 7,0 7, Mean Depreciated Utility Rate Base 78,7 7, 76,690 Allowance for Working Capital 6, 7 6,7 Adjustment for Capital Additions (8) - (8) 6 7 Mid-Year Utility Rate Base 76,0 7,90 77,9 September 9, 006 FortisBC Inc. Page 6

19 Appendix SCHEDULE EARNED RETURN 007 FortisBC PLP FortisBC Stand Alone Impact Reorganzied ($ 000s) SALES VOLUME (GW.h),077,077 ELECTRICITY SALES REVENUE 06,78,9 08,897 EXPENSES 6 Power Purchases 70,7-70,7 7 Wheeling, -, 8 7,6-7,6 9 0 Operating Expenses,08,,60 Taxes Property Tax 0,96 90,06 Water Fees 7,9-7,9 8, , Depreciation and Amortization 0,6 86,0 8 9 Other Income (,) () (,688) 0 AFUDC (,00) - (,00) Incentive Adjustments (,087) - (,087) UTILITY INCOME BEFORE TAX 9,6 9 9,8 Less: INCOME TAXES,90 8,8 6 RETURN ON RATE BASE 6,97 6 7, Utility Rate Base 76,0 7,90 77,9 9 Return on Rate Base 7.6% 7.6% 7.6% September 9, 006 FortisBC Inc. Page 7

20 Appendix SCHEDULE INCOME TAX EXPENSE 007 FortisBC PLP FortisBC Stand Alone Impact Reorganzied ($ 000s) ACCOUNTING INCOME 9, ,07 Deductions Capital Cost Allowance 8,8 7 8,799 Capitalized Overhead 8,67 8 8,8 AFUDC,00 -,00 6 Net Deductable Deferred Charge Additions Incentive & Revenue Deferrals,087 -,087 8 Financing Fees All Other (net effect) ,08 6,9 Additions Amortization of Deferred Charges,66 6,66 Depreciation 7,99 8,9 0,6 86,0 6 7 TAXABLE INCOME 6,6 70 6,7 8 9 Tax Rate.%.%.% 0 Taxes Payable,097 8, Prior Years' Overprovisions/(Underprovisions) Tax Impact of Deferred Charges 9-9 Large Corporations Tax Allowance for tax audit REGULATORY TAX PROVISION,90 8,8 September 9, 006 FortisBC Inc. Page 8

21 Appendix SCHEDULE ACTUAL AND FORECAST COMMON SHARE EQUITY 007 FortisBC PLP FortisBC Stand Alone Impact Reorganzied ($000s) Share Capital 8,000,70 0,70 Retained Earnings 60,6-60,6 COMMON EQUITY - OPENING BALANCE 08,6,70 0,76 6 Less: Common Dividends (,000) - (,000) 7 8 Add: Net Income 7,99-7,99 9 Shares Issued 0,000-0,000 0 COMMON EQUITY - CLOSING BALANCE,7,70 7, SIMPLE AVERAGE 6,,70 9,0 Adjustment for Shares Issued (6,7) - (6,7) 6 Deemed Equity Adjustment (,9) 06 (,9) 7 8 COMMON EQUITY - AVERAGE 0,6,876 08,7 September 9, 006 FortisBC Inc. Page 9

22 Appendix SCHEDULE ACTUAL AND FORECAST RETURN ON CAPITAL 007 FortisBC PLP FortisBC Stand Alone Impact Reorganzied Secured and Senior Unsecured Debt 0,88-0,88 Proportion.60% 0.00%.% Embedded Cost 6.7% 6.7% 6.7% Cost Component.0% 0.00%.7% Return,997 -, Short Term Debt 6,77, 60,89 8 Proportion 7.0% 60.00% 7.89% 9 Embedded Cost.97%.97%.97% 0 Cost Component 0.%.8% 0.7% Return (including fees),7 7,6 Common Equity 0,6,876 08,7 Proportion 0.00% 0.00% 0.00% Embedded Cost 9.0% 9.0% 9.0% 6 Cost Component.6%.6%.6% 7 Return 7, , TOTAL CAPITALIZATION 76,0 7,90 77,9 0 RATE BASE 76,0 7,90 77,9 Earned Return 6,97 7 7,88 RETURN ON CAPITAL 7.6% 7.0% 7.% RETURN ON RATE BASE 7.6% 7.0% 7.% September 9, 006 FortisBC Inc. Page 0