CALCULATION OF INCREMENTAL CAPITAL MODULE REVENUE REQUIREMENT

Transcription

1 Updated: August 9, 0 Page of 6 CALCULATION OF INCREMENTAL CAPITAL MODULE REVENUE REQUIREMENT.0 OVERVIEW In calculating the revenue requirement for the proposed ICM introduced in,, Schedule, the methodology applied is generally consistent with Board requirements as outlined in Chapter of the Filing Requirements for Transmission and Distribution Applications, dated June 8, 0. The attached Table provides the calculations made to determine the revenue requirement for Typical, Escalated Issue and Non-typical capital; the latter two categories are discussed in detail in, Tabs and respectively. An overview of the methodology and parameters applied to determine the revenue requirement follows below Hydro One Distribution is proposing to allocate the revenue requirement associated with the incremental capital expenditures eligible for cost recovery on the basis of distribution revenue. Hydro One Distribution proposes to recover this amount by means of a variable rate rider, as outlined in Exhibit E, Tab, Schedule, Attachment, which will remain in effect until Hydro One Distribution s next cost of service application. 0.0 DISCUSSION Full Year Rule for In Service Additions The revenue requirement calculations are consistent with Board direction that the halfyear rule for in-service additions not be applied. The Board determined that the half-year rule should not apply so as not build a deficiency for the subsequent years of the IRM plan term. Consequently all calculations including depreciation, return on capital as well as the CCA claim in determining the income tax are based on the full year in-service addition assumption.

2 Page of However one exception has been made in the case of the Non-Typical capital CIS project. The CCA claim used in the tax calculation is based upon the half-year rule in order to smooth this impact over the 0 and 0 years. This results in rate smoothing as well as process efficiency. Specifically, the resulting $6.8 million of incremental revenue requirement results in a 0.6% rate increase in 0. Alternatively, if the full CCA claim for CIS were factored in in 0, rather than the half-year rule, the incremental revenue requirement which would result would be -$9.8 million or a rate decrease of.7%. In this case, in order to recover a fair and equitable return on this necessary investment, Hydro One would re-submit the project in the 0 IRM test year, seeking full recovery of the required $.8 million revenue requirement in that year, resulting in an incremental.6% rate increase. Calculation details of this alternative approach are provided in Table. Hydro One believes that its recommended approach of applying the half year rule on the CCA calculation benefits the rate payer through rate smoothing (a single incremental rate increase of 0.6% in 0; versus a rate decrease of.7% in 0 followed by an incremental.6% rate increase in 0); and benefits the Board through the process efficiency of having to consider the CIS project in only one IRM proceeding rather than two Depreciation and CCA Appropriate depreciation rates and CCA rates were used for each program or project. For Typical capital, a depreciation rate of.% and CCA rate of 8% was applied. In the case of the Escalated Issue projects/ programs, depreciation rates of about % and CCA rates of 8% per year were utilized. In the case of the Non-Typical capital CIS project, the appropriate depreciation rate is 0.% whereas the CCA rate is 00% Capital Structure Hydro One Distribution s deemed capital structure for rate making purposes is 60% debt and 0% common equity. This capital structure was approved by the Board as part of its

3 Page of 6 Decision With Reasons in EB This is consistent with the Board s report on the cost of capital: see the Report of the Board on the Cost of Capital for Ontario s Regulated Utilities dated December, 009 (EB ). The 60% debt component is comprised of % deemed short term debt and 6% long term debt Cost of Capital Parameters In terms of the cost of capital parameters applied, consistent with,, Schedule, these were derived on a more recent consensus forecast than the Board approved rates for 0 in EB , resulting in a lower cost of capital Specifically, a return on equity rate of 9.6% was applied. This is based on the Board s formulaic approach in the Report of the Board (EB ). The return on equity calculation is based on the February 0 Consensus Forecast ( month out), as well as Bank of Canada data and the change in the spread of A-rated Utility Bond Yields during February. Hydro One assumes that the return on equity for 0 will be updated in accordance with the December, 009 Cost of Capital Report, upon the final decision in this case. For rates effective January, 0, the Board would determine the ROE for Hydro One Distribution based on the September 0 Consensus Forecasts and Bank of Canada data which would be available in October The deemed short-term rate assumed is.0% for 0 using the February 0 Global Insight Forecast plus a spread of 9 bps, which is based on the spread contained in the Cost of Capital Parameter Updates for 0 Cost of Service Applications for Rates Effective January, 0, dated November 0, 0. Hydro One assumes that the deemed short term debt rate for 0 will be updated in accordance with the December, 009 Cost of Capital Report, upon the final decision in this case. Specifically, for rates effective January, 0, the Board would determine the deemed short term debt rate based on the September 0 Bank of Canada data which would be available in October 0 plus the average spread obtained by Board Staff in 0.

4 Page of 6 The long term debt rate is calculated to be.9% for 0. The long term debt rate is calculated as the weighted average rate on embedded debt, new debt and forecast debt planned to be issued in 0, and 0. As discussed in this exhibit, forecast interest rates will be updated consistent with the methodology used for the return on common equity and deemed short term interest rate.

5 Page of 6 Typical Capital Table CALCULATION OF 0 ICM REVENUE REQUIREMENT Non Typical Capital Escalated Issue Capital Total Project / Program Commerce Way TS Distributing Subtotal Capital & Regulating Wood Pole Escalated Issue Miscellaneous Contribution Stations Replacement Capital CIS In Service Addition Average Rate Base (no half year) Depreciation.0%.97.0% 0.9.0% 0.8.9% % Return on Debt (blended) Return on Equity Tax (0.6) (0.07) (0.) (0.9) (0.6) (9.) (0.) Total Incremental Revenue Requirement Tax Calculation Return (.76) Add: Depreciation less: CCA (.) (0.7) (.0) (.8) (77.70) (.0) (0.9) (.6) (0.7) (7.0) Tax rate.0%.0%.0%.0%.0% (0.6) (0.07) (0.) (0.9) (9.) CCA half year (77.70) UCC CCA claimed 8%. 8% 0.7 8%.0 8%.8 00% Cost of Capital 0 Return on Long term debt.9% Return on Short term debt.0% Return on Debt (blended).7% Return on Equity 9.6%

6 Page 6 of 6 Table CIS Full Year CCA Revenue Requirement Scenario 0 0 In Service Addition Average Rate Base (no half year) Depreciation 0.% % 6.6 Return on Debt (blended).7%.9.70%.69 Return on Equity 9.6%.9 9.%.9 Tax.0% (.7).0% 7.9 Total Incremental Revenue Requirement (9.80).8 Incremental Rate Impact.7%.6% Tax Calculation Return (0.). Add: Depreciation less: CCA (.0) (79.9) 8.9 Tax rate.0%.0% Tax (.7) 7.9 CCA.0 UCC.0 CCA claimed 00%.0