COMMON ASSET ALLOCATION

Transcription

1 Filed: September 30, 2008 EB Exhibit C1 Tab 5 Schedule 3 Page 1 of 3 1 COMMON ASSET ALLOCATION INTRODUCTION This evidence will discuss the nature of Common Fixed Assets ("Shared Assets") and the method by which the costs of these assets are assigned to the Distribution and Transmission business units Similar to the common corporate costs discussed in Exhibit C1, Tab 5, Schedule 1, Hydro One has been able to maximize efficiencies through the centralization of the maintenance, management and purchase of shared assets at the corporate level. These assets include shared land and buildings, telecommunication equipment, computer equipment, applications software, tools and transportation and work equipment ( T&WE ) SHARED ASSETS AND FACILITIES COSTS Most fixed assets are directly assigned to the appropriate business unit. The remaining assets (4% of total assets) are considered shared assets, and are allocated to Transmission and Distribution as described later in this exhibit. Table 1, below, summarizes the total gross fixed assets and identifies the proportion of allocated shared assets. Table 1 Summary of Gross Fixed Assets as at December 31, 2007 ($ Million) Transmission Distribution Total Total Fixed Assets 10, , ,202.3 Shared Assets (in Total) Shared Asset % 38.3% 61.7% 100%

2 Filed: September 30, 2008 EB Exhibit C1 Tab 5 Schedule 3 Page 2 of Shared assets are sub-divided into two categories. Major Fixed Assets consist of land, buildings, applications software, and telecommunications equipment. Minor Fixed Assets include office furniture, computer equipment, tools and T&WE. Table 2, below, shows the proportion of major and minor shared fixed assets, accumulated depreciation and net book value as of December 31, Table 2 Details of Shared Net Fixed Assets as at December 31, 2007 ($ Million) Asset Gross Asset Value Accumulated Net Book Value Depreciation Shared Major Assets Shared Minor Assets Total Shared Assets ALLOCATION OF SHARED ASSETS IN SERVICE Due to the nature of Hydro One's business, Shared Assets are not directly attributable to either the Transmission or Distribution business units. In addition, from year to year, the use of these shared assets may change, based upon changes in the underlying transmission and distribution work programs. Consequently, the methodology by which shared assets are allocated to the Transmission and Distribution business units is subject to periodic review. The intent of such a review is to ensure that the assignment of assets is reflective of their use and that the costs are apportioned appropriately amongst the business units In 2005, the Company commissioned a study by R. J. Rudden Associates ("Rudden") to determine a methodology to allocate the assets which are not directly attributable to Transmission or Distribution. The methodology developed represents industry best practices, identifying appropriate cost drivers to reflect cost causality and benefits

3 Filed: September 30, 2008 EB Exhibit C1 Tab 5 Schedule 3 Page 3 of received. The Rudden study resulted in the allocation of shared assets based on the relative usage by Transmission and Distribution or by cost drivers, similar to those used for the common corporate functions and services The Company has accepted the approach of the Rudden study as a reasonable representation of the use of shared assets amongst the business units. This methodology was utilized and subsequently endorsed by the Board in the previous Distribution rate Decision RP /EB , and in the subsequent Transmission rate Decision EB , and was also used in the Company's latest application for Distribution Rates for 2008 (EB ) The appropriate use of the common asset allocation methodology for the 2009 and 2010 test years has been reviewed and confirmed by Rudden Associates in 2008, and is provided as Attachment 1 to this Exhibit Hydro One has used the approved Rudden Common Asset Allocation methodology in this application and Table 3 below shows the Hydro One Common Asset allocation as at December 31, Table 3 Hydro One Common Asset Allocation as at December 31, 2007 ($ Million) Total Gross Value All Hydro One Transmission & Distribution Assets $16,202 million Transmission (Total) $10,104 m Distribution (Total) $6,099 m Transmission (Direct) $9,846 m Distribution (Direct) $5,682 m Transmission (Common) $258 m Distribution (Common) $416 m 24

4 Filed: September 30, 2008 EB Exhibit C1-5-3 Attachment 1 Page 1 of 6 Report to Hydro One Networks Inc. Regarding September 10, 2008

5 TABLE OF CONTENTS A. Background and Purpose... 1 B. Summary of 2008 Approach... 1 C. Results... 2 Table 1. Summary of Common Assets Allocation... 3 Table 2. Comparison of Results of Common Assets Allocations... 4 D. Conclusion... 4 i

6 A. Background and Purpose Black & Veatch ( B&V or we ) is pleased to submit this Report on Hydro One s Common Assets Allocation 2008 to Hydro One Networks Inc. This Report describes the review that B&V performed, at the request of Hydro One, of Hydro One s approach to allocating the costs of Common Assets in its 2008 Transmission Rates filing before the Ontario Energy Board ( OEB ). In 2005, B&V recommended, Hydro One adopted, and the OEB accepted a methodology for Hydro One to allocate Common Assets between its Transmission business and Distribution business. B&V issued our report on our work, Report on Shared Assets Methodology Review dated June 15, 2005 ( 2005 Assets Report ). In 2006, B&V applied the OEB-accepted methodology, updated for asset values as of December 31, 2005 and information from our Report on Common Costs Methodology 2006 dated May 31, 2006, and issued our Report on Common Assets Methodology 2006 dated May 31, 2006 ( 2006 Assets Report ). The results of the methodology were included in Hydro One s 2007 and 2008 Transmission Rates filing with the OEB. B&V s objective in allocating the December 2007 Common Assets was to ensure that the allocation was reasonable and was consistent with the allocation of the costs of the common corporate functions and services, as discussed in our Review of Implementation of Common Costs Methodology 2008 dated September 10, 2008 ( 2008 Common Costs Report ). In this Report, cost means asset cost (gross book value) as at December 31, In its 2009 / 2010 Transmission Rates filing, Hydro One has allocated 38% (composite rate) of Common Assets to the Transmission business, compared to 39% (composite rate) allocated to Transmission in its 2007 Distribution Rates filing (EB ). The reader is referred to the Review of Implementation of Common Corporate Costs Methodology 2008 report for information on certain items discussed in this Report. B. Summary of 2008 Approach The approach used to allocate the costs of Common Assets, as described in our 2005 Assets Report and 2006 Assets Report, was: For each asset, if it was possible to estimate the relative usage between Transmission and Distribution, the cost of the asset was allocated based on the estimated usage. Assets estimated to be at least 95% Transmission or Distribution were 100% assigned to that business and removed from Common Assets. 1

7 If it was not possible to estimate the relative usage of an asset, a cost driver was assigned based on discussions with Hydro One personnel, to ascertain what cost driver was most closely related to usage. The cost drivers used to allocate the Common Assets were selected from among, or derived from, the cost drivers used to allocate the costs of the common corporate functions and services. The specific steps used for each Asset Group are discussed in the 2005 Assets Report and the 2006 Assets Report. For this Report, B&V performed the steps below; the results are presented in Table 1. Obtained from Hydro One the Common Assets listing as of December 2007; see the column Total in Table 1. The values for December 2007 are based on asset cost and in prior studies the values were based on net book value. Discussed with Hydro One personnel whether the relative usage of the Common Assets by Transmission and Distribution had changed since the 2006 Assets Report. It was determined that the relative usage of the Common Assets has not changed in any significant manner. Updated cost drivers to reflect percentages in the 2008 Common Costs Report. Computed the percentages allocated to Transmission and Distribution for each Asset Group and in total, and compared to the percentages used by Hydro One. C. Results The results of the Common Assets allocation for asset values as of December 2007 are shown in Table 1. 2

8 TABLE 1 SUMMARY OF COMMON ASSETS ALLOCATION (DECEMBER 31, 2007 COST) (C$000) Total Transmissioutiomissioution Distrib- Trans- Distrib- Major Assets Software $153,472 $82,767 $70,705 54% 46% Building / Telecom 74,511 42,021 32,490 56% 44% Total 227, , ,195 55% 45% Minor Fixed Assets Aircraft $ 11,750 $ 2,937 $ 8,813 25% 75% Computer Hardware 65,581 34,787 30,794 53% 47% Office Equipment 5,570 2,953 2,617 53% 47% Service- Misc. 4,644 2,322 2,322 50% 50% Service- Measure/Test 4,287 4, % Service- Storage 10,388 5,658 4,730 54% 46% Tools 4,484 3, % 20% Total 106,704 52,244 54,460 49% 51% Transportation Work Equipment Total $339,714 $ 79,034 $260,680 23% 77% Total - All Common Assets $674,401 $256,066 $418,335 38% 62% Table 2 compares the results of the Common Assets allocations for asset values as of December 2007 and December The table shows that the portion of Transmission assets has remained fairly stable. The December 2007 and December 2006 amounts represent asset costs. Previous studies used net book value. The effect of this difference is estimated to be negligible. 3

9 TABLE 2 COMPARISON OF RESULTS OF COMMON ASSETS ALLOCATIONS (C$000) Total Transmission Distribution Transmission Distribution December 2006 $ 705,158 $ 275,174 $ 429,984 39% 61% December 2007 $674,401 $256,066 $418,335 38% 62% Note: 2007 study performed by B&V; 2006 allocation calculated by Hydro One based on B&V methodology. D. Conclusion Based on the work B&V performed 38% is a reasonable composite allocation of common asset costs to Transmission for Hydro One Networks 2009 / 2010 Transmission Rates filing. That percentage reflects the results of the OEB-accepted methodology and is consistent with prior results. 4