TITLE: Capital Budget Applicatin Guidelines PAGE 1 f 11 DATE ISSUED: June 2, 2005 (Prvisinal) REVISION DATE: Octber 2007 This plicy is designed t prvide directin as t general administrative prcess utilized in the handling f Capital Budget Applicatin filings made t the Bard Table f Cntents TABLE OF CONTENTS 1 f 11 I GENERAL 2 f 11 II LEGISLATION 2 f 11 III STATEMENT 2 f 11 IV PURPOSE 2 f 11 V 2 f 11 A. Annual Capital Budget 2 f 11 1. Applicatin Schedule 2 f 11 2. Applicatin Frmat 4 f 11 a) Step 1- Defining Capital Expenditures 4 f 11 i. Clustered Expenditures 4 f 11 ii. Pled Expenditures 5 f 11 iii. Other Expenditures 5 f 11 b) Step 2 Classifying Capital Expenditures 5 f 11 i. Mandatry 5 f 11 ii. Nrmal Capital 6 f 11 iii. Justifiable Expenditures 6 f 11 c) Step 3- Segmenting by Materiality 6 f 11 i. Purchases and Imprvements 6 f 11 ii. Capital Leases 8 f 11 3. General 8 f 11 a) Multi-year Expenditures 8 f 11 b) Technical Cnference 8 f 11 c) Site Visit 9 f 11 B. Supplemental Capital Budget Expenditures 9 f 11 1. Applicatin fr Apprval f Supplemental Capital Expenditures 9 f 11 2. Allwance fr Unfreseen Items 9 f 11 C. General 10 f 11 1. Capital Expenditures Reprt 10 f 11 2. Related Applicatins 11 f 11 a) Abandnment f Plant 11 f 11 b) Cntributins In Aid f Cnstructin 11 f 11
TITLE: Capital Budget Applicatin Guidelines PAGE 2 f 11 DATE ISSUED: June 2, 2005 (Prvisinal) REVISION DATE: Octber 2007 I. GENERAL This plicy applies t capital budget applicatins filed with the Bard pursuant t Sectin 41 f the Public Utilities Act fr apprval f the annual capital budget r supplementary capital expenditures f a utility. This plicy prvides directins n prcess and timing and highlights specific infrmatin and ther requirements which are part f the apprval prcess. II. LEGISLATION A. Public Utilities Act, R.S.N.L. 1990, c. P-47, in particular sectin 41. B. Electrical Pwer Cntrl Act, 1994, R.S.N.L. 1994, c. E-5.1, in particular sectin 3. III. STATEMENT In fulfilling its mandate with respect t the supervisin f the capital expenditures f a utility the Bard balances the interests f cnsumers and the utility in the cntext f the applicable legislative prvisins. In balancing these interests the Bard is cmmitted t the efficient and effective review and apprval f expenditures in keeping with the prvisin f least cst reliable service. IV. PURPOSE The purpse f this plicy is t prvide clarity and cnsistency in the submissin f capital expenditures by a utility, while ensuring transparent and fair versight by the Bard. The plicy sets ut the frmat, prcess, schedule and bligatins f the utility and participating parties. V. A. ANNUAL CAPITAL BUDGET 1. Applicatin Schedule The filing date fr the annual capital budget applicatin fr each utility shall be set ut by the Bard frm time t time (currently July 15 fr Newfundland Pwer and August 1 fr Newfundland and Labradr Hydr). Upn receipt f an applicatin the Bard will set a schedule f dates certain based n the schedule belw.
TITLE: Capital Budget Applicatin Guidelines PAGE 3 f 11 DATE ISSUED: June 2, 2005 (Prvisinal) REVISION DATE: Octber 2007 ACTION NP NLH Applicatin filed with supprting evidence and cpied t interested persns July 15 August 1 Ntice published July 22 August 8 Intervenr Submissins filed August 2 August 19 i) RFIs filed ii) Request fr technical cnference made August 5 August 22 Replies t RFIs August 19 September 6 Target date fr technical cnference t be held August 26 September 13 i) Intervenr evidence filed ii) RFIs arising frm Technical Cnference filed iii) Request fr a hearing filed August 30 September 17 i) RFIs n Intervenr Evidence ii) Ntice if Hearing will be held September 4 September 21 i) Replies t RFIs n Intervenr Evidence ii) Replies t RFIs arising frm the Technical Cnference September 11 September 28 Hearing, r if n hearing written September 30 Octber 15 submissins must be filed Decisin Nvember 15 December 1
TITLE: Capital Budget Applicatin Guidelines PAGE 4 f 11 DATE ISSUED: June 2, 2005 (Prvisinal) REVISION DATE: Octber 2007 2. Applicatin Frmat A utility shall present its annual capital budget with sufficient detail fr the Bard and interested parties t understand the nature, scpe and justificatin fr individual expenditures and the capital budget verall. Each expenditure will be presented in the fllwing manner: a) Step 1 Define the capital expenditure. b) Step 2 Classify the capital expenditure. c) Step 3 Segment by materiality. a) Step 1 Defining Capital Expenditures Capital expenditures are t be defined as ne f the fllwing: i. Clustered; ii. Pled; r iii. Other. i. Clustered Expenditures Definitin Clustered expenditures are thse which wuld lgically be undertaken tgether. Clustered expenditures are t be divided between items that are inter-dependent and thse which are related. 1. Inter-dependent items - thse which are necessarily linked t each ther, such that the repair, replacement r acquisitin f ne item necessarily triggers the repair, replacement r acquisitin f anther item. 2. Related items - thse which, althugh nt necessarily linked t the repair, replacement r acquisitin f anther item, are nnetheless, lgically undertaken tgether. Supprting Infrmatin Fr Clustered Expenditures, in additin t the infrmatin required as set ut belw in Classifying Capital Expenditures, the utility will have t shw: 1. Why the series f expenditures shuld lgically be undertaken tgether. 2. Which cmpnents f the expenditures are cnsidered t be: a. Inter-dependent; and b. Related nly. 3. A breakdwn in csts and, where apprpriate, separate csting fr the series f interdependent items and the series f related items.
TITLE: Capital Budget Applicatin Guidelines PAGE 5 f 11 DATE ISSUED: June 2, 2005 (Prvisinal) REVISION DATE: Octber 2007 ii. Pled Expenditures Definitin A series f expenditures which are neither inter-dependent nr related but which nnetheless are lgically gruped tgether. Supprting Infrmatin 1. Fr pled expenditures, in additin t the infrmatin required as set ut belw in Classifying Capital Expenditures, the utility will have t prvide unit r aggregate csting data, as apprpriate. 2. Clear parameters fr the pl must be set ut shwing amunts in relatin t identified anticipated prjects and amunts fr expenditures anticipated based n histrical spending r ther frecasting. Fr example, in the case f Distributin and Extensins the infrmatin shuld set ut the significant amunts fr knwn gegraphic lcatins f grwth (i.e. a particular cttage area which is being develped) as well as the amunt which is anticipated based n general frecasting. iii. Other Expenditures Definitin Expenditures which d nt fit the definitin f Clustered r Pled. Supprting Infrmatin N specific additinal infrmatin is required. See Classifying Capital Expenditures belw fr the general infrmatin requirements. b) Step 2 Classifying Capital Expenditures Once an expenditure is defined as Clustered, Pled r Other, the utility will apply the Classificatin Scheme, identifying the expenditure as either: i. Mandatry; ii. Nrmal Capital; r iii. Justifiable i. Mandatry Definitin A Capital expenditure which the utility is bliged t carry ut as a result f: 1. Legislatin, 2. Bard Order, 3. Safety issues, r 4. Risk t the envirnment.
TITLE: Capital Budget Applicatin Guidelines PAGE 6 f 11 DATE ISSUED: June 2, 2005 (Prvisinal) REVISION DATE: Octber 2007 Supprting Infrmatin In relatin t mandatry expenditures a utility must shw: 1. On what basis the expenditure is mandatry; 2. All reasnable alternatives, where available, and the reasns this particular alternative was chsen; and 3. Whether the prpsed expenditure is the least cst reasnable alternative and if nt why it was chsen. ii. Nrmal Capital Definitin A capital expenditure that is required based n identified need r n histrical patterns f repair and replacement. Supprting Infrmatin In relatin t nrmal capital expenditures a utility must shw, where apprpriate: 1. There is evidence f the need, ie. histrical spending patterns, maintenance histry, reliability data, grwth; 2. All reasnable alternatives, including deferral, have been cnsidered; 3. The expenditure as prpsed is the least cst ptin; 4. Unit and/r aggregate cst data including, where available, similar csts fr the preceding five (5) years; and 5. Net Present Value (NPV). iii. Justifiable Expenditures Definitin Expenditures which are justified based n the psitive impact the prject will have n the utility s peratins. Supprting Infrmatin In relatin t justifiable expenditures a utility must shw: 1. All reasnable alternatives, including deferral, have been cnsidered; and 2. The expenditure will prvide tangible benefits t ratepayers, such as infrmatin shwing a psitive NPV, r the prpsed reslutin t an identified deficiency. c. Step 3 Segmenting by Materiality i. Purchases & Imprvements Capital expenditures shuld be segmented by their materiality as fllws: 1. Expenditures under $200,000 2. Expenditures between $200,000 and $500,000 3. Expenditures ver $500,000
TITLE: Capital Budget Applicatin Guidelines PAGE 7 f 11 DATE ISSUED: June 2, 2005 (Prvisinal) REVISION DATE: Octber 2007 1. Expenditures under $200,000 Expenditures under $200,000 will be supprted with evidence shwing that the expenditure is prudent and necessary t prvide reasnably safe, adequate, just and reasnable service. These expenditures will be cnsidered based n the written recrd filed, including the utility s applicatin, any relevant RFIs and replies, ther evidence and written submissins. 2. Expenditures between $200,000 and $500,000 Expenditures f this amunt will be supprted with evidence shwing that the expenditure is prudent, r necessary t prvide reasnably safe, adequate, just and reasnable service. The utility will be expected t prvide the fllwing infrmatin where apprpriate and when available: Age f equipment r system Majr wrk/upgrades cmpleted since installatin/implementatin Anticipated useful life Summary f maintenance recrds Summary f utage statistics Relevant industry experience What maintenance/supprt arrangements available (internal and external) Vendr recmmendatins Availability f replacement parts Safety perfrmance (if relevant) Envirnmental perfrmance (if relevant) Operating regime (cntinuus, cyclic, standby, etc.) Net Present Value NPV calculatin Levelized cst f energy Cst benefit analysis Other legislative r regulatry cmpliance requirements Histrical average and/r unit cst infrmatin Frecast custmer grwth estimate Energy efficiency benefits Lsses incurred during cnstructin Anticipated cnsequences f maintaining the status qu Any ther alternatives cnsidered Descriptin f prpsed slutin Budget estimate Prject schedule Detailed reprt/analysis f cnditin (if available). Expenditures between $200,000 and $500,000 wuld be nrmally cnsidered based n the written recrd filed, including the applicatin, any relevant RFIs and replies, ther evidence and written submissins. These expenditures may be challenged during a hearing if the Bard, n its wn mtin r upn receiving a request frm an Intervenr, determines that an ral hearing is necessary t prperly assess whether the expenditure shuld be apprved.
TITLE: Capital Budget Applicatin Guidelines PAGE 8 f 11 DATE ISSUED: June 2, 2005 (Prvisinal) REVISION DATE: Octber 2007 3. Expenditures in excess f $500,000 Expenditures f this amunt are cnsidered significant expenditures which must be supprted with mre cmprehensive and detailed dcumentatin than ther expenditures. It is expected that all the items in the checklist will be addressed with either the infrmatin prvided r an explanatin f why it is nt apprpriate in the circumstances. Where apprpriate, a utility is expected t prvide a reprt/analysis by a qualified engineer r ther apprpriate expert in supprt f the expenditure. Expenditures in excess f $500,000 are pen t review at a hearing if it is determined by the Bard, upn request r n its wn mtin, that the expenditure shuld be reviewed in an ral hearing. ii. Capital Leases Annual lease amunt less than $20,000 Capital leases prpsed t start in the year and invlving an annual expenditure less than $20,000 wuld be reviewed and generally apprved based n the written recrd. Annual lease amunt equal t r in excess f $20,000 Capital leases prpsed t start in the year and invlving an annual expenditure equal t r greater than $20,000 wuld be pen t review at a hearing, if it is determined by the Bard, upn request r n its wn mtin, that the lease shuld be reviewed in an ral hearing. 3. General a. Lease r Purchase Optin Where it is apprpriate at the time f making the applicatin t maintain the ptin t purchase r lease a capital item, a utility may seek the apprval f the Bard fr an expenditure n the basis that it may prceed either by way f a purchase r a lease. In this case, in additin t the usual infrmatin required, the utility will advise the Bard as t the lease and purchase ptins that are available in relatin t the capital expenditure at the time f the applicatin and seek the apprval f the Bard t prceed with the capital item either by way f lease r purchase, depending n the NPV. The utility shall advise in the subsequent capital expenditures reprt as t the apprach that was taken and the NPV justificatin. b. Multi-year Expenditures Each year f a expenditure will be cnsidered in the initial year f applicatin. Where a utility shws in each subsequent year f a multi-year expenditure that the scpe, nature and amunt f the capital expenditures are cnsistent with the riginal apprval, further apprval is nt required. Expenditures in subsequent years will be subject t further review if there is a material change in the scpe, nature r frecast cst f the expenditure. A change will be cnsidered material if the nature r scpe f the expenditure changes such that that riginal ratinale prvided is n lnger applicable r where the revised frecast expenditure exceeds the apprved amunt by 10% r mre.
TITLE: Capital Budget Applicatin Guidelines PAGE 9 f 11 DATE ISSUED: June 2, 2005 (Prvisinal) REVISION DATE: Octber 2007 c. Technical Cnference Where apprpriate, a utility may cnduct a technical cnference. A technical cnference will be used in cncert with the RFI prcess t gain a full understanding f the scpe and nature f the prpsed prjects and will mst ften invlve the participatin f Bard staff. T the extent that relevant infrmatin is brught frward at the technical cnference, it will nt be available fr the cnsideratin f the panel unless it is entered n the recrd thrugh the RFI prcess r in the evidence f a witness. The technical cnference will generally nt be recrded and the infrmatin prvided will nt be part f the recrd. Where the parties agree and the Bard determines that it wuld be f assistance, the Cmmissiners f the Bard hearing the applicatin may participate in the presentatin prtin f the technical cnference. Where the Cmmissiners participate the technical cnference shall be transcribed r, in the alternative with the agreement f the parties, the utility shall file as part f the recrd a written cpy f the substance f the presentatin which shall be reflective f the presentatin and may be referred t in the decisin making f the Bard. After the presentatin the Cmmissiners may ask questins but generally will nt be present during the discussin/questins f the ther participants. d. Site Visit In apprpriate circumstances a utility may prvide a site visit. These visits will be rganized by the utility where practical in the cntext f a request in writing frm the Bard r an Intervenr. Where the parties agree and the Bard determines that it is reasnably necessary, the Cmmissiners f the Bard hearing the applicatin may participate in the site visit. All Cmmissiners hearing the applicatin will participate tgether. B. Supplemental Capital Expenditures 1. Applicatin fr Apprval f Supplemental Capital Budget Expenditures Where a utility determines that a capital expenditure which was nt anticipated and included in the annual capital budget is necessary in the year and shuld nt be delayed until the fllwing year it may make an applicatin fr apprval f a supplemental capital expenditure in the year. In the case f a pled amunt supplemental capital apprval will be necessary where the additinal expenditure was nt included as an anticipated identified expenditure and is beynd the scpe f the items cntemplated in the general frecast amunt. Where a utility identifies a necessary capital expenditure which is supplemental t the annual capital budget and which des nt satisfy the requirements t be included in the Allwance fr Unfreseen Items it may apply t the Bard fr apprval f a supplemental capital expenditure. This applicatin must be supprted with apprpriate evidence and analysis similar t the frmat and requirements in relatin t expenditures which were part f the annual capital budget. In additin, the utility will prvide evidence as t: i) why the prject was nt anticipated and included in the annual capital budget applicatin fr the year; and ii) why the prject cannt wait until next year and be included in the annual capital budget applicatin.
TITLE: Capital Budget Applicatin Guidelines PAGE 10 f 11 DATE ISSUED: June 2, 2005 (Prvisinal) REVISION DATE: Octber 2007 When making an applicatin fr apprval f a supplemental capital expenditure a utility need nt apply fr apprval f an increase t the ttal annual capital budget. Fr regulatry purpses the apprved annual capital budget wuld generally nt be expected t change with subsequent apprvals f supplementary capital expenditures. Hwever, it may be necessary t apply fr changes t the previusly apprved annual capital budget where thse supplemental prjects replace r therwise relate t an expenditure included in the apprved annual capital budget. 2. Allwance fr Unfreseen Items Where it is impractical t make applicatin t the Bard fr apprval f a supplemental capital expenditure, a utility may prceed with the expenditure using the Allwance fr Unfreseen Items accunt. The purpse f this accunt is t permit the utility t act expeditiusly t deal with events affecting the electrical system which cannt wait fr the specific apprval f the Bard. The expenditure must be s urgent that any delay wuld have serius negative cnsequences. The utility must be able t shw that a delay was nt pssible in the circumstances. The amunt f the Allwance fr Unfreseen Items accunt is established fr each utility in the annual capital budget prcess. Where significant expenditures have been made in the year using the allwance fr Unfreseen Items Accunt the balance in the accunt may be erded. A utility may file an applicatin fr supplemental apprval f an additinal amunt in the Allwance fr Unfreseen Items Accunt. If an applicatin is made fr apprval f a supplementary allwance the utility will have t shw that the usage t date f the accunt was cnsistent with this plicy. Befre prceeding with wrk using the Allwance fr Unfreseen Items accunt, r as sn as practical thereafter, the utility must ntify the Bard in writing that it intends t prceed with an expenditure greater than $50,000 withut the apprval f the Bard using the Allwance fr Unfreseen Items accunt. This ntice must set ut the detailed circumstances, including the justificatin fr the expenditure and the reasn fr the use f the Allwance fr Unfreseen Items accunt, prviding t the extent available at the time, a scpe and csting fr the expenditure. Within 30 days after the cmpletin f the wrk the utility shall file a detailed reprt setting ut: i) the circumstances f the expenditure; ii) any reliability r safety issues; iii) why the wrk was nt anticipated in the annual capital budget; iv) the alternatives cnsidered; v) the financial effects f each alternative and the reasns fr the chsen alternative; vi) a timeline setting ut all relevant dates; vii) the nature and scpe f the wrk; viii) the detailed csts incurred; and ix) any ther implicatins fr ther aspects f the utility business/system. A summary reprt detailing the use f the Allwance fr Unfreseen Items accunt shall be filed with each annual capital expenditure reprt.
TITLE: Capital Budget Applicatin Guidelines PAGE 11 f 11 DATE ISSUED: June 2, 2005 (Prvisinal) REVISION DATE: Octber 2007 C. GENERAL 1. Capital Expenditures Reprt A utility must file a reprt by March 1 f each year n the annual capital expenditures t December 31 f the previus year. This reprt will include a detailed explanatin f each actual expenditure variance frm the apprved expenditures which variance is mre than bth $100,000 and 10%. The utility will prvide a full explanatin f the reasn fr the variance setting ut any change in the scpe f the prject tgether with cnfirmatin that the expenditure remains least cst and, where riginally apprved based n a NPV calculatin, that the NPV has nt been materially affected. This reprt shuld include a thrugh explanatin f all f the cmpnents that caused the actual ttal capital expenditures in any year t exceed the budgeted ttal capital expenditures by mre than $100,000 r 10%. This reprt shuld als set ut a summary in table r graph frmat f these variances bth n a dllar and percentage basis fr each f the last ten years. Shuld the verall variance in any tw years exceed 10% f the budgeted ttal the reprt shuld address whether there shuld be changes t the frecasting r capital budgeting prcess which shuld be cnsidered. In additin a utility must file with each general rate applicatin each f the annual reprts filed since the last general rate applicatin. 2. Related Applicatins a. Abandnment f Plant If a capital expenditure is related t the abandnment f plant requiring apprval f the Bard under sectin 38, the applicatin fr abandnment f plant and the applicatin fr apprval f capital expenditures shuld be made tgether. b. Cntributins In Aid f Cnstructin If there is a cntributin in aid f cnstructin assciated with a supplemental capital expenditure applicatin the tw applicatins shuld be filed tgether.
X:\CAPITAL BUDGET REVIEW PROCESS\2007\ - Capital Budget Applicatin Guidelines-Updated Oct 24, 2007.dc