SUMMARY (D-2004-47)
On August 13, 2003, Hydro-Québec in its capacity of electric power distributor (“the
Distributor”) filed with the Régie de l’énergie (“the Régie”) an application for a 3% rate
increase for the 2003-04 rate year and a 2.98% increase starting April 1, 2004, the
beginning of the 2004-05 rate year. The Régie approved the 3% increase starting
January 1, 2004 in decision D-2003-232. The present decision concerns the second part
of the application for an increase in the Distributor’s rates for the 2004-05 rate year.
When fixing rates the Régie must treat the Distributor as a distinct entity of
Hydro-Québec and apply the Act respecting the Régie de l’énergie1 (“the Act”), which
stipulates that the Distributor’s rates must be fair and reasonable, and that the Distributor
may not impose higher rates or more onerous conditions than are necessary to cover its
capital and operating costs, to maintain its stability and the normal development of its
distribution system, or to provide a reasonable return on its rate base (sections 51, 52.3
and 49 of the Act).
When examining the rate application, the Régie determines the Distributor’s revenue
requirement for the 2004-05 rate year and whether the existing rates (as modified as of
January 1, 2004), when applied to projected sales, will be sufficient to cover that revenue
requirement or need to be adjusted. The Distributor’s revenue requirement is established
on the basis of cost projections. In Phase 1 of this case, the Régie used cost projections
based on a test year beginning on January 1 and coinciding with Hydro-Québec’s
financial year, in order to facilitate comparison of the financial figures for the test year
with Hydro-Québec’s audited results.
This decision therefore concerns firstly the determination, for the 2004 test year, of the
Distributor’s reasonable revenue requirement to cover its cost of service and cost of
capital, including a reasonable return on equity (ROE) for the Distributor, in accordance
with the capital structure and parameters established by the Régie in Phase 1 of this
case. Secondly, this decision covers the requested rate increase for 2004-2005. It also
covers certain other matters, such as benchmarking of the Distributor’s costs, certain
adjustments to cost allocation methods required by the Régie, approval of the cost of
supply for Rate BT customers, and, related to this last topic, the creation of a deferred
charge account.
Benchmarking of costs
The Distributor responded in large part to a previous request from the Régie to produce a
benchmarking plan for some of its costs (direct gross charges, shared service charges),
a timetable, and a progress report to enable the Régie to monitor the Distributor’s
performance and efficiency. Since benchmarking is a progressive process, the Régie
asks the Distributor, in the first instance, to extend the list of indicators used for the
purpose of benchmarking by including a larger number of inputs and outputs. The Régie
therefore asks the Distributor to submit a list of 19 indicators and to keep records of the
results so that the usefulness and relevance of some of the indicators may be reviewed
in the future.
1
RSQ., c. R-6.01.
Method of Cost of service allocation
In this section of the decision, the Régie is called upon to examine the compliance of the
Distributor’s proposals made in response to the Régie’s specific requests stemming from
decision D-2003-93 in Phase 1 of this case. In view of the technical nature of these
questions, the Régie authorizes the creation of a committee on which representatives of
the Distributor, stakeholders and the Régie will be better able to discuss specific issues.
The Régie is generally satisfied with the follow-up of its decision D-2003-93.
Cost of capital
At the Régie’s request, the Distributor made certain clarifications to the methodology for
calculating debt service costs, and the Régie accepts these clarifications. The Régie fixes
the cost of debt for the 2004 test year at 7.41%, based on the Consensus Forecast of
August 11, 2003. With respect to the determination of the Distributor’s return on equity
(ROE) for the 2004 test year, the Régie asks the Distributor to establish its return by
applying the formula approved in Phase 1 of this case, but using more recent data,
namely the figures in the Consensus Forecast of January 12, 2004. The Régie estimates
that the two requested updates will have the effect of reducing the cost of capital
recognized for the 2004 test year by approximately $15 million.
Cost of service, revenue requirement and rate base
Certain projected costs for the 2004 test year are not recognized for rate-setting
purposes. Considering the Distributor’s undertaking in Phase 1 of this case to maintain its
workforce at 7,400 employees, the Régie does not recognize, as necessary for the
provision of electricity distribution services, amounts of $11.3 million for payroll and
$10 million for performance bonuses based on Hydro-Québec’s results as an integrated
company. With respect to the allocation of corporate costs, the Régie adopts
methodological changes and, noting a significant increase in these costs, does not
recognize an amount of $12.1 million, reducing these costs to the 2002 level.
Regarding authorization for investments in 2004, the Régie asks the Distributor to submit
a specific application for authorization of its network automation program so the Régie
may separately analyze the program’s appropriateness, effects and rate impact. The
Régie also limits the investments authorized for 2004 pursuant to section 73 of the Act to
$499 million. The Régie approves the Distributor’s rate base for 2002 and 2003. The rate
base for 2004 will be approved at a later date, when the Distributor has made the
requested adjustments.
Rate strategy
The Régie recognizes an additional revenue requirement of $117 million for the 2004 test
year, which the Distributor may cover by applying a uniform rate increase of 1.4% as of
April 1, 2004. The Distributor’s new rate schedule will be approved at a later date, when
the Distributor has made the changes requested by the Régie to its rate base and
revenue requirement for 2004. According to the Régie’s estimate, this rate change will
translate into an average increase of $1.33 per month for the average residential
customer and $1.92 per month for a customer living in an electrically heated single-family
home. The Régie finds that a uniform rate increase will not result in any significant
change to the index on which cross-subsidization for the benefit of consumers paying the
domestic rate is based.
The Régie does not accept the Distributor’s approach of recovering its full annual
revenue requirement in the last nine months of the 2004 test year (calendar year). In the
Régie’s view, this would create an artificially high rate that fails to satisfy the
requirements of section 51 of the Act. The Régie repeats that the revenue requirement is
determined on the basis of projections for the test year (calendar year) but must be
recovered over the rate year (April 1 to March 31). However, the Régie reserves the
Distributor’s right to file evidence demonstrating the existence of a variance resulting
from the difference between the test year and the rate year, and to submit a mechanism
by which any such variance may be taken into account.
Rate BT : Cost of supply and deferred charge account
The Régie accepts the Distributor’s application in part and authorizes the Distributor to
carry the difference between the acquisition cost of electricity and the current price of
energy under the rate for the period of January 1, 2004 to March 31, 2004 to a deferred
charge account carrying interest outside the rate base at the average capital cost rate
(with commissioner Anthony Frayne dissenting). At the Distributor’s request, the Régie
makes no ruling at this time on the method for the disposal of the balance of the deferred
charge account. The Régie may decide at a later date on the rate treatment of the
account and the appropriateness of allowing the Distributor to carry to the account any
price differential incurred after March 31, 2004.
By a majority decision, the Régie denies the Distributor authorization to take into account
the full cost of supply of the electricity according to the agreement between the
Distributor and Hydro-Québec’s generation division as of December 1, 2003 (7.3¢/kWh).
Since the consumption patterns of the customers in question are such that this load
should not be present at system peak and may be recalled in the event of an energy
shortage, the Régie considers a price of 6.0¢/kWh to be more reasonable.