Hydro- Québec
TransÉnergie
Application R-3605-2006
PRESENTATION OF
THE TRANSMISSION PROVIDER’S APPLICATION
Original : 2006-07-06
HQT-1, Document 1
Page 1 of 13
Hydro- Québec
TransÉnergie
Original : 2006-07-06
Application R-3605-2006
HQT-1, Document 1
Page 2 of 13
Hydro- Québec
TransÉnergie
Application R-3605-2006
TABLE OF CONTENTS
1. CONTEXT ..................................................................................................................... 4
2. CONTENTS OF THE APPLICATION............................................................................ 5
2.1 Regulatory Principles and Accounting Policies.................................................... 5
2.2 Revenue Requirement ................................................................................................ 5
2.3 Expenses Necessary to the Cost-of-Service ................................................................. 6
2.4 Rate Base ................................................................................................................... 7
2.5 Financial Policy and Cost of Capital .......................................................................... 7
2.6 Commercialization ..................................................................................................... 8
2.7 Cost-of Service Allocation .......................................................................................... 9
2.8 Rate structure .......................................................................................................... 10
2.8.1 Ratemaking ......................................................................................................... 10
2.8.2 Modifications to the Open Access Transmission Tariff ........................................... 11
3 OTHER FOLLOW-UPS ............................................................................................. 12
3.1 Transmission Provider’s Performance Regulation ................................................... 12
3.2 Rebate and Other Policies ........................................................................................ 13
4. CONCLUSION .............................................................................................................. 13
Original : 2006-07-06
HQT-1, Document 1
Page 3 of 13
1
1. CONTEXT
2
The current application for the modification of Hydro Quebec’s transmission service
3
conditions is the third to have been submitted to the Régie de l’énergie (Régie) for
4
approval since the creation of the latter in December 1996. The present application
5
initiates the process that will conclude with the establishment of transmission rates
6
applicable as of January 1, 2007. We note that the current transmission rates and
7
service conditions have been in effect since January 1, 2005, in compliance with
8
decision D-2006-66, rendered by the Régie on April 18, 2006.
9
The context within which Hydro-Quebec, in its electricity transmission activities (the
10
Transmission Provider), presents its 2007 rate application essentially constitutes an
11
update of the costs of its services, last updated in its last rate application in 2005.
12
Therefore, the Transmission Provider requests that its new transmission rates be
13
applicable starting January 1, 2007, so that it may recover all of its costs of service.
14
The current application is, in all respects, in agreement with the provisions set forth by
15
the Act respecting the Régie de l’énergie (the Act). It also takes into account the relevant
16
orders and Régie decisions, the governmental orders-in-council, as well as the
17
regulatory principles set forth in decision D-99-120, and confirmed by decisions D-2002-
18
95 and D-2005-50.
19
The current application includes a proposal that reflects this context, all the while taking
20
into account the Transmission Provider’s framework of operation.
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HQT-1, Document 1
Page 4 of 13
Hydro- Québec
TransÉnergie
Application R-3605-2006
1
2. CONTENTS OF THE APPLICATION
2
In the paragraphs that follow, the Transmission Provider summarily describes the
3
evidence submitted in support of its third application for the modification of the
4
transmission service conditions.
5
2.1 Regulatory Principles and Accounting Policies
6
In the HQT-4 section of the evidence, the Transmission Provider presents the regulatory
7
principles and accounting policies relevant to the present application.
8
It also addresses the modifications or additions for which the Transmission Provider
9
seeks the Régie’s approval, including the deferment to the next application of new
10
accounting principles relative to the accounting of financial instruments, which will be in
11
effect starting January 1, 2007.
12
We note that Hydro-Quebec’s consolidated financial statements are established in
13
accordance with generally recognized accounting principles (GAAP) of Canada as set
14
forth by the Canadian Institute of Chartered Accountants (CICA) and they take into
15
account certain methods and accounting practices generally recognized by the Régie.
16
The Transmission Provider takes into account the accounting policies used by Hydro-
17
Quebec on 31 December 2005, when they are applied to calculate its revenue
18
requirement.
19
2.2 Revenue Requirement
20
As mentioned earlier in section 1, the Transmission Provider’s current rate application
21
essentially constitutes an update of its cost of service, and consequently of its revenue
22
requirement, since its most recent rate application in 2005.
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HQT-1, Document 1
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Hydro- Québec
TransÉnergie
Application R-3605-2006
1
Therefore, section HQT-5 of the current application reports on the evolution of the
2
Transmission Provider’s revenue requirement since the last rate application. As shown
3
in the table below, the Transmission Provider’s cost of service increases by $138.7
4
million compared with the authorized revenue requirement for 2005.
5
6
Transmission Service Revenue Requirement 2005-2007
(in millions of dollars)
Authorized
in 2005
Historic
year
2005
Base year
Test year
2006
2007
Reference
D-2005-63
1 222.9
1 218.1
1 203.4
1 214.4
14 657.1
14 571.2
14 862.9
15 302.0
Average cost of capital rate
8.343%
8.360%
8.097%
7.936%
HQT-8, doc.1
EXPENSES NECESSARY TO THE COST OF
SERVICE
1 368.1
1 382.1
1 483.4
1 515.3
HQT-6, doc.1
Net O&M charges
Direct gross charges
Shared services charges
Capitalized costs
Internal billing
640.9
424.6
336.0
(79.2)
(40.5)
666.0
457.7
345.5
(92.6)
(44.6)
722.3
493.9
368.2
(102.1)
(37.7)
737.0
502.5
379.1
(106.1)
(38.5)
HQT-6, doc.2
HQT-6, doc.3
HQT-6, doc.4
HQT-6, doc.5
Other charges
Transmission service purchases
Electricity purchases
Amortization costs
Taxes
705.2
20.7
7.5
498.0
179.0
696.0
20.9
6.2
493.4
175.5
736.5
21.0
6.4
547.7
161.4
751.0
21.0
6.8
558.6
164.6
HQT-6, doc.7
HQT-6, doc.7
HQT-6, doc.7
HQT-6, doc.7
30.8
(7.2)
(1.6)
2 591.0
30.3
(7.2)
(3.0)
2 600.2
33.3
(6.6)
(2.1)
2 686.8
35.2
(5.9)
(2.0)
2 729.7
Return on the rate base
Rate base
Corporate charges
Interest related to government refund
External billing
REVENUE REQUIREMENT
7
HQT-7, doc. 2.4
HQT-6, doc.6
HQT-6, doc.1
HQT-6, doc.1
2.3 Expenses Necessary to the Cost-of-Service
8
In section HQT-6 of the current application, the Transmission Provider focuses on the
9
evolution of the expenses necessary to the cost of service since 2005.
10
There, the expenses necessary to the Transmission Provider’s cost of service for the
11
2007 projected test year are summarily presented. These are set at $1 515.3 million. If
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Hydro- Québec
TransÉnergie
Application R-3605-2006
1
we compare them with the expenses necessary for the cost of service during the 2005
2
projected test year set at $1 368.1 million, the increase amounts to $147.2 million.
3
In that section, the Transmission Provider also addresses the commitment made in
4
Hydro-Quebec’s 2006-2010 Strategic Plan to pursue the improvement of its
5
maintenance and operation practices.
6
2.4 Rate Base
7
The evolution of the rate base since the one approved by the Régie in decision D-2005-
8
63 can be found in section HQT-7 of the current rate application. There, the
9
Transmission Provider begins by providing a summary of the evolution of the rate base
10
since the establishment of the rates that are currently in effect, since 2005.
11
Secondly, a more detailed analysis of the evolution of the different components of the
12
Transmission Provider’s rate base, since 2005, is also carried out.
13
As presented in greater detail in section HQT-7, the rate base for the 2007 projected test
14
year therefore represents an increase of $ 645 million (4.4%) with respect to the one
15
authorized for 2005. This increase can primarily be explained by the increase in
16
investments related to the increase in demand so as to meet the new requirements of
17
the Transmission Provider’s clientele.
18
2.5 Financial Policy and Cost of Capital
19
The financial policy in question in section HQT-8 covers the financial parameters
20
essential to the calculation of the average weighted cost of capital applicable to the
21
Transmission Provider’s rate base. These parameters are the following:
22
Presumed capital structure;
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Hydro- Québec
TransÉnergie
1
Return on equity; and
2
Cost of the debt.
Application R-3605-2006
3
The Transmission Provider proposes, in the current application, to maintain the status
4
quo for the presumed equity proportion (presumed capital structure including 30% of
5
equity) and for the adjustment formula for the presumed return on equity rate. In section
6
HQT-8, of the current application, the Transmission Provider presents the arguments in
7
favor of this proposal.
8
Essentially, the approach advocated by the Transmission Provider in the current
9
application is made up of the following elements:
10
Renewal of the Transmission Provider’s presumed capital structure made up of
11
30% of equity and 70% of debt;
12
Maintenance of the Transmission Provider’s own risk premium as approved by
13
the Régie in the preceding rate application;
14
Updating of risk-free rates; and
15
Using Hydro-Quebec’s integrated cost-of-debt.
16
2.6 Commercialization
17
Section HQT-10 of the evidence focuses on the aspects related to the commercialization
18
of transmission services.
19
In the 2007 rate application, the Transmission Provider intends to renew, beginning
20
January 1, 2007, the transmission services presently included in the Tariffs and
21
Conditions for native load supply, the network integration transmission service and the
22
point-to-point transmission services, all the while modifying certain terms of the Tariffs
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HQT-1, Document 1
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Hydro- Québec
TransÉnergie
Application R-3605-2006
1
and Conditions. The modifications to the Tariffs and Conditions as well as their
2
justification are treated in greater detail in exhibit HQT-12, Document 3.
3
In sum, when the commercial practices observed in other regions are taken into account,
4
the Transmission Provider does not consider appropriate an in depth modification of the
5
model put in place in Quebec any more than it does for the transmission services
6
offered. This is due to the fact that, in Quebec, no short-term electricity market which
7
functions according to a power exchange model currently exists and the Transmission
8
Provider’s network is exempt from the congestion which would impede the proper
9
functioning of the commercial model put in place for electricity transmission.
10
Furthermore, the experience from recent years shows that the model put in place in
11
Quebec works well and it is compatible with those of neighbouring networks.
12
2.7 Cost-of Service Allocation
13
Last April, the Régie rendered decision D-2006-66 relative to this request and it adopted
14
a cost-of-service allocation method by modifying certain aspects of the method proposed
15
by the Transmission Provider. Consequently, the Régie ordered the latter to provide, in
16
its subsequent rate application, the results of its cost-allocation exercise applied to the
17
data of the projected test year in question, and this in accordance with the
18
functionalization it selected in its decision.
19
It is in that light that section HQT-11 of the current application deals with the
20
Transmission Provider’s cost-of-service allocation method, in exhibit HQT-11, Document
21
1, according to the specificities set forth by the Régie. The results stemming from the
22
application of this cost-of-service allocation method are in fact presented in greater detail
23
in exhibit HQT-11, Document 2.
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Hydro- Québec
TransÉnergie
1
Application R-3605-2006
2.8 Rate structure
2
2.8.1 Ratemaking
3
The objective of section HQT-12 of the current rate application is to establish the rates of
4
transmission services for 2007 which are applicable to the users of the Transmission
5
Provider’s transmission network and which seek to recover the new revenue
6
requirement.
7
The establishment of the Transmission Provider’s rates reflects the continuity of
8
respecting established rate principles. It also reflects the consideration given to the
9
requirement of its customers, the peculiarities of the network, its ratemaking history as
10
well as the commercial and regulatory context of electricity transmission in Quebec. The
11
Transmission Provider therefore opts for a strategy of continuity in the setting of its rates
12
all the while adhering to the approach approved by the Régie for the rates that are in
13
effect. This strategy allows for stability, even a slight decrease, of its transmission rates
14
all the while remaining simple in their application. Rate-setting is described in exhibit
15
HQT-12, document 1.
16
It is in that light that the Transmission Provider renews the current ratemaking approach
17
to set native load rates and annual, monthly, weekly and hourly point-to-point rates
18
beginning January 1, 2007.
19
Ancillary services
20
The Transmission Provider presents the rate-setting method for ancillary services in
21
exhibit HQT-12, Document 1 and it presents their update in exhibit HQT-12, Document
22
2.
23
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Hydro- Québec
TransÉnergie
1
Application R-3605-2006
Network Additions
2
The Transmission Provider proposes to revise the current amount of $560/kW set as the
3
maximum allowance in Phase 2 of the 2005 rate application (R-3549-2004). The amount
4
for the new maximum allocation is set at $576$/kW. The calculation for this amount is
5
presented in exhibit HQT-12, Document 1.
6
2.8.2 Modifications to the Open Access Transmission Tariff
7
As specified earlier in section 2.6, the Transmission Provider intends to continue to offer,
8
as of January 1, 2007, the transmission service for native load supply, for the network
9
integration transmission service, and the point-to-point transmission services, by
10
modifying certain terms of the Open Access Transmission Tariff (Tariffs and Conditions).
11
In the Transmission Provider’s opinion, the proposed modifications are necessary in
12
order to adapt the Tariffs and Conditions to Quebec’s prevailing commercial context and
13
to ensure the compatibility of the services offered with those of neighbouring networks.
14
The proposed modifications follow-up on the Régie’s expectations or seek to better
15
respond to the requirements of the Transmission Provider’s customers. These
16
modifications are respectively identified and justified in exhibits HQT-12, Document 3
17
and HQT-12, Document 4.
18
In order to clarify, among other things, certain business practices, the Transmission
19
Provider proposes to revise or clarify some of the terms for transmission services that
20
are currently in effect, particularly with respect to the application areas of ancillary
21
services for point-to-point transmission services and to the terms for the connection of
22
generating stations to the network. Certain other required details are also proposed in
23
the aforementioned exhibit.
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TransÉnergie
1
Application R-3605-2006
3 OTHER FOLLOW-UPS
2
3.1 Transmission Provider’s Performance Regulation
3
In its decision D-2006-99 of June 7, 2006, the Régie established a working group, as a
4
follow-up to decision D-2005-50, to examine the Transmission Provider’s performance
5
regulation. It entrusted the following mandate to the working group:
6
To determine whether performance indicators must be added to those specified
7
by the Régie in its decision;
8
To establish targets for these indicators in accordance with the Régie’s
9
instructions;
10
To determine the means for the implementation of these indicators within the
11
Transmission Provider’s activities; and
12
To examine the incentives adapted to the Transmission Provider’s regulation.
13
The Régie specified that the meetings of the working group must be held between now
14
and October 31, 2006 and that the working group must produce a report in the 45 days
15
following the date of the last meeting. The report must indicate the common and
16
individual positions and recommendations of the participants with respect to the issues
17
raised by the mandate that was entrusted to the group.
18
Since the performance indicators, targets, incentives and benchmarking is still subject to
19
discussions, to the taking of positions, and to recommendations to the Régie, within the
20
framework of the working group created by the Régie in its decision D-2006-99, the
21
Transmission Provider considered it appropriate to limit himself to the presentation, in
22
the current application, of the results on December 31, 2005 of the 23 indicators
23
selected by the Régie in decision D-2005-50, as well as to the basic data relative to cost
24
ratios.
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TransÉnergie
1
Application R-3605-2006
3.2 Rebate and Other Policies
2
In response to the Régie’s order in decision D-2006-66, the Transmission Provider has
3
established a working group whose objective it is to, namely, analyze the opportunity to
4
integrate a rebate policy in the Rates and conditions and to determine its terms, as
5
required. As specified by the Régie, the working group’s mandate is to analyze and
6
revise, as needed, the rate structure of point-to-point transmission services, including the
7
rebate policy and the ancillary services associated with point-to-point transmission
8
services.
9
All of the Transmission Provider’s point-to-point customers, including Hydro-Quebec
10
Production (the Generator), as well as Hydro-Quebec Distribution (the Distributor), have
11
received a written invitation from the Transmission Provider to join the working group. At
12
the present time, it is expected four meetings with the working group will be held in order
13
to submit the working group’s report to the Régie on October 31, 2006, as per the
14
Régie’s order.
15
4. CONCLUSION
16
The aim of the proposed modifications to the conditions of transmission services
17
submitted by the Transmission Provider is to allow it to recover the revenue requirement
18
submitted for approval to the Régie all the while ensuring the stability and continuity of
19
the rates charged to its customers for the transmission services rendered.
20
Finally, the Transmission Provider believes that the proposals made within this rate
21
application translate into the preservation of just and reasonable conditions that ensure
22
that customers of the transmission network are served in a reliable manner.
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