Hydro- Québec
Distribution
R-3677-2008 Application
CONTEXT, OBJECTIVES AND ORIENTATIONS
OF THE DISTRIBUTOR’S RATE APPLICATION
2009-2010
Original : 2008-08-01
HQD-1, Document 1
Page 1 of 16
Hydro- Québec
Distribution
Original : 2008-08-01
R-3677-2008 Application
HQD-1, Document 1
Page 2 of 16
Hydro- Québec
Distribution
R-3677-2008 Application
TABLE OF CONTENTS
1. CONTEXT.........................................................................................................5
2. THE DISTRIBUTOR’S COST OF SERVICE ...................................................7
2.1 Supply Costs .............................................................................................8
2.2 The Transmission Bill ...............................................................................8
2.3 Distribution and Customer Service Costs ..............................................9
2.4 Efficiency of the Distributor ...................................................................10
2.5 Energy Efficiency Activities ...................................................................11
3. RATE STRATEGY..........................................................................................12
3.1 Level of the Increase...............................................................................12
3.2 Rate Structures........................................................................................14
3.3 Regulatory Streamlining.........................................................................15
Original : 2008-08-01
HQD-1, Document 1
Page 3 of 16
Original : 2006-07-06
HQT-12, Document 1
Page 4 of 16
Hydro- Québec
Distribution
R-3677-2008 Application
1. CONTEXT
Hydro–Québec Distribution appears before the Régie to initiate the process that
will lead to the establishment of electricity rates applicable to Quebec customers
starting April 1, 2009.
For the 2009 rate year, the rate increase required to allow the Distributor to
recover its cost of service is 2.2%. This increase is essentially attributable to two
factors: a modification to the accounting standard for the retirement of assets,
which leads to additional amortizations totalling $94 million in 2009 (excluding the
impact on the cost of capital), and recovering, in 2009, the portion of the
variances in the weather normalization account associated with the previous
temperature average, for a total of $62 million, which cannot be otherwise
recovered. Combined, these two elements will allow customers to save $13
million in interest charges starting in 2009.
Each element of the application reflects its surrounding context. The main
elements of this application are the following:

The Distributor projects a decrease of 1.6 TWh in electricity demand for
2009 compared with its 2008 rate application that is essentially attributable
to the industrial sector, and which, a priori, reduces the pressure on supply
costs. However, for a third consecutive year, the Distributor is faced with
an important surplus of supply, totalling 6.1 TWh, related to the deliveries
expected in its long-term contracts, while the projected demand that had
initially justified their signing has not completely materialized. The
Distributor intends to lessen the economic impact of these surpluses in
2009 by suspending the activities of the TransCanada Energy generating
station in Bécancour that has been at its disposal since last year, and via
agreements that make it possible to differentiate the energy associated to
contracts with Hydro-Québec Production, thereby limiting the residual
surpluses that the Distributor will have to manage to 0.5 TWh.
Original : 2008-08-01
HQD-1, Document 1
Page 5 of 16
Hydro- Québec
Distribution

R-3677-2008 Application
In rate decision D-2007-12, applicable to rates on April 1, 2007, the Régie
ordered that the Distributor recover the balance of the deferral account for
2005 and 2006 transmission costs as quickly as possible, in particular by
applying any credit balance of the pass on account to reduce the balance
of the transmission costs deferral account. The anticipated variances for
post-heritage supply show a credit totalling $90 million.

2008 marked the successful deployment of the last deliverable for the CIS
project thereby making it possible to begin accruing efficiency gains
associated with this project.

In the last rate application, the Distributor had announced tightening
measures totalling 30 M$ for 2008 in order to reduce the pressure
resulting from the implementation of the CIS project. For 2009, the
Distributor renews these measures, which are additional to the other
commitments in its integrated efficiency plan.
The proposed rate increase for 2009 is also part of a multiannual vision of rate
stability, which takes into account the fact that Hydro-Québec will soon have to
comply with international standards on financial reporting (International Financial
Reporting Standards commonly referred to as IFRS). Hydro-Québec anticipates
that the shift from Canadian accounting standards to the IFRS will potentially
lead to considerable financial impacts in the years ahead.
Therefore, based on current information, the Distributor estimates annual rate
increases of 2% for period from 2009 to 2011, thereby ensuring rate stability for
its customers.
Original : 2008-08-01
HQD-1, Document 1
Page 6 of 16
Hydro- Québec
Distribution
R-3677-2008 Application
2. THE DISTRIBUTOR’S COST OF SERVICE
Table 1 presents the Distributor’s cost of service for the 2009 test year. The
Distributor’s cost of service totals $10,683 million, an increase of close to $141
million compared to the costs approved by the Régie for 2008. This increase is
mainly attributable to the Distributor’s proposal to amortize, in 2009, all the costs
pertaining to the retirement of assets, which are reflected in the line items Other
Charges and Cost of Capital.
Table 1
COMPONENTS OF THE REVENUE REQUIREMENT ($M)
Historical
2008
2007
D-2007Base Year
024
DISTRIBUTOR’S COST OF SERVICE
10,265
10,542
10,413
PURCHASES
 Electricity Purchases
 Transmission services
DISTRIBUTION AND CUSTOMER SERVICE
COSTS
Operation and Maintenance Costs
Other Charges
Cost of Capital
RETURN ON THE RATE BASE
Capital Structure
Debt
Equity
Rate
Debt
Equity
Rate Base (13 month average)
1
10,683
7,539
4,986
2,553
2,727
7,707
4,980
2,727
2,835
7,603
4,875
2,727
2,810
7,707
4,982
2,725
2,977
1,207
748
772
8.20%
1,252
801
783
7.81%
1,237
805
768
7.75%
1,262
961
753
7.65%
65%
35%
65%
35%
65%
35%
65%
35%
8.37%
7.88%
7.84%
7.74%
7.75%
7.74%
7.66%
7.63%
9,413.1
10,025.0
9,914.0
9,849.6
: Calculated on 4 months actual and 8 months projected.
Original : 2008-08-01
Test Year
2009
HQD-1, Document 1
Page 7 of 16
Hydro- Québec
Distribution
R-3677-2008 Application
2.1 Supply Costs
The 2009 supply costs total $4,982 million, which is almost equivalent to the
amount approved by the Régie for 2008. Two different and opposed factors
explain this result. On the one hand, supply costs have decreased by $69 million
to reflect the reduction of 1.6 TWh of forecast demand for 2009 compared with
the 2008 forecast included in the last rate application. Also, supply costs in 2009
benefit from a $90 million credit balance in the pass on account, largely because
the growth in demand that characterised the year 2008 was slower than
expected, whereas in the last rate application the pass on account also had a
credit totalling $60 million. On the other hand, the adjustment for the variance
between the revenue requirement for special contracts and the revenues that
they generate in the current application is approximately $105 million lower than
the one associated with the 2008 rate year. This adjustment is compensated by a
significant increase in revenues from these contracts, spawned by an increase in
the price of aluminium in particular.
2.2 The Transmission Bill
In 2009, the transmission bill for native load in TransÉnergie’s rate application is
$2,622 million, which is an increase of $96 million compared to the amount that
was approved by the Régie for the Distributor in 2008. Moreover, the Distributor’s
share of adjustments for point-to-point transmission services for 2007 and 2008
total $2 million (credit), thereby reducing the projected cost of service for
transmission by an equivalent amount for 2009.
Furthermore, in decision D-2007-12, the Régie asked the Distributor to recover
the balance of the deferral account for 2005 and 2006 as quickly as possible and
to give priority to the application of all subsequent credit balances in the pass on
account to reduce the balance of the transmission costs deferral account. The
balance of the latter as at December 31, 2008 will be $102 million. This amount
is higher than the credit balance of the pass-on account on December 31, 2008.
Original : 2008-08-01
HQD-1, Document 1
Page 8 of 16
Hydro- Québec
Distribution
R-3677-2008 Application
Nonetheless, the distributor proposes to recover, in the current case, all
retroactive transmission costs for 2005 and 2006 and to absorb the increase of
the transmission bill associated with the native load forecast for 2009.
In compliance with decision D-2007-12, which ordered the Distributor to include
its best estimate of the cost of service for transmission, the Distributor includes
the transmission costs that were included in the Transmission Provider’s own
rate application. Therefore, in its cost of service, the Distributor included an
estimated total for the 2009 transmission bill of $2,725 million. This projection is
subject to a subsequent adjustment, as required, in compliance with the Régie’s
decision for that application.
2.3 Distribution and Customer Service Costs
Overall, in 2009, distribution and customer service costs will increase by $142
million, or 5%, compared with the approved amount for 2008. Had it not been for
the complete amortization of the balance of net costs associated with the
retirement of assets on December 31, 2008, the increase in these costs would
have totalled only $47 million or 1.7%. The residual increase is primarily
explained by the following reasons:

The price of fuel required to meet the needs of remote communities is $33
million higher;

Additional amortization costs of $19 million related to energy efficiency
activities;

An increase in operation and maintenance costs of 0.8% ($10 million)
compared with the amount approved in 2008.
It should be noted that a reduction of the capital tax and retirement charges, as
well as the end of CIS stabilization activities, contribute to absorbing the
additional pressure exerted on the Distributor’s operation and maintenance costs,
particularly the evolution of costs related to inflation and to the increase in the
Original : 2008-08-01
HQD-1, Document 1
Page 9 of 16
Hydro- Québec
Distribution
R-3677-2008 Application
number of electricity service contracts in 2009, as well as the higher costs
associated with the renewal of collective agreements for most of Hydro-Québec’s
unionized units.
The operation and maintenance costs also include new efficiency measures
valued at $11 million. These are additional to the renewal of tightening and
efficiency measures, valued at $40 million, that were announced last year.
2.4 Efficiency of the Distributor
In 2009, the Distributor will continue to implement its integrated efficiency
improvement plan.
For a second consecutive year, the Distributor expects to reduce its operation
and maintenance costs by 1% (or $11 million in 2009) through actions aimed at
everyday management, thereby bringing these total gains to almost $21 million
over the period 2008-2009.
Structuring courses of action include efficiency gains associated with the
deployment the CIS project. These efficiency gains will total almost $19 million in
2009, over an initial potential objective of $20 million.
All these gains in no way jeopardize the quality of the electricity service and
customer satisfaction.
Moreover, Table 2 shows the evolution of the eight indicators used as reference
points which provide a synthesis of the Distributor’s performance in terms of
efficiency.
Original : 2008-08-01
HQD-1, Document 1
Page 10 of 16
Hydro- Québec
Distribution
R-3677-2008 Application
Table 2
Evolution of Efficiency Indicators Selected by the Distributor
Years ended on 31 December
Description
Historical
2001
2005
D-2008024
Test
Year
2008
2009
Average Annual
Growth
2001-2009
2005-2009
Annual
Growth
2008-2009
Distributor’s Overall Indicators
1-
Total cost of Distribution and customer
satisfaction ($) per contract
532
516
568
558
0.9%
1.9%
-1.8%
2-
Total cost of Distribution and customer
satisfaction (¢) per normalized kWh
1.22
1.14
1.28
1.29
0.7%
3.2%
1.1%
3-
NOC of Distribution and CS ($) per contract
4-
CIM ($) per contract
264
257
284
288
1.1%
2.9%
1.2%
2,140
2,063
2,239
2,191
0.3%
1.5%
-2.1%
Customer Service Process Indicators
5-
Total customer service cost ($) per contract
107
105
117
110
0.3%
1.3%
-5.3%
6-
Net Operating Cost of CS in ($) per contract
100
94
110
96
-0.5%
0.7%
-12.5%
Distribution Process Indicators
7-
Total Cost of Distribution ($) per contract
422
406
436
442
0.6%
2.2%
1.4%
8-
NOC of Distribution ($) per contract
163
162
173
188
1.8%
3.8%
8.6%
The Distributor notes that the majority of efficiency indicators show an average
annual increase that is similar to the inflation rate over the period 2005-2009. The
encouraging results that are expected in 2009 contribute to this performance.
2.5 Energy Efficiency Activities
In general terms, energy efficiency activities contribute to cutting consumers’
electricity bill by making it possible to reduce the supply that must otherwise be
acquired at market prices. In December 2007, the Government of Quebec set the
new target for electricity savings at 11 TWh by 2015. The new target is taken into
account in the 2009 objectives of the Global Energy Efficiency Plan (PGEE).
Therefore, the budget for the Distributor’s specific programs will increase by
almost $51 million compared to the one authorised in 2008 and it will total over
$262 million. Now the cumulated total in energy savings that Distributor expects
to attain by the end of 2009 is 4.1 TWh. This will allow the Distributor to meet the
new 2010 target for its programs and activities of 5.0 TWh.
Original : 2008-08-01
HQD-1, Document 1
Page 11 of 16
Hydro- Québec
Distribution
R-3677-2008 Application
The Distributor also continues its efforts to support low-income households.
Therefore, in 2009 the Distributor expects to invest over $15 million for energy
efficiency measures geared toward these customers, which represents 16% of
the total residential budget. This is additional to the budget for low-income
consumer programs offered by the Agence de l’efficacité énergétique.
The Distributor also continues to pursue its action plan, presented in the last rate
application, which is aimed at improving support for these customers. This plan
was drawn up with a committee made up of different interest groups that are
active with this customer segment. It is worth reiterating the orientations defined
by this committee:
 Ensuring the accessibility of low-income households to electricity and
services;
 Optimizing the electricity savings of low-income households all the while
improving their comfort; and
 Making electricity as well as services affordable for all low-income
households.
In 2009, more than $5.5 million will be allocated to different actions that seek to
adapt the Distributor’s commercial offer to the needs of this particular customer
segment. Of this total, 80% (or $4.5 million) will be used to alleviate the financial
burden of low-income households, in particular through bill payment support and
the gradual elimination of debt for the most critical cases (this falls within courses
of action 20 and 21 presented in application R-3644-2007).
3. RATE STRATEGY
3.1 Level of the Increase
Table 3 summarizes the rate increase being requested, based on the
Distributor’s cost of service.
Original : 2008-08-01
HQD-1, Document 1
Page 12 of 16
Hydro- Québec
Distribution
R-3677-2008 Application
Table 3
Evaluation of the Shortfall and the Rate Increase on April 1, 2009 ($M)
Application R-3677-2008
2009 Sales Revenues (without rate increase)
10,458.8
Revenues Other than those from Electricity Sales
177.2
Amortization of Weather Normalization Account
-75.3
Adjustment - 2009 Regulatory Provision
-84.2
Total Revenues for Calculation of Additional Revenue
Requirement
10,476.5
Revenue Requirement
Purchases
Electricity Purchases
4,982.4
Transmission Services
2,724.5
Distribution and Customer Service costs
Operation and Maintenance Costs
Other Charges
Return on the Rate Base
Revenue Requirement
Additional Revenue Requirement at April 1st
Sales Revenues before Increase, excluding Special Contracts
1,262.1
961.4
_________________753.1
10,683.5
-207.0
9,406.1
Increase Requested – April 1, 2009
2.2%
2009 Revenues from requested Increase
141.4
2009 Regulatory Provision Recovered in 2010
Original : 2008-08-01
65.6
HQD-1, Document 1
Page 13 of 16
Hydro- Québec
Distribution
R-3677-2008 Application
The variance between revenues on the basis of current rates and the revenue
requirement resulting from the cost of service is $207 million in 2009, which
justifies an overall increase of 2.2% for all electricity rates. The regulatory
provision for 2009 recovered in 2010, in compliance with the principle authorized
by the Régie in decision D-2005-34, is $66 million. Moreover, revenues of $141
million are anticipated by this increase over the period April 1 to December 31,
2009.
One singularity of the current application is the weather normalization
mechanism for transmission and distribution revenues. The Distributor avails
itself of this mechanism since January 1, 2006 in compliance with the terms set
out in decision D-2006-34. However, given that, since the implementation of this
mechanism the Distributor has revised the bases that define the average
temperature, and that it has been able to measure the extent of the weather
variances to which it is subject, the Distributor proposes to revise the terms of
this account which will show a balance of $132 million as at December 31, 2008.
Two adjustments are proposed, as described in exhibit HQD-4, document 2:
 The immediate recovery of $62 million which represents the portion of the
levelling account that is associated with the previous average
temperature, which the Distributor can never recover;
 The 5 year amortization of the residual balance of this account and the
inclusion of future variances in the rate base.
3.2 Rate Structures
In the last rate application, the Distributor received approval for a rate reform
aimed at sending a better price signal while, at the same time, simplifying its
commercial offer. In the current application Exhibit HQD-12, document 1
describes the terms for the implementation of this reform whose main goals are
to eliminate the degressivity of energy rates for Rates G and M and to apply the
Original : 2008-08-01
HQD-1, Document 1
Page 14 of 16
Hydro- Québec
Distribution
R-3677-2008 Application
same principles to the capacity invoice of all its customers, except for Rate L
customers. These terms essentially seek to amortize and smooth out the
financial impacts and inconveniences associated with the proposed changes.
In decision D-2008-024, the Régie asked the Distributor to complete its rate
reform by including an analysis of the Rate DT structure. This analysis,
presented in Exhibit HQD-12, document 1, makes it apparent that the recent
evolution of fuel oil prices leads to fewer advantages for customers billed at this
rate. Yet, this customer class contributes to shaving 810 MW from the system’s
peak. In a context in which the Distributor has significant power requirements, it
is important to consolidate the contribution of this customer class in the
Distributor’s balance. The Distributor thereby proposes to apply all of the rate
increase to the on-peak price and to monitor the evolution of this market in order
to react promptly, as required.
Finally, in line with the positions submitted to and approved by the Régie, the
Distributor proposes to continue to apply differentiated rate increases to the rate
components of each rate. This will make it possible to improve the price signal
sent to each customer class.
3.3 Regulatory Streamlining
The current rate application is the fifth submitted by the Distributor since its initial
request for rate adjustments in 2004. Over the years, the Régie and intervenors
have acquired a lot of knowledge on the Distributor’s strategic and operational
issues. The regulatory process has also benefitted from significant efficiency
gains, namely fostered by Application Guidelines that facilitate an improved
preparation of regulatory applications.
Generally speaking, the Distributor notes that its rate applications have reached
a certain level of regulatory maturity that make the Distributor want to reflect on
Original : 2008-08-01
HQD-1, Document 1
Page 15 of 16
Hydro- Québec
Distribution
R-3677-2008 Application
the improvements that could be made to the regulatory process in order to further
improve its efficiency, particularly given the context in which the regulatory
schedule must now also make room for the Agence de l’efficacité énergétique
whose activities will be subject to the Régie’s approval.
The Distributor invites the Régie and intervenors to partake in this reflection. It is
therefore proposed to set up a working group whose purpose it would be to
revise the process of rate applications with streamlining of this process as a main
objective. There are several possibilities to achieve this improvement. For
example, we mention:
 Favouring the use of other processes for certain parts of the application:
annual report, administrative follow-up, etc.;
 Streamlining text and prioritizing tables;
 Part of the application submitted every three or other number of years (eg:
investments, PGEE);
 Negotiated agreement process for certain part of the application.
Ideally, these possibilities, or some of them, can be included in the next rate
application.
Original : 2008-08-01
HQD-1, Document 1
Page 16 of 16