Hydro-Quebec Distribution
Application R-3677–2008
AVERAGING MECHANISM FOR WEATHER-RELATED TRANSMISSION AND
DISTRIBUTION REVENUES
Original : 2008-08-01
HQD-4, Document 2
Page 1 of 13
Hydro-Quebec Distribution
Application R-3677–2008
Original : 2008-08-01
HQD-4, Document 2
Page 2 of 13
Hydro-Quebec Distribution
Application R-3677–2008
Contents
1
BACKGROUND ........................................................................................... 5
2
2006 AND 2007 DIFFERENCES: IMPACT OF REVISION OF CLIMATIC NORMAL
6
3
2006–2007 RESIDUAL BALANCE AND NEW ADDITIONS ........................ 8
4
FINANCIAL IMPACTS ............................................................................... 10
5
ALLOCATION OF AVERAGING ACCOUNT AMORTIZATION.................. 11
6
REQUEST CONCERNING AVERAGING ACCOUNT ............................... 13
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Application R-3677–2008
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1
Application R-3677–2008
BACKGROUND
In rate application R-3579-2005, the Distributor proposed to implement an averaging
mechanism aimed at neutralizing the impacts on its transmission and distribution
income of any weather-related variation in real sales volumes with respect to projected
volumes. The Distributor recalls that for ratesetting purposes, it forecasts sales under
normal weather conditions from a standardized history netted of temperature effects.
Any temperature variation with respect to this normal generates an impact on sales
revenues. The Distributor’s proposal is thus based on the fact that sales revenues
fluctuate with temperature while the Distributor must bear any and all fixed transmission
and distribution costs, creating an impact on the Distributor’s results and return.
In its decision D-2006-34,1 the Régie accepted the Distributor’s proposed weatherrelated transmission and distribution revenue averaging mechanism and calculation
methods, applicable as of 1 January 2006. An averaging account was created for this
purpose. It contains the monthly differences between the real distribution and
transmission revenues and the corresponding projected revenues. Since the differences
are calculated from real results for a full year, and given the constraints related to the
rate case filing dates, the differences recorded in the account are included in the rate
base for the second test year following the year in question.
As mentioned in applications R-3579-2005 and R-3610-2006, insofar as weather
conditions vary randomly around an average climatic scenario, the positive and
negative fluctuations should cancel each other out over the long run, obeying a normal
1
D-2006-34, R-3579-2005, pp. 19–21.
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distribution. This being the case, the weather-related differences should tend to zero out
over the years. Therefore, the Distributor did not see the need to amortize the balance
of the averaging account. Only the aspect related to financial expenses was taken into
account in the revenue requirement.
However, in case R-3610-2006, the Distributor specified that by monitoring the account
over a certain period, it will be possible to determine whether the offsetting phenomenon
actually took place or whether the balance grew from year to year. In the latter case, the
Distributor reserved the right to request amortization of the balance. In this connection,
and further to decision D-2007-12, the Distributor asserted that the temperature-related
volume differences might offset each other over the years but that the dollar differences
might not do so.
In 2008 the Distributor wishes to return to this matter, particularly in a context in which it
has revised its climatic normal.
2
2006 AND 2007 DIFFERENCES: IMPACT OF REVISION OF CLIMATIC
NORMAL
As presented in Exhibit HQD-9, Document 1 and in the Distributor’s 2007 annual
report,2 the balance of the averaging account stood at $131.9 million as at 31 December
2007, including applicable interest. This balance represented an undercharge for the
Distributor and was integrated into the Distributor’s rate base as of 1 January 2008. The
differences recorded in 2007, signed oppositely, were much lower, only $2.6 million.
With applicable interest, an overcharge of $3.3 million will be included in the rate base
as of 1 January 2009.
2
HQD-4, Document 3, p. 8.
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The differences recorded in the averaging account were calculated based on the
climatic normal established and used by the Distributor before 2008. As described in its
rate application R-3644-2007 (HQD-2, Document 1), the Distributor, for purposes of
demand forecasting, has introduced a new climatic normal applied as of 2008.
Table 1 presents the differences for 2006 and 2007 as calculated from the old and the
new climatic normals for each customer class using the Régie-approved allocation
method. The impact on each class is determined by calculating the difference between
the balances calculated with the old and new normals for each class.
TABLE 1
DIFFERENCES RECORDED IN AVERAGING ACCOUNT
FOR EACH CUSTOMER CLASS FOR 2006 AND 2007:
OLD VERSUS NEW NORMAL
Averaging account
2006
Old normal
New normal
Difference
2007
Old normal
New normal
Difference
Combined
Old normal
New normal
Difference
Rate D
Rate DT
Rate G
Rate M
Rate L
TOTAL
(M$)
105.90
78.88
27.02
13.33
10.57
2.76
11.32
8.81
2.51
1.33
1.03
0.30
0.06
0.04
0.01
131.94
99.34
32.60
(1.65)
(24.19)
22.54
(0.74)
(3.21)
2.47
(0.70)
(4.66)
3.96
(0.20)
(0.56)
0.36
(0.01)
(0.08)
0.07
(3.30)
(32.71)
29.41
104.25
54.69
49.56
12.59
7.36
5.23
10.62
4.14
6.47
1.13
0.47
0.66
0.04
(0.04)
0.08
128.64
66.63
62.01
As indicated in the above table, the amount of $62.0 million represents a portion of the
averaging account exceeding the differences resulting from the use of the new climatic
normal, which for this reason are not likely to be offset. The Distributor therefore
proposes to fully include this portion in the 2009 revenue requirement. This portion
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thereby ceases to generate financing costs.
The Distributor specifies that this measure does not constitute a retroactive application
of the new climatic normal since the balance to be amortized remains $128.6 million
based on the old normal. The purpose of this proposal is exclusively to amortize as
adequately as possible a portion of the averaging differences that does not correspond
to the principle of offsetting.
3
2006–2007 RESIDUAL BALANCE AND NEW ADDITIONS
As regards the residual balance of $66.6 million and the addition of future differences to
the rate base, the Distributor requests authorization to straight-line amortize them over a
five-year period starting in 2009. The proposal to amortize the amounts recorded in the
averaging account is based on the following considerations:
• weather uncertainties subsisting beyond the Distributor’s revision of the
climatic normal in 2008;
• the uncertainty linked to the changes in the Distributor’s unit revenue over the
years, conditioned by the changes in its various costs and rate strategies.
These considerations lead one to believe that offsetting of differences over time might
not be symmetrical in terms of volume or monetary value. From this standpoint, the
zeroing of the averaging account balance over the long term appears uncertain.
For these reasons, and in keeping with its statement on page 13 of application R-36102006, HQD-4, Document 4, the Distributor hereby requests authorization to amortize the
balance of its averaging account.
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Application R-3677–2008
The Distributor proposes to straight-line amortize the balance of the averaging account
included in the rate base, the most appropriate method given the nature of the account,
which is designed to smooth the effects of temperature variations. In addition, since the
differences recorded in the averaging account have no future utility, it would be
inappropriate to weight them variably over the amortization period in question.
As to the choice of amortization period, the Distributor is considering the fact that the
differences recorded in the averaging account and included in the rate base result from
undercharges and/or overcharges recorded in previous test years and represent no
future advantage. Furthermore, while the zeroing of these differences in monetary terms
appears uncertain, as explained above, the Distributor cannot completely ignore the
compensatory nature of temperature fluctuations on sales volumes and, to a certain
extent, on the monetary differences recorded in the averaging account. For this reason,
the Distributor considers an amortization period of five years to be reasonable for the
purposes of amortization of the differences recorded in the averaging account. This is
also the period used by Gaz Métro for its temperature-related rate stabilization account.
The annual amortization calculation will distinguish each of the years with which the
respective components of the averaging account balance are associated. This will
enable the Distributor to allocate the amortized amounts according to the customer
class allocation factors specific to each of these years, as discussed in section 5.
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4
Application R-3677–2008
FINANCIAL IMPACTS
Table 2 below presents the impact of the five-year amortization (2009–13) considering
only the balance as at 31 December 2008.
TABLE 2
IMPACTS OF AMORTIZATION OF AVERAGING ACCOUNT BALANCE AS AT 31 DECEMBER 2008
2009
2010
2011
2012
2013
Total
Proposal – amortization
Averaging account balance 31/12/2008
Additions on 1/1/2009 re 2007 differences
Balance of account in BT as at 1 January
131.9
-3.3
128.6
53.3
40.0
26.6
13.3
Amortization balance relating to old normal
Amortization remaining balance
Total amortization
62.0
13.3
75.3
13.3
13.3
13.3
13.3
13.3
13.3
13.3
13.3
128.6
Unamortized balance
Return on unamortized balance (7.65%)
Effect on additional required revenues
Status quo without amortization
Balance account in BT as at 1 January
Return on unamortized balance (7.65%)
Differential financial expenses
Return on unamortized balance – proposal
Return on unamortized balance – status quo
Difference
53.3
4.1
79.4
40.0
3.1
16.4
26.6
2.0
15.4
13.3
1.0
14.3
0.0
0.0
13.3
10.2
138.8
128.6
9.8
128.6
9.8
128.6
9.8
128.6
9.8
128.6
9.8
49.2
4.1
9.8
-5.8
3.1
9.8
-6.8
2.0
9.8
-7.8
1.0
9.8
-8.8
0.0
9.8
-9.8
10.2
49.2
-39.0
Table 2 shows that the effects of the proposal on the financial expenses are favorable
since they result in savings of $39 million over the five-year amortization period. The
amortized amounts have no direct effect on the revenue requirement since they affect
the electricity sales revenues rather than the charges. They do, however, have an
impact on the additional required revenues. According to the differential analysis, the
impact of the Distributor’s proposal results in an $89.6 million increase in the additional
required revenues resulting from the amortized amount of $128.6 million minus the $39
million decrease in financial expenses. This effect, however, does not take account of
the offsetting that might take place in the years 2010–13. If major oppositely signed
differences are recorded, the ultimate conclusion as to the total effect on the additional
required revenues could be entirely different. Nevertheless, the Distributor notes that
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the balance of an averaging account that is not zeroed over time could prove costly to
customers who bear its financing cost. Thus, the $131.9 million differences attributable
to 2006 included interest of $11.4 million at the time of their inclusion in the rate base
and generated additional financial expenses in 2008 of $10.3 million ($131.9 million x
7.81%).
5
ALLOCATION OF AVERAGING ACCOUNT AMORTIZATION
In view of the Distributor’s proposals relating to the averaging account for transmission
and distribution revenues, we must present the amounts that will be amortized,
distinguishing the portion relating to the change in climatic normal (see section 2) and
the portion relating to the other differences associated with 2006–08, as well as the
differences that will be recorded in the averaging account of the rate base as from 2009.
For projected test year 2009, these amortizations are, respectively, $62.0 million due to
the change in climatic normal and $13.3 million corresponding to one-fifth of the residual
balance of the averaging account for the transmission and distribution revenues.
As with the interest calculation, the amortizations will be calculated on the differences
for each specific year. This will facilitate the assignment of amortizations to the right
balances. Since the averaging account is already established for different customer
classes according to the method approved by the Régie, the amortization by classes is
calculated using the same proportions. This is equivalent to taking one-fifth of the
balance for each customer class. For 2009, the amortization charge for the averaging
account is presented in Table 3.
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TABLE 3
ALLOCATION OF AMORTIZATION OF AVERAGING ACCOUNT BALANCE AS AT 1 JANUARY 2009
M$
Rate D
Rate DT
Rate G
Rate M
Rate L Total (M$)
Revision new climatic
normal ($62.01 million)
Amortization of 2006 account
Amortization of 2007 account
Subtotal
27.02
22.54
49.56
2.76
2.47
5.23
2.51
3.96
6.47
0.30
0.36
0.66
0.01
0.07
0.08
32.60
29.41
62.01
Amortization of 2006 account
Amortization of 2007 account
Subtotal
15.78
(4.84)
10.94
2.11
(0.64)
1.47
1.76
(0.93)
0.83
0.21
(0.11)
0.09
0.01
(0.02)
(0.01)
19.87
(6.54)
13.33
Total amortization 2009
60.50
6.70
7.30
0.76
0.08
75.34
Balance new climatic
normal ($66.63 million)
As regards cost allocation, these amortizations by customer class are presented in the
“Other” function in Table 27B of Exhibit HQD-11, Document 3.3 The treatment of the
averaging account amortization is similar to that of the other electricity revenues.
3
Pursuant to decision D-2005-34 (p.92), column 6 of Table 1 of Exhibit HQD-11, Document 3
presents the sum of the other revenues and the amortization of the averaging account for each customer
class.
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6
Application R-3677–2008
REQUEST CONCERNING AVERAGING ACCOUNT AMORTIZATION
Summarizing the amortization mechanisms proposed in this document, the Distributor
hereby requests the following authorizations from the Régie:
• for straight-line amortization as of 2009, over a five-year period, of the
differences recorded in the averaging account included in the rate base, with
the exception of the differences mentioned in the following paragraph;
• for full amortization in 2009 of the sum of $62.0 million based exclusively on
the old climatic normal, for which no zeroing is possible.
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