Le 21 janvier 2005 N de dossier : R-3549-2004

Le 21 janvier 2005
No de dossier : R-3549-2004
Page 1 de 7
« R-3549-2004 »
Référence :
Preuve de Mark Drazen, pages 2 et 13.
Préambule :
La FCEI soutient que la preuve du Transporteur devrait contenir des informations
supplémentaires concernant les données réelles historiques ainsi que sur la méthode
d'établissement des prévisions.
Veuillez décrire précisément les informations additionnelles que vous croyez
In order to evaluate the forecast, the Régie (and intervenors) should be able to
understand exactly how the forecast numbers were derived. Forecasts can be
prepared in several ways. On a broad level, some forecasts are “bottom up”, in which
a forecast is made for each cost category and then all the categories are summed. A
“top down” forecast starts with a sum and projects that into the future, after which the
total is broken down into the categories. These two are not exclusive, because an
organization may do a “bottom up” forecast to arrive at an initial budget amount and
then, upon examination of that total, adjust the total downward to meet some other
criterion. An example of this is explained in a decision of the British Columbia Utilities
In the 1993 hearing, Commission counsel and Intervenors extensively
reviewed the Utility's Operations, Maintenance and Administrative ("OMA")
expense and Capital Expenditure budget approval process. The Utility had a
"top down and bottom up" process in which the various work groups plan
their budgets without knowing the target framework which management
believes is appropriate at the time. Mr. Harrison, and B.C. Hydro's policy
witness, Mr. John Sheehan, were concerned that the business unit budgets
should be based on need first, prior to the setting of OMA targets by
management. (1993 Hearing, T. 206)
The February 1994 Application indicated a significant change to the process
in that the OMA targets set by management are now communicated to the
working groups much earlier in the budget preparation process.
"Target setting (top down) and work planning (bottom up) come together
early in the planning process. Analysis of different financial framework
scenarios, operational requirements and expenditure trends result in the
establishment of preliminary Corporate and SBU/CSG (Groups) OMA
targets. These OMA targets are now communicated to the Groups who are
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encouraged to prioritize work activities to stay within their OMA targets. Any
planning or budgeting issues are discussed and resolved at the senior
management level and appropriate adjustments made to the OMA targets.
The various work plans and budgets are then consolidated into Group plans
which are presented to and reviewed by the responsible Vice Presidents, the
Senior Management Committee of B.C. Hydro and the Audit and Budget
Committee of the Board of Directors. Changes to the work plans and budgets
can occur at any level of review. The budget is finalized only after receiving
approval from the Board of Directors based upon the recommendations of
the Audit and Budget Committee." (Exhibit 1, p. I-6-F-6)
In the 1994 hearing, Mr. Harrison, Vice-President of Finance, indicated that
the detailed budgets provided by the Key Business Units ("KBU") would have
been around $450 million for OMA (T. 696). As was done in last year's
budget process, the initial upper limit for fiscal 1994/95 OMA, adjusted for
customer growth, inflation and productivity increases, was determined. This
was calculated at $440 million, $10 million less than what the KBUs felt they
needed. The upper limit for capital was determined to be $655 million.
Despite the evidence provided by its KBUs, senior management actually
imposed an OMA target of $409 million and a capital target of $575 million.
(1994/95 Revenue Requirements Application, B.C.U.C. Decision, November
24, 1994, pp. 8-9)
Within a “bottom up” (which might also be called component-by-component) forecast,
the utility must determine how to forecast each cost component. One technique is to
take the historical amount and increase that by some measure of the rate of inflation
(for example, producer price index, either provincial or national). Another method is
to forecast separately the units required (employees, stock items, vehicles) and each
unit cost (salary and benefits, cost per item, vehicle lease rate) and multiply the units
by the unit cost. The units may be forecast by some measure of activity (e.g.,
forecasts of customers saved, length of lines to be maintained, attachments, etc.). In
addition, a decision must be made whether to apply factors to reflect changing
conditions, such as greater efficiency or reorganization. In all cases, a forecast value
is usually derived from some historical data, using some adjustment or extrapolation
method. These items are the additional information needed.
Understanding the methods by which a utility (HQT, in this instance) has forecasted
its test year cost is important for two reasons. First, it enables the Régie to evaluate
the reasonableness of the forecast assumptions for determining test year costs.
Second, over time it enables the Régie to determine whether a particular forecasting
approach has turned out to be reliable or not and determine whether the utility is
applying a consistent approach from case to case.
Référence :
Preuve de Mark Drazen, page 11.
Préambule :
« The costs that were included in this analysis include net salaries, government remittances,
other expenses, taxes and purchased transportation service. This produces a cash working
capital amount of 58,9M$.
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There is, however, another major item that should be considered. This is interest cost.
Because interest is, for the most part, paid semiannually (every six months), there is on
average a significant negative net lag on interest expense. That is, the amount is recovered
from ratepayers prior to the time when interest must be paid to bond holders. »
Demandes :
Veuillez fournir des exemples d’autres sociétés de service public où les intérêts
font partie du fonds de roulement.
Veuillez expliquer la ou les raisons invoquées pour retenir ou exclure, selon le
cas, les intérêts du fonds de roulement.
Réponse :
Attached are excerpts from filings of two utilities (Georgia Power and Centra Gas
Whistler) that demonstrate the conclusion of interest. More examples are given in the
discussions in response 2.2.
The techniques for determining cash working capital have evolved over time. The
methods vary to some extent among jurisdictions, although there has been an overall
trend toward more precision in the evaluation. Understanding the history may help
explain why there are differences among jurisdictions.
An early method of estimating cash working capital was to take ? of operation and
maintenance expense. The factor of ? was arrived at by assuming that there was
roughly a 45-day lag in the recovery of expenses, which was about ? of a year.
A small refinement of this method was to use a fraction of 45/365 (sometimes 45/366
for a leap year) as a slightly more accurate measure of the fraction.
A further refinement of this approach was based on the recognition that the utility’s
expenses involved in rendering service are incurred at different times, so that one
should not assume a 45-day lag in the collection of all expenses. This lead to the
development of lead/lag studies, wherein the lag for each particular type of cost is
measured separately. Similarly, the lag in revenue collection was subject to greater
Refinement in a different direction involved recognition that the rates charged to
customers recover not only operation and maintenance expenses that are paid out,
but also other expenses, notably interest and taxes. The treatment of interest and
taxes currently varies among jurisdictions. Many jurisdictions include these items,
while others do not. The difference in treatment appears to depend on whether or not
the issue has been brought to the attention of the regulator. Cash working capital is
usually a small part of the total rate base and receives correspondingly less attention.
Further, it tends to be a more technical issue and gets overshadowed by issues
relating to tangible assets, often of a more contentious nature (examples being cost
overruns, excess capacity and the « used and useful » issue).
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An alternative method, seldom used these days, is the « balance sheet » approach,
which determines the cash working capital from the utility’s balance sheet. This
would inherently reflect interest collection and payment. The difficulty with this
approach is that a balance sheet is a snapshot of the asset and liability balances at a
single point in time. Therefore, accuracy would require using multiple balance
sheets–ideally, daily balance sheets–and these are not readily available.
Excerpts from decisions of regulators that have chosen to include interest are :
Staff also argues that, contrary to the Company's claims, Staff's cash working
capital formula properly includes interest expense. According to Staff, the
Company collects cash used to make interest payments prior to the
interest due date and, during the time Arizona Water has possession of
these funds, they are a source of cost-free cash that can be used by the
Company until making payments to creditors. Therefore, in accordance
with the NARUC methodology, Staff claims that its lead-lag study properly
included interest expense. Accordingly, Staff recommends that Arizona
Water's cash working capital should be rejected and Staff's lead-lag study
We agree with Staff that the Company's proposed cash working capital
proposal is inconsistent with our prior order for Arizona Water and would
result in an overstatement of cash working capital and thus the Company's
rate base. As Staff points out, the Company calculates its cash working
capital by subtracting total expense lag days from its total revenue lag days
which, when divided by 365 days, results in the Company's proposed cash
working capital requirement. We agree with Staff that the Company's method
achieves a flawed result because it includes the revenue increase and
associated taxes, as well as the return on net invested capital needed to pay
dividends on common stock. Moreover, the Company's proposed method
excludes interest expense, which is a cash item available to the company for
payments to creditors prior to the interest due date. (Re Arizona Water
Company, Docket No. W-01445A-00-0962, 214PUR4th205, emphasis
We have repeatedly rejected the inclusion of deferred taxes and depreciation
in the circulation of current cash working capital requirements. We have also
finally concluded that interest expense should be included in a lead/lag
study…. (Re Arizona Public Service Company, Docket Nos. U-1345-86-062,
U-1345-85-367, 91 PUR4th 337, p. 367, emphasis added)
CL&P's calculated working capital for long-term debt is -$5.404 million. This
is based on a revenue lag of 39.64 days, an expense lead of 88.79 days, and
daily expense of $109,947 (annual expense $40.131M/365). The -$5.404
million is the product of multiplying -49.15 net lead days (39.64-88.79) times
the daily expense. Response to Interrogatory EL-205.
The OCC accepted the Company's 88.79 day expense lead as filed for longterm debt, however removed the negative rate base impact of the CTA and
SBC in this calculation because they are not related to distribution. Exhibit
LA-1s, Schedule B-5, p. 1. However, OCC adjusted the working capital
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requirement by applying its recommended rate base against its weighted cost
of debt. OCC's calculation resulted in a working capital requirement of -$9.3
million for long-term debt. Exhibit Schedule B-5, LA-1s, pp. 1 and 2.
The Department requires an expense lead of 91.25 days (365/2/2) on this
semi-annual payment of interest expense representing the midpoint of
the six-month period. The Department allows expense of $38.3M (ratebase
$1198.4M × \&.4601 × 6.95%) consistent with the weighted cost of debt
allowed by this Decision. The Department calculates that net lead days of 51.61 (39.64-91.25) multiplied times daily expense of $104,978 ($38.3M/365)
results in an allowed working capital requirement of -$5.42 million. The
Department's allowance results in a reduction to working capital of $0.014M
(-$5.404M-{-$5.42M}). (Re The Connecticut Light and Power Company,
Docket No. 03-07-02, 229 PUR4th 380, emphasis added)
Federal Energy Regulatory Commission
It was found appropriate to include interest expense lag as a component
of an overall lead-lag study used as a basis for determining the amount of
cash working capital to be included in the rate base of a natural gas pipeline.
(Docket Nos. RP81-85-000, RP-83-93-003, FA85-01-000, 98 PUR4th 148, p.
163, emphasis added)
Staff, in modifying the lead-lag study to include interest expense, relied
upon the following facts. First, applicant’s intrastate rates collected from
the Kansas ratepayers included charges for applicant’s interest expense.
Second, this interest expense obtained through rates charged Kansas
ratepayers is collected in advance of the time applicant pays the interest to
its debt holders. Third, these funds provide cash flow and cash balances
which applicant may use in its operations. Under these circumstances, we
find that it is appropriate to include interest expense in the lead-lag
study which is concerned with cash flow necessary for operations. (Re
Southwestern Bell Telephone Company, Docket No. 123,773-U, 42 PUR4th
89, emphasis added)
The Company, Staff and OPC adjust cash working capital to reflect the
impact of interest and preferred dividends inherent in their
recommended cost of capital and the impact of adjustments to expenses
and the level of federal income tax. Such adjustments are agreed to in
principle but varying in amount. We will compute our cash working capital
allowance taking into account the ratemaking decisions in this Order. (Re
Potomac Electric Power Company, Case No. 8315, 124 PUR4th 1, emphasis
This commission has previously determined (Case No. ER 79 19, June 1,
1979) that amounts collected as a part of rates to pay the interest on long term debt should be treated similarly as an offset to rate base. This is so
because the obligation to pay the interest on debt is a known and
certain obligation, and the amount is precollected from the ratepayer for
the sole purpose of passing it on to the bondholders. In that same case,
however, we recognized the very real distinctions between bondholders and
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shareholders, and held that dividend amounts accrued to pay preferred and
preference stockholders should not be so treated. (Re Missouri Public
Service Company, Case Nos. ER-79-60, GR-79-61, 30 PUR4th 145,
emphasis added)
Newfoundland and Labrador
The Board agrees in principle with Mr. Drazen’s proposal and acknowledges
that there appears to be a benefit to NLH from the timing of funds
received and the payment of interest on long-term bonds. The Board
also recognizes the comments of Mr. Brushett of GT, who stated that a
detailed review of Mr. Drazen’s calculations or an analysis of the full impact
of any benefits or costs has not been prepared.
At the present time the Board will not act to adjust the CWCA to reflect
the timing difference between the payment of semi-annual long term
bond interest and the receipt of the funds for their payment. The Board
feels this issue warrants further consideration and will require NLH to
submit to the Board, prior to the next rate application, an analysis of
this issue. (Re Newfoundland and Labrador Hydro, Order No. P.U. 7 (20022003), June 7, 2002, Page 100, emphasis added)
A decision to exclude interest is :
The commission ruled that depreciation, deferred taxes, interest and
dividends were properly excluded from cash working capital because those
items did not require day-to-day cash outlays. (Re General Telephone
Company of the Southwest, Docket No. 83-147-U, 63 PUR4th 663, p. 668)
Interest expense and preferred dividends were excluded from the
computation of the working capital requirement of a retail electric utility; it was
found that the receipts on account of interest expense and preferred
dividends were not revenues related to any particular expense of
providing service. (Re Hawaii Electric Light Company, Docket No. 6432,
120 PUR4th 427, p. 472, emphasis added)
57 a. PacifiCorp sponsored a lead-lag study which indicated a net revenue
lag of 8.5 days in Wyoming resulting in a cash working capital requirement of
$8.1 million allocated to Wyoming. (PacifiCorp Exhibit 43, p. 5.) Both AARP
and WIEC proposed that the study should recognize a cash "lead" in
connection with the payment of preferred stock dividends and interest on
long term debt. WIEC stated that two commissions had adopted such a
proposed adjustment. (Tr., pp. 386, 424 and 852.) PacifiCorp opposed the
adjustment, arguing, inter alia, that these monies should not be recognized in
a cash working capital calculation and that, if they were, there should be a
corresponding adjustment for the lag involved in the receipt of operating
income, noting that the "common practice is to assume that these
adjustments are offsetting" and should be ignored for rate making purposes.
(PacifiCorp Exhibit 43, pp. 7-8; and FERC NOPR cited there)
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57 b. We reject the proposed adjustment. Although we will not indulge in
comparative rate making in this case, we note that only two regulatory
commissions have adopted a WIEC/AARP-style adjustment. We consider
the money received by a utility for preferred stock dividends and
interest on long term debt to be the utility's money at that point rather
than rate payer money which could be justified theoretically as useful in
the calculation of cash working capital. Therefore, and without a
corresponding operating income "lag," the proposed adjustment would distort
the company's cash working capital needs and should be denied. We note
that the Federal Energy Regulatory Commission also approves this
conceptual treatment of the issue. [Commissioner Furtney dissents with
respect to the majority's decision on this issue. See the attached partial
concurrence and dissent.]
From the dissent:
22. I dissent from the majority's failure to recognize a cash "lead" in
connection with the payment of preferred stock dividends and interest on
long term debt. Quite simply put, PacifiCorp has the use of these funds for
the period of time prior to the time at which the payments are due to be paid
out. The money in PacifiCorp's hands should be given proper and careful
credit in the calculation of the level of Cash Working Capital needed by
PacifiCorp. WIEC and AARP advocate this adjustment. Whether or not other
commissions have adopted this treatment, it nevertheless remains the fairest
way to treat these monies prior to the time they must be employed by
PacifiCorp for preferred stock payments and debt service obligations.
PacifiCorp's argument that, if these monies are recognized, we must also
recognize the lag in the receipt of operating income lacks details and
therefore is unpersuasive. (Re Pacificorp (Wyoming), Docket No. 20000-ER02-184, 232PUR4th295, emphasis added)