RÉGIE DE L’ÉNERGIE
HYDRO-QUÉBEC DISTRIBUTION’S APPLICATION
FOR APPROVAL OF
TARIFFS EFFECTIVE 2004-2005
PHASE 1: REGULATORY PRINCIPLES AND COST OF SERVICE
FILE R-3492-2002
EVIDENCE OF
WILLIAM HARPER
ECONALYSIS CONSULTING SERVICES
ON BEHALF OF:
OPTION CONSOMMATEURS
JANUARY 8, 2003
Table of Contents
1.0
Background …………………………………………………………….
1
2.0
Purpose of Evidence ………………………………………………….
3
3.0
Purpose of a Cost Allocation Study ………………………………..
4
4.0
Hydro Quebec Distribution’s Proposed Cost
5.0
Allocation Methodology ………………………………………………
6
4.1
Overview………………………………………………………….
6
4.2
Functionalization ……………………………………………….
8
4.3
Classification and Allocation …………………………………..
25
Overall Conclusions ………………………………………………….
42
Schedule 1 Demand Allocator Adjustment Based on Minimum
System Load Carrying Capability …………………………….. 51
Appendix A – Qualifications and Experience for William Harper
Evidence of
William Harper
1
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1.0 Background
2
3
On July 8th, 2002, Hydro-Québec Distribution (HQD) filed its first Application with
4
the Régie de l’énergie (the Régie) regarding approval of its distribution rates.
5
This Application arises as a result of recent changes in both the organizational
6
structure of Hydro-Québec as well as the legislative and regulatory framework in
7
which it operates.
8
9
On June 2nd, 1997, the Act respecting the Régie de l’énergie, which was adopted
10
on December 19th, 1996 by the National Assembly of Québec, came into force.
11
The Régie de l’énergie replaced the former regulatory body, the Régie du gaz
12
naturel, whose jurisdiction was limited to the natural gas sector. The new Régie’s
13
jurisdiction was extended to cover two additional sectors of the energy industry:
14
gasoline retailing and electricity (Hydro-Québec1).
15
16
On June 16th, 2000, the Act respecting the Régie de l’énergie was amended by
17
Bill 116. The effect of Bill 116 was, among other things, to exclude from the
18
Régie’s regulatory oversight the generation function of Hydro-Québec and to
19
create the Heritage Pool for electricity, whereby Hydro-Québec – Production
20
(HQP), the generation arm of Hydro-Québec, assures HQD access to 165 TWh
21
of electricity supply (plus transmission and distribution losses) at an average unit
22
cost of 2.79¢ per kWh. In addition, Appendix I to the 2000 amended Act
23
provided for the unit allocators that were to be used to allocate the Heritage Pool
24
electricity costs to the rate classes for the year 2000. This cost allocation was
25
then to be reviewed and approved by the Régie de l’énergie for the determination
26
of future years’ rates. Consistent with the regulatory changes introduced by Bill
1
At that time the Régie’s jurisdiction covered the generation, transmission and distribution
functions of Hydro-Québec. The rates of the Utility were to be cost-based, and approved by the
Régie after public hearings such as those that had been standard practice in the natural gas
sector for many decades.
1
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
116, in June 2001 Hydro-Québec completed the functional separation of its
2
Production, Transmission and Distribution activities2.
3
4
On April 30th, 2002, the Régie released the decision D-2002-95 in the first
5
transmission tariff application ever filed by Hydro-Québec – TransÉnergie (HQT)
6
(reference R-3401-98). In this decision, the Régie ruled that the transmission
7
cost of service was to be allocated to the Native Load customers (i.e. HQD and
8
its customers) and to the Point-to-Point customers (the largest of which is HQP in
9
its export activities) on the basis of the annual coincident peak demand (1 CP).
10
This decision was on an interim basis, and the Régie directed HQT to come forth
11
in its next tariff application with further studies on a cost allocation model by
12
function.
13
14
On October 21st, 2002, the Régie released decision D-2002-221 in HQD’s
15
Application to determine the allocation of the Heritage Pool costs to the rate
16
classes for the years 2001 and 2002 (reference R-3477-2001). In this decision,
17
the Régie approved the Heritage Pool cost allocation model proposed by HQD.
18
It is understood that this same cost allocation model will be used to allocate the
19
cost of non-Heritage Pool costs to the rate classes when incremental supplies
20
come online as a result of the calls for tenders launched in 2002 going forward.
21
The Régie’s decision D-2002-221 is currently under appeal.
22
23
HQD’s July 8th, 2002 Application represents its first distribution rate application to
24
the Régie, incorporating both the charges it will incur for electricity commodity
25
and transmission service purchases from other business units of Hydro-Québec
26
and its own internal costs. The Application addresses the need for rates
27
approved by the Régie as of 2004-2005, when the current rate freeze expires3.
2
HQD-1, Document 1, page 3. Note : Hydro-Québec had previously unbundled its Transmission
activities in 1997.
3
See: DEMANDE RELATIVE À LA DÉTERMINATION DU COÛT DE SERVICE DU
DISTRIBUTEUR ET À LA MODIFICATION DES TARIFS D’ÉLECTRICITÉ (PHASE 1), July 5,
2002, page 3, § 9-10.
2
Evidence of
William Harper
1
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
2.0 Purpose of Evidence
2
3
In its Application, Hydro-Québec Distribution (HQD) proposed that the Régie
4
undertake its review in two Phases and requested that in Phase 1 the Régie
5
among other things:
6
1. Adopt its proposals with respect to the determination of HQD’s revenue
requirement based on a forward test year,
7
8
2. Approve its proposed deemed capital structure,
9
3. Approve its proposed return on equity and overall return on capital,
10
4. Approve its proposed revenue requirement for the 2002-2003 rate year,
and
11
12
5. Approve its proposed cost allocation methodology for allocating the
revenue requirement to be recovered from rates to customer classes.
13
14
In Phase 2, HQD would present an Application for rates effective April 1, 2004,
15
based on the results of Phase 1.
16
17
On October 9, 2002, the Régie issued an Order (D-2002-208 with respect to R-
18
3492-2002) outlining the schedule for the planned proceeding and identifying the
19
following issues for Phase 1:
20
•
General presentation of the case and regulatory principles,
21
•
Capital structure and capital cost,
22
•
Accounting principles, cost of service and revenue requirement, and
23
•
Cost allocation and cross-subsidization between the rate classes.
24
25
After reviewing HQD’s Application and the Procedural Order issued by the Régie,
26
Option Consommateurs (OC) retained Econalysis Consulting Services (ECS), a
27
Canadian consulting firm offering regulatory services to clients in the electricity,
28
natural gas and telecommunications sectors, to provide evidence that would
3
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
assist the Régie in evaluating the issues associated with HQD’s proposed cost
2
allocation methodology.
3
4
The Evidence was prepared by Bill Harper who, prior to joining ECS in July 2001,
5
worked for over 25 years in the energy sector in Ontario, first with the Ontario
6
Ministry of Energy and then, with Ontario Hydro and its successor company
7
Hydro One. Mr. Harper’s areas of expertise and experience include cost
8
allocation/rate design, the regulation of electric distribution utilities and
9
management of utility involvement in regulatory proceedings. He has served as
10
an expert witness in public hearings before the Manitoba Public Utilities Board,
11
the Ontario Energy Board, the Ontario Environmental Assessment Board and a
12
Select Committee of the Ontario Legislature on matters dealing with rates,
13
regulation and demand/supply planning. Mr. Harper also provided comment and
14
expert evidence in the Régie’s proceeding dealing with HQD’s 2002-2011 supply
15
plan4. A full copy of Mr. Harper’s CV is attached in Appendix A.
16
17
The Evidence starts by discussing the purpose of cost of service (or cost
18
allocation) studies, the key steps involved and the principles. This is followed by
19
a review of the cost allocation methodology proposed by HQD. Overall, HQD’s
20
cost allocation methodology is generally consistent with accepted electricity
21
industry practices. However, there are some exceptions and also areas where
22
more documentation and/or analysis are required. These are noted throughout
23
the text and summarized in section 5.0.
24
25
3.0 Purpose of a Cost Allocation Study
26
27
As a guide for determining the appropriate rates to be charged to each class of
28
customers, gas and electric utilities generally perform a cost of service or cost
29
allocation study. A cost allocation study analyzes the components of the
30
Company’s costs and assigns or directly allocates plant investments and other
4
File R-3470-2001
4
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
assets as well as operating expenses among the various customer classes
2
receiving service and, in some instances, among different services offered by the
3
utility. The purpose of the study is to determine both the total and the unit costs
4
of providing service to various customer classes. The results are then used to
5
provide guidance in establishing the rate levels and designing the rate structures
6
for each customer class so as to fairly apportion the total costs between
7
customer classes and provide proper price signals. A cost allocation study can
8
also assist in identifying the costs of providing individual services in those
9
jurisdictions where rates are to be unbundled.
10
11
12
Cost allocation studies generally employ a three-step process of cost analysis:
1) Functionalization of assets and annual expenses (including the cost of
13
capital) according to the services (or functions) the utility provides such as
14
production, transmission, distribution and customer service. However,
15
these functions are frequently broken down further to capture specific
16
activities.
17
2) Classification of each function’s costs according to the system design or
18
operating characteristics that caused those costs to be incurred. In the
19
case of electric utilities, costs are generally classified as one of three
20
types: demand costs incurred to meet a customer’s maximum
21
instantaneous power requirements (i.e., demand or capacity); energy
22
costs incurred to provide customers with electricity over a period of time;
23
and, customer costs incurred to carry customers on the system.
24
3) Allocation of each functionalized and classified cost component to specific
25
customer classes based on each class’ contribution to the specific cost
26
driver selected.
27
28
While the process appears straightforward and logical, the nature of utility
29
operations is characterized by the existence of common or joint use facilities (and
30
activities) that are used to support the provision of more than one product/service
31
and/or serve more than one customer class. As a result, while cost analysts may
5
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
strive to identify and isolate plant and expenses incurred exclusively to serve a
2
specific customer class or group of customers, it is unrealistic to assume that
3
large portions of a utility’s plant investment and expenses can be directly
4
assigned. In addition, there are practical constraints (e.g. time and budgets) that
5
will limit the extent to which costs can be directly tracked and assigned.
6
7
In evaluating any cost allocation study primary consideration should be given to
8
the need to reflect cost causality to the extent possible. In this regard, while
9
industry standards and precedents have been established which can assist cost
10
analysts in performing cost of service studies, recognition must also be given to
11
the specific utility’s circumstances (e.g., its operating characteristics and design).
12
Other considerations include equity, efficiency, stability of results over time,
13
transparency, logical consistency and practical limits of implementation.
14
15
4.0 Hydro-Québec Distribution’s Proposed Cost Allocation Methodology
16
17
4.1 Overview
18
19
HQD’s cost allocation methodology follows the standard three-step process of
20
functionalization, classification and allocation of costs to customer classes. This
21
methodology is applied to both the specific cost components of the annual
22
revenue requirement as well as the rate base, which is used in turn to allocate
23
the proposed cost of capital to customer classes.
24
25
For the 2002-2003 rate year, HQD’s proposed revenue requirement to be
26
recovered from rates is $8,747.0 M and is made up of the following costs5:
27
•
Electricity Purchases:
$4,229.0 M
28
•
Cost of Fuel for Electricity Generation:
$
29
•
Transmission Services:
$2,312.6 M
24.9 M
5
See HQD-5, Document 1, pages 3-5 and HQD-9, Doc 1, Table 3 (Note: Where differences
exist between the two sources due to rounding the values from Table 3 are reported)
6
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
•
Gross OM&A6:
$ 773.0 M
2
•
Capitalized OM&A:
$ (250.3) M
3
•
Cost of Shared (HQ) Services:
$ 415.8 M7
4
•
Depreciation and Amortization:
$ 416.5 M
5
•
Taxes:
$ 106.0 M
6
•
Corporate (HQ) Overheads:
$
37.5 M8
7
•
Services to Other HQ Units:
$
(50.2) M9
8
•
Other Revenues:
$
(63.1) M10
9
•
Ice Storm Reimbursement:
$
(4.5) M
10
The revenue requirement also includes cost of capital charges of $ 799.7 M11.
11
12
The rate base proposed by HQD for 2002-2003 is $8,063.6 M12 and consists of:
•
•
•
13
14
15
16
•
Fixed assets with a net book value of $7,624.2 M,
Unamortized expense with a value of $ 100.7 M,
Working capital valued at $ 234.0 M, and
Inventories valued at $ 104.6 M.
6
Operating, Maintenance and Administration Expense
Includes $18.2 M of billings between HQD business units. See HQD-10, Document 8, page 22,
Question 15.2.
8
The Corporate overheads included here are for services not directly billed to HQD, but rather
allocated. Directly billed services ($42.5 M) are included in the $415.8 M cost of shared services.
See HQD-10, Document 8, page 24, Question 19.1.
9
Includes $18.2 M of billings between HQD business units. See HQD-10, Document 8, page 22,
Question 15.2.
10
Only includes other non-rate revenues from customers and from third parties (e.g. pole rentals).
Other non-rate revenues (e.g. customer contributions) are treated as a cost offset. See HQD-10,
Document 8, pages 19-20, Question 14.1.
11
HQD-9, Document 1, page 28, Table 1.
12
HQD-9, Document 1, page 29, Table 2.
7
7
Evidence of
William Harper
1
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
4.2 Functionalization
2
3
Functions Employed
4
5
HQD uses the standard Production, Transmission, Distribution and Customer
6
Service functions13 employed by electric utilities. The Distribution and Customer
7
Service functions are then broken down further into a number of sub-functions as
8
follows14:
•
9
Distribution:
10
o Distribution Stations and Operating Centres
11
o Medium Voltage Lines
12
o Low Voltage Lines
13
o Connections
14
o Streetlights/Sentinel Lighting
•
15
Customer Service:
16
o Customer Care and Accounting
17
o Metering
18
o Sales and Marketing
19
o Other
20
A separate function (and set of similar sub-functions) is used to capture the costs
21
associated with serving Remote Communities.
22
23
Functionalization of HQD’s Revenue Requirement
24
25
o Electricity Purchases, Transmission Services and Fuel for Generation
26
27
The costs of electricity purchases ($4,229.0 M) and transmission services
28
($2,312.6 M) are functionalized to the Production and Transmission sub-
13
14
HQD-9, Document 1, pages 7-8
HQD-9, Document 1, pages 8-10
8
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
functions respectively15. The cost of fuel for electricity generation ($ 24.9 M) is all
2
associated with the operation of the remote communities and is assigned to the
3
Remote Communities - Production function16.
4
5
o OM&A and Shared Services
6
7
HQD has organized its internal activities and cost reporting such that costs are
8
separated based on the following cost centres17:
•
9
Networks – which captures activities associated with managing and
10
maintaining HQD’s distribution assets (including production, transmission
11
and distribution of power in Remote Communities),
•
12
Customer Service – which includes activities associated with customer
13
meter reading, billing and accounting as well as customer care (e.g., the
14
call centre) and marketing & sales activities for small and medium power
15
customers,
•
16
Large Customer Marketing & Sales – which includes marketing programs
and other support activities for large power customers, and
17
•
18
Various HQD Corporate activities including: a) Executive, b) Electricity
19
Supply, c) Regulation and Tariffs, d) Human Resources, and e)
20
International Projects (Note: The costs associated with International
21
projects are not included in the Revenue Requirement).
22
23
Based on this cost centre structure, HQD can directly assign most18 of its OM&A
24
costs (net of capitalized OM&A) to the Distribution and Customer Service
25
functions. Within the Distribution Function, OM&A costs are separated between
26
Remotes and Grid-connected distribution and then the costs are assigned to the
15
See HQD-9, Document 1, Table 3.
See HQD-9, Document 1, Table 12.
17
HQD-4, Documents 5 and 5.1 through 5.3.
18
The costs associated with HQD’s Executive and other corporate groups are assigned to the
Customer Service-Other sub-function. See HQD-10, Document 8, pages 74-75, Question 32.1.
16
9
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
sub-functions based on the net book value of the assets in each sub-function19.
2
In the case of the Customer Service, HQD indicates that the definitions of the
3
cost centres allow OM&A costs to be directly assigned to the appropriate sub-
4
functions20.
5
6
The cost of shared services (including “billings” between business units of HQD)
7
are assigned to the Distribution and Customer Service functions based on the
8
shared services costs attributable to the cost centres associated with each of the
9
two functions. Within Distribution, the costs of shared services are assigned to
10
the individual sub-functions on the basis of net book value. Within the Customer
11
Service function, the costs of shared services can be directly assigned to the
12
sub-functions, based on usage. As a result, the assignment of shared services
13
costs generally follows the same approach as used for OM&A costs.
14
15
Comments
16
17
HQD’s evidence is that its OM&A costs and costs for shared services can
18
be directly assigned to the relevant functions and, in the case of Customer
19
Service, the relevant sub- functions. However, the cost centre structure
20
for the Customer Service group presented in HQD-4, document 5.2
21
includes a number of cost centres that do not appear to be directly
22
attributable to either the Customer Care & Accounting, Metering or Sales
23
& Marketing sub-functions. Examples of this include:
24
•
Bur. dir. Princ. SALC,
25
•
Dir. Expertise et support SALC,
26
•
Dir. Développement et projets,
27
•
Dir. Planification et contrôle,
28
•
Dir. Projets Systemes d’inform. Clientèle, and
19
HQD-9, Document 1, page 36, classification factor FC17, column 3 and HQD-10, Document 1,
page 122, FC17
20
HQD-10, Document 1, page 122, FC17
10
Evidence of
William Harper
1
•
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
Gestion des actifs.
2
3
To date, there is insufficient documentation on the record to indicate
4
precisely how the OM&A and shared services costs for these activities are
5
allocated. What is required from HQD is a more complete explanation as
6
to:
7
•
proposed cost allocation methodology, and
8
9
How the costs of these business units were functionalized in the
•
What the activities associated with these business units entail and
10
whether any of the costs can be directly assigned to the sub-
11
functions.
12
As they are similar in nature to overhead costs, it is highly likely that some,
13
if not all, of the costs associated with these business units should be
14
allocated across all three sub-functions.
15
16
Another aspect of the allocation of OM&A costs requiring clarification is
17
the determination of the Distribution function costs associated with
18
Remote Communities. It not clear from the documentation provided
19
whether all of the OM&A and shared services costs for the Remote
20
Communities – Distribution function can be directly assigned based on the
21
definitions of the cost centres involved or whether some of the costs have
22
to be “allocated”. Similarly, it is not clear whether the Customer Service –
23
Customer Care and Accounting sub-function costs attributed to Remote
24
Communities were the result of a direct assignment (based on cost
25
centres) or an allocation.
11
Evidence of
William Harper
1
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
o Depreciation and Amortization Expenses
2
3
HQD’s cost of service includes both depreciation expense for assets in-service
4
($ 409.9 M) and the amortization of costs associated with commercial programs
5
($ 6.7 M)21. Depreciation expenses are assigned to the Distribution (including
6
Remotes) and Customer Service functions based on the assets associated with
7
the cost centres for each. Within Distribution, depreciation expenses are
8
assigned to the individual sub-functions on the basis of net book value. For
9
Customer Service, the depreciation expense for each of the cost centres is
10
directly assigned to the associated sub-function. The amortization costs
11
associated with commercial programs are assigned directly to the Customer
12
Service-Sales & Marketing sub-function.
13
14
Comments
15
16
The earlier comments regarding the assignment of OM&A and shared
17
services costs associated with various customer service-related cost
18
centres that are not readily attributable to a specific cost allocation sub-
19
function, also apply for any depreciation expense associated with the
20
same cost centres. Again, there is insufficient information on the record to
21
determine if there are any depreciation expenses associated with these
22
cost centres22 and, if so, how they were allocated to the various Customer
23
Service sub-functions.
24
25
While the initial evidence indicated that the amortization charges included
26
in the 2002-2003 cost of service were $6.7 M, the subsequent responses
27
to the information requests indicate that the amortization expense for
21
HQD-5, Document 10, pages 3-4.
Again, these cost centres include: a) the Bur. dir. Princ. SALC, b) Dir. Expertise et support
SALC, c) Dir. Développement et projets, d) Dir. Planification et contrôle, e) Dir. Projets Systemes
d’inform. Clientèle, and f) Gestion des actifs
22
12
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
commercial programs is $ 8.8 M23 and that this expense was allocated to
2
Customer Service-Sales & Marketing ($ 7.8 M) and Production-Remotes
3
($ 1.0 M).
4
5
o Taxes
6
7
Taxes included in the 2002-2003 cost of service consist of capital taxes ($ 53.3
8
M), gross revenue taxes ($ 39.6 M), municipal and school taxes ($ 13.3 M) and a
9
municipal tax refund ($ 0.2 M) for a total cost of $ 106.0 M24. Capital and
10
revenue taxes are both allocated between Distribution (including Remotes) and
11
Customer Service on the basis of the net book value of the assets associated
12
with each function. The main difference being that the allocation base for capital
13
taxes includes plant under construction, whereas the allocation base for revenue
14
taxes includes only assets in-service25. Within the Distribution function, HQD’s
15
response to OC interrogatory 32.9 indicates that these two tax expenses are
16
allocated between Remote Communities and the grid-connected Distribution
17
Network based on the relative number of cost centres associated with each26.
18
19
For Remote Communities, HQD’s response to OC interrogatory 32.9 indicates
20
that the costs are further split equally among Production, Transmission and
21
Distribution, and then further allocated to sub-functions based on net book
22
value27. The portion of the two taxes attributed to grid-connected distribution is
23
also allocated to individual sub-functions based on net book value.
24
25
In response to OC interrogatory 32.9, HQD does not specify how the allocation of
26
municipal and school taxes between the Distribution and Customer Service
27
functions was established. However, it appears to have been done based on the
23
HQD-10, Document 8, page 35, Table R22.2.
HQD-5, Document 11, pages 3-4 and HQD-10, Document 8, page 36, Question 23.2.
25
HQD-5, Document 11, page 3 and HQD-10, Document 8, page 82-83, Question 32.9.
26
HQD-10, Document 8, pages 82-83.
27
HQD-10, Document 8, page 83.
24
13
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
number of cost centres responsible for the expense. The costs attributed to
2
Distribution are allocated between the grid-connected distribution network and
3
Remote Communities based on the number of buildings associated with each,
4
resulting in virtually 100% of the costs being assigned to the grid-connected
5
distribution network28. The costs were then allocated to sub-functions based on
6
net book value29. Municipal and school taxes attributed to customer service cost
7
centres were allocated to the individual Customer Service sub-functions based
8
on the salaries associated with each30.
9
10
Comment
11
12
The functionalization of taxes should reflect the way they are calculated
13
for Hydro-Québec and HQD overall. HQD’s portion of the total capital
14
taxes paid by the integrated Hydro-Québec utility is based on the net book
15
value of all assets, including assets under construction. This allocation
16
base is consistent with the basis on which the overall capital taxes for the
17
utility are determined, which is based on the value of all outstanding debt
18
and equity (including that used to finance assets under construction)31. As
19
a result, allocating between Distribution and Customer Service on the
20
basis of net book value (including assets under construction) is
21
reasonable.
22
23
However, the apparent subsequent split of capital taxes between Remote
24
Communities and the grid-connected distribution network based on
25
relative number of cost centres is not appropriate and leads to a
26
significantly different result than if the allocation was done on the basis of
27
net book value. The HQD approach allocates 13.7%32 of the total capital
28
taxes associated with Distribution to Remote Communities, whereas using
28
HQD-10, Document 8, page 83 and 86, Question 32.9.
HQD-10, Document 8, page 83, Question 32.9.
30
HQD-9, Document 1, page 36, FC20 and HQD-10, Document 8, page 83.
31
HQD-10, Document 1, page 73, Question 44.2.
32
HQD-10, Document 8, page 84, Table R32.9-A, column 8.
29
14
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
net book value would allocate roughly 7% of the associated capital taxes
2
to Remotes33.
3
4
There is a further issue with the way in which capital taxes attributed to
5
Remote Communities are allocated to Production, Transmission and
6
Distribution. While over 70% of the net book value of the assets
7
associated with Remote Communities are Production related34, the “equal”
8
allocation to all three functions results in Production attracting only 1/3 of
9
the costs35.
10
11
Net book value (and preferably NBV including assets under construction)
12
should be used to allocate capital taxes between the grid-connected
13
distribution network and Remote Communities and, also, be used
14
subsequently to allocate capital taxes to the various Remote Communities’
15
sub-functions.
16
17
There is also an issue with the overall approach HQD uses to allocate
18
gross revenue taxes. Gross revenue taxes for Hydro-Québec (overall) are
19
calculated as 3% of total Hydro-Québec revenues (less a small
20
adjustment for revenues paid to other producers in the province)36. As a
21
result, one would expect revenue taxes to be allocated based on each
22
customer class’ contribution to HQD’s distribution revenues.
23
24
However, Hydro-Québec actually allocates gross revenue taxes between
25
its subsidiaries on the basis of net book value, excluding plant under
26
construction37. HQD contends that this is the appropriate way for the
27
costs to be allocated because the gross revenue tax is a tax in-lieu of
33
See HQD-9, document 1, page 29. Remotes NBV/Total NBV = 518.5/7624.2 = 6.8%. The
relative NBVs, including assets under construction are not reported.
34
HQD-9, Document 1, page 38, Table 11, row 9.
35
See HQD-10, Document 8, page 87.
36
HQD-10, Document 1, page 58
37
HQD-5, Document 11, page 3
15
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
municipal taxes. Hence, HQD argues that the gross revenue taxes should
2
be allocated the way municipal taxes would have been calculated and
3
allocated38.
4
5
Gross revenue taxes may be levied in-lieu of municipal taxes, however,
6
they should be allocated in a manner that reflects the basis on which they
7
were actually incurred. From a cost-causality perspective, if the key driver
8
or determinant for gross revenue taxes is “revenues” then this is the basis
9
on which they should be allocated to customers.
10
11
Hydro-Québec should be encouraged to alter the way it allocates revenue
12
taxes across its main lines of business so as to reflect the actual basis on
13
which the taxes are calculated. In the meantime, HQD should change its
14
basis for allocating gross revenue taxes such that it reflects the revenues
15
generated by each customer class, net of the cost of electricity supply and
16
transmission services.
17
18
This change would also address the current issues (similar to those that
19
were discussed previously for capital taxes) in the way revenue taxes are
20
allocated between Remote Communities and grid-connected distribution
21
and, then, within Remote Communities between Production, Transmission
22
and Distribution.
23
24
With respect to municipal and school taxes, there is a need for HQD to
25
clarify how the tax expense is allocated between the Distribution and
26
Customer Service functions39. Similarly, the allocation of 100% of the
27
Distribution function’s expense to grid-connected facilities requires further
28
explanation.
38
HQD-10, Document 8, page 93, Question 36.3 and HQD-10, Document 1, page 58, Question
34.2
39
See HQD-10, Document 8, page 86, Table R32.9C.
16
Evidence of
William Harper
1
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
o Corporate Overheads
2
3
The Hydro-Québec corporate overheads allocated to HQD ($ 37.5 M) include a
4
share of the costs of activities for the CEO/Board of Directors, the Auditor
5
General, Research and Strategic Planning, Corporate Affairs, Human Resources,
6
Finance and the Office of the Secretary General40. With the exception of Human
7
Resources, these corporate overheads are allocated to Distribution and
8
Customer Service functions and, subsequently, to the various Customer Service
9
sub-functions on the basis of the total cost of service associated with each
10
function (and sub-function) excluding the costs of electricity and fuel purchases
11
and transmission services. The corporate overhead costs allocated to
12
Distribution are subsequently allocated to the individual sub-functions on the
13
basis of net book value. Corporate costs for human resources are allocated
14
based on the salary costs assigned to each function and sub-function41. This
15
approach mirrors the methodology HQD proposes to use to allocate corporate
16
overheads between Hydro Quebec’s major business units42.
17
18
o Other Revenues
19
20
Revenues received for shared services provided to other Hydro-Québec
21
business units (e.g. TransÉnergie and Hydro-Québec Production) and to other
22
business units within HQD are allocated to Distribution and Customer Service
23
based on the organizational units (cost centres) providing the services43. Within
24
Distribution, the revenues are allocated to individual sub-functions on the basis of
25
net book value. Within the Customer Service function, the revenues are
26
assigned to the various sub-functions based on the cost centres that generated
27
the revenue44.
40
HQD-4, Document 7, page 8
HQD-9, Document 1, page 17 and page 36, Table 9, FC21.
42
HQD-4, Document 7.
43
HQD-10, Document 1, page 122, FC17 and HQD-10, Document 8, page 81-82.
44
HQD-10, Document 8, page 93, Question 36.1.
41
17
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
External revenues received from customers in the form of administration fees
2
and account-opening fees are assigned to the Customer Service - Other sub-
3
function. Other sources of external revenues are functionalized as follows:
•
4
Revenues received from third parties for pole rentals are allocated to the
5
Distribution sub-functions associated with medium and low voltage lines
6
on the basis on net book value of overhead line assets45,
•
7
Revenues from service agreements with other distributors are allocated to
the Distribution sub-functions on the basis of net book value46, and
8
•
9
Connection fees are assigned directly to the Distribution - Connections
sub-function47.
10
11
12
Revenue received from the Quebec government as compensation for the 1998
13
ice storm ($ 4.5 M) is allocated to the Distribution sub-functions associated with
14
the affected grid-connected assets on the basis of net book value48.
15
16
o Cost of Capital
17
18
HQD’s cost of capital is allocated to customers by applying the proposed rate of
19
return (9.917%) to the rate base allocated to each customer class49.
20
21
Functionalization of HQD’s Rate Base
22
23
o Fixed Assets
24
25
The bulk of HQD’s fixed assets consist of facilities and equipment that can be
26
directly assigned to the Distribution or Customer Service functions. Assets that
45
HQD-10, Document 1, pages 123-124, FC22.
HQD-10, Document 1, pages 123-124, FC 22.
47
HQD-10, Document 1, page 123, FC22 and HQD-10, Document 8, pages 75-76, Question
32.2.
48
HQD-10, Document 8, page 122, FC17.
49
HQD-9, Document 1, page 28, Table 1, column 3.
46
18
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
fall into this category include meters, distribution stations, operating centres,
2
overhead lines, underground lines, transformers, street lighting facilities and
3
remote community facilities.
4
5
The main issues associated with the functionalization of fixed assets are:
a) The allocation of the fixed assets associated with Distribution to the
6
7
individual sub-functions – as HQD’s accounts are not maintained in a form
8
(i.e. by voltage) that allows the costs to be directly assigned50, and
b) The allocation of general plant (“Actifs de soutien”) to functions and sub-
9
functions.
10
11
12
HQD uses the results of its minimum system analysis51 to determine the net book
13
value of the distribution assets associated with the Medium Voltage, Low Voltage
14
and Connections (“Branchements”) sub-functions.
15
16
In the case of general plant, HQD functionally separated the related assets
17
associated with the major cost centres, i.e., Networks, Customer Service and
18
Large Customer Marketing & Sales as part of the overall business unit separation
19
undertaken by Hydro Quebec in 199852. In the case of Networks-related General
20
Plant, a further separation is available as to the plant associated with Remote
21
Communities and that associated with the grid-connected network. The costs
22
associated with the grid-connected Distribution function are then allocated to the
23
sub-functions based on net book value. The costs associated with Remote
24
Communities and the Customer Service cost centres are allocated to sub-
25
functions based on an analysis of assets as of December 31, 200153. Finally, the
50
HQD-10, Document 8, pages 15-16,Question 10.3, Note 1.
HQD-9, Document 1, pages 43-58.
52
HQD-10, Document 8, pages 120-121, FC12 and HQD-10, Document 8, Question 26.1, pages
48-56.
53
HQD-10, Document 8, pages 49-54.
51
19
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
assets associated with Large Customer Marketing & Sales are allocated directly
2
to the Sales & Marketing sub-function54.
Comments
3
4
5
The minimum system analysis calculates customer-related costs for poles
6
lines and transformers associated with the Medium Voltage, Low Voltage
7
and Customer Connection sub-functions. These results are then used to
8
estimate the total costs associated with the three functions. In doing so, it
9
is assumed that:
10
•
Connections sub-function costs are all customer-related55, and
11
•
The facilities in both the Medium and Low Voltage sub-functions
12
have the same percentage split between customer-related and
13
demand-related costs56.
14
15
In response to OC interrogatory 43.1, HQD indicates that it assumed the
16
low-voltage and medium-voltage splits are the same as between
17
customer-related and demand-related costs because its accounting books
18
do not provide the level of information required to accurately track the
19
costs associated with low voltage and medium voltage lines. The
20
implications of this approach are discussed in the next section that deals
21
specifically with the classification of costs.
22
23
In any event, HQD should be encouraged to track more accurately the
24
cost of low voltage versus medium voltage facilities so to not have to rely
25
on its minimum system analysis to separate the costs of the two
26
Distribution sub-functions in its costs allocation study.
27
54
HQD-10, Document 8, pages 43-56.
HQD-10, Document 8, page 113, Question 44.1.
56
HQD-10, Document 8, page 112, Question 43.1.
55
20
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
Again, it is not readily apparent how the general plant associated with
2
those customer service cost centres57 that are not readily attributable to a
3
specific Customer Service sub-function were assigned. As discussed
4
previously, the most appropriate treatment for any such assets would
5
likely be to allocate them to all of the Customer Service sub-functions as
6
an “overhead” based on some general allocator.
7
8
o Unamortized Expenses
9
10
The following unamortized charges and credits are also included in the rate base
11
calculation:
12
•
Pension Benefits,
13
•
Other Post-Employment Benefits,
14
•
Staff Reduction Costs,
15
•
Regulatory Assets (Deferred Commercial Program costs), and
16
•
Government Reimbursement re: Ice Storm.
17
18
The first three items are related to the cost of employees and, as such, allocated
19
to the Distribution and Customer Service functions based on the salaries
20
associated with the cost centres attributable to each. Within the Distribution
21
function, the costs associated with Remotes are also determined based on its pro
22
rata share of total salaries. However, for the grid-connected Distribution sub-
23
functions, the costs of these items are allocated to sub-functions based on net
24
book value. In the case of Customer Service, the costs for these three
25
unamortized charges are also allocated to sub-functions based on the salaries
26
associated with each58.
57
Again, these cost centres include: a) the Bur. dir. Princ. SALC, b) Dir. Expertise et support
SALC, c) Dir. Développement et projets, d) Dir. Planification et contrôle, e) Dir. Projets Systemes
d’inform. Clientèle, and f) Gestion des actifs
58
HQD-10, Document 8, page 62-68, Question 31.1
21
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
The unamortized costs associated with past commercial programs are allocated
2
directly to the Customer Service - Sales & Marketing sub-function59.
3
4
Finally, the unamortized funds received from the Quebec government to offset
5
the cost of the ice storm are allocated to the grid-connected Distribution sub-
6
functions associated with lines on the basis of net book value60.
7
8
o Working Capital
9
10
Working capital requirements include both the cost of inventories and an
11
allowance for working funds. The total cost of inventories is based on the 13-
12
month average for the 2002-2003 period61. Inventories related to meters are
13
directly allocated to the Customer Service - Metering sub-function62. The
14
balance of the inventories, which are all related to Distribution activities, are
15
allocated between the Distribution sub-functions associated with grid-connected
16
facilities and Remotes based on an inventory analysis as of April 30, 200263. For
17
the grid-connected facilities, the value of inventories is allocated to individual
18
sub-functions on the basis of net book value of the associated fixed assets64.
19
20
The allowance for working funds covers cash requirements for a number of
21
items:
•
22
O&M Expenses
23
o Labour costs
24
o Labour-related deductions (payable to government)
25
o Other O&M expenses
•
26
Taxes
o Capital taxes
27
59
HQD-10, Document 8, page 67.
HQD-10, Document 8, pages 67-68.
61
HQD-6, Document 1, page 4, row « Matériaux, combustibles et fournitures ».
62
HQD-10, Document 8, page 96, Question 36.8.
63
HQD-10, Document 8, page 71, Question 31.3.
64
HQD-9, Document 1, page 36, FC16
60
22
Evidence of
William Harper
1
o Gross revenue taxes
2
o Municipal/School taxes
3
•
Electricity Commodity purchases
4
•
Transmission service purchases
5
•
Sales tax allowance
6
•
Bad debt allowance
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
7
8
HQD indicates that allowances for working funds are directly calculated for the
9
major cost centres: Networks, Customer Service and Large Customer Sales &
10
Marketing65. The costs attributed to Networks are then allocated between the
11
Remote Communities and the grid-connected distribution network on the basis of
12
to the direct OM&A costs (excluding capitalized OM&A), taxes and fuel
13
purchases associated with each and then further allocated to individual sub-
14
functions on the basis of NBV66.
15
16
In the case of Customer Service the working cash requirements associated with
17
Customer Care are allocated to sub-functions on the basis of direct OM&A costs
18
(excluding capitalized OM&A), taxes and fuel purchases associated with each
19
sub-function67. The working cash requirements associated with Large Customer
20
Sales & Marketing are directly assigned to the Customer Service – Sales and
21
Marketing sub-function.
22
Comments
23
24
25
In its information request responses, HQD has indicated how the working
26
funds requirements associated with O&M expenses and Taxes (including
27
sales taxes) are calculated in sufficient detail to determine the allocation to
28
the Networks, Customer Service and Large Customer Sales & Marketing
65
HQD-10, Document 1, page 121, FC 15 and HQD-10, Document 8, pages 68-69, Question
31.2.
66
HQD-10, Document 8, pages 69-70, Question 31.6
67
HQD-10, Document 8, page 69, Question 31.6
23
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
cost centres68. However, for the other items (i.e. electricity commodity and
2
transmission service purchases) there is insufficient detail to determine
3
how the allocation was performed.
4
5
This is particularly critical since, when it comes to the working fund
6
requirements, those associated with electricity commodity and
7
transmission service purchases are by far the largest contributors to the
8
total working funds requirement69. Ideally the working fund requirements
9
for these two items would be calculated separately for small/medium and
10
large volume customer classes based on the electricity commodity and
11
transmission service costs attributable to each and recognizing any
12
differences in billing cycles. In the alternative, if this cannot practically be
13
done, the working capital requirements associated with electricity
14
commodity and transmission purchases should be functionalized as
15
production and transmission costs respectively and, subsequently,
16
allocated to customers on the same basis as the revenue requirement
17
assigned to these two functions.
18
19
In addition it is not clear why the working fund requirements associated
20
with O&M and Taxes are allocated as a single cost item. It would be more
21
appropriate to:
§
22
Allocate the working funds associated with labour expenses to the
23
Distribution and Customer Service functions (and within Customer
24
Service to the individual sub-functions) on the basis of overall
25
labour costs by function (and sub-function),
§
26
Allocate the working funds associated with other O&M expenses on
the same basis as the underlying costs, and
27
68
69
HQD-10, Document 8, pages 36-41, Questions 23.3 & 23.4.
HQD-6, Document 6, page 3.
24
Evidence of
William Harper
§
1
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
Allocate the working funds associated with each of the tax
2
expenses on the same basis as the tax expenses themselves were
3
allocated.
4
Finally, it is clear from the information request responses that the analysis
5
of working fund requirements performed in support of the functionalization
6
of the rate base needs to be revised to reflect updated values for the
7
various working capital components, particularly those associated with
8
taxes70. The working capital requirements included in the rate base
9
calculation are currently overstated in light of the revised information71.
10
11
4.3 Classification and Allocation
12
13
HQD classifies the costs in each function (and sub-function) in order to determine
14
whether they are to be allocated to customer classes based on demand, energy,
15
customer count, or more specifically assigned. Then, in each case an
16
appropriate measure of demand, energy use, customer count is then used to
17
allocate the costs to the various customer classes72.
18
19
Classification and Allocation of HQD’s Revenue Requirement
20
21
o Production Function (Electricity Commodity and Fuel Purchases)
22
23
The allocation of HQD’s electricity commodity purchase costs were the subject of
24
an earlier proceeding73 and HQD has specifically assigned the proposed
25
commodity costs for customers served from Distribution Networks to customer
70
HQD-10, document 8, page 36, Questions 23.1 and 23.2.
While the total tax expense remains unchanged at $106.0 M – the expense associated with
municipal and school taxes has gone down significantly – from $31.8 M to $13.3 M. Since this is
the tax item with the largest net lead/lag value the requirement for working capital should
decrease.
72
Since the allocation of costs is closely linked to their classification, both steps will be addressed
at the same time.
73
File R-3477-2001.
71
25
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
classes based on the Régie’s decision74. In the case of Remote Communities,
2
the costs associated with the production of electricity have been allocated to the
3
customers served employing the same methodology as approved by the Régie
4
for the Heritage Pool electricity costs75.
5
Comment
6
7
8
The method approved by the Régie for allocating electricity commodity
9
cost to grid-connected customers is driven to a large extent by statutory
10
requirements that define the Heritage Pool, establish an average cost for
11
the associated electricity and provide direction as to how these costs are
12
to be allocated to customer classes76. It is understood that these statutory
13
requirements do not extend to the Remote Communities. As a result,
14
there is no reason to adopt the same methodology unless it is consistent
15
with the overall objectives of cost allocation.
16
17
There is no definitively correct way to allocate generation costs and
18
indeed different methodologies have been and are applied in various
19
jurisdictions. The methodology employed by HQD yields the appropriate
20
“relative” results for the various customer classes in that the lower a class’
21
load factor the higher its average cost (consistent with the need to recover
22
the cost of the generating facilities required to serve these customers over
23
fewer kWh). The approach may warrant further study in the future when
24
revenue to cost ratios are closer to unity but it is likely satisfactory for now.
74
D-2002-221.
HQD-9, Document 1, page 18, lines 18-20 and HQD-10, Document 1, page 139-141
76
Section 52.2 of the Act respecting the Régie de l’énergie.
75
26
Evidence of
William Harper
1
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
o Transmission Function
2
3
The cost of transmission services are classified as 100% demand related and
4
allocated to the various grid-connected customer classes on the basis of each
5
class’ contribution to the annual system peak (i.e. 1 CP)77. This approach mirrors
6
the basis on which HQD is billed by TransÉnergie for transmission services.
7
8
o Distribution-Distribution Stations/Operating Centres
9
10
Within the Distribution function, the costs associated with the Distribution
11
Stations & Operating Centres sub-function are classified as 100% demand-
12
related. The costs are allocated to the individual customer classes on the basis
13
of each class’ annual non-coincident peak (1 NCP). Classification of distribution
14
stations as 100% demand-related is consistent with practice elsewhere as is the
15
use of non-coincident peak (NCP) loads to allocate costs. However, the actual
16
non-coincident peak measure used varies by utility78.
17
18
o Medium Voltage, Low Voltage and Customer Connection Facilities
§
19
Classification
20
21
The costs in these sub-functions are classified between demand and customer-
22
related using the minimum system method. Under the minimum system method,
23
HQD identifies the costs of replacing the existing medium voltage facilities (lines
24
and poles), low voltage facilities (lines, poles and transformers) and connection
25
facilities (lines) with those required to provide a minimum level of service. The
26
costs associated with these facilities are deemed to be customer-related costs
27
and the balance of the costs associated with the facilities are deemed to be
28
demand-related. The results are then used to classify various miscellaneous
77
D-2002-95
For example, Hydro One Networks uses 12 NCP to allocate distribution station costs to
customer classes.
78
27
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
assets included in the sub-function such as land and land rights, regulators and
2
condensers, circuit breakers and switchgear79. The method is applied separately
3
for overhead and underground facilities.
4
Since HQD’s accounting records do not track the costs of lines or poles by
5
voltage a number of assumptions had to be made in the analysis:
6
i.
related.
7
8
ii. The split between customer-related and demand-related costs is the same for
medium and low voltage system poles.
9
10
The costs allocated to the Connections sub-function are 100% customer-
iii. The split between customer-related and demand-related costs is the same for
medium and low voltage lines.
11
12
In fact, as noted in the previous section, it is these assumptions that allow HQD
13
to determine the total costs (i.e. NBV) associated with the medium voltage, low
14
voltage and customer connection sub-functions80.
15
16
Furthermore, since the costs for the minimum system are based on current
17
replacement costs and the values for poles, lines and transformers recorded on
18
HQD’s books are historical costs there was a need to discount the replacement
19
costs in order to account for inflation. This was done by calculating the average
20
age of each type of asset (i.e. poles, transformers, etc.) and then applying the
21
Handy-Whitman Index of Public Utility Construction Costs to adjust the current
22
value replacement costs for the time difference81. Overall the analysis results in
23
32% of the Medium Voltage sub-function’s costs and 39% of the Low Voltage
24
sub-function’s costs being classified as customer-related82.
79
HQD-9, Document 1, page 57, Table 4.
Please refer to the discussion on page 19.
81
HQD-9, Document 1, pages 49-50, Section 2.4 and HQD-10, Document 8, pages 103-106,
Question 40.
82
HQD-9, Document 1, page 31, Table 4.
80
28
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
Comments
1
2
3
HQD indicates that the average age of the equipment associated with
4
overhead facilities is 12-13 years and for underground facilities it is slightly
5
less at 10-11 years83. In making its inflation adjustment for each type of
6
asset, HQD assumes all the facilities are of the same age (i.e. built in the
7
same year – somewhere between 1989 and 1992 depending upon the
8
assets concerned) and applies the change in the Handy-Whitman index
9
for the intervening period. Implicit in this calculation is the assumption that
10
the rate of inflation for the years before the period 1989-1992 has been
11
roughly the same as for the years after 1989-1992. HQD has not
12
provided the annual values for the Handy-Whitman index, as requested in
13
OC interrogatory 40. However a review of the CPI index for Canada
14
indicates that the average rate of inflation between 1990 and 2002 was
15
2.1%, whereas the average rate between 1980 and 2002 was 3.7%84.
16
There is a need for HQD to review the history of the Handy-Whitman index
17
to determine if a similar trend exists. If such is the case, then HQD’s
18
methodology will understate the magnitude of the adjustment that must be
19
made to account for inflation and, thereby, overstate the value of the
20
customer-related costs associated with each function.
21
22
Minimum system methodologies vary across jurisdictions in terms of how
23
the minimum sized poles, conductors, transformers, etc. are determined
24
and how the assets are grouped for reporting purposes. However, it is
25
possible to make some comparisons. At an overall level, HQD’s analysis
26
results in roughly 38%85 of distribution poles, lines, transformers and
27
related equipment being classified as customer-related – a percentage
28
which is comparable to that for studies done by other Canadian utilities.
83
HQD-9, document 1, page 54
The values are based on Bank of Canada data found at:
http://www.bankofcanada.ca/en/inflation_calc.htm
85
See HQD-9, Document 1, page 31.
84
29
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
2
The assumption that customer connections are 100% customer related is
3
a common, but not universal practice. In some jurisdictions, a standard
4
demand/customer split is derived for all lines (i.e., medium voltage, low
5
voltage and connections)86; while for others a portion of connections is
6
specifically classified as demand-related. As noted earlier, HQD’s
7
methodology first calculates customer-related costs and then treats the
8
balance of the capital costs associated with distribution poles, lines and
9
transformers as demand-related. As a result, classifying a portion of
10
connection costs as demand-related will not increase the overall
11
proportion of costs considered to be demand-related, but rather increase
12
the total costs associated with connections and thereby reduce the
13
demand-related costs (and thereby the total costs) attributable to medium
14
and low voltage lines.
15
16
Similarly, changes to the assumption that the split between customer and
17
demand costs is the same for medium and low voltage lines and for
18
medium and low voltage poles would not impact on total customer or total
19
demand costs. Rather, changes to this assumption would impact on the
20
total costs (and the total demand costs) attributed to low voltage versus
21
medium voltage assets.
22
23
In both cases, since demand costs associated with the low voltage sub-
24
function are allocated to a different set of customer classes than those
25
associated with the medium voltage sub-function these assumptions have
26
a direct impact on the total costs allocated to each customer class. HQD
27
should be directed to investigate further these two assumptions,
28
particularly the use of a common customer/demand split for both the low
29
voltage and medium voltage sub-functions.
86
This approach is taken in situations where the accounting records do not allow for connection
(or secondary) service lines to be identified separately.
30
Evidence of
William Harper
1
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
o Medium Voltage, Low Voltage and Customer Connection Facilities
§
2
Allocation
3
4
The demand-related costs in the Medium and Low Voltage sub-functions are
5
allocated to customer classes on the basis of each class’ non-coincident peak (1
6
NCP). Customer-related costs are allocated to the various customer classes
7
based on the number of customers in each class87. For Medium Voltage and
8
Customer Connections the demand and customer allocators are based on the
9
total customers in each class; while for Low Voltage facilities the allocators reflect
10
the number of customers in each class served at low voltage and their
11
associated 1 NCP.
12
13
Comments
14
15
The customer load characteristics used to allocate the demand-related
16
portions of Distribution function will depend upon the load diversity that is
17
present in the distribution system at the point where the equipment whose
18
costs are being allocated is located. The distribution stations included in
19
the Stations and Operating Centres sub-function transform power between
20
various medium voltage levels (e.g. 25 kV and 12 kV) and, as a result, the
21
load diversity at HQD’s distribution stations will be fairly high. The same is
22
true for the loads actually carried by the medium voltage lines. In such
23
circumstances common utility practice is to allocate the associated
24
demand-related distribution costs to customer classes based on their
25
individual class peaks (i.e., NCP) and HQD follows this practice.
26
However, HQD has not been able to provide sufficient information to
27
determine whether the use of 1 NCP is appropriate or whether the use of
28
customer class peaks over a number of months would be more
29
appropriate88.
87
88
See HQD-10, Document 1, pages 126-132 for data regarding the allocators.
See HQD-10, Document 8, page 57, Question 28.2.
31
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
For facilities closer to the customer, such as secondary feeders and line
2
transformers, the load diversity will be much lower. As a result, in these
3
situations, the demand-related costs of the facilities are often89 allocated
4
to customer classes based on the sum of the individual customer’s
5
maximum demands. HQD’s proposed cost allocation methodology does
6
not make this distinction.
7
8
Also, customer connection costs are frequently allocated to customer
9
classes based on a weighted as opposed to strict numerical customer
10
count. The weighting factor reflects the cost differential in servicing
11
different classes of customers (i.e., the higher service costs typically
12
associated with larger power customers).
13
14
Finally, there is a load carrying capability associated with the minimum
15
system. HQD has indicated that it is in the order of 1-2 kVA (or 1-2 kWs)
16
per connection90. Since the costs associated with this minimum load are
17
allocated to customer classes as a customer-related cost it is necessary to
18
adjust the 1 NCP values used to allocate demand related costs in order to
19
avoid double counting. This is generally done by reducing the 1 NCP
20
value for each customer class by the product of the per customer load
21
carrying capability of the minimum system and the number of customers
22
served. However, HQD has not done so. Furthermore, making this
23
adjustment would have a material impact on the relative 1 NCP values
24
used for each customer class (e.g. using a 2 kW/customer load carrying
25
capability reduces the overall percentage of costs allocated to the
26
Domestic customer classes by roughly 10 percentage points when applied
27
to the Medium Voltage sub-function – see Schedule 1).
28
89
As indicated earlier, in some circumstances utilities do not separate the minimum system costs
of secondary and primary feeders and, in these circumstances NCP is used to allocate the costs
of both.
90
HQD-10, document 1, pages 144-145.
32
Evidence of
William Harper
1
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
o Distribution - Streetlights/Sentinel Lighting
2
3
The costs associated with Streetlights/Sentinel Lighting are allocated specifically
4
to that customer class91.
5
6
o Customer Service-Customer Care & Accounting
7
8
In the case of the Customer Care & Accounting, the costs for the small/medium
9
power customers92 and the large volume customers are segregated ($346.9 M
10
and $ 1.2 M respectively) and each is classified as customer-related. The costs
11
are then allocated based on the number of customers by customer class93.
12
Comments
13
14
15
Customer Care & Accounting costs include significant costs associated
16
with meter reading and billing94. However, as indicated in response to OC
17
interrogatories 32.5 and 32.695, not all small/medium power customers
18
have either their meters read or bills issued with the same frequency.
19
Furthermore, the billing process for medium power customers is typically
20
more costly as it involves both demand and energy charges. Generally,
21
utilities separate out the costs associated with meter reading and billing
22
and use an allocation factor that weights the number of customers in each
23
class by a factor that reflects the relative meter reading and billing costs
24
per customer across the various customer classes. HQD has not done
25
this, but rather has allocated all costs associated with meter reading and
91
HQD-9, Document 1, pages 33-34, Table 6, column 8 for rate base and Table 7, column 10 for
annual revenue requirement.
92
Note : The customer care & accounting costs associated with Remotes are also identified
separately and also allocated based on number of customers.
93
See HQD-10, Document 1, page 127.
94
See HQD-9, Document 1, page 9, lines 3-6 and HQD-10, document 1, page 104.
95
HQD-10, Document 8, pages 78-70.
33
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
billing for small/medium power customers strictly on the basis of customer
2
count.
3
4
Also, it is not transparent how the $1.2 M in Customer Care & Accounting
5
costs associated with large volume customers was determined. However,
6
the value is directionally correct on a per customer basis (i.e., on a per
7
customer basis it is significantly higher; as one would expect, than that
8
associated with small/medium volume customers.
9
10
Overall, the process used to split the costs assigned to this function
11
between small/medium power customers and large volume customers
12
could be more clearly documented. For example, it would be useful if
13
HQD were to indicate how the cost centres described in HQD-4
14
(Documents 5.2 & 5.3) are:
§
15
Assigned to the Customer Care and Accounting, Metering, and
Marketing and Sales sub-functions, and
16
§
17
Attributed to small/medium power versus large volume customers,
in the case of the Customer Care and Accounting sub-function.
18
19
20
o Customer Service - Meters
21
22
In the case of Meters, the costs are also classified as customer-related.
23
However, in this instance, HQD does use a weighted customer allocation factor
24
to reflect the difference in the cost of meter used by customer class96.
25
26
o Customer Service - Sales & Marketing
27
28
The costs associated with the Customer Service – Sales & Marketing sub-
29
function are first split between those incurred for small/medium power customers
96
HQD-10, Document 1, pages 128-129.
34
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
($ 82.0 M) and large power customers ($ 23.7 M). For small/medium power
2
customers the costs are further segmented into those incurred in support of
3
marketing programs (“Commercialisation”) and those incurred to support sales &
4
after sales service (“Ventes en territoires”) to commercial, institutional and
5
industrial customers (i.e., non-domestic customers). Similarly, for large volume
6
customers, the costs are segmented into those incurred for sales promotion
7
programs and other customer service related costs. The costs of sales
8
promotion programs for small/medium and large volume customers are each
9
classified as energy-related and allocated to individual customer classes based
10
on the kWh sales by class. The balance of the costs attributed to small/medium
11
power customers (i.e., those for “Ventes en territoires”) are allocated to the
12
small/medium power non-domestic customer classes on the basis of energy use.
13
The balance of the Sales and Marketing costs associated with large power
14
customers are allocated to the large power rate classes on the basis of customer
15
count97.
16
Comments
17
18
19
The process used to split the costs assigned to this function between
20
small/medium power customers and large volume customers could be more
21
clearly documented, as could the determination of the costs associated with
22
marketing programs versus other sales support activities. For example, it
23
would be useful if HQD were to indicate how the cost centres described in
24
HQD-4 (Documents 5.2 & 5.3) are:
§
25
Assigned to the Customer Care and Accounting, Metering, and
Marketing and Sales sub-functions,
26
§
27
Attributed to small/medium power versus large volume customers,
in the case of the Marketing and Sales sub-function, and
28
§
29
97
Associated with marketing programs versus other sales activities.
HQD-10, document 1, page 131, Table 76.1F.
35
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
Also, it is not clear how the amortization of the costs associated with various
2
commercial programs was allocated to customer classes. While the costs
3
can be clearly associated with particular customer classes98, they appear to
4
have been allocated (along with the other costs in this sub-function) to various
5
customer classes.
6
7
o Customer Service - Other
8
9
In the case of the Customer Service - Other sub-function, revenues received
10
from customers, the internal costs of the electricity supply business unit and the
11
balance of the costs are each treated differently.
12
13
Non-rate customer revenues (e.g. late payment fees) derived from large power
14
customers are classified as customer-related and specifically allocated to the
15
large volume customer classes on that basis. Customer revenues from
16
small/medium power customers are allocated to customer classes based on the
17
relative non-rate revenues received from each of the small and medium power
18
customer classes in 2001.
19
20
The internal costs of the electricity supply business unit are allocated to customer
21
classes based on their electricity commodity costs.
22
23
Finally, the remaining costs in the sub-function (i.e., HQD overheads) are
24
allocated to customer classes based on the total costs allocated to each class
25
(excluding electricity commodity purchase costs and transmission service costs).
26
27
Comments
28
29
It was not readily transparent, until the responses to the Information
30
Requests had been received, that the internal costs incurred by HQD to
98
See HQD-10, Document 8, page 35, Question 22.2.
36
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
obtain electricity commodity supply are actually allocated to each
2
customer class based on their commodity cost of electricity. For purposes
3
of transparency, it would be preferable if the costs for HQD’s electricity
4
supply business unit were functionalized as “Production” costs.
5
6
The allocation base for HQD’s overhead costs is based on the total costs
7
allocated to each customer class, excluding electricity commodity and
8
transmission service costs but including the fuel purchase costs for
9
Remote Communities. In contrast the allocation base used for Hydro-
10
Québec’s corporate overheads is based on all the costs allocated to each
11
function, excluding electricity commodity purchases, transmission service
12
costs and fuel purchase costs99. There is no apparent rationale for the
13
different treatment of the two types of “overhead” costs. Indeed, given
14
that the allocation of the Hydro-Québec corporate overheads is based on
15
the proposed methodology for the allocation of such costs between
16
business units, it would be appropriate to allocate the HQD overheads on
17
a similar basis.
18
19
Classification and Allocation of HQD’s Rate Base
20
21
o Distribution Sub-Functions
22
23
The costs assigned to the various Distribution sub-functions of HQD’s rate base
24
are classified and allocated to customer classes generally in the same manner as
25
was used for the revenue requirement:
26
•
The rate base costs in the Distribution - Distribution Stations & Operating
27
Centres sub-function are classified as demand related and allocated to
28
customer classes based on 1 NCP.
99
See HQD-10, Document 1, page 138, Question 76.2 and HQD-9, Document 1, page 17, lines
9-12.
37
Evidence of
William Harper
1
•
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
The rate base costs in the Distribution sub-functions associated with Medium
2
Voltage, Low Voltage and Customer Connections are classified as customer-
3
related and demand-related using the minimum system method. The
4
demand-related rate base costs associated with the Medium Voltage and Low
5
Voltage sub-functions are then allocated to customer classes based on the 1
6
NCP for each class100. Customer-related costs for each of the three sub-
7
functions are allocated to customer classes based on the number of
8
customers in each class that utilize the facilities.
9
•
The rate base costs associated with Streetlights/Sentinel Lighting are
allocated specifically to the Street Lighting customer class.
10
11
Comments
12
13
14
The same comments that were made with respect to the minimum system
15
methodology – as used to classify and allocate the revenue requirement –
16
also apply for the classification and allocation of the rate base.
17
Specifically, the methodology as applied:
§
18
Potentially overstates customer-related rate base costs – due to the
way the inflation adjustment is made to replacement costs,
19
§
20
Arbitrarily establishes the demand-related cost, and hence the total
21
costs, associated with the Medium Voltage, Low Voltage and
22
Customer Connection sub-functions, and
§
23
Fails to recognize the load carrying capability inherent in the
24
customer-related facilities, in the allocation of demand-related
25
costs.
100
The 1 NCP values for Medium and Low Voltage differ, as the former includes all customers in
each rate class, while the later only includes those customers served at low voltage. See HQD10, document 1, page 126.
38
Evidence of
William Harper
1
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
o Customer Service - Customer Care & Accounting
2
3
The rate base costs associated with the Customer Service - Customer Care &
4
Accounting sub-function are allocated to customer classes in the same
5
proportion as the revenue requirement costs associated with the sub-function
6
were101.
7
Comments
8
9
10
Any change in the allocation of the revenue requirement costs associated
11
with this function to customers would also impact on the allocation of the
12
rate base. In particular, while the allocation factors as currently derived
13
recognize the higher cost customer for billing large power customers, they
14
do not capture the typically higher costs associated with billing medium
15
power versus small power customers. The rate base items associated
16
with customer meter reading, accounting and billing should be separated,
17
to the extent possible, and allocated to customer classes using a weighted
18
customer allocation factor that reflects the relative costs of service to the
19
various customer classes.
20
21
o Customer Service - Meters
22
23
The rate base costs associated with Customer Service - Meters are classified as
24
customer-related and allocated to customer classes using the same weighted
25
customer allocation factors as were developed for purposes of allocating the
26
revenue requirement costs associated with the function102.
101
See HQD-9, Document 1, page 33, Table 6, column 10 and HQD-10, Document 1, page 127,
Question 76.1, columns 14-15.
102
See HQD-9, Document 1, page 33, Table 6, column 11 and HQD-10, Document 1, pages 128129, Question 76.1.
39
Evidence of
William Harper
1
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
o Customer Service - Sales & Marketing
2
3
The rate base costs associated with the Customer Service – Sales & Marketing
4
sub-function are first split into those associated with serving small/medium power
5
customers, those associated with large volume customers and those related to
6
energy efficiency103.
7
8
For small/medium power customers, the costs are then further segregated into
9
those incurred for sales promotion programs and customer sales & after sales
10
support costs (“Ventes en territoires”). The costs of sales promotion programs
11
are allocated to the individual customer classes based on kWh sales by class.
12
The other customer sales/marketing costs are associated with sales support for
13
non-residential customer classes and are allocated specifically to these classes
14
on the basis of kWh sales.
15
16
For large volume customer, the costs are also segmented into those incurred for
17
sales promotion programs and other customer sales support costs. The costs of
18
sales promotion programs are (again) allocated to the individual customer
19
classes based on kWh sales by class. However, the other customer sales
20
support costs are allocated to the individual large power customer classes based
21
on the number of customers by customer class.
22
23
Rate base costs associated with encouraging the effective use of energy are
24
allocated to all customer classes based on the energy sales (kWh) by customer
25
class104.
103
104
HQD-10, Document 1, page 130, Table R76.1-E.
HQD-10, Document 1, page 130, Table R76.1E, columns 16-18.
40
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
Comments
1
2
3
The derivation of the breakdown between “sales promotion programs”,
4
other customer sales & marketing costs and the costs associated with
5
encouraging the effective use of energy is not well documented. It would
6
be useful if HQD were to indicate how the cost centres described in HQD-
7
4 (Documents 5.2 & 5.3) are:
8
§
Assigned to the Marketing and Sales sub-function,
9
§
Associated with sales promotion programs versus other sales
10
support activities in the case of the Large Customer Marketing &
11
Sales related cost centres, and
§
12
Associated with sales promotion programs versus sales & after
13
sales support programs in the case of the Customer Service related
14
cost centres.
15
16
Also, it is not clear how the unamortized costs associated with various
17
commercial programs were allocated to customer classes. While the
18
costs can be clearly associated with particular customer classes105, they
19
appear to have been allocated (along with the other costs in this sub-
20
function) to various customer classes.
21
22
o Customer Service-Other
23
24
The functionalized rate base provided in HQD’s Application did not have any
25
costs associated with this sub-function. However, in response to an information
26
request, HQD has indicated that there is $2.5 M currently included in the rate
27
base for the Customer Service – Sales & Marketing sub-function106 which will be
28
re-functionalized to Customer Service - Other.
105
106
HQD-6, Document 5, page 2.
HQD-10, Document 8, page 89, Question 32.11.
41
Evidence of
William Harper
1
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
5.0 Overall Conclusions
2
3
HQD’s proposed cost allocation methodology generally follows accepted industry
4
practices. However, as identified in the preceding discussion there are specific
5
areas where:
6
•
considerations of cost causality,
7
8
•
11
Clarification and further documentation is required as to how the proposed
methodology works, and
9
10
Changes are required to the methodology in order to more accurately reflect
•
Further analysis/work is required to confirm the appropriateness of the
proposed methodology.
12
13
The requirements are summarized below and the Régie should direct HQD to
14
undertake the recommended changes, documentation and analyses and
15
incorporate the results into their Phase II filing for 2004-2005 rates.
16
17
1.0 Recommended Changes to HQD’s Cost Allocation Methodology
18
19
Functionalization of the Revenue Requirement
20
21
1.1 Capital Taxes
22
23
In order to more closely reflect the basis on which capital taxes are actually
24
incurred, their allocation to Remote Communities (versus grid-connected
25
distribution network facilities) and the subsequent allocation to individual Remote
26
Community sub-functions should be changed and performed on the basis of net
27
book value (preferably including assets under construction).
42
Evidence of
William Harper
1
1.2
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
Gross Revenue Taxes
2
3
Similarly, to more closely reflect the basis on which Hydro Quebec’s gross
4
revenue taxes are actually calculated, their allocation to customer classes should
5
be based on distribution revenues or total allocated costs – excluding the cost of
6
electricity commodity purchases and transmission services.
7
8
1.3 Electricity Supply Procurement Costs
9
10
In order to improve the transparency of the proposed cost allocation
11
methodology, the internal costs incurred by HQD for procuring electricity supply
12
(i.e. the costs associated with the electricity supply cost centre107 - including
13
shared services costs and allocated overheads) should be functionalized as
14
Production.
15
16
Functionalization of the Rate Base
17
18
1.4 Working Fund Requirements
19
20
Again, in order to improve the transparency of the proposed cost allocation
21
methodology, the working fund requirements associated with the electricity
22
commodity purchases and transmission services should be assigned to the
23
Production and Transmission functions respectively.
24
25
In order to more closely reflect cost causality, the working fund requirements
26
associated with labour expenses, other O&M expenses, capital taxes, gross
27
revenue taxes, and municipal and school taxes should each be allocated
28
separately to functions. In each case, the functionalization of the working fund
107
See HQD-4, Document 5.
43
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
requirements should be based on the same methodology as was used to allocate
2
the associated revenue requirement component.
3
4
In addition, there is a need to update the calculation of the working fund
5
requirements included in the Application in order to reflect the actual expense
6
levels included in the revenue requirement.
7
8
Classification and Allocation of Revenue Requirement
9
10
1.5 Medium Voltage and Low Voltage Sub-Functions
11
12
The 1 NCP customer class values used to allocate the demand-related costs for
13
the Medium Voltage and Low Voltage sub-functions need to be adjusted to
14
reflect the load carrying capability of the minimum system. This can be done by
15
reducing the 1 NCP value for each customer class by the load carrying capability
16
included in the customer-related costs for each customer class (which is
17
determined as the product of the number of customers in the class and the per
18
customer load carrying capability of the minimum system).
19
20
1.6 Customer Care & Accounting Sub-Function
21
22
The costs associated with customer meter reading, billing and accounting should
23
be separately identified and allocated to customers based on a weighted
24
customer count allocation factor that captures the relative cost of these activities
25
for the various customer classes.
26
27
1.7 HQD Overhead Costs
28
29
The allocation of HQD overheads to customer classes should be changed so it is
30
consistent with the allocation base used to allocate Hydro-Québec’s corporate
31
overheads (i.e., exclude purchased fuel costs for Remote Communities).
44
Evidence of
William Harper
1
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
Classification and Allocation of the Rate Base
2
3
1.8 Medium and Low Voltage Distribution Sub-Functions
4
5
The 1 NCP customer class values used to allocate the demand-related rate base
6
costs for the Medium Voltage and Low Voltage sub-functions also need to be
7
adjusted to reflect the load carrying capability of the minimum system. This can
8
be done by reducing the 1 NCP value for each customer class by the load
9
carrying capability included in the customer-related costs for each customer class
10
(which is determined as the product of the number of customers in the class and
11
the per customer load carrying capability of the minimum system).
12
13
1.9 Customer Care & Accounting Sub-Function
14
15
The rate base costs associated with customer meter reading, billing and
16
accounting should also be separately identified and allocated to customers based
17
on a weighted customer count allocation factor that captures the relative cost of
18
there activities for the various customer classes.
19
20
2.0 Aspects of the Proposed Cost Allocation Methodology Requiring
21
Further Documentation
22
23
Functionalization of the Revenue Requirement
24
25
2.1 Treatment of Cost Centres
26
27
There is a need for HQD to more clearly document how the costs (i.e., OM&A,
28
depreciation, shared services, internal revenues, other revenues) attributed to its
29
various cost centres (as described in HQD-4, Document 5 and Documents 5.1-
30
5.3) are functionalized. More specifically, for those cost centres associated with
31
Networks: which ones are assigned directly to the grid-connected Distribution
45
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
sub-functions; which ones are assigned directly to Remote Communities sub-
2
functions; and, whether there was a need to allocate the costs included in any of
3
the cost centres either between grid-connected Distribution and Remote
4
Communities or among the Remote Communities’ sub-functions.
5
6
Similarly, for the Customer Service and Large Customer Marketing & Sales cost
7
centres, which ones are directly assigned to a Customer Service sub-function (or
8
Remote Communities) and whether there was any need to allocate the costs
9
included in any of these cost centres across sub-functions. With respect to the
10
later issue, there is a specific need to clarify the treatment of the following cost
11
centres: a) the Bur. dir. Princ. SALC, b) Dir. Expertise et support SALC, c) Dir.
12
Développement et projets, d) Dir. Planification et contrôle, e) Dir. Projets
13
Systemes d’inform. Clientèle, and f) Gestion des actifs.
14
15
2.2 Municipal and School Taxes
16
17
There is a need for HQD to clarify how municipal and school taxes were
18
assigned to the Distribution and Customer service functions and, then, within the
19
Distribution function, between grid-connected sub-functions and Remote
20
Communities.
21
22
Functionalization of the Rate Base
23
24
2.3 Treatment of Cost Centres
25
26
Similar to the issue raised in 5.2.1, there is a need for HQD to more clearly
27
document how the rate base costs (i.e., specific fixed assets and general plant)
28
attributed to its various cost centres (as described in HQD-4, Document 5 and
29
Documents 5.1-5.3) are functionalized. More specifically, for the Customer
30
Service and Large Customer Marketing & Sales related cost centres which ones
31
are directly assigned to a Customer Service sub-function (or Remote
46
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
Communities) and whether there was any need to allocate the assets associated
2
with any of these cost centres across sub-functions. With respect to the later
3
issue, there is specific need to clarify the treatment of the following cost centres:
4
a) the Bur. dir. Princ. SALC, b) Dir. Expertise et support SALC, c) Dir.
5
Développement et projets, d) Dir. Planification et contrôle, e) Dir. Projets
6
Systemes d’inform. Clientèle, and f) Gestion des actifs.
7
8
2.4 Working Fund Requirements
9
10
It is not clear how the working fund requirements associated with electricity
11
commodity and transmission service purchases were assigned to the various
12
functions. As noted in 5.1.4, these costs should be treated as Production and
13
Transmission function costs respectively.
14
15
Classification and Allocation of the Revenue Requirement
16
17
2.5 Customer Care & Accounting Sub-Function
18
19
Consistent with the recommendations set out in 5.2.1, it would be useful if HQD
20
more clearly documented the process used to split the costs assigned to this
21
function between small/medium power customers and large volume customers.
22
For example, HQD should indicate how the cost centres described in HQD-4
23
(Documents 5.2 & 5.3) are:
24
§
Assigned to the Customer Care and Accounting sub-function, and
25
§
Attributed to small/medium power versus large volume customers.
26
27
2.6 Sales & Marketing Sub-Function
28
29
Consistent with the recommendations in 5.2.1, it would be useful if HQD more
30
clearly documented the process used to split the costs assigned to this function
31
between small/medium power customers and large volume customers and also
47
Evidence of
William Harper
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
1
how the costs associated with marketing programs versus other sales support
2
activities were determined. For example, it would be useful if HQD were to
3
indicate how the cost centres described in HQD-4 (Documents 5.2 & 5.3) are:
4
§
Assigned to the Marketing and Sales sub-function,
5
§
Attributed to small/medium power versus large volume customers,
and
6
§
7
Associated with marketing programs versus other sales activities.
8
9
Also, HQD should more clearly explain how the amortization of the costs
10
associated with various commercial programs was allocated to customer classes
11
and why they were not directly assigned.
12
13
Classification and Allocation of the Rate Base
14
15
2.7 Sales & Marketing Sub-Function
16
17
It would be useful if HQD were to indicate how the cost centres described in
18
HQD-4 (Documents 5.2 & 5.3) are:
19
§
Assigned to the Marketing and Sales sub-function,
20
§
Associated with sales promotion programs versus other sales support
21
activities in the case of the Large Customer Marketing & Sales related
22
cost centres, and
23
§
Associated with sales promotion programs versus sales & after sales
24
support programs in the case of the Customer Service related cost
25
centres.
26
27
Also, HQD should more clearly explain how the unamortized costs associated
28
with various commercial programs were allocated to customer classes and why
29
they were not directly assigned.
48
Evidence of
William Harper
1
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
3.0 Issues Requiring Further Study/Analyses
2
3
Functionalization
4
5
6
3.1 Identification of Low Voltage, Medium Voltage and Connections SubFunction Assets
7
8
HQD should be encouraged to review its accounting records and determine
9
whether the cost of medium voltage, low voltage and customer connections can
10
be separately established and tracked.
11
12
Classification and Allocation
13
14
3.2 Minimum System Calculations
15
16
HQD should be directed to undertake an analysis of the Handy-Whitman Index’s
17
historical values to determine if there is any difference between the pre and post
18
1989-1992 values and, if so, what impact the difference would have on the
19
determination of customer-related costs.
20
21
HQD should also be directed to undertake further analysis to substantiate its
22
assumptions that:
23
o Customer Connection costs are 100% demand-related, and
24
o The demand/customer cost split is the same for Medium and Low Voltage
25
facilities (i.e., poles and lines).
49
Evidence of
William Harper
1
Hydro-Québec Distribution
Régie File R-3492-2002 Phase I
3.3 Determination of NCP Allocators
2
3
HQD should be directed to compile the necessary system loading data (e.g.,
4
monthly peak loads by delivery point) in order to establish that1 NCP is the
5
appropriate allocation factor for the Distribution sub-functions’ demand-related
6
costs.
50
SCHEDULE 1
(1)
Rate
Class
D
DH
DT
TOTAL
DEMAND ALLOCATOR ADJUSTMENT BASED ON
MINIMUM SYSTEM LOAD CARRYING CAPABILITY
( 2 KW PER CUSTOMER)
(2)
(3)
(4)
MT
%
MT
1 NCP
# Cust
14891
58.08%
2942066
2
0.01%
198
646
2.52%
117418
15538
60.61%
3059682
(5)
(6)
MT
%
Adj 1 NCP
9007
47.58%
2
0.01%
411
2.17%
9419
49.75%
G
G9
M
LIGT
BT
TOTAL
3097
371
4708
136
398
8710
12.08%
1.45%
18.36%
0.53%
1.55%
33.97%
269396
3507
11095
5833
3048
292879
2558
364
4686
124
392
8124
13.51%
1.92%
24.75%
0.66%
2.07%
42.92%
L
H
LD
SPEC
TOTAL
1383
5
0
0
1388
5.39%
0.02%
0.00%
0.00%
5.41%
142
1
0
0
143
1383
5
0
0
1388
7.30%
0.03%
0.00%
0.00%
7.33%
GRAND TOTAL
25637
3352704
18931
Notes:
(1) Source: HQD-10, document 1, page 126, Table R76.1A
(3) Source: HQD-10, document 1, page 126, Table R76.1A
(5) Based on Column (2) - 2 kW*Column (4)
51