Q1)
After an utility or local distribution company (LDC) has sent in an application to the
Ontario Energy Board for Unbundled Rates using the Rate Handbook and RUD Model,
what happens?
A1)
Once the Board receives the LDC’s Application, the Application it will be assigned a
Board file or docket number. The Application should include the LDC’s evidence,
background material (RUD Model Spreadsheets) and the completed draft Notice (found in
Appendix B of the Handbook). A Board staff member is assigned to the application and
this staff member will check to see that the application is complete, basically going
through the checklist found in the Handbook at Appendix F and reviewing the draft
Notice of Application and Notice of Written Hearing (for publication) that is to be
submitted with the application. (A template of the Notice can be downloaded from the
Board’s Website and customized by the specific LDC. The LDC should fill out the
appropriate sections of the draft Notice and include it with its application).
In particular, the Notice information regarding the rate impact on a representative
residential customer would be reviewed for accuracy and applicability. The LDC should
indicate the origin of the rate impact percentage example with a reference to the RUD
spreadsheet. If there are questions or concerns, the assigned Board staff member would
contact the LDC contact person as indicated on the application.
After review of the draft Notice, the Board Secretary will issue a “Letter of Direction” and
a final Notice. The LDC will be required to publish the Board issued Notice in the local
newspaper with the widest publication. For LDCs located in designated french language
areas, a french language version of this Notice must also be published in one issue of a
local french language paper. If the LDC services a french language designated area, the
LDC will be notified and a french translated Notice will be provided. The LDC will be
required to provide the Board with the date of publication. Further details will be
provided in the Board’s “Letter of Direction”.
After filing an Application, the LDC is required to have complete copies of the evidence
package, the Application, and any additional material made available for convenient public
perusal at the LDC’s head office. The LDC will also be required to provide a copy of its
submissions to any intervenor upon request.
Persons or groups who desire to intervene or comment on the application have 14 days
from the date of publication to register their intent to intervene or comment. Depending
on the level of response, the Board will determine whether the application will face no
hearing (only the applicant’s evidence will be considered by the Board), a written hearing
(only written submissions from the applicant and intervenors will be considered by the
Board) or an oral hearing where oral submissions will be heard by the Board from all
parties.
After the evidence is considered, the Board will issue a Decision with Reasons and an
approved rate schedule for the LDC. In total, the Notice and hearing process could span
anywhere from 8 to 12 weeks depending on the number of interventions, the time frame
for publication of the Notice, complexity of the Application, and/or whether an oral
hearing is held.
Q2)
If an LDC owns assets that have been designated as transmission assets (ie, over 50kv)
how should these assets be treated in the rate base for determining unbundled rates?
A2)
As indicated in Appendix D, Page 13 of the Rate Handbook, these assets should be
included in the net fixed asset calculation and included in Table A3 under “Other amounts
not listed above”as applicable. The methodology and reasons should be clearly
documented and made available for the Board’s review when the application is filed.
Q3)
In the Rate Handbook, 1999 returns are subtracted from the Year 2000 MARR in
calculating the additional revenue required to move to a target return. (See formula 3-3
on page 3-8). 1999 returns are calculated as: (1999 Rate Base x ROE 1999).
Utilities with a negative ROE in 1999, however, will be subject to a "floor value" of 0
percent. This 0 percent floor appears to disadvantage utilities who earned a negative
return in 1999. With no change in costs or sales volumes, they will be unable to reach the
9.88 return target?
A3)
The Rate Handbook indicates that negative returns in 1999 cannot be made up in the
future. The adjustment for a higher return results in increased rates. Therefore, they are
not disadvantaged by their current return levels. The Board's Decision (RP-1999-0034)
indicates that utilities are expected to give due consideration to any rate increases resulting
from their choice to move to a higher ROR. To address this concern the Board expects
utilities to use the option of using a deferral account to phase in the earning of a utility's
target ROR over several years to mitigate rate impact.
Q4)
If a customer’s load is only >50 kW several months in the year is this customer considered
a >50 kW or <50 kW customer for the purposes of the Rate Handbook?
A4)
As long as the customer hits 50 kW in any month of the year, that customer is considered
to be in the > 50 kW group as the capacity reserved for this customer on the system would
need to be >50 kW.
Q5)
If a utility does not wish to go for the maximum ROE or chooses to remain at existing
return level, do they have to go to the OEB to get their rates approved?
A5)
Yes, all electric utilities must come before the Board to get their unbundled rates approved
and to initiate their PBR plan. There are no exceptions to this requirement.
Q6)
How does the rate impact mitigation mechanism work with the use of the deferral
account? If a deferral account is used, does the amount in the account earn interest?
A6)
The following example illustrates the deferral mechanism:
In the first year
A utility has selected a Rate of Return of 9.0%. The additional revenue requirement to
allow the utility to earn the selected Rate of Return is $15 million. If the utility tries to
collect the full $15 million in the first year, it finds the rate impact to be excessive. Hence,
the utility proposes to recover through rates only $10 million in the first year and the
remaining $5 million is recorded in the deferral account 1574.
In the second year
In the second year, the utility’s rate will increase to recover the entire $15 million revenue
requirement implied by the 9.0% Rate of Return (subject to the Board’s review of rate
impact). Moreover, the utility is allowed (again, subject to the Board’s review of rate
impact) to recover the $5 million recorded in the first year in the deferral account 1574
through the Z factor in the rate adjustment mechanism.
Yes, the amount in the account does earn interest. The amount of interest accrued and
paid on the $5 million deferred revenue requirement in account 1574 is subject to the
policies and procedures set out in the Accounting Procedures Handbook for Electric
Distribution Utilities. These will be provided to all LDCs in due course.
Q7)
How is the diversity credit for Large Users of an MEU treated in the RUD model?
A7)
The Diversity Credit, which is a form of subsidy, will cease to exist upon market opening.
The credit does appear in RUD model as applicable to rates set before market opening but
not for rates to be applied after market opening. However, after market opening, a large
use customer has the option of buying from the competitive market. In the competitive
market place, commodity prices may be equal or less than previous prices that included
the diversity credit. Large User rates that are approved through the RUD model before
market opening include the diversity adjustment. The diversity credit appears as a
separate line item under Miscellaneous items. Upon market opening, the credit would no
longer appear in Large User rates.
Q8)
When using the RUD model and testing for the impact of the rate structure change, is the
10% impact guideline to be used for each class? And, if the impact is over 10% for a
certain rate class, can the service charge be reduced to zero to mitigate the rate impact? If
the impact is less than 10% in the initial analysis, can an LDC still adjust the service
charge?
A8)
The test for the rate impact of the rate structure change is to be used for each rate class
and each class should have its rate impact evaluated separately. When adjusting the rate
structure proportions to mitigate rate shock, the service charge should never be reduced to
zero as the Board Decision (RP-1999-0034) indicates that the rate structure is mandated
to include a service charge and a volumetric rate. If the impact on the initial analysis
passes the guideline test (ie, is about 10% or less), the LDC may still adjust the rate
structure components, as long as the Incremental Distribution Rate (IDC) is at least
0.0062 cents/kWh. However, utilities where existing rates are low may need to go below
0.0062 cents/kWh to achieve a viable two part rate structure. If this is the case, it should
be highlighted in the Manager’s Summary as a deviation from the norm.
Q9)
How are distribution rates for General Service TOU customers determined if the LDC’s
TOU rate design does not fit the RUD model methodology?
A9)
Ideally, when determining rates for General Service TOU customers, an LDC would
remove the Cost of Power for the TOU customers, leaving the distribution rates that are
the same for the TOU and non-TOU General Service customers.
In some cases, due to peculiar rate design in the past, it could appear that there is a costbasis for a difference in the TOU and non-TOU GS Rates other than the incremental cost
for the time of use metering. In this case, the LDC should remove the COP from the TOU
revenue requirement, take the TOU distribution Revenue Requirement, add it to the nonTOU distribution Revenue Requirement, and then divide by total GS (>50 kW) number of
customers (i.e. both non-TOU and TOU customers). Remember to remove the Revenue
Requirement for the incremental TOU metering cost and add this as a line item for the
TOU customers. Then the LDC can continue developing distribution rates using the RUD
spreadsheet. Any adjustment of this type should be highlighted as a change to the
standard unbundling model as part of the Manager's summary.
Q10) The Draft Rate Handbook used the term "effective tax rate" in the formula for the MBRR
adjustment. Is there some significance to the change in terminology to "deemed tax rate"
in the new Rates Handbook?
A10) The Draft Rate Handbook included the word "effective" because it was a place holder.
With the finalization of the Rate Handbook the Board has established that the tax should
be the “deemed” amount. Reconciliation with actual tax levels is not required.
Q11) If an LDC has acquired some service territory from OHNC-Distribution over the past
year, how should the LDC treat this when applying the rate handbook/RUD model?
A11) The LDC should prorate their 1999 results to account for the additional service
territory/customers that were acquired in that year.
Q12) How are the Sensitivity Analysis sheets used?
A12) The “Sensitivity Analysis 1" sheet is designed to assist LDCs in adjusting the restructured
(unbundled) rates to mitigate the rate impact of the new rate structure if it exceeds 10%
for low-end customers within each class. The RUD model requires the LDC to input a
proportion for variable and service charge revenue. You must enter the proportions that
pertain to your utility, not necessarily the 40 - 60 split that is currently entered on the
sheet (those values are for illustrative purposes only).
Utility proportions can be obtained by looking at any of the classes (other than residential)
on the “Revenue Reqts and Distr. Charges” sheet under the section “to calculate variable
and service charge revenue”. A table showing distribution revenue, variable revenue and
service charge revenue for residential class (eg. Line 118) appears. On the next line (line
119) revenue share numbers are shown. These are the numbers that should be entered on
the “Sensitivity Analysis 1" sheet on the chosen revenue shares line for each class.
These numbers are the starting point for the analysis. The sheet compares the total bill
under restructuring with the total bill under existing rates and provides the impact for a
number of consumption levels within each class. Consumption levels can be adjusted to fit
specific utility profiles.
The variable revenue proportion can be moved upwards (the service charge proportion
automatically decreases) as much as necessary to reduce the impact on low consumption
customers. However, the variable revenue portion cannot go below the starting level.
The final level chosen for the variable revenue and service charge proportions must be the
same for all consumption levels within a class, but can differ across classes.
Changes to the “Sensitivity Analysis 2" and “Sensitivity Analysis 3" sheets are not
required unless consumption levels were changed on the “Sensitivity Analysis 1“ sheet. In
this case, the same consumption level changes should be made to the latter sheets.
Q13) How does an LDC deal with unbilled revenue?
A13) The retail energy numbers required by the RUD model should include a full 12 months
data. If, for example, energy consumed in December of 1999 that wasn’t billed until
January 2000 should be included in 1999 sales data if December 1998 sales that were
billed in January 1999 were included in 1998. To include unbilled amounts, the amount
that belongs in each rate class block should be estimated and added to the respective
amounts for regularly billed sales.