Essex Powerlines Corporation
Manager’s Summary
Overview of Application
Essex Powerlines Corporation is applying for the following changes in distribution rates
effective May 1st, 2006:
 A decrease in the amount required for PILS proxy
 A decrease in the amount for Regulatory Asset Recovery
 A rate change for MARR allocated to both fixed and variable rates due to an
increase in the rate base, working capital and a decrease in the debt rate.
 A change in the rates charged to customers for Network service and Line and
Transformation service which results in an overall decrease for these services.
 A decrease in the loss factors applied
 An increase in the pass through charge for Hydro One Low Voltage wheeling
charges
 An increase in miscellaneous charges by standardizing to the OEB established
charges that reduces rates to customers that do not use these services
 Essex has differentiated the GS>50 interval metered customers as a separate
class
All other changes are included as explanations in each chapter as below.
As Essex Powerlines does not have any employees, any schedules relating to
employee costs such as compensation and pension benefits have not been
completed as confirmed by email with OEB staff.
Chapter 2 – Components of the Application and Schedules:
2.1.1
Description of the Distributor – schedule 2-1 attached
2.1.2
Corporate Structure – schedule 2-2 attached
The following is a list of services provided by each affiliate to Essex
Powerlines:
Essex Energy (EE) – Wholesale and retail interval meter reading and
settlement verification.
Essex Power Corporation (EPC)
Management Support - manages in a professional manner, EPL’s
electrical distribution system in the areas serviced by EPL, EPC
safeguards and maintains EPL’s management requirements
including but not limited to: decision-making, contractual
agreements, and OEB compliance. This includes ensuring that
Essex Power Services Corporation (EPSC) meets its obligations
with EPL.
Finance Support - acts in accordance with EPL’s financial
requirements including but not limited to: audited financial
statements, variance analysis, retail services and settlements,
variance accounts, reconciliation of approved regulatory taxes to
actual taxes, internal audit reports, annual statistics, accounts
receivable, accounts payable, budgeting, capital planning and
wholesale market monitoring and compliance.
Engineering Support - EPC safeguards and maintains EPL’s
engineering requirements including but not limited to: ESA
compliance, OEB compliance, maintenance and capital standards,
supply planning, and distribution system design. EPC engineers
and manages the required expansions and upgrades to EPL’s
electrical distribution system in a timely, competent and
workmanlike manner at EPL’s request, which is referred to as
“Capital Works” provided that such Capital Works have been
designed in accordance with good engineering principles
applicable in the Province of Ontario.
Essex Power Services Corporation (EPSC)
Electrical Distribution Operation and Maintenance Services - EPSC
maintains in a good and workmanlike manner EPL’s electrical
distribution system in the areas serviced by EPL. In providing
electrical distribution system operation and maintenance services
for EPL, EPSC maintains the minimum performance standards as
described in the OEB Distribution System Code, ESA Code and in
the Ontario Energy Board’s Monitoring Requirements and does not
discriminate in its performance as between EPL’s service area and
EPSC’s service area. EPSC follows good utility practice in
servicing the distribution system and applies EPL’s Conditions of
Service to which the distribution system is designed and operated.
Capital Works - EPSC expands or upgrades in a timely, competent
and workmanlike manner EPL’s electrical distribution system at
EPL’s request, which is referred to as “Capital Works” provided
that such Capital Works have been designed in accordance with
EPL standards and good engineering principles applicable in the
Province of Ontario.
Easements - EPSC acts on behalf of EPL to secure all
easements required for the performance of the expansion or
upgrade of electrical distribution services.
Customer Billing - EPSC bills EPL’s customers for electricity
supplied to them but such bills are clearly issued in EPL’s
name. EPSC meets the minimum disclosure standards as
per the OEB Electricity Distribution Rate Handbook – Section
9.4.
2.1.3
Audited Financial Statements and Reconciliations – statements
attached – no differences to report
2.1.4
Compliance with Licence
There are no special conditions imposed with respect to Essex
Powerlines’ licence.
2.1.5
Complete Listing of Rates and Charges
See attached schedule 2-4
Chapter 3 – Test Year and Adjustments:
Essex Powerlines rate submission is utilizing 2004 actual with Tier 1
adjustments. There are no Tier 2 Adjustments.
At the time of inputting our trial balances it became apparent that a number of
accounts were not recorded properly in our trial balances since 2002. These
include all the cost of power sales and expense accounts where we moved the
entire balance to the variance account rather than just the variance amount. In
order to make the model work, these adjustments have been made in tab 2-1.
We have included a supplemental spreadsheet that shows the changes that have
been made and an explanation. This is entitled “Adjustments to sheet 2-1 Trial
Balance Data”. This schedule also details some other minor reclassifications.
As provided in the 2006 Model spreadsheets are the following explanations:
Sheet ADJ 1 (Rate Base – Tier 1)
1) New transformer Stations – no adjustment as no requirement at this time
2) Retirements without replacement – there are no known major retirements
without replacement at this time
3) Wholesale meters – the differential between 2004 and projected 2005 does
not require any adjustment
4) CDM and Smart meter - $280,000 has been entered as the capital amount
included in the 3rd tranche that was not included in rate base previously.
Smart meters post 3rd tranche – an amount of $250,000 has been estimated
for the capital amount for smart meters that were not included in our original
CDM plan approved by the Board. These smart meters will be installed
during the latter part of 2005 and into 2006. The plan includes a propagation
study, the installation of communication, network controllers, end points,
shark fins, and 2000 meters.
5) Non Routine/Unusual adjustments – there a no adjustments that we deem to
be non routine at this time.
6) Adjustment to cost of power – the model is calculating a reduction of
$291,727. We anticipate that 2005 cost of power will be significantly higher
than 2004 but on average the adjustment is not material to warrant a change
to this calculated figure.
Sheet ADJ 1a (Rate Base – Tier 1)
As reported above there are no adjustments for Retirements without replacement
or non routine/unusual adjustments.
Sheet ADJ 2 (Tier 2 – Rate Base)
There are no Tier 2 adjustments required.
Sheet ADJ 3 (Distribution Expenses – Tier 1)
1) OEB Annual Dues – an increase in 2005 OEB fees results in an adjustment
of $16,389.
2) Pensions – no adjustment required as Essex Powerlines does not have any
employees.
3) Insurance - an increase in 2005 for liability insurance results in an adjustment
of $7,372.
4) Non Routine/Unusual Adjustments – there are no adjustments required at this
time
5) Low Voltage/Wheeling adjustments – a schedule is attached showing the
calculated low voltage charges that will be passed on by Hydro One for the
post May 2006 period – this amount totals $823,696
6) Amortization Related to Tier 1 Adjustment to Rate Base – according to the
2006 Model Tab ADJ 3b) the additional amortization is $21,200.
7) CDM (and Smart Meters) – there are no additional distribution expenses
claimed.
Sheet ADJ 4 (Distribution expense Tier 2)
There are no Tier 2 adjustments.
Sheet ADJ 5 (Specific Distribution Expenses)
1) Insurance expense – the amount input for 2005 is the actual billed and
accounts for the increase reflected on ADJ 3.
2) Bad debt expense – consistent across the last three years
3) Advertising – not significant dollars
4) Pension and post retirement benefits – no employees
Sheet ADJ 6 (Revenue amounts Tier 1)
The only adjustment was to remove $20,798 from account 4210 Rent from
Electric Property to reflect the lost revenue from 2004 due to the OEB decision
on pole attachment fees for Cable TV.
Chapter 4 – Rate Base
Schedule:
4-1: Capital Expenditures
A schedule 4-1 is attached that reports the projects that are over the threshold of
$45,934 as per tab 2-5 in the model. The remainder of the variance dollars
represent individual projects under the threshold.
4.4
Capitalization Policy
The applicant does not have a written policy of its own but adheres to the
Accounting Procedures Handbook and GAAP.
Chapter 5 – Cost of Capital
Essex Powerlines’ actual capital structure does not deviate from the applicable
deemed capital structure. Schedule 5-2 included in the 2006 Model requires
some explanation. Included as common equity is an amount of $15,772,796 that
is on the audited financial statements (note 9) as a long term promissory note to
the parent company and shareholder, Essex Power. For all intented purposes
this is considered equity as this shareholder note will never be repaid and carries
no interest requirement.
Chapter 6 – Distribution Expenses
The variances between years for distribution expenses can be attributed to a
number of increases such as inflation. However, in 2003, EPL’s affiliate that
provides services, experienced a month long labour dispute. This resulted in
lower maintenance costs in 2003. The comparison from 2002 to 2004 is
reflective of inflationary increases.
6.2.1
Insurance Expense
EPL’s insurance is supplied by MEARIE at reasonable cost. As EPL
does not have any rolling stock or buildings, other insurance is not
required.
6.2.2
Bad Debt Expense
As per tab ADJ 5 in the model, EPL’s bad debt expense has been
consistent over the period 2002- 2004 no adjustment is required.
6.2.3
Information Technology Expenses
Essex Powerlines only information technology is the billing system
software and one computer for the IESO (formerly IMO) to be a market
participant. All other information technology is included in the services
supplied by EPL’s affiliates.
6.2.4
Advertising, Political Contributions, Employee Dues, Charitable
Donations, Meals/Travel and Business Entertainment, Research and
Development
Advertising expenses – as per tab ADJ 5 – these costs are
reasonable.
Political contributions – there were none.
Employee dues – there were none
Charitable contributions – there were none
Meals/travel and business entertainment expenses – EPL does
not have any employees and therefore there are none.
Research and development – there were none.
6.2.5
Employee Total Compensation
As per the overview above – EPL does not have any employees
and therefore the schedules are not applicable.
6.2.6
Pensions and Post-retirement Benefits
As per the overview above – EPL does not have any employees
and therefore the schedules are not applicable.
6.2.7
Distribution Expenses Paid to Affiliates
Affiliate transactions – schedules 6-8 and 6-10 are attached.
Schedule 6-9 is not applicable as EPL does not share resources
with an affiliate.
Chapter 7 – Taxes/PILs
7.1
General Methodology Underlying the 2006 Tax Calculation
All tabs within the tax model provided have been used with the
exception of tax reserves and loss carryforwards as there are
none.
7.2
Principles Applicable to Specific Components of the Calculation
7.2.1
7.2.2
7.2.3
7.2.4
7.2.5
7.2.6
7.2.7
7.2.8
7.2.9
7.2.10
7.2.11
7.2.12
7.2.13
7.2.14
7.2.15
Non-recoverable and disallowed expenses – as of the date of the
filing there are none
Capital tax exemptions – as per guidelines
Loss carry-forwards – there are none
Undepreciated capital cost (UCC and capital cost allowance
(CCA) as per tab in model
Regulatory tax treatment of Eligible Capital Expenditures (ECE) –
there are none
Interest deduction – as per tab in the model
Interest capitalized for accounting, but deducted for tax purposes
– there are none
Overlapping year-ends – not applicable
Estimating taxable capital – used the model
Ontario Corporate Minimum Tax – as per the model
Non-distribution elimination – there are none
Tax credits – as per the model
Impact of CEM expenditures and Smart Meter expenditures – as
per the model
Property Taxes – as per the model – there are no proxy property
taxes
Capital Leases – there are none
Schedule 7-2 FMV Bump – this schedule has been completed in the model. The FMV
bump was used for tax purposes only and not recorded in the accounting records.
7.3
Tax Payable Filings
7.3.1
Information to be Provided with 2006 OEB Tax Model Filings
As per the explanation included in the tax model tab Test Year
PILS Variance – the variance for 2006 vs 2004 exceeds the 25%
threshold. Pending in any errors in the rate model and the tax
model, the numbers produced appear to reflect a significant
increase from 2004. There are a number of contributing factors
for this variance including: 1) higher taxable income projected for
2006 vs 2004 2) MARR now included in revenue in 2006 and not
in 2004 3) rate base increase from 2004
7.3.2
Chapter 8
Tax Information Disclosure in Future
To be determined in future filings.
Revenue Requirement
There were no major changes made to the revenue requirements as
calculated within the model.
It should be noted that EPL has adjusted its specific service charges to
the standard level as supplied by the OEB with the reason that most of
these charges have been below cost since 1999 and that EPL proposes
that the customers that use these services should pay rather than all
customers funding these costs.
In the model tab 5-4 CDM input, there were no costs recorded in this tab
as there were no costs recorded as expense in 2004.
Chapter 9
9.1
Chapter 10
Cost Allocation
Customer Classes
Essex Powerlines is proposing to segregate its GS>50 interval metered
customers into their own class. This is reflected in tab 6-1 in the model.
Rates and Charges
As below:
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Chapter 11
Fixed/Variable Split – no change
Unmetered Scattered Loads – no change
Time of Use Distribution Rates – no change
Transformer Ownership Allowance – no change
Update of Loss Adjustment Factor Reflecting System Losses Including
Unaccounted-for Energy – new loss factor proposed as per model
Standby Charges – not applicable
Low Voltage Charges – as per model tab ADJ 3 5) and supporting
schedule
Demand Determinants – no change
Recovery of CDM, Smart Meter, and Regulatory Asset Revenue
Requirements – as per model
Specific Service Charges
EPL has adjusted its specific service charges to the standard level as
supplied by the OEB with the reason that most of these charges have
been below cost since 1999 and that EPL proposes that the customers
that use these services should pay rather than all customers funding
these costs.
Chapter 12
Other Regulated Charges
There were no changes to these charges.
Chapter 13
Mitigation
All customer class changes are below the 10% threshold.
Chapter 14 Comparators and Cohorts
Not applicable at this time
Chapter 15 Service Quality Regulation
Schedule 15-1 is attached.
Regulatory Assets Model
Sheet 1 Dec 31, 2004 Reg Assets – note on this worksheet: 1) the amount for
the rebate cheques had been recorded in account 1508 in EPL’s trial balance
($34,962) (similar to Toronto Hydro and others in the Decision) and this amount
has been shown on the worksheet as account 1525. 2) amounts that were
shown in account 1525 on EPL’s trial balance have not been recorded on this
worksheet as these costs are for phase 2 rebate programming that were
disallowed in the Decision and therefore will be removed from this account in
2005 ($16,821).
Sheet 2 Rate Riders Calculation – EPL has included amounts in account 1572
Extraordinary Event Losses (costs incurred from an ice storm in 2001) and split
these costs by customer numbers. The rationale was that the majority of the
damage affected residential and small commercial customers.