Cost of Service Regulation
Wayne Taylor
W. K. TAYLOR CONSULTING LTD.
June 22, 2015
Cost of Service Regulation


Revenue Requirement Applications (Phase I)
 Revenue Requirement
 Forecast Revenue at Existing Rates
 Required Average Rate Increase
Rate Design Applications (Phase II)
 Rate Classes
 Cost of Service Study
 Rate Rebalancing and Rate Design
 Terms and Conditions of Service
CAMPUT 2015 Energy Regulation Course
W.K. TAYLOR CONSULTING LTD.
Typical Revenue Requirement Components


Capital-Related Costs
 Depreciation
 Interest
 Return on Equity
 Income Tax
Operating Costs
 Labour
 Materials and Supplies
 Fuel and Purchased Power
 Property Taxes
CAMPUT 2015 Energy Regulation Course
W.K. TAYLOR CONSULTING LTD.
Capital Expenditures and Additions
Year 1
Construction Work in Progress
Opening Balance
Capital Expenditures
AFUDC
Capital Additions
Closing Balance
Mid-Year Balance
Year 2
0.0
500.0
16.5
0.0
516.5
258.3
516.5
1,000.0
67.1
0.0
1,583.6
1,050.0
Gross Plant
Opening Balance
Capital Additions
Retirements
Closing Balance
Mid-Year Balance
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Accumulated Depreciation
Opening Balance
Depreciation
Retirements
Closing Balance
Mid-Year Balance
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
CAMPUT 2015 Energy Regulation Course
Year 3
1,583.6
500.0
50.6
(2,134.2)
0.0
791.8
Year 4
Year 5
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
2,134.2
0.0
2,134.2
1,067.1
2,134.2
0.0
0.0
2,134.2
2,134.2
2,134.2
0.0
0.0
2,134.2
2,134.2
0.0
26.7
0.0
26.7
13.3
26.7
53.4
0.0
80.0
53.4
80.0
53.4
0.0
133.4
106.7
W.K. TAYLOR CONSULTING LTD.
Rate Base
Year 1
Mid-Year Rate Base
Gross Plant
Accumulated Depreciation
CWIP in Rate Base
Future Income Tax Account
Construction Contributions
Allowance for Working Capital
Total
CAMPUT 2015 Energy Regulation Course
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Year 2
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Year 3
1,067.1
(13.3)
0.0
(7.3)
0.0
0.0
1,046.4
Year 4
2,134.2
(53.4)
0.0
(28.5)
0.0
0.0
2,052.3
Year 5
2,134.2
(106.7)
0.0
(54.5)
0.0
0.0
1,973.0
W.K. TAYLOR CONSULTING LTD.
Rate Base
2,500
2,000
Rate Base
1,500
1,000
500
0
1
3
5
7
9
11
13
15
17
19
21
23
Year
25
27
29
31
33
35
37
39
41
Mid-Year Balance
CAMPUT 2015 Energy Regulation Course
W.K. TAYLOR CONSULTING LTD.
Revenue Requirements
Year 1
Revenue Requirements
Depreciation
Cost of Debt
Cost of Equity
Income Taxes
Operating Costs
Total
CAMPUT 2015 Energy Regulation Course
0.0
0.0
0.0
0.0
0.0
0.0
Year 2
0.0
0.0
0.0
0.0
0.0
0.0
Year 3
26.7
31.4
37.7
12.6
0.0
108.3
Year 4
53.4
61.6
73.9
24.6
26.7
240.1
Year 5
53.4
59.2
71.0
23.7
27.6
234.8
W.K. TAYLOR CONSULTING LTD.
Cost of Capital
Capital
Structure
Debt
Equity
Weighted Average
Income Tax
60%
40%
Rate
Cost per $1,000
of Rate Base
5.0%
9.0%
6.6%
30.0
36.0
25.0%
12.0
Total
78.0
Weighted Average Incl Tax
7.8%
CAMPUT 2015 Energy Regulation Course
W.K. TAYLOR CONSULTING LTD.
Cost of Capital
Capital
Structure
Debt
Equity
Weighted Average
60%
40%
Income Tax
Cost per $1,000
of Rate Base
Cost per $1,046.4
of Rate Base
5.0%
9.0%
6.6%
30.0
36.0
31.4
37.7
25.0%
12.0
12.6
Rate
Total
78.0
Weighted Average Incl Tax
7.8%
CAMPUT 2015 Energy Regulation Course
W.K. TAYLOR CONSULTING LTD.
Capital-Related Revenue Requirements
300
250
Revenue Requirements
200
150
100
50
0
1
3
5
7
9
11
13
Depreciation
CAMPUT 2015 Energy Regulation Course
15
17
19
Cost of Debt
21
23
Year
25
Cost of Equity
27
29
31
33
35
37
39
41
Income Taxes
W.K. TAYLOR CONSULTING LTD.
Total Revenue Requirements
300
250
Revenue Requirements
200
150
100
50
0
1
3
5
7
9
11
Depreciation
13
15
Cost of Debt
CAMPUT 2015 Energy Regulation Course
17
19
21
23
Year
Cost of Equity
25
27
Income Taxes
29
31
33
35
37
39
41
Operating Costs
W.K. TAYLOR CONSULTING LTD.
Capital Cost Allowance
CAMPUT 2015 Energy Regulation Course
W.K. TAYLOR CONSULTING LTD.
Future Income Tax Account
Revenue
Requirement
Income Tax
Return
Financial
Statements
Revenue
108.3
108.3
108.3
Less:
Operating Costs
Interest
Depreciation
Capital Cost Allowance
(31.4)
(26.7)
-
(31.4)
(85.4)
(31.4)
(26.7)
-
Net Income Before Taxes
50.2
(8.5)
50.2
(12.6)
-
2.1
-
2.1
(14.7)
37.7
(6.3)
37.7
Income Tax
Transfer to FIT Account
Net Income After Taxes
CAMPUT 2015 Energy Regulation Course
W.K. TAYLOR CONSULTING LTD.
Future versus Flow-Through Income Taxes
CAMPUT 2015 Energy Regulation Course
W.K. TAYLOR CONSULTING LTD.
Future Income Tax Account
CAMPUT 2015 Energy Regulation Course
W.K. TAYLOR CONSULTING LTD.
Total Revenue Requirements – Flow-Through
CAMPUT 2015 Energy Regulation Course
W.K. TAYLOR CONSULTING LTD.
Comparison of Future and Flow-Through
CAMPUT 2015 Energy Regulation Course
W.K. TAYLOR CONSULTING LTD.
Depreciation Systems



Method of Allocation
 Straight Line
 Accelerated (e.g. Declining Balance)
 Decelerated (e.g. Sinking Fund)
Group Procedure
 Average Life Procedure
 Equal Life Procedure
Adjustment Technique
 Whole Life
 Remaining Life
CAMPUT 2015 Energy Regulation Course
W.K. TAYLOR CONSULTING LTD.
Revenue Requirements – Different Lives
CAMPUT 2015 Energy Regulation Course
W.K. TAYLOR CONSULTING LTD.
Impact of Including CWIP in Rate Base
Year 1
Construction Work in Progress
Opening Balance
Capital Expenditures
AFUDC
Capital Additions
Closing Balance
Mid-Year Balance
Year 2
0.0
500.0
0.0
0.0
500.0
250.0
500.0
1,000.0
0.0
0.0
1,500.0
1,000.0
Gross Plant
Opening Balance
Capital Additions
Retirements
Closing Balance
Mid-Year Balance
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Accumulated Depreciation
Opening Balance
Depreciation
Retirements
Closing Balance
Mid-Year Balance
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
CAMPUT 2015 Energy Regulation Course
Year 3
1,500.0
500.0
0.0
(2,000.0)
0.0
750.0
Year 4
Year 5
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
2,000.0
0.0
2,000.0
1,000.0
2,000.0
0.0
0.0
2,000.0
2,000.0
2,000.0
0.0
0.0
2,000.0
2,000.0
0.0
25.0
0.0
25.0
12.5
25.0
50.0
0.0
75.0
50.0
75.0
50.0
0.0
125.0
100.0
W.K. TAYLOR CONSULTING LTD.
Impact of Including CWIP in Rate Base
Year 1
Mid-Year Rate Base
Gross Plant
Accumulated Depreciation
CWIP in Rate Base
Future Income Tax Account
Construction Contributions
Allowance for Working Capital
Total
Revenue Requirements
Depreciation
Cost of Debt
Cost of Equity
Income Taxes
Operating Costs
Total
CAMPUT 2015 Energy Regulation Course
Year 2
0.0
0.0
250.0
0.0
0.0
0.0
250.0
0.0
0.0
1,000.0
0.0
0.0
0.0
1,000.0
0.0
7.5
9.0
3.0
0.0
19.5
0.0
30.0
36.0
12.0
0.0
78.0
Year 3
Year 4
Year 5
1,000.0
(12.5)
750.0
(6.9)
0.0
0.0
1,730.6
2,000.0
(50.0)
0.0
(26.7)
0.0
0.0
1,923.3
2,000.0
(100.0)
0.0
(51.1)
0.0
0.0
1,848.9
25.0
51.9
62.3
20.8
0.0
160.0
50.0
57.7
69.2
23.1
25.0
225.0
50.0
55.5
66.6
22.2
25.8
220.0
W.K. TAYLOR CONSULTING LTD.
Impact of Including CWIP in Rate Base
CAMPUT 2015 Energy Regulation Course
W.K. TAYLOR CONSULTING LTD.
Impact of Including CWIP in Rate Base
CAMPUT 2015 Energy Regulation Course
W.K. TAYLOR CONSULTING LTD.
Impact of Including CWIP in Rate Base
CAMPUT 2015 Energy Regulation Course
W.K. TAYLOR CONSULTING LTD.
Required Average Rate Increase
Revenue Requirement
Capital-Related Costs
Depreciation
Interest
Return on Equity
Income Tax
Operating Costs
Labour
Materials & Supplies
Fuel & Purchased Power
Property Taxes
Total
600
130
700
200
3,300
Forecast Revenue at Current Rates
Revenue Shortfall
Required Rate Increase
3,000
300
10.0%
CAMPUT 2015 Energy Regulation Course
500
450
540
180
W.K. TAYLOR CONSULTING LTD.
Actual Net Income
Revenue
Capital-Related Costs
Depreciation
Interest
Operating Costs
Labour
Materials & Supplies
Fuel & Purchased Power
Property Taxes
Net Income Before Taxes
Income Tax
Net Income After Taxes
CAMPUT 2015 Energy Regulation Course
3,300
(500)
(450)
(600)
(130)
(700)
(200)
720
(180)
540
W.K. TAYLOR CONSULTING LTD.
Typical Phase I Studies







Load and Revenue Forecast Study
Depreciation Study
Lead-Lag Study
Cost of Capital Studies
Compensation Surveys
Corporate Cost Allocation Study
Capital Overhead Study
CAMPUT 2015 Energy Regulation Course
W.K. TAYLOR CONSULTING LTD.
BC Hydro Revenue Requirements
F2011
Actual
F2012
Update
F2013
Update
F2014
Update
Cost of Energy
Operating Costs
Taxes
Amortization
Finance Charges
Return on Equity
Non-Tariff Revenue
Inter-Segment Revenue
Deferral Accounts
Deferral Account Additions
Interest on Deferral Accounts
Deferral Account Recoveries
Total
Other Regulatory Accounts
Regulatory Account Additions
Interest on Regulatory Accounts
Regulatory Account Recoveries
Total
1,309.1
909.7
177.4
501.4
495.4
588.9
(102.4)
(89.2)
1,203.2
1,366.7
183.9
616.4
570.7
594.5
(82.9)
(38.6)
1,348.3
1,386.1
193.1
634.3
613.8
566.4
(79.5)
(39.5)
1,469.5
1,305.7
202.7
625.0
667.2
599.1
(81.2)
(40.0)
(295.5)
(30.0)
112.9
(212.6)
(65.9)
(39.4)
89.2
(16.1)
(103.2)
(39.4)
94.3
(48.3)
(46.3)
(40.3)
99.4
12.8
(171.1)
(8.0)
(56.5)
(235.6)
(669.5)
(15.0)
92.9
(591.6)
(696.2)
(28.3)
145.0
(579.5)
(600.0)
(41.2)
90.2
(551.0)
Subsidiary Net Income
Less Other Utilities Revenue
Less Deferral Rider
Total Rate Revenue Requirement
(71.9)
(16.3)
(112.9)
3,141.1
(134.5)
(14.6)
(89.2)
3,568.1
(115.3)
(14.8)
(94.3)
3,770.9
(118.9)
(15.5)
(99.4)
3,976.1
Rate Revenue at Current Rates
3,141.1
3,323.0
3,360.1
3,409.7
Revenue Shortfall
Rate Increases (May 1 for F2012)
CAMPUT 2015 Energy Regulation Course
245.0
8.00%
410.8
3.91%
566.4
3.91%
W.K. TAYLOR CONSULTING LTD.
BC Hydro CWIP
F2011
Actual
F2012
Update
F2013
Update
F2014
Update
Capital Expenditures
1,620.0
1,699.2
2,271.4
2,289.1
Capital Additions
1,411.8
1,384.2
1,368.4
1,437.1
Unfinished Construction
Beginning of Year
Adjustment to Opening Balance
Change in Unfinished
End of Year
Mid-Year Balance
1,390.6
7.3
208.2
1,606.1
1,498.3
1,606.1
0.0
315.0
1,921.1
1,763.6
1,921.1
0.0
903.0
2,824.1
2,372.6
2,824.1
0.0
852.0
3,676.1
3,250.1
CAMPUT 2015 Energy Regulation Course
W.K. TAYLOR CONSULTING LTD.
Summary





Carefully test the capital forecast. Capital is
expensive; once in rate base, a capital project impacts
the revenue requirement for the life of the facility.
The choice of income tax method and CWIP treatment
will shift costs between generations of customers, but
impacts life-time revenue requirements and can
impact the cost of raising capital.
Also carefully test the revenue forecast.
Watch the regulatory account and CWIP balances.
Study the financial schedules.
CAMPUT 2015 Energy Regulation Course
W.K. TAYLOR CONSULTING LTD.