SUMMARY (D-2004-47)
On August 13, 2003, Hydro-Québec in its capacity of electric power distributor (“the Distributor”) filed with the Régie de l’énergie (“the Régie”) an application for a 3% rate increase for the 2003-04 rate year and a 2.98% increase starting April 1, 2004, the beginning of the 2004-05 rate year. The Régie approved the 3% increase starting January 1, 2004 in decision D-2003-232. The present decision concerns the second part of the application for an increase in the Distributor’s rates for the 2004-05 rate year.
When fixing rates the Régie must treat the Distributor as a distinct entity of Hydro-Québec and apply the Act respecting the Régie de l’énergie1 (“the Act”), which stipulates that the Distributor’s rates must be fair and reasonable, and that the Distributor may not impose higher rates or more onerous conditions than are necessary to cover its capital and operating costs, to maintain its stability and the normal development of its distribution system, or to provide a reasonable return on its rate base (sections 51, 52.3 and 49 of the Act).
When examining the rate application, the Régie determines the Distributor’s revenue requirement for the 2004-05 rate year and whether the existing rates (as modified as of January 1, 2004), when applied to projected sales, will be sufficient to cover that revenue requirement or need to be adjusted. The Distributor’s revenue requirement is established on the basis of cost projections. In Phase 1 of this case, the Régie used cost projections based on a test year beginning on January 1 and coinciding with Hydro-Québec’s financial year, in order to facilitate comparison of the financial figures for the test year with Hydro-Québec’s audited results.
This decision therefore concerns firstly the determination, for the 2004 test year, of the Distributor’s reasonable revenue requirement to cover its cost of service and cost of capital, including a reasonable return on equity (ROE) for the Distributor, in accordance with the capital structure and parameters established by the Régie in Phase 1 of this case. Secondly, this decision covers the requested rate increase for 2004-2005. It also covers certain other matters, such as benchmarking of the Distributor’s costs, certain adjustments to cost allocation methods required by the Régie, approval of the cost of supply for Rate BT customers, and, related to this last topic, the creation of a deferred charge account.
Benchmarking of costs
The Distributor responded in large part to a previous request from the Régie to produce a benchmarking plan for some of its costs (direct gross charges, shared service charges), a timetable, and a progress report to enable the Régie to monitor the Distributor’s performance and efficiency. Since benchmarking is a progressive process, the Régie asks the Distributor, in the first instance, to extend the list of indicators used for the purpose of benchmarking by including a larger number of inputs and outputs. The Régie therefore asks the Distributor to submit a list of 19 indicators and to keep records of the results so that the usefulness and relevance of some of the indicators may be reviewed in the future.
1 RSQ., c. R-6.01.
Method of Cost of service allocation
In this section of the decision, the Régie is called upon to examine the compliance of the Distributor’s proposals made in response to the Régie’s specific requests stemming from decision D-2003-93 in Phase 1 of this case. In view of the technical nature of these questions, the Régie authorizes the creation of a committee on which representatives of the Distributor, stakeholders and the Régie will be better able to discuss specific issues.
The Régie is generally satisfied with the follow-up of its decision D-2003-93.
Cost of capital
At the Régie’s request, the Distributor made certain clarifications to the methodology for calculating debt service costs, and the Régie accepts these clarifications. The Régie fixes the cost of debt for the 2004 test year at 7.41%, based on the Consensus Forecast of August 11, 2003. With respect to the determination of the Distributor’s return on equity (ROE) for the 2004 test year, the Régie asks the Distributor to establish its return by applying the formula approved in Phase 1 of this case, but using more recent data, namely the figures in the Consensus Forecast of January 12, 2004. The Régie estimates that the two requested updates will have the effect of reducing the cost of capital recognized for the 2004 test year by approximately $15 million.
Cost of service, revenue requirement and rate base
Certain projected costs for the 2004 test year are not recognized for rate-setting purposes. Considering the Distributor’s undertaking in Phase 1 of this case to maintain its workforce at 7,400 employees, the Régie does not recognize, as necessary for the provision of electricity distribution services, amounts of $11.3 million for payroll and
$10 million for performance bonuses based on Hydro-Québec’s results as an integrated company. With respect to the allocation of corporate costs, the Régie adopts methodological changes and, noting a significant increase in these costs, does not recognize an amount of $12.1 million, reducing these costs to the 2002 level.
Regarding authorization for investments in 2004, the Régie asks the Distributor to submit a specific application for authorization of its network automation program so the Régie may separately analyze the program’s appropriateness, effects and rate impact. The Régie also limits the investments authorized for 2004 pursuant to section 73 of the Act to
$499 million. The Régie approves the Distributor’s rate base for 2002 and 2003. The rate base for 2004 will be approved at a later date, when the Distributor has made the requested adjustments.
Rate strategy
The Régie recognizes an additional revenue requirement of $117 million for the 2004 test year, which the Distributor may cover by applying a uniform rate increase of 1.4% as of April 1, 2004. The Distributor’s new rate schedule will be approved at a later date, when the Distributor has made the changes requested by the Régie to its rate base and revenue requirement for 2004. According to the Régie’s estimate, this rate change will translate into an average increase of $1.33 per month for the average residential customer and $1.92 per month for a customer living in an electrically heated single-family home. The Régie finds that a uniform rate increase will not result in any significant change to the index on which cross-subsidization for the benefit of consumers paying the domestic rate is based.
The Régie does not accept the Distributor’s approach of recovering its full annual revenue requirement in the last nine months of the 2004 test year (calendar year). In the Régie’s view, this would create an artificially high rate that fails to satisfy the requirements of section 51 of the Act. The Régie repeats that the revenue requirement is determined on the basis of projections for the test year (calendar year) but must be recovered over the rate year (April 1 to March 31). However, the Régie reserves the Distributor’s right to file evidence demonstrating the existence of a variance resulting from the difference between the test year and the rate year, and to submit a mechanism by which any such variance may be taken into account.
Rate BT : Cost of supply and deferred charge account
The Régie accepts the Distributor’s application in part and authorizes the Distributor to carry the difference between the acquisition cost of electricity and the current price of energy under the rate for the period of January 1, 2004 to March 31, 2004 to a deferred charge account carrying interest outside the rate base at the average capital cost rate (with commissioner Anthony Frayne dissenting). At the Distributor’s request, the Régie makes no ruling at this time on the method for the disposal of the balance of the deferred charge account. The Régie may decide at a later date on the rate treatment of the account and the appropriateness of allowing the Distributor to carry to the account any price differential incurred after March 31, 2004.
By a majority decision, the Régie denies the Distributor authorization to take into account the full cost of supply of the electricity according to the agreement between the Distributor and Hydro-Québec’s generation division as of December 1, 2003 (7.3¢/kWh).
Since the consumption patterns of the customers in question are such that this load should not be present at system peak and may be recalled in the event of an energy shortage, the Régie considers a price of 6.0¢/kWh to be more reasonable.
