2006 EDR Electricity Distribution Rate Application

RP-2005-0020

EB2005-0430

2006 EDR Electricity Distribution Rate Application

Wellington North Power Inc. - OEB License Number ED-2002-0511

Summary of the Application

In accordance with instructions released May 11, 2005 of the 2006 Electricity Distribution Rate Handbook. Also in accordance with the July 2005 filing guidelines, application for recovery of regulatory asses for May 1, 2006 distribution rate adjustment Wellington North Power Inc. requests a final order for the recovery and distribution of regulatory assets.

This application contains the following parts:

• Summary of the Application
• Completed 2006 EDR Model
• Completed 2006 Regulatory Asset Model
• Completed 2006 OEB Tax Model V1.0
• Supporting schedules

Six (6) hard copies of this application are enclosed, together with an electronic copy of the application.

Regulatory Asset Recovery (RAR)

Wellington North Power Inc. is filing a request for regulatory asset recovery in accordance with the regulatory asset procedural order. Wellington North Power Inc. has provided the requisite inputs to the regulatory asset recovery model and the outputs of that model have been transferred to the 2006 EDRModel.

Wellington North Power Inc. has elected the Minimum Review requirement approach in filing for regulatory asset recovery.

The Supplementary Disclosure required by the December 9, 2004 document “Decisions with Reasons” serves as a cover letter to the 6 copies of the model.

Chapter 1

Introduction

The following summary is consistent with the procedural order and Wellington North Power Inc.’s understanding of the 2006 Electricity Distribution Rate (EDR) Handbook.

The components of the application are as follows:

• Summary of the Application
• Completed 2006 Regulatory Asset Model
• Completed 2006 OEB Tax Model V1.0
• Completed 2006 EDR Model, and
• Supporting schedules

This Summary of the Application is organized by chapter of the 2006 EDR Handbook.

Chapter 2 Components of the Application and Schedules

2.1.1Description of the Distributor

The description of Wellington North Power Inc. is set out in Schedule 2-1.

2.1.2Corporate Structure

Schedule 2-2 is an organization chart for Wellington North Power Inc. (WNP). This chart indicates that WNP does not have a parent company, does not have any affiliates nor does it share corporate servicesnor have any subsidiary companies.

2.1.3Audited Financial Statements and Reconciliations

The audited statements for Wellington North Power Inc. for 2002, 2003, 2004 are attached as schedule

2-3.A folder, titled “Schedule 2-3”, includes folders for each of the years and contains electronic files in .pdf format, has been included with this submission. We have also included photocopies of our Audited Financial Statement for 2002, 2003, 2004.

2.1.4Compliance with License

There are no special conditions on the license.

2.1.5Complete Listing of Rates and Charges

A complete list of all current approved rates and charges is attached as Schedule2-4. This includes distribution rates as well as other charges.

Chapter 3 Test Year and Adjustments

3.1Historical Test Year versus Future Test Year

Wellington North Power Inc. is filing based on Option 3, 2004 year with all applicable Tier 1 and Tier 2 adjustments.

3.2Tier 1 Adjustments

3.2.1Tier 1 Adjustments: Distribution Expenses

OEB Fees, Pensions and Insurance

Tier 1 Adjustments identified in Schedule 3-1 can be found in the EDR on Sheet ADJ-3 which include the Standard Distribution Expense Adjustments for OEB Fees, Pensions and Insurance. Actual expenses (if available) were used as a basis to best estimate 2005 amounts. In the case of pensions, the expenses are cleared to payroll burden at year end. Insurance Expense has been incorrectly coded in 2002 and 2003. We have aggregated all appropriate costs in schedule 6-1.

Low Voltage Adjustments

Sheet ADJ-3 also includes a Low Voltage/Wheeling Adjustment as an “Other Standard Distribution Expense”. Wellington North Power Inc. based these calculations on the peak of network and connectionmultiplied by .56 per kW using the most recent twelve (12) monthly charges from Hydro One.

CDM and Smart Meter adjustments have been made under Rate Base adjustments and do not pertain to 3.2.1. There have been no non-routine, unusual events requiring Tier 1 Adjustments.

3.2.2 Tier 1 Adjustments: Rate Base

Wellington North Power Inc. is not claiming any New Transformer Station or Retirement without Replacement adjustments. The 2005 projected estimate for Wholesale Meters is less than the 2004 amount so an adjustment is not applicable for this area either. This figure was taken directly from the current YTD balance in the general ledger for 2005. Please note, in compliance with an earlier directive these capital expenditures were booked in account 1820 rather than 1860.

The CDM adjustment found on ADJ-1 is equal to the capital expenditure already approved for third tranche. ADJ-3b indicates the third tranche CDM amortization amount of $1,276. There is no incremental amount being applied for in the 2006 application as per Schedule 3-4.

Wellington North Power Inc. is seeking an additional $335,610.00 recovery for Smart Meters, included in Rate Base Adjustments ADJ-1. The corresponding amortization adjustment calculation has been calculated as $13424.00 in ADJ-3b

Based on discussion with several vendors, Wellington North Power Inc has come up with a conservative estimate of $300.00 per customer per smart meter for purchase and installation. Since meters must be installed by 2010, Wellington North Power Inc is proactively seeking this adjustment in order to begin the meter roll out immediately. Using the customer base of 3390, this will allow for roll out to approximately 33% of our customers initially. This calculation is also detailed in Schedule 3-1.

On ADJ-1 Rate Base Adjustments, Wellington North Power Inc. has opted to put an adjustment under the Accounting Adjustment section in Additional Adjustments. This is due to the fact that the Adjustment for Normalized Cost of Power is taken from a three year average. Wellington North has been experiencing steady growth over the past few years and expects to continue with this rate of future development. For example, 2006 will see a third phase expansion at a local

Automotive parts manufacturing company.

3.2.3Non-routine/unusual Tier 1 Adjustments

Wellington North Power Inc. is not making any non-routine/unusual Tier 1 Adjustments or retirements without replacement as reflected in ADJ-1a and ADJ-3a.

3.3Tier 2 Adjustments

Wellington North Power Inc. did experience a loss in 1999 which meant that it was not included in the allowed rate of return calculations for distribution service revenue. This reduced rate of return has cause Wellington North Power to postpone capital expenditures and distribution maintenance and is therefore seeking approval for Tier 2 Adjustments.

The OEB is allowing inclusion for the calculated return that would have been included in rates for the 2006 Electricity Distribution Rate. We have calculated the amount to be the following:

1999 Negative Net Income= $ 246,483

1st Tranche ($82,161 for 5 Yrs) = $410,805

2nd Tranch($82,161 for 4 Yrs) =$328,644

Total amount not received from 2001 – 2006$739,449

In this application the Wellington North Power Inc. seeks to recover $627,000.

The estimated cost of capital projects:

1.Re-place #2 ACSR with 336 MCM conductors from Foster to Victoria St.

in MountForest. 1835$12,000

2Replace poles, Primary and secondary conductors on Wellington St from

Main Street to Church Street in MountForest.1830$15,000

1835$25,000

1850$10,000

3.Replace 44 kV line in Arthur due to industrial and residential growth

The kW from Preston Street to Highway #109 tap point is 1/0 ACSR

which will include replacement of deteriorated poles.1830$ 175,000

1835$ 125,000

1. Re-conductor and reinsulated 5 kV circuit on Preston St from Domville

Street to Smith Street.1835$50,000

1830$30,000

5.Building renovations at 290 Queen Street West in MountForest. Funds

have not been available to complete renovations to alleviate overcrowded

working conditions and storage issues.1808$ 120,000

6.Internal server required for system integrity and redundancy.1920$15,000

The estimated cost of expense:

1. OM&A costs directly reflect our inability to hire administrative staff

because of the financial constraints caused by lower rate of return.$50,000

Total Tier Two adjustments$ 627,000

Chapter 4 Rate Base

4.0Definition of Rate Base

Rate base information for the years 2002, 2003, 2004 can be found in the EDR section 2-1 Trial Balance Data as well as 2-2 Unadjusted accounting Data and 2-4 Adjusted Accounting Data. There were no removals for non-distribution assets however, we accurately removed an unclassified asset amount of $6,761 from acct. #1820, Distribution Station Equipment – Normally Primary below 50kV. This was a PME rebate from Hydro One that had been incorrectly allocated to 1584. There are no additional Non-Distribution Assets that Wellington North Power Inc. would like to have included in the definition of the rate base. The 2004 Net Fixed Asset calculation has been accurately calculated in the EDR Tab 3-1 Rate Base.

4.1Amortization Rates

The amortization rates of Wellington North Power Inc. are in compliance with Appendix B.

4.2Capital Investments

Schedule 4-1 provides a breakdown of the capital expenditures for 2004. Wellington North Power Inc. has determined the applicable level of materiality to be $5088 and has completed Schedule 4-1 based on any expenditure exceeding the materiality level.

4.3Interest on Deferral Accounts and Construction Work In Progress (CWIP)

CWIP has no direct impact for this application.

4.4Capitalization Policy

Wellington North Power Inc. has not formalized a capitalization policy. Expenditures are capitalized in accordance to Generally Accepted Accounting Principles (GAAP). The nature and scope of the project is the determinant that reflects whether the expense is to be capitalized or expensed.

4.5Contributed Capital

Contributed Capital collected on or after Jan.1/00 is not included in the rate base. Amortization expense has not been charged to operating expense.

4.6Treatment of Capital Gains and Losses

There are no capital gains or losses to report.

4.6.1Assets Sold to a Non-Affiliate

There were no gains or losses on the sale of assets to a non-affiliate in 2004.

4.6.2Assets Sold to an Affiliate

Not applicable. Wellington North Power Inc. does not have any affiliates.

Chapter 5 Cost of Capital

5.1 Maximum allowed return on equity

Wellington North Power Inc. is applying for the maximum allowed return on equity of 9.00% in accordance with the 2006 EDR Handbook.

5.2 Debt Rate

Table 5.1Size-Related Debt Formula

Wellington North Power Inc. deemed capital structure and deemed debt rate are as set out below:

Rate Base / Deemed Capital Structure / Deemed Debt Rate
Debt
(D) / Equity
(1-D)
< $100 million / 50% / 50% / 6.25%

Wellington North Power Inc.’s weighted average debt rate is set out in Schedule 5-1 and is 7.25%.

5.3Capital Structure

Schedule 5-2 sets out the shareholders’ equity. It is consistent with the 2004 audited financials.

5.4Working Capital Allowance

The working capital allowance used by Wellington North Power Inc. is in accordance with the 2006 EDR Handbook and is as calculated on worksheet 3-1 of the model.

Chapter 6 Distribution Expense

6.0 Introduction

Distribution expenses are included in aggregate format in the 2006 EDR model as outlined in Appendix A to the 2006 EDR Handbook.

Adjustments for Tier 1 are included.

Adjustments for Tier 2 are included.

6.1 Definition and Distribution Expenses

Distribution expenses recorded by Wellington North Power Inc. are consistent with the Accounting Procedures Handbook and have been separated into distribution and non-distribution amounts by the 2006 EDR model as outlined in Appendix A.

6.2 Detailed Reporting for Specific Distribution Expenses

6.2.1 Insurance Expense

In 2002 and 2003 insurance expense had been incorrectly allocated. In 2004 Wellington North Power Inc. booked these expenses appropriately. The required insurance expense information has been set out in Schedule 6-1.Wellington North Power Inc, does not self-insure.

6.2.2 Bad Debt Expense

Bad debt information is set out in schedule 6-2. In 2002, Wellington North Power Inc. had bad debt expenses of $98,059. We can attribute $13,878 to General Service > 50kW. This portion of the expense is largely due to the fact that two of our larger Manufacturers both declared bankruptcy in 2002. The $83,646 was for energy and pole rental charges to Sautel Cable TV who also declared bankruptcy in 2002. Sautel Cable TV was classed as General Service < 50kW therefore we have allocated the lost revenue to the under 50 kW class.

6.2.3 Information Technology Expenses

Wellington North Power Inc. does not have an in-house IT Department. Hardware and software maintenance and support are contracted to an outside supplier. All IT expenses are evaluated and approved by management and follow Wellington North Power Inc.’s capitalization guidelines when applicable.

6.2.4 Advertising, Political Contributions, Employee Dues, Charitable Donations, Meals/Travel and Business Entertainment, Research and Development.

Advertising Expense

The advertising expenses for Wellington North Power Inc. were reviewed and there were none with the primary purpose of promoting corporate branding or image.

Political Contributions

There were no political contributions expensed by Wellington North Power Inc. in 2004.

Employee Dues

Annual fees or dues for employee membership in organizations that are not related primarily to health and fitness were not incurred in 2004 by Wellington North Power Inc.

Charitable Contributions

There were no charitable contributions expensed by Wellington North Power Inc. in 2004.

Meals / Travel and Business Entertainment Expenses

Wellington North Power Inc. applies management control consistent with the application of its corporate policy. All expenses are reviewed and approved by management.

Research and Development

There were no research and development expenses incurred by Wellington North Power Inc. in 2004

6.2.5 Employee Total Compensation

Employee compensation disclosure as required is included in Schedule 6-4. The management of Wellington North Power Inc. has been aggregated with non-unionized category as it has only two (2) non-union management FTE’s and this is the class to which it is most closely related.

6.2.6 Pension and Post-Retirement Benefits

OMERS pension expense and post-retirement benefits for the years 2002, 2003 and 2004 are disclosed in Schedule 6-6. It is the intention of Wellington North Power Inc. to become compliant with section 3461 of the CICA Handbook by the end of 2005.

6.2.7 Distribution Expenses Paid to Affiliates

Affiliate Transactions

Wellington North Power Inc. does not have any affiliates.

Shared Services

Wellington North Power Inc. does not share services.

Outsourced Distribution Services

Wellington North Power Inc. has not outsourced more than 50% of its distribution services.

Chapter 7 Taxes / PILs

7.0 Introduction

Wellington North Power Inc. is filing on a historical test year basis and has used the 2006 OEB Tax Model.

7.1 General Methodology Underlying the 2006 Tax Calculation

Wellington North Power Inc. pays PILs under section 93 of The Electricity Act and has completed the 2006 OEB Tax Model without amendments.

The tax amount included in rates effects taxes payable as a result of operating the distribution-only business rather than the taxes calculated for accounting purposes. Filing any future/deferred taxes will not be recovered through rates as a result of this filing.

Wellington North Power Inc. has made adjustments as described in the instructions to the 2006 OEB tax model.

Disclosure of PILs tax administration and tax rulings

Wellington North Power Inc. has calculated the tax expense to be allowed in the 2006 revenue requirement following the OEB regulatory tax principles set out in the 2006 OEB Tax Model.

Tax re-assessments

Wellington North Power Inc. has not included any amount of tax from re-assessment from any prior years in the rates for 2006.

7.2 Principles Applicable to Specific Components of the Calculation

7.2.1 Non-recoverable and disallowed expenses

Wellington North Power Inc. does not have any expenses that are non-recoverable or disallowed in the revenue requirement for OEB regulatory purposes.

7.2.2 Capital Tax Exemptions

i) Federal Large Corporation Tax (LCT) Exemption – Wellington North Power Inc. is the only regulated entity in the corporate group and therefore claims the full LCT exemption.

ii) Ontario Capital Tax (OCT) exemption - Wellington North Power Inc. is the only regulated entity in the corporate group and therefore claims the full OCT exemption.

iii) Non-distribution activities with an applicant – Wellington North Power Inc. has claimed the full federal LCT and provincial capital tax exemptions for purposes of the 2006 OEB tax calculation.

7.2.3 Loss Carry-forwards

Wellington North Power Inc. does not have any loss carry-forwards available forDecember 31, 2005.

Schedule 7-1 does not apply.Wellington North Power Inc. exhausted all loss carry forwards at the end of 2004.

7.2.4 Undepreciated Capital Cost (UCC) and Capital Cost Allowance (CCA)

The closing year-end 2004 actual UCC balances by class from the distributor’s actual tax return have been used and Tier 1 capital expenditure adjustments have been allocated to the appropriate UCC class for each type of asset and its component parts using the half-year rule.

Tier 2 capital expenditure adjustments have been allocated to the appropriate UCC class for each type of asset and its component parts using the half-year rule.

No increases in Capital Cost Allowance are attributable to the distribution assets purchased above book value.

The effects of the 2001 Fair Market Value “bump” are included in the 2006 OEB regulatory tax calculations as filed with the Ministry of Finance. See Schedule 7-2.

7.2.5 Regulatory Tax Treatment of Eligible Capital Expenditures (ECE):

The value of these adjustments to fair market value has been allocated to Wellington North Power Inc.’s customers. See Schedule 7-2.

With respect of ECE related to other disallowed or non-recoverable expenses, these amounts are excluded from the 2006 regulatory tax calculation. The OEB regulatory tax calculation does not include any increase in capital cost allowance for distribution assets purchased above book value.

7.2.6 Interest Deduction

As shown in Schedule 7-3 calculations, Wellington North Power does not have any additional interest deduction expected for tax purposes in 2006 to enter into the Tax Model.

7.2.7 Interest capitalized for accounting, but deducted for tax purposes

Wellington North Power Inc. did not make an election to capitalize interest incurred on CWIP for tax purposes for 2004 and prior years.

7.2.8 Overlapping Year-ends

No action is required by the distributor.

7.2.9 Estimating Taxable Capital

Wellington North Power has used the applied-for 2006 rate base as the proxy for 2006 taxable capital for OEB purposes.