Westario Power Inc.2006 EDR
Board File Numbers: RP-2005-0020/EB-2005-0434
Schedule 2-1: Description of the Distributor
Name of distributor:Westario Power Inc.
Licence number:ED-2002-0515
Communities served:Westario Power serves 15 communities in Bruce, Grey and Wellington counties: Clifford, Elmwood, Hanover, Harriston, Kincardine, Lucknow, Mildmay, Neustadt, Palmerston, Port Elgin, Ripley, Southampton, Teeswater, Walkerton and Wingham.
Adjacent distributors:Hydro One Networks Inc.
Characteristics:Large non-contiguous service area (80 x 60 km) consisting of 15 urban communities in 3 counties with Hydro One Networks Inc. serving the interurban areas.
Embedded/Host:Westario Power is embedded in Hydro One Networks Inc.’s low voltage distribution system.
Mailing address:385 Queen Street
Kincardine, ON N2Z 2R4
Key contacts:Guy Cluff, President/CEO
Telephone:519-396-3485, ext. 211
Fax:519-396-3614
Greg Young, Finance Manager
Telephone:519-396-3485, ext. 212
Fax:519-396-3614
Schedule 2-2: Corporate Structure
Westario Power Holdings Inc. is a holding company for 100% of the shares of two operating subsidiaries, Westario Power Inc. and Westario Power Services Inc. Holdings provides corporate services, such as executive management, accounting, legal and consulting services, to its subsidiaries pursuant to Service Agreements.
Westario Power Inc. is a licensed distributor of electricity regulated by the Ontario Energy Board. It was formed through the merger of 8 former public utility commissions.
Westario Power Services Inc. is an electricity services and pole line contractor. It provides operating, maintenance, administrative and capital construction services to affiliate Westario Power Inc. pursuant to a Service Agreement.
Schedule 2-3 (Addendum): Audited Financial Statements and Reconciliations
Copies of the applicant’s audited financial statements are included with this application.
Reconciliations
Account Number / Account Description /Year / RRR Balance / 2006 EDR Model Balance /
Explanation
1525 / Misc. Deferred Debits / 2004 / $8,358 / $36,273 / Reallocation of Hydro One 2003 regulatory asset balances from a/c 1586
1570 / Qualifying Transition Costs / 2004 / 2,333,085 / 2,333,140 / Reallocation of Hydro One 2003 regulatory asset balances from a/c 1586
1580 / RSVAWMS / 2004 / 672,103 / 683,920 / Reallocation of Hydro One 2003 regulatory asset balances from a/c 1586
1582 / RSVAONE-TIME / 2004 / 97,226 / 98,086 / Reallocation of Hydro One 2003 regulatory asset balances from a/c 1586
1584 / RSVANW / 2004 / 85,015 / (20,800) / Reallocation of Hydro One 2003 regulatory asset balances from a/c 1586
1586 / RSVACN / 2002 / 42,061 / (48,176) / Credit adjustment received from Hydro One in Sep/05
1586 / RSVACN / 2003 / (211,682) / (430,307) / Credit adjustment received from Hydro One in Sep/05
1586 / RSVACN / 2004 / 251,507 / (92,740) / $65,168 Reallocation of Hydro One 2003 regulatory asset balances; ($409,415) Credit adjustment received from Hydro One in Sep/05
2205 / Accounts Payable / 2002 / (3,932,986) / (3,842,749) / Credit adjustment received from Hydro One in Sep/05
2205 / Accounts Payable / 2003 / (3,225,994) / (3,007,369) / Credit adjustment received from Hydro One in Sep/05
2205 / Accounts Payable / 2004 / (3,727,336) / (3,317,921) / Credit adjustment received from Hydro One in Sep/05
6035 / Other Interest Expense / 2002 / 37,729 / 43,746 / Error in RRR filing
Schedule 2-4: Approved Rates
Customer Class/Charge / Fixed / VariableDistribution:
Residential / $10.47 / $0.0164/kWh
General service < 50 kW / 19.26 / 0.0112kWh
General service > 50 kW / 236.29 / 2.9814/kW
General service > 50 kW, TOU / 43.21 / 0.8871/kW
Unmetered scattered load / 4.38 / 0.0502/kWh
Sentinel lighting / 1.35 / 8.6753/kW
Street lighting / 2.01 / 2.8182/kW
Service charges:
Late payment / 1.5% per month
NSF cheque / $9.00
Account setup / 8.80
Change of occupancy / 8.80
Arrears certificate / 10.00
Collection charge / 8.80
Reconnect fee / 20.00
Reconnect after hours / 50.00
Dispute meter test / 10.00
Disconnect/reconnect other than safety or non-payment / 50.00
Other:
Wholesale market service / 0.0062/kWh
Debt retirement / 0.007/kWh
RPP administration / 0.25/bill
Retail transmission: / Network / Connection
Residential / $0.0057/kWh / $0.0050/kWh
General service < 50 kW / 0.0052/kWh / 0.0045/kWh
General service > 50 kW / 2.1218/kW / 1.7885/kW
General service > 50 kW, TOU / 2.2535/kW / 1.9603/kW
Sentinel lighting / 1.6083/kW / 1.4113/kW
Street lighting / 1.6002/kW / 1.3824/kW
Schedule 3-1: Tier 1 Adjustments
1.Standard Distribution Expense Adjustments
2005 Actual (1) / 2004 Actual (2) / Adjustment (3)(1) – (2)
OEB Annual Assessment and Other Fees Paid to Energy Regulators / $66,206 / $17,235 / $48,971
Pensions / 218,476 / 191,522 / 26,954
Insurance / 125,693 / 89,784 / 35,909
2.Other Standard Distribution Expense and Rate Base Adjustments
2.1Rate Base
The applicant made the following Tier 1 adjustments to its rate base in the EDR 2006 Model (the “RAM”), at Sheets ADJ 1 and 1a. Adjustments to the applicant’s amortization resulting from these rate base adjustments were included in the RAM at Sheet ADJ 3b.
2.1.1Wholesale meters:2005 amount$400,000
less2004 amount 121,502
Adjustment$278,498
The 2005 amount is based upon year-to-date actual expenditures and planned expenditures. Amortization was calculated at 4% as per Appendix B of the 2006 Electricity Distribution Rate Handbook (the “DRH”).
2.1.2CDM Qualifying Investment:$610,000
The amount is the capital portion of the applicant’s third tranche CDM spending commitment approved pursuant to RP-2004-0203. The amortization rate of 7% is an average based upon a breakdown of CDM capital expenditures.
2.1.3Smart Meters:$1,550,000
This is an estimate based upon the applicant’s smart meter pilot project, currently underway. It assumes 5,000 meters per year at an installed cost of $300 per meter,
Schedule 3-1 (continued)
and upfront billing systems/software modification costs of $50,000. Amortization was calculated at 4% for meters, as per Appendix B of the DRH, and 20% for the software costs.
2.1.4Accounting Adjustment$607,652
This amount is the difference between the applicant’s revenues and costs for power and wholesale market services for December 2004. It was eliminated from distribution expenses and thus the working capital allowance as part of the RSVA balancing entry.
2.2Distribution Expense
The applicant made the following Tier 1 adjustments to its 2004 distribution expenses in the RAM at Sheets ADJ 3 and 2-4.
2.2.1Post May 2006 Hydro One LV Charges:$228,976
This amount is based upon Hydro One’s proposed regulatory asset charges to embedded distributors for January 2004 to April 2006, as per the Board’s letter to Electricity Distribution Utilities dated July 25, 2005, prorated for actual consumption for 2004.
2.2.2Sheet 2-4 Trial Balance Adjustments:
Account / Adjustment / Explanation4050 Revenue adjustment / $232,072 / Unbilled revenue adjustment as at December 31, 2004
4080 Distribution services revenue / (230,496
4090 Electric services incidental to energy sales /
1,576
4080 Distribution services revenue /
54,808 / Standard supply service administration charge
4090 Electric services incidental to energy sales /
(54,808)
4210 Rent from electric property / 113,533 / Pole rentals
4385 Non-utility rental income / (113,533)
4215 Other utility operating income / 5,516 / Water heater rental revenue
4385 Non-utility rental income / (5,516)
4220 Other electric revenues / 53,892 / Miscellaneous service revenues included in revenue offsets
4235 Miscellaneous service revenues / (172)
4375 Revenues from non-utility operations /
(53,720)
Schedule 3-1 (continued)
Account / Adjustment / Explanation4225 Late payment charges / ($2,551) / Late payment charges on water heater rentals
4380 Expenses of non-utility operations /
2,551
4375 Revenues from non-utility operations /
(429,651) / Carrying charges on regulatory assets
4405 Interest and dividend income /
429,651
6105 Taxes other than income taxes / (65,000) / Ontario capital tax
6110 Income taxes / 65,000
Schedule 3-2: Tier 1 Non-routine/unusual Adjustments
The applicant made two non-routine adjustments to normalize its 2004 distribution expenses at Sheet ADJ 3a of the RAM. Both exceed the applicant’s distribution expense materiality threshold of $12,037.
3.2.15335 Bad Debt Expense($134,503)
The applicant experienced unusually high bad debt expenses in 2003 and 2004. This adjustment normalizes 2004 bad debt expense.
3.2.25630 Outside Services Employed($94,194)
The applicant experienced a nine-week strike in 2004. This adjustment is comprised of non-recurring consulting, legal and security costs associated with the strike.
Schedule 4-1: Capital Expenditures
Project /Amount / In-Service Date
Materiality (RAM Sheet 2-5) / $39,710
New services throughout service territory. / 280,567 / 2004
Pole replacements:
Ongoing program to replace old and defective poles throughout service territory. /
216,993 /
2004
Feeder tie, Hanover:
To provide redundancy for station maintenance outages. /
214,853 /
2004
Tyendinaga Drive, Southampton:
Convert old rear lot plant, subject to interruption from tree branches, to front lot underground supply. /
200,684 /
2004
Valleyside subdivision, Walkerton:
Replace 5 KV butyl rubber primary cable prone to failure to permit replacement of cables and poletrans transformers without outages. /
177,136 /
2004
Transformers purchased and installed. / 172,872 / 2004
Meters purchased. / 144,039 / 2004
Arlington Street extension, Saugeen Shores:
Extend distribution system from existing subdivision. /
103,627 /
Ongoing
Piccadilly Drive, Port Elgin:
Provide service to new subdivision. /
82,544 /
Ongoing
Charles Street, Wingham:
Rebuild old pole line. /
80,019 /
2004
Fenton subdivision, Port Elgin:
New service. /
63,615 /
2004
New PME unit, Kincardine:
Comply with IESO seal expiration, incorporate 3 meter points. /
63,130 /
2004
Lord Elgin Estates, Port Elgin:
Extend service at subdivision. /
62,534 /
Ongoing
Walkerton industrial park:
Design infrastructure for underground system. /
46,873 /
2004
Palmerston industrial park:
New service. /
46,282 /
2004
Gosford Street Rebuild and Loop, Southampton:
Complete loop feed from MS #3, replace poles and conductors. /
39,586 /
2004
George Street Apartments, Walkerton:
Replace 5 KV butyl rubber primary cable to permit replacement of cables and poletrans transformers without outages. /
37,593 /
2004
Other capital expenditures below materiality. / 156,364
Total net capital expenditures (RAM Sheet 2-5) / $2,189,311
Schedule 5-1: Weighted Debt Cost
(1) / (2) / (3) / (4) / (5) / (6) / (7) / (8) / (9)No. / Description / Debt Holder / Is Debt Holder Affiliated?
(Y/N) / Date of Issuance / Principal / Term (Years) / Actual Rate / Debt rate used for weighted debt rate cost
1 / Promissory notes / Shareholders / Y / 26-Oct-00 / $8,616,765 / N/A / 5.47% / 5.47%
2 / Term loan / Shareholder / Y / 26-Oct-00 / 10,400 / 1 / 4.25% / 4.25%
3 / Demand instalment loan / CIBC / N / 1-Mar-03 / 183,292 / 10 / 4.74% / 4.74%
4 / Demand instalment loan / CIBC / N / 1-Mar-03 / 1,236,560 / 10 / 4.74% / 4.74%
5 / Demand instalment loan / CIBC / N / 1-Aug-03 / 717,619 / 10 / 3.49% / 3.49%
6 / Demand instalment loan / CIBC / N / 1-Aug-03 / 223,376 / 10 / 3.49% / 3.49%
7 / Demand instalment loan / CIBC / N / 6-Jan-04 / 1,155,225 / 2 / 4.17% / 4.17%
Total: / $12,143,237 / 5.11% / 5.11%
Shareholder promissory notes are redeemable during the next fiscal year at the option of the shareholder upon written notice 90 days prior to year-end. No shareholder provided such notice during 2005; consequently there will be no redemptions, if any, until 2007.
Demand instalment loans were previously classified as long-term debt on the applicant’s balance sheet, because they had instalment provisions. In 2004 the CICA adopted a more stringent interpretation regarding such debt, and the loans were reclassified as short-term debt. The applicant is renegotiating the terms of these loans with its banker so that they will qualify as long-term debt.
Repayment of the promissory notes, term loan and instalment loans is financed by new, unaffiliated long-term debt.
Schedule 5-2: Actual Capital Structure of the Distributor
Line / ($000) / (%) / Deemed Structure / Cost Rate %(1) / Long Term Debt / 6,853,959 / 23.9
(2) / Unfunded Short Term Debt / 5,289,278 / 18.5
(3) / Total Debt / (3) = (1) + (2) / 12,143,237 / 42.4 / 50.0 / 5.11
(4) / Preferred Shares
(5) / Common Equity / 16,475,550 / 57.6
(6) / Total Equity / (6) = (4) + (5) / 16,475,550 / 57.6 / 50.0 / 9.00
(7) / Total / (7) = (3) + (6) / 28,618,787 / 100 / 100 / 7.05
Absolute difference between actual and size-related deemed debt ratio:7.6%
Schedule 6-1: Insurance Expense
Type of Insurance / Number ofInsurers /
2002 /
2003 /
2004 /
2005
Benefits / 1 / $148,235 / $124,610 / $117,918 / $120,727
Vehicles / 1 / 10,216 / 11,635 / 12,143 / 12,026
Property / 1 / 19,715 / 24,973 / 26,274 / 28,949
Liability / 1 / 22,213 / 24,022 / 28,911 / 33,073
WSIB / 1 / 12,924 / 16,936 / 14,993 / 24,567
Health / 1 / 23,401 / 24,398 / 17,788 / 24,187
Employment / 1 / 28,709 / 30,145 / 27,152 / 37,559
Total / 6 / $265,413 / $256,719 / $245,179 / $281,088
The premiums shown in the table above are allocations of premiums paid on behalf of the applicant by its affiliate, Westario Power Services Inc., pursuant to a Services Agreement reviewed by the Board. The amounts differ from the balances in the applicant’s general ledger account 5635 because insurance premiums other than for property damage are accounted for as overhead. The 2005 amount shown at Sheet ADJ 3 of the RAM was determined by adding the 2005/2004 increase from the totals in the table ($35,909) to the 2004 balance in account 5635.
Schedule 6-2: Bad Debt Expense
Customer Class / 2002 / 2003 / 2004Residential / $32,534 / $85,020 / $101,208
GS<50 KW / 46,561 / 121,680 / 144,847
GS>50 KW / 20,395 / 53,300 / 63,448
Total / $99,490 / $260,000 / $309,503
Material Bad Debt Occurrences
Customer / Amount / Explanation1365890 Ontario Limited / $34,543.16 / Mortgagee foreclosed and company went into receivership.
Lankin Motors / 16,964.25 / Company insolvent, applicant received 15% payout and wrote off the balance of the debt.
Walter Rottar / 18,960.46 / Debtor untraceable.
Schedule 6-3: Advertising, Charitable Donations, Meals/Travel and Business Entertainment
6.3.15660 General Advertising Expenses
The applicant removed $9,766 in non-recoverable advertising expenses from its distribution expenses at Sheet ADJ 5 of the RAM.
6.3.26205 Donations
2002 / 2003 / 2004nil / nil / $2,052
These donations were not eligible for recovery and were removed from the applicant’s distribution expenses at Sheet ADJ 5 of the RAM.
6.3.3Meals/Travel and Business Entertainment Expenses
The following is an excerpt from the applicant’s Collective Agreement:
18.05 Meals
Employees are expected to carry one (1) meal per day, however, the Corporation will pay up to ten (10) dollars for a meal under the following conditions.
(1)When an employee is called out for emergency work two (2) hours prior to the normal starting time.
(2)When an employee is required to work two (2) hours past the normal quitting time and every four (4) hours thereafter.
18.06 Mileage
An employee required to report to a location other than their normal reporting location, and must use their own vehicle, shall receive the corporate kilometre rate for the difference, if any, between the distance from their place of residence to their normal reporting location and the distance from their place of residence to the temporary reporting location.
Where an employee is required to use their own vehicle on the business of the corporation, the employee will be paid the corporate kilometre rate.
Schedule 6-4: Employee Compensation
The applicant has no employees. Certain operating, maintenance, administrative and capital construction services, including certain labour-related expenses, are provided by the applicant’s affiliate, Westario Power Services Inc., pursuant to a Services Agreement reviewed by the Board. The following information is based upon the compensation paid to the employees of the affiliate.
Number of employees (Full-time equivalents (FTEs)):
2002 / 2003 / 2004Executive / 10.0 / 10.0 / 10.0
Management / 9.0 / 9.0 / 7.0
Non-unionized / - / - / -
Unionized / 25.0 / 25.0 / 27.0
Compensation – Average Yearly Base Wage ($):
2002 / 2003 / 2004Executive / $19,759 / $21,142 / $23,714
Management / 61,564 / 61,618 / 79,161
Non-unionized / - / - / -
Unionized / 45,467 / 39,878 / 40,608
Compensation – Average Yearly Overtime ($):
2002 / 2003 / 2004Executive / - / - / -
Management / $1,715 / $3,800 / $10,426
Non-unionized / - / - / -
Unionized / 5,073 / 4,899 / 6,349
Compensation – Average Yearly Incentive ($):
2002 / 2003 / 2004Executive / $2,300 / $1,650 / $2,010
Management / - / - / $3,663
Non-unionized / - / - / -
Unionized / - / - / -
Schedule 6-4: Employee Compensation (continued)
Compensation – Average Yearly Benefits ($):
2002 / 2003 / 2004Executive / $2,600 / $2,268 / $3,039
Management / 12,036 / 10,582 / 13,749
Non-unionized / - / - / -
Unionized / 11,959 / 10,798 / 14,071
Schedule 6-5: Employee Incentive Plan Expense
The applicant has not included any incentive plan expenses in its distribution expenses.
Schedule 6-6: OMERS Pension Expense and Post-Retirement Benefits
The applicant has no employees. Certain operating, maintenance, administrative and capital construction services, including certain labour-related expenses, are provided by the applicant’s affiliate, Westario Power Services Inc., pursuant to a Services Agreement reviewed by the Board. The expenses shown in the table below are allocations of expenses paid on behalf of the applicant by its affiliate pursuant to the Services Agreement. The 2005 amount shown at Sheet ADJ 3 of the RAM was determined by adding the 2005 amounts from the table below and on Schedule 6-7.
1. Pension
Pension / 2002 / 2003 / 2004 / 2005Pension premiums / - / $34,709 / $103,514 / $119,668
Adjustments
Less: amount capitalized / - / 7,494 / 22,350 / 25,838
Amount expensed in each year / - / 27,215 / 81,164 / 93,830
Schedule 6-7: Non-OMERS Pension Expense and Post-Retirement Benefits
The applicant has no employees. Certain operating, maintenance, administrative and capital construction services, including certain labour-related expenses, are provided by the applicant’s affiliate, Westario Power Services Inc., pursuant to a Services Agreement reviewed by the Board. The expenses shown in the tables below are allocations of expenses paid on behalf of the applicant by its affiliate pursuant to the Services Agreement.
1. Pension
Canada Pension Plan / 2002 / 2003 / 2004 / 2005Pension premiums / $55,564 / $60,555 / $59,059 / $80,051
Adjustments
Less: amount capitalized / 11,997 / 13,075 / 12,752 / 17,284
Amount expensed in each year / 43,567 / 47,480 / 46,307 / 62,767
2. Post-retirement benefits expense:
Post Retirement Benefits / 2002 / 2003 / 2004 / 2005Post-Retirement Benefits Cost / $61,071 / $61,071 / $61,071 / $61,879
Adjustment / 2,980
Less: Amount capitalized
Amount expensed in each year / 61,071 / 61,071 / 64,051 / 61,879
3. Post-retirement benefits accounting information:
The post-retirement benefits earned by eligible employees are actuarially determined using management's best estimate of salary escalation, retirement ages of employees and expected benefit costs. In measuring the Company's accrued benefit obligation, a discount rate of 5.75% (2003 - 6%) was assumed by the actuaries. A 3% (2003 - 2%) salary increase for life insurance coverage was assumed.
Schedule 6-7: Non-OMERS Pension Expense and Post-Retirement Benefits (continued)
Actuarial gains and losses in a year are combined with the unamortized balance of gains and losses from prior years. The portion of the total that exceeds ten percent of the accrued benefit obligation is amortized over the average remaining service period of the active employees. Past service costs arising from plan amendments are amortized over the future years of service of active employees.
Other information about the plan for the year ended December 31, 2004 is as follows:
Post-retirement Benefits / 2003 / 2004Service cost / $4,821 / $1,706
Interest cost / 19,181 / 19,639
Benefits paid / 8,433 / 11,275
Contributions paid / 18,000 / 22,549
Schedule 6-8: Distribution Expenses Paid to Affiliate(s)
For the Year 2002
Affiliate Names / Activity / Value / Basis PricingWestario Power Services Inc. / Distribution services
Capital construction services / $3,383,343
1,111,287 / Cost-based
Cost-based
Westario Power Holdings Inc. / Corporate services / 244,900 / Cost-based
For the Year 2003
Affiliate Names / Activity / Value / Basis PricingWestario Power Services Inc. / Distribution services
Capital construction services / $3,508,413
1,990,619 / Cost-based
Cost-based
Westario Power Holdings Inc. / Corporate services / 336,374 / Cost-based
For the Year 2004
Affiliate Names / Activity / Value / Basis PricingWestario Power Services Inc. / Distribution services
Capital construction services / $3,499,816
2,464,231 / Cost-based
Cost-based
Westario Power Holdings Inc. / Corporate services / 516,767 / Cost-based
Transfer Pricing Methodology
Pursuant to a Services Agreement (“SA”) with affiliate Westario Power Services Inc., the applicant purchases two categories of services: (i) certain distribution operating, maintenance, and administrative services (“Distribution”); and (ii) certain capital construction services (“Capital”). The transfer pricing methodology for these services is as follows:
Schedule 6-8: Distribution Expenses Paid to Affiliate(s (continued))
(i)Distribution
The transfer price for Distribution services is primarily fixed, based upon the actual audited, amalgamated 1999 distribution expenses of the applicant’s predecessor PUCs, as filed in the applicant’s 2001 Rate Unbundling application (RP-2000-0249/EB-2000-0534), with no return on capital. Certain distribution expenses incremental to and not included in the 2001 rate filing are based upon the actual current costs of the affiliate, with no return on capital.
(ii)Capital
The transfer price for Capital services is based upon the actual current costs of the affiliate, plus a mark-up for return on capital.
(iii)Return on Capital
Including both Distribution and Capital Services, the affiliate’s return on capital has averaged 3.1% for the period 2002 – 2004. The applicant notes that this rate of return is less than its Board-approved maximum rates of return on capital for the period.
The applicant purchases certain corporate services from its shareholder, Westario Power Holdings Inc., pursuant to an SA. The transfer pricing methodology for these services is based upon the actual current costs of the shareholder, with no return on capital.
This structure was designed to incite the applicant’s affiliates to optimize performance and productivity for the benefit of both ratepayers and shareholders. Based upon a recently-completed review by their auditors of the corporate structure of the applicant and its affiliates and the SAs, the applicant and its affiliates intend to complete a fair market value study of the services provided to the applicant, and to revise the pricing methodology of the SAs to market-based, effective January 1, 2006.