Cost of Service Regulation Wayne Taylor W. K. T AYLOR C ONSULTING L TD. June 22, 2015.

Cost of Service Regulation

Wayne Taylor

W. K. TAYLOR CONSULTING LTD.

June 22, 2015

CAMPUT 2015 Energy Regulation Course W.K. TAYLOR CONSULTING LTD.

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


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


Capital Expenditures and AdditionsYear 1 Year 2 Year 3 Year 4 Year 5

Construction Work in Progress Opening Balance 0.0 516.5 1,583.6 0.0 0.0

Capital Expenditures 500.0 1,000.0 500.0 0.0 0.0AFUDC 16.5 67.1 50.6 0.0 0.0Capital Additions 0.0 0.0 (2,134.2) 0.0 0.0Closing Balance 516.5 1,583.6 0.0 0.0 0.0Mid-Year Balance 258.3 1,050.0 791.8 0.0 0.0

Gross PlantOpening Balance 0.0 0.0 0.0 2,134.2 2,134.2Capital Additions 0.0 0.0 2,134.2 0.0 0.0Retirements 0.0 0.0 0.0 0.0 0.0Closing Balance 0.0 0.0 2,134.2 2,134.2 2,134.2Mid-Year Balance 0.0 0.0 1,067.1 2,134.2 2,134.2

Accumulated DepreciationOpening Balance 0.0 0.0 0.0 26.7 80.0Depreciation 0.0 0.0 26.7 53.4 53.4Retirements 0.0 0.0 0.0 0.0 0.0Closing Balance 0.0 0.0 26.7 80.0 133.4Mid-Year Balance 0.0 0.0 13.3 53.4 106.7


Rate Base

Year 1 Year 2 Year 3 Year 4 Year 5

Mid-Year Rate BaseGross Plant 0.0 0.0 1,067.1 2,134.2 2,134.2Accumulated Depreciation 0.0 0.0 (13.3) (53.4) (106.7)CWIP in Rate Base 0.0 0.0 0.0 0.0 0.0Future Income Tax Account 0.0 0.0 (7.3) (28.5) (54.5)Construction Contributions 0.0 0.0 0.0 0.0 0.0Allowance for Working Capital 0.0 0.0 0.0 0.0 0.0Total 0.0 0.0 1,046.4 2,052.3 1,973.0


Rate Base

0

500

1,000

1,500

2,000

2,500

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41

Rate

Bas

e

Year

Mid-Year Balance


Revenue Requirements

Year 1 Year 2 Year 3 Year 4 Year 5

Revenue RequirementsDepreciation 0.0 0.0 26.7 53.4 53.4Cost of Debt 0.0 0.0 31.4 61.6 59.2Cost of Equity 0.0 0.0 37.7 73.9 71.0Income Taxes 0.0 0.0 12.6 24.6 23.7Operating Costs 0.0 0.0 0.0 26.7 27.6Total 0.0 0.0 108.3 240.1 234.8


Cost of Capital

Capital Cost per $1,000Structure Rate of Rate Base

Debt 60% 5.0% 30.0Equity 40% 9.0% 36.0Weighted Average 6.6%

Income Tax 25.0% 12.0

Total 78.0

Weighted Average Incl Tax 7.8%


Cost of Capital

Capital Cost per $1,000 Cost per $1,046.4Structure Rate of Rate Base of Rate Base

Debt 60% 5.0% 30.0 31.4Equity 40% 9.0% 36.0 37.7Weighted Average 6.6%

Income Tax 25.0% 12.0 12.6

Total 78.0

Weighted Average Incl Tax 7.8%


Capital-Related Revenue Requirements

0

50

100

150

200

250

300

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41

Reve

nue

Requ

irem

ents

Year

Depreciation Cost of Debt Cost of Equity Income Taxes


Total Revenue Requirements

0

50

100

150

200

250

300

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41

Reve

nue

Requ

irem

ents

Year

Depreciation Cost of Debt Cost of Equity Income Taxes Operating Costs


Capital Cost Allowance


Future Income Tax AccountRevenue Income Tax Financial

Requirement Return Statements

Revenue 108.3 108.3 108.3

Less: Operating Costs - - - Interest (31.4) (31.4) (31.4) Depreciation (26.7) - (26.7) Capital Cost Allowance - (85.4) -

Net Income Before Taxes 50.2 (8.5) 50.2

Income Tax (12.6) 2.1 2.1 Transfer to FIT Account - - (14.7)

Net Income After Taxes 37.7 (6.3) 37.7


Future versus Flow-Through Income Taxes


Future Income Tax Account


Total Revenue Requirements – Flow-Through


Comparison of Future and Flow-Through


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


Revenue Requirements – Different Lives


Impact of Including CWIP in Rate BaseYear 1 Year 2 Year 3 Year 4 Year 5

Construction Work in Progress Opening Balance 0.0 500.0 1,500.0 0.0 0.0

Capital Expenditures 500.0 1,000.0 500.0 0.0 0.0AFUDC 0.0 0.0 0.0 0.0 0.0Capital Additions 0.0 0.0 (2,000.0) 0.0 0.0Closing Balance 500.0 1,500.0 0.0 0.0 0.0Mid-Year Balance 250.0 1,000.0 750.0 0.0 0.0

Gross PlantOpening Balance 0.0 0.0 0.0 2,000.0 2,000.0Capital Additions 0.0 0.0 2,000.0 0.0 0.0Retirements 0.0 0.0 0.0 0.0 0.0Closing Balance 0.0 0.0 2,000.0 2,000.0 2,000.0Mid-Year Balance 0.0 0.0 1,000.0 2,000.0 2,000.0

Accumulated DepreciationOpening Balance 0.0 0.0 0.0 25.0 75.0Depreciation 0.0 0.0 25.0 50.0 50.0Retirements 0.0 0.0 0.0 0.0 0.0Closing Balance 0.0 0.0 25.0 75.0 125.0Mid-Year Balance 0.0 0.0 12.5 50.0 100.0


Impact of Including CWIP in Rate BaseYear 1 Year 2 Year 3 Year 4 Year 5

Mid-Year Rate BaseGross Plant 0.0 0.0 1,000.0 2,000.0 2,000.0Accumulated Depreciation 0.0 0.0 (12.5) (50.0) (100.0)CWIP in Rate Base 250.0 1,000.0 750.0 0.0 0.0Future Income Tax Account 0.0 0.0 (6.9) (26.7) (51.1)Construction Contributions 0.0 0.0 0.0 0.0 0.0Allowance for Working Capital 0.0 0.0 0.0 0.0 0.0Total 250.0 1,000.0 1,730.6 1,923.3 1,848.9

Revenue RequirementsDepreciation 0.0 0.0 25.0 50.0 50.0Cost of Debt 7.5 30.0 51.9 57.7 55.5Cost of Equity 9.0 36.0 62.3 69.2 66.6Income Taxes 3.0 12.0 20.8 23.1 22.2Operating Costs 0.0 0.0 0.0 25.0 25.8Total 19.5 78.0 160.0 225.0 220.0


Impact of Including CWIP in Rate Base


Required Average Rate Increase

Revenue RequirementCapital-Related Costs Depreciation 500 Interest 450 Return on Equity 540 Income Tax 180 Operating Costs Labour 600 Materials & Supplies 130 Fuel & Purchased Power 700 Property Taxes 200 Total 3,300

Forecast Revenue at Current Rates 3,000 Revenue Shortfall 300 Required Rate Increase 10.0%


Actual Net Income

Revenue 3,300

Capital-Related Costs Depreciation (500) Interest (450) Operating Costs Labour (600) Materials & Supplies (130) Fuel & Purchased Power (700) Property Taxes (200) Net Income Before Taxes 720 Income Tax (180) Net Income After Taxes 540


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


BC Hydro Revenue RequirementsF2012 F2013 F2014

Actual Update Update Update

Cost of Energy 1,309.1 1,203.2 1,348.3 1,469.5Operating Costs 909.7 1,366.7 1,386.1 1,305.7Taxes 177.4 183.9 193.1 202.7Amortization 501.4 616.4 634.3 625.0Finance Charges 495.4 570.7 613.8 667.2Return on Equity 588.9 594.5 566.4 599.1Non-Tariff Revenue (102.4) (82.9) (79.5) (81.2)Inter-Segment Revenue (89.2) (38.6) (39.5) (40.0)Deferral Accounts

Deferral Account Additions (295.5) (65.9) (103.2) (46.3)Interest on Deferral Accounts (30.0) (39.4) (39.4) (40.3)Deferral Account Recoveries 112.9 89.2 94.3 99.4Total (212.6) (16.1) (48.3) 12.8

Other Regulatory AccountsRegulatory Account Additions (171.1) (669.5) (696.2) (600.0)Interest on Regulatory Accounts (8.0) (15.0) (28.3) (41.2)Regulatory Account Recoveries (56.5) 92.9 145.0 90.2Total (235.6) (591.6) (579.5) (551.0)

Subsidiary Net Income (71.9) (134.5) (115.3) (118.9)Less Other Utilities Revenue (16.3) (14.6) (14.8) (15.5)Less Deferral Rider (112.9) (89.2) (94.3) (99.4)Total Rate Revenue Requirement 3,141.1 3,568.1 3,770.9 3,976.1

Rate Revenue at Current Rates 3,141.1 3,323.0 3,360.1 3,409.7

Revenue Shortfall 245.0 410.8 566.4Rate Increases (May 1 for F2012) 8.00% 3.91% 3.91%

F2011


BC Hydro CWIPF2012 F2013 F2014

Actual Update Update 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 ConstructionBeginning of Year 1,390.6 1,606.1 1,921.1 2,824.1Adjustment to Opening Balance 7.3 0.0 0.0 0.0Change in Unfinished 208.2 315.0 903.0 852.0End of Year 1,606.1 1,921.1 2,824.1 3,676.1Mid-Year Balance 1,498.3 1,763.6 2,372.6 3,250.1

F2011


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.

Cost of Service Regulation Wayne Taylor W. K. T AYLOR C ONSULTING L TD. June 22, 2015.

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