Docket UE30902
Order UE93-1
BEFORE THE COMMISSION
on Thursday, the 21st day of January, 1993.
Linda Webber, Chairman
John L. Blakney, Vice-Chairman
Deborah MacLellan, Commissioner
Order
Contents
Part One—The Application1.1 Introduction
1.2 The Applicant
1.3 Details of Application
Part Two—Revenue Requirement
2.1 Introduction
2.2 Sales Forecast
2.3 Operating Expenses
2.3.1 Introduction
2.3.2 Salaries and Wages
2.3.3 Amortization Policy
2.3.4 Reserve for Equipment
2.3.5 Expenses Related to Capital Assets
2.4 Depreciation
2.5 Rate of Return
2.5.1 Introduction
2.5.2 Capital Structure
2.5.3 Return on Equity
2.5.4 Return on Rate Base
2.5.5 Surplus-Deficit Position for the Purpose of
Determining Rural Rates
2.6 Summary of Revenue Requirement
Part Three—Tariff Revisions
3.1 Introduction
3.2 General Rate Increase
3.3 Cost Allocation Study
3.3.1 Introduction
3.3.2 The Average and Excess Demand Method
3.3.3 Demand and Customer Allocation Factors
3.3.4 Other Matters
3.4 Tariff
3.4.1 Introduction
3.4.2 Energy Cost Adjustment Mechanism
3.4.3 Residential Rate
3.4.4 Large General Service Rate
3.4.5 Industrial Rate
3.5 Disposition
Appearances & Witnesses 1. For the Town of Summerside
Counsel:
Benjamin B. TaylorWitnesses:
Nelson Johnston, Town Treasurer
Donald Forbes, Electric Superintendent
Trevor Harris, Plant Supervisor
Robert Hughes, Energy Management Coordinator
Thomas E. Richardson, Consultant
Robert O'Rourke, Consultant
2. For the P.E.I. Department of Energy and Forestry
Counsel:
Barbara F. Stevenson
J. Gordon MacKay
3. For Maritime Electric Company, Limited
Paul Smith, Executive Assistant to the President
4. For the Island Regulatory and Appeals
Counsel:
Thomas A. MathesonStaff:
Donald G. Sutherland, Director Utilities Division
George W. Mason, Senior Analyst Utilities Division
Gloria Dalziel Recording Secretary
Reasons for Order
Part One The Application1.1 Introduction
This is an application under the Electric Power and Telephone Act, R.S.P.E.I. 1988, Cap. E-4 (the "Act"), by the Town of Summerside (hereinafter referred to as the "Applicant", the "Town", "Summerside"). The Town is seeking an order or orders of The Island Regulatory and Appeals Commission ("Commission") approving a number of amendments to the Summerside Electric Rural General Tariff. The Town's application was filed with the Commission on March 6, 1992 and public hearings were held on June 9, 10, 11, 12, July 28, 29, 30 and October 28 and 29, 1992. Interventions were filed by the Minister of Energy and Forestry and Maritime Electric Company, Limited ("Maritime Electric").
This is the first rate application since the Town's rates were last adjusted in 1988. Higher than anticipated sales growth in 1988 and 1989 allowed the Town of Summerside Electric Department (the "Electric Department", "Utility") to accumulate a modest operating surplus which was drawn down largely in 1991 when sales stabilized following the closure of CFB Summerside and other events. Because of the above factors and the Energy Cost Adjustment Mechanism—which allows the Town to pass on changes in the cost of purchases from Maritime Electric—the Town was able to operate for four years without a basic rate increase.
This Order and Reasons for Order address the proposals of the Town set out below. They also address the matter of cost allocation and rate design methodologies and return on investment for a municipal utility. While the general discussion focuses on the overall costs and rates of the Summerside Electric Department, the jurisdiction of the Commission is limited to the rates for customers served by the Utility that are outside the Town's corporate limits. The findings of the Commission are therefore applicable for the purposes of determining rural rates and are not to be read as interfering with the Town's right to set rates for customers resident in the Town of Summerside.
As in all proceedings of this nature, the Commission benefits from the efforts of the interveners and from people who have written to the Commission expressing their views. We acknowledge their contributions.
1.2 The Applicant
The applicant is a municipal corporation incorporated pursuant to the Town of Summerside Act. The Town owns and operates, though its Electric Department, an electric utility and is subject to the jurisdiction of the Commission insofar as [the Town] furnishes electric energy to customers beyond its corporate limits (Act s.1(f)).
The Town maintains 10,480 kW of generating capacity for standby purposes and purchases virtually all of its electricity from Maritime Electric. Electricity is distributed by the Town to customers within the corporate limits and to customers in a number of areas adjacent to the Town. In 1991, energy sales totaled 65,458 MWh, of which 22,381—or 34%—was sold to rural customers. Total revenue form energy sales was $7,546,786, of which $2,506,373—or 33%—was from rural customers.
1.3 Details of the Application
The Town proposed several amendments to the Tariff for its rural customers. The general changes that the Town seeks are:
Approval of revised rates and charges for rural customers effective July 1, 1992 which reflect an overall increase in basic rates of 6.48%;
Approval of further revised rates and charges for rural customers effective January 1, 1993 which reflect an overall increase in basic rates of 3.5 %; and
Approval of the establishment of a new Large General Service Rate class for rural customers with an annual demand of 50 kW or more.
The proposed rate increases result largely from the following:
Increased overall costs of operating the Town Utility; and
Proposed net income allowance based on a debt guarantee fee and return on capital investment.
The specific rate increases for individual customer classes initially filed are shown on Table 1.1.
Table 1.1
Initial Rate Increase Proposals
Exhibit S-2 |
Exhibit S-5 |
|
Effective |
Effective |
|
| Rate Class | 1 July 1992 |
1 January 1993 |
| Residential | 7.23% |
2.84% |
| General Service To 3 kW | 11.13% |
2.84% |
| General Service Over 3 kW | 9.82% |
2.84% |
| Large General Service 50+ kVa | 1.16% |
2.84% |
| Industrial | 15.00% |
10.00% |
| Street Lighting | 8.35% |
2.84% |
| Unmetered | 2.60% |
2.84% |
The Town stated in its application that it intends to implement the same rates for rural and in-Town customers.
Part 2 of these reasons reviews the general revenue requirement aspects of the Town's proposals. Part 3 examines the specific Tariff revisions and the issues of cost allocation and rate design.
Part TwoRevenue Requirement
2.1 Introduction
The revenue requirement constitutes the total revenue required by the Town from rates and other sources to provide safe and adequate electric service to its customers while at the same time maintaining a sound financial position. The revenue requirement is a forecast or estimate of the cost of service for a year or years which forms the foundation upon which rates and charges are based. For the purposes of this application, the revenue requirement is based on the sales forecasts and budgets for the Electric Department for 1992 and 1993.
2.2 Sales Forecast
The sales forecast of the Town is critical for determining a number of operating expenses, particularly the purchases from Maritime Electric and the rate adjustments required to meet the revenue requirement. While recognizing that forecasting is not an exact science, the Commission considers it essential that the forecast be given critical attention.
The sales forecast of the Town is based on estimates provided by the electric superintendent. In general, the estimates are based on the superintendent's examination of the trends in sales for each rate class and the new developments that he knows or expects are going to take place. Sales are forecast judgmentally based on this knowledge. The Town submits that such estimates are reasonable and that sophisticated econometric forecasting is inappropriate based on past experience and the small size of the utility.
Having examined the evidence supporting the sales forecast and the large potential uncertainty associated with a few large customers, the Commission accepts the sales forecasting methodology of the Town as being reasonable. In the future, the Commission will expect the Town to continue to improve its sales forecasting methodology and to file as part of its rate application evidence supporting its sales forecast.
The sales forecast and performance to mid-year 1992 presented by the Town is summarized on Table 2.1.
Table 2.1
Summerside Electric Sales Data
|
kWh |
% growth |
||
|
1991 Actual |
65,458,274 |
0.15 |
|
|
1992 Forecast |
66,392,666 |
1.43 |
|
|
1993 Forecast |
68,324,225 |
2.91 |
|
|
June 92 YTD |
33,346,380 |
0.60 |
The actual sales growth for the first six months of 1992 is slightly below the growth forecast for the year; however, in recent years, approximately 50% of sales have occurred in the first half of the year which would indicate that the sales forecast in kWh remains close to target.
The forecast growth in 1993 is based largely on when one major customer—the Goods and Service Tax (GST) Center—begins operations. Since this customer is expected to add approximately 7 to 8% to the Town's load, the month of startup has a major impact on sales. In the opinion of the Commission, this risk may be offset in part by the assumption made by the Town that sales to all other customers, as a group, will be approximately constant. The Commission therefore accepts the sales forecast provided by the Town as reasonable.
The GST Center is expected to have such a large impact on Summerside that its first full year of operation should result in a substantial sales increase. When combined with the expectation that the provincial economy will eventually begin to improve, the Commission does have some concern that rate increases approved in the current environment may be greater than necessary in future years.
The GST Center can also have the impact of substantially changing the proportion of sales made to each customer class. For the current application, the Town has assumed that the sales increase will apply equally to each customer class. While the Town's own forecast results indicate that most growth will occur in a few classes, the Commission does not expect that adjusting for the discrepancy would cause a material difference in rates at this time. The addition of a very large customer in 1993, however, could result in a material difference as the proportion of sales to each class shifts. The Commission is concerned that this could lead to unreasonable rates if no compensating adjustment is made.
2.3 Operating Expenses1. For future rate applications, the Town shall prefile evidence supporting its sales forecasts.
2. The Town shall file for review by the Commission its proposed 1994 budget and rates prior to December 31, 1993.
3. For its next rate application, the Town shall disaggregate its sales forecast by customer class and shall calculate rates based on the estimated kWh sales to each class.
2.3.1 Introduction
The mandate of the Commission with respect to operating expenses is to ensure that the expenses are reasonable and prudent and properly chargeable to operating account(s) (Act s.24). The Commission fulfills this mandate by ensuring that expenses are properly associated with the delivery of electrical service, that expenses are prudent or necessary for the delivery of safe and adequate electrical service and that the expenses are reasonable in amount, neither unreasonably high nor unreasonably low.
A considerable amount of time at the hearings was spent examining the operating expenses of the Electric Department. In part, this resulted from the length of time between when the budget was prepared in fall of 1991 and the date of the hearing. This review could be achieved more efficiently if the Town ensures that work done when budgets are prepared is sufficiently documented for future reference.
2.3.2 Salaries and Wages4. The Town shall review its budgeting process to ensure that explanatory notes are sufficiently documented for future reference.
In 1991, salaries and wages totaled slightly more than $1 million, or 13% of the utility's total operating expenses of $7.8 million. If purchased power costs and capital-related costs are excluded, salaries and wages make up approximately 60% of the net costs of operating the utility.
In recent years, contract settlements have resulted in annual wage increases of approximately 5%. The most recent contract—signed on October 24, 1991 for the period from December 1991 to November 1992—also included a 5% increase and a number of other specific provisions. Given the current state of the economy and the results of other public and private sector contract settlements in the same time period, the Town's contractual salary increase appears to be high. The Town argued that the increase was justified, in part, because Town wages were lower than comparable wages and there was an attempt to catch-up to competitive salaries. Comparative evidence was not, however, submitted to support this argument. In the view of the Commission, the 1991-92 contract settlement appeared to be high but not sufficiently high that it could be considered unjust or unreasonable at the time that it was made. The Commission will not, in the future, accept general explanations of the type given here.
The 1993 budget of the Electric Department was prepared using a general increase of 3% for salaries and wages based on the judgment of Town management. For comparative purposes, the Commission monitors wage and salary settlements in the public and private sector on a regional basis. Recent settlements clearly indicate that general wage and salary increases are typically being held at or near zero in the current economic environment, particularly in the public sector. The Commission expects Town management to strive to limit salary increases to the extent that can be considered just and reasonable in existing economic and labour market conditions. In the view of the Commission, this can be achieved by holding wage and salary levels at current levels for 1993 either by freezing wages or by ensuring that increases result from productivity gains. The Commission does not therefore consider it reasonable and prudent to allow a 3% salary and wage cost increase for the purposes of determining the 1993 revenue requirement. Eliminating the 3% increase is estimated to reduce the revenue requirement by $25,000.
2.3.3 Amortization Policy5. The 1993 revenue requirement shall be reduced by $25,000 to eliminate the budgeted salary and wage increase.
6. In the future, the Town shall file labour contracts and a summary of the changes thereto with the Commission immediately following the signing of the respective agreements.
7. In future rate applications where the Town argues that its wage increases are justified based on "catching up" to comparable employers, the Town shall file evidence supporting such an argument.
The Town currently capitalizes and amortizes studies and demand side management programs over a 5 year period. The exceptions are a number of very old studies that are amortized on a 5% declining balance basis. Town witness Mr. Johnston commented that the amortization policy dates back to previous discussions with the Public Utilities Commission Chairman possibly in the 1970's. The Commission believes that this policy is currently in need of review.
As a general policy, it is acceptable to recover the costs of studies which benefit rate payers for a number of years over the same period of years. While the exact period for which an asset is useful cannot be defined with precision, basing the amortization on management's best estimate of the useful life is preferable to using an arbitrary period. The Commission believes that amortizing such expenditures over the expected useful life of the project best assigns costs to the appropriate rate payers.
In addition, the Commission does not see any value in continuing to amortize indefinitely studies done in decades prior to 1980. No evidence was presented to suggest that these studies have significant continuing value. In responding to interrogatories, the Town proposed to write off the remaining balances over three years. The Commission agrees with this proposal.
2.3.4 Reserve for Equipment8. The Town shall review its policy for amortization to ensure that capitalized expenses are amortized over their expected useful life.
9. The Commission approves the Town's proposal to amortize over three years the balance of the expenditures incurred prior to 1980 which are currently being amortized on a 5% declining balance basis.
In Decision and Order E-880324 dated March 24, 1988, the Public Utilities Commission directed the Town as follows:
The Town is directed to exclude the "mobile equipment purchase" expense item in future submissions to the Commission.
(Page 11)
When the Town filed its current rate application, the "Transfer From Equipment Reserve" and "Equipment Purchase" accounts referred to above were still included. Based on evidence submitted at the hearing, the "Equipment Reserve" is created from part of the hourly charge for each motor vehicle when it is used. The reserve is then used to purchase replacement vehicles which are capitalized and depreciated as fixed assets with an offsetting credit to the Investment in Capital Assets account. During questioning, Town witness Mr. Johnston responded as follows to questions from Commission Staff:
(Partial Transcript, October 28, 1992, Pg. 1 of 14)MR. MASON: So if I, and I'm trying to link a couple of bits of evidence over the past number of months together here. If I understand Mr. Johnson, when I look at the revenue requirement of the Town historically, the Town Utility buys a truck and that truck is, one, shows up in the revenue requirement as depreciation, the capital value of that truck shows up in the revenue requirement as part of depreciation, is that correct?
MR. JOHNSON: Yeah, that's right.
MR. MASON: And the capital portion of that truck also shows up in the hourly charge out for that vehicle?
MR. JOHNSON: That's the way the accounting system had been handling it for a number of years. So in effect the current a, the current fund was in effect paying for the replacement of that capital asset.
MR. MASON: So the appearance, and please correct me if I'm wrong, the appearance is that in the revenue requirement the cost of that truck is paid for twice by the electrical customers and since that can't happen and your books have to balance, the second payment then becomes a, goes into your capital, investment in capital assets accounts.
MR. JOHNSON: I would agree, I would agree with that comment.
As a result, it appears that customers have been paying for motor vehicles both through depreciation and through operating expenses with the duplicate payment becoming a contribution to the capital account. There does not appear to be any justifiable reason for treating motor vehicles differently than other fixed assets—that is, recovering the cost through depreciation over the useful life.
At the hearing, the Town agreed to eliminate the Transfer From Reserve For Equipment and Transfer To Equipment Reserve accounts and to account for motor vehicles in a manner consistent with that used for other fixed assets. To complete this elimination, the Town further proposed to reduce hourly equipment charges to eliminate the capital portion and to close out the Reserve for Equipment account to Revenue or Vehicle Expense at the end of each year. The Commission supports these proposals. The estimated impact of reducing the hourly charges is to reduce the operating budget by $23,578 (Exhibit S-27).
2.3.5 Expenses Related to Capital Assets A number of operating expense accounts are affected by the capital expenditures made by the Electric Department each year. These include production and operating labour, depreciation, interest and excess of revenue over expenditures which accounts for more than 22% of the operating budget. The Commission's mandate is to ensure that these expenses are reasonable and prudent, to the extent that they affect Rural customers, yet at the current time the Town only seeks approval for major capital expenditures. In the opinion of the Commission, it is necessary for us to review all of the capital expenditures of the Electric Department in order to fully review rural rates (see Act s. 17). Otherwise, the Town is at risk that we may not allow it to recover the costs of a capital asset from its Rural customers.10. The Commission approves the Town's plan for disposing of its accounts "Transfer from Equipment Reserve", "Equipment Purchase" and "Reserve for Equipment".
11. The 1992 and 1993 revenue requirement shall be reduced by $23,578 to reflect the estimated reduction in hourly vehicle charges.
12. In the future, the Town shall account for motor vehicles in a manner consistent with that used for other capital assets.
13. The Town shall file with the Commission, on an annual basis prior to December 31, the budget for capital expenditures for the following year.
Details of the review process will be determined at a later date.
2.4 Depreciation
In Order E-880324 dated March 24, 1988, the Public Utilities Commission directed the Town as follows:The Commission will order the Town to conduct a depreciation study and to have the study available for our review as part of the Town's next general rate application. We encourage the Town to consult with Commission staff on the form of the study prior to commencing it.... While we understand that the Town, for the most part, employed depreciation rates that have been subject to review in the past, we believe that the current rates are in need of review.
(Page 7)
As part of this application, the Town filed with the Commission the first comprehensive depreciation study that has been carried out with respect to the Town's Electric assets in many years. The study is based on a detailed inventory of each capital asset of the utility including the actual cost, to the extent that could be determined from the Town's records. Individual depreciation rates were estimated for each asset based on analysis of the Town assets, discussions with manufacturers and other information.
The Town proposes:
a. that the straight-line remaining life method be adopted for all future depreciation studies;
b. that the remaining lives of assets be periodically reviewed and changed where appropriate;
c. that maximum service lives be established for each asset category and that remaining life estimates be limited to those that result in a total service life equal to the established maximum;
d. that the practice of retirement unit accounting be followed;
e. that the depreciation rates for the asset categories identified in Exhibit S-28 be adopted;
f. that the amount of accumulated depreciation to December 31, 1991 and the depreciation expense for 1991 as identified in Exhibit S-28 be approved;
g. that the depreciation expense for 1992 and 1993 as given in Exhibit S-34 be approved;
h. that a difference of $172,738 in accumulated depreciation be amortized over a three-year period in equal annual amounts beginning in 1992.
(Brief of Argument, Town of Summerside, Pg. 4 & 5))
An order is not required at this time on items a, b, c, and d except to the extent that results from the findings that follow. These matters will be subject to review as part of the next depreciation study.
14. The following depreciation rates are approved as presented in exhibit S-28:
Generator Buildings 2.76%
Fuel Holders 4.53%
Prime Movers 2.29%
Electrical Plant 4.19%
Plant Equipment 5.54%
Substation Buildings and Structures 2.50%
Substation Equipment 2.84%
Underground Conductors 3.86%
Overhead Conductors 3.91%
Poles & Fixtures 3.92%
Underground Street Lighting 3.93%
Overhead Street Lighting 5.90%
Transformer Line-in-Service 3.14%
Transformer Installation 3.24%
Services 3.31%
Underground Services 3.07%
Meters 3.24%
Meter Installation 3.44%
Buildings and Structures 2.25%
Transportation Equipment 11.30%
Laboratory Equipment 3.26%
Office Equipment 10.18%
Miscellaneous Equipment 5.12%
The overall results of the Depreciation Study, as presented in Exhibits S-28 and S-32 are shown in Table 2.2:
Table 2.2
Depreciation Study Summary
Book Value December 31, 1991 |
Depreciation Study December 31, 1991 |
||
|
Cost |
$14,762,882 |
$14,804,362 |
|
|
Accumulated Depreciation. |
4,568,117 |
4,186,075 |
|
|
Net Book Value |
$10,194,765 |
$10,618,287 |
15. The amount of Accumulated Depreciation of $4,568,117 as at December 31, 1991 is approved.
The Town proposes to increase the cost of its fixed assets to $14,804,362—an increase of $41,480—and to reduce the accumulated depreciation to $4,395,379 (105% x $4,186,075) by amortizing the difference of $172,738 over a three-year period in equal annual installments.
The estimated impact of the Town's proposal would be an increase in Investment in Capital Assets of $41,480 and the following depreciation expense (Exhibit S-34):
Table 2.3
Proposed Depreciation Expense
|
1992 |
1993 |
||
|
Depreciation |
$483,242 |
$499,768 |
|
|
Amortization of Excess Depreciation in Prior Years |
(57,579) |
(57,579) |
|
|
Net Depreciation |
$425,663 |
$442,189 |
Two major issues arise out of the Town's proposals:
the appropriateness of adjusting book values upwards to estimated values; and,
-
the extent to which the accumulated depreciation on the accounts is adjusted to the balance estimated in the depreciation study.
The Electric Power and Telephone Act refers to the value of assets on the basis of the prudent original cost [s.21(2)]. In this case, both the book value and the value estimated from a detailed inventory of utility assets represent approaches to determining prudent original cost, albeit at different points in time. The former represents many years of accounting transactions while the latter represents goods which are currently known to exist valued at either their actual invoice cost or an estimate where records could not be found. In the view of the Commission, neither estimate is definitively better than the other. The Commission therefore accepts the Towns proposal to increase the book value of the assets by $41,480 and to calculate depreciation on the higher amount.
The Town further proposes to treat the above adjustment as an increase to the account Investment in Capital Assets. This effectively treats the assets as if they have never been paid for by the electric customers in the past and must be recovered from rates in the future through depreciation. In the view of the Commission, no evidence was presented to support the position that these assets were either not paid for or, at least, not paid for by the electric customers. Rather, it appears more likely that the difference results from a difference in amounts which were expensed rather than capitalized in past years. The Commission therefore believes that the offsetting amount of $41,480 should be amortized to depreciation over a period of 3 years rather than treated as the Town proposed.
With respect to accumulated depreciation, the Town proposes to adjust the account to "the band" 5% higher than the current book value rather than to the actual estimated value based, in part, on the following:
(Exhibit S-28).
In fact, it would appear to be even more unlikely that the theoretical reserve and book value would ever be equal if no attempt is made to bring them together, which is ultimately the effect of adjusting to the +5% band rather than the best estimate of the actual reserve. In the view of the Commission, once a decision is made to adjust to the theoretical value, the full adjustment should be made with due consideration to avoiding undue rate shock and other factors. The Commission therefore adjusts the proposal of the Town so that the full adjustment of $382,042 is made to accumulated depreciation. In order to mitigate the impact of this adjustment on rates, the proposed period of amortization is also increased from 3 to 5 years.
The allowed depreciation expense is therefore revised as follows:
Table 2.4
Allowed Depreciation Expense
|
1992 |
1993 |
||
|
Depreciation |
$483,242 |
$499,768 |
|
|
Amortization of Excess Depreciation in Prior Years |
(76,408) |
(76,408) |
|
|
Amortization of Book Value Increment |
(13,827) |
(13,827) |
|
|
Net Depreciation |
$393,007 |
$409,533 |
The relatively large adjustment to accumulated depreciation results primarily from the fact that a detailed depreciation study of this nature has never previously been done by the Town. As a result of the study, the Town now has a detailed database which should enable such studies to be repeated in the future in a more efficient manner. The Commission considers depreciation studies to be important for determining just and reasonable rates and believes that the Town should prepare a depreciation study on a regular basis, not less frequently than once every 5 years.
16. The Town's proposal to increase the book value of the assets by $41,480 and to calculate depreciation on the higher amount is accepted.
17. The $41,480 overall adjustment to the cost of fixed assets shall be amortized to Depreciation Expense over a period of 3 years.
18. The Accumulated Depreciation balance shall be reduced by $382,042 by amortizing $76,408 per year to Depreciation Expense over a 5 year period.
19. Depreciation Expense, after amortization adjustments, of $393,007 for 1992 and of $409,533 for 1993 is approved.
20. The Town shall prepare a depreciation study for submission to the Commission not less frequently than once every 5 years.
2.5 Rate of Return
2.5.1 Introduction
Public utilities generally have a significant investment in capital and other assets, the rate base, on which they are entitled to earn a rate of return to compensate investors for the cost of capital invested in the utility. In Prince Edward Island, the authority to allow a return is stated as follows in the Electric Power and Telephone Act:
24. Every public utility shall be entitled to earn annually such return as the Commission considers just and reasonable, computed using the rate base as fixed and determined by the Commission for each type of service furnished, rendered or supplied by such public utility, and such return shall be in addition to the expenses as the Commission may allow as reasonable and prudent and properly chargeable to operating account ...
The Town of Summerside Electric Department, which is a municipal utility serving Rural customers, has not historically been regulated on a rate base/return on rate base basis. Instead, the utility has been viewed as having a service rather than a profit orientation and has been allowed to recover direct costs plus some measure of income. This concept of an equity return or net income allowance for publicly-owned utilities has, in recent years, been examined more carefully in many areas of the country. In this province, the Public Utilities Commission had the following discussion with respect to Summerside in Order No. E-880324:
In our 29 January 1985 decision, the Commission discussed the ongoing practice of the Town of budgeting for a surplus in its electric utility and then transferring the surplus to the Town's general fund. While we were critical of this practice and disallowed the recovery of the rural portion of the transfer, we noted that:
"In making this finding [the disallowance], the Commission has not overlooked the Town's attempts to place some value on the services it renders to rural customers of the electric utility in order to justify the transfer. If the Town can quantify these benefits in the form of reasonable and prudent expenses, the Commission is prepared to consider such expenses in the Town's next rate application."
(Order E-850129, p.31)
The Town now proposes that it be permitted to recover an amount from its rural customers as a coverage on its debt interest. According to Mr. Richardson:
"The Town of Summerside puts its taxpayers on the line as guarantors when it borrows money for the utility. Also, the magnitude of the total operation of the Town - General, Electric, Water, Sewer and Pollution Utilities - enables the Town to borrow at lower rates than the electric utility could get on a stand-alone basis. Some payment for this guarantee and economy-of-scale effect on interest rates makes common sense, in my opinion, and interest coverage is a logical way to assess the customers for these benefits."
It is, we believe, well established that a corporation, whether public or private, ought to recover, as part of its revenue requirement, a margin over its actual cost of service to maintain or achieve a sound financial position. Such a margin must, however, be based on sound financial principles as opposed to purely arbitrary determination.
In the case of public corporations such as the Applicant, the Commission considers that normal financial standards should apply in the determination of the revenue requirement. One such standard, the interest coverage test, is advanced herein. Regrettably, however, a full discussion of the merits of applying normal standards has not formed part of this proceeding. The Town may wish to adduce further evidence on this topic at a future rate hearing.
For the purpose of this decision, we will accept the 1.1 times interest coverage proposed by the Town. In doing so, however, we must express our reservations over the Town's apparent arbitrary determination of the margin for its in-Town customers, albeit that margin is one that falls within the exclusive jurisdiction of the Town Council.
The allocation that has been used between the town and rural customers in this application is 68% town - 32% rural. This is based on a comparison of revenues and energy sales between the town and rural customers.
The Town's interest coverage proposal would see a margin of approximately $21,000 recovered from the rural customers in 1988. If applied to the in-town customers, the margin would be approximately $45,000, for a total margin of $66,000.
The Town, however, proposes a total margin, or transfer to the Town's general account, of $175,000, or $154,000 from the in-town customers. This represents a coverage on the interest charges allocated to in-Town customers of 1.43 times, substantially more than that proposed for the rural customers.
It is the Commission's view that the Town's decision to recover a margin of some $154,000 from the in-town customers is unreasonable and unjustly discriminatory. The Town's proposal is clearly an attempt to have the ratepayers subsidize the Town's taxpayers - a practice that is non-standard and, in our opinion, unsupportable. The Commission would hope that the Town will reassess its position with the view of adopting normal financial standards in determining the margin .
(Pg. 7-10)
Two issues arise from this past discussion which are of direct relevance to the current rate proposal. First is the issue of what is a just and reasonable return or income allowance for the Electric Department for the purposes of determining Rural rates. Town witness Robert O'Rourke proposes that the Electric Department is entitled to a return based on the cost of capital that would be incurred if the department operated as a stand alone utility. This forms the basis of his proposal that the Town utility would require a capital structure—comparable to investor owned utilities—of 40% equity and 60% debt and should receive a return comparable to what it would receive if it had such a capital structure. Mr. O'Rourke argues that to do otherwise would result in the municipal taxpayers bearing some of the costs of providing electrical service.
Second is the issue of what the appropriate surplus/deficit position of the utility is with respect to Rural rates.
2.5.2 Capital Structure
The capital structure of the Town used by Mr. O'Rourke is made up of the following:
Table 2.5
Proposed Capital Structure
Average Projected Long-term Debt for 1992 |
$ 7,545,000 |
|
|
Investment in Capital Assets, Dec. 1991 |
$3,160,916 |
|
|
Write-up In Asset Value |
41,480 |
|
|
Customer Contributions |
(313,066) |
|
|
Amortization of Depreciation Adjustment |
115,158 |
|
|
Revenue Fund Surplus |
71,727 |
|
|
"Equity" |
3,076,215 |
|
|
Capital |
$10,621,215 |
The major questions with respect to the Capital Structure arise out of the fund accounting system of the Town and the source of the Investment in Capital Assets which Mr. O'Rourke interprets as equity.
The issue of fund accounting is particularly appropriate because the Town's accounting system, as stated by the Town's auditor Doane Raymond is not to express a measurement of income but to maintain proprietary control over the assets held (Exhibit S-32, Page 1). Indeed, the Town's accounting system was not designed, nor does it appear to record in an appropriate manner, the information necessary to compare the Town, from a capital structure perspective, with other government or investor owned utilities that are modeled after profit-oriented companies.
In terms of identifying the appropriate equity amount for the Town, Mr. O'Rourke proposes that:
Governments have equity in the utilities they own, either from direct investment or from reinvestment of profits. Profits retained in the utility belong to the owning government and, ultimately, to the citizens. ... It should also be noted that the owning government may invest non-cash assets, either in addition to or as an alternative to cash, in the utility. These assets may have been purchased by the government unit or they may have been transferred to the unit by another level of government. The point to be emphasized is that assets invested in a utility by its owning government are to be considered equity regardless of how the owning government acquired the assets
(Exhibit S-30, Pages 4,5).
The Investment in Capital Assets account which forms the basis for most of Mr. O'Rourke's return on equity is the result of a number of transactions reported in Exhibit S-18 and summarized in Exhibit I-13. The major additions to the account since 1974 are summarized as follows:
Table 2.6
Additions to Investment in Capital Assets Since 1974
Transfer from Equipment Reserve |
$476,832 |
|
Interest on Sinking Fund |
316,701 |
|
Contributions from Customers |
316,785 |
|
Contributions from Other Levels of Government |
273,412 |
|
Debentures Repaid |
605,566 |
|
TOTAL |
$1,989,296 |
The makeup of Investment in Capital Assets was covered in some detail at the proceedings and the Commission is concerned that these accounts do not truly represent either direct investment made by the Town or retention of earnings based on a just and reasonable standard. It is clear from the discussion at the hearings that these amounts resulted as follows:
1. The Transfer from the Equipment Reserve resulted from the accounting practices discussed in Section 2.3.4 above which effectively included in revenue requirement the cost of motor vehicles both through depreciation and through an hourly capital charge.
2. Interest on the Sinking Fund represents interest earned by the utility on investment assets (the Sinking Fund) which ultimately will be required to repay the Town's debt.
3. Contributions from customers represent non-refundable amounts paid by customers for connection to their facilities and related capital work.
4. Contributions from Other Levels of Governments represent assets funded by other levels of government which the Town transferred to the electric utility.
5. Debentures Repaid resulted from past accounting practices which included both depreciation and principal repayments on debt in the revenue requirement.
It is clear that items 1 and 5 result from past practices of the utility which were allowed by the Commission. The financial impact of these practices saw customers contribute revenues in excess of actual expenditures to the utility which were then used to finance capital assets in place of debt or other forms of financing. During questioning Mr. Johnston responded as follows:
MR. JOHNSON: It was a historical treatment that occurred in the Town's system I believe up to 1984 and I could be corrected on that date, I think '84 was mentioned here earlier. At that point in time the Town was charging depreciation on the assets and also charging a principal and interest payment and as were most of the other utilities on the Island, I have to leave Maritime Electric out of that, I'm talking Water and Sewer Utilities at that point. When the Commission looked at putting the Town on a cash basis at that time they felt that there was a double entry caused by the thing and a, what was happening was that the, there was cash accumulating from, from the depreciation funds but there was also a direct charge as an expense on our financial statement for that debenture payment. And that had to be passed through to the capital fund where the debentures are, so you ended up affecting two funds by making that cash payment. If the payment had been made as it is today, as you just outlined, which was the change in the policy, that doesn't occur, it simply as you said, an entry to the debenture payment and to the bank. Previously there was a additional entry in there because the debenture had to be reduced.
MR. MASON: Again if I follow you, and this is historical practice, but this account arises because at one time the Town was charging its electrical customers for both, for its capital both through a principal repayment and through depreciation.
MR. JOHNSON: That's right.
MR. MASON: In normal circumstances one might look at that as charging the customers, appearing to charge the customers twice from the same asset.
MR. JOHNSON: It, it was permitted by the Utilities Commission at the time that the entries were, were made. It was subsequently changed and I agree with the change. But on the other side of the line, again we're back to that situation where if the debenture payment hadn't been charged off as an expense there would of been additional cash generated on the operating account which conceivably could of been transferred to the Town general fund.
MR. MASON: So put another way, or perhaps just restating the same thing, you are saying it has implicitly the nature of retained earnings even though it was never reported that way?
MR. JOHNSON: That's right.
(Partial Transcript, October 28, 1992, Pg. 8 & 9 of 14)
Like certain related Municipal accounting practices, such practices allowed the utility to generate cash from its customers to invest in capital assets and effectively displace debt. Conceptually, this practice would be similar to the Provision for Deferred Income Taxes of investor-owned utilities, an element of capital structure which is treated as zero cost capital by those regulators that include Deferred Taxes in capital structure. Alternatively, as proposed by Mr. Johnston, conventional accounting treatment would have resulted in a greater excess of revenues over expenditures than actually reported. This excess could be viewed as being in the nature of retained earnings.
The Commission does not believe that the past practices discussed above were allowed so that the Town could then obtain a return on the investment. In fact, past practices were more likely oriented towards generating funds from customers that could be used to invest in place of debt and thereby reduce the cost to customers. Because such practices do not fairly assign costs to the customers using the assets, the Town has over the years been directed by the Commission to discontinue these practices. While no further accumulation of capital will be allowed in this manner, the Commission recognizes these historical balances as being similar to retained earnings.
With respect to transfers from the Equipment Reserve, the Town was ordered to discontinue this practice in Order No. E-880324 referenced in Section 2.3.3 above. Subsequent to that order, additions to the Investment in Capital Assets account from the Equipment Reserve for 1988 of $137,037, 1989 of $30,294 and 1990 of $68,899 (Exhibit S-18, Capital Surplus Account) were made. For the purposes of evaluating return, the Commission disallows these additions to Investment in Capital Assets totaling $236,230.
Some discussion of the Sinking Fund took place at the hearing with respect to its impact on both debt and equity balances. Mr. O'Rourke did not consider that the Sinking Fund should have any impact on his proposal. The Commission does not agree. First, the Sinking fund represents investment assets which were stated as being required to satisfy the Town's debt obligations. These therefore act as a direct offset of existing debt. In the extreme case, should the Town have to assume the debt payments of the utility, it would only be required to repay the outstanding debt less the amount in the sinking fund. Second, interest earned on the sinking fund which is reported in the Investment in Capital Assets account is both compounded, that is already earning a rate of return, and required to meet debt obligations rather than available for investment in capital assets. In the opinion of the Commission, it would not be appropriate for the Town to earn an additional return on this amount and it should be segregated from the Investment in Capital Assets account.
The Town proposes to deduct the Contributions from Customers from the proposed equity balance, but not the Contributions from other levels of Government. The Town argues that:
... the Town has in the past received assets from other levels of government which it has transferred to the Electric Utility. It was the Town's discretion that the assets were transferred, therefore the assets represent an investment by the Town of Summerside in the Utility.
...
The Town then assumed all liability for maintenance and replacement of these assets.
(Exhibit S-32, Pg. 2)
The Commission cannot accept the Town's position in a jurisdiction where regulation is on the basis of prudent original cost (Act s.21(2)) of assets and, in particular, where the Electric Department is a branch of the Town. Neither the Town nor the Electric Department had any cost for acquiring these assets. On this topic, the Town's solicitor, Mr. Taylor, made the following submission:
One final note on this matter: none of the assets currently used to provide service to the rural customers of the Utility have been purchased by the Provincial Government and transferred to Summerside.(Brief of Argument, Town of Summerside, Page 9)
This argument tends to support the view that the assets should not be included in capital or rate base for the purposes of determining rural rates. The fact that the Town is then responsible for maintaining and replacing them means only that such costs are appropriately included in the operating and capital accounts as they are incurred.
21. The Town shall modify its accounts in the future so that the following balances currently included in Investment in Capital Assets can be clearly identified:
Interest on Sinking Fund
Contributions from Customers (non-refundable)
Contributions from Others
22. The following adjustments to the capital structure are determined to be just and reasonable:
Sinking fund investments shall be deducted from Long-term debt;
Transfers from the Equipment Reserve for 1988, 1989 and 1990, Contributions from Other Levels of Government and Sinking Fund Interest shall be deducted from Investment in Capital Assets (Equity).
The estimated capital structure which results from these adjustments is as follows:
Table 2.7
Allowed Capital Structure for the Purpose of Determining Rural Rates
Average Projected Long-term Debt for 1992 |
$ 7,545,000 |
|
Sinking Fund, January 1, 1992 |
$703,501 |
|
Estimates Sinking Fund, December 31, 1992 (1) |
855,536 |
|
Estimated Average Sinking Fund |
(779,519) |
|
Net Average Projected Long-term Debt |
$6,765,481 |
|
Investment in Capital Assets, Dec. 1991 |
$3,160,916 |
|
Write-up In Asset Value (2) |
Disallowed |
|
Transfers from Equipment Reserve |
(236,230) |
|
Customer Contributions |
(316,785) |
|
Contributions from Other Governments |
(273,412) |
|
Interest on Sinking Fund |
(316,701) |
|
Amortization of Depreciation Adjustment (3) |
Nil |
|
Revenue Fund Surplus |
71,727 |
|
"Equity" |
2,089,515 |
|
Capital |
$8,854,996 |
(1) Estimated based on additions in 1991.
(2) Disallowed as discussed above.
(3) Excluded because the estimate is based on year-end 1991 balances which, if the Town operated at a zero surplus/deficit in 1992 would also be year-end 1992 balances.
The Town is cautioned that these adjustments are not to be interpreted as an indication that there have been inappropriate fund accounting practices. Rather the adjustments reflect balances on which the Commission finds that it is not just and reasonable to allow the utility to earn a rate of return, or in the case of the sinking fund, a return in addition to that which the utility is currently receiving.
2.5.3 Return on Equity
The concept of return on equity is universally accepted for investor-owned utilities. Conceptually, the shareholders of a utility make an investment and should be entitled to earn a reasonable return on that investment. The return, once realized, is either paid out in the form of dividends or reinvested in the utility in the form of retained earnings.
In terms of Municipal utilities, such as the Town of Summerside, their mandate is often viewed as oriented towards service rather than profit, that is, services are provided at some measure of the lowest possible cost. In the case of Summerside, Town Counsel Ben Taylor had the following discussion with the Chairman with respect to the Town's objectives:
CHAIRMAN: Mr., Mr. Taylor, if I, I mean I'm a little bit confused at this in the sense that Mr. O'Rourke's question was, why would the Town want to own a utility where they would not earn a return. I would of assumed that the Town owns the utility because it believes its necessary to provide a service to the people of the Town and that the purpose for owning the utility was not to make a profit. Now, I mean, that fundamentally seems to be something inherent within any municipality owning a utility. It's not there as a profit generating exercise and there would be perhaps better ways to earn money if they were out simply to make money. I mean is that what you're suggesting with this line of questioning, that that's the only reason the town has a utility?MR. TAYLOR: Well, Madam Chairman I don't think we've had it presented before this, I don't think we've had any evidence presented to this hearing to the effect that municipalities are only interested in owning utilities to provide a benefit to the citizens, that that is the only reason and that they have no interest in earning profit. I would suggest that, in fact, precisely the opposite has been the evidence given before, given at this hearing. Indeed the fact that the Town of Summerside has customers which are outside of it's municipal boundaries would seem to raise the question, of how that philosophy that they're only interested in the, in providing low cost service to the citizens of the town. I don't think that that philosophy can possible be said to apply when you have outside customers. (Partial Transcript, October 29, 1992, Pg. 61 & 62 of 74))
The evidence presented by the Town clearly does indicate that an important objective of the Town is to earn a profit from its electric utility. In fact, based on the evidence, the profit objective applies as much to in-Town customers as it does to Rural customers, albeit the overall effect on Town customers may be offset by their also being municipal taxpayers.
In terms of the level of return, Town witness Robert O'Rourke proposes that the Town be allowed to earn a return estimated as if the Electric Department was a stand alone utility and made up of the following components:
1. Cost of embedded debt;
2. Municipal Guarantee Fee of 0.5% of the amount of debt which forms 60% of its capital structure (Deemed Debt);
3. Equity Risk Premium of 2.53% of the amount of debt in excess of 60% of the capital structure (Guaranteed Equity); and,
4. Cost of Embedded Equity of 10.37%.
The return recommended by Mr. O'Rourke totals $387,753 over and above the cost of embedded debt and can be calculated as follows based on his proposed deemed capital structure of 40% equity—60% debt:
Table 2.8
Deemed Capital Structure and Return Proposed by Town
Amount |
Rate |
Cost |
|
Long-Term Debt |
|||
Cost of Embedded Debt |
$7,545,000 |
11.15% |
$ 841,268 |
Return |
|||
Municipal Guarantee Fee |
6,195,429 |
.50% |
30,977 |
Equity Risk Premium |
1,492,987 |
2.53% |
37,773 |
Cost of Embedded Equity |
3,076,215 |
10.37% |
319,003 |
$10,764,631 |
387,753 |
||
Total Return |
$1,229,021 |
The resulting interest coverage of 1.46 times ($1,229,021/$841,268) falls within the range 0f 1.40 to 1.50 times also recommended by Mr. O'Rourke.
The Commission continues to accept the principle that a publicly-owned utility should be permitted to recover, as part of its revenue requirement, a margin over its actual cost of service to maintain its financial integrity. Whether this margin is regarded as an appropriate interest coverage or as a return on equity is the subject of some debate. In previous cases, such as the Town of Summerside Case No. E-3-1(H) (1988) and the Charlottetown Water Commission Docket No. W01302 (1992), the Commission has taken the position that providing some measure of interest coverage is appropriate.
In evaluating Mr. O'Rourke's proposal, a number of issues with respect to deemed capital structure and the components of return were discussed at the hearing. In terms of deemed capital structure, the Commission has some difficulty accepting the proposal of Mr. O'Rourke. The capital structure of the utility is a product of its own financial policy with respect to investing equity and withdrawing or retaining earnings. The Town has, over time, withdrawn virtually all of its excess of revenue over expenditures and therefore has chosen not to reinvest in its own utility except to the extent that results from past accounting practices which would be considered inappropriate for the purposes of assessing rate of return. As a result, providing a return on deemed equity would reward the Town for what could be viewed as imprudent financial practices. Secondly, the Town does not have to raise equity capital on equity markets and does not have to meet the same tests which are normally used for investor-owned utilities. The Commission cannot therefore accept Mr. O'Rourke's proposal to deem an equity component comparable to investor-owned utilities. Discussion of the "equity risk premium" on long-term debt is therefore unnecessary.
In terms of the cost of debt, Mr. O'Rourke proposes a guarantee fee of 0.5% based on the belief that the Town's taxpayers pass on a benefit to the electrical customers by virtue of implicitly guaranteeing the debt. Some discussion took place at the hearing as to whether the guarantee was indeed relevant given that the Town and the Electric Department are the same entity. While the Commission is prepared to accept that the Town taxpayers do accept some risk on behalf of the electric customers—who are generally the same parties except for the Rural Customers being regulated—we believe that this compensation for risk is included in the return on equity that the Town is allowed to earn. No additional amount will be allowed.
With respect to determining an appropriate return on Investment in Capital Assets, Mr. O'Rourke proposes:
Thus, the required risk premium for TOSEU equity with respect to the Canada Bond rate of 10.77% (amended to 7.84%) is in the range of: Risk Premium (TOSEU): 2.00% to 2.50% (Exhibit S-3, Page A6)
Mr. O'Rourke then used a risk premium in his subsequent evidence calculated as follows:
Risk Premium (TSE-Can. Bonds) 2.5 to 3.00%Considerable discussion of this approach took place at the hearing, particularly the addition of the Premium of Summerside debt over Canada Bonds. The calculation of this premium results from Mr. O'Rourke's following calculation:Lower Risk of Utility Stocks -.50%
Premium (
Can.-Summ.)(Summ.-Can. Bonds) +1.03%Market Pressure -0.75%
Premium 2.28 to 2.78%
Average 2.53%
(Exhibit S-32, Page 5, As adjusted)
Equity Risk Premium
TSE-GOC 2.5-3.00
Municipal-GOC 1.03
TSE-Summerside (Municipal) 3.53-4.03
(Exhibit S-36)
On the request of Commission staff to provide the algebraic solution to the above formulas that led to his conclusion, Mr. O'Rourke filed the following response:
... To calculate the risk premium associated with equity in TOSEU, I compared the average return on the TSE with the average return on long-term Government of Canada Bonds. If the debt of TOSEU had the same risk as Canada Bonds, it would have been appropriate to stop here. However, TOSEU bonds are riskier than Canada Bonds and there must be a premium added to bring them to equivalent status with Canada Bonds. This premium is the difference in yields between municipal bonds and long-term Canada Bonds. The sole purpose in adding this difference in yields is to bring the Utility's debt into a reasonable comparison with Government of Canada Bonds. If we fail to make this adjustment, or if we subtract the adjustment from the risk premium between the TSE and Canada Bonds, we are faced with the situation of arguing for the same or a reduced risk premium when comparing the TSE with TOSEU debt than we would use when comparing the TSE with Canada Bonds. ...
The Commission has some difficulty with this aspect of Mr. O'Rourke's concept of risk premium. Town of Summerside Debt is almost certainly going to have a risk premium, that is a higher interest rate, than Government of Canada Bonds. That premium reflects the higher risk of investing in Summerside Bonds vis-a-vis the Government of Canada. The Commission can therefore come to no other conclusion than that the TSE must therefore have a smaller premium over Summerside Debt than it has over Canada Bonds. The argument evident in Mr. O'Rourke's last clause is precisely the argument to be made.
In any event, it is clear from Mr. O'Rourke's evidence that he was estimating the premium that Town of Summerside Equity should have over Town of Summerside debt (rather than Canada Bonds) as stated in his written submission:
Combining the two differentials, results in an equity risk premium for TOSEU relative to the cost of guaranteed debt of: Risk Premium: 2.28% to 2.78% For the purposes of determining total return required, a value of 2.53% for the cost of the equity risk premium on the guaranteed debt has been used.
(Exhibit S-3, Page A6-A7)
As discussed above, the Commission does not consider it just and reasonable to allow an equity risk premium on debt capital for which the above premium applies.
Mr. O'Rourke also used this risk premium for estimating his return on equity. The Commission has some difficulty with applying this same premium to the interest rate on Canada Bonds in direct contradiction to Mr. O'Rourke's previous evidence. The risk premium of 2.00% to 2.50%, averaging 2.25%, presented in Mr. O'Rourke's evidence does appear to be reasonable and would result in a return on equity of 10.09% (7.84% Canada Bond rate plus 2.25% risk premium).
23. For the purposes of evaluating a just and reasonable return, the Commission:
rejects the premium on debt issued by the Town of Summerside;
rejects the proposal to calculate a return based on a deemed equity component; and,
accepts the estimated return on equity in the adjusted amount of 10.09%.
The estimated return on equity which results from the above adjustments is as follows:
Table 2.9
Allowed Return of Equity
Amount |
Rate |
Cost |
|
Municipal Guarantee Fee |
6,765,481 |
nil |
nil |
Equity Risk Premium |
nil |
nil |
nil |
Cost of Embedded Equity |
2,089,515 |
10.09% |
210,832 |
$8,854,996 |
$ 210,832 |
Based on the Town's current budget for 1992 of $858,921 Interest on Debentures and $85,000 Interest and Bank Charges, the above return would result in an estimated interest coverage ratio of 1.25 times (($858,921+$210,832)/$858,921) on Long-term Debt and 1.22 times on total debt. In the view of the Commission, an income allowance of $210,832 is just and reasonable and will provide sufficient interest coverage to maintain the financial integrity of the Town utility.
Should the Town continue to transfer $225,000 per year to the General Accounts, no funds would be reinvested in the utility. The Town would then be in a position where it must fund virtually all new assets with debt which would lead to a worsening financial position. The Town's own financial witness did not believe that this would be prudent financial practice. Indeed, such a financial policy could threaten the financial integrity of the utility which he considered to be of critical importance.
In the view of the Commission, the Town must review its policy with respect to transferring earnings to the Town accounts to ensure that sufficient earnings are left in the utility to meet future expansion needs and to continue to provide adequate interest coverage. If the current practice continues, we will, of necessity, have to re-evaluate the net income allowance approved below.
24. A Net Income Allowance of $210,832 in 1992 and 1993 is considered just and reasonable and sufficient to maintain the financial integrity of the Town utility.
25. The Town shall review its policy for withdrawing funds from the Electric Department accounts to ensure that sufficient funds are reinvested in the utility in accordance with prudent utility practice.
2.5.4 Return on Rate Base
Under the Electric Power and Telephone Act, public utilities are entitled to earn a just and reasonable return on rate base. Historically, the Commission has applied the return on rate base provision to investor-owned utilities. Other utilities, such as the Town of Summerside, have been allowed a reasonable income allowance rather than a return on rate base. During the course of the hearing, the Town proposed two different rate bases in Exhibit S-30, Page 12 and Exhibit S-32. In the view of the Commission, the following rate base as of December 31, 1991 more appropriately reflects the provisions of the Act for the purposes of determining Rural rates:
Table 2.10
Calculation of Return on Rate Base
RATE BASE December 31, 1991 |
|
Fixed Assets |
$14,764,826 |
Accumulated Depreciation |
(4,568,117) |
10,196,709 |
|
Less: Customer Contributions |
(316,785) |
Less: Contributions from Other Governments |
(273,412) |
Net Fixed Assets |
9,606,512 |
Intangible Assets, Net of Amortization |
240,809 |
Allowance for Working Capital |
509,049 |
Rate Base |
$10,356,370 |
Normal Commission practice is to calculate return on rate base based on the average of the year-end amounts; however, this is not possible because the Town has not provided a financial forecast for either 1992 and 1993. The Commission will therefore approve a return on rate base based on the beginning of year balance for 1992 as follows:
Table 2.11
Allowed Return on Rate Base
Estimated Interest on Debentures |
$858,921 |
Estimated Interest and Bank Charges |
85,000 |
Income Allowance |
210,832 |
$1,154,753 |
|
Return on Rate Base |
11.15% |
26. The Commission approves for 1992 a return on rate base of 11.15% calculated based on the December 31, 1991 rate base. 2.5.5 Surplus-Deficit Position for the Purpose of Determining Rural Rates
In 1988, the Commission approved a revenue requirement for the purposes of determining rates for Rural Customers as follows:
The revenue requirement for 1988 - unadjusted for the operation of the Fuel Clause - for the rural portion of the Town's operations is established at $6,825,264 x 0.32 plus coverage on the interest charges of $21,123 for a total of $2,205,207. (Order No. E-880324, Page 11)
The Commission, in its decision, concluded that collection of revenues from the Rural Customers in excess of actual operating expenses plus 10% interest coverage would be unjustified. However, in each of 1988, 1989, 1990 and 1991, the Town transferred $225,000 from the Electric accounts to the General accounts which was clearly in excess of its budgeted transfer of $175,000 proposed in 1988. While it is difficult to determine with precision how much of the transfer came from Rural versus Town customers, the Commission considers that the transfer from Rural customers was in excess of that determined to be just and reasonable. Stated another way, the deficit which the Town projects to occur in 1992 and to recover in future rates is overstated because it is based on the withdrawal of earnings in excess of what is considered just and reasonable.
The Commission believes that the proportion of the excess transfer of $50,000 per year ($225,000 less $175,000) that is attributed to Rural customers is a reasonable estimate of the required adjustment:
Table 2.12
Estimate of Excess Transfer to Town Attributable to Rural Customers
Year |
1988 |
1989 |
1990 |
1991 |
Excess Transfer |
$50,000 |
$50,000 |
$50,000 |
$50,000 |
Amount Attributed (1) |
33.8% |
33.1% |
33.0% |
33.2% |
to Rural Customers |
$16,900 |
$16,550 |
$16,500 |
$16,600 |
Cumulative |
$16,900 |
$33,450 |
$49,950 |
$66,550 |
(1) Percent of Electric Revenues from Rural Customers based on the Annual Reports filed with the Commission by the Town.
For the purposes of determining Rural rates, the Commission therefore deems the proposed deficit recovery to be based on a deemed Surplus at the end of 1991 of $272,179 ($66,550/33.2% deemed excess transfer applicable to overall utility+$71,727 actual 1991 Surplus).
27. The Town shall estimate its deficit recovery for 1992 based on a deemed Surplus at the end of 1991 of $272,179.
2.6 Summary of Revenue Requirement
The revenue requirement, including a return or net income allowance, proposed by the Town for 1992 and 1993 and the respective adjustments made by the Commission for the purpose of establishing rural rates are summarized in Appendices 1 and 2. The corresponding revenue requirement Approved by the Commission is summarized in Table 2.13.
Table 2.13
Approved Revenue Requirement
1992 |
1993 |
||
Operating Expenses |
$ 6,428,502 |
$ 6,568,797 |
|
| Appropriations excluding depreciation | 195,992 |
170,370 |
|
Depreciation |
393,007 |
409,533 |
|
Interest Costs |
943,921 |
952,215 |
|
Net Income Allowance |
210,832 |
210,832 |
|
TOTAL |
$ 8,172,254 |
$ 8,311,747 |
28. The Commission finds a Revenue Requirement of $8,172,254 for 1992 and $8,311,747 for 1993 to be reasonable and prudent.
Part ThreeTariff Revisions
3.1 Introduction
This section covers the tariff proposals of the Applicant. The Commission’s mandate with respect to rates is as follows:
to ensure that the proposals are, in all respects, reasonable and non-discriminatory; and
to ensure that the proposals are reasonably expected to generate the revenue requirement.
The reasonableness of rates is often measured by how fairly the rates represent the cost of service of individual customers or customer classes. In practice, the determination of rates is based on a process of cost allocation and a comparison of costs with revenues. The process is one that requires the application of judgment.
The rate proposals of the Town are based on the general rate increase necessary to generate the revenue requirement and the 1990 Cost Allocation Study. Town witness Richardson used this study to determine the percentage rate increase for each customer class that would have been necessary in 1990 to yield revenues that exactly matched costs. Certain limits were placed on the amount of this increase to avoid undue rate shock and then the general rate increase required by the Town was added to determine the total rate increase for each customer class.
3.2 General Rate Increase
The Town's forecast of 1992 revenues from Basic Rates (excluding those associated with the ECAM) and the approved revenue requirement result in the following:
Table 3.1
Projected 1992 Deficit for the Purpose of Determining Rates
Projected Revenue from Basic Rates (Ex. S-2, Pg. F1)
$7,720,663
Other Revenue (Exhibit S-5, Page SS6)
105,000
Projected Total Revenue
7,825,663
Less: Revenue Requirement
(8,172,254)
Projected 1992 Excess of Revenues over Expenditures
(346,591)
Deemed December 31, 1991 Surplus for the Purpose
of Determining Rural Rates
272,179
Projected 1992 Deficit
($ 74,412)
For the purposes of determining Rural rates, the Commission therefore finds that the Town has a forecast deficit, after adjusting for transfers to the Town accounts in excess of that considered to be just and reasonable, of $74,412 for the year 1992. Under normal circumstances, this would result in an approximate rate increase of 1% being allowed in 1992. Given the duration of the hearing which was completed in October 1992, recovery in 1992 is not practical and the Town will be entitled to recover the $74,412 over the 23 month period beginning February 1, 1993.
For 1993, the Town forecast revenues from basic rates which would be 2.909% higher than 1992 basic rate revenues. The corresponding requirement for 1993 is therefore:
Table 3.2
Projected 1993 Revenue Shortfall
Projected Revenue from Basic Rates
$7,945,257
Other Revenue
105,000
Projected Total Revenue
8,050,257
Less: Revenue Requirement
(8,311,747)
Projected 1993 Deficit
(261,490)
Projected 1992 Deficit Recovery (74,412 x 0.5)
(37,206)
Projected Revenue Shortfall
($ 298,696)
The resulting increase in basic rates to be effective February 1, 1993 would therefore be 4.05% ($298,696/$8,050,257 x 12/11).
3.3 Cost Allocation Study
3.3.1 Introduction
The cost allocation is used by the Town to determine the adjustments that should be made to each rate class to move the rates towards the estimated cost of service. The Town has made three significant changes in its cost allocation study since the previous rate hearing:
3.3.2 The Average and Excess Demand Method
the methodology was changed from the Non-Coincident Peak approach to the Average and Excess Demand Method (AED);
the estimates for non-coincident and coincident peak for most customer were estimated using a calculation based on actual peak meter readings rather than general estimates;
the customer allocation factors were adjusted to correspond approximately with the AED allocation factors.
The Town has adopted the Average and Excess Demand method which it also supported at the 1991 Maritime Electric General Rate Hearing:
Because AED takes average demand throughout the year into account so that customer classes, whose peak is not coincident with the utility's peak, do not benefit unduly from this non-coincidence. (Exhibit S-2, Page 7)
The Public Utilities Commission, in its 1991 Order E91-7 regarding the Maritime Electric 1991 General Rate Application, came to the following conclusion:
However, the Commission, having reviewed the evidence, believes that the AED methodology more fairly apportions costs to all of the Company's customers in that it recognizes load diversity. We determine, therefore, that, in the absence of a better method of assigning certain fixed generation costs to energy, the AED method should be implemented for all of the Company's rate classes ... (Order E91-7, Page 7)
The Commission continues to believe that the AED method is appropriate for rate design but points out that its position may be tempered if an alternative approach can be established which better serves the objective of establishing just and reasonable rates.
30. The Commission approves the Town's proposal to use the AED method for determining rates for this and future rate applications until such time as otherwise ordered by the Commission.
Allocation of demand costs is a critical area of rate determination which is subject to a significant amount of judgment. In the case of Summerside, judgment is required because, among other things, customer demands are not metered in a manner that can provide an actual measurement of class peak and coincident peak (CP).
In the past, the load factors used by the Town were estimates, based in part on the estimates used by Maritime Electric. For the purposes of the current rates, the Town derived what it proposes to be more reliable estimates based on customer meter readings which it now has available. The individual monthly peaks of the customers were used to estimate class peak and coincident peak. The results, using the NCP load factor for comparison, are summarized in Table 3.3.
Table 3.3Class NCP Load Factors
1987 TOS |
Current TOS |
|
| Residential | 40.0% |
60.0% |
| GS < 3 kW | 50.0% |
50.0% |
| GS > 3 kW | 50.0% |
36.2% |
| LGS > 50 kVa | 50.0% |
54.0% |
| Industrial | 50.0% |
37.3% |
| Street Lighting | 45.0% |
47.8% |
| Unmetered Rate | 60.0% |
73.9% |
The major impacts of the revised load factors would be the rebalancing of the General Service rate to include the new Large General Service class; the allocation of a greater proportion of demand costs to the Industrial Class and a lower proportion to the Residential class.
In the Commission's view, the Town's efforts to derive load factors based on actual load data is an improvement over the use of subjective estimates; however, based on the evidence presented, the estimates presented remain imprecise and are dependent on a high degree of judgment. The Commission believes that it is prudent to consider these limitations when applying the study results.
Allocation of customer costs is a further area which is highly dependent on judgment. Since the last rate application, the Town has revised its customer weighting factors to approximately mirror the AED Demand Allocation factors. The results are summarized in Table 3.4.
Table 3.4
Customer Weighting Factors
|
1987 TOS |
Current TOS |
|
| Residential |
1.0 |
1.0 |
| GS < 3 kW |
3.1 |
1.2 |
| GS >3 kW |
25.8 |
6.0 |
| LGS > 50 kVa |
25.8 |
72.0 |
| Industrial |
16.0 |
72.0 |
| Street Lighting |
1.1 |
1.2 |
| Unmetered Rate |
1.0 |
2.0 |
The impacts on General Service and Industrial customers are quite clear—the larger customers will be allocated a much higher proportion of customer costs than in the past.
In the view of the Commission, the methodology used by the Town is based on the assumption that customer costs are approximately proportional to customer demands. Under normal circumstances, some economies of scale would be expected when serving larger customers. In the absence of evidence demonstrating that economies of scale no longer exist, the Commission again believes that it is prudent to temper the adjustments to rates proposed by the Town.
The overall impact of the above discussion can best be illustrated by examining the final affect on rates proposed by the Town as illustrated in Table 3.5. Using the Industrial rate as an example, the Town requested a rate decrease at their last rate hearing because the rate based on the methodology at the time was considered to be too high. In the current application, as a result of various changes in methodology, the Town is proposing a large increase in the Industrial rate because it is now considered to be too low. The rate changes currently proposed therefore reflect a combination of movements towards cost of service and movement in how the cost of service is defined.
Table 3.5
Revenue to Cost Ratios and Proposed Rate Changes
Revenue as % of Cost |
Proposed Rate Change |
||||
1987 TOS |
1990 TOS |
1988 |
1992 |
1993 |
|
| Residential | 107.5% |
101.0% |
-6.34% |
7.23% |
2.84% |
| GS < 3 kW | 87.7% |
97.5% |
5.49% |
11.13% |
2.84% |
| GS >3 kW | 95.5% |
98.6% |
5.49% |
9.82% |
2.84% |
| LGS > 50 kVa | 95.5% |
106.9% |
5.49% |
1.16% |
2.84% |
| Industrial | 102.3% |
80.0% |
-1.79% |
15.00% |
10.00% |
| Street Lighting | 94.5% |
99.9% |
7.76% |
8.35% |
2.84% |
| Unmetered Rate | 42.6% |
105.4% |
n/a |
2.60% |
2.84% |
| OVERALL | 100.0% |
100.0% |
1.00% |
6.48% |
3.50% |
As a result of the above discussion, the Commission believes that the results of the Cost Allocation study remain imprecise and are only an indicator—albeit the best currently available—of the cost of service. In particular, where major shifts in rates are proposed, such as the greater than 25% increase proposed for Industrial customers within a short period of time, caution is warranted. The Commission will therefore temper the proposed movement to a revenue to cost ratio of 1:1 in recognition of the imprecise nature of allocating costs and in order to avoid undue rate shock to customer classes.
The Commission has adopted a general guideline for adjustments for Maritime Electric Company, Limited rates that limits the increase to any customer class to no less than 0.5 times or no greater than 1.5 times the general rate increase. The Town opposes this guideline for reasons given in Exhibit S-20. The Commission continues to believe that the above guideline is a reasonable mechanism for avoiding undue rate shock; however, the Commission also recognizes that, in certain circumstances, a variation from this guideline might be justified. Such a situation might arise when rates for a group of customers are considered to be well above or below the cost of service. Such is the case for the Industrial Rate in Summerside. The Commission will allow a maximum adjustment to this rate of 2.0 times the general rate increase for the current rate adjustment.
31. As a general guideline, basic rate adjustments for customers classes shall reflect an upper rate adjustment of 1.5 times the average increase (decrease) in basic rates and a lower level of 0.5 times the average increase (decrease) in basic rates in the current and future rate applications.
32. For the current rate application, the Commission will allow a basic rate increase of 2.0 times the general increase for the Industrial Class which currently has a rate significantly below the estimated cost of service.
The Town's proposed adjustments to rates by class are given in Table G1 of Exhibit S-2. The estimated adjustments to rates which would result from the above findings, based on the same general methodology modified to reflect the above findings, are shown in Appendix 3 and are summarized in Table 3.6.
Table 3.6
Estimated Rate Changes by Customer Class
Total Rate |
|
Class |
Change |
Residential |
3.74% |
GS to 3 kW |
6.08% |
GS >3kW |
6.08% |
LGS >50kVa |
2.02% |
Industrial |
8.10% |
Street Lighting |
4.75% |
Unmetered |
2.02% |
3.3.4 Other Matters
The Town proposes the following additional changes to rates:
The demand/base charge in the rates will be increased relative to the energy charge to bring demand/base revenues closer to demand costs;
The off-peak discount for General Service customers larger than 3 kW and industrial customers will be increased from the current range of $0.81-$1.06 to $3.30 per kW per month to better reflect estimated savings;
The second block energy charge discount for General Service customers will be increased from the current level of 10% to 15% to encourage better capacity utilization.
The Commission considers these proposals to be reasonable.
33. Except as otherwise noted in these findings, the proposed changes in rates are approved.
3.4 Tariff3.4.1 Introduction
Summerside has further proposed a number of changes to its general tariff. These are:
· Amendment to the Energy Cost Adjustment Mechanism;
· Elimination of the second energy block for residential customers;
· Creation of a new Large General Service rate;
· Modification of the terms and conditions of the Industrial Rate.
Each topic is discussed separately below.
3.4.2 Energy Cost Adjustment Mechanism
The basic rate of the Town of Summerside is based on a composite cost of electricity generated and purchased from Maritime Electric of $0.0683/kWh. Costs above or below this amount are recovered through rates by means of the Energy Cost Adjustment Mechanism ("ECAM") which is applied to customer's bills on a monthly basis. In its 1988 decision, the Public Utilities Commission concluded that the adjustment was in need of review.
The actual costs reported by the Town in recent years were as follows:
Table 3.7
Town of Summerside ECAM Costs
Year |
kWh Purchased |
Cost |
Cents/kWh |
1989 |
68,070,888 |
4,010,772 |
5.89 |
1990 |
69,219,630 |
4,351,811 |
6.29 |
1991 |
69,103,128 |
4,681,677 |
6.77 |
Base |
6.83 |
In the opinion of the Commission, the actual fuel costs of the Town are now reasonably close to the base ECAM amount. No further review is required at the current time; however, the Town should consider adjusting the base amount in future applications if the estimated cost of purchased energy varies from the base amount by more than 0.5 cents/kWh.
The ECAM includes a line loss factor which accounts for the difference between electricity produced and purchased and electricity sold. The Town proposes to change the line loss factor from 1.0631 to 1.0537, which represents the average line loss for the period 1986 to 1990. The Commission approves this change.
34. The base amount of the Energy Cost Adjustment Mechanism shall be reviewed in the future if the cost of purchased energy varies from the base amount by more than 0.5 cents/kWh.
35. The Energy Cost Adjustment Mechanism shall be modified to read as follows:
... Such variance will be multiplied by a factor of 1.05370 to arrive at the adjustment.
The Town proposes to establish a single block energy charge for residential customers. This is consistent with the direction given by the Public Utilities Commission in Order No. E-880324 and will be approved.
36. The proposed single energy block rate structure for residential customers is approved.
3.4.4 Large General Service Rate
The Town proposes to establish a new Large General Service rate for the following reasons:
A large General Service rate has been proposed in response to requests from customers and in recognition of the higher average load factor of general service customers with demands above 50 KVA
(Exhibit S-5, Page ii.).
The view of the Commission is that new customer classifications should only be permitted where it can be demonstrated that the cost of service or load characteristics of the proposed new group of customers are materially different from those of other customer classifications. The Commission believes that the Town has demonstrated that the large General Service customers have both materially different costs and load characteristics. The proposal is approved on this basis.
37. The establishment of a new Large General Service rate for customers with demands greater than 50 kVa is approved.
The Town proposes to modify the Industrial Rate to read as follows:
This rate shall apply to all electric energy used by industry or business enterprises manufacturing, assembling or processing raw material or goods and whose...
Minimum Charge: Billing demand not less than 50% of previous 11 month maximum.
(Exhibit S-19, Page T-7, emphasis added to highlight changes)
These changes should allow smaller facilities and those with seasonal operations to qualify for the Industrial rate. The Commission approves the proposal.
38. The proposed amendments to the industrial rate are approved.
39. The Town shall immediately file with the Commission a Tariff for effect February 1, 1993 that reflects the findings contained herein.
3.5 DispositionAn Order implementing the findings and conclusions contained in these reasons will therefore issue.
IN THE MATTER of an application of the Town of Summerside dated March 6, 1992.Order
WHEREAS
the Town of Summerside, by application filed with the Commission on March 6, 1992, applied for an order or orders of the Commission approving a number of amendments to the Summerside Electric Rural General Tariff;AND WHEREAS
the Commission heard the application at public hearings conducted in Charlottetown on June 9, 10, 11, 12, July 28, 29, 30, 1992 and October 28 and 29, 1992 after due public notice;AND WHEREAS
the Commission has issued its findings in this matter in accordance with the Reasons for Order issued with this Order;NOW THEREFORE,
pursuant to the Island Regulatory and Appeals Commission Act and the Electric Power and Telephone ActIT IS ORDERED THAT
1. For future rate applications, the Town shall prefile evidence supporting its sales forecasts.
2. The Town shall file for review by the Commission its proposed 1994 budget and rates prior to December 31, 1993.
3. For its next rate application, the Town shall disaggregate its sales forecast by customer class and shall calculate rates based on the estimated kWh sales to each class.
4. The Town shall review its budgeting process to ensure that explanatory notes are sufficiently documented for future reference.
5. The 1993 revenue requirement shall be reduced by $25,000 to eliminate the budgeted salary and wage increase.
6. In the future, the Town shall file labour contracts and a summary of the changes thereto with the Commission immediately following the signing of the respective agreements.
7. In future rate applications where the Town argues that its wage increases are justified based on "catching up" to comparable employers, the Town shall file evidence supporting such an argument.
8. The Town shall review its policy for amortization to ensure that capitalized expenses are amortized over their expected useful life.
9. The Commission approves the Town's proposal to amortize over three years the balance of the expenditures incurred prior to 1980 which are currently being amortized on a 5% declining balance basis.
10. The Commission approves the Town's plan for disposing of its accounts "Transfer from Equipment Reserve", "Equipment Purchase" and "Reserve for Equipment".
11. The 1992 and 1993 revenue requirement shall be reduced by $23,578 to reflect the estimated reduction in hourly vehicle charges.
12. In the future, the Town shall account for motor vehicles in a manner consistent with that used for other capital assets.
13. The Town shall file with the Commission, on an annual basis prior to December 31, the budget for capital expenditures for the following year.
14. The following depreciation rates are approved as presented in Exhibit S-28:
Generator Buildings 2.76%
Fuel Holders 4.53%
Prime Movers 2.29%
Electrical Plant 4.19%
Plant Equipment 5.54%
Substation Buildings and Structures 2.50%
Substation Equipment 2.84%
Underground Conductors 3.86%
Overhead Conductors 3.91%
Poles & Fixtures 3.92%
Underground Street Lighting 3.93%
Overhead Street Lighting 5.90%
Transformer Line-in-Service 3.14%
Transformer Installation 3.24%
Services 3.31%
Underground Services 3.07%
Meters 3.24%
Meter Installation 3.44%
Buildings and Structures 2.25%
Transportation Equipment 11.30%
Laboratory Equipment 3.26%
Office Equipment 10.18%
Miscellaneous Equipment 5.12%
15. The amount of Accumulated Depreciation of $4,568,117 as at December 31, 1991 is approved.
16. The Town's proposal to increase the book value of the assets by $41,480 and to calculate depreciation on the higher amount is accepted.
17. The $41,480 overall adjustment to the cost of fixed assets shall be amortized to Depreciation Expense over a period of 3 years.
18. The Accumulated Depreciation balance shall be reduced by $382,042 by amortizing $76,408 per year to Depreciation Expense over a 5 year period.
19. Depreciation Expense, after amortization adjustments, of $393,007 for 1992 and of $409,533 for 1993 is approved.
20. The Town shall prepare a depreciation study for submission to the Commission not less frequently than once every 5 years.
21. The Town shall modify its accounts in the future so that the following balances currently included in Investment in Capital Assets can be clearly identified:
· Interest on Sinking Fund
· Contributions from Customers (non-refundable)
· Contributions from Others
22. The following adjustments to the capital structure are determined to be just and reasonable:
· Sinking fund investments shall be deducted from Long-term debt;
· Transfers from the Equipment Reserve for 1988, 1989 and 1990, Contributions from Other Levels of Government and Sinking Fund Interest shall be deducted from Investment in Capital Assets (Equity).
23. For the purposes of evaluating a just and reasonable return, the Commission: Maritime Electric Company, Limited (the "Company") has applied to the Commission for approval to defer the filing of the documents on the Company's current and proposed power purchase policies;
· rejects the premium on debt issued by the Town of Summerside;
· rejects the proposal to calculate a return based on a deemed equity component; and,
· accepts the estimated return on equity in the adjusted amount of 10.09%.
24. A Net Income Allowance of $210,832 in 1992 and 1993 is considered just and reasonable and sufficient to maintain the financial integrity of the Town utility.
25. The Town shall review its policy for withdrawing funds from the Electric Department accounts to ensure that sufficient funds are reinvested in the utility in accordance with prudent utility practice.
26. The Commission approves for 1992 a return on rate base of 11.15% calculated based on the December 31, 1991 rate base.
27. The Town shall estimate its deficit recovery for 1992 based on a deemed Surplus at the end of 1991 of $272,179.
28. The Commission finds a Revenue Requirement of $8,172,254 for 1992 and $8,311,747 for 1993 to be reasonable and prudent.
29. The Commission finds that an overall increase in Basic Rates effective February 1, 1993 of 4.05% is just and reasonable
30. The Commission approves the Town's proposal to use the AED method for determining rates for this and future rate applications until such time as otherwise ordered by the Commission.
31. As a general guideline, basic rate adjustments for customers classes shall reflect an upper rate adjustment of 1.5 times the average increase (decrease) in basic rates and a lower level of 0.5 times the average increase (decrease) in basic rates in the current and future rate applications.
32. For the current rate application, the Commission will allow a basic rate increase of 2.0 times the general increase for the Industrial Class which currently has a rate significantly below the estimated cost of service.
33. Except as otherwise noted in these findings, the proposed changes in rates are approved.
34. The base amount of the Energy Cost Adjustment Mechanism shall be reviewed in the future if the cost of purchased energy varies from the base amount by more than 0.5 cents/kWh.35. The Energy Cost Adjustment Mechanism shall be modified to read as follows:
36. The proposed single energy block rate structure for residential customers is approved... Such variance will be multiplied by a factor of 1.05370 to arrive at the adjustment.
37. The establishment of a new Large General Service rate for customers with demands greater than 50 kVa is approved.
38. The proposed amendments to the industrial rate are approved. And
39. The Town shall immediately file with the Commission a Tariff for effect February 1, 1993 that reflects the findings contained herein.
DATED
at Charlottetown, Prince Edward Island, this 21st day of January, 1993.BY THE COMMISSION:
Linda Webber, ChairmanJohn L. Blakney, Vice-Chairman
Deborah MacLellan, Commissioner
Appendix A
Appendix 2
Appendix 3
