Reasons for Order 1 Introduction This is an application by Maritime Electric Company, Limited ("Maritime Electric" or the "Company") for approval of the Company's 1993 capital budget. The application, which was filed with the Commission on November 9, 1992, was heard in public before the Commission on December 15 and 16, 1992, after due public notice. An intervention in this case was entered by the Minister of Energy and Forestry, Government of Prince Edward Island (the "Minister"). 2 The Application 2.1 Summary Table 1 shows a summary of the major account items submitted to the Commission for approval. Table 1 Summary of 1993 Capital Budget
2.2 Demand Side Management Specific Demand Side Management (DSM) Programs proposed in this application are set out in Table 2. Table 2 1993 Demand Side Management Budget
The Commission continues to view DSM initiatives as essential elements of the Company's activities. Experience to date is that actual expenditures for DSM programs have typically been well under the budgeted amounts. With other types of capital expenditures, being able to complete projects at lower than anticipated cost is generally viewed favourably by the Commission. In terms of DSM, such a reduction can result in foregone savings or ultimately the construction or purchase of additional generating capacity that could have been avoided with a lower overall cost to electric customers. The Commission therefore views DSM as an important component of least cost planning. During the hearings, the Company was asked to compare its efforts in DSM with those of other utilities. The Company responded by providing a comparison of DSM among Canadian utilities from data of the Canadian Electrical Association; however, at the hearing the Company stated that it had little confidence in the accuracy of the material in the report. The Commission did not view this response as helpful and, at worst, considers it a waste of effort. The Minister, during questioning, raised the issue of implementing DSM initiatives that encourage customers to switch to more energy-efficient fuels. In response, Company witness James Lea stated that the Company viewed its role as encouraging customers to use electricity as efficiently as possible rather than to switch to other energy sources. While the Commission is not asking the Company to change its direction at this time, we are aware that some North American utilities are taking a more aggressive role which can include fuel switching as an economic DSM activity. In light of the above, the Commission believes that the demand side management strategy of the company is in need of review. Such a review has not been conducted formally since the Company first proposed its DSM programs a number of years ago. The Commission is of the view that such a review should include at least the following topics:
The report should be completed and filed in sufficient time that it can be reviewed prior to the approval of the 1994 DSM budget. The Company's 1993 DSM proposals will be approved.
2.3 General Expenditures General Capital Items proposed for 1993 are shown in Table 3. Table 3 1993 General Budget
Discussion at the hearing focused on Item G-2, Management Information Systems (MIS). The Commission has expressed concern for some time that this area needs considerable review. Order UE92-6 regarding the 1992 Capital Budget included the following discussion: During the hearing, it became apparent to the Commission that the information systems area of the Company is in need of a comprehensive review. Questions posed to Company witnesses indicate that long-range planning in this area is effectively absent. This situation must be rectified.
The Company's forecast expenditures on MIS for 1992 were approximately $80,000. Under normal circumstances, approval of these expenditures would not come before the Commission until Supplementary Budget Requests are filed with the 1994 Capital Budget in late 1993. The Commission has, however, been scrutinizing these accounts more closely because it does not wish to allow the Company to continue to spend money in MIS on an ad hoc basis. On questioning about the over expenditure, the Company responded that there was a change in Executives and Management responsible for this area in early 1992, and that all except some minor expenditures for equipment replacement were made prior to the Commission issuing Order UE92-6. In addition, commitments were made for certain expenditures in late 1991 under previous management that were not identified until after the equipment was delivered in mid 1992. The Commission believes that the company was or should have been aware of our concern with respect to this account over the past few years. None-the-less, expenditures continued to be made on what appeared to be an ad hoc basis and the explanations given at the hearing left the impression that there are weaknesses in the Company's expenditure controls. The Commission would normally expect a company the size of Maritime Electric to be able to identify outstanding purchase commitments, particularly in such circumstances. The Commission therefore reminds the Company that it has a responsibility to ensure that all expenditures are reasonable and prudent and directs the company to review its accounting controls to prevent such a situation from occurring again. The Commission is particularly concerned that the incident in MIS may not be isolated and that budgets could be over committed without the immediate knowledge of the parties involved. In response to questions, the Company indicated that it will be addressing the need for a system that tracks commitments in the upcoming MIS plan to determine whether the benefits of such a system outweigh the costs. The Commission views this evaluation as important. The final issue in this matter is the Company's request for approval of $50,000 of the MIS budget prior to the completion of the MIS plan, currently scheduled for May 1993. The Commission has been pursuing this area with the Company for some time and does not wish to see further expenditures until an approved plan is in place; however, we do recognize that the Company may have requirements for unforeseen equipment failures. The Commission will provide a $15,000 allowance for the replacement of existing equipment, but will not authorize any other expenditures for capital equipment, whether by purchase or lease, except in exceptional circumstances.
2.4 Production Production Expenditures proposed for 1993 are shown in Table 4. Table 4 1993 Production Budget
Discussion of production expenditures focused on account P-7: Generation Planning Studies. The Company initially proposed a "normal" planning budget of $100,000. After being questioned about whether the budget would be sufficient with the ongoing negotiations for new capacity and the likelihood of contracts being finalized in 1993, the Company amended its application to include what appears to be a more realistic amount. The Commission considers this an example of a budget item that was not sufficiently reviewed by the Company prior to filing and expects the Company to direct sufficient attention to all budget amounts in the future. The proposed 1993 Production expenditures have been reviewed and are approved by the Commission. For 1992, the Company projects that it will be over budget by approximately $200,000 in the Steam Plant Life Extension and $250,000 in the Generation Planning accounts. Company witness Mr. Paul Newcombe acknowledged that the Company normally applies to the Commission when expenditures are expected to exceed budget amounts by more than $50,000, in accordance with previous direction from the Commission. Advance approval was not sought in 1992. The Company's response was that this resulted, in part, from the very busy agenda including negotiations, regulatory hearings and other matters. The Commission recognizes the somewhat unique circumstances in 1992; however, we do expect that in the future the Company will again seek advance approval when actual expenditures on projects are expected to exceed Commission approved budgets by more than $50,000. The Company is in the fourth year of the five-year steam plant-life extension project. The current forecast indicates that the overall project remains approximately within the original budget except for the additional expenditures needed to extend the life of Unit No. 5 which was originally scheduled for retirement. The Company shall continue to update the Commission on the steam plant life extension program and the results of its Generation Plans.
2.5 City Distribution Proposed 1992 City Distribution Expenditures are shown in Table 5. Table 5 1993 City Distribution Budget
Discussions at the hearing focused on the significant reductions in many City accounts, with some less than half the 1992 levels. According to the Company, these reductions result from the sales forecast which projects a reduction in the number of new customers connecting to the system. In most cases, the accounts are customer driven, that is, the Company is required to provide service when it is demanded. If, for example, the number of new customers is higher than forecast, the Company may require an increased budget and is expected to seek Commission approval if the increase exceeds $50,000. The City Distribution Budget will be approved.
2.6 Rural Distribution Proposed Rural Distribution Expenditures for 1993 are shown in Table 6. Table 6 1993 Rural Distribution Budget
Reductions in certain Rural Distribution accounts parallel those for the City Distribution accounts. The discussion above under the City accounts also applies here. The Commission has focused on accounts R-8: Line Rebuilds and Improvements and R-12: Pole Replacement Program for a number of years. In response to the Commission's concern that the rural distribution system must not be allowed to return to the condition it was in in the early 1980's, the Company has continued to improve its planning process. The Company is to be commended for its efforts to significantly improve the approach to decision-making in this area. In addition, the Company is now filing Outage Statistics Reports on a monthly basis in accordance with the following direction given in Commission Order UE92-6: The Commission will expect the Company to continue to refine its distribution planning methodology and to demonstrate, on an annual basis, that annual expenditures for line rebuilds and improvements and the Company's pole replacement program are adequate. The annual Average Service Reliability Index, provided in response to Commission Staff Interrogatories, was discussed in some detail at the hearing. It is clear from the discussion that further improvement is needed in reporting to provide a system reliability summary that is detailed enough to identify problem areas yet comprehensive enough to allow monitoring of the total system over time. The Company is expected to continue to work with Commission staff to achieve this goal. During the first week of December in 1992, the Company had a number of extended outages and other service problems as a result of the first major snow storm of the season. At the time of the hearing, Company officials believed that the conditions were considered severe and that they were generally pleased with how the system withstood the storm. The Commission remains concerned with the duration of some outages and the damage from other unusual conditions and, in particular, what this indicates about the rural system. As a result, the Company will be ordered to file a detailed report on the damage and interruptions resulting from the storm and the measures that might be undertaken to mitigate such problems in the future. In particular, the Commission is interested in an evaluation, including estimated costs, of building to higher standards in areas known to be exposed to severe conditions. The Commission is of the view that higher standards may be necessary in such areas to ensure that service is "safe and adequate".
2.7 Transmission The proposed transmission expenditures for 1993 are shown on Table 7. Table 7 1993 Transmission Budget
The proposals have been reviewed by the Commission and will be approved.
2.8 General Expense Capitalized General Expense Capitalized represents general overheads associated with capital items to be installed or constructed in 1993 that the Company proposes to capitalize. The Company's 1993 proposal will be approved.
3 Other Matters 3.1 Deferred Charges At the time of the hearing, the Company had a number of accounts of a capital nature which were recorded as assets, but for which no plan to amortize or otherwise reduce the balances appeared to exist. The accounts which were identified at the hearing include:
Company witness Paul Newcombe did not believe that the expenditures for the first two studies had been approved by the Commission. Rather, these accounts had accumulated as work was done on the projects which was not chargeable to expense in the respective year. As a result, customers currently only pay for these amounts to the extent that there are financing charges associated with assets recorded by the Company. The Company's plan to charge the above costs to customers (through Revenue Requirement) or otherwise dispose of the amounts is not clear. The Commission generally believes that such costs should be charged to the customers who are expected to benefit from the expenditure or, where there is no future benefit, over a reasonable period of time. The Commission is also of the view that the Company should seek approval of any expenditures not previously approved and develop a proposal for the treatment of these accounts. The Load Survey Equipment results from Public Utilities Commission Orders E90-12 and E91-12 which instruct the Company to carry out a marginal cost study. The costs associated with the study are to be amortized over a period of 5 years. While the Company did not have a plan for amortizing these costs at the time of the hearing, it appears evident from the recent rate application that amortization was commenced effective fiscal year 1992. These accounts have not historically been reviewed on a regular basis through either revenue requirement review or the capital budgeting process. The Commission is of the view that the company should file with the Commission a summary of the activity in the deferred charge accounts no less frequently than annually.
13. The Company shall file with the Commission in appropriate form a summary of activity in the Deferred Charges accounts on a regular basis. 3.2 Assets Under LeaseThe Company obtains the use of assets through leases where it is deemed appropriate for financial or other reasons. Motor vehicles were an example mentioned briefly at the hearing. The Commission is of the view that assets being leased by the Company should be reviewed on a periodic basis.
3.3 Supplementary Capital Items1991 These items have been reviewed by the Commission and will be approved. 15. The 1991 supplementary capital expenditures set out in Section 5 of the application are approved. An Order will therefore issue. IN THE MATTER of an application of Maritime Electric Company, Limited for approval of a 1993 Capital Budget. Order WHEREAS Maritime Electric Company, Limited (the "Company"), by application filed with the Island Regulatory and Appeals Commission (the "Commission") on November 9, 1992, applied for approval of the Company's 1993 capital budget;AND WHEREAS the Commission heard the application at public hearings conducted in Charlottetown on December 15 and 16, 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 Act;IT IS ORDERED THAT 1. The following 1993 DSM programs and amortization periods are approved:
2. The Company shall prepare a review of its DSM programs including a status report and plan for the future for filing with the 1994 DSM budget. 3. Approval for expenditures of $150,000 for G-2: Management Information Systems is withheld pending approval of the MIS plan except for $15,000 which is allowed for equipment replacement. 4. Other General Expenditures of $61,000 are approved. 5. The Company shall review its internal controls to ensure that purchase commitments are authorized and can be identified whenever necessary. 6. Production Expenditures for 1993 totaling $5,678,000 are approved. 7. City Distribution Expenditures for 1993 totaling $776,000 are approved. 8. Rural Distribution Expenditures for 1993 totaling $3,346,000 are approved. 9. The Company shall file a detailed report on the interruptions and damage that occurred during the storm in early December 1992 including:
10. Transmission expenditures totaling $344,000 in 1993 are approved. 11. Capitalized general and administrative expenses for 1993 totaling $1,932,000 are approved. 12. The Company shall review its deferred charges and other capital accounts for any amounts not previously approved by the Commission and shall propose appropriate treatment for these accounts. 13. The Company shall file with the Commission in appropriate form a summary of activity in the Deferred Charges accounts on a regular basis. 14. The Company shall file with the Commission on or before June 30, 1993 a summary of all assets leased in 1992 and expected to be leased in 1993 including a description of the asset, the amount of the lease, the reason for leasing the asset and such other information as may be appropriate. 15. The 1991 supplementary capital expenditures set out in Section 5 of the application are approved. DATED at Charlottetown, Prince Edward Island, this 25th day of March, 1993.BY THE COMMISSION: Linda Webber, Chairman John L. Blakney, Vice-Chairman Anne McPhee, Commissioner This is Appendix 3 to Island Regulatory and Appeals Commission Order UE93-1
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