Docket UE20708
Order UE94-4IN THE MATTER of an application by Maritime Electric Company, Limited for approval of the 1994 capital budget.
BEFORE THE COMMISSION
on Friday, the 4th day of March, 1994.
Linda Webber, Chair
John L. Blakney, Vice-Chair
Deborah MacLellan, Commissioner
Order
Contents
Appearances & Witnesses
Reasons for Order
1 Introduction
2 The Application
2.1 Summary
2.2 Demand Side Management
2.3 General Expenditures
2.4 Production
2.5 City Distribution
2.6 Rural Distribution
2.7 Transmission
2.8 Capitalized General Expenses
3 Other Matters
3.1 Supplementary Capital Items—1992
3.2 Supplementary Capital Items—1993
3.3 Supplementary Capital Items—General
3.4 Disposition
Order
Appearances & Witnesses
1. For Maritime Electric Company, Limited
Counsel:
William G. LeaWitnesses:
Philip Hughes, Vice-President, Finance and Administration and Chief Financial Officer
P. H. Newcombe, Vice-President, Production and Energy Supply
J. A. Lea, Vice-President, Corporate Planning
J. Landrigan, Director, Customer Service2. For the Minister of Economic Development and Tourism, Government of Prince Edward Island
Counsel:
Shauna Sullivan-Curley3. For the Prince Edward Island Energy Corporation
John te Raa, Operations Manager
4. For the Town of Summerside
Robert Hughes
5. For The Island Regulatory and Appeals Commission
Counsel:
Thomas A. MathesonStaff:
Donald G. Sutherland, Director, Utilities Division
George W. Mason, Senior Analyst, Utilities Division
Heather Walker, Recording Secretary
Reasons for Order
1 Introduction
This is an application by Maritime Electric Company, Limited ("Maritime Electric", the "Company") for approval of the Company's 1994 capital budget. The application was filed with the Commission on October 25, 1993 and, except for those parts related to demand side management and the Dalhousie plant conversion, was heard in public before the Commission on December 7, 8 and 9, 1993, after due public notice. Interventions in this case were filed by the Town of Summerside, the Minister of Economic Development and Tourism (the "Minister") and the Prince Edward Island Energy Corporation (the "Energy Corporation").
The sections on demand side management and the Dalhousie plant conversion were to be heard at a later date and will be the subject of a subsequent order or orders.
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 1994 Capital Budget
Major Account Amount Demand Side Management $ 506,000
General 752,000
Production-Regular 4,486,000
Production-Dalhousie Conversion 20,300,000
City Distribution 1,504,000
Rural Distribution 4,714,000
Transmission 170,000
$32,432,000
Capitalized General Expenses 2,160,700
Total $34,592,700
Contributions Demand Side Management 6,000
City Distribution 40,000
Rural Distribution 335,000
381,000
Net Total $ 34,211,700
2.2 Demand Side Management
In Order UE93-6, the 1993 capital budget order, the Commission determined that the whole demand side management strategy of the Company was in need of review. The Company was therefore ordered to file a comprehensive report on demand side management as part of its 1994 capital budget. The Company notified the Commission that it did not expect to have the report completed until January 1994 and proposed to continue with existing programs until the review was completed.
While the Commission heard the evidence on Demand Side Management prior to issuing this order, further time is needed to consider the proposals made by the Company. In the meantime, the Company’s request to continue with ongoing programs will be approved.
1. The Company’s proposal to continue with ongoing programs until further direction is given on Demand Side Management is approved.
2.3 General Expenditures
General Capital Items proposed for 1994 are shown in Table 2.
Table 2
1994 General Budget
Item Program Amount G-1 Office Equipment and Furniture 111,000
G-2 Management Information Systems 531,000
G-3 Mail Inserter 110,000
Total $ 752,000
In Order UE93-6, the Commission focused on the Management Information Systems (MIS) budget and, in particular, the lack of planning in this area apparent at that time. Approval of most of the budget was withheld pending approval of an MIS plan. The plan was subsequently filed in mid-1993 and the Company's proposed acquisitions for 1993 were approved in Order UE93-8.
The current application led to some difficulties in comparing the company's proposed expenditures for 1994 with those proposed in the MIS plan. While the MIS plan is not expected to remain static, the Commission is interested in comparing expenditures each year with the Company’s long term plan. Such monitoring would include significant changes in equipment and projects that might be planned from one filing to the next. We believe that this can be achieved with some straight-forward modifications to the Company's MIS updates and capital budget filings.
Effective for 1994, the Company also proposes to change its accounting policy from expensing application software development costs to capitalizing the costs and depreciating them over 5 years. The change was proposed to achieve a better matching between the cost of software and its use. Changing the policy would also reduce the revenue requirement in the short-term at the price of a higher revenue requirement in the long term as financing costs are added, an impact typical of any expenditure that is capitalized. Since application software is generally considered to have a useful life beyond one year, the Company’s general proposal appears reasonable. At issue is whether the policy should be phased in to smooth its impact on revenue requirement over the next 5 years. In this case, we do not consider a phase in to be necessary since the overall impact appears to be acceptable. The actual depreciation rate will be reviewed at the next rate case.
With respect to item G-1, the Company indicated that its estimate for photocopiers was $10,000 higher than now appears to be necessary. Accordingly, this item will be reduced by $10,000.
Also discussed with respect to these accounts was the Company's policy for leasing. The discussion was initiated, in part, because the Company is seeking approval for a number of purchases—namely photocopiers—which have typically been leased in the past. The Company indicated that it was seeking approval even though the decision had not been made on whether the assets would be purchased or leased. In principle, we support the Company’s analysis of leasing versus buying assets so long as the objective is to provide the lowest long-term cost to customers. We therefore consider some flexibility in the approved capital budget to be reasonable.
In the past, such "acquisitions" have not come to our attention at all—unless the specific operating account was examined—because the assets were leased. In the future, the Company should provide an annual update to the lease report as part of its capital budget application.
2. The Company shall modify it MIS filings to highlight changes, if any, proposed in its long-term plan and to provide a comparison of budgeted expenditures proposed for the upcoming year with the long-term plan.
3. The Company’s proposal to capitalize application software development costs in the future is approved.
4. The Company shall provide an annual update of assets under lease that have a cost value of $10,000 or more.
5. General expenditures are approved in the reduced amount of $742,000.
2.4 Production
Production Expenditures proposed for 1994 are shown in Table 3.
Table 3
1993 Production Budget
Item Program Amount P-1 Misc. Mechanical Equipment 5,000
P-2 Misc. Electrical Equipment 3,000
P-3 Engineering & Test Equipment 0
P-4 Plant Maintenance Shop Tools 10,000
P-5 Dalhousie Capital Additions 20,300,000
P-6 Steam Plant Life Extension 4,064,000
P-7 Generation Planning Studies 0
P-8 Communications System Development 27,000
P-9 Supervisory System Development 0
P-10 Transmission Substation Additions 158,000
P-11 Charlottetown Plant Projects 50,000
P-12 Borden Plant Projects 66,000
P-13 Submarine Cable Projects 103,000
Total $ 24,786,000
Expenditures related to P-5, Dalhousie Capital Additions, is the subject of a future hearing.
The Company is in the fifth year of what is now a six year (originally five-year) steam plant-life extension project. The current forecast continues to indicate 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 majority of the work left on the plant life extension project is related to the older boilers or what is referred to as the "old end of the plant". As it is completing the life extension, the Company is also evaluating the opportunity for extended shutdown or "lay-up". Considerable discussion took place at the hearing on what appeared to be a plan to invest $5 million dollars in assets which would then be "laid up" because it may not be necessary to keep them on standby for the next few years. The Company’s response was that the old end of the plant had continued value as planning reserve, but that with surplus capacity in the region, the Company may not need operating reserve available on short notice over the next few years. In the view of the Commission, the final phase of the project is still, therefore, supportable.
In Order E91-4 of the Public Utilities Commission, the Company was directed to file:
a detailed workplan for the Commission’s review that will see improvements in the appearance of the Charlottetown generating station commenced this year and completed by the end of 1994.
(PUC Order E91-4)
The Company filed an appeal of that section of the order at the time and effectively halted further improvements to plant aesthetics. At the commencement of the current hearing, the Company informed the Commission that the appeal had been dropped and that it would be filing in early 1994 to extend the deadline in the original order. Since a number of years have passed in the interim, the Commission believes that the work done on the plant and the Company’s future plans should be reviewed as a logical next step in this project.
With respect to P-13, the Company indicated in response to interrogatory IRACStaff 3.5 (Exhibit M-4) that it is not now seeking approval as it is uncertain who will be paying for this project. The Government of Prince Edward Island owns these cables and certain capital expenditures may be recoverable from the Cable Replacement Fund. The Commission will therefore defer this item until the Company comes forward with a further proposal.
6. The Company shall file, by September 30, 1994, a summary of work done to improve the appearance of the Charlottetown plant as well as its proposal for future improvements. >
7. Production expenditures in the reduced amount of $4,383,000 are approved.>
2.5 City Distribution
Proposed 1994 City Distribution expenditures are shown in Table 4.
Table 4
1994 City Distribution Budget
Item Program Amount C-1 Replacements due to Storm, Collision, Fire and Deterioration 10,000
C-2 Rebuilds Due to Street Alterations 5,000
C-3 City Distribution Transformers 164,000
C-4 New City Service Lines 39,000
C-5 Upgrading City Service Line 28,000
C-6 Street and Yard Lighting 31,000
C-7 Distribution Line Extensions 20,000
C-8 Distribution Line Rebuilds 90,000
C-9 System Meters 390,000
C-10 Line Tools 42,000
C-11 Engineering & Test Equipment 22,000
C-12 Transportation Equipment 597,000
C-13 Rebuilds Due to Joint Use 5,000
C-14 Transformer Shop Equipment 4,000
C-15 Meter Shop Equipment 17,000
C-16 Job Order Transfers 40,000
Total $ 1,504,000
Less Contributions: C-16 Job Order Transfers (100%) 40,000
Net Total $ 1,464,000
At the 1993 Capital Budget hearing, discussions focused on the significant reductions in many City accounts, with some less than half the 1992 levels. Based on expenditures to date in 1993, it is clear that these reductions were not realized and the company's expenditures approached historical levels. As a result, the Company changed its forecasting methodology to a five-year weighted average approach and, for 1993, is forecasting activity at closer to historical levels.
Most of these accounts are either replacement or customer driven. In the latter case, the Company provides service when it is demanded and spends either above or below its budget in accordance with customer requirements. Some discussion took place at the hearing with respect to whether the Company should be seeking further approvals when, for example, it knows part way through the year that it is likely to be well over budget. This issue is addressed in the last section of the report.
The Company has also eliminated the budget for contributions based on the new contribution policy it is proposing as part of the revised Prince Edward Island Electric Utilities’ General Rules and Regulations. Since these will not be reviewed until later in 1994, the Company should continue to receive contributions as per the existing schedule. While this should not affect the capital expenditures, it will reduce the net amount which the Company has to finance.
8. City Distribution expenditures of $1,504,000 are approved.
2.6 Rural Distribution
Proposed Rural Distribution Expenditures for 1994 are shown in Table 5.
Table 5
1994 Rural Distribution Budget
Item Program Amount R-1 Replacements due to Storm, Collision & Fire 75,000
R-2 Rebuilds Due to Road Alteration 10,000
R-3 Rural Distribution Transformers 750,000
R-4 New Rural Service Lines 679,000
R-5 Upgrading Rural Service Line 253,000
R-6 Street and Yard Lighting 53,000
R-7 Distribution Line Extensions 222,000
R-8 Line Rebuilds & Improvements (1) 688,000
R-9 Line Control Devices 86,000
R-10 Rebuilds Due to Joint Use (1) 400,000
R-11 Job Order Transfers 84,000
R-12 Pole Replacement Program (1) 1,312,000
R-13 U/G Replacements - Slemon Park 77,000
R-14 Rosebank Stores Upgrade 25,000
Total $ 4,714,000
Less Contributions: R-4 Contributions for New Rural Service Lines 65,000
R-7 Contributions for Distribution Line Extensions 6,000
R-10 Rebuilds Due to Joint Use (45%) 180,000
R-11 Job Order Transfers (100%) 84,000
335,000
Net Total $ 4,379,000
The Commission continues to monitor accounts R-8: Line Rebuilds and Improvements and R-12: Pole Replacement Program to ensure that the rural distribution system is maintained and improved. In recent years, the Company’s budget for these accounts has averaged approximately $2 million and has continued to focus on high priority lines. Combined with the greater emphasis on joint use construction with Island Tel, the Company’s investment in the rural system appears to be acceptable.
As noted under City Distribution, the budget for contributions is likely low, and will have the same impact as stated above.
9. Rural Distribution expenditures of $4,714,000 are approved.
2.7 Transmission
The proposed transmission expenditures for 1994 are shown on Table 6.
Table 6
1994 Transmission Budget
Item Program Amount T-1 Replacements Due to Storm, Collision, Fire and Deterioration $ 10,000
T-2 Rebuilds Due to Road Construction 10,000
T-3 Rebuild Transmission Line T-10 150,000
Total $ 170,000
Item T-3 was originally budgeted as a 1994 project. The Company subsequently filed a supplementary budget request for 1993, seeking approval to initiate the project early. Approval was granted by Order UE93-20 on December 9, 1993 for both the 1993 and 1994 budgets.
10. Additional Transmission expenditures of $20,000 are approved.
2.8 Capitalized General Expenses
Capitalized General Expense represents general overheads associated with capital items to be installed or constructed in 1994 that the Company proposes to capitalize. While the Company has reorganized its accounts, no major issues were raised and the budget will be approved.
11. Capitalized General Expenses of $2,160,700 are approved.
3 Other Matters
3.1 Supplementary Capital Items—1992
Supplementary Capital Items typically represent projects for which the Company’s expenditures were greater than budgeted or which were not anticipated at the time of the initial budget. These items have been reviewed by the Commission and will be approved as filed.
12. Supplementary Capital Items for 1992 are approved as filed.
3.2 Supplementary Capital Items—1993
The Company also applied for approval to advance the construction on Transmission Line T-10 into 1993 and for approval of $396,000 related to a new administration building at the Dalhousie plant. Approval of the T-10 project was given in Order UE93-20, dated December 9, 1993.
The discussion of the Dalhousie administration building focused on whether the building should be considered as part of the overall Dalhousie project. Subsequent to the hearing, the Company was notified that the Commission was unwilling to approve the expenditure until a full review of the Dalhousie upgrade was completed. The hearing is still pending.
3.3 Supplementary Capital Items—General
The issue of when the Company should apply for approval of supplementary capital expenditures has been an issue for a number of years. Reference has been made in recent hearings to the requirement for advance approval if expenditures are going to be $50,000 or more over budget on any particular account. After the hearing Commission Staff reviewed capital budget orders for directions on this issue and has provided a summary of the same to the Company. The Commission believes that some clarification is required.
The requirement for prior approval results from s. 6(1) of the Act and also from the desire to avoid having the Commission disallow an expenditure after it has already been made. Section 6(1) effectively requires prior approval to commence any project costing more than $5,000. At issue, therefore, is whether advance approval is required when the Company knows it is going to exceed the approved budget for a project. For practical purposes, the Commission has allowed some flexibility in this area so that the Company does not have to seek approval for every small variation from the budget. We do believe, however, that a guideline is required in this area along the lines of the $50,000 limit mentioned above. In our review, an over expenditure of 10% is material and should be reported subject to reasonable limitations.
13. The Company shall seek further approval from the Commission when any change in expenditures on any Capital Budget Item is material.
3.4 Disposition
An Order will therefore issue.
IN THE MATTER of an application by Maritime Electric Company, Limited for approval of the 1994 capital budget.
Order
WHEREAS Maritime Electric Company, Limited (the "Company"), by application filed with the Island Regulatory and Appeals Commission (the "Commission") on October 25, 1993, applied for approval of the Company's 1994 capital budget;
AND WHEREAS the Commission heard the application, excepting those parts related to demand side management and the Dalhousie plant conversion, at public hearings conducted in Charlottetown on December 7, 8 and 9, 1993 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 Company’s proposal to continue with ongoing programs until further direction is given on Demand Side Management is approved.
2. The Company shall modify it MIS filings to highlight changes, if any, proposed in its long-term plan and to provide a comparison of budgeted expenditures proposed for the upcoming year with the long-term plan.
3. The Company’s proposal to capitalize application software development costs in the future is approved.
4. The Company shall provide an annual update of assets under lease that have a cost value of $10,000 or more.
5. General expenditures are approved in the reduced amount of $742,000.
6. The Company shall file, by September 30, 1994, a summary of work done to improve the appearance of the Charlottetown plant as well as its proposal for future improvements.
7. Production expenditures in the reduced amount of $4,383,000 are approved.
8. City Distribution expenditures of $1,504,000 are approved.
9. Rural Distribution expenditures of $4,714,000 are approved.
10. Additional Transmission expenditures of $20,000 are approved.
11. Capitalized General Expenses of $2,160,700 are approved.
12. Supplementary Capital Items for 1992 are approved as filed.
13. The Company shall seek further approval from the Commission when any change in expenditures on any Capital Budget Item is material.
DATED at Charlottetown, Prince Edward Island, this 4th day of March, 1994.
BY THE COMMISSION:
Linda Webber, Chair
John L. Blakney, Vice-Chair
Deborah MacLellan, Commissioner
NOTICE
Section 12 of the Island Regulatory and Appeals Commission Act reads as follows:
12. The Commission may, in its absolute discretion, review, rescind or vary any order or decision made by it or rehear any application before deciding it.
Parties to this proceeding seeking a review of the Commission's decision or order in this matter may do so by filing with the Commission, at the earliest date, a written Request for Review, which clearly states the reasons for the review and the nature of the relief sought.
Sections 13.(1) and 13(2) of the Act provide as follows:
13.(1) An appeal lies from a decision or order of the Commission to the Appeal Division of the Supreme Court upon a question of law or jurisdiction.
(2) The appeal shall be made by filing a notice of appeal in the Supreme Court within twenty days after the decision or order appealed from and the Civil Procedure Rules respecting appeals apply with the necessary changes.
