On October 20, 2010 the Ontario Energy Board (OEB) issued for comment a report (the Elenchus Report) by Elenchus Research Associates (Elenchus).
On September 2, 2010, the OEB initiated a consultation on to review specific elements of its electricity distribution cost allocation policy. A cost allocation policy should reasonably allocate the costs of providing service to various classes of consumers, thereby serving as an important base for determining rates that are just and reasonable. Current policy is set out in the 2007 Report of the OEB: Application of Cost Allocation for Electricity Distributors (the 2007 Report). The 2007 Report set out the OEB’s policies in relation to specific cost allocation matters for electricity distributors, most significantly the relationship between the class revenue and the class total allocated costs (the revenue-to-cost ratio). The 2007 Report also discussed the treatment of the monthly service charge, metering credits for the unmetered scattered load class, transformer credits for customer-owned transformers, and charges for the provision of standby power for customers with load displacement generation..
The scope of the current consultation is to determine the need for and nature of any update and refinement to specific elements of the OEB’s cost allocation policy as follows:
- To take into account the creation of the microFIT rate class;
- To refine the following specific components of the cost allocation methodology:
- Cost allocation to unmetered loads (i.e., unmetered scattered loads, street lighting and sentinel lighting);
- Treatment of the transformer ownership allowance;
- Allocation of miscellaneous revenues;
- Weighting factors for services and billing costs; and
- Allocation of host distributor costs to embedded distributor(s);
- To review options for allocating costs to load displacement generation;
- To refine the three widest target ranges which are associated with the following rate classes: General Service 50 to 4,999 kW, Street Lighting, and Sentinel Lighting; and
- To address accounting changes and the transition to International Financial Reporting Standards.
The Elenchus Report
The Elenchus Report discusses various options in respect of each of the items of review, in the context of the current situation, previously undertaken work, and issues identified by distributors and other stakeholders.
Elenchus provides a recommendation for each of the items under review, as follows:
Creation of MicroFIT Rate Class
The OEB should not create a separate MicroFIT rate class in the cost allocation model, but continue to use the currently identified Uniform System of Accounts to establish the uniform provincial fixed rate for microFIT. Each distributor should be allowed to establish its own microFIT rate to better reflect cost causality for each distributor.
Cost Allocation to Unmetered Load
A separate sheet should be added to the OEB’s cost allocation model that will include the default values used for these types of customers. This would more clearly indicate to distributors the option of using their own values in place of the default values, and include descriptions of how the default values were developed. For distributors that do not have a separate class for Unmetered Scattered Loads, the distributor should be required to demonstrate that the revenue:cost ratio for these types of customers would still be within the OEB’s recommended range.
Treatment of Transformer Ownership Allowance
The OEB should modify the cost allocation model to ensure that only the customer classes that include customers providing their own transformation are included in the determination of the Transformer Ownership Allowance.
Allocation of Miscellaneous Revenues
The major components included in Miscellaneous revenues should be identified and allocated to customer classes in a way that corresponds to the allocation of the corresponding costs. The remaining Miscellaneous revenues should be allocated to the customer classes in the same proportion as composite Operations, Maintenance and Administration costs.
Miscellaneous revenues and related costs should be included in the determination of revenue:cost ratios in the cost allocation model.
Weighting Factors for Services and Billing Costs
A separate input sheet should be developed that would include the default weighting factors. It should explain the reasons behind the different weighting factors and give distributors the option of substituting their own values for the default values, if appropriate.
Allocation of Host Distributors Costs to Embedded Distributors
Host distributors should continue to use Schedule 10.7 of the 2006 EDR Handbook and this schedule should be incorporated into the cost allocation model. The OEB should establish thresholds above which host distributors would be required to set separate charges for embedded distributors. The recommended thresholds are:
- If the embedded distributor represents more than 10% of the host distributor’s total volume sales, or
- If the embedded distributor is larger than 500 kW average demand per month.
Allocation of Costs to Load Displacement Generation
Standby charges should be established for new load displacement generation above a certain size, for example 500 kW. The costs attributable to customers with load displacement generation should be determined by undertaking a specific customer avoided costs analysis. In lieu of a specific customer analysis, default avoided costs values could be used as a simplified approach. A simplified approach should also be followed to establish the benefits that load displacement generation may provide. For example, the OEB could choose, based on its own judgement, a 5% reduction in allocated costs.
Unless the distributor chooses to follow the above recommendation for existing standby charges, they should continue to be allowed to maintain on an interim basis their standby charges until more research has been evaluated on this issue, including rate design approaches.
Refine the three widest Target Ranges, which are associated with the following rate classes: General Service 50 to 4,999 kW, Street Lighting, and Sentinel Lighting
For the General Service class 50 kW to 4,999 kW, the top range should be reduced to 1.40. The bottom range should be left unchanged at 0.80.
For street lighting and sentinel lighting customer classes, the bottom range should be increased gradually over 3 to 4 years when distributors apply for rebasing, to match the bottom range of the General Service less than 50 kW class of 0.80. The top range should be left unchanged at 1.20.
Address accounting changes and the transition to IFRS
There is no demonstrated need to modify the cost allocation model to address the accounting reporting changes arising from the International Financial Reporting Standards.
The Elenchus Report provides a comprehensive, user-friendly basis upon which stakeholders can shape their positions on the development of the OEB’s cost allocation policy. The OEB expects that any revisions to its cost allocation policy as a result of this consultation will be implemented in the 2012 year.
The OEB will host a stakeholder meeting on November 18, 2010. Participants will be able to discuss the Report with Elenchus representatives. Registration is requested by the OEB by November 4, 2010.
Written comments on the Report are due by December 2, 2010.