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March 7, 2014 Via Email Original via Mail British Columbia Utilities Commission 6th Floor, 900 Howe Street Vancouver, BC V6Z 2N3 Attention: Ms. Erica M. Hamilton, Commission Secretary Dear Ms. Hamilton: Re: FortisBC Energy Inc. (FEI) and FortisBC Inc. (FBC) (collectively the Companies)

Applications for Approval of Multi-Year Performance Based Ratemaking (PBR) Plans for 2014 through 2018 (the Applications)

Opening Statement Presentation

On February 28, 2014, the Companies filed a letter1 identifying the Witness Panels being putting forward for the Oral Public Hearing commencing on Tuesday, March 11, 2014. As indicated in that letter, attached is the presentation material which Panel 1 will be using in making its Opening Statement.

1 FEI Ex. B-41 and FBC Ex. B-40.

FortisBC Energy

16705 Fraser Highway

Surrey, B.C. V4N 0E8

Tel: (604) 576-7349

Fax: (604) 576-7074

www.fortisbc.com

Regulatory Affairs Correspondence Email: [email protected]

Diane Roy

Director, Regulatory Affairs

FortisBC Inc.

Suite 100 – 1975 Springfield Road

Kelowna, BC V1Y 7V7

Tel: (250) 717-0890

Fax: 1-866-335-6295

www.fortisbc.com

Regulatory Affairs Correspondence

Email: [email protected]

Dennis Swanson

Director, Regulatory Affairs

B-47

http://www.fortisbc.com/

mailto:[email protected]

http://www.fortisbc.com/

mailto:[email protected]

markhuds

FORTISBC INC. PBR RR 2014-2018

March 7, 2014 British Columbia Utilities Commission FEI-FBC 2014-2018 PBR Plans Applications Opening Statement Presentation

If further information is required, please contact the undersigned. Sincerely, FORTISBC ENERGY INC. and FORTISBC INC. Original signed:

Diane Roy and Dennis Swanson

Attachments

cc (email only): Registered Parties

- 1 -

PBR Framework for FortisBC

March 11, 2014

- 2 - - 2 -

Why PBR

PBR Principles and Overview

Key Elements of the PBR Plan

Conclusion

Agenda

1

4

2

3

- 3 - - 3 -

PBR Benefits Customers and the Utility

Lower Rates Compared to Cost of Service

Ongoing Productivity Focus

Regulatory Efficiencies

Customers Share in Earnings

Company Maintains High Service Quality

Why PBR?

Why PBR PBR Principles and Overview


Conclusion

- 4 -

Similar principles are generally accepted for PBR Plans

across North America

FortisBC Principles of PBR Design

Align interests of customers and the utility and share

benefits

Provide the utility with a reasonable opportunity to

recover costs and earn a fair return

Recognize unique circumstances of the utility

Maintain service quality while providing productivity

incentives

Easy to understand and implement, reduce the

regulatory burden



Conclusion

- 5 - - 5 -

PBR Plan Structure

5 year Term

Formula-driven controllable capital and O&M

CPCN capital and certain non-controllable O&M treated outside formula

Flow-through Items and Exogenous Factors

Earnings Sharing mechanism (ESM)

Efficiency Carry-over Mechanism (ECM)

Service Quality Indicators (SQIs)

Annual Review/Mid-term Review/Off-ramps

Overview



Conclusion

- 6 -

2013 2014 2015 2016 2017 2018

• Fundamental to achieving sustained

incremental savings

• Streamlines regulatory process and

brings significant cost savings

Five Year PBR Term

Base Year 5-Year PBR Term



Conclusion

- 7 -

Expenditures Under the PBR Formula

Controllable

O&M

Expenditures

Subject to the PBR Formula

𝟏 + (𝐈 𝐅𝐚𝐜𝐭𝐨𝐫−𝐗 𝐅𝐚𝐜𝐭𝐨𝐫) × 𝑮𝒓𝒐𝒘𝒕𝒉𝑭𝒂𝒄𝒕𝒐𝒓

Controllable

Capital

Expenditures

CPCN

Capital not

Subject to

Formula

Base year plus Inflation (I) less Productivity (X) and factors

in Customer Growth



Conclusion

- 8 -

𝑰𝑭𝒂𝒄𝒕𝒐𝒓 = 𝟓𝟓%𝑩𝑪 𝑨𝑾𝑬 + 𝟒𝟓%𝑩𝑪 𝑪𝑷𝑰

Weighting Labour Component Non-Labour

Component

Reflective of Utility’s

Cost Structure

BC Average Weekly

Earnings Index

BC Consumer Price

Index

Inflation Factor PBR Formula Components

Composite I-Factor Reflects Expected Inflation for the Companies




Conclusion

- 9 -

Productivity Improvement Factor PBR Formula Components

0.5% X-Factor proposal poses a significant challenge for the Companies

Productivity studies (TFP) indicate negative productivity gains in recent years for the gas and electric utility industries

B&V considers 0 to be an appropriate X-Factor, which is inclusive of a Stretch Factor

Companies willing to accept additional 0.5% Stretch Factor to provide immediate benefits to customers




Conclusion

- 10 -

Growth Factor Cost Drivers


Controllable Expenditures: 𝑮𝒓𝒐𝒘𝒕𝒉𝑭𝒂𝒄𝒕𝒐𝒓 :

Controllable O&M (FEI & FBC) Change in Average Customers

Total Controllable Capital (FBC) Change in Average Customers

Controllable Growth Capital (FEI) Number of Service Line

Additions

Remaining Controllable Capital (FEI)

Change in Average Customers



Conclusion

- 11 -

Non-Controllable Expenses and Revenues Flow Through Items

… known

but beyond

the control

of the

Companies

and

forecast

each year

Revenues – FBC flow through; FEI mostly flow through

Power Purchase Expense – flow through

Property and Income Taxes – mostly flow through

Depreciation and Amortization

Interest Expense – mostly flow through

Return on Equity – 50/50 sharing in variances from allowed

Rate Base other than Gas Plant in Service

Items outside PBR Formula that are...

Flow-Through Treatment is not Unique to PBR and

Ensures that Customers Pay Only for the Actual Costs



Conclusion

- 12 -

…unknown

& beyond

the control

of the

Companies

and

brought

forward in

Annual

Reviews

Changes in Revenue Requirements due to Commission Decisions

(i.e. Rate Design Issues, Depreciation Rate Changes, Changes to Cost of Capital)

Changes in GAAP, Standards or Policies

Bypass or Similar Events

Major Seismic Incident

Acts of War, Terrorism or Violence

Catastrophic Events

Judicial, Legislative or Administrative Changes, Orders or Directions

Exogenous Factors are...

Treatment of Exogenous Factors is not Unique to PBR

Non-Controllable Expenses and Revenues Exogenous Factors



Conclusion

- 13 -

50/50

Sharing

with

Customers

Same ESM as previous FEI and FBC PBRs

50% of the difference between actual and allowed earnings (above or below) will be shared with customers each year

Customers’ share for the current year will be forecasted and trued up to actual in the following year

Amount of earnings to be shared will be returned to or recovered from customers through lower or higher rates

In the absence of ESM, all earnings above or below the allowed earnings would remain with the Companies

Earnings Sharing Mechanism (ESM)

ESM Aligns Customer and Company Interests



Conclusion

- 14 -

Efficiency Carryover Mechanism (ECM)

Customers Benefit from Lower Rates Coming out of

PBR than without ECM

Ensures the incentive to pursue efficiencies in the later years are as strong as the earlier years

Decouples the link between timing of savings and incentives

Allows the same 5 year benefit for all savings, no matter the timing or source



Conclusion

- 15 -

Performance Measure FEI Proposed

Benchmark

FBC Proposed

Benchmark

Emergency Response Time 95% 85%

Meter Reading Accuracy 95% 97%

Meter Exchange Appointment 95% N/A

Public Contact with Pipeline Informational

Telephone Service Factor – Emergency 95%

Telephone Service Factor – Non-

Emergency 70%

First Call Resolution 78%

Billing Index 5.0

All Injury Frequency Rate Informational

Customer Satisfaction Index Informational

SAIDI N/A

Informational

SAIFI Informational

Service Quality Indicators

SQIs Maintain the Already High Level of Service Quality & Ensure that

Savings are not at the Expense of Service Quality



Conclusion

- 16 -

Mid-Term / Annual Review



Conclusion

Annual Review

To Review Companies’ Performance

Mid-Term Review

Status-Check at the End of 2016

• Re-calculate next year’s items subject

to PBR formula

• To occur at the third Annual Review

(2016

• Re-forecasts non-formula items

• To provide an opportunity for parties

to review the status of the PBR

• Projects earnings sharing for the

current year and true-up to actual

earnings sharing for the prior year

• Reviews Service Quality Indicator

results

• Adjustments considered only to

address material unintended

consequences or material changes in

service quality

- 17 -

Financial and

Non-Financial

Triggers

Designed to protect customers and the shareholder from material unintended unfair outcomes of the PBR Plan

Off-ramps include both financial and non-financial components

Financial Off Ramp triggered if the after sharing difference between the achieved and allowed ROE is greater than 200 basis points in a single year of the plan

Non-Financial Off Ramp may be triggered if there is serious, sustained and unjustified degradation of the SQI metrics within the Companies’ control

Off-Ramp Mechanism

The impact to customers and the shareholder must be

considered and balanced against the effect of triggering

an off-ramp

Why PBR

PBR Principles and Overview


Conclusion

- 18 - - 18 -

Conclusion

PBR Plan Summary

PBR Plans build on the success of past Plans, in particular the FEI plan

Same basic Plan design for gas and electric utilities to create uniform incentives across FortisBC

Plan accounts for operational realities, such as already efficient operations, need for significant infrastructure investment, and existing high level of service quality

Plan works as an integrated whole to ensure rates are fair to customers and Companies

Plan will enhance regulatory efficiency



Conclusion

- 19 - - 19 -

Gas Utilities Amalgamation and PBR

PBR Methodology Unaffected by Amalgamation

Effective for 2015 delivery rates

Base O&M and capital subject to the formula will be increased for Vancouver Island and Whistler costs

The approved I-X formula will apply to this revised base to calculate 2015 delivery rates

Amalgamation specific net savings will be considered a Z factor and reforecast each year at Annual Review

The forecast for all other items will include Vancouver Island and Whistler



Conclusion

The I-X formula is not affected. The approved inflation and

productivity will be applied to the amalgamated entity

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