Filed: May 28, 2012
EB-2012-0031
Exhibit C1
Tab 7
Schedule 3
Page 1 of 4
COMMON ASSET ALLOCATION
1
2
3
1.0
INTRODUCTION
4
5
This evidence will discuss the nature of Common Fixed Assets ("Shared Assets") and the
6
method by which the costs of these assets are assigned to the Transmission and
7
Distribution business units.
8
9
Similar to the common corporate costs discussed in Exhibit C1, Tab 7, Schedule 1, Hydro
10
One has been able to maximize efficiencies through the centralization of the
11
maintenance, management and purchase of shared assets at the corporate level. These
12
assets include shared land and buildings, telecommunication equipment, computer
13
equipment, applications software, tools and transportation and work equipment
14
(“T&WE”).
15
16
2.0
SHARED ASSETS AND FACILITIES COSTS
17
18
Most fixed assets are directly assigned to the appropriate business unit. The remaining
19
assets (5% of total assets) are considered shared assets, and are allocated to Transmission
20
and Distribution as described later in this exhibit. Table 1, below, summarizes the total
21
gross fixed assets and identifies the proportion of allocated shared assets.
22
23
24
25
26
Table 1
Summary of Gross Fixed Assets
as at December 31, 2010 ($ Million)
Transmission
Distribution
Total Fixed Assets
11,666.3
7,397.0
Shared Assets (in Total)
461.2
600.1
Shared Asset %
43.5%
56.5%
Total
19,063.3
1,061.3
100%
Filed: May 28, 2012
EB-2012-0031
Exhibit C1
Tab 7
Schedule 3
Page 2 of 4
1
Shared assets are sub-divided into two categories. Major Fixed Assets consist of land,
2
buildings, applications software, and telecommunications equipment.
3
Assets include office furniture, computer equipment, tools and T&WE. Table 2, below,
4
shows the proportion of major and minor shared fixed assets, accumulated depreciation
5
and net book value as of December 31, 2010.
Minor Fixed
6
7
8
9
Asset
Shared Major Assets
Shared Minor Assets
Total Shared Assets
Table 2
Details of Shared Net Fixed Assets
as at December 31, 2010 ($ Million)
Gross Asset Value
Accumulated
Depreciation
473.1
87.7
588.2
362.0
1,061.3
449.7
Net Book Value
385.4
226.2
611.6
10
11
3.0
ALLOCATION OF SHARED ASSETS IN SERVICE
12
13
Due to the nature of Hydro One's business, shared assets are not directly attributable to
14
either the Transmission or Distribution business units. In addition, from year to year, the
15
use of these shared assets may change, based upon changes in the underlying
16
Transmission and Distribution work programs. Consequently, the methodology by which
17
shared assets are allocated to the Transmission and Distribution business units is subject
18
to periodic review. The intent of such a review is to ensure that the assignment of assets
19
is reflective of their use and that the costs are apportioned appropriately amongst the
20
business units.
21
22
In 2008, the Company commissioned a study by Black & Veatch (B&V) (Formerly R.J.
23
Rudden Associates) to determine a methodology to allocate the assets which are not
24
directly attributable to Transmission or Distribution.
25
represents industry best practices, identifying appropriate cost drivers to reflect cost
26
causality and benefits received. The B&V study resulted in the allocation of shared
The methodology developed
Filed: May 28, 2012
EB-2012-0031
Exhibit C1
Tab 7
Schedule 3
Page 3 of 4
1
assets based on the relative usage by Transmission and Distribution or by cost drivers,
2
similar to those used for the common corporate functions and services.
3
4
The Company has accepted the approach of the B&V study as a reasonable
5
representation of the use of shared assets amongst the business units. This methodology
6
was utilized and subsequently accepted by the Board in its EB-2008-0272, EB-2009-
7
0096, and EB-2010-0002 Decision with Reasons.
8
9
The appropriate use of the common asset allocation methodology for the 2013 and 2014
10
test years has been reviewed and confirmed by B&V in 2012, and is provided as
11
Attachment 1 to this Exhibit.
12
13
Due to the significance of Cornerstone as a Shared Asset, Hydro One has developed
14
transfer price charge rates to allocate a portion of the revenue requirement related to
15
certain Shared Assets to the Telecom and Remotes businesses. In the past, no Shared
16
Assets were assigned to Telecom or Remotes because the amounts would have been very
17
small. The methodology and impact of the transfer price charges are described in more
18
detail in Attachment 1 to this Exhibit.
19
20
Hydro One has used the approved B&V Asset Allocation methodology in this application
21
and Table 3 below shows the Hydro One Common Asset allocation as at December 31,
22
2010.
Filed: May 28, 2012
EB-2012-0031
Exhibit C1
Tab 7
Schedule 3
Page 4 of 4
1
Table 3
Hydro One Common Asset Allocation
as at December 31, 2010 ($ Million)
2
3
4
Total Gross Value
All Hydro One Transmission & Distribution Assets
$19,063 million
Transmission (Total)
$11,666
Distribution (Total)
$7,397
Transmission (Direct)
$11,205
Distribution (Direct)
$6,797
Transmission (Common)
5
$461
Distribution (Common)
$600
Filed: May 28, 2012
EB-2012-0031
Exhibit C1-7-3
Attachment 1
Page 1 of 8
©Black & Veatch Holding Company 2011. All rights reserved. REVIEW OF SHARED ASSETS ALLOCATION (TRANSMISSION) – 2012 PREPARED FOR Hydro One Networks Inc. 1 FEBRUARY 2012 ®
®
Hydro One Networks Inc. | REVIEW OF SHARED ASSETS ALLOCATION (TRANSMISSION) – 2012 Table of Contents TableofContents..........................................................................................................i I. Summary...............................................................................................................1 A. BackgroundandPurpose........................................................................................1 B. TypesofSharedAssets............................................................................................2 C. SummaryofApproach.............................................................................................2 II. DescriptionsofAssetGroups........................................................................4 A. MajorAssets.................................................................................................................4 B. MinorFixedAssets....................................................................................................4 III. SummaryofResults..........................................................................................6 LIST OF TABLES Table1‐TypesofSharedAssets.......................................................................................2 Table2‐SummaryofSharedAssetsAllocation.......................................................6 Table3‐TransferPriceChargesforOtherBusinesses........................................6 BLACK & VEATCH | Table of Contents i
Hydro One Networks Inc. | REVIEW OF SHARED ASSETS ALLOCATION (TRANSMISSION) – 2012 I.
Summary A. BACKGROUND AND PURPOSE Black&Veatch(“B&V”or“we”)ispleasedtosubmitthisReportonourReview
ofSharedAssetsAllocation(Transmission)–2012toHydroOneNetworksInc.
(“HONI”)ThisReportdescribesthereviewthatB&Vperformed,attherequest
ofHydroOne,ofHydroOne’sallocationofthecostsofSharedAssetsinits
2013/2014TransmissionRatesfilingbeforetheOntarioEnergyBoard(“OEB”).
InthisReport,“cost”isoriginalcost(i.e.,grossbookvalue)asderivedof
December31,2010.
In2005,B&Vrecommended,HydroOneadopted,andtheOEBaccepteda
methodologyforHydroOnetoallocatethecostsofSharedAssetsbetweenits
TransmissionbusinessandDistributionbusiness,andissuedourReporton
SharedAssetsMethodologyReviewdatedJune15,2005(“2005AssetsReport”).
B&V’sobjectiveinallocatingtheSharedAssetswastoensurethattheallocation
wasreasonable,reflectedbestpracticesandwasconsistentwiththeallocation
ofthecostsofthecommoncorporatefunctionsandservices,asdiscussedinour
ReviewofSharedServicesCostsAllocation(Transmission)–2012datedFebruary
1,2012(“2012SharedCostsReport)”.
TheOEB‐acceptedmethodologyhasbeenappliedtoHydroOne’sBusiness
Plans,andreviewedbyB&Vwithreportsissued,asfollows:
B&V REVIEW ASSET VALUES B&V REPORT 2006 Review 12/31/2005 Report on Common Assets Methodology 2006 dated May 31, 2006
2008 Review 12/31/2007 Report on Common Assets Methodology 2008 dated September 10, 2008 2009 Review (Distribution) 12/31/2008 Report on Common Assets Allocation‐ 2009 dated June 29, 2009
2010 Review (Transmission) 12/31/2008 Report on Common Assets Allocation (Transmission) ‐ 2010 dated February 26, 2010 TheOEB‐acceptedmethodologyhasbeenappliedbyHydroOnetoitsBusiness
Plan2012‐16(“BP2012‐2016”)dataforits2013/2014TransmissionRates
filing.ThisReportdescribesthe“2012SharedAssetsAllocationReview
(Transmission)”thatB&Vperformed,atHydroOne’srequest,ofHydroOne’s
applicationofthemethodologytoitsBP2012‐16,andpresentsB&V’s
conclusions.
Inits2013/2014TransmissionRatesfiling,HydroOnehasallocated43.5%of
thecostoftheSharedAssetstoitsTransmissionbusiness,and56.5%toits
Distributionbusiness.Theseareapproximatelythesameasinits2010/2011
DistributionRatesfilingandits2011/2012TransmissionRatesfiling.
BLACK & VEATCH | Summary 1
Hydro One Networks Inc. | REVIEW OF SHARED ASSETS ALLOCATION (TRANSMISSION) – 2012 Inaddition,HydroOnehasdevelopedtransferpricechargeratesforthe
TelecomandRemotesbusinesses,tobeusedinallocatingtothosebusinessesa
portionoftherevenuerequirementrelatedtotheSharedAssets(e.g.,
depreciationexpenseandreturn).Inthepast,beforeCornerstoneassetshad
beenplacedinservice,noSharedAssetswereassignedtoTelecomorRemotes
becausetheamountswouldhavebeenverysmall.
NoSharedAssetsareallocatedtoBrampton,becauseitdoesnotusetheassets.
B. TYPES OF SHARED ASSETS HydroOneprovidedB&VwithalistoftheSharedAssets,byAssetGroupand
AssetSubgroup,asshowninTable1.
Table 1 ‐ Types of Shared Assets ASSET GROUP ASSET SUBGROUPS Major Assets  Software
 Buildings and Telecommunications equipment Minor Fixed Assets (“MFA”)  Aircraft
 Computer Hardware  Office equipment  Service equipment‐ Miscellaneous  Service equipment‐ Measurement and Testing  Service equipment‐ Storage  Tools  Transportation Work Equipment  Transportation Work Equipment‐ Power equipment Ifanassetwasestimatedtobeusedatleast95%ineitherTransmissionor
Distribution,thecostofthatassetwasremovedfromSharedAssetsanddirectly
assignedtothatbusiness.
C. SUMMARY OF APPROACH Allocation of Asset Costs to Transmission and Distribution Acostdriverwasassignedtoeachasset(i.e.,abuildingwithinMajorAssets),
assettype(i.e,PickupTruckswithinTWE)orAssetSubgroup,basedon
discussionswithHydroOnepersonneltoascertainwhatcostdriverwasmost
closelyrelatedtotheusageoftheassetortheAssetSubgroup.Thecostdrivers
BLACK & VEATCH | Summary 2
Hydro One Networks Inc. | REVIEW OF SHARED ASSETS ALLOCATION (TRANSMISSION) – 2012 usedtoallocatetheSharedAssetswereselectedfromamong,orderivedfrom,
thecostdriversusedtoallocatethecostsofthecommoncorporatefunctions
andservices.ThespecificstepsusedforeachAssetGroupandSubgroupare
discussedbelow.TheamountsallocatedtoTransmissionandDistributionare
summarizedinTable2.
Development of Transfer Price Charge Rates for Telecom and Remotes ThetransferpricechargeratesrepresenttheusageoftheSharedAssetsbythe
TelecomandRemotesbusinesses.Ourapproachtodevelopingthetransfer
pricechargerateswasasfollows:
 TheportionofeachassetthatshouldbeallocatedtoTelecomandRemotes
basedontheappropriatecostdriverwasdetermined.
 ThetotaldollaramountallocatedtoTelecom,representingSharedAssetcost,
wascomputedforeachassetbymultiplyingtheTelecomshareofusagebythe
assetcost;thesedollaramountsweresummedanddividedbythecategory
totalcosttodeterminetheTelecomshareforthecategory.Thesamewas
doneforRemotes.Table3presentstheTelecomandremotesshares.
 Thepercentagesshouldbeappliedtoeachcomponentoftherevenue
requirementrelatedtotheSharedAssets(e.g.,depreciationexpenseand
return),tocomputethedollaramountchargedtoTelecomandRemotes.The
amountschargedtoTelecomandRemotesshouldbeappliedtoreducethe
revenuerequirementrecoveredfromratepayersoftheTransmissionand
Distributionbusinesses.
Forexample,thestudydeterminedthatTelecomuses0.38%(Table3)ofthe
sharedMajorAssetsownedbyHONI.Assuch,0.38%oftherevenue
requirementassociatedwithmajorassetsischargedtoTelecom.Therevenue
requirementcalculatedforHONIwillinclude100%oftheassets,however,
theotherrevenuesreceivedfromtheHydroOneInc.subsidiarieswillreduce
therevenuerequirementwhichisusedtoderivethetariffrates.
BLACK & VEATCH | Summary 3
Hydro One Networks Inc. | REVIEW OF SHARED ASSETS ALLOCATION (TRANSMISSION) – 2012 II. Descriptions of Asset Groups A. MAJOR ASSETS Software MostofthesoftwareincludedinSharedAssetswasforHydroOne’sCornerstone
project,anenterprise‐widesystemtosupportworkmanagement,asset
management,humanresources,financialandotherfunctions.Cornerstone
Phase1,Phase2andpartsofPhase3havebeenplacedinserviceasof
December31,2010.Thesecostswereallocatedusingacostdriverthatreflects
theactivitiessupported.InfrastructurecostsrelatedtoCornerstonePhase1
andPhase2wereallocatedbasedontheactivitiesthosephasessupport.
Buildings and Telecommunications Equipment EachassetincludedinBuildingsandTelecommunicationsSharedAssetswas
discussedwithHydroOnepersonnel,andallocatedusingoneofthefollowing
methods:
 Specificestimationforabuilding.Forexample,SudburyServiceCentre
hasestimatedusageofTransmission‐20%/Distribution‐80%.
 Directassignmentbasedontypeofusage.Forexample,HydroOne
summarizedFleettimecharges(whicharerecordedtotimesheets
concurrentlywithusage)foryears2009and2010anddeterminedthatFleet
usageisTransmission‐26.09%andDistribution‐73.91%;thereforethecosts
forbuildingsusedforFleetwereallocatedusingthesepercentages.
BuildingsusedforTrainingwereallocatedusingthecostdriverHeadcount.
 Costdriversbasedonusage.Forexample,Buildingsusedtomanageboth
TransmissionandDistributionprojectsareallocatedusingthecostdriver
ProgramProjectCosts,developedinHydroOne’sSharedServicesCoststudy.
B. MINOR FIXED ASSETS EachcomponentofMinorFixedAssetsincludesmanyindividualitems.B&V
reviewedthelistsofindividualitemsanddeterminedthatthefollowing
allocationsareappropriate:
 Aircraft–Helicopterandsupportingcomponents.Usagewasbasedonan
analysisoftimecharges(whicharerecordedtotimesheetsconcurrentlywith
usage)foryears2009to2010.
 ComputerHardware–IncludesLaptops,Desktops,NetworkEquipment,
Printers,etc.Allocatedusingacostdriverbasedonthenumberof
Workstations(50%weight)andthecostdriverHeadcount(50%weight).
 Officeequipment–Includesofficefurnitureandotherofficeequipment.
AllocatedusingthecostdriverHeadcount.
BLACK & VEATCH | Descriptions of Asset Groups 4
Hydro One Networks Inc. | REVIEW OF SHARED ASSETS ALLOCATION (TRANSMISSION) – 2012  Serviceequipment‐Miscellaneous–Includesmiscellaneousequipment.
AllocatedusingTotalSharedServicescostdriver,developedinHydroOne’s
SharedServicesCoststudy.
 Serviceequipment‐MeasurementandTesting–IncludesMeters,Splicers
etc.usedforDistribution.DirectlyassignedtoDistribution.
 Serviceequipment‐Storage–IncludesWasteStorageandOtherStorage
equipment.AllocatedusingthecostdriverbasedonspendingforOperating
andMaintenancecostsandCapitalspending.
 Tools–IncludesRentaltools.AllocatedTransmission‐80%/Distribution‐
20%reflectingestimatedusagebasedoninformationastowhichbusiness
unitsarerentingthetools.
 Transportation&WorkEquipment–IncludesprimarilyVehicles.
Allocatedusingthecostdriver“Fleet”,whichrepresentsFleettimecharges
(whicharerecordedtotimesheetsconcurrentlywithusage)foryears2009
and2010.Exceptforitemsrepresentinglessthan0.5%ofcost,theusagefor
alloftheTransportation&WorkEquipmentSharedAssetswererecordedon
timesheetsandincludedinthecomputationoftheFleetcostdriver.
TheresultsaresummarizedinTable2.
BLACK & VEATCH | Descriptions of Asset Groups 5
Hydro One Networks Inc. | REVIEW OF SHARED ASSETS ALLOCATION (TRANSMISSION) – 2012 III. Summary of Results Table2presentstheallocationofSharedAssetstoTransmissionand
Distribution.
Table 2 ‐ Summary of Shared Assets Allocation YEAR ‐ END 2010 $ MILLIONS COST TRANSMISSION % DISTRIBUTION % TOTAL TRANSMISSION
DISTRIBUTION
$379.5 $220.2
$159.3
58.0% 42.0%
93.6 48.1
45.5
51.4% 48.6%
473.1 268.3
204.8
56.7% 43.3%
Aircraft 19.6 14.0
5.6
71.4% 28.6%
Computer Hardware 71.0 42.6
28.4
60.0% 40.0%
Office Equipment 7.0 4.2
2.8
60.0% 40.0%
Service‐ Misc. 7.3 3.4
3.9
46.6% 53.4%
Service‐ Measure/Test 8.7 ‐
8.7
0.0% 100.0%
Service‐ Storage 6.9 3.7
3.2
53.6% 46.4%
Tools 5.5 4.4
1.1
80.0% 20.0%
Transportation & Work Equipment 462.2 120.6
341.6
26.1% 73.9% Total 588.2 192.9
395.3
32.8% 67.2%
$1,061.3 $461.2
$600.1
43.5% 56.5%
Major Assets Software Building / Telecom Total Minor Fixed Assets Total ‐ All Shared Assets Table3presentstheSharedAssetstransferpricechargesforTelecomand
Remotes.
Table 3 ‐ Transfer Price Charges for Other Businesses ASSET GROUP TELECOM REMOTES Major Assets 0.38%
0.18%
Minor Fixed Assets 0.22%
0.10%
Total ‐ All Shared Assets 0.26%
0.12%
BLACK & VEATCH | Summary of Results 6