A recent letter from the OEB updated the
policy for calculating the allowance for working capital in
electricity distributors' rate applications. Effective
immediately, the assumed (default) allowance for working capital is
set at 7.5% of the sum of the cost of power and operations &
maintenance costs. This is a significant decrease from the prior
default level of 13%.
Under the new policy, the default allowance for working capital
of 7.5% will be deemed to apply, unless a distributor requests
approval of a distributor-specific working capital allowance,
supported by appropriate evidence. That evidence would likely
include a lead-lag study, indicating an actual working capital cost
that is different from (higher than) the default allowance.
The OEB's letter indicates that the new default allowance
for working capital is at the low end of recent actual distributor
results. The range of results from lead-lag studies filed in 2015
rate applications shows a working capital cost ranging from 7.4% to
12.7% of the sum of the cost of power and operations &
maintenance costs. The OEB's rationale for setting a low
default level is to incent utilities to study business processes
and improve productivity. The OEB also noted that it expects
working capital costs to decrease as distributors move to monthly
billing (this change was confirmed earlier this year, to be
phased in by the end of 2016).
For the most part, the OEB's policy will be implemented
through a distributor's next cost of service or Custom IR
application. This will allow for all of the distributor's costs
to be examined and determined at the same time. Given the potential
for a large gap between the default working capital allowance
(7.5%) and a distributor's actual working capital costs, it
seems appropriate for most (if not all) distributors to have
appropriate lead-lag and other studies completed before their next
rebasing applications. This will ensure that properly supported
requests for a working capital allowance different from the default
level can be credibly presented. Otherwise, a distributor will find
itself recovering only the default level of working capital
allowance, even if actual costs are higher.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Canada is a constitutional monarchy, a parliamentary democracy and a federation comprised of ten provinces and three territories. Canada's judiciary is independent of the legislative and executive branches of Government.
The Government of Alberta recently announced a number of policy changes that will impact the Alberta Electricity Market, composed of its generators, transmitters, distributors, retailers, electricity consumers and wholesale electricity market.
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