Density/Cost Allocation Study April 15, 2009 Michael Roger Manager, Distribution Pricing

OEB Direction OEB Decision page 31 Detailed analysis on the relationship between density and cost allocation Whether the customer class demarcations offer the best reflection of cost causation Consideration of alternative density weightings

Current Density Definition Urban Density Zone is defined as areas containing 3,000 or more customers with a line density of at least 60 customers per kilometre. (156,000 Residential customers) Medium Density Zone is defined as areas containing 100 or more customers with a line density of at least 15 customers per kilometre. (365,000 Residential customers) Low Density Zone is defined as areas other than Urban or Medium Density Zone. (358,000 Residential customers)

Density Weighting Factors Used to allocate Overhead Lines and Transformer related costs Two Components: Customer Density weighting factors (allocation of fixed costs) Demand Density weighting factors (allocation of variable costs) (USoA Accounts 1830-3B and 4B, 1835-3B and 4B,1850-2) (Exhibit H, Tab 12, Schedule 66)

Overhead Line Costs Customer density weights based on number of customer by class for each feeder Demand density weights based on energy by customer class by feeder

Example Feeder Km Class 1 Class 2 Class 3 Total Class 1 10 5 20 10 35 Connectivity Data Feeder Km Class 1 Class 2 Class 3 Total Class 1 10 5 20 10 35 2 20 10 10 20 40 3 30 15 5 20 40 4 40 20 5 10 35 A: Total Customers 50 40 60 150 Allocated km Feeder Km Class 1 km Class 2 km Class 3 km 1 10 1.4 5.7 2.9 2 20 5.0 5.0 10.0 3 30 11.3 3.8 15.0 4 40 22.9 5.7 11.4 B: Total km 100 41 20 39 C=B/A km/customer 0.81 0.50 0.65 D* Wts 1.22* 0.76 0.98 E=DxA (Check) Wted Cust 150 60.8 30.3 58.9 D*= Wts 0.81x150/[ 0.81 x 50 + 0.5 x 40 + 0.65 x 60]=1.22 Same approach for Variable costs and for transformer costs For class 1, the allocated 5 km for feeder # 2 is equal to 10 customers out of 40 customers connected to feeder # 2 that is 20 km in length

Density Weights Overhead Lines Customer Demand For Fixed costs For Variable costs UR 0.19 0.18 R1 0.66 0.64 R2 1.61 1.42 Seasonal 1.20 1.60 GSe 1.11 1.15 GSd 1.14 1.18 UGe 0.24 0.18 UGd 0.31 0.30 Dgen 1.00 1.00 ST 1.00 1.00 St Lgt 1.00 1.00 Sen Lgt 1.00 1.00

Transformer Costs Customer density weights based on NBV of transformation assets by class for each feeder Demand density weights based on energy by customer class by feeder Same logic as explained for line costs, substitute NBV for line length

Density Weights Transformers Customer Demand For Fixed costs For Variable costs UR 0.77 0.75 R1 0.93 0.88 R2 1.23 1.12 Seasonal 0.87 1.28 GSe 1.00 1.04 GSd 1.05 1.01 UGe 1.03 0.79 UGd 0.76 0.94 Dgen 1.00 1.00 ST 1.00 1.00 St Lgt 1.00 1.00 Sen Lgt 1.00 1.00

Current Rate Issues In 2010 will still be in the middle of the 4 year Harmonization plan Continued Rate Pressure due to Smart Network and DG connections OEB Staff Paper on proposed Rate Design

Question # 1 Should “customer density” be a consideration in defining customer classes? Like other LDCs in Ontario Based on reliability definition by OEB Municipal Boundaries Square kilometer Postal code

Question # 2 What criteria are relevant for defining customer classes?

Question # 3 How should “density” be considered in allocating costs to the various classes? Sample areas Based on other LDCs’ costs Replacement costs