Overview

The capital cost recovery (CCR) financial process is an industry-wide tool used by electricity utilities in Ontario, including Kingston Hydro.

We use this process to recover infrastructure expansion costs that are triggered by new development.  Although electricity utilities may use different names for this process, the economic evaluations are governed by regulation and are completed in a standardized way.

Offer to connect

When a customer needs an electrical connection to Kingston Hydro’s distribution system that involves new, expanded, enhanced, upgraded or otherwise improved infrastructure, Utilities Kingston will provide one or more of the following:

• a connection cost, and/or
• a capital contribution cost, and/or
• an expansion deposit.

These may form part of the offer to connect that customer.

Economic evaluation

Through this process, Utilities Kingston will complete an economic evaluation to determine the customer’s share of the capital contribution cost, if any. This may include the initial capital costs of the expansion, plus the present value of the ongoing operation and maintenance (O&M) costs associated with the customer’s connection.

The capital contribution cost that Utilities Kingston requires the customer to pay shall not exceed the customer’s share of the difference between the following:

• present value of the estimated capital and the ongoing O&M costs
• present value of the projected estimated distribution revenue from the customer’s connection

The CCR process takes into consideration the following:

• expansion infrastructure costs
• the number and type of customers expected to be connected by the expansion in the first five years
• the revenue from those customers, less the O&M costs of the facilities

Revenue horizon

Utilities Kingston will normally compute the customer charge using a 25-year determination of net present values. However, we may choose to shorten the revenue horizon, if at our sole discretion we feel that a revenue stream will not persist for 25 years (e.g., some types of commercial uses). 

Expansion deposit

The CCR process will also determine the amount required for an expansion deposit. This considers the following:

• expected distribution revenue
• customer’s connection, expansion costs and O&M costs

An expansion deposit is intended to cover the forecasted risk that the revenue assumed in the CCR model does not materialize.  If revenues materialize as expected, then some or all of the deposit may be returned to the customer.

Large service connections

In some cases, where large service sizes are required (i.e., at 44 kV) customers may receive a connection charge as part of the offer to connect.

Large service size connections are unique and typically costly.  As a result, certain costs are applied directly to the customer to facilitate the connection.

Overview of the process and getting started

From there, Utilities Kingston will complete the following:

1. Determine service size (voltage and kilowatt capacity).
   
   
2. Assess the distribution system and determine the following:
   1. if the system needs to be expanded, and/or;
   2. if the existing system has capacity available, or, if not;
   3. what improvements are required to service the new/increased load.
      
      
3. Prepare an estimate of the connection costs and/or expansion costs.
   
   
4. Run the capital cost recovery model, with the following inputs:
   1. estimated increase/new kW load.
   2. supply voltage.
   3. number and required type of revenue meters.
   4. O&M expenses per customer for the respective rate class for the applicable year, as approved by the OEB. This number changes yearly.
   5. expected future distribution revenue, as derived from the approved distribution rates for that rate class, for that year. This number changes yearly.
   6. expected revenue and cost horizons.
   7. expansion costs.

From this process, we provide three possible financial reports to the customer:

1.     A connection cost estimate
2.     A capital contribution cost
3.     An expansion deposit

To view samples of these reports in advance, contact DMicallef@utilitieskingston.com.

Utilities Kingston will collect applicable costs from the customer, prior to hydro work commencing.

Definitions

Connection cost

A customer charge to cover work completed by Kingston Hydro on the customer’s side of the demarcation point, to connect a new or upgraded service to Kingston Hydro existing distribution assets.  The Ontario Energy Board DSC defines what is included in these costs. In most cases a connection charge would not apply to a 5 kV or 13.8 kV connection (except metering charges)  but would apply in situations where a 44 kV service is required. 

Capital contribution cost

The financial contribution the customer is required to make to Kingston Hydro when the expansion costs and the ongoing O&M costs are not covered by the expected distribution revenue from the new service connection. This capital contribution is not a deposit and therefore is not refundable. 

Expansion cost

This refers to the costs associated with work completed to upgrade or extend Kingston Hydro’s existing distribution assets in order to connect the requested service. This also includes circumstances where Kingston Hydro assets have not fully depreciated and are to be replaced as a result of the customer’s project.  The value of those assets being replaced before end-of-life shall be based on the remaining net book value of the replaced asset, plus advancement cost.  The OEB DSC defines what is included in these costs. 

Operation and maintenance cost 

The costs related to Kingston Hydro’s ongoing requirements to provide a safe, reliable and efficient electricity distribution system to our customers. These costs include maintenance and operational aspects of running the distribution system. The O&M costs are derived from the rate class of the application submitted, such as residential or commercial >50 kW. 

Capital cost recovery model 

A net present value calculation that determines the financial requirements of the project that must be completed by the customer and submitted to Kingston Hydro.  The model (calculation) considers the following factors:

• Expansion costs
• O&M costs
• Expected future distribution revenue earned from the customer connection over time (years)
• Expansion and O&M costs of the new customer connection, assessed against the expected future distribution revenue
• Net present value: a financial calculation to express the difference between the present value of cash inflows (expected future distribution revenues) and the present value of cash outflows (expansion and ongoing O&M costs)

Number of customers

The total number of customers or connections by rate class, serviced by Kingston Hydro.  The customer classifications for Kingston Hydro are as follows:

• residential
• small commercial <50 kW
• commercial >50 kW
• large users

The number of customers by class is a factor in the CCR model, since the costs for one customer are the total costs for the class, divided by the number of customers.  Each class has its own rates and service charges, because the costs of servicing each class of customers are different.

Expected distribution revenues 

For residential and general service less than 50 kW (GS<50 kW)  rate classes, the expected distribution revenues (EDR) from a customer connection request is considered met if the number of accounts indicated on the customer load forecast form or service request form matches the actual activated accounts. The customer load forecast form is provided to Kingston Hydro by the customer (or agent) as the basis to determine and calculate the revenue and costs. Kingston Hydro reviews the number of accounts annually against the data submitted in the customer load forecast form. 

For general service greater than 50kW (GS>50kW) and large users the EDR is based on the new or upgraded customer’s estimated electrical load for the first five years of the new or upgraded service.  The average monthly peak electrical load is provided by the customer (or agent) to Kingston Hydro and is expressed in Kilowatts (kW). The EDR is calculated using the electrical load based on Kingston Hydro electricity rates as approved by the OEB.

Expansion deposit

A financial deposit that the customer provides to Kingston Hydro when expansion costs are incurred.  It is calculated by subtracting the capital contribution from the expansion costs and ongoing O&M costs. The value of the deposit is determined by the Kingston Hydro CCRM. 

If the EDR is equal to or greater than the combination of the expansion costs and ongoing O&M costs, the CCRM will only generate a requirement for an expansion deposit (not a capital contribution).

If the EDR is less than the combination of the expansion costs and ongoing O&M, the CCRM will generate a need for both an expansion deposit and capital contribution from the customer. 

The expansion deposit is returned to the customer if the expected distribution revenues materialize.  If the EDR does not materialize as expected from the load provided by the customer, a portion of the expansion deposit will be kept by Kingston Hydro to make up for this shortfall