SHARED SERVICES COSTS Page 1 of 15
TABLE OF CONTENTS 1. 2005-2007 SUMMARY...4 2. THE TRANSMISSION PROVIDER S MAIN SUPPLIERS...6 2.1 Technology Group...8 2.2 Shared Services Centre...10 2.3 Corporate Units...12 3. PROGRAM FOR THE IMPROVEMENT OF INSTALLATION SECURITY...13 Page 2 of 15
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1. 2005-2007 SUMMARY Table 1 hereafter shows the evolution of the shared services costs incurred by the Transmission Provider, by supplier. 1 The amounts shown relate to the Transmission Provider s operating activities and therefore exclude the part of the costs that are billed to the Transmission Provider by its internal suppliers when costs relate to the Transmission Provider s investment activities. Also, since the data presented in this table covers a three-year period, in which the responsibilities and resources of certain activities, which vary in importance from one case to the next, have been transferred from one supplier to another, the detailed analysis of their evolution can sometimes be difficult. We note the most important of these changes as being the creation of the Technology Group in 2006, which is primarily made up of specialized telecommunication activities and telecommunications services, as well as Hydro-Quebec s Research Institute (IRHQ). Insofar as possible and with a reasonable level of effort, in the exhibits of the current application, the Transmission Provider has reclassified certain services previously offered by other suppliers to the most recent provider of these services. Moreover, to establish the Transmission Provider s regulated rates, these shared services costs are set according to the complete cost, including a return on assets, used by the suppliers for the services rendered. This exercise is carried 1 In the current document the word supplier and the term provider of these services are both used to translate the French word («fournisseur»). Page 4 of 10
out in compliance with the cost-of-service method recognized by the Régie and described in Exhibit HQT-4, Document 1. We note an overall increase shared services costs of $22.7 million between 2005 and 2006 and of $10.9 million between 2006 and 2007. These increases can primarily be explained by the following factors: the incorporation of the increase in pension costs since 2006 in the calculation of the suppliers billing grids ($12 million); the implementation of a program to improve the security of installations ($2.6 million) as described in section 3; as well as maintenance on the transmission system s automation equipment ($7 million). Page 5 of 15
Table 1- Summary of Shared Services Costs Table-1 key Column 1 : Technology Group, Telecommunication Services, Specialized Telecommunications, Innovation, Return on Assets; Shared Services Centre, Supply and Services, Information Technology, Other, Return on Assets; Corporate Units, Financial Services, Human Resources, Security, Litigation and Other; HQ Equipment, HQ Production, Maintenance and Operation of Installations, Northern Real Estate, Other; HQ Distribution, Reinvoicing of Real Estate, Other, Various Adjustments and Non-Allocated Amounts; Total Costs Including Return. 2. THE TRANSMISSION PROVIDER S MAIN SUPPLIERS The main suppliers of the Transmission Provider s shared services are the Technology Group, the Shared Services Centre (SCC), and corporate units. We Page 6 of 15
note that the value of the services charged by these internal providers of these services amounts to nearly 85% of shared services costs. Moreover, the services rendered by the Hydro-Québec Production Division are primarily associated with the maintenance and operation of transmission facilities ($16.9 million) and with reinvoicing for Northern real estate (refacturation d espaces nordiques) ($7.2 million), while services rendered by the Hydro- Quebec Distribution are mainly associated with extra billing (refacturation des espaces) ($9.8 million). As for the Hydro-Québec Equipment and SEBJ Division, it mainly provides support services for the maintenance of lines and substations, as well as quality control services for materials. An exceptional budget of $7.1 million was set for the security of installations in 2006 and budgets of $3 million in 2006 and $7 million in 2007 are projected for applications to the transmission network s automation equipment. All of the financial data for the 2005-2007 period, pertaining to the costs and prices of products and services for the Transmission Provider s main suppliers of shared services, as well as data pertaining to cost allocators and to the billing principles (bases de facturation) are presented in the following Exhibits: HQT-6, Document 3.1 Technology Group HQT-6, Document 3.2: Shared Services Centre HQT-6, Document 3.3: Corporate Units Page 7 of 15
Since agreements between the customer and providers of shared services will only be concluded in the fall of 2006, the Transmission Provider used the agreements negotiated in 2006 to forecast costs for 2007, increased by an inflation factor not exceeding 2%, and by specific cost elements, such as pension costs, as well as installation security improvements, and maintenance on transmission system s automation equipment. In the Transmission Provider s opinion, these were the most realistic and probable hypotheses at the time of preparing the current rate application. 2.1 Technology Group In February 2006, the Board of Directors approved the creation of the Technology Group and specifically conferred it the responsibility for the company s telecommunication activities, as well as innovation activities. Therefore, the responsibility for the transmission system s telecommunication activities, network service activities and projects carried out for these activities, which were formerly under the responsibility of the Hydro-Quebec Division, the Shared Services Centre, and the Hydro-Quebec Equipment and SEBJ Division, has been transferred to the Technology Group. As for innovation activities, these remain under the management of the IRHQ, which, henceforth, comes under the Technology Group. The Technology Group offers important services to the Transmission Provider pertaining to the operation of the transmission system. Among others, Page 8 of 15
specialized telecommunication requirements stem from the need to ensure the security and reliability of the electricity system, and to manage it efficiently. Table 2 below presents in detail the evolution of costs charged by the Technology Group and its predecessors, applicable to the Transmission Provider s operating activities. Table 2- Shared Services Costs Billed by the Technology Group Table-2 key Column 1: Telecommunications Service; Specialized Telecommunications; Circuits, Mobile Radio, Miscellaneous; Innovation; Technological Innovation Projects, Technical Support, Total Excluding Return; Return on Assets of the Supplier; Total Including Return. The financial data for the services rendered to the Transmission Provider by the Technology Group are presented in Exhibit HQT-6, document 3.1. Page 9 of 15
Moreover, Table 3 hereafter shows the allocation of amounts billed by the Technology Group to the Transmission Provider between the operating costs and the investments of the latter. Table 3- Allocation of Amounts Billed by the Technology Group from 2005 and 2007 Table-3 key Column 1: Cost Areas; Telecommunications Service; Specialized Telecommunications; Circuits, Mobile Radio, Miscellaneous; Innovation; Technological Innovation Projects, Technical Support, Total Excluding Return; Return on Assets of the Supplier; Total Including return. 2.2 Shared Services Centre Table 4 hereafter shows the detailed evolution, between 2005 and 2007, of the costs billed by the SSC, applicable to the Transmission Provider s operating activities. To facilitate the comparison from one year to the next, the data pertaining to the transfer of activities and to the resources of telecommunications system services have been reclassified to represent the services billed as though the SSC was never the supplier for these services. Page 10 of 15
Table 4- Shared Services Costs Billed by the SSC Table-4 key Column 1: Cost Areas ; Supply and Services, Building Services, Transmission Material, Overhead Transmission, Management of Material, Management of Documents, Acquisition; Information Technology, IT solutions, Development of Technologies, Office Automation; Other, Transactional Accounting Services, Training Centre for Enterprise Resource Planning; Total Excluding return; Return on Assets of the Supplier; Total Including return. The financial data concerning the services rendered to the Transmission Provider by the SSC are presented in Exhibit HQT-6, Document 3.2. Page 11 of 15
Moreover, Table 5 shows the allocation of amounts billed by the SSC to the Transmission Provider between the operating costs and the investments of the latter. Table 5 - Allocation of Amounts Billed by the SSC from 2005 and 2007 Table-5 key Column 1: Cost Areas ; Supply and Services, Building Services, Transmission Material, Overhead Transmission, Management of Material, Management of Documents, Acquisition; Information Technology, IT solutions, Development of Technologies, Office Automation; Other, Transactional Accounting Services, Training Centre for Enterprise Resource Planning; Total Excluding return; Return on Assets of the Supplier; Total Including return. 2.3 Corporate Units Table 6 hereafter presents the detailed evolution, between 2005 and 2007, of the costs billed by the corporate units, applicable to the Transmission Provider s operating activities. Page 12 of 15
Table 6 - Shared Services Costs Billed by the Corporate Units Table-6 key Column 1: Costs Areas; Financial Services, Human Resources, Security, Litigation; Other; Total. Finally, as indicated above, the financial data related to the services supplied to the Transmission Provider by the corporate units are presented in Exhibit HQT-6, Document 3.3. 3. PROGRAM FOR THE IMPROVEMENT OF INSTALLATION SECURITY The Transmission Provider must control access to its installations, primarily (i) for public protection against electrification or electrocution in the case of an intrusion within its installations; (ii) for protection of equipment against possible acts of vandalism or theft following an intrusion; (iii) to ensure the security of supply to customers. Page 13 of 15
Since the events of September 11, 2001 in New York, the Transmission Provider has undertaken the classification of its assets according to several criteria, including their strategic impact. The intrusions that occurred in 2005 in several Hydro-Québec installations, including those of the Transmission Provider, reinforce the need to rapidly implement a program for the improvement of installation security. The level of protection of each installation will be adjusted as a function of the classification standard for the Transmission Provider s assets, and of the impact of the installation on system reliability. Physical security systems and remote surveillance of installations will be improved and added, and security guard presence will be reinforced. Table 7 hereafter indicates the amounts billed to operations by the different suppliers of shared services within the framework of this program. Table 7 - Shared Services Costs Related to the Program for the Improvement of Installation Security Page 14 of 15
Security guard fees for the physical surveillance of installations will be billed by the Industrial Security corporate unit. As of 2007, it is forecast that the Industrial Security bill will decrease following the implementation of physical security systems and remote surveillance. The Hydro-Québec Equipment bills assigned to the Transmission Provider s operations amount to $0.7 million for 2005 and $7.1 million for 2006 for security upgrades on non-capitalized installations. Hydro-Québec Equipment plans to finish this work in 2006 and therefore there will be no costs assigned to operations in 2007. As for Hydro-Québec Production, the costs correspond to the portion of the fees relative to the implementation of two central alarm systems that will be used, among others, to ensure the protection of the Transmission Provider s assets. Page 15 of 15