In January 2013, the AUC initiated a coordinated process to examine alternative approaches to mitigate or smooth the impact on consumers of rate increases, while still ensuring that regulated utilities have an opportunity to earn a fair return on invested capital (the “2013 Transmission Rates Initiative”).
On August 25, 2016, the AUC issued Bulletin 2016-16 in which it provided its final determinations regarding the 2013 Transmission Rates Initiative.
Forecast Transmission Additions
The AUC noted that in the AESO’s five-year long-term transmission planning report issued in January 2014 the AESO forecast $11.6 billion in transmission capital additions. In November 2015, the AESO issued an update to the five-year long term plan, which included a number of announcements about increasing costs. The AUC noted that the added costs for new transmission projects will result in higher rates for consumers.
Rate Impact of New Transmission on Consumers
The AUC noted that the allocation of new transmission capital costs should be clear, predictable and based on sound principles. The AUC noted that regulatory principles generally require the parties that cause the need for new transmission have to pay the associated costs. Prices should reflect the cost of the transmission services that are being provided.
The AUC noted that in practice, the allocation of new transmission capital costs must also be consistent with governing legislation which may be influenced more by public policy than by economic principles, such as the principle of cost causation. Therefore, principles relied on in past decisions regarding cost allocation are at times in conflict with one another. The AUC must exercise its discretion in determining the relative weight assigned to principles when allocating costs in a manner that is just and reasonable.
Alternative Approaches and Rate Treatments to Mitigate or Smooth Impact on Consumers
During the course of the 2013 Transmission Rates Initiative process, the AUC studied two alternatives to the allocation of transmission costs to mitigate impacts to consumers:
1. A rate cap and deferral account mechanism; and
2. The use of depreciation alternatives to delay capital recovery.
Under the rate cap and deferral account mechanism, the transmission costs included in the ISO tariff would be capped and increased each year by the forecast inflation rate. The difference between capped transmission costs and the actual revenue requirement would accumulate in a deferral account, that would increase by the accrual of carrying costs. Overtime, the transmission rate would be increased as the balance of the deferral account is drawn down.
With respect to depreciation alternatives, the AUC noted that depreciation expenses estimate the cost of the service potential consumed. It follows that, if it is predictable that the net revenue generated by an asset will either increase or decrease over time, an accelerated or decelerated time-based method should be used to approximate the rate at which service potential is actually consumed.
The AUC retained Foster Assoiciates Inc. (“Foster”) to examine depreciation alternatives. In its report (the “Foster Depreciation Report”), Foster explained that the “dual objective of depreciation accounting is cost allocation over the economic life of an asset in proportion to the consumption of service potential.” If the revenue generated by an asset is predicted to increase overtime, it is appropriate to use an accelerated time-based method, as opposed to a straight-line method currently used in Alberta. Foster stated that a compound interest method can achieve delayed capital cost recovery, which would be appropriate to better achieve intergenerational equity by increasing depreciation expenses as more customers come onto the system.
Testing the Alternatives
The Office of the Utilities Consumer Advocate (“UCA”) agreed to assist with the initiative by working with stakeholders to test the two mitigation alternatives. The UCA engaged EDC Associates Ltd. (“EDC”) to assist in running models to test the rate smoothing impact of the proposed alternatives.
Conclusion: No New Policy
In the AUC’s report on EDC’s analysis, it was estimated that while both alternatives achieved some savings, the savings achieved under both were small.
The AUC concluded that the predicted savings were not sufficiently large to adopt either mitigation proposal as policy.
Rather, the AUC directed that parties wishing to pursue the alternatives examined, or to pursue other alternatives, must bring such proposals forward in either an ISO tariff application, in the case of a rate cap and deferral account mechanism or a similar proposal, or a TFO general tariff application in the case of depreciation alternatives.
