Regulated Rate Option – Leave to Appeal
Direct Energy Regulated Services (“DERS”) applied for leave to appeal Decision 2941-D01-2015 of the AUC pursuant to section 29(1) of the Alberta Utilities Commission Act.
The Alberta Court of Appeal (“ABCA”) described DERS’ risk margin applied for in Decision 2941-D01-2015 as based on a methodology that utilized rolling weighted average historical systematic gains and losses over a 12-month period, plus forward-looking compensation by adding one standard deviation for volatility to the rolling weighted average.
The Utilities Consumer Advocate (“UCA”) proposed an alternate methodology to calculate the risk margin to the AUC, using:
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a variable adaptive component (using a 12-month rolling average of commodity gains and losses without commodity risk compensation, divided by the commodity revenues without commodity risk compensation over the same period); and
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a risk cycle component (a fixed $/megawatt-hour value calculated using historical data at the beginning of the energy price setting plan (“EPSP”) and updated annually).
The AUC issued Decision 2941-D01-2015 where it rejected DERS’ proposed risk margin and accepted the UCA’s methodology as providing a reasonable method for regulated rate option (“RRO”) providers to forecast expected net systematic gains and losses over a 12 month period using historical data. The AUC noted in providing its finding that a hypothetical application of DERS’ methodology would have provided DERS with an additional gain of $16.5 million over its previously EPSP.
DERS applied for a review of Decision 2941-D01-2015, which was denied by the AUC.
DERS submitted that the AUC erred in jurisdiction or law by:
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Holding that DERS’ risk margin in its EPSP was restricted to allowing DERS to recover only risk-related costs and expenses, instead of just and reasonable compensation for bearing financial risk, in addition to its prudent costs and expenses, contrary to sections 5 and 6 of the Regulated Rate Option Regulation; and
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Imposing a method of calculating the risk margin which requires backward looking adjustments to set the level of compensation to cover the actual losses incurred, contrary to section 3(2) and 6(2) of the Regulated Rate Option Regulation which prohibits the use of deferral accounts, true-ups, rate riders or other similar accounts.
In 2014, DERS, along with ENMAX Energy Corporation, and EPCOR Energy Alberta GP Inc., as RRO providers, filed their respective 2014-2018 EPSP. DERS has applied for a regulated rate tariff (“RRT”) that provided for a specific risk margin pursuant to section 1(1) of the Regulated Rate Option Regulation, which defines a risk margin as:
The just and reasonable financial compensation that an owner’s regulatory authority approves for the owner based on the financial risks
(i) that remain with the owner, and
(ii) that are associated with the supply of electricity services to regulated rate customers.
DERS submitted that the methodology approved by the AUC in Decision 2941-D01-2015 would impede the development of a fair, efficient and openly competitive electricity market, and would create an unfair and artificially low RRO price, stunting the development of fair and open competition. DERS further submitted that the issue was significant, since RRO providers are obligated to provide electricity services, and that Decision 2941-D01-2015 would set a dangerous precedent.
The UCA submitted that DERS incorrectly interpreted section 6(1) of the Regulated Rate Option Regulation as requiring subsection (a) and (c) to be read as mutually exclusive requirements. Instead the UCA submitted that the risk margin should provide a reasonable opportunity for DERS to recover its prudent costs and expenses associated with its risk as well as additional financial compensation for the financial risks assumed. The UCA submitted that the AUC appropriately applied the Regulated Rate Option Regulation, and specifically distinguished the UCA methodology from a deferral account or true-up, since it did not actually provide a settlement mechanism for the exact amount of losses incurred by an RRO provider.
The ABCA determined that the questions raised by DERS involve the AUC’s ratemaking authority, which is at the core of its mandate and expertise. Accordingly, the ABCA afforded the AUC’s reasons a high degree of deference.
The ABCA held that the AUC expressly considered section 6 of the Regulated Rate Option Regulation in setting the risk margin, and that there was no indication from the AUC’s reasons that the AUC considered the prudent costs of the owner separately from the just and reasonable financial compensation for the risks in opting for the UCA’s methodology.
The ABCA held that the AUC did not err in law or jurisdiction in selecting the UCA methodology, pointing to the AUC’s finding that there should not be risk compensation in excess of the full recovery of costs related to risk.
The ABCA also rejected the submission that the UCA methodology consisted of a deferral account, pointing to testimony noted by the AUC in providing its findings that the UCA methodology was prospective, and left a risk of gain or loss over the EPSP.
The ABCA, in rejecting the submission that the UCA methodology consisted of a deferral account, also determined that the issue was a question of mixed fact and law, and therefore expressly excluded from appellate review.
The ABCA held that DERS had failed to demonstrate a meritorious argument on the questions of law. Accordingly, the ABCA held that Decision 2941-D01-2015 fell within a range of possible acceptable outcomes that are defensible in respect of the facts and the law, and therefore dismissed the application.
