Rates – Regulated Rate Option
ENMAX Energy Corporation (“ENMAX”) applied for approval of its 2015 to 2016 regulated rate option (“RRO”) non-energy tariff pursuant to section 103 of the Electric Utilities Act and the Regulated Rate Option Regulation.
ENMAX requested the following amounts for its forecast non-energy revenue requirement in 2015 and 2016:
Compliance with previous AUC Directions
In Decision 2014-138, the AUC directed ENMAX to provide information about the billing and customer care (“B&CC”) cost allocations, between affiliate companies in its next RRO non-energy tariff application. ENMAX requested confidential treatment of the information it submitted concerning responses to Direction 7 from the AUC arising from Decision 2014-138 with respect to B&CC. ENMAX requested such confidentiality due to the commercially sensitive nature of the information on B&CC costs allocated to its unregulated competitive businesses which from part of the ENMAX group of companies.
The AUC also directed ENMAX, in Decision 2014-138 to file its most recent actuarial valuation, effective December 31, 2012, as part of its next RRO non-energy tariff application. The AUC held that ENMAX filed its most recent actuarial pension valuation with the application, and therefore complied with the direction.
In Decision 2941-D01-2015, the AUC directed ENMAX to provide information concerning its payment in lieu of taxes (“PILOT”) filings in its next non-energy application, including an explanation of its reporting of PILOT, and support for its PILOT calculations.
The AUC held that the amounts claimed for PILOT treatment by ENMAX were reasonable. However, since the AUC approved a higher site count retention rate and new inflation rates for test years, the AUC directed that the PILOT calculation be updated to reflect these related findings.
In Decision 2014-347, the AUC directed ENMAX to use the average of its gross margin numbers from audited financial statements for the most recent three years for which gross margin data was available for the purposes of allocating costs.
In Decision 2014-347, the AUC also directed ENMAX to remove any affiliate company financial metrics from its long-term variable pay plan (“LTVPP”), as the AUC did not allow a variable component based on parent company financial performance in the variable pay component of revenue requirement.
ENMAX submitted that it removed $69,000 and $66,000 for 2015 and 2016 respectively from its LTVPP amounts to reflect the AUC’s direction in Decision 2014-347.
The AUC held that in ENMAX’s initial application, it had misstated the amounts removed, but accepted the updated calculations of $69,000 and $66,000 provided by ENMAX. The AUC therefore directed ENMAX to update the amounts in its compliance filing to this application.
Inflation Factors
ENMAX submitted that it applied the following inflation factors for 2015 and 2016:
ENMAX also submitted that it inflated all other labour costs for 2016 by 4.1 percent, and all other non-labour costs by 2.1 percent, using figures adopted from the Conference Board of Canada and Statistics Canada.
ENMAX stated that its annual salary forecasts were generated from either collective bargaining agreement (in the case of CUPE labour costs) or from survey market data in setting compensation within plus or minus 10 percent of median salary in the competitive market.
The Consumers’ Coalition of Alberta (“CCA”) questioned the data used by ENMAX, since it predated the recent decline in commodity prices, resulting in overstated inflation rates and noted that more recent Conference Board of Canada forecasts are substantially different from those provided by ENMAX. The CCA accordingly recommended that the AUC reduce ENMAX’s requested inflation amounts to at least 2.1 percent for all labour components in 2016 and to 0.0 percent for 2016.
The Utilities Consumer Advocate (“UCA”) also supported a reduction to inflation factors, noting that the Spring 2016 Conference Board of Canada report contained drastically different inflation factors and consumer price indices (“CPI”) for Alberta. The CCA therefore recommended that the AUC reduce the inflation factors to 1.1 percent for 2016 and 1.75 percent for 2016 based on the average of forecast reports. The CCA also recommended that labour costs be reduced to 1.7 percent for 2016 based on the average of forecast reports.
The AUC held that ENMAX’s forecast costs for 2015 used data from 2014, and determined that more recent data which becomes available during the course of a hearing should be used. The AUC therefore found that ENMAX’s forecasts based on 2014 data no longer provided an accurate reflection of labour and non-labour increases.
However, the AUC did not agree with the UCA and CCA’s recommended interest rates. The AUC held that increases of 1.0 percent for 2015, and 1.7 for 2016 for labour and non-labour salary was reasonable. The AUC accepted the inflation rates for unionized employees as filed. The AUC therefore directed ENMAX to reflect the AUC’s findings in its compliance filing.
Site Count Forecast
ENMAX submitted that it generated its site count forecast using a previously approved site count forecast methodology, which it described as exponential smoothing with a trend. ENMAX provided the following site count forecasts to the AUC:
ENMAX submitted that its RRO site reductions have been slowing from previous years, noting that RRO sites fell by more than 30,000 in 2012, whereas RRO sites fell by only 8,000 in 2014. Therefore, ENMAX forecasted residential decreases of 6.0 and 8.5 percent for 2015 and 2016, and commercial decreases of 9.5 percent and 11.7 percent in 2015 and 2016.
The CCA submitted that year over year site count reductions from 2013 and 2014 were 6.4 percent for residential RRO customers and 8.1 percent for commercial customers. The CCA submitted that since ENMAX noted that site count decreases were slowing, the year over year site count decrease should be less than the year over year reductions for 2013 and 2014.
The AUC held that ENMAX’s forecast site counts did not accord with its evidence of a trend of lower site count reduction rates. Accordingly, the AUC determined that ENMAX’s site count reductions for RRO customers were not reasonable.
The AUC therefore directed ENMAX to change its site count reduction forecast to no more than the 2014 end of year total RRO reduction rates, noting that such data was the most up-to-date information available. Accordingly, the AUC directed ENMAX to restrict its RRO site reduction rate to 4.0 for both 2015 and 2016 in its compliance filing.
Billing and Customer Costs
ENMAX submitted that its B&CC costs were supported through a centralized allocation model, including regulated, competitive and municipal services provided by ENMAX Encompass Inc. ENMAX provided the following cost information for its applied-for B&CC costs:
ENMAX noted that the decline in B&CC costs from 2015 to 2016 was primarily driven by the allocation factors, using the number of RRO site relative to non-RRO sites. ENMAX noted that this decline was offset somewhat by inflation.
The AUC held that since it previously directed changes to site counts and inflation rates, which are key elements to the allocation of B&CC costs, ENMAX would be required to update its B&CC costs to reflect the changes ordered to those figures. Accordingly, the AUC directed ENMAX to update its B&CC costs in its compliance filing.
The AUC also held that given ENMAX’s representations throughout the proceeding that it was performing further analysis on its B&CC costs, the AUC directed ENMAX to present the results of its B&CC costs analysis as part of its next RRO non-energy tariff application.
Bad Debt
ENMAX submitted that bad debt costs typically fluctuate with economic conditions, volumes and energy prices. ENMAX indicated that it intended to place an increased emphasis on collections in the forecast period, and expected to decrease bad debt costs in 2015 and 2016.
ENMAX forecast the following amounts and percentages for bad debt costs:
ENMAX identified four risk factors that could negatively affect its RRO bad debt forecast in the test period:
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Amendments to existing legislation;
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Future amendments to legislation, including reconnecting high credit risk customers;
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Adverse economic conditions; and
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Exogenous and unforeseen circumstances outside ENMAX’s control.
The AUC approved ENMAX’s bad debt forecast, noting that bad debt numbers were based on recent years of actual data, and that lower energy prices may reduce the amount of bad debt. However, since the bad debt forecast costs and revenue assumptions were generated using applied for site count retention rates and an inflation factor of 2.1 percent, the AUC directed ENMAX to update its bad debt forecast using the newly approved site retention rates and inflation factors in its compliance filing.
Working Capital
ENMAX requested approval for working capital amounts related to the lag time for items such as the cost of electricity, grid charges, salaries, B&CC costs, and goods and services tax. ENMAX requested working capital amounts of $(795,000) and $(963,000) for each of 2015 and 2016.
The AUC approved the working capital requirements as filed, subject to any changes resulting from changes to inflation factors and site counts. The AUC directed ENMAX to update its working capital amounts in its compliance filing.
Rent Expense
ENMAX requested approval of rent expenses related to assets held outside of the RRO, that are used to provide RRO service. ENMAX submitted that its rent expense costs were $0.48 million for 2015 and $0.45 million for 2016.
The AUC approved the rent expenses as filed.
Revenue Requirement Offsets
ENMAX requested the following revenue offsets, which are fees collected directly from RRO customers for certain items that offset the costs for utility services provided by the RRO:
ENMAX submitted that its 2015 costs were drawn from its 2015 budget, and its 2016 costs were calculated by escalating its 2015 costs by an inflation factor of 2.1 percent.
The AUC held that ENMAX’s revenue requirement offset amounts were reasonable for 2015 and 2016. However, the AUC determined that since it directed higher site count retention rates and new inflation factors, the revenue requirement offsets were approved subject to any changes directed by the AUC. As such, the AUC directed ENMAX to reflect the changes to revenue requirement offsets in its compliance filing.
Hearing Cost Reserve Account
ENMAX requested continued approval of its hearing cost reserve account in the RRO tariff. ENMAX provided the following information with respect to its hearing cost reserve account:
ENMAX submitted that its expected hearing costs were for its 2015-2016 non-energy application and the commencement of its next RRO non-energy application. ENMAX also submitted that it anticipated an increase in hearing costs due to potential changes to the Alberta electricity market from the new provincial government.
The AUC held that it approved of the continued use of the hearing cost reserve account, and found that ENMAX’s forecasts adequately reflected a design meant to achieve a zero balance at the end of the test period.
Non-Energy Risk Compensation
ENMAX proposed to collect a reasonable return through its energy charge once the AUC renders its decision on ENMAX’s proposed new energy price setting plan. However, ENMAX noted that until such time as a new energy price setting plan is approved, it proposed to continue to collect a six percent margin through its non-energy rates.
ENMAX submitted that the AUC’s determination in Decision 2941-D01-2015 that the reasonable return for RRO rates should be collected through the energy charge only would apply here, but that it was not reasonable to assume that the risk margin constitutes only a return. ENMAX submitted that the six percent margin included both return and risk margin. Accordingly, ENMAX submitted that according to section 6(1)(b)(ii) of the Regulated Rate Option Regulation, a separate risk margin must be approved for its non-energy operations going forward.
ENMAX provided an expert report that recommended a non-energy risk compensation margin of between 4.52 percent and 4.64 percent. ENMAX proposed to collect its non-energy margin as the midpoint of this range, at 4.58 percent. ENMAX’s expert report used the 6.0 percent margin as a starting point, and backed out the portion of the margin related to a fair return, leaving only the risk compensation component.
ENMAX’s expert report used the following steps to determine the non-energy compensation margin:
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Identify the AUC approved return on equity range;
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Adjust the generic return on equity by amending the risk-free rate, accounting for ENMAX’s shorter asset lives for RRO service;
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Adjusting the current non-energy return of 6.0 percent by the difference calculated in a similar report generated in 2013;
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Identifying the appropriate risk-free rate for 2015-2016; and
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Determining the risk compensation range by deducting the risk-free rate from the adjusted total non-energy return.
ENMAX’s expert justified the use of the AUC approved return on equity in noting that ENMAX has to set aside working capital to support non-energy operations, and that the nature of the RRO business does not lend itself to debt financing despite its obligation to serve.
The UCA submitted that ENMAX’s submission on non-energy compensation was not reasonable, and provided no evidence supporting any dollar amount of compensation for risks associated with intra-site variation and bad debt expenses for ENMAX. The UCA therefore recommended non-energy risk compensation of $0.00.
The AUC agreed with the UCA that ENMAX’s approach to non-energy risk compensation was not reasonable for an RRO provider. The AUC determined that the generic cost of capital return on equity are calculated for large utilities with significant amounts of invested capital. Therefore the AUC determined that the comparison to generic cost of capital rates by ENMAX was not warranted. The AUC noted in particular ENMAX’s reasoning for using generic cost of capital returns would actually result in a further credit to consumers, since the working capital applied for by ENMAX in this proceeding was actually negative, at $(795,000) and $(963,000) for each of 2015 and 2016. Therefore, contrary to ENMAX’s assertion that it has to set aside working capital to support its non-energy operations, the non-energy operations for ENMAX’s RRO provides working capital to ENMAX.
The AUC also rejected ENMAX’s assertion that the risk margin was a mixture of risk and return components, citing a response from ENMAX provided in Proceeding 20480, where it submitted that the RRT non-energy amounts were only for a reasonable return, and were not related to risk.
However, the AUC considered that ENMAX should be able to attempt to quantify the risk associated with bad debts and attrition, noting that EPCOR had previously done so for its non-energy RRO applications. Despite this, the AUC determined that ENMAX had not met its onus to include a non-energy risk compensation amount for the 2015-2016 test years. Accordingly, the AUC directed ENMAX to remove any non-energy risk compensation amounts from its compliance filing.
The AUC did, however, approve the collection of part of the reasonable return amounts approved in Decision 2941-D01-2015 through the non-energy tariff, as ENMAX noted it was seeking to transition the reasonable return from its non-energy RRO tariff to the energy component of its RRO tariff.
Order
The AUC therefore directed ENMAX to re-file its 2015-2016 RRO tariff to reflect the AUC’s findings in this decision, and to do so on or before May 30, 2016.
