Capital Tracker – True-Up – Rates
ECPOR Distribution & Transmission Inc. (“EDTI”) applied for approval of its 2014 capital tracker true-up and 2016-2017 capital tracker forecast under performance-based regulation (“PBR”). EDTI requested that the revenue requirement associated with the applied-for capital trackers be included in the applicable year.
The PBR framework, as described by the AUC, provides a formula mechanism for the annual adjustment of rates over a five year term. In general, the companies’ rates are adjusted annually by means of an indexing mechanism that tracks the rate of inflation (“I Factor”) relevant to the prices of inputs less an offset (“X Factor”) to reflect productivity improvements that the companies can be expected to achieve during the PBR plan period. The resultant I-X mechanism breaks the linkages of a utility’s revenues and costs in a traditional cost-of-service model. The PBR framework allows a company to manage its business with the revenues provided for in the indexing mechanism and is intended to create efficiency incentives similar to those in competitive markets.
However, certain items may be adjusted for necessary capital expenditures (“K Factor”), flow through costs (“Y Factor”), or material exogenous events for which the company has no other reasonable cost control or recovery mechanism in its PBR plan (“Z Factor”).
This supplemental funding mechanism was referred to in Decision 2012-237 as a “capital tracker” with the revenue requirement associated with approved amounts to be collected from ratepayers by way of a “K factor” adjustment to the annual PBR rate setting formula.
Projects or programs are eligible for capital tracker treatment, provided that they meet the following three criteria:
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The project must be outside the normal course of on-going operations (“Criterion 1”);
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Ordinarily the project must be for replacement of existing capital assets or undertaking the project must be required by an external party (“Criterion 2”); and
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The project must have a material effect on the company’s finances (“Criterion 3”).
In order to qualify under Criterion 1, the AUC noted that the increase in associated revenue provided by the PBR formula must be insufficient to recover the entire revenue requirement associated with the prudent capital expenditures for the program or project in question. This test is therefore considered by the AUC as more accounting oriented than engineering oriented, although such applications must generally be supported by an engineering study and business case to assess the reasonableness of the request.
With respect to Criterion 2, generally a growth related project which can demonstrate that customer contributions and incremental revenues are insufficient to offset the revenue requirements associated with a project for a given PBR year will satisfy the requirements.
The materiality threshold in Criterion 3 requires that each project must individually affect the revenue requirement by four basis points. On an aggregate level, all proposed capital trackers must have a total impact on revenue requirement of 40 basis points.
EDTI applied for capital tracker treatment for the following amounts:
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A reduction of $2.21 million for its 2014 K factor true-up;
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2016 K factor amounts of 27.57 million, consisting of 24.52 million for previously approved projects, and 3.05 million for projects not previously approved.
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2017 K factor amounts of 38.16 million, consisting of 28.65 million for previously approved projects, and 9.49 million for projects not previously approved.
EDTI applied for capital tracker treatment for the following projects and programs, in the following amounts:
In total, EDTI applied for capital tracker treatment of 27 separate capital projects or programs in the years 2016 and 2017, 20 of which were previously approved by the AUC in Decision 2013-435 or Decision 3100-D01-2015.
Project Grouping
EDTI submitted that it applied the same approach to grouping as it did in prior capital tracker applications, which was approved in Decision 2013-436 and Decision 3100-D01-2015 with certain exceptions.
The AUC noted that in Decision 3100-D01-2015, it found EDTI’s general approach to grouping as reasonable, but questioned whether all of EDTI’s life cycle replacement projects should be grouped together with the Neighbourhood Renewal Program for the purposes of the accounting test under Criterion 1. The AUC noted that all of these projects and programs had the key aim of replacing or renewing aging assets.
EDTI explained in this application that while such a grouping was “technically possible”, it submitted that it would be impractical and very burdensome to complete.
Neither the Utilities Consumer Advocate (“UCA”) nor the Consumers’ Coalition of Alberta (“CCA”) took issue with EDTI’s proposed project groupings.
The AUC held that EDTI adequately responded to its directions from Decision 3100-D01-2015 in respect of grouping life cycle replacement programs with the Neighbourhood Renewal Program. The AUC held that, to the extent the project groupings for previously approved projects were the same as found in Decision 3100-D01-2015, it considered these groupings to be reasonable, and approved them as filed.
Grouping of New Capital Tracker Projects
EDTI submitted that it will be installing new Advanced Metering Infrastructure (“AMI”) meters during 2016 and 2017, stating that it planned to replace customer meters with AMI meters, and that a number of meters are in need of replacement. EDTI stated that it would group AMI costs with growth and life cycle replacement projects, but would maintain tracking as a separate line item.
The AUC held that grouping AMI projects with other growth and life cycle replacement projects would have no effect on the total K factor over the forecast period, as both were net positive throughout 2016 and 2017. However, the AUC directed that EDTI group these projects together under the title “Customer Revenue Metering”, while filing separate business cases for both.
EDTI also applied for a Work Centre Redevelopment project, which consisted of acquiring a new building and space at its north service centre, and redeveloping the north service centre and south service centre, along with consolidating EDTI employees at other locations to the north and south service centres, and transferring EDTI’s training facilities to its Winterburn location. EDTI did not group the life cycle replacements for the north and south service centres with this project, submitting that the life cycle replacements were mainly repairs and capital maintenance.
The CCA opposed EDTI’s grouping on the basis that EDTI was only able to distinguish these projects based on scope and scale, rather than separate drivers for the projects themselves.
The AUC held that while there were differences in timing and scope for the Work Centre Redevelopment and other building life cycle replacements, the projects were not sufficiently different to warrant separate groupings for capital tracker purposes. The AUC therefore directed EDTI to group the Work Centre Redevelopment project along with the other building life cycle replacement projects into a single grouping for its compliance filing.
EDTI submitted that its Civil Work for Downtown Vault and Manholes included repairing and replacing deteriorated vault or manhole structures in its network.
Neither the UCA nor the CCA raised any concerns with the Civil Work for Downtown Vault and Manholes project.
The AUC held that the Civil Work for Downtown Vault and Manholes Project was substantially similar in terms of scope and drivers to the Distribution Manhole Rebuilds (for which capital tracker treatment was not requested). The AUC therefore directed that EDTI group these projects together in its compliance filing.
Criterion 1 Assessment
EDTI submitted that it applied the following inflation factors for its 2016 and 2017 forecast costs:
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4.0 percent salary escalation factor for non-union staff;
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3.0 percent escalation for union staff;
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Employee fringe benefit rates of 43.65 percent to all salary and labour costs;
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Material cost inflators of 2.2. percent; and
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Contractor cost inflators of 3.1 percent and 3.2 percent for 2016 and 2017 respectively.
EDTI explained that it did not forecast costs related to specific capital cost categories for 2016 and 2017, since it is under PBR. EDTI instead applied a capital overhead amount to the cost of the projects using a capital overhead rate of 8.0 percent. The CCA argued that EDTI’s forecast allocated overhead costs, for which EDTI claimed a 3.4 percent increase, should be reduced to the 2016 I factor of 2.06 percent. EDTI however, argued that the application of the I factor to the overhead cost of each capital project was not relevant to the calculation of overhead costs.
EDTI requested the inclusion of its short term incentive pay (“STIP”) costs associated with staff that work on capital projects. EDTI submitted that it historically did not capitalize its STIP costs, but were instead allocated to the master overhead pool for operating cost categories. However, EDTI stated that the change is consistent with the remainder of the EPCOR corporate group, and that the costs should be capitalized as they are directly attributable to capital expenditures.
The CCA recommended that the AUC reject the inclusion of STIP costs for two reasons. First, that incentive pay costs were already included in EDTI’s going-in rates for PBR, and so may be double counted. Second, EDTI was not proposing any changes to its I-X portion of rates as a result of its STIP calculation.
The AUC held, with respect to STIP costs, that EDTI was required to disclose the change in accounting methods as part of its attestation letter for the present application. However, the AUC found that because the capitalization policy for STIP had not been implemented until late 2014, EDTI could not have included this information in its application, which was filed on September 10, 2014.
The AUC also accepted the CCA’s argument regarding STIP costs. The AUC found that double counting would occur if STIP costs are capitalized under capital tracker programs, since the I-X component of PBR rates already provide funding to account for those costs. The AUC therefore directed EDTI to remove any STIP costs from its compliance filing.
The AUC held that the evidence before it did not support a 4.0 percent salary increase for non-union labour, pointing to the evidence presented by EDTI that such labour escalators are trending downward. The AUC accordingly approved a non-union escalation rate of 3.0 percent for the 2016 and 2017 period, and directed EDTI to reflect these findings in its compliance filing.
The AUC held that it was not persuaded that EDTI’s increases in capital overhead amounts were reasonable. Therefore, in the absence of evidence supporting such a requested increase, the AUC held that it would not approve overhead costs in excess of an amount adjusted by the I-X mechanism for the applicable year. The AUC approved the remainder of EDTI’s input escalation rates as filed, finding them to be reasonable.
EDTI submitted that its Customer Revenue Metering – Growth & Life Cycle Replacements project was outside the normal course of business, owing to impacts in changes to Measurement Canada’s meter testing requirements. EDTI also submitted that its Customer Revenue Metering – Growth & Life Cycle Replacements project was approved for capital tracker treatment in Decision 3100-D01-2015. EDTI submitted that all new meters installed would be AMI meters, which were obtained through a competitive bidding process.
The AUC held that the Customer Revenue Metering – Growth & Life Cycle Replacements project scope, level and timing of costs were reasonable. EDTI submitted that its Customer Revenue Metering – Growth & Life Cycle Replacements project was outside the normal course of business, owing to impacts in change to Measurement Canada’s meter testing requirements. EDTI also submitted that its Customer Revenue Metering – Growth & Life Cycle Replacements project was approved for capital tracker treatment in Decision 3100-D01-2015. EDTI submitted that its 2014 actual costs for its AMI project, which formed part of the Customer Revenue Metering – Growth & Life Cycle Replacements project, were impacted by new requirements from Measurement Canada to test, and in some cases replace, existing meters on its system. EDTI noted that it was in the process of applying for a temporary dispensation from Measurement Canada to test its recently installed AMI meters. EDTI submitted that all new meters installed would be AMI meters, which were obtained through a competitive bidding process.
The AUC therefore directed EDTI to explain the impacts on its 2014 actual costs in its compliance filing. The AUC otherwise held the scope, level and timing of the Customer Revenue Metering – Growth & Life Cycle Replacements project to be reasonable for 2016 and 2017.
EDTI also requested accelerated depreciation expenses for the Customer Revenue Metering – Growth & Life Cycle Replacements project. The AUC held that allowing a company to file a depreciation study, or a depreciation technical update was inconsistent with the third PBR principle, namely that the PBR plan should be easy to understand, implement and administer. The AUC held that the introduction of a depreciation technical update, with the exception where a Z factor (a material exogenous event for which the company has no other cost recovery mechanism available) adjustment is warranted. The AUC denied the technical update for depreciation rates on the basis that such adjustments would not comport with the object of PBR to reduce the regulatory burden, and provide an established revenue framework during the PBR period. The AUC directed EDTI to remove the accelerated depreciation amounts from the K factor calculation in its compliance filing.
The AUC held that each of the remaining capital tracker projects and programs met the requirements for Criterion 1 and accordingly approved the need, scope, level and timing for each program, either on an actual basis for 2014, or on a forecast basis for 2016 and 2017.
However, since the AUC directed changes to EDTI’s accounting test as it relates to the approved I-X index value and Q factor values for 2016, the AUC held that it was unable to make a determination as to whether the capital tracker projects met the accounting test under Criterion 1 in its entirety.
The AUC therefore directed EDTI to revise its accounting test in its compliance filing to reflect the approved I-X index value and Q factor values for 2016 and 2017.
Criterion 2 Assessment
EDTI confirmed that the drivers for each of its previously approved programs and projects have not changed, and that its programs and projects were each approved in Decision 3220-D01-2015 as having met the requirements of Criterion 2.
The AUC held that there was no need to undertake a reassessment of any of the projects or programs against the Criterion 2 requirements.
For the new capital tracker projects and programs, EDTI submitted that each met the requirements for Criterion 2. EDTI explained that although its AMI project was not required due to system growth or increase in load, it involved the replacement of existing capital assets.
The UCA submitted that the AMI project did not meet the requirements of Criterion 2, since it was not required for the replacement of aged infrastructure that has come to the end of its useful life, nor was it required by a third party.
The AUC held that although the conventional customer meters were capable of continuing to provide their respective metering functions, the least cost alternative for EDTI was to replace the assets with AMI meters. Accordingly, the AUC held that the AMI project was a replacement of existing infrastructure and met the requirements of Criterion 2.
The AUC held that all other new capital tracker projects and programs complied with the requirements of Criterion 2.
Criterion 3 Assessment
Criterion 3 is a two step materiality test which assesses the impact of capital tracker costs at four basis points of total revenue requirement for individual projects or programs, and 40 basis points of total revenue requirement for the total capital tracker costs not covered by the I-X mechanism for the applicable year.
For its 2014 capital tracker true-up, EDTI applied a four basis point threshold of $103,327 and a 40 basis point threshold of $1.033 million, which it submitted were previously approved in Decision 3100-D01-2015. EDTI also submitted that each 2014 capital tracker project or program satisfied both materiality requirements of Criterion 3.
For 2016-2017, EDTI submitted that it calculated the materiality thresholds consistent with the methodology set out in Decision 2013-435. However, since EDTI did not have approved inflation factors for 2016 or 2017, it used I-X index values of 0.42 percent for 2016 and negative 0.21 percent 2017 based on the approved X factor, and its own inflation forecasts. Accordingly, EDTI calculated its 2016 materiality thresholds as follows:
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Four basis point threshold: $105,307; and
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40 basis point threshold: $1.053 million.
EDTI calculated its 2017 materiality thresholds as follows:
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Four basis point threshold: $105,086; and
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40 basis point threshold: $1.051 million.
None of the interveners took issue with the 2014, 2016 or 2017 materiality thresholds.
The AUC held that EDTI’s calculations and forecasting methods were reasonable. The AUC accordingly approved FAI’s 2014 threshold values as filed, and confirmed that the 2014 true-up values met the materiality thresholds of Criterion 3 for capital tracker treatment. However, since the filing of EDTI’s application, the AUC provided a final 2016 I-X value of 0.90 percent in Decision 20821-D01-2015. Therefore, the AUC directed FAI, in its compliance filing, to apply materiality thresholds for Criterion 3 using the approved 2016 I-X factor as a forecast value for both 2016 and 2017.
2014 True-Up and 2016-2017 K Factor Calculations
EDTI proposed to use its Rider DJ to collect or refund any approved 2014 K factor adjustment.
EDTI submitted that its final base rates and billing determinants are applied for as part of its annual PBR rate adjustment filings. EDTI would therefore provide calculations of its 2016 capital tracker allocator percentages and adjustments to rates with its 2016 annual PBR adjustment filing for 2016, and the subsequent 2017 values as part of its 2017 PBR adjustment filing for 2017.
The AUC held that while it confirmed the prudence of the actual capital additions associated with EDTI’s projects and programs for 2014, due to the removal of the STIP amounts and other revisions, the AUC could not approve a final 2014 K factor true up adjustment.
Similarly, the AUC held that EDTI’s forecast capital expenditures for 2016-2017 were generally reasonable, subject to the removal of the STIP amounts. However, due to the AUC’s directions for EDTI to change its materiality test under Criterion 3, and to change the accounting test under Criterion 1, it could not approve the 2016 or 2017 K factor adjustments in this decision.
Order
The AUC directed EDTI to file a compliance filing in accordance with the directions in this decision on or before March 16, 2016.
