Compliance Filing – Energy Price Setting Plan
EPCOR Energy Alberta GP Inc. (“EEA”) filed a compliance filing for its energy price setting plan (“EPSP”) in response to directions made by the AUC in Decision 2941-D01-2015.
Adjustment of After Tax Return Margin
In Decision 2941-D01-2015 the AUC approved an all-in after-tax return margin of $2.51/megawatt-hour (MWh) for EEA. In this proceeding, EEA proposed to collect the $2.51/MWh charge as part of its energy rates effective March 1, 2016.
However, the AUC had previously approved a recovery of $1.99/MWh in the energy charge as a transitional measure as part of its findings in Decision 20342-D01-2015, with the balance being recovered through non-energy charges. The AUC later approved EEA’s 2016 non-energy charges in Decision 20676-D01-2015, which did not include an amount for its all-in after tax return, leaving a $0.52/MWh amount to be trued-up.
As part of its application, EEA proposed to true up the collection of these amounts in its application for the months of January and February 2016.
The Utilities Consumer Advocate (“UCA”) and Consumers’ Coalition of Alberta (“CCA”) expressed concerns only with respect to the true-up portion of the application, noting that section 3(2) of the Regulated Rate Option Regulation prohibits the use of true-ups, rate riders or other similar accounts or devices for energy-related costs.
Accordingly, the AUC did not accept EEA’s proposal to true up the remaining $0.52/MWh charge, finding that it would violate section 3(2) of the Regulated Rate Option Regulation.
The AUC noted however that EEA may apply for the recovery of the true-up charges at the time EEA trues up its 2016 interim rates for its non-energy charge.
Adjustments to Auction Parameters
In Decision 2941-D01-2015, the AUC directed EEA to exclude any reference to a role for the Market Surveillance Administrator (“MSA”) in its EPSP. EEA submitted that its auction parameters now no longer refer to the MSA. EEA noted that it procures its energy through an auction process on the Natural Gas Exchange (“NGX”). As part of its application, EEA requested the ability to adjust its approved parameters in order to maintain competitiveness in the marketplace. EEA noted three options to address the need for flexibility to adjust its approved auction parameters:
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Require EEA to seek AUC approval through a confidential and expedited process;
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Deny EEA the ability to implement any adjustments to its auction parameters; or
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Confirm EEA’s understanding that it can make adjustments to its auction parameters, and file the adjustments with the AUC for acknowledgement.
The CCA argued that such unilateral discretion for EEA in the absence of any real oversight may lead to sub-optimal results for customer rates. The CCA submitted that EEA was instead required to demonstrate how any proposed adjustments actually resulted in EEA remaining competitive or becoming more competitive as a result.
The UCA, in contrast, acknowledged that an approved EPSP framework may require a number of amendments throughout its term to ensure that it continues to function effectively. However, the UCA voiced its concerns that EEA would be able to influence the base energy charge (“BEC”) by manipulating the auction parameters. The UCA therefore argued that if auction parameter amendments were required, that EEA should apply to the AUC for approval of such amendments.
EEA submitted that it performs a thorough analysis prior to making any adjustments to its auction parameters, however, once the change is deemed necessary, EEA submitted that the change must be implemented quickly to mitigate any adverse effects caused by changing market conditions. EEA also submitted that its proposed level of discretion was limited, being restricted to small modifications that do not change the underlying nature of the auction process.
The AUC held that EEA complied with the direction to remove the references to the MSA in its EPSP.
With respect to the proposed modifications, the AUC held that it did not give specific direction on the adjustment of other parameters. The AUC agreed with EEA that a certain level of discretion was necessary to account for and respond to market developments that may materially affect the competitiveness of EEA’s energy acquisition process for RRO customers. The AUC therefore held that the ex-post facto monitoring of rates relative to past raes, NGX market information and rates of other RRO providers were sufficient to determine whether the rates were just and reasonable. The AUC also directed EEA to file an acknowledgment letter with the AUC for any change in the auction parameters including the following information:
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An explanation of the market factors necessitating the change;
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A supporting analysis; and
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A schedule identifying the history of all changes to the individual parameters.
Hedging
In Decision 2941-D01-2015, the AUC directed EEA to set their final hedge targets at a level similar to the 75th percentile of the average hourly load during peak hours, and to produce an analysis demonstrating the effects on the BEC.
EEA submitted an analysis that reflected a hedging target based on the 60th percentile of the average hourly load during peak hours as having the lowest RRO energy charge, and submitted other information on a confidential basis.
The AUC approved EEA’s application to hedge peak product to the 60th percentile, although its reasons for doing so were confidential.
Backstop Mechanism
The AUC directed EEA in Decision 2941-D01-2015 to include a backstop mechanism in its EPSP.
EEA provided a backstop mechanism that excluded a retainer fee with its backstop supplier. EEA’s proposed backstop mechanism is a contract for supply to be executed following a request for proposal, and provided further information on a confidential basis.
The CCA submitted that the entire process in selecting a backstop supplier should be filed with the AUC on a monthly basis, and be fully transparent. The CCA also submitted that a formal backstop arrangement with a third party was not truly critical to procure its forecast hedges. Instead the CCA recommended that EEA should procure its backstop requirements through the over-the-counter market or the NGX screen.
The AUC echoed its concerns raised in Decision 2941-D01-2015 that EEA could not include an estimated cost of its proposed backstop arrangement. Accordingly, the AUC held that EEA did not provide sufficient information for the AUC to assess the cost of backstop procurement and therefore denied EEA’s proposed backstop mechanism.
The AUC directed EEA to file an application to give effect to a new backstop supply mechanism. In the meantime, the AUC directed EEA to continue to maintain its current backstop mechanism.
Commodity Risk Compensation Structure
EEA submitted that, as part of its revised commodity risk compensation strategy, that it would transition its peak volume hedging from the 75th percentile to the 60th percentile. EEA explained that it would also calculate its variable risk compensation using the gains and losses for the preceding 12 months for which monthly settlements are available to determine the commodity risk compensation.
The AUC held that while EEA complied with the direction to revise its commodity risk compensation structure in Decision 2941-D01-2015, the AUC held that the calculation method using the prior 12 month period required “synthetic data”, since 60th percentile hedging values were not available. As such, the AUC found that the commodity risk compensation structure was inconsistent with the direction provided in Decision 2941-D01-2015. Accordingly, the AUC directed EEA to revise its commodity risk compensation structure using actual historical commodity revenue for the prior 12 month period.
Implementation
EEA stated that after the AUC renders its decision on the EPSP compliance application, it would require five months to implement the EPSP. EEA offered the following reasons for its requested implementation period:
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EEA required four months’ time to begin procuring under its new hedging percentile;
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EEA needed time to inform all potential block product suppliers of the changes, and needed to provide one month’s notice prior to the first NGX auction using the new auction mechanism; and
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The reduced number of auctions required an elongated transition period, otherwise procurement would be skewed toward the beginning of the 120-day price setting period at the outset of the EPSP term.
The CCA submitted that EEA’s proposal requesting five months was excessive, and recommended a one month transition period as of the date of the AUC’s decision. The CCA submitted that there was no reason to believe that EEA’s suppliers were not aware of the impending change, and that the extended notification period was not warranted. The UCA also supported a timely implementation of EEA’s EPSP.
The AUC accepted EEA’s argument that the change to its hedging strategy was the driver behind its implementation schedule, and found that such a quick change might cause a disproportionate amount of hedging volume to occur in the months prior to the transition. The AUC therefore held that one month for notice, and 120 days for procurement would result in a five month transition period, which it approved.
Regulated Rates and Forecast Accuracy
EEA stated that it would provide an illustrative forecast performance report showing the forecast variances due to weater, site counts and consumption levels on a monthly basis.
The CCA recommended that EEA should continue to provide peak data in the load forecast summary, as a reasonableness check for consumers. The CCA noted its concerns that EEA did not compare forecast peak percentage with the subsequent actual peak percentage. As a result, CCA recommended that the AUC order EEA to include the following in its monthly filings:
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the basis for determining the range of reasonableness in respect of the peak to base ratio, including historical data;
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the difference between forecast and actual peak to base ratio for the most recent month available;
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an assessment of the effect on rates as a result of the difference between forecast and actual peak to base percentages; and
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a description of any actions necessary for subsequent months.
The CCA also proposed, in the alternative, that the AUC undertake an audit using a list of specified parameters agreed to by EEA and consumer groups at regular intervals, in lieu of monthly filings.
EEA submitted that there was no evidence on the record of the proceeding that the additional information or process requested by the CCA would improve the operation of EEA’s EPSP. EEA also submitted that the AUC previously held in Decision 2941-D01-2015 that the involvement of third parties in monthly filings was not needed, and that there was no evidence of negative consequences from their not participating in the monthly filing process.
The AUC held that the differences in views between the parties for monthly filings related only to the detail required to check the accuracy of the calculations and the scope of information to be provided. However, the AUC determined that the requests of the interveners were beyond what was required to review the ongoing operation of EEA’s EPSP. Consequently, the AUC found that the monthly filings as proposed by EEA were sufficient to support the AUC’s information requirements for monthly filings.
Process for review of monthly filings
The CCA requested a clarification on the timelines for reviewing monthly RRO filings, including access to confidential information. Given that the monthly rates are filed five days prior to the end of the month, the CCA recommended a process timeline for submitting clarification questions to EEA, as well as responses on a confidential basis.
EEA submitted that the timelines for filing are set by regulation, and argued that the CCA’s proposal for the monthly filing process was reasonable or compatible with the Regulation Rate Option Regulation.
The AUC held that no further guidance was necessary on the process for monthly filings. However, the AUC noted it could establish further process if it considered it warranted based on an objection through the process already provided for in acknowledgement letters.
Forecasting Methodology
The UCA submitted evidence that EEA could manipulate the inputs to its load forecasts to achieve a desired expected volumetric position, equivalent to hedging beyond its approved target of the 60th percentile. The CCA raised concerns with the potential for manipulating forecasts toward the end of the EPSP term, on account of the 12 month lag in the risk cycle adder component of its EPSP.
EEA submitted that the forecast methodology was tested and approved by the AUC in Decision 2941-D01-2015. EEA also submitted that the forecast methodology itself was a purely mechanical exercise with no decision points or ability to manipulate forecasting techniques. EEA submitted that the only tool it has to manage forecasting risk is the accuracy of its forecasting.
The AUC dismissed the CCA’s concerns with forecast manipulation, noting that EEA’s forecast methodology was tested and approved, and in any event, contained no decision points.
Conclusion
The AUC approved EEA’s compliance filing to Decision 2941-D01-2015 as filed, with the exception of the backstop supply mechanism, for which EEA was directed to file a new application in Proceeding 20342.
