Capital Tracker – True-Up – Rates
FortisAlberta Inc. (“FAI”) applied for approval of its 2014 capital tracker true-up and 2016-2017 capital tracker forecast under performance based regulation (“PBR”). Fortis applied for the revenue requirement associated with its capital trackers to be included in the K factor component of the PBR formula for 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.
In order to receive capital tracker treatment under PBR, a capital project or program must meet the following three criteria established in Decision 2012-237:
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The project must be outside of the normal course of the company’s ongoing 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”).
FAI applied for capital tracker treatment for the following amounts:
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An additional $0.3 million in K factor revenue from its compliance filing provided for in Decision 3220-D01-2015 (being FAI’s last capital tracker approval from the AUC);
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A reduction of $4.2 million to its 2014 K factor revenue, taking into account actual capital additions and related costs, updated debt rates and weighted average cost of capital FortisAlberta Inc. (“FAI”) applied for approval of its 2014 capital tracker true-up and 2016-2017 capital tracker forecast under performance based regulation (“PBR”). Fortis applied for the revenue requirement associated with its capital trackers to be included in the K factor component of the PBR formula for 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.
In order to receive capital tracker treatment under PBR, a capital project or program must meet the following three criteria established in Decision 2012-237:
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The project must be outside of the normal course of the company’s ongoing 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”).
FAI applied for capital tracker treatment for the following amounts:
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An additional $0.3 million in K factor revenue from its compliance filing provided for in Decision 3220-D01-2015 (being FAI’s last capital tracker approval from the AUC);
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A reduction of $4.2 million to its 2014 K factor revenue, taking into account actual capital additions and related costs, updated debt rates and weighted average cost of capital assumptions, as well as amounts provided for in Decision 3220-D01-2015; and
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Forecast K factor revenue of $71.5 million for 2016 and $89.9 million for 2017.
FAI’s 2013 and 2014 capital tracker true-up amounts that are the subject of this decision were applied for as follows:
FAI’s applied-for capital projects and programs for the 2016-2017 forecast period were all previously approved for capital tracker treatment in Decision 2013-435, Decision 3220-2015 or in Decision 201351-D01-2015.
FAI applied for the following amounts for the 2016-2017 forecast period:
Project Groupings
The AUC, in Decision 2013-435 and Decision 3220-D01-2015 approved a number of FAI’s project groupings. The AUC noted that where such groupings persist in this decision, they were not considered further and were approved as filed. Therefore the AUC considered only the project and program groupings for Distribution Capacity Increases, Metering Unmetered Oilfield Services, and the Compliance, Safety, Aging Facilities and Reliability (“CSAR”), the Worst Performing Feeders, and Urgent Repairs.
Distribution Capacity Increase projects are comprised of capacity increases, system improvements, system neutrals and line loss reduction. FAI submitted that the grouping was appropriate to avoid duplication in mitigating load growth issues. FAI noted for example that increasing conductor size to mitigate overloading also reduces line losses.
The Consumers’ Coalition of Alberta (“CCA”) argued that the programs have little to do with one another, based on nomenclature alone, and recommended that the projects be split into four separate categories.
The AUC held that project grouping was essentially an account exercise, and that the optimal manner by which a group of projects is managed is not a valid reason to group projects for capital tracker treatment. As such, the AUC did not accept FAI’s Distribution Capacity Increases grouping on the basis that the grouping avoids duplication of effort. However, as the historical cost breakdowns were not available, the AUC approved the grouping for the purposes of the PBR term.
With respect to Metering Unmetered Oilfield Services, FAI submitted that it included conversion from three-wire to four-wire services within the program, since it allows for efficiencies in design and construction, and required only one contractor site visit to achieve both installations.
Similar to the reasoning for Distribution Capacity Increases, the AUC also did not accept FAI’s explanation regarding efficiencies for grouping projects under the Metering Unmetered Oilfield Services umbrella of work. However, citing a lack of separate financial tracking for the individual project components, the AUC approved the grouping for the purposes of the PBR term. The AUC directed FAI to track all projects concerning the repair, replacement and installation of meters in a single grouping going forward.
The CCA submitted that the Urgent Repairs, Worst Performing Feeders and CSAR, were essentially all maintenance driven programs, with the only distinction between the three being timing of execution. Therefore the CCA recommended that the AUC order FAI to group the Urgent Repairs, Worst Performing Feeders and CSAR into a single program.
The AUC agreed with the CCA’s submissions regarding Urgent Repairs, Worst Performing Feeders and CSAR, finding that the programs share a common requirement for capital investment. The AUC directed FAI to group the Urgent Repairs, Worst Performing Feeders and CSAR programs together in its compliance filing and future capital tracker applications.
Criterion 1 Assessment
FAI provided business cases and engineering studies for each of the projects or programs applied for, consistent with the minimum filing requirements set out in Decision 2013-435 and Decision 3558-D01-2015.
The AUC approved all of the forecast business cases and engineering studies as applied for, finding that the proposed scope, level, timing and forecast costs for the programs applied for continued to be reasonable. The AUC also held that the amounts included by FAI were prudent, subject to certain adjustments made elsewhere in this decision.
FAI applied the following inputs in its forecasts for 2016 and 2017:
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Consumer Price Index (“CPI”) Alberta – 2.2%
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Gross Domestic Product growth – 1.7 %
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Housing Starts – 32,017
FAI confirmed that it applied the same forecasting methods as approved in Decision 3220-D01-2015.
The AUC found that FAI’s forecasting methods were the same as those approved in Decision 3220-D01-2015. The AUC held FAI’s forecast values for CPI, GDP and housing starts, to be reasonable and approved them as filed.
FAI applied for a technical update to its depreciation figures based on actual capital additions in the period since its last capital tracker approval. However, 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 was not warranted in this case. The AUC noted that the only circumstance in which it would accept a depreciation technical update was for a Z factor adjustment (a material exogenous event for which the company has no other cost recover mechanism available). 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 FAI to remove the updated depreciation amounts from the K factor calculation in its compliance filing.
The AUC generally approved of all of FAI’s proposed capital tracker projects and programs. However, the AUC held that because the adjustments to the I-X mechanism and depreciation amounts affected the program costs for 2016 and 2017, it was unable to make a final determination as to whether FAI’s programs or projects met the assessment requirements for Criterion 1. The AUC therefore directed FAI to update its accounting test parameters for its applied for projects and programs in its compliance filings to reflect the AUC’s findings in this decision.
Criterion 2 Assessment
FAI 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.
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, FAI applied a four basis point threshold of $0.341 million and a 40 basis point threshold of $3.409 million, which it submitted were previously approved in Decision 3220-D01-2015. FAI also submitted that each 2014 capital tracker project or program satisfied both materiality requirements of Criterion 3.
For 2016-2017, FAI submitted that it calculated the materiality thresholds consistent with the methodology set out in Decision 2013-435. However, since FAI did not have approved inflation factors for 2016 or 2017, it used the approved 2015 inflation factor of 1.49 percent for both 2016 and 2017. Accordingly, FAI calculated its 2016 materiality thresholds as follows:
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Four basis point threshold: $0.351 million; and
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40 basis point threshold: $3.512 million.
FAI calculated its 2017 materiality thresholds as follows:
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Four basis point threshold: $0.356 million; and
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40 basis point threshold: $3.564 million.
None of the interveners to the proceeding took issue with FAI’s calculations.
The AUC held that FAI’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 FAI’s application, the AUC provided a final 2016 I-X value of 0.90 percent in Decision 20818-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.
Order
The AUC directed FAI to file a compliance filing for its 2014 PBR Capital Tracker True-Up and 2016-2017 PBR Capital Tracker Forecast in accordance with the findings in this decision on April 1, 2016.
