Rates – True-up – Capital Tracker
ATCO Electric Ltd. (“ATCO”) applied for approval of its 2014 capital tracker true-up and 2016-2017 capital tracker forecast under performance based regulation (“PBR”). ATCO 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”).
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ATCO applied for capital tracker treatment for the following amounts:
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A reduction of $9.5 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; and
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Forecast K factor revenue of $48.2 million for 2016 and $61.1 million for 2017.
ATCO used the following inflation factors in its 2016 and 2017 capital tracker forecast costs:
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A 3.75 per cent labour inflation rate was applied for union and non-union staff for both 2016 and 2017 to reflect the overall expected average increase for employees.
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An inflation rate of two per cent in 2016 and four per cent in 2017 contractor costs.
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An “other” inflation rate of 2.10 per cent for both 2016 and 2017.
The Consumers’ Coalition of Alberta (“CCA”) recommended that the AUC approve labour escalation rates of 2.71 for 2016, being a weighted average of the 3.75 percent negotiated rate for union employees, and the 2015 actual rate of 0.6 percent for non-union labour. For 2017, the CCA recommended a labour inflation rate of 1.0 percent. However, due to recent layoffs within the larger ATCO corporate group, the CCA updated its recommended labour escalation rates to 0.0 and 1.0 percent for 2016 and 2017 respectively.
The AUC held that the evidence before it suggested that economic growth forecasts are currently trending downward, but that economic growth is still expected. The AUC also rejected the CCA recommendation, pointing to a lack of evidence that recent layoffs would justify escalation rates of zero and one percent. However, the AUC determined that due to the lower forecast growth rates, ATCO’s requested 3.75 percent escalation rate for non-union labour was not reasonable, and instead established an escalation rate of 3.0 percent for labour and contractor costs as more reasonable. The AUC directed ATCO to update its application using this value in its compliance filing for non-union labour and contractor costs.
ATCO’s 2014 capital tracker true-up amounts that are the subject of this decision were applied for as follows:
ATCO’s 2016 and 2017 capital tracker project forecast costs were applied for as follows:
Project Groupings
The AUC, in Decision 3218-D01-2015, approved a number of ATCO’s project groupings. ATCO submitted that for all of its previously approved capital tracker programs, it had maintained the same project grouping as previously approved by the AUC.
ATCO proposed three new programs however, for 2016 and 2017: the Distribution Automation Program; the Transmission Driven Program; and the Underground Rebuilds, Replacements and Life Extension Program.
ATCO submitted that the Distribution Automation Program was required to maintain service reliability, quality and safe operation of its distribution systems, through the installation of field supervisory control and data acquisition (“SCADA”) systems, and integrating control room technology and enterprise systems. ATCO submitted that its Distribution Automation Program was consistent with FortisAlberta’s Distribution Control Centre/SCADA grouping, which the AUC approved in Decision 2013-435.
ATCO submitted that its Transmission Driven Program consisted of capital additions driven by transmission projects, such as relocating, extending or reconfiguring lines to reach relocated substations, or purchasing transmission line assets where distribution circuits are strung on transmission lines that are being decommissioned. ATCO noted that the Transmission Driven Program did not include transmission projects that address capacity, reliability or distribution deficiencies, as those are associated with other capital tracker programs.
ATCO submitted that the Underground Rebuilds, Replacements, and Life Extension Program was required to maximize the life of underground line components and replacement of damaged or defective equipment. ATCO submitted that this program was consistent with ATCO’s Overhead Line Rebuilds, Replacement and Life Extension Program approved by the AUC in Decision 3218-D01-2015.
The Consumers’ Coalition of Alberta (“CCA”) submitted that ATCO did not provide details on capital expenditures for the Transmission Driven and Underground Rebuilds, Replacements, and Life Extension Programs for 2013-2016, which only surpassed the materiality threshold in 2017. The CCA also proposed that ATCO merge a large number of projects into two programs, being Capital Maintenance and Large System Improvements, which the CCA submitted were the only two programs maintained by ATCO prior to PBR.
The AUC dismissed the recommendation of the CCA, holding that the CCA had not satisfactorily explained any common driver or requirement for such programs.
The AUC determined that consistent with its prior capital tracker Decision 3558-D01-2015, to the extent that the groupings in the 2014 true-up and 2016-2017 capital tracker forecast were the same as those approved in Decision 3218-D01-2015, the AUC would not re-evaluate those groupings.
The AUC also held that the Distribution Automation program, the Transmission Driven Program; and the Underground Rebuilds, Replacements and Life Extension Program groupings were reasonable, and were approved as filed.
Criterion 1 Assessment
With the exception of Fort McMurray North Service Building Project, information technology projects for 2016-2017 and the Distribution Automation Program summarized below, the AUC approved all of the forecast business cases and engineering studies as applied for. The AUC found 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 ATCO were prudent, subject to certain adjustments made elsewhere in this decision.
ATCO proposed to have its Fort McMurray North Service Building included as part of its Buildings, Structures and Leasehold Improvements Program. ATCO submitted that rapid growth in the Fort McMurray service area increased the work force needed to operate and maintain it, growing from 39 staff to 103 staff from 2007 to 2014. ATCO noted that it temporarily leased facilities as a short term solution, but noted that its lease expires in 2019. Accordingly, ATCO proposed to include the construction of a North Service Building in 2016 and 2017, at a cost of $20.5 million and $0.61 million for each respective year.
The UCA submitted that this project did not satisfy the test for capital tracker treatment, because it did not satisfy Criterion 1, insofar as ATCO did not, in the UCA’s view demonstrate the need, scope and timing of the project as being reasonable. The UCA submitted that ATCO had provided testimony that ATCO could continue to maintain service and safety in its current location. The UCA further took issue with the timing, noting that ATCO proposed to construct the building two years in advance of its lease expiration date.
The AUC accepted that the Fort McMurray service area experienced high levels of growth in the past decade, and noted the corresponding increase of ATCO staff in the region. The AUC also accepted that the construction of the facility would yield significant advantages by, for instance, improving response times for emergencies and customer service requests, and found that the need for the facility was driven by the significant levels of past growth. However, the AUC held that it was not satisfied that the timing of construction was reasonable, being more than two years prior to the expiration of ATCO’s current lease. Accordingly, as the Fort McMurray North Service centre did not meet the requirements of Criterion 1, the AUC denied capital tracker treatment for this project in 2016 and 2017.
With respect to information technology projects, the AUC approved the scope, need and timing of ATCO’s information technology programs as filed. However, ATCO had applied for a deferral of its measurement compliance project, due to recent changes to meter equipment testing requirements from Measurement Canada. The AUC determined that ATCO’s deferral of the measurement compliance project resulted in some work being moved to 2015 from 2014. The AUC however, held that ATCO did not sufficiently explain the progress it made on this program, and did not explain why work was further moved into 2016, and why an additional $4.0 million was required in 2016 to complete the previously approved program for measurement compliance. As a result, the AUC held that it could not determine whether the measurement compliance program for 2016 met the requirements of Criterion 1. Accordingly, the AUC denied capital tracker treatment for the measurement compliance program.
With respect to the Distribution Automation Program, ATCO submitted that it consisted of two main categories, field SCADA installation, and Control Room Technology Development Integration. ATCO noted that its current control centre project consists of acquiring a SCADA master that will collect and present data in a control centre and other operational support. ATCO identified two alternatives to its proposed Distribution Automation program:
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Continuing to use the shard SCADA master with ATCO’s transmission function; and
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Changing the rate of field SCADA installations.
ATCO stated that it rejected the first alternative since the shared SCADA master is subject to physical and cyber security regulations that prohibit inter-system integration. ATCO submitted that it rejected the second alternative, pointing to a need for the project at this time to provide adequate levels of service and safety.
The CCA and Utilities Consumer Advocate characterized the Distribution Automation program as a “bucket of costs” rather than a specific plan, and both recommended that the program be denied capital tracker treatment, pointing to a lack of detailed support for costs, aside from the budget provided by ATCO.
The AUC held that the Distribution Automation forecast scope and costs were not adequately supported, and accordingly, the AUC determined that the scope, level, timing and costs for the Distribution Automation Program were not supported. The AUC held that the Distribution Automation Program did not satisfy the requirement of Criterion 1, and was accordingly denied capital tracker treatment at this time.
The AUC generally approved of all of ATCO’s proposed capital tracker projects and programs, except where noted otherwise. However, the AUC held that because the adjustments to the I-X mechanism, return on equity, weighted average cost of capital, and billing determinants (Q Factor) affected the program costs for 2016 and 2017, it was unable to make a final determination as to whether ATCO’s programs or projects met the assessment requirements for Criterion 1. The AUC therefore directed ATCO 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
ATCO submitted that the drivers for each of its previously approved programs and projects had not changed, since they were previously approved in Decision 3218-D01-2015, and submitted that a re-examination of Criterion 2 compliance was not necessary. None of the parties took issue with ATCO’s submissions regarding 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. The AUC also determined that the driver for each of the three new capital tracker programs fell into asset replacement or refurbishment, required by a third party or growth related, and accordingly complied with 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, ATCO applied a four basis point threshold of $0.228 million and a 40 basis point threshold of $2.274 million, which it submitted were previously approved in Decision 3218-D01-2015. ATCO also submitted that each 2014 capital tracker project or program satisfied both materiality requirements of Criterion 3.
For 2016-2017, ATCO submitted that it calculated the materiality thresholds consistent with the methodology set out in Decision 2013-435. However, since ATCO 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, ATCO calculated its 2016 materiality thresholds as follows:
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Four basis point threshold: $0.234million; and
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40 basis point threshold: $2.342 million.
ATCO calculated its 2017 materiality thresholds as follows:
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Four basis point threshold: $0.238 million; and
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40 basis point threshold: $2.377million.
None of the interveners to the proceeding took issue with ATCO’s calculations.
The AUC held that ATCO’s calculations and forecasting methods were reasonable. The AUC accordingly approved ATCO’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 ATCO’s application, the AUC provided a final 2016 I-X value of 0.90 percent in Decision 20822-D01-2015. Therefore, the AUC directed ATCO, 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 ATCO to update the 2016 and 2017 forecast amounts of $48.2 million and $61.1 million in the compliance filing to this decision, to give effect to:
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The 2017 I-X index and Q factor, per Decision 20822-D01-2015;
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The approved labour escalation rates in this decision; and
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The projects that were denied capital tracker treatment (Fort McMurray North Service Building Project, Information Technology Projects and the Distribution Automation Program).
The AUC accordingly directed ATCO to file a compliance filing to this decision on or before April 14, 2016.
