Tariff – Transmission Facility Owner
EPCOR Distribution & Transmission Inc. (“EDTI”) filed a general tariff application (“GTA”) for its transmission facility owner (“TFO”) function for the 2015, 2016 and 2017 test period. As part of its GTA, EDTI requested approval for the following forecast revenue requirements:
EDTI requested a return on equity of 8.30 percent and common equity ratios of:
(a) 36.27 percent for 2015;
(b) 35.80 percent for 2016; and
(c) 36.23 percent for 2017.
The figures for 2016 and 2017 were applied for on a placeholder basis.
EDTI also applied for approval of:
(a) Its TFO terms and conditions of service (“T&Cs”) under which EDTI provides transmission service to the AESO;
(b) The continued use of the following transmission reserve and deferral accounts:
(i) Hearing cost reserve;
(ii) Self-insurance reserve;
(iii) AESO directed projects deferral account;
(iv) Transmission property, business and linear taxes; and
(v) Transmission short-term incentive deferral account; and
(c) Placeholder for capital structure and rate of return on equity for EDTI’s transmission function, which were the subject of the AUC’s 2013 Generic Cost of Capital proceeding.
EDTI described the changes in its forecast revenue requirements as being related primarily to capital additions in each of 2015, 2016 and 2017, including recovery of AESO direct projects deferral account balances for the Heartland project, and subsequent increases to operating costs. EDTI provided the following summary of its forecast capital expenditures and capital additions:
Three year test period
EDTI applied for its TFO tariff for a three year period, from 2015 through 2017 (the “Test Period”). EDTI submitted that the extended Test Period would increase regulatory efficiency and provide greater incentives for EDTI to implement cost saving measures during the Test Period. EDTI also noted that a three year period would coincide with the end of EDTI’s performance based regulation term, which may reduce duplication and create further efficiencies.
The AUC agreed that the Test Period would create regulatory efficiencies and related cost savings as compared to a two year period. The AUC therefore approved the use of the Test Period, providing its findings on the accuracy of forecasting by EDTI elsewhere in its decision.
Nature of Best Available Information
The AUC held that information that becomes available after the filing of an application will be used in assessing the reasonableness and accuracy of the forecasts and methodology used by the applicant. The AUC confirmed that information that becomes available during a proceeding may be used for adjustments to revenue requirement or other forecasts. The AUC determined that it would consider the forecasts submitted in the application given the best information available. The AUC considered the reasonableness of each component of the forecasts elsewhere in its decision.
Operational Performance and Service Quality and Forecasting of “Bucket Projects”
EDTI did not propose any changes to its service levels for the Test Period. EDTI noted that it used two reliability indices to track its operating performance reliability: system average interruption duration index (“SAIDI”); and system average interruption frequency index (“SAIFI”). EDTI submitted that from 2009 to 2013, its SAIDI and SAIFI scores were 0.28 and 20.45 minutes, as compared with industry averages of 0.78 and 74.16 minutes. EDTI submitted that its high SAIDI and SAIFI scores were not indicative of a management choice to achieve an unreasonably high level of safety and reliability. EDTI submitted that its scores were reflective of an entirely urban transmission system, allowing EDTI to respond much more quickly and effectively than its comparators in the industry, who typically have a mix of urban and rural transmission systems.
Counsel for the AUC, in questioning EDTI, explored the concept of “bucket projects” which consist of a lifecycle program that is forecasted based on a three-year average of historical costs. EDTI noted that it could not forecast exactly what equipment would require replacements in a specific year given their variability from year to year.
The AUC held that the methodology of using historical actual costs to forecast capital projects could be a reasonable alternative to bottom up forecasting in certain circumstances. In noting the inconsistency of costs from year to year, the AUC found a three year average to be appropriate, as the length of the Test Period is expected to account for annual variability. Given the necessity for a compliance filing related to other matters, the AUC directed EDTI to update its three year average using 2012 to 2014 actuals in its compliance filing.
The AUC agreed that EDTI’s elevated SAIFI and SAIDI performance levels were likely due to the urban nature of EDTI’s service area. Therefore, the AUC held that the comparator group used by EDTI was not helpful, and directed EDTI to file a comparison of its SAIFI and SAIDI results as compared with other urban transmission utilities for it next GTA.
Outstanding AUC Directions
EDTI also addressed several outstanding directions made by the AUC in Decision 2014-269, which addressed EDTI’s 2013- 2014 GTA. Directions 1 through 7, 9 through 12, 16, 19, 20, 29, 31 and 34 were, as the AUC found in Decision 3474-D01-2015, applicable to EDTI’s future GTAs.
With respect to direction 20, the AUC directed EDTI, in future applications, to include costs, such as corporate services cost allocations to EDTI’s portion of the Heartland Transmission line, and explain any material impact to corporate services costs allocated to Heartland through the AESO directed projects review process. EDTI explained that the resultant impacts would be provided in a future application as the direct assigned capital deferral accounts application had not yet been reviewed by the AUC.
The AUC accepted EDTI’s explanation, and held that EDTI’s compliance with direction 20 from Decision 2014-269 should be addressed in its next GTA.
With respect to direction 31, the AUC had directed EDTI to use the most recently approved return on equity of 8.75 percent and a 37 percent common equity capital structure for test years, and to be trued-up as necessary. After EDTI had submitted its application however, the AUC released Decision 2191-D01-2015, wherein it approved a return on equity of 8.3 percent and a capital structure of 36 percent common equity. As a result, EDTI amended its application at the direction of the AUC, and requested placeholder treatment for its return on equity and common equity ratios for 2016 and 2017. The AUC approved EDTI’s amended return on equity figures, reflecting the AUC’s findings in Decision 2191-D01-2015, and directed EDTI to true up its return on equity figures for 2016 and 2017 once a decision is issued for the next generic cost of capital proceeding.
Transmission Operating Costs
EDTI applied for operations and maintenance (“O&M”) costs of $19.06 million in 2015, $18.64 million in 2016, and $19.11 million in 2017. EDTI noted that its O&M costs in 2015 were 14.7 percent higher than its approved 2014 amounts, but only 2.3 percent higher than actual O&M costs for 2014. EDTI explained that the increase in 2015 operating costs was primarily due to contractor costs associated with a single year project implementing procedures related to supervisory control and data acquisition cyber security standards.
The bulk of the remaining changes in O&M costs, according to EDTI was attributable to a change in accounting for the Short Term Incentive (“STI”) program. EDTI noted that the quantum of costs was not changing; only their treatment as capital, rather than operating costs.
EDTI forecast STI amounts of $0.96 million for 2015, $1.00 million for 2016 and $1.03 million for 2017. Since these costs would be capitalized however, EDTI submitted that the net effect on revenue requirement would be a decrease of $0.35 million in 2015, $0.33 million in 2016, and $0.31 million in 2017.
EDTI submitted that its incentive compensation structure is designed to attract and retain employees, and to improve EDTI’s overall performance. Among the metrics captured by the STI program, EDTI noted that the STI program in 2014 tracked:
(a) Injury/illness frequency rate;
(b) Workplace observations completed;
(c) Variance of actual to base approved capital;
(d) Controllable operating costs per customer;
(e) SAIDI scores; and
(f) Customer service index.
The AUC accepted EDTI’s STI program and metrics, holding that they would incent employees to provide excellent service and ultimately reduce costs. However, the AUC noted that incentive programs that are included in revenue requirement should be designed so that the resulting benefits accrue to customers.
As a result of its findings related to other O&M costs, such as corporate services, the AUC directed EDTI to refile its O&M expenses consistent with the directions made in the decision.
Labour Costs
EDTI applied for an increase in the number of full time equivalent (“FTE”) positions in the Test Period as compared with its approved 161.7 FTEs in Decision 2014-269. EDTI submitted that the increase was required due to higher forecast workload from increased capital activity due to ongoing system growth, and due to the addition of an engineer-in-training program for succession planning. EDTI’s requested FTE levels for the Test Period were as follows:
EDTI arrived at its FTE numbers by adopting a new methodology, which led to a decrease of 4.1 FTEs for 2015 compared to its previous methodology.
The AUC held that the forecast capital FTEs were reasonable, and accepted EDTI’s forecasts for the Test Period in this regard, noting that the capital activity and costs remained relatively constant. However, with respect to forecast operating FTEs, the AUC was not convinced that an increase was needed, noting that the actual figures of 71.3 operating FTEs in 2013 for a similarly sized transmission system was indicative that increased operating FTE levels were not required.
Additionally, the AUC directed EDTI to reduce the forecast operating FTEs for each of the years in the Test Period by 2.0 operating FTEs, and to apply an average cost per FTE of $130,000 for 2015 and $140,000 for 2016 and 2017, in its compliance filing.
With respect to vacancy rates for FTE positions, EDTI applied a zero percent vacancy rate for salaried employees. EDTI’s actual two-year average of gross vacancies was 2.9 percent, consistent with the AUC’s previous determination in Decision 2012-272 regarding negative vacancy factors.
The AUC held that due to the negative average vacancy rates for forecast FTEs, no vacancy factor was warranted for salaried FTEs during the Test Period. However, the AUC noted that EDTI had interpreted the AUC’s findings in Decision 2012-272 in a manner other than it had intended. The AUC clarified that although it considers that vacancies do occur, EDTI’s explanation that positive vacancy related variances were offset by higher staffing costs, overtime and use of contractors was not adequately supported. In light of the apparent ambiguity in its direction to apply gross vacancy levels, the AUC accepted EDTI’s proposed zero vacancy rate. Accordingly, the AUC directed EDTI, in its next application, to disregard this direction.
Administration and General Expenses
EDTI applied for total administrative costs of $2.40 million for 2015, $3.00 million for 2016, and $3.60 million for 2017. EDTI explained that the majority of the change in costs was due to the capitalization of STI costs in 2014 actuals, which created much lower than forecast costs in 2014.
The AUC accepted EDTI’s Administration and General expenses as filed, subject to any other directions in the decision.
Capital Overhead Rate Methodology
EDTI submitted that it allocated its indirect costs through its master overhead pool (“MOP”) by dividing the capital overhead pool costs by total capital expenditures for EDTI transmission and distribution, consistent with the method used to calculate its 2012 to 2014 capital overhead rates. However, EDTI did not calculate a forecast for its distribution function, as it was under PBR.
The AUC determined that EDTI shared three basic common costs to be allocated between distribution and transmission:
(a) Common field operations costs incurred by distribution and charged to transmission through asset usage fees or allocators;
(b) MOP costs, allocated as the proportion of direct labour costs for administration and general labour costs; and
(c) Capital overhead costs, allocated a proportion of direct capital labour costs for capital expenditures on a forecast basis.
The AUC recognized that EDTI uses forecast allocators associated with services provided by EDTI to its affiliates and other common operations, in lieu of relying on historical information, noting that at the time of EDTI’s reorganization it may not have had sufficient historical information to base its allocators between affiliates. Therefore, for the purpose of this decision, the AUC accepted EDTI’s allocators as reasonable, but directed EDTI to provide historical information for its allocators of common costs for its next GTA.
Despite the lack of information available regarding EDTI’s distribution function for MOP and capital overhead rates, the AUC found nonetheless that the MOP and capital overhead methodologies themselves were reasonable. Therefore the AUC was not convinced that a change to the methodologies was warranted. However, the AUC agreed with submissions made by the Consumers’ Coalition of Alberta (“CCA”) insofar as the absence of detailed information raised concerns about potential cross-subsidization between EDTI’s transmission and distribution functions.
The AUC therefore directed EDTI to revise its forecast MOP and capital overhead rates to be consistent with those approved in Decision 2014-269 in its compliance filing, and to account for and explain any further adjustments due to the capitalization of STI costs.
Corporate Services Costs
EDTI requested approval of its corporate services costs as follows:
The AUC determined that EDTI’s allocation methodologies for corporate cost allocations were reflective of the approach approved by the AUC in Decision 2014-269. Therefore, the AUC approved EDTI’s corporate services costs as filed, with the exception of $0.08 million requested for Corporate Development costs. The AUC found that EDTI had failed to justify any cost reductions that may result from the Corporate Development department.
The CCA raised concerns respecting EDTI’s rent costs in EPCOR Tower, noting that EDTI’s allocable share of rent in EPCOR Tower had increased from 31.5% to 33.9% due to the fact that an affiliate had moved out of the space. The CCA therefore recommended that these costs be reduced to incentivize EDTI to exercise control over its rent costs. The CCA also submitted that EDTI’s actual rent costs are at or above the high end of the market price of rental space.
The AUC held that a decision by other business units to transfer from the EPCOR Tower to elsewhere should not necessarily lead to an increase in corporate rent costs allocated to EDTI. The AUC held that EDTI had not justified why the costs associated with higher corporate rental costs arising from underutilization of space should be included in revenue requirement. Therefore, the AUC directed EDTI to remove the cost increases to EDTI due to the above noted vacant rental space during the Test Period.
Allocations to the Heartland Project
EDTI requested the following forecast revenue requirement related to the Heartland project:
The AUC held that given its previous directions in Decision 2014-160, it would be inconsistent to deny the allocation of corporate service costs for the Heartland project simply due to its unique ownership structure. Therefore the AUC approved the Heartland project costs, subject to any adjustments from the AltaLink Direct Assign Capital Deferral Account Proceeding 3585.
Transmission Deferral and Reserve Accounts
EDTI requested a true-up of transmission deferral and reserve accounts that were in effect in 2014, and further requested the continuation of such accounts throughout the Test Period. EDTI requested the following amounts related to its deferral and reserve accounts:
The AUC accepted EDTI’s reasons for continuing each of the five deferral accounts. However, the AUC noted that the AESO directed projects account included the Heartland project, which is the subject of a separate proceeding that the AUC noted was not likely to conclude in 2015. Therefore the AUC directed EDTI to remove the deferral account true-up for the Heartland project from its 2015 amounts, and reflect it instead in 2016.
Rate Base
EDTI requested approval of an opening 2015 net transmission rate base of $624.3 million.
After considering the reasonableness of the opening rate base by examining the actual capital expenditures and additions in 2013 and 2014, the AUC approved the opening rate base as filed.
Cost Forecast Approach
EDTI submitted that it applied a similar cost approach for all its lifecycle projects, based on:
(a) EDTI’s cost estimates for engineering, materials, project management, construction, contractor supervision where required, testing and commissioning into service; and
(b) Where available, historical actual costing information for similar projects constructed in previous years.
EDTI further submitted that it applied a bottom-up approach to forecasting costs, based on the particular work required for each particular project. However, where a project’s scope has yet to be defined, EDTI noted that it relied on three-year historical averages for similar projects.
In the course of forecasting costs, EDTI submitted that it took the following steps to minimize its costs:
(a) Utilization of competitive bid processes;
(b) Utilization of industry standard materials;
(c) Adopting existing designs and drawings from previous similar projects;
(d) Coordination of construction scheduling through its project management office; and
(e) Coordinating work schedules with other projects to minimize costs and maximize efficiencies.
For the purposes of asset replacement, EDTI submitted that it applies an asset health index tool to its existing assets to arrive at a risk index score for each asset. EDTI noted that it uses the risk index scores to create a priority sequence for addressing risks and replacing assets, which it updates annually. EDTI further submitted that a large number of its asset lifecycle programs were previously approved by the AUC.
The AUC did not approve EDTI’s cost forecasting mechanism in general, but instead addressed the reasonableness of each project. However, the AUC cautioned EDTI against relying on prior AUC approvals as an indication of receiving the same treatment in future proceedings. The AUC held that while prior approvals do weigh in favour of continued approval, the AUC would still make its findings based on the evidentiary record before it in each instance.
Overview of 2015-2017 Forecast Capital Expenditures and Additions
EDTI applied for approval of the following forecast capital additions during the Test Period:
(a) $43.7 million in 2015;
(b) $65.2 million in 2016; and
(c) $56.0 million in 2017.
EDTI also applied for approval of the following forecast capital expenditures during the Test Period:
(a) $48.6 million in 2015;
(b) $70.0 million in 2016; and
(c) $47.8 million in 2017.
EDTI categorized its transmission capital additions into three main components, lifecycle projects, performance improvement projects, and AESO directed growth projects. EDTI noted that the majority of the performance improvement project cost in 2015 was due to the Lambton transformer capacity upgrade, representing $6 million or 15 percent of planned capital additions in 2015. With respect to lifecycle projects, EDTI submitted that these projects accounted for $23 million or 60 percent of planned capital additions in 2015:
(a) Protective relaying & control system replacements;
(b) Supervisory control and data acquisition upgrades;
(c) Communication system replacements and improvements;
(d) Medium voltage switchgear additions and replacements; and
(e) 500-kV air blast circuit breaker replacements.
EDTI noted that the majority of capital additions in 2016 were forecast to be attributable to AESO directed projects, such as the transmission reinforcement project known as the Garneau expansion, representing approximately $44 million or 67 percent of planned capital contributions in 2016.
In 2017, EDTI submitted that the majority of its planned capital additions were attributable to the following lifecycle replacement projects, representing $36 million or 64 percent of planned capital additions in 2017:
(a) Protective relay & control system replacements;
(b) Medium voltage switchgear additions; and
(c) Lifecycle replacement of 240-kV cable sections.
The AUC held that the bulk of the planned capital additions and expenditures were reasonable, however the AUC found several exceptions which it disallowed.
Notably, the AUC was concerned about the uncertainties and cost overruns associated with the south central transmission reinforcement project, which was an AESO directed project. The AUC noted that the AESO had yet to provide a Needs Identification Document application for the project, and further noted that there was uncertainty as to whether the project would be classified under the transmission or distribution function.
The AUC also disallowed forecast capital expenditures related to a 240-kV GIS substation project, which is an AESO directed project to improve transmission reliability in Edmonton. EDTI forecasted capital expenditures of $2.2 million, $0.6 million and $12.7 million in each of 2015, 2016 and 2017 respectively, but did not forecast any capital additions in the Test Period. EDTI also noted that a Needs Identification Document had yet to be filed by the AESO.
The AUC also disallowed proposed capital additions for the Rossdale and Victoria substation medium voltage switchgear addition projects. The AUC approved the capital expenditures for these medium voltage switchgear replacement projects, however, due to what the AUC foresaw as delays that would push the in service date (and hence the capitalization of these costs) past the end of 2017, the AUC held that these projects would not likely be capitalized within the Test Period.
The AUC disallowed the 240-kV lifecycle replacement project on the basis that the evidence on the record showed that good maintenance practices in concert with the average remaining service life of the 240-kV lines would render their replacement unnecessary during the Test Period. However, the AUC agreed that the replacement of the 240-kV sections would become necessary at a later date.
Accordingly, the AUC directed EDTI to remove the following costs from its revenue requirement in its compliance filing related to the following projects:
(a) The south central transmission reinforcement project;
(b) The 240-kV GIS substation project;
(c) The Rossdale and Victoria substations medium voltage switchgear replacement projects;
(d) The lifecycle replacement of 240-kV cable sections; and
(e) Other minor projects.
Return on Rate Base
EDTI’s calculations of its return on mid-year transmission rate base, including return on debt and return on equity (“ROE”) assumed an ROE of 8.75 percent and an equity ratio of 37 percent on a placeholder basis pending the 2013 Generic Cost of Capital decision. The AUC issued Decision 2191-D01-2015 approving the generic cost of capital for 2013 through 2015 with a return on common equity of 8.30 percent and a capital structure of 64 percent debt and 36 percent equity for EDTI throughout the same period. The AUC also approved the same capital structure for 2016 on an interim basis and each subsequent year unless otherwise directed by the AUC.
Accordingly, EDTI revised its application to reflect the AUC’s findings in Decision 2191-D01-2015. EDTI noted that the impact of Decision 2191-D01-2015 resulted in a reduction to EDTI’s forecast revenue requirement of $1.55 million for 2015, $1.57 million for 2016 and $1.55 million for 2017. EDTI calculated the return on rate base for the Test Period as follows:
The AUC held that EDTI’s use of the most recently approved ROE of 8.30 percent for 2015 on a final basis and 2016 and 2017 on an interim basis was consistent with Decision 2191-D01-2015. The AUC directed EDTI to apply to true-up its ROE for 2016 and 2017 once a decision is issued in the next generic cost of capital proceeding.
The AUC held that EDTI did not reflect Decision 2191-D01-2015’s approved debt and equity ratios of 64.0 and 36.0 percent for the Test Period. The AUC therefore directed EDTI, in its compliance filing, to recalculate its forecast transmission capital structure and average cost of capital and transmission return on rate base for the Test Period using the approved figures.
With respect to costs associated with the issuance of long-term debt, EDTI forecasted 2015 and 2016 long-term debt issues of $25 and $50 million respectively. An expert witness on behalf of EDTI determined its debt forecast costs using a four-step process:
(a) Consider one, two, and three year forward curve yield on 30-year Government of Canada bonds;
(b) Add a 60 basis points maturity premium in order to develop a forecast of the yields;
(c) Add a credit risk premium of 160 basis points to reflect the ‘A’ stand-alone credit rating of EDTI’s transmission operations; and
(d) Add an allowance of five basis points for financing costs.
These four steps resulted in estimates of the cost of new long-term debt of 3.85 percent, 4.25 percent and 4.95 per cent for 2015, 2016 and 2017, respectively. EDTI submitted however that its actual cost of debt for 2015 was 4.17 percent, and therefore requested approval to recover those costs.
The CCA submitted that the range of volatility using the forecast debt cost approach favoured by EDTI is more than double that of alternative methodologies, and recommended that the AUC apply a forward curve rate methodology, as it argued those rates were closer to actual market rates.
The AUC held that, as the actual cost of debt for 2015 was known, the cost of debt issued at 4.17 percent was approved for inclusion in EDTI’s 2015 revenue requirement. The AUC directed EDTI to reflect the actual 2015 debt rates in its compliance filing.
With respect to the debt forecasting methodology, the AUC held that the forecast based on the forward curve did not introduce any more risk than a forecast cost based on consensus forecasts. On this basis the AUC held that it preferred the forward curve methodology as it reflected actual market transactions, whereas the consensus forecasts were unrelated to market transactions. The AUC noted that the risk that the actual debt costs will differ from the forecast amount is simply an inherent risk faced by utilities in forecasting costs. The AUC therefore held that EDTI bearing the inherent risk of forecast debt cost rates may not actually materialize. Therefore, the AUC directed EDTI to implement the rates set out in the forward curve methodology. However, the AUC was equally clear in its decision that it was not directing EDTI to actually lock in its debt rates nor was it setting an actual cost of debt, but was setting a reasonable forecast debt cost for the purposes of EDTI’s Test Period.
Accordingly, the AUC held that the 2016 forward curve cost of debt of 4.05 percent was a reasonable forecast cost of debt and directed EDTI to reflect this finding in its compliance filing.
Depreciation
EDTI proposed to continue its use of the direct life method of depreciation (“DLM”), which was first approved in Decision 2006-054, and was the subject of an AUC direction in Decision 2014-269. EDTI did not include a depreciation study, did not propose any changes to its methodology, and applied the previously approved depreciation rates to its forecast mid-year property, plant and equipment balances for the Test Period. EDTI’s resulting depreciation expense calculations were as follows for the Test Period:
(a) 2015 – $22.27 million;
(b) 2016 – $23.84 million; and
(c) 2017 – $25.19 million.
The AUC held that it was satisfied with EDTI’s calculations, and approved EDTI’s depreciation expenses as filed. The AUC also noted EDTI’s plans to undertake a depreciation study for its next tariff application. The AUC directed EDTI to conduct and file as part of its next application, research and conclusions respecting alternative methods of accounting for the cost of removal of retired assets under DLM beyond EDTI’s current practice of capitalizing the cost of removal at the time a new asset is installed and placed into service.
The AUC also considered it necessary for EDTI to explore the effects of ISO Rule 502.2 functional specifications on the estimated useful service lives of EDTI’s transmission lines and towers, and directed EDTI to file its findings in respect of the same in its next GTA.
Order
The AUC approved EDTI’s 2015-2017 GTA application subject to the findings directions and conclusions in the decision. The AUC therefore ordered EDTI to submit a compliance filing on or before January 4, 2016 addressing the directions in the decision.
