Water Utilities – General Rate Application – Interim Basis
In this decision, the AUC approved the continuation of Blazer Water Systems’ (“Blazer”) existing rates as interim rates beginning January 1, 2019.
The AUC ordered Blazer to file a compliance filing by February 22, 2019.
Background
The water facilities were originally built in the late 1980s to service Bearspaw Meadows. In 1999, the ownership of Blazer changed from the original developer to the golf course developers, who expanded and improved the water treatment plant.
Blazer’s water system consisted of several previously separate and distinct water systems that were combined into a single water system, which is currently owned and operated by Blazer. This amalgamation of the water systems began in 2013.
As a condition of Rocky View County’s approval of the first phase (now completed) of the Watermark development, Blazer was also required to offer water utility services to the Bearspaw Village (“BPV”) and Blueridge Rise (“BRR”) communities. To meet the water needs of BPV, BRR, and the Watermark development, it was necessary to expand Blazer’s water treatment plant and treated water storage facilities to increase capacity.
In 2013, Blazer’s production capacity was able to serve approximately 250 homes. Blazer’s expansion and upgrade project was completed in December 2014, and its system capacity can now serve approximately 1,250 homes.
Blazer’s water system consists of river intake pumps in the Bow River, a raw water pumping station and raw water transmission main, which supply raw water to the irrigation pump house and water treatment plant. The irrigation pump station supplies untreated water through the irrigation water distribution systems to the residential irrigation customers in Lynx Ridge. The water treatment plant and treated water storage supply potable water through the transmission mains and potable water distribution systems to Blazer’s potable water customers.
Blazer processes potable water through a water treatment facility and provides water delivery to customers. Water service is directly provided using Blazer’s distribution system to residential customers in Blazer’s franchise area. Blazer also provided irrigation water service to a subset of customers in Lynx Ridge.
Jurisdiction
The Public Utilities Act (“PUA”) applies to public utilities that the AUC regulates, including water utilities.
Section 1 of the PUA defines “owner of a public utility” and a “public utility”. The AUC was satisfied that Blazer met the definitions of a “public utility” and an “owner of a public utility” as defined in the PUA. Blazer operates “a system, works, plant, equipment or service” for the delivery or furnishing of water directly or indirectly to customers.”
Section 78 of the PUA gives the AUC the jurisdiction and power to deal with public utilities and the owners of public utilities. The AUC must ensure that it sets just and reasonable rates for the utility services while balancing the interests of both the customers and the utility.
Proposed Revenue Requirements
Blazer’s forecasted revenue requirements for the 2019 to 2020 test period were $1,056,289 for 2019 and $1,062,304 for 2020.
Blazer also requested approval of a revenue deficiency deferral account and terms and conditions of service.
Bearspaw Village and Blueridge Rise Water Cooperatives
The BPV and BRR agreements each contained a section regarding the monthly contingency fund assessment that would be added to the bills of the BPV and BRR customers. Blazer requested that these sections be revised to provide a monthly contingency fund amount of $30/customer/month.
The AUC considered that it was premature to consider Blazer’s request for approval of sections of the BPV and BRR agreements. The AUC found that there was insufficient evidence on the record with respect to calculation of the $30 contingency fund amount.
Accordingly, the AUC directed Blazer to provide in the compliance filing to this decision the calculation of the $30 contingency fund amount and an explanation on why this amount should be approved.
Phase I – Revenue Requirement
The test period revenue requirement included operating and maintenance (“O&M”) costs, depreciation on owner-invested capital, and allowed return on owner-invested capital.
O&M and Administration Costs
O&M and administration costs were either designated by Blazer as varying with flow rate or not varying with flow rate. Those costs that vary with flow rate were forecast to increase proportionally to the expected increase in water treatment plant production of 6.3-6.4 percent and inflation of 1.8 percent. Those that do not vary with flow rate were forecast to increase at the inflation rate only.
The AUC approved the allocated costs for the administrative staff position and office rent as filed by Blazer.
The AUC directed Blazer to update its financial model, in its compliance filing, to reflect an allocation of 80 percent of the general manager’s salary to Blazer’s revenue requirement. The AUC found the reasonable amount to allocate to the regulated utility was the annual salary for the staff person multiplied by the proportion of time spent by that staff person working for the regulated utility. In the case of Blazer’s general manager, this meant that the allocation of the general manager’s salary should be set at 80 percent of the general manager’s annual salary.
For the purposes of this application, the AUC was generally satisfied that the hourly rates for the operators supplied by H2o Pro were generally competitive with rates in other contracts approved by the AUC.
The AUC further accepted Blazer’s explanation that, due to the expansion of the water treatment plant and adherence to the operator requirements of Alberta Environment, the increased hours and rates in 2016 were necessary to provide safe and adequate water service. Given that Blazer paid the operator rates since 2016 while operating at a revenue shortfall, a reduction in Blazer’s forecast costs for the operating contract was not warranted.
However, the AUC agreed with BPV with respect to the absence of an explanation regarding the splitting of O&M costs on the H2o Pro invoices into two cost codes. Blazer did not explain what these individual cost codes reflected regarding the service provided by H2o Pro in a given month.
The AUC directed Blazer to explain the difference between the two different cost codes on the H2o Pro invoices, why the charges are split on the invoices, how the two amounts appearing on the invoices were derived and any potential consequences of not splitting the amounts, as part of its compliance filing.
Savings Due to Lynx Ridge Treated as a Single Customer
The AUC found that it would not direct a reduction to Blazer’s revenue requirement for reduced billing costs as a result of the transition of Lynx Ridge irrigation services to a single customer bill. Given that each Lynx Ridge customer would still receive individual potable water bills, the AUC considered that any actual reduction in O&M and administration costs associated with transitioning Lynx Ridge to a single residential irrigation customer would likely be immaterial.
The AUC agreed with Blazer’s submission that its billable costs did not actually decrease by $56,194 per year as a result of treating all Lynx Ridge residential irrigation customers as a single customer but rather that this was simply an allocation of the revenue requirement to fewer customers. However, the AUC found that the fact that the revenue requirement allocated to residential irrigation decreased by $56,194 without an actual decrease in Blazer’s costs indicated that the customer base allocator for Blazer’s costs was not the best allocator for its O&M and administration costs.
The AUC found that all O&M and administration costs proposed to be allocated based on the number of customers should be allocated based on volume.
Rate Base
The AUC directed Blazer to update Schedule 12 of the financial model to reflect the actual net book value as of December 31, 2018, in its compliance filing to this decision. As part of this direction, the updated net book value must take into account any findings and determinations of the AUC in the other sections of this decision.
The AUC considered that it was necessary to update the opening rate base numbers to reflect the significant amount of time that passed since Blazer filed its initial application with the AUC.
Forecast Capital Additions
The AUC accepted that Blazer attempted to recover the previous infiltration gallery in order to continue service to customers and approved Blazer’s decision for replacement of these systems. Given the expansion of Blazer’s water treatment plant and its forecasted customer base growth, the AUC considered that replacement of the infiltration gallery was necessary for the continued safe and reliable operation of Blazer’s water utility. The AUC agreed with Blazer that continued use of the submersible pumps would require provincial and federal approvals, and would lead to increased maintenance costs.
However, the AUC considered that Blazer’s proposed capital costs for the river intake replacement should be updated to reflect the time that passed since Blazer filed its application to the AUC in January 2017.
Accordingly, the AUC directed Blazer to file updated actuals for costs associated with the river intake replacement, the costs incurred to date for the replacement, and to update its forecast for any remaining costs for this project in the compliance filing.
The AUC found that a contingency allowance amount for possible unexpected works was not a regulatory cost that related to a tangible capital asset, i.e., it was an amount that was unrelated to an asset that was required for regulatory service. An asset is only included in rate base when it is operational. For these reasons, the AUC directed Blazer to exclude any capital additions or asset amounts for “contingency allowance against unexpected works” in the compliance filing,
Depreciation
The AUC approved the depreciation rates proposed by Blazer and found them acceptable for depreciating its capital assets because they were based on the lives of the capital assets, which is an underlying principle of depreciation.
The AUC directed Blazer to adopt the straight-line basis of calculating depreciation for 2019 and 2020 in the compliance filing to this decision.
Return on Debt and Equity and Capital Structure
The AUC found that the applied-for return on equity (“ROE”) percentages were in accordance with the ROEs approved in the 2016 generic cost of capital decision, and the 2018 generic cost of capital decision. Blazer used an ROE of 8.30 per cent for 2015 and 2016 and increased this to 8.50 percent for 2017 and subsequent years.
The AUC found that a deemed capital structure of 60 percent debt and 40 percent equity for Blazer for 2019 and 2020 was warranted given the size of Blazer’s operations and its business risk.
Blazer Subsidy, Revenue Deficiency Deferral Account and Connection Fee
Blazer proposed to address the overbuilt nature of its water system by foregoing a percentage of its allowed return on owner-invested capital, and by determining that percentage in a manner that arrived at rates, which Blazer submitted were within the range of rates charged by other water utilities in the area surrounding the city of Calgary.
The AUC found it unreasonable to calculate the Blazer subsidy by selecting a percentage of allowed foregone return in order to arrive at a specified variable rate charged to customers.
The AUC directed Blazer to update its financial model such that the subsidy was calculated based on foregoing a percentage of Blazer’s depreciation and return, and whereby that percentage was calculated by dividing the forecast number of homes for the year by 1,250 (the number of homes the water treatment plant can currently serve). This update is to be included in the compliance filing.
The AUC found that it was also reasonable for Blazer to collect a connection fee to offset some of that revenue deficiency as future water customers were added to the system.
Although the AUC approved Blazer’s proposed connection fee, the AUC found that a deferral account was not warranted because it had approved a set fixed connection fee for recovery in the test years that provided certainty in recovery of connection fee amounts for Blazer.
Phase II – Allocation and Rate Design
Rate Classes
Blazer requested approval of rates for four customer classes:
(a) the WPO customer class (potable water customers other than BPV/BRR customers);
(a) the BPV/BRR customer class;
(b) the residential irrigation customers class (Lynx Ridge); and
(c) commercial irrigation (the Lynx Ridge Golf Course).
The AUC approved Blazer’s request for two potable water rate classes and two irrigation rate classes.
Cost Allocators
The AUC approved Blazer’s allocations for all capital costs that did not use the time-of-use allocator. The AUC was satisfied that, apart from the time-of-use allocator, all other capital cost allocators reflected the underlying drivers of the costs and found that the resulting allocations of capital costs were reasonable.
The AUC denied Blazer’s use of an allocator based on a function of water consumption and time-of-use for the following O&M cost categories:
(a) materials supplied and maintenance at the raw water pump station; and
(b) the electricity – river pump house.
The AUC accepted these costs varied with flow rate to some degree. The AUC, therefore, directed Blazer to use water consumption as the sole allocator for these two cost categories.
Consumption Data
The AUC found that Blazer should use the average water consumption for the BPV/BRR potable water rate class that was available to Blazer. The AUC directed Blazer to design the potable water rates for the two potable water rate classes using average water consumption data specific to those rate classes. The AUC further directed that the average water consumption data should use the actuals for 2016.
Tiered Water Consumption Rates
The AUC approved the use of 60 m3 as the threshold for the block rate structure.
The AUC considered that the threshold of 60 m3 was not overly restrictive. The AUC found that this determination to approve a block rate structure was not unreasonable given that in 2015 and 2016 only six percent of Blazers’ customers consumed over 60 m3 of water per month.
The AUC considered that Blazer’s proposed block rate structure should act as an incentive to customers to monitor their monthly potable water use. If water use was reduced because customers were aware of the increased rate for monthly consumption above 60 m3, this will also help reduce those O&M expenses that vary with flow rate to the benefit of the utility and customers.
Summary
The AUC approved the continuation of Blazer’s current rates on an interim refundable basis, as of January 1, 2019. The difference between the interim and final rates approved will either be collected from customers or refunded to customers.
The AUC found that approval of Blazer’s costs and allocations in this decision resulted in just and reasonable cost allocation to the commercial irrigation rate class and other irrigation customers.
The AUC directed Blazer to submit its compliance filing to this decision by February 22, 2019.
