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Commission-Initiated Review and Variance of Decision 22741-D01-2018 (AUC Decision 23505-D01-2018)

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Capital Tracker True-Up – PBR Regulation – AESO Contributions Program


In this decision, the AUC decided to rescind its direction in paragraph 138 of Decision 22741-D01-2018 (the “Original Decision”). In that decision, the AUC issued a direction to FortisAlberta Inc. (“Fortis”) on how to finalize the Alberta Electric System Operator (“AESO”) Contributions Program amounts to enable Fortis’ transition to the 2018-2022 performance-based regulation (“PBR”) plan.

Background

The Original Decision

In the Original Decision, the AUC determined Fortis’ 2016 capital tracker true-up application. One of the capital tracker true-up programs under consideration was Fortis’ AESO Contributions Program. The AESO Contributions Program recognized the cost to Fortis of contributions paid to the AESO for the construction of transmission facilities that had been approved by the AUC and were found to be required to supply load growth in Fortis’ distribution area.

The AUC approved an incremental capital funding mechanism for the 2018-2022 PBR term that divided capital into two categories: Type 1 and Type 2.

The AUC determined that Type 2 capital would be managed under a K-bar mechanism, which provided a base amount of capital funding determined using the average level of actual expenditures for the period 2013 to 2016 and the notional 2017 closing rate base as a starting point.

The K-bar amount would be adjusted annually to account for the effects of inflation and productivity growth (I-X), growth in billing units (Q), and changes to the weighted average cost of capital. The determination of base amount funding for Type 2 capital required a determination of the final approved capital expenditure amounts for the years prior to 2018.

Funding for Fortis’ AESO Contributions Program fell within Type 2 capital subject to K-bar. Therefore, it was necessary to determine the final amounts for this program for the years 2013-2017.

In the Original Decision, the AUC acknowledged the difficulties in truing up the AESO Contributions Program, noting that AESO contribution amounts on projects were subject to ongoing update and revision as project timing, design and cost estimates changed over time. However, Fortis’ transition to the next generation 2018-2022 PBR plan, which no longer employed the same capital tracker mechanism, might necessitate a determination of final 2013-2017 project costs, prior to the actual AESO contribution amounts being determined in subsequent transmission facility owner and Fortis capital-related true-up proceedings.

Therefore, in the Original Decision, the AUC directed Fortis to finalize its AESO Contributions Program amounts to enable its transition to the 2018-2022 PBR plan. Specifically, the AUC directed Fortis to recalculate the AESO contributions to reflect the refund that Fortis would be eligible for if it immediately increased Demand Transmission Service (“DTS”) to the amount of the maximum capacity of the project, and then to calculate the effect of such DTS contract capacity changes to determine a revised prior-year true-up for the year 2016.

Compliance Filing

Fortis’ compliance filing to the Original Decision (AUC Proceeding 23372), revealed that the directed recalculation would result in a net reduction of $169 million in capital additions for 2016. Fortis submitted that incorporating this into its notional 2017 revenue requirement and 2018 K-bar amounts would generate “anomalous” results and result in a significant administrative burden.

Review Decision

Section 10 of the Alberta Utilities Commission Act authorizes the AUC to review any decision or order made by it and, after the review, to confirm, rescind, or vary the decision or order.

In this review decision, the AUC found that the outcome of the approach directed in the Original Decision did not fairly balance the interests of both ratepayers and Fortis. The AUC accepted Fortis’ submissions that complying with the direction would result in a significant administrative burden and a net reduction of $169 million in capital additions for 2016.

Fortis’ Hybrid Deferral Account Proposal

Fortis proposed a hybrid deferral account, which involved a deferral mechanism for determining final changes to AESO contribution amounts up to the end of the 2013-2017 PBR term and the establishment of incremental K-bar funding for the 2018-2022 PBR term.

Under this approach, customers received refunds associated with historical AESO contributions they paid for through capital tracker mechanism. New investments were subject to the incentives inherent in the K-bar mechanism. The AUC found that this approach was also consistent with the general treatment of costs subject to capital tracker treatment during the 2013-2017 PBR term as well as the overall 2018-2022 PBR framework.

Fortis proposed that projects, including any project changes, that were issued a permit and licence prior to, or during, the 2013-2017 PBR term would be subject to a true-up through a deferral account.

The 2018 base K-bar amount would also be adjusted as a result of the going-in rate base being incorporated into the calculation of the deferral account. Fortis confirmed that its hybrid deferral account proposal would not have any mechanism to refund customers should Fortis receive any refund from the AESO with respect to projects completed after 2017.

Fortis also noted that the 2017 closing rate base and 2018 revenue from the PBR formula would be subject to a one-time true-up following finalization of Fortis’ notional rebasing amounts. Similarly, the 2018 net additions based on the four-year average of actual approved amounts from 2013 to 2016 would be subject to a one-time true-up following the approval of any outstanding actual refunds or costs related to AESO contributions made in the 2013-2017 PBR term.

For purposes of the deferral account calculations, Fortis would apply the annual adjustments for refunds or costs related to the AESO contributions made during the 2013-2017 term to the historical rate base (i.e., the 2017 closing rate base) associated with the AESO Contributions Program. The difference between the revenue collected through going-in rates (escalated each year by I-X and Q) and the revenue requirement associated with related true-ups would form the deferral true-up amount.

AUC Findings

The AUC directed Fortis to implement the hybrid deferral account approach for its AESO Contributions Program amounts, finding that this approach best balanced the interests of customers and Fortis.

The AUC found that Fortis’ hybrid deferral account approach would ensure that past prudent investments were properly accounted for in current and future rates. The AUC did not consider the annual true-up to be overly burdensome because these deferral account true-ups would be combined with other true-ups as part of the annual PBR rate adjustment filings.

The AUC recognized that this approach had the benefit of not requiring Fortis to make any changes to the K-bar calculation mechanics.

Summary

The AUC varied its direction from the Original Decisions and directed that Fortis use its proposed hybrid deferral account approach to account for amounts relating to the AESO Contributions Program. Under this approach, projects that received a permit and licence prior to December 31, 2017, shall be given deferral account treatment provided that the AUC approved the need, scope, level and timing and associated costs for the project as part of a capital tracker review. Projects that receive a permit and licence after December 31, 2017, shall be managed under the incentive properties of K-bar.

Once the AUC reaches a determination on the finalized 2016 and 2017 capital tracker amounts, Fortis will be directed to use the approved amounts to finalize its 2016 and 2017 capital tracker true-ups and adjust its going-in rates and K-bar amounts for its 2018-2022 PBR plan.

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