General Tariff Application
The City of Red Deer (“Red Deer”) applied to the AUC pursuant to sections 37, 119 and 124(2) of the Electric Utilities Act for approval of its General Tariff Application (“GTA”) for its transmission facilities. Red Deer’s GTA consisted of:
(a) Red Deer’s proposed revenue requirements for the period from January 2015 to December 2017;
(b) A return on equity deferral account;
(c) A direct-assign deferral account;
(d) A hearing cost reserve; and
(e) A self-insurance reserve.
Red Deer submitted that it had responded to, or complied with all of the AUC’s remaining directions from Decision 2013-373, 2013-214, 2013-417 and 2005-149, with the exception of Direction 5 (salvage value of new buildings) from Decision 2013-373. Red Deer advised that it would comply with Direction 5 in filing its next depreciation study.
The AUC found that Red Deer had complied with all outstanding directions, and noted that Direction 5 from Decision 2013-373 would remain outstanding until Red Deer files its next depreciation study.
With respect to cost of debt, Red Deer noted that it did not have a history of debt financing, and used a proxy calculation using the Alberta Capital Finance Authority (ACFA) rate of 2.925 percent (as of July 1, 2014) adjusted to a 15-year rolling average. Red Deer’s requested cost of debt rates were as follows:
(a) 2015 – 4.359 percent;
(b) 2016 – 4.137 percent; and
(c) 2017 – 3.924 percent.
The AUC found that the mid-year rate base convention did not apply to interest rates, and therefore ordered Red Deer to apply a 2.235 percent rate to reflect the most recent actual rate recorded for the 2015-2017 period. The AUC ordered Red Deer to use the 2.235 percent rate to calculate its 15-year rolling average rate in its compliance filing.
With respect to inflation assumptions used in developing the proposed revenue requirement for 2015-2016, Red Deer submitted that it used the following assumptions:
The Consumers’ Coalition of Alberta (“CCA”) challenged the inflation figures provided by Red Deer, on the basis that the uncertain state of Alberta’s economy, and recent downturn in employment figures would not likely remain untouched. Therefore the CCA recommended that the AUC reduce the union wages to reflect the negotiated agreements at 3.5 percent, utilize actual contractor costs as negotiated, and utilize the consumer price index for non-union inflation increases.
The AUC agreed with the CCA and found that Red Deer had not justified the 0.5 percent inflationary increase for union employees, but found that the step increases for long-service employees above 3.5 percent was warranted to some degree. Therefore, the AUC approved an overall inflationary increase of 3.75 percent for union employees, and directed Red Deer to reflect this in its compliance filing.
With respect to contractor wage inflation, the AUC noted that it could not ignore current economic conditions, even if not brought up in evidence. The AUC found that it would be unreasonable for contractor inflation rates to exceed those for Red Deer employees, and therefore applied the negotiated union agreement inflation rate of 3.5 percent as the latest and best arm’s-length evidence available for inflation. The AUC directed Red Deer to reflect this change in its compliance filing.
The AUC found that all the remaining inflationary rates requested by Red Deer were reasonable and approved them as filed.
With respect to vacancy rates, the AUC approved a vacancy rate of 1.0 percent for full time equivalents, to reflect the low level of vacancies for Red Deer.
Red Deer requested approval of a depreciation rate of 3.26 percent for its towers and fixtures, consistent with the depreciation rates used by the City of Lethbridge in its 2012-2014 tariff application. Red Deer submitted that it did not undertake its own depreciation study as it did not previously own transmission lines prior to this application, and its last depreciation study was filed in 2011. Red Deer proposed to true up any variance between its estimated depreciation rate and a rate to be determined during its next depreciation study.
The CCA submitted that depreciation rates used by ENMAX and EPCOR would be more appropriate. However, the AUC determined that the depreciation rates used by Lethbridge were more appropriate and approved Red Deer’s depreciation rates as filed, on the basis that the two utilities were comparable in nature, and had similar expected service life of assets.
With respect to Allowance for Funds Used During Construction (AFUDC), Red Deer calculated AFUDC on a gross expenditure basis, and did not recognize the customer contribution obligation prior to completion of two substation projects. Red Deer submitted that it did not include the customer contribution since the contribution is not ‘received’ as the Transmission Facility Owner and Distribution Facility Owner are part of the same municipal department. Therefore amounts were only added upon the in-service date of the two substation projects.
The AUC disagreed, and held that a customer contribution is to be accounted for as soon as it is confirmed that a contribution will be required for the project. Further, the AUC found that waiting until expenditures are capitalized before contributions are received effectively overstates the rate base due to AFUDC. Despite this, the AUC found that it was reasonable to assume that contributions from the distribution function of Red Deer are recognized simultaneously with costs incurred by the transmission function of Red Deer. Therefore, the AUC directed Red Deer to adjust in its compliance filing, recognition of contributions in its revenue requirement calculations, such that contributions are recognized at the start of construction and accumulated as an offset to project expenditures for calculating AFUDC.
The AUC also approved the continued use of the methodology to allocate costs between transmission and distribution functions for Red Deer, as set out in Decision 2005-149. However, the AUC ordered Red Deer to re-file its corporate allocation costs using 2014 actual allocators for its recent substation projects, as it held that actual figures were a more reliable data source.
Red Deer proposed to include land purchase costs for substation 209S into rate base in 2016, in the amount of $927,750, comprised of $914,750 for the cost of the land itself, and $13,000 paid by AltaLink Management Ltd. (“AltaLink”) for land easement and damage claims. Red Deer further proposed to include the AltaLink portion of the substation cost in its rate base, in the amount of $2.679 million to reflect its contribution.
The CCA questioned why the amounts for the AltaLink portion of the project were being proposed for inclusion in the Red Deer rate base for 2016, arguing that if the ownership of the AltaLink portion resides with AltaLink, that should be reflected in AltaLink’s books, not Red Deer’s.
The AUC agreed with the CCA, and consequently ordered Red Deer to confirm whether or not the AltaLink portion of the 209S substation costs were included. The AUC directed that if Red Deer cannot confirm that the AltaLink costs were not included, that Red Deer is to remove the $2.679 million from the substation costs, and the $13,000 related to land costs, and all associated AFUDC amounts.
The AUC therefore ordered Red Deer to provide a compliance filing within 60 days of this decision, and ordered Red Deer to continue to maintain and reconcile the following deferral accounts in its next application:
(a) Return on equity;
(b) Direct-assign capital;
(c) Hearing cost reserve; and
(d) Self-insurance reserve.
