Capital Tracker – PBR – K Factor – Revenue Requirement
EPCOR Distribution & Transmission Inc. (“EDTI”) requested approval for:
(a) Certain capital projects for capital tracker treatment in 2014 and 2015; and
(b) The associated revenue requirement for the capital tracker projects to be included in the K Factor component of the performance based regulation (“PBR”) rate formula, which was approved by the AUC in Decision 2012-237.
The PBR formula applies for a five year term effective January 1, 2013 for EDTI. The PBR adjusts rates annually by means of an indexing mechanism, tracking the rate of inflation (I), less an offset for productivity improvements (X). This mechanism is known as the I-X mechanism. However, as utilities may not be able to recover all costs using an I-X mechanism, the PBR formula allows for three adjustment types:
(a) Adjustments for necessary capital expenditures in a year (“K Factor”);
(b) Adjustments for flow through costs (“Y Factor”); and
(c) Adjustments to account for “material exogenous events for which the company has no other cost recovery or refund mechanism within the PBR plan” (“Z Factor”).
In order for a “capital tracker” project to qualify for K Factor treatment, the utility would have to satisfy the following three-part test:
(a) The project must be outside of the normal course of the company’s ongoing operations;
(b) Ordinarily the project must be for replacement of existing capital assets or undertaking the project must be required by an external party; and
(c) The project must have a material effect on the company’s finances.
In order to qualify as “outside the normal course of on-going operations”, the AUC noted that the increase in associated revenue provided by the PBR formula, must be insufficient to recover the entire revenue requirement associated with the prudent capital expenditures for the capital tracker program or project in question. This test is therefore considered by the AUC as more accounting oriented than engineering oriented, although such applications must generally be supported by an engineering study and business case to assess the reasonableness of the request.
In order to qualify as being required by a third party under the second criterion, a growth related project must demonstrate that customer contributions and incremental revenues are insufficient to offset the revenue requirements associated with a project for a given PBR year.
The materiality threshold in the third criterion requires that each project must individually affect the revenue requirement by four basis points. On an aggregate level, all proposed capital trackers must have a total impact on revenue requirement of 40 basis points.
EDTI applied for approval of actual costs for its 2013 capital tracker projects, including:
(a) 14 projects which were previously approved in Decision 2013-435, with an aggregate variance of $0.63 million; and
(b) 3 projects which were not previously approved for capital tracker treatment with an aggregate cost of $0.57 million.
EDTI also applied for approval of its 2014-2015 forecast capital tracker projects, including:
(a) The continuation of 13 projects which were previously approved for capital tracker treatment in Decision 2013-435, with an aggregate cost of $9.54 million in 2014 and $16.41 million in 2015; and
(b) 10 projects which were not previously approved for capital tracker treatment, with an aggregate cost of $1.22 million in 2014, and $3.70 million in 2015.
Project Grouping
The Consumers’ Coalition of Alberta (“CCA”) argued that EDTI had grouped its projects in such a manner as to keep any projects for which the accounting tests are negative, outside of, or separate from, those that would require a K Factor amount. The CCA argued that, by grouping projects in such a way, EDTI was attempting to increase its return on equity. The CCA therefore requested that the AUC implement a “retrospective mechanism” to review the circumstances of expenditure deferral and strategic shifting of capital tracker projects.
EDTI submitted that the numbers provided by the CCA in support of its argument were unrealistic, had little value for the AUC, and constituted new evidence. EDTI did not support the use of a retrospective mechanism of any kind. EDTI also submitted that it had grouped its applied for projects consistent with past AUC directions.
The AUC held that any grouping of projects for the sole purpose of minimizing or maximizing capital tracker revenue would be contrary to the PBR model. The AUC noted that grouping projects in such a manner would likely be apparent on its face, as such groupings would be generally inconsistent with past accounting practices and regulatory reporting prior to the commencement of the PBR period.
The AUC noted that EDTI proposed some 60 capital project categories, raising prospects that such categories are overly refined, and that some categories contain the same asset types. However, the AUC also noted that EDTI used the same capital project categories from previous applications. The AUC held that EDTI had not manipulated its groupings, and therefore would not order any re-grouping of capital tracker projects. The AUC further held that any revisions to EDTI’s capital tracker groupings would best be addressed in a review of its next PBR plan. The AUC approved EDTI’s project groupings as reasonable.
The AUC rejected CCA’s proposed retrospective mechanism, as most of the information sought was already available for scrutiny. The AUC further rejected the retrospective mechanism on the grounds that it would, in effect, require the AUC to examine and verify the entirety of a company’s capital forecasts.
2013 Project Deferrals
EDTI applied for deferral treatment of:
(a) $12.21 million of capital tracker costs previously approved for expenditure in 2013, to be applied in 2014; and
(b) $6.54 million of capital tracker costs previously approved for expenditure in 2014, to be applied in 2015.
EDTI noted that the deferral of such work was precipitated mainly by the significant uncertainty arising from its previous capital tracker application, and the potential capital funding shortfalls.
The CCA expressed concerns about EDTI’s rationale for deferrals, noting that customers experienced approximately 6,900 hours of service interruptions due to the deferred work not being completed. The Office of the Utilities Consumer Advocate (“UCA”) submitted that substantial capital funding shortfalls, and regulatory uncertainty are not acceptable business reasons for deferring work required to ensure service reliability or safety.
The AUC agreed with the UCA’s stance on project deferrals, noting that the AUC’s approval is not required for a utility to undertake projects required to maintain service reliability and safety at adequate levels. However, the AUC also noted that 2013 was a year of transition for several utilities, in moving from a cost-of-service model to PBR. Therefore, the AUC held that it would consider the prudence of these expenditures at the time of EDTI’s 2014 and 2015 capital tracker true-up applications, including any additional net costs that could have been avoided had the projects proceeded as planned.
Project Assessments
EDTI provided a business case together with an engineering study for each of its programs and projects, consistent with the AUC’s previous directions in Decision 2013-435.
As a general finding, the AUC noted that EDTI’s proposed escalators for labour costs were consistent with either previous AUC directions in EDTI’s last Tariff application, or with negotiated results of collective bargaining agreements. Where the AUC did find minor discrepancies (e.g. escalator costs for non-union employees), the AUC held that such differences were not likely to be significant. In the interest of regulatory efficiency, the AUC did not require EDTI to correct these discrepancies, as such corrections would require substantial time and effort to correct.
The AUC held that all of the projects previously approved in Decision 2013-435 continued to be necessary to maintain service reliability and safety at adequate levels. With respect to the true-up amounts requested, the AUC held that the variance amounts were consistent with the scope, level and timing of the work outlined in the business case provided and approved in Decision 2013-435. The AUC accepted the explanations for each variance as reasonable, with the exception of Information Technology related projects. EDTI withdrew its Information Technology related projects from capital tracker consideration, noting that the capital additions could be fully funded through the I-X mechanism. The AUC held that EDTI would have to re-apply for capital tracker treatment of these projects.
The AUC approved the following new capital tracker programs as necessary projects, holding that they were required during either the 2014 or 2015 forecast period to maintain service reliability and safety at adequate levels:
(a) Outage Management System/Distribution Management System, as EDTI’s current outage management software was becoming obsolete and is reaching the end of its useful life;
(b) Capitalized Aerial System Damage, consisting of repairs to EDTI’s aerial distribution facilities that are either damaged, or about to fail;
(c) Underground Industrial Distribution Servicing –Rebates, Acceptance Inspections & Terminations, which consists of building new underground 15- and 25-kilovolt primary cables, switching cubicles and ancillary equipment to connect new industrial lots within EDTI’s service area;
(d) Replacement of Faulted Distribution Paper Insulated Lead Covered Cable (“PILC”), which consists of repairs and replacements to cables as they occur;
(e) Neighbourhood Renewal program, which contemplates replacement of large portions of electric distribution infrastructure in aging neighbourhoods;
(f) Life Cycle Replacement of Network Transformers, which consists of replacing aging network transformers installed in sidewalk vaults;
(g) Street Light Service Connections and Security Lighting Addition and Capital Replacement, which consists of installing and repairing street lighting, signal and security lighting; and
(h) Life Cycle Replacement of PILC, which consists of replacing PILC that have reached the end of their useful lives.
The AUC held that the Customer Revenue Metering – Growth & Life Cycle Replacements project, which consists of installing revenue meters at new sites and replacing revenue meters at sites that are no longer compliant with Measurement Canada requirements for such meters, would only be eligible for its lower forecast of costs. EDTI submitted that capital tracker treatment for this project was inextricably linked to its Advanced Metering Infrastructure (AMI) project. The AUC was therefore only prepared to approve the lower forecast of $4.19 million for 2015.
EDTI Accounting Test
The AUC held that EDTI’s accounting tests were generally consistent with accounting methodologies previously approved in Decision 2013-435. The AUC did direct EDTI to make certain adjustments to the I-X Index, the Q Factor, and weighted average cost of capital rate.
EDTI’s 2013 I-X factor was set at 1.71 percent in Decision 2013-072. EDTI applied an I-X factor of 1.59 percent for 2014, as approved in Decision 2013-462. EDTI applied an I factor value for inflation of 2.70 percent. EDTI also applied Q Factors of 0.54 percent for 2013, 1.96 percent for 2014, and 0.64 percent for 2015. However, EDTI noted that its calculations for the 2014 Q factor (which is derived from the approved I-X factor), were not based on the 2013 final forecast billing determinants approved in Decision 2013-270.
The AUC held that EDTI was required to make its preliminary forecasts based on 2013 billing determinants approved in Decision 2013-072. Therefore the AUC directed EDTI to use a 2013 Q Factor of 1.46 percent.
The AUC also held that, because it had determined the 2015 I-X factor and billing determinants forecast for 2015 PBR rate adjustments in another proceeding, the AUC directed EDTI to update its calculations applying the directions in Decision 2014-346.
With respect to weighted average cost of capital, the AUC noted that it expects to render a decision in respect of a common set of assumptions in respect of values comprising weighted average cost of capital as part of Proceeding 3434. Therefore, the AUC directed EDTI to reflect any directed changes from the decision forthcoming for Proceeding 3434 into its compliance filing.
As a result of these directed changes to EDTI’s accounting tests, the AUC concluded that it was unable to make a determination as to whether any of EDTI’s proposed capital tracker tests satisfied the accounting tests, and therefore reserved any determination until EDTI files its compliance filing. The AUC made no findings as to whether the proposed capital tracker costs satisfied the first criteria of the three-part test capital tracker treatment.
The AUC did however, find that the driver for each of the projects approved as necessary projects satisfied the second criteria of the three-part test capital tracker treatment, in that each of the projects were either an asset replacement or refurbishment, required by a third party, or was growth-related.
On matters of materiality, the third criteria of the three-part test for capital tracker treatment, the AUC noted that EDTI submitted that the primary threshold of four basis points on a project level was approximately $102,000, and the secondary threshold of forty basis points on an aggregate level was approximately $1.017 million for 2013, and applied the escalating I-X factor for subsequent years. The AUC directed EDTI to apply the recently approved 2015 I-X factor and revise its materiality thresholds for 2015 in its compliance filing.
The AUC held that EDTI generally applied the materiality tests appropriately. However, as a result of the AUC’s directions to change the accounting tests, the AUC was unable to assess whether the projects identified by EDTI meet the third criteria of the three-part test for capital tracker treatment.
Advanced Metering Infrastructure
EDTI proposed to install Advanced Metering Infrastructure (“AMI”) as a solution for customer revenue metering to replace current processes for reading, energizing, de-energizing and enabling more efficient access to end-user information. EDTI proposed to implement the AMI program from 2014 to 2017. The AUC had previously rejected a request by EDTI to implement an AMI project in 2010-2011, as the AUC found that the business case was not well founded, and that Alberta lacked a smart grid policy. EDTI submitted that it had incorporated and updated its business case in consultations with stakeholders and in accordance with Decision 2010-505.
The AUC determined that the updated business case did not suffer from the same drawbacks as EDTI’s prior proposal, noting that the directions in Decision 2010-505 have been addressed. The AUC therefore found that the AMI project would represent the least cost solution for customer revenue metering in the long term. However, the AUC noted that the implementation of AMI would result in the wholesale retirement of current meters on EDTI’s system, triggering concerns related to asset dispositions, and the treatment of un-depreciated capital.
EDTI applied for capital tracker treatment of its AMI project, but noted that it will not implement the AMI project if its shareholders will be responsible for the remaining net book value of its existing customer revenue meters. The AUC held that this position essentially rendered the issue moot, and directed EDTI to remove the 2015 capital forecast additions of $10.39 million from its forecast K Factor calculation. The AUC did not determine whether the AMI project would qualify for capital tracker treatment, but reiterated that companies may choose to undertake a capital investment at their discretion, and need not wait for AUC approval to proceed.
K Factor Calculation
EDTI submitted that it had calculated its proposed 2013 K Factor true-up amount in accordance with AUC Decisions 2012-237 and 2013-435. EDTI proposed to collect its 2013 K Factor true-up amount through Rider DJ, consistent with Decision 2013-435. EDTI proposed to collect this amount over two months, effective March 1, 2015.
Due to the AUC’s directions for EDTI to revise its accounting tests for capital tracker treatment, the AUC could not approve any 2013 K Factor true up adjustments, as the revisions may cause changes to the 2013 K Factor true-up amount. However, the AUC noted that the calculations and methodology used by EDTI in deriving the 2013 K Factor true-up amount were generally consistent with prior AUC directions, including the proposal to collect the amounts through Rider DJ from each rate class.
With respect to EDTI’s 2014-2015 K Factor forecast, the AUC noted that it directed EDTI to remove $10.39 million in capital additions associated with the AMI project from the 2015 forecast K Factor calculation (though the AUC made no determination as to whether the AMI project qualifies for capital tracker treatment). Due to this, and the AUC’s prior directions for EDTI to revise its accounting tests, the AUC held that it could not approve any 2014 or 2015 K Factor adjustment for EDTI on a forecast basis. However, the AUC noted that EDTI’s calculations and methodologies were generally consistent with prior AUC directions.
Accordingly, the AUC ordered EDTI to file a compliance filing in accordance with its findings in this decision, not later than March 3, 2015.
AltaLink Management Ltd. 2015 Interim Transmission Facility Owner Tariff (Decision 3504-D01-2015)
Interim TFO Tariff
AltaLink Management Ltd. (“AltaLink”) applied for approval of an interim, refundable transmission facility owner (“TFO”) tariff of $60,787,500 per month, effective January 1, 2015. The requested amount reflects 90 percent of AltaLink’s forecast 2015 revenue requirement of approximately $810.5 million, divided on a monthly basis. AltaLink further applied to continue its existing terms and conditions of service.
The AUC previously held that AltaLink should apply for an updated interim TFO tariff, noting the significant shortfall amounts awarded in Decision 2014-258.
AltaLink noted its 2015 forecast revenue requirement increased by $189.1 million from its 2014 revenue requirement of $621.4 approved in Decision 2014-258. AltaLink therefore projected a revenue shortfall of the same amount for the 2015 test period, and submitted that the monthly shortfall of approximately $15,758,333 was material. AltaLink submitted that the applied for interim rates would still result in a revenue shortfall of $108.5 million on an annualized basis.
The Consumers’ Coalition of Alberta (“CCA”) and Office of the Utilities Consumer Advocate (“UCA”) argued that the increased numbers were untested or overstated, specifically with respect to items for labour escalation, contractor escalation and capital escalation.
AltaLink argued that approval of the 90 percent of 2015 forecast revenue requirement (calculated at $60,787,500 per month) was necessary to cover costs of operations, and was only marginally larger than the amount approved by the AUC in Decision 2014-258 (calculated at $59,953,967 per month).
In weighing the merits of the application, the AUC held that the projected revenue shortfall was material, and therefore some relief was necessary. The AUC approved the requested 90 percent of the revenue requirement as filed on an interim refundable basis, effective January 1, 2015, citing concerns related to rate stability, minimization of rate shock, intergenerational equity, and potential financial hardship to AltaLink if the requested relief was not granted.
The AUC also approved the continued interim application of AltaLink’s existing terms and conditions.
