Commission Initiated Review – Test for Capital Tracker – Assumptions
The AUC initiated a proceeding to achieve consistency in the methods and assumptions used by AltaGas Utilities Inc. (“AltaGas”), ATCO Electric Ltd. (“ATCO Electric”), ATCO Gas and Pipelines Ltd. (“ATCO Gas”), EPCOR Distribution & Transmission Inc. (“EPCOR”) and FortisAlberta Inc. (“Fortis”) in performing accounting test requirements for capital tracker forecast applications. The AUC noted that the scope of the proceeding would examine the possible use of a consistent set of assumptions comprising each company’s respective weighted average cost of capital (“WACC”) rate, including:
(a) Debt rates;
(b) Return on equity (“ROE”) rates; and
(c) Capital structure.
The capital tracker mechanism has three general criteria in order for supplemental capital funding to flow through the “K Factor” under a performance-based regulation (“PBR”) plan:
(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 the PBR mechanism, figures used to determine rate base are escalated by the I-X mechanism, (which is the rate of inflation, less a productivity factor). Programs and projects under a PBR plan are assessed on a project net cost approach to demonstrate that a project is outside the normal course of ongoing operations. The accounting test used to assess the impacts of proposed capital tracker programs occurs in two components. The first component is the revenue provided under the I-X mechanism for a project or program proposed for capital tracker treatment. The second component is the forecasted cost impacts based on actual capital additions for that PBR year.
The AUC noted that all companies had used the WACC assumptions to determine their rates that were approved in their respective general tariff applications in the first component of the accounting test, but noted that some companies used different assumptions for WACC in the second component of the accounting test, such as actual rates or capital tracker forecast amounts.
The AUC held that the purpose of the first component of the accounting test in Decision 2013-435 was to determine the revenue available through going in rates associated with a project or program under the I-X mechanism.
Therefore, the AUC held that the going-in rates and inputs for WACC in the first component of the accounting test continue to be appropriate.
With respect to the second component of the accounting test, the AUC held that it was strictly based on the company’s actual costs and funding requirements with no application of any PBR factors. Therefore, the AUC held it was necessary to update the WACC assumptions for ROE and capital structure in the second component of the accounting test with the most recently approved figures.
However, for matters related to cost of debt and preferred shares, the AUC took a different approach. The AUC held that since the capital tracker amounts are regulated on a cost of service basis, they are calculated outside the I-X mechanism. Accordingly, the AUC found that the I factor would therefore not update the cost of debt for capital tracker amounts.
Therefore the AUC directed the companies to adjust the revenue requirement amount for approved capital tracker costs to reflect the actual cost of embedded debt and actual cost of preferred shares incurred. The AUC also directed companies to use debt forecasts based on the best information available, including updated information from their respective most recent actual debt and preferred share issuances.
With respect to WACC forecast rate true-ups, the AUC held that the purpose of the true-up process was to provide companies with the ability to recover prudently incurred actual costs for capital tracker programs on a more traditional cost of service basis. With this purpose in mind, the AUC held that while companies must use forecast debt using the best information available, any true-ups for these forecasts should match the actual cost of embedded debt incurred by the company in the year for which the project in question was approved.
Therefore, the AUC directed that, in all capital tracker true-up applications, a company’s WACC used in the second component of the accounting test must reflect the embedded debt rate based on actual debt issues, and the ROE and capital structure for that year as determined by the AUC in any generic cost of capital proceeding.
The AUC inquired as to whether there were any compelling reasons to use different approaches to calculate WACC rates used in the various components for capital tracker applications. Each of the companies stated that there were no such compelling reasons. Accordingly, the AUC determined that the findings in this decision would apply as a common approach for all companies.
The AUC ordered AltaGas, ATCO Electric, ATCO Gas, EPCOR and Fortis to incorporate the findings of this decision into their compliance filings for their 2013 true-up and 2014-2015 forecast capital tracker applications, as well as all future capital tracker applications.
