Performance Based Regulation
In this decision, the AUC considered AltaGas Utilities Inc. (“AltaGas”)’s 2017 capital tracker true-up application. The AUC approved the 2017 K factor true-up amount of $644,176. The AUC further approved the refund of this amount through AltaGas’ 2019 annual PBR rates.
Overview of PBR Capital Tracker Mechanism
The PBR framework was approved in AUC Decision 2012-237 for 2013 to 2017 PBR plans. The PBR framework provides a formula mechanism for the annual adjustment of rates over a five-year term. In general, the companies’ rates are adjusted annually by means of an indexing mechanism that tracks the rate of inflation (“I Factor”) relevant to the prices of inputs, less an offset (“X Factor”) to reflect productivity improvements that the companies can be expected to achieve during the PBR plan period. The resultant I-X mechanism breaks the linkages of a utility’s revenues and costs under a traditional cost-of-service model. The PBR framework allows a company to manage its business with the revenues provided for in the indexing mechanism and is intended to create efficiency incentives similar to those in competitive markets.
Certain items may be adjusted for necessary capital expenditures (“K Factor”), flow through costs (“Y Factor”), or exogenous material events for which the company has no other reasonable cost control or recovery mechanism in its PBR plan (“Z Factor”).
The AUC approved a rate adjustment mechanism to fund certain capital-related costs, referred to as the capital tracker. The capital tracker provides a supplemental funding mechanism for approved amounts to be collected from ratepayers by way of a K Factor adjustment to the annual PBR rate setting formula.
Projects or programs are eligible for capital tracker treatment if they meet the following three criteria:
(a) the project must be outside the normal course of on-going operations (“Criterion 1”);
(b) ordinarily, the project must be for replacement of existing capital assets or the project must be required by an external party (“Criterion 2”); and
(c) the project must have a material effect on the company’s finances (“Criterion 3”).
Criterion 1: Project Assessment and Accounting Test
Criterion 1 requires a two-stage assessment of each project or program for which capital tracker treatment is requested.
At the first stage (project assessment), an applicant must demonstrate that:
(a) the project is required to provide utility service at adequate levels; and, if so,
(b) the scope, level and timing of the project are prudent, and the forecast or actual costs of the project are reasonable.
At the second stage, an applicant must demonstrate the absence of double-counting (the “Accounting Test”). The purpose of the Accounting Test is to determine whether a project or program proposed for capital tracker treatment is outside the normal course of the company’s ongoing operations. This is achieved by demonstrating that the associated revenue provided under the I-X mechanism would not be sufficient to recover the entire revenue requirement associated with the prudent capital expenditures for the project or program.
Criterion 2: Insufficient Customer Contributions and Incremental Revenue
With respect to Criterion 2, a growth-related project will generally qualify where an applicant demonstrates that customer contributions and incremental revenues are insufficient to offset the project’s cost.
Criterion 3: Materiality Test
To assess whether a proposed capital tracker has a material effect on a company’s finances, an applicant must satisfy the two-part Criterion 3 materiality threshold (the “Criterion 3 Materiality Test”). Namely, that:
(a) each individual project affects the revenue requirement by four basis points; and
(b) on an aggregate level, all proposed capital trackers must have a total impact on the revenue requirement of 40 basis points.
AUC Process for Reviewing the 2017 Capital Tracker True-Up Application
For 2017 capital tracker true-up applications, the AUC assessed the scope, level, and timing of each project or program for prudence, and whether the actual costs on the project or program were prudently incurred. The AUC did not undertake a reassessment of the need under the project assessment component of Criterion 1 for projects the AUC previously confirmed the need for in prior capital tracker.
For programs or projects previously approved under the Criterion 2 requirements, the AUC did not undertake a reassessment of the project or program against the Criterion 2 requirements unless the driver for the project or program had changed.
The AUC also conducted an assessment of the 2017 capital tracker projects and programs with respect to the accounting test under Criterion 1 and materiality test under Criterion 3.
To the extent the AUC previously approved the grouping of projects for capital tracker purposes, the AUC did not re-evaluate those groupings in this decision.
Materiality Threshold for Project or Program Variance Explanations
Based on AltaGas’ most recent Rule 005: Annual Reporting Requirements of Financial and Operational Results filing, the AUC agreed that AltaGas fit within the $100 million to $500 million rate base category. AltaGas provided variance explanations as follows:
(a) for cost differences, where the variance for the actual total costs at the individual project is plus or minus $500,000; or greater than or equal to plus or minus 10 percent and a dollar amount greater than or equal to plus or minus $125,000 of the approved amount;
(b) for non-financial data, such as units/volume differences, where the variance for actual length of pipe at the individual project level is greater than or equal to plus or minus 10 percent of the approved amount; and
(c) explanations for differences in overhead rates for individual projects are provided where variances on an individual project are greater than plus or minus 0.5 percent, and plus or minus $10,000.
The AUC confirmed that the cost and non-financial variance explanation thresholds that AltaGas provided in the application were consistent with the Rule 005 thresholds.
The AUC found AltaGas’ variance explanation threshold definition, including assessment at the project level rather than account line level, subject to significant variances at the account line level, to be reasonable.
Summary of Programs Included in the 2017 Capital Tracker True-Up
The table below sets out the programs included in AltaGas’ 2017 capital tracker true-up application. The K factor true-up amounts are equal to the variance between the 2017 approved forecast K factor amounts and the 2017 actual K factor.
2017 K Factor True-Up and Adjustments
Pipeline Replacement Program
The Pipeline Replacement Program is a multi-year program that provides for the replacement of three types of pipe: pre-1957 steel pipe, polyvinylchloride (“PVC”) pipe, and non-certified and interim-certified polyethylene (“PE”) (collectively referred to as “non-certified PE”) pipe.
Station Refurbishment Program
The Station Refurbishment Program is also a multi-year program that provides for partial, through to complete, replacement of a particular station.
Gas Supply Program
The Gas Supply Program is also a multi-year program that ensures safe, continuous gas supply to customers.
Grouping of Projects for Capital Tracker Purposes
AltaGas used the same approach to grouping that was previously approved by the AUC for its three programs.
The AUC did not re-evaluate these groupings in this decision. The AUC found that AltaGas’ description of the nature, scope, and timing of non-capital tracker projects complied with the AUC’s previous direction.
Assessment of Individual Projects Within Programs Under Criterion 1
For each project, the AUC assessed whether the actual scope, level, timing, and costs of the previously approved capital tracker project or programs was prudent. The AUC also evaluated whether, for each project or program, AltaGas provided business cases, engineering studies, cost-related information, and related evidence and argument to demonstrate compliance with each of the project assessment minimum filing requirements.
The AUC found that:
(a) AltaGas’ 2017 actual capital additions associated with each of the projects was consistent with the scope, level, and timing of the work outlined in the business case approved in Decision 20522-D02-2016;
(b) the actual scope, level, timing, and costs of the work undertaken in 2017 were prudent; and
(c) accordingly, the pre-1957 steel, PVC, and non-certified PE pipe replacement programs and each of the associated projects approved on a forecast basis in Decision 20522-D02-2016, satisfied the project assessment requirement of Criterion 1 for 2017.
Pipeline Replacement Program
The Pipeline Replacement Program provided for the replacement of three types of pipe: pre-1957 steel pipe; PVC pipe; and non-certified PE pipe.
In Decision 20552-D02-2016, the AUC approved the need on a forecast basis for each of the pre-1957 steel, PVC and non-certified PE pipe replacement projects for purposes of capital tracker treatment in 2016 and 2017. The AUC also determined that the proposed scope, level, timing and forecast costs for the approved projects and programs were reasonable.
The AUC found no evidence to indicate that any of the pre-1957 steel, PVC and non-certified PE pipeline replacement projects were not required in 2017.
Pipeline Replacement Program Trailing Costs
The AUC approved the inclusion of AltaGas’ trailing costs as part of the project total costs for the purposes of the K factor calculation and found they were prudently incurred.
The application included trailing costs incurred in 2014, 2015, and 2016 associated with several pipeline replacement capital tracker projects previously approved on a forecast basis by the AUC in prior capital tracker decisions.
Accounting Test Under Criterion 1
The accounting test under Criterion 1 determines whether a project or program proposed for capital tracker treatment is outside the normal course of the company’s ongoing operations. The accounting test is satisfied by demonstrating that the associated revenue provided under the I-X mechanism would not be sufficient to recover the entire revenue requirement associated with the prudent capital expenditures for the program or project.
The AUC found AltaGas’ schedules, that made up its accounting test analysis for the purposes of the 2017 capital tracker true-up, were reasonable and consistent with the accounting test methodology approved in Decision 2013-435. The AUC verified AltaGas’ weighted average cost of capital (“WACC”), I-X and Q value assumptions used in the first component of the accounting test, and found that AltaGas used the correct values. The AUC found AltaGas’ 2017 actual WACC of 6.122 percent used in the second component of its accounting test, based on the 2017 actual cost of debt of 4.470 percent, as well as the approved equity thickness of 41 percent and the approved return on equity of 8.5 percent from Decision 20622-D01-2016, were reasonable.
The AUC was satisfied that AltaGas’ accounting test model demonstrated that all of the actual expenditures for a capital project were, or a portion was, outside the normal course of the company’s ongoing operations, as required to satisfy the accounting test component of Criterion 1.
The AUC found that AltaGas’ programs or projects proposed for capital tracker treatment in 2017 on an actual basis satisfied the project assessment requirement of Criterion 1.
Since AltaGas’ 2017 capital tracker true-up had not changed since the AUC undertook and approved proposed capital tracker projects and programs against the Criterion 2 requirements in Decision 20522-D02-2016, there was no need to undertake a reassessment of these programs or projects against the Criterion 2 requirements.
The AUC found that AltaGas interpreted and applied the Criterion 3 two-tiered materiality test correctly for the purposes of its 2017 capital tracker true-up, based on the projects and assumptions included in the application. The AUC found that each of AltaGas’ proposed capital tracker programs for 2017 exceeded the materiality thresholds, and therefore satisfied Criterion 3.
The AUC approved the 2017 K factor true-up amount of $644,176. The AUC further approved the refund of this amount through AltaGas’ 2019 annual PBR rates.