Performance-Based Regulation – Electricity
In this decision, the AUC approved ATCO Electric Ltd. (“ATCO Electric”)’s 2017 K factor true-up collection amount of $8.9 million to be collected from customers in its 2019 Performance-Based Regulation (“PBR”) annual 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 ATCO Electric 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.
Overview of the ATCO Electric Projects Included in the 2017 Capital Tracker True-Up Application
The projects included in ATCO Electric’s 2017 capital tracker true-up and the variance from the approved forecast, resulting in proposed K Factor true-up adjustment for 2017, were as follows:
(a) information technology related;
(b) tools and instruments;
(c) transportation equipment;
(d) overhead line rebuilds, replacements, and life extension;
(e) wood pole replacements and life extension;
(g) wildfire risk reduction;
(h) underground rebuilds, replacements, and life extension;
(i) distribution to transmission contributions;
(j) buildings structures and leasehold improvements;
(k) third-party driven relocations;
(l) new extensions; and
(m) distribution automation,
Grouping of Projects for Capital Tracker Purposes
The AUC approved ATCO Electric’s grouping of the Projects proposed in its application. The AUC found that ATCO Electric’s capital tracker schedules, which include its non-capital tracker projects, complied with the AUC’s previous directions.
The AUC found that the actual 2017 costs for each of the programs or projects were prudent. This was based on the evidence provided by ATCO Electric supporting the costs, the associated procurement, and construction practices and ATCO Electric’s explanation of the differences between the approved forecast and actual costs.
Project Assessment: Distribution to Transmission Contributions
The Distribution to Transmission Contributions Program consisted of the annual contributions that ATCO Electric was required to make for transmission projects that directly relate to transmission system access in its distribution service territory.
The AUC found that ATCO Electric’s 2017 actual capital additions associated with the Distribution to Transmission Contributions Program were prudent. The Distribution to Transmission Contributions Program consisted of the annual contributions that ATCO Electric is required to make for transmission projects that directly relate to transmission system access in its distribution service territory.
The 2017 approved forecast capital additions for this program were $36.2 million and the actual 2017 capital additions were $3.6 million, resulting in a $32.6 million variance below forecast. The AUC found ATCO Electric’s 2017 actual capital additions associated with the Distribution to Transmission Contributions to be consistent with the variance explanations provided and consistent with the scope. The 2017 approved forecast capital additions for this program were $36.2 million and the actual 2017 capital additions were $3.6 million, resulting in a $32.6 million variance below forecast. The AUC accepted ATCO Electric’s explanation that cost variations were generally attributed to final construction costs, finalized customer contribution decision (“CCD”) calculations, and in-service date variations from forecast.
Project Assessment: Distribution Automation Program
The Distribution Automation Program was an ongoing multi-year program, which consisted of a number of small projects related to two interdependent components: the installation of field Supervisory Control and Data Acquisition (“SCADA”) infrastructure; and the development and integration of control centre technology and enterprise systems.
The AUC found that the Distribution Automation Program satisfied the project assessment requirement of Criterion 1 and, therefore, the AUC approved the Distribution Automation Program capital costs as proposed for 2017 capital tracker treatment.
In the application, ATCO Electric provided a business case, engineering studies and actual results realized in 2013 to 2017 for the Distribution Automation Program.
Accounting Test Under Criterion 1
The AUC found that ATCO Electric’s programs or projects proposed for capital tracker treatment in 2017 on an actual basis satisfied the project assessment requirement of Criterion 1, based on the following:
(a) ATCO Electric used the correct values for its weighted average cost of capital (“WACC”), I-X, and Q assumptions used in the first component of the accounting test;
(b) ATCO Electric’s accounting test demonstrated that all or a portion of the actual expenditures for a capital project were outside the normal course of the company’s ongoing operations.
ATCO Electric confirmed that there were no changes to the drivers of any of its previously approved capital tracker programs
Distribution Automation Program
With respect to Criterion 2, the AUC clarified in Decision 2013-435 that certain projects proposed for capital tracker treatment that did not fall into any of the growth-related, asset replacement or external-party-related categories might also satisfy Criterion 2 in certain circumstances.
The Distribution Automation Program was an example of a capital tracker project that did not fit into any of the three Criterion 2 categories.
The AUC found that the Distribution Automation Program projects were required to provide utility service at adequate levels and to maintain safe operation of ATCO Electric’s distribution system. Furthermore, the program was not adequately funded under the I-X mechanism in 2017. Therefore, the AUC found that the Distribution Automation Program satisfied the requirements of Criterion 2.
The AUC found that ATCO Electric applied the Criterion 3 Materiality Test correctly for the purposes of the 2017 capital tracker true-up, based on the projects and assumptions included in the application. The AUC found that each of ATCO Electric’s proposed capital tracker programs for 2017 exceeded the materiality thresholds and, therefore, satisfied Criterion 3.
2017 True-Up K Factor Calculations
In Decision 21516-D01-2016, the AUC approved a 2017 forecast K Factor of $62.6 million to be recovered from ATCO Electric’s customers on an interim basis. As part of the 2017 capital tracker true-up, ATCO Electric calculated its actual 2017 K Factor to be $71.5 million, resulting in a proposed 2017 K Factor true-up adjustment of $8.9 million, to be collected from customers. ATCO Electric included this amount in its 2019 PBR annual rates application.
The AUC found that ATCO Electric’s methodology in determining the 2017 K Factor true-up amount was consistent with the requirements set out in Decision 2012-237 and Decision 2013-435. The AUC approved the 2017 K Factor true-up collection amount of $8.9 million. The AUC further approved the collection of this amount through ATCO Electric’s 2019 PBR annual rates.
The AUC approved ATCO Electric’s 2017 K Factor true-up collection amount of $8.9 million to be collected from customers in its 2019 PBR annual rates.