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FortisAlberta Inc. – Capital Tracker True-Up for the 2016 and 2017 AESO Contributions Program, AUC Decision 24281-D01-2019

Link to Decision Summarized

Rates


In this decision, the AUC considered FortisAlberta Inc.’s (“Fortis”) 2016 and 2017 capital tracker true-up for its Alberta Electric System Operator (“AESO”) Contributions Program. The AUC determined that:

  • Fortis must review its pro forma Electric Service Agreement and other provisions to ensure that end-use customers are provided with sufficient incentives to request only the capacity that they reasonably expect to require and that sufficient safeguards are in place to guard against forecast risk.

  • The Consumers’ Coalition of Alberta’s (“CCA”) request for a refund of 50 percent of the amount calculated by Fortis in relation to the cost of complying a direction from Decision 22741-D01-20181 represented a collateral attack and was denied.

  • Adjustments are required for projects with costs transferred from cancelled projects.

  • The application of the allowances for funds used during construction (“AFUDC”) true-up in respect of 2016 rather than 2017 has the effect of allowing the AFUDC to be reflected in the K-bar calculation for the 2013-2016 period, and is consistent with the AUC’s finding which applies risk-reward mechanism disallowances to 2016 rather than in 2017.

  • Fortis is directed to apply risk-reward reductions totalling negative $1,222,085, as an adjustment to its 2016 AESO contribution amount.

  • Given the approval of the AESO’s grandfathering proposal in Decision 22942-D02-2019, the AUC’s adoption of the AESO’s adjusted metering practice in that decision will not require any adjustments to AESO contribution amounts for the years 2016 and 2017 within this decision.

  • Fortis must identify all projects it listed where the cumulative AESO contribution addition amounts for 2016 or 2017 are based on estimated values.

  • A reassessment of whether the AESO Contributions Program included in Fortis’s 2016 and 2017 true-up satisfies the project assessment and accounting test requirements of Criterion 1 is required.

The AUC directed Fortis to recalculate its accounting test requirement of Criterion 1 for 2016 and 2017 in a compliance filing reflecting the findings in this decision.

The AUC also noted that findings in this decision are limited to the true-up of Fortis’s AESO contribution amounts for 2016 and 2017. The AUC recognized that the subsequent treatment of the unamortized balances of Fortis’s AESO contribution amounts, including those that are the subject of this decision, was addressed in Decision 22942-D02-2019. Decision 22942-D02-2019 is subject to a review and variance (“R&V”) application filed by Fortis; this application is currently being addressed in Proceeding 24932 (the “R&V Proceeding”). By approving certain AESO contribution amounts in this decision, the AUC noted that it was not commenting on the appropriate subsequent treatment of these amounts.

Background

On February 6, 2017, the AUC issued Decision 20414-D01-2016 (Errata), which set out the parameters of the 2018-2022 Performance Based Regulation (“Next Generation PBR”) plan for AUC-regulated distribution utilities, including Fortis. In that decision, the AUC also established a rebasing methodology to transition from the 2013-2017 PBR plan to the 2018-2022 PBR plan. The Next Generation PBR plan and the rebasing methodology adopted require a determination of the final approved capital expenditure amounts for the years prior to 2018. Therefore, the final amounts for Fortis’s 2013-2017 capital tracker programs, including its AESO Contributions Program, must be determined.

Summary of AESO Contributions Program Included in the 2016 and 2017 Capital Tracker True-up Application

Fortis applied for finalization of its 2016 and 2017 capital tracker true-up amounts for its AESO Contributions Program. In the application, Fortis explained that the 2016 K factor revenue true-up refund associated with the AESO Contributions Program was reduced by $0.5 million as a result of including the net capital additions related to the Cochrane and Okotoks/High River project legacy costs in the 2016 closing rate base.

Project Assessment Under Criterion 1

The AESO Contributions Program recognizes the cost to Fortis of contributions paid to the AESO for the construction of transmission facilities that have been approved by the AUC.

Fortis’s AESO Contributions Program included in the 2016 and 2017 true-up was evaluated against the second part of the project assessment requirement of Criterion 1: whether the actual scope, level, timing and costs of the project are prudent.

Projects Involving a Material Variance Between the Actual Load and the Forecast Load and the Effect of Such Discrepancies on AESO Contribution Prudence

The AUC noted that in “need for development” or “NFD” reports prepared by Fortis in support of the transmission connection projects, Fortis typically prepares a breakdown of historical load for each feeder at a substation, as well as a forecast of the load that Fortis expects at both existing substation feeders and any proposed new substation feeders.

The AUC asked Fortis questions about 23 projects that appeared to show a material variance between the actual load and the forecast load anticipated in the NFD report prepared for specific substation construction or upgrade projects. Fortis argued that, notwithstanding these variances, its load forecasting methods were sound and generated reasonable results.

Forecasting Methodology

The AUC noted that Fortis’s approach to forecasting with NFD documents for Needs Identification Document applications builds in capacity at the time that a specific project comes into service that is expected to be greater than the peak load forecasts for a specific year. On the basis of the evidence filed by Fortis and, in particular, its responses to AUC Information Requests, the AUC found this approach to be reasonable for the following reasons:

  • Customers benefit from the use of standardized transformer sizes; and

  • The costs of “oversizing” the capacity of a point of delivery (“POD”) substation may be less than the costs of upgrading a POD substation multiple times.

Reasonableness of Fortis’s Forecasts

The AUC agreed with Fortis that variances between the forecasts used by Fortis within NFDs for POD substation projects under consideration and the latest available actual feeder loading statistics reflected the effect of economic factors on end-use customers that Fortis could not have anticipated with any degree of certainty at the time it made key decisions on many projects.

However, the AUC found that the commitments required from end-use customers by Fortis are not sufficiently strong. Accordingly, the AUC directed Fortis to review its pro forma Electric Service Agreement as well as other measures to ensure that expenditures are not stranded, to ensure that end-use customers are provided with incentives sufficient to ensure that they request only the capacity that they reasonably expect to require and that sufficient safeguards are in place to guard against forecast risk, particularly where based on customer demand.

Projects with Costs Transferred from Cancelled Projects

The AUC asked a series of information requests that sought clarification of the treatment of costs in instances where a project with an identifiable name was initiated by Fortis but was either not completed, or where the initial work appeared to have been completed under a project with a different name.

For the South Mayerthorpe 443S Upgrade Project, Fortis was directed to apply an adjustment in the amount of negative $80,000 to the AESO contribution for the year 2016.

For the Blackfalds 198S substation, the cumulative AESO contribution capital addition amount of $1,312,636 was approved, as filed.

The AESO contribution amount of $10,146,678 for the year 2016 shown for Okotoks/High River Area Project was approved, as filed.

In Decision 24329-D01-2019, in respect of AltaLink’s compliance filing pursuant to Decision 22542-D02-2019, the AUC made findings on the reasonableness of costs transferred from the Waiparous 639S project to the Cochrane 291S projects. AltaLink noted that Fortis had instructed it to transfer Waiparous project costs into the Cochrane project.

The AUC found that of costs totalling $2,494,111 that were transferred into the Cochrane 291S Upgrade Project from the Waiparous 639S project, only $739,526 was reasonable within the Cochrane 291S Upgrade Project. Accordingly, the AUC found that the balance of the costs transferred over totalling $1,754,585 ($2,494,111 – $739,526) should be recovered by AltaLink from Fortis in accordance with the applicable provisions of the construction commitment agreement for that project.

The AUC found that Fortis failed to explain why the costs beyond the $739,526 amount should be eligible for recovery. Therefore, Fortis was directed to apply an adjustment in the amount of negative $1,754,585 to Fortis’s AESO contribution additions for the Cochrane 291S Upgrade Project for the year 2016 in its compliance filing.

The AUC asked Fortis why the capital tracker amounts totalling $5,594,361 in respect of the Edwards Lake 189S new substation project should not be reversed in light of the cancellation of the project. The AUC noted that notwithstanding Fortis’s receipt of a refund in December 2018 related to the Edwards Lake 189S project as noted above, it was clear that Fortis was aware that this project was “on hold” by January 2016, and that it was formally advised by Canadian Natural Resources Limited on March 8, 2017, that the project would no longer be required.

Given the foregoing, the AUC found that in lieu of Fortis’s proposal to make an adjustment reflecting the project cancellation as part of its next annual PBR rate adjustment application, the AESO contribution amounts of $3,200,000 in 2014 and $2,394,361 in 2015 should be reversed through an adjustment applied in 2016 in the amount of negative $5,594,361.

Reaccrual of Allowances for Funds Used During Construction

In Proceeding 22741, the AUC asked Fortis to confirm that its AESO contribution amounts had been updated to reflect the reaccrual of AFUDC to certain projects. In its response, Fortis indicated that it had not updated its projects to reflect the reaccrual of AFUDC and instead indicated that such reaccrual was expected to occur in 2017.

Fortis indicated that it had applied the reaccrual of AFUDC to many, but not all, of the projects. Specifically, Fortis explained that, as indicated in subsection 9.7(5) of the ISO tariff, the market participant is not required to pay, and the legal owner of the transmission facilities is not required to refund adjustments of less than $10,000.

The AUC was satisfied that AFUDC had been applied in a reasonable manner to the applicable projects. However, the AUC considered that this true-up should be applied as a pre-2016 true-up instead. The AUC considered that the application of the AFUDC true-up in respect of 2016 rather than 2017 has the effect of allowing the AFUDC to be reflected in the K-bar calculation for the 2013-2016 period, which applies risk-reward mechanism disallowances to 2016 rather than in 2017.

Risk-reward Mechanism Disallowances

In Decision 2013-407, the AUC disallowed AltaLink’s request to include the costs of its proposed “risk-reward mechanism” in its forecast capital costs in its tariff application.

With the release of Decision 2013-407, all parties were aware that no risk-reward mechanism related costs should be included within any AltaLink capital projects. Fortis was directed to apply the risk-reward reductions totalling negative $1,222,085, as an adjustment to its 2016 AESO contribution amount.

Distribution Connected Generation

The AUC noted that the hybrid deferral account mechanism approved in Decision 23505-D01-2018 provides a means by which changes arising from the application of the substation fraction to Fortis POD substation projects can be recovered from Fortis’s distribution connected generation (“DCG”) customers. The AUC also agreed that in such events, the hybrid deferral account mechanism provides a means, on a go-forward basis, by which the benefits of amounts that are charged to Fortis’s DCG customers can be provided to Fortis’s load customers.

In Decision 22942-D02-2019, the AUC approved an AESO proposal to adopt an adjusted metering practice that would separately meter Demand Transmission Service (“DTS”) and Supply Transmission Service energy on Distribution Facility Owner (“DFO”) feeders located within the DFO substation grounds. The adoption of the adjusted metering practice is a change from the metering practice in respect of DCG applied by DFOs, including Fortis, whereby, the DTS energy amount entering the Alberta Interconnected Electric System (“AIES”) had been metered on a “net” basis.

Given the approval of the AESO’s grandfathering proposal in Decision 22942-D02-2019, the AUC’s adoption of the AESO’s adjusted metering practice in that decision will not require any adjustments to AESO contribution amounts for the years 2016 and 2017 within this decision.

Direction 5 from Decision 22741-D01-2018

In Decision 22741-D01-2018, the AUC issued Direction 5 to Fortis, as follows:

Having regard for the above, and having regard for the Commission’s finding in Section 7.1.2.1 that the projects in Attachment FAI-AUC-2017SEP07-002.01 are not final by virtue of Fortis’ structural reliance on future refunds to be triggered by future DTS [demand transition service] increases, the Commission directs Fortis to recalculate AESO contributions for all projects in Attachment FAI-AUC-2017SEP07-002.01 to reflect the AESO contribution refund pursuant to subsection 2 of Section 9 of the ISO tariff that Fortis would be eligible for if it immediately increased DTS to the amount of the maximum capacity of the project. For this purpose, Fortis is directed to use the maximum DTS level indicated for each project in Fortis’ response to FAI-AUC-2017SEP07-003, and to calculate the effect of such DTS contract capacity changes to determine a revised prior-year true-up for the year 2016. Fortis is directed to file this information in a compliance filing pursuant to this decision.

The AUC noted that Direction 5 from Decision 22741-D01-2018 was varied in conjunction with the adoption of the hybrid approach in Decision 23505-D01-2018. As such, the AUC noted that a CCA request for a refund of 50 percent of the amount calculated by Fortis in relation to the cost of complying with Direction 5 from Decision 22741-D01-2018 represented a collateral attack on that decision. The CCA’s request was denied.

AUC’s Conclusions on Criterion 1

Because of adjustments outlined in this decision, the AUC could not make a determination as to whether the AESO Contributions Program included in the 2016 and 2017 true-up satisfy the project assessment requirement of Criterion 1.

For the same reason, the AUC could not determine in this proceeding as to whether Fortis’s AESO Contributions Program included in the 2016 and 2017 true-up satisfy the accounting test requirement of Criterion 1. The AUC directed Fortis, in its compliance filing pursuant to this decision, to revise its accounting test for 2016 and 2017, based on directions in this decision, and reassess whether the AESO Contributions Program included in the 2016 and 2017 true-up satisfy the accounting test requirement of Criterion 1.

Fortis’s Compliance with AUC Directions from Decision 23505-D01-2018

The AUC reviewed Fortis’s response to Direction 1 from Decision 23505-D01-2018 and was satisfied that Fortis has complied with the direction as it confirmed that it would implement the hybrid approach for incremental AESO contributions and has not changed its contracting practices.

The AUC also found that Fortis complied with Direction 2 from Decision 23505-D01-2018 with respect to filing of an application to finalize the 2016 and 2017 capital tracker amounts. However, the AUC directed Fortis to use the approved amounts to finalize its 2016 and 2017 capital tracker true ups and adjust its going-in rates and K-bar amounts for the 2018-2022 PBR plan.

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