Rates – General Tariff Application – Retirement of Destroyed Assets
In this decision, the AUC considered utility asset disposition and other matters pertaining to the Fort McMurray wildfire, filed as part ATCO Electric Ltd. (“AET”)’s 2018-2019 transmission general tariff application (“GTA”). The AUC found the undepreciated capital costs of assets destroyed in the Fort McMurray wildfire were for the account of customers.
Fort McMurray Wildfire Considerations
With respect to the Fort McMurray wildfire, AET provided the following summary of the event in its 2018-2019 GTA:
In May of 2016, sustained strong winds fueled a series of wildfires in the vicinity of the community of Fort McMurray. Over the course of several days, fueled by strong winds, the fire grew to approximately 590,000 hectares. The fire spread through the city of Fort McMurray, impacted operations in the Athabasca Oil Sands, and threatened several transmission substations and powerline facilities in the area. During this period of time it destroyed thousands of homes within the city and is estimated to have cost $3.58 billion in insurable damages. Roughly 88,000 people were evacuated in the municipality of Wood Buffalo.
As a result of the wildfire, AET experienced what it described as “losses” to overhead transmission facilities, substations and telecommunication facilities. Consequently, AET developed the Fort McMurray Wildfire Transmission Asset Restoration Project (the “Project”) for which it forecast $7.8 million for 2016 and 2017. The actual capital amounts incurred in connection with the Project in 2016 and 2017 were $7.0 million and $0.6 million, respectively.
The entirety of the AUC panel determined that the unrecovered capital investment in the retired assets was for the account of the customers of AET, albeit for different reasons.
Findings of Acting Commission Member Romaniuk and Commission Member Sebalj
Commission Member Romaniuk and Commission Member Sebalj noted that in Decision 2013-417, the utility asset disposition (“UAD Decision”), the AUC made a distinction between asset retirement causes or events that had been considered in the determination of the depreciation parameters, which were referred to as “ordinary retirements,” and those that had not been considered, which were referred to as “extraordinary retirements.” The Commissioners explained that any unrecovered utility investment in an asset taken out of service as the result of an ordinary retirement would be for the account of customers because the type of retirement had been factored into the determination of the useful life of the applicable class of assets, the depreciation parameters and the resulting rates.
In contrast, Commission Member Romaniuk and Commission Member Sebalj explained that an asset taken out of service as the result of an extraordinary retirement would be for the account of the utility shareholders because the nature of that retirement had not been factored into the useful life of the applicable class of assets, the depreciation parameters and the resulting rates. What is important in determining whether a retirement event is ordinary or extraordinary, the Commissioners found, is whether it is reasonable to assume that the causes of the retirement event have been anticipated or contemplated in the determination of the depreciation parameters, not the impact that the retirement event may or may not have had on those parameters.
Commission Member Romaniuk and Commission Member Sebalj noted that, in Decision 24369-D01-2019, the AUC referred to earlier decisions, including the UAD Decision, and emphasized that each utility asset disposition situation is unique and must be evaluated on its individual facts.
Commission Member Romaniuk and Commission Member Sebalj determined, as a finding of fact, that the characteristics of the Fort McMurray wildfire retirement event were sufficiently similar in nature to the characteristics of retirement events that AET could be reasonably assumed to have been anticipated or contemplated in the preparation of its past depreciation study. As a result, the Fort McMurray wildfire retirement event was factored into the derivation of the existing depreciation parameters. Accordingly, the AUC found that the Fort McMurray wildfire gave rise to an ordinary retirement of the destroyed assets, for the account of customers.
Findings of Acting Commission Member Lyttle
Commission Member Lyttle found that the application of the UAD Decision will result in a nature-related event that might have been considered extraordinary in the past now being considered ordinary because the opportunity to have contemplated the event in a depreciation study has now occurred. Commission Member Lyttle noted that this exercise is likely to lead to inconsistent regulatory treatment over time of similar nature-related events in determining what constitutes ordinary and extraordinary retirements of utility assets. Commission Member Lyttle found that the ultimate logical outcome is that, eventually, all retirement events will be considered ordinary. Ultimately, as natural events are considered ordinary in all, or virtually all, circumstances, the UAD test for extraordinary retirement versus ordinary retirement will be moot.
Commission Member Lyttle found that to remove the undepreciated costs of the destroyed assets from rate base, one would need to find that the assets were no longer used and required to be used for the provision of utility service. The fire that devastated Fort McMurray did not destroy the need for the assets, nor the requirement for service.
Commission Member Lyttle explained that the capacity needed to operate the electric transmission facility in Fort McMurray is still required for utility service. In Commission Member Lyttle’s view, to assign the loss to the account of shareholders, the event would have had to also eliminate or alter the need to provide the service, not just destroy the individual components of the electricity delivery mechanism. The need for the utility to have the capacity to deliver the service in Fort McMurray continues. The utility service remains used or required to be used by the public. Therefore, Commission Member Lyttle found, the undepreciated capital costs of the destroyed assets continue to be associated with a service that is used or required to be used by the public and should continue to be recovered from customers.
The AUC indicated it appreciates the difficulty utilities face operating in an environment where they must anticipate reasonably foreseeable future events, not just to properly align depreciation parameters but also to reduce the risk of shareholder losses due to an extraordinary retirement. The AUC noted that, notwithstanding these efforts, no party benefits if utilities are compelled to respond to negative economic incentives by adopting risk-averse policies that impede regulatory efficiencies or improvements in service or reliability where prudent investment would otherwise occur. These are perhaps some of the possible deleterious effects on the regulation of utilities in Alberta noted by the courts.
The AUC noted that UAD matters are complex and include not only the allocation of risk for ordinary and extraordinary retirements, but also involve the disposition of utility property, the withdrawal of utility property for non-regulated purposes, the underutilization of utility assets and the determination of a fair return on utility investment. Each aspect of these issues goes directly to the setting of just and reasonable rates in the context of the applicable law and the relevant circumstances.
The AUC indicated that it made these comments in the expectation that they will encourage debate on the evolution of public utility regulation in Alberta while the AUC continues to carry out its main function of fixing just and reasonable rates and in protecting the integrity and dependability of the supply system.