General Tariff Application – Negotiated Settlement Agreement
In this decision, the AUC considered AltaLink Management Ltd.’s (“AltaLink”) application for approval of a negotiated settlement agreement (the “NSA”) regarding its 2017-2018 general tariff application (“GTA”).
The AUC approved the NSA as filed with the quantum for the refund of surplus accumulated depreciation set at $31.4 million.
Background and NSA Application
On September 8, 2016, AltaLink requested approval to commence a negotiated settlement process (“NSP”) for its 2017-2018 GTA. The Industrial Power Consumers Association of Alberta (“IPCAA”), Alberta Direct Connect Consumers Association (“ADC”) and the Office of the Utilities Consumer Advocate (“UCA”) (the “NSA Signatories”) filed letters in support of entering into the NSP.
AltaLink filed its NSA with the AUC on February 8, 2017. The NSA encompassed all aspects of AltaLink’s 2017-2018 GTA, except for the quantum of the refund of the accumulated depreciation surplus. The AUC noted that although the parties agreed in principle on a refund of the accumulated depreciation surplus, there were differences related to the quantum. The parties’ provided a range between $31.4 million, as advocated by the CCA, and $130.3 million, as advocated by the other signatories to the NSA, including AltaLink.
Legislative Scheme
AltaLink requested approval of the NSA pursuant to AUC Rule 018: Rules on Negotiated Settlements (“Rule 018”) and sections 134 and 135 of the Electric Utilities Act (the “EUA”).
Sections 134 and 135 of the EUA provide the AUC with authority to approve a negotiated settlement. Section 135 of the EUA limits the AUC’s discretion with respect to negotiated settlements, providing that if parties negotiated a settlement contingent on the AUC accepting the entire settlement, the AUC “must either approve the entire settlement or refuse it.”
The AUC noted that the terms of the subject NSA were negotiated as a package and contingent on the AUC accepting the entire settlement, with the provision that the AUC would determine the amount of the accumulated depreciation surplus to be refunded, within the range agreed to by the parties. Therefore, the AUC found that AltaLink requested that the AUC approve the NSA as filed, in its entirety, in accordance with Section 135 of the EUA.
The AUC noted that section 8 of Rule 018 deals with unanimous or unopposed negotiated settlements and requires that the AUC assess the settlement on the basis of two elements, namely whether:
(a) the settlement will result in rates and terms and conditions that are just and reasonable; and
(b) the settlement is patently against the public interest or contrary to law.
Given the statutory requirements, Rule 018, and the relevant case law, the AUC summarized the following factors it considered in making its determination on whether the NSA should be accepted or rejected in its entirety:
(a) Fairness of the negotiated settlement process: assessing whether there was procedural fairness, concerning both the adequacy of notice and the conduct of the fairness of the negotiation process itself;
(b) Just and reasonable rates: considering the reasonableness of the NSA. The AUC considers the reasonableness of the individual elements that make up the application to the extent they have been set out in the NSA; and
(c) Patently against the public interest or contrary to law: conducting a review of each of the material provisions of the NSA in order for the AUC to determine whether any provisions appear contrary to accepted regulatory practices or could result in undue rate and service effects on customers or are clearly contrary to law.
Fairness of NSP
With respect to the fairness of the NSP, the AUC found that:
(a) the parties to the NSA had sufficient information at the time negotiations commenced to allow them to participate as informed parties;
(b) the parties were provided sufficient notice, adequate information, and the opportunity to participate meaningfully, such that the negotiations were conducted in an open and fair manner; and
(c) the parties represented a reasonable cross-section of affected customers.
Based on the above, the AUC concluded that the NSP met the requirements for fairness set out in Section 6(3) of Rule 018.
Just and Reasonable Rates & Public Interest
With respect to the NSA being in the public interest, the AUC explained that its assessment was guided by the EUA and Rule 018, particularly section 8(2), which requires the AUC to intervene if it determines that a unanimous settlement agreement is patently against the public interest or contrary to law.
The AUC found that the NSA represented a unanimous agreement amongst signatories representing a constituent of Albertans that have historically participated in the testing of AltaLink’s GTAs. The AUC found that this supported finding the NSA to be in the public interest.
The AUC found that the NSA was not “patently against the public interest or contrary to law” and should result in “rates and terms and conditions that are just and reasonable” as required by Section 8 of Rule 018.
The AUC therefore approved the NSA as filed.
Quantum of Refund of Surplus Accumulated Depreciation
As noted above, the NSA Signatories were unable to agree on the quantum of the refund of surplus accumulated depreciation. The CCA submitted that the refund should be $31.4 million while the remaining signatories proposed that the refund be $130.3 million.
The AUC noted that the parties were clear that if the AUC were to determine a refund outside that range, the NSA could not be approved because it was presented on the basis that it must be accepted in its entirety.
Surplus Accumulated Depreciation
The AUC explained that depreciation rates used for mass property accounts were predicated on historical retirement patterns continuing into the future. However, the actual mortality of plant assets was only known with certainty after the asset has lived its useful life and the costs associated with the retirement had been incurred. Thus, the estimations for assets’ average service lives and net salvage costs, as compared to what actually occurs, would invariably be different.
To determine the appropriate refund amount within the range of the $31.4 to $130.3 million amount, the AUC considered:
(a) the discount rate to be used by the AUC in its assessment of the appropriate refund amount;
(b) principles of gradualism and moderation;
(c) intergenerational equity issues; and
(d) capacity utilization.
Appropriate Discount Rate
The AUC explained that its determination of the amount of the accumulated depreciation surplus to be returned to current ratepayers was an intertemporal decision. The determination involved a cost/benefit analysis considering the value of refunds to ratepayers today compared to the value of refunding surplus amounts in the future. The AUC explained that intertemporal decision-making necessarily involves choosing a discount rate that allows the decision maker to account for the difference between future welfare and current consumption.
AltaLink argued that the AUC should use market interest rates for its inter-temporal decision making, which reflect the market costs of borrowing or the return from investing in private investments for a variety of market participants. AltaLink submitted that market-determined rates reflect the correct preferences for time discounting.
The AUC noted concerns regarding the use of market interest rates for inter-temporal decision making, including:
(a) those in the future cannot participate in current market decision making and may regret the decisions made by current market participants;
(b) market interest rates do not account for those who cannot signal their time value of money, as a result of being excluded from markets (e.g. young people, who are future ratepayers, but do not have the means to participate in currently operating credit markets); and
(c) market interest for the economy are uncertain and can vary considerably over time. Uncertainty regarding future market interest rates and growth rates means that declining discount rates should be used.
Based on the above, the AUC found that:
(a) Market interest rates should not be used in assessing the inter-temporal cost-benefit analysis regarding the refunding of the surplus.
(b) It was preferable to use discount rates that are lower than market rates; and
(c) considering the effects of declining discount rates had merit, and declining discount rates would suggest moving toward reducing the amount of the accumulated depreciation surplus to be returned to current ratepayers.
Intergeneration Equity and the Public Interest
Given the finding that market rates in general are likely too high to be used when considering inter-temporal decision making, the AUC considered that if market interest rates had been used in the past to inform inter-temporal decision making, then it was likely that current ratepayers were paying rates that were too high, everything else equal. The AUC found that this supported using lower discount rates, since it made it more likely that the current rates already reflected intergenerational inequity.
The AUC found that the public interest would be served by using lower discount rates when employing inter-temporal cost-benefit analysis, which suggested refunding smaller amounts of the accumulated depreciation surplus over two years, everything else equal.
Gradualism and Moderation
Lower depreciation rates result in a larger rate base at each point in time, which, in turn, means a higher return at each point in time, everything else equal.
The AUC explained that AltaLink’s proposal to refund surplus amounts over two years represented a departure from the accepted method through which accumulated depreciation differences are returned to customers using an amortization of reserve differences true-up methodology (the “Status Quo Method”). Under the Status Quo Method, in the case of a surplus, the depreciation rate is lowered by a small amount for the remaining years of an asset’s life to refund the surplus. The sum of all of the reductions to depreciation expense, as a result of the composite depreciation rate reductions, would equal the value of the accumulated depreciation surplus.
Conclusion
Based on its weighing of the above factors, the AUC found that a refund of the accumulated depreciation surplus in the amount of $31.4 million was reasonable and in the public interest.
The AUC found that the rest of the surplus should be returned to customers using the currently established amortization of reserve differences methodology.
