Rates – Pension Costs
On July 20, 2016, the ATCO Utilities (consisting of ATCO Gas and Pipelines Ltd. and ATCO Electric Ltd.) (“ATCO”) filed an application with the AUC requesting approval of the its pension application (the “Pension Application”).
The Pension Application requested increasing the cost-of-living allowance (“COLA”) pension adjustment to 80 per cent of the Consumer Price Index of Canada (“CPI”) for 2014 and 2015 and to 100 per cent of CPI for 2016 and beyond.
In support of its Pension Application, ATCO filed two valuation reports prepared by Mercer (Canada) Limited (“Mercer”):
• the 2013 valuation report, upon which the ATCO Utilities relied in determining its 2014-2015 pension costs; and
• the 2015 valuation report, upon which the ATCO Utilities relied in determining its 2016-2018 pension costs.
Legislative Scheme
The AUC explained that its authority to determine just and reasonable rates is found in sections 36 and 37 of the Gas Utilities Act (the “GUA”) for ATCO Gas and ATCO Pipelines, and the Electric Utilities Act (the “EUA”) for ATCO Electric Ltd. Section 4(3) of the Roles, Relationships and Responsibilities Regulations under the GUA also provides that a gas distributor is entitled to recover in its tariffs its prudent costs as determined by the AUC.
The AUC explained that before it can approve pension costs in a revenue requirement application, a utility’s management decisions made in respect of both forecast pension costs and the funding of the pension plan must be assessed for prudence.
The AUC explained that the COLA amount’s reasonableness must be evaluated under the circumstances in place at the time of the revenue requirement application that includes the relevant the pension expense. In determining the reasonableness of amounts, the AUC found the following factors to be to relevant:
(a) the specific provisions of the plan;
(b) the change in the unfunded liability and special payments;
(c) the impact of market conditions on the pension plan;
(d) changes in pension plan legislation; and
(e) the number of active employees and retirees covered by the DB plan.
AUC Findings
The AUC found that the provisions of the pension plan did not require that the COLA be paid to beneficiaries at 100 percent of CPI for a given year. The AUC found that it must therefore assess whether the plan being set at 100 percent of COLA was prudent, because the COLA amount affected what was to be recovered in rates.
The AUC found that ATCO’s applied-for increase in the COLA amount was not warranted, because of:
(a) the impacts of recent changes in pension legislation affecting the windup and solvency valuations conducted by Mercer for 2013 and 2015;
(b) the high degree of volatility in the unfunded liability;
(c) the reported increase in the windup liability from 2013 to 2015; and
(d) the risk that customers might bear higher special payment costs if the plan were to fall into a deficit position because the number of active DB employees contributing to the CU plan is declining.
The AUC found that a pension cost based on COLA set at the previously approved 50 per cent of CPI up to a maximum of three per cent for 2014 onward was reasonable.
AUC Directions to ATCO Utilities
With respect to ATCO Electric – Distribution and ATCO Gas, which are currently under performance based regulation (“PBR”), the AUC noted that the impact of pension costs is subject to the PBR formula. The AUC therefore directed ATCO Gas and ATCO Electric – Distribution to confirm any placeholders included in the second generation PBR proceeding, any changes required to pension costs arising from this decision on PBR utilities, and proposed treatment of any resulting adjustments to pension costs on the PBR utilities.
The AUC noted that its determination in this decision directly affected the revenue requirements of the ATCO. transmission utilities, namely ATCO Electric – Transmission and ATCO Pipelines.
The AUC directed:
• ATCO Pipelines to incorporate the findings of this decision in its compliance filing to the decision in Proceeding 22011 dealing with ATCO Pipelines 2017-2018 general rate application; and
• ATCO Electric – Transmission to reflect the findings of this decision in its compliance filing to Decision 22050-D01-2017, which will be its second compliance filing with respect to its 2015-2017 general tariff application (considered in Decision 20272-D01-2016).
