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ATCO Electric Ltd. 2018-2019 Transmission General Tariff Application (AUC Decision 22742-D01-2019)

Link to decision summarized

Electricity – General Tariff


In this decision, the AUC considered ATCO Electric Ltd. (“AET”)’s 2018-2019 transmission general tariff application for the test years 2018 and 2019 (the “Application”).

As part of the Application and associated updates, AET sought AUC approval for revenue requirements of $691.7 million in 2018 and $699.5 million in 2019. AET also sought approval of rates based on AET’s approved forecast revenue requirements.

The AUC found that not all of the forecast revenue requirements requested in the Application were reasonable. The AUC ordered that AET file a compliance filing to the Application to reflect the AUC’s findings, conclusions, and directions in this decision.

Forecasts Not Accepted

The AUC did not accept the following AET forecasts:

(a) the level of full-time equivalents (“FTEs”);

(b) 2019 escalation (inflation) rates;

(c) 2018 severance costs;

(d) costs and allocations with respect to ATCO Park;

(e) cost allocations concerning Alberta PowerLine Limited Partnership (“Alberta PowerLine”);

(f) costs with respect to the Variable Pay Program (“VPP”);

(g) certain operating and maintenance (“O&M”) costs; and

(h) the AUC did not approve AET’s request to treat TCM project number 50463 for line 9L101 (“Kearl Lake”) as a system cost.

FTEs

The AUC found that AET failed to justify its requested FTEs and associated dollar amounts in the test years. Consequently, the AUC directed AET to use its 2018 actual FTEs as the approved FTE complement for 2018. The 2018 FTEs were approved as the opening 2019 FTE complement.

2019 Escalation (Inflation) Rates

The AUC was not persuaded that the current Alberta economic climate supported an out-of-scope labour escalation rate of 3.0 percent in 2019. Rather, the AUC found that an out-of-scope labour escalation rate of 2.0 percent for 2019 better reflected current labour inflation rates, similar to what the AUC approved for AET’s in scope inflation rate.

2018 Severance Costs

AET allocated the severance payment amounts in its revenue requirement forecasts based on where the severed position was providing its services in 2018. The AUC did not find this to be a reasonable allocation of severance payments. The AUC directed AET to provide in its compliance filing a recalculation of its 2018 severance costs based on the proportion of years of service each severed position provided to AET’s transmission function. The AUC approved AET’s 2019 severance costs of $1.5 million on a placeholder basis and committed to review the historical service years within ATCO companies to determine the final approved amounts in AET’s next general tariff application.

Costs and Allocations With Respect to ATCO Park

AET forecast increased head office rent in each of the test years due to a move to a new corporate head office, ATCO Park, built by its parent company, ATCO Ltd. The AUC found AET had failed to meet its onus to demonstrate that the head office rent costs it was seeking to recover in rates during the 2018-2019 test period (and beyond) were just and reasonable. To determine AET’s reasonable share of corporate rent costs, the AUC directed AET to provide additional evidence in its compliance filing.

Cost Allocations Concerning Alberta PowerLine

Alberta PowerLine Limited Partnership (“Alberta PowerLine”) owned 100 per cent of the Fort McMurray West 500-Kilovolt Transmission Line Project (the “APL Project”). AET provided management services, O&M services, route development and design build management services to Alberta PowerLine with respect to the APL Project under a service concession arrangement.

AET explained that head office costs were allocated to operating entities based on a formula that took into account equal weightings of total assets, net revenues and labour costs. AET confirmed that it would not be until the in-service date of the APL Project that Alberta PowerLine would become an operating entity within the pool and be allocated head office costs. Because of the head office costs allocation methodology, there would therefore be a two-year lag regarding the inputs to the costs in question.

The AUC took issue with the methodology for allocating head office costs, in particular the two-year lag, given that AET was already providing services to Alberta PowerLine. The AUC directed AET to propose, in its compliance filing, a proxy for labour, including its rationale and calculations, to be used in the head office cost allocation calculation to account for Alberta PowerLine.

VPP Costs and Reserve Account

The AUC approved as a placeholder AET’s VPP forecasts at 80 percent of the eligible employee payout amounts, noting that this determination was consistent with the AUC’s previous VPP approval in Decision 20272-D01-2016. The AUC found that it was unrealistic for the AET to assume that all of the employees eligible for VPP would meet 100 percent of the targets set for them, and that all FTEs eligible for VPP would be with AET when the VPP payouts were made. The AUC also noted that the actual VPP payouts were inconsistent with historical forecasts prepared by AET, making it difficult for the AUC to rely with any confidence on AET’s VPP forecasts.

AET sought the continuation of its VPP reserve account. AET also requested that approved but unused VPP amounts be carried forward and added to next year’s VPP reserve. AET proposed that VPP payments made in excess of the approved forecast for any given test year be recovered through the reserve in a future test year. The AUC denied AET’s request to amend the mechanics of the reserve account, noting that granting AET’s request would, in effect, allow the VPP reserve account to act as a deferral account. The AUC explained that in Decision 2013-358, it removed deferral account treatment for AET’s VPP costs and that the concerns underlying that decision had not changed.

The AUC directed AET to reflect the AUC’s findings and directions regarding VPP costs from this decision in AET’s compliance filing. The AUC noted that in implementing this direction, AET was to take into account the mechanics of the reserve account, including how it could best operate the VPP reserve account to avoid an increasing accumulated balance

O&M Costs

AET was required by the Surface Rights Act to pay annual compensation to landowners for transmission structures located on their property. Among the costs included were annual structure payments and any costs relating to Surface Rights Board (“SRB”) proceedings. AET requested $6.9 million and $7.3 million in costs for the respective 2018 and 2019 test years. However, AET confirmed in its rebuttal evidence that 2018 actual SRB costs were less than the applied-for amounts (based on forecasts) but that AET still expected the 2019 SRB costs to be consistent with its forecast.

The AUC accepted there was uncertainty regarding SRB costs consistent with AET’s $200,000 reduction in its forecast costs for 2018. The AUC therefore directed AET to reflect, in its compliance filing, the $200,000 reduction for the 2018 test year. The AUC also directed AET to reduce the 2019 forecast by $200,000.

Regarding vegetation management, the AUC found that a reduction to AET’s 2019 forecast was warranted because there was insufficient support that the forecast work required to be completed in 2019. The AUC therefore directed that AET reduce the forecast vegetation management costs for 2019 by 10 percent in its compliance filing.

Kearl Line System Costs

In the Application, AET filed a business case supporting the relocation of the Kearl line as requested by Fort Hills Energy to accommodate its oilsands expansion project. The AUC found that the costs of the relocation should be the responsibility of the owner of the Fort Hills mine. Therefore, the AUC denied the forecast capital expenditures in the amount of $1.0 million and $3.0 million in 2018 and 2019, respectively.

Continued Use of Deferral and Reserve Accounts

AET sought AUC approval for the continued use of certain previously approved deferral and reserve accounts.

The AUC directed that the following reserve accounts be maintained by AET: the reserve for injuries and damages (“RID”), VPP, and rate case costs.

The AUC denied AET’s request to expand the scope of its existing International Financial Reporting Standards (“IFRS”) deferral account to permit it to seek approval of new depreciation rates.

Discontinuance of Deferral and Reserve Accounts

AET sought AUC approval for the discontinuance of the following previously approved deferral and reserve accounts for the test period:

(a)      right-of-way payments;

(b)      income taxes relating to: capital repair costs and deductible capital costs;

(c)      debenture rates; and

(d)      vegetation management.

However, the AUC directed that AET maintain these accounts for the test period.

Additional Approvals

In its application, AET sought the continued collection of federal future income tax (“FIT”) for the test period. AET submitted that the continued collection of FIT would help maintain credit metrics at a level that would sustain an “A” rating and minimize the risk of a credit rating downgrade that would result in higher AET costs for new debt issues. The AUC approved AET continuing to collect FIT for the test years, as its sole credit relief measure.

The AUC also approved AET’s isolated generation operating costs and AET’s forecasted depreciation expenses as filed.

Order

The AUC ordered that AET file its 2018-2019 transmission general tariff application compliance filing by August 8, 2019, to reflect the findings, conclusions, and directions in this decision.

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