PBR Anomaly Adjustments
In this decision, an AUC review panel (the “Review Panel”) determined whether to confirm, rescind or vary Decision 22394-D01-20181 as it related to the concept of anomalies in the context of rebasing for the 2018-2022 performance-based regulation (“PBR”) plans for several distribution utilities (the “Distribution Utilities”). The Review Panel decided to vary Decision 22394-D01-2018 by:
(a) rescinding the five criteria that the AUC indicated must all be met to qualify as an anomaly for rebasing purposes; and
(b) providing additional clarification regarding the concept of an anomaly adjustment for the purposes of rebasing and the principles that will apply.
The Review Panel confirmed Decision 22394-D01-2018 as it related to the placeholder treatment for certain costs of the ATCO Utilities identified in that decision.
Background
This decision was concerned with rebasing and the method established by the AUC to calculate going-in rates for the 2018-2022 PBR term.
While the AUC hearing panel (the “Hearing Panel”) accepted the general rebasing approach undertaken by the majority of the Distribution Utilities in Decision 22394-D01-2018, it denied all of the anomaly adjustments proposed. In doing so, the Hearing Panel stressed that it was necessary to read all of the criteria articulated by the AUC with respect to anomalies in Decision 20414-D01-2016 together, rather than favouring or disregarding certain components. The Hearing Panel further explained that to qualify as an anomaly for rebasing purposes, a proposed cost adjustment must have exhibited all of the following characteristics:
(i) be specific and identifiable;
(ii) be required to account for unique existing or anticipated costs;
(iii) be material;
(iv) not reflect actual or forecast 2017 costs; and
(v) not be costs that each Distribution Utility, operating under the incentives of the PBR mechanism, unencumbered by incentives inconsistent with the PBR incentives, would have incurred in 2017.
Three Distribution Utilities applied for a review and variance of Decision 22394-D01-2018. The AUC granted a review and commenced this proceeding to consider the concept of an anomaly adjustment and the type(s) of anomaly adjustment(s) to be permitted.
Anomaly adjustments
The concept of an anomaly
The Review Panel considered that an anomaly is something that should be accounted for in a distribution utility’s going-in rates, to enable that utility to provide safe and reliable service to its customers and give the utility a reasonable opportunity to earn a fair rate of return.
In the context of rebasing, the need for an anomaly adjustment may arise in the event that distorting influences on the incentives of PBR, those that promote long-term and permanent productivity improvements, were present during the utility’s lowest cost year.
AUC discretion
The Review Panel accepted that the exhaustive list articulated by the Hearing Panel in Decision 22394-D01-2018 could risk excluding an adjustment that is reasonable and necessary because it fails to meet all of the criteria or, conversely, requires the AUC to include an adjustment that is not necessary because it meets all of the criteria. This could circumscribe the discretion that the AUC indicated in Decision 20414-D01-2016 it retained to determine what it considers to be reasonable going-in rates for each distribution utility. The Review Panel, therefore, rescinded the five mandatory criteria articulated in Decision 22394-D01-2018.
Not accounted for elsewhere in the PBR plans
The Review Panel agreed with parties that maintained that double counting must be avoided, and adjustments for anomalies should not apply when the costs to be adjusted are already accounted for in some other fashion. Any application for an anomaly adjustment must clearly demonstrate how the applied-for anomaly adjustment is not already captured in the mechanisms used to set the distribution utility’s rates.
Consistent with PBR principles
In Decision 20414-D01-2016, the AUC outlined the five PBR principles that the AUC adopted in the 2013-2017 PBR plans and confirmed that it continues to support these principles for the 2018-2022 PBR plans for all electric and gas distribution utilities under its jurisdiction. Those principles are:
(a) Principle 1. A PBR plan should, to the greatest extent possible, create the same efficiency incentives as those experienced in a competitive market while maintaining service quality;
(b) Principle 2. A PBR plan must provide the company with a reasonable opportunity to recover its prudently incurred costs including a fair rate of return;
(c) Principle 3. A PBR plan should be easy to understand, implement and administer, and should reduce the regulatory burden over time;
(d) Principle 4. A PBR plan should recognize the unique circumstances of each regulated company that are relevant to a PBR design; and
(e) Principle 5. Customers and the regulated companies should share the benefits of a PBR plan.
The Review Panel maintained that any permitted anomaly adjustments must be consistent with the AUC’s five PBR principles.
Accounted for in going-in rates
The Review Panel found a positive adjustment may be required to a utility’s going-in rates if it can be demonstrated that the anomaly adjustment accounts for a cost that repeats throughout the 2018-2022 PBR term. Alternatively, a negative adjustment may be warranted in circumstances where it can be demonstrated, in addition to addressing the other considerations in this decision, that a cost in going-in rates should not reasonably be included in a utility’s revenues over the 2018-2022 PBR term.
Exogenous versus endogenous
While the Review Panel noted that it generally expects an anomaly to be exogenous (outside the control of management), the AUC will not make this a necessary criterion for an anomaly to qualify for an adjustment. Any party applying for an endogenous anomaly will be required to satisfy the AUC that the adjustment is reasonable and necessary in the circumstances. Suboptimal behaviour or decision making on the part of a utility will not qualify for an anomaly adjustment. Given that each distribution utility may encounter unique circumstances in its business cycle, the AUC does not consider the applicability of an anomaly to all utilities, to be a necessary criterion for an anomaly adjustment.
Specific, identifiable and unique
In Decision 22394-D01-2018, the Hearing Panel articulated the following two characteristics of an anomaly: (i) that it must be specific and identifiable; and (ii) that it must be required to account for unique existing or anticipated costs.
The Review Panel noted that anomalies should be rare and that related adjustments will be required only in unique cases.
Relevance of the return on equity
Although there may be circumstances in which evidence of a utility’s actual earnings may be relevant to the assessment of a particular anomaly, the Review Panel was not persuaded that it can conclude from a utility’s earned return on equity (“ROE”), as stated in its Rule 005 filings, whether or not an applied-for anomaly adjustment is required. Nor is the examining or averaging the utilities’ ROEs as a group over prior PBR terms of assistance in considering anomaly adjustments.
Materiality threshold
The Review Panel was not persuaded that specifying a materiality threshold was reasonable or necessary in the circumstances. For an applied-for anomaly adjustment to be approved, it must be material. However, what constitutes a material adjustment may not be consistent across all anomalies and all distribution utilities.
Retirement anomalies
The Review Panel maintained the view expressed by the Hearing Panel that cost changes associated with retirements are not different than other cost changes in the utility’s operating environment and in particular, that such costs can be managed collectively with all other costs in accordance with the incentives inherent in the PBR plans.
Conclusion
The Review Panel indicated that interested parties would be given an opportunity to apply for anomaly adjustments in accordance with Decision 20414-D01-2016 and the clarification provided in this decision.
