Review and Variance – Salvage
In this decision, the AUC varied findings from Decision 23848-D01-2020 (the “Decision”) and approved the net salvage method proposed by AltaLink Management Ltd. (“AltaLink”).
AltaLink proposed to change its method for collecting net salvage costs related to the retirement of its utility assets in its 2019-2021 general tariff application (“GTA”). In the Decision, this proposal was denied by the majority hearing panel. AltaLink subsequently requested a review and variance (“R&V”) of the Decision. The AUC issued Decision 25769-D01-2020 and granted the second stage review proceeding to re-examine AltaLink’s proposed net salvage method.
Proposed Net Salvage Method
Views of Interveners
The United Consumer Advocate (“UCA”) supported the proposed net salvage method submitting that the traditional approach to net salvage was no longer working. Further, the UCA submitted that AltaLink’s proposal should be approved in light of evidence that it reflected a widely used and well-accepted approach to managing the costs of net salvage both in other jurisdictions and in Alberta, and would be more consistent with a fair allocation of the real value of assets over time.
The Consumer’s Coalition of Alberta (“CCA”) opposed the proposed net salvage method. The CCA submitted that the transfer of net salvage costs to future ratepayers, who would receive minimal benefit from the use of the assets, was the most significant reason why AltaLink’s proposal should be denied.
Views of AltaLink
AltaLink argued that the deepening of the COVID-19 crisis, oil price shock, and accompanying economic turmoil, all of which occurred after the issuance of the Decision, had made the basis for approving its proposed net salvage method even more compelling. AltaLink submitted that its proposed net salvage method represented a long-term and principled solution to both the immediate need for customer rate relief and to the broader issue of transmission rate levelization following the “big build.”
Stage 2 Panel Findings
(a) Testing of AltaLink’s Net Salvage Method and Demonstration of Near-Term Rate Relief
The Stage 2 Panel agreed with the conclusions in Bulletin 2016-16, i.e. that alternative approaches and rate treatments to mitigate or smooth the effect of rate or bill increases on consumers should be considered on a case by case basis in the context of comprehensive tariff applications. Accordingly, the Stage 2 Panel found that consideration of AltaLink’s proposed net salvage method was properly within the context of a comprehensive GTA such as Proceeding 23848.
Regarding the demonstration of near-term rate relief, the Stage 2 Panel agreed with the majority hearing panel that the proposed net salvage method would benefit existing customers by materially reducing AltaLink’s revenue requirement in the forecast period.
The AUC highlighted AltaLink’s calculations that recalculating its 2019-2021 revenue requirement assuming approval of its proposed net salvage method would result in lower salvage collections in the amounts of $37.1 million, $34.5 million, and $30.3 million for the years 2019, 2020 and 2021, respectively, compared to the amounts approved in Proceeding 25627 of $61.2 million, $62.7 million and $64.4 million.
Also, the Stage 2 Panel noted that, assuming the proposed net salvage method was approved, the reduction to AltaLink’s revenue requirement for the years 2019, 2020 and 2021 would be $23.6 million, $26.7 million and $31.2 million, respectively, resulting in materially lower revenue requirements.
(b) Intergenerational Equity and the Premise of AltaLink’s Proposed Net Salvage Method
The Stage 2 Panel found that, on balance, the proposed net salvage method would afford equitable intergenerational treatment for both current and future ratepayers for whom the transmission system was built to serve. This was because, based on AltaLink’s submissions, in the absence of another “big build,” future customer rates would likely reflect reduced levels of undepreciated transmission capital costs, and the costs would be borne over a greater expected customer load base compared to current customers. This was notwithstanding that AltaLink’s proposed net salvage methodology would result in the deferral of salvage costs into the future, either in the form of a capitalized asset or as an operations and maintenance cost.
The Stage 2 Panel found that, given the unprecedented economic effect of the COVID-19 pandemic on ratepayers, and the potential for AltaLink’s proposal to provide urgently needed relief in the current test period, significant weight must be attributed to near-term interests.
(c) Ability of AltaLink to Proceed with the Proposed Net Salvage Method
The Stage 2 Panel found that AltaLink’s proposed net salvage method was otherwise principled, based on AltaLink’s submissions that it was financially able to implement the proposed net salvage method, notwithstanding the effects of COVD-19; that adopting the proposal would not impact its credit rating, assuming certain parameters; and that Alberta’s load growth was expected to recover in the mid to long term. The Stage 2 Panel relied on AltaLink’s confirmations that it remained financially able to proceed with its proposed net salvage method over the test period and that the viability of the proposal applied to both economic downturns and uptrends.
(d) AltaLink’s Agreement with UCA Recommendations 3-8
The Stage 2 Panel noted that AltaLink accepted the UCA’s recommendations 3-8, regarding implementation aspects and future GTAs. AltaLink agreed to record and track costs of removal related to the retirement of an asset, whether to be capitalized to the cost of a replacement asset or recorded in association with a terminal asset retirement. AltaLink further confirmed that the implementation of changes to its process for recording and tracking of cost of removal would be sufficient information for AltaLink to return to the traditional method of net salvage on a prospective basis, where the capitalization of historical salvage amounts would be unchanged.
AltaLink further confirmed that specific amounts of net salvage to be included in revenue requirements for each year would be tested and approved in future GTAs. AltaLink was not seeking advance rulings on the prudency of any cost of removal. AltaLink agreed that the prudence of any cost of removal, whether to be capitalized or recorded in association with a terminal asset retirement would be included in future revenue requirement for collection from customers subject to testing within future direct assigned capital deferral account applications and GTAs.
(e) Stage 2 Panel Clarifications Concerning AltaLink’s Proposed Net Salvage Method
The Stage 2 Panel provided the following clarifications concerning AltaLink’s proposed net salvage method implementation, tracking, and ongoing operation.
The Stage 2 Panel accepted that the measure by which AltaLink would determine the amount of net salvage expense to recover through depreciation expense during the period of transition is linked specifically to funds from operation (“FFO”)/Debt of 11.1 per cent for the test years. However, the Stage 2 Panel directed that this measure would be subject to testing in future GTAs in terms of both substance and form.
AltaLink was directed to maintain enough information to revert to its traditional net salvage method at any point in the future. The requirement to maintain this information considered the implications of AltaLink’s statement that a return to the traditional method of salvage would be on a prospective basis, where the capitalization of historical salvage amounts would be unchanged. AltaLink was directed to, in each future GTA or direct assigned capital deferral account (“DACDA”), report by a uniform system of account, both the forecast and actual costs of removal that had been recorded to the net salvage reserve account during the period of transition, capitalized or recorded in association with a terminal asset retirement.
The Stage 2 Panel directed that if the balance in the net salvage reserve account becomes insufficient to meet the anticipated costs of removal associated with terminal asset retirements, AltaLink would be required to propose the manner and period of collection of those costs in that GTA or DACDA. AltaLink was directed to provide a continuity schedule for its net salve reserve account in each future GTA on both a forecast and actual basis.
AltaLink was directed to, in each future GTA or DACDA, provide detailed information to test the prudency of costs of removal whether recorded to the net salvage reserve account during the period of transition, capitalized to the cost of a replacement asset, or recorded in association with a terminal asset retirement.