Rates – Anomaly Adjustment
In this decision, the AUC considered the anomaly adjustment applications (”Anomaly Applications”) filed by AltaGas Utilities Inc. (“AltaGas”), ATCO Gas and Pipelines Ltd. and ATCO Electric Ltd. (the “ATCO Utilities”), ENMAX Power Corporation (“ENMAX”) and FortisAlberta Inc. (“Fortis”) (together referred to as the “Utilities”) and The City of Calgary (“Calgary”). The Anomaly Applications aimed to adjust the going-in rates for the 2018-2022 performance-based regulation (“PBR”) plans of the Utilities.
The AUC approved ENMAX’s retirement anomaly as applied for and denied the other anomaly adjustments applied for by the Utilities and Calgary. ENMAX was directed to update its 2021 PBR rate adjustment application to account for the change of its 2018 going-in rates and K-bar by November 18, 2020.
The AUC set out the rebasing methodology for the 2018-2022 PBR term in Decision 20414-D01-2016 (Errata). This methodology consisted of setting the Utilities’ going-in rates based on a notional 2017 revenue requirement. The AUC determined that operations and maintenance (“O&M”) and average actual retirements, as components of the notional 2017 revenue requirement could be adjusted for anomalies.
Anomaly Adjustments Applied for by the Utilities
The Utilities proposed various anomalies that would adjust the O&M component of the notional 2017 revenue requirement, including changes to the parameters used to convert the lowest O&M cost year to 2017 dollars and adjustments to account for labour escalation.
The AUC assessed the applied for anomalies to determined whether adjustments were required to enable the utility to continue to provide safe and reliable service to its customers and provide it with a reasonable opportunity to earn a fair rate of return.
Adjustments for Converting the Lowest O&M Cost Year Expenditure
(a) Proposed Adjustment to the I Factor
The AUC considered that the views advanced by the Utilities applying for a conversion adjustment were premised upon an underlying presupposition that the PBR inflation factor formula and the inputs, prescribed in Decision 20414-D01-2016 (Errata), are incorrect notwithstanding that no party sought to raise any issue with the methodology and inputs when it was approved. The AUC found that the appropriate time to challenge the methodology for setting going-in rates was after it was established in Decision 20414-D01-2016 (Errata).
The AUC noted that the question is whether an adjustment is required to the I factor used to convert the expenditures in the lowest O&M cost year for the purposes of rebasing. Having considered the evidence, the AUC could not conclude that this adjustment is required to enable those utilities that applied for such an adjustment to continue to provide safe and reliable service to their customers and give them a reasonable opportunity to earn a fair rate of return.
(b) Proposed Adjustment to the Alberta Average Weekly Earnings (“AWE”) Index of the I Factor
In rebasing, the AUC had instructed the utilities to calculate the I factor by utilizing a lagged weighted average of the AWE and the consumer price index (“CPI”).
The AUC found that the AWE and CPI indices are integral components of the I factor, which is an integral component of the rebasing methodology. As such, the AUC stated that the index prescribed in Decision 20414-D01-2016 (Errata) will not be adjusted, and denied AltaGas’s application for an anomaly adjustment related to the labour cost index (AWE vs. fixed weighted index or “FWI”) of the I component.
(c) Proposed Adjustment to X
The AUC did not accept the submission from ENMAX or AltaGas that the inclusion of the X factor in converting costs from a utility’s lowest O&M cost year is similar to double counting. The AUC found that to calculate 2018 going-in rates based on a 2017 notional value, the X factor was required in the rebasing methodology.
The AUC did not find any evidence to suggest that the inclusion of the X factor in converting AltaGas and ENMAX’s lowest O&M cost year expenditures to 2017 dollars was anomalous or could otherwise have impeded either utility’s ability to provide safe and reliable service to its customers and have a reasonable opportunity to earn a fair return.
(d) Proposed Adjustments to Q
ATCO Electric and ENMAX applied for an anomaly related to Q. ATCO Electric proposed a Q of 0.4 per cent based on the expected customer growth using forecast 2017 to actual 2016 billing determinants instead of its approved 2017 Q of -2.7 per cent. ENMAX proposed a similar adjustment based on its average Q for the 2015-2016 time-period, which was 1.20 per cent, instead of its approved 2017 Q of -0.75 per cent. The AUC was not persuaded by these submissions from ATCO Electric and ENMAX.
(e) AUC Findings on the Proposed Adjustments for Converting the Lowest O&M Cost Year Expenditures to 2017 Dollars.
The AUC found that the AWE index and the FWI were integral parts of the conversion formula. The AUC found that the difference between these two labour indices that are components of I, the conversion to 2017 dollars calculation, the inclusion of the X factor and the calculation of Q based on the prescribed methodology used to convert the lowest O&M cost year expenditures to 2017 dollars are integral components of the conversion formula. The AUC noted again that the appropriate time to challenge the methodology for setting going-in rates was after it was established in Decision 20414-D01-2016 (Errata). No party had filed for review of that decision at that time. The AUC was not prepared to alter the conversion methodology in the current proceeding and was not persuaded that the applied-for anomalies were related to the application of the methodology rather than to the methodology itself. The AUC did not approve any of the applied-for anomaly adjustments that relate to fundamental I, X, or Q parameters of the conversion formula.
The AUC determined there was no evidence that the Utilities had been unable to provide safe and reliable service while having the opportunity to earn a fair return because of the conversion parameters used to calculate the O&M component forming 2018 going-in rates, of which the Utilities would have been aware since 2016. Accordingly, the AUC denied all proposed anomalies related to the PBR inflation factor formula and the inputs prescribed in Decision 20414-D01-2016 (Errata) to convert the lowest O&M cost year expenditures to 2017 dollars.
Proposed Labour Escalation Adjustments
The AUC did not consider unfavourable outcomes of labour negotiations, as suggested by Fortis and ENMAX, a valid reason for the adjustments proposed by Fortis or ENMAX to qualify as an anomaly for the purposes of rebasing. The AUC denied Fortis’s and ENMAX’s application for an anomaly adjustment related to a specific labour cost adjustment escalation rate.
Other O&M Adjustments Proposed by ENMAX
ENMAX applied for anomaly adjustments of $0.82 million for severance costs and $1.67 million to account for new staffing and initiatives required to transition to a new business environment. The anomaly adjustment for severance costs comprised $0.35 million for incremental regulatory resources and $1.31 million for new initiatives in cyber-security and data center transformation.
The AUC was not convinced that any of these requested anomaly adjustments were based on abnormal circumstances, and denied the applications for the corresponding anomaly adjustments.
Retirement Adjustment Proposed by ENMAX
ENMAX submitted that the $36.23 million retirement of the Wires Retail Access Program (“WRAP”) in 2016 was anomalous and would result in a material impact of $15.32 million to its K-bar funding over the 2018-2022 PBR term. ENMAX proposed that the retirement of the WRAP be entirely excluded from the calculation of its 2018 base K-bar.
Based on submitted evidence, the AUC noted that the retirement of the WRAP in 2016 stood out amongst the retirements used to calculate ENMAX’s retirement average. It was significantly larger than other retirements in the PG8 capital program retirements category and had a disproportionate effect on ENMAX’s retirement average due, in part, to ENMAX’s average having been based on only two years. The AUC accepted the application for an anomaly adjustment. The AUC determined that it was reasonable to reduce the contribution of the WRAP to the determination of the retirement average by 85 per cent (i.e., only 15 per cent of the WRAP retirement amount shall be used in the calculation of the retirement average). This would result in a retirement average that is closely aligned with ENMAX’s 2004-2016 average. ENMAX was directed to update its 2021 PBR rate adjustment application accordingly by November 18, 2020.
2018-2022 K-Bar I Factor Adjustment Proposed by Fortis
In addition to requesting the I factor conversion adjustment of 0.91 per cent to establish the notional 2017 revenue requirement, Fortis also requested approval to apply this rate to determine the K-bar incremental capital funding for the 2018-2022 PBR term.
The AUC found no basis to expand the concept of anomaly adjustments to apply to K-bar funding. This extension would be inconsistent with the concept of an anomaly adjustment. Fortis’s request to apply the 0.91 per cent in the calculation of its 2018-2022 PBR plan K-bar was denied.
Anomaly Adjustments Applied for by Calgary
Calgary sought adjustments to the going-in rates of the ATCO Utilities related to determinations made in Decision 20514-D02-2019. In that decision, the AUC directed specific reductions to the prices contained in the IT master services agreements (“MSA”) between ATCO transmission and distribution utilities and Wipro Solutions Canada Limited (“Wipro”) for inclusion in each of the regulated utilities’ revenue requirements.
Calgary proposed a two-part anomaly it considered would take into account AUC-directed reductions to the prices contained in the IT MSAs between ATCO and Wipro. Calgary indicated that the two-part anomaly adjustment was designed to ensure that the 2018 going-in rates would reflect all ordered adjustments to Wipro prices from Decision 20514-D02-2019. It was further designed to ensure that customers would not pay for imprudent costs during the second term PBR.
The AUC observed that Calgary’s anomaly application in the current proceeding sought relief similar to, if not the same as had been previously sought and rejected. The AUC disagreed with Calgary’s argument that the proposed IT anomalies were required, in addition to the X factor, to ensure the intended incentives under PBR. The AUC denied Calgary’s applied-for anomalies.