Review and Variance – Contributions in Aid of Construction
In this decision, the AUC decided to vary findings made in Section 8 of Decision 22942-D02-2019 (“the Decision”) regarding the application from the Alberta Electric System Operator (“AESO”) for approval of the 2018 Independent System Operator (“ISO”) Tariff in Proceeding 22942. This review and variance (“R&V”) proceeding concerned findings set out in section 8.1 of the Decision regarding a proposal by AltaLink Management Ltd. for a different treatment of AESO contributions in aid of construction.
The AUC decided to rescind the requirements stated in section 8.1 of the Decision. Section 8.1 required that FortisAlberta Inc. (“Fortis”) transfer the unamortized balance of its AESO contributions as at December 31, 2017 to AltaLink Management Limited (“AML”) and that the new contribution policy proposed by AML be applied effective January 1, 2018. The decision is based on findings in two main areas.
(i) The AUC found that if the Decision were confirmed and Fortis was required to transfer the unamortized balance of AESO contributions as at December 31, 2017, to AltaLink, Fortis would incur incremental income tax, carrying costs and debt restructuring costs of at least $116.6 million that would be required to be recovered from ratepayers.
(ii) The AUC found that a majority of the approximately $40 million in savings to ratepayers on which the Hearing Panel relied as the basis for requiring Fortis to transfer the unamortized balance of AESO contributions and to apply the new contribution policy proposed by AltaLink can be achieved by directing Fortis to adjust the applicable amortization rate for its AESO contributions to match the service lives of the transmission assets.
After receiving the request from Fortis to commence an R&V proceeding, the AUC limited the scope of the proceeding to the changes made to the AESO’s customer contribution policy that had been approved in Section 8 of the Decision and indicated that the proceeding would focus on the second stage of the two-stage R&V process established according to Rule 016.
As part of its supplemental submission, Fortis requested that the AUC immediately stay Section 8 of the Decision pending the disposition of the R&V proceeding.
In this decision, the members of the AUC panel who authored the original decision were referred to as the “Hearing Panel,” and the members of the AUC panel considering the R&V application were referred to as the “Review Panel.”
Review Panel’s Decision
In section 8.1 of the Decision, the Hearing Panel considered a proposal advanced by AML to change how the AESO’s contribution policy is accounted for as between a distribution facility owner (“DFO”) (Fortis) and a transmission facility owner (“TFO”) (AML). The Hearing Panel found that AML’s contribution proposal would result in a $40 million financial benefit to customers during the 2018-2022 performance-based regulation (“PBR”) term.
This finding led to two requirements. First, approximately $400 million of unamortized AESO customer contributions in Fortis’s rate base (the balance effective December 31, 2017) were to be transferred to AML for which Fortis was to be compensated at net book value (“NBV”) (the “rate base transfer”). Second, as of January 1, 2018, the AESO customer contributions would be capitalized by AML, not Fortis (the “AML contribution proposal”).
The Review Panel reversed both aspects of the Decision based on the evidence filed in the proceeding that was not available to the Hearing Panel. The Review Panel concluded that the costs to Fortis (that would be recoverable from ratepayers) resulting from the transfer of unamortized customer contributions from Fortis to AML significantly outweigh the financial benefits that would occur during the 2018-2022 period. The Review Panel also set aside the commencement of the AML contribution proposal on January 1, 2018.
The Review Panel rescinded the Hearing Panel’s determination that ratepayers would derive a material benefit valued at approximately $40 million from the adoption of the AML contribution proposal. The Hearing Panel’s finding of benefit was based on the effect of applying AML’s lower cost of debt and lower depreciation rates to the balance of Fortis’ unamortized customer contributions as at December 31, 2017, over the 2018-2022 period. The Review Panel found that a significant majority of the $40 million could be offset by requiring Fortis to adjust its depreciation rate to match the rate that AML would utilize on the unamortized balance of customer contributions as at January 1, 2018. The income tax, carrying costs and debt restructuring costs that the Review Panel determined would arise would require Fortis to recover incremental costs of at least $ 111 million from ratepayers. This would be in addition to offsetting a portion of the $ 40 million benefit that would arise from the adoption of the AML contribution proposal by requiring Fortis to adjust its depreciation rate.
The Review Panel also considered two categories of additional benefits advanced by AML. These were related to the method of calculation of the NBV of Fortis’ unamortized AESO contributions, and to AML’s forecast of savings that would be realized by Fortis ratepayers from the replacement of Fortis’ projected K-bar amounts with the actual and forecast cost of energized projects. The Review Panel did not accept either of these purported savings as benefits to ratepayers over the 2018-2022 period.
Regarding Fortis’s submissions that the Hearing Panel’s decision in Section 8 of the Decision was legally unsound, the Review Panel noted that it based its decision on the conclusion that the costs to ratepayers outweighed the benefits. Further, the decision was based on the conclusion, that Fortis could achieve the majority of the $40 million benefit by adjusting its depreciation rate of the unamortized balance of customer contributions to match the service lives of the transmission assets. The Review Panel noted that it did not base its decision on any legal argument advanced by Fortis and found it unnecessary to consider the legal arguments in this decision.
The Review Panel decided to rescind the Decision in respect of the implementation of the AML contribution proposal and the transfer of rate base associated with the unamortized AESO contributions from Fortis to AML.
The Review Panel decided to set aside the commencement of any new customer contribution policy on January 1, 2018. The AUC scheduled a separate proceeding, that will focus on the legal basis of the current AESO customer contribution policy as it pertains to all transmission facility owners (“TFOs”) and distribution facility owners (”DFOs”). It will further consider whether the need for a new policy including considerations of AML’s contribution proposal. If approved, the AUC will set the date on which any new policy would commence. If a new policy was approved, the commencement date would be on a prospective basis and all DFOs and TFOs, the AESO and other interested parties would be expected to participate.