Rates – Depreciation Application
In this decision, the AUC considered ATCO Gas and Pipelines Ltd.’s (“ATCO Gas”) 2018 depreciation application, which was supported by a depreciation study prepared by Concentric Advisors, ULC (“Concentric”). The AUC determined that the service lives, Iowa life-curves (“life-curves”) and estimated net salvage percentages as proposed by ATCO Gas for its depreciation study accounts were reasonable, except for Account 475 Mains, where the proposed change for net salvage from negative 60 percent to negative 70 percent was denied.
The AUC also found that ATCO Gas complied with Direction 51 from Decision 2011-450. The segregation of Account 475 Mains into separate accounts for steel or plastic pipe will not be required at this time.
Background
In December 2018, ATCO Gas filed an application with the AUC requesting approval of its proposed depreciation parameters to be effective January 1, 2018. Specifically, ATCO Gas requested approval of:
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updated depreciation parameters as supported by the depreciation study conducted by Concentric; and
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interim approval of a change in net depreciation expense of $24.2 million to be collected as a Rider S effective March 1 to December 31, 2019. The amount to be collected was subsequently corrected to $21.3 million.
Rider S
For the reasons detailed in Decision 24188-D01-2019, the AUC approved a Rider S that would recover 25 percent of ATCO Gas’ applied-for 2018 and 2019 depreciation expense shortfall, on a placeholder basis, effective August 1, 2019, to December 31, 2019, as well as a subsequent Rider S that would recover 25 percent of the estimated depreciation expense shortfall for the year 2020 on a placeholder basis, effective January 1, 2020, to December 31, 2020.
AUC-initiated Review and Variance
On May 29, 2019, the AUC initiated a review and variance (“R&V”) proceeding, Proceeding 24609, to consider the method of accounting for new depreciation parameters and expense in rates under the 2018-2022 PBR term. The changes to depreciation parameters approved in this decision were approved on a final basis, to be reflected in rates in accordance with the directions in Decision 24609-D01-2020.
ATCO Gas’s Depreciation Study
The 2018 depreciation study, prepared by Concentric for ATCO Gas, was based on ATCO Gas’ plant in service as of December 31, 2017 (the “Depreciation Study”).
ATCO Gas noted in its application that the net increase in depreciation expense, because of the applied-for changes to depreciation parameters, was $24.2 million (later corrected to $21.3 million), as compared to depreciation parameters approved in the 2011-2012 general rate application
Accounts for Which No Issues Were Raised by Interveners
Accounts for Which No Changes Were Proposed
The AUC was satisfied that a departure from the previously-approved service life, life-curve and net salvage rates for Account 471.01 Land Rights (Railway) and Account 487.00 Equipment on Customer Sites was not required.
Accounts for Which Changes Were Proposed
ATCO Gas proposed service life, life-curve and/or net salvage adjustments for 20 accounts. The AUC was satisfied that the proposed changes to the previously-approved service life, life-curve and/or net salvage rates for each of these accounts were reasonable.
Amortization of Contributions by ATCO Gas to Transmission Service Providers
The AUC considered ATCO Gas’ proposal to amortize contributions over an average service life equal to that used for similar assets built by ATCO Pipelines to be reasonable, based on ATCO Gas’ evidence that this would contribute to administrative efficiency while aligning the recovery of the original capital cost over the useful life of the assets.
Move to Amortization Accounting for Certain Accounts
ATCO Gas proposed to change the capital recovery methodology for certain accounts listed in the decision from the standard form of depreciation to capital recovery through amortization accounting. In the case of Account 471 (Land rights), a 100-R5 curve and for Account 496 (Specialized computer and office equipment), a 10-R4 curve was previously approved. Account 495 (Leaseholds) previously had a depreciation rate of zero.
The AUC found that amortization accounting was reasonable for these accounts, given the administrative benefits of applying a square Iowa curve (“SQ”) amortization methodology.
Accounts for Which Changes Were Proposed and Issues Were Raised by Interveners
Accounts for Which Amortization was Proposed and Issues Were Raised
In Decision 20272-D01-2016, the AUC approved amortization periods of ten, seven and three years for similar ATCO Electric (transmission) software accounts. The AUC subsequently approved the same amortization periods for the same or similar accounts for ATCO Pipelines and for ATCO Electric (distribution). The AUC, therefore, accepted that the amortization periods proposed by ATCO Gas were reasonable.
The AUC approved the use of a 3-SQ life-curve for Account 499.00 (Software Desktop), a 7-SQ life-curve for 499.01 (Software Minor), and a 10-SQ life-curve for Account 499.02 (Software Major) for ATCO Gas.
Account for Which Issues were Raised Involving Service Life and/or Life-Curve Adjustments
Account 473 Services represents over 30 percent of distribution plant in service. In its application, ATCO Gas proposed to maintain the currently approved life-curve of 57-R2.5. In its evidence, the Utilities Consumer Advocate (“UCA”) suggested a 59-R3 life-curve would be a better fit to the data.
The AUC found insufficient evidentiary support for the UCA’s recommended use of the 59-R3 curve. The AUC approved the 57-R2.5 curve, as proposed by ATCO Gas.
Accounts for Which Issues Were Raised Involving Net Salvage
Gradualism
The AUC agreed that the principles of gradualism and moderation are important and should be included in the assessment of a depreciation study, especially in situations where a large change in a depreciation parameter or parameters has been proposed.
Alternative Accounting Approaches
The AUC agreed that an examination of alternatives to the traditional method of net salvage may be beneficial where there is a large gap between ATCO Gas’ net salvage rates and those of its peers or where the traditional approach to net salvage may result in atypical outcomes.
The AUC directed ATCO Gas, in its next depreciation study, to review and report on alternatives to the traditional approach to net salvage for: (a) any account in which ATCO Gas has proposed net salvage rates that are more negative than negative 60 percent; or (b) for which the mean net salvage percentage for the peer utility comparator group for ATCO Gas is more than 25 percent different from the net salvage rate proposed by ATCO Gas. ATCO Gas should explain in detail why the alternative was either adopted or rejected.
Accounts 472 (Structures and Improvements) and 474 (Regulator and Meter Stations)
The AUC noted that ATCO Gas applied gradualism to arrive at the proposed net salvage value of negative 65 percent value for Account 472. The AUC accepted the explanation of ATCO Gas that environmental considerations were driving the trend towards more negative net salvage for this account and considered the proposed net salvage rate of negative 65 percent to be reasonable.
ATCO Gas did not apply gradualism to Account 474 but rather, relied on historical indications, the comments from the operations and management staff, and indications from the peer comparison of Canadian utilities in support of the recommended change to a negative 60 percent net salvage for this account. The AUC accepted that net salvage for Account 474 was becoming more negative than the currently approved value of negative 30 percent and that the proposed value of negative 60 percent was reasonable.
Account 473 Services
ATCO Gas applied gradualism to this account to arrive at the proposed salvage value of negative 125 percent. The AUC accepted that the net salvage percentage for this account demonstrated an increasing trend (becoming more negative) and considered the proposed net salvage rate of negative 125 percent to be reasonable.
Account 475 Mains
With respect to ATCO Gas’s request to a change in the net salvage rate for Account 475 Mains from negative 60 percent to negative 70 percent, the AUC found there was insufficient information on the record to conclude that this change was warranted.
The AUC denied ATCO Gas’ proposed negative 70 percent net salvage rate for Account 475 Mains, and the current negative salvage value of minus 60 percent for this account was therefore retained.
ATCO Gas Response to Direction 51
This section considered ATCO Gas’ compliance with Direction 51 of Decision 2011-450, which dealt with the segregation of the Mains Account (475) into plastic or steel pipe.
The AUC had directed that ATCO report on the feasibility of segregating significant accounts by material on a go-forward basis. ATCO committed to providing this information in a future application. It then provided a review of peer Canadian natural gas distribution companies, showing the majority (60 percent) of peer companies do not segregate their mains account by material.
ATCO Gas explained that segregating mains would require additional administrative burden as it did not have detailed retirement records by material type. It also noted that steel and plastic service lives are similar due to technological advances.
The AUC found the initial response of ATCO Gas to Direction 51 in its application materially inadequate. The AUC was particularly concerned over the unavailability of supporting background material given ATCO Gas’ commitment to conduct a study and provide it to the AUC.
Notwithstanding this, the AUC found that ATCO Gas complied with Direction 51. The segregation of Account 475 Mains into separate accounts for steel or plastic pipe would not be required at this time as the evidence of ATCO Gas, and the UCA confirmed that steel and plastic service lives are considered to be similar due to technological advances.
Rate Shock
The AUC noted that in the current proceeding, it considered changes in depreciation parameters and depreciation expenses arising from the ATCO Gas application. The increase in rates as a result of these changes, particularly when evaluated cumulatively with a number of other changes to rates based on the other rate-related adjustments, was not an adequate basis to deny the application or otherwise reduce a level of expense that the AUC otherwise found to be reasonable and justified. However, the impact of this decision on rates would be addressed in ATCO Gas’ 2021 annual PBR rate adjustment filing. The AUC may evaluate the potential for rate shock during that proceeding and, if it finds that the rate adjustments may result in rate shock, it may consider one or more options to mitigate this concern at that time.
