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AltaGas Utilities Inc. 2018 Depreciation Study (AUC Decision 24161-D03-2019)

Link to Decision Summarized

Depreciation Study


In this decision, the AUC provided its findings on the AltaGas Utilities Inc. (“AltaGas”) 2018 depreciation application, which was supported by a depreciation study. The AUC approved the service lives, Iowa life-curves (“life-curves”) and estimated net salvage percentages and resulting changes in depreciation parameters as proposed by AltaGas for its depreciation study accounts.

With regard to the items summarized below, the AUC denied AltaGas’ proposed depreciation changes for the following reasons:

  • the AUC rejected AltaGas’ proposal to change the net salvage rate from negative ten per cent to negative 30 per cent for Account 465 Transmission Mains and directed AltaGas, in its compliance filing, to incorporate a negative 15 per cent net salvage rate instead;

  • the AUC denied AltaGas’ proposal to change the net salvage rate from negative 35 per cent to negative 75 per cent for Account 467 Transmission Measuring and Regulation Station Equipment and directed AltaGas, in its compliance filing, to incorporate the currently approved negative 35 per cent net salvage rate for this account;

  • the AUC rejected AltaGas’ proposal to change the net salvage rate from negative 30 per cent to negative 100 per cent for Account 473 Distribution Services and directed AltaGas, in its compliance filing, to increase the net salvage rate for this account to negative 50 per cent; and

  • the AUC denied AltaGas’ proposal to change the net salvage rate for Account 475 Distribution Mains from negative 10 per cent to negative 75 per cent and directed AltaGas, in its compliance filing, to incorporate a negative 25 per cent net salvage rate for this account.

Background

In December 2018, AltaGas filed an application with the AUC requesting approval of its 2018 depreciation study. Specifically, AltaGas requested approval of:

  • the service life depreciation rates and net salvage rates proposed in the application for the 2018-2022 PBR term, as recommended by AltaGas’ external consultant, Concentric Advisors ULC (“Concentric”) in AltaGas’ 2018 depreciation study; and

  • collection, on an interim basis, of a 50 per cent placeholder of the forecast 2018 and 2019 depreciation expense aggregate shortfall by implementation of a Rate Rider F, effective March 1, 2019, until December 31, 2019 (the “Rider F request”).

Rider F request

For the reasons detailed in Decision 24161-D01-2019, the AUC approved a Rider F that recovers 25 per cent of AltaGas’ 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 F placeholder for 2020, to be implemented effective January 1, 2020, to December 31, 2020.

AUC-initiated review and variance

Proceeding 24609 is a review and variance proceeding to consider the method of accounting for new depreciation parameters and expense in rates under the 2018-2022 PBR term. The AUC noted that all adjustments to going-in rates and base K-bar, and subsequent annual adjustments resulting from changes to depreciation parameters approved are interim pending the conclusion of Proceeding 24609.

AltaGas’ depreciation study

AltaGas’ current depreciation parameters and related depreciation expense were approved in 2012 based on a depreciation study completed in 2010. A 2018 depreciation study was prepared by Concentric for AltaGas, and was based on AltaGas’ natural gas transmission, distribution, and general plant accounts as at December 31, 2017.

The proposed depreciation parameters would result in an overall increase of approximately $7.9 million and $8.6 million in depreciation expense for 2018 and 2019, respectively, compared to the depreciation expense that would be recorded for these two years using the depreciation parameters approved in Decision 2012-091. Approximately 90 per cent of the requested increase in depreciation expense was due to increased net salvage (negative), with the remainder due to changes in asset service lives.

Service life and /or life-curve adjustments

Account 474.01 Customer AMR

Account 474.01 Customer AMR is a subaccount to Account 478 Meters. Total investment in the account was $16.352 million at 2018 year end, approximately 2.7 per cent of AltaGas’ total asset investment.

AltaGas proposed to retain the use of amortization accounting and a 15-SQ life parameter for this account.

The AUC found that extending the average service life would not benefit the utility or rate payers. Accordingly, the AUC approved the continued use of the 15-year estimated average service life.

AltaGas was directed, in the next depreciation study, to provide a table of the number of remaining meters with encoder receiver transmitter modules installed in order for the AUC to evaluate the continued need for the account.

Account 475 Distribution Mains

AltaGas requested a change from the previously approved life parameter of a 62-R2 life-curve to a 65-R2 life-curve. The AUC approved AltaGas’ request to change the previously approved life parameter of a 62-R2 life-curve to a 65-R2 life-curve. However, the AUC directed AltaGas to re-examine this parameter at the time of its next depreciation study and to advise the AUC if further changes are justified based on the makeup of the account at that time.

Net salvage

During the proceeding, several issues arose with respect to net salvage and the costs that are charged to cost of retirement, including general issues regarding moderation and gradualism principles, site remediation, five per cent allocation to cost of removal and alternative accounting approaches. The other four issues were account-specific (Account 465 Transmission Mains; Account 467 Transmission Measuring and Regulation Station Equipment; Account 473 Distribution Services; and Account 475 Distribution Mains).

Moderation and gradualism principles

The AUC agreed that the depreciation 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. This was further addressed in later parts of the decision that dealt with the four specific net salvage accounts.

Site remediation

The AUC shared concerns raised by the Utilities Consumer Advocate (“UCA”) that AltaGas’ current practice of recording site remediation and site clean up costs to cost of removal instead of operating costs where no assets are retired, limits the level of visibility into and regulatory review of such expenditures. This is of particular concern where the dollar amounts charged to cost of removal are large relative to the original amounts of the assets being retired.  Having regard to the above concerns and the failure of AltaGas to provide sufficient justification for continuation of its practice, the AUC considered that this practice should be adjusted. 

The AUC directed AltaGas, for 2018, 2019 and future years, to charge site remediation costs to operating costs and not to cost of removal where there are no related asset retirements occurring concurrently or within a reasonably foreseeable period of time (such as in the same fiscal year) and the existing assets continue to be used. Site remediation costs caused by assets that are either in the process of being retired or have been retired can still be charged to cost of removal. AltaGas was further directed to reflect this change for all accounts that include site remediation costs as part of net salvage, in its compliance filing to this decision.  

Five per cent allocation to cost of removal

The AUC accepted evidence that AltaGas has not used the five per cent allocation method on mains projects (Account 465 Gas Transmission – Mains replacement). However, the AUC noted that the method for allocating costs of removal with respect to AltaGas’ remaining accounts was not clear from the data presented and was not clearly explained by AltaGas.

The AUC directed AltaGas, in the compliance filing, to provide the amounts charged to cost of removal by allocation (and not actual costs) in each account, and the method of allocation used for the years 2016 through 2018.

Alternative accounting approaches

AltaGas requested net salvage rates of negative 75 per cent for accounts 467 and 475, and a net salvage rate of negative 100 per cent for Account 473.

The UCA recommended that where net salvage rates are more negative than negative 50 per cent, AltaGas be directed to review, report on and adopt alternatives to the traditional approach for net salvage. UCA’s experts considered any negative net salvage rates more negative than negative 60 per cent to be atypical.

The AUC agreed that an examination of alternatives to the traditional method of net salvage may be of benefit where there is a large gap between AltaGas’ net salvage rates and those of its peer comparators or where the traditional approach to net salvage may result in atypical outcomes. However, the AUC considered that such an examination could be time consuming and is better undertaken in connection with a full depreciation study. The AUC therefore directed AltaGas in its next depreciation study to review and report on alternatives to the traditional approach to net salvage for any account for which AltaGas has proposed net salvage rates that are more negative than negative 60 per cent, or for which the mean net salvage percentage for the peer utility comparator group for AltaGas is more than 25 per cent different from the net salvage rate proposed by AltaGas. For all alternatives considered, AltaGas should explain in detail why the alternative was either adopted or rejected.

Account 465 Transmission Mains

AltaGas requested a change in the net salvage rate for Account 465 Transmission Mains from negative 10 per cent to negative 30 per cent.

The AUC found that AltaGas failed to offer sufficient justification to change the net salvage rate for this account from negative 10 per cent to negative 30 per cent. AltaGas was directed to incorporate a negative 15 per cent net salvage rate for this account in its compliance filing to this decision.

Account 467 Transmission Measuring and Regulation Station Equipment

AltaGas proposed to change the net salvage rate for Account 467 Transmission Measuring and Regulation Station Equipment from negative 35 per cent to negative 75 per cent.

AltaGas’ request was denied and AltaGas was directed, in its compliance filing to this decision, to incorporate the currently approved negative 35 per cent net salvage rate for this account.

Account 473 Distribution Services

AltaGas proposed to change the net salvage rate for Account 473 Distribution Services from negative 30 per cent to negative 100 per cent.

The AUC found that a net salvage rate of negative 50 per cent was reasonable. AltaGas was directed to set the net salvage rate for this account at negative 50 per cent and to incorporate a negative 50 per cent net salvage rate for this account in its compliance filing to this decision.

Account 475 Distribution Mains

AltaGas proposed to increase its net salvage rate for Account 475 Distribution Mains from negative 10 per cent to negative 75 per cent.  

The AUC found that a net salvage rate of negative 25 per cent took into account the upward trend in net salvage activity as well as gradualism and moderation. It was also within the range of the peer comparison of Canadian utilities.

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