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ATCO Electric Ltd. – Hanna Region Transmission Development Deferral Account Compliance Filing, Decision 24753-D01-2020

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In this decision, the AUC set out its determinations on the application by ATCO Electric Ltd. (“ATCO”) for approval of its Hanna Region Transmission Development (“HRTD”) deferral account compliance filing. The AUC found that ATCO complied with six of the directions from Decision 22393-D02-20191 but that it had not complied with three other directions. ATCO was directed to file a second compliance filing by April 20, 2020, to address the AUC’s findings.

Background

On February 3, 2017, ATCO filed an application with the AUC requesting approval of capital additions totalling $688.0 million for its HRTD program for the years 2012-2015. The AUC issued a confidential Decision 22393-D02-2019, a public summary of that decision, and a redacted version of the confidential decision in June of 2019.

In Decision 22393-D02-2019, the AUC set out nine directions to be addressed in a compliance application and directed ATCO to refile its HRTD program compliance application. The compliance application was assigned Proceeding 24753.

Compliance With Directions from Decision 22393-D02-2019

In its application, ATCO responded to the nine directions arising from Confidential Decision 22393-D02-2019. The AUC addressed conditions 2, 3, 4, 5, 6, 7 and 8 in detail in its decision.

Direction 2 – The AUC directed that chartered aircraft charges for travel between Edmonton and Calgary be removed in their entirety, and revised travel costs based on lower cost options be provided.

ATCO provided three different travel options, which included labour costs for those travelling. Having regard to the labour costs, travel by commercial airline was the lowest cost option, and ATCO removed $0.061 million from its filing.

The AUC agreed that it was necessary to consider both the direct costs associated with each travel option (i.e., ticket price) and the productivity or lost time associated with each travel option. It also accepted evidence that in-person meetings were necessary. The AUC found that ATCO complied with Direction 2 and approved the recovery of total travel costs of $56,856.

Direction 3 Legal Costs

Direction 3 – With regard to specified invoices and the legal costs for the work performed that was attributed to the HRTD program, including any invoice submitted by Bennett Jones [LLP] to ATCO Electric in a pre-LEAF [Legal Expenditure Authorization Form] and LEAF format, ATCO Electric is directed to identify, summarize and remove every expense of a similar nature to those noted in sections 7.3.1, 7.3.2, and 7.3.3 …. The Commission finds them to be unnecessary or beyond what could be considered a reasonable expenditure.

The AUC described the legal costs in decision 22393-D02-2019 as follows:

7.3.1 “there are allocations … that appear to be related to services or capital projects other than the HRTD Program” and “… costs that appear to be improperly charged to the HRTD Program”

7.3.2 … concerns with the nature of the costs being charged … as being charged to the HRTD Program”.

7.3.3 “concerns with the nature of the costs being charged to the HRTD Program” and “The costs appear to be for work that should only have been performed by internal resources” and accordingly, these costs “appear to be improperly charged to the HRTD Program”.

ATCO’s response to Direction 3 was two-fold:

(i) it argued that the AUC should have advised ATCO of its concerns with these types of expenses and its supporting documents before the AUC issued its decision to allow ATCO to provide further support; and

(ii) it presented further arguments and materials with respect to each of the three areas of concern, subsections 7.3.1, 7.3.2, and 7.3.3, to support its continued view that the majority of the costs in these categories of expenses should be allowed, except for certain costs identified by ATCO in its compliance response.

ATCO identified a total of $42,935 in legal costs it considered pertain to Direction 3. These costs represented legal costs related to cost and performance audit services in the amount of $13,690 and legal costs related to other projects in the amount of $29,245.

Direction 4 Legal Costs

Direction 4 – In light of ATCO Electric’s acknowledgement that the hourly rates at the partner level exceed peer rates by approximately 10 per cent, ATCO Electric is further directed to apply a reduction of 10 per cent to the legal fees recorded at the partner level as charged by Bennett Jones to the HRTD program.

After applying the $42,935 reduction to legal fees attributable to Direction 3, ATCO determined a reduction of $325,130 related to hourly rates charged at the partner level that the AUC found exceeded peer rates by approximately 10 per cent.

Direction 5 Legal Costs

Direction 5 – ATCO Electric is directed to apply a 10 per cent reduction to the remaining legal fees of Bennett Jones, in recognition of the long-standing relationship between the two parties and the volume of the work being conducted.

ATCO determined a reduction of $177,666 related to the overall 10 per cent reduction that was directed by the AUC to be applied to the remaining legal fees in recognition of the long-standing relationship between Bennett Jones and ATCO.

The Consumers’ Coalition of Alberta (“CCA”) argued that ATCO’s calculation of the impact of Direction 5 should have taken into account the impact of Direction 4 on the amount of remaining legal fees that the further 10 per cent reduction was applicable to.

AUC Findings on Directions 3, 4 and 5 – Legal Costs

The AUC noted that directions 3, 4 and 5 were the subject of a review and variance application in Proceeding 24754. In its review application, ATCO generally raised the same issues that it raised in this compliance proceeding concerning individual time entries for the legal fees incurred, as well as the general percentage reductions to the legal fees.

The AUC released Decision 24754-D01-201929 on December 9, 2019, dismissing ATCO’s request in Proceeding 24754, finding that ATCO had not satisfied the requirements for a review.

The AUC found that ATCO’s compliance with Direction 3 was incomplete. The costs identified by ATCO as requiring removal in response to Direction 3 were identified based on ATCO’s determination as to whether those costs were to be removed. Direction 3 required ATCO “to remove every expense of a similar nature to those noted in sections 7.3.1, 7.3.2 and 7.3.3 of Decision 22393-D02-2019”. It was not invited to argue whether those costs should be removed. The AUC made a finding of fact in Decision 22393-D02-2019 that these costs were “unnecessary or beyond what could be considered a reasonable expenditure.” ATCO was expected to comply with this direction or to seek a review of this direction, which it did. Its disagreement with the AUC’s findings regarding these costs was examined in the review proceeding and dismissed.

With respect to Direction 5, the AUC disagreed with ATCO’s calculation and confirmed that the impact of Direction 4 should be taken into account prior to the determination of the impact of the 10 percent reduction under Direction 5. This is because Direction 4 found that legal fees at the partner level were subject to a 10 per cent reduction as they were in excess of similar peer rates. Had ATCO submitted its legal fees at the partner level in accordance with peer rates from the outset of Proceeding 22393, the impact of doing so would be the same as having applied Direction 4 to legal fees prior to determining the effect of Direction 5.

The AUC found that to comply with Direction 5, ATCO must reduce partner level legal fees to the amount determined in Direction 4 and take that reduction into account when complying with Direction 5.

The AUC was satisfied with ATCO’s calculation of the impact of Direction 4. However, the attendant calculation will be required to change as a result of ATCO’s compliance with Direction 3. More specifically, further reductions for legal costs related to ATCO’s compliance with Direction 3 will be required to inform the final calculation of the impact of Direction 4.

ATCO was directed to include the impact of complying with Direction 3 in applying Direction 4 and, further, to take this amount into consideration in its application of Direction 5 in a further compliance filing.

Direction 6 – Salvage Costs

Direction 6: The Commission will not approve salvage costs with respect to ATCO Electric’s poles and conductor for project numbers 58473, 58571 and 58936 until sufficient detail is submitted…

In response to this direction, ATCO submitted detailed support in relation to the salvaging of its poles and conductor assets for the projects identified.

The AUC found that the supplementary salvage detail provided by ATCO was helpful in determining the prudence of the salvage costs related to the poles and conductor for the three projects identified. It found that ATCO complied with Direction 6, and its salvaging costs with respect to poles and conductors for project numbers 58473, 58571 and 58936 were approved.

Direction 7 – Miscellaneous Disallowed Costs

Direction 7 – The principles set out in Decision 21206-D01-2017 regarding the recovery of charges relating to non-taxable employee benefits, late payment penalties and finance charges apply equally to the costs incurred on the HRTD program. The Commission … directs ATCO Electric to remove the amounts quantified as part of its compliance filing to this decision.

In response to this direction, ATCO identified $53,113.62 in costs similar to those disallowed in Decision 21206-D01-2017 and calculated that a reduction in these capital costs results in a $28,000 revenue requirement refund to the AESO.

ATCO explained that it had inadvertently included land access payments in the calculation of late payment penalties in Proceeding 22393 and was seeking to correct the error. It explained that interest associated with land access payments is incurred due to the timing of payments in relation to land acquisition as compared to construction.

ATCO advised that in previous instances where land access has been negotiated through the Surface Rights Board (SRB), the SRB has directed ATCO to pay interest “on any part of the compensation that was payable on the date the right-of-way agreement was executed or the date the right-of-entry order was issued, also known as the effective date” under the Surface Rights Act. Consequently, ATCO asserted that interest on land access payments is not avoidable and is appropriately included in project capital costs.

The AUC found that ATCO removed the directed amounts and corrected an error found in its Proceeding 22393 rebuttal evidence. ATCO had incorrectly included interest payable on land access payments in late payment penalty or finance charges and requested that these be included in approved capital costs.

The AUC found that it was reasonable for ATCO to include the payment of interest in the negotiated settlements it entered into with landowners. It found that the applied-for deduction of $53,113.62 was compliant with Direction 7.

Direction 8 – Business Training Costs

Direction 8 – The Commission therefore disallows the expenditures related to “Business Training” and ATCO Electric is directed to remove from rate base the value of the related expenditures in its compliance filing.

In response to this direction, ATCO estimated that 12 percent of its training costs pertained to business training. Accordingly, ATCO removed $132,000 from requested capital additions. This adjustment resulted in a $62,000 revenue requirement refund to the AESO.

The AUC considered that the most accurate way to complete this task would require that all business training expenditures included in the HRTD projects subject to Decision 22393-D02-2019 be individually identified, quantified and removed from rate base. However, the AUC accepted ATCO’s evidence that given that the size of any variance from its estimate would likely be relatively small compared to the level of work required, it was reasonable to apply an estimate.

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