Depreciation Parameters – Review and Variance
In this decision, the AUC considered the mechanics for incorporating approved changes to a distribution utility’s depreciation parameters into the calculation of going-in rates for the 2018-2022 performance-based regulation (“PBR”) term. The AUC decided, on its own motion, to initiate a review of Decision 20414-D01-2016 and Decision 22394-D01-2018 (collectively the “decisions”) limited to this issue. The AUC found that adjusting only the second component of the K-bar calculation best advanced or was most consistent with the AUC’s identified objectives for rebasing and the K-bar incremental capital funding mechanism. The AUC also found a variance of Decision 22394-D01-2018 was warranted.
Background
In Decision 20414-D01-2016, the AUC determined that cost-of-service studies, including depreciation studies, would not form part of rebasing applications from ATCO Electric Ltd., ENMAX Power Corporation, EPCOR Distribution & Transmission Inc., FortisAlberta Inc., AltaGas Utilities Inc., and ATCO Gas and Pipelines Ltd. (“ATCO Gas”) (collectively the “Utilities”), and subsequently provided the Utilities with an opportunity to file separate depreciation-related applications in 2018.
ATCO Gas, ATCO Electric and AltaGas each filed depreciation applications (the “Applications”) in December 2018, according to the directions set out in Decision 20414-D01-2016. The Applications consisted of depreciation studies based on plant account data as of December 31, 2017, and were considered by the AUC in Decision 22394-D01-2018.
In Decision 22394-D01-2018, the AUC found the notional 2017 revenue requirement for a utility is developed using certain actual costs of the utility during the preceding PBR term, with any necessary adjustments. The 2018 base K-bar calculation had two components: the first component calculated the revenue provided to a distribution utility under the I-X mechanism for Type 2 capital projects or programs for 2018, and the second component calculated the projected revenue requirement for Type 2 projects or programs for 2018. Type 2 capital projects are those funded by revenue from I-X or from the AUC-approved K-bar mechanism that provides an amount of capital funding for each year of the next generation PBR plans based, in part, on capital additions made during the previous PBR term.
The AUC initiated this proceeding for the limited purposes of considering how the Decision 20414-D01-2016 and Decision 22394-D01-2018 prescribe the mechanics for incorporating approved changes to a distribution utility’s depreciation parameters into the calculation of rates during the 2018-2022 PBR term and if a variance to the decisions was required.
AUC findings on the method of accounting for new depreciation parameters and depreciation expense in rates
The AUC found that there were two possible approaches to the incorporation of approved changes to a distribution utility’s depreciation parameters into the calculation of going-in rates:
(a) adjust only the second component of the K-bar calculation to account for the approved changes in depreciation parameters in determining the base K-bar portion of 2018 going-in rates; and
(b) adjust the notional 2017 revenue requirement and both the first and second components of the base K-bar calculation for the approved depreciation parameters in the calculation of the 2018 going-in rates.
The AUC found that adjusting both components of the base K-bar calculation would diminish the AUC’s stated intention in Decision 20414-D01-2016 to rebase using actual data and to set going-in rates that reflect productivity gains achieved during the 2013-2017 PBR term. Adjusting both components of the K-bar calculation, would also result in effects inconsistent with the AUC’s intention, regarding PBR plan components, to encourage utilities to continue to make cost-saving investments near the end of the PBR term.
The AUC noted that adjusting only the second component of the K-bar calculation to account for proposed changes to approved depreciation parameters would result in none of the above-described effects associated with adjusting both components of the K-bar calculation. On that basis, the AUC found that adjusting only the second component of the K-bar calculation to account for proposed changes to approved depreciation parameters was more consistent with the AUC’s identified objectives for rebasing the K-bar incremental capital funding mechanism and would provide a distribution utility with a reasonable opportunity to earn a fair return. Based on this finding, the AUC found that a variance of Decision 22394-D01-2018 was warranted.
The variance
The AUC noted that while finality is an important principle in administrative decision making because it provides certainty to those parties who participated in or are affected by the proceeding, the range of interpretations of the implementation mechanics set out in the decisions indicates that finality does not, in these circumstances, beget certainty. The AUC stated that uncertainty and ambiguity are not congruent with either regulatory efficiency or setting an effective regime and incentives for PBR, particularly considering the principal public interest objective of the decisions was to provide for the establishment of just and reasonable going-in rates and a base K-bar for the 2018-2022 PBR term.
For these reasons, and to clarify the base K-bar adjustment mechanism and associated effects on PBR rates during the 2018-2022 PBR term, the AUC considered that it is necessary to vary Decision 22394-D01-2018 to clarify the mechanics for incorporating approved changes to a distribution utility’s depreciation parameters into the calculation of going-in rates for the 2018-2022 PBR term.
The AUC indicated an amended version of Decision 22394-D01-2018 would be issued following the release of this decision.
Order
The AUC ordered that approved changes to a distribution utility’s depreciation parameters be incorporated into the calculation of going-in rates for the 2018-2022 PBR term by adjusting only the second component of the K-bar calculation.
