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City of Lethbridge – 2018-2020 Transmission Facility Owner – General Tariff Application, AUC Decision 24847-D01-2020

Link to Decision Summarized

Rates – GTA

This decision set out the determinations of the AUC regarding a general tariff application (application or “GTA”) filed by the City of Lethbridge’s electric utility (“Lethbridge”) transmission facility owner (“TFO”) requesting approval of its revenue requirement for the 2018-2020 test period.

The AUC denied Lethbridge’s requested revenue requirement for the years 2018-2020 with respect to proposed 2020 escalation rates for “other” and “contractor” categories; a proposal to apply a direct assigned deferral account surplus to a hearing cost reserve account deficit; and certain depreciation expense related calculations. The AUC directed Lethbridge to respond to all directions set out in this decision by way of a compliance filing.

Introduction and Background

On August 28, 2019, Lethbridge filed an application with the AUC requesting approval of its 2018-2020 TFO GTA. The Consumers’ Coalition of Alberta (“CCA”) participated in the application.

Compliance With Outstanding Directions from Decision 21213-D01-2016

The AUC found that Lethbridge complied with Direction 1, which required a breakdown of labour and contractor costs for Account 563, to enable the AUC to track variances in such costs arising from the purchase of a bucket truck.

The AUC also found that subject to inflation assumptions, Lethbridge complied with Direction 2, which directed that Lethbridge address salaries and wages for employees, and other compensation issues.

Direction 10 required that Lethbridge reflect all incurred costs of removal into its accumulated depreciation account, rather than capitalizing costs of removal into its capital asset accounts. The AUC found that Lethbridge complied with this direction.

Direction 11 stated the following:

103. Lethbridge is also directed to include in its next application, a detailed explanation of its accounting practices for retirement, gross salvage and cost of removal. Lethbridge is further directed to include an explanation of its accounting practice for the disposition of utility assets, including the treatment of gains or losses, in a manner that will address the concerns raised by the Commission in paragraph 100 [parts (a) to (e)] above.

Concerning its accounting practices for gross salvage and cost of removal, Lethbridge explained in its response to Direction 11 that the City’s asset management system calculates depreciation on an individual asset basis, as opposed to the group depreciation method used by some other AUC regulated utilities.

To address the issue of never having a large enough balance of accumulated depreciation attributable to pre-collected net salvage, Lethbridge proposed to pool the pre-collection of all net salvage provisions for all asset accounts into an “asset retirement obligation” account. This single pooled account would then be charged (or drawn down against) with all subsequent salvage costs (costs of removal) as they are incurred. The AUC addressed issues with Direction 11 later in its decision.

Direction 12 from Decision 21213-D01-2016 required that Lethbridge address issues with its depreciation study accounts and provide additional information on depreciation parameters. The AUC found that Direction 12, in its entirety, remains outstanding until Lethbridge’s next depreciation study.

Forecasting Methodology and Key Assumptions

Operation and Maintenance Expenses

The AUC approved the 2018-2020 Operation and maintenance (“O&M”) expenditures, subject to any further determinations made elsewhere in the decision that affected O&M expenses.

Inflation Factors

In its application, Lethbridge used actual 2018 expenses and then reverted to trends for 2019-2020.

The AUC considered that the escalation factor increases for unions of 1.75 percent were reasonable and consistent with the escalation rates of other municipalities and utilities. Further, the AUC considered that an escalation rate of 1.75 percent for administration employees for 2020, consistent with the Canadian Union of Public Employees, also appeared to be reasonable.

Given the lack of evidence filed by Lethbridge concerning the economic climate in the Lethbridge area, contactor quotes, or other supporting evidence, the AUC was not persuaded that Lethbridge’s contractor escalator and “other” escalator should be higher than the 1.75 percent approved for unions and administration. Lethbridge was directed to incorporate a contractor and “other” escalation of 1.75 percent for the 2020 test year in its compliance filing to this decision.

Municipal Corporate Expenses

In the application, Lethbridge identified that it receives services from other municipal departments, and those transactions are considered to be analogous to “affiliate” transactions. Specifically, Lethbridge stated that these affiliate expenses are costs that are charged to the electric utility department from other municipal departments. The prices for these services are based on allocations that are subject to a public and transparent municipal budget approval process.

As the total municipal corporate expenses represented roughly 4.6 percent of Lethbridge’s total gross revenue requirement, and in an effort to reduce regulatory burden, the AUC noted that it was willing to approve the O&M affiliate charges amounts for each of the 2018, 2019, and 2020 test years, respectively.

However, the AUC also agreed with the CCA that Lethbridge should better trace and track municipal corporate expenses to its transmission function, as well as have a better understanding of how allocation factors are determined or approved by City Council. The AUC directed Lethbridge to provide a general discussion of this process, and provide support for any changes to its allocation methodology and associated factors, at the time of its next GTA.

Depreciation Expense

The AUC observed several technical issues with Lethbridge’s current depreciation practices that require resolution.

Lethbridge Deviations from Approved Depreciation Parameters and Associated Rates

The AUC noted that Lethbridge’s statement that it was using depreciation rates that are not consistent with the “composite rate recommended by the depreciation study” or that Lethbridge was “at times [deviating] from the depreciation study parameters to avoid over-forecasting accumulated depreciation” was an issue in this proceeding.

For forecasting purposes, the AUC noted that there is no reason for Lethbridge to deviate, under any circumstance, from the use of approved depreciation parameters or rates.

The AUC directed that in all future GTAs, Lethbridge is to use AUC-approved depreciation parameters and associated rates to determine forecast depreciation expense.

Allocation of General Plant Accounts

The method by which Lethbridge allocates general plant assets to the transmission function was of particular concern to the AUC.

The AUC observed that Lethbridge’s current practice is to re-allocate in the first test year the total City (distribution and transmission) amount of actual general plant assets and the total City amount of actual accumulated depreciation related to those assets based on revised test year allocation factors.

The AUC considered that for forecasting purposes, current additions to (transmission) general plant assets should be informed by the revised test year allocation factors. The current allocated portion, combined with prior year actual (transmission) general plant closing balances, is what is subject to transmission depreciation rates for the purposes of determining depreciation expense for Lethbridge’s (transmission) general plant assets.

Lethbridge Practices Related to the Retirement of Utility Assets and the Proposed “Asset Retirement Obligation” Account

The AUC noted that there are two considerations with respect to the retirement of an asset from utility service: the retirement of the original historical cost (service life) and the subsequent recording of any net salvage incurred (net salvage) in the retirement of the assets.

In this proceeding, it was established that Lethbridge’s accounting practice in transacting an asset retirement is to remove the original historical cost from the asset account, and the actual depreciation expense attributed to the asset from the corresponding accumulated depreciation account. The remaining net book value is recorded as a loss.

Where gross salvage amounts received are in excess of salvaging costs, Lethbridge records a gain in its accounting records.

The AUC observed that Lethbridge’s asset retirement transactions, as described above, are contrary to group depreciation practices for both the retirement of the asset and any subsequent recording of net salvage.

With respect to service life, group depreciation practice is to remove the original historical cost of the retired asset from both the asset account and the corresponding accumulated depreciation account – thereby leaving any remaining net book value to be recovered from ratepayers under the assumption of an ordinary retirement event.

With respect to net salvage, notwithstanding Lethbridge’s proposal to implement a single pooled “asset retirement obligation” account, the practice of recording a gain or a loss under the assumption of an ordinary retirement event is likewise contrary to group depreciation practices. Group depreciation practice is to record both salvage costs and gross salvage amounts received against the pre-collected net salvage amount in the accumulated depreciation account – there should be no gain or loss realized by Lethbridge for an ordinary retirement event.

The AUC directed Lethbridge to implement group depreciation practices for its capital and depreciation related accounting transactions and to determine forecast depreciation expense in all future GTAs.

The AUC noted that the issues noted in this section require resolution prior to the AUC approving Lethbridge’s proposed “asset retirement obligation” account. For this reason, Lethbridge’s proposed “asset retirement obligation” account was denied.

Next Steps

Having regard to issues in this proceeding, following Lethbridge’s compliance filing to this decision, the AUC will establish a framework for the purpose of advancing Lethbridge’s understanding of its regulatory reporting requirements. The AUC will also examine whether there may be simplified reporting requirements or methodologies to better accommodate Lethbridge’s unique circumstances as a TFO. Lethbridge was also directed to arrange for a technical workshop with intervening parties and AUC staff, within three-to-six months before the anticipated filing of its next GTA.

Capital Structure, Return on Equity and Cost of Debt

The AUC was satisfied that for 2018-2020, Lethbridge had used the deemed capital structure of 37 percent equity and 63 percent debt, and a return on equity of 8.5 percent, consistent with the AUC’s direction in Decision 22570-D01-2018.

Further, the AUC was satisfied that Lethbridge followed the same approach approved by the AUC in Decision 3599-D01-2015 by using the rates recorded by the Alberta Capital Finance Authority of 3.66 percent, 3.48 percent and 3.36 percent for its annual 2018-2020 forecast cost of debt.

Reconciliation and Maintenance of Deferral and Reserve Accounts

Lethbridge was directed to refund a direct assigned deferral account surplus amount of $95,000 related to its 2018 tariff and to recover the forecast hearing cost reserve deficit in equal amounts in 2018, 2019, and 2020. Lethbridge was directed to show the impact of this direction on its tariff in a compliance filing.

Transmission Tariff

Lethbridge was directed to incorporate the findings and directions in this decision in a compliance filing and to reflect the impact of doing so in a revised monthly tariff, including any required true-up.

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