Review and Variance – Z Factor
In this decision, the AUC considered a review application filed by ATCO Electric Ltd. (“ATCO”) requesting a review and variance of specific findings in AUC Decision 21609-D01-2019: ATCO Electric Ltd., Z Factor Adjustment for the 2016 Regional Municipality of Wood Buffalo Wildfire (“Decision”). The Decision addressed an application from ATCO for approval of the recovery of $15 million through a Z factor rate adjustment to compensate it for the costs it incurred as a result of the 2016 Regional Municipality of Wood Buffalo (“RMWB”) wildfire and other northern Alberta wildfires in the ATCO Electric Z Factor Adjustment for the 2016 Wood Buffalo Fire proceeding. The review application sought a review and variance of those parts of the Decision denying (1) ATCO’s request to restate its 2016 Rule 005 filing and (2) Z factor treatment for lost revenue for sites that remained inactive after May 2, 2017. The AUC denied the review application.
The members of the AUC panel who authored the Decision will be referred to as the “Hearing Panel” and the members of the AUC panel considering the review application will be referred to as the “Review Panel.”
Background
In the Decision, the Hearing Panel made two findings that were the subject of the review application.
First, the Hearing Panel held that there was insufficient evidence to support ATCO’s contention that all normal business activities of supervisory and management employees were backfilled using overtime and contractors when supervisory and management employees were seconded to deal with the RMWB wildfire. For this reason, Z factor treatment was denied for the supervisory and management labour costs for the RMWB wildfire. Since the regular base labour costs of these employees seconded to deal with the RMWB wildfire were already covered in base rates, the restatement of the 2016 Rule 005 filing was not required.
Second, the Hearing Panel held that revenue lost as a result of the RMWB wildfire was eligible for inclusion in the Z factor adjustment. However, the AUC denied Z factor treatment for the lost revenue for sites that remained inactive after May 2, 2017, 12 months after the start of the mandatory evacuation period, on the basis that ATCO could disconnect service after 12 months where it was not receiving revenue for that service.
AUC’s Review Process
The AUC’s authority to review its own decisions is discretionary and is found in section 10 of the Alberta Utilities Commission Act. The review process has two stages. In the first stage, a review panel must decide whether there are grounds to review the original decision. This is sometimes referred to as the “preliminary question.” If the review panel decides that there are grounds to review the decision, it moves to the second stage of the review process where the AUC holds a hearing or other proceeding to decide whether to confirm, vary, or rescind the original decision.
Grounds for Review and Hearing Panel Findings
ATCO submitted that the Hearing Panel made an error of fact, law or jurisdiction. The arguments presented in ATCO Electric’s review application concerning the alleged errors were summarized as follows:
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Operations and Maintenance (“O&M”) Costs issue: The Hearing Panel erred in finding that it was unnecessary for ATCO Electric to restate its 2016 Rule 005 filing to include the O&M Costs in 2018 going-in rates for the second Performance Based Regulation (“PBR”) term. ATCO presented two arguments:
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The Hearing Panel’s failure to specify in which “base rates” the O&M Costs had already been covered; and
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The Hearing Panel’s failure to recognize that because ATCO’s 2016 Rule 005 filing booked the O&M Costs to a deferral account, these O&M Costs were excluded from ATCO’s 2018 going-in rates and base rates.
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Lost revenue issue: The Hearing Panel erred in denying Z factor treatment for lost revenue for sites that remained inactive after May 2, 2017. ATCO submitted that this constituted a reviewable error on the following three grounds:
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The Hearing Panel’s “incorrect, unreasonable, and impractical interpretation and application” of ATCO’s customer Terms & Conditions (“T&Cs”);
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The Hearing Panel did not adequately consider, or attribute appropriate weight to, the evidence on the record of the proceeding in respect of the lost revenue, in particular, the timelines within and the frequency at which customer sites that were destroyed by the RMWB wildfire were reconstructed and reactivated; and
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ATCO operates under a PBR price-cap framework where it does not have the ability to recover lost revenue from the RMWB wildfire other than by a Z factor until rates are re-based for the next PBR term, such that the utility experiences continued losses until the end of the current PBR term.
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Review Panel Findings
O&M Costs Issue
ATCO stated that the Hearing Panel failed to specify in which base rates the O&M Costs had already been covered. ATCO claimed that the Hearing Panel failed to recognize that its 2016 Rule 005 filing excluded these O&M Costs from its total O&M because they were booked to a deferral account. These costs were therefore excluded from ATCO’s 2018 going-in and base rates. Considering the denial of Z factor treatment of the O&M Costs, ATCO submitted that it should be permitted to restate its 2016 Rule 005 filing to include these costs in going-in rates for the 2018-2022 PBR term.
The Review Panel rejected ATCO’s arguments. It agreed with the Hearing Panel’s finding in the Decision that the onus was on ATCO to demonstrate its “contention that all normal business activities of such supervisors and managers in their home locations were backfilled using overtime and contractors.” The Review Panel found that ATCO did not meet its onus and, accordingly, the Hearing Panel’s determination that the 2016 Rule 005 restatement was not required was a reasonable outcome.
Lost Revenue Issue – Interpretation of the Terms and Conditions
ATCO submitted that the Hearing Panel’s interpretation of and expectations as to how ATCO should enforce Section 14.1 of the T&Cs (regarding the ability to permanently disconnect customers after 12 months) was neither reasonable nor appropriate. This is because Section 14.1 was intended to operate in the context of normal course business, with a case-by-case assessment being required before permanently disconnecting a service based on the likelihood that a customer will never come back online.
In the Review Panel’s judgement, it would be unreasonable for a utility to claim lost revenue for the entire remaining duration of a PBR term, which could be up to five years in a five-year PBR plan. The Review Panel found that the recovery of lost revenue related to the RMWB wildfire ought to be subject to a reasonable time limitation in the circumstances. After due consideration of the applicable T&Cs, and their underlying intent and manner of operation during periods of normal business activity, the Review Panel found that the 12-month limit imposed by the Hearing Panel was neither (1) inconsistent with the spirit and intent of the T&Cs, notwithstanding the lack of evidence of any disconnection request being made by a retailer, nor (2) unreasonable or inappropriate in the circumstances.
Lost Revenue Issue – Lack of Regard to Evidence on Reconnection Rates
ATCO submitted that the Hearing Panel committed an error in law by ignoring evidence related to reactivation rates. ATCO submitted that the record clearly showed that site reconnection rates accelerated over time up to the end of 2017. ATCO explained this was due to most reconstruction beginning six to 12 months after the fire, and the time it takes (six to 12 months) to reconstruct a site. ATCO noted that the reconnection rate increased from 13 sites per month between May and December 2016 to 88 sites per month between May and December 2017. On the basis of the accelerated reconnection rates, ATCO concluded that it was reasonable and accurate for it to expect continued site reactivations until the end of 2017 and beyond. ATCO submitted that to enforce rights under Section 14.1 to permanently disconnect services would have been inappropriate, unreasonable, and punitive to its customers attempting to recover from the fire.
The Review Panel disagreed with ATCO’s contention that the Hearing Panel ignored evidence concerning the reactivation rates. ATCO’s review application cited an information request by the AUC seeking information related to the number of sites that were not receiving electricity services on a monthly basis for the years 2016 and 2017, information that was ultimately included in a table in the Decision. The Review Panel considered that including the table showing reconnection rates in the Decision indicated that the Hearing Panel considered the information relevant to its determination relating to lost revenue.
Lost Revenue Issue: PBR Price-cap Framework
ATCO argued that under PBR, it did not have the ability to recover lost revenue other than by a Z factor until rates were re-based in 2018. ATCO asserted that under a PBR price-cap framework, it suffers continued losses until rebasing. ATCO explained that with a natural disaster, revenue is lost until the earlier of (1) the end of the PBR term (20 months for ATCO, up to 4 years in other circumstances) or (2) the time until destroyed sites are reactivated; and that if a utility is not permitted to recover these losses as a Z factor, then they could be at grave financial risk until the end of the PBR term.
The Review Panel noted that in a PBR framework, with the exception of specifically approved adjustments outside of the I-X mechanism, a utility’s revenues are not linked to its costs during the PBR term. Under the price-cap plan, ATCO is expected to bear the risk of a change in the number of customers or in energy volumes transported through its system. Therefore, the Review Panel considered that any losses or gains experienced by ATCO during a PBR term related to the volume of energy transported through its system, or number of customers, is expected under a PBR price-cap framework.
The Review Panel found that the Hearing Panel’s decision to limit the lost revenue to a period of 12 months following the RMWB wildfire was a determination that was not unreasonable, either on its face or on a balance of probabilities. Accordingly, ATCO’s request for a review on this ground was denied.
The application for review was dismissed.
