R&V – DFO Contributions – ISO Tariff
In this decision, the Alberta Utilities Commission (“AUC”) review panel (“Review Panel”) denied the applications from ATCO Electric Ltd. (“AE”), ENMAX Power Corporation (“ENMAX”) and FortisAlberta Inc. (“FortisAB”) for review and variance of Decision 26061-D01-2021 regarding the AUC’s examination of distribution facility owner (“DFO”) customer contribution payments under the Independent System Operator (“ISO”) tariff.
The issues raised in Proceeding 26061 stem from the AUC’s decision regarding the Alberta Electric System Operator’s (“AESO”) 2018 ISO Tariff (the “2018 Tariff Decision”). In the 2018 Tariff Decision, the AUC approved a proposal from AltaLink Management Ltd. (“AML”) to change how the AESO’s customer contribution policy is accounted for between a DFO and a transmission facility owner (“TFO”).
Because of this approval, the balance of unamortized AESO customer contributions in FortisAB’s rate base effective December 31, 2017, was to be sold to AML at net book value. After January 1, 2018, all AESO customer contributions would be capitalized by AML, not FortisAB.
In Decision 24932-D01-2020, the AUC rescinded these findings and the associated approval. The AUC also scheduled a proceeding which would examine: (i) the legal basis of the existing AESO customer contribution policy as it pertains to all TFOs and DFOs; (ii) whether there is a need for a new policy, including consideration of AML’s customer contribution proposal; and (iii) if approved, set the prospective date on which any new policy would commence. The proceeding scheduled in Decision 24932-D01-2020 was commenced as Proceeding 26061. The review applicants sought to review and vary the decision issued in Proceeding 26061.
The Commission’s authority to review its own decisions is discretionary and is found in Section 10 of the Alberta Utilities Commission Act. Rule 016 sets out the process for considering an application for review. The Commission considered the applications under the version of Rule 016 that was applicable when the review applicants filed their applications on June 14, 2021. This review process has two stages. In the first stage, a review panel decides if there are grounds to review the original decision (the preliminary question). If the review panel decides to review the decision, it moves to the second stage where it decides whether to confirm, vary, or rescind the original decision (the variance question). In this decision, the review panel decided the preliminary question.
Grounds for Review
AE submitted that the hearing panel rendered decisions that are:
inconsistent with the legislative requirements of section 122 of the Electric Utilities Act (“EUA”);
inconsistent with the judicially recognized regulatory compact that details the rights and obligations of both regulated utilities and their customers; and
inconsistent with AE’s rights, as an applicant, the procedural fairness and due process, in knowing the case it must meet.
ENMAX submitted that by prohibiting electric utilities from earning a fair return on AESO customer contributions or the related transmission facilities, the hearing panel erred in:
exceeding the limits of the AUC’s jurisdiction, thereby failing in its statutory obligation to provide the utilities with a reasonable opportunity to earn a fair return;
failing to adequately identify or consider the consequences of changing the regulatory accounting treatment of DFO customer contributions, asserting an error in law; and
breaching its duty of procedural fairness by deciding that neither DFOs nor TFOs will be permitted to earn a return on transmission facilities (or the related customer contributions) that require a customer contribution under the AESO tariff without identifying that as an issue in its notice of application and without giving parties a reasonable opportunity to be heard on that issue.
FortisAB submitted that the hearing panel had erred by making factual findings without sufficient evidence and making factual determinations that are contrary to Section 122 of the EUA. FortisAB submitted that the AUC had made this error in its determination to remove the return on equity (“ROE”) component earned on any AESO customer contribution payments paid by DFOs.
Review Panel Findings
Treatment of AESO Customer Contributions
(a) Section 122 of the EUA and the Opportunity to Earn a Fair Return
The applicants submitted that the hearing panel had made an error in fact, law or jurisdiction as its directions prohibited DFOs from having the opportunity to earn a fair return on AESO customer contributions, contrary to Section 122 of the EUA.
The AUC noted that in both the original proceeding and Proceeding 26061, the AESO referenced the AUC’s ratemaking discretion. It is within the AUC’s authority to determine if a DFO or TFO should earn a rate of return on customer contributions that are paid toward the cost of transmission connection facilities.
Whether AESO customer contributions are a cost and expense associated with a capital investment as described in subsection 122(1)(a), the equity portion of which, in accordance with subsection 122(1)(a)(iv), would attract a fair return, or whether AESO customer contributions are a cost, an expense or an amount that a utility owner is required to pay under other subsections of section 122, is a decision to be made by the AUC applying the law to determine how those contributions should be categorized. The hearing panel expressly did so, provided its reasoning therefor, and concluded that AESO customer contributions are properly an other (non-capital) cost or expense under subsections 122(1)(b) or (h) or an “amount that the owner is required to pay” under subsection 122(1)(c). Because they are not capital investments the hearing panel determined that it was “necessary to (i) remove the profit element (i.e., return-on equity-component) earned on any AESO customer contribution payments DFOs make…”.
The hearing panel therefore found that DFOs must not earn a return on the costs incurred for AESO customer contributions. This would avoid the distorted or muted price signals that arise when DFOs can earn a fair return because this converted what was intended to be a price signal, into a revenue signal to DFOs. The review panel determined that these conclusions are consistent with the hearing panel’s reliance on subsections 122(1)(b), (c) and (h) of the EUA and with its determinations that the AESO customer contributions are properly recoverable in a tariff, but do not provide the owner of the electric utility an opportunity to recover a return on (in addition to the recovery of) these amounts.
AE, ENMAX and FortisAB, as the review applicants, did not demonstrate that the hearing panel exercised its authority in a manner inconsistent with its statutory authority in deciding if the AESO customer contributions should earn a return. Accordingly, the requests to review the hearing panel’s direction prohibiting a utility owner from an opportunity to earn a fair return on AESO customer contributions are denied.
(b) The Regulatory Compact
AE argued that the hearing panel’s finding that neither a DFO nor a TFO is entitled to a return on AESO customer contributions does not respect the regulatory compact. It was submitted that this constitutes an error of law. FortisAB further argued that the approach adopted by the hearing panel to purportedly correct the price signals directly conflicts with the regulatory compact. The hearing panel had found that the correction would not provide an effective incentive to end-use customers to choose the most economical connection solution.
The review panel found that the hearing panel’s findings in the original decision demonstrate that it was aware of the requirement to ensure that a utility is provided with a reasonable opportunity to recover a fair return on the equity portion of capital investments. It noted that the hearing panel underlined that it was removing the ROE component previously earned by DFOs on AESO customer contributions. This would eliminate the incentive that the hearing panel found could exist for a pure-play DFO to prefer a transmission solution over a distribution solution and for a DFO to increase the amount of AESO customer contributions to grow the rate base. The hearing panel stated that it removed the proponent to protect the public interest.
The review panel found that consistent with the regulatory compact, and the hearing panel made its decision while being aware in consideration of shareholder interests, the requirement to ensure that utilities are given a reasonable opportunity to earn an ROE of shareholders, and the interest of ratepayers. The hearing panel’s decision that AESO customer contributions were to be treated as an expense was within the panel’s discretion and did not constitute a reviewable error of law. Accordingly, the requests to review the original decision on the basis that the hearing panel erred in law in deciding inconsistent with the regulatory compact are denied.
AE and ENMAX stated that the hearing panel had exceeded its jurisdiction. In the original decision, the hearing panel decided that the DFO tariff recovery mechanism applicable to AESO customer contributions in effect at the time did not provide effective price signals to provide end-use customers with an incentive to choose the most economical connections solution. It was also concluded that the intended price signal is likely absent because the DFO can earn a return on AESO customer contributions payments.
The AUC was not persuaded that the original decision is inconsistent with the doctrine of implied authority, as argued by ENMAX. It found that the objectives pursued in the original decision are consistent with the AUC’s rate-setting mandate to safeguard the public interest in the nature and quality of the service to the widest proportions.
The AUC noted that the future accounting treatment of AESO customer contributions is simultaneously being considered in Proceeding 26521. The AUC noted that accounting treatment for AESO customer contributions for the DFOs was not known at the time of this decision, as their treatment was still being considered in Proceeding 26521.
The hearing panel supported the principles it had previously found to be the foundation for a customer contribution policy, most importantly establishing an effective price signal for the siting of connection facilities. The review panel found that the hearing panel had correctly exercised its discretion in determining if an incentive is not in the public interest. The hearing panel did not make any error in its conclusion on how to properly give effect to the principle of sending effective price signals.
The AUC found that no error of jurisdiction was shown to be apparent on the face of the decision or otherwise exists on a balance of probabilities warranting a review, variance or rescission of the decision.
Sufficiency of Evidence
ENMAX and FortisAB argued that the hearing panel’s finding that the DFO tariff recovery mechanism applicable to AESO customer contributions, in effect at the time of the original decision, does not provide effective price signals encouraging the choice of the most economical connection solution by end-use customers was not supported by enough evidence.
The review panel determined that wording chosen by the hearing panel in the previous decision demonstrated that its considerations were general in nature and related to the AESO customer contribution scheme as it pertains to DFOs in general. The hearing panel did not make any findings specifically related to FortisAB. The review panel determined that the hearing panel was aware of previous decisions, including those raised by FortisAB, in its argument regarding a lack of evidence. The hearing panel made its decision notwithstanding and without varying findings of the 2018 AESO tariff decision.
The AUC found that FortisAB and ENMAX did not demonstrate an error of fact, law or jurisdiction that could lead the AUC to materially vary or rescind the decision.
The applicants questioned whether, through the process established in the proceeding of the original decision, the applicants were provided with reasonable notice of the issues to be addressed by the hearing panel and raised by the interveners and with an opportunity to address these issues.
The review panel found that, based on the comprehensive notice issued for the original proceeding, registered parties, including AE and ENMAX, knew, or reasonably should have known, the scope of the original proceeding.
The hearing panel was explicitly considering the legal basis of the AESO customer contribution policy as it pertains to all TFOs and DFOs and whether a new AESO customer contribution policy was needed. The hearing panel was permitted to render a decision on not only the identified issues but also other issues which arose from the submissions received, was free to accept or reject evidence presented by the parties, and was entitled to use its expertise to arrive at different conclusions than the parties.
The AUC found that the review applicants did not demonstrate an error on the grounds of procedural fairness to the extent that it could lead the AUC to materially vary or rescind the original decision. The review applicants’ requests for review on the grounds of a lack of procedural fairness was therefore denied.