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Revised Regulatory Accounting Treatment for Alberta Electric System Operator Customer Contributions, AUC Decision 26521-D01-2021

Link to Decision Summarized

Return – 2023 COS Rebasing Application

The Alberta Utilities Commission (“AUC”) determined that the revised accounting treatment for Alberta Electric System Operator (“AESO”) customer contributions will require each distribution facility owner (“DFO”) to expense the contributions in the year that they occur through use of the Y factor mechanism under performance-based regulation (“PBR”). This treatment will be applied during the 2023 cost-of-service (“COS”) rebasing and any following PBR term. The AUC further approved the establishment of a deferral account for AESO customer contributions if the amounts in a particular year are large enough to contribute to rate shock.

The AUC noted that it expects that carrying costs on the AESO customer contribution amounts included in the Y factor will be calculated using Rule 023: Rules Respecting Payment of Interest. If a longer-term deferral account is needed, the AUC would determine the carrying costs and amortization period on an individual basis based on the proposals from DFOs.

Background and Procedural Summary

This Proceeding 26521 was initiated following Decision 26061-D01-2021. In Decision 26061, the AUC found that the DFO tariff recovery mechanism applicable to AESO customer contributions in effect at the time did not provide a price signal that effectively incents end-use customers to choose the most economical connection solution. Accordingly, the AUC decided that DFOs would no longer be able to earn a return on AESO customer contribution payments and that the customer contributions are to be flowed through to the DFO customer requesting a new connection. The AUC directed DFOs to file proposals for revised regulatory accounting treatment for future customer contributions. This decision considers the intended revised regulatory accounting treatment.

Issues and AUC Findings

Types of AESO Contributions

Participating DFOs, specifically ATCO Electric Ltd. (“AE”), highlighted two contribution scenarios that must be considered when assessing if the current accounting policy meets the objective of the AUC’s directions in Decision 26061-D01-2021. First, there are customer to distribution to transmission contributions (“C to D to T contributions”) that can be assigned to a specific customer. Second, there are distribution to transmission contributions (“D to T contributions”) that cannot be assigned to a customer and are for system upgrades to serve multiple customers, required under the DFO’s obligation to serve.

Regarding the first scenario, AE noted that its accounting process complies with the AUC’s directions as an identifiable customer pays the contribution. The DFO does not include the contribution in its rate base. Accordingly, and as the DFO would not record any investment related to the upgrades on the transmission system, no adjustment to the accounting mechanism is needed. The AUC agreed with AE’s explanation and conclusion regarding the C to D to T contributions. It found that such a DFO is not earning a return in this scenario and that the mechanism complies with its directions.

Regarding the D to T contributions, AE explained that the accounting practice in place is appropriate because the request for a transmission facility is for a group of customers that cannot be identified. In this case, the utility must invest to fulfill its obligation to serve. In return, the utility is given the opportunity to earn a fair return on the investment. AE and ENMAX Power Corp. argued that the revised accounting treatment should not apply to these projects as they cannot be attributed to a specific individual or group of customers. If the revised treatment must apply to these contributions, the contributions should be flowed through to all distribution customers.

Regarding the D to T contributions, the AUC was concerned that because of the incentives created under the previous DFO tariff recovery mechanism applicable to AESO customer contributions, the contributions were generally not being flowed through to the customers that trigger the need for new connection assets, even where such customers could be identified. Instead, the AUC found that these contributions were being distributed across all DFO customers and treated as D to T contributions on which DFOs earned a return. The AUC therefore found that, for D to T contributions, the accounting treatment must change to ensure compliance with AUC directions.

Revised Regulatory Accounting Treatment

The DFOs preferred to treat the AESO customer contributions as an expense item in the year in which they occurred. Using the Y factor mechanism under PBR, the contributions could be flowed through to the customers. The DFOs proposed that the annual Y factor amount would be based on a forecast of the AESO customer contributions. This would be subject to true-up in a subsequent annual rate filing, with the application of carrying charges.

The AUC agreed with DFOs that expensing the AESO customer contributions in the year in which they occur is consistent with its directions from Decision 26061-D01-2021 to remove the equity component earned by the DFOs on the contributions. The AUC determined that a proposal from FortisAlberta Inc. (“FortisAB”) to achieve compliance by using the Y factor under PBR with an equivalent treatment applied during the 2023 COS rebasing and all subsequent PBR terms is reasonable and would support rate stability. The proposal to submit an annual forecast for the AESO contribution Y factor amounts subject to a true-up in a subsequent annual rate filing was approved.

The AUC found that it may be necessary to establish a deferral account that is amortized over a longer period in the event that expensing AESO customer contributions in the year they occur will cause rate shock. The AUC further found that the amortization period should be as short as possible and that the deferral account should only be used to reduce the impact of rate shock.

The AUC noted its expectation that DFOs will propose carrying costs calculated using Rule 023 on any deferral account balances.

The amortization period and any proposed carrying costs will be determined on a case-by-case basis that takes into account a DFO’s unique circumstances.

Implementation

Because of its findings from Decision 26061-D01-2021 and the decision to implement the revised DFO tariff recovery mechanism on a prospective basis as of April 23, 2021, the AUC directed each DFO to include in its 2023 COS rebasing application any forecast of AESO customer contributions for 2023 to be accounted for as expenses. This now needs to include any deferral account proposal as approved in this Decision 26521-D01-2021, including proposed carrying costs and amortization period if the AESO customer contributions are forecast to contribute to rate shock. The opening 2023 forecast rate base may not include any AESO customer contributions made after April 23, 2021, as they are treated as expense amounts as determined in this decision.

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