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Sage Water Services Corp. 2020-2023 General Rate Application, AUC Decision 24695-D01-2021

Link to Decision Summarized

Rates – GRA

In this decision, the Alberta Utilities Commission (“AUC”) considered the general rate application (“GRA”) filed by Sage Water Services Corp. (“Sage Water”), requesting the establishment of final water rates until March 31, 2023.

Sage Water applied for revenue requirements of $184,900 from November 19, 2020, to March 31, 2021; $462,000 from April 1, 2021, to March 31, 2022; and $473,900 from April 1, 2022, to March 31, 2023 (the “test periods”).

The AUC determined that downward adjustments of several applied-for amounts were necessary and approved lower revenue requirements for the test periods. The AUC approved revenue requirements of $156,735 for November 19, 2020, to March 31, 2021; $404,005 for April 1, 2021 to March 31, 2022; and $412,366 for April 1, 2022, to March 31, 2023.

The AUC ordered that Sage Water is to resume the use of a fixed monthly rate structure and allocated the revenue requirements to each customer group to establish final rates. To prevent rate shock, the AUC found It necessary, just and reasonable to use a gradualism approach when implementing the final rates.

Details of the Application

Sage Water operates a water utility which began servicing the Prince of Peace site in 2019. The Prince of Peace site comprises the senior care community (“the Senior Care Community”), the Prince of Peace School (“the School”) and 175 residential condominium units known as the Village (“the Village”). During the time of operation as a water utility, Sage Water has been charging the School, the Senior Care Community, and the Village a fixed monthly fee for water consumption and services. The AUC had approved interim rates of $57.04 for the Residential rate class, $24,200.00 for the Senior Care Community rate class, and $757.90 for the School rate class. These interim rates were approved and effective as of November 19, 2020.

Sage Water based its revenue requirement (“RR”) forecast on operating expenses and requested a reasonable return instead of a return on rate base. It indicated that it does not have a rate base. Its parent company obtained the water utility assets in a bankruptcy proceeding and the utility assets were not assigned a value by the receiver.

Discussion of Issues and Findings

Contentious Issues

Issues were raised regarding twelve operating expense categories and the expense amounts. The categories at issue are those regarding corporate management fees, office and administration cost-sharing, repair and maintenance, site maintenance, pump maintenance, insurance, security, consultants, professional fees, legal, reasonable return, and approved revenue requirements.

The AUC found that the costs requested by Sage Water regarding office and administration, repair and maintenance, legal fees, and security monitoring were calculated appropriately and approved as reasonable.

Regarding corporate management fees and site maintenance costs, concerns were raised regarding the reasonableness of the amounts. However, following a comparison with other water utilities, the AUC found that allocating 10 per cent of the corporate management fees to the water utility is reasonable.

The AUC was concerned with the detail of explanation and justification provided regarding costs related to insurance and professional fees. While Sage Water provided some explanation, the AUC noted that the level of detail did not justify the significant increase of 15 per cent requested regarding insurance. Sage Water provided evidence for the increase in professional fees and some detail regarding the actual expenses for the periods. It noted that $4,500 allocated for the Specific Procedures Report will likely not be required for the 2021-2023 period unless requested by the Village.

As a result, regarding insurance, the AUC approved an increase of two per cent each year to account for inflation. Regarding professional fees, the AUC removed the unjustified and not sufficiently supported costs from each of the test periods. The AUC approved forecast professional fees of $1,421 for the stub period; $3,900 for fiscal 2022; and $3,978 for fiscal 2023, which was derived by applying a two per cent inflation factor to the approved amount for the 2022 fiscal year.

The AUC also emphasized that whenever possible, costs need to be allocated only to those rate payers benefitting from the specific service. Regarding pump maintenance, the AUC was satisfied by the explanation that all rate classes benefit from this service. However, the AUC found that the quantum was not sufficiently supported and disallowed a portion of related costs.

Concerning costs related to consultants, the AUC found that scheduled assessments and consultations regarding Sage Water’s water system were scheduled to be completed in 2021. Accordingly, it disallowed the inclusion of consultant costs related to future assessments of the water system in rates for the fiscal years 2022 and 2023.

Reasonable Return

Sage Water explained that its parent company obtained the water utility in a bankruptcy proceeding where the utility assets were not assigned a value. As a result, a return on the rate base is not possible. It requested a reasonable return margin in its application as it has an obligation to provide water services.

Sage Water stated that the number of ratepayers is fixed and there is no opportunity to bring in additional customers. Given a fixed ratepayer base and revenues under $500,000, Sage Water considers its operational risk to be high as it has a reduced ability to recover unforeseen costs. Sage Water explained that it requested a 2.5 per cent return margin based on its review of AUC Decision 2941-D01-201570 for regulated electric utilities. Sage Water argued that “the decision outlines a reasonable rate of return at an after-tax margin in the range of 1.25% to 1.75% depending on the provider (for electrical services) with an allowable return margin of 1.5%”.

Sage Water’s request for a 2.5 per cent after-tax return on its approved costs was found to be reasonable and was approved. Regarding established ratemaking principles followed by the AUC, Sage Water would be entitled to a return based on the net book value of its assets. Sage Water has no discernible values for the capital assets that comprise the water operation. As a result, the AUC found that calculating a return component based on a percentage of costs was the next best alternative. The AUC added that this is consistent with the method used to determine the return for regulated rate option providers.

Rate Structure

Sage Water requested a change in its rate structure from a fixed fee to a two-step tiered structure, including a fixed monthly fee and a fee based on consumption.

The AUC found the proposed tiered rate structure mechanism contemplated by Sage Water to be inaccurate because averaging the quarterly meter reads into monthly averages may not reflect true monthly consumption. It could result in customers not being charged the second tier usage rates even though they may have used more than the first tier volumes in a particular month. Moreover, implementation of a rate based, in part, on water consumption, cannot be reasonably effected without a fully functional meter at the School.

In view of the anticipated transfer of the water utility to Rocky View County, the AUC found that by maintaining the current interim rate structure to develop final rates, the complexity of truing up interim rates to final rates under the tiered rate structure and the need for an immediate water meter replacement at the school would be avoided.

Final Rate Determination

Rates are designed based on approved revenue requirements. There is a minimum revenue requirement that a utility requires to operate and maintain its financial viability. The Sage Water utility business has been operating with a static customer base on fixed rates that were not designed with a proper allocation methodology. The AUC remarked that when the RR of a utility and the rates charged to recover the RR are not appropriately linked, aligning the two can be complicated.

Determining final rates for the three customer groups for each of the test periods starts with the approved forecast amounts for each of the operating expense categories and the reasonable return for each of the three test periods. The next step is to allocate the approved forecast amounts to each of the three customer groups. The allocation of approved forecast amounts to the three customer groups is intended to reflect the principle of cost causation. In the absence of a detailed cost-of-service study, which entails time and cost that is not likely to be warranted given the size of this water utility, the Commission considers that basing the allocation on the available water usage data is the fairest way to allocate the costs. While that data is imperfect given the absence of a fully functional meter at the School, it is the best evidence available to the Commission. It is also representative of the costs incurred. Once all costs are allocated to each of the three customer groups, the resulting monthly fixed rates for each of the three customer groups are calculated by dividing the total costs allocated to the customer group by the number of months in the test period and then by the number of customers. For each test period, the Commission counted the Senior Care Community as one customer, the school as one customer, and the Village as 175 customers.

The AUC compared the calculated rates to the existing interim rates paid by the customers. The result was an increase of at least 60 per cent for the School and the Village rate groups. The Commission typically considers any rate increase for a customer group that exceeds 10 per cent to constitute rate shock for the customers in that group. Typically, the Commission mitigates rate shock by “gradualism,” which is the practice of phasing in rate increases over a longer period of time to allow customers to eventually pay their fair share of the allocated costs. Because this significantly exceeds the rate shock threshold considered by the AUC, the AUC found that rate shock mitigation by “gradualism” was reasonable. Final rates for the stub period for the School and the Village would be set by increasing the current interim rates by 10 per cent. This will be followed by a further 10 per cent increase for the 2022 fiscal year and another 10 per cent increase for the 2023 fiscal year. The resulting rates for the Senior Care Community will be set to recover the remaining amounts of the approved revenue requirements for each of the test periods, after accounting for the revenues to be collected through the final rates for the School and the Village. True-up of Interim Rates to Final Rates.

The AUC noted that interim rates are approved to function as placeholders until final rates are approved. Interim rate orders are used by the AUC to prevent rate shock and to ensure the financial integrity of a utility while final rates are being established. Sage Water’s final rates are higher than interim rates for the School and the Village and lower than the interim rates for the Senior Care Community. This means that the School and the Village are required to pay the difference to Sage Water through a rate rider, and the Senior Care Community is entitled to be reimbursed through a rate rider.

Sage Water’s total revenue requirement, as adjusted, for the 2020-2023 period was approved and the approved bill amounts set out in Table 9 of the decision was approved on a final basis.

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