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ATCO Electric Ltd. 2020-2022 Transmission General Tariff Application, AUC Decision 24964-D01-2021

Link to Decision Summarized

Rates – General Tariff Application

This decision reflects the determinations of the AUC regarding head office rent and the shared services initiative in the 2020-2022 general tariff application (“GTA”) filed by ATCO Electric Ltd. (“AE”). In this decision, the AUC panel found that not all of the forecast revenue requirements related to head office rent and the shared services initiative are reasonable and has revised or denied these amounts. The findings regarding the remainder of AE’s forecast revenue requirements for the 2020-2022 test period are issued in Decision 24964-D02-2021.

In proceedings 25663 and 24964, similar issues were raised, and similar evidence was filed by ATCO Pipelines and AE concerning ATCO Park – head office rent and the shared services initiative. The submission of similar evidence on the shared services initiative was directed by the AUC in Decision 23793-D01-2019.

ATCO Park – Head Office Rent

Head office costs are related to functions such as corporate governance and financial and administrative services that cannot be directly charged to subsidiaries. The applied-for square footage, lease, and operating rates for ATCO Park to be included in head office rent costs allocated to ATCO Pipelines’ and AE’s revenue requirements for their respective test periods were set out in the AUC decision.

Lease and Operating Rates

In support of the applied-for lease rates, ATCO Pipelines and AE provided a report prepared by Altus Group in which it recommended lease rates of $29.00 to $31.00 per square foot in August 2017 and $28 to $30 per square foot at January 2020, on an “as is” basis, for ATCO Park. ATCO Pipelines submitted that the Altus Group report is still reflective of market conditions and noted that the AUC had found that the time for assessing the fair market value (“FMV”) of ATCO Park’s head office rent was August 1, 2017.

AE further argued that the correct determination of the FMV for the ATCO Park lease rate as at August 1, 2017, is important because it is the baseline for the escalation factor of $1 per square foot every third year that, in its view, the AUC approved in Decision 24805-D02-2020, the compliance filing to AE’s 2018-2019 GTA.

The AUC disagreed with AE’s description of the findings in Decision 24805-D02-2020 and the asserted significance of the FMV for the ATCO Park lease rate as at August 1, 2017. The AUC denied the application of the proposed rent calculator in that decision and noted that its comments in that decision do not fetter the assessment of the reasonableness of the ATCO Park lease rate costs in the forecast test years under consideration in the current proceeding.

Because of the lack of a formal lease or sublease for AE or ATCO Pipelines, the AUC considered that these utilities retain discretion to negotiate their rental rates. The AUC considered evidence of lease rates filed in proceedings 25663 and 24964 addressing the impact of COVID-19, the accompanying economic downturn on lease rates over the current test periods. The AUC did not find convincing evidence to support a change in previously approved lease rates of $20 per square foot. It, therefore, found it reasonable to continue this rate for each of 2020, 2021, and 2022 for AE.

For operating rates, the AUC approved a continuation of the previously approved $0.50 per square foot escalator per year. Accordingly, operating rates per square foot of $17 for 2020, $17.50 for 2021, and $18 for 2022 were approved for AE.

Square Footage

The AUC approved the head office square footage of 122,049 applied for in this proceeding. In consideration of regulatory efficiency and the public interest, the AUC will no longer examine head office square footage in every GTA and GRA when the impact on revenue requirement is potentially immaterial.

Shared Services Initiative

As part of the shared services initiative, ATCO Pipelines AE and several other ATCO group entities identified common shared services functions that provide standardized internal services for all of the ATCO group of entities on a cost-recovery basis. To allocate shared service costs between the various entities, allocation methods, including direct charging, using casual allocation factors, or using a general cost allocation formula, were proposed. In Decision 23793-D01-2019, the AUC approved ATCO Pipelines’ shared services costs as filed on an interim basis.

Shared Services Functions and Allocators

Fourteen functional groups were transitioned to the share services model. The innovation and Indigenous, government relations and sustainability (“IGRS”) groups were identified as discreet functional groups for the first time in proceedings 25663 and 24964. Utilities and Interveners disagreed on whether the innovation, government, and sustainability functions would provide value to the utilities and customers.

The AUC recognized the importance of the Indigenous relations component of the IGRS function, such as increasing focus and awareness, educational programs and training, and more. The AUC also recognized the government relations’ group efforts in providing support and guidance to ATCO Pipelines and AE on strategic government initiatives and plans, and it considers innovation to be a legitimate activity for regulated utilities.

The AUC was also satisfied that the allocator of the number of invoices proposed for the accounts payable; headcount, proposed for human resources; space square footage, proposed for facilities management; the number of vehicles, proposed for fleet services; and 50 per cent operating costs & 50 per cent net book value of IT assets, proposed for IT services, were appropriate. The AUC approved the proposed shared services allocators of these groups for the 2020-2022 GTA and 2021-2023 GRA periods.

The AUC found that the general cost allocator (“GCA”) method was the most appropriate allocation method for the supply chain, financial services (not including accounts payable), regulatory, project management, innovation, and IGRS functions. While the AUC approved the use of the GCA, it noted that the evidence presented by ATCO Pipelines and AE in support of the GCA had limitations.

Because of these limitations, the AUC determined that there was a need for further testing to confirm the reasonableness and accuracy of the GCA allocation methodology and to ensure the reasonableness of the associated GCA allocation methodology as between regulated and non-regulated entities. AE and ATCO Pipelines were directed to each conduct an analysis that examines direct charging (or some reasonable and defensible proxy of effort or time) for the supply chain and financial services (excluding accounts payable) functional groups and to produce a cost allocation for each ATCO group entity, for both functional groups (including each financial services subfunction). This information was to be filed in their next GTA and GRA, respectively, following the completion of the requested analysis.

Further, the AUC directed that AE use the 2019 actual variable in place of the 2018 actual variable as inputs into the shared services allocation formulas in its compliance filing to maintain consistency between proceedings 24964 and 25663. The shared services allocations were also to be adjusted accordingly.

The AUC also took issue with the clarification of the weighting between IT annual operating costs and IT asset net book value used in the IT services allocator. The AUC found that the evidence submitted by AE did not demonstrate that IT annual operating costs and IT asset net book value were weighted equally. In their respective compliance filings, AE and ATCO Pipelines were directed to recalculate the IT services allocator with net revenues, total assets, and total labor costs being weighted equally and to make the necessary adjustments to the IT services cost allocation.

The AUC was concerned with deferral accounts. AE and ATCO Pipelines were directed to, in their respective compliance filings, adjust their shared service cost allocations by including deferral account revenues in calculating net revenues for the GCA allocator.

In Proceeding 24964, AE stated that Canadian Utilities Limited sold Alberta PowerLine in 2019 and that Alberta PowerLine was consequently removed from the shared services allocation formulas to reflect this sale. The AUC directed AE and ATCO Pipelines to confirm that shared services employees are no longer providing services to Alberta PowerLine and that no direct or indirect services will be provided to Alberta PowerLine on the 2020-2022 GTA or the 2021-2023 GRA test period.

Shared Services Costs and FTEs

The AUC determined that insufficient evidence was submitted to support the forecast shared services FTE increases throughout 2020-2023. The AUC found it difficult to review the shared services forecasts provided by AE and ATCO Pipelines, given the frequent corporate reorganizations at ATCO Ltd., the inability of ATCO Pipelines, and AE to provide accurate information on historical shared services costs and FTEs, and the inconsistent FTE forecasts provided by AE. The AUC noted it could not rely on the forecasts provided by AE and ATCO Pipelines.

The AUC was concerned with the number of FTEs allocated to AE and ATCO Pipelines for services provided by the government relations and sustainability groups. The AUC found that the inclusion of these two regulated rates provides limited benefits to the utilities and their regulated customers. The AUC found it unclear how the extent of the applied-for increase in IGRS FTEs is required for ATCO Pipelines and AE to provide safe and reliable services to Alberta ratepayers.

AE and ATCO Pipelines were further directed to, in their compliance filings:

(a)     apply a zero per cent vacancy rate to its shared services FTEs, and to make all the necessary salary, benefit and escalation adjustments to reflect the AUC’s direction above on shared services FTEs;

(b)     not offset the impacts of the reduction to capital FTEs with an increase in contractor costs;

(c)      not adjust its capitalization policy with respect to FTEs; and

(d)     clearly identify how these various directions are complied with by showing each individual adjustment and the associated impact on shared services costs.

ATCO Pipelines had noted that the 2019 IT Asset NBV inadvertently included construction work in progress (“CWIP”) related to all intangible assets for all entities. It noted that the revenue requirement impact would be approximately $150,000 per year and will be updated in the compliance filing to the GRA Decision. The AUC directed ATCO Pipelines to make the corresponding revisions in its compliance filing. AE was directed to make the same revisions if the same error had been made in its 2020-2022 GTA.

AUC Order

The AUC ordered that ATCO Electric filed its 2020-2022 transmission general tariff application compliance filing to reflect the findings, conclusion, and directions of this decision on a date to be confirmed by the AUC in Decision 24964-D02-2021.

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