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ATCO Electric Ltd. 2020-2022 Transmission General Tariff Application, AUC Decision 24964-D02-2021

Link to Decision Summarized

Rates – GTA


This decision set out the determinations of the AUC regarding the transmission general tariff application (application or “GTA”) filed by ATCO Electric Ltd. (“AE”). Not all forecast revenue requirements for the 2020-2022 test period were determined to be reasonable.

Introduction and Background

The breakdown of the 2020-2022 revenue requirements and other forecast costs reflected AE’s September 28, 2020, application update for material impacts, including impacts of the COVID-19 pandemic and economic downturn. The revenue requirements showed an annual increase of 4.7 per cent, to 724.2 million, in 2020, a decrease of 0.7 per cent, to 718.8 million in 2021, and an increase of 1.9 per cent, to $732.2 million in 2022. AE requested approval of additional opening rate base additions of approximately $0.7 million above the amounts forecast in its 2018-2019 GTA.

Common Group Full-Time Equivalent Allocators

The AUC’s findings on AE’s shared services full-time equivalents (“FTEs”) are set out in Decision 24964-D01-2021. AE requested approval to transition 18 functions to the common group model and proposed a method of allocating FTEs and costs between AE Transmission and AE Distribution for each common group function.

For the allocators proposed for the field health and safety and the service operations director functions, the AUC was satisfied that they were consistent with the common group allocators previously approved in Decision 22742-D01-2019. The AUC approved the proposed allocation methodologies.

With regard to FTEs, the AUC found that the submitted evidence did not support the approval of the requested 32.6 “Differences between forecast and actual” FTE additions for 2021 and 2022. AE was direct to use its internal 2019 actual FTEs as the approved base level FTE complement for all test years. Notwithstanding these findings, the AUC approved AE’s incremental additions of 3.7 capital and 6.1 operation and maintenance (“O&M”) FTEs in 2020, 5.0 capital and 3.4 O&M FTEs in 2021, and 1.5 capital FTEs in 2022.

With regard to vacancy rates, the AUC found that a vacancy rate of zero per cent is reasonable and accordingly directed AE to apply a vacancy rate of zero per cent to its approved FTE complement.

On labor reporting, the AUC found that AE’s proposed headcount method is not a reasonable alternative to the established FTE allocation method for labor reporting purposes. AE was directed to provide its labor requirements and labor reports via the established and long-standing FTE method.

The applied-for severance costs and severance cost forecast were approved as filed.

For inflation for in-scope labor, AE was directed to incorporate the approved 1.90 per cent for 2020 and 1.75 per cent for 2021. AE was directed to apply a 1.8 per cent in-scope labor inflation rate for 2022.

The AUC approved out-of-scope labor inflation rates of zero per cent for 2020, 0.8 per cent for 2021, and 1.8 per cent for 2022. AE was directed to use “other” and contractor inflation rates of 1.2 per cent for 2020, 0.8 per cent for 2021, and 1.8 per cent for 2022.

Operation and Maintenance Costs

The AUC approved telecommunication service agreements as filed for the test years. The AUC also approved forecast costs for compliance activities for Alberta Reliability Standards, as well as cybersecurity and critical infrastructure costs. Taxes other than income were approved as filed.

The AUC approved a disaggregated method of administering the variable pay program (“VPP”) effective January 1, 2020. The AUC found that this facilitated that the closing balance at the end of each new test period year equals the applied-for VPP and that VPP accounts can be maintained as close to zero as possible where actual and approved information was not yet finalized.

AE’s Mid-Term Incentive Program (“MTIP”) raised concerns regarding the need for additional incentive programs for executive positions, considering the existing pay level of those positions. AE was directed to remove its forecast MTIP costs for the test period in its compliance filing.

AE had forecast decreasing costs for vegetation management because of changing its vegetation management method. The AUC found that the unpredictable nature of and forecast risk associated with the Vegetation Management Program still justified maintaining this reserve account.

Depreciation

Examination of Average Service Lives

AE requested approval of a decreased service life for substation equipment. The AUC rejected this request and directed AE to use its currently approved 53-R3 for USA 353.00 – Substation Equipment in its compliance filing.

The AUC approved the implementation of a 50-R3 for the USA 353.02 – HVDC Substation account in its compliance filing.

AE proposed to change the life-curve parameters for the communications account from the currently approved 25-R2 to 25-R3. The AUC found this to be reasonable and approved the proposed life-curve.

AE proposed to decrease the life-curve parameters for USA 354.00 account from the currently approved 65-R4 to 60-R3. The decrease proposed by AE was approved.

For USA 354.01 – Towers – ISO Rule 502.2 Compliant, the AUC found an increase of the service life from 65 to 67 years to be reasonable. Although AE requested a curve parameter of R2.5, the AUC did not find sufficient reasons to treat this account differently than account USA 354.00, for which a curve parameter of R3 had been requested. AE was directed to implement a life-curve of 67-R3 for this account in its compliance filing.

Regarding account USA 355.00 – Poles, AE was directed to maintain the life-curve of 60-R2 for this account.

Examination of Net Salvage Percentages

AE proposed to increase the net salvage percentage for USA 353.00 – Transmission Substation from the currently approved -15 per cent, to -20 per cent. The AUC approved the applied for increase.

The AUC found it was reasonable to mirror the net salvage percentage for USA 353.00 (AC substations). The AUC approved a net salvage of -20 per cent for USA 353.00 – Transmission Substation.

AE request to increase the negative net salvage percentage for USA 354.00 – Towers was denied. It also denied a request to increase the negative net salvage percentage for USA 354.01 – ISO Rule 502.2 compliant towers.

For USA 355-Poles, the AUC found that the approved -90 per cent net salvage remained reasonable.

Affiliate Transactions and Revenue Offsets

Revenue offsets that form part of a revenue requirement include amounts related to facility charges, affiliate revenues, services to outside parties, and other revenue. The AUC approved the forecast revenue offset as filed.

Opening Rate Base and Capital Projects

AE’s Transmission Capital Maintenance (“TCM”), direct assigned capital, and isolated generation projects did not raise any issues and were found to reflect applicable directions issued by the AUC. The AUC approved the 2020 opening rate base amounts for these categories. After briefly examining issues raised by interveners, AE’s General Property and Equipment 2020 opening rate base was approved as filed.

Transmission Capital Maintenance Projects

AE’s TCM Program includes asset replacement and maintenance projects and is designed to manage transmission assets in accordance with life cycle asset strategies. The AUC approved the forecast costs for the capital projects apart from Wildfire Mitigation and Grid Resiliency, Isolated Generation Projects, and the ATCO 9L32/66 Line Move.

Regarding the proposed new Wildfire Mitigation and Grid Resiliency Project (“WMP”), aimed at addressing increasing wildfire-related risks observed in Alberta and in North America, issues were raised regarding the level of risk identified by AE. The AUC denied the WMP, finding that increased wildfire risks can be addressed within existing TCM programs and projects.

AE requested approval of capital expenditures for the maintenance and capacity needs of AE’s isolated generation assets in the amount of $12.6 million in 2020, $17.0 million in 2021, and $8.5 million in 2022.

The AUC reviewed the information with respect to AE’s isolated generation projects. With the exception of three projects discussed in the decision, the AUC was satisfied that the forecast costs for the isolated generation projects, as applied for by AE, were reasonable and approved them.

Regarding fuel costs associated with isolated generation projects, AE was directed to update its fuel cost forecast in the compliance filing.

AE requested the relocation of two transmission lines so that Canadian Natural Resources Limited could mine and develop its resources in a certain area. The AUC found that the benefits of the line relocation outweighed the relocation costs to ratepayers of $41.5 million and approved the allocation of these costs to the system.

General Plant and Equipment IT Projects Forecast Expenditures

The AUC approved the forecasted General Plant and Equipment IT capital project expenditures and additions.

Direct Assigned Capital Projects

AE forecast the capital expenditures for its direct assigned capital projects to be $95.9 million, $182.8 million, and $172.8 million in 2020, 2021, and 2022, respectively. No concerns were raised regarding the direct assigned forecast capital expenditures, except for forecast expenditures for the CETO Project. AE forecast capital expenditures for the CETO Project of $2.8 million in 2020, $49.3 million in 2021, and $57.7 million in 2022, for a total of $109.8 million in the test period.

The AUC observed that the CETO Project had experienced several delays. AE was directed to reduce its forecast expenditures for the 2020-2022 test period by 50 per cent of the applied for $109.8 million and to update the applicable schedules.

Project Identification

AE indicated that it would adopt a “written description of the categorized appropriation grouping” on documentation included in its GTAs, such as the application, GTA schedules, and business cases. The AUC found it necessary to maintain the ability to follow a capital project through all stages of its construction as presented in AE’s GTAs and Rule 005 filings. Because project stages often span more than one test period, there is a risk that project identification relying on a project name alone could result in confusion and categorization of costs to the wrong project. Accordingly, AE was directed to continue using the approved numbering and identification scheme and strategy for its capital projects.

Financing and Income Taxes

AE was directed to include a deemed common equity ratio and return on equity of 37 per cent and 8.5 per cent on a final basis, for the years 2021 and 2022, respectively, to reflect findings in decision 24110-D01-2020 and 26121-D01-2021, the 2021 as well as the 2022 Generic Cost of Capital proceeding. The AUC accepted AE’s forecast of federal and of provincial income taxes for 2020-2022. These forecasts had been derived using the future income tax method and flow-through method, respectively.

Provincial Corporate Income Tax

The AUC found the statutory rate deferral account true-up mechanism would result in an unnecessary regulatory process to true up to a provincial corporate income tax rate that is now known with certainty, at a cost to ratepayers. AE was directed to update its forecast income taxes to reflect the current provincial corporate income tax rate of eight per cent effective July 1, 2020, in its compliance filing.

Long-Term Debt Rates

As AE’s external financing requirements are obtained through CU Inc., the AUC found this to be the best available information in determining reasonable forecast 2022 long-term debt rates. Accordingly, AE was directed to use a 2022 long-term debt rate of 2.60 per cent in its compliance filing.

Preferred Shares – Deemed Redemption

AE stated that two of its three preferred share issues would be subject to rate resets during the 2020-2022 test period. It forecast its series four and V reset rates at 3.37 per cent (currently 2.24 per cent) and 5.00 per cent (currently 4.6 per cent), respectively.

The AUC did not approve AE’s forecast 2022 Series V preferred share reset rate of 5.00 per cent and directed AE to maintain the Series V preferred share rate of 4.60 per cent on a placeholder basis in its compliance filing.

Escalation Mechanism 2023 and 2024

AE requested approval of an I-X escalation mechanism. The mechanism would allow AE to choose, at its discretion and at some future date, whether to apply an inflation factor (I) and a productivity factor (X) to its approved 2022 revenue requirement, thereby setting its revenue requirement for the year 2023, or for the year 2023 and then subsequently 2024, without the need for a full cost of service application.

Despite possible efficiency benefits, the AUC denied the applied for escalation mechanism. The AUC determined that the mechanism creates an unreasonable risk to customers and none to AE. It did not accept the statement that both AE and customers could benefit if the escalation mechanism was used and would be no worse off if it remained unused.

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