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ATCO Pipelines 2021-2023 General Rate Application, AUC Decision 25663-D01-2021

Link to Decision Summarized

Rates – GRA


This decision provides the AUC’s determinations on the general rate application (“GRA”) filed by ATCO Pipelines (“ATCO Pipelines”) for the 2021-2023 test years.

Rate Base

The following table set out ATCO’s historical and forecast rate base:


Table 3.PNG

Capital Expenditures

Urban Line Replacement and Pembina-Keephills Transmission Line Project

The AUC approved ATCO Pipelines’ forecast capital expenditures for the Urban Pipeline Replacement (“UPR”) program in the 2021-2023 test period, as filed.

In earlier decisions, the AUC had denied UPR program assets that were proposed to be transferred from ATCO Pipelines to ATCO Gas for capital tracker recovery in 2017. ATCO requested to reflect the transfer of these assets back to it in the compliance filing to this decision, where assets will be retired in the normal course of business. The AUC found insufficient information to demonstrate that ATCO has adjusted for the transfer or retirement of its UPR assets in its closing 2020 rate base. ATCO Pipelines was directed to file updated schedules showing the treatment of the asset transfers and retirements from its rate base, the corresponding associated revenue requirement impacts, and the removal of the asset transfers or retirements from its closing 2020 rate base in the compliance filing to this decision. ATCO Pipelines was also directed to provide a detailed list of any future asset transfers of this nature in future proceedings.

The Pembina-Keephills Transmission Pipeline project had been approved by the AUC in Decision 23799-D01-2019 and was to be put into service in 2020. The capital expenditures for this project were approved as filed.

General Growth Capital Expenditures Forecast

ATCO Pipelines forecast general growth capital expenditures, which included the Stoney Transmission and Calgary Stoney and Nose Creek Gates projects (collectively the “Stoney Project”). The AUC found that the Stoney Project does not meet ATCO Pipelines’ threshold of $15 million for use in the three-year rolling average. ATCO Pipelines was directed to revise its revenue requirement and capital expenditure forecasts in its compliance filing to this decision to reflect the removal of the Stoney Project from the three-year rolling average in the general growth category.

ATCO Pipelines’ Assets and the Integration Agreement

An Integration Agreement between ATCO Pipelines and NGTL was approved by the AUC in Decision 2010-228. This Integration Agreement specifies that ATCO Pipelines is to apply to the AUC for its revenue requirement, which, when approved, would flow through NGTL’s rates. An intervener sought to confirm that ATCO Pipelines is complying with the Integration Agreement and that all of its assets in rate base are “used and useful.”

The AUC accepted ATCO Pipelines’ explanation that it has not been necessary to remove any assets from the rate base in the last three years and that ATCO conducts its asset review independently of NGTL, except for contracts regarding service of certain assets.

In-Line Inspection Program

The AUC found that the updated forecast capital expenditures related to the In-Line Inspection (“ILI”) Program were not supported by the evidence submitted. The updated forecasts for inclusion in the improvement and replacement capital expenditures for the 2021 to 2023 test period were denied.

Weld Assessment and Repair Program

The AUC was concerned that increases in average excavation costs from $37,000 to $55,000 caused significantly increased capital expenditures: from $36,809,000 to $56,277,000 in weld inspection costs. ATCO Pipelines was directed to revise its 2021-2023 weld inspection forecast by calculating the average excavation costs per site using the actual data from projects completed from the initiation of the program in 2016 to the end of 2020 in its compliance filing. The AUC accepted ATCO Pipelines’ justification of the change in program costs for repairs from $28,979,000 to $15,783,000, being the result of fewer welds needing repair. The forecast capital expenditures for weld repairs were approved as filed.

Pipeline Facilities Security Program

ATCO Pipelines proposed to initiate a multi-year program to install security enhancements into its transmission system for 100 Level 2 sites deemed as needing “high security measures” over a five-year period concluding in 2025. The AUC found evidence in support of the capital expenditures for increased security measures at Level 2 sites to be insufficient and denied the Pipeline Facilities Security Program for the 2021-2023 test years.

Spruce Grove and Stony Plain Installation

The AUC was satisfied that ATCO Pipelines had sufficiently explained the need for this project and the expenditures to ensure pipeline integrity. The forecast costs of $11.464 million were approved as filed.

General Improvements and Replacements

General improvement and replacement capital expenditures were forecast using a three-year rolling average of actual data from 2017 to 2020. The AUC found that the use of a three-year rolling average of actual data to forecast general improvement and replacement costs is representative of ATCO Pipelines’ costs for these projects. The applied method to forecast general improvement and replacement capital expenditures costs were approved.

Construction Work in Progress

The AUC noted that construction work in progress (“CWIP”) schedules are provided in GTAs for electric utilities. It directed that ATCO Pipelines provide these schedules on a go-forward basis in each GRA.

Operating Costs

ATCO Pipelines filed for approval of its total operating costs of $73,527,000 in 2021, $76,066,000 in 2022 and $77,893,000 in 2020, representing approximately 23 per cent of ATCO Pipelines’ forecast total revenue requirements.

Forecasting Accuracy

Issues regarding forecasting accuracy were raised, suggesting that ATCO Pipelines had demonstrated upward bias in its forecasting approaches, resulting in excessive returns on equity (“ROEs”) and that operating costs were too high, exceeding the actual costs.

While a trend analysis had been rejected by the AUC in the past, it noted that in this case, the trend analysis showed a consistent pattern of conservative forecasting by ATCO Pipelines, with the result being that the accuracy of ATCO’ Pipelines forecast not having been reflective of its costs for previous periods. ATCO Pipelines was directed to, in the compliance filing to this decision, incorporate and provide an overall reduction to forecast operating costs of five per cent in each of 2021, 2022, and 2023.

Salary Escalators

The AUC found that a 1.6 per cent increase for in-scope employees, which is the bottom of the average escalator range from 2017 to 2021, is likely more representative of forecast salary escalators for the test period given the current economic conditions. ATCO Pipelines was directed to revise its out-of-scope employee salary escalator to 0.8 per cent, as the AUC determined this to be more reflective of the market and show the impacts to revenue requirements in its compliance filing.

Vacancy Rate

The AUC approved the forecast vacancy rate of 3.9 per cent for O&M and 3.3 per cent for capital for each of 2021, 2022, and 2023. ATCO Pipelines was directed to revise its forecast vacancy rates and show the impacts to revenue requirements in its compliance filing.

Pressure Vessel Inspection Compliance Program Costs

The request for an additional $828,000 in forecast cost to finalize the program in 2022 was denied, and ATCO Pipelines was directed to remove the corresponding forecast costs of $753,000 in 2021 and $75,000 in 2022 from its revenue requirements.

Pandemic Costs

The AUC directed that ATCO Pipelines established a deferral account to include a total of $2.3 million in forecast pandemic expenses over the test period.

Mid-Term Incentive Program

The AUC denied ATCO Pipelines’ 2021-2023 forecast mid-term incentive program costs of $339,000 for the test period.

IT Costs

The AUC found that ATCO Pipelines should develop a long-range plan for its IT spending and provide documentation that its IT spending, capital, and O&M are consistent with those of relevant comparators. ATCO Pipelines was directed to provide its long-term IT plan and detailed IT business cases in the next GRA.

Property Taxes

The AUC directed ATCO Pipelines to establish a deferral account for forecast property tax expenses over the test period to adjust for historical property tax forecasting inaccuracies. ATCO Pipelines was also directed to reduce its property tax forecast for the 2021-2023 test years by 10 per cent, which is approximately the midpoint of the range by which property taxes have been over-forecasted from 2015-2019.

Common Issues for Proceeding 25663 and Proceeding 24964

In the absence of convincing evidence supporting a change, the AUC found a continuation of the currently approved lease rate of $20 per square foot reasonable for each of 2021, 2022, and 2023 for ATCO Pipelines.

With regard to shared services, 14 functional groups were transitioned to the shared 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.

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 (subject to comments below) the government relations’ group efforts in providing support and guidance to ATCO Pipelines and ATCO Electric on strategic government initiatives and plans, and it considers innovation to be a legitimate activity for regulated utilities.

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 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. The results of such testing will be filed in the next GTA / GRA ATCO Electric and ATCO Pipelines.

The AUC determined that insufficient evidence was submitted to support the forecast shared services FTE increases throughout 2020-2023. Except for the innovation function, the AUC directed ATCO Electric and ATCO Pipelines, in their respective compliance filings, to use 2019 actual FTEs as the approved total pre-allocated shared services FTE complement for all GTA and GRA test years and to then allocate these total pre-allocated shared services FTE complements in accordance with the allocators approved above. The innovation function was created in 2020. Therefore, 2019 data is not available, and ATCO Electric and ATCO Pipelines were directed to use 2020 forecast FTEs as of the approved total pre-allocated FTE component for all GTA and GRA test years.

The AUC was concerned with the number of FTEs allocated to ATCO Electric and ATCO Pipelines for services provided by the government relations and sustainability groups, as the AUC found that the inclusion of these two regulated rates provides limited benefits to the utilities and their regulated customers. Accordingly, the AUC directed ATCO Electric and ATCO Pipelines, in their respective compliance filings, to further reduce the total pre-allocated pool of IGRS FTEs by four FTEs, resulting in 11 total pre-allocation FTEs for the IGRS function for each GTA and GRA test year.

Return on Rate Base

In Decision 24110-D01-2020, the AUC approved the return on equity (“ROE”) of 8.5 per cent and deemed an equity ratio of 37 per cent for 2021 on a final basis. ATCO Pipelines’ proposed placeholder treatment of ROE and its deemed equity ratio was reasonable, pending a determination of generic cost of capital matters in future proceedings.

Debt

ATCO Pipelines was directed to revise its 2021-2023 forecast debt rate to mirror CU Inc’s September 2020 debenture rate of 2.609 per cent.

Preferred Shares

The AUC found that ATCO Pipelines’ preferred share forecast for the 2021-2023 test years was reasonable, with the exception of ATCO Pipelines’ Series V dividend rate. ATCO Pipelines is directed to revise its Series V dividend rate to 4.6 per cent for the 2021-2023 test period.

Large Asset Purchases Deferral Account

The AUC was not persuaded that a deferral account was required for large asset purchases. In the previous ten years, there had been no large asset purchases that ATCO Pipelines was unable to forecast at the time prior to GRAs that met the proposed criteria for the large asset purchases deferral account. The only example of a project that supported the creation of a deferral account is the Pioneer Pipeline application considered in Proceeding 25937. ATCO Pipelines’ request for a large asset purchases deferral account was denied, and a zero-dollar placeholder was approved pending AUC determination of the facilities application related to the acquisition of the Pioneer Pipeline.

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