Review and Variation – Compliance Filing Requirements – Admissible Evidence
In this decision, the AUC allowed, in part, an application filed by ATCO Electric Ltd (“AE”) requesting a review and variance of the AUC’s directions in Decision 24805-D02-20202 (the “Compliance Decision”) related to the issues of income tax expense and severance costs in respect of the preliminary question of whether a reviewable error exists.
Background and the AUC’s Review Process
The Compliance Decision provided the AUC’s determinations on the application of AE for its compliance with AUC directions in Decision 22742-D01-20193 (“Original Decision”) on ATCO Electric’s 2018-2019 general tariff application (“GTA”).
The AUC’s authority to review its own decisions is discretionary and is found in Section 10 of the Alberta Utilities Commission Act. Rule 016: Review of Commission Decisions sets out the process for considering an application for review.
The review process has two stages. In the first stage, a review panel decides if there are grounds to review the original decision (the preliminary question). If the review panel decides to review the decision, it moves to the second stage, where it decides whether to confirm, vary, or rescind the original decision.
AE alleged in its review application that the compliance panel erred in fact, law and/or jurisdiction:
(a) by denying the severance costs incurred by AE in accordance with the Original Decision; and
(b) in directing certain adjustments to tax expense and minimum filing requirement schedules to comply with the AUC’s findings to recalculate its income tax expense to adjust for the allowance for funds used during construction (“AFUDC”).
For the reasons set out below, the AUC found that AE has not shown, either on a balance of probabilities or on the face of the Compliance Decision, that an error in fact, law or jurisdiction exists in the Compliance Decision in relation to the approval of severance costs that could lead the AUC to materially vary or rescind the Compliance Decision respecting severance costs.
In the original proceeding, the hearing panel found that the allocation of severance costs to AE was not reasonable because, instead of reflecting an employee’s years of service with AE as a proportion of the total years employed within the ATCO group of companies, AE allocated the entire cost of severance to AE, regardless of the severed employee’s work history with any of the other ATCO entities. The hearing panel instructed AE to recalculate the severance amounts.
In its compliance filing, AE provided new evidence of additional years of work history for the 2003-2013 period for AE employees severed in 2018. AE also filed evidence of positions severed from other ATCO companies with a history of prior service to AE. Some of these positions were identified in the original proceeding, and some were not.
The compliance panel found that, except for information relating to the years 2014 to 2018, none of this evidence was provided on the record of the original proceeding. The compliance panel accepted the evidence of the positions severed from other ATCO companies with a history of prior service to AE and identified in the original proceeding, but only for the years 2014-2018. The compliance panel found that the evidence in this category was “consistent with the purpose of a compliance filing…as this gives effect to the ‘interrelated impact’ of the AUC’s findings…” and on the basis that it was first raised in the original proceeding.
In the review application, AE asserted that the compliance panel’s decision resulted in the denial of $3.3 million in severance costs for 2018 and that the compliance panel made numerous errors of fact, law or jurisdiction.
The AUC held that the review application is related to a compliance filing decision, which has a more restricted purpose than an original proceeding. As noted by the compliance panel, the purpose of a compliance filing is to provide the utility with an opportunity to reflect the full and interrelated impact of all the AUC findings, and it is inappropriate for a party to introduce new evidence in a compliance filing. It is not the review panel’s role to retry the application based upon its own interpretation of the evidence, nor is it to second guess the weight assigned by the compliance panel to various pieces of evidence absent an error of fact, law or jurisdiction that is either apparent on the face of the decision or otherwise exists on a balance of probabilities that could lead the AUC to materially vary or rescind the decision.
The AUC found that it was within the compliance panel’s discretion to determine what evidence was responsive to the direction on severance costs. In establishing compliance with a GTA decision, the AUC is not obligated or otherwise required to accept the evidence of the applicant regarding its costs if the evidence adduced is beyond what is required for compliance with the direction. The AUC further agreed with the compliance panel that “with proper diligence,” and for AE to meet its onus, it should have been able to produce work history evidence back to 2004 in the original proceeding.
Income Tax Expense
AFUDC represents the financing cost of a capital asset during the construction phase of a project. It is only calculated and included in the cost of a capital asset if the construction of the capital asset exceeds one year. When a utility calculates AFUDC, one of the inputs used is the weighted average cost of capital, which consists of a debt component and an equity component. AFUDC is not an operating expense, and it is not included as a separate revenue requirement item. Instead, recovery of AFUDC commences in the year that the capital asset to which AFUDC applies is included as part of the rate base, and the utility includes a return on that rate base as well as a return of that rate base through depreciation.
In its review application, AE challenged the basic findings of the compliance panel and alleged that those findings result in an unsupported assumption that the regulatory income tax expense over the life of a capital asset should be the same for a non-AFUDC capitalized asset and for a capital asset that includes AFUDC. AE submitted that the AUC-directed accounting for AFUDC in the calculation of regulatory income tax expense was, in part, not correct. AE disclosed, for the first time in the review application, that it had made an inadvertent error in its accounting for AFUDC in the calculation of regulatory income tax expense. AE stated that it had improperly added the debt portion of AFUDC to the utility earnings before tax. To correct its identified error, AE proposed to adjust its regulatory income tax expense by removing the debt portion of AFUDC from the total utility earnings before tax.
The AUC held that there were two concerns that arise in respect of AE’s review submission on the accounting for AFUDC in the calculation of regulatory income tax expense. The first is that AE only recently disclosed that it had made an error with respect to how it accounts for AFUDC in the calculation of regulatory income tax expense. The second was that AE’s discovery of its error means that it was not properly calculating the regulatory income tax expense component of its revenue requirement in the past, including in years prior to the test period, to the detriment of customers. In fact, AE acknowledged that under its historical methodology, no effective income tax deduction for the debt portion of AFUDC was reflected in the calculation of the regulatory income tax expense, and this resulted in an overstated revenue requirement.
The AUC noted AE had filed new evidence in this proceeding, which should, in the AUC’s view, have been discoverable prior to the review proceeding and which AE had the clear onus to adduce in response to the direction in the original proceeding. AE’s failure to exercise the diligence required to adequately respond to the AUC’s original direction in this respect, which would have uncovered the error in its accounting for AFUDC in the calculation of the regulatory income tax expense, was neither efficient nor helpful to the regulatory process. Further, AE’s error has resulted in the overcharging of customers and has unjustifiably benefitted the shareholders of AE in past rates.
Despite these reservations, based on the material presented in the review application, the AUC found that there was an error in the Compliance Decision in the AUC-directed regulatory accounting for the equity portion of AFUDC in the calculation of income tax expense that requires correction. AE was directed in the Compliance Decision to exclude both the debt and equity components of AFUDC from total utility earnings before tax and to include deductions for both components.
The AUC held that the correct accounting, for regulatory purposes, requires AE to include the equity portion of AFUDC as part of the total utility earnings before tax, but not the debt portion. The accounting then requires a deduction for the equity portion, which results in no net deduction for the equity component of AFUDC being reflected in the regulatory income tax expense. The accounting also requires a deduction for the debt portion, which reduces the revenue requirement.
The AUC accepted that a net equity deduction is not permissible for statutory income tax purposes. The equity component of AFUDC is the portion of the financing expense funded by equity, for which there is no offsetting expense, unlike the portion funded by debt, which has an offsetting interest expense that is deductible for statutory income tax purposes. For regulatory purposes, the AUC deemed that the financing expense is funded by debt and equity by allowing the AFUDC amount to be calculated using the weighted average cost of capital. The benefits customers receive from the AFUDC amounts for a given year arise because of the deduction of the debt portion of AFUDC in the calculation of regulatory income tax expense, which reduces that expense and lowers the revenue requirement.
The AUC, as a final matter, noted that this review decision and the second stage review decision will not only affect the calculation of income tax expense in the 2018-2019 test years but will also impact AE’s income tax expense included in future applications, including the 2020-2022 GTA compliance filing. It will also affect AE’s 2017 income tax expense because an adjustment would be required to the income tax expense related to the refund/collection calculation for the differences in 2017 AFUDC tax inputs between the forecast and actual costs as part of its settlement of deferral account balances.
The review panel directed AE to indicate in its second stage review application where it proposes to address the final settlement of the placeholder of $2.99 million for its 2017 income tax inputs between forecast and actual costs and where it proposes to update its revenue requirement schedules for its 2020-2022 GTA forecasts to adjust its income tax expense
In answering the preliminary question on the issue of AE’s 2018 severance costs, the AUC found that AE did not demonstrate the existence of an error of fact, law or jurisdiction that is apparent on the face of the decision or otherwise exists on a balance of probabilities that could lead the AUC to materially vary or rescind AE’s 2018-2019 GTA Compliance Decision and consequently dismissed the application for review on this ground.
In answering the preliminary question on the issue of income tax expense and, more specifically, the accounting for AFUDC in the calculation of regulatory income tax expense, the AUC found that a reviewable error exists, and the application for review was therefore granted. AE was directed to file, by May 5, 2021, a second stage variance application to accord with the AUC’s findings.