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Commission-Directed Examination of Distribution Facility Owner Payments Under the Independent System Operator Tariff Customer Contribution Policy, AUC Decision 26061-D01-2021

Link to Decision Summarized

Rates – Electricity


In Decision 22942-D02-2019, which addressed the Alberta Electric System Operator’s (“AESO”) 2018 tariff, the AUC approved changes to the recovery and treatment of contributions in aid of construction (“CIAC” or “AESO Customer Contributions”) paid by distribution facility owners (“DFOs”) to the AESO. These findings were varied in Decision 24932-D01-2020. In its variance decision, the AUC advised that it would further examine the treatment and recovery of these contributions in a further proceeding. It undertook that examination in this proceeding.

In this decision, the AUC determined that:

(a)     The legislative framework applicable to electric utilities supports the payment of customer contributions to the AESO as part of the AESO’s tariff.

(b)     No changes to the AESO’s customer contribution policy currently set out in the approved AESO tariff were directed.

(c)      The legislative framework applicable to electric utilities permits the current DFO tariff recovery mechanism of AESO customer contribution payments made by a DFO.

(d)     The current DFO tariff recovery mechanism applicable to AESO customer contributions fails to provide effective price signals to incent the end-use customers to choose the most economical connection solution. To better achieve the objectives of the AESO customer contribution policy:

(i)       DFOs will no longer be permitted to earn a return (i.e., return-on-equity component) on any AESO customer contribution payments; and

(ii)      to the extent possible, customer contributions are to be flowed through to the DFO customer that is requesting the new connection.

(e)      A revised accounting mechanism for the recovery of future AESO customer contribution payments in a DFO tariff will be examined in a further proceeding. DFOs are directed to file one or more proposal(s) for a revised accounting treatment for the recovery of future AESO customer contributions that achieve the objectives set out in this decision by May 31, 2021.

(f)       (Changes to the DFOs’ tariff recovery mechanism are to be applied on a prospective basis to new AESO customer contributions, effective as of the date of this decision. AESO customer contributions made by DFOs for new projects following the date of this decision are directed to be tracked as placeholder amounts and will be accounted for according to the revised accounting treatment approved by the Commission.

(g)     AESO customer contributions made by DFOs prior to the date of this decision shall continue to be treated according to the current DFO tariff recovery mechanism that allows the contribution costs to be capitalized and included in the rate base until those contribution amounts have been fully depreciated.

(h)     Alternative AESO customer contribution refund proposals, including the one proposed by AltaLink, that allow a transmission facility owner (“TFO”) to earn a return on an AESO customer contribution, also fail to provide an effective price signal and were not approved.

Is the Current Treatment of Customer Contributions Supported by the Legislative Framework?

The AESO defines a construction contribution as the financial CIAC in excess of any available maximum local investment by the AESO in system costs that a market participant must pay for the construction and associated costs of transmission facilities required to provide system access service (“SAS”). Under its current tariff, the AESO requires contributions from (a) DFOs; (b) customers directly connected to the transmission system; (c) a designated industrial system; and (d) the City of Medicine Hat. The focus of this decision is on the customer contributions paid by DFOs.

After reviewing the legislative provisions and the historical treatment of customer contributions, the AUC concluded that the legislative framework is aligned with and supports the inclusion and operation of a customer contribution policy within the AESO tariff.

DFO Recovery of AESO Customer Contributions

The AUC then examined how DFOs (specifically Fortis) had been recovering these contribution costs and examined the treatment of AESO customer contribution amounts prior to 2013 under cost of service ratemaking and subsequently under Performance Based Regulation (“PBR”) plans for DFO tariffs.

The AUC noted that it continues to support the principles it had previously identified as the foundation for a customer contribution policy, the most important of which is the establishment of an effective price signal for the siting of connection facilities. In Decision 2012-362, the Commission found that the AESO’s customer contribution policy should “exert an economic discipline on siting decisions by sending price signals, reflective of the AESO’s economics, to connecting customers.” Further, customer contributions are intended to balance the economic effects of connecting a new customer between existing customers and the new customer.

A CIAC is required to be made by a connecting customer when the construction and associated costs of transmission facilities required to provide SAS exceed the available investment by the AESO (the maximum investment level). Connecting customers that have to bear the project costs above the AESO maximum investment levels by way of a CIAC are incented to (i) request the most economical connection facilities and service requirements that meet their needs; and (ii) take into account proximity to the existing or planned transmission system when considering alternative locations for their load to be served. In turn, these contribution amounts offset the investments made by the TFO (with a TFO only investing up to the maximum investment level and therefore only receiving a return of, and on, that investment). As a result, existing customers do not unduly subsidize the construction of new facilities.

However, the AUC noted that, unlike Direct Connect customers who bear the costs of the connection directly, DFOs could pass the costs of the CIAC on to distribution ratepayers. From a regulatory perspective, the recovery of an AESO customer contribution is indistinguishable from the way in which the DFO recovers its capital assets and puts the invested contributions under the same incentives.

The AUC had previously commented on the incentives associated with the cost of service regulation:

… under cost of service regulation, since the company earns a profit on the equity in its rate base, there is an incentive to choose spending money on capital assets, on which a return can be earned, over spending on maintenance, for example, on which a return is not earned. In addition, there is no incentive to minimize the costs of capital assets. The more that is spent and included in the rate base, the more return that can be earned.

In Decision 20414-D01-2016, the AUC recognized that similar incentives were also present under the capital tracker mechanism included in the 2013-2017 PBR plans regarding capital expenditures (including the AESO customer contributions). Capital trackers were administered in a manner similar to traditional cost of service regulation (i.e., relying on prudence reviews to establish the necessary level of capital investment) and had the unintended effect of placing a considerable amount of capital outside of the incentive-enhancing I-X mechanism.

The AUC considered that there is a general incentive for DFOs to increase the amount of AESO customer contributions to grow rate base, which is exacerbated by the fact that a DFO has a degree of influence on transmission project requirements, associated costs, and therefore AESO customer contribution amounts. The current DFO tariff recovery mechanism applicable to AESO customer contribution amounts, therefore, fails to provide effective price signals intended to incent the end-use customers to choose the most economical connection solution.

The AUC noted that first, the DFO is not generally flowing the costs of the AESO customer contribution amounts to the end-use customers that trigger the need for new connection assets. As a result, the costs of the AESO customer contributions associated with the connections are socialized across all DFO customers. This mutes the price signal on siting decisions since the customer or customers that caused the need for a new connection do not directly pay their share of the AESO customer contribution. Conversely, when the AESO customer contributions are passed through to an end-use customer of a DFO or are paid by a Direct Connect customer, the intended price signal to impose economic discipline on siting decisions operates properly.

Second, the DFO is able to earn a return on its invested AESO customer contribution amounts. As a result, the intended price signal is at best distorted or muted and is likely absent. In fact, what was intended to be a price signal is converted to a revenue signal to a DFO. The AUC considered that the tariff recovery mechanism applicable to AESO customer contributions could create an incentive for Fortis, as a pure-play DFO, to prefer a transmission solution over a distribution solution because it would need to manage and operate the assets associated with a distribution solution and bear all of the attendant ownership risks when it receives the same rate of return on the investment in either case.

The AUC also found, however, that allowing a TFO to earn the return on the AESO customer contributions paid by a DFO through a refund, as proposed by AltaLink, would also mute the price signal to “right-size” the capital cost of new facilities. AltaLink’s proposal would allow it to earn a return on “gross” rate base rather than on rate base net of contributions, thereby nullifying the price signal to customers, which is intended to bring discipline to the cost of new facilities and result in a prudent investment. Consequently, the AUC found that it would not be in the public interest for either a DFO or a TFO to earn a return on AESO customer contributions.

The AUC found that it is in the public interest to address the issues arising from the revenue signal identified in this decision and to better achieve the underlying objective of the AESO customer contribution policy; namely, to send price signals to connecting customers that are considering alternatives for siting their interconnecting loads. To achieve this objective, it is necessary to (i) remove the profit element (i.e., return-on-equity component) earned on any AESO customer contribution payments DFOs make; and (ii) to the extent possible, flow these contributions through to the DFO customer that is choosing between a transmission or distribution connection.

By removing the profit element, the conflict between the incentive for a DFO to increase its rate base and the requirement to consider the least cost technical solution to meet customer connection requirements is removed. Second, by flowing through the AESO customer contributions, where possible, to the specific customers that require the connection and, therefore, the additional investment, the price signal is imposed on the customer, in terms of decisions both with respect to siting and to the nature and size of facilities required.

The AUC noted that the scope of this proceeding did not extend to establishing a new DFO tariff recovery mechanism applicable to AESO customer contributions. The AUC will commence a process to examine the tariff mechanism for the recovery of future AESO customer contributions within the DFO tariff that takes into account the findings of the Commission herein.

The AUC directed the DFOs to file a proposal or proposals for a revised regulatory accounting treatment of their subsequent AESO customer contributions by May 31, 2021, to reflect the findings in the present decision. The AUC found that a change to the DFO tariff recovery mechanism will be applied on a prospective basis to new AESO customer contributions, effective as of the date of this decision. The DFOs were directed to track all subsequent AESO customer contribution payments as placeholders. The tariff recovery mechanism currently in effect for AESO customer contributions made prior to the date of this decision shall continue to be in effect until these costs are fully depreciated.

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