DFO – Cost-of-Service Applications
In this decision, the AUC set out how it will process the 2023 cost-of-service (“COS”) applications that will be filed by the electric and gas distribution facility owners (“DFOs”). The AUC has prescribed the minimum level of detail each application is expected to include to support the DFOs’ 2023 revenue requirement forecasts. The AUC will adopt a hybrid methodology for assessing the 2023 forecasts where the extent to which expenditures are examined is guided by the nature, size or complexity of the associated cost to facilitate a streamlined review of the upcoming 2023 COS applications. The AUC also prescribed filing dates for these applications.
Background
Rates for the electric and natural gas DFOs under the AUC’s jurisdiction are currently set according to the performance-based regulation (“PBR”) plans established in Decision 20414-D01-2016 (Errata). These plans are effective from January 1, 2018, to December 31, 2022, and apply to the four electric DFOs: ATCO Electric Ltd., FortisAlberta Inc., ENMAX Power Corporation, and EPCOR Distribution & Transmission Inc.; and the two natural gas DFOs: ATCO Gas and Pipelines Ltd., and Apex Utilities Inc. (formerly AltaGas Utilities Inc.).
The AUC commenced this proceeding to determine alternatives for streamlining the traditional line-by-line review of DFOs’ forecast costs while meeting the objectives set out in Bulletin 2021-04. The objectives are identifying efficiencies achieved by the DFOs during the 2018-2022 PBR term and passing the benefits on to customers, realigning the DFOs’ costs and revenues and examining the DFOs’ forecast costs and rates to ensure they are reflective of the economic situation in Alberta; and assessing actual DFO costs in the 2018-2022 PBR term for the purposes of approving 2023 opening rate base and ensuring forecasts are justified based on the prior-period actuals. The AUC further stated that the rates approved for 2023 under this COS review might be used as going-in rates for any subsequent PBR term.
Form of Streamlined Review
The AUC will adopt a hybrid methodology under which the review of expenditures is guided by the nature, size, or complexity of the associated cost, allowing the AUC to focus on certain cost categories while other costs could be assessed in a more streamlined manner. The AUC agreed that each DFO should be allowed to develop its 2023 forecast on its own accord with an understanding that the utility bears the onus of demonstrating and supporting the reasonableness of the elements comprising its revenue requirement. The AUC found that adopting a hybrid methodology permits DFOs to both streamline their submissions pertaining to costs that are routine or less controversial and to tailor and focus their 2023 COS applications on complex issues. The AUC further considered that a hybrid methodology achieves an appropriate balance between regulatory efficiency and providing an adequate opportunity for interveners and the AUC to test a DFO’s case.
Level of Detail for the 2023 COS Applications
The AUC prescribed a particular form of presenting 2023 forecasts by way of an AUC-developed template. The DFOs were directed, at a minimum, to fill out the template as part of their 2023 COS application filings but may supplement their application and/or template with additional information and schedules as they deem necessary.
Operating and Maintenance Costs
The AUC prepared and requested parties to provide feedback on a draft schedule for operation and maintenance (“O&M”) expenses. The schedule was developed using descriptions provided in prior Rule 005 filings from electric DFOs, where the majority of DFOs presented information at a Uniform System of Accounts (“USA”) level.
The AUC found that there is merit in assessing the three-year average (2018-2020) of actual O&M costs against the 2023 forecast and directed the DFOs to include comparisons, explanations of any significant changes, actions taken to manage O&M expenditures, a description of new actions to manage O&M costs as well as an explanation of the effect of trends in the Alberta economy in their 2023 COS applications.
Capital Costs
To reflect the actual performance of the DFOs in the last two years of the present PBR plans, the AUC accepted the DFOs’ request for placeholder treatment for the opening 2023 rate base. This will not preclude the AUC from examining any variances between the actual opening 2023 rate base and the placeholder amount in a future proceeding, which could result in 2023 disallowances.
The AUC found that allowing deferral accounts or true-ups for capital programs that are driven by external factors will result in additional subsequent applications, which contradicts the AUC’s objective of an efficient regulatory process. The AUC is confident that the DFOs have the knowledge and experience to anticipate, plan for, and provide a one year 2023 forecast for externally driven capital programs and will therefore not approve deferral account treatment for these programs.
To assist the AUC in achieving its objectives for rebasing while allowing for an efficient regulatory process, the DFOs were directed to provide similar level information in respect of O&M costs and capital costs.
The AUC gave parties until September 1, 2021, to develop the proposed uniform approach to reporting capital-related items to be used in the rebasing schedules for reporting purposes in the 2023 COS review applications.
Materiality Threshold
The AUC adopted materiality thresholds for testing the 2023 forecast O&M and capital costs and directed the DFOs to apply them in the 2023 COS applications.
Identification and Quantification of Efficiencies
One of the guiding PBR principles used by the AUC is that customers and the regulated companies should share the benefits of a PBR plan. The AUC considered that this principle remains an important consideration when establishing 2023 rates through a COS review.
The AUC expects that DFOs tracked and monitored their expenditures in various accounts, or cost centers, as a normal course of managing their businesses. In the AUC’s view, where costs have changed or trended in a certain direction, DFOs should be in a position to explain what has caused the changes, be it an internal cost-reducing action or the result of external factors. Further, DFOs should be able to quantify the outcomes of the initiatives they undertook.
If a DFO is not able to satisfactorily demonstrate to the AUC how cost reductions will be flowed through to its customers in its forecast 2023 revenue requirement, the AUC may consider a more mechanistic, high-level approach to ensure ratepayers benefit from the efficiencies achieved during the PBR term.
Prudence Review
The DFOs expressed concern with reference to an “assessment of prudence” in the Bulletin and stated that a prudence review should not occur because actual costs incurred under the incentives of PBR are presumed to be prudent.
One of the fundamental differences between the present PBR plan and the 2013-2017 PBR plan is the absence of the capital tracker funding mechanism in its legacy form. The capital tracker funding mechanism in the 2013-2017 PBR plan applied to the majority of the DFO’s capital-related costs and resembled a traditional COS review process. When this mechanism was replaced with an “envelope” funding type of approach in the current PBR plan through the K-bar factor, DFOs were provided with the majority of capital funding on the basis of a pre-determined formula; this capital was not subject to the same level of AUC scrutiny that was applied to the capital tracker program.
The AUC maintained its view that actual costs incurred under the incentives of PBR should generally be deemed prudent and not be subjected to the same level of assessment as expenditures under COS regulation. However, given that all capital expenditures were managed under the K-bar funding envelope with no AUC scrutiny under the 2018-2022 PBR plan, the AUC may require the DFOs to demonstrate the reasonableness of the costs of certain programs.
Other Matters
Pre-filing of Historical Data – The AUC considers that the timely completion of the COS proceedings in the compressed timeframe available will be aided through the pre-filing of historical DFO data for 2013 to 2020. Accordingly, the AUC directed each DFO to file on the record of its respective proceeding such historical data, using the rebasing template format reflective of the developed capital groupings, at least one month prior to the deadline date for 2023 COS application filings.
Depreciation Studies and Technical Updates – In the AUC’s view, consideration of depreciation and other similar COS studies in conjunction with a review of 2023 COS applications will hinder the AUC’s objective of promoting regulatory efficiency and achieving a streamlined rebasing process. As such, depreciation applications, or technical updates, will be considered outside the forthcoming 2023 COS applications. However, to ensure that a DFO’s 2023 rates are reflective of the most up to date information and to minimize future true-ups, the AUC was prepared to approve the updated depreciation costs on a placeholder basis in COS review proceedings for those DFOs that wish to update their depreciation parameters. These placeholders may be adjusted as a result of the AUC’s review of the 2023 COS applications. Each DFO will be given an opportunity to file its depreciation application following the completion of the COS review process, at which point the depreciation parameters approved as part of the DFO’s 2023 forecast will be trued up to reflect any disallowances in the AUC’s decision.
Billing Determinant Forecast – The 2023 billing determinant forecast should be developed using AUC-approved methodologies for each DFO unless there is a valid reason for departure, in which case, a detailed explanation for such departure should be provided. The 2023 billing determinant forecast should reflect the rate class allocation last approved in each DFO’s respective Phase II proceeding. Each utility was directed to provide an analytical and numerical explanation of how the Alberta economy and COVID-19 pandemic factors were considered in arriving at the proposed 2023 billing determinant forecast.
Investment Level Changes –The AUC found that to facilitate an efficient regulatory process and to minimize the regulatory burden associated with undertaking a review of six COS applications, it would not allow changes to investment levels to be included in the 2023 COS applications.
Deferral Accounts – The AUC confirmed that currently approved deferral accounts and rate riders would remain applicable in the 2023 COS year, as clarified in this decision. The differences between forecast and actual costs for items in these accounts will be subsequently trued up. In this respect, placeholder treatment will also be afforded to those 2021 and 2022 costs requiring alignment to establish the 2023 opening rate base.
Timing – The AUC will assess the 2023 COS applications in pairs in a staggered manner in accordance with the schedule set out in the decision.
