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FortisAlberta Inc. Distribution-Connected Generation Credit Module for Fortis’s 2022 Phase II Distribution Tariff Application, AUC Decision 26090-D01-2021

Link to Decision Summarized

DCG – Rates

The AUC determined that the existing distribution-connected generation (“DCG”) credit mechanism within the tariffs of ATCO Electric Ltd. (“AE”), ENMAX Power Corporation (“EPC”) and FortisAlberta Inc. (“Fortis”) will be discontinued. The AUC found that the provision of the DCG credit mechanism does not support just and reasonable ratemaking.

The AUC found that a four-year transition period, set on a declining basis, for the demand transmission service (“DTS”) portion of the DCG credit mechanism balances the competing public interest objective in discontinuing it. The rate supply transmission service (“STS”) portion of the DCG-related tariff is to be calculated as per usual with no change.


The DCG Credit Mechanism

DCG is a supply-side distributed energy resource. As the units are connected to the distribution system, they are required to be smaller than 80 megawatts (“MW”). DCG credits are the payments that AE, EPC, and Fortis provide to DCG connected to their respective distribution systems.

The credits are calculated and paid pursuant to provisions within their respective tariffs. The credits are calculated based on the electrical energy delivered by the DCG to the distribution system and represent the difference between the Alberta Electric System Operator (“AESO”) transmission charges the distribution utility must pay with the DCG in operation and the hypothetical charges that would have been incurred if the DCG had not been in operation. The calculated credits are allocated to and recovered from all customers of the distribution utility.

Does the DCG Credit Mechanism Result in Just and Reasonable Rates?

The DCG credit mechanism had previously been approved as part of the rate schedules of AE, EPC and Fortis. The AUC determined that the provision of the DCG credit mechanism does not support just and reasonable ratemaking as it unnecessarily increased the payments ratepayers make for transmission service, and these additional payments are not offset by any proven benefit to ratepayers. The AUC also determined that it promoted an unlevel playing field between generators at the cost of ratepayers.

What DCG Credits Cost Ratepayers

The distribution tariff sets the rates to recover the cost of transmission service, which is set by the AESO and recovered through the AESO tariff, and the distribution service. The distribution utility flows the cost of transmission charges through to its load customers through transmission access charges. DCG credits relate to transmission access charges.

If DCG is able to locate on a distribution feeder that also serves load and is able to generate electricity coincident with that load, its operation reduces the flow of energy from the transmission system to the substation. Given the current AESO tariff design and metering locations, these reduced flows serve to lower the metered demand and energy at the substation. Since a considerable portion of the AESO’s tariff is collected from its bulk and regional charges on the basis of the monthly coincident peak of the system (“12 CP”), the reduction in metered demand coincident to the peak can significantly reduce the bill received by the distribution utility from the AESO for transmission service due to the presence of DCG on the feeder.

To recover the costs of the transmission system, the AESO employs true-up mechanisms that result in the reduced distribution utility payments being recovered, in subsequent periods, from all ratepayers.

The AUC found that DCG credits represent a high and escalating cost to ratepayers.

What Benefits DCG Credits Provide Ratepayers

The AUC determined that there was not enough evidence to support that, in the current regulatory environment, DCG reduces transmission costs in the long term.

The AUC noted that DCG has the potential to reduce transmission costs. But, because the AESO does not consider the presence of DCG in the planning and operation of the transmission system, the AUC determined that there was not enough evidence to support the benefits of DCG.

The AUC further considered the effect of DCG credits on transmission access charges. It found that the way the DCG credit mechanism is structured leads to higher overall transmission access payments for all load customers.

The AUC found that higher payments are a result of the legislative requirement that the AESO manage itself in a manner that does not result in a profit or loss from its operations. The measures that are undertaken by the AESO to meet this requirement result in load customers in aggregate paying for both the total cost of the transmission system and the cost of the DCG credits.

Further, DCG credits result in transmission access charges increasing because the true-up mechanisms and the AESO’s revisions to its billing determinant forecast serve to increase the amount of DCG credits paid to DCG. This results in a shortfall in revenue caused by lower billing determinants. The shortfall is accounted for in the AESO’s subsequent forecasts, resulting in higher per-unit Rate DTS charges, thus increasing the amount paid to DCG credits for the same amount of energy provided to the system.

The AUC found that because the costs of the transmission system are largely sunk, and the presence of DCG credits is later reconciled in the annual true-up process, ratepayers do not pay a lower bill for avoided transmission access charges due to DCG. This is consistent with the AUC’s findings in Decision 22942-D02-2019 and the Final Report for the 2017 Alberta Electric Distribution System-Connected Generation Inquiry. The AUC also found that there are proven costs but no benefits to ratepayers resulting from the DCG credits and that, therefore, the inclusion of DCG credits in a distribution utility’s tariffs is not just and reasonable.

Level Playing Field Considerations

The AUC considered whether DCG credits are needed to set a level playing field between DCG and other connection and technology configurations.

The AUC considered whether DCG credits support the goal and purpose of the Electric Utilities Act (“EUA”) to provide a fair, efficient and openly competitive electricity market for generation; and to maintain a flexible framework so that decisions on the need for and investment in generation of electricity are guided by competitive market forces. The AUC also considered whether, as argued by supporters of DCG credits, DCG creates similar value additions to the Alberta Interconnected Electric System as industrial system designations, the installation of energy efficiency, or demand response technologies.

The AUC determined that DCG credits harm the competitive market intended by the EUA at the expense of customers. It further did not accept the argument comparing DCG to industrial system designation and other technologies because it ignores the fact that these connection and technology configurations are granted differing treatment under the legislation.

The AUC held that the DCG credits create distortionary harm to the wholesale electricity market, impairing the competitive purpose of the EUA. In the short run, this results from generators’ bidding being influenced by receipt of DCG credits. In the long run, this is because investment choices may be distorted away from potentially less expensive alternatives towards DCG. The result is that the overall cost of generation may be unnecessarily increased. Therefore, and because the AUC found that DCG credits unnecessarily increase the cost to ratepayers without providing them with a proven or quantifiable benefit, the AUC determined that DCG credits should be discontinued.

What Should the Transition Period for DCG Credits Be?

In consideration of the need to balance the interest of ratepayers in saving costs of the DCG credits with the need to foster the confidence of investors in the electricity market to provide a benefit to ratepayers by allowing the implementation of legacy rates, the AUC found a four-year transition period for the Rate DTS portion of the DCG credit mechanism to be reasonable. This transition period, set on a declining basis, balances the competing interests.

Accordingly, AE, EPC and Fortis were directed to calculate the Rate DTS portion of the DCG credits in the same way that they otherwise would have, but then apply a multiplier, starting at 0.8 on January 1, 2022, and decreasing by 0.2 every year on January 1. These utilities were also directed to file their 2022 annual performance/based regulation rate adjustment filings showing the changes directed in this decision.

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