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AUC Evaluation of Performance-Based Regulation in Alberta, AUC Decision 26356-D01-2021

Link to Decision Summarized

PBR – Rates

The AUC evaluated the performance of the first two terms of performance-based regulation (“PBR”) of the electricity and gas distribution utilities operating in Alberta. The AUC, in this decision, determined that PBR met many of the objectives set out in the founding PBR principles. A third PBR term (“PBR3”) commencing in 2024, following a one year cost-of-service (“COS”) rebasing year in 2023, is supported.

Background and Procedural Summary

The PBR plans under which the electric and natural gas distribution rates are set are established in Decision 20414-D01-2016. The plans are effective until December 31, 2022, and apply to the electric distribution facility owners (“DFOs”) ATCO Electric Ltd., FortisAlberta Inc. ENMAX Power Corporation, and EPCOR Distribution and Transmission Inc. They also apply to the natural gas DFOs ATCO Gas and Pipelines Ltd. and Apex Utilities Inc. These utilities will collectively be referred to as “the Utilities”.

PBR Performance to Date Evaluated Against the AUC’s PBR Principles

Principle 1. A PBR Plan Should, to the Greatest Extent Possible, Create the Same Efficiency Incentives as Those Experienced in a Competitive Market While Maintaining Service Quality

In evaluating the performance of PBR in Alberta according to Principle 1, the AUC separately evaluated if PBR created, to the greatest extent possible, the same efficiency incentives as those experienced in a competitive market; and if service quality was maintained.

Regarding the efficiency incentives, the AUC concluded that PBR created efficiency incentives, but not to the greatest extent possible. The Utilities stated that they could not quantify all the efficiencies and that some efficiencies were not tracked as this was excessively burdensome. Additionally, the Utilities indicated that it is not always possible to attribute efficiencies solely to PBR incentives. This was because some initiatives would have been implemented regardless of the regulatory regime.

The Utilities agreed that PBR encourages the introduction of cost-saving programs as they can retain earnings in excess of their approved return on equity (“ROE”) arising from savings resulting from these programs.

Issues were brought by interveners regarding the need to quantify the cost savings resulting from any specific initiative or program implemented as a result of PBR. They argued that the Utilities’ overall performance should be evaluated according to the fair return standard during the PBR terms.

Industrial Power Consumers’ Association of Alberta (“IPCAA”) proposed comparing achieved earnings to approved earnings. The AUC found that the method proposed by the IPCAA supports that the Utilities responded to PBR incentives in the same way as would have been expected in a competitive market. In this respect, the AUC noted that PBR was successful. However, the AUC agreed with the Utilities in finding that quantifying the efficiencies created as a result of PBR incentives may not be as simple as suggested by the method of the IPCAA.

Further, the AUC found that PBR may not have created the same efficiency incentives as those experienced in competitive markets to the greatest extent possible. The AUC accepted that, as suggested by evidence submitted by the City of Calgary, PBR may not have accurately reflected the economic realities in Alberta, particularly in consideration of the COVID-19 pandemic. Further, the AUC found that PBR did not achieve, to the greatest extent possible, the same efficiency incentives as a competitive market for Utilities that have distribution and transmission functions. It based this conclusion, in part, on the fact that general operations and maintenance (“O&M”) allocations to transmission have increased significantly more than the allocations to distribution over the same time period while noting that the divergence could have been based on other factors such as the high number of transmission line constructions.

The AUC found that the Utilities have maintained service quality during the PBR terms. It based this finding on data submitted by the Utilities under Rule 002 reports. Rule 002 sets the minimum service quality standards and reporting requirements for the Utilities. Some Utilities reported, beyond meeting the requirements, that the requirements of Rule 002 had been exceeded, particularly in customer service and response time measures.

Principle 2. A PBR Plan Must Provide the Company with a Reasonable Opportunity to Recover its Prudently Incurred Costs Including a Fair Rate of Return

Provincial legislation governing the regulation of distribution utilities requires the AUC to provide the utility with a reasonable opportunity to recover its prudently incurred costs, including a fair rate of return. The AUC noted that, as stated by the ABCA in ATCO Gas and Pipelines Ltd v Alberta (Utilities Commission), 2014 ABCA 397, PBR does not guarantee a return. It only guarantees the opportunity to earn a return.

The AUC was satisfied that this principle was achieved. Over the eight-year period and seven utilities evaluated, there were only eight instances in which the actual ROE was below the approved ROE. In the remaining 48 instances, the actual ROE exceeded the approved ROE, often by significant amounts.

Principle 3. A PBR Plan Should be Easy to Understand, Implement and Administer and Should Reduce the Regulatory Burden Over Time

Parties submitted that there were some successes in improving regulatory efficiency and reducing regulatory burden through the implementation of the PBR plans. These were largely attributable to the implementation of routine annual PBR rate adjustment filings and the adoption of the K-bar mechanism instead of capital trackers in the 2018-2022 PBR plan. Additional regulatory efficiencies identified included reductions to overall processing time, scoping issues and setting submission length limits in AUC proceedings. The AUC did note that some efficiency initiatives were implemented to improve adjudicative efficiency and were not specific to the PBR plan, even though they were implemented during the same period.

The parties took different positions regarding the achievement of Principle 3 during the two PBR terms. The annual PBR rate adjustment filings that are routine, regular, and mechanical in nature allowed for an expedited review by the AUC and customer groups while allowing the Utilities to plan for the development of their applications and any subsequent related proceedings. The introduction of a K-bar mechanism in lieu of the legacy capital tracker mechanism reduced the number of regulatory proceedings by avoiding the need to forecast and review the vast majority of capital spending, activities that required a lot of time and effort from all stakeholders. PBR still needs improvement to improve regulatory efficiency and to reduce the burden, and make it easier to understand. The AUC concluded that future PBR plans would benefit from clearer rules and parameters.

Principle 4. A PBR Plan Should Recognize the Unique Circumstances of Each Regulated Company that are Relevant to a PBR Design

The AUC recognized the unique circumstance of each utility in designing the first and second PBR terms. It developed PBR plan features to recognize a utility’s circumstances, including a revenue-per-customer cap design for natural gas distribution utilities and a price cap for electric distribution utilities and rebasing the current 2018-2022 PBR plan using historical O&M and capital spending during the 2013-2017 PBR term specific to each utility.

Utilities submitted that the inflation factor, which impacts what rates are established, did not always accurately represent the economic circumstances in Alberta. A number of Utilities also submitted that the X factor value, representing the productivity offset, in the 2018-2022 PBR term is not reflective of current expected productivity growth in the utility sector. The Utilities were also concerned with obtaining sufficient capital funding to keep pace with the new trends affecting the grid.

While the AUC found that other PBR plan features contributed heavily to reaching Principle 4 during the PBR terms, it would evaluate modifying the I and X Factors and any incremental funding provisions.

Principle 5. Customers and the Regulated Companies Should Share the Benefits of a PBR Plan

Disagreement arose among parties regarding the achievement of Principle 5. The Utilities Consumer Advocate (“UCA”), Consumers’ Coalition of Alberta (“CCA”) and IPCAA agreed that PBR has resulted in enhanced efficiencies and cost savings for the Utilities, but consumers have yet to benefit. This is proved by the Utilities’ consistent earnings above the approved ROE. It was suggested that an earnings sharing mechanism (“ESM”) should be incorporated in the next PBR plan to allow customers to share in the benefits of PBR. Utilities opposed the ESM, arguing that it counteracts PBR incentives and increases the regulatory burden.

The Utilities submitted that customers did benefit during the PBR terms as they experienced lower rates than what would have been in place under COS regulation. The AUC agreed with the Utilities and with calculations provided by the Utilities that suggested that under both PBR plans, customers experienced lower rates under PBR than would be expected under COS regulation.

The AUC concluded that Principle 5 was not adequately met over the two PBR terms. Although customers saw lower rates under PBR than would be expected under COS regulation, and some sharing of savings occurred during the rebasing for the 2018-2022 PBR plans, rates increased during the economic downturn while utility earnings at the same time were excessive.

As a result, and to ensure that 2023 COS rebasing achieves objectives of Principle 5, the AUC will permit the Utilities to develop its 2023 forecast on its own accord. Utilities are directed to quantify and demonstrate how the efficiencies found and cost reductions achieved during the current PBR term are reflected in their forecast revenue requirement and how it will be passed on to customers. As far as Utilities are not able to quantify the efficiencies, they are encouraged to propose their own mechanistic methods as part of the 2023 COS proceedings to ensure ratepayers receive the benefit of reduced utility costs achieved during the PBR term.

Conclusions from the Evaluation of PBR in Alberta and Next PBR Term

On balance, PBR has achieved many of the objectives that were set out in the founding PBR principles. However, the AUC found that there are areas for improvement. The AUC found it to be in the public interest that the distribution Utilities return to a third PBR term commencing in 2024, upon completion of the 2023 COS year.

Future PBR plans should be more reflective of ongoing economic conditions. To facilitate this, a review of incremental capital funding provisions and of the I factor; and a consideration of introducing a mechanism to share earnings was suggested and supported. The AUC is also looking to simplify future PBR plans in support of making it easier to understand, implement and administer.

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