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FortisAlberta Inc. 2022 Phase II Distribution Tariff Application, AUC Decision 25916-D01-2021

Link to Decision Summarized

Rates – Distribution

In this decision, the AUC addressed the 2022 Phase II distribution tariff application filed by FortisAlberta Inc. (“FortisAB”). Subject to certain modifications, the AUC approved FortisAB’s proposals regarding transmission and distribution cost allocation and rate design. The AUC did not approve FortisAB’s proposals regarding the reallocation of shared system costs among small capacity rate classes; revenue-to-cost ratios and resulting bill impacts; and terms and conditions.

With respect to the distribution costs related to Rural Electrification Associations (“REA”s), the AUC found that the costs attributable to serving REAs should be addressed under an integrated operating agreement (“IOA”). With the exception of load settlement costs attributable to and recovered from REAs, REA farm transmission credits, and the REA distribution system use credit, REA-related costs must be removed from the rates charged to FortisAB’s distribution customers at the time of its 2023 cost-of-service application. In addition, FortisAB was directed to return any costs attributable to REAs that it recovers under the IOAs dollar-for-dollar by a Y factor during the remainder of the current performance-based regulation (“PBR”) period.

Transmission Cost Allocation

FortisAB is required to pay, on behalf of its customers, for transmission service provided by the AESO. FortisAB treats its transmission access costs separately from its distribution costs. FortisAB allocates these transmission charges to its customer rate classes, which are billed for these costs according to a methodology set out in its application.

FortisAB proposed a methodology change and applied a point of delivery (“POD”) specific allocator, to Rate 63 (Large General Service) customers to allocate the billing capacity and POD charges. For all the other rate classes, FortisAB maintained that using a three-year average of load settlement data applied across all PODs continues to be the most practical approach to develop cost allocators. The AUC approved the proposal to incorporate a POD-specific allocator for Rate 63 customers and maintain the status quo for all other customer rate classes.

Load Settlement Data

FortisAB applied an average of 2017 to 2019 load settlement data to allocate 2021 transmission access costs. The AUC directed FortisAB to update its schedules to reflect the most recent 2018 to 2020 load settlement data. The update was required as the AUC found that 2020 load settlement data would better reflect the changes in load resulting from the COVID-19 pandemic for transmission cost allocation purposes.

Line Loss Study

The AUC found it reasonable for Fortis to rely on the results of its 2010 line loss study but directed Fortis to provide an updated line loss study for all of its rate classes in its next Phase II application.

Transmission Billing Capacity

FortisAB’s transmission cost allocation methodology takes into account forecast monthly billing capacity and forecast monthly energy. EQUS REA Ltd. (“EQUS”) submitted that some irregularities exist for the billing capacity and energy forecast for the exterior lighting and irrigation rate classes. The AUC directed FortisAB to re-examine its forecasting methodologies for its rate classes and propose any changes to account for the irregularities for these rate classes and any other impacted rate classes in its next Phase II application.

Distribution Cost Allocation

The AUC evaluated whether FortisAB’s distribution cost allocation methods provide for a just and reasonable allocation of FortisAB’s distribution revenue requirement among its customer rate classes and REAs interconnected with its distribution system.

FortisAB’s distribution cost allocation study relied on results obtained from FortisAB’s Component Analysis Method (“CAM”) model to allocate the majority of its distribution system costs. The CAM model analyzes the individual components in a distribution feeder and allocates each component (or segment of feeder) to the customers served downstream of that component. In this application, FortisAB expanded its CAM model to include all of its distribution feeders, whereas previously, its CAM model only included a sample of feeders.

Use of Customer Metering Data to Determine Customer Peak Demands Instead of Transformer Size

The CAM model does not use actual customer usage data. To further establish the accuracy of the method, FortisAB was directed to, in its next Phase II application, complete an analysis and comparison of the CAM cost allocation results on a sample of ten feeders, using actual load settlement data.

The Operation and Use of the Property Retirement Unit Multiplier Study

From information provided in an information request regarding property retirement unit multipliers, the AUC noted that the total meters of line used to calculate the estimated construction costs differed from the total amount of line used to calculate the property retirement unit costs for each rate class. FortisAB explained that the discrepancy was due to neutral conductors not being specifically delineated when determining the number of lines of each conductor configuration. The AUC directed that FortisAB correct the property retirement unit multiplier study to properly account for neutral conductors. FortisAB was directed to further examine this issue and to modify the property retirement unit multiplier study, as well as subsequently update its cost allocation study and rate calculations accordingly.

The AUC further took issue with FortisAB’s indication that construction of overhead secondary conductors has similar per meter costs to that of building a line for a primary conductor. The AUC directed FortisAB to modify its property retirement unit multiplier study to add additional conductor configurations that are specific to the unit costs FortisAB incurs to construct a secondary conductor for use in the calculation of estimated construction costs and assign the appropriate quantities of a secondary conductor to these configurations for each rate class.

Sub-Functionalizing Costs Between Shared System and Local Facilities

Sub-functionalization, in the context of this application, refers to FortisAB’s proposal to categorize all its distribution system components and costs into three groups (or sub-functions), which it refers to as a shared system, local facilities, and customer-related.

The AUC was not satisfied by FortisAB’s sub-functionalization of asset management-related operating costs and general operating costs as 100 percent local facilities. The AUC considered that asset management-related activities should be split between shared system and local facilities and directed that FortisAB make this change in its compliance filing.

Allocation of Metering Costs

FortisAB allocated its total metering capital costs to each rate class based on the number of customers in that rate class. In this way, a residential customer with a single-phase service was allocated the same amount of metering capital costs as a three-phase large industrial customer. This is a change from previous applications as FortisAB now assumes that all meters have the same capital costs, and accordingly, the number of metered sites is used to allocate meter costs.

The AUC found that there were material differences in costs for different meter types, and noted that additional costs are required for larger services. As a result, the AUC was not persuaded that FortisAB’s assumption that metering capital costs do not vary by rate class or meter type is reasonable. Accordingly, FortisAB was directed to use allocation methods similar to those of its previous Phase II applications.

Calculation and Allocation of the Farm Transmission Amounts

FortisAB submitted that it allocates its farm transmission costs to its customers and REAs as part of the costs of its distribution system. The farm transmission credits received from the Alberta Electric System Operator (“AESO”) are credited to FortisAB customers annually through a Y factor provision of its PBR plan, offsetting the farm transmission costs directly borne by customers.

FortisAB last calculated its farm transmission costs and determined how to allocate the credits to customers in 2011. The AUC determined that it was preferable to use the CAM model and the allocation study to calculate farm transmission costs, as this is consistent with how FortisAB allocates all its other costs. The AUC directed FortisAB to revise its distribution cost allocation study and to update its farm transmission cost calculation.

Reallocation of Costs Between Small Capacity Rate Classes

FortisAB used its distribution cost allocation study, in combination with its CAM model, to perform most of the cost allocation study steps of functionalization, classification and allocation. The AUC found that the reallocation proposed by FortisAB more than doubled the amount of shared costs allocated to small general service customers and nearly halved the amount of shared system costs allocated to farm customers.

The AUC found that this would not result in just and reasonable rates, and it would lead to a significant and unacceptable bill impact. To set customer rates, the AUC directed that, in its compliance filing, FortisAB use the allocated costs from the CAM model without the additional cost reallocation step.

Rate Design and Bill Impacts

Bill Impacts and Revenue-To-Cost Ratios

In light of the extraordinary economic realities facing Alberta at the time of this decision, the AUC considered that FortisAB’s bill impacts should be minimized and ideally kept to zero percent for the purposes of this decision. For the purposes of this decision, the AUC temporarily departed from its usual approach to target revenue-to-cost ratios between 95 percent and 105 percent to maintain bill predictability during this time of economic uncertainty.

The AUC noted that the timing of FortisAB’s 2023 cost-of-service application could provide an opportunity for FortisAB to keep its bill impacts at or near zero for 2022 and then to adjust its rates for 2023 to move closer to the usual targeted range of 95 percent to 105 percent, keeping the rest of the methodology approved in this Phase II application the same. FortisAB was directed to address this matter in its 2023 cost-of-service application.

Customer Rate Classes

The AUC approved the request from FortisAB to split Rate 21 Farm Service into two rate schedules: Rate 21 Farm Service – Breakered Service (Closed) and Rate 22 Farm Service – Demand Metered. It further approved the requested elimination of REA Rates 24 and 29 in favour of REA Wire Owner schedules and lump sum allocation amounts for each REA Wire Owner.

The AUC denied FortisAB’s proposal to eliminate Rate 32 Grain Drying Service (Closed), with the existing legacy Rate 23 customers migrated to proposed Farm Service rates (Rate 21 or 22). FortisAB’s request to eliminate Rate 44 Oil & Gas (Capacity) Service (Closed), with the existing legacy Rate 44 customers being moved to Rate 45 Oil & Gas Service, was also denied.

Other Rate Design Proposed Changes

The AUC accepted changes proposed by FortisAB to transmission charges and system access services rates. The AUC determined that FortisAB’s proposed transmission rate design, including introduction of a monthly peak metered demand charge is reasonable because it flows through the price signals and costs that it receives from the AESO’s tariff.

Consistent with its approach of functionalizing its costs based on system, local facilities and customer cost groupings in its cost allocation study, FortisAB generally classified and designed its distribution charges based on these three cost areas. FortisAB requested approval of changes to distribution rate structures for the following Farm (Brokered Service), Irrigation Small General Service, and Oil and Gas rate classes.

The AUC found that FortisAB’s proposed distribution rate design is reasonable because the proposed structure generally aligns with FortisAB’s cost-of-service study, particularly with respect to sub-functionalization and classification and because, where it does not align, the AUC accepted that FortisAB was trying to minimize intra-class bill impacts. The AUC also found FortisAB’s proposed weighting between fixed and variable distribution charges to be reasonable in the circumstances. The proposed changes were approved.

Billing Determinants Forecast Methodology

Given the approval of the proposed rate structure changes provided in this decision, the AUC found that FortisAB’s proposed changes were necessary to contribute to billing determinant forecast accuracy and, as a result, found it is reasonable for the changes to be implemented during this PBR term. The AUC directed FortisAB to incorporate its proposed changes to its billing determinant forecast methodology according to the approved rate design changes, as well as directions related to the billing determinant method in Decision 25843-D01-2020. The AUC noted its expectation of FortisAB to use the same billing determinant forecast method in its 2022 annual PBR rate adjustment filing, as for its compliance filing to this decision.

How Should the Costs Attributable to Integrated Operations with REAs be Treated in FortisAB’s Distribution Tariff

FortisAB’s service area overlaps with the service areas of other REAs. Within an overlapping service area, FortisAB and an REA are required, under the Roles, Relationships and Responsibilities Regulation, 2003 (“3R Regulation”), to enter an IOA. As previously approved, FortisAB proposed to allocate to, but not charge, REAs for what FortisAB calculated was the REAs’ share of distribution system costs resulting from its integrated operation, as identified by the CAM model.

FortisAB’s Costs that are Attributable to Integrated Operations with REAs

In its cost allocation study and CAM model, FortisAB recognized that some of its assets are used, in part, to deliver energy to REA assets for use by the REAs to subsequently serve their members and vice-versa. FortisAB indicated that where its calculations needed data specific to the REAs’ assets, it relied on data provided by the REA. The AUC determined that the data used by FortisAB was sufficient and of sufficient accuracy to reasonably determine the amounts allocated.

FortisAB used its CAM model in combination with its distribution cost allocation study to determine the FortisAB costs to serve REAs under integrated operations, and the REA distribution system use credit. These compose the two amounts relating to its integrated operations with REAs.

The AUC accepted the assumption that FortisAB and the REAs have similar per-unit costs for the purpose of determining the REA distribution system use credit. However, the AUC found that the usefulness of the calculated REA distribution system use credit using the CAM model is limited to a value that can be used to gauge the reasonableness of the cost allocation in this proceeding.

Are There Integrated Operations/Related Costs that Should not be Borne by FortisAB’s Customers?

The AUC considered whether costs incurred by FortisAB that are related to its integrated operations with REAs and attributable to the REAs should be recovered through the distribution tariff or under the IOAs. FortisAB argued that its total revenue requirement is recoverable in its distribution tariff under Section 122 of the Electric Utilities Act. This includes the costs attributable to integrated operations with REAs, which were calculated to be $16.39 million in 2017.

The AUC determined that the Electric Utilities Act and the 3R Regulation govern the method of REA-related costs and that it does not have the authority to approve FortisAB’s costs to serve REAs under integrated operations. The AUC determined that Fortis is required to recover these costs through the mechanism set out in the 3R Regulation, through arbitration or negotiation. These costs were required to be removed from rates charges to distribution customers.

However, the AUC found that it has the authority, and it is in the public interest, to approve the recovery of Fortis’s costs related to its customers’ use of the REAs’ assets and systems in Fortis’s distribution tariff (i.e., the REA distribution system use credit).

In determining when these costs should be removed from FortisAB’s regulated revenue requirement, the AUC considered, the AUC found it reasonable to maintain FortisAB’s 2017 revenue requirement for the remainder of the current PBR term. This revenue requirement had previously been approved as just and reasonable, and the two percent adjustment was not enough to require a correction.

The AUC directed FortisAB to include in its 2023 cost-of-service review application an estimate of its costs to serve REAs under integrated operations for 2023 and to remove this 2023 amount from its revenue requirement.

Terms and Conditions

FortisAB requested approval of extensive changes to its customer and retailer terms and conditions (“T&Cs”) of its service. The AUC required FortisAB to provide more detail regarding the proposed section regarding the quotation package in its compliance filing to this decision. The AUC made approval of this proposed section conditional on its review of the level of detail in the compliance filing. The AUC approved, in part, amendments to the section regarding adjustment of bills in the event of a billing error.

The AUC denied the remaining amendments to FortisAB’s customer T&Cs. It determined that Alberta ratepayers face exceptional circumstances in 2021, which include the current economic downturn due to the ongoing COVID-19 pandemic, the collapse in the price of oil, and the resulting significant negative impact on Albertans and businesses. The AUC considered it contrary to regulatory efficiency to approve the proposed revisions now when the T&Cs are likely to undergo additional substantive changes within the next few years due to the AUC’s standardization initiative.

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