Capital Tracker – Required by Third Party
In this decision, the AUC denied the application from ENMAX Power Corporation (“EPC”) for a Type 1 capital treatment of funds associated with the relocation of EPC’s infrastructure and service connection work pursuant to The City of Calgary’s (“Calgary”) Green Line Light Rail Transit (“LRT”) Project (the “Project”).
Consequently, the AUC directed that EPC refund all associated placeholder amounts previously collected from customers in a compliance filing to this proceeding.
Background and Procedural Summary
The PBR Framework
As part of the framework of the performance-based regulation (“PBR”) plans, the AUC separated capital funding into two categories: Type 1 and Type 2 capital. Type 1 capital is intended to provide supplemental funding to a distribution utility for a type of capital that the utility has not deployed in the past. It is supplemental because it is in addition to the funding (or revenue) the distribution utility receives under the other terms of the PBR plan, including Type 2 capital. Under the PBR plans, a distribution utility may apply for an adjustment to account for the effect of exogenous and material events for which it has no other reasonable cost recovery or refund mechanism within the PBR plan (Z Factor).
EPC’s Type 1 Capital Tracker Application
In 2018, Calgary reached an agreement with the federal and provincial governments to fund the first stage of the Project. As the owner of the electric distribution system in Calgary, EPC is required to perform service connection work for the planned LRT expansion. EPC is required to relocate existing civil and electrical infrastructure to accommodate the proposed LRT alignment. EPC filed the application for supplemental Type 1 capital funding for these expenditures.
In its 2019 annual PBR rate adjustment filing, EPC stated that it had received a request from Calgary to relocate existing infrastructure and was granted approval of a Type 1 capital funding placeholder equal to 90 percent of the management-approved internal forecast costs associated with the relocation.
In this application, EPC requested a true-up of its 2019 and 2020 Type 1 capital funding placeholder and associated revenue requirements.
While the AUC determined that the Project meets the Type 1 capital tracker materiality threshold, it found that the Project cannot be characterized as extraordinary and finds that the expenditures incurred by EPC under the Green Line Project are types that can reasonably be considered as having been previously included in EPC rate base.
Issues
Materiality Threshold and Criterion 2 – Required by a Third Party
The materiality threshold for Type 1 capital tracker funding is calculated annually as the dollar amount equal to four basis points of the utility’s return on equity. The AUC found that the Project met the Type 1 capital tracker materiality threshold in 2019, 2020, 2021 and 2022. EPC incurred capital additions in 2019 and 2020 and requested approval of the Type 1 capital tracker funding for its revenue requirement of $0.48 million in 2019 and $1.15 million in 2020.
Criterion 2 provides that a project must be required by a third party. The AUC considers that there are two questions within this criterion: (i) what entity is requiring the Project to be completed? And (ii) is that entity a third party?
Regarding the first question, the AUC determined that it was undisputed that EPC’s Green Line Project is required and that it is Calgary, EPC’s sole shareholder, that is requiring EPC to complete the Project.
The assessment of whether Calgary is a third party, as required by the second question, is complicated because Calgary is EPC’s sole shareholder. EPC and Calgary have a relationship beyond that of a utility and a municipality.
EPC argued that it was relevant in which capacity Calgary acted and that, in these circumstances, Calgary acted in its capacity as a municipality when making decisions regarding the planning and construction of the Green Line LRT extension. The Utilities Consumer Advocate (“UCA”) argued that the term third party requires a narrow interpretation and that third party must be more than just a separate legal entity. The UCA argued that Calgary plays a role in the governance of EPC and receives a financial benefit from EPC in the form of dividends. As a result, Calgary and EPC are closely connected and cannot be considered arm’s length.
While Calgary has some control over EPC through the election of EPC’s board of directors and review of EPC’s business plans, the AUC determined that Calgary’s interactions with EPC go beyond the corporate relationship. Depending on the circumstances, Calgary may or may not be considered a third party in the context of Criterion 2 when making a request of EPC. In considering Criterion 1, the AUC agreed with EPC that it needs to consider the extent to which a request by Calgary is made in its capacity as a municipality versus as EPC’s shareholder.
Within the Green Line LRT Project context, the AUC determined that Calgary acted in its capacity as a municipality. The AUC found that EPC’s Green Line Project can be considered to be required by a third party. Accordingly, this Project meets Criterion 2 for the Type 1 capital tracker treatment.
Criterion 1 – Extraordinary and Not Previously Included in Rate Base
Criterion 1 requires that a project must be extraordinary and not previously included in the distribution utility’s rate base.
EPC argued that the Project is unique as it had not undertaken a project of comparable size or complexity before. EPC supported the extraordinary nature of the Green Line Project by pointing to the magnitude of capital additions, unparalleled project complexity, line length, iterative design process, and unique land use and planning considerations.
The UCA and Consumers Coalition of Alberta argued that EPC had not described that the Project meets the requirements of Criterion 1. It noted that a “project must be of a type that is extraordinary” and that EPC had not made it clear that this is the case.
The AUC determined that this Project did not create issues that EPC had not faced before and that the challenges were not unusually complex. The AUC noted that the Project is different from previously undertaken projects but is not beyond EPC’s normal course of business.
The AUC determined that neither the Green Line Project nor any segment meets Criterion 1 for the Type 1 capital tracker treatment.
Conclusion
EPC had been authorized to collect the placeholder amounts of $1.0345 million, $1.2546 million, and $1.78 million for 2019, 2020 and 2021, respectively for the Project from its customers. As the AUC found that the Project does not meet the requirements of Criterion 1, EPC was directed to refund all Green Line Project Type 1 capital tracker placeholder amounts to customers in 2022 by way of a compliance filing.
