Performance-Based Regulation Plan – Rates
Application
In Bulletin 2022-006, issued on May 26, 2022, the Alberta Utilities Commission (“AUC”) initiated Proceeding 27388 to establish the parameters of the performance-based regulation (“PBR”) plans that will start in 2024, for Alberta distribution facility owners (“DFOs”).
Decision
In the decision, the AUC established the parameters of the third generation (“PBR3”) plan to be implemented for the 2024 to 2028 period applying to ATCO Electric Ltd., FortisAlberta Inc., ENMAX Power Corporation, and EPCOR Distribution & Transmission Inc. (“EPCOR”) (the “Electric Distribution Utilities”); ATCO Gas and Pipelines Ltd. and Apex Utilities Inc. (the “Gas Distribution Utilities”) (collectively, the “Distribution Utilities”).
Pertinent Issues
The PBR3 plan builds upon the AUC’s second-generation PBR plan, which was in effect from 2018 to 2022. The AUC set the PBR3 plan parameters as described below.
The AUC set the inflation (“I”) factor to use: (i) the Alberta Fixed Weighted Index (“FWI”) labour price index instead of the Alberta Average Weekly Earnings (“AWE”); (ii) an updated 60 percent labour and 40 percent non-labour weighting; and (iii) a forecast and true-up approach for the I factor instead of the lagged approach.
The AUC approved a total factor productivity (“TFP”) growth factor of 0.1 percent, based on industry TFP growth and a stretch factor, and an additional benefit-sharing provision in the form of an X-factor premium of 0.3 percent. Except for the calculation of the K-bar, the total X-factor to be used in PBR3 is 0.4 percent, inclusive of the benefit-sharing premium. For K-bar calculation purposes, the X-factor of 0.1 percent must be used.
The AUC modified the funding mechanisms for each of the Type 1 and Type 2 capital from the ones used in prior PBR plans. Type 1 capital includes projects of a type that is extraordinary and not previously included in the distribution utility’s rate base, if the project is required by a third party. Type 2 capital, managed under the K-bar mechanism, includes all or most other capital that does not qualify for either Y factor or Z factor treatment, whether fully funded under the I-X mechanism or not. The AUC expanded the criteria used in the PBR2 plan to provide for funding for capital directly caused by applicable law related to net-zero objectives, and introduced an expanded accounting test to calculate the Type 1 capital tracker amount. The AUC approved the following new alternative remuneration scheme on a pilot basis:
- For Type 1 capital, the AUC approved a capital tracker mechanism with some modifications for the eligibility criteria to provide funding for expenditures directly caused by applicable law related to net-zero objectives. The AUC also introduced an expanded accounting test to calculate the Type 1 capital tracker amount.
- For Type 2 capital, the AUC approved the K-bar mechanism used in PBR2 with some modifications, including using a five-year average of 2018-2022 historical actual capital additions and a customer growth escalator instead of the Q factor. The AUC further clarified that an X-factor of 0.1 percent must be used in the K-bar accounting test.
- The AUC also implemented a new alternative remuneration scheme on a pilot basis, which allows utilities to earn a return on specific operation costs.
The AUC introduced two additional benefit-sharing provisions to the PBR3 plan. First, an X-factor premium of 0.3 percent, and second, an asymmetric, two-tiered earnings sharing mechanism (“ESM”) with the following parameters:
- A deadband of 200 basis points above the approved return on equity (“ROE”) for a given year with no customer sharing. Further, no sharing with customers through an ESM occurs below the approved ROE rate.
- A first tier of sharing between 200 basis points and 400 basis points above the approved ROE for that year within which a distribution utility retains 60 percent of the incremental earnings and customers receive 40 percent of the incremental earnings.
- A second tier of sharing at 400 basis points above the approved ROE for that year, where utilities retain 20 percent of the incremental earnings and customers receive 80 percent of incremental earnings.
The AUC determined that there was no longer a need to trigger the reopener review when an achieved ROE exceeds the approved ROE by 300 basis points in two consecutive years. Other reopener provisions remained unchanged from the first two PBR terms. The AUC also determined that the efficiency carryover mechanism (“ECM”) will not be included in the PBR3 plan.
The AUC directed the Distribution Utilities to track efficiencies, using: (a) controllable operations and maintenance (O&M) per customer; (b) controllable O&M per kilometre (km) of line (pipe); (c) total cost per customer, broken out by O&M and capital additions separately; and (d) total cost per km of line (pipe), broken out by O&M and capital additions separately. The AUC also approved EPCOR’s proposed treatment of its customer-specific rates in the PBR3 plan.
The AUC did not direct any changes to regulating the Electric Distribution Utilities under the price-cap plan and Natural Gas Distribution Utilities under the revenue-per-customer plan.
The remaining parameters of the PBR3 plan, such as the annual rate changes, price-cap vs revenue-per-customer cap approaches, Y factor, Z factor, service quality, financial reporting and annual reporting requirements were unchanged from those established in the PBR2 plans.
