Negotiated Settlement – Rule 018 – Performance Based Regulation – Electricity Distribution

On December 18, 2015, ENMAX Power Corporation (“EPC”) filed an application with the AUC for approval of a 2015-2017 performance based regulation (“PBR”) plan for its electricity distribution services. After the AUC issued a notice of application, the Consumers’ Coalition of Alberta (the “CAA”) and the Office of the Utilities Customers Advocate (the “UCA”) registered to participate as interveners in the proceeding.

In EPC’s application, the X factor component of the PBR plan would be interim in nature. The interim X factor would be used until the AUC determined the final X factor in the ongoing AUC initiated Proceeding 20414. Proceeding 20414 was initiated for the purposes of establishing the parameters for the next generation of PBR plans.

PBR Plan Overview

The PBR framework provides a mechanism to adjust rates annually for each class of ratepayers using the following formula:

 

 

Negotiated Settlement Process

On January 20, 2016, EPC notified the AUC that EPC, the CCA, and the UCA (collectively, the “Negotiating Parties”) were willing to explore a negotiated settlement. In March 2016, EPC applied to the AUC for approval to initiate a negotiated settlement process (“NSP”), pursuant to Section 4 of AUC Rule 018: Rules on Negotiated Settlements (“Rule 018”). The AUC approved EPC’s request to commence the NSP, and set May 16, 2016 as the deadline for EPC to file any resulting agreement between the Negotiating Parties, or advise the AUC the negotiations were unsuccessful.

In its application, EPC listed the following as the issues that would be the subject of negotiation among the Negotiating Parties:

• going-in rates;

• PBR plan term;

• Interim X Factor (to be replaced by a final X Factor to be determined in Proceeding 20414);

• I-X mechanism

• Y Factors;

• Z Factor mechanism; and

• reopeners.

On March 10, 2016, EPC notified the AUC that the Negotiating Parities had reached a negotiated settlement in principle on all the major issues except for the interim X Factor. On May 12, 2016, EPC filed a negotiated settlement application with the AUC. The application included a settlement brief and the terms of the negotiated settlement agreement for EPC’s 2015-2017 PBR plan (the “NSA”).

Consideration of NSA

The AUC’s role in approving negotiated settlements is governed by sections 132 – 135 of the Electric Utilities Act (the “EUA”) and Rule 018. EPC requested the AUC consider the NSA pursuant to Section 135 of the EUA, which requires the AUC to either accept or reject a negotiated settlement agreement in its entirety. EPC further requested that if the AUC had concerns with certain NSA provisions, it indicate to the Negotiating Parties those provisions and provide the parties an opportunity to re-negotiate rather than reject the entire NSA. The AUC agreed to consider the NSA on this basis.

After reviewing the relevant legislative provisions, Rule 018, and case law, the AUC summarized the factors it must consider in determining whether to reject or accept the NSA. Those factors are:

• Fairness of the NSP: assessing whether there was procedural fairness, both with respect to adequate notice and with respect to the conduct of the negotiation process itself;

• Just and reasonable rates: the AUC considers the reasonableness of the individual elements of the NSA in accordance with its duty to ensure just and reasonable rates; and

• Patently against the public interest or contrary to law: the AUC considers each of the material provisions of the NSA in determining whether those provisions appear contrary to accepted regulatory practices or are clearly contrary to law.

Fairness of the Negotiated Settlement Process

The AUC noted that the UCA and CCA had been provided sufficient notice to allow them to participate in the negotiations as informed parties. The AUC concluded that from the information submitted by EPC, the AUC was satisfied that the negotiations were conducted in an open and fair manner. The AUC also reviewed the terms of the NSA to ensure customers not directly represented in the negotiations were not compromised.

The AUC concluded that the NSA provides a reasonable balance of customer interests from all rate classes. Based on this review – and the fact that no larger commercial or industrial customers filed submissions in opposition of the NSA – the AUC concluded the negotiated settlement process was fair.

Public Interest

EPC submitted that the proposed PBR plan agreed to under the NSA was consistent with the requirements and directions set out in AUC Decision 2012-237, in which the AUC had previously set out PBR plan parameters for other utilities under the AUC’s jurisdiction.

The EPC summarized the terms of the NSA as follows:

• The PBR formula is the same formula previously approved by the AUC in Decision 2012-237. The use of the I Factor methodology, proposed Y Factor, and EPC’s line loss reduction program are generally consistent with those previously approved by the AUC for EPC and other distribution utilities.

• The going-in rates for the PBR plan are determined through cost-of-service methodology. The going-in rates under the NSA are the 2014 distribution access service (DAS) rates, adjusted to reflect the revenue shortfall in 2014.

• The 3-year PBR plan term under the NSA aligns with that of other distribution utilities.

• There is no efficiency carry-over mechanism included in the PBR plan.

The AUC noted that the NSA represents a unanimous agreement reached as a result of successful negotiations. The unopposed NSA resulting from the successful efforts of the Negotiating Parties, including the CCA and UCA representing a majority of EPC’s customers, supported a finding that the NSA is in the public interest.

The AUC concluded that having considered the NSA in its entirety, approval of the NSA would result in greater regulatory efficiency and cost savings to customers than would a contested process.

However, as noted above, the Negotiating Parties did not reach an agreement with respect to the interim X Factor. The Negotiating Parties requested that the AUC consider their opposing positions and make a determination regarding the interim X Factor.

Interim X Factor

EPC proposed a total factor productivity (“TFP”) growth factor of negative 0.89 percent and a stretch factor of 0.0 percent. Both the CCA and UCA proposed a TFP growth factor of 0.96 percent and a stretch factor of 0.20 percent, for an X Factor of 1.16 percent, consistent with the Decision 2012-237.

The AUC noted that any analysis with respect to the TFP growth factor or stretch factor components of the X Factor, even on an interim basis, would be premature and unfair to parties participating in Proceeding 20414. The AUC stated that it was not persuaded by the consumer groups’ argument that the 1.16 percent X Factor should be used.

The AUC did not adopt either of the proposed interim X Factors advanced by EPC or the consumer groups. Instead, the AUC ordered the interim X Factor be set at 0.8 percent, as determined in Decision 2009-035.