Transmission – General Rate Application – Use of Forecast – Depreciation Parameters
ATCO Electric Ltd. (“ATCO”) filed a general rate application with the AUC for the test years 2015, 2015, and 2017 (the “General Rate Application” or “GTA”).
The AUC received SIPs from AltaLink Management Ltd. (ALtaLink), Alberta Direct Connect Consumers Association (“ADC”), Industrial Power Consumers Association of Alberta (“IPCAA”), Consumers’ Coalition of Alberta (“CCA”), Office of the Utilities Consumer Advocate (“UCA”) and the City of Calgary (“Calgary”). The CCA, ADC, and IPCAA also worked together as part of a coalition called the Ratepayer Group (“RPG”).
Length of Test Period
The CCA submitted that the AUC should limit the test period to two years due to the risk associated with the current economic uncertainty in Alberta. Similarly, the RPG noted ATCO’s history of over-earning in the past 10 years and suggested that including 2017 would provide little or no future benefit to ratepayers.
The AUC noted that the GTA and resulting AUC proceedings had been unusually protracted due to numerous re-filings and other interlocutory steps. While on the one hand the unduly long process had eroded efficiency gains that might have resulted from using a longer test period, these same factors meant that for all of 2015, and much of 2016, actual cost data was available. This mitigated the risk associated with basing rates on forecasts. The AUC also noted that excluding 2017 this late in the process would result in duplication and redundancy when the AUC considered ATCO’s next GTA.
The CCA motion was therefore denied, and the AUC approved the use of the three year test period.
Forecasting Methodology and Assumptions
The recent economic downturn in Alberta brought into focus issues regarding the treatment of personnel costs when an employee is terminated in a given year and a regulated entity incurs severance costs.
With respect to personnel costs, the AUC agreed with the RPG’s submission that the mid-year convention should be applied with respect to forecasted termination of full time equivalent (“FTE”) positions. The effect of the mid-year convention is to deem an employee terminated at the beginning of the year (or anytime, for that matter) as having been terminated at mid-year for the purpose of calculating the revenue requirement in that year. The midyear convention mitigates a utility’s incentive to terminate employee’s at the beginning of the year, but still collect from ratepayers the terminated employee’s entire year’s salary.
The AUC held that “a utility should apply the mid-year convention to the removal of an FTE in the year of its forecasted removal if the utility is not expecting to fill the position going forward.”
With respect to severance costs, ATCO submitted that international accounting standards allow severance costs pertaining to capital FTEs be expensed rather than capitalized. The RPG submitted that ATCO had misinterpreted International Accounting Standards (IAS) 16 – Property, Plant and Equipment – and recommended the AUC direct ATCO to capitalize those severances costs.
The AUC concluded that ATCO’s interpretation of IASs was reasonable and permitted ATCO to expense, rather than capitalize, severance costs attributable to capital FTEs.
Requested Placeholder Amounts
ATCO requested the AUC approve for placeholder treatment the following categories of costs:
• Common group costs;
• Corporate licence fees;
• IT common matters costs for price only, not volume;
• Transmission line insurance costs;
• Return on equity and common equity ratios; and
• Defined benefit plan pension costs.
The AUC approved ATCO’s request for common group costs as filed. ATCO submitted a Common Group Cost Application on June 8, 2016, which was assigned AUC proceeding number 21701.
The AUC denied ATCO’s requested placeholder amounts for corporate licence fees. The licence fees were the subject of Proceeding 21029, for which AUC decision 21029-D01-2016 was issued on June 30, 2016 (the “Licence Fees Decision”).
In the Licence Fees Decision, the AUC stated that it was not persuaded the licence fees payable by ATCO Electric and ATCO Pipelines to their parent ATCO Ltd. constituted reasonably incurred costs in connection with providing utility services. The licence fees are intended to compensate the parent for its subsidiaries’ use of certain intangibles including economies of scale purchasing power benefits, benefits of the ATCO name, intellectual property, and know-how.
Specifically, the AUC was concerned about the ambiguity with respect to the valuation of benefits realized by the subsidiaries as a result of their relationship with their parent. Further, the Commission noted that there had been no effort undertaken by the subsidiaries to critically assess whether the licence fees represented the fair market value of any benefits received.
With respect to requested placeholder for IT common matters prices, the AUC noted that IT prices were being determined in Proceeding 20514 (the “IT Common Matters Proceeding”), but that determining IT volumes was being determined under the current proceeding. Because ATCO had not proposed a place holder for prices, the AUC ordered ATCO to confirm in its compliance filing whether it proposed an IT cost placeholder in relation to the IT Common Matters Proceeding.
ATCO proposed placeholders of 8.30 percent for return on equity and 36.0 percent for the common equity ratio for each of the three test years. The AUC noted that the final approved return on equity and deemed equity ratio for 2013-2015 had been determined in Decision 2191-D01- 2015. Therefore the AUC denied the use of a placeholder for the year 2015, but approved the proposed placeholders for 2016 and 2017.
Fuel Costs
ATCO proposed a deferral account for fuel costs due to uncertainty in both fuel prices and volume. ATCO proposed the use of a deferral account on the bases that:
1. Fuel costs volatility can be very high,
2. ATCO has limited ability to control either the price or the volume, the latter of which varies as a result of load variation, and
3. There is no offsetting revenue associated with fuel price or volume changes.
The AUC discussed its reasons in Decision 2013-358, which dealt with the continued use of a deferral account for fuel. In Decision 2013-358, the AUC found that the use of a deferral account for fuel was not warranted as ATCO’s fuel costs represented an insignificant proportion of its total revenue requirement (about 1%) and the use of deferral account treatment for fuel costs removes any incentive for ATCO to improve efficiency to minimize such costs.
The AUC was not persuaded by ATCO’s proposal to reestablish deferral account treatment for fuel costs.
Operating Costs Forecast Methodology
In Decision 2013-358, the AUC instructed ATCO to develop its forecast from an assumed zero-base, which seeks to reassess costs required to fulfill its statutory duties on an annual basis, as opposed to assuming that costs are simply incremental to the forecasted or actual costs from the preceding year.
ATCO submitted that it employed an activity-based forecasting approach whereby it considered the activities to be performed for each test year, and then evaluated if such costs are indeed required to provide safe and reliable service.
The AUC held that it was satisfied that ATCO’s methodology was in accordance with the direction provided by the AUC in Decision 2013-358.
Vegetation Management
RPG submitted that ATCO had not provided a logical explanation to support the significant increase in the proposed ratio of areas treated to areas under vegetation management (“VM”) in the test years relative to the 2008 – 2014 period (e.g. the ratio in 2014 was 1.8%, which jumped to 8.6% in 2015, the first test year).
In response, ATCO submitted that its forecasts were based on current conditions, as assessed by professional foresters.
The AUC concluded that a major driver in the increase in actual VM expenditures in 2015 was related to a backlog of deferred work from previous years. In particular, ATCO had experienced issues related to the availability of contractors to complete the forecasted VM work.
The AUC held that customers should not bear a disproportionate share of risk that ATCO, for whatever reason, is unable to complete its forecasted VM work.
The AUC directed ATCO to set up a reserve account for VM in its no cost capital in its revenue requirement schedules. The AUC further directed that ATCO will be required to set off amounts that exceed approved forecasts in a year against amounts included in approved forecasts for subsequent years within the same test period. Approved but unused amounts remaining at the end of the test period are to be added to the VM reserve account for the next GTA period. In other words, ATCO may defer work within the test period, but the total recoverable VM costs cannot exceed the total permitted VM amount in that period.
The AUC also applied a 25% reduction to the 2016 and 2017 VM forecasts submitted by ATCO.
Telecommunication Costs
ATCO proposed to change its method for the allocation of telecommunication network costs. Under its proposal, ATCO Electric Transmission would recover telecommunication costs from ATCO Electric Distribution for the use of the network built by the transmission affiliate.
ATCO submitted that its proposed treatment of telecommunication costs was intended to provide a price signal consistent with competitive markets, to encourage a more efficient outcome with respect to telecommunication cost allocation. ATCO also proposed giving a 10 percent discount to its affiliate for the use of telecommunication network.
The UCA submitted that ATCO Electric Distribution has consistently used its affiliate’s telecommunication networks and would continue to do so with the 10 percent discount proposed by ATCO. The UCA also submitted that the different regulatory regimes applicable to the distribution arm (performance based regulation or “PBR”) and transmission arm (cost-of-service regulation) would create a situation in which double-recovery of telecommunication cost would occur.
The AUC agreed that the proposed change to the allocation method of telecommunication costs would result in double-recovery at the expense of transmission customers. This is because ATCO Electric Distribution’s rates under its existing PBR rates would not change, but the allocation of telecommunication costs would. As a consequence, transmission customers would bear an additional burden caused by ATCO Electric Transmission revenue shortfalls arising from the reallocation of costs.
The AUC denied the proposed telecommunication costs allocation method and directed ATCO to continue to use the allocation percentages approved in its 2013-2014 GTA.
Depreciation Parameters
ATCO filed a depreciation study prepared by Larry Kennedy (Mr. Kennedy) of Gannet Fleming, Canada, ULC (“Gannet Fleming”).
In response to ATCO’s depreciation study, the CCA filed evidence prepared by Mr. Jacob Pous (Mr. Pous) of Diversified Utility Consultants, Inc., to address a number of issues related to ATCO’s requested depreciation provisions, based on Mr. Kennedy’s study.
Mr. Pous’s most significant critique of Mr. Kennedy’s study was the fact the Mr. Kennedy had included forecasted retirements in determining depreciation parameters (i.e. average service life and net salvage estimates). Mr. Pous submitted that Mr. Kennedy’s inclusion of forecast data in the development of depreciation parameters is inconsistent with industry practices in the field of depreciation analysis.
The AUC concluded that the use of forecasts has been previously limited strictly for the purpose of developing depreciation rates within a depreciation study conducted for the purpose of a GTA. The AUC held that the use of forecast data to develop depreciation parameters has not been permitted in the past and that the portions of Mr. Kennedy’s study that did so would be afforded little or no weight in the AUC’s determination of the reasonableness of ATCO’s proposed depreciation parameters.
It followed that the AUC did not accept many of ATCO proposed changes to depreciation parameters. In particular, a number of proposed net salvage value parameters (“NS”) were revised significantly by the AUC including:
• The -175% wooden poles NS proposed by ATCO revised to -90%;
• The -200% steel towers NS proposed by ATCO revised to -25%;
• The -40% substation equipment (AC) NS proposed by ATCO revised to -15%; and
• The -40% HVDC conductor towers (new) NS proposed by ATCO revised to -15%.
Capital Expenditures and Additions Forecast
ATCO submitted its forecasted capital expenditures and additions as shown in Table 1 below.
Direct Assigned Projects: Capital Expenditures and Additions
Table 2 below provides a summary of significant direct assigned capital expenditures and additions forecast by ATCO, which the AUC denied or directed ATCO to revise.
Capital Maintenance
ATCO forecast capital expenditures and additions for its transmission capital maintenance (“TCM”) program are set out in the table below.
The RPG submitted that ATCO had failed to carry out any cost/benefit analysis of alternatives for nearly all the business cases related to TCM projects, contrary to the AUC’s direction in Decision 2013-358, which considered ATCO’s 2013-2014 GTA. RPG further submitted that ATCO has continuously over forecast its TCM spending by an average of 36% over the past five years. The RPG submitted that for the years 2013 and 2014, ATCO over earned by $6 million as a result of over forecasting capital maintenance additions, an amount which customers are not reimbursed.
The RPG recommended the AUC set a ceiling on capital maintenance spending of $50.9 million per year, which represented the 10 year average of actual spending, adjusted for inflation.
ATCO responded that RPG’s recommendation would effectively force ATCO to run the system into the ground before it would be permitted to increase its maintenance expenditures.
The AUC noted that while the RPG’s evidence regarding poor forecasting accuracy was concerning, what was even more concerning was the failure of ATCO to demonstrate that it had attempted to improve its forecasting methodology.
The AUC concluded that a 25% reduction in TCM forecasts was warranted. The AUC directed ATCO to provide a revised breakdown of TCM costs in its compliance filing. However, the AUC concluded that given ATCO’s large base of ageing assets, adopting the RPG’s ceiling proposal would not be appropriate.
