Rates – Tariff
The City of Lethbridge (“Lethbridge”) filed its general tariff application (“GTA”) for approval with the AUC. Lethbridge requested approval of the following as part of its GTA:
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A revenue requirement of $6.3407 million in 2015, $6.3184 million in 2016 and $7.1156 million in 2017;
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Reconciliation and maintenance of Lethbridge’s return on equity (“ROE”) deferral account and direct assign deferral account;
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Reconciliation and maintenance of Lethbridge’s hearing cost reserve account and self-insurance reserve account; and
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Acknowledgement of Lethbridge’s compliance with outstanding directions from Decision 2013-364 and Decision 2013-417.
Lethbridge’s requested revenue requirement for each of 2015, 2016 and 2017 were provided as follows:
Lethbridge submitted that the majority of the increases in its rate base and revenue requirement for 2016 and 2017 was attributable to the addition of the new Chinook 181S Substation and associated transmission line, which represents costs of $569,452 in 2016 and $755,131 in 2017.
Operating Expenses
Lethbridge submitted that it applied a six year historical average for overhead line expenses, given the cyclical nature of preventive maintenance work on overhead lines. Lethbridge also submitted that the purchase of a bucket truck in 2015 would serve to reduce external contractor costs, and allow Lethbridge to conduct more frequent inspections of overhead lines.
The Consumers’ Coalition of Alberta (“CCA”) submitted that the purchase of the new equipment served only to shift costs from contractors to internal labour, and did not significantly affect forecasts. Accordingly, the CCA submitted that the test year expenses be based on 2014 actual expenses with adjustments for inflation and growth.
The AUC agreed with Lethbridge that its overhead line expenses were cyclical in nature, and held that a six year average was reasonable, as it helped to smooth forecast costs. The AUC further held that the purchase of the bucket truck for the purposes of inspections was reasonable, despite the fact that Lethbridge did not provide a business case in support of the purchase. The cost of the truck itself was not significant in the AUC’s determination.
With respect to overhead costs for administration, design, engineering and other services, Lethbridge forecasted overhead recoveries of approximately $0.103 million for 2015, $0.491 million for 2016, and $0.209 million for 2017.
The CCA submitted that the forecast costs represented a material variation from year to year. The CCA argued that earnings fluctuations ought to be minimized, and that the level of overhead capitalization should be based on sustainable levels of capital activity from year to year. Accordingly, the CCA recommended that Lethbridge be directed to review its overhead capitalization policy, based on sustainable capital activity levels.
Lethbridge replied that its current capitalization method was reasonable, in that the costs are explainable as well as the actual dollar amounts being reasonable.
The AUC held that Lethbridge was not bound by International Financial Reporting Standards (IFRS), but instead by the standards of the Public Sector Account Board. The AUC held that Lethbridge’s capitalization method was reasonable and consistent with historical practice. Accordingly, the AUC approved the forecast overhead costs recoveries as filed.
Inflation
Lethbridge provided the following inflation figures in its application:
Lethbridge noted that the forecast amounts for the International Brotherhood of Electrical Workers (“IBEW”), as well as the Canadian Union of Public Employees (“CUPE”) were set by collective agreements already in place, which expire at the end of 2017. Lethbridge submitted that it has been its practice to match the inflation rate for management to the inflation rate for CUPE wages because that rate is the principal driver of management wage increases within the City of Lethbridge. Lethbridge submitted that any compaction between administration and CUPE rates would make it difficult to incent employees to take on increased responsibility in managerial roles.
The AUC noted that it was concerned about the yearly salary increases in all union and non-union areas for 2015, 2016 and 2017. However, noting that the economic conditions were different at the time Lethbridge entered into the contracts, the AUC noted that Lethbridge was bound by its agreements. The AUC held that although economic conditions do not warrant the application of escalators to administration and managerial salaries, it was prepared to accept the forecast based on the potential for compaction of employee and managerial wages.
The AUC however, noted that insufficient information was provided to support how Lethbridge adjusts for changes in market conditions in Alberta. Accordingly, the AUC directed Lethbridge in its next GTA, to:
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Explain the reasonableness of its forecast salaries and wages for all employees;
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Explain how its compensation adequately responds to economic downturns; and
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Provide the positioning of Lethbridge’s total compensation relative to the Alberta marketplace and Lethbridge’s justification for that positioning.
The AUC, for the same reasons outlined above, directed Lethbridge to apply for contractor rates at 0.0 percent escalation for the term of the GTA.
Depreciation
With respect to depreciation parameters, Lethbridge filed an updated depreciation study, which was not opposed by the CCA.
Changes to Lethbridge’s proposed life curves for depreciation costs were approved as filed, with the exception of Supervisory Control and Data Acquisition (“SCADA”) cost categories, net salvage amounts for transmission lines, and structures and improvements.
The AUC noted however, that Lethbridge filed a number of corrections to its depreciation expenses throughout the hearing. As a result, the AUC directed Lethbridge to update its schedules and revenue requirements in its compliance filing.
With respect to the accounting treatment of retired assets, gross salvage and removal, the CCA submitted that Lethbridge’s depreciation practices had the potential to unduly increase the cost of new assets in service, and recommended that Lethbridge change its deprecation accounting to ensure that new asset costs are not burdened with the costs of assets retired and removed from service.
Lethbridge replied, stating that any such change to depreciation practices would not benefit ratepayers. Other departments within Lethbridge do not use such a depreciation system, and any potential cost savings would be offset by the administration costs of transitioning to a new system.
The AUC held that it shared the concerns raised by the CCA, holding that by capitalizing the cost of asset removals into the asset accounts, the balance of capital assets upon which the accumulated depreciation is determined is misrepresented by including removal costs that should be accounted for elsewhere. The AUC held that the effect of this calculation method would effectively overstate the annual amortization of reserve differences true-up calculation.
Accordingly the AUC determined that there was no rationale for Lethbridge to capitalize removal costs into its capital asset accounts, and accordingly directed Lethbridge to reflect all incurred removal costs in its accumulated depreciation accounts effective January 1, 2016. The AUC also noted that Lethbridge’s depreciation study was often unclear, and at times conflicting with depreciation information filed in support of the application. As such, the AUC directed Lethbridge (in its next GTA) to adopt consistent account names and numbering conventions, identify any changes made to depreciation parameters, and to group its depreciation accounts into Transmission Plant and General Plant in both its depreciation study and its supporting materials.
Capital Structure
Lethbridge applied for a 2015 deemed capital structure of 36 percent equity and 64 percent debt, consistent with the AUC’s findings in Decision 2191-D01-2015. Lethbridge applied for the same capital structure in 2016 and 2017 as a placeholder. Lethbridge forecasted a return on equity using the generic return on equity rate of 8.3 percent as approved in Decision 2191-D01-2015.
With respect to debt costs, Lethbridge submitted that it provides for capital plant investments through its Mill Rate Stabilization Reserve, which Lethbridge noted was analogous to injections of equity. Accordingly Lethbridge submitted that it did not directly incur debt, but included a proxy cost of debt as a 15-year rolling average lending rate of the Alberta Capital Finance Authority as of the mid-year date of July 2.
The AUC held that it was satisfied that the proposed capital structure and return on equity was in compliance with its prior findings in Decision 2191-D01-2015. Further the AUC held that maintaining such a capital structure as a placeholder for 2016-2017 until such time as a final determination could be approved was a reasonable approach.
Deferral Accounts
The AUC approved the continuation of Lethbridge’s return on equity deferral account, direct assign deferral account, hearing cost reserve account and self-insurance reserve deferral accounts as filed, finding them to be reasonable.
Order
In light of the directions provided in this decision, the AUC directed Lethbridge to file a compliance filing no later than July 28, 2016.
