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Tariff – Rates

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AltaLink Management Ltd. (“AltaLink”) applied for approval of its 2015-2016 General Tariff Application (“GTA”), including the following:

• Revenue requirements for the years 2015 and 2016 in the amounts of $810.5 million and $1,001.6 million;

• AltaLink’s Tariff, including its terms and conditions of service; and

• Deferral and reserve accounts.

Alberta Direct Connect, the Consumers’ Coalition of Alberta (“CCA”), and the Industrial Power Consumers Association of Alberta (collectively, the “RPG”), as well as the Utilities Consumer Advocate (“UCA”) intervened in the application.

Expert Evidence

AltaLink took issue with the qualifications and credibility of two witnesses put forth by the RPG. AltaLink argued that the two witnesses put forth by RPG should be rejected.

AltaLink submitted that one witness from the RPG held only a bachelor’s degree, had no relevant experience after graduation in 2014, and was not advanced as an expert by the RPG.

AltaLink submitted that another witness from the RPG was not an engineer, was not an economist, and held no degree in economics, math, or statistics, and had no relevant experience in forecasting labour market conditions. AltaLink also submitted that this witness improperly attempted to give opinion evidence on the general intention of AltaLink’s contractual relations with its engineering, procurement, and construction management (“EPCm”) contractor.

The RPG replied, noting that AltaLink did not challenge the expertise of the witnesses in evidence, and waited only until final argument to raise the issue. The RPG submitted that the evidence provided by its witnesses was properly tendered.

The AUC held that it would not disregard the evidence of the RPG’s two witnesses. Rather, the AUC held that it would assess the weight to be given to such evidence.

Forecast Methodology and Assumptions

AltaLink noted that for its forecast of the test period, it had implemented a zero-based budgeting system, assessed all activities required to be performed to meet all of its statutory duties and objectives, as well as re-assess full-time equivalents (“FTE”) and contractor levels required to carry out workloads and operating expenses.

AltaLink applied the following forecast parameters to its 2015 and 2016 test period:

 

AltaLink stated that its escalation factors were applied to its expenses using 2014 dollars.

The RPG opposed the escalation rates proposed by AltaLink, noting that it should seek lower contractor rates as a result of the recent economic downturn. Consequently, the RPG recommended reduced contractor escalation rates of 0.7 percent in 2015 and 2.2 percent in 2016, based on the Conference Board of Canada’s forecast Alberta Wage and Salary escalation estimates for summer 2015.

The AUC held that it continued to have the same concerns from AltaLink’s prior GTA, where it found AltaLink’s proposed escalators for contracted manpower to be excessive. The AUC also found that AltaLink did not provide a breakdown of how it established contractor escalation rates. As a result, the AUC found that removing 3.0 percent from AltaLink’s forecast escalation for 2015 was reasonable. The AUC also determined that a forecast escalation for contractor costs in 2016 of 1.27 percent was reasonable, being similar to the Conference Board of Canada’s forecast Alberta Wage and Salary escalation for summer 2015.

With respect to capital escalation rates, AltaLink submitted it completed an update of escalation rates for direct assign projects, and the three-year compound annual growth rate was 3.4 percent, while the five-year compound annual growth rate was 3.9 percent. AltaLink noted that the growth rates were calculated using 60 percent direct labour costs, 30 percent demand market premium costs, and 10 percent equipment costs.

The RPG stated that due to current labor market conditions, it recommended that labour escalation rate components included in the capital escalation rate should be no greater than the forecast wage inflation in Alberta. Accordingly, the RPG recommended that escalation rates be reduced to 0.66 percent for 2015 and 1.86 percent for 2016.

AltaLink replied that its escalation rates were based on the consumer price index and other publically available indices. AltaLink submitted that the RPG was confusing general inflation with the specific cost escalations for construction of transmission capital projects.

The AUC held that it was not necessary to determine a forecast capital escalation for 2015, as it directed AltaLink to file actual amounts for capital in 2015 elsewhere in the decision. With respect to 2016 values, the AUC determined that the only application of the capital escalator in 2016 was for adjusting expenditures delayed from 2015 to 2016. As a result the AUC determined that the total amounts related to the capital escalator was less than 0.2 percent of capital expenditures. However, due to future impacts due to the calculation of escalations for 2016 being in 2016 dollars, the AUC directed AltaLink to explicitly state the value of the capital escalator being used to generate its unadjusted capital expenditures for each year as well as the capital escalator values used in adjusting any delayed expenditures in AltaLink’s next GTA.

The AUC held that AltaLink’s consultant that it engaged to develop the capital escalation values did not provide clear details on how the capital escalator was determined for any historical or forecast year. While the AUC noted that a lack of methodological is common for forecasting organizations such as the Conference Board of Canada, provincial and federal governments, as well as financial institutions, when forecasts are used for specific singular purposes, the need for methodological detail is amplified. The AUC therefore directed AltaLink to provide an enhanced level of detail for its escalator factor forecasts.

In view of the limited detail provided in the AltaLink capital escalation forecast, the AUC recalculated AltaLink’s capital escalator using a rate of 2.2 percent for labour and 1.8 percent for the remainder of capital expenditures, for a weighted capital escalation factor of 1.95 percent.

For general inflation escalation rates, AltaLink proposed to use 2.1 percent and 2.0 percent for 2015 and 2016 respectively, based upon forecasts from Alberta Treasury Board and the Alberta government’s budget forecasts.

The RPG recommended that such interest rates be reduced to 0.9 percent in 2015 and 1.7 percent in 2016 based on the recent economic downturn in Alberta. The UCA recommended that inflation rates be reduced to 0.9 percent and 1.8 percent based on the 2015-2016 First Quarter Update and Economic Statement from Alberta Finance.

The AUC held that the values presented by the UCA were reasonable, as they were the latest and best values available regarding general inflation values. Accordingly, the AUC directed AltaLink to apply general inflation escalators of 0.9 percent for 2015 and 1.8 percent for 2016 in its compliance filing.

Union and Non-Union Escalation

The AUC accepted AltaLink’s forecasted union compensation escalation factors as filed, noting that although the 2015 increase is considered high, economic conditions were likely different at the time the contract was signed.

For non-union costs, AltaLink submitted that it forecasted its non-union compensation around three targets:

• To achieve at least market median compensation;

• To achieve at least market median total direct compensation; and

• To achieve market median target total direct compensation by the end of the test period.

Using the above criteria, AltaLink originally forecasted escalators of 6.0 percent for each of 2015 and 2016. These figures were later revised to match AltaLink’s proposed union escalators for both 2015 and 2016.

RPG raised several concerns related to AltaLink’s non-union labour escalators. Primarily, RPG was concerned that the escalation rates did not reflect current economic conditions in Alberta, and were premised on incomplete data. RPG also submitted that AltaLink’s 6.0 percent deviation from the median compensation level was well within the historical norm for utility companies, and should be disregarded.

The AUC held that adjustments to base salary, which are permanent, would not adequately correct for the variance in total direct compensation that is due to non-permanent portions of total compensation. Accordingly, given the current economic climate, the AUC held that this GTA was not the time to correct for perceived market deviations. The AUC noted that the market may move to AltaLink’s current total compensation level.

As a result, the AUC held that it would reduce the escalation for 2015 to 2.0 percent. For 2016, the AUC held that, given the current economic climate, a 1.0 percent increase would be reasonable. The AUC directed AltaLink to reflect these figures.

The AUC also denied any increase to executive compensation for both 2015 and 2016, noting that the evidence demonstrated that executive compensation was already 3.0 percent above the market at the beginning of 2015. Accordingly, the AUC directed AltaLink to reduce its executive compensation escalators to 0.0 percent for both 2015 and 2016 in its compliance filing.

AltaLink’s short term incentive plan and long term incentive plans were both approved as filed. However as some forecast adjustments made elsewhere in the decision may impact the calculations, the AUC directed AltaLink to recalculate its short term and long term incentive plan amounts in its compliance filing.

FTEs and Vacancy Rates

AltaLink forecasted total operating FTEs of 316 for the 2015 test year, split between 227.4 FTEs for operating and maintenance (“O&M”) and 88.6 FTEs for administrative and general (“A&G”).

AltaLink proposed a vacancy rate of 2.5 percent, representing the five-year average, consistent with the methodology directed by the AUC in previous GTA applications, and based on its experiences during the 2008 financial crisis.

The UCA submitted that AltaLink’s figures for adjusted turnover, and average time to hire were not supported by any analysis, submitting that vacancy rate averages were 4.2 percent for operating FTEs and 10.5 percent for capital FTEs.

The AUC approved AltaLink’s forecast FTE’s for 2015 as filed, finding them to be reasonable, as the values were similar to AltaLink’s previous 2014 compliance filing.

With respect to vacancy rates, the AUC held that the current economic climate may result in a multi-year average not being reasonable. However, the AUC was not persuaded that AltaLink’s turnover rates would be as low as forecast. Accordingly, the AUC determined that a vacancy rate of 3.2 percent would be reasonably reflective of the current Alberta economic climate, and directed AltaLink to use this value in its compliance filing.

Operations and Maintenance Expenses

AltaLink applied for the following O&M expenses and A&G expenses for 2015 and 2016:

 

AltaLink stated that three factors contributed to its increased O&M costs, which totalled $111.1 million in 2014:

• Aging equipment;

• Increased external requirements; and

• Growth in new assets requiring maintenance.

The CCA did not oppose any specific accounts for operating expenses, submitting instead that it applied an inflation index and composite growth index to O&M costs and A&G expenses, adjusted them for one-time events, externally imposed costs, and converted the figures to constant dollars to reflect levelized growth. The CCA submitted that it used a two-year average O&M base to estimate O&M productivity, and noted a 4.68 percent productivity decrease from 2013-2014 actuals compared with the 2015-2016 forecast values. The CCA therefore recommended reducing AltaLink’s O&M costs by $3.8 million in 2015 and $3.9 million in 2016 to offset productivity losses.

AltaLink rejected the CCA’s analysis, submitting that the CCA was attempting to impose a performance based regulation (“PBR”) formula on to a cost-of-service utility, and further submitted that, once escalators are accounted for, real O&M costs are actually declining over the test period.

While the AUC found that the productivity growth metrics and related evidence from both parties provided some value, it ultimately held that it was not prepared to accept either party’s figures. The AUC held that productivity growth metrics are useful as an order of magnitude check on O&M expenses as a benchmarking tool, but noted that:

• There is no standard industry definition or criteria for externally imposed costs;

• There are no generally accepted industry practices for forecasting inflation; and

• There is no consensus on what is the appropriate base from which a productivity measure can be calculated.

With the exception of outside services costs, the AUC accepted AltaLink’s forecast costs as filed and subject to its directions with respect to escalation rates. With respect to outside services costs, the AUC held that the forecast increases of $0.5 million in 2015 and $0.3 million in 2016 were not reasonable, as AltaLink had provided no explanation for the increase. The AUC accordingly directed AltaLink to apply the previous 2014 amount of $4.8 million for outside services in its compliance filing.

Depreciation

AltaLink filed a depreciation study with its application, and proposed the following recommendations for its 2015 and 2016 depreciation rates:

• Include forecast capital additions and retirements for 2015 and 2016 in determining annual rates;

• Separate accrual amounts to reflect the amount related to the depreciation of original cost and to the amount for the recovery of future costs in relation to retirement of assets;

• A review of net salvage requirements, consistent with the AUC’s determinations in Decision 2011-453; and

• A review of average service life and retirement dispersion rates.

AltaLink’s forecast depreciation on rate base was provided as follows:

 

AltaLink noted that growth in depreciation rates was driven primarily by growth in assets, since its gross plant in service has increased by a magnitude of four times since 2009, with roughly two thirds of the increase being attributable to such growth.

The UCA, and Alberta Direct Connect challenged changes to several of the 15 depreciation study accounts put forth by AltaLink in its depreciation study. The AUC summarized the impact of the proposed recommendations from each group as follows:

 

AltaLink submitted that it had generated its depreciation parameters, including average service life by comparing itself to a “peer group” of utilities.

The RPG disagreed with AltaLink’s choice of peer group, arguing that in many instances, “peers” consisted mainly of utilities for which the expert filing the depreciation study had previously worked for, thus calling into question many opinions expressed in the depreciation study.

The AUC held that peer statistics are useful to gauge the reasonableness of depreciation parameters, but only if sufficient weight can be assigned to the selected peers. The AUC noted that:

• the same analyst filing the depreciation study also prepared studies for AltaLink’s selected peer group;

• the degree to which the analyst incorporated his own judgement in this or other depreciation studies was not readily apparent; and

• the group of peer comparators was too small to overcome the two points above. The AUC also noted that some utilities selected were not sufficiently representative of AltaLink’s operations, either due to size or location.

Accordingly, the AUC assigned little weight to whether or not AltaLink’s proposed parameters were within a peer comparator group.

The AUC held that “gradualism” was a central tenet of utility depreciation regulation, and would help to avoid any significant forecasting errors, which may in turn lead to intergenerational inequity. Accordingly, the AUC provided its findings for each account, using gradualism as a basis for its findings.

The AUC held that AltaLink’s proposed changes to its accounts were reasonable. However, the AUC also directed AltaLink to implement subaccounts for depreciation promptly when it has the data and is capable of breaking out subaccounts for new assets, given the large spike in asset growth.

The AUC held that the increase in net salvage values to negative 40.0 percent proposed by AltaLink for transmission station equipment was not warranted. Accordingly, the AUC directed AltaLink to reduce its net salvage percentage to negative 10.0 percent and to account for the impact of this change in its compliance filing. With respect to transmission poles and fixtures, the AUC determined that AltaLink’s requested change to net salvage rates of negative 100.0 percent was an unreasonable magnitude of change, and directed AltaLink to apply a net salvage value of negative 53.0 percent in its compliance filing. The AUC also directed AltaLink to maintain the net salvage value of transmission overhead conductors and devices in its compliance filing, at negative 29.0 percent.

With respect to accounts for underground conductors and devices, structures and improvements, as well as power operated equipment, the AUC directed AltaLink to incorporate its previously approved net salvage percentages in its compliance filing.

The remaining net salvage values either remained unchanged or were approved as filed.

Transmission Income Taxes and Revenue Offsets

AltaLink forecasted income tax rates of:

• 15 percent federally in both 2015 and 2016;

• 11 percent provincially in 2015; and

• 12 percent provincially in 2016.

AltaLink sought to include federal and provincial future income tax (“FIT”) in its revenue requirement for 2015, and stated that it was not currently taxable in 2016, nor did it expect to be taxable for the foreseeable future.

As a result of AltaLink’s submission as to its non-taxable status, it requested an additional 2.0 percent increase to its equity ratio in 2016, which AltaLink submitted as consistent with requests from FortisAlberta, and other Alberta municipal utilities in previous generic cost of capital proceedings.

AltaLink submitted that its proposed inclusion of FIT was a difference in accounting method, and would be revenue neutral to the utility and its rate payers.

The AUC held that AltaLink’s forecasted tax rates were substantively enacted, and were approved for use in the compliance filing to this decision. The AUC noted that due to changes to International Financial Reports Standards, that should the Canada Revenue Agency reassess AltaLink’s tax filings in the future, the AUC would review the financial implications, and consider what relief, if any, is warranted at that time.

With respect to revenue offsets, AltaLink submitted that it has two main sources of revenue offsets: fixed contracts and variable labour contracts for services provided to affiliates. AltaLink forecasted the following revenue offset amounts for the test period:

 

The AUC noted that no party presented evidence or argument in respect of AltaLink’s revenue offsets. However, the AUC noted a discrepancy between two tables projecting revenue offsets in the main application, and in a schedule to the application. As a result, the AUC directed AltaLink to explain the discrepancy in its compliance filing.

Capital

AltaLink submitted that its most up to date forecast of capital costs reflected the following developments:

• Broad changes in Alberta markets, and weak oil prices;

• Actual project costs incurred, as of July 31, 2015;

• Changes arising from AESO additions, delays, deferrals, or cancellations of projects;

• Updated escalation rates;

• Updates to forecast in-service dates from the AESO; and

• Review and update of forecasting uncertainties.

AltaLink submitted its capital cost forecast as follows:

• Capital replacement and upgrade expenses of $116.8 million in 2015 and $137.8 million in 2016; and

• Facilities project costs of $18.3 million in 2015 and $29.9 million in 2016.

The UCA raised its concerns regarding AltaLink’s facilities projects, submitting that it is incumbent on the facility owner to demonstrate that each project is the least cost alternative, and that such facilities would provide a net benefit to customers. Accordingly, the UCA submitted that AltaLink had not provided an explanation for why its expenditures were in the public interest, through a quantitative or net present value analysis. The UCA also submitted that AltaLink understated its facilities costs calculations, by discounting year-zero expenses. The UCA therefore recommended that AltaLink’s costs be reduced or recalculated accordingly.

The UCA recommended that the AUC reduce AltaLink’s facilities maintenance expenditures by $1.7 million in each of 2015 and 2016, arguing that a lack of quantitative analysis made it difficult to determine capital versus O&M cost splits, or to examine the necessity of the expenditure in the forecast year.

AltaLink submitted that each of its forecast facilities expenditures would ensure its ability to provide safe and reliable service, noting that its planned projects would assist in avoiding restoration delays in the future, and that such value is not easily captured in a quantitative manner.

The AUC agreed with the UCA in respect of discounting forecasted facilities costs, holding that AltaLink’s forecast costs should not use a discount rate for year-zero costs in calculating the net present value of forecast projects.

The AUC also held that AltaLink had not provided adequate explanations for accumulated project variance costs for the AltaLink East Relocation project, which exceeded $500,000. Accordingly, the AUC reduced AltaLink’s project costs by $500,000, as AltaLink had not provided an adequate explanation of the cost variance.

The AUC also reduced AltaLink’s forecast costs for maintenance for its head office by $0.8 million in each of 2015 and 2016, holding that insufficient information was provided for certain head office maintenance expenditures to justify the forecast expenses.

The RPG opposed AltaLink’s proposed capital replacement and upgrade costs, arguing that AltaLink did not appropriately balance cost, safety, reliability and the environment. The RPG submitted that AltaLink’s capital replacement and upgrade costs for 2015-2016 increased by 64 percent compared to the average costs between 2005 and 2014, while AltaLink’s average system interruption frequency was below the average of its peer group.

The AUC noted AltaLink’s lower than average system interruption frequency, but did not find such a fact to be sufficient evidence of excessive replacement spending.

The AUC did express concern regarding the increase in AltaLink’s capital replacement spending. Accordingly, the AUC directed AltaLink to explain in its next GTA how it achieves a reasonable balance between cost and reliability in light of its high reliability rating compared to its peers.

The AUC approved AltaLink’s capital replacement and upgrade forecast costs as filed.

The AUC directed AltaLink to re-file its 2015 capital additions, holding that AltaLink would have complete and accurate information about the actual amount for direct assign projects brought into service in 2015 by the time the refiling application is brought.

The RPG submitted that for engineering labour, construction labour and materials in capital additions, these costs were within AltaLink’s control or were fixed costs. Thus, any costs attributable to project delays should be disallowed, since AltaLink could take steps to enforce its third party contracts.

AltaLink submitted that the RPG was essentially arguing that, in relation to future unknown events, AltaLink should sue its service providers to prevent delays. AltaLink submitted that the RPG’s argument was without merit and irrelevant to a GTA.

The AUC dismissed the RPG’s recommendation to disallow costs arising from delays, finding that the evidence on the record could not support such a contention.

The AUC approved AltaLink’s 2016 forecast capital addition costs of $357 million as filed. However, the AUC noted that if AltaLink has better forecast information at the time of its compliance filing, it is directed to update its 2016 forecast costs as part of its compliance filing using that information.

The AUC approved AltaLink’s forecast Control Centre Upgrades Project costs of $2.4 and $2.6 million as filed over the 2015-2016 period.

With respect to information technology (“IT”) capital expenditures, AltaLink submitted the following forecast expenses:

 

The AUC determined that it had concerns with the overall level of AltaLink’s IT capital expenditures, noting that in 2007, IT capital expenditures were $4.8 million, compared to $34.9 million for 2015.

The AUC held that such an increase in expenses was not supported by any evidence with regard to the benefits accruing from such expenditures, even taking into account the substantial growth in rate base. The AUC noted that although AltaLink had managerial discretion to re-prioritize the timing of expenditures, significant variances from forecast values have persisted year over year. In view of such discrepancies, the AUC directed AltaLink to explain these variances, and what steps AltaLink has taken or will take to address it in its next GTA.

Furthermore, the AUC held that the increased expenditure for SAP software in 2013 and 2014 beyond the approved forecast amounts of $6.1 million for 2013 and $8.8 million for 2014 were not prudent. Accordingly the AUC directed AltaLink to reduce its capital additions for 2013 and 2014 to the approved amounts.

With respect to forecast amounts, the AUC approved forecast amounts of $10.0 million for 2015 and $9.5 million for 2016. These amounts represent the full amount requested save for the CERC project, which the AUC deferred to a later date, noting that AltaLink had not yet proven the business case for the project.

Financing and Transmission Necessary Working Capital

AltaLink submitted that as a result of a new lead/lag study for necessary working capital, it required $0.2 million less per year in its revenue requirement for necessary working capital.

The AUC approved AltaLink’s necessary working capital component as filed.

For financing measures, AltaLink proposed, as an alternative to its requested 41 percent equity ratio, incorporating up to $675 million of subordinated debt on a 60-year term into its capital structure, in a similar fashion to ATCO Electric’s preferred shares. AltaLink submitted that due to the tax deductibility of interest payments on subordinated debt, the after tax cost of capital with subordinated debt was expected to be lower than only using conventional secured medium-term debt. AltaLink submitted that the treatment of subordinated debt by ratings agencies would result in being given a 50 percent equity credit on the subordinated debt. In AltaLink’s view, this would allow AltaLink to reduce its equity ratio to 38 percent from 41 percent, if the AUC were to accept it as an alternative.

Alberta Direct Connect and the UCA opposed the measure in large part because it submitted that subordinated debt was unbalanced, and would increase costs to consumers in the current test period, while not providing any benefit to consumers in future periods.

The AUC held that AltaLink’s proposed method of financing was more expensive than debt financing, but was also less expensive than conventional equity financing. As a result, the AUC held that it would provide greater flexibility in financing.

Accordingly, the AUC authorized AltaLink to enter into subordinated debt financing if it consider it to be beneficial. The AUC held that it would determine the cost of such financing in the current generic cost of capital proceeding.

Tariff Relief and Credit Metric Support

AltaLink proposed a number of measures to provide tariff relief in light of the AUC’s 2013 generic cost of capital decision, stranded asset risks, and the resulting increased risk of a credit downgrade. AltaLink proposed the following tariff relief measures:

• Discontinue the collection of construction work in-progress (“CWIP”) in-rate base amounts effective January 1, 2015;

• Refund previously collected 2011 to 2014 CWIP-in-rate base amounts, to be distributed evenly over 2015 and 2016;

• Discontinue, effective January 1, 2016, the FIT method of collective income taxes and conversion to a flow through method, and a two percent equity increase in 2016; and

• A refund of the accumulated FIT liability in 2016, with the remainder to be refunded in 2017.

AltaLink submitted that the net effect of its tariff relief measures would amount to a reduction of revenue requirement from $858.9 million in 2015 to $694.4 million (a reduction of $164.5 million) and a reduction of revenue requirement from $955.1 million in 2016 to $701.2 million (a reduction of $254.0 million).

AltaLink also submitted that without an amended capital structure, its own credit metrics would fall below the thresholds required to maintain an “A-” level credit rating. AltaLink indicated however that it would only be able to provide its tariff relief if the AUC approved its revenue requirement and equity ratios as proposed, while not significantly changing other amounts, such as depreciation.

The UCA challenged AltaLink’s submissions that it was required to maintain a higher equity ratio, with consequential percentage of funds from operations to debt (“FFO-to-debt”) of 13 percent. Instead the UCA argued and provided evidence that AltaLink was only obligated to maintain an FFO-to-debt ratio of 10 percent in order to avoid a credit downgrade. The UCA and RPG also noted that none of the ratings agencies have changed their credit ratings for AltaLink.

The AUC determined that the 13 percent FFO-to-debt ratio is not the new required “floor” to maintain an “A-” credit rating. However, the AUC also did not agree with the RPG and UCA that 10 percent FFO-to-debt was an adequate target either.

The AUC held that it would prefer if other credit metric relief support mechanisms be implemented before awarding an increase to a utility’s equity ratio. The AUC noted that if AltaLink chose to avail itself of the option to pursue subordinated debt financing, such equity ratio relief would not be necessary at all.

However, the AUC held that it evaluated credit metric proposals using an FFO-to-debt target range of 11.1 to 14.3 percent. Accordingly, the AUC denied AltaLink’s proposed equity increase, holding that an increase of three percent to AltaLink’s equity ratio to obtain an FFO-to-debt ratio of 13 percent was unnecessary.

With respect to the remaining tariff relief measures, the AUC held that CWIP-in-rate base no longer provides AltaLink with any substantial credit metric relief. Accordingly the AUC directed AltaLink to resume allowance for funds used during construction (“AFUDC”) accounting, effective January 1, 2015.

The issue of refunding the CWIP-in-rate base amounts was highly contested. AltaLink submitted that the refund would result in no change to project costs, and would properly allocate the type of assets, locations and years, and would facilitate the proper depreciation of costs for asset classes. AltaLink proposed to refund the CWIP-in-rate base amounts over two years.

The CCA and UCA opposed the refund, arguing that the refund constituted retroactive ratemaking. The City of Calgary, in a similar vein, expressed concern regarding intergenerational equity impacts arising from the refund. The UCA argued that the refund amounted to a high interest loan that will be paid over the next 25 years, was an impermissible exercise in retroactive ratemaking, and did not have the highest net present value when compared to the net present value accounting for the benefits to customers with no refund. The CCA submitted that the refund constituted retroactive ratemaking since the 2011-2014 rates were settled on a final basis, and that parties had no notice that such costs could change.

AltaLink replied that the rates were not final, that the AUC suspended established regulatory accounting principles, but did not permanently change them, and noted further that the refund falls within an exception to the rules against retroactive ratemaking.

The AUC held that in a prospective ratemaking regime, parties are generally entitled to rely on the finality of decisions. However, exceptions to this rule occur when the decision is not final, or if it is interim in nature. The AUC determined that the previous GTA decisions for AltaLink were not interim decisions, and could therefore not be revisited on that basis. Notwithstanding this determination, the AUC also considered whether the manner of approval would enable it to substitute AFUDC for CWIP.

The AUC held that capital projects to which the CWIP-in-rate base were directed to apply had always been subject to deferral account treatment. While the UCA submitted that the purpose of deferral accounts is not to facilitate change in accounting treatment, the AUC found this to be unnecessarily restrictive.

The AUC found that the refund of CWIP-in-rate base did not offend the prohibition against retroactive ratemaking, so long as the project for which the refund would apply were still the subject of direct assign capital deferral account (“DACDA”) treatment, which are not yet included in final rates. The AUC determined that the amounts approved on a final basis in Decisions 2013-407 and Decision 2044-D01-2016 would be excluded from this refund, as those costs were approved on a final basis. The AUC therefore directed that AltaLink file an update of the requested refund in Proceeding 3585 in keeping with the determinations made above.

With respect to the discontinuation of FIT amounts, the AUC noted that the consequential equity ratio uplift requested by AltaLink would be considered as part of the ongoing generic cost of capital proceeding. The AUC therefore declined to approve the equity uplift. Accordingly, the AUC also declined to refund the previously collected FIT balances.

No Cost Capital

AltaLink submitted that its forecasted mid-year balance of no-cost capital increased by $50.6 million in 2015 over the 2014 actual amount and would decrease by $7.5 million in 2016. AltaLink submitted that the largest factor to changes in no-cost capital balances was the FIT liability account.

None of the interveners in the proceeding raised concerns with AltaLink’s proposed no-cost capital figures, including:

• FIT liability balances;

• Self-insurance reserve amounts;

• Hearing reserve amounts;

• Rainbow reserve;

• Pension/post-retirement benefits;

• Deferral accounts, including:

• Taxes other than income tax;

• ASP;

• Direct Assign capital;

• Long-term debt deferral; and

• IFRS changes.

Accordingly, the AUC approved the amounts as filed. However, the AUC directed AltaLink to explain and confirm whether transactions processed through its self-insurance reserve account would comply with utility asset disposition principles set out in Decision 2013-413.

Order

In accordance with the above findings, the AUC directed AltaLink to file a compliance filing to reflect the findings, conclusions and directions in this decision on or before July 25, 2016.