Capital Tracker – True-up and Forecast
AltaGas Utilities Inc. (“AltaGas”) filed an application with the AUC for approval of its 2014 capital tracker true-up and 2016-2017 capital tracker forecast application and associated schedules.
In Decision 2014-357, the AUC approved AltaGas’ application for a 90 percent placeholder K factor for 2015 in the amount of $3.14 million on an interim basis. Similarly, in Decision 20823-D01-2015, the AUC approved AltaGas’ application for a 2016 K factor placeholder in the amount of $4.86 million on an interim basis.
Capital tracker applications are part of the performance based regulation (“PBR”) plans originally approved by the AUC on a five-year term in Decision 2012-237.
The PBR framework essentially provides a formula mechanism to adjust rates annually, using inflation (I Factor) less an offset (X Factor) to reflect the productivity improvements the utility can expect to achieve during the test period, as well as growth in forecast billing determinants (Q factor). However, the PBR framework also requires certain adjustments, including amounts to fund necessary capital expenditures (K Factor), flow-through costs to be recovered directly from the consumer (Y Factor), and material events for which the company has no other reasonable cost recovery mechanism (Z Factor). Capital tracker costs form part of the K Factor adjustments within the PBR mechanism.
Projects or programs meet the following three criteria in order to be eligible for capital tracker treatment:
(a) The project must be outside the normal course of on-going operations (“Criterion 1”);
(b) Ordinarily the project must be for replacement of existing capital assets or undertaking the project must be required by an external party (“Criterion 2”); and
(c) The project must have a material effect on the company’s finances (“Criterion 3”).
Project Groupings
AltaGas submitted that its project groupings for capital tracker purposes remain largely unchanged, and are consistent with groupings approved by the AUC in Decisions 2013-435 and 2014-373.
No party objected to AltaGas’ proposed project groupings.
The AUC held that AltaGas’ proposed project groupings continue to be reasonable, and were therefore approved as filed.
The AUC noted that unless the driver for a previously approved ongoing capital tracker project or program has changed, the AUC would not undertake a reassessment under Criterion 1 or Criterion 2, but would undertake an assessment to ensure compliance with Criterion 3. Any new capital tracker programs are required to satisfy all of Criterion 1, Criterion 2 and Criterion 3 to receive capital tracker treatment.
Projects and Programs previously approved
i. Pipeline Replacement Program
AltaGas applied for continued capital tracker treatment of its pipeline replacement program, which was previously approved in Decision 2012-091 and 2010-012, and most recently in Decision 2014-373. AltaGas noted that the program provides for the replacement of three types of pipe:
(a) Polyvinylchloride (“PVC”) pipe;
(b) Non-certified and interim certified polyethylene (“PE”) pipe; and
(c) Pre-1957 steel pipe.
AltaGas submitted that it replaces each type of pipe according to a risk assessment matrix taking into account the impact of failure and the likelihood of failure. AltaGas forecasted the replacement of approximately 52.9 kilometers of PVC pipe in 2015, 111.9 kilometers of PVC pipe in 2016, and 131.4 kilometers of PVC pipe in 2017. AltaGas submitted that recent improvements in resourcing and internal processes should result in AltaGas being able to complete the replacement of PVC pipe by the end of 2018.
With respect to non-certified PE pipe, AltaGas submitted that it planned to replace 27.1 kilometers of non-certified PE pipe in 2015, 44.3 kilometers in 2016, 83.6 kilometers in 2017. AltaGas further anticipated replacement lengths of 114.1 kilometers, 163.8 kilometers, and 160 kilometers in 2018, 2019 and 2020 respectively.
With respect to pre-1957 steel pipe, AltaGas noted that it still has approximately 98.8 kilometers of pre-1957 high pressure steel pipe on its system. AltaGas indicated that 85.6 kilometers is scheduled for replacement, with 12.4 kilometers slated for replacement under a different project, and the remaining 0.8 kilometers will be abandoned. AltaGas anticipates replacing all pre-1957 steel pipe by 2019.
ii. Station Refurbishment Program
AltaGas applied for continued capital tracker treatment of its station refurbishment program, which was previously approved in Decision 2012-091 and 2010-012, and most recently in Decision 2014-373. AltaGas submitted that it operates 686 stations in Alberta, approximately 30 percent of which were installed in the 1950s through 1970s, and are equipped with obsolete parts or do not conform to modern pipe configurations. AltaGas submitted that it would prioritize station refurbishments according to a priority list based on risks to worker safety and potential for failure. AltaGas stated that it operates three types of stations:
(a) Purchase meter stations (“PMS”);
(b) Town border stations (“TBS”); and
(c) Post regulator stations (“PRS”).
AltaGas’ PMS were the largest and most complex stations of the three types. According to AltaGas’ risk assessment matrix, it identified 39 PMS and 40 TBS over 25 years old as the highest priority for refurbishment based on throughput, station age, obsolescence and design, and site specific issues (e.g. flood prone, security, etc.) AltaGas planned to complete 41 PMS, 33 TBS and 27 PRS refurbishments from 2015 through 2018, and planned to complete all refurbishments by the end of 2018.
iii. Gas Supply Program
AltaGas submitted that its gas supply program was previously approved by the AUC in Decisions 2012-091 and was most recently approved in Decision 2014-373. AltaGas submitted that the purpose of its gas supply program was to assess the gas supply across the AltaGas system to identify risks to service quality and safety. AltaGas noted the difficulty of predicting such issues due to the variety of causes, and the unique nature of each project. AltaGas submitted that it identified two gas supply projects for its forecast term:
(a) Gas supply issues to the Barrhead/ Westlock/ Morinville (“BWM”) area in 2016, as one of AltaGas’ third party suppliers intends to discontinue operation of its high pressure supply line servicing the BWM area; and
(b) The replacement of the gas supply to the town of Calmar, which is serviced by a combination of pre-1957 steel pipe and non-certified PE and PVC pipe, due to severe corrosion observed on the nearby pipes.
Project Assessments under Criterion 1
The AUC noted that AltaGas did not apply for any new capital tracker programs, but did apply for approval of specific projects within each of its pipeline replacement, station refurbishment and gas supply programs. Each of the projects applied for by AltaGas fall within three broad categories:
(a) Projects completed in 2013, not approved for capital tracker treatment in Decision 2014-373 and reapplied for in the application on an actual basis;
(b) Projects previously approved in Decision 2014-373 for 2014 on a forecast basis and fully or partially completed in 2014; and
(c) Projects to be implemented in 2016 or 2017 that have not been previously approved for capital tracker treatment.
The AUC held that there was no evidence that any of the following projects were not necessary:
(a) Those projects completed in 2013; and
(b) Those projects previously approved for 2014 and now proposed for true-up.
The AUC also held that there was no evidence on the record that the forecast projects for 2016 and 2017 were not required to maintain service reliability, quality and safety at adequate levels. Accordingly, the AUC held that these three categories of projects satisfied Criterion 1.
2016-2017 Forecast Capital Tracker Projects
AltaGas submitted that for forecasting its costs, it applied a regression process to estimate future costs using a three year set of historical costs divided by project type.The results of its regression costing approach fit its historical data very well, noting that tendered contractor costs have a very high correlation. AltaGas noted that, at the time a project area is defined, little is known about the project aside from the length of the project and the scope of services involved. As a result, AltaGas submitted that its regression analysis provided the best estimate of project costs without having to do field reconnaissance too far in advance.
i. Pipe Replacement Program
AltaGas submitted that PVC pipe replacement projects would cost approximately $8.2 million in 2016, and $10.3 million in 2017, based on its linear regression model and an inflation factor of 4.56 percent. For non-certified PE pipe replacement, AltaGas forecasted additions of approximately $4.2 million for 2016, and $7.8 milion for 2017, using the same methodology. Pre-1957 steel pipe forecast replacement costs were estimated at $12.2 million for 2016, and $14.7 million for 2017 using the same methodology.
None of the parties to the proceeding opposed AltaGas’ forecast costs for PVC, non-certified PE, and pre-1957 steel pipe replacement projects.
ii. Station Refurbishment Program
AltaGas forecasted its 2016-2017 station refurbishment program costs as follows:
(a) PMS refurbishments – $312,200 for 2016 per station and $318,800 for 2017 per station;
(b) TBS refurbishments – $211,200 for 2016 per station and $215,700 for 2017 per station; and
(c) PRS refurbishments – $34,600 for 2016 per station and $35,200 for 2017 per station.
AltaGas stated that its forecast costs were escalated by its standard 2015 costs, inflated by 2.65 percent and adding an overhead rate of 5.36 percent. In total, AltaGas stated that it planned to complete 19 station refurbishments in 2016 for a total cost of $3.9 million and 24 stations in 2017 for a total cost of $3.8 million.
None of the parties to the proceeding opposed AltaGas’ forecast costs for station refurbishments.
The AUC held that while the regression model was a useful forecasting tool, if parties were to properly test the forecast costs, AltaGas’ regression model was required to provide more information. Notably, the AUC held that a complete understanding was not possible unless detailed descriptions of the variables used and the models themselves were provided. Consequently, the AUC determined that the forecasts could not be reproduced, but that the steps taken by AltaGas to forecast costs more accurately were reasonable and approved for the purposes of this decision. Accordingly, the AUC found that the forecast cost information was reasonable and met the requirements of Criterion 1.
The AUC held that the detailed cost breakdown for station refurbishment forecasts were comparable to those approved in Decision 2014-373, adjusted for inflation. The AUC noted that based on the information provided by AltaGas, the station refurbishment program costs satisfied Criterion 1.
iii. Gas Supply Program
AltaGas’ forecast costs for its gas supply program were $3,094,500 for 2016 and $2,069,894 for 2017. AltaGas requested that the costs associated with its gas supply program for the BWM area receive placeholder treatment, pending the outcome of AltaGas considering alternatives to replacing or building new assets to connect gas supply to Calmar and the BWM area. AltaGas submitted that placeholder treatment was necessary, as a denial of such placeholder treatment would negatively impact AltaGas’ ability to secure financing.
The Office of the Utilities Consumer Advocate (“UCA”) requested an explanation from AltaGas regarding its forecast, and requested that AltaGas provide full disclosure regarding alternative options. AltaGas replied that it may not be possible or permissible for it to fully disclose such information at the time of the hearing as it was still in negotiations with a third party supplier. However, AltaGas noted that it may be in a position to fully disclose its business case at the time of its 2015 capital tracker true-up application.
The UCA requested that the AUC deny placeholder treatment of the gas supply program costs, given that AltaGas had not submitted a business case in compliance with Criterion 1. The UCA also submitted that using a placeholder amount effectively defeats the purpose of the requirement. The UCA submitted that if AltaGas felt the program was necessary, it should either complete a business case, or complete the project and apply for capital tracker treatment of its committed costs.
The Consumers’ Coalition of Alberta (“CCA”) supported the UCA’s argument, submitting that AltaGas provided no evidence regarding the need for approving the forecast costs, apart from a statement that a denial would impact AltaGas’ finances. The CCA requested that AltaGas be directed to provide a business case and engineering study, and provide further evidence of the financial effects of such a denial to AltaGas’ finances.
None of the parties opposed AltaGas’ forecast costs related to the Calmar gas supply program.
The AUC noted that it had previously approved a forecast placeholder for AltaGas’ gas supply program in Decision 2014-373, noting that it was determined to be a reasonable approach as at least one gas supply project would arise, although the particulars were not known sufficiently in advance to provide detailed costing information. The AUC noted that the placeholder amount was approved based on a historical review of gas supply projects in the three years prior. Actual gas supply program expenditures are then trued-up against actual project costs in subsequent applications.
The AUC accepted AltaGas’ evidence that the gas supply project in the BWM area would be required, but that it did not file a business case due to ongoing negotiations. The AUC also accepted that AltaGas’ forecast costs of $3.1 million for the gas supply project in the BWM area would impose some degree of financial hardship on AltaGas. However, the AUC held that placeholder funding should continue to be based on the historical three year average of gas supply program costs (with the exception of the Calmar gas supply project.) The AUC therefore approved a gas supply program placeholder for 2016 of $661,250 based on the historical three year average of gas supply project costs.
With respect to the Calmar gas supply project, the AUC noted that AltaGas provided a fully explained business case, and a forecast cost of the project. The AUC determined that the information provided by AltaGas in respect of the Calmar gas supply project in 2017 was reasonable, and therefore approved a placeholder of $2.07 million for the Calmar gas supply project.
Accounting Test Under Criterion 1
The AUC noted that the accounting test under Criterion 1 is meant to determine whether a program proposed for capital treatment falls outside the normal course of business. The AUC stated that this is achieved by demonstrating that the revenue requirement growth under the I-X mechanism of PBR would be insufficient to recover the costs necessary for the capital tracker programs.
AltaGas submitted that for the accounting test for the 2014 true-up, it applied an I-X index of 1.59 percent, and a Q factor (i.e. billing determinant growth) of 1.70 percent approved in Decision 2013-465. For the 2016 and 2017 forecast periods, AltaGas applied 1.49 percent as a placeholder for the I-X mechanism and a Q factor of 1.72 percent for 2016, and 1.49 percent as a placeholder for the I-X mechanism and a Q factor of 1.78 percent for 2017.
None of the parties objected to AltaGas’ proposed methodologies or assumptions used in the accounting test.
With respect to the I-X index and Q factors, the AUC reminded AltaGas that it expressed a preference to use an I-X index that was previously approved in a PBR rate adjustment proceeding and a Q factor based on an approved billing determinant forecast, where possible. The AUC held that AltaGas’ accounting test methodology was reasonable and consistent with the methodology approved in Decision 2013-435. The AUC also held that AltaGas applied the correct I-X and Q factor values for its 2014 true-up, and that the forecast values for 2017 were acceptable, as the final approved numbers for 2017 were not available. However, for 2016 values, the AUC directed AltaGas to apply the forecast billing determinants approved in Decision 20823-D01-2015 in its compliance filing to this decision.
Subject to the adjustments directed, the AUC determined that it was satisfied that AltaGas’ accounting test method could demonstrate that the forecast expenses were outside the normal course of business, in compliance with Criterion 1.
Criterion 2
As noted above, the AUC held that unless the driver behind a project or program changes, previously approved programs would not be required to demonstrate compliance with Criterion 2 again. AltaGas confirmed that none of the drivers for its capital tracker programs changed.
The AUC therefore held that the projects and programs applied for continue to satisfy Criterion 2.
Criterion 3
The AUC noted that Criterion 3 applies in two tiers. The first tier materiality threshold asks if each project would meet a four basis point impact threshold on revenue requirement. The second tier examines whether, in aggregate, all of the capital trackers would exceed a 40 basis point impact threshold on revenue requirement.
AltaGas submitted its capital tracker costs all exceeded the materiality thresholds required by Criterion 3. AltaGas submitted that the four basis point and 40 basis point thresholds for 2014 true-up costs were $31,816 and $318,156, respectively by escalating its approved 2012 amount by the 2013 and 2014 I-X mechanism values.
For the 2016-2017 forecast period, AltaGas submitted the following basis point thresholds by escalating its approved costs by its current I-X index and Q factors as follows:
(a) Four basis point threshold: $32,771 for 2016 and $33,259 for 2017; and
(b) 40 basis point threshold: $327,707 for 2016 and $332,590 for 2017.
None of the parties took issue with AltaGas’ calculation of its materiality thresholds.
The AUC held that while it accepted AltaGas’ forecasting methodology, and noted that AltaGas’ calculations of the materiality thresholds were reasonable, the AUC directed AltaGas to refile its materiality thresholds for 2016 using the I-X index and Q factor values approved in Decision 20823-D01-2015 to calculate the first and second tier materiality thresholds.
K Factor Adjustments
As a result of AltaGas’ requested capital tracker true-up and forecast costs, AltaGas requested the following K Factor amounts:
(a) 2014 K factor true-up reduction of $193,806;
(b) 2016 forecast K factor addition of $5,854,585; and
(c) 2017 forecast K factor addition of $8,483,831.
AltaGas proposed to allocate these reductions and additions using the same methodology approved in Decision 2014-373.
None of the parties took issue with AltaGas’ proposed amount or allocations of K factors.
The AUC held that the K factor amounts were correctly calculated and were reasonable. However, for the 2016 and 2017 amounts, the AUC directed AltaGas to refile its requested K Factor amounts to reflect the 2016 I-X index and Q factor as approved in Decision 20823-D01-2015, and to reflect the revised gas supply placeholder. All other K factor amounts were approved as filed.
Order
In the result, the AUC directed AltaGas to file a compliance filing reflecting the AUC’s directions by February 29, 2016.
