Default Rate Tariff – Regulated Rate Tariff
Direct Energy Regulated Services (“DERS”) applied for approval of a default rate tariff (“DRT”) including a reasonable return on DRT service, and a regulated rate tariff (“RRT”) for a five year period beginning on January 1, 2012 through December 31, 2016. DERS noted that it was applying for customer care and billing costs for 2015 and 2016 on an interim placeholder basis, as it would be engaging a new provider for that service after 2014.
Previous Decisions
DERS had previously applied to the AUC for approval of its 2012-2014 DRT and RRT under Proceeding 1454 through a negotiated settlement agreement (“NSA”), which the AUC rejected in Decision 2012-343, and under Proceeding 2406, which application the AUC determined was incomplete, and closed the proceeding.
The AUC made a number of directions to DERS in rejecting the NSA in Decision 2012-343. In this decision, the AUC determined that DERS had complied with directions 1, 2, and 4 through 7. The AUC held that DERS had partially complied with direction 3, which directed DERS to include specific amounts for its share award scheme in its DRT and RRT for 2012, 2013 and 2014. The AUC determined that DERS had included the proper amount for 2012, but had failed to update the amounts for 2013 and 2014. The AUC therefore ordered DERS to make the necessary corrections for the 2013 and 2014 share award scheme amounts in its compliance filing.
Revenue Requirement
DERS requested an inflation factor of 2.75 percent based on prior ATCO Gas applications, the Alberta Weekly Earnings and Alberta Consumer Price Index (“CPI”). The Consumers’ Coalition of Alberta (“CCA”) argued that, due to the major change in economic circumstances in Alberta since the original filing in 2012, the AUC should adopt a 0.1 inflation rate for 2015 and a 2.4 percent inflation rate for 2016, based on current external forecasts.
The AUC found that for the “Other Administration Costs” cost category, it was not reasonable for DERS to apply its requested inflation factor, as there were no direct labour costs in that category. The AUC directed DERS to apply an inflation rate of 0.1 percent for 2015 and 2.4 percent for 2016 to the “Other Administration Costs” cost category in its compliance filing.
The AUC accepted DERS’ methodology for forecasting the remaining cost categories and inflation. The AUC determined that the prior ATCO Gas application was the result of a weighted average of the most up to date figures for Alberta Weekly Earnings data and CPI figures. The AUC calculated the forecast inflation rates for 2015 and 2016 to be 1.92 percent and 2.95 percent, respectively, and directed DERS to update the inflation rates accordingly.
Given the long delay since the initial application for the 2012-2014 test period, DERS submitted that the actual values for these test years should not be used for the sole purpose of simply reducing the applicant’s revenue requirement. Rather, DERS submitted that the actual values be used as a tool for the AUC to validate the forecasts, noting that DERS has borne the risk on its revenue requirement for the test period, and that the revenue requirements must be approved on a prospective basis.
The Office of the Utilities Consumer Advocate (“UCA”) submitted that the actual values for 2012 and 2013 reflect a pattern of material over-forecasting by DERS, and that the AUC should apply the actual results as the approved forecasts, citing AltaGas Utilities Inc. 2010-2012 general tariff application wherein the 2010 actual results were incorporated. The CCA agreed with the UCA’s submissions, and requested reductions to reflect the actual financial data for the 2012-2014 period.
The AUC held that it would set the rates prospectively on the basis of forecast test years, but noted that it may approve the forecast revenue requirements, or approve the actual results for the 2012-2014 period, as well as the forecasts for 2015-2016 as the forecast revenue requirement.
The AUC cited its previous decisions where it applied principles of prospective ratemaking, but also required applicants to use the most up to date information available, including in some instances, actual results for certain test years. Therefore, with the exception of amounts already determined in earlier decisions, the AUC held that the 2012-2014 non-energy revenue requirements in this decision should be based on actual financial data. The AUC ordered DERS to adjust the requested revenue requirement for 2012-2014 to reflect actual amounts in its compliance filing.
With respect to forecast amounts for 2014, 2015 and 2016, the UCA submitted that the clear pattern of over-forecasting warranted reductions to the revenue requirements. The UCA recommended the application of actual data from 2012 and 2013 to update forecasts for site counts, which would result in reductions as follows:
(a) DRT forecasts:
(i) 2014 – $3.383 million;
(ii) 2015 – $3.354 million; and
(iii) 2016 – $3.368 million; and
(b) RRT forecasts:
(i) 2014 – $0.567million;
(ii) 2015 – $0.552 million; and
(iii) 2016 – $0.576 million.
The AUC partially agreed with the UCA’s approach, holding that the use of a reasonable forecast does not obviate the use of a more accurate forecast if updated data becomes available. Therefore the AUC ordered DERS, in its compliance filing, to update its site counts forecasts for 2015 and 2016 based on the actual number of sites at the end of 2014.
With respect to the customer care and billing costs, DERS submitted that it had retained new services through a request for proposals following the expiry of its 10 year master services agreement with ATCO I-Tek, and would be outsourcing the customer care and billing functions to several suppliers, one of which was an affiliate.
The AUC found that a comprehensive request for proposals process was conducted, and that DERS adequately explored alternative options for customer care and billing.
Accordingly, the AUC accepted DERS’ customer care and billing costs of $4.66 and $4.77 per site for 2015 and 2016 respectively, per site. The AUC directed DERS to reflect these amounts in its updated customer site counts for 2015 and 2016 in its compliance filing.
Vendor Selection Costs
DERS also requested approval to recover $300,000 for each of 2015 and 2016 under its DRT, and $75,000 for each of 2015 and 2016 under its RRT for vendor selection costs expended on the customer care and billing request for proposals, including consulting, legal and other costs.
The AUC disallowed the inclusion of the entirety of the vendor selection costs requested by DERS, noting that pricing had a minimal ranking in the request for proposal evaluation, and also noted that customers did receive some benefit through the comprehensive customer care and billing solution. Therefore, the AUC ordered DERS to reduce its vendor selection costs for each year from $750,000 to $356,250 in its compliance filing.
Corporate Costs
DERS requested an allocation of its corporate costs between the DRT and RRT of 80 and 20 percent respectively based on a 1.0 percent allocation for all corporate costs based on full-time equivalents for direct costs, and gross profit for indirect costs. DERS also submitted that its methodology, which also used gross margins was fair and reasonable, as these measures represented a proxy for the relative size of the business, and noted that the corporate costs allocated by DERS represented a smaller share of total revenue requirement compared with other regulated distribution utilities in Alberta.
The CCA argued that gross margins were inappropriate for several cost allocator items such as human resources, finance or health and safety and environment, as they bore no logical linkage to gross margins. The CCA also argued that the use of gross margins, as a profitability measure, allowed DERS to push costs from its unregulated business into a regulated cost of service regime.
The CCA recommended that all corporate costs be allocated according to the number of full-time equivalents employed by Direct Energy North America based on the 2012 average employee count, and therefore recommended that the AUC reduce DERS’ corporate cost allocations by 42 percent (or $318,000).
The CCA also took issue with DERS booking AUC approved amounts as “actuals” for the purposes of accounting, on the basis that such accounting practices did not accord with standard industry practice, and was misleading and confusing.
The AUC determined that a 1.0 percent allocation for all corporate costs based on full-time equivalents was not reasonable, finding the CCA’s evidence to be persuasive, and therefore reduced the allocation by 42 percent. However, the AUC disagreed with the CCA’s recommendation that the reduction be applied to all corporate costs.
The AUC agreed with the CCA’s concerns related to DERS’ practice of booking AUC approved amounts as actuals, and ordered DERS to cease the practice, and to provide a new corporate costs allocation methodology with its next application.
The AUC also found that DERS’ corporate costs were inflated using CPI forecasts, and directed DERS to update its inflation of these costs in accordance with its findings for inflation. The AUC otherwise approved DERS’ applied for corporate costs.
Labour Costs
With respect to remuneration for employees, DERS calculated its 2015 and 2016 labour remuneration costs by inflating the 2014 labour forecasts by the CPI, consistent with its inflation forecast of 2.75 percent.
The CCA argued that the remuneration costs should be reduced to the actual costs for 2012 through 2014, and that the forecast amounts for 2015-2016 be based off of the average of the actual data. The CCA also noted that a further full time equivalent vacancy rate be applied to the forecasts, consistent with DERS’ actual vacancy rates for earlier years.
The AUC accepted the CCA’s recommendation to use the available actual financial data for remuneration, as it was better reflective of DERS’ customer base. However, the AUC rejected the CCA’s arguments concerning full time equivalent vacancy rates, noting that the application of a vacancy rate to the actual data would result in an under-collection of forecast labour costs, as the actual data already reflects the vacancy rates.
The AUC directed DERS to amend its 2012, 2013 and 2014 labour costs to reflect actual amounts, and to amend its 2015 and 2016 forecasts for remuneration based on the average of 2012-2014 actual costs in its compliance filing.
Working Capital
The AUC approved DERS’ working capital forecast and methodology for 2012-2014. The AUC directed DERS to update its 2015 and 2016 forecasts by incorporating the most recent information available in the proceeding, and to update those forecasts to reflect the AUC’s findings in Decision 2191-D01-2015 for generic cost of capital matters.
Bad Debt and Un-billable Revenue
DERS requested bad debt costs for:
(a) 2015 of $3.20 million and $1.37 million for its DRT and RRT, respectively; and
(b) 2016 costs of $3.17 million and $1.44 million for its DRT and RRT, respectively.
For un-billable revenues, DERS requested:
(a) 2015 costs of $2.08 million, and $869,800 for its DRT and RRT, respectively; and
(b) 2016 costs of $2.05 million and $914,800 for its DRT and RRT, respectively. DERS used a methodology that applied the average of the previous five years of expenses, escalated by
inflation of 2.75 percent for each of bad debt and unbillable revenue.
The UCA submitted evidence that the costs of bad debt had been consistently over-forecasted by DERS by approximately 4.47 percent for the DRT, and 1.21 percent for the RRT on a per-site basis. The UCA also submitted evidence that the un-billable revenue for DERS under its DRT and RRT were over-forecasted by an average of 46.47% and 56.22% respectively.
The AUC rejected DERS’ five year average methodology, holding that it did not accurately reflect recent experience. Instead the AUC considered a more reasonable forecasting methodology would be based off of actual costs associated with bad debt and collections for 2012, 2013 and 2014, eliminating the need for any forecast risk adjustments.
Idle sites
DERS submitted that it books un-billable revenue to idle sites in its site count, as these sites still attract distribution and transmission charges. The threshold methodology applied by DERS for a site was a 13 month waiting period before being permanently disconnected. Each site must meet a number of criteria before disconnection, including 12 consecutive months of inactivity, and the removal of the meter.
The AUC accepted DERS’ methodology for booking un-billable revenue from idle sites.
Inter-Affiliate Code of Conduct
DERS requested that it not be subject to an Inter-Affiliate Code of Conduct, on the basis that its affiliate with which it has a master services agreement does not operate within Alberta, and its agreement simply provides access to infrastructure (i.e. hardware and software) in a fee for service arrangement at fair market value. DERS noted that it already operates under a compliance plan for its employees in the course of any inter-affiliate transactions.
The AUC rejected this request on the basis that DERS’ affiliates took part in unregulated business activities, and the compliance plan DERS operates under was not on the public record, and not approved by the AUC. Therefore the AUC directed DERS to file an inter-affiliate code of conduct for approval by December 31, 2015, consistent with the principles set out in Decisions 2002-069 and 2003-040.
Compliance Filing
The AUC accordingly ordered DERS to submit a compliance filing consistent with the findings and directions above on or before August 21, 2015.
