Pensions Costs – AUC Jurisdiction – Cost-of-Living Adjustment
ATCO Electric Ltd. (“ATCO Electric”), ATCO Gas, and ATCO Pipelines, (collectively, the “ATCO Utilities”), applied to the AUC for approval of the 2013 pension costs. In accordance with the Decision 2011-391, the ATCO Utilities filed:
(a) An updated actuarial valuation for pension funding as of December 31, 2012; and
(b) Supporting evidence to recover the full pension costs identified in the actuarial valuation report.
The ATCO Utilities are participants in the “Retirement Plan for Employees of Canadian Utilities Limited and Participating Companies” (the “Pension Plan”), administered by Canadian Utilities Limited (“Canadian Utilities”).
The ATCO Utilities requested 2013 pension costs of:
(a) $7.1 million for ATCO Electric – Transmission; and
(b) $5.4 million for ATCO Pipelines.
The ATCO Utilities noted that the current service costs of pensions are as follows:
(a) $3.9 million for ATCO Electric – Transmission; and
(b) $3.0 million for ATCO Pipelines.
In the previous AUC Decision 2011-391, the AUC directed ATCO to limit its cost-of-living adjustment (“COLA”) to 50 percent of the consumer price index (“CPI”) to a cap of three percent (“50 percent COLA”). The impact of limiting the COLA to the 50 percent COLA resulted in a revenue requirement reduction of $4.9 million for the ATCO Utilities. The ATCO Utilities requested cost recovery using a COLA based on 100 percent of the CPI to a cap of three percent (“100 percent COLA”) as calculated in the actuarial valuation effective January 1, 2013.
The AUC received four statements of intent to participate, one of which was from the Office of the Utilities Consumer Advocate (the “UCA”).
Pension Legislation
The AUC noted that pensions are governed by provincial pension legislation, notably the Employment Pension Plans Act (“EPPA”). The EPPA, among other things, requires a pension plan administrator to require that plan funding be adequate to protect the rights and obligations of members covered by the plan. The AUC also noted that COLAs are considered to be ancillary benefits under the pension plan legislation and regulations.
Pension Plan
The Pension Plan consists of two components operating under a single plan: a defined benefit component (“DB Plan”) and a defined contribution plan (“DC Plan”). The DC Plan was created in 1997, and the DB Plan has been closed to new ATCO Utilities employees since that time.
AUC’s Jurisdiction
ATCO Utilities and the UCA each argued different positions with respect to the scope of the AUC’s jurisdiction in assessing pension costs. ATCO Utilities suggested that the AUC had a much more limited scope of jurisdiction in regard to pension costs, and should not consider the resultant rate impacts of including such costs if they are prudent. The UCA argued that the AUC had a much broader jurisdictional power, including ensuring that overall compensation costs are prudent, and that the components of such compensation are both necessary and reasonable.
The AUC held that the Gas Utilities Act and the Electric Utilities Act provide the AUC with the authority to set just and reasonable rates. This broad and general power included the authority to assess management decisions. The AUC further held that the pension legislation itself may be instructive as to the parameters, procedures and requirements of a pension plan, but do not extend to whether such costs should be approved in a rate-setting context. The AUC found that ATCO Utilities would still bear the onus of proving that such costs to be recovered were reasonable.
Past Actions of the Pension Administrator
The AUC considered whether past actions by the pension administrator were relevant to assessing the applied for 2013 pension costs. ATCO Utilities submitted that the administration of its pension plan has been prudent and reasonable throughout the plan’s history, noting its past actions to close the DB Plan provision to new entrants in 1997, and its various cost-containment measures since that time which have in turn benefitted ratepayers. The UCA submitted that past actions were irrelevant to the current proceeding, noting that a utility must demonstrate on an ongoing basis that its costs are prudently incurred and that resulting rates are just and reasonable.
The AUC determined that its findings would be based on the evidence filed on the record, and to the extent that such information relates to 2013 pension costs, or affect the pension plan going forward.
50 percent COLA vs. 100 percent COLA
ATCO Utilities argued that the AUC should consider the applicable COLA provisions of the DB Plan not in isolation, but in the context of overall compensation consistent with prior AUC decisions on similar matters. ATCO Utilities took the position that the 50 percent COLA, deprived ATCO Utilities of any opportunity to recover its prudently incurred costs, resulting in overall compensation falling below the median of other comparable utilities.
The UCA argued that, while the AUC does ensure that overall compensation, as well as the individual components that make up the overall compensation, are reasonable and necessary, the UCA took issue with ATCO Utilities’ characterization of what were considered comparable utilities. The UCA also asserted that the change from the 100 percent COLA to the 50 percent COLA would only affect approximately $0.077 per $1.00 of additional contributions to improving the competitive position of the overall compensation of the ATCO Utilities.
The AUC agreed with the UCA’s approach to compensation, looking at both the overall compensation and the individual components as reasonable and necessary. The AUC held that applying the 100 percent COLA versus the 50 percent COLA would result in incremental special payment expenses of approximately $3.5 million and $12.2 million. The AUC held that this would have a negligible impact on ATCO Utilities as compared to its peer competitor group, as the impacts between 100 percent COLA and 50 percent COLA would see ATCO Utilities remain within +/- 10 percent of the 50th percentile of its peer competitor group, regardless of which COLA percentage is applied.
The AUC therefore reasoned that an incremental expenditure of approximately $15 million should not be recovered from utility customers, as the ATCO Utilities evidence demonstrated that the ATCO Utilities were market competitive when compared to their peer competitor group.
Further, the AUC held that:
(a) There were no explicit provisions in the pension plan text that prescribe a clear mechanical application of a COLA without any discretion on the part of the plan administrator;
(b) The pension plan does not clearly define how the CPI and previous adjustments are taken into consideration when setting the COLA for the year; and
(c) The pension plan text does not link the unfunded liability or financial position of the pension plan to the COLA provisions.
Therefore, the AUC found that the plan administrator was exercising discretion in the application of the annual COLA, and not simply following a mechanical exercise. The AUC noted the previous management decisions of the plan administrator as having a resulting impact on the forecast pension costs for which recovery is sought through ATCO Utilities’ rates. However, the AUC held that there has not been a material change in circumstances or changes to the provisions of the pension plan to warrant an increase in the COLA to the 100 percent COLA. The AUC held that such an increase would be unreasonable in the circumstances, and that an application of the 50 percent COLA was reasonable in setting just and reasonable rates.
The UCA submitted that ATCO Utilities paid its 2012 DB Plan pension costs to retirees using the 100 percent COLA, despite the 50 percent COLA established by the AUC in Decision 2011-391. The AUC agreed with the UCA’s submission, and held that the $996,000 paid to retirees in 2012 above the approved 50 percent COLA from ATCO Utilities’ regulated entities’ should not be recovered through rates. The AUC therefore directed ATCO Utilities to reduce its pensions costs to reflect the 50 percent COLA, and remove any accruing or compounding impact of the 100 percent COLA amounts from their revenue requirements.
AUC Ruling and Directions
The AUC approved the application of the 50 percent COLA as a reasonable COLA for regulatory purposes while the pension plan is in a deficit position. This would reduce service costs and the elimination of going concern special payments for both regulated and non-regulated participating companies in the pension plan.
The AUC further directed ATCO Utilities to identify the impact of the above findings as it applies to each of the ATCO Utilities, and to clearly identify the breakdown between current service costs and special payment costs, and further breaking down those items into capital versus operating and maintenance portions.
The AUC ordered the ATCO Utilities to file a compliance filing consistent with the findings of this decision by March 16, 2015.
