Performance Based Regulation – Capital Tracker True-up
In this decision, the AUC considered ATCO Gas and Pipelines Ltd.’s (“ATCO Gas”) application requesting approval of its 2015 capital tracker true-up, capital tracker treatment for the capital costs related to the 2013 southern Alberta floods for the years 2014 and 2015, and its updated forecast for the 2017 Steel Mains Replacement (“SMR”) capital tracker program.
Capital Tracker and K-Factor Overview
In Decision 2012-237 (the “2012 PBR Decision”), the AUC set out the first generation PBR framework and approved PBR plans for certain distribution utilities, including ATCO Gas. In that decision, the AUC approved a flow-through rate adjustment mechanism to fund certain capital-related costs, referred to as a “capital tracker.”
Programs or projects approved for capital tracker treatment are included in a utility’s annual revenue requirement adjustments, as determined by the applicable PBR plan formula. The revenue requirement associated with approved capital tracker projects is collected from ratepayers by way of a flow-through “K factor” adjustment.
The 2012 PBR Decision also set out the three criteria a program or project must meet to be eligible for capital tracker treatment, namely:
1. the project must be outside the normal course of on-going operations (“Criterion 1”);
2. 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
3. the project must have a material effect on the company’s finances (“Criterion 3”).
Criterion 1 requires a two-stage assessment of each project or program for which capital tracker treatment is requested. At the first stage (project assessment), an applicant must demonstrate the project is:
(a) required to provide utility service at adequate levels; and, if so,
(b) that the actual scope, level and timing of the project are prudent.
At the second stage, an applicant must demonstrate the absence of double-counting (the “Accounting Test”). The Accounting Test requires an applicant to demonstrate that the associated revenue provided by the PBR formula will be insufficient to recover the entire revenue requirement associated with the prudent capital expenditures for the program or project in question.
With respect to Criterion 2, a growth-related project will generally qualify where an applicant demonstrates that customer contributions and incremental revenues are insufficient to offset the project’s cost.
The materiality threshold in Criterion 3 requires that each individual project affect the revenue requirement by four basis points. On an aggregate level, all proposed capital trackers must have a total impact of 40 basis points or more.
AUC Approach to Capital Tracker True-up Applications
The AUC explained that for a capital tracker true-up application, it will assess all three criteria for capital tracker treatment for capital projects or programs not previously considered.
For projects or programs for which the AUC has previously confirmed are necessary (first part of Criterion 1) in prior capital tracker decisions, the AUC will not reassess of the need in the absence of evidence that the project or program is no longer required. However, the AUC will assess the scope, level and timing of each project or program for prudence, and whether the actual costs of the project or program were prudently incurred, as required by the second part of the project assessment under Criterion 1.
The AUC explained that it will not reassess against the Criterion 2 unless the driver for the project or program had changed.
Decision Summary
The AUC found that:
• ATCO Gas’ proposed grouping into projects or programs was reasonable;
• the need for the capital tracker projects or programs included in the 2015 true-up was confirmed and the actual scope, level, timing and actual costs of each of the projects or programs included in the 2015 true-up were prudent. As a result, each of those programs or projects met the project assessment requirement under Criterion 1;
• the capital tracker projects or programs included in the 2015 true-up satisfied the accounting test requirement of Criterion 1. Therefore, all of ATCO Gas’s programs or projects included in the 2015 true-up satisfy the requirements of Criterion 1 for capital tracker treatment;
• the previously-approved capital tracker projects or programs included in the 2015 true-up continue to meet the requirements of Criterion 2. The new Alberta Floods program also meets the requirements of Criterion 2;
• all of ATCO Gas’s capital tracker projects or programs included in the 2015 true-up satisfy the two-tiered materiality test requirement of Criterion 3;
• the Alberta Floods program meets all three capital tracker criteria based on the actual expenditures in 2014; and
• The Steel Mains Replacement (SMR) capital tracker program meets all three capital tracker criteria based on an updated forecast basis for 2017.
The AUC approved:
• the 2015 K factor true-up refund of $2.9 million and $1.8 million in the north and south, respectively;
• the portions of the 2017 forecast K factor amounts of $0.8 million and $0.5 million in the north and south, respectively, arising from the approval of the 2017 updated SMR forecast; and
• The portion of the 2014 K factor amount associated with the Alberta Floods program of $0.375 million in the south.
