Direct Assigned Capital Projects – Deferral Account Disposition
In this decision the AUC considered ATCO Electric Ltd.’s (Transmission) (“ATCO”) application for approval of the capital costs of 35 direct assigned capital projects completed in 2013 and 2014 (the “Direct Assigned Capital Projects”), representing total additions to its rate base of $421.4 million in 2013 and $402.3 million in 2014.
Decision Summary
The AUC approved the vast majority of the Direct Assigned Capital Project costs without changes.
The AUC disallowed some of the project costs in relation to legal costs, hearing support, capitalized training costs and the use of charter aircraft.
The AUC approved ATCO’s 2013 and 2014 direct assign capital deferral accounts (“DACDA”) on an interim basis. ATCO requested the interim approval given the AUC’s pending decision on its 2018-2019 general tariff application (“GTA”).
ATCO proposed in the 2017-2018 GTA to refund construction work in progress (“CWIP”) in rate base balances collected over the 2013 to 2016 period for direct assigned projects. The AUC explained that because those 2013-2014 capital project costs would be affected by the AUC’s determination on that issue, the capital project costs could not be finally determined as part of this application.
The AUC did not approve ATCO’s requested application of the net present value (“NPV”) methodology for disallowed costs related to the northeast loop project. The AUC directed that the disallowed costs simply be removed from rate base.
Common Costs
Disallowed Legal Costs
The AUC considered it appropriate to disallow $100,000 of the legal fees claimed by ATCO, representing a reduction of about 10 per cent of the fees attributed to senior resources.
The AUC noted that the legal invoices supplied by ATCO included the name of the resource, level of resource, hourly rate, total time of the resource for that invoice and an itemized list of the work performed by the resources. The AUC found that such level of detail was sufficient to assess the allocation of resources.
The AUC explained that while ATCO was free to retain the legal counsel of its choice, the AUC is responsible for evaluating the overall reasonability and prudence of the costs claimed.
The AUC encouraged ATCO to use an open and freely competitive tendering process, similarly to what is used for other contractors. The AUC found that although it would not order a tendering process for legal services, it would rely on the evidence and what it has seen from other law firms and utilities with respect to regulatory legal fees. In this regard the AUC noted that legal counsel for other utilities offered discounts off standard rates in some cases.
Disallowed Aircraft Charter Costs
The AUC directed ATCO to remove $115,000 from the requested aircraft charter costs, approximately one third of the total ATCO requested.
The AUC noted its concerns that the information provided on aircraft charter flights was not sufficient to show that using charters was the best alternative based on weather, ambient conditions, availability of other alternatives and cost.
The AUC found that ATCO failed to demonstrate that:
(a) aircraft charters were the best available alternative in many cases; and
(b) in particular, the AUC found that for flights between Calgary and Edmonton, attendance at meetings could have been accommodated by teleconferencing or similar technologies, as opposed to in-person attendance, and therefore that those aircraft charter flights were not required.
With respect to flights to and from the United States, the Commission found that manufacturing facility visits may be required to understand the capability of the vendor and view the quality of material being procured. However, ATCO had not adequately demonstrated that a “compressed itinerary” was necessary and that commercial flights were not a valid alternative.
Capitalized Projects
For the 35 projects for which ATCO sought additions to rate base in 2013 and 2014, ATCO calculated that a net refund of $3,208,000 would be payable to the AESO for 2013 and a net collection of $2,729,000 would be due from the AESO for 2014.
Test for Prudence
The AUC cited the test for prudence, as previously set out in Decision 3585-D03-2016, where it stated:
In summary a utility will be found prudent if it exercises good judgment and makes decisions which are reasonable at the time they are made, based on information the owner of the utility knew or ought to have known at the time the decision was made. In making decisions, a utility must take into account the best interests of its customers, while still being entitled to a fair return.
The AUC explained that the burden of proof to establish prudence is on the applicant and that recent jurisprudence from the Supreme Court of Canada confirmed that the AUC had no obligation to presume prudence, even where no evidence is provided to the contrary.
The AUC’s role, it explained, was to examine each project’s costs with consideration to the applicant’s decisions, given the information that was known or should have been known at the time the decisions to incur were being made (i.e. no hindsight). If there was insufficient information to determine that a decision was reasonable, the AUC had the discretion to direct disallowances.
With respect to the 35 projects included in this application, other than for projects specifically addressed (summarized below), the AUC found that:
(a) the information on the record was sufficient to assess the reasonableness of the requested capital additions; and
(b) ATCO’s requested capital addition amounts were reasonable.
Livock 240-kV Phase Shifting Transformer
ATCO reported the actual cost of the Livock 240-kV Phase Shifting Transformer (“PST”) project to be $38.4 million, compared to the $31.5 million estimated in the proposal to provide service (“PPS”).
ATCO explained that the key cost variances between the PPS and actuals were mainly due to (1) bridge reinforcement along the transportation route, (2) higher camp costs, (3) the addition of oil containment, (4) increased engineering due to the unique nature of the PST, and (5) poor and wet ground conditions at the substation site.
The CCA requested $3.8 million in disallowed costs related to the Livock PST project, or roughly 10 percent of the total project costs.
Unique Nature of PST – Substation Engineering Labour Costs
The AUC found that:
(a) the unique nature of the PST, combined with transportation requirements for the PST resulted in cost increases, as compared to the PPS;
(b) variance from a PPS estimate is not, in and of itself, an indication of imprudence;
(c) the costs could not have been avoided and had the unique requirements of the PST been fully understood, the PPS estimate simply would have been higher; and
(d) ATCO attempted to proactively address the unique nature of the PST by retaining specialized engineering support to assist in engineering the PST, while attempting to minimize costs by limiting the hours worked by the external vendors.
The AUC concluded that ATCO’s substation engineering labour cost variances attributable to the unique nature of the PST were not unreasonable.
Substation Labour – Site Prep and Survey
The AUC found that:
(a) ATCO had limited opportunity to conduct geotechnical investigations prior to permit and licence, after which relocating the substation or PST based on the geotechnical data would have been difficult;
(b) the geotechnical conditions encountered required additional cut and fill quantities that, in turn, resulted in higher site grading costs;
(c) ATCO could not have known that the weather conditions would result in a wetter site that would necessitate dewatering and additional rig mats;
(d) regardless of whether ATCO had known earlier that the Alberta Transportation bridge load rating would be inadequate to support the weight of the PST, ATCO would still have been required to build a new bridge; and
(e) the AESO was at all times aware of the schedule and estimated cost increases and did not direct ATCO to stop work or modify the ISD or scope.
Based on the above, the AUC did not find ATCO’s substation labour cost variances attributable to site grading or rig mats to be unreasonable.
Substation labour – construction – oil containment
The AUC found that there was insufficient information on the record to determine if the quantum of costs for the secondary oil containment were reasonable. The AUC noted that ATCO did not provide a technical and cost analysis of the technologies that were available for secondary containment, nor any reason why other technologies were rejected in favour of a concrete secondary oil containment system. The AUC found that without such analysis, it could not make a determination on the reasonableness of ATCO’s decisions in light of available alternatives at the time of design and construction.
The AUC directed ATCO, in the compliance filing, to provide an analysis of the secondary oil containment systems that would have been available at the time, the estimated costs for design, procurement and construction of each system and the resulting rationale for ATCO’s selection of a concrete secondary oil containment system.
The AUC approved the oil containment system costs on the Livock PST project on a placeholder basis, pending final determination in the compliance filing.
Variance in Final Cost and Requested Capital Additions
The AUC noted that ATCO’s requested capital additions for the Livock PST project were $38,648,913, with zero forecast trailing costs and that this amount was greater than the final project cost of $38,429,415. The AUC directed ATCO to provide an explanation for this variance at the time of its refiling.
Otauwau 144-kV Reinforcement Project
ATCO requested additions to rate base of $12.2 million in 2013 and $0.1 million in 2014, representing a variance of approximately $2.8 million from the forecasted costs at the PPS stage.
The AUC approved the costs for the Otauwau project based on the following findings:
(a) Given the market conditions at the time, the actions of ATCO to execute the project by bundling the substation construction for two projects and soliciting bids from a large number of vendors for the procurement of substation construction services was reasonable;
(b) ATCO pointed out these market conditions to the AESO, who determined that the project should proceed without delay; and
(c) as ATCO is legislatively required to follow the direction of the AESO, its actions to proceed with the execution of the project were reasonable at the time.
Cancelled Projects
ATCO applied to recover costs it incurred for Project 57130 – Athabasca Area Transmission Development up to the date of its cancellation by the AESO. ATCO incurred approximately $139,000 to date in preliminary planning costs.
The AUC found that ATCO provided sufficient information to justify the reasonableness of these costs and approved ATCO’s cost recovery for that cancelled project in accordance with Section 40 of the Transmission Regulation.
NPV Payment of True-up Balances
ATCO proposed the use of a one-time net present value (“NPV”) payment for the true-up of 2013 and 2014 and direct and indirect IT capital balances. It also proposed the use of this NPV approach to deal with the disallowed assets related to the disallowed NE Loop project. ATCO Electric proposed a one-time NPV payment of $924,000 for 2014 for the NE Loop Project disallowance.
The AUC noted that:
(a) it previously approved the use of the NPV for the refund of the Evergreen II disallowances; and
(b) it approved the use of ATCO’s weighted average cost of capital (“WACC”) as the discount rate to be used in those calculations.
Despite these previous decisions, the AUC considered the use of the NPV methodology and the associated discount rate as a specific matter to be decided with respect to the NE Loop disallowance in this proceeding.
The AUC found that in the present case, for customers to be held whole, the customers, upon receipt of the one-time payment from ATCO, would then have to purchase an annuity which would yield after tax payments to the customers that were equal to the future payments they in turn would make to ATCO Electric. The AUC rejected ATCO’s assertion that customers could purchase such an annuity, guaranteeing payments for 40 years, that would be based upon a discount rate equal to ATCO Electric’s WACC.
For the above reasons, the AUC found that if the NPV method were to be approved for use in the future, the discount rate applied should reflect the actual discount rate that would be inherent in a notional annuity.
The AUC therefore denied ATCO’s request to use the NPV approach for dealing with the disallowed assets in this case. The AUC directed that the expenditures and assets related to the NE Loop be removed from rate base.
