PBR Regulation – Capital Tracker True-up
In this decision, the AUC considered ATCO Electric Ltd.’s (“ATCO Electric”) 2016 capital tracker true-up.
AUC Determinations
The AUC made the following determinations:
• The actual scope, level, timing and actual costs of each of the projects or programs included in the 2016 true-up were prudent, subject to the removal of the Fort McMurray North Service Building Project capital additions and Commission directions with respect to the Buildings, Structures and Leasehold Improvements Program.
• Because of the removal of the Fort McMurray North Service Building Project capital additions and AUC directions with respect to the Buildings, Structures and Leasehold Improvements Program, a reassessment of whether the capital tracker projects or programs included in the 2016 true-up satisfied the accounting test requirement of Criterion 1 was required.
• The previously approved capital tracker projects or programs included in the 2016 true-up continued to meet the requirements of Criterion 2.
• Because of the removal of the Fort McMurray North Service Building Project capital additions and Commission directions with respect to the Buildings, Structures and Leasehold Improvements Program, a reassessment of whether the capital tracker projects or programs included in the 2016 true-up satisfied the two-tiered materiality test requirement of Criterion 3 was required.
Based on the following determinations, the AUC found that it could not make a determination as to whether the projects or programs included in the 2016 true-up satisfied the project assessment requirement of Criterion 1 (defined below) and materiality requirement under Criterion 3 (defined below). The AUC directed ATCO Electric to revise its accounting test for 2016 in a compliance filing to this decision.
The AUC’s findings and directions regarding the Fort McMurray North Service Building Project are summarized below.
Eligibility for Capital Tracker Treatment
Projects or programs are eligible for capital tracker treatment, provided that they meet the following three criteria:
(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 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”).
Criterion 1: Project Assessment and Accounting Test
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 that:
(a) the project is required to provide utility service at adequate levels; and, if so,
(b) the scope, level and timing of the project are prudent, and the forecast or actual costs of the project are reasonable.
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.
Criterion 2: Replacement/Externally Requested Project
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.
Criterion 3: Materiality Test
To assess whether a proposed capital tracker has a material effect on a company’s finances, an applicant must satisfy the two-part Criterion 3 materiality threshold, namely, that:
(a) each individual project affects the revenue requirement by four basis points; and
(b) on an aggregate level, all proposed capital trackers must have a total impact on the revenue requirement of 40 basis points.
Criterion 1 Applied
Project assessment under Criterion 1 – the project must be outside of the normal course of the company’s ongoing operations
The AUC evaluated ATCO Electric’s programs or projects included in the 2016 true-up against the second part of the project assessment requirements of Criterion 1, which is whether the actual scope, level, timing and costs of the project were prudent.
The AUC found that the actual scope, level, timing and actual costs of each of the projects or programs included in the 2016 true-up were prudent, subject to the removal of the Fort McMurray North Service Building Project.
The AUC explained that the Buildings, Structures and Leasehold Improvements Program is an annual recurring program involving the procurement of office and garage space, furniture, warehouse and equipment storage facilities, as well as renovations and improvements required for the continuing operation of owned and leased facilities.
The AUC explained that the Fort McMurray North Service Centre (the “North Service Centre”) was a new 20,774 square foot building in Fort McMurray, consisting of 15,974 square feet of office space and 4,800 square feet of shop space. In the application, ATCO Electric applied for capital tracker treatment for the north service centre for 2016 with actual capital additions of $20.2 million, with expecting trailing costs of $0.6 million in 2017. ATCO Electric had forecast capital additions of $21.1 million in its 2016-2017 capital tracker forecast application.
The need and scope of the project were approved in Decision 20555-D01-2016 on a forecast basis. In this decision, under the project assessment requirement of Criterion 1, the AUC considered whether the north service centre project was required in 2016 to provide utility service at adequate levels and, if so, whether the actual costs were prudently incurred. Specifically, the AUC considered whether it was necessary to relocate employees to the north service centre in 2016, in order to maintain utility service quality.
The AUC noted that:
(a) in September 2016, before the north service centre was ready for occupancy in October 2016, ATCO Electric had 82 employees requiring office space in Fort McMurray; and
(b) 56 employees were located in the south service centre, and 26 were located in the portable units.
The AUC found that:
(a) given the availability of space at the south service centre, it was not necessary for ATCO Electric to move employees from the south service centre to the North Service Centre in order to maintain service quality in 2016; and
(b) given the availability of the office space in the portable units and the fact that utilities at that site were not disconnected until 2017, there was no requirement to relocate employees from these units in order to maintain service quality in 2016.
The AUC concluded that the North Service Centre project did not meet the project assessment requirement of Criterion 1. Therefore, the AUC denied capital tracker treatment as requested by ATCO Electric for 2016.
The AUC directed ATCO Electric to remove the 2016 capital additions related to the Fort McMurray North Service Building Project from the Buildings, Structures and Leasehold Improvements Program in its compliance filing.
