Compliance Filing – Electrical Distribution System Purchase – Depreciation Component
In this decision, the AUC considered whether to approve the depreciation component associated with FortisAlberta Inc. (“Fortis”)’s purchase of the electric distribution system from the Municipality of Crowsnest Pass (“Crowsnest Pass” or the “Municipality”). The AUC found the depreciation amount of $2,936,000 to be reasonable.
Background
In Proceeding 21785, Fortis requested that the AUC assess the prudence of the price it paid to purchase Crowsnest Pass’s electric distribution system, for ratemaking purposes. The AUC did not find the applied-for depreciation amount to be prudent. The AUC was not convinced that the applied-for depreciation component of $1,640,277 produced a value that was commensurate with the value of Crowsnest Pass’s system. The AUC indicated that Fortis could reapply for approval of a revised purchase price in a compliance filing to that decision. Fortis applied for a revised depreciation amount in this proceeding.
Fortis’s revised methodology resulted in an updated depreciation amount of $2,947,000 as compared to the previous depreciation amount of $1,640,277 based on the application of a 30.33 percent depreciation rate.
In the second round of information requests for this proceeding, the AUC requested that Fortis provide the depreciation component of the transaction based on the estimated service life and Iowa curve approved for each asset class. In response, Fortis provided a revised depreciation component value of $2,936,000.
AUC Findings
The AUC was generally satisfied that Fortis had provided a comprehensive depreciation methodology that better reflected the condition, vintage and necessity of the infrastructure assets acquired from Crowsnest Pass, as contemplated by the AUC in Decision 21785-D01-2018.
However, the AUC did not find certain aspects of the overall revised approach undertaken by Fortis, and the resultant depreciation amount of $2,947,000, to be an accurate representation of Crowsnest Pass’s electric distribution system assets. Specifically, the AUC was not persuaded that utilizing the weighted average service life was superior to using estimated service lives specific to each asset class. The AUC found that Fortis’s methodology of applying the weighted average service life of 42 years against the transformers and poles asset classes unnecessarily skewed the estimated service life of those assets.
The AUC also did not find Fortis’s “blanket” approach of applying an R1.5 curve to each asset class to be reasonable in this instance. In the AUC’s view, Fortis’s proposed “blanket” approach unreasonably diminished a more precise way of determining depreciation amounts.
However, the AUC found the depreciation amount of $2,936,000, as calculated by Fortis in response to the AUC’s second round of information requests resolved the AUC’s concerns. Therefore, the AUC found the purchase price associated with the acquisition of Crowsnest Pass’s electric distribution system in the amount of $2,450,180 (reflective of the replacement cost new value of $5,407,786, less the approved depreciation amount of $2,936,000, subject to adjustments for the acquisition of inventory in the amount of $99,480 and removal costs of $121,086) to be prudent for ratemaking purposes.
