Electricity – Rates
Previously, the Alberta Court of Appeal (“ABCA”) allowed ATCO Electric Ltd.’s (“AE”) appeal of the Alberta Utilities Commission (“AUC”) Decision 21609-D01-2019 (the “Z Factor Decision”) and returned the decision to the AUC for reconsideration. This was an AUC-initiated proceeding to reconsider the Z Factor Decision.
The AUC allowed AE to include within its rate base the net book value of the electric distribution assets destroyed in the Wood Buffalo fire. The AUC directed AE to reverse the adjustment made to its accumulated depreciation account, as well as reverse the adjustments made to the revenue requirements over the 2018-2023 period and include the associated carrying charges.
In the Z Factor Decision, the AUC denied AE the ability to recover the net book value of assets destroyed in the Wood Buffalo fire and directed AE to retire the destroyed assets from its rate base. Following an appeal from AE, the ABCA held that the AUC had erred in law in thinking that its treatment of the destroyed assets was constrained by earlier decisions. The ABCA confirmed that the AUC has discretion to decide where a just and reasonable tariff would place the losses, having regard to the right of the utility to a reasonable opportunity to recover its prudent costs. The ABCA rejected the AUC’s conclusion that its determination of how to treat destroyed assets was constrained by the Supreme Court of Canada’s (“SCC”) decision in ATCO Gas & Pipelines Ltd v Alberta (Energy & Utilities Board), 2006 SCC 4 (“Stores Block”). The ABCA held that the AUC had over-read Stores Block, incorrectly concluding that it was obliged to apply in the fire, the AUC relied on the UAD test and Stores Block. The ABCA rejected the AUC’s conclusion that its determination on how to treat destroyed assets was constrained by Stores Block. The ABCA held that the ultimate issue was whether the destroyed assets were prudently acquired, whether they were related to the provision of the utility service to customers, and whether the utility had been given a reasonable opportunity to recover those costs.
AUC Reconsideration Findings
The AUC held that the first two factors identified by the ABCA were not in dispute and focused its attention on the third factor, which was whether AE has been provided with a reasonable opportunity to recover its costs.
The AUC disagreed with the suggestion that, for determining how to treat the net book value of destroyed assets, it must limit its consideration to assessing the prudence of the capital costs when they were first incurred. The Electric Utilities Act (“EUA”) provides the AUC with discretion to deal with depreciation and assets destroyed by force of nature and the EUA does not impose the no-hindsight prudence test, as alleged by certain parties.
The AUC also disagreed with the suggestion that providing a reasonable opportunity to recover costs requires that costs be included in revenue requirement, and remain in revenue requirement until fully recovered, regardless of intervening events, which may be relevant to the question of where a just and reasonable tariff would place the losses.
In this case, the AUC was satisfied that it was just and reasonable to allow AE to recover the costs associated with the net book value of the assets destroyed by the Wood Buffalo fire. The AUC accepted that, in the circumstances of the Wood Buffalo fire, isolating and directing the removal of the entirety of the net book value of the destroyed assets had the effect of rescinding the reasonable opportunity previously afforded to AE to recover these costs.
The AUC was also satisfied that, in this case, allowing recovery of the costs results in a just and reasonable tariff. According to the AUC, a just and reasonable tariff is a tariff that is fair to the utility and its customers by enabling the customers to pay no more and no less than what it costs to provide service.
The AUC determined that reversing the original $ 3.177 million adjustment through a collection of annual revenue requirement adjustments for the 2018-2023 period through a Y factor incorporated into its 2024 rates, as proposed by AE, is efficient and accurate. The AUC determined that AE’s proposed accounting treatment aligns with the approved amortization of a reserve differences (“ARD”) mechanism, ensuring surplus or deficiency in accumulated depreciation is trued-up over the remaining life of the specific account when an asset is retired. The AUC was satisfied that AE’s proposed treatment is consistent with existing depreciation practices and provided an adequate level of transparency to enable testing those amounts in a future AE depreciation study.