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Corix Utilities (Foothill Water) Inc 2023-2025 Revenue Requirements and Rates Application, AUC Decision 27844-D02-2023

Link to Decision Summarized

Water – Rates

Application

Corix Utilities (Foothills Water) Inc. (“Corix”) provides water utility service that comprises of potable water distribution service to 955 customers (residential and commercial), potable bulk water service at its fill station, and raw water transportation service to four customers. Corix also has a wastewater utility (Foothills Wastewater) serving the same community, which is unregulated.

Corix applied for approval of proposed changes to the terms and conditions, rate design and rates for 2023 to 2025. Corix requested a 2023 rate increase of 18.6 percent for its typical residential and commercial customers, as well as smaller increases for 2024 and 2025.

Corix also requested that the proposed residential and commercial customer rates be made effective on an interim basis beginning on January 1, 2023. The AUC denied that request in Decision 27844-D01-2023, stating that Corix had not demonstrated that an interim rate increase was in the public interest and directed a continuation of the existing rates charged by Corix on an interim basis commencing on January 1, 2023, until such time the new rates are approved.

Decision

The AUC approved certain parts of the application and ordered Corix to file a compliance filing to this decision by August 31, 2023, to reflect the findings, conclusions and directions in this decision.

Pertinent Issues

Interrelation with the Wastewater Utility

A customer group expressed concerns that the unregulated nature of the wastewater business provides an opportunity for Corix to “sidestep” any disallowances to its regulated potable water rates, by increasing its wastewater rates commensurately. The AUC found that sewage disposal and waste management are not enumerated as public utility services in the Public Utilities Act, which establishes the regulation of investor-owned public utilities. As a result, the AUC concluded that it was not empowered under legislation to set rates for Foothills Wastewater or to investigate its conduct.

Findings Regarding Proposed Values or Increases

The AUC was not persuaded to accept all proposed values or increases requested by Corix. Specifically, the AUC took issue with the following items.

Revenue Requirement

The AUC noted the submitted revenue requirement forecast for the application test period, recognized that some of the revenue requirement numbers will change as a result of its findings in this decision and directed Corix to update its revenue requirement as part of its compliance filing to this decision.

Rate Base

Corix provided mid-year rate base calculations for its 2021 actual, 2022 projected forecast, and 2023 to 2025 test period forecast. The AUC noted that the forecast mid-year rate base approved for 2014 was $4,586,184,22, which is $436,239 greater than Corix’s 2021 actual rate base. This decrease in rate base suggests that during this period (2015 to 2021), when Corix did not file any new rate applications, depreciation on its assets in service was outpacing new capital additions and contributions in aid of construction (“CIAC”).

Capital Additions

Corix proposed 12 capital projects to be approved in its 2023 to 2025 revenue requirement. Out of these 12 projects, five projects incurred capital costs in 2022, which required AUC approval for those costs to be included as capital additions into the opening rate base for 2023. The AUC scrutinized the proposed capital costs and made findings on specific capital projects, while the projects not specifically mentioned in the decision were approved as filed.

Depreciation

The AUC observed that in certain asset classes, the service life of the asset did not match the depreciable life of the asset recorded in Corix’s rate model. As a result, the AUC directed Corix to retire certain assets and to remove from rate base in its 2023 forecast any residual amounts for certain assets being replaced.

Operating and Maintenance

The total operating and maintenance (“O&M”) expenses forecasted for each year make up approximately 65 per cent, 62 per cent and 61 per cent of the 2023-2025 forecast revenue requirements, respectively. The AUC did not accept the proposed allocated costs (being corporate services, common administrative and regional services costs) and instead approved single total allocated costs amounts for 2023, 2024 and 2025 that will cover all three allocation categories: corporate, regional and common administrative costs.

Salaries and Wages

The AUC accepted Corix’s forecast of a 0.7 full-time equivalent employee (“FTE”) for the area supervisor for 2023-2025 and approved 1.9 operator FTEs in each year, instead of the requested 2.3 operator FTEs. The AUC found reasonable the use of the labour escalators of 4.3 per cent for 2023, three per cent in 2024 and three per cent in 2025 and agreed with Corix that these rates will maintain salaries at a level equal to or higher than the Bank of Canada’s inflation projections for 2023, 2024 and 2025. The AUC denied the forecast increase in salaries and wages for 2024 related to operator certification advancement, as Corix did not adequately justify the need for these additional salary increases.

Consulting and Outside Services

Corix explained that the costs for consulting/outside services include services provided for engineering reviews and analyses along with professional services related to the monitoring and testing of equipment. The AUC found that using the 2022 projected costs as the base for the 2023 forecast was unreasonable and that it would be more reasonable to use the 2021 restated cost of $31,900 as the base year for the 2023 forecast. The AUC found that the use of the inflation rates of three per cent for 2023 and 2024, and two per cent in 2025 was reasonable and agreed with Corix that these rates reflect the Bank of Canada’s inflation projections for 2023, 2024 and 2025 as reported in the October 26, 2022, monetary policy report.

Fleet and Vehicles

Corix indicated that vehicle costs are tied to the number of hours costed to the utility by the operators and area supervisor. It stated that the forecast fleet/vehicles costs for 2023 were calculated using the forecast FTEs of 2.7, which is the total forecast FTEs of 3.0 less 0.3 FTEs for summer students, who do not have dedicated vehicles. The AUC noted that it already approved 0.7 FTEs for the area supervisor for 2023 and 1.9 FTEs for operators for 2023, for a total of 2.6 FTEs. Deducting the forecast 0.3 FTEs for summer students from this total resulted in 2.3 FTEs to use in the calculation of the fleet/vehicles costs for 2023. The AUC directed Corix to use the revised calculation.

Lab Testing

Corix explained that the costs for lab testing are required to ensure that the potable water meets the standard potable water quality indicating that lab testing costs are not consistent year over year and that testing requirements from regulators tend to increase over time. The AUC accepted Corix’s submission that lab testing costs tend to increase over time. The AUC found that that the forecasts for 2023-2025 should be based on the 2022 actual costs, plus inflation, directing Corix to update these costs in its compliance filing.

Other Miscellaneous Expenses

Corix indicated that other miscellaneous expenses included expenses for customer freight charges and, memberships and dues directly related to the water utility. The AUC found that Corix provided no explanation why the customer freight/courier charges forecast for 2023 was greater than the 2022 projected costs, which represented forecast increase was 40.5 per cent. The AUC also found that Corix provided no explanation why the memberships and dues forecast for 2023 was greater than the 2022 projected costs, which resulted in forecast increase of 176.9 per cent. The AUC denied both applied-for increases.

Information Technology

Corix indicated that information technology (“IT”) costs are the annual cost of operations support software, explaining that, starting in 2023, the costs also include estimates for computer and IT costs related to the new office located at the water utility. Based on the information provided, the AUC found that Corix did not provide sufficient evidence in support of the IT forecast for 2023 and 2024.

Travel

Corix explained that the costs for travel include costs related to any operator or supervisor meals and travel costs, which reflect travel expenses that can be charged directly to a specific utility; otherwise, the actuals are charged to common administrative costs. The AUC found that Corix provided no explanation why the travel costs forecast for 2023 was greater than the 2022 projected costs, which represented a forecast increase of 250 per cent. In the absence of any support for this forecast increase, the AUC denied the applied-for increase.

Cost of Capital

Corix applied for a continuance of its previously approved capital structure set at 40 per cent equity and 60 per cent debt. The AUC found that there has been no fundamental or material change to Corix’s business risk or its operations since the last time its capital structure was addressed by the AUC and approved Corix’s capital structure of 40 per cent equity and 60 per cent debt.

Return on Equity

Corix applied to use an 8.75 per cent return on equity (“ROE”), which was its last equity rate approved by the AUC. Given the 2023 ROE rate in the AUC’s most recent generic cost of capital (“GCOC”) proceeding was maintained at 8.5 per cent, and since Corix’s former ROE rate was approved based on the approved GCOC ROE rate in place at that time, the AUC found that Corix’s approved ROE for its application years of 2023 to 2025 should be the current ROE of 8.5 per cent.

Cost of Debt

Corix requested a deemed interest rate of 5.52 per cent for its cost of debt based on the calculation of the deemed interest rate on debt financing. The cost of debt rate previously approved for Corix in its last rate application was 6.5 per cent based on the actual cost of Corix’s fixed rate debt. The AUC found that the methodology Corix has used to determine a deemed interest rate was reasonable and approved the proposed deemed interest rate of 5.52 per cent as its cost of debt.

Rate Design

Corix currently has two core customer classes, residential and commercial, which are billed two types of charges, namely basic monthly and metered charges. The rate for each charge differs between the customer classes. In its application Corix proposed to: refine the residential and commercial basic monthly charge to be based on meter size with the 15 mm (5/8 inch) meter considered as the standard minimum size to which the larger meters are charged based on the meter ratio; and apply the commercial basic monthly charge to all potable commercial customers regardless of whether they are using water for commercial or irrigation purposes.

The AUC found that the rate design for fixed and variable charges proposed by Corix for its two core customers was reasonable and that it appropriately reflected cost causation. Additionally, the AUC found the commercial basic charge meter ratios, as proposed, to be reasonable. The AUC also noted Corix’s non-compliance with the AUC’s previous direction to file its next rate application within five years of its previous application, without providing the reason for the delay. The AUC advised Corix that further non-compliance with AUC instructions could result in financial or other penalties.

Proposed rates

Corix stated the proposed residential and commercial rates for 2023 to 2025 reflect rate increases of 18.6 per cent in 2023, 0.6 per cent in 2024, and 2.6 per cent in 2025. The AUC held that it will not establish the amount of the rate increase for residential and commercial customers at this time and directed Corix to update its schedules as part of its compliance filing to incorporate the directions contained in this decision and, based on the results of the amendments, submit a new rate proposal as part of its compliance filing.

The AUC directed Corix to set its 2023 bulk water rates at $4.50 per m3, in 2024 at $5.00 per m3 and in 2025 at $5.40 per m3. The increases to 2024 and 2025 follow the same dollar value increment of increases as proposed by Corix in its application for bulk water rates in 2024 and 2025, which are increases of $0.50 and $0.40, respectively. Corix was also directed to forecast in its compliance filing its bulk water revenues using the approved bulk water rates.

Number of Customers and Forecast Water Consumption

After reviewing the forecasting methodology, the forecast number of customers by customer type and the water consumption forecasts provided by Corix, the AUC found them to be reasonable and reasonably consistent with historical numbers and usage patterns. Consequently, the AUC accepted Corix’s approach to its forecasting methodology, as well as its customer count and water consumption forecasts for the test years.

Water Losses

Corix reported its historical system water losses from 2014 to 2021. Corix stated that its water treatment plant (“WTP”) is above ground where leaks are easily identified. As a result, the WTP water loss is due to unmetered water used in the water treatment plant as part of the process for the production of potable water. Corix’s distribution system is below ground and water consumption is tracked by meters at the point of delivery. Corix explained that the cause of distribution system water losses was due to: undetected system leaks; unmetered use from waste streams, fire hydrants and water used in operations; dated process technology; and failed meters.

The AUC was of the view that Corix could do more to improve its water loss tracking and reduce the amount of water lost. The AUC observed that the WTP and distribution system water losses were at the high end of the range of the AUC’s expectations for a water utility, and that the losses have been relatively volatile from year to year. If the water loss ratio remains high, Corix’s customers would continue to bear the cost of that inefficiency. The AUC directed Corix to establish system-specific water loss targets for each of WTP and distribution system water losses measured in loss percentages and litres per customer, and to provide justifications for its selected targets. The AUC also directed Corix, in its next rate application, to provide its historical and present water loss statistics beginning in 2010 to its most recently available year and an update on the progress of Corix’s water loss mitigation plan and achievement of its targets.

Terms and Conditions of the Water Utility Tariff

Corix included a list of the proposed changes that it intended to make to the currently approved terms and conditions of service, the standard fees and charges schedule, and the schedule of fines. The AUC was of the view that Corix sufficiently justified each of the proposed changes, approving them as filed.

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