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Corix Utilities (Foothills Water) Inc. Decision on Preliminary Question of Application for Review of Decision 27844-D02-2023 2023-2025 Revenue Requirements and Rates Application, AUC Decision 28417-D01-2023

Link to Decision Summarized

Review and Variance – Changed Circumstance

Application

Corix Utilities (Foothills Water) Inc. (“Corix”) applied to the AUC for a review of the AUC’s Decision 27844-D02-2023 (the “Decision”). In the Decision, the AUC decided on the approval of Corix’s 2023-2025 revenue requirement and rates.

Decision

The AUC granted the review application in part.

Pertinent Issues

Corix is a public utility that provides potable water service to 955 customers in Heritage Pointe, Alberta. The application was processed under Rule 011: Rate Application Process for Water Utilities (“Rule 011”).

Rule 011 contemplates that some water rates applications of investor-owned water utilities may need to be developed in two phases: an application development phase, and an application review phase. In the application development phase, AUC staff may assist the applicant in preparing the application so that it meets the requirements set out in the AUC’s Information Required for Water Applications. This is a departure from the AUC’s ordinary practice as a quasi-judicial tribunal wherein the role of staff is to support the AUC, and not assist or advise any individual party. Rule 011 reduces the need for investor-owned water utilities and customer groups to rely on outside consultants and legal counsel during this phase.

Corix filed its application to review the Decision pursuant to s 10 of the Alberta Utilities Commission Act (“AUC Act”) and Rule 016: Review of Commission Decisions (“Rule 016”).

In this decision, the AUC panel who issued the Decision is referred to as the “Hearing Panel” and the AUC panel that considered the review application is referred to as the “Review Panel.”

Corix advanced the review on the following grounds:

1. The Hearing Panel erred by failing to adhere to and apply Rule 011 correctly, resulting in a significant breach of the AUC’s duty of procedural fairness;

2. The Hearing Panel erred by disallowing capital costs based on assumed facts not in evidence and by substituting the utility’s business decisions for its own;

3. The Hearing Panel erred in its interpretation of Corix’s evidence on allocated costs;

4. The Hearing Panel erred by relying on financials of incomparable water utilities; and

5. The Hearing Panel erred by not providing Corix an opportunity to address the AUC’s concerns regarding the proposed return on equity (“ROE”).

Ground 1

Questions of procedural fairness are questions of law. The AUC Act provides for a statutory right of appeal on questions of law. Under Rule 016, the AUC does not review its own decisions for errors of law. Corix has not identified any specific alleged errors of fact or mixed fact and law in this ground. Accordingly, the AUC dismissed this ground of review as an error of law as being beyond the scope of Rule 016.

Ground 2

Corix alleged that the Hearing Panel erred by disallowing capital costs based on erroneous or assumed facts not in evidence, by applying these assumed or erroneous facts to the legal test, and by substituting the business decisions for the utility with its own. Specifically, Corix sought to recover $1,255,000 from ratepayers for a project carried out in 2022 (the “Project”).

In assessing the original application, the Hearing Panel was required to determine if the costs were prudently incurred, and if the associated increase to rates was just and reasonable. The Hearing Panel ultimately disallowed one-third of the Project costs based on its prudence review. This determination was premised on the Hearing Panel’s understanding that at least some portion of the costs were driven by the need to repair damages caused by deficient repair work conducted in the aftermath of the 2013 floods (the “2013 Work”). The Hearing Panel found that it was not just and reasonable to recover the entirety of the $1,255,000 in Project costs from ratepayers.

Corix argued that the Hearing Panel erred in fact by finding that the 2013 Work was deficient and by finding a direct causal connection between the 2013 Work and the Project. Corix also argued that the Hearing Panel made an erroneous inference that it acted imprudently in not pursuing legal or regulatory recourse. Further, Corix submitted that these errors of fact formed the basis for errors of mixed fact and law, insofar as the AUC applied these facts to a legal test. Lastly, Corix stated that the Hearing Panel’s substitution of its own business decision for Corix amounts to an error of mixed fact and law.

Corix’s initial application was not seeking approval of the costs of the 2013 Work as these costs were largely funded by a government grant. Rather, Corix’s application was seeking approval of the Project costs. Corix, in response to an AUC information request, clarified that, as part of the 2013 Work, parts were installed that did not meet needed specifications resulting in the 2013 Work being deficient. The Review Panel was not persuaded that the Hearing Panel erred in fact by inferring that the 2013 Work was deficient.

The AUC was also not convinced that the Hearing Panel erred in fact by finding a causal connection between the original repair work and the Project.

The AUC did not find that the Hearing Panel erred in fact or mixed fact and law by inferring that Corix had not exhausted all other cost recovery avenues.

The Hearing Panel did not substitute its own business decisions for that of Corix since it did not issue any directions to Corix in relation to its business activities. Rather, in the course of considering a rates application, the Hearing Panel exercised its discretion, based on the evidence before it, to disallow certain capital costs from rates on the basis that it would not be reasonable to place these costs on ratepayers. Accordingly, the AUC did not find an error of mixed fact and law and an unreasonable substitution of business decisions for Corix by the Hearing Panel.

While it did not find any error, the AUC considered Corix’s arguments on the economic impacts associated with the magnitude of the disallowance to determine whether to re-open this matter on its own motion. The AUC was not persuaded to do so since the disallowance did not jeopardize Corix’s ability to provide safe and reliable service and did not deprive Corix of a reasonable opportunity to recover its prudent costs and earn a fair return, to warrant an AUC intervention.

Ground 3

The AUC found no evidence to suggest that the Hearing Panel disregarded Corix’s evidence on its projected 2023-2025 allocated costs. Rather, Corix disagreed with the weight the Hearing Panel assigned to this evidence and its choice of methodology for determining Corix’s allocated costs. The Hearing Panel concluded that Corix provided insufficient information to substantiate its forecast amounts or demonstrate that its projected allocated costs would result in just and reasonable rates.

The Hearing Panel provided substantial reasons for why it could not approve or rely on Corix’s projected 2023-2025 allocations. Accordingly, the Review Panel found that Corix failed to demonstrate any error of fact or mixed fact and law in the Hearing Panel’s decision to fix a total allocated costs amount for corporate services, regional services and common administrative services based on the average of Corix’s actual 2017-2021 costs, adjusted for inflation.

The AUC, however, found that the Hearing Panel made an error of fact by not including any amount for billing and customer services costs in the amount approved for Corix’s total allocated costs amount. The average of Corix’s actual 2017-2021 amount for billing and customer service costs, adjusted for inflation, should have been included as a common administrative cost in determining the total allocated costs amount. Accordingly, the AUC decided to hear this issue as an error of fact in a Stage 2 proceeding.

Ground 4

The Hearing Panel considered French Creek, a water utility owned by a subsidiary of EPCOR Distribution and Transmission Inc. to be the best comparator on the record for Corix with regard to the level of allocated costs. The Hearing Panel clarified that it did not conduct a strict line-by-line comparison between Corix and French Creek but considered French Creek as a comparator for Corix’s allocated costs, in conjunction with the AUC’s expertise and Corix’s historical costs. The AUC found no error of fact in this comparison.

Ground 5

The statutory framework provides a hearing panel with broad discretion to determine what factors it considers relevant in setting a fair return. Corix asserted that the Hearing Panel erred by failing to consider all factors that influence the determination of a ROE. However, the Review Panel determined that the issuance of Decision 28585-D01-2023 in November 2023, which set a return on equity (“ROE”) of 9.28 percent for 2024, constituted a changed circumstance material to the Decision. As a result, under s 2(1) of Rule 016, the AUC decided to consider Corix’s ROE for 2024 and 2025, in a Stage 2 proceeding.

The Hearing Panel approved an ROE for 2023 of 8.5 percent, rather than the applied for 8.75 precent. It determined that this would provide the utilities with a fair return for 2023, when combined with the existing deemed equity ratios.  The Hearing Panel found that Corix’s business risk had not changed. It determined that it would continue to apply its existing deemed equity ratio, and the most recently approved  generic cost of capital (“GCOC”) rate, consistent with how Corix has been treated in the past.

Corix did not demonstrate any error of fact or mixed fact and law in the Hearing Panel’s finding that using the most recently approved GCOC rate of 8.5 percent would provide Corix with a fair return for 2023. However, as the AUC determined that the release of Decision 28585-D01-2023 constituted a changed circumstance material to the Decision, it decided to evaluate Corix’s ROE on its own motion in light of Decision 27084-D01-2022 and Decision 28585-D01-2023 in a Stage 2 proceeding.

In determining whether the generating unit satisfies s 1(1)(h)(ii), the AUC found that it was appropriate to use the five-year historical average energy consumption at the site, given the nature of the farming industry, including the associated fluctuation in energy needs and the atypical conditions affecting the site’s energy consumption in the very dry 2021 and 2022 years. The AUC determined that the generating unit satisfied s 1(1)(h)(ii) and met all other requirements of the MGR.

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