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Direct Energy Regulated Services 2023 Default Rate Tariff and Regulated Rate Tariff, AUC Decision 27631-D01-2023

Link to Decision Summarized

Revenue Requirements – Non-Energy

Application

Direct Energy Regulated Services (“DERS”) applied for approval of its default rate tariff (“DRT”) and regulated rate tariff (“RRT”) revenue requirements and non-energy charges for 2023.

Decision

The AUC approved the application in part.

Applicable Legislation

AUC Rule 003: Service Quality Reporting for Energy Service Providers

AUC Rule 023: Rules Respecting Payment of Interest

Electric Utilities Act, SA 2003, c E-5.

Default Gas Supply Regulation, Alta Reg 184/2003.

Gas Utilities Act, RSA 2000, c G 5.

Regulated Rate Option Regulation, Alta Reg 262/2005.

Pertinent Issues

Regulated and Competitive Split

DERS calculated a ratio, referred to as the regulated and competitive split, between its regulated and competitive retail businesses to establish the percentage of costs for services shared between DERS and Direct Energy Partnership that is allocated to DERS. The regulated and competitive split is used to determine specific costs associated with customer operations and impacts the labour revenue requirement. The calculation is based on the quarterly retail statistics report from the Market Surveillance Administrator (the “MSA retail statistics report”).

The AUC denied the approach using the MSA retail statistics report as the basis to forecast the regulated and competitive split.  The AUC held that the currently used method is not forward-looking. DERS uses data from one point in time as the basis for determining what site counts will be during the test period. However, the AUC determined that market conditions can result in significant shifts in the regulated and competitive split over a short period. Further, the MSA retail statistics reports are based on data from other utilities, not DERS. This data does not reflect facts specific to DERS’ site counts.

The AUC found that DERS’ internal site data is the most accurate and therefore recognized it as the primary source of data. The AUC found that using DERS’ data best reflects market conditions and accurately allocates shared costs. The AUC, therefore, used DERS’ internal data and found the regulated and competitive split to be 60.1 percent regulated.

Merchant Fees

The merchant fees are built into the non-energy charge paid by all of DERS’ regulated customers regardless of their method of payment. DERS noted there had been a continued increase in the percentage of DERS customers who pay using credit cards and that the trend is forecast to continue. DERS applied for approval of a revised formula to forecast merchant fees. The updated formula includes distinct components based on data from a 36-month period and uses a multiplier to account for the differences in average bill amounts between those who pay by credit card and those who pay via other methods. DERS stated that its revised method will provide a better forecast of merchant fees because there is visibility into the drivers of the merchant fee such that recurring and one-time payments are separately accounted for. The AUC approved the revised method for forecasting merchant fees.

In addition, the AUC directed DERS to investigate the feasibility of passing on the associated merchant fees to customers electing to pay by credit card for the DRT in its next non-energy application.

Customer Information

The AUC disallowed DERS’ customer information forecast of $224,047 and approved the amount of $84,000 for customer information consistent with the amounts approved for 2021 and 2022. The customer information costs are incurred as DERS provides and gathers information to and from customers. DERS submitted that for 2023 it expected to carry out a higher level of customer information activities. The AUC considered customer information costs to be discretionary and was not persuaded that a higher level of customer information activities is warranted given that DERS forecasted declining regulated sites for 2023.

Labour

DERS forecast an increase of 2.4 full-time equivalents (“FTEs”) in 2023 to support its digital functions and customer communication roles.

The AUC denied DERS’ requested five percent increase for labour inflation and approved three percent to account for labour inflation. The AUC determined that labour comparisons for DERS should be based on local Alberta data, specifically a local, non-union comparison. The AUC considered the Average Weekly Earnings and ATB’s summary of 2022 increases to be representative figures and approved a rate labour inflation rate of three percent.

The AUC found that without a comparable digital and marketing group in DERS’ 2020-2022 non-energy application, it was difficult to ascertain how much of the applied-for support functions were embedded in the Alberta Regulated Business team. Further DERS’ application lacked a clear explanation of FTE shifts and department changes.

The AUC was not convinced that DERS’ parent company would provide approximately six FTEs to support digital and marketing functions without a cost allocation to DERS. Given that DERS is projecting continued decreases in both the DRT and RRT regulated sites for 2023, the AUC found that DERS has adequate support in the digital and marketing team to carry on the duties described in DERS’ application. Accordingly, the AUC denied the request for 2.4 incremental FTEs to support the digital and marketing team.

Bad Debt

The AUC denied DERS’ bad debt expense forecast and directed DERS to recalculate its bad debt expense forecast. The AUC rejected the use of any percentage of revenue figures for 2020 and 2021 in determining the forecast bad debt expense component for 2023. While actual year-to-date percentages may be reflective of what the actual full-year percentages will be, no analysis was presented demonstrating that this is the case. The AUC noted that year-to-date actuals may not reflect the bad debt activities that take place at different times during the year. The AUC considered that full-year actual percentages should be used as the basis for the bad debt forecasts. The AUC found that the average of the corresponding actual bad debt expense as a percentage of revenue for the years 2017-2019 should be used to forecast the bad debt component for the DRT and the RRT for 2023. The AUC directed DERS to use the percentages for those years as reported in this application, in the compliance filing when forecasting the bad debt component of the total bad debt expenses for 2023.

The AUC denied DERS’ proposed bad debt deferral account where bad debt expense would only be refunded to customers if it is lower than the AUC approved forecast. In this case, 75 percent would be refunded. If total bad expense exceeds the approved forecast 100 percent would be recovered from customers. Instead, the AUC approved a symmetrical deferral account such that if aggregate bad debt exceeds the revised forecast, 100 percent of the difference will be deferred to the account of customers; and if the aggregate debt is less than the revised forecast, 100 percent of the difference will be credited to customers.

In the interest of regulatory efficiency, the AUC approved the proposal to combine the balances in the DRT bad debt expense deferral account and the DRT late payment charge deferral account. The AUC also approved the combination of the amounts in the corresponding RRT accounts.

Other Matters

The AUC approved DERS’ revisions to its terms and conditions of service including editorial changes and clarifications regarding practices, policies, and customer responsibilities to address the growing costs related to bad debt and unknown customers. The AUC directed DERS to make minor amendments to its updates and refile the documents in the compliance filing.

The AUC denied DERS’ hearing reserve of $0.453 million for 2023. Instead, the AUC directed DERS to update the hearing cost reserve and hearing cost recovery amounts by updating the hearing costs to match DERS’ cost claims in Proceeding 28082 in addition to excluding the costs for the 2024-2025 DRT and RRT application.

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