Electricity – Rates
Application
ENMAX Power Corporation (“EPC”) filed an application with the AUC for approval of its 2023-2025 GTA for the period of January 1, 2023, to December 31, 2025. EPC sought approval of: the forecast revenue requirement for the test period; updated depreciation rates in accordance with the updated depreciation study; a one-time deferred depreciation expense and a one-time placeholder to true up 2022 deferred depreciation expense; the 2023 opening rate base balance; forecast capital additions and rate base for the test period; the methodologies used to allocate common operations costs; continuation of the previously approved transmission deferral accounts; and disposition of the previously approved transmission deferral account balances.
After filing the application, EPC reached a negotiated settlement agreement (“NSA”) with the intervening parties and requested an approval of the NSA. EPC and the intervenors subsequently amended the NSA to address the ongoing investigation that commenced after the original NSA was reached. The investigation was initialed by the AUC’s enforcement staff (“Enforcement Staff”) in relation to the year-end capitalization of certain EPC distribution and transmission projects.
Decision
The AUC determined that the NSA, as amended, was negotiated under a fair process, resulted in just and reasonable rates and, consequently, was in the public interest. The AUC approved the NSA on an interim basis, subject to the outcome of the Enforcement Staff’s investigation. The AUC also: approved the recovery of the enterprise software depreciation expense shortfall through EPC’s existing amortization of reserve differences (“ARD”) mechanism over a period of approximately five years; directed EPS to recover the depreciation shortfalls through the established ARD mechanism; approved the opening adjustments to the closing balance for the test period; and required EPC to address, as part of EPC Distribution’s 2025 annual rate application, whether an adjustment is required to ensure that the changed allocation does not create an over-recovery at the expense of customers.
The AUC directed EPC to file a compliance filing to this decision no later than October 31, 2023, and identify any changes required as a result of the Enforcement Staff’s investigation.
Pertinent Issues
Negotiated Settlement Agreement
With respect to the NSP, the AUC noted that all participants in the negotiations were sophisticated parties that represent a cross-section of Alberta residential, small business and farm ratepayers. The AUC was satisfied that the parties had the opportunity to participate meaningfully and that the negotiations were conducted in an open and fair manner. The AUC found that EPC provided adequate notice to parties. The AUC was satisfied that, subject to the outcome of the investigation and any related enforcement action that may trigger, the negotiated settlement process (“NSP”) was fair and that the requirements set out in ss 3, 6(1) and 6(3) of Rule 018: Rules on Negotiated Settlements (“Rule 018”) were met.
Additionally, the AUC considered each element of the NSA and the NSA as a whole, including whether the NSA will be in the public interest from the perspective of ratepayers. In total, the adjustments resulting from the NSA amount to a reduction of $11.57 million to EPC’s 2023-2025 revenue requirements for the transmission business, and a reduction of $8.13 million to EPC’s 2023 revenue requirement for the distribution business. Parties to the NSA also agreed that the salary escalation for the Canadian Union of Public Employees (“CUPE”) employees will be updated at the time of EPC’s compliance filing to reflect the actual outcome of the CUPE contract ratification and that the cost of debt will be updated at the time of EPC’s compliance filing to reflect the actual cost of debt. Given the adjustments made and the upcoming updates resulting from the NSA, the AUC found that the amending agreement, taken as a whole, is not patently against the public interest or contrary to law. The AUC found that the NSA, as amended, results in rates and terms and conditions that are just and reasonable, as required by s 8 of Rule 018 and approved the amended NSA on an interim basis.
Depreciation of Shortfall for Account 487.3
The parties were unable to agree in the NSA to EPC’s proposal regarding the recovery of depreciation shortfall for Account 487.3 – General Plant, Computer Systems – Enterprise Software. The AUC, therefore, considered this issue.
Utility assets are booked into accounts using the Uniform System of Accounts (“USA”) and depreciated in accordance with AUC-approved parameters. EPC previously applied, and the AUC approved, a 10-SQ curve for Account 487.3, and EPC depreciated the assets in that account at a rate of 10 percent. EPC’s depreciation expert recommended at the time of the 2013 depreciation study, a 5.1 percent depreciation rate. This resulted in a longer amortization period and a lower depreciation rate than would be typical for a 10-SQ curve. EPC indicated that, while preparing its most recent 2021 depreciation study, their expert recommended to change its policy and start retiring assets in square curve accounts at the end of the approved amortization period (as opposed to retiring assets when they were taken out of service). This proposal would depreciate the assets in Account 487.3 at a rate of 10 percent, consistent with the 10-SQ curve parameters, rather than at a rate of 5.1 percent. EPC indicated that it accepted this recommendation and formally implemented this policy in 2021, which meant that the depreciation in this account will be accelerated relative to the previous rate. EPC’s position was that the variance in this account was not the result of an error or misapplication of depreciation rates, but rather, that it arose in the normal course because of the application of a depreciation rate consistent with a policy that was approved by the AUC. The interveners opposed EPC’s proposal.
The AUC emphasized that, in the 2013 depreciation study, it approved depreciation parameters, including estimated service lives, Iowa curves, and where applicable, net salvage percentages. The AUC did not approve the resulting depreciation rates. In the AUC’s view, EPC’s evidence generally supports EPC’s recovery of the capital costs associated with Account 487.3. This is because the variance results from EPC’s policy for retiring assets when they are physically taken out of service. It was also acknowledged that EPC relied upon the advice of its experienced depreciation expert, both in implementing the asset retirement policy and the depreciation rate. The AUC held that, to deny EPC recovery of the $18.5 million shortfall in the unique circumstances of this case would not afford EPC the reasonable opportunity to recover its capital investments under s 122(1)(a)(i) of the Electric Utilities Act.
The AUC emphasized that EPC’s proposed recovery in this case is distinguishable from the facts underlying a recent decision, where the AUC denied ATCO Electric Ltd.’s (“AE”) proposed one-time $7.5 million adjustment to its depreciation expense to correct an AE accounting error (Decision 27062-D01-2023). AE had recorded the assets into the incorrect account and had opportunities to identify its error, including when the AUC specifically directed AE to confirm that its then calculated accumulated depreciation balances for the assets in question were accurate. On the other hand, the AUC found that EPC supported its contention that the basis for the variation in depreciation rates is at least partly attributable to an AUC-approved EPC policy. The AUC therefore found that the depreciation rate to Account 478.3 between 2014 and 2022 was not an error and was, therefore, recoverable. Turning to how EPC should recover the variance associated with Account 487.3, the AUC held that the approved ARD mechanism is the appropriate mechanism for recovery.
Accelerated Collection of Deferred Depreciation Expense
EPC requested an “accelerated collection of the deferred depreciation expense” from the years 2021 and 2022 through one-time true-ups of $3.4 million in 2023 and $5.0 million (a placeholder true-up amount) in 2024, rather than using the ARD mechanism, which would recover these amounts over the remaining life of the asset. This issue arose because the AUC denied a depreciation expense claimed by EPC in its last GTA. EPC applied to collect the depreciation amounts from the 2021-2022 capital additions through two lump-sum true-ups, one in each of 2023 and 2024. EPC argued that collecting the amounts as quickly as reasonably possible would mitigate intergenerational inequity concerns and would avoid administrative complexity.
The AUC was not persuaded there are intergenerational concerns of any significance triggered in the assessment of this issue. The AUC considered the previous decision and found that the panel contemplated at that time that the ARD would be an appropriate way for EPC to collect the shortfall in its next tariff application. The shortfalls in question arose as a result of EPC’s lack of evidentiary support in its last GTA for its forecast depreciation expenses. With respect to EPC’s submissions on the complexity associated with using the ARD to recover the amounts in question, the AUC held that rather than complicating the recovery, the use of the existing ARD mechanism should simplify EPC’s recovery in this case. As such the AUC denied EPC’s request and directed recovery via the ARD mechanism.
Adjustments to Closing Balance in Previous Years’ Closing Balances
EPC’s common costs are costs incurred internally and attributable to both EPC Transmission and EPC Distribution. These common costs are allocated to the appropriate business unit, using a common cost allocation methodology. Generally, operating costs that can be directly assigned to a business unit are charged to the relevant business unit. Costs that cannot be directly assigned are allocated, to the extent possible, using an allocator consistent with cost causation. If a cost cannot be directly assigned or allocated based on cost causation, a universal allocator is used. This allocation is based on the forecast test period ratio, rounded to whole numbers. For the 2023 to 2025 test period, EPC updated the capital asset allocator ratio, agreed to by all parties in the NSA. Based on its revised allocations, EPC made opening adjustments in its supporting schedules to previous years’ closing balances for the 2021 test period compliance filing, the 2023 forecast, and the 2025 forecast, for the transmission allocated general property, plant and equipment accounts and the corresponding accumulated depreciation accounts.
The AUC was persuaded that the methodology behind the previous years’ closing balance adjustments do not result in retroactive ratemaking nor in incorrect forecasting of depreciation and return in the revenue requirement. The AUC was satisfied that the changes proposed by EPC would only impact customer rates on a prospective basis. Also, the depreciation, interest and return for the test years should be based on the value of the assets calculated using the new allocation ratio to properly reflect how the assets are being used. If EPC did not adjust the opening balances, its depreciation, interest and return in the test years would not properly reflect how these assets were being used during that test period, which in turn would result in an incorrect tariff to both EPC Transmission and EPC Distribution. As a result, the AUC approved the opening adjustments to previous years’ closing balances for the 2021 test period compliance filing, the 2023 forecast, and the opening adjustment to the 2025 forecast.
