Post on 20-Jul-2018
Decision 20351-D01-2015
FortisAlberta Inc. 2013-2015 Capital Tracker Compliance Filing September 23, 2015
Alberta Utilities Commission
Decision 20351-D01-2015
FortisAlberta Inc.
2013-2015 Capital Tracker Compliance Filing
Proceeding 20351
September 23, 2015
Published by the:
Alberta Utilities Commission
Fifth Avenue Place, Fourth Floor, 425 First Street S.W.
Calgary, Alberta
T2P 3L8
Telephone: 403-592-8845
Fax: 403-592-4406
Website: www.auc.ab.ca
Decision 20351-D01-2015 (September 23, 2015) • i
Contents
1 Introduction ........................................................................................................................... 1
2 Details of the application ...................................................................................................... 2
3 Responses to Commission directions ................................................................................... 3 3.1 Commission direction on capitalized overhead ........................................................... 3 3.2 Commission direction on Worst Performing Feeders program .................................... 4 3.3 Commission direction on forecasting methodology for the Worst Performing Feeder
program...................................................................................................................... 5 3.4 Commission direction on line rebuild projects ............................................................ 5
3.5 Commission directions on I and Q factors .................................................................. 7 3.6 Commission direction on weighted average cost of capital ......................................... 8 3.7 Commission direction on FortisAlberta’s accounting test ..........................................10 3.8 Commission directions on FortisAlberta’s materiality thresholds ...............................10 3.9 Commission directions on collection of K factor amounts .........................................12
3.9.1 FortisAlberta’s proposal for rate adjustments ................................................12 3.9.2 Allocation of K factor revenue .....................................................................14
3.9.3 Carrying costs ..............................................................................................17 3.10 Commission direction on submitting a compliance application ..................................20
4 Discussion of other issues ................................................................................................... 20 4.1 Regulatory lag ...........................................................................................................20 4.2 Reopeners and measurement of performance .............................................................22
4.3 Accounting test .........................................................................................................23
5 Order .................................................................................................................................... 24
Appendix 1 – Proceeding participants ...................................................................................... 25
Appendix 2 – Summary of Commission directions .................................................................. 26
List of tables
Table 1. Capital tracker programs and K factor revenue ..................................................... 2
Table 2. Capital overhead analysis .......................................................................................... 3
Table 3. WACC per Decision 2191-D01-2015 ......................................................................... 9
Table 4. Approved K factor allocators from Decision 2014-018 ......................................... 15
Table 5. Proposed K factor allocators.................................................................................... 15
Table 6. Carrying costs............................................................................................................ 17
Decision 20351-D01-2015 (September 23, 2015) • 1
Alberta Utilities Commission
Calgary, Alberta
FortisAlberta Inc. Decision 20351-D01-2015
2013-2015 Capital Tracker Compliance Filing Proceeding 20351
1 Introduction
1. On April 14, 2015, FortisAlberta Inc. (FortisAlberta) filed an application with the Alberta
Utilities Commission requesting approval of its 2013, 2014 and 2015 capital tracker compliance
filing in accordance with the directions set out in Decision 3220-D01-2015.1
2. The Commission issued notice of the application on April 16, 2015. In the notice, any
party who wished to intervene in this proceeding was required to submit a statement of intent to
participate (SIP) to the Commission by the participation closing deadline of April 30, 2015. The
Commission received a SIP from the Consumers’ Coalition of Alberta (CCA) in which it
indicated its intention to actively participate in the proceeding and test the application. The CCA
proposed to file information requests, review responses, and file argument and reply argument.
3. Based upon the submissions and its own review of the application, the Commission
established a written process and set the following schedule:
Process step Deadline dates
Information requests to FortisAlberta May 19, 2015
Responses to information requests from FortisAlberta June 2, 2015
Argument June 16, 2015
Reply argument June 30, 2015
4. In a letter dated June 24, 2015, the Commission explained that it required further
clarification regarding FortisAlberta’s accounting test and consequently issued a second round of
information requests (IRs) on this issue. FortisAlberta was directed to submit its responses on
June 29, 2015. The Commission also added that the issuance of the second round of IRs would
not affect the process schedule as set out in the table above. However, to give parties an
opportunity to file supplemental argument and reply argument based on the second round of IRs,
the Commission established the following supplemental process:
Process step Deadline dates
Supplemental argument July 3, 2015
Supplemental reply argument July 8, 2015
5. Accordingly, the Commission considers the record of this proceeding to have closed on
July 8, 2015.
11
Decision 3220-D01-2015: FortisAlberta Inc., 2013-2015 PBR Capital Tracker Application, Proceeding 3220,
Application 1610570-1, March 5, 2015.
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
2 • Decision 20351-D01-2015 (September 23, 2015)
6. In reaching the determinations set out within this decision, the Commission has
considered all relevant materials comprising the record of this proceeding, including the
argument provided by each party. Accordingly, references in this decision to specific parts of the
record are intended to assist the reader in understanding the Commission’s reasoning relating to a
particular matter and should not be taken as an indication that the Commission did not consider
all relevant portions of the record with respect to that matter.
2 Details of the application
7. The table below sets out the K factor revenue, by capital tracker, as applied for in
FortisAlberta’s 2013-2015 PBR Capital Tracker Application2 and as updated for compliance
with the Commission’s directions in this compliance filing.
Table 1. Capital tracker programs and K factor revenue
Capital trackers K factor revenue ($ million)
2013 2014 2015
Applied
for Compliance
filing Applied
for Compliance
filing Applied
for Compliance
filing
Customer Growth program [Note 1]
8.2 5.5 19.6 17.5 28.2 26.0
AESO Contributions program 7.6 6.7 12.4 11.7 17.2 16.5
Substation Associated Upgrades program
2.0 1.6 3.9 3.6 4.8 4.5
Distribution Line Moves program [Note 1]
1.1 0.8 2.3 2.1 3.1 2.9
Urgent Repairs program 0.9 0.5 1.7 1.4 2.1 1.8
Distribution Capacity Increases program
- - 0.6 - 1.3 1.0
Worst Performing Feeders program
- - 0.6 0.4 1.0 0.5
Pole Management program 1.2 0.6 2.8 1.7 5.2 3.4
Cable Management program - - 0.4 0.4 1.0 0.9
Distribution Control Centre/SCADA project
0.8 0.8 2.0 2.0 2.4 2.3
Compliance, Safety, Aging Facilities, and Reliability (CSAR) program
0.7 0.5 1.2 1.0 1.7 1.5
Metering Unmetered Oilfield Services project
0.5 0.5 0.5 0.4 0.9 0.8
Total [Note 2] 23.2 17.4 48.1 42.2 68.9 62.2
Note 1: Net of contributions.
Note 2: Minor variances in this table are due to rounding.
2 Proceeding 3220.
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
Decision 20351-D01-2015 (September 23, 2015) • 3
3 Responses to Commission directions
8. The following sections deal with FortisAlberta’s compliance with the directions outlined
in Decision 3220-D01-2015.
3.1 Commission direction on capitalized overhead
159. In its compliance filing, Fortis is directed to limit the total pool of overheads for
each of 2013, 2014 and 2015 to the lower of the amount in this application or amounts
reflecting increases by I-X, for each year, applied to the 2012 total pool of overheads
approved in Decision 2012-108 dealing with Fortis’ 2012 rates. This recalculated total
pool of overheads should then be allocated to Fortis’ 2013 actual capital expenditures and
2014-2015 forecast capital expenditures, including capital tracker projects, consistent
with the capitalization and allocation methodologies.
9. To comply with this direction, FortisAlberta has calculated the pool of capitalized
overhead for each of 2013, 2014 and 2015 by escalating the approved overhead pool included in
the 2012 going-in rates by the approved I-X value for each year. The calculation as submitted by
FortisAlberta is provided below.
Table 2. Capital overhead analysis3
($ million)
2012 NSA 2013 I-X 2013A 2014 I-X 2014F 2015 I-X 2015F
Capitalized overhead in total capital expenditures 41.9 44.1 45.9
2012 capitalized overhead in going-in capital expenditures 39.0
Capitalized overhead per Direction 5 1.71% 39.6 1.59% 40.3 1.49% 40.9
Total capitalized overhead exceeding I-X (2.3) (3.8) (5.0)
Capitalized overhead adjustment related to capital tracker expenditures (2.0) (3.3) (4.3)
10. The reduction in capitalized overheads was allocated to capital tracker expenditures
based on approved capitalization and allocation methods. This resulted in reductions to the
requested capital tracker revenue of $0.1 million for 2013, $0.4 million for 2014 and $0.8 million
for 2015. This reductions are reflected in the requested capital tracker revenue in Appendix A4 of
the application.
Commission findings
11. The Commission has reviewed the calculations in Table 2 above and in Appendix A of
the application and finds that FortisAlberta has complied with the Commission’s direction
regarding capitalized overhead.
3 Exhibit 20351-X0008, application, page 5, Table 2.
4 Exhibit 20351-X0007, Appendix A.
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
4 • Decision 20351-D01-2015 (September 23, 2015)
3.2 Commission direction on Worst Performing Feeders program
12. The scope of FortisAlberta’s Worst Performing Feeders program, as applied for in its
2013-2015 capital tracker application,5 addressed the following: (a) three per cent of worst
performing feeders; (b) trouble switches that cause multiple or sustained outages; and (c) feeders
that cause customer multiple outages as defined by six or more outages to 50 or more customers
over a 12-month period.
13. The Commission gave the following directions with regards to FortisAlberta’s Worst
Performing Feeders program in Decision 3220-D01-2015:
313. In light of the above considerations, the Commission finds that, for purposes of
capital tracker treatment in 2014 and 2015 on a forecast basis, the scope of the Worst
Performing Feeders program should be limited to “three per cent of the circuits with the
highest SAIDI values […] considered the worst performing circuits,” as currently
required under Rule 002. The Commission has reviewed the business case and the
evidence on the record of the proceeding with respect to the Worst Performing Feeders
program and finds that the information provided by Fortis supports a finding that the
program, limited to “three per cent of the circuits with the highest SAIDI values […]
considered the worst-performing circuits,” is required to maintain service reliability and
safety at adequate levels in 2014 and 2015, to repair and upgrade those sections of
feeders on Fortis’ distribution system that have the poorest reliability.
316. As shown in Table 27, Fortis’ forecast capital additions associated with this
program are $5.5 million in 2014 and $5.7 million in 2015. Forecast capital expenditures
are $6.1 million in each of 2014 and 2015. Of these, $3.0 million in each of 2014 and
2015 relate to the worst performing feeders component of the program. The Commission
directs Fortis, in its compliance filing to this decision, to recalculate the accounting test,
the first tier of the materiality test and the K factor amount associated with this program
based only on capital additions for the worst performing feeders component of the
program for each of 2014 and 2015.
14. In response to the Commission’s directions, FortisAlberta only included capital
expenditures in its 2014 and 2015 forecast related to the three per cent of the worst performing
feeders and removed expenditures related to trouble switches and customer multiple outages.
The capital expenditures related to these components for 2014 and 2015 were $3.1 million and
$3.2 million, respectively, resulting in reductions to net capital additions of $2.9 million for 2014
and $3.2 million for 2015. This resulted in a decrease in the requested capital tracker revenue of
$0.1 million in 2014 and $0.5 million in 2015, as demonstrated in appendices A and B6 of the
application.
Commission findings
15. The Commission has reviewed FortisAlberta’s calculations reflecting the removal of the
capital expenditures related to the trouble switches and the customer multiple outages
components of the Worst Performing Feeders program from its 2014 and 2015 forecast in
appendices A and B of the application, and finds that FortisAlberta has complied with the
Commission’s direction regarding the Worst Performing Feeder program.
5 Proceeding 3220.
6 Exhibit 20351-X0006, Appendix B.
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
Decision 20351-D01-2015 (September 23, 2015) • 5
3.3 Commission direction on forecasting methodology for the Worst Performing
Feeder program
16. In Decision 3220-D01-2015, the Commission directed FortisAlberta to change its
forecasting methodology for the Worst Performing Feeder program in 2015. In its 2013-2015
application, FortisAlberta had based its 2015 forecast on its 2014 forecast. The Commission
directed FortisAlberta to base its 2015 forecast capital expenditures for the worst performing
feeders component on the three-year average of the 2012 actual expenditures, the 2013 actual
expenditures, and the 2014 forecast expenditures, adjusted for inflation.
319. However, the Commission considers that basing the 2015 forecast on the 2014
forecast may not be accurate, given the year-to-year variations in capital expenditures for
this activity, resulting in potentially large true-ups. To mitigate the potential for an undue
volatility of customer rates, the Commission directs Fortis, in its compliance filing to this
decision, to base its 2015 forecast capital expenditures for the worst performing feeders
component on the three-year average of the 2012 actual expenditures, the 2013 actual
expenditures, and the 2014 forecast expenditures, adjusted for inflation. This forecasting
method is similar to the method that Fortis uses for the Urgent Repairs Program,
discussed in Section 7.2.5.
17. In response to the Commission’s direction, FortisAlberta based its forecast for 2015 on a
three-year average of the 2012 and 2013 actuals and the 2014 forecast of capital expenditures,
adjusted for inflation, which resulted in a forecast of $3.1 million compared to the previously
requested forecast of $3.0 million. The adjusted net capital addition resulted in $2.6 million.
FortisAlberta indicated that this resulted in an increase in the K factor amount by $6,000 in 2015
as summarized in Appendix A of the application.
Commission findings
18. The Commission has reviewed the calculations submitted in appendices A and B of the
application and finds that FortisAlberta has complied with the Commission’s direction.
3.4 Commission direction on line rebuild projects
19. The Commission made the following findings in Decision 3220-D01-2015 with respect
to FortisAlberta’s line rebuild projects for 2013, 2014 and 2015 in its Pole Management
program:
350. … The Commission finds the $11.7 million in actual capital expenditures in 2013
relating to pole replacements, treatments, wraps and stubs to be prudent. Accordingly, the
Commission finds that these components of the 2013 Pole Management program satisfy
the project assessment requirement of Criterion 1. However, there is insufficient evidence
on the record for the Commission to make a determination of prudence with respect to
the $3.9 million in actual capital expenditures relating to the 16 identified line-rebuild
projects.
…
356. With respect to line-rebuild projects for 2014, the Commission notes that the
business case provided support for the 64L and Sulphur Mountain line rebuild projects,
but did not address the remaining line-rebuild projects forecast for 2014, which were all
under $500,000. Fortis forecast $8.2 million in line rebuild projects in 2014. The 64L
rebuild project is forecast at $1,929,000, the Sulphur Mountain rebuild project is forecast
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
6 • Decision 20351-D01-2015 (September 23, 2015)
at $514,000. Fortis identified an additional 93 line-rebuild projects for 2014, at a forecast
cost totaling $5,185,673. The total of all the identified projects was $7,628,673. Fortis
also provided a map of projects with costs exceeding $100,000.In the absence of
sufficient evidence in support of the line-rebuild projects forecast for 2014, Fortis cannot
be said to have satisfied the onus to demonstrate that all of these projects satisfy the
project assessment requirements of Criterion 1. Accordingly, while the Commission is
prepared to accept that the 64L and the Sulphur Mountain line-rebuild projects satisfied
the project assessment requirements of Criterion 1, it is not prepared to accept the balance
of the forecast line-rebuild projects for capital tracker treatment at this time on the basis
of the record.
…
358. With respect to line-rebuild projects forecast for 2015, Fortis provided a list of 14
line rebuild projects, with a forecast cost of $2,454,715. However, documentation
providing a project description, project driver, forecast costs, construction schedule, maps
and alternatives were only provided with respect to the 52L line-rebuild project with a
forecast cost of $1,114,598 in 2015. The total of the 14 listed projects and the 52L line-
rebuild project is approximately $3.6 million. Fortis applied for capital tracker treatment
for forecast line-rebuild projects in 2015 of $8.5 million. Fortis was not able to provide
additional support for its forecast capital expenditures or its forecasting methodology for
line-rebuild projects, noting that it “did not commence tracking the volume of pole
replacements associated with line rebuilds until 2013.”
359. In the absence of sufficient evidence in support of the line-rebuild projects
forecast for 2015, Fortis cannot be said to have satisfied the onus to demonstrate that all
of these projects satisfy the project assessment requirements of Criterion 1. Accordingly,
while the Commission is prepared to accept that the 52L line-rebuild project satisfies the
project assessment requirements of Criterion 1, it is not prepared to accept the balance of
the forecast line-rebuild projects for capital tracker treatment at this time, on the basis of
the record.
…
362. In light of the above findings with respect to line-rebuild projects, the
Commission directs Fortis, in its compliance filing to this decision, to recalculate the
accounting test, the first tier of the materiality test and the K factor amount associated
with the Pole Management program for each of 2013, 2014 and 2015.
20. FortisAlberta submitted that it removed the capital expenditures for those line rebuilds of
the Pole Management program that have not yet been approved for capital tracker treatment,
resulting in reductions of net capital additions of $4.2 million in 2013, $5.9 million in 2014, and
$7.5 million in 2015.7 This resulted in reductions of the K factor amount by $0.2 million in 2013,
$0.7 million in 2014, and $1.4 million in 2015, as shown in appendices A and B of the
application.
Commission findings
21. The Commission has reviewed FortisAlberta’s calculations in appendices A and B of the
application, reflecting the removal of capital expenditures related to the line rebuilds that had not
received approval in Decision 3220-D01-2015, as well as the resulting impact on the K factor
7 Exhibit 20351-X0022, FAI-AUC-2015MAY19-001.
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
Decision 20351-D01-2015 (September 23, 2015) • 7
amounts, and finds that FortisAlberta has complied with the Commission’s directions on line
rebuild projects.
3.5 Commission directions on I and Q factors
22. In Decision 3220-D01-2015, the Commission gave FortisAlberta the following directions
regarding its calculation of I and Q factors.
511. The Commission has reviewed the 2013 and 2014 I-X indices used in the
accounting test, and finds that Fortis has correctly used the values approved in the 2013
and 2014 annual PBR rate adjustment proceedings. The Commission notes that Fortis has
based its Q factor for 2013 and 2014 on billing determinants approved in Decision
2013-072 and Decision 2013-464, respectively. However, Fortis did not submit
calculations that demonstrate how its Q factors of 1.27 per cent and 1.90 per cent were
derived from its approved billing determinants. Consequently, Fortis is directed to submit
its calculations for its 2013 and 2014 Q factor in a compliance filing.
…
514. Fortis proposed that its 2014 and 2015 Q factors be treated as placeholders until a
decision on rates by rate class, rate structures and billing determinants is finalized in its
Phase II compliance filing. Since the implementation date of the new rate structure is
January 1, 2015, as stated in the quote above, only the 2015 billing determinants will be
affected by the findings of Decision 2014-224. Consequently, the Commission directs
Fortis, it its compliance filing to this decision, to calculate the 2014 and 2015 Q factors
on a final basis using the 2014 forecast billing determinants approved in Decision 2013-
464 and the 2015 billing determinants approved in Decision 2014-351 reflecting the new
rate structure approved in Decision 2014-224.
515. In its accounting test, Fortis used 2013 and 2014 I factors that had already been
approved in prior Commission decisions. Since this application was filed in advance of
its 2015 annual PBR rate adjustment filing, Fortis did not have the approved I factor for
2015 and used the 2014 I factor value as a placeholder. Nevertheless, the Commission
observes that, since the filing of Fortis’ 2014-2015 capital tracker application, the 2015
I factor has been approved in Decision 2014-351 at 2.65 per cent, along with its 2015
forecast billing determinants that reflect the new Phase II rate structure approved in
Decision 2014-224. To minimize future true-ups, the Commission directs Fortis, in its
compliance filing to this decision, to use the 2015 I-X index value and the Q factor based
on the forecast billing determinants approved in Decision 2014-351 for purposes of its
2015 capital tracker forecast accounting test and to use the 2015 billing determinants
approved in Decision 2014-351 reflecting the new rate structure approved in Decision
2014-224 for the calculation of the 2015 Q factor.
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
8 • Decision 20351-D01-2015 (September 23, 2015)
23. In response to the above Commission directions, FortisAlberta provided its revised
calculations for the 2013, 2014 and 2015 Q factor in Appendix C8 of the application.
FortisAlberta indicated that its calculations for 2013, 2014 and 2015 Q factors were based on the
billing determinants approved in Decision 2013-072,9 Decision 2013-46410 and
Decision 2014-351 (Errata).11 In its calculations for 2015, FortisAlberta submitted that it
incorporated the approved 2015 I factor, the 2015 Q factor based on approved forecast billing
determinants, and the new rate structure approved in Decision 2014-224.12 This resulted in an
increase to the 2015 K factor amount of $0.7 million as demonstrated in Appendix A and
Appendix B of the application.
Commission findings
24. The Commission has reviewed the calculations of the 2013, 2014 and 2015 Q factors in
Appendix C of the application. The Commission confirms that FortisAlberta has used the billing
determinants approved in Decision 2013-072, Decision 2013-464 and Decision 2014-351
(Errata),13 and the 2015 I factor approved in Decision 2014-351 (Errata) as directed by the
Commission. The Commission is also satisfied with the methodology used to calculate the
Q factors and therefore approves the Q factors for 2013, 2014 and 2015 calculated in this
compliance filing.
3.6 Commission direction on weighted average cost of capital
25. The Commission gave the following directions regarding the weighted average cost of
capital (WACC) in Decision 3220-D01-2015.
520. Accordingly, Fortis is directed to reflect the findings of Decision 3434- D01-
2015 pertaining to its WACC rates used in its accounting test for the 2013 true-up in its
compliance filing.
26. In Decision 3434-D01-2015,14 the Commission made the following findings:
70. The Commission acknowledges that all parties in the proceeding agreed that the
ROE and capital structure should be updated for the purposes of the revenue requirement
calculation in the second component of the accounting test to reflect the outcomes of
Proceeding 2191. […] Accordingly, the Commission directs the companies to update the
ROE and capital structure used in the second component of the accounting test to reflect
the approved values resulting from the Proceeding 2191. […] Furthermore, the
Commission considers that in the second component of the accounting test, it is necessary
8 Exhibit 20351-X0005.
9 Decision 2013-072: 2012 Performance-Based Regulation Compliance Filings, AltaGas Utilities Inc., ATCO
Electric Ltd., ATCO Gas and Pipelines Ltd., EPCOR Distribution & Transmission Inc. and FortisAlberta Inc.,
Proceeding 2130, Application 1608826-1, March 4, 2013. 10
Decision 2013-464: FortisAlberta Inc., 2014 Annual PBR Rate Adjustment Filing, Proceeding 2825,
Application 1609914-1, December 23, 2013. 11
Decision 2014-351 (Errata): FortisAlberta Inc., 2015 Annual PBR Rate Adjustment Filing, Proceeding 3406,
Application 1610836-1, February 5, 2015. 12
Decision 2014-224: FortisAlberta Inc., 2012-2014 Phase II Distribution Tariff Compliance Filing,
Proceeding 3103, Application 1610368-1, July 31, 2014. 13
Decision 2014-351 (Errata): FortisAlberta Inc., 2015 Annual PBR Rate Adjustment Filing, Proceeding 3406,
Application 1610836-1, February 5, 2015. 14
Decision 3434-D01-2015: Distribution Performance-Based Regulation, Commission-Initiated Review of
Assumptions Used in the Accounting Test for Capital Trackers, Proceeding 3434, Application 1610877-1,
February 5, 2015.
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
Decision 20351-D01-2015 (September 23, 2015) • 9
to update the ROE to incorporate the most recently approved ROE, and those values will
continue to be updated in future GCOC proceedings.…
71. The other components of the WACC, which are not determined in the GCOC
proceeding, are the costs of debt and preferred shares. Given that the intent of capital
trackers is to provide incremental revenue to the companies to recover the costs of
approved projects outside of the funding provided by the I-X mechanism, the
Commission finds that updated costs of debt and preferred shares are required to be used
in the second component of the accounting test.
27. FortisAlberta submitted that it has updated the 2013 debt rate of 5.53 per cent, which
represented the going-in cost of debt, to the actual cost of debt reported in its 2013 Rule 005:
Annual Reporting Requirements of Financial and Operational Results filing, which is
5.34 per cent. This update reduced the 2013 K factor revenue by $1.8 million as demonstrated in
Appendix A of the application.
28. In paragraph 76 of Decision 3434-D01-2015, the Commission determined:
76. … The companies are not required to update the debt rates used in their 2014 and
2015 forecast capital tracker applications because these will eventually be trued-up to
actual, and a revised forecast is not required to ensure that the final rates will eventually
reflect the correct debt rates.
29. In keeping with Decision 3434-D01-2015, FortisAlberta used a forecast cost of debt for
2014 and 2015 as per the original application, which is a rate of 5.53 per cent.
30. FortisAlberta also adjusted its 2013, 2014 and 2015 WACC for the return on equity
(ROE) of 8.3 per cent and capital structure of 60 per cent debt and 40 per cent equity approved in
Decision 2191-D01-2015.15 The WACC rates used in the second component of the accounting
test are shown in the table below:
Table 3. WACC per Decision 2191-D01-2015
WACC per Decision 2191-D01-2015
Capital
structure
2013
WACC
2014
WACC
2015
WACC
Debt 60% 5.34% 3.20% 5.53% 3.32% 5.53% 3.32%
Equity 40% 8.30% 3.32% 8.30% 3.32% 8.30% 3.32%
100% 6.52% 6.64% 6.64%
31. FortisAlberta indicated that these adjustments further reduced 2013 K factor revenue by
$3.6 million, 2014 K factor revenue by $4.6 million and 2015 K factor revenue by $4.8 million,
as demonstrated in appendices A and B of the application.
15
Decision 2191-D01-2015: 2013 Generic Cost of Capital, Proceeding 2191, Application 1608918-1, March 23,
2015.
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
10 • Decision 20351-D01-2015 (September 23, 2015)
Commission findings
32. The Commission has reviewed appendices A and B of the application and finds that
FortisAlberta has used the ROE and capital structure approved in Decision 2191-D01-2015 and
used the 2013 actual debt rate reported in its Rule 005 filing in the second component of its
accounting test. The Commission therefore is satisfied that FortisAlberta has complied with the
Commission’s direction regarding WACC rates.
3.7 Commission direction on FortisAlberta’s accounting test
33. The Commission gave the following direction in Decision 3434-D01-2015 regarding
FortisAlberta’s accounting test.
523. Accordingly, although the Commission finds the general form of Fortis’
accounting test model to be reasonable and consistent with the methodology approved in
Decision 2013-435, the Commission cannot make a determination in this decision as to
whether any of Fortis’ projects or programs proposed for capital tracker treatment in
2013-2015 satisfy the accounting test requirement of Criterion 1 and, accordingly,
whether any of Fortis’ projects or programs satisfy Criterion 1 in its entirety. The
Commission directs Fortis, in its compliance filing to this decision, to revise its
accounting test for 2013, as well as for 2014- 2015, based on approved final forecast or
actual capital additions and model assumptions and other directions as set out in the
previous sections of this decision.
34. FortisAlberta submitted that it revised its accounting test for 2013, 2014 and 2015 based
on the Commission’s directions set out in Decision 3434-D01-2015, as demonstrated in
Appendix B of the application.
35. Table 1 in this decision summarizes the impact of the Commission’s directions on
FortisAlberta’s accounting test result.
Commission findings
36. The Commission has reviewed FortisAlberta’s accounting test in Appendix B of the
application and finds that it has reflected the directions provided in Decision 3434-D01-2015.
3.8 Commission directions on FortisAlberta’s materiality thresholds
37. The Commission provided directions 18, 20 and 21 with regards to FortisAlberta’s
materiality thresholds for 2013, 2014 and 2015 in Decision 3220-D01-2015.
541. In Decision 2013-435, the Commission approved a four basis point threshold of
$330,000 and a 40 basis point threshold of $3.356 million for Fortis for 2013. For the
purpose of the 2013 capital tracker true-up, Fortis is directed to use these approved
materiality thresholds.
542. For 2014, Fortis calculated the first and second tier materiality thresholds by
escalating the respective 2012 values by the approved 2013 and 2014 I-X index values.
The Commission has reviewed Fortis’ calculations and finds the resulting 2014 four basis
point threshold of $0.341 million and the 40 basis point threshold of $3.409 million to be
reasonable.
…
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
Decision 20351-D01-2015 (September 23, 2015) • 11
545. The Commission observes that, since the filing of Fortis’ 2013-2015 capital
tracker application, the 2015 I-X index had been approved in Decision 2014-351 at
2.65 per cent. To minimize future true-ups, the Commission directs Fortis, in its
compliance filing to this decision, to use the 2015 I-X index value of 1.49 per cent
approved in Decision 2014-351 to calculate the first and second tier materiality
thresholds for 2015.
…
547. Given these findings, the Commission directs Fortis, in its compliance filing to
this decision, to reassess whether each of its projects or programs proposed for capital
tracker treatment in 2013 to 2015, satisfies the two-tiered materiality test requirement of
Criterion 3. For this reassessment, Fortis should use the approved 2013 and 2014
threshold amounts, as well as revised 2015 threshold amounts, as directed above.
38. FortisAlberta submitted that it used the approved four basis point threshold of $336,000
and 40 basis point threshold of $3.356 million for 2013. For 2014, FortisAlberta used the four
basis point threshold of $0.341 million and the 40 basis point threshold of $3.409 million.
FortisAlberta submitted that it has used the approved 2015 I-X index value of 1.49 per cent to
calculate the first and second tier materiality thresholds for 2015. FortisAlberta has applied the
revised 2015 four basis point materiality threshold of $0.346 million to the individual programs
and the revised 40 basis point materiality threshold of $3.460 million to the aggregate capital
tracker revenue. The use of the materiality thresholds for 2013, 2014 and 2015 was demonstrated
in Appendix B of the application.
39. FortisAlberta reassessed its programs using the approved first and second tier materiality
thresholds discussed in the above paragraph. FortisAlberta confirmed that each of the projects or
programs proposed for capital tracker treatment in 2013, 2014 and 2015 meets the respective
first and second tier materiality thresholds for the specific years in which it was applied for in the
2013-2015 capital tracker application, with the exception of the Distribution Capacity Increases
program in 2014.
40. FortisAlberta sought clarification from the Commission in respect of future filings as to
whether the calculation of capital tracker materiality threshold levels in a cost of service manner
should reflect the currently approved parameters for return on equity and deemed capital
structure, or should remain at the levels used to set going-in rates.
Commission findings
41. The Commission has reviewed the application of the materiality thresholds in
Appendix B of the application and finds that FortisAlberta has complied with the Commission’s
direction. The Commission has also reviewed the reassessment of FortisAlberta’s capital tracker
projects and programs in accordance with the two-tiered materiality thresholds established for
2013, 2014 and 2015 and finds that it has satisfied the requirements of Criterion 3.
42. The Commission also confirms that for future filings, FortisAlberta is to use the capital
tracker materiality threshold levels that reflect the going-in rates escalated by the appropriate I-X
values.
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
12 • Decision 20351-D01-2015 (September 23, 2015)
3.9 Commission directions on collection of K factor amounts
43. The Commission provided the following direction in Decision 3220-D01-2015 regarding
the collection of the differences between the existing K factor placeholders for 2013, 2014 and
2015 already included in FortisAlberta’s PBR rates and the K factor revenue amounts to be
approved in this compliance filing.
589. Fortis did not propose how it would collect the differences between its existing
K factor placeholders for 2013, 2014 and 2015 already included in its PBR rates and the
K factor amounts that will ultimately be approved in the compliance filing to this
decision. Therefore, in its compliance filing to this decision, Fortis is directed to include
a description of the rate adjustments it plans to use to recover the differences between the
existing K factor placeholders and the updated K factors for 2013, 2014 and 2015 (i.e.,
the rider mechanism to be used, the timing for the collection, the methodology for
allocating the adjustments to rate classes), along with calculations of the rate adjustments.
The effective date and the duration of the collection period for the rate adjustments
should be commensurate with the Commission’s process timelines set out in Bulletin
2010-16 and take into account the impact on customer bills.
3.9.1 FortisAlberta’s proposal for rate adjustments
44. FortisAlberta proposed to recover the differences between the existing K factor
placeholders already included in its PBR rates and the K factor revenue amounts requested for
approval in this application, in its upcoming 2016 annual PBR rates filing to be submitted on
September 10, 2015. FortisAlberta also proposed to charge carrying costs using WACC on the
differences between the placeholders and the requested K factor revenue amounts in this
application. Instead of using a separate rider, FortisAlberta proposed that the reconciliation of the
2013, 2014, and 2015 capital tracker revenue be added to the 2016 K factor placeholder that will
be applied for in its annual PBR rate adjustment filing. FortisAlberta explained that, in effect, the
true-up K factor amounts applied for in this compliance filing will be combined with the applied-
for 2016 K factor placeholder in the annual PBR rate adjustment filing to set the K factor rate
adjustment for 2016. This 2016 K factor rate adjustment will then be summed and used, along
with the other distribution rate components, in establishing the 2016 PBR rates.
45. In justification of its proposal, FortisAlberta submitted that it is consistent with the
Commission’s findings in Decision 2013-270,16 where it determined that:
85. Accordingly, consistent with the Commission’s determinations at paragraph 76
of Decision 2013-072, in developing its PBR rates for 2014 and subsequent years, Fortis
is directed to include any approved K factor amounts, Z factor amounts and Y factor
amounts that do not have a separate collection rider or mechanism in the PBR rates,
rather than recover these amounts through a DAR [distribution adjustment rider].
46. FortisAlberta proposed that the timing of collection be from January 1, 2016, through
December 31, 2016. FortisAlberta also provided calculations of rate class specific K factor rate
adjustments associated with this compliance filing in Appendix D-2.17
16
Decision 2013-270: 2012 Performance-Based Regulation Second Compliance Filings, AltaGas Utilities Inc.,
ATCO Electric Ltd., ATCO Gas and Pipelines Ltd., EPCOR Distribution & Transmission Inc. and
FortisAlberta Inc., Proceeding 2477, Application 1609367-1, July 19, 2013. 17
Exhibit 20351-X0027, FAI-AUC-2015MAY19-002.01.
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
Decision 20351-D01-2015 (September 23, 2015) • 13
47. Since FortisAlberta did not have an approved 2016 billing determinant forecast, it
calculated the placeholder forecast using the 2014-2015 billing determinant growth to provide an
approximation of what the 2016 rate adjustments will be in the 2016 annual PBR rate adjustment
filing. FortisAlberta also provided bill impact schedules in Appendix D-318 of the application to
determine the effect recovery of the true-up K factor amounts applied for in this application will
have on customer bills by rate class in 2016. These bill impacts used the existing 2015 rates for
illustrative purposes as FortisAlberta did not have estimates for the 2016 I-X index, the 2016
K factor placeholder, and the 2016 forecast transmission costs at the time the application was
filed.
48. In an IR, the Commission explored the option of extending the collection period from
October 1, 2015 to December 31, 2016, in order to prevent any possible rate shock that may
occur as a result of collecting the true-up amount of $17.8 million as a part of its 2016 PBR rates
from January 1, 2016 to December 31, 2016. Under this option, FortisAlberta would implement a
rider effective from October 1, 2015 to December 31, 2015, collecting a portion of the true-up
difference with the remaining being collected as a part of its 2016 PBR rates. The Commission
inquired if FortisAlberta foresaw any impediments with the extension. FortisAlberta replied:
FortisAlberta does not foresee any material impediments to extending the collection
period to 15 months, beginning October 1, 2015. Under this timeline, only straight
forward price changes ($/unit) would be possible as these would not require significant
programming changes. In addition, the required testing could be incorporated with the
billing testing and implementation required for the scheduled October 1, 2015 QTAR
changes.
Consideration should be given to Rate 26 irrigation customers. While the extension to
15 months would reduce the magnitude of the bill impact to these customers, it will also
produce a second impact on the October bill for these same customers at the end of the
2015 irrigation season (April 1 to October 31, 2015). Irrigation customers also
experienced a large impact to rates at the beginning of the irrigation season due to the
2015 rate changes. These rate changes included a greater allocation of distribution costs
due to implementation of the Phase II results, and a reversal of the transmission rider
refund that had occurred in 2014 due to the previous years’ Government rate freeze.
Secondly, moving to a 15-month collection period creates another rate change / billing
implementation cycle, beyond the generally preferred approach of keeping base rate
changes streamlined with the Annual PBR Rate Filings (rate changes occurring on a
calendar year basis). There would be some additional cost and resourcing associated with
implementing rate changes outside the normal annual PBR rate change process.19
Commission findings
49. The Commission has reviewed FortisAlberta’s proposal and finds that collecting the
K factor true-ups as part of the 2016 PBR rates is reasonable and will result in regulatory
efficiency. The Commission is mindful of the impact on irrigation customers20 if the collection
period is extended to 15 months, with implementation of a rider to collect a portion of the true-up
difference beginning on October 1, 2015, instead of January 1, 2016. Therefore, the Commission
18
Exhibit 20351-X0026, FAI-AUC-2015MAY19-002.02. 19
Exhibit 20351-X0024, FAI-AUC-2015MAY19-003. 20
Exhibit 20351-X0024, FAI-AUC-2015MAY19-003.02.
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
14 • Decision 20351-D01-2015 (September 23, 2015)
approves FortisAlberta’s proposal to collect the K factor true-up amount as a part of its 2016
PBR rates from January 1, 2016 to December 31, 2016.
50. The Commission notes that FortisAlberta was not able to provide the exact bill impact of
its proposal as it did not have estimates for the 2016 I-X index, the 2016 K factor placeholder,
and the 2016 forecast transmission costs at the time the current application was filed.
Consequently, the Commission will assess the updated bill impacts as part of FortisAlberta’s
2016 annual PBR rate adjustment filing.
3.9.2 Allocation of K factor revenue
51. FortisAlberta proposed that the true-up differences between the capital tracker
placeholders and the K factor revenue requested for approval in this application be allocated to
rate classes consistent with its 2012-2014 Phase II distribution tariff application, which was
approved in Decision 2014-018.21
52. In Decision 2014-018, the Commission made the following findings regarding the
allocation of K factor revenue.
29. In Decision 2012-237, the Commission directed the companies to allocate items
outside of the I-X mechanism, including K, Y and Z factors (except for items subject to
flow-through treatment and collected by way of a separate rider) to rate classes based on
the most recent approved forecast of billing determinants along with the Phase II
methodologies currently in place.
30. This matter was further discussed in Decision 2013-072, where the Commission
determined that both the simplified factor allocation (i.e., using the projected base
revenue per rate class as the allocator) and classifying, functionalizing and then allocating
the K, Y, and Z factor amounts by rate class using the last approved Phase II
methodologies are acceptable for allocating K, Y, and Z factor amounts that apply to all
rate classes. In addition, the Commission noted that, in the event that any of the applied-
for K, Y or Z factors do not apply to all customer classes, they should be allocated to rate
classes using the approved Phase II methodologies which involve classifying,
functionalizing, and then allocating any rate-class specific amounts.
…
34. The Commission has considered the proposed allocators for each Y factor and
K factor, as shown in the table above. The Commission is satisfied that the approach
adopted by Fortis to allocate the approved K and Y factors is consistent with the
Commission’s directions in decisions 2012-237 and 2013-072. Accordingly, the
Commission approves the allocation of K, and Y factors as proposed by Fortis. Fortis is
directed to use these allocators throughout the PBR term for any approved K and
Y factors.
35. However, the Commission approved a simplified allocation methodology, which
uses base revenue per rate class as the allocator, for the K factor placeholder amounts in
Decision 2013-072. Accordingly, the Commission finds that Fortis may use this
simplified allocation methodology for any K factor placeholders approved by the
Commission until such time as the Commission approves a final K factor.
21
Decision 2014-018: FortisAlberta Inc., 2012-2014 Phase II Distribution Tariff, Proceeding 2363,
Application 1609211-1, January 27, 2014.
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
Decision 20351-D01-2015 (September 23, 2015) • 15
53. FortisAlberta provided a list of the K factor allocators approved in Decision 2014-018:
Table 4. Approved K factor allocators from Decision 2014-01822
K factors Approved allocators
Customer Growth program As per capital tracker application
AESO Contributions program Transmission Demand Transmission Service (DTS) Point Of Delivery (POD) charges
Substation Upgrades program Component Allocation Method (CAM) Replacement cost new (RCN) shared
Distribution Line Moves program CAM RCN shared
DCC/SCADA project Cost subtotal
54. FortisAlberta pointed out that since the issuance of Decision 2014-018, it has received
approval for additional capital tracker programs, the allocation of which had not been considered
in the proceeding for its 2012-2014 Phase II distribution tariff application. Consequently,
FortisAlberta proposed allocators in its compliance application to address the new programs. The
following is the list of proposed allocators, which FortisAlberta submitted are consistent with the
Phase II methods currently in place:
Table 5. Proposed K factor allocators
K factors Proposed allocators
Urgent Repairs program CAM RCN shared
Distribution Capacity Increases program CAM RCN shared
Metering Unmetered Oilfield Services project Direct assigned to Oil and Gas
Worst Performing Feeders program CAM RCN shared
Pole Management program Pole RCN
CSAR program CAM RCN shared
Cable Management program Underground conductor RCN
55. In Appendix D-123 of the application, FortisAlberta submitted the proposed allocators,
reconciliation and allocation of K factor true-up amounts by rate class, and confirmed that the
allocation is consistent with the above allocators and the Phase II methodologies currently in
place.
56. In response to an IR from the CCA, FortisAlberta provided a reference to past
proceedings where the above allocators were described and an explanation for why the allocator
was selected for each program.24
57. FortisAlberta explained that the Urgent Repairs program, Distribution Capacity Increases
program, Worst Performing Feeders program and the CSAR program share the same allocator
because the costs associated with these programs are incurred for the reliability of the whole
distribution system. The Urgent Repairs program consists of the replacement of damaged
equipment that has failed in service, or has been damaged due to external causes. The
Distribution Capacity Increases program is comprised of capacity increases and system
improvements. The Worst Performing Feeders program improves the distribution system’s
reliability by identifying the worst performing circuits of the distribution system, determining the
22
Exhibit 20351-X008, application, page 22. 23
Exhibit 20351-X0004. 24
Exhibit 20351-X0019, FAI-CCA-2015MAY19-005.
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
16 • Decision 20351-D01-2015 (September 23, 2015)
causes, and implementing solutions to address those causes. The CSAR program is driven by the
need to maintain the safety and reliability of FortisAlberta’s distribution assets dispersed
throughout its service territory. Since these costs are incurred for the reliability of the whole
distribution system, they are similar to Distribution Operation costs. Distribution Operation costs
were approved in Decision 2014-01825 to be allocated based on the Distribution Property
Allocator (RCN). This allocator is the same as the CAM RCN Shared allocator. Therefore,
FortisAlberta proposed to allocate costs based upon CAM RCN.
58. FortisAlberta further explained that the Metering Unmetered Oilfield Services program
costs are solely related to oil and gas customers. Therefore, these costs were assigned to only oil
and gas rate class customers.
59. The costs for the Pole Management program relate to the poles in the distribution system.
The Distribution Poles Allocator (RCN) was approved most recently in Decision 2014-018.26
Consequently, FortisAlberta proposed to allocate costs using the Distribution Poles Allocator
(RCN) as it represents the allocation of pole property between rate classes.
60. Costs relating to the Cable Management program are for underground cable and
associated infrastructure in the distribution system. The Underground Conductor Allocator
(RCN) was approved most recently in Decision 2014-018.27 FortisAlberta submitted that the
Underground Conductor (RCN) is the appropriate allocator for the Cable Management program
as it represents the allocation of underground conductor property between rate classes.
61. The CCA did not raise any issues with FortisAlberta’s proposal for the allocators for
additional capital tracker programs that were not considered in Decision 2014-018.
Commission findings
62. In Decision 2013-072, the Commission determined:
65. For this reason, for the purposes of this decision, the Commission finds that both
the simplified factor allocation (proposed by AltaGas, ATCO Electric, EPCOR and
Fortis), and classifying, functionalizing and then allocating the K, Y, and Z factor
amounts by rate class using the last approved Phase II methodologies (as used by ATCO
Gas) are acceptable for allocating K, Y, and Z factor amounts that apply to all rate
classes.
66. The Commission agrees with the view of EPCOR and AltaGas that, in the event
that any of the applied-for K, Y or Z factors do not apply to all of customer classes, these
K, Y and Z factor amounts should be allocated to rate classes using the approved Phase II
methodologies which involve classifying, functionalizing, and then allocating any rate-
class specific amounts.
63. The Commission has reviewed the proposed allocators set out in Table 5 above and the
responses to FAI-CCA-2015MAY19-005. The Commission is satisfied with the rationale for the
selection of the allocators for each program provided by FortisAlberta, which are summarized
from paragraphs 57 to 60 of the decision. The Commission is assured that the CAM-RCN Shared
25
FortisAlberta Inc. 2012-2014 Phase II Distribution Tariff Application, Schedule 2.1-N1, Column G. 26
Ibid., Schedule 2.1-N1, Column B. 27
Ibid., Schedule 2.1-N1, Column C.
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
Decision 20351-D01-2015 (September 23, 2015) • 17
allocator is the appropriate allocator for the Urgent Repairs program, Distribution Capacity
Increases program, Worst Performing Feeders program and the CSAR program as the costs
associated with these programs are incurred for the reliability of the whole distribution system
and FortisAlberta’s costs related to its entire distribution system are allocated to rate classes
based on its CAM model. The Commission finds it justifiable to assign the costs of the Metering
Unmetered Oilfield Services program to only oil and gas customers as they are the sole users of
this program. The Commission also finds it reasonable to use the Distribution Poles Allocator
(RCN) and the Underground Conductor Allocator (RCN) as the correct allocators for the Pole
Management program and Cable Management program, respectively, as they represent the
allocation of pole property and underground conductor property between rate classes,
respectively. The Commission also notes that the CCA did not raise issues with respect to
FortisAlberta’s proposed allocators for the additional capital tracker programs. Based on the
foregoing, and given the Commission’s findings in Decision 2013-072, the Commission
approves the allocators proposed in Table 4 for the additional capital tracker programs that were
not considered in Decision 2014-018.
64. The Commission also reviewed Appendix D-1 of the application, which contains
FortisAlberta’s proposed allocators, reconciliation and allocation of all K factor true-up amounts
by rate class and finds that the allocation is consistent with the allocators and the Phase II
methodologies approved in Decision 2014-018.
3.9.3 Carrying costs
65. FortisAlberta proposed to charge carrying costs by applying the WACC rate to the
differences between its existing K factor placeholders already included in its PBR rates and the
K factor revenue requested for approval in this application. The table below shows the carrying
costs for 2013, 2014 and 2015 as calculated by FortisAlberta:
Table 6. Carrying costs
Capital tracker amounts to be collected ($ million)
2013 2014 2015
Opening balance – uncollected capital trackers - 2.9 15.9
Capital trackers per compliance filing 17.4 42.2 62.2
Collected in rates (14.6) (29.2) (62.0)
Closing balance – uncollected capital trackers 2.9 15.9 16.1
Mid-year balance 1.4 9.4 16.0
WACC 6.52% 6.64% 6.64%
Carrying costs 0.1 0.6 1.1
66. In support of its proposed methodology for calculating carrying costs, FortisAlberta
referenced paragraph 977 of Decision 2012-237:
977. The calculation of the K factor rate adjustments will be similar to revenue
requirement calculations under cost of service, except that the calculation will be limited
to the depreciation, taxes and return associated with the incremental rate base for the
expenditures that form the capital tracker. The weighted average cost of capital rate to be
used in calculating the revenue requirements associated with capital trackers will be
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
18 • Decision 20351-D01-2015 (September 23, 2015)
based on current rates established in the most recent GCOC proceeding rather than using
the rates that were in place at the start of the PBR term …
67. FortisAlberta submitted that the calculation as prescribed acknowledges that capital
tracker expenditures are financed through a combination of debt and equity, the costs of which is
reflected in the utility’s WACC. Therefore, the collection or refund of the related K factor
amounts should include carrying costs calculated on the same basis.
68. FortisAlberta also submitted that under cost of service regulation, FortisAlberta
recovered certain long-term deferrals related to capital investments through no cost capital
deferral accounts. Long-term balances for capital-related deferrals such as the USA/MFR
project, the Automated Metering project, and the AESO contributions deferral were financed
through debt and equity and, therefore, carrying costs were calculated and approved at the
WACC. FortisAlberta argued that since the uncollected capital tracker amounts are also long-
term deferral balances associated with capital investments, they should be accorded similar
treatment with respect to carrying charges.28
69. In an IR, the Commission inquired why the calculation of carrying charges for K factor
amounts should be granted a different treatment than the one prescribed by the Commission for
Y and Z factor amounts, which is calculated using Rule 023: Rules Respecting Payment of
Interest.29
70. FortisAlberta responded:
When a utility undertakes capital expenditures required to ensure the safe and reliable
operation of the distribution system, the utility finances such expenditures using long-
term financing sources, namely debt and equity. The utility must recover the costs
associated with these financing sources through customer rates to ensure it has sufficient
funding to undertake necessary capital expenditures. Given that the expenditures were
financed at WACC, it is appropriate that the carrying costs on those expenditures be
collected, or refunded, at WACC as well.
71. The CCA, in its argument, noted that there is a divergence in the way that the various
utilities are proposing to deal with carrying charges on K factor true-ups. FortisAlberta in this
proceeding has proposed to use WACC, whereas ATCO Electric Ltd. has proposed to use
Rule 023.30 The CCA argued that the Commission had prescribed the use of Rule 023 for the
calculation of carrying charges for Y and Z factor amounts31 and there is some similarity between
K factor true-ups and Y and Z factors, as all three are amounts based on items which are not
covered by the I-X mechanism. The CCA concluded the following:
… in the interest of consistency and simplicity the CCA agrees with ATCO that the
K factor true-up amounts should be based on Rule 023 and on the same basis as
paragraphs 972 and 983 in Decision 2013-237. This will result in the K, Y and Z factors
all utilizing the same adjustment mechanism which will assist in regulatory efficiency.32
28
Exhibit 20351-X0008, application, paragraph 65. 29
Exhibit 20351-X0022, FAI-AUC-2015MAY19-004. 30
Proceeding 20369, Exhibit 20369-X0007, application, page 21. 31
Decision 2012-237, paragraphs 972 and 983. 32
Exhibit 20351-X0029, CCA argument, paragraph 6.
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
Decision 20351-D01-2015 (September 23, 2015) • 19
72. In its reply argument, FortisAlberta submitted the following in response to the CCA’s
recommendation:
… the CCA itself acknowledged as above, that what the CCA relies on relates to Y and
Z Factors, which may well extend to operating cost matters. K Factors are different, in
that they reflect solely capital investment related costs, and capital investments are
funded by debt and equity. WACC, therefore, is and remains the appropriate measure of
carrying costs.33
Commission findings
73. In Decision 2012-237 the Commission made the following determination with respect to
the calculation of carrying charges for Z factor amounts:
Due to the time lag that may occur between the occurrence of a Z factor event and
implementation of the necessary rate adjustments, the companies will be permitted to
record carrying charges calculated using an interest rate equal to the Bank of Canada‘s
Bank Rate plus 1½ per cent, subject to any previously approved Commission procedure
for awarding interest. This interest rate is consistent with AUC Rule 023, however the
regulatory lag and materiality requirements of Rule 023 will not apply.34
74. Similarly, with respect to the calculation of carrying charges for Y factor amounts, the
Commission determined:
Carrying charges on balances that are subject to true up will be calculated using an
interest rate equal to the Bank of Canada‘s Bank Rate plus 1½ per cent, subject to any
previously approved Commission procedure for awarding interest on accounts that
existed prior to implementation of PBR. This interest rate is consistent with AUC
Rule 023, however the regulatory lag and materiality requirements of Rule 023 will not
apply. [footnote deleted]35
75. The Commission sees no merit in FortisAlberta’s argument that Y and Z factors differ
from K factor on the basis that K and Z factors “may well extend to operating cost matters.” In
Decision 2012-237, the Commission established the criteria for determining Y and Z factors
costs. Pursuant to the Commission’s findings, Y factor costs can either include costs the
company is required to pay to a third party (such as the AESO) or other Commission-approved
costs incurred by the company for flow through to customers. With respect to a Z factor, the
Commission found that it is ordinarily included in a PBR plan to provide for exogenous events.36
Therefore, both Y and Z factor costs are also intended to recover costs that may be incurred for
capital expenditures. Furthermore, the Commission agrees with the CCA that there is an
additional similarity between K factor true-ups and Y and Z factors as they are all costs which
are not recovered by way of the I-X mechanism.
76. The Commission also notes that ATCO Electric Ltd.,37 ATCO Gas38 and EPCOR
Distribution & Transmission Inc.39 used Rule 023 in the calculation of carrying charges for their
33
Exhibit 20351-X0038, FortisAlberta reply argument, paragraph 7. 34
Decision 2012-237, paragraph 972. 35
Decision 2012-237, paragraph 983. 36
Decision 2012-237, paragraphs 517 and 617. 37
Proceeding 20369, Exhibit 20369-X0007, application, page 21. 38
Proceeding 20385, Exhibit 20385-X0018, AG-AUC-2015JUN01-001 - Attachment 1.
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
20 • Decision 20351-D01-2015 (September 23, 2015)
K factor true-up. Consequently, given the findings above, and for the purposes of consistency
across utilities in the treatment accorded K, Y and Z factors, the Commission finds that Rule 023
should be applied in the calculation of carrying charges for K factor true-ups. However,
consistent with the Commission determinations on the application of carrying charges for Y and
Z factors as set out in Decision 2012-237, the regulatory lag and materiality requirements of Rule
023 will not apply for K factors. FortisAlberta is therefore directed to recalculate the carrying
charges associated with the K factor true-ups using Rule 023 and reflect the change in its 2016
PBR annual rate adjustment filing application.
3.10 Commission direction on submitting a compliance application
77. At paragraph 590 of Decision 3220-D01-2015, the Commission directed FortisAlberta to
file a compliance filing application in accordance with the directions in that decision on April 14,
2015.
Commission findings
78. FortisAlberta submitted this compliance filing on April 14, 2015, as directed by the
Commission and is therefore in compliance with the Commission’s direction.
4 Discussion of other issues
79. The following section will discuss other issues raised by either the CCA or the
Commission during the course of this compliance filing proceeding.
4.1 Regulatory lag
80. In the application, FortisAlberta made the following statement:
The Company also reserves the opportunity, in a future application, to raise such matters
as (i) the provision of additional evidence in support of an alternate treatment for a
Capital Tracker program or project from that previously decided upon, or (ii) recovery of
Capital Tracker revenue for expenditures related to unanticipated projects not previously
applied for or with respect to the true-up of actual program or project expenditures from
approved forecasts.40
81. In an IR, the CCA inquired about which year(s) FortisAlberta is reserving the right to
provide evidence in respect of capital trackers. FortisAlberta provided the following reply:
As is clear on the face of pages 1 and 2 of the Application in this Proceeding, the
Compliance Filing is making no request that the Commission approve expenditures that
were undertaken prior to capital tracker approval. However, as stated in Decisions 2012-
237 and 3220-D01-2015, a company can undertake expenditures before an application for
capital tracker treatment for those expenditures is made or Commission approval is
received. Those matters form part of another application by FortisAlberta currently
before the Commission, and are accordingly not relevant to this Proceeding.41
39
Proceeding 20559, Exhibit 20559-X0001, application, paragraph 12. 40
Application, Exhibit 20351-X0008, paragraph 15. 41
Exhibit 20351-X0019, FAI-CCA-2015MAY19-004(a)
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
Decision 20351-D01-2015 (September 23, 2015) • 21
82. In its argument, the CCA expressed its concern over the lack of clarity in FortisAlberta’s
response and stated:
Fortis provided minimal clarification in its response … As of today, parties do not know
if Fortis will bring any such projects forward in future applications, nor the quantum of
these amounts, nor when projects with respect to 2013 are finalized. As noted above, the
amounts involved are not trivial and the potential revenue related to 2013 remains
unknown.42
83. The CCA concluded by making the following recommendation:
Given that Fortis recognizes lag as an issue it is unclear why they would not assist in
helping to clarify what K factors in respect of 2013 and 2014 it may apply for in the
future. The CCA recommends that in future, Fortis be required to indicate what projects,
if any remain outstanding with respect to possible K factor applications as well as
disclosure of the expenditure to date on the outstanding K factor projects which it expects
to apply for in the future.43
84. In its reply argument, FortisAlberta referenced Decision 3220-D01-2015, where the
Commission stated:
20. At paragraph 615 of Decision 2012-237, the Commission indicated that a
company may choose to undertake a capital investment prior to applying for capital
tracker treatment in the subsequent annual capital tracker filing.…
85. Given the Commission’s determinations, FortisAlberta reiterated its right to apply for
capital tracker treatment for investments already undertaken if appropriate.
86. With regard to the CCA’s proposal, FortisAlberta submitted:
The CCA’s request for pre-filing of “possible K factor applications” is advocating an
inefficient and duplicative regulatory process. As discussed in FortisAlberta’s 2014 True-
up and 2016/2017 Capital Tracker Application in Proceeding 20497, the Company has
requested approval for additional amounts related to the Pole Management Program, the
Worst Performing Feeder Program and capitalized overhead. FortisAlberta does not
currently anticipate seeking additional funds over and above such amounts in respect of
2013 and 2014.44
Commission findings
87. The Commission has considered the arguments submitted by both the CCA and
FortisAlberta in making its determination. The Commission agrees with FortisAlberta that the
CCA’s recommendation is beyond the scope of this proceeding. In this application, FortisAlberta
has not requested approval of any capital expenditures that were not granted approval in
Decision 3220-D01-2015. Given the Commission’s findings in Decision 2013-435, where the
Commission stated, “[n]onetheless, the companies remained free to incur expenditures prior to
applying for capital tracker approval,”45 the Commission finds that issues related to the approval
42
Exhibit 20351-X0029, CCA argument, paragraphs 17-18. 43
Exhibit 20351-X0029, CCA argument, paragraph 20. 44
Exhibit 20351-X0038, FortisAlberta reply argument, paragraph 13. 45
Decision 2013-435: Distribution Performance-Based Regulation 2013 Capital Tracker Applications,
Proceeding 2131, Application 1608827-1, December 6, 2013, paragraph 48.
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
22 • Decision 20351-D01-2015 (September 23, 2015)
of capital expenditures as capital trackers should be dealt with when such an application is
submitted. Consequently, the CCA’s recommendation is denied.
4.2 Reopeners and measurement of performance
88. In its IRs, the CCA requested clarification on FortisAlberta’s Rule 005 filings in order to
gauge the impact of the unrecovered K factor amounts on FortisAlberta’s rate of return and
whether these amounts could potentially trigger a reopener. FortisAlberta provided the following
response:
Paragraph 590 of Decision 3220-D01-2015 directed that FortisAlberta submit a
compliance filing in accordance with the directions contained in that Decision. The
notice, as issued by the Commission in this current Proceeding ID. 20351, confirms that
compliance with the directions given in Decision 3220-D01-2015 is the scope of this
Proceeding. The questions posed by the CCA are outside the scope of this Compliance
Filing, and are thus not relevant to the Proceeding.
Moreover, in the proceeding leading to Decision 3220-D01-2015, the CCA sought to
infuse Rule 005 matters into that proceeding, while the Commission determined that such
matters were outside the scope of that proceeding. Paragraph 553 of Decision 3220-D01-
2015 states:
553. The Commission considers that the CCA’s proposal to segregate the reporting of
capital tracker and non-capital tracker additions in Fortis’ financial reporting filed in
accordance with Rule 005 and to restate the 2013 financial reporting, once the final
capital tracker decision is issued, are outside the scope of the present proceeding. There is
an established process pursuant to which the Commission develops its rules, whereby it
considers stakeholder feedback and enacts or modifies its proposed rules. The
Commission considers that it is within that process that changes to Rule 005 should be
considered.
FortisAlberta accordingly declines to respond as the questions are outside the scope of,
and not relevant to, this Proceeding.46
89. In argument, the CCA expressed concern with what it perceived as FortisAlberta’s
refusal to answer its question. However, the CCA submitted that, “… in view of the fact that the
Commission has initiated Proceeding ID 20414 and the Commission’s and the UCA, The City or
Calgary and CCA’s first issue is evaluation, the CCA believes that in the interest of regulatory
efficiency the issue of performance and evaluation is best dealt with in that proceeding. [footnote
deleted]”47
Commission findings
90. The issue of the calculation of returns for reopener purposes is included in the final list of
issues48 to be considered in Proceeding 20414 dealing with establishing the parameters of the
next generation PBR plans for companies under PBR, including FortisAlberta. Since the CCA
has submitted that this matter is best explored in that proceeding, no further finding is required in
this regard.
46
Exhibit 20351-X0019, FAI-CCA-2015MAY19-001 47
Exhibit 20351-X0029, CCA argument, paragraph 15. 48
Proceeding 20414, Exhibit 20414-X0026, Final issues list, Issue 4.
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
Decision 20351-D01-2015 (September 23, 2015) • 23
4.3 Accounting test
91. In Proceeding 3220, FortisAlberta provided the following description of the additional
allocated amount in its accounting test:
64. The sum of depreciation and return calculated for each Project Grouping was
compared to the total return and depreciation included in 2012 Going-in Rates. Since the
depreciation calculations are completed on a Project Grouping basis rather than using
depreciation asset classes, as in the 2012 Going-in Rates, the sum of depreciation by
Project Grouping differs from the total depreciation in the Going-in Rates. The difference
of $0.3 million was allocated across all Project Groupings, based on the ratio of
depreciation and return by Project Grouping to the total depreciation and return for all
Project Groupings. The allocation was done the ‘2012 Additional Allocated’ column in
Schedule 4 of Appendix B. This allocation ensures that the Going-in Rates by Project
Grouping align with the total Going-in Rates.
92. Upon review of FortisAlberta’s accounting test calculations, the Commission observed
that the “Additional Allocated” revenue requirement for 2013 actuals in Schedule 8 of
Appendix B is hard-coded and appears to be calculated in a manner contrary to the method
described in Proceeding 3220. In an IR, the Commission requested FortisAlberta to clarify the
apparent discrepancy.
93. FortisAlberta responded:
In Proceeding 3220, FortisAlberta described, in paragraph 64, the method used to
proportionately allocate across all Project Groupings the difference between mid-year
depreciation by asset class and mid-year depreciation by Project Grouping per the
accounting test (Additional Allocated) to determine going-in and forecast revenue
requirements.
With respect to a true-up year, such as 2013, the method of allocating depreciation
differences was discussed in FortisAlberta’s response to AUC-FAI-007 (b) in
Proceeding 3220:
In Schedule 8, the “Additional Allocated” in column T represents (i) the true-
up of 2013 actual depreciation compared to the mid-year calculation of
depreciation by asset class allocated to project groupings, and (ii) a
proportionate allocation of the difference between the depreciation calculated
by project grouping and the depreciation determined by asset class, both
calculated using the mid-year convention.
The true-up of 2013 actual depreciation compared to the mid-year calculation of
depreciation by asset class allocated to Project Groupings is provided in the Depreciation
True-up Allocated column of Attachment FAI-AUC-2015JUN24-001.01, Tab 1 as
calculated in Attachment FAI-AUC-2015JUN24-001.01, Tabs 2 and 3.
The proportionate allocation of the difference between the depreciation calculated by
Project Grouping and the depreciation determined by asset class, both calculated using
the mid-year convention as described in paragraph 64, is provided in the Other Allocated
column of Attachment FAI-AUC-2015JUN24-001.01, Tab 1.49
49
Exhibit 20351-X0035, FAI-AUC-2015JUN24-001.
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
24 • Decision 20351-D01-2015 (September 23, 2015)
Commission findings
94. The schedules provided by FortisAlberta in Attachment FAI-AUC-2015JUN24-001.01,50
demonstrate the allocation between (i) the true-up of 2013 actual depreciation compared to the
mid-year calculation of depreciation by asset class allocated to project groupings, and (ii) a
proportionate allocation of the difference between the depreciation calculated by project
grouping and the depreciation determined by asset class, using the methodology described in
FortisAlberta’s 2013-2015 capital tracker application. Upon review of the schedules and given
the explanation provided in FAI-AUC-2015JUN24-001, the Commission is satisfied with the
allocation of the additional amounts of revenue requirement in 2013 for the purposes of this
compliance filing. However, the Commission may revisit the treatment of additional allocated
revenue requirement amounts in future capital tracker proceedings.
5 Order
95. It is hereby ordered that:
(1) The 2013 K factor amount of $17.4 million for 2013 is approved on actual basis.
The 2014 and 2015 K factor amounts of $42.2 million and $62.2 million,
respectively, are approved on a forecast basis.
(2) FortisAlberta Inc. will include the collection of additional K factor amounts
associated with the 2013 actual, 2014 forecast and 2015 forecast and the
associated carrying charges as part of its 2016 annual performance-based
regulation rate adjustment application. The Commission will undertake an
assessment of FortisAlberta Inc.’s final bill impacts and approve the amount of
carrying costs associated with this application as part of FortisAlberta’s 2016
performance-based regulation rate adjustment application.
Dated on September 23, 2015.
Alberta Utilities Commission
(original signed by)
Mark Kolesar
Vice-Chair
50
Exhibit 20351-X0036.
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
Decision 20351-D01-2015 (September 23, 2015) • 25
Appendix 1 – Proceeding participants
Name of organization (abbreviation) counsel or representative
FortisAlberta Inc. (FortisAlberta)
Consumers’ Coalition of Alberta (CCA)
AltaLink Management Inc. (AltaLink)
Alberta Utilities Commission Commission panel M. Kolesar, Vice-Chair Commission staff
L. Desaulniers (Commission counsel) N. Mahbub O. Vasetsky P. Genderka J. Bezuidenhout
2013-2015 Capital Tracker Compliance Filing FortisAlberta Inc.
26 • Decision 20351-D01-2015 (September 23, 2015)
Appendix 2 – Summary of Commission directions
This section is provided for the convenience of readers. In the event of any difference between
the directions in this section and those in the main body of the decision, the wording in the main
body of the decision shall prevail.
1. The Commission also notes that ATCO Electric Ltd., ATCO Gas and EPCOR
Distribution & Transmission Inc. used Rule 023 in the calculation of carrying charges for
their K factor true-up. Consequently, given the findings above, and for the purposes of
consistency across utilities in the treatment accorded K, Y and Z factors, the Commission
finds that Rule 023 should be applied in the calculation of carrying charges for K factor
true-ups. However, consistent with the Commission determinations on the application of
carrying charges for Y and Z factors as set out in Decision 2012-237, the regulatory lag
and materiality requirements of Rule 023 will not apply for K factors. FortisAlberta is
therefore directed to recalculate the carrying charges associated with the K factor true-ups
using Rule 023 and reflect the change in its 2016 PBR annual rate adjustment filing
application. ................................................................................................... Paragraph 76