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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:


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

http://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


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.

http://www.auc.ab.ca/applications/decisions/Decisions/2015/3220-D01-2015.pdf

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.



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.



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.



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



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.



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.



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.

http://www.auc.ab.ca/applications/decisions/Decisions/2013/2013-072.pdf


http://www.auc.ab.ca/applications/decisions/Decisions/2015/2014-351_Errata.pdf

http://www.auc.ab.ca/applications/decisions/Decisions/2015/3434-D01-2015.pdf



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.

http://www.auc.ab.ca/acts-regulations-and-auc-rules/rules/Documents/Rule005.pdf



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.

…



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.



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.




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.



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.




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.



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.



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




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.

http://www.auc.ab.ca/acts-regulations-and-auc-rules/rules/Documents/Rule023.pdf



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.



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)



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.



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.



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.



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.


(original signed by)

Mark Kolesar

Vice-Chair

50

Exhibit 20351-X0036.



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



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

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