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FAES Regulatory Affairs Correspondence

Email: [email protected]

July 14, 2020 Delta School District No. 37 c/o Borden Ladner Gervais LLP 1200 Waterfront Centre 200 Burrard St, P.O. Box 48600 Vancouver, BC V7X 1T2 Attention: Mr. Dionysios Rossi Dear Mr. Rossi: Re: FortisBC Alternative Energy Services Inc. (FAES)

Application for Approval of the Fiscal 2020/2021 Annual Cost of Service and Cost of Service Rate for the Thermal Energy Service to Delta School District No. 37Subject Matter

Response to Delta School District No. 37 (DSD) Information Request (IR) No. 1

On June 9, 2020, FAES filed the Application referenced above. In accordance with British Columbia Utilities Commission Order G-155-20 setting out the Regulatory Timetable for the review of the Application, FAES respectfully submits the attached response to DSD IR No. 1. If you require further information or have any questions regarding this submission, please contact Grant Bierlmeier at (604) 443-6548. Sincerely, FORTISBC ALTERNATIVE ENERGY SERVICES INC. Original signed: Lloyd Jacobs General Manager Attachments cc (email only): Commission Secretary

Registered Parties

B-3

~ FORTISBc-Alternative Energy Services

mailto:[email protected]

Yvonne.Lapierre

Annual COS Rate for DSD No. 37

FortisBC Alternative Energy Services Inc. (FAES or the Company)

Application for Approval of the Fiscal 2020/2021 Annual Cost of Service and Cost of Service Rate for the Thermal Energy Service to Delta School District No. 37 (the

Application)

Submission Date:

July 14, 2020

Response to Delta School District No. 37 (DSD) Information Request (IR) No. 1 Page 1

1.0 Reference: Application, Section 2.7 “Financing Costs and Return on Equity” 1

pp. 14-19. 2

1.1 Please confirm that the interest rate methodology applied by FAES in the current 3

Application is based on a 20-year debt term, which FAES calculated by 4

averaging the cost of debt for a 10-year term and a 30-year term, as described 5

on page 17 of the Application. 6

7

Response: 8

Confirmed. 9

10

11

12

1.2 DSD notes that other new regulated thermal energy systems in B.C. have been 13

financed based on a 10-year debt term1. The interest rates for the other projects 14

cited have been consistently lower than the interest rates applied by FAES to the 15

DSD project (the “Project”). Given this, what is FAES’ justification for using a 16

20-year debt term for the Project? 17

18

Response: 19

Please refer to the response to BCUC IR1 2.2. 20

FAES notes that the thermal energy systems referenced in the footnote all use a deemed debt 21

rate that is approved by the BCUC. Further, the actual debt terms for each of these utilities is 22

not publicly available. 23

24

25

26

1.3 In an excerpt of the generic cost of capital (“GCOC”) Stage 1 Decision cited by 27

FAES on page 15 of the Application, the Commission stated as follows: 28

29

Because the deemed long-term debt by definition is set for a fixed term, the 30

Panel finds that adjustments will not be necessary during the term of the loan 31

[…] However, to allow some flexibility, the utilities will have an option to apply 32

for a rate adjustment in accordance with the following reopener-criteria 33

• A measurable change in market conditions 34

1 See, for example: Corix BMDEU 2017 CPCN Application, Exhibit B-1, p. 37, Section 8.8 including Table 15; Corix

2015 UBC NDES Final Rates Application, Exhibit B-1, pp 32-33, S. 4.2 including Table 22.

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Application)

Submission Date:

July 14, 2020


• A measurable change in debt costs”2 1

(1) Has either or both of these things (a measurable change in market 2

conditions, or a measurable change in debt costs) occurred in every 3

year that the interest rate for this Project has previously been adjusted? 4

5

(2) If so, please provide a description of the change in market conditions 6

and/or debt costs corresponding to each past interest rate adjustment. 7

8

Response: 9

FAES calculates the interest rate each year as part of the annual revenue requirement filing. 10

The BCUC directed FAES to do so in Order G-71-12: 11

…FAES is directed to review its deemed cost of debt rate in its revenue 12

requirements annual filing using the same methodology as directed in this Order 13

and accompanying Reasons for Decision. 14

Accordingly, the reason that FAES recalculates the deemed debt rate each year as part of the 15

revenue requirement calculation is because it was ordered to do so. Furthermore, the purpose 16

of including the excerpt was to provide the evidentiary record demonstrating that the BCUC 17

recommends using an interpolated rate for the deemed rates of TES utilities. 18

FAES notes that the interest rate approved in Order G-88-12 was 5.37 percent. Whereas, 19

Table 9 of the Application, replicated here for ease of reference, shows the approved interest 20

rates each year since the service began. This table demonstrates that the recalculation of debt 21

costs has resulted in a benefit to the DSD. 22

Table 9 (Application): DSD Allowed Debt Rate History 23

24

2 Decision accompanying Order G-75-13, p. 110.

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Cred it Spread GOC Issuance BCUC BBB 20-year rat e

1 GOC Benchmark 20-year rate

1 Fee Allowed

CIBC RBC Average CIBC RBC Average Annuali.zed Debt Rate

2012/ 13 2.58% 2.53 % 2.34% Vl4% 0.35% 5.37%

2013/ 14 2.03% 1.86%, 1.94% 2.43% 2.44% 2.44% 0.35% 4.73%

2014/ 15 1.62% 1.61% 1.62% 2.78% 2.87% 2.83% 0.35% 4.79%

2015/ 16 2.04% 1.88% 1.96"/4 2.04% 2.10% 2.07"/2 0.35% 4.3S°/4

2016/ 17 3.12% 2.89% 3.00% 1.86"/4 1.90% 1.88% 0.35% 5.23%

2017/ 18 1.95% 1.97% 1.96"/4 1.87% 1.89% 1.88% 0.35% 4.19%

2018/ 19 1..85% 1.78% 1.81% 2.35% 2.32% 2.33% 0.35% 4.49%

2019/ 20 2.54% 2.28% 2.41% 2.04% 1.94% 1.99% 0.35% 4.75%

2020/21 3.20% 3.29% 3.24% 0.96"/4 0 .'95% 0.96"/4 0.35% 4.55%

1 - Linea r Interpolat ion



Application)

Submission Date:

July 14, 2020


1

2

3

1.4 Please explain the rationale for setting the Project’s interest rate using a long-4

term interest rate, but adjusting that long-term interest rate every year. 5

6

Response: 7

Please refer to the response to DSD IR1 1.3. 8

9

10

11

1.5 How closely does FAES’ interest rate in the Application approximate FAES’ 12

actual financing costs? 13

14

Response: 15

The interest rate for the DSD is a deemed interest rate based on calculations agreed to by the 16

DSD in Compliance Filing to Order G-31-12 and approved by the BCUC each year as part of 17

the annual revenue requirements review which was directed in Order G-71-12. 18

FAES is not a “ring-fenced” regulated utility and the financing of FAES overall is currently done 19

at a consolidated corporate holdings level. As such, the actual financing costs of FAES as a 20

whole are not relevant to the rate setting process for the DSD because the deemed interest rate 21

for the DSD is intended to reflect “the true cost of the Delta SD Project”3 on a stand-alone basis. 22

Further, FAES does not have any other projects that are subject to cost of service rates that the 23

BCUC approves from time to time. The result is that the BCUC’s observation that “at $6 million, 24

the Delta SD Project is too small for FEI to establish a separate debt facility efficiently”4 remains 25

valid today. 26

27

28

29

1.6 Including the 2020/2021 contract year, how many years remain in the current 30

term of FAES’ Rate Development Agreement with DSD in respect of this Project? 31

32

3 March 9, 2012 BCUC Decision, page 114. 4 March 9, 2012 BCUC Decision, page 114.

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Application)

Submission Date:

July 14, 2020


Response: 1

There are eleven years remaining in the initial term including 2020/21. 2

3

4

5

1.7 In the current Application, what would be the interest rate and what would be the 6

annual debt cost if FAES’ proposed methodology were applied to a 10-year debt 7

term, instead of a 20-year debt term as proposed by FAES in the Application? 8

Please provide the results by filling out the table below. 9

10

2020/2021 Interest Rate 2020/2021 Interest Cost

FAES Proposed

Methodology

4.55%

$167,000

FAES Proposed

Methodology, but with

10 year Debt Term

11

Response: 12


14

15

16

17

1.8 In a section of the above-noted GCOC Stage 1 Decision cited by FAES on page 18

15 of the Application, the Commission summarized a proposed approach to 19

setting debt costs, which included the following: 20

21

Step 2: Determine a Government of Canada (GoC) bond yield reflecting the 22

proposed term of debt that could be either the 10-year or 30-year bond as the 23

benchmark, or an interpolation of the two. The selected benchmark should 24

reflect the long-term nature of utility assets, contractual terms and available 25

debt terms.3 26

(1) Please explain if the use of a 10-year debt term in this case would be 27

consistent with the above-noted excerpt, having regard to the factors 28

set out therein. 29

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Application)

Submission Date:

July 14, 2020


1

Response: 2


4

5

6

1.9 Please explain whether it would it be appropriate to fix the DSD’s interest rate for 7

the remaining term of the Rate Development Agreement in respect of this 8

Project. 9

10

Response: 11

FAES believes it would be most appropriate to continue recalculating the deemed interest rate 12

annually. FAES notes that it is common practice to recalculate the deemed interest rate for 13

utility rates on an ongoing basis. This reflects the perpetual nature of utility service and the fact 14

that regular investment occurs as part of the ongoing delivery of service. 15

The DSD and FAES agreed in 2012 to fix the rate for 20-years using the method currently 16

approved. That rate would be 5.37 percent for the entire 20-year initial term. Table 1 below 17

shows the incremental cost that the DSD would have paid if the rate were 5.37 percent as the 18

parties had agreed in 2012 versus the BCUC-approved method. The savings to the DSD has 19

amounted to over $200 thousand so far. This is the first time that DSD has raised any issues 20

with the use of a 20-year interpolated rate since the parties agreed to use it in the Compliance 21

filing to Order G-21-12. 22

Table 1: Incremental Interest Charges using fixed 5.37% interest rate 23

24

2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/201 2020/21 Total

Forecast Forecast

Rate Base ($,000's) 453 5,088 6,654 6,563 6,384 6,204 6,186 6,165 6,104

Debt Compenent of Rate Base ($,000's) 272 3,053 3,993 3,938 3,830 3,722 3,712 3,699 3,662

Interest Rate on Debt (%) 5.37% 4.73% 4.79% 4.38% 5.23% 4.19% 4.49% 4.75% 4.55%

Interest ($,000's) 15 144 191 172 200 156 167 176 167 1,388

Fixed Interest Rate (%) 5.37% 5.37% 5.37% 5.37% 5.37% 5.37% 5.37% 5.37% 5.37%

Interest ($,000's) 15 164 214 211 205 200 199 198 196 1,603

Variance ($,000's) - 19 23 39 5 44 32 23 30 215

Forecast of Thermal Energy Sales for Rate

Setting (MWh) 2,099 7,892 7,892 5,701 6,205 6,658 6,504 6,672 6,602 56,225

Rate Impact of Alternate Interest Rate

($/kWh) -$ 0.002$ 0.003$ 0.007$ 0.001$ 0.007$ 0.005$ 0.003$ 0.005$ 0.004$

1 - Actuals to March 31, 2020

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